You may expect your tax refund to be paid in full once the IRS processes your tax return. However, there’s a catch: the Treasury Department can deduct certain debts from your refund before you see a cent. This process is called a tax refund offset, and it can leave you wondering where your full refund went.
The Bureau of the Fiscal Service (BFS) processes federal tax refunds and runs the Federal Treasury Offset Program. If you owe certain types of debts, the BFS may take a portion of your tax refund to pay them off. But don’t worry — there’s more to know about how it works, and how you can prevent it.
What Is a Tax Refund Offset?
A tax refund offset is when the BFS deducts amounts you owe to specific government agencies from your tax refund. These debts could include a variety of obligations, such as:
- Child support
- Spousal support
- State income tax
- Federally insured student loans
- Unemployment compensation debts
- Debts owed to federal agencies, such as the Small Business Administration
It’s important to note that the IRS can also deduct unpaid federal income taxes, but this is separate from the Treasury Offset Program.
When Will You Be Notified About an Offset?
The good news is that the BFS has to inform you before they reduce your tax refund. They will send you a notice of intent to offset your refund due to the debt, which will be sent to the name and address they have on file. You’ll receive this notice at least 60 days before your debt is referred to BFS (and 65 days for school loans).
What to Do if You Receive a Notice
Receiving a notice can feel like a surprise, but it doesn’t mean you’re out of options. Here’s how to handle it:
- Act Quickly: If you believe you owe the debt, consider paying it off as soon as possible or entering into a payment plan with the creditor agency.
- Request a Review: If you believe the debt isn’t yours or the amount is incorrect, you can request a review by the creditor agency. However, you’ll need to provide evidence that supports your case.
- Contact the Right Agency: If there’s an issue with the offset, don’t contact the IRS or BFS—they don’t have the authority to resolve your issue. Instead, reach out directly to the agency that issued the debt. The IRS or BFS won’t have the necessary information to help with disputes or adjustments.
Special Considerations for Joint Tax Returns
If you filed a joint tax return and the debt was only owed by your spouse, you can request your share of the refund. This is done by filing IRS Form 8379: Injured Spouse Allocation. The IRS will review your case, calculate the portion of the refund that belongs to you, and send it to you.
How to Avoid a Refund Offset
The best way to avoid the headache of a refund offset is to avoid getting a large refund in the first place. A large refund means you’ve overpaid your taxes throughout the year, essentially giving the IRS an interest-free loan. Instead, aim for a refund that’s either small or zero—this way, you won’t risk having your refund offset, and you’ll be sure that your tax payments match what you owe.
To achieve this, ensure that your withholding and/or estimated tax payments are accurately aligned with your total tax liability for the year. While this isn’t always easy to do perfectly, it should be the goal to avoid a refund.
Key Takeaways
- Tax refund offsets can happen if you owe certain government debts (child support, student loans, etc.).
- The BFS will notify you before it happens, giving you time to resolve the issue.
- If the debt isn’t yours or is incorrect, you can request a review by the creditor agency.
- Injured Spouse Allocation (Form 8379) allows you to claim your share of the refund if the debt was owed by your spouse.
- The best way to avoid a refund offset is to aim for a zero refund by adjusting your withholding or estimated tax payments.
Contact a tax expert to ensure you’re prepared for potential offsets and make the best tax decisions for your financial situation.