An individual who receives an over payment from a governmental agency generally does not have a legal claim to retain those funds. This general principle also applies to erroneous tax refunds.
The concept of keeping a ledger in the black also applies to tax obligations. If a taxpayer owes taxes for previous years, any refund issued in subsequent years might be applied against that outstanding debt. This liability generally applies only to the taxpayer. However, there is at least one notable exception.
Consider the example of the farm bill in 2008. A revision in that bill authorized the government to seize the tax refunds from adult children whose deceased parents had outstanding tax debts from up to ten years earlier.
As a tax law firm that has helped many clients involved in disputes with the IRS, we understand the importance of due process. Before the IRS can take collection efforts, the agency generally must provide written notice to the taxpayer, along with an opportunity to challenge the proposed assessment.
In this example, there were serious issues involving due process. In some cases, the children had not been aware of any debts until the IRS sent a letter, informing the recipient that it would be intercepting the federal and state ta refund to apply to a late parent’s debt.
Not surprisingly, the collection efforts prompted a lawsuit against the government in 2014. An article in the Washington Post prompted further public outcry. In response, the Treasury Department recently announced that it would halt the collection efforts, at least regarding Social Security over payments.
Source: Washington Post, “U.S. to stop seizing tax refunds to pay off old family debt,” Marc Fisher, May 12, 2017