What Is a Tax Refund Offset?

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You beat the tax deadline and were lucky enough to get a tax refund!  But what happens when the amount the IRS has deposited into your bank account is less than the amount you expected.

What could have possibly happened?

It’s possible the IRS completely agrees with your refund claim but has still paid you less than the amount you requested.

Now, how can that be?

Your tax refund may have been offset by the Treasury Offset Program.   Tax refund offsets are authorized reductions to tax refunds you’d otherwise be entitled to but which are not paid to you because you owe certain debts.

What Kind of Bills Can Be Offset?

Not every late bill is potentially subject to a tax refund offset.  For example, we’re not talking about late cable bills or delayed car payments.  Such private lenders are unable to directly offset your tax refunds.

However, entities to which you owe other types of debt can do exactly that.   Fortunately, the list of such entities is a short one.

Here are the most common examples of past due debts that can offset (reduce) your income tax refund:

  • Past due child support
  • Federal agency non-tax debts
  • State income tax debt
  • Certain unemployment compensation debts owed to a state

You might notice one type of debt which would seem obviously eligible for a tax refund offset, but is not on this list: past due federal income taxes.

No, it’s not that the IRS is foolishly ignoring its own demands.

Quite the contrary, the IRS will immediately reduce any refund payable to you in order to pay back taxes you owe before any possible offset is considered for other entities you owe.

It’s just that, technically, they just don’t consider such reductions as tax refund offsets.

What to Do If Your Tax Refund Is Offset and You Don’t Know Why

The IRS typically provides you with a notice by mail anytime your tax refund is different than the amount you claim.

In the case of an offset, the notice will list the refund you were eligible for, the amount offset (reduced), the entity to whom the offset money will be sent, and the address and telephone number of that entity.

If you have questions or concerns about the offset, your best bet is to first contact the agency collecting the offset.