IRS partially shields some stimulus payments from debt reductions

However, the move won’t shield people with some other debts, including state taxes and overpayments of certain federal benefits.

The IRS has agreed not to reduce economic stimulus payments for some people who owe federal tax debts. | Eric Gay/AP Photo

The IRS has agreed not to reduce economic stimulus payments for some people who owe federal tax debts, the agency’s in-house watchdog said Monday.

However, the move won’t shield people with some other debts, including state taxes and overpayments of certain federal benefits.

Unequal treatment: At issue is a change Congress made late last year in how people owing government debts would be treated if they received coronavirus relief payments approved in March and December as a credit on their 2020 taxes, instead of direct payments as most people did.

Those who received the “recovery rebate credits” would see their credits reduced to settle unpaid federal and state taxes, Social Security and Veterans Affairs debts, student loan debt, and child support obligations.

Highlighting the issue: National Taxpayer Advocate Erin Collins flagged the unequal treatment in January, saying that millions of people could have their credits reduced, particularly those most in need of relief money because of the coronavirus pandemic, including veterans, Social Security recipients and students.

She urged the IRS to use its own authority to fix the problem, at least for those who have federal tax debts, and the agency has agreed to do so, Collins wrote in a blog Monday.

“It has committed to doing so as quickly as practical,” she wrote.

Limited reach: However, she noted that the change won’t cover those who have already filed their 2020 returns or file them before the IRS can make a necessary computer programming change. It also won’t affect most categories of debt.

The IRS is still required by law “to offset refunds to satisfy numerous other categories of debt, including state tax debts, overpayments of unemployment insurance benefits, and overpayments of certain federal benefits,” Collins wrote.

“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.”

Same deal with new payments: Nor did Congress change the rules for debt deductions in another round of stimulus payments it approved earlier this month.

“Thus, the statutory scheme in its present state will continue the inequities ... during the 2022 filing season,” she wrote.