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The Advance Child Tax Credit: What Lies Ahead

David D. Stewart: Welcome to the podcast. I'm David Stewart, editor in chief of Tax Notes Today International. This week: extra credit. In mid-July, the IRS will begin distributing advance child tax credit payments. While the agency has been preparing for this rollout for months, some questions remain about how the process will go.

So, how will the IRS issue these advanced child tax credit payments? And what challenges could taxpayers and practitioners face in the coming months? Here to talk more about this is Tax Notes contributing editor Marie Sapirie. Marie, welcome back to the podcast.

Marie Sapirie: Thanks for having me.

David D. Stewart: Now, you've been covering this topic pretty closely over the past year. Could you tell us about the new advance child tax credit and how it came about

Marie Sapirie: The advance child tax credit was enacted in the American Rescue Plan Act, which was signed into law on March 11. The new law increased the amount of the credit for 2021 for families under certain income thresholds and made two major changes to how the credit is administered from the existing child tax credit.

First, it is fully refundable. And second, instead of the financial benefit being claimed only when a taxpayer files their return, the American Rescue Plan Act added advanced periodic payments of the credit amount. This distribution process is new for the advance child tax credit, and the IRS has had to quickly figure out how to implement it. That's the topic we'll be looking at today.

In thinking about how the advance child tax credit came about, it's useful to back up briefly to 1997 when Congress passed the child tax credit. The child tax credit was introduced then after consideration of competing proposals as a way to reflect a family's reduced ability to pay taxes as family size increases.

The dependent personal exemption had declined substantially at that point, and Congress was looking for a way to reduce the income tax burden on families. That credit provided a $500 credit for each child under age 17 and it phased out for higher incomes. Since 1997, Congress has passed various increases to the credit, including the 2000 per child credit in the Tax Cuts and Jobs Act of 2017, and culminating in March with the 2021 advance child tax credit.

David D. Stewart: Now, you recently spoke to someone about this. Can you tell us about your guest and what you talked about?

Marie Sapirie: I spoke with Omeed Firouzi, who is a staff attorney in the Taxpayer Support Clinic at Philadelphia Legal Assistance. Omeed has practiced at PLA since 2018 when he earned an American Bar Association Tax Section fellowship focused on worker misclassification. And before that, he ran Villanova Law's Volunteer Income Taxpayer Assistance Program.

Omeed earned degrees from Villanova University School of Law and George Washington University, and he's a native of Northeastern Pennsylvania. We talked about the implementation of the advance credit, and potential issues taxpayers and practitioners should look for.

David D. Stewart: All right. Now before we get started, I should note that we're still recording this podcast remotely, so please excuse any background noises you may hear. And now, let's go to that interview.

Marie Sapirie: Thanks, Omeed, for joining me today to talk about the implementation of the advance child tax credit as we approach the July 15 start date for distributions of the advance credit amounts to begin. The implementation timeline for the advance child tax credit has been relatively short. The American Rescue Plan Act was enacted in March and the IRS is getting ready to start distributions.

The IRS has been putting out information at a rapid pace, as well as issuing new FAQs and setting up a web-based assistant to help taxpayers determine their eligibility. So much of what we know about how the new advanced payment process will work we've learned in the past couple of weeks. But there are still a number of questions to consider, especially as we head into the filing season in 2022.

With that in mind, let's start with the portals. The IRS has set up two new portals for taxpayers to use. One allows taxpayers to opt out of the advance payments if they choose. And the other is for nonfilers to use to submit information to the IRS so that the agency can process their payments. These portals have recently opened up, so taxpayers and professionals are getting their first look at them. What should taxpayers and professionals know about the new portals? And are there any challenges that you foresee as taxpayers start to use them?

Omeed Firouzi: Well, thank you so much, Marie. It's a privilege to be here. In terms of the portal to sign up for a nonfiler tool to file a 2020 tax return, basically that is a portal meant for people who traditionally do not file tax returns. And so one key thing to know is that the expansion of the child tax credit in the American Rescue Plan Act made it so that there's no minimum earnings requirement.

So that means that a lot of folks who typically do not file taxes, who may have received SSI, or TANF, or some other kind of public benefit and therefore are not usual tax filers, they can use this nonfiler sign-up tool on the IRS website to get on the record, to get on the books, to get their child tax credit payments. And they can also use that tool to sign up to get any recovery rebate credits, that is missed stimulus payments from the economic impact payments last year. Because in fact, it is like a tax return. It is a tax return that is through the Free File Fillable Forms website.

