Updates for ITIN Holders

Two issues have come up recently for ITIN holders that I’d like to flag. Thanks to Sarah Lora of the Lewis & Clark Low Income Taxpayer Clinic for prompting this post and providing much of the content.

1. Earlier this spring, NTA Erin Collins wrote a blog post highlighting the delays caused by the paper-filing requirement for ITIN seekers. This issue has gone on so long that I almost forgot it seems strange to people seeing it for the first time.

Taxpayers needing an ITIN may not file electronically.  They must always file a paper return, attaching the return to their ITIN application and mailing the package with supporting documents to the IRS ITIN unit. The IRS’s reasoning is that the attached tax return demonstrates the taxpayer’s need for an ITIN. Taxpayers needing an ITIN renewal fare slightly better: they may obtain the renewal prior to the filing season, which then allows for an e-filed return.  However, when taxpayers seek help with both filing their return and renewing their ITIN during the filing season, the renewal application must be attached to a paper tax return.

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The requirement to paper file has resulted in extraordinary wait times for taxpayers needing ITINs for themselves or dependents.

During 2021 through March 27, the IRS had received over 150,000 ITIN applications, with over 125,000 submitted with a tax return. This number is expected to grow – in 2020, the IRS received over a million ITIN applications, including about 470,000 applications from new applicants, meaning they had to apply with a paper tax return if they did not meet one of the narrow exceptions. These taxpayers are facing a double-whammy this filing season – first, the delay in having an ITIN application processed and second, the delay in having a paper tax return processed. For the week ending March 27, 2021, ITIN applications submitted with a return were taking 25 business days on average just to be input into the system. During this same week, the ITIN unit started with inventory of almost 67,000 applications to be worked and ended with an inventory of over 74,000, reflecting a growing backlog.

The NTA points out that many ITIN holders have dependent children that qualify for the Child Tax Credit (CTC) or Recovery Rebate Credit, creating delayed refunds for those families most in need.

In the post, the NTA suggests that ITIN applicants should not be required to attach a tax return if they can prove a filing requirement some other way, for example by submitting wage documents from an employer. She notes that accepting ITIN applications throughout the year would “prevent unnecessary delays, encourage voluntary compliance, and reward these individuals for doing the right thing by filing U.S. tax returns.”

2. ITIN holders with children who qualify for the CTC are entitled to the advanced CTC. The implementation of this provision has come with some glitches.  First, the IRS computers were initially programed to disallow the AdvCTC if the taxpayer or spouse was an ITIN holder. This programing error prevented approximately 1.2 million families from receiving the first monthly advanced CTC payment in July.  Advocates raised the issue with the IRS, and it appears that the glitch has been fixed and these families should begin receiving their payments in August 2021. According to the IRS news release, these taxpayers will receive the full amount of their AdvCTC:

Such families who did not receive a July payment are receiving a monthly payment in August, which also includes a portion of the July payment. They will receive the remainder of the July payment in late August.

Finally, advocates recently flagged the issue that the ITIN unit may reject ITIN applications for individuals with qualifying children filing 2020 returns with no income, seeking the advanced CTC. There were several reports of both private and nonprofit Certified Acceptance Agents (CAAs) refusing to submit ITIN applications for these individuals.

Sarah Lora previously wrote a post here discussing the ITIN unit’s flawed policy of rejecting ITIN applications where the accompanying paper tax return does not show what the IRS deems a federal monetary tax benefit. This policy rejects a century of tax policy that provides favorable tax treatment to citizens Canada and Mexico, as Sarah argues in a Tax Notes State article here. Even though a 2020 return is the ticket to receiving the advanced CTC, the ITIN unit’s current policy of blindly looking at monetary federal tax benefits on the attached return before them could lead them to reject ITINs for 2020 $0 income returns, preventing children with social security numbers, the vast majority of which are U.S. Citizens, from receiving the advanced CTC.

Because of this ITIN policy, it is logical for CAAs to think they would be wasting their time submitting applications for nonfilers who have “only” a 2021 tax benefit. Legal services attorney Jen Burdick submitted the issue to TAS through the Systemic Advocacy Management System (SAMS). Happily, Jen reports that there is a workaround. According to the Systemic Advocacy employee with whom Jen corresponded, a nonfiler’s 2020 tax return should be processed and the ITIN issued if the Form 1040 shows “Rev. Proc. 2021-24” written at the top of the first page.

Revenue Procedure 2021-24 sets out procedures for nonfilers to file 2020 tax returns in order to obtain AdvCTC payments, and it mentions ITINs at § 4.03(4)(b). Hopefully the ITIN unit will process applications attached to such returns. Because of the delays described above, it is difficult to say whether the ITIN unit is aware of the special 2020 procedures. Please reach out to Sarah at sarahlora@lclark.edu if you find taxpayers facing an improper ITIN rejection.

The workaround is good news, but it is discouraging that it has not been publicized by the IRS. The IRS needs to get the word out to all CAAs, so taxpayers stop getting turned away and told to wait until the 2022 filing season. A crush of ITIN applications next spring is the last thing that the IRS or taxpayers need.

Treasury Commits to a Permanent and Accessible Simplified Filing Portal for Child Tax Credit Claimants

One of the main stumbling blocks to full distribution of advance child tax credit (AdvCTC) payments has been the relative inaccessibility of the online sign-up tool for individuals who don’t have a 2019 or 2020 tax return on file with the IRS. Today the Treasury Department announced major improvements to the sign-up tool:

Treasury is announcing its commitment — as part of the Administration’s efforts to extend the expanded CTC program — to create a permanent, multi-lingual, and mobile friendly sign-up tool to help more Americans who do not regularly file taxes to claim their CTC. Treasury will work with Congress to ensure the effort is fully resourced. The Administration will also work with Congress to provide the necessary funding for a multi-year effort — leveraging public sector and community-oriented solutions — to reach and sign up more families and children.

In the meantime, Treasury and the White House are announcing a new, mobile-friendly, bilingual sign-up tool created by Code for America — a civic technology non-profit — which will be available in the coming weeks. The Administration will make an all-of government effort to enroll eligible families in the CTC, while also supporting the type of outreach and assistance needed over the long-term to ensure the Child Tax Credit is lifting up all our nation’s children.

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The “sign-up tool” functions as a simplified filing portal, creating a 2020 tax return which the IRS uses to calculate 2021 advance child tax credit payments pursuant to the American Rescue Plan Act. The inability to get a 2020 return “on file” has been a major source of frustration for some nonfilers with children. A more accessible portal will help, although it is just one piece of the puzzle. Individuals will still need help verifying their identity and resolving problems. Next to identity verification and return processing delays, the most common problem we hear from callers is submitting their information only to have it bounce back as someone else has already claimed them or their children on a tax return. But, improvements to the first step should surface these problems earlier.

The press release also includes information on payments made to date, and the impact that the payments are having:

…more than $15 billion were paid to families that include roughly 61 million eligible children in the second monthly payment of the expanded and newly-advanceable Child Tax Credit from the American Rescue Plan passed in March. The number of payments this month increased and cover an additional 1.6 million children. Eligible families received a payment of up to $300 per month for each child under age 6 and up to $250 per month for each child age 6 to 17.

This tax relief is having a real impact on the lives of America’s children. According to the Census Bureau’s Household Pulse Survey data released earlier this week, parents reported having less trouble covering the costs of food and other household expenses after receiving their first CTC payment. The share of families reporting that they sometimes or often did not have enough to eat in the past week dropped to the lowest percentage since the pandemic began. Parents are using their CTC payments to pay for basics for their kids. Roughly half of those who received a July CTC payment reported using it to pay for food and 1 in 4 spent some of their CTC on clothing.

Given the impact on child poverty that the payments appear to be having, the improvements to the simplified filing portal announced today may pave the way for Congress to extend advance CTC payments beyond 2021.

Into the Weeds with the Advance Child Tax Credit – Including Dispute Resolution

Last week, I wrote three blogs, here and here and here, trying to think through how an Advanced Child Tax Credit (AdvCTC) could be administered through the tax system and by the Internal Revenue Service.  Jen Burdick also wrote a very thoughtful post about the need for due process protections associated with the program.  I received a lot of thoughtful comments from folks, and I really appreciate that.  Today, I want to get a little further into the weeds and actually think through how all this would work, and I will also try to address some of the issues raised in the comments.

Regardless of which monthly AdvCTC proposal is ultimately enacted into law – an irrebuttable presumption of eligibility or a rebuttable presumption of eligibility (as I propose), certain administrative elements will be constant, even if their magnitude varies.  These include applying for advance payment of the credit via the annual return filing system; protecting the program from excessive claims; updating changes in circumstances throughout the year; and reconciling advance payments on the next tax return.

Now, into the weeds.

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Applying for the credit 

From the taxpayer perspective, taxpayers need relative ease in applying for and receiving the credit.  Because the CTC is administered through the tax system, the tax return will be the primary vehicle for applying for the CTC.  Taxpayers already receiving the CTC are familiar with this process. On their return for each year, they can affirm, under penalties of perjury, that they are eligible to receive the monthly CTC for the coming year with respect to a particular QC.  If they affirm they are eligible, then they must either elect to receive the monthly CTC or elect not to receive the monthly CTC.  That is, they must tell the IRS how they want to receive the credit – monthly or as a lump sum at year-end.  If they elect to receive the AdvCTC, they mustalso affirm that they understand their obligation to update the IRS about changes in circumstances that might affect their eligibility to receive the credit.  Establishing the obligation to update at the outset of the program both educates the taxpayer about the obligation and also establishes a behavioral norm. 

The 1040 already has a check box next to each dependent’s name and social security number to affirm whether that child is a qualifying child or other relative for the CTC.  It would be hard to fit more checkboxes onto that line and still have it readable.

Image of IRS Form 1040 page 1, section for listing dependents.

Personally, I think there needs to be a separate section on the return in which to make the election, but it could look similar to the above, where the taxpayer lists the dependents for whom an election is being made.  There would be two checkboxes – “Check if qualifies for the Advanced Child Tax Credit” and “Check if opting out of the Advanced Child Tax Credit.”  The check box for opting out is essential if the IRS is to prevent incorrect claims of the AdvCTC – it will need that information to catch other claims for the same child, where a taxpayer already has said they are eligible for the Adv CTC but want a lump sum at year-end.  Finally, there should be a question under the AdvCTC list of dependents, saying “I understand I am required to update the IRS promptly about any changes in circumstances affecting eligibility for the AdvCTC” with a check box.

