IRS Expresses Disapproval of Tax Court Case Allowing EITC for Separated But Married Taxpayer

There are many complexities in the Internal Revenue Code. There are also many nuances in tax procedure. Put the two together and there are ingredients for the need for guidance. Earlier this week the IRS issued a nonacquiesence in a 2016 Tax Court case that had slipped through and I had not noticed.

The case at issue is Tsehay v. Commissioner, T.C. Memo. 2016–200. In Tsehay, the taxpayer, a custodian whose first language was not English, had an on again off again relationship with his spouse. During 2013, the taxpayer testified (credibly, according to the opinion) that he his wife and their children lived with him though by 2014 they had separated. He, using a paid return preparer, filed a 2013 return as head of household and claimed his kids as qualifying children for the EITC and dependency exemptions. HOH status was crucial for purposes of the EITC, as married taxpayers who are not divorced or separated (or who do not live apart from their spouse for the last 6 months of the year and who otherwise generally pay ½ of the household and childcare expenses) cannot claim the EITC unless they file a joint return. There is no similar anti-MFS rule in place for claiming children as dependents.

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The opinion concluded that his credible testimony regarding his living with his kids was enough to justify his receiving dependency exemptions and the EITC.

It appears that the judge and IRS counsel may have missed the special rule that prevents MFS taxpayers from claiming the EITC.

This takes us to earlier this month when the IRS announced that it did not acquiesce in the case. We have not discussed this form of guidance in the blog. The Internal Revenue Bulletin nicely describes the IRS policy on commenting on case law, which comes in the form of acquiescence, acquiescence in result only, or nonacquiescence:

It is the policy of the Internal Revenue Service to announce at an early date whether it will follow the holdings in certain cases. An Action on Decision is the document making such an announcement. An Action on Decision will be issued at the discretion of the Service only on unappealed issues decided adverse to the government. Generally, an Action on Decision is issued where its guidance would be helpful to Service personnel working with the same or similar issues. Unlike a Treasury Regulation or a Revenue Ruling, an Action on Decision is not an affirmative statement of Service position. It is not intended to serve as public guidance and may not be cited as precedent.

Actions on Decisions shall be relied upon within the Service only as conclusions applying the law to the facts in the particular case at the time the Action on Decision was issued. Caution should be exercised in extending the recommendation of the Action on Decision to similar cases where the facts are different. Moreover, the recommendation in the Action on Decision may be superseded by new legislation, regulations, rulings, cases, or Actions on Decisions. Prior to 1991, the Service published acquiescence or nonacquiescence only in certain regular Tax Court opinions. The Service has expanded its acquiescence program to include other civil tax cases where guidance is determined to be helpful. Accordingly, the Service now may acquiesce or nonacquiesce in the holdings of memorandum Tax Court opinions, as well as those of the United States District Courts, Claims Court, and Circuit Courts of Appeal. Regardless of the court deciding the case, the recommendation of any Action on Decision will be published in the Internal Revenue Bulletin.

The recommendation in every Action on Decision will be summarized as acquiescence, acquiescence in result only, or nonacquiescence. Both “acquiescence” and “acquiescence in result only” mean that the Service accepts the holding of the court in a case and that the Service will follow it in disposing of cases with the same controlling facts. However, “acquiescence” indicates neither approval nor disapproval of the reasons assigned by the court for its conclusions; whereas, “acquiescence in result only” indicates disagreement or concern with some or all of those reasons. “Nonacquiescence” signifies that, although no further review was sought, the Service does not agree with the holding of the court and, generally, will not follow the decision in disposing of cases involving other taxpayers. In reference to an opinion of a circuit court of appeals, a “nonacquiescence” indicates that the Service will not follow the holding on a nationwide basis. However, the Service will recognize the precedential impact of the opinion on cases arising within the venue of the deciding circuit.

At times, the AOD that the Service issues has an extensive discussion of the reasoning. Other times, as in AOD 2017-05 on Tsehay, it just states the conclusion that the Service does not acquiesce in the decision. That nonaqciescence makes sense, as it appears that Tsehay is just the result of a counsel and judicial foot fault on the law. It is intended to remind counsel attorneys (and taxpayers) that it is inappropriate to rely on Tsehay for the position that married taxpayers who file an MFS return  or who are required to file an MFS return are entitled to the EITC. As a guest post from Andy Grewal discusses a couple of years ago, while Tax Court memo opinions are not supposed to be precedential (and are intended to be used only in clear cut or heavy factual cases), as a practical matter advocates and the court itself often look to and effectively rely on these cases so Counsel wanted to clear the air.

