Refund checks, and other “news” inspired by the IRS

We welcome back guest blogger Bob Kamman. Today Bob delves into the “real-time” tax return statistics available during the filing season. Christine

You might remember February 27, 2019 as the day of a House committee hearing in Washington, or a summit meeting in Hanoi. But for millions of Americans, it was Jackpot Wednesday, when the Treasury made, in one day, seventeen percent of the Form 1040-related payments it will issue all filing season.

The news media have been fascinated more than usual this year by IRS refund checks. They simply disregard that in many cases they are not refunds, and in most cases they are not checks.

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So let’s agree that when we read about “refund checks,” we know what the journalists and IRS itself mean are largely electronic deposits to individual bank accounts, often representing credits claimed by people who pay no federal income tax.

For actual taxpayers, 2019 refund amounts may be more or less than those of previous years because of changes both to tax law, and to the way that wage and pension withholding is calculated. There is anecdotal evidence, and nothing else, that many are receiving smaller amounts.

But for those whose annual budget relies on the earned income credit or the child tax credit, the annual concern is whether IRS will question eligibility and sequester payments until it is sure that there is no fraud or mistake involved. That’s why the February 27 mass payout of $45 billion was good news for the poor and for those who help them with tax procedure.

Last filing season, IRS paid out about $265 billion in “refunds” through April 20. IRS will tell you once a week, how many returns it had processed cumulatively through the previous week. But Treasury will tell you by this afternoon, how much tax money it collected and how much in IRS payouts it made yesterday; so far this month; and to date this fiscal year. The data can be found online in the Daily Treasury Statement.

There is a lag between when IRS counts a refund return, and when Treasury makes the payment. That’s why the IRS weekly report for Friday, February 22, showed a huge increase in refunds, while the Treasury report for February 22 still showed a lag. The following week’s $45-billion payout explained the IRS calculation.

Treasury does not report the number of payments, just the amount. So we must rely on IRS for the “average refund” figure, which answers the question: “Of those who get refunds, what is the average amount?” This figure does not attempt to answer the question: “Of those who file returns, how many owe nothing or must pay?”

However, the March 1, 2019 IRS report shows that the number of refunds was 81.6% of the total returns processed. This was down slightly from 82.1% in the comparable report from March 2, 2018. Half a percentage point is not that much unless you filed one of the 650,000 or so returns which that number represents. Elections have been decided by smaller margins.

IRS does not tell us, until much later this year or next, how many returns showed no tax owed. Nor does it report the average payment with balance-due returns. What we do know from the Daily Treasury Statement is how much money was deposited into its account at the Federal Reserve. (This number also includes employment taxes not paid through the “Federal Tax Deposit” system, but those are mostly from small employers.)

Through March 7, the total “individual income and employment taxes, not withheld” for the fiscal year that began October 1 was $125.3 billion. The comparable amount for the previous year was $123.7 billion. But keep in mind that IRS offers a “file now, pay later” option for electronic filers. Taxpayers can request the balance due be withdrawn from their account on a certain date – for example, April 15. Last year, tax returns were due on Tuesday, April 17. The one-day count on that date for this category was $28.1 billion. The next three days, the checks continued falling out of the envelopes: $11.6 billion on Wednesday, $11.8 billion on Thursday, and $15.2 billion on Friday.

While the weekly IRS reports shed little light on collections, they raise a couple of interesting questions about tax administration. For example:

1) Where have all the practitioners gone?

Through March 1, 2019, the returns prepared by tax professionals had dropped by 1.7 million, or 5.8%. Meanwhile, self-prepared returns had increased by about 371,000. Does this mean the new 1040 forms, and higher standard deduction, have made do-it-yourself an option for more people? Are improvements in commercial software responsible? Are more kitchen-table preparers just refusing to sign off on their work because of the Form 8867 “due diligence checklist” interrogatories?

2) Why did direct-deposit become so popular?

Last year, about 84% of refunds were deposited directly to taxpayer accounts. So far this year, the rate is about 93%. Do Americans trust the financial-services industry more, or the Post Office less?

The Daily Treasury Statement provides some interesting information about tax-related issues, as well. For example:

  • Customs “and certain excise taxes” collected for the fiscal year through March 7 were $35.3 billion, up from $20.3 billion for the same period last year. What could the Treasury do with an extra $15 billion? Well, corporation income tax FTD receipts were down from $94.1 billion to $73.5 billion.
  • FTD’s for “withheld income and employment taxes” are holding steady at $1.108 trillion through March 7, about the same as $1.120 trillion last year.
  • The “Treasury Offset Program” collected nearly $3 million in February from tax refunds that would otherwise have been paid to people who owe federal, state or child-support debts. The amount for February 2018 was $2.4 million.
  • Social Security benefit payments increased from $72.35 billion in February 2018 to $76.83 billion in February 2019. Some of that 6.2% growth can be explained by the 2.8% “cost of living adjustment” this year.
  • “Business” tax refunds so far this fiscal year total $28.9 million, and more than half of them were paid by check, not direct deposit. The comparable amount for FY 2018 is $35.4 million.

How reliable are any of these reports? My confidence was somewhat shaken by the Daily Treasury Statement for Friday, March 8, which showed a negative $32 million for “IRS Tax Refunds Individual (EFT).” A footnote explained, “reported as a negative amount due to a return/reversal of $32 million.”

Well, I suppose if some economists can advocate a negative income tax, others can support a negative income tax refund.

The Supreme Court Clears the Way for a State Tax Refund to a Class of Federal Employees

Thanks to Carl Smith for bringing the case of Dawson v. Steager to my attention.  This case was decided by the Supreme Court on February 20 in a unanimous victory for a federal marshal who retired to West Virginia.  Even though the issue in the case concerns a refund of state taxes, it has a procedural aspect and deserves some attention.  I do not know if the decision has implications beyond West Virginia but knowing about the decision will allow you to check to see if any problems continue to exist with the laws in your state. 

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Mr. Dawson spent the bulk of his career as a federal marshal.  After retiring to West Virginia, he noticed that the state had a law that exempted from taxation the pensions of certain law enforcement officials who retired after working for the state of West Virginia.  It’s not clear how he knew about the Supreme Court precedent in this area or maybe he just felt the law was unfair and happened to bring the issue up across the dinner table from a tax lawyer with knowledge of the precedent but his case follows closely behind a Supreme Court case decided three decades ago, Davis v. Michigan Department of Treasury, 489 U.S. 803 (1989). 

 Justice Gorsuch, rendering the opinion for a unanimous court, framed the issue as follows: 

If you spent your career as a state law enforcement officer in West Virginia, you’re likely to be eligible for a generous tax exemption when you retire. But if you served in federal law enforcement, West Virginia will deny you the same benefit. The question we face is whether a State may discriminate against federal retirees in that way. 

The problem for West Virginia is that 30 years ago the Supreme Court faced a very similar issue concerning state employees in Michigan whose pensions were exempted by state statue there and retired federal employees living in Michigan whose pensions were not exempted.  In the Davis case the Supreme Court decided that the state could not exempt the pensions of its employees while taxing the pensions of federal employees because of 4 USC 111.  Describing that statute Justice Gorsuch stated:  

In that statute, the United States has consented to state taxation of the “pay or compensation” of “officer[s] or employee[s] of the United States,” but only if the “taxation does not discriminate against the officer or employee because of the source of the pay or compensation.” §111(a). 

