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

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

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

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
Analyst in Financial
largest sources of federal cash benefits to U.S. households (after Social Security) and
Economics
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
deliver cash benefits—especially to low- and moderate-income individuals and families.

Cash benefits in the tax code for low- and moderate-income families are generally structured as refundable tax
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 still receive
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
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
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.
Selected Policy Considerations
Issue
Policy Considerations
The Application for Tax Benefits Is the
Some information on the 1040 (i.e., various forms of income) can be accurately and
Federal Income Tax Return
efficiently verified, but other information (like some aspects of a child’s eligibility
The federal income tax return (i.e., “the 1040”)—
for child benefits) are difficult or impossible for the Internal Revenue Service (IRS)
while designed primarily to determine if
to verify, absent an audit. In addition, the 1040 does not col ect some parameters
households have paid all the income tax they owe
that policymakers may wish to use to administer tax benefits.
for the year—also functions as an application for
tax benefits.
Not All Households File a Federal Income
Lack of information on low-income households may limit tax benefit programs’
Tax Return
reach. Policymakers seeking to reach low-income households may consider
The lowest-income households are generally not
requesting this information directly (e.g., via a “nonfiler” portal) or using other
required to file federal income tax returns
administrative data for outreach or administrative purposes. They may also
(although they can if they choose to). The IRS thus
consider whether a comparable nontax benefit administered by a different agency
may lack information on nonfiling households who
could better reach these populations in the short, medium, and/or long term.
are eligible for a tax benefit.

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

Congressional Research Service

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

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

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

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

Congressional Research Service

link to page 5 link to page 5 link to page 6 link to page 6 link to page 7 link to page 7 link to page 7 link to page 8 link to page 8 link to page 9 link to page 11 link to page 12 link to page 13 link to page 14 link to page 16 link to page 17 link to page 17 link to page 17 link to page 19 link to page 20 link to page 20 link to page 22 link to page 23 link to page 24 link to page 25 link to page 27 link to page 27 link to page 27 link to page 28 link to page 29 link to page 29 link to page 30 link to page 30 link to page 32 link to page 32 Using the Federal Income Tax System to Deliver Cash Assistance to Families

Contents
Introduction ..................................................................................................................................... 1
Issue 1: The Application for Tax Benefits Is the Federal Income Tax Return ................................. 1
Verification of Data Provided on the 1040 ................................................................................ 2
Data Not Provided on the 1040 ................................................................................................. 2
Policy Considerations ................................................................................................................ 3
Refundable Tax Credits Are Not Taxable and Do Not Reduce the Amount of
Other Need-Tested Federal Benefits .............................................................................. 3
Case Study 1A | EITC Improper Payments and Verifying Where a Child Lives .................. 4
Case Study 1B | Race, Ethnicity, and the Tax Code ............................................................. 4
Issue 2: Not All Households File a Federal Income Tax Return ..................................................... 5
Policy Considerations ................................................................................................................ 7
Case Study 2A | Nonfiler Portals........................................................................................ 8
Case Study 2B | Using Data from Other Programs to Administer Tax Benefits ................ 9
Issue 3: Many Households Use Paid Preparers and Commercial Software .................................. 10
Policy Considerations .............................................................................................................. 12
Case Study 3 | Volunteer Income Tax Assistance (VITA) .................................................. 13
Issue 4: Data Used to Administer Tax Benefits Are Generally Annual Data from a Prior
Year ............................................................................................................................................ 13
Policy Considerations .............................................................................................................. 15
Case Study 4 | Stimulus Checks Issued During the COVID-19 Pandemic ....................... 16
Issue 5: Tax Benefits Are Usually Delivered Once a Year ............................................................ 16
Policy Considerations .............................................................................................................. 18
Case Study 5 | Advance Payments of the Fully Refundable Child Tax Credit ................... 19
Issue 6: Some Households Do Not Have or Use Bank Accounts to Receive Tax Benefits ........... 20
Policy Considerations .............................................................................................................. 21
Case Study 6 | Refund Advance Products and Difficulties Receiving
Stimulus Payments .......................................................................................................... 23
Issue 7: Tax Benefits Can Be Reduced via Offset or Garnishment Actions .................................. 23
Offset................................................................................................................................. 24
Garnishment ...................................................................................................................... 25
Policy Considerations .............................................................................................................. 25
Case Study 7 | Protecting Stimulus Checks Enacted During the COVID-19
Pandemic from Offset and Garnishment ....................................................................... 26
Conclusion ..................................................................................................................................... 28

Contacts
Author Information ........................................................................................................................ 28

Congressional Research Service

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
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
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,
especially 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
of Health and Human Services (HHS) and the Social Security Administration.”3
Cash assistance for low- and moderate-income families is generally structured in the tax code as
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
owe little or nothing in income taxes—can still receive these benefits as part of their annual tax
refunds. This report will 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
of tax benefits for families.
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
common to most tax benefits.4 Selected examples (“case studies”) are provided throughout to
illustrate some of these issues or examine certain topics more closely.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
primary purpose. The federal individual income tax return’s primary function is to reconcile how
much households owe in income taxes annually and how much they have already paid during the
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