They can potentially get at least $1,800 in recovery rebate credits and stimulus payments for their children and sign up to file basically a $1 tax return, a simplified return for 2020, claiming the child tax credit and making sure that they're on the books for this advance payment and for the refund next year, that is the second half of the advance payment.

In terms of the other portal that you referenced, that is a portal for people opt out of getting advance monthly payments so that instead they get them as a lump-sum refund on their tax return next year. So instead of getting the $250 or $300 per month payments in the second half of this year, these individuals would be basically opting out so that they can claim the entire $3,600 or entire $3,000 per each child as a refund on their 2021 return next year in 2022.

The credit is now also fully refundable. So that is also a change from the past when $1,400 out of a $2,000 child tax credit was only refundable. And so of course, a lot of families may prefer this option because they budget around getting that lump-sum refund, or they're concerned about possibly getting advance payments based on information that has since become inaccurate, or is since no longer the case from their 2019 and 2020 tax returns. So these are two portals that are available online.

There has been some concern about the portal that allows people to do a nonfiler sign-up tool, the nonfiler portal, because in fact, it may not work on a mobile device as well. It's only in English, and it can be complicated for some people to navigate. But thankfully there are some events that are going on around the country, the weekend of July 9 and July 10, where the IRS is partnering with VITA sites to have centers and cities across United States, including here in Philadelphia, where they can help people to use this tool to sign up, to file these returns so that they're in the system ahead of time for the child tax credit payments.

Now, generally speaking, if someone has already filed a 2019 or 2020 return, and by the way that includes if somebody used the nonfiler tool last year because that created a 2019 $1 return. If someone already filed a 2019 or 2020 return claiming the child tax credit and it's been processed, then they're good to go. There's nothing they need to do to get the child tax credit.

But these are some of the issues that we're looking at in terms of the technological, the user-friendly aspect of the nonfiler sign-up tool, whether it's going to be something that people are able to navigate and maneuver. And related to that I should say is that I'd be curious to see if the IRS will actually look to public benefits programs that they already have information about to get benefits to people who don't end up using the nonfiler sign-up tool. Because the law seems to contemplate that they'll get these advance payments out to people based on information from Social Security, SSI, veterans' benefits, railroad benefits. So I hope that that does occur because these are people who are some of the absolute poorest people who need this help more than anyone.

Marie Sapirie: One of the open questions about the advanced child tax credit is whether the IRS will provide an expedited review process for taxpayers who are denied the advance credit when they think they should have received it, and what that review process might look like. Do you have thoughts on what considerations should go into designing that process?

Omeed Firouzi: I think it would be a good idea to have such an independent appeals process. And it's something that I think would be supported by the language of the Taxpayer First Act of 2019, federal law on the books that strengthens taxpayer's independent appeals rights. And so we often see that in cases where taxpayers, for example, are assessed the debt that they should not owe, that they have a dispute regarding that, they can appeal that through a collection due process hearing, for example, after getting a few collection notices. And similarly, if you're denied a refund, you can always appeal that. And six months have passed from when you filed your return, you could file a refund suit.

There should be a similar kind of independent appeals process here for folks to try and get these child tax credit payments if they are denied them. We've often seen cases where people get notice of this allowance letters or these 30-day letters where they have to respond and provide the documentation that the IRS needs.

There should be such an expedited process. I would think that potentially the Taxpayer Advocate Service could be involved as well in helping to make sure that people who are in need of this money and can demonstrate a hardship and have been denied it, that they can help to get these cases resolved so people get their money sooner rather than later.

When we had the distribution of the economic impact payments, there was a dedicated EIP phone line that was at least able to answer general questions. And there were specific lines as well for if your money got lost, or if it had been stolen, God forbid. And so they were able to streamline calls about those issues specifically through those numbers. So to the extent that there could be such dedicated resources to ensure that this is a priority for the IRS, similar to how they were able to prioritize EIPs overall, that would be helpful for taxpayers.

Marie Sapirie: That's a good point about the EIP as precedent that the IRS can look to in rolling out this program as well. So for taxpayers that don't receive an advance payment, but know that one has been issued, the IRS recently put out an FAQ that says that the taxpayer can request a payment trace to track the payment. How has the payment trace process worked in other situations, such as the economic impact payments?

Omeed Firouzi: So I've had a lot of success in utilizing the payment trace process with regard to economic impact payments. We've been able to help people get money that they were rightfully eligible for and that got lost in the mail or got intercepted by an identity thief. And in terms of how it's worked for EIPs, you could either submit a Form 3911 for a refund trace, or as we've done, as we'd call up a specific dedicated number that is associated with refund traces. We asked for the trace to be initiated with an IRS representative on the phone. And either within four to six weeks, if they find that a check has been cashed and it's not by the taxpayer, then they'll send out a package from the Bureau of the Fiscal Service to the taxpayer that will get them on the path to getting a new check in their own name rightfully to their right address.

