My favorite tax blog asks an interesting question this morning: If someone owes tax for 2019, what will happen to the $1,200 Economic Impact payment?

https://procedurallytaxing.com/how-big-will-my-recovery-rebate-be/ 

We know that the payments can’t be used to offset taxes owed for previous years, or other federal debts. But the way the law is written, the $1,200 is considered an advance payment on the taxpayer’s 2019 account, of the credit to be allowed next year on the 2020 return.

(For that matter, if someone not eligible in 2019 turns out to be eligible in 2020, but owes tax for 2020, will the credit just be applied to the balance due? I think we can expect that.)

Here is an example, from Texas lawyer Bob Probasco’s discussion:

“Sam has filed a tax return for 2019, which the IRS uses to determine the advance refund amount. Sam wanted to file the return in order to get an advance refund but was unable to pay the entire tax liability shown on the return. There was a $2,000 balance owed to the government. The advance refund amount for Sam is $1,200, so the IRS records a $1,200 payment in the 2019 tax year. And there is no overpayment to be refunded; instead, there is now an $800 underpayment. Sam receives no money now or when filing the 2020 tax return because the $1,200 has been offset against the 2019 tax liability.”

But let’s take this a step further. What if Sam has $2,000 in the bank but set up his IRS payment to be made on July 15. He filed his return last month because, well, his preparer told him that he might as well because he could wait to pay. Is there anything on the IRS transcript that shows a payment is scheduled? I doubt it. And does IRS know if the bank account has sufficient funds? Of course not – Sam doesn’t know that himself, now that he has been laid off.

In the time it took for you to read this, dozens of balance-due returns have been e-filed with requests for July direct debits. Can anyone guarantee what will happen with those taxpayers’ rebate checks, if the IRS needs to post them first as credits on the still-underpaid 2019 account?