1 See CRS Report R46823, Need-Tested Benefits: Who Receives Assistance?, by Gene Falk, Karen E. Lynch, and Paul
D. Romero; and Hilary Hoynes and Diane Schanzenbach, “Safety Net Investments in Children,” NBER Working Paper
24594, May 2018, https://www.nber.org/papers/w24594.
2 Congress provided three rounds of stimulus checks to low- and moderate-income individuals and families during the
COVID-19 pandemic; see CRS Report R46415, COVID-19 and Direct Payments: Overview and Resources,
coordinated by Margot L. Crandall-Hollick. It also expanded the child tax credit in 2021; see CRS Report R46900, The
Expanded Child Tax Credit for 2021: Frequently Asked Questions (FAQs), by Margot L. Crandall-Hollick. In addition,
Congress has proposed redistributing the receipts from a proposed cap-and-trade program to households via the tax
system; see CRS Report R40841, Assisting Households with the Costs of a Cap-and-Trade Program: Options and
Considerations for Congress, by Jonathan L. Ramseur and Libby Perl.
3 Kristin Hickman, “Pursuing a Single Mission (or Something Closer to It) for the IRS,” Columbia Journal of Tax Law,
vol. 169 (2016), p. 175.
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 family and household are generally used interchangeably in this report and,
unless otherwise specified, refer to all the individuals listed on a federal income tax return.
Congressional Research Service
1

link to page 8 Using the Federal Income Tax System to Deliver Cash Assistance to Families

Service (IRS) Form 1040 (often simply called “the 1040”). In contrast, a household that has
underpaid its taxes throughout the year owes a balance to the IRS.
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 on numerous types of income, some family relationships (spouse, children, other
dependents), some expenses, and government issued identification numbers (IDs). A household
generally also provides its mailing 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
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
insufficient to administer tax benefits that are designed for households, which are the focus of this
report.
Verification of Data Provided on the 1040
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,
the IRS can independently verify the accuracy of some taxpayer-provided information, especially
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
employers, banks, financial institutions, universities, health insurers, and non-IRS government
databases. As the Government Accountability Office (GAO) notes6
misreporting [tax information] is much higher when little or no third-party information
reporting exists than when substantial reporting exists. For items subject to substantial
third-party information reporting, such as employers reporting wages on Form W-2, the
IRS is able to use automated processes to identify and address noncompliance. Information
reporting also produces indirect benefits by increasing taxpayers’ incentive to comply,
knowing that IRS collects the information, according to IRS officials.
However, the IRS cannot verify all information provided on the 1040 efficiently or accurately
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
for families with children since many aspects of eligibility cannot be accurately or efficiently
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
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
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
household’s debt or wealth or demographic characteristics like race, gender, education level, or
immigration status—are also not provided on the 1040.
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), Tax Administration: Better Coordination Could Improve IRS’s Use
of Third-Party Information Reporting to Help Reduce the Tax Gaps, GAO-21-102, December 15, 2020, p. 7,
https://www.gao.gov/products/gao-21-102.
Congressional Research Service
2

link to page 8 link to page 8 Using the Federal Income Tax System to Deliver Cash Assistance to Families

example, an existing database that provides accurate and timely information on individuals who
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
consequences, 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
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 Bill Gale, the income tax (and
the 1040) can provide “‘one stop’ shopping that enables people to receive, in one fell swoop, the
benefits 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, refundable tax credits for individuals are not considered taxable income. This is the case
regardless 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, or as resources for a 12-month period, in determining eligibility for or the
amount of assistance provided by any federal or federally funded need-tested public benefit program.8
The treatment of assistance provided under other benefit programs varies, depending on the particulars of each
program and whether Congress has specifically addressed the treatment in law.
In contrast, to receive other forms of assistance, a household may need to fill out a separate
application and have its eligibility information (including income) verified before a benefit is
issued, sometimes with a face-to-face interview. This may improve compliance with a particular
program’s eligibility requirements, for example by helping administrators more accurately
determine need. But it also may place more administrative burdens on applicants than filling a tax
return, may increase overall program administration costs, and may result in increased social
stigma compared to claiming tax benefits.9 Conversely, while using tax 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 determining
eligibility, which could contribute to households erroneously receiving these benefits.10
And some dispute how simple the process of using a tax return to apply for benefits actually is.
For some families, preparing and filing a return may be complicated, especially in terms of
understanding tax terminology and eligibility rules for tax benefits (e.g., what is a dependent for

7 William G. Gale, Are Taxes Complicated? Compared to What?, Tax Policy Center, TaxVox Blog, April 15, 2022,
https://www.taxpolicycenter.org/taxvox/are-taxes-complicated-compared-what.
8 See Internal Revenue Code (IRC) §6409.
9 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
(EITC) 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. This is quite different from
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 Taxpayer Advocate, in U.S. Congress,
House Committee on Ways and Means, Subcommittee on Oversight, Improper Payments in the Administration of
Refundable Credits, hearings, 112th Cong., 1st sess., May 25, 2011, p. 9, https://www.irs.gov/pub/tas/testimony-written-
wm_oversight-improper_payments-5-25-2011.pdf.
Congressional Research Service
3

