Can the IRS Seize Your Tax Refund? 4 Reasons They Can (and How To Avoid It)
According to data from the IRS, the average tax refund in 2024 has been $3,011, an increase of 4.6% from one year ago. If you’re still waiting for your tax refund, the IRS states that you should typically expect to get your money within 21 days.
However, you may not receive a refund this tax season — if the IRS deems it can seize your funds.
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Even though your tax return could show that you’re in for a refund from the IRS, the funds could be kept in what’s known as an offset to pay for a portion or all of your debts. If you owe a federal or state debt from a previous year or have delinquent payments to any other federal agency, the IRS could seize your refund. Here are the common reasons why the IRS can seize your tax refund — and how you can keep this from happening to you.
You Owe Back Taxes
If you owe federal or state income taxes, the IRS can use a portion of your refund to cover this balance. The federal entity that handles tax refunds is the U.S. Department of the Treasury’s Bureau of the Fiscal Service (BFS), which can hold back a portion or all of your tax refund to cover debts you have with the government.
One of the conditions of an installment plan for your taxes is that the IRS can apply your refund toward the debt owed. Any amount left after covering your debts will be refunded to you. The IRS should send you a notice with an explanation.
You can contact the IRS directly by calling (800) 829-1040 if you feel a mistake was made.
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You Collected More in Unemployment Compensation Than You Should Have
Your state can have the BFS offset a portion of your tax refund by the amount they believe you collected more in unemployment compensation than you were entitled to. This could be due to fraud concerns or an issue with your reported earnings.
If you discover an issue, you should contact the IRS to prove that you received the correct amount of unemployment compensation based on your situation.
You Defaulted on Student Loans
Your tax refund can be seized or held back if you default on any federally insured student loans. Your state can also seize funds from your state tax refund for student loans.
To make matters worse, the U.S. Department of Education and the agency you defaulted on can request that your employer withhold up to 15% of your disposable income to garnish your wages until the debt gets paid off.
You Owe Child or Spousal Support
Your state’s child support agency can have the BFS seize money from a tax refund to cover any delinquent payments regarding court-ordered child support.
You should receive a notice from the BFS that indicates how much money has been seized from your refund based on child or spousal support issues. You’ll want to directly deal with the state’s child support agency for this matter.
Regarding spousal support, any payments awarded for this matter as part of a child support order could lead to a tax refund offset when payments haven’t been made.
How To Handle the IRS Seizing Your Tax Refund
Those who have past-due debts including federal and state taxes, child support and student loans will see the funds from their returns be used to offset these outstanding obligations. This also applies to any unemployment benefits that were paid out by mistake. If any of these conditions apply to you, the IRS can automatically draw on your would-be return to correct as much of that balance as possible.
Here are the best steps to take if you’re worried about a tax refund getting seized:
If you don’t think you owe the IRS or there’s a mistake with a federal tax return, call them at 800-829-1040 for more information.
For any additional information on an offset, contact the Bureau of the Fiscal Service at (800) 304-3107 (or TTY/TDD 866-297-0517).
If you don’t believe that you have a debt with the agency that seized your funds, you want to contact them directly.
While the IRS can hold back your tax refund if they find an issue with your return, there are a few scenarios where they can outright seize your funds. If you believe that your refund could be seized, you’ll want to consider calling the BFS directly at 1-888-826-3127. It’s critical that you understand that the BFS will likely seize your refund if you owe any back taxes or are delinquent on any of the debts mentioned in this article.
Georgina Tzanetos contributed to the reporting for this article.
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This article originally appeared on GOBankingRates.com: Can the IRS Seize Your Tax Refund? 4 Reasons They Can (and How To Avoid It)