Taxpayers who trade off claiming the child every other year with the other parent can simply not check the box “Eligible for the Adv CTC” for that child.  If Congress decides to allow taxpayers to allocate the AdvCTC between themselves, this section would be the place to do so.  Taxpayers would be required to enter the name of the other main carer and the percentage allocation.   IRS would have to program its systems to systemically check the matching return before issuing payments according to the allocation.  Alternatively, taxpayers could attach a separate form in which both persons sign and consent to the allocation.  (The IRS already requires a similar form when the custodial parent waives the dependency exemption/CTC in favor of the noncustodial parent, although in that case only the custodial parent’s signature is required.)

To facilitate filing by households who have little or no income, the IRS needs to create a robust simplified filing portal – one that can also obtain the necessary information to pay the childless-worker or with-child EITC on an annual basis as well as serve as the application for the monthly Adv CTC.  The simplified filing portal must be mobile accessible and in multiple languages.  The IRS should either develop it itself or issue a request-for-proposal.  Building this on top of Free Fillable Forms, where the IRS has no ability to mandate additional features like EITC eligibility, creates a sub-par product that increases taxpayer burden and IRS rework.

Ensuring program integrity and minimizing incorrect payments

To ensure program integrity, because the “application” for the AdvCTC is on the tax return (including the simplified filing portal), it goes through all the IRS questionable refund filters, identity theft systems, and the dependent database.  This enables the IRS to identify any math errors that would disallow the child on the tax return (Year 1) and identify any duplicate claims for the child for that year.  Because the 1st payment of the AdvCTC would not be paid out until May 15th, the IRS will also have time after the April 15th filing deadline to identify any dual AdvCTC applications for the same child for current tax year (Year 2).   Because taxpayers must tell the IRS whether they are prospectively eligible for the CTC for Year 2 even if they elect not to receive it in advance, the IRS will be able to identify and resolve these competing claims as well.

Note that the National Taxpayer Advocate recently reported that in the 2021 filing season (through May 22, 2021) the IRS “selected” 3.78 million individual tax returns on suspicion of identity theft, almost double the 1.9 million selected in the 2020 filing season (through July 16, 2020, the end of the extended filing season).  This increase is probably attributable to the Economic Income Payment/Rebate Recovery Credit claims.  When someone’s return is selected by the Taxpayer Protection Program (TPP) the taxpayer has to either authenticate their identity online or by telephone, or visit a Taxpayer Assistance Center to authenticate (good luck getting an appointment).  This can lead to weeks and even months of delay.  For the 2021 filing season, the National Taxpayer Advocate reports that the TPP phone line received about 6 million calls, and the level of service on that line was 19 percent – meaning 4 out of 5 calls did not get through.

I am concerned that advocates for the AdvCTC are unaware of the significant delays that can occur during the filing season, which will impact the delivery of the AdvCTC.  Advocates for child welfare and poverty eradication remind us that one of the most important features of the credit is that it must “smoothly” deliver benefits – no big ups and downs, no gaps in payment.  Yet for millions of taxpayers, year in and year out, receipt of their refunds is often a traumatic, indefinite process.  Each year the IRS freezes millions of returns – especially from low income taxpayers – on suspicion of fraud or error and requires taxpayers to interact with an understaffed, technologically challenged agency to clear up the problem.  In a good year it takes the IRS until July or August to clear up the majority of these suspended returns.  The IRS has not had a good year since 2017 or so; and for Tax Year 2019, the IRS is still digging itself out of this frozen return backlog.  If a return’s processing is suspended, there will be no AdvCTC paid out until the underlying matter is resolved and the return (and AdvCTC election) is finally posted to the IRS system.

If taxpayers find themselves not being able to count on the timely delivery of the AdvCTC, or if they have to navigate an unfriendly system to receive the AdvCTC, they just may elect to not participate in the system.  That would be a tragedy.  To avert this tragedy, the Administration needs to propose and Congress needs to enact a robust taxpayer service budget to handle the calls and resolve the disputes.  IRS needs to staff up these units for quick issue resolution; even more important, IRS needs to improve its fraud selection systems and establish specific goals to reduce false positives in that selection process.

At any rate, barring any dueling or ineligible claims for the AdvCTC, or any questionable refund flags in the return processing system, a taxpayer who elects to receive the Year 2 AdvCTC on a Year 1 return should expect to receive the first payment on May 15th.  The May payment would be for the month of April and is 1/12th of the full amount of the credit.  Under most AdvCTC proposals, once the taxpayer passes through return processing, the taxpayer is presumed to be eligible for the AdvCTC for the year, unless and until the taxpayer reports a change of circumstances that affects eligibility or a competing claim is filed for the same child during the year.

Change of Circumstances Portal and Dispute Resolution 

The change of circumstances portal needs to be accessible, mobile adapted, and in English and Spanish, and eventually in other major languages.  Any new household coming in during the year and claiming a child would input the child’s name and social security number and other relevant information such as the taxpayer’s financial account; the system would automatically check if another taxpayer was receiving or had elected out of receiving AdvCTC for that child.  If no one else was claiming the child, the system would also run that request through the IRS’ various questionable refund, identity theft, and dependent database filters. 

The system would then provide an automated response – for example, the taxpayer is eligible for AdvCTC as of this month and the first payment will be issued on that date.  If another household is receiving AdvCTC for that child, the new applicant will receive an automated response stating that another household is receiving AdvCTC for that child and if the new applicant disagrees, then the applicant has 30 days within which to provide the IRS information demonstrating the child is living with the new applicant.  At the same time, the IRS issues a “soft” notice to the original AdvCTC recipient advising them IRS has received information that may indicate the child’s living arrangements have changed, and if this is the case, the notice reminds the household of the obligation to update via the change-of-circumstances portal or by telephone in order to avoid clawbacks of the payments.  No additional information is required of the original claimant at this time; the notice serves as a “nudge” and helps minimize incorrect payments and clawbacks.

I have wrestled with whether the original AdvCTC recipient should be required to submit additional information early in the dispute resolution process or that information should be requested only after the IRS has determined the new applicant is eligible for the AdvCTC.  If the new applicant is ineligible, then there is no reason to burden the original recipient with supplying information.  On the other hand, if the IRS preliminarily determines the new applicant is eligible for the AdvCTC, it is important to provide the old household with an opportunity to challenge that determination and also to do that speedily so as to minimize erroneous payments and avoid clawbacks.

Let’s call the original AdvCTC recipient “Household 1” and the new AdvCTC applicant “Household 2.”  As noted earlier, if IRS systemically denies Household 2 because Household 1 is receiving the AdvCTC, Household 2 is provided the opportunity to request administrative review within 30 days.  Legislation should specifically instruct the IRS to develop an affidavit form that taxpayers can use to make such a request.  On the affidavit form, the taxpayer could state, under penalties of perjury, the child has been living with Household 2 since a specific date; the affidavit would also be signed, under penalties of perjury, by an official third party with knowledge of the child’s residence.  The IRS developed just such an affidavit for a test of residency for EITC purposes in 2004 (Form 8836 and Form 8836 Schedule A), and this affidavit could be modified for AdvCTC disputes.  (You can read the report of this pilot here – Form 8836 Schedule A is included this report.)  Third parties included case workers, school or medical personnel, court and law enforcement officials, members of the clergy, and others; the affiants certified they had either personal or records-based knowledge of the child’s residence.  Using an affidavit minimizes the administrative burden on the applicant but provides some third party evidence of the child’s location.  Of course, taxpayers could also submit other documentation, including protective orders.

If Household 2 submits this information within 30 days, the IRS immediately issues a notice to Household 1, asking them to provide information within 30 days, about the residency of the child, usually via the affidavit form.  Thus, by 60 days, the IRS will have the necessary information with which to make a decision, and while waiting for Household 1’s information it can contact the affiants for Household 2 and verify the affidavit, if necessary.  The IRS will have an additional 30 days to make a final eligibility determination.  In this way, Household 1 is not burdened unless and until Household 2 actually requests an administrative review and submits the affidavit or other documentation.

If Household 1 is ultimately determined to be ineligible, a safe harbor  — I’ve proposed 3 months — should protect Household 1 from any clawbacks attributable to the dispute resolution process.  If the IRS takes longer than 30 days to make the final determination, Household 1 would be protected from clawbacks during that extended period.  Under the rebuttable presumption model, Household 1 would generally have clawbacks (more than 1 month) only if Household 1 delayed submitting change of circumstances for a significant length of time.

Availability of Judicial Review

One thing I haven’t worked out is whether we need judicial review during the year or whether such a right would arise when the tax return is filed at year end.  In the benefits context, I have been told that adjudication takes about 18 months to become final; by then tax returns have been filed and the IRS may need to make decisions about whether to award the Earned Income Tax Credit or Child and Dependent Care Tax Credit for the child tied up in litigation.  Can the IRS make that decision if the issue of where the child resided for more than 6 of the 12 months of that year is the subject of judicial review?  I may be wrong, but I don’t think so.  For that reason, one approach would grant administrative review during the year, and then provide deficiency jurisdiction (not math error) for a final monthly CTC determination upon the filing of a tax return.

Because disputes based on a past year’s tax return may not be resolved in time for the current year’s payment of AdvCTC, the IRS could require that taxpayer to submit the affidavit form or even a recertification in order to receive the AdvCTC for the current year.  While this creates some administrative burden for the taxpayer, it does not deny them the AdvCTC outright for the current year pending resolution of litigation.  Recertification is already required with the EITC context.  (But see my comments about the current recertification form below.)

On the other hand, Congress could establish a new jurisdiction for the United States Tax Court, specifically for review of AdvCTC claims.  The legislation would set forth specific timeframes within which the Court must render a decision.  Given the logistical challenges with judicial review of monthly payments in the context of an annual tax system, I come down on the side of providing judicial review arising from the reconciliation on the income tax return.  This allows for all the issues relating to family status and child benefits to be decided in one cause of action.  It isn’t perfect, I know.

Paid Preparer Due Diligence

Unlike traditional social benefit programs, the IRS has taken itself out of the application process for programs like the EITC and CTC.  Taxpayers have the obligation to file returns; over half of returns claiming EITC are filed by paid preparers.  Return preparers are required to sign and date any return they prepare for compensation, and they can be subject to a monetary penalty if they fail to meet this and other requirements.  We don’t know how many returns are filed by ghost preparers – i.e., paid preparers who do not sign the return. 

