Unintended Consequences: The Inflation Reduction Act of 2022’s Farm Debt Relief Causes Farmers Massive Tax Headaches

Posted on: February 17th, 2023 by Joe Peiffer

For a deeper analysis into this topic, see a version of this article written for tax professionals and other interested parties here.

On August 16, 2022, President Biden signed the Inflation Reduction Act (IRA) into law. Section 22006 of the IRA provided $3.1 billion for the United States Department of Agriculture (USDA) to provide relief for distressed borrowers under certain Farm Service Agency (FSA) direct and guaranteed loans.

On October 18, 2022, USDA provided nearly $800 million in assistance to distressed borrowers to help cure delinquencies and resolve uncollectable farm loan debts:

$600 million in payments to the accounts of approximately 11,000 borrowers who were 60 or more days delinquent on their FSA direct or guaranteed loans on September 30, 2022.
- Direct loan borrowers’ assistance included payments to bring their loans current and make their next annual installment payment.
- Guaranteed borrowers received direct payments on their loans equal to the amount the borrower was delinquent on the most recent report from their lender.
$200 million in payments were made to resolve the remaining debts for approximately 2,100 borrowers who had their loan collateral liquidated but remained liable on deficiencies that had been or were due to be referred to the Department of Treasury for offset or collections. Since these debts have been paid, these borrowers will no longer face garnishment of tax refunds, Social Security benefits or other Federal benefit payments.

Unintended Consequences of the IRA Payments

Farm debt relief is certainly welcome, especially to its recipients. However, when Congress authorized the IRA payments it did not consider that those payments would be counted as income for many recipients, leading to:

Significant income taxes.
Disqualification for:
- SNAP benefits.
- WIC benefits.
Increase in Medicare Part B premiums.
Loss of the self-employed healthcare premium deduction.

Two Distressed Borrowers, Similar Problems

Consider these two typical borrowers with FSA debts who are in currently not collectible (CNC) status, both of whom benefitted from IRA farm debt relief:

Scenario 1: In 2010, Robert defaulted on his FSA-direct loan, which was secured by a lien on his property. When he could not obtain further financing, he could not continue his farming business and the loan went into default. FSA foreclosed, leaving a $100,000 deficiency judgment. Although FSA initially contacted Robert to collect on the debt after the foreclosure, the account was moved into CNC status, where it has remained for 12 years. As of 2022, his past due balance was $150,000, with interest.^[1]

Scenario 2: Charles has been in default on his FSA-guaranteed loan from a local bank for several years. Charles has continued to farm while working with his bank under forbearance agreements. The debt was moved to the CNC status in 2019. In October of 2022, FSA repaid his entire guaranteed loan to local bank. The payment consisted of principal of $400,000 and interest of $12,000. Now, instead of owing a long-term debt to his bank, with low payments and the option of obtaining a forbearance, he faces a large tax liability (equal to multiple years of payments) due all at once.

IRA’s Effects: Increased Taxes

While the IRA’s debt relief payments could have many consequences for recipients, for Robert and Charles the primary consequences are increased federal income taxes. Because of this repayment Robert could owe $24,000 or more in additional federal income taxes, and Charles $96,000. Since this debt relief was targeted at farmers who were behind on their payments, Robert and Charles likely cannot pay these bills.

Current Nonviable and Viable Options

Robert and Charles do have options to address their taxes, but all of them have significant downsides. However, two of the common tools for addressing these taxes are off the table from the get-go. Bankruptcy will not help Robert or Charles any time soon, because these tax debts will be nondischargeable (they will survive a bankruptcy) until at least 2026. Similarly, while insolvent taxpayers don’t pay tax on debt cancellation, that does not apply to a debt repayment like this. Robert and Charles could enter into an installment agreement to pay off their tax debts (with interest and penalties) over six year, if the IRS agrees and they can afford that additional cost. They could make an offer in compromise to the IRS to reduce the amount they owe, but that is a lengthy, difficult, and expensive process, often requiring professional assistance. Moreover, the IRS can take up to two years to review an offer in compromise.

USDA is Considering Options to Assist Farmers with their Income Tax Problems.

After being informed of the significant problems caused by the repayment of the debt for over 13,000 farmers, the USDA has held a series of meeting and considered three options to ease the income tax problems experienced by farmers: asking the IRS to streamline and ease offer in compromise criteria, giving farmers the option to retroactively opt out of this debt relief, and recharacterizing this debt repayment as debt cancellation instead. The USDA is also considering asking the IRS to grant IRA farm debt relief beneficiaries an extension of time to file their tax returns so they can better plan for and adapt to this unexpected income. It is also considering sponsoring professional tax assistance for affected farmers.

Get the Advice You Need and Contact your Members of Congress!

If you or someone you know received IRA farm debt relief but now don’t know how to deal with the tax consequences contact Ag & Business Legal Strategies today! We can assist in assessing the consequences, navigating the options, and making an informed decision. Moreover, contact your members of Congress! Tell them USDA needs to find ways to help farmers with the unforeseen tax consequences of the IRA’s farm debt relief. Download a letter template here.

Read a deeper analysis here.

[1] Thanks to Kristine Tidgren of Iowa State University’s Center for Agricultural Law and Taxation for Robert’s scenario.

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