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Into the Weeds with the Advance Child Tax Credit – Including Dispute Resolution

Posted on July 7, 2021

Last week, I wrote three blogs, here and here and here, trying to think through how an Advanced Child Tax Credit (AdvCTC) could be administered through the tax system and by the Internal Revenue Service.  Jen Burdick also wrote a very thoughtful post about the need for due process protections associated with the program.  I received a lot of thoughtful comments from folks, and I really appreciate that.  Today, I want to get a little further into the weeds and actually think through how all this would work, and I will also try to address some of the issues raised in the comments.

Regardless of which monthly AdvCTC proposal is ultimately enacted into law – an irrebuttable presumption of eligibility or a rebuttable presumption of eligibility (as I propose), certain administrative elements will be constant, even if their magnitude varies.  These include applying for advance payment of the credit via the annual return filing system; protecting the program from excessive claims; updating changes in circumstances throughout the year; and reconciling advance payments on the next tax return.

Now, into the weeds.

Applying for the credit

From the taxpayer perspective, taxpayers need relative ease in applying for and receiving the credit. Because the CTC is administered through the tax system, the tax return will be the primary vehicle for applying for the CTC. Taxpayers already receiving the CTC are familiar with this process. On their return for each year, they can affirm, under penalties of perjury, that they are eligible to receive the monthly CTC for the coming year with respect to a particular QC. If they affirm they are eligible, then they must either elect to receive the monthly CTC or elect not to receive the monthly CTC. That is, they must tell the IRS how they want to receive the credit – monthly or as a lump sum at year-end. If they elect to receive the AdvCTC, they mustalso affirm that they understand their obligation to update the IRS about changes in circumstances that might affect their eligibility to receive the credit. Establishing the obligation to update at the outset of the program both educates the taxpayer about the obligation and also establishes a behavioral norm.

The 1040 already has a check box next to each dependent’s name and social security number to affirm whether that child is a qualifying child or other relative for the CTC. It would be hard to fit more checkboxes onto that line and still have it readable.

Figure: 1040-snip-Dependents.png

Personally, I think there needs to be a separate section on the return in which to make the election, but it could look similar to the above, where the taxpayer lists the dependents for whom an election is being made.  There would be two checkboxes – “Check if qualifies for the Advanced Child Tax Credit” and “Check if opting out of the Advanced Child Tax Credit.”  The check box for opting out is essential if the IRS is to prevent incorrect claims of the AdvCTC – it will need that information to catch other claims for the same child, where a taxpayer already has said they are eligible for the Adv CTC but want a lump sum at year-end.  Finally, there should be a question under the AdvCTC list of dependents, saying “I understand I am required to update the IRS promptly about any changes in circumstances affecting eligibility for the AdvCTC” with a check box.

Taxpayers who trade off claiming the child every other year with the other parent can simply not check the box “Eligible for the Adv CTC” for that child. If Congress decides to allow taxpayers to allocate the AdvCTC between themselves, this section would be the place to do so. Taxpayers would be required to enter the name of the other main carer and the percentage allocation.  IRS would have to program its systems to systemically check the matching return before issuing payments according to the allocation. Alternatively, taxpayers could attach a separate form in which both persons sign and consent to the allocation. (The IRS already requires a similar form when the custodial parent waives the dependency exemption/CTC in favor of the noncustodial parent, although in that case only the custodial parent’s signature is required.)

To facilitate filing by households who have little or no income, the IRS needs to create a robust simplified filing portal – one that can also obtain the necessary information to pay the childless-worker or with-child EITC on an annual basis as well as serve as the application for the monthly Adv CTC.  The simplified filing portal must be mobile accessible and in multiple languages.  The IRS should either develop it itself or issue a request-for-proposal.  Building this on top of Free Fillable Forms, where the IRS has no ability to mandate additional features like EITC eligibility, creates a sub-par product that increases taxpayer burden and IRS rework.

