If you pay more in tax than you owe, the Internal Revenue Service will send you a tax refund when you file your tax return. Although federal benefits are exempt from seizure by creditors that hold a judgment against you, your tax return doesn’t constitute a federal benefit and it is only partially exempt from seizure. Thus, in certain situations, a creditor may seize your tax refund in lieu of payment for your delinquent debt.
Judgment Creditors' Rights
A judgment creditor is any company or individual who previously won a debt-collection lawsuit against you. Creditors lacking a court judgment do not have the right to seize payment from you involuntarily. Judgment creditors, however, can seize your income from you before you ever receive it via a wage garnishment.
Wage garnishments only apply to employers. Because your tax refund from the IRS does not constitute wages, a judgment creditor cannot order the IRS to direct all or a portion of the funds toward paying your judgment. Thus, if your judgment creditor is a commercial agency, such as a credit card company, you will receive the full tax refund the IRS owes you. Your creditor cannot use garnishment to seize your tax refund.
Judgment creditors are not restricted to collecting debts through wage garnishment. These creditors can also force you to pay your debt with a bank levy. Through a bank levy, your creditor forces your bank to place a hold on your checking or savings account and subsequently turn over the funds both accounts contain to the creditor. If you deposited your tax refund check into your bank account, your creditor can seize it from you during a levy.
The federal government enjoys seizure rights that commercial creditors do not – including the right to seize your tax return before you receive it. If you owe a debt to any government agency, the agency will intercept your tax refund via a process known as “tax refund offset.” The IRS does not need a judgment against you to offset your tax refund if you owe back tax debt. Other government departments, however, may seek a judgment before withholding your tax refund.
You have the right to appeal a tax refund offset with the IRS. The appeal process differs depending on the reason for the offset. For example, if your tax refund was withheld due to a defaulted student loan, the U.S. Department of Education will send you advance notice that it intends to withhold all or a portion of your tax refund as payment. You then have 65 days to contest the withholding. You must have grounds for disputing the tax refund offset – such as that you already repaid your loan or recently filed for bankruptcy.
If your spouse owes an unpaid debt to the government and you file a joint tax return, the government agency your spouse owes can offset your tax refund in its entirety. Should this occur, you can file IRS Form 8379 – Injured Spouse Allocation – in an effort to have your portion of the refund returned to you.