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Tax Refund Offset Reversal: Understanding what it is and how to avoid

Tax Refund Offset Reversal

The Tax Refund Offset Reversal, also known as a Tax Refund Offset or Tax Refund Offset Claim, is a process that the United States Department of Education uses to collect on defaulted federal student loan debt.

This means that if you have defaulted on your loans and the Department has been trying to repay them for ten years without success, they may ask the government to seize your tax refund to pay off what you owe.

This blog post will explain how Tax Refund Offset reversal works and what steps can be taken to avoid them.

Tax refund offset reversal 2022

Thousands of Americans each year receive the shock of their tax refund being offset to pay back federal student loan debt, child support, and taxes they’ve fallen behind on.

The good news there’s a process to request a tax refund offset reversal. Tax refund offset reversal is a process that allows the borrower to request their Tax Refund Offset Reversal from the original creditor (federal student loan servicer).

Tax refund offset reversals can help prevent thousands of dollars in unnecessary tax debt.

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Tax Refund Offset Reversal Process

Tax refund offset reversals are rare but allowed by law for some borrowers who have fallen behind on federal student loans and owe back taxes or child support.

Before requesting an adjustment, you must do your research to determine if this applies to ensure that you’re eligible before filing form 45062 Tax Refund Offset Reversal Request Form with the IRS.

Fortunately, the IRS has announced that it will not be seizing student loan repayments during the first half of 2022. President Joe Biden recently extended the student loan payment pause and collection hold to May 2022.

This means the Department of Education will not start collecting tax refunds until May 2, 2022, unless President Biden extends the freeze once more.

Why does an IRS tax refund offset happen?

A tax refund offset happens when the IRS takes money from your refund to pay back the money you owe them. This can occur if you have delinquent taxes, child support payments overdue, or student loans in default.

The IRS will take the money from your refund to cover the amount you owe, and you will receive the remaining balance of your refund.

If you are concerned about a tax refund offset happening, it is crucial to stay up-to-date on all of your payment obligations. You can also contact the agency that is owed money and work out a payment plan so that you can avoid having your refund taken.

If your debt is reported to the TOP by an agency, your refund will be offset to repay the following obligations:

  • Past due child support.
  • Defaulted federal student loans.
  • Unpaid federal income taxes.
  • Unpaid state income taxes.
  • Outstanding unemployment compensation debts.

Child support offsets are handled by the state in which the child support order was issued, rather than by the federal government.

You will be notified if the claim is accepted, and you’ll be entered into the Treasury Offset Program if you accept it.

Your tax refunds will not be offset once you are current on your support obligations.

Learn More: How to Stop Student Loan Wage Garnishment

Tax-Refund Offset During Coronavirus

You might be eligible for a tax refund during the Covid-19 epidemic if you have student loans. Former President Trump paused the interest rate and collection efforts for most defaulted student loans after the nation first locked down.

President Biden extended the student loan payment pause when he first took office and again this past December.

How soon can you be debt free?

If the freeze ends on May 1, 2022, the IRS will be able to apply tax refunds to student loans, child support, and other delinquent debts owed to state and federal agencies.

Refund offsets have also been halted in many jurisdictions. California, for example, suspended refunds until July 2021. Check with your state to see what kind of relief it’s giving out.

Is the Department of Education taking tax refunds in 2022?

The coronavirus student loan payments freeze will come to an end in May 2022, and collection efforts will resume. The Department of Education will contact the IRS to collect your tax refund to repay federal student loans in May 2022.

You can prevent this from occurring by getting out of default. The U.S. Department of Education provides three options for restoring accounts to good standing:

  • Student loan settlement.
  • Student loan rehabilitation program.
  • Defaulted student loan consolidation.

Getting out of default not only secures your refund but also restores your eligibility for student loan forgiveness programs, low-cost repayment options, and new loans and grants from the Department of Education.

If you want to get your tax refund early, you can file it before May. But if you wait too long or the government does not process your return until after May, then you are at risk of having your federal student loans taken out of your refund.

Which student loans can garnish refunds?

The Department of Education has a policy that says any borrower delinquent on their repayment obligation may have their “withheld payment” applied to the debt.

That means they will take out of your monthly income whether you get paid weekly or biweekly, so it’s essential to be aware of this when signing up for a new loan because if you default on one type of loan, they might garnish your paycheck from another source as well.

Loans eligible for student loan tax refund offset:

  • Direct Loans
  • Direct Consolidation Loans
  • Federal Family Education Loan Program (FFELP) Loans
  • Federal Perkins Loans

Private student loans cannot take money from your bank account or tax refund without suing you first and getting a court order.

How to find out if your income tax refund will be garnished

There are a few ways to find out if your income tax refund will be garnished, but the most accurate way is to contact the IRS directly. You can call them or go online to their website and use their handy self-service tools.

If you didn’t get a notice, call the Treasury Offset Program at 800-304-3107. The TOP Interactive Voice Response System will use your Social Security Number to check if you are in the system.

If they find your name, then they will play an automated message that tells you what number to call for your debt.

