Tax Refund Offset Reversal: Step By Step Guide

Any taxpayer can experience a tax refund offset reversal which may affect their short-term finances drastically.

RELATED: Where Is My Federal Tax Refund? What To Do If You Don’t Receive It

A Primer on the IRS Tax Refund Offset Reversal Process

Step 1: Understand the Concept of a Tax Refund Offset and Its Process

Sometimes, a taxpayer checks on a tax refund status and discovers a tax refund offset.

Any taxpayer wondering how long their tax refund takes should check as often as possible. Generally, a tax refund can take around 21 calendar days for processing.

A tax refund offset happens when a taxpayer has a tax refund and simultaneously has debts owed. Interestingly, the debt does not need to come from the IRS only.

However, before a taxpayer assumes a tax offset occurred, they should check to see if they:

1. Failed to sign the forms;
2. Have incorrect or mismatching amounts in the sent forms, which triggered another review of the correct tax refund amount;
3. Filed the tax return near or during peak tax season. Usually, the tax deadline is April 15, and the IRS is busy handling new tax information;
4. Have mismatching data in the forms. For example, the taxpayer sent a different social security or tax identification number;
5. Did not attach documents the IRS required, like confirmation of a new dependent, that triggered the tax refund.

This list is not exhaustive, as there are many reasons why the IRS cancels, postpones, or reviews a tax refund.

In a nutshell, if the tax refund processing or confirmation took more than three weeks, the taxpayer may want to contact the IRS.

When does a tax refund offset usually occur? When the taxpayer has not filed a tax return for the year and he or she has an outstanding tax refund, the law allows the IRS to offset the tax refund and apply it to the tax debt.

However, if the tax refund offsetting party is not the IRS, there is a higher chance of not receiving a notice. The most common offsetting party is either an outstanding student loan or payment of child support.

Step 2: Understand the Process on How to Reverse Tax Refund Offset

Taxpayers should take note that the IRS sends a letter called Notice of Intent to Offset if the IRS applies the tax refund to an outstanding tax debt from the IRS.

However, other cases may not necessarily trigger a notice, and it bears repeating that a taxpayer should contact the IRS if the tax refund processing time takes more than 21 calendar days.

Before we talk about the process, taxpayers should know when the tax refund offset reversal deadline is.

Basically, the IRS applied the tax refund to the tax debt automatically during peak tax season and just sends a notice to the taxpayer about the offset. However, taxpayers can bypass the offsetting by applying to the IRS first before the tax offset happens.

To put it into concrete terms, the tax refund offset reversal application should happen before April at the latest.

If the tax refund offset has already been applied, the taxpayer cannot reverse the offset. The only exception for the reversal lies with a clerical error from the side of the IRS, but that usually translates to a lower tax refund and not the original amount.

RELATED: What Is The IRS Employee Misclassification Amnesty Program?

Step 3: Find Out Who Requested the Tax Offset

Generally, the party who requested the tax offset affects whether or not the taxpayer receives anything in writing.

1. If the offsetting part is the Federal Government or a branch, the IRS usually gives the notice. This can also apply to student loans as well.
2. For creditors, they can actually contact the IRS to garnish the tax refund. Usually, civilians and groups inform the taxpayer, but not always.
3. Court awards, like child support, may attach themselves directly to the IRS if no other assets are available for garnishing. Usually the taxpayers receive notification after a judgment. However, if quite a lot of time has passed from the promulgation of the court judgment, the offsetting party may not inform the taxpayer in advance.
4. The local government may also ask the IRS to forward the tax refund. However, tax refunds apply first to federal tax debts and then state or local tax debt, which may trigger a notice from the IRS and the state.

For tax offsets related to federal tax debt, taxpayers can contact 1-800-829-1040. This option applies if the taxpayer believes that he or she does not owe the money to the IRS.

For a non-federal tax offset:

1. Taxpayers can contact 1-800-304-3107, the Bureau of Fiscal Service, if the taxpayer needs more information about the offset.
2. If the taxpayer believes he or she does not owe the money, they should contact the specific agency.

If the tax refund received by the taxpayer is lower than expected, he or she should call the IRS. Lastly, if the tax refund offset happened but the taxpayer did not receive the remainder, another offsetting party may be involved, and the taxpayer should investigate further.

Step 4: Apply For the Tax Refund Offset Reversal

With a tax refund offset, taxpayers can either:

1. Apply for the tax refund offset process, or
2. Dispute the tax refund offset through an appeal.

It must be noted that for an IRS appeal to prosper, the taxpayer should first receive a bill.

For tax refund offsets, the IRS or agencies seldom send a bill to the taxpayer and often opt to send the garnishment to the IRS.

Regarding forms, the IRS actually does not have a standard form to start the tax refund offset reversal process. The taxpayer has to send a letter that states:

1. The name of the taxpayer,
2. The amount of the supposed tax refund,
3. Name of the offsetting party,
4. The reason why the tax refund offset reversal should not have happened, and
5. That the taxpayer is formally challenging the offset of the refund.

For spouses, the IRS offers two possible options.

1. If the tax refund offset comes from the debt of the other spouse, the taxpayer can use IRS Form 8379, Injured Spouse Allocation.
2. On the other hand, IRS Form 8857, Innocent Spouse Relief, helps a spouse recover the tax refund offset if the reason is the spouse reporting false or misleading information in the tax filing.

The IRS may allow a tax refund offset reversal due to economic hardship, subject to its own discretion. The taxpayer should:

1. Fill out IRS Form 433-A, “Collection Information Statement for Wage Earners and Self-Employed Individuals.”
2. File only if he or she is encountering financial difficulty in meeting basic necessities, like food.
3. Disclose if under bankruptcy proceedings,
4. Document assets and expenses as proof.

For all these processes, whether for spousal, financial hardship, or individual, the IRS has no specific time-frame to give a reply. It may work best if the taxpayer asks the IRS for an update with their case.

Step 5: Avoid Getting a Tax Refund Offset

Taxpayers can avoid a tax refund offset through:

1. Budgeting properly via an IRS installment plan for debt,
2. Applying for a CNC status to protect the incoming tax refund,
3. Ask for penalty abatement.
4. Requesting an Offer In Compromise.

Bear in mind that the tax refund offset reversal process is like an appeal; it can take quite a lot of time. Preventing a tax refund offset requires due diligence and even evidence to prove to the IRS that the offset should be reversed.

A tax refund offset reversal should be the last resort, as the process takes too much time. By avoiding getting into these kinds of situations, taxpayers can allocate their finances better.

Have you experienced the tax refund offset process? How long did it take before the IRS replied? Let us discuss in the comments section below.

If you owe back taxes, visit taxreliefcenter.org for more information on tax relief options.

Up Next:

• 9 Tax Records You Should Keep In Your Business To Avoid IRS Audit
• What Is An IRS Backup Withholding Notice And How To Deal With It
• How To Calculate Your Estimated Tax Penalty