Tax Court Opinion in Ballard Highlights Fundamental Uncertainty of Its Jurisdiction to Rule on the IRS Power to Ban Taxpayers From Claiming Refundable Credits

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There are a few procedural provisions in the Code that are specially targeted to refundable credit claims. One is Section 32(k). Under Section 32(k), there is a two-year ban (a disallowance period) for a claim “for which there was a final determination” that the claim was due to a reckless or intentional disregard of rules or regulations (the ban is ten years if the there is a final determination of fraud). Congress imported this ban from non-tax benefits’ programs like food stamps, originally limiting it to earned income tax credit (EITC) but last year expanding its reach to include child tax credit and American Opportunity Tax Credit claims.

This past week in Ballard v Commissioner, a bench opinion in a small tax case, the Tax Court questioned its jurisdiction relating to the imposition of the two-year ban under Section 32(k). The issue of the court’s jurisdiction is one we have raised before and while Ballard is nonprecedential, the court and IRS alike will have to face the issues in future disputes.

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IRS audited Ballard and for good measure slapped an accuracy-related penalty and a two-year ban based on his recklessly claiming the EITC. The ban purported to preclude Ballard from claiming the EITC in 2014 and 2015.

In the bench opinion, the court found that Ballard was not entitled to treat the child as a qualifying child for purposes of the EITC or the CTC (though was able to treat him as a dependent) but was not subject to the accuracy-related penalty in part due to his use of a paid preparer and its finding that “nothing in the record suggested petitioner has any particular training or background in accounting or matters involving Federal income taxation.”

What caught my attention was the court’s discussion of the Tax Court’s jurisdiction to consider the ban in the current proceeding:

Respondent made that determination for the year in dispute here [2013], but the determination obviously has no consequence to the deficiency determined in the notice – the consequences of the determination take effect in years other than the year before us. Normally, in a deficiency case the Court is reluctant to make findings or rulings that have no tax consequences in the period or periods presently before it.

I have previously written that there is significant uncertainty as to how someone subject to a two or ten-year ban for recklessly or fraudulently claiming the EITC can challenge that determination in a deficiency proceeding. See Recent Tax Court Case Shows Challenges Administering Civil Penalties and the EITC Ban. The basic issue concerns whether in a deficiency proceeding the Tax Court has jurisdiction to effectively impose a potential penalty for a year that is separate from the year in which a taxpayer has filed a petition. As I discussed in my earlier post, “I do not believe the Tax Court has adequately explained how it can have jurisdiction over the merits of the ban relating to future years when there is no proposed deficiency for those future years. The Tax Court has previously side-stepped this issue, ….[a]nd it is likely that the 32(k) issues will continue to vex the Court until the IRS establishes the process, separate from the exam process, by which it makes the state of mind determination so central to 32(k)’s required findings.”

In another post, The Ban on Claiming the EITC: A Problematic Penalty, I elaborated:

The Tax Court is a court of limited jurisdiction. Section 6214(a) generally provides that the Tax Court has jurisdiction to redetermine the correct amount of the deficiency. Section 6214(b) provides in relevant part that the Tax Court in redetermining the correct amount of a deficiency for any taxable year “shall consider such facts with relation to taxes for other years…as may be necessary correctly to redetermine the amount of such deficiency, but in so doing shall have no jurisdiction to determine whether or not the tax for any other year…has been overpaid or underpaid.”

Carl Smith in the Problematic Penalty post offered his views as well:

Section 32(k) is not described as a penalty or addition to tax.  But, even if section 32(k) is a penalty, it is not contained within Chapter 68 dealing with additional amounts and penalties (Code secs. 6651-6751).  Section 6665 authorizes the deficiency procedures to apply to certain penalties imposed by Chapter 68, but that does not give the Tax Court jurisdiction to treat a section 32(k) determination as if it were a penalty imposed by Chapter 68.  Finally, there is no provision in the Code giving the Tax Court independent declaratory jurisdiction to review the IRS determination that 32(k) will apply to any EITC claim made in a later year.