Or if a check hasn't been cashed, then they'll send out a new check, new payment to the person at their correct address. And so we've had — I have at least two clients I can identify who their EIPs got lost in the mail. And one of them had moved, one of them had just genuinely got lost in the shuffle. But we put in refund traces, and within a few weeks they were able to get their payment.

We had one person who their payment went to an old address and someone there cashed it, unfortunately, but we were able to put it in that that was a stealing of the check. So we were able to get a Bureau of the Fiscal Service package out to her, and then she was able to get her own check in the end. So it's a process that has worked well, at least in my personal experience in terms of economic impact payments.

So to the extent that this could be something that could help people with the child tax credit, I think that will be good because we've still been seeing mail delays. We've been told before that the IRS cannot forward refund checks. So even if you've got USPS forwarding set up, it could be returned then to the IRS instead of forwarded to where you are. So if we have the trace mechanism in place, I hope that it would be effective for purposes of the CTC.

Marie Sapirie: One of the aspects of implementing the advance payments process that the IRS has worked on is communicating information about the process to the public. Would you tell us about the outreach efforts that you've been involved in and what those will include over the course of the rest of the year?

Omeed Firouzi: Absolutely. We have done Facebook Lives in which we've talked about this benefit and what people can expect to see about it and what it'll look like. We've also done social media posts. We've put information up on our website at philalegal.org. We are partnering with VITA sites in the Philadelphia region as part of these advance child tax credit free tax prep days. That will be in the weekend of July 9 and 10 where we're going to be providing information to taxpayers and making sure that we're doing our own outreach education at these events and referring anyone who has questions that comes through our intake to those events. People who need to still get their 2020 tax returns done to get on the books for the child tax credit.

So we've been trying to do all we can and we're still limited by the fact that we're working from home. The fact that a lot of things are opening up again, and that we've got these VITA sites that are doing these in-person events coming up, has enabled us to finalize some in-person outreach for the first time in a long time, so that we can make sure that people are aware of this.

It's really, really important that we spread the word about this. I think I saw a poll a few weeks ago that said that 53 percent of individuals were not even aware that this credit was had been expanded, that there were advance payments. So one thing that was, I think, really crucial as part of this outreach effort is that on June 21 it was child tax credit awareness day. So you saw the president, the vice president, the secretary of the Treasury, members of Congress, social services organizations, legal aid offices like our own posting all over Facebook, Twitter, Instagram, everywhere about the child tax credit, how it would work, promoting the nonfiler sign-up tool and using simple, clear language to make sure that people were aware of what to expect, how much the payments would be each month.

The fact that they would be on the 15th each month except for August, because the 15th is on a weekend that month and so it'll be on the 13th. And letting people know that if they did file a 2019 or 2020 return or signed up on the nonfiler tool last year, that there was nothing that they needed to do as long as they were income eligible.

But I think efforts like those are really important to spread the word so that people know that when this money starts hitting their bank accounts, that you know what it's all about. And if they don't get that money because they haven't taken an action like filing a 2020 return, let's say that they know what to do in order to get there.

Marie Sapirie: Looking ahead to the 2022 tax return filing season when the advance child tax credit payments and the 2021 child tax credit will be reconciled, what potential issues should taxpayers and practitioners be aware of?

Omeed Firouzi: There are a lot of issues that taxpayers and practitioners should be aware of here, including if a child, for example, lived with another parent or another individual in 2021 and that information hadn't been updated yet. For example, now there will be a portal that will be coming out actually in August it seems like where taxpayers can update their family and income information so that they can see to it that they get the correct amount of advance payments. Because that's something that is really important.

Because let's say you had a baby that was born in 2021. Then you can make sure that you use this portal to try and update that information so that that child is on the books so that you can start getting advance payments for them. But if for whatever reason you were unsuccessful in using this portal to get that information on the books, then you can claim the whole $3,000 or $3,600 child tax credit for that child on the 2021 return in 2022.

Another thing that people should know is that if you get more child tax credit advance payments than you should have received, because let's say your child aged out and the IRS didn't catch it. Right? So you have to be in this new child tax credit 17 or younger. It used to be 16 or younger, but basically if you're under age 18, you're eligible for child tax credit here. You're an age eligible child, and the IRS should be able to figure out who's age eligible still before 2021 ends.

