By approving a third round of economic impact payments (EIPs) and expanding refundability of the Child Tax Credit, Congress has made refundable tax credits a more important pillar of income support than ever. But using tax credits as a way to provide income security to low-income households creates a significant challenge: How can the IRS more effectively deliver payments to those who are unbanked, or even homeless?
One possible solution: The IRS should consider expanding its use of prepaid low- or no-fee debit cards to deliver tax refunds and the CTC advance payments.
So far this year, almost three-quarters of the federal income tax returns that the IRS has processed are owed a refund, similar to the experiences in 2019 and 2020. For low- and moderate-income families with children, those refunds typically stem from refundable tax credits such as the earned income tax credit (EITC) and the CTC. This year, many households will receive a refund thanks to the Economic Impact Payments.
The IRS generally delivers tax refunds by direct deposit to a filer’s bank account or by sending a paper check to the address on a Form 1040. During the pandemic, the IRS also distributed EIPs through Direct Express (a debit card that also is used to deliver Social Security and other benefits) or another debit card operated as part of the Department of Treasury’s US Debit Card Program.
These delivery methods might be particularly important when the IRS begins making periodic CTC payments. In the ARP, Congress urged the IRS to begin making those payments by July. The reason: Many recipients do not have stable housing or bank accounts, and thus are unable to receive either checks or direct deposit payments.
The coronavirus pandemic has increased housing instability, which may make it harder for the IRS to deliver tax refunds. Among renters, 9.4 million are behind on rent and 1 in 4 of families with children reported either a late or deferred payment. Housing instability and subsequent homelessness is often associated with frequent changes of address, making delivery of benefits through checks ineffective.
In addition, about 7.1 million US households lack access to a savings or checking account. People experiencing homelessness can frequently change addresses and to the extent they are unbanked, they tend to rely on cash, cash advances, payday loan services, and other predatory financial services with high fees.
Even some people with bank accounts and stable addresses may have trouble accessing tax refunds. For instance, the IRS may deposit EIP payments into accounts controlled by abusive spouses. There is evidence to show that domestic violence has increased due to the pandemic.
There may be a better way to deliver tax refunds, including CTC advance payments. Social Security delivers benefits monthly through Direct Express. These debit cards generally have low fees and, importantly, can be reloaded with benefits on a regular basis. The US Debit Card Program that was used to issue EIPs could function similarly. Expanding these payment options could help assure that people receive those periodic child credits.
During the pandemic, Volunteer Income Tax Assistance (VITA) preparers worked with state and local agencies that provide services to people experiencing homelessness to make it easier for them to receive their EIPs. In response to the IRS reaching out to these agencies, the IRS made minor modifications to its rules to allow the same email and physical address to be used for multiple people. This enabled organizations that provide services to people experiencing homelessness to serve as intermediaries for receiving payments. The IRS should consider these options for the advance CTCs as well.
Tax refunds can help stabilize low- and moderate-income families. A recent poll suggested people were planning to save refunds, or use them to pay down debt or meet daily expenses. The periodic CTC payments will help them accomplish the same goals as well, but only if the funds get to the people who need it most, including those without homes or bank accounts.