If you’re not comfortable contacting the IRS yourself, you can also hire a tax professional to do it for you. They will have access to more detailed information about your specific situation and can help you understand what’s going on.

Regardless of how you find out, it’s important to address the issue as soon as possible to avoid any potential penalties or further complications.

Options for a tax refund offset reversal for student loans

If your refund is taken for student loans, you can request a tax refund offset reversal if:

  • If you had a repayment agreement with the Department of Education, then you have already made monthly payments.
  • When you received the notice, your loans were not in default and an error was made when the notice was issued. This may happen if a Social Security number or name is entered incorrectly.
  • The bankruptcy case is still open. This can also apply if the student loan was erased in bankruptcy. Student loans that are being discharged in bankruptcy is quite unusual.
  • You’ve been a victim of identity theft or fraud.
  • Totally and permanently disabled.
  • Closed school or false certification student loan refund.
  • Financial hardship

How to request a tax refund offset reversal for financial hardship

In order to prove you are experiencing extreme financial hardship, you will need to work hard. You will also need to follow up a lot. But it is not impossible. For example, this process applies to student loans and can be used when trying to reverse a tax refund offset.

  • Identify who took your tax refund.
  • Contact the company (Default Resolution Group or guaranty agency) that took your return fund to find what information you need to submit (hardship packet).
  • Submit the necessary information.
  • Follow-up to confirm they received the necessary information.
  • Wait to see if they approved your hardship request.

How do I dispute a tax refund offset?

If you owe money on your student loan, the government can take your tax refund. But if you can prove that you have experienced hardship and stopped making payments on the loan, then the government might give back your tax refund to you.

A lender will want to know about the hardship. Depending on the agency, they might accept any of these as proof:

  • Notice of a pending eviction or foreclosure
  • Homelessness
  • Utility disconnection or shutoff
  • Exhausted unemployment benefits

To get your refund back, you’ll need to prove that you are having a lot of financial trouble.

How to go about completing your hardship packet

The packet you receive will include information on how to fill out the hardship request form and where to send it.

Fill out the form in its entirety and promptly, following the directions precisely.

After that, call or e-mail the office to ensure that your hardship package was received and that they have all of the information needed to process your request. If not, determine exactly what the agency requires in order for you to complete your request.

How long does it take for a tax offset to be removed 

It might take up to 6-8 weeks for a tax refund to be reversed after it’s been offset for student loan debt. A tax refund offset reversal on a jointly filed return, on the other hand, can take up to six months.

Can I track my offset refund

You may not be given a tracking number if you request a refund through the Treasury Offset Program. To discover which agency is handling your claim, call the Treasury Offset Program at 1-800-304-3107.

Options to prevent a tax refund offset

If you’re one of the millions of Americans who have already defaulted on their student loans, you’re not alone. According to the Education Department, 9.7 percent of student loan borrowers default within three years of beginning repayment.

The most essential thing for you is to minimize the financial damage. Here’s how to avoid student loan default and keep your tax refund from being offset.

Loan rehabilitation

Loan rehabilitation is a process that allows borrowers who have defaulted on their loans to bring their loans current. To rehabilitate a loan, the borrower must agree to make nine consecutive on-time payments.

The payments must be equal to or greater than the monthly payment amount for the standard 10-year repayment plan. Borrowers who rehabilitate their loans will have the default notation removed from their credit history and will be eligible for federal student aid.

 Student loan consolidation

Student loan consolidation is the process of combining one or more student loans into a single new loan. The new loan has a new interest rate and a new repayment term. The repayment term is usually longer than the original terms of the individual loans that were consolidated.

Consolidating your loans can be a helpful way to manage your debt, but it’s important to understand the risks and benefits involved before you consolidate.

Negotiate a settlement

If you’re unable to make the required payments, one option is to negotiate a settlement with your loan servicer. A settlement allows you to pay a lump sum amount that’s less than the total amount you owe.

Be aware that settlements can have negative consequences on your credit history and may also be reported to the IRS.

Check out student refinancing

If you’re looking for a way to manage your student debt, you may want to consider refinancing your student loans. Refinancing can lower your interest rate, reduce your monthly payment, or both.

Be sure to do your research before you refinance, though. There are a number of factors to consider, including the interest rate, the loan term, and the fees involved.

Refinancing may be a good option for you if you want to save money on your student loans or if you’re looking for a way to make your payments more manageable.

Request a review

The offset will be put on hold if you submit a request for review right away. You must file your request within 65 days of the notice date or 15 days after submitting your request, and have your loan file.

File bankruptcy

A Chapter 7 and a Chapter 13 bankruptcy both protect your refund, wage, and other federal payments from being transferred to pay off debts. If you can show that the defaulted loan poses an undue hardship, the bankruptcy procedure may assist you in getting rid of it.

Need help to Keep tax refund?

Regardless of the strategy you pick, it’s preferable to deal with your debt rather than ignoring it and hoping it goes away. If you’re unsure which one is best for you, a student loan lawyer can assist.

A student loan advisor wants to work with you if you have student loans in default and are facing tax refund offsets. Make a call right now. They can go through your situation together.