Offsets in a Time of Coronavirus

As discussed in yesterday’s post, Congress has created an override of the normal offset provisions for the CARES rebate.  It does not matter how much a taxpayer owes the IRS for prior years, if a taxpayer qualifies for the CARES rebate, the $1,200 rebate will pass through the normal offset provisions without stopping to satisfy the outstanding federal tax liability.  This is a sign of how much the government wants to put these checks into the hands of taxpayers and signals a difference in approach from the 2008 rebate checks where a large number were siphoned off to pay prior debts.

Also discussed yesterday was the decision of the Department of Education to pull back from claiming an offset of federal taxes this year. 

While it is nice that the IRS seems to acknowledge a small loosening of the normal offset bypass rules by requiring less documentation to request an offset bypass, it could go further.  It could follow the lead of the Department of Education and simply pull back from making offset for a period of time to allow taxpayers to get their refunds this year because of the extraordinary circumstances.  The IRS has this discretion as discussed above because the statute says may.  Why not exercise this discretion in the same manner as another department of the federal government?  Why should the Department of Education be making a policy decision about waiver of offset during this period different from the policy decision made by the IRS?

The issue of pulling back from making IRS offsets for a period of time took on greater urgency yesterday with the closing of the last IRS campus still running.  As long as Ogden was open it was possible for TAS to reach out to IRS employees who could perform the OBR.  Now that all of the service centers are closed there is no one home to make the OBR.  Anyone with a critical need for their refund, will not have OBR as an option because of the absence of IRS employees who could perform the OBR.

read more...

On Friday April 3 the ABA Tax Section sent a letter to the IRS with a list of recommendations regarding how the IRS could respond to the COVID-19 impact on the tax system and on taxpayers.  One recommendation concerned offset and it provides:

… the Service has discretion to not offset a tax refund to cover a previous federal tax debt.20 In tandem with the stimulus checks provided by the CARES Act, offset bypass could provide powerful, targeted relief to those most in need. We recommend the Service provide relief from refund offset due to federal tax debt for all taxpayers with gross income less than 250 percent of the federal poverty line. In addition, we recommend the Service bypass refund offsets for returns claiming the earned income credit or additional child tax credit. Currently, the Taxpayer Advocate Service (“TAS”) assists with offset bypass refund (“OBR”) claims for individual taxpayers facing exigent circumstances. However, the tollfree number for TAS has been taken offline, and TAS local offices are busy meeting the demand of many struggling taxpayers and the challenges involved in remote work. TAS employees would be overwhelmed if they were required to individually request OBR for each eligible low-income taxpayer. A blanket policy of suspending refund offsets would enable TAS to focus on the many other taxpayer issues. Further, most low-income taxpayers are not aware of the OBR process and without Low Income Taxpayer Clinics (“LITCs”) and Volunteer Income Tax Assistance (“VITA”) sites to inform them, they likely will not know to request this assistance from TAS.

Yesterday’s post also discusses how IRC 6402 and the Treasury Offset Program (TOP) work.  Even if the IRS exercises its discretion in the statute to pull back from taking 2019 refunds to past due taxes, some taxpayers will still lose their refunds to other debts that participate in TOP.  For broader relief Congress would need to step in and provide some direction as part of the next relief package.

Offset is a powerful collection tool.  A 2016 Treasury Inspector General for Tax Administration report states that the IRS collected about $7 billion per year through offset.  By substantially turning off the computers which normally capture federal payments headed out to taxpayers with outstanding federal tax and other federal obligations, Congress has made a strong statement about the need to get money into the hands of individuals devastated by the economic impact of COVID-19.  Should it do more?

If Congress wants to be consistent with its actions in CARES, it could suspend TOP for this tax season (with the exception of past due child support payments).  Similarly, if the administration wants to be consistent with the action of at least one of its departments, assuming the statutes governing the departments have the permissive language similar to IRC 6402(a), the administration could grant relief from offset across the board for this tax season.  If there is no Congressional action to broadly suspend TOP, the administration could take the lead and follow the example set by the Department of Education by suspending offset to all federal agencies.  The IRS could independently exercise its discretion as recommended by the ABA and suspend offset.  There are many possibilities here but action should come quickly.

Refunds, Offsets & Coronavirus Tax Relief

We welcome back guest blogger Barbara Heggie. Barb is the Coordinator and Staff Attorney for the Low-Income Taxpayer Project of the New Hampshire Pro Bono Referral System.  A shout out goes to Silya Shaw for alerting readers of the Pro Bono and Tax Clinics listserv to the Department of Education action discussed below.  Les is also adding a new section on offset to Chapter 14A of the treatise “IRS Practice and Procedure” where you can soon find additional resources regarding offset issues.  This is the first of three posts discussing offset issues in this special time. Keith

For most low-income, working families, tax season is a time of hope – hope for paying off bills, getting caught up on rent, fixing the car, and maybe even signing up for that certificate program promising a better wage. This is because the Internal Revenue Code provides thousands of dollars in refundable credits for such families if they have “qualifying children,” including the earned income credit and additional child tax credit. For a family with three children under age seventeen and a household income around $20,000, the federal tax refund can amount to over $9,000.          

But what if there’s a federal tax liability from a prior year clouding the family’s financial picture? Perhaps someone was an independent contractor and didn’t pay sufficient self-employment taxes. Maybe someone completed a Form W-4 incorrectly and wound up grossly under-withholding. What will happen to the family’s current-year tax refund?            

And what about the new stimulus money – the “economic impact payments” – meant to help people get through the coronavirus crisis? Will this family see any of that money? What if jobs are lost and savings depleted because of this emergency? Does that make a difference?

read more...

The short answers are: (1) the “normal” refund will probably be offset to pay down the prior-year tax debt, unless the family succeeds in securing a discretionary “pass” from the IRS, known as an offset bypass refund; and (2) the economic impact payment will probably still come, so long as there’s no child support arrearage on the books for the family’s taxpayers.

Section 6402(a) provides that the Secretary of the Treasury Department “may credit the amount of [a person’s] overpayment, including any interest allowed thereon, against any liability in respect of an internal revenue tax on the part of the person who made the overpayment.” (This is accomplished through the Treasury Offset Program.) Thus, the IRS may offset a person’s refund to pay down an old federal tax debt. The choice of the word “may,” rather than “shall,” means that Congress left an “out” for taxpayers; the Secretary doesn’t have to offset the refund.

