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Tax Offset: What It Is and How to Avoid It

Are you expecting a tax refund this year? If you owe money to a state or federal government agency, you may want to hold off on any plans to spend that money. There’s a good chance that you may not receive part or even all of your refund because the U.S. Department of Treasury could seize it to pay your debts through a process known as tax offset.

What is Tax Offset?

Tax offset is the legal interception of your tax refund, with or without your consent, to pay off certain debts owed by a taxpayer. The Bureau of Fiscal Service (BFS), a division of the Department of Treasury, has the authority to issue tax offsets through its Treasury Offset Program (TOP). Typically, this occurs when a taxpayer owes money to certain agencies and has fallen into arrears (no payment for 90 days or longer). The agency will then report the delinquency to TOP. In fiscal year 2019, the program recovered more than $9.3 billion in delinquent debts.

Debts That Trigger an Offset

Not every creditor has the ability to request a tax offset to recoup their money. If you owe money on your credit cards or are behind on your car payments, your tax refund cannot be used to satisfy those debts. Money owed to state and federal agencies, however, could put your tax refund at risk. Some of the debts that can trigger a tax offset include, but are not limited to:

  • Defaulted federal student loans
  • Past due child support
  • State tax debts
  • Unemployment compensation debts
  • Other federal agency non-tax debts

The Internal Revenue Service also has the right to immediately withhold all or part of your tax refund if you owe back taxes. In fact, they are first in line and supersede any other agency requests for payment.

Notice of Intent to Offset

Once an agency has referred your debt to TOP, the Bureau of Fiscal Service will issue a Notice of Intent to Offset. This letter should include your name, the amount of your tax refund, as well as the amount you’ll receive after the tax offset. It will also list the agency that requested the money, contact details, and how to dispute the amount.

Do not contact the IRS or BFS to dispute the amount, even if you have paid the debt in full. Only the agency that requested the money can have the offset canceled or refunded. Any disputes must go through the agency listed on the notice and should be addressed immediately. 

For federal student loan debts, you have 65 days from receipt of the notice to request a review from the Department of Education (DOE). During that time, your refund will be withheld from both you and the DOE until the dispute is resolved.

Delayed Refund? How to Know If It’s an Offset

Are you still waiting on a refund or it’s less than expected? There are some steps you can take to see if it was offset. Although the BFS is required to send notice of its intent to offset, there may be instances where you don’t receive the letter, especially if you recently moved and neglected to update your address. Unfortunately, not receiving the letter does not give you grounds to dispute the tax offset.

To determine if your refund was reduced or withheld due to tax offset, contact TOP at 800-304-3107 during regular business hours. Simply enter the requested information using the automated system to find out if you have any current or pending offsets.

If you believe your refund was used to satisfy an existing tax debt, contact the IRS at 800-829-1040 to verify.

How to Avoid Tax Offset

The easiest way to avoid having your tax refund taken is to pay off your debt within 60 days of receiving the notice. You can make payments by phone at 888-826-3127, online, or by postal mail:

Department of the Treasury

P.O. Box 979101

St Louis, MO 63197-9000

Bankruptcy

Did you recently file for bankruptcy? You may be able to avoid a tax offset due to an automatic stay.  This is a court order that stops most collection actions against you until your bankruptcy case is dismissed.

Injured Spouse Claim

If you filed a joint return and are not responsible for your spouse’s debt, you may request that the IRS refund your portion of the tax refund taken through offset by filing Form 8379, Injured Spouse Allocation. Be sure to include both your Social Security number and your spouse’s in the same order they appear on your joint tax return. Follow the instructions carefully, attach all required documents, and sign the form. Do not attach a copy of your previously filed return. Once received, it typically takes at least 8 weeks for the IRS to process your request.

The tax professionals at Tax Defense Network can help you file Form 8379 and answer your tax offset questions. We offer an array of tax relief services and can help you find the right solutions for your tax problems. Call 833-803-4222 to schedule a free consultation today!