Because AODs give direct insight into Chief Counsel’s litigating position and because understanding that position allows a representative to provide valuable advice about the likelihood a case will go to trial rather than settle, the more AODs the IRS issues the better. Back in the 1970s the IRS issued AODs routinely. Today, issuing an AOD seems to be the exception rather than the rule. Still, the AODs that are issued provide a benefit when trying to understand what will happen with a case and they should not be overlooked.

Trump Budget: Perhaps Dead on Arrival But Key Themes Emerge for Tax Administration

The Trump Administration released its FY 18 budget, a budget that is generating a great deal of controversy due to unrealistic assumptions and for its slashing many entitlement programs. Since early days on the campaign the President has emphasized the need to control for errors and fraud in transfer programs. IRS has been a poster child for improper payments, and it is no surprise that this budget addresses that issue.

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The document entitled Analytical Perspectives to the budget seems to contain most of the context and description of the assumptions and additional detail. Starting at about page 99 is a discussion of the need to ensure greater integrity in federal spending programs. While I have not read line by line the budget materials there are two measures in the budget that stand out for possible impact on tax administration: oversight over tax return preparers and expanded IRS math error powers. The former in my view is a great idea and the latter not so much.

The  budget requests “authority to increase [IRS] oversight over paid preparers.” As the Administration states, “[i]ncreasing the quality of paid preparers lessens the need for after-the-fact enforcement of tax laws and increases the amount of revenue that the IRS can collect.” We have discussed this issue numerous times in PT. Increasing accountability and visibility of unenrolled preparers is on balance good for taxpayers and tax administration. The most recent IRS compliance study pegged unenrolled preparers as having the highest error rates on EITC returns, and while regulation is not a panacea, requiring minimum standards and directly bringing those preparers into the Circular 230 fold is a way to discourage preparers and taxpayers from acting as if the tax system is an unwatched cookie jar and to encourage preparers to act as gatekeepers.

The second proposal in the budget is a call to expand IRS power to essentially use math error summary assessment powers:

[W]ith this new authority, the IRS could deny a tax credit that a taxpayer had claimed on a tax return if the taxpayer did not include the required paperwork, or where government databases showed that the taxpayer-provided information was incorrect.

I understand the reasoning behind this proposal. EITC exams already hover at about 40% of all IRS exams and while IRS does these exams mostly on the cheap through correspondence, TIGTA has estimated that it still costs IRS on average about $400 for each correspondence exam. Yet the problem with the proposal is that the underlying information in many of the federal databases is not reliable enough to justify dispensing with the normal due process protections of pre-assessment notice and defined right to Tax Court review. For example, HHS maintains database on child custody but millions of lower income individuals do not have formal custody arrangements or even if they do the databases are not reliable enough to warrant automatic rejection. In addition, GAO and others have criticized past IRS administration of its math error powers, an issue that is particularly pressing if individuals rely on the claimed credit to meet basic needs.

While IRS is still an efficient administrator of refundable credits (even accounting for program error costs per $ of benefit are very low relative to other means-based benefit programs), Congress would be better served recognizing the limits of IRS ability to verify eligibility and provide additional resources to do its job properly rather than look for ways to do its job on the cheap and on the backs of the beneficiaries.

While many observers have labeled this budget dead on arrival, tax proposals and tax administration proposals often have nine lives. The theme of reducing errors and saving money through increased compliance will be recurring over the next few years, and that will likely lead to proposals like these that if enacted could mean significant tax administration changes.

New Report Discusses the Rebirth of Refund Loans

As this year’s fling season is winding down, the National Consumer Law  Center released a report discussing the filing season issues from the perspective of lower and moderate-income taxpayers. This year’s report discusses some of the main issues in the past filing season, including the Congressionally mandated delay associated with EITC and CTC refunds, the rebirth of a new form of refund anticipation loan, challenges associated with getting a Tax Identification Number, the limited ways in which states regulate commercial tax return preparers, and the onset of private debt collection.