The Internal Revenue Manual spells out how the Secretary should exercise this discretion, whether directly through the Internal Revenue Service (IRS) or by way of the Taxpayer Advocate Service (TAS). The mechanism for exercising the discretion is an offset bypass refund (OBR) which, in turn, depends on a showing of financial hardship. According to Internal Revenue Manual (IRM) 13.1.24.6.2.2.1, “Hardship for this purpose is economic hardship within the meaning of IRC § 6343 and the regulations thereunder (i.e., unable to pay basic living expenses).” IRM 21.4.6.5.11.1 stresses, “Handle each OBR on a case by-case basis. There is no exclusive list of expenses which would qualify a taxpayer for an OBR.”

Professor Keith Fogg blogged about OBRs for Procedurally Taxing in December 2015 and spelled out the mechanics of this tool. Traditionally, the amount of the refund offset that is bypassed via the OBR is limited to the precise amount that the taxpayer can document is needed in order to avert a specific financial catastrophe. Take the example of someone with a $3,000 federal tax liability for 2018 and an expected 2019 refund of $2,500. If the taxpayer requests an OBR and presents an eviction notice based on past-due rent of $1,000, the IRS might approve an OBR in that amount, assuming the taxpayer has also shown a lack of available assets to cover the back rent. Thus, the taxpayer would receive $1,000, and the IRS would use the remaining overpayment of $1,500 to credit the 2018 account. If the taxpayer also provided documentation of past-due medical bills, a utility shutoff notice, and an estimate for necessary vehicle repair – and if those totaled more than $1,500 – the IRS could issue a manual refund of the whole $2,500 overpayment.

But what if you can’t provide such documentation because a pandemic comes and your state issues a stay-at-home order and closes non-essential businesses, and you’re laid off and you lose Internet service? Are the traditional forms of proof necessary to secure an OBR? No, according to new guidance from TAS. A recent TaxNotes article published this guidance, TAS-13-0320-0008; it urges case advocates to consider the likelihood that a taxpayer’s ability to provide documentation of financial hardship may be impaired because of the unique circumstances and challenges of the coronavirus emergency. The guidance also reminds advocates of an important tool at TAS disposal whenever documentation can’t be secured, pandemic or no:

IRM 13.1.24. 6.2, Advocating for Taxpayers Seeking Offset Bypass Refund, clarifies when TAS can advocate for an OBR and, after an offset has occurred, when TAS can advocate for the reversal of the offset.

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. See IRM 3.17.79.3.3(2), Issuing Hardship Refunds, and IRM 3.17.79.6.4.2, Certifying Automated Clearing House (ACH)/Direct Deposit Hardship Refunds.

(Emphasis added.) The cited IRM provisions provide that a letter from the LTA verifying the existence of a hardship can take the place of third-party documentation.

But what if the federal tax debt isn’t the taxpayer’s only debt governed by section 6402 and the Treasury Offset Program? While Congress made the offset for federal tax debt discretionary, the Code section requires offsets for child support arrearages, non-tax federal debts, unpaid state income tax, and unemployment compensation debts. IRM 13.1.24.6.2.2.2 thus concludes: “This means that the IRS has no discretion to bypass one of those debts.” Moreover, “the IRS has adopted a policy of not issuing an OBR when the taxpayer has both a federal tax debt and any other type of debt for which offset is authorized by IRC § 6402.”            

Interestingly, section 6402(e)(2) provides that an offset for a state income tax debt is permitted against a person “only if the address shown on the Federal return for such taxable year of the overpayment is an address within the State seeking the offset.” Thus, a current New Hampshire resident who incurred both a federal and a Vermont state income tax liability for 2018 might qualify for an OBR in 2020 on a 2019 overpayment.

Despite the statutory mandate for the IRS to offset the nontax debts listed above, other federal agencies have the discretion to halt any refund offset originating from debts they hold. For example, the Department of Education announced on March 25, 2020, that it “has stopped all requests to the U.S. Treasury to withhold money from defaulted borrowers’ federal income tax refunds, Social Security payments, and other federal payments.” Given the economic magnitude of the pandemic, the Education Secretary went even further and “directed the Department to refund approximately $1.8 billion in offsets to more than 830,000 borrowers.” Perhaps the IRS and TAS will issue new guidance clarifying that an OBR may be granted if the taxpayer has both federal tax and student loan debt.

And now, finally, what about the economic impact payments – the stimulus money – promised by the CARES Act? Are they subject to offset to pay down federal or nonfederal debt? With the exception of child support arrearages, the answer is no.

Section 2201(a) of the CARES Act inserts a new section 6428 into the IRC, mandating the payment of these “recovery rebates,” subject to income limits and phaseouts:

  • $1,200 ($2,400 in the case of eligible individuals filing a joint return), plus
  • an amount equal to the product of $500 multiplied by the number of qualifying children (within the meaning of section 24(c)) of the taxpayer.

(See here, here, here, here, and here for extensive discussions in Procedurally Taxing of these provisions, their possible implementation, and the concerns they generate.)

Section 2201(d) of the CARES Act, entitled “Exception from Reduction or Offset,” spells out a broad prohibition against offsetting the economic impact payments to pay down federal and nonfederal debt:

Any credit or refund allowed or made to any individual by reason of section 6428 of the Internal Revenue Code of 1986 (as added by this section) or by reason of subsection (c) of this section shall not be –

            (1) subject to reduction or offset pursuant to section 3716 or 3720A of title 31, United States Code,

            (2) subject to reduction or offset pursuant to subsection (d), (e), or (f) of section 6402 of the Internal Revenue Code of 1986, or

            (3) reduced or offset by other assessed Federal taxes that would otherwise be subject to levy or collection.

The one exception is provided by omission; section 2201(d)(2) of the CARES Act lists IRC section 6402(d), (e), and (f), but not 6402(c). The first three subsections concern offsets of nontax federal debt, state income tax debt, and unemployment compensation debt, respectively; subsection (c) governs offsets of overpayments for child support arrearages.

Thus, economic impact payments/recovery rebates/stimulus checks cannot be offset to pay any debt except child support. “Normal” federal tax refunds remain fair game in the absence of an OBR, but OBRs may be slightly easier to come by in these coronavirus times.

