How Tax Policy Can Help Low-Income Americans’ Pandemic Plight

In this episode of Tax Notes Talk, Rebecca Thompson of Prosperity Now, a nonprofit based in Washington, D.C., discusses how the COVID-19 pandemic has affected low-income communities and families of color in the United States, and what tax policy tools could help them.

The post has been edited for length and clarity.

David Stewart: Welcome to the podcast. I’m David Stewart, editor in chief of Tax Notes Today International. This week: privilege check. The coronavirus pandemic has had an impact on all facets of life, from how we work to how we file our taxes. For now, gone are the days of grabbing lunch with a colleague or walking into your tax preparer’s office. And for low-income individuals and families, COVID-19 has heightened these inequities and presented new challenges, from navigating government assistance to finding reliable internet access.

What role does tax policy play in these issues and how should that change going forward? Here to talk more about this is Tax Notes reporter Alexis Gravely. Alexis, welcome back to the podcast.

Alexis Gravely: Hey, Dave. It’s good to be back.

David Stewart: You recently spoke with someone about this issue. Who did you talk to and what did you talk about?

Alexis Gravely: I spoke with Rebecca Thompson of Prosperity Now. We discussed what it’s like for lower and moderate income families who are trying to file their taxes during a pandemic and a program that aims to help them out. Rebecca also shared a really interesting perspective on some of the provisions in the next COVID-19 relief package and what she wants Congress to keep in mind as they finalize the legislation.

David Stewart: All right. Let’s go to that interview.

Alexis Gravely: Hi, Rebecca. Welcome to the podcast. Thanks for being here.

Rebecca Thompson: Hi, Alexis. Thank you so much for having me. It’s great to be here with you today.

Alexis Gravely: It’s been nearly a year since the pandemic hit the U.S. We’re now in our second tax filing season since COVID-19 began. How has the pandemic changed the tax filing season for low-income families and families of color? Is there anything in particular that you’ve seen or heard?

Rebecca Thompson: There have been significant changes in the tax filing season due to COVID-19, particularly for low-income families and families of color. I would go back to around mid-March of last year when the majority of the free tax preparation sites across the country had to close their doors mid-season.

On an average year we have about 3,700 VITA, or Volunteer Income Tax Assistance, sites across the country where IRS trained and certified volunteers give their time and their service to prepare and file tax returns for low-income people. Right about mid-March over 90 percent of those sites closed their doors due to the pandemic. We saw with some immediate shifts and some quick responses to identify, plan, develop, and deploy alternative service delivery models of free tax preparation services.

Where people had previously come into a site, gone in, and sat down with the preparer and had their returns done in person, we were no longer able to do that. We saw our programs and our partners across the country using things like Zoom, Google Meet, JotForm, as well as texting and email to communicate with the filers that they hadn’t yet served for the filing season and then make an effort to try to get them in to get their returns completed and filed.

That actually carries forward into this 2021 filing season, where we see our partners using even more limited contact methods to deliver services, including their iterations of a drop-off method where people go in and drop their documents off or they have them scanned or copied. We have some folks who are offering appointments only. It’s very, very limited contact, but we’re still providing the same free tax preparation services to low- to moderate-income households and families of color across the country this filing season.

Alexis Gravely: The IRS began the filing season on February 12, which is about three weeks later than normal. As of right now, the deadline hasn’t changed. What sort of impact, if any, do you think this could have on low-income residents or families of color? And do you think another deadline extension like we saw last year would be beneficial?

Rebecca Thompson: Our sites are dealing with limited capacity. In previous years, you would show up to a VITA site on a Saturday morning and if the site opens at 10 a.m., by 9 a.m. there’s a line of 50 clients waiting outside, sometimes in the cold, huddled outside waiting for the site to open. And then they would all crowd into whatever community space was available and wait to have their returns prepared.

That is no more for this filing season. We are just not able to serve people in that way and allow for such crowds. We find that our sites are dealing with limited capacity. I mentioned earlier that some folks are offering limited appointments. And with social distancing and the need for space and cleaning between clients, even if they come in in-person, we’re still operating with limited capacity.

For those folks who absolutely need to file by April 15, we could be feeling a bit of a crunch to get all of the clients taken care of by the filing deadline if it’s not extended. One of the things that we learned from last filing season, though, with the extension to July 15, 2020, was that if you give people more time to file, they actually take more time to file.

At the beginning of July, we saw this mass influx of tax returns to be prepared and of clients through virtual and other means because people had waited until the last minute. I would say that there’s no guarantee that an extension of the filing deadline would actually allow for more capacity given human nature to procrastinate. But it could definitely be beneficial in allowing our partners who normally close their doors on April 15 that additional time to serve more clients.

