Person snatches away money
gettyMost taxpayers know that the federal government can seize their tax refund to satisfy that debt if they have an old tax bill. But what about other kinds of debt?
The government has long had the authority to seize tax refunds and other payments to resolve certain debts. However, in 2008, the rules that limited the time to seize those funds were rewritten. The change was made in the Food, Conservation, and Energy Act of 2008. The applicable provision, tucked at the end, is titled "Elimination of statute of limitations applicable to collection of debt by administrative offset" and reads, "Notwithstanding any other provision of law, regulation, or administrative limitation, no limitation on the period within which an offset may be initiated or taken pursuant to this section shall be effective."
In other words, the government gave itself the right to chase taxpayers for old debts indefinitely. And one of the easiest ways to do that is through an offset. The provision remains on the books and is officially codified in Title 31, Section 3716 of the federal statutes.
The government has a significant opportunity to collect debts through the Treasury Offset Program (TOP). Financial Management Service, a branch of the U.S. Department of Treasury, administers the program.
TOP has been successful. In fiscal year 2023, the program recovered more than $3.8 billion in federal and state delinquent debts.
How It Works
If you don't pay your debt, it can be turned over to TOP, which helps collect the debt by holding back money from a federal payment, like a tax refund. That process may be referred to as offsetting the payment, administrative offset, or offset.
The debt can't just be leapfrogged to TOP. First, the agency that claims it is owed the debt must send a letter to the the person who owes the debt at the name and address on file at least 60 days before sending the debt to TOP. The letter must explain the debt, including the type and amount, and that the agency intends to refer the debt to TOP for offset. Notably, the letter must give the debtor opportunities to pay the debt or dispute that they owe the money to the agency.
If you don't pay or dispute the debt, it can be sent to TOP after it’s 120 days overdue. Information about the overdue debt includes the debtor's taxpayer identification number. For an individual, that's usually a Social Security Number (SSN). For a business, nonprofit organization, or state agency, that's usually a federal Employer Identification Number (EIN).
The debt is then entered into a database and matched to payments made by federal agencies, like the IRS. If your name shows up, certain payments—like your tax refund—can be offset. When TOP takes money from your payment, they must send you a letter explaining what they did.
And that's it. The law only requires the two letters: one from the original agency that claims a debt saying it intends to refer the debt to TOP, and one from TOP once an amount is withheld from the payment. And, in cases like tax delinquencies, the IRS doesn't need a court order to establish the legitimacy of a debt—that's why it's essential to open your mail and respond to IRS notices.
If you don't believe that you owe money, you should contact the agency (such as the IRS) that claims to hold the debt. TOP advises you to call or write to the agency using the contact information on the initial letter that you should have received. If you can't find that information, you can call the TOP Call Center at 1.800.304.3107 to ask questions. While TOP can answer some questions, they can't make arrangements for you to pay off your debt, tell you when the debt occurred, or tell you how much you owe. TOP can only give you the contact information for the federal or state agency attempting to collect the debt.
Once the debt has been collected—or offset—the federal agency sends those funds to the Bureau of the Fiscal Service (part of TOP), which makes the payments to the appropriate agency (a few exceptions apply).
Your debt will remain in the TOP database until the original agency tells TOP to stop collecting it. That typically happens once the debt has been paid in full, is subject to a bankruptcy stay, or if there are other reasons to pause or stop collection.
Debts Subject To Offset
Not all debts can be collected by TOP. Typically, debts must be $25 or more and must be delinquent and legally enforceable, which means they cannot be in bankruptcy, forbearance, or under appeal.
If they meet those hurdles, examples of federal debts that might trigger offsets include federal income tax delinquencies and student loan defaults. States can participate, too, by asking the IRS to intercept or offset federal tax refunds for state tax obligations or money owed to state agencies—this includes the state's child support enforcement office's authority to collect on outstanding child support debts.
Those numbers in play can be significant. According to the most recent data from the IRS, Americans owed over $120 billion in back taxes, penalties, and interest in 2022. And, according to the Education Data Initiative, one out of every ten Americans has defaulted on a student loan. An average of 430,000 students defaulted between 2015-2018 after the second year of repayment, and roughly four million student loans enter default each year.
Keep in mind, however, that TOP offsets apply to federal or state government-related debts. They don't include private debt unrelated to a government agency, such as credit card debt or a delinquent car loan. TOP can’t seize your tax refund to repay your Verizon bill or to resolve a debt you owe to your Aunt Angela.
Seizure Amounts
It has long been the case that if you owe money, your federal income tax refund can be seized to satisfy your federal tax debt. Up to 100% of your federal tax refunds can also be seized to pay federal non-tax debts, child support, state income tax, and unemployment insurance debts.
Your Social Security and Railroad Retirement benefits can also be seized for federal tax and non-tax debts—but those seizures are limited to 15%. Other payments that can be seized all or in part, depending on the kind, include vendor and federal employee travel-related payments, federal salaries (including military pay), Office of Personnel Management retirement, and state payments of all kinds (subject to reciprocal agreements).
There's also a catch-all that allows TOP to collect from federal payments that are otherwise not exempt by law or by action of the Secretary of the Treasury. (That necessarily means that some payments are exempt from collection—you can find those here.)
It's not just the debt—plus any penalties and interest—that could result in an offset. By law, an administrative offset fee can be charged to collect what you owe. Yes, that means you may have to pay the government a fee for the privilege of repaying your debt.
Tax Refunds
Years ago, even without written notice, some taxpayers could reasonably predict the seizure of their tax refunds in advance. However, starting with the 2011 tax season, the IRS announced that it would no longer provide a "debt indicator" to third parties. A debt indicator notifies third parties about debts that might result in an offset or seizure of a tax refund. Loan underwriters traditionally used those indicators to determine how much of a risk a taxpayer might be for purposes of advancing refunds through products like Refund Anticipation Loans (RALs). A clean debt indicator gave the underwriter assurance that the loan would be repaid through a tax refund. Without those debt indicators, RALs became pretty hard to come by—that was precisely the IRS' plan.
The removal of debt indicators had a secondary result beyond making RALs difficult to underwrite—it also meant that taxpayers might not have advance notice that an offset was in the works. Remember that you're supposed to receive notice before a debt is shuttled over to TOP. But taxpayers who didn't receive notice—either because they moved or because the agency owed the debt never issued proper notice—had to rely on tools like "Where's My Refund?" on IRS.gov to check the status of a tax refund. The problem, as you can imagine, is that, for some taxpayers, that was a little too little too late. If an offset was in the works, finding out after a tax refund was expected (and, in some cases, already spent) could be difficult.
The problem was exacerbated if the alleged debt was old—and the taxpayer had forgotten about the liability. Fortunately, the IRS has some limitations on its ability to collect old debts. Typically, there's a 10-year window for collections, but sometimes, that window can be stretched (see "Questions" here).
And keep in mind that if you don't pay your debt or otherwise take steps to resolve it, the IRS has other tools at its disposal outside of the offset program. That can include liens and levies (seizures of your property, including bank accounts). It doesn’t have to get that far, however. There are a lot of opportunities to resolve your debt ahead of time—and help is available.
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