Tax Offsets: What They Are and How To Avoid Them

Government agencies can take your tax refund if you owe them money

Woman at her desk chewing her nails as she reads a bill/notice

Many people have their tax refunds spent before they get their hands on them. Maybe you're planning to use yours to pay off a delinquent debt. Unfortunately, the federal government might be one step ahead of you, depending on the nature of that debt. The U.S. Department of the Treasury might pay it for you, with or without your consent.

This process is called a "tax offset," and it's perfectly legal. Even worse, if the total of what you owe is greater than your refund each year, the Treasury can continue to seize your federal refunds until your debt is paid.

The Treasury Offset Program

The federal Treasury Offset Program (TOP) is the force behind tax offsets. It authorizes the government to intercept a taxpayer's refund to pay off certain outstanding debts. TOP is run by the Bureau of Fiscal Service (BFS), a division of the Department of the Treasury—not coincidentally, the same agency that issues your tax refund.

TOP doesn't go on a hunt to dig up everyone's unsettled debts. Certain agencies to which you owe money can report to the program if you've gone 90 days without making a payment, provided they've personally notified you first of the outstanding debt and have informed you of your rights and options for settling it.

Consider talking to a tax professional about filing for an "injured spouse allocation" if an offset has occurred against a refund that results from a joint married return. You might be able to get your share of the refund back by filing IRS Form 8379 if you can prove that you're not personally liable for the debt in question.

What Debts Can Trigger an Offset?

Your credit card lender, bank, auto lender, or mortgage lender can't go running to TOP for collection purposes. Offsets are reserved for loans that are either considered to serve the public good or owed to the government. They include but aren't limited to:

  • Federal student loans
  • State tax debts
  • Child support
  • Unemployment compensation debts

Your refund is vulnerable to debts that are owed to or through a government agency. Child support is typically collected by state services and forwarded to custodial parents, so the state will be aware if you fall behind and will notify the TOP.

How an Offset Happens

You'll receive a notification first if the BFS has a current mailing address for you. You should receive a Notice of Intent to Offset, letting you know that you won't be receiving some or all of your tax refund this year.

The notice will identify the agency or creditor that will receive your refund instead. It will tell you how much of a refund you would have received and your debt amount. It will also state how much of a refund—if any—you can expect to receive after the offset.

The BFS will then subtract the money from your refund, send it to the party you owe, and let the IRS know.

What To Do If You Receive a Notice

The notice you receive will also include contact information for the agency you owe the money to. You have a right to dispute it, but don't call TOP or the IRS to do so. The IRS says you should take up the matter directly with the agency that submitted your debt and try to work something out with them.

The IRS doesn't have the authority or the necessary information at its disposal to help you, and it doesn't pay taxpayers their refunds—the BFS does that. And TOP can't pull the plug on an offset without the consent of the agency who placed it, even if you can prove that you've already paid the debt. You have no choice but to work it out with the agency that imposed the offset.

Consider reaching out to the Taxpayer Advocate Service (TAS) for help if you legitimately don't owe the lender, but the lender won't budge.

Otherwise, you can pay off the debt in question, but you only have 60 days after you receive the notice to do so. Visit the government's debt payment website, call 888-826-3127, or send payment with proof that you made it to the Department of the Treasury, P.O. Box 979101, St. Louis, MO 63197-9000.

If the Debt Is a Federal Student Loan

You have another option if the debt in question is a student loan. You can request a review of the debt from the U.S. Department of Education. You have 65 days to request a review after you've received notice of the offset. You can dispute the debt, but your defenses will be limited.

Be prepared to submit supporting documentation for your argument. The Department of Education will investigate the situation. You won't get your refund until it's resolved, but the lender shouldn't get the money yet, either. 

What If You Don't Receive a Notice?

The BFS might not have a current mailing address for you. You might have requested that your refund be directly deposited to your bank account, and then you might have moved without filing a change of address with the post office.

You can contact TOP at 800-304-3107 on business days. You won't get to speak to a live person, but you can enter information at the prompts, and TOP will then tell you whether any offsets are pending or have been applied to your refund.

You can also call the IRS at 800-829-1040. It can help you if the problem turns out to be not an offset by another agency. For example, the IRS will take the balance due from a future refund if you've entered into an installment agreement to pay off a tax debt unpaid in a previous year.

Unfortunately, not receiving a notice isn't considered acceptable grounds for objecting to the offset. Government agencies initiate offsets, so it's unlikely that you'll be able to sidestep one if you legitimately owe the debt.

Offsets During the Coronavirus Pandemic

Some of these rules also apply to the economic impact payments provided to eligible taxpayers by the American Rescue Plan Act (ARP) of 2021, signed into law by President Joe Biden.

Section 9601(2) of the ARP Act prohibits offsets against the impact payments for debts to federal agencies, unemployment compensation debts, past-due child support, or state tax debts.

Key Takeaways

  • The federal Treasury Offset Program (TOP) authorizes the government to intercept a taxpayer's refund to pay off certain outstanding debts, called offsets.
  • Regular lenders can't request an offset. Rather, offsets are used for government loans or other loans that serve the public good.
  • If your tax return is subject to an offset, you'll get a notice in the mail with information about the agency or creditor who received the funds.
  • If you wish to dispute the offset or work out a payment plan, you should contact the creditor directly.

Frequently Asked Questions (FAQs)

Is there a way to know ahead of time if my tax refund will be offset?

The TOP call center can provide automated information about whether your tax refund may be offset. Call (800) 304-3107 and follow the prompts.

Is it true that refunds won't be offset in 2021?

The IRS relaxed some regulations for Coronavirus relief, but offsets are still processed. If you are experiencing financial hardship, you can request an Offset Bypass Refund once your return is filed and before the offset takes effect by contacting the IRS at 800-829-1040. There is no specific form for this process, so when you talk to an agent, plan to have all your information at hand.

Article Sources

  1. Bureau of the Fiscal Service. "Tax Refund Offset."

  2. Taxpayer Advocate Service. "Refund Offsets."

  3. Taxpayer Advocate Service. "Contact Us."

  4. U.S. Department of the Treasury, Bureau of the Fiscal Service. "Online Payment for Delinquent Nontax Debt."

  5. Student Loan Borrower Assistance. "Tax Refund Offsets."

  6. Internal Revenue Service. "Frequently Asked Questions / Refund Inquiries."

  7. 117th Congress. "American Rescue Plan Act of 2021."

  8. Internal Revenue Service. "Topic No. 203 Reduced Refund."

  9. Internal Revenue Service. "How IRS Collection is Helping Taxpayers During the Pandemic."