We welcome two students from the Georgia State University College of Law Philip C. Cook Low-Income Taxpayer Clinic as guest bloggers, Lauren Zenk and Lauren Heron, for a discussion of the latest developments in stimulus payment legislation as it relates to U.S. citizens who file jointly with non-citizens spouses. The Georgia State Clinic began working with the Harvard Clinic last October to file an Amicus Brief on behalf of low-income taxpayers denied stimulus payments due to the non-citizen exclusion in the initial CARES Act legislation. This brief was mooted by the next round of legislation which provided: 1) U.S. Citizens who elect to file jointly with their non-citizen spouses can receive the stimulus payments for themselves and their eligible children, and 2) the value of the first stimulus payment can be issued as a credit on their 2020 tax return. Still, the initial eligibility exclusion that the clinics were preparing to argue against raises issues that may arise again in the future, and, should that occur, the authors thought that it would be useful to highlight the arguments they were preparing to make. Keith
Congress enacted the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) to respond to one of the worst public health crises this country has ever experienced. The CARES Act directed the Treasury Secretary to process the payments “as rapidly as possible.” 26 U.S.C. § 6428 (f)(3)(A). Initially excluded from these payments were most taxpayers without a Social Security Number (SSN), which the government argued included U.S. citizens with a SSN who elected to file jointly with their non-citizen spouse. The result denied millions of American citizens, and their eligible children, benefits they desperately needed. Before the passage of the Omnibus Spending Bill in December of 2020, the U.S. citizens who were initially denied relief only had one identifiable remedy to receive the stimulus payment: file their 2020 tax return separately from their non-citizen spouse and receive the payment as a Recovery Rebate Credit.
However, this remedy would have been inadequate for two compelling reasons: First, filing MFS would cause them to lose favorable tax rates and certain credits available to low-income taxpayers; and second, they would have to wait until 2021 to receive the benefit of the payment during a period where the timeliness of relief was critical. The spending bill addressed the inadequacy of this remedy and provided that the U.S. citizens with non-citizen spouses and their families were “eligible individuals” for the credit. Still, only the U.S. citizen spouse and eligible children are counted for the credit, so these families are still receiving $600 less than similarly situated families. The spending bill also provided for retroactive payments for those families denied the first EIP under the Cares Act.
The Statutory Ambiguity Question
Litigation was quickly brought to challenge the government’s interpretation in regard to the eligibility of U.S. citizen taxpayers married to non-citizen spouses. The clinics were preparing to file an amicus brief that would argue against the government’s position that the CARES act excluded this class of U.S. citizens from eligibility. The clinics approached their arguments from two perspectives: (1) demonstrating that the statutory language at issue was in fact ambiguous and should be read as including this class of taxpayers as being eligible for payments; and (2) specifically illustrating how the government’s interpretation would negatively impact low-income and economically vulnerable taxpayers and conflict the with the CARES Act’s legislative purpose.
The statutory interpretation argument focused specifically on the statutory language in 26 U.S.C. § 6428(g)(1)(B), which the government interpreted as requiring that married spouses filing jointly both have valid social security numbers in order for either to qualify for the stimulus payment. This interpretation had the effect of punishing mixed-status families by denying American citizens and their eligible children the benefits they deserve.
Section 6428(a)(1) establishes that any individual with a SSN shall be allowed a $1,200 credit. Subsection (d) defines an “eligible individual” as any individual that is not a “nonresident alien individual,” a dependent, or “an estate or trust.” Therefore, any non-dependent with a SSN is plainly recognized as an eligible individual. Subsection (a)(1) states that “[i]n the case of an eligible individual, there shall be allowed as a credit . . . .an amount equal to the sum of . . . $1,200 ($2,400 in the case of eligible individuals filing a joint return).” The subsection’s parenthetical is limited to the narrow case of eligible individuals filing a joint return. The parenthetical does not encompass joint returns where a single party is an eligible individual, such as mixed-status filers. The SSN holder remains recognized as an eligible individual entitled to a credit of $1,200 under § 6428(a) for the purposes of emergency relief and economic stimulus.
Section 6428(g)(1) establishes the requirement that joint returns must include the SSNs of both spouses, but it is ambiguous whether this requirement applies to joint returns where only one spouse has a SSN. The provision states that, “No credit shall be allowed . . . to an eligible individual who does not include on the return of tax . . . (B) in the case of a joint return, the valid identification number of such individual’s spouse.” Subsection (B) presumes that the spouse on the joint return shall have an SSN. Therefore, it overlooks situations where one spouse simply does not have an SSN to provide. The language of section 6428(g)(1) may have been included as an administrative measure to ensure that all relevant information possessed by the tax filers is provided and to prevent $2,400 from going to a pair of an eligible and non-eligible individuals. The government’s reading of (g)(1) as establishing a circumstantial barrier preventing distribution of the payment is not the only possible reading of the section. Rather, the presence of an implicit waiver of subsection (g)(1)’s requirement to provide a spouse’s SSN on the joint return when a spouse does not possess an SSN is a valid interpretation of the passage.
