District Court Denies 6511(h) Financial Disability Claim

We have covered several cases in which the taxpayer sought to hold open the statute of limitations based on financial disability here, here, here, and here.  In Estate of Kirsch v. United States, the taxpayer’s estate loses, which is the norm for these cases, but does so with slightly different facts than the usual case.

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Ms. Kirsch passed away on September 16, 2016.  Her estate brought this action seeking to recover a refund of an overpayment for her 2008 return.  She did not file the 2008 return until June 5, 2015.  Her estate argued that the delay in filing was due to financial disability.  When she filed her 2008 return seeking a refund, she knew that she had missed the time for filing a refund absent the suspension caused by the financial disability provisions.  So, she submitted with the return two statements, one from her doctor and the other from her son.

The doctor’s statement provided:

Florence W. Kirsch is a patient known to me.

  1. [Ms.] Kirsch has been diagnosed with a cognitive mental impairment;
  2. It is my medical opinion that in addition to issues in remembering to take certain medications, her mental impairment has prevented [Ms.] Kirsch from managing certain aspects of her financial affairs;
  3. It is my medical opinion that the mental impairment has lasted for a continuous period of not less than twelve months and will continue to last indefinitely;
  4. While first diagnosed on January 3, 2012, [Ms.] Kirsch first began reporting issues with her memory in 2007. Given the progressive nature of cognitive mental impairments, [Ms.] Kirsch would have begun to experience adverse effects of her mental impairment first in 2007 and it became progressively worse.

 

The statement from her son, which it what makes this case somewhat unusual, involves a durable power of attorney granted to him.  In 2003, Ms. Kirsch created a durable power of attorney naming her husband as her agent and her son, Ken Kirsch, as the successor agent.  Mr. Kirsch, the husband, passed away on March 28, 2009, before the 2008 return was due.  Ken Kirsch did not exercise his authority under the power immediately.  He said in his statement that he lives on the West Coast, some distance from his mother in Massachusetts and did not realize that his assistance was required until about the time the refund claim was filed when her symptoms became more pronounced.

The statute requires that the taxpayer seeking to suspend the normal three year period for filing a refund claim show financial disability and defines that as someone who “is unable to manage [her] financial affairs by reason of a medically determinable physical or mental impairment of the individual which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months.”    You cannot be considered financially disabled unless “proof of the existence thereof is furnished in such form and manner as the secretary may require.”  The IRS has not gotten around to writing regulations on this issue yet but it issued Rev. Proc. 99-21 which sets out the requirements regarding a statement from a physician’s medical opinion.  The Rev. Proc. also sets out the requirement of a statement from the claimant that no person was authorized to act on the individual’s behalf during the period of impairment described in the doctor’s statement.  The second requirement exists because the statute also provides that a person is not financially disabled if “any other person is authorized to act on behalf of such individual in financial matters.”

The IRS argued that no suspension of the statute should occur in this case based on the inadequacy of the doctor’s statement and the existence of the durable power of attorney to the son.  The court agreed with both points.

The problem with the doctor’s statement her is the uncertainty of the starting point.  The statement says Mrs. Kirsch “would have begun” experiencing the effect of her mental impairment in 2007 but does not make a clear statement that in 2007 she could not manage her financial affairs.  The problem may stem in part from the doctor’s uncertainty about the progression of her illness.  The situation here mirrors other situations in which taxpayers have tried to claim financial disability.  The creation of the durable power of attorney several years before might suggest her family members saw a problem but, on the other hand, the delay in action by her son suggestions whatever impairment existed, he did not see it from afar.  The family tried to fix the problem by submitting another statement from the doctor.  The court acknowledged a willingness to receive a supplement statement citing Bowman v. Internal Revenue Serv., No. CIV-S-09-0167 MCE GGH PS, 2010 WL 178094 (E.D. Cal. Apr. 30, 2010); however, it found that the supplemental statement did not cure the defect because it still did not say exactly when she became financially disabled.  The physician continues to discuss her abilities based on an examination in 2012 where the issues existed and her statements that they began in 2007 but does not describe when the impairment crossed the line into financial disability.  Doing so would be a hard task for almost any physician.  The statement just talks about her cognitive abilities becoming worse over time.

Additionally, the Court finds that even if the doctor’s statement had contained satisfactory language, it still would not have found financial disability because of the power of attorney given to the son to assist her.  His letter states that he was authorized to assist her.  The son argued that the durable power of attorney did not become effective under Massachusetts law until “the designees became aware that they had such authorization.”  The Court holds that even if he is right about Massachusetts law he was authorized to act on his mom’s behalf during the time periods referenced in the doctor’s letter.  As such, the estate cannot meet the criteria in the statute.

I agree with the Court that the doctor’s letter leaves something to be desired in terms of clarity about exactly when Mrs. Kirsch became impaired.  The statute creates a very difficult task for a doctor how sees a patient only infrequently.  The doctor knows when the patient can no longer function with financial affairs (or can make a reasonably educated opinion based on observation) and knows that the inability did not turn on like a light switch but does not know exactly when the line was crossed.  It would seem that where the doctor makes a statement like the one here that other evidence should be allowed to more precisely pinpoint the timing when the line was crossed or a non-treating professional should be allowed to take the doctor’s opinion coupled with the other evidence and give a professional opinion.  Stating precisely when someone can no longer handle their financial affairs would not have been the goal of the doctor at the time of treatment and hindsight will not always allow for precision in this type of diagnosis.

