Using the Federal Income Tax System to Deliver Cash Assistance to Families: Policy Considerations

Changes from December 5, 2022 to February 14, 2023

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Using the Federal Income Tax System to
~~December 5, 2022~~February 14, 2023
Deliver Cash Assistance to Families: ~~Policy~~
Margot L. Crandall-Hollick
Policy Considerations
Specialist in Public Finance Specialist in Public Finance

The central purpose of the federal income tax system is to collect revenue to fund the The central purpose of the federal income tax system is to collect revenue to fund the
Cheryl R. Cooper
federal government’s activities. Nonetheless, the income tax system is also one of the federal government’s activities. Nonetheless, the income tax system is also one of the
Analyst in Financial Analyst in Financial
largest sources of federal cash benefits to U.S. households (after Social Security) and largest sources of federal cash benefits to U.S. households (after Social Security) and
Economics Economics
remains the largest source of need-tested cash assistance for low- and moderate-income remains the largest source of need-tested cash assistance for low- and moderate-income

families with children. Policymakers often look to the federal income tax system to families with children. Policymakers often look to the federal income tax system to
deliver cash benefits—deliver cash benefits—~~especial y~~especially to low- and moderate-income individuals and families. to low- and moderate-income individuals and families.

Cash benefits in the tax code for low- and moderate-income families are Cash benefits in the tax code for low- and moderate-income families are ~~general y~~generally structured as refundable tax structured as refundable tax
credits. Refundable credits, unlike other tax benefits, are not limited by how much a family owes in income taxes. credits. Refundable credits, unlike other tax benefits, are not limited by how much a family owes in income taxes.
Hence, low- and moderate-income families—who tend to owe little or nothing in income taxes—can Hence, low- and moderate-income families—who tend to owe little or nothing in income taxes—can ~~stil~~ still receive receive
these benefits as part of their annual tax refunds. these benefits as part of their annual tax refunds.
There are a variety of benefits and limitations of using the federal income tax system as the mechanism to provide There are a variety of benefits and limitations of using the federal income tax system as the mechanism to provide
cash assistance to families. Insofar as policymakers are interested in using the income tax system for this purpose, cash assistance to families. Insofar as policymakers are interested in using the income tax system for this purpose,
either on a temporary or permanent basis, they may wish to consider some of these issues as they develop their either on a temporary or permanent basis, they may wish to consider some of these issues as they develop their
policies. This report examines seven issues that might inform the design of tax-based social benefit policies. policies. This report examines seven issues that might inform the design of tax-based social benefit policies.
Those issues are summarized in the table below. Those issues are summarized in the table below.
Selected Policy Considerations
Issue
Policy Considerations
The Application for Tax Benefits Is the
Some Some information on the 1040 (i.e., various formsinformation on the 1040 (i.e., various forms of income) can be accurately and of income) can be accurately and
Federal Income Tax Return
efficiently verified, efficiently verified, but other information (likebut other information (like some aspects of a child’s eligibility some aspects of a child’s eligibility
The federal income The federal income tax return (i.e.,tax return (i.e., “the 1040”)—“the 1040”)—
for child benefits) are difficult or impossible for child benefits) are difficult or impossible for the Internal Revenue Servicefor the Internal Revenue Service (IRS) (IRS)
while designed primarily while designed primarily to determineto determine if if
to verify, to verify, absent an audit. In addition, the 1040 does not col ect someabsent an audit. In addition, the 1040 does not col ect some parameters parameters
households have paid households have paid al all the income tax they owe the income tax they owe
that policymakers that policymakers may wish to use to administer tax benefits.may wish to use to administer tax benefits.
for the year—also for the year—also functions as an application for functions as an application for
tax benefits. tax benefits.
Not All Households File a Federal Income
Lack of information on low-income Lack of information on low-income households may limithouseholds may limit tax benefit programs’ tax benefit programs’
Tax Return
reach. Policymakers reach. Policymakers seeking to reach low-income households may consider seeking to reach low-income households may consider
The lowest-income The lowest-income households are households are ~~general y~~generally not not
requesting this information directly (e.g., requesting this information directly (e.g., via a “nonfiler” portal) or using other via a “nonfiler” portal) or using other
required to file required to file federal income tax returns federal income tax returns
administrative administrative data for outreach or administrativedata for outreach or administrative purposes. They may also purposes. They may also
(although they can if they choose to). The IRS thus (although they can if they choose to). The IRS thus
consider whether a comparable nontax benefit administered consider whether a comparable nontax benefit administered by a different agency by a different agency
may lack information on nonfiling households who may lack information on nonfiling households who
could better reach these populations in the short, medium, could better reach these populations in the short, medium, and/or long term. and/or long term.
are eligible are eligible for a tax benefit. for a tax benefit.

Many Households Use Paid Preparers and
Private third-party intermediaries Private third-party intermediaries may make applying for and receiving tax benefits may make applying for and receiving tax benefits
Commercial Software
with complex rules easier with complex rules easier for many households. But the associated fees reduce the for many households. But the associated fees reduce the
Most families Most families that receivethat receive cash assistance through cash assistance through
amount of assistance families amount of assistance families receive.receive. And the high errorAnd the high error rates of tax benefit claims rates of tax benefit claims
the tax code pay for assistance in preparing and the tax code pay for assistance in preparing and
on returns prepared by paid preparers—due in part to the complexity of tax on returns prepared by paid preparers—due in part to the complexity of tax
filing their returns—either filing their returns—either using paid tax preparers using paid tax preparers
benefit eligibility benefit eligibility rules—mayrules—may leave taxpayers and tax benefits more open to leave taxpayers and tax benefits more open to
or commercial or commercial software. software.
scrutiny. scrutiny.

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Using the Federal Income Tax System to Deliver Cash Assistance to Families

Issue
Policy Considerations
Data Used to Administer Tax Benefits Are
While While the IRS has data on family structure, number of children,the IRS has data on family structure, number of children, and various and various
Generally Annual Data from a Prior Year
sources of income for the majority sources of income for the majority of U.S.of U.S. households, these data are both households, these data are both
Eligibility Eligibility for and the amount of tax benefits a for and the amount of tax benefits a
retrospective retrospective and annual. Prior-yearand annual. Prior-year tax data may not reflecttax data may not reflect a household’s current a household’s current
family receives family receives in a given year are based on prior-in a given year are based on prior-
circumstances, circumstances, especial yespecial y if familiesif families experience income volatilityexperience income volatility or changes in or changes in
year annual tax data. In other words, the IRS has year annual tax data. In other words, the IRS has
family structure within the year and/or from year to year, so tax benefits may be family structure within the year and/or from year to year, so tax benefits may be
information on a household’s situation in the information on a household’s situation in the
less less ~~responsive~~ responsive to families’to families’ needs than other types of benefits. needs than other types of benefits.
previous year, but not on its present situation. In previous year, but not on its present situation. In
addition, tax data addition, tax data ~~general y~~generally do not include do not include
information about within-year fluctuations in information about within-year fluctuations in
income and family structure. income and family structure.

Tax Benefits Are Usually Delivered Once a
Insofar as tax benefits are “advanced,” policymakers Insofar as tax benefits are “advanced,” policymakers may considermay consider if and to what if and to what
Year
extent those advanced amounts should be reconciled with the amounts extent those advanced amounts should be reconciled with the amounts ~~al owed on~~
~~General y,~~ allowed on Generally, tax benefits are paid out once a year as tax benefits are paid out once a year as
applicable tax returns and the extent to which taxpayers would need to pay back applicable tax returns and the extent to which taxpayers would need to pay back
a lump sum as part of a federal income a lump sum as part of a federal income tax refund. tax refund.
overpayments of advanced tax benefits. overpayments of advanced tax benefits.
The IRS has demonstrated an ability to issue The IRS has demonstrated an ability to issue
monthly payments by “advancing” credits before monthly payments by “advancing” credits before
the applicable tax return is filed. the applicable tax return is filed.
Some Households Do Not Have or Use
Direct Direct deposit into a traditional bank account may provide the most secure and deposit into a traditional bank account may provide the most secure and
Bank Accounts to Receive Tax Benefits
fastest receipt of tax benefits, but households that lack such accounts may struggle fastest receipt of tax benefits, but households that lack such accounts may struggle
Some Some Americans,Americans, especial yespecial y lower-income lower-income
to receive to receive their benefits. Moreover,their benefits. Moreover, ~~some~~ some taxpayers use refund advanced products taxpayers use refund advanced products
Americans, Americans, may face difficultiesmay face difficulties receiving payments receiving payments
that direct tax refunds to temporary that direct tax refunds to temporary bank accounts, to which the IRS cannot bank accounts, to which the IRS cannot
quickly and securely from quickly and securely from the IRS if they do not the IRS if they do not
deliver deliver later payments. Policymakerslater payments. Policymakers may consider other options for benefit may consider other options for benefit
have or do not use bank accounts to receive have or do not use bank accounts to receive their their
receipt, receipt, such as issuing prepaid cards. such as issuing prepaid cards.
tax refunds. tax refunds.

Tax Benefits Can Be Reduced via Offset or
Col ecting delinquent debts may benefit populations to whom the debts are owed. Col ecting delinquent debts may benefit populations to whom the debts are owed.
Garnishment Actions
But col ection activities But col ection activities can also imposecan also impose significant financial hardship on those significant financial hardship on those
A household’s tax benefits (i.e., A household’s tax benefits (i.e., its tax refund) can its tax refund) can
whose benefits are offset or garnished, especial y whose benefits are offset or garnished, especial y if they are low income. if they are low income.
be reduced by the federal government to col ect be reduced by the federal government to col ect
Policymakers Policymakers may considermay consider the trade-offs between col ecting certain past-due debts the trade-offs between col ecting certain past-due debts
certain debts or garnished by private creditors. certain debts or garnished by private creditors.
and the impact those offsets or garnishments wil and the impact those offsets or garnishments wil have on policy objectives for a have on policy objectives for a
particular tax benefit or population. particular tax benefit or population.

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Using the Federal Income Tax System to Deliver Cash Assistance to Families

Introduction
The central purpose of the federal income tax is to collect revenue to fund the federal The central purpose of the federal income tax is to collect revenue to fund the federal
government’s activities. Nonetheless, the income tax system is also one of the largest federal government’s activities. Nonetheless, the income tax system is also one of the largest federal
sources of cash benefits to households in the United States. In particular, the federal income tax sources of cash benefits to households in the United States. In particular, the federal income tax
system is the largest source of need-tested cash assistance for low- and moderate-income families system is the largest source of need-tested cash assistance for low- and moderate-income families
with children.1 Policymakers often look to the federal income tax system to deliver cash benefits, with children.1 Policymakers often look to the federal income tax system to deliver cash benefits,
~~especial y~~especially to low- and moderate-income individuals and families.2 As one scholar commented, to low- and moderate-income individuals and families.2 As one scholar commented,
“the IRS is now one of the government’s principal welfare agencies, on par with the Department “the IRS is now one of the government’s principal welfare agencies, on par with the Department
of Healthof Health and Human Services (HHS) and the Social Security Administration.”3 and Human Services (HHS) and the Social Security Administration.”3
Cash assistance for low- and moderate-income families is Cash assistance for low- and moderate-income families is ~~general y~~generally structured in the tax code as structured in the tax code as
refundable tax credits. Refundable credits, unlike other tax benefits, are not limited by how much refundable tax credits. Refundable credits, unlike other tax benefits, are not limited by how much
a family owes in income taxes. Hence, low- and some moderate-income families—who tend to a family owes in income taxes. Hence, low- and some moderate-income families—who tend to
owe little or nothing in income taxes—can owe little or nothing in income taxes—can ~~stil~~ still receive these benefits as part of their annual tax receive these benefits as part of their annual tax
refunds. This report refunds. This report ~~wil~~ will tend to focus on refundable credits as the primary mechanism for tend to focus on refundable credits as the primary mechanism for
delivering assistance to families, although some of the issues discussed may apply to other types delivering assistance to families, although some of the issues discussed may apply to other types
of tax benefits for families. of tax benefits for families.
This report provides policymakers with a broad understanding of some of the benefits and This report provides policymakers with a broad understanding of some of the benefits and
limitations of using the tax code to provide cash assistance to families by examining seven issues limitations of using the tax code to provide cash assistance to families by examining seven issues
common to most tax benefits.common to most tax benefits.4 Selected examples (“case studies”) are provided throughout to Selected examples (“case studies”) are provided throughout to
~~il ustrate~~illustrate some of these issues or examine certain topics more closely. some of these issues or examine certain topics more closely.4
5 Issue 1: The Application for Tax Benefits Is the
Federal Income Tax Return
The federal income tax return functions as the application for tax benefits, although that is not its The federal income tax return functions as the application for tax benefits, although that is not its
primary purpose. The federal individualprimary purpose. The federal individual income tax return’s primary function is to reconcile how income tax return’s primary function is to reconcile how
much households owe in income taxes much households owe in income taxes ~~annual y~~annually and how much they have already paid during the and how much they have already paid during the
year. A household that has overpaid its taxes—often when individuals have had too much year. A household that has overpaid its taxes—often when individuals have had too much
withheld from their paychecks during the year—receives a refund after filing its Internal Revenue withheld from their paychecks during the year—receives a refund after filing its Internal Revenue

~~1 See CRS~~ 1 See CRS Report R46823, Report R46823, Need-Tested Benefits: Who Receives Assistance?, by Gene Falk, Karen E. Lynch, and Paul , by Gene Falk, Karen E. Lynch, and Paul
D. Romero; and Hilary Hoynes and Diane Schanzenbach, “D. Romero; and Hilary Hoynes and Diane Schanzenbach, “ Safety Net Investments in Children,” Safety Net Investments in Children,” NBER Working Paper
24594, May 2018, https://www.nber.org/papers/w24594. , May 2018, https://www.nber.org/papers/w24594.
2 Congress provided three rounds of stimulus 2 Congress provided three rounds of stimulus checks to low- and moderate-income individuals and families duringchecks to low- and moderate-income individuals and families during the the
COVID-19 pandemic; see CRSCOVID-19 pandemic; see CRS Report R46415, Report R46415, COVID-19 and Direct ~~Paym ents~~Payments: Overview and Resources, ,
coordinated by Margot L. Crandall-Hollick. It also expanded the child tax credit in 2021; see CRScoordinated by Margot L. Crandall-Hollick. It also expanded the child tax credit in 2021; see CRS Report R46900, Report R46900, The
Expanded Child Tax Credit for 2021: Frequently Asked Questions (FAQs) , by Margot L. Crandall-Hollick. In addition, , by Margot L. Crandall-Hollick. In addition,
CongressCongress has proposed redistributing the receipts from a proposed cap-and-trade program to households via the tax has proposed redistributing the receipts from a proposed cap-and-trade program to households via the tax
system; see CRSsystem; see CRS Report R40841, Report R40841, Assisting Households with the Costs of a Cap -and-Trade Program : Options and
Considerations for Congress, by Jonathan L. Ramseur and Libby, by Jonathan L. Ramseur and Libby Perl. Perl.
3 Kristin Hickman, “Pursuing a Single 3 Kristin Hickman, “Pursuing a Single Mission (or Something CloserMission (or Something Closer to It) for the IRS,” to It) for the IRS,” Columbia Journal of Tax Law, ,
vol. 169 (2016), p. 175. vol. 169 (2016), p. 175.
4 4 Other experts have examined how the federal income tax code is used to provide social benefits, including their differences with traditional spending programs. For example, see Frank Sammartino, Eric Toder, and Elaine Maag, Providing Federal Assistance for Low-Income Families through the Tax System: A Primer, Tax Policy Center, Discussion Paper No. 4, July 2002, https://www.taxpolicycenter.org/sites/default/files/alfresco/publication-pdfs/410526-Providing-Federal-Assistance-for-Low-Income-Families-through-the-Tax-System.PDF. 5 Note that for ease of reading, the terms Note that for ease of reading, the terms family and and household are generally used are generally used interchangeably in this report and, interchangeably in this report and,
unlessunless otherwise specified,otherwise specified, refer to all the individualsrefer to all the individuals listed on a federal income tax return.listed on a federal income tax return.
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Service (IRS) Form 1040 (often simply Service (IRS) Form 1040 (often simply ~~cal ed~~called “the 1040”). In contrast, a household that has “the 1040”). In contrast, a household that has
underpaid its taxes throughout the year owes a balance to the IRS.underpaid its taxes throughout the year owes a balance to the IRS.5
When a household prepares its federal income tax return, it provides various pieces of When a household prepares its federal income tax return, it provides various pieces of
information so that the IRS can administer the tax code, including tax benefits. This includes information so that the IRS can administer the tax code, including tax benefits. This includes
information on numerous types of income, some family relationships (spouse, children, other information on numerous types of income, some family relationships (spouse, children, other
dependents), some expenses, and government issued identification numbers (IDs). A household dependents), some expenses, and government issued identification numbers (IDs). A household
~~general y~~generally also provides its mailing also provides its mailing address for the previous year and, if it is owed a refund and address for the previous year and, if it is owed a refund and
has a bank account, may provide its bank information (e.g., the routing and account number has a bank account, may provide its bank information (e.g., the routing and account number
associated with its bank account) to receive its refund via direct deposit. Tax data provided on associated with its bank account) to receive its refund via direct deposit. Tax data provided on
other IRS forms—like information provided on W-2 wage statements for employees—are often other IRS forms—like information provided on W-2 wage statements for employees—are often
insufficient to administer tax benefits that are designed for households, which are the focus of this insufficient to administer tax benefits that are designed for households, which are the focus of this
report. report.
Verification of Data Provided on the 1040
When taxpayers provide information on their signed and filed tax returns, they acknowledge, When taxpayers provide information on their signed and filed tax returns, they acknowledge,
under penalties of perjury, that the information provided is accurate and complete. Nonetheless, under penalties of perjury, that the information provided is accurate and complete. Nonetheless,
the IRS can independently verify the accuracy of some taxpayer-provided information, the IRS can independently verify the accuracy of some taxpayer-provided information, ~~especial y~~especially
various sources of income. Broadly, the IRS verifies the accuracy of some tax data by comparing various sources of income. Broadly, the IRS verifies the accuracy of some tax data by comparing
the information provided on the 1040 to information provided to the IRS by third parties, like the information provided on the 1040 to information provided to the IRS by third parties, like
employers, banks, financial institutions, universities, health insurers, and non-IRS government employers, banks, financial institutions, universities, health insurers, and non-IRS government
databases. As the Government Accountability Office (GAO) notes6databases. As the Government Accountability Office (GAO) notes6
misreporting misreporting [tax[tax ~~information] is much higher when little or no third -party information~~
~~reporting exists than when substantial reporting exists . For items subject to~~ information] is much higher when little or no third-party information reporting exists than when substantial reporting exists. For items subject to substantial substantial
third-party information reporting,third-party information reporting, such as employers reportingsuch as employers reporting wages on Form Wwages on Form W -2, the -2, the
IRS is able to use automated processes to identify and address noncompliance. Information IRS is able to use automated processes to identify and address noncompliance. Information
reportingreporting ~~also produces indirect benefits by increasing taxpayers’ incentive to~~ also produces indirect benefits by increasing taxpayers’ incentive to comply, comply,
knowing that IRS collects the information, according to IRS officialsknowing that IRS collects the information, according to IRS officials . .
However, the IRS cannot verify However, the IRS cannot verify al all information provided on the 1040 efficiently or accurately information provided on the 1040 efficiently or accurately
because it may not have relevant high-quality and timely third-party information. Lack of third-because it may not have relevant high-quality and timely third-party information. Lack of third-
party information may be of particular concern to policymakers who are interested in tax benefits party information may be of particular concern to policymakers who are interested in tax benefits
for families with children since many aspects of eligibility cannot be accurately or efficiently for families with children since many aspects of eligibility cannot be accurately or efficiently
verified (see verified (see “Case Study 1A | EITC Improper Payments and Verifying Where a Child Lives”). .
Data Not Provided on the 1040
Information that could be necessary to administer a new tax benefit may not currently be Information that could be necessary to administer a new tax benefit may not currently be
collected on the 1040. For example, families do not currently report information regarding more collected on the 1040. For example, families do not currently report information regarding more
nuanced relationships or activities that policymakers may wish to encourage or support—such as nuanced relationships or activities that policymakers may wish to encourage or support—such as
kinship care or unpaid caregiving. Other aspects of family life that are not necessary to administer kinship care or unpaid caregiving. Other aspects of family life that are not necessary to administer
federal tax law but may be of interest to policymakers when designing tax policies—such as a federal tax law but may be of interest to policymakers when designing tax policies—such as a
household’s debt or wealth or demographic characteristics like race, gender, education level, or household’s debt or wealth or demographic characteristics like race, gender, education level, or
immigration status—are also not provided on the 1040. immigration status—are also not provided on the 1040.

~~5 Households who pay exactly what they owe are sometimes said to have “perfect withholding” and neither re ceive a~~
~~refund nor have a balance due.~~
~~6 U.S.~~ Even if the IRS updated the form to request certain information from taxpayers, accurate third-party data that could be used to verify this information may not be available. There is not, for 6 U.S. Government Accountability Office (GAO), Government Accountability Office (GAO), Tax Administration: Better Coordination Could Improve IRS’s Use
of Third-Party ~~Inform ation~~Information Reporting to Help Reduce the Tax Gaps, GAO-21-102, December 15, 2020, p. 7, , GAO-21-102, December 15, 2020, p. 7,
https://www.gao.gov/products/gao-21-102. https://www.gao.gov/products/gao-21-102.
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~~Even if the IRS updated the form to request certain information from taxpayers, accurate third-~~
~~party data that could be used to verify this information may not be available. There is not, for~~
example, an existing database that provides accurate and timely information on individualsexample, an existing database that provides accurate and timely information on individuals who who
provide unpaid caregiving or kinship care. Some taxpayers could see requests for information that provide unpaid caregiving or kinship care. Some taxpayers could see requests for information that
is not necessary to administer tax law as overly intrusive. This could have unintended is not necessary to administer tax law as overly intrusive. This could have unintended
consequences, like discouraging participation in the tax system (seeconsequences, like discouraging participation in the tax system (see “Case Study 1B | Race,
Ethnicity, and the Tax Code”). ).
Policy Considerations
If families are preparing their returns and already providing information about their income and If families are preparing their returns and already providing information about their income and
family composition for tax purposes, using the federal income tax return may be an efficient way family composition for tax purposes, using the federal income tax return may be an efficient way
for families to receive cash assistance. In the words of economist for families to receive cash assistance. In the words of economist ~~Bil~~ Bill Gale, the income tax (and Gale, the income tax (and
the 1040) can provide “‘one stop’ shopping that enables people to receive, in one the 1040) can provide “‘one stop’ shopping that enables people to receive, in one ~~fel~~ fell swoop, the swoop, the
benefits of numerous social policies and economic incentives.”7benefits of numerous social policies and economic incentives.”7
Refundable Tax Credits Are Not Taxable and Do Not Reduce the Amount of
Other Need-Tested Federal Benefits
At the federal level, At the federal level, refundable tax credits for individuals are not considered taxable income.refundable tax credits for individuals are not considered taxable income. This is the case This is the case
regardlessregardless of whether the credit is claimed on a tax return or issued as advance payments. In addition, refundable of whether the credit is claimed on a tax return or issued as advance payments. In addition, refundable
tax credits do not count as income,tax credits do not count as income, or as resourcesor as resources for a 12-month period,for a 12-month period, in determiningin determining ~~eligibility~~ eligibility for or the for or the
amount of assistance provided by any federal or amount of assistance provided by any federal or ~~federal y~~federally funded need-tested public benefit program.8 funded need-tested public benefit program.8
The treatment of assistance provided under other benefit programs varies,The treatment of assistance provided under other benefit programs varies, depending on the particulars of each depending on the particulars of each
program and whether Congress has program and whether Congress has ~~specifical y~~ specifically addressed the treatment in law. addressed the treatment in law.
In contrast, to receive other forms of assistance, a household may need to In contrast, to receive other forms of assistance, a household may need to ~~fil~~ fill out a separate out a separate
applicationapplication and have its eligibilityand have its eligibility information (including income) verified before a benefit is information (including income) verified before a benefit is
issued, sometimes with a face-to-face interview. This may improve compliance with a particular issued, sometimes with a face-to-face interview. This may improve compliance with a particular
program’s eligibilityprogram’s eligibility requirements, for example by helping administrators more accurately requirements, for example by helping administrators more accurately
determine need. But it also may place more administrative burdens on applicants than determine need. But it also may place more administrative burdens on applicants than ~~fil ing~~filling a tax a tax
returnreturn ~~and may also increase overal program administration costs.~~, may increase overall program administration costs, and may result in increased social stigma compared to claiming tax benefits.9 Conversely, while using tax Conversely, while using tax
returns as the application for tax benefits may be less burdensome to households and less costly returns as the application for tax benefits may be less burdensome to households and less costly
for the government in terms of upfront administration costs, it may be an imperfect instrument for for the government in terms of upfront administration costs, it may be an imperfect instrument for
determining eligibility,determining eligibility, which could contribute to households erroneously receiving these which could contribute to households erroneously receiving these
benefits.benefits.910
And some dispute how simple the process of using a tax return to apply for benefits And some dispute how simple the process of using a tax return to apply for benefits ~~actual y~~actually is. is.
For some families, preparing and filing a return may be complicated, For some families, preparing and filing a return may be complicated, ~~especial y~~especially in terms of in terms of
understanding tax terminology and eligibilityunderstanding tax terminology and eligibility rules for tax benefits (e.g., what is a dependent for rules for tax benefits (e.g., what is a dependent for

