Taxpayer Advocate seeks equal debt treatment for all COVID relief payments

The Internal Revenue Service has delivered two rounds of COVID-19 economic impact payments (EIPs).

The first was the $1,200 per person approved in late March 2020 under the Coronavirus Aid, Relief and Economic Security (CARES) Act. The second EIP for $600 per person was authorized at the end of last December as part of the Consolidated Appropriations Act (CAA), with payments distributed through the first two weeks of January 2021.

By now, folks know that if they didn’t get the full amounts, which included additional payments for eligible dependents, they need to claim the Recovery Rebate Credit (RRC). You’ll do that on your 2020 Form 1040, which the IRS will start accepting and processing returns on Feb. 12.

But what if your payment was short because the IRS withheld a portion because of debts you owed?

The differences in the laws authorizing the payments and the subsequent claims for missed amounts via the RRC mean that some folks won’t get their full EIPs. And the National Taxpayer Advocates says that needs to be corrected.

Differing debt treatments: The IRS is allowed to subtract from regular tax refunds certain debts owed by filers. This typically happens when a taxpayer owes past-due child support, unpaid student loans and other federal and state liabilities. My blog post, Where’s the rest of your tax refund? Being used to pay delinquent federal and state debts, has more on this process.

When it comes to EIPs, the CARES Act specifically said that the first coronavirus payments could be offset only in cases of unpaid child support. The CCA went a step further and prevented any offsets in the second round of EIPs.

However, when you file for any COVID-19 cash you missed out on in the advance EIP disbursements, the IRS will be able to take out any unpaid bills allowed under the offset rules. That means the coronavirus rebate credit claims are treated differently from the advance payments.

That also means, notes National Taxpayer Advocate (NTA) Erin M. Collins, that similarly situated taxpayers are treated differently.

In a recent NTA Blob post Collins points out that:

• Eligible individuals who received the full amount of their EIPs in advance, despite having certain outstanding debts, did not have their payments subject to offset (with the exception of past-due child support).
• Eligible individuals who did 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.

“This disparate result undermines public confidence in the fairness of the tax system,” writes Collins. “Financially struggling taxpayers who were entitled to receive the full amount of the EIP last year but did not 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.”

Expected refunds unexpectedly short: In addition, Collins points out that many taxpayers rely on federal tax refunds to pay for basic and necessary living expenses or to prevent hardships such as eviction or loss of utilities.

The filers’ financial troubles are compounded since we still are in the midst of a pandemic that’s produced historic unemployment levels.

“The reality is that many of the taxpayers who are most likely to be subject to offset – because they cannot afford to pay their bills and have unpaid debts – are the ones who need relief the most,” writes Collins.

But there is a way these filers could get some relief.

IRS discretion to issue full refunds: Collins argues in her blog post for the IRS to exercise discretion when it comes to refund and rebate offsets. This is allowed under the Offset Bypass Refund (OBR).

Under the OBR, taxpayers experiencing economic hardship can request the IRS bypass any offset of their refund to repay tax debts.

Collins’ post has more on this taxpayer-friendly option, as well as other alternatives that could help taxpayers who might miss out on the full economic impact payments or rebate credit. That’s why her Jan. 28 blog item it gets this weekend’s Saturday Shout Out.

I don’t want to spoil her post, but the National Taxpayer Advocate does offer a bit of hope.

“After discussions with the IRS, I understand it has been looking into this issue and is exploring ways to exercise its discretion to help vulnerable taxpayers,” Collins writes.

You also might find these items of interest:

• 9 tax software companies offer Free File products in 2021
• Slow tax refunds again make the annual Top 10 list of taxpayer problems
• TAS now can help taxpayers with certain COVID-19 stimulus payment problems 

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