Refund Claims and Section 7508A – Progress!

We welcome back Bob Probasco as today’s guest blogger.  Bob has written several guest posts parsing the code with a particular emphasis on issues involving interest.  He teaches at Texas A&M Law School where he is a Senior Lecturer and Director of the Tax Dispute Resolution Clinic.  Today, he parses the IRS guidance on when a taxpayer can successfully file a refund claim three years after COVID changed normal tax return filing deadlines.  Keith

Relax – you have more time to file a refund claim for the 2019 tax year.  For many taxpayers, April 15, 2023, is no longer a hard deadline.  But you still need to pay attention to exactly what relief the IRS offered; there are some situations in which taxpayers may assume they have more time than they do.

The IRS issued Notice 2023-21 on February 27, protecting taxpayers from falling into an inadvertent trap that might have precluded recovery for some refund claims.  The IRS website tells us that it has this effect for 2019 income tax returns:

  • If taxpayers filed their 2019 return after April 15, 2000, but on or before July 15, 2020, they can recover the maximum amount if they file their claim within 3 years of the date the original return was filed.
  • If taxpayers filed their 2019 return after July 15, 2020, they can recover the maximum amount if they file their refund claim by July 17, 2023.

The Notice also adjusts the date by which refund claims for the 2020 tax year must be filed to ensure full recovery.  For this blog post, though, I’m focusing on the 2019 tax year, and income tax returns for individuals, for simplicity.

This is welcome relief although short of a complete solution.  The National Taxpayer Advocate’s blog had some observations, praising the Notice and pointing out what more still has to be accomplished.  I have a few thoughts as well.



Why was this a problem?  Because of the COVID emergency declaration and IRS responses, most taxpayers had until July 15, 2020, to file their 2019 tax returns and until May 17, 2021, to file their 2020 tax returns.  And most taxpayers have been conditioned to assume, from multiple reminders over the years, a general rule that they must file refund claims (including filing an original return claiming a refund) within three years of the original filing due date to receive that refund.  Thus, some were likely to assume that they had until July 15, 2023, to file refund claims for the 2019 tax year.  Before Notice 2023-21 was issued, that was not a safe assumption, and still isn’t for some taxpayers.

This problem was identified more than a year ago.  The National Taxpayer Advocate submitted her 2021 Annual Report on January 12, 2022.  The Purple Book included a legislative recommendation (starting at page 30) to address problems with the interaction between section 7508A and refund claims.  Notice 2020-23 allowed taxpayers with 2019 tax returns due on April 15, 2020, to be filed as late as July 15, 2020.  As a result, refund claims for 2019 would satisfy the section 6511(a) deadline if filed within three years after the return was filed, potentially (I’ll come back to this adverb later) as late as July 15, 2023. 

Unfortunately, even when a refund claim is filed by the section 6511(a) deadline, section 6511(b)(2)(A) limits the amount of the recovery to the amounts paid within “3 years plus the period of any extension of time for filing the return.”  Section 7508A doesn’t extend the deadline for filing returns.  It suspends or postpones it.  Thus, a refund claim for 2019 filed on July 15, 2023, could only recover amounts paid by the taxpayer (including refundable credits) by July 15, 2020. Most payments (including income tax withholding and estimated tax payments) and refund credits for the 2019 tax year are deemed to have been paid as of April 15, 2020.  As a result, that timely filed refund claim might result in no recovery.  In effect, we would be forcing taxpayers to file the refund claim earlier than the section 6511(a) deadline and most taxpayers wouldn’t realize that.

I looked at the Purple Book suggestion back in January 2022 and concluded that there were some arguments, even before Notice 2023-21, to protect the unwary taxpayer.  TL;DR summary: section 7508A(a)(3) arguably provided the IRS the authority to provide relief regarding the lookback rule, and Regulation § 301.7508A-1(f), Example 5 provided an example where the suspension period was disregarded in determining the lookback period.  But that example was of a situation in which the section 7508A suspension period included the section 6511(a) deadline; it didn’t address situations in which the suspension period under section 7508A included the deadline for filing the original return.  Could you make an argument for the latter even without legislative or regulatory change?  Sure, but it might not succeed and taxpayers without representation wouldn’t even know to make that argument if their refund claim were denied.

Notice 2023-21 – details

The new Notice takes a straightforward approach to solving the problem.  As with the previous COVID questions, it defines Affected Taxpayers and then specifies the relief.  Affected Taxpayers are:

  • “any person with a Federal tax return filing or payment obligation that was postponed by Notice 2020-23 to July 15, 2020”
  • “any person with a Federal tax return filing or payment obligation that was postponed by Notice 2021-21 to May 17, 2021”

Notice 2020-23 applied to filing and payment obligations due, including as a result of a valid extension, on or after April 1, 2020, and before July 15, 2020; Notice 2021-21 was more narrowly focused on filing and payment obligations normally due on April 15, 2021, or June 1, 2021, but didn’t take into account extensions.  (This is a vast over-simplification; it’s always best to carefully parse any such notices.)

Essentially, under Notice 2023-21, all individual taxpayers for both years are Affected Taxpayers and some entities are Affected Taxpayers with respect to the 2019 tax returns.  The relief granted was to disregard the two different suspension periods in determining the beginning of the lookback period.  But the two different suspension periods were stated in separate sentences and the relief granted was qualified as “relating to the tax for which the return filing or payment due date was postponed.”

That last phrase, I assume, was because the lookback period for individual taxpayers filing a refund claim for the 2019 tax year included both suspension periods.  The IRS apparently decided that they should be allowed to disregard the first suspension period (4/1/2020 – 7/15/2020) but not the second suspension period (4/15/2021 – 5/17/2021).

I was particularly interested in how this relief affected a couple of our clients who had not yet filed their original 2019 tax returns, which would show overpayments.  The only example in Notice 2023-21 wasn’t very helpful, as it involved a taxpayer who filed the 2019 tax return on June 22, 2020.  The notice doesn’t specify anywhere that relief was not available who had not filed their original returns by the postponed due date, but the absence of “no” doesn’t always mean “yes.”  But the description on the IRS website did say “yes” to this question.

Some observations

I began looking at this with a vague impression that the interaction of Notice 2020-23 (suspending the period for filing and payment obligations for the 2019 tax year) and Notice 2023-21 (disregarding the suspension period for purposes of determining the lookback period for refund claims) might lead to some strange results.  After close reading of Notice 2023-21, it seems to have been very well drafted.  I think it achieves the IRS’s immediate goals, in terms of resolving issues of a specific, nationwide emergency that affects imminent (normal) deadlines for refund claims.  The NTA is still advocating for a solution that is statutory, permanent, and inclusive of all section 7508A relief.  Tax professionals would like the same thing.  But Notice 2023-21, if nothing more, has been a useful exercise in starting to work through the complexity.

However, I still have a few concerns.

Policy choice leading to (somewhat) strange results?

