34National Taxpayer Advocate 2023 Purple Book
IMPROVE ASSESSMENT AND COLLECTION PROCEDURES
Legislative Recommendation #14
Prohibit Offset of the Earned Income Tax Credit (EITC) Portion
of a Tax Refund to Past-Due Federal Tax Liabilities
SUMMARY
• Problem: e IRS has discretion to not oset tax refunds to satisfy outstanding federal tax liabilities,
but it has not exercised that discretion with respect to Earned Income Tax Credit (EITC) refunds.
Reducing the amount of EITC a taxpayer is eligible to receive by withholding a tax refund undermines
the purpose of this anti-poverty program.
• Solution: Prohibit the IRS from osetting the EITC portion of a taxpayer’s refund to satisfy prior-year
tax liabilities.
PRESENT LAW
IRC § 6402(a) generally authorizes the IRS to oset (i.e., withhold) a taxpayer’s refund and apply it to satisfy
a prior-year federal tax liability, but it does not require the IRS to do so.
1
If a taxpayer can demonstrate that
he/she will experience an economic hardship if the IRS osets his/her refund, the IRS sometimes will “bypass”
the oset (i.e., pay the refund). is is referred to as an “oset bypass refund” (OBR).
2
Similarly, the IRS
paid refunds generated by Recovery Rebate Credits (RRCs) enacted during the COVID-19 pandemic without
reduction to satisfy a tax debt.
3
e EITC is a refundable credit for low-income working individuals and families.
4
e EITC is claimed on
a tax return and is included in the computations that determine whether a taxpayer is entitled to receive a
refund and, if so, the amount of the refund.
e Debt Collection Improvement Act of 1996 (DCIA) requires federal agencies to oset certain federal
payments to collect outstanding non-tax debts owed to the United States.
5
However, the amount subject to
oset is statutorily limited in some instances, and payments made pursuant to “means-tested” anti-poverty
programs, such as Supplemental Security Income and Temporary Assistance to Needy Families, are exempt
1 Kalb v. United Statescert. denied
See
See
See
See,
e.g.
.
Sorenson v. Sec’y of Treasury
5 See
IMPROVE ASSESSMENT AND COLLECTION PROCEDURES
35 Improve Assessment and Collection Procedures
from oset when exemption is requested by the head of the agency administering the program.
6
e EITC is
sometimes referred to as a means-tested benet, although it does not meet the DCIA denition of that term.
7
Nevertheless, the amount of the EITC depends in part on the amount of a taxpayer’s earned income. In
2022, for example, joint lers with no qualifying children who earn more than $22,610 will be ineligible for
the credit; if they have two qualifying children and earn more than $55,529, they will be ineligible for the
credit. All other lers with no qualifying children who earn more than $16,480 in 2022 will be ineligible for
the credit; those with two qualifying children who earn more than $49,399 will be ineligible for the credit.
8
Any taxpayer with more than $10,300 of investment income in 2022 will be ineligible for the credit.
9
REASONS FOR CHANGE
Like other anti-poverty programs, Congress created the EITC to provide nancial assistance for low-income
individuals and families and to reduce poverty. e average adjusted gross income of taxpayers who received
the EITC for tax year 2020 was $20,174.
10
Taxpayers whose EITC refund is subject to oset may request an OBR, but the timeframe for requesting
an OBR is narrow. e IRS must approve an OBR between the date the return is led and the date the
IRS assesses the tax shown on the return. is period is approximately ten to 20 days when a return is led
electronically. In scal year2022, only 377 taxpayers received OBRs.
11
To its credit, the IRS has exercised its discretion to not oset some tax benets to satisfy past-due federal tax
liabilities, but the IRS has not adopted a policy of protecting EITC refunds from oset. Consistent with
congressional recognition that osets may impose economic hardships on recipients of federal benets, the
National Taxpayer Advocate recommends that Congress prohibit the IRS from osetting the portion of a
taxpayer’s refund attributable to the EITC.
To be clear, we are not recommending that the full refund subject to oset be released – just the amount
of the refund that is attributable to the EITC. Programming would be straightforward, rendering it easily
administrable.
12
RECOMMENDATION
• Amend IRC § 6402(a) to prohibit oset of the EITC portion of a taxpayer’s refund to satisfy prior-year
tax liabilities.
See, e.g.What you Need to Know About Means-Tested Entitlements
.
9 Id.
10
11
12
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