Why is My Refund Less Than Expected?

Where you depending on your tax refund only to find out the IRS reduced it drastically? Or, did the IRS not sent it all? Now, are you finding yourself asking questions like: Why is my refund less than expected? or Where's my refund? The IRS can reduce your tax refund for several reasons. Refund offset is the most common reason tax refunds are less than expected. Having an experienced tax preparer can hep prevent future let downs. You can also use our tax planning documents for free to ensure you are organized and ready for the next tax season.

What is a Tax Refund Offset?

A refund offset is when the IRS, specifically the Treasury’s Bureau of the Fiscal Service (BFS) Treasury Offset Program (TOP), sends all or part of your federal tax overpayment (refund) to certain qualified agencies to pay down your overdue debts. These agencies must meet specific criteria to qualify for this collection option. Refund offsets can be used to pay back past due:

  • federal income taxes,
  • child or spousal support payments,
  • federal agency non-tax debts, such as student loans,
  • state income tax, and
  • certain types unemployment compensation debt.

Agencies, typically, do not refer debts to the TOP database unless they are over ninety (90) days late. Before submitting a debt to TOP for collection, the agency must write you regarding your outstanding debt and give you opportunities to repay.

How Do You Determine if Your Tax Refund Was Offset by Outstanding Debt?

The good news is if your refund is used (offset) to pay down a debt you owe, the BFS will mail you a letter advising you of the deduction in your tax refund. The letter will include the amount of your refund, the amount used for the refund offset, and the name, phone number, and address of the agency receiving the money.

If you do not want to wait for the notification, the easiest way to confirm if your tax refund was offset by an outstanding debt is to check the Where’s My Refund tool on the IRS website and click on Check My Refund Status. Also, you can contact the agency you owe money and ask them if they submitted the debt for a tax refund offset. If you are not sure what agency may have submitted your debt for a tax refund offset, contact the Treasury’s Bureau of the Fiscal Service (BFS) Treasury Offset Program (TOP) at (800) 304-3107 or (866) 297-0517 for TTY/TDD.

If the IRS reduced your refund for a different reason, such as changes they made to your tax return, the IRS will send you a letter explaining how they reached the different amount.

How do You Stop Your Refund from Being Offset?

You can confirm whether or not you are in the TOP’s database by contacting them at (800) 304-3107. If your debt is registered with the TOP’s database, the easiest way to avoid your refund being used to pay down your debt is to pay it off. You can pay off your debt by calling (866) 826-3127, online at pay.gov website, or by mailing your payment to:

Department of Treasury
PO Box 979101
St. Louis, MO 63197-9000.

If you are facing hardship and cannot afford to pay your debt, there are certain circumstances, where the IRS will issue the refund to the taxpayer. It is important to discuss your options with a tax professional before you file your taxes. In most cases, if you wait until your refund has already been used to offset your outstanding debt, it will be too late unless an error was made.

Also, if you file married filing jointly and one spouse is subject to a refund offset, the other spouse can file a form titled, Injured Spouse Allocation, to have their share of the refund returned to them rather than used for the refund offset, that is, to pay down the other spouse’s debt.

The Bottom Line

There can be other reasons your refund is less than expected, such as the IRS made changes to your return. However, one of the most common reasons is because of a refund offset.

A refund offset occurs when an agency that meets specific criteria submits your past due debt to the IRS for collection, and the IRS uses your overpayment (refund) to pay down that debt by submitting all or a portion of it to that agency. If the IRS uses only a part of your refund to offset the outstanding debt, they will issue you a refund for the remaining balance. Also, if the IRS applies a refund offset, the BFS will send you a letter explaining which agency received the money, how much, and that agency’s contact information.

If you are facing hardship or the IRS made an error, you have options to determine why you refund was less than expected. If you are facing a refund offset, schedule an appointment today with the accounting and tax preparation professionals at Gudorf Tax Group before you file your tax return to review your options and plan for the best possible outcome.