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Social Security benefits are off–limits to creditors, such as credit–card companies and banks. But the U.S. can collect debts to federal agencies by "offsetting," or withholding Social Security and disability payments.

The Treasury currently withholds benefits of 3.1 million Social Security recipients to recover defaulted student–, farm– and small–business loans, unpaid income taxes, amounts veterans owe for health care, and other debts to the government.

Previously, the U.S. hasn't been able to withhold Social Security payments to recover most debts delinquent for more than ten years.

But a provision in the 2008 Farm Bill lifted the ten–year statute of limitations on the government's ability to withhold Social Security benefits in collecting debts other than student loans—for which the statute of limitations was lifted in 1997—and income taxes, where the limit remains 10 years.

This means that a person who defaulted on a small–business loan in 1995, for example, and who is receiving Social Security could be notified that his benefits may be reduced each month until the debt, with interest, fees, and penalties, is paid. The Treasury can withhold 15% of the benefit, though it can't be reduced to below $750. Tax debts have no floor.

The change will add more than $6 billion to the $75 billion in delinquent debt individuals owe the government, according to the Financial Management Service, the Treasury's debt collection unit.

A Treasury spokesman says the new legislation "allows Treasury's Financial Management Service to collect older debts and levels the playing field so that all eligible debts, regardless of age, are subject to debt collection. Treasury expects this legislation will result in increased collections of $10 million per year in delinquent federal non–tax debt."

Though no one argues that people shouldn't repay their debts, the change is coming at a challenging time for older Americans already pinched by mortgage woes, pension cuts and spiraling medical costs.

The shift applies to debtors of all ages, but Social Security recipients will bear much of the brunt. A Wall Street Journal analysis of Treasury Department data shows that Social Security recipients comprise a large and growing percentage of people from whom the Treasury recovers debts.

For years, most debt the Treasury collected through its "Offset Program," came from withholding income–tax refunds. But with an aging population and growing unemployment, roughly 10% of the $4.3 billion in debts collected by the Treasury came from Social Security benefits in 2008, the latest figures available. That's up from 1.6% in 2001, according to Journal computations that the Treasury confirms.

Though the law has expanded the age of debts that can be recovered, it hasn't addressed the sometimes–Kafkaesque process debtors can face when challenging the validity of a claim.

Consider the predicament of Dr. Robert Steinberg, the founder of Scharffen Berger chocolates, who spent more than six years and thousands of dollars in legal fees appealing the Social Security Administration's claim that he owed it more than $28,000.

Dr. Steinberg received disability benefits in the early 1990s while undergoing chemotherapy for lymphoma, a condition that ultimately claimed his life. Dr. Steinberg returned to work sporadically at a free clinic before co–founding the chocolate company.

Year later, the Social Security Administration notified Dr. Steinberg he was overpaid in the 1990s. In May 2002, with the matter still unresolved, the agency turned the debt over to the Treasury for collection.

In Oct. 2002, administrative law judge Gary Lee found that the Social Security Administration had never established the amount of the overpayment; had dismissed an earlier appeal "for spurious reasons"; had misinformed Dr. Steinberg and mishandled his later appeals; and had lost his file. He noted that Dr. Steinberg was "without fault," and told the agency to stop its collections efforts.

Dr. Steinberg died in 2008, at 61. His lawyer, Peter Young, a former staff attorney for the Social Security Administration, has handled more than 100 overpayment cases, "very few of which were accurate," he says. "Most people can't find or afford help, and give up very quickly and end up with painful offsets on a fixed budget."

An agency spokeswoman says mistakes can happen, but "over all, the process works."

A Treasury spokesman says the new regulations require agencies seeking to recover debts more than a decade old to give debtors the right to review and copy their files, make payment arrangements, and apply for disability and hardship waivers.

But a recent dispute about a student loan shows that even with these rights, a person challenging an old debt can face hurdles similar to homeowners in foreclosure trying to modify a loan that has been resold.

