Understanding Nontax Federal Debt and Its Implications

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How Much Tax Debt Do You Owe?

Shannon McKee
Shannon McKee
December 19, 2018

  • The IRS can reduce the amount of money that comes to you in your income tax return refund check if you have other types of federal debt.
  • Nontax federal debt includes money owed to other governmental agencies for debts such as unemployment overpayments, back child support, or late student loan payments.
  • The Financial Management Service will send you a letter if your refund check will be garnished to pay toward your outstanding nontax federal debt.

For many people, the reward for going through the motions of filing your federal taxes for the previous year is a tax return refund check. This money is often seen as a bonus that many utilize for big purchases, like a down payment on a new car, or for once-a-year splurges, like a big family vacation. For some people, the amount of money they expect to receive from their taxes is much less than what they actually see when the check arrives. The question they often ask at this moment is, “why?”

The answer to this question is often federal debt they have that isn’t involved with their taxes. There are some debts that the federal government will seek to recover from money that’s owed to you. They are often debts that are owed to another governmental agency on the national or even the state level. This money is taken out of your refund check to pay the other agency. Taking it in this manner ensures the agency owed the money gets what they are owed.

What Are Some Nontax Federal Debt Examples?

Even being up to date on your federal tax debt for this year and previous years will not save you from a smaller-than-expected tax return refund check if you owe other governmental agencies money. Some of the debts that may dip into your federal tax return money owed to you include:

Understanding Nontax Federal Debt and Its Implications
  • Unemployment.
  • Child support.
  • Student loans.
  • Social Security.
  • Disability.
  • HUD loans.
  • State tax.

These are all run by different government agencies, and to recoup the debt owed to them, they can garnish the amount you receive from your tax return refund. In some cases, they can take your entire refund if it happens to be less than the tax debt owed. Additionally, they can continue to take money from your federal refund for several years until the tax debt has been repaid. The good news is that you can be proactive in dealing with each of these agencies to help protect your refund.


There are some situations where a person that gets unemployment compensation may end up violating the rules and regulations that surround it. For employees, this may mean you were given unemployment payments you weren’t entitled to, and you are required to refund this money back to the unemployment office. There may even be fees and penalties levied against you for these payments. You may be unable to qualify for future unemployment compensation in the future if you don’t pay back the money owed.

Problems with unemployment can also go against employers and their business taxes. For example, a business owner that didn’t pay their required unemployment insurance must make these missed payments and pay fines. Not paying the amount due can result in an adjusted refund from your federal taxes to make up for payments that weren’t made.

To avoid the potential of your next income tax refund check being taken by the IRS to repay your unemployment compensation debt, get ahead of the amount you owe. The Department of Labor often requires a lump sum payment of the money you owe for overpaid workers’ compensation benefits, but they may be willing to make other arrangements. In some instances, they’ll take money from you or your spouse’s paycheck or another payment plan. Often, this is when the overpayment made was a mistake on your part.

When you’ve been found to have knowingly falsified your information after the appeal’s process, the Department of Labor may not be as willing to work with you. However, it can be beneficial to speak to a representative of the Department of Labor to find out what your options are to work on keeping your future income tax refund check intact. This issue may result in an impact on being able to file for unemployment in the future. It’s essential to follow through on it.

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Student Loans

Student loans are another federal program that people may end up in default of by not making the required payments or other arrangements. The Higher Education Act has set up rules on how much money guaranty agencies can garnish from a person’s disposable earnings. They can take up to 10 percent to repay any money that is overdue on your federal student loans. These protections are put in place to help ensure that it doesn’t have an impact on your finances more than necessary. It shouldn’t be more than you can bear with your other financial responsibilities.

It can be beneficial to look into the repayment options available to you. You may be eligible for a deferment or a forbearance. Both of these actions will help you get up-to-date with your payments and makes it so that you don’t have to make payments until the deferment or forbearance is up. You do have the option to make payments on the interest that accrues during this period to help with the amount you owe later.

Another option is to explore the different repayment plans available, some are based on your income while others start out low and increase over time. You may be eligible for a repayment plan that doesn’t require any payments based on the amount of money you’re bringing home in your paycheck. Speaking with your student loan company representatives can help you to find the right repayment program.

Going through the steps of becoming up-to-date on your student loans can help to save your refund check. Although you’ll still owe money on your student loan, you’ll no longer be behind on your payments. You’ll be able to make the choice if you want to use some or all of your return to pay on your student loans.

