American Taxpayers Deserve and Will Benefit from Enhanced Transparency
What is the Debt Indicator? The Debt Indicator (or “DI”) is a transparency tool provided by the Internal Revenue Service to tax preparers, tax software providers and financial institutions that lets taxpayers know their federal income tax refund (or a portion of that refund) is subject to garnishment due to unpaid debts, including federal incomes taxes from previous years, student loans and child support payments. The availability of the DI allows taxpayers to be notified at the time of filing if a portion (or all) of their refund will be redirected to pay an outstanding government debt. This transparency is critical to set taxpayer expectations about their refund.
Is the Debt Indicator available today? No. Prior to 2011, the DI previously was available to tax preparers, tax software providers and financial institutions, which then would timely inform a taxpayer that part (or all) of an expected federal income tax refund might be subject to garnishment. This gave taxpayers the real-time information necessary to better plan and manage their finances, and to avoid spending a refund that never comes. However, in 2011, the IRS stopped making the DI available, leaving taxpayers in the dark regarding unpaid debts and possible garnishment of an expected federal income tax refund.
READ MORE: Myth and Facts About the IRS Debt Indicator and Taxpayer Transparency
Why do taxpayers care about the Debt Indicator? American taxpayers deserve clear, honest communication and transparency from their government especially when it comes to income taxes. Specifically, taxpayers need to immediately know if the refund on Form 1040, Line 35a, is going to be deposited into their bank account, or if it will be redirected to pay unpaid debts. The Taxpayer Bill of Rights mandates taxpayers have the right to be informed, have quality service, finality, and a fair and just tax system. Accurate communication is essential to taxpayer service. It is unfair to keep taxpayers in the dark about their unpaid debts, and to surprise them by withholding or garnishing a portion (or all) of a federal income tax refund that the taxpayer is expecting. This will cause hardships and confusion, especially for those at risk of having their refunds used to pay defaulted student loans, a process paused in March 2020.
Are there privacy concerns about providing tax preparers, tax software providers or financial institutions with access to this information? No. The IRS already knows if a refund should be garnished. It is just a matter of when it tells the taxpayer – immediately, or weeks or months after filing. Regarding tax preparers and tax software providers, they are required by law and regulation to not disclose or use any tax return information provided by a taxpayer, absent the taxpayer’s voluntary, knowing consent. Similarly, financial institutions have a legal duty to keep customers’ financial information confidential and secure. Re-establishing the DI will not alter these legal requirements.
The many reasons the IRS should re-establish the Debt Indicator.
- Transparency. Taxpayers have a right to know whether their refunds are at risk of garnishment. Making this information available immediately at filing enables taxpayers to make better financial decisions, especially those who will be subject to student-loan garnishment.
- Simplifying tax preparation. Tax preparation is too complex. Knowing whether a refund is subject to garnishment assists the IRS with delivering quality taxpayer service by avoiding unfavorable surprises.
- Strengthening tax compliance. When taxpayers are aware of their debts and the potential impact on a tax refund, they may be more likely to resolve these issues.
