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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Non-filer Tool:  A Creature with Many Names

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

What to Expect

Follow these steps in order to provide your information:

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

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

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

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

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

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

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

The Portal and the Beard Test

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

We Need More Transparency on This Question.

Some additional thoughts:

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

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

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

Further on, the notice says:

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

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

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

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

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

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

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Don’t Forget the Vets and Supplemental Security Income Recipients

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

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

Going Forward: What can we learn from this?

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

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

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

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

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

More Good News:  the CARES Act Refund Offset Provisions

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

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

But, But, But:  Some omissions in the legislation

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

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

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

More Buts:  Some implementation issues

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

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

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

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

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

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

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

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

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

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

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

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

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

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

This is not to say Congress should stop using the IRS to deliver programs, including economic stimulus.  By virtue of annual return filings, the IRS is uniquely positioned to reach 155 million individual taxpayer households and over 14 million businesses.  These programs, however, should be designed so the IRS can administer them relatively efficiently, and the IRS must be provided the necessary resources for implementation.  In this blog, I look at the CARES Act from the viewpoint of planning and implementation, and examine it in light of IRS and taxpayer experiences in 2001 and 2008.

Setting the stage:  the IRS current workload and the effect of prior Economic Stimulus Payments

In FY 2019, the IRS received 99.3 million calls on its “enterprise” telephone lines, of which only 28.6  million – or 29 percent – were answered by an assistor.  Considering only those calls coming in on the Accounts Management lines (those relating to account inquiries and tax law questions) 28 percent of the 76.8 M net call attempts actually got through to a live assistor.  (Note the IRS calculates its Level of Service (LOS) differently – among other things, it only counts the number of calls it routes to assistors in the denominator; under this calculation, the LOS for Accounts Management was 65 percent.  The Taxpayer Advocate Service believes this figure does not accurately reflect taxpayers’ experience or IRS call demand.  Few taxpayers choose to go to automated lines; in fact, it is the IRS system that forces them to automated lines in response to certain responses by the taxpayer.  I concur with TAS on this point, and will use their figures when available.) 

If past experience holds today, IRS phone service will plummet with the advent of calls arising from the 2020 Economic Stimulus Payment (ESP) program.  (All of these figures come from my June 19, 2008 testimony before the Ways and Means Subcommittees on Oversight and Social Security.)  With respect to the 2008 ESP, as of June 7, 2008, the IRS had received 27.7 million call attempts on its dedicated ESP toll-free line, of which 2.9 million spoke with a live assistor.  The IRS computed LOS on that line for the week of June 7, 2008 was 30.4 percent.  And those were good years for the IRS, when the 2007 LOS for its main phones lines was 80.6 percent.  It also received 316,000 ESP-related visits to its walk-in sites, which are now operated by appointment-only (meaning you have to make a phone call).  All such sites are closed due to the coronavirus. 

The environment for the 2020 Economic Stimulus payment is much more dismal than 2008, even disregarding the impact of the coronavirus.  IRS funding has declined by about 20 percent since FY 2010, adjusting for inflation.  Of its FY 2019 $11.3 billion appropriation, only $2.587 billion was appropriated for taxpayer service (including tax return processing) and $4.678 billion was appropriated for enforcement.  And abysmal $150 million was appropriated for Business Systems Modernization, the account from which Master File replacement is funded.

In March 2020, the IRS was probably already receiving an uptick in calls as a result of people wanting additional information and reassurances about the extension of the filing season.  Adding another 28 or 30 million calls relating to the ESP will just cause the LOS to crater, however one calculates it.  The same employees who answer the phones are also the ones who open and process taxpayer account correspondence.  If the IRS moves more people to handle the phones, it falls behind with the correspondence.  This is precisely what happened in 2008 – the inventory of accounts correspondence more than doubled from the previous year.  The 2008 workload surges don’t take into account the IRS’s coronavirus-related staffing adjustments.  As I understand it, most if not all campus offices have been shuttered, the practitioner priority service line is shut down, the IVES system that verifies taxpayer identity for purposes of releasing questionable refunds is not operative, and TAS is refraining from sending Operation Assistance Requests the operating divisions in order to resolve cases. 

Additional appropriations for ESP hiring or keeping seasonal employees on board longer won’t help the IRS manage the ESP workload if employees don’t have access to systems remotely.  Employees have to be at the mail sites to process mail, but, rightfully so, the staffing has been significantly reduced to ensure social distancing and allow for rigorous cleaning.  The call sites themselves are not set up for telework.  While telework pilots were underway, few call center employees have laptops and government phones that enable them to work from home.

The IRS is aware of taxpayer anxiety and is attempting to calm taxpayers down.  Its coronavirus web page has a plea for taxpayers not to call:

At this time, the IRS does not have any information available yet regarding stimulus or payment checks, which remain under consideration in Congress.  Please do not call the IRS about this.  When the IRS has more specific details available, we will make it available on this page.

But just in case anyone thinks we can head off all these calls with proper communications, the 2001 experience should serve as a guide.  The IRS sent out a letter to every taxpayer who was eligible to receive an additional payment, alerting them to that fact and advising them there was nothing they needed to do to receive the payment – it would come to them automatically over several weeks.  In response to this letter telling taxpayers they didn’t have to do anything, the IRS had its first 1 million call day in its history, in which taxpayers called to ask, was it really true they didn’t have to do anything to get the additional check?  Human nature is what it is.  You can’t make this up.

As with the 2008 legislation, the 2020 “recovery rebate” is structured as a “refundable” credit against 2020 tax liabilities that must be claimed on 2020 individual income tax returns.  To get these dollars into the economy quickly, however, the legislation instructs the Secretary of the Treasury to issue advanced refunds of that credit based on taxpayers’ 2019 or 2018 income, or in the absence of a 2019 or 2018 return, on the basis of Social Security or Railroad Retirement benefits reported on the relevant Form 1099  (For a more detailed discussion of the recovery rebate, see Carl Smith’s PT posts here and here.) 

Because taxpayers are motivated to receive their refunds, the IRS generally has two “bumps” of refund claims – at the start of the filing season, and in the last 3 weeks of the season.  With the EITC and ACTC refund issuance now delayed each year until February 15^th at the earliest, the first refund “bump” has been pushed back, but many such returns have already been filed by now, and presumably taxpayers will continue to file refund returns regardless of the filing season extension. 

But for the lowest income and the elderly, how will these returns be prepared?  Free Tax Counseling for Elderly/Tax Aide/AARP sites have all been shut because of the coronavirus, and most VITA sites have closed down.  In 2008, the IRS kept TACs fully operational after April 15, and prepared tax returns for free for people with income of $40,000 or less.  Given the coronavirus protections, all TACs are closed.  At any rate, TACs abandoned return preparation several years ago, so that avenue of assistance is no longer available.  Will low income taxpayers eager for their additional refunds flock to unregulated return preparers, who will charge exorbitant fees and reduce the amount of cash in the hands of these taxpayers to stimulate the economy (other than stimulating the return preparation economy ….)? 

As if the constraints the IRS’s current operating environment were not challenging enough, the coronavirus’ impact exponentially complicates ESP implementation.  In Part II of this blog, I will explore some of the positive changes in the CARES Act, as well as gaps in the legislation and specific challenges relating to implementation.