Retroactive Math Error Notices May Be on the Horizon

Earlier this week the IRS publicly released a Program Manager Technical Advice (PMTA) memo evaluating the time limits on math error assessment authority. (POSTS-129453-17, 4/10/18) In it, the IRS concludes that it can lawfully make a math error assessment at any time within the assessment statute of limitations. The IRS currently and traditionally uses its math error authority to make corrections during the initial processing of returns. The potential for a change in this practice is the subject of the National Taxpayer Advocate’s 2019 Objectives Report, Area of Focus #7 

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Section 6213(b)(1) allows the IRS to make a streamlined assessment without issuing a Notice of Deficiency if the assessment arises from a math or clerical error. This is not as straightforward as it seems. Congress has gradually expanded the definition of a math error in section 6213(g)(2) to encompass situations that do not fit the commonsense definition or a math or clerical error. Math error authority is attractive to Congress and the IRS because theoretically it prevents clearly erroneous spending at a fraction of the cost of a correspondence audit. However, it is not always that simple, as the National Taxpayer Advocate has repeatedly pointed out. Les has discussed the issues on PT here and here 

Background 

The April 10th PMTA was written in response to TIGTA Report 2017-40-042 (July 17, 2017). On pages 5-7 of that report, TIGTA dings the IRS for not incorporating PATH Act restrictions into its return processing procedures for the 2016 filing season. Specifically, the PATH Act prohibited taxpayers from claiming certain credits unless the TINs used to qualify for the credits were issued prior to the due date of the return. The IRS has math error authority to reject claims without the required TIN, but it was unable to put math error procedures in place for the PATH Act TIN requirements until the 2017 filing season. 

The IRS points out that the new restrictions were enacted 32 days before the start of the filing season, which was simply not enough time to adjust its processes and inter-agency agreements. The IRS simply did not have TIN issuance dates available during the 2016 filing season. However understandable the situation, the IRS acknowledged that due to the time crunch it issued improper refunds during the 2016 filing season, and it agreed with TIGTA’s recommendation that it take steps to recover the improper refunds. The PMTA is one such step.

Time Limits on Math Error Assessment 

Both the PMTA and the NTA’s response in the 2019 Objectives Report are well worth reading for a deeper understanding of the history of math error assessments and the administrative and policy considerations involved in their use. While the PMTA indicates that the IRS is considering the use of math error authority to recover the specific post-PATH Act refunds identified by TIGTA, its analysis is not limited to that situation.  

The memo points out that section 6213 places no time limits on math error assessments. Likewise, section 6501 setting time limits on assessments does not mention math error assessments or set a different rule for them. Given this statutory structure, and Congress’s repeated expansion of math error authority, the memo concludes that use of math error after return processing is consistent with Congressional intent.

The National Taxpayer Advocate acknowledges that the statute is silent, but she takes issue with the IRS’s ability to significantly expand its use of math error authority after 92 years without explicit Congressional approval or at least a public notice and comment period. She disputes the memo’s interpretation of the 1926 legislative history, since from 1926 to 1976 math error authority was limited to actual arithmetic errors. Congress may never have anticipated that the IRS would change its use of math error procedures so dramatically.  

Finally, the IRS and the National Taxpayer Advocate disagree over whether the use of math error procedures after return processing is necessarily consistent with constitutional due process rights guaranteed by the 5th Amendment. This issue deserves its own post so I will only flag it here. The National Taxpayer Advocate does not claim that retroactive use of math error can never be constitutional, but she urges the IRS to more seriously consider the hurdles and limitations faced by the targeted taxpayers, as well as the importance to the taxpayers of the tax credits being targeted. These factors affect not only policy considerations, she argues, but also constitutional due process analysis.  

Policy and Fairness Concerns 

Erroneous math error assessments abridge taxpayer rights and cause hardships. The NTA does not argue that taxpayers who received erroneous refunds should be allowed to keep them. Her concern is systemic: even a fact as simple as a TIN issuance date is subject to error. The 2019 Objectives Report cites a study from the 2011 Annual Report to Congress in which 55% of TIN-based “math errors” were subsequently reversed at least in part. The July 2017 TIGTA report also raises concerns about the accuracy of the IRS’s TIN issuance data (“The Methodology for Recreating the Individual Taxpayer Identification Number Issuance Date Resulted in Errors).  

