Why the IRS Took Your State Tax Refund: The State Income Tax Levy Program

You owe the IRS. You file your state return expecting a refund, and the state sends you a letter saying the refund went to the IRS. You might assume this is the same thing as the federal refund offsets you have heard about. It is not.

Federal refund offsets under IRC 6402 move money from a federal refund to a debt. A state refund is not a federal overpayment, so the IRS collects it a different way: by levy. The Internal Revenue Manual calls this the State Income Tax Levy Program, or SITLP, and covers it in IRM 5.19.9.3.

How SITLP works

SITLP is one of the IRS's automated levy programs. Each participating state has an agreement with the IRS. The IRS sends the states levy files, and when a state is about to issue a refund to someone on the file, it sends the refund to the IRS instead. According to IRM 5.19.9.3, production starts in mid-January and runs until mid-December, and some states receive levy files weekly.

The IRM says that, of the 42 jurisdictions with an income tax (counting the District of Columbia), these currently participate: Alabama, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, the District of Columbia, Georgia, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Nebraska, New Jersey, New Mexico, New York, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, Utah, Vermont, Virginia, West Virginia and Wisconsin.

Florida has no state income tax and is not on the list, so a Florida return will never produce a SITLP levy. The program matters to Floridians mainly when they file a return in one of the participating states.

Who gets selected

SITLP applies only to individual accounts, and only valid Social Security numbers are included. IRM 5.19.9.3.1 says a balance due module must have passed through a specific earlier collection status, or carry one of two specific account codes, before it can be included, and each included module gets an annual marker showing the levy has been served. In other words, SITLP picks up accounts that have already moved through the IRS notice stream, not brand-new balances.

IRM 5.19.9.3.2 lists exclusions. Your entire account is excluded if any balance due period shows:

• a pending or accepted offer in compromise;
• a military deferment or combat zone indicator;
• bankruptcy or litigation;
• a deceased taxpayer (one year after death);
• an active Criminal Investigation case;
• a pending installment agreement requested before the levy, or an approved installment agreement;
• an open disaster case;
• a Collection Due Process request not yet assigned to Appeals; or
• a duplicate return freeze.

And an individual period is excluded if it shows a pending amended return claim, an expired collection statute, an innocent spouse claim, or an injured spouse claim.

That list is a roadmap. A properly requested installment agreement or a pending offer takes you out of the program before the next refund season.

The notices: state first, then CP92

Participating states are required to mail you a notice saying your state refund was levied by the IRS and applied to a federal tax liability, with the amount and an IRS phone number, according to IRM 5.19.9.3.

Then the IRS sends its own notice. Normally a levy must be preceded by a Collection Due Process notice at least 30 days in advance under IRC 6330(a). State refund levies are an exception. IRC 6330(f)(2) says that when the IRS has served a levy on a state to collect from a state tax refund, the pre-levy rule does not apply, but you must be given the opportunity for a hearing within a reasonable period after the levy.

IRM 5.19.9.3.4 describes the resulting notice, CP92, titled Seizure of your state tax refund and notice of your right to a hearing. It is sent by certified mail and includes Publication 594, Publication 1660, Form 12153 for requesting a hearing, and a return envelope. On joint liabilities, each spouse gets a separate CP92. If you already received a CDP notice for those tax periods, the IRS does not issue another one unless there was a new assessment.

Using the post-levy hearing

The CP92 hearing right is a real Collection Due Process hearing, conducted after the fact. Under IRC 6330(c), you can raise collection alternatives such as an installment agreement or offer, spousal defenses, challenges to the appropriateness of collection, and in some cases the underlying liability if you did not have a prior opportunity to dispute it. A determination can be taken to the Tax Court within 30 days under IRC 6330(d)(1).

Even if you do not want to contest the levy, the hearing can be the forum to set up the resolution that keeps the next state refund from being taken.

Timing quirks and double collection

IRM 5.19.9.3.5 says it generally takes up to four weeks from the time a state receives the levy file until the proceeds are applied, and IRM 5.19.9.3.6 says payments may take four to six weeks to post. That lag causes a common filing-season problem: the federal refund is offset and pays the balance in full, and then the state refund levy arrives.

The IRM tells IRS employees how to handle that: the balance was due when the levy was issued, the payment had not yet posted, and when the state levy payment arrives it will be refunded to the taxpayer as long as there are no other outstanding balances. If you see this happen, the extra money should come back to you. If it has not posted within six weeks, the IRM directs staff to escalate internally.

Non-liable spouses: wrongful levy, not injured spouse

If you filed a joint state return with a spouse who owes the IRS and you do not, the state refund levy may take money that is partly yours. IRM 5.19.9.3.7.1 says a non-liable spouse in that position is not an injured spouse. You are a third party claiming the IRS levied your property, and your remedy is an administrative claim for return of wrongfully levied property under IRC 6343(b) and Treasury Regulation 301.6343-2(b).

The IRM lists what the claim needs: the state offset notice if available and the amount requested, copies of the state and federal returns for the year, any information from the state agency that bears on the claim, and Form 8379 and Form 8379-A or just the worksheet, which the IRM says can be used as a guide to the share of the state refund attributable to each spouse. The burden of proof is on the non-liable spouse.

A wrongful levy suit under IRC 7426 is also available. The IRM summarizes the timing under IRC 6532(c): if you file an administrative claim, you have the shorter of 12 months from the claim or six months from its disallowance to sue; if no claim is filed, suit must be brought within two years from the levy. The general rules for getting levied property returned apply here too.

SITLP and passport certification

One more connection. A levy is one of the triggers for passport certification. IRM 5.19.25.6 says that for passport purposes, a state income tax refund levy is not recognized as a levy until the CDP notice for it has been provided. Once it has, a SITLP levy can complete the certification test if your assessed balance is over the threshold, which is $66,000 for 2026. The full test is in what counts as seriously delinquent tax debt.

The firm's main site has a broader overview of IRS levies if your state refund is only one of several things the IRS is reaching for. For most people, though, SITLP is a once-a-year event, and the fix is the same as for every automated levy: move the account into a status the program excludes, and the program stops selecting you.