Credit Elect Carry Forward vs. Offset

In the case of Hadsell v. United States, 127 AFTR2d 2021-808 (N.D. Cal. 2021) the taxpayer sought to apply a relatively large refund to his subsequent year’s tax liability at a time when he had an arrearage in child support.  Instead of allowing him to apply the refund as a payment toward the subsequent year’s liability, the IRS offset the refund against the past due child support.  Mr. Hadsell did not contest the fact the IRS did this nor the timing of its notification to him of the offsetting of his refund.  Acting pro se, he brought an action to set aside the offset and to obtain damages for wrongful collection.  The IRS moved to dismiss for lack of subject matter jurisdiction.

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Mr. Hadsell timely filed his 2016 return, electing to carry forward a $9,547 refund to 2017.  On July 9, 2018, over a year later and after he filed his 2017 return, the IRS notified him that it had taken the 2016 overpayment and applied it to outstanding child support obligations.  He had some liabilities in the subsequent year returns he attributed to the failure to carry forward the 2016 overpayment as he requested and to notify him in a timely manner.

The IRS argues that IRC 6402 both allows the offset in (a) and prevents a judicial review of it in (g).  Section 6402(b) also sets out the provision for crediting an overpayment toward the estimated tax payment for a subsequent year.  Section 6402(c) specifically allows, indeed requires with no discretion available to the IRS, offset of an overpayment to satisfy certain non-federal tax debts including past due child support.  While the IRS has discretion to waive offset against federal debts, as we have discussed here in describing the offset bypass refund provisions, subparagraph (c) removes the discretion if debts exist which the Treasury Offset Program (TOP) covers.

In addition to arguing the mandatory nature of the offset, the IRS argued that section 6402(g) precludes court review of offsets with its sweeping language of prohibition:

[n]o court of the United States shall have jurisdiction to hear any action, whether legal or equitable, brought to restrain or view [reductions to a taxpayer’s overpayment]

The court acknowledged the breadth of the statutory language regarding court review of offset and acknowledged that applying the offset to non-tax debt did not give rise to a claim for damages under IRC 7433, citing Ivy v. Commissioner, 197 F. Supp. 3d 139, 142 (D.D.C. 2016), aff’d 877 F.3d 1048 (D.C. Cir. 2017).  The court notes that any disputes Mr. Hadsell has regarding the past due child support must be fought with the child support agency and not the IRS.

The court finds, however, that although Mr. Hadsell has little maneuvering room with respect to the offset, he also raised issues regarding his 2017 liability that resulted in large part from the timing of the IRS offset – or at least its notification of the offset.  He claims that the IRS accepted his carry forward election, citing to Martin Marietta Corp. v. United States, 572 F.2d 839, 842 (Fed. Cir. 1978) which held that

If a taxpayer, such as plaintiff, elects to credit an overpayment to its succeeding taxable year’s estimated tax liability, that election is irrevocable and binding upon both the taxpayer and the Internal Revenue Service.

The court raises concerns that the IRS may have irrevocably accepted the credit election to carry forward the overpayment. Neither party cited authority on this point.  At what point in time does the credit election become irrevocable?  Since the parties did not adequately address this aspect of the case, the court does not dismiss the section 7433 claim.

It’s easy to understand why someone with outstanding child support would try to make the election that Mr. Hadsell made and attempt to save for himself the value of the overpayment rather than allow it to pay down his past due obligation.  Feelings can run high regarding child support payments.  I once had a clinic client who stopped filing returns because he did not want the refunds to go to his ex-spouse for past due child support/spousal support payments.

I have seen taxpayers attempt to use the credit elect carryforward of a refund to attempt to skirt the bankruptcy provisions for payment of past due debts and seek to pass the benefit of the credit to themselves rather than the creditors. See, e.g., In re Feiler, 218 F.3d 948 (9th Cir. 2000) (deeming debtor’s prepetition waiver of a NOL carryback avoidable by the trustee as a fraudulent transfer); United States v. Kapila, 402 B.R. 56 (S.D. Fla. 2008) (same).

While it’s clear why a taxpayer wants to preserve the refund for themselves by pushing it forward to apply to a future tax liability of the taxpayer and it’s easy to see why the IRS, or TOP, would want to apply the overpayment to a past due tax or other debt subject to TOP, the issue of the timing of the offset action as it relates to the government’s ability to effect the offset appears novel.  Did the filing of the subsequent year return prior to the time of the offset serve to cut off the government’s right to offset.  Could it have waited even longer?  Did it have an obligation to notify the taxpayer before the next filing season so that the taxpayer would not rely on the election and enter a cycle of problems similar to the problems that a levy could cause to a bank account with a host of bounced checks resulting?

It will be interesting to see how the court decides to limit the government’s ability to offset and whether there is or should be a time limit on the right that would otherwise exist.  We have recently updated Saltzman and Book, Chapter 14A (behind WestLaw paywall) to create a much expanded discussion of offset.  Michael Waalkes and I have just posted an article on SSRN walking through many of the issues raised by offset, including some of the issues presented by the CARES Act with its statutory waiver of almost all offset provisions as discussed here, here and here

After declining to dismiss the wrongful collection claim brought under IRC 7433, the court did dismiss the Federal Tort Claims Act (FTCA) count in Mr. Hadsell’s complaint.  The court pointed out that the waiver of sovereign immunity in 28 U.S.C. 2680  under this provision contains an applicable exception for “[a]ny claim arising in respect of the assessment or collection of any tax.”  While the offset funds went to pay past due child support and not taxes the claim arose out of the IRS’s mechanism for assessing and collecting taxes and falls within the statutory exception provided in FTCA.

Pandemic Relief: Are Welfare States Converging?

Starting this year, I will cover law review articles of interest to PT readers. The goal of my coverage is not to provide a critical review, but rather to make you all aware of thought-provoking research that may serve as an inspiration or enhancement to your own work.

I start with Converging Welfare States, a 2018 keynote address by Prof. Susannah Camic Tahk for the “Always with Us? Taxes, Poverty and Social Policy” symposium at Washington and Lee University, published in the Washington and Lee Journal of Civil Rights and Social Justice (available here.)   She looks at the trajectories of direct-spending welfare programs and tax antipoverty programs, and asks “To what extent can we expect tax programs become more like direct-spending programs, or ‘welfare’ over time?”

