If you owe the federal government tax money, don't expect to get your state refund check anytime soon. The Internal Revenue Service can seize state income tax refunds to collect delinquent federal income taxes in most states and the District of Columbia. The IRS program for refund seizures is called the State Income Tax Levy Program, or SITLP. If you owe the IRS, but still got a refund, you likely live in a state that does not participate in SITLP. Alaska has a program like SITLP, even though it doesn't tax personal income. Of course, in states that do not have a personal income tax, there would be no refund to seize.
If you live in a state that participates in the State Income Tax Levy Program, any back taxes which you owe the federal government could be deducted directly from your state income tax refund.
Comparing State and Federal Tax Returns
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. Currently, no equivalent of the program exists for businesses, although it may include business state tax refunds in the future.
States That Allow Tax-Refund Seizures
The states that currently participate in SITLP, and that can take your state tax refund, are:
- Alabama, Arizona and Arkansas
- California, Colorado and Connecticut
- Delaware and District of Columbia (D.C.)
- Idaho, Illinois, Indiana and Iowa
- Kansas and Kentucky
- Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi and Missouri
- Nebraska, New Jersey, New Mexico, New York and North Carolina
- Ohio, Oklahoma and Oregon
- Rhode Island
- South Carolina
- Vermont and 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.
Read More: What Happens If You Don't File Taxes?
No Surprises: The State Notifies You First
None of the IRS actions are a secret. Each state participating in SITLP has to send you a notice in the event your tax refund is going to be seized for delinquent federal taxes. If you owe federal taxes, they can take your state refund, if the state allows for it, but creditors can't take your income tax return. 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 mistake 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 non-liable 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.
Read More: Where's My Tax Refund: An Easy Guide