Bypass the IRS Offset: Getting Tax Refunds Back

IRS tax refund offset bypass letter

You probably found this page as the IRS took your tax refund. It may have taken it to satisfy your IRS back taxes or another debt that you might owe, such as back child support.

You might also be searching for “will the IRS take my refund” or the “IRS Offset program.”

You may have even received a letter about the offset from the IRS and/or the Bureau of Fiscal Services.

If you have questions about these topics, this page is for you. Continue reading to see how the IRS can take an offset refund and how to go about getting your refund back.

What is an Offset (or Setoff)?

The term “offset” is a legal concept. It is commonly found in various state statutes and in contract terms.

The term refers to the ability of a creditor to deduct from an amount owed an amount the creditor owes the debtor.

This is usually based on a counterclaim against the party making the original claim.

The concept is that the creditor should not have to make a payment to the debtor and then go back and collect the full amount owed by the debtor.

The term is synonymous with the term setoff.

The IRS’s Power to Offset Tax Refunds

The IRS has been granted the power to offset amounts with taxpayers.

Thus, if you owe back taxes to the IRS, any refund the IRS owes to you is automatically used (i.e., “offset”) against your back taxes. This means that the IRS is able to keep your money to pay back taxes. It does not have to issue a refund check.

This offset power is not limited to back taxes. This includes the power to offset outstanding:

  • Child support,
  • Treasury Offset Program debts,
  • State Income tax obligations, and
  • Unemployment Compensation debts.

These debts are collected as part of the Treasury Offset Program (“TOP”). The TOP is part of the Treasury Department, Bureau of the Fiscal Service (“BFS”).

You probably do not recognize the name, but the BFS is the part of the Treasury Department that issues refund checks, including IRS refund checks. It is the part of the treasury that handles other money matters for the government as well.

The agencies that are owed the debts listed above notify the BFS of the tax debt. The BOF then initiates refund offsets for these outstanding federal agency debts or child support, state Income tax obligations, and unemployment compensation debts by notifying you about the debt. This notification usually comes in the form of an IRS tax refund offset letter, which identifies the agency, the amount of the debt, and says that the debt is being set off.

The IRS’s Offset Bypass Refund

Section 6402(a) provides the IRS “may” credit and refund overpayments to taxpayers even if they owe back taxes or other debts:

In the case of any overpayment, the Secretary, within the applicable period of limitations, may credit the amount of such overpayment, including any interest allowed thereon, against any liability in respect of an internal revenue tax on the part of the person who made the overpayment and shall, subject to subsections (c), (d), (e), and (f), refund any balance to such person.

The IRS does this if the offset will cause financial hardship. This exception is informally referred to as the “IRS offset bypass refund.”

There is no legal authority that requires the IRS to issue an offset bypass refund. This is just an IRS policy decision.

It should be noted that the IRS will first apply the overpayment to back taxes owed to the IRS and then, after that, to any other liability.

Economic Hardship

The IRS’s policy for offset bypass refunds is set out in IRM et seq. This is the IRS’s policy manual.

According to the IRS’s IRM, the IRS uses the economic hardship rules found in Section 6343 and the regulations thereunder in evaluating whether to issue a bypass refund.

These are the hardship rules that are applied to IRS levy releases, which are described in Treas. Reg. § 301.6343-1(b)(4):

The levy is creating an economic hardship due to the financial condition of an individual taxpayer. This condition applies if satisfaction of the levy in whole or in part will cause an individual taxpayer to be unable to pay his or her reasonable basic living expenses. The determination of a reasonable amount for basic living expenses will be made by the director and will vary according to the unique circumstances of the individual taxpayer. Unique circumstances, however, do not include the maintenance of an affluent or luxurious standard of living.

Thus, the “reasonable basic living expenses” analysis is applied.

The factors the IRS is to consider in evaluating these cases are as follows:

  1. The taxpayer’s age, employment status and history, ability to earn, number of dependents, and status as a dependent of someone else;
  2. The amount reasonably necessary for food, clothing, housing (including utilities, home-owner insurance, home-owner dues, and the like), medical expenses (including health insurance), transportation, current tax payments (including federal, state, and local), alimony, child support, or other court-ordered payments, and expenses necessary to the taxpayer’s production of income (such as dues for a trade union or professional organization, or child care payments which allow the taxpayer to be gainfully employed);
  3. The cost of living in the geographic area in which the taxpayer resides;
  4. The amount of property exempt from levy which is available to pay the taxpayer’s expenses;
  5. Any extraordinary circumstances such as special education expenses, a medical catastrophe, or a natural disaster; and
  6. Any other factor that the taxpayer claims bear on economic hardship and brings to the attention of the director.

This begs the question as to how one is to request this type of relief. How to file hardship with the IRS? Who do you contact about tax offsets?

IRS Hardship Refund Request – How Do I Get an Offset Bypass Refund?

There is no IRS form that can be used to request this type of relief.

Instead, most taxpayers either (1) have to submit a letter to the IRS with the tax return that reports an overpayment (i.e., reports a refund due to the taxpayer) or (2) ask the IRS Taxpayer Advocate Service (“TAS”) to intervene and force the refund.

The first option that the taxpayer includes a letter with their tax return is advisable. You generally cannot stop a tax refund offset. The IRS service center processing the return will likely not honor the request. However, the documentation submitted with the tax return can help with other interactions with the IRS.

This first option presupposes that the taxpayer knows of their Federal or other debt. This is often not the case. The taxpayer may first learn of the debt when the BOF offset notice letter is received. This letter prompts the taxpayer to make inquiries with the agency that has the debt and/or the BOF directly.

The taxpayer can also respond by asking the TAS to force the refund. The TAS is well-positioned to make these determinations, as they regularly consider collection issues in economic hardship cases. They also have some expedited review, which is often needed in these cases.

Taxpayers can initiate this process by submitting Form 911 or calling the IRS TAS directly.

Get Help With Your Tax Refund

We are tax attorneys in Houston, Texas.

We usually do not get involved in refund requests for smaller amounts. If your refund is less than $20,000, your best bet is to contact the IRS directly as noted above.

If it is larger than this or if you owe back taxes that you want to resolve, you should contact us to see how we can help.

You can also reach out to us if you need help preparing a refund bypass letter to go with your tax return or to submit to the IRS.

We can be reached at (713) 909-4906.

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