In today’s post Contributor Nina Olson explores the issue of stimulus payments being issued to deceased individuals. For a response to this post from Professor Bryan Camp, see here.
For the last month or so, media reports have highlighted the fact that Economic Impact Payments (EIPs) were sent to deceased taxpayers. After weeks of silence, on May 6, 2020, the Internal Revenue Service added FAQ 10 to its coronavirus tips website, which follows:
Q10: Does someone who has died qualify for the Payment?
A10: No. A Payment made to someone who died before receipt of the Payment should be returned to the IRS by following the instructions in the Q&A about repayments. Return the entire Payment unless the Payment was made to joint filers and one spouse had not died before receipt of the Payment, in which case, you only need to return the portion of the Payment made on account of the decedent. This amount will be $1,200 unless adjusted gross income exceeded $150,000. (Emphasis added)
Now, leaving aside that the FAQ does not tell you what you should do if your income exceeds $150,000 – Should you keep the money? Return even more of the EIP? What? – the FAQ contains some very strange language. First of all, it sounds admonishing. This to survivors of loved ones who died in 2020, 2019, or 2018 and did nothing to receive this payment other than open the mail or check their bank accounts. Second, it is not couched in the language of a legal requirement. Instead, it says you “should” return the payment. As in, you should eat your vegetables.
As Bob Kamman pointed out in an earlier PT post this spring, I have something of a history with the issue of stimulus payments to decedents. During a June 2008 Ways and Means Oversight Subcommittee hearing on the economic stimulus payments (ESPs) under the Economic Stimulus Act, Congressman Doggett asked me why these payments were going to deceased individuals, including his mother. Up until that point I was blissfully ignorant of this occurrence, but my wonderful staff quickly located the IRS FAQ explaining that, in fact, such payments were absolutely legitimate. Here is the language of the 2008 FAQ, updated on March 17, 2008.
Q. If an individual dies, what happens to his or her direct deposit or stimulus check?
A. Stimulus payments will be issued in the name of the individual eligible for payment on a filed 2007 income tax return or to the account designated by the individual on that return. This includes situations where a person dies after filing a return or where the final 2007 income tax return was filed by a personal representative or surviving spouse. Any issues or concerns involving a decedent’s filed return or the related stimulus payment should be addressed by the legal representative of the decedent’s estate. See Publication 559 for more useful information for survivors and personal representatives.
So, in 2008, the IRS position was that ESPs would be correctly paid to a decedent based on information on the 2007 return. The IRS also directed taxpayers to confer with the estate’s legal representative to figure out what to do with the payment – i.e., how to divide it up.
This spring, as EIPs were being issued, I began to get calls and emails from reporters and taxpayers, saying that EIPs were going to decedents. Having this issue seared into my brain from the 2008 experience, I checked the 2020 statutory language and compared it to the 2008 language. The statutes are identical in terms of who is an eligible individual. Here’s the 2020 language from IRC § 6428(d)(1):
For purposes of this section, the term ‘eligible individual’ means any individual other than —
(1) any nonresident alien individual,
(2) any individual with respect to whom a deduction under section 151 is allowable to another taxpayer for a taxable year beginning in the calendar year in which the individual’s taxable year begins, and
(3) an estate or trust.
How could the IRS come up with two completely contradictory interpretations of identical language in just 12 short years? Is there no one in the IRS that remembers 2008? Or did everyone just prefer to forget about it, since the President and Treasury Secretary said the funds should be returned.
Of course, the government is entitled to change its mind and reverse its position. But when it does so, due process insists that it explain this reversal. To date we have received no explanation, just this conclusory, precatory instruction. This instruction – couched, in FAQ 10, in terms of “should” – is even more bizarre when one reads on to FAQ 26 on the same 2020 IRS webpage:
Q26. I received an additional $500 payment in 2020 for my qualifying child. However, he just turned 17. Will I have to pay back the $500 next year when I file my 2020 tax return?