A suspension of the section 6511(a) deadline for filing refund claims – such as was included in Notice 2020-23 for the 2016 tax year, normally due 4/15/2020 – automatically results in disregarding the suspension period when determining the lookback period.  That’s in the regulation above, which relies on language that mirrors section 7508A(a)(3).  That keeps the two deadlines in sync, so that a timely filed return followed by a timely filed refund claim will always be able to recover the maximum amount.

A suspension of the deadline for filing the tax return would – once the principles of Notice 2023-21 are implemented more broadly by regulation or legislation – automatically result in disregarding the suspension period when determining the lookback period.  A suspension of the deadline for filing the tax return, however, would not change the section 6511(a) deadline.  The two deadlines would not be in sync. 

You can see that in looking at the effect on three different hypothetical taxpayers.  Consider A, B, and C, all of whom are Affected Taxpayers for purposes of Notice 2023-21.  A filed his 2019 return on 4/15/2020; B filed her 2019 return on 6/1/2020; and C filed his 2019 return on 7/15/2020.  All three returns were filed timely because of Notice 2020-23.  For all three returns, the lookback rule allows a refund claim filed by 7/15/2023 to reach all payments and refundable credits.  Yet section 6511(a) requires that A must file his refund claim by 4/15/2023; B must file her refund claim by 6/1/2023; and C can file his refund claim as late as 7/15/2023.  In effect, C is rewarded for filing his return later than A and B filed theirs.

The Code includes several provisions to ensure that a timely filed refund claim, following a timely filed return, can recover all payments and refundable credits:

  • Amounts paid before the filing due date are deemed to have been paid as of the filing due date.
  • An extension of the filing due date results in an extension of the deadline for filing a refund claim and of the lookback period.
  • The lookback period is also adjusted for several special circumstances leading to a later deadline for filing a refund claim – e.g., section 6511(d)(1)(B), (2)(A), (3)(B), and (4)(A).

Notice 2023-21 does not do the same thing, because it disregards the suspension period with respect to section 6511(b) but not with respect to section 6511(a).  This leads to a relatively rare situation in which section 6511(b) would not limit the amount of a refund, but section 6511(a) would preclude any refund at all.

I assume this was a deliberate choice; the example in Notice 2023-21, as well as the description on the IRS website, both state that refund claims must be filed within three years of the date they filed the original return, with an outer limit of July 15, 2023.  The argument for the IRS choice here may be that, in the example above, taxpayers A and B evidently didn’t need the postponed due date.  The counter-argument might be that we don’t apply the same principle with respect to the original due date.  For the 2022 tax year, for example, taxpayers could file returns as early as January 23, 2023, but would still have until April 15, 2026, to file refund claims.

I perhaps would have preferred a different policy choice here.  In part to treat taxpayers equally with respect to COVID relief that was made available to everyone, not just those who needed extra time.  In part because of the potential for misunderstanding.  Let’s turn to that topic.

Communicating to taxpayers

I commend the IRS for their efforts to publicize the effects of Notice 2023-21, as well as many others who have been spreading the word.  But I still have some concerns about whether that message will be received by taxpayers, particularly since most of them do not read the IRS website, let alone Notice 2023-21.  They get their information (condensed and simplified) from other sources and don’t always read closely for the details.

For example, one of our clients – with a more sophisticated understanding than most taxpayers – heard about the postponement of the filing date for 2019 tax returns to July 15, 2020.  Unfortunately, he did not catch the qualification, that the postponement was for acts due between Apri1 1, 2020, and July 15, 2020.  That took care of his personal tax return but he and his wife also had a small partnership.  The partnership return was still due March 15, 2020, and he filed late.  There was no partnership activity or taxable income to pass through to their Form 1040 but the partnership was hit with a $1,640 penalty under section 6698(a)(1).  (The IRS refused to abate the penalty but there was still a happy ending when the IRS eventually issued Notice 2022-36, a general abatement of penalties for late filing.)

We will almost certainly have similar misunderstandings with some aspects of this relief that may not be intuitively clear for some taxpayers, despite all of our best efforts.  If they reach out to tax professionals, we can explain in the context of their particular facts, but some won’t until it’s too late.

Late Filing Penalty Relief for 2019 and 2020 Returns to Generate Automatic Refunds

Today the IRS issued a press release announcing extremely broad late filing penalty relief for the 2019 and 2020 taxable years. Importantly, relief is being applied automatically, and taxpayers do not need to take any action to receive a refund of penalties they paid.

Notice 2022-36 details the specific tax returns and penalties for which relief is provided. Returns must be filed by September 30, 2022 to qualify for relief.

The notice also explains the government’s rationale for providing relief, citing the President’s coronavirus pandemic emergency declaration as well as the pandemic’s impact on IRS operations and return processing backlog. The notice states, “the Treasury Department and the IRS have determined that the penalty relief described in this notice will allow the IRS to focus its resources more effectively, as well as provide relief to taxpayers affected by the COVID-19 pandemic.”

Kudos to the IRS for making relief automatic. The press release indicates that most refunds will be issued by the end of September.

Edited to add: the National Taxpayer Advocate blog has a very good summary of the relief provided.

Refund Claims and Section 7508A

Bob Probasco, a regular guest poster, has joined Procedurally Taxing as a contributor. In today’s post, Bob unravels the intersection of the suspension rules of Section 7508A and the refund lookback limits in Section 6511. Les

In normal years, the President may make multiple regional disaster declarations; in 2020, we had a nationwide disaster declaration related to the COVID pandemic.  Our work environments and financial security were affected dramatically, as were IRS operations.  The IRS generally provides taxpayers broad-based relief under section 7508A after such disaster declarations.  That has resulted in more than a few PT blog posts on the complexities of those provisions (see herehere,herehere, and here for just the tip of the iceberg; you can find several more if you go to the top of the blog webpage and type “7508A” or “7508A(d)” into the Search box).  

The National Taxpayer Advocate submitted her 2021 Annual Report on January 12, 2022.  As Les noted, it really is required reading for those interested in tax administration.  Alas, I’ve fallen behind in my reading, but someone brought one particular legislative recommendation in the 2022 Purple Book to my attention.  The #10 legislative recommendation (starting at page 30) proposes an amendment to avoid problems arising from the interaction between section 7508A and refund claims.


The problem and the proposed fix

As we all remember, there are two different statutes of limitations with respect to refund claims in section 6511.  Section 6511(a) describes how soon a refund claim must be filed – three years after the return was filed.  (If the refund claim is not filed by then, it will still be timely if paid within two years of a payment by the taxpayer.  That option is not relevant to this discussion.)  That deadline is clearly one that the IRS has discretion to suspend.   § 301.7508A-1(c)(1)(iv).  For the pandemic, the IRS exercised that discretion in Notice 2020-23.

But there is the second limitation.  Section 6511(b)(2) limits how much the taxpayer can recover, even from a timely filed refund claim.  When the claim is timely filed within three years after the return was filed section 6511(a), section 6511(b)(2)(A) limits the amount of the recovery:

If the claim was filed by the taxpayer during the 3-year period prescribed in subsection (a), the amount of the credit or refund shall not exceed the portion of the tax paid within the period, immediately preceding the filing of the claim, equal to 3 years plus the period of any extension of time for filing the return. 