The problem with the power of attorney exists whenever the person with the power is remote or not paying careful attention.  Not many children want to step in and declare their parent incompetent with financial affairs.  It is nice to create the power before the parent loses the capacity to grant it; however, deciding to exercise it requires a different calculus.  Where, as here, the son was remote it becomes even more difficult.  He was not seeing his mom on a regular basis apparently and would have had difficulty recognizing when her actions crossed over the line.  I see this with my own dad.  My sisters and I are in constant contact with him.  While at 91 his cognitive abilities are not what they once were, he is still quite financially able.  We see little things but we are watching closely.  Someone who is remote will have a very difficult time until a significant event occurs.

No one is arguing that the refund does not belong to the estate but for the statute of limitations on claiming it.  While the finality of a statute of limitation provides benefits, I question whether the benefits are great enough in these situations.  Do we have to make it so hard to recover monies lost because of cognitive decline?  I do not think we do.  I think we should be more compassionate.  This money is an overpayment of tax.  Someone who has spent a lifetime complying with the tax statutes should get a break when compliance becomes difficult because of cognitive decline.  We should err on the side of returning the money.

District Court Grounds NetJets’ Refund Suit

NetJets Large Aircraft v US, a recent case out of the Southen District of Ohio, [free link not available], illustrates some of the nooks and crannies that taxpayers must navigate in refund suits. Being right on the merits is not enough. Filing a timely claim for refund is a jurisdictional requirement, even when the circumstances are clear that the government knows that a taxpayer wants its money back. Most of the times when there is a dispute about timeliness of a claim the issue revolves around a taxpayer filing a claim too late. Sometimes, as in this case, a claim for refund can also be too early.

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IRS assessed NetJets and related entities air transportation excise taxes on a variety of fees that the fractional jet company collected from its customers. For a court to have jurisdiction over a refund suit, taxpayers must under the Flora rule fully pay the tax, file a refund claim, and if the Service denies the claim, file a refund suit in federal court. As a divisible tax, under Flora, NetJets only needed pay the amount of excise tax due on an individual transaction for each tax quarter at issue to gain standing to challenge the entirety of the assessment.

NetJets payed a representative amount of tax, and then filed a claim for refund on the amounts it paid.(As to whether an amount is considered representative to meet the Flora divisible payment exception see an earlier two-part guest post by Rachael Rubenstien here ). After the Service denied the claim, it filed a suit seeking 1) a refund of the amounts it paid and 2) an abatement of the unpaid amounts the IRS had assessed for other transactions that IRS felt were subject to the excise tax.

Here is where it got tricky for NetJets.

During the pendency of the suit, IRS applied overpayments from other periods to the unpaid assessments that were at issue in the refund suit.  NetJets won on the merits in the refund suit and then filed a motion to make sure that the district court’s final judgment included an order that directed the Service to pay back the tax that were originally listed in the complaint as well as the overpayments that the IRS had applied during the pendency of the suit.

For support for its motion, NetJets relied in part on Fed R Civ Proc 54(c), which states that ‘[e]very . . . final judgment [other than a default judgment] should grant the relief to which each party is entitled, even if the party has not demanded that relief in its pleadings.'”

The Service disagreed, and in opposing the motion argued that the US had not waived sovereign immunity with respect to the overpayments it had applied to the unpaid assessments during the pendency of the refund suit. In particular, the government leaned on the jurisdictional requirement in Section 7422 that a tax refund suit cannot be brought until a claim has been filed and the rule in Section 6511(b)(2) that “no credit or refund shall be allowed or made after the expiration of the period of limitation prescribed in [Section 6511(a)] for the filing of a claim for credit or refund, unless a claim for credit or refund is filed by the taxpayer within such period.”

While the government agreed that NetJets had filed a refund claim, it filed its claim before the Service had applied the later overpayments to the assessments that were at issue in the case. According to the government, its earlier claim was not a claim with respect to the later amounts. The evidence in the record did not indicate that NetJets filed a formal claim for those other applied amounts; nor did it amend its pleadings to specifically allege a return of those funds. While the government agreed to abate the unpaid assessments, it would not refund any of the amounts that were applied to the assessment after NetJets filed its original refund claim because there was no separate claim filed with respect to those latter amounts.

The district court agreed with the government, looking primarily to the statutory language in Section 6511(b)(2). To get around that statute’s rather clear language that tethers the government issuing a refund to a taxpayer filing a claim, NetJets argued that a plain language approach to the issue failed to effectuate legislative intent (preventing the litigation of stale claims) and produced an absurd result. The court disagreed, initially noting that Section 6511(b)(2) had no exception for divisible taxes and that the broad language of the statute suggested perhaps an intent that was not so clear to discern.

As to the absurdity of requiring a taxpayer to file a separate claim when litigation was already pending, the court disagreed with NetJets:

Plaintiffs point to the apparent absurdity of filing a new refund claim when the Court has already determined that the underlying tax assessment cannot be collected. The application of § 6511(b)(2) in this case is, admittedly, tedious. But it is hardly absurd. Where the IRS retains overpayments and applies them toward a divisible tax liability for which a claim has already been filed, the taxpayer, to comply with § 6511(b)(2), must take a simple action: file a new refund claim. And contrary to Plaintiffs assertion, a refund claim is not only a “challenge [to] the lawfulness of an underlying tax assessment.” More mundanely, and as relevant here, a refund claim is a formal request to the IRS for the return of a taxpayer’s money. See 26 C.F.R. 301.6402-2. Filing a refund claim does not become a superfluous task simply because the lawfulness of the underlying assessment has already been determined.

