Can a Private Creditor Garnish the IRS for an Income Tax Refund?

Isn’t tax season a wonderful time for creditors seeking to collect on a judgment?  A time when all that money flowing from the federal government to debtors could go straight into your pocket.  Or can it?  Can you garnish the Internal Revenue Service (“IRS”) in order to take that refund check before the debtor gets a hold of it and the money disappears?

The answer is:  NO.  A private creditor cannot garnish the federal government for an income tax refund.  The idea that the IRS cannot be garnished is based on the federal government’s sovereign immunity stemming from Article III, Section 2 of the U.S. Constitution.  The idea of sovereign immunity was first clearly discussed by the courts in United States v. Clark, 8 Pet. (33 U.S.) 436, 444 (1834) where the Court stated that the United States was not suable as a common right.  Subsequent case law has established that the federal government, including all of its departments and agencies, are immune from suit unless said immunity has been waived.  Specifically, the IRS cannot be sued without the express authorization of Congress.  Blackmar v. Guerre, 342 U.S. 512, 514-15 (1952).  The term “sued” has been interpreted to include acts of garnishment.

Federal and state agencies are the only entities that can offset an IRS tax refund straight from the federal government before it is paid to the individual.  This is accomplished through the Treasury Offset Program administered by the U.S. Department of Treasury by virtue of 26 U.S.C. § 6402(d) and 31 U.S.C. § 3720A, and other applicable laws.  These provisions within the United States Code allow federal agencies and states to offset their debts through an IRS tax refund.  There is a priority system utilized with the IRS at the top, followed by state agencies overseeing child support payments then other federal agencies with outstanding debts and lastly state agency debts.

So, what do you do if you want to get your hands on that income tax refund?  Well, once that refund hits an individual’s bank account it is fair game.  Even though a tax refund from the IRS stems from income earned by the individual, it is not considered exempt disposable earnings under Section 222.11(1)(b), Florida Statutes.  In re Lancaster, 161 B.R. 308, 309 (S.D. Fla. 1993).  As an additional note, an income tax refund is not exempt as wages for the purpose of bankruptcy and must be turned over to the trustee for administration.  Id. at 310.  The refund must be turned over to the trustee because bankruptcy courts have determined that an IRS income tax refund is considered “property” of the estate subject to the trustee’s power.  Kokoszka v. Belford, 94 S. Ct. 2431, 2435 (1974).

This poses the problem of how to get the refund after delivery to the debtor, but before the funds are transferred or spent.  It’s all about timing.  The first vital task is taking a deposition in aid of execution duces tecum or propounding a request for production in aid of execution along with interrogatories in aid of execution.  Ask questions about whether the person typically receives a refund, when they normally file and how much they have received or anticipate receiving this year.  Also, request copies of their last three income tax returns, which will show when the tax returns were filed and provide you with an average time for the current year.  By doing this, you will know whether a refund is coming and approximately when they will receive it.  Of course, do not forget to confirm where they bank or you will be garnishing in the dark.  Once you have that information, you can file and serve your garnishment paperwork right around when that refund is being deposited.  If you time it just right, bingo!  If not, try again, and again…and again.

In sum, a private creditor cannot garnish the IRS directly because of its sovereign immunity.  However, a federal income tax refund is subject to garnishment once it has been provided to the individual, such as deposited into a bank account.  The refund is not considered earnings of the debtor and therefore is not exempt.  So, it you know your debtor is going to be receiving an income tax refund and you have your timing down, one garnishment could ideally satisfy your entire judgment balance (or at least put a dent in it).