The IRS and the Taxpayer Advocate Service are discussing possible solutions to a twist in the stimulus payment law that could snag millions of taxpayers in the upcoming filing season, according to the national taxpayer advocate.
Taxpayers who received either or both of the first two rounds of economic impact payments (EIPs) as advance payments can’t have them offset for debt (except for past child support) by the IRS, but those who claim them as recovery rebate credits on their 2020 tax returns may, National Taxpayer Advocate Erin M. Collins told attendees at an American Bar Association Section of Taxation virtual meeting January 28.
A change in the law that authorized the second round of EIPs means that people who didn’t receive payments in 2020, and were advised to claim them in the 2021 filing season, will discover that their payments may be reduced or eliminated for unpaid tax or other debts, Collins said. She wrote a National Taxpayer Advocate blog post on the subject January 28.
Collins said taxpayers with federal or state tax debt, unpaid student loans, overdue child support, or other claims — who must request part or all of their EIPs on their 2020 returns — could have those payments reduced or eliminated.
“We have been discussing this with the IRS,” Collins said. “I do think there’s an appetite and an interest to try and protect those people” affected by the change, she said. “The real challenge is how.”
The IRS didn’t respond to a request for comment.
“It seems to me [an IRS offset process] has to be automated,” Collins said, “Otherwise, it’s going to be a lot of manual hours for individuals because it potentially is going to impact many thousands, if not millions, of taxpayers.”
Notices in the Mail
Dietra Grant, IRS director of customer account services, said that “there was a slew” of notices such as CP10 (tax miscalculation), CP11 (tax deficiency), and CP12 (overpayment correction) regarding recovery rebate credit math errors that could be sent starting with the February 12 filing season.
The IRS will treat as a deficiency in tax any excess recovery rebate credits claimed on a 2020 tax return, and it will collect non-excepted debts under the tax agency’s math error authority, Grant said.
Taxpayers still have 60 days to challenge the IRS’s math error corrections, noted Nancy Rossner of the Community Tax Law Project.
The refundable credit issue could frustrate incarcerated individuals, innocent spouses, those with a taxpayer identification number who have children with Social Security numbers, and others denied EIPs in 2020 who were advised to claim them on their tax returns in 2021, the panelists agreed.
No Time to Lose
The IRS and Treasury have contended with multiple challenges to their EIP distribution plans in 2020, although some of their differences with low-income and disadvantaged taxpayer advocates have been settled.
The difference between 2020 advance payments and 2021 recovery rebate credits arises from an amendment to the Coronavirus Aid, Relief, and Economic Security Act (P.L. 116-136) by the Consolidated Appropriations Act, 2021 (P.L. 116-260), which states that only advance payments are protected from offset, according to Collins.
The Taxpayer Relief Act of 2020, which was incorporated into the Consolidated Appropriations Act before then-President Trump signed it on December 27, 2020, amended the CARES Act so that EIPs not distributed in 2020 but claimed on tax returns filed in 2021 could be reduced by the IRS, Collins said.
With the opening of the filing season just two weeks away, the question at the IRS is whether the agency can make the necessary changes in time, Collins said.
Collins said she is hopeful that, between tax practitioner discussion and pressure on Congress, a policy or administrative solution can be formulated.