Offset of Tax Refund to Satisfy Unpaid Child Support

We are entering peak offset season as federal tax refunds serve to satisfy many state and federal obligations of individuals who anticipated a check from Uncle Sam.  The recent case of Blue v. United States Department of Treasury, No. 1:19-cv-01926 (N.D. Ohio 2019) serves as a reminder not only of the ability of the Treasury Department to take a federal tax refund and send it to a government creditor but of the inability to challenge the offset by suing Treasury.

read more...

Mr. Blue brings his case against Treasury pro se in the state court.  In some ways this makes sense because he will ultimately need to bring an action in state court to obtain the relief he seeks but the defendant will differ.  The Department of Justice removes the case to federal court and then immediately files a motion to dismiss for lack of subject matter jurisdiction.  You might think it odd to remove a case only to dismiss it but doing so is normal and makes sense.  The government does not want to make the jurisdictional argument to a state court judge who might find jurisdiction exists.  Better to remove the case to federal court, which the government has the absolute right to do, and dispose of it there in a setting where the government has more comfort in the outcome.

The district court dismisses the case with a short order first discussing sovereign immunity and the failure of Congress to authorize a suit such as this and then citing to IRC 6502 and the specific prohibition against a suit such as this:

Congress has not waived sovereign immunity for this type of suit against the Treasury Department. In fact, Congress has explicitly barred such suits, stating, “No Court of the United States shall have jurisdiction to hear any action, whether legal or equitable, brought to restrain or review a reduction authorized by subsection (c), (d), (e), or (f).” 26 U.S.C.A. §6402(g). Subsection (c) cited above authorizes a reduction of an individual’s federal income tax refund for “any past-due [child] support . . . owed by that person.” 26 U.S.C. § 6402(c). Under the terms of the statute, this Court lacks jurisdiction over any claims against the Treasury Department pertaining to offsets of income tax refunds for child support arrearages.

If Mr. Blue wants to get his tax refund, he needs to go to the state court that issued the child support order and convince that court that no outstanding order existed that should have caused the Treasury Department to send his federal tax refund to the child support agency.  The system does not allow attacking the offset by suing Treasury.  His only remedy lies in getting the child support order declared incorrect or fully satisfied.  It’s not surprising that Mr. Blue thinks he should go after the Treasury Department and the offset program.  Many clients of the clinic come in with the same view – that they have a tax problem not a problem with whatever agency has used the Treasury Offset Program to grab the tax refund.  The Blue case shows the futility of suing Treasury.  Taxpayers seeking to obtain a refund must always go to the part of the state or federal government requesting the offset and work out the issue there.  Assuming that the state or federal agency properly certified a debt to Treasury, Treasury will always win with the defense that it simply offset as contemplated in the federal statutes.

Because he brought the suit against the wrong party, we do not know if he really owes the child support to which the refund was offset.  The court did not need to get into the merits of his liability in order to dismiss his case.  Assuming that he has a valid argument that he does not owe the child support, the dismissal here does not prevent Mr. Blue from making that argument in a case against the child support agency.

Because it is the season for offset, here are links to prior blog posts on the offset issue that might be of benefit if you are dealing with an offset issue:

Offset of an overpayment where taxpayer designated the payment

Defense to Payment as a basis for stopping offset of student loans

Offset to satisfy student loans and general discussion of offset program operation

When is an offset an offset

TIGTA report explaining offset program

Illegal exaction – offset against a criminal fine

Requesting a bypass of the offset against prior federal taxes

“Defense to Repayment” Protects Taxpayers with Defaulted Student Loans from Treasury Offset Program

Professor Michelle Drumbl who teaches at Washington & Lee University School of Law and who runs the low income taxpayer clinic there brings us a guest post on an interesting case regarding the intersection of the earned income tax credit, defaulted student loan debt and the Treasury Offset Program. I am privileged to work at the Legal Services Center of Harvard Law School with a group of amazing lawyers who represent individuals who have attended for profit colleges and who have not received the bargained for benefits of higher education. As Professor Drumbl describes and as they posted, my colleagues recently won an important case protecting the tax refunds of students of a for profit college. I hope that this case, and others, will help create a movement to protect the earned income tax credit from the offset program. For those interested in this issue look for a deeper discussion in Professor Drumbl’s book which will be published next year by Cambridge University Press. Keith

Individuals expecting a tax refund are sometimes unpleasantly surprised to learn the refund instead has been applied to another outstanding debt. Internal Revenue Code section 6402(a) authorizes the Department of Treasury to offset an “overpayment” (generally speaking, the amount of refund shown as due on the return) against any outstanding federal tax, addition to tax, or interest owed by the taxpayer. If the taxpayer does not have any outstanding federal tax debts, or if any amount of refund remains after those debts are paid, section 6402(c)-(f) provide that the overpayment is then subject to the Treasury Offset Program in the following order of priority: 1) past-due child support payments; 2) outstanding debts to other federal agencies, including federal student loan debt; 3) outstanding state income tax debt; and 4) outstanding unemployment compensation debt owed to a state.

read more...

Keith blogged about section 6402 nearly three years ago in a post that drew a few dozen comments, including many from return filers who had experienced various types of refund offsets. In my view, the refund offset rules are troubling because they capture the refundable portion of the earned income tax credit (EITC) and the child tax credit. These two refundable credits constitute important social benefits for millions of working Americans. Administered by the IRS and delivered as part of the tax return filing process, these credits are a critical part of the U.S. social safety net.

In its 1986 decision Sorenson v. Secretary of the Treasury, the Supreme Court held that the refundable portion of the earned income tax credit is an “overpayment” for purposes of section 6402(c). Sorenson involved a challenge brought by a married taxpayer who filed a joint income tax return with her husband; their expected tax refund was offset and applied toward her husband’s past-due child support obligation. Mrs. Sorenson protested, and because they lived in Washington state, the IRS determined she was entitled to one-half of the joint refund under the state’s community property laws. But Mrs. Sorenson was unsatisfied with that outcome and filed suit in federal court, arguing that Congress did not intend for section 6402(c) to reach the earned income tax credit. On appeal to the Supreme Court, Mrs. Sorenson made a statutory interpretation argument and also argued that “permitting interception of an earned-income credit would frustrate Congress’ aims in providing the credit.” The Court rejected both of these arguments. While the Court acknowledged the “undeniably important” objectives of the EITC, it also noted that the “ordering of competing social policies is a quintessentially legislative function.” In particular, it is for Congress, not the Court, to decide whether the goals of the EITC outweigh the offset program’s goals of “securing child support from absent parents whenever possible.” After all – as the decision alludes – securing child support from absent parents also reduces the number of families on welfare (just as the EITC does). Following Sorenson, it is clear that it would be up to Congress to explicitly carve out the EITC from the definition of overpayment for purposes of section 6402. In the meantime, taxpayers subject to refund offsets will continue to lose this valuable social benefit which they otherwise are entitled to receive.

