Substantive Rights or Normative Policy? The TBOR’s contribution to federal tax compliance and enforcement

Today we welcome Guest Blogger Christina Thompson. Christina teaches at Michigan State and assists in running the low income taxpayer clinic there. Today she writes about a recent article published that addresses the importance of the Taxpayer Bill of Rights Congress passed in 2015. Her review of this article dovetails nicely with yesterday’s post on the possible uses of those rights in litigation. This is also an opportunity to point out that you can find a discussion of those rights in the National Taxpayer Advocate’s annual reports here, here, here and here. The NTA is hosting the third conference on Taxpayer Rights in Amsterdam in May. You can find out more about that conference here. Les and I will be joining the NTA and Judge Panuthos to talk about taxpayer rights at the upcoming Tax Court Judicial conference at the end of March. The ABA Tax Section is hosting panels on this topic in their upcoming February meeting next week. I suspect we will be talking about the impact of the passage of the rights for years to come. Keith

In Embracing the TBOR (Taxpayer Bill of Rights), Alice G. Abreu and Richard K. Greenstein grapple with the question of whether the TBOR adds anything to the tax code. Their answer is yes – but with qualifications. Instead, Abreu and Greenstein appear to be making a normative argument, i.e., that the TBOR enhances compliance by fostering taxpayer confidence and enhancing the demand for remedies.

read more...

The Value of the TBOR

The authors counter two criticisms of the TBOR: it does not introduce new rights, and does not provide remedies for violation of those rights. It is true that the TBOR does not purport to add rights to the code (or does it? That is one of the questions I will explore later in this post). It gathers taxpayers’ existing rights into one easy-to-understand document. The TBOR was originally championed by the Taxpayer Advocate Nina Olson. In her proposal to Congress, Ms. Olson argued that because the rights already existed elsewhere in the code, there should be no objection to gathering those rights together in a Bill of Rights. Abreu and Greenstein point out that while that argument likely led to a speedy codification, practitioners may have seen it as merely a reminder to the commissioner to do his job. But the authors of this article suggest there is more to it.

The authors give three reasons demonstrating the value of the TBOR: it supports voluntary compliance, it creates a normative basis for enforcement, and it may create new rights.

Supporting Voluntary Compliance

Nina Olson discussed how the TBOR supports voluntary compliance in her 2013 annual report to Congress:

“Taxpayer rights are central to voluntary compliance. If taxpayers believe they are treated, or can be treated, in an arbitrary and capricious manner, they will mistrust the tax system and be less likely to comply with the laws voluntarily. If taxpayers have confidence in the fairness and integrity of the tax system, they will be more likely to comply.”

Abreu and Greenstein list three ways the TBOR can enhance voluntary compliance. The first way is through taxpayer awareness of their rights (and not merely awareness that the rights exist, but also an awareness of how to use them), an essential ingredient in achieving better taxpayer outcomes.

The second way the TBOR enhances voluntary compliance is through the use of the language of “rights.” As the authors pointed out earlier, the TBOR does not create new rights – it is a compendium of rights that already exist in the code. These “rights” come from legal obligations imposed on the Treasury. The use of the word “rights” turns a Treasury obligation into a taxpayer’s entitlement – listing the rights in terms of a Bill of Rights likens the document to the Constitution’s Bill of Rights, giving the TBOR greater legitimacy.

Finally, the TBOR enhances voluntary compliance by allowing the taxpayer to demand procedural justice. It assures taxpayers that outcomes should be fair and just for both sides.

Creating A Normative Basis for Enforcement

After discussing how the TBOR can enhance voluntary compliance, Abreu and Greenstein examine how the rights create a normative basis for enforcement. Even though no remedies are provided, the very fact that the rights exist creates a more welcoming environment for the taxpayer to demand a remedy, i.e., enforcement of enumerated rights. And using the language of positive taxpayer rights, as opposed to mere duties of officials, emphasizes that those rights are connected to procedural protections (and ultimately, justice). Thus, linking the rights to notions of justice means that the failure to enforce a taxpayer right is a failure of justice itself.

