Refund delayed? Our ability to help may be limited.
Part I of this series addressed ten things that individuals should know about the Advance Child Tax Credit (AdvCTC), including qualification, reasons someone might want to unenroll from receiving monthly payments, and first-time parents. Part II focused on issues experienced by taxpayers with Individual Taxpayer Identification Numbers and the issuance of paper checks versus direct deposits for the August payment. Part III explains how AdvCTC tools work, including ID.me, and discusses the struggles some taxpayers are facing in receiving their AdvCTC.
The IRS had a heavy lift to get the new system up timely and will be adding functionality in the upcoming months. The IRS issued AdvCTC to taxpayers on July 15, made a second round of payments in mid-August, and will continue monthly payments through mid-December.
The IRS has created Frequently Asked Questions (FAQs) addressing AdvCTC. It is also anticipated that the IRS may issue guidance addressing mechanics of AdvCTC, including topics such as issuing payments to taxpayers who file with the status of married filing jointly, the impact to taxpayers with a change in filing status midyear, and rules for the end-of-year reconciliation.
The Child Tax Credit Update Portal (CTC UP) allows a taxpayer to check enrollment for payments, unenroll from the program, update bank account information, and update their address. As of August 19, 2021, 1.8 million taxpayers have unenrolled. Taxpayer changes made on the portal three days before the first Thursday of each month will be incorporated in time to affect that month’s payment. So, for the September payment, the taxpayer will need to make any change by August 30 at 11:59 p.m. ET. Later this year, taxpayers will be able to make changes to the number of eligible children, marital status, and income; re-enroll after unenrolling; and enroll as a first-time parent.
Taxpayers without a filing requirement for tax years 2019 or 2020 should use the Child Tax Credit Non-Filer Sign-Up Tool to enroll for future monthly payments if eligible. Otherwise, they can claim and receive the credit when filing their 2021 tax return in 2022.
Accessing CTC UP, the system the IRS set up for taxpayers to communicate changes, presents its own set of complexities and challenges. There are two methods for accessing the portal: either the taxpayer needs to have verified identity through Secure Access Digital Identity (SADI) (using credential service provider ID.me) or the taxpayer has to have established an IRS online account that used Secure Access to verify identity.
ID.me is an online tool used by the IRS, the Department of the Treasury, the Social Security Administration, and other government agencies to verify an individual’s identification. Once verified on a site that uses ID.me, you can use the same login information on any other site that uses the secure login service. The IRS is using ID.me for its CTC tools but will be expanding its use for future applications.
As of August 7, 2021, over five million taxpayers started the SADI verification process, and over 3.3 million were verified. Additionally, approximately 1.6 million users have accessed the portal using their existing Secure Access credentials. TAS knows some taxpayers are struggling to get the verification system to work for them. Even if a taxpayer has access to IRS.gov, he or she may still struggle to navigate the process. And, it has been reported that the CTC UP tool is incompatible with certain mobile devices.
Another challenge many taxpayers face is that the IRS’s interface for CTC UP assumes internet access. That’s not a reality for some. There should be a way to reach the IRS by mail expeditiously, especially given the high volume of calls that go unanswered. Although the IRS recently issued Rev. Proc. 2021-24 authorizing taxpayers to file a simplified paper return to register for AdvCTC payment, it is our understanding there is not an expedited process in place for processing those returns or for the processing of Form W-7, Application for IRS Individual Taxpayer Identification Number, that are needed to receive the AdvCTC. With the high volume of backlogged inventory of 2020 returns, the IRS has limited resources to process these simplified returns as well as the Form W-7s that are needed to initiate the monthly payments for ITIN individuals. We recommend that individuals make every effort possible to use the portal. For those not including the Form W-7, filing through the portal will considerably speed up the process, and payments should begin within a month of registering, whereas a simplified paper return will experience delays in processing as will the Form W-7. However, once the W-7 is processed, the individual will be able to file a 2021 return and claim the entire CTC with his or her 2021 tax return.
Six to 12 percent of Americans are without access to high-speed internet. This lack of access is not just because of availability but because of cost. When we look at income levels, only 57 percent of Americans earning less than $30,000 report having broadband internet access at home, compared to 93 percent earning $100,000 or more per year. This is the very population who will benefit the most from expanded CTC benefits.
In its August 13, 2021 press release, Treasury announced its efforts to extend the expanded CTC program to create a permanent, multilingual, and mobile-friendly sign-up tool to help more Americans who do not regularly file taxes to claim their CTC. In the meantime, Treasury and the White House announced a new, mobile-friendly, bilingual sign-up tool created by Code for America, a civic technology nonprofit, which will be available in the coming weeks, in an effort to enroll eligible families in the CTC. Having a mobile-friendly tool will be a welcome development and can’t come soon enough for families.
The IRS had a heavy lift getting the AdvCTC system up timely. As a family-based credit, the challenge in programming is that the AdvCTC touches on very personal family situations subject to change, as explained by TAS in three of our Most Serious Problems related to another refundable credit, the Earned Income Tax Credit (EITC): to improve taxpayer education in the pre-filing environment, to use the audit process to educate taxpayers and reevaluate which cases are selected for audit, and to address the role of paid preparers in EITC noncompliance.
