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Where's the rest of your tax refund? Being used to pay delinquent federal and state debts


The Internal Revenue Service announced today that it has begun releasing refunds for taxpayers who claimed the Earned Income Tax Credit and the Additional Child Tax Credit.

Many of these refunds should arrive in bank accounts or on debit cards this week, according to the IRS.

That should make many of the ol' blog readers who've been frustrated by the delay (and shared their irritation in the comments section of my recent Where's Your Refund? post) happy.

But some folks are likely to be irked about their refunds for another reason.

The amount that arrived as a check, in their bank account or as a debit card wasn't as much as they expected.

Old debts eat into current refunds: There are many reasons for such refund shortfalls. One of the most common is offsets for other federal or state debts.

The U.S. Treasury, which is boss to the IRS, is able to grab part or all of taxpayers' refunds to pay some outstanding federal or state debts. This is known as offset, that is, the reduction or withholding of a payment.

The offset process is handled by the Treasury Offset Program, or TOP, which is run by the Treasury's Bureau of the Fiscal Service, BFS.

Congress has authorized BFS via TOP to use part or all of a tax refund to pay certain other debts. This means, pardon my acronym French, such taxpayers are SOL (or simply outta luck if you want to go for a G acronym).

Debts that can be collected from federal tax refunds include:

  • Federal tax debts, such as previous federal income tax you didn't pay.
  • Federal agency debts like a delinquent student loan.
  • State income tax obligations.
  • Past-due child and spousal support.
  • Certain unemployment compensation debts owed to a state.

The offset collection process: Basically, creditor agencies, such as the Department of Education when it comes to unpaid student loans or state tax agencies seeking overdue tax payments, submit those delinquent debts as payment vouchers to BFS for collection and inclusion in TOP.

The creditors' vouchers must certify that such debts qualify for collection offset and must contain information about the payment, including the Tax Identification Number (TIN) and name of the recipient.

How TOP works infographic
Click image for FAQ on TOP from the BFS.

Using this info, TOP officials compare the refund payment information with debtor information that's stored in BFS' delinquent debtor database. Where a refund recipient's TIN and name match that of a debtor cited on a submitted voucher, TOP offsets — withholds — payment — tax refund — to satisfy the debt.

Just how much is offset from a tax refund is, per the TOP's words, "to the extent legally allowed." In some cases, Treasury can take tax refund money to pay all of a qualifying unpaid debt. In other, only a percentage or the money due can be taken from a tax refund.

Look for the notice: Either way, the offset bite to a tax refund can be a big, unwelcome surprise.

However, it shouldn't have been.

Part of the offset process requires the BFS to send affected taxpayers a notice alerting them that it is taking part or all of their federal refunds to pay other debts.

The notice will list the original refund and offset amounts. It will also include the agency that received the offset payment and its contact information.

If you didn't get a notice, call the BFS' TOP center toll-free at (800) 304-3107 or (800) 877-8339 if you are hearing impaired and, after making your language choice, punch 1 for further instructions.

The phone service is open Monday through Friday, 7:30 a.m. to 5 p.m. Central time.

Your rights as a debtor: As with other issues involving Uncle Sam's handling of your money, for example your taxpayer rights when dealing with the IRS, you also have rights when it comes to refund offsets.

The TOP notice must explain these rights and opportunities to dispute the debt to the owing taxpayer.

This includes the right to examine and request copies of agency records regarding the debt.''

You also can request an administrative review of the determination of indebtedness.

Or you can negotiate a compromise payment deal or set up a repayment plan acceptable to the agency to which you owe the money.

And if you believe you don't owe the debt or you want to dispute it, don't contact the BFS or IRS. They are just the collection agents. You need to go to the debtor, the agency that sent the offset requite to TOP.

To have and to hold debt: Also note that when your file a joint return, any old unpaid federal debts your spouse incurred likely will affect you, too.

There might be, however, a way out of such a reduced refund predicament.

Say, for example, your spouse missed her child support payments for her kids from a previous relationship and you don't think you should suffer a refund loss because of it. The IRS might agree.

You might be entitled to part or all of the refund that was reduced by the offset in cases where your spouse is solely responsible for the debt. In these cases, you need to make your case to the IRS that you are an injured spouse.

Do that by filing Form 8379, Injured Spouse Allocation, with the IRS to request your part of the offset refund.

You may file Form 8379 with your original joint tax return, with your amended joint tax return or by itself after you are notified of an offset. Details on filing for a portion of a refund reduced by a husband's or wife's debt are found in the form's instructions.

An injured spouse also can use the IRS' online Interactive Tax Assistant, specifically the section on "Can I or My Spouse Claim Part of a Refund Being Applied toward a Debt Owed by the Other Spouse?" This will help you decide whether to file a claim for part of a refund jointly applied toward a spouse's past due debt for which he or she is solely responsible.

You also might find these items of interest:



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