The Roll of Offset in the Collection of Federal Taxes

The legal principle of offset has played a key role in debt collection by private parties for centuries. In 2021, offset continues to play an equally essential role in the United States government’s collection of debts owed to it, accounting for billions of dollars in funds taken from outgo¬ing payments. The right of offset arises when two parties owe each other debts. The party asserting offset can subtract what is owed to them from what they owe, allowing the parties to avoid an unnecessary transaction. Offset thus makes intuitive sense, simplifying two payment flows into one. But offset becomes far more complex when one of the parties is the federal government, which is unlike a traditional private creditor in important ways. Offset has perhaps its largest impact in the tax system, where Congress has legislated that the Internal Revenue Service (the “Ser¬vice”) has the authority (and sometimes, the mandate) to offset tax refunds. Refunds are commonly offset when a taxpayer owes prior year tax liabilities, other agency debts (e.g., student loans), state taxes or past-due child support. Despite its frequent use by the Service, offset is subject to minimal procedural protections, likely due to its origin in longstanding common law doctrine. Unlike other forms of tax collec¬tion, offset does not carry a right to prepayment judicial review in Tax Court. Nor does offset require the Service to issue a notice to the tax¬payer prior to taking collection action. Courts also treat offset incon¬sistently when the applicable taxpayer/debtor is protected by a collection stay under Title 26 or Title 11, allowing offset in some sce¬narios and denying it in others. Finally, Congress and the Service have often failed to use their authority to make offset more equitable, particularly as applied to low-income taxpayers. The Service has a limited administrative remedy available for taxpayers to affirmatively request bypass from the offset of their refund to a tax debt. But the remedy is little-publicized, little-used and difficult to administer. During the COVID-19 pandemic and reces-sion, Congress legislatively protected advance stimulus payments from some forms of offset. But Congress failed to make that protection expan¬sive or to extend it to conventional tax refunds, both of which would have put needed funds in the hands of millions of taxpayers during an economic crisis. Similarly, the Service declined to exercise its statutory discretion to systemically suspend offset of conventional tax refunds to past tax liabilities. These issues extend to payments of the Earned Income Tax Credit (EITC), which are subject to offset. Both Congress and the Service have failed to acknowledge the EITC’s unique nature as a type of public benefit, treating it instead as a conventional tax refund subject to offset. This disproportionately hurts the low-income taxpay¬ers, and their children, that the EITC was enacted to benefit. I argue that policymakers should pay closer attention to offset and make the necessary changes to apply it in a more equitable and logical manner

Constitutional Law-Civil Rights-Standard for Relief in Racial Discrimination Cases Requires a Showing of Discriminatory Intent

When Congress passed Title VII of the Civil Rights Act of 1964, it did not extend the coverage of the Act to public employers. Consequently, the Griggs v. Duke Power Co. decision in 1971 created the anomalous situation that private employers were held to a tougher standard of scrutiny with respect to racial considerations in their hiring procedures under Title VII than were public employers under the Constitution. This curious development in the relationship between public employment and Title VII caused many courts to alter their standards for equal protection violations in the early 1970\u27s. In the realm of public employment, these courts began to permit a showing of the disparate impact of an employment test on a minority group to shift the burden to the state of showing that the test was job related. Since this analysis had been used in the context of the constitutional standard for equal protection violations, these decisions abandoned the traditional de jure test in favor of a de facto test which required only a showing of impact without inquiry into the state\u27s intent

Transparency in Private Collection of Federal Taxes

Most federal taxes are collected from taxpayers by business entities, held in a public trust for the United States, and then paid over to the Internal Revenue Service (the IRS). While the vast majority of business entities pay over the taxes held in trust in a timely and appropriate manner, a sizeable amount, in dollar terms, does not get paid. The amount of unpaid “collected” taxes in 2008 created a $58 billion tax gap item. Disclosure law governing federal taxes defaults to non-disclosure for most tax returns. This general rule of non-disclosure governs the returns reporting the taxes collected by business entities even though the information on these returns is information concerning a public trust. This article analyzes the federal tax disclosure laws and concludes that the amount of taxes collected on behalf of the United States and the amount of these collected taxes paid over to the IRS should be disclosed. Rather than coming under the general rule of non-disclosure which applies to income tax returns and other returns reporting the liability of an individual or entity for the payment of taxes, these returns should be treated like the returns of pension plans, which are open for the public to see. In addition to approaching the issue from the perspective of disclosure policy, the article also looks at the collection policy issues presented by the disclosure of this information. For the same policy reasons that Congress has decided compliance is enhanced by the disclosure of pension plans and the returns of exempt organizations, the article concludes that compliance would be enhanced by this proposal and the tax gap reduced

Financial Disability For All

The Internal Revenue Code has four discreet sections that allow late filing of claims and other documents under the circumstances described in those sections. The IRS has promulgated a procedural regulation that allows it to permit late elections under prescribed circumstances. Neither the Code sections nor the Regulation cover all of the circumstances in which taxpayers have a good excuse for missing a time frame. The current provisions have developed in an ad hoc manner. More ad hoc development of this area is possible as equitable tolling litigation seeks to open up time frames under the Code despite the efforts of the IRS to argue the tax code is exceptional. Rather than continue down the path of ad hoc allowance of late claims and certain other late actions, this Article recommends the creation of a statute that would apply to all situations. The recommendation draws from the current provisions allowing late action and from principles developed in equitable tolling litigation. It proposes a transparent system under which the IRS would make a determination whether the late action qualified and that determination would be subject to judicial review under an abuse of discretion standard