Revisiting the IRS’s Erroneous EIP Guidance for Nonresident Aliens

We welcome first-time guest blogger Justin Schwegel. Justin is a Sarasota, Florida-based attorney. His academic interests include international economic justice, agricultural policy, and government integrity. Today Justin offers thoughts regarding economic impact payments to nonresident aliens. This issue and related administrative law considerations will be addressed in more depth in an article to be published in the CUNY Law Review’s Footnote Forum. When the link becomes available it will be linked here. Christine

On March 27, in response to the economic crisis caused by Covid-19, Congress passed bipartisan stimulus legislation that included enhanced unemployment benefits, relief for small businesses, financial support for state, local, and tribal governments, and a one-time stimulus payment for eligible individuals. On May 6, the IRS issued guidance on its Economic Impact Payment Information Center website instructing incarcerated individuals, nonresident aliens (even if they were resident aliens in 2019), and the family members of the deceased taxpayers that they should return economic impact payments they received from the IRS. This guidance is wrong, and has the potential to harm vulnerable migrant workers, some of whom will see a tax residency status change as a result of the global pandemic.

Following the recent success of incarcerated individuals in getting a permanent injunction enjoining the IRS from withholding their CARES Act Economic Impact Payments, it is worth revisiting similar erroneous guidance the IRS provided to another class of individuals, nonresident aliens. Nina Olson has already explained why the guidance is wrong with respect to the families of deceased taxpayers, and Patrick Thomas explored this topic briefly in May, but the issue warrants a deeper dive.

Most nonresident aliens who received economic impact payments in 2020 did so because based on 2018 or 2019 tax filings they were resident aliens, and consequently, “eligible individuals.” H-2A (nonimmigrant agricultural guest workers) and H-2B (nonimmigrant unskilled guest workers) visa holders who returned to their country of origin could be particularly impacted by the guidance. In 2019, there were almost 258,000 H-2A workers, while the H-2B program is capped at 66,000 annually.

Many H-2A employees list their labor camp as their address on their tax filings, while many H-2B employees list the residence they have while working in the United States. Both visa categories have many people who are unbanked. Consequently, for many H-2A and H-2B workers who were resident aliens in 2019, but not in 2020, payments were likely sent in the form of physical checks to either labor camps where the workers no longer live or to other housing that is no longer current and would have been returned as undeliverable. Requesting a new physical check from an administrative agency that believes you are not entitled to a payment, and asking that it be delivered to a different address is probably an insurmountable barrier for most aliens who have undergone a tax residency change.

IRS Guidance

The IRS guidance is inconsistent with past guidance and inconsistent with the statutory language of the CARES Act. On April 17, the IRS issued several Q and A responses on its Economic Impact Payment Information Center. Most interesting for the purpose of this post:

Q17. I received an additional $500 payment in 2020 for my qualifying child.  However, he just turned 17.  Will I have to pay back the $500 next year when I file my 2020 tax return?

A17. No, there is no provision in the law requiring repayment of a Payment…

This guidance was renumbered several times, but remained largely unchanged until August. On May 6, the IRS published guidance stating that incarcerated individuals, nonresident aliens, and relatives of deceased taxpayers should make repayment of a payment. This means that for months, the IRS had guidance on its Economic Impact Payment Information Center stating both that there “is no provision in the law requiring repayment of a payment” and advising three different categories of individuals that they should repay a payment.

On August 3, the IRS issued new guidance on repaying economic impact payments.

Q J3. I received an Economic Impact Payment. Do I need to pay back all or some of the Payment if, based on the information reported on my 2020 tax return, I don’t qualify for the amount that I already received??