At first blush, it appears that the government could successfully counter this argument by pointing out that the CARES Act expressly provided that members of the armed forces were exempted from the (1)(B) requirement that the other spouse provide a SSN where paragraph (1)(A) is satisfied, allowing these certain families to receive the full $2,400. The government would likely use this carve-out to argue that Congress knew how to make an exception and chose not to do so for the class of taxpayers at issue. The military exemption does not fully clarify Section 6428(g)(1) as it applies to mixed-status filers. The CARES Act expressly exempts members of the armed forces from the requirements of (1)(B) when at least one spouse satisfies the requirements of paragraph (1)(A). The requirement of (1)(B) refers to joint returns, however, so this “Special Rule” allows military families to receive the $2,400. Section 6428 still ignores the possibility of an eligible individual, who is owed the $1,200 payment, but happens to file a joint return with an ineligible individual.
Courts must do their best, “bearing in mind the fundamental canon of construction that the words of a statute must be read in their context and with a view to their place in the overall statutory scheme,” to enforce the meaning of the statute. Utility Air Regulatory Group, 573 U.S. at 320. When reading subsection (g)(1) in concert with the rest of § 6428, ambiguity is evident.
Why this Still Matters for Low-Income Taxpayers
Thankfully, Congress got around to clarifying the legislative language, which removed any ambiguity and included this class of taxpayers in the class of individuals eligible for economic impact payments. Whether you call the legislative fix an eligibility extension or a correction ambiguous language, it is difficult to ignore that some families were wrongfully denied relief at the height of the pandemic. The relief given is better late than never, but it still undercuts the initial purpose of the Act. In March 2020, the Bureau of Labor Statistics reported the unemployment rate increased by .9 percent, up to 4.4 percent, which was the largest “over-the-month” increase since 1974. This statistic reflects 1.4 million Americans who became unemployed as a result of the pandemic outbreak. For these families that may currently be facing unemployment, a tax credit retroactively issued in 2021 is almost without purpose. Further, a Pew Research Center Survey found that lower-income American’s were experiencing job loss at a higher share and that only about one-in-four of these individuals/families said they had funds set aside that could cover three months of expenses in the case of job loss. While over 130 million individuals did receive stimulus payments, the requirement that both spouses have a social security number allowed otherwise eligible individuals and their eligible children to fall through the cracks at a time where financial assistance is greatly needed, especially by low-income, vulnerable populations.
Had the statutory language not been changed and had the government persisted with its interpretation of the original CARES Act language, the remedy the government proposed for these excluded U.S. citizens and their dependents originally would have been to file their 2020 tax return separately from their non-citizen spouse. This potential remedy, however, would have been insufficient, because it would have placed taxpayers in the position of having to forego other tax benefits in order to obtain the economic impact payments. The Internal Revenue Code (IRC) incentivizes the MFJ filing status by providing that taxpayers filing separately will often have higher tax rates and will be ineligible for certain deductions, exemption amounts, and credits that are allowed to those filing jointly. These differences can be especially punitive when the taxpayers are low-income. Unfortunately for low-income taxpayers in particular, a married filing separately filing status will reduce or eliminate the impact of the following tax credits and deductions, which low-income taxpayers commonly use. These include the child tax credit, additional child tax credit, exclusion of a portion of Social Security benefits, credit for elderly and disabled, deduction for college tuition expenses, student loan interest deduction, and credits incentivizing investments in higher education like the American Opportunity Credit and Lifetime Learning Credit. In many circumstances, low-income taxpayers rely on these credits to supplement their income and lift them above the poverty threshold and being forced to relinquish these benefits to obtain economic impact payments would have not made economic sense, defeating the CARES Act’s stated purpose.
It is tempting to say that these arguments have only academic interest because all’s well that ends well. However, we believe that it is important to present these arguments to the practitioner community because of how often this type of statutory language is used and is interpreted by the government to exclude U.S. citizens married to non-citizen spouses from critical government benefits. For instance, this exclusion was not unique to the CARES Act. In the 2008 global financial crisis, Congress used similar statutory language that the government interpreted as giving tax rebates to most American taxpayers, except for spouses of non-citizens without social security numbers. It does not take much imagination to think that, in the coming years, similar language might once again be used in future stimulus bills. Finally, this exclusion affects low-income taxpayers who would otherwise be eligible for the Earned Income Tax Credit (EITC). The EITC gives preference to spouses who elect to file MFJ, where both spouses have a valid SSN, and eligible children. These taxpayers are entitled to large refundable credits, sometimes up to around $7,000. However, it has been widely accepted, perhaps uncritically, that this credit is unavailable to U.S. citizens filing jointly with their non-citizen spouse.
In the absence of a judicial venue to raise these sorts of arguments, it is important to raise them for discussion so that policy makers can consider the unintended consequences of their legislation. Hopefully, in the future, Congress and the IRS will take these considerations into account on the front-end of legislation, so vulnerable taxpayers are not excluded from legislation intended to assist families in the midst of economic crises. However, if this type of language is once again used in stimulus payments, we encourage practitioners to not accept the government’s interpretation at face value, as there are sound interpretative arguments that can be made on behalf of these taxpayers who deserve to be included in these stimulus and anti-poverty efforts.