Contributor Nina E. Olson returns with further thoughts on the CARES Act.
Update: As this blog went to press, the IRS released a statement noting that “People who typically do not file a tax return will need to file a simple tax return to receive an economic impact payment.” This undermines one of the improvements over 2008 that I identify in the following post. I fully understand the challenges of programming in the middle of the filing season, and that such programming and coordination between the Social Security Administration, IRS, and Bureau of Fiscal Services would delay payments to this part of the population. It seems to me a delay in payments for this group would be more than offset by the fact that this population would actually receive the payments. We know from 2008 that most of the taxpayers in this group never filed the “simple” tax return at all.
Some Silver Linings in the CARES Act: Treatment of Social Security and Railroad Retirement Beneficiaries
In 2008, the Economic Stimulus Act defined ESP eligible taxpayers as those with at least $3,000 of “qualifying income,” which included Social Security benefits. Taxpayers did not need to have taxable income in order to receive the ESP. However, all taxpayers were required to file a tax return in order for the IRS to issue the ESP. In 2008, in addition to mailing over 130 million notices to TY 2006 filers, the IRS mailed information packages to 20.5 million people who received Social Security or Veterans benefits and who did not file a TY 2006 return, reminding them to file a 2007 return in order to claim the ESP. These returns were known as ESP-only returns.
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 184.108.40.206.5 and 220.127.116.11.11.1.) 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 30th 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.