Don't Mess With Taxes

I was talking last week to a tax preparer who was steeling herself for an onslaught of calls from clients wanting to know how come their rebate amounts are less, and potentially much less, than they were expecting.

"I tried to tell them about offsets, but they didn't want to hear it," she said.

Ah, yes. The back-door tax collection method.

If you owe the IRS federal taxes from previous tax years or have ignored a variety of nonfederal debts you owe, Uncle Sam can take those uncollected amounts out of any federal money you might be due.

Treasury Offset Program: Congress has given the Department of Treasury's Financial Management Service (FMS), which issues IRS tax refunds, the power to conduct the Treasury Offset Program. Through this program, any refund, overpayment or special tax allotment such as the stimulus package payment (aka rebate) may be reduced, or offset, to pay those outstanding debts.

These include past–due child support, federal agency nontax debts such as student loans, or state income tax obligations.

The Treasury, via the FMS, will automatically pull out the applicable amounts if the agency to which you owe money has submitted the debt as part of the federal offset program. FMS will take as much of your refund as is needed to pay off the debt (or debts) and send it to the agency (or agencies) you owe.

If there's anything left after offset, it will be issued to you as a check or directly deposited if that's what you requested on your return.

You can read more about the Treasury Offset Program at this IRS Web page. It also tells you what you can do if you believe you do not owe the debt or you want to dispute the amount taken from your refund.

Unfortunately, some folks who perhaps haven't filed for ages but decided to do so this year just to get the rebate might find they opened up a can of tax and other debt worms.

More IRS rebate FAQs: The issue of offsets and rebate money is included in a new set of most frequently asked questions the IRS has just issued in connection with the stimulus payments.

In addition to offsets, these FAQs cover other commonly asked questions, such as how receipt of a refund anticipation loan will affect delivery of your rebate (and which I blogged about here), how to make sure your payment follows you if you moved after filing your return and how to double check your rebate amount using the IRS' stimulus payment calculator.

The calculator is especially useful if your income was high enough ($$75,000 for a single taxpayer or over $150,000 for married taxpayers) to trigger a phase down (or out) of your rebate amount.

That's another reason your rebate might be less than you were expecting.