The American Rescue Plan Act of 2021 (ARPA) amended IRC § 32 to recognize two new categories of taxpayers, “qualified former foster youth” and “qualified homeless youth.” These taxpayers may be eligible to claim the Earned Income Tax Credit (EITC) if they are not claiming a qualifying child and are at least 18 years old (the minimum age for other taxpayers who are not claiming a qualifying child to claim the EITC is 19. There is no minimum age for taxpayers who are claiming a qualifying child). The amount of the credit depends on the amount of their earned income and whether or not they are filing a joint return: the maximum amount of the credit is $1,502, which corresponds to earned income between $9,800 and $17,599 for joint filers, and to earned income between $9,800 and $11,649 for other filers. As I explained in an earlier blog, qualified former foster youth and qualified homeless youth who meet the other requirements for EITC eligibility can claim the credit by checking the box on line 27 on their 2021 tax returns. Like other taxpayers who claim the EITC in tax year 2021, they may elect to use their tax year 2019 income instead of their 2021 income if their tax year 2021 income is lower than their 2019 income.

For this filing season, qualified former foster youth and qualified homeless youth are likely to be first-time filers, and they may need free tax preparation assistance through, for example, Volunteer Income Tax Assistance (VITA) programs.

The new ARPA provision will assist youth who have “aged out” of the foster care system, i.e., those who have reached the maximum age at which a state will support them, such as 18, and have not been reunited with their families or placed in a permanent home. When foster youth “age out” of the system, they are legally emancipated and are no longer eligible to receive state assistance with housing, food, and medical care under the foster care system.

According to the U.S. Department of Health and Human Services, more than 20,000 children exited the foster care system and were emancipated in fiscal year 2020. The National Foster Youth Institute notes that “[a]fter reaching the age of 18, 20 percent of the children who were in foster care will become instantly homeless.”

The new ARPA provision will also assist unaccompanied children or youth who are homeless or who are at risk of homelessness and are self-supporting. The U.S. Department of Housing and Urban Development estimates that on a single night in January 2020, there were 30,821 unaccompanied homeless youth between the ages of 18 and 24. Another 7,230 youth between the ages of 18 to 24 were experiencing homelessness as parents.

This ARPA provision is in effect only for tax year 2021. Among the Purple Book Legislative Recommendations included with my 2021 Annual Report to Congress, I recommended that Congress permanently expand the expiring age eligibility for the EITC to individuals who have attained age 18 in the case of qualified former foster youth or qualified homeless youth.

Taxpayers should file early and file electronically. To claim the EITC benefits the youth will need to check the box on line 27 of the tax return. If the box on line 27 is not checked the IRS will treat the claimed EITC as a math error and disallow it.

The taxpayer will then have to correspond with the IRS to show he or she qualifies for the credit, which is especially difficult for taxpayers who lack a permanent address and will delay the payment of the refund. The delay in receiving the refund is also particularly burdensome for these taxpayers. Also, qualified former foster youth and qualified homeless youth should file electronically and file as early as they can.

Word of caution: If the IRS processes the return of another taxpayer, such as a former foster parent, before that of a qualified former foster youth or qualified homeless youth, and the other taxpayer claimed the EITC or another tax benefit with respect to the youth, the IRS will reject the youth’s return. The qualified former foster youth or qualified homeless youth will then need to file a paper return to claim the EITC.

As I’ve said before, paper is the IRS’s kryptonite – paper returns have been taking up to eight months to process.

These young taxpayers, especially those who are homeless, may not have a bank account where the IRS can deposit their refund, and they may not have a fixed address where the IRS can send a prepaid debit card or a check. The IRS notes that a homeless shelter counts as a home, and taxpayers may be able to open a low-cost or no-cost bank account, or have a check or prepaid debit card sent to a trusted friend or relative. These taxpayers are likely to move frequently. Processing their returns and issuing their refunds needs to be rapid. Their experience this filing season may shape their view of the IRS and tax administration.

TAS and the IRS became aware that one tax preparation software, including software used at VITA sites, was not updated to allow taxpayers to check the box on line 27 of Form 1040 until February 4. Prior to the updated software, users were not able to prepare or file returns for taxpayers who are eligible to check the box on line 27.

Recommendation: The IRS should also identify returns filed by 18-year-olds who did not check the box on line 27 and send those taxpayers a letter to ask them whether they were eligible to check the box, similar to the notice the IRS sends to taxpayers who may be eligible for the EITC but did not claim it on their return. Also, the IRS should keep track of the number of taxpayers who check the box on line 27 of their returns. This would allow the IRS to better understand this population and better serve these taxpayers in the future.

Filing Season Tips to Avoid Processing Delays:

• Make every effort to file your return electronically;
• Provide your bank routing information;
• Request direct deposit for your refund; and
• Triple check entries on your return for errors.

Errors or inconsistencies with IRS records will cause delays in processing.