For many taxpayers, there’s a silver lining to the hassle of filing taxes: the refund. If you’re expecting a refund, it’s tough to keep yourself from fantasizing about all the ways you’ll spend your windfall. Before you start shopping for that vintage guitar you always coveted or trying on designer-label evening gowns, you’d better take it easy. Although you can expect to receive your refund if you calculated your return properly in most cases, the Internal Revenue Service can hold it if it deems you haven’t been playing by the rules.
TL;DR (Too Long; Didn't Read)
The IRS may hold your tax refund due to prior tax issues, certain unpaid bills, late tax payments or bankruptcy.
You're Too Late
While you’ll earn interest on your refund as it sits in the IRS’ coffers if you file late, you can’t put off claiming that return forever. In addition to late-filing penalties that incur when you dawdle, the IRS only allows procrastinators a window in which to claim back taxes. But wait longer than three years, and the statute of limitations expires on your refund. It becomes the property of Uncle Sam – you snooze, you lose.
You Have Tax Issues
Tax refunds only go to taxpayers who keep up their commitments. If you skipped a year and didn’t file a return in the past, don’t expect the IRS to overlook it. The agency will hold your return if you haven’t filed in past years.
Don’t think the bean counters at the IRS are going to overlook the fact that you still have an unpaid tax bill sitting around on the books and send you a refund this year. If you still owe a balance from prior years, prepare yourself to receive a letter that your refund has been applied toward your outstanding balance.
You're Behind on Bills
If you have bill collectors hounding you, you can at least rest easy that the IRS won’t hand your check over to most creditors as garnishment. While your credit-card bills are off limits to refund garnishment, the IRS doesn’t take so kindly to unpaid child support payments, and if you’re behind on those, it applies your tax return to your court-ordered obligations. If you’re delinquent in paying off federally subsidized student loans, the IRS will also apply your refund directly to your loan balance.
You're In Bankruptcy
While most creditors can’t garnish a tax refund, everything changes drastically when you file bankruptcy. The court that administers your bankruptcy filing may decide to intervene and seize your tax refund to help sort out the situation with your unpaid creditors. If you’re in Chapter 13 bankruptcy, the court can request the funds be directed to your reorganization, and those in Chapter 7 bankruptcy may lose their refund entirely. If your bankruptcy’s been discharged before your file your return, you can expect to receive your refund as normal.
Wilhelm Schnotz has worked as a freelance writer since 1998, covering arts and entertainment, culture and financial stories for a variety of consumer publications. His work has appeared in dozens of print titles, including "TV Guide" and "The Dallas Observer." Schnotz holds a Bachelor of Arts in journalism from Colorado State University.