As If It Were A “Tax”

Bobby L. Dexter
Professor, Chapman University, Dale E. Fowler School of Law

A complete and comprehensive discussion of the future of tax administration and enforcement requires, as an initial matter, some level of consensus with respect to the meaning of “tax.” For the most part, commentators referring to the word “tax” are comfortably on the same page, but as NFIB v. Sebelius, 132 S. Ct. 2566 (2012), recently taught us, the question of what does or does not constitute a tax can be contentious enough to make it to the nation’s highest court.  In Sebelius, the U.S. Supreme Court ruled that the penalty imposed on those failing to comply with the individual health care mandate of the Patient Protection and Affordable Care Act (“ObamaCare”) constituted a “tax” within the meaning of Article I, § 8 of the Constitution.  The Court thus confirmed that the notion of a “tax” is far more chameleon than one might think at first glance.  Then again, even if the Court had held otherwise, taxpayers might still have found themselves vulnerable.

Several years ago, section 6305 of the Internal Revenue Code of 1986 (as amended) (hereinafter, the “Code”) was used to allow aggressive pursuit of specific past due child support obligations.  Legislative fiat did the trick. Under that provision, the IRS could collect amounts certified by the Secretary of Health and Human Services “in the same manner, with the same powers, and . . . subject to the same limitations as if such amount were a tax . . . the collection of which would be jeopardized by delay . . .” (emphasis added). Thus, § 6305 not only morphed what many would consider non-tax items into tax status but also allowed the IRS to apply jeopardy assessment and collection measures.  Because pursuit of the revenue using § 6305 was deemed cumbersome even with enhanced collection powers, the new weapon of choice became § 6402.  That provision authorizes the seizure of federal income tax refunds with respect to a host of items including (1) past-due child support obligations; (2) past-due, legally enforceable debt owed to a federal agency (e.g., federally-guaranteed student loans); and (3) past-due, legally-enforceable state income tax obligations.  These provisions ultimately have the potential to substantially complicate “plain vanilla” tax administration and enforcement given that the federal government can serve, in essence, as debt collector for a host of obligations. Even if past due state income tax obligations and past-due child support obligations remain static, one cannot ignore the specter of ever-burgeoning, past-due, federally-guaranteed student debt owed to a federal agency (i.e., the Department of Education). A substantial portion of student debt now rests in the hands of the federal government, the cost of college-level and graduate education is skyrocketing, and student grant funding is under attack.

Some might argue that refund seizure is an extraordinarily efficient collection method given that it is largely electronic and therefore unlikely to result in enhanced administrative burden.  After all, unlike most unsecured creditors, the IRS sitting on a taxpayer refund need not seek out and secure a judgment, petition for a writ of execution, and attempt levy on widely-scattered, fortuitously unencumbered, and rapidly-evaporating assets. But at the end of the day, the measure may backfire. Badly. Although certain innocent spouses impacted by refund seizure under a joint return may enhance administrative burdens by pursuing partial refunds, the more ominous concern regarding administration and enforcement relates to what taxpayers may do in response to an initial seizure. The IRS’s creative display of power is just the first step in a sequential game.  Given their inevitable turn, taxpayers may alter withholdings to ensure that they do not end up in a refund posture or (assuming an initial seizure eliminated the obligation) embrace cheating as a way of “getting back” what was seized previously. Thus, the IRS’s willingness to seize a refund under one set of circumstances may ultimately introduce compliance and enforcement hurdles that were not initially present and may persist for years in the future. The refund intercept program also has potential privacy violation ramifications. A given taxpayer may suffer, for example, the revelation not only that they have a child outside their existing relationship but that they have failed to support the child.  Further, equity concerns present because a refund intercept program may affect only those subject to withholding while sparing those who submit quarterly estimated tax payments, notwithstanding the fact that both taxpayer classes are similarly-situated from an obligation default perspective.

Perhaps tax administrators should stay their hand and let those seeking payment from those with “non-tax” delinquencies pursue other channels. After all, the government may have the power to serve as debt collector, but it need not intervene in every instance, especially when administration and enforcement revenues have long been scarce. Indeed, intervention at the behest of a federal agency (or one of the several states) may ultimately make it more difficult for the IRS to accomplish its central and core mission of collecting revenue due the United States under its tax laws.

For further analysis of these issues, including those rooted in constitutional law, see Bobby L. Dexter, Transfiguration of the Deadbeat Dad and the Greedy Octogenarian:  An Intratextualist Critique of Tax Refund Seizures, 54 U. Kan. L. Rev. 643 (2006).