Reasons

• The IRS can only take a tax refund for certain reasons. If you owe money on tax debt that was not discharged in the bankruptcy, either for state or for federal taxes, the IRS can keep your tax refund to apply towards that debt. The same is true in some cases if you have a non-dischargeable child support or alimony obligation, and the recipient has requested the government withhold your refund.
  
  

Trustee Seizure

• A bankruptcy trustee may also ask the IRS to hold a person's tax refund after a bankruptcy discharge. This is because the tax refund is typically earned during part of the year when a debtor was not under bankruptcy protection, and the bankruptcy trustee views this as being available to pay creditors. In addition, it is one of the easiest assets for a trustee to take to pay creditors, especially when compared to selling off other assets.
  
  

Time Frame

• The amount of an income tax refund that a bankruptcy trustee will take may depend on when a debtor files for bankruptcy. If a person files for bankruptcy relatively early in the year, much of the present year's refund would be received the following year, long after the bankruptcy has been discharged. The trustee may have a small claim against that refund, but will probably have more claims against the prior years refund if the debtor has not received it yet. Generally, a trustee will specify during the bankruptcy if he will be taking any income tax refund.
  
  

Exemptions and Protecting the Refund

• If the IRS takes your refund for tax debt or child support, the taxpayer cannot do much to prevent it. If the bankruptcy trustee expresses an interest in the refund, the debtor may be able to exempt the cash amount of the refund under state or federal law, protecting it from the trustee. If the trustee expresses an interest in the next year's refund, the taxpayer can adjust his withholding so that there is a small, or even no refund to take.