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More Trouble with Notices and More Discussion of Offsets

Posted on Feb. 12, 2021

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.

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.

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