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Created By : Stacy B Miller
On 27th May,19
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Worried that a debt collector will snatch your precious tax reward for an unpaid bill? Well, honestly speaking, if a debt collector takes your tax refund, then there is not much you can do about it. But at the same time, I need to tell you one fact. It’s a rare or exceptional case. Usually, debt collection agencies can’t take your federal tax refund from the IRS straightaway.

Typically, the federal government can withhold your income tax refund or give it to creditors only for 4 types of debts, and these are:

  • Past due state income tax
  • Past due federal tax
  • Child support payments
  • Past due federal student loans

What does this mean?

This actually implies that 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. Here are a few scenarios when debt collectors can snatch 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.

What to do if a debt collector takes your tax refund

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 the copy of your bank statements and paychecks.

2. Apply for tax refund hardship:

If you’re 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.

How to protect your tax refund from debt collectors

The non-government agencies can’t garnish your income tax refund before it is released. However, they can take your refund once it’s disbursed. When a levy is imposed on your bank account due to a default judgment, all funds in your account become instantly accessible. You can protect your tax refund by requesting the IRS to send you the refund via check or prepaid visa. This way you can safeguard your tax refund before debt collectors get a chance to seize them.

Last Updated on: Mon, 27 May 2019