On March 27, 2020, President Trump signed into law H.R. 748, the Coronavirus Aid and Economic Security Act or the CARES Act. The $2 trillion coronavirus-relief legislation provides financial assistance to small businesses and taxpayers through a host of mechanisms, including through newly-established “advanced recovery rebates” and programs designed to encourage employee retention during the coronavirus epidemic. The Act relaxes the ability to withdraw funds and loans from certain qualified retirement plans without adverse tax consequences and establishes favorable small business loan programs, tax credits, and a number of amendments to the Internal Revenue Code of 1986, as amended (the “I.R.C.”). In addition, the economic stimulus Act retroactively amends several provisions of the Tax Cuts & Jobs Act of 2017 (the “TCJA”), including certain restrictions on net operating losses and carrybacks, excess-loss deductions, business-interest deductions, and bonus depreciation rules relating to qualified improvement property, among other changes.
This post provides an outline of new I.R.C. section 6428, which was enacted by the CARES Act and provides credits and advanced refunds to qualifying taxpayers.
Amount of Credit.
The base amount of the advance recovery rebate, subject to phase-out limitations discussed below, available to an individual is as follows:
- $1,200 for taxpayers who file single, head of household, and married filing separately.
- $2,400 if married filing jointly.
- Plus $500 for each qualifying child, which are generally dependents under the age of 17.
Phase-Out. The amount of the credit is phased out for higher-income earners. These phase-outs begin for taxpayers whose AGI exceeds: (1) $150,000 for joint returns; (2) $112,500 for head of households; and (3) $75,000 for all others. The rebate is phased out at a rate of 5 percent of AGI above the applicable threshold. The rebate is therefore completely phased out for joint filers with no children and AGI exceeding $198,000; head-of-household filers with no children and AGI exceeding $146,000; and single filers with no children and AGI over $99,000.
Eligibility. Generally, all individuals qualify for the credit. Rebates are available even if the taxpayer does not have income. However, nonresident alien individuals, people claimed as dependents, and trusts or estates do not qualify.
Advanced Refund Mechanism. The credit applies to the 2020 tax year. But the IRS is directed to issue advanced refunds of the credit amount based on the taxpayer’s 2019 tax return unless the taxpayer has not filed a return for such year. In this latter case, the IRS is directed to issue the advanced refund of the credit amount based on the taxpayer’s 2018 tax return. Taxpayers who receive advanced refunds of the credit amounts will have their 2020 credit amount reduced by such payment. Any failure to reduce the credit on the 2020 return by the payment will be treated as a mathematical or clerical error and assessed according to I.R.C. section 6213(b)(1). The CARES Act directs the IRS to issue the advanced refunds “as rapidly as possible.” Finally, the CARES Act contemplates that the advanced refund will be disbursed to bank accounts electronically based on information the IRS has available for tax filings on or after January 1, 2018.
IR 2020-61. On March 30, 2020, Treasury and IRS announced that distribution of the advanced refunds would begin in the next three weeks and would be distributed automatically, with no action required for most people. However, some seniors and others who typically do not file returns would need to submit a simple tax return to receive the advanced refund. In addition, Treasury and IRS indicated that in the coming weeks, they intended to develop a web-based portal for individuals to provide their banking information to the IRS online, so that individuals can receive payments immediately if the IRS does not have the individual’s direct deposit information. Moreover, Treasury and IRS advised that if a taxpayer has not filed a 2018 or 2019 tax return, he or she should do so as soon as possible to receive an advanced refund.
Notice. After payment is delivered to the taxpayer, the IRS is required to issue a notice of payment within 15 days to the taxpayer’s last known address. The notice is required to inform the taxpayer the method in which the advanced refund of the credit was made, the amount of the payment, and a phone number for the appropriate point of contact at the IRS to report any failure to receive such payment.
Past-Due Debts. The credit may not be reduced for certain unpaid debts, which include debts owed to other federal agencies (excluding support payments), state income tax obligations, and unemployment compensation debts.
Territories. The CARES Act provides that the U.S. Treasury is to make payments to each possession of the United States that has a mirror code tax system in an amount equal to the loss (if any) to that possession by reason of the rebate provisions. The CARES Act provides for similar payments to each possession of the United States which does not have a mirror code tax system as if the possession had a mirror code tax system in effect. However, no possession of the United States may receive a payment unless the possession has a plan, which has been approved by the Treasury, under which such possession will promptly distribute such payments to its residents.
For more Coronavirus-related resources, see:
- The Paycheck Protection Program SBA Loans (“PPP Loans”)
- Force Majeure and Coronavirus: “Act of God” or Breach of Contract?
- U.S. Department of Labor Issues Guidance on Families First Coronavirus Response Act
- Additional IRS Guidance on Coronavirus Tax Relief: New People First Initiative
- TEXAS COMPTROLLER OFFERS ASSISTANCE TO TEXAS BUSINESSES DURING THE CORONAVIRUS OUTBREAK
- Latest IRS Coronavirus Guidance on Deadlines
- Speedy Trial Rights and the Coronavirus
- Families First Coronavirus Response Act
- The CARES Act’s Impact on the Tax Code’s Business Interest Deductions
- A Fresh Start for Many? Economic Downturn Means an Upturn in Favorable Tax Settlements
Need assistance in managing the audit process? Freeman Law’s team of attorneys and dual-credentialed attorney-CPAs regularly represents taxpayers before the IRS and Texas Comptroller. Our team also provides tax return-related representations and helps taxpayers navigate state tax laws. Our Firm offers value-driven services and provides practical solutions to complex issues. Schedule a consultation or call (214) 984-3000 to discuss our tax representation services.