In my forthcoming book, Improving Tax Credits for the Working Poor, I argue that Congress should indeed consider protecting the EITC from offset, at least in part, and at least with respect to certain types of debts. I acknowledge, though, that Sorenson presented the most morally troublesome argument for protection from offset, because the underlying debt at issue was past-due child support. It is difficult to argue that a taxpayer should receive the EITC in support of a child who currently resides with him or her if the alternative is to divert the EITC to a child for whom the taxpayer is delinquent on child-support obligations.

In contrast, I highlight student loan defaulters as a relatively sympathetic case for which to carve out EITC offset protection. My proposals are inspired in part by informative National Consumer Law Center (NCLC) reports available here and here, from which I learned that approximately 1.3 million individuals in student loan default were subject to tax refund offsets in 2017. We do not know how many of those 1.3 million individuals were also EITC recipients, but surely there is some significant overlap between low-income working families and student loan defaulters. Among the most vulnerable student loan borrowers are those who borrow to attend for-profit institutions. As NCLC attorney Persis Yu describes in her March 2018 report, some of these borrowers are denied the promised benefits of their education when a fraudulent school closes in mid-course.

Thus, I was thrilled recently to learn that Keith’s colleagues Toby Merrill and Alec Harris are succeeding in some of their consumer protection efforts against the for-profit college industry. Toby and Alec, who have also blogged on the issue of refund offsets previously, work for the Project on Predatory Student Lending, which is part of the Legal Services Center of Harvard Law School. Among other cases, the Project on Predatory Student Lending has represented individuals who borrowed money to attend Corinthian College, a now-defunct for-profit company that operated post-secondary schools around the country, including a school called Everest Institute in Massachusetts.

The Massachusetts Attorney General’s office spent several years investigating Everest Institute for its deceptive recruiting and marketing practices. On March 25, 2016, Massachusetts Attorney General Maura Healey and U.S. Department of Education Secretary John B. King announced that students who were defrauded by Corinthian campuses nationwide (including the two Everest Institute campuses in Massachusetts) would be eligible for forgiveness of those federal loans. While this sweeping announcement was great news for borrowers, the details remained to be seen as to how and when this relief would apply.

Darnell Williams and Yessenia Taveras were among the thousands of students who had attended programs at Everest Institute. Williams and Taveras each took out federal student loans to pay for their program. Both individuals defaulted on their loans in the fall of 2014, before Healey’s office had completed its investigation of the Everest Institute campuses. Following their default, in August of 2015 the Department of Education sent Williams and Taveras the required notice of intent to turn the defaulted debt over to the Treasury Offset Program (TOP). Once the Department of Education certifies to the TOP that the debt meets certain requirements, the debt becomes subject to section 6402 offset procedures in the manner I describe above. Neither Williams nor Taveras individually filed an objection to the Department of Education notice within the prescribed 65-day deadline.

After the 65-day window to file an objection, but before the Department certified Williams’ and Taveras’ student loan debts to the TOP, Healey wrote to the Secretary of Education to request immediate and automatic discharge of all federal student loans borrowed to attend Everest Institute in Massachusetts (note that this November 2015 request of Healey’s also predates the aforementioned joint announcement with the Department of Education). Healey referred to her written request as a “defense to repayment” application on behalf of the student borrowers. Healey’s defense to repayment application included, among other exhibits, a list of names of more than 7,000 student borrowers who had attended Everest Institute, including Williams and Taveras. The Department of Education nonetheless certified the Williams’ and Taveras’ debts for collection by the TOP without deciding on the merits of Healey’s letter.

The following spring, in April and May of 2016, Williams and Taveras each filed income tax returns showing refunds due. Because the Secretary of Education had certified the defaulted debts to the TOP, the taxpayers’ refunds were offset against their outstanding loans. The amounts they lost were significant: Williams’ offset was in the amount of $1,263, and Taveras’ offset was in the amount of $4,999.

At issue in Williams v. Devos is whether Attorney General Healey successfully raised a borrower defense proceeding on behalf of the thousands of individuals listed in her exhibit, including Williams and Taveras. The Project on Predatory Lending represented Williams and Taveras in the matter in federal court, arguing that the Secretary of Education improperly certified their student loan debts as legally enforceable for purposes of the TOP program.

Last month, the judge in this case ruled that Healey’s November 2015 submission did invoke a borrower defense proceeding as to Williams and Taveras, and that the Secretary’s certification of the debt to the TOP without consideration of Healey’s submission was arbitrary and capricious. The court order vacated the certifications for refund offset for Williams and Taveras and remanded the matter to the Department of Education for a consideration of the borrower defense asserted by Healey.

Congratulations to Toby, Alec, and all at the Project on Predatory Student Lending on this ruling in Williams v. Devos. This is a significant victory for student borrowers challenging the validity of their loans. Though not strictly speaking a tax case, this development has important collateral consequences for low-income taxpayers who are eligible for refundable credits. As Keith has written recently in the offer in compromise context, and as I contemplate in my book, the fact that the EITC is an anti-poverty supplement for working families provides a compelling argument to protect it from offset, at least in certain circumstances. While I would like to see Congress act to at least partially exempt the EITC from offset against any federal student loan default, this ruling is an important and tangible step forward, as it is precedent for protecting student loan defaulters from tax refund offset while a borrower defense proceeding is pending.

