Tax refunds are typically seen as a welcome financial relief for many Americans. On average, taxpayers receive a refund of approximately $3,200. This refund often comes as a result of excessive withholding, overpayment of estimated taxes, or eligibility for various tax credits. However, not everyone receives their full refund, as some may be subject to a tax refund offset. In this article, we will explore what tax refund offsets are, how they work, and what you can do to prevent or address them.

What is a Tax Refund Offset?

A tax refund offset occurs when the U.S. Treasury Department deducts part or all of your tax refund to satisfy outstanding debts owed to various government agencies. The Treasury’s Bureau of the Fiscal Service (BFS) processes these payments through the Federal Treasury Offset Program (TOP), which handles the collection of delinquent debts. This means that the IRS itself does not handle offsets – rather, BFS processes the payments on behalf of other agencies.

Tax refund offsets can occur for a range of debt types, including:

• Child Support

  If you owe child support, particularly in cases where you are behind by $150 (or $500 if no Temporary Assistance for Needy Families benefits are involved), the state can request an offset from BFS.

• Spousal Support

  Similar to child support, spousal support arrears may result in an offset.

• State Income Taxes

  If you owe state income taxes, your state’s tax agency can request an offset if you reside in the state involved.

• Student Loans

  Defaulted federal student loans can trigger an offset request by the U.S. Department of Education.

• Federal Debts

  Any unpaid federal debts, such as those from the Small Business Administration (SBA) loans, may be subject to a tax refund offset.

• Unemployment Benefits Overpayment

  If you owe a debt from receiving incorrect unemployment benefits, such as those involving fraud or overpayment, the state unemployment agency can request an offset.

How Does a Refund Offset Happen?

A refund offset should not be a surprise. The government is required to send a Notice of Intent to Offset before any deductions are made. This notice must be sent to the debtor at least 60 days in advance (65 days for student loans). The notice will include:

• A description of the debt,
• The amount owed,
• A statement that the debt will be referred to BFS for offset,
• Contact information for the agency involved.

Once a debt is added to the TOP database, BFS automatically deducts the owed amount from your tax refund and forwards it to the creditor agency. If the debt is fully paid off, any remaining refund will be returned to you.

What to Do If You Receive an Offset Notice

If your refund is offset, you will receive a notice from BFS outlining the following:

• The original refund amount,
• The offset amount,
• The agency receiving the payment, and
• Contact details for the creditor agency.

If you believe you don’t owe the debt, or if the amount taken is incorrect, you should contact the agency that imposed the offset, not the IRS or BFS. Neither the IRS nor BFS can resolve disputes related to the debt; they can only process the offsets.

Refund Offsets and Married Couples

If you filed a joint tax return, but the debt is only owed by one spouse, the non-debtor spouse may be able to claim their portion of the refund. This is done by filing IRS Form 8379 – Injured Spouse Allocation. You can file this form with your original or amended tax return or even separately, as long as you expect the refund to be offset due to your spouse’s debt. The IRS will then calculate the non-debtor spouse’s share of the refund based on the allocated income and deductions.

Federal Income Tax Debts and Offsets

The IRS can also deduct unpaid federal income taxes directly from your refund. Unlike other refund offsets, these are not processed through the Treasury Offset Program but handled by the IRS. If you’re facing financial hardship due to the offset, the IRS may allow an offset bypass refund (OBR), which permits you to receive your full refund despite the outstanding tax debt. This is a little-known provision, and the IRS does not widely publicize it. However, the request must be made within a narrow window between the time the return is filed and when the IRS assesses the taxes (approximately 10 to 20 days for electronically filed returns).

How to Avoid a Tax Refund Offset

The best way to avoid a refund offset is to ensure that you don’t owe any debts that could trigger one. Here are a few strategies:

1. Accurate Tax Withholding

   The simplest way to avoid a large tax refund (or any refund) is to adjust your withholding throughout the year. Ensure that your withholding is aligned with the actual amount of tax you owe to avoid excessive refunds, which essentially act as an interest-free loan to the government.

2. Pay Off Debts

   If you know you owe money that could result in a tax refund offset, consider paying it off or entering into a payment plan with the creditor agency.

3. Dispute Errors

   If you believe the debt is incorrect or you do not owe it, contact the agency that imposed the offset and provide evidence to support your claim.

4. File for Bankruptcy

   Filing for bankruptcy may provide temporary relief from tax refund offsets, as an automatic stay goes into effect, halting collection actions.

Conclusion

Tax refund offsets can be frustrating, especially when you are expecting a refund only to find it reduced or eliminated. However, knowing how these offsets work and taking proactive steps can help you avoid or mitigate the impact. If you live in Salt Lake City, working with a tax preparer can help you stay on top of your obligations and ensure that your taxes are filed correctly, reducing the risk of offsets. By understanding your rights and responsibilities, you can better manage your finances and avoid unexpected deductions from your tax refund.