Admitting that they expect another chaos-filled filing season, Treasury and the IRS have been vehement (almost rabid) about encouraging taxpayers to file their 2021 tax returns electronically. They have also been encouraging taxpayers who received advance payments of the Child Tax Credit (CTC) to watch for Letter 6419, which reports the amount of the credit that was paid in advance and which is necessary to reconcile the full CTC on Form 1040. They have been telling taxpayers to wait for this letter and to use it when preparing Form 1040 to ensure that advance payments of the CTC are reconciled and the full CTC is calculated accurately on the return. They have been warning that failure to use the letter could result in inaccurate calculations, incorrect returns, and refund delays. But what happens when Letter 6419 is inaccurate?
The IRS has recently acknowledged that some Letters 6419 that were printed and mailed to taxpayers in December were wrong. The cause of the error was that the letters were printed and mailed in December but the December advance payment was returned by the bank (if deposited electronically to an account that had been closed) or by the postal service (if the taxpayer received a paper check). The IRS has stated that they expect this will only affect a small percentage of taxpayers who received advance payments of the CTC, but even a small percentage can mean several million incorrect letters.
The IRS is also aware that the letters may be inaccurate for taxpayers who alternate custody of their children (and the associated tax benefits) every other year. Unfortunately the problem may not end with the known errors. Tax professionals on social media are increasingly reporting errors on Letter 6419 that cannot be attributed to returned payments or custody arrangements. Indeed, some of the incorrect letters are being received by tax professionals themselves.
As of this writing the IRS has only acknowledged two of the three problems: issues arising from December payments that were returned and issues arising from alternating custody years. The IRS is recommending that taxpayers who received a Letter 6419 but who did not receive a December payment verify the amount using an account transcript. Account transcripts can be mailed to the taxpayer or can be accessed if the taxpayer has an IRS online account. If the amount on the letter is different from the total of the amount of the payments listed on the transcript, the amount on the transcript should be used to reconcile the credit on the taxpayer’s tax return.
Unfortunately the IRS has not provided any clear guidance for reconciling the credit in situations where parents alternate custody every other year. Nor do they have any recommendations as to what to do when the information on the letter doesn’t match what is on the account transcript and the information on the account transcript is different than the payments the taxpayer actually received. That sounds crazy given that computers are usually pretty good at doing arithmetic and printing reports, but taxpayers are finding that amounts deposited to their bank accounts don’t match the total amount reported on the letter nor do they match the reported transcript payments. Again, the IRS has not officially acknowledged the problem and, consequently has not provided any information as to why the math and reporting errors are occurring or what taxpayers should do with respect to reconciling the advance payments on their tax return. There’s no official guidance as to which number to use when all three numbers are different.
So what should you do? Well, if you think the amount on your Letter 6419 is wrong, you should definitely check the amount against both your bank deposits and your IRS account transcript. And even if you think the letter is correct it can’t hurt to double check. Nevertheless verifying deposited amounts against a transcript reported amount is not a workable option for taxpayers who received paper checks and cashed them. Those taxpayers can still compare their account transcripts to their Letter 6419 but proving what they did or did not receive by paper check (if the check was cashed rather than deposited) will be difficult (if not impossible).
Anecdotal reports of similar errors in Letter 6475, which report the amounts of the third Economic Impact Payment, are also being found by taxpayers and tax practitioners. Again, the letter amounts can (and should be) compared against amounts deposited when possible and compared to the amounts reported on the taxpayer’s IRS transcript. It is clear that for either letter the IRS will be using the amount on the transcript as the basis for comparison to determine if the taxpayers Form 1040 is accurate with respect to credit reconciliation (CTC for Letter 6419 and the Recovery Rebate Credit for Letter 6475). What is less clear is the path to resolution (and an accurate tax return) when the client can prove that the amount of their direct deposits was different than the amount reported on the transcript whether the discrepancy arises from a custody arrangement or a possible calculation error. All the Service is saying about those types of situations is expect delays in both return processing and the issuing of refunds. And all I can add to that is if you use a paid preparer, please be patient as much of this situation is completely beyond their control.