Much ado after stimulus checks sent to dead people KATHLEEN PENDER
Kim Schwarcz, a private professional fiduciary in Corte Madera, was infuriated when she received two stimulus checks made out to two clients who died last year.
The $1,200 checks were made out to the clients’ names followed by DECD, short for deceased, so the Internal Revenue Service knew or should have known they were dead.
“They don’t need the money, and I’m upset there is no oversight,” said Schwarcz. An email list she subscribes to is full of comments from other fiduciaries receiving checks for dead clients, she added.
Earlier this month, the Internal Revenue Service began depositing economic impact payments into the bank accounts of people who were deceased but had a 2018 or 2019 tax return with direct deposit information.
The IRS and Treasury Department are aware of the issue but haven’t said how many payments went out to dead people.
In an emailed statement, Treasury Secretary Steven Mnuchin said, “You’re not supposed to keep that payment. We’re checking the databases, but there could be a scenario where we missed something, and yes, the heirs should be returning that money.”
Experts are not sure they legally have to.
“It’s not clear whether making a payment to the deceased person is erroneous under the law,” said Nina Olson, former IRS national taxpayer advocate and is now executive director of the Center for Taxpayer Rights. And even if it is, getting that money back would be no easy task.
“Saying heirs should be returning that money is not legal guidance. It is not the legal position of the IRS,” Olson said.
On Wednesday morning, a Treasury spokeswoman said the department “will be issuing guidance on this issue shortly.”
Nothing in the Cares Act prevented deceased people from receiving a payment if they filed a tax return in 2018 or 2019, or had one filed on their behalf, and they met the income requirements and had a valid Social Security number, Olson said.
The payment is technically a credit on your 2020 tax return. But since those won’t be filed until next year, Congress agreed to pay them this year based on your 2019 tax return or, if it hasn’t been filed, your 2018 return. If you’re not eligible for the full payment based on your 2019 or 2018 tax return — perhaps because you exceeded the income limit — but are eligible this year, you can claim it on your 2020 return, but you must reduce the credit by any amount you got this year. However, this amount cannot go below zero.
That implies that if you are not entitled to a credit based on your 2020 return, but got a payment this year based on your 2019 or 2018 return, you would not have to give it back. The Senate Finance Committee said as much in a FAQ: “If the credit amount you qualify (for) based on 2020 income is less than what you qualify for based on your 2019 tax return, it does not have to be paid back.”
It didn’t say: except for dead people.
“Tax administration specialists and law professors I’ve spoken with all agree there doesn’t appear to be a mechanism for the IRS to ‘claw back’ the funds under the CARES Act,” Olson said in an email. “The law doesn’t prohibit payments to deceased individuals; it does prohibit payments to trusts and estates, but that is because trusts and estates file Form 1041, not Form 1040, so it is basically saying you can’t issue a stimulus payment based on Form 1041.” In many cases, there is no Form 1041 estate tax return filed for deceased people.
Some banks have been telling customers who have authority to cash checks made out to dead people they can cash the stimulus checks.
“We are following our standard procedures for handling checks payable to someone who is deceased. A customer or personal representative can deposit a check payable to a deceased individual with the proper documentation that verifies the payee’s death and shows the customer or personal representative is the legal successor to the payee,” Wells Fargo spokesman Ruben Pulido said in an email.
Chase is “recommending customers call the IRS directly for instructions on what to do with the check,” bank spokesman Erich Timmerman said in an email.
The IRS is not staffing customer service lines. Its website for stimulus payments says, “Do not call.”
At Bank of Marin, where Schwarcz banks, “If a check is made out to an estate and it is properly endorsed by the trustee or executor, we would accept this deposit,” bank spokeswoman Beth Drummey said in an email.
Even so, Schwarcz said she’s going to hold onto her deceased clients’ checks for a while.
“I don’t want to distribute them and then have to give the money back,” she said.
Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting, said the Treasury might try to argue that the Cares Act states that the credit and payments are to go to “individuals,” and a deceased person is no longer an “individual.” It also states that estates and trusts are not entitled to the credit and payments, and they could argue that a payment to a deceased individual is in essence a payment to his or her estate, he said in an email.
The Cares Act also states that the credit and payment to joint filers are considered to be one half to each spouse, “so this language could give them a basis for seeking to recover one half of the payment to a joint account.”
However, he is surprised that the Treasury “is taking this action, since it will likely be a burden to try to recover this money. They will probably try to address it through the credit on the 2020 tax return, but there they face the language that you can keep a payment that exceeds the credit. Also, deceased persons may not be required to file a 2020 tax return, so the IRS may have to recover that money through collections, an expensive process for some relatively small amounts.”
Steve Hartnett, director of education with the American Academy of Estate Planning Attorneys, said he thinks heirs should return the payment, even if they don’t legally have to. “The secretary of Treasury is saying that is the appropriate thing to do, and most clients do not want to get into a fight with Treasury, especially over just $1,200.”
Olson summed it up this way: “What a mess!”