Federal law allows income tax refunds to be seized under certain circumstances to collect specific types of debt. This taking of your refund and sending it to the creditor instead of you is known as an offset. Offsets can be taken from any tax refund due, even if the debt involves only one person on a joint return.
The IRS itself can withhold and keep your refund for certain reasons. For example, they may keep your refund if their records show that there are any unpaid back taxes, even for just one spouse. The IRS might also keep your refund if they discovered missing tax returns from previous years, if there is an ongoing audit or if there are unresolved errors from past returns.
Certain types of debt other than federal taxes can also be collected through a tax refund offset. This action is regulated and administered by the U.S. Treasury Offset Program -- or TOP -- and these types of debt are limited and restricted by law. They include unpaid state taxes, defaulted student loan debt, unpaid court-ordered child support payments, debts involved with a current bankruptcy case, and overpaid or erroneously awarded state unemployment insurance benefits. Many other types of debt involving private creditors such as banks or credit card companies, not covered by the offset regulations, and therefore your tax refund cannot be seized by these creditors.
Regulations and Procedure
Certain conditions must be met before an eligible creditor can use TOP for collection of debt. The debt usually needs to be at least 90 days past due. The creditor must show that it has actively tried to collect the debt directly from you. This includes making repeated attempted or actual contacts. The creditor has to send you a notice specifically stating that the debt is being sent to TOP for collection. TOP must send you a detailed notice if an offset is taken from your tax refund.
Injured Spouse Allocation
Although the offset applies against the total refund of a jointly filed tax return, the non-debtor spouse has the right to get part of the seized refund back. This is known as an Injured Spouse Allocation. If you're an "injured spouse," you need to file IRS Form 8379 to request that your share of the refund be sent to you. The IRS will calculate this allocation based on your proportion of the income, deductions and credits from the joint return. You can file this form with the actual tax return or separately after receiving notice of an impending or actual offset.
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