Creditor Cannot Garnish IRS To Get Your Tax Withholding Or Refunds
If you have paid money to the IRS to cover estimated future tax liability, can a judgment creditor ask the IRS to turn over the money the IRS is holding on your account? One of my clients has in his possession a large amount, over $1 million, of U.S. Savings bonds. He understands that a prospective judgment creditor may be able to attack the bonds. The client wants to cash out the bonds and take other measures to protect the cash. If he redeems the bonds, he says, the bank will pay the IRS money to cover his estimated tax liability on the savings bond interest. He wants to know if a creditor could get the money the IRS is holding for an uncertain future tax liability.
Federal law prohibits civil judgment creditors from garnishing the IRS. Creditors cannot garnish tax refunds in the IRS’s possession. Some debtors seek protection of cash by advance payment, or overpayment, of future tax liability. In bankruptcy, a prospective tax refund is property of your bankruptcy estate and must be turned over to the bankruptcy trustee when received from the IRS. A trustee cannot take the money from the IRS before the refund is issued to the debtor.
So could one prepay future tax liability by say overpaying $50,000 to the IRS, and each year roll it over instead of taking a refund by saying "apply it to next year's return?
I realize it would seem dumb to overpay the IRS by so much but if the alternative is for a creditor to get it, it would be better to apply it to a future tax liability, or eventually, take a refund after the creditor is gone.