Your first or second round stimulus check cannot be withdrawn to pay taxes or other government debts that you owe. Second-round stimulus checks also cannot be used to pay back-up child support or money owed to private creditors or debt collectors. But what if you did not receive a stimulus check – or did not receive the full amount – and expect to receive the stimulus money you are entitled to when claiming the “recovery discount” credit on your 2020 tax return?
Unfortunately, thanks to a little-known provision in the COVID relief law passed in December, these protections do not apply to recovery reimbursement credits. Therefore, if you receive a refund on your 2020 income tax return because of the credit, the IRS can withdraw it to pay any child support, taxes or other government debts that you owe. Banks and other creditors and debt collectors can also get your repayment.
The IRS is aware of this situation and can provide some relief. Congress could also intervene and change the law. But for now, the attachment of any tax refunds you get this year is possible – even if the refund is based entirely on the credit of the recovery discount.
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Stimulus checks vs. recovery discount credits
Stimulus checks are actually just prepayments of the recovery discount tax credit, which is only available for fiscal 2020. As a result, when calculating the value of the credit on your income tax return, you will have than subtracting the combined total from your two stimulus checks (assuming you received them). If you still have a remaining credit after subtracting your stimulus checks, this will lower your tax bill, trigger a tax refund or make your refund larger. If the value of your two stimulus checks is equal to or greater than the value of the credit, you do not need to pay the difference.
The value of each stimulus check and the value of your recovery discount credit are usually calculated in the same way. However, the IRS depends on different sources of information to determine the quantity of each – this is one of the reasons why the two values may be different. For stimulus checks, the IRS primarily reviewed your 2019 income tax return. If you did not file a 2019 return, they looked for a 2018 return to calculate first round payments. If you have not registered a 2018 or 2019 return, the IRS may have obtained the necessary information from a special online portal for non-architects or from a government agency that pays benefits to you, such as the Social Security Administration or Department of Veterans Romances.
There are other reasons why the combined total of your two stimulus checks and your recovery discount credit are not the same. For example, if you had a child in 2020, the extra amount of $ 500 or $ 600 added to eligible child stimulus checks would not have appeared on your two stimulus payments, but the extra amounts will be added to your discount credit. recovery. Some Americans have had their stimulus checks reduced because of their 2019 income, but because of the loss of income in 2020, their recovery discount credit will not be reduced. Many people did not receive one or both of the stimulus checks simply because the IRS did not have enough information to process payment for them. Inmates were illegally denied payment for the first round, but the correct amount will be included in the tax credit. There are many other situations that can trigger a positive recovery discount credit, including the fact that the IRS simply confused and sent a stimulus check for the wrong amount.
Are recovery discount credit guarantees unfair?
Because of the change in tax law made in December, “the rug is being pulled out of eligible individuals with outstanding debts,” said Erin Collins, National Taxpayer Lawyer, in a recent post. “Since spring, the IRS has assured these taxpayers that if they claim the [recovery rebate credit] when they submit their returns for 2020, they will receive the full value of the stimulus money for which they are eligible and will be compensated. Now, that guarantee has ended up being inaccurate based on the change in the law. “
This is the current situation, according to Collins:
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People with certain outstanding debts who received the full amount of their stimulus checks did not have their payments subject to attachment (except for child support in arrears for payments of the first round), but
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People with similar outstanding debts who have not received the full amount of their stimulus checks will receive a reduced recovery refund credit or nothing when they claim on their 2020 tax return.
“This disparate outcome undermines public confidence in the fairness of the tax system,” said Collins. “Taxpayers with financial difficulties who were entitled to receive the full amount of the [stimulus check] last year, but it hasn’t actually been harmed once. It is unfair to harm some of these taxpayers a second time by confiscating part, or all, of their stimulus payments. “
Possible solutions
Congress could come in and reverse the December move so that the pledge protections allowed for stimulus checks are applied to recovery discount credit as well. We haven’t heard of this adjustment being included as part of President Biden’s $ 1.9 trillion stimulus package, but perhaps it will be added.
If Congress fails to act, the IRS can still provide some limited relief on its own. According to the compensation offset (OBR) process rarely used by the tax agency, people who are experiencing economic hardship can ask the IRS to postpone tax refunds to pay tax debts. Collins wants the IRS to use the OBR process to issue recovery refund credits without any compensation for federal tax debts (although it does not work for other types of debt).
Collins also supports the American Bar Association’s recommendation to automatically apply OBR procedures to any federal tax debt compensation for Americans with an annual income below 250% of the applicable federal poverty level. According to her, automating the process for everyone would be easier both for taxpayers, who would not have to contact the IRS and request a waiver, and for the IRS, who would not have to process a large number of OBR requests in the case a case. ABA also recommends the use of an automatic OBR process for anyone claiming income tax credit earned on their 2020 federal income tax return and for taxpayers who have an outstanding commitment offer in 2020 or 2021.
The IRS is “examining this issue and exploring ways to exercise its discretion to help vulnerable taxpayers,” according to Collins. However, with the tax reporting season starting on February 12, there is not much time to act. We will report any changes made … so stay tuned.