Can I Receive a Tax Refund?

You may be wondering whether or not you can receive a tax refund if you are currently making payments under an Installment Agreement or Payment Plan for a prior year’s federal taxes.

The short answer is simply, no.

All taxpayers are entitled to make a claim for a refund of overpaid taxes within the prior three years. However, in instances where there is a past balance, the IRS will confiscate any refund due and apply it towards a taxpayer’s oldest liability period before remitting any excess portion of the overpayment back to the taxpayer.  Even in cases where a taxpayer has entered into a formal payment arrangement, the IRS will offset any refund due and apply it towards the liability. The federal government will pursue all available options to ensure that it is paid for any delinquencies as expeditiously as possible.  The same holds true for many other types of federal debt the most common being delinquent student loan debt.

This is also why the Internal Revenue Service issues tax liens and assesses interest and penalties.  These are all mechanisms the IRS utilizes to ensure repayment of a tax and encourage “voluntary compliance” amongst taxpayers.  When the IRS grants payment arrangements they take into consideration all allowable household expenses and net that amount against the gross household income. Any excess income, beyond the amounts that are considered necessary living expenditures, the IRS expects to be remitted in the form of structured monthly payments.  One of those expenses being considered is income tax withholding.  If income taxes were taken into consideration as a qualified monthly expense, but there is in fact excess withholding, the IRS would assume that that amount should have been reduced when formulating the initial installment agreement terms anyway. Therefore, the IRS will confiscate the excess withholding in the form of a tax refund offset.

The best method for avoiding this pitfall is to seek the counsel of a qualified tax professional shortly after accruing a tax liability with the Internal Revenue Service.  This is especially crucial in instances where a taxpayer may have received or is due a large federal tax refund.  Careful tax planning in the current year can ensure that tax debtors minimize or altogether eliminate a tax refund that would ultimately be confiscated the following year.

For wage earners (those that receive a form W-2 at the end of the year) this can be as simple as adjusting the exemptions reported to their employer on form W-4.  All taxpayers are allowed to claim up to nine exemptions without providing any proof that they qualify.  This will severely reduce the amount of income tax withholding that an employer deducts from each paycheck and ultimately any refund due at the end of the tax year.  For self-employed individuals, taking a little extra time each week to maintain careful bookkeeping records will allow them the ability to consistently track current year tax obligations so that they aren’t in danger of over or under paying when making estimated tax deposits.