The Advance Child Tax Credit: What Lies Ahead

Omeed Firouzi with Philadelphia Legal Assistance discusses the upcoming advance child tax credit payments and the related potential challenges for taxpayers and practitioners.

This transcript has been edited for length and clarity.

David D. Stewart: Welcome to the podcast. I’m David Stewart, editor in chief of Tax Notes Today International. This week: extra credit.

In mid-July, the IRS will begin distributing advance child tax credit payments. While the agency has been preparing for this rollout for months, some questions remain about how the process will go. How will the IRS issue these advanced child tax credit payments? What challenges could taxpayers and practitioners face in the coming months?

Here to talk more about this is Tax Notes contributing editor Marie Sapirie. Marie, welcome back to the podcast.

Marie Sapirie: Thanks for having me.

David D. Stewart: Now, you’ve been covering this topic pretty closely over the past year. Could you tell us about the new advance child tax credit and how it came about?

Marie Sapirie: The advance child tax credit was enacted in the American Rescue Plan Act, which was signed into law on March 11. The new law increased the amount of the credit for 2021 for families under certain income thresholds and made two major changes to how the credit is administered from the existing child tax credit.

First, it is fully refundable. Second, instead of the financial benefit being claimed only when a taxpayer files their return. The American Rescue Plan Act added advance periodic payments of the credit amount. This distribution process is new for the advance child tax credit, and the IRS has had to quickly figure out how to implement it. That’s the topic we’ll be looking at today.

In thinking about how the advance child tax credit came about, it’s useful to back up briefly to 1997 when Congress passed the child tax credit. The child tax credit was introduced then after consideration of competing proposals as a way to reflect a family’s reduced ability to pay taxes as family size increases.

The dependent personal exemption had declined substantially at that point, and Congress was looking for a way to reduce the income tax burden on families. That credit provided a $500 credit for each child under age 17 and it phased out for higher incomes.

Since 1997, Congress has passed various increases to the credit, including the $2,000 per child credit in the Tax Cuts and Jobs Act of 2017, and culminating in March with the 2021 advance child tax credit.

David D. Stewart: You recently spoke to someone about this. Can you tell us about your guest and what you talked about?

Marie Sapirie: I spoke with Omeed Firouzi, who is a staff attorney in the Taxpayer Support Clinic at Philadelphia Legal Assistance. Omeed has practiced at PLA since 2018 when he earned an American Bar Association Tax Section fellowship focused on worker misclassification. Before that, he ran Villanova Law’s Volunteer Income Taxpayer Assistance Program.

Omeed earned degrees from Villanova University School of Law and George Washington University, and he’s a native of Northeastern Pennsylvania. We talked about the implementation of the advance credit, and potential issues taxpayers and practitioners should look for.

David D. Stewart: All right, let’s go to that interview.

Marie Sapirie: Thanks, Omeed, for joining me today to talk about the implementation of the advance child tax credit as we approach the July 15 start date for distributions of the advance credit amounts to begin.

The implementation timeline for the advance child tax credit has been relatively short. The American Rescue Plan Act was enacted in March and the IRS is getting ready to start distributions. The IRS has been putting out information at a rapid pace, as well as issuing new FAQs and setting up a web-based assistant to help taxpayers determine their eligibility.

Much of what we know about how the new advanced payment process will work we have learned in the past couple of weeks, but there are still a number of questions to consider, especially as we head into the filing season in 2022.

With that in mind, let’s start with the portals. The IRS has set up two new portals for taxpayers to use. One allows taxpayers to opt out of the advance payments if they choose. The other is for nonfilers to use to submit information to the IRS so that the agency can process their payments.

These portals have recently opened up, so taxpayers and professionals are getting their first look at them. What should taxpayers and professionals know about the new portals? Are there any challenges that you foresee as taxpayers start to use them?

Omeed Firouzi: Thank you so much, Marie. It’s a privilege to be here.

In terms of the portal to sign up for a nonfiler tool to file a 2020 tax return, basically that is a portal meant for people who traditionally do not file tax returns. One key thing to know is that the expansion of the child tax credit in the American Rescue Plan Act made it so that there’s no minimum earnings requirement.

That means that a lot of folks who typically do not file taxes, who may have received Supplemental Security Income, Temporary Assistance for Needy Families, or some other kind of public benefit, and therefore are not usual tax filers, can use this nonfiler sign-up tool on the IRS website to get on the books and get their child tax credit payments.

They can also use that tool to sign up to get any recovery rebate credits, which are missed stimulus payments from the economic impact payments last year. Because it is in fact like a tax return. It is a tax return that is through the Free File Fillable Forms website. They can potentially get at least $1,800 in recovery rebate credits and stimulus payments for their children.

They can sign up to file basically a $1 tax return, a simplified return for 2020, claiming the child tax credit and making sure that they’re on the books for this advance payment and for the refund next year. That is the second half of the advance payment.

The other portal that you referenced is a portal for people to opt out of getting advance monthly payments. Instead of getting the $250 or $300 per month payments in the second half of this year, these individuals can claim the entire $3,600 or entire $3,000 per each child as a refund on their 2021 return next year in 2022.

