Going Forward – Refundable Credits in the 2021 Filing Season and Beyond

In my last post I called on the IRS to reopen its non-filer portal for recipients of federal benefits who have dependents and issue supplemental Economic Impact Payments for those dependents. On August 14th, the IRS announced on that it would do that very thing, responding to congressional and public pressure and facing what promised to be an adverse ruling in pending litigation.  This is truly an important development that will provide much-needed financial assistance to vulnerable families in the midst of a pandemic.  It also provides a foundation for the IRS to build on in future filing seasons.

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A second proposal I made in that post received some interesting comments.  I proposed the IRS use its internal Form W-2 and 1099-MISC-NEC data to identify those taxpayers who appeared to qualify for the childless worker Earned Income Tax Credit (EITC) and automatically pay out the amount of EITC based on those earnings.  By now, the IRS has received almost all of the wage and information returns for 2019.  The National Taxpayer Advocate reports that by February 28, 2020, the IRS had received 3.9 percent more W2s and 12.8 percent more 1099-MISC forms than the year before.  (For comparison, the IRS received 219 million W2s by February 4, 2019.)    IRS also can determine whether the taxpayer was claimed as a dependent on another’s return, so the risk of noncompliance is very low.  In fact, in 2018 the Treasury Inspector General for Tax Administration, whose job is to ferret out fraud, waste, and abuse in the tax administration, actually recommended the IRS automatically calculate and pay out the EITC.

One comment questioned how someone could live on, say, $7,000 a year and cited an example of a client who, upon questioning, ceded that he had unreported cash income.  Another noted that one of his clients had low wage income but was receiving a significant amount of income that was reported on an estate’s Schedule K-1, which likely would not be in the IRS’s systems yet.  I will address the issue of living off of $7,000 a year below, but as to the K-1 income, my response is something I have said to the IRS for decades:  you design tax administration around the 95 percent of the taxpayers who are trying to comply, not around the 5 percent who are not.  No aspect of tax administration will have zero errors or noncompliance; you have to accept some people will slip through.  Otherwise, you end up with the byzantine tax administration we have now. 

The proposals outlined in my earlier post don’t solve all the problems with unclaimed EITC or missed EIPs.  They addressed emergency situations and provided a one-time way to get much needed dollars out to the most vulnerable populations in our society, populations that are most impacted by the coronavirus and pandemic-related job loss.  For 2021 and beyond, the IRS can build on its EIP initiatives this year to increase the EITC participation rate while minimizing taxpayer burden.  But before I discuss these proposals, let’s take a high-level look at poverty in America.

Refundable tax credits play an important role in reducing poverty in America

According to the US Census Bureau, the 2018 official poverty rate was 11.8 percent, with 38.1 million people in poverty.  The official definition of poverty is established by the Office of Management and Budget in Statistical Poverty Directive 14 and is used to determine eligibility for various government programs.  Here are some rather stunning statistics from the U.S. Census Bureau report, Income and Poverty in the United States: 2018, (the 2019 poverty statistics will be issued on September 15, 2020).  For purposes of determining family poverty, Census defines a family as “a group of two or more people related by birth, marriage, or adoption and living together.”

  • The 2018 poverty rate for primary families (i.e., a family that includes a householder) was 9.0 percent.
    • For female householder families, the rate was 24.9%.
    • For married couples, the rate was 8.1%.
  • The 2018 poverty rate for unrelated individuals not in families was 20.2%.  (This is a cohort of the childless worker EITC population.)
    • For unrelated male individuals not in families, the rate was 17.7%.
    • For unrelated female individuals not in families, the rate was 22.6%.
  • The 2018 poverty rates varied significantly by race:
    • For Blacks, the rate was 20.8%.
    • For Hispanics, the rate was 17.6%.
    • For non-Hispanic Whites, the rate was 8.1%.
  • The 2018 poverty rate varied by sex:
    • For males, the rate was 10.6%.
    • For females, the rate was 12.9%
  • The 2018 poverty rate varied significantly by age:
    • For children under the age of 18, the rate was 16.2%.
    • For persons age 65 or older, the rate was 9.7%.
  • The 2018 poverty rate for workers was 5.1%.
    • For full-time year-round workers, the rate was 2.3%.
    • For less-than-full-time year-round workers, the rate was 12.7%.
    • For workers who did not work at least 1 full week, the rate was 29.7%.

The Department of Health and Human Services publishes the poverty guidelines each year in the Federal Register.  The 2020 poverty guidelines are below:

Since 2011, in collaboration with the Bureau of Labor Statistics, the Census Bureau has also computed and published the Supplemental Poverty Measure (SPM), which takes into account the impact of government benefit programs for low income persons and families – including food stamps, school lunches, housing assistance and refundable tax credits —  as well as deductions for certain necessary expenses, including taxes, child care, commuting, health insurance premiums and co-pays, and child support, that are not included in calculating the official poverty rate.  Here are a few eye-opening factoids from the SPM:

  • For 2018, the Supplemental Poverty Measure was 12.8 %, a full percentage point higher than the official poverty rate.
  • Social Security benefits moved 27.2 million persons out of poverty in 2018.
  • Refundable tax credits moved 8.9 million persons out of poverty in 2018.
  • If the EITC and the refundable portion of the Child Tax Credit were not included in the SMP calculation, the 2018 SPM poverty rate would have been 15.5 % rather than 12.8 % — meaning the tax code accounts for an almost 4 percentage point reduction in the official poverty rate of 11.8 %.

The Supplemental Poverty Measure shows that it is possible for someone to live on earnings of $7,000 a year by receiving federal benefits, including the Earned Income Tax Credit.  In fact, according the U.S. Census Bureau, 10.2 percent of over 128 million householders had money income under $15,000 in 2018.  That is the reality for over 13 million Americans.

Going forward, the IRS needs to take more proactive steps to get the EITC and other refundable credits into the hands of eligible taxpayers

The stunning data presented above should give us all pause to reflect on the significant role the tax code and IRS play in lifting Americans out of poverty.  Although some complain that the IRS should not be in the benefits business (or, more cynically, it should only be administering social benefits to home-owners and businesses), it turns out the EITC is an efficient and effective program.  Yes, there are plenty of things that need fixing about the EITC, and I personally have made scores of recommendations in that regard.  But folks who wish for a past time when the EITC didn’t exist need to just get over it.  And that includes the IRS – it needs to embrace its role as deliverer of social benefits.

The IRS can begin its embrace in the 2021 filing season and beyond, by keeping the non-filer portal and enhance it by adding a screen and checkboxes designed to determine eligibility for the EITC.  The IRS’s own data show that through April 17, 2020, 5.631 million filers used Free File, a 110 percent increase over 2019, largely attributable to taxpayers who used the non-filer portal and thus bumped up the abysmal Free File usage rates.  [See National Taxpayer Advocate Fiscal Year 2021 Objectives Report to Congress, pages 97-98.]  Usage would increase even more if the portal were made available on mobile devices as well as in other languages.  Moreover, the IRS could consider a telefile version of the nonfiler portal – which would really help out those households who don’t have broadband or any internet access in their homes.

In 2018, TIGTA recommended the IRS modify Form 1040 to capture information that would allow it to automatically issue the EITC to taxpayers who filed a return.  Although the IRS ultimately declined to go along with this recommendation, it is a good idea that should be adopted.  Here is TIGTA’s suggested mock-up for the pre-“simplified” Form 1040:

In addition to adding these boxes to the face of the Form 1040, IRS should add to the non-filer portal a few extra checkboxes:  Did you (and your spouse, if filing married-filing-jointly) have your principal residence in the US for more than six months of the year?  Would you like the IRS to compute your eligibility for and amount of the Earned Income Tax Credit?  If a taxpayer enters dependents on the nonfiler portal, another checkbox can pop up:  Did this child live with you in the US for more than six months of the year?  These questions, along with retaining the checkbox question about being claimed as a dependent on another’s return and IRS internal databases and filters, provide all the information the IRS needs to get the EITC out to eligible households.

Second, as TIGTA recommended in 2018, the IRS should study how best to use CP-09 and CP-27 letters, the EITC reminder notices IRS sends to taxpayers with children and without children, respectively.  Today, IRS sends out these letters to only a fraction of taxpayers it believes are eligible for underclaimed EITC, and it completely ignores those who have not filed a return.  According to TIGTA, for Tax Year 2014, IRS estimated 5 million households were potentially eligible for EITC totaling $7.3 billion.  Of those 5 million taxpayers, 1.7 million filed returns but did not claim the EITC.  TIGTA reported the IRS annually spends $2 million issuing notices to potentially eligible taxpayers, but the notices were sent to only 361,000 of the 1.7 million filers (and none to the nonfilers).  The response rate to these letters was 28 percent for taxpayers with children, and 57 percent for taxpayers without children.   The CP-09 and CP-27 letters may not be necessary for filers if the IRS adopted TIGTA’s and this post’s recommendations to modify the Form 1040 and the non-filer portal.  Instead, these letters (or postcards) could be sent at the beginning of the filing season to prompt nonfilers to file and claim the EITC.   

As TIGTA noted, the CP-09 and CP-27 letters historically have had low response rates.  But thousands of businesses and political campaigns have figured out that direct marketing, done correctly, actually has an impact.  The IRS possesses a mother lode of data on nonfilers – it has Forms W-2 and 1099s; all of those forms have taxpayer addresses.  The IRS could use this address data to send the letters, or generic postcards, to EITC nonfilers.  A postcard with a generic message about EITC eligibility, can be written so as to not violate IRC § 6103.  For example: 

The EITC is a tax credit for low income workers with or without children. To learn whether you are eligible for the credit, go to [website] or call [toll-free dedicated number]. If you haven’t filed a return, you may be able to use the non-filer portal to claim the EITC.

It may be people don’t open IRS letters, but they will read a generic postcard about needing to file in order to get the EITC.  This is worth experimenting with. 

The IRS could also send letters to potentially eligible filers and nonfilers immediately before the opening of the next filing season, urging people to check out the EITC; a TAS study found that educational letters, sent to taxpayers who appeared ineligible for the EITC in the previous year but were not audited, with the words “important tax information” on the envelopes and mailed right when W-2s were being issued, resulted in significant taxpayer behavior changes.  Recipients apparently opened the envelopes and read them. 

IRS also could promote the non-filer portal during its EITC Awareness Day events every January.  Moreover, since the non-filer portal is built upon the Free File Alliance’s Free Fillable Forms portal, as discussed here, it won’t run afoul of the IRS-FFA agreement.

In the past, the IRS cited lack of resources to be able to handle the responses to more of the  CP-09 and CP-27 notices.  As I’ve noted in other posts, I understand all too well the problem of diminished resources.  But EITC funds are lifelines to these taxpayers and should be prioritized as much as enforcement hires.  If the IRS were to adopt a dual-role mission statement, as I’ve recommended since 2010, it and the Administration would develop a budget proposal to provide the resources and staffing necessary to issue the notices and process responses.  Moreover, if the IRS maintains and improves the portal, nonfilers would use the portal instead of mailing in a response, so the resource demand would be minimized.  Congress has a role to play here, too.  It can nudge the IRS in the right direction and provide it with dedicated funding to increase the EITC participation rate.  With the pandemic showing the vital role the IRS plays in the delivery of economic benefits, Census data showing the important role of refundable tax credits in lifting millions of Americans out of poverty, and Congress finally aware of what years of underfunding have done to tax administration, now is the time to make the case for robust and proactive taxpayer assistance. 

