Stimulus Check Warning: IRS Can Take Your Recovery Rebate Credit for Child Support or Other Debts Owed
Restrictions put in place to protect your stimulus check from garnishment don't apply to "recovery rebate" tax credits.
Your first- or second-round stimulus check can't be taken away to pay back taxes or other government debts you owe. Second-round stimulus checks can't be garnished to pay child support arrears or money owed to private creditors or debt collectors, either. But what if you didn't receive a stimulus check – or didn't receive the full amount – and you're expecting to get the stimulus money your entitled to by claiming the "recovery rebate" credit on your 2020 tax return?
Unfortunately, thanks to a little-known provision in the COVID-relief law passed in December, those protections don't apply to recovery rebate credits. So, if you get a refund on your 2020 tax return because of the credit, the IRS can take it away to pay any child support, taxes, or other government debts you owe. Banks and other creditors and debt collectors may be able to snatch your refund, too.
The IRS is aware of this situation and could provide some relief. Congress could step in and change the law, too. But for now, garnishment of any tax refund you get this year is possible – even if the refund is entirely based on the recovery rebate credit.
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Stimulus Checks vs. Recovery Rebate Credits
Stimulus checks are actually just advance payments of the recovery rebate tax credit, which is only available for the 2020 tax year. As a result, when you calculate the credit amount on your tax return, you'll have to subtract the combined total of your two stimulus checks (assuming you got them). If you still have a credit left after subtracting out your stimulus checks, it will lower your tax bill, trigger a tax refund, or make your refund bigger. If the amount of your two stimulus checks equal or exceed the amount of the credit, you don't have to repay the difference.
The amount of each stimulus check and the amount of your recovery rebate credit are generally calculated in the same way. However, the IRS relies on different sources of information to determine the amount of each – that's one of the reasons why the two amounts could be different. For stimulus checks, the IRS mainly looked at your 2019 tax return. If you didn't file a 2019 return, they looked for a 2018 return to calculate first-round payments. If you didn't file a 2018 or 2019 return, the IRS may have gotten the information it needed from a special online portal for non-filers or from a government agency that pays you benefits, such as the Social Security Administration or Department of Veterans Affairs.
There are other reasons why the combined total of your two stimulus checks and your recovery rebate credit are not equal. For instance, if you had a child in 2020, the extra $500 or $600 amount added to stimulus checks for qualifying children would not have shown up in your two stimulus payments, but the extra amounts will be tacked on to your recovery rebate credit. Some Americans had their stimulus checks reduced because of their 2019 income, but because of lost income in 2020 their recovery rebate credit will not be lowered. Many people didn't receive one or both of their stimulus checks simply because the IRS didn't have enough information to process a payment for them. Prison inmates were unlawfully denied their first-round payments, but the correct amount will be included in their tax credit. There are many other situations that could trigger a positive recovery rebate credit, including that the IRS simply messed up and sent you a stimulus check for the wrong amount.
Are Recovery Rebate Credit Garnishments Unfair?
Because of the tax-law change made in December, "the rug is being pulled out from under eligible individuals with outstanding debts," said Erin Collins, National Taxpayer Advocate, in a recent blog post. "Since the spring, the IRS reassured these taxpayers that if they claim the [recovery rebate credit] when they file their 2020 returns, they will get the full amount of stimulus money they are eligible for and be made whole. Now that reassurance turns out to be inaccurate based upon the law change."
Here's the current situation, according to Collins:
- People with certain outstanding debts who received the full amount of their stimulus checks didn't have their payments subject to garnishment (except for past-due child support for first-round payments), but
- People with similar outstanding debts who didn't receive the full amount of their stimulus checks will receive a reduced recovery rebate credit or nothing at all when they claim it on their 2020 tax return.
"This disparate result undermines public confidence in the fairness of the tax system," said Collins. "Financially struggling taxpayers who were entitled to receive the full amount of the [stimulus check] last year but did not have effectively been harmed once. It is unfair to harm some of these taxpayers a second time by seizing some, or all, of their stimulus payments."
Congress could go in and reverse the December change so that the garnishment protections allowed for stimulus checks are made applicable to the recovery rebate 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 doesn't act, the IRS can still provide some limited relief on its own. Under the tax agency's rarely used Offset Bypass Refund (OBR) process, people dealing with an economic hardship can ask the IRS to hold off on taking their tax refund to repay tax debts. Collins wants the IRS to use the OBR process to issue recovery rebate credits without any offset for federal tax debts (it won't work for other types of debt, though).
Collins also supports the American Bar Association's recommendation to automatically apply the OBR procedures to any offset for federal tax debt for Americans with an annual income under 250% of the applicable federal poverty level. According to her, making the process automatic for everyone would be easier for both taxpayers, who wouldn't have to reach out to the IRS and request the waiver, and the IRS, which wouldn't have to process large numbers of OBR requests on a case-by-case basis. The ABA also recommends using an automatic OBR process for anyone claiming the earned income tax credit on their 2020 federal tax return and taxpayers who have an offer in compromise pending in 2020 or 2021.
The IRS is "looking into this issue and is exploring ways to exercise its discretion to help vulnerable taxpayers," according to Collins. However, with tax filing season starting on February 12, there isn't much time to act. We will report any changes that are made…so stay tuned.