Identity Theft Meets Student Loans and Wrongful Collection

An interesting case at the confluence of identity theft, student loans, and wrongful collection is set for oral argument in the D.C. Circuit on November 21, 2017. As with many cases we write about on PT, thanks goes out to Carl Smith for finding this case and bringing it to our attention. The case is Reginald L. Ivy v. Commissioner. Although Mr. Ivy is pro se, the court has appointed Travis Crum and Brian Netter of Mayer Brown LLP as Amicus Curiae to write in support of his position.

Mr. Ivy owed student loans and the Department of Education certified those loans to the Treasury Department for offset because he was in default. Someone stole Mr. Ivy’s identify and filed a false return claiming a refund. The IRS allowed an overpayment of $1,822, and the money was sent to DOE to pay off the student loan. I can only imagine the chagrin of the identity thief for being good enough to prepare a return that got through the IRS filters only to find out that the selected victim had an outstanding federal liability subject to the federal offset procedures.

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In August of 2013, the student loan was fully satisfied thanks, in part, to the offset of the refund on the fraudulently filed return by the ID thief. In September of 2013 Mr. Ivy learned of the false 2011 return and prepared and submitted his own return for that year. On his return, he showed an overpayment of $634.

The IRS became aware that the first return filed under Mr. Ivy’s name for 2011 was a false return and it reversed the credit which had the effect of putting Mr. Ivy into default on his student loan. When the IRS reversed the credit, it caused the “real” overpayment by Mr. Ivy to go to, or stay with, DOE. Mr. Ivy complained that he should receive his $634 refund because his student loan was satisfied and argued that in keeping his $634, the IRS acted impermissibly. He brought suit in federal district court under IRC 7433, seeking the return of his money plus damages, arguing that the failure of the IRS to send him the refund caused him to miss a payment on another debt and triggered higher interest charges on the other debt.

The IRS argued that IRC 6402(g) prohibited suit against the IRS and that Mr. Ivy would have to sue DOE on the debt. In effect, the IRS argued that it gave him his refund and that his recourse was to go against the agency that prevented him from receiving the refund, and that agency was not the IRS. This is the standard argument that the IRS makes when someone has their refund offset because of the debt of owed to another agency of the state or federal government participating in the Treasury offset program and is a logical argument because of the language of the statute. In effect, his real beef was not with the IRS which had allowed not one but two refunds on his account, but rather was with the agency seeking to collect his student loan debt.

The district court agreed with the IRS and dismissed the suit. Mr. Ivy appealed, and the Circuit Court brought in the pro bono lawyers. The briefs have been filed. Attached are the Opening Brief of Amicus Curiae and the reply brief of Amicus Curiae. The briefs were filed this summer. During the briefing, the IRS sent Mr. Ivy a check for $634 plus interest. I cannot explain why the IRS did that. The sending of the refund means that only the damages portion of the suit remains.

At issue is the interplay between IRC 6402(g) and 7433(a). Section 6402(g) provides:

No court of the United States shall have jurisdiction to hear any action, whether legal or equitable, brought to restrain or review a reduction authorized by subsection (c), (d), (e) or (f). No such reduction shall be subject to review by the Secretary in an administrative proceeding. No action brought against the United States to recover the amount of any such reduction shall be considered to be a suit for refund of tax. This subsection does not preclude any legal equitable, or administrative action against the Federal agency or State to which the amount of such reduction was paid or any such action against the Commissioner of Social Security which is otherwise available with respect to recoveries of overpayments of benefits under section 204 of the Social Security Act.

Section 7433(a) provides

If, in connection with an collection of Federal tax with respect to a taxpayer, any officer or employee of the Internal Revenue Service recklessly or intentionally, or by reason of negligence, disregards any provision of this title, or any regulation promulgated under this title, such taxpayer may bring a civil action for damages against the United States in a district court of the United States. Except as provided in section 7432, such civil action shall be the exclusive remedy for recovering damages resulting from such actions.

The issue is whether there is any room left between to two statutes for Mr. Ivy to squeeze in a claim. Does the very broad bar of 6402(g) stop all action as the district court found (and as I am inclined to believe), or do the actions of the IRS with respect to the refund somehow constitute collection action on which the IRS has recklessly, intentionally, or negligently disregarded the code or regulations? So, Mr. Ivy must not only get past the bar of the first statute, he must find that sending the refund to DOE is collection activity. The amicus brief makes that argument after examining, through other cases, what is collection activity. It gets there in part because the refund is sent after an assessment, and an assessment is a predicate to collection action. But assessment, as they point out, is also a predicate to creation of an overpayment. I cannot make the leap that granting someone a refund and then sending it to another agency is collection action taken by the IRS in any sense, other than the sense covered by the jurisdictional bar of 6402(g).

The situation makes for an interesting discussion, but I cannot get past the fact that it looks like the IRS did exactly what the jurisdictional bar covers and nothing more. I would love to know why the IRS sent Mr. Ivy his refund in the end. I am curious to know if DOE is still trying to collect from him after the IRS reversed the credits. Of course, I would also like to know more about the ID thief and whether he or she, after starting this whole mess, has been caught.

