With tax day just a few days away, many people wait in expectation their tax refund. This money might go towards a new TV, vacation, or another luxury item; paying down credit card debt; adding to a savings account; or many other options. Unfortunately, some may find their dreams of a vacation ending early when their tax refund gets garnished towards an outstanding bill. How can you make sure this doesn’t happen? Know what you owe before you file your taxes.

The 411 on Tax Refund Garnishment

You may feel as though your tax refund money belongs to you, since you worked hard to make the money through your wages in the first place. However, that is not exactly the case. Several government agencies, including the IRS, have the right to garnish all or part of your refund if you have outstanding debt. This is known as the Treasury Offset Program, or TOP. The Treasury’s Financial Management Service, a part of the U.S. Department of Treasury, administers this program. It allows for certain state and federal government agencies to offset your debt with your tax refund. They can do the same with other federal payments, but the most common one is a tax refund.

The only agencies who can garnish your tax refund are those that fall under the TOP, all of which are governmental agencies. You do not have to worry about creditors from outstanding credit card debt or other private loans taking your refund. Not all governmental agencies fall under this program, either.

In addition to your federal income tax with the IRS, other outstanding payments that can garnish your tax refund include:

  • State income tax debts
  • Federal debts not relating to tax
  • Federal student loans
  • Court-ordered child support that is past due

What Agency Has Priority

When you have outstanding debt to more than one federal agency, there is a priority system in place. The IRS has top priority. Before any other agency has the ability to garnish your tax refund, you must have paid all of your previous income tax and be compliant. If you have any outstanding tax debt, your refund will be applied to your past-due tax bill. In some cases, even if you have an Installment Agreement set up, your tax refund will still be applied to your balance.

If your income taxes are all paid, the next agency to see your tax refund money is the state agency governing any past due child support payments that are court-ordered. If you are up to date on your payments, then you do not have to worry about the court taking your refund money; this only applies when you are past due.

After that, any other agencies with which you have federal debt you have will get their chance to get some of your tax refund. This includes federal student loan programs. Once all of the federal agencies have been paid off, any state agencies, including state tax boards, can garnish any remaining federal tax refund.

Only When You Are In Default

Other than your federal income taxes, any tax refund garnishment will only apply when you are in default or past due. If you owe money to the state or government agencies that fall under TOP but are up to date on your payments, then you do not have to worry about them garnishing your refund. The same may not be true for your income taxes, depending on the term agreement of your Installment Agreement or other tax relief program.

How to Know If You Might Lose Your Refund

The IRS will notify you if your tax refund is going to be garnished to pay for debts under the TOP. You will receive any part of the refund that is not used to offset your debt. You have the chance to dispute the garnishment if you feel it has been done in error. Those who file jointly but for whom the outstanding debt belongs to just one of the spouses can file for Injured Spouse Allocation to get part or all of the offset refund.

If you are not sure if you owe any money to the IRS, you can use their online account tool to check the status of your account. Many of these other government programs have similar features that allow you to see your status. This will help you know whether you are at risk of a tax refund offset or will get that check in the mail or direct deposit so you can continue with your plans for your refund.

Do you have tax debt, whether before or after a tax refund garnishment? Then contact Fidelity Tax Relief. We will review your situation and see if you qualify for one of the Fresh Start Initiative tax relief programs, such as an Installment Agreement, Offer in Compromise, Innocent Spouse Relief, or Penalty Abatement.

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