Ensuring program integrity and minimizing incorrect payments

To ensure program integrity, because the “application” for the AdvCTC is on the tax return (including the simplified filing portal), it goes through all the IRS questionable refund filters, identity theft systems, and the dependent database.  This enables the IRS to identify any math errors that would disallow the child on the tax return (Year 1) and identify any duplicate claims for the child for that year.  Because the 1st payment of the AdvCTC would not be paid out until May 15th, the IRS will also have time after the April 15th filing deadline to identify any dual AdvCTC applications for the same child for current tax year (Year 2).   Because taxpayers must tell the IRS whether they are prospectively eligible for the CTC for Year 2 even if they elect not to receive it in advance, the IRS will be able to identify and resolve these competing claims as well.

Note that the National Taxpayer Advocate recently reported that in the 2021 filing season (through May 22, 2021) the IRS “selected” 3.78 million individual tax returns on suspicion of identity theft, almost double the 1.9 million selected in the 2020 filing season (through July 16, 2020, the end of the extended filing season).  This increase is probably attributable to the Economic Income Payment/Rebate Recovery Credit claims.  When someone’s return is selected by the Taxpayer Protection Program (TPP) the taxpayer has to either authenticate their identity online or by telephone, or visit a Taxpayer Assistance Center to authenticate (good luck getting an appointment).  This can lead to weeks and even months of delay.  For the 2021 filing season, the National Taxpayer Advocate reports that the TPP phone line received about 6 million calls, and the level of service on that line was 19 percent – meaning 4 out of 5 calls did not get through.

I am concerned that advocates for the AdvCTC are unaware of the significant delays that can occur during the filing season, which will impact the delivery of the AdvCTC.  Advocates for child welfare and poverty eradication remind us that one of the most important features of the credit is that it must “smoothly” deliver benefits – no big ups and downs, no gaps in payment.  Yet for millions of taxpayers, year in and year out, receipt of their refunds is often a traumatic, indefinite process.  Each year the IRS freezes millions of returns – especially from low income taxpayers – on suspicion of fraud or error and requires taxpayers to interact with an understaffed, technologically challenged agency to clear up the problem.  In a good year it takes the IRS until July or August to clear up the majority of these suspended returns.  The IRS has not had a good year since 2017 or so; and for Tax Year 2019, the IRS is still digging itself out of this frozen return backlog.  If a return’s processing is suspended, there will be no AdvCTC paid out until the underlying matter is resolved and the return (and AdvCTC election) is finally posted to the IRS system.

If taxpayers find themselves not being able to count on the timely delivery of the AdvCTC, or if they have to navigate an unfriendly system to receive the AdvCTC, they just may elect to not participate in the system.  That would be a tragedy.  To avert this tragedy, the Administration needs to propose and Congress needs to enact a robust taxpayer service budget to handle the calls and resolve the disputes.  IRS needs to staff up these units for quick issue resolution; even more important, IRS needs to improve its fraud selection systems and establish specific goals to reduce false positives in that selection process.

At any rate, barring any dueling or ineligible claims for the AdvCTC, or any questionable refund flags in the return processing system, a taxpayer who elects to receive the Year 2 AdvCTC on a Year 1 return should expect to receive the first payment on May 15th. The May payment would be for the month of April and is 1/12th of the full amount of the credit. Under most AdvCTC proposals, once the taxpayer passes through return processing, the taxpayer is presumed to be eligible for the AdvCTC for the year, unless and until the taxpayer reports a change of circumstances that affects eligibility or a competing claim is filed for the same child during the year.

Change of Circumstances Portal and Dispute Resolution 

The change of circumstances portal needs to be accessible, mobile adapted, and in English and Spanish, and eventually in other major languages.  Any new household coming in during the year and claiming a child would input the child’s name and social security number and other relevant information such as the taxpayer’s financial account; the system would automatically check if another taxpayer was receiving or had elected out of receiving AdvCTC for that child.  If no one else was claiming the child, the system would also run that request through the IRS’ various questionable refund, identity theft, and dependent database filters.

