Tax Notes logo

Analyzing the IRS FAQs on Incarcerated and Non-Resident Taxpayers

Posted on May 12, 2020

On May 6, the IRS released four new FAQs (FAQ 10, 11, 12, and 41) relating to deceased, non-resident alien, and incarcerated individuals with respect to economic impact payments. The FAQs provide advice regarding both eligibility for payments (FAQ 10-12) and detailed procedures for returning payments that an individual should not have received (FAQ 41).

FAQs 10 – 12 provide that deceased, non-resident, and incarcerated taxpayers are not eligible for payments. In this post, I discuss the (lack of a) legal rationale for the Service’s conclusion with respect to incarcerated and non-resident taxpayers, along with practical problems the IRS is likely to encounter. In a subsequent post, Nina Olson will discuss similar issues with respect to deceased taxpayers.

For incarcerated taxpayers, the IRS advice strikes me as contravening the clear statutory language that Congress enacted. The question is more complicated for stimulus recipients who are non-resident aliens, but similarly lacks a solid legal foundation.

Section 6428 Overview

As Carl Smith explained in one of our first posts on the economic impact payments, the payments are provided in section 2201(a) of the CARES Act and codified in section 6428 of the Code. Section 6428(a) & (b) provide the payments as a refundable credit for the 2020 tax year. Section 6428(c) provides AGI limitations. Finally, one must be an “eligible individual” under 6428(d). This includes “any individual other than (1) [a] non-resident alien . . . (2) an individual with respect to whom a deduction under section 151 is allowable to another taxpayer . . . and (3) an estate or trust.”

But as nearly everyone now knows, so that taxpayers don’t have to wait to receive the credit when filing their 2020 tax returns in 2021, the IRS is providing those payments in advance; by April 17, the IRS had issued nearly 90 million payments. Section 6428(f) authorizes this advance payment mechanism.

Section 6428(f)(1) provides that “each individual who was an eligible individual for such individual’s first taxable year beginning in 2019 shall be treated as having made a payment against [their income] tax . . . for such taxable year in an amount equal to the advance refund amount for such taxable year.” So, we look to see whether, in 2019, an individual met the “eligible individual” definition. If so, they get the “advance refund amount”, which section 6428(f)(2) defines as the amount that would have been allowed as a credit under section 6428(a) if it had been enacted for 2019. Section 6428(f)(3) directs the Secretary to issue the advance payments as quickly as possible. Finally, if a taxpayer hasn’t filed a return for 2019, the Secretary may use a 2018 return in a similar manner (and similarly determine whether the taxpayer was an “eligible individual” in that tax year); otherwise, they may use information provided on Forms SSA-1099 and RRB-1099 issued in 2019 to send out the payments. See I.R.C. § 6428(f)(5).

The key point, however, in section 6428(f) is that if the individual is an “eligible individual” for 2019 (or 2018), they should get the advance payment, regardless of their eligibility in 2020. Section 6428(f)(1) states that “an eligible individual for such individual’s first taxable year beginning in 2019 [or 2018] shall be treated as having made a payment against the tax imposed . . . for such taxable year.” Note also that this does not say “each eligible individual who was an eligible for such individual’s first taxable year…” It just says “individual.” This section, as I read it and explain below, applies equally to the incarcerated, non-resident, and deceased taxpayers that the IRS declares ineligible (the latter of which Nina Olson blogged about yesterday).

What happens if the advance payment is more than what the taxpayer should have received? Section 6428(e) provides that the 2020 credit is reduced, but not below zero. That’s critical, as this language means that taxpayers don’t have to pay back the credit. For example, if a taxpayer’s 2019 AGI qualified them for a full advance credit of $1,200, but their 2020 AGI bumps them into the phaseout range, they don’t have to pay back the difference.

With the background out of the way, let’s dive into the categories of folks the IRS has excluded from 6428. I believe the IRS FAQs are incorrect in all of these cases, but for different reasons.  

Incarcerated Taxpayers

IRS FAQ 12 provides:

Q12. Does someone who is incarcerated qualify for the Payment? (added May 6, 2020)

A12. No. A Payment made to someone who is incarcerated should be returned to the IRS by following the instructions about repayments. A person is incarcerated if he or she is described in one or more of clauses (i) through (v) of Section 202(x)(1)(A) of the Social Security Act (42 U.S.C. § 402(x)(1)(A)(i) through (v)). For a Payment made with respect to a joint return where only one spouse is incarcerated, you only need to return the portion of the Payment made on account of the incarcerated spouse. This amount will be $1,200 unless adjusted gross income exceeded $150,000.