 

Prisoners Filing Fraudulent Returns and the Efforts to Detect It

On July 20, 2017, the Treasury Inspector General for Tax Administration (TIGTA) issued its third report in the past several years on the topic of tax fraud perpetrated by prisoners and the efforts to detect and stop it.  As with most TIGTA reports this one bears the catchy title “Actions Need to be Taken to Ensure Compliance with Prisoner Reporting Requirements and Improve Identification of Prisoner Returns.”  While TIGTA found a number of items the IRS needed to improve because that’s its job, I found that the IRS had made significant improvements in this area due to increased effort and legislative assistance.  I last wrote about this issue on April 24, 2015 following the last TIGTA report.

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Prisoners have a reputation for using the tax system to get easy money.  The increase in the use of refundable credits put a target on the back of the IRS as a place to pick up money simply by filing a tax return.  Since tax returns can be filed from prison, using the tax system to gain access to money makes sense for prisoners.  When Congress created the first time homebuyer credit and the refundable adoption credit, it created very attractive targets for the type of fraudulent activity by prisoners.

In this report, TIGTA continues to find problems with the way the IRS administers the program for catching prisoners but the data also shows that the IRS has made significant strides using the relatively new legislation as well as its computers.  The process of seeking prisoner fraud looks very much like the other processes the IRS uses to detect mistakes in individual tax returns.  It relies heavily on matching information with computers rather than people and applying filters.  The ability to tackle the problem without devoting much people power allows the IRS to succeed here in a time of reduced resources.  While this program does not bring in revenue, the ability to keep improper refunds from going out the door is at least as important as putting effort into bringing in money.

One of the legislative changes requires prisons to provide the IRS with the Social Security Numbers of inmates.  The IRS then puts a prisoner indicator on the account of that SSN.  If someone is in prison, we should not expect that person to have significant income, though of course exceptions exist, and we should not expect that person to buy a home, adopt a child or engage in other activities that might trigger a refundable credit.  Having the information from the prisons, allows the IRS to do some immediate filtering that can catch improper claims.

Dealing with prisoner fraud also implicates the broader area of identity theft.  The IRS appears to have made significant strides in attacking ID theft in the past two years and that success has an impact on prisoner fraud since fraudulent returns filed by prisoners will more often than not involve the use of stolen or misused identification.

There is more than one program underway to stop prisoner refund fraud.  In addition to getting the SSNs of prisoners and loading it into the IRS database, prisons are now more carefully monitoring prisoner communication looking for tax fraud.  When a prison identifies a communication as one which might involve tax fraud, it notifies the IRS through the “Blue Bag Program.”  While the amount of correspondence sent to the IRS using this program in 2016 was slightly under 1,000, the existence of the program must serve as a deterrent.  This program would seem to play to a strong suit of prisons the way data matching plays to a strong suit of the IRS.

The prison program did not seem to work as well as one might hope in addressing the cases in which the IRS detects fraud by a prisoner.  The report indicates that the IRS might stop the fraud but little is done to punish the prisoner who engaged in the fraud even though the prisoner is known.  The IRS is not going to be able to prosecute prisoners unless they engage in a fairly wide ranging fraudulent effort just because of the limitations on its resources.  My impression from the report was that when the IRS provided information to the prisons about specific tax fraud activity but that information did not necessarily result in parole denial or other actions that could occur without criminal tax prosecution.  While the report did not discuss this in depth, it would seem that tailoring disclosure laws to allow the IRS to provide prisons with detailed information about an incidence of tax fraud and making that information a part of probation denial and other punishments within prison system without requiring criminal tax prosecution would be a way to strongly deter prisoner fraud for prisoners with hope of release or of the ability to use computers or other forms of communication.

TIGTA found that the IRS had not created a master list of all prisons.  Most of the prisons the IRS seemed not to be getting information from were part of the state and local system.  I would be interested in an analysis of which prisons or which types of prisons are most likely to generate tax fraud.  It would seem to state prisons incarcerating individuals for crimes of violence would be much less likely than federal prisons with more white collar crime and the knowledge base for creating the type of scheme necessary for refund fraud but my thinking about this could be entirely wrong.  Still, a profile of the likely prisoner to commit tax fraud would seem like something useful to create and to target efforts on those prisons or those prisoners where the likely criminals reside.

Since few tax practitioners represent incarcerated individuals, this report may provide little practical information.  I see it as a success story for IRS and Congress at a time when there are not enough success stories about legislative or administrative efforts to fix a problem.  Maybe lessons can be learned from the efforts to stop prisoner fraud and applied to the tax gap generally.  We know where the big holes are.

 

TIGTA Report Shows IRS Has a Long Way to Go On Employment Related Identity Theft

The other day I wrote about the Electronic Tax Administration Advisory Committee and its annual report showcasing many successes and improvements IRS made when it came to identity theft. Part of the success ETAAC discussed included a major drop in identity theft receipts, which the report suggests is the product of better detection at the front end of the return filing process. TIGTA, in a report from last month, highlights a different story when it comes to employment related identity theft. Essentially TIGTA found that IRS materially understates the number of employment-related identity theft cases and has had major systemic flaws in informing victims.

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What is employment related identity theft? As most readers know, to gain employment one must have valid Social Security number. Individuals who are not authorized to work in the US sometimes use other peoples’ Social Security numbers to secure employment. They then file a individual income tax return using an Individual Taxpayer Identification Number (ITIN). Individuals whose SS numbers are used by someone else can be in for a surprise after they file a tax return (or do not file due to not having an obligation to file) when IRS may send an Automatic Underreporting (AUR) notice reflecting the income that was earned by someone else who illegitimately used their SS number.