The system would then provide an automated response – for example, the taxpayer is eligible for AdvCTC as of this month and the first payment will be issued on that date.  If another household is receiving AdvCTC for that child, the new applicant will receive an automated response stating that another household is receiving AdvCTC for that child and if the new applicant disagrees, then the applicant has 30 days within which to provide the IRS information demonstrating the child is living with the new applicant.  At the same time, the IRS issues a “soft” notice to the original AdvCTC recipient advising them IRS has received information that may indicate the child’s living arrangements have changed, and if this is the case, the notice reminds the household of the obligation to update via the change-of-circumstances portal or by telephone in order to avoid clawbacks of the payments.  No additional information is required of the original claimant at this time; the notice serves as a “nudge” and helps minimize incorrect payments and clawbacks.

I have wrestled with whether the original AdvCTC recipient should be required to submit additional information early in the dispute resolution process or that information should be requested only after the IRS has determined the new applicant is eligible for the AdvCTC.  If the new applicant is ineligible, then there is no reason to burden the original recipient with supplying information.  On the other hand, if the IRS preliminarily determines the new applicant is eligible for the AdvCTC, it is important to provide the old household with an opportunity to challenge that determination and also to do that speedily so as to minimize erroneous payments and avoid clawbacks.

Let’s call the original AdvCTC recipient “Household 1” and the new AdvCTC applicant “Household 2.”  As noted earlier, if IRS systemically denies Household 2 because Household 1 is receiving the AdvCTC, Household 2 is provided the opportunity to request administrative review within 30 days.  Legislation should specifically instruct the IRS to develop an affidavit form that taxpayers can use to make such a request.  On the affidavit form, the taxpayer could state, under penalties of perjury, the child has been living with Household 2 since a specific date; the affidavit would also be signed, under penalties of perjury, by an official third party with knowledge of the child’s residence.  The IRS developed just such an affidavit for a test of residency for EITC purposes in 2004 (Form 8836 and Form 8836 Schedule A), and this affidavit could be modified for AdvCTC disputes.  (You can read the report of this pilot here – Form 8836 Schedule A is included this report.)  Third parties included case workers, school or medical personnel, court and law enforcement officials, members of the clergy, and others; the affiants certified they had either personal or records-based knowledge of the child’s residence.  Using an affidavit minimizes the administrative burden on the applicant but provides some third party evidence of the child’s location.  Of course, taxpayers could also submit other documentation, including protective orders.

If Household 2 submits this information within 30 days, the IRS immediately issues a notice to Household 1, asking them to provide information within 30 days, about the residency of the child, usually via the affidavit form.  Thus, by 60 days, the IRS will have the necessary information with which to make a decision, and while waiting for Household 1’s information it can contact the affiants for Household 2 and verify the affidavit, if necessary.  The IRS will have an additional 30 days to make a final eligibility determination.  In this way, Household 1 is not burdened unless and until Household 2 actually requests an administrative review and submits the affidavit or other documentation.

If Household 1 is ultimately determined to be ineligible, a safe harbor  — I’ve proposed 3 months — should protect Household 1 from any clawbacks attributable to the dispute resolution process. If the IRS takes longer than 30 days to make the final determination, Household 1 would be protected from clawbacks during that extended period. Under the rebuttable presumption model, Household 1 would generally have clawbacks (more than 1 month) only if Household 1 delayed submitting change of circumstances for a significant length of time.

Availability of Judicial Review

One thing I haven’t worked out is whether we need judicial review during the year or whether such a right would arise when the tax return is filed at year end.  In the benefits context, I have been told that adjudication takes about 18 months to become final; by then tax returns have been filed and the IRS may need to make decisions about whether to award the Earned Income Tax Credit or Child and Dependent Care Tax Credit for the child tied up in litigation.  Can the IRS make that decision if the issue of where the child resided for more than 6 of the 12 months of that year is the subject of judicial review?  I may be wrong, but I don’t think so.  For that reason, one approach would grant administrative review during the year, and then provide deficiency jurisdiction (not math error) for a final monthly CTC determination upon the filing of a tax return.