He provided background for the adoption of section 111: 

Section 111 codifies a legal doctrine almost as old as the Nation. In McCulloch v. Maryland, 4 Wheat. 316 (1819), this Court invoked the Constitution’s Supremacy Clause to invalidate Maryland’s effort to levy a tax on the Bank of the United States. Chief Justice Marshall explained that “the power to tax involves the power to destroy,” and he reasoned that if States could tax the Bank they could “defeat” the federal legislative policy establishing it. Id., at 431–432. For the next few decades, this Court interpreted McCulloch “to bar most taxation by one sovereign of the employees of another.” Davis v. Michigan Dept. of Treasury, 489 U. S. 803, 810 (1989). In time, though, the Court softened its stance and upheld neutral income taxes—those that treated federal and state employees with an even hand. See Helvering v. Gerhardt, 304 U. S. 405 (1938); Graves v. New York ex rel. O’Keefe, 306 U. S. 466 (1939). So eventually the intergovernmental tax immunity doctrine came to be understood to bar only discriminatory taxes. It was this understanding that Congress “consciously . . . drew upon” when adopting §111 in 1939. Davis, 489 U. S., at 813. 

In Mr. Dawson’s case the trial court in West Virginia determined that his duties were essentially similar to the duties of the state law enforcement officers whose pensions were exempted.  Based on that determination the trial court held for Mr. Dawson applying the Davis precedent; however, the Supreme Court of West Virginia reversed finding that the state did not intend to discriminate against this class of retired federal employees but only intended to benefit certain state law enforcement retirees.  The Supreme Court was not buying what West Virginia was selling and reversed the decision of the state supreme court.  Read the opinion to see the other arguments made by the state but the Supreme Court rightly dismissed them with little effort.   

I have to think that this decision did not come as a big surprise in West Virginia.  It’s possible that other federal law enforcement officers who have retired to West Virginia will seek to show that their duties paralleled the duties of the individuals exempted by the state.  I do not know if the fight will now morph to see how close others may be to federal marshals or if the state will amend its statute to eliminate the exemption altogether.  Given the small number of individuals covered here and the types of work performed by those individuals, I doubt that the state will eliminate the exemption just because of this opinion. 

So, Mr. Dawson is going to get a refund of taxes he has paid; however, the procedural issue facing him and others who are similarly situated is how far back can he go?  In the Davis case federal retirees could not obtain the state taxes they had paid for every year but were limited to the years for which the refund statute remained open.  So, retired federal law enforcement officials in West Virginia who were not already clued into this case need to file their refund claims ASAP in order to preserve the right to obtain as many years of refunds as possible. 

After the Davis case came out, and not before it because his son was not paying attention to the issue, my father, a retired federal employee living in Virginia filed claims for all open years and eventually received a nice refund.  It took several years before he received his refund because of the high number of federal employees in Virginia and the strong efforts by Virginia to obtain a ruling from the Supreme Court that the Davis case did not apply in Virginia for a variety of reasons similar in spirit to the arguments made by West Virginia in the Dawson case. 

Information Letter Shows Need for Broader Guidance on Difficulty of Care Exclusion

At the Low-Income Taxpayer Clinic Grantee conference in December, I presented on the tax treatment of state payments for in-home care, alongside Daniel Kempland of Washington University and Sarah Lora of Legal Aid Services of Oregon. The topic will also be discussed at the Pro Bono and Tax Clinics Committee meeting during the ABA Tax Section’s May Meeting. So a related item in February 5th’s Tax Notes caught my eye. IRS Information Letter 2018-0034 responds to questions about “difficulty of care” payments under section 131(c). The letter must have gotten caught by the shutdown on its way out the door; its official release date is 12/28/18. 

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Difficulty of Care 

Section 131 promotes community care for severely disabled adults by excluding certain state payments from caregivers’ gross income. Specifically, section 131 excludes from gross income any “qualified foster care payments” and “difficulty of care” payments received by a foster care provider from a state or from a qualified foster care placement agency.  

There are multiple tax questions that arise in this context. When in-home care is provided to adults with disabilities, one question is whether the “difficulty of care” exclusion applies to any of the caregiver’s income. Difficulty of care payments are defined in 131(c) as

payments to individuals which are not [qualified foster care payments], and which— 

(A) are compensation for providing the additional care of a qualified foster individual which is— 

(i) required by reason of a physical, mental, or emotional handicap of such individual with respect to which the State has determined that there is a need for additional compensation, and 

(ii) provided in the home of the foster care provider, and 

(B) are designated by the payor as [difficulty of care payments] 

In health care, community or home care is contrasted with institutional care, e.g. in a nursing home. Government programs that pay for care at home allow people with disabilities to continue living in their communities, where they may enjoy greater “family relations, social contacts, work options, economic independence, educational advancement, and cultural enrichment.” (Olmstead v. L.C., 527 U.S. 581 (1999)) 

For caregivers who are family members or low-wage workers, the gross income exclusion can make a significant difference by freeing up funds for other living expenses. (At certain income levels caregivers may be better off with taxable income for the Earned Income Credit; the tax impact is not uniform.) Also, under the Affordable Care Act adults can qualify for Medicaid based on their modified AGI. Sec. 131 is not one of the modifications, so the difficulty of care exclusion gives some caregivers access to nearly free health care. This is a big deal. 

In several cases in the 1990s and 2000s, the Service challenged the applicability of section 131 to family members who cared for disabled relatives. The general theory was that a biological parent cannot be a “foster parent” within the meaning of the statute. However, in 2014 it reversed this position in Notice 2014-7. For unclear reasons, Notice 2014-7 only addresses one specific type of Medicaid waiver program. It also does not address FICA or FUTA treatment of qualifying payments. Since then, the IRS has not issued any regulations or other guidance under section 131 besides website FAQ and a PLR.  

Unfortunately, the wide variety of state programs, a lack of general reliable guidance from the IRS, and differing levels of state responsiveness to caregiver groups have led to disparate treatment of caregivers’ income depending on where they live. There is much more to say on this topic. For more on Notice 2014-7 and the FAQ, the National Health Law Program has an excellent summary written for health care advocates.

Information Letter 2018-0034  

On September 25, 2018, a requester wrote to the IRS on behalf of  

business clients who provide “Alzheimer, dementia, adult and family care and mental health and residential support services.” Specifically, you asked about the tax treatment of “social security personal care services funding” and “Medicaid waiver payments” received by these clients under a program by the “Division of Social Services via a network of oversight groups.” 

The IRS’s answer is quite short.

Notice 2014-7 specifically addresses payments made under § 1915(c) of the Social Security Act (Act), relating to Home and Community-Based Services waivers, and does not specifically address the tax treatment of other state Medicaid programs. Whether the Internal Revenue Service (IRS) will treat payments received under a state program other than a program under of § 1915(c) of the Act as difficulty of care payments depends on the nature of the payments and the purpose and design of the program. See Q&A1 at www.irs.gov/Individuals/Certain-Medicaid-Waiver-Payments-May-Be-Excludable-From-Income. 