Conclusion

This is a harsh result for NetJets but the opinion suggests that all is not lost. While it is too late to file claim now, the opinion states that the government “hinted” that previously NetJets may indeed have filed another formal claim for some of the amounts. Moreover, the opinion discusses that NetJets may have submitted informal refund claims, though there was insufficient evidence in the record on that point, and a party who files an informal claim must also perfect that informal claim with a formal claim in order for a court to have jurisdiction.

While NetJets may be able to salvage some of its refund the lesson of this case is clear: if litigating a divisible tax refund suit taxpayers should be on the lookout for IRS applying any overpayments to the dispute that is at issue in the suit. Even if the taxpayer wins on the merits, absent a specific refund claim for those amounts, taxpayers are vulnerable to the government’s argument that it has not waived sovereign immunity.

NetJets Large Aircraft v US, 119 AFTR2d 2017-1246 (SD Ohio 2017)

Taft v. Comm’r: Innocent Spouse Relief Generates a Refund

We welcome back frequent guest blogger Carl Smith who writes about an innocent spouse case in which the Tax Court granted relief under a subsection permitting the innocent taxpayer to obtain a return of money previously taken from her to satisfy the liability caused by her ex-spouse.  Because the IRS frequently defaults to granting relief in a way that prevents the innocent spouse from obtaining refunds, this case shows a path to a more complete victory.  Keith

A number of people have congratulated Keith for contributing to a victory last month for a taxpayer seeking a $1,500 refund under the innocent spouse provisions at section 6015See Taft v. Commissioner, T.C. Memo. 2017-66.  Keith and I had filed an amicus brief in the case on behalf of the Harvard Federal Tax Clinic.  In it, we agreed with pro bono Florida attorney Joe DiRuzzo and his firm that a regulation on which the IRS relied to deny the refund under subsection (f) (equitable relief) was invalid – though invalid for different reasons than articulated by Joe and his firm.  But, as noted in footnote 4 near the end of the opinion, Tax Court Judge Vasquez never had to discuss the regulation’s validity, since he found the refund authorized under subsection (b) (traditional relief), even though the taxpayer had also been nominally granted relief under subsection (c) (separation of liability relief), which does not allow for refunds.  So, really, Keith and I did not win this case.  Rather, the taxpayer, aided by Joe and his firm, did.

In any event, the Taft opinion provides a useful reminder of some of the rules on getting a refund under the innocent spouse provisions.  And a post on it may alert others who find themselves in this position to the regulation invalidity argument.

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The traditional way to bring a refund suit is to file an administrative claim, which, if not allowed, forms the basis of a suit for refund in district court or the Court of Federal Claims.  But, when Congress, in section 6015(e)(1)(A), also gave the Tax Court stand-alone jurisdiction to “determine the relief available to the individual under” section 6015, that included also determining whether a taxpayer was due a refund, even in the absence of predicate unpaid taxes.  Thus, Ms. Taft had her choice of bringing this refund action in any of three federal courts.

The pro se Ms. Taft first filed a Form 8857 seeking a refund under section 6015.  Note that she could not have used a Form 1040X to seek the refund, since the year involved, 2010, was one in which she had filed a joint return, and she did not want to file a joint amended return with the former husband that she had divorced in 2013.  The IRS treats a Form 8857 as a refund claim for purposes of the section 6511 statute of limitations.  Prop. Reg. § 1.6015-1(k)(4) (Nov. 19, 2015) (“Generally the filing of Form 8857, ‘Request for Innocent Spouse Relief,’ will be treated as the filing of a claim for credit or refund even if the requesting spouse does not specifically request a credit or refund.”).  Her refund request was timely because the IRS had taken about $1,500 of her reported overpayment on her 2012 return (filed in 2013) and applied it to fully pay the 2010 joint deficiency at issue.  She filed the Form 8857 less than two years after the overpayment was applied, so she qualified under the 2-years-from-payment refund statute of limitations in section 6511(a).

Since, by the time she filed the Form 8857, she was divorced, she was entitled to elect (c) (separation of liability) relief.  This led to the first complication, since relief under (b) and (f) can entitle a taxpayer to a refund, but relief under (c) cannot.  Section 6015(g)(3).  The reason why Congress made a refund under (c) unallowable is because it made relief under (c) so easy to obtain.

Relief under (c) applies to deficiencies when, at the time the Form 8857 is filed, the taxpayer is divorced, legally separated, or has been living apart from the taxpayer’s spouse for at least 12 months.  For relief under (c), a taxpayer merely elects to separate his or her liability from that of his or her spouse based on their respective contributions to causing the deficiency.  In this case, the deficiency was tax on about $4,500 of unreported dividends from stock Mr. Taft owned and that he had acquired as an employee of the supermarket chain, Publix.  Mr. Taft had worked for many years at Publix until he was fired in 2009.  Relief is available under (c) even where it would not be inequitable to hold the electing spouse liable (e.g., where he or she significantly benefited from the underpayment and would have no hardship in paying the amount).  The only way the IRS can deny relief under (c) is for it to prove (note the burden shift) that the taxpayer had actual knowledge of the item giving rise to the deficiency.  The IRS concluded that Ms. Taft did not see the statements addressed to Mr. Taft that would have shown the exact amount of dividends that were unreported, so, in the notice of determination, the IRS conceded that Ms. Taft was entitled to relief under (c) because she did not have actual knowledge.  But, that relief under (c) did absolutely nothing for Ms. Taft, since she had (involuntarily) already fully paid the deficiency and was only seeking a refund, which could not be granted under (c).