For returns that involve the family-status provisions of the Internal Revenue Code, paid preparers must meet statutory due diligence requirements and complete Form 8867, Paid Preparer’s Due Diligence Checklist and file that with the return.  If they don’t file the form, they will be subject to a $540 penalty (per omission).  The due diligence requirements apply to the EIC, the CTC, the Additional CTC, the American Opportunity Tax Credit, the Credit for Other Dependents, and Head of Household filing status.

If you haven’t taken a look at this form and the requirements, you should.  Preparers have commented that it is difficult enough to ascertain that a child lived with a taxpayer for more than half the year, much less try to determine the child lived with a taxpayer more than half of a month, on a month-by-month basis.

I am sympathetic with this plight.  One thing that might help is my proposed Form 1099-CTC, which would indicate the months for which the taxpayer received Adv CTC.  Form 8867 already requires the preparer to ask if any of the various credits had been disallowed or reduced in prior years.  If so, the preparer must complete Form 8862, Information to Claim Certain Credits after Disallowance.   This is an insane form and needs to be completely redesigned.  Here is where the affidavit, Form 8836 Schedule A, can be very helpful.  The point is, if the CTC has not been reduced or disallowed in prior years, the preparer is still going to have to do basic due diligence for various other credits that rely on the 6-months-and-a-day rule.  If there is nothing to alert the preparer to eligibility concerns under those credits, then it seems to me the IRS should be comfortable with the preparer relying on the IRS-issued Form 1099-CTC in preparing the return.  If something triggered greater scrutiny (problems with the other credits, or a prior disallowance or reduction), then the taxpayer could provide the Form 8836, Schedule A to show residence, and the preparer could rely on that.  But again, this whole due diligence process needs to be revised.

There is, however, the issue of unscrupulous preparers.  It goes without saying that because there is a lot of money involved, there will be incompetent or unscrupulous people willing to help the low/no income population with applying for the AdvCTC.  This includes so-called preparers siphoning off the AdvCTC to their own accounts.  Congress needs to pass legislation that requires unenrolled preparers to register with the IRS, take a one-time tax law competency exam, and complete annual continuing education courses.  It was urgent before the AdvCTC, but it is a necessity now if you don’t want vulnerable taxpayers preyed upon.

I know my “in the weeds” suggestions will not satisfy everyone; but I have tried to think through how all this might work, in the context of the IRS.  Because of the interaction with other family-based credits, I believe there needs to be the ability to reconcile.  In earlier posts, I’ve proposed ways to minimize, if not eliminate, clawbacks.  I’m going to think about various scenarios, how this and other approaches might play out.  And we’ll soon learn where Congress lands on this issue.

The Importance of Notice and Hearing Rights for the Advanced Child Tax Credit

Today we welcome first-time guest blogger Jennifer Burdick. Jen is an attorney with Community Legal Services of Philadelphia focusing on SSI benefits. In this post, she explains the notice and appeal rights that typically apply in public benefit programs, and why they are crucial to her clients’ accessing the benefits that they qualify for. She then addresses the promise and shortfalls of the American Rescue Plan’s child tax credit expansion. Christine

Notice and Hearing Rights in Public Benefits: an Example

Jacob is a five-year-old child who receives SSI, a modest Social Security income support for children with disabilities. His mother receives a notice that Jacob is no longer eligible for SSI because a data match shows that his mother has too much money in the bank. In fact, the Social Security Administration (SSA) is mistaken — that’s not her bank account.

The notice of the termination, which SSA must send mom prior to stopping Jacob’s benefits, provides instructions for how she can appeal by seeking reconsideration. 20 C.F.R. § 416.1336. She is given 60 days, plus five for mailing, to appeal the decision. Id. All she has to do to appeal is send in the provided form (or any writing) disagreeing with the termination. She does not have to write much – one or two sentences is sufficient, and she does not need to use any magic words like “appeal,” or even sign the form. POMS SI 04020.020. If she appeals within ten days, plus five for mailing, Jacob’s benefits will remain on during the appeal, until there is a reconsideration decision. 20 C.F.R. § 416.1336(b).

Once Jacob’s mother requests reconsideration, an SSA claims representative who was not involved in the initial termination decision must review the case and issue a new written determination. 20 C.F.R. §§ 416.1413 & 416.1422. As part of that review, Jacob’s mother can select if she wants SSA to do a case review, or if she wants to attend an informal conference; in certain circumstances a formal conference is also available. 20 C.F.R. § 416.1413a. In a case review, SSA will allow Jacob’s mother to review SSA’s evidence, and present additional oral or written evidence, but typically these cases are decided by re-reviewing the case file. 20 C.F.R. § 1413(a). At an informal conference, Jacob’s mother will attend, can testify, and can additionally present witnesses. Id.  SSA regulations indicate the reconsideration proceeding should be scheduled within fifteen days of her request at her local office, either by phone or in person based on Jacob’s mom’s preference. 20 C.F.R. § 416.1413c. Jacob’s mother can bring an attorney or representative to the meeting. A summary of the informal or formal conference will be included in the record. 20 C.F.R. § 416.1413.

If, after the reconsideration proceeding, the SSA claims representative reaffirms the termination of benefits, Jacob’s mother once again has 60 days, plus five days for mailing, to appeal the decision with the opportunity for benefit continuation pending appeal. This time, the Social Security Act entitles her a hearing before a qualified administrative law judge within 90 days. She’s entitled to bring an attorney or other representative to the hearing.

Importantly, throughout this process SSA shares with Jacob’s mother the duty to develop the record in her case. 42 U.S.C. § 423(d)(5)(B). So as long as Jacob’s mother tells SSA about evidence that might support her claim for benefits, SSA has to help her get it if she cannot. Regulations governing SSA proceedings provide they are inquisitorial rather than adversarial. Carr v. Saul, 19-1442, 593 U.S. (2021). The shared duty to develop the evidence and the inquisitorial nature of the proceedings is critical because many claimants appear without the assistance of counsel, although legal services programs do represent claimants as resources allow. Following the hearing, she receives a written decision with further appeal rights if she loses.

Fortunately, though, she doesn’t need to appeal: the judge agrees that she does not have too much money in the bank, and Jacob’s disability income remains intact.

Implications for the Advanced Child Tax Credit

Among Social Security applicants and recipients, Jacob and his mother’s experiences are utterly commonplace, enshrined in decades of constitutional and statutory law that guarantee basic due process rights. Yet with the tax system, which is increasingly administering the American safety net, there is no similar inquisitorial process.  Instead, people with similar issues related to their tax payments and refund face adversarial process. But Congress can fix this. In the coming weeks, it should draft legislation providing notice and hearing rights to taxpayers seeking the refundable advanced Child Tax Credit (AdvCTC), as expanded in the American Rescue Plan (ARP).

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The expansion of the Child Tax Credit (CTC), coupled with making it fully refundable and available monthly to sync its availability to need, has the potential to revolutionize the social safety net. If this advanced tax credit is successfully distributed to those eligible, including Jacob and his mother, it will be literally life changing. Millions of families will rely on this benefit to help them pay for life’s necessities. My clients, low-income families where either a caregiver or child has a severe disability qualifying them for SSI, are excited because monthly payments bring the promise of helping them cover recurring expenses including the rent and utility expenses. One of my clients, Mr. McGruder hopes it will allow him to get his grandsons a cable subscription.

The problem is that ARP does not provides for necessary procedural protections in the event someone seeking to claim the advanced CTC credit is denied, or has their advanced payment reduced or ceased. The only legally required notice provided to families under the ARP is one letter, to be provided in January 2022 (after the receipt of any AdvCTC payments), which will list the total amount of advanced CTC the taxpayer received in 2021. IRC Sec. 7527A(b)(3). To be fair, IRS has elected to provide additional notice to families, sending letters to 36 million families who may qualify for AdvCTC payments, and announcing their intention to send a second personalized letter listing an estimate of their monthly payment. However, there is no provision in ARP, and the IRS has not committed, to send written notices at other key moments:

  1. if a family seeks advanced payments and is determined eligible for less than the full amount;
  2. if a family is determined completely ineligible; or
  3. if IRS will use their unilateral power to reduce or stop AdvCTC that the family has been receiving.

As a result, if a taxpayer is denied access to complete AdvCTC payments, or the Secretary uses the modification powers outlined in the ARP to modify or stop the advanced payment (IRC Sec. 7527A(b)(3)), a taxpayer may experience unexpected interruptions in those payments without any sort of advanced warning that the payment isn’t coming, or any information about an opportunity to appeal. In that event, the taxpayer won’t be able to easily contact IRS customer service, as IRS staff are already struggling to answer the current call volume and IRS directs that people not call in with CTC questions.

Can you imagine anything more frustrating? Imagine if Jacob’s mother, based on the promise of the AdvCTC’s additional $250 a month, secures a larger apartment so she and Jacob can have separate bedrooms, affording him the personal space that is recommended by this therapist. After relying on these payments to offset the additional rent, without receiving any notice, the payment does not come in September due to an internal IRS decision. She will no doubt try to call the IRS, but even the IRS website instructs people not to call for assistance.  If she does call and connect to a human, there is a decent chance she will be connected to a contractor who is unable to give her specific information about her tax case.  She will reach out to me, a legal aid lawyer, who will have to inform her that there is no clear avenue for appeal. Hopefully this will not result in their eviction and all the adverse consequences that follow.

There should be legislation, not litigation, creating detailed notice and hearings rights. In the public benefits context, the Fifth Amendment to the U.S. Constitution’s promise that “[n]o person shall be deprived of life, liberty, or property without due process of law” has been interpreted to convey both applicants and recipients a property interest in government benefits, including cash payments like the AdvCTC. U.S. Const. amend V. Because of this property interest, applicants and recipients are entitled to notice and an opportunity to appeal a denial, reduction, or termination of benefits, in many cases before the reduction or termination takes place. U.S. Const. amend V.; Goldberg v. Kelly, 397 U.S. 254 (1970).

