The Biden administration is thrilled with the rollout of advance child tax credit (CTC) monthly payments that began flowing in July, but that enthusiasm isn’t shared by tax return preparers.
The White House and Treasury have strongly touted the creation and issuance of advance payments of the expanded CTC that were authorized by the American Rescue Plan Act of 2021 (P.L. 117-2), describing the policy as a dramatic step forward in reducing child poverty and sustaining families through the pandemic.
In practice, however, the program seems destined to cause headaches for tax professionals in the upcoming filing season. “This, quite frankly, is going to be another Congress-created train wreck for the IRS,” declared Karen Brosi, an enrolled agent in California.
The CTC received its first major recent expansion with the 2017 Tax Cuts and Jobs Act, doubling from $1,000 to $2,000 per child under 17, significantly raising the adjusted gross income phaseout limits, and making more of the credit refundable.
Lawmakers built onto that with ARPA, which temporarily raised the credit to $3,000 per child, with an additional $600 credit for children under the age of 6. The credit was also made fully refundable, and for the additional $1,000 or $1,600 tax credit, a separate phaseout structure was added for lower incomes.
“Boy, I need software to get these right from one year to the next,” Brosi said July 29 at the American Institute of CPAs conference in Las Vegas.
One of the most consequential developments authorized by ARPA was to make the newly expanded credits advanceable this year by default, while allowing taxpayers to opt out. Taxpayers receiving the advance payments will receive half of their total CTCs in the form of monthly payments. The IRS issued $15 billion in payments in July.
“Members of Congress don’t get it; they just want to give out money,” Larry Pon of San Francisco-based Pon & Associates told Tax Notes. “They’re saying it’s like Social Security for kids, and we should make it a permanent part of the law, but they’re not the ones doing tax returns.”
The chief challenge ahead for return preparers is that they will have to reconcile the advance payments their clients receive with what is reported on their 2021 returns next spring, and some taxpayers may be surprised — and unhappy — to hear that they have to pay some of those credits back.
“That’s going to create a collections issue for the IRS, and us tax preparers are going to get yelled at: ‘What do you mean I have to pay it back? You’re doing something wrong!’” Pon said.
The IRS is basing the advance payments of the credit on a taxpayer’s 2020 tax return, but for many taxpayers, the year of the pandemic was far outside their norm. Pon said that a family may have experienced a large drop in income 2020, such as both parents being laid off because of the pandemic. But they may have bounced back strongly in 2021 and now earn substantially more, pushing them beyond the phaseout thresholds.
For some return preparers, the prospect of reconciling advance credits on the 2021 tax returns echoes the problems associated with reconciling the economic impact payments (EIPs) issued in 2020, with one key difference: Overpayments of the EIPs didn’t have to be paid back.
The EIPs still had their hiccups. Pon indicated that he’s still dealing with the fallout of one client who claimed they didn’t receive their first EIP, noted as much on their 2020 tax return, and is now receiving letters from the IRS reducing their refund and contending that the taxpayer did in fact receive the EIP.
Now the client has to file a Form 3911, “Taxpayer Statement Regarding Refund,” requesting that the IRS trace where the payment went, a process that can stretch on for months, Pon said. That kind of problem will play out all over again with the advance CTCs, he predicted.
Donna Laubscher, a CPA and partner with the Arizona-based accounting firm Henry+Horne, likewise said the EIPs “very much complicated the 2021 filing season.” Taxpayers ran into difficulties tracking exactly how much in EIPs they received or reported incorrect amounts, and absent a power of attorney, there’s no way for tax professionals to verify how much each taxpayer received, she said.
IRS FAQs say that the agency will distribute Letter 4619 in January 2022 stating the total amount of advance payments that each taxpayer should have received, but even so, “based upon the guidance tax professionals received regarding the economic impact payments, we are anticipating quite a bit of confusion,” Laubscher said.
Taxpayers received letters for each round of EIPs but often failed to give them to their tax professionals, Laubscher said, adding, “I’m not sure that these CTC payments would be different.”
Know Thy Client
The IRS is automatically issuing advance CTC payments to eligible taxpayers, but there are a variety of reasons why a taxpayer would prefer to opt out of receiving the payments now, practitioners say.
Some taxpayers will have had substantial changes in income between 2020 and 2021, such that they’ll end up having to pay back some of the CTC. Tax professionals also noted that advance payments could be particularly problematic for divorced parents who take turns claiming their shared children as dependents in alternating years. If one parent claimed the children in 2020, the IRS system will likely designate that same parent to receive the advance payments in 2021, at odds with the divorce settlement, and further complicated by the fact that both parents must opt out separately.
Pon described another client who is on an installment plan with the IRS to pay back taxes, which he typically uses his refund for each year, and so he’s advised that client to opt out. Some taxpayers also simply prefer to receive a larger refund at the end of each filing season, tax professionals said.
Laubscher added that if a taxpayer’s bank account information has changed since 2020, that could make it harder to track down where payments are deposited and accounted for.
“In preparing for the upcoming tax season, we’ve got to follow up with the people we think need to opt out,” Pon said.
The Biden administration anticipates 39 million families will be enrolled in the advance payment process by the end of 2021. An additional 1 million families who would otherwise be receiving those payments had opted out by the deadline for the first round of payments, a senior administration official said July 14.
Amy Miller of the AICPA said during a separate panel at the conference that the IRS is doing all that it reasonably can to keep the public informed about the advance CTC payments. For instance, the IRS has online portals for unenrolling from the advance payments and for enrolling nonfilers in the program and has an online tool to determine CTC eligibility.
The IRS portal for unenrolling provides taxpayers with two choices for opting out: They can use their existing IRS online account, if they have one, or they can use an application called ID.me, which confirms an individual’s identity in a multistep process that includes directing the taxpayer to take a selfie with their cellphone’s camera and digitally compare it with the image on their driver’s license.
For some, that process has been straightforward enough. Jeffrey Porter of Porter & Associates CPAs in Huntington, West Virginia, relayed that none of his clients have voiced any difficulties, and his own daughter and her husband were able to unenroll in just a few minutes.
But that experience hasn’t been universal. “I understand you need an advanced degree in mathematics or computer science in order to work your way through that website,” Brosi said. Pon similarly warned that taxpayers should budget at least an hour to unenroll from the CTC payments.
Miller cautioned that despite the government’s efforts at public awareness, the burden of helping taxpayers navigate the advance payments and whether to unenroll ultimately falls on tax practitioners. The government is “absolutely relying on tax preparers to guide taxpayers in the opt-out process,” she said.
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