I-Team: With Little-Known Rule Change, IRS Can Seize Your Refund

The IRS seized one woman's refund due to an issue from four decades ago

Alice Palatnick tore eagerly into the envelope that she received from the Internal Revenue Service this summer, assuming that it was her $3,780 tax refund.

Much to her dismay, there was no check in the envelope. Instead, the 62-year-old hospice nurse from the Upper West Side found a letter saying that all but $26 of her eagerly-awaited refund had been seized because she owed that much to the Social Security Administration.

Three phone calls later, an IRS employee finally explained that the debt dated back 44 years, to when Palatnick was 19 years old and her father died. Palatnick had received something called “survivor benefits,” a payment from Social Security that allowed her to go to college even though her father's death left the family with almost nothing. According to the person Palatnick spoke to, she had been overpaid the benefits because she had taken a work-study job in the Rutgers University Student Union that should have reduced her payments.

“I find it totally unbelievable,” Palatnick said. “How did this even come up after 40 years
that they found this little error from 1969?” Even more outrageous to Palatnick, when she asked for paperwork showing how she was overpaid, she said a representative told her that the Social Security Administration doesn't keep records dating back that far.

A Social Security spokesman said he could not comment on Palatnick’s case because it would violate her privacy. However Palatnick did provide copies of her correspondence with the IRS and Social Security.

When the I-Team started asking questions, Palatnick got her money back. But the I-Team found that many other Americans may have similar decades-old debt seized, and many of them may not get their money back like Palatnick did.

Deep in a piece of legislation passed by Congress in 2008 called the “Food, Conservation and Energy Act of 2008,” more commonly known as the 2008 U.S. Farm Bill, is a little-noticed passage that wipes out any statute of limitation for most individual debts owed to the federal government.

A Social Security spokesman said the agency collected $60 million more in 2012 than in 2011, but he did not say how many debts have been collected because the statute of limitations was lifted.

John Genova, a Manhattan-based tax lawyer, said the farm bill provision may be one small way for the federal government to close its deficit gap.

“I think the government is owed tens of billions of dollars, and they're looking for way to collect it, frankly,” Genova said. “And raising taxes is not always a popular thing. So they find alternative

Genova said even without the statute of limitations, the federal government is required to give a person notice that a debt is owed, an opportunity to dispute the debt, and a chance to pay it over time if
they choose. Palatnick says the first she heard about her debt was when she got the letter saying her refund had been taken.

In Palatnick's case, the Social Security Administration sent her a letter saying it had been incorrect to seize most of her refund in the first place, and she actually only owed $281, which the agency also waived. Federal regulations allow officials to do so if the debtor was not at fault, or in the interest of equity, a spokesman said.

Palatnick said she's glad she got her money back, but she worries that others won't be so lucky.

“I still have a lot of unanswered questions,” she said in a telephone interview after she received her check. “What's going to happen to the other people in the same boat?”

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