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When A Promise to Pay Is Not A Debt

Posted on Apr. 24, 2019

In this post, frequent guest blogger Bob Kamman provocatively explores possible links between the Thrift Savings Plan, tax refunds, and the federal debt limit. Christine

An army of accountants and lawyers is standing by while its employer cooks the books of their pension plan, but it’s nothing you should expect a special prosecutor to investigate.

That’s because their employer is the federal government, and the consent of IRS professionals along with all of their colleagues in other agencies and the military who participate in the Thrift Savings Plan was never requested. Like a shutdown with mandatory work hours, they have to take it or leave.

This situation arose when the federal debt limit returned on March 2, after being suspended for a year. Congress has told the Treasury not to borrow any more money. However, Congress has also told the government to spend more money than it collects. Treasury has a solution to this paradox, at least for the short term. It makes a side deal, off the books, with the employees who pay into the federal equivalent of a 401(k) retirement savings plan.

The Thrift Savings Plan (TSP), created in 1986, allows investments in several funds based on the stock or bond markets. The most popular is the “G” fund, which invests in a special variable-rate United States Treasury bond. Last year its rate of return was 2.91%. Today it earns 2.50%.

What could be safer than Treasury bonds, right? But right now the Treasury can’t issue those bonds, because of the pesky debt limit. So Treasury simply promises to sell them to TSP just as soon as Congress allows. Meanwhile, accounts are credited with interest as if these phantom bonds really existed. For those who want to withdraw their funds or take out an allowable loan, the account value includes this phantom interest.

On March 5, the Thrift Savings Plan assured federal employees that the TSP money in their “G” spot was safe. It issued a statement:

As of Tuesday, March 5, 2019, the U.S. Treasury was unable to fully invest the Government Securities Investment (G) Fund due to the statutory ceiling on the federal debt. However, G Fund investors remain fully protected and G Fund earnings are fully guaranteed by the federal government. This statutory guarantee has effectively protected G Fund investors many times over the past 30 years. G Fund account balances will continue to accrue earnings and will be updated each business day, and loans and withdrawals will be unaffected.

Further details on this scheme are provided in an article on the Govsmith website.

Why does this matter to tax law practitioners? Maybe it doesn’t. But in my mind, it’s a useful reminder that federal government employees, including those at IRS with whom we occasionally interact, face different challenges from many of the rest of us.

More importantly, the future of the IRS depends on recruiting qualified professionals to protect the Treasury’s revenue without violating taxpayer rights. The IRS “brain drain” is a real problem. The GAO recently reported that attrition is causing a serious risk to the IRS mission:

IRS officials told GAO that resource constraints and fewer staff with strategic workforce planning skills due to attrition required IRS to largely abandon strategic workforce planning activities. …

IRS staffing has declined each year since 2011, and declines have been uneven across different mission areas. GAO found the reductions have been most significant among those who performed enforcement activities, where staffing declined by around 27 percent (fiscal years 2011 through 2017). IRS attributed staffing declines primarily to a policy decision to strictly limit hiring. Agency officials told GAO that declining staffing was a key contributor in decisions to scale back activities in a number of program and operational areas, particularly in enforcement, where the number of individual returns audited from fiscal years 2011 through 2017 declined by nearly 40 percent.

While reduced budgets and government shutdowns bear most of the responsibility for the IRS brain drain, underfunding the Thrift Savings Plan can only make matters worse. Imagine a Chief Counsel recruiter at a law school campus, trying to answer questions about this make-believe bookkeeping.

On the other hand, the Thrift Savings Plan might be easier to sell because it is guided by BlackRock, one of the world’s largest money managers with nearly $6 trillion of assets under supervision. BlackRock recently disclosed that its funds have an $11 million stake in Curaleaf Holdings, a Massachusetts-based medical cannabis company.

TSP does not yet have a W fund, for investments in the marijuana industry. But to my knowledge, no one has yet ruled it out.

Meanwhile, I am still wondering whether a record $45 billion in tax refunds was paid out on February 27, as I reported here, because the new debt limit was based on how much the federal government owed on March 1. Did Treasury tell IRS to clean out the bank account because the balance sheet needed to show as little cash as possible?

My suspicions grew when I saw the refund check my clients received that was dated March 1, based on an amended return they had filed in August. The explanation for the refund (“this is what you asked for with the amended return”) was not dated and mailed until March 11. Checks seldom arrive at the same time as the notices that explain them, but a ten-day lag seems unusual.

But I digress. At some point federal employees’ tolerance for TSP shenanigans may grow thin. Congress cannot afford to worsen the already critical brain drain at our nation’s revenue collection agency.

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