Congress’s latest Covid relief package gives the IRS a slew of new tax measures to interpret—some of which will need to be incorporated into the agency’s software, forms, and instructions ahead of next month’s expected filing season kickoff.
The package’s tax provisions include more direct payments to households, boosted tax credits for businesses and individuals, incentives for renewable energy projects, and permanent excise tax breaks for brewers, winemakers, and distillers.
Fortunately for the IRS, it already has basic programming in place for several provisions that are consequential for the upcoming filing season. The direct payments are based on a similar framework to what Congress set for the first round of payments enacted by the CARES Act (Public Law 116-136). And a measure temporarily allowing people to use 2019 income data to boost the value of crucial tax credits is similar to the relief that victims of natural disasters have gotten in the past.
“It’s not easy,” said Nina E. Olson, executive director of the Center for Taxpayer Rights and the former National Taxpayer Advocate. But “it’s not like they’re making it out of whole cloth.”
Stimulus Checks: Round Two
The new direct payments—worth up to $600 per individual, plus an additional $600 per qualifying child—are drafted as credits against 2020 taxes, like the larger CARES Act payments enacted in the spring. Treasury Secretary Steven Mnuchin said on CNBC Monday that some households could begin receiving those payments as soon as the beginning of next week.
The latest stimulus package directs the IRS to use income data from 2019 tax returns, so individuals who had a child or saw their income take a hit this year would be eligible for more money. Those who receive less than they should—or no payment at all—will have to claim additional credit on the 2020 tax returns filed next year.
The current Form 1040, used to report federal income taxes, only has a line for claiming an additional credit based off the first round of direct payments—meaning the IRS may have to make adjustments to that form and its instructions ahead of the filing season to incorporate the second batch.
Olson said the IRS will have to make some minor software programming changes too, “but the basic structure of the eligibility has been programmed.”
Even so, the timing of the new checks, which the agency is supposed to deliver by mid-January, could create challenges. The IRS has been trying to sort through a massive backlog of paper-filed returns and other documents since last spring, when it was forced to shut down the majority of its onsite operations because of Covid-19.
Olson said she is concerned that the backlog could prevent some individuals from quickly obtaining a second stimulus payment if the IRS hasn’t already processed their 2019 tax returns. In particular, that could hurt victims of domestic violence who were advised to file superseding 2019 returns to access payments being withheld by their abusers, she said.
Another potential issue with the direct payments is their potential to generate a flood of taxpayers questions to compete with the normal customer service and taxpayer advocate inquiries that arise during filing season, Mike Dolan, national director of IRS policies and dispute resolution in the Washington National Tax practice of KPMG LLP. Dolan is a former IRS deputy commissioner and served two extended appointments as acting commissioner.
“This has the potential to delay or reduce the number of those questions that can be answered,” he said.
Changes to Popular Credits
The stimulus deal contains a temporary provision for 2020 that will allow people to use information from the 2019 tax year to determine the Earned Income Tax Credit and the refundable portion of the Child Tax Credit. The change is intended to help workers who earned less this year due to the pandemic get a larger refund based off their pre-pandemic income level.
“On its face it seems like a great idea, but in practice it’s more complicated,” said Francine Lipman, a professor at the University of Nevada, Las Vegas William S. Boyd School of Law.
Lipman, who works with low-income taxpayers, said she worried the temporary change could lead taxpayers to make mistakes that would hold up their refunds.
Len Burman, a co-founder of the Tax Policy Center and former deputy assistant Treasury secretary for tax analysis, echoed this sentiment, noting the high audit rates for EITC recipients.
“There are real sanctions for making errors if you screw up the EITC calculation,” he said. “The IRS can ban you from claiming the credit for a number of years after that.”
The measure, however, shouldn’t be too difficult for the agency to implement, though it will have to make some programming changes and revisions to tax forms and instructions for 2020.
The IRS has allowed taxpayers to use earlier years for the EITC before, said Norman Richter, an adjunct lecturer at Babson College and former Treasury official. For example, under a 2019 IRS publication, victims of natural disasters were allowed to use their 2018 income to increase their 2019 credit amount.
“Of course, this would be on a much bigger scale,” Richter said. But IRS officials “don’t have to reinvent the wheel.”
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