If you owe back taxes and you’re expecting a refund this year, you might be wondering if the IRS will keep it.
In some cases, yes. In others, no. Whether the refund reaches your bank account depends on several factors.
If you have unpaid federal tax debt, the IRS can apply your current refund to that balance before sending you any money. And in some situations, your refund can also be applied to other debts, such as student loans or child support.
When the IRS Keeps Your Refund
If you owe federal taxes from a previous year, the IRS will usually apply any refund to that outstanding balance automatically (even if you have an installment agreement with the IRS for those back taxes). You should receive a notice explaining how much of your refund was applied to your debt and how much remains owed.
Treasury Offset Program
The Treasury Offset program allows the federal government to take your tax refund to pay off certain debts. Back taxes are at the top of that list.
Other debts include:
- Past-due federal student loans
- Unpaid child support
- State income tax debt
- Certain unemployment compensation debts
If your refund is taken through the Treasury Offset Program, you will receive a written notice detailing the original amount, the amount taken, and the agency that received the payment.
If you believe the offset was made in error, contact the agency that received the payment, not the IRS.
What Happens If Your Refund Doesn’t Cover What You Owe?
If your refund doesn’t fully cover your tax debt, the IRS will take the entire amount and apply it to your balance, even if you’ve been making on-time payments to a payment installment agreement. And interest and penalties will continue to accrue.
Options When Owing Back Taxes
Owing back taxes to the federal government feels overwhelming, but there are options available. The key is taking action instead of avoiding the issue. These options include:
- Installment agreement: This agreement allows you to pay off your debt over time in monthly payments. Taxpayers can usually set this up online themselves, and it’s the simplest solution if you can afford monthly payments.
- Currently Not Collectible (CNC) status: This is an option for taxpayers facing significant financial hardship. This agreement allows you to pay off your debt over time in monthly payments. Taxpayers can usually set this up online themselves, and it’s the simplest solution if you can afford monthly payments.
- Offer in Compromise: This option allows you to settle your tax debt for less than you owe. The IRS does not approve these easily. You need to prove you can’t pay the full amount owed, and you likely won’t be able to, so accepting less than the full amount is actually in the IRS’s best interest. You’ll need to prove hardship or that there’s real doubt about the amount owed.
Adjust Your Withholding Going Forward
Once you’ve dealt with your back taxes, think about adjusting your paycheck withholding. Submitting a new W-4 form to your employer can help prevent underpayment in future years.
Don’t Wait for the IRS to Act
The worst thing you can do when you owe back taxes is nothing. The debt isn’t going to disappear, and the penalties will keep piling up. The sooner you address it, the more options you’ll have. Your refund might be gone this year, but dealing with the problem now prevents a bigger mess down the road.
