Most of us turn out to be eager-beavers after filing in our annual tax returns, waiting for a fat tax refund from Uncle Sam. But, often we are in for a rude shock when the refund money doesn't seem to trickle in. Yes, there could be some valid reasons for such a windfall not happening in our lives, as expected. And of the most prominent one of them is debt.
IRS tax refund and your gory debt obligations
Its hard to sink in, but its true nevertheless, that the IRS is well within its right to seize any sort of tax refund honored in your name for having debt. So, before you go hoarse over crying about an alleged foul play by the government for eating up on your tax dollars due to some un-Godly mistakes, you may want to consider the several reasons for which a tax refund is seized from the recipients.
Causes for tax refund seizure
Here are some of the reasons that authorizes Uncle Sam to withhold any kind of tax refund disbursed in your name:
1 You owe taxes
The IRS has all the powers to withhold your tax refund and use that money to fulfill your outstanding tax obligations. Regardless of since when you've owed tax to them, the IRS has got long arms and memory too, and will use all the means it has to recover those funds the moment a discrepancy has been identified. So, you could owe taxes for over a decade or just for a year ago, there's simply no escaping the long arms of Uncle Sam. Moreover, your tax debt might be of any kind state or federal, but that hardly holds any water in front of the IRS. In case, you've not paid your state tax bill, then your state might seize your state tax refund, or ask the IRS to seize whatever refund money you're being provided by them.
2 You owe child support
Sooner rather later the federal government will catch up with you, if you've not fulfilled your Child Support obligations. Actually, both the federal as well as state agencies can levy your tax refund dollars and pay off your outstanding child support debt. Moreover, you'd be grossly mistaken, if you think you're home free, even if your son or daughter has reached 18 years of age. Your tax refund money can be levied way past the time your child no longer requires a support, in case you've been found guilty of delinquency.
3 You are bankrupt
Using your tax refund dollars to pay off your outstanding loan balances can be one of the best favors you could toward yourself. And in case, you are going a certain type of bankruptcy proceedings, then your assigned Trustee can make that decision on your behalf. In Chapter 13 bankruptcy cases, bankruptcy trustees can request the court to use your tax refund money for your debt relief. However, in case of Chapter 7 bankruptcies, petitioners can lose all or a part of their tax refund. Still, they can prevent its seizure by the IRS. As soon as you've been discharged off your debts, your tax refund dollars will be in safe hands. Hence, if you think there is a possibility of losing your tax refund over bankruptcy, then you may find out more from your trustee.
4 You owe student loan debt
One of the most interesting reason for student loans to have such affordable rate of interests as compared to other loans, is that they're nearly inescapable. Unfortunately, if you retire with student loan debt, then the government can even have your Social Security payments levied to cover your debt payments. So, it is but obvious for the IRS to siphon off your tax refund dollars over to the Department of Education, if you haven't paid off your student loans.
Tax refund - When they are not seized
Here are two of the many reasons when you tax refund dollars will not be seized by the IRS:
1 File Separately
If you are married and want to shed off the burden of tax refund seizure, you can file your taxes as married filing separately. This way your refund money will safe from the hands of the IRS. Individual spouse will have to bear the burden of his or her financial woes alone.
2 Injured Spouse Allocation
To prevent the IRS from seizing your tax refund money, you can file for injured spouse relief'. This is just to stay clear of your obligations and to prove your case to the IRS that you've fulfilled your tax obligations and you have nothing to do with the present scenario. However, you should have your own sources of income, should have made tax payments or even had taxes on hold from that income, and that you're expecting the IRS to grant you with your due tax refund.
You'll have to complete Form 8379 (Injured Spouse Allocation), to apply for injured spouse relief and to calculate the amount of tax refund you should get. Make sure, you don't confuse injured spouse relief with innocent spouse relief. This is because the latter comes into play when either of the spouses has been charged with tax fraud, tax evasion, under-reporting of income, or falsifying tax return papers. These acts are federal crimes and might draw civil penalties toward both the spouses, in case a joint return was filed by them.