Like millions of Americans, you might anxiously await your tax refund each spring. Perhaps you’re saving for a major purchase, or you’re going to be one of the smart ones and stash that cash in your retirement fund. Whatever your motivation, you can’t wait for that check to arrive (or land in your account via direct deposit).
More often than you might imagine, taxpayers instead receive a notice, informing them that the IRS has seized their return. Not only is that disappointing; it’s also confusing. In some cases, people don’t even see this coming.
So, why does the IRS take refunds, and what happens to those whose refunds are seized? It almost always boils down to one of these five reasons.
Back taxes. If you owe income taxes from a previous year, the IRS will withhold future refunds. This happens most frequently with federal income tax debts, but individual states can report unpaid debts as well.
Overpaid unemployment compensation. If you’ve ever had to claim unemployment compensation, you might have been accidentally overpaid. That state can ask the US Treasury to seize your refund.
Defaulted student loans. Never, ever, allow any student loan to go into default! The government offers such a wide variety of deferment, forbearance, and low-payment options that no one should ever lapse into default. But if you do, you can be sure the IRS will help out your lender by reclaiming your tax refund.
Unpaid child support. If you fall behind on child support payments, you will receive a notice explaining what you owe. If your state asks the Treasury Department to hold your refund, they will. The past-due amount will be sent to the custodial parent of your child, and any money left over will be sent to you.
Delinquent spousal support. Sometimes, past-due spousal support is collected in a manner similar to child support.
Since it can be upsetting to lose part or all of your tax refund, try not to let any of the above situations happen to you. Often, if you take the initiative to set up a payment plan for these debts, you can protect your refund from garnishment.
For more information on financial planning, give us a call. We can help you establish a budget, as well as a long-term plan, that helps you achieve your goals.