Treasury Struggles With CARES Act Rebates To Social Security Beneficiaries

Taxes

Update Issued on Thursday, April 2, 2020: In response to requests from lawmakers, the Treasury Department announced late on April 1st that COVID-19 rebates would automatically be made to Social Security beneficiaries who do not file income tax returns. That announcement did not indicate when such payments would be made. Given the challenges in setting up a system of automatic payments, I suspect that Social Security recipients will get their payments sooner if they file a tax return immediately—especially if they file electronically and provide account information for direct deposit. And there is another reason to do that if they are raising their grandchildren: the IRS does not have enough information on hand to determine whether a nonfiler has dependents, so the automatic payments will not include additional amounts for children.

The Coronavirus Aid, Relief, and Economic Security (CARES) Act promises that low-income Social Security beneficiaries will automatically get their $1,200 COVID-19 rebate, but new guidance from the IRS belies that promise. Under this guidance, Social Security recipients who have not filed a federal income tax return for 2018 or 2019 now will have to file a “simple” return to get their money.

At the best, this will mean that many older Americans—unlike most other eligible Americans—will have to do something they would not ordinarily do in order to receive the rebate this spring. At worst, it will mean that millions of low-income older adults could miss out on the money altogether.

When I first saw the bill, I hoped that promises made were promises kept. After all, the CARES Act said–quite clearly–that the IRS would make payments based on 1099-SSA information returns that the Social Security Administration already sends to the IRS each year. But I had my doubts.

The mechanism matters because many people who are 65 or over do not have to file a federal income tax return under normal circumstances: Their income filing threshold is less than $13,850 for singles and $27,500 for married couples. Nontaxable Social Security benefits don’t matter when determining whether a person has to file a tax return. And Social Security benefits are taxable only for those with significant sources of other income.

Some lower-income older Americans still file an income tax return—either because they expect a refund of overwitheld income taxes or because they never lost the habit.

But many do not. For them that’s just one less hassle to deal with.

The challenge, though, occurs when the government tries to distribute money through the tax system to people who do not file income tax returns. In 2008, the IRS sent economic stimulus payments to low-income people who received Social Security and certain Veterans’ benefits if—and only if—they first filed a simple tax return.

But over 3 million did not. Perhaps they viewed filing a return as just one more hassle to deal with.

Many advocates for low-income people and the elderly hoped this year’s automatic mechanism would lower that 3 million number. But buried in this week’s IRS guidance were a few words that delivered a very different message: Low-income Social Security recipients “will need” to file a simple income tax return to get that rebate.

I am not surprised. The IRS receives close to three billion Form 1099s (information returns) from many sources (financial institutions, companies employing contractors, state governments, and the Social Security Administration, to name a few). While electronic filing makes the job of using the information from those forms easier than it once was, a decade’s worth of staff cutbacks likely makes it harder. Many of those forms are not fully processed, checked for errors, and matched to tax returns until the income tax filing season is completed.

The CARES Act would add another step: To determine which Social Security beneficiaries have not filed a tax return, the IRS would have to first match the edited 1099-SSA forms to the income tax returns of people who did file—an ever-increasing number as more people rush to send in Form 1040s to get their rebate. I can’t see how the automatic process called for in the Act would work without delaying payments to Social Security recipients.

And then there is another important consideration that often gets ignored: The IRS staff is not immune from the virus. Last week, I wrote about how the IRS had to scale back its activities in response to COVID-19.  Since then, the agency ordered the “evacuation” (their scary word, not mine) of most of its workforce from its facilities. Those staffers are supposed to work from home. We won’t know how much that evacuation order will slow COVID-19 rebates until the inevitable snafus occur.

In the end, the CARES Act seems to have made a promise that the IRS cannot keep. As a nation, we may have learned some things since 2008, but we have not learned how to get timely tax credits to low-income Social Security recipients without requiring them to file a tax return.

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