A lot of people have slowly but steadily started getting their tax refunds based on the latest IRS schedule and transaction cycle batch. But common questions that keep coming up include, “Why is my refund so small?“, “Why was it lower than expected?“, “Why did it change on my transcript?” and “How can I find out more details?”
Basically it boils down tax filers getting stressed and depressed around why their refund was much lower than expected and why this changed or happened. Below are some reasons why this could be happening to you.
Tax Refund Offset (Reduced Refund via Treasury Offset Program)
A major reason why some folks refund is actually less than the amount they were expecting or provided by their e-filing tax provider is that the federal government has “offset” or deducted monies from your tax refund to cover debts you owe other federal agencies. Treasury Offset Program (TOP) Offset
These are classified as non-IRS debts offset, which you may see against tax topic code 898, (refund applied to non IRS debt) on your transcript. The IRS rules around this are covered in Tax Topic 203. You can read this article for the details on how offsets get applied to your tax refund.
The Department of Treasury’s Bureau of the Fiscal Service (BFS) manages the Treasury Offset Program (TOP) and may reduce your refund (overpayment) and offset it to pay for the following items (under ):
- Past-due child support;
- Federal agency non-tax debts;
- State income tax obligations; or
- Unemployment compensation debts owed to a state
Under the law, federal payments such as tax refunds, can be reduced or offset by approved agencies (e.g the IRS) before being paid to you. This is know as the Treasury Offset Program (TOP) Offset
You will or may have gotten a formal notice from the BFS explaining this offset to your federal refund and why it differs from what was estimated in your filed return. They will provide details on the agency that requested the offset (e.g child services or your state unemployment agency) with details to contact them for more information.
They will give you an opportunity to dispute this collection, but you will have to prove you had no federal obligations. If you have questions or disputes regarding the offset of your refund for the above items you will need to contact the Treasury Offset Program (TOP) or the debtor agency that initiated the offset.
The IRS won’t be able to help you with non-IRS offset payments. However, if you are able to successfully appeal the offset you will get issued the additional refund and see this a credit on your tax transcript (Tax code 766 – Tax Offset Reversal).
Also note, if you filed a joint return with a spouse and you believe you are not responsible for your spouse’s debt and subsequent offset, you’re entitled to request your portion of the refund back from the IRS via the injured spouse form.
Refundable Credit Adjustments – Advance CTC and Stimulus Payments
In the last few tax years tax refund amounts have been impacted by the several rounds of advance refundable tax credits. For the current tax season these are primarily the Recovery Rebates (adult and dependent stimulus checks) and the expanded advance Child Tax Credit (CTC).
These refundable tax credits paid you in advance against your future tax refund and in some cases if you were over paid or your tax situation changed (income, dependents, filing status etc) then the IRS could have adjust refund to cover the difference. This would result in your tax refund being lower than expected.
For example, many filers are seeing the message below around a refund adjustment the IRS has automatically made for CTC payments that tax filers claimed on their tax return (Schedule 8812), but did not reconcile with what the IRS has on their payments.
There is also a known issue (for certain filers) where the IRS’ letters around the 2021 CTC payments were not updated with their final payment amounts or did not account for payments made to spouses. So if tax filers with joint returns use the amounts provided in the letters to figure out how much to claim on their 2021 tax return, it would have been flagged and likely delayed their refund payment further.
When this happens, and it is happening to many tax filers this season, they will automatically adjust and send you a notice with details. You will have an opportunity to appeal, but it could take several weeks to hear back from the IRS and resolve this adjustment.
Tax Filing Fees and Refund Transfer Payments – SBTPG Processing Fees and Delays
Many filers take advantage of advance refund payment or refund transfer programs where they pay a fee to get their refund in advance or have the cost of their tax filing covered by their future refund payment.
For example, TPG PRODUCTS SBTPG LLC, Santa Barbara Tax Products Group, is a company that offers a pay-by-refund (refund transfer) program for many providers (including TurboTax and H&R block) which allows filing costs to be covered by the estimated future refund payment.
In addition to the filing fee many filers are not aware that these companies charge an additional processing fee based on the size of overall filing fee, which will lower their actual refund payment. This is why its important to read the fee disclosures and fine print before using these services.