If you filed your tax return for 2018 (without an extension) late on June 10, 2019, a refund claim will be timely if filed by June 10, 2022.  A refund claim timely filed on June 10, 2022, can only recover amounts paid by June 10, 2019: three years preceding the date the refund claim was filed and without adjustment because there was no extension of time to file.  For many taxpayers, most if not all payments (withholding, estimated taxes, or payment with return or extension request) will have been made on or before April 15, 2019, and are deemed to be paid on that date.  Thus, the taxpayer has very limited if any recovery on that timely filed refund claim.

Ah, but for 2019 tax returns, we had until July 15, 2020, to file returns, as a result of a determination by the Secretary of the Treasury pursuant to section 7508A.  If we filed our return on July 15, 2020, it was timely because of section 7508A.  If we later file a refund claim on July 15, 2023, the refund claim would satisfy the first limitations requirement, in section 6511(a).  Thus, both the return and the refund claim were filed timely.  Oops!  The “lookback” period is “3 years plus the period of any extension of time for filing the return.”  Section 7508A doesn’t extend the deadline for filing returns.  It suspends or postpones it.  And it doesn’t change the fact that most payments were deemed paid on April 15, 2020.  A suspension is not an extension.  So the lookback period only goes back to July 15, 2020, but payments of withholding or estimated taxes were deemed paid on April 15, 2020.  Result – limited or no recovery after a timely-filed return and a timely-filed refund claim.  Of course, that’s probably not what Congress had in mind – maybe Congress didn’t consider it at all – but Chief Counsel Advise 2020-53013 concluded that’s exactly what would happen.  

Thus, the Taxpayer Advocate Service recommended that Congress amend section 6511(b)(2)(A) to increase the lookback period by the period of any postponement of the filing deadline under section 7508A.  The legislative recommendation makes perfect sense and I whole-heartedly agree with it.  Unfortunately, that leaves us dependent on Congress.  Even if the proposed fix is enacted, it may take a while.  In the meantime, taxpayers may be losing legitimate refund claims because they didn’t understand the Service’s interpretation of the rules.  The deadline for refund claims associated with 2019 tax returns is still more than a year away, but some taxpayers received section 7508A relief for their 2018 tax returns and the deadline for refund claims for those returns is only three months away.

Non-legislative fix?

While we wait to see if Congress will enact the NTA proposal, is there anything that the IRS could do in the meantime to solve the problem?  I think perhaps there is, although TAS may have already discussed non-legislative fixes with the IRS and been rebuffed.  And we still want the statutory fix as much more certain.

We’ve mostly focused on declarations under section 7508A as postponing filing and payment deadlines.  The actual language of Section 7508A(a) states that the Secretary “may specify a period of up to 1 year that may be disregarded in determining” three things:

(1) whether any of the acts described in paragraph (1) of section 7508(a) were performed within the time prescribed therefor (determined without regard to extension under any other provision of this subtitle for periods after the date (determined by the Secretary) of such disaster or action),

(2) the amount of any interest, penalty, additional amount, or addition to the tax for periods after such date, and

(3) the amount of any credit or refund.

The first two are fairly obvious, but how does disregarding a period of time change the determination of the amount of a credit or refund, instead of just whether the refund claim was timely??  The only thing I can think of offhand – other than overpayment interest, for which that period specified by Treasury is explicitly not disregarded – is the lookback limitation for refund claims.

The regulations include an example where section 7508A relief was granted to disregard a period including the refund claim deadline.  See § 301.7508A-1(f), Example 5.  A timely refund claim for 2008 would normally have to be filed no later than April 16, 2012.  Due to an earthquake, the IRS determined that deadlines from April 2, 2012, through October 2, 2012, were postponed to October 2, 2012.  That included the section 6511(a) deadline for filing a refund claim.  The example concluded that the lookback provision was effectively changed by section 7508A(a)(3).  The specified period was disregarded for purposes of the lookback provision.

Moreover, in applying the lookback period in section 6511(b)(2)(A), which limits the amount of the allowable refund, the period from October 2, 2012, back to April 2, 2012, is disregarded under paragraph (b)(1)(iii) of this section [which duplicates the statutory language].

Moreover, in applying the lookback period in section 6511(b)(2)(A), which limits the amount of the allowable refund, the period from October 2, 2012, back to April 2, 2012, is disregarded under paragraph (b)(1)(iii) of this section [which duplicates the statutory language].

It’s notable that the regulation just states that the specified period is disregarded, rather than any distinction between “suspension” or “extension” that the CCA relied on.  Although they were not dealing with the same fact pattern, the regulation and the CCA seem fundamentally at odds.  (There’s no discussion of the regulation in the CCA, so perhaps the author didn’t check it.  That’s easy to understand; email advice by its very nature cannot require the same depth of careful analysis and review.)  Before concluding that we have a regulation that we can rely on, though, there are a few questions to address.

First, does the suspension of the lookback period determined in the regulation depend on it being explicitly stated by the IRS in its determination under section 7508A, or is it an automatic result of the determination of that specified period? The example doesn’t mention an explicit statement in the determination; it only references the regulation language that duplicates the statutory language.  There was no mention of the lookback period in Notice 2020-23, which perhaps suggests that the IRS normally doesn’t make such an explicit statement about the lookback period.  That in turn perhaps suggests that the IRS considers the result as automatic and need not be stated in the determination.  It’s not entirely clear, but before having researched it further I think the better answer is that it’s automatic.

Second, does the result in the regulation only apply if a disregarded period includes the deadline for the refund claim (fact pattern in the regulation) or also if a disregarded period includes the deadline for filing the original return (fact pattern in the CCA)?  The CCA didn’t try to distinguish the regulation, but perhaps it could/would have.  

The rationale for a longer lookback period in the former situation is that, absent the disaster, the taxpayer could have filed the refund claim within three years of timely filing the return and satisfied the lookback rule.  The rationale for a longer lookback period in the latter situation presumably would be different.  A disaster in the year that the return was filed wouldn’t make it more difficult for the taxpayer to file the refund claim three years later.  I think the rationale rests on the disadvantage to taxpayers who are familiar with the basic 3-year statute of limitations for refund claims (often widely publicized by the IRS and tax practitioners each year) but unaware of the lookback rule.

So, there’s some uncertainty.  I would certainly be willing to argue in court for the result proposed by the NTA, even without a fix.  The regulation ties the language of section 7508A(a)(3) to the lookback limitation for refunds.  The “amount of any credit or refund” in the statute is not explicitly limited to a refund claim filed during that disregarded period.  Section 6511(b)(2)(A) is structured so that the taxpayer’s refund is not limited if she files her return timely and files the refund claim timely.  Why should that principle be invalidated because the taxpayer was in a disaster area when the return was filed?    