A26. No, there is no provision in the law requiring repayment of a Payment. When you file next year, you can claim additional credits on your 2020 tax return if you are eligible for them, for example if your child is born in 2020. But, you won’t be required to repay any Payment when filing your 2020 tax return even if your qualifying child turns 17 in 2020 or your adjusted gross income increases in 2020 above the thresholds listed above. [Emphasis added]
Here the IRS is acknowledging that the law does not require any repayment of an EIP. This is correct – IRC § 6428(e)(1) states the EIP credit claimed on 2020 returns “shall be reduced” by the amount of the advance EIPs “but not below zero”. The FAQ is also saying it is perfectly okay for the EIP to go someone who in 2020 will not be an “eligible individual.”
This is so, apparently, only if you are living in 2020 after the EIP was issued. Somehow the IRS has decided that, without any statutory justification, it alone can pick winners and losers. So a 17 year old’s parents can keep the $500, or a person who made less than $75,000 in 2018 or 2019 can keep the $1,200 despite making $200,000 in 2020, but the surviving spouse of a person who died in 2019 and who has two young children “should” return the $1,200.
The phrasing of FAQ 10 gets weirder as one applies it to different scenarios. By saying the payment should be returned if the person died before receipt of the EIP, it includes persons dying in 2020 whose personal representatives will be filing final individual tax returns on their behalf in 2021. This means, if someone died on March 1, 2020 of Covid-19, and the EIP was direct deposited into that person’s account on April 15, 2020, the grieving surviving spouse should repay the $1,200. Really? This is just downright cruel.
Finally, FAQ 10 ignores a longtime provision in the Internal Revenue Code for “qualifying widows and widowers.” IRC § 2(a) provides a surviving spouse who has not remarried with whom a dependent child has resided for the entire year and who has provided more than half the cost of maintaining that home, may file as married filing jointly in the two years following the death of the spouse. This statute represents Congress’ recognition that the death of a spouse or parent can have a devastating impact on one’s financial wellbeing, and that should be taken into account when calculating the household’s tax burden. Yet according to FAQ 10, these qualifying widows/widowers must repay the $1,200 EIP for the deceased spouse.
What is the basis of any of these choices in the legislation? Answer: the IRS has articulated none. In fact, there is even more justification to make these payments to survivors of decedents in 2020 than there was in 2008 – we are in the midst of a pandemic with unprecedented levels of unemployment.
One final point. Let’s say the IRS finally produces some sort of legal justification for its 180 degree turn from 2008. (Let’s also hope there is a legal opinion somewhere on this point and someday it will be made public.) What is it going to do to recover all these EIPs that have been issued to deceased individuals? Other than shaming grieving people into giving back this money, it must make a determination that it can use the deficiency process to obtain an assessment of this amount or refer the case to the Department of Justice to bring an erroneous refund suit under IRC § 7405. Do you think the Tax Division of the Department of Justice will bring a case for $1,200 against a grieving widow/widower of a deceased COVID-19 victim? (You can find some previous PT discussions of erroneous refunds here and here.)
A word about deficiency procedures and the EIP. The CARES Act provides “there shall be allowed as a credit against tax … for the first taxable year beginning in 2020 ….” Consistent with this language, I understand the IRS has programmed its systems to credit the advance EIP against the taxpayer’s 2020 1040 tax module. (As Carl Smith discussed here a few weeks ago, it is unclear for bankruptcy purposes to which year the credit applies – the year in which it was paid or the year in which it is claimed on the tax return.)
If a taxpayer has died in 2018 or 2019 and receives the EIP, there is no one for whom a Form 1040 can be filed, so against what can the IRS assess a deficiency? If the taxpayer died in 2020, then there may be a final Form 1040 return filing requirement for the decedent. In that case, under IRC § 6428, the math goes like this: subtract the amount of EIP paid in 2020 from the amount of EIP the taxpayer is eligible for based on 2020 circumstances, but do not go below zero. Here that would be zero – 1200 = -1200 but don’t go below zero, so = zero. Where is the deficiency?
At any rate, all of this is completely avoidable. Instead of putting more burden on taxpayers who are already anxious about their economic and physical health, today and in the future, the IRS could have adopted the approach of the 2008 FAQs, and added, “If you would like to return the funds, please send them [here].” Then, just as in 2008, the survivors who didn’t need the funds could (and did) return them. But those who needed the funds were not made to feel like criminals if they retained them.