Is your tax refund smaller than expected this year? If you owe debts to the state or federal government, tax refund garnishment may be the answer. Tax refund garnishment is a method that the United States government uses to collect money from citizens on their unpaid debts. There are many ways that the government can recoup the money that you owe, including wage garnishment, property liens, and more, but tax refund garnishment is one of the most common.
Could tax refund garnishment be the cause of your small refund? If you’re looking to learn more about tax refund garnishment, you’ve come to the right place. We’ll cover the ins and outs of tax refund garnishment, how garnishment works, who can garnish your state or federal tax refunds, and how you can stop tax refund garnishment. Read on to learn all about tax refund garnishment, or use the links below to jump to a section of your choosing.
- What is Tax Refund Garnishment?
- How Does Tax Garnishment Work?
- Which Debts Can Take Your Tax Refund?
- Which Debts Cannot Take Your Tax Refund?
- How Can I Stop a Tax Refund Garnishment?
What is Tax Refund Garnishment?
Tax refund garnishment is a way that the US government offsets, or pays down, debts owed to it by U.S. citizens. There are a number of reasons you may fall into debt with the United States government. You may owe the government for unpaid child support, unpaid income tax, and more. If you qualify for a tax return and have outstanding debt, it’s very likely that your tax refund will be garnished, and the money taken will be used to offset your outstanding debts.
When it comes to both tax refunds and debts, the key figure at play is the US Department of Treasury. The Department of Treasury acts as the accountant and banker for the United States. Within it is a branch known as the Bureau of Fiscal Service. This bureau manages both federal payments and collections for the United States government. That means that it handles any money going out to citizens, as well as money coming in from citizens. It also manages what is known as the Treasury Offset Program (TOP). This is the program through which tax garnishment is enacted. Because both tax refunds and debts are managed under the Bureau of Fiscal Service, tax refund garnishment is a go-to way for the government to offset unpaid debts.
How Does Tax Garnishment Work?
Tax refund garnishment can take up to 3 months, from start to finish. There are a number of ways that tax refund garnishment can play out. If your outstanding debt is with the IRS, tax refund garnishment is pretty quick. The Department of Treasury will simply reconcile the money you owe them with the money they owe you, and send you the difference, along with your Notice of Income Tax Refund Used for Debts and a Garnishment Disclosure.
On the other hand, if you fall into a debt with another creditor that is eligible to garnish your tax refund, it can be much more complex. The first thing your creditor will do is bring your case to court. At this point, you will receive a notification that you may be subject to tax garnishment, known as the Request and Writ for Garnishment (Income Tax Refund/Credit). Your case will then go through court and, if a judgement is issued against you, the Department of Treasury will be notified to garnish your tax refund.
Once the Department of Treasury receives notice from the court, they are tasked with locating your income tax return and withholding the owed amount to pay the debt owed. At this point, you’ll receive both the Notice of Income Tax Refund Used for Debts and a Garnishment Disclosure. Eventually, you’ll receive any remaining portion of your tax refund.
What if My Spouse is in Debt?
If you are filing jointly with a spouse and the outstanding debt is only tied to one spouse, the IRS must first divide the income tax refund between the two spouses, and then garnish funds from only the portion of the refund that is tied to the spouse with debt, known as the obligated spouse.
Which Debts Can Take Your Tax Refund?
Tax refund garnishment is not an available tool for all creditors. As a general rule, the Department of Treasury can use the TOP to offset debts that are owed to state or federal agencies, but not simply any. There is a very specific list of debts that can be offset through tax refund garnishment. Those include:
- Federal income tax debts.
- Outstanding child support.
- Non-tax federal debts.
- State income tax debts.
- Unemployment compensation fund.
In addition, there’s a specific order in which the above creditors can make a claim to your tax refund. Let’s take a deep dive into each type of debt and how it may affect your income tax return.
Federal Income Tax Debts
The Internal Revenue Services, or IRS, is the branch of the Department of Treasury that manages tax law. Throughout the year, most US citizens pay estimated income taxes to the IRS. Come April, US citizens must submit their income information, along with the amount of taxes that they’ve already paid, and more, in a process that is colloquially known as “doing taxes”. This process is done for both the state and federal level. If a person has overestimated their income tax, the IRS will send them the overpayment in a tax refund. If they’ve underestimated their income taxes, and still owe money to the IRS, they’ll need to pay the owed amount promptly. If they fail to do so, they will fall into debt with the IRS.
First priority for tax refund garnishment goes to your federal income tax debt. Before any other type of debt may be collected upon using tax refund garnishment, your federal income tax debts must be paid in full. This is what’s known as IRS priority. Before the IRS will use your tax return to pay any other type of eligible debt, it will use the tax return to pay your federal income tax debt. If you have any outstanding tax payments from a prior tax year, those must be paid in full using tax refund garnishments before the IRS will release your tax refund to offset debts with any other agency.
Say, for instance, you owed $200 on your 2020 taxes. You were put on an IRS payment plan to settle your tax debt, but you never paid. Due to interest and IRS penalties, your $200 debt has now ballooned to $500. The next year, when you file your 2021 taxes, you’re notified that the IRS owes you $600 back on your 2021 taxes. Before the IRS will send you any of your tax return, they’ll deduct the $500 that you still owe on your 2020 taxes. You’ll receive a Notice of Income Tax Refund Used for Debts and a Garnishment Disclosure, along with your remaining $100 of your 2021 tax return.
Child Support Debt
Child support debts have second priority on your tax return, after federal income tax debt. If you’ve fallen into debt with your child support payments, tax refund garnishment is a common way that the Department of Treasury offsets that debt.
