What You Need to Know About Offsets, Tax Refunds and Stimulus Checks

April 29, 2021, 8:45 AM

When the IRS began issuing the first round of stimulus checks (EIP1) in 2020, I received thousands (yes, really) of emails with related questions. One of the issues that routinely perplexed taxpayers was why stimulus checks might be offset.

As Congress rolled out subsequent stimulus checks (EIP2 and EIP3), the buzz surrounding offsets didn’t become more clear. If anything, taxpayers were more confused because the stimulus check offset rules had changed. To help you sort it out, here’s what you need to know about offsets.

The offset program is not new. It has long been the case that if you owe money to state and federal agencies, the government can seize certain federal payments, including your tax refund, to satisfy your debt. When that happens, it’s referred to as “offsetting the payment” or an “administrative offset” or, for short, an offset.

The IRS is not in charge. The Treasury Offset Program (TOP) is administered by Financial Management Service, a branch of the U.S. Department of Treasury. TOP collects on federal debts, like federal income tax delinquencies and student loan defaults, as well as past-due state obligations. State debts can include state tax liabilities and money owed to state agencies, such as child support arrears.

There is a formal offset process. If you owe money to a government agency, the agency must give you notice in writing. The notice must indicate the type and amount of debt and advise that the agency intends to refer the debt for offset. You must also be advised that you can pay or dispute the debt. If you don’t reach a resolution, the agency can send the debt information to TOP.

TOP matches up offset information. TOP maintains a database to compare payees and debtors. For example, if you are due a tax refund—but you have delinquent student loan debt—the database will show a match, and all or part of your tax refund will be redirected to pay the debt. If there’s money left after the offset (for example, your refund was $1,500 and you owed $1,200), you’ll receive the remainder. You will also receive a letter explaining why your payment is less than expected.

Child support is treated a little differently. The offset amount does not automatically get delivered to the person who is owed the outstanding child support. When a refund or stimulus check is intercepted, the state agency that submitted the case receives the money and then directs it to the proper recipient—typically the custodial parent who is owed support. The process can take some time, especially if the offset applies to a jointly filed tax return. In that case, the state may hold the funds for up to six months before distributing them.

Tax refund offsets are not reduced for financial hardship. There is no reduction or other exception available for federal income tax refund offsets, even for economic hardship. If you are experiencing financial difficulty due to the pandemic or any other reason, you should contact the agency that you owe to discuss your options.

A man turns out his empty pockets, circa 1948.
Photo by FPG/Hulton Archive/Getty Images

While federal income tax refunds can be offset, not all payments may be. Some payments are exempt from offset, including VA pensions and Supplemental Security Income (SSI) benefits. You can find a complete list here.

Not all stimulus checks are exempt from offset. The second and third rounds of stimulus checks (EIP2 and EIP3) are exempt from offset for debts, including delinquent taxes and child support arrears. However, the first round of stimulus checks (EIP1), while exempt from offset for most debts, remains subject to offset for past-due child support.

Stimulus checks may be offset on your tax return. Taxpayers who didn’t receive complete EIP1 and EIP2 payments may reconcile those amounts on their tax returns with the Recovery Rebate Credit (RRC). Since the RRC is treated as an ordinary tax credit, it will be applied to any tax owed or refunded to you. That means that if you’re due a refund, it may be subject to offset. As noted earlier, the IRS has agreed to use its discretion to bypass these offsets.

There is relief available for joint filers. If your share of your tax refund on a jointly filed return was, or is expected to be, applied against your spouse’s past-due debts, you are considered an injured spouse. You may be able to get your share of the tax refund released to you by filing Form 8379, Injured Spouse Allocation, with the IRS. In that case, the IRS acts as if you and your spouse each filed a separate tax return instead of a joint tax return. That means that wages and expenses are treated separately, while commingled items like interest earned in a joint bank account are divided equally. The IRS uses that formula to determine which portion of the refund, if any, should be turned over to the injured spouse.

You can remain in the TOP database for a long time. A 2008 law gave the government the right to chase old debts indefinitely. Typically, a debtor stays in the TOP database until the agency tells TOP to stop collecting the debt. That might happen when the debt is paid in full or subject to a bankruptcy stay, or if there are other reasons to stop collections.

If you have concerns about an offset, you can call TOP. The number is 1-800-304-3107. TOP can answer some questions, but they can’t make arrangements for you to pay your debt or even tell you how much you owe. TOP can only give you the contact information for the federal or state agency attempting to collect the debt. If your tax refund is offset, you should not call the IRS since they cannot reverse an offset or give you information about the debt. However, if you owe federal tax, you should contact the IRS to make arrangements to pay.

The program works. Taxpayers may not like the program, but TOP boasts some impressive numbers. In the last fiscal year, TOP recovered more than $10.4 billion in federal and state delinquent debts: about half ($5.1 billion) fulfilled child support obligations.

To contact the reporter on this story: Kelly Phillips Erb in Washington at kerb@bloombergindustry.com

To contact the editors responsible for this story: Jeff Harrington at jharrington@bloombergindustry.com; Kathy Larsen at klarsen@bloombergtax.com

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