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IRS Plan for Monthly Child Credit Distribution Lacks Details

Posted on Feb. 22, 2021

The IRS may be ready to distribute monthly child tax credit (CTC) payments to eligible families if Congress passes legislation, but exactly how remains unclear.

The American Family Act of 2021 envisions that the payments would be distributed through the coronavirus economic impact payment system set up by the IRS in 2020, according to Nick Martin, spokesman for House Ways and Means Committee member Suzan K. DelBene, D-Wash., a cosponsor of the bill.

Congress also expects that the pending $1.9 trillion COVID-19 relief bill would fund IRS infrastructure needed to pay an enlarged and expanded CTC regardless of a family’s tax or employment status, Martin said.

The Biden administration’s American Rescue Plan provides for a one-year version of the America First Act’s permanent program for monthly CTC payments. But neither plan offers much in the way of specifics about how it would be executed.

IRS Commissioner Charles Rettig told the New York City Bar Association February 17 that the agency would be able to make the transition from annual CTC refunds to monthly payments, as first reported by Politico.

Yet neither that report nor repeated questions from Tax Notes elicited any further detail from the IRS on what resources the agency would use or need to make the transition to monthly payments, and whether that transition could disrupt the 2021 filing season.

“The IRS showed they could get people to use a nonfiler portal to claim benefits and that they could deliver a large number of payments rapidly with the [Coronavirus Aid, Relief, and Economic Security Act (P.L. 116-136)] economic impact payments,” said Elaine Maag, principal research associate at the Urban-Brookings Tax Policy Center.

“That makes me optimistic that, if given enough resources, the IRS could deliver an advanced CTC as well, including to people who did not file a tax return,” Maag said.

‘Straightforward’ IRS

On the other hand, the IRS doesn’t have a system to distribute monthly advance refundable tax credit payments to individuals, Maag said.

The American Family Act would mandate creation of an online portal in which eligible individuals could enter changes in family status and income related to the monthly CTC.

The bill would also permit parents to opt out of the monthly payments in favor of the usual lump sum, Martin noted. The bill would allow Treasury Secretary Janet Yellen to adjust the frequency of payments if the IRS can’t deliver monthly.

Yet questions remain on what would be needed to set up and monitor the payment system in terms of software programming, computer hardware, labor, and other resources, as well as interactions with entities such as the Social Security Administration or third-party information reporters.

Also unknown is whether establishing that system will interfere with the budget-strapped agency work on filing season and preparing for another round of economic impact payments.

Still, tax system observers expressed no doubts that the IRS is up to the job.

“The IRS can do great things when it is given the proper funding to do so,” Martin said.

“It seems more straightforward to have the IRS send the check,” said James R. McTigue Jr., director of strategic issues, tax policy and administration at the Government Accountability Office, which Congress tasked with oversight of all pandemic-related legislative implementation.

Reviving Advanced EITCs

There may be alternative mechanisms for the big job, other observers suggested.

“The payroll systems and mechanics are there” for the IRS to implement an advance CTC through payroll withholding, according to Pete Isberg of the National Payroll Reporting Consortium Inc.

A payroll-withholding-based system could also accommodate taxpayers who pay no income taxes so that federal income tax could show negative, but still hike net pay, Isberg said.

This would be similar to the monthly advance earned income tax credit that taxpayers from 1979 through 2010 could opt to receive through their paychecks instead of a refund-based annual lump sum, Isberg said.

But advanced EITCs were never popular, Isberg added. The subtitle of an August 2007 GAO report on the advance EITC, “Low Use and Small Dollars Paid Impede IRS’s Efforts to Reduce High Noncompliance,” summarized the problems that the program encountered. Despite 15 years of IRS outreach, the report found that only 3 percent of those eligible signed up.

While congressional proposals have focused on the IRS doing the job, Maag noted that the SSA “has experience delivering monthly payments, and they have experience moving benefits with children as they move.”

However, Maag added, “SSA does not have information about where children live, and so would be unable to quickly start delivering a benefit.”

Systemic Risks

Congress is ultimately expected to issue instructions on who qualifies for the new CTC, which in turn will affect IRS operational and programming decisions in implementing the monthly payment.

McTigue noted that economic impact payments, and by implication the IRS systems built in 2020 to distribute them, are less complex than what would be required for a monthly CTC.

“Because the CTC being proposed is almost universal in nature, there’s little concern about income eligibility,” Maag said.

The base $3,000-per-child CTC contemplated in the American Family Act phases out for singles with incomes starting at $130,000 and for couples starting at $180,000 — far higher than the current EITC phaseouts.

McTigue cautioned, “Even in the best of circumstances, programs like the CTC are susceptible to fraud and errors.” He noted that Treasury’s fiscal 2020 financial report found that the improper payment rate for the refundable portion of the additional CTC was 12 percent, or $4.5 billion of the $39.1 billion paid.

Semper Paratus?

While there are reasons to be hopeful for a smooth rollout of monthly CTCs, if that’s what Congress eventually orders, Maag warned that unscrupulous tax practitioners could prey on clients by charging money to secure CTC benefits to which they are automatically entitled.

“I do worry about an informal role [for practitioners in IRS outreach] that ends up costing low-income families a substantial share of their expected CTC,” Maag said.

That said, McTigue noted that “it’s helpful that Congress and the [Biden] administration are talking in February about CTC payments in July.” The first round of economic impact payments went out less than two weeks after the CARES Act legislation was signed in March 2020, he said.

“What worked well . . . was that IRS was looking at the [economic impact payment] proposals in March, and so IRS was pretty far along for programming systems to make the payments so quickly,” McTigue said.

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