Can the Government Take My Tax Refund?

Posted on November 4, 2021

A maxim for today:

The Government giveth, but more often it taketh away.

Within the last two weeks, I have been approached and asked by multiple folks, “Can the government take my tax refund?” In this Taxing, Briefly article, we’ll discuss offsetting tax refunds to pay other state and Federal obligations.

If you overpay tax to the government (due to over withholding or some other fortuitous circumstance), you are entitled to a refund of this overpayment. If you owe a liability for previous year or otherwise, the U.S. government 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;^[1] debts owed to other federal agencies;^[2] past-due, legally enforceable State income tax obligations;^[3] and unemployment compensation debts.^[4]

The Mechanics of Refund Offsets

The Department of Treasury’s Bureau of the Fiscal Service issues tax refunds, and Congress has authorized the BFS to conduct the Treasury Offset Program. Through this program, the BFS may reduce a taxpayer’s Federal income tax refund to offset the aforementioned obligations. The Treasury Offset Program is authorized under the Internal Revenue Code and the Federal banking and finance regulations.^[5]

An Example of Offsets in Practice: Past Due, Legally Enforceable State Income Tax Debts

A “past-due, legally enforceable state income tax obligation” is a debt that either (i) resulted from a judgment rendered by a court of competent jurisdiction which has determined an amount of state income tax to be due;^[6] or (ii) resulted from a determination after an administrative hearing which has determined an amount of state income tax to be due,^[7] neither of which may be subject to judicial review.

The term also encompasses a debt which resulted from a state income tax which has been assessed but not yet collected, the debt has become final under state law, and it has not been delinquent for more than 10 years.^[8]

An Example of Offsets in Practice: Delinquent State Income Tax Debts

Let’s look at offsetting state tax debts as an example of how the Treasury Offset Program works in practice. In order to begin the offset procedures, a state notifies the IRS that a taxpayer owes a past-due, legally enforceable State income tax obligation to such State.^[9]

No state may take action against a taxpayer until it notifies that individual (by certified mail) that the state proposes to take action to offset the taxpayer’s debt to the state through their Federal tax refund.^[10] Also, delinquent state income tax offsets are only permitted if the address shown on the taxpayer’s Federal tax return (for the year of the overpayment to which the refund relates) is within the state seeking the offset.^[11]

Procedural Rights of the Taxpayer and Requirements of the State

The individual must be given at least 60 days to present evidence that all or part of such liability is not past due or is not legally enforceable. The state then must certify that it has considered any evidence presented by the individual and determined that the amount of such debt is past due and legally enforceable, as well as certifying that the state has made reasonable efforts to obtain payment of the state income tax obligation.^[12]

When an offset occurs, the BFS must notify the debtor in writing regarding (i) the amount and date of the offset; (ii) that the purpose of the offset was to satisfy a past-due, legally enforceable state income tax obligation; (iIi) the state to which this amount has been paid or credited; and (iv) a contact point within the state, who will handle concerns or questions regarding the offset.

Priority of Offsets

As noted above, the IRS may offset a number of different obligations. What if an individual, who made an overpayment on this year’s taxes owes child support and has a Federal and state tax lien filed against him for unpaid income taxes?

The Treasury will first offset the Federal income tax obligation, then it will offset the past-due support obligation, and finally it will offset the state income tax obligation.^[13] If a taxpayer owes state income taxes and a state unemployment compensation debt,^[14] the Treasury will offset them in the order that they accrued.^[15]

No Judicial or Administrative Review of Treasury Offset Program

No court in the United States—state or Federal—has the jurisdiction, legally or equitably, to restrain or review a Federal offset under the Treasury Offset Program, nor may the Treasury review an offset in an administrative hearing.^[16] Finally, an individual may not sue the United States for a refund of the offset. A taxpayer, however, may sue or bring an administrative action against the state or the Federal agency which requested and received the offset.

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 have 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 nerve to use their refund to pay off an installment agreement or satisfy a Federal tax lien against them.

Bottom line, when you owe money to the government—state or federal—or to your baby mama, your Federal tax refund is at risk. The good news is that once you receive a refund, you do not have to pay it back under the Treasury Offset Program. That’s not to say you don’t still owe your state income tax debt or child support obligations…you bum.

Footnotes:

See IRC § 6402(c). The origin of the IRS’s authority can be found in § 664 of the Social Security Act (formerly 42 U.S.C. § 464), which defines “past-due support” as “the amount of a delinquency, determined under a court order, or an order of an administrative process established under State law, for support and maintenance of a child (whether or not a minor), or of a child (whether or not a minor) and the parent with whom the child (whether or not a minor) is living.” ↑
See IRC § 6402(d); 31 U.S.C. § 3721. ↑
See IRC § 6402(e). ↑
See IRC § 6402(f). ↑
IRC § 6402; 31 C.F.R. § 285.8. ↑
IRC § 6402(e)(5)(A)(i)(I). ↑
See IRC § 6402(e)(5)(a)(i)(II); 31 C.F.R. § 285.8(a). ↑
IRC § 6402(e)(5)(B). ↑
IRC § 6402(e)(1). ↑
IRC § 6402(e)(4)(A). ↑
IRC § 6402(e)(2). ↑
IRC § 6402(e)(1); 31 C.F.R. § 285.8(c)(1). ↑
IRC § 6402(e)(3)(A)(i)-(iii). ↑
Arising under IRC § 6402(f). ↑
IRC § 6402(e)(3) (flush language). ↑
IRC § 6402(g). ↑