Professor Michelle Drumbl who teaches at Washington & Lee University School of Law and who runs the low income taxpayer clinic there brings us a guest post on an interesting case regarding the intersection of the earned income tax credit, defaulted student loan debt and the Treasury Offset Program. I am privileged to work at the Legal Services Center of Harvard Law School with a group of amazing lawyers who represent individuals who have attended for profit colleges and who have not received the bargained for benefits of higher education. As Professor Drumbl describes and as they posted, my colleagues recently won an important case protecting the tax refunds of students of a for profit college. I hope that this case, and others, will help create a movement to protect the earned income tax credit from the offset program. For those interested in this issue look for a deeper discussion in Professor Drumbl’s book which will be published next year by Cambridge University Press. Keith
Individuals expecting a tax refund are sometimes unpleasantly surprised to learn the refund instead has been applied to another outstanding debt. Internal Revenue Code section 6402(a) authorizes the Department of Treasury to offset an “overpayment” (generally speaking, the amount of refund shown as due on the return) against any outstanding federal tax, addition to tax, or interest owed by the taxpayer. If the taxpayer does not have any outstanding federal tax debts, or if any amount of refund remains after those debts are paid, section 6402(c)-(f) provide that the overpayment is then subject to the Treasury Offset Program in the following order of priority: 1) past-due child support payments; 2) outstanding debts to other federal agencies, including federal student loan debt; 3) outstanding state income tax debt; and 4) outstanding unemployment compensation debt owed to a state.
Keith blogged about section 6402 nearly three years ago in a post that drew a few dozen comments, including many from return filers who had experienced various types of refund offsets. In my view, the refund offset rules are troubling because they capture the refundable portion of the earned income tax credit (EITC) and the child tax credit. These two refundable credits constitute important social benefits for millions of working Americans. Administered by the IRS and delivered as part of the tax return filing process, these credits are a critical part of the U.S. social safety net.
In its 1986 decision Sorenson v. Secretary of the Treasury, the Supreme Court held that the refundable portion of the earned income tax credit is an “overpayment” for purposes of section 6402(c). Sorenson involved a challenge brought by a married taxpayer who filed a joint income tax return with her husband; their expected tax refund was offset and applied toward her husband’s past-due child support obligation. Mrs. Sorenson protested, and because they lived in Washington state, the IRS determined she was entitled to one-half of the joint refund under the state’s community property laws. But Mrs. Sorenson was unsatisfied with that outcome and filed suit in federal court, arguing that Congress did not intend for section 6402(c) to reach the earned income tax credit. On appeal to the Supreme Court, Mrs. Sorenson made a statutory interpretation argument and also argued that “permitting interception of an earned-income credit would frustrate Congress’ aims in providing the credit.” The Court rejected both of these arguments. While the Court acknowledged the “undeniably important” objectives of the EITC, it also noted that the “ordering of competing social policies is a quintessentially legislative function.” In particular, it is for Congress, not the Court, to decide whether the goals of the EITC outweigh the offset program’s goals of “securing child support from absent parents whenever possible.” After all – as the decision alludes – securing child support from absent parents also reduces the number of families on welfare (just as the EITC does). Following Sorenson, it is clear that it would be up to Congress to explicitly carve out the EITC from the definition of overpayment for purposes of section 6402. In the meantime, taxpayers subject to refund offsets will continue to lose this valuable social benefit which they otherwise are entitled to receive.
In my forthcoming book, Improving Tax Credits for the Working Poor, I argue that Congress should indeed consider protecting the EITC from offset, at least in part, and at least with respect to certain types of debts. I acknowledge, though, that Sorenson presented the most morally troublesome argument for protection from offset, because the underlying debt at issue was past-due child support. It is difficult to argue that a taxpayer should receive the EITC in support of a child who currently resides with him or her if the alternative is to divert the EITC to a child for whom the taxpayer is delinquent on child-support obligations.
In contrast, I highlight student loan defaulters as a relatively sympathetic case for which to carve out EITC offset protection. My proposals are inspired in part by informative National Consumer Law Center (NCLC) reports available here and here, from which I learned that approximately 1.3 million individuals in student loan default were subject to tax refund offsets in 2017. We do not know how many of those 1.3 million individuals were also EITC recipients, but surely there is some significant overlap between low-income working families and student loan defaulters. Among the most vulnerable student loan borrowers are those who borrow to attend for-profit institutions. As NCLC attorney Persis Yu describes in her March 2018 report, some of these borrowers are denied the promised benefits of their education when a fraudulent school closes in mid-course.