IRS procedures are supposed to catch returns that are submitted by an ITIN user that reflect someone else’s SS # associated with wages. In IRS speak, that is known as an ITIN/SSN mismatch. When all works well, IRS places an identity theft marker on the victim’s account, and prevents victims from getting an AUR notice.

TIGTA found that all does not work well, with a number of systemic issues associated with placing markers on accounts. It examined over a million e-filed returns that had an SS/ITIN mismatch and found that in about 51.8% of the time IRS put the appropriate identity theft marker on the account. The IRS did not place markers on the remaining 48%; that was because many in that 48% group did not have a tax account (Note IRS defines tax account as an active account as one “for which the taxpayer’s Master File account, which contains the taxpayer’s name, current addresses, and filing requirements, etc., exists on the IRS computer system capable of retrieving or updating stored information.”).

Of the e-filed returns, there were another 60,000 or so victims who did have a tax account but still did not have an id theft marker placed; IRS noted various reasons, including its placing only one marker per return even if the return filed has multiple incorrect SS# associated W-2s and that some of the victims were minors and IRS did not have procedures in place to inform minors.

TIGTA sensibly recommended that IRS take steps to improve its process of placing id theft markers on all e-filed returns. IRS generally agreed with the recommendations and said it would monitor progress “and determine, by July 2018, the requisite programming changes needed to ensure that identity theft markers are properly applied when the potential misuse of an individual’s SSN becomes evident.”

In addition to e-filing issues, TIGTA noted major problems that the IRS has had in placing identity theft markers when a return reflecting an ITIN/SS mismatch is not e-filed:

Specifically, guidelines state that a Form W-2 is not required for Line 7 (Wages, Salaries, Tips, etc.) of Form 1040. As such, the IRS has no way to identify ITIN/SSN mismatches associated with paper tax returns. In addition, if the ITIN filer voluntarily attaches a Form W-2 with an SSN, IRS internal guidelines do not require employees processing these returns to place an employment identity theft marker on the SSN owner’s tax account.

TIGTA recommended that IRS require ITIN filers to attach W-2s with their 1040’s; IRS rejected that recommendation because it noted that “wages constitute taxable income under Internal Revenue Code Section 61 and are reportable even when a Form W-2 is not provided or is otherwise unavailable at the time of return filing.” IRS did, however, agree to put better procedures in place when a paper filed ITIN return does in fact include W-2s that reflect a mismatch.

Conclusion

The TIGTA report shows that IRS has a lot of room for improvement. People need to be vigilant, as IRS in many cases does not take action even if it has information that reflects a high likelihood that someone is improperly using a Social Security number. As TIGTA notes, if IRS fails to place an identity theft marker on an account, “victims can be subjected to additional burden when the IRS processes their tax returns.” It may trigger confusing and stressful notices and limit the ability for IRS and others to help victims unwind the effects of the identity thief. IRS needs to do a better job here, as the costs for victims in time, stress and potentially dollars are likely very significant.

Electronic Tax Administration Advisory Committee Report to Congress: Updates on E-Filing, Refund Fraud and Identity Theft

Last month the Electronic Tax Administration Advisory Committee issued its annual report to Congress. ETAAC was born in the 98 Restructuring Act; it is an advisory committee that is made up of a number of volunteers from the private sector, consumer advocacy groups and state tax administrators. As I discuss below, the report considers e-filing and refund fraud and identity theft issues.

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When formed in 98, ETAAC’s mission was principally directed at IRS reaching an 80% rate of electronic return filing; this year’s report details the substantial progress in meeting that target, though there is a range in e-filing that is based on type of return. For example individual income tax returns are e-filed at around 88%; exempt org returns are in the mid-60% range. ETAAC projects this year that the overall electronic filing for all returns will exceed 80%.

A Shifting Focus to Refund Fraud and Identity Theft

With ETAAC essentially fulfilling its primary mission, last year its charter was amended to include the problem of Identity Theft Tax Refund Fraud (ITTRF), which, as the report states, threatens to undermine the integrity of our tax system:

America’s voluntary compliance tax system and electronic tax filing systems exist, and succeed, because of the trust and confidence of the American taxpayers (and policy makers). Any corrosion of trust in filing tax returns electronically would result in reverting back to the less-efficient and very costly “paper model.” That option is neither feasible any longer nor desirable.

The report discusses the IRS’s convening of a Security Summit and last year’s special $290 million appropriation to “improve service to taxpayers, strengthen cybersecurity and expand their ability to address identity theft.” The main goals relating to ITTRF include educating and protecting taxpayers, strengthening cyber defenses and detecting and preventing fraud early in the process.

The report discusses a number of ITTRF successes in the past year:

  • From January through April 2016, the IRS stopped $1.1 billion in fraudulent refunds claimed by identity thieves on 171,000 tax returns; compared to $754 million in fraudulent refunds claimed on 141,000 returns for the same period in 2015. Better data from returns and information about schemes meant better filters to identify identity theft tax returns.
  • Thanks to leads reported from industry partners, the IRS suspended 36,000 suspicious returns for further review from January through May 8, 2016, and $148 million in claimed refunds; twice the amount of the same period in 2015 of 15,000 returns claiming $98 million. Industry’s proactive efforts helped protect taxpayers and revenue.
  • The number of anticipated taxpayer victims fell between/during 2015 to 2016. Since January, the IRS Identity Theft Victim Assistance function experienced a marked drop of 48 percent in receipts, which includes Identity Theft Affidavits (Form 14039) filed by victims and other identity theft related correspondence.
  • The number of refunds that banks and financial institutions return to the IRS because they appear suspicious dropped by 66 percent. This is another indication that improved data led to better filters which reduced the number of bad refunds being issued.
  • Security Summit partners issued warnings to the public, especially payroll industry, human resources, and tax preparers, of emerging scams in which criminals either posed as company executives to steal employee Form W-2 information or criminals using technology to gain remote control of preparers’ office computers.

