Tax Court And Delivery Services

 We sent a petition to the Tax Court on Friday. It needs to arrive by Monday.

Technically, the petition does not have to arrive Monday, as long as it is in the care of an “approved” delivery service. I do not like to count on that extra day(s), however, so I treat the final day of the 90-day letter as an absolute deadline. In truth, I do not like waiting this late into the 90 days, but there was, you know, tax season and all.

COMMENT: Yes, the individual filing deadline was moved to May 17, but we made a concerted effort to prepare as many individual returns as possible by April 15. The majority of us here at Galactic Command do not like or appreciate a Dunning-Kruger Congress requiring us to again reschedule our personal lives.  

You may remember the old days when people used to go to the post office on April 15^th and mail their returns, especially if there was money due. Clearly there is no way that the return could make it to the IRS on the 15^th if one mailed it on the 15^th. The reason this worked (and still works, although it is much less of an issue with electronic filing) is Code Section 7502.

            § 7502 Timely mailing treated as timely filing and paying.

(a)  General rule.

(1)  Date of delivery.

If any return, claim, statement, or other document required to be filed, or any payment required to be made, within a prescribed period or on or before a prescribed date under authority of any provision of the internal revenue laws is, after such period or such date, delivered by United States mail to the agency, officer, or office with which such return, claim, statement, or other document is required to be filed, or to which such payment is required to be made, the date of the United States postmark stamped on the cover in which such return, claim, statement, or other document, or payment, is mailed shall be deemed to be the date of delivery or the date of payment, as the case may be.

This Section means that putting the return in the mail timely equals the IRS receiving it timely.

Mail service in our corner of the fruited plain has been … substandard recently. We have an accountant who no longer uses mail delivery for repetitive time-sensitive filings, such as sales and payroll taxes. She has too many experiences of mail taking a week to go crosstown that she has given up on regular mail for certain returns.

It is easier nowadays to avoid the post office, of course, with Fed Ex and UPS and other delivery services available.

We sent our petition via Fed Ex.

I am looking at a case that deals with “approved” delivery services.

What makes this an issue is that a delivery service is not approved until the IRS says it is. Granted, a lot of services have been approved, but every now and then one blows up. Use CTG Galactic Delivery, for example, have a hiccup – or just cut it too close – and you may not like the result.

A law firm sent a Tax Court petition the day before it was due. The admin person shipped it with Fed Ex using “First Overnight” delivery.

OK.

Something weird happened, and the package got relabeled. Why? Who knows. The result however is the petition got to the Tax Court late.

In general, one would consider Fed Ex to be a safe bet and Fed Ex to be squarely within the list of approved delivery services. The problem is that the IRS does not look at Fed Ex overall as “approved.” It instead looks at the delivery options of Fed Ex as individually approved or not. When the law firm sent their petition, the following services were approved:

·      Fed Ex Priority Overnight

·      Fed Ex Standard Overnight

·      Fed Ex 2 Day

·      Fed Ex International Priority

·      Fed Ex International First

You know what service is not on the list?

Fed Ex First Overnight, the one the law firm used.

Now, Fed Ex Overnight eventually got added to the list, but not in time to save the law firm and this specific filing.

Are their options left if one blows the Tax Court filing?

Yes, but the options are less appealing. One could litigate in District Court, for example, but that would require one to pay the assessed tax in full and then sue for refund.

There is also audit reconsideration, but I shudder to take that option with IRS COVID 2020/2021. The IRS has the option of accepting or rejecting a reconsideration request. I can barely get the IRS to do what it HAS to do, so the idea of giving it the option to blow me off is unappealing.

For the home gamers, our case this time was Organic Cannabis Foundation LLC et al v Commissioner.

Racing As A Trade Or Business

 I am reading a case that made me grimace. The following is a total NO-NO if you are unfortunate enough to be selected for audit:

As part of the audit RA Chavez issued information document requests to petitioners requesting their accounting records for 2013, but petitioners did not respond. RA Chavez completed his audit without receiving any additional information from petitioners …”

The abbreviation “RA” means revenue agent; those are the IRS folks who do the examinations.

This is not going to turn out well.

… respondent issued … revenue agent reports (RARs) to petitioners with proposed adjustments to tax and accuracy-related penalties. Petitioners did not respond to the … RARs.

Chances are very good that I would have resigned from this representation or refused to accept the client in the first place.