~~7 William G. Gale,~~ 7 William G. Gale, Are Taxes Complicated? Compared to What?, , ~~T ax~~Tax Policy Center, Policy Center, ~~T axVox~~TaxVox Blog, April 15, 2022, Blog, April 15, 2022,
https://www.taxpolicycenter.org/taxvox/are-taxes-complicated-compared-whathttps://www.taxpolicycenter.org/taxvox/are-taxes-complicated-compared-what . .
8 See8 See Internal Revenue Code (IRC) §6409. Internal Revenue Code (IRC) §6409.
9 9 ~~T he IRS T axpayer Advocate has argued~~ For example, see Jennifer Sykes et al., “Dignity and Dreams: What the Earned Income Tax Credit (EITC) Means to Low-Income Families,” American Sociological Review, vol. 80, no. 2 (August 2015), pp. 243-267. 10 The IRS Taxpayer Advocate has argued that using tax returns as the “application” for the earned income tax credit that using tax returns as the “application” for the earned income tax credit
((~~EIT C~~EITC) rather than a traditional screening process results in low cost with high participation as well as a higher risk of ) rather than a traditional screening process results in low cost with high participation as well as a higher risk of
improper payments. “Current administration costs are less than 1% of benefits delivered. improper payments. “Current administration costs are less than 1% of benefits delivered. ~~T his is~~ This is quite different from quite different from
other non-tax benefits programs in which administrative costs related to determining eligibility can range as high as other non-tax benefits programs in which administrative costs related to determining eligibility can range as high as
20% of program expenditures.” Written Statement of Nina E. Olson, National 20% of program expenditures.” Written Statement of Nina E. Olson, National ~~T axpayer~~Taxpayer Advocate, in U.S. Congress, Advocate, in U.S. Congress,
HouseHouse Committee on Ways and Means, Subcommittee on Oversight, Improper Payments in the Administration of Committee on Ways and Means, Subcommittee on Oversight, Improper Payments in the Administration of
RefundableRefundable Credits, hearings, 112th Cong., 1st sess.,Credits, hearings, 112th Cong., 1st sess., May 25, 2011, p. 9, https://www.irs.gov/pub/tas/testimony-written-May 25, 2011, p. 9, https://www.irs.gov/pub/tas/testimony-written-
wm_oversightwm_oversight -improper_payments-5-25-2011.pdf. -improper_payments-5-25-2011.pdf.
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tax purposes, what is adjusted gross income). tax purposes, what is adjusted gross income).1011 This can be This can be ~~especial y~~especially true of child tax benefits true of child tax benefits
claimed by more complex or dynamic families (e.g., multigenerational families or families where claimed by more complex or dynamic families (e.g., multigenerational families or families where
members move in and out of a household during the year). In these families, more than one adult members move in and out of a household during the year). In these families, more than one adult
may be able to claim a child for a given tax credit and family members may struggle with may be able to claim a child for a given tax credit and family members may struggle with
understanding who can claim the child for a particular benefit.understanding who can claim the child for a particular benefit.1112 This may lead families to make This may lead families to make
mistakes when preparing their returns or turn to paid preparers for help, which could create new mistakes when preparing their returns or turn to paid preparers for help, which could create new
policy concerns including increased scrutiny of benefit recipients and reduced benefit amounts. It policy concerns including increased scrutiny of benefit recipients and reduced benefit amounts. It
may also increase the opportunities for individuals to fraudulently claim tax benefits for which may also increase the opportunities for individuals to fraudulently claim tax benefits for which
they are not eligible.they are not eligible.
Case Study 1A | EITC Improper Payments and Verifying Where a Child Lives
The lack of accurate third-party data, especial y The lack of accurate third-party data, especial y those tied to children,those tied to children, makes certain tax benefits difficult for the makes certain tax benefits difficult for the
IRS to administer.IRS to administer. A primeA prime example of this issue is the lack of accurate third-party data to verifyexample of this issue is the lack of accurate third-party data to verify that a child that a child
claimedclaimed by a taxpayer for the earned income tax credit (EITC) meets the residencyby a taxpayer for the earned income tax credit (EITC) meets the residency test. Taxpayers state on their test. Taxpayers state on their
returns that the children they are claiming for the credit have lived with them for at least half of the calendar year. returns that the children they are claiming for the credit have lived with them for at least half of the calendar year.
But as the National Taxpayer Advocate noted in a 2019 report:But as the National Taxpayer Advocate noted in a 2019 report:1213
the IRS cannot independently verify that a child meets the IRS cannot independently verify that a child meets al all the current EITC qualifying child rules, the current EITC qualifying child rules,
especial yespecial y the residency requirement,the residency requirement, during filingduring filing season.season. ~~There is~~ There is no national,no national, authoritative, authoritative,
and timelyand timely database that indicates where and with whom a child livesdatabase that indicates where and with whom a child lives during a calendar year for during a calendar year for
the purposes of administeringthe purposes of administering this tax benefit, making accurate verification of this requirementthis tax benefit, making accurate verification of this requirement
difficult. Nor do we believe U.S. taxpayers would tolerate the government creating such a difficult. Nor do we believe U.S. taxpayers would tolerate the government creating such a
database. database.
Notably, IRS research Notably, IRS research also indicates that taxpayers who claim children who do not meet the EITC’s eligibility also indicates that taxpayers who claim children who do not meet the EITC’s eligibility
requirementsrequirements are the largest source of improperare the largest source of improper payments of the credit in dol ar terms,payments of the credit in dol ar terms, and the most common and the most common
eligibilityeligibility ~~requirement~~ requirement that they fail to meet is the residency requirement.that they fail to meet is the residency requirement.13 14 (Improper claims(Improper claims may be intentional may be intentional
fraud or honest mistakes.)fraud or honest mistakes.) This suggests that tax benefits that relyThis suggests that tax benefits that rely on information that is difficult to verify on information that is difficult to verify
independently could be moreindependently could be more prone to erroneousprone to erroneous claims,claims, which could makewhich could make the benefits (and their recipients) the benefits (and their recipients)
moremore prone to scrutiny. For example,prone to scrutiny. For example, returns with EITC claimsreturns with EITC claims tend to be audited moretend to be audited more frequently than non-EITC frequently than non-EITC
returns.returns.1415
Case Study 1B | Race, Ethnicity, and the Tax Code
Some Some ~~policymakers~~ policymakers are interested in understanding the impact of tax provisionsare interested in understanding the impact of tax provisions on familieson families and individuals ofand individuals of
different races and ethnicities.different races and ethnicities.15 16 While tax provisions are not explicitly designed to benefit individuals of certain While tax provisions are not explicitly designed to benefit individuals of certain

~~10 Gabriel~~ 11 Gabriel Zucker, CassandraZucker, Cassandra Robertson, and Nina Olson, “Introduction: Problems with IRSRobertson, and Nina Olson, “Introduction: Problems with IRS Benefit Delivery and Goals Benefit Delivery and Goals
of Reform,” in of Reform,” in The IRS as a Benefits Administrator: An Agenda to Transform the Delivery of EIP, EITC, and CTC, ,
NewNew America, NewAmerica, New Practice Lab, March 24, 2021, https://www.newamerica.org/new-practice-lab/reports/the-irs-as-a-Practice Lab, March 24, 2021, https://www.newamerica.org/new-practice-lab/reports/the-irs-as-a-
benefits-administrator/. benefits-administrator/.
11 12 For more information, see CRS For more information, see CRS Insight IN11634, Insight IN11634, Child Tax Benefits and Children with Complex or Dynamic Living
~~Arrangem ents~~Arrangements, by Patrick A. Landers and Margot L. Crandall-Hollick;, by Patrick A. Landers and Margot L. Crandall-Hollick; and Elaine Maag,and Elaine Maag, H. Elizabeth Peters, and Sara H. Elizabeth Peters, and Sara
Edelstein, Increasing Family Complexity and Volatility: Edelstein, Increasing Family Complexity and Volatility: ~~T he~~The Difficulty in Determining Child Difficulty in Determining Child ~~T ax~~Tax Benefits, Benefits, ~~T ax~~Tax Policy Policy
Center, March 3, 2016, https://www.taxpolicycenter.org/publications/increasing-family-complexity-and-volatility-Center, March 3, 2016, https://www.taxpolicycenter.org/publications/increasing-family-complexity-and-volatility-
difficulty-determining-child-tax-benefits/full. difficulty-determining-child-tax-benefits/full.
~~12 T axpayer~~13 Taxpayer Advocate Service, Advocate Service, Earned Income Tax Credit: Making the EITC Work for Taxpayers and the Government, ,
Objectives Report to Congress FY2020, Volume 3, JulyObjectives Report to Congress FY2020, Volume 3, July 2019, p. 12. 2019, p. 12.
1314 Internal Revenue Service (IRS), Internal Revenue Service (IRS), Compliance Estimates for the Earned Income Tax Credit Claimed on 2006 -2008
Returns, Publication 5162, August 2014, http://www.irs.gov/pub/irs-soi/, Publication 5162, August 2014, http://www.irs.gov/pub/irs-soi/~~EIT CComplianceStudyT Y2006-2008.pdf.~~
~~14 See CRS~~ EITCComplianceStudyTY2006-2008.pdf. 15 See CRS Insight IN11952, Insight IN11952, Audits of EITC Returns: By the Numbers, by Margot L. Crandall-Hollick. , by Margot L. Crandall-Hollick.
1516 For example, see Letter from Richard E. Neal, Chairman of the Committee on Ways and Means, and Ayanna For example, see Letter from Richard E. Neal, Chairman of the Committee on Ways and Means, and Ayanna
Pressley, Member of Congress,Pressley, Member of Congress, ~~to T he~~ to The Honorable Steven T Honorable Steven T . Mnuchin, Secretary of the U.S. Department of the . Mnuchin, Secretary of the U.S. Department of the
~~T reasury~~Treasury, July 31, 2020, https://waysandmeans.house.gov/sites/democrats.waysandmeans.house.gov/files/documents/, July 31, 2020, https://waysandmeans.house.gov/sites/democrats.waysandmeans.house.gov/files/documents/
2020.07.31%20Letter%20to%20Treasury%20CARES-IRC%20FINAL.pdf. Also see Executive Order 13985, 2020.07.31%20Letter%20to%20Treasury%20CARES-IRC%20FINAL.pdf. Also see Executive Order 13985,
“Advancing Racial“Advancing Racial Equity and Support for Underserved Communities Equity and Support for Underserved Communities ~~T hrough~~Through the Federal Government.” the Federal Government.”
Congressional Research Service Congressional Research Service
4 4

Using the Federal Income Tax System to Deliver Cash Assistance to Families

races or ethnicities, races or ethnicities, some researcherssome researchers have found that “wealthy, morehave found that “wealthy, more ~~likely~~ likely White and male,White and male, households may households may
disproportionatelydisproportionately benefit from certain tax provisions.”benefit from certain tax provisions.”1617
Taxpayers do not directly report race and ethnicity data and someTaxpayers do not directly report race and ethnicity data and some other demographic data on their federal other demographic data on their federal
income tax returns, making it difficult to accurately assess these policies’income tax returns, making it difficult to accurately assess these policies’ impacts by race and ethnicity. In a 2022 impacts by race and ethnicity. In a 2022
report, the Governmentreport, the Government Accountability Office (GAO) notedAccountability Office (GAO) noted:
According to the According to the Department of the Treasury, IRS cannotDepartment of the Treasury, IRS cannot col ect demographic data under col ect demographic data under
current law unlesscurrent law unless such data are necessary for administeringsuch data are necessary for administering the tax code. As a result,the tax code. As a result, analysts analysts
have limited ability to assess the effects of taxhave limited ability to assess the effects of tax laws, including COVID-19-related taxlaws, including COVID-19-related tax relief relief
provisions,provisions, by demographics such as households’ race, ethnicity, and sex. by demographics such as households’ race, ethnicity, and sex.
Many argue that asking for this information directly on tax forms could have drawbacks, including increasing the Many argue that asking for this information directly on tax forms could have drawbacks, including increasing the
chances of confidential tax data being leaked and reducing voluntary taxpayer compliance.chances of confidential tax data being leaked and reducing voluntary taxpayer compliance.17
18 Due to the legal, administrative,Due to the legal, administrative, and policy issuesand policy issues around directlyaround directly asking taxpayers to provide their race/ethnicity asking taxpayers to provide their race/ethnicity
data, researchers,data, researchers, including those at the Urban Institute,including those at the Urban Institute,1819 Congressional Congressional Budget Office (CBO),Budget Office (CBO),1920 GAO, GAO,20 21 and and
Treasury,Treasury,2122 are exploring ways to model are exploring ways to model the impact of tax provisions by race and ethnicity using data matching and/or imputation. For example, a January 2023 Office of Tax Analysis (OTA) working paper used a novel method of imputing race and Hispanic origin—an extension of a technique called Bayesian Improved First Name Surname Geocoding (BIFSG)—to estimate the distribution of certain tax expenditures by race and ethnicity. 23 Issue 2: Not All Households File a Federal Income Tax Return Generally, households must file an annual income tax return, in order to receive tax benefits. And many households—including low-income households with workers—may file a federal income tax return to claim refunds of over-withheld income taxes and/or refundable tax credits.24 But not 17 GAO, ~~the impact of tax provisions by race and ethnicity using data matching~~
~~and/or imputation~~
~~Issue 2: Not All Households File a Federal Income~~
~~Tax Return~~
~~General y, households must file an annual income tax return, in order to receive tax benefits. But~~
~~not al households file tax returns, in many cases because their incomes are too low to require~~
~~filing. Specifical y, while any household can file a federal income tax return, general y only those~~
~~that have sufficient income to owe income taxes—more than $13,850 for single taxpayers,~~
~~$20,800 for single parents, and $27,700 for married couples in 2023 (i.e., the standard deduction~~
~~amount in 2023)—must file.22 Households with income below these levels general y would have~~
~~no “taxable income” and owe no income tax (even before taking credits into account). Hence,~~
~~from the perspective of revenue collection—the main purpose of the tax system—it makes little~~
~~sense to require them to file given the burden and costs of doing so. The IRS estimates that it~~

~~16 GAO,~~ Tax Equity: Lack of Data Limits Ability to Analyze Effects of Tax Policies on Households by Demographic
Characteristics,, GAO-22-104553, May 2022, p. 6, https://www.gao.gov/assets/gao-22-104553.pdf. GAO-22-104553, May 2022, p. 6, https://www.gao.gov/assets/gao-22-104553.pdf.
1718 According to GAO, According to GAO, “Most experts we interviewed did“Most experts we interviewed did not favor this method [collecting demographic data on tax not favor this method [collecting demographic data on tax
forms]. forms]. ~~T hey~~They cited concerns with public cited concerns with public reaction and the potential for inadvertent consequences of IRSreaction and the potential for inadvertent consequences of IRS examiners examiners
having accesshaving access to that information.” GAO, to that information.” GAO, Tax Equity: Lack of Data Limits Ability to Analyze Effects of Tax Policies on
Households by ~~Dem ographic~~Demographic Characteristics, GAO-22-104553, May 2022, p. 14, https://www.gao.gov/assets/gao-22-, GAO-22-104553, May 2022, p. 14, https://www.gao.gov/assets/gao-22-
104553.pdf. 104553.pdf.
~~18 See T racy~~ 19 See Tracy Gordon and Aravind Boddupalli, Gordon and Aravind Boddupalli, New Data Tools and Methods Can Help Federal Policymakers Create
More Equitable Tax Policy, , ~~T ax~~Tax Policy Center, March 22, 2021, https://www.taxpolicycenter.org/taxvox/new-data- Policy Center, March 22, 2021, https://www.taxpolicycenter.org/taxvox/new-data-
tools-and-methods-can-help-federal-policymakers-create-more-equitable-tax-policy. tools-and-methods-can-help-federal-policymakers-create-more-equitable-tax-policy.
1920 U.S. U.S. Congressional BudgetCongressional Budget Office, Office, Analyzing How the Effects of Federal Policies May Differ by Race and Ethnicity, ,
May 6, 2022, https://www.cbo.gov/publication/58030. May 6, 2022, https://www.cbo.gov/publication/58030.
2021 GAO, GAO, Tax Equity: Lack of Data Limits Ability to Analyze Effects of Tax Policies on Households by Demographic
Characteristics,, GAO-22-104553, May 2022, https://www.gao.gov/assets/gao-22-104553.pdf. GAO-22-104553, May 2022, https://www.gao.gov/assets/gao-22-104553.pdf.
21 22 Deputy Secretary Wally Adeyemo and Assistant Secretary for Deputy Secretary Wally Adeyemo and Assistant Secretary for ~~T ax~~Tax Policy Lily Batchelder, Policy Lily Batchelder, Advancing Equity
Analysis in Tax Policy, U.S. Department of the , U.S. Department of the ~~T reasury~~Treasury, December 14, 2021, https://home.treasury.gov/news/featured-, December 14, 2021, https://home.treasury.gov/news/featured-
stories/advancing-equity-analysis-in-tax-policy. stories/advancing-equity-analysis-in-tax-policy.
~~22 For details on 2021 filing requirements for most taxpayer, as well as exceptions, see IRS,~~ ~~Dependents, Standard~~
~~Deduction, and Filing Inform ation for Use in Preparing 2021 Returns, Publication 501, June 28, 2022,~~
~~https://www.irs.gov/pub/irs-pdf/p501.pdf.~~
~~Congressional Research Service~~
5

~~Using the Federal Income Tax System to Deliver Cash Assistance to Families~~

~~takes the average taxpayer nine hours to prepare and file an individual~~ 23 Julie-Anne Cronin, Portia DeFilippes, and Robin Fisher, Tax Expenditures by Race and Hispanic Ethnicity: An Application of the U.S. Treasury Department's Race and Hispanic Ethnicity Imputation, Department of the Treasury, Office of Tax Analysis, Working Paper 122, January 2023, https://home.treasury.gov/system/files/131/WP-122.pdf. 24 For example, IRS data for the 2022 filing season indicate that among households with adjusted gross income (AGI) between $1 and $25,000 who filed a 2021 federal income tax return (representing about 28% of all 2021 individual income tax returns during that period), the majority (about 60%) had no income tax liability before any tax credits. Hence, even though many low-income taxpayers have income low enough that they do not owe taxes, many still file. (Among the 40% who did have a precredit income tax liability, the average amount they owed precredit was about $550 per return.) Of note, once credits were applied, 84% of taxpayers in this income category were due an income tax Congressional Research Service 5 Using the Federal Income Tax System to Deliver Cash Assistance to Families all households file tax returns, in many cases because their incomes are too low to require filing. Specifically, while any household can file a federal income tax return, generally only those that have sufficient income to owe income taxes—more than $13,850 for single taxpayers, $20,800 for single parents, and $27,700 for married couples in 2023 (i.e., the standard deduction amount in 2023)—must file.25 Households with income below these levels generally would have no “taxable income” and owe no income tax (even before taking credits into account). Hence, from the perspective of revenue collection—the main purpose of the tax system—it makes little sense to require them to file given the burden and costs of doing so. The IRS estimates that it takes the average taxpayer nine hours to prepare and file an individual return, costing on average return, costing on average
$160.$160.23 26 Accordingly, for households with no obligation to file a tax return, preparing and filing a Accordingly, for households with no obligation to file a tax return, preparing and filing a
federal income tax return may be a particularly intimidatingfederal income tax return may be a particularly intimidating application instrument. (Some application instrument. (Some
~~individuals~~ individuals and households fail to file, even when they are required to do so, because they are and households fail to file, even when they are required to do so, because they are
attempting to evade paying the taxes they owe. Data suggest tax evaders are likely a attempting to evade paying the taxes they owe. Data suggest tax evaders are likely a ~~smal share~~
~~of al~~ small share of all nonfilers.nonfilers.2427) )
Current estimates indicate that a Current estimates indicate that a ~~smal~~ small share of people in the United States are nonfilers, meaning share of people in the United States are nonfilers, meaning
they do not appear anywhere on an income tax return as either the primary filer, a spouse, or a they do not appear anywhere on an income tax return as either the primary filer, a spouse, or a
dependent. The Tax Policy Center estimates that about 15 dependent. The Tax Policy Center estimates that about 15 ~~mil ion~~million households did not file an households did not file an
income tax return in 2019, while a 2014 report estimated the nonfiling population included about income tax return in 2019, while a 2014 report estimated the nonfiling population included about
30 30 ~~mil ion~~ million individuals.individuals.2528 A 2017 Congressional Budget Office (CBO) study of 2006 tax data A 2017 Congressional Budget Office (CBO) study of 2006 tax data
estimated that approximately 17% of households in the United States did not file an income tax estimated that approximately 17% of households in the United States did not file an income tax
return. According to this study, nonfiling households represented 14% of the U.S. population. Put return. According to this study, nonfiling households represented 14% of the U.S. population. Put
another way, about 86% of another way, about 86% of ~~al individuals~~ all individuals in the United States were included on a tax return as in the United States were included on a tax return as
either the primary taxpayer, a spouse, or a dependent.either the primary taxpayer, a spouse, or a dependent.2629 A 2014 report using 2011 tax data A 2014 report using 2011 tax data
estimated about 10% of the U.S. population did not “appear” on a federal individualestimated about 10% of the U.S. population did not “appear” on a federal individual income tax income tax
return.return.2730
The 2017 CBO study estimated that of The 2017 CBO study estimated that of al all nonfilers, the largest share were unmarried adults under nonfilers, the largest share were unmarried adults under
65 years old without any dependents (37%), followed by adults 65 years or older (31%).65 years old without any dependents (37%), followed by adults 65 years or older (31%).28
~~Nonfiling households had lower incomes on average and were more likely to receive federal~~
~~assistance than their tax-filing counterparts.29 Overal , estimates indicate that nonfilers are a~~
~~diverse group made up of low-income “students, older adults living on Social Security, people on~~
~~public assistance or Supplemental Security Income,” and working people with incomes below the~~
~~filing requirement.30 The 2014 study suggested that younger nonfilers were more likely to be~~
~~male, while older nonfilers were more likely to be female. Broadly, these results are similar to~~
~~older research on nonfilers done by the U.S. Treasury.31~~

~~23 IRS,~~ 31 refund. See Internal Revenue Service, SOI Tax Stats - Filing Season Statistics, Table 1. All Individual Returns: Selected Income Items, Adjustments, Credits, and Taxes, by Size of Adjusted Gross Income (Through Filing Season Cycle 47), 2022, https://www.irs.gov/statistics/filing-season-statistics. 25 For details on 2021 filing requirements for most taxpayer, as well as exceptions, see IRS, Dependents, Standard Deduction, and Filing Information for Use in Preparing 2021 Returns, Publication 501, June 28, 2022, https://www.irs.gov/pub/irs-pdf/p501.pdf. 26 IRS, 1040 (and 1040-SR Instructions) Tax Year 2021, December 21, 2021, p. 107, https://www.irs.gov/pub/irs-pdf/, December 21, 2021, p. 107, https://www.irs.gov/pub/irs-pdf/
i1040gi.pdf. i1040gi.pdf.
~~24 T axpayers~~ 27 Taxpayers who owe taxes but do not file are a relatively small contributor to the tax gap—about $39 billion of a who owe taxes but do not file are a relatively small contributor to the tax gap—about $39 billion of a
grossgross tax gap of $496 billion, or 8%—according to IRStax gap of $496 billion, or 8%—according to IRS estimates. Seeestimates. See IRS,IRS, Tax Gap ~~Estim ates~~Estimates for Tax Years 2014-
2016, Publication 1415 (Rev. 8-2022), August 2022, https://www.irs.gov/pub/irs-pdf/p1415.pdf. , Publication 1415 (Rev. 8-2022), August 2022, https://www.irs.gov/pub/irs-pdf/p1415.pdf.
2528 Howard Howard Gleckman and Elaine Maag, Gleckman and Elaine Maag, Free File Is An Easy Way For Government To Get Coronavirus Payments To
Non-Filers, , ~~T ax~~Tax Policy Center, March 30, 2020, https://www.taxpolicycenter.org/taxvox/free-file-easy-way- Policy Center, March 30, 2020, https://www.taxpolicycenter.org/taxvox/free-file-easy-way-
governmentgovernment -get-coronavirus-payments-non-filers; and James Cilke, -get-coronavirus-payments-non-filers; and James Cilke, The Case of the Missing Strangers: What We Know
and Don’t Know About Non-Filers, paper presented at the 107th Annual Conference of the National , paper presented at the 107th Annual Conference of the National ~~T ax~~Tax Association, Association,
Santa Fe, NM, November 13-15, 2014, http://tinyurl.com/y7chw254. Santa Fe, NM, November 13-15, 2014, http://tinyurl.com/y7chw254.
~~26 See T able~~ 29 See Table 5 in Shannon Mok, 5 in Shannon Mok, An Evaluation of Using Linked Survey and Administrative Data to Impute Nonfilers to
the Population of Tax Return Filers,, CBO, Working Paper 2017-06, September 2017, p. 39. CBO, Working Paper 2017-06, September 2017, p. 39.
2730 James Cilke, James Cilke, The Case of the Missing Strangers: What We We Know and Don’t Know About Non-Filers, paper presented , paper presented
at the 107th Annual Conference of the National at the 107th Annual Conference of the National ~~T ax~~Tax Association, Santa Fe, NM, November 13-15, 2014, Association, Santa Fe, NM, November 13-15, 2014,
http://tinyurl.com/y7chw254. http://tinyurl.com/y7chw254.
~~28 See T able~~31 See Table 10 in Shannon Mok, 10 in Shannon Mok, An Evaluation of Using Linked Survey and Administrative Data to Impute Nonfilers
~~to the Population of Tax Return Filers, CBO, Working Paper 2017-06, September 2017, p. 44.~~
~~29 See T able 6 and T able 7 in Shannon Mok,~~ ~~An Evaluation of Using Linked Survey and Administrative Data to Impute~~
~~Nonfilers to the Population of Tax Return Filers, CBO, Working Paper 2017-06, September 2017, pp. 40-41.~~
~~30 Howard Gleckman and Elaine Maag,~~ ~~Free File Is An Easy Way For Government To Get Coronavirus Payments To~~
~~Non-Filers, T ax Policy Center, March 30, 2020, https://www.taxpolicycenter.org/taxvox/free-file-easy-way-~~
~~government -get-coronavirus-payments-non-filers.~~
~~31 Jim Cilke, A Profile of Non-Filers, U.S. Department of the T reasury, Office of T ax Analysis, July 1998,~~
~~Congressional Research Service~~
6

~~link to page 11 link to page 12 link to page 12~~ ~~Using the Federal Income Tax System to Deliver Cash Assistance to Families~~

