Author: LegalEase Solutions
QUESTION PRESENTED
Can a creditor seize a husband’s share of a joint tax refund for his wife’s individual debt?
SHORT ANSWER
Under Michigan law, if a creditor files a garnishment on tax refund, in the case of joint tax return, the non-obligated spouse may be able to protect his or her part of the refund from garnishment under the “Non-Obligated Spouse” rule. For this, they have to file a specific form, NOS Form-743.
Under federal law, private creditors can’t garnish one’s federal tax refund. Such refund can be reduced only by an “offset.”
RESEARCH FINDINGS
In Michigan
Under Michigan Law, the Michigan Department of Treasury withholds income tax refunds or credits for payment of certain debts, state agency debts, garnishments, and IRS levies on individual income tax refunds. But the Treasury is required to provide notice to taxpayers before withholding individual income tax refunds or credits for payment of a debt.
Moreover, prior to holding the debtor’s income tax refund, the debtor must have received notification from the creditor who brought the case before the court. This notification must be in the form of “Request and Writ for Garnishment (Income Tax Refund/Credit)”. The taxpayer receives “Request for Income Information” notice and “Income Allocation for Non-Obligated Spouse (NOS Form-743)”.1 The NOS Form allows joint filers to allocate (separate) income by spouse. In the NOS form, income from each spouse must be entered and must be returned within 30 days of the date on the “Request for Information” notice.
Accordingly the statute provides that:
Sec. 4061a. (1) The state treasurer shall intercept a state tax refund or credit that is subject to a writ of garnishment served upon the state treasurer pursuant to section 4061.1 Upon intercepting a state tax refund or credit pursuant to a writ of garnishment, the state treasurer shall do all of the following:
(a) Calculate the amount available from the interception to satisfy all or part of the garnishment, and within 90 days after establishing other liability for which the state tax refund or credit may be applied under section 30a of Act No. 122 of the Public Acts of 1941, being section 205.30a of the Michigan Compiled Laws, do both of the following:
(i) File with the court a verified disclosure that identifies the intercepted amount, less any setoff, counterclaim, or other demand of the state against the defendant.
(ii) Serve upon the plaintiff and defendant a copy of the disclosure described in subparagraph (i).
(b) Unless notified by the court that objections to the writ of garnishment have been filed, deposit the amount available for the garnishment with either of the following pursuant to the terms of the writ not less than 28 days after filing the disclosure pursuant to subdivision (a):
(i) The clerk of the court.
(ii) The plaintiff’s attorney of record in the garnishment action, or, if the plaintiff is not represented by counsel, the plaintiff or the plaintiff’s designee.
(2) Objections to the writ of garnishment of a tax refund shall be filed with the court within 14 days after the date of service of the disclosure on the defendant.
MCL § 600.4061a
“Michigan law required [the creditor] to serve a writ of garnishment on the State. Absent objection, once the writ of garnishment for Debtor’s income tax refund was received, the State was required to intercept the refund and deposit the garnished funds with the clerk of the court or Chrysler’s attorney.” In re Manuel, No. 14-53487, 2014 WL 7405471, at *1 (Bankr ED Mich December 24, 2014).
If in case the department finds that the refund claimed is on a joint tax refund, then MCL § 205.30a requires that:
(4) If the department determines that all or a portion of a refund claimed on a joint tax return is subject to application to a liability of an obligated spouse, the department shall notify the joint taxpayers by first class mail sent to the address shown on the joint return. The notice shall be accompanied by a nonobligated spouse allocation form. The notice shall state all of the following:
(a) That all or a portion of the refund claimed by the joint taxpayers is subject to interception to satisfy a liability or liabilities of 1 or both spouses.
(b) The nature of the other liability or liabilities and the name of the obligated spouse or spouses.
(c) That a nonobligated spouse may claim his or her share of the refund by filing a nonobligated spouse allocation form with the department of treasury not more than 30 days after the date the notice was mailed.
(d) A statement of the penalties under subsection (7).