E-file Signature Verification

While ETAAC shifts its focus to include security and fraud detection, it still examines how IRS is doing in the e-file arena. One area in the report that I think warrants further reflection is ETAAC’s recommendation that IRS improve its ability to allow taxpayers to verify an e-filed return. The report discusses the history of signing and verifying an e-filed return, which now requires that the taxpayer have access to the prior year’s AGI or a special PIN.  While most software will allow for those numbers to carry over from last year’s returns, at times taxpayers may not know last year’s AGI or the PIN (e.g., when there is a switch in software) and ETAAC tells us that this has triggered many taxpayers abandoning e-filing and reverting to paper filing.

The report discusses how the IRS Get Transcript online tool ostensibly could facilitate taxpayers getting access to their last year’s AGI but that access has a clunky authentication process that has led to a very high fail rate for users (the Report also discusses the compromising of a prior iteration of the Get Transcript online tool and other data breaches).

As IRS works out the kinks with its “Future State” platform, authentication and ease of taxpayer access will be crucial. Of course, given the backdrop of dedicated and as the report notes nimble and dedicated criminals who continue to probe for weaknesses this will continue to be a challenge for IRS and its partners.

Using a Refund Suit to Remedy Identity Theft of Return Preparer Fraud

Today, we welcome guest blogger, Robert G. Nassau.  Professor Nassau teaches at Syracuse University College of Law and directs the low income taxpayer clinic (LITC) there.  Today, he discusses twin problems that have plagued my taxpayers, identity theft and preparer fraud.  He has employed refund suits before to resolve cases in which the IRS has frozen a taxpayer’s earned income tax credit and in the post today he explains how he used a refund suit to solve a seemingly intractable identity theft/preparer fraud issue.  His pioneering and innovative use of refund suits to craft favorable results for his clients is probably what caused him to become the author of the chapter on refunds in the book “Effectively Representing Your Client before the IRS.”  The book is gearing up for its seventh edition in 2017 and Professor Nassau has signed on for another update of the refund chapter.  Keith

As all tax professionals know, tax-related identity theft and return preparer fraud are widespread, and trying to assist a victim of these crimes – despite significant procedural improvements made by the Internal Revenue Service – can make one envy Sisyphus and his Boulder Problem.  Recently, the Syracuse University College of Law Low Income Taxpayer Clinic successfully resolved one such taxpayer’s ordeal – and did it by filing a refund suit in Federal District Court.  This is his story.

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The Taxpayer.

Prior to 2011, John Doe (not his real name) had traditionally prepared and filed his own tax returns, and had never had any problems.  When he was working on his 2011 return, his calculations were not leading to his accustomed refund.  When he mentioned his dilemma to a friend, she suggested that he contact Bonnie Parker (not her real name), who, according to the friend, was very knowledgeable in all things tax.  John went to Bonnie, showed her his W-2, and gave her some additional personal information.  Bonnie said she would look into it and get back to him, but she never did.  John never saw her again.  John himself did not timely file his 2011 return, because he was considering filing for bankruptcy, and thought he had three years to file the return.

The Crime Perpetrated.

Unbeknownst, at the time, to John, Bonnie submitted a fraudulent return using John’s identity and some of his legitimate information, and received a refund of about $5,000.

The Crime Discovered.

In early 2013, John realized that something was amiss, as he started to get collection notices regarding “his” 2011 tax return.  The Service had audited John’s “return” on the basis of both automated underreporting and child-based benefits.  Because the audit was ignored, John now found himself assessed close to $6,000.

The Failure of Traditional Remedies.

Having “put two and two together,” John filed his real 2011 return in the summer of 2013, claiming a refund of about $2,000.  This return was not processed.  In early 2014, John went to his local Taxpayer Assistance Center, where he was encouraged to submit an Identity Theft Affidavit (IRS Form 14039), which he did.  This did not solve the problem.  Later in 2014 he was told to submit a Tax Return Preparer Fraud or Misconduct Affidavit (IRS Form 14157-A), and a Complaint: Tax Return Preparer (IRS Form 14157).  John submitted both of these Forms.  He also filed a police report with the Syracuse Police Department.  None of this solved his problem.  In fact, while he was trying to solve his 2011 problem, his refunds for 2012 and 2013 (and, later 2014) were all offset and applied to his 2011 “debt,” reducing it to around $2,000.  In early 2015, John sought help from the Taxpayer Advocate Service, which, despite diligent efforts by his Case Advocate, was unable to fix the problem.  Apparently, the Service was confused by whether this was an Identity Theft case or a Return Preparer Fraud case.  In addition, the Service was suspicious of John and his “relationship” with Bonnie.  Ultimately, his Case Advocate suggested that he contact the Syracuse LITC.

Commencement of the Refund Suit.

