UK restriction on corporate interest tax relief
Refunds, Offsets & Coronavirus Tax Relief.
A shout out goes to Silya Shaw for alerting readers of this Pro Bono and Tax Clinics listserv to the Department of Education actions discussed below. Les can also be adding a new section on counter tops to Chapter 14A of this treatise "IRS Practice and Procedure" at which you can soon find additional resources regarding offset issues. Here is the first of 3 articles discussing offset problems within this special moment. Keith.
For many low-income, working families, tax season is a period of hope — hope for paying bills, getting caught up on lease, fixing the car, and perhaps even signing up for that certificate program promising a better wage. This is since the Internal Revenue Code provides thousands of dollars in non refundable credits for such families if they have "qualifying children," including the earned income credit and additional child tax credit. For a household with three children under age seventeen and a household income about $20,000, the federal tax refund can amount to over $9,000.
But what if there’s a federal tax obligation from a previous year clouding the household ‘s financial picture? Perhaps someone was an independent contractor and didn’t pay adequate self-employment taxes. Maybe someone finished a Form W-4 incorrectly and wound up grossly under-withholding. What’s going to happen to the household ‘s current-year tax refund?
And what about the new stimulus money — the "economic effect payments" — meant to help people get through the coronavirus catastrophe? Can this family see any of that money? What if jobs are lost and economies depleted because of this emergency? Does that make a difference?
The short answers are: (1) the "regular " refund will likely be offset to pay down the prior-year tax debt, unless the household succeeds in securing a discretionary "pass" from the IRS, known as an offset skip refund; and (2) the economic effect payment will likely still come, provided that there’s no child support arrearage on the books for the household ‘s taxpayers.
Section 6402(a) provides that the Secretary of the Treasury Department "may credit the sum of [someone ‘s] overpayment, including any interest allowed thereon, against any liability in respect of an internal revenue tax on the part of the person who made the overpayment. " (This can be accomplished via the Treasury Offset Program.) Thus, the IRS may offset a person’s refund to pay down an outdated federal tax debt. The choice of the word "might," instead of "shall," means that Congress left an "outside " for taxpayers; the Secretary doesn’t have to offset the refund.
The Internal Revenue Manual spells out how the Secretary should exercise this discretion, whether directly through the Internal Revenue Service (IRS) or by way of the Taxpayer Advocate Service (TAS). The mechanics for exercising the discretion is an offset skip refund (OBR) which, in turn, depends on a showing of financial hardship. " IRM 220.127.116.11.11.1 worries, "Handle every OBR on a case by-case basis. There’s not any exclusive list of expenses which would qualify a taxpayer for an OBR. "
Professor Keith Fogg blogged about OBRs for Procedurally Taxing in December 2015 and spelled out the mechanics of this tool. Traditionally, the amount of the refund offset that is bypassed via the OBR is limited to the exact amount that the taxpayer can document is required in order to prevent a particular monetary catastrophe. Take the example of someone with a $3,000 federal tax obligation for 2018 and an expected 2019 refund of $2,500. If the taxpayer requests an OBR and presents an eviction notice predicated on past-due rent of $1,000, the IRS might approve an OBR in that sum, assuming the taxpayer has also shown a lack of available assets to pay the back rent. Thus, the citizen would get $1,000, and the IRS would utilize the remaining overpayment of $1,500 to credit the 2018 account. If the taxpayer also provided documentation of past-due medical bills, a utility shutoff notice, and a quote for required vehicle repair — and when those totaled over $1,500 — the IRS might issue a manual refund of this whole $2,500 overpayment.