I have been following the refund loan return, which I discussed on PT in Refund Loans on the Comeback, With A Twist and in a follow up to that post.

For those of you unfamiliar with the issue, a refund anticipation loan (or RAL) was a loan that banks made and that was secured by and paid with the proceeds of a taxpayer’s refund. In their heyday they were controversial, in part because they were almost always accompanied by high fees and high effective interest rates. In addition there was significant concern that the fees provided the incentive for preparers and banks to encourage improper claims, especially when IRS shared with preparers a debt indicator that let preparers know if the refund were likely to be delayed or intercepted to apply to a past due tax or other offset.

In 2012, RALs in their earlier incarnation dried up after IRS pulled the debt indicator and federal regulators essentially forced banks out of that business. As I discussed earlier this year, many preparers and partner banks brought back the loans this filing season, though with two key differences: the loans 1) had no stated fee and 2) were non-recourse, meaning that if the refund does not materialize due to say a refund freeze or offset the losses were not the responsibility of the individual filer. It appears that for this filing season the RAL is now a loss leader, or a way to bring clients into the door to generate prep fees and perhaps upsell other products that the preparers offer.

Given the statutory mandated delay in EITC and CTC refunds and the mostly no-fee modern RAL, it is not surprising people were attracted to this product. The NCLS report indicates that this year over 1.5 million RALS were issued, up from about 40,000 in 2015.

The report discusses that not all preparers were genuinely offering a no-fee RAL; some had disguised fees and others essentially wrapped in costs with the fee for preparing a return. Prep fees take a big bite out of many lower-income individuals’ refunds; the report discusses the wide range in fees that preparers charge to prepare EITC returns and discusses a survey from the Progressive Policy Institute that indicates EITC recipients can expect to pay between 13 and 22% of their refunds on tax prep fees and related services.

In years past, in addition to the consumer issues, I was interested in the relationship of RALs and noncompliance. I discussed that issue in a 2009 article in Stanford Law & Policy Review called Refund Anticipation Loans and the Tax Gap. Under the old RAL regime, some argued that the combination of high fees, the IRS’s release of the indicator that allowed preparers to know if the claimant’s refund would be offset or likely frozen, and the recourse nature of the loan created a divergence in the preparer’s interest in turning profits and the general interest in submitting claims that relate to eligible claimants. The dynamics have changed considerably. Since I first discussed the issue Congress tightened up due diligence rules; IRS is (albeit sporadically) enforcing those rules among preparers, and now with this new RAL product preparers rather than filers are on the hook for defaults.

From a compliance standpoint it is possible that the current rise in RALs helps ensure that preparers are actually more invested in performing due diligence, or at least more sensitive to the issues (or at least audit risk), as repayment will be based on the consumer actually getting the refund claimed.

As NCLC discusses, however, compliance is not the only issue associated with the product. It comes back to the healthy prep fees that preparers generate. If the individual were already going to use a preparer for the return, then as the report notes the RAL (assuming no hidden fee or truly no passing on of the higher costs) is just a benefit without much additional expense. But there are free options available for many lower or moderate-income individuals, such as the Free File program IRS itself makes available in tandem with the private sector and VITA sites. So to the extent that the product attracts people to high cost preparers, it creates a different dynamic.

In the past it was generally easy to criticize RALs. Now it is not so clear. The costs of RALs this time out are a little less visible though still present for those now using a paid preparer offering a RAL when they otherwise would not. Also, there are now benefits if in fact preparers’ interests are more closely aligned with the government’s in ensuring that eligible claimants apply and receive an EITC-generated refund.

Preparer “Doctors” the Return Adding Phantom Income: Court Sustains Preparer Penalties

Tax return preparers have heightened requirements when preparing returns claiming many refundable credits. While the IRS lost the battle over regulating unlicensed preparers, it does have tools to examine and sanction preparers who violate those rules. There have been very few opinions considering whether a preparer’s conduct justifies the imposition of civil penalties. Last week in Foxx v US the Court of Federal Claims held that a preparer was subject to a civil penalty under Section 6694(b) for his willful or reckless conduct relating to his failure to make reasonable inquiries into income from taxpayer’s purported auto-detailing business. The IRS claimed that the taxpayer did not in fact earn the income in question. The Foxx case presents the what frequent guest poster Carl Smith has referred in a guest post to as the topsy-turvy world of earned income tax credit (EITC) cases because the creation of the phantom income fueled a refundable EITC that exceeded the taxpayer’s income and self-employment tax liability.

