Many tax filers experience a feeling of joy when they see the refund approved and sent status on WMR/IRS2Go or code 846 (refund issued) on their tax transcript.
However this turns into sadness and frustration when they see that their estimated refund on their transcript or actual refund in their bank account is lower than expected.
One of the main reasons is that the refund has been offset by the IRS under the Treasury Offset Program (TOP).
This program is run by the Treasury’s Bureau of the Fiscal Service (BFS) which collects past-due (delinquent) debts that people owe to state and federal agencies.
There are many delinquent payment types that can be collected via this program. This includes over-due tax debts from previous years, child support payments, overpaid unemployment compensation and student loan debts.
After a certain notice period (120 days) these past due debts can legally be offset or garnished against your IRS tax refund payment. These debts can also be offset against social security benefits in some cases.
On WMR or IRS2Go you will see this refund garnishment referenced via Tax Topic 203. It will also show the adjusted refund payment and date, assuming no other offsets (e.g. code 570)
On your tax transcript you will see the amounts reflected against this transaction code (TC) 898. It will be listed as a refund applied to non IRS debt, with the amount or your refund applied to the debt shown per the screenshot below.
How do I know why and by how much my refund was reduced (offset)?
The Bureau of the Fiscal Service (BFS) will send you a “offset notice“, with details on adjustment that includes the amount and agency to which you owe the debt.
While many tax filers are surprised at the refund adjustment, it is 100% legal and they would have also gotten a letter from the debtor agency at least 60 days before the debt is sent to the IRS to process. The letter or notice will outline details of monies owed and will have payment options, including payment plans.
You will also be provided instructions and options to appeal this payment, to prevent it from being collected via your refund. If you don’t respond or do anything the debt collection is passed on the TOP program which then instructs the IRS to offset your refund.
The law requires agencies to send debts to TOP when the debt is 120 days overdue. So you should have had ample time to dispute the debt before your refund was garnished.
If you changed your home address or contact details, you may not have gotten this letter, but that would not be an acceptable excuse to claw back this refund offset.
Who can I contact to get more information?
You should have contact details on your delinquent debt notice, but you can also call the BFS/TOP on 1-800-304-3107 (toll free) to get more information on the offset. Select option 1 to hear an automated message of the amount, date and creditor agency or agencies to whom you owe the debt.
To get more details on your debt and talk to a real person you need to contact the agency (e.g Child Services) to whom you owe the debt. That agency maintains your records and makes all decisions regarding your debt, repayment plan, refunds and removal from the Treasury Offset Program (TOP).
Note: You may be shuffled through several calls/agencies to get answers. Lines are jammed and you must stay patient. Also ensure you watch for the “offset notice” which will have a lot of the details on why your refund was lowered.
Tax Topic 203 & Form 8379 Injured Spouse Allocation
While your tax transcript will show code 898 for the offset transaction, the overall procedure is covered in IRS Tax Topic 203 (reduced refund). This topic reflects the above points and procedure for the IRS around tax offsets.
The BFS’ TOP will notify the IRS of the amount to take from your refund once your refund date has passed. These details are kept in the IRS’ TOP database against which refund payments are checked before being paid out.
The IRS cannot help with details or appeals against the offset/debt, but can be contacted if the original refund amount shown on the BFS offset notice differs from the refund amount shown on your tax return.
Reversing the Offset (766 – IRS TOP Offset Reversal)
There are also details for spouses (filing a joint return) who believe they are not responsible for their partners debt and subsequent offset to their portion of the tax refund. They can file Form 8379, Injured Spouse Allocation to request their portion of the refund back from the IRS.
If you are successful in getting the offset reversed through appeal or via Form 8379 you will see this reflected against code 766 (removed refund applied to non IRS debt) on your IRS transcript. This is a credit to your IRS account and you will get an additional refund check or direct deposit for the adjusted amount.
Student Loan Debt Exempt from Offsets
The Federal Education Department has announced a pause on offsetting refunds to collect on delinquent student-loan for this tax season (or until Nov. 1, 2022). This will affect around 9 million filers with over due student loan debt (> 270 days late).