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Saturday, August 1, 2020

Recovery Rebate Fix Needed by Congress to Not Encourage MFS Filing Status


The CARES Act enacted March 27, 2020 included the 2020 recovery rebate for individuals that provided over 160 million adults with $1,200 to help them with financial challenges during the pandemic (see GAO data). The IRS refers to this payment as the Economic Impact Payment (EIP) and as of today (8/1/20) has provided 70 FAQs to help explain it! The provision added Section 6428 to the Internal Revenue Code.

I was surprised by FAQ 26 and its answer because I would think that if for a married couple one spouse has an SSN and the other has an ITIN which disqualifies that spouse for an EIP, the spouse with the SSN would still have been given $1,200. But that will only happen if they file as Married Filing Separately rather than as Married Filing Jointly.


A26. No, when spouses file jointly, both spouses must have valid SSNs to receive a Payment with one exception. If either spouse is a member of the U.S. Armed Forces at any time during the taxable year, only one spouse needs to have a valid SSN.
If spouses file separately, the spouse who has an SSN may qualify for a Payment; the other spouse without a valid SSN will not qualify.
In reviewing Section 6428, the rationale for this answer seems to be at Section 6428(g)(1)(B) which in explaining the identification number requirement states that a person filing a joint return only gets an EIP if the spouse has an EIN. So, the answer from the IRS appears to be correct.

So, the problem is with the text of the law. I say this because the tax law doesn't encourage using the MFS status over the MFJ status. The tax law provides that when a married couple file separately, there are several favorable rules they will no longer qualify for. These include the Earned Income Tax Credit, the dependent care credit, most education tax breaks, and a few others (see page 7 of Pub 501).

I think the rationale for the harsh treatment for MFS that has existed in the law for a long time is that it is extra work for the IRS to be sure both spouses are not claiming benefits where only one may be allowed to claim them. Generally, MFS is only used where a spouse wants to avoid joint liability for the taxes owed or their combined taxes will be lower with that status (which occurs in rare situations).

I believe Section 6428(g) is incorrect because the tax law should not be encouraging MFS over MFJ. For example, a couple with children where one spouse has an SSN and the other has an ITIN, will need to determine if skipping the $1,200 EIP is better than losing an EITC and other tax breaks. This awful decision should not have to be made - a fix is needed from Congress.

I hope that the next round of COVID legislative relief will correct this by removing Section 6428(g)(1)(B). The IRS can easily tell from a MFJ return that one spouse has an SSN and the other has an ITIN so only issue the EIP to the spouse with the SSN. Thus, (B) at (g)(1)is not needed. This change would also enable the IRS to issue these EIPs based on the 2018 or 2019 returns already filed.

What do you think?


3 comments:

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21st century taxation (Annette Nellen) said...

The August 7 post in Procedurally Taxing discusses a lawsuit filed April 28 by MALDEF on the issue of this blog post. A decision was issued August 5 to allow the suit to proceed. For more, see https://procedurallytaxing.com/court-rules-against-government-in-cares-litigation-challenging-statutes-denial-of-payments-to-mixed-status-couples/.

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