If your clients would like the IRS to address whether payments described in your letter or other similar payments are excludible from gross income under § 131 of the Code, they may request a private letter ruling. Revenue Procedure 2018-1, 2018-1 I.R.B. 1, (and the first revenue procedure of each year), provides the procedures and fees for a taxpayer to request a private letter ruling. 

This response is likely frustrating for the requester, but it was to be expected.

An Information Letter “provides general statements of well-defined law without applying them to a specific set of facts.” There is no user fee to request one, but the advice given is not binding on the IRS, so it does not protect the taxpayer from audit or penalty. For binding and reliable advice, taxpayers must pay a hefty user fee to get a Private Letter Ruling (PLR). The parties who requested Information Letter 2018-0034 would likely need to pay $30,000 if they wanted a PLR. There are reduced fees for taxpayers with gross income less than $250,000 (a fee of $2,800) and for taxpayers with gross income less than $1 million (a fee of $7,600). One can understand why the requesters tried the free option first.  

In the wake of Notice 2014-7, the State of California paid for a PLR (PLR-127776-15), and it now has guidance on the applicability of section 131 to its four programs that support in-home care for disabled adults. But not every state or company can afford $30,000. For many individual caregivers, the reduced fee of $2,800 may as well be $30,000. Also, technically only the requester can rely on a PLR. The letter to the State of California posted by the IRS is redacted so the public cannot see which specific programs were at issue. If the state had not posted an unredacted version, California families would not be able to tell whether the guidance applied to their program.

The analysis in California’s PLR has uniform application to thousands of individual taxpayers. Yet in order to rely on it, each caregiver needs to request their own PLR. This is an inefficient system; the PLR is simply not the right tool for issues that have broad, relatively uniform application to third party taxpayers.

It is not clear why the 2014 guidance was so narrow in scope. While caregiver programs do vary by state, the IRS has identified principles in its FAQ that could provide a basis for broad national guidance. I hope the IRS will develop a regulation project or a broader guidance project on the difficulty of care exclusion. IRS and Treasury Department resources are stretched thin and have been for many years. However, the government should prioritize guidance for issues that have a deep impact on thousands of low-income taxpayers and that are not suitable for individual guidance through the PLR process.

Rethinking Free File

Today’s post is written by Frank DiPietro, LITC Director at Indiana Legal Services, Inc., and Sarah Taylor, a third-year law student at Indiana University Mauer School of Law. Frank and Sarah review the development of the Free File program and examine possible reasons for its extremely low take-up rate. As Frank and Sarah mention, the National Taxpayer Advocate’s 2018 Annual Report to Congress identifies deficits in the Free File program as the fourth most serious problem facing taxpayers.

One issue of concern to the NTA (and today’s guest bloggers) is the upselling of paid products. While the Memorandum of Understanding governing the Free File program has provisions designed to protect taxpayers from upselling, these protections are limited and they don’t apply to non-Free File preparers. To address this, the 2019 Purple Book includes a recommendation that Congress amend section 6713 so the Treasury Department could write regulations designating the “use of tax return information for certain questionable business practices or the sale of certain products with high abuse potential as civil violations without also making them criminal violations.” Christine

On January 28th, tax filing season officially began. It is estimated by the Internal Revenue Service (IRS) that over 150 million individual tax returns will be filed for tax year 2018. The majority of these tax returns could be prepared and filed electronically for free. According to the Free File, Inc., formally Free File Alliance (Alliance), an organization composed of the largest tax preparation software companies, 70% of taxpayers are eligible to prepare their tax returns and file electronically for free. However, it is estimated that only 3% of those eligible will utilize this service. This post evaluates some of the reasons the Free File program has failed to provide free online preparation and filing for the majority of taxpayers and suggests alternative approaches to addressing the tax preparation needs of the most vulnerable taxpayers.

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The IRS and the Free File Alliance (members include H&R Block, Intuit, Liberty Tax) entered into a memorandum of understanding (MOU) in 2002 to allow financially eligible taxpayers to prepare and electronically file tax returns using Free File Alliance members’ tax preparation software for free. Section 2004 of the IRS Restructuring and Reform Act of 1998 (RRA ’98) mandated that the IRS develop a return-free tax system under which eligible individuals could comply with their filing obligations without preparing a tax return for all returns filed after December 31, 2007. However, in a 2003 report to Congress, the Secretary of the Treasury stressed that such a system would not be feasible without a significant increase in electronic filing and may not actually reduce administrative costs or compliance burdens for low- to middle-income taxpayers. Instead of developing the return-free system Congress envisioned, under the direction and guidance of the Department of the Treasury and the Office of Management and Budget, the IRS entered into the Free File MOU with an intention to increase access to online tax preparation software and free electronic filing options. Yet, over 15 years later, almost all eligible taxpayers still pay tax preparation and electronic filing fees, use of the Free File program is actually declining, and the Secretary of the Treasury has not implemented the return-free mandate for eligible taxpayers or continued to annually update Congress on its development as required by RRA ’98.

The reasons behind the failure of the Free File program are numerous. The National Taxpayer Advocate, Nina Olson, once described it as “a bit like living in the Wild, Wild West.” Each member of the Alliance (currently there are 12) has its own specific eligibility requirements, and eligibility may not be determinable until the return is started or nearly completed. Examples of these varying requirements include active duty military status, differing income and age eligibility requirements, foreign address filing, or required associated tax forms or schedules. Although the IRS website attempts to address this concern with its Free File Software Lookup Tool, the tool is overinclusive in that it only screens for adjusted gross income, age, state of residency, military service, and a self-assessment of whether the taxpayer is eligible for the earned income tax credit. The result is that many Schedule C filers or filers with complicated dependency issues, for instance, may inadvertently think they are eligible for a free version of a specific software when in fact they are not.

Unfortunately, the only way for many filers to discover their ineligibility is to first create an online account with the software company, begin entering their data, and then see if their situation is covered. For instance, H&R Block currently does not support free Schedule C preparation online. However, a taxpayer would not discover this ineligibility until attempting to enter 1099-MISC or other self-employment income data, which could happen well into the process of completing the return. In these situations, the current MOU with the Alliance requires the software company, at this point, to re-direct the taxpayer back to the IRS’s Free File website. Additionally, the company may offer to let the taxpayer continue if he or she agrees to pay to the proposed fee (H&R Block starts at $49.99 for a federal return). Thus, a taxpayer in this situation must determine whether he or she wants to restart the entire process or pay the fee to continue.

Another reason most taxpayers do not use the Free File program is taxpayers may simply not know it exists. Although an Alliance spokesperson stated a lack of an Alliance advertising budget is partly to blame for this awareness issue, a recently filed tax return (available through GuideStar.org) for the nonprofit organization suggests its revenue is steadily increasing. Regardless, according to terms of the MOU, it is ultimately the responsibility of the IRS to advertise and promote the program, and this advertising budget has reportedly been eliminated.