In 2003, the U.S. began withholding $173 a month in Social Security benefits from Annie Brown, a paralyzed 75–year–old widow living in a nursing home to repay a defaulted $8,823 student loan the Education Department says she took out in 1989. The offset reduced Mrs. Brown's benefit to about $980 a month.

Mrs. Brown said a granddaughter had forged her signature on a loan application. Her daughter and a lawyer spent more than four years disputing the debt with the owner of the loan, United Student Aid Funds, a student–loan guarantor that also was acting as one of the Education Department's 21 debt collectors. USA Funds itself farms out various debt–collection activities to others, which it did in Mrs. Brown's case.

Between 2003 and 2008, Mrs. Brown's daughter and Lynn Drysdale, a legal–aid lawyer in Jacksonville, Fla., corresponded numerous times with USA Funds and two other debt–collection companies it hired. One letter from USA Funds warned that unless documents were received "within 30 days from the date this letter was generated...your case will be closed." The letter was undated. Another letter required Mrs. Brown to refer to an attached document. There was no attachment. "I don't know how a lay person could maneuver through this process," says Ms. Drysdale. "Nobody seemed to know what was needed."

In 2007, USA Funds denied Mrs. Brown's claim, citing a recently passed federal rule requiring people claiming identity theft on student loans to obtain a criminal court verdict of the crime. That was impossible for Mrs. Brown; a statute of limitations for bringing a case had passed years earlier. In any case, she wasn't alleging identity theft, but forgery.

Robert Murray, a spokesman for USA Funds, agrees that Mrs. Brown's signature was forged. "It's absolutely a forgery," he says, "It \[the loan\] should never have been made."

But he says that USA Funds couldn't discharge the loan as a forgery because Mrs. Brown didn't return a required form in 2005, and that USA Funds must rigorously defend claims. "There are borrowers who want to get out of a legitimate debt," he says. "By the same token, we want to work with individuals who have a legitimate issue."

Ms. Drysdale, the legal–aid lawyer, finally sought to obtain a disability waiver for her client. That process took more than a year, and was achieved only after Ms. Drysdale asked for help from the Social Security Administration's ombudsman, who declined to comment.

In August 2009, the Education Department agreed that Mrs. Brown is permanently disabled, and discharged her obligation to repay the loan she never took out. The Treasury returned her withheld benefits in December.

• Dueling Retirement Plans

Three steps to take to protect your account data from getting into the wrong hands

Whether by choice or necessity, American consumers are increasingly relying on debit rather than credit cards. Debit card spending has risen steadily, growing from 47.7 percent of purchases made with plastic in 2003 to 58.9 percent in 2008 and it is expected to surpass 67 percent by 2013, according to the Nilson Report, a newsletter that tracks the consumer payment industry.

When you use a debit card, the money is immediately taken from your checking account. While using debit guarantees that you pay as you go, these cards have downsides, including a growing appeal to thieves. "As economic conditions have worsened, there's been a noticeable increase in all types of card fraud," says Avivah Litan, an analyst specializing in fraud detection and prevention at Gartner Research in Stamford, Conn. "But ATM and debit-card fraud is the top area of concern we're hearing about from banks all over the world."

Unlike credit-card thieves, who usually charge merchandise and then resell it to come up with money, people who create counterfeit ATM or debit cards by stealing your PIN and other account data can simply pull cold cash from your bank account. Using a technique known as skimming, they set up equipment that captures magnetic stripe and keypad information when you input your PIN at ATM machines, gas pumps, restaurants, or retailers.

Here's how you can protect yourself:

Be especially vigilant at gas stations, Litan says. "Gas pumps are notorious for skimming because they're produced by only a couple of different manufacturers, and if someone gets the key to one from a disgruntled employee, they can insert a skimming device inside the pump where it can't be seen," she says. She recommends using a credit card rather than a debit card when you fill your tank.

