When it comes to creditors, the IRS may be the worst. Unlike other bill collectors, the IRS does not have to go through a court hearing before it can seize your assets or garnish your wages. This includes your federal tax refund. It is unlikely to happen without your knowledge, however, and there are steps you can take to prevent it, or to protect the portion of your refund that belongs to an innocent spouse.
Tax Bill Basics
When you owe back taxes, the IRS will send you a bill. You may owe for a variety of reasons: you didn't file a return, you calculated your tax obligation incorrectly or you didn't pay enough. Once the IRS recognizes the problem, they send you a paper bill that you can either pay in full, pay in installments, negotiate or challenge. If the IRS intends to offset your tax bill with a refund, you will receive notice of this as well.
Refunds When You Owe
If you owe back taxes at the time you are set to receive a tax refund, the IRS will deduct the amount you owe from your refund. If you owe less than the amount of your refund, you'll receive the difference. If you owe more, the amount you owe will be reduced by the value of your refund. This happens automatically, even if you have entered into an installment payment plan for your back taxes.
Injured and Innocent Spouses
If you incurred the debt prior to your marriage, your spouse is considered an injured party, and is not responsible for the debt. This means that she can request her portion of the tax refund, and not use it to cover the debt. If this is the case, your spouse should fill out IRS Form 8379 to request a partial refund. She can send in the form with your tax return or after the fact. In most cases, both spouses are responsible for tax debt incurred while married. Occasionally, the IRS may determine that one spouse had no knowledge of the tax obligation or intent to defraud. This spouse is an innocent spouse, and should fill out Form 8857.
Avoiding Refund Reduction
You can avoid a refund reduction by paying up your back taxes. In most cases this will also save you money, as the IRS charges interest and penalties based on how long the debt is outstanding. If you have questions about the back taxes you owe, want to contest them or to make payment arrangements, you can call the IRS at the number on your tax bill, or (800) 829-1040.