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They’re the two Rs that define tax season: tax returns and tax refunds. While few people probably enjoy filing returns (shoutout to the accountants in it for love of the game), I’d bet that everybody loves getting some money back in a refund, if they’re lucky enough.
Despite the similar-sounding names, returns and refunds are hugely different, yet hugely important aspects of the tax filing season. Your return is what you file with the IRS listing all of the taxable income you (and possibly your spouse) made in the previous year, to determine how much you owe in income taxes. If you happen to have more deducted from your paychecks then you owe — or if you get your tax due lowered by other means — the IRS will send you the difference as a refund.
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According to statistics from the IRS, over 42 million tax returns have been filed as of early March. Out of that number, just shy of 30 million were eligible for a refund, with the overall amount issued so far totaling around $102 billion. This makes the average return issued this year a bit higher than the average from the same time last year.
Before you celebrate a potentially higher return this year, you should keep reading to find out the scenarios in which the IRS might have the power to seize some or all of your refund amount. It won’t all be doom and gloom, however, as we’ll share some of the ways in which you have power over your refund as well.
For more tax tips, check out how you can get a deduction from making student loan payments and use this tax cheat sheet to file your taxes with ease.
Here’s when the IRS might alter your tax refund
Delinquent taxes: This is probably the most common situation in which your tax refund will be dipped into by the IRS. If you still owe taxes from previous years, federal or state, the agency will most likely use your refund amount for the current year to pay that off.
Say for example you owe $500 in federal taxes and are owed $1,200 this year: the IRS would pull from that refund, and you would only receive $700. Or maybe you owe a larger amount, like $3,000: in that case, your entire $1,200 refund would be seized, and the amount you owe would go down to $1,800.
Delinquent child support: Similar deal here, pertaining to outstanding debts. If you owe a former spouse or partner money in child support, the IRS can seize some or all of your refund to pay off that debt, much in the same way as I explained above for tax debts.
Unemployment debt: The third type of debt that the IRS can use your tax refund to pay down, unemployment compensation debt racks up when you are, for whatever reason, overpaid when receiving unemployment payments and are required to pay back some or – yikes – all of the money you received.
Here’s how you have power over your refund
So none of that was particularly fun to hear about, I’d imagine, especially if you’re already in one of those situations. Don’t stress too much, though, because you also have some amount of leverage over your refund, particularly with how and where it’s dispensed.
Split refund: You have the option to split your refund amount among up to three financial institutions, in any proportion you want to. While you might usually think of a tax refund as getting deposited to your bank account, this option allows you to, for example, set aside portions of it for a retirement savings account, or a health savings account. To do this, you’ll want to fill out a Form 8888.
Offset Bypass Refund: You might want to try doing this if you’ve got one of the outstanding debts described earlier, but are experiencing a major financial hardship and want to request that the IRS not collect from your refund this year. This can only be done when you have a federal tax debt and no other debts at the state level or other government agencies, so make sure your situation matches up to that requirement first.
There’s no form for this option, so you’ll either have to call the IRS at 800-829-1040 or reach out to the Taxpayer Advocate Service, but make sure you do it quickly, before the IRS collects part of your refund. At that point, you’re out of luck.
For more tax tips and coverage, find out how recent IRS layoffs might impact your taxes and whether or not you’ll have to pay them if the government shuts down.