Creditors can seek redress against you if you don’t pay your debts. Their options include seeking a judgment that gives them the ability to garnish your wages or levy your accounts. Garnishing your federal tax refund, however, is a much trickier proposition. Except in a few specific cases, creditors can’t access your refund directly, though it is fair game once it hits your bank account.
TL;DR (Too Long; Didn't Read)
There are some cases where your IRS refund can be garnished, but creditors will not have access to your refund immediately unless it is directly deposited into your bank account.
Debts Leading to Offsets
Unless your creditor is the IRS itself or another government agency, your federal tax refund should get to you intact. Private creditors that want to garnish your IRS refund have to go through the Department of the Treasury’s Financial Management Service to make their request. This body will garnish funds only for a narrow range of reasons, such as past-due federal or state income taxes, delinquent child support or student loan debt. In these cases, the IRS might intercept your refund to pay what you owe and then return any remaining portion of the refund to you.
Don't Contact the IRS
When the IRS garnishes some or all of your refund, it sends you a letter to alert you of the pending reduction in your check. If you dispute the garnishment and don’t think you owe the debt, don’t complain to the IRS. In its letter, the IRS tells you the original refund, the amount being garnished, the agency that will receive the payment and that agency’s contact information. Contact the listed agency to argue your case.
Taking It To Court
A creditor that wants to garnish your wages or levy your assets can’t do so without going to court. It must alert you that it intends to take legal action and give you a chance to mount a defense. Once the creditor gets a judgment against you, however -- which it can do relatively easily if you fail to contest the matter -- the creditor can get an order to garnish your wages or levy your bank account for the money. However, the creditor can’t directly seize your tax refund.
Deposited Funds Not Protected
While creditors such as collection agencies and credit card companies can’t intercept your federal tax refund, that doesn’t mean they won’t wind up with the money eventually. If you selected on your tax return to have the IRS direct-deposit the money into your bank account and your creditor got a judgment allowing it to seize assets from that account, it can do so once the funds get there. Unlike Social Security benefits or federal student loans, a tax refund loses its protection from creditors once deposited.