Tax Refund Offset Reversal 2022: The Complete Guide

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Each tax season, thousands of Americans get the unwelcome surprise of having their tax refund offset to repay federal student loan debt, child support, and taxes they've fallen behind on. However, there's a process to request a tax refund offset reversal.

Federal law allows the government to use "tax refund offsets" to withhold funds from people who fall behind on federal defaulted student loans, unpaid taxes, and more. The government notifies people ahead of time that their refunds (and other expected federal payments) may be withheld. But many never get the notice because they moved or are too overwhelmed with their debt to open their mail.

Thankfully, the IRS is not taking refunds for student loans during the first part of 2022. President Joe Biden recently extended the student loan payment pause and collections hold through May 2022. That means the Department of Education will not start taking tax refunds until May 2, 2022 — unless Mr. Biden extends the freeze once more.

Ahead, you'll learn how to stop an offset from happening and how to request a tax refund offset reversal to get some money back if it's already been taken to repay defaulted student loan debt.

Key Takeaways

  • The IRS can start taking tax refunds for student loans in May 2022.
  • You can stop a tax refund offset by getting federal student loans out of default.
  • You can find your defaulted student loans by calling the Federal Student Aid Information Center at 800-433-3243.

Why does an IRS tax refund offset happen?

A tax refund offset happens because you fall behind on debts owed to the government. Federal law allows state and federal agencies to use the Treasury Offset Program to withhold your refund — including the child tax credit — to repay those debts. If an agency reports your debt to the TOP, the IRS will offset your refund to repay:

  • Past due child support.
  • Defaulted federal student loans.
  • Unpaid federal income taxes.
  • Unpaid state income taxes.
  • Unpaid unemployment compensation debts.

Learn More: How to Stop Student Loan Wage Garnishment

Note: Offsets for child supports are done by the state the child support order was entered in rather than the federal government. The agency will file a claim with the Bureau of the Fiscal Service, and you'll be entered into the Treasury Offset Program. Once that happens, your tax refunds will be offset until you become current on your support obligations.

Tax-Refund Offset Coronavirus

If you owe student loans, you can get your tax refund during the Covid-19 pandemic. When the nation first locked down, former President Trump paused the interest rate and collection efforts for most defaulted student loans. Mr. Biden extended the student loan payment pause when he first took office and again this past December. When the freeze ends May 1, 2022, the IRS will be able to apply tax refunds to student loans, child support, and other delinquent debts owed to state and federal agencies.

Some states have also put a hold on refund offsets during the pandemic. For example, California stopped taking refunds until July 2021. Check with your state to see what type of relief it's providing.

Learn More: $10,000 Student Loan Forgiveness — Update

Is the Department of Education taking tax refunds in 2022?

In May 2022, the coronavirus freeze will end, collection activities will resume, and the Department of Education will contact the IRS to take your tax refund to repay federal student loans. You can stop that from happening by digging out of default. The U.S. Department of Education offers three options to bring accounts into good standing:

Not only does getting out of default protect your refund, but it also reinstates your eligibility for student loan forgiveness programs, affordable repayment plans, and new loans and grants from Federal Student Aid.

Note: If you file your tax return early, you may be able to get your refund back without getting out of default. But if you wait too late or if the IRS doesn't process your return until after May, you're at risk of having your refund taken for student loans. The best way to avoid having your refund taken is to get out of default.

Learn More: Student Loan Rehabilitation CARES Act — How it Works

Which student loans can garnish refunds?

Only federal student loans that are in default can garnish your tax refunds. Your refund is safe from tax garnishment if you're in deferment, forbearance, or repayment.

Loans eligible for student loan tax refund offset:

  • Direct Loans
  • Direct Consolidation Loans
  • Federal Family Education Loan Program (FFELP) Loans
  • Federal Perkins Loans

Private student loans cannot offset your tax refund or take money from your bank account without first suing you and then getting a court order.

Learn More: Do FFEL Loans Qualify for PSLF?

How to find out if your income tax refund will be garnished

The agency that's scheduled your debtfor offset is supposed to send you a Pre-Offset Notice before it withholds your refund. But never get it because they moved and never updated their contact information.

If you didn't get that notice, call the Treasury Offset Program at 800-304-3107. The TOP Interactive Voice Response System will use your Social Security Number to check if you're in the system. The system will play an automated message on who to call for your specific debt if your name's listed.

If you learn that your tax refund might be subject to offset, you can request an extension from the IRS to file your taxes later in the year without penalty. This will give you more time to work out what to do next to have your account removed from the program.