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As tax practitioners, we are typically more familiar with tax antipoverty programs, like the earned income credit (“EITC”) and the child tax credit (“CTC”), and less familiar with direct-spending welfare programs, like Temporary Assistance to Needy Families (“TANF”), the Supplemental Nutrition Assistance Program (“SNAP”), and the now repealed Aid to Families with Dependent Children (“AFDC”). In the low-income taxpayer world, our clients can benefit from both types of programs.

In her address, Prof. Tahk asks, “Will the trajectories of the tax antipoverty programs and the direct-spending programs converge?” In light of recently proposed Covid-relief legislation, tax antipoverty programs may start to look more like direct-spending welfare while retaining the hallmarks and benefits of living within the tax code… at least, for now.

The House proposed bills last week included a provision (here at page 22) to make the child tax credit refundable with the option of being paid in advance on a monthly basis for 12 months (but there is already buzz around the idea of making it permanent). The child tax credit changes will purportedly have the effect of decreasing the number of children in poverty by more than 40%.

There is another provision that expands the EITC (here at page 45), with a key aspect that it makes it more generous to childless taxpayers. PT has covered some general EITC issues here and here.

In her address, Prof. Tahk asserts that differences in public opinion, legal framework and administration make tax antipoverty programs more popular, effective and sustainable than direct-spending welfare programs. And she asks if that popularity, effectiveness and sustainability is threatened when tax programs begin to look more like direct-spending welfare?

People may be supportive of programs in which they are more likely to receive the benefit themselves. The House proposal doesn’t alter the TCJA change which made the Child Tax Credit available to those with higher incomes, so joint filers with adjusted gross incomes up to $400,000 would still be entitled to a $2,000 credit. It does, however, impose lower limits on the proposed additional amount of $1,000 to $1,600 per child, i.e. joint filers with adjusted gross incomes of $150,000 begin to be phased out of that portion. Even with a lower limit for the additional amount, a lot of taxpayers will still be eligible.

Prof. Tahk suggests that, “If tax antipoverty programs are popular because they are widely available, more growth to these programs may in fact enhance, rather than diminish, their relative popularity.” 

Many tax antipoverty programs are framed as tax cuts, which Prof. Tahk thinks may also be why the general public is supportive of them. On the other hand, she cites research by others that suggests people don’t mind paying taxes, are proud to do so, and prefer refundable tax credits to direct-spending programs, even when they are explicitly made aware of the welfare-like nature and purpose of refundable tax credits. So, what does that mean for an advanced monthly payment of a tax credit?

Congress has heavily relied upon the tax system to deliver money to people throughout the pandemic. Procedurally Taxing has covered may of the administrative and procedural concerns this creates. In a PT post on the differences between the EIP and the Recovery Rebate Credit (here), Les begins to contemplate the issues that may arise as, “Congress considers the possibility of using the tax system in additional ways to deliver regular benefits in advance of (or even in the absence of) filing a tax return.“

The disproportionate effect the pandemic has had on low income Americans is hard to deny, which is why relief legislation is being used to expand upon existing tax antipoverty programs. But it begs the question, is the tax code the right place for the government to advance its antipoverty agenda?

Prof. Tahk points out that there are more substantial procedural rights found in the tax code than there are in many traditional poverty means-tested  laws, which have eroded over time. For example a 1996 welfare statute banned federally funded legal-services organizations from “participat[ing] in litigation, lobbying or rulemaking involving an effort to reform a Federal or State welfare system,” which has made it far more challenging for poverty law attorneys to assert and expand rights related to direct-spending welfare.

The Taxpayer Bill of Rights and the statutorily rooted protections akin to due process notice and hearing rights found in the tax law, automatically bestow certain rights on recipients of tax antipoverty programs. Additionally, it is significant to Prof. Tahk that the “tax legal framework continues to develop under circumstances where it affects everyone who interacts with the tax code, business and nonbusiness, rich and poor,” because taxpayers with resources can hire attorneys who can defend, assert and expand tax-based rights.

Prof. Tahk is careful to point out that some tax antipoverty provisions are treated differently than other sections of the code, such as the EITC ban under section 32(k) (which PT has covered here and here) and delayed refunds for EITC and CTC recipients. If the trend continues, she postulates, even tax antipoverty law could become its own area of law, but it would still be different from the law that governs direct-spending welfare programs.

Legislated exceptions have already been created for some pandemic-relief provisions, but so far, in ways that benefit taxpayers. Take, for example, carve outs related to Payroll Protection Program loans- forgiven loans are not included as income and expenses paid for with forgiven loans can be deducted. This treatment is contrary to well-established principles in the code under I.R.C. §§ 61(a)(11) and 265.  The provision that prevented EIPs from being offset, except for past due child support, is another example, and could have implications for the treatment of tax antipoverty payments going forward.

It has yet to be seen whether the IRS can or will collect on erroneous Economic Impact Payments, but Caleb has some compelling analysis about it here. Unlike the EIP, the House proposal includes safeguards that protect low-income taxpayers by limiting the amount they are required to repay if advanced CTC payments are erroneously received.

We’ve seen that the IRS is relatively well-suited to deliver cash to people quickly, and it also has data at its disposal (including cross-agency date from the SSA and VA) which can be used to determine eligibility. It’s not perfect, of course, but nothing is. Prof. Tahk also points that there are ways in which the IRS’s infrastructure can be used to reduce problems with noncompliance or improper payments, referencing research and work done by Nina and others in the EITC realm.

If you are interested in more of Prof. Tahk’s research and analysis in the area, I encourage you to read her keynote address and check out her other work.

More Trouble with Notices and More Discussion of Offsets

We have written about the two rounds of misstated notices the IRS has sent out because of delays resulting from the pandemic.  You can find those posts, here and here.  In both instances, the National Taxpayer Advocate through her blog provided the alert or at least the alert that we noticed.  Another problem with notices has occurred and again the NTA has blogged on the problem, providing a window into IRS action not otherwise available.  The latest correspondence problem does not implicate statutory time frames the way the earlier misdated notices did.  Instead, this problem simply involves the IRS sending 109,000 taxpayers a notice with wrong information.  The notice not only wrongly tells the taxpayer of action the IRS did not take but contains a typographical error that will compound confusion.

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According to the NTA, the IRS sent Notice CP21C informing taxpayers that the IRS was offsetting their Economic Impact Payment (EIP) to satisfy outstanding debt.  Here is the critical language from the notice as recounted in the NTA blog post:

We applied a credit to your 2007 [that is not a typographical error!] tax account due to new legislation. We used (offset) all or part of your economic stimulus payment to pay your federal tax as the law allows … As a result, you don’t owe us any money, nor are you due a refund.