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George Foxx came to the attention of the IRS after it audited the tax return of Shakeena Bryant. Bryant had claimed an EITC; almost all of the earned income on the return was from an auto-detailing business she reported on Schedule C. Foxx referred to himself as the tax doctor and claimed to have 37 years of tax return prep experience. Bryant went to the tax doctor with a friend of hers, Herman James. On audit of Bryant’s return, the IRS disallowed the credit. During the audit, she agreed that she did not have the income necessary to justify her claiming the credit. In correspondence, Bryant claimed that she was instructed by Foxx to report the income to justify the refund.

IRS then examined Dr. Foxx and assessed a $5,000 penalty under Section 6694 for his willful or reckless conduct in preparing the return (note there is a separate $500 penalty under Section 6695(g) for violating the due diligence rules; that penalty was not at issue in the case). After an administrative appeal of his penalty IRS reduced it to $2500. Foxx paid and sued for refund.

The government deposed Bryant’s friend (James) who accompanied her to Dr. Foxx when the Tax Doctor prepared her return.

The case on the surface turned on whether the preparer George Foxx 1) facilitated the improper claiming of the credit by instructing the taxpayer how to goose the credit and make it look legitimate by applying for a business license even in the absence of the actual business or 2) prepared the return based on what Bryant told him about her business.

A bad fact for the Tax Doctor in this case was that James on deposition supported Bryant’s version of the facts. Both Bryant and James stated that she obtained a business license the same day the return was prepared pursuant to Dr. Foxx’s instruction. James also stated that Dr. Foxx “explained that such a license would allow him to obtain more money for Ms. Bryant, and Dr. Foxx, not Ms. Bryant, created the false business income that appeared on Ms. Bryant’s tax return.”

According to the opinion, Foxx clamed that in preparing the return he relied upon Bryant’s business license and two pages of his notes that outlined expenses associated with the business.

What was potentially a he said/they said case evolved into the court concluding that it did not matter which version was true. Even if Bryant did tell the preparer about her income the court concluded that Foxx had an affirmative obligation under the specific EITC due diligence regulations to dig deeper:

Dr. Foxx argued before the IRS that his reliance on Ms. Bryant’s alleged statements regarding her business was reasonable because Ms. Bryant otherwise would have only earned approximately $15 in 2007 based on the W-2 she provided to Dr. Foxx. Such an argument is misplaced; Ms. Bryant’s financial situation did not relieve Dr. Foxx of his obligation to make reasonable inquiries into any auto detailing business purportedly conducted by Ms. Bryant after she did not provide adequate documentation. His failure to do so was an intentional or reckless disregard of relevant Treasury Regulations [referring to the due diligence regulations under Section 6695]

Schedule C and Compliance Generally

As the Foxx case illustrates, the EITC creates the odd incentive for the creation of phantom income that could fuel a tax refund. That phantom income could also create a record of social security benefits that could generate Social Security benefits.

While noncompliance with the EITC generates significant attention, the absence of information reporting that ties much income to self-employed taxpayers contributes to those taxpayers in general comprising the largest source of the individual tax gap. EITC noncompliance among self-employed taxpayers is a small but significant part of the tax gap that is associated with self-employed taxpayers. Despite the EITC comprising a small portion of the tax compliance problem among the self-employed, there are special due diligence obligations imposed on preparers who prepare EITC returns with Schedule C’s that do not apply to other Schedule C returns.

On the IRS’s EITC web page for professionals it has a special training section discussing Schedule C. The training states that preparers “generally can rely on the taxpayers’ representations, but EITC due diligence requires the paid preparer to take additional steps to determine that the net self-employment income used to calculate the amount of or eligibility for EITC is correct and complete.”

