Suing to Recover Offset of Tax Refund Against Student Loan Debt

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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.”


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.


  1. Charles J SIgerseth says

    On the issue of subject matter jurisdiction and the statute of limitations I was convicted of filing fraudulent tax returns for 1995-1996 after the statute of limitations had expired for that ‘statutory crime”. The indictment, and superseding indictment, did not allege the returns were fraudulent, which they were not by the prior US TAX CT decision identified in the indictment “overt acts”. IN other words, i was convicted and sentences to 60 months for a statutory crime that never existed, by a jury based on the judge instructions that stated the govt did not have to prove the existence of a vaild assessment of unpaid tax.

    • Kenneth H. Ryesky says

      I will note that in Commissioner v. Idaho Power Co., 418 U.S. 1, 19 (1974), Justice Douglas’s dissenting opinion notes that the US Supreme Court is “particularly ill-equipped to resolve income tax disputes between the Commissioner and the taxpayers [because it] . . . seldom see[s] enough of them to develop any expertise in the area.”

      In the case of Rebecca K. Crown Income Charitable Fund v. Commissioner, 8 F.3d 571, 576 (7th Cir. 1993), Judge Richard Posner, perhaps one of the most erudite persons to ever wear the black robes, effectively admits that he is a “generalist judge” who would not deign to claim expertise in the complexities of tax law.

      The gold standard (at least outside of the U.S. Tax Court) for judicial expertise in tax law is US Supreme Court Justice Robert H. Jackson, who, prior to ascending to the bench (and, for a while, also breaking new ground in criminal prosecutions at Nuremberg) had served as General Counsel of the Bureau of Internal Revenue and as an Assistant Attorney General in the Department of Justice Tax Division.

      Accepting, arguendo, Charles’s assertions at face value*, it is not surprising that absurd results might occur when generalist judges who have neither the expertise nor the inclination to understand the practicalities of the Internal Revenue Code preside over tax cases and essentially buy off on what the IRS’s man or woman says.

      * [In other contexts I personally would question Charles’s assertions
      [ ].

  2. Robert Kantowitz says

    The answer is simple once several aphorisms are kept in mind. First, Einstein’s definition of insanity: doing the same thing over and over and expecting different results. Going forward, stop giving student loans for the study of subjects that give the student no realistic chance of paying back the loan. That is very hard to delineate, of course, because a classics major who has talents other than deciphering ancient Greek and Latin can be very successful financially, and as a civilization we are better off if at least someone studies certain subjects that lead to no employment path other than teaching the next generation. So, how do we decide? As Justice Stewart said, “I know it when I see it.” Whatever the right answer is, we currently are expending too much money for too many less-than-spectacular students to study too much nonsense that no rational person would call education. And as to past loans, as Hal Holbrook said in the movie: “follow the money.” Neither the government nor the taxpayers signed up for the current situation, and it would be a gross inequity for the public fisc to discharge the loans of those who borrowed and cannot repay while those who tightened their belts to cover tuition and did not borrow get nothing. So, tell universities that they get no more government funding for anything — that’s right, zero, cold turkey — unless they dip into their endowments and trim their bloated faculties and administrative rolls to repay student loans that under their aegis, in connection with their holding out that they were providing an education, the students incurred. That is still unfair to those who paid in full, but at least it does not entail expending taxpayer money.

    And a suggestion for Ms. Nelson: change the amounts of your withholding and estimated taxes (if any) so that you owe the IRS money in April and there is no refund to be confiscated.

    • Christopher Faber says

      I’m asking for help my stimulous was offset but I’m facing eviction for past due rent …please guide me to proper help in my matter and its hard phone was also disconnected due to a failure to pay….


    Lessons to be learned include don’t borrow money for education or any other purpose that will not increase future income sufficiently to not only repay the loan but also increase the utility and enjoyment of the individual’s future years AND Repay those Student Loans. Failure to repay hurts all others who will need those funds in the future.

    Ms. Nelson must have had income over the past thirty years, if she has a refund, oh, was the refund from EIC or another welfare item? Why hasn’t she been responsible and paid her debt?

    She ought to be thrown in jail for misuse of the Judicial System. 30 year shackles of the debt is her making and should be the least of her problems.

  4. Bruno Mbele says

    Some of you are assumptive, arrogant, and judgemental with your comments. I was in a similar situation as Ms. Nelson and whenever I tried to get DETAILS from the IRS, there were none. It is not required that the IRS send you a statement indicating that they actually applied the offset to your student loan. Because of this, I believe I paid off my loans TWICE. Once via multiple offsets, the other making direct payments. And this was on a loan under 10K with offsets sometimes 1-2k at a time for 20 years–seemingly vanished into a black hole. Toward the end I wised up and adjusted my withholdings, but alas, it was too late. There should be a law that the IRS be REQUIRED to send a detailed statement of your offsets as well as keeping them on file so you can find/access them on the FedLoan website the same way the IRS can hound you, in perpetuity. Otherwise, it ends up being your word against theirs, and we know who wins in that scenario.

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