Many poverty advocates, public benefits lawyers, and policy analysts have been surprised to learn that the Supreme Court does not necessarily believe that Fifth Amendment’s promise of pre-deprivation due process applies with the same force to tax refunds and credits. See Leslie Book, The IRS’s EITC Compliance Regime: Taxpayers Caught in the Net, 81 Or. L. Rev. 351, n.9 (2002), (reviewing relevant due process and tax cases, and finding that “the Supreme Court has long held that the collection of tax is so essential to the nation’s lifeline that IRS adjudicative actions should remain largely untouched by procedural protections inherent in the Fifth Amendment Due Process Clause”); Nina Olson, Erwin N. Griswald Lecture Before the American College of Tax Counsel: Taking the Bull by its Horns: Some Thoughts on Constitutional Due Process in Tax Collection, Tax Lawyer Vol 63, No. 3, 2010, at  n. 24.

Although there is some legal basis to support a finding that there is a protectable property interest that would confer due process rights on tax benefits that target alleviating poverty like the AdvCTC, the jurisprudence in this area is murky. Compare, e.g., In re Hardy, 787 F.3d 1189, 1190-91 (8th Cir. 2015) (holding child tax credit qualified as a “public assistance benefit”); Flanery v. Mathison, 289 B.R. 624, 628 (W.D. Ky. 2003) (recognizing trend that refundable tax credits fall within the classification of public assistance designed to combat poverty and are not merely tax refunds); In re Vazquez, 516 B.R. 523, 526 (Bankr. N.D. Ill. 2014) (holding child tax credits can be claimed as exempt public assistance benefits); with, Phillips v. Comm’r, 283 U.S. 589, 596-97 (1931).

Because of the complex legal ground in this area, it would be helpful if Congress would legislate a notice and hearing process. This process must include the following elements:

  1. Plain language notice of approval, denial, termination, or reduction of advance CTC payments, with the reason for the approval, denial, termination, or reduction of the payment;
  2. A clear deadline to protest (or appeal) an adverse action (denial, reduction, or termination), with an additional explanation that if the taxpayer disagrees they can still file a tax return claiming the CTC, which would then be subject to deficiency procedures;
  3. With each notice of payment denial, reduction or termination, a plain language worksheet and sample affidavits to allow claimants to easily file a written protest, with no requirements that people use *magic words* to appeal;
  4. An appeals conference (in person, or over the phone) with an impartial officer must be scheduled promptly after receipt of a protest;
  5. A plain language notice to appellants with the conference information, including its time and date, information about what to have on hand, what to expect, and how to reschedule;
  6. The ability to attend the conference virtually or by phone, plus an in-person option if public health measures allow;
  7. Information to appellants detailing their right to an authorized representative of their choice (including an LITC representative) via phone or video conferencing;
  8. Written procedures for conduct of the conference, including use of interpreters and assistive technology;
  9. Appeals to issue a decision within 30 days of the conference, as well as notification making it clear that the denial does not mean the underlying CTC is decided, and does not prevent the taxpayer from seeking it through a subsequent tax return.

The creation of an accessible appeal conference is critical. Some of the disputes about the ability to claim the AdvCTC will revolve around which caregiver a child lives with, and from whom the child gets more support. These may seem like a straightforward questions, but many families are complex. Real disputes may exist: for example, do you know where a child’s official residence is if she has a bedroom at her mother’s house, but usually sleeps at her grandmother’s house because her mother works overnight shifts? These sorts of questions will not likely be resolvable with dueling pieces of paper, but will require testimony and possibly witnesses. Absent the creation of notice and hearing rights, many children who most need the support the AdvCTC promises may be unable to benefit.

Thinking Out Loud about the Advanced Child Tax Credit – Part 3: The Family and Worker Benefit Unit

In my last two blogs here and here, I have tried to think through how to reconcile challenging and sometimes competing policy and administrative considerations in order to pay the Child Tax Credit in advance throughout the tax year on a monthly basis.  In this blog post I turn to the broader issue of how the IRS should be restructured and reformed so it can effectively administer social benefit programs such as the Earned Income Tax Credit (EITC) and the Advanced Child Tax Credit (AdvCTC).

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Since my 2010 Annual Report to Congress, I have urged the IRS to recognize that as of the 2000s, its mission has undergone a major paradigm shift.  No longer is the IRS just a revenue collector for the federal fisc.  It is, instead, both a revenue collector and a benefits administrator.  Here are just a few of the social benefit programs it administers:

  • Earned Income Tax Credit – As of December 2020, the IRS issued $ 62 billion in payments to about 25 million low income working taxpayers and households annually;
  • Premium Tax Credit – For Tax Year 2018 the IRS issued $ 41.8 billion in payments to 5.4 million taxpayers;
  • Economic Impact Payments – over three rounds of payments in 2020 and 2021, under incredibly difficult pandemic conditions, the IRS issued almost $ 800 billion in economic impact payments to about 160 million taxpayers.
  • Advanced Child Tax Credit – The IRS has projected it will be issuing monthly payments of half the annual credit to approximately 39 million taxpayers beginning July 15, 2021, totaling many tens of billions of dollars.

This shift in the type of IRS program responsibilities has major ramifications for how it conducts business.  To date, the IRS has treated these programs in the same way it treats other tax administration programs, which is to say, from an enforcement-oriented perspective.  Its emphasis has been on using remote correspondence examinations, pre-refund fraud detection filters, and automated summary assessment authorities (math errors), sprinkled sporadically with some outreach efforts (see the annual EITC day events).  Its ongoing outreach efforts basically involve issuing electronic alerts and creating posters and flyers in multiple languages to distribute to its ever-expanding stakeholder base.  The language expansion is terrific, and kudos to Commissioner Rettig for driving this.  The IRS’s stakeholder base, on the other hand, is having an increasingly difficult time carrying the IRS message because it is shouldering so much of the service delivery burden and has very little opportunity to influence both the operations and the message.  To many, it feels like a one-way street.

While I had hoped the IRS would seize the opportunity provided it in the Taxpayer First Act to come up with a comprehensive customer service strategy that comes to grips with its social benefit mission, the IRS’s Taxpayer First Act Report largely punts on this issue.  With the focus on IRS’s role in implementing the AdvCTC, we have another chance to get the IRS to embrace this mission.  As I’ve outlined in my previous posts, the AdvCTC will require the IRS to engage with taxpayers not currently in the tax system and interact with current taxpayers outside of the annual return filing process.  It will require the IRS to develop social skills that presently do not exist in an agency that views its primary role as enforcement.  This paradigm shift will not be easy, but Congress and the Administration can make this happen as a key service and strategy component of the push to update IRS technology and reduce the tax gap.

The first step in this transformation is for Congress to require the IRS to adopt a new mission statement that explicitly acknowledges its dual mission.  (IRS could do this without congressional intervention, but I have been recommending this since 2010 and the IRS has explicitly declined to do so.)  The IRS current mission statement could be modified as follows (added/altered language is italicized):

The mission of the IRS is to provide America’s taxpayers top quality service by helping them understand and meet their tax responsibilities and receive the tax benefits for which they are eligible, and by applying the tax law with integrity and fairness to all and in accordance with the Taxpayer Bill of Rights.

Some may wonder why I keep harping on the mission statement, since it may seem like just a bunch of words.  But my 18 years inside the IRS, at the highest leadership level, have taught me that strategic planning starts with the mission statement.  From the mission statement flow the agency’s goals, objectives, strategies, initiatives, and performance measures, down to annual executive performance agreements (upon which individual executive performance is scored and bonuses are awarded).  In a hierarchical, command and control organization like the IRS, you get what you measure.  And what you measure starts with your mission. 

Establishing a dual mission means that, rather than lumping the EITC and other benefits in with offshore noncompliance and pass-through underreporting, the IRS will have go through a separate strategic planning and performance management process for the mission of delivering social benefits to eligible individuals.  The goal for such a program will be achieving the highest possible participation rate of eligible taxpayers while protecting taxpayer rights and minimizing undue burden.  Thus, rather than focusing on the improper payment rate as the primary driver of all EITC/CTC/APTC initiatives, the IRS will focus on understanding the particular characteristics of the eligible population that might create challenges for benefit delivery and program integrity.  It could then use that information to design and staff a program delivery approach that meets the needs of the target population, rather than forcing the target population to fit the needs of the IRS.

In order to accomplish this, the next step is the establishment of a Family and Worker Benefit Unit (and because it is the IRS and it will need an acronym, I suggest FAWBU).  This unit will be responsible for program design, implementation, assistance, and compliance for all tax provisions that hinge on family status.  Some might say the IRS already has a division that has these responsibilities, namely the Wage & Investment Operating Division.  But as I noted in 2010, the vast majority of W&I’s employees are dedicated to tasks that affect all taxpayers – e.g, submission processing (processing all types of returns, information reports, and other submissions); accounts management (handling the main phone numbers and correspondence for accounts of many different types of taxpayers, including all individual taxpayers); forms and publications (designing and writing all IRS forms and publications for all types of taxes and taxpayers).  Separate and apart from what happens with the FAWBU, these functions should be moved into a separate division, since they serve all taxpayers, not just those receiving social benefits through the tax system. 

To get a sense of what operations should be under the FAWBU, I spent some time the other day scrolling through the IRM provisions relating to the Wage & Investment Operating Division, which had a major update on February 20, 2020.    Two units caught my eye – Stakeholder Partnerships, Education and Communication (SPEC) and Return Integrity and Compliance Services (RICS).

According to the IRM, SPEC’s mission is “to assist customers taxpayers [sic] in satisfying their tax responsibilities by building and maintaining partnerships with key stakeholders, seeking to create and share value by informing, educating and communicating with its shared customers.“ (IRM 1.1.13.6.2(2))  The FAWBU could absorb the functions of SPEC, which would be redesigned to incorporate a renewed focus on educating about and delivering benefits to eligible taxpayers.  IRS budgets should allocate SPEC increased staffing that is geographically based where its partners are and where taxpayer populations who have most need of education are located.  The unit would continue to operate the Volunteer Income Tax Assistance and Tax Counseling for the Elderly programs, with increased staffing to provide better support, innovation, and assistance to the grantees.  SPEC should focus on recruiting new hires from the programs they interact with – it needs to bring the skills, experience, and knowledge of persons who have worked directly with the affected populations into the IRS.  That is the beginning of organizational change.

