Taxpayers may file a 2020 superseding return changing their joint filing election to receive the third economic impact payment.
Economic Impact Payments
The IRS previously issued two rounds of economic impact payments (EIPs). The IRS delivered over 160 million payments for the first round of EIPs and 147 million payments for the second round of EIPs. The IRS has currently disbursed approximately 159 million payments for the third round of EIPs based on the adjusted gross incomes of the taxpayers’ latest processed returns from 2019 or 2020. The IRS is also automatically issuing and will continue to issue true-up payments for those individuals who already received a third EIP based on their 2019 tax return but have since filed their 2020 tax return and qualify for additional EIP funds. However, since enactment of the legislation many eligible victims of domestic abuse face issues in receiving their EIPs.
If the IRS determined the EIP based upon a filed joint tax return, it electronically deposited the EIP to the bank account shown on the joint return or it issued a check in both taxpayers’ names and sent the check to the address shown on the joint return. And on March 30, the IRS advised joint filers that taxpayer may receive half of the EIP payment as a direct deposit and the other half as a check, so keep an eye on your mailbox.
In my April 29, 2020, blog, I called attention to superseding returns — returns filed after an original return but before the due date of the original return. Returns are typically due on April 15, but taxpayers can submit a Form 4868, Application for Automatic Extension of Time to File, until October 15. Taxpayers can use superseding returns to correct an error or change a tax election as a substitute for the original filed return. For example, taxpayers might elect to have an overpayment shown on an original return applied to the tax owed the following year. By filing a second (superseding) return, taxpayers can change that election and receive the refund in the current year instead.
Superseding returns are treated as a replacement of an original return, and the IRS adjusts its records accordingly (see, for example, Internal Revenue Manual (IRM) 22.214.171.124.10). As I noted in a recent blog, it is important to remember the IRS treats the original return filing date as the key date for assessment and refund statute purposes — not the date the superseding return was filed if the superseding return was filed before an extended due date.
Superseding Return Changing Filing Status
Another reason to file a superseding return would be to change the election to file a joint return. For example, taxpayers who were married at the conclusion of the tax year, filed a joint return, and subsequently divorced or separated might decide to change their filing statuses (to married filing separately or head of household, if eligible). One additional benefit is each spouse would receive their EIP individually rather than receive their EIP as an electronic deposit to a joint bank account they no longer share, or via a check in both their names to an address they no longer share.
Taxpayers who are still married, particularly victims of domestic abuse, may also decide to change their joint return election by filing a timely superseding return. This may be especially important when they do not have access to the bank account shown on the filed joint return, or they cannot access the mail at the address shown on the joint return, and the other joint filer may misappropriate their share of EIP.
The IRM takes the position that superseding returns changing the joint filing election must be filed before the due date of the original return without regard to extensions. The deadline for filing an original return was postponed to May 17, 2021, for tax year 2020 (see Treas. Reg. § 1.6013–1(a)(1)). Taxpayers may request extensions to file beyond that date and may file superseding returns if they do so by the extended filing date, but the IRS’s position set forth in its IRM states that for irrevocable elections (e.g., section 179, Joint to Separate) a return filed after the original due date but on or before the extended due date does not constitute a superseding return.
If the IRS did not issue the first or second EIP based on a taxpayer’s filed superseding return changing a joint filing status and instead based the EIP on the prior joint return, the taxpayer may still claim a Recovery Rebate Credit (RRC) on their 2020 income tax return, Form 1040, line 30. However, taxpayers should expect that their refund will be delayed because the IRS will manually review the claim if its records are inconsistent with the RRC. The IRS will likely issue a math error notice explaining that it is reducing or eliminating the claimed RRC because the EIP was previously paid. This leaves the taxpayer in a situation that is similar to the one I discussed in my February 11, 2021, blog — EIP is based on a joint return but the joint election was invalid because it was coerced, or the taxpayers were not married. In either instance, taxpayers will have the opportunity to explain their situation by responding to the math error notice and must respond within 60 days that the joint election was invalid or was superseded and they did not receive the EIP to which they were entitled.
Conclusion and Recommendation
Taxpayers who did not receive their first or second EIP after they filed a superseding return changing their election from filing jointly may still be eligible for the RRC on their 2020 income tax return. Taxpayers may still file a superseding return electing to file married filing separately or head of household for the 2020 return by May 17 which may trigger a separate EIP after processing the superseded return. That superseded return would be the basis for the third EIP.
I will continue to work with the IRS to ensure appropriate math error notice procedures are in place to assist with the processing of the 2020 RRC for those taxpayers that filed superseding returns changing their election to file a joint return. Victims of domestic violence in particular may benefit from these procedures.
If you have any questions regarding accounting, domestic taxation, essential business accounting, international taxation, IRS representation, U.S. tax implications of Real Estate transactions or financial statements, please give us a call at 305-274-5811.