4. Advance Periodic Payments: A Critical Step that Requires Careful Implementation

Advocates have argued for years¹ that the annual lump sum distribution of low-income tax credits undercuts their mission, denying working families support when they need it throughout the year, and leading to perverse financial choices, like families taking out high-interest loans in January against the EITC they expect to collect in March or April. Properly speaking, there are two aspects to this argument: (1) annual lump sum distributions constitute forced savings throughout the year, when families would rather spread out their consumption, and (2) for families with volatile incomes, the delayed disbursement guarantees that they will not see their benefits until they may no longer need them as urgently. The program design borrows from needy families today to pay their potentially-less-needy selves later. The first principle has its benefits; helping families save can be a feature, not a bug, and policymakers would be well-advised to find ways to maintain some of this functionality. The second, though, is pure deadweight loss.

The clear solution is for Congress to authorize the IRS² to advance portions of the credits on a monthly or quarterly basis throughout the year. In fact, such a measure was included in the American Rescue Plan, with the IRS being tasked to issue monthly advance payments on the 2021 CTC between July and December of 2021, based on TY2020 eligibility.

The appeal of such an approach is obvious, and it is heartening to see it gain traction in Washington. However, advance periodic payments will likely prove more complex to implement than some advocates anticipate, at least publicly, and Congress would be well advised to move carefully. Unlike in other sections of this paper, we outline first some of the reasons for caution, before sketching the outline of a reasonable way to advance this commonsense policy.

IRS eligibility rules, application (that is, filing) procedures, and processing are all fundamentally annual; but periodic payments are monthly or quarterly. Broadly, this contradiction creates two sets of challenges: (1) non-linearities in eligibility, and (2) gaps in information-gathering.³

4.1.1 Annual Eligibility Rules and Monthly Payments

Consider a single mother of two, who has always lived with and cared for her children. In a given year, she continues to live with and care for them until May 31. On June 1, however, she is checked into the hospital for medical issues, and the children stay with their grandparents. Throughout the year, her medical issues persist, such that the grandchildren wind up essentially staying with their grandparents the rest of the year.

Properly speaking, the grandparents can claim the two children under EITC, as they lived with them and cared for them for more than six months. The mother cannot; she lived with them for less than six months. She can only claim (insofar as she is eligible) the childless EITC.

But how would this play out under advance periodic payments? For the first five months of the year, she would presumably receive the EITC with two qualifying children, adding up to, at certain income levels, nearly $2,500.⁴ But at the end of the year, it would be clear she had no qualifying children under EITC, and would be eligible for no more than a few hundred dollars of childless EITC at most. When she finally did her taxes the following February, it would be clear she received an approximately $2000 overpayment from the IRS, and she would owe the IRS that money. And this would occur even if the IRS was informed promptly on June 1 of the change in family circumstances—which is a big if, and suggests the second, larger issue.

4.1.2 Collecting Information on Changing Circumstances

Suppose that somehow the laws were written such that eligibility were proportional to the portion of the year that a given family structure existed. In such a world, the above illustration would pose no particular problem; the mother would be entitled to the first $2500 of EITC for the year, and the grandparents to the remainder for the next seven months. But there would still remain the tricky question of how the IRS is supposed to know that the children essentially changed custody on June 1, and adjust payments accordingly.

Most advance payment proposals—including the American Rescue Plan version—envision an online tool via which beneficiary families would periodically log in to advise the IRS of changes to their circumstances. On June 1—or at least by June 30—both the mother in the hospital and the grandparents newly taking care of their two grandchildren would log into some web application and advise the IRS that they, respectively, now had zero (mother), or two (grandparents), qualifying children. That is, this overburdened low-income family (who may well be in the 20 percent of EITC-eligible families who do not even manage to file annual taxes to claim the EITC in the spring) would proactively log in to a government website promptly to describe their changed circumstances—and have the foresight to know that this at-first temporary arrangement was going to prove durable enough to justify doing so. (Note while this example illustrates the case of a change in family structure, the same principle applies to a change income. And while changes in income may be easier to recognize and report in the case of a salaried worker getting a raise or a new job, freelancers and gig workers may not have clear visibility into the stability—or lack thereof—of their income month to month.)

