Recovery Rebate Credit Won’t Be Applied to Past-due Federal Income Tax Debts

IRS announced that the 2020 Recovery Rebate Credit (RRC) amount will no longer be applied to past due federal income tax debts. This announcement, however, does not apply to debts owed to other federal government or state agencies.

IRS “may credit… [an] 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” and, “shall, subject to [certain limitations], refund any balance to such person.” (Code Sec. 6402(a)

Therefore, this Code gives the IRS the authority to offset a taxpayer’s overpayment against any outstanding federal tax liability before issuing a refund.

Details to Understand:
Because the statute is phrased as IRS “may credit…,” IRS can exercise its discretion to bypass the outstanding federal tax liability and issue a refund to a taxpayer experiencing economic hardship. This type of refund is known as an offset bypass refund (OBR). There is no legal authority that requires IRS to issue an OBR.

Provided by the CARES Act, direct payments and rebates to certain individual taxpayers are referred to as Economic Impact Payments (EIP 1). EIP 1 is actually an advance payment of a RRC. (Code Sec. 6428(e)).

Later, RRC 2 was added by the COVID-Related Tax Relief Act as part of the Consolidated Appropriations Act (CAA, 2021), which is the Rebate payable for eligible individuals. The IRS is authorized to make advance payments (EIP 2) of this credit to eligible individuals using their 2019 return information to determine their eligibility for the credit (Code Sec. 6428(f)).

RRC 1 and RRC 2 are, collectively, referred to as 2020 RRC.

IRS won’t apply the 2020 RRC to past due federal income debts.
As of March 18, 2021, the 2020 RRC amount will no longer be applied to past due federal income tax debts. Where a taxpayer is eligible for a 2020 RRC and the return reflects a refund, the refund amount associated with the 2020 RRC will not be applied to a federal income tax liability.

2020 RRCs will be used to pay other federal and state debts.
The IRS says that the 2020 RRC can be reduced to pay debts owed to other federal government agencies (separate from federal income tax debt) as well as to state agencies. The IRS notes that the credit is part of a taxpayer’s tax refund, and tax refunds are subject to these offsets.

If you have questions or concerns regarding RRC and whether or not it applies to your tax returns, contact the CTBK service team for guidance. | 716-630-2400