A J3. No, there is no provision in the law that would require individuals who qualify for a Payment based on their 2018 or 2019 tax returns, to pay back all or part of the payment, if based on the information reported on their 2020 tax returns, they no longer qualify for that amount or would qualify for a lesser amount…

This modification seems aimed at allowing the IRS to distinguish between an individual who changes from an “eligible individual” to an “ineligible individual” between 2019 and 2020 and a filer who remains an “eligible individual” but no longer qualifies for a payment. The eligibility criteria are written negatively such that any individual who is not 1) a nonresident alien, 2) an individual who could be claimed as a dependent by another taxpayer or 3) an estate or trust, is an eligible individual so long as they also provide the requisite Social Security Numbers on their taxes. One can shift from being an eligible individual because they have died, changed tax residency status, or become a dependent. Not all eligible individuals qualify for payment. If an eligible individual (filing single) has an AGI that exceeds $99,000, they are an eligible individual, but do not qualify for the payment. Likewise an individual who has a dependent who turns 17 in 2020 no longer qualifies for the additional $500 payment they received as an advance payment in 2020. Answer J3 is couched exclusively in terms of qualifying for payment rather than status as an eligible individual. The IRS assures these individuals who simply no longer qualify for a payment that they need not worry about making repayment.

The new guidance would allow the IRS to maintain consistency when it seeks to require repayment from the families of deceased taxpayers and 2019 resident aliens who undergo a tax residency status change in 2020. This distinction cannot be supported by statutory text that clearly delineates the time at which eligibility criteria must be met, i.e. in 2019.

The IRS has not sought repayment from all individuals who have changed from eligible to ineligible between 2019 and 2020. Specifically, individuals who filed taxes independently in 2019, but can be claimed as a dependent in 2020 have not been instructed to return the 2019 payments. This predominantly includes elderly individuals who were eligible individuals based on 2018 or 2019 tax filings, but who can now be claimed as a dependent by e.g. their child. It also includes children between the ages of 19 and 24 who return to school in 2020.

This seems conspicuous, because the IRS is aware of this situation and addresses some questions regarding newly dependent adults on its Economic Impact Information Center. If the IRS’s position is that individuals who received advance refunds because they were eligible in 2019 must return them if they become ineligible in 2020, for consistency it must require adults who become dependents in 2020 to do so as well. Perhaps the IRS overlooked this category of individuals in instructions to return economic impact payments. It seems more likely that the Trump Administration was aware that such a move would be politically toxic.

Statutory text

IRS guidance notwithstanding, the plain language of the CARES Act makes it clear that if a person was a resident alien in 2019, they need not return payment just because their tax residency status changed in 2020.

Section 2101 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) added a new section to the tax code at 26 U.S.C. 6428 governing EIPs. This section created a refundable tax credit for the 2020 tax year called a “recovery rebate” and defined the eligibility criteria. Eligibility criteria were defined negatively, i.e. all classes of ineligible individuals were listed. An ineligible individual is any individual who in 2020 is a nonresident alien, an individual who could be claimed as a dependent, and an estate or trust. Individuals must also file their taxes with a social security number, their spouse’s social security number if filing jointly, and their child’s social security number if claiming a dependent child.

26 U.S.C. 6428 also created an “advance refund” with eligibility criteria identical to the eligibility criteria for the 2020 recovery rebate in all ways except timing. If an individual was an eligible individual in 2019 the individual is eligible for an an advance refund so long as they are not excluded by the limitation based on adjusted gross income. Those who were eligible individuals in 2019 are treated as having made an income tax payment “in an amount equal to the advance refund amount for such taxable year.” Consequently, the advance refund functions as a refund of an overpayment of 2019 taxes. 26 U.S.C. 6428(e) coordinates the advance refund with the 2020 recovery rebate so that the 2020 rebate is reduced, but not below zero, by the amount of the advance refund.

Most H-2A and H-2B guest workers are required to file taxes as resident aliens under the arcane substantial presence test outlined in publication 519, though the terms of relevant bilateral tax treaties control and can be difficult for workers to navigate.  These workers are also eligible to receive social security numbers. These workers are eligible to receive social security numbers and many do have them. It is risible that the IRS asked 2019 resident aliens who received an economic impact payment to guess at the beginning of May, during an unprecedented global pandemic, whether over the next eight months they would meet the complicated substantial presence test, and return the payment if not.

With the exception of a few foreign nationals who filed their income taxes incorrectly, economic impact payments made to aliens were made because they were eligible based on 2018 or 2019 tax filings. There is no provision in the CARES Act that requires an individual to repay an economic impact payment made under the CARES Act. Indeed, the advance refunds function as a reimbursement of overpayment of 2019 taxes. It is bizarre that the IRS has asked individuals who, in effect, received a refund for overpayment of 2019 taxes to return the refund with no rational explanation why.