If you owe a debt that’s past-due, it can reduce your federal tax refund. The Treasury Department’s Offset Program can use all or part of your refund to pay outstanding federal or state debt.
Here are five facts to know about tax refunds and ‘offsets.’
1. The Bureau of Fiscal Service runs the Treasury Offset Program.
2. Debts such as past due child support, student loan, state income tax or unemployment compensation may reduce your refund. BFS may use part or all of your tax refund to pay the debt.
3. You’ll receive a notice if BFS offsets your refund to pay your debt. The notice will list the original refund and offset amounts. It will also include the agency that received the offset payment and their contact information.
4. If you believe you don’t owe the debt or you want to dispute it, contact the agency that received the offset. You should not contact the IRS or BFS.
5. If you filed a joint tax return, you may be entitled to part or all of the refund offset. This rule applies if your spouse is solely responsible for the debt. To request your part of the refund, file Form 8379, Injured Spouse Allocation.
Very few people are put in jail for not filing a tax return, but it does happen occasionally. A willful failure to file tax returns is a misdemeanor if you owe taxes. You can be sentenced for up to a year in jail and a $25,000 fine for each year of non-filing (Internal Revenue Code 7201). If you failure to file is deemed to be part of a scheme to evade taxes you can be charged with a felony, a more serious crime, which carries a maximum punishment of five years and more sever monetary penalty. The felony crime requires a deceitful act beyond the non-filing, such as using a fake social security number. Non-filers may be contacted by the IRS Criminal Investigation Division, or CID. This does not mean that you will be prosecuted, but you still should get your past due returns prepared and filed. In deciding whether or not to prosecute a non-filer, the CID considers many factors, such as:
- The number of years you haven’t filed
- The amount of taxes due
- Your occupation and education
- Your previous history of tax delinquencies
- Whether or not you are involved in a business that deals with large amounts of cash
The IRS looks for nonfilers through its computerized Information Returns Program (IRP). This tremendously effective operation matches information documents, such as W-2s and 1099s form payers against the tax returns you have filed. If the computer search fails to find a return, the IRS initiates a taxpayer Delinquency Investigation, or a TDI. A TDI is an IRS search for a taxpayer to discover why he or she did not file a tax return. TDS’ usually begin with computer generated notices. If you don’t respond to the notices, your case is normally turned over to a Taxpayer Service Representative for a telephone contact or more letters. Failure to respond will lead to a contact to A Revenue Officer at your local IRS office. This means that the IRS is serious and you should contact a professional immediately.
Unless you live in Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas Washington or Wyoming, the IRS is not the only agency that you have to be concerned about. All 41 states have their own income tax reporting requirements, and a few cities do as well. In many cases, if you haven’t filed a tax return, you may be contacted first by the state taxing authorities, rather than the IRS. The IRS will contact you soon after, however, as all states except a few have agreements with the IRS to trade tax information about their residents. Nowadays, with such sophisticated technology available, the exchange occurs automatically. If one taxing authority finds you aren’t filing, their computer systems can inform the other. If you file a Federal tax return, even if it is late, be sure to get into compliance with the state as well.