Additionally, unless taxpayers begin their search for the appropriate Free File software from the IRS’s Free File website, which is accessible through the IRS’s homepage, they may never learn of the different software options. A simple “Google” search for “free file” only reveals some advertisements by some of the providers, and the IRS’s website only appears below those advertisements. This can result in taxpayers directly choosing to visit a provider’s page without ever visiting the IRS’s Free File website. If the taxpayer has chosen a provider that he is not eligible for, he may not know there are other options with different eligibility requirements.

Moreover, if the taxpayer has not accessed the provider’s website through the IRS Free File website, he may never land on the “Member Free File Landing Page.” This is a critical step in the functioning of the program because only these “landing pages” are regulated by the MOU. Thus, a software provider may advertise its free filing option in any way it chooses, or not at all, anywhere else on its website, and it is not required to notify taxpayers that they are eligible for a free return if those taxpayers have selected a purchased version of the software.

Finally, the providers are not required to screen Free File eligible taxpayers who enter their websites via any method other than the Member Free File Landing Page. For instance, the TurboTax website offers new users the option of letting the website choose which software is best for them based on taxpayers selecting certain criteria that are applicable to them. But, by choosing the first option “I want to maximize deductions and credits,” the taxpayer is already disqualified for a “Free Edition” version of the software. Even though TurboTax is the leading software provider of taxpayers who use the Free File program, it is not obligated to offer its Free File software anywhere except the Member Free File Landing Page. As another example, Liberty Tax does not advertise its associated Free File software – esmart tax – on its online filing homepage or associated links, nor does it appear on its comparison of its online tax filing products.

It should be apparent by now that the opportunities available and utilized by Free File members to steer otherwise eligible taxpayers into paid versions of their software or other products are numerous. Past practices by these software providers have been well documented and reported, and they include the use of “value add” links promoting products such as audit protection services, refund advance loans, and refund transfer services, charging to file corresponding state returns even if a free filing option is available for that state, and failing to advertise or link to the company’s free file edition from its homepage.

The Internal Revenue Service Advisory Council’s (IRSAC) most recent report addressed some of these concerns, including “the IRS’s deficient oversight and performance standards” for the program which “put vulnerable taxpayers at risk.” The Free File MOU was revised to address some of these concerns, including how members may communicate with previous free file users and how products are advertised on the Member Free File Landing Page and within the Free File version of the member’s software. Additionally, in the most recent Annual Report to Congress, the National Taxpayer Advocate addresses the underutilization and lack of oversight of the Free File program as a “most serious problem” facing taxpayers. The report notes, “With no effective goals, measures, or budget, the IRS’s Free File program in its current format has become an ineffective relic of early efforts to increase e-filing.” It urges the IRS to develop actionable goals and increase its oversight of the program or otherwise discontinue its use.

Given calls for increased federal oversight, why do the for-profit Alliance members continue to offer versions of their tax preparation and filing software for free? In short, it keeps the IRS out of the tax preparation business. The current non-compete agreement, which extends the terms of the MOU until October 31, 2021, ensures Alliance members that if individuals wish to self-prepare and electronically file their tax returns for free, they must use Alliance software. During fiscal year 2017, this amounted to approximately 53 million self-prepared and electronically filed tax returns, of which only 2.5 million were filed for free using the Free File program. Given the fact that a significant majority of eligible free file taxpayers still pay, how can the IRS expect these for-profit companies to direct most of their paying customers towards a free version of their software? Also, the current partnership with the IRS and Alliance does nothing to address the return-free mandate of 1998.

The privatization of tax return preparation has created an industry fundamentally at odds with the objectives of the IRS. While the IRS wants citizens to file and pay the correct amount of tax, the software industry wants to generate its own revenue, which does not necessarily entail ensuring legally correct tax returns. For instance, in an evaluation of the various Free File software options, the Taxpayer Advocate Service noted a lack of consistency in the amount of assistance the software versions provide to taxpayers, which can result in filing incorrect returns. Additionally, scholars such as Jay A. Soled and Kathleen DeLaney Thomas have raised concerns with other features of the software, such as displaying the running refund total or balance due throughout the return preparation. Although the Free File program requires members to guarantee their calculations, it does not require any level of assistance to assure taxpayers are claiming legally correct tax positions. This feature of continuously displaying the refund may make taxpayers more susceptible to filing incorrectly in an attempt to game the system.

Realizing the regressive costs of tax return preparation on low- and middle-income individuals, Congress directed the IRS to develop a system that would allow eligible individuals to comply with their filing obligations without the need for preparing a return. One such system implemented in Mexico provides pre-populated tax returns to its citizens – also known as a type of tax agency reconciliation filing system – using cloud-based technology provided by Microsoft’s Azure. The results were that taxpayers were able to complete their returns often in a matter of minutes, and the revenue agency experienced an increase in overall revenue collections by as much as fifteen percent in a single year. This example calls into question whether a complete reliance on industry software and services as the “financial gatekeepers of the income tax system” is the most efficient method for the IRS to administer electronic tax return preparation and filing.

However, in its final annual report to Congress on the matter, the Secretary of the Treasury stressed the need for tax simplification as a pre-requisite to implementation of an American return-free system. The Tax Cuts and Jobs Act of 2017 is expected to significantly reduce the number of individuals who itemize their deductions. Treasury Secretary Mnuchin touted the simplification of the “postcard” sized new IRS Form 1040 for tax year 2018. Could this be the necessary simplification the IRS requires to finally implement the return-free mandate?

Meanwhile, the future of the Free File program is currently undecided. Both houses of Congress have offered vastly different options going forward. The House of Representatives passed the Taxpayer First Act on December 20, 2018 and referred it to the Senate. This bill would have codified the Free File program to guarantee its perpetuity. Alternatively, Senator Elizabeth Warren, along with 11 co-sponsors, presented a drastically different direction for tax return preparation in the Tax Filing Simplification Act of 2017. This act would have prohibited future agreements from barring the IRS from developing its own preparation software and would have provided for optional government preparation of individual tax returns for eligible taxpayers. Neither bill has been voted on in the Senate.

For now, however, the Free File program remains the only option for taxpayers to self-prepare and electronically file a free tax return. Without an advertising budget, it also remains one of the IRS’s best kept secrets. In its current form, an overwhelming majority of taxpayers who are eligible for Free File will never use it.

NTA Issues 2018 Annual Report to Congress

Yesterday, National Taxpayer Advocate Nina Olson released the 2018 Annual Report to Congress. In an accompanying news release and in the report’s preface, she highlights the impact of the government shutdown on taxpayer rights, and also emphasizes the crucial need for IT modernization to replace antiquated systems at the IRS.

We will be highlighting issues of interest to readers in forthcoming posts. I look forward to reading the report.

Commenting on Regulations

A recent paper shines a light on the fascinating process of commenting on regulations. This year Tax Notes recognized the regulation writers at the IRS Office of Chief Counsel and the Treasury Department as the most significant tax players. Because of the 2017 legislation and the downsizing of Chief Counsel’s office due to the budget reductions over the past eight year, the attorneys there did a tremendous job under very difficult circumstances. They are very deserving of the recognition given by Tax Notes.

