Nina E. Olson returns with further thoughts on the CARES Act.
I wasn’t planning to write another post about the CARES Act this week, but new things have popped up that I am now worrying about. We’ve seen a dizzying about face by Treasury on a crucial issue. Earlier this week, Bob Kamman, in a comment to Part I of this blog series, noted the IRS had issued a news release with the following statement:
People who typically do not file a tax return will need to file a simple tax return to receive an economic impact payment. Low-income taxpayers, senior citizens, Social Security recipients, some veterans and individuals with disabilities who are otherwise not required to file a tax return will not owe tax.
The IRS statement caused a huge uproar, causing members of Congress to write the Secretary and urging a reversal of this position. It did not take long for that reversal to come:
The U.S. Department of the Treasury and the Internal Revenue Service today announced that Social Security beneficiaries who are not typically required to file tax returns will not need to file an abbreviated tax return to receive an Economic Impact Payment. Instead, payments will be automatically deposited into their bank accounts.
We can now all breathe a sigh of relief, at least with respect to this issue. But because the IRS’s original position, that Social Security beneficiaries with little or no income were going to have to file “simple” returns, seems to fly in the face of provisions in the CARES Act, I think it is important to go through the analysis of why the IRS even took this position in the first place, if only so we don’t have to go through this again.
I have no first-hand knowledge of the deliberations (I’m still under the one-year prohibition against contacting IRS for purposes of seeking to influence. . . ). But some possible explanations for the IRS’s original position have occurred to me.
First, there is the IRS culture itself. It is a very conservative, enforcement-minded agency that tilts toward preserving the status quo. In an environment where every news cycle brings the Secretary making yet another promise – we’ll get payments in 2 weeks! We’ll create a new app for deposit account information! – the IRS must be reeling. In that context, it makes sense the agency response to Economic Stimulus legislation is look back to what was done before, in 2008.
What the IRS failed to factor in, however, is that 2020 is not 2008! We are in the midst of a pandemic that threatens not only individuals’ economic health but also their physical health. People are ordered not to go outside, with few exceptions, and the entities that assist low income taxpayers with their filing requirements – TCE, VITA – are shuttered. IRS employees are not available to assist either, and digital services, for the elderly and low income population, are not a very good solution.
The IRS either failed to recognize the impact of the difference between 2008 and 2020 or recognized it but decided it was better to put the burden on vulnerable taxpayers rather than a risk a different approach. The risks inherent in the IRS’s archaic technology infrastructure reinforce the IRS’s innate resistance to change. If a single mistake is made in programming a new system, it might bring down the filing system or lock employees out of most major databases (this happened in April 2018). Worse, it could create a back door for hackers. From that perspective, it is better to go with what you know than what you don’t know.
The IRS’s Enforcement Mindset Undermines a Focus on Taxpayers’ Circumstances
The IRS’s conservative approach gets additional justification from the IRS’s enforcement mindset. What if someone gets more advance recovery rebate than they are entitled to? Of course, Congress has already contemplated and accepted that eventuality, when it authorized the IRS to use 2018 tax return information if the 2019 return isn’t filed. And section 6428(e)(1) provides there will be no recapture below zero.
But still, it appears the IRS was worried that it cannot tell whether a low income nonfiling SSA/RRB taxpayer’s filing status is single, head of household, married filing jointly, or married filing separately. It also cannot tell whether these taxpayers have any children qualifying for the extra stimulus payment of $500. As a result, it may have believed it cannot accurately calculate the ESP amount because the AGI limitations for the payments are based on filing status. Therefore, it may have reasoned, the IRS should require these taxpayers to file an ESP-Only return to get their ESP.
It is ironic that the IRS would insist on a return to know the filing status when under its own procedures elsewhere it is perfectly comfortable assuming a taxpayer’s filing status in the absence of a return. Under IRC § 6020(b), the Secretary has the authority, where a taxpayer has failed to file a required return, to make a return “from his own knowledge and from such information as he can obtain through testimony or otherwise.” In administering this provision, the IRS generally assumes a filing status of single, no dependents; it relies on income reported on W2s, 1099s and other schedules, and it computes taxes owed based on those amounts.
The CARES Act , however, authorizes the Secretary of the Treasury to issue a payment to below-filing-threshold Social Security and Railroad Retirement beneficiaries without a tax return. The section may not be perfectly drafted, but the gist is clear enough. Let’s walk through section 6428(f) as enacted by the CARES Act:
Step 1: Section 6428(f)(1) provides that in making an eligibility determination, the Secretary shall look to the 2019 tax year and treat the taxpayer as having made a tax payment equal to the advanced refund amount.
Step 2: Section 6428(f)(2) defines the advance refund amount as the amount the individual would be entitled to if the credit had been allowed in the tax year at issue (e.g., 2019).
Step 3: Section 6428(f)(3)(A) provides the Secretary shall refund or credit the overpayment created by the advance refund amount as rapidly as possible.
Step 4: Section 6428(f)(5)(A) provides that in making the refund or credit “determination” as rapidly as possible, if the individual has not filed a 2019 return, the Secretary may use the 2018 return (i.e., 2018 would be the tax year at issue).