IRS has on its EITC due diligence web site a series of scenarios discussing what it believes are examples of when preparers need to take additional steps. One of the scenarios involves a self-employed housecleaner who comes to a preparer claiming exactly $12,000 in earnings with no records and no expenses. A similar example is in the regulations. For the house-cleaner with the rounded off income figures and no expenses the IRS advice states that a preparer should “probably not” prepare the return in the absence of at least a written record of expenses and earnings, though opens the door a bit if the taxpayer “can reasonably reconstruct” the earnings and expenses. To that end the advice suggests that the preparer should ask how much she charges per house, as well questions relating to how many houses she cleaned on average per week and probe as to the reason for the lack of expenses (e.g., the homeowners provided all supplies).

Back to Foxx

One does not need to have a suggestion that a preparer has encouraged the fabrication of phantom income to generate preparer penalties. A cautious reading of the Foxx opinion is when preparing a return with an EITC based on self-employment income the preparer should  require documentary evidence supporting the amount claimed to have been earned and any expenses that are incurred. In the absence of records (a sure bet for many) the preparer should document and retain an explanation as to how he came to the net earnings, tying conclusions to specific information that the client has provided. For a taxpayer with little in the way of documents, it would be a good idea to have the taxpayer in writing affirm the manner that the preparer computed a business’ net earnings and state that the facts that the preparer is relying on are accurate to the best of the taxpayer’s recollection. Absent that the preparer opens himself up to a charge that he has failed to make “reasonable inquiries” in the presence of incomplete information (one of the requirements under the due diligence regulations).

Brief Follow up to Today’s Post on Refund Loans

Today’s post noted that we are likely to hear from consumer groups regarding the return of refund loans. It turns out that yesterday the National Consumer Law Center issued a press release called Tax Time Kick-Off: Delays and Risks Await Many Taxpayers This Year, discussing some of this filing season’s challenges. In the release, the NCLC, which was a leading voice against the earlier use of refund loans, again warns consumers against their use:

Advocates recommend that taxpayers avoid no fee RALs if possible. One risk is that some unscrupulous tax preparers might charge more in their tax preparation fees to “no fee” RAL borrowers. Also, in the last tax season some lenders, such as EPS and River City Bank, appeared to actually impose a price for “no fee” RALs by charging a higher price for a refund anticipation check (RAC) if the preparer was offering these loans.

With RACs, the bank opens a temporary bank account into which the IRS direct deposits the refund. After the refund is deposited, the bank issues the consumer a check or prepaid card, minus tax preparation fees paid to the preparer, and closes the temporary account. RACs do not deliver refunds any faster than the IRS can, yet cost $25 to $60. Some preparers charge additional “add-on” junk fees for RACs, fees that can range from $25 to several hundred dollars.

The NCLC also discusses some of the other challenges this year, including the need for many taxpayers to get a renewed Taxpayer ID number (ITIN), the coming of private debt collectors and the need to select competent and honest preparers.

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Further note: I have updated the link to the IRS web page for this filing season.

Refund Loans on the Comeback, with a Twist

Tax filing season has kicked off. IRS has a web page dedicated to the filing season, and it includes a lot of helpful information, including information on ITIN changes and this year’s delay in releasing refunds relating to EITC and child tax credit.

The delay in the timing of the refunds is a major change.  New York Times reported last week on the resurrection in refund loans this filing season in Tax Refund Loans are Revamped and Resurrected, with the large tax prep chains offering up to $1300 within a day or so with no direct fees passed on to the individuals for the loan. The article discusses the history of refund loans, which in their earlier form carried heavy fees and attracted a lot of criticism from consumer advocates. They essentially disappeared a few years ago.

Here is why the loans have returned. As we have discussed, Congress in the PATH legislation mandated a delay in remitting refundable-credit-based refunds until mid-February. The start of filing season has traditionally been a time when millions of lower-income refund seeking individuals filed early to get the refunds. To offset the PATH delay, and as a way to stem the flow of individuals to DIY software, the large prep chains have stepped in and essentially offered access to the refund loans as a loss leader.

What happens if the refund never materializes come late February (say there is a set off or examination based refund freeze) and the loan cannot be repaid? The NYT article says the large prep chains are going to eat the loss, though I have not read the fine print on what the consumers are signing when getting the loans.

From a tax compliance perspective, this situation more closely aligns the prep companies with the government’s interest in ensuring that the claimants are in fact eligible when claiming a credit, or at least are able to get past the IRS filters on freezing a refund if there are eligibility concerns.

