Debt collectors utilize a wide variety of debt recovery methods, from letters and telephone calls to garnishment and asset seizure. Debt collectors must follow federal and state laws that limit the actions they can take during the debt recovery process. While collection agents have the right to garnish your tax refund, they cannot intercept it directly from the Internal Revenue Service or your state government before you receive it.
Intercepting Tax Refunds
After you file your tax return, the state government or IRS will return any excess taxes you paid during the year in the form of a tax refund. Debt collectors must hold a civil judgment against you before being able to seize your assets without your permission. A court judgment does not, however, give the company the right to intercept your tax refund by seizing it from the state or federal government before you receive it.
Withholding Tax Refunds
While commercial debt collectors cannot intercept your tax refund, that does not mean that your tax refund is immune from collection activity. If you owe a federal debt, such as unpaid student loans or back taxes, or a state government debt, such as unpaid property taxes, the government in question will withhold your tax refund and apply it to the unpaid portion of your debt. This process is known as “tax refund offset.” The tax refund offset will continue each year that you receive a refund until your debt is paid in full.
Tax Refund Garnishment
Your tax refund is safe from interception or garnishment from nongovernment creditors until you receive it. After you deposit the refund into your bank account, however, it becomes fair game for garnishment.
If a debt collector sued you in the past and won a judgment against you, it has the right to levy your bank accounts in an effort to recover the unpaid debt. Unlike government benefits, child support and alimony, your tax refund is not exempt from garnishment after you deposit it. Your refund money represents income you overpaid in taxes, not a government benefit. Because debt collectors can legally garnish your income, they can also garnish your tax refund.
State laws require debt collectors with a judgment to collect the debt within a certain period of time before the judgment loses its validity. Each state’s validity period varies but, once a debt collector’s judgment expires, it can neither sue you again nor garnish your bank accounts, allowing you to safely deposit your tax refund into your checking or savings accounts without worrying about whether or not the creditor will seize it.