If you’ve ever filed your taxes expecting a refund, only to get a notice saying the IRS kept it, you’re not alone. One common reason this happens is because of tax debt resulting from underreported income. But when exactly does the IRS take your refund, and how does it work? Here’s what you need to know.
It starts when the IRS finds unreported income.
If the IRS finds that you didn’t report all your income such as freelance work, side gigs, or investment earnings, they’ll typically send a notice (such as a CP2000) showing how your income was underreported and how much additional tax you owe. If you don’t respond or disagree with the IRS’s findings, the agency will go ahead and assess the extra tax against you.
What happens after the tax is assessed?
Once the IRS officially assesses the tax and any penalties or interest, that balance becomes collectible debt. If you don’t pay it or arrange a payment plan, it remains on your account. The IRS can now start applying collection methods, and one of the first being to seize your future tax refunds to pay off the debt.
The IRS will automatically check for any outstanding debts when you file your next tax return. If you’re due a refund, and you still owe taxes from a prior year (including from underreported income), the IRS will offset your refund and apply it to your balance due. This typically happens during processing, that is, before the refund ever reaches your bank account or mailbox.
You’ll receive a Notice afterward.
If your refund is taken, you’ll usually get a Notice CP49, which explains how your refund was applied to your outstanding tax debt. It will list the original refund amount, how much was used to cover your debt, and whether any refund remains.
Important: This can happen more than once.
If your tax debt isn’t fully paid off with one year’s refund, the IRS can keep applying future refunds until the debt is cleared. That means year after year, your refunds can be withheld if the balance remains unpaid.
What are the ways to protect your tax refund?
To avoid losing future tax refunds, it’s important to deal with the tax debt as soon as possible. You can:
- Pay the amount due in full.
- Set up an installment agreement.
- Or work with a tax professional to explore other options like penalty abatement or an Offer in Compromise.
Final Thoughts
If you’ve underreported income and now face a tax debt, it’s crucial to take action before the IRS takes your refund to cover what you owe. Ignoring the debt won’t make it disappear. Instead, it can lead to lost refunds, additional penalties, and added stress every tax season. Addressing the issue early, either by paying the balance or setting up a payment plan, can help you regain peace of mind and protect your financial future.
At the Law Office of Steven N. Klitzner, we help taxpayers throughout Florida resolve IRS issues including debts caused by unreported income. Whether you’ve received a CP2000 notice or just found out your refund was seized, we can help you take control of the situation before it gets worse. Contact us today to schedule a free and confidential consultation. Let’s protect your refund and your future.
Steven N. Klitzner, P.A. is a tax attorney based in Miami, Florida. He has been practicing tax law for over 40 years, and currently holds a 10.0 rating by Avvo. Mr. Klitzner was appointed to the IRS Service Advisory Council in 2021 and is... 
