What happens when you have a balance owed to the IRS with your tax return, but you’re supposed to get a refund from the state you live in?

Can you simply apply the state refund to reduce the IRS balance owed?

I get this question a lot, including yesterday.

A client owed the IRS about $2,500, but they were scheduled to receive a refund of about $900 from the state they live in.

In their mind, they only needed to submit a payment of $1,600 to the IRS, since they could just apply their state refund to their IRS balance owed.

Unfortunately, this is not the way it works.

The IRS and your state agency are not the same.

It’s like trying to use a potential credit from your grocery at the gas station.

You’ll need to submit your entire balance owed, while your refund will be processed by the separate agency and refunded once it is processed.