 

Offset of Tax Refund to Pay Student Loan Debt

I mentioned recently that many comments have been made on the blog in the past few weeks in response to a post I wrote over two years ago regarding offset of tax refunds to satisfy other state and federal debts. Almost all of the comments to the post were written by individuals who had their 2017 refund taken to satisfy an outstanding student loan debt. Because of the volume, I asked my wonderful colleagues at the Legal Services Center of Harvard Law School who run the Project on Predatory Student Lending of the Consumer Law Clinic if they would write something that might guide individuals in this situation in trying to address the offset of their refund by the Department of Education. Toby Merrill, the director of the Project, and Alec Harris, an attorney working on the Project, have written a post that might be especially useful to the many non-tax professionals who wander onto our site from a Google search. The information may also be helpful to tax professionals with clients facing this problem. Keith

The U.S. Department of the Treasury collects debts owed to other federal agencies (and even state governments) by seizing taxpayers’ federal tax refunds. This process is known as “Treasury offset.” The federal agency that collects the most money by Treasury offset is the U.S. Department of Education, which uses offset to collect defaulted federal student loans. With tax season approaching, this post covers some basic information about how the Treasury offset process works for federal student loans, and what can be done to stop it.

read more...

How to find out if a federal tax refund will be taken

The Department of Education does not give much warning about offset. The Department only provides a single notice of Treasury offset before it occurs. This notice should come in the mail, and usually gets sent in late summer. After that first notice, the Department of Education will not give another warning about offset before it occurs ever again, even if offset occurs in multiple years. (It will, however, send a notice after it has already taken a person’s tax refund, each time offset occurs, when the person is in a much worse position to do anything about it.)

The IRS hotline, (800) 304-3107, will confirm whether someone’s tax refund will be taken to pay their defaulted federal student loans. This is an automated number that can say whether a tax refund is “certified” for offset (meaning the refund will be taken) and, if so, which agency is going to take it (student loans will be reported under the “U.S. Department of Education”).

What to do about a notice that the federal government intends to take a refund

A person who receives a notice that the government intends to take their tax refund to pay their student loans has 65 days to request a hearing. If the person requests a hearing within 65 days of the date of the notice, the offset will be put on hold during their challenge. If they make the request later, they might still get a hearing, but the offset will go forward in the meantime. This page has more information about requesting a hearing, including some of the reasons that may stop the Department of Education from taking a tax refund—for example, that the loan was already repaid, that the debt is someone else’s, that the taxpayer is making payments pursuant to a repayment agreement, that the taxpayer is completely disabled, or that the loan is not enforceable.

Another way to avoid offset besides requesting a hearing is by entering a written repayment agreement within twenty days of getting the notice, and starting payments right away. It is important to negotiate for a plan that is reasonable and affordable.

Financial hardship is not an officially recognized reason to contest an offset, but the Department of Education might nonetheless consider a request based on extreme hardship, which it generally limits to cases of imminent eviction or foreclosure.

What to do if a refund has already been taken

When a tax refund has already been taken, it is very hard to get back.It is permissible to submit a hearing request even though the one-time, 65-day review period has passed (see above), but this does not guarantee a hearing. If the taxpayer does not owe the loan, they may consider challenging the offset in court by bringing a lawsuit against the Department of Education.

If the tax refund was taken to pay a spouse’s defaulted federal student loan and the spouses filed jointly, then the non-defaulted spouse can get back their part of the joint refund by filing an injured spouse claim with the IRS. Be aware that if the government grants the injured spouse claim, it will add the amount refunded back to the outstanding loan balance of the defaulted spouse.

How to stop future offsets

The simplest way to avoid tax refund offset is to get student loans out of default. Once federal loans are out of default, they will no longer be eligible for offset. The two main ways to get federal student loans out of default are consolidation and rehabilitation. More information about both of these processes is available here.

Neither consolidation nor rehabilitation is immediate, although consolidation is faster. If defaulted student loans are being collected by wage garnishment (as well as Treasury offset), then they cannot be consolidated right away. Treasury offset remains possible until these processes finish and the loans are no longer defaulted. A taxpayer can request an extension to file their taxes to avoid filing a tax return until their loans are out of default and their tax refund is safe from offset.

In addition, a person can avoid future tax refund offsets by getting their loans discharged. This page has more information about various discharge options for federal student loans. In some cases, applying for a discharge can provide protection from offset while an applicant waits for a discharge decision, but these protections are not reliably applied, and an applicant may consider seeking an extension to file their taxes while their discharge application is processed to protect their tax refund.

 

 

On Offsets and Posted Dates

We welcome guest blogger Caleb Smith.  Caleb has worked on tax returns and tax transcript issues for several years.  Before law school he worked for Prepare and Prosper as a Tax Program Manager for their VITA program.  At Lewis and Clark Law School he participated in the excellent low income taxpayer clinic there run by my former colleague, Jan Pierce.  Most recently Caleb has been working at Mid-Minnesota Legal Aid in their tax clinic.  Next month he will join me as the new fellow at the Harvard Tax Clinic.  Keith

When is an offset not a § 6402 offset? After the recent Tax Court memorandum opinion, Luque v. Commissioner, the answer seems to be only “when the offset didn’t actually happen.” And because of the nearly wholesale prohibition on Tax Court review of § 6402 offsets codified at § 6512(b)(4), checking to see if the offset actually happened is about as far as the court will go. The opinion serves as an illustration of the pitfalls many taxpayers face in getting to court, while also offering a look into the arcana of IRS transcript posted dates. Indeed, this latter endeavor appears to be the main objective of Judge Halpern in issuing the opinion.

read more...

The facts of the case are fairly commonplace: taxpayer files a 2011 return showing a refund and the refund is credited in its entirety against a 2009 tax liability. In this instance, after the refund was credited the IRS issued a NOD for 2011, thus allowing the taxpayer into Court to argue (1) that the offset did not arise under § 6402 and (2), even if it did, the offset never actually was credited to 2009.

Prior to issuing the opinion the Court had essentially dashed the hopes that the liability giving rise to the offset, the 2009 liability, could be reviewed (i.e. didn’t arise under § 6402) in an earlier court order. It could be noted that the judge issuing the opinion, Judge Halpern, has been involved with previous cases questioning what is and is not an offset (found here with more insight on the matter provided by the First Circuit in appeal found here). But even though the Tax Court cannot “restrain or review” a § 6402 offset by examining if the taxpayer really owes the taxes being paid through the offset under § 6512(b)(4), Judge Halpern noted that it can look to see if the offset actually happened.

