If you’ve received a Notice of Intent to Offset, it’s time to take a look at your finances. Perhaps you forgot about an old debt or didn’t realize you needed to file a state tax return in addition to your federal one.
You might have received a notice of refund offset because you avoided repayment on student loans, not knowing the consequences. Whether your past-due obligation was left unpaid accidentally or intentionally, a tax offset can be applied by the government to settle your outstanding balances. Leaving your debt unpaid can result in a refund offset year after year, leading to serious financial consequences.
This article answers the following questions:
- What is a Tax Offset?
- What is a Notice of Intent to Offset?
- Why Does the IRS Offset Tax Refunds?
- How Does the Treasury Offset Program Work?
- How Do I Know if My Tax Refund has Been Offset?
- How are Offsets Different from Other IRS Penalties?
- What Do I Do if I Receive a Notice of Refund Offset?
- How Can I Avoid a Tax Offset?
Read on to learn all about offsets and how to correct them.
What is a Tax Offset?
A tax offset, also known as a tax refund offset, is when money from your tax refund is withheld in order to pay taxes you owe to the IRS for a prior year, or to settle other state and federal debts including:
- Overdue federal taxes
- State income tax
- State unemployment compensation debts
- Child support
- Spousal support
- Federal non-tax debt, such as student loans
Any offsets triggered by past-due federal taxes are handled by the IRS and all other offsets are handled by the Bureau of Fiscal Service (BFS).
What is a Notice of Intent to Offset?
A “Notice of Intent to Offset” is the IRS or BFS official warning of their intent to offset part or all of your federal tax refund and apply it to unsettled debts. A Notice of Intent to Offset will contain several pieces of critical information:
- The name of the individual taxpayer
- The amount of the original tax refund
- The adjusted amount after the refund offset
- The agency receiving the tax offset payment (ie. the IRS, student loan lender)
- The agency’s contact information
Why Does the IRS Offset Tax Refunds?
The Treasury Offset Program allows the government to apply your tax refund to unsettled debts owed to several government agencies.
Not all debts are subject to a refund offset, however, a Notice of Intent to offset can be used to pay for:
- Unpaid child support
- Past due federal student loans
- Federal agency non-tax debts
- State income tax obligations
- Certain unemployment compensation debts
You’ll notice that private debts such as credit card balances and auto loans are not listed above. These agencies don’t have the ability to leverage the tax refund offset program because they are non-government organizations. In other words, you might have your taxes offset and allocated toward your federal student loan, but they wouldn’t be offset in order to pay off your credit card debt.
How Does the Treasury Offset Program Work?
IRS tax returns are issued through the U.S. Department of Treasury’s (BFS). The federal payments returned to you go through the BFS and can be mitigated by the Treasury Offset Program therein.
Through the Treasury Offset Program, the BFS can notate where state or federal debts are owed and create a tax offset which reduces your return depending on how much debt you owe. The amount that is withheld from your refund is then issued to the agency to whom the debt is owed. If you owed state income taxes, for example, the money would be delivered to your state tax department in order to settle your outstanding debt.
If a portion of your tax return remains, it’ll be issued to you per your original request either by check or direct deposit. The BFS will notify the IRS of the amount taken from your refund once your refund date has passed.
How do you know if you’ve incurred a tax offset? The first step in the Treasury Offset Program is issuing the taxpayer an official Notice of Intent to Offset.
How Do I Know if My Tax Refund has Been Offset?
When taxpayers experience a delay in their refund, it can be difficult to tell whether the IRS plans on keeping it as part of a tax offset, or if there’s simply been a complication with your return.
If your refund is going towards an unpaid debt—as part of a tax refund offset—you will receive a letter notifying you of the intent to offset federal payments after your tax return has been filed and before the refund has been processed. This letter is called a Notice of Intent to Offset.
As we mentioned above, the Notice of Intent to Offset should include information such as your name, the amount offset, and the agency receiving the money offset from your tax refund.
If you didn’t receive a Notice of Intent to Offset but are expecting a much larger tax return, contact the BFS Treasury Offset Program Center by phone: 800-304-3107 Monday through Friday, 7:30 AM to 5:00 PM.
Additionally, the IRS offers a toll-free number [800-304-3107] which you can call and go through automated prompts to see if you have any tax offsets against you by entering your Social Security number.
How are Offsets Different from Other IRS Penalties?
