Sunday, October 8, 2017

Can The IRS Reduce Your Refund for Other Debt?

You file a tax return showing tax due (before withholdings) of $503.

You have withholdings of $1,214.

You therefore have a refund of $711 ($1,214 - $711).

The IRS takes your refund because you owe taxes for another year.

The IRS later audits your return. It turns out that you owe another $1,403.

Question:  Can you get back the $711 that went who-knows-where?

The tax lingo is the “right of offset.”


Here is Code section 6402(a):

(a)       General rule
In the case of any overpayment, the Secretary, within the applicable period of limitations, may credit the amount of such overpayment, including any interest allowed thereon, against any liability in respect of an internal revenue tax on the part of the person who made the overpayment and shall, subject to … refund any balance to such person.

The pace car in this area was Pacific Gas & Electric Co v U.S.

Pacific Gas & Electric had an overpayment for 1982 of almost $37 million. It filed for a refund, and the IRS included interest for sitting on PG&E’s money well into 1988. However, the IRS miscalculated and overpaid interest by approximately $3.3 million.

The IRS wanted its money back, but what to do?

In 1992 PG&E filed another refund on the same tax year!

So the IRS lopped-off $3.3 million as an “offset” for the earlier interest overpayment.

On to Court they went. There were tax-nerd issues, such as the tax years under dispute having closed under the statute of limitations. That issue did not concern the Court. What did concern the Court was whether the IRS was correct in shorting a tax refund by its previous overpayment of interest.

The IRS can clearly offset for a tax.

But was the interest paid PG&E the equivalent of a tax?

And the Court decided it was not:

·      Interest you (as a taxpayer) owe the IRS is considered a “deemed” tax thanks to Section 6601(e).

Any reference to this title (except subchapter B of chapter 63, relating to deficiency procedures) to any tax imposed by this title shall be deemed also to refer to interest imposed by this section on such tax.”

·      But there is no Code section going the other way - that is, when the IRS pays you interest.

PG&E won its case and kept the interest.

Back to our taxpayer.

He did not have a chance of having the IRS return the $711 it had previously applied to another tax year. What made his case interesting is that his offset year was audited, resulting in an addition to his tax.  It made sense that he would want his withholding to be applied to its proper tax year before the IRS went offsetting everything in sight.

It made sense but it was not the correct answer. The IRS’ authority to offset is quite broad.


BTW, the offset is not just for taxes. It can be for student loans or monies owed to state agencies (think child support).  The offset is not limited to your tax refund either: your federal retirement and social security can also be offset.

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