Some financially struggling Americans who owe back taxes will miss out on stimulus payments unless the Internal Revenue Service decides to change its rules.
The problem is hitting an estimated 8 million households that didn't get the money sent directly to them, most commonly because the IRS didn't have their correct information on file. Even though they're eligible, they'll now have to claim it on their 2020 tax return -- and if they owe back taxes or certain other kinds of debt, the IRS is taking that out of the stimulus payment.
It's been more than a month since the Taxpayer Advocate Service, an independent organization within the IRS, called attention to the issue. It argued that the agency could find a way to make sure people received the money as intended.
The issue "is a problem the law and the IRS have created," wrote Erin M. Collins, the National Taxpayer Advocate, adding that "the rug is being pulled out from under eligible individuals with outstanding debts."
The agency is reviewing what might be possible, a spokesman told CNN this week.
Yet people who have filed their 2020 tax returns could already have lost out on the cash -- and won't have any way to get it back.
IRS rules vs. what Congress wanted
Congress, which sent stimulus payments to millions of people last year and another round in December, intended for people who owe back taxes to still be eligible for the money.
In fact, lawmakers made it clear in the legislative text that they would still qualify. For the $1,200 payments authorized by the CARES Act last year, the payment was protected form all debts except delinquent child support. Congress expanded the exclusion for the second round of payments, worth up to $600, making sure the money would not be offset even for owed child support.
But the situation gets complicated when a taxpayer has to claim the payment on a tax return -- a kind of backstop for people the Treasury missed when sending out the money. Most people received the cash automatically, but many very low-income Americans who don't normally file taxes could have missed out. People who have moved or changed their bank accounts recently could have also fallen through the cracks.
The stimulus payment, however, is technically a tax credit, known as the Recovery Rebate Credit, and tax credits are allowed to be offset for certain debts.
Those who already received their stimulus money don't have to worry about it being clawed back. But the loophole could resurface for people who are due the expected third round of stimulus checks being debated now in Congress, which would send $1,400 per person.
A spokesperson for the House Ways and Means Committee, which wrote this piece of the Covid relief bills, said lawmakers did not exclude the tax credit from debt offsets largely due to administrative difficulties associated with exempting a sole credit.
What people can do to claim their money
As of now, people are left with little recourse. But an existing process called an Offset Bypass Refund allows people experiencing economic hardship to apply for a waiver so that they can still receive their full tax refund.
But it's not guaranteed and there's a small window to apply: between filing your 2020 tax return and receiving the refund or tax bill.
Biden's push to reach more people
Soon after President Joe Biden took office, he signed an executive order directing the Treasury Department, which houses the IRS, to consider taking a series of actions to reach the millions of Americans who were eligible for stimulus payment but didn't receive one.
Most eligible adults received the money automatically. But very low-income people who don't normally file tax returns had to take an extra step and register with the IRS so the agency knew how to reach them. The IRS created an online tool to make this process easier and has made efforts to partner with local groups that work with homeless populations. Still, experts have said the government could be more aggressive in these efforts.
While the IRS is likely the best suited government agency to handle sending money to millions of Americans, it's hurting from deep budget cuts and was tasked with delivering the first round of stimulus payments at the height of the 2019 tax season when most of its employees were working from home.
Taxpayers have had trouble reaching the agency with questions -- 76% of calls went unanswered last year -- and local Taxpayer Assistance Centers have cut in-person services to adhere to social distancing guidelines. A backlog of 2019 paper tax returns built up, delaying not only tax refunds but stimulus payments as well.