IRS Offset Program

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We have written before about the IRS offset program, here, including not only offsets by the IRS to satisfy liabilities owed to it by individuals receiving a refund but also the offset of federal tax refunds to pay many other types of state and federal debts.  On March 31, 2016, the Treasury Inspector General for Tax Administration (TIGTA) issued a report critical of the way the IRS is handling the offset program and calling for updates in the system. The report deserves some attention because of the importance of offset to the overall collection system of the IRS.


The offset provisions are found in IRC 6402. The basic rule is that the IRS may offset any refund due to a taxpayer against any outstanding federal tax debt. I use the word “may” because the IRS does have some discretion in deciding whether to offset and that discretion manifests itself in the offset bypass refund (OBR) program discussed previously that allows certain individuals with a hardship to obtain all or a portion of their refund despite having outstanding federal tax debt. The OBR procedure will not, however, allow a taxpayer to bypass the offset of their refund against one of the other debts included in agreements with the IRS such as child support, student loans or state tax obligations.

The TIGTA report naturally focuses on problems with the IRS offset program rather than other state and federal debts and identifies a few problems. It is interesting to look at the problems because in doing so we also learn more about how the program works. Most of the problems involve situations in which the offset crosses some boundary, e.g., offsetting a Form 1040 refund against a business debt. Because of the amount of money involved and the ease of collecting through offset rather than other enforced collection methods, solving these problems should be a priority for the IRS. The report focuses on the years 2011 to 2013. For those years the amount of the offset from individual refunds to individual debts averaged about $7 billion – a decent amount of money. The report did not talk about this type of offset very much because it is routine and the offset process works well here.

I would like the IRS to send a notice when it makes an offset that says something like, “You filed a return claiming a refund of $X which the IRS has allowed; however, you are not receiving your 2015 income tax refund of $X because we took $X to pay off your outstanding income tax liability for 2014 in the amount of $Y. Even though we applied $X to your 2014 liability, you still owe $Z for 2014.”  This type of offset is an in house offset that does not need to go through Treasury’s Financial Management Services. The IRS controls the information. It should provide the taxpayer as much information as possible so the taxpayer can plan for the future and can explain the problem in detail should they go for assistance concerning the debt. I would especially like it if the letter to provide more detail when the refund is offset to a non-IRS liability such as a student loan. I would like the letter to say “you are not receiving your 2015 income tax refund of $X because we have offset that refund to partially satisfy your obligation on your student loan. After the offset of your 2015 refund, your student loan has an outstanding balance of $Y.” I know I live in a dream world and this was not the focus of the TIGTA report but it would be nice to focus a bit on the information provided to the person whose refund is offset. By providing detailed information about what has happened, the individual will be better prepared to deal with the consequences of the offset.  I can only say that at the clinic we have a number of clients who come in each year seeking to find out what happened to their refund and it takes some digging to find out.  The IRS does provide some data but I would like it to provide more.

The report focuses on the problems the IRS is having making offsets of individual refunds to pay off business tax debts. The IRS cannot take an individual refund and apply it to pay off the debt of a corporation in which the individual owns stock but can offset the individual refund against a business debt of a sole proprietorship. For example, if I am due a refund of $X for 2015 and my sole proprietorship failed to pay employment taxes for 2014 of $Y, the IRS can take my refund and apply it against the employment taxes of the sole proprietorship. The dollar amounts of the individual income tax refunds of offsets of this type are much smaller than the offsets of individual refunds to individual liabilities. The amounts ranged from $16 million in 2011 to just under half that in 2013. TIGTA identified that the IRS misses many refund opportunities for offset here because “the IRS’s current process does not effectively identify sole proprietors with business tax debt.” The businesses use an EIN for the employment tax returns rather than the SSN of the sole proprietor. The IRS must match the EIN against its database in order to find the corresponding SSN. TIGTA identified 53,672 individual taxpayers who received approximately $74.5 million in tax refunds in 2013 that could have been offset. The IRS is using a process developed in the 1980s and TIGTA recommended use of a new process that would capture the data necessary to effect these offsets. The IRS agreed but said that to do so would require resources it did not currently have. Consequently, it does not sound as though this change will happen anytime soon.

I do not know the priorities of the IRS. This is low hanging fruit. It requires programming changes which requires computer resources. The use of the resources would eliminate the need for some resources in ACS or field collection to get back the money the hard way. This seems like a good catch by TIGTA and something that should go relatively high on the IRS list of changes it should make. Putting resources in capture money it already has instead of working hard to get a taxpayer to pay over money would always seem like a high priority item.

In addition to the problem of capturing refunds to satisfy the sole proprietor debts of individuals for employment taxes, TIGTA identified problems in capturing refunds when the liability for the debt is coded non-master file instead of master file. We should do a post on how the IRS classifies its accounts and explaining more about the distinction between master file and non-master file. I welcome input from a guest blogger on this issue. In broad terms, most accounts start in master file but sometimes unusual things happen on an account which requires that the IRS move the debt to non-master file accounts. Non-master file accounts can be hard to monitor for the IRS and create confusion when a taxpayer or a representative looks at a master file transcript for a period with known liabilities and sees a zero balance due because the account has transferred to non-master file status. The problems that plague individuals looking at these accounts also impede the IRS when it seeks to make an offset and TIGTA found numerous examples, some with large liabilities, in which the IRS failed to make an available offset. In some of these accounts the taxpayer owed a fair amount of money. The IRS agreed with TIGTA and has taken steps to correct its system to capture these refunds although with respect to some accounts additional programming is needed and may take some time to complete.