Concluding that it would be fruitless to try to solve John’s problem administratively (that train had left the station and was not coming back), the Syracuse LITC decided to file a refund suit on John’s behalf in Federal District Court, which it did in November 2015.  The Complaint sought a recovery of John’s claimed refunds on his actual 2011, 2012, 2013 and 2014 returns. In our view, because each of those returns had claimed a refund; six months had passed since each return had been filed; and it was not more than two years from John’s receipt of a notice of disallowance with respect to any of his claims (there had been no such notices), the District Court had jurisdiction to hear his case.  (Section 6532(a)(1) of the Code.)

The Department of Justice Answers.

In his Answer, the attorney for the Department of Justice raised two interesting points (while denying most of the factual assertions for lack of knowledge): (1) the refunds for 2012, 2013 and 2014 had actually been granted – they had just been offset to 2011, therefore, there was no issue for those years; and (2) there might be a jurisdictional issue regarding 2011, because there was currently a balance due for 2011, and, pursuant to United States v. Flora, one cannot bring a refund suit if one still owes any part of the taxes assessed for that year.  While this first point is not without a good deal of merit, the second point creates a fascinating potential Catch-22 (fascinating from a tax law perspective, not from a solve-the-problem perspective).  If the DOJ attorney were correct, the Court would implicitly have to conclude that the fraudulent return was the real return, when the case is premised on the fact that the fraudulent return is fraudulent and the real return shows a refund (hence no Flora issue).  Effectively, if the DOJ attorney were correct, one might never get his “day in court” to prove that he was the victim of identity theft or return prepare fraud.

How It Played Out.

While reserving his Flora argument, the DOJ attorney flew to Syracuse to depose John.  Having listened to John’s story in person, and having done some independent sleuthing of his own, the DOJ attorney concluded that John was telling the truth.  He arranged to have the fraudulent 2011 return (and its liability) purged from the system, and John’s actual 2011 return respected and processed.  Interestingly, that actual 2011 return wound up showing a small liability, but it was more than offset by John’s 2012, 2013, 2014 and 2015 refunds, so he received a significant check.  It took thirteen months from the time John filed his refund suit until the time his account was rectified and he received his proper refund.

Lessons and Observations.

Given John’s – and even TAS’s – inability to solve his tax problem administratively, a refund suit seemed his best, if not only, resort.  While it took over a year to reach the correct result, the refund suit brought with it an intelligent, diligent and dedicated DOJ attorney who, to his credit, seemed more concerned with reaching the correct result than with trying to set a new jurisdictional precedent.  It also brought a Judge who seemed to believe John from the “get-go,” and who prodded the parties toward settlement.  While we would certainly recommend fully exhausting one’s administrative avenues of relief first, where those have proven unsuccessful, we would encourage taxpayers to file refund suits to get the result they deserve.

 

Getting a Copy of the Fraudulent Return Filed in Your Name

We wish everyone a happy holiday.  Next week will be a light week at PT as we celebrate with our families.

As ID theft became more prevalent over the past decade or so, victims seeking to address the theft ran into a stone wall at the IRS in their efforts to come to an understanding of the theft and their efforts to fix the problems it caused.  The IRS took the position, after receiving advice from its Chief Counsel interpreting the relevant sections of IRC 6103, that it could not give to victims the fraudulent return filed with their own name on it if they told the IRS that the return was not their return.  In those circumstances, the IRS interpreted the disclosure provisions of the code to prevent giving the true taxpayer, i.e., the victim, a copy of a return filed by someone else.  The IRS position could make it extremely difficult or impossible for the victim to unwind the situation since they were operating in the dark as to what caused their problem.  Practitioners who knew that the IRS would decline to give the true taxpayer a copy of the fraudulent return if they said their client was the victim of identity theft took to asking for transcripts and return copies first and then reporting the ID theft in order to circumvent this problem.

In 2011 the Chair of the ABA Tax Section asked each committee to propose a legislative fix to a problem facing their committee.  As chair of the Low Income Taxpayer Committee, on behalf of the committee I worked with others and drafted a legislative fix to 6103 that would allow the true taxpayer to see any return filed with their identifying information on the return as the person filing the return.  Like most of my ideas, this one lacked sufficient pizzazz to make it off the ground based on the initiative of just the committee recommendation; however, on May 6, 2015 a Senator wrote to the IRS expressing concern with the IRS policy of not providing returns fraudulent using the name and identifying information of a taxpayer to the victim.  In responding to this letter less than four weeks later, the IRS obtained a new opinion from Chief Counsel’s office reinterpreting section 6103 and allowing victims to obtain copies of the fraudulent returns.  It is interesting how an inquiry from the right source can influence the outcome of a legal opinion.  After changing its position, the IRS established the Fraudulent Return Request Program on November 3, 2015.

On November 8, 2016, the Treasury Inspector General for Tax Administration (TIGTA) issued a report examining the new program.  Because this issue is important to me and to my clients, I read their report with interest.

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TIGTA reports provide terrific insights into IRS processes.  The reports themselves follow similar patterns and do not have a spellbinding writing style, but they convey information that those outside the IRS would otherwise miss.  For that reason almost every report written by TIGTA deserves a quick glance.  This report, in typical fashion, provides interesting data on how well the IRS has responded to the requests of victims for the fraudulent returns with their identifying information and the typical findings that the IRS has not set up the best process and has not followed the process it set up.