Thus, I was thrilled recently to learn that Keith’s colleagues Toby Merrill and Alec Harris are succeeding in some of their consumer protection efforts against the for-profit college industry. Toby and Alec, who have also blogged on the issue of refund offsets previously, work for the Project on Predatory Student Lending, which is part of the Legal Services Center of Harvard Law School. Among other cases, the Project on Predatory Student Lending has represented individuals who borrowed money to attend Corinthian College, a now-defunct for-profit company that operated post-secondary schools around the country, including a school called Everest Institute in Massachusetts.
The Massachusetts Attorney General’s office spent several years investigating Everest Institute for its deceptive recruiting and marketing practices. On March 25, 2016, Massachusetts Attorney General Maura Healey and U.S. Department of Education Secretary John B. King announced that students who were defrauded by Corinthian campuses nationwide (including the two Everest Institute campuses in Massachusetts) would be eligible for forgiveness of those federal loans. While this sweeping announcement was great news for borrowers, the details remained to be seen as to how and when this relief would apply.
Darnell Williams and Yessenia Taveras were among the thousands of students who had attended programs at Everest Institute. Williams and Taveras each took out federal student loans to pay for their program. Both individuals defaulted on their loans in the fall of 2014, before Healey’s office had completed its investigation of the Everest Institute campuses. Following their default, in August of 2015 the Department of Education sent Williams and Taveras the required notice of intent to turn the defaulted debt over to the Treasury Offset Program (TOP). Once the Department of Education certifies to the TOP that the debt meets certain requirements, the debt becomes subject to section 6402 offset procedures in the manner I describe above. Neither Williams nor Taveras individually filed an objection to the Department of Education notice within the prescribed 65-day deadline.
After the 65-day window to file an objection, but before the Department certified Williams’ and Taveras’ student loan debts to the TOP, Healey wrote to the Secretary of Education to request immediate and automatic discharge of all federal student loans borrowed to attend Everest Institute in Massachusetts (note that this November 2015 request of Healey’s also predates the aforementioned joint announcement with the Department of Education). Healey referred to her written request as a “defense to repayment” application on behalf of the student borrowers. Healey’s defense to repayment application included, among other exhibits, a list of names of more than 7,000 student borrowers who had attended Everest Institute, including Williams and Taveras. The Department of Education nonetheless certified the Williams’ and Taveras’ debts for collection by the TOP without deciding on the merits of Healey’s letter.
The following spring, in April and May of 2016, Williams and Taveras each filed income tax returns showing refunds due. Because the Secretary of Education had certified the defaulted debts to the TOP, the taxpayers’ refunds were offset against their outstanding loans. The amounts they lost were significant: Williams’ offset was in the amount of $1,263, and Taveras’ offset was in the amount of $4,999.
At issue in Williams v. Devos is whether Attorney General Healey successfully raised a borrower defense proceeding on behalf of the thousands of individuals listed in her exhibit, including Williams and Taveras. The Project on Predatory Lending represented Williams and Taveras in the matter in federal court, arguing that the Secretary of Education improperly certified their student loan debts as legally enforceable for purposes of the TOP program.
Last month, the judge in this case ruled that Healey’s November 2015 submission did invoke a borrower defense proceeding as to Williams and Taveras, and that the Secretary’s certification of the debt to the TOP without consideration of Healey’s submission was arbitrary and capricious. The court order vacated the certifications for refund offset for Williams and Taveras and remanded the matter to the Department of Education for a consideration of the borrower defense asserted by Healey.
Congratulations to Toby, Alec, and all at the Project on Predatory Student Lending on this ruling in Williams v. Devos. This is a significant victory for student borrowers challenging the validity of their loans. Though not strictly speaking a tax case, this development has important collateral consequences for low-income taxpayers who are eligible for refundable credits. As Keith has written recently in the offer in compromise context, and as I contemplate in my book, the fact that the EITC is an anti-poverty supplement for working families provides a compelling argument to protect it from offset, at least in certain circumstances. While I would like to see Congress act to at least partially exempt the EITC from offset against any federal student loan default, this ruling is an important and tangible step forward, as it is precedent for protecting student loan defaulters from tax refund offset while a borrower defense proceeding is pending.