Tax Notes logo

Year in Review – Legislation

Posted on Dec. 28, 2020

This review of 2020 legislation is cribbed from a presentation given by LaKesha P. Thomas, Esq., Clinic Director at Three Rivers Legal Services (FL); William Schmidt, Clinic Director at Kansas Legal Services; and Caleb Smith, Associate Professor of Clinical Law at University of Minnesota Law School.

Of course, the major legislation in 2020 focuses on taxpayer relief from the economic pain caused by the pandemic. That legislation, in many respects follows the pattern set in two other downturns of the 21st Century. As the year ends another round of legislation to promote relief may be happening.

Paycheck Protection Program (PPP) Loan Forgiveness

This program was established by §1102 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) which amended IRC §1102 and §7(a)(36) of the Small Business Act (15 U.S.C. 636(a)). The basics of this program were detailed in Notice 2020-32 -PPP Loan Expenses. This notice summarizes the PPP loan process and is further discussed here:

  • Loan amount is up to 250% of average monthly payroll expense, up to a $10 million maximum.
  • Loan forgiveness is equal to 8 weeks of payroll, mortgage interest, rent, and utility payments.
  • No more than 25% of the amount forgiven can be attributable to non-payroll costs.
  • PPP loan forgiveness is excluded from income under the CARES Act, and
  • There is no reduction of tax attributes required, unlike §108.
  • Sole proprietors with no employees are allowed to use their 2019 Schedule C net income as a payroll expense for PPP loan purposes. For additional discussion see here and here.

Neither section 1106(i) of the CARES Act nor any other provision of the CARES Act addressed whether deductions otherwise allowable for payments of eligible section 1106 expenses would be allowed if the loan was subsequently forgiven.

Notice 2020-32: Clarifies Matter by providing that expenses that qualify a TP for PPP loan forgiveness are non-deductible under two legal theories:

  1. §265(a)(1); §1.265-1, which denies expenses related to tax-exempt income, and
  2. Deductions are not allowed for payments for which the TP receives reimbursement.

The notice cites Manocchio v. Comm., 78 T.C. 989 (1982).

CARES Act §2204 – Adds $300 Charitable Contribution:
  • §2204 adds IRC §62(a)(22) & §62(f) to allow for a maximum $300 deduction/adjustment to income for cash charitable contributions for those who take the standard deduction.
  • If you don’t itemize your deductions on Schedule A (Form 1040), you may qualify to take a deduction for charitable contributions of up to $300. See the instructions for line 10b (1040).
  • Applies to taxable years beginning after 12/31/2019.
  • Deduction allowed for organizations that are religious, charitable, educational, scientific, or literary in purpose.
  • Contributions to donor advised funds or supporting organizations cannot be used.
  • Above-the-line charitable contribution deduction
  • The maximum deduction is $300 per return regardless of filing status.
  • It is only applicable to tax year 2020.
  • Previously, charitable contributions could only be deducted if taxpayers itemized their deductions.
Economic Impact Payments, IRC 6428

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) allows a refundable credit for 2020 for eligible individuals to help with financial difficulties the COVID-19 pandemic caused. EIP summary and EIP Eligibility, and Other IRS Frequently Asked Questions:

If the TP owes for IRS back tax liabilities will the Recovery Rebate Credit (RRC) be reduced by any outstanding tax debts?

Preliminary IRS Answer: Like EIPs, RRCs will only be offset to child support

  • •IRS is working out the procedures for RRCs
  • IRM 21.6.3 is in the process of being updated in relation to RRC procedures
  • •See section 2201(d) of the CARES Act, which appears as a note to IRC section 6428, stating:

(d) Exception from Reduction or Offset.

—Any credit or refund allowed under IRC 6428 shall not be —

(1) subject to reduction or offset pursuant to section 3716 [administrative offset by the head of an executive, judicial or legislative agency] or 3720A [by any Federal agency such as for an OASDI overpayment] of title 31, USC,

“(2) subject to reduction or offset pursuant to subsection (d) [debts owed to Federal agencies], (e) [State Income Tax Debts], or (f) [unemployment compensation debts]of IRC section 6402, or

“(3) reduced or offset by other assessed Federal taxes that would otherwise be subject to levy or collection.

