Retroactive Math Error Notices May Be on the Horizon

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

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

Background 

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

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

Time Limits on Math Error Assessment 

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

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

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

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

Policy and Fairness Concerns 

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

The 2019 Objectives Report notes several other concerns: 

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

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

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

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

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

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

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

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

  • Access underlying documentation to demonstrate eligibility;  

  • Recall and explain relevant facts;  

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

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

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

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

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

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

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

Christine Speidel About Christine Speidel

Christine Speidel is Assistant Professor and Director of the Federal Tax Clinic at Villanova University Charles Widger School of Law. Prior to her appointment at Villanova she practiced law at Vermont Legal Aid, Inc. At Vermont Legal Aid Christine directed the Vermont Low-Income Taxpayer Clinic and was a staff attorney for Vermont Legal Aid's Office of the Health Care Advocate.

Comments

  1. John R. Dundon II, EA says:

    Great post, thank you Christine! Post refund math error assessments are going to be another nightmare.

  2. Norman Diamond says:

    “In it, the IRS concludes that it can lawfully make a math error assessment at any time within the assessment statute of limitations.”

    In the math or clerical error statute I did not see any deadline for issuing a notice (not assessment) of mathematical or clerical error.

    Also in the statute I don’t see any authority to make an administrative record of a mathematical or clerical error without issuing a notice. Even if the notice comes after the assessment statute of limitations, it enables taxpayer rights which they should have had 10 years ago: demand an abatement, get a Notice of Deficiency, petition Tax Court, summon the withholding agent to testify that the original Form 1099 was correct, and get credited for the overpayment.

    Though also to provide due process rights to some taxpayers, the deadline to demand abatement needs to have the same 60 day extension (i.e. total 120 days, in comparison to 150 days for petitioning Tax Court in a deficiency case) for lucky situtations when the taxpayer lives in a country that has good postal service, and if the IRS addresses the letter correctly and sends it by air mail and affixes sufficient postage.

    “Specifically, the PATH Act prohibited taxpayers from claiming certain credits unless the TINs used to qualify for the credits were issued prior to the due date of the return.”

    This is troublesome for at least two reasons.

    If the TIN is supposed to be an SSN, the SSA’s delay (and SSA’s destruction of records of the application) legally forces the taxpayer to pay more tax than the amount that should have been correct.

    If the TIN is supposed to be an ITIN, Form W-7 is supposed to accompany the return so even if the IRS issues an ITIN it’s after the due date of the return.

    Besides, the IRS can reject an ITIN application. If a taxpayer reports “ITIN: Rejected” on a subsequent return, the IRS and Tax Court don’t seem to mind, but the DOJ and other courts call the taxpayer frivolous. The DOJ used to boast of convicting someone who fabricated a social security number, but now they require it.

  3. I have had a client that have already received one of these TIN “Math Error Notices”. The one we got was clearly erroneous. These should go to examination first. To us and the client, it just seems like a cheap shot to try and get around the deficiency procedures.

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