05/17/2013 04:51 pm ET Updated Jul 17, 2013

Is Your Tax Refund Less Than Expected?

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There's nothing more frustrating than expecting a certain amount in your tax refund and then having it be less when it finally arrives. And not less than you hoped (we all like a big refund), but less than you expected once you filed. Unfortunately, there are many reasons this could happen, and even worse, it happens to many taxpayers each year, causing surprise, confusion and frustration.

There are certain cases where if you owe the government or have outstanding dept, your refund can be offset or used to pay the debt. This could be the case if you owe delinquent federal taxes, federal agency non-tax debts (as with HUD loans, Student loans, VA loans), state income taxes and other obligations. It could also come into play if you have state unemployment compensation claims due for various reasons, including fraudulent unemployment compensation filings and/or delinquent child support. Simply said, if you owe other government agencies a balance due for whatever reason, know that the government and especially the IRS are getting very good at "cross collecting" those debts -- especially if you have a federal income tax refund coming your way.

The Treasury Department's Financial Management Service (FMS) issues federal income tax refund checks, but it has also been authorized by Congress to conduct the Treasury Offset Program, which allows FMS to withhold all or part of your refund to pay certain delinquent debts from your federal income tax refund. The debts are collected in the following order:

  • Federal taxes of all types
  • Past-due child support
  • Federal agency non-tax debts (such as student loans)
  • State debts other than past due child support (such as state taxes, local taxes, or overdue library fines)

Anytime your federal refund is completely used or reduced by FMS, you will receive a letter explaining the offset. If your refund has been reduced or delayed, you can contact FMS at 800-304-3107 for additional information.

If your refund is more than your debt, you usually receive the balance of your refund in the same payment manner you requested when you filed your return, whether it be via direct deposit or mailed check.

For married taxpayers who file a joint return, where only one spouse is responsible for a debt in FMS collection, the IRS does have a process in place to allow a partial refund to be processed for the spouse who doesn't owe the debt. To receive your share of a refund that has been reported to FMS for collection, you should complete IRS Form 8379, Injured Spouse Allocation, which allows the "non-debtor" taxpayer to provide information to the IRS, who will then determine the allocation necessary for the tax refund. The form can be filed by itself after a tax refund has been reduced or eliminated in the Offset Program, or it can be completed and attached to the tax return when the return is filed, if you know of the offset in advance.

If you are under an Installment Agreement Request with the IRS, FMS will intercept any refund you may have and apply it to the principal balance of your tax debt. The refund offset is not considered part of your monthly payments; you should continue to make your payments in full on the appointed date as agreed upon in the original application.

If you were expecting a certain amount in your tax refund and the amount you anticipated did not arrive, you should investigate. There may be a good explanation and the lower amount may be correct, but there may also be an error -- and even worse, your refund may have fallen into the wrong hands or misused. The most important thing is to act quickly to investigate and understand exactly what happened, so that you can ensure any amounts removed or offset to settle other past due debts are accurate. A good place to start is with your tax return preparer, who can work with you on the process and ensure you get the money you deserve.