Tax Season officially started Friday February 12, 2021 while the country and the globe remain entrenched in the fallout of the COVID-19 pandemic. Many Americans are rushing to file 2020 tax returns and, hopefully, receive their much-needed refunds. For those taxpayers who did not receive their Economic Impact Payments (EIPs) the stakes are even higher as they hope to be able to receive the Recovery Rebate Credit (RRC). But what happens if those same taxpayers owe back taxes or other debts eligible for refund offset? The EIPs issued in 2020 were excluded from all refund offsets, apart from past due child support, but the RRC will not receive the same treatment according to the Internal Revenue Service (IRS).
On January 22, 2021 President Biden issued the Executive Order on Economic Relief Related to the Covid-19 Pandemic. President Biden ordered that “all executive departments and agencies (agencies) shall promptly identify actions they can take within existing authorities to address the current economic crisis resulting from the pandemic… and in doing so should prioritize actions that provide the greatest relief to individuals, families, and small businesses.”
The National Taxpayer Advocate, Erin Collins, has urged the IRS to take steps to protect the RCC from refund offset. The Advocate discussed the potential harm to taxpayers in her blog, Many Taxpayers May Not Receive the Full Amount of Economic Impact Payments to Which They Are Entitled, but the IRS Has the Discretion to Correct the Resulting Injustice, and that protecting the RCC was consistent with the authority of the IRS, existing laws and the mandate of the President Biden’s executive order.
Offsetting the RRC against federal tax debts runs counter to the objective of the stimulus payments – to allow taxpayers to receive funds to meet their basic needs. Taking a taxpayer’s RRC and applying it to repay a tax debt is punitive and makes little economic sense in this context. Using the IRS’s authority to waive offsets of RRC-based refunds would go a long way toward meeting the Executive Order’s directive that the IRS take actions “within existing authorities to address the current economic crisis resulting from the pandemic.”
As of the opening of tax season the IRS had made no move to implement any protection of the Recovery Rebate Credit potentially leaving vulnerable taxpayers at risk of being unable to meet basic living expenses. Perhaps the IRS feels there is no need to implement such a policy since another route exists via Offset Bypass Refund (OBR) for taxpayers experiencing hardship to receive refunds that might otherwise be diverted towards past due tax balances. While that may be so, the process of reviewing and authorizing refunds to taxpayers under OBR is laborious; with staff at the IRS already behind in so many areas this will increase the workload of the IRS and delay their return to normal operations.
IRM 188.8.131.52.11.1 allows the IRS to issue manual refunds, without first satisfying an outstanding federal tax balance, under certain hardship circumstances. Hardship for purposes of an OBR is economic hardship within the meaning of IRC § 6343. This can be defined as 1) the funds needed to prevent the eviction, foreclosure or utility shutoff OR 2) the taxpayer is unable to pay for their necessary & reasonable living expenses. The IRM states that there is no exclusive list of expenses which would qualify a taxpayer for an OBR. Moreover, it is not necessary to involve the office of the Taxpayer Advocate, which is also overwhelmed at this time, unless the IRS representative needs their assistance. Unfortunately, this process is not all painless or easy, there are some drawbacks.
Firstly, the OBR process can only be used to prevent a refund offset against existing federal tax debt. The IRS cannot prevent the refund to being applied, under the Treasury Offset Program (TOP), to other debts referred to the Bureau of Fiscal Management. These debts can include past due child support, defaulted student loan balances, and state tax debts. So even if you successfully prevent a taxpayer’s refund from being applied to a past due tax debt if there is another debt under TOP there is no saving it.
Secondly, you MUST make the request prior to the return being processed. Once a refund has been issued the IRS will be unable to process an OBR request. This leaves you with two viable options: 1) File the return on paper with a statement requesting the OBR or 2) e-file the return and call IRS to verbally make the OBR request. Neither is ideal at this time given ongoing challenges faced by IRS Staff. Paper filed returns will take months to process and potentially even longer for the refund to be issued via check. Hold times at the IRS are extended at this time and the possibility exists for the OBR request to get lost, possibly needing the practitioner to make multiple phone calls. It would be better operationally for the IRS to have made a proactive decision regarding the Refund Recovery Rebate credit to avoid more burdens on an agency still struggling to return to normal.
Lastly, how do you prove the taxpayer is experiencing hardship? One way is showing that the taxpayer needs the funds to prevent eviction, foreclosure, or utility shutoff, doing so will protect the refund up to amount necessary to cure the hardship, i.e., pay the bill. Some taxpayers may meet this criteria but other may not, especially as the new administration has continued federally authorized protections preventing evictions and foreclosures. Second option is showing that the taxpayers income is exceeded by their necessary and reasonable living expenses, or, in tax resolution speak, showing the taxpayer is Currently Non Collectible.
If your client is experiencing COVID related hardship, or just hardship in general, and expecting a refund now would be a good time to work towards resolving those balances with a Currently Non-Collectible Status. Be their hero by resolving the back balances and make the OBR request to protect their refund! New to resolution and need help, Tax Mentor is your partner in tax resolution!