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Understanding when the IRS can seize your tax refund

With Tax Day 2017 now in the rearview mirror, those who filed their returns at the eleventh hour are more than likely anxiously awaiting their federal income tax refund, perhaps regularly checking their mailboxes or online accounts.

While there's no denying that it can take time for the Internal Revenue Service to process returns, there are circumstances in which the Treasury Department's Bureau of the Fiscal Service, the federal agency tasked with remitting refunds, can seize some -- or even all -- of a tax refund.

It's important to understand that this practice, known in federal tax parlance as an "offset," can only occur under specific circumstances.

In fact, some of the more common reasons why the Bureau of the Fiscal Service may withhold a tax refund at the request of the IRS include:

  • Federal income tax debt: If an individual owes federal income taxes, their refund can be deducted by the amount necessary to cover the balance with any remainder direct deposited or mailed via check. The IRS should send notice setting forth why the refund was withheld in these situations.
  • Student loans: If an individual has fallen behind on payments for a loan insured by the Department of Education (i.e., a federal student loan), his or her tax refund may be seized. However, the IRS must provide advance notice of such an intended seizure in order to provide the taxpayer with the chance to catch up on payments or challenge the action.
  • Child support/spousal support: If an individual is in arrears with child support, their state's child support enforcement office may file a request with the IRS to withhold a tax refund to cover the missing payments. If a spousal support award was part of the child support order, it too, can result in a tax-refund offset. Advance notice must be provided by the IRS in these scenarios.   
  • State income tax debt/unemployment compensation: If an individual owes state income taxes, their state's tax enforcement office may file a request with the IRS to withhold a tax refund. It can also file such a request if it believes the individual was paid more unemployment compensation than they were otherwise entitled to receive.

As alarming as this situation can be, it's not the only collection tool available to the IRS. Indeed, it will routinely resort to such collection efforts as liens, levies and seizures. If you are a professional, business owner or high net-worth individual anticipating this type of tax collection by force, consider speaking with a skilled legal professional to learn more about your options.

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