Prior Opportunity and Receipt of the Notice of Deficiency

In Chinweze v. Commissioner, TC Memo 2022-56 the Tax Court finds that the petitioner received his statutory notice of deficiency even though he stated that he did not.  Proof of non-receipt is generally tricky.  Here, the Court did not need to find that he did not receive the notice in order to deny his request to have the merits of his liability considered during the Collection Due Process (CDP) case.  Mr. Chinweze presents a disorganized and unsympathetic case but the decision could make it tougher for others who make a similar argument of non-receipt.  Perhaps the case relies on the facts and does not set any precedent but it provides a cautionary tale for others seeking to argue non-receipt in order to gain access to the opportunity to argue the merits of their liability in a CDP case.

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Mr. Chinweze is a tax lawyer admitted to practice before the Tax Court.  He apparently practiced as a sole practitioner during the years at issue – 2008 to 2010.  He did not file his federal tax returns for those years.  I imagine that this makes the Tax Court a little nervous that one of its bar members falls into the non-filer category.  I have not seen it discipline a practitioner for non-filing in looking at prior disciplinary actions.  It does not take the same tack as the IRS Office of Professional Responsibility nor am I suggesting that it should; however, a Tax Court bar member who fails to file would generally not get a case off on the best footing from a sympathy perspective.

According to the Court, the returns were filed in 2012 without remittance reflecting small liabilities.  The IRS audited the returns proposing relatively substantial increases and certain penalties.  A notice of deficiency was sent on March 4, 2014, by certified mail to an address he subsequently used in his correspondence with Appeals.  Mr. Chinweze did not petition the Tax Court and the IRS assessed the proposed deficiencies.

The IRS sent a notice of intent to levy on March 6, 2015 at which time he owed over $160,000.  On March 17, 2015 it sent a second CDP notice after filing notice of federal tax lien.  He requested a CDP hearing with respect to the second CDP notice.  Even though the CDP notices were sent only 11 days apart, his failure to request a CDP hearing with respect to the first notice created a bar to the litigation of the merits of his tax liability because it served as a prior opportunity to litigate the merits – an opportunity he passed up.  So, even if he could conclusively prove that he did not receive the notice of deficiency, his effort to litigate the merits was never going to get off the ground.

Despite the fact that his merits argument lacked legs, the Settlement Officer (SO) considering his CDP case asked him to submit information supporting his claim that he did not owe the assessed amount.  Mr. Chinweze did not respond the the SO’s attempts to obtain information.  This also could provide a basis for cutting off his effort to litigate the merits of his liability.

After hearing nothing from Mr. Chinweze, the SO sent out the notice of determination and he filed a petition in Tax Court.  The case was remanded to insure proper verification of the assessments and this may have been when the penalties were dropped by the IRS probably because of Graev problem in the approval.  Because of the time from of the case the IRS was not paying careful attention to penalty approval at that time.

In the supplemental hearing the SO gave Mr. Chinweze four dates to comply with sending information.  He never responded.  He has not built a sympathetic case based on his education and professional background or his lack of responsiveness.  Certainly, that must color the decision of the Court.

The Court finds that the IRS records regarding the mailing of the notice of deficiency are not sufficiently complete to create a presumption of proper mailing.  The case provides a detailed list of cases on this issue.  The Court, however, points out that the Form 3877 still provides probative information upon which the Court could concluded the IRS did mail the notice to Mr. Chinweze.  Again the Court provides a detailed list of cases.

Mr. Chinweze’s only evidence is his statement he did not receive the notice.  The Court says:

We are unconvinced. Mr. Chinweze was an experienced tax lawyer and filed a CDP request setting forth specific challenges to the NFTL filing (i.e., the liability amount and mitigating factors). His failure to contest receipt of the notice of deficiency in his CDP request undermines the credibility of his subsequent claim, particularly in light of the compelling evidence of mailing and the accompanying presumption of delivery.

The Court cites several more cases.  If nothing else, this case provides a good roadmap of the challenges for others who want to argue non-receipt.  Undoubtedly, Mr. Chinweze’s unsympathetic background plays a role in this outcome but you can see that the hill is still a steep one to climb even for taxpayers who would invoke much more sympathy.

Having determined that he received the notice, the Court did not need to further explain that he missed the boat by not seeking a CDP hearing from the levy notice but the Court also explains in one paragraph why he loses his opportunity to raise the merits of the liability for a second reason.

If he wants to fight the merits now, he needs to come up with a fair amount of cash in order to full pay the liability allowing him to satisfy the Flora rule and file a claim for refund.  He can full pay any of the three years at issue and fight over that year.  To the extent the issues are the same in each of the years, he could fight and win one and then seek a claim for abatement.  Still, he has a lot of work ahead to fight the merits of this liability.

Reimagining Tax Administration: Social Programs Through the Tax Code – Workshop 4: Eligibility Rules for EITC/CTC and Other Family Benefit/Anti-Poverty Programs, Part 2

Prior blogs in our series giving an advance look at the Center for Taxpayer Rights’ Reimagining Tax Administration workshop briefs have covered the characteristics of the Earned Income Tax Credit/Advance Child Tax Credit population and the impact of administrative burden on that population’s ability to claim and receive those credits.  You can read the first two blogs here and here.

