Just because a creditor is garnishing your wages doesn't mean they are automatically entitled to your tax refund. In fact, very few creditors have permission to pluck your refund from IRS coffers. If you think you might have to give up your refund to pay outstanding debt, find out before your refund is seized. Knowing in advance can help you prepare your finances for the blow, and you might even be able to hang onto your refund if you play your cards right.
TL;DR (Too Long; Didn't Read)
Only government agencies can directly intercept your tax refund. Examples of such debt might include back child support, student loans and prior tax debts. However, other creditors may place a bank account levy.
Wage Garnishment Facts
If a creditor threatens to garnish your wages, it means that your employer will divert some of what you earn to pay your debts. The Consumer Credit Protection Act limits creditors to 25 percent of your disposable income, or any income more than 30 times the federal minimum wage, whichever is greater. The law also defines who can garnish your wages and when.
Most creditors need a court order. However, the U.S. Department of Education and its collections agencies can garnish your wages for student loan debt without a court order, provided they give you notice 30 days prior to the first garnishment.
The IRS and state and local departments of revenue don't have to get a court order before they can garnish your wages, but they must send you a letter with an overview of the garnishment details before they proceed. If you're ordered to pay child support or alimony, your wages will be garnished automatically.
Tax Refund Offset
If you qualify for a tax refund offset, the IRS holds all or a portion of that year's refund total to pay a debt. Technically and legally, a tax refund offset and wage garnishment don't have anything to do with one another. Just because your wages are garnished doesn't mean your tax refund will be seized and vice versa. However, if your wages are being garnished for a debt you owe to the government, you probably won't see all of your tax refund.
The only creditors permitted to intercept your tax refund are government agencies, including the U.S. Department of Education, state departments of revenue and the IRS. If your student loans are in default or you owe back taxes, these agencies could intercept your refund.
Child support, however, works a bit differently. While courts can seize your tax refund to pay child support, this is only true in the case of back child support. Your tax refund isn't automatically garnished to pay your child support, as are your wages.
Bank Account Levy
Creditors not associated with the government, including credit card companies and private lenders, can't take your tax check, but all bets are off if you have it direct-deposited. If you don't pay your bills, your creditors can take you to court and win a judgment, which means the court agrees with your creditors that you owe money. Once they have a judgment, your creditors have the legal right to force you to pay by levying, or taking money out of your bank account.
If you have your tax refund direct-deposited into your bank account and your creditors have placed a levy against it, the cash could be in their hands before you ever lay eyes on it.
Avoiding Garnishments and Offsets
In most cases, wage garnishment and tax refund offsets don't happen right away. Creditors will try to get their cash by other means first. They'll probably start by sending you a lot of mail and calling you daily. They might hand you over to a collection agency.
Talk to the creditors and collection agencies; ask for lower interest rates, reduced payments or more time to pay. If you have some cash, ask your creditors if they'll settle. You'll pay them a large chunk of change, but less than you owe now, and they'll call it even -- debt paid in full.
If none of these ideas works, the notice you receive about the garnishment or offset might offer you another way out. For example, the U.S. Department of Education offers you the chance to enter into a voluntary repayment plan before it takes your tax check.
- Department of Labor: Wages and Hours Worked – Wage Garnishment
- Nolo: Who Can Garnish My Wages?
- Nolo: If Your Wages Are Garnished - Your Rights
- Nolo: Defaulting on Your Student Loans: Tax Refund and Social Security Intercepts
- IRS: Internal Revenue Manual – Refund Offsets
- IRS: Topic Number 203 - Reduced Refund
Miranda Morley is an educator, business consultant and owner of a copywriting/social-media management company. Her work has been featured in the "Boston Literary Magazine," "Subversify Magazine" and "American Builder's Quarterly." Morley has a B.A. in English, political science and international relations. She is completing her M.A. in rhetoric and composition from Purdue University Calumet.