If you’re like a lot of tax-paying Americans, you may be relying on a tax refund to fill some monetary gaps. However, if you’re in debt to the IRS from previous years, you may find yourself without the windfall you were expecting. Unfortunately, if you owe the IRS back taxes in any amount, or if you have any unfiled returns, the IRS can take what you overpaid this year to cover what you owe.
For example, if you file a 2024 tax return with a refund, but you owe or haven’t filed for tax year 2023 or previous years, the IRS will keep the tax refund. To get help now, contact us at Seattle Legal Services today.
Key Takeaways
- Tax refunds come from overpayments and/or tax credits.
- The IRS will take your tax refunds to pay for outstanding debt.
- To avoid getting a refund, update your W4, calculate quarterly payments more accurately, or look into advance credits.
- Even if you’re up to date on a payment plan, the IRS can take your current tax refund.
- The IRS will not take refunds earned after an offer in compromise is accepted.
How to Check If Your Refund Will Be Taken
If you owe back taxes, the IRS will keep refunds and apply them to your debt. Unfortunately, this is true whether you’re making payments or ignoring the tax debt.
Not sure if you owe from previous years? Then, follow these steps to check whether or not you’re at risk of a refund offset:
- Log into your IRS account at IRS.gov to check for outstanding balances.
- Call the Bureau of the Fiscal Service Offset Program at 800-304-3107 to see if your refund is scheduled for offset.
- Check your most recent IRS notice (CP14, CP501, CP504, or final notice)—these call out your tax debt before refund season.
You may also want to reach out to a tax professional. They can find out how much you owe and help guide you toward a resolution.
Note that historically, the IRS has allowed some taxpayers to keep some or all of their refunds even if they owed back taxes. For example, when the agency gave out advance tax child tax credits in 2021, they sent out this portion of the refund regardless of whether the taxpayer owed back taxes or not.
Tax Overpayment and How to Avoid It
It’s common for taxpayers to be excited about receiving a large check from the IRS at tax time. However, getting a refund usually means you’ve overpaid throughout the tax year. The more money you get back after filing, the more you lent the IRS interest-free throughout the last year.
The best case scenario is to get back as close to zero for a refund. When you have to pay the IRS, that means you have underpaid your taxes for the year. One key way to avoid having your tax refund taken if you owe back taxes is to avoid getting a refund by ensuring the IRS doesn’t take too much in the first place.
Adjust Your Withholding
The IRS provides a W-4 form for employees to adjust their withholding. If you’ve been overpaying and receiving large refunds in previous years, consider adjusting your withholding by submitting a new W-4 to your employer. This can ensure that your tax liability matches your actual tax situation, avoiding an excessive refund or an overpayment that the IRS may apply to any existing debt.
Use the IRS Tax Withholding Estimator
You can use the IRS Tax Withholding Estimator to get a more accurate estimate of how much should be withheld from your paycheck. By entering your income details and other relevant tax info, the estimator will help you determine whether you need to adjust your withholding and how to prevent overpayment in the future.
Avoid Overpaying Quarterly If You’re Self-Employed
If you’re self-employed, you pay taxes through quarterly estimated payments. If these payments are too low, you will incur a penalty when you file your annual tax refund. If they’re too high, you will be entitled to a refund when you file. To pay the most accurate amount possible, consider using an online calculator to estimate how much to pay, or if your income fluctuates throughout the year, consider working with an accountant who can help determine the optimal amount of quarterly payments.
Look Into Advance Credits
A lot of people receive tax refunds due to credits such as the Earned Income Tax Credit (EITC), rather than due to overpayments. If your refund is usually based on an EITC, look into getting the credits in advance. You can only get a certain amount in advance, but it will help to reduce your refund.
What to Do If Your Refund Is Offset
If your refund is offset, the IRS will send you a Notice of Offset detailing the amount taken and the debt it was applied toward. You can review this notice for accuracy. If you believe there’s been an error or if you disagree with the offset, you have the right to dispute it.
Here’s a step-by-step look at what you should do if you receive a refund offset letter:
- Review the Notice: Check the offset notice for any discrepancies, especially if you’re under a payment plan.
- Contact the IRS: If you believe there’s been an error, contact the IRS directly or through their Taxpayer Advocate Service to help resolve the issue.
- Resolve Your Debt: If the offset is valid, you’ll need to ensure your back taxes are paid. Contact the IRS for options on resolving your debt, whether by paying the full amount, setting up a payment plan, or applying for a relief option.
- Be aware of state refund offsets: The IRS can also seize state tax refunds for unpaid taxes. You may get Notice CP504 before this happens, but the agency isn’t required to send advance notice.
- Stay Informed: Regularly monitor your account and refund status through the IRS’s online tools.
How to Keep Your Refund If You Owe Back Taxes
If you owe back taxes, there are a few ways to protect your refund, but these options don’t apply to every situation. Consider the following:
Injured Spouse Claim
If you file taxes jointly with a spouse, but your spouse is the one who has outstanding tax debts, the IRS could apply your refund to their debt, even if you don’t owe anything. This is where the Injured Spouse claim comes into play.
