I believe the IRS and Treasury is taking that stance because, as a starting point, IRS Chief Counsel's Office has likely advised it that the CARES act itself provided no way for government to collect those improperly issued EIPs. That is the conclusion I too reached upon reading the Act. Thus, Chief Counsel would then have told the Commissioner and Treasury that without any authority in the Act to easily collect those wrongfully issued refunds there is only one possible avenue left in the Code to recover them: the erroneous refund procedure of IRC § 7405. It is a procedure that is not often used for two reasons. First, truly erroneous refunds are not terribly common. I encountered just two such situations in my entire entire career at IRS, at least that I can recall.
That then leads to two issues for the government. The first is cost and administrative burden. In order for the IRS to recover an erroneous refund, it must sue the person who received it in federal district court. It does not have the option to use the administrative collection procedures that the IRS may use for delinquent tax. Because the suit must be done in federal district court, the Department of Justice (DOJ), Tax Division would actually have to do the litigation, not IRS Chief Counsel. The cost to the government to pursue that would exceed the $500 (in the case of an erroneous dependent EIP) that it is trying to recover. Moreover, the government must initiate that action within 2 years of the date the erroneous refund was made. Because these payments were made 9+ months before the 2020 returns are even due, that leaves the IRS in the position of having to process returns, match them, determine that an erroneous refund was made, and then coordinate with DOJ to file the lawsuit all within the space of about a year or less. That's a lot work and expense to recover $1,200 or $500.
The second issue is one of policy. Would doing this be in the best interest of the government and the public? I think the conclusion would be no. The government is not going to want to take on that burden for these small payments and will be reluctant to flood the district courts with these small claims when the courts are already overburdened with cases. Particularly when the error that cause the refund in the first place was made by the government itself, not the taxpayer. And DOJ itself may not have the resources to spend on that given all the other litigation it has on its plate already.
Moreover, doing that would not be a good look for the government. The purpose of these payments was not some tax policy objective. The purpose was to stimulate the economy, and the use of tax refunds to do it was simply a fast and easy way to get the payments out to the public. I think the Treasury would be of the view that it is fine with letting those erroneous payments go uncollected. That's just more money to help stimulate the economy and would avoid the howls of those taxpayers who got those checks in tough times, spent the money for rent, food, or whatever, and would then be called upon to repay it to the government later when they might not even have the money to do it.