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

tax purposes, what is adjusted gross income).11 This can be especially true of child tax benefits
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
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.12 This may lead families to make
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
may also increase the opportunities for individuals to fraudulently claim tax benefits for which
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 those tied to children, makes certain tax benefits difficult for the
IRS to administer. A prime example of this issue is the lack of accurate third-party data to verify that a child
claimed by a taxpayer for the earned income tax credit (EITC) meets the residency 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.
But as the National Taxpayer Advocate noted in a 2019 report:13
the IRS cannot independently verify that a child meets all the current EITC qualifying child rules,
especial y the residency requirement, during filing season. There is no national, authoritative,
and timely database that indicates where and with whom a child lives during a calendar year for
the purposes of administering this tax benefit, making accurate verification of this requirement
difficult. Nor do we believe U.S. taxpayers would tolerate the government creating such a
database.
Notably, IRS research also indicates that taxpayers who claim children who do not meet the EITC’s eligibility
requirements are the largest source of improper payments of the credit in dol ar terms, and the most common
eligibility requirement that they fail to meet is the residency requirement.14 (Improper claims may be intentional
fraud or honest mistakes.) This suggests that tax benefits that rely on information that is difficult to verify
independently could be more prone to erroneous claims, which could make the benefits (and their recipients)
more prone to scrutiny. For example, returns with EITC claims tend to be audited more frequently than non-EITC
returns.15
Case Study 1B | Race, Ethnicity, and the Tax Code
Some policymakers are interested in understanding the impact of tax provisions on families and individuals of
different races and ethnicities.16 While tax provisions are not explicitly designed to benefit individuals of certain

11 Gabriel Zucker, Cassandra Robertson, and Nina Olson, “Introduction: Problems with IRS Benefit Delivery and Goals
of Reform,” 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/.
12 For more information, see CRS Insight IN11634, Child Tax Benefits and Children with Complex or Dynamic Living
Arrangements, by Patrick A. Landers and Margot L. Crandall-Hollick; and Elaine Maag, H. Elizabeth Peters, and Sara
Edelstein, Increasing Family Complexity and Volatility: The Difficulty in Determining Child Tax Benefits, Tax Policy
Center, March 3, 2016, https://www.taxpolicycenter.org/publications/increasing-family-complexity-and-volatility-
difficulty-determining-child-tax-benefits/full.
13 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. 12.
14 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/EITCComplianceStudyTY2006-2008.pdf.
15 See CRS Insight IN11952, Audits of EITC Returns: By the Numbers, by Margot L. Crandall-Hollick.
16 For example, see Letter from Richard E. Neal, Chairman of the Committee on Ways and Means, and Ayanna
Pressley, Member of Congress, to The Honorable Steven T. Mnuchin, Secretary of the U.S. Department of the
Treasury, 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,
“Advancing Racial Equity and Support for Underserved Communities Through the Federal Government.”
Congressional Research Service
4

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

races or ethnicities, some researchers have found that “wealthy, more likely White and male, households may
disproportionately benefit from certain tax provisions.”17
Taxpayers do not directly report race and ethnicity data and some other demographic data on their federal
income tax returns, making it difficult to accurately assess these policies’ impacts by race and ethnicity. In a 2022
report, the Government Accountability Office (GAO) noted
According to the Department of the Treasury, IRS cannot col ect demographic data under
current law unless such data are necessary for administering the tax code. As a result, analysts
have limited ability to assess the effects of tax laws, including COVID-19-related tax relief
provisions, 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
chances of confidential tax data being leaked and reducing voluntary taxpayer compliance.18
Due to the legal, administrative, and policy issues around directly asking taxpayers to provide their race/ethnicity
data, researchers, including those at the Urban Institute,19 Congressional Budget Office (CBO),20 GAO,21 and
Treasury,22 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, 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.
18 According to GAO, “Most experts we interviewed did not favor this method [collecting demographic data on tax
forms]. They cited concerns with public reaction and the potential for inadvertent consequences of IRS examiners
having access to that information.” 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. 14, https://www.gao.gov/assets/gao-22-
104553.pdf.
19 See Tracy Gordon and Aravind Boddupalli, New Data Tools and Methods Can Help Federal Policymakers Create
More Equitable Tax Policy, Tax Policy Center, March 22, 2021, https://www.taxpolicycenter.org/taxvox/new-data-
tools-and-methods-can-help-federal-policymakers-create-more-equitable-tax-policy.
20 U.S. Congressional Budget Office, Analyzing How the Effects of Federal Policies May Differ by Race and Ethnicity,
May 6, 2022, https://www.cbo.gov/publication/58030.
21 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.
22 Deputy Secretary Wally Adeyemo and Assistant Secretary for Tax Policy Lily Batchelder, Advancing Equity
Analysis in Tax Policy, U.S. Department of the Treasury, December 14, 2021, https://home.treasury.gov/news/featured-
stories/advancing-equity-analysis-in-tax-policy.
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 $160.26
Accordingly, for households with no obligation to file a tax return, preparing and filing a federal
income tax return may be a particularly intimidating application instrument. (Some individuals
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 small share of all
nonfilers.27)
Current estimates indicate that a small 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
dependent. The Tax Policy Center estimates that about 15 million households did not file an
income tax return in 2019, while a 2014 report estimated the nonfiling population included about
30 million individuals.28 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
return. According to this study, nonfiling households represented 14% of the U.S. population. Put
another way, about 86% of all individuals in the United States were included on a tax return as
either the primary taxpayer, a spouse, or a dependent.29 A 2014 report using 2011 tax data
estimated about 10% of the U.S. population did not “appear” on a federal individual income tax
return.30
The 2017 CBO study estimated that of all nonfilers, the largest share were unmarried adults under
65 years old without any dependents (37%), followed by adults 65 years or older (31%).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/
i1040gi.pdf.
27 Taxpayers who owe taxes but do not file are a relatively small contributor to the tax gap—about $39 billion of a
gross tax gap of $496 billion, or 8%—according to IRS estimates. See IRS, Tax Gap Estimates for Tax Years 2014-
2016, Publication 1415 (Rev. 8-2022), August 2022, https://www.irs.gov/pub/irs-pdf/p1415.pdf.
28 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; 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 Tax Association,
Santa Fe, NM, November 13-15, 2014, http://tinyurl.com/y7chw254.
29 See Table 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.
30 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.
31 See Table 10 in Shannon Mok, An Evaluation of Using Linked Survey and Administrative Data to Impute Nonfilers
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
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
limitation in a variety of ways. For example, they may try to encourage nonparticipating
households to manually provide information to the IRS, effectively having these households file
income tax returns (see “Case Study 2A | Nonfiler Portals”). This solution, while broadening the
information available 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
filing, including one-to-one outreach and support like “navigators.”35 Alternatively, policymakers
could attempt to use data from other federal or state programs to either administer a tax program
or 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
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, policymakers may consider designing tax-based assistance to target families most
likely 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
use an alternative system, policymakers may consider the tax benefit’s structure and duration.

