For anyone getting a refund, tax season is the best time of year. But for those who have defaulted on their federal student loans, their potential joy can be seized by the IRS to pay down the federal debt.It may not currently be tax season, but it’s never too early to start preparing to secure that refund. Specifically, if you have federal student loans that you’re behind on, it’s in your best interest to get in good standing before the Department of Education decides to collect your tax refund.If you’re worried about the IRS taking your tax refund, you’re in the right place.Note: Due to the coronavirus, the Department of Education is stopping tax offsets, and issuing refunds to those who received an offset. See this press release.If you’re not quite sure where to start or what to do, consider hiring a CFA to help you with your student loans. We recommend The Student Loan Planner to help you put together a solid financial plan for your student loan debt. Check out here.
Effective March 13, the President declared a state of emergency due to the coronavirus. As part of those measures, the Department of Education is suspending student loan collections after that date. Any collection activity that happened after March 13 will receive a refund. It’s unclear if anything before that date will receive anything, but it doesn’t appear to be so.Furthermore, collection activity is stopping for at least 60 days from March 13. So, if you’re planning to file your taxes to get your Coronavirus stimulus check or tax refund, you are safe during this period.See all the loan help options during the emergency here.
First, tax offsets are legal. The Treasury Offset Program, created in 1986 and overseen by the Bureau of Fiscal Service, allows departments of the federal government to request that the IRS seize tax refunds to pay down debt owed to the federal or state governments.Unlike for private loans, the federal government doesn’t need permission from anyone to garnish your earnings, including your tax refund, if you have defaulted on your federal student loans.In the case of federal student loans, the Department of Education may send the Treasury a request to seize your tax refund to put toward defaulted loans. If they do this, they can take your entire tax refund. If the debt is paid off and any amount of your refund remains, it will be returned to you.If you have a spouse with whom you file your taxes jointly, the IRS can seize the entire joint tax return, even if your spouse is not connected to your federal student loan. However, it is possible to get your spouse’s portion of the refund returned to him or her.It’s important to note that, because there is no statute of limitations for federal loans, the IRS can offset your taxes for every year your federal student loans are in default.Fortunately, the IRS is legally required to notify you by mail of their proposal to offset your taxes and allow you some time to respond.If you have federal student loans that are in default, you may receive a letter in the fall notifying you that the IRS plans to take your potential tax refund and apply it to your education debt. The letter will include information about your loans and instructions on how to proceed.Once you get the letter, you can do one of three things:1. Request a review to challenge the offset. 2. Agree to pay the debt. 3. Do nothing.
First, check all the information in the letter against your records and your loan accounts. You can even request an official copy of your loan information from the Department of Education. If anything looks incorrect, you have the right to request a review hearing, where you’ll have the opportunity to prove that your taxes should not be offset.Here are some common reasons you might request a review hearing: