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The Inner Income Service (IRS) processes more than 160 million tax returns yearly, and every tax season, tens of millions of People uncover that they are owed refunds — a few of that are substantial. For a lot of of those filers, the cash from their tax refund acts as an important a part of their budgets, permitting them to cowl massive bills, put cash in financial savings or make it simpler to repay debt or meet cash objectives. However in case you’re owed a tax refund and are among the many many taxpayers who’re nonetheless carrying outstanding tax debt from earlier years, you would possibly wonder if that refund cash will truly make it to your checking account.
The IRS maintains meticulous data of what each taxpayer owes, in any case, and that data follows you from year to year. So, it might be logical to conclude that any prior tax debt you could have would affect whether or not you are eligible to obtain a tax refund sooner or later. Nevertheless, the reply to that query is not as minimize and dry as you could count on, as there are quite a few components — together with your fee historical past and your present tax scenario — that may affect whether or not you will see a tax refund examine once you’re caught in the IRS’s collection system.
So, must you count on to obtain your tax refund this 12 months in case you nonetheless owe money to the IRS for outdated tax debt? Or must you put together your self on your funds for use to repay what’s owed as an alternative? That is what we’ll look at under.
Learn how to get help with your IRS tax debt now.
Will I get a tax refund if I owe cash from a earlier 12 months?
Technically, sure — you will be entitled to a tax refund even if you owe money from earlier years. Your refund is calculated primarily based solely in your present tax 12 months’s revenue, deductions, withholding and credit. When you overpaid your present 12 months’s taxes via paycheck withholding or estimated tax funds, you’ve got earned that refund no matter previous money owed.
Nevertheless, there is a catch: The IRS will virtually definitely intercept your refund via a course of known as “offset.” Underneath the Treasury Offset Program, the IRS robotically applies any refund you are entitled to towards any excellent federal tax debt that accrued in years prior, they usually’ll achieve this earlier than sending you any cash. This occurs with out requiring your permission or advance discover, although it is best to obtain a letter after the offset explaining what occurred.
The mathematics right here is straightforward. When you’re owed a $2,500 refund however have $4,000 in again taxes, the IRS would preserve your total refund and apply it to your debt, leaving you with a $1,500 stability that also must be paid. Conversely, in case you owe $1,000 in prior tax debt however earned a $2,500 refund, the IRS deducts $1,000 out of your refund and sends you the remaining $1,500. You will not obtain any refund till your total tax debt is satisfied.
This offset applies to any kind of again taxes, whether or not you owe from one earlier 12 months or a number of years, and whether or not you are on an IRS payment plan or not. The IRS will nonetheless seize your refund and apply it towards your remaining stability, even in case you’ve been diligently making month-to-month installment funds.
Compare the IRS tax debt solutions available to you today.
What are your choices in case you owe again taxes?
When you’re going through tax debt and wish to maximize your possibilities of seeing future refunds, it’s worthwhile to tackle the underlying stability now. Fortunately, there are several options to choose from, relying in your monetary scenario and the way a lot you owe.
An installment agreement, for instance, lets you pay your debt over time, although the IRS will proceed offsetting refunds whilst you’re paying. For these experiencing real monetary hardship, pursuing Currently Not Collectible status can briefly pause assortment actions, although curiosity and penalties proceed accruing. In case your debt exceeds your capability to ever fairly pay, an Offer in Compromise would possibly allow you to accept lower than the total quantity, although the IRS solely approves a proportion of those functions.
Adjusting your withholding is one other strategic method. If the IRS retains seizing your refunds to cowl outdated tax debt, you could wish to modify your withholdings and have much less tax held out of your paychecks, basically giving your self that cash all year long fairly than lending it to the federal government. Simply watch out to not underwithhold a lot that you just create new tax debt, which might solely add to your points.
Whilst you can pursue any one in every of these treatments independently, it is price noting that the IRS tax debt solutions, particularly, will be robust to qualify for. Consequently, it typically is sensible to work with a tax relief company on a decision. These firms concentrate on negotiating with the IRS in your behalf, dealing with paperwork and figuring out which decision choice most closely fits your scenario, and dealing with one can present essential steering, particularly for advanced instances or substantial money owed.
The underside line
Owing again taxes would not get rid of your eligibility for refunds, however it does nearly assure you will not obtain that cash till your debt is cleared. The IRS’s offset program operates robotically, making use of refunds towards excellent balances no matter any fee plans or options in place. So, fairly than relying on refunds that will by no means arrive, deal with resolving your tax debt via installment agreements, settlement packages or skilled tax aid providers that may negotiate higher phrases. The earlier you tackle the underlying debt, the earlier you will begin holding your refunds as an alternative of watching them disappear as they’re utilized towards your tax debt stability.
