IRS Sent $1 Billion in Mistaken CTC Payments

By: Lauren Loricchio

The IRS was able to get advance child tax credit (CTC) payments out relatively quickly, but millions of the payments were sent to taxpayers who shouldn’t have gotten them, and millions more didn’t get to others who qualified, according to a new audit.

In a report released September 27, the Treasury Inspector General for Tax Administration reviewed 178.9 million advance CTC payments sent from July through November 2021 in accordance with the American Rescue Plan Act of 2021. The watchdog found that 98 percent of the payments were made to taxpayers who were eligible for them, but 2 percent — or 3.3 million payments, totaling over $1.1 billion — were sent to 1.5 million taxpayers who weren’t eligible.

The agency also failed to send 8.3 million payments, worth about $3.7 billion, to eligible taxpayers, according to the report.

ARPA expanded the credit as part of a COVID-19 pandemic aid package by boosting the amount to $3,000 per child under 18 and to $3,600 for children under 6, and by making it fully refundable for 2021. The law required the IRS to set up a program for issuing the payments, using 2020 tax return information or 2019 return information for taxpayers who hadn’t filed their 2020 returns yet. It also required the IRS to set up an online portal.

While performing the audit, TIGTA noticed that some eligible taxpayers weren’t getting their advance payments and notified the IRS on August 9, 2021.

The IRS fixed programming errors that had prevented some taxpayers from getting the relief, according to the report. In cases for which it wasn’t able to fix the payments, the IRS said taxpayers would get the relief when they complete the CTC reconciliation, or Schedule 8812, as part of their 2021 tax returns, according to the report.

Garrett Watson of the Tax Foundation told Tax Notes that the erroneous payments, while a small portion of overall CTC payments in 2021, show how the tricky aspects of the CTC expansion for that year can lead to mistakes for both policymakers and taxpayers.

For example, TIGTA found that many of the erroneous payments occurred because a dependent was claimed on another return, which can be challenging to deal with even under the CTC that existed before ARPA, Watson said.

Other eligibility issues — such as complying with age or care requirements — can be confusing for taxpayers, especially if the requirements change over time and ask taxpayers to update the IRS for it to properly administer the advance payments, Watson said.

“This underscores the importance of simplicity for reforms to the CTC in the future,” Watson said. “On the flip side, changes to the credit need to be communicated well to taxpayers, as many of the eligible taxpayers who did not get the benefit may not have received notification letters for the advance CTC payments.”

Democrats have called for making ARPA’s CTC expansion permanent, pointing to a September 13 report from the Census Bureau, which found that the expanded CTC helped lower the child poverty rate to a record low of 5.2 percent in 2021. But for Republicans, whose votes would be needed to ensure passage in the Senate, the expanded CTC is said to be a non-starter if it lacks a work requirement.