The IRS Taxpayer Bill of Rights states that taxpayers have the right to pay no more than the correct amount of tax. For many workers with low incomes, that means both paying the taxes they owe and getting back refundable tax credits, which can exceed taxes owed.
But a new IRS form developed alongside a proposed rule change governing several refundable credits could make claiming those credits more complicated. Taxpayers claiming affected credits would have to complete Schedule 3-A and explicitly answer whether they want to receive the refundable portion of their credits, which would be classified as a “federal public benefit” under the proposed rule. This represents an entirely new way to look at refundable credits, which have often been lauded for their ties to work.
Refundable credit administration through a tax return is convenient and effective
For low-income working families, the two largest refundable credits, the earned income tax credit (EITC) and the child tax credit (CTC), are based primarily on earnings. Using the tax system to deliver these benefits is administratively convenient.
From a family’s perspective, most already file a tax return, making a tax credit vastly easier to claim than potentially missing a day of work to stand in line at a traditional welfare office.
From the government’s perspective, the IRS already collects relatively reliable information on earnings from most workers. Delivering benefits based on this already collected information is simpler than relying on a separate infrastructure to collect it. And, as the National Taxpayer Advocate has documented, delivering benefits through the tax system can cost the government less to administer than traditional benefit programs.
But Schedule 3-A adds a steep step for families
The draft 1040 (the form most people use to file their taxes) adds line 32b which requires people claiming the refundable portion of the EITC, CTC, Adoption Tax Credit, or the American Opportunity Tax Credit to report information from a new form, Schedule 3-A. The new form serves two related purposes.
First, as has been widely reported, it would be used to implement rules associated with classifying refundable credits as “federal public benefits,” newly restricting eligibility forthe refundable portion of these credits for some noncitizens who are legally authorized to live and work in the US including Temporary Protected Status (TPS) holders and Deferred Action for Childhood Arrivals (DACA) recipients (outlined by my colleagues here). Second, however, Schedule 3-A would affect everyone claiming any of the affected refundable credits, not just noncitizens whose eligibility would change under the proposed rule.
After calculating the portion of a taxpayer’s refundable credits considered a federal public benefit, line 7 asks, “Do you want to receive your federal public benefit?” Will people recognize this is referring to their refundable tax credits?
A taxpayer who checks “No” is instructed to enter that amount on Form 1040, where it is subtracted from the refundable credits otherwise available to the taxpayer. Taxpayers who answer “Yes” proceed to another question asking whether they or their spouse are a US citizen, US national, or qualified alien. If they are, they enter “0,” to subtract nothing from available refundable credits.
This presents a potential new source of administrative burden.
Research already shows that administrative burdens can prevent eligible taxpayers from claiming benefits, including tax benefits.
Treasury acknowledges that the proposed rules create new reporting requirements for taxpayers claiming these credits. But rather than separately estimating how much time Schedule 3-A would require, Treasury says its reporting burden will be incorporated into the broader Paperwork Reduction Act estimate for Form 1040.
Questions remain: The draft materials do not make clear how the IRS would treat an otherwise eligible taxpayer who fails to attach the schedule or leaves one of its questions unanswered. Would this be grounds for denying a credit? How many eligible taxpayers could lose some or all of a refundable credit because they overlook the new schedule, misunderstand its questions, or make an error completing it?
The new form could complicate credit claiming for many
Taxpayers have the right to pay the correct amount of tax and receive the refundable credits for which they qualify. Is there reason to assume they would choose otherwise?
The IRS should abandon Schedule 3-A. It has the potential to complicate tax credit claiming for many. Every additional question, form, certification, or eligibility determination creates another opportunity for an eligible person to make a mistake or abandon a claim.
The proposed form would add to the “time tax”, aptly called out by journalist Annie Lowery in her recent book, erecting a new barrier to receiving important tax benefits, which are often lauded for encouraging work and reducing poverty.