But I would feel more comfortable with at least a regulatory fix, while we’re waiting for a legislative fix.  The IRS could amend the regulation to provide an example reaching the result described by the NTA, and perhaps state explicitly the effect on the lookback rule in any determinations pursuant to section 7508A.  Perhaps the IRS could reconsider that CCA from 2020.  

In determining the language for the legislative and/or regulatory fix, Congress and/or the IRS will also have to answer a third question.  For the 2019 tax year, for which the return is due in 2020 and a refund claim would have to be filed in 2023, which determinations by the IRS disregarding a period pursuant to section 7508A will have that same effect on the lookback period?  A determination with respect to a disaster in 2023 that includes the deadline for filing a refund claim?  Yes, per the existing regulation.  A determination with respect to a disaster in 2020 that includes the deadline for filing the return?  Yes, per the NTA’s recommendation.  What about disasters in 2021 and 2022?  Draft carefully if you want to exclude those.

Impact of Initial Exclusion from EIP of U.S. Citizens Filing Jointly with Non-Citizen Spouses

We welcome two students from the Georgia State University College of Law Philip C. Cook Low-Income Taxpayer Clinic as guest bloggers, Lauren Zenk and Lauren Heron, for a discussion of the latest developments in stimulus payment legislation as it relates to U.S. citizens who file jointly with non-citizens spouses. The Georgia State Clinic began working with the Harvard Clinic last October to file an Amicus Brief on behalf of the Center for Taxpayer Rights as the amicus. The Center sought to assist low-income taxpayers denied stimulus payments due to the non-citizen exclusion in the initial CARES Act legislation. This brief was mooted by the next round of legislation which provided: 1) U.S. Citizens who elect to file jointly with their non-citizen spouses can receive the stimulus payments for themselves and their eligible children, and 2) the value of the first stimulus payment can be issued as a credit on their 2020 tax return. Still, the initial eligibility exclusion that the clinics were preparing to argue against raises issues that may arise again in the future, and, should that occur, the authors thought that it would be useful to highlight the arguments they were preparing to make.  Keith

Congress enacted the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) to respond to one of the worst public health crises this country has ever experienced. The CARES Act directed the Treasury Secretary to process the payments “as rapidly as possible.” 26 U.S.C. § 6428 (f)(3)(A). Initially excluded from these payments were most taxpayers without a Social Security Number (SSN), which the government argued included U.S. citizens with a SSN who elected to file jointly with their non-citizen spouse.  The result denied millions of American citizens, and their eligible children, benefits they desperately needed. Before the passage of the Omnibus Spending Bill in December of 2020, the U.S. citizens who were initially denied relief only had one identifiable remedy to receive the stimulus payment: file their 2020 tax return separately from their non-citizen spouse and receive the payment as a Recovery Rebate Credit.

However, this remedy would have been inadequate for two compelling reasons: First, filing MFS would cause them to lose favorable tax rates and certain credits available to low-income taxpayers; and second, they would have to wait until 2021 to receive the benefit of the payment during a period where the timeliness of relief was critical. The spending bill addressed the inadequacy of this remedy and provided that the U.S. citizens with non-citizen spouses and their families were “eligible individuals” for the credit. Still, only the U.S. citizen spouse and eligible children are counted for the credit, so these families are still receiving $600 less than similarly situated families. The spending bill also provided for retroactive payments for those families denied the first EIP under the Cares Act.


The Statutory Ambiguity Question

Litigation was quickly brought to challenge the government’s interpretation in regard to the eligibility of U.S. citizen taxpayers married to non-citizen spouses.  The clinics were preparing to file an amicus brief that would argue against the government’s position that the CARES act excluded this class of U.S. citizens from eligibility.  The clinics approached their arguments from two perspectives: (1) demonstrating that the statutory language at issue was in fact ambiguous and should be read as including this class of taxpayers as being eligible for payments; and (2) specifically illustrating how the government’s interpretation would negatively impact low-income and economically vulnerable taxpayers and conflict the with the CARES Act’s legislative purpose.

The statutory interpretation argument focused specifically on the statutory language in 26 U.S.C. § 6428(g)(1)(B), which the government interpreted as requiring that married spouses filing jointly both have valid social security numbers in order for either to qualify for the stimulus payment.  This interpretation had the effect of punishing mixed-status families by denying American citizens and their eligible children the benefits they deserve.

Section 6428(a)(1) establishes that any individual with a SSN shall be allowed a $1,200 credit. Subsection (d) defines an “eligible individual” as any individual that is not a “nonresident alien individual,” a dependent, or “an estate or trust.” Therefore, any non-dependent with a SSN is plainly recognized as an eligible individual. Subsection (a)(1) states that “[i]n the case of an eligible individual, there shall be allowed as a credit . . . .an amount equal to the sum of . . . $1,200 ($2,400 in the case of eligible individuals filing a joint return).” The subsection’s parenthetical is limited to the narrow case of eligible individuals filing a joint return. The parenthetical does not encompass joint returns where a single party is an eligible individual, such as mixed-status filers. The SSN holder remains recognized as an eligible individual entitled to a credit of $1,200 under § 6428(a) for the purposes of emergency relief and economic stimulus.

Section 6428(g)(1) establishes the requirement that joint returns must include the SSNs of both spouses, but it is ambiguous whether this requirement applies to joint returns where only one spouse has a SSN. The provision states that, “No credit shall be allowed . . . to an eligible individual who does not include on the return of tax . . . (B) in the case of a joint return, the valid identification number of such individual’s spouse.” Subsection (B) presumes that the spouse on the joint return shall have an SSN. Therefore, it overlooks situations where one spouse simply does not have an SSN to provide. The language of section 6428(g)(1) may have been included as an administrative measure to ensure that all relevant information possessed by the tax filers is provided and to prevent $2,400 from going to a pair of an eligible and non-eligible individuals. The government’s reading of (g)(1) as establishing a circumstantial barrier preventing distribution of the payment is not the only possible reading of the section. Rather, the presence of an implicit waiver of subsection (g)(1)’s requirement to provide a spouse’s SSN on the joint return when a spouse does not possess an SSN is a valid interpretation of the passage.

At first blush, it appears that the government could successfully counter this argument by pointing out that the CARES Act expressly provided that members of the armed forces were exempted from the (1)(B) requirement that the other spouse provide a SSN where paragraph (1)(A) is satisfied, allowing these certain families to receive the full $2,400. The government would likely use this carve-out to argue that Congress knew how to make an exception and chose not to do so for the class of taxpayers at issue.  The military exemption does not fully clarify Section 6428(g)(1) as it applies to mixed-status filers. The CARES Act expressly exempts members of the armed forces from the requirements of (1)(B) when at least one spouse satisfies the requirements of paragraph (1)(A). The requirement of (1)(B) refers to joint returns, however, so this “Special Rule” allows military families to receive the $2,400. Section 6428 still ignores the possibility of an eligible individual, who is owed the $1,200 payment, but happens to file a joint return with an ineligible individual.