There are a couple of challenges that we see with this. One of them is volunteer capacity and volunteer retention. As a former program manager, I had a lot volunteers who were retirees. When the filing season ended on April 15, they usually left town by April 18. They were on vacation. Of course, folks won’t be leaving; there won’t be this mass exodus this year due to COVID-19, but there are some concerns about keeping volunteers around to serve during an extended filing season.

I also think there’s a couple of opportunities. One is for education for those people who are expecting a refund. Of course we encourage people who are expecting a refund, especially during this time, to go ahead and file or e-file early and get direct deposit so that they can get that cash in hand as quickly as possible. Not everybody is able to do that.

I think this is an opportunity to educate people that if they’re expecting a refund, they will not incur any penalties if they’re not able to get that tax return by April 15. Now if they’re expecting to owe, then that return absolutely must be filed by the April 15 deadline, or they will incur penalties for failure to file and failure to pay.

Even if the IRS does eventually elect or decide to extend the deadline beyond April 15, one key concern that we have is around earned income tax credit (EITC) returns and particularly those returns from 2017. If someone may be eligible for the EITC for 2017 income and they haven’t filed that return yet, that return as of right now is due in the hands of the IRS by April 15. If they don’t, those families would risk losing that EITC refund, which expires after three years if the return hasn’t been filed.

As we’re we’re having conversations around extending the filing deadline, we want to make sure that if there’s any extension of the general deadline beyond April 15 that the deadline for those 2017 EITC returns is also extended as well.

Alexis Gravely: You just mentioned with respect to VITA that one of the lessons you all learned last year is that if the deadline is extended, then people will still wait until the deadline to try to file their returns. Are there any other lessons that you all learned in offering free tax prep services during the pandemic? How will that shape the work that VITA continues to do post-pandemic?

Rebecca Thompson: Yes, we learned that if you give people more time to file, they will take more time to file. Other lessons that we learned last summer and fall have really helped us tailor the service delivery models that are being offered this year. I think one of the biggest things was something that we already knew in the back of our minds, but really came to the forefront, which is not everybody can do virtual.

The digital divide in this country is real. It’s real not only in access to technology, but also in tech savviness. That was brought to the forefront for us last year and this year more so than ever as our partners made the shift to continue to deliver services in this new virtual environment and non-traditional space.

We saw clients who were apprehensive about this new technology, but then there’s some folks who just can’t. And then there’s some folks who just won’t. Our partners have identified and learned and worked to develop a menu of service delivery options to accommodate a broad range of client capabilities and to meet their volunteer needs as well. There are also many volunteers who don’t want to operate and volunteer in a virtual environment.

Our partners have had to develop and implement a number of ways to serve clients this filing season. We did a survey a couple of weeks ago, and we’ve got 77 responses from our partners. The overwhelming majority of our partners are delivering and offering services in three or more different ways.

Clients have the opportunity to either do fully virtual through programs and platforms like getyourrefund.org and they can also do drop-off at the same site or the same location through the same VITA partner. Some clients are also offering limited appointment, only in-person services as well. The menu is definitely something that we have learned is a must-have during this filing season.

We also learned more about the challenges of reaching the hard-to-reach communities. In the summer and fall of 2020 many of our partners actually joined forces with other local community partners and state agencies to participate in the outreach for the economic impact payments. It was challenging because it is hard to reach people who don’t have email or bank accounts, or who don’t normally use their phones for more than just a cell phone.

We found that clear, concise, targeted messaging and communications as well as strategic partnerships are key to reaching the communities and the populations that we want to serve the most.

Alexis Gravely: Switching gears a little bit, we know that marginalized communities have suffered disproportionately during the pandemic. What are some steps that you would like to see Congress take to further assist these communities during this tax season and beyond?

Rebecca Thompson: Right now, the first thing that we have asked and continue to ask Congress to do is to share messages with their constituents about the free filing options for this season, especially those who are in the hardest hit areas, those districts and states who have really been hit hard by the pandemic. One is sharing the messages.

Now I know that Congress has a lot that’s going on and there’s a lot of relief packages that they’re looking at right now. I will caution this: it could potentially be a double-edged sword. More money in the form of stimulus payments right now could actually disrupt the filing season because they are leaning on the IRS to administer these payments. We have some concerns about whether or not there will be any potential disruptions to the filing season, which could cause delays in refund processing.

On the one hand we would be providing additional cash in hand to those families in the form of a stimulus check while on the other hand, also delaying the cash in hand that they are expecting in the form of a tax refund. We must be careful when making the decision. We ask Congress to be cautious and to be mindful when they’re making the decisions around the next stimulus payment and the implications that it will have on the filing season.

Other things that Congress can do over the course of the next year as families, communities, and our economy hopefully starts to rebound from the pandemic is to expand the EITC in the eligibility criteria. We’re looking to actually increase eligibility for the EITC to those ages 18 to 24. We also want to on the other end remove the age limit to support working grandparents who are taking care of their grandchildren.