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
nonfilers to file a return, including that many think that they are not allowed to file a return. This research was
conducted in regard to the stimulus checks enacted during the COVID-19 pandemic, but may include lessons more
broadly applicable to nonfilers. See Gabriel Zucker and Lindsey Wagner, Talking to Non-Filers: Evidence from
Qualitative Research with Families Who Don’t Regularly File Taxes, New America, July 16, 2021,
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, Early Lessons on Increasing Participation in The Child Tax Credit, Urban
Institute, May 18, 2022, https://www.urban.org/research/publication/early-lessons-increasing-participation-child-tax-
credit.
36 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. Individuals may be confused by the tax terms
used or struggle if they do not speak English as a first language, have limited access to a computer or the internet,
or require additional assistance. One concern with some of the nonfiler portals initially deployed during the
COVID-19 pandemic, for example, was that they were not available in Spanish and not mobile friendly. Code for
America, a nonprofit organization, developed an alternative mobile-friendly nonfiler portal for families to receive
the 2021 expanded child credit. The organization’s evaluation of the child tax credit nonfiler portal was that
combining certain outreach strategies with simplified filing using the portal was more successful than either
strategy on its own.40
There is increased interest among some policymakers in simplifying income tax filing for some households,
especial y those with relatively simple tax situations.41 Insofar as the federal government provides more social
benefits through the tax code, nonfiler portals—and the simplified tax returns they generate—may be a tool to
include nonfilers in the tax filing system. For example, 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 or ful y prepopulated returns, perhaps using data from IRS information returns or other
federal programs, if feasible.
Case Study 2B | Using Data from Other Programs to Administer Tax Benefits
A 2017 CBO study on nonfilers suggests this population tends to participate in other benefit programs like Social
Security, Medicare, Medicaid, and SNAP at higher rates than filing households.42 Some might argue that data from
these programs could be used by the IRS to “find” nonfilers, either to administer a benefit directly or for outreach
purposes.
However, data from other benefit programs may be il suited to directly administering a tax program, in particular
because they may lack the relevant information to implement a tax provision. Data from other programs may use
different eligibility rules, different measures of households and income, and different time periods (e.g., eligibility
for tax benefits is typically determined on an annual basis, while eligibility for some nontax benefits is determined
on a shorter time frame, such as a monthly basis).
In a 2015 study, Elaine Maag and col eagues from the Urban Institute examined whether SNAP administrative data
could be used to administer a tax benefit, the EITC.43 Maag et al. noted a significant overlap in the population
eligible for SNAP and the EITC in Florida, where the study was conducted. However, the researchers found that
“except in limited circumstances, the information that applicants report to SNAP is not detailed enough to
conclusively verify eligibility [for the EITC].” More broadly, when discussing using SNAP data for tax benefit
administration, Maag et al. noted that from the perspective of administering tax benefits, “data are likely to be
cumbersome to work with and may not be available in a timely manner.”
It is important to note that benefit programs themselves are not universal, so administrative data from federal or
state benefits programs do not encompass the universe of nonfilers. In particular, adults aged 18 to 64 without
disabilities and 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 information returns filed with the
IRS.
These studies suggest that data that may not be suitable for the administration of a tax provision could potentially
be used for outreach to nonfilers. Indeed, during the rol out of stimulus checks during the COVID-19 pandemic,
the Center on Budget and Policy Priorities (CBPP) advocated for using data from SNAP and Medicaid not to
directly issue the payments, but rather for “aggressive state outreach” to nonfiling households, which CBPP
estimated could reach 9 mil ion of the estimated 12 mil ion nonfiling households.46
Nonetheless, there may always remain some households—especial y those comprised of working-age adults who
do not receive any federal or state benefits, are not disabled, and do not work (or do not have a documented
work record)—that wil be difficult for any system 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
and filing their returns, using either paid tax preparers or commercial software. IRS data indicate
that almost 53% of all 2018 tax returns were prepared by a paid preparer, with a similar share of
low- and moderate-income households using paid preparers.47 Other IRS research indicates that a
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).48 This
contrasts with the administration of nontax social benefit programs, which are typically
administered using government-provided assistance.49
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
assistance families receive. According to one estimate, the fees charged by preparers averaged
