This is a frequent question at this time of the year, when financially distressed taxpayers are confronted with a variety of collection efforts. While many creditors will threaten “seizure” of an income tax refund, there are usually only a privileged few that are permitted to “seize” or “intercept” an income tax refund. First, keep in mind that the seizure of an income tax refund means that all or a portion of the refund is taken before the money exits the United States Treasury. Once a refund is deposited into a bank or credit union account, it will be vulnerable to any judgment creditor that has obtained a garnishment order for the account.
The Internal Revenue Service may withhold a sufficient portion of the refund to address any existing income tax delinquency from previous years.[i] In some instances, a portion of the refund can be seized for application to state income taxes. However, the payment of federal tax debt will always have priority over state income tax debt. Next in line for seizure of an income tax refund would be any agency that is seeking to collect past due child support. Finally, a federal income tax refund can be seized for payment of any federally guaranteed student loans which are in default. It is not necessary for any of these creditors to obtain a judgment in order to intercept the income tax refund, although there will usually be a court or agency order directing the payment of child support. Under no circumstances should you obtain a refund anticipation loan if you believe that you owe income taxes, child support or delinquent student loan debt.
So if a private, non-governmental lender tells you that they are going to take your income tax refund, it is probably just an empty threat. But that money enjoys no special protection once it is deposited into a bank or credit union account, so a judgment creditor could attach/garnish the account and take the money. Also be wary of any creditors that you have allowed to debit your bank account on an ongoing basis for a delinquent debt, as they may take advantage of the opportunity to deduct more than the agreed upon amount in an effort to pay the debt off faster, once the refund is deposited.
[i] This article is not intended to provide any tax or accounting advice. Consult your accountant or other tax professional regarding your income tax requirements.