IRS won’t subtract tax debts from stimulus payments


The Internal Revenue Service has decided to use its discretion to avoid reducing the size of Economic Impact Payments with tax debts owed to the federal government.

National Taxpayer Advocate Erin Collins had asked the IRS to avoid subtracting outstanding tax debts from stimulus and wrote about the IRS’s decision in a blog post Monday. She noted that the Tax Code allows the IRS to reduce a tax refund by offsetting it with any outstanding federal tax liabilities. The IRS is required to make offsets to satisfy past-due child support, unpaid student loans, and some other federal and state liabilities, but it has discretion to allow the stimulus payments to remain intact.

She was worried that eligible taxpayers who had not yet received their full stimulus payment, but filed a tax return to claim the unpaid amount by claiming the Recovery Rebate Credit and had certain outstanding debts, might see some or all of their unpaid stimulus payment withheld to offset their old debts. Collins and the Taxpayer Advocate Service she runs advocated for the IRS to use its discretion and not offset RRCs for outstanding federal tax debts to preserve the goal of the Recovery Rebate Credit, to give taxpayers swift relief to deal with the COVID-19 pandemic.

National Taxpayer Advocate Ern Collins talks with Frank Agostino of Agostino & Associates during the online NYU Tax Controversy Forum

Cohn, Michael

The IRS agreed to use its discretion to bypass offsets for federal tax debts for taxpayers who file 2020 returns that claim the Refundable Rebate Credit, and to do so as soon as practical.

However, Collins noted that’s not a complete solution for two reasons. Federal tax offsets have already been made for taxpayers who file their returns before the IRS could implement the programming fix. The change also won’t affect most offsets. The CARES Act effectively directed the IRS to apply regular offset rules, and in accordance with the Tax Code, the IRS only has discretion to avoid offsetting overpayments to satisfy federal tax debts. It is required to offset refunds to satisfy numerous other categories of debt, including state tax debts, overpayments of unemployment insurance benefits, and overpayments of certain federal benefits. Thus, there;s still a significant disparity between the treatment of taxpayers who received advance payments and those who didn’t receive advance payments and are claiming their benefits as RRCs.

“By allowing systemic relief for payments of Refundable Rebate Credits (RRC) without reduction for federal tax debts, the IRS will lessen burdens on taxpayers and the IRS’s resources and provide a needed lifeline to the country’s most vulnerable individuals and families,“ Collins wrote.

By continuing to advocate on this issue, Collins anticipates her office will eventually prompt the IRS to correct the situation in full in the near future. “For taxpayers who already have had their RRCs offset to repay federal tax debts, we will work with the IRS to try to identify a way to make them whole,” she wrote.

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