$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
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
preparers may struggle to navigate the eligibility rules of these tax benefits.55
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
enrolled agents. The most common and costliest errors tended to occur among unregulated tax
preparers, often called “unenrolled preparers.”56 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 Advocate Service, Earned Income Tax Credit (EITC): The IRS’s EITC Return
Preparer Strategy Does Not Adequately Address the Role of Preparers in EITC Noncompliance, 2015 Annual Report
to Congress, Volume 1, p. 261, https://www.taxpayeradvocate.irs.gov/wp-content/uploads/2020/08/
ARC15_Volume1_MSP_24_EITC-Preparer-Strategy.pdf.
54 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/.
55 GAO, Tax Filing: 2021 Performance Underscores Need for IRS to Address Persistent Challenges, GAO-22-104938,
April 2022, p. 15.
56 For more information on unenrolled preparers, see Taxpayer Advocate Service, RETURN PREPARER OVERSIGHT:
The IRS Lacks a Coordinated Approach to Its Oversight of Return Preparers and Does Not Analyze the Impact of
Penalties Imposed on Preparers, 2018 Annual Report to Congress, Volume 1, pp. 105-116.
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
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
are ultimately responsible.
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-
provided alternative to commercial software.61 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
million to study the cost and feasibility of creating a free direct e-file program (i.e., a public
option).62 Other proposals have included requiring “truth in lending” disclosures of tax
preparation fees so that consumers can make better-informed decisions;63 allowing the IRS to
establish minimum competency standards for paid preparers;64 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 of this and
similar legislation, see Dylan Matthews, “Elizabeth Warren has a great idea for making Tax 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-
block-turbotax-automatic-simple.
62 See CRS Insight IN11977, IRS-Related Funding in the Inflation Reduction Act, by Brendan McDermott.
63 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, pp. 30-31.
64 National Taxpayer Advocate, “Legislative Recommendation #4 Authorize the IRS to Establish Minimum
Competency Standards for Federal Tax Return Preparers,” in 2022 Purple Book, pp. 9-11,
https://www.taxpayeradvocate.irs.gov/reports/2021-annual-report-to-congress/national-taxpayer-advocate-2022-purple-
book/.
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 (TCE) programs provide free tax
preparation and filing services to low-income taxpayers during tax filing season. According to the IRS, about
80,000 volunteers at 11,000 sites prepare about 3.5 mil ion tax returns each year.67 About $41 mil ion was set
aside for VITA/TCE funding in FY2022.68
The IRS does not directly run VITA/TCE sites, but rather provides grants to community organizations and
nonprofits to operate sites. The IRS sets forth basic requirements of the sites, and “provides the sponsoring
organization with limited administrative support, grant money, and periodic inspection. The sponsor organization
recruits volunteers to run the site, trains the volunteers, provides equipment like laptops and printers (often paid
for with IRS grants), and oversees the day-to-day operations. All sites also generally use the same tax preparation
software (TaxSlayer), which is provided by the IRS.”69
VITA volunteers must pass a minimum certification test in order to prepare returns, with higher-level
certifications for some complex tax situations, like preparing returns for servicemembers.70
Research indicates that tax returns prepared by VITA volunteers are less prone to error than returns prepared by
most other types of preparers. One IRS Taxpayer Advocate Report found that in FY2017, VITA/TCE sites had a
93% accuracy rate over all returns they prepared.71 VITA volunteers were also less prone to errors when helping
taxpayers file for refundable tax credits. For example, the most recent IRS study of EITC compliance found that
20%-26% of EITC returns prepared by VITA volunteers had an overclaim of the credit, compared to 35%-44% for
EITC returns prepared by national tax return preparation firms. (The percentages of EITC returns with overclaims
for other types of preparers were 42%-46% by enrol ed agents, 47%-49% by accountants [CPAs], 35% by
attorneys, and 49%-54% by unenrol ed preparers.) The same study also indicated that the errors on VITA-
prepared 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-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
rate. IRS, “Table 9” in Selected Taxpayer Assistance and Education Programs, by Type of Assistance or Program,
Fiscal Year 2021, IRS Databook: Service to Taxpayers, https://www.irs.gov/statistics/service-to-taxpayers.
68 See CRS In Focus IF11979, Internal Revenue Service Appropriations, FY2022, by Gary Guenther.
69 Noah B. Metz, “Volunteer Income Tax Assistance During the Pandemic and Beyond,” Tax Notes, vol. 169
(December 21, 2020), p. 1912.
70 IRS, “Volunteer Training Certification,” https://www.irs.gov/individuals/volunteer-training-certification (updated
April 26, 2022).
71 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/.
72 IRS, Compliance Estimates for the Earned Income Tax Credit Claimed on 2006-2008 Returns, Publication 5162 (8-
2014) Catalog Number 66766H, August 2014, https://www.irs.gov/pub/irs-soi/EITCComplianceStudyTY2006-
Congressional Research Service
13

