Key Takeaways
- Federal law allows only state and federal government agencies (not individual or private creditors) to take your refund as payment toward a debt.
- The Treasury Offset Program (TOP) is administered by the United States Department of Treasury's Financial Management Service (FMS) and allows federal and state government agencies to collect outstanding debts owed to them by garnishing, or offsetting, your debt with your tax refund.
- The IRS pays itself first, before making your tax refunds available for garnishment by other government agencies.
- If you overpay your income taxes and have an amount eligible for a refund, the state agency that governs your child support order has first claim to that refund if your support payments are unpaid.
Garnishing your refund
If you’re expecting a tax refund but have concerns about creditors garnishing it, you may be worrying too much. Federal law allows only state and federal government agencies (not individual or private creditors) to take your refund as payment toward a debt. However,
- once you deposit the refund into your bank account, these rules no longer apply
- depending on the laws of your state, private creditors may have access to those funds
Treasury Offset Program
The Treasury Offset Program (TOP) is administered by the United States Department of Treasury’s Financial Management Service (FMS). It allows federal and state government agencies to collect outstanding debts owed to them by garnishing, or offsetting, your debt with your tax refund.
Government agencies frequently garnish federal income tax refunds since they are the most common federal payments. The TOP is the only way your refund can be garnished; private creditors such as credit card companies don’t have access to your tax refund. Moreover, only certain types of government debts are eligible for TOP. These include:
- past-due court-ordered child support payments
- outstanding debts with federal agencies other than the Internal Revenue Service
- past-due state income taxes
- unemployment compensation you must pay back
IRS priority
Before any other federal or state agency can garnish your tax refund, you need to be current on your federal income tax payments. This is because the outstanding taxes you owe to the IRS always need to be paid first from available tax refunds.
For example, if you owe taxes for a prior year, but expect a tax refund in the current year, the federal government doesn’t view this as an overpayment to which non-IRS government agencies have access.
- In this scenario, the IRS applies the current tax refund to your past-due tax balance.
- In other words, the IRS pays itself first, before making your tax refunds available for garnishment by other government agencies.
Child support payments
If you overpay your income taxes and have an amount eligible for a refund, the state agency that governs your child support order has first claim to that refund if your support payments are unpaid. The state can continue to garnish tax refunds each year until all child support payment obligations are satisfied.
TurboTax Tip:
State government agencies have the lowest priority when it comes to garnishing IRS refunds, but if you're required to return unemployment compensation payments, or you have outstanding state income tax debts, your federal refund can be garnished to repay these obligations as well.
Nontax federal debts
Any federal agency you owe has the next shot at garnishing your tax refund.
For example, let's say you will get a $5,000 tax refund, and
- You're current with your federal income tax obligations.
- You have $3,000 in past-due federal student loan payments.
- You owe $2,000 in past-due child support.
The state is eligible to take $2,000 for your past-due child support, and the Department of Education can take the remaining $3,000 to pay for your past-due student loan payments.
State debts
State government agencies have the lowest priority when it comes to garnishing IRS refunds. But, if you’re required to return unemployment compensation payments, or you have outstanding state income tax debts, your federal refund can be garnished to repay these obligations as well.
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