The IRS did not offset their EIP and tax year 2007 has nothing to do with the issue. 

The people receiving this notice appear to be people who did not have a 2018 return on file and who filed their 2019 return too late for the IRS to process their EIP before the end of 2020.  For these individuals, the ability to obtain an EIP turned into an ability to receive a Recovery Rebate Credit (RRC) upon the filing of their 2020 return.  If these individuals only need to file a 2020 return in order to claim the RRC, they may be sufficiently confused by the notice to forego the opportunity to file a 2020 return to obtain the recovery check Congress intended for them to receive. The letter directs them to the IRS phone number to call with questions; however, as the NTA points out in her blog post, they may have as much luck getting through to that number as they will getting through to CVS to try to schedule a vaccine (well she doesn’t exactly put it that way but you get the idea.)

According to the NTA’s post

The IRS added Questions and Answers(Q/A) to its coronavirus tax relief site on January 28 which explains that the notices were issued in error. The Q/A says the notice was intended to inform taxpayers that the IRS must mail or issue EIP1 by December 31, 2020, and that the IRS was unable to process their 2019 tax return in time to issue EIP1.

Of course, not everyone goes to the IRS website or reads an NTA post.  The NTA indicates she is negotiating with the IRS to send a second letter to these individuals alerting them to ignore the first letter.  Even assuming the IRS has the bandwidth to do that during the filing season, the second letter may cause even more confusion.

The NTA also notes that for those among the 109,000 who do file a 2020 return claiming the RRC, the general pass on offset (except for past due child support) that existed for EIP does not exist for payments made as RRC.  So, for individuals pushed into obtaining the recovery through their 2020 return, outstanding federal taxes from other years (even possibly including 2007), as well as other debts subject to offset under the Treasury Offset Program (TOP), will cause the taxpayer to miss out on actual receipt of the payment as it is applied to the outstanding debt.

The NTA went on to mention that she is pushing to convince the IRS to voluntarily waive offset of RRC payments.  The IRS has that authority under IRC 6402.  It could make a decision on a blanket basis to let refunds based on RRC go out to taxpayers without being offset to outstanding federal tax debt.  That would be a good thing and create consistency for taxpayers receiving their recovery payment this year.  It would line up with one of the suggestions made by the ABA Tax Section in its recent comments to the IRS concerning how to administer taxes in a time of pandemic.  (You can find a link to the report in a recent post by Nina.)  It would not prevent the offset of the RRC against debts other than federal taxes, because IRC 6402 only gives the IRS discretion to waive offset against federal taxes and not all of the other debts to which TOP applies.

In other potentially encouraging offset news, it was reported yesterday that IRS Deputy Commissioner Sunita Lough stated that the IRS was considering how it will administer the offset bypass refund (OBR) program.  She talked about consistency in application of the program, which was a criticism of the program in a recent Treasury Inspector General for Tax Administration (TIGTA) report discussed here by Les.  OBRs were also the subject of the recent comment from the ABA Tax Section to the IRS in which Les and I participated, which is linked above through Nina’s post.

Offset has received much attention in the past year.  Not only did Congress acknowledge the important role that offset plays by giving taxpayers a pass on almost all offset provisions in the CARES Act, but a portal snafu by the IRS with respect to injured spouses created the most commented upon blog posts we have had during the existence of this blog.  Look at the hundreds of comments, still coming in, from this one post last spring by Caleb.

Getting correspondence right is a critical function of the IRS.  The latest NTA blog post recounts yet another, and perhaps the least excusable, of the IRS mass correspondence problems during the past year.  Administering the tax laws requires giving taxpayers accurate information.  When specific correspondence gives wrong information, it creates a real problem of trust in the system.  Let’s hope that the IRS can avoid future correspondence problems of this type.  Let’s also hope that one of the positive developments of the pandemic is a new way to look at offsets.  Michael Waalkes and I have an article on offset I intend to post soon.  This is a silent but important collection tool in the IRS collection arsenal that comes with many policy issues deserving consideration in the manner of its implementation.

My IRS Wishlist for 2021 Part 2 – the Economic Hardship Indicator

In recent weeks, the American Bar Association Section of Taxation wrote the IRS, recommending the IRS not exercise its refund offset authority under IRC § 6402 on 2020 individual income tax refunds with respect to three groups:  taxpayers claiming the Earned Income Tax Credit; taxpayers with income below 250% federal poverty level, and taxpayers who have pending offers in compromise.  Last week, the National Taxpayer Advocate released a blog advocating a similar approach.  Because both of these proposals seek to avoid creating economic hardship for taxpayers, I thought it would be a good idea to revisit a proposal I made years ago for the IRS to proactively identify taxpayers who are likely at risk of economic hardship and shield them from potentially devastating collection action.  This in turn has led to my next two wishes on my “IRS wish list”: 

  • That the IRS implement an “economic hardship indicator” that identifies taxpayer accounts with balances due where the taxpayer is at risk of economic hardship as defined by IRC § 6343(a)(1)(D), and use that indicator to trigger further inquiry into the taxpayer’s financial status before issuing levies or placing them into streamlined or other installment agreements; and
  • That the IRS utilize the algorithm underlying the economic hardship indicator (or other proxy such as percentage of federal poverty level) to identify taxpayer refunds where the offset of such refund for past tax liabilities would create economic hardship and proactively not offset those refunds.
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Proactively Using Data to Protect Taxpayer Rights

One of the things that has bothered me over the years is the IRS’s reluctance to use data to minimize taxpayer burden and protect taxpayer rights, despite its eagerness to use data to identify and address areas of noncompliance.  I first confronted this tendency in the first month of my tenure as the National Taxpayer Advocate, when the IRS was ready to implement the provisions of IRC § 6331(h) by offsetting 15% of the monthly social security benefit of any beneficiary who had a tax debt.  Despite years of working on the implementation strategy, the IRS apparently had not completed an analysis of the economic condition of Social Security beneficiaries – including the elderly and disabled – and thus had no plans to filter out taxpayers whose income was insufficient to pay their basic living expenses.  In a memo to Commissioner Rossotti in April, 2001, I outlined my concerns, and the Commissioner put a moratorium on the Federal Payment Levy Program (FPLP) with respect to social security benefits until those concerns could be addressed.  That led to the development of the Low Income Filter, a rudimentary tool which GAO criticized as both over- and under- inclusive.  That is, it allowed levies against many taxpayers who could not afford to pay and it excluded many taxpayers who had the ability to pay.  Based on this criticism, the IRS ceased using the filter.

