Can the IRS Hold Your Refund for a State Debt?

The right of the IRS to intercept refunds expands well beyond just federal tax debts. Whether you know it or not, the IRS is charged with collecting debts for a variety of state agencies. If you don't desire to see your refund vanish because you owe an unrelated state debt, then it's best if you know what precautions to take ahead of time and who to contact if your refund is offset.

Significance

If you have a delinquent debt with a state agency, the money may be taken from your federal refund and applied to the amount you owe. State debts that can be offset include, but are not limited to, state tax and child support. These state debts are handled by the Treasury Department's Financial Management Service (FMS) office, which is responsible for collecting the refund and sending it to the state agency where the delinquency exists.

Process

Before your refund is offset, FMS will send you a notice advising you of the amount of your original refund as well as the amount of the offset. After the refund is released by the IRS, FMS will hold the offset portion of the refund for a short period to allow time for innocent joint filers to recover their portion of the refund. After this initial hold period, the funds will be sent to the state agency where the debt is owed. If you have questions about which agency submitted the debt, call FMS at 800-304-3107.

Remedies

If you are a joint filer and the IRS withheld your combined refund when only your spouse owes a state debt, then you can request to have your portion of the offset refunded by completing IRS form 8379. Once you've completed the form, mail it to the IRS service center which processes returns for your region. The processing time frame for form 8379 is 11 weeks if filed electronically with the original return or 14 weeks if filed by paper. In addition, if the offset causes a hardship for you, then you may be eligible for relief by the Taxpayer Advocate Service (TAS). Call TAS at 877-777-4778 to determine whether you qualify.

Exceptions

Your state creditor will suspend your debt if it is subject to a bankruptcy filing. If the IRS is aware of your bankruptcy filing before the offset, they may be able to reverse it. If, however, you did not make the IRS aware of your bankruptcy filing, you may be required to contact the state agency that is requesting the funds directly.

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