The recent paper, entitled “Beyond Notice-and-Comment: The Making of the § 199A Regulations” was written by Shu-Yi Oei of Boston College Law School and Leigh Osofsky of the University of North Carolina at Chapel Hill. The authors focus on the comments made to Treasury and the IRS regarding just one provision of the 2017 legislation. This provision resulted in a high volume of comments because of its nature. The paper not only looks at the volume and the substance of the comments but takes a hard look at the timing and how the timing of comments plays into the final product.

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Although I have limited experience in writing regulations and in commenting on regulations, the article was eye opening in its detail of the process of submissions. In addition to formal submission, the article also comments on the informal ways that parties can influence regulations through the scholarly and popular press, including blogs.

The authors spent a fair segment of the article chronicling the comments on section 199A made prior to the call for formal comments. They detail their effort to find the early comments. These comments do not have the same type of recordkeeping that attaches to formal comments made during the notice and comment period. Their efforts to find these comments is interesting in itself. Also interesting is the impact the early comments had on the proposed regulation. The authors note the number of times the proposed regulations refer to the comments receiving during the period prior to the call for notice and comments. This section had the greatest impact on me because it told me that players with early access have influence at the most critical time. Certainly, parties making comments on the proposed regulation have an influence but having an influence in the formation of the regulation seems even more meaningful.

Because low income taxpayers have no ability to hire lobbyists or attorneys to make their case during the process of creation of a regulation, the Pro Bono and Tax Clinic Committee of the ABA Tax Section tries to comment on legislation and other notices when the IRS puts out a call for comments. At some low income taxpayer clinics around the country, there is also an effort to comment. The article makes me wonder if we are missing an opportunity to more proactively provide our voice on the formation of rules because we generally wait for the IRS to make a request.

If you have ever participated in making comments or wondered about the process, this article will open your eyes. Thanks to the authors for great work.

Are Nonresident Aliens Exempt From the Loss of Personal Exemptions?

We welcome back guest blogger Robert G. Nassau. Professor Nassau teaches at Syracuse University College of Law and directs its low income taxpayer clinic. Today he discusses a little-known tax increase that the December 2017 tax law may cause for agricultural guest workers who pay taxes as non-US residents. As a former Vermont resident I take issue with Professor Nassau’s maple syrup supremacy claims, but on a professional level I had similar experiences working with Jamaican guest workers who pick Vermont’s apples and other crops, working long, hard hours far from home to support their families in Jamaica. Any tax increase will be sorely felt by these taxpayers. Christine

Until recently, I thought I had left International Tax in my side-view mirror (“rear-view mirror” is a cliché, and I was taught to avoid those).  Back when dinosaurs roamed the Earth and I was a Big Law Tax Associate, three of my “specialties” were Eurodollar transactions, foreign tax credit maximization, and FIRPTA (don’t bother to look it up), none of which was relevant when I moved to Little Law, but all of which validated my bona fides when Syracuse University College of Law was looking for an adjunct to teach International Tax.  Years later, SUCOL had sadly dropped International Tax, but happily added a Low Income Taxpayer Clinic, which I, as the devil they knew, got to direct.  And, as they say, the rest is history.  (So much for avoiding clichés.) 

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Last year, our Clinic formed a relationship with the Legal Aid Society of Mid-New York, through which LASMNY referred to us a number of foreign “temporary agricultural workers.” These gentlemen, mostly from Jamaica, validly reside in the United States and work in our agriculture industry.  They receive H-2A Visas and have Social Security Numbers.  Some come every year; some come for two or three months; and some come for as long as six or seven months.  (For those readers whose notion of New York is Broadway and Wall Street, please note that the Empire State is #2 nationally in apple production, #2 in cabbage (think sauerkraut), #3 in pumpkins and grapes (we have over 400 wineries), and #4 in sweet corn, squash and snap beans.  We are also #1 in the world, both quantitatively and qualitatively, in maple syrup.  Take that Justin Trudeau!)   

For tax purposes, these non-U.S. citizens are classified either as resident aliens, in which case their income tax treatment is nearly identical to that of a citizen, or nonresident aliens, in which case their income tax treatment is governed by special rules in Subchapter N of the Code (Section 861 et seq.).  The definitions of resident alien and nonresident alien are set forth in Section 7701(b), which, for the holder of an H-2A Visa, looks to a formula based on days of physical presence within the United States.  By way of simple example, someone in the U.S. for 90 days a year would always be a nonresident alien (“NRA”), whereas someone in the U.S. for 150 days a year would quickly become a resident alien.   

Among the special rules governing the tax treatment of NRAs are Sections 873(a) and (b), which limit an NRA’s allowable deductions.  For tax years prior to 2018, an NRA was not allowed a standard deduction, but was allowed a personal exemption, pursuant to Section 873(b)(3), which provided – and still provides:

The deduction for personal exemptions allowed by section 151, except that only one exemption shall be allowed under section 151 unless the taxpayer is a resident of a contiguous country or is a national of the United States. 

Now comes TCJA 2018, which, as we all know, was not the poster child for precise statutory draftsmanship, but did, for tax years 2018 through 2025, eliminate personal and dependent exemptions, replacing them with a larger standard deduction and expanded child tax credit.  Or at least it did this for U.S. citizens and resident aliens.  But what about NRAs?  

Congress’ method for eliminating personal exemptions was not to repeal Section 151, but rather, in Section 151(d)(5)(A), to make the “exemption amount” zero for 2018 through 2025.  But that’s not all Congress did.  Realizing that the concepts of “dependent” and “exemption amount” had repercussions throughout the Code, Congress also enacted Section 151(d)(5)(B), which provides:

For purposes of any other provision of this title, the reduction of the exemption amount to zero under subparagraph (A) shall not be taken into account in determining whether a deduction is allowed or allowable, or whether a taxpayer is entitled to a deduction, under this section. 

During 2018, the Treasury Department released some guidance regarding Section 151(d)(5)(B).  For example, in Notice 2018-70, it announced that the exemption amount should not be treated as zero for purposes of determining whether someone is one’s qualifying relative, which is relevant for the new partial child tax credit for taxpayers who do not have a qualifying child; and in Notice 2018-84, it announced similar principles for purposes of the premium tax credit and shared responsibility payment.   

But crickets regarding Section 873(b)(3) . . . until the recent publication of the tax forms used by NRAs: Form 1040NR and Form 1040NR-EZ.  In each of these Forms, the line once used for claiming personal exemptions is gone.  The IRS has not yet released Instructions for Form 1040NR, but it has for Form 1040NR-EZ, and there, under “What’s New” is the sentence: “For 2018, you cannot claim a personal exemption.” 

So, the IRS has clearly concluded that, notwithstanding Section 151(d)(5)(B), an NRA is no longer entitled to any personal exemptions.  But is that right?  The plain language of Section 151(d)(5)(B) states: “For purposes of any other provision of this title, the reduction of the exemption amount to zero under subparagraph (A) shall not be taken into account in determining whether a deduction is allowed or allowable or whether a taxpayer is entitled to a deduction, under this section” (emphasis added).  Certainly, Section 873(b)(3) is an “other provision of this title.”  Can’t one argue that the reduction of the exemption amount to zero is irrelevant for purposes of allowing an NRA to claim personal exemptions, because that reduction is “not to be taken into account in determining whether a deduction is allowed” for purposes of Section 873(b) (an “other provision”)? 

