Overview

When you file your tax return, the IRS checks for certain outstanding debts that can be collected from your refund. If an eligible debt exists, the government may intercept (offset) your refund and send the money to the agency you owe instead of issuing the refund to you. This collection method is handled primarily through the Treasury Offset Program (TOP), which coordinates offsets for federal agencies and participating states (U.S. Department of the Treasury, Bureau of the Fiscal Service — TOP).

In my 15 years as a financial planner and CPA advisor, I’ve seen taxpayers surprised when a refund they were counting on is reduced or eliminated because of an offset. The good news: most offsets are lawful, documented, and accompanied by notices explaining why the money was taken — and there are clear steps you can take to check, challenge, or prevent them.

(Authoritative resources: IRS guidance on refund offsets and Treasury’s TOP program — see links below.)

Which debts can the IRS (or TOP) apply your refund to?

The most common categories of debts that can reduce or cancel a federal tax refund are:

  • Unpaid federal taxes (including penalties and interest). The IRS can hold your refund to satisfy prior-year tax balances.
  • Past-due child support, collected at the state level and processed through TOP.
  • Defaulted federal nontax debts — most notably federal student loans in default — referred to Treasury for collection.
  • State income tax liabilities (many states participate in offset programs that can reduce federal or state refunds).
  • Other federal agency debts (for example, benefit overpayments) referred to TOP.

The Treasury Offset Program and IRS procedures mean several different agencies can request money from a refund. For summaries of how TOP works and the kinds of debts it collects, see the Treasury’s TOP overview (U.S. Dept. of the Treasury — Fiscal Service) and the IRS general information on offsets (IRS.gov).

How the process works (step-by-step)

  1. Debt identification: A federal or state agency reports a past-due debt to Treasury/ TOP (or the IRS identifies a tax balance). Agencies follow their internal requirements before referral.
  2. Offset match: When you file a return or the IRS processes an existing return, the Treasury system matches your taxpayer identifiers against the TOP database.
  3. Notice and timing: If an offset is applied, Treasury and/or the agency that received payment will send notices explaining the offset amount, the debt it paid, and how to contact the agency to dispute or resolve it.
  4. Payment: The offset amount is sent to the agency that holds the debt. If the offset amount doesn’t completely cover the debt, the agency may seek additional collection actions; if the refund exceeds the debt, you receive the remainder.

Offsets typically happen during refund processing and can reduce your refund to zero. If your refund is fully offset, you will receive a written notice explaining which agency received the money and why.

What notices and documentation should you expect?

You should receive a written notice explaining any offset. The notice will identify:

  • The agency receiving the money (for example, your state child support agency or the Department of Education),
  • The amount taken from your refund, and
  • Who to contact to dispute or resolve the debt.

Keep copies of your IRS return, any prior notices, and the offset notice. These documents are essential if you need to appeal or request relief.

Common reasons an offset might be incorrect

Errors do happen. Typical causes of incorrect offsets include:

  • Identity mismatches or clerical errors when debts are referred to TOP,
  • Debts that were already paid but not updated in agency records,
  • Offsets applied to the wrong person (identity theft or incorrect identifiers), or
  • A debt that shouldn’t be collectible via TOP (rare, but possible).

If you believe an offset is wrong, the correct first step is to contact the agency that received the offseted funds — not the IRS — because that agency controls the underlying debt and any reversal. If the agency confirms an error, Treasury can reverse the offset and return the funds. See Treasury TOP guidance for dispute procedures.

How to check if an offset is likely or already occurred

  • Sign in to your online IRS account (IRS.gov) and review outstanding balances and notices.
  • Use the Treasury Offset Program information pages to learn if your debt type is offset-eligible.
  • If you expected a refund and received an offset notice instead, read the notice carefully to identify the receiving agency and the contact information provided.
  • For student loans, contact the Federal Student Aid office or your loan servicer to confirm status and potential offsets (studentaid.gov).

What to do if your refund is offset (practical steps)

  1. Read the notice carefully: It will say who got the money and why. That is your first and best point of contact.
  2. Contact the collecting agency: For child support, call your state child support enforcement agency. For federal student loans, contact your federal loan servicer or the Department of Education. For federal tax balances, contact the IRS.
  3. Request documentation: Ask the collecting agency for proof of the debt and the referral to Treasury. If you already paid the debt, provide proof of payment.
  4. Dispute if appropriate: If you believe the debt is not yours or has been paid, follow the agency’s dispute process. If the agency agrees it was an error, they will request a Treasury reversal.
  5. Explore alternatives: If the debt is valid but you need to keep refunds, consider negotiating a payment plan, loan rehabilitation (for some student loans), or offer-in-compromise with the IRS where eligible.

Strategies to prevent surprise offsets

  • Stay current on child support and federal student loan payments.
  • Check your IRS online account periodically for outstanding tax balances and set up an installment agreement if you can’t pay in full.
  • If you receive a notice of debt from any federal agency, respond promptly — unresolved debts are often referred to TOP after a period of delinquency.
  • Consider tax withholding or estimated tax adjustments if you rely on a refund for key expenses; budgeting around the possibility of an offset avoids dependency on a refund that may not arrive.

When offsets can’t be used

Not every type of debt is collectible through TOP. For example, purely private debts (credit card balances, mortgage arrears) are not collected via federal refund offsets, although other collection tools are available to private creditors. TOP is limited to debts owed to federal and certain state agencies.

Example scenarios (realistic outcomes)

  • You expect a $2,500 refund but owe $1,800 in past-due child support. The IRS processes your return, TOP reduces your refund by $1,800, sends that to the child support agency, and you receive the remaining $700.
  • You owe $2,200 on defaulted federal student loans and have a $2,200 refund. The refund can be fully offset and applied to the loan, leaving you with no refund. If you later rehabilitate the loan or dispute the debt successfully, you may recover funds through the agency’s review process.

Disputes and appeals

To challenge an offset, contact the agency that received the funds. If the agency refuses to resolve an error, you can escalate the issue to Treasury’s Bureau of the Fiscal Service, which administers TOP. If the offset involves a tax assessment error, you may need to pursue administrative remedies with the IRS or file a claim in the U.S. Tax Court for certain tax disputes. Consult a qualified tax attorney or CPA for complex cases.

Useful links and references

Internal resources on FinHelp.io:

Final notes and professional disclaimer

This article explains how refunds can be applied to prior-year federal and state debts via the Treasury Offset Program and related IRS procedures. It is written for general education based on current public guidance as of 2025 and my professional experience. It is not a substitute for personal legal or tax advice. If you face a complex or disputed offset, consult a tax attorney, CPA, or the appropriate federal or state agency to review your specific situation.