IRS, we applaud your work and we feel your pain, but we need you to do more to get dollars out to vulnerable taxpayers

As Congress and the Administration debate the shape and scope of the next coronavirus relief package and unemployment benefits end or are delayed, the Internal Revenue Code already provides another way to get dollars into low income workers’ pockets – the childless worker Earned Income Tax Credit (EITC).  The IRS can and should pay out this credit to every taxpayer who appears eligible for it based on 2019 return filings, including through the non-filer portal.

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Before I launch into a discussion of how this could be done, and because the IRS seems particularly sensitive right now about any criticism of its performance in implementing CARES Act and other economic stimulus provisions, I want to stipulate the IRS accomplished a near-miracle in getting over 160 million payments out to needy households, and it should be congratulated on that act.  We all recognize the challenges the IRS faced, and still faces, with its workforce hobbled by the pandemic closures of offices, and the precautions necessary as it tries to get back to some semblance of normal work.  And we applaud the sacrifices IRS employees made to program IRS systems and develop new applications and issue guidance.

However, because these are extraordinary times, more is being asked of the IRS.  Those asking for more are not being mean-spirited or ungrateful or even ungracious.  They are advocating for various populations who have been left out in the cold. 

For example, while it is understandable and even commendable the IRS wanted to get automated Economic Impact Payments (EIPs) out to elderly and disabled Social Security beneficiaries very quickly and thus set a 40-hour deadline for these individuals to enter their dependents into the nonfiler portal, it is inexcusable for the IRS not to provide an ongoing option for those individuals who missed the short deadline to be able to obtain the EIP for their dependents now, not in 2021.  We are in the midst of a pandemic and an unprecedented economic turndown, for heaven’s sake, and 2021 is just too far away.  These payments are a lifeline for many of the most vulnerable members of our society and they cannot wait. 

In fact, in a recent communication to its employees, and as the National Taxpayer Advocate (NTA) confirmed in a recent blog, the IRS advised that the programming will be completed by August 13, 2020, that will enable it to issue dependent payments for those who actually entered their information into the nonfiler portal but failed to receive the payments due to a programming bug.  If the IRS is able to “perform automated recovery” procedures for these payments, it can surely allow those who missed the April 22 deadline to now enter their dependent information into the nonfiler portal and apply the “automated recovery” procedures here, too.  Since it has already developed the programming, it cannot claim it does not have the resources.

The IRS has sufficient information to pay out the childless worker EITC automatically

The idea of automating the childless worker EITC has bounced around for years.  As the NTA, I recommended it in my 2016 Annual Report to Congress, here.  The Treasury Inspector General for Tax Administration (TIGTA) recommended it in April, 2018, here.  TIGTA’s report, The Internal Revenue Service Should Consider Modifying the Form 1040 to Increase Earned Income Tax Credit Participation by Eligible Filers, notes that for Tax Year 2014, the IRS estimated 5 million households were potentially eligible for the EITC, leaving $7.3 billion unclaimed.  Of those 5 million taxpayers, 1.7 million actually filed returns and did not claim the EITC.  In recommending that the IRS modify the Form 1040 to capture information that would allow it to automatically issue the EITC to taxpayers who failed to claim it, TIGTA noted the IRS annually spends $2 million issuing notices to potentially eligible taxpayers, but the notices were sent to only 361,000 of the 1.7 million filers (and none to the non-filers), and only 28 percent of the eligible-with-children responded and 57 percent of the eligible-without-children responded.  TIGTA even provided a nifty mock-up of how the 1040 could be modified.

On January 31, 2020, Senators Sherrod Brown and Catherine Cortez Masto wrote Commissioner Rettig asking why the childless worker EITC could not be paid out automatically based on available wage and other income data.  In the letter, here, the Senators cited the TIGTA report discussed above and asked whether the IRS had studied TIGTA’s recommendation and if so, why it had not implemented the recommendation.

In his response to the Senators, the Commissioner stated that

 [i]n 2018, the IRS and Treasury began developing a shorter, streamlined Form 1040 with the goal of simplifying the experience for taxpayers and partners in the tax industry.  Adding additional information to the Form 1040 for EITC purposes would not align with the new simplified Form 1040 strategic approach. 

The Commissioner then cited this very absence of such information, and the consequent risk of improper payments, as the reasons IRS could not automatically issue EITC refunds to childless workers: 

For example, based on the information on the Form 1040, the IRS cannot determine if a taxpayer can be claimed as a dependent on another return or if the taxpayer lived in the United States for more than six months.

Before we explore the IRS’s position a little more closely, a little bit of background is helpful.  The childless worker EITC is available to taxpayers who are at least 25 years of age and under 65 years of age.  For Tax Year 2019, eligible taxpayers filing as single or head of household must have less than $15,570 adjusted gross income (AGI); married-filing jointly taxpayers must have AGI below $21,370.  (Married-filing-separately taxpayers are not eligible for the credit.)  Both the childless and child-based EITC require earned income, which means that income will be reported and on file with the IRS on Forms W-2 or Forms 1099-MISC.  The IRS has announced that for 2021 filing season, a new Form 1099-NEC will be required, which should make it even easier to identify non-employee compensation.  IRC § 6071 requires both of these forms to be filed by January 31 of each year.  By now, pandemic notwithstanding, the IRS should have this earned income information for Tax Year 2019 for almost every single worker in the United States.

Other than earned income, the requirements for the childless worker EITC are that the person claiming the credit (1) not be claimed as a “qualifying child” of another person; (2) not be claimed as a dependent on someone else’s tax return; (3) have the principal residence in the United States for more than half the year; (4) have the appropriate Social Security Number (SSN); and (5) have less than $3,600 in investment income.  The IRS can check all of these requirements against its internal databases, except for the principal residence test.

In fact, taxpayers who file a Form 1040 must check a box on the front of that form declaring that they cannot be claimed as a dependent on someone else’s tax return.   Similarly, one of the questions taxpayers must answer when they complete the IRS’s nonfiler portal is whether you can be claimed as a dependent on someone else’s tax return.  So the IRS has affirmations of this status requirement for hundreds of millions of taxpayers, made under penalties of perjury.  (As I noted in an earlier post here, the nonfiler portal requires the submitter to affirm the jurat.)

What’s more, any return filed claiming a refund passes through innumerable filters and databases designed to identify questionable and fraudulent claims, including duplicate claims of qualifying children (one of the Commissioner’s concerns in his letter to the Senators).  It has Social Security databases matching name, age, and parentage of social security number holders, among other information.  Regardless of what people claim on their returns, the IRS checks those claims against its databases.  It is doing that even as I write this.  Thus, the IRS has internal processes in place to prevent improper automated payments of the childless worker EITC.

Okay.  So, as of today, the IRS has earned income and other income information necessary for computing EITC eligibility for most taxpayers.  It also has a sworn statement from the vast majority of taxpayers as to their status of being claimed as a dependent on another’s return.  And the IRS has internal databases that can check the taxpayer’s SSN, age, and status as dependent/qualifying child on another’s return.  All that is left to verify is the “more than 6 months U.S. residence” status.

I propose a two-prong approach for this last test.  I’ll discuss how to handle this for Tax Year 2020 returns later in this blog, but for 2019 returns, filed in 2020, the IRS could administratively deem this requirement to be met unless the IRS has clear and convincing evidence to the contrary.  The IRS uses “tolerances” all the time in letting errors go unchallenged, and if there were ever a time to use tolerance, today is the time.  Thus, by administratively deeming taxpayers with a US address on their returns to have lived in the US for more than 6 months of the tax year, the IRS can create an “automated recovery” algorithm that computes and pays out the childless worker EITC to taxpayers who filed returns (including the nonfiler portal) without requiring an amended return.  This approach saves the IRS resources dedicated to processing amended (paper) returns as well as the letters it sends out to potentially eligible childless workers.

If IRS is nervous exercising its administrative discretion in this way, let me point out that nowhere on the Form 1040 or any of its schedules does the IRS require the taxpayer to aver its principal residence was in the US for more than six months of the year, and yet it stills pays out the childless worker EIC to people who claim it on the return.  To claim the childless worker EITC, you do not attach any schedule whatsoever, you simply write in the amount, per a look-up chart, on line 18a of the Form 1040.  Buried in the 17 page EITC section of the Form 1040, Step 4, Question 3 asks: “Was your main home, and your spouse’s if filing a joint return, in the United States for more than half of 2019?”  If the answer is “no,” you can’t take the credit.  In fact, the IRS instructs you to write “no” next to line 18a, presumably because it does use data on returns to identify potentially eligible EITC recipients that it can contact, via Letter CP-27!  Since the IRS is already using return data to identify some eligible taxpayers and send them CP-27 letters, it can use the same algorithm to identify, calculate, and pay out the childless worker EITC.

The maximum amount of the 2019 childless worker EITC, for earned income between $6,950 and $8,649, is $529, nothing to sneeze at in the midst of the pandemic.  As anyone who has practiced in the field of poverty law can tell you, to truly understand the impact of money to a low income person, add a zero.  $529 to them is as $5,290 to more affluent persons.

The Nonfiler Portal Created a “Filing Trap” for Households with Income Below the Filing Threshold

The IRS actually inadvertently exacerbated EITC underclaims via its nonfiler portal.  Again, this observation is not meant to be piling on to the IRS (I will say this over and over and over …).  It created the portal in record time, and it has been a useful tool.  But the nonfiler portal created what Gabriel Zucker of New America has called the “filing trap.”  People who used the portal were not given the option to compute the EITC – either the childless EITC or the child-based EITC.  For a family of four – two parents and two qualifying children – with income between $23,950 and $23,999, entering their dependents into the non-filer portal meant they lost out on $4,787 of EITC (they would lose $2,736 for 1 child, and $5,515 for 3 children).  Similarly, childless workers with income of $11,999 and filing through the nonfiler portal did not have the option to request $275 of EITC benefits.  To receive it now, they will have to file a paper amended 2019 Form 1040.   Good luck getting that processed.  And does the IRS really want to receive all those paper Forms 1040X?  (The IRS has announced that electronic filing for those forms is coming, but it’s not here yet, so that’s not much help for folks who need their EITC now.)

There is a better way.  As discussed above, for the childless worker filers, whether on a Form 1040 or through the nonfiler portal, the IRS can automatically calculate the childless worker EITC from information it has available to it in-house.  For the child-based EITC, it can use its internal data and the information about dependents provided on the non-filer portal to compute the appropriate amount of EITC.  For this extraordinary filing season, for once the IRS can use its internal data and filters for the good of these vulnerable taxpayers.  It can identify duplicate claims, etc., but it can also compute the EITC for taxpayers who appear eligible and which the IRS’s own system, which it encouraged taxpayers to use, blocked them from claiming.

