Tax refunds can vanish if you have old IRS bills, other debts

As much as people relish getting a tax refund, many others just dread seeing that money disappear to cover a host of delinquent bills — such as old income tax bills. 

“If you owe the IRS money, they’re obviously not going to issue you a refund without offsetting that first,” said Greg Rosica, tax partner at the EY Private Client Services in New York. “Certainly, the IRS has the first priority.” 

The Treasury’s Bureau of the Fiscal Service also is able to immediately reduce your tax refund for specific past-due debts:

  • State income taxes. 
  • Child support.  
  • Federal agency non-tax debts, including past-due federal student loans.
  • Overpayment of unemployment compensation, say in the case of fraud. 

Overall, the bureau’s program that reduces federal income tax refunds for unpaid debts claimed 4,564,980 in offsets for a total of $5.9 billion from 2018 tax returns filed last year, according to the Treasury’s Bureau of the Fiscal Service. 

If you’re concerned about a garnishment involving a state income tax refund, Michigan issues a Non-Obligated Spouse Form 743 to the taxpayers after the return is filed. The Form has a strict 30-day response date.

Some couples use different strategies. 

Another option, Phillips said, is for the couple to file married filing separate returns if only one spouse is liable for a past due debt.

But there can be other negative consequences, perhaps losing out on some tax breaks, by using the married filing separate status. For example, if you opt to file married filing separately, you would not be able to reduce your taxable income by up to $2,500 through a special deduction that allows you to claim interest paid in 2019 on federal and private student loans. The student loan interest deduction can be taken on federal returns even if you do not itemize your deductions and choose to opt for the standard deduction. 

“Taxpayers should run the numbers each way to determine which choice is best for them,” Phillips said. 

ContactSusan Tompor  at313-222-8876 or Follow her on Twitter@tompor. Read more on business and sign up for our business newsletter.