July 15 Scheduled Payments vs. $1,200 Rebates

[BobKamman]

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?

[IRonMaN]

Bob - you should talk to Intuit to see if they can save you a spot in this forum for "Bob's Corner" since you seem to be providing these thought provoking topics on a daily basis 😀

[itonewbie]

I have a different take on it (perhaps out of wishful thinking).  The (well-respected) author focuses on the mechanics of the refund based on the statutory language of §6428(f)(1).  I would, however, argue that Sec. 2201(d) of the CARES Act is the overarching clause that protects such refunds from offsets:

(d) EXCEPTION FROM REDUCTION OR OFFSET.—Any credit or refund allowed or made to any individual by reason of section 6428 of the Internal Revenue Code of 1986 (as added by this section) or by reason of subsection (c) of this section shall not be—
(1) subject to reduction or offset pursuant to section 3716 or 3720A of title 31, United States Code,
(2) subject to reduction or offset pursuant to subsection (d), (e), or (f) of section 6402 of the Internal Revenue Code of 1986, or H. R. 748—59
(3) reduced or offset by other assessed Federal taxes that would otherwise be subject to levy or collection.

The key is that this subsection refers to "any refund allowed or made to any individual by reason of section 6428".  The term "refund" should be read not as a mechanic of delivery but as one that is defined under §6428(f), particularly subparagraph (2).

The fact this refund is accomplished through a make-believe tax payment should not negate the protection offered here.  After all, §6428(f)(1) alone does not provide sufficient authority to the IRS to issue a refund, without establishing a taxpayer's liability, prior to a return being filed as a claim under §6511 or by means of a substitute return issued by the IRS pursuant to §6020.  Offsetting the advance refund only against outstanding balance on returns filed by taxpayers for 2019 seem to deviate from the intent and plain reading of Sec. 2201(d) of the CARES Act and will create disparate application of §6428 for those who have filed a 2019 return vs those who have not.