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In a previous blog, I pointed out that a change in the law made in late December affected the treatment of recovery rebate credits (RRCs) claimed on taxpayers’ 2020 income tax returns. Unlike the advance payments issued to individuals last spring and in early January, the credit claimed on a 2020 tax return will be reduced to pay off certain outstanding debts. This offset creates an inconsistency between the treatment of the advance payments and the treatment of RRCs claimed on 2020 tax returns where the RRC will be reduced by outstanding liabilities. This is a big deal for taxpayers affected by the change.
Good news: The IRS has agreed to use its discretion to bypass offsets for federal tax debts for taxpayers who file 2020 returns that claim the RRC.
By Way of Background
When Congress directed the IRS to issue stimulus payments (otherwise known as Economic Impact Payments or EIPs) of $1,200 per adult and $500 per qualifying child in April 2020 and then for an additional $600 per person in December, it required that the payments be issued without reduction to satisfy other debts of the recipient (except for child support for the first round of payments). The rationale seemed clear: Individuals in debt are often the ones financially struggling the most, and Congress wanted the funds to reach these people without any reductions as soon as possible.
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