As I describe in my prior posts, there are only two nonprecedential summary opinions where the Tax Court has discussed the merits of a ban, Baker v Commissioner and Garcia v Commissioner (I discuss Baker here and Garcia here). In both those cases there was no discussion of the jurisdictional issue Ballard raises. Ballard states that only nonprecedential cases exist on the issue though it also acknowledges the attractiveness as a policy matter of having the Tax Court decide the merits of the ban even though it may be outside its jurisdiction, a point I also made in my Problematic Penalty post, excerpted below:

Delaying the possibility of court review to a ban year places additional potential burdens on the court and taxpayers. Memories fade as time passes; it is harder to get documents that may be relevant, and witnesses may be less available. In addition, the uncertainty in outcome might chill lower-income taxpayers from claiming the EITC in a ban year, as the return will carry not only possible preparation costs but also the certainty that the EITC will be disallowed, triggering eligibility costs such as time and even legal fees (though most taxpayers will likely be pro se or represented by clinics, give the costs of representation relative to the amount in controversy). Moreover, the language that I have seen the IRS use in its correspondence in the conduct year suggests to taxpayers that they are prevented from even claiming the EITC in a ban year, which in and of itself may chill taxpayers from filing a return and getting the court review the IRS’s determination.

Ballard also highlights some practical problems with the ban:

In this case not only does the application of section 32(k) have no tax consequence to Petitioner’s Federal income tax liability for the year before us, the record does not reveal whether a finding or ruling on the point would have any Federal tax consequence in either 2014 or 2015. We cannot tell whether petitioner’s Federal income tax returns, if required, have been filed for those years– and point out that his return for 2015 is not yet even due. Assuming that one or both of those returns have been filed, we cannot determine if either return includes a Claim for an earned income credit.

In light of the above, in Ballard the court declined to rule on the ban though it did note that its finding that the accuracy-related penalties did not apply “strongly suggests” that the ban is not warranted.

Parting Thoughts

This opinion and my prior posts highlight the uncertainty surrounding the way an individual can challenge the IRS’s proposed ban under Section 32(k). Congress did not help in late 2015 by adding that the Child Tax Credit and American Opportunity Tax Credit can be subject to the ban and also cutting back further on taxpayer rights by allowing IRS to use math error procedures to disallow a credit that is claimed in the ban period. So, as Congress expands the credits potentially subject to the ban and also reduces taxpayer rights during the time the ban is in place (see my post Extenders Bill Gives IRS Additional Powers to Impose Penalties on Preparers and Disallow Refundable Credits on the 2015 legislative change), the Tax Court in Ballard highlights the possible limits on a taxpayer’s rights to get court review.

Ballard addresses the oddity that even if the ban is properly imposed a claimant would not potentially have notice of it until after he or she could file the return in later years. That also raises all sorts of fairness and potentially even due process issues. The ban itself is blunt; it may be of no effect anyway because in later years the claimant may not have been eligible to treat the child as a qualifying child (though with possible expansion of the childless EITC in the works it is possible that the impact could still be felt). At the same time, the ban may reach others who are not even parties to the dispute. Consider if someone who is subjected to the ban marries during the period that the ban is in effect. At that point it appears the taint of the ban reaches the spouse (with impact also potentially felt on minors who might now be eligible to be treated as qualifying children), as the EITC is not eligible to be claimed on MFS returns.

 

Leslie Book About Leslie Book

Professor Book is a Professor of Law at the Villanova University Charles Widger School of Law.

Comments

  1. Les’s post raises numerous and legitimate concerns. I therefore suggest that Congress repeal each refundable tax credit.

    Problems solved.

  2. Carl Smith says:

    Les,

    One of the things that surprises me is how rarely the section 32(k) issue has come up in Tax Court opinions or decisions. I know that when running the Cardozo clinic, I probably saw 10 new clients who walked in with letters they had received imposing the 32(k) penalty. But the 32(k) letter was not part of a notice of deficiency. In your post, you mention only three opinions that have ever discussed a proposed imposition of the section 32(k) ban: Garcia (a 2013 Summary Opinion), Baker (a 2014 Summary Opinion), and Ballard (a 2016 bench opinion issued by order in an S case). Tonight, I did a search of all orders that have been issued by the Tax Court since it started posting orders on June 17, 2011, and besides the order in Ballard, I found only one other order citation to section 32(k) — its being upheld as part of a decision in a case in which a taxpayer’s case was dismissed for lack of prosecution. The order of dismissal and decision was issued in a regular case by Judge Swift in Campbell in December 2011 (Docket No. 2287-11). The specific language in the order and decision relating to 32(k) reads: “That the two year ban for claiming the earned income tax credit, pursuant to I.R.C. § 32(K) (1) (B) (ii), is imposed as set forth in the notice of deficiency dated October 28, 2010.” There is no discussion of the Court’s authority for including this language in the decision.

    I wonder why some 32(k) sanctions are imposed by a simple letter and others (though apparently very few) are imposed in notices of deficiency?

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