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Unemployment tax refunds may be seized for unpaid debt and taxes

Samuel Corum/Bloomberg via Getty Images

The IRS will start issuing tax refunds on unemployment benefits this week. But some people may see a smaller refund — or none at all.

The lesser amounts will apply to those who have past-due debts, like federal and state taxes, child support, student loans and unemployment benefits that were paid in error, according to the IRS. The federal government can use tax refunds to offset overdue bills.

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In the private sector, funds may be garnished by third-party creditors (like banks, for past overdraft charges) once they hit a taxpayer’s bank account, according to Nina Olson, executive director of the Center for Taxpayer Rights.

(Garnishment is a court order that allows for funds to be removed from someone’s account.)

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

Unemployment tax break

However, the federal Treasury Offset Program allows up to 100% of a tax refund to be seized to pay debts owed to federal or state agencies, according to Erica York, an economist at the Tax Foundation. (This applies to government agencies, not private debt collectors.)

It appears federal student loan borrowers will get a reprieve due to a pause in federal student-loan payments through September.

“The Covid-19 student loan flexibilities were extended through at least Sept. 30, 2021, and include a pause on collections activity, including federal tax offsets,” according to an Education Department spokesperson.

Private creditors can also access tax refunds once deposited into a bank account, depending on state laws, York said. That may apply to private debts, such as medical bills or credit card debts, subject to a court order.

The IRS is issuing the refunds via direct deposit for those who provided bank account information on their 2020 tax return. (The funds will be mailed as a paper check to the address of record if that information isn’t available.)

Banks must obey court-ordered garnishment and state garnishment laws unless Congress exempts a specific payment from garnishment, according to a banking industry source.

Congress had exempted stimulus checks received since March 2020 from being seized by government agencies, according to Olson. (Child support was an exception for the first round of payments, she said.) However, that same protection isn’t available for unemployment tax refunds.

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