If you have outstanding debts, you may worry that a debt collector could take your tax refund. Depending on the debt and to whom you owe it, you could have good cause to worry. This article will tell you when and how your tax refund might get taken to cover your debts. It will also tell you some ways to avoid this and direct you to helpful resources.
Are you expecting a state or federal tax refund but have past due debts? If so, you may wonder whether debt collection agencies will be able to intercept your refund. Technically, the answer is “yes.” Creditors can garnish your tax refund in certain circumstances. The details depend on the laws of your state. But there is good news:
Table of contents:
- Under federal law, only federal and state agencies can directly intercept your income tax refund.
- Private creditors can only take your tax refund if they sue and are granted a civil judgment against you.
Who may intercept your state and federal income tax refund? When may they do so? Very specific rules determine this. Your refund can only be directly garnished at the government level for particular kinds of debt.
Treasury offset program
The United States Department of Treasury’s Bureau of Fiscal Service (BFS) issues IRS tax refunds. This agency’s Treasury Offset Program (TOP) determines when refunds may be garnished. The TOP allows federal or state agencies to garnish refunds to pay or offset certain types of debt. These debts include:
- past-due federal income tax
- past-due court-ordered spousal or child support payments
- outstanding non-tax debts to federal agencies other than the IRS
- past-due state income tax obligations
- unemployment compensation owed to a state due to fraud
It is important to note that the TOP is the only way your refund can be directly garnished. Private creditors, such as credit card companies, do not have direct access to your refund from the government. This is because the law provides several other avenues for them to collect debts. These are covered below.
TOP tax refund garnishment hierarchy
If your debt is one of those listed above, which creditors get first dibs? A governmental pecking order determines this. First, the Internal Revenue Service has priority for any unpaid federal income tax. Suppose, for example, that you still owe taxes for a prior year but are expecting a refund for the current year. In that case, the IRS will pay itself first by applying your current tax refund to your past-due balance.
So, the IRS first garnishes enough of your refund to satisfy your overdue tax debts. Once it’s done that, it makes any remaining refund money available to other agencies. These other agencies get to garnish your refund in the following order.
Past-due child support
Next in line to be offset after federal income taxes is past-due child support. Your state tax refund usually offsets these delinquent payments. But if you don’t have a state refund, your federal refund will be used. It will be directed to the appropriate state agency to pay overdue child support. The same applies to spousal support that is part of a child support order. The state has legal authority to continue garnishing tax refunds until all child support obligations have been paid.
Non-tax federal debts
Your overdue non-tax debts to the federal government will be covered next by your tax refund. These may include:
- federal student loans you have defaulted on
- overdue payments on FHA or HUD loans
- fines, fees, or penalties owed to any federal department
- repayment for fraudulently accepted overpayment of Social Security, disability benefits, or other federal insurance programs
Past-due state debts
The lowest on the totem pole with a claim to your tax refund are state governments. Garnishment orders for past-due state debts is the same as for child support payments. Your state tax refund is garnished first. However, if you are not due to receive a state tax refund, your federal refund can be intercepted. Outstanding state debts can include:
- overdue state income tax
- repayment for excess unemployment compensation
- repayment for excess welfare benefits
- fines, fees, or penalties owed to the state
Government agencies must notify you that they intend to intercept your refund. This requirement applies in all of the above situations. You should receive a notice by mail. The notice will include the name and contact information of the agency requesting the garnishment. It will also include the original amount of your refund and how much is being garnished. What if your obligations are less than your refund? In that case, you will receive what’s left of your refund.
When a collection agency can garnish your tax refund
Some state revenue services may allow state tax refund garnishment for debt collection. Most of the time, however, debt collectors must file a lawsuit against the debtor. If a debt collector does so and wins a judgment, it can then garnish wages. It can also levy a bank account or impose property liens.