Going Forward – Filing Season 2021 and Beyond

The proposals outlined above don’t solve all the problems with unclaimed EITC or missed EIPs.  They address emergency situations and provide a way to get much needed dollars out to the most vulnerable populations in our society, populations that are most impacted by the coronavirus and pandemic-related job loss.  For 2021 and beyond, the IRS can build on what it has created this year to increase the EITC participation rate while minimizing taxpayer burden.  In my next blog post, I’ll explore how the IRS can keep the non-filer portal and expand its utility, as well as how it could improve the use of CP-09 and CP-27 letters.  Oddly enough, the pandemic opens the door for the IRS to embrace its role in delivering social benefits.  It would be more than a shame if it did not seize that opportunity.

A Sun Has Set: Reflections on the Honorable John Lewis

Over the next days, weeks, months, and years, there will be many tributes to Congressman John Lewis, who passed away on July 17, 2020.  Historians and advocates will assess his enormous contributions in the fields of human and civil rights.  Here, today, I just want to share how John Lewis affected my life and my work.

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I was seven years old when John Lewis boarded the bus south in the first wave of Freedom Riders, and I have no memories of hearing about them.  But even at that age I was acutely aware of racial prejudice; my mother had been raised in Mississippi and I could sense her fear and anxiety over racial matters.  I had personally experienced scorn and ridicule at school because of my family’s religious beliefs and practices, so I knew some measure of cruelty people could inflict because of perceived differences.  I also knew religious beliefs were a matter of free exercise, whereas skin color was not.  I was not sure what all that meant, but I was aware, from my own home environment, that people of color experienced discrimination in ways I did not.

But nothing prepared me, at the age of eleven, for the events shown on the news the night of March 7, 1965, when I watched peaceful human beings be bludgeoned and set upon by dogs, simply because they wanted to cross a bridge.  More astonishing to me, though, was the courage of those human beings, moving forward even as they knew they would face violence.  The conviction and strength of their beliefs affected me profoundly.  They showed they could speak truth to power and were willing to accept the consequences.  I took that lesson to heart, and it altered the trajectory of my life.

Fast forward several decades to 2011, the 50th anniversary of the Freedom Riders.  By that time, as National Taxpayer Advocate, I had testified before the Ways and Means Committee, and its Subcommittee on Oversight, about ten times, and had testified before Congress about forty times.  For much of that time Congressman Lewis was either chair or ranking member of the Oversight Subcommittee.  I had worked with his staff on numerous occasions on legislative proposals, many incorporating the recommendations in the National Taxpayer Advocate’s Annual Reports to Congress.  One of my most treasured possessions is a copy of the Taxpayer First Act signed by Chairman Neal and inscribed – yes, inscribed – by John Lewis.

Whenever I testified, regardless of which party was in control of the House or Senate, I was a bipartisan witness, asked to testify by both the Chair and the Ranking Member.  But for the hearing on May 25, 2011, for the first and only time in my career, I was a Democratic witness at a hearing on “Improper Payments in the Administration of Refundable Tax Credits”.  I was understandably nervous about the hearing; the subject of improper payments and the Earned Income Tax Credit is very politically charged and I was aware many people wanted more enforcement focus on the EITC. I knew I was going to have to present a persuasive case for a more nuanced approach, and I was going to have to do that even as the members of one party did not want me there.

As fortune would have it, the week before, on May 16, 2011, PBS aired the documentary Freedom Riders, a film by Stanley Nelson, based on Raymond Arsenault’s book, “Freedom Riders: 1961 and the struggle for Racial Justice.”  I had watched that film, curled up in fetal position through most of it.  It was with the memories of that film and those events fresh in my mind that I approached the hearing.  Also during that week, I had listened to radio and television interviews with Congressman Lewis, as he reflected on past and current times.  As I approached the hearing, I kept in my mind’s eye the deliberate courage and peaceful strength of those individuals who created a movement.  I knew, too, the steely determination and strategy it took to survive such events.  What I was facing was child’s play, but they were my role models.

The hearing went very well and respectfully.  After the hearing, Congressman Lewis came over to thank me.  The room was buzzing, with side conversations and people milling about.  Reporters were leaving the room, the court reporter was packing up.  I mumbled some thanks about the invitation, and then told the Congressman that I had seen his interviews and seen the film and that I was just so profoundly grateful for his work.  He took both my hands in his and looked me in the eyes and for the next five minutes or longer just spoke to me, never moving his eyes, talking about those events and the challenges today.  The world just stopped for me.  And apparently it did for others, too, because out of the corner of my eye I could see people stop moving and then slowly edge toward us, to listen in.

The moments ended, the Congressman had to move on, and so did I.  Well, almost.  Anyone who has felt the strength of those hands and of that gaze is not the same.  They impart compassion, yes,  but they urge you on and they do not accept excuses.

Occasionally, as a person in a position of some authority, I could use that authority to accomplish something that might not happen under normal circumstances.  Later in 2011, all of the Local Taxpayer Advocates (LTAs) were going to be in Washington DC for a leadership training meeting.  I had been frustrated how many of the LTAs seemed burned out and were not advocating as vigorously on various issues as I would like them to.  It kept coming to me that they needed more courage.

In the weeks leading up to the showing of the film Freedom Riders in the spring of 2011, there were posters on the Washington DC Metro promoting the film, with a picture of a bombed out bus, and the tagline, “Would you get on the bus?”  That line kept going through my mind all summer; it made it clear that societal and systemic change starts with individual acts of courage and conviction.  That is what the LTAs needed to understand – that despite all the roadblocks put in front of them by their colleagues at the IRS, it was their responsibility to stand fast, and they needed to muster their courage to do that.

Well.  I decided that we would show the Freedom Riders film mid-way through the leadership meeting.  My staff thought I was nuts, but I insisted: we would dedicate an entire afternoon to the film.  We printed up “tickets” that said, Would you get on the bus?  I asked three LTAs, who were African American and were over the TAS offices in the deep south, to be on a panel after the film.  I introduced the film by saying I just wanted people to watch it and think about the courage these people showed, what it took for them to do what they did, and how that would apply to them.  I could tell that everyone thought this was just another crazy NTA thing they had to go along with, and many of the African Americans in the room were suspicious; what was the subtext here?

After the film, there was absolute silence.  And then the three LTAs on the panel started speaking.  They shared their experiences, their families’ experiences, what they experienced to that day, in terms of racism.  They spoke about the quiet courage required every single day of their existence, to assert their humanity and go through life with dignity.  Then others in the audience stood up and spoke; people talked about how the film affected them, how it made them reflect on their own beliefs and actions, and also how it made them look at their work with renewed commitment.  People broke for the day and carried those conversations on at dinner and the next day.

There were no miracles after that – no all-of-a-sudden people showed more courage.  But some did.  It was a small step, and it mattered.

On March 7, 2019, I had my final hearing before Congressman Lewis as chair of the Ways and Means Oversight Subcommittee.  Seven days before, I had announced my pending retirement as National Taxpayer Advocate.  At the end of the hearing, I approached the dais to thank the Chairman.  Again, he took my both my hands, looked in my eyes, and said, “A sun is setting.”  We hugged.  (You can watch the hearing here.)

Hon. John Lewis and Nina Olson embrace following her testimony on March 7, 2019.
Screen shot of Hon. John Lewis and Nina Olson embracing following a Congressional hearing on March 7, 2019.

Over the course of John Lewis’ long life, he saw many a sun set.  But what John Lewis knew, and I learned from him, is after each sun has set, there is a new dawn.  It is up to each and every one of us to determine what the new dawn brings. To mix metaphors, will you get on that bus?

Due Process Requires the IRS Make Supplemental Advance Economic Impact Payments for Eligible Children of Recipients of Federal Benefits

Last week GAO released a 400 page report entitled COVID-19: Opportunities to Improve Federal Response and Recovery Efforts.  Right on the first page of the report (the Highlights page), GAO notes that it was unable to obtain total federal spending data because of an Office of Management Budget directive that agencies don’t have to report COVID-19 obligations and expenditures until July 2020.  GAO states “[i]t is unfortunate that the public will have waited more than 4 months since the enactment of the CARES Act for access to comprehensive obligation and expenditure information about the programs funded through these relief laws.”  For government auditors, these are strong words, indeed! 

Nevertheless, the report is chock-full of information about the four COVID-19 relief laws enacted to date, reviewing the actions of every relevant agency, including nine pages dedicated to the Economic Impact Payments (EIPs) (see pages 25 to 28 and pages 217 to 224).  Among other things, GAO reported that despite entering their eligible children on the nonfiler portal established by the IRS, between April 10 and May 17, up to 450,000 recipients of Social Security, Veterans, and Railroad Retirement benefits did not receive the per-child EIP.  Instead, they received EIPs for themselves only.  (See GAO report at page 220.)

Any discussion of the IRS’s implementation of the EIP must begin with the now-standard disclaimer that the IRS overall has done an amazing job issuing EIPs.   According to GAO, from mid-April through May 31, 2020, IRS and Treasury had issued 160.4 million payments totaling $269.3 billion, through a combination of electronic transfers to bank account, paper checks, and prepaid debit cards.  (See GAO report at page 25.)  This accomplishment is even more impressive when one considers the IRS has had to operate under pandemic conditions as well.  The IRS is also making efforts to reach the large nonfiling population of individuals who are eligible for EIPs and either have not or are not required to file a return.  But – and you knew this was coming – the IRS has made some administrative decisions with respect to EIPs that are very troubling.

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Recall that the IRS got off to an initial rocky start, when it informed Social Security retirement and disability benefits recipients and Railroad Retirement benefits recipients that they would have to file returns to obtain their EIPs.  (For the purpose of this blog, I will call these folks “SSA/SSDI/RRB” beneficiaries.)  This approach was completely contrary to IRC § 6428(f)(5)(B), which directs the IRS to calculate the advance EIP by using information in the 2019 Form SSA-1099 (Social Security Benefit Statement) or Form RRB-1099 (Social Security Equivalent Benefit Statement) if there is no 2019 or 2018 return on file for an individual.  After much uproar, Treasury and IRS quickly did an about-face and issued a statement that – good news! – these individuals would not have to file a return after all in order to receive their EIPs.  Instead, they would be paid out automatically to the accounts used to receive the benefits payments.  The IRS later announced that below-filing-threshold recipients of Supplemental Security Income (SSI) and certain Veterans’ benefits would not have to file returns either in order to receive EIPs directly deposited into their benefits accounts.