link to page 20 Using the Federal Income Tax System to Deliver Cash Assistance to Families

has information on what a household’s situation was in a prior year, but no information on its
present situation, which may differ. In addition, tax data generally do not include information
about within-year fluctuations in income and family structure.
When families apply for tax benefits that they will receive in that year, they provide 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
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
2021 returns, or until October 17, 2022, if they requested a filing extension. This lag in time
provides taxpayers with flexibility 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.
In addition, the data collected for administering federal tax benefits are typically annual data—
specifically, 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
or not the taxpayer has dependents. In both cases, these aspects of a household’s status might not
be apparent until the end of the year. Marital (and hence filing) status is generally based on
whether a taxpayer is married on the last day of the year.76 For most tax benefits, dependent
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.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,” Vox, April 13, 2022,
https://www.vox.com/policy-and-politics/22596072/irs-turbotax-hr-block-free-file-tax-return.
75 Taxpayer Advocate Service, 2017 Annual Report to Congress, Volume 1, pp. 128-140,
https://www.taxpayeradvocate.irs.gov/reports/2017-annual-report-to-congress/full-report/.
76 For example, if a couple is 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.) See IRS, Publication 501 (2021), Dependents,
Standard Deduction, and Filing Information, https://www.irs.gov/publications/
p501#en_US_2020_publink1000220722.
77 For more information, see CRS Insight IN11634, Child Tax Benefits and Children with Complex or Dynamic Living
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

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
year than in previous decades in ways that could complicate the administration of existing tax
benefits.79 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
who move in and out of households.80
Policy Considerations
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
that moderate-income families, and poor families in particular, can experience significant
variations in income from month to month.81 To make the social benefits in the tax code more
responsive to changes in families’ situations, like income, the IRS would need more frequent
and/or timely tax data to be provided by both individuals and employers. Gathering this
information could necessitate taxpayers to manually update information about their family
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
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.
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
ease of use, reduced stigma, and low operational costs.82 Absent creating an entirely new income
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, Increasing Family Complexity and Volatility: The Difficulty in
Determining Child Tax Benefits, Tax Policy Center, March 3, 2016, https://www.taxpolicycenter.org/publications/
increasing-family-complexity-and-volatility-difficulty-determining-child-tax-benefits/full.
80 See Elaine Maag et al., Income Volatility: New Research Results with Implications for Income Tax Filing and
Liabilities, Tax Policy Center, May 25, 2017, https://www.taxpolicycenter.org/publications/income-volatility-new-
research-results-implications-income-tax-filing-and-liabilities/full.
81 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
Working Paper, September 11, 2015.
82 As the former National Taxpayer 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 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 checks. These payments were
structured as temporary one-time refundable tax credits that were issued to households before they had to file
their applicable returns. For example, the first payment enacted as part of the CARES Act (P.L. 116-136) equaled
$1,200 per eligible individual ($2,400 for married taxpayers filing a joint tax return) plus an additional $500 per
eligible child. The payment amount then phased down for higher-income taxpayers. These payments were
structured as a new one-time refundable tax credit for 2020 that was advanced so that payments were received in
2020, as opposed to 2021 (when 2020 income tax returns were filed).
To facilitate implementation, the statute directed the Department of the Treasury to automatically issue these
payments to households in 2020 if they had filed 2019 income tax returns, determining eligibility based on
information on their 2019 returns. If a 2019 return had not been filed, the statute directed the Treasury to
automatically issue payments based on 2018 return information. Eligible households who did not automatically
receive the first payment (or who received less than they would have based on their income and family size as
reported on their 2020 income tax returns) were eligible to receive the payment (or additional amount) as the
recovery rebate credit when they filed their 2020 income tax returns. In contrast, if a household received more
than it was eligible for, the difference did not need to be paid back. The second and third rounds of payments
were structured similarly and based on prior-year tax return information, although the amounts and some
eligibility rules differed.83
The fact that the stimulus check amounts and eligibility were based on older data led to concern that the benefits
were being received by ineligible households, when in fact the households were often eligible based on the statute.
For example, after enactment of the CARES Act, the Washington Post reported a story with the headline “The IRS
sent $1,200 to a rich woman who doesn’t need it. Also, she’s British. And lives in London.”84 Nevertheless, the
woman in question lived in the United States on a work visa in 2018, filed a 2018 income tax return, and was,
according the statute, eligible for the advance payment based on her 2018 return.
Issue 5: Tax Benefits Are Usually Delivered
Once a Year
Generally, 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
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
forced savings that enables them to make large purchases.85 But households may also use their
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.
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, COVID-19 and Direct Payments: Overview and Resources, coordinated by Margot L.
Crandall-Hollick.
84 Michelle Singletary, “The IRS sent $1,200 to a rich woman who doesn’t need it. Also, she’s British. And lives in
London.” Washington Post, May 1, 2020.
85 See, for example, Elaine Maag, William J. Congdon, and Eunice Yau, The Earned Income Tax Credit: Program
Outcomes, Payment Timing, and Next Steps for Research, 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 Some research on the child tax credit suggests that some low-
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
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
tax refund.”88
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
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
their tax withholding to receive the portion of the refundable credits that exceeds their income tax
liability. Hence, many low-income families, who have little or no income tax liability, can only
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
benefits before 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
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.
Crucially, when policymakers advance refundable tax credits, they have generally based the
advance amounts on retrospective annual tax data to estimate current eligibility. For example,
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
benefit based on older data is if and how to reconcile what is received in advance with what can
eventually 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
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 for a $2,000 credit when it
filed its 2022 income tax return in 2023? Would the household need to pay back all or some of the
$1,000 overpayment of the credit?
Reconciling estimated payments with what a household is actually eligible for ensures that
households receive the correct amounts of a credit. Reconciling may also discourage taxpayers
from strategically 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
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
assistance 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, Periodic Payment of the Earned Income Tax Credit Revisited, Brookings Institution Metropolitan Policy
Program, December 2015.
88 Elaine Maag 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-
monthly-child-tax-credit-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 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 returns.91 These overpayments
generally 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 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.92 However, while “repayment protection” may
benefit taxpayers, it can increase a tax benefit’s overall budgetary 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
so, however, generally requires policymakers to consider whether and how to reconcile advance
payments with what a household is actually eligible for when it files a return. Policymakers have
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
pandemic, and the premium assistance tax credit in 2020). Other benefits have only been partially
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. Finally, some benefits have
included provisions limiting how much low- and moderate-income taxpayers must repay if they
received overpayments from the advanced credit (the premium assistance tax credit and 2021
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 “Case
Study 6 | Refund Advance Products and Difficulties Receiving Stimulus Payments”). For all of
these reasons, the IRS may not have some Americans’ bank account information and, therefore,
may not be able to deliver direct payments quickly.
Fast and easy delivery of direct payments—particularly for nonfilers, unbanked consumers, or
those without account information at the IRS—may be especially valuable. Individuals in these
groups may be more likely to be low income or liquidity constrained (colloquially, living
“paycheck to paycheck”) and may need access to their payments quickly, especially during
economic downturns or periods of financial hardship.105
Policy Considerations
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
represents a potential barrier to certain populations receiving the benefits for which they are
eligible. Policymakers may wish to consider alternative delivery mechanisms for tax benefits that