After reversing its legal position on its ability to provide victims with copies of fraudulent returns filed using their information, the IRS established the Fraudulent Return Request (FRR) program.  The TIGTA report stated that the IRS received more than 5,000 requests for fraudulent returns during the first year.  In order to obtain a copy of the fraudulent return, identity theft victims must snail mail a signed letter containing their name, SSN, mailing address and the tax year of the fraudulent return.  The letter must contain the statement “I declare that I am the taxpayer.”  The taxpayer must also send a copy of a government-issued ID.

A representative can also make the request for the fraudulent return.  The rep needs to sign a statement that reads “I declare that I am a person authorized to obtain the tax information requested.”  In addition the rep must submit his or her own name, TIN, mailing address and how he or she represents the victim.  Some of this seems redundant with the power of attorney (POA) form but the IRS must want to make doubly sure that the rep has this authority.

Once the IRS receives the request for the fraudulent return it has an internal time frame of 30 days to acknowledge receipt of the request and 90 days to fulfill the request or ask for more time.  The report states that the IRS will not “release a redacted copy of a tax return for any identity theft case open and still being worked.”  Since getting a copy of the fraudulent return can provide significant assistance to the victim in explaining that they are the victim, this limitation surprises me.  Once you prove that you are a victim, the need to see the fraudulent return diminishes.  I cannot understand why the IRS would adopt this policy limitation that makes it harder for victims to prove the theft.  If the IRS has decided that it can legally provide a copy of the return to the true owner of the person whose identity has been used on the return why does it matter that the IRS has declared the person a victim of identity them before it releases the information to the true owner of the identity?  The TIGTA report does not explain or question the thinking behind this position.

The report describes the process that the IRS will use if it rejects the request.  My recent interaction with the IRS identity protection unit did not leave me with a great deal of confidence in that unit.  For my client it sent a letter stating that it agreed he was the victim of identity theft and that if we had questions we should contact Ms. X.  I called Ms. X and requested a copy of an account transcript showing that the assessment was reversed.  Ms. X told me that it was not her job to provide account transcripts and that I should seek a copy elsewhere.  I pointed out to her that because of the identity theft indicators I could not use E-Services to obtain the transcript or call and wait on the phone to successfully request one.  Ms. X let me know that was not her problem and I should not be badgering her.

While thinking about how I should go about obtaining a transcript to make myself comfortable that the problem was indeed solved, my client received another bill for the tax assessed as a result of the theft of his identity.  So much for the fixing of his account.  I had a reasonably high degree of confidence that calling Ms. X again would not solve the problem so we called the general number for the identity theft unit and had a totally unsatisfactory call which was described in the recent post by Caleb Smith.  After that call we were left with no alternative but to contact the Local Taxpayer Advocate’s office.  I hate to contact the advocate’s office, not because the office is unhelpful, but because I feel that I have enough knowledge to solve problems without bothering them.  They did assist in getting the liability removed from my client’s account after which we received another letter from the identity theft unit inviting us to contact Ms. X, the extremely unhelpful employee we originally encountered, if we had any questions or concerns.  We passed on this offer of assistance but I wonder how many others Ms. X has sent down the same path to purgatory that she did with us.

In its report TIGTA found that the IRS did not meet its internal guidelines in processing requests for the fraudulent returns.  The most prevalent mistake involved redaction errors.  The IRS has a redaction protocol for the fraudulent so that the victim will not learn the name and address of the person using their identity and it did not always redact everything in the protocol.  The IRS sometimes released the return without getting a complete copy of everything it should receive in the request for the return.  To fix the problems related to insufficient requests TIGTA suggested that the IRS develop a form to make it easier for persons requesting the fraudulent returns to followed the prescribed list of items wanted by the IRS.  This suggestion makes sense although it did not seem to rise to the level of a formal recommendation requiring a response.

The second suggestion intrigues me because I recently made a similar suggestion to the Tax Court based on software suggested to me by a colleague at Harvard.  Since more than 40% of the errors identified by TIGTA were attributable to redaction errors, TIGTA suggested that the IRS automate the redaction of the documents before turning them over.  It pointed out that the IRS is testing software to redact information from Form 990.  In the Tax Court a very high percentage of the pro se cases I review when I go to the clerk’s office have unredacted information making it easy to pick up the taxpayer’s SSN.  If the redaction software works for the IRS, it should consider making it available to the Tax Court which could use it to clean up the submissions it receives and assist taxpayers who fail to redact.  This, in turn, might make the Tax Court more comfortable making its public records more publicly accessible.

The TIGTA report discussed here describes a process that might be helpful to practitioners although getting the fraudulent returns filed using your taxpayer’s identifying information may still be easier if you request the returns before alerting the IRS to the existence of identity theft.   The report focuses only on issues related to the new process of giving fraudulent returns to the victim and not to broader problems of identity theft.  Still, the report provides useful information for those whose clients suffer from the theft of their identity.

Using 20th Century Technology in a 21st Century World: IRS Stops Initiating Contact By Phone on Failure to Deposit Cases

There was a great scene from the TV show Black-ish last season when the stylish and trendy older daughter Zoey (played by Yara Shahidi) decides she has had enough of her brothers’ using her trend-setting ways as a way to get ideas on the next big thing to make money in the stock market. She decides to thwart her brothers’ plans and shun new technology; we see her sitting in a chair reading a print newspaper and making a phone call on a rotary phone. (as an aside, video of this generation of kids trying to use a rotary phone is a good way to spend a few minutes).