We have, for example, a client who has not filed returns for years. There are mitigating reasons, but not that many or reasons that persuasive for the number of years. My partner brought them in; I looked at their stuff and gave them a list and timetable of what we needed. I reached out to the IRS, explained that they had just hired tax representation and requested time.

I am not going to say that the IRS is always hospitable, but in general they tend to be reasonable if someone is truly trying to get back into the system (except during COVID; the COVID procedural issues have been extensive, unrelenting and extremely frustrating. The IRS really should have stopped issuing notices like government stim checks until it could at least open its mail on a timely basis).

What did my partner’s client do?

They gave us nothing. Two weeks became two months. Two months became three. I received exculpatory e-mails that read like a Grateful Dead tour.

My - and our - credibility with the IRS took a hit.

If they were my client, I would have dismissed them. They are not, however, so I did the next emphatic thing I could do: I will not work with them. We have a younger tax pro here at Galactic Command, and he will take this matter over. He has a nice background in preparation, and I would like to expose him to the representation side of practice. He is somewhat interested (at least, not uninterested), and if he remains in a CPA firm as a career it will be a nice addition to his skill set.

Back to our case.

There is a lot going on, but I want to focus on one issue.

Two families own a construction S corporation (Phoenix). The IRS disallowed $121,903 in 2013 related to car racing activities. More specifically, the racing was by a son of the owners, and his car of choice was a 1968 Camaro.

He started racing it in 2014.

One has to be very careful here. One is taking an activity with a high level of personal interest and gratification and jamming it into a profitable company. It would take minimal tax chops to argue that the racing activity is a hobby or is otherwise personal. The purported advertising cannot be “merely a thin cloak for the pursuit of a hobby.”   

The company fired back with three arguments:

(1)  The racing expenses were ordinary and necessary advertising expenses.

(2)  Phoenix purchased the car as an investment.

(3)  Racing was a separate trade or business from Phoenix and was engaged in for profit.

I do not know if these arguments existed when the return was prepared or dredged-up after the fact, but still … kudos.

Except …

The racing was not conducted under the Phoenix name. There was no company logo on the car, with the possible exception of something minimal on the rear window. There were no photographs or videos of the car on the company’s advertising.

One more thing.

Phoenix did not even separate the car racing expenses as Advertising on its tax return. Instead, it just buried them with “Construction Costs.”

Folks, the IRS does NOT like it when one appears to be hiding something iffy in a big, enveloping category of other expenses. It is, in fact, an indicium of fraud.

The first argument whiffed.

One BTW does not race a car that is held for investment. One stores a car that is held for investment, perhaps taking it to an occasional show.

The second argument collapsed.

That leaves a lot of pressure on the third argument: that the car was its own separate trade or business.

You know what the car did not do in 2013 (the year of examination)? It did not race, that is what it did not do. If one were to argue that the car was a separate trade or business, then one would have to concede that the activity started the following year – 2014 – and not in 2013. All those expenses are what the tax Code calls “startup expenses,” and – with a minimal exception - they have to be amortized over 15 years.

Let me check: yep, this is a pro se case, meaning that the taxpayers represented themselves.

We have said it before: hire a pro, spend a few dollars. You do not know what you do not know.

What would I have advised?

They should have posted photos and videos of that car everywhere they advertised, and I would have recommended adding new advertising venues. I am thinking a video diary: the purchase of the car, its modification, interviews with principal parties, technical issues encountered and resolved, anticipated future race sites and dates.

And yes, I would have put the company name on the car.

Our case this time is Berry v Commissioner, T.C. Memo 2021-42.

Income and Credit Card Rebates

I am reading a case so unique that I doubt there is much takeaway taxwise, other than someone beat the IRS.

What gets the story started is automobile rebates back in the mid -70s. The economy was limping along, and car manufacturers wanted to sell cars. Buy a car, get money back from the manufacturer.

To a tax geek, receiving a check in the mail raises the question of whether there is income somewhere.

The overall concept behind taxable income is that one has experienced an accession to wealth. That is how discharge of debt can create income, for example. As one’s debt goes down, one’s wealth increases.

What to do with a car rebate?

The IRS did the obvious thing: it saw a car; it saw payment for a car; and it saw a rebate going back to whoever bought the car. There was no increase in wealth here, it decided. The result was that one paid less for the car.

There are countless variations on the theme. What to do with airline miles, for example?

Our case features Konstantin Anikeev (K). K got himself a Blue Cash American Express credit card. The card had a reward program. American Express would send you money for buying (approved) things with the card.

