One of the best feelings is filing your taxes and realizing you’re entitled to a refund. The thought of money coming into your pockets is an exciting thing. However, there are a few circumstances in which the IRS may keep your refund, especially if you owe them money in back taxes. Let’s look at the most common reasons the IRS may keep your federal tax refund.
You owe back taxes. The most common reason the IRS holds a person’s refund is that they owe back taxes. If you do owe the IRS money, they will keep your refund to pay that bill until the debt is paid off. This can occur even if you’re in a payment plan (installment agreement). Additionally, if you have missing tax returns that have not been filed, the IRS can keep your refund from the current tax year until the missing ones are submitted.
If the IRS believes you owe money on a past tax return, you will receive a CP88 Notice that explains why your refund is being held and which tax years are in question. Use the response form that comes with the CP88 Notice to let the IRS know about the previous tax years. For example, you can tell them the returns were not filed, if they were already filed, or the reason why it’s late.
You are making payments for another federal tax period. If you are currently paying money under an installment agreement or payment plan, the IRS will automatically apply for any refund due to you against the taxes you owe. This means that if you owe $1,000 for a previous tax year, but you’re owed a refund of $500 for the tax year 2018, the IRS will apply that $500 to what you already owe. If your refund exceeds what you owe, you will receive a refund for the amount over what you owe.
You owe child support or spousal support. If parents have not paid court-ordered child support, the state’s child support enforcement agency may ask the Treasury Department to withhold any tax refund owed to cover the delinquent child support payments. This same situation can be applied if you owe court-ordered spousal support as well. Your refund could be held or used to offset overdue payments.
The IRS is questioning the accuracy of your tax return. At times, the IRS may believe the tax return you just filed has errors or believes there are discrepancies on the filed return. Perhaps the IRS believes you claimed deductions or credits you should not have. For these reasons, it may choose to hold your refund until the tax return can be audited for accuracy.
You owe other debts that have not been paid. The IRS can keep your tax refund if you have outstanding balances on debts such as student loans, child support, spousal support, unemployment compensation repayment, or state taxes. You need to contact the source of that debt to remedy the situation before the IRS releases your refund.
You owe unpaid student loan debt. If you are delinquent on federally insured student loans, the IRS can keep your tax refund and apply it toward the debt you owe to the U.S. Department of Education. Additionally, your state could also withhold money from your state tax refund.
There is a problem with your tax account. It may be the case that the IRS believes your tax account has been compromised and, as such, they are keeping your refund until the matter is rectified. For example, if the IRS suspects you’ve been the victim of identity theft or there’s a discrepancy related to your dependents or filing status. If this is the case, you’ll want to contact the IRS to clear up the matter and they will then generally release the refund within a few weeks.
You’ve filed for bankruptcy. Being in bankruptcy is not an automatic way for the IRS to keep your refund. However, your bankruptcy trustee can ask the court to take your tax refund and apply it toward your debts.
Does Bankruptcy Clear Tax Debt?
Discharge tax debt through Chapter 7 bankruptcy if the debt is federal or state income tax and meets all eligibility conditions. Fraud penalties and payroll taxes cannot be discharged.
If you feel you are entitled to a refund and it’s being kept from you in error, consult with an experienced tax professional or tax attorney for help. Dealing with the IRS can be challenging. You don’t have to navigate those difficult waters on your own.
Allison Soares is a partner and tax attorney at Vanst Law. Before starting her own practice, Soares was a partner at a tax law firm where she honed her skills handling a wide variety of tax and employment-related cases. In addition to her legal work, she has worked in accounting and utilizes that knowledge to her advantage while handling cases involving EDD audits.