This experience taught me, very early on, the importance of well-designed applied research studies for driving appropriate tax administration approaches.  Over the years, the research studies published in the National Taxpayer Advocate’s Annual Reports to Congress prompted many changes in IRS policy, simply because the data showed the way.  For example, with respect to the flawed Criminal Investigation Questionable Refund Program, TAS’s 2005 research study stopped it in its tracks and brought about major changes, including moving the program from CI and into W&I.  We revisited the FPLP Low Income Filter in the 2008 NTA Annual Report to Congress (vol. 2, beginning at page 48), showing that FPLP Social Security levies were being applied to taxpayers who could not pay their basic living expenses and therefore the levies must be released under IRC § 6343(a)(1)(D).  As a result of our study, the IRS asked TAS to identify a percentage of Federal Poverty Level (FPL) that could be used as a proxy for the algorithm we developed to identify taxpayers experiencing economic hardship as a result of the levy.  The IRS ultimately agreed to use 250% FPL as a proxy for economic hardship and to exclude taxpayers from the FPLP population.  This measure is known as the “Low Income Filter” or LIF.

The issue of using data to proactively identify taxpayers who are experiencing economic hardship has popped up time and time again – in the context of Private Debt Collection, streamlined installment agreements (IAs), and now, in the age of the coronavirus pandemic, refund offsets.  So it is helpful to review the proposal for an Economic Hardship Indicator and explore the research underlying it. 

The Economic Hardship Indicator

Section § 7122(d)(2)(A) requires the IRS to “develop and publish schedules of national and local allowances designed to provide that taxpayers entering into a compromise have an adequate means to provide for basic living expenses.”    The statute also requires the IRS to not use these schedules of allowances where “such use would result in the taxpayer not having adequate means to provide for basic living expenses.”  IRC § 7122(d)(2)(B). In these cases, the IRS should review the taxpayer’s circumstances on a case-by-case basis.  Treasury regulation 301.7122-1(c)(2)(i) further clarifies what the IRS must do:

A determination of doubt as to collectibility will include a determination of ability to pay. In determining ability to pay, the Secretary will permit taxpayers to retain sufficient funds to pay basic living expenses. The determination of the amount of such basic living expenses will be founded upon an evaluation of the individual facts and circumstances presented by the taxpayer’s case. To guide this determination, guidelines published by the Secretary on national and local living expense standards will be taken into account. [Emphasis added.]

The approach outlined in IRC § 7122(d)(2) and the related regulations gives effect to the taxpayer’s right to a fair and just tax system, which requires the IRS to recognize the taxpayer’s facts and circumstances in determining the ability to pay, and the right to privacy, which requires the IRS to take enforcement actions “no more intrusive than necessary.”  The Commissioner is required to ensure his employees adhere to these rights.  IRC § 7803(a)(3).

The IRS also applies these allowances in calculating the monthly payment for “non-streamlined” installment agreements, for currently not collectible status, and for determining economic hardship for purposes of releasing levies.  The Allowable Living Expenses, or ALEs, are based on data from the Bureau of Labor Statistics which reflect the actual spending based on family composition and income.  I have written elsewhere about the shortcomings of using BLS data for this purpose, and TAS research has clearly documented the harmful impact of the IRS’s application of ALEs here and here.  But for purposes of the Economic Hardship Indicator, it makes sense to accept the IRS’s ALE figures because they are what the IRS relies on and are very conservative, which should make it easier for the IRS to agree with this approach.  That is, the Economic Hardship Indicator algorithm adopts the very allowances and procedures the IRS lays out in its Internal Revenue Manual instructions to staff for determining ability to pay. 

TAS’s Economic Hardship algorithm essentially used the greater of total positive income from the taxpayer’s most recent tax return (or from a two-year old return if the most recent was not filed), or the total Information Return income reported for the most recent year.  In determining allowable expenses, the algorithm used family composition reported on the most recent tax return, and if no return was on file, it defaulted to a single person household.  The algorithm also took into consideration whether the taxpayer had assets.  The algorithm allowed ownership and operating expenses for one vehicle if a single or head of household return, and two vehicles for married-filing-jointly.  Finally, with respect to home expenses the algorithm used the local allowances based on the zip code shown on the return or income source used as a basis for the income calculation.

To the Injury of Many Taxpayers, the IRS No Longer Conducts Financial Analysis for Most Installment Agreements

With the IRS’s recent expansion of streamlined Installment Agreements (IAs) to seven year terms and liabilities over $25,000, it is clear the IRS wants to drive taxpayers into formulaic IAs rather than engage with them to learn their specific financial circumstances.  While streamlined IAs can be less burdensome for many taxpayers, and certainly minimize the use of IRS staff time, they also can extract payments from taxpayers who do not have the ability to pay.  The Economic Hardship Indicator maximizes the benefits of the streamlined IA while ensuring the IRS takes into consideration the taxpayer’s specific facts and circumstances where warranted by risk of economic hardship.

Over the years, TAS research has demonstrated that automated levies and streamlined installment agreements can harm taxpayers.   In addition to work with the FPLP Low Income Filter, the TAS research studies cited earlier found:

In Fiscal Year (FY) 2018,

  • streamlined IAs constituted 72% of all installment agreements;
  • 40% of those streamlined installment agreements were entered into by taxpayers whose income was below ALEs; and
  • 40% of streamlined IAs entered into by Private Collection Agencies were with taxpayers whose income was below ALEs; and
  • Streamlined IAs had high default rates – between 37% and 39%.

In the 2018 Annual Report to Congress, we proposed the IRS apply the algorithm TAS built and adopt the Economic Hardship Indicator (EHI) as a means to identify taxpayers who might experience economic hardship if the IRS levied upon their payroll or accounts, or placed them in a streamlined IA.  I clearly stated that the EHI was not a determination of economic hardship or currently not collectible status.  Rather, it could be used to program a pop-up screen for IRS phone assistors and collection employees to trigger a few additional questions about the taxpayer’s financial status before placing them in a streamlined IA or issuing a levy.  The EHI algorithm could trigger a similar pop-up where a taxpayer is applying for an online IA, prompting the taxpayer to provide a bit more financial information.  Moreover, the EHI could be a powerful tool applied during filing season to avoid refund offsets.  It would also improve the IRS’s case scoring and selection criteria, so it doesn’t waste resources pursuing uncollectible debts.  Thus, the EHI would serve as a trigger for when the IRS should conduct a case-by-case analysis of the taxpayer’s ability to pay basic living expenses, as outlined in 7122(d)(2)(A), the regulations thereunder, and the Taxpayer Bill of Rights.

