What to Do If Your Tax Return Was Taken to Pay a Debt

Learn what to do when your debts catch up to you.

Your accountant or tax software says you’re getting a $1,000 refund on your taxes. But when the check arrives, it’s only $250. What gives? That’s $750 short of your rightful $1,000.

When you go check online through the IRS’ Where’s My Refund tool, you see a notification. Your tax return has just been “offset.” Due to an outstanding debt that you forgot about or perhaps an overdue bill that has accrued interest and penalties, the IRS has decided to offset your tax return. This is called a tax return offset.

Click to read more about why you shouldn’t assume you’re getting a tax refund.

This type of scenario can happen to almost anyone who has overdue debts. If you owe a federal or state debt, you can see your federal payments taken to repay the debt and fees associated with it. You aren’t without options. There are ways to prepare yourself.

Who Can Offset Your Tax Return?

When it comes to offsetting your tax return, those making the request must go through the IRS. It is then up to the IRS if they want to grant the request. This basically means anyone can go after your tax return. Federal agencies have a higher chance of being successful at offsetting your tax return. Collection agencies for credit card companies have virtually no chance.

Here’s a list of the most common entities that are likely to offset your tax return:

– Federal agencies (student loans, Department of Housing and Urban Development [HUD] loans, penalties or fines to these agencies)
– State taxes
– Owed child support
– Unemployment compensation

In the case of child support, Emily Beach said a tax offset generally “kicks in if you owe more than $150 in state-assigned tax support payments or more than $500 in child support payments to an individual, such as your child’s custodial parent.”

In the case of non-federal collection agencies trying to offset your tax return, there’s very little chance this will ever happen. The IRS website provides more detail on how the IRS collects taxes owed through tax returns: People who have slipped up on their student loan or child support payments had their refund status money taken because of the collection agencies requesting it from the IRS. The IRS as an entity does not collect on debts except for taxes owed to them.

Spousal Debt

The debt of your spouse can be a factor in your tax return being offset if you are married and filing jointly. Debts that can be collected are the same government debts mentioned above. If the debt is exclusively that of your spouse, you can file Form 8379 to claim a portion of the tax return for you as an individual. This is also called “Injured Spouse.”

There is another term called “Innocent Spouse,” which is relief from tax liabilities including interest and penalties. You can read about both on the IRS website.

There are cases when you might consider filing separately due to debt owed by one spouse and not the other.

This is especially true if you’re dealing with student loan debt. If you’re in default on your student loans and see your tax return garnished, you might consider filing separately. This also allows you to potentially get a lower repayment plan amount if you’re on Income-Based Repayment (IBR) and Pay As You Earn (PAYE).

Learn more here about the implications of filing separately for student loans.

What Rights Do You Have?

To avoid being blindsided by a tax return offset, there are a few things you can do. First is to wait for a notice from the Bureau of the Fiscal Service (BFS), which is part of the Department of the Treasury, and issues refunds and tracks offsets. The BFS will have the following in its notice:

– Original refund amount
– Your refund offset amount
– Agency receiving the payment
– Address and telephone number of the agency

If you don’t receive the above notice, you can call the BFS directly. Once you call them, listen to the message and do as instructed. You’ll enter your Social Security number, and it will check to see if there is a tax offset against you. If there is, write down any information provided so that you can call and get additional information. The database is updated consistently, so you can call and check as often as you’d like.

You can also check your credit report and see if there are any debts in default listed.

Further, the Taxpayer Advocate Service is a great resource to learn more about options that are available to you in the case of an offset.

Final Thoughts

Having your tax refund taken to pay a debt you owe isn’t fun, but there are steps that you can take to avoid this and prevent it from happening in the future.

And if you’re married, there are options to get at least some of your refund today.

Click through to read more about the No. 1 thing Americans do with their tax refund.