Debts Owed to Federal Government Can Be Collected Through Social Security Benefit Checks


December 2001

Social Security Benefits Subject to Offset to Collect Non-Tax Federal Debts

Iowans should know the U.S. Department of Treasury and Social Security Administration are working together to collect non-tax debts owed the U.S. Government. Since May 2001, people who owe a non-tax debt to the U.S. Government are subject to new actions to collect the money. They can have their Social Security retirement or Social Security disability benefits reduced to pay the non-tax debt. Supplemental Security Income (SSI) benefits will not be effected by the offset.

Repaying non-tax federal debt from Social Security benefits is required under a new law called the Debt Collection Improvement Act. Some Black Lung benefits and Railroad Retirement benefits can also be reduced. This new process may affect persons who owe the federal government for a non-tax debt. It can be used to get money back from a food stamp overpayment, but not debts to state government or for child support. It can also be used to collect money for a federal student loan or defaulted federal mortgage. The U.S. Treasury will send notices to persons who may owe the debt. The federal agency that is owed the debt should also send a notice.

The person on Social Security will then have about two months to arrange how to pay the federal agency. It is important to note that the beneficiary who gets the notice will need to contact the federal agency to which they owe the debt, not the Social Security Administration. If someone believes they do not owe the debt, they should file an appeal with the federal agency at the time the debt is established. No appeal rights will rest with the Social Security Administration over the proposed reduction.

The most that can be withheld from a Social Security beneficiary's check is 15% after any deductions required by law authorizing the reduction, such as medical premiums. The first $750 of monthly benefits is protected. The amount to be withheld each month until the debt is paid will be the least amount of the three figures:

  1. the amount of the debt;
  2. the amount of the monthly benefit that exceeds $750; or
  3. 15% of the monthly benefit.

For example, suppose someone on Social Security has a monthly benefit of $850 and owes $125. Looking at the three items above, the three amounts would be:

  1. the debt is $125.
  2. the monthly benefits exceeds $750 by $100 ($850 - $750 = $100)
  3. $850 x .15 = $127.50

Since number 2 is the smallest of the three numbers, that is how much would be withheld each month until the debt is paid in full. After the first payment of $100, the next month the remaining amount due of $25 would be withheld.

You may be an Iowan who gets a notice that your Social Security benefits are being offset because of a debt. You can contact your local Legal Services office if you want help. You can also contact the agency which says that you owe the debt to see if you can work something out.

If you owe a tax debt, the federal government has a program that allows the IRS to collect the debt. Please see the next section

Social Security Payments Subject to Levy for Federal Tax Debt

The Internal Revenue Service (IRS) issued an alert to people getting Social Security benefits who have unpaid federal tax bills. The alert said some benefits may be reduced to collect any unpaid federal tax bills. Close to 232,000 people who get Social Security benefits also have unpaid federal tax bills less than 10 years old. They will be subject to levy until the debt is repaid. The Taxpayer's Relief Act of 1997 set up this new system to collect unpaid federal tax bills.

Federal income taxes are based on income from a number of sources. The income may be from a job (including self-employment) or Social Security benefits combined with other income. If you withdraw funds from IRAs or other retirement plans, have a capital gain, or get a tort damage award that includes lost wages, it counts as income. All these sources of money can result in owing tax. If you disagree with the amount of money the IRS says is due, you can file an appeal. Details on how to proceed with an appeal are available from the IRS (Also see "Where to Get Help" at the end of this article). If someone does not pay taxes the IRS determines are due, the result is a federal tax debt.

The law says the IRS can impose a levy on certain federal payments to collect past-due federal tax debts. These federal payments include some benefits paid by the Social Security Administration (Title II, retirement, or disability insurance). Federal payments also include Veterans Administration and Railroad Retirement Board payments. The law says some property is exempt from the levy, including:

  • Unemployment benefits;
  • Benefits based on a low income to qualify, like welfare payments and SSI; and
  • Social security payments to children, lump sum payments, or payments that are already being reduced to collect the Social Security overpayment.

The levy to be assessed is 15% of the monthly Social Security benefit. People who get both Title II (retirement or disability) and Title XVI (SSI) benefits will have 15% of the Title II benefits reduced, and the SSI will remain the same. Couples could see a 30% reduction in their income (15% to be assessed against each of them) if they are both liable for the tax debt.

Here are some examples to show how the new law works.

Sally Smith is 65 years old and gets Social Security retirement benefits. Her monthly benefit amount is $800. She previously owed a federal tax bill of $400 and did not appeal. Next, the IRS will collect part of her Title II benefits each month until the tax bill is paid. The amount the IRS is going to take will be $120 (15% of her $800 payment) for the first three months. It will be $40 for the last month.

Juan and Maria Garcia are married. Juan gets SSI payments of $136 and Social Security disability payments of $400. The total of his payments is $536 per month. They owe a federal tax bill of $200. Under the law, when no appeal is filed, Social Security will be able to take 15% of the $400 until the tax debt is paid. In Juan and Maria's case, this would be three months' reduction of $60 per month, and a reduction of $20 in the fourth month.

Taxpayers have several ways to resolve their debt. They can pay the taxes owed in full, including interest and penalty. They can set up an installment agreement, ask for an offer in compromise, or apply for a hardship request. Some taxpayers may qualify for relief as an innocent or injured spouse, or by filing bankruptcy. Actions to collect the debt stop while the taxpayer is appealing the levy notice, or trying to qualify for relief.

Where to Get Help
Throughout the process of establishing a debt and taking steps to collect it, you have opportunities to appeal actions the federal government plans to take. Iowans who get a notice that their Social Security or other federal payments may be levied are encouraged to contact the Taxpayer Advocate Service, an independent service for taxpayers at 1-877-777-4778 for assistance in resolving tax issues. Iowans can also contact their local Iowa Legal Aid office to seek help. Iowa Legal Aid's Low-Income Taxpayer Clinic (LITC) and Volunteer Lawyers Project may be able to assist.

Last Review and Update: Jul 11, 2002

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