Briefly Taxing
Can the Government Take My Tax Refund?
The Treasury giveth, and the Treasury taketh away.
If you pay more to the IRS than you owe — whether through over-withholding, a large deduction, or otherwise — you are generally entitled to an income tax refund. However, if you underpaid in a previous year and have an outstanding liability, the IRS has the ability to “offset” your tax refund against any liability you may have. What’s more, the IRS may offset your refund due to past-due support; debts owed to other federal agencies; past-due, legally enforceable State income tax obligations; and unemployment compensation debts.
The Mechanics of Refund Offsets
An Example of Offsets in Practice: Past Due, Legally Enforceable State Income Tax Debts
In Florida where I live and practice, we do not pay individual state income tax — thanks, in large part, to Mickey Mouse. This is not true in most other states that do not have a line item in their budget for anthropomorphized mice, like much of New England. (California, too, has Mickey Mouse revenue, but they also have a large state individual income tax…go figure.)
If you live in one of these non-tourism-driven states, and you fail to pay your state income tax, the Treasury Department (the IRS’s parental unit) may “offset” your federal income tax refund and pay it over to the state in satisfaction of your state income tax debt. Of course, there are some payments specifically exempt from offset.
In order to begin the offset procedures, a state notifies the IRS that a taxpayer owes a past-due, legally enforceable state income tax debt. The state must notify the delinquent taxpayer before it tells the IRS that the taxpayer has been a bum and has refused to pay its state income tax. Once the state notifies the taxpayer, and the taxpayer does nothing (as taxpayers are wont to do), then the state can notify the IRS and ask that it offset the taxpayer’s federal tax refund.
Procedural Rights of the Taxpayer and Requirements of the State
The individual must be given at least 60 days to show that all or some of the liability is not past due or is not legally enforceable. This is not a very high hurdle to overcome, unless, of course, you actually owe past-due state income taxes.
Once the taxpayer fails to cross this hurdle, the state will notify the IRS that it has weighed and measured the taxpayer’s claim and found it wanting. The state must also certify that it has made reasonable efforts to collect the income tax on its own before asking the IRS to step in.
If the state meets its procedural obligations, the IRS will then notify the taxpayer that it intends to offset the taxpayer’s refund. In doing so, the IRS must tell the taxpayer why it is offsetting the refund, how much it plans to offset, and the contact information for a person on the state level who can answer the taxpayer’s questions about the offset.
Priority of Offsets
What if an individual, who made an overpayment on this year’s federal income taxes, owes child support and also has a Federal and state tax lien filed against him for unpaid income taxes?
The IRS will not offset any amount of the refund to satisfy the past-due child support until the federal debt is paid off. The IRS may be magnanimous in offsetting refunds, but it wants its cut before it even thinks about helping Tiny Tim get a new crutch.
If a taxpayer owes state income taxes and child support, the IRS will offset the state obligations in the order that they became due.
No Judicial or Administrative Review of Treasury Offset Program
You want to sue to stop this offset? No dice, my friend. No court — state or federal — has the jurisdiction to stop or even review a federal refund offset. Further, you cannot sue the United States for a refund of the offset (of a refund). The only recourse that an individual has is to sue or bring an administrative claim against the state that requested and received the offset.
If this seems like the United States is kind of punting responsibility, you are absolutely correct. Nonetheless, the law is the law, and the United States government has absolved itself of any responsibility when it comes to issuing a refund offset to the states.
It’s good to be the king (of the fisc), I suppose.
Bottom Line
If you give money to the Government that you don’t owe it, the Government will — if the circumstances are appropriate — not give it back. I’ve had a number of clients come to me after the refund that they were expecting never came, and they got notice that the Government had some damn gall to use their refund to pay off some other (legally enforceable, and absolutely due and owing) debt against them.
Bottom line, when you owe money to the government — state or federal — or to your baby mama, your Federal tax refund is not guaranteed.
The good news is that once you receive a refund, you do not have to pay it back. The IRS cannot claw back what it paid to you to then apply it to a state debt. That’s not to say you don’t still owe your tax or child support obligations, you bum.
Briefly Taxing is not your typical tax blog. As Emily Dickinson might have said, we tell all the tax, but we tell it slant. We are a source for the latest developments in U.S. taxation with a dash of humor, a pinch of wit, and a heaping helping of sarcasm and not-so-passive aggression. Simply put, Briefly Taxing offers a churlish take on taxes.