The antithesis of successful integration of technology for communication is the IRS. When one looks at tax administration, we see a world where the IRS for the most part operates in a 20th century model. To be sure, IRS has achieved success in getting Americans to e-file (in partnership with the private sector), but as the recent Electronic Tax Administration Advisory Committee report indicated the IRS is “mired in a manual taxpayer service delivery model that relies on interactions using people, paper and phones.” The IRS needs to change the meet the expectations of those who expect to seamlessly communicate while at the same time be sensitive to the needs of those who rely on and may in fact prefer the opportunity for a more personal way to communicate with the IRS.

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The next few years will be important as the IRS tries to shift away from paper and phones and begin providing resources for real time communications with taxpayers (see NTA Objectives Report Focuses on IRS Future State: Some Thoughts on Technology, Participation and Tax Administration). This possible shift is one of the most important developments in tax administration. No doubt it has animated the National Taxpayer Advocate in her efforts to get the IRS to balance its needs for efficiency and the public’s expectation that it can communicate with its citizens in a manner similar to other business interactions with the realities that among other things there is a deep digital divide in our country. This complicates IRS measures to rely heavily on technology for all the programs it administers, especially those like refundable credits where many Americans who claim various credits do not have ready internet access.

One complicating feature that all businesses (and IRS) have come to address is the possibility that bad guys are out to get personal information that would facilitate identity theft and just plain theft. We have discussed identity theft and IRS imposter scams many times as well. In a speech earlier this year the Commissioner said that IRS would not initiate phone calls to taxpayers; that was a big deal because as TIGTA and others have reported there has been a proliferation of IRS imposter phone schemes that have separated many innocents from their money.

Well, it turned out that in some instances IRS did initiate phone calls with Americans. One area was when employers are delinquent with depositing employee income and employment taxes. IRS has been pulling back from that practice, and earlier this month in an IRS Small Business and Self-Employed Division (SB/SE) legal memorandum the Director of Collections Policy indicated that “[i]n response to the continuing threat of phone scams, phishing and identity theft, we are changing our practice of making initial contact on FTD (Failure to Deposit) Alerts by telephone.”

The memorandum provides some additional information, including some templates for letters to use and how the process should work generally:

Field contact is the preferred method of contact on assigned FTD Alerts. However, Revenue Officers retain the discretion to determine the best method of effective initial contact on a case-by-case basis. Effective immediately, all anticipated telephone initial contacts on FTD Alert taxpayers can proceed AFTER a notice is sent to the taxpayer informing them that a Revenue Officer (RO) will contact them by phone within 15- calendar days of receipt of the FTD Alert.

Parting Thoughts

It is not easy trying to administer compliance with FTD penalties, which require a real time interactive experience to prevent the possibility of cascading liabilities. It is even more difficult for an agency stuck in 20th century technology and at the same time combatting 21st century scams. I suspect in about ten years the way the IRS communicates with taxpayers in 2016 will remind us of Lily Tomlin playing Ernestine the telephone operator trying to collect an unpaid phone bill.

Summary Opinions through 12/18/15

Sorry for the technical difficulties over the last few days.   We are glad to be back up and running, and hopefully won’t have any other hosting issues in the near future.

December had a lot of really interesting tax procedure items, many of which we covered during the month, including the PATH bill.  Below is the first part of a two part Summary Opinions for December.  Included below are a recent case dealing with Section 6751(b)(1) written approval of penalties, a PLR dealing with increasing carryforward credits from closed years , an update on estate tax closing letters, reasonable cause with foundation taxes, an update on the required record doctrine, and various other interesting tax items.

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  • In December, PLR 201548006 was issued regarding whether an understated business credit for a closed year could be carried forward with the correct increased amounts for an open year.  The taxpayer was a partner in a partnership and shareholder in an s-corp.  The conclusion was that the corrected credit could be carried forward based on Mennuto v. Comm’r, 56 TC 910, which had allowed the Service to recalculate credits for a closed year to ascertain the correct tax in the open year.
  • IRS has issued web guidance regarding closing letters for estate tax returns, which can be found here.  This follows the IRS indicating that closing letters will only be issued upon taxpayer request (and then every taxpayer requesting a closing letter).  My understanding from other practitioners is that the transcript request in this situation has not worked well.  And, some states will not accept this as proof the Service is done with its audit.  Many also feel it is not sufficient to direct an executor to make distributions.  Seems as those most are planning on just requesting the letters.
  • Models and moms behaving badly (allegedly).  Bar Refaeli and her mother have been arrested for tax fraud in Israel.  The Israeli taxing authority claims that Bar told her accountant that she resided outside of Israel, while she was living in homes within the country under the names of relatives.  Not model behavior.
  • The best JT (sorry Mr. Timberlake and Jason T.), Jack Townsend, has a post on his Federal Tax Procedure Blog on the recent Brinkley v. Comm’r case out of the Fifth Circuit, which discusses the shift of the burden of proof under Section 7491.
  • PMTA 2015-019 was released providing the government’s position on two identity theft situations relating to validity of returns, and then sharing the return information to the victims.  The issues were:

1. Whether the Service can treat a filed Business Masterfile return as a nullity when the return is filed using a stolen EIN without the knowledge of the EIN’s owner.

2. Whether the Service can treat a filed BMF return as a nullity when the EIN used on the return was obtained by identifying the party with a stolen name and SSN…

4. Whether the Service may disclose information about a potentially fraudulent business or filing to the business that purportedly made the filing or to the individual who signed the return or is identified as the “responsible party” when the Service suspects the “responsible party” or business has no knowledge of the filing.

