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Tax Refund Offset: Why the IRS Is Holding Your Money

You filed your tax return on time and eagerly await that refund to hit your bank account. But weeks have gone by and no deposit from the IRS. Frustrated, you’re left wondering, “Why is the IRS holding my tax refund?”

When you don’t receive your refund on time, a discrepancy, debt, or security problem has been identified on your account, and the IRS can hold or seize your tax refund while they sort out the issue. It could be due to a simple mistake made by you or your tax preparer, or it could be a more serious problem, like a tax refund offset or attempted identity theft.

Whatever the cause, it’s disappointing not to receive your money right away. If you believe the IRS has held your refund by mistake, there are actions you can take to help expedite a resolution. Here’s how to identify the likely causes of a tax refund hold and resolve any tax problem with minimal hassle:

Federal Tax Refund Offset Program

What Is a Tax Refund Offset?

If you owe back taxes to the IRS from previous years, the agency can seize some or all of your current refund to pay towards that tax debt—this is called a tax refund offset. The federal government uses this program to chip away at outstanding tax liabilities.

If this applies to you, it’s best to either pay the outstanding balance or consult a trusted tax expert for professional advice. A tax professional can verify the amount you owe is correct and potentially lower the balance by amending your past returns. In this situation, taking swift action is critical, as the IRS is likely applying penalties and interest to your account each month.

To better understand your options for resolving your tax debt, take our brief Tax Survey, which can provide an expert evaluation of your tax situation and refund offset.

Unfiled Tax Returns

Do you have any unfiled tax returns from prior years? The IRS may hold your refund until those delinquent returns are filed and processed properly.

Similar to past-due tax debt, unfiled returns must be filed as soon as possible to avoid additional penalties. If you don’t, the IRS will eventually file for you—a substitute for return—without the deductions and credits you could have received, ultimately increasing your tax liability. The IRS may have applied your refund to these back taxes using a tax refund offset.

Work with a trusted tax professional who can file those unfiled returns and help minimize any penalties and interest you may owe. Take our quick Tax Survey for a comprehensive analysis of your tax situation and learn how to get back to IRS compliance.

Tax Return Under Review

One of the most common reasons the IRS will hold your tax refund is that they’ve identified a potential error on your tax return. This could be anything from an innocent mistake like a miscalculation or typo, to a more dubious issue like a questionable deduction or credit claim. If this is the case, the IRS should reach out to you to correct the error or substantiate your claims. If they have not, contact the IRS immediately.

There is also a small chance the IRS suspects you’re an identity theft victim, as the agency flagged over 1 million tax returns for potential identity theft in 2023—less than 1% of all returns filed.

What Happens When Your Tax Return Is Under Review?

When your tax return is under review, the IRS needs time to clarify your reporting or calculations. They typically review the taxable income, withholding, credits, or deductions reported on your return. 

How Long Can the IRS Hold Your Refund for Review?

This process can take some time – the IRS holds your refund for review between 45 and 180 days, depending on the discovered discrepancies and substantiation provided.

The bottom line is that if the IRS wants to verify information on your return, it may hold your refund until that review process is complete. Contact the IRS at 800-829-1040, ask about why your refund is being held, and cooperate with the representative to help resolve the issue.

Other Government-related Debt

The IRS can use a tax refund offset to seize your refund if you have defaulted on other government debts, like delinquent student loans, unpaid child support, or state income tax debts. Your federal refund may be used to offset those other obligations.

In this case, contacting the IRS may not help. Instead, you need to contact the agency you owe money to and resolve the debt directly with them.

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Conclusion

If your refund has been delayed, those are the typical culprits. But don’t panic—this doesn’t necessarily mean you did anything wrong. The IRS sometimes pulls ‘red flag’ returns for further examination that turn out to be completely valid.

However, you also shouldn’t ignore the situation, as issues like tax refund offsets only escalate with penalties and interest if not resolved promptly. The best move is to call the IRS directly and inquire about the specific reason your refund is being held. Be prepared to provide documentation or information to verify your identity or tax return details.

While dealing with the IRS is never fun, responding to their notices quickly and cooperatively is not just important; it’s paramount to your financial health. Should you ignore them, the agency has broad powers to collect tax debts owed through wage garnishments, bank levies, tax liens, and other aggressive enforcement actions. Taking a proactive approach to resolve any delays or discrepancies can help prevent greater headaches down the road.

If you believe the IRS is holding your refund due to a tax refund offset or unfiled returns, take our brief Tax Survey to receive an expert evaluation of your tax situation and determine if you may qualify for IRS-sanctioned relief programs. TaxRise designed this survey to help Americans with tax debt better understand their financial situation, weigh their options, and take action for a healthy financial future.

If you’re ready to begin your journey back to financial freedom, TaxRise can be your guide. Our team of IRS-Enrolled Agents can bring you back into compliance and communicate directly with the IRS to help minimize your tax debt and mitigate your tax refund offset. Contact us today.

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