Any overpayment resulting from the recovery rebate creditor from related payments to the U.S. territories is not subject to reduction or offset by other assessed Federal taxes that would otherwise be subject to levy or collection.

  • In addition, such overpayments are not subject to offset for other taxes or non-tax debts owed to the Federal government or State governments.
  • As an exception to the above rule, an overpayment resulting from the recovery rebate credit is subject to the offset against overpayments of the amount of any past-due support. [Sec. 6402(c).]
  • An overpayment resulting from the recovery rebate credit may be subject to claims by the taxpayer’s creditors under applicable State law or Federal bankruptcy law.
  • Economic Impact Payment (EIP) –Adjustments –Systemic refunds issued as a result of an adjustment to EIP will post with the Bypass Indicator 4. This ensures the EIP can only be offset to child support obligations. IRM

If the same qualifying child is properly claimed by two different taxpayers in different years may result in two credits for the same child as discussed here.

Generally, individual income tax credits for a given taxable year are based on a taxpayer’s situation and actions in that taxable year, so a 2020 credit would generally be based on a taxpayer’s 2020 factors. Due to the lack of recapture, the 2020 recovery rebates could be considered imperfectly targeted as some taxpayers will receive a larger credit than their 2020 attributes would otherwise allow.

Example: The same qualifying child properly claimed by two different taxpayers in different years, one taxpayer in 2019 and another in 2020, may generate $500 of credit to the taxpayer claiming the child in 2020 and $500 of credit to the taxpayer claiming the child in 2019 for a total of $1,000. [This] example illustrates some targeting and incentive effects resulting from the design of the 2020 recovery rebate, which allows advance rebate amounts to be calculated on prior-year return information without full recapture. See also: EIP Information Center–Topic J –Reconciling on Your 2020 Tax Return -You will not be required to pay back the $500 even if the child’s other parent claims $500 for the same child on his or her 2020 tax return.

What About the Parent who also Properly Claims the Child on a 2020 Return?
  • The 2020 transcript will reflect the payment of an EIP and thus his/her claim for a RRC on the 2020 Form 1040 will likely be denied.
  • If the refund is disallowed, file an appeal to the disallowance –Argue:
  • the CARES Act specifically designates each eligible taxpayer as entitled to $1200 [IRC 6428(a), (d)]
  • IRM Economic Impact Payments -Manual Adjustments.

No manual adjustments to the Economic Impact Payment are allowed at this time. This section will be updated once approved.

•Reminder: Taxpayers who received less payment than entitled to in 2020 can claim the difference, as the recovery rebate credit, on their 2020 tax return. See also IRM

Parent’s Other Option:

Initiate a Civil Matter in Small Claims Court

Small Claims Action -Basic Steps:

  1. File small claims action
  2. Service by personal service on defendant
  3. Pretrial conference
  4. Mediation (possible)
  5. Trial
  6. Judgment or Dismissal
  7. If judgment, defendant must complete fact information sheet (financial affidavit more or less)
  8. Judgment creditor may use lawful collection methods (garnishment, levy, or attachment)
  9. If garnishment, ex parte motion for continuing writ of garnishment
  10. Facially sufficient? Court grants writ of garnishment and its’s sent to employer or bank
  11. Employer or bank withholds pay/money pending court order
  12. Debtor must be served with claim of exemption and assert any exemptions expeditiously
  13. If debtor files claim of exemption, hearing on exemptions
  14. If successful, garnishment limited or stopped, funds unfrozen by bank or employer and remitted to debtor
  15. If not, final judgment of garnishment entered; garnishment occurs
Dependent Now An Adult