Economic Hardship Algorithm and the Federal Poverty Level

As noted above, when TAS first tested its economic hardship algorithm in 2008 for Federal Payment Levies on Social Security recipients, the IRS resisted developing an algorithm, and instead proposed using a percentage of federal poverty level for purposes of the Low Income Filter.  Although I believe the correct approach is for the IRS to build an algorithm that adheres to the procedures used by IRS employees, 250 percent of federal poverty level is an effective proxy for economic hardship.  A chart from one of my last blogs as NTA makes this point:

Comparison of Ability to Pay by Indicated Percent of Federal Poverty Level (Computed on Adjusted Gross Income) to Ability to Pay as Determined by an Analysis of Total Positive Income to ALE

* Single = 1 vehicle allowance; married filing jointly = 2 vehicle allowances

As shown above, using 250% federal poverty level (FPL) as a proxy for the economic hardship algorithm excludes 85% of the taxpayers the algorithm (based on IRS procedures) finds cannot pay a tax debt.  And although 250% FPL also has the highest percentage – 3% — of taxpayers who the algorithm finds can afford to pay the debt, that is a small error rate for the significant taxpayer protection of avoiding profoundly damaging collection action.  And remember, all we are doing with the Economic Hardship Indicator is requiring the IRS to get more information from the taxpayer before it undertakes collection action that is very likely to result in the taxpayer being unable to pay basic living expenses.  (The rationale for using the EHI to bypass refund offsets is slightly different – unlike other collection actions which can be unwound (levy releases) or modified (IAs), the refund offset takes place within a very short window of processing time and cannot be reversed.  Thus, if there is a risk of economic hardship, as indicated by the EHI, the IRS should refrain from offset.)

It is baffling to me why, in the face of all this data (including yet another TAS research study from the 2020 Annual Report to Congress), the IRS refuses to adopt the EHI.  The IRS complains of not having sufficient resources to do collection work.  Well, failure to use the EHI not only harms taxpayers but also results in massive amounts of unnecessary work for those limited IRS collection resources, in the form of defaulted IAs, released levies under IRC § 6343(a)(1)(D) and return of levy proceeds, refund offset bypasses, and unproductive collection work, to name a few.  The time is long past for the IRS to “put taxpayers first” by adopting the EHI and proactively act to avoid harming taxpayers.  If it won’t do this in the midst of a pandemic, I really don’t know what it will take, other than legislative action.  And in fact, per IRC §§ 6343 and 7122, I would argue Congress has already legislated.

Some Quick Thoughts on a Key Difference Between the Advance Payment of an EIP and Claiming the 6428 and 6428A Credit on a 2020 Tax Return

We have previously discussed the mechanics of the advance credit, both in the original CARES legislation from last spring and also in the Tax Relief Act legislation from late last year.  For a really good primer on the mechanics of all of this, I recommend the recently retired sage of tax procedure, Carlton Smith So, How Will the “Recovery Rebate” Refunds Work This Time? Part 1 and Part 2.  In this post I will flag how things have changed a bit since Carl’s initial post, and also offer some brief observations on why the current status for individuals who are entitled to receive 6428/6428A credits when they file their 2020 tax returns puts people in a less favorable place than if they were fortunate enough to receive the advance payments.

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As background, individuals who receive an advance payment or payments that exceed the amount of their eligible credit (as later calculated on the 2020 return) will not have to repay any of the payment. If the amount of the 6428 and 6428A credit as determined on the 2020 return exceeds the amount of the advance payment, taxpayers are entitled to claim the difference as a refundable tax credit on their 2020 returns.

There is an uneasy relationship between tax procedure and refundable credits. Typically (and I am simplifying here quite a bit) a refundable credit is treated as a payment for a particular tax year, and a taxpayer will have an overpayment if the sum of their payments and credits exceeds their tax liability for that year. Just because a taxpayer has an overpayment does not necessarily mean a taxpayer gets a refund, however. Section 6402(a) allows (but does not require) the IRS to offset any overpayment of one tax against any other federal tax debt; Section 6402(c), (d), (e) and (f) require IRS (through Treasury) to offset or apply the balance of any overpayment to certain defined other debts, including past due child support, and state income taxes and covered employment compensation debt.

In an off-Code part of the law, the original CARES legislation trumped the offset rules. CARES did not distinguish between advance payments and amounts that would be claimed later on 2020 tax returns. Essentially CARES said that IRS could not exercise its discretion under Section 6402(a) to offset the economic impact payments and amounts later claimed on 2020 returns against past due federal taxes, and also overrode the mandatory offset rules in Sections 6402(d)-(f), but preserved the mandatory offset for past due child support.

Fast forward to December and the Tax Relief Act. 

Sec. 273(b) of the Tax Relief Act retroactively changes the off Internal Revenue Code provision  found in CARES Act Sec. 2201(d). What are the changes? As I mentioned above the original CARES Act provided that BOTH the advanced credit that the IRS distributed in the spring (the original EIP) and any amount of the 6428 credit that was later claimed on the 2020 return was exempt from the IRS applying to past due federal income taxes or to all mandatory offsets (e.g., state tax debt, debt to other federal agencies), except for child support.

First the good news. The TRA provided some additional protection for the second round of EIP’s by providing protection from all offsets, including for past due child support. It also protected the second round of advance payments form bank garnishment or levy by private creditors and debt collectors.

That is the good, at least from the taxpayer perspective. What about the bad? The TRA now provides that the recovery rebate credit a taxpayer claims on a 2020 tax return (under both 6428 and 6428A) loses the protection from discretionary and mandatory offsets under Section 6402. It will also be applied to any unpaid current 2020 tax liability, a necessary step to determine if a taxpayer has an overpayment in the first instance. There is also no protection from garnishment or levy if a taxpayer is lucky enough to get a 6428/6428A fueled refund. So in sum, what IRS refers to as the  “Recovery Rebate Credit” (the amount that is claimed on the 2020 return, rather than the Economic Impact Payments paid out in advance), is subject to ALL offsets, just like any other credit claimed on a tax return that generates an overpayment. 

