Tax Refund Direct Deposit Reduced? Don’t Panic! Understanding Debt Offset For Past Due Obligation

The IRS is now processing refunds on a regular basis and many taxpayers are seeing their refunds approved and in the “Refund Sent” status stage.

The refund payment status screen (in WMR or IRS2go) as shown below will show your payment date, as well as any messages on potential IRS adjustments/offsets. This will correspond to code 846 on your tax transcript.

This confuses many folks who are surprised to see their refund adjusted and a lower amount than expected. Here is a common reason why this happens and options you have.

Tax Refund Offset or Reduction

The Federal Government and Treasury, under which the IRS falls, has the mandated authority to “offset” or deduct funds from your tax refund to cover debts you owe other federal agencies.

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:

• Past-due child support;
• Federal agency non-tax debts;
• State income tax obligations;
• Unemployment compensation debts owed to a state

When the IRS takes an action on your tax refund you will get a formal notice from the BFS explaining the offset to your federal refund and why it differs from what was estimated in your filed return.

They will provide details in the notice on the agency that requested the offset (e.g child services or your state unemployment agency) with details to contact them for more information. The IRS cannot discuss or change the debt with a another government agency.

Non-IRS Debt and Your Transcript

The IRS rules around these “non-IRS” obligations and treatment are covered in this article for the details on how offsets get applied to your tax refund (Tax Topic 203).

You will see transactions the IRS takes in related to non-IRS debts offset referenced as a tax topic or transaction code 898 – refund applied to non IRS debt – on your IRS transcript.

After the IRS adjustment you see see code 846 (refund issued) for the adjusted payment amount on your IRS transcript.

If you are able to successfully appeal your adjustment (see next section), you will see another code 846 line on your transcript showing the adjusted or additional refund paid.

What if I Don’t Agree with the Adjustment or Offset?

You should have gotten several notices, emails or letters from the agency that is claiming you owe them a debt. Their final action is to notify the IRS for collecting the debt if they cannot get it from you.

However once you receive a notice of refund adjustment due to the TOP, you will have 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 (federal or state) that initiated the offset.

The BFS (TOP) or IRS cannot setup a payment plan or discuss your debt with you or refund your money.

If you are able to successfully appeal the offset you will get issued the additional or missing refund and see this as 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 are entitled to request your portion of the refund back from the IRS via the injured spouse form.

Other IRS Adjustments

Note that the above is just one (major) reason for refund adjustments. The IRS may make automatic adjustments or corrections based on information they have from various sources. This happened with past stimulus payments, for example.

This prevents the tax filer from having to file an amended return and reduce delays in some or all of their refund payment.

In any event, whenever the IRS makes a change you will get a notice explaining the changes. You can also check your free IRS transcript/account for details.