We welcome back guest blogger Bob Probasco. Bob runs the tax clinic at Texas A&M but has many years of experience in accounting and law firms before taking on his current position. This week we have been talking about offset and Bob raises another issue concerning offset that we have not discussed and that has not been discussed in the press concerning the CARES rebate. We have made it clear that the CARES rebate passes by the normal offset provisions (except for child support) but Bob points out that maybe that overstates the way it will work. Read on and let us know your thoughts. Keith
PT has some recent outstanding posts by Carl Smith (Part I and Part II) and Nina Olson (Part I, Part II, and Part III) on the CARES Act, both generally and specifically concerning the Recovery Rebates (or “economic stimulus payments”). If you haven’t read them yet, you should – I have a much better sense of the problems and likely results than I had before. There has also been a lot of chatter recently on the Pro Bono & Tax Clinics community in ABA Connect, another great resource with very knowledgeable contributors from whom I’ve learned a lot.
Today, I want to discuss a question that I haven’t really seen mentioned elsewhere. (Perhaps it has been, and I just haven’t been reading as widely as I’d like to during this hectic time.) It concerns the amount of the advance refunds. The impression many people have is that the advance refunds will only be offset against a taxpayer’s past-due child support obligations; otherwise, the taxpayer will receive the full amount.
I’m not sure that’s correct.
Section 2201(d) of the CARES Act states:
Any credit or refund allowed or made to any individual by reason of section 6428 of the Internal Revenue Code of 1986 (as added by this section) or by reason of subsection (c) of this section shall not be—
(1) subject to reduction or offset pursuant to section 3716 or 3720A of title 31, United States Code,
(2) subject to reduction or offset pursuant to subsection (d), (e), or (f) of section 6402 of the Internal Revenue Code of 1986, or
(3) reduced or offset by other assessed Federal taxes that would otherwise be subject to levy or collection.
That sounds pretty good and has rightly been praised as a huge improvement over the 2008 stimulus payments.
Carl’s Part II post discusses how the IRS was able to keep those 2008 payments under the terms of offers in compromise (OICs). The Second Circuit approved. I’m not entirely sure whether the terms of an OIC would take precedence over § 2201(d) of the CARES Act, but it might. However, there’s another possible exception to § 2201(d), resulting from the structure of the advance refunds.
New § 6428(f)(1) states that taxpayers who were eligible individuals for their 2019 tax return “shall be treated as having made a payment against the tax for [the 2019 tax year] in an amount equal to” what would have been allowed as a refundable credit for 2019 if § 6428 had applied to 2019. Section 6428(f)(3)(A) then goes on to say: “The Secretary shall, subject to the provisions of this title, refund or credit any overpayment attributable to this section as rapidly as possible.” That’s the actual authority to make the advance refunds and seems patterned after § 6402(a).
Treating the advance refund amount as a payment and then authorizing a refund of any overpayment is the same method used for the 2008 stimulus payments. (Carl quotes the 2008 version of § 6428 in the comments of his Part I post.) There are some obvious advantages of this method. The stimulus payments are classified as tax refunds and therefore: (a) not taxable income and (b) not “resources” for eligibility determinations for benefits and assistance under Federal programs or State programs partially financed by Federal funds.
It also appears to have a possible drawback. It works well if there is no balance outstanding for the 2019 (or 2018 if no 2019 tax return was filed) tax year. The advance refund amount, treated as a payment, is the same as the overpayment. It also works well if there was a frozen refund for 2019, as the frozen refund would not be “attributable to” Section 6428; only the advance refund amount would be refunded. But what if there were a balance owed by the taxpayer for 2019?
Here’s a simple example. Sam has filed a tax return for 2019, which the IRS uses to determine the advance refund amount. Sam wanted to file the return in order to get an advance refund but was unable to pay the entire tax liability shown on the return. There was a $2,000 balance owed to the government. The advance refund amount for Sam is $1,200, so the IRS records a $1,200 payment in the 2019 tax year. And there is no overpayment to be refunded; instead, there is now an $800 underpayment. Sam receives no money now or when filing the 2020 tax return because the $1,200 has been offset against the 2019 tax liability.
That seems inconsistent with the spirit of § 2201(d) of the CARES Act, doesn’t it? This is a time to get money to people who desperately need it, not to recover amounts they owe. Is this an unintended consequence, that the drafters did not anticipate? But the same thing can happen on the 2020 return, if there is no advance refund – the refundable credit will not be refunded in full if the return shows a net amount due from the taxpayer before the credit. So, a similar result with the advance refund may be intentional, or at least a result that the drafters knew about.
Maybe I’m missing something here. If not, this may be an unpleasant surprise for those taxpayers it affects – hopefully few in number – after hearing the information that has been shared publicly about the rebate and advance refund provision.