But let's say they missed it for some reason in the system and you've got more payment for that child and you shouldn't have, and they're 18 or19 now let's say. Or let's say, the child that you claimed now is living with someone else and you didn't have a chance to update it. Then there is a total safe harbor forgiveness on repaying all of the money if you make below $40,000 as a single filer, $50,000 for head of household, and $60,000 for married filing jointly.

However, above those levels, there is some repayment that would be required, but it is phased out and so there are some limitations that exist above that. It can get a little detailed, but those are things that people should be aware of that could occur. And also another thing in terms of the issue of whether the child lived with someone else, you've got custody issues, of course, that can come into play here. You've got separated spouses and who gets the money for a certain child.

And so we've often seen cases where somebody has already claimed a child and they get denied earned income credit and they have to file a paper amended return to try and get the money for that child. We might see situations like that arise, where people will have to file paper amended returns with LITCs like ours, low-income taxpayer clinics, where they can rightfully claim the child to try and recoup child tax credit that they never got and that they should have been eligible for, but that a partner claimed that they didn't have a right to claim that child.

So those are some of the things that we are going to be mindful of. And they're very similar to some issues that occurred with economic impact payments. Because you had separated estranged spouses getting all of the money, and the other spouse not being able to cash a check. In those cases, we've seen people try and return checks as void or filed new returns. Sometimes it may have to be dealt with in family court. So there are a whole range of issues like that, that we're expecting to see.

We're also hoping that tax preparers will be able to fully claim the expanded child tax credit on the tax returns next year, so that people can get all the money that they're eligible for. I'd be curious to see the total positive impact it could have on people when they get this money back as a fully refundable credit.

One last thing here is just that if somebody didn't doesn't get any advance payments and they have little to no income and so they don't file a return traditionally, let's say they only have SSI or another public benefit, and they never used the nonfiler tool last year. They don't use the nonfiler sign-up tool this year. And they have a child who's age eligible, they're still eligible because they're eligible based on the child that they have. And there's no minimum income earnings requirement. So it'll be a challenge to try and get those folks in the system in early 2022. So, 'Hey, if you didn't get your advance payments but you were eligible, you got to go ahead and file a 2021 return then to get the full $3,000 or $3,600 per child at that time.'

So I envision that there will be a lot of people in that boat as well. Because the stimulus payments, the EIPs, you had a lot of people who didn't get any economic impact payment, and they had to end up getting all of it as a recovery rebate credit on their 2020 return in 2021, especially a lot of folks who have little to no income, couldn't use the nonfiler portal last year. And so I think we're going to have a lot of people who are in that boat as well.

But maybe we can do our best in the next coming weeks and months to try and get all these people in the system, on the books now so they can start getting these advance monthly payments. Because I know a lot of parents are already starting to budget in anticipation of getting these payments. So we hope it will have a positive, beneficial impact. It's projected to cut child poverty in half, which of course would be such a big deal. So we'll see what happens.

Marie Sapirie: Thank you, Omeed, for joining the podcast today.

Omeed Firouzi: Thank you so much. I really appreciate it.

David D. Stewart: And now, coming attractions. Each week we highlight new and interesting commentary in our magazines. Joining me now is Acquisitions and Engagement Editor in Chief Paige Jones. Paige, what will you have for us?

Paige Jones: Thanks, Dave. In Tax Notes State, Walter Hellerstein and Andrew Appleby provide an update and complete description of state marketplace platform legislation. William Hays Weissman examines a California bill which requires the state to follow two nonprecedential California Unemployment Insurance Appeals Board cases. In Tax Notes International, William Gale and Claire Haldeman propose reforms to various business tax provisions of the TCJA. Lewis Greenwald examines the IRS’s authority to request taxpayers’ intercompany agreements. On the Opinions page, Joseph Thorndike writes that when struggling with tax enforcement, rich countries have long tried to shift blame to poor countries. He contrasts that with how the United States dealt with tax avoidance through the Bahamas in the New Deal era. And Doug Sheppard traces the career of Denvil Duncan, who rose from a modest upbringing in Jamaica to become an associate professor at Indiana University.

David D. Stewart: That's it for this week. You can follow me online @TaxStew, that's S-T-E-W. And be sure to follow @TaxNotes for all things tax. If you have any comments, questions, or suggestions for a future episode, you can email us at podcast@taxanalysts.org. And as always, if you like what we're doing here, please leave a rating or review wherever you download this podcast. We'll be back next week with another episode of Tax Notes Talk.

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