Only in rare cases will the IRS turn your refund over to a creditor. Unless your debt is for child support, payments to government agencies, taxes or defaulted student loans, the IRS sends your refund directly to you. However, your creditor can attempt to freeze and levy your back accounts after you deposit your tax refund check.
Judgment Collections
Most creditors, or their collection agencies, must take you to court before using aggressive debt collection tactics such as the seizure of assets or wage garnishments. Your creditor must prove to the court that you owe the debt, and only after a judge decides the case in your creditor's favor can it attempt to levy your bank accounts or garnish your wages. These creditors cannot seize your federal tax return before you receive it.
Exceptions
The IRS does cooperate with government agencies by "offsetting," or paying, tax refunds directly to these agencies for the purpose of debt collection. If you have defaulted on your student loan or owe back taxes or child support, the agency responsible for collecting your debt can contact the Department of Treasury's Financial Management Service and make a claim against your tax refund. These agencies can request the offsetting of your funds each year until you pay off your debt.
Chapter 13 Bankruptcy
Some Chapter 13 bankruptcy trustees insist that debtors turn over their tax refunds. The trustee then uses these funds to compensate the debtor's creditors. Policies differ by jurisdiction, so if you are in Chapter 13, ask your trustee about his policy.
Bank Levies
Once you deposit your federal tax refund into a bank account, a judgment creditor can levy those funds and apply them to your debt. You should receive a notice of any attempts to levy your bank accounts from either your creditor or the court with jurisdiction over your judgment. If the levies cause you significant financial hardship, you can go to court and ask the judge to reduce the amount of money your creditor can seize.
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