What happens if I owe the IRS money and I’m supposed to get a tax refund?

August 31, 2020 by Robin Scott-Hutchens, EA
Tax Refund Check

Have you finally completed the filing of your tax return? Are you expecting a refund? If you already owe the IRS back taxes – meaning taxes from prior years – don’t start spending your refund before it arrives. The IRS has the ability to levy or take your refund and apply it to your outstanding debts. Even if you have an installment agreement in place and are meeting your obligation on those payments, the IRS will still use your refund to pay down the balance you owe even more.

In addition to Tax Debt, the IRS can apply your tax refund to Child Support, State Taxes, and Student Loans.

It’s important to know what to anticipate and what your potential options are when you owe money to Uncle Sam. And be advised that an outstanding tax balance is not the only reason the IRS can hang on to that refund you were hoping to get. The IRS can also take your refund and apply it toward outstanding child support payments, delinquent student loan balances, and state income tax bills as well. Let’s say your spouse owes back child support from a prior relationship and arrangement. Or maybe they fell behind on their student loan payments because, right after college, the lease on that trendy apartment in downtown seemed like a cooler way to spend money. If you are married and filing jointly, it can be frustrating to think that your portion of a potential tax refund might also be used to settle some of the obligations they created for themselves before they met you and your good financial habits. It could be an unpleasant surprise to learn the entire refund has been taken for these reasons. Couples have run into this situation on countless occasions. Does it mean there’s no hope of getting your share back? Not necessarily. There are options available to folks who find themselves in a position where they may be doing their best but still feel like the odds are not in their favor.

The best way to protect your refund is to pay your tax debt before you file your tax return.

The upside to the IRS using your refund for an offset is that your debt is being paid down faster. The obvious downside is that a federal tax refund is considered by many as an income injection that can help cover day-to-day bills, pay off those holiday gifts, or plan for a family vacation. If you’re anticipating a refund and it does not arrive, that can be very disheartening. If you know you have an outstanding amount due with the IRS, whether you have set up an installment arrangement or not, your best bet is to count on not receiving your refund. The best way to protect your refund is to make sure your outstanding tax debts are paid in full before you file your return.

In general, though, it’s essential to understand what you may be able to do to help yourself out in this situation. First, be aware of any outstanding balances you owe to the IRS or other agencies that may handle the types of balances mentioned previously. These agencies should be making collection attempts and finally warning you that they now intend to collect their debt through claiming your refund (called an administrative offset). The Treasury Offset Program will be notified, and now your tax refund could be in the crosshairs. You can also call the IRS toll-free number for information about tax offsets. That number is (800) 304-3107.

Next, take steps to meet the obligation. If you have a federal tax balance due, consider setting up an installment agreement. If you have a state tax balance due, find out if the state offers a similar option. As mentioned earlier, the installment agreement will not stop the IRS from taking your refund, but it will allow you to make payments to bring down your balance due. And with an installment agreement, you have the option to pay more than your agreed upon monthly minimum amount. The IRS will always accept more money from you. Paying extra for one or more months does not obligate you to keep doing so. However, you want to be sure you always make at least the minimum agreed payment amount. The sooner you get that debt paid off, the sooner you can start planning what to do with a refund again.

Other Options to Get Your Tax Refund


Then consider other options that may be available to you, depending on your situation. If your portion of a refund was held due to your spouse’s previous tax bill or other outstanding debt, you might consider filing an Injured Spouse form to protect your portion of a refund when you file your return, although it can also be filed when you receive the notice of the refund being offset. And if you owe an amount to the IRS that seems impossible, you may want to look at the possibility of an Offer in Compromise.

As you can see, there are ways to hopefully salvage some of your refund or at least take care of a balance sooner rather than later. There are plenty of companies out there too that will gladly charge you a large fee to review your situation and provide advice. It can be tempting to contact these companies only to be greeted with a salesperson, usually more interested in getting their hefty fee from you upfront than actually providing a transparent and honest assessment of your options.

By contrast, TaxAudit’s Tax Debt Relief Assistance is operated by credentialed tax professionals who will review your case for a nominal fee and then present you with a plan to move forward, should that option exist. They work with federal and state tax agencies daily, so they are prepared to look at all options and build a strategy for you. Their goal is to help you better understand your situation and available options in clear and easy-to-understand terms.

Military Service Members may be able to have Tax Debt suspended for a period of time.

A brief word for our military service members where circumstances of your military service make it difficult for you to pay a tax balance due. You may be able to have your amount due “suspended” for a period of time while those conditions of your service exist. This is true even if you have an installment agreement already in place with the IRS. This suspension is not automatic and must be requested by providing written details of how your current service situation is adversely affecting your ability to pay. You can find more information in IRS Publication 3.

Do you owe money to the IRS or State?

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Robin Scott-Hutchens, EA
Corporate Trainer


Robin Scott-Hutchens is an Enrolled Agent who has worked in the tax industry for over a decade.   She has a Bachelor of Science degree in Accounting.  Her love of taxes has led her to prepare taxes with large corporations as well as private practice.  She joined TaxAudit in 2016 as an Audit Representative where she enjoyed working with taxpayers to help them navigate the stressful landscape of being audited.  She then moved to the Learning and Development Team at TaxAudit, where she now serves as a Corporate Trainer.  When she is not preparing tax returns or teaching tax concepts, she enjoys reading and writing about taxes, being outdoors, and petting any dog that will allow her to do so.


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