One does not need to guess how unrealistic this assumption is; one need merely look at payments of the Advance Premium Tax Credit (APTC) created as part of the Affordable Care Act to defray the cost of private health insurance for low-income families. The APTC, like the theoretical advance EITC or CTC, is paid monthly (though in the APTC’s case directly to insurers rather than to families), and families are expected to log in to their healthcare marketplace to update their information when a life change event impacts the amount of APTC they are entitled to. But, empirically, families do not do so. In tax year 2016,⁵ according to the IRS, 58 percent of APTC claimants had an overpayment (that is, net owed the IRS PTC at tax time); half of these (29 percent overall) owed over $500, and 25 percent of these (14 percent overall) owed over $1000. Not to mention, as discussed at length throughout this paper, the government historically does not have the best track record in quickly providing simple and accessible software to low-income families. The notion that the IRS would be able to deliver an excellent, modern, and easy-to-use piece of relatively complex software to track life change events before it can roll out a more basic tool to file simple taxes seems hopeful at best.

The APTC, like the proposed advance CTC in the American Rescue Plan, contains a robust safe harbor provision, limiting the amount of money low-income families owe back to the IRS if it turns out their advance payments were too generous, and such a provision is critical in any such implementation. But policymakers and the IRS would have to be ready to start accepting large amounts of actual overpayments from families who, critics will allege, “willfully broke the rules” by neglecting to proactively report their life changes. It seems far more likely that members of Congress and inspectors general will, instead, raise alarms about alleged waste and fraud.

A second option, of course, is to find some way to determine the relevant data without requesting it directly from already overburdened low-income families. In the case of income data, this is not unreasonable, as the IRS already receives quarterly wage and earnings data from businesses, although there remains the trickier point of self-employment income which may not be regularly reported to the IRS. But the situation is far more complex still in the case of qualifying children, where the IRS—at least without significant statutory reforms—has no plausible third-party data source to suggest when a child has moved across households.

Moreover, all of this coexists uneasily with the recommendation above that the definition of qualifying child be simplified to a commonsense standard that the government does not interrogate except in the case of conflicts. Suppose one household claims a child all year in advance payments, but another household claims the child at tax time the following February, and the IRS must reconcile the claims. At this point it either would have to defer to the earlier-claiming family, which may be incorrect and unjust, or risk clawing back the entire payment to that family.

All told, the implementation challenges for advance periodic payments are non-trivial, especially for an already resource-constrained IRS. More details will be forthcoming in future publications, but the following recommendations may help policymakers as they plan out possible nearer-term implementations:

• As much as possible, rely on automatic detection of eligibility, rather than counting on low-income families to file still more data with the federal government. The IRS should be moving in a direction of more automation, not less, and the IRS should design the entirety of the advance payments system with the goal of minimizing burden on families.
  • Relying on automatic eligibility detection means that advance payments could not be fully implemented until after significant statutory simplifications (see Section 3), which would make it simpler to detect and calculate eligibility.
  • In the case of family structure data, the IRS should examine whether states can share SNAP/Medicaid data on dependents, which is determined and updated by case managers. (Similarly, consider whether APTC data can be shared within the IRS.) Pending the adoption of a simplified “primary caregiver” definition for qualifying children (see Section 3.1), those programs’ records on dependents should closely approximate those of the IRS, and changes recorded in those programs can be taken as a sign that family structure has likely changed.
  • Consider starting with advance payments that are based solely on income rather than family structure, since income is easier to detect throughout the year. To address the unknown of self-employment income, consider restricting eligibility—at least at first—to households that historically have had W-2 income only, for at least several years.
• If there must be a new portal to update data throughout the year, it should be built in-house by the government, not outsourced to the Free File Alliance or private industry. The tool should follow best practices in modern web design, including extensive user testing and plain language. High-quality government tech teams like the U.S. Digital Service of 18F would be good candidates for developing such an application.
• Prevent mid-year life events from causing huge overpayments. Either eliminate the six-month minimum for program eligibility, transitioning programs to a by-month credit schedule, or postpone all affected advance payments until after July 1 of a given year, when six months of cohabitation with a child can be confirmed.
• Create a generous enough safe harbor provision and/or restrict advance payments to a small enough portion of the expected total benefits that clawbacks are incredibly rare or non-existent. Especially early on in the program, widespread unexpected clawbacks could discredit the advance payment program—and perhaps refundable tax credits like EITC and CTC entirely—in the eyes of beneficiaries and skeptical policymakers.
• At least at first, run the advance payment program on an opt-in basis, with households choosing to receive advance payments for a given year on the prior year’s tax return.