The only relevant Legislative History for Section 151(b)(5)(B) is found in a footnote in the TCJA Conference Report, which states:

The provision also clarifies that, for purposes of taxable years in which the personal exemption is reduced to zero, this should not alter the operation of those provisions of the Code which refer to a taxpayer allowed a deduction (or an individual with respect to whom a taxpayer is allowed a deduction) under section 151.

Section 873(b)(3) does not “refer” to a taxpayer allowed a deduction under Section 151; it actually allows the deduction.  But then, neither does the definition of qualifying relative in Section 152(d) refer to a taxpayer allowed a deduction under Section 151; rather, it refers to the exemption amount, and the Treasury Department has decided that is good enough for Section 151(d)(5)(B) purposes. 

I do not know the answer to this question of statutory interpretation, though I feel there is enough in Section 151(d)(5)(B), and not enough contrary anywhere else, to take a valid reporting position that an NRA is still entitled to a personal exemption.  But, I’m prepared to be proven wrong.   

It would, of course, have been nice if Congress had spoken more clearly on this issue by, perhaps, explicitly suspending Section 873(b)(3) for 2018 through 2025.  Or, in the alternative, Congress could have said it wanted NRAs to start paying tax from Dollar One.  Because the bottom line, if the new Form 1040NR is correct, is that a temporary agricultural worker making $7,000 during his 100 days in America in 2018 will now owe $700 in tax, rather than $285.  Is that really what Congress intended?  Is that really fair?

Systemic Problems in the CAF Unit with Form 2848 Processing for Academic LITCs

Tax Court update:  The Court’s website announces that all of the calendars scheduled for January 28 are cancelled.

Professor Patrick Thomas usually brings us posts on designated orders but today branches out to discuss an issue impacting all practitioners but of particular importance to academic clinics. All practitioners interact with the CAF unit at the IRS in order to submit their power of attorney (POA) forms. If the CAF unit does not operate efficiently, the problems there multiply downstream and cause significant frustration for the practitioner, the client and for other parts of the IRS. The failure of the CAF unit to operate efficiently can cause practitioners to resort to the phone lines and engage in lengthy calls to resolve issues and obtain transcripts in situations where the IRS and the practitioner would prefer to avoid that interaction.

While only a small portion of our readers will encounter the specific problems academic clinics encounter where the IRS breaks apart the required six page submission necessary when substituting a student onto a POA, many of the CAF unit problems cross all practice areas. The low income tax clinic community, and particularly its academic component, is engaging in a conversation with the CAF unit to seek improvements. We welcome others to join in that effort. If you read no other portion of Professor Thomas’ post today, look closely at the chart he created regarding correspondence. If you experience the same amazing problem of receiving correspondence two months after the date on the correspondence, let the IRS know about your frustration and help us work together with the IRS to improve this critical process. Keith

I’m willing to bet that all federal tax practitioners have, at one time or another, experienced problems with the IRS Centralized Authorization File (CAF) Unit. The CAF Unit processes Form 2848 (among other forms), which authorizes practitioners to receive information on behalf of their clients that is otherwise protected from disclosure under section 6103.

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The Form 2848 Filing and Rejection Processes

Filling out and filing Form 2848 is, in theory, relatively straightforward. List the client’s name, address, and taxpayer identification number. List the representative’s name, address, phone, fax, and CAF number. List the tax periods and tax types for which the client wishes to grant access. Have the client sign, date, and print their name. Sign and date the form yourself as the practitioner. Fax the form to the CAF Unit. Within a week or two, the practitioner should have access to the taxpayer’s information throughout the IRS, including transcripts through IRS e-Services.

But sometimes the Form 2848 is rejected. Much of the time, the CAF Unit properly rejects incomplete Forms 2848. Perhaps the taxpayer or practitioner missed one of the steps above; that’s certainly happened to me more times than I’d like to admit.

Other times, the CAF Unit rejects a perfectly valid Form 2848. In my prior clinical practice, the CAF Unit often did so because they believed our signature appeared to be a copy or stamped. (It was not.) (How exactly the CAF Unit can perceive a copied or stamped signature from a fax—which is, itself, a copy—I do not know). Illegibility of a name or date can also cause rejection, even if it’s the fax that causes the illegibility.

In either case, the CAF Unit sends a letter to the practitioner and the taxpayer, indicating the problem it sees in the Form 2848, with a copy of the offending Form 2848 and directions for correcting the issue.

When the Form 2848 is rejected for an invalid reason, numerous complications arise. First, the practitioner doesn’t have access to the taxpayer’s information on IRS e-Services, making initial investigation of the tax problem fairly difficult. Second, IRS telephone assistors may be unwilling to speak with the practitioner, even where the practitioner can fax a Form 2848 to them directly. And third, but not unimportantly, the taxpayer can become confused because the IRS sends the taxpayer a copy of the POA rejection notice. The notice comes to the taxpayer with no context. The taxpayer receives it at the same time the practitioner receives notice so that the practitioner has no opportunity to explain what is happening before the taxpayer receives the notice of rejection of the POA. This frequently causes the taxpayer to believe either that they or the practitioner have made a mistake before the IRS (even when none has occurred) or that the IRS will not allow the practitioner to represent them leaving them on their own to deal with the IRS. These issues are an annoyance for most practitioners, but ultimately are surmountable.

Special Concerns for Academic LITCs

Student Representatives and Substitution Procedures

These problems multiply for academic Low Income Taxpayer Clinics, especially those that change students frequently. Per IRM 4.11.55.2.1.1, law students in an LITC may represent taxpayers if, per IRM 21.3.7.8.5, the Taxpayer Advocate Service issues a special appearance authorization (“Authorization Letter”), which we must attach to a Form 2848 on which a student representative appears. Student representative authority lasts for 130 days—about the length of one semester.

Because students cycle in and out of the Clinic so frequently, most academic clinics opt to use the “substitution procedures” to change or add representatives. Per IRM 4.11.55.2.3.1.2, a practitioner may substitute authority to another representative or add another representative if the taxpayer grants this authority on the original Form 2848, Line 5a. Per IRM 21.3.7.8.5(6) an LITC Director may delegate authority to student representatives. The Director must sign the substitute Form 2848 on behalf of the taxpayer, attach a copy of the original Form 2848 that authorized the Director to add or substitute a representative, and attach a copy of the Authorization Letter. The student representative and Director also sign as the representatives.

It is not feasible for LITCs to have clients sign a new Form 2848 every 4 to 6 months. IRS cases take a long time to work. Our Clinic currently has about fifty active cases; obtaining signatures for all of these clients would take up much of the first few weeks of the clinical experience. As many clinicians can attest, our clients may not respond to requests for information or documentation as quickly as we’d like. Therefore, the substitution procedures provide an expedient solution to this problem, one which is explicitly recognized in the IRM.

Form 2848 Rejections in Academic LITCs – A Case Study

Because of the confluence of these unique requirements, academic clinics experience a high rejection rate for Form 2848. All clinicians understand this intuitively; however, this past semester, I conducted a systemic analysis of my clinic’s Form 2848 submissions and rejections. Of the approximately 50 Forms 2848 submitted, 10 were rejected. Three were rejected for valid reasons (one student representative forgot to sign the 2848; in the other two, the student representative sent last semester’s Authorization Letter, rather than the current semester).

