IRS tax returns 2026: 5 reasons why taxpayers may get less refund and how to avoid them

Millions of Americans are expecting large tax refunds this year. However, not everyone might see a big payout from the IRS. Here's why

President Donald Trump and House Speaker Mike Johnson have called the 2025 tax year refunds "historic" and predicted that they will be significantly substantial for millions of people.

Millions of Americans are expecting large tax refunds this year. However, not everyone might see a big payout from the IRS. Here's why (Pexel)

According to Internal Revenue Service (IRS) data, the average refund for this filing season will be approximately $4,000 this year, up from $3,167 in 2025, Johnson revealed last month.

Millions of Americans are expecting large tax refunds this year due to new legislation and large deductions. However, not everyone might see a big payout from the IRS.

Large tax refunds are always preferable, but they are never free.

In essence, refunds are the government giving back the money that Americans made over the year from interest-free loans.

Here are 5 reasons why you might receive a smaller tax refund.

Key reasons tax refunds may be smaller in 2026

IRS refund offsets for debts

Refunds can be automatically reduced to settle certain debts you owe to government agencies or, in joint return situations, taxes owed by a spouse. This triggers an offset notice.

A "reduced refund" can happen if a portion of your refund is offset, or redirected, to settle certain outstanding bills, including child support, student loans, or federal agency obligations, per official IRS guidelines on Tax Topic 203.

The offset notice outlines how much was taken and which agency received it.

Capital gains and asset sales

Your taxable income increases when you sell a personal asset like a house or a boat. Similarly, if you have certain stocks and cryptocurrency that you have sold in the market and have gained significant capital from it can push you into a higher tax bracket.

This will show up as large gains if you have not set aside funds for estimated payments, leading to reduced refunds or taxes due when you file.

Short-staffed IRS

According to a Treasury inspector assessment, the Internal Revenue Service was understaffed and overburdened when the 2026 filing season began, raising the possibility of delays and issues for millions of taxpayers.

While this does not entirely mean smaller tx refund, however, delays and service issues can lead to delays if returns are processed more slowly because the agency views them as complicated.

Ageing out of Child Tax credits

The Child Tax Credit remains a major refund driver for families. However, once a child turns 17 or older, the enhanced credit of $2,200 per child drops significantly often to around $500.

This change alone can trim your expected refund substantially if multiple dependents age out in the tax year.

Higher income and multiple jobs

If you receive a raise, a bonus or have started a gig company side hustle in 2025, you will move up into a higher tax bracket.

The IRS might have collected less tax than you actually owe if you didn't make anticipated tax payments or change your W-4 withholding allowances. This would have reduced your refund or made it a balance due.

Moreover, when taxpayers work more than one job, they frequently find themselves in a situation where each employer withholds taxes, which will project as the employee's only income source.

As a result, less money may be reimbursed at tax time due to insufficient total withholding across all occupations.