Tax Refund Offsets

Federal and state income tax refunds are not always protected from debt collectors. We have seen increased instances, especially from North Carolina, to reduce refunds to pay outside debts. Here are the most common reasons Federal or state refunds may be offset:

(1)    Prior year income tax obligations outstanding

(2)    Child support payments are unpaid

(3)    Student loan debt default

(4)    Medical bills outstanding

(5)    Parking tickets or other local citations outstanding

What can be pulled from refunds at the state level is determined by each state’s law. If an agency puts in a claim against the refund you will be notified by the appropriate agency who intends to seize the refund, the amount to be offset, and steps to appeal if you believe it is inaccurate.

We see this come as a surprise with couples who are filing jointly for the first time. Their refunds can be offset due to unknown debt that their spouse has. The IRS does provide relief for spouses who were not responsible for the debt. By filing Form 8379 you can claim “injured spouse” and request that the portion of refund due be returned.

In all of the above cases outstanding debt can reduce or delay the refund process. If it has been more than 6 weeks and you have not seen a refund we would advise checking with the IRS or Department of Revenue regarding any outstanding debt that may be causing the delay.