The FAWBU would also absorb RICS.  RICS’ mission is “to strengthen the integrity of the tax system by:

  • Protecting the public interest by improving IRS’s ability to detect and prevent improper refunds
  • Serving the public interest by taking enforcement actions fairly and appropriately to identify, evaluate and prevent the issuance of improper refunds
  • Helping taxpayers understand the refundable tax credits for which they are eligible.”  IRM 1.1.13.5 (1)

IRM 1.1.13.5(2) lists eight ways RICS accomplishes its mission, with a heavy emphasis on program integrity, fraud, identity theft, and compliance.  Programs under RICS includes the Return Integrity Verification Operations (RIVO); Integrity and Verification Operations (IVO); Refundable Credits Exam Operations, and Refundable Credits Program Management.  In the IRS today, RICS oversees all the compliance operations and revenue protection programs relating to refunds, including refunds attributable to refundable credits.

Now, RICS’ functions are incredibly important to the integrity of the nation’s tax system, and it’s work protects both taxpayers individually and collectively from systemic and individual efforts at refund fraud.  But because it is viewed primarily as a revenue protection function, it tolerates high false positive rates and creates burdensome processes for issue resolution.  

Under the FAWBU, program integrity would be redefined to include using data and technology not only to identify ineligible taxpayers but to proactively identify eligible persons who have not claimed the benefits and persons for whom the benefits can be issued automatically where data indicate there is low risk of an improper payment.  In this way, RICS focus becomes broader – it develops a more holistic approach to program integrity, and has a specific goal assisting taxpayers with their compliance challenges.  There is an explicit taxpayer service component to program integrity, including reducing false positive rates.

I would move the entire RICS operation under FAWBU, since RICS interacts with billions of dollars of refundable credit refunds.  I would rename the Refundable Credits Exam Operation as the Refundable Credits Compliance Unit, which would have a small component of audits but primarily focus on preventive initiatives, soft touches, nudging notices and communications; the unit would also incorporate the return preparer strategy aspect of RICS.  The unit would focus on alternatives to correspondence audits, which are particularly unsuitable for low income populations.  The compliance unit would be responsible for providing expedited administrative review of denials of the Advanced Child Tax Credit or dueling AdvCTC claims, if the credit is permanently enacted.

Outreach and education would be transformed to include the establishment of a Family and Worker Benefit Federal Advisory Committee under the Federal Advisory Committee Act (FACA), the members of which would come from various stakeholders who regularly interact with, serve, or research the target populations.  The Advisory Committee would advise the IRS on all things related to these benefit programs – including communication strategy, taxpayer assistance (including the advisability of digital approaches and account authentication), and education and compliance initiatives.  The IRS would be able to share communications, FAQs, draft notices, prototypes of the nonfiler and update portals, etc., with the Advisory Committee.  The Advisory Committee would submit an annual report to the Secretary of the Treasury and the Commissioner.  Having a dedicated Advisory Committee will ensure pre-implementation external expert comments and suggestions on social benefit program administration.

The FAWBU would have responsibility for taxpayer service operations, including maintenance of a toll-free line pre- and during filing season dedicated to answering taxpayer questions about eligibility for refundable credits, as well as a dedicated phone line for updating circumstances for the AdvCTC.  The FAWBU would also hire and maintain a staff of researchers, data scientists, and psychologists who could assist in the planning of initiatives and tools that would influence behavior, both to increase the participation rate and to minimize noncompliance.

Most importantly, the FAWBU must be staffed with employees with the particular skillsets best adapted to achieve the goals and implement the strategies and initiatives deriving from the IRS’s social benefits delivery mission.  This unit’s front line taxpayer-facing employees should have social work skills; compliance personnel should also have that background, especially important as approaches are developed to address compliance issues that occur not because the individual is a bad actor but rather is experiencing the challenges that arise in the context of poverty and near-poverty.  Thus, in achieving its social benefits mission, the FAWBU would place heavy emphasis on its employees (1) directly assisting individual taxpayers with applying for the credits; (2) answering questions upfront and quickly; (3) resolving discrepancies quickly with clear explanations; (4) actively partnering with stakeholders, listening to recommendations, and incorporating into IRS approaches; (5) emphasizing education and compliance touches over enforcement; and (6) exploring innovative approaches and conducting ground-breaking research on the service and compliance needs of the target population.

Further, the FAWBU would reach out to federal and state government entities to learn how these other agencies interface with, educate, and assist these vulnerable populations, including alternative approaches to online authentication and to digital accounts and services.  (The Advisory Committee could include a member from a state benefits office. ) Finally, the FAWBU would learn about the program integrity and dispute resolution systems utilized in other programs, and how due process protections must be and can be incorporated into tax social benefit programs.  It would also study and learn from approaches adopted by international tax administrations.

My proposed reorganization uses existing resources and introduces a mission and goals that will apply those resources in a way that views the taxpayer population as trying to comply with the tax laws.  It focuses resources on education and assistance, on using technology to deliver benefits to taxpayers who are eligible, and on using nudges and preventive approaches to noncompliance.  Increased IRS appropriations offer a chance to create a Family and Worker Benefit Unit within the IRS that can recruit employees with the skills necessary to meet the needs of the benefit population, and enhance training for existing employees who are interested in helping the IRS fulfill the benefits-distribution aspect of its mission.

If we don’t make this change in the IRS mission and establish a FAWBU, and instead just layer additional social benefits on top of the current IRS structure, we will harm taxpayers because the IRS will treat this program from an enforcement perspective and not provide taxpayers with the assistance and guidance they need to receive the benefits they are eligible for.  To effectively administer social benefits through the federal tax system, we need a unit dedicated solely to the needs of these taxpayers and all aspects of benefits distribution.

Thinking Out Loud About the Advanced CTC – Part 2

In my last blog post, I identified some of the challenges that arise when the Child Tax Credit is converted from an annual pay-out to a monthly pay-out. In this blog post, I will explore some alternative approaches that may address, if not resolve, those challenges. I have to confess that I am muddling through this – none of this is easy, and there are trade-offs. Before I explore some alternative approaches, it may be helpful to lay out some key design considerations.

First of all, as I stated in my earlier blog, I believe the monthly advanced CTC should be paid to the taxpayer/household(s) that actually cares for and has responsibility for the child in any given month. That is the starting point for my proposal.

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Second, the program has to be administrable – both from the IRS’s and the taxpayer’s perspective. The minimal amount of administrative burden should be placed on taxpayers, while maintaining program integrity – i.e., we can’t design a process that is so easy to administer that it results in a significant amount of payments to the wrong individuals, because that will erode public and political support for the program. There are a lot of levers here to avoid that result – e.g., refining the definitions of eligible individual or qualifying child; establishing safe harbor amounts; paying out only a percentage of the full credit. Administrability also has to take into consideration the IRS’s technology and staffing capabilities, taxpayer’s ability to navigate whatever systems and procedures are developed, and the external support networks necessary to ensure taxpayer participation in the program.

Some have expressed concerns that going from an annual payment to monthly payments will be a heavy lift for the IRS. I don’t think the issuance of monthly payments in and of itself is a problem. The challenge for the IRS is getting the payments to the right household. The IRS will do what the law instructs it to do; it needs clear guidance, and if guidance is vague it will resolve the ambiguity in the manner that makes it easiest for the IRS to administer and that minimizes the risk of incorrect payments. Because the IRS is an enforcement-minded agency, it will always err on the side of not issuing a payment where ambiguity exists, unless the law clearly instructs it otherwise. Design features such as safe harbors and bars on offset against other tax refunds are clear legislative statements that it is understood and accepted some level of error is unavoidable when administering the program.  By minimizing (by not eliminating) clawbacks, these features allow the IRS to direct its resources to assistance, education, and outreach to minimize avoidable errors, as well as focus its enforcement actions on actual abuse and fraud.

And to avoid unnecessary errors, the monthly advance CTC should align with other tax provisions – the EITC, the American Opportunity Tax Credit (AOTC), head of household status. There will have to be differences between the programs because some are administered annually and one monthly, but the concepts underlying eligibility rules of all these programs should be fairly consistent in order to avoid confusion and illogical claims. For example, we shouldn’t design a program in which a taxpayer can receive the EITC for a given child on the tax return but be barred from claiming the CTC for that child on the return because irrebuttable presumptive eligibility awards the monthly CTC to another person.

Third, the program’s goals must be clearly defined. Is the point of the Child Tax Credit to alleviate child poverty, or, as I discussed in my earlier blog, is it still to reflect the impact of family size on a taxpayer’s ability to pay tax? Are we trying to do both, and if so, are we prioritizing one goal over the other? If the goal of the program is to alleviate child poverty, then avoiding clawbacks of the credit and smoothing the amount of the credit (consistent payments throughout the year, without fits and starts) will be high priorities.

Fourth, the design of the program should accommodate the characteristics of the population that will avail themselves of the CTC. Elaine Maag, Elizabeth Peters, and Sara Edelstein show that between 1996 and 2008 the composition of US households changed significantly. By 2008, although the majority of children were in households with two parents, their share of households had declined from 70.9 percent to 67.3 percent. The percentage of children in households with cohabiting couples and non-parent households increased over that period. Single parent households, regardless of income levels, remained relatively constant. These patterns hold true for low income households. Thus, the CTC needs to work for a wide variety of households; its eligibility rules should reflect that diversity.

Fifth, and this seems to me to be very important, how significant is the behavioral change we are asking of individuals who are currently claiming or will be eligible for claiming the CTC? Are we introducing discrepancies into the current system that will confuse currently eligible individuals or increase the likelihood of errors? We will need to consider how the introduction of advance monthly payments affects taxpayers already engaged in the tax system.

In Tax Year 2018, according to IRS Statistics of Income, the CTC was claimed on almost 39.4 million tax returns for almost $81.5 billion. Over 26 million taxpayers claimed the Additional CTC, for about $36 billion; 19.5 million of these taxpayers received $19.5 billion as refunds (i.e., not offset against taxes owed). For that same year, over 26 million taxpayers claimed the EITC, totaling almost $65 billion; over 23 million of these EITC taxpayers received $56 billion in refunds. That is a lot of human beings who are currently claiming the CTC and the EITC and who will be affected by any changes in the design and delivery of the credit. On the other hand, making the CTC fully refundable with no income requirement clearly benefits a significant number of families. Jacob Goldin and Katherine Michelmore estimate this change makes 5.9 million children, primarily from Black and very low income households, eligible for the credit. Some of these households are currently not engaged in the tax filing process (although some may have filed returns through the nonfiler portal in 2020 and 2021 in order to receive economic impact payments).