American Express disallowed certain purchases from the program, however, including:

(1)  Interest charges and fees

(2)  Balance transfers

(3)  Cash advances

(4)  Purchase of traveler’s checks

(5)  Purchase or reloading of prepaid cards

(6)   Purchase of any cash equivalent

I get it. American Express did not want someone to walk the transaction through back to cash.

K noticed something: the program did not address gift cards.

A gift card is just a prepaid card, right? Not quite. A gift card is not redeemable in cash or eligible for deposit into your bank account.

I had not really thought about it.

K did think about.

You know what you can do with a gift card?

You can buy a money order, that’s what. You then deposit the money order in the bank.

Sounds like a lot of work for a couple of bucks.

K went to town. Over the course of a year or so, he and his wife generated rebates of over $300 grand.

K knows how to commit.

Interestingly enough, American Express did not seem to care. 

The IRS however did care. They were going to tax K on his $300 grand. K pointed out that the IRS had provided guidance way back by saying that rebates were not income, and all he received were rebates. Granted, there were more bells and whistles here than a 1978 Chrysler Cordoba, but that did not change anything.

The IRS said nay-nay. The guidance they put out back in the 70s involved a product or service. That product or service had a cost, and that cost could then be reduced to absorb the effect of the rebate. There were no goods and services with K’s scheme. There was nothing to “absorb” the rebate.

Off they went to Tax Court.

There is a tax subtlety that we need to point out.

The IRS could have argued that the exchange of the gift card for a money order was a taxable event. Since the cost of the gift card had been adjusted down by the rebate K received (meaning the cost was less than a dollar-on-a-dollar), there would be a gain upon the exchange.

It is a formidable argument.

That is not what the IRS did. They instead argued that K had an income recognition event when he bought the gift card.

Huh? How?

Because he intended to ….

The Court was having none of this argument.

The Court reminded the IRS that gift cards are a product. The card has a uniform product code that the cashier uses to ring up the cost. It is a product, just like a car. The IRS was upset because it got gamed. It did not like the result, but that did not give the IRS leash to arbitrarily look down the road and back-up the tax truck when it did not like the destination. The IRS should tighten its rules.

Here is the Court:

These holdings are based on the unique circumstances of this case. We hope that respondent polices the IRS policy in the future in regulations or in public pronouncements rather than relying on piecemeal litigation.”

K won. He and his wife had tax-free cash.

BTW, K did all this with a card whose credit limit was $35 grand. I am REALLY curious how much time they put into this.

Our case this time was Anikeev v Commissioner, TC Memo 2012-23.

When Is Divorce A Tax-Deductible Theft?

 

I am reading a case involving tax consequences from a divorce.

More specifically, the (ex) wife trying to deduct $2.5 million as a theft loss.

That is a little different.

He and she got married in 1987. Husband (Bruno) lifted a successful career in the financial sector, and by 2005 was earning over $2 million annually.

There was an affair.

There was a divorce.

The Court ordered an equitable distribution of marital properties.

That did not seem to impress Bruno, who transferred no marital properties. The court held him in contempt, ordered him to pay interest and yada yada yada.

QUESTION: Can’t a court place someone in jail for contempt?

It appeared that the Court had enough of Bruno, and in 2010 the Court transferred real estate to the (ex) wife, with instructions to sell, keep the first $300 grand and transfer the balance to an escrow account. The property sold for $1.9 million. Th (ex) wife kept all the money, placing nothing in escrow.

Yep, the Court held her in contempt.

By now I am thinking that the contempt of this court is clearly meaningless.

In 2015 our esteemed Bruno filed for bankruptcy. He claimed he was down to his last $2,500.

Which raised the question of where all the money went.

In 2016 the (ex) wife filed suit against Bruno’s new wife and several companies that he, she or both owned.

Methinks we found where the monies went.

She filed a claim against the bankruptcy estate for $3.5 million.

Apparently, there was something to the (ex) wife’s claim, as the bankruptcy trustee filed suit against the new wife, against Bruno’s mother, the Bruno companies previously mentioned and some poor guy Bruno talked to while walking his dog around the neighborhood.

That case was settled in 2019.

Let’s be honest: there is really no likeable character in this story.

The (ex) wife amended her 2015 tax return to report a $2.5 million theft.

That – not surprisingly – created a net operating loss that went springing across tax years like kids at a pre-COVID McDonald’s Playland.

The IRS caught the amended return and said: No way. No theft. No loss. Get outta here.

