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Recovery Rebate Fix Needed By Congress To Not Encourage MFS Filing Status



Annette Nellen- Economic Impact Payment

The CARES Act enacted March 27, 2020 included the 2020 recovery rebate for individuals that provided over 160 million adults with $1,200 to help them with financial challenges during the pandemic (see GAO data). The IRS refers to this payment as the Economic Impact Payment (EIP) and as of(8/1/20) has provided 70 FAQs to help explain it! The provision added Section 6428 to the Internal Revenue Code.

I was surprised by FAQ 26 and its answer because I would think that if for a married couple one spouse has an SSN and the other has an ITIN which disqualifies that spouse for an EIP, the spouse with the SSN would still have been given $1,200. But that will only happen if they file as Married Filing Separately rather than as Married Filing Jointly.

Q26. I filed a joint return with my spouse. Will we receive a Payment if I have a valid SSN and my spouse has an IRS Individual Taxpayer Identification Number (ITIN)?

A26. No, when spouses file jointly, both spouses must have valid SSNs to receive a Payment with one exception. If either spouse is a member of the U.S. Armed Forces at any time during the taxable year, only one spouse needs to have a valid SSN.

If spouses file separately, the spouse who has an SSN may qualify for a Payment; the other spouse without a valid SSN will not qualify.
In reviewing Section 6428, the rationale for this answer seems to be at Section 6428(g)(1)(B) which in explaining the identification number requirement states that a person filing a joint return only gets an EIP if the spouse has an EIN. So, the answer from the IRS appears to be correct.

So, the problem is with the text of the law. I say this because the tax law doesn’t encourage using the MFS status over the MFJ status. The tax law provides that when a married couple file separately, there are several favorable rules they will no longer qualify for. These include the Earned Income Tax Credit, the dependent care credit, most education tax breaks, and a few others (see page 7 of Pub 501).

I think the rationale for the harsh treatment for MFS that has existed in the law for a long time is that it is extra work for the IRS to be sure both spouses are not claiming benefits where only one may be allowed to claim them. Generally, MFS is only used where a spouse wants to avoid joint liability for the taxes owed or their combined taxes will be lower with that status (which occurs in rare situations).

I believe Section 6428(g) is incorrect because the tax law should not be encouraging MFS over MFJ. For example, a couple with children where one spouse has an SSN and the other has an ITIN, will need to determine if skipping the $1,200 EIP is better than losing an EITC and other tax breaks. This awful decision should not have to be made – a fix is needed from Congress.

I hope that the next round of COVID legislative relief will correct this by removing Section 6428(g)(1)(B). The IRS can easily tell from a MFJ return that one spouse has an SSN and the other has an ITIN so only issue the EIP to the spouse with the SSN. Thus, (B) at (g)(1)is not needed. This change would also enable the IRS to issue these EIPs based on the 2018 or 2019 returns already filed.

What do you think?

Annette Nellen

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Annette Nellen, CPA, Esq., is a professor in and director of San Jose State University’s graduate tax program (MST), teaching courses in tax research, accounting methods, property transactions, state taxation, employment tax, ethics, tax policy, tax reform, and high technology tax issues.

Annette is the immediate past chair of the AICPA Individual Taxation Technical Resource Panel and a current member of the Executive Committee of the Tax Section of the California Bar. Annette is a regular contributor to the AICPA Tax Insider and Corporate Taxation Insider e-newsletters. She is the author of BNA Portfolio #533, Amortization of Intangibles.

Annette has testified before the House Ways & Means Committee, Senate Finance Committee, California Assembly Revenue & Taxation Committee, and tax reform commissions and committees on various aspects of federal and state tax reform.

Prior to joining SJSU, Annette was with Ernst & Young and the IRS.

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