Your first or second round stimulus check cannot be taken away to repay taxes or any other government debt that you owe. Second round stimulus checks cannot be garnished to pay back arrears on child support payments or money owed to private creditors or debt collection agencies. But what if you didn’t receive a Stimulus Check – or the full amount – and you expect to get the Stimulus money you are entitled to by claiming the “Refund Discount” credit on your 2020 tax return ?

Unfortunately, thanks to a little-known provision in the COVID Relief Act that was passed in December, this protection doesn’t apply to refund credits. So if the credit gives you a refund on your 2020 tax return, the IRS can take it back to pay for child support, taxes, or any other government debt you owe. Banks and other creditors and collection agencies may also be able to claim your refund.

The IRS is aware of this situation and could help. Congress could also step in and change the law. However, it is currently possible to garnish a tax refund that you will receive this year – even if the refund is based entirely on the refund balance.

[Stay on top of all the new stimulus relief developments – Sign up for the Kiplinger Today E-Newsletter. It’s FREE!]

Stimulus Checks vs. Recovery Rebate Credits

Stimulus Checks are actually just prepayments for the tax credit for reimbursement discounts, which is only available for the 2020 tax year. Therefore, when calculating the loan amount on your tax return, you will need to subtract the total of your two stimulus checks (assuming you received them). If you still have a credit after your Stimulus Checks have been deducted, your tax charge will be reduced, a tax refund triggered or your refund increased. If the amount of your two stimulus checks equals or exceeds the amount of the credit, you do not have to repay the difference.

The amount of each Stimulus Check and the amount of your Recovery Discount Credit are generally calculated in the same way. However, the IRS relies on different sources of information to determine which amount – this is one of the reasons the two amounts can be different. For stimulus reviews, the IRS primarily reviewed your 2019 tax returns. If you didn’t submit a 2019 return, you searched for a 2018 return to calculate payments for the first round. If you haven’t filed a return for 2018 or 2019, the IRS may have obtained the required information from a dedicated online portal for non-applicants or from a government agency that pays you for benefits such as: B. the Social Security Agency or the Department of Veterans Affairs.

There are other reasons why the total of your two Stimulus Checks and your Recovery Discount credit is not the same. For example, if you had a child in 2020, the additional amount of $ 500 or $ 600 added to the Qualified Child Stimulus Tests would not have been included in your two Stimulus Payments, but the additional amounts will be added to your Refund balance. Some Americans have had their stimulus checks reduced due to their 2019 income, but their recovery discount will not be reduced because of the 2020 income loss. Many people haven’t received one or both of their stimulus checks simply because the IRS didn’t have enough information to process a payment for them. Inmates were illegally denied their payments on the first round, but the correct amount is included in their tax credit. There are many other situations that could trigger a positive repayment discount credit, including the fact that the IRS simply messed up and sent you a stimulus check for the wrong amount.

Are Restoration Discount Garnishments Unjust?

The December change to the tax law “is pulling the carpet out of eligible people with outstanding debt,” said Erin Collins, National Taxpayer Advocate, in a recent blog post. “Since spring, the IRS has been assuring these taxpayers that if they ask [recovery rebate credit] When they file their 2020 returns, they will receive the full amount of stimulus funds they are eligible for and will be earned as a whole. Now it turns out that this confirmation is inaccurate due to the change in the law. “

Here is the current situation, according to Collins:

• Individuals with certain outstanding debts who had received the full amount of their stimulus checks did not have to garnish their payments (with the exception of overdue child benefit for payments in the first round), however
• People with similar outstanding debts who have not received the full amount of their business stimulus checks will receive a reduced repayment discount credit or nothing when claiming it on their 2020 tax return.

“These mixed results undermine public confidence in the fairness of the tax system,” said Collins. “Financially troubled taxpayers who were entitled to the full amount of the tax [stimulus check] but not even effectively harmed last year. It is unfair to harm some of these taxpayers a second time by confiscating some or all of their stimulus payments. “

Possible solutions

Congress could reverse the December amendment so that the seizure protection allowed for stimulus reviews also applies to the repayment discount balance. We haven’t heard of this adjustment being part of President Biden’s $ 1.9 trillion stimulus package, but it may be added.

If Congress does not act, the IRS itself can offer only limited relief. As part of the tax authority’s seldom used Offset Bypass Refund (OBR) process, individuals struggling with economic difficulties can request the IRS to withhold their tax refund to repay tax debt. Collins wants the IRS to use the OBR process to issue non-offset refund credits for federal tax debt (but this doesn’t work for other types of debt).

Collins also supports the American Bar Association’s recommendation that OBR procedures automatically apply to all federal tax debt compensation payments for Americans with annual income below 250% of the applicable federal poverty line. According to her, it would be easier for both taxpayers who would not have to contact the IRS and apply for the waiver and the IRS who would not have to handle large numbers of OBR requests to make the process automatic for everyone on a case-by-case basis Case. The ABA also recommends using an automatic OBR procedure for anyone claiming the Earned Income Tax Credit on their 2020 tax return and for taxpayers whose 2020 or 2021 compromise offer is pending.

The IRS “is investigating this problem and looking at ways to use its discretion to help vulnerable taxpayers,” said Collins. However, since the tax return starts on February 12th, there isn’t much time to act. We will report any changes made. So stay tuned.