If I Owe State Taxes, Will They Take My Federal Refund?

Most Americans expect a tax refund from the IRS after they file their tax returns. If your income tax return has not yet arrived, there is a possibility that the government has delayed it. If you owe federal or state taxes, the IRS can seize some or all of your refund.

The US department of treasury Financial Management Service (FMS) administered a Treasury Offset Program (TOP) that allowed the federal and state government to block anyone’s refund for garnishing debts that they owe.

Commonly, federal agencies offset or garnish income tax refunds because federal taxes occupy the main part of tax payments.

Your refund is offset for many reasons. It can happen if you have underpaid your taxes on any income, owe state unemployment compensation, child support, spousal support, or if you default on a student loan.

If you are still unclear on why your IRS withheld your federal income tax refund, here are the details.

Will you get a refund?


Whether you receive a financial refund or not is totally dependent on your financial situation. If you have successfully paid all the liable taxes and have a pretty clear tax situation, you can easily say that you will get the refund.

If there are certain liable taxes that you failed to make (including state taxes), IRS can hold back your federal refund.

How does the IRS manage State Income Taxes?

US department of Treasury state and income taxes

Regarding Tax refund offset on state income taxes, here is how the IRS works.

State government agencies have the lower priority in garnishing IRS refunds, but if you owe them, they can garnish your refund to offset the obligations. State debts may include state income taxes and unemployment compensations. 

If you collected more than you were entitled to receive in the case of state unemployment compensation, the IRS can withhold your refund to offset that extra amount. IRS holds back the income tax refund in the following order:

IRS Priority

The first taxes that you owe to the IRS are federal income tax payments. They will hold back your refund to clear its outstanding taxes.

For example, if you owe some taxes for the prior year and expect a refund for the current year, the IRS will use this refund to clear past due-tax balances. Or you can say that the IRS will pay itself first and then look for any other outstanding payment you owe before sending you the remaining refund.

You will also get a direct notice from the IRS explaining why they withheld your refund.

➡LEARN MORE: Do the IRS Process Tax Returns on Weekends?

Child Support Payment

After federal income tax, child support payment is on the priority list for the offset. If your child support payments are unpaid, the child support agency can request the Treasury Department to withhold money from your refund.

For this, the taxpayer is sent a pre-offset notice on what amount he owes and how the whole process works. The Bureau of the Fiscal Service sends another notification once the money is withheld.

Spousal Support Payment

If you get the spousal support more than you were entitled to, it could also result in a tax refund offset.

For the spouses who filed jointly and their refund was seized because of debts belonging to only one spouse, the other spouse can request the IRS to get back a portion of his refunds.

Defaulted On Student Loan

Government can also seize your tax refund if you default on a federally insured student loan.

State Income Taxes

As mentioned above, state debts get the lowest priority.

Lastly, if you think there is any mistake in withholding your refund, you can contact the IRS at (800) 829-1040 to review your case.