Why Refunds Get Offset by Federal and State Debts

How refund offsets actually work

There are two common routes that cause a taxpayer’s refund to be reduced or withheld:

• IRS application for tax liabilities: Before issuing a refund, the IRS applies that refund against any outstanding federal tax balance the taxpayer owes. This is an administrative process inside the IRS’s tax-account system.
• Treasury Offset Program (TOP): The Treasury’s Bureau of the Fiscal Service runs TOP, which matches federal tax refunds against a centralized list of delinquent debts owed to federal agencies and many state agencies. TOP can intercept a refund to satisfy past-due child support, defaulted federal student loans, federal non-tax debts, and state tax obligations submitted to the program (Bureau of the Fiscal Service, TOP). (See the IRS overview of refunds and offsets: https://www.irs.gov/newsroom/tax-refunds-and-offsets.)

In my 15 years helping clients, I’ve repeatedly seen two practical patterns: taxpayers who first learn of offsets when their expected deposit doesn’t arrive, and cases where an offset was avoidable if the taxpayer had addressed the debt or disputed the debt in advance.

What types of debts trigger refund offsets?

Common debt categories that can trigger an offset include:

• Child support arrears — State child support agencies submit delinquent accounts to TOP for collection.
• Federal non-tax debts — Debts owed to federal agencies (for example, certain benefit overpayments) can be collected through TOP.
• Defaulted federal student loans — The U.S. Department of Education can request offsets for loans in default (see Federal Student Aid at https://studentaid.gov/).
• State tax liabilities — Many states submit past-due state income tax or unemployment-compensation debts to TOP.
• Unpaid federal taxes — The IRS will apply refunds internally to satisfy outstanding federal tax liabilities before issuing refunds to taxpayers.

Each program has its own rules about notification, appeal deadlines, and how the remaining refund (if any) is handled afterward.

What you’ll receive if your refund is offset

If a refund is intercepted, the IRS will send a written notice explaining:

• The amount of your original refund, the amount offset, and the reason.
• The agency that claimed the debt and contact information for that agency.
• Whether any portion of the refund remains to be issued to you.

The notice is critical because it tells you which agency to contact to dispute or resolve the debt. Keep the letter and any supporting documentation.

Why sometimes you don’t see advance warning

Different agencies use different notice processes. In many cases the creditor agency has already sent you multiple notices before the offset occurs; in other cases, the offset appears faster than the taxpayer expects. The Treasury Offset Program operates on electronic matches, so a debt that has been certified to TOP can trigger an offset without additional IRS contact beyond the offset notice.

Common scenarios and examples

• A taxpayer files electronically and expects a $3,000 refund. The IRS finds no federal-tax balance, but TOP finds a certified child-support arrearage; the entire refund is applied to child support. The taxpayer receives an offset notice that includes the state child support agency’s contact information.
• A borrower in default on federal student loans has wages garnished and the refund intercepted under a TOP match. If the borrower had entered rehabilitation or an income-driven repayment plan before the certification to TOP, the offset could have been avoided.

How to check whether an offset is likely

• IRS Online Account: Check your account balance and notices at IRS.gov (create an account if you don’t have one).
• “Where’s My Refund?” and account transcripts: These can show the refund status and any adjustments.
• Contacting the agency named on the IRS offset notice: They can confirm the debt and explain next steps.

How to stop or prevent an offset (practical steps)

1. Prioritize communication: If you receive pre-collection notices from any federal or state agency, respond immediately. Often a phone call can reveal options such as repayment agreements or temporary holds.
2. Pay or enter a payment plan: Settling the debt before the refund is issued prevents the intercept. Many agencies offer installment agreements (for IRS tax debt, a Form 9465 installment agreement is a common option) or administrative arrangements.
3. Correct an error quickly: If the debt is not yours or the amount is incorrect, follow the dispute process with the agency that certified the debt to TOP. The IRS notice will list which agency to contact—appeals usually go to the creditor agency, not the IRS.
4. Request review or hardship relief: Some agencies have limited ability to halt an offset for economic hardship or when collection would be inequitable. Contact the creditor agency for details.

For additional step-by-step guidance, see our related article: How Refund Offsets Work: When the IRS Keeps Your Refund.

What to do after an offset happens

• Read the offset notice and note the agency contact information.
• Gather documentation that proves payment, discharge, or error (loan payoff letters, court orders for child support changes, or tax transcripts showing a paid balance).
• Contact the creditor agency to request a review or to arrange payment. If the offset was for a federal student loan, contact Federal Student Aid (https://studentaid.gov/) and the Department of Education’s collections unit if necessary.
• If the agency confirms the debt is not valid or the offset occurred in error, ask for a written acknowledgement and request a refund of the offset amount (the creditor agency or Treasury will provide instructions).

If you believe the IRS made a mistake in applying the offset (for example, the IRS applied the refund to a different tax year than it should have), contact the IRS using the information on the notice. For procedural disputes about TOP certifications, contact the creditor agency; the IRS is generally not the party to reverse TOP certifications.

Timing and partial offsets

• Partial offsets: It’s common for only part of a refund to be used if the debt is smaller than the refund amount. The remainder is issued to the taxpayer.
• Multiple debts and priority: TOP applies offsets based on the debt certifications it has and the relative priority of claims (child support often has priority). The Treasury posts general program rules but priority will depend on the certifying agencies.
• Electronic timing: Once a debt is certified to TOP, interception can happen rapidly during refund processing. Planning ahead is the only reliable way to prevent a last-minute offset.

When an offset is unlawful or incorrect

If the offset was made in error because of identity theft, a wrong Social Security number, or a discharged debt (for example, bankruptcy discharge that should prevent collection), you should:

1. Contact the agency listed on the IRS notice and explain the error—provide supporting documents (bankruptcy discharge papers, identity-theft affidavits).
2. If the agency does not resolve it, file a written complaint with the Bureau of the Fiscal Service (TOP) and consider contacting the CFPB for assistance with collection practices (Consumer Financial Protection Bureau: https://www.consumerfinance.gov/).
3. Keep copies of every communication and escalate to a tax professional or attorney if recovery stalls. In my practice, timely, documented disputes often compel agencies to return an improperly intercepted refund.

Quick action checklist

• Keep all collection notices and the IRS offset notice.
• Contact the agency that certified the debt immediately.
• Obtain a written repayment or dispute agreement.
• If the debt is valid, negotiate an affordable payment plan; if invalid, request re-credit in writing.
• Consider tax planning: adjust withholdings or estimated payments for future years if you rely on refunds for cash flow.

Resources and further reading

• IRS — Tax Refunds and Offsets: https://www.irs.gov/newsroom/tax-refunds-and-offsets
• Bureau of the Fiscal Service — Treasury Offset Program (TOP)
• Federal Student Aid — studentaid.gov
• Consumer Financial Protection Bureau — guidance on federal debt collection: https://www.consumerfinance.gov/

Also see our practical guides: How to Stop a Refund Offset for Student Loans or State Debts: Dispute Process and How to Request a Refund Offset Review.

Professional disclaimer
This article is educational and based on current practices and public agency guidance as of 2025. It does not substitute for personalized tax, legal, or financial advice. Contact a qualified tax professional or attorney for help with your specific situation.

Author background
I’m a senior financial content strategist and tax practitioner with over 15 years of experience helping individuals and small business owners resolve collection issues and navigate refund offsets. My practical experience informs the procedures and negotiation tips above.