A taxpayer who incurs an unpaid debt may notice a reduction in his or her federal tax refund. The Treasury Offset Program is allowed to use all or part of a taxpayer’s federal refund to settle unpaid federal or state debts, to include unpaid individual shared responsibility payments.
For example, the IRS is prohibited from using liens or levies to collect any individual shared responsibility payment, if a taxpayer owes a shared responsibility payment, the IRS may offset the taxpayer’s tax refund against the liability.
The Department of Treasury’s Bureau of the Fiscal Service, or BFS, runs the Treasury Offset Program. The BFS may use part or all of a taxpayer’s tax refund to pay certain debts such as federal tax debts, federal agency debts (e.g. a delinquent student loan), state income tax obligations, past-due child and spousal support, and certain unemployment compensation debts owed to a state.
The BFS mails a taxpayer a notice if it offsets any part of the taxpayer’s refund to pay the debt incurred. The notice lists the original refund and the offset amount. It also includes the agency that received the offset payment, as well as the agency’s contact information.
A taxpayer may dispute the offset by contacting the agency that received the offset payment. Note that taxpayers should only contact the IRS if the offset was applied to a federal tax debt.
Taxpayers who filed a joint tax return with their spouse may be entitled to part or the entire offset. However, this rule only applies if the spouse is solely responsible for the debt. For the taxpayer to obtain his or her part of the refund, he or she should file Form 8370, Injured Spouse.
Further, although the IRS is prohibited from using liens or levies to collect any individual shared responsibility payment, if a taxpayer owes a shared responsibility payment, the IRS may offset the taxpayer’s tax refund against the liability.