This is the first of a two-part post on the portion of the coronavirus legislation that adopts, once again, “recovery rebate” credits and refunds.
When Congress passed the Economic Growth and Tax Relief Reconciliation Act of 2001, Pub. L. 107-16 – i.e., Bush 43’s first tax bill – it reduced taxes, in part, by creating a new 10% bracket. Congress wanted to get into taxpayer hands some of the benefit of that rate reduction even before returns were due. So, it came up with the idea of sending checks mid-year. The methods of sending and computing those checks were laid out in a new Code section 6428. That section was entitled “Acceleration of 10 Percent Income Tax Rate Bracket Benefit for 2001”.
Even before the economy cratered in late 2008, Congress saw what was coming, so, in February 2008, in the Economic Stimulus Act of 2008, Pub. L. 110-185, Congress revived and revised section 6428 – now to send “recovery rebate” checks in mid-2008.
In section 2201 of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, Congress has again decided to send out checks through the IRS and has again revived and revised section 6428 to send recovery rebate checks in mid-2020.
Why use the IRS to send out checks, rather than some other government entity? Well, because Congress wants to base the amount of the checks, in part, on citizens’ income, and only the IRS would have that information handy.
Section 6428 operates as a refundable credit – just like the earned income tax credit or the additional child tax credit. Section 6428(b). (Hereinafter, all references to section 6428 are to the 2020 version, unless I tell you otherwise.) Because it has been awhile since this recovery rebate credit has been in the law (and because I litigated on behalf of taxpayers the only district court and appellate court opinions addressing the 2008 version of section 6428; see Sarmiento v. United States, 812 F. Supp. 2d 137 (E.D.N.Y. 2011), aff’d in part and rev’d in part, 678 F.3d 147 (2d Cir. 2012), and Maniolos v. United States, 741 F. Supp. 2d 555 (S.D.N.Y. 2010), aff’d per order, 469 Fed. Appx. 56(2d Cir. 2012)), I thought it would be useful for me to give a practical primer on how the new recovery rebate is written, how it was administered last time, and how I think it will be administered this time – because I anticipate the IRS will make administrative choices in 2020 similar to those that the IRS made in 2008.
The current recovery rebate credit is nominally a credit against 2020 income taxes. Section 6428(a). This follows the pattern of the prior two versions of making the credit a credit against the income taxes of the tax year in which the “advanced refund” (i.e., “stimulus check”) is sent out. That means that, on the 2020 income tax return that you prepare in April 2021, there will likely be a line entry under payments and refundable credits in which you calculate the section 6428 credit using your 2020 income. You will then subtract from the credit due you on that return the amount of any stimulus check that you received in 2020. If you are due more credit, you will get it as part of your 2020 refund. If you have been overpaid through the stimulus check, however, you do not have to return the excess. Section 6428(e)(1).
This brings me to a comment based on my experience dealing with low-income taxpayers while I headed the Cardozo Tax Clinic during 2008 and 2009: Most taxpayers, at the time the 2020 return is prepared, will not be sure whether or not they received the stimulus check or the amount thereof. Since you have to subtract the amount of the stimulus check from the calculation of the 2020 credit, how do you solve this problem? As discussed below, the stimulus check, if precedent holds, is going to be posted to the taxpayer’s 2019 income tax transcript as (1) a credit and (2) then a refund check. So, order a copy of that transcript for 2019 before preparing the 2020 return.
If you fail to subtract the amount of a stimulus check that was sent, several things happen:
The excess refundable credit that you claimed is treated as a deficiency in tax under section 6211(b)(4) and can be collected without a notice of deficiency under the math error authority of section 6213(b)(1) and (g). This is partly stated at section 6428(e)(1) and the rest is stated in subsection (b) of CARES Act section 2201, the non-codified part of the statute that adopted the new section 6428.
You can also expect a 20% section 6662 penalty to be imposed on that deficiency.
Who gets the credit? Any individual who is not a nonresident alien or a person who can be claimed as someone else’s dependent. Section 6428(d). This is a much broader category of individuals entitled to the credit than in the prior two versions of section 6428. For the prior versions, smaller credits were allowed if an individual had not paid income tax in the amount of the usual credit, but the individual had a certain amount of qualifying income (which included Social Security benefits).
How much is the credit? It is $1,200 per person ($2,400 in the case of a joint return) plus $500 per dependent who is a qualifying child of the individual under section 24(c). Section 6428(a). That means that the rules of section 24(c) apply to limit the additional $500 to children up to age 17. All other limits on who is a qualifying child under section 24(c) also apply.
What is the phaseout of the credit? The phaseout of the credit begins at certain adjusted gross income (AGI) levels, depending on filing status. The phaseout is 5% of the AGI that exceeds that level. The level at which the phaseout begins is AGI of $150,000 for joint filers, $112,500 for head of household filers, and $75,000 for single or married filing separately filers. Section 6428(c).
How is the stimulus check sent to me in mid-2020 calculated, since I don’t know my 2020 income yet, and, indeed, my income is likely to be much lower in 2020 than in prior years? As with the earlier versions of section 6428, this problem is only partly solved by having the IRS calculate the stimulus check as the amount that would have been due you under subsection (a) if your 2019 tax information were used. Section 6428(f). As you can see, though, many more people are likely to face smaller stimulus checks than they will ultimately be due for a recovery rebate refund under this system. For example, say a single filer earned $200,000 of AGI in 2019. She would get no stimulus check because of the operation of the phaseout. But, when she filed a 2020 return showing AGI of only $60,000, she would get $1,200 at that time, since she did not get a stimulus check and her AGI was not above the phaseout amount.
What if an individual never filed a 2019 return, so the IRS can’t know the individual’s 2019 AGI? Well, first, the IRS can substitute 2018 for 2019 in calculating the stimulus check, and, second, “if the individual has not filed a tax return for such individual’s first taxable year beginning in 2018, [the IRS 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.” Section 6428(f)(5).
I am not sure what happens if the individual did not file either a 2018 or 2019 return and was not receiving Social Security benefits in 2019. For example, many taxpayers are working and are slightly overwithheld and so do not bother to file a tax return for the small refund they may be due. Are these taxpayers going to get a stimulus check? My guess is that they are not. They will have to wait until they file a 2020 return to get the benefit of the credit. If they are perennial non-filers, so don’t file for 2020, either, they may never get the credit. I think the drafters of section 6428 could have been more creative – such as allowing the IRS to total all gross income shown on 2018 or 2019 third-party information returns for purposes of calculating an AGI.
When will the stimulus checks be paid? The statute does not set a specific date for payment, but it does require that no checks be sent out after December 31, 2020. Section 6428(f)(3). For the 2008 checks, the IRS ended up staggering the issuance of checks each week, so as not to overwhelm its computers or staff. If I recall, the checks were issued over a three-month period, with the last two digits of one’s Social Security Number determining in which tranche any check would be sent. I am not sure the IRS can do it any faster. However, if the first checks only go out to some people late summer or early fall, I don’t know how poor people or people who have lost their jobs already will be able to get by in the interim.
There are also provisions in section 6428 and the noncodified accompanying legislation addressing members of the Armed Forces and the treatment of possessions. I will not discuss those. However, in my next post, I will discuss issues that arose in the courts in response to the prior versions of section 6428 and how the answers may or may not differ under the current version.