On the afternoon of Monday, April 20, 2020, the IRS issued a press release informing SSA and RRB recipients that although they would get their own EIP automatically, if they wanted to receive the up to $500 EIP for each of their eligible children, they would have to provide information on the non-filer portal by Wednesday, April 22, 2020.  That is, elderly and disabled individuals were given less than 48 hours notice – delivered electronically via a press release – to submit their children’s information – digitally – or else wait until 2021 to get the child-EIP.  Never mind that TCE was shut down and VITA was pretty much inoperable, so there was little or no filing assistance available to them.  Never mind that TAS research studies showed that 41 million US taxpayers did not have broadband access in their homes, and 14 million had no internet access.  The study found that vulnerable groups – the low income, disabled, and elderly – were more likely to access the internet infrequently (less than once a week) and feel less skilled doing internet research than non-low income taxpayers.  And never mind that in 2019 the average annual SSA benefit for retirees was $17,652, and for disabled persons $14,832, so they very much needed the additional EIP now, not later.

To compound matters, on the May 1, 2020, the IRS issued yet another press release giving Veterans and SSI benefits recipients a full four days in which to enter their eligible children’s info into the portal; failing that, they would have to wait until 2021 to get the child-EIP.

Making automatic payments to SSA/SSDI/RRB/VA/SSI benefit recipients requires a lot of coordination between the IRS, Social Security, Veterans’ Administration, and the Bureau of Fiscal Services.  Faced with the daunting task of issuing these payments in the middle of a pandemic, with a filing season still underway, I can understand why the IRS would want to find ways to make things easy on itself, and even rely on processes already in place.  That tendency helps explain (partially) why the IRS initially ignored the requirement to make automatic payments to SSA/SSDI/RRB beneficiaries by trying to take the same approach to these populations it did in 2008 with the Economic Stimulus Payment (ESP), which I discuss here.

The IRS also had the statutory mandate to get these advance payments out “as rapidly as possible.”  IRC § 6428(f)(3)(A).   Understandably, it wanted to issue them in batches, and set internal deadlines for when it would release data to the Bureau of Fiscal Services (BFS) to make EIPs with respect to different groups of taxpayers.  GAO reports the IRS and BFS issued more than 81 million payments, totaling more than $147 million, on April 10, a mere two weeks after the law’s enactment.  It began sending paper checks out on April 17, with the first batch going to 7 million individuals.  Because BFS can only issue 5 to 7 million checks a week, commendably the IRS prioritized mailing checks first to those with the lowest adjusted gross income.  The IRS established April 24 as the date on which automatic payments would be issued to nonfiling SSA/SSDI/RRB benefits recipients, and May 5 as the date for issuance of payments to nonfiling SSI/VA recipients. The IRS also appears to have made the internal decision that once an eligible individual receives an EIP, there will be no supplemental EIPs made in 2020.  Instead, eligible individuals can file a 2020 tax return in 2021 and obtain the additional EIP on that return. 

GAO reports the IRS has stated it will find a way to issue supplemental EIPs to those eligible individuals who entered their children’s information on the nonfiler portal before the IRS’s “deadlines”.  IRS should expand that approach and commit to issuing supplemental payments to SSA/SSDI/RRB/VA/SSI nonfilers who missed the deadlines.  As near as I can tell, because the recipients of automatic EIPs don’t have a 2019 return on file (this has been confirmed by Philadelphia Legal Assistance Tax Clinic Supervising Attorney Lazlo Beh, who obtained transcripts for automatic EIP recipients – thank you, Lazlo!), there is no reason why these individuals can’t file a 2019 return via the nonfiler portal.  Once the IRS has this information, it can issue supplemental EIPs to these persons.

I can hear the voices saying, but the IRS doesn’t have the resources to do this in the midst of a pandemic.  Actually, what I am proposing doesn’t require significant additional resources.  The IRS has already committed to GAO that it will create a mechanism to match the returns coming through the nonfiler portal with the database of automatic EIP recipients, so it can create a file for BFS to issue 450,000 supplemental payments.  Once it has that mechanism or algorithm in place, it can run it each week to capture the new nonfiler portal filings and continue to issue supplemental payments through the end of the year. It is even more imperative to do this in 2020 because some of the children eligible in 2019 will have “aged out” and not qualify for a dependent EIP on the 2020 return.

Which brings me to the procedural due process aspects of this whole mess. In Weinstein v. Albright, a case involving passport denial and revocation because of child support arrearages in excess of $5,000, the Second Circuit stated

Pursuant to the due process clauses of the Fifth and Fourteenth Amendments, neither the states nor the federal government may deprive an individual of property or liberty without due process.  In order to prevail on a due process claim, a claimant must identify a constitutionally protected property or liberty interest and demonstrate that the government has deprived that party of the interest without due process of law.”

The court, quoting Mullane v. Central Hanover Bank & Trust Co., noted that due process at a minimum requires the government give “notice reasonably calculated, under all circumstances, to apprise interested parties of the pendency of the action and afford them an opportunity to present their objections.”  (Emphasis added.)

Let’s apply the above analysis to the situation at hand.  The class of persons affected – SSA/SSDI/RRB/SSI/VA benefits recipients – clearly have a property interest in the EIP.  To that end, consider RV v Mnuchin, a recent case filed in federal district court in Maryland. In RV v Mnuchin, the plaintiff alleges that the CARES Act violates the equal protection principles of the Fifth Amendment by prohibiting the EIP for US citizen children in a family where one or both parents have an ITIN and are undocumented immigrants. The plaintiffs in that case argued that the federal district court has jurisdiction under the Little Tucker Act, which is a jurisdictional statute that waives sovereign immunity protection and authorizes monetary claims founded upon the Constitution or any Act of Congress. In finding that the plaintiffs had jurisdiction and did not have to wait until filing a refund claim in 2021 to have the case heard the district court emphasized that CARES creates a statutory mandate for the receipt of the EIP:

The CARES Act provides for economic impact payments by creating a legal fiction that qualified individuals “overpaid” on previously filed taxes. The Act states “there shall be allowed a credit” of $1,200 for eligible individuals and $500 for qualifying children for this overpayment and that “[t]he Secretary shall, subject to the provisions of this title, refund or credit any overpayment attributable to this section as rapidly as possible.” 26 U.S. Code §§ 6428(a), (f)(3)(a) (emphasis added). The Act therefore requires the government to pay the fictional overpayment, and be quick about it. This indicates that 26 U.S. Code § 6428 is a money-mandating statute.

In fact, given the current circumstances – a global pandemic and resulting recession – they have a property interest in obtaining the advance EIP “as rapidly as possible”, as the law requires.  We must then turn our attention to whether the IRS’s notice of the deadline to receive the advance EIP for eligible children in 2020 was “notice reasonably calculated, under all circumstances” to give this population time to take action or raise objections before being deprived of their property interest.  The circumstances here include the target populations of the notice – the elderly and disabled, and the lowest income persons in the United States.  These populations are among those most likely not to have access to the internet, most likely to be isolated, and for whom the normal support systems (VITA and TCE) were literally inoperable. 

Under these circumstances, a 48 hour or four day digital notice does not meet minimum due process safeguards.  The IRS did not give these individuals adequate due process before it deprived them of their property interest in receiving the advance EIP for their children in 2020.  In fact, the government’s failure to provide adequate notice will permanently deprive some of these individuals of their property interest in the EIP because they will be ineligible to claim it on their 2020 returns.  Therefore, the IRS must take steps now to remedy that violation, before December 31, 2020.

Others have written posts about EIP issues pertaining to injured spouses and victims of domestic violence.  In 2008, according to TIGTA, the IRS processed 3.5 million Forms 1040X amended returns that were solely related to the ESP and also processed 316,000 injured spouse claims.  It is not clear why the IRS cannot address these taxpayers’ claims before December 31, 2020, and issue supplemental EIPs.  It was done in 2008, and it is even more urgent to get these funds out in 2020.  Yes, I know these are difficult times for the IRS, but they are also difficult times for taxpayers.  Unlike IRS employees, who are being paid even as they are unable to work, the people included in the supplemental payment population are among the most economically vulnerable in the United States.  So, on top of all the extraordinary measures the IRS has taken to date to deal with COVID-19, the people of the United States need it to undertake one more extraordinary measure and issue supplemental and replacement EIPs to automatic EIP recipients with children, injured spouses, and innocent spouses.    

The Uncertainty of Death and Taxes: Economic Stimulus Payments to Deceased Individuals

In today’s post Contributor Nina Olson explores the issue of stimulus payments being issued to deceased individuals. For a response to this post from Professor Bryan Camp, see here.

For the last month or so, media reports have highlighted the fact that Economic Impact Payments (EIPs) were sent to deceased taxpayers.   After weeks of silence, on May 6, 2020, the Internal Revenue Service added FAQ 10 to its coronavirus tips website, which follows:

Q10:  Does someone who has died qualify for the Payment?

A10:  No.  A Payment made to someone who died before receipt of the Payment should be returned to the IRS by following the instructions in the Q&A about repayments.  Return the entire Payment unless the Payment was made to joint filers and one spouse had not died before receipt of the Payment, in which case, you only need to return the portion of the Payment made on account of the decedent.  This amount will be $1,200 unless adjusted gross income exceeded $150,000. (Emphasis added)

Now, leaving aside that the FAQ does not tell you what you should do if your income exceeds $150,000 – Should you keep the money?  Return even more of the EIP? What? – the FAQ contains some very strange language.  First of all, it sounds admonishing.  This to survivors of loved ones who died in 2020, 2019, or 2018 and did nothing to receive this payment other than open the mail or check their bank accounts.  Second, it is not couched in the language of a legal requirement.  Instead, it says you “should” return the payment.  As in, you should eat your vegetables.

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As Bob Kamman pointed out in an earlier PT post this spring, I have something of a history with the issue of stimulus payments to decedents.  During a June 2008 Ways and Means Oversight Subcommittee hearing on the economic stimulus payments (ESPs) under the Economic Stimulus Act, Congressman Doggett asked me why these payments were going to deceased individuals, including his mother.  Up until that point I was blissfully ignorant of this occurrence, but my wonderful staff quickly located the IRS FAQ explaining that, in fact, such payments were absolutely legitimate.  Here is the language of the 2008 FAQ, updated on March 17, 2008.

Q. If an individual dies, what happens to his or her direct deposit or stimulus check?

A. Stimulus payments will be issued in the name of the individual eligible for payment on a filed 2007 income tax return or to the account designated by the individual on that return.  This includes situations where a person dies after filing a return or where the final 2007 income tax return was filed by a personal representative or surviving spouse.  Any issues or concerns involving a decedent’s filed return or the related stimulus payment should be addressed by the legal representative of the decedent’s estate.  See Publication 559 for more useful information for survivors and personal representatives.

So, in 2008, the IRS position was that ESPs would be correctly paid to a decedent based on information on the 2007 return.  The IRS also directed taxpayers to confer with the estate’s legal representative to figure out what to do with the payment – i.e., how to divide it up.