Abreu and Greenstein argue that the lack of remedy now does not mean the lack of remedy in the future. Perhaps a future court will see fit to craft a remedy. Indeed, Facebook cited in a district court complaint the taxpayer’s right to appeal an IRS decision in an independent forum. Another taxpayer cites his right to challenge an IRS decision and be heard under §7803a)(3) in his reply to a supplemental brief in US Tax Court. Lawrence G. Graev & Lorna Graev v. Commissioner of Internal Revenue, Docket No. 30638-08 (2017). The authors do not suggest that a remedy is appropriate for every violation, but the rights’ codification allows a taxpayer to demand a remedy.

It is not that the authors see codification of these rights as meaningless or devoid of content, but rather that the TBOR may not add anything new. Their suggestion invites the reader to question whether the TBOR accomplishes what the authors suggest, or if barriers remain between taxpayers and full realization of their rights. And even if taxpayers are aware of their rights as such, one might also ask whether they have a sufficient understanding of their mechanical operation.

The suggestion that the TBOR’s contribution is strictly normative is a fine argument on its own. Indeed, there is reason to think that it is true – both in its description of taxpayer/government relationships and prescription for stronger tax compliance. But the authors appear to reach for more – i.e., assert that the TBOR adds substantive legal rights.

Creating New Rights

Abreu and Greenstein next tackle the idea that perhaps the TBOR does not simply restate rights found elsewhere in the code, but actually creates new rights. The authors argue that the answer depends on how the relationship between the taxpayer and the taxing authority is conceived. Here, the authors set up competing poles for understanding the TBOR’s value. On the one hand, they seem to suggest that the world of tax enforcement/compliance is Hegelian, which is to say, a world of mutual recognition by taxpayers and the taxing authority of their respective rights and obligations. In this world, positive rights are implied by governmental duties and need no separate/affirmative declaration.

At the other end of spectrum, they describe a distinctly American conception of tax compliance and enforcement. That is to say: a world in which the primary ingredient is distrust. In this world, there is no mutual recognition and no rights by implication: the individual requires procedural protection from the levies of government. The government poses a constant threat to individual liberty, and rights must exist to protect from government abuses of power. It is necessarily government over-against the individual, i.e., the taxing authority over-against the taxpayer. Rights are not left to contingency: they must be specifically and affirmatively articulated, in the absence of which the “duties” of the taxing authority are no more than ostensible.  The authors cite Supreme Court case of Richardson as an example: while a government official had the constitutional duty to keep a particular record, that duty did not give rise to a substantive right for the individual. United States v. Richardson, 418 U.S. 166 (1974). Thus, something more is needed to actually confer rights.

The First Amendment, for example, states in part “Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof.” The authors note the absence of a “right” to anything. No positive right is conferred by that language. It restricts the government’s actions – it is a negative obligation. Other rights in the Bill of Rights do not contain the word “right.” The Amendments need ‘something more’ – and Abreu and Greenstein argue the Ninth Amendment is that ‘something more.’ The Ninth Amendment states that the “enumeration in the Constitution of certain rights, shall not be construed to deny or disparage others reserved by the people.” The Ninth Amendment designates the previous eight amendments “rights.” It confers positive rights. Similarly, the TBOR seeks to codify certain rights as positive rights, i.e., not merely implied or based on a negative formulation, but instead actionable as such. In sum: the authors assert the value of the TBOR is that it supports voluntary compliance, creates a normative basis for enforcement, and may even create new rights.

Taxpayer Obligations

The authors conclude by noting that the adopted TBOR does not contain a list of taxpayer obligations. Ms. Olson’s original vision included not only rights but obligations for the taxpayer. The obligations included the obligation to be honest, cooperative, provide accurate and timely information and documents, keep records, and pay on time. Her reason for including them was simple: it put forth a partnership between the taxpayer, advisor, and tax administrator – working together in a balanced and constructive relationship. The obligations laid out taxpayers’ legal obligations but also remind them of what they ought to do. But these obligations did not make it into the final codified language and Abreu and Greenstein give two reasons.

