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Created By : Stacy B Miller
On 15th Jul,20
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When can debt collectors snatch your tax refunds and what to do?
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Have you filed your income tax returns? Are you expecting a refund? If so, then you must have already planned how to use that money. Whether you wish to repair your home, pay off credit card bills, buy a laptop, is completely irrelevant if a debt collector takes away your tax refund. All your financial plans can be ruined and you can be left with empty hands.

Don’t lose your heart. The situation is not that bad. The IRS allows debt collectors to intercept your tax refund only under special circumstances. All you need to do is know about those circumstances and try to avoid them as much as possible.

When can a CA seize your tax refunds?

A debt collection agency (CA) can seize your tax refunds under the following circumstances:

  • You owe a huge amount on your federal student loans. The Department of Education can request a treasury offset for your student loan debt.
  • You have a tax debt and the IRS can take it for past-due income tax payment.
  • You have not made child support payments for several months. The child support enforcement office can easily request for a treasury offset.
  • You have filed income tax returns jointly and your spouse is in a situation where his/her tax refunds will be seized.

Special circumstances

There are a few scenarios when the collection agency can’t snatch tax refunds for past-due tax. 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 him/her 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 debts, medical debts, auto loan debt or any other debt because there are many legal ways to collect them. Debt collectors can file a lawsuit against the debtor and obtain a judgment against him. They can levy a bank account, garnish wage or impose a lien on a property. So there are lots of options. Find out what to do when you’re sued for a loan default.

If a collection agency threatens to seize your tax refund for the aforementioned debts, then it’s a scam. You should file a complaint against the debt collector at FTC or the CFPB. You can also post a bad review against the collection agency at the BBB.

Which debt collection agencies can collect for the IRS?

Usually, IRS sends you a notice when they are trying to collect income tax debt from you. However, sometimes the IRS hires collection agencies for collecting tax debts. Some of them are Pioneer, Performant, Conserve, and CBE. Still, if you have doubts, contact the IRS for verification.

Can a CA intercept your tax refunds in bankruptcy?

A debt collection agency can’t seize your tax refunds when you’re going through bankruptcy. However, the bankruptcy trustee can make you lose your tax refunds.

If you have filed Chapter 13 bankruptcy, the trustee can request the court to intercept your tax refund and pay off your debts. In a Chapter 7 bankruptcy, you can lose your entire tax refund but can protect some of it from seizure.

Are debt collectors obligated to inform you?

Of course, they are obligated to inform you before taking away the money. Just like in case of wage garnishment, the CA is required to inform you that they are going to seize your tax refund if you don’t pay off your debts.

If a CA informs you that they are likely to snatch your tax refund, you can call Treasury Offset Program's call center and get all the required information. The best option is to pay off 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 or debt collectors can’t take your income tax refund from Uncle Sam directly. All they can do is levy your bank account or garnish your wage. But that is not so easy.

First, debt collection agencies need to file a lawsuit against you to garnish your wage or levy your bank account. If you don’t contest the credit card lawsuit or the collection agency wins it, then the court will issue a judgment against you. In that case, the collection agency can either garnish your wage or levy your bank account.

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

There is yet another situation when debt collectors can intercept your tax refund. When a debt collector receives a writ of garnishment against you from the court, he gets the opportunity to snatch a portion of your income to pay off debt, and this 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.

Don't worry. All hopes are not lost. There are 2 steps you can take when a debt collector intercepts your tax refund. Let’s discuss them a little bit.

  1. Check if limits have been crossed:

    As per the federal laws, only 25% of your disposable income can be garnished. If debt collectors garnish more than 25% of your income, then you can put up the matter at the local court. The government agencies and the IRS also can withhold your tax refund without giving attention to percentages. However, they can’t break the federal and state laws when garnishing your wage. If they do so, you can challenge the garnishment at the court. Just make sure you have a copy of your bank statements and paychecks.

  2. Apply for tax refund hardship:

    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/government organizations from taking your tax reward.

How to apply for the tax refund hardship

Submit the IRS Form 433-A as soon as possible. Mention your current wage and expenses in the form and submit it with valid documents to prove your financial hardship. Submit the copies of bills and receipts to prove your expenses.

What can you do before a CA intercepts your tax refund?

There are a few steps you can take to protect your tax refunds from the CA. Make sure you take these steps before any CA tries to intercept your income tax refund.

(i) File income tax returns separately:

When you file your returns 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 the refund.

(ii) Take advantage of ‘injured spouse’ clause:

Complete the form 8379 and submit it to get the injured spouse relief. In the form, you can state that you have paid your share of tax. You have nothing to do with your spouse’s situation.

Don’t get confused between the injured spouse clause and the innocent spouse relief clause. Both are different. You can take advantage of the innocent spouse relief clause when your spouse is guilty of tax evasion.

(iii) 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 get rid of them.

(iv) Appeal to the court:

If you can’t afford to make child support payments, file a motion in the court and request to change the amount due to your financial hardship.

(v) Pay your taxes:

Please take your tax seriously. Pay your tax every year on time. If you can’t, take advantage of the IRS tax debt relief options to pay back your debts.

Last Updated on: Wed, 15 Jul 2020