As this is usually a fairly straightforward inquiry (either the taxpayer had funds credited to a prior year or they didn’t), the import of the opinion seems to be elsewhere. Indeed, what appears to motivate the Court was the educational opportunity for tax practitioners in better understanding how IRS official records work. Judge Halpern almost explicitly acknowledges this rationale:

“On March 29, 2016, we issued an order concerning the motions in which we addressed and rejected petitioners’ jurisdictional argument. We, did not, however, dispose of the motions. Instead, we ordered respondent to address seeming anomalies between his representations and entries on the official records he submitted in support of his motion. Because there may be general interest in respondent’s reconciliation of those seeming anomalies […] we use this opportunity to make that reconciliation public.” [Emphasis added.] Luque at *3 – 4.

I’ll admit that as someone who frequently pores over IRS transcripts I counted myself as an enthusiastic member of the “general interest” Judge Halpern referred to. And yet, after reading the opinion, I couldn’t help but feel that the more important aspects of the decision remained elsewhere. But more on that later.

My naïve hope was that the opinion would give more insight on the meaning of IRS transaction codes. In my experience, the codes can be extraordinarily misleading or arbitrary. As one example, the notation “additional tax assessed” often does not mean that additional (i.e. “more”) tax was assessed, or even that any assessment action took place at that time. I have had one IRS employee tell me over the phone that the “additional tax assessed” transaction code is sometimes used as a “placeholder” just to show that some action was taken on the account… even where clearly no assessment action took place because the ASED had run years ago and the balance continued to show $0. The mind fairly boggles.

The opinion did not much address such things. However, if you are looking for insight on posted dates and cycle numbers you are in luck. I won’t spoil you with the mechanics (some may say, minutia) of their complete inner workings. You can read that for yourself at pages *12 – 14. I will, however, provide the general take-away points.

First of all, a “posted date” is the effective date of the transaction, which is either the actual date the transaction processing was finalized or the date it is deemed to have occurred by law (like withholding always being credited as paid on the last day to timely file). Meanwhile, a “cycle number” pertains to the dates the IRS actually processed the transaction. In the transcripts that are readily available to taxpayers and practitioners, the “cycle number” field is often left blank. This has never bothered me much because on the account transcript alone the cycle number is mostly useless: it leads off with a year (e.g. 2012) and ends with a number that appears to mean nothing. In Luque, for example, the cycle number was 201219, which corresponded to transactions taking place in 2012 over the month of… May. The 19, as far as I can tell, only has meaning if you have access to an IRS list of 2012 cycle numbers with their corresponding dates, as the IRS Appeals Officer does. With access to that list, you can then glean when the transaction was actually processed by the IRS: a three-step procedure concluding, in most cases, with the effective “posting date” (see above) unless there is an otherwise designated effective date.

This is all to say that cycle numbers are unlikely to matter much unless you are playing a game of inches (likely in a statute of limitations scenario). It also serves as a reminder that the law has numerous artificial constructs for when something is deemed to have actually taken place (like when you are deemed to have paid in withholding). Reconciling anomalies in these dates on the IRS records (when the return was filed, when the return was processed, and when the withholding was credited) was the reason the Court felt the matter was not resolved simply by saying “it was a § 6402 offset, and we have no jurisdiction to review those.”

Yet I am actually not convinced that the timing matters so much as to warrant much inquiry in this case. If the IRS can show that the 2009 liability on the books is $4,223 less (the amount of the 2011 credit), can a slight discrepancy in dates really do so much as to call into question if an offset actually occurred at all? Judge Halpern almost acknowledges as much, stating “Although the question of whether the overpayment reported on petitioners’ 2011 return was credited to their 2009 account is more important than precisely when that credit was allowed, the ambiguity in the dates […] called into question the reliability of the respondent’s certifications as evidence that the credit was, in fact, allowed.” Luque at *9. [Emphasis in original.] Of course, the exact date matters quite a bit if the liability causing the offset may have had the CSED run (or if the date to file a refund claim is close). But those issues both involve investigating the propriety of the offset: something § 6412(b)(4) does not allow. The date the offset occurred is essentially moot as far as the Tax Court should be concerned. It may matter, but it would presumably be litigated in a refund suit in district court.

And there, I think, is the lesson behind the opinion: what would be the victory to the taxpayer if the Court found the records so shoddy as to hold that an offset didn’t occur? I imagine the Court could find that the taxpayer is due that amount… which the IRS could promptly credit as an offset. For the Tax Court to do anything else (that is, compel the IRS not to offset) would be a violation of both § 6512(b)(4) and § 6402 since the choice to offset is committed to the IRS’s discretion. Thus, as Judge Halpern intimated, the greater point of the opinion may well be the education of taxpayers and (more likely) practitioners on the mysteries of IRS transcripts such that the issue can be resolved administratively when errors do arise. Failure to actually credit an offset certainly seems to be in the province of TAS, and a tax practitioner is better able to see when such errors arise (or don’t arise) if they have greater knowledge of the transcripts showing them. Indeed, in most cases it is doubtful that the Tax Court will even be able to review if an offset occurred: Luque was fortuitous in that both offset and NOD (i.e. ticket to tax court) occurred for the same tax year.

And that, in turn, allows us to close on what I believe to be the most important point is lurking behind this all: the difficulties of getting to court at all if you are low-income seeking to challenge an ancient, but sizeable, tax debt. Under § 6512(b)(4) when an offset occurs, the taxpayer better look elsewhere than Tax Court to challenge the propriety of the offset. That “elsewhere” is a refund action in federal district court. At least, it ought to be. The restrictions of Flora’s full-pay rule (discussed, among other times, here and here) and § 6512(b)(4) means that when a taxpayer has a substantial past tax debt that current year refunds will never full pay, the taxpayer can pretty much count on losing a refund they may desperately need for the foreseeable future. (Practitioners, of course, should be aware that the IRS offset for past federal income taxes is discretionary, and would do well to acquaint themselves with Offset-Bypass Procedures, discussed here in cases where the taxpayer is suffering hardship.)

Thus, under Flora and § 6512(b)(4), an offset applied to what may well be an inflated underlying liability will continue to haunt the taxpayer with little chance for judicial review. In such situations, the law seems to give short shrift to the right of the taxpayer to “pay no more than the correct amount.” The statutes as written give the Tax Court no power other than to ensure that at least the offset is properly credited to the earlier year… or give us practitioners the tools to read the transcripts and determine exactly when that happened for ourselves.