The credit is now also fully refundable. That is a change from the past when $1,400 out of a $2,000 child tax credit was refundable. A lot of families may prefer this option because they budget around getting that lump-sum refund, or they’re concerned about possibly getting advance payments based on information that has since become inaccurate, or is no longer the case, from their 2019 and 2020 tax returns. 

There has been some concern about the nonfiler portal because it may not work on a mobile device as well. It’s only in English, and it can be complicated for some people to navigate.

There are some events going on around the country the weekend of July 9 and July 10 to help people use this tool to sign up. The IRS is partnering with Volunteer Income Tax Assistance (VITA) sites to have centers and cities across United States, where they can file these returns so that they’re in the system ahead of time for the child tax credit payments.

If someone already filed a 2019 or 2020 return claiming the child tax credit and it’s been processed, then they’re good to go. There’s nothing they need to do to get the child tax credit.

But these are some of the issues that we’re looking at in terms of the technological, the user-friendly aspect of the nonfiler sign-up tool, whether it’s going to be something that people are able to navigate and maneuver.

I’d be curious to see if the IRS will actually look to public benefits programs that they already have information about to get benefits to people who don’t end up using the nonfiler sign-up tool. The law seems to contemplate that they’ll get these advance payments out to people based on information from Social Security, SSI, veterans’ benefits, and railroad benefits. I hope that that does occur because these are people who are some of the absolute poorest people who need this help more than anyone.

Marie Sapirie: One of the open questions about the advance child tax credit is whether the IRS will provide an expedited review process for taxpayers who are denied the advance credit when they think they should have received it, and what that review process might look like. Do you have thoughts on what considerations should go into designing that process?

Omeed Firouzi: I think it would be a good idea to have such an independent appeals process. It’s something that I think would be supported by the language of the Taxpayer First Act of 2019, a federal law on the books that strengthens taxpayers’ independent appeals rights.

We often see that in cases where taxpayers are assessed the debt that they should not owe and have a dispute regarding that, they can appeal that through a collection due process hearing after getting a few collection notices. Similarly, if you’re denied a refund, you can always appeal that. If six months have passed from when you filed your return, you could file a refund suit.

There should be a similar kind of independent appeals process here for folks to try and get these child tax credit payments if they are denied them. There should be such an expedited process. I would think that the Taxpayer Advocate Service could be involved in helping to make sure that people who are in need of this money, who can demonstrate a hardship and have been denied it, can help so people get their money sooner rather than later.

When we had the distribution of the EIPs, there was a dedicated EIP phone line that was at least able to answer general questions. There were specific lines as well for if your money got lost, or if it had been stolen, God forbid. They were able to streamline calls about those issues specifically through those numbers.

To the extent that there could be such dedicated resources to ensure that this is a priority for the IRS, similar to how they were able to prioritize EIPs overall, that would be helpful for taxpayers.

Marie Sapirie: That’s a good point about the EIP as precedent that the IRS can look to in rolling out this program as well. For taxpayers that don’t receive an advance payment, but know that one has been issued, the IRS recently put out an FAQ that says that the taxpayer can request a payment trace to track the payment. How has the payment trace process worked in other situations, such as the EIPs?

Omeed Firouzi: I’ve had a lot of success in utilizing the payment trace process with regard to EIPs. We’ve been able to help people get money that they were rightfully eligible for and that got lost in the mail or got intercepted by an identity thief.

In terms of how it’s worked for EIPs, you could either submit a Form 3911 for a refund trace, or, as we’ve done, call up a specific dedicated number that is associated with refund traces. We asked for the trace to be initiated with an IRS representative on the phone. Within four to six weeks, if they find that a check has been cashed and it’s not by the taxpayer, then they’ll send out a package from the Bureau of the Fiscal Service to the taxpayer that will get them on the path to getting a new check in their own name rightfully to their right address. Or if a check hasn’t been cashed, then they’ll send out a new payment to the person at their correct address. 

I have at least two clients I can identify whose EIPs got lost in the mail. One of them had moved and one of them had just genuinely got lost in the shuffle. We put in refund traces, and within a few weeks they were able to get their payment.

We had one person whose payment went to an old address and someone there cashed it, unfortunately. But we were able to put in that that was a stealing of the check. We were able to get a Bureau of the Fiscal Service package out to her, and then she was able to get her own check in the end.

It’s a process that has worked well, at least in my personal experience in terms of EIPs. To the extent that this could be something that could help people with the child tax credit, I think that will be good because we’ve still been seeing mail delays. We’ve been told before that the IRS cannot forward refund checks. Even if you’ve got USPS forwarding set up, it could be returned then to the IRS instead of forwarded to where you are. If we have the trace mechanism in place, I hope that it would be effective for purposes of the child tax credit.

Marie Sapirie: One of the aspects of implementing the advance payments process that the IRS has worked on is communicating information about the process to the public. Would you tell us about the outreach efforts that you’ve been involved in and what those will include over the course of the rest of the year?

