Can Bill Collectors Garnish My Federal Tax Return?

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Avoid bill collectors by paying debts on time.
Avoid bill collectors by paying debts on time. (Image: Steve Cole/Photodisc/Getty Images)

Unpaid bills leave you subject to legal consequences such as lawsuits, garnishments and property liens. Fortunately, federal consumer protection laws limit the types of income that most bill collectors can garnish after winning a lawsuit against you. Some states carry additional consumer protection laws that further limit most bill collectors‘ garnishment rights.

Facts

If you owe a credit card debt, medical debt, mortgage deficiency or any other variety of private unsecured debt, your creditor may sue you, obtain a judgment and attempt to garnish your wages and bank accounts. It cannot, however, garnish your annual tax refunds. Nor can it garnish other funds the government provides, such as Social Security payments, federal student loan awards or public assistance checks.

Exceptions

Although private creditors have no access to your tax refund, government creditors do. If you failed to pay back taxes to the Internal Revenue Service (IRS) or defaulted on past federal student loans, the government will offset any tax refund money you were scheduled to receive and apply it to your outstanding debt. Unlike private creditors, the federal government can garnish all forms of income you receive without the benefit of a court judgment against you.

Time Frame

When a private creditor seeks a garnishment order, it must garnish your wages during the period of time that its court judgment is legally valid. Once the judgment expires, it is no longer enforceable and garnishment must cease. If you have an unpaid tax debt, the IRS has a total of 10 years from the date the tax was assessed to collect your debt through garnishment. Federal student loan debts, however, have no statute of limitations and you will face a tax refund offset for your unpaid student loan debts until you satisfy the full balance you owe.

Prevention/Solution

If you are facing a severe financial hardship or you feel your tax refund is being garnished in error, you can contest the tax offset as soon as you receive notification that the government intends to withhold your federal refund money. You must provide the IRS with extensive documentation to prove your case and, if you succeed, the garnishment will either not take place or the government will refund the garnished funds. You have 60 days after receiving notification of the garnishment to officially contest it.

Considerations

Bill collectors who lack the legal authority to garnish your tax refunds cannot attempt to frighten you into making a payment by threatening to do so. Threatening consumers with actions that a debt collection agency does not have the legal authority to take is a violation of the laws set forth in the Fair Debt Collection Practices Act. You have the right to file a lawsuit against any private collection agency that threatens to withhold your tax refunds unless that collection agency is employed to collect a federal debt.

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