The promise that the IRS won’t offset economic impact payments may run into a snag when tax season opens Feb. 12
Alabama couple Cheryl and Kevin Barton were counting on the second stimulus payment of $1,800 to catch up on some bills and help take care of their 16-year-old daughter.
The family has had a rough year financially. The pandemic’s devastating toll on the economy has led to less work for Kevin Barton, an independent truck driver who transports building materials. They are two months behind on their mortgage, and they struggle to pay their utility bills.
“We thought, oh, wow, we’re going to be able to get some help, because my husband’s a self-employed truck driver and trucking has been hit hard just as much as everybody else, because a lot of manufacturing companies aren’t pushing out what they usually do,” Cheryl Barton said in an interview. “So it’s hard for him to come across loads.”
The Bartons received $2,900 during the first round of stimulus payments that Congress approved in March, under the Cares Act. But because of a backlog at the IRS and bad timing, they might never get the second payment in hand to help with their monthly expenses as Congress had intended.
The Cares Act provided economic impact payments of up to $1,200 per adult ($2,400 for couples filing jointly) and $500 per child under 17. The Coronavirus Response and Relief Supplemental Appropriations Act of 2021, authorized at the end of December, called for additional payments of up to $600 per adult ($1,200 for couples) and up to $600 for each qualifying child also under 17.
Typically, the IRS may reduce a taxpayer’s refund to offset past-due tax debt, child support and other federal liabilities, such as for student loans. A refund can also be garnished for state debts, such as overdue state taxes.
However, under the Cares Act, the IRS could offset the stimulus payment only for back child support. In the second round of payments, even that offset was removed, allowing people to get the full payment regardless of any money they might owe.
Here’s the problem that many people may not realize until they file their tax returns starting Feb. 12.
The stimulus payments are actually an advance tax credit referred to on the 2020 1040 as a “Recovery Rebate Credit.” The credit was eligible to be paid in two rounds of advance payments during 2020 and early 2021.
The IRS has pointed out that the rebate is “a tax credit against your 2020 income tax. Generally, this credit will increase the amount of your tax refund or decrease the amount of the tax you owe.”
Therein lies the problem. It’s possible the Bartons’ stimulus payment is still in the pipeline and may be delivered after all. But if they have to wait to claim the credit when they file their 2020 return, the money may be snatched to satisfy their tax bill.
The Bartons, who said they are on a payment plan with the IRS, owe $4,000 in back taxes. They were able to get the first stimulus payment of $2,900 ($2,400 plus the $500 for their child). But they filed their 2019 return in December, and it has not yet been processed. The IRS has a huge backlog of returns from last year. The agency used the 2019 tax year to issue the second stimulus payments automatically.
Like so many others, the Bartons still need assistance and qualify for the second payment.
“I know we have to pay our taxes, but I was under the assumption that Congress wanted to get the help to the American people right now,” Barton said. “We would be able to catch up on the house payment and our electric bill and possibly start the year off at a little bit better spot than we did going out at the end of the year.”
President Biden signed an executive order last week urging government agencies, including the Treasury Department, to “promptly identify actions they can take within existing authorities to address the current economic crisis resulting from the pandemic.”
The Treasury Department said there are 8 million Americans who may be eligible but still have not received the financial assistance from the Cares Act. In response to the president’s order, the department said it’s working with the IRS to “create in the coming weeks simple options for people who have not filed an income tax return to do so.”
But there are others like the Bartons who may fall through the cracks.
Scott Heemann is concerned that he and his spouse won’t get the second stimulus payment, either.
The Maryland couple filed their 2019 return in October. It still hasn’t been processed, and as a result, their eligibility for the second stimulus payment could not be determined, said Heemann, who said they would qualify for some of the relief funds. They have about $10,000 in past-due tax debt.
“We are paying past years‘ taxes owed under the terms of an existing payment arrangement with the IRS,” he said. “So typically any refund we are due is applied to our outstanding tax-owed balance.”
There is no specific carve-out right now to allow those who claim the credit on their returns to get a direct stimulus payment if they owe the IRS, other government entities or past-due student loans. Under normal circumstances, it makes sense to offset a refund to reduce the debts people owe. But these are not normal times.
“I’m hoping with the president’s executive order, perhaps they are going to say, okay, we’ve got to do this differently,” Barton said.
I hope so, too.
Article from: https://www.washingtonpost.com/business/2021/01/26/stimulus-payments-back-taxes/
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