Courts must do their best, “bearing in mind the fundamental canon of construction that the words of a statute must be read in their context and with a view to their place in the overall statutory scheme,” to enforce the meaning of the statute. Utility Air Regulatory Group, 573 U.S. at 320. When reading subsection (g)(1) in concert with the rest of § 6428, ambiguity is evident.

Why this Still Matters for Low-Income Taxpayers

Thankfully, Congress got around to clarifying the legislative language, which removed any ambiguity and included this class of taxpayers in the class of individuals eligible for economic impact payments.  Whether you call the legislative fix an eligibility extension or a correction ambiguous language, it is difficult to ignore that some families were wrongfully denied relief at the height of the pandemic. The relief given is better late than never, but it still undercuts the initial purpose of the Act. In March 2020, the Bureau of Labor Statistics reported the unemployment rate increased by .9 percent, up to 4.4 percent, which was the largest “over-the-month” increase since 1974.  This statistic reflects 1.4 million Americans who became unemployed as a result of the pandemic outbreak. For these families that may currently be facing unemployment, a tax credit retroactively issued in 2021 is almost without purpose. Further, a Pew Research Center Survey found that lower-income American’s were experiencing job loss at a higher share and that only about one-in-four of these individuals/families said they had funds set aside that could cover three months of expenses in the case of job loss.  While over 130 million individuals did receive stimulus payments, the requirement that both spouses have a social security number allowed otherwise eligible individuals and their eligible children to fall through the cracks at a time where financial assistance is greatly needed, especially by low-income, vulnerable populations.

Had the statutory language not been changed and had the government persisted with its interpretation of the original CARES Act language, the remedy the government proposed for these excluded U.S. citizens and their dependents originally would have been to file their 2020 tax return separately from their non-citizen spouse. This potential remedy, however, would have been insufficient, because it would have placed taxpayers in the position of having to forego other tax benefits in order to obtain the economic impact payments.  The Internal Revenue Code (IRC) incentivizes the MFJ filing status by providing that taxpayers filing separately will often have higher tax rates and will be ineligible for certain deductions, exemption amounts, and credits that are allowed to those filing jointly. These differences can be especially punitive when the taxpayers are low-income. Unfortunately for low-income taxpayers in particular, a married filing separately filing status will reduce or eliminate the impact of the following tax credits and deductions, which low-income taxpayers commonly use. These include the child tax credit, additional child tax credit, exclusion of a portion of Social Security benefits, credit for elderly and disabled, deduction for college tuition expenses, student loan interest deduction, and credits incentivizing investments in higher education like the American Opportunity Credit and Lifetime Learning Credit. In many circumstances, low-income taxpayers rely on these credits to supplement their income and lift them above the poverty threshold and being forced to relinquish these benefits to obtain economic impact payments would have not made economic sense, defeating the CARES Act’s stated purpose.

It is tempting to say that these arguments have only academic interest because all’s well that ends well.  However, we believe that it is important to present these arguments to the practitioner community because of how often this type of statutory language is used and is interpreted by the government to exclude U.S. citizens married to non-citizen spouses from critical government benefits.  For instance, this exclusion was not unique to the CARES Act. In the 2008 global financial crisis, Congress used similar statutory language that the government interpreted as giving tax rebates to most American taxpayers, except for spouses of non-citizens without social security numbers. It does not take much imagination to think that, in the coming years, similar language might once again be used in future stimulus bills.  Finally, this exclusion affects low-income taxpayers who would otherwise be eligible for the Earned Income Tax Credit (EITC). The EITC gives preference to spouses who elect to file MFJ, where both spouses have a valid SSN, and eligible children. These taxpayers are entitled to large refundable credits, sometimes up to around $7,000. However, it has been widely accepted, perhaps uncritically, that this credit is unavailable to U.S. citizens filing jointly with their non-citizen spouse.


In the absence of a judicial venue to raise these sorts of arguments, it is important to raise them for discussion so that policy makers can consider the unintended consequences of their legislation. Hopefully, in the future, Congress and the IRS will take these considerations into account on the front-end of legislation, so vulnerable taxpayers are not excluded from legislation intended to assist families in the midst of economic crises. However, if this type of language is once again used in stimulus payments, we encourage practitioners to not accept the government’s interpretation at face value, as there are sound interpretative arguments that can be made on behalf of these taxpayers who deserve to be included in these stimulus and anti-poverty efforts.

A Second Look at the American Rescue Plan Act

We welcome back guest blogger Omeed Firouzi, who works as a staff attorney at the Taxpayer Support Clinic at Philadelphia Legal Assistance, for a discussion of the latest developments in the IRS position and administration of the part of the act dealing with the exclusion of certain unemployment benefits.  The process of the change in the position at the IRS on how to calculate the unemployment compensation excluded by statute from income provides an interesting process to watch, similar to the process last spring that led to changes in how the Service approached the payment of the stimulus checks.  Keith

Since my last post on the American Rescue Plan Act, the IRS has provided two critical updates regarding the $10,200 unemployment compensation tax forgiveness provision of the law:

  1. A taxpayer’s modified adjusted gross income, for purposes of claiming the exclusion, should disregard the amount of unemployment compensation the taxpayer receives. Therefore, if your unemployment compensation in 2020 is what pushes you above the $150,000 adjusted gross income limit for claiming the exclusion, you can still be eligible for the exclusion. You do not count the unemployment compensation you got in 2020 as part of your income when factoring the exclusion. This IRS interpretation of the statute comes on the heels of a debate within the tax community as to how to read this section of the law. Last week, the IRS took the position in its unemployment compensation exclusion instructions that a taxpayer’s unemployment compensation does count towards the $150,000 income limitation for eligibility. Now, they’re saying otherwise.

A Look at Tax Provisions for Low-Income Americans in the American Rescue Plan Act

We welcome back guest blogger Omeed Firouzi, who works as a staff attorney at the Taxpayer Support Center at Philadelphia Legal Assistance.  Today’s post provides more substantive tax than most.  In the discussion of the tax break for unemployment insurance, Omeed picks up on comments made by frequent commenter Bob Kamman.  Keith

The American Rescue Plan Act, signed into law by President Joe Biden on March 11, 2021, provides immediate IRS-administered relief for millions of taxpayers and creates more potentially long-term changes that will impact low-income and middle-income taxpayers.



Already, the new $1.9 trillion COVID relief law has led to the distribution of $1,400 stimulus payments for millions of Americans. This round of economic impact payments total $1,400 per person, including per adult dependent (a group that was excluded from the first two rounds; undocumented parents can now obtain payments for their children who have Social Security numbers as well).

The income eligibility guidelines are similar to the last two rounds in that the full $1,400 payments go to single filers who make up to $75,000, married filing jointly filers who make up to $150,000, and head of household filers who make up to $112,500. There are smaller payments for single filers who make up to $80,000, married filers who make up to $160,000, and head of household filers who make up to $120,000. Anyone with a Social Security number authorized for work, who is not a nonresident immigrant and not a dependent, can get a payment.