If you must use a debit card at the gas pump, choose the screen prompt that identifies it as a credit card so that you do not have to type in your PIN. The purchase amount will still be deducted from your bank account, but it will be processed through a credit-card network, which will give you greater protection from liability if fraud does occur. This is because card issuers typically have "zero liability" policies for both debit and credit cards, but sometimes exclude PIN-based transactions from that protection.

To reduce your risk at ATMs, use machines at banks rather than in convenience stores, airports, or any isolated locations, advises Darrin Blackford, a spokesman for the U.S. Secret Service, which investigates financial crimes involving interstate commerce. "A thief has to be able to attach and retrieve a skimming device to use the data it's gathered," he says. "And that's more likely to happen in nonbank settings where there's less traffic and no surveillance cameras."

That doesn't mean that bank ATMs are immune, however. In August 2008, Wachovia Bank reported that several debit-card "identities" were stolen when a skimming device was placed on an ATM at a branch in Cape Coral, Fla.

"It's often hard to spot skimmers," Blackford says. "But if you notice a change at an ATM you use routinely, such as a color difference in the card reader or a gap where something appears to be glued onto the slot where you insert your card, that's a warning sign you'd want to report to the bank that owns the machine."

Check them regularly—preferably online rather than waiting for monthly statements to arrive in the mail. Federal law limits your liability for fraudulent debit-card charges to $50, but only if you report the theft or loss of your card or PIN within two business days of discovering the problem. If you fail to report unauthorized charges within 60 days of the date the statement listing those charges was mailed, you could be liable for any unauthorized withdrawals afterward, including the full value of credit lines or savings accounts linked to your account for overdraft protection.

Visa and MasterCard have zero liability policies that go beyond federal law by exempting debit cardholders from liability in most circumstances when a bank investigation confirms that a transaction is fraudulent. But dealing with debit-card fraud can have a greater impact on your finances than credit-card fraud.

When you're a victim of unauthorized charges on a credit card, you won't be out any money while the disputed charges are being investigated. But when a thief steals money from your bank account using a counterfeit debit or ATM card, that cash won't be restored to your account until the bank conducts its investigation and classifies it as a case of fraud. Some victims of debit-card skimming scams who have contacted the Privacy Rights Clearinghouse, a nonprofit consumer advocacy group, about their experiences report that while banks in most cases replenished the stolen funds, some of them had no access to the money for several weeks while bank investigations were conducted.

Most people retire in the same town where they spent their final working years. But some seek out a new locale with ski slopes or perhaps ocean views. Of course, budget is a big concern. "Many people move close by and move to a smaller home or condo where they have less upkeep," says William Frey, a Brookings Institution demographer. "But they still want to stay close to their children and stay involved in the business world by consulting and remaining close to their clients." Here are some tips for finding a place that fits your budget and interests.

Cost of living.

Moving to a place with lower housing, food, and entertainment costs is an obvious way to stretch your nest egg. "A lower cost of living is the major factor behind retirement mobility," says David Savageau, author of Retirement Places Rated. "I don't know anyone moving from Kansas to Hawaii." Some 22 percent of Americans age 51 and older who moved between 1992 and 2004 did so to save money, according to a recent Center for Retirement Research at Boston College analysis. Estimate how your expenses will change if you move.

Low-tax locales.

Tax rates vary considerably by location. Seven states don't levy an income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. New Hampshire and Tennessee tax only dividend and interest income. And five states have no sales tax: Alaska, Delaware, Montana, New Hampshire and Oregon. Be sure to evaluate property taxes and state and local tax exemptions for seniors.

Healthcare facilities.

Your healthcare needs are bound to increase as you age. Make sure your prospective retirement spot has adequate health and elder-care facilities and a doctor who can treat any condition you may have. "You can call and see how difficult it is to get an appointment," says Michael Perskin, a geriatrics physician at the New York University Langone Medical Center. "If you're on hold for more than 10 minutes or you leave a message on voice mail and you don't get a call back, then you know."

Proximity to family.

