When can debt collectors snatch your tax refunds and what to do?

Have you filed your income tax returns? Expecting a refund? If so, then you’ve probably already planned how you’re going to use that money. Whether you plan to repair your home, pay off credit card bills, or buy a laptop is completely irrelevant if a debt collector takes away your tax refund. When that happens, all your financial plans go up in smoke.

And it happens.

But don’t lose heart! It’s not that bad. The Internal Revenue Service (IRS) allows debt collectors to intercept your tax refund only under special circumstances. You just need to know what those circumstances are, and avoid them.

When can a debt collection agency seize your federal tax refund?

A debt collection agency can seize your federal tax refund under the following circumstances:

  • You owe a huge amount on your federal student loans. In that case, the Department of Education can request a treasury offset for your student loan debt.
  • You have a tax debt. The IRS can apply your refund to past-due income tax you owe.
  • You are several months behind in child support payments. The federal Office of Child Support Enforcement can request a treasury offset against your tax refund.
  • You have filed income tax returns jointly and your spouse is in a situation where his/her tax refunds will be seized.

Other special circumstances

There are scenarios where the collection agency can’t snatch tax refunds, even if the above conditions apply. Some of them are:

  1. The taxpayer is less than 18 years old
  2. The taxpayer is dead
  3. The taxpayer lives in a nationally declared disaster area and seeks relief
  4. The taxpayer owes tax due to a tax-identity theft
  5. The taxpayer is in a specified combat zone
  6. The taxpayer has criminal charges against them and is under investigation
  7. There is a case of an injured spouse

What about the other debts

Debt collectors can’t seize your tax refunds for credit card debt, medical debt, auto loan debt or any other debt because the law provides for many other avenues to collect such debts. Most commonly, debt collectors file a lawsuit against the debtor and obtain a judgment against him. Then they can levy a bank account, garnish wages or impose a lien on a property. Because they have so many options, federal law does not allow them to lay claim to income tax returns. If you’ve been sued for a loan default, find out what to do.

If a collection agency threatens to seize your tax refund for the aforementioned debts, they are lying. You should file a complaint against the debt collector at the Federal Trade Commission or the Consumer Financial Protection Bureau. You can also post a review against the collection agency at the website of the Better Business Bureau.

Which debt collection agencies can collect on behalf of the IRS?

Usually, the IRS sends you a notice when they are trying to collect an income tax debt from you. However, sometimes the IRS hires collection agencies to collect tax debts, including Pioneer, Performant, Conserve, and CBE Group. Still, if you have doubts, contact the IRS for verification before making payments or providing any financial information.

Can a debt collections agency intercept your tax refund in bankruptcy?

A debt collection agency can’t seize your tax refund when you’re going through bankruptcy. However, the bankruptcy trustee can award your tax refund to your creditors.

If you have filed Chapter 13 bankruptcy, the trustee can request that the court intercept your tax refund and use it to pay off your debt. In chapter 7 bankruptcy, it’s still possible to use your entire tax refund, but there are ways to protect some of it from seizure.

Are debt collectors obligated to inform you before snatching your refund?

Yes. They must inform you before they take the money. Just like the case of wage garnishment, collections agencies are required to inform you that they are going to seize your tax refund if you don’t pay your debt.

If a collections agency informs you that they are likely to snatch your tax refund, you can call the Treasury Offset Program's call center and get all the information you need to put up a fight. The best option is usually to pay your debts and avoid interception.

What to do if a debt collector takes your tax refund

In normal circumstances, debt collectors can’t intercept or garnish your income tax refund. Even when you default on credit cards, creditors and debt collectors can’t take your income tax refund from Uncle Sam directly. They can levy your bank account or garnish your wages, however. The good news is that it’s not that easy.

To garnish your wage or levy your bank account, debt collection agencies first need to file a lawsuit against you. If you lose the lawsuit, or simply don’t contest it, the court will issue a judgment against you. In that case, the collection agency can either garnish your wages or levy your bank account.

If the collection agency decides to levy your bank account, then anything in your bank account is subject to the levy, including your tax refund.

When a debt collector receives a writ of garnishment against you from the court, they get the opportunity to snatch a portion of your income to pay off debt. That includes your tax refund.

The court sends the writ of garnishment to the collection agency, and they have to follow the order diligently to extract money from you. Usually, they do.

Don't worry. All hope is not lost. There are two steps you can take when a debt collector intercepts your tax refund. Let’s discuss them a little bit.

  1. Check if the interception is within legal limits:

    Per federal law, only 25% of your disposable income can be garnished. If debt collectors garnish more than 25% of your income, then you can bring the matter at the local court. Government agencies, including the IRS also can withhold your tax refund without giving attention to percentages, but they still can’t break federal and state law when garnishing your wage. If they do, you can challenge the garnishment in court. Just make sure you have a copy of your bank statements and paychecks, along with any other evidence you have to support your claim.

  2. Apply for hardship relief:

    If you are unable to cover your basic family expenses due to tax refund garnishment, then try for hardship relief, which prevents the debt collection agencies, the IRS, or other government organizations from taking your tax refund.

How to apply for hardship relief:

Submit the IRS Form 433-A as soon as possible. Provide your current income and expenses on the form, and submit it with supporting documentation. Submit copies of bills and receipts to prove your expenses and verify your financial hardship.

What can you do before a collections agency intercepts your tax refund?

There are a few steps you can take to protect your tax refunds from collections agencies. Make sure you take these steps to prevent one from trying to intercept your income tax refund.

  1. File separate returns: When you file as married filing separately, the IRS can’t intercept your tax refund, even if your spouse is in a situation where he or she may lose theirs.
  2. Take advantage of the ‘injured spouse’ clause: Submit form 8379 to seek relief for an injured spouse. On this form, you can state that you have paid your share of tax and have nothing to do with your spouse’s situation.
    Don’t confuse the injured spouse clause with the innocent spouse relief clause. They are different. You can take advantage of the innocent spouse relief clause when your spouse is guilty of tax evasion, while the injured spouse clause applies if some of your tax refund would be intercepted. For example, the IRS says it applies to “separate past-due federal tax, state tax, child or spousal support, or federal non-tax debt (such as a student loan) owed by your spouse.”
  3. Pay off your student loans: You can’t escape from student loan debt. If you have federal student loan debt, take advantage of the various payment plans to pay them off. However, if your spouse owes on student loans, you may be able to find some relief with the injured spouse form, detailed above.
  4. Appeal to the court: If you can’t afford to make child support payments, file a motion with the court and ask that the amount you pay be lowered due to your financial hardship.
  5. Pay your taxes:Please take your tax burden seriously. Pay your taxes every year on time. If you can’t, take advantage of tax debt relief options provided by the IRS to pay your tax debt as quickly and inexpensively as possible.
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