The IRS then went on to deny Ms. Taft the refund under (b).  Under (b), relief is only available in the case of deficiencies if, among other things, a taxpayer had no reason to know of the deficiency and it would be inequitable to hold the taxpayer liable for the deficiency.  The IRS argued that she should have known that there were unreported dividends from Publix because for many prior years she had signed joint returns that reported such dividends.  The IRS also argued that it would not be inequitable to hold Ms. Taft liable for the deficiency.

Relief under subsection (f) (including refunds) is available if only two conditions are met:  First, relief is “not available” under subsections (b) or (c).  Second, it would be inequitable to hold the taxpayer liable for the deficiency or underpayment.  Reg. § 1.6015-4(b) (which applies to relief under (f)), states:  “This section may not be used to circumvent the limitation of § 1.6015-3(c)(1) (i.e., no refunds under § 1.6015-3) [i.e., the regulations under subsection (c)]. Therefore, relief is not available under this section to obtain a refund of liabilities already paid, for which the requesting spouse would otherwise qualify for relief under § 1.6015-3.”  This regulation was controversial before it was enacted in 2002.  It seems to prohibit a refund under (f) – even if the taxpayer can show that it would be inequitable for the taxpayer to be held liable for the deficiency – because of qualification for nonexistent relief under (c) (which does not require proof of inequity).  The IRS argued that since relief had been “available” to Ms. Taft under (c), she was not entitled to a refund attributable to the Publix dividend underreporting deficiency.  The IRS also argued that it was not inequitable to hold Ms. Taft liable, in any event.

Judge Vasquez held that, even though Ms. Taft could not get a refund under (c), she could get a refund under (b).  Mr. Taft had started an affair, which Ms. Taft discovered in 2011.  During 2010, Mr. Taft, unbeknownst to Ms. Taft, liquidated all the family savings (including the Publix stock) and spent them on himself and his girlfriend.  Wanting to conceal his affairs (both emotional and financial) from Ms. Taft, when it came time to prepare the 2010 joint Form 1040, he did so with the long-time accountant without her present and had the return e-filed.  That return revealed all the income from liquidating the family assets, though mistakenly left off the Publix dividends.  Mr. Taft did not let Ms. Taft see a copy of the return, though he assured her that it had been properly prepared by the long-time accountant.  Given all this secretiveness, Judge Vasquez held that Ms. Taft had no reason to know of the deficiency for purposes of that requirement for (b) relief.

Given the fact that Mr. Taft had wasted the family assets in his affair and so Ms. Taft did not benefit in the slightest from the Publix dividends and Ms. Taft’s lack of knowledge of the underreporting, Judge Vasquez also held that it would have been inequitable to hold Ms. Taft liable – another condition for (b) relief.

Since the judge granted Ms. Taft a refund under (b), he no longer had to reach the issue of refunds under (f) and the possible invalidity of the regulation under (f).

The Regulation’s Possible Invalidity

Joe DiRuzzo took on the Taft case pro bono at a Tax Court calendar call.  It was his first innocent spouse case, so, knowing I was experienced in this area, he gave me a call about it later that day.  We both were worried that the judge might find that Ms. Taft should have known about the unreported Publix dividends based on the prior-year reporting of similar dividends.  In that event, Ms. Taft could not get relief under (b), and the issue of relief under (f) (and the validity of the regulation under (f) possibly prohibiting a refund) would be squarely presented.

Despite the small amount involved in the case, Joe asked the court for permission to do post-trial briefs.  And he then immediately did a FOIA request of the IRS for all comments submitted on the proposed regulations that were finalized in 2002.  Finding a few comments objecting to the proposed (f) refund regulation limitation and not feeling the IRS had adequately responded to those comments, in his brief in Taft, Joe challenged the validity of the regulation under the Administrative Procedure Act.  He made the same argument that had recently been successful in Altera Corp. v. Commissioner, 145 T.C. 91 (2015) (currently on appeal in the Ninth Circuit):  that the IRS had not sufficiently responded to the comments or provided a “reasoned explanation” for why it reached the result that it did under the standard set out in Motor Vehicle Mfrs. Ass’n of the U.S. v. State Farm Mut. Auto Ins. Co., 463 U.S. 29 (1983).

Keith and I then got permission from the court to weigh in as amicus, arguing in our brief in Taft that the regulation was invalid under the tests of Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984).  We argued that the regulation added a limitation on getting a refund under (f) that was not in the statute – i.e., preventing circumvention of the no refund rule of subsection (c).  We pointed out that there could be no circumvention because a refund under (f) was not automatic, since, under (f), one had to prove inequity (something that was irrelevant under (c)).  We cited to the Tax Court’s opinions in Lantz v. Commissioner, 132 T.C. 131 (2009), revd. 607 F.3d 479 (7th Cir. 2010), and Hall v. Commissioner, 135 T.C. 374 (2010), which made similar points that the 2-year period for requesting (f) relief imposed by § 1.6015-5(b)(1) did not need to be imposed to prevent the circumvention of the 2-year periods provided by statute for (b) and (c) relief because (f) relief (by contrast) requires additional proof of a number of events that may occur years after the returns are filed.

