Federal income tax refunds are generally exempt from judgments and garnishments; however, there are a few exceptions. These generally apply to debts owed to government agencies, including state governments.
The treasury department has a division dedicated to debt collection, called the Treasury Offset Program, or TOP, that is run by the Treasury Department's debt management service. In order for the department to garnish your tax refund, the debt management service must receive a notification from the appropriate department with proof of the debt and the amount you owe, which it will then verify. Once that has been completed, TOP can set the amount required to be deducted from your income tax refund.
Eligible debts for tax return garnishment are debts owed to the government. Therefore, debts owed to private individuals or companies are not eligible for tax return offsets. Any government agency can apply to have your tax refund offset to help collect past due amounts. Common debts that are used for offsets include federal -- but not private -- student loans, past due child support, unemployment insurance overpayment, or fees and penalties resulting from those debts.
If you are married and filing a joint refund, and your federal tax refund is garnished to offset a debt belonging exclusively to your spouse, you may be eligible to receive part of the refund. You will have to fill out Form 8379, which can be submitted either with your income tax form or after you have received notification of garnishment of your federal tax refund. Be advised, however, that you can only receive the portion of the federal tax refund for which you individually qualified.
If you suspect you may have past due balances for government agencies, the best way to avoid garnishment of your federal tax refund is to contact those agencies prior to filing your tax return to make payment arrangements. In most cases, you do not have to pay the entire debt before your tax return is filed; setting up a payment plan is sufficient to avoid garnishment of your federal tax refund.
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