Writ of garnishment
A writ of garnishment is a court order that allows a debt collector to garnish a portion of your earnings and other sources of income to pay off your debts. The “other sources of income” include your tax refunds. What sorts of creditors obtain and use such writs? Credit card companies, banks, and other financial institutions.
To obtain a writ of garnishment, a creditor must bring a civil suit against you and win. If you are deeply in debt, it may be possible to protect yourself against a judgment. How can you learn about your options? Consult a qualified financial advisor or bankruptcy attorney. You may be able to work out a repayment plan with your creditors and avoid garnishment. You also have the option to challenge a garnishment by raising an objection. The process of objecting to a writ of garnishment depends on your state laws and the type of debt you owe.
A debt collector may win a judgment of levy against your bank account. If that happens, all the funds in the account are subject to the levy, including your tax refund. So to protect your tax refund from debt collectors, do not direct deposit it into your bank account. Doing so would make it fair game for creditors.
Like government agencies, debt collection agencies must inform you before they take your money. So what can you do if you are notified that a debt collector plans to garnish your tax refund if you do not pay your debt? One thing you can do is contact the TOP call center to find out what your options are. The best way to hang onto your tax refund, of course, is to pay your debts on time.
When tax refunds cannot be seized
A collection agency cannot lawfully intercept income in certain circumstances. This is true regardless of the type of debt. Some situations where this is the case are:
- Taxpayers who are under the age of 18.
- When the taxpayer is deceased.
- The taxpayer lives in a nationally declared disaster area.
- Tax debt due to identity theft.
- The taxpayer is in a specified combat zone.
- The taxpayer has been charged with a crime and is under investigation.
There is another situation worth noting. This is where a debtor’s spouse is negatively affected (“injured”) by garnishment. This situation can occur when spouses file an income tax return jointly. The tax refund for such a return may get intercepted to pay the debts of a single spouse. The other spouse may, in that case, file for an “injured spouse allocation” of the refund. That spouse’s portion of the intercepted refund may then be reimbursed.
Is my tax refund protected if I file for bankruptcy?
What to do if your income tax refund is intercepted
Federal limits on wage garnishment
Federal law provides that a judgment creditor can garnish no more than the lesser of two amounts. The first amount is 25% of your disposable income. The second amount is how much your income exceeds 30 times the federal minimum wage.
In the case of a student loan in default, the U.S. Department of Education cannot garnish more than 15% of your disposable income. However, up to 50% of your disposable income can be garnished to pay child support, or in some cases, 60%. The percentages vary depending on who is collecting the debt and for what.
A government agency allowed to intercept your tax refund must ensure its garnishment does not exceed these limits. If it fails to do so, this is against the law, and you have the right to challenge the garnishment in court.
Financial hardship relief
Income or tax refund garnishment could cause you undue financial hardship. That is, it could leave you unable to cover basic expenses. If garnishment would have this effect in your case, you have the option of filing for hardship relief.
In the case of the IRS or other government agencies, you can claim that financial hardship makes the taxes uncollectible. You can also challenge the judgment of a consumer debt wage garnishment on the same grounds.
In either case, you must prove through financial records that you are in dire financial circumstances. This proof qualifies you for temporary abatement.
- Only the government has the ability to directly garnish your federal tax refund, and only for certain types of debt.
- Debt collectors must take you to court and win a legal judgment to garnish your income or income tax refund.
- There are federal and state limits to how much money can be garnished from you.
- If you’re in financial distress, you have options.
Are you tired of the IRS nipping at your heels and the feeling that you just can’t get ahead of your debt? Are you struggling to hold onto your tax return or pay off tax debt? If so, SuperMoney has a wealth of tools and information that can help. Use them to figure out what steps to take to achieve financial relief. A good start is to check out our list of the best tax relief companies.
Lara is a personal finance writer that enjoys helping people live a balanced life. She covers the essentials — think budgeting and healthcare — and the finer things in life, such as food, travel, and design. In her free time, she enjoys reading, climbing, and cooking up globe-spanning fare for her favorite people.