Currently, under the IRC, the CTC is awarded to an eligible individual with respect to a qualifying child (QC) under IRC § 152(c) (the rules for claiming the dependency exemption). In addition to having a specific relationship to the child, and other rules relating to age, support, etc., there is a residency requirement – the QC must have lived with the eligible individual for more than half the year. Essentially, the relationship and residency tests are proxies for the “care and control” standard found in many benefit programs and the “main carer” standard found in some tax credits in other countries, including Australia. The result of the 6 months-and-a-day test is that it is all or nothing – if you meet the test, you get the entire credit; if you don’t meet the test, you get nothing. Under the test, if the child moves around a lot, it is possible no carer gets the benefit of the credit.

If we base monthly eligibility on where the child resides for that month, how is residency determined? Do we determine monthly residency based on where the child is on the first day of the month, or the last day of the month, or the majority or most days of the month? What if the child splits her time 50-50 between parents? What if the split is 51 percent/49 percent?

We could allow both “main carers” to allocate the month’s credit between themselves and notify the IRS that they are making the election in that way (Australia allows this). The IRS has said it will split the Advanced CTC between parents who filed Married-Filing-Jointly in 2020 (or 2019) if they notify the IRS that they have separated and will file separate returns for Tax Year 2021. While under the current law one of these payments would be considered incorrect, the law could be amended to incorporate this concept of two (consensual) main carers. The Ways and Means Committee Working Draft of the Building an Economy for Families Act here adopts this approach. The IRS would only get involved where one main carer will not agree to split the credit, in which case the all or nothing residency test for that month applies (in addition to all the other IRC § 152 eligibility requirements – relationship, support, etc).

Regardless of which test we apply, there will be changes of circumstances. Maag et al found that while most children live in the same household within the tax year, 4.6% change parental households at least once in a tax year and 1% change 2 or more times within the tax year. Perhaps because of this volatility in households, presumptive eligibility proposals shift the burden of updating for change of circumstances to the newly eligible household to apply; the household currently receiving the monthly payment has no responsibility to update. And because there is an irrebuttable presumption that once you’ve received a payment for the month, you are eligible for it (absent fraud), there are no erroneous payments. This violates my cardinal rule – that we should try to pay the AdvCTC to the person who actually cares for the child in that month.

I understand the concern that when children move out of a home it is often because that home is in turmoil or under deep stress, so it may not be possible to expect an immediate update of circumstances. I fully understand the challenges low income taxpayers face every day – after all, representing and advocating for low income persons has been my life’s work. Still, it seems to me that the responsibility to update change of circumstances should be borne by everyone, regardless of income level. Then it becomes a question of how easy we can make the updating process; and whether we need to accommodate the exigencies and stresses of poverty by having safe harbors in order to avoid serious clawbacks.

There also seems to be a belief that the new claimant household will navigate the administrative burden of filing a claim for the QC immediately upon becoming eligible. I personally think that is a flawed assumption. If a child moves into a new household, there are many things that need to be addressed, and it may be a few months before the new household learns about or applies for the monthly CTC. Yet presumptive eligibility is not retroactive to when the child actually lived with the taxpayer; it will only go back to when the taxpayer applies for it. And in the meantime, the original household continues to receive the monthly CTC for a child that does not live with them.

So here are my thoughts about how we could reconcile all these somewhat competing considerations. I put this out here so that others can comment and make suggestions. I know there are issues I haven’t addressed, or I’ve made choices that others might not make. But I have tried to think through how to implement a monthly tax credit through an annual tax system without doing too much violence to that system. I may be splitting the baby here (with apologies to King Solomon), but I am continuing to come down on the side of having the monthly CTC paid out as an advanced CTC, with year-end reconciliation required. Also note that I am calling persons who apply for the AdvCTC “taxpayers” – this is a deliberate reminder that we are administering this program through the tax system. These individuals have now entered a different system from the traditional benefits system. We cannot, nor should we, ignore that fact.

  1. The monthly AdvCTC is based on where the child has a principal residence, so long as other CTC eligibility requirements are met (relationship, age, etc.). Principal residence would be defined as where the child resides for more than half the month (or for the greatest number of days in the month where the child does not reside with one household for more than half the month).
  2. Taxpayers may apply for the AdvCTC on the tax return for the prior year or during the year via the change-of-circumstances portal. If they do not want the AdvCTC for their qualifying child, they must affirmatively state this, so the IRS can identify competing claims. If there are no competing claims and the claim passes the usual questionable refund/identity theft/dependent database screens, the monthly AdvCTC will be paid out to the electing taxpayer during the year.
  3. The presumption that the electing taxpayer is the eligible taxpayer is not irrebuttable, however. The electing taxpayer has the obligation to update the IRS when the household is no longer the principal residence of the child for any given month, other than temporary absences. (There are many definitions of temporary absence in the IRC, but regulations may need to define this for purposes of the AdvCTC.)
  4. Taxpayers who successfully elected on the prior year tax return to receive the AdvCTC would receive the first credit on or about May 15, for the month of April. Payments would continue throughout the year (unless the taxpayer notifies the IRS circumstances have changed or a dueling claim arises) until January 15, which is the payment for the month of December. The monthly AdvCTC would not span tax years. The taxpayer could receive up to 9/12ths of the annual CTC in advance.
  5. By January 31 of the next year, the IRS would be required to send every taxpayer receiving the monthly AdvCTC a form showing which monthly payment was received for a qualifying child (Form 1099-CTC?).
  6. The electing taxpayer would use this form to file a reconciliation schedule with their return (not just to allow for claiming the CTC retroactively but because more than 6 months of the monthly CTC creates potential eligibility for the EITC, CDCC, and AOTC). For very low (or no) income taxpayers, the reconciliation could be done through a “simplified filing portal” with the IRS populating certain fields from internal information (e.g., the reconciliation form). This reconciliation would be no more difficult than recertifying eligibility for public benefits once every 12 months.
  7. If eligible, the taxpayer can claim the remaining 3/12ths of the CTC on the tax return; if the return passes IRS refund filters, the taxpayer can expect to receive his full refund, including the remaining CTC, the EITC, and other credits by the last two weeks in February. (Recall that by law, the EITC and CTC cannot be paid out before February 15 of any given year so IRS can validate income.)
  8. Where there is income volatility, taxpayers would be able to elect to use prior year income instead of current year income when reconciling and claiming the CTC on the current year tax return.
  9. Where a taxpayer is eligible for the EITC and has an overpayment of monthly AdvCTC, the IRS would be prohibited from applying the EITC refund (or limited to 15% of the EITC refund) toward that overpayment.
  10. There would be an expeditious administrative dispute resolution process throughout the year, with immediate notice to the household currently receiving the AdvCTC, advising that a competing claim has been filed and reminding that household to update its circumstances if appropriate. The eligible new claimant will receive the monthly AdvCTC retroactively to when the qualifying child resided with the claimant for more than half the month (or the most days in the month). There would be a safe harbor of 3 months protecting the original claimant from clawback, and there would be reasonable cause exceptions (e.g., for sickness) and first-time abatement provisions for late change-of-circumstances updates, similar to penalty relief already available under the IRC and IRS procedures.
  11. To ease the administrative burden of both parties in situations of dueling claims, the IRS would be required to develop an affidavit form, similar to Forms 8836 and 8836 Schedule A which were developed and successfully tested in 2003 and 2004 to establish residency for purposes of the EITC.
  12. Judicial review by the Tax Court would be available when the income tax return is filed, reconciling the credit for the year. This allows for all benefits pertaining to family status and children to be determined in one proceeding.
  13. The combination of the 3-month safe harbor, paying only 9/12ths of the CTC in advance, the income look-back rule, the EITC collection prohibition, the reasonable cause and 1st time failure-to-update relief, routine nudges regarding the responsibility to update, and IRS systemic error and fraud detection will minimize clawbacks while protecting program integrity and reputation.

One final point: by applying the principal residence test of § 152 on a monthly basis, and amending the definition to establish principal residence by the greatest number of days in one household in a month, you may actually make more taxpayers eligible for the monthly AdvCTC than if you measured residence by the majority of days. And once you have established principal residence for a given month under this definition, you may make more taxpayers eligible for the EITC and all the other family benefits that require 6 months-and-a-day residency.

In my final blog for the week, I will discuss the Family and Worker Benefit Unit that Congress should require the IRS to establish in order to administer all the family status proposals fairly and as seamlessly as possible. In closing, I just want to reiterate that the above proposals are my attempt to think through very challenging questions of tax policy and administration. I welcome people’s thoughts and alternative recommendations. I have put my thoughts forward here because I believe we will all benefit from a full and transparent discussion of these complex issues.

Thinking Out Loud About the Advanced Child Tax Credit – Part I

With the recent launch of a campaign to get people who are not usually networked with the federal tax system to sign up for the Advanced Child Tax Credit (AdvCTC), the Administration, Congress, and advocates are focusing on what a permanent AdvCTC would look like.  Some child welfare and anti-poverty advocates are promoting the concept of a monthly payment that would bear many characteristics of traditional social benefits programs, notably the concept of “presumptive” eligibility.  While this concept appears superficially attractive, I have a lot of concerns about how this approach would fit with fundamental principles of taxation.  If it is adopted as currently proposed, I believe it would ultimately lead to the CTC being removed from the tax code entirely because it would become unworkable and severely impair taxpayer rights and a fair tax system.  That’s a lot to put on a simple proposal, and I am not sure about this – I am noodling through this, having many discussions and doing a lot of thinking.  But because this idea seems to be gaining traction, I thought I should lay out my concerns.  Again, this is me thinking out loud, but I haven’t heard these issues raised publicly and they need to be discussed before we, as a country, do something that ultimately might end up a big mess.  If we want to proceed after considering these things, fine, but at least we will go forward with eyes wide open.  Given the importance of these issues, this post is longer than the typical PT blog post, and I will follow it up this week with two additional posts.

