Tax Season Tidbits
Tax Season Tidbits In today’s video, Tom covers some tax season tidbits, including: More May 17 guidance from IRS When is an exclusion not an exclusion? Can we have faith…
February 1st, 2021
If you are a follower of our weekly blogs or perhaps attended the Get Ready for Filing Season webinar on January 26, you already know that, as a fellow tax practitioner, I feel your pain and anguish regarding how we reconcile Recovery Rebates (a.k.a. Economic Impact Payments) when 2020 returns are filed. This anguish could be extinguished if the IRS would provide a Recovery Rebate “lookup” tool as they did in past years when economic stimulus was provided to America’s taxpayers.
While it is still very early in the 2020 filing season, I want to share the possibilities I am considering that may alleviate (hopefully) symptoms of what I have coined, “Recovery Rebate Restlessness Syndrome.” We’ll see how “Phil” might approach this problem later on.
Ask the taxpayers tell you what they received (and pray the answer isn’t “nothing”).
Ask the taxpayers to provide the IRS letters they received after the rebate payments. The payments from the summer of 2020 were provided in letter 1444-A. For the recovery rebates most recently paid, the IRS letter is 1444-B.
For taxpayers who don’t provide their letters, go to the Get My Payment IRS tool. While this service will not give the taxpayer’s actual dollar amounts received, if it works properly, the tool will indicate when a direct deposit was made and the last four digits of the bank account used. I have yet to test the online tool for what information it provides when a physical check was mailed.
Using the taxpayer’s 2018 or 2019 income tax information, use a third-party online service to estimate what the payments should have been. Without providing an endorsement, I found the tool provided by AARP to be user friendly for at least a calculation of the second stimulus payment, which was based only on 2019 return information.
When in possession of the taxpayer’s 2018 or 2019 tax return information, your software may have provided an estimate of what the first rebate check should have been if you prepared these returns. Giving taxpayers a number may help to jog their memories. You may want to revisit your previous year’s software because this feature may have been added as an update after filing your taxpayer’s 2019 return.
Go to the Economic Recovery Rebate website at irs.gov to get some of your questions answered. (maybe)
The first question I received dealt with the seemingly now age-old question of what happens with a dependent who is claimed in odd years by one of the parents and in the even years by the other parent. While not getting a direct answer, Question J3 states that your client could be entitled to the credit for a dependent in 2020 even if a different parent received a recovery rebate payment because the child was claimed on the 2018 or 2019 return by the other parent. This statement would appear that, at least regarding dependents, the IRS might be allowing for double-dipping of rebate payments.
The second question is more nefarious. What happens when a joint return was filed for 2018 or 2019, and the taxpayers have since divorced? The IRS does not approach this with a proverbial 10-foot pole. My research seems to indicate that the rebate checks should be treated as received by both parties. The test I did for this was to go to the Get My Payment tool and enter either taxpayer’s SSN (for when they filed jointly) and guess what? The online tool regards the payment as being sent to both parties. That answer seems to support my online research on this issue, which tells us the clients have a legal property issue for the parties to sort out (imagine that with divorced persons), or take the matter up with their attorney. In any event, it appears to be a property settlement issue, but your taxpayer who claims they received nothing will still likely get nothing from IRS based on my experience with the Get My Payment tool.
For those taxpayers who were into the phase-out ranges for the payments, my advice would be to force them to get the actual amounts received rather than speculating or estimating what the amount might have been. The IRS online tool will give them a date and an account where the money was deposited.
If I make no entries in my software for recovery rebate payments, it will automatically make a calculation. Suppose my taxpayer emphatically tells me that no money was received. In that case, I’m going to make them sign a hold harmless agreement with me that I warned them that the IRS could deny the claim.
The taxpayer fell through the various cracks in the IRS system, and their 2019 return has yet to be processed. As of the date of this blog, millions of 2019 returns still have the status of “in-process.” While the recovery rebate from last summer should have been based on 2018 or 2019 filing and the situation with their 2019 return processing should not have impacted the first round, the 2019 return not yet processed likely caused the failure of the second payment to be made.
Your taxpayers did not receive any recovery payments because their income was too high in 2018 or 2019.
Remember, first and foremost, the recovery rebate payments were an advance on a 2020 credit. Just because they didn’t receive anything last summer or recently doesn’t mean they won’t be entitled to some or all the rebates now. If they are self-employed and purchased equipment, for example, perhaps we can get their income low enough currently to qualify.
Secondly, consider reviewing the taxpayer results under married filing jointly versus married filing a separate return. One of the taxpayers may have earned significantly more than the other spouse. But as with any tax planning, be sure to consider the entire picture rather than just the potential to generate recovery rebates.
Is your taxpayer claiming children over age 17 as dependents? Would it make sense not to claim the dependent? The answer is basically, “it depends.” But remember, just because an individual is not claimed as a dependent, that person is not necessarily independent. In my opinion, the child’s income would determine “independence.”
Taxpayer circumstances are different than they were in 2018 or 2019. Perhaps the taxpayers recently married or had a child in 2020. These changes in circumstances could result in rebates or increases in the rebates received when 2020 returns are filed.
Be advised that the FAQs on the IRS website remind taxpayers that even though they may have received too much in recovery rebates, they will not have to repay the money. The only exception is in a deceased taxpayer situation where the money is to be returned to the government (good luck with that).
If taxpayers received checks for dependents who were under age 17 in 2018 or 2019 but are now age 17 or greater in 2020, the IRS does not require repayment of these recovery rebates.
Remember: Congress only intends for recovery rebate payments to be returned if they were issued to a deceased taxpayer.
I’m guessing that if we follow the sage advice of our favorite end-of-winter prognosticator, Punxsutawney Phil, going back into our COVID-19 bunkers for another six weeks may alleviate some of the current symptoms of Recovery Restlessness Syndrome. However, it will not provide us with a cure.
by Tom O’Saben, EA
Disclaimer: The information referenced in Tax School’s blog is accurate at the date of publication. You may contact firstname.lastname@example.org if you have more up-to-date, supported information and we will create an addendum.
University of Illinois Tax School is not responsible for any errors or omissions, or for the results obtained from the use of this information. All information in this site is provided “as is”, with no guarantee of completeness, accuracy, timeliness or of the results obtained from the use of this information. This blog and the information contained herein does not constitute tax client advice.