6 Ways the IRS Can Seize Your Tax Refund

If you're still waiting for your federal income tax refund this year, here's one reason it might be delayed: the government might have seized it. The same federal agency that issues tax refunds, the U.S. Department of the Treasury's Bureau of the Fiscal Service (BFS), also has the authority to hold back all or part of your refund to repay debts you owe. In bureaucratic terms, this is known as an "offset."

There are six reasons the BFS can seize your refund. Each reason is related to a personal debt owed to state or federal entities or a court-ordered debt. Here's what they are and what you can do about it.

Key Takeaways

  • The BFS can seize some or all of your refund if you owe federal or state back taxes.
  • It also can seize your refund if you default on child support or student loan debts.
  • If you think a mistake has been made, you can contact the BFS and IRS.

You Owe Federal Income Taxes

If you owe back income taxes, your refund can be taken to pay or offset the amount due. If anything is left, it will be refunded as requested on your tax return, either by direct deposit or check. You should also get a notice from the IRS explaining why the money was withheld.

You can contact the Internal Revenue Service (IRS) if you believe a mistake was made. The number to call is (800) 829-1040.

You Owe State Income Taxes

The feds can also withhold money from your tax refund to cover any unpaid state income taxes.

The first call should go to the IRS at (800) 829-1040. Once that call is made and your options are explained, your should contact your state's tax authority. Be prepared for a run around on this one.

You Owe State Unemployment Compensation

If your state believes you collected more in unemployment compensation than you were entitled to receive, either due to outright fraud or to a failure to properly report your earnings, it can ask the U.S. Treasury to offset your tax refund by the amount in dispute.

Your first step is again the IRS at (800) 829-1040. You need to be ready to prove that you rightfully received that unemployment compensation.

E-filing allows you to check the status of your return. This can be helpful in situations where you might be concerned about it being withheld because you can track your return.

You Defaulted on a Student Loan

If you defaulted on a federally-insured student loan, the government can seize your tax refund to offset the amount you owe unless you qualify for and have applied for loan forgiveness.

In this case, the Treasury Department must send you advance notice of its intention and provide an opportunity for you to challenge the claim or pay it off before your refund is withheld.

Your state is also authorized to withhold money from your state tax refund for this purpose. In addition, the U.S. Department of Education and the guaranty agency that holds your loan have the authority to order your employer to withhold up to 15% of your disposable income until the loan is paid off.

You Owe Child Support

When a parent is delinquent in paying court-ordered child support, the state’s child-support agency can request that the Treasury Department withhold money from the person's tax refund to cover the back payments.

A person in this situation should receive a pre-offset notice explaining how much is owed, how the offset process works, and how to contest the debt. Once the money has been withheld from the refund, the taxpayer also should receive an offset notice from the BFS showing how much money was withheld.

Anyone in this situation should contact their state's child support agency for further information.

The IRS and BFS do not withhold your tax return if you file for bankruptcy. Tax returns generally become part of your bankruptcy estate and the bankruptcy trustee will be looking for it.

You Owe Spousal Support

An award for spousal support that is part of a child support order can also result in a tax-refund offset if the payments are overdue.  

On a related note, if you filed a joint tax return with your spouse and your refund was offset because of debts belonging only to the spouse, you can request your portion of the refund back from the IRS. You must file Form 8379: Injured Spouse Allocation to make this claim.

Other Ways the Government Can Collect

Your tax refund is not the only leverage the Treasury can use to collect on back debts. Your Social Security or Social Security Disability Insurance (SSDI) benefits can be garnished (partially withheld) in some instances.

However, supplemental security income cannot be garnished, even by the government. This program provides a basic income to people aged 65 and over or those with disabilities, and it's not part of the Social Security system.

How Do I Know If the IRS Will Take My Refund?

If you're delinquent on any of the abovementioned payments, the BFS will likely take your refund. You'll also receive a notice after you file your taxes.

How Do I Stop the IRS From Taking My Refund?

Your best chance is to ensure you make payments on the six types of debt the BFS will hold a return for. If you can't, it's best to notify the IRS, then contact the BFS and talk to a debt analyst.

How Do I Know if the IRS Is Giving Me a Refund?

You should be able to tell once you file your taxes. If you've paid more than you owe, you should receive a refund unless you meet one of the six reasons the IRS and BFS can take your refund.

The Bottom Line

You receive a tax refund if you have paid more tax than you owe. However, if you have specific debts you have not paid, the IRS and BFS can withhold your refund to make payments on them for you.

If you find yourself in a situation where the BFS might hold your refund, it's best to call the agency at 1-888-826-3127. It can work with you to set up an installment plan or guide you on the best options for your situation.

Article Sources
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  1. Bureau of the Fiscal Service. "Frequently Asked Questions For the Public."

  2. Internal Revenue Service. "Topic No. 203 Reduced Refund."

  3. Internal Revenue Service. "Let Us Help You."

  4. Internal Revenue Service. "Refund Status."

  5. U.S. Department of Education. "Collections."

  6. United States Bankruptcy Court District of Columbia. "Important Information About Tax Returns."

  7. Internal Revenue Service. "Instructions for Form 8379 (11/2019)."

  8. U.S. Department of Health and Human Services. "Garnishment of Supplemental Security Income Benefits."

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