This spring, as EIPs were being issued, I began to get calls and emails from reporters and taxpayers, saying that EIPs were going to decedents.  Having this issue seared into my brain from the 2008 experience, I checked the 2020 statutory language and compared it to the 2008 language.  The statutes are identical in terms of who is an eligible individual.  Here’s the 2020 language from IRC § 6428(d)(1):

For purposes of this section, the term ‘eligible individual’ means any individual other than —
  (1) any nonresident alien individual,
  (2) any individual with respect to whom a deduction under section 151 is allowable to another taxpayer for a taxable year beginning in the calendar year in which the individual’s taxable year begins, and
  (3) an estate or trust.

How could the IRS come up with two completely contradictory interpretations of identical language in just 12 short years?  Is there no one in the IRS that remembers 2008?  Or did everyone just prefer to forget about it, since the President and Treasury Secretary said the funds should be returned. 

Of course, the government is entitled to change its mind and reverse its position.  But when it does so, due process insists that it explain this reversal. To date we have received no explanation, just this conclusory, precatory instruction.  This instruction – couched, in FAQ 10, in terms of “should” – is even more bizarre when one reads on to FAQ 26 on the same 2020 IRS webpage:

Q26.  I received an additional $500 payment in 2020 for my qualifying child.  However, he just turned 17.  Will I have to pay back the $500 next year when I file my 2020 tax return?

A26.  No, there is no provision in the law requiring repayment of a Payment.  When you file next year, you can claim additional credits on your 2020 tax return if you are eligible for them, for example if your child is born in 2020.  But, you won’t be required to repay any Payment when filing your 2020 tax return even if your qualifying child turns 17 in 2020 or your adjusted gross income increases in 2020 above the thresholds listed above.  [Emphasis added]

Here the IRS is acknowledging that the law does not require any repayment of an EIP.  This is correct – IRC § 6428(e)(1) states the EIP credit claimed on 2020 returns “shall be reduced” by the amount of the advance EIPs “but not below zero”.  The FAQ is also saying it is perfectly okay for the EIP to go someone who in 2020 will not be an “eligible individual.” 

This is so, apparently, only if you are living in 2020 after the EIP was issued.  Somehow the IRS has decided that, without any statutory justification, it alone can pick winners and losers.  So a 17 year old’s parents can keep the $500, or a person who made less than $75,000 in 2018 or 2019 can keep the $1,200 despite making $200,000 in 2020, but the surviving spouse of a person who died in 2019 and who has two young children “should” return the $1,200.   

The phrasing of FAQ 10 gets weirder as one applies it to different scenarios.  By saying the payment should be returned if the person died before receipt of the EIP, it includes persons dying in 2020 whose personal representatives will be filing final individual tax returns on their behalf in 2021.  This means, if someone died on March 1, 2020 of Covid-19, and the EIP was direct deposited into that person’s account on April 15, 2020, the grieving surviving spouse should repay the $1,200.  Really?  This is just downright cruel. 

Finally, FAQ 10 ignores a longtime provision in the Internal Revenue Code for “qualifying widows and widowers.”  IRC § 2(a) provides a surviving spouse who has not remarried with whom a dependent child has resided for the entire year and who has provided more than half the cost of maintaining that home, may file as married filing jointly in the two years following the death of the spouse.  This statute represents Congress’ recognition that the death of a spouse or parent can have a devastating impact on one’s financial wellbeing, and that should be taken into account when calculating the household’s tax burden.  Yet according to FAQ 10, these qualifying widows/widowers must repay the $1,200 EIP for the deceased spouse.

What is the basis of any of these choices in the legislation?  Answer: the IRS has articulated none.  In fact, there is even more justification to make these payments to survivors of decedents in 2020 than there was in 2008 – we are in the midst of a pandemic with unprecedented levels of unemployment. 

One final point.  Let’s say the IRS finally produces some sort of legal justification for its 180 degree turn from 2008.  (Let’s also hope there is a legal opinion somewhere on this point and someday it will be made public.)  What is it going to do to recover all these EIPs that have been issued to deceased individuals?  Other than shaming grieving people into giving back this money, it must make a determination that it can use the deficiency process to obtain an assessment of this amount or refer the case to the Department of Justice to bring an erroneous refund suit under IRC § 7405.  Do you think the Tax Division of the Department of Justice will bring a case for $1,200 against a grieving widow/widower of a deceased COVID-19 victim?  (You can find some previous PT discussions of erroneous refunds here and here.)

A word about deficiency procedures and the EIP.  The CARES Act provides “there shall be allowed as a credit against tax … for the first taxable year beginning in 2020 ….”  Consistent with this language, I understand the IRS has programmed its systems to credit the advance EIP against the taxpayer’s 2020 1040 tax module.  (As Carl Smith discussed here a few weeks ago, it is unclear for bankruptcy purposes to which year the credit applies – the year in which it was paid or the year in which it is claimed on the tax return.)

If a taxpayer has died in 2018 or 2019 and receives the EIP, there is no one for whom a Form 1040 can be filed, so against what can the IRS assess a deficiency?  If the taxpayer died in 2020, then there may be a final Form 1040 return filing requirement for the decedent.  In that case, under IRC § 6428, the math goes like this: subtract the amount of EIP paid in 2020 from the amount of EIP the taxpayer is eligible for based on 2020 circumstances, but do not go below zero.  Here that would be zero – 1200 = -1200 but don’t go below zero, so = zero.  Where is the deficiency?

At any rate, all of this is completely avoidable.  Instead of putting more burden on taxpayers who are already anxious about their economic and physical health, today and in the future, the IRS could have adopted the approach of the 2008 FAQs, and added, “If you would like to return the funds, please send them [here].”  Then, just as in 2008, the survivors who didn’t need the funds could (and did) return them. But those who needed the funds were not made to feel like criminals if they retained them.

What is this thing called … Portal?

In today’s post Contributor Nina Olson offers views on what happens when taxpayers use the portal.

What is this thing called … portal?
This funny thing called … portal?
Just who can solve this mystery?
Why should it make a fool of me?

With apologies to Cole Porter, over the last two weeks, a few of us at Procedurally Taxing have been noodling over what, precisely, is this thing the IRS has created called the “non-filer tool.”  I have been insisting that the “tool” actually creates and files a tax return on behalf of the taxpayer, while Les, for various reasons, was holding out for it being something akin to a tentative application for refund similar to Form 1139.  After declaring the entire discussion was giving him a headache, Les finally threw in the towel, and agreed that the “non-filer tool” is a return. But then Les, Keith and I had another conversation and now we are thoroughly confused.  This blog is an attempt to identify and explore the sources of that confusion.  We welcome comments and observations.

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The Non-filer Tool:  A Creature with Many Names

According to the irs.gov, the full name of this “tool” is “Non-Filers: Enter Payment Info Here tool.”  Before I get into the analysis of why it may be a return, and the consequences of that status, let’s look at how the IRS has described this tool on its website:

What to Expect

Follow these steps in order to provide your information:


• Create an account by providing your email address and phone number; and establishing a user ID and password.
• You will be directed to a screen where you will input your filing status (Single or Married filing jointly) and personal information.
Note: Make sure you have a valid Social Security number for you (and your spouse if you were married at the end of 2019) unless you are filing “Married Filing Jointly” with a 2019 member of the military. Make sure you have a valid Social Security number or Adoption Taxpayer Identification Number for each dependent you want to claim for the Economic Impact Payment.
• Check the “box” if someone can claim you as a dependent or your spouse as a dependent.
• Complete your bank information (otherwise we will send you a check).
• You will be directed to another screen where you will enter personal information to verify yourself. Simply follow the instructions. You will need your driver’s license (or state-issued ID) information. If you don’t have one, leave it blank.

You will receive an e-mail from Customer Service at Free File Fillable Forms that either acknowledges you have successfully submitted your information, or that tells you there is a problem and how to correct it. Free File Fillable forms will use the information to automatically complete a Form 1040 and transmit it to the IRS to compute and send you a payment.

Now, note the last paragraph of this website excerpt: it tells the taxpayer that Free Fillable Forms will acknowledge the successful submission of information and it “will use the information to automatically complete a Form 1040 and transmit it to the IRS to compute” and then send a payment.  [Emphasis added.]

Why is it the IRS website uses all sorts of words – “tool”, “submitted your information” “register” – as if filling in this tool is some innocuous act?  If this document is actually a Form 1040, submitted under penalties of perjury, it will trigger the statutory period of limitations for assessing tax and possible penalties; if it is not a tax return, the taxpayer remains fully exposed for later assessment of tax and potential failure to file penalties.

The first clue about what the “tool” might be came in the Treasury announcement of the “tool”, where it was described as a “web portal where Americans who did not file a tax return in 2018 or 2019 can submit basic personal information to the IRS so that they can receive payments.” [Emphasis added.]  So now the “tool” is a portal.  But what is it a portal to?  The basic personal information provided by the taxpayer has to enter the Return Processing Pipeline (RPP) at some point, or payments won’t be issued.  Recall that in 2008 the IRS required nonfilers claiming the Economic Stimulus Payment to complete a Form 1040EZ, and IRS e-filing systems required those returns to report at least $1.00 of Adjusted Gross Income.  (See my 2008 congressional testimony on this point here.)

At any rate, we’ve learned that the portal is actually just an interface on top of Free Fillable Forms, the fillable 1040 that the Free File Alliance and Intuit created in response to my advocacy for a  digital analog of the paper Form 1040 that could be prepared and e-filed for free, regardless of the taxpayer’s income.  (See discussion starting on page 236 here.)  Now, I am one of the few human beings on the planet who has used Free Fillable Forms since its inception to file my income tax return. (I hate the idea of having to pay for a software package for the privilege of filing and paying my taxes.)  So I am very familiar with the product that is lurking behind the non-filer portal/interface.

The second clue as to the portal’s identity was the IRS language quoted above, saying Free Fillable Forms will “automatically complete a Form 1040” and transmit it on to the IRS.  Hmmm …. So was this just taking the information, putting it into the Form 1040 in order to get it in a format that could be processed by the IRS, or was it creating an actual return?   The IRS is silent on this point.  In all its commendable efforts of issuing guidance and FAQs about carryback of NOLs and other items impacting wealthy and corporate taxpayers, the IRS has not explained to the most vulnerable taxpayers among us the actual legal status and significance of using the portal.

The Portal and the Beard Test

In Beard v. Commissioner, the Tax Court outlined the basic requirements of what constitutes a valid return for statute of limitations purposes:

“First, there must be sufficient data to calculate tax liability; second, the document must purport to be a return; third, there must be an honest and reasonable attempt to satisfy the requirements of the tax law; and fourth, the taxpayer must execute the return under penalties of perjury.”

Let’s apply the Beard test to the non-filer portal. 

Step 1:  Sufficient data to calculate tax liability:  According to the IRS, if the information is successfully submitted, the IRS “will compute and then send a payment.”  Here’s the welcome screen to the Free Fillable Forms portal:

Both the IRS and Free Fillable Forms (FFF) websites lay out the criteria for using the portal in negative terms.  For example, you cannot use the portal if your 2019 gross income exceeds $12,200 ($24,400 if married filing jointly).  You cannot use the portal if “other reasons” require you to file a 2019 Form 1040.  So according to the IRS and FFF, if you meet these requirements and fill out the portal, there will be sufficient data to calculate … what?  The tax liability, or the amount of the EIP?  Since the EIP is contingent on filing status and Adjusted Gross Income, among other things, the IRS has to compute your taxable income (and tax liability) for 2019 in order to calculate the amount of the payment. 

