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Dear Kim:
Can the IRS Apply My Tax Refund
To An Outstanding Debt?

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By Kim Cole

Dear Kim,

I filed my taxes and was expecting a $2000 return. I received a letter from the IRS stating that my return is being applied to an old student loan that I didn’t pay. Can they do that? That loan had nothing to do with my taxes! I think I owe approximately $8000 on that loan so does that mean they will take my tax refund next year too? I am so upset; I had that money earmarked for a down payment on a new car.

Thank you,

David M.

Dear David,

I can understand your frustration, but the simple answer is yes the IRS can hold the funds from your refund and apply them to a delinquent, unpaid federal student loan. This is known as a tax refund offset. Some states permit an offset of your state tax refund in addition to your federal. Federal law does require that you receive prior notice of the offset. This notice is typically sent to the address on your previously filed tax return. This gives borrowers an opportunity to either dispute the loan’s delinquency, or argue why the offset is not enforceable. It also provides the opportunity to make arrangements to repay the loan prior to the offset. Valid reasons to challenge the offset would be: the loan has been repaid, it is not your loan, you have an established repayment plan in which your payments are current, or the borrower is deceased.

As a Personal Finance Educator, I feel it is very important to advise all of my readers to take student loan debt seriously. Students should not be borrowing more than they absolutely need, and should thoroughly understand the repayment terms. It is also important to understand that an unpaid, delinquent student loan can produce larger problems than an offset tax return. In many states there can be a refusal to license, certify, or a revocation of certification or license for a number of professions. These professions include teaching, healthcare careers, and attorneys amongst others.

Thanks for sending in your question.





Kimberly Cole is Education Outreach Coordinator with Novadebt. Novadebt is a member of the National Foundation for Credit Counseling. Contact Novadebt at 800.992.4557, or visit them online at www.novadebt.org.

Views expressed are the personal views of the author, and do not represent the views of the National Foundation for Credit Counseling, its employees, its members, or its clients

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