The advance refund is not an advance refund
Apr 18, 2020
Pandemic tax relief encompasses far more than deadline pushes; governments are also writing checks. The US, under the CARES Act,[1] is giving many of its citizens and residents a $1200 payment. The IRS calls this an “Economic Impact Payment” (EIP), but the codification in IRC § 6428 calls it an “advance refund amount”.[2]
The IRS’s FAQ[3] addresses, among other things, various conditions which alter the $1200 allowable amount:
- The amount doubles to $2400 for married joint filers.
- The amount increases by $500 for each qualifying child, borrowing the child tax credit’s qualification criteria.[4]
- The amount is reduced by 5% of income over $75000. The phaseout threshold also doubles for joint filers.
- Dependents and nonresident aliens are ineligible.
Simple enough. But there has been a great deal of confusion and misinformation about the effects of § 6428 on tax year 2020, and the treatment of eligibility changes between 2018, 2019, and 2020, which I will try to clear up.
So, to be more precise, there are two recovery provisions under § 6428, coordinated but distinct:
- Subsections (a)–(d) provide a $1200 credit for tax year 2020, applying the eligibility conditions and adjustments described above to the taxpayer’s facts for the year 2020.
- Subsection (f) provides for immediate payment by the IRS of an “advance refund amount” equal to the amount of credit that “would have been allowed” by § 6428(a)–(d) if they “had applied” to an earlier tax year[5]—that year being 2019 or 2018, depending on which returns have been filed.[6]
The phrase “advance refund” suggests that the EIP is a refund of 2020 taxes to account for the reduction of liability that the taxpayer will enjoy thanks to the § 6428(a) credit. This is wrong; their coordination is more subtle.
Under § 6428(f)(1), someone eligible for the advance refund based on their 2019 or 2018 tax year “shall be treated as having made a payment against” the normal income tax “for such taxable year in an amount equal to the advance refund amount” (emphasis added).
In other words, the “advance refund” under § 6428(f) is not refunding future 2020 taxes, but rather refunding a deemed overpayment by the taxpayer of their 2019 (or 2018) taxes.
Furthermore, the relationship of the advance refund to the § 6428(a) credit is one of mutual exclusion: the credit “shall be reduced (but not below zero)” by the refund.[7] This would be absurd if the EIP were refunding 2020 tax—a true reduction of overall tax would be enjoyed only by refund-ineligible individuals. It is sensible only on the understanding that the refund is on account of a tax benefit of equal value distinct from the credit (namely, the deemed prior-year overpayment).
Armed with this reframing, the following are evident:
- If someone meets the eligibility conditions for 2020, but not prior years, they do not receive the EIP, but instead derive the benefit of the recovery provisions through a credit on their 2020 return.
- If someone receives the EIP, they are not allowed the 2020 credit, unless their 2020 eligibility would entitle them to a larger amount (for example, they acquire a qualifying child). But their receipt of the EIP will not otherwise subtract from their 2020 income tax refund, or increase their 2020 balance owing.
- If someone receives the EIP based on 2018 or 2019 eligibility, their ineligibility in a future year (2019 or 2020) creates no obligation to repay it.
- Because the EIP is a refund of a deemed overpayment of tax, it is not gross income within the meaning of IRC § 61. Thus the EIP, like other federal tax refunds, is not itself taxable (by the US, at least).
This is an example, and not the first, of the tax code overcomplicating its own expression—both by defining terms in misleading or unnatural ways, and by depending on counterfactual applications (amounts that would be allowable if such-and-such had applied).
Instead of “advance refund amount”, § 6428 should have defined a concept like “eligible amount for a taxable year”, and used it (with reference to 2018, 2019, or 2020, as appropriate) in its provisions for granting credit and deeming payment of prior-year tax, to achieve the same substantive result.
But this blemish predates the CARES Act, which reuses the structure and terminology, and even the Code section number, of the rebate provisions of the Economic Stimulus Act of 2008,[8] enacted during the previous financial meltdown. The ESA’s version of § 6428 (struck from the Code in 2014) very similarly provided a 2008 credit paired with an “advance refund” of a deemed 2007 payment.
The Second Circuit held that the ESA’s advance refund was “advance” in name only,[9] when it mattered to the scope of an Offer-in-Compromise agreement denying the taxpayer “any refund … for tax periods extending through”[10] the year 2007. The deeming language (“shall be treated as having made a payment”) in § 6428, it said, “is best interpreted as establishing the legal fiction that eligible taxpayers overpaid their 2007 taxes”.[11]
It also admitted that the ESA was “hardly a model of lucid statutory draftsmanship”, but asserted that it was “clear on its face with regard to which tax years the stimulus credits relate”.[12] Apparently not clear enough for the district court, whose contrary finding was reversed.