Interesting news from NCPE about the Treasury offset program and Economic Impact Payments
New Refund Offset Rules Hit Persons Who Qualified for EIPs But Didn’t Get Them
The National Tax Advocate (NTA)’s blog points out: a) that the Consolidated Appropriations Act, 2021 contains changes in the rules for when IRS can offset a refund by certain debts owed by the taxpayer; and b) that those changes treat taxpayers who qualified for economic impact payments (EIPs), but did not get one or both of them, differently from taxpayers who received their EIPs. The blog contains suggestions to fix the problem.
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act, PL 116-136) provided for direct payments/rebates to certain individual taxpayers. These were referred to as Economic Impact Payments (“EIP 1”). (Code Sec. 6428(f)) EIP 1 is actually an advance payment of a “recovery rebate credit” (RRC). (Code Sec. 6428(e))
Code Sec. 6428A, as added by Sec. 272 of the COVID-Related Tax Relief Act, which is part of the Consolidated Appropriations Act, 2021 (CAA; PL 116-260), provides an RRC payable for eligible individuals.
IRS is authorized to make advance payments (EIP 2s) of this credit to eligible individuals using their 2019 return information to determine their eligibility for the credit. (Code Sec. 6428A(f))
Code Sec. 6402 generally authorizes IRS to reduce a taxpayer’s refund through offset to repay outstanding federal tax liabilities and requires IRS to make offsets to satisfy past-due child support, unpaid student loans, and certain other federal and state liabilities.
The CARES Act provided that EIP 1s and the RRC could not be offset to satisfy outstanding debts, with the exception of past-due child support. (Sec. 2201(d)DivA, PL 116-136)
CAA went a step further and protected EIP 2s from all offsets, including past-due child support. (Sec. 272(d)DivN, PL 116-260) However, it limited this protection to advance payments (Sec. 272(d)DivN, PL 116-260) and retroactively revised CARES Act Section 2201(d), subjecting RRCs to regular offset rules for unpaid federal taxes and certain other debts. (Sec. 273(c)DivN, PL 116-260, 12/27/2020)
Among the NTA’s powers is the power to issue Taxpayer Assistance Orders (TAOs) in cases involving “significant hardship.” (Code Sec. 7811(a)(1))
A TAO can direct IRS immediately to pay a refund due a taxpayer where the taxpayer faces a severe hardship (Ann. 96-5, 1996-4 IRB 99; Fact Sheet 1996-04), even though the taxpayer owes unpaid taxes against which the refund can be offset. As noted above, normally, IRS will offset the overpayment against the taxpayer’s outstanding federal tax liabilities. But if the taxpayer establishes that a significant hardship exists, the NTA will issue a TAO for an “offset bypass refund” (OBR), i.e., a refund that bypasses the normal offset process. (Service Center Advice 200135027)
Since the passage of the CARES Act, IRS has continued to tell taxpayers that it could not correct or issue additional EIP 1 payments due to lack of resources and that individuals who did not receive some or all of their EIPs would need to claim an RRC when they file their 2020 tax return. See, for example, IR 2020-257.
The NTA notes that the current situation treats similarly situated taxpayers differently:
• Eligible individuals who receive the full amount of their EIPs in advance, despite having certain outstanding debts, do not have their payments subject to offset (with the exception of past-due child support).
• Eligible individuals who do not receive the full amount of their EIPs in advance and have certain outstanding debts will receive a reduced RRC or none at all when they claim it on their 2020 tax returns later this year.
The NTA notes that financially struggling taxpayers who were entitled to receive the full amount of the EIP last year, but did not receive it, have effectively been harmed once. It is unfair to harm some of these taxpayers a second time by seizing some, or all, of their stimulus payments.
Additionally, some offsets of overpayments attributable to unpaid federal tax liabilities may be inaccurate. As of December 25, 2020, IRS estimated it still has not fully processed nearly seven million 2019 individual income tax returns and millions of pieces of taxpayer correspondence. As a result, the tax accounts of millions of taxpayers may not be properly adjusted. They may be owed refunds or have challenged a tax liability. As a result, IRS may end up offsetting refunds to satisfy federal tax debts that no longer exist. Until IRS is fully caught up in processing 2019 tax returns and correspondence, the risk of improperly offsetting taxpayer refunds is substantially higher than in most years.
The NTA suggests that IRS use its discretion to issue RRCs without offset against federal tax debts. It notes that he American Bar Association Section of Taxation recently issued formal comments making three suggestions regarding how this could be accomplished. One suggestion is to automatically apply the OBR procedures to any offset of unpaid federal taxes for individuals with incomes under 250% of the Federal Poverty Level.