(5) A nonobligated spouse who wishes to claim his or her share of a tax refund shall file with the department a nonobligated spouse allocation form. The nonobligated spouse allocation form shall be in a form specified by the department and shall require the spouses to state the amount of income or other tax base and all adjustments to the income or other tax base, including all subtractions, additions, deductions, credits, and exemptions, stated on their joint income tax return or other joint tax return that is the basis for the claimed refund, and an allocation of those amounts between the obligated and nonobligated spouse. In allocating these amounts, all of the following apply:
(a) A federal deduction for 2-income married persons shall be allocated to the spouse with the lower income who claims the deduction.
(b) Individual income shall be allocated to the spouse who earned the income. Joint income shall be allocated equally between the spouses. The tax base appropriate to tax other than income tax shall be similarly allocated.
(c) Each spouse shall be allocated the personal exemptions he or she would be entitled to claim if separate federal returns had been filed, except that dependency exemptions shall be prorated according to the relative income of the spouses.
MCL § 205.30a
Therefore, the party seeking to garnish a joint return must first file a writ of garnishment, of which debtor should have received a copy, and then the treasurer must notify the joint filers and provide the nonobligated spouse an opportunity to claim their share of the return.
Federal Tax Returns
(1) In general.–Upon receiving notice from any Federal agency that a named person owes a past-due legally enforceable debt (other than past-due support subject to the provisions of subsection (c)) to such agency, the Secretary shall—
(A) reduce the amount of any overpayment payable to such person by the amount of such debt;
(B) pay the amount by which such overpayment is reduced under subparagraph (A) to such agency; and
(C) notify the person making such overpayment that such overpayment has been reduced by an amount necessary to satisfy such debt.
(2) Priorities for offset.–Any overpayment by a person shall be reduced pursuant to this subsection after such overpayment is reduced pursuant to subsection (c) with respect to past-due support collected pursuant to an assignment under section 402(a)(26) of the Social Security Act and before such overpayment is reduced pursuant to subsections (e) and (f) and before such overpayment is credited to the future liability for tax of such person pursuant to subsection (b).
If the Secretary receives notice from a Federal agency or agencies of more than one debt subject to paragraph (1) that is owed by a person to such agency or agencies, any overpayment by such person shall be applied against such debts in the order in which such debts accrued.
26 U.S.C. § 6402
The federal regulation on offset made with regard to a tax refund payment based upon joint return states that:
If the person filing a joint return with a debtor owing the past-due, legally enforceable debt takes appropriate action to secure his or her proper share of a tax refund from which an offset was made, the IRS will pay the person his or her share of the refund and request that Fiscal Service deduct that amount from amounts payable to the creditor agency. Fiscal Service and the creditor agency will adjust their debtor records accordingly.
31 C.F.R. § 285.2 (f)
With regard to Injured Spouse Claim, when a husband and wife file a joint tax return, then, the spouse who does not owe the obligation (referred to as the “injured spouse”) could file a claim for his or her share of the overpayment (referred to as an “injured spouse claim”), and, the Service is required to refund his or her share of the overpayment.2
Moreover, the Internal Revenue Service ruled that:
[W]hen a husband and wife file a joint return each spouse has a separate interest in the jointly reported income and a separate interest in any overpayment.
Rev. Rul., , , C.B., 1980-1, (1980)
CONCLUSION
In Michigan, a judgment creditor must file a writ of garnishment with the Treasury. The Treasury must then notify joint filers of the writ of garnishment and allow the nonobligated spouse allocate their separate income and return.
Under Federal law, only state and federal government agencies can take tax refund as payment towards a debt. No individual or private creditors are allowed to take such tax refund for debt payment. It is the United States Department of Treasury under the Treasury Offset Program (TOP) that allows federal and state government agencies to collect debts owed to them. Treasury offset Program may garnish or offset any debts owed to them with the tax refund. But private creditors such as credit card companies do not have access to such tax refund unless such fund is deposited to any bank account.
