I have an old outstanding credit card debt and the collection agency said they are going to withhold my tax refund. Can they do that?
No unless the collection agency has a judgment against you.
A collection agency cannot threaten action which it knows it can't take - withholding your tax refund is outside their ability.
This violates the Fair Debt Collection Practices Act (FDCPA) to threaten this. This federal law allows you to be compensated and to have your attorney's fees and expenses paid. In addition we also have state laws here in Alabama that can help you.
Don't be intimidated by abusive debt collectors - instead learn your rights and take action.