Retirees Targeted by Debt Program

Retirees be warned.

The federal government has launched an aggressive debt-collection program, which is ramping up this fall to nab some 232,000 Social Security recipients who owe taxes. Unless they respond quickly, these Social Security beneficiaries could lose as much as 15% of their retirement or disability income.

The program is part of an effort to collect all delinquent government debts--ranging from student loans to back taxes--from people who get government payments from contracts, wages or social programs. The goal: collect an estimated $1 billion annually in government debts owed by individuals and companies that receive government payments.

Although the collection effort started last summer, until now it has focused on relatively small groups--a few thousand federal government workers and retirees and some child support scofflaws, for instance.

Now the government is targeting Social Security recipients who owe taxes. The stepped-up collection effort is expected to bring in $311.8 million a year in delinquent income taxes.

In general, the government will withhold as much as 15% of benefit payments unless the recipient responds to or corrects his or her delinquency within 30 days of receiving a notice. That could reduce a retiree’s $1,000 monthly Social Security benefit to $850 until the debt is paid.

Cross-Checking Increased

This collection program was authorized by two laws passed in the late 1990s that gave the U.S. Treasury far-reaching authority to go after people who owe the government money because of defaulted student loans, back child support, tax delinquencies or other debts.

“The IRS has always had the authority to do levies, but they had to do it on a payment-by-payment basis in the past,� said Mike Brostek, director of tax issues at the General Accounting Office in Washington. “This program allows them to keep the levy going.�

Individuals and companies that owe the federal government more than $1 billion in past-due debts receive $8.2 billion a year in payments from government offices ranging from the U.S. Postal Service to the Treasury, according to the General Accounting Office.

Until recently, the government’s internal tracking procedures weren’t sophisticated enough to recognize when one government agency was sending a check to someone while another agency was trying to collect delinquent payments from the same person.

Since these laws were passed, government agencies have been attempting to cross-check lists of contractors, employees and benefit recipients with lists of persons and companies whose government debts are at least six months in arrears.

Some government employees and government retirees already have been affected. The Social Security Administration also started dinging about 50,000 recipients for back child support and delinquent student loan payments this year.

Social Security recipients with tax delinquencies will get two warnings that they must resolve their tax debt or face reduced retirement or disability benefit payments, said Leslie Walker, a Social Security spokeswoman in San Francisco. The first wave of warnings is expected to go out next month, with a second in December.

If Social Security recipients don’t contact the IRS to either make arrangements for payment, correct an erroneous bill or request a hardship exemption, their benefit payments will be cut as much as 15% a month beginning in February, Walker said.

Previously, the Social Security Administration wouldn’t reduce benefit checks that were for less than $750 a month. The current tax-collection program has no such minimum-benefit threshold, Walker said.

However, certain types of benefits will be exempt from collection. Payments to children, lump-sum death payments, so-called Prouty benefits--a minimum Social Security payment to some people who didn’t qualify for regular retirement benefits--and Supplemental Security Income benefits, a welfare payment to the elderly, will not be affected.

The agency also won’t reduce payments to those in bankruptcy or who have applied for tax relief because of a hardship or because they claim their tax debt was the result of improper conduct by a former spouse--an “innocent spouse� claim.

“The IRS is not going to tax your grandmother to death,� said Richard Quarterman, a San Diego tax expert who specializes in tax collections. “A great deal of these [Social Security recipients] are going to qualify for hardship exemptions.�

However, what Social Security recipients should not do is ignore the tax notices, Quarterman said.

Unless taxpayers ask for relief before the collection process starts, their payments will be reduced. It’s far more difficult to stop garnishments once they’ve begun than it is to head them off in the first place.

Hardships Exempted

Those who think they may qualify for a hardship exemption should contact the nearest Taxpayer Advocate’s office, Quarterman said. That office will need information about your income and expenses, as well as how much you owe in back taxes. There are Taxpayer’s Advocate offices in Los Angeles and Laguna Niguel.

If the exemption is approved, the collection process can be put on hold almost indefinitely--or at least until or unless your monthly income rises past set “hardship� thresholds. (The thresholds vary by both state and county, based on standard costs of food, clothing, housing, utilities and transportation.)

“Most seniors and Social Security recipients will not be affected,� IRS Commissioner Charles Rossotti said. “But we want those who are to contact the IRS now so they can resolve their tax obligations before it affects their Social Security payments.�

*

Times staff writer Kathy M. Kristof, author of “Investing 101â€� (Bloomberg Press, 2000), welcomes your comments and suggestions but regrets that she cannot respond individually to letters or phone calls. Write to Personal Finance, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012, or e-mail [email protected]. For past Personal Finance columns visit The Times’ Web site at http://ukobiw.net./perfin.