Omeed Firouzi: Absolutely. We have done Facebook Lives in which we’ve talked about this benefit and what people can expect to see and what it’ll look like. We’ve also done social media posts. We’ve put information up on our website at philalegal.org. 

We’ve been trying to do all we can, but we’re still limited by the fact that we’re working from home. The fact that a lot of things are opening up again has enabled us to finalize some in-person outreach for the first time in a long time, so that we can make sure that people are aware of this.

It’s really important that we spread the word about this. I think I saw a poll a few weeks ago that said that 53 percent of individuals were not even aware that this credit had been expanded and that there were advance payments.

One thing that was really crucial as part of this outreach effort is that June 21 was child tax credit awareness day. You saw the president, the vice president, the secretary of the Treasury, members of Congress, social services organizations, and legal aid offices like our own posting all over Facebook, Twitter, Instagram, and everywhere about the child tax credit. It was about how it would work, promoting the nonfiler sign-up tool and using simple, clear language to make sure that people were aware of what to expect and how much the payments would be each month.

We let people know that payments would be on the 15th each month except for August, because the 15th is on a weekend that month, so it’ll be on the 13th. We also let people know that if they did file a 2019 or 2020 return or signed up on the nonfiler tool last year, then there was nothing that they needed to do as long as they were income eligible.

I think efforts like those are really important to spread the word so that people know what this money is all about when it starts hitting their bank accounts. If they don’t get that money because they haven’t taken an action like filing a 2020 return, then they know what to do in order to get there.

Marie Sapirie: Looking ahead to the 2022 tax return filing season when the advance child tax credit payments and the 2021 child tax credit will be reconciled, what potential issues should taxpayers and practitioners be aware of?

Omeed Firouzi: There are a lot of issues that taxpayers and practitioners should be aware of, including if a child lived with another parent or another individual in 2021 and that information hadn’t been updated yet. There will be a portal that will be coming out in August, it seems, where taxpayers can update their family and income information so that they can get the correct amount of advance payments. 

Let’s say you had a baby that was born in 2021. You can make sure that you use this portal to update that information so that child is on the books and you can start getting advance payments for them. But if, for whatever reason, you were unsuccessful in using this portal to get that information on the books, then you can claim the whole $3,000 or $3,600 child tax credit for that child on the 2021 return in 2022.

Another thing that people should know is what to do if you get more child tax credit advance payments than you should have received. For example, let’s say your child aged out and the IRS didn’t catch it. You have to be 17 or younger. If you’re under age 18, you’re eligible for child tax credit here. You’re an age eligible child, and the IRS should be able to figure out who’s age eligible still before 2021 ends.

But let’s say they missed it for some reason in the system. You got more payment for that child than you should have because they’re 18 or 19 now. Or let’s say, the child that you claimed is living with someone else and you didn’t have a chance to update it. There is a total safe harbor forgiveness on repaying all of the money if you make below $40,000 as a single filer, $50,000 for head of household, and $60,000 for married filing jointly.

However, above those levels, there is some repayment that would be required, but it is phased out. There are some limitations that exist above that. It can get a little detailed, but those are things that people should be aware of that could occur.

If you’ve got custody issues, that can come into play here. If you’ve got separated spouses, it’s figuring out who gets the money for a certain child. We’ve often seen cases where somebody has already claimed a child get denied the earned income tax credit, and they have to file a paper amended return to try and get the money for that child. We might see situations like that arise.

People may have to file paper amended returns with LITCs, low-income taxpayer clinics, like ours so they can rightfully claim the child to try and recoup child tax credit that they never got and that they should have been eligible for, but that a partner claimed that they didn’t have a right to claim that child.

These are very similar to some issues that occurred with EIPs. You had separated estranged spouses getting all of the money, and the other spouse was not able to cash a check. In those cases, we’ve seen people try and return checks as void or file new returns. Sometimes it may have to be dealt with in family court. There is a whole range of issues like those that we’re expecting to see.

We’re also hoping that tax preparers will be able to fully claim the expanded child tax credit on the tax returns next year, so that people can get all the money that they’re eligible for. I’d be curious to see the total positive impact it could have on people when they get this money back as a fully refundable credit.

One last thing here is if somebody didn’t get any advance payments, has little to no income, doesn’t file a return traditionally, but has a child who’s age eligible, they’re still eligible. They’re eligible based on the child that they have. There’s no minimum income earnings requirement. It’ll be a challenge to try and get those folks in the system in early 2022. 

I envision that there will be a lot of people in that boat as well. You had a lot of people who didn’t get any EIP, and they had to end up getting all of it as a recovery rebate credit on their 2020 return in 2021. A lot of folks who have little to no income couldn’t use the nonfiler portal last year. I think we’re going to have a lot of people who are in that boat as well.

We can do our best in the coming weeks and months to try and get all these people in the systemnow so they can start getting these advance monthly payments. I know a lot of parents are already starting to budget in anticipation of getting these payments. We hope it will have a positive, beneficial impact. It’s projected to cut child poverty in half, which of course would be such a big deal. We’ll see what happens.

Marie Sapirie: Thank you, Omeed, for joining the podcast today.

Omeed Firouzi: Thank you so much. I really appreciate it.