Can the State Take a Federal Refund Due to Owed Taxes From Last Year?

State and federal agencies work together to collect delinquent debts. Due to technological advances in the 21st century, it is much easier for state and federal agencies to share information and take action in real-time based upon that information. In laymen's terms, this means that if you're due a refund from one state or federal agency, but you owe money to another, chances are that the government will offset your refund to pay the debt. This constitutes the working relationship between state tax agencies and the Internal Revenue Service.

Significance

The Financial Management Service administers the Treasury Offset Program to collect delinquent debts owed to federal and state agencies. When you file a federal tax return, TOP must to check the system for delinquent IRS, state or non-tax debts, such as delinquent child support, before issuing a refund. If you owe state taxes from the previous year, FMS will take your federal refund and forward it to your state tax agency to cover the money you owe.

Features

Creditor agencies, such as child support agencies or state tax agencies, submit delinquent debts to FMS for collection; and payment agencies, such as the IRS, prepare payment vouchers and forward them to FMS. Then payment specialists at FMS compare identifying information on the voucher, such as the Social Security number and name, to the information submitted by creditor agencies. If the information matches, then FMS transmits the voucher funds to the creditor agency. FMS will continue to maintain information on delinquent debts and offset those debts until paid in full.

Exceptions

Creditor agencies suspend collections if your refund is subject to a bankruptcy stay. If you file a bankruptcy proceeding and want to know if your delinquent debt is subject to a bankruptcy stay, contact the IRS.

Warning

Having an installment agreement with the state in which you owe delinquent tax debt does not usually protect you from an offset. If the state has flagged your account for an offset, setting up a payment arrangement will not stall or postpone the offset transaction. If the offset of your refund to the state causes you financial hardship, you can contact the Taxpayer Advocate Service to request assistance.

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