If I Owe Taxes, Will I Get a Refund? Usually Not
If you owe back taxes, the Internal Revenue Service will keep your tax refund and apply it to your tax debt. The IRS will keep your tax refund even if you're on a payment plan. However, if you're experiencing financial hardship, you can request not to have your refund seized.
Through the Treasury Offset Program, the IRS can also keep tax refunds for unpaid child support, delinquent student loans, state tax debt, and other debts to government agencies.
Many people with tax debt have one big question: if I owe taxes, will I get a refund? Unfortunately, the answer is usually no, but in certain situations, you may be able to request to keep your refund through a refund offset bypass, but that is rare and only available to people experiencing hardship.
This guide explains what happens to your federal income tax refund when you owe an income tax debt or a debt to another government agency. It looks at different situations. Then, it explains how to apply to keep your refund if you owe back taxes and are experiencing financial hardship.
Tax Refunds and Unpaid Taxes
If you owe back taxes, the IRS will keep your tax refund and apply it to the amount you owe. If there is anything left, the IRS will send you the difference. Here's an example, imagine that you owe $10,000 in back taxes and you file a tax return that shows a refund of $3,000. The IRS will keep the $3,000 and apply it to your tax liability. You will still owe the remaining $7,000.
Or imagine you owe $5,000 in tax debt and file a tax return showing a $6,500 refund. The IRS will keep $5,000. Then, as long as you don't have any other debts to government agencies, the IRS will send you the remaining $1,500.
The IRS also works with other federal government agencies to collect unpaid debts. If you owe child support, an outstanding student loan, outstanding unemployment compensation repayments, or state taxes, the IRS can keep your federal income tax refund for those debts. Similarly, if you owe the IRS and earn a state tax refund, the state can keep your refund and send it to the IRS. This is all part of the Treasury Offset Program which was created by federal law.
When you file a return that shows a refund, the government looks at the Treasury Offset Program (TOP) database before issuing the check. This database has information on all kinds of outstanding debt from federal government agencies and state governments. If you owe money such as child support or back income taxes, the government will keep your tax refund and apply it to your debt.
Will I get my refund if I owe back taxes and I'm on a Payment Plan?
Unfortunately, no. The IRS will keep your tax refund if you're on an IRS installment agreement to pay off your delinquent income taxes. This is one of the conditions of the payment plan. Keep in mind that your tax refund does not cover your monthly payment. You still have to make your regularly scheduled payment for the month, or you may incur a fee or go into default.
Will I Get a Refund If I Owe Back Taxes and I Apply for an Offer in Compromise?
If you apply for an offer in compromise, the IRS will keep your refunds while the offer is pending. The refunds will be applied to your tax debt, but they will not count as part of your offer in compromise settlement. However, if you have a financial hardship while your offer is pending, you can request to receive your refund.
This is called a refund offset bypass. There is no specific form to apply. Instead, you just need to contact the IRS and request the offset bypass. You also have to explain the exact hardship. If you qualify, the IRS will release the amount that you need to pay for the hardship. The agency will keep the rest.
For instance, say that your tax refund is $6,000, and you need $500 or the power company is going to cut off your electricity. As long as you meet the other criteria, the IRS will send you the $500 and apply the rest of your refund to your tax debt.
Once the IRS accepts your offer, you will get to keep any tax refund you earn from filing a tax return from the year IRS accepted the offer. This is a new rule. In the past, the IRS kept tax refunds for the year in which IRS accepted your offer in compromise. For instance, the IRS won't keep that refund if your offer is accepted in 2021 and you file a 2021 return.
However, if you amend tax returns for years before the offer acceptance year and earn refunds, the IRS can keep those. If the IRS sends you refunds for amended years before the year you got an offer, you're supposed to return the funds.
If I Owe Taxes, Do I Get a Refund If I'm Experiencing Financial Hardship?
As indicated above, the IRS keeps your federal refund by default when you owe back taxes. However, if you're experiencing severe financial hardship, you can request an exception to this rule. There is no specific form for this process. You just need to reach out to the IRS or talk with a tax professional about your situation.
If My Spouse Owes Taxes, Will I Get a Refund?
If your spouse owes back taxes that are unrelated to you, the IRS shouldn't take your refund. Similarly, if just your spouse owes child support, the IRS also shouldn't claim your refund for that. If the IRS keeps your refund for your spouse's debt, you can apply for injured spouse relief.
How to Get Help When the IRS Takes Your Tax Refund
To avoid losing your refund, you must make arrangements for your past-due taxes. A tax professional can help you understand your options and navigate the best path forward. To learn more, use TaxCure to find a local tax pro today.