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
mailing prepaid cards. However, reports suggest some people experienced confusion when
receiving these unsolicited prepaid cards from the federal government,110 and had questions about
how to avoid fees when using these government-provided cards.111 In addition, the Treasury
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
so may not be current.
Prepaid cards can be used in payment networks, such as Visa or MasterCard. They generally have
features similar to debit and checking accounts, such as the ability to pay bills electronically, get
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
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
common in the United States. A RAC is an agreement to pay tax preparation fees when a consumer receives a tax
refund, for an additional fee (rather than when a tax preparer files a consumer’s taxes). According to the IRS, with
2019 tax returns, over 21 mil ion people used RACs (19% of households receiving a tax refund).112 According to
the Consumer Financial Protection Bureau (CFPB), RAC fees typically range from $30 to $50.113 In contrast, a
RAL is a credit product where a consumer receives an advance on an anticipated tax refund. Consumers can be
charged interest and fees on these loans.114 According to the FDIC, 1.0% of households used a RAL during
2021.115 Lower-income and minority consumers were more likely to use refund advance products.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
of refund anticipation loans and that refund transfers became the most used product. Industry data also indicate that
product fees for refund transfers increased in 2018; multiple other fees can be associated with tax-time products. New
tax-time products and product features continue to be introduced.” See GAO, Tax Refund Products: Product Mix Has
Evolved and IRS Should Improve Data Quality, GAO-19-269, April 2019, p. 10, https://www.gao.gov/assets/700/
698292.pdf.
113 Laura Udis, “Tax Refund Tips: Understanding Refund Advance Loans and Checks,” CFPB, February 13, 2018,
https://www.consumerfinance.gov/about-us/blog/tax-refund-tips-understanding-refund-advance-loans-and-checks/.
114 Laura Udis, “Tax Refund Tips: Understanding Refund Advance Loans and Checks,” CFPB, February 13, 2018,
https://www.consumerfinance.gov/about-us/blog/tax-refund-tips-understanding-refund-advance-loans-and-checks/.
115 FDIC, National Survey of Unbanked and Underbanked Households, p. 66, https://www.fdic.gov/analysis/
household-survey/2021report.pdf.
116 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.
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
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
federal government can collect these delinquent debts.118
Tax refunds—including the portion of refunds from refundable tax credits—are subject to general
offset rules.119 Under these rules, the Treasury’s offsets (reduces) tax refunds to collect past-due
federal and state income taxes, certain past-due child support debts collected by child support
enforcement agencies, nontax debts owed to federal agencies, and state unemployment
compensation debts.120 In addition, reductions of nontax federal payments for federal tax debts
are done through the Federal Payment Levy Program (FPLP) in conjunction with Treasury.121
Outside of offset procedures and FPLP, the IRS may reduce tax refunds for federal tax debts.122
At the end of FY2020, the U.S. Treasury reported collecting about $10 billion in unpaid nontax
debts by offsetting tax refunds. Of that amount, $5 billion was for state child support debt, $3.5
billion was for federal nontax debt (e.g., student loans), $503 million was for state income tax
debt, and $225 million was for state unemployment compensation debt.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, Topic No. 203 Reduced Refund, May 18, 2021, https://www.irs.gov/taxtopics/tc203.
119 See IRC §6402.
120 31 C.F.R. §258.8, 42 C.F.R. §664, 31 C.F.R. §285.2, 31 C.F.R. §285.8, respectively.
121 See IRS, Federal Payment Levy Program, last updated March 3, 2022, https://www.irs.gov/businesses/small-
businesses-self-employed/federal-payment-levy-program.
122 Past-due nontax debts that can be collected via offset are generally more than 120 days past due, and federal
agencies are generally required to notify the U.S. Treasury of these debts. U.S. Department of the Treasury, Bureau of
the Fiscal Service, Treasury Offset Program (TOP): Frequently Asked Questions for Federal Agencies,
https://fiscal.treasury.gov/top/faqs-for-federal-agencies.html.
123 See Figures 24 and 25 in U.S. Department of the 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 refers to debt collection actions after a refund has been
issued and deposited in a household’s bank account. Garnishment may be used to collect debts to
governments as well 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
effect of reducing the amount of a tax refund.
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
disability benefits, servicemember pay, military annuities, and survivor benefits—are generally
protected from garnishment for certain types of delinquent debt.126 Federal tax refunds are not
considered federal benefits payments and are generally not protected from garnishment actions
under current law. Data on the types of delinquent debts collected via garnishment from federal
tax refunds are not publicly available.
Policy Considerations
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
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
support from a noncustodial parent.127 But collection activities can also impose significant
burdens on those whose benefits are offset or garnished, especially if they are low income or
facing a financial hardship.
Policymakers may wish to reduce financial hardship for some recipients of tax benefits, for
example by limiting 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
unemployment. Some tax refunds may be partially protected from offset for past-due federal tax
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 allows the taxpayer to
receive at least a partial refund to address current financial hardships. The National Taxpayer
Advocate’s research suggests that only a small share of eligible taxpayers may receive an OBR
prior to their refunds being issued and recommends making “OBRs systematically available to
taxpayers whose refunds include allowable EITC claims.”128 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
spouse if they are not legally responsible for the debt as an “injured spouse.”129
Alternatively, 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

