Around 96 million people received tax refunds in 2019. The amounts varied but all came as a welcome surplus helping people do everything from pay down debt to splurge on the latest gadget.
But for some Americans the tax refund they were set to receive vanished before it reached their bank accounts. With a treasury offset, tax refunds are reallocated to cover the cost of past-due tax debts.
Take a look at this guide to avoiding a treasury offset.
What is a Treasury Offset?
The Department of the Treasury set up the Treasury Offset Program (TOP) as a way to increase outstanding tax debts. Through the program, the government is authorized to intercept tax refunds to cover any debts you have.
This treasury offset can affect your refund for years depending on how much you stand to receive and the total amount of your debt.
Does the government always take away your refund when you have unsettled debts? Not necessarily.
The Treasury Offset Program is run by the Bureau of Fiscal Service (BFS). This agency is the same division of the Department of the Treasury that issues tax refunds.
They don’t seek out every person’s past-due tax debt to give taxpayers a chance to manage their own repayment. But there are agencies within the Department of the Treasury that can report your unsettled debt if they haven’t received a payment in longer than 3 months.
Your debt is fair game for the Treasury Offset Program if you’ve been notified of the outstanding debt and given several options for getting your payments up to date.
Can I Avoid the Treasury Offset Program?
Most people assume that the Treasury Offset Program just applies to tax debt. But there are certain types of debts that affect whether or not you’ll be selected for the program.
Debts that are government-related like unemployment compensation penalties, child support, federal student loans, and state tax debts. These debts can trigger an offset because they’re considered loans that serve the public good.
A credit card company or auto lender can’t request an offset on past due debt because the financing isn’t issued by or related to a government agency.
You can avoid a treasury offset using the following strategies.
Work Out a Payment Plan
One of the first things you can do to avoid the treasury offset program is to work out a payment plan for you debt. It’s natural to want to shrink away from expensive balances that you see no way of paying back.
But the loan balance isn’t going anywhere. In fact, it might continue to snowball if you ignore the debt too long.
Most government agencies charge penalty fees and interest on the unsettled debt. Waiting months, or years, to settle your balance only leads to much bigger problems.
Respond to any notices you receive about past-due tax debt right away. Most government agencies are happy to work out a payment plan with you.
Make On-Time Payments
If you’re already on a payment plan, continue making on-time payments to avoid the offset program. A few late or missed payments are usually forgivable.
But once you fall behind 90 days, you’re at risk of an offset. It might be necessary to renegotiate your payment plan if you find yourself constantly falling behind on your debt payments.
Set up auto-pay for the debt so you won’t risk missing a payment or making it past the due date. Ninety days is a generous amount of time to make a late payment.
If you’re having trouble meeting your obligation within this time frame, there’s a good chance you can’t afford to make these payments.
Dispute the Debt
Another way to avoid a treasury offset is through an appeal. If you’re in the process of disputing your tax debt, you won’t be required to repay it right away.
There are multiple phases to the appeal process. When you notify the Department of the Treasury in writing that you’re requesting an appeal, you’ll receive a new notice with documentation to verify the claim.
If you can prove your debt isn’t valid or that it has already been repaid, you won’t be subject to an offset. Keep in mind that the appeal process isn’t fast.
It might take months of exchanging written correspondence with the Department of the Treasury before you receive a final decision.
Claim Financial Hardship
If you’re experiencing financial setbacks, it might be possible to claim hardship and avoid a treasury offset. You can contact the IRS online or request a form by phone.
The IRS makes a determination on a case by case basis of whether or not your tax refund is the solution to your financial hardship. If you can’t manage financial matters without it, the tax offset can be lifted.
You receive the entire amount of your refund when your hardship request is granted.
What to Do When You Receive a Notice
It’s important to respond to treasury offset notices immediately. You won’t have any luck calling the IRS for help because offsets are controlled by the government agency that requested the offset.
For example, if you owe child support and receive an offset notice, you should contact your state’s child support office. You have the right to dispute the debt directly with the government and potentially get the offset removed.
If the debt is valid, you have 60 days to make your payment. Payments are accepted online, by mail, and by phone.
Federal Treasury Offset Program
The Treasury Offset Program helps the government collect past due revenue from taxpayers. An offset can be triggered when you owe back taxes but any government agency can request a treasury offset on unsettled debts.
The best way to avoid an offset is to remain in touch with the TOP to outline your plans to pay or request an appeal. For more information and tips, visit our blog for updates.