Can the IRS Ever Collect on Erroneous EIPs?

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The IRS sent out a lot of EIPs this summer, and at a pretty quick clip. While there were certainly issues with people failing to receive the payments that should have (see posts on injured spouse issues here, domestic violence survivors here, and incarcerated individuals here), there were also undoubtedly people that received EIPs who shouldn’t have. The question this post sets out to answer is simply this: for those who shouldn’t have received an EIP what if anything can the IRS do to get the money back? No doubt taxpayers will want to know what to expect on these issues and will expect tax professionals to have a clear answer… you’ll have to read on to determine if there is one.

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If I were to survey the room, I’d bet most people have already made up their minds that there is an easy answer to the title question of this post: “No, the IRS cannot collect on erroneous EIP. Haven’t you read IRC § 6428(e)(1)? If you received too much EIP you just reduce the amount of credit on your 2020 return, but not below zero.”

My dear friends, I’m here to tell you that nothing in life is easy -least of all parsing the language of IRC § 6428. Further, I’m sorry to say, in my opinion IRC § 6428(e)(1) is actually irrelevant to the question of whether the IRS can collect on erroneous EIPs. Lastly, and again with sincere apologies, I regret to inform that if the EIP is a rebate (a big “if”) the IRS can collect on it through the deficiency procedures.

Gasps all around, I’m sure. Let me explain myself.

First off, it is critically important that we are clear what we’re talking about when we talk about EIPs. The term EIP (for our purposes) only refers to the “advanced” payments made in 2020 pursuant to IRC § 6428(f). The payments that people will be claiming on their 2020 returns are not “EIPs” but instead are Recovery Rebate Credits (“RRC”) under IRC § 6428(a). They are separate and distinct credits. Conceptually, you aren’t claiming the “remainder” of your EIP when you file your tax return: you are claiming an entirely different credit that is simply reduced by any EIP you received.

To me, that IRC § 6428 creates two separate credits (and not simply staggered payments of the “same” credit) is uncontroversial despite the unhelpful language on the IRS website. But because it is critical to my analysis I want to drive the point home. I also think it will help lay bare why the IRC § 6428(e)(1) provision has no relevancy to the IRS ability to collect on erroneous EIPs.

Two Credits, One Code Section

We can all agree (I hope) that eligibility for the EIP is based on your 2019 (or 18) information. IRC § 6428(f) makes that pretty explicit, and that is also how the IRS administered the payments. That is in part why people rushed to file 2019 tax returns.

Yet some analyze the EIP as if 2019/18 isn’t the determinant for eligibility, but rather some expedient way of delivering the EIP. In this mistaken conceptualization the IRS just administered a 2020 tax credit based on 2019/18 information because that’s all they had (2020 not being even half-way done when the CARES Act was passed). This mistaken view reads IRC § 6428(f) as paying out some sort of “tentative” credit that the taxpayer then has to reconcile on their 2020 tax return with the “true” credit, since 2020 is the information we really cared about all along. I believe this is why so many people read the “good news” in IRC § 6428(e)(1) to be that if we got too much “tentative” credit we don’t have to pay any back when we claim our “true” credit on the 2020 tax return.

But that’s not how the law is written, and not how the credits work. The EIP is a 2019/18 animal. That is the year it looks at. That is the year it applies to. Allow me to illustrate.

Imagine you weren’t making much money in 2019. Maybe most of the year you were in law school and only after passing the bar in September did you begin making big-law money. Your AGI for 2019 is only $65,000, but by March 2020 you are already way over the AGI threshold for IRC § 6428(a). Nevertheless, you get a full EIP of $1,200 in May 2020. Common wisdom says you “got too much” EIP and will need to reconcile on your 2020 return. You aren’t too worried though, because the reconciliation provision at IRC § 6428(e)(1) protects you from paying back this excess EIP. If not for IRC § 6428(e)(1) you’d be in a bind…

Ah, my dear friend, can’t you see that no reconciliation is even necessary? You received exactly the right amount of EIP (assuming your 2019/18 return was accurate… more on that later). You don’t need to do anything on your 2020 tax return, because the 2020 tax return is only for claiming a wholly different credit -the RCC. Note that the IRS worksheet for the RCC supports this: the moment you determine you are ineligible for the credit based on 2020 information, you stop and do nothing more. Your EIP simply doesn’t matter at that point. See IRS Form 1040 Instructions at page 59.

It might be instructive to compare this to another tax credit where reconciliation actually does occur: the “Premium Tax Credit” at IRC § 36B. Because health insurance premiums are incurred on a monthly basis, the Premium Tax Credit is paid “in advance” as each monthly payment is due. The Premium Tax Credit looks at only one year for eligibility determinations: the tax year you are receiving the payments. Obviously, you cannot know exactly what your AGI (or even filing status) will be at the beginning of 2020, so you provide an estimate and then “reconcile” with the year-end numbers. This is exactly what you would expect with a “tentative” credit that looks at the same tax year for eligibility and advance payments… and this is not at all what happens with IRC § 6428.