This presents the easiest case. The Service’s position is flat wrong. Nothing in section 2201 of the CARES Act generally prevents payments to incarcerated individuals. An “eligible individual” is defined as “any individual”, so long as the individual is not (1) a non-resident alien, (2) a dependent, or (3) an estate or trust. There could potentially be situations where incarcerated individuals qualify as dependents under section 151; however, those are individualized determinations not subject to a general rule.

Why would the IRS have made this sort of clear error? I suspect it harkens back to the 2009 Stimulus (hat tip to Seth Hanlon who keyed me into these provisions on Twitter). In section 2201(a)(4) of the American Recovery and Reinvestment Act, Congress excluded incarcerated individuals and non-U.S. citizens not lawfully present in the United States from receiving stimulus payments. It did so through referencing provisions of the Social Security Act that similarly exclude these individual from receiving Social Security payments: 42 U.S.C. § 402(x) and (y). There are a number of conditions under 42 U.S.C. § 402(x), but suffice to say it excludes many incarcerated individuals from receiving payment. Beyond the provisions in the Social Security Act, various other incarceration-related triggers excluded payments to incarcerated individuals. See American Recovery and Reinvestment Act § 2201(a)(4)(A)-(C).

No such provision appears in section 2201 of the CARES Act, or indeed, anywhere within the CARES Act. To check, I performed a text search on the PDF version of the CARES Act for every provision referenced in the 2009 Act. None appears.

Perhaps the IRS is concerned with these payments not supporting the type of spending that Congress intended. Congress enacted the stimulus payments to stimulate the economy with consumer spending, but did not prescribe the type of consumer spending for these payments. Congress did not say “spend the money in the mainstream economy.” Incarcerated individuals face spending needs too. They have families. They may have child support obligations to which the stimulus payment would be offset, or their spouses may be struggling to maintain the family home to which the individual may be released. The IRS provides no explanation as to why it decided to harm these non-incarcerated individuals.

The FAQ also harms those who may be exonerated, and who might be forever deprived of the stimulus payment under the IRS’s guidance. Incarcerated wrongly, they are also wrongly deprived of the payment. With the statute’s temporal limitation on the issuance of the stimulus payments, those exonerated two years from now, for example, will not have the payments they should have received had they not been wrongly incarcerated.

Filing a 2020 tax return next year to remedy this situation provides only an incomplete solution. Just as the unemployed or underemployed worker needs the stimulus payment now, so do those incarcerated individuals whom the IRS is prohibiting from receiving the stimulus payment.

The FAQ also rests on the faulty presumption that incarceration is a permanent lifestyle choice. Yet even the Tax Court recognizes that not all new residences are permanent homes: the inquiry is whether the taxpayer faces a temporary absence due to special circumstances. Incarceration is merely the involuntary removal from the taxpayer’s principal place of abode with no manifestation of intent to change abode. See Rowe v. Commissioner, 128 T.C. 13, 27 (2007) (Goeke, J., concurring). Even a resident near death in a nursing home is considered to be temporarily absent from his home. See Hein v. Commissioner, 28 T.C. 826 (1957).

Putting the reasons for, harms of, and the faulty premises of the FAQ aside, many practitioners are wondering about what periods of incarceration trigger the exclusion to incarcerated individuals. These questions are largely answered in the statute the FAQ cites: 42 U.S.C. § 402(x). Generally, someone has to be incarcerated pursuant to a conviction for more than 30 days. 42 U.S.C. § 402(x)(1)(A)(i). But what does that mean for how the IRS is deciding not to issue payments? What period does the IRS use to make this determination? The FAQ is also silent as to which year matters. Is it 2019 (or 2018 in the absence of the 2019 return), the year for which the IRS will search for taxpayer information? Is it 2020, the tax year for which the stimulus acts as a credit? Does it matter if the taxpayer is in pre-trial detention? What if the taxpayer is incarcerated for less than twelve months? What if the taxpayer is in home detention? With the release of non-violent prisoners to home detention to avert the spread of COVID-19, this population is growing. What if the taxpayer is in a work-release program, a state of semi-detention? The IRS must define the population it has determined should not receive the stimulus payment if it wants to limit the ability of a group to receive that benefit. In this regard, the FAQ raises more questions than it answers.

