When you have a federal income tax refund, that refund may in some cases be used to pay other unpaid debts. The United States Treasury Offset Program contains the tax rules of how and when your refund will be used against a debt. The Treasury Offset Program can use a portion or all of your income tax refund to pay against your state or federal debt, and the program is administered by the Treasury Bureau of the Fiscal Service.
The types of debts that the tax refund can be used to offset are numerous. The types of tax debts include 1) federal tax debts (income taxes, trust fund recovery penalties, etc), 2) Federal agency debts such as federal student loans that are outstanding (not in payment plan status), 3) unpaid spousal or child support that were crated by court order, 4) unpaid State tax obligations (income and payroll taxes), 5) State unemployment debts, and 6) unpaid shared responsibility payments for health insurance.
The IRS will notify an affected taxpayer by mail when they are using the refund to pay a certain debt listed above, and the State has a similar program. The notice will tell you the refund that you would have received, and the amount of that refund that is being used to pay the tax debt. The notice will provide which agency (state or federal) that is administering the debt, and also provide their contact information in case the debt amount is incorrect or not yours. It is important to only contact the IRS if the debt relates to a debt related to them, in other cases you need to contact the agency that is administering the debt. When you are disputing the debt, it is very important to keep copies of the dispute letters that you send them, and follow up each letter with a phone call to make sure your request is being acted upon.
In some instances, it is possible to have your refund used against another persons debt. This happens when you file a joint income tax return and your spouse by themselves has a debt subject to the program, and you would have otherwise have had a tax refund if you filed by yourself. The IRS allows for a injured spouse allocation in these cases to get relief. This rule only applies if your spouse is solely liable for the debt (meaning it was not a past joint tax debt for income taxes, for instance). To obtain part or whole of your refund, a Form 8379 (Injured Spouse Allocation) would have to be filed with your income tax return. As an example, say the husband is not working, and has unpaid child support owed. The wife and husband file a joint income tax return, and due to over payments from the wife, they are entitled to a refund. Furthermore, based on past income tax returns, that were filed jointly, there is unpaid federal tax debt. In this case, if a Form 8379 is filed, the refund would not go toward the unpaid child support, but would be used to offset the joint federal tax debt since the wife is listed on that debt.