Mostly, if the taxpayer’s 2020 and 2019 tax returns have been filed but have not yet been processed, the AdvCTC payments will be postponed until the reason for the return not being processed has been cured. If a taxpayer is under an EITC examination for the prior filed return, taxpayers may not get the AdvCTC until that examination closes. With the delays in processing of paper correspondence, those examinations are taking longer to close. While the taxpayer can claim the full amount of CTC on their 2021 tax return, this does not serve Congress’s purpose of getting money into the pockets of families who need it now.
With AdvCTC, things will be complicated if parents exchanged Form 8332 for 2020 or if they divorced after filing their 2020 return. The legislation requires the IRS to base the AdvCTC on the filing information from the 2020 tax return or 2019 if it is the most recent return. Right now, the CTC UP does not allow for changes to filing status or children being claimed. A parent expecting to claim a child for tax year 2021 whom the other parent claimed on a separate 2020 tax return will need to have the other parent remove the child in CTC UP. Changes to CTC UP anticipated for later this fall could alleviate this situation. Each parent will need to reconcile their correct amount of CTC on their 2021 return.
The legislation requires the IRS to determine the estimated AdvCTC payment based upon the taxpayer’s 2020 tax return, but if no 2020 tax return was filed or processed, it will look for a 2019 tax return. Although this legislation is not perfect, it will provide much-needed assistance to families in need; it will still require end-of-year reconciliation. Eligible individuals are expected to receive half of the amount as an advance payment of the CTC in six monthly payments and the balance, the other half of the payment, will be claimed and received with the filing their 2021 tax return.
Taxpayers who receive periodic payments will need to reconcile the amounts they received on their 2021 tax return. If the AdvCTC payments are lower than the credit they are allowed based on their 2021 information, taxpayers will receive the additional amount with the second half of the CTC payment. If taxpayers receive too much AdvCTC in 2021, they will have the credit or refund amount reduced on their 2021 return or could owe a tax liability if they were not entitled to the money payments received. There will be exceptions, and reconciliation of AdvCTC will be an important issue going forward. Some problems have already been identified with the first round of payments, including missing payments, incorrect amounts, and an inability to reach the IRS for answers. Individuals should make every effort possible to determine the correct amount of their AdvCTC reported on their 2021 tax return. Individuals will be receiving a letter in January reflecting the AdvCTC the IRS paid during 2021. Individuals will be able to check the CTC UP to verify the amount of payments received. Any inconsistencies between the taxpayer’s 2021 income tax return for CTC and the IRS records will require review and manual processing and can result in delays in processing their 2021 refunds.
But what if taxpayers know they are not eligible, and they receive an AdvCTC payment? The IRS will soon post instructions on how to return the payment in a way similar to instructions for returning issued Economic Impact Payments. In addition, those taxpayers should use the CTC UP to unenroll from receiving any additional advance payments.
If a taxpayer receives more AdvCTC in 2021 than he or she will qualify for when the 2021 tax return is filed in 2022, IRC § 24(j)(2) requires that the taxpayer pay the excess AdvCTC back either by incurring a balance due liability or having a reduced refund. However, the American Rescue Plan Act of 2021 (ARPA) includes repayment protection in IRC § 24(j)(2)(B) that may excuse repayment of some or all of the excess AdvCTC if AdvCTC payments took more qualifying children into account than the taxpayer claims on the 2021 tax return. Full repayment protection is $2,000 multiplied by this difference in the number of children claimed. The full repayment protection is then reduced based on a threshold income from the taxpayer’s 2021 filing status ($60,000 for joint filers). If the taxpayer’s modified adjusted gross income is less than two times his or her income threshold, then some repayment protection will reduce the amount he or she owes for excess AdvCTC. This is a long way of saying that if the taxpayer received AdvCTC based on a child he or she does not claim when preparing the 2021 tax return, the taxpayer may not have to repay all excess AdvCTC. We recommend these taxpayers consult with a tax advisor, an LITC, or the Volunteer Income Tax Assistance (VITA) program before filing their 2021 tax return reconciling the AdvCTC.
ARPA does not allow the IRS to offset the AdvCTC for outstanding federal tax debts. The IRS will also not offset AdvCTC payments. If there is an inadvertent levy, it may be grounds for releasing the levy under Internal Revenue Manual Sections 184.108.40.206 and 220.127.116.11.10. This relief is welcomed by many taxpayers during these difficult times.
Perhaps the challenges with the rollout for AdvCTC will lead to more long-lasting reforms down the road. For instance, TAS has advocated for redefining how we think about which caregiver should receive the EITC (and other child-related credits). How should the law be simplified to provide the much-needed assistance to individuals and their families with the least amount of confusion and complexities? With some of the credit complexities, including a situation where two parents could potentially incorrectly receive the AdvCTC, Congress should consider making changes to EITC and any future extension of CTC with an eye toward providing relief with administrable credits reaching eligible families in a simplified method that is easier for taxpayers and their families to compute and easier to administer, thereby reducing the errors and need for IRS audits of EITC returns.
The views expressed in this blog are solely those of the National Taxpayer Advocate. The National Taxpayer Advocate presents an independent taxpayer perspective that does not necessarily reflect the position of the IRS, the Treasury Department, or the Office of Management and Budget.