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When the Arizona Department of Child Support Services moves to seize your federal or state tax refund (known as “offsetting”), you should receive advance notice of the proposed seizure. For federal income tax offsetting, the notice will come from the Financial Management Service, a division of the US Department of Treasury. For state income tax offsetting, the notice will come from the Arizona Department of Revenue.
You should take action as soon as you receive a notice from either of these agencies. Hopefully there has been a mistake, and you can contest the proposed offsetting. At the very least, you may be able to minimize the impact of an unavoidable tax refund seizure. In rare situations where there’s nothing that you can do to minimize the proposed offset, you can at least take preventative measures to ensure future tax refund offsets have less of an impact on your income.
If you are expecting a substantial tax refund and the proposed offset will affect wipe out most—if not all—of the refund, you may want to consult with a family law attorney. You’ll need to weigh the value of the potential refund against the cost of hiring an attorney, but if there is a way to save your tax refund from the proposed offset it could be well worth the extra cost.
Request an administrative review
If you dispute the amount of child support arrears owed, you can request an administrative review of the proposed offset. To be successful, you’ll need to provide sufficient evidence that the proposed offset exceeds the amount of child support arrears. This should be relatively easy to prove with a recent child support arrears statement.
Alternatively, if the custodial spouse is not a recipient of TANF benefits, you may be able to stop the offset on the grounds that the amount of child support arrears does not qualify for an income tax offset. The law stipulates that the state can only seek an income tax offset if the arrears are $5,000 or more, so if your child support arrears are less than this amount the government cannot seize your income tax returns.
File an Injured Spouse Allocation form
Non-custodial parents who have remarried often face higher stakes with a tax refund offset, as both spouses’ income is at risk for seizure. However, state law does not hold a spouse responsible for their partner’s child support, so it’s fairly easy to have your spouse’s income tax refund removed from the equation. Your spouse will simply need to file an Injured Spouse Allocation form (Form 8379) with the IRS, and request that their portion of the refund be kept separate from your portion of the refund. You may file this form automatically with your income taxes, or you may file it immediately upon receiving a notice of seizure.
File Chapter 13 bankruptcy
Bankruptcy law doesn’t allow a parent to erase child support arrears, but you may be able to restructure the arrearage and pay down the balance over a 3- to 5-year time period. Declaring bankruptcy is a serious matter with significant long-term repercussions, so you should counsel with a bankruptcy attorney before taking this action.
File your taxes separately from your spouse
If you’d like to protect your spouse’s income tax return from being offset for your child support arrears, and if the Injured Spouse Allocation form isn’t a valid option, then you may want to consider filing your income taxes separate from your spouse. That said, while filing your taxes as “married filing separately” is an option, you may miss out on key deductions and lower tax brackets that are available to spouse who file as “married filing jointly.” Filing separately may save your spouse’s income from an offset, but it also could end up costing you more in terms of higher taxes. As such, you should consult with an accountant before changing your tax filing strategy.
Adjust your income tax withholding percentage with your employer
While adjusting your withholding percentage will have no effect on this particular tax offset, doing so may protect your income tax returns for future years if you are subject to another offset. By lowering the percentage of income that your employer withholds from your paycheck, you will get to keep more money from each paycheck as your employer sends less in taxes to the IRS. If you are subject to an offset the following year, the income that you managed to retain on each paycheck wouldn’t be subject to the offset. In fact, if you adjust your withholding percentage to the point that you are not entitled to a tax refund (i.e. you owe the IRS during tax season), you won’t be subject to a tax refund offset at all.
As with our discussion of potentially changing your tax filing status, it’s important to note that you should discuss your finances with an accountant before making major tax decisions such as adjusting your withholding percentage. Knowingly dropping your withholding percentage too low—especially switching to exempt status when you’re not eligible to be exempt—can have serious repercussions, including punitive fees and interest imposed by the IRS.
Penalties for not paying child support
While you should absolutely fight any unreasonable attempt to seize your income or assets, it’s worth considering the repercussions that come with child support arrears. Losing your income tax refund may be painful, but some of the enforcement methods at the state’s disposal can be much worse. If your child support arrears are substantial, you may be subject to the following penalties:
- Asset seizure
- Contempt of court charges
- Federal criminal prosecution, prison sentence, and fines
- Negative credit bureau reporting
- Property liens
- State criminal prosecution, jail sentence, and fines
- Suspension or revocation of licenses (driver’s license, professional licenses, etc.)
- Wage garnishment (up to 65% of your gross income)
Considering this, it may be better to allow the IRS and/or Arizona State Tax Commission to proceed with the income tax offset in order to avoid more serious penalties. Before you choose how to respond, consult with a family law attorney to discuss all of your options and make an informed decision.