tax refund offset reversal

What Is Tax Refund Offset Reversal For 2021 and How to Apply for It?

You may wish to use your tax refund to repay your debt or to pay your current bills. However, if you have borrowed a federal student loan, and you have not been able to make payments towards it, you can then leverage the mechanism of the tax refund offset reversal.

So, that brings us to our first question:

What Is a Tax Refund Offset?

If you stop making payments towards your student loan, your loan can go into default status. So, if you have defaulted on your student loan, the Department of Education may work with the Internal Revenue Service (IRS) to locate you in the system and determine whether you owe any tax refund. If you do owe a tax refund, the IRS may garnish your tax refund. When your tax refund is garnished, it means that some or all your tax refunds are redirected towards paying off your defaulted student loan. This mechanism is called tax refund offset or treasury offset.

Tax refund offset is useful in the situation mentioned above. But if you are in a financial crunch and are expecting to receive the tax refund, the tax refund offset may seem disheartening. No need to fret as there may be a way to prevent tax offset and to apply for tax refund offset reversal.

So, that brings us to our next question:

How to Request a Tax Refund Offset Reversal?

tax refund offset reversal


You would receive a letter called the Notice of Intent to Offset before the tax season takes off. In most cases, you would receive such notice from the IRS only when you have defaulted on a loan or have an outstanding tax debt.

The notice would emphasize your right to see a copy of your debt-related records, to review your debt obligation, and to enter into a payment agreement for repaying your debt. Do carefully review this notice and your present student loan status as the tax department may have made certain errors while adjudging your student loan status.

However, if you believe that you qualify for a tax offset hardship refund, you can initiate the process of tax refund offset reversal. To qualify for the refund, you may have to prove that your tax refund will garnish amid financial distress. You will require valid proofs as your medical bills, income statements, etc. alone will not suffice as proof of your financial distress.

Here are a few cases in which you may qualify for a tax refund offset reversal 2021 are:

  • You have repaid your student loan.
  • If you are completely disabled.
  • You have an ongoing bankruptcy case.
  • Your student loan is not enforceable.
  • The Social Security Number (SSN) attached to the loan is incorrect.
  • Another person’s name is on the notice.

There is no time limit to apply for tax refund offset reversal student loans. However, since the process is quite strenuous, you should apply at the earliest.

But before you apply:

  • Review and identify your financial hardship. 
  • Collect valid and effective documentation to prove that you are in financial hardship. 
  • Once you have gathered the relevant documentation, fill up the student loan tax offset hardship request form that you may have received along with the notice. 
  • Once filled, send the form to the address mentioned in the notice.

You may even have to fill a review request form provided by your loan servicer. So, keep your documentation proofs handy while submitting this request form as well. But if you are filing for tax refund offset reversal after your tax refund will garnish, you may have to appeal to the Department of Education.

For all you know, getting a tax offset refund reversal after being put on the notice may be slightly difficult. There is no guaranteed success. But if you believe that you have a good case, you should give it a shot!

Now, that brings us to our next question:

How to Avoid a Tax Refund Offset in the First Place?

tax refund offset reversal


Financial hardships can happen to anyone and at any time. But student loans offer special benefits as compared to other loans, especially if you are in some financial crisis. Thus, there are a few ways in which you can avoid a tax refund offset even when you have defaulted on your student loan payment. 

Make Timely Student Loan Payments 

It takes about 270 days of nonpayment on federal student loans before an official default status is tagged to the loan. However, you become delinquent as soon as you miss a loan payment. So, make minimum payments on time to stay out of default. But if this is not possible due to certain reasons, you can bank upon other options to avoid a tax refund offset.

Enter into a Payment Agreement

If you have defaulted on your student loan payments, but a tax refund offset has not happened yet, then you may request the Department of Education for a payment agreement. The notice that is sent to you will have all the details on how to request a payment agreement. 

You must file the request for a payment agreement within 20 days of receiving the notice. The Department of Education will decide the terms of the payment agreement and the amount you have to pay. You must make the first payment within 65 days of receiving the notice.

Consider Deferment of Your Student Loan

If you know that you will not be able to make the minimum payments towards your student loan, you may try to defer the loan before going into default. Deferment of the loan can postpone the payments for up to three years. You may contact your loan provider to apply for deferment of your loan.

Consider Forbearance of Your Student Loan

Forbearance is like deferment but has slightly different eligibility rules. Forbearance can pause your loan payments for up to one year. However, interest may continue to add up during the forbearance period.

Consolidate Your Student Loans

By consolidating your student loans, you can keep your loan payments low. You can make one payment, rather than making multiple payments, per month. You may even qualify for low interest rates through refinancing.

Find Out Whether You Qualify for a Student Loan Forgiveness Program

If you are an employee of public service, education, healthcare, or any kind of helping profession, you may qualify for a student loan forgiveness program. If you qualify for the program, some or even the full amount of your student loan may get paid off.

That brings us to our last question:

Also Read: Forgot To File Taxes? Here Is What You Can Do Now

What Is the Last Resort to Deal with a Tax Refund Offset?

What if you have tried all options of tax refund offset reversal but nothing has helped you get back your tax refund? You may have to let go of your tax refund. 

But it may turn out to be a blessing in disguise for you. The Treasury Department redirects your tax refund to pay off the interest and the principal of your student loan. Thus, your total debt liability will reduce because of your tax refund offset.

But if you still want to stop the tax refund offset at any cost, you may have to file for bankruptcy before the offset happens. Filing for bankruptcy will freeze all the negative financial actions against you, including the tax refund offset. But filing for bankruptcy is a drastic step to take and can even tarnish your credit score for years. 

Thus, try your best while applying for tax refund offset reversal when you can and let it go when you cannot. It will be a win-win situation for you in the end!

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Stay tuned and happy reading!!