It sounds like something out of a bad dream. You file your taxes and happily anticipate a refund. You start thinking of all the things you’ll do with that money…buy a new couch, pay off that credit card, or take a mini-vacation. But day after day, your refund fails to arrive. Finally, you check its status and are horrified to discover that your entire refund has been seized by the IRS or another government agency. You might even have your state tax refund seized! How do you know when your refund might be taken?
No Tax Refund Because of Unpaid Tax Debts?
The IRS doesn’t forget about that time in 2005 that you “forgot” to pay your taxes. Whether it’s state or Federal taxes, having an unpaid tax debt can follow you for a long time, especially, if you fail to file a tax return. If you owe state taxes, these agencies can report the unpaid states taxes to the Department of Treasury’s Financial Management Service, which can result in the IRS taking some or all of your Federal tax refund to satisfy tax debts. If you owe Federal taxes, the IRS will continue taking your refund and applying it to your tax debt until it’s completely paid off. Since this can include steep fees and penalties, you could end up paying a lot more than the original tax debt.
No IRS Tax Refund Because of Outstanding Child Support?
If you owe any child support and haven’t paid up, your refund can also be taken by the Federal or state tax agencies and used to pay that debt. Don’t think that your obligation is erased when your child turns eighteen – the debt doesn’t go away until it’s paid off, so your state or Federal tax refunds could be seized for years until the debt is settled.
You Could Lose Your Tax Refund As Part of the Bankruptcy Process
Many people say they’ll use their refund to help them pay off debts, and those in bankruptcy are no exception. However, if you’re currently going through bankruptcy, your trustee might make that decision for you! If you have a Chapter 13 bankruptcy, the bankruptcy trustee can request that the refund be taken from you and applied directly to your debts. If you have a Chapter 7 bankrupcty, you can apply to have some of it exempt from seizure but you may lose the refund anyway. Only once your bankruptcy is fully discharged will your refunds typcially will be safe from seizure. So if you are in this situation, you’ll want to check with your bankruptcy trustee or a bankruptcy attorney to see if some or all of your refund might be put towards your debts.
Tax Refund Seized Because You Defaulted on Student Loans
Student loans are usually a great deal, with much better interest rates than private loans, but come with a much longer repayment schedule – potentially, the rest of your life. They are nearly impossible to get out of (normally cannot be discharged in bankruptcy), and if you’re old enough, the government will take payments out of your Social Security check. Any other money that comes from the Federal government is also a target. So if you have student loans that you have defaulted on, the Department of Education can request that the IRS send them your refund. They’ll use it to pay down the loans you didn’t, and they can keep seizing your refund till the debt is paid. Like tax debt, interest and fees will continue to accrue, so you’ll end up paying more than you would have otherwise.
While there are certainly a number of reasons the IRS might seize your refund, they are limited. These are some things that your refund will never be seized for, no matter what you are told by unscrupulous collectors.
Mortgage debt – Unless it is part of a bankruptcy, your mortgage company cannot take your refund to pay outstanding mortgage payments.
Credit card debt – Again, unless it’s part of a bankruptcy, your credit card company won’t be able to touch your refund.
Collection agencies – No collection agency has the ability to take your refund without a lien, nor can they add other debts on to any existing tax debt. Don’t be fooled by collection agencies who try to convince you they’re from the IRS – the IRS does use collection agencies, but they’ll be happy to prove who they work for. The IRS also doesn’t collect debts by email, so don’t respond to any emails that say they’re from the IRS. (They’re exclusively old-school and do everything by mail or phone.)
Overdrawn checking accounts or other bank overages – The bank can’t apply to the IRS to get money from your refund, but it’s a safe bet that if you ask the IRS to deposit your refund in an overdrawn account, they’ll apply any penalties or overages against that money before you can withdraw it. The IRS does offer a new debit-card program where you can receive your money pre-loaded on a card, which might be a better option.
If you’ve had financial troubles, make sure you are informed about the possibility of a tax refund seizure. If you check with the appropriate agency beforehand, they are sometimes able to tell you if they’re planning to seize your tax refund, and they’ll definitely be able to tell you if you have outstanding debt. You can also take that opportunity to work something out with them if seizing the refund would have serious consequences for you. Remember, all of the above reasons for tax refund seizure will occur before your refund is processed, at the Federal level – just getting the refund by check, sent to a different bank account or put on a tax refund debit card will not stop it from being seized. In the end, if your refund is seized, you can at least rest assured that a portion of your debt has been paid.