Today’s blog is an edited reprint from the Tax Season blog we posted in 2016.
One week from today, April 18th, is Tax Day. While taxpayers mourn the arrival of April 18th, we probably don’t have to tell you why debt collectors and credit grantors love Tax Season! Car dealers and furniture stores, the IRS and debt collectors all get excited, because they know there’s a chance consumers are getting a refund. They all scramble to get a piece of it. First quarter months have long been among their best months of the year.
Unfortunately, Debt Defense Lawyers are giving consumers advice like this, “The question consumers with default judgments against them need to be asking at Tax Time is: ‘What happens if a debt collector times things juuust right, and the tax refund that I had direct-deposited into my bank account is sitting there at the time the debt collector attempts to collect on that judgment?’ Unfortunately, the answer is: there goes your tax refund. Bye Bye. Adios. Sayonara. Even if you are ‘head of household,’ tax refunds are not considered wages, and are fair game for debt collectors.” Consumers with debt are being warned to not choose Direct Deposit for their refunds.
Who Can Garnish a Tax Refund Before It Gets to the Debtor
Tax season is the ideal time for debt collectors to issue strategically-timed writs of garnishment. However, Federal law allows only state and federal government agencies (not individual or private creditors) to take refunds as payment toward a debt before they are in the hands of a collector. However, once a refund is deposited into a bank account, these rules no longer apply. Depending on state laws, private creditors may then have access to funds that have been deposited.
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, debt with tax refunds.
Government agencies frequently garnish federal income tax refunds since they are the most common federal payments. The TOP is the only way a tax refund can be garnished; private creditors such as credit card companies, don’t have access to tax refunds. 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 and any unemployment compensation that must be paid back.
Before any other federal or state agency can garnish a tax refund, the consumer must be current on federal income tax payments. This is because the outstanding taxes owed to the IRS must always be paid first. If you have filed a suit for a debt in collection, a civil judgment could result in garnishment of a state tax refund, depending on your state’s laws. Know your state laws and the parameters of a judgment so you know how it will affect a debtor’s state income tax refund.
If a collection agency sues in a civil court, the court can intervene and issue a judgment to satisfy the debt. A writ of garnishment gives the collection agency the right to a portion of the debtor’s earnings and other sources of income, such as tax refunds. The court sends the writ of garnishment to the applicable agencies and employers involved, and they have to follow the order to extract the money ordered by the court.
Collection agencies often receive a judgment that includes a levy on bank accounts. If a debtor arranges to have their federal income tax refund electronically deposited into a bank account and the collection agency has a levy on that account, the levy gives the collection agency or law firm access to all funds in the account, enabling them to take the refund when it hits the account.
Tax Refunds and Debt Collection without a Suit
Tim Grimes, Legal Forwarding Manager of Barr Credit Services, a valued National List client, reminds us that the scenario can be different in commercial collections. “As a commercial agency we usually do not see a large increase in collections during tax season. However, we have had some success with small businesses, as well as personal guarantors.” Most consumer debt collection agencies and ARM departments try to help a debtor find a way to pay their bills, and they often view litigation as a last resort. Savvy third-party collectors are primed to remind debtors that their tax refund is a fairly painless way to help them settle their debts. Where there are multiple debts owed by the same person, there is typically a rush to be the first collector to tap into this resource.
Seize the day! Don’t delay and miss the opportunity to make the remaining months of Tax Refund Season your best revenue months of the year!