Each spring, the taxman comes knocking on your door looking for your share. Taxpayers who paid extra receive a refund of the overage -- in most circumstances. Taxpayers who owe a debt to a government entity may not receive the refund. The Internal Revenue Service can hold your refund if you didn't pay your taxes, but the hold is not automatic. The IRS doesn't garnish your refund to pay your local taxes unless the local municipality requests the offset through the Treasury Offset Program.
The IRS gets first priority on your federal income tax refund. Owing back taxes to the IRS automatically comes out of your refund. State and local municipalities may also garnish federal income tax refunds to pay back-taxes owed. Your refund is garnished for the amount owed. The remainder, if any, is issued to you after payment of your debts.
Treasury Offset Program
The federal government created the Treasury Offset Program for state and government agencies to collect on debts owed. Common Treasury Offset debts include student loans, taxes and child support payments. The creditor agency must certify attempts to contact you within 60 days of the request for offset. The debt must be delinquent and legally enforceable in order to collect through the program. The IRS takes the money from your refund and sends any leftovers to you.
In all offset cases, the IRS sends notice of the offset before and after the offset occurs. The offset notice explains the offset, the date of the offset, the creditor, the creditor's contact information, and the amount taken to cover the bill. You need to contact the creditor to dispute the offset. The IRS does not handle disputes over tax refund offsets.
Only government agencies may request offset of a tax refund. Private creditors cannot use the Treasury Offset Program. In addition, once the money is deposited in your bank account, the IRS has no control over what happens to it. If a creditor or municipality has a lien against your account, it may be drained up to the limit as allowed by state statute.
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