Tax preparers are bracing for a raft of new, expanded, and sometimes retroactive provisions of the American Rescue Plan that promise financial assistance to millions of taxpayers, and millions of headaches for their tax professionals.
The Democrats’ $1.9 trillion pandemic relief law — enacted March 11 after receiving no Republican votes — tasks the IRS with distributing economic impact payments (EIPs) worth up to $1,400 per person, sending periodic advance child tax credits to eligible individuals starting this summer, and instructing tax practitioners and their clients on how to exclude up to $10,200 in unemployment compensation, which can retroactively affect 2020 tax returns.
“The IRS has so many balls in the air,” said CPA Rhonda Collins of the National Association of Tax Professionals. “But it’s like, which one do you do first?”
Yet eight Democratic senators and 13 representatives sent a letter March 12 to Treasury Secretary Janet Yellen and IRS Commissioner Charles Rettig making clear their priority for implementation of the American Rescue Plan Act of 2021 (P.L. 117-2).
“We encourage you to determine whether it would be feasible for the IRS to automatically adjust taxable income and deliver refunds without requiring an amended tax return from eligible taxpayers who have already filed” before the maximum unemployment compensation exclusion of $10,200 became law, the members’ letter said.
“If this is not possible, we urge you to provide clear, accessible information to ensure eligible taxpayers who have already filed for 2020 can file an amended return as quickly and easily as possible,” the 21 lawmakers said.
‘They Want to Know Now’
While the IRS is focused on the 2021 filing season and distributing EIPs, practitioners said they and their clients are impatient for guidance on Congress’s tax-agency-based expansion of the social safety net.
“Clients want to know when they’re going to get their third EIP check, and their monthly advance child tax credit, and they want to know now,” said continuing education provider Kathy Morgan, owner of Puzzled By Taxes?.
The up-to-$10,200 exclusion for unemployment compensation was much anticipated by taxpayers, practitioners told Tax Notes. Jeffery S. Trinca, legislative counsel for the National Association of Enrolled Agents, said many preparers were holding off filing returns for some clients eligible for the exclusion in anticipation of its becoming law.
But taxpayers who’ve already filed their 2020 returns will have to amend them, practitioners said. Other taxpayers who delayed filing to await enactment of the law are contacting preparers in large numbers, clamoring to file.
“The big thing with unemployment is whether there’s anything special we have to do, rather than just making an adjustment” on the 2020 returns, said Phyllis Jo Kubey, president of the New York State Society of Enrolled Agents. “I would rather not reduce the 1099-G [“Certain Government Payments”] amount by $10,200 and call it a day,” she said.
Morgan said she hoped to have IRS guidance on the unemployment exclusion before a continuing education class she’s teaching on March 19. But she added that she’s not counting on it.
‘Fraught With Worry’
Taxpayers were also eager to find out about refunds of advance premium tax credit payments, Collins noted.
The American Rescue Plan Act states that advance premium tax credit overpayments don’t have to be repaid on 2020 returns. However, taxpayers who didn't wait for Congress’s vote and have already filed need instructions from the IRS about whether and how they can reclaim the overpayment.
Trinca said enrolled agents advising employers are “fraught with worry” over implementation of the advance child tax credit. “It’s a fairly complicated tax situation for people who aren’t that sophisticated about tax,” he said.
“No one knows how the mechanics of the advance child tax credit will work,” Morgan said. Employers’ payroll and human resources departments will be required to participate in monitoring employees for eligibility, she noted.
While the IRS has, mostly successfully, distributed two rounds of EIPs, it hasn’t sent advance refundable tax credits since it stopped sending monthly earned income tax credit payments in 2010.
The IRS will open an online portal for eligible taxpayers to keep their family circumstances up to date and their periodic advance child tax credit payments accurate, Trinca noted.
Yet the opportunities for taxpayer and preparer confusion, and for abuse and fraud, should compel Congress to require licensed tax practitioners to prepare returns that include advance child tax credits, Trinca said.
Despite the numerous uncertainties of the massive relief bill, Morgan hailed its passage. Most recent tax legislation has been business-oriented, she noted. The American Rescue Plan Act is the first bill in recent memory that overwhelmingly favors individual taxpayers, she said.
“And the individuals have heard about this, and they’re now going, ‘Ahhh,’” and reconsidering their tax positions, Morgan said.
Compliance vs. Education
Tax practitioners said they began preparing for the bill’s changes even before it became law.
Collins said the National Association of Tax Professionals began drafting educational webinar plans on the new law after it was passed by Congress but before President Biden signed it. The association held its first live webinar on the law just hours after enactment, with practitioner questions focused on the unemployment exclusion, advance premium tax credit refunds, and the advance child tax credit, she said. The webinar was sold out, she added.
Kubey said she’s been reviewing clients’ records to notify them of tax opportunities based on the new law since before the bill passed.
Kubey said she hopes to see IRS unemployment exclusion instructions within days. “I’m not sure that even rises to the FAQ level,” she added. “It’s more likely a form, or an instruction change.”
But other guidance will take longer to formulate and be harder to explain to taxpayers, said Morgan. Considering that implementation for many of the law’s provisions is immediate, every day without IRS guidance potentially frustrates and delays taxpayers and their preparers, she and other practitioners said.
Morgan said that completing IRS forms for changes in earned income tax credit thresholds and raising the amount of day-care credits may be relatively easy compared with educating taxpayers in time to claim their benefits.