Will Money Owed on State Taxes Stop My Federal Refund?

You tax refund could be reduced to pay delinquent state taxes.

When you file your federal taxes and are owed a refund, you may not get that refund in your pocket if you owe the state or federal government money. The Department of Treasury's Financial Management Service, which issues refunds to taxpayers, conducts the Treasury Offset Program. The program could result in your refund being reduced by the amount you owe in state taxes.


Reasons for Tax Refunds to be Reduced or Withheld

The Department of Treasury's Financial Management Service is authorized by Congress to reduce tax refunds for past-due child support, federal agency non-tax debts, some unemployment compensation debts owed to a state -- usually as a result of fraud, or state income tax obligations. In order for your tax refund to be reduced for a state tax debt, it has to be reported as a delinquent or overdue debt to the Department of Treasury's Financial Management Service.


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Offset Notice

If your refund is withheld or reduced to pay a state tax obligation, you'll receive an offset notice in the mail from the Department of Treasury's Financial Management Service. The notice will tell you how much your refund was and how much was offset to pay the state tax debt due. The notice will also give you the name and address of the agency that requested the offset. If your refund was withheld or reduced for a state tax debt, the name and address will likely be your state tax agency.


The Treasury Offset Process

If you think your federal tax refund may be withheld to pay delinquent or past due state taxes, you can contact your state taxation office to find out how much will be withheld. It may be possible to pay the overdue taxes or come up with a payment plan to prevent the offset, depending on which state you live in. If your refund is offset, the Department of Treasury will send the offset amount to the state tax department and send you the remainder, either via check or direct deposit -- depending upon your chosen refund method.


Injured Spouse Allocation

If you filed a joint return with your spouse and your joint tax refund was withheld due a debt owed by your spouse and not by you, you can claim back your portion of the tax refund by filling out Form 8379, Injured Spouse Allocation (see Resources). If you know that an offset is going to occur, you can submit the form with your federal taxes. Otherwise, you can file the form by itself.