TIGTA found that in some instances the IRS offset refunds of individuals and used the money to satisfy the liabilities of limited liability (LLC ) companies. TIGTA identified $780,474 in incorrect offsets. LLCs are distinct from sole proprietorships and the offset in this situation was wrong. Interestingly, the IRS agreed to fix this problem and send refunds to the effected taxpayers. Contrast this with its action concerning low income taxpayers against whom it assessed hundreds of thousands of penalties incorrectly, according the Tax Court, where the IRS refuses to fix its mistake. The IRS seems willing to fix mistakes it (including TIGTA) finds but less willing to fix mistakes found by courts even though it concedes it will not litigate the issue further.

This TIGTA report bears at least a skim if you have concerns about the offset of your client’s funds because it provides some detail on the process. This is an efficient process that could become even more efficient in the future.


  1. Henry Jefferson says

    Can the IRS offset an individual’s refund for the tax liability of a single member LLC?

  2. Tynesha Harris says

    My taxes have been offset due to a student loan what can I do to get at least half of it back

  3. My comment on the offset program is a wonderfull program to have except theres a few things that i thinh needs to be changed.I understand that if you are required to pay childsupport that you should be willing to step up to the plate and take care of it with out having your wages garnished or getting your taxes ever some time or another you may experience finacial problems especially by yourself that might lead you to the point that you just cant pay childsupport at the only speaking for myself .and i understand that just because you have enter into a finacial hardship that your chilldsupport should go on it shouldnt but when your left with no options either pay your rent or power bill or just live out there on the streets and pay your childsupport any way.and thats the way that yall see it .yall dont look at the other side just the side that recieves the child support and thats now since youve gottan behind on your child support that your taxes goes into an off set not only one but both of them thats what i disagree dont understand what the other side might be going through.its like we are the bad side so the hell with them and thats wrong . i love my daughter more then i love jesus.and when danielle runs off with my mothers husband after 19 years of being married .that only caused a break up between us and a devorce between him and my mother for what reason all because he promised her every thing under the sun if she would leave me and be with him.and it happened after they had me locked up for hear say and it caused me my job and i was on a little misdermiener probation and had only 6 months to go so it violated that 6 months and i did that time it allowed them enough time to get gone where i wouldnt find them when i got out and yes i ran out 850 worth of gas looking for who my daughter and never did find her hadnt seen her or nothing for almost a year then went to court on her filing a protectant order on me the judge gave me a year to hire me a lawyer i got my daughter every other week end for a year and at that time i was also to pick my daughter up at sheriffs department like im a prediter or some thing and at that time i was required to pay my child support at the clerck of court weell i took 400 that week and 150the next week well when i picked up my daughter that following week end danielle gets out of the car that my mothers husbands buys her with anew 300 dollar phone and a 400 laptop that she bought with the child support money i asked her did you buy kyra any thing she not yet but i am i said with what when i pay again what im trying to say is that witch ever side that recieves the child support shoul atleast once a month be made to show where the money went and show reciepts. Thats my opionion and thats only right.I was there with my daughter from day one .Im the one that she peed on in the hospital im the one that when i got off of work every morning that i hurried and got to the house and got kyra up got her dressed fed her breakfast learned how to fix her hair and stood there with her until she got on the bus and off of the bus every day i would half to cuss her out to get her up and get kyra dressed while i was on my way to the house she has two other girls that gave her rights up to let there daddy have them why cant she let me have mine and i would be fine with tat and wouldnt asdk her for child sopport one day ill be able to return the favor that she done for me i promise you that.and now i hadnt seen kyra in over 4 years yes im speaking my mind so yes theres a few things that i think needs to be changed god bless you and every one have a good day

  4. I owe a bill but have no debts or collections against me. I called BFS and they verified that I’m not in collections and yet my state and federal refunds were sent to satisfy somthing that doesn’t exist how do I get my refund refunded to me? Is very appreciated

  5. Justin Pethick says

    I had all 3 garnished state fed and stimulas so now I.m broke out of work starving to death and I never was

  6. Patti Weichman says

    This is 100% BS!! I married my husband 4 years ago and every year I’ve gotten at least half of my state tax refund taken from ME because HE owes back child support. He collected this debt BEFORE we were married. They are NOT my children or my responsibility! I am the only one working while he spends his time in jail/prison. I am the head of household, he contributes NONE!! I pay all the Bill’s and groceries. TELL ME WHY I should have to pay his debt that he accumulated years before we got married while he refuses to work because of the child support. Make HIM responsible! You want to take MY tax refund money but allow HIM to cash in on a $600 stimulus check? What the hell is wrong with you people?????? Get off your ridiculous power trip and stop taking innocent, hard working, honest people’s money to pay SOMEONE ELSES DEBTS!!!! THIS LAW HAS GOT TO CHANGE!!!!
    PS…..I’ve filed for divorce!

  7. I received a topic 203 against my stimulus check/tax place yesterday. It’s the weekend and I was able to piece together it’s from Mo Unemployment. I haven’t claimed unemployment for 11 or 13 years and NEVER have gotten a notice about this. I just want to know how much and when.

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