The Internal Revenue Service calls it a “refund offset”, but in simpler terms it’s a deduction based on delinquent state or federal debt that is subtracted from the money you would have gotten back from overpaying income taxes.
With college student loan debt at the $1 trillion crossroad and growing, many taxpayers who have defaulted on these federally-subsidized loans are finding out first-hand about offsets.
Federal student loans fall under the category of “federal agency non-tax debts.” The U.S. Treasury Department has been authorized by Congress to reduce tax refund payments in order to pay off past-due child support; state income tax obligations; certain unemployment compensation debts owed to the state; and the non-tax debts owed to federal agencies, such as the Department of Education.
Taxpayers can contact the respective federal agency to see if a tax refund offset was submitted.
You can also call the Treasury’s Financial Management Service (FMS) at 800–304–3107 for an agency address and phone number. The available hours are Monday through Friday 7:30 a.m. to 5 p.m. central time. If your debt was submitted for offset, FMS will take as much of your refund as is needed to pay off the debt and send it to the agency you owe.
Contact the IRS only if your original refund amount shown on the FMS offset notice differs from the refund amount shown on your tax return.
Any portion of your refund remaining after offset will be issued in a check to you or direct deposited for you.
According to the IRS:
FMS will send you a notice if an offset occurs. The notice will reflect the original refund amount, your offset amount, the agency receiving the payment, and the address and telephone number of the agency. FMS will notify the IRS of the amount taken from your refund. Contact the agency shown on the notice if you believe you do not owe the debt, or if you are disputing the amount taken from your refund.