It should be no big surprise to folks that if you happen to owe money to the IRS for back taxes or for other federal debts, any tax refund owed to you from your current income tax filings can be grabbed instead of paid to you. When the IRS processes a tax return, it goes through a check to see if the filer owes funds to any other federal agency that has submitted a claim. Operating almost like lien on your refund, the IRS than redirects your refund amount to that agency to be used as an offset for amounts owed, including interest. The IRS does the same for any back taxes or penalties owed as well. This management of funds occurs via the U.S. Treasury’s Financial Management Service system.
Other debts can be included in a refund grab as well. For instance, if you happen to owe unpaid child support or you have unpaid balances from old student loans, these can trigger a collection. The FMS system will redirect only the amount of your refund necessary to satisfy claims submitted to the system from a federal agency. So if your refund will be $2,000 but you still owe $1,500 for an old student loan, then you will see a net refund paid to you for $500 and a note telling you what happened to the rest of the money. Additionally, the other federal agency’s debt will be settled.
If there is a dispute on the collected amount, i.e. you don’t think you owed it in the first place, then unless the debt is owed to the IRS, you should connect with the federal agency associated with that funding. So, using our student loan example again, instead of talking to the IRS, the filer should take the offset notice received and contact the federal education agency that provided the student loan to resolve the incorrect collection.
It is common for a spouse to be impacted by the financial mistakes of a partner. Student loans are frequent examples. In such cases, if the non-involved spouse wants to seek recourse for a refund offset or collection, she or he should file IRS Form 8379 – Injured Spouse Allocation to seek a recovery. Do not confuse this resource option with the relief for an innocent spouse. That is entirely a different program in the IRS for spouses who have suffered specific situations, such as domestic violence or tax implications as a result of partner’s criminal activity. Form 8379 can be sent in attached to the original tax filing form submitted (i.e. your IRS Form 1040) or independently. If attached to the tax return just being filed, make sure to write the words “INJURED SPOUSE” on the top left corner of the tax return form (1040 EZ, 1040, 1040 A). This will signal to the IRS to process the recourse request first before the tax return, protecting the tax refund due back. Don’t forget to include both spouses’ social security numbers on Form 8379, otherwise IRS personnel will have a hard time figuring out how to apply the request.
A refund offset can occur whether you’re expecting a paper check refund from the IRS or if you designated an electronic deposit of the refund. The offset reference occurs before the payment is ever issued, so neither format makes a difference.
If it turns out that you still owe a balance to a federal agency after the full tax refund has been used as an offset, that remaining debt will still exist. It will also still incur new interest and penalties the longer it goes unpaid. Just because you realized an offset doesn’t mean that the remaining balances are now waived. Settling these balances needs to occur with the respective agency unless the funds are owed to the IRS specifically. The IRS will not intervene on your behalf; you need to contact the respective federal agency directly on unpaid amounts.
If you received a refund offset but never got the notice that explains what happened, you can follow up with the Financial Management Service to get a copy or the information. FMS can be contacted at 800-304-3107 during normal business hours in the week. Keep in mind the office runs on Central Time, so if you’re in a different time zone, you will need to adjust when you call to make sure you connect. For IRS assistance you can also call 800-829-1040.
IRS Form 8379 – Injured Spouse Allocation
IRS Publication 971 – Innocent Spouse Relief
IRS Form 8857 – Request for Innocent Spouse Relief
U.S. Internal Revenue Service: Applying for Innocent Spouse Relief