 

IRS Offset Program

We have written before about the IRS offset program, here, including not only offsets by the IRS to satisfy liabilities owed to it by individuals receiving a refund but also the offset of federal tax refunds to pay many other types of state and federal debts.  On March 31, 2016, the Treasury Inspector General for Tax Administration (TIGTA) issued a report critical of the way the IRS is handling the offset program and calling for updates in the system. The report deserves some attention because of the importance of offset to the overall collection system of the IRS.

read more...

The offset provisions are found in IRC 6402. The basic rule is that the IRS may offset any refund due to a taxpayer against any outstanding federal tax debt. I use the word “may” because the IRS does have some discretion in deciding whether to offset and that discretion manifests itself in the offset bypass refund (OBR) program discussed previously that allows certain individuals with a hardship to obtain all or a portion of their refund despite having outstanding federal tax debt. The OBR procedure will not, however, allow a taxpayer to bypass the offset of their refund against one of the other debts included in agreements with the IRS such as child support, student loans or state tax obligations.

The TIGTA report naturally focuses on problems with the IRS offset program rather than other state and federal debts and identifies a few problems. It is interesting to look at the problems because in doing so we also learn more about how the program works. Most of the problems involve situations in which the offset crosses some boundary, e.g., offsetting a Form 1040 refund against a business debt. Because of the amount of money involved and the ease of collecting through offset rather than other enforced collection methods, solving these problems should be a priority for the IRS. The report focuses on the years 2011 to 2013. For those years the amount of the offset from individual refunds to individual debts averaged about $7 billion – a decent amount of money. The report did not talk about this type of offset very much because it is routine and the offset process works well here.

I would like the IRS to send a notice when it makes an offset that says something like, “You filed a return claiming a refund of $X which the IRS has allowed; however, you are not receiving your 2015 income tax refund of $X because we took $X to pay off your outstanding income tax liability for 2014 in the amount of $Y. Even though we applied $X to your 2014 liability, you still owe $Z for 2014.”  This type of offset is an in house offset that does not need to go through Treasury’s Financial Management Services. The IRS controls the information. It should provide the taxpayer as much information as possible so the taxpayer can plan for the future and can explain the problem in detail should they go for assistance concerning the debt. I would especially like it if the letter to provide more detail when the refund is offset to a non-IRS liability such as a student loan. I would like the letter to say “you are not receiving your 2015 income tax refund of $X because we have offset that refund to partially satisfy your obligation on your student loan. After the offset of your 2015 refund, your student loan has an outstanding balance of $Y.” I know I live in a dream world and this was not the focus of the TIGTA report but it would be nice to focus a bit on the information provided to the person whose refund is offset. By providing detailed information about what has happened, the individual will be better prepared to deal with the consequences of the offset.  I can only say that at the clinic we have a number of clients who come in each year seeking to find out what happened to their refund and it takes some digging to find out.  The IRS does provide some data but I would like it to provide more.

The report focuses on the problems the IRS is having making offsets of individual refunds to pay off business tax debts. The IRS cannot take an individual refund and apply it to pay off the debt of a corporation in which the individual owns stock but can offset the individual refund against a business debt of a sole proprietorship. For example, if I am due a refund of $X for 2015 and my sole proprietorship failed to pay employment taxes for 2014 of $Y, the IRS can take my refund and apply it against the employment taxes of the sole proprietorship. The dollar amounts of the individual income tax refunds of offsets of this type are much smaller than the offsets of individual refunds to individual liabilities. The amounts ranged from $16 million in 2011 to just under half that in 2013. TIGTA identified that the IRS misses many refund opportunities for offset here because “the IRS’s current process does not effectively identify sole proprietors with business tax debt.” The businesses use an EIN for the employment tax returns rather than the SSN of the sole proprietor. The IRS must match the EIN against its database in order to find the corresponding SSN. TIGTA identified 53,672 individual taxpayers who received approximately $74.5 million in tax refunds in 2013 that could have been offset. The IRS is using a process developed in the 1980s and TIGTA recommended use of a new process that would capture the data necessary to effect these offsets. The IRS agreed but said that to do so would require resources it did not currently have. Consequently, it does not sound as though this change will happen anytime soon.

I do not know the priorities of the IRS. This is low hanging fruit. It requires programming changes which requires computer resources. The use of the resources would eliminate the need for some resources in ACS or field collection to get back the money the hard way. This seems like a good catch by TIGTA and something that should go relatively high on the IRS list of changes it should make. Putting resources in capture money it already has instead of working hard to get a taxpayer to pay over money would always seem like a high priority item.

In addition to the problem of capturing refunds to satisfy the sole proprietor debts of individuals for employment taxes, TIGTA identified problems in capturing refunds when the liability for the debt is coded non-master file instead of master file. We should do a post on how the IRS classifies its accounts and explaining more about the distinction between master file and non-master file. I welcome input from a guest blogger on this issue. In broad terms, most accounts start in master file but sometimes unusual things happen on an account which requires that the IRS move the debt to non-master file accounts. Non-master file accounts can be hard to monitor for the IRS and create confusion when a taxpayer or a representative looks at a master file transcript for a period with known liabilities and sees a zero balance due because the account has transferred to non-master file status. The problems that plague individuals looking at these accounts also impede the IRS when it seeks to make an offset and TIGTA found numerous examples, some with large liabilities, in which the IRS failed to make an available offset. In some of these accounts the taxpayer owed a fair amount of money. The IRS agreed with TIGTA and has taken steps to correct its system to capture these refunds although with respect to some accounts additional programming is needed and may take some time to complete.

TIGTA found that in some instances the IRS offset refunds of individuals and used the money to satisfy the liabilities of limited liability (LLC ) companies. TIGTA identified $780,474 in incorrect offsets. LLCs are distinct from sole proprietorships and the offset in this situation was wrong. Interestingly, the IRS agreed to fix this problem and send refunds to the effected taxpayers. Contrast this with its action concerning low income taxpayers against whom it assessed hundreds of thousands of penalties incorrectly, according the Tax Court, where the IRS refuses to fix its mistake. The IRS seems willing to fix mistakes it (including TIGTA) finds but less willing to fix mistakes found by courts even though it concedes it will not litigate the issue further.

This TIGTA report bears at least a skim if you have concerns about the offset of your client’s funds because it provides some detail on the process. This is an efficient process that could become even more efficient in the future.