Congressional Research Service 6 link to page 12 link to page 13 link to page 13 Using the Federal Income Tax System to Deliver Cash Assistance to Families Nonfiling households had lower incomes on average and were more likely to receive federal assistance than their tax-filing counterparts.32 Overall, estimates indicate that nonfilers are a diverse group made up of low-income “students, older adults living on Social Security, people on public assistance or Supplemental Security Income,” and working people with incomes below the filing requirement.33 The 2014 study suggested that younger nonfilers were more likely to be male, while older nonfilers were more likely to be female. Broadly, these results are similar to older research on nonfilers done by the U.S. Treasury.34 Policy Considerations
The federal income tax system is not a universal system, with many nonparticipating households The federal income tax system is not a universal system, with many nonparticipating households
being very low income. This may complicate policymakers’ goals to create near-universal being very low income. This may complicate policymakers’ goals to create near-universal
programs and/or reach the lowest-income households. Policymakers may try to address this programs and/or reach the lowest-income households. Policymakers may try to address this
limitationlimitation in a variety of ways. For example, they may try to encourage nonparticipating in a variety of ways. For example, they may try to encourage nonparticipating
households to households to ~~manual y~~manually provide information to the IRS, effectively having these households file provide information to the IRS, effectively having these households file
income tax returns (see income tax returns (see “Case Study 2A | Nonfiler Portals”). This solution, while broadening the ). This solution, while broadening the
information availableinformation available to the tax system, would add to the administrative burden on low-income to the tax system, would add to the administrative burden on low-income
households. Policymakers could attempt to lower this burden with easier tax preparation and households. Policymakers could attempt to lower this burden with easier tax preparation and
filing, including one-to-one outreach and support like “navigators.”filing, including one-to-one outreach and support like “navigators.”3235 Alternatively, policymakers Alternatively, policymakers
could attempt to use data from other federal or state programs to either administer a tax program could attempt to use data from other federal or state programs to either administer a tax program
or conduct outreach to certain households (seeor conduct outreach to certain households (see “Case Study 2B | Using Data from Other Programs
to Administer Tax Benefits”). This approach could reduce the administrative burden on . This approach could reduce the administrative burden on
individuals, but might lead to more errors in administering the program.individuals, but might lead to more errors in administering the program. Since take-up for many needs-tested benefits is not universal—and data suggest it is significantly lower than take-up of refundable tax credits—there may also be concerns that information from these programs would itself be inadequate to make tax-based aid universal.36 Alternatively,
~~Alternatively,~~ policymakers may consider designing tax-based assistance to target families most policymakers may consider designing tax-based assistance to target families most
~~likely~~ likely to file tax returns, while trying to reach the lowest-income households via an alternative to file tax returns, while trying to reach the lowest-income households via an alternative
policy mechanism, such as a more traditional cash assistance program. In considering whether to policy mechanism, such as a more traditional cash assistance program. In considering whether to
use an alternative system, policymakers may consider the tax benefit’s structure and duration. use an alternative system, policymakers may consider the tax benefit’s structure and duration.
~~Some argue that in the short and potential y medium term, the IRS may be best suited to deliver~~
certain types of cash assistance quickly because the agency already possesses critical data on most
~~U.S. households—including data on family structure, marital status, income, and where to send~~
~~payments.33 Others argue that in the longer term, with time to develop the appropriate~~
~~infrastructure and data sharing, other agencies like the Social Security Administration (SSA)~~
~~could be better suited than the IRS to provide certain forms of ongoing cash assistance to~~
~~families.34 Some may argue that joint administration of cash assistance programs between the IRS~~
~~and another agency could succeed over the longer term.~~
~~Case Study 2A | Nonfiler Portals~~
~~Nonfilers can receive tax benefits by manual y providing information to the IRS that the IRS can then use to~~
~~administer and issue the benefits. During the COVID-19 pandemic, the IRS developed “nonfiler portals” so low-~~
~~income nonfilers could receive stimulus check payments and advance payments of the child credit. Unlike data~~
~~from a different program that may be ill suited to administer a tax benefit (see Case Study 2B), the data from~~

~~https://home.treasury.gov/system/files/131/WP-78.pdf.~~
~~32 T he~~ to the Population of Tax Return Filers, CBO, Working Paper 2017-06, September 2017, p. 44. 32 See Table 6 and Table 7 in Shannon Mok, An Evaluation of Using Linked Survey and Administrative Data to Impute Nonfilers to the Population of Tax Return Filers, CBO, Working Paper 2017-06, September 2017, pp. 40-41. 33 Howard Gleckman and Elaine Maag, Free File Is An Easy Way For Government To Get Coronavirus Payments To Non-Filers, Tax Policy Center, March 30, 2020, https://www.taxpolicycenter.org/taxvox/free-file-easy-way-government-get-coronavirus-payments-non-filers. 34 Jim Cilke, A Profile of Non-Filers, U.S. Department of the Treasury, Office of Tax Analysis, July 1998, https://home.treasury.gov/system/files/131/WP-78.pdf. 35 The New America Foundation’s qualitative research indicates that there are a number of logistical barriers to getting New America Foundation’s qualitative research indicates that there are a number of logistical barriers to getting
nonfilers to file a return, includingnonfilers to file a return, including that many think that they are not allowed to file a return. that many think that they are not allowed to file a return. ~~T his~~This research was research was
conducted in regard to the stimulus checks enacted duringconducted in regard to the stimulus checks enacted during the COVID-19 pandemic, butthe COVID-19 pandemic, but may includemay include lessons more lessons more
broadly applicable to nonfilers. See Gabrielbroadly applicable to nonfilers. See Gabriel Zucker and Lindsey Wagner, Zucker and Lindsey Wagner, Talking to Non-Filers: Evidence from
Qualitative Research with Families Who Don’t Regularly File Taxes, New, New America, JulyAmerica, July 16, 2021, 16, 2021,
https://www.newamerica.org/new-practice-lab/blog/talking-to-non-filers/. For an example of one-to-one outreach, see https://www.newamerica.org/new-practice-lab/blog/talking-to-non-filers/. For an example of one-to-one outreach, see
Fay Walker, Mary Bogle, and Elaine Maag, Fay Walker, Mary Bogle, and Elaine Maag, Early Lessons on Increasing Participation in The Child Tax Credit, Urban , Urban
Institute, May 18, 2022, https://www.urban.org/research/publication/early-lessons-increasing-participation-child-tax-Institute, May 18, 2022, https://www.urban.org/research/publication/early-lessons-increasing-participation-child-tax-
credit. credit.
3336 See See, for example, Figure 1 on page 3 of Taxpayer Advocate Service, Earned Income Tax Credit: Making the EITC Work for Taxpayers and the Government, Objectives Report to Congress FY2020, Volume 3, July 2019. Congressional Research Service 7 Using the Federal Income Tax System to Deliver Cash Assistance to Families Some argue that in the short and potentially medium term, the IRS may be best suited to deliver certain types of cash assistance quickly because the agency already possesses critical data on most U.S. households—including data on family structure, marital status, income, and where to send payments.37 Others argue that in the longer term, with time to develop the appropriate infrastructure and data sharing, other agencies like the Social Security Administration (SSA) could be better suited than the IRS to provide certain forms of ongoing cash assistance to families.38 Some may argue that joint administration of cash assistance programs between the IRS and another agency could succeed over the longer term. In such cases, policymakers may want to look at existing jointly administered programs like the health insurance premium assistance tax credit, which is administered by the IRS and the Department of Health and Human Services (HHS). Case Study 2A | Nonfiler Portals Nonfilers can receive tax benefits by manually providing information to the IRS that the IRS can then use to administer and issue the benefits. During the COVID-19 pandemic, the IRS developed “nonfiler portals” so low-income nonfilers could receive stimulus check payments and advance payments of the child credit. Unlike data from a different program that may be il suited to administer a tax benefit (see Case Study 2B), the data from these nonfiler portals were used to effectively create a simplified income tax return and hence directly administer tax benefits.39 Unlike administrative data from other programs, nonfiler portals can request the exact information that the IRS needs to determine eligibility for and the amount of a payment. But because they require taxpayers to manually provide information, they may have limited benefit on their own—that is, without outreach and/or assistance—to households who historically do not interact with the tax system. ~~for example, Elaine Maag, Should IRS or Social Security Administer A Monthly Child Benefit? T ax Policy~~
~~Center, T axVox Blog, February 17, 2021, https://www.taxpolicycenter.org/taxvox/should-irs-or-social-security-~~
~~administer-monthly-child-benefit .~~
~~34 See, for example, Sam Hammond and Elaine Maag,~~ ~~Issues in Child Benefit Administration in the United States:~~
~~Im agining the Next Stage of the Child Tax Credit, Urban Institute, December 2021.~~
~~Congressional Research Service~~
7

~~Using the Federal Income Tax System to Deliver Cash Assistance to Families~~

~~these nonfiler portals were used to effectively create a simplified income tax return and hence directly administer~~
~~tax benefits.35~~
~~Unlike administrative data from other programs, nonfiler portals can request the exact information that the IRS~~
~~needs to determine eligibility for and the amount of a payment. But because they require taxpayers to manual y~~
~~provide information, they may have limited benefit on their own—that is, without outreach and/or assistance—to~~
~~households who historical y do not interact with the tax system.~~ Individuals may be confused by the tax terms Individuals may be confused by the tax terms
used or struggle if they do not speak English as a first language, have limitedused or struggle if they do not speak English as a first language, have limited access to a computer or the internet, access to a computer or the internet,
or require additional assistance.or require additional assistance. One concern with some of the nonfiler portals One concern with some of the nonfiler portals ~~initial y~~ initially deployed during the deployed during the
COVID-19 pandemic, for example, was that they wereCOVID-19 pandemic, for example, was that they were not available in Spanish and not mobilenot available in Spanish and not mobile friendly.friendly. Code for Code for
America,America, a nonprofit organization, developed an alternative mobile-friendlya nonprofit organization, developed an alternative mobile-friendly nonfiler portal for familiesnonfiler portal for families to receive to receive
the 2021 expanded child credit. The organization’s evaluation of the child tax credit nonfiler portal was that the 2021 expanded child credit. The organization’s evaluation of the child tax credit nonfiler portal was that
combining certain outreach strategiescombining certain outreach strategies with simplifiedwith simplified filing using the portal was more successful than either filing using the portal was more successful than either
strategy on its own.strategy on its own.3640
There is increased interest among someThere is increased interest among some ~~policymakers~~ policymakers in simplifyingin simplifying income tax filing for someincome tax filing for some households, households,
especial yespecial y those with relativelythose with relatively ~~simple~~ simple tax situations.tax situations.3741 Insofar as the federal government provides Insofar as the federal government provides more social more social
benefits through the tax code, nonfiler portals—and the simplifiedbenefits through the tax code, nonfiler portals—and the simplified tax returns they generate—maytax returns they generate—may be a tool to be a tool to
include nonfilersinclude nonfilers in the tax filing system.in the tax filing system. For example,For example, ~~policymakers~~ policymakers may wish to integrate aspects of nonfiler 37 See, for example, Elaine Maag, Should IRS or Social Security Administer A Monthly Child Benefit? Tax Policy Center, TaxVox Blog, February 17, 2021, https://www.taxpolicycenter.org/taxvox/should-irs-or-social-security-administer-monthly-child-benefit. 38 See, for example, Sam Hammond and Elaine Maag, Issues in Child Benefit Administration in the United States: Imagining the Next Stage of the Child Tax Credit, Urban Institute, December 2021. 39 Nina Olson, What is this thing called … Portal? Procedurally Taxing (blog), April 29, 2020, https://procedurallytaxing.com/what-is-this-thing-called-portal/. 40 Code for America, Lessons from Simplified Filing in 2021, End of Filing Season GetCTC Report, January 2022, https://files.codeforamerica.org/2022/01/15163938/lessons-from-simplified-filing-in-2021-getctc-report-january-2022.pdf. Other research suggests that having “trusted messengers” or “navigators” could help families navigate the tax system and increase uptake of benefits. For example, a brief by researchers at the Tax Policy Center highlighted the potential benefits from having nurses inform low- and middle-income families about the child tax credit, making them aware of free resources to determine their eligibility, file their taxes, and claim tax benefits. For more information, see Nikhita Airi, Luisa Godinez-Puig, and Kim Rueben, Trusted Messengers’ Role in Helping new Mothers File Taxes, Tax Policy Center, December 2022, https://www.taxpolicycenter.org/publications/trusted-messengers-role-helping-new-mothers-file-taxes/full. 41 See, for example, Lucas Goodman et al., Automatic Tax Filing: Simulating a Pre-Populated Form 1040, National Bureau of Economic Research, Working Paper no. 30008, April 2022. Congressional Research Service 8 Using the Federal Income Tax System to Deliver Cash Assistance to Families portals with partially~~may wish to integrate aspects of nonfiler~~
~~portals with partial y~~ or ful y prepopulated returns, perhaps using data from IRS information returns or other or ful y prepopulated returns, perhaps using data from IRS information returns or other
federal programs,federal programs, if feasible.if feasible.
Case Study 2B | Using Data from Other Programs to Administer Tax Benefits
A 2017 CBO study on nonfilers A 2017 CBO study on nonfilers suggests this population tends to participate in other benefit programssuggests this population tends to participate in other benefit programs ~~like~~ like Social Social
Security, Medicare,Security, Medicare, Medicaid, and SNAP at higher rates than filing households.Medicaid, and SNAP at higher rates than filing households.3842 Some Some might argue that data from might argue that data from
these programs could be used by the IRS to “find” nonfilers,these programs could be used by the IRS to “find” nonfilers, ~~either~~ either to administer a benefit directly or for outreach to administer a benefit directly or for outreach
purposes. purposes.
However,However, data fromdata from other benefit programsother benefit programs may be il suited to directly administeringmay be il suited to directly administering a tax program, in particular a tax program, in particular
because they may lack the relevant information to implementbecause they may lack the relevant information to implement a tax provision.a tax provision. Data from other programsData from other programs may use may use
different eligibilitydifferent eligibility rules,rules, different measuresdifferent measures of households and income, and different timeof households and income, and different time periods (periods ( e.g., eligibility e.g., eligibility
for tax benefits is for tax benefits is ~~typical y~~typically determined determined on an annual basis, while eligibilityon an annual basis, while eligibility for somefor some nontax benefits is determined nontax benefits is determined
on a shorter timeon a shorter time frame, such as a monthly basis). frame, such as a monthly basis).
In a 2015 study, Elaine Maag and col eaguesIn a 2015 study, Elaine Maag and col eagues from the Urban Institute examined whether SNAP administrative data from the Urban Institute examined whether SNAP administrative data
could be used to administer a tax benefit, the EITC.could be used to administer a tax benefit, the EITC.3943 Maag et al. noted a significant overlap in the population Maag et al. noted a significant overlap in the population
eligibleeligible for SNAP and the EITC in Florida,for SNAP and the EITC in Florida, where the study was conducted. However,where the study was conducted. However, the researchersthe researchers found that found that
“except in limited“except in limited circumstances,circumstances, the information that applicants report to SNAP is not detailed enough to the information that applicants report to SNAP is not detailed enough to
conclusively verifyconclusively verify ~~eligibility~~ eligibility [for the EITC].” More broadly, when discussing using SNAP data for tax benefit [for the EITC].” More broadly, when discussing using SNAP data for tax benefit
administration,administration, Maag et al. noted that from the perspectiveMaag et al. noted that from the perspective of administering tax benefits, “data are likelyof administering tax benefits, “data are likely to be to be
cumbersomecumbersome to workto work with and may not be available in a timelywith and may not be available in a timely manner.” manner.”
It is important to note that benefit programsIt is important to note that benefit programs ~~themselves~~ themselves are not universal, so administrativeare not universal, so administrative data from federaldata from federal or or
state benefits programs do not encompass the universe of nonfilers.state benefits programs do not encompass the universe of nonfilers. In particular, adults aged 18 to 64 without In particular, adults aged 18 to 64 without
disabilitiesdisabilities and without children tend not to receiveand without children tend not to receive any need-tested benefits.44 Some have pointed out that most individuals in the United States are visible to the IRS because they are listed somewhere on a tax information return filed by a third party with the IRS. For example, even though low-income seniors may not file federal income tax returns due to their low incomes, they and the IRS are sent SSA-1099s, Social Security benefit statements. Similarly, many low-income nonfiling workers and the IRS are sent information returns like W-2s or 1099-NECs. In a 2014 paper, James Cilke estimated that45 The IRS’s Federal income tax reporting “touches” an estimated 99.5 percent of the U.S. resident population…. Approximately 90 percent of the U.S. population appears on a filed income tax return, while almost everybody else appears on one or more ~~any need-tested benefits.40~~

~~35 Nina Olson, What is this thing called … Portal? Procedurally T axing (blog), April 29, 2020,~~
~~https://procedurallytaxing.com/what -is-this-thing-called-portal/.~~
~~36 Code for America, Lessons from Simplified Filing in 2021, End of Filing Season GetCT C Report , January 2022,~~
~~https://files.codeforamerica.org/2022/01/15163938/lessons-from-simplified-filing-in-2021-getctc-report-january-~~
~~2022.pdf.~~
~~37 See, for example, Lucas Goodman et al., Automatic Tax Filing: Simulating a Pre-Populated Form 1040, National~~
~~Bureau of Economic Research, Working Paper no. 30008, April 2022.~~
~~38 See T ables 6 and 7 in Shannon Mok,~~ ~~An Evaluation of Using Linked Survey and Administrative Data to Impute~~
~~Nonfilers to the Population of Tax Return Filers, CBO, Working Paper 2017-06, September 2017.~~
~~39 Elaine Maag et al.,~~ ~~Using Supplemental Nutrition Assistance Program Data in Earned Income Tax Credit~~
~~Adm inistration: A Case Study of Florida SNAP Data Linked to IRS Tax Return Data~~ ~~, Urban Institute, September 2015,~~
~~https://www.urban.org/sites/default/files/publication/71686/2000438-using-snap-data-in-eitc-administration.pdf.~~
~~40 See, for example, Figure 2 in CRS Report R46823, Need-Tested Benefits: Who Receives Assistance?, by Gene Falk,~~
~~Karen E. Lynch, and Paul D. Romero.~~
~~Congressional Research Service~~
8

~~Using the Federal Income Tax System to Deliver Cash Assistance to Families~~

~~Some have pointed out that most individuals in the United States are visible to the IRS because they are listed~~
~~somewhere on a tax information return filed by a third party with the IRS. For example, even though low-income~~
~~seniors may not file federal income tax returns due to their low incomes, they and the IRS are sent SSA-1099s,~~
~~Social Security benefit statements. Similarly, many low-income nonfiling workers and the IRS are sent information~~
~~returns like W-2s or 1099-NECs. In a 2014 paper, James Cilke estimated that41~~
~~The IRS’s Federal income tax reporting “touches” an estimated 99.5 percent of the U.S. resident~~
~~population…. Approximately 90 percent of the U.S. population appears on a filed income tax return, while~~
~~almost everybody else appears on one or more~~ information returns filed with the IRS. information returns filed with the IRS.
These studies suggest that data that may not be suitable for the administration These studies suggest that data that may not be suitable for the administration of a tax provision could of a tax provision could ~~potential y~~potentially
be used for outreach to nonfilers.be used for outreach to nonfilers. Indeed, during the rol out of stimulusIndeed, during the rol out of stimulus checks during the COVID-19 pandemic, checks during the COVID-19 pandemic,
the Center on Budget and Policy Prioritiesthe Center on Budget and Policy Priorities (CBPP) advocated for using data from SNAP and Medicaid not to (CBPP) advocated for using data from SNAP and Medicaid not to
directly issuedirectly issue the payments, but rather for “aggressivethe payments, but rather for “aggressive state outreach” to nonfiling households, which CBPP state outreach” to nonfiling households, which CBPP
estimated could reach 9 mil ionestimated could reach 9 mil ion of the estimated 12 mil ionof the estimated 12 mil ion nonfiling households.nonfiling households.4246
Nonetheless,Nonetheless, there may always remain somethere may always remain some households—especial yhouseholds—especial y those comprisedthose comprised of working-age adults who of working-age adults who
do not receivedo not receive any federal or state benefits, are not disabled, and do not work (or do not have a documented any federal or state benefits, are not disabled, and do not work (or do not have a documented
work record)—that wilwork record)—that wil be difficult for any systembe difficult for any system ~~to find.~~
to find. 42 See Tables 6 and 7 in Shannon Mok, An Evaluation of Using Linked Survey and Administrative Data to Impute Nonfilers to the Population of Tax Return Filers, CBO, Working Paper 2017-06, September 2017. 43 Elaine Maag et al., Using Supplemental Nutrition Assistance Program Data in Earned Income Tax Credit Administration: A Case Study of Florida SNAP Data Linked to IRS Tax Return Data, Urban Institute, September 2015, https://www.urban.org/sites/default/files/publication/71686/2000438-using-snap-data-in-eitc-administration.pdf. 44 See, for example, Figure 2 in CRS Report R46823, Need-Tested Benefits: Who Receives Assistance?, by Gene Falk, Karen E. Lynch, and Paul D. Romero. 45 James Cilke, The Case of the Missing Strangers: What we Know and Don’t Know About Non-Filers, paper presented at the 107th Annual Conference of the National Tax Association, Santa Fe, NM, November 13-15, 2014, http://tinyurl.com/y7chw254. 46 Chuck Marr et al., Aggressive State Outreach Can Help Reach the 12 Million Non-Filers Eligible for Stimulus Payments, Center on Budget and Policy Priorities, October 14, 2020, https://www.cbpp.org/research/federal-tax/aggressive-state-outreach-can-help-reach-the-12-million-non-filers-eligible#_ftn1. Congressional Research Service 9 Using the Federal Income Tax System to Deliver Cash Assistance to Families Issue 3: Many Households Use Paid Preparers and
Commercial Software
Most families that receive cash assistance through the tax code pay for assistance in preparing Most families that receive cash assistance through the tax code pay for assistance in preparing
and filingand filing their returns, using either paid tax preparers or commercial software. IRS data indicate their returns, using either paid tax preparers or commercial software. IRS data indicate
that almost 53% of that almost 53% of al all 2018 tax returns were prepared by a paid preparer, with a similar share of 2018 tax returns were prepared by a paid preparer, with a similar share of
low- and moderate-income households using paid preparers.low- and moderate-income households using paid preparers.4347 Other IRS research indicates that a Other IRS research indicates that a
significant proportion of low- and moderate-income taxpayers—about 4 in 10—self prepare their significant proportion of low- and moderate-income taxpayers—about 4 in 10—self prepare their
returns using commercial software (including software available through Free File).returns using commercial software (including software available through Free File).4448 This This
contrasts with the administration of nontax social benefit programs, which are contrasts with the administration of nontax social benefit programs, which are ~~typical y~~
typically administered using government-provided assistance.administered using government-provided assistance.4549
Paid preparers by definition and most commercial software companies charge fees for their Paid preparers by definition and most commercial software companies charge fees for their
services—in some cases very high fees—which ultimately reduces the amount of tax-based services—in some cases very high fees—which ultimately reduces the amount of tax-based
assistance families receive. According to one estimate, the fees charged by preparers averaged assistance families receive. According to one estimate, the fees charged by preparers averaged

~~41 James Cilke, The Case of the Missing Strangers: What we Know and Don’t Know About Non -Filers, paper presented~~
~~at the 107th Annual Conference of the National T ax Association, Santa Fe, NM, November 13-15, 2014,~~
~~http://tinyurl.com/y7chw254.~~
~~42 Chuck Marr et al.,~~ ~~Aggressive State Outreach Can Help Reach the 12 Million Non -Filers Eligible for Stimulus~~
~~Paym ents, Center on Budget and Policy Priorities, October 14, 2020, https://www.cbpp.org/research/federal-tax/~~
~~aggressive-state-outreach-can-help-reach-the-12-million-non-filers-eligible#_ftn1.~~
~~43 For 2018 data, see IRS, Table 22, Statistics of Income Historical T ables, https://www.irs.gov/statistics/soi-tax-stats-~~
~~historical-table-22; GAO, Paid Tax Return Preparers: In a Lim ited Study, Preparers Made Significant Errors, GAO-~~
~~14-467T , April 8, 2014; and T axpayer Advocate Service,~~ ~~Earned Incom e Tax Credit: Making the EITC Work for~~
~~Taxpayers and the Governm ent, Objectives Report to Congress FY2020, Volume 3, July 2019.~~
~~44 For example, 41% of 2017 tax returns with an EIT C claim were self prepared using commercial software and 2%~~
~~were prepared using Free File. See T axpayer Advocate Service,~~ ~~Earned Incom e Tax Credit: Making the EITC Work for~~
~~Taxpayers and the Governm ent, Objectives Report to Congress FY2020, Volume 3, July 2019, p. 24.~~
~~45 T he National T axpayer Advocate argued, “T he application process for social benefit programs administered outside~~
~~the tax system typically includes government -provided assistance. Unlike those other programs, the IRS has essentially~~
~~outsourced significant functions in the EIT C claim and distribution process to the private sector.” T axpayer Advocate~~
~~Service, Earned Incom e Tax Credit: Making the EITC Work for Taxpayers and the Governm ent , Objectives Report to~~
~~Congress FY2020, Volume 3, July 2019, p. 23.~~
~~Congressional Research Service~~
9

