In 2020 and 2021, most families in the United States received pandemic stimulus payments, meant to provide emergency relief to those impacted by job and income loss and to prompt consumer spending. The three stimulus payments delivered were a prominent example of Congress using the tax system to deliver large-scale cash assistance in times of need.
Many forms of financial assistance in the US, including unemployment insurance, food stamps, and rental assistance, require an individual to apply. The application process can be a barrier. Some people do not apply because they do not realize they qualify for assistance. Others may try to apply but face such difficulties when doing so that they give up.
Efficient channel to deliver cash assistance…for many, but not all
One policy response to this lack of “take up” has been to use the federal income tax system to deliver cash assistance. In addition to stimulus payments, the tax system is used to deliver large tax refunds via the earned income tax credit (EITC) and the child tax credit (CTC).
Receiving this money requires only that an eligible individual files an income tax return. And because most Americans are required to file an income tax return, cash assistance delivered through the income tax system generally has a much higher take-up rate than other assistance.
Among lower-income individuals and families, however, take up is very low for those who don’t meet the income thresholds for filing a federal income tax return. For one, these individuals and families may not know of the benefits to their filing a federal tax return. And in some cases, they are under the wrong impression that they can NOT file a return because they don’t make enough money.
The consequences can be huge. By not filing a federal income tax return, these individuals and families
- are not able to claim EITC and CTC benefits.
- are not eligible to receive income tax withheld by their employer that may be due to them.
- will not receive economic stimulus payments.
Bridging information and expertise gaps is critical
During the pandemic, many nonprofits and advocacy groups offered tax assistance to help lower-income people who typically don’t file tax returns in two key ways:
- by explaining that they must file a federal tax return in order to receive a refund of income taxes withheld, to receive stimulus payments, or to claim tax credits such as the EITC and CTC, and
- to help them actually file a tax return to claim their cash assistance.
These efforts to boost take up rates are needed because despite the value in filing a tax return and claiming otherwise inaccessible cash assistance, as many as one in five eligible taxpayers do not file returns that claim this cash assistance.
A number of these nonprofits and advocacy groups have shared what was effective in helping people file tax returns, along with insights into barriers people faced in engaging with the IRS. Their insights shed light on longstanding take-up issues with benefits programs that rely on tax returns for distribution, which I review in Why Are Millions of Dollars in Tax Refunds Going Unclaimed?
Here are some of the groups’ findings:
- For those in simple tax situations, information-only outreach from a trusted source combined with a simple filing tool is effective at increasing tax filing and take up of tax benefits.
- Those in more complex tax situations also need hands-on expert tax assistance to complete their tax returns.
Getting a tax expert’s take can help claim assistance—and avoid heartache
During my own research on this issue, I’ve heard many compelling stories about the crucial role that trusted messengers and expert tax help can play in providing people with cash assistance via income tax filing.
Andrew VanSingel, a government tax attorney and former director of a low-income taxpayer clinic (LITC), understands how a bad experience with the federal income tax system can cause a person to avoid filing taxes even at the cost of missing out on thousands of dollars in tax refunds. In one example he shared with me, an individual paid to have his return prepared and learned he was eligible for a $2,000 tax refund. However, he had unpaid tax debt of $3,000 and the IRS took, or offset, the refund to apply towards the balance, meaning he actually owed the IRS $1,000.
The unpaid tax debt was the result of a former employer failing to withhold income taxes from the man’s wages when he was an employee. Though employers are required by law to withhold taxes on wages paid to employees, the company had not done so, resulting in the tax bill.
Frustrated and upset at what he viewed as an unfair result, the individual did not file income taxes for the next nine years—leaving more than $60,000 in legitimate tax refunds unclaimed. During those nine years without filing returns, the individual and his family encountered financial difficulties, including a default on a mortgage. It’s impossible to know with any certainty, but had a trusted source been able to convince him to file taxes and claim those $60,000 in refunds, he might have avoided defaulting on his mortgage and ensured financial stability in the household.
Many people have complex tax situations, so asking for help is smart
Another example of the importance of trusted tax assistance comes from John Burton Advocates for Youth (JBAY). During the pandemic, JBAY helped to establish a volunteer income tax assistance (VITA) site in Santa Clara County, California. The site provided free income tax return preparation to current and former foster youth ages 16 to 24. The site hosted volunteers with expertise in foster youth-specific tax issues and was created to help ensure these individuals received state and federal tax credits and stimulus payments only accessible by filing taxes.
Most individuals who filed at the site had missed one or both stimulus payments from 2020 because of tax identity theft or because they had never filed taxes and the IRS did not have their information. Notably, every one of the 45 youth who filed through the site received a refund. Collectively, they received more than $135,000 in state and federal tax refunds. Because they filed, all received funds to help pay for housing, vehicle repairs, food, and debts incurred during the pandemic.
Where to learn more about trusted tax resources
Despite years of mailers and other outreach to inform people of available cash assistance, as many as 1 in 5 eligible recipients do not receive their cash assistance because they don’t file tax returns.
However, efforts show that outreach from trusted messengers such as schools and social service agencies can substantially increase tax filing, especially when it is combined with a referral to simplified tax filing resources and, for those with more complex tax situations like the foster youth described above, expert tax assistance. These efforts are helping many more people with no or low incomes get thousands of dollars in cash assistance by filing a tax return.
More information on these efforts, including best practices, is available at:
- Lessons learned from outreach in Massachusetts to encourage tax filing to claim CTC
- Lessons learned on connecting people to simplified online tax filing to claim CTC
- Lessons learned from efforts to increase EITC take up in California and Colorado
- Interviews with people who don’t regularly file income taxes to understand why they did file to claim tax refunds
- Lessons learned from helping foster youth in California file income tax returns to claim tax refunds
- Video training on how schools can help connect families to thousands of dollars this tax season
The IRS provides a list of locations of LITC and VITA programs:
- LITC locations provide free or low-cost assistance to low-income taxpayers who need help resolving a tax dispute with the IRS and cannot afford representation.
- VITA locations offer free tax return preparation for taxpayers who qualify.
Originally published March 24, 2022.
Last updated January 17, 2023 to reflect that stimulus payments were sent in 2020 and 2021.
