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March 21, 2021, 11:56 a.m. EDT

Are you claiming a 2020 stimulus payment on your taxes? The IRS will no longer seize it for unpaid debts — but there are exceptions

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By Andrew Keshner

The Internal Revenue Service won’t take a taxpayer’s refund money to pay off any federal debts they owe if that taxpayer claims a 2020 stimulus payment on their tax return, according to a consumer watchdog inside the tax collection agency.

This policy change provides “a needed lifeline to the country’s most vulnerable individuals and families,” National Taxpayer Advocate Erin Collins said, announcing the IRS decision this week.

Without the fix, Collins said these people could have seen their stimulus-check money unfairly eaten up by debts at the time they needed it most.

But there is a catch, Collins noted in a blog post. The IRS decision only prevents money being held back to pay federal debts, such as unpaid federal taxes or defaulted student loans. (The Department of Education already has a moratorium on payments and collections through the end of September.)

The decision does not apply to state debts, which include back taxes owed to a state or past-due child support.

The IRS informed Collins’ office, the Taxpayer Advocate Service, of its decision on Monday not to take money for federal debts, but the timeframe on implementation is still being determined.

At this point, anyone who says they are owed their 2020 economic impact payment, also known as a stimulus check, must claim it as a “ Recovery Rebate Credit ” on their income taxes.

The IRS merged people’s stimulus money into their tax refunds and, as a result, the economic impact payment became subject to the same rules that allowed the IRS to seize the refund and pay down the taxpayer’s federal and state debts.

That quirk set an unfair playing field for the people seeking their stimulus money now, Collins said. The people getting their economic stimulus payment during the initial distributions did not face the same offset rules, she noted.

When the IRS distributed the first round of $1,200 stimulus checks, it only seized money for past-due child support. The second round of $600 payments did not hold back money for past due child support.

The third check for $1,400 hitting accounts now cannot be offset for any reason when people receive it in the initial disbursement, according to the Treasury Department’s Bureau of the Fiscal Service.

Some of those past-due child support amounts are very old and the child has grown up, Lauren Saunders, associate director of the National Consumer Law Center, previously told MarketWatch.

Collins wrote that she’s “very pleased” with the outcome, but there’s more to do.

For one thing, some taxpayers might have already had the debts skimmed off the top of their refunds. Collins said her office will work with the IRS on next steps for people who fall into that category.

People in this group could still have pared down refunds due to state debts, she said.

As a result, there’s still “a significant disparity” in the treatment of people who already received their economic stimulus payment and the people who are claiming it now.

The IRS did not immediately respond to a request for comment.

But other people had thoughts. This is a “major development,” according to one attorney working with low-income taxpayers on applications asking the IRS not to seize their refunds.

“This policy will help individuals who expected to be able to keep all of the stimulus payments they were eligible for in 2020. Our clients need this money to pay off bills, support themselves and their families, and make ends meet,” said Omeed Firouzi, a staff attorney at Philadelphia Legal Assistance.

Under the circumstances covering just federal debts, Firouzi noted some people may still need to file paperwork seeking further exemptions and low-income tax payers should consider professional assistance.

A list of low-income taxpayer clinics across the country can be found here.

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