How offsets happen

The Treasury Offset Program (TOP), run by the U.S. Department of the Treasury’s Bureau of the Fiscal Service, matches federal payment records against delinquent debts submitted by states and federal agencies. When a state certifies an outstanding tax debt to TOP, the Treasury can reduce (offset) federal payments owed to the taxpayer and forward the recovered amount to the state. The most common target is a federal income tax refund, but other federal payments may be affected depending on the submitting agency and the type of payment. (See Treasury Offset Program, Bureau of the Fiscal Service; IRS.gov.)

Step-by-step: what to expect

1) State action: A state tax agency identifies an unpaid tax liability and follows its procedures to certify the debt to the Treasury Offset Program.
2) Matching: TOP compares the taxpayer’s information to federal payment records.
3) Notice: Before an offset, the state generally notifies the taxpayer about the debt and intent to submit it for offset; after the offset, the Treasury or IRS sends a notice explaining the amount applied and which agency received it.
4) Result: The federal payment is reduced by the offset amount; any remaining balance (if any) is issued to the taxpayer.

Who is affected

  • Taxpayers with unpaid state income taxes, unpaid state unemployment taxes, or other state-administered tax liabilities that the state submits to TOP.
  • Recipients of federal tax refunds are the most commonly affected group.
  • Some federal benefit payments can be subject to offset for certain kinds of debts; protections and limits vary by program and the type of debt submitted. For details about whether a specific federal benefit can be reduced, check the agency that administers that benefit and Treasury’s TOP guidance.

Practical example

A client expected a $2,800 refund but received a notice that the state had certified a $1,200 overdue income tax balance to TOP. The Treasury applied $1,200 of the refund to the state debt and issued the remaining $1,600 to the client. Because the state sent prior notice about the debt, our client was able to confirm the amount and arrange a repayment plan for other state liabilities.

What you can do (actionable steps)

  • Read notices promptly: If you receive a notice from your state tax agency about a delinquent account, respond or request the stated validation steps—this often prevents surprises at tax time.
  • Confirm the debt with the submitting agency: To dispute the offset you must generally contact the state agency that submitted the claim; the submitting agency holds the records for contesting liability.
  • Check your refund status: Use IRS tools (Where’s My Refund?) and watch IRS offset notices.
  • Request a hardship consideration: If an offset would cause significant financial hardship, ask the submitting agency whether it offers hardship relief, waivers, or installment agreements.
  • Seek professional help: A CPA, tax attorney, or enrolled agent can help evaluate disputes, negotiate with the state, or develop a settlement plan.

Common misconceptions

  • “Only refunds are offset”: Refunds are most common, but other federal payments can be affected depending on the agency and the type of debt.
  • “The IRS initiated the offset”: For state tax debts, the state initiates the collection by sending a certified claim to TOP; the Treasury carries out the payment reduction.
  • “You can only dispute the offset with the IRS”: In most cases you must dispute the underlying debt with the state agency that submitted the claim.

Tips to reduce risk

  • File timely state returns and pay or set up payment plans before the state refers a debt to TOP.
  • Keep contact information current with both state and federal agencies so you receive notices.
  • If you expect a refund but have unresolved state tax issues, contact the state tax office in advance to avoid surprises.

Key resources and where to check (authoritative)

  • Treasury Offset Program (Bureau of the Fiscal Service) — comprehensive TOP guidance and how offsets are processed.
  • IRS — information about tax refunds and notice types; use IRS.gov to check refund status and to view IRS notices after an offset.

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Frequently asked questions

Q — Can I stop an offset once it’s in process?
A — Once TOP applies an offset it can be difficult to stop; immediate contact with the submitting state agency is the quickest route to challenge the debt or request relief.

Q — Will I always be notified before an offset?
A — States typically provide pre-offset notices under state law. Treasury or the IRS will send a follow-up notice after a federal payment is reduced. Timing and content vary by state.

Professional disclaimer

This article is educational and does not substitute for personalized tax, legal, or financial advice. If you face an offset or potential enforcement action, consult a qualified tax professional or attorney familiar with state collection procedures.

Sources

Bureau of the Fiscal Service, Treasury Offset Program (TOP); Internal Revenue Service (IRS.gov).