To be sure, the prep chains have other ways to make money on the transaction, and the prep companies are good at cross-selling. I suspect we will be hearing more from consumer groups on this practice.

 

 

Grab Bag: Posts and Articles of Note on EITC, Compliance, IRS Guidance, Alimony, Private Debt Collectors and Tax Return Simplification

Today’s extra post looks to some other blog posts and articles that may be of interest for people looking for some weekend reading.

EITC and Compliance

We have been reading and enjoying many of the posts on the Surly Subgroup Blog. Francine Lipman’s 2015 Poverty Measures Released: Antipoverty Relief Delivered through the IRC = EITC & CTC discusses the anti-poverty effects of refundable credits such as the Earned Income Tax Credit. While not a procedure post, the intersection of tax procedure and administration and refundable credits is a major issue. While I am plugging away on my article on EITC compliance (as Steve discussed last week) there are some really good articles on that topic that have come out in the last few months. Two of the articles that stand out are Steve Holt’s The Role of the IRS as a Social Benefits Administrator and Michelle Drumbl’s Beyond Polemics: Poverty, Taxes and Noncompliance.  For those interested in how recent trends in family life complicate tax administration, and administering refundable credits in particular, I recommend the Tax Policy Center’s report Increasing Family Complexity and Volatility: The Difficulty in Determining Child Tax Benefits. I will be appearing on a panel with Elaine Maag, one of the authors of the Family Complexity paper, at next week’s ABA Tax Section meeting, where we will discuss some of the report’s implications for tax administration as well as some of my research on EITC compliance.

Speaking of noncompliance and more from Surly Subgroup Blog, Shu-Yi Oei in Does Enforcement Reduce Compliance? discusses Leandra Lederman’s draft paper and presentation on that topic at the Boston College Law School Tax Colloquium. I look forward to reading that paper.

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Alimony and Tax Compliance Again

Last week I discussed the procedural issues that spun out of Leslie v Commissioner in African Diamond Scam and Millions in Alimony: (and Some Reasonable Cause and Chenery). My Villanova colleague Jim Maule in Mauled Again discusses the alimony issue in his post on the case. As usual, Jim clearly describes the issue and offers some practical advice for practitioners. For good measure, and while relating back to compliance, I recommend Jim’s thought-provoking post from September 2 where he discusses a Washington Post op-ed piece by Catherine Rampell  that offered six reasons why cheating on taxes is likely to increase. Jim’s take, as with many of his posts, takes the reader outside the tax world:

It is the increase in self-focus, the increase in greed, and the increase in harsh economic conditions that coalesce to tempt people to cheat on their taxes. It is the weakening of concerns for integrity and responsibility that make it possible for increasing numbers of people to succumb to that temptation. These are problems that will not go away with a simplified tax law and adequate IRS funding, as Rampell advocates. Of course I support simplifying the tax law and adequate funding of the IRS, but I also support increased attention to tax education in middle and high schools, and a broader dissemination and explanation of what happens with tax revenue. And somehow, some way, the sense of integrity and responsibility that was once a core value of the culture needs to be reinvigorated. That, however, is more than just a tax compliance problem.

IRS Guidance

Former PT guest poster Andy Grewal has a post on Notice & Comment discussing a recent GAO report called Treasury and OMB Need to Reevaluate Long-standing Exemptions of Tax Regulations and Guidance. Andy hits some important points in his post, including his highlighting that “[t]he GAO recognizes that the IRS puts out many forms of guidance, but notes that the IRS’s procedures for choosing one method of guidance (e.g., regulations) as opposed to another (e.g., Revenue Rulings, Announcement, Procedures) is a bit of a mess.”

Litigants are likely to continue to press the adequacy of IRS guidance and the choice IRS makes in issuing that guidance. We discussed this briefly in our latest review of the AICPA litigation challenging the IRS’ voluntary testing and education program for tax return preparers (IRS Wins Latest Battle on Voluntary Return Preparer Testing and Education Though Other Battles Likely Remain). In that case, the district court opinion, while finding against AICPA, suggests that a different litigant could challenge the IRS’s use of a revenue procedure to create the voluntary program.

