Owe an IRS Debt? Losing Your Tax Refunds to the IRS Every Year? Consider These Changes.

If you have an IRS debt and have been receiving refunds every year, the IRS will keep the refund and apply it to your unpaid debt. For some this is a forced savings plan and helps get the debt paid off faster.  For those that are on an Installment Agreement and want to keep more of their money throughout the year, there is a solution.  Increase your withholdings. 

Below are two key points you must know before changing your withholdings:

1. You need to be actively pursuing some method to repay your IRS debt.  If the only way the IRS was getting paid was through your refunds and you prevent that from happening, the IRS will seek other methods of payment such as a wage garnishment.
2. Do not overdo the reduction in withholdings to the point where you now owe every year.  If you owe every year on top of a previous debt, the IRS considers this pyramiding and will take aggressive collections actions, such as wage garnishment, bank levy and asset seizure.
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How do I calculate how much I should reduce my withholdings?

Take your typical refund, divide it by the number of your paychecks remaining for the year.  That will produce an amount for the remaining paycheck to be reduced per paycheck.  Next, you will need to look at the W-4 chart to determine the number of exemptions and filing status that will get you as close to your targeted reduction.  You will want to shoot for as near to zero refund as possible but NOT to the point you will owe. Tell your employer to change the number of exemptions and perhaps even the filing status to hit your target.  Since it is likely you are doing this sometime during the year, it is ABSOLUTELY CRITICAL you redetermine your withholdings and filing status at the beginning of the new year.  Failing to do so will cause you to owe and be open to collections.

If you are married, file jointly and only your spouse owes the IRS, it is important to attach an Injured Spouse Allocation (Form 8379) to your return.

If you are losing your refunds to your spouse’s tax liability prior to filing joint returns, you can still file jointly but use the injured spouse allocation.  This permits the IRS to calculate how much of the refund was generated by you, and pay it to you, rather than apply it to a debt that is not yours.