Can EDD Take Your Tax Refund for Overpayment Recovery?

The Employment Development Department (EDD) can take your state tax refund if you owe money due to an overpayment of unemployment or disability benefits. Many people are caught off guard when they receive a lower refund than expected, often unaware that EDD has the authority to recover debts this way.

Why EDD May Take a Tax Refund

When EDD determines that someone received more benefits than they were entitled to, the overpaid amount becomes a debt that must be repaid. Overpayments can result from errors in reported income, incorrect eligibility determinations, or failure to update information affecting benefit amounts. Some individuals unknowingly receive excess payments due to administrative mistakes, while others may have provided inaccurate details.

California law allows EDD to recover these debts through various means, including intercepting state tax refunds. Under California Unemployment Insurance Code Section 2736, EDD has the authority to offset refunds issued by the Franchise Tax Board (FTB) without requiring a court judgment. Once a debt is established, EDD can proceed with collection efforts immediately.

Interest and penalties can significantly increase the total amount owed. If the overpayment is classified as fraud—meaning the recipient knowingly provided false information—EDD may impose a 30% penalty on top of the original debt, as outlined in California Unemployment Insurance Code Section 1375. Unpaid balances also accrue interest at an annual rate of 3%, increasing the financial burden. Addressing overpayments promptly can help minimize these additional costs.

Official Collection Mechanisms

EDD uses multiple collection methods beyond tax refund offsets. Wage garnishment allows the agency to deduct a portion of a debtor’s paycheck directly from their employer. Under California Code of Civil Procedure Section 706.070, up to 25% of disposable earnings—after legally required deductions—can be withheld. Employers must comply with these orders or face penalties.

Bank levies provide another method for EDD to collect unpaid amounts. Under California Revenue and Taxation Code Section 19280, EDD can issue a levy to financial institutions, freezing funds in a debtor’s account and seizing available balances up to the owed amount. This action typically follows a notice period, giving individuals an opportunity to resolve the debt before funds are withdrawn.

For self-employed individuals or business owners, EDD may file a lien against personal or business assets. A lien, recorded with the county, establishes EDD’s legal claim over property, making it difficult to sell or refinance assets without first satisfying the debt. Liens also appear on credit reports, potentially affecting loan approvals.

Factors That Determine the Offset Amount

The amount EDD takes from a state tax refund depends on the total outstanding balance. EDD will attempt to recover as much of the debt as possible, up to the full refund amount. If the refund exceeds the debt, the taxpayer receives the remaining balance. If the refund is less, the offset is applied, and the remaining debt continues to accrue interest until fully repaid.

The timing of the offset request also matters. EDD submits claims to the Franchise Tax Board before tax season, and any debts on record at that time are eligible for interception. However, if a refund is processed before EDD’s claim is finalized, the offset may not occur until the following tax year.

Joint filers face additional complexities. If only one spouse owes an overpayment, the other may be entitled to a portion of the refund through an “Injured Spouse Allocation.” This requires submitting Form FTB 705, which allows the non-debtor spouse to claim their rightful share. Without this request, the entire refund may be applied to the debt.

Disputing an Overpayment

Challenging an overpayment determination begins with reviewing EDD’s notice, which explains the basis for the decision and the amount owed. Requesting a copy of the claim file can help identify discrepancies, such as miscalculated earnings or incorrect benefit periods. Under California Unemployment Insurance Code Section 1334, individuals have 30 days from the notice date to appeal.

Filing an appeal requires submitting a written request to the California Unemployment Insurance Appeals Board, explaining why the overpayment determination is incorrect. Supporting documentation, such as pay stubs, employer statements, or medical records, can strengthen the case. If the dispute involves an administrative error, providing factual records can improve the chances of a favorable outcome. The appeals process includes a hearing before an administrative law judge, where both EDD and the claimant present their arguments.

Arranging Partial Payments

For those unable to repay their debt in full, EDD offers installment agreements that allow structured, gradual repayment. These arrangements help prevent further collection actions, such as wage garnishment or bank levies. To qualify, individuals must contact EDD’s Benefit Overpayment Collection Section and propose a payment plan based on their financial situation. While there is no fixed minimum payment, EDD typically expects a reasonable monthly amount.

Missing a payment can result in the reinstatement of aggressive collection efforts. If an installment plan is canceled due to nonpayment, EDD may pursue the remaining balance through tax refund offsets or other enforcement measures. Additionally, interest continues to accrue on unpaid amounts. Those facing financial hardship should communicate with EDD promptly to renegotiate terms or request a temporary deferment.

Effects on Federal Refunds

While EDD primarily intercepts California state tax refunds, federal tax refunds can also be affected under certain circumstances. The U.S. Department of the Treasury’s Treasury Offset Program allows state agencies to submit eligible debts for federal tax refund interception. Although EDD itself does not directly seize federal refunds, it can refer outstanding unemployment insurance overpayments to the California Franchise Tax Board, which may then escalate the debt to the federal level if it remains unpaid.

Federal refund offsets are typically reserved for long-delinquent debts or fraud-related overpayments. If a debt is submitted to the offset program, the IRS will reduce the taxpayer’s refund by the amount owed and redirect it to the appropriate state agency. Unlike state-level offsets, federal intercepts do not require prior notice from EDD, as the IRS issues its own notification once the refund has been adjusted. Individuals concerned about potential federal offsets should check their debt status with EDD and the Franchise Tax Board before filing their tax return.