Can a tax refund offset be reversed?

June 30, 2023 by Steve Banner, EA, MBA
Graphic of arrows going one way and then reversing

Before we answer this question, let’s just take a moment to make sure we’re all on the same page when we use the term “tax refund offset.” What we are referring to here is a national program that allows the Federal Department of the Treasury to take part or all of your tax refund and send it to another State or Federal agency where you have a past-due debt. These funds are withheld from your tax refund before the refund is even issued, and the term used for this withholding is "offset" or "administrative offset."

But no matter what the government may call it, Taxpayer Tom who receives $50 instead of the $850 refund that he expected to get is likely to come up with his own colorful name for the tax refund offset program. In this case, the “missing” $800 was used to pay off Tom’s delinquent student loan debt. This should have been no surprise to Tom because he should have received notification well in advance by mail that the $800 offset was going to take place.

From the above example, we can see how the offset system is supposed to work. But what if Tom had already paid off his student loan debt before filing his tax return? In this instance, the offset should never have happened, but how can Tom get that $800 offset reversed? Although his first instinct may be to call the IRS, the IRS is not authorized to refund money that has been paid to another agency. The only case where the IRS can refund the money is if it was paid by mistake due to an internal clerical error. But if the money was sent to the agency even though Tom had already paid off his debt, his only recourse to recover the $800 would be to directly contact the agency that received the funds. Although this may take some time to be resolved, Tom should eventually receive the $800 back from the agency. Obviously, it would have been much better for Tom if the offset had not been made in the first place. Let us briefly review how the system works so that we can see how Tom’s offset could have been prevented.

As we said earlier, a tax refund offset takes place when the Federal Government’s Treasury Offset Program (TOP) withholds part or all of a taxpayer’s expected Federal tax refund to pay past-due debt that the taxpayer owes to a Federal or State agency. The TOP makes these payments based on information in its database that contains details of taxpayers who owe an overdue debt to a government agency. An agency can send a taxpayer’s name to the TOP to add to its database but, first, the agency must determine that the taxpayer’s debt is valid and legally enforceable. Some taxpayers may not even be aware of the debt and, for this reason, the law requires that the agency send the taxpayer a letter 60 days before they send details of the taxpayer’s debt to the TOP. This letter must give the taxpayer the opportunity to dispute or resolve their debt. The agency is also required to respond to any questions the taxpayer may have about the debt.

In Tom’s case, he may have forgotten or even been unaware of his student loan debt. But when he received his 60-day letter, he could have checked with the agency to make sure the debt was valid and that he truly owed $800. He may have decided to pay the $800 and get it over with but, if he was delayed in doing so, the agency may have already sent his name to the TOP before it received his payment. And then Tom may have filed his tax return before the agency got around to requesting the TOP to remove his name from its database.

On the other hand, if Tom did not have ready access to $800 in cash, he could have filed for an extension to file his tax return which would have given him a few more months to save up to pay off the debt. Prior to filing his return, Tom could contact the agency to ensure that it had not only received his payment but also had informed the TOP to remove his name from its database.

The offset could also have been prevented if Tom had been able to demonstrate that the withholding of these funds would cause him undue hardship.

Returning to our original question, a tax refund offset can indeed be reversed – but it is not a simple matter. It would be much better for taxpayers like Tom to prevent the offset from happening in the first place. An ounce of prevention is better than a pound of cure, in other words.

Regardless of whether you were previously aware of its existence, there is no time to waste if you have received a letter from a State or Federal agency notifying you of a past-due debt that is about to be referred to the TOP. The same thing applies if an offset has taken place in error. In both cases, you will need to take Immediate action, and a good first step is to seek professional advice. At no cost to you, and with no obligation on your part, you can contact TaxAudit to speak with an experienced tax professional who can discuss your case with you and provide details of the options available to resolve the matter at hand.

Do you owe money to the IRS or State?

Get Professional Help Now!



Steve Banner, EA, MBA
Tax Content Developer


Steve Banner began his career in the field of income tax in 1977 and has since gathered business experience in a variety of countries and cultures. In addition to the United States, he has lived and worked for extended periods in Australia, Saudi Arabia, Canada, and Sweden. Along the way he studied Adult Education and earned a Bachelor of Education, Master of Educational Administration, and MBA. He joined TaxAudit in 2016, where he is a Tax Content Developer.


Recent Articles

Tax Returns, plant, and $100 bills laying on a desk
What happens if your spouse overstated the deductions claimed on the return or substantially understated the income?  Are you still liable for the tax due?
wedding cake split with man on one side and woman on the other
Alimony payments may indeed be tax deductible if the divorce or separation instrument under which they are made was executed prior to 2019.
Double Taxation written on notepad
Most states that have income taxes offer a credit for taxes paid to another state on the same income, although how that credit is calculated is not identical.
File Cabinet with Documents
IRS notice CP05A is sent by the IRS to inform taxpayers that they need more information about the submitted income tax return before a tax refund can be issued.
This blog does not provide legal, financial, accounting, or tax advice. The content on this blog is “as is” and carries no warranties. TaxAudit does not warrant or guarantee the accuracy, reliability, and completeness of the content of this blog. Content may become out of date as tax laws change. TaxAudit may, but has no obligation to monitor or respond to comments.