The federal government has many avenues to collect on unpaid debts, including your federal income tax refund. The Treasury Offset Program can use some or all of your refund to repay the money you owe for federal defaulted student loans, unpaid taxes, and more.
This can be a considerable blow to borrowers who are counting on that refund check, and some may even request a tax refund offset reversal. However, it's not a simple process to regain your refund. Here's what you need to know about offsetting, who's at risk, and what to do next.
Why does an IRS tax refund offset happen?
Having your tax refund offset can be a substantial financial burden. You may have been counting on your tax refund to pay off your credit cards, pay utility bills, or pay for some necessary repairs.
The TOP is a collection effort used when you’re delinquent or in default on certain federal and state debts, but it certainly isn’t the first option for unpaid sums. If an agency reports your debt to the TOP, your tax refund offset is then used to repay your delinquent debt.
The debts the IRS will take your federal tax refund to repay include:
- Past due child support: the state agency where the child support order came from can request your entire tax refund be offset to pay towards unpaid child support debt.
- Defaulted federal student loans: defaulting on federal student loans exposes you to administrative wage garnishment and tax refund offset.
- Unpaid federal income taxes: your tax refund can be offset to pay any outstanding federal tax debt.
- Unpaid state income taxes: your state can offset your federal tax refund for outstanding state tax debts.
- Unpaid unemployment compensation debts: your state can also offset your refund for unemployment compensation paid due to fraud or contributions due to a state fund that wasn't paid.
Which student loans can garnish refunds?
Only federal student loans that are delinquent or in default can garnish your tax refunds. The types of federal student loans eligible for tax refund offset are:
- Direct Loan
- Direct Consolidation Loan
- Federal Family Education Loan (FFEL)
- Federal Perkins Loan
Private student loans cannot offset your tax refund. A private student loan lender cannot garnish your wages or take money from your bank account until it sues you and gets a judgment.
FAQs On Tax Refund Offset Reversals
Tax refund offsets can raise some questions for student loan borrowers. Here are a few things to know about this process.
- What is the IRS? The IRS, or Internal Revenue Service, is the government arm that retrieves taxes from taxpayers and administers the official tax code that Congress enacts.
- Can the IRS give back my tax refund? A tax refund offset isn't done by the IRS. Instead, the Bureau of the Fiscal Service handles the offset under the Treasury Offset Program. If the BFS is new to you, it’s a consolidated branch of the Department of the Treasury made up of the former Financial Management Service (FMS) and the Bureau of the Public Debt (BPD).
- What is the difference between an IRS offset and a bank account seizure? An IRS offset occurs when the federal government seizes your tax refund to pay the past due debt you owe the government, such as back taxes or defaulted loans. A bank account seizure is when money is garnished from your bank account directly.
- What is the tax refund offset process? The tax refund offset process is when the Treasury Offset Program identifies borrowers with past-due federal debt or child support and intercepts their tax refund after sending them a notice. The Bureau of the Fiscal Service (BFS) then issues the offset to the agency to which you owe money.
- Will I get any refund back if there is an offset? You can still receive a portion of your tax refund if it’s larger than the offset amount. However, you likely won’t receive your full refund unless you are able to reverse the offset.
- Will I receive an offset for my defaulted private student loans? No, private student loans cannot offset your tax refund. Similarly, before private lenders can put a lien on your house or take money from your bank account or wages, they will first need to sue you and get a judgment.
- What types of debt are exempt from the TOP? For a list of nontax debts and tax credits exempt from being offset, click here.
Remember, only state and federal agencies have access to seize any of your refund amount. Debts that aren’t owed to government agencies will use another form of collection.
How to know if your refund will be offset
It shouldn’t be a mystery if your refund will be affected by defaulted student loans. Before your tax refund is offset, the agency requesting offset is required by federal law to send you a tax offset notice.
Depending on the type of debt, the Pre-Offset Notice should:
- Explain the offset process
- Explain that your debt will be sent to the U.S. Department of the Treasury for offset
- Provide you with an opportunity to inspect and copy the records related to your debt
- Explain that you can obtain a review of the existence, amount, enforceability, or past-due status of the debt
- Show the amount of the debt you owed at the time of the notice.
Nevertheless, even if you didn’t receive a notice, your tax refund can still be offset. Federal law only requires the notice to be sent once to the last known address, so long as reasonable means are used to provide the notice.
Federal courts have also held that non-obligated spouses on joint tax returns are not entitled to pre-offset notice.
An extension may help
If you think your tax refund might be subject to offset, check before you file your tax returns. Call the Treasury Offset Program Call Center at 800-304-3107 to find out if your tax refund will be offset.
If you are in the TOP database to have your tax refund offset, you can file an extension to file your taxes. This will give you more time to work out what to do next to have your account removed from the program—more on that in a bit.
Options for tax refund offset reversal
Once you get the tax offset notice, review it and check your student loan information. You may be able to reverse the tax refund offset if you’re in one of the following situations:
- You’ve already entered into a repayment agreement or rehabilitation program with the Department of Education and have made 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.
Unfortunately, the qualifications for tax refund offsets are very narrow, so if you don’t fall into these categories, there may not be much you can do.
