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Offsets in a Time of Coronavirus

Posted on Apr. 7, 2020

As discussed in yesterday’s post, Congress has created an override of the normal offset provisions for the CARES rebate. It does not matter how much a taxpayer owes the IRS for prior years, if a taxpayer qualifies for the CARES rebate, the $1,200 rebate will pass through the normal offset provisions without stopping to satisfy the outstanding federal tax liability. This is a sign of how much the government wants to put these checks into the hands of taxpayers and signals a difference in approach from the 2008 rebate checks where a large number were siphoned off to pay prior debts.

Also discussed yesterday was the decision of the Department of Education to pull back from claiming an offset of federal taxes this year.

While it is nice that the IRS seems to acknowledge a small loosening of the normal offset bypass rules by requiring less documentation to request an offset bypass, it could go further.  It could follow the lead of the Department of Education and simply pull back from making offset for a period of time to allow taxpayers to get their refunds this year because of the extraordinary circumstances.  The IRS has this discretion as discussed above because the statute says may.  Why not exercise this discretion in the same manner as another department of the federal government?  Why should the Department of Education be making a policy decision about waiver of offset during this period different from the policy decision made by the IRS?

The issue of pulling back from making IRS offsets for a period of time took on greater urgency yesterday with the closing of the last IRS campus still running.  As long as Ogden was open it was possible for TAS to reach out to IRS employees who could perform the OBR.  Now that all of the service centers are closed there is no one home to make the OBR.  Anyone with a critical need for their refund, will not have OBR as an option because of the absence of IRS employees who could perform the OBR.

On Friday April 3 the ABA Tax Section sent a letter to the IRS with a list of recommendations regarding how the IRS could respond to the COVID-19 impact on the tax system and on taxpayers. One recommendation concerned offset and it provides:

… the Service has discretion to not offset a tax refund to cover a previous federal tax debt.20 In tandem with the stimulus checks provided by the CARES Act, offset bypass could provide powerful, targeted relief to those most in need. We recommend the Service provide relief from refund offset due to federal tax debt for all taxpayers with gross income less than 250 percent of the federal poverty line. In addition, we recommend the Service bypass refund offsets for returns claiming the earned income credit or additional child tax credit. Currently, the Taxpayer Advocate Service (“TAS”) assists with offset bypass refund (“OBR”) claims for individual taxpayers facing exigent circumstances. However, the tollfree number for TAS has been taken offline, and TAS local offices are busy meeting the demand of many struggling taxpayers and the challenges involved in remote work. TAS employees would be overwhelmed if they were required to individually request OBR for each eligible low-income taxpayer. A blanket policy of suspending refund offsets would enable TAS to focus on the many other taxpayer issues. Further, most low-income taxpayers are not aware of the OBR process and without Low Income Taxpayer Clinics (“LITCs”) and Volunteer Income Tax Assistance (“VITA”) sites to inform them, they likely will not know to request this assistance from TAS.

Yesterday’s post also discusses how IRC 6402 and the Treasury Offset Program (TOP) work. Even if the IRS exercises its discretion in the statute to pull back from taking 2019 refunds to past due taxes, some taxpayers will still lose their refunds to other debts that participate in TOP. For broader relief Congress would need to step in and provide some direction as part of the next relief package.

Offset is a powerful collection tool. A 2016 Treasury Inspector General for Tax Administration report states that the IRS collected about $7 billion per year through offset. By substantially turning off the computers which normally capture federal payments headed out to taxpayers with outstanding federal tax and other federal obligations, Congress has made a strong statement about the need to get money into the hands of individuals devastated by the economic impact of COVID-19. Should it do more?

If Congress wants to be consistent with its actions in CARES, it could suspend TOP for this tax season (with the exception of past due child support payments). Similarly, if the administration wants to be consistent with the action of at least one of its departments, assuming the statutes governing the departments have the permissive language similar to IRC 6402(a), the administration could grant relief from offset across the board for this tax season. If there is no Congressional action to broadly suspend TOP, the administration could take the lead and follow the example set by the Department of Education by suspending offset to all federal agencies. The IRS could independently exercise its discretion as recommended by the ABA and suspend offset. There are many possibilities here but action should come quickly.

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