Federal income tax refunds can be garnished, but only in cases of past-due child support or debts owed to federal or state governments. Federal refunds cannot be garnished to satisfy private debts, such as credit card bills or private loans. Further, any bill collector who threatens to seize your federal refund for such a debt is breaking the law.
The entity that issues income tax refunds is the Treasury Department's Financial Management Service, or FMS. It is also in charge of the Treasury Offset Program, which is the program that reduces your refund for authorized reasons. In other words, the Treasury Offset Program garnishes your tax refund. There are four general reasons why your taxes might be garnished, or "offset": past-due child support; federal agency non-tax debts; state income tax obligations; or unemployment compensation debts you owe to a state.
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How the Program Works
The Treasury Offset Program is a collection tool for government agencies. It is run by FMS' Debt Management Services, or DMS. Agencies with debts eligible for offsets send a notice to the DMS with the details of, and authorization for, the collection of the debt. Once received and verified, the amount necessary to pay off the debt is deducted from your federal income tax refund. According to the Treasury Department, non-tax federal debt can include "unpaid loans, over payments or duplicate payments made to federal salary or benefit payment recipients, misused grant funds, and fines, penalties or fees assessed by federal agencies." Defaulting on a government student loan is an example of non-tax debt owed to a federal agency.
If your taxes are offset, the FMS notifies you of the amount of the offset, your original refund, the agency getting the money and their its contact information. You can dispute the offset with the agency. If the amount of your refund differs from the amount the FMS put on the notice, contact the IRS. If you are married filing jointly, the debt belongs to your spouse and you are entitled to a portion of the refund, you can request it by filing Form 8379 either by itself, after you filed your taxes, or with your 1040, 1040A or 1040 EZ.
Debt collectors not contracted by the federal government to collect a debt, do not have any jurisdiction over your income tax refund. Your refund cannot be taken as part of a court judgment. Debt collectors will sometimes tell debtors that they will garnish their tax refund. A debt collector who does this can be reported to the Federal Trade Commission and sued in civil court for violating the Fair Debt Collection Practices Act. The Act prohibits debt collectors from making threats that they cannot fulfill, such as having you put in prison for your debt or garnishing your federal tax refund.
- FTC.gov: Creditors Seeking Federal Benefits in Your Bank Account? Understanding Your Rights; May 2009
- IRS.gov: Topic 203 - Refund Offsets: For Unpaid Child Support, And Certain Federal, State, and Unemployment Compensation Debts
- Treasury.gov: Treasury Offset Program Expands to Include Unemployment Compensation Debts
- Treasury.gov: FMS Debt Collection and The Debt Collection Improvement Act of 1996
- ConsumerCity.com: Fair Debt Collection Practices Act
- Treasury.gov: Debt Collection 101