If you are one of many Americans who expect a tax refund each year, the reality of debt and the garnishment of your refund can cause some anxiety. This may be exacerbated by knowledge of or directly experiencing the garnishment of bank accounts and employment wages. However, unlike your bank account and wages, your income tax refund is a property of either the federal or state government.
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Rules of Liens
A lien is a claim against a particular item of property, which does not have to be physical property. This claim can be exercised by companies or businesses that are owed a debt. A lien can be either voluntary, meaning a debtor requests it, or involuntary, as when it is mandated by a court or other legally capable entity.
As a general rule, liens are designed to prevent an individual from selling or transferring property without paying a debt, allow the individual or company making the claim to sell the property to repay the debt and give the individual or company priority against claims by any other creditors.
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Defaulting on Student Loans
If you default on your student loans from college, the Department of Education can place a lien on both your federal and state income taxes. The Department of Federal Student Aid states that student loans can enter default status if they remain unpaid after 270 to 360 days.
If you have not paid your taxes for previous years and are expecting an income tax refund, you can expect the IRS to place a lien on this refund, says H&R Block.
Once you are in default status, the Department of Education notifies the IRS to issue all of your tax refund to pay the debt, if required, or the portion owed. According to the U.S. Department of Education, the Biden administration has temporary put a pause on student loan collections until May 1, 2022 due to the COVID-19 pandemic.
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Other Liens on Refunds
If you have not paid your taxes for previous years and are expecting an income tax refund, you can expect the IRS to place a lien on this refund, says H&R Block. In fact, this is usually the first step taken by the IRS to collect any back taxes. Additionally, if you owe child support arrears and are delinquent in payments, your income tax refund may be subject to a lien by your state child support enforcement agency.
Each state specifies its own rules for delinquency. As an example, the New Jersey Office of Child Support Enforcement orders liens on the tax refunds of non-custodial parents who owe $500 or more in child support payments.
Creditors and Liens
If you owe any outstanding credit card or bank debts, a lien cannot be placed on your income tax refund by these creditors. Federal law prohibits creditors from placing liens on federal income tax refunds, which are considered IRS possessions. Because state income tax refunds are the property of the state governments, they are also exempt from liens.
However, should you deposit your income tax refund into your bank account, your refund could be garnished if the creditor has obtained a judgment and a resulting bank execution.