Failure to Timely Notify

Before delving into the reasons for the improper rejections, the CAF Unit’s notification delays deserve mention. Our Clinic’s small survey indicates that the CAF Unit consistently fails to notify practitioners of an error until about two months from the date of faxing the Form 2848. While the CAF Unit usually dates its rejection letters soon after it receives the Form 2848, we do not actually receive those letters anywhere close to their dates. One letter took nearly three months to arrive. Below, I include a table of the rejection letters I used in our analysis.

Letter Number Date of Fax from Clinic Date of CAF Receipt Date of Letter Date of Clinic Receipt Taxpayer
1 9/7/2018 9/10/2018 9/21/2018 11/5/2018 Client A
2 9/6/2018 9/6/2018 9/18/2018 11/5/2018 Client B
3 9/5/2018 9/11/2018 9/18/2018 11/5/2018 Client C
4 9/5/2018 9/11/2018 9/18/2018 11/5/2018 Client C
5 9/10/2018 9/10/2018 9/21/2018 11/5/2018 Client D
6 8/23/2018 8/23/2018 9/6/2018 10/25/2018 Client E
7 8/23/2018 8/23/2018 9/6/2018 10/25/2018 Client F
8 7/24/2018 7/24/2018 8/8/2018 9/24/2018 Client G
9 9/5/2018 9/4/2018 9/20/2018 11/6/2018 Client H
10 9/7/2018 9/12/2018 9/21/2018 11/7/2018 Client I
11 9/7/2018 9/10/2018 10/9/2018 12/3/2018 Client J
12 9/7/2018 9/24/2018 10/1/2018 December 2018 Client A

* While there were 10 clients and 10 Forms 2848 submitted, there are 12 rejection letters from the CAF. This is due, as noted above, to rejection letters for both a substitute Form 2848 and original Form 2848 for the same client.

This notification delay hampers effective client representation in an academic LITC. Telephone assistors routinely do not communicate with student representatives if they are not properly entered in CAF—even if a student can fax them an appropriately executed Form 2848. Students may not discover this until they must take action on a case within the two months in which the CAF Unit has failed to appropriately process their Form 2848. Unless I am physically present in the Clinic to step in and take over the conversation—a pedagogical opportunity that I do not enjoy usurping from my students—students often can make no progress and taxpayer representation suffers.

Stated Reasons for Rejections

In each letter to the practitioner/taxpayer that rejects a Form 2848, the CAF Unit provides a block-text reason for rejection. Below, I provide a redacted version of a letter I sent to the CAF Unit director in December, detailing the inappropriate rejections we received, along with our responses thereto. The stated reasons for rejection often feel Kafkaesque; for example, numerous letters stated that the CAF Unit rejected the Form 2848 because it did not include an Authorization Letter. The CAF Unit then attached the Authorization Letter from our submission to the Form 2848 it rejected. More details appear below:

Letters 1 and 12 (Client A)

On September 7, 2018, Student Attorney 1 submitted a substitute Form 2848 for our client, Client A. This included (1) an original Form 2848 signed by Client A, which authorized myself and a former student attorney; (2) the student authorization letter from TAS for Fall 2018; and (3) a substitute Form 2848 that I signed on behalf of Client A, which substituted Student Attorney 1 as the representative. The former student attorney was a student in the Tax Clinic in Spring 2018, and Student Attorney 1 was a student in Fall 2018.

The CAF Unit sent two rejection letters. The first (Letter 1), received on November 5, contained the entire submitted package, but rejected the Form 2848 as noted below:

  • “You indicated you are delegating or substituting one representative for another. Please refer to Section 601.505(b)(2)(i), Statement of Procedural Rules, which you can find in Publication 216, Conference and Practice Requirements, for information on what you must send to us to make this delegation or substitution…”
  • “You indicated you want an existing power of attorney to remain in effect. Please attach to your form a copy of the power of attorney you want to remain active.”

The Clinic received another rejection letter in December 2018 regarding this client. This letter only contained the original Form 2848. In addition to the statement referring the Clinic to 26 CFR § 601.505(b)(2)(i), the letter stated:

  • “On Form 2848, you entered “student attorney” … as the designation in the Declaration of Representative. We need a copy of the Authorization for Student Tax Practice Letter the Taxpayer Advocate Service sent you that authorizes you to practice before the IRS.”

Response: The Form 2848 that the CAF Unit sent back to the Clinic was properly filed. Using the substitution authority granted on the original Form 2848 that the client signed, I substituted Student Attorney 1 for the former student representative. The Clinic attached the original Form 2848, which was signed by the client and both representatives. I signed the substitute Form 2848 as the taxpayer’s POA, and both I and the new student representative signed as representatives. Finally, the Clinic attached the student authorization letter from the LITC Program Office for Fall 2018.

We did not indicate that we wanted an existing POA to remain in effect. Had we so indicated, we would have checked Line 6 on the Form 2848. Line 6 is blank on the substitute Form 2848.

Letters 3 & 4 (Client C)

Student Attorney 2 submitted a substitute Form 2848 for Client C on September 5, 2018. This fax submission contained the following documents, in this order: (1) fax cover sheet, (2) the Fall 2018 student authorization letter, (3) a substitute Form 2848, and (4) an original Form 2848, signed by the client, which granted authority to substitute or add representatives.

The CAF Unit stated the following reason for rejection of the Form 2848 in both Letter 3 and Letter 4:

  • “On Form 2848, you entered “student attorney”… . We need a copy of the Authorization for Student Tax Practice letter the Taxpayer Advocate Service sent you that authorizes you to practice before the IRS.

Response: Letter 3 contains a substitute Form 2848 that I signed on behalf of the client as her POA on August 29, 2018. Letter 4 contains the original Form 2848 that the client signed on June 28, 2018, and which granted me authority to substitute or add representatives. It seems that the CAF Unit separated the original Form 2848 from the substitute Form 2848, along with misplacing the student authorization letter.

Letter 5 (Client D)

Student Attorney 3 submitted a substitute Form 2848 for Client D on September 10, 2018. This fax submission contained the following documents, in this order: (1) fax cover sheet, (2) page one of a substitute Form 2848, (3) student authorization letter, (4) page two of the substitute Form 2848, and (4) an original Form 2848.

The CAF Unit stated the following reason for rejection of the Form 2848:

  • “You indicated you want an existing power of attorney to remain in effect. Please attach to your form a copy of the power of attorney you want to remain active.”

Response: As with Letter 1, we did not indicate that we wanted an existing POA to remain in effect. Had we so indicated, we would have checked Line 6 on the Form 2848. Line 6 is blank on the substitute Form 2848.

The letter from the CAF Unit attached only the substitute Form 2848 and a student authorization letter. The packet did not contain the original Form 2848. It appears that the CAF Unit separated the substitute from the original Form 2848.

Letter 8 (Client G)

Student Attorney 4 submitted an original Form 2848 to the CAF Unit on July 24, 2018, which was signed by the client, Client G, along with a student authorization letter for Summer 2018.

