Stimulus Check Warning: IRS Can Reduce Your Recovery Rebate Credit for Child Support or Other Debts Owed

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Your first- or second-round stimulus check couldn't be taken away to pay back taxes or other government debts you owe. Second-round stimulus checks couldn't be garnished to pay child support arrears or money owed to private creditors or debt collectors, either. But what if you didn't receive a stimulus check – or didn't receive the full amount – and you're expecting to get the stimulus money your entitled to by claiming the Recovery Rebate credit on your 2020 tax return?

What's the Recovery Rebate Credit?

Unfortunately, thanks to a little-known provision in the COVID-relief law passed in December, most of those protections don't apply to Recovery Rebate credits. So, if you get a refund on your 2020 tax return because of the credit, the IRS can take it away to pay any child support, state taxes, or other government debts you owe. Banks and other creditors and debt collectors may be able to snatch your refund, too.

The IRS is aware of this situation and has provided some limited relief (i.e., it won't reduce refunds to pay federal taxes owed by people who claimed the Recovery Rebate credit on their 2020 tax return). Congress could step in and change the law, too. But for now, garnishment of any tax refund you get this year is possible – even if the refund is entirely based on the Recovery Rebate credit.

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Stimulus Checks vs. Recovery Rebate Credits

Stimulus checks are actually just advance payments of the Recovery Rebate tax credit. As a result, when you calculate the credit amount on your 2020 tax return, you'll have to subtract the combined total of your first- and second-round stimulus checks (assuming you got them). If you still have a credit left after subtracting out these stimulus payments, it will lower your tax bill, trigger a tax refund, or make your refund bigger. If the amount of your stimulus checks equal or exceed the amount of the credit, you don't have to repay the difference.

The amount of each stimulus check and the amount of your Recovery Rebate credit are generally calculated in the same way. However, the IRS relies on different sources of information to determine the amount of each – that's one of the reasons why the two amounts could be different. For first- and second-round stimulus checks, the IRS mainly looked at your 2019 tax return. If you didn't file a 2019 return, they looked for a 2018 return to calculate first-round payments. If you didn't file a 2018 or 2019 return, the IRS may have gotten the information it needed from a special online portal for non-filers or from a government agency that pays you benefits, such as the Social Security Administration or Department of Veterans Affairs.

There are other reasons why the combined total of your first- and second-round stimulus checks and your 2020 Recovery Rebate credit are not equal. For instance, if you had a child in 2020, the extra $500 or $600 amount added to first- and second- round stimulus checks for qualifying children wouldn't have shown up in your stimulus payments, but the extra amounts will be tacked on to your Recovery Rebate credit. Some Americans had their stimulus checks reduced because of their 2019 income, but because of lost income in 2020 their Recovery Rebate credit won't be lowered. Many people didn't receive one or both of their first two stimulus checks simply because the IRS didn't have enough information to process a payment for them. Prison inmates were unlawfully denied their first-round payments, but the correct amount will be included in their tax credit. There are many other situations that could trigger a positive Recovery Rebate credit on your 2020 return, including that the IRS simply messed up and sent you a stimulus check for the wrong amount.

Are Recovery Rebate Credit Garnishments Unfair?

Because of the tax-law change made in December, "the rug is being pulled out from under eligible individuals with outstanding debts," said Erin Collins, National Taxpayer Advocate, in a January 28 blog post. "Since the spring, the IRS reassured these taxpayers that if they claim the [recovery rebate credit] when they file their 2020 returns, they will get the full amount of stimulus money they are eligible for and be made whole. Now that reassurance turns out to be inaccurate based upon the law change."

Here's the situation, according to Collins:

People with certain outstanding debts who received the full amount of their stimulus checks didn't have their payments subject to garnishment (except for past-due child support for first-round payments), but
People with similar outstanding debts who didn't receive the full amount of their stimulus checks will receive a reduced Recovery Rebate credit or nothing at all when they claim it on their 2020 tax return.

Your Third Stimulus Check: How Much? When? And Other FAQs

"This disparate result undermines public confidence in the fairness of the tax system," said Collins. "Financially struggling taxpayers who were entitled to receive the full amount of the [stimulus check] last year but did not have effectively been harmed once. It is unfair to harm some of these taxpayers a second time by seizing some, or all, of their stimulus payments."

Possible Solutions

In a March 15 blog post, Collins said the IRS won't reduce Recovery Rebate credits to satisfy federal tax debts. That will help, but it won't stop refund reductions to pay for other debts. Plus, there's still the question of what to do about people who filed their 2020 tax return and had their refund reduced or taken before the IRS implements this new policy.

A better solution for taxpayers is for Congress to reverse the December change so that all the garnishment protections allowed for stimulus checks are made applicable to the Recovery Rebate credit as well. This adjustment wasn't included as part of President Biden's $1.9 trillion American Rescue Plan, but perhaps it will be addressed in future legislation.

Who's Not Eligible For a Third Stimulus Check

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Rocky Mengle was a Senior Tax Editor for Kiplinger from October 2018 to January 2023 with more than 20 years of experience covering federal and state tax developments. Before coming to Kiplinger, Rocky worked for Wolters Kluwer Tax & Accounting, and Kleinrock Publishing, where he provided breaking news and guidance for CPAs, tax attorneys, and other tax professionals. He has also been quoted as an expert by USA Today, Forbes, U.S. News & World Report, Reuters, Accounting Today, and other media outlets. Rocky holds a law degree from the University of Connecticut and a B.A. in History from Salisbury University.