And that is how we got to the Tax Court.

Establishing the existence of a deductible theft can be tricky in tax law. Yes, one always has the question of what was stolen, how much was it worth and all that. Tax law introduces an additional requirement:

·      One must establish the year in which the loss was sustained.

The blade is in Reg 1.165-1(d):

However, if in the year of discovery there exists a claim for reimbursement to which there is a reasonable prospect of recovery, no portion of the loss with respect to which reimbursement may be received is sustained  .. until the taxable year in which it can be ascertained with reasonable certainty whether or not such reimbursement will be received.”

It is not the “what” that will trip you up; it is the “when.”

There of course some Court guidance over the years, such as:

·      The evaluation should not be made “through the eyes of the ‘incorrigible’ optimist,” or

·      … the “mere possibility or the bare hope of a future development permitting recovery does not bar the deduction of a loss clearly sustained.”

Yep. That is like telling a baseball player to step to the plate against Jacob deGrom and “just swing the bat.”

Thanks for the advice there, pal.

And the Court decided against the (ex) wife.

No one believed Bruno when he filed bankruptcy in 2015 and claimed he was worth only $2,500. The trustee filed suit; the (ex) wife filed suit. Lawsuits were everywhere.

The Court stated that the (ex) wife may well have a theft loss. What she did not have was a theft loss in 2015.

Our case this time for the home gamers was Bruno v Commissioner, T.C. Memo 2020-156.

Withdrawing A Tax Court Petition

 

We have a case coming up in the Tax Court.

Frankly it should never have gone this far. Much of it was COVID, I suspect. However, some of it was the IRS dropping the ball.

What set this off was someone dying. His employer had a life insurance policy on him. I suspect that this came as a surprise to his employer, who probably thought all along that the employee owned the policy with the employer paying the premiums. This would be a “split dollar” arrangement. The taxation of split dollar plans became trickier in the mid aughts, but these arrangements have been around for a long time. 

The employee died. The company received the proceeds. The company intended for the widow to receive the proceeds. How did the company get the proceeds to the widow?

They botched is what they did.

They tried to correct the botch by amending a Form 1099.

Our client is the widow, and she is being chased by the IRS. I reviewed the history of the transaction, the original and amended 1099, e-mails galore.

I have been trying to contact the IRS on the case. I even reached out to the clerk for Judge Morrison (at the Tax Court) for an assist. She was extremely helpful, but getting a response – or a pulse – from the IRS has been frustrating.

Until this week.

It is amazing how quickly some issues can be resolved if people can just talk.

The IRS understood our argument. They were willing to compromise, except for one thing.

The company never filed the amended 1099 with the IRS.

Explains why the IRS was digging in its heels.

Mind you, we can correct this – now that we know. We could also have corrected this long ago and not involved the Tax Court.

We will never appear before the Court.

Procedure here is important. Both the IRS and we will tell the Court the matter has been settled. The Court will be happy to move on.   

By contrast, what happens if we unilaterally pull out of Tax Court?

Bad things.

The seminal case goes back to 1974.

The IRS came after William Ming. Whatever was going on, the IRS was going after the fraud penalty.

There was back and forth. Mr Ming died. The IRS eventually showed some leeway on the fraud issue.

That caught the estate’s attention.

The estate tried to withdraw its case. They may have wanted a jury, and the Tax Court does not have a jury.

Here is the Court:

It is now settled principle that a taxpayer may not unliterally oust the Tax Court from jurisdiction which, once invoked, remains unimpaired until it decides the controversy.”

There is a Hotel California vibe here: the Tax Court will hold against you should you withdraw. This triggers the legal doctrine of res judicata, and you then cannot relitigate the issue in another court.

You can leave by winning, losing or settling. What you cannot do is walk out.

Our case this time for the at-home tax historians was Estate of Ming 62 T.C. 519.

How Much Paperwork Does the IRS Want?

Sometimes practitioners disagree on how much supporting paperwork – if any – should go with a tax return.

The issue can take on a keener edge when one is working with amended returns or claims for refunds.

COMMENT: For the nerds, an amended return can technically be a claim for refund – if the amended return shows a refund.

It also can vary with the tax issue at play.

I am looking at two cases – the first being the initial hearing and the second the appeal – involving a research tax credit.

The research credit is easier to understand if we think of companies such as Johnson & Johnson or Pfizer. Lab coats, scientific equipment, people wearing safety glasses and so forth. The image screams research.