The 2019 Objectives Report notes several other concerns: 

As discussed in prior reports, the IRS’s pre-existing [math error authority] raises the following concerns when the resulting assessments are (or may be) erroneous:  

  • The IRS does not try to resolve apparent discrepancies before burdening taxpayers with summary assessments that they are expected to disprove; 

  • IRS communication difficulties, fewer letters (i.e., one math error notice vs. three or more letters from exam), and shorter deadlines (i.e., 60 days vs. more than 120 days in an exam) make it more difficult for taxpayers to respond timely (e.g., because they want to call the IRS to make sure they understand the letter before responding);  

  • Because it is easier to miss math error deadlines, more taxpayers — particularly low income taxpayers — will lose access to the Tax Court; and  

  • Internal Revenue Code § 7605(b) generally prohibits the IRS from examining a return more than once, but the IRS can examine a return after making a math error adjustment. 

(footnotes omitted). The expansion of math error to post-processing situations only heightens these concerns. As the NTA explains,  

Post-processing adjustments make it more difficult for taxpayers to:  

  • Discuss the issue with a preparer who could help them respond;  

  • Access underlying documentation to demonstrate eligibility;  

  • Recall and explain relevant facts;  

  • Return any refunds (or endure an offset) without experiencing an economic hardship; and  

  • Learn how to avoid the problem before the next filing season. 

The PMTA acknowledges that there are legitimate fairness concerns associated with post-processing math error assessments, and notes that the IRS could choose as a matter of policy to take a different approach to the errors identified in the TIGTA report.

Are Math Error Notices Coming Soon for Returns Filed in 2016? 

When the PMTA was written last April, the IRS was contemplating using math error authority to reclaim erroneous credits issued in 2016. For example, a 2014 return filed in spring 2016 with an EIC claim, if some SSNs on the return were issued after the original due date of the 2014 return. This was kosher before the PATH Act but not after. The assessment statute of limitations for that return is coming up next spring, so IRS will need to decide what to do soon, if it has not already decided.  

Before the IRS starts using math error authority 2 ½ years after issuing a refund, I hope it will seriously consider the National Taxpayer Advocate’s concerns and solicit public comments. Many of the taxpayers affected by the PATH Act changes are immigrants. The need for more Spanish-language and other translated correspondence has been a concern since the PATH Act and is just one example of an issue likely to be raised in public comments.  

The erroneous credits flagged by TIGTA primary affect immigrant taxpayers, but the issues raised by the PMTA and the 2019 Objectives Report affect all taxpayers. Once the IRS begins to use math error notices in post-refund situations, further expansion may be irresistible.  

TIGTA Report Makes (Incomplete) Case For Expanded Math Error Authority

An earlier version of this post appeared on the Forbes PT site on May 20, 2016

TIGTA just released a report called Without Expanded Error Correction Authority, Billions of Dollars in Identified Potentially Erroneous Earned Income Credit Claims Will Continue to Go Unaddressed Each Year. The report is sure to generate headlines, as it details some eye popping numbers about EITC improper payment rate and the IRS’s failure to take action on EITC-claiming returns it knows are likely to contain errors. On the surface TIGTA makes a compelling case but I do not understand why the default solution TIGTA proposes is one that effectively treats EITC claiming individuals as a suspect class that is not entitled to the same due process protections as other individuals who file income tax returns. Our tax system is built on individuals having procedural protections in the form of pre-assessment Tax Court review rights through deficiency procedures. TIGTA’s proposals amount to a possible rejection of protections for millions of individuals least likely to be in a position to protect themselves against IRS overreaching.

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A snapshot of the numbers from the TIGTA report shows that the improper payment rate hovering between 23 and 27% for the past six years, with 2015 estimates looking at about IRS improperly paying out $15.6 billion out of a total $62.3 billion claimed for a 24% improper payment rate. TIGTA also notes that the IRS has identified millions of EITC returns which it believes are likely erroneous but due to resource constraints (and perhaps other reasons) IRS fails to take action and prevent the outflow of improper credits. For example, for 2014 TIGTA estimates that IRS identified over 5.7 million EITC returns with over $20 billion claimed that were likely containing improper claims but due to resource issues IRS only “systematically corrected” about 166,000 of the returns:

We continue to report that IRS compliance resources are limited. Consequently, the IRS does not address the majority of potentially erroneous EITC claims despite having established processes that identify billions of dollars in potentially erroneous EITC payments. For example, the IRS identified approximately 5.7 million potentially erroneous EITC claims totaling approximately $20.7 billion in Tax Year 2014 for which it does not have error correction authority to address.

The TIGTA solution is one that the President has proposed in recent budget proposals, an expanded ability to use summary math error assessment procedures to disallow the credits without allowing people the same pre-assessment right to notice and Tax Court review that everyone else enjoys.