COVID-19 and tax refund offsets
As a response to the coronavirus pandemic, the federal government has paused all collection efforts for most defaulted student loans. The American Rescue Plan extended this pause until at least September 30, 2021.
During this time, all tax refund offsets have been put on hold, as well as Social Security Benefit offsets and federal wage garnishment. The TOP will not offset the 3 federal payments that Congress approved as stimulus measures during the COVID-19 pandemic.
Additionally, during the COVID-19 pandemic, most federal student loans were placed on automatic forbearance with 0% interest. This means those federal student loans can’t enter default and won’t be subject to a tax refund offset when the pandemic ends.
However, unless the forbearance is extended, collection efforts will resume on October 1, 2021. This means that it’s a great time to get started with improving your student loan situation.
5 steps to a tax refund offset reversal
Successfully reversing a tax refund offset is very difficult. Proving you’re experiencing extreme financial hardship takes work and requires a lot of follow-up.
However, it’s not impossible. The following process applies for student loans and can be used to try and reverse a tax refund offset.
- Identify who took your tax refund.
- Contact the company (Default Resolution Group or guaranty agency) that took your return fund to find what information you need to submit (hardship packet).
- Submit the necessary information.
- Follow up to confirm they received the necessary information.
- 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
- Utility disconnection or shutoff
- Exhausted unemployment benefits
You’ll need to be able to prove that you are having severe financial difficulty to get your refund back.
Finding the collection agency
The IRS can grant a tax refund offset reversal, known as Offset Bypass Refund, for debts owed to the IRS. OBR is governed by Internal Revenue Manual 184.108.40.206.11.1.
However, if your refund was offset to pay a debt owed to a third party (e.g., defaulted student loans, child support, etc.), then you would need to contact the third party to request a tax refund offset reversal for financial hardship.
If you’re having trouble identifying the collection agency that took your tax refund, you can find the contact information by following these steps:
- Call the Default Resolution Group at 800-621-3115.
- Enter your Social Security Number and birth date to locate your student loan debt.
- The automated system may provide you with a number to a collection agency. If that happens, write that number down, stay on the phone, and wait to be connected to a representative.
- Ask the representative to search for any other loans you have that may be in default.
- If the representative says you don’t have other default student loans, ask to be transferred to the National Student Loan Data System.
- An NSLDS representative will also check to see if you have any other federal student loans in default.
- Contact all the collection agencies that have your student loans and ask how to submit a hardship packet.
Completing your hardship packet
The hardship packet you received 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 else 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, for a jointly filed return, a tax refund offset reversal can take up to six months.
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.
My spouse’s loan caused a tax refund offset. What now?
Spouses who choose joint tax filing can have their share of the refund offset, even if just one spouse defaults on their student loan.
However, the spouse who's not in student loan default can often have their portion of the refund returned by submitting an injured spouse allocation form to the IRS.
You can submit an injured spousal claim by submitting IRS Form 8379 to the IRS. There are several options for submission, as you are allowed to send the claim:
- By itself, after you receive notice of offset
- With your original joint tax return or
- With your amended joint tax return
Once you submit your form, you can check the status of your injured spouse request by contacting the IRS at 800-829-1040.
Child support and tax refund offsets
Child support is facilitated by state agencies rather than the federal government. If you have unpaid child support, the state agency can file a claim with the Bureau of the Fiscal Service, and you’ll be entered into the Treasury Offset Program.
Once this happens, your tax refunds will be offset until your unpaid child support amount is fully satisfied.
5 options to prevent a tax refund offset
The best way to avoid having to deal with a tax refund offset reversal because of your defaulted student loans is to pay them on time in the first place.
However, life happens, and you may find yourself in a tough spot. If you’re delinquent or in default on your student loans, you can do the following to get your loans back in good standing and prevent a tax refund offset:
- Consolidation: Combines your federal student loans into a Direct Consolidation Loan. Your student loan will be in good standing in just 2-3 months.
- Repayment: If you can pay off the full amount at once, this is the most immediate way to prevent a tax refund offset. Income-driven repayment is often a good option for federal student loans you’re struggling to repay.
- Rehabilitation: You’ll make 9 on-time payments within a 10-month period. Your student loan will no longer be in default, and you’ll start fresh with a new repayment plan. Rehabilitation will also reinstate you for other federal loan programs, like an FHA Loan or VA Loan to buy a home.
- Settlement: You may be able to reach a settlement with your lender. Federal student loans typically settle between 85-90% of the outstanding loan balance.
- 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.
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.
Should I file for bankruptcy to prevent my offset?
Filing bankruptcy when you get the notice of offset but before the refund is scheduled to be deposited in your bank account may also help you keep your refund.
While filing a Chapter 7 or Chapter 13 bankruptcy won't automatically discharge student loan debt, the bankruptcy automatic stay will prevent your tax refund from being offset.
Though having your student loans discharged in bankruptcy is extremely rare, it will prevent your tax refund from being offset in the meantime. If you file for bankruptcy after the refund has been offset, you may be able to get some of your money back.
Contact a bankruptcy lawyer near you to understand your options — this can be a complicated process.
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.