Even though this is noted, many tax filers don’t realize that the actual IRS refund payment first goes to the refund transfer company like Santa Barbara Tax Products Group (SBTPG). This allows them to recover all associated tax preparation and processing fees before the remaining refund amount is issued to the taxpayer.
Further, in 2022, several folks are reporting that SB TPG are holding refund payments longer (perhaps to earn more interest for themselves?). And they are then given the runaround by tax filing providers and the IRS when trying to figure out what’s happening with refund payment, despite it saying it has been issued (TC 846).
Unfortunately, filers will just need to wait for TPG to finish their fee processing, before seeing their refund payment. And, the processing fee is not refundable!
New Tax Reforms and Laws
Another reason for lower refunds over the last few years is that new tax laws and reforms that took effect a few years ago cut several popular deductions (e.g. personal exemption state and local taxes capping at $10,000) for a number of Americans.
This and lower tax rates meant people got higher paychecks during the year, but their refund payment was lower at tax time.
Unemployment Tax Income Exclusion Removal
So like regular income, jobless workers needed to adjust their withholdings and if they didn’t withhold enough from their unemployment pay checks they could see a lower than expected refund when filing their tax return or as the IRS makes adjustments based on 1099G forms that state unemployment agencies submit.
While the ARPA stimulus bill included a $10,200 unemployment income exclusion credit, it was only valid for the 2020 tax year. It was not extended into 2021 which mean the pandemic unemployment payments for all of 2021 were subject to federal and state taxes, in some cases.
Smaller Refund Scenarios Due to Paycheck Withholdings
Other reasons for smaller federal refunds can be attributed to various causes related to your income, tax rate and number of withholdings claimed via your W4. Here is a sampling of scenarios based on actual reader comments that could be causing your refund to be much lower than you expected.
Scenario 1 (multiple jobs): Mary is a single person and in the past has always gotten a large refund back. However this year, Turbo Tax showed she was due a $400 tax refund. But Mary made way more last year than ever having worked for two different companies. Mary made $15,000 at one job (tax withholding was ~$1200). At her other job she made $14,800 and had a similar withholding amount. So should she have got a larger refund since she made more money?
Answer: The reason Mary is getting a much smaller refund is that her tax withholding was much lower than it should have been since it was likely calculated for each job based on her salary being the annual amount. That is one employer thinks she earned $15,000 and withheld taxes based on that annualized income. The other place thinks she earned $14,800 and withheld taxes based on that income.
But Mary really earned $29,800 for the year and should have had more taxes withheld based on your total income. To fix this going forward she needs to adjust her W4 for the current tax year is she wants to get a larger refund the following year.
Scenario 2 (too few withholdings): I tried several tax software providers and they all come back with a federal refund of only a $95. This is the lowest I have ever got and I made the most money ever this year. I am single, own no property or anything, made around 14,000 last year ($590 federal withholdings). I claimed 2 deductions (withholding) on my paycheck as I have no dependents.
Answer: The answer for your lower refund is your deductions claimed via your W-4. Based on $14,000, your taxable income is around $4,850. Tax on that amount is $495 and with having $590 taking out, you’d get a $95 refund. You must have your deductions higher than 2 if you want more tax taken out so that you can get a higher refund next year.
Scenario 3 (making more money than last year, smaller refund): Last year my wages were around $30,000 (withheld taxes of $2,240) and state income tax was $1,500. When I entered this info into TurboTax get a free refund estimate before filing, both of them showed my federal refund at $47. However two years ago I made much less (around $22,000) and my return was almost $2000. What is going on? I am a single filer with no dependents and didn’t claim or get any other credits.
Answer: The most likely reason for the smaller refund, despite the higher salary is that you are now in a higher tax bracket. And you likely didn’t adjust your withholdings for the applicable tax year. To understand this you need to realize that your tax refund is determined by your total income, marginal tax rate and the amount of federal/state taxes that are withheld.
So since your taxable income was higher you fell into a higher tax bracket that resulted in higher taxes. But you would have got more money on a weekly basis (due to your higher salary) as well – which is better than getting a larger refund in my opinion.
At the end of the day getting a smaller refund with a higher income is not actually a bad thing in most cases. It basically means you didn’t give an interest free loan to the IRS (which is what a refund represents). In reality you don’t want a large refund as you should get the money in your pay check when you earn it. Not a year later.