Can the State Take a Federal Refund Due to Owed Taxes From Last Year?

Certain creditors are permitted to take your federal tax refund without your consent.

Certain creditors are permitted to take your federal tax refund without your consent.

Your federal income tax refund is fairly secure in the hands of the Internal Revenue Service, since most consumer creditors have no authority to take your tax refund because of unpaid debts. However, a state collecting past-due income tax is exempt from this taxpayer-favorable rule and can take all of your federal tax refunds until you're caught up. State tax agencies can take your refund through the Treasury Offset Program.

Treasury Offset Program

The Treasury Offset Program, or TOP, is administered by the Treasury Department's Bureau of Fiscal Service -- the same agency that issues federal tax refunds. In addition to past-due state income tax debts, the Bureau of Fiscal Service, or BFS, allows creditors to take your tax refund if it's to pay child support, a non-tax debt owed to the federal government (such as a defaulted student loan), and unemployment compensation payments that you're obligated to return.

Legally Enforceable State Income Tax Debts

In order for a state to intercept a federal tax refund to pay your state taxes, the TOP requires that a legally enforceable debt exist. This means the debt must arise from a court judgment against you, a final determination of the amount of state income taxes you owe made at the conclusion of an administrative hearing or through an assessment, including amounts you voluntarily report on a state income tax return. If you owe local income taxes, such as to a city, your federal refund can be taken to pay off these taxes as well if your state's tax agency is ultimately responsible for administering the local tax.

Tax Refund Offset Notice Requirement

If you suspect that a state is going to take your tax refund, you can find out for sure before filing your federal return by contacting the BFS TOP call center at (800) 304-3107, or your state tax agency. When the amount of your tax refund is more than the state income tax you owe from last year, you'll receive payment of the excess through direct deposit or a paper check -- whichever method you requested on your return. The BFS is required to send you a notice that indicates the full amount of your tax refund, how much of it is being used to pay off last year's state taxes, and the name, address and telephone number of the state tax agency that will receive it.

Joint Return Issues

When filing a joint return with your husband, you're entitled to a portion of any federal refund. However, the entire payment still can be taken even if the state tax debt is solely the responsibility of your husband, such as if he filed a separate return or you weren't married last year. If you're aware of the state income tax debt and anticipate having your refund taken to pay it, you may want to consider filing Form 8379 to claim injured spouse protection for your portion of the refund. The IRS will process Form 8379 before the joint return if filed together. This means that, based on your answer to a number of questions and the tax information entered on the form, the IRS will determine how much of the refund, if any, you're entitled to receive before your husband's state income tax debt is paid out of it.

About the Author

Michael Marz has worked in the financial sector since 2002, specializing in wealth and estate planning. After spending six years working for a large investment bank and an accounting firm, Marz is now self-employed as a consultant, focusing on complex estate and gift tax compliance and planning.

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