The Internal Revenue Service correctly calculated the allowable Recovery Rebate Credit for the vast majority of 2021 tax returns, but some erroneous payments were made, according to a new report.
The report, released Monday by the Treasury Inspector General for Tax Administration, examined the IRS’s handling of the pandemic relief program. The American Rescue Plan Act of 2021 created a third Recovery Rebate Credit of up to $1,400 for each eligible individual for that tax year. The law also told the IRS to make advance payments of the credit, referred to as advance Recovery Rebate Credit payments or as Economic Impact Payments. Taxpayers who claimed the Recovery Rebate Credit on their tax year 2021 returns had to reduce the credit by the amount of any advance payment they received.
As of May 5, 2022, according to the report, the IRS processed 17.8 million tax returns with Recovery Rebate Credit claims totaling $33 billion. TIGTA has done previous reviews of the IRS’s implementation of the Recovery Rebate Credit and found the agency’s calculation of the amount individuals were entitled to receive was highly accurate. However, those previous reviews also spotted some significant payments to potentially ineligible taxpayers and a large number of potentially eligible people who didn’t receive an advance payment or Recovery Rebate Credit.
The new report found the IRS correctly calculated the allowable Recovery Rebate Credit for 99.7% of tax year 2021 tax returns that claimed a credit as of May 5, 2022. Not only that, but the IRS’s validation processes worked so well that taxpayers received the Recovery Rebate Credit to which they were entitled on 98.3% of the returns.
On the other hand, the report found erroneous payments continue to be significant on some returns. Of the 17.8 million returns reviewed, 316,425 of the returns (or 1.7%) received an incorrect Recovery Rebate Credit. That number included 52,297 returns with payments totaling $99.4 million in which the IRS’s calculation of the Recovery Rebate Credit amount was incorrect, and 264,128 returns with payments totaling $369.3 million that were issued to potentially ineligible dependents, nonresidents and residents of a U.S. territory.
Some eligible people still haven’t claimed a Recovery Rebate Credit despite extensive outreach efforts by the IRS to tell taxpayers about their eligibility for the credit and help them file a return to claim these credits. TIGTA identified nearly 3 million individuals who were potentially eligible for $4.7 billion in Recovery Rebate Credits in tax year 2021 but still haven’t claimed the credits.
Another hitch was the use of advance payment debit cards, which delayed access to Recovery Rebate Credit funds for 25,146 taxpayers as of Oct. 27, 2022. Those taxpayers had $44 million in Recovery Rebate Credit claims denied because the IRS records indicated the individual received a debit card, even though none of them had activated the cards.
TIGTA made four recommendations in the report to the IRS, such as reviewing the payments distributed to potentially ineligible taxpayers and sending a letter to the potentially eligible people associated with the nearly 3 million individuals identified by TIGTA who never claimed the credits, encouraging them to amend their 2021 returns and claim the credit if they’re indeed eligible. The IRS agreed with one of TIGTA’s four recommendations, but didn’t agree to revise its Tax Tip information and the related frequently asked questions page or to review the 274,865 people who received a potentially erroneous Recovery Rebate Credit.
Kenneth Corbin, commissioner of the IRS’s Wage and Investment Division, pointed out that the IRS had to respond quickly to the American Rescue Plan Act and began distributing advance payments of the Recovery Rebate Credit as Economic Impact Payments on the same day as ARPA was enacted into law and continued through the end of the 2021 filing season. The IRS had to make some assumptions upfront and leave some of the reconciliations for later on matters such as who counted as a dependent.
“Like the computation of EIPs to eligible individuals, the calculation of the RRC is dependent on the information contained within the four corners of the tax return,” Corbin wrote in response to the report. “As returns are processed, it could not be determined if a dependent was or will be claimed in the future on another return. Such an analysis is performed after returns have been processed.”
The IRS might later spot the use of a dependent Taxpayer Identification Number on multiple returns and that would be one factor to consider when determining whether an examination should be done to make sure the taxpayer was entitled to claim the dependent. ARPA was one of several pandemic relief laws from Congress authorizing the IRS to make advance payments of tax credits rapidly during the pandemic, and keeping track of all the necessary information was a major task.
“It is also noteworthy that with the three pieces of legislation authorizing the advance payments, there was an extreme sense of urgency conveyed in issuing them,” said Corbin. “The timeline for implementing and executing those provisions was compressed to the point where it was administratively not possible to track payments beyond the primary and secondary taxpayers listed on tax returns. Consequently, we could not capture the portion of the payments attributable to individual dependents for use in RRC reconciliation.”