If you are expecting a tax refund and owe creditors you may be able to protect your tax refund, but it will depend on whether your debt is owed to a private creditor or to a federal government agency. Recently on our bankruptcy forum a user asked, “Does a creditor have access to my tax refunds?”
Federal Government and tax refunds
Income tax refunds can be garnished or offset by certain federal agencies. For example, the Treasury Offset Program (TOP), which is administered by the United States Department of Treasury’s Financial Management Service (FMS), can collect outstanding debts owed to the federal and state government agencies through a “tax intercept.” Within the tax intercept process the refund money is never sent to you but is collected and paid directly to the appropriate federal or state agency.
The most common debts collected through the tax intercepts are payments for tax debts, unemployment compensation over payments, federal student loan debts, and child support payments.
Who can garnish my tax refunds first?
The Internal Revenue Service will be the first federal agency who will have access to your tax refund. Tax refunds are garnished by the IRS for all past due taxes before any money or overpayment is sent to another agency or refunded to you.
Next, overdue child support orders will be deducted from any remaining tax refund. In fact, child support payment obligations can be deducted each year from tax refunds until the debt is paid.
After IRS tax debt and child support obligations have been paid, if you still have a refund available, other nontax federal debts can be deducted from the refund. For example, if you owe money for federal student loans the Department of Education will have access to your refund and may take all necessary funds to repay student loan debt.
Finally, state government agencies may have access to any tax refunds for debts owed to the state (i.e. unemployment compensation).
Challenging a tax intercept?
If you do not believe you owe money to the federal government you will need to appeal the tax intercept and schedule a hearing. Details for the process should be sent to you as well as a deadline for the appeal. If you fail to challenge the intercept or you do not prove your case at the hearing you will be required to repay the debt.
Consider, however, there is a statute of limitations for collecting certain types of federal debts. Judgments for tax debts which are older than 10 years may be challenged (in some cases). Talk to a private tax attorney if you have questions about your tax debt.
Private debt collection and tax refunds
If you owe debts to private collection agencies or creditors they will not be able to intercept your tax refund for debt collection payments. They may, however, be able to eventually file a judgment against you and levy your bank accounts if you deposit the money into a checking or savings account. State laws may vary.
Will filing bankruptcy stop a tax intercept?
So what do you do if you want to stop a tax intercept? Unfortunately, filing bankruptcy generally will not help. Bankruptcy will not stop a tax intercept for any debt which is not dischargeable in bankruptcy, including recent tax debt or child support payments.
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