It’s easy to experience confusion when trying to make sense of the common IRS collection methods. The Treasury Offset Program is just one way the IRS can collect past due taxes. Tax liens, levies, and garnishments are other methods the IRS employs in order to collect taxpayer money in an effort to resolve outstanding debts.
The tax offset method is an effective tool for the IRS because it can initiate an automated tax levy, unlike other types of collections which could take more time and communication in order to carry out. Tax refund offsets only collect money from your tax refund, while other collections methods—such as levies and garnishments—can impact your paycheck, retirement fund, and even your Social Security benefits.
Here are some federal payments that are subject to tax levy:
- Federal employee retirement annuities,
- Federal payments made to you as a contractor/vendor doing business with the government (including Defense contracts),
- Federal employee travel advances or reimbursements,
- Certain Social Security benefits paid to you,
- Some federal salaries,
- Medicare provider and supplier payments.
- Railroad Retirement Board benefits paid to you.
- Military Retirement
What Do I Do if I Receive a Notice of Refund Offset?
If you’re aware of your unpaid debt and don’t need to dispute any of the information included in your Notice of Intent to Offset, there’s nothing you need to do. However, many people are shocked upon receiving a tax offset and disagree with the intent to offset federal payments. If you fall into the latter camp, there are a few steps you can take:
- If you believe you do not owe the amount listed on your Notice of Intent to Offset and want to dispute the tax offset, you should contact the agency that received the offset payment, not the IRS. The IRS is not in charge of the Treasury Offset Program and they cannot speak to the accuracy of their report. Only contact the IRS if your original refund amount shown on the BFS notice of refund offset differs from the refund amount shown on your tax return.
- For those who filed a joint tax return and received a notice of refund offset due to a spouse’s outstanding debt, you might be able to receive a portion of the offset amount. To request your portion of the refund, you’ll need to file Form 8379 Injured Spouse Allocation. You can find this form online at IRS.gov, by calling 1-800-829-3676, or by hiring a tax professional to file on your behalf. This refund only applies if the past-due obligation is entirely due to the spouse. For example, an individual might typically expect to receive a large tax refund but was unaware of their newlywed spouse’s unpaid student loans when filing a joint tax return; after receiving a Notice of Intent to Offset, he or she can request Injured Spouse Allocation to receive their portion of the return. In these situations, it’s best to submit your Form 8379 as soon as possible—even before receiving a Notice of Intent to Offset—as it can take up to fourteen weeks to process an Injured Spouse request. Do note that it requires a specific set of instructions, and hiring a professional for help is the best way to expedite the process.
- Student loan borrowers in default who have a refund offset can request a hearing to appeal the offset. The IRS states that you must appeal to the Department of Education to challenge a tax offset after it’s already occurred. To put the tax offset on hold while challenging it requires filing a request for review within 65 days after receiving the Notice of Intent to Offset. The main defenses for student loan tax offsets include:
- You already repaid the loan
- You had entered into a repayment agreement with the loan holder and are making the payments as required
- You have filed for bankruptcy and the case is still open
- You did not receive a refund owed to you by the school
- The best way to correct an offset, and prevent a notice of refund offset in future years, is to make payments towards your outstanding debt. If you demonstrate an effort to settle your past-due obligations, the BFS is less likely to impose a tax offset.
Once a tax offset is imposed, however, it will be held against you each year until your debt is paid in full. If you try to outsmart the IRS and neglect to file annual tax returns to avoid losing your refund to an applied debt, you could end up with serious penalties, fees and in some cases, criminal charges.
How Can I Avoid a Tax Offset?
To avoid a tax refund offset altogether, you’ll need to pay off your balance in full—including interest and penalties—within 60 days of receiving your Notice of Intent to Offset. For those protected by bankruptcy laws, submit the necessary evidence of your bankruptcy including the filing date and case number.
Once you’ve lost an offset tax return, you won’t be able to get it back, but you might recover your portion if you qualify Injured Spouse Allocation. Do your best to stay afloat of financial responsibilities and avoid defaulting on loans to prevent a tax offset from ever occurring.
Use the expert tax professionals at Community Tax for advice regarding all of your tax-related needs. We can help you submit Form 8379 if applicable and settle any liens imposed against you. We offer a full suite of tax services, including income tax filing, back tax relief, and audit representation.
From professional advice to knowledgeable tax attorneys, Community Tax is your one-stop shop during your tax research. Whether you’re in need of information on tax offsets, general collection relief, or need help for filing returns, Community Tax is your trusted assistant. Contact us today to see how we stand to benefit our clients and learn why we’ve grown into the nation’s leading tax service provider.