Earlier today Nina Olson discussed EIP being issued to deceased taxpayers. Professor Bryan Camp responds to that post below. Les
I agree with much of Nina Olson’s thoughtful post this morning on PT. However, I also think both Nina’s analysis and the IRS FAQ may be wrong to make no distinction between people who died before or after January 1, 2020.
This post will first explain why date of death may be an important distinction. It will then argue that concerns about the IRS making erroneous EIP payments to dead people is making a mountain out of a molehill.
(1) It May Matter When Death Occurred
Section 6428(a) creates an entitlement to a refundable credit for tax years starting in 2020. My take is to start with the entitlement. The question of who is entitled to what amount of refundable credit is covered by (a). It allows an “eligible individual” a “credit against the tax imposed by subtitle A for the first taxable year beginning in 2020.”
I do not read §6428(f) as creating an entitlement separate from subsection (a). Its purpose is to authorize the advance payment of that to which an “eligible individual” is entitled. It both authorizes the IRS to send out a payment of the 2020 refundable credit in advance of taxpayers claiming the credit and it requires the IRS to figure to whom it should send the advance credit based on 2019 or 2018 returns.
Supporting my reading of how these two subsections work together is the true-up language in subsection (e). It creates a one-way ratchet that directs taxpayers to offset their claimed 2020 credits against the advanced payments they actually received. Thus advanced payments will reduce the amount of credit taxpayers can claim on the 2020 returns. Importantly, however, the amount offset cannot reduce their 2020 credit below zero. That permits taxpayers to keep excess advance payments while being able to claim underpaid credits.
The true up provisions are the reasons why taxpayers whose 2018 or 2019 returns show the existence of a dependent do not have to return the $500 they receive if the dependent has ceased being a dependent in 2020, for whatever reason (including death of the dependent). The $500 will have turned out to have been erroneous because—again go to (a)—the basic entitlement is that this is a refundable credit for tax year 2020.
I think it important to note that the true-up (and consequent forgiveness of erroneous advance payment) occurs only when determining the tax obligations for 2020, which for most people will happen on a 2020 return.
Folks who died before January 1, 2020, are not entitled to the refundable credit authorized by subsection (a). Perhaps obviously, neither will such folks be able to file a return for 2020 on which to have errors forgiven by the subsection (f) true up provisions.
Ms. Olson references the definition of “eligible individual” in §6428(d)(1). That provision says that an “eligible individual” must actually be an individual. It seems to me pretty plain that taxpayers who died before 2020 are no longer individuals in 2020. Therefore, they cannot be “eligible” individuals.
In short, I do not agree that (f) creates a separate entitlement to an amount. It creates an entitlement to timing of an amount. But that is just my reading. I think Ms. Olson and others have a reasonable position that taxpayers who died in 2018 or 2019 are indeed eligible to receive the advance payment of the 2020 refundable credit. You get there by reading subsection (f) as creating an entirely separate entitlement from subsection (a). The strongest support for doing that is the language in subsection (f)(1) and (f)(2) that seems to create a counter-factual that pretends the credit allowed by (a) “would have been allowed as a credit under this section for such taxable year.”
I disagree with that interpretation but for purposes of keeping this post short let’s just leave it that this: I think everyone agrees (or should agree) that EIP payments sent to taxpayers who died after January 1, 2020 are proper but there is disagreement about the legality of payments made to taxpayers who died before January 1, 2020. Given that, the more important question is perhaps, what should be done?
Here’s my answer.
Assuming some payments to dead people are erroneous, what should the IRS or Congress do about it and what should taxpayers do about it?
(A) IRS and Congress
The IRS does an amazing and fantastic job in determining and collection the correct tax for taxpayers. But when you are dealing with over 150 million individual taxpayers and trillions of tax dollars, a small percentage of error looks like a really big number. That is the political game that Congress and others repeatedly and disingenuously play with the IRS. Various so-called “oversight” functions repeatedly express horror! horror! that the IRS either erroneously over-collects or erroneously under-collects billions of dollars per year.
Get a grip. Chill out. If you want perfection, die and go to Heaven. Otherwise, you have to evaluate the nature of the errors and what it costs to fix them.
