Can Unemployment Seize Your Tax Refund? Overpayment and the IRS in 2023

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“Can Unemployment Seize Your Tax Refund? Overpayment and the IRS in 2023” is a question that has been on the minds of many, especially in the wake of the economic turmoil caused by the global pandemic. As unemployment remains a pressing issue affecting millions of Americans, it’s crucial to understand how overpayments from unemployment benefits can affect their taxes. The Internal Revenue Service (IRS) is increasing scrutiny on individuals who owe overpayments, which may cause many to wonder whether their tax refund is at risk.

Can Unemployment Seize Your Tax Refund? Overpayment and the IRS in 2023

Understanding Overpayments

If you were disbursed more than the benefits owed by your state’s jobless benefit program or if there was a mistake made in processing your claim, then you have received an ‘overpayment.’ Most states will require that you pay back these funds. While it might seem like just another bill to pay with no real consequences, receiving an overpayment also carries potential legal ramifications. States are required by law to report all participants who receive uncleared overpayments from any public trust fund, including the Unemployment Insurance Trust Fund.

The Impact of Overpayments on Tax Refunds

If you received an overpayment during a previous taxation year and outstanding balances remain after December 31st, all or a portion of your federal income tax refunds can be diverted toward repayment without warning. Furthermore, interest may accrue on unpaid balances while penalties could be assessed for late payments. However, a provision included within the American Rescue Plan Act signed into effect in March 2021 temporarily suspends actions against taxpayers’ refunds towards paying off such debts until September 6th. The changes only apply through September 6th though, so individuals should still address any due payments as soon as possible upon receipt since the extension of deadlines remains unclear.

Tips For Avoiding Tax Penalties

To avoid any potential tax penalties, follow these tips:

  • Check your unemployment benefits and make sure you understand how they work.
  • Keep track of overpayments and repay them as soon as possible or seek legal guidance for assistance.
  • Consider asking for an installment agreement if you cannot pay all of it back immediately.
  • Make sure that all tax returns are filed on time to prevent late filing fees.

The Treasury Offset Program (TOP)

The Department of Treasury’s Bureau of the Fiscal Service (BFS) issues IRS tax refunds and Congress authorizes BFS to conduct the Treasury Offset Program (TOP). Through the TOP program, BFS may reduce your refund (overpayment) and offset it to pay:

  • Past-due child support;
  • Federal agency nontax debts;
  • State income tax obligations; or
  • Certain unemployment compensation debts owed to a state (generally, these are debts for (1) compensation paid due to fraud, or (2) contributions owing to a state fund that weren’t paid).

Injured Spouse Claim

If you filed a joint return and you’re not responsible for the debt that is subject to offset because it is owed by your spouse, you’re entitled to request your portion of the refund back from the IRS. You may file a claim for this amount by filing Form 8379, Injured Spouse Allocation.


Receiving an overpayment through unemployment can cause a lot of confusion and anxiety about whether your taxes are at risk. Remember that under certain circumstances the IRS may use your federal income tax refunds to offset past due amounts owed from uncleared payments received during previous taxation seasons. It is always best to address any issues related to overpayments and other debts sooner rather than later so that they don’t become costly problems down the line.