Returning erroneous stimulus payment

Remember that IRS instructions in a FAQ are not authoritative. They are only indicative of how the IRS currently thinks.

Ira Smilovitz, EA Leonia, NJ

The interested reader should see Q41 at the site linked above: "Q41. What should I do to return an Economic Impact Payment (EIP)? (added May 6, 2020)"

The site says nothing about what "erroneous" is or whether checks must be returned under the law. Per the answer to Q41, the sender is supposed to write a note indicating the reason for returning the check. At this writing, I think anything I might write to the IRS about why I was returning the check would be guessing.

Maybe I missed the following, or maybe the IRS posted the following just a little while ago:

A10. No. A Payment made to someone who died before receipt of the Payment should be returned to the IRS by following the instructions in the Q&A about repayments. Return the entire Payment unless the Payment was made to joint filers and one spouse had not died before receipt of the Payment, in which case, you only need to return the portion of the Payment made on account of the decedent. This amount will be $1,200 unless adjusted gross income exceeded $150,000."

Interesting that they provide instructions for returning an erroneous check, but don't define what constitutes an erroneous check.

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Hmmn, to return the erroneous direct deposit, they say I should write out a paper check and mail it to them.

I think I'll wait a while and be sure it doesn't disappear on its own.

Q10 also addresses the question of joint filers where one of the spouses dies. The FAQ answer is that only the part due to the decedent needs to be returned.

You are guessing that the person named on the check is dead?

snip

I meant that I would be returning the check without knowing whether I was legally obligated to do so.

Why doesn't the IRS just stop payment on these checks? Could it be because the IRS legally is not entitled to pursue return of the money?

Does sending a note with a statement like "recipient is deceased" have legal implications, as in once I send this statement with the voided check, the IRS can at last legally claim no stimulus payment is owed?

The San Francisco Chronicle stated:

----Start Excerpt--- Many people who received payments on behalf of a deceased spouse, relative or client ?were very surprised and want to pay it back,? said Nina Olson, executive director of the Center for Taxpayer Rights. But ?I don?t know how they are going to recoup any of this, and I don?t see anywhere that they provided legal reasoning for any of their conclusions.? If a payment is not returned, ?the only way I can think of they could get it back is to classify it an erroneous refund; it can then demand you repay it, but if you refuse it has to make a referral to the Department of Justice to bring suit. I can?t see DOJ taking a case over $1,200.?

Are the heirs of deceased people entitled to the money?

?We have seen arguments on both sides,? Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting, said via email. If taxpayers disagree with the IRS? position, they may have to try to convince the IRS or a court of their position. ?Neither the IRS nor the taxpayer wants to spend a lot of money trying to recover or hold onto $1,200.?

He added: ?If people are not returning the money, the IRS may select a test case to try to get a court to support their position and hope that will get people to return the money. The IRS may also try to assert interest and penalties that will continue to build up as long as the money is not returned. The IRS may also try to reduce 2020 tax refunds, or even perhaps 2019 tax refunds, to collect the money if they can identify an appropriate tax return to assert it against, such as the spouse of the deceased when the funds went to a joint account. I have not yet seen that the IRS has stated clearly why they think that people are not entitled to keep the money.?

----End Excerpt----

See

At this point, for the sake of the reputation of the estate and indirectly, the beneficiary, I expect to return the check to the IRS. The required note about why I am returning it will say something like, "I am returning this check because the IRS said such checks should be returned."

I took a quick look at the legislation and didn't see anything dealing with this specific issue. It appears that the payments are under unemployment insurance laws, so perhaps there is something about needing to be alive to get unemployment insurance that might apply.

That would take a lot of time, energy and money for them to figure out who has died and then have all those checks stopped. It's easier and cheaper for them to just ask for the money back later if it comes to their attention.

The statute says estates are not entitled to the payment. End of story.

Exactly where does the statute say that? I looked at the legislation and couldn't find it.

The statute also directs the IRS to whom to send payments. The IRS followed this instruction. The estate ended up with a payment.

I believe many estates will keep the check and suffer no consequences, as was common around 2010 when stimulus payments were sent to decedents/their estates.

The check I received as personal representative of the estate is now in the mail, on its way back to the IRS. I informed the beneficiary. The required note says I am returning the check because the online IRS Economic Impact Payment Information Center states that a payment made to someone who died before receipt of the Payment should be returned to the IRS.