~~Using the Federal Income Tax System to Deliver Cash Assistance to Families~~

~~$400 for taxpayers eligible for the EITC, or about 16% of the average EITC amount.46 These fees~~
~~may vary widely from preparer to preparer. According to one GAO study of 19 paid preparers,~~
~~“[t]he fees charged for tax preparation services varied widely across the 19 visits, sometimes~~
~~between offices affiliated with the same chain. Often, paid preparers either did not provide an~~
~~estimate of the fees upfront or the estimate was less than the actual fees charged.”47~~
~~Research suggests that many taxpayers are wil ing to pay these fees, believing that doing so wil~~
~~ensure their compliance with the complex rules that govern these tax benefits while maximizing~~
~~the benefits for which they are legal y eligible.48 The eligibility rules for family-related tax~~
~~benefits like the EITC and the child credit are widely regarded as complex, especial y those~~
~~governing who can claim a child for a particular benefit. Low- and moderate-income families~~
~~who have lower literacy rates, speak English as a second language, or have nontraditional or~~
~~complex family structures (e.g., where the child is not the biological child of the taxpayer~~
~~claiming the credit) may find the eligibility rules for family tax benefits especial y confusing.49~~
~~Research suggests this complexity may be an important factor in driving low-income families to~~
~~use paid preparers.50~~
~~While taxpayers may believe paid preparers help them accurately prepare their tax returns and~~
~~receive al~~ $400 for taxpayers eligible for the EITC, or about 16% of the average EITC amount.50 These fees may vary widely from preparer to preparer. According to one GAO study of 19 paid preparers, “[t]he fees charged for tax preparation services varied widely across the 19 visits, sometimes between offices affiliated with the same chain. Often, paid preparers either did not provide an estimate of the fees upfront or the estimate was less than the actual fees charged.”51 Research suggests that many taxpayers are willing to pay these fees, believing that doing so will ensure their compliance with the complex rules that govern these tax benefits while maximizing the benefits for which they are legally eligible.52 The eligibility rules for family-related tax benefits like the EITC and the child credit are widely regarded as complex, especially those governing who can claim a child for a particular benefit. Low- and moderate-income families who have lower literacy rates, speak English as a second language, or have nontraditional or 47 For 2018 data, see IRS, Table 22, Statistics of Income Historical Tables, https://www.irs.gov/statistics/soi-tax-stats-historical-table-22; GAO, Paid Tax Return Preparers: In a Limited Study, Preparers Made Significant Errors, GAO-14-467T, April 8, 2014; and Taxpayer Advocate Service, Earned Income Tax Credit: Making the EITC Work for Taxpayers and the Government, Objectives Report to Congress FY2020, Volume 3, July 2019. 48 For example, 41% of 2017 tax returns with an EITC claim were self prepared using commercial software and 2% were prepared using Free File. See Taxpayer Advocate Service, Earned Income Tax Credit: Making the EITC Work for Taxpayers and the Government, Objectives Report to Congress FY2020, Volume 3, July 2019, p. 24. 49 The National Taxpayer Advocate argued, “The application process for social benefit programs administered outside the tax system typically includes government-provided assistance. Unlike those other programs, the IRS has essentially outsourced significant functions in the EITC claim and distribution process to the private sector.” Taxpayer Advocate Service, Earned Income Tax Credit: Making the EITC Work for Taxpayers and the Government, Objectives Report to Congress FY2020, Volume 3, July 2019, p. 23. 50 Gabriel Zucker, Cassandra Robertson, and Nina Olson, The IRS as a Benefits Administrator: An Agenda to Transform the Delivery of EIP, EITC, and CTC, New America, New Practice Lab, March 24, 2021, https://www.newamerica.org/new-practice-lab/reports/the-irs-as-a-benefits-administrator/; and Figure 5 in CRS Report R43805, The Earned Income Tax Credit (EITC): How It Works and Who Receives It, by Margot L. Crandall-Hollick, Gene Falk, and Conor F. Boyle. 51 GAO, Paid Tax Return Preparers: In a Limited Study, Preparers Made Significant Errors, GAO-14-467T, April 8, 2014, p. 19, https://www.gao.gov/products/gao-14-467t. 52 “The high U.S. [tax] preparer usage rate is in part a symptom of the complexity of the income tax system, as taxpayers want to be sure they comply with the law but also want to make sure they take advantage of all the tax breaks they legally qualify for.” Leonard E. Burman and Joel Slemrod, Tax in America: What Everyone Needs to Know, second ed., vol. 217 (Oxford University Press, 2020). Congressional Research Service 10 link to page 17 Using the Federal Income Tax System to Deliver Cash Assistance to Families complex family structures (e.g., where the child is not the biological child of the taxpayer claiming the credit) may find the eligibility rules for family tax benefits especially confusing.53 Research suggests this complexity may be an important factor in driving low-income families to use paid preparers.54 While taxpayers may believe paid preparers help them accurately prepare their tax returns and receive all tax benefits for which they are eligible, the evidence indicates that is not necessarily tax benefits for which they are eligible, the evidence indicates that is not necessarily
the case. According to one GAO study, the most common errors on tax returns, including those the case. According to one GAO study, the most common errors on tax returns, including those
prepared by paid preparers, are errors related to refundable tax credits, suggesting even paid prepared by paid preparers, are errors related to refundable tax credits, suggesting even paid
preparers may struggle to navigate the eligibilitypreparers may struggle to navigate the eligibility rules of these tax benefits.rules of these tax benefits.51
55 Another study that examined erroneous EITC claims found that a large share of returns prepared Another study that examined erroneous EITC claims found that a large share of returns prepared
by paid preparers included errors, including those returns prepared by attorneys, CPAs, and by paid preparers included errors, including those returns prepared by attorneys, CPAs, and
enrolled agents. The most common and costliest errors tended to occur among unregulated tax enrolled agents. The most common and costliest errors tended to occur among unregulated tax
preparers, often preparers, often ~~cal ed~~called “unenrolled preparers.” “unenrolled preparers.”5256 The lowest frequency of errors and the least costly errors tended to occur among volunteers trained by the IRS to prepare the returns of low- and moderate-income families (see “Case Study 3 | Volunteer Income Tax Assistance (VITA)”). Moreover, since taxpayers are generally legally responsible for the accuracy of the information on their tax returns, the cost of these inaccuracies, as well as the cost of the services themselves, is ultimately borne by families. The high error rates may also increase scrutiny of taxpayers who claim family tax benefits like the EITC, contributing to, for example, higher audit rates.57 In lieu of paid preparers, taxpayers who self-prepare their returns may use commercial software, which itself is minimally regulated. This extends to the IRS’s Free File program, which allows low- and moderate-income taxpayers to use free commercial software to prepare and file their income tax returns.58 The IRS does not generally test any commercial software—including software offered via Free File—to ensure it will help taxpayers accurately prepare and file their returns.59 The lack of regulation, oversight, and testing may contribute to the low usage of the Free File program.60 53 For more information, see Taxpayer ~~The lowest frequency of errors and the least~~

~~46 Gabriel Zucker, Cassandra Robertson, and Nina Olson,~~ ~~The IRS as a Benefits Administrator: An Agenda to~~
~~Transform the Delivery of EIP, EITC, and CTC, New America, New Practice Lab, March 24, 2021,~~
~~https://www.newamerica.org/new-practice-lab/reports/the-irs-as-a-benefits-administrator/; and Figure 5 in CRS Report~~
~~R43805, The Earned Incom e Tax Credit (EITC): How It Works and Who Receives It, by Margot L. Crandall-Hollick,~~
~~Gene Falk, and Conor F. Boyle.~~
~~47 GAO, Paid Tax Return Preparers: In a Limited Study, Preparers Made Sign ificant Errors, GAO-14-467T , April 8,~~
~~2014, p. 19, https://www.gao.gov/products/gao-14-467t.~~
~~48 “T he high U.S. [tax] preparer usage rate is in part a symptom of the complexity of the income tax syst em, as~~
~~taxpayers want to be sure they comply with the law but also want to make sure they take advantage of all the tax breaks~~
~~they legally qualify for.” Leonard E. Burman and Joel Slemrod, Tax in America: What Everyone Needs to Know,~~
~~second ed., vol. 217 (Oxford University Press, 2020).~~
~~49 For more information, see T axpayer~~ Advocate Service, Advocate Service, Earned Income Tax Credit (EITC): The IRS’s EITC Return
Preparer Strategy Does Not Adequately Address the Role of Preparers ~~in EITC Noncom pliance~~ in EITC Noncompliance, 2015 Annual Report , 2015 Annual Report
to Congress, Volumeto Congress, Volume 1, p. 261, https://www.taxpayeradvocate.irs.gov/wp-content/uploads/2020/08/1, p. 261, https://www.taxpayeradvocate.irs.gov/wp-content/uploads/2020/08/
~~ARC15_Volume1_MSP_24_EIT C~~ARC15_Volume1_MSP_24_EITC-Preparer-Strategy.pdf. -Preparer-Strategy.pdf.
5054 Gabriel Gabriel Zucker, CassandraZucker, Cassandra Robertson, and Nina Olson, Robertson, and Nina Olson, The IRS as a Benefits Administrator: An Agenda to
Transform the Delivery of EIP, EITC, and CTC,, ~~New~~ New America, NewAmerica, New Practice Lab, March 24, 2021, Practice Lab, March 24, 2021,
https://www.newamerica.org/new-practice-lab/reports/the-irs-as-a-benefits-administrator/. https://www.newamerica.org/new-practice-lab/reports/the-irs-as-a-benefits-administrator/.
5155 GAO, GAO, Tax Filing: 2021 Performance Underscores Need for IRS to Address Persistent Challenges, GAO-22-104938, , GAO-22-104938,
April 2022, p. 15. April 2022, p. 15.
5256 For more information on unenrolled preparers, see For more information on unenrolled preparers, see ~~T axpayer~~Taxpayer Advocate Service, Advocate Service, RETURN PREPARER OVERSIGHT:
The IRS Lacks a Coordinated Approach to Its Oversight of Return Preparers and Does Not Analyze the ~~Im pact~~Impact of
Penalties ~~Im posed~~Imposed on Preparers, 2018 Annual Report to Congress, Volume, 2018 Annual Report to Congress, Volume 1, pp. 1051, pp. 105 ~~-116.~~
~~Congressional Research Service~~
10

~~link to page 16~~ ~~Using the Federal Income Tax System to Deliver Cash Assistance to Families~~

~~costly errors tended to occur among volunteers trained by the IRS to prepare the returns of low -~~
~~and moderate-income families (see “Case Study 3 | Volunteer Income Tax Assistance (VITA)”).~~
~~Moreover, since taxpayers are general y legal y responsible for the accuracy of the information on~~
~~their tax returns, the cost of these inaccuracies, as wel as the cost of the services themselves, is~~
~~ultimately borne by families. The high error rates may also increase scrutiny of taxpayers who~~
~~claim family tax benefits like the EITC, contributing to, for example, higher audit rates.53~~
~~In lieu of paid preparers, taxpayers who self prepare their returns may use commercial software,~~
~~which itself is minimal y regulated. This extends to the IRS’s Free File program, which al ows~~
~~low- and moderate-income taxpayers to use free commercial software to prepare and file their~~
~~income tax returns.54 The IRS does not general y test any commercial software—including~~
~~software offered via Free File—to ensure it wil help taxpayers accurately prepare and file their~~
~~returns.55 The lack of regulation, oversight, and testing may contribute to the low usage of the~~
~~Free File program.56~~-116. 57 For more information on EITC audits, see CRS Insight IN11952, Audits of EITC Returns: By the Numbers, by Margot L. Crandall-Hollick. 58 For more information on Free File, see CRS In Focus IF11808, The Internal Revenue Service’s Free File Program (FFP): Current Status and Policy Issues, by Gary Guenther. 59 Taxpayer Advocate Service, Earned Income Tax Credit: Making the EITC Work for Taxpayers and the Government, Objectives Report to Congress FY2020, Volume 3, July 2019, p. 25. 60 See the series, “The TurboTax Trap: How the Tax Prep Industry Makes You Pay,” ProPublica, https://www.propublica.org/series/the-turbotax-trap. Congressional Research Service 11 Using the Federal Income Tax System to Deliver Cash Assistance to Families
Policy Considerations
The use of paid preparers may be convenient for many taxpayers. But the fees charged by paid The use of paid preparers may be convenient for many taxpayers. But the fees charged by paid
preparers effectively reduce the value of tax benefits, which may undercut policymakers’ preparers effectively reduce the value of tax benefits, which may undercut policymakers’
objectives. In addition, returns prepared by paid preparers can include errors for which taxpayers objectives. In addition, returns prepared by paid preparers can include errors for which taxpayers
are ultimatelyare ultimately responsible. responsible.
In response to concerns about the cost and accuracy of paid preparers, policymakers have In response to concerns about the cost and accuracy of paid preparers, policymakers have
proposed a variety of different reforms. These include instituting a “public option” government-proposed a variety of different reforms. These include instituting a “public option” government-
provided alternative to commercial software.provided alternative to commercial software.5761 Of note, the law commonly referred to as the Of note, the law commonly referred to as the
Inflation Reduction Act (IRA; P.L. 117-169) includes a provision that provides the IRS with $15 Inflation Reduction Act (IRA; P.L. 117-169) includes a provision that provides the IRS with $15
~~mil ion~~ million to study the cost and feasibility of creating a free direct e-file program (i.e., a public to study the cost and feasibility of creating a free direct e-file program (i.e., a public
option).option).5862 Other proposals have included requiring “truth in lending” disclosures of tax Other proposals have included requiring “truth in lending” disclosures of tax
preparation fees so that consumers can make better-informed decisions;preparation fees so that consumers can make better-informed decisions;~~59 al owing~~63 allowing the IRS to the IRS to
establish minimum competency standards for paid preparers;establish minimum competency standards for paid preparers;6064 and having the IRS use data it already possesses to send prefilled forms to taxpayers.65 This final option, which has been the subject of recent congressional interest, may work best for low-income workers without children and with simple tax situations. For example, researchers found that “single individuals with no dependents, wage-only income, and income less than $100,000—[who] comprised 20 percent of all return filers ... had a roughly 80 percent success” with prefilled returns.66 In other words, prefilled returns may not be an appropriate option for certain families, especially ones where the family’s structure changes from year to year. 61 See, for example, S. 912 in the 115th Congress, as introduced by Sen. Elizabeth Warren. For a discussion ~~and having the IRS use data it~~

~~53 For more information on EIT C audits, see CRS Insight IN11952, Audits of EITC Returns: By the Numbers, by~~
~~Margot L. Crandall-Hollick.~~
~~54 For more information on Free File, see CRS In Focus IF11808,~~ ~~The Internal Revenue Service’s Free File Program~~
~~(FFP): Current Status and Policy Issues, by Gary Guenther.~~
~~55 T axpayer Advocate Service, Earned Income Tax Credit: Making the EITC Work for Taxpayers and the Government,~~
~~Objectives Report to Congress FY2020, Volume 3, July 2019, p. 25.~~
~~56 See the series, “T he T urboTax T rap: How the T ax Prep Industry Makes You Pay,” ProPublica,~~
~~https://www.propublica.org/series/the-turbotax-trap.~~
~~57 See, for example, S. 912 in the 115th Congress, as introduced by Sen. Elizabeth Warren. For a discussion~~ of this and of this and
similar legislation, see Dylan Matthews, “Elizabeth Warren has a great idea for making similar legislation, see Dylan Matthews, “Elizabeth Warren has a great idea for making ~~T ax~~Tax Day less painful,” Day less painful,” Vox, ,
April 14, 2018, https://www.vox.com/2016/4/13/11417676/elizabeth-warren-tax-return-free-filing-tax-day-intuit-hr-April 14, 2018, https://www.vox.com/2016/4/13/11417676/elizabeth-warren-tax-return-free-filing-tax-day-intuit-hr-
block-turbotax-automatic-simple. block-turbotax-automatic-simple.
~~58 See CRS~~ 62 See CRS Insight IN11977, Insight IN11977, IRS-Related Funding in the Inflation Reduction Act, by Brendan McDermott, by Brendan McDermott .
~~59 T axpayer~~. 63 Taxpayer Advocate Service, Advocate Service, Earned Income Tax Credit: Making the EITC Work for Taxpayers and the Government, ,
Objectives Report to Congress FY2020, Volume 3, JulyObjectives Report to Congress FY2020, Volume 3, July 2019, pp. 302019, pp. 30 -31. -31.
6064 National National ~~T axpayer~~Taxpayer Advocate, “Legislative Recommendation #4 Authorize the IRS to Establish Minimum Advocate, “Legislative Recommendation #4 Authorize the IRS to Establish Minimum
Competency Standards for Federal Competency Standards for Federal ~~T ax~~Tax Return Preparers,” in Return Preparers,” in 2022 Purple Book, pp. 9-11, , pp. 9-11,
https://www.taxpayeradvocate.irs.gov/reports/2021-annual-report-to-congress/national-taxpayer-advocate-2022-purple-https://www.taxpayeradvocate.irs.gov/reports/2021-annual-report-to-congress/national-taxpayer-advocate-2022-purple-
book/. book/.
~~Congressional Research Service~~
11

~~Using the Federal Income Tax System to Deliver Cash Assistance to Families~~

~~already possesses to send prefil ed forms to taxpayers.61 This final option, which has been the~~
~~subject of recent congressional interest, may work best for low-income workers without children~~
~~and with simple tax situations. For example, researchers found that “single individuals with no~~
~~dependents, wage-only income, and income less than $100,000—[who] comprised 20 percent of~~
~~al return filers ... had a roughly 80 percent success” with prefil ed returns.62 In other words,~~
~~prefil ed returns may not be an appropriate option for certain families, especial y ones where the~~
~~family’s structure changes from year to year.~~
65 Lucas Goodman et al., “Automatic Tax Filing: Simulating a Pre-Populated Form 1040,” NBER Working Paper 30008, April 2022; and CRS Insight IN11992, Prefilled Individual Income Tax Return Filing: What It Is and Policy Issues, by Gary Guenther. 66 Jonathan Curry, “Study: Pre-Filled Tax Returns Would Come With Tricky Trade-Offs,” Tax Notes Federal, June 20, 2022. Congressional Research Service 12 Using the Federal Income Tax System to Deliver Cash Assistance to Families Case Study 3 | Volunteer Income Tax Assistance (VITA)
The Volunteer Income Tax Assistance (VITA) and Tax Counseling for the Elderly The Volunteer Income Tax Assistance (VITA) and Tax Counseling for the Elderly (TCE) programs provide free tax (TCE) programs provide free tax
preparation and filing servicespreparation and filing services to low-incometo low-income taxpayers during tax filing season.taxpayers during tax filing season. According to the IRS, about According to the IRS, about
80,000 volunteers at 11,000 sites prepare about 3.5 mil ion80,000 volunteers at 11,000 sites prepare about 3.5 mil ion tax returns each year.tax returns each year.6367 About $41 mil ion About $41 mil ion was set was set
aside for VITA/TCE funding in FY2022.aside for VITA/TCE funding in FY2022.64
68 The IRS does not directlyThe IRS does not directly run VITA/TCE sites,run VITA/TCE sites, but rather provides grants to community organizations and but rather provides grants to community organizations and
nonprofits to operate sites.nonprofits to operate sites. The IRS sets forth basic requirementsThe IRS sets forth basic requirements of the sites,of the sites, and “provides the sponsoring and “provides the sponsoring
organization with limitedorganization with limited ~~administrative~~ administrative support, grant money, and periodicsupport, grant money, and periodic inspection. The sponsor organization inspection. The sponsor organization
recruitsrecruits volunteers to run the site, trains the volunteers, providesvolunteers to run the site, trains the volunteers, provides equipment likeequipment like laptops and printers (often paid laptops and printers (often paid
for with IRS grants), and overseesfor with IRS grants), and oversees the day-to-day operations. the day-to-day operations. Al All sites also sites also ~~general y~~generally use the same tax preparation use the same tax preparation
software (TaxSlayer), which is provided by the IRS.”software (TaxSlayer), which is provided by the IRS.”6569
VITA volunteers must pass a minimumVITA volunteers must pass a minimum certification test in order to prepare returns,certification test in order to prepare returns, with higher-level with higher-level
certifications for somecertifications for some complex tax situations, likecomplex tax situations, like preparing returns for servicemembers.preparing returns for servicemembers.66
70 Research indicates that tax returns prepared by VITA volunteers are lessResearch indicates that tax returns prepared by VITA volunteers are less prone to errorprone to error than returns prepared by than returns prepared by
most other types of preparers.most other types of preparers. One IRS Taxpayer Advocate Report found that in FY2017, VITA/TCE sites had a One IRS Taxpayer Advocate Report found that in FY2017, VITA/TCE sites had a
93% accuracy rate over 93% accuracy rate over al all returns they prepared.returns they prepared.6771 VITA volunteers were also less VITA volunteers were also less prone to errorsprone to errors when helping when helping
taxpayers file for refundable tax credits.taxpayers file for refundable tax credits. For example, the most recent IRS study of EITC compliance found that For example, the most recent IRS study of EITC compliance found that
20%-26% of EITC returns prepared by VITA volunteers had an overclaim20%-26% of EITC returns prepared by VITA volunteers had an overclaim of the credit, compared to 35%-44% for of the credit, compared to 35%-44% for
EITC returns prepared by national tax return preparation firms.EITC returns prepared by national tax return preparation firms. (The percentages of EITC returns with overclaims (The percentages of EITC returns with overclaims
for other types of preparersfor other types of preparers ~~were~~ were 42%-46% by enrol ed42%-46% by enrol ed agents, 47%-49% by accountants [CPAs], 35% by agents, 47%-49% by accountants [CPAs], 35% by
attorneys, and 49%-54% by unenrol ed preparers.)attorneys, and 49%-54% by unenrol ed preparers.) The same study also indicated that the errorsThe same study also indicated that the errors on VITA-on VITA-
prepared returns wereprepared returns were also less costly compared to other types of preparers.72 Despite the accuracy and low cost of VITA tax preparation, it is one of the least used tax preparation methods. Although about 75% of individual taxpayers may be eligible to have their returns prepared by VITA/TCE,73 only about 1%-3% of taxpayers use VITA sites. It is unclear what the major drivers of the comparatively low utilization rate of VITA are, but they could include insufficient funding, taxpayer preference for more convenient options, or belief that paid preparers wil get them a bigger refund. One volunteer preparer noted that VITA/TCE are underfunded and staff are overworked, limiting their ability to meet demand.74 The Taxpayer Advocate has also highlighted that the lack of a year-round presence and the fact that returns with common schedules (like those associated with gig work) are deemed “out of scope” for VITA volunteers may also discourage taxpayers from using VITA.75 Issue 4: Data Used to Administer Tax Benefits Are Generally Annual Data from a Prior Year Like other provisions of the income tax, eligibility for and the amount of tax benefits a family receives in a given year are based on prior-year (i.e., lagged) annual tax data. As a result, the IRS 67 Frank Nolden, Tax Volunteers Support Taxpayers in Need, IRS, https://www.irs.gov/about-irs/tax-volunteers-support~~also less costly compared to other types of preparers.68~~

~~61 Lucas Goodman et al., “Automatic T ax Filing: Simulating a Pre-Populated Form 1040,” NBER Working Paper~~
~~30008, April 2022; and CRS Insight IN11992,~~ ~~Prefilled Individual Incom e Tax Return Filing: What It Is and Policy~~
~~Issues, by Gary Guenther.~~
~~62 Jonathan Curry, “Study: Pre-Filled T ax Returns Would Come With T ricky T rade-Offs,” Tax Notes Federal, June 20,~~
~~2022.~~
~~63 Frank Nolden, Tax Volunteers Support Taxpayers in Need, IRS, https://www.irs.gov/about-irs/tax-volunteers-~~
~~support~~ -taxpayers-in-need, updated January 25, 2022. More recent data from FY2021, which include the impact of the -taxpayers-in-need, updated January 25, 2022. More recent data from FY2021, which include the impact of the
COVID-19 pandemic, indicate that 52,874 volunteers at 8,874 sites prepared 1,977,465 returns with a 96.4% accuracy COVID-19 pandemic, indicate that 52,874 volunteers at 8,874 sites prepared 1,977,465 returns with a 96.4% accuracy
rate. IRS,rate. IRS, ~~“ T able~~ “Table 9” 9” inin Selected Taxpayer Assistance and Education Programs, by Type of Assistance or Program,
Fiscal Year 2021, IRS Databook: Service, IRS Databook: Service ~~to T axpayers~~ to Taxpayers, https://www.irs.gov/statistics/service-to-taxpayers. , https://www.irs.gov/statistics/service-to-taxpayers.
~~64 See CRS~~ 68 See CRS In FocusIn Focus IF11979, IF11979, Internal Revenue Service Appropriations, FY2022, by Gary Guenther. , by Gary Guenther.
6569 Noah B. Metz, “Volunteer Income Noah B. Metz, “Volunteer Income ~~T ax~~Tax Assistance During the Pandemic and Beyond,” Assistance During the Pandemic and Beyond,” Tax Notes, vol. 169 , vol. 169
(December 21, 2020), p. 1912. (December 21, 2020), p. 1912.
66 70 IRS, IRS, “Volunteer “Volunteer ~~T raining~~Training Certification,” https://www.irs.gov/individuals/volunteer-training-certification (updated Certification,” https://www.irs.gov/individuals/volunteer-training-certification (updated
April 26, 2022). April 26, 2022).
~~67 T axpayer~~71 Taxpayer Advocate Service, Advocate Service, 2017 Annual Report to Congress, Volume, Volume 1, p. 129, 1, p. 129,
https://www.taxpayeradvocate.irs.gov/reports/2017-annual-report-to-congress/full-report/. https://www.taxpayeradvocate.irs.gov/reports/2017-annual-report-to-congress/full-report/.
6872 IRS, IRS, Compliance Estimates for the Earned Income Tax Credit Claimed on 2006 -2008 Returns, Publication 5162 (8-, Publication 5162 (8-
2014) Catalog Number2014) Catalog Number 66766H, August 2014, https://www.irs.gov/pub/irs-soi/66766H, August 2014, https://www.irs.gov/pub/irs-soi/~~EIT CComplianceStudyT Y2006-~~
~~2008.pdf.~~
EITCComplianceStudyTY2006- Congressional Research Service Congressional Research Service
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link to page 20 Using the Federal Income Tax System to Deliver Cash Assistance to Families ~~Using the Federal Income Tax System to Deliver Cash Assistance to Families~~

~~Despite the accuracy and low cost of VITA tax preparation, it is one of the least used tax preparation methods.~~
~~Although about 75% of individual taxpayers may be eligible to have their returns prepared by VITA/TCE ,69 only~~
~~about 1%-3% of taxpayers use VITA sites. It is unclear what the major drivers of the comparatively low utilization~~
~~rate of VITA are, but they could include insufficient funding, taxpayer preference for more convenient options, or~~
~~belief that paid preparers wil get them a bigger refund. One volunteer preparer noted that VITA/TCE are~~
~~underfunded and staff are overworked, limiting their ability to meet demand.70 The Taxpayer Advocate has also~~
~~highlighted that the lack of a year-round presence and the fact that returns with common schedules (like those~~
~~associated with gig work) are deemed “out of scope” for VITA volunteers may also discourage taxpayers from~~
~~using VITA.71~~
~~Issue 4: Data Used to Administer Tax Benefits Are~~
~~Generally Annual Data from a Prior Year~~
~~Like other provisions of the income tax, eligibility for and the amount of tax benefits a family~~
~~receives in a given year are based on prior-year (i.e., lagged) annual tax data. As a result, the IRS~~
~~has information on what a household’s situation was~~ has information on what a household’s situation was in a prior year, but no information on its in a prior year, but no information on its
present situation, which may differ. In addition, tax data present situation, which may differ. In addition, tax data ~~general y~~generally do not include information do not include information
about within-year fluctuations in income and family structure. about within-year fluctuations in income and family structure.
When families apply for tax benefits that they When families apply for tax benefits that they ~~wil~~ will receive in that year, they provide their receive in that year, they provide their
characteristics—for example, their income and number of children—for the prior year on their characteristics—for example, their income and number of children—for the prior year on their
federal income tax returns. For example, taxpayers receive their 2021 EITCs—the EITCs that federal income tax returns. For example, taxpayers receive their 2021 EITCs—the EITCs that
reflect their total annual earned income in 2021 and their family structures for 2021—after they reflect their total annual earned income in 2021 and their family structures for 2021—after they
file their 2021 income tax returns in 2022. Most taxpayers had until April 18, 2022, to file their file their 2021 income tax returns in 2022. Most taxpayers had until April 18, 2022, to file their
2021 returns, or until October 17, 2022, if they requested a filing extension. This lag in time 2021 returns, or until October 17, 2022, if they requested a filing extension. This lag in time
provides taxpayers with flexibilityprovides taxpayers with flexibility to complete their income tax returns for the prior year, but also to complete their income tax returns for the prior year, but also
delays when the IRS receives the most recent complete annual tax information for the prior year. delays when the IRS receives the most recent complete annual tax information for the prior year.
In addition, the data collected for administering federal tax benefits are In addition, the data collected for administering federal tax benefits are ~~typical y~~typically annual data— annual data—
~~specifical y~~specifically, annual measures of taxpayers’ marital status, income, and number of children. Tax , annual measures of taxpayers’ marital status, income, and number of children. Tax
filing status for a given year depends on whether a taxpayer is married or unmarried, and whether filing status for a given year depends on whether a taxpayer is married or unmarried, and whether
or not the taxpayer has dependents. In both cases, these aspects of a household’s status might not or not the taxpayer has dependents. In both cases, these aspects of a household’s status might not
be apparent untilbe apparent until the end of the year. Marital (and hence filing) status is the end of the year. Marital (and hence filing) status is ~~general y~~generally based on based on
whether a taxpayer is married on the last day of the year.whether a taxpayer is married on the last day of the year.7276 For most tax benefits, dependent For most tax benefits, dependent
children must live with a taxpayer for more than six months out of the year to be considered a children must live with a taxpayer for more than six months out of the year to be considered a
“qualifying child,” which may only be clear at the end of the year for some households.“qualifying child,” which may only be clear at the end of the year for some households.73