Mind you, there are accounting and recordkeeping issues that go with this credit.

A routine accounting system would capture functional costs (think payroll, rent, utilities), departmental costs (think auto parts versus auto service at a car dealership) and divisional costs (consumer and industrial, for example). The research credit wants even more detail from the accounting system. It wants detail at the research activity level.

What is a research activity?

You could be an activity. Say that you are an engineer. You work in manufacturing, but a portion of your time is spent on activities that might qualify for the credit. What would be an example? Let’s say improving a product or the process to manufacture that product.  

The accounting system easily captures your payroll as a functional cost.

The system also captures your payroll as a manufacturing cost.

What the system perhaps doesn’t do – at least without upgrades – is break-down your lab time into specific projects, some of which might qualify for the credit and others which might not. Yep, your time sheets going forward are going to be a bear.

Let’s be clear: if you are Pfizer, you likely have tweaked-out your accounting and reporting system to capture 360 degrees of data, including whatever is needed for the research credit. Our discussion here concerns more routine companies.

The Harpers owned a company that specializes in military design build projects. They initially filed returns not claiming a research tax credit.

Now pause and consider what they do.

Chances are that some of what they do has an element of uncertainty: what to, how to do it, what order to do it and so on. Depending upon, that uncertainty might trigger the research credit.

There are four principal requirements to the research credit:

(1)  There must be a reduction in uncertainty about the development or improvement of a product or process.

(2)  That development or improvement in turn involves experimentation – that is, there are different ways to get there from here. The experimentation involves determining which ways work and which ways do not.

(3)  The experimentation must involve hard sciences: engineering, chemistry and so forth. Experimenting with tax law, for example, will not work (sadly).

(4)  The purpose of the activity must be a new or improved product or process: performance, function, quality, reliability, that kind of thing.

The Harpers reviewed what they did and determined that the company had research activities qualifying for the credit. They amended their returns for 2008 and 2010. The credit amount was impressive:

         2008                    $437,632

         2010                    $388,325

The IRS reviewed the amended returns and denied the credit.

Off to Court they went. The first case was in California district court.

The IRS position was both straightforward and cynical:

The claim must set forth in detail each ground upon which a credit or refund is claimed and facts sufficient to apprise the Commissioner of the exact basis thereof.”

Let me rephrase the position: we (the IRS) decide when we have enough facts and in any event the facts you submit are not sufficient to apprise us of anything until we say that they are sufficient.

The district court agreed with the IRS.  The taxpayer was required to establish all facts and details for its refund claim. The IRS said that the taxpayer had not, and the Court said that was all it needed to know.

Wow. Let me think how can this standard can possibly be abused….

The Harpers appealed the case to the 9^th Circuit Court of Appeals.

Their argument?

• The IRS has the right to notice of a claim and its underlying facts so it can make an informed and appropriate determination. This is referred to as the “specificity” requirement.
• The IRS can always ask one more question. This makes attaching ALL possible paperwork to a claim virtually impossible.
• In practice, the IRS can review a claim with a taxpayer. One way is to audit the claim, of course. This act is considered a waiver of the specificity requirement.
• Why would the IRS review a claim and thereby waive anything? Consider the alternative. Tax practitioners would attach so much documentation to the research tax credit that the IRS would have to lease additional storage to house it all.  It is in both parties’ mutual interest to go along and get along.

The Harpers argued that the IRS had waived the specificity requirement.

How did the IRS do this?

By auditing the claim.

The IRS spent four years auditing the amended returns. The Harpers provided over 100,000 pages of supporting documentation. At no point in time did the IRS tell the Harpers that they had not provided ENOUGH documentation.

I am trying to be fair, but I am distressed by the IRS behavior.

It is common professional knowledge that the IRS can always ask for additional information. One can provide it and still get turned down, but the give and take allows the system – the IRS and tax practitioners - to function and not be overwhelmed.

Is that what happened here?

Nope.

The IRS did not go to Court arguing that it had reviewed 100,000 pages of supporting documentation and decided the Harpers did not qualify for the research credit.

The IRS argument was that the Harpers did not meet the specificity requirement – meaning the Harpers did not include enough paperwork.

The Appeals Court called out the IRS. It had waived the specificity requirement by auditing the amended returns.

The Appeals Court sent the case back to the district court. The case should never have been dismissed for the specificity requirement.

The Harpers may win or may lose, but they will have their day in court.

Our case this time for the home gamers was Harper v United States.