The Failure to Internalize Sharing Norms 

The first reason is our failure to internalize sharing norms. Abreu and Greenstein believe that unlike other areas of law, the norms that define income taxation have not generally been internalized by taxpayers. “Internalizing” means that people develop a psychological need or motive to conform to a set of shared norms. Acting in accordance with those norms is “good,” and acting outside those norms is “bad,” and people follow social norms not only because they want to but because it is consistent with their values.

The authors argue that tax laws are not internalized – these laws seem external, and compliance feels coerced. Public legal norms of tax do not coincide with personal moral norms. The authors use the example of murder. Laws against murder are reinforced by an internalized moral norm against killing. Tax sharing norms are not internalized to the same extent. For example, most people would not voluntarily transfer property to the government if no legal obligation exists. The two social norms involved with tax laws are the sharing of resources (sharing wealth for the public good) and the sharing of private information (sharing information with the government for the collection of tax). Abreu and Greenstein believe Americans are ingrained with notions of private property and privacy, which prevent tax law norms from being internalized.

The Prejudice Against Affirmative Duties 

The second reason is a prejudice against affirmative duties. Put simply, Americans do not like being told what to do. As the authors point out, requiring a person to do something limits liberty more than prohibiting an individual from doing something. Thus, Americans’ sense of liberty militates against affirmative duties.

The authors suggest that the fact that the taxpayer obligations did not make it into the final bill portends the “contentious” relationship between the taxing authority and the taxpayer, which resonates with deep cultural, political, and legal traditions in the US. The focus on rights implies an imbalance in power and infringement of liberty.

In short: The authors link the lack of taxpayer obligations to integral American values.

Conclusion

In conclusion, Abreu and Greenstein believe Ms. Olson accomplished more than she realized. Whether you carry the paradigm of a “cooperative” or “contentious” relationship, the codified TBOR is helpful to both. With increased taxpayer awareness, the TBOR fosters voluntary compliance and may change the taxpayer’s view of the taxing system – in addition to facilitating an environment wherein taxpayers can more readily enforce their rights. Tax professionals should be aware of these rights, help inform the public of their existence and proper usage, and lead the charge in demanding remedies in court for their violation.

 

Housing Law May Provide a Model for Application of the Taxpayer Bill of Rights in Litigation

We welcome first time guest blogger Steve Sharpe, who works for the low-income taxpayer clinic covering Southwest Ohio, including Cincinnati. Steve also has significant experience in housing and consumer advocacy. It’s not unusual for an attorney at a low income tax clinic housed in a legal services organization to arrive in the tax clinic with the type of background Steve possesses rather than a solely tax background. Steve’s cross functional knowledge allows him to provide us with an interesting insight into the importance of the taxpayer bill of rights (TBOR).  

If you read the IRM, you quickly become aware that TBOR is making a difference in tax administration at the IRS in the way it now frames its discussion of many issues concerning taxpayers. You can also find mention of it in GAO reports and TIGTA reports. Since the IRS adoption of TBOR in June of 2014 and its codification in 2015, there has been a debate on whether TBOR will make a difference in case outcomes in litigation. Special Trial Judge Panuthos has mentioned it in a Tax Court case. Facebook mentions it in a complaint it filed in November, 2017, seeking to cause the IRS to allow it the opportunity to meet with Appeals. Maybe over time, other litigants will make more direct arguments about the protections afforded by TBOR and more court opinions will address those protections. Steve provides insight into how TBOR might follow a similar path to an aspirational type of law that exists in the housing arena and provide protections many may not have imagined when TBOR was passed. Keith

As the IRS enters into an intense period of rulemaking and implementation following the passage of the tax overhaul, advocates for taxpayers must be vigilant and ensure that any new rules or other IRS decisions protect our clients’ basic rights.

Advocates will naturally look to the Taxpayer Bill of Rights for guidance, and I suggest we evaluate whether Congress’s decision to codify the Taxpayer Bill of Rights into a statute impacts how the IRS must act. Looking at litigation under Congress’s longstanding national housing policy codified at 42 USC 1441 (hereinafter, the “National Housing Goals”) may be particularly useful and relevant. Under this frame, the Taxpayer Bill of Rights may provide more than general standards and may provide additional legal support for taxpayers challenging IRS decisions, including rulemaking, pursuant to the Administrative Procedure Act (“APA”).

read more...