Many retirees would like to become more involved in their grandchildren's lives. Living near family sometimes has another bonus: help with lawn care or transportation for grocery shopping-services you would otherwise have to hire. More than a quarter (28 percent) of older Americans who have relocated after age 51 did so primarily to be near children or relatives, Boston College found. "People often migrate toward someone because they have become more disabled or have lost their spouse and they need some support that they are not getting in their current location," says Mark Fagan, a sociology professor at Jacksonville State University in Alabama who studies retirement migration. "They will move toward their children or some friends to help them with their daily life."

Job opportunities.

Many people who haven't saved enough or have seen their investments drop significantly in value will need to work during the traditional retirement years. More than a third (38 percent) of Americans between the ages of 62 and 74 worked in 2008, up 39 percent since 1993, according to the Census Bureau. Although the national unemployment rate has been climbing, cities such as Kennewick, Wash.; McAllen, Texas; and Danville, Va., have added thousands of jobs over the past year. Look for a place that has plenty of part-time job opportunities or consulting work in a field that interests you.

Recreation and culture.

When you're no longer tied to a job, you have the freedom to live in wine country or within walking distance of a beach. Perhaps your ideal retirement spot has plenty of art galleries, golf courses, and hiking trails. College towns often fit the bill and host world-class speakers and entertainers, and they often have an affordable cost of living.

Public transportation.

Retirees often reach a point when they can't or no longer want to drive. Consider the cost and quality of a town's public transportation system and how to get around without a car. AppalCART, a regional bus service in Boone, N.C., for example, provides free local transportation. And retirees who join Walnut Creek, Calif.'s Senior Club ($7 annual dues) are eligible for a minibus service that offers transport within the city limits for $1 each way.

Housing needs.

Downsizing into a smaller house or condo goes a long way in stretching your retirement budget. "There's a lot of money tied up in your home, and sometimes there is someplace else you could buy a home and free up some of those assets," says Michael Goodman, a certified financial planner and president of Wealthstream Advisors in New York. Retirement communities and assisted living facilities aim to cater to baby boomers' changing needs and whims. "As you age, you are going to be less able to maintain a large home and [keep up the grounds], and you may be looking for a smaller place with less maintenance," says Fagan. "Rent in a place for a while to see how well you really like it."

Weather.

To some, it's important to not have to shovel snow or defrost a car. But warm climates also come with the downside of larger air-conditioning bills. Think about whether you want four distinct seasons. Some retirees can get the best of both worlds by maintaining or renting a residence in the north and then heading south for the winter.

Amenities.

Of course, you'll want to cover the basics, including the crime rate and quality of healthcare facilities. But don't forget about things like libraries, Internet and cellphone access, shopping, religious institutions, and senior centers. If you plan to travel on a regular basis, look for a place that's near an airport or train station. Some cities, including Boston, Princeton, N.J., and Washington, have developed nonprofit associations of seniors who pool their resources to stay safely in their homes longer. These aging-in-place communities typically provide a range of services, including affordable door-to-door transportation, home maintenance and meal services, and even a daily check-in phone call for an affordable annual fee.

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If history is any indicator, less than 1% of Americans will be audited by the Internal Revenue Service in the coming year. And while some of these audits are totally random, and there's nothing that the individual taxpayer can do about them, many audits are actually instigated by the taxpayers themselves.

To that end, below is a list of "red flags" that can cause your return to be cherry picked by the IRS for review. Pay particular attention, as knowing what the flags are can keep you out of trouble.

1. Overestimating Donated Amounts

The IRS encourages individuals to donate things like clothes, food and even old automobiles to charities. It does this by offering a deduction in return for a donation. However, the problem with this system is that it is up to the taxpayer to determine the value of goods that are donated.

As a general rule, the IRS likes to see individuals value the items they donate at anywhere between 1% and 30% of the original purchase price (unless special circumstances exist). Unfortunately many, if not most, taxpayers either aren't aware of this, or simply choose to ignore this fact.