This claim is designed to protect the refund of the spouse who doesn’t owe the debt. For example, if your spouse owes back child support or federal tax debt, the IRS may apply your entire joint refund to their personal debt.
By filing an Injured Spouse Claim, you can get your share of the refund back, provided the tax debt is solely attributed to your spouse and not you. Note that this process may differ if you live in a community property state.
Filing Separately to Protect Your Refund
If only one spouse owes taxes, a possible way to avoid the IRS seizing both spouses’ refunds is for the spouse who doesn’t owe to file separately. If you choose the “Married Filing Separately” status, the IRS can only offset the refund of the spouse who owes taxes. However, filing separately has its drawbacks.
While this filing status may help protect your refund from being seized, it also comes with significant limitations. Certain tax credits, such as the Earned Income Tax Credit (EITC) and the Child and Dependent Care Credit, are not available or are reduced when filing separately. This could reduce your overall tax benefits, making this approach less advantageous for many taxpayers.
So, while filing separately could be a viable option to protect your refund, it’s important to carefully weigh the trade-offs and consider how this filing status will affect your overall tax situation.
Request Hardship Relief
In rare cases, the IRS may grant an exception for taxpayers experiencing extreme financial hardship. However, in this situation, you generally do not qualify to get the full refund. Instead, you may be able to get a portion of the refund based on the hardship you are having.
For example, if you’re facing a utility shut-off notice or a broken furnace, you can petition the IRS to let you keep enough of the refund to cover those expenses. Contact the IRS directly or consider reaching out to the Taxpayer Advocates with Form 911.
Form 911 is used to request assistance from the IRS Taxpayer Advocate Service when you are unable to resolve a tax issue on your own, such as when you’re facing financial distress due to a tax refund offset. It’s important to note that the IRS rarely grants exceptions, but in extreme cases, this can be a route to pursue.
If you’re facing financial hardship and believe that a refund offset would push you into further financial distress, it’s worth submitting the form to see if the Taxpayer Advocate Service can offer help. However, this should only be considered in truly exceptional cases.
Negotiate a Settlement (Offer in Compromise)
If you owe more than you can afford to pay, you may qualify for an offer in compromise. An Offer in Compromise allows you to negotiate with the IRS to pay a reduced amount to settle your tax debt, and it can help you protect future tax refunds.
If your offer is approved, the IRS will not keep any refunds that are related to tax returns due after the acceptance of the offer in compromise.
For example, let’s say you owe $30,000 in taxes for tax years 2021 through 2023. You get an offer of $5000 accepted on March 1, 2025. If your 2024 due April 15, 2025 return shows a refund, you will be able to keep it. In contrast, if you had not settled that tax debt, the IRS would have applied the refund to the full amount due.
The IRS can seize refunds while your offer is pending, but if you need the funds, you can apply for an offset bypass refund (OBR) – which just means that the IRS bypasses its usual refund offset procedures.
Payment Plans and Compliance with Prior Year Taxes
If you owe back taxes but have set up a payment plan (Installment Agreement), the IRS will still seize any refunds that you earn.
Let’s say you owe $20,000 in back taxes, and you’ve entered a payment plan with the IRS. If your current year’s refund is $1,500, the IRS will apply the $1,500 toward the $20,000 balance, and you’ll still owe $18,500. If the refund is greater than the amount you owe, you’ll receive the difference.
It’s important to note that if your offset amount does not cover the balance due, you will still need to make payments as spelled out in your payment agreement. The offset counts as an extra payment and does not negate the regular monthly payment that you are supposed to make.
Frequently Asked Questions (FAQs)
Can I stop the IRS from taking my refund?
Not in most cases – typically, if you owe back taxes, the IRS will take your refund. However, Injured Spouse Relief or hardship relief are two ways that you may be able to preserve your refund.
Will my state refund be taken if I owe federal taxes?
Yes, your state refund may be taken if you owe federal taxes. However, if you also owe state taxes, the state will keep your refund instead of releasing it to the IRS.
Can I get my refund back after it’s taken?
If your refund was taken in error or if the amount taken was not correct, you may get your refund back. You may also use the Injured Spouse Program to retroactively reclaim refunds taken for your spouse’s debts.
Should I file my taxes if I know my refund will be taken?
Yes. File your taxes each year to avoid penalties and interest on taxes owed. As noted above, if you think you might qualify for a settlement, consider applying for an offer in compromise before your tax return is due, and then, you may be able to preserve your refund.
Can the IRS take my refund for other debts?
Yes, including child support, defaulted student loans, and state taxes.
Get Help and Protect Your Tax Refund Now
When you owe taxes from previous years, your tax refund can be used to settle that debt through a refund offset. If you have a payment plan in place, staying on track with your payments is crucial to preventing your refund from being taken.
Adjusting your withholding or quarterly estimated tax payments can prevent overpayment during the tax year, and choosing the correct filing status can protect your portion of a refund in the case of a spouse who owes debt.
Owe back taxes and need help? Seattle Legal Services can help reduce your tax debt, prevent IRS collections, and explore options to protect your refund. Contact us today to learn more and to set up a consultation.