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McConnell Stimulus Bill May Allow IRS to Deduct for Tax Debt

Posted on Mar. 23, 2020

Taxpayers with unpaid tax debt may not get some or any of their anticipated stimulus money under the coronavirus package introduced March 19 by Senate Majority Leader Mitch McConnell, R-Ky.

Carlton Smith, retired former director of the Benjamin N. Cardozo School of Law Tax Clinic, told Tax Notes March 19 that the Coronavirus Aid, Relief, and Economic Security Act (S. 3548) contains a revived section 6428 that Smith believes could be used by the IRS to claw back part or all of tax debtors’ stimulus relief.

Without a modification to clarify that stimulus funds may not be withheld, the new section 6428 may blunt Congress’s estimated $1 trillion effort to resist the economic effects of the coronavirus pandemic, he said.

The old section 6428, which was repealed by the Tax Technical Corrections Act of 2014, enabled section 6402(a), which states that the Treasury secretary “may credit the amount of such overpayment, including any interest allowed thereon, against any liability in respect of an internal revenue tax” — that is, withhold stimulus income to repay tax debt, Smith noted.

The Government Accountability Office estimated that more than $5 billion was deducted from income tax refunds in 2008 for unpaid taxes and other payments collectible by the federal government, while Treasury disbursed nearly $100 billion in stimulus payments to fight the economic downturn.

The Senate bill contains a section 2101(d), which prohibits offsets under portions of section 6402 for payment of debts to other federal agencies, debts to states for past-due child support, and unemployment compensation debts, Smith noted.

Smith said he shared his concerns with a friend on the Joint Committee on Taxation who was involved in drafting S. 3548. “Someone on the Hill was aware of this issue,” Smith said. “Or they wouldn’t have written [section] 2101(d).”

Smith also emphasized the word “may” in section 6402(a). The Treasury secretary doesn’t have to allow the IRS to claw back stimulus payments for tax debt, he said.

Treasury didn’t respond to a request for comment.

Offsets Work?

Mark Mazur, co-director of the Urban-Brookings Tax Policy Center, said, “I can imagine [Treasury] waiving” section 6402(a) offsets, “but there’s probably a good reason for them to have that provision.”

Partly not to encourage tax scofflaws, and partly because the federal government needs funds, “there’s a whole range of reasons why [Congress] would want their money back,” Mazur said.

Mazur said he doubted that the effect of stimulus funds lost to unpaid tax debt would be significant compared with the anticipated result of the proposed $1 trillion package.

And modifying or shutting off the IRS’s automated process for implementing section 6402 offsets could have unintended consequences that might be magnified during the tight disbursal timeline Congress wants, Mazur said.

Smith recalled when in 2008 the Bush administration ordered Treasury to disburse economic stimulus payments through the tax system.

“The IRS sent out no checks to anyone who owed taxes, which greatly limited the amount of money sent out,” Smith said. “The IRS used the overpayment as a credit and simply applied it to back taxes, not stimulating the economy at all.”

Under section 6428 as it was written, the IRS automatically confiscated stimulus money under section 6402 for debts to other federal agencies, as well as other debts excepted under the new bill’s section 2101(d), Smith noted. But the potential to withhold billions of dollars for unpaid tax debt under the new bill remains, he said.

“That's terrible policy when we want to stimulate the economy and get needed funds into hands of people who generally are already too poor to pay their old tax debts,” Smith said. “In effect, this will simply mean that the credits from new section 6428 will be used as a bookkeeping entry for those who owe tax debts larger than the credits.”

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