So it seems to me the portal might meet Step 1 of the Beard test.  What’s holding me back?  That language regarding “other reasons” requiring you to file a 2019 Form 1040.  This statement implies that the IRS believes the document filed through the portal is not the 2019 individual income tax return.  On the other hand, as noted above, the IRS’s website says “Free File Fillable forms will use the information to automatically complete a Form 1040.”  Is the Form 1040 a tax return?  Only if it meets the Beard requirements.  Arghh … this circular reasoning is giving me a headache too.

What might some of those “other reasons” be, for filing a 2019 tax return? Well, you may have income below the filing threshold but have qualifying children for purposes of claiming the EITC, or you qualify for the childless worker EITC.  Or you may have $10,000 in self-employment income.   Apparently, you can’t use the portal, because you have to file a Schedule C and then compute self-employment (SE) tax.  The IRS hasn’t been very clear about this, and I doubt low income folks are pouring over every FAQ on the website.   If you tried to use the portal, as you’ll see later in this blog, there’s nothing that asks you about your income.  So conceivably, if your self-employment income is below the AGI caps, you could just file through the portal and not pay your SE tax.  Would that mean it isn’t a return?  I think it could still be considered a return, despite the website language.  After all, many low income self-employed taxpayers don’t complete Schedule SE when they file a return with a Schedule C.  That’s why IRS has summary assessment authority under IRC § 6213(g)(2)(G) to summarily compute and assess SE tax on returns claiming EITC.  At any rate, even if an individual wanted to identify SE income on the portal, there is no way to do so.  Similarly, many other taxpayers who file non-portal Forms 1040 leave off Non-employee Compensation reported on Form 1099-MISC and the IRS proposes adjustments to income and assesses additional tax, including SE tax, through its underreporter program.  In both of those situations, you still have an original (inaccurate) return.

Step 2: The document must purport to be a returnOnce you hit the “get started” button and successfully create an account with a password, you get to the following screen titled Step 1, Fill Out Your Tax Forms. 

Although FFF is just a software program, with this language a user of the program could reasonably conclude that the information input into these fields is being used to prepare a tax return.  Note that nowhere on this form is the taxpayer asked what his income is.  If all the IRS needed was a few bits of information, it could have created a different form that wasn’t labelled a return.  By having the “portal filing” going through FFF, I believe the file moves through the entire Return Processing Pipeline.  If you want to take a high-level look at the steps included in that journey, see the Taxpayer Advocate Service’s Taxpayer Roadmap.  The journey includes math error checks, Identity theft filters, the dependent database (if children are included) and pre-refund wage verification. This latter step includes a process whereby the IRS checks a refund return against the Forms W-2 it has received to date.  It seems to me the entire point of using FFF behind the portal is to get the “portal filings” to go through these error and fraud detection filters.  Otherwise the IRS would be paying out billions to identity thieves and scam artists.

Note that the next tab says: Step 2: E-file Your Tax Forms.  It really would be difficult at this point to not think you were filing a return, notwithstanding the confusing and conflicting website language about “other reasons” for filing a 2019 return and FFF preparing a Form 1040 for you.

The IRS might hang its hat on a “purpose-based” analysis – that is, the purpose of this form is to apply or register for the EIP rather than to report liability under subtitle A.  If that is its reasoning, then it needs to make it abundantly clear, because all labeling on this portal militates against that argument, especially as we get to the product at the end of the submission.

Step 3: There must be an honest and reasonable attempt to satisfy the requirements of the tax law.  This step in the Beard analysis has been the subject of a great deal of litigation.  Les discussed this requirement in his blog about New Capital Fire v. Commissioner, where the Tax Court found the taxpayer only failed to meet this test if the purported return was “false or fraudulent with intent to evade tax.”  For our purposes, I think we can say that because the Treasury Department and IRS are practically begging taxpayers with no filing requirement to use this portal, and because it was developed in close partnership and consultation with Treasury and the IRS, if the taxpayer provides the information requested on these screens, and believes she meets the requirements for use of the nonfiling portal, one could easily conclude there was an honest and reasonable attempt to satisfy the requirements of the tax law.

Step 4:  The taxpayer must execute the return under penalties of perjury.  Well, this is an easy one to meet.  After the taxpayer fills out Personal Verification and E-signature sections shown above, she can click the button to e-file.  And look what pops up! A jurat!

It seems to me the portal meets 3.5 to 3.75 of the four Beard requirements.  The confusion is created by the IRS’s (and FFF’s) conflicting website language, as to whether the portal submission purports to be a return.  Fortunately, the site itself has some pretty conclusive evidence, which was provided us by an enterprising LITC attorney, who managed to create a dummy return and make it all the way through the nonfiling portal, answering questions, and saving and printing (but not e-filing) the following document.

I don’t know — if it walks like a duck, and quacks like a duck, maybe it actually is a duck.

We Need More Transparency on This Question.

Some additional thoughts:

Despite all my efforts to think through this thing called “Portal”, I think I’ve acquired Les’ headache.  I have no doubt that somewhere in the IRS, Chief Counsel has opined on what this thing is.  I hope it isn’t in some kind of “white paper” that Counsel believes is exempt from disclosure.  I hope we will see the reasoning some day soon in the form of a PMTA or email required to be disclosed under a settlement agreement with Tax Analysts.  For a discussion of Chief Counsel transparency, see here.

To add to the confusion, an IRS notice issued April 24th, 2020 states:

“If they [SSI and VA recipients] have children and aren’t required to file a tax return, both groups are urged to use the Non-Filers tool as soon as possible before the May 5 deadline. Once the deadline passes and processing begins on the $1,200 payment, they will not be eligible to use the Non-Filers tool to add eligible children. Their payment will be $1,200 and, by law, the additional $500 per eligible child amount would be paid in association with a return filing for tax year 2020.”

Further on, the notice says:

“For SSA/RRB beneficiaries who don’t normally file a tax return and have a child but did not register on the IRS Non-Filers tool by April 22, they will still receive their automatic $1,200 beginning next week. Given the deadline has passed, by law, the additional $500 per eligible child amount would be paid in association with filing a tax return for 2020. This group can no longer use the Non-Filers tool to add eligible children.”

What does this language imply?  First of all, there is that really weird “did not register” language in the quote above.  “Register” by filing a form that is a Form 1040, under penalties of perjury?  Huh?  What is that?

Second, I don’t see why a person can’t file a return for 2019 claiming qualifying children after either the April 22nd or May 5th deadline.  The IRS has peremptorily stated this prohibition is required “by law” but I have seen no published guidance, no explanatory FAQ, and no PMTA on this point.  On the most basic questions pertaining to the most vulnerable taxpayers, the IRS has not been transparent.

I am wondering whether, in order to generate the automatic EIPs to SSA/SSDI/SSI/VA beneficiaries, the IRS is secretly creating returns.  If that is the case, I would understand it saying you can’t efile a 2019 return after automatically processing the EIP.  The IRS has long maintained that once you e-file a return, you cannot e-file another one.  The system will reject it.  Thus, victims of identity theft must file a paper return if the identify thief has e-filed before them.

But the IRS isn’t just saying you can’t e-file a return.  It is saying, without any transparent legal analysis or explanation, you can’t file a 2019 return at all in order to claim the $500 EIP for qualifying children; instead you much wait until 2020.  Well, if the nonfiler portal is just a “registration” of some sort, then you should be able to file a paper 2019 Form 1040 as an original return and be issued an additional EIP for your children.  You just need to do it in time for the IRS to issue the advanced EIP before December 31, 2020.  That’s the only statutory deadline in the CARES Act.  Alternatively, if the nonfiler portal actually generates a return under Beard, you can file a superseding 2019 return before July 15, 2020, the filing deadline, as Nancy Rossner discussed in a recent PT post.

My personal hunch is the IRS is swamped and really worried about how it will dig itself out of all of this.  It didn’t want to issue automatic payments; recall it initially stated  that SSA and RRB and SSI and VA folks would have to file returns, just like in 2008.  It doesn’t want to have to process supplemental advanced EIPs.  I get that.  It is a lot of work, when the IRS is already reeling from the impact of the pandemic.  But so are the low income individuals and families of the United States.  They shouldn’t have to wait until 2021 to get the additional EIP for their children.  And that doesn’t depend on whether the portal is a return or … a mystery.

What I worry about when I think about the IRS and the CARES Act – Part III

Nina E. Olson returns with further thoughts on the CARES Act.

I wasn’t planning to write another post about the CARES Act this week, but new things have popped up that I am now worrying about.  We’ve seen a dizzying about face by Treasury on a crucial issue.  Earlier this week, Bob Kamman, in a comment to Part I of this blog series, noted the IRS had issued a news release with the following statement:

People who typically do not file a tax return will need to file a simple tax return to receive an economic impact payment. Low-income taxpayers, senior citizens, Social Security recipients, some veterans and individuals with disabilities who are otherwise not required to file a tax return will not owe tax.

The IRS statement caused a huge uproar, causing members of Congress to write the Secretary and urging a reversal of this position.  It did not take long for that reversal to come:

The U.S. Department of the Treasury and the Internal Revenue Service today announced that Social Security beneficiaries who are not typically required to file tax returns will not need to file an abbreviated tax return to receive an Economic Impact Payment. Instead, payments will be automatically deposited into their bank accounts. 

We can now all breathe a sigh of relief, at least with respect to this issue.  But because the IRS’s original position, that Social Security beneficiaries with little or no income were going to have to file “simple” returns, seems to fly in the face of provisions in the CARES Act, I think it is important to go through the analysis of why the IRS even took this position in the first place, if only so we don’t have to go through this again.

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I have no first-hand knowledge of the deliberations (I’m still under the one-year prohibition against contacting IRS for purposes of seeking to influence. . . ). But some possible explanations for the IRS’s original position have occurred to me.

First, there is the IRS culture itself.  It is a very conservative, enforcement-minded agency that tilts toward preserving the status quo.  In an environment where every news cycle brings the Secretary making yet another promise – we’ll get payments in 2 weeks!  We’ll create a new app for deposit account information! – the IRS must be reeling.  In that context, it makes sense the agency response to Economic Stimulus legislation is look back to what was done before, in 2008.

What the IRS failed to factor in, however, is that 2020 is not 2008!  We are in the midst of a pandemic that threatens not only individuals’ economic health but also their physical health.  People are ordered not to go outside, with few exceptions, and the entities that assist low income taxpayers with their filing requirements – TCE, VITA – are shuttered.  IRS employees are not available to assist either, and digital services, for the elderly and low income population, are not a very good solution. 

