Many people this year are startled to find that the IRS is holding some or all of the portions of their tax return as a form of payment for old debt. Many so called debts are decades-old and often the debt is not even the debt of the taxpayer being targeted.
How did this happen? The first part of the process began in 2008, when Congress passed HR6124, The “Food, Conservation, and Energy Act 0f 2008”, commonly known as the “Farm Bill”. On page 594-594 of the 662 page document, Section 14219 reads. “Elimination of statute of limitations applicable to collection of debt by administrative offset”.
(a) ELIMINATION.—Section 3716(e) of title 31, United States
Code, is amended to read as follows: ‘‘(e)(1) Notwithstanding any other provision of law, regulation,
or administrative limitation, no limitation on the period within which an offset may be initiated or taken pursuant to this section shall be effective. (2) This section does not apply when a statute explicitly prohibits using administrative offset of setoff to collect the claim or type of claim involved.” (b) APPLICATION OF AMENDMENT — The amendment made by subsection (a) shall apply to any debt outstanding on or after the date of the enactment of this Act.
As a result of this legislation, the Department of the Treasury issued 74 FR 68537: “OFFSET OF TAX REFUND PAYMENTS TO COLLECT PAST-DUE, LEGALLY ENFORCEABLE NONTAX DEBT” on December 28, 2009. The Department of the Treasury, Financial Management Service made changes to it how it dealt with non-tax debts owed by taxpayers. This rule allowed the “ offset of Federal tax refunds irrespective of the amount of time the debt has been outstanding”.
I. Background
“The Food, Conservation and Energy Act of 2008, Public Law 110–234,
Section 14219, 22 Stat. 923 (2008) (‘‘the Act’’) amended the Debt Collection Act
of 1982 (as amended by the Debt Collection Improvement Act of 1996) to
authorize the offset of Federal nontax payments (for example, contract and salary payments) to collect delinquent Federal debt without regard to the amount of time the debt has been delinquent. Prior to this change, nontax payments could be offset only to collect
debt that was delinquent for a period of less than ten years. There is no similar time limitation in the statutes authorizing offset of Federal tax refund payments to collect Federal
nontax debts (see 26 U.S.C. 6402(a) and 31 U.S.C. 3720A). However, Treasury had imposed a time limitation on collection of debts by tax refund offset in order to create uniformity in the way that it offset payments. Now that the ten-year limitation has been eliminated for the offset of nontax payments, the rationale for including a ten-year limitation for the offset of tax refund payments no longer applies.Therefore, on June 11, 2009, Treasury issued a notice of proposed rulemaking proposing to remove the limitations period by explicitly stating that no time limitation shall apply. See 74 FR 27730. The proposed rule explained that by removing the time limitation, all Federal nontax debts, including debts that were ineligible for collection by offset prior to the removal of the limitations period, may now be collected by tax refund offset. Additionally, to avoid any undue hardship, Treasury proposed the addition of a notice requirement applicable to debts that were previously ineligible for collection by offset because they had been outstanding for more than ten years. For such debts, creditor agencies must certify to FMS that a notice of intent to offset was sent to the debtor after the debt became ten years delinquent. This notice of intent to offset is meant to alert the debtor that any debt the taxpayer owes to the United States may now be collected by offset, even if it is greater than ten years delinquent. It also allows the debtor additional opportunities to dispute the debt, enter into a repayment agreement or otherwise avoid offset. This requirement will apply even in a case where notice was sent prior to the debt becoming ten years old. This requirement applies only with respect to debts that were previously ineligible for collection by offset because of the previous time limitation. Accordingly, it does not apply with respect to debts that could be collected by offset without regard to any time limitation prior to this regulatory change—for example, Department of Education student loan debts.”
The ramifications of this rule change has been far reaching. One agency, the IRS, has used it to justify going after old debts by holding tax refunds. This is a growing problem, because the agency has begun going after relatives of the phantom debt, not the debt-holder themselves.
According to the Treasury rule, “For such debts, creditor agencies must certify to FMS
that a notice of intent to offset was sent to the debtor after the debt became ten years delinquent. This notice of intent to offset is meant to alert the debtor that any debt the taxpayer owes to the United States may now be collected by offset, even if it is greater than ten years delinquent”.
The rule does not state “relative of the debtor”. In several instances this year alone, the targeted person was a relative of the debt-holder, not the debt-holder themselves, and every one of them stated they received no notice or advance warning from the IRS before the IRS decided to withhold their refund. The IRS has no right to do so.
There exists a process called “transferee liability” where the IRS can go after the debts of a relative. It is a high burden process and is not done easily. Such a scenario might be if a person died with $100,000 in a bank account, which was bequeathed to a child. Then later, it was revealed that the original account holder owed the IRS, which really should have been discovered by the person doing the estate process, and thus the money received by bequeathment could be considered as being received under false pretenses. The IRS in this situation could make a case, under “transferee liability”, that it has a right to go after the relative for that money.
Obviously, this above scenario is much different than resurrecting decades-old debt via an obscure provision in a 662 page bill. Those affected by it should demand proof of debt as well as argue that the debt is not theirs. However, in the cases where the IRS merely held the tax refund, the “debtor” did not receive due process and is at the mercy of trying to deal with a convoluted, poorly run government agency. Most people do not have the time or means to fight back. This action taken by the IRS is legal plunder, plain and simple.