In a few situations, an agency can ask the IRS to intercept (take) your tax refund and apply the money to your debt.
Tax refund intercepts are allowed in these situations only:
Before the IRS takes your money, the agency must notify you. You can present written evidence or have a hearing to show that any of the following is true:
Tax refund intercepts are most common in the case of a defaulted student loan. Each year, for example, the federal government pockets hundreds of millions of dollars by grabbing tax refunds from hundreds of thousands of former students. (For more on student loan collections, including stopping or avoiding tax refund intercepts, see Student Loan Debt.)
If the intercept is for a student loan, you can make a written request to review the agency’s file on your loan and the agency seeking the offset will consider other information, such as information showing you qualify to have your loan discharged because the school closed, falsely certified your eligibility, or failed to pay refunds owed because you left before completion of the course.
If you are married and the intercept is for child support from a previous relationship, your spouse can file a claim for her share of the refund.
If your tax refund is small, you will have less to lose from an intercept. You can increase the money you receive with your paycheck during the year, so your tax refund at the end of the year is not that large.
(To learn about other ways creditors can collect debts, see Debt Collection: Repossession, Wage Garnishments, Property Levies, and More.)
This is an excerpt from Nolo's Solve Your Money Troubles: Debt, Credit & Bankruptcy, by Margaret Reiter and Robin Leonard.