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4 Reasons the IRS Can Seize Your Income Tax Refund Money for Debt

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If you’ve recently filed your taxes and were expecting a nice fat refund check, you may be shocked if you check the tax refund status and discover that it’s no longer coming.

Believe it or not, there are several situations in which the IRS can rightfully seize your refund. Therefore, before crying foul and blaming the government for making a terrible mistake, consider whether any of the numerous reasons for tax refund seizure could apply to you.

Reasons for Tax Refund Seizure

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1. You Have Past Tax Debt
If you have an outstanding tax debt from previous years, the IRS can just take your expected refund and apply it to the old debt without so much as a thank you note. It does not matter whether the debt is from last year or more than a decade ago – the IRS has a long memory, and will take the owed funds whenever the discrepancy is discovered.

Keep in mind, it does not matter whether the money you owe is for federal or state taxes. If you’re behind on your state tax bill, the state government can either seize your state refund, or apply to the IRS to seize money from your federal refund.

2. You Owe Child Support
The Federal Government will eventually notice if you are behind on child support payments. In fact, federal and state agencies can place levies on your refund to help pay your outstanding child support debt.

Don’t make the mistake of thinking you’re home free when your son or daughter reaches 18 years of age. If you are still delinquent, this can continue even past the time that your child no longer qualifies for support.

3. You’re in Bankruptcy
Paying down debt can be a smart way to use your tax refund money, and if you’re currently going through bankruptcy, your bankruptcy trustee might make that decision for you.

Under a Chapter 13 bankruptcy, the bankruptcy trustee can request that the court take your refund and apply it to your debts. Chapter 7 filers may lose their refund, but can exempt some of it from seizure.

Once your bankruptcy is fully discharged, your refunds will be safe. If you think this could happen to you, check with your bankruptcy trustee.

4. You’ve Defaulted on Student Loans
Part of the reason that student loans have much better interest rates than other loans is because they’re nearly impossible to escape. If you get old enough, the government can even take payments out of your Social Security check to cover them. Therefore, it shouldn’t come as a shock that the IRS can turn your refund over to the Department of Education to pay for any loans you’ve defaulted on.

Married Filing Jointly

You should be aware that if you file jointly with your spouse and he or she is in a situation where his or her tax refund will be seized, yours will be seized as well. Luckily, there are a couple of things you can do to hold on to your share of the refund:

  1. File Separately. If you file your taxes as married filing separately, you don’t have to worry about this issue. Your refund will be safe and your spouse must bear the burden of his or her financial issues alone.
  2. Injured Spouse Allocation. If you want to avoid having your part of the refund seized, you can file for “injured spouse relief” in order to make your case to the IRS that you paid your own share of taxes and didn’t have anything to do with the situation. You must have your own income and have made tax payments or had taxes withheld from that income, and you must be expecting a refund of at least some of those taxes that you paid on your own income.

To apply for injured spouse relief and determine how much you should get back, you’ll need to complete Form 8379, “Injured Spouse Allocation.” Also, don’t confuse injured spouse relief with innocent spouse relief, which comes into play when the other spouse has falsified a tax return, under-reported income, is guilty of tax evasion or fraud, or committed other acts that might have civil penalties to both spouses if a joint return was filed.

What Your Refund Can’t Be Seized for

Even if the above situations don’t apply to you, the possibility of having your refund seized might still be a concern if you’re experiencing financial difficulties. You may be relieved to know that there are certain instances that do not warrant seizure.

The IRS cannot seize your refund for the following:

  • Credit Card or Mortgage Debt (Not Related to Bankruptcy). Only federal agencies can take your refund. However, if your bank account has a lien on it, a creditor might be able to swoop in and take money out if it’s notified you received a hefty deposit.
  • Collection Agencies. No collection agency or creditor can intercept your refund without a lien, or add on to any existing tax debt. If a collection agency tries to convince you that they’re from the IRS, don’t bite. The IRS does use collection agencies, but only a select few, who will be happy to prove that they work for the IRS.
  • Overdrawn Checking Accounts and Bank Overages. The bank can’t take your refund; however, it is likely that if a refund lands in the troubled account, the bank will apply any penalties or bank overage fees against it before you can withdraw the money.

Holding The Refund

There are several reasons that the IRS may hold your refund. It isn’t taking your refund (not yet, anyway), but the IRS can keep it from being provided to you. In each of these situations, the IRS should contact you by mail to provide more details and a plan for resolution.

  • You Didn’t File Taxes In a Previous Year. If you didn’t file your taxes in a prior year, the IRS may hold your refund until you prove that you don’t have a tax debt from that year. The only way you can get the IRS to release your refund is if you go ahead and file for that year, or send a letter explaining why you didn’t file, and request more time.
  • Your Spouse Filed an Injured Spouse Allocation Form. If your spouse filed a Form 8379 as detailed above, the IRS may put your refund on hold until it can process all the paperwork and sort out who should get what.
  • 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 contact the IRS to work out a payment plan, the IRS may hold your refund until it has determined whether the money should be put toward your payment plan.

Final Word

If you have financial troubles, whether they’re in the form of an unpaid tax bill, late child support, bankruptcy, or student loan debt you’ve defaulted on, make sure you understand the possible consequences. You can also check with the IRS to see if it’s planning to seize your tax refund.

Remember, all of the above reasons for tax refund seizure will occur at the federal level before your refund is processed – asking for the refund to be sent to another account or put on a tax refund debit card won’t help. And if your spouse is the reason for your refund woes, you can put in an application for injured spouse relief, even if his or her refund has already been seized. If your refund is seized ultimately, you can at least rest assured that a portion of your debt has been paid.

Has your tax refund ever been seized? If so, what were the circumstances?

Kira Botkin
Kira is a longtime blogger and serial entrepreneur who enjoys gardening, garage sales, and finding stray animals. She lives in Columbus, Ohio, where football is a distinct season, and by day runs a research study for people with multiple sclerosis. She hopes that the MoneyCrashers team can help you achieve your goals and live a great life.

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