If you recently filed your tax return and were expecting a nice, fat refund check, you might be shocked to check the refund status and discover it’s no longer coming.
There are several situations in which the IRS can legally seize your refund. So before crying foul, consider whether one of these situations applies to you.
Reasons for Tax Refund Seizure
The IRS believes in paying itself first, so if you owe back federal income taxes, interest, or penalties from previous years, the IRS can take your expected refund and apply it to the outstanding balance.
If you’re going through bankruptcy, you may receive your tax refund, but that doesn’t mean you can decide what you do with it. Your bankruptcy trustee can request that the court take your refund and apply it to your debts. While a bankruptcy exemption can protect all or a portion of your refund, whether you can exempt it and how much you can exempt depends on the laws in your state. So check with your attorney if you’re worried about losing your refund.
Tax debts and bankruptcy aren’t the only reasons the IRS can hold onto your refund. The IRS can seize federal income tax refunds under a program known as the Treasury Offset Program (TOP). The Bureau of Financial Service, a division within the Department of the Treasury, runs the program. It acts like a collection agency for the federal and some state governments.
The TOP can take all or a part of your federal tax refund to satisfy a variety of debts.
1. Past-Due Child Support
State child support agencies regularly submit to the Department of the Treasury the names and Social Security numbers of people who are behind on their child support payments.
If you’ve fallen behind on child support payments, you may receive a pre-offset notice from the Office of Child Support Enforcement explaining the actions the federal government can take to enforce your obligation to pay. The notice also includes information about how to contest the debt amount if you believe it’s wrong.
Don’t make the mistake of thinking you’re off the hook when your child reaches 18 years of age. If you owe back child support, the agency can still intercept refunds even after your child no longer qualifies for support.
2. Nontax Federal Debts
If you owe money to other federal agencies, TOP can take money to satisfy these debts. These include past-due or defaulted federal student loans, payments on HUD loans, and any fines, penalties, or fees due to other federal agencies.
3. State Income Tax Debts
If you owe income taxes to any state — whether you still live there or not – TOP can seize your refund to cover that debt. This can happen even if you have a payment plan in place with the state agency.
4. Money Owed to a State Unemployment Compensation Fund
State unemployment funds can also apply to the TOP to claim your refund. This typically happens for one of two reasons:
- You owned a business and didn’t pay unemployment taxes as required by law.
- You accepted fraudulent unemployment compensation payments or accidentally received double payments and haven’t repaid them.
Debts That Can’t Touch Your Tax Refund
People who experience financial difficulties often worry about losing their tax refund, even if the IRS reasons for tax seizure don’t apply to them. Fortunately, certain debts can’t affect your tax refund.
The IRS cannot seize your refund for:
- Collection Agencies. No collection agency or creditor can intercept your refund without a lien or add to any existing tax debt. However, the IRS does use private collection agencies. You will receive a notice from the IRS letting you know if they assign your overdue account to one of the four private collection agencies they use. You’ll also receive a letter from the agency itself. Both letters will contain a Taxpayer Authentication number. If you receive a call from a collection agency claiming to work on behalf of the IRS, use that authentication number to confirm the caller is legitimate. Other scam artists and unscrupulous debt collectors may claim to be calling on behalf of the IRS, so never give out information to callers who can’t verify they’re legit.
- Credit Card Debt Not Related to Bankruptcy. Only federal and state agencies can take your refund. However, other creditors can put a lien on your bank account if they get a court order allowing the lien. Once your bank account has a lien on it, a creditor can swoop in and take money out when it receives a notice you got a hefty deposit. For that reason, if you know a creditor has a judgment against you, don’t have your refund direct-deposited into your bank account.
- Overdrawn Checking Accounts and Bank Charges. The bank can’t take your refund. However, if your refund lands in an overdrawn account, the bank will apply it to any overdrafts, penalties, or bank fees before you can withdraw the money.
Reasons the IRS Can Hold Up Your Refund
There are several reasons the IRS can hold your refund, even if they don’t seize it. In each of these cases, the IRS will contact you by mail to provide more details and instructions for resolving the situation.
- You Didn’t File Taxes in a Previous Year. If you didn’t file a tax return in a prior year, the IRS could hold your refund until it confirms you didn’t have a filing obligation or owe taxes that year.
- You’re Currently on a Payment Plan for Back Taxes. If you weren’t able to pay your taxes in full in a previous year and had to apply for a payment plan, the IRS can hold your refund until it determines whether to apply the money toward your payment plan.
How to Protect Your Refund
The best way to avoid having your refund seized is to pay off any debts you owe to the federal or state government. If that’s not an option, there are three other ways to protect your refund.
1. File Separately
If you’re married and file a tax return jointly with your spouse, the IRS can seize your refund even if your spouse is the one who owes an outstanding debt. If you use married filing separately as your filing status, you don’t have to worry about that. Only your spouse’s refund is at risk of seizure.
2. Reduce Your Withholding
Receiving a big tax refund every year isn’t a smart financial move. It’s essentially an interest-free loan to the federal government. Instead of counting on a refund you might not get to pay off your debts, adjust your withholding.
The IRS has a tax withholding estimator that can help you calculate the right amount of withholding. Once you’ve used the calculator, give your employer a new Form W-4 to ask them to adjust your withholding.
Just don’t reduce your withholding too much. If you have too little tax withheld, you could end up owing a significant tax liability to the IRS next year, which only makes your situation worse.
3. File an Injured Spouse Claim
If your spouse owes a tax debt and you want to avoid having your part of a joint refund seized, file an injured spouse claim using Form 8379, Injured Spouse Allocation. This form makes the case to the IRS that you paid your share of taxes. To qualify, you must 1) have your own income, 2) have made tax payments or had taxes withheld from your income, and 3) be expecting a refund of at least some of those taxes.
Don’t confuse an injured spouse claim with innocent spouse relief, which protects someone whose spouse or former spouse falsified a tax return, underreported income, is guilty of tax evasion or fraud, or committed other acts for which civil penalties apply to both spouses if they filed a joint tax return.
Remember, all the reasons for tax refund seizure occur at the federal level before your refund is processed. Asking for a refund to be direct-deposited to another account or put on a tax refund debit card won’t help.
If you have financial troubles, whether they’re in the form of an unpaid tax bill, late child support, bankruptcy, or another debt you’ve defaulted on, make sure you understand the possible consequences. Contact the federal or state agency responsible for collecting your debt to find out if they submitted your account to the Treasury Offset Program. You can also call the TOP call center at 800-304-3107 to find out if you’re in their system and how much you owe.
Having your tax refund seized isn’t ideal, but if it is seized, at least you know you’ve paid a portion of your debt.
Has your tax refund ever been seized? If so, what were the circumstances?