Every year around tax time, current and prospective clients call to see if their tax returns are safe, or if they can be garnished. The answer depends on whether you are talking about your Federal Tax Return or your State Tax Return. Lets start with the Federal Tax return. Federal Tax returns are subject to garnishment by the IRS for past Tax debts as well as interest and penalties, the Department of Education can garnish you refunds for Student Loans in Default and the Department of Treasury can garnish your refund for failure to pay child support, spousal support or state income tax obligations. Other creditors, such as credit card companies, can not garnish your Federal Tax return; however, if the return is deposited in your bank account the money can be garnished at that time. So if you have creditors who may be looking towards your tax return for debt repayment, you may want to consider getting an old fashioned check from Uncle Sam, so that the electronic deposit does not get garnished when it hits the bank.
State Taxes are different story. The State of Michigan will honor judgments from Michigan Courts and Federal garnishments. So in addition to the parties who can garnish your Federal Tax Return, anyone with a Michigan Court Judgment can garnish your Michigan Taxes. If you have received a notice of garnishment from the “Third Party Withholding Unit” and you are considering a bankruptcy filing, speak with your attorney, or hold off filing your Tax return until after the Bankruptcy Filing.