Child Support

Money owed by a noncustodial parent to a custodial parent under court-ordered child support can also impact a refund. This applies to past-due child support payments only. The IRS won’t garnish your income tax for future child support payments.

Often, this garnishment occurs if you owe at least $500 to the custodial parent or $150 to the tax support payments for the state. The IRS cannot only take your entire tax return refund amount but if you owe more than your refund, it can continue to garnish your tax refunds for years. It will continue to take the money until the debt has been paid in full.

Speaking with your state’s child support office about your back child support payments is the first step to protecting your income tax return. You’ll want to get up to date with your late payments. You may want to speak with a lawyer that’s familiar with family law and child support if you believe that your payments are too high. They can advise you on whether or not you have a case for seeing your child support payments reduced, such as if you fell behind because you lost your job or had a reduction in pay.

State Taxes

The federal government can also collect money for state taxes. If you owe any income tax money to a state, your refund can be reduced to pay this debt. It doesn’t matter if you still reside in the state or not. In some cases, the government may claim this money from your federal refund even if a payment plan is in place between you and the state.

As there is a possibility of the government making a claim on any past due state taxes even if you have a payment plan, it can often be beneficial if you speak to the representative handling your payments. Taking the initiative to find out more about how your income taxes could be impacted will not leave you waiting until the notification letter comes or doesn’t come.

Other Governmental Debts

There are other government debts that can come from your tax return refund. Any past-due payments to organizations like HUD can be taken out of your refund. In addition, any fees, penalties, or fines that are owed to a governmental agency can be garnished from your tax return refund check.

Try to be as proactive about these debts as any other debts on the list. Reaching out to the agency with which you have an unpaid balance in advance is often the best action you can take for yourself. Something as simple as a phone call can start the process of taking care of any governmental debts that you have, and may even get you in touch with a program that can help make repaying the debts easier on you.

How Will You Know?

The good news is that this information shouldn’t come as a surprise. You won’t open your tax return check to see it significantly less without notification. There is an office inside the Department of Treasury called the Financial Management Service that will notify an individual about this action in advance. This department is the one that runs the Treasury Offset Program, which is the program that grants governmental agencies the right to collect these outstanding debts from your tax refund.

You will receive a letter from the Financial Management Service giving you details on the action being taken against you in response to these debts. According to the Debt Collection Improvement Act, collection agencies and federal agencies can only garnish up to 15 percent of your disposable earnings. This amount is different for student loan debt, which is capped at 10 percent per the Higher Education Act.

Owing More Than One Governmental Agency

The IRS will determine which governmental agencies will be paid from your tax return refund. Often, if you owe both state and federal agencies money, the federal agencies will be compensated first. If you owe more than one agency, your entire refund may be used to pay these debts. Your refund could be impacted for more than one year if your refund amount doesn’t cover your entire debt, and you don’t take action during the following year to address it.

IRS Appeals

If you are in disagreement with the IRS’s determination and want to request an appeal, you can either file a formal written protest or a small case request. The small case request is if the penalty is at or below $25,000 and you didn’t file as a partnership, S corporation, exempt organization or employee plan.

You typically have about 30 days from the date you get the letter notifying you of this action. The letter itself should contain information that tells you exactly how much time you have to file your appeal paperwork. It’s essential that you file your formal written protest or small case request before this deadline.

The main thing that you should look into when it comes to moving forward with the process of appealing this tax decision is learning as much as you can about your particular issue. Go over the different publications available through the IRS or their Tax Topics to educate yourself. You’ll also want to gather any records or other evidence that you have that disputes the information put forth by the IRS. For example, if your tax return check was garnished for an amount that you already paid, you’ll need to gather the documentation that shows that you paid the amount already.

Depending on the conflict of your information versus the documentation provided by the IRS, it may be necessary to seek professional help. One of the reasons why doing your taxes is so complicated is the way that the laws are written. It can be very confusing, so it’s helpful to have someone on your side of the table that understands tax law and how the appeals process works.

Are you worried about a nontax federal debt that could cause your refund to be lower than you expect this year? Solvable is here for you. We offer programs for taxpayers to help them with debt relief when it comes to both tax and credit card debt. We’ve partnered with several organizations that provide services to help you get the right solution. You can receive education, free tax debt evaluations, and other solutions to help you get out of debt the right way. Let us help you take control of your financial future.

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