By now, many eligible taxpayers may have found a deposit appear in their bank account during July. This was likely in addition to one or more correspondence letters from the Internal Revenue Service and/or the White House (which may or may not have given some taxpayers a heart attack, thinking the IRS letter was a potential income tax audit). That initial deposit and related communications were the beginning of advance Child Tax Credit payments. Eligible taxpayers will receive periodic payments between July and December 2021 in advance of the 2021 Child Tax Credit claimed on their 2021 personal income tax returns. Some taxpayers are not thrilled about the advance deposits (to the extent they have received them); however, according to a recent memorandum issued by the Internal Revenue Service, such funds may be subject to levy protection.
Advance Child Tax Credit Payments
Generally, if a taxpayer has a qualifying child during a given tax year, the taxpayer may be eligible to claim a tax credit up to $1,000 for each qualifying child. The credit, however, is subject to certain limitations, including credit reductions to the extent the taxpayer’s modified adjusted gross income exceeds certain threshold amounts:
(a) Allowance of Credit
There shall be allowed as a credit against the tax imposed by this chapter for the taxable year with respect to each qualifying child of the taxpayer for which the taxpayer is allowed a deduction under section 151 an amount equal to $1,000.
(b) Limitations
(1) Limitation based on adjusted gross income
The amount of the credit allowable under subsection (a) shall be reduced (but not below zero) by $50 for each $1,000 (or fraction thereof) by which the taxpayer’s modified adjusted gross income exceeds the threshold amount. For purposes of the preceding sentence, the term “modified adjusted gross income” means adjusted gross income increased by any amount excluded from gross income under section 911, 931, or 933.
(2) Threshold amount
For purposes of paragraph (1), the term “threshold amount” means—
(A) $110,000 in the case of a joint return,
(B) $75,000 in the case of an individual who is not married, and
(C) $55,000 in the case of a married individual filing a separate return.
For purposes of this paragraph, marital status shall be determined under section 7703.[1]
Pursuant to the American Rescue Plan Act of 2021, the Internal Revenue Service began issuing monthly advance payments of the 2021 Child Tax Credit to eligible Americans in July. The American Rescue Plan provides that the IRS is required to pay half of the Child Tax Credit in advance—the remaining portion of the tax credit may be claimed on the taxpayer’s 2021 personal income tax return.[2]
Further, to qualify for advance Child Tax Credit payments, a taxpayer must have:
- Filed a 2019 or 2020 tax return and claimed the Child Tax Credit on the return; or
- Given the IRS information in 2020 to receive the Economic Impact Payment using the Non-Filers: Enter Payment Info Here tool; and
- A main home in the United States for more than half the year (the 50 states and the District of Columbia) or file a joint return with a spouse who has a main home in the United States for more than half the year; and
- A qualifying child who is under age 18 at the end of 2021 and who has a valid Social Security number; and
- Made less than certain income limits.[3]
Levy Limitations
On July 13, 2021, the Internal Revenue Service’s Small Business/Self-Employed Division instructed its employees that they should generally not levy bank accounts that hold advance Child Tax Credit payments. Further, the memorandum also provided guidance related to the release of levies previously issued on bank accounts holding such advance payments. The memorandum provides, in part:
Pre-levy determinations
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- When possible, determine if the taxpayer is receiving periodic payments for the CTC and in what amount, where the funds are deposited, and when.
- Employees should not levy on a bank account that contains periodic Advance CTC funds unless it is known that the account holds more than the eligible maximum advanced CTC.
- Review IDRS to determine if periodic CTC payments are made prior to levy. . . .
Levy Release Determinations
When Advance Child Tax Credit funds are levied inadvertently, employees must release the levy on the Advance Child Tax Credit funds. If payments are monthly, additional levies should not be issued on the account until the conclusion of monthly payments at the end of 2021, unless it is known that the account holds more than the eligible maximum advanced CTC. . . .
If an employee believes that exigent circumstances exist not to release the levied CTC funds, the matter must be elevated to the Area Director or Campus Director and documented in the case history before communicating any decision to the taxpayer.
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- An exigent circumstance involves the final loss of opportunity for the government to collect taxes due, such as the expiration of the statute of limitations, assets that taxpayers place beyond the reach of the government, etc. Generally, the taxpayer’s indication that he/she may file for bankruptcy is not an exigent circumstance.[4]
Conclusion
Pursuant to the guidance issued by the Internal Revenue Service, the deviations from typical collection activities are only temporary. These instructions to IRS personnel are only effective until January 1, 2022. Further, IRS employees are instructed not to levy on accounts containing advance Child Tax Credit payments, unless it is known that the account holds more than the eligible maximum advanced Child Tax Credit. Generally, the IRS will not be aware of a bank account balance until after the 21-day release period of an operative levy. However, this “knowledge” issue in addition to the “exigent circumstance” language indicates the IRS’s temporary guidance is not an impenetrable shield for taxpayers.
[1] I.R.C. § 24(a)-(b).
[2] See generally I.R.C. § 7527A.
[3] See I.R.C. § 6331(e); Rev. Rul. 55-210.
[4] IRS SB/SE Memorandum, Deviation for Levy Actions Involving Advance Payment of Child Tax Credit (CTC), Control Number: SBSE-05-0721-0038 (July 13, 2021).