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First of all, it is worth going back to first principles and considering why children even factor in the tax code at all.  Many countries don’t incorporate children in their tax codes – the taxable unit is the individual.  An individual’s wages are taxed through a Pay As You Earn (PAYE) system; individuals also pay taxes through sales tax, value added taxes (VAT) or goods and services tax (GST).  Benefits to families are traditionally disbursed via health and human services agencies rather than the tax system.  But the U.S. has opted to make the family unit the taxable unit, and thus incorporated provisions relating to spouses, children, and other dependents throughout the Internal Revenue Code (IRC).  Having adopted the family as the taxable unit, the dependency exemption (IRC §§ 151 and 152) – temporarily suspended and supplanted by an enhanced child tax credit (IRC § 24) — reflects the basic principle that taxation is based on one’s ability to pay, and that ability to pay should take into consideration the size of one’s family and basic living costs associated with that family.  The dependency exemption, however, only helps people who have taxable income.  It is worthless to those families who have no taxable income, which is not a problem if all you are doing with your tax system is taxing income.  (There is another problem with the current dependency exemption and definition of “household,” namely that it is based on a 1950s, Leave-it-to-Beaver concept of the family: middle income, White, mother and father, two kids.  More on that in future posts.)

As many tax scholars have noted, a straight exemption or deduction gives a greater benefit to those with incomes high enough to fully absorb the deduction/exemption, and less benefit to those on the lower income scale whose income is less than the amount of the deduction/exemption.  Similarly, the “value” of the exemption/deduction varies depending on the marginal tax rate of the taxable unit.  Converting the exemption/deduction to a tax credit avoids the latter problem, and introducing an element of refundability addresses the first problem.  Congress added the Child Tax Credit to the IRC in 1997, later adding limited refundability; it temporarily suspended the dependency exemption and replaced it with an expanded CTC in 2017 in the Tax Cuts and Jobs Act, and now has introduced a fully refundable CTC, severing the connection between taxable income and the child benefit.  For 2021 Congress also authorized a 6-month “proof of concept” of monthly issuance of the CTC in advance.  These last changes have been lauded as having the ability to reduce child poverty from 13.7 to 11.3 percent.

Of course, the income tax has never been solely about taxing income – it is an instrument for driving social policy and economic and personal behavior.  Not only are a limited number of household structures recognized as “households” for purposes of the income tax, but those households are awarded all sorts of tax credits, deductions, and allowances that reward certain behaviors – the earned income tax credit (EITC), the American opportunity tax credit (AOTC), the child and dependent care tax credit (CDCTC), and the head of household (HOH) filing status, to name a few.  It seems like a natural progression to include child poverty reduction in the mix of these social policies run through the tax code.

Why would we do this?  Well, the IRS is, when it puts its collective mind to it, an efficient machine for processing returns and disbursing benefits.  Each year, it processes over 150 million individual tax returns and disburses 102 million refunds totaling $282 billion.  I’ve probably written over a thousand pages criticizing the IRS’s failure to address problems in processing those returns, and made scores of recommendations, but the fact remains the IRS knows how to process and move the majority of returns through its pipeline.  The three rounds of Economic Impact Payments over the last 18 months have clearly demonstrated that the IRS can do this work.

The IRS’s “efficiency” was one reason the EITC was expanded.  Originally designed as a way to offset the regressive nature of the payroll tax (applied to the first dollar of earned income), the EITC has been expanded over the years to be one of the largest federal anti-poverty programs for families.  Although it requires earned income, it is refundable; thus, households who have no taxable income can still benefit from it, and over 26 million households do, to the tune of $64 billion for tax year 2018.  

One of the arguments for running such a social benefit program through the tax code is the ease of application.  Traditional benefit programs like the Supplemental Nutrition Assistance Program (SNAP, or food stamps) and Temporary Assistance to Needy Families (TANF, or “welfare”) have cumbersome application processes which require submission of documentation, and even in-person interviews, before eligibility is determined, as well as periodic recertifications requiring additional documentation.  There is the stigma of welfare attached to the application process; hence historical participation rates have been low with respect to these programs.  Moreover, the application and review processes result in relatively high direct administration costs.

Policymakers viewed the application process via the annual tax return as relatively stigma-free, and certainly much less burdensome than having to meet the documentation requirements of state-administered welfare programs.  And the EITC is anonymous – no one need know you receive it, unlike SNAP, where you segregate your food out based on SNAP coverage and present your SNAP card to the cashier at the food store, and all the people in line behind you see it.  The low cost of administering the program via tax return processing, especially with the near-universal use of e-filing, is another efficiency, compared to the personnel-intensive application process for traditional safety-net programs.  These features result in a relatively high participation rate for the EITC vis a vis other programs.  (For a comparison of programs, see Figure 2.1.5 from my 2016 legislative recommendation about family status provisions in the code here.)  The ease-of-application has downsides, however:  high noncompliance rates.  Treasury estimates the EITC improper payment rate is about 25%. This has led to disproportionately high audits of low income taxpayers, as well as an increasing use of summary assessment authority (aka “math error”) under IRC § 6213 and highly punitive penalties, including the 2 year/10 year ban under IRC §32(k).

The other downside to running social benefit programs through the tax code is its annual and retrospective nature, as well as the calendar year aspect of the annual determination, which may or may not conform to patterns of family relationships.  The tax return is filed after the close of the tax year, and eligibility for all of its provisions, including the EITC and other family-status credits, is determined retroactively.  This is a major difference with traditional social welfare programs; these programs accept applications throughout the year, and eligibility is determined on a prospective basis, meaning the benefit commences from the date of application, once the agency has reviewed the application and supporting documentation and determined eligibility.  Further, the agency’s determination means that for a period of time, until recertification, the applicant is presumptively eligible for the benefit unless someone else comes along and files a competing claim.  Under presumptive eligibility, claw back of benefits is rare, particularly during the period of dispute resolution.  If someone else was actually eligible for claiming the benefits during the presumptive period, but didn’t claim those benefits, well tough.  The presumptively eligible person has been defined as the correct person to receive the benefits, even if they aren’t.  Thus, noncompliance is defined out of existence.  Even if we get the wrong result, it isn’t the wrong answer because we have declared it isn’t the wrong answer.  Therefore, we have no improper payments.

Of course, it isn’t as bad as I make it sound, as it exists in other social benefit programs.  First of all, as noted earlier, traditional safety net programs have intensive and administratively burdensome and costly application processes; if an applicant makes it through this process (many don’t even try), there is a fair amount of confidence that the person actually is eligible for the benefit.  Second, the recertification process (e.g., 12 months in Washington, DC for SNAP, unless you are homeless in which case recertification is 6 months) ensures a regular check on eligibility.  Third, the process accommodates the fluidity of families at the lower income levels.  You can come in at any point in the year and apply for benefits; you don’t have to wait until the end of the year to apply to receive retroactive benefits; you receive the benefits when you need them.

It is these features that have led some advocates to propose presumptive eligibility for the AdvCTC.  The proposals generally require a taxpayer to check a box on their tax return that affirmatively states, under penalties of perjury, that you are eligible to receive the AdvCTC going forward on a monthly basis, generally starting the month after the end of the filing season.  It isn’t clear what definition of eligibility the advocates are proposing – is it the Qualifying Child of IRC §§ 151 and 152, which requires both a specified relationship and sharing a principal residence with the child for more than 6 months of the year, or is it some other test, like the “main carer” test that Canada and Australia have adopted.  (Canada Revenue also has a presumption that the mother of the child is the main carer, which is really troubling.  See Moritz v. Commissioner, here.)

The proposals adopt the approach of traditional benefits programs, with a few alterations.  For the AdvCTC, presumptive eligibility would be based on an affirmative statement and a checkbox on the return; unlike traditional benefit programs there is no application nor is any supporting documentation submitted.  Further, unlike traditional benefit programs, there is no obligation for the presumptively eligible claimant to update the IRS about any change of circumstances.  Instead, the burden is placed on newly eligible claimants to make a claim, and if the agency finds that this new claimant is eligible going forward, the AdvCTC payment will be paid to that claimant from date of application. Like traditional benefit programs, eligibility is based on the date the new claimant applies, not when they started serving as the primary caregiver or when the child actually resided in the new home.

Unlike the current design of the AdvCTC, in many cases the only way someone could claim the CTC on that year’s tax return is if no one else had claimed the AdvCTC for the child for that particular month.  There is no reconciliation to determine whether AdvCTC had been paid to an ineligible person during the year, absent fraud; as noted earlier, improper payments are defined away because the person is presumptively eligible.  Thus, there are no claw backs.  There can only be additional payments made with the tax return, if no one else has received a payment for that child for that month.  If the child lived with you and you were the main carer of that child during a month for which someone else received the AdvCTC, tough for you.  You should have known about the AdvCTC and come in and claimed it.  Some proposals have a grace period for the first year of implementation; my experience is it will take at least 3 years for new rules to be understood.  On the other hand, if a child is unclaimed for any given month during the year, you may receive the CTC retroactively if you claim it on your return (and you meet the 6 months-and-a-day principal residence test).

Perhaps this system works for traditional benefit programs – it seems to me the combination of intensive application process, the requirement that the presumptively eligible person report change of circumstances, and the recertification process (with application and documentation) provide some checks and balances to get to a comfort level that for the most part, the right households are getting the benefits.  But these traditional benefit programs have high operational costs and low participation rates.  Why would we want to import this process into the tax benefits system that has low operational costs and high participation rates?  Why would we bring in features that the tax benefits system was actually designed to eliminate?

There’s another problem here – people are forgetting that unlike the traditional social safety net programs, the Child Tax Credit is almost universal – that is, it isn’t just targeted to the lowest income levels or those who have no income.  In Tax Year 2018, the CTC was claimed on almost 39.4 million tax returns for almost $81.5 billion.  Over 26 million taxpayers claimed the Additional CTC, for about $36 billion; 19.5 million of these taxpayers received $19.5 billion as refunds (i.e., not offset against taxes owed).  (See Figure D, IRS 2018 Statistics of Income.) That is a huge swath of taxpayers.  The near-universality of the CTC brings some complications.

Will we regress and have more than one definition of a qualifying child instead of working toward a single definition?   For example, how will the IRS administer the EITC, the Child and Dependent Care Credit, and head of household status if the presumptively eligible person did not reside with the qualifying child for more than 6 months of the year?  Will the actually eligible person receive these three tax benefits but not the CTC, because the presumptively eligible person received the AdvCTC throughout the year?  Or will the presumptively eligible AdvCTC person also be presumptively eligible for the other family status provisions, compounding the harm to actually eligible persons?  (There will have to be a form on which to claim the CTC where someone opted out of the monthly payments or where no one claimed the AdvCTC for the child for a given month.)  