~~69 T axpayer Advocate Service, 2017 Annual Report to Congress, Volume 1, p. 129,~~
~~https://www.taxpayeradvocate.irs.gov/reports/2017-annual-report-to-congress/full-report/.~~
~~70 Dylan Matthews, “T he IRS has a big~~ 77 Because tax benefits received in a given year are generally based on a family’s characteristics for the prior year, they cannot reflect monthly or quarterly fluctuations in families’ lives in real time (see “Case Study 4 | Stimulus Checks Issued During the COVID-19 Pandemic”). In other words, a tax benefit cannot immediately be provided to a family based solely on its current income in a given month for two reasons: no such tax data exist at that point (a W-2 has not been generated and a 2022 return will not be filed until 2023) and the IRS collects information on individuals’ earned income on an annual basis, not a monthly basis. This is in contrast to other nontax forms of cash assistance, which may be more responsive to changes in families’ circumstances: Spending programs typically reflect changes in income and living arrangements throughout the year, allowing them to be more responsive than tax credits to changes in circumstances. A person determines who else is in his or her assistance unit, applies for a benefit, is determined eligible, and then begins receiving that benefit, typically on a monthly basis.78 2008.pdf. 73 Taxpayer Advocate Service, 2017 Annual Report to Congress, Volume 1, p. 129, https://www.taxpayeradvocate.irs.gov/reports/2017-annual-report-to-congress/full-report/. 74 Dylan Matthews, “The IRS has a big opportunity to fix the way Americans file taxes,” opportunity to fix the way Americans file taxes,” Vox, April 13, 2022, , April 13, 2022,
https://www.vox.com/policy-and-politics/22596072/irs-turbotax-hr-block-free-file-tax-return. https://www.vox.com/policy-and-politics/22596072/irs-turbotax-hr-block-free-file-tax-return.
~~71 T axpayer~~75 Taxpayer Advocate Service, Advocate Service, 2017 Annual Report to Congress,, VolumeVolume 1, pp. 128-140, 1, pp. 128-140,
https://www.taxpayeradvocate.irs.gov/reports/2017-annual-report-to-congress/full-report/. https://www.taxpayeradvocate.irs.gov/reports/2017-annual-report-to-congress/full-report/.
72 76 For example, if a couple is For example, if a couple is married on December 31, 2020, they are generally considered married for all of 2020 on married on December 31, 2020, they are generally considered married for all of 2020 on
their 2020 income tax return. (There are exceptions to this general rule.) Seetheir 2020 income tax return. (There are exceptions to this general rule.) See IRS,IRS, Publication 501 (2021), Dependents,
Standard Deduction, and Filing ~~Inform ation~~Information, https://www.irs.gov/publications/, https://www.irs.gov/publications/
p501#p501#~~en_US_2020_publink100022072 2.~~
73en_US_2020_publink1000220722. 77 For more information, see CRS For more information, see CRS Insight IN11634, Insight IN11634, Child Tax Benefits and Children with Complex or Dynamic Living
~~Arrangem ents~~Arrangements, by Patrick A. Landers and Margot L. Crandall-Hollick. 78 Sam Hammond and Elaine Maag, Issues in Child Benefit Administration in the United States: Imagining the Next Stage of the Child Tax Credit, Urban Institute, December 2021, p. 7. Congressional Research Service 14 Using the Federal Income Tax System to Deliver Cash Assistance to Families ~~, by Patrick A. Landers and Margot L. Crandall-Hollick.~~
~~Congressional Research Service~~
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~~link to page 19~~ ~~Using the Federal Income Tax System to Deliver Cash Assistance to Families~~

~~Because tax benefits received in a given year are general y based on a family’s characteristics for~~
~~the prior year, they cannot reflect monthly or quarterly fluctuations in families’ lives in real time~~
~~(see “Case Study 4 | Stimulus Checks Issued During the COVID-19 Pandemic”). In other words,~~
~~a tax benefit cannot immediately be provided to a family based solely on its current income in a~~
~~given month for two reasons: no such tax data exist at that point (a W-2 has not been generated~~
~~and a 2022 return wil not be filed until 2023) and the IRS collects information on individuals’~~
~~earned income on an annual basis, not a monthly basis. This is in contrast to other nontax forms~~
~~of cash assistance, which may be more responsive to changes in families’ circumstances:~~
~~Spending programs typically reflect changes in income and living arrangements throughout~~
~~the year, allowing them to be more responsive than tax credits to changes in circumstances.~~
~~A person determines who else is in his or her assistance unit, applies for a benefit, is~~
~~determined eligible, and then begins receiving that benefit, typically on a monthly basis.74~~
This lag in data may be of interest to policymakers in light of research on the changing structure This lag in data may be of interest to policymakers in light of research on the changing structure
of some families, with a greater share of families changing composition over the course of the of some families, with a greater share of families changing composition over the course of the
year than in previous decades in ways that could complicate the administration of existing tax year than in previous decades in ways that could complicate the administration of existing tax
benefits.benefits.7579 It may also be of interest to policymakers designing tax benefits based on income, as It may also be of interest to policymakers designing tax benefits based on income, as
income can change over time, and income volatility may be more common among individuals income can change over time, and income volatility may be more common among individuals
who move in and out of households.who move in and out of households.7680
Policy Considerations
Characteristics of families—like their income and structure—can change from month to month Characteristics of families—like their income and structure—can change from month to month
and year to year, and those changes may not be captured by current tax data. Research suggests and year to year, and those changes may not be captured by current tax data. Research suggests
that moderate-income families, and poor families in particular, can experience significant that moderate-income families, and poor families in particular, can experience significant
variations in income from month to month.variations in income from month to month.7781 To make the social benefits in the tax code more To make the social benefits in the tax code more
responsive to changes in families’ situations, like income, the IRS would need more frequent responsive to changes in families’ situations, like income, the IRS would need more frequent
and/or timely tax data to be provided by both individualsand/or timely tax data to be provided by both individuals and employers. Gathering this and employers. Gathering this
information could necessitate taxpayers to information could necessitate taxpayers to ~~manual y~~manually update information about their family update information about their family
circumstances with the IRS (e.g., whether they had a qualifying child for a given month or if their circumstances with the IRS (e.g., whether they had a qualifying child for a given month or if their
marital status had changed). It could also necessitate workers and businesses regularly providing marital status had changed). It could also necessitate workers and businesses regularly providing
updates of workers’ income. Improved technology (e.g., an IRS account accessible from a mobile updates of workers’ income. Improved technology (e.g., an IRS account accessible from a mobile
device) could help lessen these burdens, although it is not clear to what extent. device) could help lessen these burdens, although it is not clear to what extent.
Some experts caution against trying to make the tax system operate more like a traditional benefit Some experts caution against trying to make the tax system operate more like a traditional benefit
system, as it would sacrifice some of the advantages of using the income tax system, including system, as it would sacrifice some of the advantages of using the income tax system, including
ease of use, reduced stigma, and low operational costs.ease of use, reduced stigma, and low operational costs.7882 Absent creating an entirely new income Absent creating an entirely new income

~~74 Sam Hammond and Elaine Maag,~~ ~~Issues in Child Benefit Administration in the United States: Imagining the Next~~
~~Stage of the Child Tax Credit, Urban Institute, December 2021, p. 7.~~
~~75 Elaine Maag, H. Elizabeth Peters, and Sara~~ tax system based on real-time monthly data, policymakers may want to consider weighing their policy goals against the limitations of the current income tax system. 79 Elaine Maag, H. Elizabeth Peters, and Sara Edelstein, Edelstein, Increasing Family Complexity and Volatility: The Difficulty in
~~Determ ining~~Determining Child Tax Benefits, , ~~T ax~~Tax Policy Center, March 3, 2016, https://www.taxpolicycenter.org/publications/ Policy Center, March 3, 2016, https://www.taxpolicycenter.org/publications/
increasing-family-complexity-and-volatility-difficulty-determining-child-tax-benefits/full. increasing-family-complexity-and-volatility-difficulty-determining-child-tax-benefits/full.
76 80 See See Elaine MaagElaine Maag et al., et al., Income Volatility: New Research Results with Implications for Income Tax Filing and
Liabilities, , ~~T ax~~Tax Policy Center, May 25, 2017, https://www.taxpolicycenter.org/publications/income-volatility-new- Policy Center, May 25, 2017, https://www.taxpolicycenter.org/publications/income-volatility-new-
research-results-implications-income-tax-filing-and-liabilities/full. research-results-implications-income-tax-filing-and-liabilities/full.
7781 Anthony Hannagan and Jonathan Morduch, Anthony Hannagan and Jonathan Morduch, Income Gains and Month-to-Month Income Volatility: Household
Evidence from the U.S. Financial Diaries, NYU Wagner Research Paper No. 26598833, U.S. Financial Diaries , NYU Wagner Research Paper No. 26598833, U.S. Financial Diaries
Working Paper, September 11, 2015. Working Paper, September 11, 2015.
78 82 As the former National As the former National ~~T axpayer~~Taxpayer Advocate has written, “But if we want to administer them [benefits] through the tax Advocate has written, “But if we want to administer them [benefits] through the tax
system, then we have to understand how they fit into the greater scheme of the tax system, and we can’t just impose a system, then we have to understand how they fit into the greater scheme of the tax system, and we can’t just impose a
~~Congressional Research Service~~
14

~~Using the Federal Income Tax System to Deliver Cash Assistance to Families~~

~~tax system based on real-time monthly data, policymakers may want to consider weighing their~~
~~policy goals against the limitations of the current income tax system.~~
system that was created for a completely different purpose onto the tax system.” Nina Olson, “Thinking Out Loud About the Advanced Child Tax Credit—Part I,” Procedurally Taxing (blog), June 29, 2021, https://procedurallytaxing.com/thinking-out-loud-about-the-advanced-child-tax-credit-part-i/. Congressional Research Service 15 Using the Federal Income Tax System to Deliver Cash Assistance to Families Case Study 4 | Stimulus Checks Issued During the COVID-19 Pandemic
During the COVID-19 pandemic, Congress enacted three rounds of stimulus During the COVID-19 pandemic, Congress enacted three rounds of stimulus checks. These payments were checks. These payments were
structured as temporarystructured as temporary one-time refundable tax creditsone-time refundable tax credits that were issued to households before they had to file that were issued to households before they had to file
their applicable returns. For example,their applicable returns. For example, the first payment enacted as part of the CARES Act (P.L. 116-136) equaled the first payment enacted as part of the CARES Act (P.L. 116-136) equaled
$1,200 per eligible$1,200 per eligible individual ($2,400 for marriedindividual ($2,400 for married taxpayers filing a joint tax return) plus an additional $500 per taxpayers filing a joint tax return) plus an additional $500 per
eligibleeligible child. The payment amount then phased down for higher-incomechild. The payment amount then phased down for higher-income taxpayers. These payments were taxpayers. These payments were
structured as a new one-time refundable tax credit for 2020 that was advanced so that payments were receivedstructured as a new one-time refundable tax credit for 2020 that was advanced so that payments were received in in
2020, as opposed to 2021 (when 2020 income tax returns were filed). 2020, as opposed to 2021 (when 2020 income tax returns were filed).
To facilitate implementation,To facilitate implementation, the statute directed the Department of the Treasurythe statute directed the Department of the Treasury ~~to automatical y issue~~ to automatically issue these these
payments to households in 2020 if they had filed 2019 income tax returns, determining eligibilitypayments to households in 2020 if they had filed 2019 income tax returns, determining eligibility based on based on
information on their 2019 returns. If a 2019 return had not been filed, the statute directed the Treasury to information on their 2019 returns. If a 2019 return had not been filed, the statute directed the Treasury to
~~automatical y~~automatically issue payments based on 2018 return information. issue payments based on 2018 return information. Eligible households who did not Eligible households who did not ~~automatical y~~automatically
receivereceive the first payment (or who receivedthe first payment (or who received ~~less~~ less than they would have based on their incomethan they would have based on their income and family size as and family size as
reported on their 2020 income tax returns) were eligiblereported on their 2020 income tax returns) were eligible to receiveto receive the payment (or additional amount) as the the payment (or additional amount) as the
recoveryrecovery rebate credit when they filed their 2020 income tax returns. In contrast, if a household receivedrebate credit when they filed their 2020 income tax returns. In contrast, if a household received more more
than it was eligiblethan it was eligible for, the difference did not need to be paid back. The second and third rounds of payments for, the difference did not need to be paid back. The second and third rounds of payments
were structured similarlywere structured similarly and based on prior-yearand based on prior-year tax return information,tax return information, although the amounts and some although the amounts and some
eligibilityeligibility ~~rules~~ rules differed.differed.7983
The fact that the stimulusThe fact that the stimulus check amounts and eligibilitycheck amounts and eligibility were based on olderwere based on older data led to concern that the benefits data led to concern that the benefits
were being receivedwere being received by ineligibleby ineligible households, when in fact the households werehouseholds, when in fact the households were often eligibleoften eligible based on the statute. based on the statute.
For example,For example, after enactment of the CARES Act, the after enactment of the CARES Act, the Washington Post reported a story with the headline “The IRS reported a story with the headline “The IRS
sent $1,200 to a rich woman who doesn’t need it.sent $1,200 to a rich woman who doesn’t need it. Also,Also, she’sshe’s British.British. And lives in London.”And lives in London.”8084 Nevertheless, Nevertheless, the the
woman in question lived in the United States on a workwoman in question lived in the United States on a work visa in 2018, filed a 2018 incomevisa in 2018, filed a 2018 income tax return, and was, tax return, and was,
according the statute, eligibleaccording the statute, eligible for the advance payment based on her 2018 return. for the advance payment based on her 2018 return.
Issue 5: Tax Benefits Are Usually Delivered Once a
Year
~~General y~~Generally, tax benefits are paid out once a year as a lump sum as part of a federal income tax , tax benefits are paid out once a year as a lump sum as part of a federal income tax
refund. Research suggests that some households may value these annual lump sum payments as a refund. Research suggests that some households may value these annual lump sum payments as a
form of forced savings that enables them to make large purchases. For example, some research form of forced savings that enables them to make large purchases. For example, some research
has found that some households that receive the EITC use their annual tax refunds as a kind of has found that some households that receive the EITC use their annual tax refunds as a kind of
forced savings that enables them to make large purchases.forced savings that enables them to make large purchases.8185 But households may also use their But households may also use their
refunds to pay for necessities or pay off debt. Hence, policymakers may be interested in paying refunds to pay for necessities or pay off debt. Hence, policymakers may be interested in paying
out a tax benefit more frequently than once a year to help people meet their ongoing needs.out a tax benefit more frequently than once a year to help people meet their ongoing needs.

~~system that was created for a completely different purpose onto the tax system.” Nina Olson, “T hinking Out Loud~~
~~About the Advanced Child T ax Credit —Part I,” Procedurally T axing (blog), June 29, 2021,~~
~~https://procedurallytaxing.com/thinking-out -loud-about -the-advanced-child-tax-credit-part-i/.~~
~~79 See CRS~~ Some studies indicate that many low- and moderate-income families who receive refundable tax credits face financial hardship during the year and may take on debt to meet their basic needs or put off certain expenses (like out-of-pocket health care expenses) until they receive their tax refunds.86 After they receive their refunds, some households have “an opportunity to catch up, but 83 See CRS Report R46415, Report R46415, COVID-19 and Direct Payments: Overview and Resources, coordinated by Margot L. , coordinated by Margot L.
Crandall-Hollick. Crandall-Hollick.
8084 Michelle Singletary, “ Michelle Singletary, “~~T he~~The IRS sent $1,200 to a rich woman who IRS sent $1,200 to a rich woman who doesn’t need it. Also, she’s British. Anddoesn’t need it. Also, she’s British. And lives in lives in
London.” London.” Washington Post, May 1, 2020. , May 1, 2020.
8185 See, See, for example, Elaine Maag, William J. Congdon, and Eunice Yau, for example, Elaine Maag, William J. Congdon, and Eunice Yau, The Earned Income Tax Credit: Program
~~Outcom es, Paym ent Tim ing~~Outcomes, Payment Timing, and Next Steps for Research , OPRE, MEF Associates, and, OPRE, MEF Associates, and the Urban Institute, February 2021, pp. 15-18. 86 Elaine Maag, Stephen Roll, and Jane Oliphant, Delaying Tax Refunds for Earned Income Tax Credit and Additional Child Tax Credit Claimants, The Tax Policy Center, December 7, 2016, p. 3; and JP Morgan Chase Institute, Deferred Care: How Tax Refund Enable Healthcare Spending, January 2018, https://bit.ly/3u68GtN. Congressional Research Service 16 Using the Federal Income Tax System to Deliver Cash Assistance to Families then the cycle often repeats.”87~~the Urban Institute, February~~
~~2021, pp. 15-18.~~
~~Congressional Research Service~~
15

~~Using the Federal Income Tax System to Deliver Cash Assistance to Families~~

~~Some studies indicate that many low- and moderate-income families who receive refundable tax~~
~~credits face financial hardship during the year and may take on debt to meet their basic needs or~~
~~put off certain expenses (like out-of-pocket health care expenses) until they receive their tax~~
~~refunds.82 After they receive their refunds, some households have “an opportunity to catch up, but~~
~~then the cycle often repeats.”83~~ Some research on the child tax credit suggests that some low- Some research on the child tax credit suggests that some low-
income families prefer receiving regular monthly payments. According to a survey from the income families prefer receiving regular monthly payments. According to a survey from the
Urban Institute, “45 percent of nonelderly adults living with children who received the advanced Urban Institute, “45 percent of nonelderly adults living with children who received the advanced
child credit payments in 2021 preferred receiving the credit as a monthly payment, 28 percent child credit payments in 2021 preferred receiving the credit as a monthly payment, 28 percent
reported no preference in payment timing, and 27 percent preferred a single payment as part of a reported no preference in payment timing, and 27 percent preferred a single payment as part of a
tax refund.”tax refund.”8488
Under current law, most families receive refundable tax credits once a year as part of their annual Under current law, most families receive refundable tax credits once a year as part of their annual
tax refunds. And while some taxpayers may adjust how much is withheld from their paychecks tax refunds. And while some taxpayers may adjust how much is withheld from their paychecks
throughout the year (i.e., they receive little to no refund at tax time because they have had throughout the year (i.e., they receive little to no refund at tax time because they have had
“perfect withholding”), they cannot have negative withholding. In other words, they cannot adjust “perfect withholding”), they cannot have negative withholding. In other words, they cannot adjust
their tax withholding to receive the portion of the refundable credits that exceeds their income tax their tax withholding to receive the portion of the refundable credits that exceeds their income tax
liability.liability. Hence, many low-income families, who have little or no income tax liability,Hence, many low-income families, who have little or no income tax liability, can only can only
receive refundable tax credits once a year in their tax refunds. receive refundable tax credits once a year in their tax refunds.
However, policymakers have attempted to work around this aspect of tax benefits by issuing tax However, policymakers have attempted to work around this aspect of tax benefits by issuing tax
benefitsbenefits before a taxpayer files the applicable tax return, which is often referred to as “advancing” a taxpayer files the applicable tax return, which is often referred to as “advancing”
the tax benefit. Several tax benefits have been paid out before the applicable federal income tax the tax benefit. Several tax benefits have been paid out before the applicable federal income tax
return is filed—notably the health insurance premium assistance tax credit; the 2021 expanded return is filed—notably the health insurance premium assistance tax credit; the 2021 expanded
child tax credit; and, from 1979 through 2010, part of the EITC. child tax credit; and, from 1979 through 2010, part of the EITC.
~~Crucial y~~Crucially, when policymakers advance refundable tax credits, they have , when policymakers advance refundable tax credits, they have ~~general y~~generally based the based the
advance amounts on retrospective annual tax data to estimate current eligibility.advance amounts on retrospective annual tax data to estimate current eligibility. For example, For example,
advance payments of the child credit issued in 2021 were based on an estimate of the 2021 credit advance payments of the child credit issued in 2021 were based on an estimate of the 2021 credit
using 2020 tax data on income and family structure. One issue that arises with advancing a using 2020 tax data on income and family structure. One issue that arises with advancing a
benefit based on older data is if and how to reconcile what is received in advance with what can benefit based on older data is if and how to reconcile what is received in advance with what can
~~eventual y~~ eventually be claimed on a tax return. This is often referred to as “reconciling” or “truing up” the be claimed on a tax return. This is often referred to as “reconciling” or “truing up” the
advance payment. For example, if Congress decided that a $3,000 refundable tax credit were to advance payment. For example, if Congress decided that a $3,000 refundable tax credit were to
be advanced in 2022 based on an estimate using 2021 data—perhaps as 12 monthly payments of be advanced in 2022 based on an estimate using 2021 data—perhaps as 12 monthly payments of
$250—what would happen if a household was only ultimately eligible$250—what would happen if a household was only ultimately eligible for a $2,000 credit when it for a $2,000 credit when it
filed its 2022 income tax return in 2023? Would the household need to pay back filed its 2022 income tax return in 2023? Would the household need to pay back al all or some of the or some of the
$1,000 overpayment of the credit? $1,000 overpayment of the credit?
Reconciling estimated payments with what a household is Reconciling estimated payments with what a household is ~~actual y~~actually eligible eligible for ensures that for ensures that
households receive the correct amounts of a credit. Reconciling may also discourage taxpayers households receive the correct amounts of a credit. Reconciling may also discourage taxpayers
from from ~~strategical y~~strategically deciding when to report information to the IRS to receive a larger benefit. deciding when to report information to the IRS to receive a larger benefit.
However, reconciliation—depending on how it is designed—could dissuade people from However, reconciliation—depending on how it is designed—could dissuade people from
spending the money they receive via the tax system for fear they might need to pay it back. It spending the money they receive via the tax system for fear they might need to pay it back. It
could also result in additional hardship for low- and moderate-income households who spend could also result in additional hardship for low- and moderate-income households who spend

~~82 Elaine Maag, Stephen Roll, and Jane Oliphant,~~ ~~Delaying Tax Refunds for Earned Income Tax Credit and Additional~~
~~Child Tax Credit Claim ants, T he T ax Policy Center, December 7, 2016, p. 3; and JP Morgan Chase Institute,~~ ~~Deferred~~
~~Care: How Tax Refund Enable Healthcare Spending~~ ~~, January 2018, https://bit.ly/3u68GtN.~~
83assistance for which they are ultimately not eligible and then need to pay it back. The need to reconcile may be common—especially if the eligibility for and amount of a tax benefit are based in part on factors that are likely to change from year to year, like income.89 For example, a 2023 87 Steve Holt, Steve Holt, Periodic Payment of the Earned Income Tax Credit Revisited , Brookings Institution Metropolitan Policy , Brookings Institution Metropolitan Policy
Program, December 2015. Program, December 2015.
8488 Elaine Maag Elaine Maag and Michael Karpman, and Michael Karpman, Many Adults with Low Income Prefer Monthly Child Tax Credit Payments, ,
Urban Institute, July 27, 2022, https://www.taxpolicycenter.org/publications/many-adults-lower-income-prefer-Urban Institute, July 27, 2022, https://www.taxpolicycenter.org/publications/many-adults-lower-income-prefer-
monthly-child-tax-creditmonthly-child-tax-credit ~~-payments.~~
~~Congressional Research Service~~
16

~~link to page 22 link to page 22~~ ~~Using the Federal Income Tax System to Deliver Cash Assistance to Families~~

~~assistance for which they are ultimately not eligible and then need to pay it back. The need to~~
~~reconcile may be common—especial y if the eligibility for and amount of a tax benefit are based~~
~~in part on factors that are likely to change from year to year, like income.85 For example, among~~
~~households that received the advance of the health insurance premium tax~~-payments. 89 The economist Kathryn Ann Edwards discussed the impact of income volatility and benefit program broadly in Kathryn Anne Edwards, “America’s Endangered Solution to Child Poverty,” Bloomberg Tax, February 8, 2022, https://news.bloombergtax.com/tax-insights-and-commentary/americas-endangered-solution-to-child-poverty-kathryn-edwards. Other studies include Anthony Hannagan and Jonathan Morduch, Income Gains and Month-to-Month Income Congressional Research Service 17 Using the Federal Income Tax System to Deliver Cash Assistance to Families study by researchers at the Tax Policy Center found that among low-income families with children eligible to receive the EITC in one year, 39% would have been eligible for an EITC that was at least $500 smaller in the subsequent year. According to their estimates, more than half of these families (22% of all low-income families with children) would have been eligible for a credit that was at least $2,000 less than the credit in the previous year. The researchers estimated that when families experienced declines of $2,000 or more from one year to the next, the most common factor driving these declines was a change in income.90 Hence, advancing the EITC—currently delivered as a lump sum annually—could create financial hardships for many low-income families. Similarly, an older study of the health insurance premium assistance tax credit found that overpayments of the advance of the credit (which is credit (which is
advanced monthly to health insurers)advanced monthly to health insurers) were common. Among households that received the advance of the health insurance premium tax credit, 57% had an overpayment of the advance on their 2015 , 57% had an overpayment of the advance on their 2015
returns.returns.8691 These overpayments These overpayments ~~general y~~generally need to be paid back, although there are protections for need to be paid back, although there are protections for
lower-income households and repayment was waived with 2020 tax returns due to concerns about lower-income households and repayment was waived with 2020 tax returns due to concerns about
economic hardship from the COVID-19 pandemic. Research suggests the majority of households economic hardship from the COVID-19 pandemic. Research suggests the majority of households
who repay the premium tax credit do so in the form of a reduced refund.who repay the premium tax credit do so in the form of a reduced refund.8792 However, while However, while
“repayment protection” may benefit taxpayers, it can increase a tax benefit’s “repayment protection” may benefit taxpayers, it can increase a tax benefit’s ~~overal budgetary~~
overall budgetary score and lead to concerns about program integrity. score and lead to concerns about program integrity.
Policy Considerations
The IRS has demonstrated that it can issue tax benefits outside of the normal filing season. Doing The IRS has demonstrated that it can issue tax benefits outside of the normal filing season. Doing
so, however, so, however, ~~general y~~generally requires policymakers to consider whether and how to reconcile advance requires policymakers to consider whether and how to reconcile advance
payments with what a household is payments with what a household is ~~actual y~~actually eligible eligible for when it files a return. Policymakers have for when it files a return. Policymakers have
used various approaches for reconciliation when designing tax benefits. Some benefits have not used various approaches for reconciliation when designing tax benefits. Some benefits have not
required any reconciliation (the three rounds of stimulus check enacted during the COVID-19 required any reconciliation (the three rounds of stimulus check enacted during the COVID-19
pandemic, and the premium assistance tax credit in 2020). Other benefits have only been pandemic, and the premium assistance tax credit in 2020). Other benefits have only been ~~partial y~~
partially paid out in advance (the advanced EITC and the advance of the 2021 child tax credit) to reduce paid out in advance (the advanced EITC and the advance of the 2021 child tax credit) to reduce
the amount that may need to be paid back with reconciliation. the amount that may need to be paid back with reconciliation. ~~Final y~~Finally, some benefits have , some benefits have
included provisions limitingincluded provisions limiting how much low- and moderate-income taxpayers must repay if they how much low- and moderate-income taxpayers must repay if they
received overpayments from the advanced credit (the premium assistance tax credit and 2021 received overpayments from the advanced credit (the premium assistance tax credit and 2021
~~child tax credit).~~
~~A tax benefit’s design may help reduce the discrepancy between an advance benefit and the~~
~~benefit received on a tax return. For example, if a parameter once used to calculate eligibility for~~
~~an amount of a tax benefit no longer affects eligibility or amount, taxpayers wil not need to~~
~~reconcile or true up the benefit based on annual changes in this factor. This can occur, for~~
example, if older income data are not used to estimate eligibility but instead used to determine
~~eligibility (as was the case with the temporary “income lookbacks” for the EITC enacted as part~~
~~of P.L. 116-260 and P.L. 117-2).88 Discrepancies are also likely to be reduced when income, if~~
~~below certain levels, does not affect the amount of the benefit, like the “fully refundable” child~~
~~credit in 2021 (see~~ ~~“Case Study 5 | Advance Payments of the Fully Refundable Child Tax~~
~~Credit”). As these examples highlight, in addition to considering whether and to what extent to~~