Private Debt Collectors

Keith has discussed private debt collection a few times, including his most recent this past February Private Debt Collection which noted problems with prior two versions and raised concerns with the new legislation mandating its use. The IRS asked for permission to push back the deadline on implementing the new debt collection program so it has not yet gone live. Last week Accounting Today ran a post Here Come the Private Tax Debt Collectors…Again by H&R Block’s Jim Buttonow, where he discusses how the IRS will select the collectors and the plan is set go live in 2017. In his post, he highlights seven things about the new program, including how IRS and the collectors themselves will be letting people know by snail mail if they have the golden ticket and private debt collectors will be working their accounts. No doubt we will be hearing more about the program in the months ahead.

Simplified Return Filing

Finally, ABA Tax Times this past August has a fascinating point /counterpoint with longtime tax return simplification protagonist (and my former law school professor) Joe Bankman discussing his views on how technology can make tax filing time less painful and my Villanova colleague Jim Maule offering thirteen reasons why he believes Professor Bankman’s proposals make for bad tax policy.

Happy reading and enjoy the weekend.

 

 

 

Professor Book Presents at Loyola (LA) on Taxpayer Rights, Social Psychology, and the EITC

Les is out on the West Coast today presenting at Loyola Law School’s Tax Policy Colloquium.  Les is the first presenter this year, and the other speakers cover a broad range of topics.  Les’ talk is based on research and a paper he is currently working on, some of which is based on his prior writing and a number of Procedurally Taxing posts where he discusses the EITC, compliance, and criticism of the IRS in relying on sanctions like the Section 32(k) ban.   He also weaves in his interest in viewing these issues through the social science and behavioral economics lenses.

Some of Les’ recent PT posts that he pulls from for the talk and paper are:

Legislative Language Directs IRS to Make Self-Prepared EITC Claims More Burdensome

Warren Buffet Calls For Expanding EITC: Tax Administration Impact Highlights There is No Free Lunch

IRS Issues New Report on EITC Overclaims (Title A)

H&R Block CEO Asks IRS To Make it Harder to Self-Prepare Tax Returns and Why That is Good for the Tax System

The paper will likely not be finalized until later this fall, but the abstract for the paper and talk is as follows:

Thinking About Taxpayer Rights and Social Psychology to Improve Administration of the EITC

 Abstract

The IRS is a reluctant but key player in delivering social benefits to the nation’s working poor.  The earned income tax credit (EITC) is generally praised for its role in reducing poverty and incentivizing low-wage work. While the EITC has generally received bipartisan support, the IRS faces strong criticism over EITC compliance issues. Opponents focus on headline-generating reports of improper payments and a characterization of errors as likely due to fraud. Advocates look to the intersection of legal complexity and the characteristics of recipients as the main driver of error and the relatively low share of the tax gap that is attributable to refundable credits in general and the EITC in particular.

The current compliance challenge presents an opportunity to think about the compliance problem differently than before. In prior research, building off the work of sociologists Kidder and McEwen, I applied a typology of noncompliance to EITC claimants. That typology suggests that the problem of EITC overclaims is not a single problem but best thought of as many different compliance problems, some of which reflect intentional taxpayer misconduct and others which reflect problems that are more directly connected to the characteristics of the claimants (such as transiency or literacy challenges), perceived unfairness of eligibility rules, or actions attributable to third parties, such as return preparers who play an important role in the delivery of the EITC. In this article, I build on that typology by integrating recent compliance studies, current research on the increased complexity of American family life and two approaches that may present an opportunity for the IRS to improve the likelihood that claimants will voluntarily comply. One approach is based on research that suggests tax agencies can enhance voluntary compliance by an appropriate mix of power and measures that will enhance greater trust in the IRS. The other is based on social psychology research that has shown that by increasing psychological costs and the perceived likelihood of detection through changes in forms, disclosure statements and a more personalized communication approach people may be more inclined to be truthful in the first instance.

By explicitly tying in how possible administrative and legislative solutions relate to the complex structure of today’s American family life, trust in the tax administration, and social psychology research, this article takes the small but I believe important step of recognizing that IRS and Congress cannot principally rely on detecting and deterring noncompliance through audits, penalties and expanded summary tax return adjustment powers. While there is no silver bullet that Congress and IRS can turn to, and audits and penalties are and should remain an important part of a tax agency’s approach, the article provides insights from tax compliance researchers and offers specific administrative and legislative proposals that may improve administration of the EITC.