In the end, the work that Joe DiRuzzo and his firm and that Keith and I did was irrelevant to the court’s decision to grant a refund in Taft under (b).  But, we know this situation occurs now and then.  Recently, at least one attorney with a section 6015 refund case contacted me with the same problem concerning refunds under the regulation under (f) where useless (c) relief was arguably “available”.  I have linked to the two briefs filed in the Taft case, just in case anyone might be helped in a future litigation by seeing the arguments we raised.  And readers should also know that Joe DiRuzzo has on a disk copies of all the comments made on the section 6015 regulations that were adopted in 2002, which is not only a resource for this issue under the (f) regulations, but for any other challenge to the 2002 regulations.

Finally, I would note that the IRS proposed new section 6015 regulations on November 19, 2015, that are still awaiting adoption.  The proposed regulations retain the current sentences quoted above, but add this:  “For purposes of determining whether the requesting spouse qualifies for relief under § 1.6015-3, the fact that a refund was barred by section 6015(g)(2) [res judicata] and paragraph (k)(2) of this section [no refunds under (c)] does not mean that the requesting spouse did not receive full relief.” Prop. Reg. § 1.6015-1(k)(3).  The IRS is trying to buttress its argument that even relief under (c) that is, as a practical matter, useless (because no refund is allowed under (c)), is relief that precludes a refund under (f).

 

Innocent Spouse Injured by Using the Wrong Form

The difference between innocent and injured spouse can create confusion.  That confusion gets illustrated in the case of Palomares v. Commissioner, T.C. Memo 2014-243 which will soon be argued before the 9th Circuit by a student at the tax clinic at Gonzaga Law School.  The case illustrates something that regularly happens in innocent spouse case – the innocent spouse’s refunds get offset by the IRS to satisfy the liability of the “liable” spouse – and getting them back can prove very difficult for the innocent spouse.

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For anyone unfamiliar with the innocent spouse and injured spouse provisions, I will briefly discuss the distinction between the two types of relief.  Innocent spouse relief allows a spouse who has filed a joint return to obtain relief from the joint and several liability that results from filing a joint return if the spouse requesting relief meets certain criteria set out in IRC 6015(b), (c) or (f).  Injured spouse relief allows a spouse who files a joint return to recover the portion of the refund resulting from that return which relates to the liability of the requesting spouse when the refund would otherwise go to satisfy a tax, or other liability subject to offset, owed solely by the other spouse.  While both forms of relief result from filing a joint return, the goal of each type of relief differs and the difference can create confusion for someone who does not regularly handle these types of cases.

Ms. Palomares got confused.  She needed innocent spouse relief but filed Form 8379 designed for use by injured spouses.  The IRS recognized her confusion and provided her with the correct form, Form 8857.  Upon receipt of the correct form, Ms. Palomares eventually filed it but the delay creates the issue in the case.  The IRS determined she deserved some relief as an innocent spouse; however, the delay in filing the correct form limited that relief.  After incurring the joint liability for which she sought innocent spouse relief, Ms. Palomares found that the IRS took the refunds she claimed in subsequent years in order to satisfy the unpaid liability on the joint return.  In seeking innocent spouse relief, she also wanted a return of the refunds the IRS had offset against the joint liability.  The issue here turns on the timing of her request for refund, which turns on whether the filing of the incorrect form nominally seeking injured spouse relief can meet the requirements of the informal claim doctrine allowing her request for relief to relate to the date of filing the injured spouse relief rather than the date of filing the correct form for innocent spouse relief.

In addition to the general confusion that exists between innocent and injured spouse relief, Ms. Palomares had the additional handicap that English was not her first language, and she spoke very little English.  The years at issue for the refund are 2005 through 2008.  By these years, she had separated from her husband, and she filed returns using the filing status of head of household.  As mentioned above, the IRS took the refunds reflected on these returns as it should using the power of offset granted in IRC 6502.  When she did not receive her refunds for 2006 and 2007, she sought assistance from the Northwest Justice legal clinic which helped her fill out the wrong form on July 1, 2008.  This clinic is not a low income taxpayer clinic but a clinic providing general legal assistance.  On September 24, 2008, the IRS sent her a letter with the correct form.  The Court found that “She did not call or otherwise contact respondent with respect to the September 24 letter.”

Ms. Palomares’s life intervened and kept her from focusing on her taxes for almost two years.  Finally, in August, 2010, she filed the Form 8857 seeking innocent spouse relief with the correct form and seeking a return of the refunds taken from her for four years.  Initially, the IRS took the position that the request came too late because she sent it more than two years after collection activity had begun; however, on May 14, 2012 the IRS reversed its position regarding the two year rule and requests for relief under IRC 6015(f).  The IRS granted her relief as an innocent spouse; however, it limited her refund to amounts paid within two years of the filing of the Form 8857 in 2010.  She appealed arguing that the relief should date from the submission of Form 8379 and that is the issue before the court in this case.

The Tax Court found that the Form 8379 did not meet the requirements for an informal claim.  The requirements for an informal claim do not come from a statute since this is an equitable remedy constructed by the courts to prevent an injustice.  As the Court notes, the sufficiency of an informal claim largely turns on the facts; however, courts generally look for certain markers in deciding whether to treat something other than a formal claim for refund as an adequate informal one.  The underlying principle concerns exhaustion of administrative remedy and whether the IRS had a chance to consider the request.  The more the taxpayer can show that the inappropriate document filed essentially apprised the IRS of what it needed to know in order to grant a refund, the more likely the taxpayer will succeed.

