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

0 Flares Filament.io 0 Flares ×

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

read more...

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

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

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

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

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

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

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

In his response to the Senators, the Commissioner stated that

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Going Forward – Filing Season 2021 and Beyond

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

Comments

  1. Bob Kamman says

    As pointed out, the “childless EIC” tops out at $529, for those with earned income between $6,900 and $8,650. That’s a significant amount, but it may be almost as likely that a potential recipient identified by IRS would receive less than $200. That’s how much is paid for earned income of less than $2,600 or more than $12,950.

    The Form 1040 does not ask whether the principal place of residence was in the United States. But practitioner-prepared returns must include the two-page “due diligence” Form 8867, which requires verification that all of the conditions have been met. Even at lower income levels, many taxpayers require professional help, which no doubt costs more because of the extra form. The Form 8867 should not be required for childless EIC claims, and a first step toward reform would be to eliminate it for those returns.

    IRS cannot always check whether someone has more than $3,600 of investment income. A taxpayer could have sold capital assets for a $6,000 profit, or acquired a house during the year that brought in $4,000 net rent. Likewise, IRS receives a 1099-K from eBay (or other online venues) if a taxpayer makes more than $20,000 in gross sales and has 200 or more transactions. But that doesn’t always mean a Schedule C should be filed. In fact, many money-losing businesses this year will not require a return to report zero income and thousands in expenses. Those losses, however, lower the EIC amount (or in some cases, increase it).

    I just completed a return for a taxpayer whose income in 2018 was not enough to require a return. For 2019, she had to report more than $100,000 income from an estate, shown on a Schedule K-1 that was not sent until July. It could have been delayed even further. IRS does not always know by February, how much investment income someone receives.

    Nor does IRS know whether a married couple has AGI of less than $21,370, now that the standard deduction and filing requirement has been increased to $24,400.

    The childless EIC was intended as an antidote to the regressive nature of payroll taxes. It could be simplified by just returning to everyone the first $500 of FICA taxes paid each year. If that benefits too many middle-class and wealthy Americans, then phase it out when a return must be filed showing AGI of more than $75,000. A slight increase in the tax rate – either FICA or income tax – would be enough to fund this.

    • Daniel Stearns says

      In my experience preparing returns for lower income taxpayers, it is extremely rare for an childless person to qualify for earned income credit for people with no children. It is next to impossible to live off that amount of income. Almost every time someone qualifies on paper they fail after I ask them how they can live off of 7,000.00 a year. They almost always admit there is supplemental (under the table) income.

      • Income limits for childless workers are over $15,000 for single/HOH and over $21,000 for married though for sure the max amount phaseout is low — actually about a quarter of EITC claims are from childless workers; only about 3% of total EITC goes to that cohort.

  2. Kenneth H. Ryesky says

    The basic problem is that distributing alns to the needy is at diametric odds with the IRS’s primary mission to collect revenue.

    It is true that admimistering an income tax requires personal information which would be unnecessary in administering imposts such as customs duties on imports of molasses, rum, slaves, or other essential commodities. But even with such data in its file cabinets and hard drives, the IRS, by its very nature as a collection-oriented system, is ill-postured to efficiently utilize that data.

  3. I think that it’s a bad idea to accelerate these payments, in particular for childless taxpayers.

    It’s not hard for a childless taxpayer to go “in” and “out” the EITC income guidelines, say, single taxpayer with $12,000 of earned income in 2019 (which qualifies for the EITC) and $16,000 in 2020 (which does not qualify for the EITC). The EITC for couples with dependents is more sticky and predictable.

    On these numbers, the IRS would pay an advanced EITC for a taxpayer who would need to repay it next Spring. That’s hugely problematic, because it is doubtful that the taxpayer will have any money to repay this amount. So, expect lot’s of unhappy taxpayers in Spring of 20201 with penalties, etc.

    Also, folks at this level of income are just about in desperate need for this amount money ($200 or $300) just about any time. It’s a continuous struggle to pay rent, etc. So, not sure that accelerating a refund will help.

Comment Policy: While we all have years of experience as practitioners and attorneys, and while Keith and Les have taught for many years, we think our work is better when we generate input from others. That is one of the reasons we solicit guest posts (and also because of the time it takes to write what we think are high quality posts). Involvement from others makes our site better. That is why we have kept our site open to comments.

If you want to make a public comment, you must identify yourself (using your first and last name) and register by including your email. If you do not, we will remove your comment. In a comment, if you disagree with or intend to criticize someone (such as the poster, another commenter, a party or counsel in a case), you must do so in a respectful manner. We reserve the right to delete comments. If your comment is obnoxious, mean-spirited or violates our sense of decency we will remove the comment. While you have the right to say what you want, you do not have the right to say what you want on our blog.

Leave a Reply to Kenneth H. Ryesky Cancel reply

*