It has been a couple of years since I have discussed TIGTA math error proposals, but the TIGTA discussion brings to mind a post from December 2014 Annual TIGTA Review of IRS Erroneous Payments and The Possible Expansion of Math Error Powers. In that post I go into some more detail regarding the efficiency issues that the government points to in making the case for expanded math error procedures (it is on the surface way cheaper to use math error powers than to give taxpayers a stat notice and full blown deficiency rights). Back in 2014 I referred to TIGTA’s dollars and cents discussion:

While the IRS has the authority to audit potentially erroneous EITC claims for which it does not have math error authority, doing so is more costly than the math error process. The IRS estimates that it costs $1.50 to resolve an erroneous EITC claim using math error authority compared to $278 to conduct a prerefund audit. In addition, the number of potentially erroneous EITC claims the IRS can audit is further reduced by its need to allocate its limited resources among the various segments of taxpayer noncompliance to provide a balanced tax enforcement program. As a result, billions of dollars in potentially erroneous EITC claims go unaddressed each year.

The TIGTA report both now and in 2014 fails however to address some of the criticism of the proposals for expanded powers. In my 2014 post I argued for caution in this area:

If the administration is successful in getting its expanded summary assessment procedures, I hope that IRS carefully studies its impact (as it seems to have done with child support data), establishes clear guidelines for employees, and drafts simple understandable correspondence to allow taxpayers to unwind the assessment and get back in line for deficiency procedures. Some lower-income taxpayers may be less equipped to contest erroneous assessments; telephone wait times are long, and taxpayers who are lower-income are often more transient and less likely to receive correspondence. Add to the mix language and literacy obstacles and you have a potential recipe for real harm.

Congress’ continued use of the Internal Revenue Code to deliver social benefits combined with pressure on IRS to reduce error rates may lead to the IRS taking additional compliance steps without an ability to serve taxpayers who may be inadvertently caught in the compliance crosshairs. Even an agency intent on balancing competing interests must reflect the budget realities that are likely going to jeopardize those taxpayers least likely to be able to withstand erroneous IRS determinations.

In the 2015 NTA Report to Congress a section called Authorize the IRS to Summarily Assess Math and “Correctable” Errors Only in Appropriate Circumstances makes a systematic case for at least some more caution in this area before giving IRS expanded math error powers. That report suggests that before giving IRS expanded powers the following must take place:

  1. There is a mismatch between the return and unquestionably reliable data (rather than the IRS’s estimate about the mere probability of an error).
  2. The IRS’s math error notice clearly describes the discrepancy and how taxpayers may contest the proposed change.
  3. The IRS has researched all of the information in its possession (e.g., information provided on prior- year returns) that could reconcile the apparent discrepancy.
  4. The IRS does not have to analyze facts and circumstances or weigh the adequacy of information submitted by the taxpayer (e.g., whether sufficient documentation is attached) to determine if the return contains an error.
  5. The abatement rate for a particular issue or type of inconsistency is below a specified threshold for those taxpayers who respond.
  1. For any new data or criteria, the Department of Treasury, in conjunction with the National Taxpayer Advocate, has evaluated and publicly reported to Congress on the reliability of the data or criteria for purposes of assessing tax using math error procedures The report should analyze the burdens and benefits of the proposed use of math error authority, considering downstream costs
    to taxpayers (e.g., time, paperwork, representation) and the IRS (e.g., processing taxpayer calls and letters, requests for audit reconsideration, amended returns, appeals, and TAS intervention).

Parting Thoughts

I recognize that there is a compelling interest in reducing error rates for programs such as the EITC. Underlying the NTA suggestion for caution is that with expanded math error powers comes the distinct likelihood that millions of Americans who may claim the credit are the same Americans who need the procedural protections that come with the regular right to Tax Court pre-assessment review. Due process at its core reflects a balancing of interests between the government and its legitimate right to ensuring program integrity and the general right to protect against erroneous government determinations that deprive people of protected property rights. The NTA proposal to carefully study and consider the effect of expanded math error powers reflects a respect for the individual.  Congress has increasingly given IRS special powers when it comes to trying to nudge down the improper payment rate for the EITC. Congress would be well-served from stepping back and rather than continuing to add piecemeal provisions study individual noncompliance more generally and consider what is likely to work and what are the full consequences of additional IRS powers.

 

Annual TIGTA Review of IRS Erroneous Payments and The Possible Expansion of Math Error Powers

Before drinking the egg nog and lighting a few more candles on our menorah here is a brief post on TIGTA, which continues to deliver lumps of coal in the IRS’s stocking.