There are several other tips that the taxpayer can use to ensure that he or she is valuing donated goods at a "fair" price. Aside from the 30% and under rule mentioned above, consider having an appraiser write a letter. (In fact, for individual items valued at $5,000 or more, an appraisal is required.). Another benchmark the IRS uses that could come in handy is the willing-buyer-willing-seller test.

This means that taxpayers should value their goods at a point or price where a willing seller (who is under no duress) would be able to sell his property to a willing buyer (who also is under no duress to purchase the item). Using such a benchmark will keep you out of trouble and prevent you from placing an excessive value on your dad's old Frank Sinatra albums.

2. Math Errors

While this may sound simple, many returns are selected for audit due to basic math errors. So when filling out your tax return (or checking it after your accountant has completed the form) make sure that the columns add up. Also make sure that the total dollar value of capital gains and/or losses are properly calculated. Even a small error can raise eyebrows.

3. Failure to Sign the Return

A large percentage of folks simply forget to sign their tax returns. Don't be a part of that number! Failure to sign the return will almost guarantee that it will receive additional scrutiny. The IRS will wonder what else you might have forgotten to include in the return.

4. Under-Reporting Income

Tempting as it might be to exclude income from your tax return, it is vital that you report all money that you received throughout the year from work and/or from the sale of an asset (such as a home) to the IRS. If you fail to report income and you are caught, you will be forced to pay back-taxes plus penalties and interest.

How can the IRS tell if you've reported everything? In some situations it can't. After all, the system isn't perfect. However, a common way some individuals get caught is that they accept cash for a service they've performed. If the customer or individual who paid that individual the cash gets audited, the IRS will see a large cash disbursement from his or her bank account. The IRS agent will then follow that lead and ask the individual what that cash layout was for. Inevitably, the trail leads right back to the individual who failed to report that money as income.

In short, it's better to be safe than sorry. Make sure you report all of your income.

5. Home Office Deductions

Be careful with home office deductions. Excessive or unwarranted deductions can raise red flags. In addition, large deductions in proportion to your income can raise the ire of the IRS as well.

For example, if you earned $50,000 as an accountant (operating from home), home-office related deductions totaling $30,000 will raise more than a few eyebrows. Trying to write off the value of a new bedroom set as office equipment could also draw unwanted attention.

Deduct only items that were used in the course of your business.

6. Income Thresholds

There is nothing the individual taxpayer can do about this one, but if you earn more than $100,000 each year, your odds of being audited increase exponentially. In fact, some accountants put the odds of being audited at one in 72, compared to the one in 154 odds for people with lower incomes.

If you own shares in a limited partnership, control a trust or partake in any other tax shelter investments, you are more apt to be audited. While there may be no way to avoid such an audit, individuals that have a stake in such an entity should be aware that they have a target on their backs. They should also take even greater care to document deductions, donations and income.

Small business owners are an easy target - particularly those with cash businesses. Bars, restaurants, car washes and hair salons are exceptionally big targets, not only because they deal in so much cash, but also because there is so much temptation to under-report income and tips earned.

Incidentally, other actions that go part and parcel with business ownership may draw unwanted IRS interest too, including putting family members on the payroll and over-estimating expenses.

In short, business owners must know that they can't "push the envelope". If they want to stay in business and avoid the scrutiny of an audit, it's best to remain on the straight and narrow.

So why does the IRS seem to be cracking down more and more on individuals and small business owners these days? It's simple. According to the IRS there is roughly an annual $300 billion gap between what Americans pay in taxes versus what they owe. That equates to about $2,680 per household. The Congress knows this too, and given the deficits the United States government has run up over the past 20 years, there is enormous pressure on legislators and the IRS to collect all tax funds.

What should you do if you are audited? Be honest with the auditor and respond to all inquiries as quickly as possible. Don't be afraid to show all of your documentation. If possible, have a qualified accountant and/or tax attorney represent you.

Audits have and will remain a part of the tax collection process for a long time to come, but that doesn't mean that you have to be among the "lucky" few to be chosen. The key to avoiding an audit is to be honest, document your deductions, donations and income.