Tax Refund Offset Reversal 2023: The Complete Guide

Each tax season, IRS computers flag taxpayers’ accounts with delinquent student debt so the government can take back the money it’s owed. But this year is different.

The economic battering Americans have suffered from the coronavirus pandemic has led to the federal government putting a temporary hold on that process until later this year.

The U.S. Department of Education will not take tax refunds until next summer at the earliest — unless President Biden extends the federal student loan payment freeze once more.

Ahead, you’ll learn how to avoid a tax refund offset and, if your refund has already been taken, how to get some of it back with a hardship reversal.

Related: When Do Student Loans Start Again?

Under normal circumstances, the government can offset your tax refund for defaulted student loans through a process known as a tax refund offset or tax garnishment. This process lets the Treasury Department match defaulted student loans with expected tax refunds after submitting tax returns. The tax refund is then used to repay the defaulted student loan debt.

Related: How to Get Student Loans Out of Default

Besides student loans, tax refund offsets can also be applied to past due child support payments, delinquent tax debt, and other debts owed to the government and its agencies.

Before the offset occurs, you will receive a notice informing you of the impending offset.

In 2023, student loans will not take your tax refund due to an ongoing pause on collections through Treasury offset, lasting six months after the COVID-19 payment pause ends. This protection applies to loans held by the Department of Education and FFEL Program loans held by guaranty agencies.

The Fresh Start Program for student loans provides more relief for eligible borrowers, extending collections relief for one year after the payment pause ends. This policy protects government payments, such as child tax credits, Social Security payments, and tax refunds for the 2022 tax season.

Only defaulted federal student loans can garnish tax refunds.

Private student loans cannot garnish tax refunds for defaulted student loans. Private lenders like Citizens Bank, CommonBond, and Sallie Mae must take you to court and get a judgment before they can garnish your wages, take money from your bank account, or put a lien on your home.

Related: What Happens If You Default on Private Student Loans?

A tax refund offset occurs when you have outstanding debts owed to the government. State and federal agencies use the Treasury Offset Program (TOP) to withhold your refund and repay these debts. If an agency reports your debt to TOP, the IRS offsets your refund to cover obligations such as:

• Past due child support.

• Defaulted federal student loans.

• Unpaid federal income taxes.

• Unpaid state income taxes.

• Unpaid unemployment compensation debts.

Previously, the IRS could also take your child-tax credit to recover money for student loans. But Education Secretary Miguel Cardona announced that the department would not take child-tax credits for borrowers in default, even after the payment pause ends.

Keep in mind that states handle child support offsets, not the federal government. The state where the child support order was entered files a claim with the Bureau of the Fiscal Service, enrolling you in the Treasury Offset Program. Consequently, the offset continues until you fulfill your child support obligations.

Even if you owe student loans, you still can get your tax refund due to the Covid-19 pandemic. In the early months of the pandemic, former President Trump paused the interest rate and collection efforts for most defaulted student loans. President Biden extended the student loan payment pause when he first took office and again this past December.

Some states have also put a hold on refund offsets during the pandemic. For example, California stopped taking refunds until July 2021. You can check with your state to see what relief might be available.

To stop student loan tax garnishment, consider these options and gather the supporting documents:

1. Agreed payment plan: If you have a formal agreement with your loan holder and made payments within 65 days of receiving your offset notice, provide a copy of the agreement and payment documentation to receive a refund.

2. Financial hardship: Different loan holders have varying hardship relief eligibility standards. Some may return all or part of your tax refund if you can prove hardship, such as unemployment benefits exhaustion or a house foreclosure. Most require starting the rehabilitation process or entering a repayment plan voluntarily.

3. Debt repayment: If you have repaid some or all of the debt, provide copies of checks or money orders and payment receipts to your student loan holder. This may result in a full or partial refund.

4. Debt not owed: If your student loan has been or will be discharged due to bankruptcy, total and permanent disability, or school fraud, submit loan discharge applications or court documents to your loan holder. If you never took out a loan, investigate possible identity theft.

After receiving an offset notice, you have 65 days to contest it. If the garnishment seems inaccurate, request your records within 20 days. Once you receive the records, you have 15 more days to request a formal review.

Follow the instructions on your offset notice for setting up a review, or contact the Treasury Offset Program at 800-304-3107 for questions about the process.

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

Only federal student loans in default can be used by lenders to garnish your tax refunds. Your refund is safe from student loan tax garnishment if you’re in deferment, forbearance, or repayment.

Loans eligible for student loan tax refund offset include:

• Direct Loans

• Direct Consolidation Loans

• Federal Family Education Loan Program (FFELP) Loans

• Federal Perkins Loans

Defaulted private student loans can never take your tax refund unless authorized by state law.

Learn More: Do FFEL Loans Qualify for PSLF?

The agency that schedules your debt for offset is supposed to send you a Pre-Offset Notice before it withholds your refund. But many people 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 verify that you are in the system. The system will play an automated message on who to call for your specific debt if your name is 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.

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 loan 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 is 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 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.

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 to 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 must 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 your hardship. Depending on the agency, they may accept 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, you must prove you have severe financial difficulty.

If you default on your student loans, you have several options to prevent your tax refund from being offset. Here’s how to get your loans out of default and protect your tax refund:

• Apply for Fresh Start. The Fresh Start Program basically replaced the loan rehabilitation program during the pandemic by eliminating the need to make nine on-time payments over 10 months to remove the student loan default status from your credit report. Instead, student loan borrowers who enroll in the program can get out of default and have their loans sent to a new student loan servicer in a few weeks.

• Apply for loan consolidation. Combine your loans into one new loan, make three full, on-time consecutive payments, or sign up for one of the four types of income-driven repayment plans to get out of default. Each of the IDR plans ties your payment amount to your family size and discretionary income. Submit a Direct Consolidation Loan application for free at StudentAid.gov.

• Negotiate a settlement. Ask the collection agency representative about your settlement options. Federal student loans typically settle for 85-90% of the outstanding loan balance.

• Consider refinancing options. Some lenders, like Yrefy, may refinance private loans that are delinquent or in default for borrowers with stable income and good credit scores or a cosigner with both.

• Request a review. File a request for review within 65 days of the notice date or 15 days after obtaining your loan file. This will put the offset on hold.

• File bankruptcy. Both Chapter 7 and Chapter 13 bankruptcy can protect your refund and other federal payments from being taken to repay debts. Filing bankruptcy will also stop a student loan wage garnishment. Proving undue hardship during bankruptcy may help eliminate the defaulted loan.

Seek help from a student loan lawyer if you’re unsure which option is best for you. Addressing the debt rather than ignoring it is crucial for resolving the issue.

Working with the IRS or any government agency is never fun because there are 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 with a default status and are ready to file your tax return, I want to work with you. Schedule a call with me today. Together, we can go over your situation.

In a typical call, we’ll discuss your options and help you decide what’s best to get on top of your defaulted student loans before you lose another refund.

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