So we agree that the law student doesn’t owe any EIP back, not because of IRC § 6428(e)(1), but because you don’t owe money “back” when you get the right amount of it in the first place. But imagine the IRS screwed up and didn’t send this law student their EIP. Can they claim it on their 2020 return? Obviously not, because the 2020 return is (again) for a wholly separate credit (the RCC) that they are not eligible for. The RCC looks at 2020 for eligibility determinations whereas the EIP looks at 2019/18. IRC § 6428(e)(1) only functions to make sure you don’t double-up on the RCC credit if you received an EIP payment (the italicized words will matter more in a moment). The “not below zero” reduction language just makes sure that if your (correct) EIP payment is larger than your (correct) RRC credit you get the full value of the larger of the two.

The RCC is a 2020 tax credit and the EIP, to beat this dead horse, is not.

Great, so the EIP is a Different Credit: Why Does that Matter?

The RCC is a remarkably conventional refundable credit. The RCC can be offset -just like any other tax credit (see Les’ post here). It is subject to math error procedures for certain “math-like” mistakes -just like many other refundable credits listed at IRC § 6213(g)(2). And it is explicitly made part of the definition of a deficiency as a negative tax -just like other refundable credits (see IRC § 6211(b)(4)(A)). Oh, and just like most tax credits it is something you affirmatively claim on your return.

The EIP, on the other hand, is metaphysically a tax-chimera. I have spent many a sleepless night trying to pin down exactly what it is, because “what it is” will drive how or if it can be collected.

First off, it isn’t entirely clear that the EIP is a “refundable tax credit.” Yes, IRC § 6428(b) refers to the refundable credits portion of the Internal Revenue Code. But note that the language of IRC § 6428(b) refers to the credit “allowed by subsection (a).” It does not refer to the credit “allowed by subsection (f)” (the advanced credit) or more broadly the credit “allowed by this section.”

Things get more difficult. The RCC provision (IRC § 6428(a)) provides a “credit” against the tax of 2020. The EIP provision (IRC § 6428(f)) treats the taxpayer as if they made a “payment” against tax for 2019/18…

This tricky distinction between “credit” and “payment” could matter. A lot. It could be the determinant on if the EIP is a “rebate.” That distinction directly touches on the assessment and collection procedures the IRS will need to follow. I will go into it in more detail on a subsequent post. For now, let’s just pretend the EIP is a rebate and go into why that would matter.

Here’s the fun thing about rebates: erroneous ones can be collected through deficiency procedures. Don’t believe me? Look to the definition of “deficiency” for yourself -specifically IRC § 6211(a) and (b)(2). Have Kleenex handy for the tears that statutory language is sure to inspire. But the critical take-away is that you can have a tax return that doesn’t (necessarily) understate tax and still have a deficiency if the IRS were to issue a “rebate” they shouldn’t have. This could happen, for example, if the IRS give you an EITC that you never really claimed and weren’t actually entitled to. In fact, that is the exact example used by the IRM at 21.4.5.5.2(1) (10-01-2020). If the IRS noticed the mistake in time they could issue a notice of deficiency… the rest is well-trodden tax history.

No one claimed the EIP on their 2019/18 return, and yet some may well have received the EIP when they shouldn’t have based on mistakes from their 2019/18 returns. But if EIPs are rebates (again, a big “if”) made by the IRS, the recognition of these mistakes is exactly how they could be subject to the deficiency procedures and assessed like any other tax. And with exactly the same administrative collection options thereafter.

Uh oh…

But maybe it isn’t that bad. Recall, to begin with, the only people to worry would be those that had inaccurate 2019/18 returns resulting in EIPs they shouldn’t have received. If you were eligible based on 2019/18 information you have nothing to worry about. Also, as I will discuss in detail in another post, there are arguments that in some instances the erroneous EIP is not a “rebate” at all, which seriously limits the IRS collection options. Lastly, and importantly, there is the very real possibility that the IRS will simply make the decision not to go after EIPs at all as an administrative matter.

Those are all questions I’ll explore in my follow up post. For now, I’ll be content if only I have convinced you that the answer “the IRS cannot collect EIP because you just reduce it on your tax return” is 100% wrong. I’m afraid nothing in life is that simple.

About Caleb Smith

Caleb Smith is Visiting Associate Clinical Professor and the Director of the Ronald M. Mankoff Tax Clinic at the University of Minnesota Law School. Caleb has worked at Low-Income Taxpayer Clinics on both coasts and the Midwest, most recently completing a fellowship at Harvard Law School's Federal Tax Clinic. Prior to law school Caleb was the Tax Program Manager at Minnesota's largest Volunteer Income Tax Assistance organization, where he continues to remain engaged as an instructor and volunteer today.

Comments

  1. Bob Probasco says

    Caleb,

    Nice post! You convinced me. 🙂 Although I think when most people say “the IRS cannot collect EIP because you just reduce it on your tax return” they’re probably really thinking “the IRS cannot collect EIP [that was excessive based on your 2020 (higher) income] because you just reduce it on your tax return”. They’re right about that, but not if they mean “the IRS cannot collect [that was excessive based on your 2019/2018 income]”. Most of us have not been focused on *that* question, but we should have, so your post is an important contribution.

    My gut reaction is that the EIP is not a rebate, but never trust gut reactions. 🙂 I look forward to your follow up post and the analysis of that issue – which is certainly critical.

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