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
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
not in poverty.130
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
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
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 limitations on debt collection action be targeted to vulnerable households,
so that households with sufficient means to repay their debts without falling into financial
hardship do pay?
Historically, the federal government has limited debt collection activities on certain 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,
protected portions of tax refunds as part of the IRS’s OBR program, and limited debt collection
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 determines that parents who owe past-due support have enough employment
opportunities to be self-sufficient without a relief payment.
They also noted that
Most state and tribal child support programs understood the purpose of the payment was to
provide immediate and necessary relief to individuals who may have been impacted by the
COVID-19 pandemic. They preferred that the payment be paid to each parent without being
offset for past-due support, as the self-sufficiency of both parents was the immediate focus.
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.
The treatment was different for amounts that individuals received as the recovery rebate credit on their tax
returns. None of the acts provided offset protections for the recovery rebate credit. Notably, the CARES Act, as
originally enacted, did provide such protections, except for past-due child support; however, the Consolidated
Appropriations Act, 2021 amended the CARES Act to remove them, apparently due to administrative
concerns raised by the IRS.132 Thus, all recovery rebate credits were subject to offset under the general rules.
However, the IRS announced that it would not reduce the recovery rebate credits claimed on 2020 and 2021 tax
returns to satisfy past-due federal tax debts.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/
news/nta-blog-update-on-offset-of-recovery-rebate-credits-the-irs-has-agreed-to-exercise-its-discretion-to-stop-offsets-
of-federal-tax-debts/.
133 See IRS, “Q F2: Back taxes: Will the credit be applied to back taxes I owe?” (added January 13, 2022), in “2021
Recovery Rebate Credit—Topic F: Receiving the Credit on a 2021 Tax Return,” https://www.irs.gov/newsroom/2021-
recovery-rebate-credit-topic-f-receiving-the-credit-on-a-2021-tax-return; and IRS, “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
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
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.
Others—like how to deliver benefits to unbanked households—may apply to other types of
assistance provided outside the tax code.
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—
an agency that has historically focused on compliance with and enforcement of tax law and less
on benefits administration—lends itself to being the appropriate agency to issue benefits.137
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?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
credits] in the same way it treats other tax administration programs, which is to say, from an enforcement-oriented
perspective. Its emphasis has been on using remote correspondence examinations, pre-refund fraud detection filters,
and automated summary assessment authorities (math errors), sprinkled sporadically with some outreach efforts (see
the annual EITC day events).” Nina Olson, “Thinking Out Loud about the Advanced Child Tax Credit—Part 3: the
Family and Worker Benefit Unit,” Procedurally Taxing (blog), July 1, 2021, https://procedurallytaxing.com/thinking-
out-loud-about-the-advanced-child-tax-credit-part-3-the-family-and-worker-benefit-unit/.
138 For a summary of how Canada, Australia, and the United Kingdom administer their child benefits through the tax
code, see Samuel Hammond and David Koggan, 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-
through-the-tax-code-lessons-for-the-irs-from-abroad/.
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

Disclaimer
This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan
shared staff to congressional committees and Members of Congress. It operates solely at the behest of and
under the direction of Congress. Information in a CRS Report should not be relied upon for purposes other
than public understanding of information that has been provided by CRS to Members of Congress in
connection with CRS’s institutional role. CRS Reports, as a work of the United States Government, are not
subject to copyright protection in the United States. Any CRS Report may be reproduced and distributed in
its entirety without permission from CRS. However, as a CRS Report may include copyrighted images or
material from a third party, you may need to obtain the permission of the copyright holder if you wish to
copy or otherwise use copyrighted material.

Congressional Research Service
R47323 · VERSION 3 · UPDATED
29