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Why is my tax refund less than I expected? Debt offsets

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You just got your federal tax refund it was not what you were expecting. In fact, it’s much less than the amount your Form 1040 calculations showed.

What the heck happened?

There are several reason why a refund amount could be less that amount on your filing.

The most common smaller refund situations involve math errors in computing your tax bill, or the claiming of incorrect credits or deductions. In these cases, you should have heard from the Internal Revenue Service via a notice about the discrepancy.

But another common reason your tax refund is much smaller is because you owe either Uncle Sam or some other government agency money.

In these cases, the Internal Revenue Service trades its tax collecting cap for a bill collector beret, taking those unpaid amounts straight from your federal refund.

Old debts offset current refunds: Officially, these paid-from-refund amounts are known as offsets.

And while the IRS is involved because it’s the agency that processes returns, technically it’s the tax agency’s boss, the U.S. Treasury, that is able to grab part or all of taxpayer refunds to pay certain outstanding federal or state debts.

This is done by offsetting a payment, like a tax refund, that the debtor is set to receive.

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

The BFS is authorized via TOP to use part or all — that’s worth repeating: 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 rating).

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, for example, a delinquent student loan.
  • State income tax obligations.
  • Past-due child and spousal support.
  • Certain unemployment compensation debts owed to a state.

Beyond taking from tax refunds: And it’s not just tax refunds from with TOP can collect. Depending on the type of debt you owe, Uncle Sam can take money from the following federal payments —

  • Wages, including military pay;
  • Retirement, including military retirement pay;
  • Contractor or vendor payments;
  • Travel advances and reimbursements;
  • Some federal benefit payments, including Black Lung (Part B) benefits, Railroad Retirement benefits (other than Tier 2), and Social Security benefits (other than Supplemental Security Income); and
  • Other federal payments, unless the law or the Secretary of the Treasury says we can’t use them to pay the overdue debt.

With such leniency in how it can collect, the offset program has been successful. In fiscal year 2023, TOP recovered more than $3.8 billion in federal and state delinquent debts.

Refund offset rules: There are some general rules that apply to tax refund offsets.

Debts of $25 or more must be delinquent and legally enforceable. That means the what the person owes is not being adjudicated under bankruptcy or forbearance process, or under appeal.

All delinquent debts submitted to TOP must be certified as valid, legally enforceable in the amount submitted, and that all due process has been completed.

Once it receives an offset amount, TOP must send notices to debtors, which include the date and amount of offset, creditor agency to which offset money was sent, and contact point within the creditor agency if the taxpayer has questions.

The notices also must meet due process prerequisites, which include —

  • 60-day prior notice to the debtor of intent to offset; and
  • An explanation of the debtor’s rights and opportunities to dispute the debt.

That dispute process includes the ability to examine and request copies of the owed agency’s records, requests for administrative review of the determination of indebtedness, and the option to enter into a compromise or repayment plan acceptable to the agency.

Child support, student debt collections: Delinquent child support is one of the most common state-level reasons for federal tax refund offsets.

State agencies alert the U.S. Health and Human Services Office of Child Support Enforcement (OCSE), which reports the certified overdue amounts,(along with the debtor’s name and Social Security number, to the U.S. Treasury.

When Treasury processes tax refunds, it checks the OCSE data for those who owe past-due support and intercepts all or part of the tax refund. Treasury then sends the intercepted or offset funds through OCSE to the state child support agency to pay the past-due support.

It works basically the same with other creditor agencies at all levels, such as the Department of Education when it comes to unpaid student loans or state tax departments when filers don’t pay at that level.

The offset collection process: Regardless of who is asking for tax refund offset help in collecting overdue amounts, the requesting federal or state agencies must submit their 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.

TOP tax refund offset process graphic

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, as noted earlier, it shouldn’t be.

You should get a notice before the money is offset from a refund. That statement 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, or got one but have questions, you can call the BFS’ TOP center toll-free at (800) 304-3107 or (800) 877-8339 if you are hearing impaired. After punching 7 to skip past COVID-19 economic impact payment, make your preferred language choice, and then hit 1 for further instructions.

You also can check out the TOP frequently asked questions page for additional information.

While the BFS and TOP will provide you direction in understanding why your refund was reduced by an offset, note that neither of those offices nor the IRS can help with any dispute you might have. They are just the collection agents.

You need to go directly to the debtor, the agency that sent the offset requite to TOP to get the money from your tax refund.

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