“We’re going to continue to take steps like that to mitigate the impact,” Vice President Mike Pence said of the tax refunds.
Until Monday, the Trump administration and its predecessors had followed the legal determination that refunds couldn’t be paid while the IRS was shut because those payments weren’t necessary to protect life or government property. Switching that position makes it easier for the political fight over the wall and the other shuttered agencies to continue into February without tens of millions of Americans clamoring for their money.
Your browser does not support HTML5 video.
0:00 / 0:00
President Trump and prominent Democrats met Friday to discuss ending the government shutdown, which the president had claimed responsibility to further the cause border security. The talks were described by the president as productive, but the Democrats disagreed. Photo: AP
Since the shutdown began Dec. 22, the IRS has been operating with a skeleton staff of just one in eight employees, mostly focused on maintaining computer systems and investigating crimes. Audits have ceased and the IRS isn’t answering taxpayers’ questions. The tax agency and the Treasury Department have been preparing a plan for the filing season and had already been planning to call back workers needed to collect revenue.
The biggest open question was the fate of refunds. Failure to pay refunds could have steep political consequences, especially because the coming filing season is the first under the tax law that President Trump and Republicans enacted in December 2017.
It could also have had economic ripple effects because retailers count on people spending their tax refunds in February and March. The early recipients of tax refunds tend to be lower-income households that use them to pay down debt or make major purchases.
By Feb. 16 of last year, the IRS had paid $101.2 billion in tax refunds to nearly 32 million households.
The news was a relief to the country’s consumer bankruptcy lawyers, who often see their clients use refunds to cover the cost of filing for chapter 7 bankruptcy. Those costs can range between $800 and $1,500.
Without the ability to file for bankruptcy, people can lose paycheck money to wage garnishment orders, cutting into already tight budgets, said Latife Neu, a bankruptcy lawyer.
House Democrats have seized on the potential missing refunds. They are planning to pass a bill this week that would provide funding for agencies including the IRS; the administration’s action Monday saps some of that bill’s punch.
“I look forward to seeing a more detailed description of how the agency will carry out these operations, particularly what will be expected of Treasury and IRS personnel,” House Ways and Means Committee Chairman Richard Neal (D., Mass.) said in a statement after the OMB’s announcement. “These developments are no substitute for funding the government and fully reopening these agencies.”
When government agencies run out of money during a shutdown, they are allowed to perform a limited set of activities even without congressional funding. In the past, the Treasury Department has interpreted one exception—to protect life and government property—to enable the IRS to collect tax revenue but not pay refunds.
The IRS plans for this shutdown and for one that could have occurred during last year’s tax-filing season both listed “issuing refunds” among the activities that can’t be performed during a shutdown.
In a statement late Monday, the IRS referenced the permanent, indefinite appropriation that it uses to pay refunds. The IRS said the agency had consistently thought it could issue refunds but had been directed not to by OMB in the past. Administration lawyers may be arguing that the activities needed to support refunds are implied by permanent appropriation for refunds. That is the exception the government uses to pay Social Security benefits and keep the Social Security Administration running during shutdowns.
One possible distinction, however, is that Social Security benefits are paid at specific times while refunds aren’t. The government would have to start paying interest on tax refunds by the end of May but otherwise has no required schedule
It is hard to see the legal justification for reversing past practice and paying refunds, said Sam Berger, a former senior OMB official under President Barack Obama.
“There’s no new information here,” he said. “The only new information we have here is that Donald Trump and the White House are concerned about the political fallout from the impacts of the shutdown.”
At the extreme, Mr. Berger said, government workers could face administrative penalties or criminal charges for performing activities for which Congress hasn’t provided money. He said no one has been prosecuted for this and that any attempt to enforce the law would likely have to come from a future administration. Mr. Berger is now a senior adviser at the Center for American Progress, a Washington group aligned with Democrats.
—Katy Stech Ferek contributed to this article.
The Government Shutdown
Write to Richard Rubin at email@example.com and Peter Nicholas at firstname.lastname@example.org
Appeared in the January 8, 2019, print edition as ‘IRS to Shield Tax Refunds.’