4 reasons the IRS can seize your income tax refund money for debt
If you filed your taxes recently and your calculations told you that you’d be getting a nice fat refund check, you might be a bit surprised when you check the tax refund status and discover that it’s no longer coming.
Believe it or not, there are several situations in which the IRS can seize your refund.
So, before blaming the government for making a terrible mistake, read through the following to see if any of these could potentially apply to you.
Reasons for Tax Refund Seizure
1. You Have Past Tax Debt
The IRS is like an elephant with the world’s longest memory. It’s big, has enormous ears, and remembers when you stuck them with the bill back in 1998.
If you have an outstanding tax debt from previous years, the IRS can (and frequently does) just take that overpayment and apply it to the old debt without so much as a thank you note.
Keep in mind, this debt can come from a federal or state tax bill. If you’re behind on your state tax bill, they can either seize your state refund, or apply to the IRS to seize money from your federal refund.
2. You Owe Child Support
The federal government will eventually notice if you are behind on child support. In fact, federal and state agencies can place levies on your refund to help pay your outstanding child support debt.
Don’t make the mistake of thinking you’re home free when your son or daughter reaches 18 years of age. If you are still delinquent, this can continue even past the time that your child no longer qualifies for support.
3. You’re in Bankruptcy
Paying down debt can be a smart way to use your tax refund money, and if you’re currently going through bankruptcy, your bankruptcy trustee might just make that wise decision for you.
Under a Chapter 13 bankruptcy, the bankruptcy trustee can request that the court take your refund and apply it to your debts. Chapter 7 filers may lose their refund, but can exempt some of it from seizure.
Once your bankruptcy is fully discharged, your refunds will be safe. If you think this could happen to you, check with your bankruptcy trustee.
4. You’ve Defaulted on Student Loans
Part of the reason that student loans have much better interest rates than other loans is because they’re nearly impossible to get out of. If you get old enough, the government will even take payments out of your Social Security check to cover them. Therefore, it shouldn’t come as a shock that the IRS can turn your refund over to the Department of Education to pay for any loans you’ve defaulted on.
Married Filing Jointly
You should be aware that if you file jointly with your spouse and they are in a situation where their tax refund will be seized, yours will be seized along with it. Luckily, there are a couple of things you can do to hold on to your share of the refund:
- File Separately. If you file your taxes as married filing separately, you won’t have to worry about this issue. Your refund will be safe and your spouse will bear the burden of their financial issues alone.
- Injured Spouse Allocation. If you want to avoid having your part of the refund seized, you can file for “injured spouse relief” in order to make your case to the IRS that you paid your own share of taxes and didn’t have anything to do with the situation. You must have your own income, made tax payments or had taxes withheld from that income, and you must be expecting a refund of at least some of those taxes that you paid on your own income.
To apply for injured spouse relief, and determine how much you should get back, you’ll need to complete Form 8379, Injured Spouse Allocation. You should read this section of the Internal Revenue Manual if you have concerns about community property problems or have credits such as the Earned Income Tax Credit affecting your joint return, since it can change what portion of the refund you’re entitled to.
Also, don’t confuse injured spouse relief with innocent spouse relief, which is involved when the other spouse has falsified a tax return, under-reported income, is guilty of tax evasion fraud, or committed other acts that might otherwise have civil penalties to both spouses if a joint return was filed.
What Your Refund Can’t Be Seized for
Even if the above situations don’t apply to you, the possibility of having your refund seized might still be a concern if you’re going through some financial difficulties. You may be relieved to find out that there are certain instances that cannot warrant a seizure.
The IRS cannot seize your refund for the following:
- Credit Card or Mortgage Debt (not related to bankruptcy). Only federal agencies can take your refund. However, if your bank account has a lien on it, a creditor might be able to swoop in and take money out if they’re notified you’ve just gotten a hefty deposit.
- Collection Agencies. No collection agency or creditor can intercept your refund without a lien, or add on to any existing tax debt. If a collection agency tries to convince you that they’re from the IRS, don’t bite. The IRS does use collection agencies, but only a select few who will be happy to prove that they work for the IRS.
- Overdrawn Checking Accounts and Bank Overages. The bank can’t take your refund, but you can bet your pennies that if that refund lands in the troubled account, they’ll apply any penalties or bank overage fees against it before you can withdraw the money.
Final Word
If you’ve had financial troubles, whether they’re in the form of an unpaid tax bill, child support, bankruptcy, or student loan debt, make sure you are informed about possible consequences. You can check with the appropriate agency to see if they’re planning to seize your tax refund.
Remember, all of the above reasons for tax refund seizure will occur at the federal level before your refund is processed – asking for the refund to be sent to another account or put on a tax refund debit card won’t help. And if your spouse has one of the mentioned situations, you can put in an application for injured spouse relief, even if their refund has already been seized. In the end, if your refund is seized, you can at least rest assured that a portion of your debt has been paid.
Has your tax refund ever been seized? What were the reasons why and what did you do about it?
Tags: tax refund, tax refund 2011, tax tips, tax tips for 2011
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