While I have not followed in detail much of the substance in the end of year tax legislation (with the exception of the very interesting legislation on professional employer organizations, which I hope to discuss soon), the IRS’s budget cuts will have a major impact on IRS’s operations. I read with interest the recent TIGTA report discussing the EITC’s improper payment rate. This TIGTA report looks at the erroneous payments with the Advanced Child Tax Credit (ACTC) as well as the EITC. The report raises the possibility of an expansion of IRS math error powers, and it is that possible expansion I mainly discuss in this brief post.

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TIGTA Calls on Expanded Summary Assessment of EITC Errors

I will not drill into the report’s statistics nor discuss the implications of expanding TIGTA’s annual erroneous payment study to ACTC in addition to EITC. I have previously discussed last year’s OMB overclaim stats here and recent IRS EITC compliance studies here. In addition, others, such as Accounting Today, have summarized the overall report. Instead, I highlight an interesting part of the report that relates to IRS compliance resources.

TIGTA in this report states that IRS believes that it cannot meaningfully reduce EITC error rate using the traditional compliance method of auditing returns. IRS has stated this for some time. IRS’s belief that traditional compliance tools are inadequate for EITC is in part why the EITC is home to some unique (for tax anyway) compliance measures, such as the ban under 32(k) for reckless or fraudulent claims and the 6695(g) EITC due diligence rules; topics that I have likewise addressed this year and which are worthy of continued scrutiny. The IRS’s botched efforts to regulate unlicensed preparers are also best understood in part as reflecting the IRS’s justifiable belief that it cannot meaningfully reduce credit error rates using traditional compliance tools.

What is on IRS’s wish list this year in terms of additional nontraditional compliance tools in dealing with the EITC? It is safe to say that it is unlikely this Congress will give the IRS legislative authority to regulate unlicensed preparers. Next on the list and possibly more likely to get enacted is expanded summary assessment powers.

As I discussed earlier in the year when I summarized the President’s budget request, the administration has previously asked for legislative authority to expand what is effectively a summary assessment procedure when it detects certain classes of potential errors in EITC returns:

The proposal would remove the existing specific grants of math error authority, and provide that “math error authority” will refer only to computational errors and the incorrect use of any table provided by the IRS. In addition, the proposal would add a new category of “correctable errors.” Under this new category, Treasury would have regulatory authority to permit the IRS to correct errors in cases where (1) the information provided by the taxpayer does not match the information contained in government databases, (2) the taxpayer has exceeded the lifetime limit for claiming a deduction or credit, or (3) the taxpayer has failed to include with his or her return documentation that is required by statute.

The current TIGTA report discusses the benefit of summary assessment like math error assessments, noting the major difference in cost to IRS in using a summary math error assessment as compared to going through the correspondence deficiency process:

Currently, under the Internal Revenue Code, the IRS can use its math error authority to address erroneous EITC claims by systemically correcting mathematical or clerical errors on EITC claims, such as correcting entries made on the wrong line on the tax return or mathematical errors in computing income or the EITC. In addition, the IRS can use math error authority to adjust an EITC claim if a qualifying child’s SSN is not valid. However, the majority of potentially erroneous EITC claims the IRS identifies do not contain the types of errors for which it has math error authority. For example, the IRS identified approximately 6.6 million potentially erroneous EITC claims totaling approximately $21.6 billion in Tax Year 2011 for which it does not have math error authority. In Tax Year 2011, the IRS used math error authority to identify and systemically correct only 270,492 (.009 or less than 1 percent) of more than 27.4 million EITC claims. The 270,492 returns claimed the EITC totaling $314 million.

While the IRS has the authority to audit potentially erroneous EITC claims for which it does not have math error authority, doing so is more costly than the math error process. The IRS estimates that it costs $1.50 to resolve an erroneous EITC claim using math error authority compared to $278 to conduct a prerefund audit. In addition, the number of potentially erroneous EITC claims the IRS can audit is further reduced by its need to allocate its limited resources among the various segments of taxpayer noncompliance to provide a balanced tax enforcement program. As a result, billions of dollars in potentially erroneous EITC claims go unaddressed each year.

(TIGTA Report at page 16, emphasis added, footnotes omitted)

Math Error and Policy Considerations Beyond Efficiency

That cost differential is enough to make an IRS administrator with responsibility for driving down error rates take notice, even if the administrator is weighing a taxpayer’s right to challenge the IRS’s actions. After all, math error procedures do not eliminate a taxpayer’s right to a deficiency notice; instead, a taxpayer who gets a math error notice has the right under Section 6213(b)(2)(A) to inform IRS that he wants to abate the assessment. Informing within the 60-day period generally triggers the return of the deficiency procedures with respect to the adjustment. A taxpayer who thinks the IRS adjustment is wrong but who misses the 60-day deadline to request abatement of a math error assessment can then pursue refund litigation or effectively request administrative reconsideration of the assessment.