But what if you’re able to ‘t provide such documentation as a pandemic comes along with your state issues a stay-at-home sequence and closes non-essential businesses, and also you ‘re laid off and you eliminate Internet support? Are the traditional kinds of proof necessary to secure an OBR? No, based on new guidance from TAS. A recent TaxNotes article published this guidance, TAS-13-0320-0008; it urges instance advocates to consider the chance that a citizen ‘s capability to offer documentation of financial hardship might be diminished because of the exceptional circumstances and challenges of this coronavirus emergency. The guidance also reminds advocates of an important tool at TAS disposal whenever documentation may ‘t be secured, pandemic or not any:
IRM 13.1.24. 6.2, Advocating for Taxpayers Hunting Offset Bypass Refund, clarifies when TAS can advocate for an OBR and, even after an offset has occurred, when TAS can advocate for the reversal of this counter.
Many taxpayers seeking an Offset Bypass Refund won’t have the ability to secure hardship documentation like eviction notices, late invoices, etc.. Determine whether the citizen can confirm the hardship circumstances via oral testimony or a third party optima contact. In that case, discuss the case with your LTA to determine if a written statement signed by the LTA confirming that the hardship was validated is appropriate.
(Emphasis added.) The mentioned IRM provisions provide that a letter from the LTA verifying the occurrence of a hardship can choose the place of third party documentation.
But what if the federal tax debt isn’t the citizen ‘s only debt governed by section 6402 and the Treasury Offset Program? While Congress forced the counter for federal tax debt discretionary, the Code section requires offsets for child support arrearages, non-tax federal loans, outstanding state income tax, and unemployment payment debts. IRM 18.104.22.168.2.2.2 thus concludes: "This usually means that the IRS has no discretion to skip one of those debts. " Additionally, "the IRS has adopted a policy of not issuing an OBR when the taxpayer has a federal tax debt and another sort of debt for which offset is authorized by IRC 6402. "
Interestingly, part 6402(e)(2) provides that an offset for a state income tax debt is allowed against a person "only when the address shown on the Federal return for such taxable year of the overpayment is an address within the State seeking the offset. " Thusa recent New Hampshire resident that incurred both a federal and a Vermont state income tax obligation for 2018 could qualify for an OBR in 2020 on a 2019 overpayment.
Despite the statutory mandate for the IRS to offset the nontax debts listed above, other federal agencies have the discretion to halt any refund offset originating from debts that they hold. " Given the economic magnitude of this pandemic, the Education Secretary went further and "directed the Department to refund approximately $1.8 billion in offsets to over 830,000 borrowers. " Perhaps the IRS and TAS will issue new guidance clarifying that an OBR might be awarded if the citizen has both federal tax and student loan debt.
And now, finally, what about the economic impact obligations — the stimulation money — guaranteed by the CARES Act? Are they subject to offset to pay down federal or nonfederal debt? With the exception of child support arrearages, the answer is no.
Section 2201(a) of this CARES Act inserts a new section 6428 to the IRC, mandating the payment of those "recovery rebates," subject to revenue limitations and phaseouts:
$1,200 ($2,400 in the case of qualified people filing a joint return), plus an amount equal to the product of $500 multiplied by the number of qualifying children (within the meaning of section 24(c)) of the taxpayer.
(See here, here, here, here, and here for comprehensive discussions in Procedurally Taxing of those provisions, their potential implementation, as well as the concerns that they generate.)
Department 2201(d) of this CARES Act, eligible "Exception from Reduction or Offset," spells out a broad prohibition against offsetting the economic effect obligations to pay down federal and nonfederal debt:
(1) subject to reduction or offset pursuant to section 3716 or even 3720A of title 31, United States Code,
(3) reduced or offset by other assessed Federal taxation that could otherwise be subject to levy or group.
The one exception is provided by omission; section 2201(d)(2) of this CARES Act lists IRC section 6402(d), (e), and (f), but not 6402(c). The first few subsections concern offsets of nontax federal debt, state income tax debt, and unemployment compensation debt, respectively; subsection (c) governs offsets of overpayments for child support arrearages.
Thus, economic effect payments/recovery rebates/stimulus checks cannot be offset to pay any debt except child support. "Normal" federal tax refunds remain fair game in the lack of an OBR, but OBRs could be slightly less difficult to come by in these coronavirus times.