~~85 T he economist Kathryn Ann Edwards discussed the impact of income volatility and benefit program broadly in~~
~~Kathryn Anne Edwards, “America’s Endangered Solution to Child P overty,” Bloomberg Tax, February 8, 2022,~~
~~https://news.bloombergtax.com/tax-insights-and-commentary/americas-endangered-solution-to-child-poverty-kathryn-~~
~~edwards. Other studies include Anthony Hannagan and Jonathan Morduch,~~ ~~Incom e Gains and Month-to-Month Income~~
~~Volatility: Household Evidence from the U.S. Financial Diaries, NYU Wagner Research Paper No. 2659883 , U.S.~~
~~Financial Diaries Working Paper, September 13, 2015; Robert Moffitt and Sisi Zhang, “ Income Volatility and the~~
~~PSID: Past Research and New Results,” AEA Papers and Proceedings, vol. 108 (May 2018); and Karen Dynan,~~
~~Douglas Elmendorf, and Daniel Sichel, “T he Evolution of Household Income Volatility,”~~ ~~The B.E. Journal of~~
~~Econom ic Analysis & Policy, vol. 12, no. 2 (December 18, 2012).~~
~~86 Letter from John A. Koskinen, Commissioner of the Internal Revenue Service, to Members of Congress, January 9,~~
~~2017, https://www.irs.gov/pub/newsroom/commissionerletteracafilingseason.pdf.~~
~~87 Leonard Burman, Gordon Mermin, and Elena Ramirez, Tax Refunds and Affordable Care Act Reconciliation, T ax~~
~~Policy Center, April 1, 2015.~~
~~88 See CRS Report R44825, The Earned Income Tax Credit (EITC): Legislative History, by Margot L. Crandall-~~
~~Hollick.~~
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~~Using the Federal Income Tax System to Deliver Cash Assistance to Families~~

~~limit repayment of advanced benefits, policymakers may also consider using program design to~~
~~improve ease of administration.~~
~~Case Study 5 | Advance Payments of the Fully Refundable Child Tax Credit~~
~~The American Rescue Plan Act (ARPA; P.L. 117-2) temporarily expanded the child credit for many taxpayers and~~
~~modified its administration. Among other changes, the law made the credit ful y refundable for 2021 only.~~
~~Fully Refundable~~
~~In the context of the ARPA-expanded child credit, ful refundability meant the credit was the same amount per~~
~~child for low- and moderate-income taxpayers, irrespective of their incomes. Specifical y, if an unmarried parent~~
~~had income in 2021 under $112,500 ($150,000 for married parents), the credit amount did not vary based on~~
~~income. Whether the family had $0, $20,000, $50,000, or $100,000 of income, the credit amount was the same~~
~~for a given number of children. (Higher-income taxpayers were subject to a phaseout of the credit based on their~~
~~income.) By making the child credit ful y refundable for 2021, ARPA temporarily eliminated the prior-law formula~~
~~used to phase in the credit for lower-income taxpayers based on income. Under the prior-law formula, a taxpayer~~
~~with more than $2,500 of earned income was eligible to receive a partial benefit from the credit.~~
~~While many studies examined the impact of ful refundability on poverty, ful refundability also eliminated the~~
~~chance that low- and some moderate-income taxpayers would need to repay advance payments of the child credit~~
~~due to changes in income. To understand this, it is important to first understand how the 2021 credit was~~
~~advanced.~~
~~Advance Payments~~
~~The advance payments of the 2021 child credit were based on estimates of the credit taxpayers were eligible to~~
~~claim on their 2021 income tax returns. In order to estimate taxpayers’ 2021 child credits, the IRS was directed by~~
~~the statute to use data from 2020 income tax returns, or if those were not available, data from 2019 income tax~~
~~returns. Since up to half of the 2021 credit could be issued in advance, the IRS general y calculated 50% of the~~
~~estimated 2021 credit amount and then issued that in monthly payments. For example, if a married couple filing~~
~~jointly listed $75,000 of income and two young children on a 2020 return—and those children were also young in~~
~~2021 (i.e., 0-5 years old)—the IRS would have estimated their 2021 credit to be $7,200. The IRS would have~~
~~issued half of that amount—$3,600—in six monthly payments of $600, beginning July 15, 2021, and ending~~
~~December 15, 2021.~~
~~When taxpayers filed their 2021 returns (in 2022), they first calculated the total amounts of the 2021 child credit~~
~~for which they were eligible (based on the number and ages of qualifying children, income, and marital status for~~
~~2021). Then, taxpayers subtracted from their total 2021 credits the sum of advanced child credit payments they~~
~~received during calendar year 2021. For example, if an unmarried taxpayer had two young children (and filed as a~~
~~head of household) in 2021 (like they did in 2020), but their 2021 income had actual y fal en to $40,000 , they~~
~~would stil be eligible for a total child credit for 2021 of $7,200. Since they would have received half of their total~~
~~2021 credit in advance payments in calendar year 2021 ($3,600), they would ultimately claim the remaining half~~
~~($3,600) on their 2021 return. As long as this unmarried parent’s income was below $112,500 in both 2020 and~~
~~2021, their credit amount would not change even if their income did. (If their income had instead risen to~~
~~$350,000 in 2021, they would not have been eligible for any credit in 2021, and would have needed to repay the~~
~~$3,600 in advance payments they had received.) Ful refundability effectively removed income as a factor that~~
~~would lead to low- and some moderate-income taxpayers needing to repay the advance payments of the credit.~~
~~The Treasury Inspector General for Tax Administration (TIGTA) found that the IRS issued 98% of advance child~~
~~credit amounts correctly based on the 2020 data used to determine these payment amounts.89 According to this~~
~~analysis, errors tended to occur when the IRS advanced a credit for a child that was not ultimately a qualifying~~
~~child based on 2020 or 2019 tax data. For example, a taxpayer may have claimed a child incorrectly in 2020 as a~~
~~dependent, and the IRS may have erroneously issued an advance payment based on this information.~~
~~Notably, other factors, including changes in the number of eligible children from year to year, could have resulted~~
~~in overpayments of the advance credit compared to what taxpayers were ultimately eligible to claim based on~~
~~2021 tax data. In these cases, Congress enacted repayment protection in the form of a safe harbor.90~~

~~89 T reasury Inspector General for T ax Administration,~~ ~~American Rescue Plane Act: Accuracy of Advance Child Tax~~
~~Credit Periodic Paym ents, Report Number 2022-47-070, September 21, 2022.~~
~~90 For more information on the safe harbor, see Appendix D in CRS Report R46900,~~ ~~The Expanded Child Tax Credit~~
~~for 2021: Frequently Asked Questions (FAQs), by Margot L. Crandall-Hollick.~~
~~Congressional Research Service~~
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~~Using the Federal Income Tax System to Deliver Cash Assistance to Families~~

~~Issue 6: Some Households Do Not Have or Use Bank~~
~~Accounts to Receive Tax Benefits~~
~~Some Americans, especial y lower-income Americans, may face difficulties receiving payments~~
~~quickly from the IRS because they do not have bank accounts or do not use a bank account to~~
~~receive their tax refunds. Most U.S. consumers choose to open a bank account because it is a safe~~
~~and secure way to store money.91 However, some U.S. households—often those with low~~
~~incomes, lack of credit histories, or credit histories marked with missed debt payments—do not~~
~~use banking services. According to the FDIC’s 2021 survey on how America banks, 4.5% of~~
~~households in the United States were unbanked, meaning that these households did not have a~~
~~bank account.92 Compared with the general U.S. population, unbanked consumers are more likely~~
~~to have lower incomes, have less formal education, be of a racial or ethnic minority, and be~~
~~disabled.93~~
~~Households may not open a bank account for a number of reasons. In the FDIC survey, unbanked~~
~~households’ most reported answers for why they did not have bank accounts were because they~~
~~did not have enough money, were concerned about privacy, did not trust banks, and wanted to~~
~~avoid high and unpredictable bank fees.94 In the past two decades, the availability of free or low-~~
~~cost checking accounts has reportedly diminished, and fees associated with checking accounts~~
~~have grown.95 Some bank accounts require minimum account balances to avoid certain~~
~~maintenance or service fees.96 For consumers living paycheck to paycheck, maintaining bank~~
~~account minimums and avoiding account overdrafts might be difficult, leading to unaffordable~~
~~account fees.97 At least some of these consumers may be served better by alternative financial~~
~~providers if their products are less expensive, faster, and more convenient for some consumers.98~~

~~91 In this report, bank accounts refer to checking, savings, and other accounts at all depository institutions, including~~
~~banks and credit unions.~~
~~92 Federal Deposit Insurance Corporation (FDIC),~~ ~~2021 FDIC National Survey of Unbanked and Underbanked~~
~~Households: Executive Sum m ary, November 2022, p. 1, https://www.fdic.gov/analysis/household-survey/~~
~~2021execsum.pdf. (Hereinafter “ FDIC, National Survey of Unbanked and Underbanked Households.”)~~
~~93 FDIC, National Survey of Unbanked and Underbanked Households, p. 1-2.~~
~~94 FDIC, National Survey of Unbanked and Underbanked Households, p. 3.~~
95 Consumer Financial Protection Bureau (CFPB), CFPB ~~Study of Overdraft Programs: A White Paper of Initial Data~~
~~Findings, June 2013, pp. 15-17, https://files.consumerfinance.gov/f/201306_cfpb_whitepaper_overdraft -practices.pdf;~~
~~and FDIC, FDIC Quarterly Banking Profile: Quarterly Incom e Tim e-Series Data, 2022, https://www.fdic.gov/bank/~~
~~analytical/qbp/.~~
~~96 T he most common fees that checking account consumers incur are overdraft and nonsufficient fund fees. Overdraft~~
~~services can help consumers pay bills on time, but fees can be costly, particularly if used repeatedly. For more~~
~~information, see T revor Bakker et al., Data Point: Checking Account Overdraft, CFPB, July 2014, p. 5,~~
~~https://files.consumerfinance.gov/f/201407_cfpb_report_data-point_overdrafts.pdf.~~
~~97 In addition, unpaid fees can lead to involuntary account closures, making it more difficult to obtain a bank account in~~
~~the future.~~
~~98 For example, although check cashing, money orders, and other nonbank transaction products might charge high fees,~~
~~some consumers may incur higher or less predictable fees with a checking account. In addition, such alternative~~
~~financial products might allow consumers to access cash more quickly, which might be valuable for consumers with~~
~~tight budgets and little liquid savings or credit to manage financial shocks or other expenses. Lastly, nonbank stores~~
~~often are open longer hours than banks, including evenings and weekends, which might be more convenient for~~
~~working households. Moreover, these nonbank stores might also be more likely to cater to a local ethnic or racial~~
~~community, for example, by hiring staff who speak a native language and live in the local community. Although~~
~~consumers may find benefits in using alternative financial products substitutes, these products may not always have all~~
~~Congressional Research Service~~
19

~~link to page 25 link to page 25~~ ~~Using the Federal Income Tax System to Deliver Cash Assistance to Families~~

~~Households with bank accounts can elect to receive tax refunds via direct deposit. Direct deposit,~~
~~usual y to a bank account, is general y a faster and more secure way to receive payments than a~~
~~paper check. For 2019 income tax returns, 87% of tax refunds were delivered by direct deposit,~~
~~and the rest were delivered by mailing paper checks.99 Some unbanked households may receive~~
~~their tax refunds as paper checks, even though some of these households may prefer a faster and~~
~~more reliable way to receive direct payments from the IRS.~~
~~The IRS does not send al direct deposits to permanent bank accounts. For consumers using~~
~~refund advance products, a paid preparer establishes a virtual bank account solely to receive a~~
child tax credit). Volatility: Household Evidence from the U.S. Financial Diaries, NYU Wagner Research Paper No. 2659883, U.S. Financial Diaries Working Paper, September 13, 2015; Robert Moffitt and Sisi Zhang, “Income Volatility and the PSID: Past Research and New Results,” AEA Papers and Proceedings, vol. 108 (May 2018); and Karen Dynan, Douglas Elmendorf, and Daniel Sichel, “The Evolution of Household Income Volatility,” The B.E. Journal of Economic Analysis & Policy, vol. 12, no. 2 (December 18, 2012). 90 The authors note that “In some cases, drops in the EITC from one year to the next can be dramatic. Among low- income families [with children], about 22 percent see a drop of at least $2,000 and another 11 percent see a drop of between $1,000 and $2,000 (figure 3). Drops of at least $2,000 are caused by income increasing 64 percent of the time, children decreasing 20 percent of the time, and income decreasing 16 percent of the time.” Elaine Maag, Nikhita Airi, and Lillian Hunter, Understanding Yearly Changes in Family Structure and Income and Their Impact on Tax Credits, Tax Policy Center, February 1, 2023, pp. 8-10, https://www.taxpolicycenter.org/publications/understanding-yearly-changes-family-structure-and-income-and-their-impact-tax-credits/full. 91 Letter from John A. Koskinen, Commissioner of the Internal Revenue Service, to Members of Congress, January 9, 2017, https://www.irs.gov/pub/newsroom/commissionerletteracafilingseason.pdf. 92 Leonard Burman, Gordon Mermin, and Elena Ramirez, Tax Refunds and Affordable Care Act Reconciliation, Tax Policy Center, April 1, 2015. Congressional Research Service 18 link to page 23 link to page 23 Using the Federal Income Tax System to Deliver Cash Assistance to Families A tax benefit’s design may help reduce the discrepancy between an advance benefit and the benefit received on a tax return. For example, if a parameter once used to calculate eligibility for an amount of a tax benefit no longer affects eligibility or amount, taxpayers will not need to reconcile or true up the benefit based on annual changes in this factor. This can occur, for example, if older income data are not used to estimate eligibility but instead used to determine eligibility (as was the case with the temporary “income lookbacks” for the EITC enacted as part of P.L. 116-260 and P.L. 117-2).93 Discrepancies are also likely to be reduced when income, if below certain levels, does not affect the amount of the benefit, like the “fully refundable” child credit in 2021 (see “Case Study 5 | Advance Payments of the Fully Refundable Child Tax Credit”). As these examples highlight, in addition to considering whether and to what extent to limit repayment of advanced benefits, policymakers may also consider using program design to improve ease of administration. Case Study 5 | Advance Payments of the Fully Refundable Child Tax Credit The American Rescue Plan Act (ARPA; P.L. 117-2) temporarily expanded the child credit for many taxpayers and modified its administration. Among other changes, the law made the credit ful y refundable for 2021 only. Fully Refundable In the context of the ARPA-expanded child credit, ful refundability meant the credit was the same amount per child for low- and moderate-income taxpayers, irrespective of their incomes. Specifically, if an unmarried parent had income in 2021 under $112,500 ($150,000 for married parents), the credit amount did not vary based on income. Whether the family had $0, $20,000, $50,000, or $100,000 of income, the credit amount was the same for a given number of children. (Higher-income taxpayers were subject to a phaseout of the credit based on their income.) By making the child credit ful y refundable for 2021, ARPA temporarily eliminated the prior-law formula used to phase in the credit for lower-income taxpayers based on income. Under the prior-law formula, a taxpayer with more than $2,500 of earned income was eligible to receive a partial benefit from the credit. While many studies examined the impact of ful refundability on poverty, ful refundability also eliminated the chance that low- and some moderate-income taxpayers would need to repay advance payments of the child credit due to changes in income. To understand this, it is important to first understand how the 2021 credit was advanced. Advance Payments The advance payments of the 2021 child credit were based on estimates of the credit taxpayers were eligible to claim on their 2021 income tax returns. In order to estimate taxpayers’ 2021 child credits, the IRS was directed by the statute to use data from 2020 income tax returns, or if those were not available, data from 2019 income tax returns. Since up to half of the 2021 credit could be issued in advance, the IRS generally calculated 50% of the estimated 2021 credit amount and then issued that in monthly payments. For example, if a married couple filing jointly listed $75,000 of income and two young children on a 2020 return—and those children were also young in 2021 (i.e., 0-5 years old)—the IRS would have estimated their 2021 credit to be $7,200. The IRS would have issued half of that amount—$3,600—in six monthly payments of $600, beginning July 15, 2021, and ending December 15, 2021. When taxpayers filed their 2021 returns (in 2022), they first calculated the total amounts of the 2021 child credit for which they were eligible (based on the number and ages of qualifying children, income, and marital status for 2021). Then, taxpayers subtracted from their total 2021 credits the sum of advanced child credit payments they received during calendar year 2021. For example, if an unmarried taxpayer had two young children (and filed as a head of household) in 2021 (like they did in 2020), but their 2021 income had actually fallen to $40,000, they would stil be eligible for a total child credit for 2021 of $7,200. Since they would have received half of their total 2021 credit in advance payments in calendar year 2021 ($3,600), they would ultimately claim the remaining half ($3,600) on their 2021 return. As long as this unmarried parent’s income was below $112,500 in both 2020 and 2021, their credit amount would not change even if their income did. (If their income had instead risen to $350,000 in 2021, they would not have been eligible for any credit in 2021, and would have needed to repay the 93 See CRS Report R44825, The Earned Income Tax Credit (EITC): Legislative History, by Margot L. Crandall-Hollick. Congressional Research Service 19 Using the Federal Income Tax System to Deliver Cash Assistance to Families $3,600 in advance payments they had received.) Ful refundability effectively removed income as a factor that would lead to low- and some moderate-income taxpayers needing to repay the advance payments of the credit. The Treasury Inspector General for Tax Administration (TIGTA) found that the IRS issued 98% of advance child credit amounts correctly based on the 2020 data used to determine these payment amounts.94 According to this analysis, errors tended to occur when the IRS advanced a credit for a child that was not ultimately a qualifying child based on 2020 or 2019 tax data. For example, a taxpayer may have claimed a child incorrectly in 2020 as a dependent, and the IRS may have erroneously issued an advance payment based on this information. Notably, other factors, including changes in the number of eligible children from year to year, could have resulted in overpayments of the advance credit compared to what taxpayers were ultimately eligible to claim based on 2021 tax data. In these cases, Congress enacted repayment protection in the form of a safe harbor.95 Issue 6: Some Households Do Not Have or Use Bank Accounts to Receive Tax Benefits Some Americans, especially lower-income Americans, may face difficulties receiving payments quickly from the IRS because they do not have bank accounts or do not use a bank account to receive their tax refunds. Most U.S. consumers choose to open a bank account because it is a safe and secure way to store money.96 However, some U.S. households—often those with low incomes, lack of credit histories, or credit histories marked with missed debt payments—do not use banking services. According to the FDIC’s 2021 survey on how America banks, 4.5% of households in the United States were unbanked, meaning that these households did not have a bank account.97 Compared with the general U.S. population, unbanked consumers are more likely to have lower incomes, have less formal education, be of a racial or ethnic minority, and be disabled.98 Households may not open a bank account for a number of reasons. In the FDIC survey, unbanked households’ most reported answers for why they did not have bank accounts were because they did not have enough money, were concerned about privacy, did not trust banks, and wanted to avoid high and unpredictable bank fees.99 In the past two decades, the availability of free or low-cost checking accounts has reportedly diminished, and fees associated with checking accounts have grown.100 Some bank accounts require minimum account balances to avoid certain maintenance or service fees.101 For consumers living paycheck to paycheck, maintaining bank 94 Treasury Inspector General for Tax Administration, American Rescue Plane Act: Accuracy of Advance Child Tax Credit Periodic Payments, Report Number 2022-47-070, September 21, 2022. 95 For more information on the safe harbor, see Appendix D in CRS Report R46900, The Expanded Child Tax Credit for 2021: Frequently Asked Questions (FAQs), by Margot L. Crandall-Hollick. 96 In this report, bank accounts refer to checking, savings, and other accounts at all depository institutions, including banks and credit unions. 97 Federal Deposit Insurance Corporation (FDIC), 2021 FDIC National Survey of Unbanked and Underbanked Households: Executive Summary, November 2022, p. 1, https://www.fdic.gov/analysis/household-survey/2021execsum.pdf. (Hereinafter “FDIC, National Survey of Unbanked and Underbanked Households.”) 98 FDIC, National Survey of Unbanked and Underbanked Households, p. 1-2. 99 FDIC, National Survey of Unbanked and Underbanked Households, p. 3. 100 Consumer Financial Protection Bureau (CFPB), CFPB Study of Overdraft Programs: A White Paper of Initial Data Findings, June 2013, pp. 15-17, https://files.consumerfinance.gov/f/201306_cfpb_whitepaper_overdraft-practices.pdf; and FDIC, FDIC Quarterly Banking Profile: Quarterly Income Time-Series Data, 2022, https://www.fdic.gov/bank/analytical/qbp/. 101 The most common fees that checking account consumers incur are overdraft and nonsufficient fund fees. Overdraft services can help consumers pay bills on time, but fees can be costly, particularly if used repeatedly. For more Congressional Research Service 20 link to page 27 link to page 27 Using the Federal Income Tax System to Deliver Cash Assistance to Families account minimums and avoiding account overdrafts might be difficult, leading to unaffordable account fees.102 At least some of these consumers may be served better by alternative financial providers if their products are less expensive, faster, and more convenient for some consumers.103 Households with bank accounts can elect to receive tax refunds via direct deposit. Direct deposit, usually to a bank account, is generally a faster and more secure way to receive payments than a paper check. For 2019 income tax returns, 87% of tax refunds were delivered by direct deposit, and the rest were delivered by mailing paper checks.104 Some unbanked households may receive their tax refunds as paper checks, even though some of these households may prefer a faster and more reliable way to receive direct payments from the IRS. The IRS does not send all direct deposits to permanent bank accounts. For consumers using refund advance products, a paid preparer establishes a virtual bank account solely to receive a given tax refund, and the account cannot be used later for delivering other payments (see given tax refund, and the account cannot be used later for delivering other payments (see “Case
Study 6 | Refund Advance Products and Difficulties Receiving Stimulus Payments”)”). For . For al all of of
these reasons, the IRS may not have some Americans’ bank account information and, therefore, these reasons, the IRS may not have some Americans’ bank account information and, therefore,
may not be able to deliver direct payments quickly. may not be able to deliver direct payments quickly.
Fast and easy delivery of direct payments—particularly for nonfilers, unbanked consumers, or Fast and easy delivery of direct payments—particularly for nonfilers, unbanked consumers, or
those without account information at the IRS—may be those without account information at the IRS—may be ~~especial y~~especially valuable. Individuals in these valuable. Individuals in these
groups may be more likely to be low income or liquiditygroups may be more likely to be low income or liquidity constrained (constrained (~~colloquial y~~colloquially, living , living
“paycheck to paycheck”) and may need access to their payments quickly, “paycheck to paycheck”) and may need access to their payments quickly, ~~especial y~~especially during during
economic downturns or periods of financial hardship.economic downturns or periods of financial hardship.~~100~~
105 Policy Considerations
Some of the lowest-income and most vulnerable populations may struggle to receive cash Some of the lowest-income and most vulnerable populations may struggle to receive cash
assistance provided through the tax code because they do not have bank accounts. This issue assistance provided through the tax code because they do not have bank accounts. This issue
represents a potential barrier to certain populations receiving the benefits for which they are represents a potential barrier to certain populations receiving the benefits for which they are
eligible.eligible. Policymakers may wish to consider alternative delivery mechanisms for tax benefits that Policymakers may wish to consider alternative delivery mechanisms for tax benefits that
~~could be accessible to unbanked families. Other government benefit programs like Social~~
~~Security have used prepaid cards as an alternative delivery method.~~
~~General-purpose prepaid cards may be considered an alternative to a traditional checking account,~~
~~and they can be obtained through a bank, at retail stores, or online.101 Prepaid card use is more~~
~~prevalent among unbanked households.102 For this reason, prepaid cards may be an alternative~~
~~way for the government to reach unbanked consumers for direct payments. Indeed, a growing~~
~~number of government programs are using general-purpose prepaid cards to distribute benefits to~~
~~unbanked and other consumers, including Social Security payments using the Direct Express~~
~~card.103 The Treasury Department has experimented with prepaid cards for receiving tax refunds~~

~~of the benefits of bank accounts, such as FDIC insurance or other consumer protections. For more information, see Lisa~~
~~Servon, The Unbanking of Am erica: How the New Middle Class Survives (New York, NY: Houghton Mifflin Harcourt,~~
~~2017).~~
~~99 Approximately 115 million of 158 million total returns were due tax refunds (73%), and of these 100 million were~~
~~received as direct deposit (87%) See IRS, SOI Tax Stats—Historic Table 2, https://www.irs.gov/statistics/soi-tax-stats-~~
~~historic-table-2.~~
~~100 For more information on access to checking accounts and financial inclusion policy issues, see CRS In Focus~~
~~IF11631, Financial Inclusion: Access to Bank Accounts, by Cheryl R. Cooper; and CRS Report R45979,~~ ~~Financial~~
~~Inclusion and Credit Access Policy Issues, by Cheryl R. Cooper.~~
~~101 For more information on prepaid cards, see CRS Report R43364,~~ ~~Recent Trends in Consumer Retail Payment~~
~~Services Delivered by Depository Institutions, by Darryl E. Getter.~~
~~102 FDIC, National Survey of Unbanked and Underbanked Households, p. 4.~~
~~103 For more information on the Direct Express program, see U.S. Department of the Treasury, Bureau of the Fiscal~~
~~Service, “Direct Express,” https://www.fiscal.treasury.gov/directexpress/.~~
~~Congressional Research Service~~
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~~Using the Federal Income Tax System to Deliver Cash Assistance to Families~~

