In Switcheroo, IRS To Deliver Full Stimulus Payments To Those With Federal Tax Debts

There’s welcome news for financially struggling taxpayers with federal tax debts who didn’t get Round 1 and Round 2 economic impact payments, and were instructed to file 2020 tax returns to claim the payments as a recovery rebate credit.The Internal Revenue Service has now agreed to use its discretion to bypass offsets for federal tax debts for taxpayers who file 2020 returns that claim the recovery rebate credit, according to the Taxpayer Advocate Service, an independent voice at the IRS that fights to solve taxpayer problems. 

This means these taxpayers will get 100% of the value of the stimulus payments they’re due just like the Americans who got their stimulus payments as advance payments by direct deposit or in the mail. “This is a big deal for taxpayers affected by the change,” says National Taxpayer Advocate Erin Collins in a blog post.

Collins had called on the IRS to use its discretion to aid these taxpayers. The IRS had told people waiting for their stimulus checks through no fault of their own that the money would come through when they filed their 2020 tax returns. Then in the year-end Covid-relief bill, Congress said that outstanding stimulus payments to be paid as recovery rebate credit could be offset for back taxes and other claims. That didn’t seem fair: One group got the full stimulus payments while another didn’t.

A lot of money is at stake. There are still millions of people waiting for these payments. The first round of payments authorized under the CARES Act in March was worth up to $1,200 per adult and up to $500 per child, while the second round of payments authorized in December was worth up to $600 per adult and child.

It’s not all good news for struggling taxpayers. By law, the IRS still is required to offset tax refunds to satisfy other categories of debt, including state tax debts, overpayments of unemployment benefits, and overpayments of certain federal benefits.

What about the third round of $1,400 stimulus payments that the IRS is just starting to process? Yesterday President Joe Biden called for 100 million payments to be issued within 10 days. The IRS says it will be issuing them throughout 2021. For taxpayers whose Round 3 payments fall through the cracks, they’ll have to file for a recovery rebate credit on their 2021 tax return in the spring of 2022, and as the law stands now, the credit will be subject to offsets. Collins urges Congress to take another look at the law and consider providing that recovery rebate credits are exempt from reduction or offset to the same extent as advance payments for the 2022 filing season.