The IRS either failed to recognize the impact of the difference between 2008 and 2020 or recognized it but decided it was better to put the burden on vulnerable taxpayers rather than a risk a different approach.  The risks inherent in the IRS’s archaic technology infrastructure reinforce the IRS’s innate resistance to change.  If a single mistake is made in programming a new system, it might bring down the filing system or lock employees out of most major databases (this happened in April 2018).  Worse, it could create a back door for hackers.  From that perspective, it is better to go with what you know than what you don’t know.

The IRS’s Enforcement Mindset Undermines a Focus on Taxpayers’ Circumstances

The IRS’s conservative approach gets additional justification from the IRS’s enforcement mindset.  What if someone gets more advance recovery rebate than they are entitled to? Of course, Congress has already contemplated and accepted that eventuality, when it authorized the IRS to use 2018 tax return information if the 2019 return isn’t filed.  And section 6428(e)(1) provides there will be no recapture below zero. 

But still, it appears the IRS was worried that it cannot tell whether a low income nonfiling SSA/RRB taxpayer’s filing status is single, head of household, married filing jointly, or married filing separately.  It also cannot tell whether these taxpayers have any children qualifying for the extra stimulus payment of $500.  As a result, it may have believed it cannot accurately calculate the ESP amount because the AGI limitations for the payments are based on filing status.  Therefore, it may have reasoned, the IRS should require these taxpayers to file an ESP-Only return to get their ESP. 

It is ironic that the IRS would insist on a return to know the filing status when under its own procedures elsewhere it is perfectly comfortable assuming a taxpayer’s filing status in the absence of a return.  Under IRC § 6020(b), the Secretary has the authority, where a taxpayer has failed to file a required return, to make a return “from his own knowledge and from such information as he can obtain through testimony or otherwise.”  In administering this provision, the IRS generally assumes a filing status of single, no dependents; it relies on income reported on W2s, 1099s and other schedules, and it computes taxes owed based on those amounts.

The CARES Act , however, authorizes the Secretary of the Treasury to issue a payment to below-filing-threshold Social Security and Railroad Retirement beneficiaries without a tax return.  The section may not be perfectly drafted, but the gist is clear enough.  Let’s walk through section 6428(f) as enacted by the CARES Act:

Step 1:  Section 6428(f)(1) provides that in making an eligibility determination, the Secretary shall look to the 2019 tax year and treat the taxpayer as having made a tax payment equal to the advanced refund amount.

Step 2: Section 6428(f)(2) defines the advance refund amount as the amount the individual would be entitled to if the credit had been allowed in the tax year at issue (e.g., 2019).

Step 3: Section 6428(f)(3)(A) provides the Secretary shall refund or credit the overpayment created by the advance refund amount as rapidly as possible.

Step 4:  Section 6428(f)(5)(A) provides that in making the refund or credit “determination” as rapidly as possible, if the individual has not filed a 2019 return,  the Secretary may use the 2018 return (i.e., 2018 would be the tax year at issue).

Step 5:  Section 6428(f)(5)(B) provides that in making the refund or credit “determination” as rapidly as possible, if the individual has not filed a 2018 return either, then the Secretary may “use information with respect to such individual for calendar year 2019 provided in – (i) Form SSA-1099, Social Security Benefit Statement, or (ii) Form RRB-1099, Social Security Equivalent Benefit Statement.”

Now, this provision clearly implies, if not expressly states, that Congress intended the Secretary to use the information on forms SSA-1099 and RRB-1099 to calculate the amount of the rebate for below-filing-threshold nonfilers.  There is no requirement that a return be filed to make that calculation. 

At this point in the filing season, the IRS has a ton of information about taxpayers’ income.  At least with respect to the 2018 tax year, it has Forms W-2, 1099 series, and K-1 information for taxpayers.  For 2019 it has likely received almost all W-2 information and most 1099-Misc-Nonemployee Compensation returns.  I can hear IRS enforcement personnel saying, “But we can’t just use this information to measure eligibility; we don’t know about cash earnings” (the “shadow economy”).  Well, cash earnings are a problem for all taxpayers.  A taxpayer who files a return and reports W-2 income is just as likely to have unreported cash earnings as a taxpayer who receives SSA benefits and has no other reported income.  So there is no basis to worry about cash earnings with respect to nonfiling SSA/RRB recipients alone.  It is a potential problem with everyone, filer or nonfiler.  (I think this is what Donald Rumsfeld called a “known unknown.”)

Understanding the Characteristics of the Low Income Nonfiling SSA/RRB Population Addresses Overpayment Concerns

What, exactly, is the IRS worried about with these SSA nonfilers?  For the most part, SSA recipients have so little income that their filing status won’t matter – their income is below the AGI thresholds for all filing statuses.  Look at the SSA data:

  • Social Security is the major source of income for most of the elderly, and comprises 33 percent of income for all elderly persons.
  • For 50 percent of married couples and 70 percent of unmarried persons, Social Security Old Age benefits constitute 50 percent or more of their income.
  • For 21 percent of married couples and about 45 percent of unmarried persons, Social Security Old Age benefits constitute 90 percent or more of their income.

So let’s just do the math.  Social Security says the average monthly benefit in 2019 for retired persons was $1,471, or $17,652 annually.  If Social Security constituted 50 percent of that person’s income, the AGI would be $35,304.  If it constituted 90 percent of the individual’s income, the AGI is $19,613.  Both are well below the $75,000 AGI beginning phaseout threshold.

The average monthly benefit in 2019 for a disabled person was $1,236.  Note that disability benefits are means-tested.  That is, in 2020, if you make more than $1,260 per month (over a 36 month period), your benefits will cease.  These amounts are well below the AGI threshold for all filing statuses under the CARES Act. 

Thus, the IRS could easily calculate a $1200 benefit for each person receiving Social Security Old Age and Disability benefits.  The only thing we have to worry about here is whether the SSA recipients have dependent children.  If you receive Social Security and have even a little earned income, you are already probably filing in order to get the EITC and CTC.  We are left with a very small group of SSA recipients who have no other income at all and have children.  Given the urgency of getting some stimulus into the economy and into the hands of folks, it seems to me the best approach would be to automatically send the $1200 to each of these SSA nonfilers and then ask them to file a return to get the qualifying child portion of the stimulus.  The IRS return processing pipeline can automatically adjust for the amount of stimulus already paid out via math error authority.

Don’t Forget the Vets and Supplemental Security Income Recipients

This same approach can be applied to recipients of Veterans benefits, as well as recipients of Supplemental Security Income (SSI).  Once the IRS does the programming to accommodate automatic SSA/RRB payments, it could adopt the “no return necessary” approach for these additional populations.  There is no requirement in the CARES Act for a return – the IRS could exercise its administrative discretion here.  On the other hand, if the IRS believes it needs statutory authorization for automatic payments to beneficiaries of VA and SSI, then it should request it, ASAP.

Regarding SSI, although the IRS does not receive a 1099 reporting those payments, the Social Security Administration does know who gets how much SSI, and IRS could enter into an agreement with SSA to obtain that information in order to do matching.  The IRS has not done so previously, and I cannot tell whether SSA is reluctant to share that information or the IRS is not wanting to ask.  This is where the Administration should step in and make sure the agencies work with each other.  The goal is to get these payments out as quickly as possible to the neediest in our population.  As I noted in Part 2 of this blog series, SSI recipients are some of the most vulnerable among us.

Going Forward: What can we learn from this?

Congress knew how confusing it was for low income populations during the 2008 filing season, when they had to file ESP-only returns.  In the CARES Act, it tried to remedy the flaw in the 2008 program with the language discussed above.  I am very relieved that Treasury and the IRS have reversed course and adopted the return-free approach.  This saves taxpayers and the IRS a lot of anxiety, phone calls, follow ups, and confusion, at a time when no one needs any of that.  I realize it may require more programming for the IRS to accomplish this, but what the IRS builds today can be a foundation for future payments and other initiatives.  It is using its data in a taxpayer-friendly way, not just to assess taxes but also to assist taxpayers.

What is disturbing about this affair is what it tells us about the agency – how, being under stress, it reverted to the past and didn’t recognize how doing so imposes unacceptable burdens on vulnerable taxpayers.  We will all have opportunity to reflect on this as we get back to normal, someday, and can focus on the IRS modernization, customer service, and training plans required by the Taxpayer First Act.

Part II: What I Worry About When I Think About the IRS and the CARES Act

Contributor Nina E. Olson returns with further thoughts on the CARES Act.

Update:  As this blog went to press, the IRS released a statement noting that “People who typically do not file a tax return will need to file a simple tax return to receive an economic impact payment.”  This undermines one of the improvements over 2008 that I identify in the following post.  I fully understand the challenges of programming in the middle of the filing season, and that such programming and coordination between the Social Security Administration, IRS, and Bureau of Fiscal Services would delay payments to this part of the population.  It seems to me a delay in payments for this group would be more than offset by the fact that this population would actually receive the payments.  We know from 2008 that most of the taxpayers in this group never filed the “simple” tax return at all.

Some Silver Linings in the CARES Act: Treatment of Social Security and Railroad Retirement Beneficiaries

In 2008, the Economic Stimulus Act defined ESP eligible taxpayers as those with at least $3,000 of “qualifying income,” which included Social Security benefits.  Taxpayers did not need to have taxable income in order to receive the ESP.  However, all taxpayers were required to file a tax return in order for the IRS to issue the ESP.  In 2008, in addition to mailing over 130 million notices to TY 2006 filers, the IRS mailed information packages to 20.5 million people who received Social Security or Veterans benefits and who did not file a TY 2006 return, reminding them to file a 2007 return in order to claim the ESP.  These returns were known as ESP-only returns.

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IRS programming enabled the issuance of the 2008 ESP payment automatically upon e-filing of the tax return.  However, the IRS systems required at least $1.00 of adjusted gross income (AGI) to be processed.  Many people receiving Social Security and other benefits did not have any AGI; the IRS advised them to write in $1.00 of AGI on their “ESP-only” returns, and Treasury issued guidance that such an entry would not violate the “penalties of perjury” signing statement on the return.  For many retirees, the small amount of the refund may not have justified the additional step of return filing; others may have found it confusing.  As of June 7, 2008, the IRS had received 7.7 million ESP-only returns out of a projected 20.5 million eligible.

With the CARES Act, the good news is that Social Security and Railroad Retirement beneficiaries whose income is below the filing threshold will no longer be required to file an ESP-only return. Instead, as I recommended in my June 19, 2008 testimony before the House Ways and Means Subcommittees on Social Security and Oversight, Congress has instructed the Secretary to issue the advance recovery rebates to “any account to which the payer authorized, on or after January 1, 2018, the delivery of taxes under this title or a Federal payment (as defined in Section 3332 of Title 31 United States Code.”  31 USC 3332 requires all Federal payments made after January 1, 1999 to be electronic funds transfers (EFT), subject to waivers.  “Federal payments” includes “benefit payments.”  31 USC 3332(j)(3)(C).  (Interestingly, tax refunds and payments are excluded from the EFT requirement.)  Social Security recipients are now required to utilize EFT, either via a bank account or a low-fee debit card, known as Direct Express.