The CAF Unit stated the following reason for rejection of the Form 2848:

  • “On Form 2848, you entered “student attorney”… . We need a copy of the Authorization for Student Tax Practice letter the Taxpayer Advocate Service sent you that authorizes you to practice before the IRS.

Response: The letter attached the original 2848, which was signed by the client and both representatives. It also attached the student authorization letter for summer 2018, dated May 9, 2018. This is the very document that the CAF Unit letter itself requests.

While the student authorization letter limits practice to a maximum of 130 days, 130 days from May 9, 2018 is September 16, 2018. Given that the CAF Unit received the Form 2848 on July 24, 2018 and issued this letter on August 8, 2018, there is no timeliness issue.

Letter 9 (Client H)

Student Attorney 4 sent a substitute Form 2848 for this client on September 5, 2018. This fax included (1) a fax cover sheet, (2) a substitute Form 2848 for Client H, which added the student attorney as a representative, and which I signed for the client (3) the Fall 2018 student authorization letter from TAS, and (4) the original Form 2848 signed by the client, which authorized me to substitute or add representatives.

The CAF Unit stated the following reason for rejection of the Form 2848:

  • “On Form 2848, you entered “student attorney”… . We need a copy of the Authorization for Student Tax Practice letter the Taxpayer Advocate Service sent you that authorizes you to practice before the IRS.

The CAF Unit’s letter attached the original 2848, which is signed by the client and both representatives. It does not include the student authorization letter. It seems that the CAF Unit separated the original Form 2848 from the substitute Form 2848, along with misplacing the student authorization letter.

Letters 10 and 11 (Clients I and J)

Student Attorney 1 faxed a substitute Form 2848 for these clients on September 7, 2018. These faxes included (1) a fax cover sheet, (2) a substitute Form 2848 for the client, which added the student attorney as a representative, and which I signed for the client (3) the Fall 2018 student authorization letter from TAS, and (4) the original Form 2848 signed by the client, which authorized me to substitute or add representatives.

For Letter 10, the CAF Unit stated the following reason for rejection of the Form 2848:

  • “A copy of your civil power of attorney, guardianship papers, or other legal documents that authorize you to sign Form 2848.”

For Letter 11, the CAF Unit stated the following reason for rejection of the Form 2848:

  • “You indicated you are delegating or substituting one representative for another. Please refer to Section 601.505(b)(2)(i), Statement of Procedural Rules, which you can find in Publication 216, Conference and Practice Requirements, for information on what you must send to us to make this delegation or substitution…”
  • “On Form 2848, you entered “student attorney”… . We need a copy of the Authorization for Student Tax Practice letter the Taxpayer Advocate Service sent you that authorizes you to practice before the IRS.

Additionally, our client delivered Letter 10 to us. The CAF Unit did not copy us on this Form 2848 rejection letter.

These letters also attach only the substitute Forms 2848; they did not attach our student authorization letter from TAS or original Form 2848. It seems that for both letters, the CAF Unit separated the original Form 2848 from the substitute Form 2848, along with misplacing the student authorization letter.

Actual Reasons for Rejections

These rejections appear to largely to result from two separate, but related reasons, which match the shared intuition among academic LITC directors. First, it appears that the CAF Unit separates the original Form 2848 from the substitute Form 2848 and treats them as separate submissions. It then rejects the substitute Form 2848 for lacking the original Form 2848 that grants authority to substitute, and then rejects the original Form 2848 if the prior student’s 130-day authority expired or was not attached (or else, the original Form 2848 is rejected as duplicative of one already accepted). Second, the CAF Unit often separates the substitute or original Form 2848 from the Student Authorization Letter, and rejects the submission for lack of an Authorization Letter.

Potential Solutions

The CAF Unit’s use of dated fax technology bears some responsibility for causing this problem. The ABA Tax Section facilitated a call in October 2018 between LITC directors and the CAF Unit director, who confirmed that the CAF Unit uses physical fax machines, rather than the e-fax process that every other IRS unit uses (at least, that I’ve worked with).

Understandably, the CAF Unit receives very many Forms 2848 each day, and has a limited workforce, and so our Forms 2848 can, quite literally, be lost in the shuffle. Most Form 2848 submissions are 2-3 pages long, consisting of the two pages of the Form 2848, plus a fax cover sheet. Our submissions are often six pages long, consisting of a substitute Form 2848, an original Form 2848, a student authorization letter, and a fax cover sheet. I suspect that a CAF Unit employee may pick up only the first two pages of a Form 2848 and then disregard the remainder.

Keith suggested during that call that the CAF Unit may wish to implement an e-fax solution to ensure that it receives the entire fax. I agree with that approach, and accordingly suggested this solution to the CAF Unit director. I also submitted a Systemic Advocacy Management System (SAMS) report in December, informing TAS of the above problems and proposing this as a solution. According to the systemic advocacy analyst that I spoke with, the issue is being assigned to an active task force within TAS. I encourage other academic clinicians to submit similar reports via SAMS so that the IRS has the data to support this problem’s existence.

Effect of Changes to IRS Transcripts 

Finally, recent changes to IRS Transcript procedures will further exacerbate the issues facing academic LITCs. Last fall, the Service announced that in January 2019, transcripts will no longer be faxed to practitioners who are not duly authorized in the CAF. Any transcripts would have to be mailed to the taxpayer’s last known address. Since then, the Service has stepped back somewhat from the position, allowing that if a telephone assistor could verify a Form 2848 over the phone, then the assistor could send transcripts to the practitioner’s secure mailbox on IRS e-Services. (The ABA Tax Section submitted commentary on these changes, which appear to have helped move the needle on this issue).

This is welcome news and ameliorates much of the concern for academic clinics. Nevertheless, students often encounter difficulties accessing IRS e-Services (for example, if they’ve never filed a federal income tax return or do not have loan or credit card information to verify identity).

Conclusion

Unwarranted Form 2848 rejections cause numerous negative consequences for low income taxpayers. The letters from the CAF Unit confuse our clients; they believe that some information is required of them or that their representative has erred. The rejections can also unnecessary delay the ability of student representatives to advocate on behalf of low income taxpayers, as IRS telephone assistors often refuse to speak with student representatives if their authority is not properly registered on the CAF. Additionally, forthcoming changes to transcript delivery will require that representatives are properly verified in CAF before issuing a transcript, with some helpful exceptions.

Finally, the CAF Unit takes, on average, two months to inform practitioners and/or taxpayers that a Form 2848 was rejected. The dates on the CAF Unit’s letters do not correspond to the actual dates of mailing. There is ordinarily a 45 day delay between the date on the letter and receipt in our Clinic. By the time students have faxed a Form 2848, learned of its rejection, and taken steps to fix it, the semester is essentially over. This problem can then repeat in subsequent semesters.

The CAF Unit should consider implementing an e-fax solution for its incoming correspondence. Because the largest source of error appears to be separation of the faxed pages, an e-fax solution would include the precise fax that the taxpayer intended to submit. I encourage the Service to consider these changes to improve taxpayer service and ensure taxpayers’ statutory right to representation before the IRS.