Conclusion

Congress’ decision to place these benefits in the tax code and also to attempt to ensure that the IRS deliver them to the majority of people before filing a 2020 tax return (or in some instances even in the absence of a return), raises a lot of procedural issues. In this brief post, I did not attempt to exhaustively discuss those issues, but to highlight some differences between the 6428 and 6428A mechanics and typical refundable credits, like the EITC and the Additional Child Tax Credit. The post suggests that there are significant substantive differences between the advance payment mechanism and the typical way that individuals receive benefits by claiming a refundable tax credit on a tax return. This brief discussion may also be of relevance as Congress considers the possibility of using the tax system in additional ways to deliver regular benefits in advance of (or even in the absence of) filing a tax return. How and whether benefits are offset ( and whether the IRS will facilitate or publicize the ability to request a bypass of offsets when taxpayers are experiencing hardship, a topic of recent comments submitted by the ABA Tax Section), as well as what happens when there may be changing circumstances when it is time to reconcile, are issues that will have a material impact on the effectiveness of any program that is tethered to the tax code.

For another day, and another post, are issues relating to how taxpayers prove eligibility for claimed refundable credits, especially given that eligibility proof for a benefit embedded in the tax code typically means a correspondence audit. As Congress possibly looks to the tax system to play a bigger role, how the IRS administers these provisions looms even larger in the welfare of some of the population’s most vulnerable.

Refund Offset versus Bankruptcy Exempt Property Claim

An important bankruptcy case was decided by the Fourth Circuit last spring that I missed, perhaps due to the pandemic – at least that’s my excuse because both Carl Smith and Nancy Ryan brought it to my attention at the time.  It came to my attention again last month thanks to Michelle Drumbl who directs the tax clinic at Washington and Lee and who will serve as interim dean there in the coming academic year.  This past semester Michelle was on sabbatical in Northern Ireland with her family but, as with most sabbaticals, she was writing during her time away from school producing at least one article on the cross over topic of bankruptcy and taxes.  Fortunately for me, she asked that I take a look at her draft of the article which caused me to finally pay attention to an interesting case that I ignored when Nancy and Carl brought it to my attention.  Michelle’s forthcoming article focuses on the case of Copley v. United States, 125 AFTR 2d 2020-XXXX (4th Cir. 2020) involving the issue of the interplay of IRC 6402, BC 362(b)(26), BC 522, BC 541 and BC 553

In prose the case concerns whether the IRS can offset a pre-petition income tax refund that the taxpayer claimed as exempt in his bankruptcy case against a pre-petition income tax debt.  The debtor argues that when the refund became exempt property it received a type of protection from the IRS offset not otherwise available, while the IRS argues the opposite.  The Fourth Circuit holds that exempting the refund does not protect it from offset.  I found this outcome totally unsurprising; however, the fact that the Fourth Circuit decision reversed the decisions of the two lower court judges in Richmond I happen to know as well as the absence of authority on this point did surprise me.  See the bankruptcy court’s opinion here and the district court’s opinion here.

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The Copleys filed a chapter 7 bankruptcy in May 29, 2014 listing the IRS as a priority creditor for over $13,000 claiming as exempt their 2013 tax refund of $3,208.  Virginia provides debtors a fairly stingy exempt property option, as do many former English colonies along the East Coast.  It allows the debtor to protect “money and debts due the householder not exceeding $5,000 in value.”  The Copleys used the exemption to elect to protect their 2013 refund and neither the IRS nor anyone else objected.  After making their exemption election, the Copleys filed their 2013 tax return on June 6, 2014, and the IRS offset the refund pursuant to IRC 6402 and BC 362(b)(26) which came into existence in the 2005 bankruptcy refund legislation and permits the IRS to exercise its offset rights despite the automatic stay prohibition against offset in BC 362(a)(7).  The automatic stay exception limits the IRS to offsetting pre-petition refunds against pre-petition debts of the same type of tax.  Here, the debt and the refund both satisfied the conditions of type and time.  No one objected to the offset based on a stay violation of BC 362(a)(7) rather the fight turns on the power of the exemption versus the power of the right to offset.

In appealing the case the IRS made two arguments.  First, it argued that the 2013 refund never became part of the Copleys’ bankruptcy estate.  Second, it argued that their right to exempt the property does not supersede the IRS right to offset.

The property of the estate argument raises the question of whether the Copleys even had the right to exempt the refund since they could only exempt property of the estate.  The IRS argued that:

A taxpayer can only have a property interest in a tax refund, not a tax overpayment, and the taxpayer can only have an interest in a refund if the overpayment exceeds preexisting tax liabilities.  Because the Copleys’ overpayment did not exceed their preexisting tax liabilities, the government asserts that their interest in the refund was valueless and, therefore, did not become part of the bankruptcy estate. (emphasis in original)

The Fourth Circuit did not buy this argument and that did not surprise me.  It pointed to the expansive nature of the concept of property of the estate, citing prior Fourth Circuit law as well as Supreme Court law.  The Court did note in footnote 3 that offset under IRC 6402 is discretionary which is inconsistent with the government’s position.  Two prior Fourth Circuit cases went to the Supreme Court that dealt with property of the estate.  I suspect this circuit may be more sensitive to this issue that almost any other circuit given that history.  Here, it cited to one of those prior cases that dealt explicitly with offset, Citizens Bank of Md. v. Strumpf, 516 U.S. 16 (1995) in pointing out that three things had to happen before offset could take place and none of those things had happened at the time of the bankruptcy petition.  In the IRS’s defense Strumpf and the other case, Patterson v. Shumate, 540 U.S. 753 (1992) pre-dated the 2005 amendment to IRC 362 excepting certain offsets from the automatic stay; however, that change did not remove the property from the estate under BC 541.  Rather than spending much of its time focusing on whether the Copleys’ refund became property of the bankruptcy estate, quickly concluding that it did, the Fourth Circuit moves on to describing the primary issue as one of the preservation of the right of offset despite the fact that the refund became part of the bankruptcy estate.

The IRS relied on the case of IRS v. Luongo, 259 F.3d 323 (5th Cir. 2001) where the debtor did not claim the refund as exempt until after the offset occurred.  The facts in Luongo were:

On May 19, 1998, Appellant Luongo filed for relief under Chapter 7 of the Bankruptcy Code. At the time of her filing she owed the IRS $3,800 in unpaid taxes from her 1993 tax year. On August 15, 1998, Appellant filed her 1997 income tax return showing an overpayment of $1,395.94. The bankruptcy court entered an order on September 10, 1998 discharging Appellant’s personal liability for her 1993 income tax deficiency. Subsequently, in November 1998, the IRS executed its claim to setoff and applied all of Appellant’s 1997 tax overpayment to her unpaid 1993 tax liability. 

