By Stephen K. Cooper

Law360 (May 12, 2021, 2:52 PM EDT) -- The government sent out an additional 1.1 million stimulus payments last week, but some low-income taxpayers won't receive them because of Congress' failure to keep the money from going to private debt collectors instead. 

The American Rescue Plan Act , signed into law by President Joe Biden in March, included a third, $1,400 round of economic impact payments for Americans facing economic hardship from the coronavirus pandemic, but those with unpaid private debts subject to bank garnishment won't receive them.

When Republicans couldn't support the size and contents of Biden's pandemic relief plan, Democrats passed it without their votes by using an expedited budget procedure known as reconciliation that has strict rules for what can be included without bipartisan support. The Coronavirus Aid, Relief and Economic Security Act , the pandemic relief law passed by Congress with bipartisan support in March 2020, protected stimulus checks from going to private debt collectors. Without Republican consent, however, Democrats couldn't include a similar provision in the ARPA.

The political roadblock's impact goes beyond just low-income families, according to Francine Lipman, professor at the University of Nevada, Las Vegas, William S. Boyd School of Law. It's also hurting newly unemployed taxpayers who fell behind financially amid the global pandemic, Lipman told Law360.

Pushing relief money out through the tax code in unprecedented amounts with unprecedented coverage saved the economy from spiraling into a depression, but it did come with problems, Lipman said.

"I guess the takeaway is that we can't try to fix everything through the tax system," she said, adding that the bright side is that "while some creditors got payments that they might not otherwise have gotten … at least that did reduce some of the debt that these households had."

Since early March, the Internal Revenue Service has disbursed approximately 164 million payments worth roughly $386 billion. The latest round of stimulus checks includes more than 585,000 payments worth roughly $1.2 billion to those who recently filed tax returns and 570,000 payments worth $1 billion to those eligible for a new or larger payment based on their recently processed 2020 tax returns, according to the IRS. About 600,000 of the latest payments were made via direct deposit.

"The IRS will continue to make economic impact payments on a weekly basis," the agency said in a statement. "Ongoing payments will be sent to eligible individuals for whom the IRS previously did not have information to issue a payment but who recently filed a tax return, as well to people who qualify for 'plus-up' payments."

In March, at the urging of the Taxpayer Advocate Service, the IRS agreed to refrain from offsetting federal tax debts when taxpayers who didn't receive their full stimulus payments last year claimed a recovery rebate credit on their 2020 income tax returns. However, the IRS can still offset refunds to satisfy state tax debts and unemployment insurance benefit overpayments. 

"There remains a significant disparity between the treatment of taxpayers who received advance payments and the treatment of taxpayers who did not receive advance payments and are claiming their benefits as" recovery rebate credits, the TAS said in a March blog post.

House Ways and Means Chairman Richard Neal, D-Mass., said he's aware that taxpayers with outstanding debts may not have gotten a stimulus check, but he stopped short of saying a fix was imminent.

"I'm taking a look at all that," Neal told Law360. "Staff is working on that."

In late April, Neal introduced legislation to permanently extend ARPA's changes to the earned income tax credit, which include increasing the maximum credit amount for childless workers from around $540 to roughly $1,500. Neal's bill would also make permanent ARPA's increase in the child tax credit to $3,000 per child under 18 and $3,600 per child below age 6.  

Neal took steps to ensure that debt collection would not be a problem going forward for his legislation. A summary of the bill provided by Neal's office notes that advance payments are generally "not subject to administrative offset" for past due federal or state debts, including offset for past due child support.

"Additionally, the advance payments are also exempt from bank garnishment or levy by private debt collector," the summary says.

Rep. Kevin Brady, R-Texas, the ranking member of the House Ways and Means Committee, indicated that GOP lawmakers could have supported a bipartisan agreement on debt collection in the March pandemic relief bill if they had been allowed to participate in its drafting.

Brady told reporters he was initially unfamiliar with the issue of IRS and private debt collectors, but a spokesman later clarified that remark, saying that "Democrats' insistence on a partisan reconciliation process unraveled a number of crucial end-of-year bipartisan agreements intended to help American families, including Republican-supported prohibitions on bank garnishment." 

Following passage of the March stimulus bill, the Senate lawmakers rejected a so-called hotline request for expedited unanimous approval of S. 823, a bill offered by Senate Finance Committee member Sen. Sherrod Brown, D-Ohio, to amend ARPA to provide for protection of recovery rebates.

Sen. Chris Van Hollen, D-Md., who chairs a Senate appropriations subcommittee with IRS oversight responsibility, told Law360 that Democrats weren't able to get the votes necessary to move the legislation that would ensure that emergency relief money didn't go to debt collectors. 

"We think it's a good idea to protect people's payments from debt collectors, but we were, in the end, not able to get it," Van Hollen, a co-sponsor of the legislation, told Law360. "Ultimately, we have not given up. We're keeping the idea alive, maybe [it can move] on some of these upcoming bills."

Sen. James Lankford, R-Okla., a member of the Finance Committee, took a biblical approach to the issues of debt collectors, quoting a Gospel admonition to "render unto Caesar the things that are Caesar's."

Lankford told Law360 that it is "entirely reasonable and it's in the statute" that taxpayers have to settle their tax debts when they claim recovery rebate credits on their tax returns, even though the stimulus money was intended to assist people to "pay for rent and everything else they got behind on."  

He said taxpayers would still be helped because their overall debt would be lowered.  

Lipman noted it may be too late for Congress to take action once the money goes to debt collectors or the IRS, and that leaves low-income debtors with little recourse.

She said it's nearly impossible to overturn a court ruling that set up a bank garnishment for past due debts or to persuade the IRS to administratively return the money, given the delayed tax season now underway and the service's other pandemic-related responsibilities.

"You're talking about somebody trying to navigate that system without resources," she said. "It's just such a heavy lift. I'm confident people are going to be too overwhelmed to try to do that."

--Additional reporting by Theresa Schliep and David van den Berg. Editing by Robert Rudinger and Neil Cohen.

For a reprint of this article, please contact reprints@law360.com.