Congress authorized the IRS to look to 2019 and 2020 returns to determine eligibility. This time, Congress also specifically authorized the IRS to make “additional payments,” through rolling eligibility determinations, for individuals who file 2020 returns that make them eligible for additional stimulus payment. Therefore, if a taxpayer has a 2019 return on record right now that makes them eligible for partial or no stimulus payment but then they file a 2020 return that makes them eligible for more stimulus payment, they should get the additional payment.

Beneficiary recipients (Social Security, SSI, VA, RRB recipients) will automatically get payments. The payments are again protected from offset for federal and state tax debts, debts to federal agencies, unemployment overpayments, and child support. Congress was unable to protect the payments from garnishment by private debt collectors but members of Congress are considering introducing legislation to remedy this issue.

Non-filers who don’t receive the aforementioned benefits qualify for these payments as well. If these individuals used the Expedited Filing Portal last year that created 2019 returns, they should get these payments as well – since 2019 return information is used for eligibility. We are still awaiting guidance as to whether such a portal will return this time, particularly in light of President Biden’s January 22 executive action. Already though, the IRS revived the “Get My Payment” tool on its website with an IRS EIP Information Center too (

If an individual’s income dropped in 2021 such that they are eligible for more payment now than they were based on current information or if they have a child born in 2021, they can claim the additional stimulus payment as a refund on their 2021 return. Alternatively, if an individual’s 2019 return makes them eligible for payment but a 2020 return would make them ineligible, were it to be filed, they may want to wait to file the 2020 return until they receive the stimulus payment – and the law makes clear they won’t have to pay back any excess.


One aspect of the American Rescue Plan Act that has gotten significant attention is the expanded Child Tax Credit (CTC). Only for tax year 2021, the law makes the CTC fully refundable and enlarges it to $3,600 for each child 0-5 years old and $3,000 for each child 6-17 years old, including children who are 17.

Notably, the expanded CTC may begin to impact families already starting around this summer. The law authorizes the IRS to make periodic, advance payments of half of the child tax credit from this summer until December 2021. If the payments are distributed monthly, it could mean that families receive $300/month or $250/month – a new monthly child allowance that, if made permanent, has the potential to reduce child poverty in half. The other half of the credit would then be claimed on a 2021 return. Significantly, the law also abolishes the minimum income earnings requirement for receipt of the expanded CTC thus bringing millions more within this safety net’s reach.

Further, the law directs the IRS to develop an “online information portal” where individuals can update their information for purposes of this credit. This portal could be vital because the distribution of the expanded CTC will be based on the most recent return, whether that be 2019 or 2020, available but since the enlarged benefit incorporates potential non-filers, the portal could be useful for them or for individuals whose children are born this year.

The full $3,600 or $3,000 will be available for single filers who make up to $75,000, married couples who make up to $150,000, and head of household filers who make up to $112,500. However, single filers who make up to $200,000 or married couples who make up to $400,000 can still access a $2,000 child tax credit. If one makes less than $40,000 as a single filer, $50,000 as a head of household filer, or $60,000 as a married filing jointly filer, they need not pay back any overpayment on a 2021 return.


Weeks ago, Senator Dick Durbin and Congresswoman Cindy Axne’s proposal to exempt from taxation the first $10,200 of unemployment compensation individuals received in 2020 appeared to be a longshot possibility. Negotiations over the federal weekly unemployment supplement and its duration though led to this provision’s inclusion in the final legislation. A major change in the middle of the tax filing season, this aspect of the law will avoid surprise, large tax bills for millions and will boost the finances of those who had tax withheld.

The IRS already has guidance on how to claim this $10,200 exclusion if you have not filed a return but it remains unclear what taxpayers who already filed should do. It is possible taxpayers will have to file superseding or amended 2020 returns. If so, it will be convenient that 1040-Xs can be filed electronically now but nevertheless, it could also add to the backlog of unprocessed returns. It is uncertain if the IRS will instead try to automatically refund individuals but recently, the same Democratic members of Congress who crafted the exclusion wrote to the IRS requesting as much

It should be noted that this tax forgiveness applies per person – so up to $20,400 of UC could be forgiven from tax for a married couple – and only applies for individuals making up to $150,000 in adjusted gross income. But there’s a potentially thorny issue of statutory interpretation at play: does the $150,000 AGI limit include your unemployment compensation in 2020? If a taxpayer received $10,200 in unemployment compensation as part of $150,001 in AGI in 2020, can they exclude the UC or not because their income is too high? If the taxpayer received more than $10,200 in UC (let’s say, $20,000) and that $20,000 put them above $150,000, how much of that is part of AGI that goes into determining eligibility for this forgiveness provision?

The statutory construction here is important as Section 9042 of the American Rescue Plan Act reads that Section 85 of the Code (the section that made unemployment compensation taxable) is amended by adding the special $10,200 tax forgiveness rule “if the adjusted gross income for such taxable year is less than $150,00.” The statute goes on to read “for purposes of [the paragraph describing the forgiveness], the adjusted gross income of the taxpayer shall be determined…without regard to this section.”

So far, in its guidance regarding this new forgiveness, the IRS seems to have taken the position that “without regard to this section” means that all of a taxpayer’s unemployment compensation is included in your AGI. If your AGI is above $150,000, even if without your unemployment compensation in 2020 you would’ve been eligible for this exclusion, you won’t be able to claim it, the Service says. Some observers agree but there appears to be disagreement among tax professionals as to this interpretation, particularly since it would seem to encourage married couples to file separate returns to lower their particular AGIs in order to each claim this benefit. It would be interesting to hear from members of Congress who crafted this language to ascertain their legislative intent.


For 2021 only, the law triples the maximum Earned Income Tax Credit for childless workers from $543 to $1,502 – a proposal long sought by President Biden’s economic adviser, Jared Bernstein. Childless workers who are not full-time students can now start getting the EITC at  age 19, former foster youth can start getting it age 18, and the upper age limit of 65 is gone – again, all for 2021. The “EITC lookback period” will be applicable for 2021 tax year too so individuals can use 2019 earned income if the latter is higher.

There are a few permanent changes to the EITC though. Married but separated individuals can receive the EITC for themselves (as if they are single essentially) if they meet certain criteria. The married person would have to live with a qualifying child for more than half of the year and not reside with their spouse for at least six months of the year or not live with their spouse by December 31 and have a separation agreement. Another permanent change is an increase in the limit on investment income to $10,000 that individuals can have in figuring EITC eligibility. Also, people are otherwise eligible for EITC can get a single-filer EITC if they are have children who don’t have Social Security numbers.


In addition to the UC tax forgiveness, another major change in the middle of the filing season has to do with Affordable Care Act Premium Tax Credits. For 2020 only, if an individual received more ACA premium tax credits than they should have based on their income and family information, they do not need to pay back the credits on their returns. If a taxpayer already filed their 2020 return, it is possible they may need to file an amended return. Again, this process could add to the processing backlog at the IRS but it will also mean relief for a lot of taxpayers.

