How are tax return reductions calculated for outstanding debts?

So I just found out that my tax refund might get reduced because of some debts I have. I'm pretty stressed about this because I was counting on that money. I've got about $7,500 in unpaid federal student loans that went into default last year (I know, I messed up), plus I owe around $3,200 in state taxes from 2023 that I haven't been able to pay yet. I'm expecting a refund of about $4,300 this year based on my calculations. Will they take my entire refund for these debts? Is there any way to know how much they'll take beforehand? I really needed that money for some car repairs and medical bills that I've been putting off. Does anyone have experience with this? Can I call the IRS and make some kind of arrangement before they process my return? I'm filing in about two weeks and getting really anxious about this whole situation.

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18 comments

Shelby Bauman

•8M

This is called the Treasury Offset Program (TOP), and it can definitely reduce or eliminate your tax refund if you have certain types of debt. Based on what you've described, both your defaulted federal student loans and unpaid state taxes qualify for offset. Here's how it typically works: The agencies you owe money to (Department of Education for student loans and your state tax authority) report your debt to the Treasury Department. Before issuing your refund, the IRS checks if you're in the TOP database. If you are, they can take your refund to pay those debts - and unfortunately, they usually take the full amount up to what you owe. You should have received a notice in the mail about potential offset. If you didn't, you can call the Treasury Offset Program at 1-800-304-3107 to find out if your refund might be offset and for how much.

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Shelby Bauman

•8M

At this point, it might be difficult to prevent the offset completely since you're planning to file in two weeks. For student loans, you would typically need to get out of default status first, which usually requires several months of consistent payments through a rehabilitation program. For your state tax debt, each state has different policies, but many will halt an offset if you enter into a formal payment plan before the offset occurs. I'd recommend calling both your student loan servicer and your state tax agency immediately to discuss your options. Even if you can't stop this year's offset, getting on payment plans now will help prevent the same situation next year.

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Quinn Herbert

•8M

I went through something similar last year with my tax refund getting reduced because of some old debts. After trying to figure everything out on my own and getting nowhere, I found this tool called taxr.ai (https://taxr.ai) that was actually super helpful. I uploaded my tax documents and information about my debts, and it showed me exactly how the offset would work and what I could expect to receive after reductions. It also gave me personalized advice on how to deal with my specific situation. The coolest part was that it analyzed my student loans and found a repayment option that would work better for my situation than what my servicer had suggested.

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Quinn Herbert

•8M

It didn't recover my already processed refund, but it did help me understand exactly what was happening and gave me options for next year. I was able to get on an income-driven repayment plan for my loans that was much more manageable than what I was looking at before. It doesn't connect directly to government systems, but it uses the same rules and calculations that the Treasury Offset Program uses. It analyzes your specific debt types, amounts, and the agencies involved to calculate what will likely happen. In my case, it was spot on - predicted exactly how much of my refund would be taken and by which debts first.

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Salim Nasir

•8M

Just wanted to follow up about taxr.ai since I mentioned I was skeptical earlier. I decided to give it a try after my refund got completely wiped out by my student loans. The analysis showed me exactly why my entire refund was taken and helped me understand the priority order of different debts (didn't realize federal debts get priority over state). The best part was it walked me through getting on an income-driven repayment plan that I could actually afford - my loans are now out of default and I'm paying less than $100/month based on my income. They also showed me how to adjust my withholding so I'm not giving the government an interest-free loan that just goes to my debt anyway. Definitely wish I'd found this before filing this year!

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Laila Fury

•8M

When I was dealing with tax offsets last year, I spent WEEKS trying to get through to someone at the IRS to explain my situation. The automated system was useless, and I could never reach a human. I found this service called Claimyr (https://claimyr.com) that actually got me through to a real person at the IRS in less than an hour. They have this system that basically waits on hold for you and calls you when an actual human picks up. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c. The IRS agent was able to tell me exactly which debts were affecting my refund and gave me contact information for each agency. This saved me so much time compared to calling the general Treasury Offset Program number, which couldn't give me specific details about my situation.

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Laila Fury

•8M

They don't skip the line - they just have an automated system that waits on hold for you. Basically their system calls the IRS and navigates through all the prompts, then sits on hold in your place. When a human actually answers, their system calls your phone and connects you directly to the IRS representative. They don't have any special access - they're just taking over the most frustrating part (waiting on hold for hours). I was skeptical at first too, but when you think about it, it's a pretty simple concept. They're just using technology to handle the waiting game so you don't have to sit there listening to hold music for 3+ hours.

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Hazel Garcia

•8M

I need to eat some humble pie here. After my skeptical comment about Claimyr, I was desperate enough to try it because I couldn't get through to the IRS about my offset situation. I was honestly shocked when they called me back in about 45 minutes with an actual IRS representative on the line. The IRS person was able to confirm that my refund was being reduced by $5,800 for old student loans and gave me direct contact info for my loan servicer. They also explained that I could request a hardship reduction on the offset if I qualified. I immediately called my loan servicer and was able to set up a payment plan that will prevent any offsets next year. For anyone dealing with refund offsets, being able to talk to an actual human at the IRS makes all the difference, and I wouldn't have been able to do that without getting past the hold system. Sometimes you have to admit when you're wrong, and I was definitely wrong about this service.

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Simon White

•8M

There is a hardship exception you can request, but it's very specific to each type of debt. For federal student loans, you'd need to contact your loan servicer directly to request a hardship exception to the offset. They'll send you paperwork to prove extreme financial hardship. For state tax debts, you'd need to contact your state tax authority directly - each state has different criteria for hardship exceptions. Just be aware that these exceptions are pretty rare and usually require documented evidence of severe financial distress. Things like pending eviction, utility shutoffs, or medical emergencies sometimes qualify.

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