If you are worried about a private creditor garnishing your tax refund, you shouldn’t be too concerned. In accordance with federal law, only state and federal government agencies can take your refund as payment for an outstanding debt.
However, once you deposit a refund into your bank account, the rules no longer apply, meaning a credit lender can have access to funds in your account. If you have outstanding debt and are concerned about wage garnishment, it may be in your best interests to contact a debt settlement lawyer. Here are some things you should know about tax refunds and wage garnishment.
The Treasury Offset Program and Debt Collection
Run by the Depart of Treasury’s Financial Management Service (FMS), the Treasury Offset Program (TOP) is a program that allows federal and state entities to collect any outstanding debts they are owed by offsetting them with a tax refund. Most commonly, government agencies will garnish federal income tax refunds, as they are the most common federal payments.
Technically, TOP is the only way your refund can be garnished, and since it only applies to federal agencies, private creditors cannot access your tax refund as a means of wage garnishment. Additionally, only certain kinds of government debts are eligible for garnishment under TOP. Some of these debts include:
- Outstanding court-ordered child support payments
- Past-due state income taxes
- Unemployment compensation that needs to be paid back
- Other debts owed to federal agencies other than the IRS
TOP always gives priority to the IRS, meaning before any other federal or state agency can garnish your refund, you must be current on your federal income payment. This means that if you owe income taxes from a prior year, your tax refund in the current year will likely be used by the IRS to start paying off your owed income taxes. In short, the IRS will always pay itself first before making your refund available to other federal and state entities.
After the IRS has settled your income taxes, the next priority is given to any outstanding child support payments. The state can continue to garnish your tax refunds every year until a child support payment is paid off.
Federal Debts That Aren’t Tax-Related
Next in line is any federal agency that you owe funds to. For example, say a person receives a $4,000 refund and doesn’t have any outstanding income tax payments but has $1,500 in past-due child support and $2,000 in past-due Stafford loan payments. In this scenario, the state is eligible to take $1,500 of your refund to pay your outstanding child support obligations and the Department of Education can take the remaining $2,000 to pay for your outstanding loan payments.
State Agencies and Debt Collection
State government agencies have the lowest priority when it comes to garnishing IRS refunds. However, if you have to return unemployment funds or have any outstanding state income taxes, your federal refund may be garnished by the state to pay for these outstanding debts.
Contact a Skilled Debt Settlement Lawyer
If you suspect your tax refund may be garnished to pay outstanding debts, you should take action in a timely manner. Wage garnishment can negatively impact your credit score and employment and, in some cases, result in termination from your job. Therefore, it is imperative to get on top of the situation as soon as possible to minimize any negative effects.
At McCarthy Law, we are dedicated to helping our clients facing wage garnishment navigate their financial circumstances and reach a favorable debt settlement. We understand the overwhelming burden that debt creates and are committed to helping our clients resolve their debts and restart their lives. To schedule a consultation with one of our skilled debt settlement attorneys, call (855) 976-5777 or fill out our online contact form.
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