Each year, millions of taxpayers anxiously await the receipt of a W2. This little piece of paper essentially equals a large chunk of change for many taxpayers, who use the money to catch up on bills, pay off credit cards, or to make a big-ticket purchase. In 2014, the Internal Revenue Service (IRS) issued more than 48 million refunds and together, taxpayers got back more than $146.91 billion from the government.
Instead of receiving a payment, however, some taxpayers receive a notice in the mail from the Financial Management Service (FMS) indicating that their refund has been offset, or in essence, taken. These taxpayers usually owe some sort of debt to a government entity. Offset generally does not occur as a result of one or two late payments. In most cases, a debt has to be seriously delinquent to get to this point. Oftentimes, a taxpayer is already aware of the possibility of offset and around tax time, they are ready to pick up the phone and call the Treasury Offset Program Hotline to find out to whom, if anyone, they owe debts.
If this sounds like you, you may have a few options if you filed a joint return. First, you can allow the money to be taken. It will go to the entity to which you owe a debt and it will count as a payment, albeit an involuntary one. You can then work toward preventing offset in the future. Prevention comes in the form of coming up with come sort of payment arrangement and working to repay the debt so you can receive future tax returns. On the other hand, if the debt only belongs to you or your spouse and not to both of you, you may have some ammunition in the injured spouse allocation.
Examine these criteria. If you fit all of these, you may be an injured spouse and be entitled to receive your portion of your tax return.
1. Tax payments
You must have filed a joint return to be considered for injured spouse. You generally must have also made tax payments. These payments may be in the form of withholdings from a paycheck or estimated tax payments. If your spouse was the only earner in the household, you may not be eligible because if you didn’t earn any income and you more than likely didn’t make any payments to Uncle Sam. On the other hand, if you filed for refundable tax credit, such as earned income credit, you may still be eligible as the IRS decides how to distribute such refundable credits.
To be a potential injured spouse, the amount of taxes you paid during the year, coupled with your deductions and credits, must render you eligible to receive a refund. The injured spouse allocation distributes this refund between you and your spouse based on your income, tax, deductions, and credits. You may be able to receive your percentage portion based on these factors. The other portion will still go toward the debt. Those who owe money to the IRS will not be eligible for injured spouse.
3. Offset and type of debt
Debts that can result in offset are debts to government entities, such as student loans, state tax debts, and unemployment-related debts. Past-due child support also may lead to a refund offset. Debts to businesses, like unpaid credit cards, auto loans, or home loans, generally do not result in federal refund offset. However, in some cases, your state tax return may be offset for medical bills like hospital debts.
To file for injured spouse, the debt must be one you are not legally liable to pay. If the debt is a joint debt, such as a tax bill that both you and your spouse owe, you cannot file injured spouse. However, something like a student loan that your spouse took out before you were married, or past-due child support for a child that is only your spouse’s, is generally not your legal responsibility. These are the types of debts that apply.
5. Other requirements
If you live in one of these community property states, then you must follow specific rules regarding your taxes, and these rules may impact your filing for injured spouse:
- New Mexico
In these states, the way income is distributed is a bit different. A refund is considered the property of both of you, and it may be used to pay your spouse’s debt in some cases.
Additionally, when you file a joint tax return, any payments, late fees, and interest become the responsibility of both parties. Injured spouse should not be confused with innocent spouse, which relieves your liability for money owed to the IRS as a result of your spouse’s improper reporting of income, deductions, or credits.
When you file for injured spouse, you are going to proportionally allocate income, payment, deductions, and credits on form 8379 Injured Spouse Allocation. This helps the IRS determine how much of the refund you’re entitled to. When filling out the form, make sure you fill it out clearly and accurately, as mistakes can delay processing.