Can a Creditor Garnish Tax Refunds?

You may rely on your income tax refund each year to pay your expenses or debts. A creditor may threaten to take your income tax refund for a past-due debt. While creditors have no right to do so, you should know that government agencies may divert your tax refund to pay certain types of your debts.

Student Loans

The U.S. Department of Education has a right to intercept your income tax refunds to apply the money to your past-due student loans. A student loan goes in default if not paid for 270 to 360 days. The department may withhold all or part of your tax refund to pay the student loan debt. However, if the offset creates a severe hardship for you, such as inability to pay high medical bills or a threat of eviction from home, you may appeal and receive a refund.

Past-Due Taxes

If you have failed to pay individual federal, state or property taxes (if you own a home) in the past 10 years, the Internal Revenue Service may garnish all or part of your federal and state income tax refund to pay down the balance. It may also levy other assets, such as your wages, your bank accounts and other types of income you may receive. The IRS does not need to file a lawsuit against you; it notifies you by sending a levy notice at least 30 days before the levy.

Past-Due Child Support

If you owe overdue child support, a child support enforcement agency can seek a court order to garnish your wages and income tax refunds. Most states have special child support enforcement programs designed to intercept tax refunds of parents who are past due on their payments. An individual receives a notice when such agency places him on a list. He has right to appeal it in court.

Overpayment of Benefits

The government may take all or part of your tax refund to recover the overpayment of benefits, such as Social Security, public assistance or unemployment compensation. If you failed to notify the agency about your working status and continued to receive the money, it is considered fraud. The government can garnish your wages and take your tax refunds to repay the balance you owe. You may pay off the balance in full or negotiate a repayment plan with the agency to prevent it from taking your tax refund.