IRS Problem Solver Blog
How Your Tax Refund Gets Deducted
We all look forward to receiving a big tax refund from Uncle Sam. But you may be in for a rude shock if you find that your tax refund check is very much less than what you expected. This may happen and the reason for it is deductions by the government. If the government finds you owe them money, they will take it out of your refund. So if you do not want to be shocked by a big deduction on your check, read on and I will show you the most common ways Uncle Sam deducts from your tax refund.
Prior tax year debt
If you owe on your taxes from a previous year, the IRS is entitled to take it out of your tax refund. I’m afraid there’s nothing you can do about this. This also applies to an audit by the IRS. If the audit finds you liable for taxes (or additional taxes) then it will be deducted from your tax refund. Knowing this will at least give you a heads up and you will not be taken by surprise when you receive your check.
Student loans default
If you or your spouse has not been keeping up with your student loan repayments, this debt will be deducted from your refund check. You are considered in default of a student loan if you have not been making payments for at least 270 days. Currently, about 14% of borrowers are in default.
If you make joint tax returns with your spouse, his or her failure to repay a student loan will also render you liable and the IRS can intercept your refund check. To avoid that, you have to fill out
Form 8379 Injured Spouse Allocation to request only one spouse’s refund is deducted from, not both.
Child support debt
If you are behind in paying child support, your tax refund can be intercepted. This has been the practice since 1982, according to the Office of Child Support Enforcement. Once again, Form 8379 Injured Spouse Allocation may help make it such that only the spouse that is responsible for child support will get his tax refund deducted.
Change in tax situation
The Earned Income Tax Credit (EITC) has been responsible for billions of dollars of tax refunds each year. But if your tax situation changes, for example if you now earn more income, it could reduce the amount of tax refund you are entitled to under the EITC.
If you now earn more, it may also have an effect on other tax benefits, like the premium tax credit. Suppose you used the premium tax credit to lower the premiums of your marketplace health insurance plan. If your income increases this year, you may even end up owing money because you are not entitled to as much tax credit as you received.
If someone has access to your Social Security number, he can use your name to steal your tax refund. If this happens, you will not just receive a reduced refund, you won’t receive any refund at all. Instead, you will be notified by the IRS that someone has filed a tax return under your name. Should that happen, make a police report and inform the IRS straight away. Submit IRS Form 14039, Identity Theft Affidavit, and continue to send in your tax return. You should also place a Fraud Alert on your credit report and lodge a complaint with the FTC.