New Procedures Allow Taxpayers Who Don't File 2020 Returns to Access Tax Benefits

(Parker Tax Publishing May 2021)

The IRS issued procedures for individuals, who are not otherwise required to file federal income tax returns for tax year 2020, to receive advance child tax credit payments under Code Sec. 7527A and third-round economic impact payments under Code Sec. 6428B. The procedures also allow individuals to claim the 2020 recovery rebate credit under Code Sec. 6428 and the additional 2020 recovery rebate credit under Code Sec. 6428A. Rev. Proc. 2021-24.

Background

Significant taxpayer-favorable changes were made to the child tax credit in the American Rescue Plan Act of 2021 (ARP). For 2021, the ARP increased the child tax credit amount, increased the age at which a qualifying child qualifies for the credit (i.e., a 2020 CTC qualifying child), increased the refundable amount of the child tax credit, and, under Code Sec. 7527A, provides a program for distributing the credit monthly. This annual advance amount is the amount (if any) that the Secretary of the Treasury estimates as being equal to 50 percent of the refundable child tax credit amount that would be treated as allowed by reason of Code Sec. 24(i)(1) for the taxpayer's tax year beginning in that calendar year. The amount is determined with respect to the taxpayer's "reference taxable year" which means, with respect to any taxpayer for any calendar year, the taxpayer's tax year beginning in the preceding calendar year (that is, the taxpayer's 2020 tax year) or, in the case of taxpayer who did not file a federal income tax return for that tax year, the taxpayer's tax year beginning in the second preceding calendar year (i.e., the taxpayer's 2019 tax year).

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) added Code Sec. 6428, which provided an eligible individual a refundable tax credit against the individual's federal income tax liability for the eligible individual's first tax year beginning in 2020 (2020 recovery rebate credit). The COVID-related Tax Relief Act of 2020 provided an eligible individual, in addition to the 2020 recovery rebate credit, a refundable tax credit against the eligible individual's federal income tax liability for the eligible individual's first tax year beginning in 2020 (additional 2020 recovery rebate credit). In the ARP, Congress authorized a third round of economic impact payments in new Code Sec. 6428B. Code Sec. 6428B(a) provides an eligible individual a refundable tax credit against the eligible individual's federal income tax liability for the first tax year beginning in 2021 (2021 recovery rebate credit).

Rev. Proc. 2021-24

To allow individuals who are not required to file a federal tax return or wish to file a federal tax return electronically to receive advance child tax credit payments, third-round economic impact payments, the 2020 recovery rebate credit, and the additional 2020 recovery rebate credit, the IRS needs certain information that would ordinarily be provided by a federal tax return. Because not all individuals are required to file tax returns, the IRS issued Rev. Proc. 2021-24, which provides the procedures for such individuals to follow so they may access credits they would not otherwise be able to access.

In order to ensure that individuals otherwise not required to file a federal income tax return in 2020 are able to receive (1) advance child tax credit payments, and (2) third-round economic impact payments, Rev. Proc. 2021-24 provides a procedure for these individuals to file simplified federal income tax returns for 2020. It also permits individuals to claim the 2020 recovery rebate credit and additional 2020 recovery rebate credit on that simplified federal income tax return. Another procedure is provided for (1) individuals that would like to file federal income tax returns electronically, but use tax return preparation software that does not permit them to file using the simplified return procedure, or (2) individuals that may need to file a complete federal income tax returns to receive certain state or local benefits.

Because many federal income tax returns cannot be filed electronically if the filer reports an AGI of zero (as opposed to an AGI of $1 or more) and does not claim the 2020 recovery rebate credit, the additional 2020 recovery rebate credit, or any amount as a refund, Rev. Proc. 2021-24 provides a special procedure to facilitate the processing of electronic returns filed by zero AGI individuals not otherwise required to file federal income tax returns. That procedure provides for these individuals to file complete electronic federal income tax returns to receive (1) advance child tax credit payments, and (2) third-round economic impact payments.

Practice Tip: Rev. Proc. 2021-24 does not apply to a resident of American Samoa, Guam, the Commonwealth of the Northern Mariana Islands, the Commonwealth of Puerto Rico (Puerto Rico), or the U.S. Virgin Islands (each, a U.S. territory). A resident of a U.S. territory other than Puerto Rico should contact his or her local territory tax agency for additional information about the child tax credit and advance child tax credit payments. A resident of Puerto Rico may be eligible to claim the child tax credit under procedures that the IRS plans to announce at a later date, but is not eligible to receive advance child tax credit payments. Residents of a U.S. territory are directed to contact their local territory tax agency for additional information about third-round economic impact payments, the 2020 recovery rebate credit, and the additional 2020 recovery rebate credit.

Under the simplified procedure, a simplified return may be filed on paper or electronically, on a Form 1040, U.S. Individual Income Tax Return, Form 1040-SR, U.S. Tax Return for Seniors, or Form 1040-NR, U.S. Nonresident Alien Income Tax Return. A federal income tax return for tax year 2020 filed under the simplified procedure will result in the following:

(1) The Treasury Secretary will use the information provided on the simplified return to (i) estimate the annual advance amount for the simplified return filer, and (ii) calculate the third-round economic impact payment for which the simplified return filer is eligible.

(2) The simplified return filer may claim the 2020 recovery rebate credit and additional 2020 recovery rebate credit when filing Form 1040 or Form 1040-SR.

Under the alternative procedure, a zero AGI filer may file electronically a Form 1040, Form 1040-SR, or Form 1040-NR for tax year 2020. A federal income tax return for tax year 2020 filed under this alternative procedure will result in the following:

(1) The Treasury Secretary will use the information provided in the electronic return to (i) estimate the annual advance amount for the zero AGI filer, and (ii) calculate the third-round economic impact payment for which the zero AGI filer is eligible.

(2) The zero AGI filer may claim the 2020 recovery rebate credit and additional 2020 recovery rebate credit when filing Form 1040 or Form 1040-SR.

A "zero AGI filer" is defined as an individual who is not required to file a federal income tax return for tax year 2020, has zero AGI for tax year 2020 (that is, the individual has zero AGI for tax year 2020 reportable on line 11 of Form 1040, Form 1040-SR, or Form 1040-NR), and has not yet filed a federal income tax return for tax year 2020.

For a discussion of the 2020 and 2021 economic impact payments, see Parker Tax ¶78,800. For a discussion of the child tax credit, see Parker Tax ¶100,700.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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