Because child support is managed through a wealth of different agencies, the process of offsetting your child support debt using your federal tax return is much more complex. First, the agency that oversees your child support order must submit a claim with the Bureau of Fiscal Service to your refund. At this point, you’ll receive a Pre-Offset Notice, which will include information about tax refund garnishment and the amount of debt you owe. Once the claim goes through court and has been deemed valid, the Bureau of Fiscal Services may garnish your current year’s tax refund and any future tax refunds until the debt is paid in full.
What to Do If You Can’t Pay Child Support
If you are unable to pay your child support, tax garnishment isn’t the only solution. There are plenty of reasons that a parent may fall behind in paying child support. Perhaps you’ve lost your job, or have an unexpected medical expense. Whatever the reason is that you are unable to make your child support payment, you have a few options for help.
First, you can contact the Office of Child Support Enforcement and enquire about their job training programs, to help you earn a better and more consistent wage. Additionally, most courts are willing to work with you to avoid garnishment. You, along with a lawyer, will need to prove in court that you deserve relief on your child support payments.
Once you’ve taken steps to resolve your child support debt, contact the Office of Child Support Enforcement and let them know that you are working on resolving your child support debt. They may help you set up a payment plan, waive interest on back child support, or negotiate a debt settlement. Any of these can be favorable to garnishing your tax refund.
Non-Tax Federal Debts
Next priority for tax refund garnishment goes to non-tax federal debts. There are many types of federal debts other than income tax, and many of these are eligible for tax refund garnishment.
Federal student loan debt is a common cause of tax refund garnishment for non-tax federal debts. If you have taken out a federal student loan and have been past due on payment for at least 270 days, your student loan will enter what is known as default. This means that you have not made payments as required. As soon as you default on your federal student loan, you may be subject to student loan garnishment.
If a federal student loan creditor wants the IRS to garnish your tax refund, they will first send you a tax offset notice. This is your opportunity to take action by disputing your garnishment, if you are eligible. If you do not take action, or your dispute is deemed invalid, the IRS will take your tax return to pay off your federal student loan.
Any other fine, fee, or penalty that is owed to a federal agency can result in tax refund garnishment. This may include late payments on HUD loans, direct loans, small business administration loans, and more.
State Income Tax Debts
Final priority for tax refund garnishment goes to state debts, like state income tax debt. Similarly to any federal income tax debts, the IRS can garnish state tax refunds to pay off state income tax debts. Your state’s Department of Treasury can offset your prior years’ state income tax debts with your current year’s state income tax refund. Just as with the federal Department of Treasury, you’ll receive any remaining refund after your debt has been offset, along with a Notice of Adjustment to Income Tax Refund letter that details the original amount of the refund and the offset amount.
Unemployment Compensation Fund Debts
Unemployment compensation fund debts are another type of state debt that gets final priority on your income tax return for refund garnishment. There are a number of ways to fall into debt with unemployment compensation. If you are a business owner, you are required to pay into unemployment compensation by law. If you aren’t a business owner, you may fall into unemployment compensation debt if you received fraudulent unemployment compensation or workers compensation.
Which Debts Cannot Take Your Tax Refund?
So, who cannot take your tax refund? It’s pretty simple. If your debt does not fall into one of the above categories, the creditor cannot take your income. That may include…
Private Financial Institutions
There are many ways you can fall into debt with a private financial institution. Perhaps you’ve failed to make mortgage payments, failed to pay off your credit card debt, or more. The good news is, if you fall into debt with a private financial institution, you are not eligible for tax refund garnishment. Instead, your financial institution will likely enlist the help of a private debt collector to repay your unpaid debt.
Debt collection can be an unrelenting process. Debt collectors will call you on any available number (including your place of work), send letters, and more. They may even contact your friends or family to try and get a hold of you.
If one of your credit accounts has gone into collection, you have 30 days to request validation for the debt. This means that you’ve requested the debt collection agency provide proof of your debt. At this point, you have the opportunity to contest your debt collection, if you have a valid reason.
Private Student Loan Lenders
Unlike federal student loan lenders, private student loan lenders cannot take your tax refund to pay off your outstanding debt. If you fail to pay your student loan for 90 days, your account will become delinquent. Delinquency is a huge blow to your credit score, and it will drop substantially.
Just like with federal student lenders, you go into default with private student loans after 270 days. At this point, just like with private financial institutions, your debt will likely be sent to a collections agency.
Have you received a loan from a friend or family member, and failed to pay them as agreed upon? They, too, cannot take your tax refund. Collection on this type of debt is a little trickier. If the terms of the loan have been put into writing, it is a legally binding contract. Your creditor can take you to small claims court, and even enlist the assistance of an attorney. If you’ve found yourself nearing this outcome, consider proposing a debt settlement agreement. This will give you and your lender the opportunity to come up with new payment terms and timeline, and hopefully give you a bit of reprieve.
How Can I Stop a Tax Refund Garnishment?
If you believe that your tax refund is being garnished in error, you have the opportunity to dispute your garnishment. You have up to 28 days from the issuing of your Garnishment Disclosure to do so. Valid reasons for dispute include:
- The garnishment has already been resolved and the debt has been paid in full.
- You are in the process of filing for bankruptcy, or the debt was previously dismissed in bankruptcy court.
- The statute of limitations on your debt has expired.
- The debt has been claimed in error and is not actually owed.
Have you received a Garnishment Disclosure? It’s time to list the help of a professional. At Community Tax, we’re experts at all things tax related. We can help stop your tax refund garnishment, and even help you get a tax refund if you owe the IRS. You don’t have to go at it alone, but you do need to act fast. Contact us today.