Judge Phyllis Hamilton of the U.S. District Court for the Northern District of California agreed and ordered the Treasury Department and the IRS to reverse their decision to disallow stimulus funds to prisoners solely based on their incarcerated status. The government has filed an appeal.
The Coronavirus Aid, Relief, and Economic Security (Cares) Act provides economic impact payments or stimulus payments of up to $1,200 for individuals and up to $2,400 for taxpayers filing a joint tax return.
The Cares Act specifically excluded some people: nonresident aliens, an estate or trust and people who are dependents on someone else’s tax return. The law did not exclude payments to incarcerated individuals.
Initially, the IRS sent nearly 85,000 payments totaling $100 million to incarcerated people, according to a June report by the Treasury Inspector General for Tax Administration (TIGTA). After TIGTA raised concerns about the payments to prisoners, the IRS reversed course, declaring in an FAQ on irs.gov that such payments to people in local, state and federal correctional facilities were not allowed under the Cares Act.
“On the law, there is literally zero legitimate argument on the IRS side,” said Kelly Dermody, a partner with San Francisco-based Lieff Cabraser Heimann & Bernstein, one of the law firms representing the class-action members.
Now, not only does the government have to give that money back to prisoners, but Hamilton also ordered the IRS to extend to Oct. 30 a deadline for incarcerated individuals to file paper returns to get their money before the end of the year.
The judge also said the IRS should immediately send a memo to staff working the agency’s hotline and other public-facing roles to stop telling people that the incarcerated are ineligible for a stimulus payment. Additionally, the IRS has to send letters to correctional facilities retracting prior communication that stimulus payments should be intercepted and returned. The letters should also include a statement from the agency that incarcerated people are permitted to submit claim forms and receive stimulus payments.
“The court’s order reflects its well-supported concern that IRS has previously created, and continues to disseminate misleading and wrong information,” Dermody said. “The deadline extension helps to ensure that people inside, and the families on the outside that support them, will have a chance to claim these desperately needed funds.”
The economic impact payment is an advance credit for 2020. Under the Cares Act, payments must be made by Dec. 31. If people don’t receive a payment by then, they won’t receive their stimulus funds until they file a 2020 federal return next year.
The IRS estimates that there are about 9 million Americans who typically don’t file federal income tax returns who may be eligible for but have not registered to claim stimulus payments. This group, which now includes incarcerated individuals, has until Nov. 21 to use the agency’s online non-filers tool at irs.gov.
Because incarcerated individuals are generally not allowed access to a computer, they will have to file a paper return to claim the money. This means that people covered by the lawsuit who did not file a 2018 or 2019 tax return will have to postmark a simplified Form 1040 paper return by Oct. 30 to receive a stimulus payment this year. Before the court order, the IRS said they had until Oct. 15.
“We need to get the word out to families of incarcerated persons and advocacy groups that incarcerated persons should file returns, either through the non-filer portal, if they have Internet access, or on paper,” said Nina Olson, a former taxpayer advocate who is now executive director of the Center for Taxpayer Rights. “It is very important people not hesitate to file.”
For information on how to help an incarcerated person file for a stimulus payment either online on by mailing a paper return, go to caresactprisoncase.org. On the site is an FAQ section with directions on where to mail a paper return. There’s also a link to a sample Form 1040 with instructions on how incarcerated people should fill out a 2019 return to get a stimulus payment, including where to add the personal corrections number that is given to each prisoner so the payment is sent to the right place.
Color of Money Online Chat
Join me for an online discussion about your money on Thursday, Oct. 15, at noon (Eastern).
All you have to do is send in your written questions, and I’ll answer them during the one-hour chat.
This will be my last regularly scheduled weekly chat, but I’ll still be hosting occasional online discussions.
As I told chat participants last week, I have loved taking your questions live on a weekly basis. I hope I’ve helped you. I hope I’ve inspired you to save more if you can and get out of debt. Your questions help inform me and have led to numerous columns — some of my best.
As my work expands, I’m finding I need to trim some of my responsibilities, so I’ve decided to only do the chats occasionally.
You can still reach me at firstname.lastname@example.org. Comments and questions are welcome, but because of the volume of mail, personal responses may not be possible.
Reader Question of the Week
If you have a personal finance or retirement question, send it to email@example.com. In the subject line, put “Question of the Week.”
This week’s question is a bit long, but hang in there, because many parents face this type of issue with their adult children.
Q: We are retired debt-free. Here is our dilemma. How do we gently advise our mid-30s child to try to live more frugally? Our adult child has a large student loan debt from graduate school. (We paid undergrad.) Our child and spouse, both with good-paying jobs, recently moved from New York City to the suburbs (renting) and now need a car. They are looking at leasing even though we offered them a no-interest loan on a used car. Child’s spouse wants a new car. I want to gently advise them on what to do. Any suggestions?
A: Step back and let these grown folks make their own financial decisions — good or bad. As the mother of three young adults in their 20s, I get that you want the best for them and you probably know best. And really, I have no problem with you offering advice, although it may be better received if given after being asked.
But once you lay out what you think is a wiser money move, you need to stand down. Wait and watch. Be supportive without an “I told you so” if their way turns out to be a costlier decision.
Parenting doesn’t end when your children become adults. However, you have to realize that you can’t make them take your advice anymore.
By the way, I would not offer a loan for anything. If you can’t afford to give them the money for the car, don’t play their banker. Such agreements often don’t go as planned when the money is not paid back or as agreed, which then creates a rift in your relationship.
Retirement Rants and Raves
I’m interested in your experiences or concerns about retirement or aging. You can rant or rave. Send your comments to firstname.lastname@example.org. Please include your name, city and state. In the subject line, put “Retirement Rants and Raves.”
You plan your retirement the best you can, but then life happens. Here’s a part rant, part rave, part cautionary tale.
“I’m retired,” wrote Ellen, 68, from California. “Nothing went according to my expectations or plan. I was laid off at age 62 after 25-plus years at the same company. I then chose to spend two years as a part-time independent consultant earning less than 40 percent of my prior income. No benefits, but it was far preferable to getting back into a full-time job with all its responsibilities. I also got a severance package, which helped. I had to buy a car because my old job also came with a car I could use for personal purposes. I also had a significant tax bill come due because I had taken out a loan from my 401(k) to buy a home, and it wasn’t paid off when I got laid off. Some of that tax liability was offset by medical bills, but not all."
Despite all the curveballs, Ellen says she enjoys retirement.
“It took a couple of years to adapt and find new purpose — writing group, gardening, tutoring kids, some new friends, art, exercise. I now have a pretty good life. I do miss earning money, but not enough to give up my freedom,” she wrote.