While a collection agency can't take your income tax refund, there are instances when the government can. If you owe federal or state taxes from previous tax years you'll have to fork over your refund to cover those taxes. In addition, if you owe child support or student loans, the government can take your refund as well.
The term garnishment is usually reserved for earned income such as pay you receive from an employer. After winning a lawsuit in court and receiving a default judgment, a collection agency can garnish part of your paycheck. However, the debt collector can only garnish 25 percent of your disposable income or the amount by which your disposable income for the pay period exceeds 30 times the federal minimum wage of $7.25 an hour, whichever is less.
If you owe federal taxes from a previous year, the IRS is not going to issue you a refund. The same is true if you owe state taxes. The Department of Treasury's Financial Management Service, which issues tax refunds, is authorized by Congress to conduct the Treasury Offset Program. This means that if you owe "past-due child support, federal agency non-tax debts, state income tax obligations and certain unemployment debts owed to a state," the government can forward your refund to agency to whom you owe the debt.
Frozen Bank Account
Once a collection agency receives a default judgment, it can also freeze your bank account to force you to pay the debt. There is a chance that you won't have access to your tax refund if you have the money directly deposited into your bank account and the collection agency makes a request to have the account frozen. What makes a frozen bank account even more pernicious is that your bank does not have to notify you beforehand.
Know Your Rights
There's nothing you can do if you owe federal taxes, state taxes or other debt obligations deemed worthy of garnishment by the IRS. In addition, you might lose your refund if you had the money deposited to your bank and a collector freezes your account. However, you do have rights if this happens. Under the Exempt Income Protection Act, your bank account cannot be frozen if the balance is less than $2,500 and contains directly deposited exempt benefits such as Social Security, disability, child support payments and unemployment insurance or less than $1,740 and doesn't contain any exempt funds. You may have to go to court to vacate the default judgment in you had your refund deposited into a bank account that falls under the protection of the EIPA. Lastly, you have the right to negotiate a settlement with the creditor to prevent it from levying your bank account.
- TurboTax.Intuit: Can A Collection Agency Claim My Tax Refund?
- Internal Revenue Service: Refund Offsets: For Unpaid Child Support, And Certain Federal, State, and Unemployment Compensation Debts
- Neighborhood Economic Development Advocacy Project: Frozen Bank Accounts
- Department of Labor: Wages and Hours Worked: Wage Garnishment
- Can I Still Receive My Tax Refund if I Owe Sallie Mae Loans?
- How Long Can an Applied Refund Be Left With the IRS?
- What Can I Do About Government Garnishment?
- Maine Laws Regarding Garnishment of Wages
- What Could Cause You Not to Get an Income Tax Refund?
- Does the IRS Apply Refunds Due to the Money Owed From Previous Years?
- Negative Effects of Garnishment
- How to Avoid Bank Account Garnishments by a Debt Collector