And the conclusions were:

1. The Service may treat a filed BMF return as a nullity when a return is filed using a stolen EIN without the permission or knowledge of the EIN’s owner because the return is not a valid return.

2. The Service may treat a filed BMF return as a nullity when the EJN used on the return was obtained by using a stolen name for Social Security Number for the business’s responsible person. The return is not a valid return.

  • Back in 2014, SCOTUS decided Clark v. Rameker, which held that inherited IRAs were not retirement accounts under the bankruptcy code, and therefore not exempt from creditors.  In Clark, the petitioners made the claim for exemption under Section 522(b)(3)(C) of the Bankruptcy Code for the inherited retirement account, and not the state statute (WI, where petitioner resided, allowed the debtor to select either the federal exemptions or the state exemptions).  End of story for those using federal exemptions, but some states allow selection like WI between state or federal exemptions, while others have completely opted out of the federal exemptions, such as Montana.  A recent Montana case somewhat follows Clark, but based on the different Montana statute.  In In Re: Golz, the Bankruptcy Court determined that a chapter 7 debtor’s inherited IRA was not exempt from creditors.  The Montana law states:

individual retirement accounts, as defined in 26 U.S.C. 408(a), to the extent of deductible contributions made before the suit resulting in judgment was filed and the earnings on those contributions, and Roth individual retirement accounts, as defined in 26 U.S.C. 408A, to the extent of qualified contributions made before the suit resulting in judgment was filed and the earnings on those contributions.

The BR Court, relying on a November decision of the MT Supreme Court, held that an inherited IRA did not qualify based on the definition under the referenced Code section of retirement account.  I believe opt-out states cannot restrict exemption of retirement accounts beyond what is found under Section 522, but it might be possible to expand the exemption (speculation on my part).   Here, the MT statute did not broaden the definition to include inherited IRAs.

  • In August, we covered US v. Chabot, where the 3rd Circuit agreed with all other circuits in holding the required records doctrine compels bank records to be provided over Fifth Amendment challenges.  SCOTUS has declined to review the Circuit Court decision.
  • PLR 201547007 is uncool (technical legal term).   The PLR includes a TAM, which concludes reasonable cause holdings for abatement of penalties are not precedent (and perhaps not persuasive) for abating the taxable expenditure tax on private foundations under Section 4945(a)(1).  The foundation in question had assistance from lawyers and accountants in all filing and administrative requirements, and those professionals knew all relevant facts and circumstances.  The foundation apparently failed to enter into a required written agreement with a donee, and may not have “exercised expenditures responsibly” with respect to the donee.  This caused a 5% tax to be imposed, which was paid, and a request for abatement due to reasonable cause was filed.  Arguments pointing to abatement of penalties (such as Section 6651 and 6656) for reasonable cause were made.  The Service did not find this persuasive, and makes a statutory argument against allowing reasonable cause which I did not find compelling.  The TAM indicates that the penalty sections state the penalty is imposed “unless it is shown that such failure is due to reasonable cause and not due to willful neglect.”  That language is also found regarding Section 4945(a)(2), but not (1), the first tier tax on the foundation.  That same language is found, however, under Section 4962(a), which allows for abatement if the event was due to reasonable cause and not to willful neglect, and such event was corrected within a reasonable period.  Service felt that Congress did not intend abatement to apply to (a)(1), or intended a different standard to apply, because reasonable cause language was included only in (a)(2).  I would note, however, that Section 4962 applies broadly to all first tier taxes, but does specify certain taxes that it does not apply to.  Congress clearly selected certain taxes for the section not to apply, and very easily could have included (a)(1) had it intended to do so.

I’m probably devoting too much time to this PLR/TAM, but it piqued my interest. The Service also stated that the trust cannot rely on the lack of advice to perform certain acts as advice that such acts are not necessary.  I am not sure how the taxpayer would know he or she was not receiving advice if it asked the professionals to ensure all distributions were proper and all filings handled.  I can hear the responses (perhaps from Keith) that this is a difficult question, and perhaps the lawyer or accountant should be responsible.  I understand, but have a hard time getting behind the notion that a taxpayer must sue someone over missed paperwork when the system is so convoluted.  Whew, I was blowing so hard, I almost fell off my soapbox.

  • This is more B.S. than the tax shelters Jack T. is always writing about.  TaxGirl has created her list of 100 top tax twitter accounts you must follow, which can be found here. Lots of great accounts that we follow from writers we love, but PT was not listed (hence the B.S.).  It stings twice as much, as we all live within 20 miles of TaxGirl, and we sometimes contribute to Forbes, where she is now a full time writer/editor.  Thankfully, Prof. Andy Gerwal appears to be starting a twitter war against TaxGirl (or against CPAs because Kelly included so many CPAs and so few tax professors).  We have to throw our considerable backing and resources behind Andy, in what we assume will be a brutal, rude, explicit, scorched earth march to twitter supremacy.  We are excited about our first twitter feud, even if @TaxGirl doesn’t realize we are in one.
  • This doesn’t directly relate to tax procedure or policy, but it could be viewed as impacting it, and we reserved the right to write about whatever we want.  Here is a blog post on the NYT Upshot blog on how we perceive the economy, how we delude ourselves to reinforce our political allegiances (sort of like confirmation bias), and how money can change that all.