2 Debts That Can Reduce or Completely Devour Your Tax Refund

Law Articles

It can be exciting learning you'll be getting a tax refund. However, that excitement may be short-lived if you owe certain debts, since the state and federal government can deduct what you owe from your refund. If you owe money in any of the following categories, be prepare to have a chunk (or all) of your refund taken and what you can do to possibly avoid this outcome.

Government Fines and Fees

If you've got unpaid traffic tickets, parking fines, or similar legal penalties, the state may offset your past due account by dipping into your tax refund. Currently, only a few states have laws letting the government deduct the debt from refunds. For instance, Georgia passed a law in 2015 letting the government take refunds to pay for money owed for government debts over $25. As states see success with this method of collecting on past due accounts, you can be sure more will join in.

The easiest way to avoid having your refund taken because of this is to pay the amount owed. If it's a lot of money, even setting up a payment plan may stop the government from taking your money. The other option is to include the fines and fees in a bankruptcy filing. However, not all government penalties are dischargeable.

The government levies monetary penalties for two reasons: to punish people for committing wrongful acts and to compensate the appropriate agency for any losses and damages caused by citizens. For example, someone purposefully throws a brick into the window of a police car. That person will likely be hit with a fine for destruction of property as well as a fee that will go towards covering the damage to the vehicle.

Only the fees levied to compensate the government for its losses are dischargeable. Fines levied to punish you for wrongdoing will survive the bankruptcy. It can be challenging determining the purpose of a particular penalty, so it's best to consult with an attorney to see if you can erase the debt via bankruptcy before filing a petition.

Student Loans

Another debt that puts your tax refund at risk of being confiscated are past due student loans. This is only true for loans that are provided or guaranteed by the government. Regular loans obtained through banks would generally go through the normal collection process, though the bank may grab some of your tax refund if it garnishes the bank account where you deposited the money.

The Department of Education gets its authority to take refunds through the Treasury Offset Program, which also allow the agency to take money from normally untouchable payments such as Social Security. Typically the DOE will notify you that they're taking the money, but if the agency doesn't have your current address, you may be unpleasantly surprised to get a notice from the IRS that your tax refund has been confiscated.

One option for avoiding this issue is to rehabilitate your student loans. This involves working with your lender to develop a new payment plan. If you make on-time payments on the new plan for a minimum of 9 to 10 months, the loan will be essentially reset to eliminate the default status (though you'll still owe the money).

If the DOE has already taken the money, you can challenge the offset by contacting the agency and requesting a hearing. Be aware, though, it can be difficult to win back the cash. You may have a good chance of getting the money back if you can show

  • You already paid the debt
  • You rehabilitated the debt
  • You were in bankruptcy at the time (the automatic stay prevents creditors from collecting on debts while your case is active)
  • You filed your tax return jointly with your spouse and the student loan belongs to your spouse (so at least half the refund belongs to you via marital property laws)

Unfortunately, student loans are rarely discharged through bankruptcy. You would have to essentially have to show that paying the loans back would present an undue hardship for you, which can be hard to do.

It's best to consult with an attorney like Patrick D. Riley about options for protecting your tax refund from being taken to pay old debts. For more information about this issue, contact a lawyer.


5 May 2017