Why Did My Tax Refund Get Garnished?

You were looking forward to your tax refund this year with all the fervor and excitement of a kid on Christmas Eve waiting to see what Santa brought him, but then you received a notice from the IRS that crushed your hopes in one fell swoop: your refund has been garnished. You didn’t even know this was possible, but now that it has happened to you, you’re curious: who was allowed to garnish your tax refund?

You may be thinking that your credit card company found a way to get their money, or that maybe the dealership you bought your car from is the culprit, but in actuality, private and individual collectors cannot garnish your tax refund—only state and federal agencies can. (That doesn’t mean that these same rules apply once the refund is placed into your account – once there, it’s free game.) So who took it, and why were they allowed to?

The Treasury Offset Program (TOP)

The TOP is a program administered by the United States Department of Treasury’s Financial Management Service (FMS). TOP effectively allows federal and state government agencies to collect outstanding debts owed to them by garnishing your tax refund. Or, in other words, they offset your debt with your refund. Though you may have never heard of this program before, government agencies have been garnishing income tax refunds for quite some time, as they are the most common federal payments, and the easiest to get their hands on.

The TOP does have restrictions on what kind of debt is eligible for garnishing though, and what’s not. For instance, private collectors and creditors are going to have to use traditional means of collecting what’s owed to them, such as cold calling, sending notices via mail, talking to friends and family and showing up on your doorstep; they are NOT eligible for TOP. Furthermore, only certain government debts are eligible for TOP. These include past-due court-ordered child support payments, outstanding debts with the IRS, past due state income taxes and any unemployment you must pay back.

As Always, IRS is Priority

The agency trying to collect money from you may be a fellow government agency, but the IRS isn’t too concerned with brotherhood. If you owe other government agencies money AND the IRS money, the IRS will take what is owed to them first, before freeing up access to the remainder of your refund for TOP. Or, in simpler terms, the IRS pays itself first, before making your tax refund available for garnishment by other government agencies.

Once the IRS is satisfied that you do not owe them any money, there is a hierarchy of agencies that can collect from you. It is as follows:

Child Support

If you have a tax refund due to you, the state agency that governs your child support payments has first claim to that refund if you have outstanding child support payments. The state can continue to do this each year until all of your child support payment obligations are met.

Non-Tax Federal Debt

Any federal agency has the next shot at garnishing your refund. So, for instance, let’s say you’re expecting a $6,000 refund, but you have an outstanding debt of $4,000 in student loans, and $2,000 in overdue child support payments. The state is allowed to take the $2,000 in past-due child support first, and the department of education is entitled to the remaining $4,000. That $6,000 refund you were expecting is now gone. (On the bright side, your debts are now paid off!)

State Debts

State government agencies are the lowest guys on the totem pole, and are only allowed to garnish tax refunds for things like unemployment compensation payments or outstanding state income tax debts once the IRS, the state child-support agency and the non-tax federal agencies have been satisfied.

What Can You Do?

Unfortunately, if you owe the IRS or any other federal or state government agency money, they’re in the right to garnish your refund, and your wages. While it may not seem fair that you’re essentially being forced to pay off a debt you may or may not be able to afford at the moment, if your refund is being garnished, it’s because the agency felt they’d given you adequate amount of time to pay it off before taking alternative action.

While there is nothing you can do once the garnishment has occurred, there is something you can do to prevent future refund and wage garnishment. At IRS All Star, we do everything in our power to reduce your tax liability and maximize your refund. Visit http://www.irsallstar.com/our-services#3 to see how we can help you keep your money in your wallet – right where it belongs.