A Different Type of Offset Fight – Illegal Exaction

In Greene v. United States, the Court of Federal Claims determined that the IRS could offset a federal tax refund against a criminal fine.  Mr. Greene filed a joint return for 1990 with his then wife, Sandy.  They reported a tax liability of $8,870.  Their withholding credits exceeded that amount so they received a small refund.  Subsequently, the IRS audited their return and determined that they had forgotten to report an additional $888,497 of income.  Ms. Greene was determined to be an innocent spouse.  The IRS came back and assessed additional liabilities including the fraud penalty against Mr. Greene.

On September 1, 2005, Mr. Greene was convicted of evasion of the payment of taxes and subscribing to a false tax declaration. The district court entered a judgment against him imposing a 70 month prison sentence and a $500,000 fine.  In 2012, Mr. Greene settled a tax refund suit that was distinct from the criminal action and received a $437,423 tax refund for 1995.  The IRS offset this refund to satisfy the $500,000 fine.  He brought suit to reverse the offset and obtain his refund.  This was not a refund suit in the traditional sense but rather a suit over the correctness of the offset of the refund.  The IRS allowed the refund but then, according to Mr. Greene, made an illegal exaction.

read more...

Mr. Greene brought suit to recover the refund amount based on the legal theory of illegal exaction. Tax professionals are accustomed to offset under IRC 6402 but the federal government has broader offset powers as well partially discussed in an earlier post.  In looking to determine whether it had jurisdiction over this matter, the Court of Federal Claims looked to the Tucker Act which is the principal statute governing its jurisdiction.  The Tucker Act waives sovereign immunity for claims against the United States if the claim is found, inter alia, in the Constitution or a federal statute.  The Tucker Act itself does not provide for remedies but provides jurisdiction.  Here, the plaintiff pointed to “illegal exaction” as the basis for the Court’s jurisdiction and for relief.  Illegal exaction “involves money that was improperly paid, exacted, or taken from the claimant in contravention of the Constitution, a statute or a regulation.”

The Court said that “the prototypical illegal exaction claim is a tax refund suit alleging that taxes have been improperly collected or withheld by the government.” However, a taxpayer may allege an illegal exaction claim not grounded in tax refund.  The Court cited to Section 6402(g) stating “[n]o action brought against the United States to recover the amount of any such reduction [of a tax refund by an offset] shall be considered to be a suit for refund of a tax.”  The reason that a suit seeking to set aside an offset is not a suit for refund is that the IRS has granted the refund and the granting of the refund created the basis for making the offset.  So, a taxpayer unhappy with the offset of a refund is not fighting with the IRS about the refund.  Rather, it is fighting with the federal government about the taking of the refund and applying it somewhere else instead of sending it to the taxpayer.  When the federal government offsets a refund and applies it to another tax year, then the refund provisions are implicated with respect to the other tax year.  If, however, it applies the refund to something other than taxes then the general offset provisions set forth in 31 USC 3720A are implicated and the individual can bring an action arguing that the provisions of that title were not met as the offset occurred.

The Court stated that to invoke its jurisdiction under the Tucker Act “a claimant must demonstrate that the statute or provision causing the exaction itself provides, either expressly or by necessary implication that the remedy for its violation entails a return of money unlawfully exacted.”   Here, it found that 31 USC 3720A “necessarily implies a monetary remedy if the Government perpetrates an illegal exaction pursuant to [its] authority [because] … absent a monetary remedy, a litigant has no recourse to cover wages unlawfully garnished or income tax refunds unlawfully offset.”  The Court pointed out that although the Flora rule requires full payment in order to sue for a tax refund claim, “a plaintiff who alleges an illegal exaction claim based on an offset need not have fully paid the tax liability for this court to have jurisdiction” citing Ibrahim v. United States, 112 Fed Cl 333, 336 (2013).

Mr. Greene argued that in making this offset the government did not follow the requirements of 31 USC 3720A because it failed to notify him of the proposed offset, failed to allow him 60 days to present evidence that his fine was not past due, it failed to properly certify the debt and it failed to make reasonable efforts to obtain payment of the debt from him. You can see from these arguments and from looking at the statute that the basis for making an illegal exaction argument does not turn on whether the underlying liability to which the payment was applied was a valid debt.  Mr. Greene did not argue that he did not owe the $500,000 fine.  Rather, he argued that the IRS did not go through the proper steps before it got the Treasury Department to make this offset, viz., it failed “to notify him of the proposed offset; to allow him sixty days to present evidence that all or part of the fine was not past due; to certify the debt; and to make a reasonable effort to obtain payment of any debt.”

The IRS filed a motion to dismiss based on lack of subject matter jurisdiction and the parties filed cross motions for summary judgment. The IRS argued that it did provide Mr. Greene with notice before the offset occurred and with notice after it occurred.  The IRS also argued that the debt was certified.  It said that it referred the matter to the Treasury Offset Program in 2006 and that it certified the debt annually each year thereafter.  The IRS next argued that the judgment in the criminal case allowed it to levy or execute on his property even if he were paying according to the schedule of payments imposed by the judgment.  Finally, the IRS argued that even if it committed a procedural foot fault, return of the proceeds was not the appropriate remedy and further that if the court awarded Mr. Greene a monetary judgment as a result of any procedural error the IRS would be required by 31 U.S.C. 3728 to offset that monetary judgment as well.

The court next provides a fairly detailed description of the DOJ system for collecting on judgments. This section is of the opinion is worth reading if you want a primer on the steps DOJ takes when entering judgments into its computer system and generating notices.  Many parallels exist between this system and the IRS computer system for assessing and recording collection action.  Although the DOJ system did not contain copies of the precise letters sent to Mr. Greene the testimony of the DOJ employees convinced the court that it entered his information correctly and appeared to have followed the correct procedures.  The court agreed with the government that the debt was past due at the time of the offset because the judgment order required immediate payment and specifically allowed the IRS/DOJ to take steps to collect it if it were not immediately paid.  With respect to the damages Mr. Greene requested, the court found that it appeared the IRS had complied with all of the requirements of the notice statute, that even if it had not complied the court had no basis for returning the proceeds or ordering a monetary judgment.

The case is instructive concerning the process of offset where the IRS is getting the benefit of offset to satisfy a judgment. The court walks through the statutory requirements and provides a map for others to follow if they feel the government has not properly performed an offset in these circumstances.  In the end, this type of case appears extremely difficult to win which is why so few of these cases make it to published opinions.