Options for a tax refund offset reversal for student loans

If your refund is taken for student loans, you can request a tax refund offset reversal if:

  • You've already entered into a repayment agreement or rehabilitation program with the Department of Education and made monthly payments under that agreement.
  • Your loans aren't really in default, and an error was made when you received the notice. This may happen if a Social Security number or name was entered incorrectly.
  • You've filed for bankruptcy, and your case is still open. This can also apply if the student loan was discharged in bankruptcy. Student loans being discharged in bankruptcy is extremely rare,
  • You have been the victim of fraud or identity theft.
  • You've become totally and permanently disabled.
  • Your school has closed, and you're granted a closed school or false certification student loan refund.
  • You have an extreme financial hardship — more on that below.

How to request a tax refund offset reversal for financial hardship

Proving you're experiencing extreme financial hardship takes work and requires a lot of follow-ups. But it's not impossible. The following process applies for student loans and can be used to try and reverse a tax refund offset.

  • Step 1: Identify who took your tax refund.
  • Step 2: Contact the company (Default Resolution Group or guaranty agency) that took your return fund to find what information you need to submit (hardship packet).
  • Step 3: Submit the necessary information.
  • Step 4: Follow-up to confirm they received the necessary information.
  • Step 5: Wait to see if they approved your hardship request.

How do I dispute a tax refund offset? To dispute a tax refund offset, you'll need to prove you've experienced hardship that prevents you from making your student loan payments. This may entitle you to a hardship refund.

Your loan holder or the collection agency will want to know the details of the hardship you're facing. Depending on the agency, they may accept any of the following as proof of extreme financial hardship:

  • Notice of a pending eviction or foreclosure
  • Homelessness
  • Utility disconnection or shutoff
  • Exhausted unemployment benefits

To get your refund back, you'll need to be able to prove that you are having severe financial difficulty.

Completing your hardship packet

The packet you receive will give you instructions on how to submit the hardship request form and where to send the form. Follow the instructions exactly and fill the form out promptly.

Afterward, call and confirm your hardship packet was received and that they have all the necessary information to process your request. If not, find out exactly what the agency needs to complete your request.

How long does it take for a tax offset to be removed? It can take up to 6-8 weeks to get a tax refund reversed after it's been offset for student loan debt. However, a tax refund offset reversal can take up to six months for a jointly filed return.

Can I track my offset refund? You may not be provided with any tracking number as refund checks are sent via U.S. mail. You'll need to contact the Treasury Offset Program at 1-800-304-3107 to locate the appropriate agency.

Options to prevent a tax refund offset

You're not alone if you've already defaulted. Within three years of entering repayment, 9.7% of student loan borrowers default, according to the Education Department. The key thing for you is to minimize the damages to your finances. Here's how you can get out of student loan default and protect your tax refund from being offset.

  • Apply for loan rehabilitation. You can return your loans to good standing and remove the default from your credit report by making nine monthly payments over 10 months. Your payment amount will be 15% of your discretionary income or a smaller amount based on your overall finances. Rehabilitation is a one-shot program. So consider enrolling in an income-driven repayment plan after your rehabilitation period ends to make your payments more manageable. These plans tie your bill to your income and family size. Plus, they have a bonus: IDR forgiveness.
  • Apply for consolidation: Combine your loans into one new loan and make three full, on-time consecutive payments or agree to make payments on an IDR plan to get your loans out of default. You can submit a Direct Consolidation Loan for free at studentaid.gov. Bonus: you can choose a new loan servicer.
  • Negotiate a settlement: Federal student loans typically settle between 85-90% of the outstanding loan balance. And that large amount has to be paid within 90 days. Ask the collection agency representative about your settlement options.
  • Check out refinancing options: Although uncommon, some lenders are willing to refinance student loan debt that's delinquent or in default for borrowers with stable income and good credit scores.
  • Request a review: A prompt request for review will put the offset on hold. You'll need to file the request within 65 days after the notice date or 15 days after your request and obtain your loan file.
  • File bankruptcy: Both a Chapter 7 and Chapter 13 bankruptcy protect your refund, paycheck, and other federal payments (e.g., Social Security benefits) from being taken to repay debts. The bankruptcy process can also help you get rid of the defaulted loan if you can prove undue hardship.

Regardless of which one you choose, all of these options are better than ignoring the debt and hoping it goes away. If you're not sure which one is best for you, a student loan lawyer may be able to help.

Keep your refund, lose the headache.

Working with the IRS or any government agency is never a fun process, with forms to fill out and hoops to jump through. Understandably, you may not know all the options available to you. That's where I can help.

If you have student loans in default and facing tax refund offsets, I want to work with you. Schedule a free 10-minute call with me today. Together we can go over your situation.

We'll discuss what options you have and help you decide what's best for you to get on top of your defaulted student loans before you lose another refund.

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