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Starting on page 145 of:

ELIGIBLE INDIVIDUAL.?For purposes of this section, the term ?eligible individual? means any individual other than? . . ??(3) an estate

The statute also has a strong anti-clawback provision. It isn't at all clear that once the IRS disburses the funds that it can reclaim them.

Issuing a formal legal opinion on whether the funds need to be returned seems to be something the IRS is trying to avoid. My sense is that the IRS wants to guilt people into voluntarily returning the funds (thus the FAQ) but doesn't want to pay the political and other costs of actually coercing windows, beneficiaries, and charities to pay the money back.

Thanks. I'd actually seen that before and forgot it was there and didn't see it when I did a quick look.

Commenting on an issue upthread:

Unstated in that quote from the San Francisco Chronicle is that Nina Olson served as the IRS Taxpayer Advocate for 18 years before assuming her current position. She definitely knows what she is talking about.

Ira Smilovitz, EA Leonia, NJ

In article <XnsABB64BDC8CE48spamtraplexregiacom@130.133.4.11> you write:

It would also be ineffective since many payments were made by direct deposit or the check's already been cashed.

I'm planning just to leave the direct deposit in the estate account for a while and see what happens.

The exclusion of the Estate in 6428(d)(3) refers to the tax credit against the tax imposed by Subtitle A. (6428(a)) In other words, an Estate cannot claim the credit on a 1041 tax return.

While it might be a logical leap from this to the position that an Estate cannot receive an advance payment, the logic doesn't hold. (Logic and taxes rarely coincide.)

If you read the statutory language closely, the advance is issued to the eligible individual who is the taxpayer who filed a 2019 (or 2018) return or who was an SS or RRB recipient in 2019. The fact that the check may be made payable to the personal representative is a clerical accommodation. Note that the check is not made payable to the Estate,

That's my position until authoritative guidance is released.

Ira Smilovitz, EA Leonia, NJ

Section 6428 also addresses "advance refunds" of the credit referenced above. The "advance refund" is the $1,200 check most single folks are receiving; the $2,400 most married-filing-jointly couples are receiving; and so on. This is the only section of the CARES Act that speaks of the specific dollar figures that people are now receiving in the mail and by direct deposit.

The definition of "eligible individual" also appears in Section 6428(d). Section 6428(d) says the definition of "eligible individual applies to all of Section 6428.

I think Section 6428 is clear that the IRS would be in its legal rights not to send a stimulus check to an estate.

Based on all of Section 6428, I continue to believe a check that notes the payees are "Jane Sierra DECD John Doe PER REP" is a check to the estate and was a mistake.

Regarding former long-time IRS Taxpayer Advocate Nina Olson: I think her comments have been helpful on this, but I also think that her comments have evolved. Initially she asserted that estate beneficiaries are allowed to keep the stimulus payment sent to the estate/decedent. E.g. from the LA Times on April 24:

======Start Apr 24 LA Times Excerpt===== "Congress didn?t make exceptions for the deceased, said Nina Olson, former head of the Taxpayer Advocate Service, an internal IRS watchdog.

?The IRS is following the law,? Olson said. ?The law tells the IRS to look at what the taxpayer reported on their 2019 return. ?Look at their income and their filing status. If they are eligible based on that, make the payment.? It doesn?t say, ?Don?t make the payment to dead people.??

Olson said it would be difficult for the IRS to exclude the deceased.

The agency would have to take the time to cross-reference eligibility lists with Social Security death records, said Nicole Kaeding, an economist and vice president of the National Taxpayers Union Foundation, a conservative tax think tank.

?Expediency has been prioritized,? she said. ?The IRS would rather be accurate than precise.?

The IRS could have scrubbed the data to eliminate deceased individuals, but doing so would have delayed checks for everyone by weeks or months, Kaeding said.

Both Kaeding and Olson said that beneficiaries of the deceased are legally allowed to keep the money. That?s what happened in 2010. Some returned the money, while others kept it. ==== End Apr 24 LA Times Excerpt===

Yesterday though, Olson said she does not see where the IRS offers any legal reasoning for telling estates to return the stimulus money. She adds, "the only way I can think of [that the IRS] could get it back is to classify it [as] an erroneous refund; it can then demand you repay it, but if you refuse it has to make a referral to the Department of Justice to bring suit. I can?t see DOJ taking a case over $1,200."

The academic question for me that lingers is whether the IRS would win in court on this.

I continue to welcome further thoughts on this.

Thank you Bob Sandler for bringing the IRS announcement to the attention of this forum.