Your 2020 Tax Return and the Stimulus Payments

 

Let’s talk about your 2020 personal tax return and the two stimulus payments that you (may have) received.

The first round of stimulus checks was up to $1,200 for each spouse and $500 for each qualifying child.

The second round was up to $600 for each spouse and qualifying child.

So, if you have two qualifying kids and qualified for the maximum, you would have received $5,800 ($3,400 plus $2,400) between the two rounds.

How do you not qualify for the maximum?

One way is easy: you had too much income.

The second way is nonintuitive: the child was over age 16. A qualifying child means a child under the age of 17. Seems odd to me to exclude a high school senior, but there it is.

Let’s talk about the first non-qualification: income.

Let’s use a married couple with two qualifying children as our example.

The income limit for marrieds is $150,000. Past that point the stimulus check goes away by a nickel on the dollar. The maximum for two spouses is $2,400, so we can calculate this as follows:

                      $2,400 divided by .05 = $ 48,000

                      $150,000 plus 48,000 = $198,000

All right, the stimulus for marrieds burns-out at $198,000, right?

Nope.

Why?

Because of the qualifying children.

Each of the kids adds another $10,000 to the phaseout range.

We have two kids. That means $20,000 added to the $198,000, totaling $218,000 before we burn-out of stimulus altogether.

Are we stilling phasing-out at a nickel on the dollar?

Let’s check.

           $218,000 – 150,000 = $68,000

           $3,400 divided by 68,000 equals $0.05.

Yep, nickel on the dollar.

You received the first stimulus check in April, 2020. Remember that tax returns were automatically extended until July 15, 2020 because of COVID. The odds were extremely good that the IRS was not basing its calculations on your 2019 return, because your 2019 return had not been prepared, much less filed. For most of us, the IRS was looking at our 2018 tax return.

Let’s continue.

You received your second stimulus check very late in December, 2020 or (more likely) January, 2021 – but the income phaseout range was the same.

What did change was the tax year the IRS was looking at. By December, 2020 you would have filed your 2019 tax return (let’s skip paper filings that may not have been processed by then, or we are going to drive ourselves crazy).

If your income went up from 2018 to 2019, you would have climbed the phaseout range. You might have received a first stimulus check, for example, but not qualified for a second one. It could have gone the other way, of course, if your income went down in 2019. 

Now your 2020 tax return lands on my desk and we need to settle-up on the stimulus.

How do we settle-up?

We run through the income phaseout range … again.

Using your 2020 tax return this time.

Did you notice we are doing the calculation three times using income from three different tax years?

Yep, it’s a pain.

Mind you, if you have modest income, I know that you received the maximum stimulus.

Conversely, if you made bank, I know that you received no stimulus.

Fall in between – or have wildly varying income – and I you need to tell me the amount of your stimulus checks.

Let’s go through a quick example, using our married couple with two qualifying children.

Their 2018 adjusted gross income was 201,000.

Here is the first stimulus:

phaseout start			150,000.00
phaseout end		198,000.00
add: 2 children		20,000.00
			218,000.00
				68,000.00
2018 AGI			201,000.00
				51,000.00
First stimulus		2,400.00
		1,000.00
			3,400.00	times	51,000.00	=	2,550.00
					68,000.00
			(2,550.00)
			850.00

They would have received $850.

Their 2019 adjusted gross income was $320,000.

Way over the income limit. There was no second stimulus.

Their 2020 tax return lands on my desk. Their adjusted gross income is $104,000.

Way below the income limit. Full stimulus.

Two qualifying kids. The maximum over two rounds of stimulus would be $3,400 plus $2,400 = $5,800.

They already received $850 per above.

That means a $4,950 credit on their 2020 individual tax return. I look like a hero.

But why? After all, their 2019 income was over $300 grand – way above the range for receiving any stimulus.

The quirky thing is that the stimulus is based on one’s 2020 tax return. Congress however wanted the money out as fast as possible. The stimulus had an income test, though, so the first option was to do the calculation on one’s 2019 tax return. When that option proved unworkable, the second option was to use 2018. It was messy but quick, and one would settle-up when filing the 2020 tax return.

Congress realized that settling-up could mean repaying some of the stimulus money. Since that somewhat negated the purpose of a stimulus, Congress decided that the gate would only swing one way. If one did not receive enough stimulus, then one could claim the shortfall on the 2020 return. If one was overpaid, well … one got to keep the money. 

It was a win:win.

Not so much for the accountant, though.