Only after discharge and after offset did the debtors in Luongo seek to reopen their bankruptcy case and claim the refund as exempt.

Luongo involved a number of arguments not present in Copley but one of the argument the IRS won and on which it relied here was that the refund was not part of the estate.  The Fourth Circuit in Copley says that it does not dispute that conclusion of the Luongo decision.  I cannot reconcile the Copley decision and the reason for the Copley decision with that statement but, in the end, it does not matter whether the refund comes into the estate or not because of the decision of the Fourth Circuit on the second issue.

The second issue pits BC 553 preserving a creditor’s right to offset against BC 522 and the debtor’s right to exempt property.  The court acknowledges a conflict between BC 522 which protects exempt property against “any” prepetition debts and IRC 6402 which permits the IRS to offset “any overpayment” against preexisting liabilities.  It finds that BC 553 resolves the apparent conflict.

The critical language of BC 553 states “this title does not affect any right of a creditor to offset a mutual debt.”  That broad language, which caused me not to think that this case presented much of an issue, persuades the Fourth Circuit that the IRS can still make the offset even through the Copleys exempted the property.  It views acceptance of the Copleys’ argument as one which would violate the statutory directive of BC 553.  The court notes that BC 553 does not create the right of offset but only preserves an existing right.  Since IRC 6402 created a clear existing right, BC 553 steps in to preserve that right.

The court then addressed the Copleys’ arguments and knocked them down.  The one that most interested me was the argument that bankruptcy courts had the discretion to decide if BC 553 would apply.  The Fourth Circuit found that while bankruptcy courts could strike down a creditor’s attempt to offset, the basis for doing so derived from the questioning of the validity of the right of offset and not from some equitable discretionary ability to do so.

I think the Fourth Circuit got it right on both counts.  The refund comes into the estate but the IRS, or any other creditor with a valid right of offset, can exercise that right with the proper permission of the statute or the bankruptcy court.  Despite what I think, the lower courts here found the IRS could not offset.  This issue does not have much case law even though the bankruptcy code is well into middle age.  Perhaps, other debtors in other circuits will make this argument to see where it leads.

TIGTA Report Criticizes TAS’s Approach to Offset Bypass Refunds

Last month TIGTA released a report reviewing the Taxpayer Advocate Service’s role when taxpayers request an offset bypass refund. In the report TIGTA found 1) that TAS offices inconsistently treated taxpayers seeking OBRs, 2) some TAS failures to honor requests as to how taxpayers wished to receive their refunds (paper check, direct deposit to the taxpayer’s account, or direct deposit to a third-party financial institution), 3) some TAS actions that exceeded its delegated authority, especially when a taxpayer seeking an OBR had an open matter with another IRS function, and 4) TAS failed to record fully its processed OBRs. 

In this post I will focus on the first item relating to TIGTA’s findings concerning inconsistencies in the process and standards used to evaluate OBR requests.

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Offset bypass refunds allow taxpayers to receive a refund when the IRS would otherwise apply an overpayment to past due tax liabilities. TAS case advocates are delegated authority to generate an OBR for a taxpayer if the taxpayer has no other debt subject to mandatory offset under Section 6402 and the taxpayer establishes that she is unable to pay reasonable living expenses if the IRS were to offset the overpayment against a past due tax debt.

We have discussed OBRs a few times, including one of our most viewed posts all time, a 2015 post Keith wrote discussing the OBR process. In one of our recent posts on OBRs from this past April, Barbara Heggie discusses challenges that taxpayers face securing the needed documents to prove the financial hardship necessary to get an OBR. In her post, Barbara refers to TAS guidance that allows TAS employees to dispense with third-party documentation: 

Many taxpayers seeking an Offset Bypass Refund will not have access or the ability to secure hardship documentation such as eviction notices, late bills, etc. Determine whether the taxpayer can validate the hardship circumstances through oral testimony or a third-party contact. If so, discuss the case with your LTA to determine if a written statement signed by the LTA confirming that the hardship was validated is appropriate.

The TAS guidance reflects experience that sometimes taxpayers facing hardship have a difficult time providing a full set of documents or record that would prove the hardship.  

In its report, TIGTA found that TAS’s flexibility led to inconsistencies across TAS offices in how TAS case advocates reviewed and decided on OBR requests:

We determined that most OBR cases did not include an analysis of the taxpayer’s income and expenses before an OBR was issued. In addition, we identified cases in which OBRs were provided to taxpayers based on supporting documentation that was not current orreasonable. However, in other cases, TAS case advocatesrequired a full review of the taxpayer’s income and expenses, as well as applied stricter supporting documentation criteria, before determining whether the taxpayer should be issued an OBR. 

The TIGTA report noted specific inconsistencies, including how one office created a detailed processing form to review compliance history and prior OBR requests, while other offices did not consider those factors, and how some offices did not verify supporting documentation. To be sure, TIGTA used only a judgmental sampling approach, which is a non-probability sampling technique, but its auditor observed a pattern of inconsistencies across offices (the report does not discuss why TIGTA did not do a deeper dive). Despite the limits in auditing technique, in TIGTA’s view, the inconsistencies stemmed from a lack of detailed centralized guidance, which led to inconsistent treatment of similarly situated taxpayers. This leads to an increased “risk of abuse by individuals seeking to avoid payment of their outstanding tax liabilities.” 

The report includes are other specific examples of inconsistencies, some of which reflect a lack of use of financial hardship criteria or processes associated with assessing reasonable collection potential that IRS generally requires when considering alternatives to enforced collection. TIGTA makes a number of recommendations, including floating the idea that TAS should create OBR specialists who would have more experience. It also contrasts the TAS OBR process with other more centralized review functions, such as the innocent spouse unit.

TAS’s response to the report reflects a different perspective on its role. In addition to noting that the TIGTA observations only reflected “just a few cases” it noted that centralization could create additional taxpayer burdens. In addition, the lack of detailed process, in TAS view, was by design, and it worried that a too detailed approach in the IRM on OBRs is “unnecessary and that more specific IRM guidance will lead to employees failing to think critically.”