Step 5: Section 6428(f)(5)(B) provides that in making the refund or credit “determination” as rapidly as possible, if the individual has not filed a 2018 return either, then the Secretary may “use information with respect to such individual for calendar year 2019 provided in – (i) Form SSA-1099, Social Security Benefit Statement, or (ii) Form RRB-1099, Social Security Equivalent Benefit Statement.”
Now, this provision clearly implies, if not expressly states, that Congress intended the Secretary to use the information on forms SSA-1099 and RRB-1099 to calculate the amount of the rebate for below-filing-threshold nonfilers. There is no requirement that a return be filed to make that calculation.
At this point in the filing season, the IRS has a ton of information about taxpayers’ income. At least with respect to the 2018 tax year, it has Forms W-2, 1099 series, and K-1 information for taxpayers. For 2019 it has likely received almost all W-2 information and most 1099-Misc-Nonemployee Compensation returns. I can hear IRS enforcement personnel saying, “But we can’t just use this information to measure eligibility; we don’t know about cash earnings” (the “shadow economy”). Well, cash earnings are a problem for all taxpayers. A taxpayer who files a return and reports W-2 income is just as likely to have unreported cash earnings as a taxpayer who receives SSA benefits and has no other reported income. So there is no basis to worry about cash earnings with respect to nonfiling SSA/RRB recipients alone. It is a potential problem with everyone, filer or nonfiler. (I think this is what Donald Rumsfeld called a “known unknown.”)
Understanding the Characteristics of the Low Income Nonfiling SSA/RRB Population Addresses Overpayment Concerns
What, exactly, is the IRS worried about with these SSA nonfilers? For the most part, SSA recipients have so little income that their filing status won’t matter – their income is below the AGI thresholds for all filing statuses. Look at the SSA data:
- Social Security is the major source of income for most of the elderly, and comprises 33 percent of income for all elderly persons.
- For 50 percent of married couples and 70 percent of unmarried persons, Social Security Old Age benefits constitute 50 percent or more of their income.
- For 21 percent of married couples and about 45 percent of unmarried persons, Social Security Old Age benefits constitute 90 percent or more of their income.
So let’s just do the math. Social Security says the average monthly benefit in 2019 for retired persons was $1,471, or $17,652 annually. If Social Security constituted 50 percent of that person’s income, the AGI would be $35,304. If it constituted 90 percent of the individual’s income, the AGI is $19,613. Both are well below the $75,000 AGI beginning phaseout threshold.
The average monthly benefit in 2019 for a disabled person was $1,236. Note that disability benefits are means-tested. That is, in 2020, if you make more than $1,260 per month (over a 36 month period), your benefits will cease. These amounts are well below the AGI threshold for all filing statuses under the CARES Act.
Thus, the IRS could easily calculate a $1200 benefit for each person receiving Social Security Old Age and Disability benefits. The only thing we have to worry about here is whether the SSA recipients have dependent children. If you receive Social Security and have even a little earned income, you are already probably filing in order to get the EITC and CTC. We are left with a very small group of SSA recipients who have no other income at all and have children. Given the urgency of getting some stimulus into the economy and into the hands of folks, it seems to me the best approach would be to automatically send the $1200 to each of these SSA nonfilers and then ask them to file a return to get the qualifying child portion of the stimulus. The IRS return processing pipeline can automatically adjust for the amount of stimulus already paid out via math error authority.
Don’t Forget the Vets and Supplemental Security Income Recipients
This same approach can be applied to recipients of Veterans benefits, as well as recipients of Supplemental Security Income (SSI). Once the IRS does the programming to accommodate automatic SSA/RRB payments, it could adopt the “no return necessary” approach for these additional populations. There is no requirement in the CARES Act for a return – the IRS could exercise its administrative discretion here. On the other hand, if the IRS believes it needs statutory authorization for automatic payments to beneficiaries of VA and SSI, then it should request it, ASAP.
Regarding SSI, although the IRS does not receive a 1099 reporting those payments, the Social Security Administration does know who gets how much SSI, and IRS could enter into an agreement with SSA to obtain that information in order to do matching. The IRS has not done so previously, and I cannot tell whether SSA is reluctant to share that information or the IRS is not wanting to ask. This is where the Administration should step in and make sure the agencies work with each other. The goal is to get these payments out as quickly as possible to the neediest in our population. As I noted in Part 2 of this blog series, SSI recipients are some of the most vulnerable among us.
Going Forward: What can we learn from this?
Congress knew how confusing it was for low income populations during the 2008 filing season, when they had to file ESP-only returns. In the CARES Act, it tried to remedy the flaw in the 2008 program with the language discussed above. I am very relieved that Treasury and the IRS have reversed course and adopted the return-free approach. This saves taxpayers and the IRS a lot of anxiety, phone calls, follow ups, and confusion, at a time when no one needs any of that. I realize it may require more programming for the IRS to accomplish this, but what the IRS builds today can be a foundation for future payments and other initiatives. It is using its data in a taxpayer-friendly way, not just to assess taxes but also to assist taxpayers.
What is disturbing about this affair is what it tells us about the agency – how, being under stress, it reverted to the past and didn’t recognize how doing so imposes unacceptable burdens on vulnerable taxpayers. We will all have opportunity to reflect on this as we get back to normal, someday, and can focus on the IRS modernization, customer service, and training plans required by the Taxpayer First Act.