Tax Offsets: What They Are and How to Avoid One
Government agencies can take your tax refund if you owe them money
Many people have their tax refunds spent before they get their hands on them. Maybe you’re planning to use it to pay off a delinquent debt. Unfortunately, the federal government might be one step ahead of you, depending on the nature of that debt. The U.S. Department of the Treasury might pay it for you, with or without your consent.
This process is called a “tax offset,” and it's perfectly legal. Even worse, it can happen year after year until the debt is finally paid off if the total of what you owe is greater than your refund each year.
The Treasury Offset Program
The federal Treasury Offset Program (TOP) is the force behind tax offsets. It authorizes the government to intercept a taxpayer’s refund to pay off certain outstanding debts owed by taxpayers. TOP is run by the Bureau of Fiscal Service (BFS), a division of the Department of the Treasury—not so coincidentally the same agency that issues your tax refund.
TOP doesn’t go on a hunt to dig up everyone’s unsettled debts. Certain agencies to whom you owe money can report to the program if you’ve gone 90 days without making a payment, provided they’ve personally notified you first of the outstanding debt and have informed you of your rights and options for settling it.
Consider talking to a tax professional about filing for an “injured spouse allocation” if an offset has occurred against a refund that results from a joint married return. You might be able to get your share of the refund back by filing IRS Form 8379 if you can prove that you’re not personally liable for the debt in question.
What Debts Can Trigger an Offset?
Your credit card lender, bank, auto lender or your mortgage lender can’t go running to TOP for collection purposes. Offsets are reserved for loans that are either considered to serve the public good or are owed to the government. They include but aren’t limited to:
- Federal student loans
- State tax debts
- Child support
- Unemployment compensation debts
Your refund is vulnerable to debts that are owed to or through a government agency. Child support is typically collected by state services and forwarded to custodial parents, so the state will be aware if you fall behind and will notify TOP.
How an Offset Happens
You’ll receive a heads-up first if the BFS has a current mailing address for you. You should receive a “Notice of Intent to Offset,” letting you know that you won’t be receiving some or all of your tax refund this year.
The notice will identify the agency or creditor that will receive your refund instead. It will tell you how much of a refund you would otherwise have received, as well as the amount of the debt. It will tell you how much of a refund—if anything—you can expect to receive after the offset.
The BFS will then subtract the money from your refund, send it to the party you owe, and let the IRS know that this has occurred.
What to Do If You Receive a Notice
The notice you receive will also include contact information for the agency to whom you owe the money. You have a right to dispute it, but don’t bother calling TOP or the IRS to do so. The IRS says you should take the matter up directly with the agency that submitted your debt and try to work something out with them.
The IRS doesn’t have the authority or the necessary information at its disposal to help you, and it doesn’t actually pay taxpayers their refunds—the BFS does that. And TOP can’t pull the plug on an offset without the consent of the agency who placed it, even if you can prove that you’ve already paid the debt. You have no choice but to work it all out with the agency that imposed the offset.
Consider reaching out to the Taxpayer Advocate Service (TAS) for help if you legitimately don’t owe the lender but the lender won’t budge. Local offices are listed on their website. Their physical offices are temporarily closed in the spring of 2020 due to the coronavirus pandemic, but you should be able to get through to them by phone because their employees are working from home.
Otherwise, you can pay off the debt in question, but you only have 60 days to do so after you receive the notice. Go to pay.gov/paygov/paymydebt, call 888-826-3127, or send payment with proof that you made it to the Department of the Treasury at P.O. Box 979101, St. Louis, MO 63197-9000.
If the Debt Is a Student Loan
You have another option if the debt in question is a federal student loan. You can request a review of the debt from the Department of Education. You have 65 days to make a request for review after you’ve received notice of the offset, and your defenses are limited.
Maybe the loan in question has already been repaid, or you’ve filed for bankruptcy protection and haven’t yet received a discharge—your case is still pending. You might have already made arrangements with the lender to catch up on your past-due payments and you’re performing as agreed, but the lender hasn't reported this to TOP.
Be prepared to submit supporting documentation for your argument. The DOE will look into the situation. You won’t get your refund until it’s resolved, but the lender shouldn't get the money yet, either.
What If You Don’t Receive a Notice?
The BFS might not have a current mailing address for you. Maybe you requested that your refund be directly deposited to your bank account and you’ve moved since you filed your return and failed to put in a change of address with the post office. For whatever reason, the notice never gets to you, but your refund is less than you expected—or it doesn’t arrive at all.
You can contact TOP at 800-304-3107 on business days in this case. You won’t get to speak to a real live person, but you can enter information at the prompts and TOP will then tell you if any offsets are pending or have been applied to your refund.
You can also call the IRS at 800-829-1040 in this case. They can help you if the problem turns out to be not an offset by another agency. For example, the IRS will take the balance due from a future refund if you've entered into an installment agreement with them to pay off a tax debt due in a previous year.
Unfortunately, not receiving a notice isn’t considered acceptable grounds for objecting to the offset. Offsets are initiated by government agencies, so it’s unlikely you’ll be able to sidestep one if you legitimately owe the debt in the stated amount.
Offsets During the Coronavirus Pandemic
Some of these rules also apply to the economic impact payments provided to eligible taxpayers by the Coronavirus Aid, Relief, and Economic Security (CARES) Act, signed into law by President Trump on March 27, 2020.
Section 2201(d) of the CARES Act prohibits offsets against these payments for debts due to federal agencies, for unemployment compensation debts, or for state tax debts. But it does allow offsets for past due child support payments.
Tax laws change periodically and the above information may not reflect the most recent changes. Please consult with a tax professional for the most up-to-date advice. The information contained in this article is not intended as tax advice and it is not a substitute for tax advice.