~~in the past,104~~ information, see Trevor Bakker et al., Data Point: Checking Account Overdraft, CFPB, July 2014, p. 5, https://files.consumerfinance.gov/f/201407_cfpb_report_data-point_overdrafts.pdf. 102 In addition, unpaid fees can lead to involuntary account closures, making it more difficult to obtain a bank account in the future. 103 For example, although check cashing, money orders, and other nonbank transaction products might charge high fees, some consumers may incur higher or less predictable fees with a checking account. In addition, such alternative financial products might allow consumers to access cash more quickly, which might be valuable for consumers with tight budgets and little liquid savings or credit to manage financial shocks or other expenses. Lastly, nonbank stores often are open longer hours than banks, including evenings and weekends, which might be more convenient for working households. Moreover, these nonbank stores might also be more likely to cater to a local ethnic or racial community, for example, by hiring staff who speak a native language and live in the local community. Although consumers may find benefits in using alternative financial products substitutes, these products may not always have all of the benefits of bank accounts, such as FDIC insurance or other consumer protections. For more information, see Lisa Servon, The Unbanking of America: How the New Middle Class Survives (New York, NY: Houghton Mifflin Harcourt, 2017). 104 Approximately 115 million of 158 million total returns were due tax refunds (73%), and of these 100 million were received as direct deposit (87%) See IRS, SOI Tax Stats—Historic Table 2, https://www.irs.gov/statistics/soi-tax-stats-historic-table-2. 105 For more information on access to checking accounts and financial inclusion policy issues, see CRS In Focus IF11631, Financial Inclusion: Access to Bank Accounts, by Cheryl R. Cooper; and CRS Report R45979, Financial Inclusion and Credit Access Policy Issues, by Cheryl R. Cooper. Congressional Research Service 21 Using the Federal Income Tax System to Deliver Cash Assistance to Families could be accessible to unbanked families. Other government benefit programs like Social Security have used prepaid cards as an alternative delivery method. General-purpose prepaid cards may be considered an alternative to a traditional checking account, and they can be obtained through a bank, at retail stores, or online.106 Prepaid card use is more prevalent among unbanked households.107 For this reason, prepaid cards may be an alternative way for the government to reach unbanked consumers for direct payments. Indeed, a growing number of government programs are using general-purpose prepaid cards to distribute benefits to unbanked and other consumers, including Social Security payments using the Direct Express card.108 The Treasury Department has experimented with prepaid cards for receiving tax refunds in the past,109 and it provided some stimulus payments issued during the COVID-19 pandemic by and it provided some stimulus payments issued during the COVID-19 pandemic by
mailing prepaid cards. However, reports suggest some people experienced confusion when mailing prepaid cards. However, reports suggest some people experienced confusion when
receiving these unsolicited prepaid cards from the federal government,receiving these unsolicited prepaid cards from the federal government,~~105~~110 and had questions about and had questions about
how to avoid fees when using these government-provided cards.how to avoid fees when using these government-provided cards.~~106~~111 In addition, the Treasury In addition, the Treasury
Department needs up-to-date household addresses to successfully mail prepaid cards to taxpayers; Department needs up-to-date household addresses to successfully mail prepaid cards to taxpayers;
as previously discussed, the information on federal income tax returns is lagged by one year and as previously discussed, the information on federal income tax returns is lagged by one year and
so may not be current. so may not be current.
Prepaid cards can be used in payment networks, such as Visa or MasterCard. They Prepaid cards can be used in payment networks, such as Visa or MasterCard. They ~~general y~~generally have have
features similar to debit and checking accounts, such as the ability to pay features similar to debit and checking accounts, such as the ability to pay ~~bil s electronical y~~bills electronically, get , get
cash at an ATM, make purchases at stores or online, and receive direct deposits. Prepaid cards cash at an ATM, make purchases at stores or online, and receive direct deposits. Prepaid cards
often have a monthly maintenance fee and other particular service fees, such as fees for using an often have a monthly maintenance fee and other particular service fees, such as fees for using an
~~ATM or reloading cash.~~
~~Case Study 6 | Refund Advance Products and Difficulties Receiving Stimulus~~
ATM or reloading cash. 106 For more information on prepaid cards, see CRS Report R43364, Recent Trends in Consumer Retail Payment Services Delivered by Depository Institutions, by Darryl E. Getter. 107 FDIC, National Survey of Unbanked and Underbanked Households, p. 4. 108 For more information on the Direct Express program, see U.S. Department of the Treasury, Bureau of the Fiscal Service, “Direct Express,” https://www.fiscal.treasury.gov/directexpress/. 109 For more information, see U.S. Department of the Treasury, “Treasury Launches Pilot Program of Prepaid Debit and Payroll Cards for Fast, Safe and Convenient Tax Refunds,” press release, January 13, 2011, https://www.treasury.gov/press-center/press-releases/pages/tg1021.aspx; and Caroline Ratcliffe, William Congdon, and Signe-Mary McKernan, Prepaid Cards at Tax Time and Beyond: Findings from the MyAccountCard Pilot, Urban Institute, March 2014, https://www.urban.org/sites/default/files/publication/22476/413082-Prepaid-Cards-at-Tax-Time-and-Beyond-Findings-from-the-MyAccountCard-Pilot.PDF. 110 Michelle Singletary, “Stimulus prepaid debit card is causing a lot of confusion,” Washington Post, June 1, 2020, https://www.washingtonpost.com/business/2020/06/01/faq-stimulus-debit-card/. 111 CFPB, “How to Use Your Economic Impact Payment Prepaid Debit Card without Paying a Fee,” June 1, 2020, https://www.consumerfinance.gov/about-us/blog/economic-impact-payment-prepaid-card/. Congressional Research Service 22 Using the Federal Income Tax System to Deliver Cash Assistance to Families Case Study 6 | Refund Advance Products and Difficulties Receiving Stimulus Payments
Refund advance products, such as refund anticipation checks (RACs) and refund anticipation loans (RALs), are Refund advance products, such as refund anticipation checks (RACs) and refund anticipation loans (RALs), are
common in the United States. A RAC is an agreement to pay tax preparation fees when a consumercommon in the United States. A RAC is an agreement to pay tax preparation fees when a consumer ~~receives~~ receives a tax a tax
refund, for an additional fee (rather than when a tax preparer files a consumer’srefund, for an additional fee (rather than when a tax preparer files a consumer’s taxes). According to the IRS,taxes). According to the IRS, with with
2019 tax returns, over 21 mil ion2019 tax returns, over 21 mil ion people used RACs (19% of households receivingpeople used RACs (19% of households receiving a tax refund).a tax refund).~~107~~112 According to According to
the Consumer Financial Protection Bureau (CFPB), RAC fees the Consumer Financial Protection Bureau (CFPB), RAC fees ~~typical y~~typically range from $30 to $50. range from $30 to $50.~~108~~113 In contrast, a In contrast, a
RAL is a credit product where a consumer receivesRAL is a credit product where a consumer receives an advance on an anticipated tax refund. Consumersan advance on an anticipated tax refund. Consumers can be can be
charged interest and fees on these loans.charged interest and fees on these loans.~~109~~114 According to the FDIC, 1.0% of households used a RAL during According to the FDIC, 1.0% of households used a RAL during
2021.2021.~~110~~115 Lower-income Lower-income and minorityand minority consumers wereconsumers were ~~more likely~~ more likely to use refund advance products.to use refund advance products.~~111~~

~~104 For more information, see U.S. Department of the Treasury, “Treasury Launches Pilot Program of Prepaid Debit~~
~~and Payroll Cards for Fast, Safe and Convenient T ax Refunds,” press release, January 13, 2011,~~
~~https://www.treasury.gov/press-center/press-releases/pages/tg1021.aspx; and Caroline Ratcliffe, William Congdon, and~~
~~Signe-Mary McKernan, Prepaid Cards at Tax Tim e and Beyond: Find ings from the MyAccountCard Pilot, Urban~~
~~Institute, March 2014, https://www.urban.org/sites/default/files/publication/22476/413082-Prepaid-Cards-at-Tax-Time-~~
~~and-Beyond-Findings-from-the-MyAccountCard-Pilot.PDF.~~
~~105 Michelle Singletary, “Stimulus prepaid debit card is causing a lot of confusion,” Washington Post, June 1, 2020,~~
~~https://www.washingtonpost.com/business/2020/06/01/faq-stimulus-debit-card/.~~
~~106 CFPB, “ How to Use Your Economic Impact Payment Prepaid Debit Card without Paying a Fee,” June 1, 2020,~~
~~https://www.consumerfinance.gov/about-us/blog/economic-impact -payment -prepaid-card/.~~
~~107 IRS, SOI Tax Stats—Historic Table 2, https://www.irs.gov/statistics/soi-tax-stats-historic-table-2. According to the~~
~~GAO, “IRS data on tax-time financial products for 2016-2018 do not accurately reflect product use and the IRS has not~~
~~updated reporting guidance to tax preparers. IRS data for 2008 -2016 and information from industry participants and a~~
~~consumer advocacy group’s reports suggest~~ 116 When consumers use RACs or RALs, a virtual bank account is usually established solely for the transition. Tax refunds are deposited into this account, so fees, loans, or other amounts owed can be deducted before the consumer receives the remaining refund. Often, these temporary accounts are prepaid card accounts.117 Because these accounts are temporary, future tax benefits cannot be directed to them. For this reason, these consumers faced difficulties quickly receiving stimulus checks issued during the COVID-19 pandemic from the IRS (these payments were advances of a one-time refundable credit based on older tax data, including information about RACs provided on older tax returns). This problem may be especially important for these consumers, since use of refund advance products suggests either a lack of funds to pay tax preparation fees or a desire for quick access to tax refunds. Therefore, this issue may limit rapid payment of tax benefits to those who may be most cash constrained, and for whom fast payments would be most valuable. Issue 7: Tax Benefits Can Be Reduced via Offset or Garnishment Actions A household’s tax benefits may be reduced to collect past-due debts owed to the federal government, state or local government, or private creditors. This generally occurs by one of two mechanisms: offset or garnishment. 112 IRS, SOI Tax Stats—Historic Table 2, https://www.irs.gov/statistics/soi-tax-stats-historic-table-2. According to the GAO, “IRS data on tax-time financial products for 2016-2018 do not accurately reflect product use and the IRS has not updated reporting guidance to tax preparers. IRS data for 2008-2016 and information from industry participants and a consumer advocacy group’s reports suggest that trends in the market for tax-time financial products include the decline that trends in the market for tax-time financial products include the decline
of refund anticipation loans and that refund transfers became the most usedof refund anticipation loans and that refund transfers became the most used product. Industry data also indicate that product. Industry data also indicate that
product fees for refund transfers increased in 2018; multiple other fees can be associated with taxproduct fees for refund transfers increased in 2018; multiple other fees can be associated with tax -time products. New -time products. New
tax-time products and product features continue to be introduced.” Seetax-time products and product features continue to be introduced.” See GAO,GAO, Tax Refund Products: Product Mix Has
Evolved and IRS Should ~~Im prove~~Improve Data Quality, GAO-19-269, April 2019, p. 10, https://www.gao.gov/assets/700/, GAO-19-269, April 2019, p. 10, https://www.gao.gov/assets/700/
698292.pdf. 698292.pdf.
~~108~~113 Laura Udis, Laura Udis, ~~“ T ax Refund T ips~~ “Tax Refund Tips: Understanding Refund: Understanding Refund Advance Loans and Checks,” CFPB, February 13, 2018, Advance Loans and Checks,” CFPB, February 13, 2018,
https://www.consumerfinance.gov/about-us/blog/tax-refund-tips-understanding-refund-advance-loans-and-checks/. https://www.consumerfinance.gov/about-us/blog/tax-refund-tips-understanding-refund-advance-loans-and-checks/.
~~109~~ 114 Laura Udis, Laura Udis, ~~“ T ax Refund T ips~~ “Tax Refund Tips: Understanding Refund: Understanding Refund Advance Loans and Checks,” CFPB, February 13, 2018, Advance Loans and Checks,” CFPB, February 13, 2018,
https://www.consumerfinance.gov/about-us/blog/tax-refund-tips-understanding-refund-advance-loans-and-checks/. https://www.consumerfinance.gov/about-us/blog/tax-refund-tips-understanding-refund-advance-loans-and-checks/.
~~110~~115 FDIC, FDIC, National Survey of Unbanked and Underbanked Households, p. 66, https://www.fdic.gov/analysis/, p. 66, https://www.fdic.gov/analysis/
household-survey/2021report.pdf. household-survey/2021report.pdf.
~~111~~116 GAO, GAO, Tax Refund Products: Product Mix Has Evolved and IRS Should Improve Data Quality ~~, GAO-19-269, April~~
~~2019, pp. 23-27, https://www.gao.gov/assets/700/698292.pdf.~~
~~Congressional Research Service~~
21

~~Using the Federal Income Tax System to Deliver Cash Assistance to Families~~

~~When consumers use RACs or RALs, a virtual bank account is usual y established solely for the transition. Tax~~
~~refunds are deposited into this account, so fees, loans, or other amounts owed can be deducted before the~~
~~consumer receives the remaining refund. Often, these temporary accounts are prepaid card accounts.112 Because~~
~~these accounts are temporary, future tax benefits cannot be directed to them. For this reason, these consumers~~
~~faced difficulties quickly receiving stimulus checks issued during the COVID-19 pandemic from the IRS (these~~
~~payments were advances of a one-time refundable credit based on older tax data, including information about~~
~~RACs provided on older tax returns). This problem may be especial y important for these consumers, since use of~~
~~refund advance products suggests either a lack of funds to pay tax preparation fees or a desire for quick access to~~
~~tax refunds. Therefore, this issue may limit rapid payment of tax benefits to those who may be most cash~~
~~constrained, and for whom fast payments would be most valuable.~~
~~Issue 7: Tax Benefits Can Be Reduced via Offset or~~
~~Garnishment Actions~~
~~A household’s tax benefits may be reduced to collect past-due debts owed to the federal~~
~~government, state or local government, or private creditors. This general y occurs by one of two~~
~~mechanisms: offset or garnishment.~~
, GAO-19-269, April 2019, pp. 23-27, https://www.gao.gov/assets/700/698292.pdf. 117 H&R Block, “0% Interest Tax Refund Advance Loan: Frequently Asked Questions,” https://www.hrblock.com/offers/refund-advance/. Congressional Research Service 23 Using the Federal Income Tax System to Deliver Cash Assistance to Families Offset
Various payments made by the federal government, including tax refunds, may be reduced before Various payments made by the federal government, including tax refunds, may be reduced before
they are issued—or offset—to collect certain debts. In effect, a payment (e.g., a tax refund) is they are issued—or offset—to collect certain debts. In effect, a payment (e.g., a tax refund) is
reduced to pay these debts before it is issued to a household, providing a mechanism by which the reduced to pay these debts before it is issued to a household, providing a mechanism by which the
federal government can collect these delinquent debts.federal government can collect these delinquent debts.~~113~~118
Tax refunds—including the portion of refunds from refundable tax credits—are subject to general Tax refunds—including the portion of refunds from refundable tax credits—are subject to general
offset rules.offset rules.~~114~~119 Under these rules, the Treasury’s offsets (reduces) tax refunds to Under these rules, the Treasury’s offsets (reduces) tax refunds to ~~col ect~~collect past-due past-due
federal and state income taxes, certain past-due child support debts federal and state income taxes, certain past-due child support debts ~~col ected~~collected by child support by child support
enforcement agencies, nontax debts owed to federal agencies, and state unemployment enforcement agencies, nontax debts owed to federal agencies, and state unemployment
compensation debts.compensation debts.~~115~~120 In addition, reductions of nontax federal payments for federal tax debts In addition, reductions of nontax federal payments for federal tax debts
are done through the Federal Payment Levy Program (FPLP) in conjunction with Treasury.are done through the Federal Payment Levy Program (FPLP) in conjunction with Treasury.~~116~~
121 Outside of offset procedures and FPLP, the IRS may reduce tax refunds for federal tax debts.Outside of offset procedures and FPLP, the IRS may reduce tax refunds for federal tax debts.~~117~~
122 At the end of FY2020, the U.S. Treasury reported At the end of FY2020, the U.S. Treasury reported ~~col ecting~~collecting about $10 about $10 ~~bil ion~~ billion in unpaid nontax in unpaid nontax
debts by offsetting tax refunds. Of that amount, $5 debts by offsetting tax refunds. Of that amount, $5 ~~bil ion~~billion was for state child support debt, $3.5 was for state child support debt, $3.5
~~bil ion~~ billion was for federal nontax debt (e.g., student loans), $503 was for federal nontax debt (e.g., student loans), $503 ~~mil ion~~million was for state income tax was for state income tax
debt, and $225 debt, and $225 ~~mil ion~~ million was for state unemployment compensation debt.was for state unemployment compensation debt.~~118~~123 Current data on how much tax refunds were offset for past-due federal tax debts are unavailable, but according to a report from the Treasury Inspector General for Tax Administration, in 2013, “more than $6.8 billion in individual refunds were offset to pay outstanding individual and business tax debts.”124 Offset mechanisms generally apply to other payments issued by the federal government, and are not unique to tax benefits. However, there are limitations or protections of certain payments from offset actions. For example, veterans’ pensions from the Department of Veteran Affairs (VA) and Supplemental Security Income (SSI) are not subject to offset.125 118 IRS, ~~Current data on how~~

~~112 H&R Block, “ 0% Interest T ax Refund Advance Loan: Frequently Asked Questions,” https://www.hrblock.com/~~
~~offers/refund-advance/.~~
~~113 IRS,~~ Topic No. 203 Reduced Refund, May 18, 2021, https://www.irs.gov/taxtopics/tc203. , May 18, 2021, https://www.irs.gov/taxtopics/tc203.
~~114~~119 See See IRC §6402. IRC §6402.
~~115~~120 31 C.F.R. §258.8, 42 C.F.R. 31 C.F.R. §258.8, 42 C.F.R. §664, 31 C.F.R. §285.2, 31 C.F.R. §285.8, respectively.§664, 31 C.F.R. §285.2, 31 C.F.R. §285.8, respectively.
~~116 See IRS,~~ 121 See IRS, Federal Payment Levy Program , last updated March 3, 2022, https://www.irs.gov/businesses/small-, last updated March 3, 2022, https://www.irs.gov/businesses/small-
businesses-self-employed/federal-paymentbusinesses-self-employed/federal-payment -levy-program. -levy-program.
~~117~~122 Past-due nontax debts that can be collected via offset are generally more than 120 days past due, Past-due nontax debts that can be collected via offset are generally more than 120 days past due, and federal and federal
agenciesagencies are generally requiredare generally required to notify the U.S. to notify the U.S. ~~T reasury~~Treasury of these debts. U.S. of these debts. U.S. Department of the Treasury, Bureau of Department of the Treasury, Bureau of
the Fiscal Service,the Fiscal Service, Treasury Offset ~~Program~~ Program (TOP): Frequently Asked Questions for Federal Agencies, ,
https://fiscal.treasury.gov/top/faqs-for-federal-agencies.html. https://fiscal.treasury.gov/top/faqs-for-federal-agencies.html.
~~118 See Figures 24 and~~ 123 See Figures 24 and 25 in U.S.25 in U.S. Department of the Department of the ~~T reasury, “~~ Treasury, “U.S. Government Non-Tax Receivable and Debt Collection Activities of Federal Agencies,” in Fiscal Year 2020 Report to Congress, August 2021. By comparison, about $470 million of federal nontax debt was collected via administrative offset, and $507 million of federal tax debt was collected by offsetting federal payments (excluding refunds) via the FPLP. The collection of state child support debt in 2020 was nearly three times the amount in FY2020 as in the previous four fiscal years, when it averaged between $1.7 billion and $1.9 billion. This could be due in part to rules that allowed the first COVID-related stimulus payment to be offset for past-due child support. 124 Treasury Inspector General for Tax Administration, Revising Tax Debt Identification Programming and Correcting Procedural Errors Could Improve the Tax Refund Offset Program, 2016-4-028, March 13, 2016, p. 1. 125 For a list of payments exempt from offset, see U.S. Department of the Treasury, Treasury Offset Program: Payments Exempt from Offset by Disbursing Officials, May 16, 2022, https://fiscal.treasury.gov/files/dms/dmexmpt.pdf. Congressional Research Service 24 Using the Federal Income Tax System to Deliver Cash Assistance to Families Garnishment Garnishment of tax refunds generally~~U.S. Government Non-Tax Receivable and Debt~~
~~Congressional Research Service~~
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~~Using the Federal Income Tax System to Deliver Cash Assistance to Families~~

~~much tax refunds were offset for past-due federal tax debts are unavailable, but according to a~~
~~report from the Treasury Inspector General for Tax Administration, in 2013, “more than $6.8~~
~~bil ion in individual refunds were offset to pay outstanding individual and business tax debts.”119~~
~~Offset mechanisms general y apply to other payments issued by the federal government, and are~~
~~not unique to tax benefits. However, there are limitations or protections of certain payments from~~
~~offset actions. For example, veterans’ pensions from the Department of Veteran Affairs (VA) and~~
~~Supplemental Security Income (SSI) are not subject to offset.120~~
~~Garnishment~~
~~Garnishment of tax refunds general y~~ refers to debt collection actions refers to debt collection actions after a refund has been a refund has been
issued and deposited in a household’s bank account. Garnishment may be used to collect debts to issued and deposited in a household’s bank account. Garnishment may be used to collect debts to
governments as governments as ~~wel~~ well as private creditors. While the mechanics and legal authority for as private creditors. While the mechanics and legal authority for
garnishment actions differ from offset—and may vary from state to state—they both have the garnishment actions differ from offset—and may vary from state to state—they both have the
effect of reducing the amount of a tax refund. effect of reducing the amount of a tax refund.
Payments from the federal government that are considered “federal benefit payments”—including Payments from the federal government that are considered “federal benefit payments”—including
Social Security benefits, SSI benefits, veterans’ benefits, civil service and federal retirement and Social Security benefits, SSI benefits, veterans’ benefits, civil service and federal retirement and
disabilitydisability benefits, servicemember pay, military annuities, and survivor benefits—are benefits, servicemember pay, military annuities, and survivor benefits—are ~~general y~~
generally protected from garnishment for certain types of delinquent debt.protected from garnishment for certain types of delinquent debt.~~121~~126 Federal tax refunds are not Federal tax refunds are not
considered federal benefits payments and are considered federal benefits payments and are ~~general y~~generally not protected from garnishment actions not protected from garnishment actions
under current law. Data on the types of delinquent debts collected via garnishment from federal under current law. Data on the types of delinquent debts collected via garnishment from federal
tax refunds are not publicly available. tax refunds are not publicly available.
Policy Considerations
The collection of past-due debts via offset and garnishment helps to ensure that individuals and The collection of past-due debts via offset and garnishment helps to ensure that individuals and
organizations that owe money to the federal government and other creditors ultimately pay these organizations that owe money to the federal government and other creditors ultimately pay these
debts. The repayment of these debts may also have positive benefits for populations who are debts. The repayment of these debts may also have positive benefits for populations who are
owed the debts. For example, collections of past-due child support may benefit families seeking owed the debts. For example, collections of past-due child support may benefit families seeking
support from a noncustodial parent.support from a noncustodial parent.~~122~~127 But collection activities can also impose significant But collection activities can also impose significant
burdens on those whose benefits are offset or garnished, burdens on those whose benefits are offset or garnished, ~~especial y~~especially if they are low income or if they are low income or
~~facing a financial hardship.~~

