Offsets for Taxes: What It Means & What to Do

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 isn’t what 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 aren’t paid to you because you owe certain debts.

What is a tax offset?

A tax offset is when your tax refund is withheld to pay your tax balances. If you have past-due taxes or a balance from another government agency but you’re eligible to receive a refund this tax season, the IRS — or state tax agencies — may apply that refund to your past-due balance. Tax offsets can also be used to pay off:

• Child support
• Spousal support
• Student loans
• State income tax

What can cause a tax offset to be implemented?

Offsets for taxes occur because of outstanding debt. If you have outstanding debt and you’re set to receive a tax refund, the IRS can apply that refund toward your past-due debts.  Generally, these debts fall into two categories:

1. Outstanding federal tax debt
2. Another debt

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. These types of 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 isn’t 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

So, your tax refund has been offset and you’re stumped about what to do next. Here’s where you start:

Step 1:

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
• Amount offset (reduced)
• Entity to whom the offset money will be sent
• Address and telephone number of that entity

Step 2:

If you have questions or concerns about the offset, your best bet is to first contact the agency collecting the offset. You can follow up after you receive a notice via mail, which will have the entity listed.

What happens if you tax refund is offset for a debt your spouse owes

If you’re married filing jointly with your spouse, your refund may be reduced to offset your spouse’s debt. Keep in mind that your filing status is a key determining factor in whether your refund is used to offset your spouse’s debt. 

If you don’t want to be on the hook for their debt, and are eligible you could file Form 8857, Request for Innocent Spouse Relief. However, Innocent spouse relief is only for taxes due on your spouse’s income from employment or self-employment. You can’t claim relief on your own income, household employment taxes, individual shared responsibility payments, business taxes, or trust fund recovery penalties for employment taxes. 

On the other hand, you can apply for Injured Spouse Relief by filing Form 8379, to help you get back your share of a federal tax refund that was reduced to pay your spouse’s debts if you are eligible.

Can the IRS reverse an offset on your taxes?

The IRS may decide not to offset your taxes if you’re facing an undue hardship. For example, your refund may not be used to offset past-due debt if you can show the IRS that you’re unable or barely able to cover basic living expenses.

Generally speaking, the IRS doesn’t have the ability to reverse an offset after the offset has been completed. It’s important to contact the IRS before your refund is applied to your federal tax debt. 

How can you avoid a tax refund offset?

If you want to avoid tax refund offsets, the smartest thing you can do is pay your debts or taxes on time. If you owe back taxes, the IRS may decide to use your refund to offset your debt.

You should also learn the steps to take if you want to prevent an offset that results from past-due debts. You can request a review of your objection to prevent or reduce tax offsets. You can also discuss your situation with the IRS if you have an undue hardship that may make you eligible for relief.

Get help addressing an offset on your taxes

Knowing what to expect when tax season arrives is important — especially if you have past-due tax debt. If you’re owed a tax refund at the end of the year, keep in mind that all or part of your refund may be used as offsets for taxes and other debts.

If you’re facing an offset, you’ll want to contact the agency collecting the offset as soon as possible.

No matter what moves you made last year, TurboTax will make them count on your taxes. Whether you want to do your taxes yourself or have a TurboTax expert file for you, we’ll make sure you get every dollar you deserve and your biggest possible refund – guaranteed.