The Internal Revenue Service sent out the vast majority of advance payments of the Child Tax Credit last year to eligible families, alleviating poverty, according to a new report, but millions of taxpayers who should have received the payments did not, while millions of others who didn't qualify received them instead.
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"However, 3.3 million payments, totaling over $1.1 billion, were sent to 1.5 million taxpayers who should not have received the payment," said the report. "Further, the IRS did not send 8.3 million payments, totaling about $3.7 billion, to 4.1 million eligible taxpayers."
The American Rescue Plan Act, which was enacted in March 2021, increased the amount of the Child Tax Credit from $2,000 to $3,000 per child under the age of 18 (and to $3,600 for children under age of 6) for tax year 2021 only and made the credit fully refundable to eligible taxpayers. The increased Child Tax Credit was reduced (or phased out) for taxpayers with adjusted gross income that exceeds $75,000 ($112,500 for head of household and $150,000 for married couples filing a joint return and qualifying widows or widowers. The IRS developed a reconciliation letter, as required by legislation, identifying advanced payments received by taxpayers and to use when preparing their tax year 2021 tax returns. However, the guidance changed constantly last year, and it was difficult for taxpayers and tax preparers to keep up with the continuing changes. Even the IRS seems to have had a challenging time of it, though the agency managed to ramp up the payments quickly, despite the other difficulties associated with tax season.
"The swiftness of the IRS's implementation of the ARPA-related monthly advance Child Tax Credit payments was a significant undertaking," said the report. "The first monthly payments were issued on July 15, 2021, only four months after legislation was enacted."
TIGTA's review of the 57.1 million reconciliation letters sent to taxpayers found only 6,829 letters that were not sent to taxpayers or were sent with an incorrect amount of advance Child Tax Credit payments. That was mainly due to the reversals of advance payments that were not reflected on the reconciliation letters. TIGTA said it plans to continue to monitor payment reversals that occur after issuance of the letters in a review of the reconciliation of Child Tax Credit payments in 2022.
The report said the IRS also needs to have processes in place to ensure the validity of bank account information received from third parties. TIGTA's review identified 11,459 payments, totaling $4.2 million, that were erroneously sent to 523 bank accounts. The IRS also erroneously updated 1,610 taxpayers' direct deposit information with bank account information associated with a payroll allotment account, such as a health savings account.
TIGTA made five recommendations in the report to the IRS, including the need to take actions to prevent taxpayers from receiving additional improper advance Child Tax Credit payments, inform taxpayers of the possibility that their advance payments may have been sent to other accounts the taxpayers may own, and validate incoming files from third-party sources prior to their use. The IRS agreed with all of TIGTA'S recommendations. The IRS posted transaction codes on the impacted accounts to block additional payments to ineligible taxpayers, and the agency intends to implement procedures to validate incoming files from third-party sources prior to their use.
The IRS had to juggle multiple priorities while rolling out the advance payments of the Child Tax Credit.
"At the time of the ARPA's enactment, the 2021 filing season was well underway," wrote Kenneth Corbin, commissioner of the IRS's Wage and Investment Division, in response to the report. "In addition to the provision for issuing advance payments of the CTC, it also called for the IRS to issue a third round of Economic Impact Payments (EIPs). We marshaled resources to continue the execution of the filing season while also developing and implementing programming and processes to issue both the EIPs and the advance CTC payments."
The IRS began issuing CTC payments on July 15, 2021, and continued issuing them on a monthly basis through Dec. 15, 2021. The IRS and congressional Democrats were unable to extend the payments this year after failing to pass the original version of the Build Back Better Act. The slimmed down Inflation Reduction Act that was passed last month left out the extension of the enhanced Child Tax Credit. However, the advance payments that went out last year are credited with helping reduce the rate of childhood poverty, according to a
