If you have a delinquent state tax bill, the Internal Revenue Service is within its rights to withhold or divert your refund to settle this unpaid debt. Depending on the circumstances, the federal government can offset, or withhold, all or part of your federal tax refund and send the funds to the state you owe taxes to pay off your delinquent tax bill.
TL;DR (Too Long; Didn't Read)
The IRS can withhold your refund to pay delinquent state taxes if the debt has been registered with the Bureau of Fiscal Service.
IRS Delinquent Taxes
The U.S. tax code authorizes the U.S. Treasury to use monies from a federal tax refund to pay certain delinquent federal payments and state debts owed by a taxpayer. Title 26, Section 6402(e) of the U.S. Code requires that a state income tax debt be past due to qualify for a federal offset. This means that either a court judgment or an administrative hearing has determined the amount of the delinquent state tax debt that is due.
When the IRS authorizes a federal tax refund, it sends a payment request to the U.S. Treasury’s Bureau of Fiscal Service. Using the recipient’s Social Security number or employer identification number, the bureau’s Debt Management Services department checks its list of delinquent federal taxes and state debts. If the recipient appears on its delinquent debt list, Debt Management Services determines whether the type of debt, including a delinquent state tax payment, is legally subject to a federal income tax refund offset.
Exceptions to This Rule
The U.S. Treasury will not authorize an offset from your federal tax return if the state has not reported your delinquent debt to the Bureau of Fiscal Service. Your debt must appear on the Treasury’s delinquent debt list. The Treasury also does not offset an unpaid state tax obligation that has been delinquent for 10 years or more. Federal law restricts offsets of state delinquent tax debts to residents of the state that is owed money. If you do not live in the state to which you owe a delinquent tax debt, the federal government will not withhold the amount of the debt from your federal tax refund.
If the U.S. Treasury plans to offset your delinquent state tax debt from your federal tax refund, it will send you a notice before taking action. The notice will provide the original amount of your federal tax refund, the amount of the offset, the state tax authority receiving the payment and the telephone number and address of that agency. Contact the state tax authority if you want to dispute the existence of the debt or the amount owed. You may also call the Treasury at 800-304-3107 to ask questions about the offset. The Treasury will send you a check for the portion of your refund remaining after any offset.
2018 Tax Changes and State Taxes
Before you file this year, pay close attention to the tax changes that could inflate your state tax bill. If you're unprepared to pay extra, you could end up owing more in taxes than you can afford. In all but five states with state income tax (Alabama, Arkansas, Mississippi, New Jersey and Pennsylvania), those taxes are in some way tied to federal tax laws. You may end up owing more, as a result.
Filing Your 2017 Taxes
If you filed in 2017 but didn't receive your refund, you should have received a notice if part or all of it was withheld due to offset. If you've been putting off filing due to delinquent taxes, though, it's important to file as soon as possible to avoid further penalties.
Grygor Scott has written professionally since 1991, with a focus on law, government, food and travel. His work has appeared in "New York Resident" and on several websites. The author of more than 20 nonfiction books, Scott graduated with honors from the University of North Carolina School of Law.