So it is here. In 2018 this CDC report said about 2.8 million people died. Let’s say 2.5 million of them were taxpayers. And let’s say another 2.5 million died in 2019. So that’s 5 million erroneous payments of $1,200 each. Looking at the back of my envelope that adds up to $6 billion in erroneous refunds. Max. Heck, I bet that’s just a drop compared to the money Congress wastes in spending each year.
The IRS has more important matters to deal with than to go chasing some theoretical 5 million payments made to taxpayers who died in 2018 or 2019.
Also, the IRS has extremely limited tools to collect back those amounts. That is because these erroneous EIP payments are very much like non-rebate erroneous refunds. When the IRS sends an erroneous refund because of some error in determining a taxpayer’s correct tax (such as mistakenly allowing a deduction or exclusion that should not have been allowed) such refunds create a deficiency that the IRS can get back by either acting with the appropriate limitation period to re-assess the tax (and then collect administratively by offset or lien or levy) or by filing suit to recover the erroneous refund under §7422 within the time permitted by §6532.
In contrast, erroneous refunds that result from some action that is not connected to a determination of liability (such as a clerical error in inputting a $100 as $1,000 and sending $900 back to the taxpayer) are called non-rebate erroneous refunds and those may only be collected by filing suit. United States v. O’Bryant, 49 F.3d 340 (7th Cir. 1995)(“The money the O’Bryants have now is not the money that the IRS’ original assessment contemplated, since that amount was already paid. Rather, it is a payment the IRS accidentally sent them. They owe it to the government because they have been unjustly enriched by it, not because they have not paid their taxes.”).
I think the EIPs sent to folks who died before 2020 would be, technically, rebate refunds because they would be connected to a substantive determination that they were entitled to the refund, based on their 2018 or 2019 filed returns. The determination would be erroneous. But they would be, functionally, like non-rebate refunds because a TP who died before Jan 2020 cannot, by definition, have a deficiency of tax for 2020. So forget re-assessment. Also, fun fact: that also means there is no transferee liability for the heir or family member who cashed the EIP check and used the erroneous EIP payment.
So if my reading is correct, there is no opportunity to re-assess and the only action the IRS can take is to beg the Department of Justice Tax Division to file suit.
Good luck with that. The DOJ is unlikely to file suit. It’s a busy place and filing a suit for $1,200 is just not worth their time and effort.
So to the IRS I would say: Chill out. Let it go. To Congress I say: move on. Go do some actual oversight on the huge opportunities you have created for graft and corruption in the distribution of various relief funds you created. Leave the dead alone.
Just because the IRS may not have the proper tools to collect an erroneous refund, however, does not mean a taxpayer has no legal duty to return it.
I would advise a client who received an EIP check or direct deposit for a taxpayer who died before January 1, 2020 to contact the Service for instructions on how to return the EIP. My reading of the law is that the client has a legal duty to return the money. The notion that there is no legal duty to return a payment made to you in error by the federal government is not only a dangerous notion, it is flat out wrong. Taking something that is not yours and to which you have no right to is generally called stealing. The notion that you cannot steal from the federal government denigrates the rule of law by suggesting legal rules do not apply as between a citizen and the government.
More importantly the notion is also belied by 18 USC §641. That statute makes it a felony to steal more than $1,000 from the federal government.
This type of scenario is not limited to EIP. The IRS sends out billions of non-rebate erroneous refunds each year. I tell my students that they need to advise their clients who receive a non-rebate erroneous refund to contact the Service for instructions on how to return the money. They should explain 18 USC 641 to their clients. There is, in fact, a legal duty to return that to which you are not entitled.
So yes, taxpayers who got EIP payments for folks who died in 2018 or 2019 do, IMHO, have a legal duty to return the money. However, the IRS is unlikely to be able to enforce it. That is why the FAQ uses the word “should” which is similar to the language that the Service uses in letters to TPs asking them to return non-rebate erroneous refunds.
But to say that a taxpayer has no legal duty just because the IRS cannot easily enforce the duty is not good. It undermines the rule of law to say one need not comply with the law just because one is unlikely to get caught or punished. We already have a HUUUGE problem with the guy currently stinking up the White House undermining the rule of law in this country. Just because he is corrupt does not mean we have to be.