Admitting they expect another chaos-filled season, Treasury and the IRS have been vehement (almost rabid) in encouraging taxpayers to file their 2021 tax returns electronically. They have also been encouraging taxpayers who received Child Tax Credit (CTC) advances to be on the lookout for Letter 6419, which reports the amount of the credit that was paid in advance and is necessary to reconcile the full CTC on Form 1040. They have been telling taxpayers to expect this letter and to use it when preparing Form 1040 to ensure that the CTC advance payments are reconciled and the full CTC is calculated accurately on the return. They have been warning that failure to use the letter could lead to inaccurate calculations, incorrect returns and delayed refunds. But what happens when Letter 6419 is inaccurate?
The IRS recently acknowledged that some Letter 6419s that were printed and mailed to taxpayers in December were wrong. The cause of the error was that the letters were printed and mailed in December but the December advance was returned by the bank (if it was electronically deposited into an account that had been closed) or by the postal service (if the taxpayer received a paper check). The IRS has stated that they expect this to only affect a small percentage of taxpayers who received CTC advance payments, but even a small percentage could mean several million incorrect letters. The IRS is also aware that the letters may be inaccurate for taxpayers who alternate custody of their children (and associated tax benefits) every two years. Unfortunately, the problem may not end with known bugs. Tax professionals on social media are increasingly reporting errors in Letter 6419 that cannot be attributed to returned payments or escrow arrangements. In fact, some of the wrong letters are being received by the tax professionals themselves.
As of this writing, the IRS has only acknowledged two of the three issues: issues arising from December payments being returned, and issues arising from alternating custody years. The IRS recommends that taxpayers who received a Letter 6419 but did not receive a December payment verify the amount using an account transcript. Account transcripts can be mailed to the taxpayer or can be accessed if the taxpayer has an IRS online account. If the amount on the letter is different from the total amount of the payments on the transcript, the amount on the transcript should be used to reconcile the credit on the taxpayer's tax return. Unfortunately, the IRS has not provided any clear guidelines for reconciling credit in situations where parents alternate custody every two years. They also do not have recommendations on what to do when the information on the letter does not match what is on the account transcript and the information on the account transcript is different from the payments the taxpayer actually received. That sounds crazy since computers are usually pretty good at doing math and printing reports, but taxpayers find that the amounts deposited into their bank accounts don't match the total amount reported in the letter or the reported transcript payments. Again, the IRS has not officially acknowledged the problem and, as a result, has not provided any information about why the math and reporting errors are occurring or what taxpayers should do about reconciling prepayments on their tax return. There is no official guide on which number to use when all three numbers are different.