Going forward, for 2021 and 2022, the law removes the 400 percent federal poverty line cap for ACA premium assistance. Premium assistance is also now more generous in that premiums for benchmark health plans are capped at 8.5 percent of household income and individuals who make up to 150 percent of the federal poverty line are eligible to pay zero premiums. For 2021 only, individuals who receive unemployment compensation in 2021 are eligible for zero premiums and also get lower out-of-pocket costs.


The law also expands the child and dependent care credit as it will now be fully refundable for 2021 and will increase to $4,000 for one individual or $8,000 for two or more individuals; the credit will also cover 50% of eligible expenses. Lastly, the law also excludes from taxation any student loan debt cancelation that occurs from December 31, 2020 to January 1, 2026. As such, if the President or Congress does cancel federal student loan debt, federal taxation of canceled debt income in such a scenario would not be of concern to individuals.

All told, these dramatic changes will be enormously impactful in the lives of clients of low-income taxpayer clinic practitioners. Practitioners like me will also surely be navigating questions and concerns about the implementation of these measures. The IRS will certainly have new hurdles to overcome in the process. Ultimately, one thing is clear: these are major changes that require our focus.

Congress Enacts Law of Unintended Tax Consequences

We welcome back occasional guest blogger and frequent commenter, Bob Kamman.  Bob has a practice in Phoenix that provides both representation and return preparation.  Today, he comes to the rescue of the PT team that has struggled to produce content this past week due to other obligations and provides us with insights on some of the quirks created by the legislation designed to provide relief for taxpayers impacted by the pandemic.  Keith

As the latest Covid-relief legislation makes its way through the Congressional meat grinder, a couple of tax inequities continue to be overlooked. Maybe it’s not too late to correct them.

One is mostly of interest to college students and the low-income taxpayer clinics where they may seek help. The other might interest college professors considering a sabbatical year abroad.


I) The Unemployment Trap

Many people who lost their jobs in 2020 qualified for federally-funded unemployment benefits that were more generous than those allowed by state programs. Recipients were paid $600 a week for up to 17 weeks, in addition to normal state benefits. Even college students with part-time jobs qualified, in many cases. It didn’t matter if they were under 24 years old, and still being claimed as dependents by their parents.

The $600 weekly checks ended on July 31, 2020, and would not resume until this year. Meanwhile, some people had continued eligibility for state benefits, and for other Covid-related compensation.

Enter the dreaded Kiddie Tax.

Since 1986, children with unearned income of more than a certain amount have been taxed on it at the same marginal rate as their parent(s). This prevented high-bracket adults from shifting investment income to their low-bracket kids. But back then, it only applied to children under age 14.

Congress eventually applied the law to older “children,” including full-time students up to age 23 who were not providing at least half of their support with their own earned income. Their earnings are taxed at the usual rates, but their unearned income is taxed at the higher parental rate. And unemployment is considered unearned income.

Tax practitioners this filing season are finding it not unusual for young unemployed college students to bring in Forms 1099-G showing five-figure amounts for unemployment compensation. If federal tax was withheld at all, it was mostly at a 10% rate. If $10,000 was received, $1,000 was withheld. But if the student must use the higher tax rate of, for example, 24%, the tax could approach $2,400 and the balance due IRS even after withholding, nearly $1,400.

If earned at a job and reported on a Form W-2, none of the $10,000 in wages would be taxed because of the $12,400 standard deduction.

Is this what Congress intended? Probably not.

Will it be fixed by pending legislation? Predictions are welcome in the Comments section below.

II. Welfare for Expatriates

If our unemployed students in the example above must pay IRS another $1,400 on their “unearned” unemployment compensation, what will the federal government do with it? Maybe, send it to one of their instructors.

Suppose you have a job offer from the Sorbonne to teach in Paris for a year at a salary of $180,000. Would it help, if the Treasury added another $1,400 tax-free? And that much for your spouse, also. That’s how the “Economic Impact Payments” have worked in the last two rounds.

They are based on AGI, after the exclusion for income earned abroad. That amount in 2021 is a maximum of $107,600. Then the $1,200 and $600 payments were not reduced unless this post-exclusion AGI exceeded $75,000 – or $150,000 on a joint return. All you must do to claim the exclusion is meet the “physical presence test:” stay overseas more than 330 days out of any 12-month period. (You also have to show that you have not kept your “tax home” in the United States, but for many academics those rules are not onerous.)

Paris is too expensive on $180,000 a year? Try Auckland. Cost of living in New Zealand is lower, and there is less virus around once they let you in.

Of course, educators are just a small minority of the Americans who benefit from this loophole. Half a million taxpayers claim the Section 911 exclusion each year, according to IRS estimates based on 2016 returns.

Are Covid disaster-relief payments for well-paid Americans living abroad what Congress intended? Probably not. A bipartisan group of 16 senators in early February sponsored a budget resolution amendment that promised to target stimulus checks to low- and middle-income families. It passed 99-1.

How simple would this be to fix, with a sentence that defines AGI as the amount before the foreign earned-income exclusion? Very.

Will that happen? Again, your predictions are welcome.

Can the IRS Ever Collect on Erroneous EIPs?

The IRS sent out a lot of EIPs this summer, and at a pretty quick clip. While there were certainly issues with people failing to receive the payments that should have (see posts on injured spouse issues here, domestic violence survivors here, and incarcerated individuals here), there were also undoubtedly people that received EIPs who shouldn’t have. The question this post sets out to answer is simply this: for those who shouldn’t have received an EIP what if anything can the IRS do to get the money back? No doubt taxpayers will want to know what to expect on these issues and will expect tax professionals to have a clear answer… you’ll have to read on to determine if there is one.

read more…

If I were to survey the room, I’d bet most people have already made up their minds that there is an easy answer to the title question of this post: “No, the IRS cannot collect on erroneous EIP. Haven’t you read IRC § 6428(e)(1)? If you received too much EIP you just reduce the amount of credit on your 2020 return, but not below zero.”

My dear friends, I’m here to tell you that nothing in life is easy -least of all parsing the language of IRC § 6428. Further, I’m sorry to say, in my opinion IRC § 6428(e)(1) is actually irrelevant to the question of whether the IRS can collect on erroneous EIPs. Lastly, and again with sincere apologies, I regret to inform that if the EIP is a rebate (a big “if”) the IRS can collect on it through the deficiency procedures.

Gasps all around, I’m sure. Let me explain myself.

First off, it is critically important that we are clear what we’re talking about when we talk about EIPs. The term EIP (for our purposes) only refers to the “advanced” payments made in 2020 pursuant to IRC § 6428(f). The payments that people will be claiming on their 2020 returns are not “EIPs” but instead are Recovery Rebate Credits (“RRC”) under IRC § 6428(a). They are separate and distinct credits. Conceptually, you aren’t claiming the “remainder” of your EIP when you file your tax return: you are claiming an entirely different credit that is simply reduced by any EIP you received.

To me, that IRC § 6428 creates two separate credits (and not simply staggered payments of the “same” credit) is uncontroversial despite the unhelpful language on the IRS website. But because it is critical to my analysis I want to drive the point home. I also think it will help lay bare why the IRC § 6428(e)(1) provision has no relevancy to the IRS ability to collect on erroneous EIPs.

