How can I fight VA State Tax Dept?

The state of VA sent a letter over a month ago that they were going to garnish my wages due to repayment of back taxes from 2006. I contacted them, made payment arrangements. My first payment was due 2/18/11 of $100. Last Friday, the 18th, I was expecting my IRS refund and found out earlier this week that it was intercepted. That amount was $550. The state says I owe them about $1700 total. I was able to obtain 2 of my W-2 forms and in that year, I was also collecting unemployment. The only thing missing is one W-2 form because the company is no longer doing business in VA and I am unable to locate any information on the company. I wrote a letter explaining this to VA. I also obtained a transcript from IRS showing all my employers and filed that with the 760 form. This was mailed to them last Saturday. I was told over the phone they received it but it may take 6 -8 weeks for them to get around to it because of the filings for 2010. I was also told that interest would still accrue. I told them that is not fair due to the fact that they intercepted my tax refund and why should I be penalized for this.

Can you give me any suggestions, such as filing a complaint, etc. Everyone I have spoken to seems incompetent. I also printed the transcript because the conversation I had with the individual filing dept and collections dept was interactive. Should I copy this information and send to them as well? They also would not reduce my payment arrangement which $100 per month. What else can I do? I thought about taking out a loan to pay them off but I am attempting to buy a home soon and don't want any more debt.

Thanks for your help, appreciate whatever you can give to me.