It is important to note up front that I have not completed a broad survey of recent APA litigation or research into the legislative history for the Taxpayer Bill of Rights. I may be missing something very obvious. The goal of this post is to raise some ideas for people to explore. Obviously, significant research is needed before taking any action.

In 2015, Congress passed the Taxpayer Bill of Rights that were incorporated in 26 U.S.C. 7803(a)(3). The statute codifies basic concepts to ensure that people are treated fairly, pay only the amount of tax they owe, and have the ability address errors, among other things. On their own and divorced from specific procedures, they are important and provide fundamental ideas for the tax system to include.

The impact of the Taxpayer Bill of Rights, however, may reach well beyond overarching goals and should directly impact actions taken by the IRS. This is not an argument without precedent. Rather, the Taxpayer Bill of Rights shares a similar structure with the National Housing Goals, which have been the subject of housing litigation. According to the Taxpayer Bill of Rights,

In discharging his duties, the Commissioner shall ensure that employees of the Internal Revenue Service are familiar with and act in accord with taxpayer rights as afforded by other provisions of this title, including…

26 U.S.C. 7803(a)(3) (emphasis added). The statute then lists the particular rights that the Commissioner must protect when discharging its duties.

Similarly, the National Housing Goals provide directives for federal agencies addressing housing.

The Department of Housing and Urban Development, and any other departments or agencies of the Federal Government having powers, functions, or duties with respect to housing, shall exercise their powers, functions, and duties under this or any other law, consistently with the national housing policy declared by this Act and in such manner as will facilitate sustained progress in attaining the national housing objective hereby established . . .

42 U.S.C. 1441 (emphasis added). As with the Taxpayer Bill of Rights, the National Housing Goals then list specific objectives for housing agencies to attain.

The National Housing Goals have not simply served as lofty goals that lack practical meeting. Rather, Courts have looked to the National Housing Goals in evaluating whether a housing agency has acted appropriately. For example, in United States v. Winthrop Towers, 628 F.2d 1028 (7th Circuit 1980), HUD sued to foreclose on a low-income housing development. The owner of the development argued that the decision to foreclose was not completely committed to agency discretion. Even if there was no law to apply, the owner argued that the agency had to act consistent with National Housing Goals. The court agreed and stated:

In this case the law to be applied includes s 2 of the National Housing Act, 42            U.S.C. s 1441, which contains a detailed statement of national housing objectives, as well as 42 U.S.C. s 1441a, 42 U.S.C. s 1437 and 12 U.S.C. s 1715l (a). Section 1441 specifically provides that HUD shall exercise its powers and perform its duties “consistently with the national housing policy declared by this Act. . . .” This language compels our conclusion that HUD’s decision to foreclose may be reviewed to determine whether it is consistent with national housing objectives.

Id. at 1034-35 (emphasis added). Simply put, the National Housing Goals went beyond providing general standards – the goals impacted review of agency action. As the Seventh Circuit stated, “the language of s 1441 ‘is not precatory; HUD is obliged to follow these policies. Action taken without consideration of them, or in conflict with them, will not stand.’” Id. at 1035 (emphasis added) (quoting Commonwealth of Pennsylvania v. Lynn, 501 F.2d 848, 855 (D.C.Cir.1974)); see also Russell v. Landrieu, 621 F.2d 1037 (9th Cir. 1980); Lee v. Kemp, 731 F.Supp. 1101 (D.D.C. 1989).

The National Housing Goals have specifically limited agency action in rulemaking as well. In United States v. Garner, 767 F.2d 104 (5th Cir. 1985), borrowers with loans from the Farmers Home Administration (“FmHA”), a subdivision of the USDA, challenged the validity of a regulation that prevented the agency from refinancing its own loans. In reviewing whether the agency acted in an arbitrary and capricious manner, the Fifth Circuit noted that

[I]n enacting the section 502 loan program and its amendments, Congress generally intended the Secretary to exercise his refinancing authority in accordance with the goals of national housing policy as defined in the Act. For our purposes, the most important among these is providing government credit to responsible rural borrowers in jeopardy of losing their homes through no fault of their own. See 42 U.S.C. § 1441.”