Two Credits, One Code Section

We can all agree (I hope) that eligibility for the EIP is based on your 2019 (or 18) information. IRC § 6428(f) makes that pretty explicit, and that is also how the IRS administered the payments. That is in part why people rushed to file 2019 tax returns.

Yet some analyze the EIP as if 2019/18 isn’t the determinant for eligibility, but rather some expedient way of delivering the EIP. In this mistaken conceptualization the IRS just administered a 2020 tax credit based on 2019/18 information because that’s all they had (2020 not being even half-way done when the CARES Act was passed). This mistaken view reads IRC § 6428(f) as paying out some sort of “tentative” credit that the taxpayer then has to reconcile on their 2020 tax return with the “true” credit, since 2020 is the information we really cared about all along. I believe this is why so many people read the “good news” in IRC § 6428(e)(1) to be that if we got too much “tentative” credit we don’t have to pay any back when we claim our “true” credit on the 2020 tax return.

But that’s not how the law is written, and not how the credits work. The EIP is a 2019/18 animal. That is the year it looks at. That is the year it applies to. Allow me to illustrate.

Imagine you weren’t making much money in 2019. Maybe most of the year you were in law school and only after passing the bar in September did you begin making big-law money. Your AGI for 2019 is only $65,000, but by March 2020 you are already way over the AGI threshold for IRC § 6428(a). Nevertheless, you get a full EIP of $1,200 in May 2020. Common wisdom says you “got too much” EIP and will need to reconcile on your 2020 return. You aren’t too worried though, because the reconciliation provision at IRC § 6428(e)(1) protects you from paying back this excess EIP. If not for IRC § 6428(e)(1) you’d be in a bind…

Ah, my dear friend, can’t you see that no reconciliation is even necessary? You received exactly the right amount of EIP (assuming your 2019/18 return was accurate… more on that later). You don’t need to do anything on your 2020 tax return, because the 2020 tax return is only for claiming a wholly different credit -the RCC. Note that the IRS worksheet for the RCC supports this: the moment you determine you are ineligible for the credit based on 2020 information, you stop and do nothing more. Your EIP simply doesn’t matter at that point. See IRS Form 1040 Instructions at page 59.

It might be instructive to compare this to another tax credit where reconciliation actually does occur: the “Premium Tax Credit” at IRC § 36B. Because health insurance premiums are incurred on a monthly basis, the Premium Tax Credit is paid “in advance” as each monthly payment is due. The Premium Tax Credit looks at only one year for eligibility determinations: the tax year you are receiving the payments. Obviously, you cannot know exactly what your AGI (or even filing status) will be at the beginning of 2020, so you provide an estimate and then “reconcile” with the year-end numbers. This is exactly what you would expect with a “tentative” credit that looks at the same tax year for eligibility and advance payments… and this is not at all what happens with IRC § 6428.

So we agree that the law student doesn’t owe any EIP back, not because of IRC § 6428(e)(1), but because you don’t owe money “back” when you get the right amount of it in the first place. But imagine the IRS screwed up and didn’t send this law student their EIP. Can they claim it on their 2020 return? Obviously not, because the 2020 return is (again) for a wholly separate credit (the RCC) that they are not eligible for. The RCC looks at 2020 for eligibility determinations whereas the EIP looks at 2019/18. IRC § 6428(e)(1) only functions to make sure you don’t double-up on the RCC credit if you received an EIP payment (the italicized words will matter more in a moment). The “not below zero” reduction language just makes sure that if your (correct) EIP payment is larger than your (correct) RRC credit you get the full value of the larger of the two.

The RCC is a 2020 tax credit and the EIP, to beat this dead horse, is not.

Great, so the EIP is a Different Credit: Why Does that Matter?

The RCC is a remarkably conventional refundable credit. The RCC can be offset -just like any other tax credit (see Les’ post here). It is subject to math error procedures for certain “math-like” mistakes -just like many other refundable credits listed at IRC § 6213(g)(2). And it is explicitly made part of the definition of a deficiency as a negative tax -just like other refundable credits (see IRC § 6211(b)(4)(A)). Oh, and just like most tax credits it is something you affirmatively claim on your return.

The EIP, on the other hand, is metaphysically a tax-chimera. I have spent many a sleepless night trying to pin down exactly what it is, because “what it is” will drive how or if it can be collected.

First off, it isn’t entirely clear that the EIP is a “refundable tax credit.” Yes, IRC § 6428(b) refers to the refundable credits portion of the Internal Revenue Code. But note that the language of IRC § 6428(b) refers to the credit “allowed by subsection (a).” It does not refer to the credit “allowed by subsection (f)” (the advanced credit) or more broadly the credit “allowed by this section.”

Things get more difficult. The RCC provision (IRC § 6428(a)) provides a “credit” against the tax of 2020. The EIP provision (IRC § 6428(f)) treats the taxpayer as if they made a “payment” against tax for 2019/18…

This tricky distinction between “credit” and “payment” could matter. A lot. It could be the determinant on if the EIP is a “rebate.” That distinction directly touches on the assessment and collection procedures the IRS will need to follow. I will go into it in more detail on a subsequent post. For now, let’s just pretend the EIP is a rebate and go into why that would matter.

Here’s the fun thing about rebates: erroneous ones can be collected through deficiency procedures. Don’t believe me? Look to the definition of “deficiency” for yourself -specifically IRC § 6211(a) and (b)(2). Have Kleenex handy for the tears that statutory language is sure to inspire. But the critical take-away is that you can have a tax return that doesn’t (necessarily) understate tax and still have a deficiency if the IRS were to issue a “rebate” they shouldn’t have. This could happen, for example, if the IRS give you an EITC that you never really claimed and weren’t actually entitled to. In fact, that is the exact example used by the IRM at (10-01-2020). If the IRS noticed the mistake in time they could issue a notice of deficiency… the rest is well-trodden tax history.

No one claimed the EIP on their 2019/18 return, and yet some may well have received the EIP when they shouldn’t have based on mistakes from their 2019/18 returns. But if EIPs are rebates (again, a big “if”) made by the IRS, the recognition of these mistakes is exactly how they could be subject to the deficiency procedures and assessed like any other tax. And with exactly the same administrative collection options thereafter.

Uh oh…

But maybe it isn’t that bad. Recall, to begin with, the only people to worry would be those that had inaccurate 2019/18 returns resulting in EIPs they shouldn’t have received. If you were eligible based on 2019/18 information you have nothing to worry about. Also, as I will discuss in detail in another post, there are arguments that in some instances the erroneous EIP is not a “rebate” at all, which seriously limits the IRS collection options. Lastly, and importantly, there is the very real possibility that the IRS will simply make the decision not to go after EIPs at all as an administrative matter.

Those are all questions I’ll explore in my follow up post. For now, I’ll be content if only I have convinced you that the answer “the IRS cannot collect EIP because you just reduce it on your tax return” is 100% wrong. I’m afraid nothing in life is that simple.