Every year, some taxpayers find the tax refunds the Internal Revenue Service sends them are less than they expected. The usual reason for the shortfall is that the federal refund amounts were offset by other debts, such as unpaid taxes, student loans or delinquent child support.
That situation cropped up last year when the Recovery Rebate Credit was created as part of COVID-19 relief legislation. The rebates were paid in advance to millions of taxpayers. And in some, but not all, instances, economic impact payments (EIPs) were dinged to pay outstanding debts.
Now, the IRS is changing its EIP offset process. It will help some, but not all, who faced a cut in their coronavirus relief amounts.
EIP timing affected collections: Part of the problem is that there were two 2020 relief programs with different rules about debt collection from the payments.
EIP1, which called for $1,200 for taxpayers and $500 per qualifying child, was created in March 2020. EIP2, signed into law on Dec. 27, 2020, established another $600 per person.
The EIP1 law specifically said that only child support payments would reduce those amounts. The EIP2 law reversed that, letting the IRS deduct unpaid federal liabilities and requiring the agency to take out money to cover child support and other state obligations.
Then there are taxpayers who didn't automatically get any or received less than the full EIP1 and EIP2 amounts.
They could claim either or both as the Recovery Rebate Credit (RRC) on their 2020 tax returns. But any refund those credits created would be subject to the usual offset rules.
Request to re-do rebate reductions: This confusing and disparate treatment of taxpayers caught the attention of National Taxpayer Advocate (NTA) Erin M. Collins. Basically, she said, the different rebate offset treatments weren't fair, since some got the full stimulus payments while another saw their rebates reduced.
In January, Collins brought the matter to the attention of the IRS.
At that time, she urged the tax agency to use the discretion granted it under the Offset Bypass Refund (OBR) rules. OBR says that taxpayers experiencing economic hardship can request the IRS bypass any offset of their refund to repay tax debts.
The IRS listened.
The tax agency has agreed to use its discretion to bypass offsets for federal tax debts for taxpayers who claim the Recovery Rebate Credit, according to Collins.
Programming review allows for changes: In her NTA blog post last week, Collins noted that the IRS changed its original position, which was that its filing season programming did allow for offsetting RRCs for child support but not for all other outstanding debts.
However, upon further review, the IRS went back and "corrected" its original programming "to ensure that all RRCs were offset to satisfy federal and state debts, consistent with the change in law," wrote Collins.
Following that, Collins again called on the IRS exercise its authority to correct EIP offset inequities. And it did.
"I am very pleased that the IRS has agreed to exercise its discretion under [the tax code] to refrain from offsetting RRCs to satisfy federal tax debts. It has committed to doing so as quickly as practical," Collins blogged.
One step forward, more needed: However, Collins still has a couple of coronavirus rebate concerns.
One is that many taxpayers filed (or will file) their returns before the IRS fully implements its programming fix.
The other is that the IRS change will not affect most categories of mandatory offset. The IRS is still required by law to offset refunds to satisfy several other categories of debt, "including state tax debts, overpayments of unemployment insurance benefits, and overpayments of certain federal benefits,” Collins wrote.
Check it out, even if right now you're not facing EIP reduction. You never know when you might get his by a tax refund offset.
You also might find these items of interest:
- 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
- Where's the rest of your tax refund? Being used to pay delinquent federal & state debts
|Coronavirus Caveat & More Information
In 2021, we're still dealing with extraordinary circumstances,
both in our daily lives and when it comes to our taxes.
The COVID-19 pandemic and efforts to reduce its transmission
and protect ourselves and our families means that,
for the most part, we're focusing on just getting through these trying days.
But life as we knew it before the coronavirus will return,
along with our mundane tax matters.
Here's hoping that happens soon!
In the meantime, you can find more on the virus and its effects on our taxes
by clicking Coronavirus (COVID-19) and Taxes.