The Court states that a qualifying informal claim must satisfy three requirements.  It quoted from a non-precedential memo opinion to set out the requirements:

It has long been recognized that a writing which does not qualify as a formal refund claim nevertheless may toll the period of limitations applicable to refunds if (1) the writing is delivered to the Service before the expiration of the applicable period of limitations, (2) the writing in conjunction with its surrounding circumstances adequately notifies the Service that the taxpayer is claiming a refund and the basis therefor, and (3) either the Service waives the defect by considering the refund claim on its merits or the taxpayer subsequently perfects the informal refund claim by filing a formal refund claim before the Service rejects the informal refund claim. Jackson v. Commissioner, T.C. Memo 2002-44, slip op. at 10.

The Court found that the Form 8379 meet the first test citing to Kaffenberger v. United States, 314 F.3d 944 (8th Cir. 2003).  The Court found that the Form 8379 did not convey sufficient information to notify the IRS that Ms. Palomares sought relief from the liability created by the joint return with her then husband and sought a refund of amounts applied to the liability created by the joint return.  The Court determined that sending her the form for innocent spouse relief amounted to guess by the IRS that she might have intended to request that relief rather than an awareness that she wanted such relief.  The Form 8379 did not reference 1996, the year for which she wanted innocent spouse relief.  Because it did not reference that year, the IRS lacked sufficient clues to know exactly what she wanted and to make a determination based on her Form 8379 other than that the form she sent did not work for the circumstances of her situation since she had not filed a joint return in the years to which the form related.  So, the Court denied her claim for refund based on the date of filing the Form 8379.

Ms. Palomares presents sympathetic facts.  She clearly did not know the difference between innocent spouse and injured spouse, and neither did the clinic that assisted her with her divorce and that helped her file the wrong form.  The IRS gave her the correct form relatively quickly but she delayed filing that form because of things happening in her personal life.  She appears to deserve the refunds she seeks.    The case deserves watching as it heads into argument in the 9th Circuit because of the effort to expand the informal claim doctrine into an area of some confustion.  If the IRS loses, it will probably do so because it was nice and sent her the innocent spouse form.  The outcome turns on whether the IRS knew what she wanted to a degree that would have allowed it to make an innocent spouse determination at the time it received the injured spouse form or instead made an educated guess based on the unavailability of the relief requested on the form she submitted and the confusion surrounding these two similar but different forms of relief available to spouses.

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

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

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

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The Taxpayer.

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

The Crime Perpetrated.

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

The Crime Discovered.

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

The Failure of Traditional Remedies.

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

Commencement of the Refund Suit.

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

The Department of Justice Answers.

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

How It Played Out.

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

Lessons and Observations.

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

 

How Does the IRS Decide Which Amended Returns to Examine

A report of the Treasury Inspector General for Tax Administration (TIGTA) from May 16, 2016, entitled “Improvements are Necessary to Ensure That Individual Amended Returns with Claims for Refunds and Abatements of Taxes are Properly Reviewed” provides significant insight into the handling of refund claims by the IRS.  The report itself follows the typical TIGTA style of reviewing actions by the IRS and finding fault with those actions; however, in describing what the IRS does with amended returns, the reports offers a detailed view of what happens once the amended return arrives at the IRS.  For that reason, the report may interest readers who want to know more about that process.  In this post, I will talk about the process and also about why auditing amended returns may matter more than auditing original returns.

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Why the IRS Should Audit More Amended Returns

The report criticizes the IRS for accepting certain amended returns without auditing them or providing any explanation for making the decision not to audit.  The report acknowledges that some of the decisions may result from resource limitations but still decries the lack of documentation surrounding the decision.  It details the reasons for its concerns but does not discuss the collection criteria applicable to audits.  I see a link between this report and the report I discussed in a recent post concerning the requirement that the IRS make a collectability determination prior to starting an examination.

In the amended return context, the taxpayer has made the collectability determination for the IRS.  The IRS holds the taxpayer’s money, which the taxpayer wants back.  If the IRS audits this return and makes adjustments, the collection division never becomes involved.  For this reason alone, amended returns should receive more scrutiny in a world where collectability provides a finger on the decision making scale of which returns to examine.  The reasons for filing amended returns vary greatly and do not by any means involve bad motives.   I could even argue that because practitioners generally, and I think correctly, believe that filing an amended returns brings scrutiny to the return that filing an original return does not, that amended returns have a greater likelihood of accuracy than original returns.  Since I believe that the IRS should take collectability into account in making audit determinations, I think the IRS should audit a higher percentage of amended returns than original returns since the collectability factor will always support auditing the amended return, but, other factors matter as well and I am not arguing for the audit of all amended returns.

Other factors may override collectability but on that one factor, the decision is clear.  While not clearly articulated in the IRS guidance or in this report, this factor has always played a role in making the scrutiny of amended returns higher than that of original returns.  Just reading the process of review of amended returns, whether or not selected for audit, provides plenty of support for the conclusion that the IRS guards the money it already has more than it looks for money it might obtain through an audit.

The Process of Reviewing Amended Returns

The report gives a fairly detailed walk through of the procedures that the IRS uses to pipeline an amended return.  The report suggests that tax examiners manually review each claim.  That process obviously provides greater scrutiny than original returns receive.  Claims that the initial reviewers list as Category A go on to additional review and possible audit, while claims that avoid Category A in the initial screening apparently move forward for acceptance.  Figure 1 of the report provides a flow chart of the processing of amended returns that receive the Category A classification.  I.R.M. 4.4.4.5.3 provides guidance to the IRS employees processing amended returns.  The initial review also checks for timeliness of the claim which could result in a denial of the claim at the initial review if the claim is deemed untimely.

