Can Collection Agencies Take Your Tax Refund?
- Collection agencies can’t directly take your tax refund.
- Your tax refund can only be garnished by government agencies.
- A collection agency could indirectly take your tax refund from your bank account if a court allows them to do so.
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When you fall behind on your debts, your original creditors might eventually send them to collections. At that point, your phone might start ringing with calls from collection agencies trying to recoup the money you owe.
Debt collectors have a lot of tools available to try and collect what you owe. You may be wondering whether a collection agency can take your tax refund. Let's take a look at the rules so you know what to expect.
Can a Collection Agency Take Your Tax Refund?
When it comes to private debt collectors, the answer is no—a consumer debt collection agency can’t directly garnish your tax refund. This applies to federal refunds as well as state refunds.
The only time your tax refund can be garnished directly is if a government agency does so. The Treasury Offset Program allows government agencies to take your tax refund under specific circumstances, such as when you:
Owe money on previous unpaid taxes (federal or state)
Are behind on court-mandated child support or spousal support payments
Have defaulted on federal student loans
Even then, government agencies can't just take your tax refund without any kind of communication. They're usually required to send you a letter describing the debt you owe and its amount.
If you're unable to resolve the matter, your tax refund could be partially or fully garnished. You should receive a notice ahead of time that explains why your refund is being garnished and the amount being garnished.
How a Collection Agency Might Take Your Tax Refund Indirectly
While a collection agency can’t directly take your tax refund, they may be able to get that money indirectly. If you don't make payments on a debt that's gone to collections, your debt collector could file a lawsuit against you. If a judgment is entered against you, your debt collector may have the right to garnish your wages or seize funds in your bank account.
If your tax refund is deposited into your bank account and a debt collector gets the go-ahead from a court to seize that money, they can technically take your tax refund—but not without first going through a few steps. That money has to land in your bank account first before they can take it.
How to Avoid Having Your Tax Refund Garnished
You may be counting on your tax refund for groceries, medical bills, or another important cost, like car repairs. So it's wise to take steps to avoid having your refund garnished.
If you're behind on a debt that could lead to having your refund garnished, contact the appropriate agency to try to resolve the issue.
If you owe back taxes, reach out to the IRS to get onto a payment plan.
If you're behind on your federal student loans, contact your loan servicer to find out what payment plan options may be available to you.
What to Do if a Debt Collector Threatens to Take Your Tax Refund
Under the Fair Debt Collection Practices Act (FDCPA), it's illegal for a debt collector to threaten to take your tax refund if they don't have the legal authority to do so. The FDCPA’s statement is very clear: "A debt collector may not use any false, deceptive, or misleading representation or means in connection with the collection of any debt."
If that happens, ask for written proof of the debt in question and the debt collector's authority to garnish your tax refund because of it. Document everything and consider filing a complaint with the Consumer Financial Protection Bureau. You may also want to file a complaint with your state Attorney General.
What to Do if Debt Collection Calls Become Overwhelming
When you’re getting debt collection calls, remember that you have rights. Under the FDCPA, debt collectors aren’t allowed to:
Call you at unreasonable hours—namely, before 8 a.m. or after 9 p.m.
Contact you at work if you tell them not to
Contact you via social media if you tell them not to
Use harassing or inappropriate language
If a collection agency isn't violating these rules, but the calls are still getting to be too much for you, you may want to reach out to a debt relief company for help—especially if you don't envision a path toward paying your debts.
A debt relief company may be able to settle your debt with a collection agency for a smaller amount than what you owe. You can also try negotiating with a collection agency yourself, though many find the process intimidating.
The Bottom Line
A consumer debt collection agency can't directly take your tax refund, though government agencies can under certain circumstances. Even though you're safe from having a debt collector take your refund directly, they may be able to seize funds from your bank account or garnish your wages if you lose a debt lawsuit. Rather than let things get to that point, consider debt relief.
Author Information
Written by
Maurie Backman
Maurie Backman is a personal finance writer with over 10 years of experience. Her coverage areas include retirement, investing, real estate, and credit and debt management.
Reviewed by
Kimberly Rotter
Kimberly Rotter is a financial counselor and consumer credit expert who helps people with average or low incomes discover how to create wealth and opportunities. She’s a veteran writer and editor who has spent more than 30 years creating thousands of hours of educational content in every possible format.
What happens if I never pay my student loans?
After 270 days of non-payment, federal student loans go into default status. Delinquencies can show up on your credit reports and harm your credit scores. Defaulting on federal loans can result in lawsuits or liens. Your tax refunds, social security checks and/or wages may be garnished. You may not be able to purchase real estate or obtain your school transcript. Private student loan lenders can sue you for unpaid debt. It is possible, although very difficult, to discharge student loans in bankruptcy.
Can you stop a bank garnishment?
If your bank account is frozen, dispute the levy as soon as possible. Your account will remain frozen until the dispute is resolved, but the creditor won’t get your funds if your dispute is valid. Reasons for disputing a bank garnishment include:
Error: you don’t owe the money
The statute of limitations has passed, and the debt is uncollectible
The creditor is already garnishing your wages
Some or all funds in your account are exempt under federal or state law
You’re a victim of identity theft, and the past-due account is not yours
Other ways to stop a bank garnishment include filing bankruptcy or settling with the creditor for an amount or payment that you can afford.
Can you negotiate credit card debt after being sued?
Yes, and it's much easier to negotiate before losing in court. Negotiating tells the creditor you plan to fight, and they might be open to hearing your offer.
Once a creditor wins a lawsuit, they could ask the court for permission to garnish your wages or levy (take money from) your bank account. You might also be responsible to pay their court costs. There’s little incentive for them to discount your debt, because they now have legal tools to take your money. It's possible to negotiate after losing, but success is less likely.