The Blog Of TL Wall Accounting

States Will Garnish Your Federal Tax Refunds

One of my clients was ecstatic when he was informed that he’d be getting a nice tax refund. I was betting that he had already spent some of the money. Later on I ran into him at a networking function and found out that almost all of the refund had been absorbed by the state.

What happened is the client owed a sizable amount of tax from the previous year. He’d done the right thing and set up a payment arrangement with both the state and federal government, since he owed something to both of them. He’d been making regular monthly payments to both to offset the balance.

The bulk of the refund was coming from the federal government. The client knew that was going to happen but assumed that the rest would be coming his way.

Thus, he was surprised when he found out that one source of the state refund, which was coming from another state for work his wife had performed, had been garnisheed by New York state. Not only that but at the end of the same week, he received another letter saying that the state had put out a claim on the rest of his refund, to the extent that all he was going to receive back was around $40.

That’s a major blow when one is expecting more money, yet it’s a cautionary tale when it comes to paying on back taxes owed. Whereas the federal government doesn’t put out a garnish on state taxes, every state in the union files with the IRS to recover any outstanding funds owed to them before they make it to your bank.

What you need to know is that it doesn’t only go to taxes if requested. If there’s any other outstanding federal debt, your refund can be intercepted by them. States can also garnish refunds if there’s child support payments that are outstanding, and if you’ve been ordered to pay back any workers compensation you might have received from your state, and in some cases even student loan payments if you haven’t been paying them on a regular basis.

There is a caveat to intercepting refunds though. If you filed a joint return but filed separately, the spouse who doesn’t have an obligation can request their part of the refund without the states being allowed to take any of it.

As always, the government will make sure they get their money from you. If you’re independently employed, you can only help your case by making quarterly payments when you can. It also helps if you can make bigger payments instead of the bare minimum when setting up payment arrangements.

In any case, it’s good to know what could happen so you don’t get caught off guard when you don’t receive the refund you were expecting.

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