For many taxpayers, an IRS tax refund provides valuable financial support and can make a real difference to the household budget. However, there are situations in which this amount may never reach the taxpayer’s bank account, particularly where outstanding debts allow the refund to be seized.
In this article, we will explain when this can happen and what you should keep in mind.
Seizure of an IRS Tax Refund: When and How Can it Happpen?
Receiving an IRS tax refund, where one is due, is often the most eagerly anticipated stage of the annual tax return process.
In another article, we shared several tips on how you can maximize the amount of your tax refund.
What some taxpayers may not realize is that this much-anticipated payment may never reach their bank account because the refund itself can be seized.
A seizure is a legal enforcement mechanism used to recover outstanding debts when someone fails to meet their payment obligations and becomes a debtor.
What types of debts can lead to the seizure of an IRS Tax Refund?
When people think about the seizure of an IRS tax refund, they often assume that it only applies to unpaid tax debts.
In practice, however, this is not the case.
Both debts owed to the Portuguese Tax Authority and debts owed to private creditors may result in the seizure of an IRS refund.
This is because, for enforcement purposes, an IRS refund is treated as a financial asset in the same way as any other form of income. As such, it may also be subject to seizure.
That said, before enforcement proceedings can begin, the creditor must prove the existence of the debt and complete the necessary legal procedures with the Portuguese Tax Authority.
What happens if you file a joint tax return?
In the case of a joint IRS tax return, the tax refund is considered a credit belonging to the entire household.
As a result, using the refund to settle one person’s debt may create an unfair situation, as it can also affect household members who have no connection to the debt.
Currently, Portuguese legislation does not provide a clear legal framework specifically addressing this issue. Court decisions have also varied, meaning that each case must be assessed individually based on its particular circumstances.
What should you do if your tax refund is seized?
If you are notified that your IRS tax refund has been seized to settle a debt that you acknowledge, your options are limited. In most cases, you will either need to pay the outstanding amount or attempt to negotiate a settlement agreement with the creditor.
However, if you believe the seizure is irregular or that you are not legally responsible for the debt, you have the right to challenge the decision.
This challenge may also be brought by your spouse or partner in a de facto union if the seizure concerns the refund from a joint tax return.
Depending on the circumstances, the available legal remedies include:
- Opposition to tax enforcement proceedings
This applies when the enforcement action has been initiated by the Portuguese Tax and Customs Authority (Autoridade Tributária e Aduaneira), the Social Security authorities, or another public body.
- Opposition to the seizure
This legal remedy is used when the seizure has been requested by a private creditor. It generally occurs after other assets have already been seized but were insufficient to satisfy the outstanding debt.
Conclusions
The best way to avoid having your IRS tax refund seized is to keep your tax affairs up to date and ensure that any outstanding debts are addressed as early as possible.
If you are unsure about your tax situation or have received a notice of enforcement, seeking advice from a Certified Accountant can help you understand your rights and ensure that the appropriate legal procedures are followed.