Unemployment tax refunds can be confiscated for unpaid debts and taxes

Samuel Corum / Bloomberg via Getty Images

The IRS will issue tax refunds for unemployment benefits starting this week. But some people may see a lower refund – or none at all.

The lower amounts apply to those with past due debts, such as federal and state taxes, child benefits, student loans, and unemployment benefits, that were incorrectly paid, according to the IRS. The federal government can use tax refunds to settle overdue bills.

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In the private sector, third-party creditors’ funds (like banks for past overdraft fees) can be garnished once they are in a taxpayer’s bank account, said Nina Olson, director of the Center for Taxpayer Rights.

(Attachment is a court order that allows funds to be removed from an account.)

“This is no different from any other type of government refund,” said Janet Holtzblatt, senior fellow at the Urban-Brookings Tax Policy Center.

Tax relief for unemployment

The American bailout plan waived federal taxes on up to $ 10,200 per person in unemployment benefits collected in 2020.

Many taxpayers had filed their tax returns before this break became available. President Joe Biden signed the relief law on March 11th.

The IRS automatically grants refunds to those who have overpaid their federal tax liability as a result. The agency identified more than 10 million taxpayers who may be eligible.

There are two-phase refunds that will continue through the end of summer, the IRS said Friday.

The first phase begins this week for individual taxpayers with the “simplest” returns. This includes tax returns from taxpayers who have not claimed children or refundable tax credits, according to the IRS.

“This first group will be relatively small, but we will increase over time,” said an agency spokesman.

However, according to Erica York, an economist at the Tax Foundation, up to 100% of a tax refund can be seized to pay off federal or state debt. (This applies to government agencies, not private collection agencies.)

It looks like federal student loan borrowers will see redress due to a hiatus in federal student loan payments through September.

“The flexibility of the Covid-19 student loan has been extended to at least September 30, 2021 and includes a break in debt collection activities, including federal tax breaks,” said a spokesman for the Ministry of Education.

Private creditors can also access tax refunds once they are deposited into a bank account, subject to state laws, York said. This can apply to personal debts such as medical bills or credit card debt that are subject to a court order.

The IRS issues direct deposit refunds to those who provided bank account information on their 2020 tax returns. (The money will be sent as a check to the address on the file if this information is not available.)

Banks must comply with court-ordered garnishment and garnishment laws unless Congress exempts a particular payment from garnishment, according to a banking industry source.

According to Olson, Congress had exempted stimulus checks received from government agencies since March 2020. (Child benefit is an exception for the first round of payments, she said.) However, this protection is not available for reimbursement of unemployment tax.

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