Info. Letters, IRS INFO 2020-0015 (Sept. 25, 2020) Generally, an individual’s eligibility for an EIP depends on the information reported on the individual’s 2019 tax return, or the 2018 return if he or she did not file a 2019 return. Therefore, if a taxpayer claimed an individual as a dependent for 2019, the individual dependent will not qualify for an EIP. If that individual no longer qualifies as another taxpayer’s dependent for the 2020 tax year, the individual must file a return for 2020 and claim the credit, if otherwise eligible. Taxpayer was claimed on another return. Our records show that for tax year YYYY you were claimed as a dependent on another tax return. Dependents are not eligible for the Economic Impact Payment (EIP). You should refer to the Recovery Rebate Credit on the 2020 tax return to determine eligibility for any amounts not received under the EIP. IRM

ID Theft of EIP -The IRS Says Taxpayer Received the Stimulus Check, but Taxpayer Didn’t
  • If you are claiming ID theft of your Economic Impact Payment (EIP), file Form 14039 with ‘EIP’ or ‘Stolen EIP’ notated on the topof the form. The IRS will complete EIP refund trace process.
  • A low income taxpayer represented posted that the ID Theft Unit rep said that the ID Theft Unit doesn’t currently have authority to adjust accounts to issue the EIP after determining that someone claimed as a dependent was the victim of ID theft, but that this may change.
  • IRM -No manual adjustments to the Economic Impact Payment are allowed at this time. This section will be updated once approved.
  • See also IRM and IRM
How Do I Request a Payment Trace to Track My EIP
  • To start a Payment trace: Call the IRS at 800-919-9835 or Mail or fax a completed Form 3911, Write “EIP” (or Stolen EIP) on the top of the form; Enter “2020” as the Tax Period.
  • If you were expecting a check, didn’t get one and the IRS determines the check was not cashed, the IRS will send you a replacement check.
  • If the refund check was cashed, the Bureau of the Fiscal Service (BFS), part of the U.S. Treasury Department, will send you a claim package that includes a copy of the cashed check. Follow the instructions. BFS will review your claim and the signature on the canceled check before determining whether they can issue you a replacement check.
  • ID Theft –Requesting an Identity Protection Pin (IP-PIN)
  • The IPPIN indicator doesn’t come on until the ID theft complaint is processed.
  • If you’re a confirmed identity theft victim, we will mail you an IP PIN on a CP01A Notice if your case is resolved prior to the start of the next filing season.
  • Opt-In, Online Get an IP PIN Service is unavailable until mid-January 2021.
  • Starting in 2021, you may voluntarily opt into the IP PIN program as a proactive way to protect yourself from tax-related identity theft.
  • No Computer Access: If your income is $72,000 or less and you can’t use the online tool, file Form 15227, Application for an Identity Protection Personal Identification Number (Available mid-January 2021).
Injured Spouse Allocation/Stimulus Payment
  • Automatic Catch-Up Stimulus PaymentsIRS News Release IR-2020-192, August 25, 2020. We have discussed this issue on many occasions. View our most recent post here.
  • IRM MFJ accounts that included an Injured Spouse claim with the original return will reflect the transactions on both the primary and secondary tax year 2020 modules. Both taxpayers will be credited with half of the total EIP. See also IRM, Indented paragraph.
EIP and Domestic Violence
  • A roadmap to delivering Economic Impact Payments/Rebate Recovery Credit to Victims of Domestic Violence is here.  
  • IRC §6428(e)(2) provides that “with respect to a joint return, half of such refund or credit shall be treated as having been made or allowed to each individual filing such return,” thus creating an individual property interestof each joint filer in his or her share of the credit.
  • The CARES Act contemplates overpayments of the EIP. IRC §6428(e)(1) provides: “The amount of credit which would (but for this paragraph) be allowable under this section shall be reduced (but not below zero) by the aggregate refunds and credits made or allowed to the taxpayer under subsection (f).” The IRS can utilize erroneous refund procedures under IRC §7405 to recoup the refund from the other spouse, if it desires.
  • The taxpayer should be able to file an original MFS return (or Head of Household return, if eligible) and receive her or his own EIP or RRC. In some instances, DVAA victims may already have filed superseding returns claiming that status.
  • Allow the DVAA victim to submit a simple affidavit, modelled after the Form 8857, Part II, questions 8 and 10, and Part V
Subject Areas / Tax Topics
Copy RID