As it did in 2008, the IRS can utilize SSA/RRB data to identify nonfilers who receive SSA/RRB payments and have income below the filing threshold.  But unlike 2008, in 2020 these individuals can receive their advance recovery rebate in the same manner they receive their SSA/RRB benefits.  They do not need to file a return to receive the rebate.  This is a very taxpayer-friendly change, and it also reduces the IRS workload significantly.  (Actually, it is the Bureau of Fiscal Services that processes government payments, including tax refunds and Social Security/Railroad Retirement benefits.  The relevant agencies provide the information to BFS, which then disburses funds – either in the form of EFT or paper checks.)

More Good News:  the CARES Act Refund Offset Provisions

In my 2008 testimony I discussed the problem of refund offsets as it applied to the advanced ESP.  If a taxpayer has an outstanding tax liability from prior years, that refund will automatically be offset against that debt.  IRC section 6402(a).  Taxpayers experiencing economic hardship can request an override (or bypass) of the offset and, if eligible, will receive a manual direct deposit of funds.  (See IRM 21.4.6.5.5 and 21.4.6.5.11.1.)  However, in 2008, despite zealous advocacy by the Taxpayer Advocate Service, the IRS did not allow either manual refunds or offset bypass refunds of the ESP in cases of economic hardship, except where the taxpayer was a victim of identity theft or refund fraud.  The IRS did not publicize this decision, which increased the number of angry calls from taxpayers wondering where their ESP payment was.  This decision was inexplicable, given the reason for the ESP was the overwhelming economic crisis of 2008.

Fortunately, saner minds have intervened with the 2020 legislation, which explicitly states that the advanced recovery rebate shall not be offset against outstanding federal tax debt.  The provision in the 2008 legislation barring offsets for federal debt under the Treasury Offset Program (TOP, administered by BFS) is carried over to the 2020 legislation.  It appears offsets will be permitted child support arrearages.

But, But, But:  Some omissions in the legislation

Notwithstanding these improvements, there are some significant omissions in the current legislation.  First, for some reason, the legislation omits mention of benefits paid by the Veterans Administration (VA), including disability payments.  In 2008 the IRS worked with the VA in the same manner it worked with Social Security Administration (SSA), and identified those nonfiling VA beneficiaries whose income was below the filing threshold.  Yet the VA is not included in the matching program established for SSA/RRB beneficiaries under the 2020 CARES Act.  Thus, it appears these VA beneficiaries will have to file an ESP-only return, as in 2008, in order to receive the advance recovery rebate,.  This is an unnecessary burden on a vulnerable population as well as on an over-stretched IRS.  I hope Congress will correct this oversight in supplemental legislation. 

Second, a similar omission exists for Supplemental Security Income (SSI) recipients – these are folks who are aged, blind, or disabled and have little or no income.  The program is funded by general tax revenues and provides cash to meet the most basic needs of food, clothing and shelter.  SSI recipients are among the most vulnerable populations in the US – and they are among the most at-risk for complications from coronavirus infection.  The matching program established for SSA/RRB beneficiaries could easily apply to these folks.

And then there is the group of taxpayers whose income is below filing threshold but who do not yet receive SSA or RRB.  How are these taxpayers to receive the advanced recovery rebate?  Will they have to file ESP-only returns, as in 2008?  How will the IRS let these taxpayers know about the filing requirement?  Who will help them with return preparation in this coronavirus-impacted environment?

More Buts:  Some implementation issues

New IRC § 6428(f)(6) requires the Secretary to send a notice to taxpayers within 15 days of issuing the advance recovery rebate, informing the taxpayer of the amount of the rebate, the method by which it was paid, and providing an IRS phone number the taxpayer can call in case the payment is not received.  This notice is to be sent to the taxpayer’s last known address (LKA) per IRC § 6212.  The LKA is the address on the taxpayer’s most recently filed and “properly processed” return, unless the IRS has been given “clear and concise notification” of a different address.  Rev. Proc. 2010-16.  Now, the IRS cuts itself a lot of slack on what it considers a “properly processed” return or clear and concise notification.  It gives itself 45 days from proper processing to update the taxpayer’s address on record – but for returns that are filed before the due date of the return, the 45-day processing period begins on the due date of the return!  And during filing season it will take even longer to update the address of record based on new return filings:

Due to the high volume of returns received during the filing season, if a taxpayer provides new address information on a Form 1040, 1040-A, 1040-EZ, 1040 (NR), 1040 (PR), 1040-SS, or 1040-X that is received in processible form by the Service after February 14 and before June 1, the return will be considered properly processed on July 16.

What does all this mean for the 2020 filing season and ESP issuance?  Well, first, the IRS will have until August 30th to update the address on any 2019 return filed before the extended due date of July 15, 2020.  Second, if taxpayers or nonfilers wanted to update their LKA orally, it is doubtful  they will get through on the reduced-capacity phone lines or that anyone would be at the IRS sites to process faxed or mailed Forms 8822, Change of Address.  Third, taxpayers whose returns are held up in processing – for identity theft, or questionable refund review – won’t have their addresses updated until 45 days after their processing issues are resolved – which can take months.  So it is very likely that tens of millions of ESP notices will go to old taxpayer addresses.  Which means the IRS should brace itself for a lot of phone calls from taxpayers.

What address can the IRS use for nonfilers who receive SSA/RRB benefits?  The address the Social Security Administration has on file is not the IRS’s last known address.  Any address the IRS has on file for these taxpayers is likely years if not decades old.  The same issue arises, to a lesser extent, where the advance recovery rebate is calculated based on the 2018 return.  As noted above, the taxpayer may have moved since the 2018 return was filed.  Moreover, the bank account to which a 2018 refund was paid may be closed, further delaying the stimulus payment as the IRS is notified by the bank and then issues a paper check.

Finally, what happens with returns that are filed with a balance due?  The IRS will not have financial account information with which to make an EFT.  Will the IRS issue a paper check?  Will it use the 2018 account if that tax year involved a direct deposit refund?  By establishing January 1, 2018 as the date to begin determining the deposit account, the legislation appears to contemplate this approach.

Many low income taxpayers who receive sizable refunds or who are unbanked utilize Refund Anticipation Loan (RAL) or Refund Anticipation Check (RAC) products, which create a temporary bank account in the taxpayer’s name so the taxpayer’s refund can be paid into it.  The taxpayer does not control this account and thus any TSP paid into this account would not reach the taxpayer.  In 2008, the IRS used the RAL/RAC indicator on a tax return to trigger the issuance of a paper check to these taxpayers, thereby delaying receipt of the ESP, which in turn led taxpayers to call the IRS.  This issue will also bedevil taxpayers and the IRS in 2020.

Additional Challenges:  Educating and notifying the public about the Stimulus Payments

By now, unless you have been living under a rock for the last six weeks, everyone knows that a check for $1200 or more is coming one’s way.  That, of course, is not quite accurate, and in 2008 it was the nuances that caused a lot of confusion.  The CARES Act requires the Secretary to launch a public awareness campaign in coordination with SSA and other federal agencies to inform taxpayers about the rebate, including information for taxpayers who have not filed a Tax Year 2018 or 2019 return.  As in 2008, the advance recovery rebate is not only an effort to get dollars into the hands of consumers to meet basic human needs and stimulate the economy but also an effort to calm consumer nerves and buoy consumer confidence.  Thus, getting the message out about the ESP should be a major focus. 

In 2008, the short message was, you will get money, soon.  The more nuanced message was conveyed in twenty pages of FAQs and a 7 minute podcast (by me) to explain all the provisions and exceptions.  The short message went viral, if you will, promoted through advertising by diamond merchants, department stores, auto dealers, and electronics stores enticing taxpayers to spend stimulus payments on their products.  While the 2020 ESP is designed to help people through the economic crisis arising from the coronavirus, and thus is more likely to be spent on basic human necessities such as housing, food, and medicine, this will not stop promotions that over-promise eligibility and lead to confusion.

Moreover, in 2008, the organized identity theft and refund fraud scams had not yet reached their peak.  Today, these scams are rampant and at a much higher level of sophistication.  (In fact, as I write this, a call came on my landline voice mail, telling me that there was a certified cashier’s check waiting for me and I just had to call back to receive it.  And USA Today is already reporting on scams.)  Any information campaign must warn against these scams – with explicit instructions about what to do if you suspect a scam.  This would be a good use of the toll-free number Congress has required the IRS to establish so taxpayers can report problems with stimulus payments.  Of course, the IRS will have to have people available to answer the calls – easier said than done when trying to protect employees from the coronavirus, but the risk of harm to taxpayers justifies staffing that phone line to the fullest extent possible, both to counter the dissemination of inaccurate information and to protect taxpayers from fraudulent scams.

The information campaign also should provide information to taxpayers about ways they can have their returns prepared for free – whether by VITA and TCE if they re-open, or by Free Fillable Forms or Free File. As the virus recedes (we hope this summer), the IRS should also consider holding Free Tax Return Preparation days in its Taxpayer Assistance Centers, with returns prepared by IRS employees; by utilizing appointments, social distancing and protective equipment such as masks and gloves, it can minimize risk for employees and taxpayers.  In addition, the IRS should work with VITA sites to enable them to utilize remote interview and preparation software, just as physicians are doing in this crisis.  (This technology will be especially helpful, long after the virus has receded, for assisting rural and home-bound taxpayers.  The VITA grant program authorized under the Taxpayer First Act could really jump-start the use of this technology.)

Finally, in 2008, to help inform taxpayers about the status of their economic stimulus payments, the IRS created the “Where’s My Stimulus Payment?” application.  By directing taxpayers to this tool, the IRS hoped to provide good information and minimize phone calls to its toll free numbers.  However, the application did not reflect electronic payments until after the funds were actually deposited into the taxpayer’s account, limiting its usefulness and again leading to more calls. 

The situation in 2020 is a mixed bag.  On the one hand, TAS research has shown that 41 million US taxpayers do not have broadband access in their homes, and 14 million don’t have any internet.  The shelter-in-place and business/government closure requirements have significantly reduced taxpayers’ access to public spaces that provide wifi, so they may not be able to check the app and can only call the IRS.  And unlike 2008, when the IRS sent out about 130 million letters to taxpayers before issuing stimulus payments, the 2020 letters will go out after the actual issuance of the payments.  If the IRS posts a “Where’s My Stimulus Payment” app this time around, anxious taxpayers will be checking it and receiving no information.  This, in turn, will lead to more calls to the toll-free line.

Obviously, there is a lot we don’t know about the actual mechanics of how the IRS will administer the 2020 advance recovery rebate.  The 2020 design has significant improvements over 2008, notwithstanding some gaps.  The coronavirus that necessitated this legislation has also created the most challenging conditions in the history of the IRS, in terms of its employees being able to do their jobs, especially in the area of taxpayer service – providing assistance by answering calls and responding to correspondence.  And the advance recovery rebate is just one element of the recovery work the IRS is charged with delivering.  In future blogs, I’ll explore the downstream consequences of this additional work on the IRS and taxpayers.