The government may take your income tax refund if you are in default. A number of states also have laws that authorize state guaranty agencies to take state income tax refunds. Computer records of all borrowers in default are sent to the I.R.S. Borrowers in default can expect to have all or a portion of their tax refund taken and applied automatically to federal student loan debt.
Challenging a Tax Refund Offset
You can request a hearing to challenge the tax offset. The I.R.S. has said that you must appeal to the Department of Education if you want to challenge an offset after it’s already been done.
The main defenses to tax offset are (this is not an exhaustive list):
- You have repaid the loan,
- It is not your loan or there is some other reason why you do not owe the money,
- You have already entered into a repayment agreement with the loan holder and are making payments as required,
- You have filed for bankruptcy and the case is still open or the loan was discharged in bankruptcy,
- The school failed to pay you an owed refund,
- The borrower is dead or totally and permanently disabled,
- The loan is not enforceable, for example because of forgery, or
- You are eligible for a closed school discharge or false certification discharge.
If you want the offset to be on hold while you are challenging it, you must file a request for review at the address written in the offset notice by the later of 65 days after the date of the notice or 15 days after you request to see your loan file. It is a good idea to make this request so that you know what is in your file. You must make a written request if you want to see the loan file and you must do this within 20 days of the notice. You can request a hearing after these deadlines, but the offset will generally not be held up while you are waiting for your hearing. The Department accepts requests for hearings on-line. (Alert: This link does not appear to work at all times. If it is not working, you should contact your loan holder if you need the form to request a hearing).
The Department of Education provides this explanation about tax offsets. (Alert: The Department’s on-line explanations are not always available. The site with general information about default does appear to be working).