Id. at 121. After considering the record, the Fifth Circuit held “the government has failed to demonstrate that regulation 7 C.F.R. § 1944.22(a), prohibiting the FmHA from refinancing its own loans, is a product of reasoned decision making.” Id. at 123.

Again, a substantial amount of research is necessary before advocates start raising these issues. That said, advocates should at least consider the impact of codifying the Taxpayer Bill of Rights on the IRS, and the National Housing Goals provide a useful first step.

 

Taxpayer Rights: Measuring IRS Performance

There is a lot to digest in the 2016 National Taxpayer Advocate Annual Report that was released earlier this month. One of the new parts of the 2016 report was the creation of a taxpayer rights assessment, which reviews IRS performance measures and data organized around the ten taxpayer rights embedded in the Taxpayer Bill of Rights. The general idea is to further cement the notions of taxpayer rights into the calculus of good tax administration.

read more...

As the report discusses, this is a work in progress, both in identifying what are the appropriate ways to illustrate IRS performance relating to taxpayer rights and in ensuring that IRS or an outside group can observe and report on those tasks.

The initial assessment compares and reports on FY 2015 and 2016 metrics, including the following:

  • percentage of phone calls to IRS answered,
  • the no change, agreed and non response rate for correspondence, field and office exams,
  • the numbers of e-filed and paper filed returns by preparers and taxpayers directly,
  • numbers of returns submitted through the Free File consortium, by VITA and other volunteer groups,
  • the average days needed to resolve EITC and other correspondence examinations,
  • the numbers of submitted and accepted collection alternatives like offers and installment agreements,
  • and the number of tax clinics and volunteers hours at those clinics.

There are lots of items identified where there was no data available, such as numbers of math error adjustments that were abated, the percentage of taxpayers who felt their issues were resolved after contacting IRS by phone, and satisfaction relating to a variety of Appeals functions.

A taxpayer rights assessment is a great idea. One of the common critiques of taxpayer rights provisions is that in some cases an agency that violates a taxpayer’s rights may not lead to the taxpayer enjoying a specific remedy. No doubt when Congress wants to get an agency’s attention it can be specific in providing a consequence, such as monetary damages or a shift in the burden of proof if a dispute finds its way in court.

Yet the absence of a remedy does not mean that there are no other ways to encourage good agency practice. My research in the ways that agencies interact with regulated parties outside the tax system suggests that softer notions like employee training and mission statements that specifically address aspirational conduct and respect for the rights of those who are regulated can have an impact on rights that agencies should aspire to protect. In addition, transparency surrounding agency performance can influence agency conduct. An annual taxpayer rights assessment has the potential for  encouraging the IRS to do the right thing in the absence of a specific statutory consequence for failing to do so.

I am working on a paper discussing the role of taxpayer rights and compliance. Part of my paper focuses on how IRS metrics on its audits justifiably key in on revenue protected and on important metrics like the percentage of taxpayers who fail to respond to IRS correspondence audits and agree with IRS proposed adjustments. Absent from the equation has been the percentage of taxpayers who following an adjustment understand why in fact their return as filed was incorrect or whether the taxpayer felt that she had a fair shake in presenting information to justify a tax return position or explain why the taxpayer may have taken a position on a return.

To be sure, measuring taxpayer reaction is costly, and IRS has lots on its plate. It seems to me that good administration includes trying to assess more methodically how IRS is doing around the rights that are reflected in the 2014 Taxpayer Bill of Rights. I look forward to this hopefully becoming a regular part of the annual reports and more importantly it becoming inculcated in how IRS thinks it is doing in administering the tax laws.

For our prior post on the 2016 Report generally as well as links to the different volumes of the Report see NTA Releases Annual Report.

Sidebar: Taxpayer Rights Conference

The Institute for Austrian and International Tax Law at WU (Vienna University of Economics and Business) is hosting the second international taxpayer rights conference in Vienna on March 13 and 14. The conference is convened by the National Taxpayer Advocate and is sponsored in part by Tax Analysts. The conference promises to bring together an eclectic group of scholars and tax administrators. Details on the conference can be found here.