Advocates for the presumptive approach argue that by defining away improper payments, you avoid clawbacks, theoretically reduce political pressure by eliminating or reducing improper payments,  and eliminate the need for the IRS to reconcile competing claims at tax filing time.  I find these arguments naïve.  First, I can guarantee you that the Treasury Inspector General for Tax Administration (TIGTA) will be conducting an audit to determine whether there is any congruence between who were presumptively eligible and who were actually eligible.  When that hits the press, the noise will be great about the amount of payments that went out to people who did not care for the child.  Second, there will be competing claims regardless of how you design it – taxpayers who are actually eligible will be claiming the CTC on their returns and the IRS will have to send out notices stating someone else received the AdvCTC for those months; then the IRS will have to respond to those angry phone calls, and there will be calls to the Taxpayer Advocate Service and congressional offices, and news media will pick up stories about people who weren’t able to get the CTC because the noncustodial ex-spouse received it.  Third, what about those taxpayers who don’t want a monthly benefit and opt out?  Will they find, at the end of the year, that someone claimed the child and therefore they will not be eligible for a retroactive benefit?  Will they be forced to come in during the year and prove their eligibility for something that they don’t want to claim or deal with until the end of the year?  Or are we paternalistically saying that everyone has to get this payment monthly, even if for your circumstances it is better to receive it at year end?

Advocates also say that, as with the traditional benefits system, there will be a dispute resolution process throughout the year.  I believe it is possible to have an expedited administrative dispute resolution process to resolve competing claims throughout the year, but I have my doubts about having an expedited Tax Court or other judicial procedure during the year.  Right now, in speedy cases it can take over a year for the Tax Court to resolve an EITC dispute.  Remember that while the dispute is ongoing, the presumptive recipient is continuing to receive the AdvCTC; even if the dispute is resolved in favor of the new applicant, does the benefit start when the court decision is final or does it relate back to the date of application?  What if that is after the end of the tax year?  How does that impact an ultimately successful taxpayer’s eligibility for the EITC and head of household status for the tax year in question?

The final point I would like to make is that advocates are actually trying to resolve the right problems; they just have come up with the answers that aren’t an easy fit for a system that is administered through the tax code.  We do need to deal with improper payments – but it is best done by looking at the Payment Integrity Information Act (PIIA) and really analyzing whether overpayments of programs like the EITC or AdvCTC are, in fact, improper payments after all.   TIGTA has reported that Treasury and the IRS requested the Office of Management and Budget exempt IRS from PIIA reporting requirements.  (Read Procedurally Taxing’s blog about this here.)  And we need to have a more flexible definition of the family unit, to accommodate different family structures at all income levels.  There are legislative fixes to these issues.

Advocates also argue that presumptive eligibility eliminates the need for a large safe-harbor, which, they believe, encourages improper claims and has reputational risk.  To me, this makes no sense.  Presumptive eligibility encourages a race to be the first to claim the checkbox on the return – the first-to-file get the credit, at least for a few months, until the second-to-file’s claim is “adjudicated.”  It is not enough to say that there will be a claw back for fraud – how is the IRS going to prove that at the time of checking the box on the return, you did not intend for the child to live with you?  And here, to me, is the fatal flaw – because payments to the actually eligible taxpayer are dependent on when that taxpayer applies for the monthly credit, the windfall to the presumptively eligible person comes at the expense of the actually eligible person (i.e., the person who actually is the main carer of the child).  That just seems to me to be a violation of the right to a fair and just tax system.

This is not to say we can’t do monthly payments for children.  But if we want to administer them through the tax system, then we have to understand how they fit into the greater scheme of the tax system, and we can’t just impose a system that was created for a completely different purpose onto the tax system.  In tomorrow’s post I will explore about how we could administer monthly advanced child tax credit payments through the tax system we have, and what changes would be needed to the tax system to make it work.  I believe there is a way to administer a monthly advanced CTC that is paid to the taxpayer/household(s) that actually care for and have responsibility for the child in any given month.  I may not have the complete solution, but I will take a stab at coming up with some ideas.  And I look forward to everyone’s thoughts and comments.

TIGTA Releases Report on Improper Payment Rate For Refundable Credits

Last month TIGTA released its annual review of the IRS’s improper payment reporting requirements under the Payment Integrity Information Act  (PIIA). The focus in this TIGTA report is the IRS’s administration of refundable credits. In the pre-COVID time frame (FY 20), OMB determined that the Earned Income Tax Credit (EITC), Additional Child Tax Credit (ACTC), and American Opportunity Tax Credit (AOTC) are high-priority programs that are susceptible to significant improper payments.  

Under applicable executive orders, for any program identified as “susceptible to significant improper payments” the IRS is required to provide the following information for the Treasury Department’s financial report:

  • The rate and amount of improper payments. 
  • The root causes of the improper payments. 
  • The actions taken to address the root causes. 
  • The annual improper payment reduction targets. 
  • A discussion of any limitations to the IRS’s ability to reduce improper payments. 

Rather than focus on the data that the report reveals (as I have done in the few times I have reviewed these reports), in this brief post I will focus on two somewhat surprising developments discussed in the TIGTA report: 1) that the IRS has formally requested that OMB excuse it from reporting erroneous refundable tax credit claims under the PIIA and 2) that the IRS is systemically imposing a two-year ban for ACTC claimants.  The first of these developments is encouraging and the second is alarming. I will briefly discuss each below.

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Possible IRS Carve Out From PIIA

On pages 2 and 3 of the report TIGTA discusses how last fall Treasury and the IRS formally requested that the OMB allow IRS to be excused from meeting the requirements under the PIIA. As TIGTA discusses, Treasury and IRS stated that the tax system is “primarily” a collection system and not a payment program. More substantively the request centered on how IRS directly addresses similar concerns as part of its comprehensive tax gap strategy. As part of its pitch, and as TIGTA summarized, the argument centered on the following points:

  • The refundable portion of tax credits, or outlays, should not be considered separately from the rest of the credit because the IRS and Treasury Department need to view any errors to address them effectively. 
  • Tax credits are embedded into and affected by other provisions of the Federal tax system. Tax Gap estimates and other comprehensive compliance analyses are more effective in helping the IRS identify noncompliance and allocate limited resources effectively.
  • Tax Gap estimates already effectively monitor changes in refundable tax credit errors over time. 
  • Improper payment estimates under the PIIA provide no additional information to the IRS as it administers tax credits and addresses noncompliance. 
  • Refundable tax credit overclaims are largely due to the credits’ statutory design and the complexity taxpayers face when self-certifying eligibility for the refundable tax credits, not internal control weaknesses, financial management deficiencies, or reporting failures. 
  • Tax credits are part of an interrelated tax administration portfolio that the IRS addresses through a comprehensive enterprise risk management program. 

Given that refundable credits comprise a relatively small amount of the overall tax gap, and that special focus on this one small aspect of the gap seems to contribute to additional pressure on IRS to single out relatively low income and low payoff audits, the Treasury and IRS request seems sound. Does this mean that if the request is granted the number of EITC audits will decrease? I am not certain, though I suspect that with additional pressure on IRS to step up audits of higher income taxpayers and lighten the touch on others it would likely give the IRS more flexibility to shift resources and contribute to a relative rebalancing of individual audit coverage.

The other side of the coin is that Congress seems intent on using the tax system to deliver all sorts of benefits, and as the IRS itself more directly acknowledges its role as a benefit administrator, the reasons for exceptional treatment may not be as compelling. According to TIGTA, earlier this year OMB advised Treasury and IRS that it is considering IRS’s request and will respond after the new management team at OMB is in place. It is unclear if the last year’s expanded use of IRS to deliver benefits that seem less tethered to tax collection will have an impact on the OMB decision. Perhaps OMB might press IRS to focus more on certain payments, like the advanced component of the CTC if that is made permanent.   

Systemic Ban and Child Tax Credit

One aspect of the TIGTA report is to evaluate whether IRS is using its existing powers to adequately address refundable credit errors (this is a common refrain; see my post Is IRS Too Soft on People Claiming EITC? Treasury Says Yes and Also Suggests No). One part of the IRS tool kit is the extraordinary power IRS has to impose a two or ten-year ban following a determination that an individual has disregarded credit eligibility rules. TIGTA observes that in its view IRS has failed to effectively use bans, looking at 1.9 million taxpayers from FY 17 and over 3900 of them who were allowed to claim credits despite having some or all of the credits disallowed in the two prior years. Given audit costs (even correspondence audits) TIGTA’s “solution” is for IRS to systemically impose a ban when individuals have had two successive years of disallowed credits.

The report is a little foggy on the details but it appears that IRS pushed back on the TIGTA recommendation. On page 8 the IRS stated that it did not agree to  “modify systemic processes to apply the two-year ban after two audits result in the disallowance of a refundable tax credit “ On the other hand, earlier on the same page the report states that starting in “Processing Year 2021, systemic processes will assess the two-year ban for the ACTC.” 

I read this to mean that for some refundable credits (ACTC and I suspect EITC) IRS will be using a systemic ban following prior disallowances. There are a number of problems with this solution, as the NTA’s 2019 special report on refundable credits highlighted. With Congress at least temporarily buttressing the CTC, and the influx of claims to hit IRS from nontraditional taxpayers, any IRS decision to systemically impose a ban is fraught with risks to taxpayer rights. It seems hard to square bootstrapping a failure to respond with the mental state needed to justify a ban determination.  While I would like to know more about the systemic banning IRS will be imposing I suspect that this means IRS can make a determination that an individual has acted recklessly or intentionally in the absence of any hearing or even direct taxpayer communication. Given that there is no published guidance on the meaning of reckless or intentional disregard for these purposes, and no outward facing guidance on exactly how IRS makes its determinations, this is a relatively obscure but potentially significant part of the IRS’s job in administering benefits.

As I and others have written before (see for example Bob Probasco’s The EITC Ban-Further Thoughts Part 1Part 2 and Part 3) the absence of clear notice and a defined path to administrative and judicial review of a ban determination is inconsistent with taxpayer rights, including the right to be informed, the right to a fair and just tax system, and the right to appeal. As Congress leans on IRS to deliver more benefits, the absence of clarity around these potentially catastrophic ban determinations is likely to generate close judicial scrutiny and highlight how IRS practice is inconsistent with due process protections that surround other nontax based programs. Given the temporary and likely permanent expansion and advanced payment of the ACTC, the stakes are even higher than in past years.