Because disputes based on a past year’s tax return may not be resolved in time for the current year’s payment of AdvCTC, the IRS could require that taxpayer to submit the affidavit form or even a recertification in order to receive the AdvCTC for the current year. While this creates some administrative burden for the taxpayer, it does not deny them the AdvCTC outright for the current year pending resolution of litigation. Recertification is already required with the EITC context.  (But see my comments about the current recertification form below.)

On the other hand, Congress could establish a new jurisdiction for the United States Tax Court, specifically for review of AdvCTC claims.  The legislation would set forth specific timeframes within which the Court must render a decision.  Given the logistical challenges with judicial review of monthly payments in the context of an annual tax system, I come down on the side of providing judicial review arising from the reconciliation on the income tax return.  This allows for all the issues relating to family status and child benefits to be decided in one cause of action.  It isn’t perfect, I know.

Paid Preparer Due Diligence

Unlike traditional social benefit programs, the IRS has taken itself out of the application process for programs like the EITC and CTC.  Taxpayers have the obligation to file returns; over half of returns claiming EITC are filed by paid preparers.  Return preparers are required to sign and date any return they prepare for compensation, and they can be subject to a monetary penalty if they fail to meet this and other requirements.  We don’t know how many returns are filed by ghost preparers – i.e., paid preparers who do not sign the return.

For returns that involve the family-status provisions of the Internal Revenue Code, paid preparers must meet statutory due diligence requirements and complete Form 8867, Paid Preparer’s Due Diligence Checklist and file that with the return.  If they don’t file the form, they will be subject to a $540 penalty (per omission).  The due diligence requirements apply to the EIC, the CTC, the Additional CTC, the American Opportunity Tax Credit, the Credit for Other Dependents, and Head of Household filing status.

If you haven’t taken a look at this form and the requirements, you should.  Preparers have commented that it is difficult enough to ascertain that a child lived with a taxpayer for more than half the year, much less try to determine the child lived with a taxpayer more than half of a month, on a month-by-month basis.

I am sympathetic with this plight.  One thing that might help is my proposed Form 1099-CTC, which would indicate the months for which the taxpayer received Adv CTC.  Form 8867 already requires the preparer to ask if any of the various credits had been disallowed or reduced in prior years.  If so, the preparer must complete Form 8862, Information to Claim Certain Credits after Disallowance.   This is an insane form and needs to be completely redesigned.  Here is where the affidavit, Form 8836 Schedule A, can be very helpful.  The point is, if the CTC has not been reduced or disallowed in prior years, the preparer is still going to have to do basic due diligence for various other credits that rely on the 6-months-and-a-day rule.  If there is nothing to alert the preparer to eligibility concerns under those credits, then it seems to me the IRS should be comfortable with the preparer relying on the IRS-issued Form 1099-CTC in preparing the return.  If something triggered greater scrutiny (problems with the other credits, or a prior disallowance or reduction), then the taxpayer could provide the Form 8836, Schedule A to show residence, and the preparer could rely on that.  But again, this whole due diligence process needs to be revised.

There is, however, the issue of unscrupulous preparers.  It goes without saying that because there is a lot of money involved, there will be incompetent or unscrupulous people willing to help the low/no income population with applying for the AdvCTC.  This includes so-called preparers siphoning off the AdvCTC to their own accounts.  Congress needs to pass legislation that requires unenrolled preparers to register with the IRS, take a one-time tax law competency exam, and complete annual continuing education courses.  It was urgent before the AdvCTC, but it is a necessity now if you don’t want vulnerable taxpayers preyed upon.

I know my “in the weeds” suggestions will not satisfy everyone; but I have tried to think through how all this might work, in the context of the IRS.  Because of the interaction with other family-based credits, I believe there needs to be the ability to reconcile.  In earlier posts, I’ve proposed ways to minimize, if not eliminate, clawbacks.  I’m going to think about various scenarios, how this and other approaches might play out.  And we’ll soon learn where Congress lands on this issue.

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