Do You Still Receive Your State Refund if You Owe Back Taxes on Your Federal Taxes?

by Sarah Brumley
Judgment day: The IRS takes action -- and your state refund.

The Internal Revenue Service can seize state income tax refunds to collect delinquent federal income taxes in 33 states and the District of Columbia. The IRS program for refund seizures is called the Selected Income Tax Levy Program, or SITLP. Eight states do not participate in SITLP, and another eight states do not tax personal income, so there is no refund to seize. Alaska has a program like SITLP, even though it doesn't tax personal income.

Comparing State and Federal Tax Returns

You will not receive your state refund if you owe federal taxes.

SITLP is an automated program that matches federal tax returns with state tax returns when an individual taxpayer owes delinquent taxes. The IRS program also includes federal government payouts. For example, the federal government can take up to 15 percent of a federal employee's salary and a retiree's Social Security payments in addition to an individual's state tax refund. The IRS does not deduct money from payouts that are means tested -- payouts you receive because you have a low income. As of the time of publication, no equivalent of the program exists for business tax returns.

States That Allow Tax-Refund Seizures

The states that participate in SITLP are Alabama, California, Colorado, Connecticut, Delaware, Georgia, Idaho, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Missouri, Nebraska, New Jersey, New York, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, Utah, Vermont, Virginia, West Virginia and Wisconsin. Alaska doesn't tax income, but the IRS does take money for delinquent taxes from the payments that residents receive each year from the state's Permanent Fund Dividend Levy Program. That program pays Alaskans directly for their share of the wealth from oil and gas reserves that are removed from the state each year.

No Surprises: The State Notifies You First

None of the IRS actions is a secret. Each state participating in SITLP has to send you a notice if your tax refund is going to be seized for delinquent federal taxes. Of course, if your state refund is taken, your federal refund is taken too. On occasion, state and federal refunds amount to more than you owe. If that happens, you get to keep whatever remains of your refunds, but it may take four to six weeks longer than usual to receive that money.

When Governments Goof

A state occasionally sends refund money to the IRS that should have gone back to the taxpayer. This mistakes is called an erroneous receipt of funds, and the state handles the process of requesting a refund. Wrongful levies are another accidental outcome. One type is when the SITLP program takes refund money from a spouse who isn't liable for the tax delinquencies of the other. The nonliable spouse then must go through IRS channels to have the money returned. This can get complicated in four of the community-property states -- California, Idaho, Louisiana and Wisconsin. Community-property states consider the spouses' assets jointly owned.

About the Author

Sarah Brumley has written extensively on business and health-industry topics since 1995. Her work has appeared in publications ranging from Funk & Wagnall's yearbooks to "Medical Economics," a magazine for physicians. She holds a master's degree in finance from New York University.

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