We also want to increase the value of the credit, particularly for those who are childless workers because we know that they continue to be taxed into poverty. Younger, single childless workers need a larger value in the EITC. Finally, of course, there’s expansions of the CTC, or the child tax credit, to make it fully refundable and to increase the dollar value and the eligibility for the credit.

Alexis Gravely: We’re recording this on February 23 as Democrats in Congress are working on this next COVID-19 relief package and an expanded child tax credit is included. If this is enacted, what does that mean for low- and moderate-income families? And do you think it will be enough?

Rebecca Thompson: I think it’s definitely a start. It’s definitely helpful. The expansion of the child tax credit is beneficial to support families with children. I don’t think it’ll be enough just because the wealth gap is so wide and so large. This is just one step in the process. There are many other policies that we would like to see enacted to support the whole family.

While it’s a step in the right direction, it’s not quite enough. I am a single mother of four sons and so I’m also very excited about the possibility of an expanded child tax credit.

I will say that one of the good things that has come out, but has also raised a concern and an issue, is that what we’re finding is that low- and moderate-income filers, especially people of color, are paying attention. They’re watching and they have a heightened level of awareness around what’s happening with the COVID-19 relief package.

For instance, one of our partners in New Jersey commented a couple of weeks ago that as their sites were opening they already had tax filers coming in. They were reviewing a return with a client and she looked over the numbers and said, “Well, what happened to my $3,000? Where is my $3,000 child tax credit that I was promised that was in the COVID-19 relief package?”

People are aware of what’s in the package. They understand how it can benefit them. They’re looking for it right now just because they don’t have a full understanding of the legislative process. And just because it’s in the relief package that the president proposed doesn’t make it a done deal.

It presents an opportunity, particularly for our members of Congress to reach out to their constituents and help them to understand the legislative process. But it’s a good thing that we have a heightened level of awareness all around.

Alexis Gravely: This proposed expansion of the child tax credit in its current iteration in the bill says that it would be delivered monthly beginning in July. Do you think that that could have some sort of negative impact on the filing season if that comes up?

Rebecca Thompson: I don’t think that the delivery of a monthly credit would have any impact on this filing season, especially if it doesn’t start until July. I do think, again, that it presents another opportunity for clear, concise messaging and outreach to people.

It’s also important to provide people with an opportunity to choose how they would like to receive their credit. Several years ago, we had an advanced earned income tax credit, which was done away with around 2011 or 2012 because not enough people were taking advantage of it. Our organization conducted a survey a couple of years ago where we asked a variety of hosts of clients about what their needs were.

One of the things that we learned was that our clients really prefer getting the lump sum refund. It is somewhat of a savings account. It’s confusing and baffling to the economists that people actually don’t want the cash in hand on a monthly basis to help to smooth out their income, but that they would rather set it aside in somewhat of a federal savings account knowing that they’re going to get that those funds in their tax refund.

Part of the reason is because it allows them to plan for large expenses and major purchases throughout the course of the year if they know that they have that money coming in. That is something that I would say should be offered as a consideration — whether or not people would want to get that money monthly or if they should have the option to receive it as a lump sum during their tax refund.

Alexis Gravely: In covering this part of the package, I haven’t heard a lot of people make that point so thank you for that. Are there any other tax policy initiatives or proposals that you would like to see either in this relief package or in future relief packages that are really targeted towards low- and moderate-income families?

Rebecca Thompson: There are are a couple. One thing that we’ve proposed is a refund to rainy day savings account. Through this proposal, people who are eligible for the EITC would be able to defer up to 20 percent of their refund to receive it six months later than after they filed their taxes. And so you file your taxes, you get 80 percent of your refund within the three weeks direct deposit. And then another six months later, you get the 20 percent of your refund.

What this does is allows a cushion for families, particularly around the August and September timeframe when children are preparing to go back to school in a normal year. Families have to expend resources to help buy school supplies and now those funds would be there. It’s not something that would have to come out of that family’s normal household budget, but it will be drawn from that additional refund. 

Another strong proposal that we’re looking at is the baby bonds — The Americans Opportunity Accounts Act, which would actually provide for every child to receive a savings account at birth to help to support their long-term future. That way 18 years from now they’re prepared to go to college or what have you.

We want to give every child some seed money to start with. We know that children who have a savings account — no matter how much even if it’s as little as $25 — are much more likely to attend college and get post-secondary education than those who don’t. We want to help to level the playing field by providing that seed money and that starting account for every child in America.

Alexis Gravely: It was great talking to you, Rebecca. Thanks again for joining us. I really appreciate it.

Rebecca Thompson: Thank you so much for having me. It’s been a pleasure to talk with you today.