Last week, we were sitting in a meeting discussing potential topics for which we would like to share with our clients. During these conversations, one of the staff at Cerini & Associates brought up the topic of the IRS seizing taxpayer refunds to pay for the debts of their parents. Having countless years of tax experience in the room at the time, we all looked at each other flabbergasted; the idea sounded almost comical at first, and a few people thought maybe the article had come from a satire news site. However, we promptly found out that this was indeed true. The Treasury Department and Social Security were indeed working together to seize the refunds due to taxpayers in order to satisfy old debts that were not even incurred by the taxpayer themselves, but by their parents!
First, we should take a few steps back to cover some basics. The IRS has the Treasury Offset Program as a way to collect certain debts owed by a taxpayer – this is not a new concept. The IRS maintains a database of agencies making federal payments and certain creditor agencies (state tax agencies, child support, and student loans are the most common) and can use this database to check if an individual is subject to an offset.
When a taxpayer is issued a refund (or other federal payment, such as social security), the agency sending the payment first checks the name and Tax Id Number of the payee against the database to see if there are any eligible debts for the offset. Typically, the taxpayer has no debt due and the full disbursement is made. However, in the event that the payee has an eligible debt, the Treasury will withhold, to the extent legally allowed, an amount from the payment to satisfy the outstanding debt and as a courtesy, the IRS will pay the debt directly on your behalf using the dollars that you were expecting to be sent to you. The IRS has been taking these actions pursuant to 31 U.S.C. 3716(c) since at least 1986.
Up until 2008, the statute of limitations on collecting government debts was 10 years. In 2008, however, a single line was added to the Food, Conservation and Energy Act (Farm Bill) that removed this limitation. This mostly went unnoticed as the bill was massive and one line often does not have such an impact. In 2011, the Social Security Administration (“SSA”) began to work with the Treasury Department to begin to collect the estimated $714 million in debts that are over 10 years old. From 2011 – 2013, the SSA began to enact offsets against those who were overpaid benefits. In the event that they were deceased, the offset was put onto the oldest surviving child.
IRC Section 6402 deals with the authority of the Service to make credits or refunds. Sections 6402(c) & (d) deal specifically with the offset program. Within the text of the code, there is no reference to being able to attach the debt of the parent to their children, nor is there reference in 31 U.S.C. 3716. IRC 6402(d) includes procedures in place to protect an innocent spouse, as well.
As these cases began to get more frequent, many taxpayers discovered that fighting the case was more difficult than they had imagined. Often, the notices that the debt may be due was sent to old addresses and not delivered to the taxpayers, and when they had discovered all or part of their refund was taken, trying to discuss this with the Treasury and SSA proved futile.
However, in April 2014 these stories started to receive national exposure. The Washington Post is credited with running the first story. In the days that followed after the outrage, the SSA announced that they would immediately cease the practice of trying to collect debts over 10 years old, even though they have the legal right. The law still exists however, so the potential exists that other agencies may attempt similar collection efforts.
The above scenario highlights a critical advice that we give our clients, that is, when you receive a notice from the government, you should immediately send us a copy of the notice, and contact us for further action. We have years of experience in protecting the interests of our clients and the resources to minimize the exposure from any government notice. As we noted above, the government is constantly enhancing their collection efforts. Rest assured we will be prepared to assist you in any controversy that may arise.
Edward McWilliams, CPA
Ed is a Partner in the firm’s tax and business advisory practice focusing on providing services to middle market private companies across different industries as well as to early stage startups. Ed has over a decade of experience providing tax and business consulting services to these companies of different sizes and across different industries, bringing a broad and diverse knowledge base and strategic solutions to the many complex issues that businesses face.