Can the IRS intercept some of your payments to force you to pay off the debts you owe? For example, what if the IRS intercepted a tax refund to cater to your federal student loan debts?
If you are struggling with student loans and debt collectors are knocking on your doorstep, it would be wise to learn about the IRS debt collection process so that it doesn’t work against you.
Whether a debt collector can intercept your income tax refund depends on who the debt collector is. The federal government, and state agencies working with the federal government, can take all or part of your income tax refund. Private debt collectors cannot.
The IRS and Private Debt Collectors
Neither the IRS nor the Treasury Department will intercept your tax refund to pay for credit cards, car loans or mortgages. This holds true even if the debt has been sold to a debt collection agency or there’s a judgment against you.
If you owe money to the federal government due to unpaid taxes or legally obligated debts, such as child support, the chances are good that your tax refund can be intercepted and used to satisfy these issues. However, private debt collectors cannot acquire your tax refund in this fashion.
The IRS can keep your tax refund if you owe federal taxes that are past due. Your state can have your federal refund intercepted to pay past due state taxes and to collect unpaid child support. These are known as offsets.
Additionally, your tax refund can be kept to pay other federal debts that are not tax-related. These debts are called federal agency nontax debts. They include federally guaranteed student loans and unemployment benefits that were fraudulently obtained.
Read More: Where's My Tax Refund: An Easy Guide
Tax Intercept Exceptions
If you’re married, and you and your spouse file joint tax returns, your entire refund can be used to pay debts that belong to one of you. If you’re in a situation where this could happen, filing separate returns is a good idea.
Alternatively, the spouse who is not legally responsible for the debt can file a Form 8379, Injured Spouse Allocation, to try to get their part of the refund. Form 8379 can be sent with your joint tax return, or you can file it separately later.
This may seem like splitting hairs, but the IRS can also hold your refund. Holding differs from intercepting because, at least initially, they don’t apply the money to anything. For example, they may hold your refund if your spouse has filed a Form 8379 and it’s still in process. They may also hold your refund if they’re still reviewing your return.
IRS Private Debt Collector Issues
When it comes to collecting taxes, the IRS is often thought of as the U.S.’s tax collection agency. While the IRS is responsible for collecting taxes, they also contract with four private collection agencies to go after old unpaid tax debts. Reviews are not mixed on how this is going.
The Taxpayer Advocate Service is an independent organization but it operates within the IRS. They’re charged with protecting taxpayers’ rights. In spring 2018, they ordered the IRS to stop handing over debts to private collection agencies for taxpayers whose incomes are less than 250 percent of the federal poverty level.
The IRS responded by agreeing that it can do more to identify taxpayers experiencing hardship and exempts them from further collection attempts. But as of 2021, the IRS still uses private debt collection agencies to collect outstanding inactive tax debts.
IRS Private Debt Collector Beginnings
IRS private debt collectors are not new. Programs that use private collection agencies to collect tax debts has been tried in the past and scrapped. The IRS’s current program was implemented in 2017.
They picked four collections agencies to contact taxpayers about accounts that they’re no longer actively working on. The idea was to try to get some of the estimated $920 million in back taxes that the IRS had classified as uncollectible. The income was supposed to pay for the program and then some. But it’s hasn’t been working that way.
IRS Private Debt Collector Challenges
For starters, the collection agencies have to get over the hurdle that the IRS has been telling the public for years that they will never contact them by phone. They’ve said, if you receive a call from someone saying they’re from the IRS, it’s a scam, hang up. While the collection agencies are not the IRS, they do represent the IRS. So getting a call from one of them could be confusing.
The IRS is addressing this problem by sending taxpayers written notice that their account is being transferred to a private collection agency. The collection agency then sends a notice of their own to confirm they’ve got your account.
When they call, these agencies are supposed to identify themselves as contractors working for the IRS to collect a tax debt. An IRS private debt collector will not ask for payment by a prepaid debit card, an iTunes card or a gift card. They will direct you to the IRS website to make an electronic payment or tell you to mail a check made out to the U.S. Treasury.
- The Guardian: ‘Killing the middle class’: millions in US brace for student loan payments after Covid pause
- FTC.Gov: Debt Collection FAQs
- IRS.Gov: Topic No. 203 Reduced Refund
- IRS.Gov: Form 8379
- IRS.Gov: Private Debt Collection – Accounts Assigned to Private Collection Agencies
- The Washington Post: IRS outsources debt collection to private firms, and the poor feel the sting, watchdog charges
- Business Insider: The IRS just blew millions of dollars on a project that already failed before
- IRS.Gov: Private Debt Collection Frequently Asked Questions
LeDona Withaar has over 20 years’ experience as a securities industry professional and finance manager. She was an auditor for the National Association of Securities Dealers, a compliance manager for UNX, Inc. and a securities compliance specialist at Capital Group. She has an MBA from Simmons College in Boston, Massachusetts and a BA from Mills College in Oakland, California. She has done volunteer work in corporate development for nonprofit organizations such as the Boston Symphony Orchestra. She currently owns and operates her own small business in addition to writing for business and financial publications such as Budgeting the Nest, Zacks and PocketSense.