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Advanced Child Tax Credit

Posted on May 19, 2021

Congress has passed legislation creating a much expanded child tax credit (CTC) and requiring the IRS to make advance payments of the CTC during the 2021 tax year starting in July.  The expanded credit provides a $3,600 credit for every child under 6 and a $3,000 credit for every child under 17.  The expanded CTC does not require that taxpayers have earned income in order to qualify.  The credit will phase out for taxpayers earning more than X and completely vanish for taxpayers earning more than Y.  Currently, the expanded CTC only happens for the 2021 tax year though many efforts exist to expand it to a more permanent fixture.  Whether the expanded CTC has a life beyond 2021 could depend on the ability of the IRS to surmount the significant administrative hurdles to make it happen without drawing too many negative stories of parents unpaid or ineligible individuals paid.  The IRS faces a tough challenge.  

At the ABA Tax Section meeting last week there was a couple programs on the CTC because this is such a big change and because the almost immediate implementation raises many questions as well as many challenges. At the Individual and Family meeting on Friday panelist Margot Crandall-Hollick, Acting Section Research Manager, Congressional Research Service, created some excellent slides showing the history of the CTC and the way it will work for different families. Recent studies indicate that nearly 1 in 7 US children live in poverty. Originally enacted in 1997, the child tax credit (CTC) is part of our nation’s patchwork efforts to address the high costs of raising children. The panel focused on the underlying policy issues behind the adoption of the expanded CTC and administrative issues associated with the implementation.

Ms. Crandall-Hollick has kindly allowed us to display those slides here:

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In addition to the background information about CTC and the basics of the law, the panel included Ken Corbin, the Commissioner for Wage & Investment at the IRS who is tasked with making this work.  He provided some answers regarding where the IRS in its effort to ramp up for this and noted some areas where the IRS still seeks answers.  Mr. Corbin pointed to the experience of the IRS in issuing the stimulus payments as the starting point for its approach to delivering the advanced CTC payments.  He not only talked about lessons learned from this experience but the partnerships developed with the Social Security and Veterans Administrations as well as other partner within and without the government.  He sounded positive that the IRS can meet this challenge.  I certainly hope that it can, because the delivery of the advanced CTC payments represents a significant policy shift to insure that children will have a better chance.

One of the major problems with the Earned Income Tax Credit, the largest refundable credit the IRS has administered to this point, concerns payments to the wrong individual, which can occur for a wide variety of reasons.  The fluidity of many family situations often makes it difficult to correctly claim the credit, the complexity creates confusion and the refundable nature of the credit creates an incentive to wrongfully claim the credit that proves too tempting for some taxpayers and some preparers.  He spoke of a new authentication process the IRS has developed that will work on the phone or in person.  Perhaps this authentication process will eliminate some of the problems that have caused concern with the payments of the EITC refundable credit and perhaps the tool(s) developed for the expanded CTC will have some crossover benefits in boosting the accuracy of the EITC claims.  I am glad to hear that it has developed such a process.  I am a bit concerned that even if the process works perfectly, the IRS ability to answer the phone and to meet taxpayers in person may create a barrier to the success of the process.

Mr. Corbin indicated that the IRS will potentially send out three letters to the intended recipients of the expanded CTC. First, the individual will receive a notice alerting them to their potential eligibility. I assume that this letter will provide some mechanism for the individual to opt out of the expanded CTC as opting out is one of the features of the program. By opting out the individual identified by the IRS signals that someone else, usually the other parent, should receive the advance payment of the expanded CTC. Second, the individual will receive a notice that the payment is coming. I assume this notice will signal the amount of the payment. He did not provide enough detail to make clear whether the first or the second notice would provide an opportunity for the taxpayer to notify the IRS that the number of eligible children in the IRS calculation is wrong perhaps because of a new birth or a child moving to live with a different family unit. Third the individual who has received the payments will receive a reconciliation statement at the end of 2021 that will be used to file with their 2021 tax return. The IRS may develop a system similar to the premium tax credit by which taxpayers will reconcile that the payments received were correct.

In response to questions Mr. Corbin indicated that the IRS was still working on the process for resolving disputes over who is entitled to the advanced CTC payment. While the vast majority of cases will probably work smoothly, family dynamics dictate that situations will exist where more than one person claims the credit for a child. Given the abbreviated time frames within which the payment determinations are being made the ability of the IRS to create a system for resolving disputes during the 2021 period will provide quite a challenge and could severely strain its resources. On the other hand, if the IRS cannot find a reasonable way to handle disputes, it will receive much criticism.

Congress has once again tasked the IRS to perform a very difficult task in a short time period while its resources are already strained past the point of allowing it to provide the best service on the tasks already on its plate. The IRS will once again try to pull a rabbit out of the hat as it did with the stimulus payments. There will, no doubt, be problems. Keeping the problems to a minimum and delivering the payments to families could impact the long term viability of a program that makes a lot of sense.

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