The report does not talk about how long after the filing of the amended return this initial screening takes place.  The IRS now has a handy track my amended return feature on its web site.  I have not yet used that feature to track a refund and do not have a sense of how quickly someone can obtain a refund.  The TIGTA report reads as though the refund could occur relatively quickly if the initial screeners do not put the amended return into Category A.

For amended returns falling into Category A, the IRS sends them to field or campus exam depending on the type of case.  The chart suggests that all Category A claims going to campus exam get audited, while cases going to field exam get another level of review once they reach the field.  The written report does not make this distinction.

For field exam cases, two additional levels of review occur after the initial screening has designated the case as Category A.  The case first goes through the Planning and Special Programs (PSP) office and then, potentially, to the field exam group.  PSP could survey the return if it determines that an audit of the amended return would not result in a material change.  In reviewing the amended return, PSP should also review the original return and other relevant case file material.  If PSP does not survey the case – survey meaning accept the amended return after the PSP review – then it goes to the group manager of the group assigned to the case.

The group manager gives the amended return another review, which includes the review done by PSP for risk analysis, but the group manager must also “plan, monitor, and direct the input of work to accomplish program priorities and effectively utilize resources….”  This means that the group manager’s decision to assign the amended return for examination not only includes a determination of the need for examination of the amended return, but balances that need against other workload priorities with the group.  The group manager could conclude that the risk analysis does support examination of the amended return but still survey the return because of other priority work within the group.

The report does not talk about time frames but they will enter into the equation.  The statute does not require the IRS to examine the amended return within any set time.  The IRS can simply sit on an amended return forever if it chooses to do so and need not act.  Of course, sitting on amended returns forever would be a bad practice for the IRS to adopt, but when a group manager considers priorities, the statute of limitations for making an assessment provides a bright line for decision making about auditing original returns, while the absence of such a bright line for amended returns slightly changes the equation.  The group manager will have internal guidance driving the decision but has a bit more leeway with amended returns.

The system established by the IRS provides three cut points for the amended return headed to field exam, i.e., those amended returns with larger and more complicated refund claims, to get sent for acceptance without an audit.  TIGTA’s concerns about the IRS process for surveying amended returns focuses on the cases getting sent for acceptance because the IRS did not adequately document that decision.  The further the case gets into the process, the greater the concern because the more likely that an audit of the amended return would result in adjustments.  Because the acceptance of an amended return means handing over money, TIGTA wants more documentation of the decision to accept the refund claim without an audit.

Timing of Refund and Choices between Original and Amended Returns

Of course, a very high percentage of original returns also involve handing over money, meaning that these returns are also refund claims, yet the system does not require the same type of review and documentation for handing over money as the result of an initial return.  When taxpayers file the initial return, the IRS, as with the amended return, has no statutory time pressure within which it must accept the return.  Mild pressure exists in both circumstances based on interest which will accrue.  Stronger pressure exists with original return based on social expectations that have developed over decades and systems the IRS has created to send back refunds as quickly as possible, but the statute does not require that the IRS race to refund money with original returns yet carefully scrutinize refund requests on amended returns.

With the PATH Act, Congress signaled that it wanted to slow down the payment of refunds on certain original returns and stop the race that happens at the opening of filing season.  The PATH Act concerns focus on refundable credits which cause the same concerns in many ways as amended returns.  Yet, the biggest part of the tax gap does not exist because of amended returns or refundable credits.  It exists with self-employed.  TIGTA’s concerns about documentation of amended returns being surveyed has a legitimate basis because of the likelihood that amended returns surveyed after making the cut to Category A probably contain mistakes.  It makes sense, if resources permit, for the IRS to internally explain why it allows the payment of a refund in those cases.  Except for the distinction concerning collection, it would also make sense to explain why the IRS does not examine original returns with an equal likelihood of adjustable mistakes, but the TIGTA report focuses only on amended returns and not original ones.

Wrongful Incarceration Claims

On December 11, 2016, I posted an 11th hour plea for assistance with a project to file refund claims for individuals who had received monetary awards resulting from wrongful incarceration.  A provision of the December 2015 PATH Act, amending IRC 139F, allowed the exclusion of qualifying payments for wrongful incarceration and provided a one-year window to claim federal tax refunds for those individuals who had previously received such an award and paid taxes on it before the passage of the exclusion.  Thank you to those who responded to the plea for assistance.

Kelley Miller, the leader from the group making the plea for assistance, the Exonerees Tax Assistance Network, told me that several PT readers stepped forward to help.  At the time of the plea the clock was about to run for making the refund requests.  In addition to trying to submit all of the refund claims before the deadline established by the PATH Act, an effort was underway to get an extension of time within which individuals with the refund possibility might make their requests.  Kelley also told me that “the extender legislation got through the House on the consent calendar but time ran out in the Senate—the bill got to Committee and never got out.  Ironic, sadly, as Senator Schumer was one of the original main supporters of the legislation.  There may be efforts to re-introduce before the end of the month.”

A recent case interpreting the legislation and an FAQ on the issue from the IRS give me the opportunity to discuss the issue further in case you have a client who has made one of these claims or you have a client who would like to make one of these claims should the time get extended.