The possibility of giving the IRS the right to assess and effectively ask questions later via math error abatement procedures may offend some sense of procedural fairness and even suggest constitutional due process issues. The Supreme Court has long ago poo-pooed constitutional procedural due process pre-deprivation hearing protections when it comes to taxpayers, admittedly taxpayers who were not challenging procedures relating to statutory entitlements with defined eligibility criteria. (Some may also note that taxpayers do not have an established property right in changing statutory entitlements in the form of tax credits anyway, a topic I may revisit when I have finished grading exams or have the appetite to dig into procedural due process jurisprudence). Yet, deficiency procedures are the starting point to ensure that taxpayers are protected before having to reach into their pockets and challenge IRS administrative determinations relating to income tax. Even while most of the EITC is refunded, the IRS applies a significant portion of the claimed EITC against taxpayers’ income taxes and their share of employment taxes. Moreover, many have come to rely on Uncle Sam’s refund to meet basic living expenses in light of wages in low paying jobs that are insufficient to keep families out of poverty, thus highlighting the individual’s interest in ensuring that adequate procedures are in place to protect against erroneous IRS determinations.

Reports in the past have raised questions about whether the IRS’s use of math error procedures puts taxpayers at undue risk. See for example a 2011 report from the Taxpayer Advocate Service called Expansion of Math Error Authority and Lack of Notice Clarity Create Unnecessary Burden and Jeopardize Taxpayer Rights. A few years ago GAO in looking at possible math error expansion commented that there are steps Congress and IRS can take to ensure that taxpayer rights are protected if in fact there is expanded use of math error procedures, such as requiring IRS to study and report on the impact of its math error adjustments.

I have not dug deep into the research on accuracy of the information that may trigger expanded summary assessment powers. However, if Congress goes in this direction and legislates expanded math error powers for IRS, and if IRS takes up the legislative power, I do hope that there is a careful review of the impact and accuracy of any adjustments.

What are some of the risks? Again, I am not in the trenches, but I worry that IRS’s compliance filters and external databases may produce false positives.

IRS for example has been wary of using its powers to rely on certain databases that it is authorized to use to make math error adjustments because there were concerns over the accuracy of the data. For example, the recent TIGTA report discusses how the IRS has had the legislative power to use information from the Federal Case Registry (FCR) [national database that “consists of records that identify children, custodial parties, noncustodial parents, and putative (assumed) parents along with other relevant information”] to make math error adjustments with respect to EITC. It has declined to do so because, as TIGTA reported, IRS analyzed the information included in the FCR and “found that, although the information in the registry provides information as to a child’s custodial/noncustodial parent, the database cannot be solely relied upon to systemically adjust a potentially erroneous EITC claim.”

If the administration is successful in getting its expanded summary assessment procedures, I hope that IRS carefully studies its impact (as it seems to have done with child support data), establishes clear guidelines for employees, and drafts simple understandable correspondence to allow taxpayers to unwind the assessment and get back in line for deficiency procedures. Some lower-income taxpayers may be less equipped to contest erroneous assessments; telephone wait times are long, and taxpayers who are lower-income are often more transient and less likely to receive correspondence. Add to the mix language and literacy obstacles and you have a potential recipe for real harm.

Congress’ continued use of the Internal Revenue Code to deliver social benefits combined with pressure on IRS to reduce error rates may lead to the IRS taking additional compliance steps without an ability to serve taxpayers who may be inadvertently caught in the compliance crosshairs. Even an agency intent on balancing competing interests must reflect the budget realities that are likely going to jeopardize those taxpayers least likely to be able to withstand erroneous IRS determinations.

It also seems somewhat unfair that on the one hand IRS is asking for more automatic assessment rights, but at the same time it fails to notify taxpayers or unwind the erroneous assessments it has made with respect to accuracy related penalties imposed on reversed refundable credits in excess of income tax liability; the so-called Rand issue we have discussed before. The Code as a social delivery mechanism for lower-income taxpayers may be an odd fit and may justify additional IRS powers such as summary assessment; yet when IRS makes mistakes and refuses to fix those errors or even tell taxpayers about those errors it seems unfair to require taxpayers to go through hoops to receive the same procedural protections everyone else is presumptively entitled to receive.