We have written several posts on offset over the past year and offset posts continue to be the most popular posts we write. It might be possible to start an offset blog based on reader interest. Some prior posts are here (injured spouse offset issues); here (CARES Act offset exceptions); and here (offset bypass rules – most heavily visited post on our site.)
The issue of offset of stimulus payments took an interesting turn this past week. As you probably remember last year, in passing the CARES Act Congress took the extraordinary step of excepting from offset all debts except for past due child support. This meant that stimulus payments in the first and second rounds went directly into the hands of taxpayers who would ordinarily have simply received a letter notifying them that their refund was taken to satisfy some past due debt.
It looked like individuals who did not receive their stimulus payment for the first or second round and who could claim it as a Recovery Rebate Credit (RRC) as they filed their 2020 return would have the disadvantage of having the payment subject to federal tax offset and all of the other available offsets. A recent post by the National Taxpayer Advocate (NTA) sets out some of the history on what the IRS did as it moved into the 2020 filing season.
The bottom line is that the IRS has now decided to exercise its discretion under 6402(a) with respect to the offset of federal tax refunds to federal tax liabilities. The IRS will allow refunds based on RRC to pass through to taxpayers without being offset to satisfy prior federal tax debts. Great news for persons with only federal tax debts in their portfolio of debts subject to offset under the Treasury Offset Program (TOP) but less good news for taxpayers with other outstanding obligations. For a detailed discussion of offset and an explanation of TOP, you can read an article recently written by Michael Waalkes and me found here.
The NTA points out two problems with the otherwise good news regarding the IRS decision to forego offset of refunds based on RRC. First, the decision happened in the middle of the filing season after many taxpayers had already filed and already had their refunds offset. A similar offset decision occurred last year when the Department of Education decided during the middle of the filing season not to exercise its right to offset federal tax refunds (and other federal payments) against outstanding student loan debts. Individuals who filed early (i.e., those most likely to have substantial refunds) get treated differently than those who wait. A similar issue has occurred during this filing season with unemployment benefits that Congress decided mid filing season to exclude from income. (Though yesterday the Commissioner in his testimony before Congress said that the IRS was working on a way to fix this for early filing taxpayers without the need for them to file a superseding or amended return.)
Should the unfairness of the treatment of early filers versus later filers cause the IRS not to adopt a change like this in the middle of a filing season? Should the IRS (can the IRS) reverse the offsets it has already made during this filing season and put everyone on equal footing? The NTA says “For taxpayers who already have had their RRCs offset to repay federal tax debts, we will work with the IRS to try to identify a way to make them whole.” So, perhaps a fix will come for early filers with RRC based refunds, similar to what will happen for early filers reporting unemployment income. This is a lot of extra work for the IRS when it is already strained recovering from the pandemic and pushing out stimulus payments. If it can make this happen, it will be impressive.
The NTA pointed out a second problem with the IRS decision to exercise its discretion to allow the RRC refunds to bypass the federal tax offset – the IRS does not have the ability to keep these refunds from offset through TOP. IRC 6402(a) gives the IRS discretion to waive offset of federal tax refunds but does not give it authority to waive offset of the other offsets that occur when a taxpayer has a federal tax offset. The NTA says “Therefore, there remains a significant disparity between the treatment of taxpayers who received advance payments and the treatment of taxpayers who did not receive advance payments and are claiming their benefits as RRCs.”
Fixing the second problem requires Congressional action and passage of a bill with language similar to the CARES Act legislation last year. There is no indication that such legislation is coming. When the IRS is considering offset bypass refunds (OBR) discussed in the post linked above and in the article, it does not exercise its discretion when it can see a debt indicator on the taxpayer’s account alerting the IRS that the exercise of discretion will not put the money in the taxpayer’s hands but simply send it to the Bureau of Fiscal Services to satisfy another federal or state outstanding debt. Because of the blanket decision to exercise discretion made with respect to RRCs, the IRS will benefit other federal and state creditors in some instances rather than the taxpayer. While not optimal, this is the most the IRS can do with the authority it has. It also provides a model for IRS moving forward that could benefit recipients of certain types of refunds, such as those generated by the earned income tax credit or other programs designed to put money in taxpayers’ hands.
Innocent Spouse news regarding the administrative record
We received correspondence from PT reader James Everett of DeFranceschi & Klemm, PC in Boston. Mr. Everett represents the taxpayer in Sutherland v. Commissioner which Christine blogged here and I blogged here in the year in review post because of the importance of this case. For those who do not remember Sutherland, it involves the issue of IRC 6015(e)(7) which limits Tax Court review in innocent spouse cases to the administrative record, including cases pending at the time of enactment that had already gone through the administrative process prior to the legislation creating the limitation. The case was originally set for trial on December 2, 2020 in Boston but continued and rescheduled for trial on St. Patrick’s Day in Phoenix. Most Bostonian’s would welcome a trip to Phoenix during the winter. Alas, this trip was a virtual one.
Here is the news from Mr. Everett regarding the IRS position on the administrative record:
The national office interjected itself into the case and the IRS objected to all documents that we wanted to include with the stipulation that weren’t part of the “administrative” record (i.e. documents not provided during the administrative stage). In other words, it looked like the IRS was setting this case up for an appeal. There was really no way of telling what the AO or CISCO actually reviewed previously because records weren’t kept in that fashion (since it didn’t matter with a de novo review). Judge Lauber was going to require the IRS to call the appeals officer as a witness at the trial to discuss the record. A few days before the trial, the IRS dropped its administrative record objections. Judge Lauber asked the respondent’s counsel if this was reflection of Service wide policy (i.e., the IRS agreed that §6015(e)(7) didn’t apply to pending cases), respondent’s counsel candidly replied that this was above his paygrade to comment on – he could only speak to the case at hand. Thought this might be helpful to the readers of your blog.
The withdrawal of objection to the administrative record is welcome news but does not resolve the issue. The administrative record rule presents significant problems for individuals who go through the administrative process pro se, since they often fail to develop the full record needed if litigation occurs.