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The IRS published an FAQ on June 16, 2016 explaining the circumstances in which someone would qualify for the refund. It explained that the exclusion applied to compensatory or statutory damages and restitution received by a wrongfully incarcerated individual in connection with the covered offense. It set out three requirements for qualification one of which must be met: 1) receipt by the taxpayer of a pardon, grant of clemency or grant of amnesty for the covered offense due to innocence of the charge; 2) reversal or vacation of the judgment of conviction for the covered offense and dismissal of the indictment, information, or other accusatory instrument; or 3) reversal or vacation of the covered offense and a finding of not guilty after a new trial. The legislation allowed for an exclusion from federal taxes for any payment received by the taxpayer even if received in a prior year which essentially opened up the statute of limitations for claiming refunds during the window created by Congress in the PATH Act. The FAQ also explains the way the taxpayer should make the claim, where it should be sent and the time limit for making the claim which was December 19, 2016. In addition, it states that an award received by a spouse, child, parent, or other individual for a derivative claim can also qualify for the exclusion. This last issue presented itself in the case of Elkins v. United States (N.D. Ohio December 16, 2016).

In Elkins, the district court heard an appeal from the bankruptcy court in which the wife and child of the individual incarcerated brought an action for a refund based on the derivative loss of consortium due to wrongful incarceration. The Circuit Court considering an earlier phase of the case provided a detailed discussion of the underlying facts concerning the wrongful incarceration. Elkins v. Summit County, Ohio, 614 F.3d 671 (6th Cir. 2010).  Because thinking about the way criminal cases can go wrong is important to understanding why excluding monetary awards to exonerees is important, I provide some of those details here.

In 1998, Mr. Elkins’ mother-in-law was raped and murdered in her home in Ohio.  Mr. Elkins’ six-year-old niece was also assaulted and raped.  Based on the six-year-old’s statement, the perpetrator looked like her uncle, Mr. Elkins, and the police arrested him.  Shortly afterward, Mr. Elkins was indicted on charges of aggravated murder, attempted aggravated murder, rape, and felonious assault.

While the Elkins investigation was ongoing, another man, Mr. Mann, was arrested.  During the arrest, Mr. Mann – who was drunk – asked an officer, “Why don’t you charge me with the Judy Johnson murder?”  The patrol offer wrote an interdepartmental memorandum, in compliance with his training and protocol, regarding Mr. Mann’s statement which was directed to the department in charge of the Elkins investigation.  However, the memorandum was not disclosed to Elkins or the prosecution, and was never produced.

At trial, the six-year-old identified Mr. Elkins as the perpetrator; however, Mr. Elkins presented substantial evidence that someone else committed the crime. Mr. Elkins’ then-wife testified that Mr. Elkins had been at home with her, forty miles away, at the time of the crime. Other witnesses testified that they had spent time with Mr. Elkins throughout the evening until just before the time the murder occurred.  Moreover, police officers recovered hairs from the scene that did not match Mr. Elkins’ DNA.  The officers were unable to find a match, and a jury convicted Mr. Elkins on all of the charges, sentencing him to life imprisonment without parole.

In 2002, the six-year-old (or, thirteen-year-old) recanted, yet the state did not reverse Mr. Elkins’ conviction.  Mr. Elkins began to suspect that Mr. Mann – who was in the same prison facility – was the person responsible for the murder, and was able to obtain a DNA sample from him.  Subsequent DNA testing revealed that Mr. Mann’s DNA matched the DNA found at the scene.  After an investigation, Mr. Elkins was released from prison, after having served seven years, Mr. Mann pled guilty to the murder, and the case against Mr. Elkins was dismissed.  The Summit County Court of Common Pleas found that Elkins was wrongfully imprisoned, and in a wrongful imprisonment settlement, the State of Ohio awarded him $1,075,000.

In the bankruptcy case in which the debtor’s claim arose, the IRS argued that Mr. Elkin’s wife and son did not qualify for a refund because they claim they sought to exclude from income and on which they based their claim for refund did not meet the definition of the statute because it was based on loss of consortium rather than wrongfully incarceration. The bankruptcy court agreed with the IRS, and the claimants appealed.

The claimants argued that the language of the statute applies to all civil damages and awards related to wrongful incarceration and not just those awards given to the individual wrongfully incarcerated. The district court upheld the determination of the bankruptcy court, finding that the statutory language which stated “in the case of any wrongfully incarcerated individual” defined the person to whom the statute applies and limits the special rule excluding the award from tax to the incarcerated individual and not to derivative claimants. The court reached this determination based on the plain language of the statute.

Alternatively, the claimants argued that because their proof, as derivative claimants, for damages under state law mirrored the proof required by the wrongfully incarcerated individual they should recover for that reason. Since state law did not distinguish between direct and derivative claimants, they argued that the tax law should not treat them differently. The district court pointed out that the tax result at issue here was a federal tax result stemming from a federal statute that had a distinct basis for existence from the underlying state based claim for damages. The court, therefore, rejected this argument as well. The claimants made two more similar arguments which the court rejected as well. The court noted that only one other case mentions IRC 139F. I do not know if the claimants will appeal the district court decision to the circuit.

Unless Congress does extend the statute, all of the claims have now been filed but it could take a couple of years to work out the litigation that will accompany the claims where the IRS issues a denial. Kelley’s group is already working on one case in which the claim was denied. They are waiting to see if the other claims filed will result in refunds or if additional litigation will be necessary. The group is also continuing to seek a statute extension because one year was not enough time for them to reach all of the exonerated individuals and advise them of their right to file a claim

Refund Loans on the Comeback, with a Twist

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

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

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

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

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

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