Conclusion

The report reflects very differing perspectives on the OBR process and on tax administration generally.  It reminds me of Gina Ahn’s recent guest post Proving Your Client’s Marital Status, Not as Simple as It Appears but Crucial for EITC where she contrasted Social Security and IRS employees in how they evaluate marital status.  SSA’s perspective is based on ensuring that people receive the maximum benefits they are entitled to receive whereas the IRS perspective is more enforcement based, with a concern that taxpayers may be gaming marital status to generate an improper refund.  TIGTA, consistent with its mission, is primarily concerned with reducing fraud and waste. TAS, consistent with its mission, is attempting to help taxpayers, especially for taxpayers who may be facing financial hardship.

In addition, TAS has offices nationwide. Unlike the post RRA 98 IRS, its employees are meant to work with and assist taxpayers who live and work in the same region as TAS employees.  The lack of centralization within TAS is by design. TAS’s decentralized structure helps ensure that its employees are more likely familiar with the circumstances of people it is charged to assist. 

To be sure, finding the right balance between uniformity and flexibility is a challenge.  Providing relief from an offset or collection action is also a challenge, as we generally accept that while IRS should have extraordinary collection powers those powers should not render taxpayers unable to meet life’s necessities. Within this framework, OBRs exist in a shadowy world of tax procedure, and the report highlights that within the shadows there is a great likelihood of disparate treatment of similarly situated taxpayers. 

What could be done to address the issues TIGTA flagged, while at the same time possibly preserving a role for TAS? In discussing the issue with Keith he raises the important issue as to whether TAS should be the initial point of contact on OBRs. Instead, perhaps IRS could centralize administration of OBRs and local taxpayer advocates could issue a directive if the centralized IRS office failed to 1) take into account the appropriate weighing of a more definitive listing of factors or 2) address unique local circumstances that may create hardships for taxpayers that employees in a centralized location might miss.  Such an approach would take some filing season pressure off of TAS, create standardization, and leave TAS to be creative when needed.  This approach may make additional sense given that during the filing season the IRS typically has additional employees, while TAS typically does not hire up for the filing season and that period creates a lot of extra work for it.

Suing to Recover Offset of Tax Refund Against Student Loan Debt

In the case of Nelson v. United States, No. 1:19-cv-00841-EDK (Fed. Cir. June 3, 2020) the Federal Circuit gave a per curiam affirmance of the decision by the Court of Federal Claims dismissing her complaint for lack of subject matter jurisdiction.  Ms. Nelson represented herself seeking to recover her federal tax refund for the years 1988 to 2018 offset to satisfy debt to the Missouri Department of Higher Education.

She initially filed suit in state court in Missouri.  Because she named the Department of Education as a defendant, the case was removed to the United States District Court, which the government will do in essentially every case in which it is sued in state court.  The case there was dismissed because it was barred by the statute of limitations and for other reasons.  The court also granted a motion for summary judgement filed by the Department of Education finding that she “continued to owe money to [the Department of Education] and that [its] continuing efforts to collect that debt [were] justified.”

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In the tradition of Elizabeth Warren, Ms. Nelson persisted.  Unfortunately for her, persistence does not equal victory.  In June of 2019 she filed a complaint against the same two parties in the Court of Federal Claims, after her 2018 income tax refund was once again taken to pay past due education loans.  She sought to obtain the return of all of her refunds for a 30-year period, to stop further offset of her refunds, to clear her credit history and to obtain punitive damages for the violation of her 14th Amendment rights.

The Court of Federal Claims dismissed her case for lack of jurisdiction for several reasons.  With respect to the challenge to the offset, it pointed out that IRC 6402(g) “explicitly bars judicial review of [such] action.”  The correct way to attack the offset would have been to sue the Department of Education on the debt itself and not on the offset.  I do not mean to suggest that such a suit would have produced a different result in the end, but she would not have bumped headlong into a bar against litigation.

The Court of Federal Claims dismissed her case for illegal exaction (see prior post here on the meaning of these terms), because of her prior suit against the Department of Education and the result in that suit, which causes issue preclusion in this case and bars her claim.

Finally, the Court of Federal Claims dismissed her case under the 14th Amendment for punitive damages or to clear her credit history because the 14th Amendment “do[es] not mandate payment by the government.”

The Federal Circuit reviews her claims on these various grounds.    First, it agreed that the Court of Federal Claims has no jurisdiction over the Missouri Department of Higher Education.  It also found no jurisdiction against the IRS for offsetting her tax refund based on the Department of Education claim.  This is a point we have discussed before and one that is difficult to explain to clients who come into the office seeking redress for an offset refund against the IRS, thinking that the IRS has failed to give them the refund.  As the court points out, the IRS (or the Treasury Offset Program) is required to offset the funds under IRC 6402(d)(1) upon receiving notice of a past due legally enforceable debt from one of the approved parties in the statute and then IRC 6402(g) bars review of the action.  Finally, it agreed on the issue preclusion aspect of the decision.

This sad result for Ms. Nelson can be traced into the bankruptcy discharge provisions, which make it nearly impossible to discharge student loan debt.  BC 523 (a)(8) prevents an individual from discharging student loan debt:

unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor’s dependents, for—

(A) (i) an educational benefit overpayment or loan made, insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution; or

(ii) an obligation to repay funds received as an educational benefit, scholarship, or stipend; or

(B) any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of the Internal Revenue Code of 1986, incurred by a debtor who is an individual;

So, Ms. Nelson is stuck.  Her federal tax refund will be taken year after year.  Other collection actions will be taken against her to collect this money.  When a debt is excepted from discharge, a debtor faces potentially a lifetime of staring at that debt.  Here, I do not think the statute of limitations on collection will provide much assistance to her because the Department of Education has obtained a judgment.  We don’t learn from this case how she incurred the debt and what happened to the education that caused her to incur it.  The case simply presents the very real and sad situation facing many individuals holding student loan debt.  They cannot meet the near impossible standard to obtain an exception from bankruptcy discharge and cannot show that the educational institution failed to provide the agreed upon education, as some students have successfully argued in for-profit college context.

Ms. Nelson’s case was decided days after President Trump vetoed a bill that would overturn regulations issued by the Department of Education making it more difficult than Obama era regulations to raise the borrower defense.  Congress is currently considering providing relief to student loan borrowers as part of the ongoing COVID-19 response. Because of the large amount of student loan debt, there are significant implications to loosening the ability to obtain relief from student debt.  We have blogged about these issues before here, here and here.  Student loan issues will not go away.  We need to find a way to provide relief for those who deserve the relief in order to avoid cases like Ms. Nelson’s, where we see the 30 year shackles of the debt.  I am not proposing an answer, but it’s a problem that badly needs one.