You were supposed to get a refund, Federal or state, and instead you receive a letter saying that your refund was being taken to pay a debt you owe. What’s going on and what can you do about it.
The IRS will offset (take) your federal refund for back child support, a state tax debt, or a federal debt. Generally those debts are back federal taxes and being in default on a student, VA or HUD loan. The operative work is default. The letter you receive telling you about the lost refund will tell you where the money is going. The first question is if you really do owe the money. It could be payments haven’t been credited to your account yet. If you disagree with the IRS about a tax debt, call them. Other debts are handled by Financial Management and you’ll have to talk to them. (800-304-3107) But don’t be surprised if you have to talk the organization you owed too.
If you do owe the money, the next question is how you are filing? If you are using any filing status but Married Filing Joint, congratulations you just paid down your debt. If you file Married Filing Joint, whose debt is it? If the debt belongs to both, like prior year taxes not being paid, you paid down your debt. But if the debt just belongs to one spouse, there might be a little relief using Form 8379, Injured Spouse Claim. The injured spouse, the one without the debt, might be able to get their part of the refund by filing this form. It asks that the taxpayers allocate income and deductions to each spouse and submit the form. The form can be sent with the return if you know you will have a problem or as a response to the letter you receive. The form only allocates it doesn’t calculate any refund. The IRS will do that based on the info on the form and if the state is community property or not.
The states will also take state tax refunds for debts. Taxes and child support are the most common but each state has their own list of debts. Kansas will collect for municipal debts like hospital, ambulance, and utilities. Also states are beginning to collect back taxes for each other. As with a federal offset, it may be possible to do an equivalent of injured spouse on a state debt once you are notified about the lost refund.
It’s disappointing to lose money you were counting on for other things. On the other hand, you are paying down your debt. And once the debt is satisfied, you’ll get a refund again.