~~Collection Activities of Federal Agencies,” in Fiscal Year 2020 Report to Congress, August 2021. By comparison,~~
~~about $470 million of federal nontax debt was collected via administrative offset, and $507 million of federal tax debt~~
~~was collected by offsetting federal payments (excluding refunds) via the FPLP. T he collection of state child support~~
~~debt in 2020 was nearly three times the amount in FY2020 as in the previous four fiscal years, when it averaged~~
~~between $1.7 billion and $1.9 billion. T his could be due in part to rules that allowed the first COVID -related stimulus~~
~~payment to be offset for past -due child support.~~
~~119 T reasury Inspector General for T ax Administration,~~ ~~Revising Tax Debt Identification Programming and Correcting~~
~~Procedural Errors Could Im prove the Tax Refund Offset Program~~ ~~, 2016-4-028, March 13, 2016, p. 1.~~
~~120 For a list of payments exempt from offset, see U.S. Department of the T reasury,~~ ~~Treasury Offset Program:~~
~~Paym ents Exem pt from Offset by Disbursing Officials, May 16, 2022, https://fiscal.treasury.gov/files/dms/~~
~~dmexmpt.pdf.~~
~~121 For more information on federal benefit payments that are protected from garnishment, see U.S. Department of the~~
~~T reasury, Bureau of Fiscal Service, Guidelines for Garnishm ent of Accounts Containing Federal Benefit Paym ents,~~
~~March 2020, p. 16, https://www.fiscal.treasury.gov/files/eft/garnishment -guideline.pdf.~~
~~122 For an overview of the Child Support Enforcement program , see CRS In Focus,~~ ~~The Child Support Enforcement~~
~~(CSE) Program~~ ~~, by Jessica T ollestrup.~~
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~~Using the Federal Income Tax System to Deliver Cash Assistance to Families~~

facing a financial hardship. Policymakers may wish to reduce financial hardship for some recipients of tax benefits, for Policymakers may wish to reduce financial hardship for some recipients of tax benefits, for
example by limitingexample by limiting offset or garnishment activities for those whose income is below a certain offset or garnishment activities for those whose income is below a certain
threshold, who receive certain tax benefits (like the EITC), or who face another hardship, like threshold, who receive certain tax benefits (like the EITC), or who face another hardship, like
unemployment. Some tax refunds may be unemployment. Some tax refunds may be ~~partial y~~partially protected from offset for past-due federal tax protected from offset for past-due federal tax
debts under existing IRS practices. For example, the IRS can provide relief to taxpayers facing debts under existing IRS practices. For example, the IRS can provide relief to taxpayers facing
hardship by issuing an Offset Bypass Refund (OBR), which effectively hardship by issuing an Offset Bypass Refund (OBR), which effectively ~~al ows~~allows the taxpayer to the taxpayer to
receive at least a partial refund to address current financial hardships. The National Taxpayer receive at least a partial refund to address current financial hardships. The National Taxpayer
Advocate’s research suggests that only a Advocate’s research suggests that only a ~~smal~~ small share of eligibleshare of eligible taxpayers may receive an OBR taxpayers may receive an OBR
prior to their refunds being issued and recommends making “OBRs prior to their refunds being issued and recommends making “OBRs ~~systematical y~~systematically available to available to
taxpayers whose refunds include taxpayers whose refunds include ~~al owable~~allowable EITC claims.” EITC claims.”~~123~~128 In other cases, a spouse who files In other cases, a spouse who files
jointly may be able to protect part of their refund from offset for a past-due debt owed by their jointly may be able to protect part of their refund from offset for a past-due debt owed by their
spouse if they are not spouse if they are not ~~legal y~~ legally responsible for the debt as an “injured spouse.”responsible for the debt as an “injured spouse.”~~124~~129
Alternatively, Alternatively, policymakers may exempt payments entirely from offset and garnishment policymakers may exempt payments entirely from offset and garnishment
activities, as they did with the second round of stimulus payments enacted during the COVID-19 activities, as they did with the second round of stimulus payments enacted during the COVID-19
126 For more information on federal benefit payments that are protected from garnishment, see U.S. Department of the Treasury, Bureau of Fiscal Service, Guidelines for Garnishment of Accounts Containing Federal Benefit Payments, March 2020, p. 16, https://www.fiscal.treasury.gov/files/eft/garnishment-guideline.pdf. 127 For an overview of the Child Support Enforcement program, see CRS In Focus, The Child Support Enforcement (CSE) Program, by Jessica Tollestrup. 128 National Taxpayer Advocate, Most Serious Problem #10 COLLECTION: IRS Collections Policies and Procedures Negatively Impact Low-Income Taxpayers, Annual Report to Congress 2021, p. 175, https://www.taxpayeradvocate.irs.gov/reports/2021-annual-report-to-congress/. 129 See Taxpayer Advocate Service, Injured Spouse, February 11, 2022, https://www.taxpayeradvocate.irs.gov/get-help/issues-errors/injured-spouse/. Congressional Research Service 25 link to page 30 link to page 30 Using the Federal Income Tax System to Deliver Cash Assistance to Families pandemic, or they may limit offset and garnishment activities for certain types of delinquent pandemic, or they may limit offset and garnishment activities for certain types of delinquent
federal debts. For example, some view offsetting the refunds of EITC recipients for certain federal debts. For example, some view offsetting the refunds of EITC recipients for certain
debts—including student loans—as at odds with the credit’s goal of ensuring those who work are debts—including student loans—as at odds with the credit’s goal of ensuring those who work are
not in poverty.not in poverty.~~125~~130
When determining whether and/or to what extent to protect tax benefits from offset and When determining whether and/or to what extent to protect tax benefits from offset and
garnishment, policymakers may weigh the benefits of collecting certain past-due debts against garnishment, policymakers may weigh the benefits of collecting certain past-due debts against
any hardship such collections could impose on debtors. How should Congress or the IRS any hardship such collections could impose on debtors. How should Congress or the IRS
prioritize the collection of certain debts over others? What would the impact be on other creditors prioritize the collection of certain debts over others? What would the impact be on other creditors
if they are not repaid and what could the impacts be on borrowers if they think a debt may not if they are not repaid and what could the impacts be on borrowers if they think a debt may not
need to be repaid? Can limitationsneed to be repaid? Can limitations on debt collection action be targeted to vulnerable households, on debt collection action be targeted to vulnerable households,
so that households with sufficient means to repay their debts without so that households with sufficient means to repay their debts without ~~fal ing~~falling into financial into financial
hardship do pay?hardship do pay?
~~Historical y~~ Historically, the federal government has limited debt collection activities on certain federal , the federal government has limited debt collection activities on certain federal
benefits among households that may be facing financial hardship. For example, the federal benefits among households that may be facing financial hardship. For example, the federal
government has limited debt collection actions on programs for low-income populations like SSI, government has limited debt collection actions on programs for low-income populations like SSI,
protected portions of tax refunds as part of the IRS’s OBR program, and limited debt collection protected portions of tax refunds as part of the IRS’s OBR program, and limited debt collection

~~123 National T axpayer Advocate,~~ ~~Most Serious Problem #10 COLLECTION: IRS Collections Policies and Procedures~~
~~Negatively Im pact Low-Incom e Taxpayers, Annual Report to Congress 2021, p. 175,~~
~~https://www.taxpayeradvocate.irs.gov/reports/2021-annual-report-to-congress/.~~
~~124 See T axpayer Advocate Service, Injured Spouse, February 11, 2022, https://www.taxpayeradvocate.irs.gov/get-help/~~
~~issues-errors/injured-spouse/.~~
~~125 Some researchers argued, “ In recognition of the EITC’s role as a critical anti-poverty program and the CT C’s role as~~
~~child assistance, both should be exempted from offset, like Social Security benefits.... As a rule of thumb, exempting 85~~
~~percent of EIT C/CT C from all debt offset —with the possibility for more generous exemptions in the case of extreme~~
~~hardship—would bring EIT C and CT C offsets roughly in line with standard policy for Social Security offsets.” Gabriel~~
~~Zucker, Cassandra Robertson, and Nina Olson, “ 1.9 Offset Exemption (for EIT C, CT C),” in~~ ~~The IRS as a Benefits~~
~~Adm inistrator: An Agenda to Transform the Delivery of EIP, EITC, and CTC, New America, New Practice Lab, March~~
~~24, 2021, https://www.newamerica.org/new-practice-lab/reports/the-irs-as-a-benefits-administrator/.~~
~~T he National T axpayer Advocate has proposed that a portion of the EITC received in a refund be protected from offset~~
~~for any debt. For example, see National T axpayer Advocate, “ Legislative Recommendation #2, T ax Reform:~~
~~Restructure the Earned Income T ax Credit and Related Family Status Provisions to Improve Compliance and minimize~~
~~T axpayer Burden,” in 2016 Annual Report to Congress, Volume 1, pp. 325-357. Also see Persis Yu,~~ ~~Voices of Despair:~~
~~How Seizing the EITC is Leaving Student Loan Borrowers Hom eless and Hopeless During a Pandem ic~~ ~~, National~~
~~Consumer Law Center, July 2020, https://bit.ly/voices-despair-eitc.~~
~~Congressional Research Service~~
24

~~link to page 29 link to page 29~~ ~~Using the Federal Income Tax System to Deliver Cash Assistance to Families~~

~~activities on stimulus checks (see “Case Study 7 | Protecting Stimulus Checks Enacted During the~~
~~COVID-19 Pandemic from Offset and Garnishment”).~~
~~Case Study 7 | Protecting Stimulus Checks Enacted During the COVID-19~~
~~Pandemic from Offset and Garnishment~~
~~During the COVID-19 pandemic, Congress approved three rounds of stimulus checks that were each structured~~
~~as a temporary one-time refundable tax credit advanced using older tax data. (Note that the IRS referred to the~~
~~advance payments as economic impact payments, while they were col oquial y referred to as “stimulus checks.”~~
~~Any additional amount claimed on a federal income tax return was referred to as the recovery rebate credit.)~~
~~Advocates for these payments often discussed them as a way to provide financial relief to households affected by~~
~~the economic downturn associated with the COVID-19 pandemic and provide economic stimulus. As such, some~~
~~viewed a reduction in these amounts, including through garnishment actions, as undermining the payments’ policy~~
~~objectives.126~~
~~Because these payments were structured as refundable tax credits, they would have been subject to the general~~
~~administrative offset rules under which Treasury offsets (reduces) tax refunds to col ect past-due federal and state~~
~~income taxes, certain past-due child support debts col ected by child support enforcement agencies, nontax debts~~
~~owed to federal agencies, and state unemployment compensation debts.~~
~~However, Congress created special rules for the payments. The CARES Act (P.L. 116-136) exempted the first~~
~~round of payments from these offsets except to satisfy past-due child support.~~
~~After the first round of payments were approved, the board of directors of the National Child Support~~
~~Enforcement Association (NCSEA) adopted a resolution urging Congress to exempt future payments from offset~~
~~for past-due child support col ected by child support enforcement agencies. NCSEA’s board of directors urged~~
~~Congress to~~
~~exclude any future COVID-19 related relief payments from~~ activities on stimulus checks (see “Case Study 7 | Protecting Stimulus Checks Enacted During the COVID-19 Pandemic from Offset and Garnishment”). Case Study 7 | Protecting Stimulus Checks Enacted During the COVID-19 Pandemic from Offset and Garnishment During the COVID-19 pandemic, Congress approved three rounds of stimulus checks that were each structured as a temporary one-time refundable tax credit advanced using older tax data. (Note that the IRS referred to the advance payments as economic impact payments, while they were col oquially referred to as “stimulus checks.” Any additional amount claimed on a federal income tax return was referred to as the recovery rebate credit.) Advocates for these payments often discussed them as a way to provide financial relief to households affected by the economic downturn associated with the COVID-19 pandemic and provide economic stimulus. As such, some viewed a reduction in these amounts, including through garnishment actions, as undermining the payments’ policy objectives.131 Because these payments were structured as refundable tax credits, they would have been subject to the general administrative offset rules under which Treasury offsets (reduces) tax refunds to col ect past-due federal and state income taxes, certain past-due child support debts col ected by child support enforcement agencies, nontax debts owed to federal agencies, and state unemployment compensation debts. 130 Some researchers argued, “In recognition of the EITC’s role as a critical anti-poverty program and the CTC’s role as child assistance, both should be exempted from offset, like Social Security benefits.... As a rule of thumb, exempting 85 percent of EITC/CTC from all debt offset—with the possibility for more generous exemptions in the case of extreme hardship—would bring EITC and CTC offsets roughly in line with standard policy for Social Security offsets.” Gabriel Zucker, Cassandra Robertson, and Nina Olson, “1.9 Offset Exemption (for EITC, CTC),” in The IRS as a Benefits Administrator: An Agenda to Transform the Delivery of EIP, EITC, and CTC, New America, New Practice Lab, March 24, 2021, https://www.newamerica.org/new-practice-lab/reports/the-irs-as-a-benefits-administrator/. The National Taxpayer Advocate has proposed that a portion of the EITC received in a refund be protected from offset for any debt. For example, see National Taxpayer Advocate, “Legislative Recommendation #2, Tax Reform: Restructure the Earned Income Tax Credit and Related Family Status Provisions to Improve Compliance and minimize Taxpayer Burden,” in 2016 Annual Report to Congress, Volume 1, pp. 325-357. Also see Persis Yu, Voices of Despair: How Seizing the EITC is Leaving Student Loan Borrowers Homeless and Hopeless During a Pandemic, National Consumer Law Center, July 2020, https://bit.ly/voices-despair-eitc. 131 Pamela Foohey, Dalié Jiménez, and Chris Odindet, “Time is Running Out to Protect Americans’ Relief Payments from Debt Collectors,” Harvard Law Review Blog, April 7, 2020. Lauren Saunders and Margot Saunders, Protecting Against Creditor Seizure of Stimulus Checks, National Consumer Law Center, May 6, 2020, https://library.nclc.org/protecting-against-creditor-seizure-stimulus-checks; and Emily Flitter and Alan Rappeport, “Some Banks Keep Customers’ Stimulus Checks if Accounts Are Overdrawn,” New York Times, April 16, 2020, https://www.nytimes.com/2020/04/16/business/stimulus-paychecks-garnish-banks.html. Congressional Research Service 26 Using the Federal Income Tax System to Deliver Cash Assistance to Families However, Congress created special rules for the payments. The CARES Act (P.L. 116-136) exempted the first round of payments from these offsets except to satisfy past-due child support. After the first round of payments were approved, the board of directors of the National Child Support Enforcement Association (NCSEA) adopted a resolution urging Congress to exempt future payments from offset for past-due child support col ected by child support enforcement agencies. NCSEA’s board of directors urged Congress to exclude any future COVID-19 related relief payments from offset for past-due child support until Congress offset for past-due child support until Congress
~~determines~~ determines that parents who owe past-due support have enough employmentthat parents who owe past-due support have enough employment opportunities to be self-opportunities to be self-
sufficient without a reliefsufficient without a relief payment. payment.
They also noted that They also noted that:
Most state and tribal child support programs Most state and tribal child support programs understood the purpose of the payment was to understood the purpose of the payment was to ~~provide~~
~~immediate and necessary relief to individuals who may have been impacted by the~~ provide immediate and necessary relief to individuals who may have been impacted by the COVID-19 pandemic. They preferred ~~COVID-19 pandemic. They~~
~~preferred~~ that the payment be paid to each parent without being offset for past-due support, as the self-that the payment be paid to each parent without being offset for past-due support, as the self-
sufficiency of both parents was the immediatesufficiency of both parents was the immediate focus. focus.
The Consolidated Appropriations Act, 2021 (P.L. 116-260), and American Rescue Plan Act (ARPA; P.L. 117-2) The Consolidated Appropriations Act, 2021 (P.L. 116-260), and American Rescue Plan Act (ARPA; P.L. 117-2)
exempted the second and third rounds of direct payments from offset, including offsets for past-due child support. exempted the second and third rounds of direct payments from offset, including offsets for past-due child support.
The treatment was different for amounts that individuals receivedThe treatment was different for amounts that individuals received as the recoveryas the recovery rebate credit on their tax rebate credit on their tax
returns. None of the acts provided offset protectionsreturns. None of the acts provided offset protections for the recoveryfor the recovery rebate credit. Notably, the CARES Act, as rebate credit. Notably, the CARES Act, as
~~original y~~ originally enacted, did provide such protections, except for past-due child support; however,enacted, did provide such protections, except for past-due child support; however, the Consolidated the Consolidated
Appropriations Act, 2021 amended the CARES Act to removeAppropriations Act, 2021 amended the CARES Act to remove them, apparently due to administrative them, apparently due to administrative
concerns raised by the IRS.concerns raised by the IRS.~~127~~132 Thus, Thus, al all recovery rebate credits wererecovery rebate credits were subject to offset under the general rules. subject to offset under the general rules.
However,However, the IRS announced that it would not reduce the recovery rebate credits claimedthe IRS announced that it would not reduce the recovery rebate credits claimed on 2020 and 2021 tax on 2020 and 2021 tax
returns to satisfy past-due federalreturns to satisfy past-due federal tax debts.tax debts.~~128~~

~~126 Pamela Foohey, Dalié Jiménez, and Chris Odindet, “T ime is Running Out to Protect Americans’ Relief Payments~~
~~from Debt Collectors,” Harvard Law Review Blog, April 7, 2020. Lauren Saunders and Margot Saunders,~~ ~~Protecting~~
~~Against Creditor Seizure of Stim ulus Checks, National Consumer Law Center, May 6, 2020, https://library.nclc.org/~~
~~protecting-against-creditor-seizure-stimulus-checks; and Emily Flitter and Alan Rappeport, “ Some Banks Keep~~
~~Customers’ Stimulus Checks if Accounts Are Overdrawn,” New York Times, April 16, 2020, https://www.nytimes.com/~~
~~2020/04/16/business/stimulus-paychecks-garnish-banks.html.~~
~~127 T axpayer Advocate Service, “ NT A Blog: Update on Offset of Recovery Rebate Credits: T he IRS Has Agreed to~~
~~Exercise Its Discretion to Stop Offsets of Federal T ax~~133 Separate from the issue of Treasury offset was the question of whether stimulus checks would be subject to garnishment and other col ection actions by private creditors and debt col ectors. The Consolidated Appropriations Act, 2021, shielded the second round of direct payments from garnishment and other col ection actions.134 The CARES Act and ARPA did not include such protections for the first and third rounds of payments. Some states took actions to protect the payments from these col ection actions,135 and other federal laws might have provided limited protection in specific circumstances (e.g., for nursing home residents).136 132 Taxpayer Advocate Service, “NTA Blog: Update on Offset of Recovery Rebate Credits: The IRS Has Agreed to Exercise Its Discretion to Stop Offsets of Federal Tax Debts,” April 15, 2022, https://www.taxpayeradvocate.irs.gov/ Debts,” April 15, 2022, https://www.taxpayeradvocate.irs.gov/
news/nta-blog-update-on-offsetnews/nta-blog-update-on-offset -of-recovery-rebate-credits-the-irs-has-agreed-to-exercise-its-discretion-to-stop-offsets--of-recovery-rebate-credits-the-irs-has-agreed-to-exercise-its-discretion-to-stop-offsets-
of-federal-tax-debts/. of-federal-tax-debts/.
~~128 See IRS, “~~ 133 See IRS, “Q F2: Back taxes: Will the credit be applied to back taxes I owe?”Q F2: Back taxes: Will the credit be applied to back taxes I owe?” (added(added January 13, 2022), in “2021 January 13, 2022), in “2021
Recovery Rebate CreditRecovery Rebate Credit ~~—T opic~~—Topic F: Receiving the Credit on a 2021 F: Receiving the Credit on a 2021 ~~T ax~~Tax Return,” https://www.irs.gov/newsroom/2021- Return,” https://www.irs.gov/newsroom/2021-
recovery-rebate-creditrecovery-rebate-credit -topic-f-receiving-the-credit-on-a-2021-tax-return; and IRS, “-topic-f-receiving-the-credit-on-a-2021-tax-return; and IRS, “ ~~Q E2: Back taxes: Will the credit~~
~~Congressional Research Service~~
25

~~Using the Federal Income Tax System to Deliver Cash Assistance to Families~~

~~Separate from the issue of Treasury offset was the question of whether stimulus checks would be subject to~~
~~garnishment and other col ection actions by private creditors and debt col ectors. The Consolidated~~
~~Appropriations Act, 2021, shielded the second round of direct payments from garnishment and other col ection~~
~~actions.129 The CARES Act and ARPA did not include such protections for the first and third rounds of~~
~~payments. Some states took actions to protect the payments from these col ection actions,130 and other federal~~
~~laws might have provided limited protection in specific circumstances (e.g., for nursing home residents).131~~
Q E2: Back taxes: Will the credit be applied to back taxes I owe?” (updated December 10, 2021), in “2020 Recovery Rebate Credit—Topic E: Receiving the Credit on a 2020 Tax Return,” https://www.irs.gov/newsroom/2020-recovery-rebate-credit-topic-e-receiving-the-credit-on-a-2020-tax-return. 134 See CRS Insight IN11605, COVID-19 and Direct Payments: Comparison of First and Second Round of “Stimulus Checks” to the Third Round in the American Rescue Plan Act of 2021 (ARPA; P.L. 117-2), by Margot L. Crandall-Hollick. This may have been a result of the rules under which the law that included the second payments was considered. The laws creating the first and third stimulus checks were considered under reconciliation, whereas the law creating the second payment was not. 135 Lori J. Sommerfield and John L. Culhane, “Protection of federal stimulus payments from creditors,” Ballard Spahr LLP, April 15, 2021, https://www.consumerfinancemonitor.com/2021/04/15/protection-of-federal-stimulus-payments-from-creditors/. 136 Centers for Medicare and Medicaid Services, “Nursing Home Residents’ Right to retain Federal Economic Incentive Payments,” July 11, 2020, https://www.cms.gov/newsroom/press-releases/nursing-home-residents-right-retain-federal-economic-incentive-payments. Congressional Research Service 27 Using the Federal Income Tax System to Deliver Cash Assistance to Families Conclusion
The federal income tax is a near universal system that can be used to provide cash assistance to The federal income tax is a near universal system that can be used to provide cash assistance to
low- and moderate-income families. However, this report identifies a variety of issues with low- and moderate-income families. However, this report identifies a variety of issues with
providing assistance through the tax code that policymakers may wish to address so that tax providing assistance through the tax code that policymakers may wish to address so that tax
benefits achieve their policy objectives. Some of these issues may be unique to the tax system—benefits achieve their policy objectives. Some of these issues may be unique to the tax system—
like the benefits and limitations of using the income tax return as the application for benefits. like the benefits and limitations of using the income tax return as the application for benefits.
Others—like how to deliver benefits to unbanked households—may apply to other types of Others—like how to deliver benefits to unbanked households—may apply to other types of
assistance provided outside the tax code.assistance provided outside the tax code.
These are not the only issues Congress may consider when developing tax benefits for low- and These are not the only issues Congress may consider when developing tax benefits for low- and
moderate-income families. Congress may consider, for example, whether the culture of the IRS—moderate-income families. Congress may consider, for example, whether the culture of the IRS—
an agency that has an agency that has ~~historical y~~historically focused on compliance with and enforcement of tax law and less focused on compliance with and enforcement of tax law and less
on benefits administration—lends itself to being the appropriate agency to issue benefits.on benefits administration—lends itself to being the appropriate agency to issue benefits.~~132~~137
Should the IRS embrace its role as a benefits administrator, as has been done by revenue agencies Should the IRS embrace its role as a benefits administrator, as has been done by revenue agencies
in other countries, or does that impede its central goal of collecting revenue?in other countries, or does that impede its central goal of collecting revenue?~~133~~

~~be applied to back taxes I owe?” (updated December 10, 2021), in “ 2020 Recovery Rebate Credit —T opic E: Receiving~~
~~the Credit on a 2020 T ax Return,” https://www.irs.gov/newsroom/2020-recovery-rebate-credit-topic-e-receiving-the-~~
~~credit-on-a-2020-tax-return.~~
~~129 See CRS Insight IN11605,~~ ~~COVID-19 and Direct Payments: Comparison of First and Second Round of “Stimulus~~
~~Checks” to the Third Round in the American Rescue Plan Act of 2021 (ARPA; P.L. 117 -2), by Margot L. Crandall-~~
~~Hollick. T his may have been a result of the rules under which the law that included the second payments was~~
~~considered. T he laws creating the first and third stimulus checks were considered under reconciliation, whereas the law~~
~~creating the second payment was not.~~
~~130 Lori J. Sommerfield and John L. Culhane, “Protection of federal stimulus payments from creditors,” Ballard Spahr~~
~~LLP, April 15, 2021, https://www.consumerfinancemonit or.com/2021/04/15/protection-of-federal-stimulus-payments-~~
~~from-creditors/.~~
~~131 Centers for Medicare and Medicaid Services, “ Nursing Home Residents’ Right to retain Federal Economic Incentive~~
~~Payments,” July 11, 2020, https://www.cms.gov/newsroom/press-releases/nursing-home-residents-right -retain-federal-~~
~~economic-incentive-payments.~~
~~132 According to the former IRS T axpayer Advocate, “To date, the IRS has treated these programs [refundable~~ 138 Another factor Congress may consider is whether tax benefits are more sustainable and politically popular than other types of cash assistance.139 Given recent history, policymakers may also want to consider whether debating tax legislation under the budget reconciliation process in the Senate affects their ability to address certain aspects of tax benefit administration.140 By considering these issues as they create new or modify existing tax-based cash assistance, policymakers may be able to increase the likelihood that their policies achieve their intended goals. Author Information Margot L. Crandall-Hollick Cheryl R. Cooper Specialist in Public Finance Analyst in Financial Economics 137 According to the former IRS Taxpayer Advocate, “To date, the IRS has treated these programs [refundable tax tax
credits] in the same way it treats other tax administration programs, which is to say, from an enforcementcredits] in the same way it treats other tax administration programs, which is to say, from an enforcement -oriented -oriented
perspective. Its emphasis has been on usingperspective. Its emphasis has been on using remote correspondence remote correspondence ~~exam inations~~examinations, pre-refund fraud detection filters, , pre-refund fraud detection filters,
and automated summary assessment authorities (math errors), sprinkled sporadically with some outreach efforts (see and automated summary assessment authorities (math errors), sprinkled sporadically with some outreach efforts (see
the annual the annual ~~EIT C~~EITC day events).” Nina Olson, “ day events).” Nina Olson, “ ~~T hinking~~Thinking Out Loud about the Advanced Child Out Loud about the Advanced Child ~~T ax~~Tax Credit—Part 3: the Credit—Part 3: the
Family and Worker Benefit UnitFamily and Worker Benefit Unit ,” Procedurally ,” Procedurally ~~T axing~~Taxing (blog), July 1, 2021, https://procedurallytaxing.com/thinking- (blog), July 1, 2021, https://procedurallytaxing.com/thinking-
out-loud-about-the-advanced-child-tax-creditout-loud-about-the-advanced-child-tax-credit -part-3-the-family-and-worker-benefit-unit/. -part-3-the-family-and-worker-benefit-unit/.
~~133~~ 138 For a summary of how Canada, Australia, and the United Kingdom For a summary of how Canada, Australia, and the United Kingdom administer their child benefits through the tax administer their child benefits through the tax
code, see Samuelcode, see Samuel Hammond and David Koggan,Hammond and David Koggan, ~~Adm inistering~~ Administering a Child Benefit Through the Tax Code: Lessons for the
IRS from Abroad, Niskanen Center, May 27, 2021, https://www.niskanencenter.org/administering-a-child-benefit, Niskanen Center, May 27, 2021, https://www.niskanencenter.org/administering-a-child-benefit --
through-the-tax-code-lessons-for-the-irs-from-abroad/. through-the-tax-code-lessons-for-the-irs-from-abroad/.
~~Congressional Research Service~~
26

~~Using the Federal Income Tax System to Deliver Cash Assistance to Families~~

~~Another factor Congress may consider is whether tax benefits are more sustainable and political y~~
~~popular than other types of cash assistance.134 Given recent history, policymakers may also want~~
~~to consider whether debating tax legislation under the budget reconciliation process in the Senate~~
~~affects their ability to address certain aspects of tax benefit administration.135 By considering~~
~~these issues as they create new or modify existing tax-based cash assistance, policymakers may~~
~~be able to increase the likelihood that their policies achieve their intended goals.~~

~~Author Information~~

~~Margot L. Crandall-Hollick~~
~~Cheryl R. Cooper~~
~~Specialist in Public Finance~~
~~Analyst in Financial Economics~~

139 According to some experts, “Benefits delivered through the tax code are, at least for now, more popular than those delivered through the transfer system.” Sam Hammond and Elaine Maag, Issues in Child Benefit Administration in the United States: Imagining the Next Stage of the Child Tax Credit, Urban Institute, December 2021, p. 23. 140 See CRS Report R41408, Rules and Practices Governing Consideration of Revenue Legislation in the House and Senate, by Megan S. Lynch. Congressional Research Service 28 Using the Federal Income Tax System to Deliver Cash Assistance to Families

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~~134 According to some experts, “Benefits delivered through the tax code are, at least for now, more popular than those~~
~~delivered through the transfer system.” Sam Hammond and Elaine Maag,~~ ~~Issues in Child Benefit Administration in the~~
~~United States: Im agining the Next Stage of the Child Tax Credit, Urban Institute, December 2021, p. 23.~~
~~135 See CRS Report R41408,~~ ~~Rules and Practices Governing Consideration of Revenue Legislation in the House and~~
~~Senate, by Megan S. Lynch.~~
~~Congressional Research Service~~
~~R47323 · VERSION 1 · NEW~~
27 Congressional Research Service R47323 · VERSION 3 · UPDATED 29