Finally, there are a couple of downstream consequences to note, absent further action from the IRS or Congress. First, while this is an incomplete remedy, incarcerated taxpayers who do not receive an advance payment should nevertheless file a tax return for 2020 to claim the 2020 refundable credit (to the extent they are not excluded as dependents under 6428(d)(2)). Second, those receiving payments on behalf of incarcerated taxpayers should consider disregarding the IRS FAQ, since it contravenes the clear statutory text that Congress provided.

Non-Resident Taxpayers

IRS FAQ 11 provides:

Q11. Does someone who is a resident alien qualify for the Payment? (added May 6, 2020)

[A]11. A person who is a non-resident alien in 2020 is not eligible for the Payment. A person who is a qualifying resident alien with a valid SSN is eligible for the Payment only if he or she is a qualifying resident alien in 2020 and could not be claimed as a dependent of another taxpayer for 2020. Aliens who received a Payment but are not qualifying resident aliens for 2020 should return the Payment to the IRS by following the instructions about repayments.

Unlike incarcerated taxpayers, Congress clearly indicated that non-resident aliens (i.e., non-U.S. citizens who do not have a green card, meet the substantial presence test, or otherwise qualify as resident aliens under section 7701(b)(1)(A)) are not “eligible individuals.” See I.R.C. § 6428(d)(1). So, if you’re a non-resident alien who files a 2020 tax return, no credit will be allowed. Clear enough.

But what if the IRS sent you a check anyway? The IRS FAQ indicates that 2020 non-resident aliens who received a payment should return it. That advice isn’t necessarily wrong, but it appears incomplete.

As noted above, section 6428(f) provides advance payments depending on whether one is an eligible individual in 2019 or 2018, as the case may be. There are circumstances where a resident alien in 2019 could become a non-resident alien in 2020 (e.g., meeting the substantial presence test in one year but not the other). If an individual legitimately was a resident alien in 2019, however, section 6428(f)(1) treats the taxpayer as having made a payment in 2019 and compels the Secretary to refund that amount to the taxpayer. And while no payment is authorized for 2020, section 6428(e)(1) provides only a reduction of the 2020 payment, capped at $0. There are no other repayment provisions provided in the statute. Therefore, for taxpayers who were resident aliens under section 7701 in 2019, the IRS appears to lack any statutory basis for compelling these taxpayers to return these payments.

The question is more complicated if an individual appeared to be an eligible individual for 2019, but was not. For example, I’ve heard anecdotes of international students mistakenly filing resident tax returns for tax year 2019, thereby receiving the stimulus payment. In reality, they should not have been treated as residents due to section 7701(b)(5)(A)(iii). In these limited situations, I think the IRS has sounder legal footing to request a return of the payment.

Moreover, because the substantial presence test counts the days a taxpayer is physically present in the United States, many taxpayers may not yet know whether they will be classified as resident or non-resident aliens in 2020. Given worldwide travel restrictions, it’s perhaps easier for these taxpayers to guess where they’ll be physically present through the end of 2020 (I, for one, plan to spend the foreseeable future at my dining room table in South Bend). But the FAQ still asks taxpayers to predict the future to some extent.

Here’s the bottom line, pending further Congressional action. The IRS FAQs for incarcerated taxpayers lack any grounding in statute. If they haven’t received an advanced payment, incarcerated taxpayers should file 2020 returns claiming the credit. If they have received an advanced payment, incarcerated taxpayers should consider disregarding the IRS FAQ.

For non-residents taxpayers, those who are non-residents in 2020 definitely can’t claim a credit on their 2020 tax return. But those who were “eligible individuals” in 2018 or 2019 have a good argument to retain the advance payments they’ve already received.

If the IRS doesn’t rescind the guidance in the FAQ, then more questions will arise. Will it issue notices of deficiency to taxpayers who received these payments? A longer post is necessary to address this question, but suffice to say that if the IRS is correct in its statutory argument (and I am wrong), then the IRS may not have authority to issue notices of deficiency. See United States v. O’Bryant, 49 F.3d 340 (7th Cir. 1995). Will it then really proceed with erroneous refund litigation over $1,200 payments? The IRS should think twice before maintaining this legally dubious guidance, let alone litigating these issues.

Subject Areas / Tax Topics
Copy RID