Federal Income Tax Refund Garnishment Laws

By Michael Marz
Man looking at papers
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If you calculate a refund on your federal income tax return but have an outstanding debt with a state or federal government agency, you may find that refund check to be smaller than expected. The U.S. Department of Treasury may be able to offset, or garnish, your tax refund to pay specific types of debts. When your refund isn't subject to offset, other creditors may be able to garnish it once the funds hit your account.

How Tax Refunds Are Garnished

The U.S. Department of the Treasury -- the agency that oversees the Internal Revenue Service and is charged with issuing all income tax refunds -- authorizes garnishments through the Treasury Offset Program, or TOP. In order to offset your tax refund, a creditor's only option is to submit the dollar amount of your delinquent debt through the TOP. As long as the debt is verified by the TOP, is more than 90 days past due and all other procedural requirements are met, the agency will deduct the amount you owe from your refund and send payment to your creditor. In the event your tax refund is more than the amount owed to the creditor, you'll still receive the remaining balance of your refund.

Eligible Creditors

Most creditors you borrow money from, such as credit card companies and banks that issue car and other personal loans, are ineligible to garnish your tax refund through TOP. Federal income tax refunds only can be garnished by government agencies for unpaid child and parent support obligations, non-tax debts you owe to an agency of the federal government, such as a federally-subsidized student loan that's in default, unpaid state income taxes and unemployment insurance benefits that you're required to return to your state's unemployment agency because of payments you receive prior to a determination that you're ineligible for them. If you owe back taxes to the IRS, the agency always has priority over other eligible creditors and is authorized to apply your refunds to your unpaid tax bill without having to initiate a garnishment through the TOP.

Advance Warning

Having your tax refund garnished should never come as a surprise. Federal law mandates that you receive notification of the offset at least 60 days in advance. Your notice will provide all the details of the garnishment, including the amount garnished, the creditor requesting it and information regarding your rights to obtain relevant records, how to dispute the debt or the amount the creditor claims you owe, and the opportunities you may have to enter into a payment plan.

Garnishment after Receiving Tax Refund

When a creditor isn't eligible to collect on a debt by garnishing your tax refund, they may be able to intercept it once it hits your bank account, if permitted under your state's laws. In many jurisdictions, creditors who obtain court judgments against you may be able to levy, or freeze, your bank account to recover the money you owe. Therefore, if your tax refund is direct deposited into a bank account and you have a judgment against you, the underlying funds are no longer treated as a tax refund -- which means the federal income tax garnishment laws no longer apply.

About the Author

Michael Marz has worked in the financial sector since 2002, specializing in wealth and estate planning. After spending six years working for a large investment bank and an accounting firm, Marz is now self-employed as a consultant, focusing on complex estate and gift tax compliance and planning.