In Part 1 of this workshop’s coverage, we analyzed whether the eligibility rules for tax benefits targeted to low income households actually fit the characteristics of the target population and whether those rules caused some eligible children not to receive the benefits.  Today we explore what are the risks that might arise in using the tax system to deliver these benefits to that population, how other countries have tried to come up with approaches that minimize that risk, and why, even given the risks, we might still want to run such programs through the tax code. All of the workshop sessions are recorded, and the videos are available here on the Center’s website, along with slide decks and other materials.

Avoiding repayment risks in the Child Tax Credit: Lessons from the UK, Australia, New Zealand, and Canada

Presented by Kathleen Bryant, Legal Research Associate & Chye-Ching Huang, Executive Director, The Tax Law Center, New York University

Refundable credits, particularly those with an advance payment feature and eligibility determined retroactively, can pose a “repayment risk.”  Based on evidence from United Kingdom, Australia, and New Zealand, repayment risks can create program instability and financial hardship.  Taxpayers may be required to pay back some or all of the benefit received due to changes in income or family circumstances. While safe harbors can mitigate some of the financial harm, substantial repayment risk can undermine political and public support for the program.

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Generally, there are three approaches to minimizing repayment risk that have been employed internationally (or proposed in the United States). (More information on avoiding repayment risks internationally can be found here.)

  1. The government can require repayment with some protections in place for taxpayers. This is the case in the United Kingdom, Australia, New Zealand, and the United States (for 2021).

In the United Kingdom between 2003 to 2004 and 2005 to 2006, about one-third of all tax credit awards were overpaid, with income fluctuation accounting for 70% of the overpayments and delays in reporting changes in family circumstances accounting for about 30% of repayment obligations. Requiring repayment created financial hardship for families in the UK: as a result, over 25% of overpaid taxpayers owed the government more than £2,500 and 10% owed the government more than £5,000. Seventy-one percent of overpaid taxpayers reported that the obligation to repay the government caused financial difficulty, with some reporting that they went without basic needs so they could make payments back to the government.

In addition to causing financial hardship, credit repayment obligations in the UK discouraged taxpayers from claiming the credit in future years. Credit repayment debt affected the government as well, creating administrative instability with ineffective fixes. Further, while initially UK had large safe harbors to account for income variation from year to year, these safe harbors were reduced over time.

  1. The government can eliminate income-based repayment obligations but can require reconciliation when family circumstances change. This is the option adopted in Canada.

Unlike that in the UK, the Canadian child tax credit is based on prior year income, meaning that changes in circumstances during the current year do not create repayment obligations during that year. However, if a taxpayer fails to immediately report changes in family circumstances, the delay may cause steep repayment obligations and subsequent financial hardship.

  1. The government can create presumptive eligibility rules, implement a grace period for reporting updates, and allow for an income lookback period to protect against all repayment methods.

The repayment structure proposed by the House Ways & Means Committee in the Build Back Better Act provides another approach to repayment obligations. The proposal includes monthly eligibility, an income “lookback,” and presumptive eligibility with a grace period for reporting changes in income and family circumstances.  (Note that under the proposal, the new caregiver has the responsibility to apply for the monthly credit when the care-giving circumstances change.)  Similar to the UK, New Zealand, and Australia, this proposal includes a safe harbor provision that would cover some or all of the excess, meaning a qualifying taxpayer could be protected from repaying any CTC amount overpaid by the government.  However, the safe harbor only applies to changes in the number of qualifying children, and not to other changes such as change in filing status or income.

While repayment risks associated with refundable credits are a concern, the administrative remedies can a high burden on honest/accurate filers.  Refundable tax credits account for 10% of the tax gap, with EITC constituting only 6% of the tax gap and the CTC/Additional CTC comprising only 2%, yet they receive more negative media attention than other contributors, such as underreporting business income tax (25%). Further, as noted earlier, improper refundable credit payments are reported twice – first as part of the tax gap and then as improper payments. This imbalance in scrutiny leads to adoption of more complex rules which can, in turn, result in more mistakes and overclaims, thereby increasing repayment risk.

District of Columbia Earned Income Tax Credit

Presented by Elena Fowlkes, Program Manager, Office of the Taxpayer Advocate, DC Office of Tax and Revenue

The District of Columbia’s Earned Income Tax Credit (DC EITC) provides an alternate approach to refundable credits that the federal government can study to improve its administration of the EITC and other refundable credits. Although the DC EITC piggybacks off of the federal EITC, the program has been greatly expanded and will continue to grow in the future.

For families with qualifying children, the DC EITC started at 10% of the federal credit in 2001 and increased to 40% in 2009 and more than 75% beginning in 2022. The DC EITC for childless workers has been a particular focus of the DC Council, in response to the DC Tax Revision Commission’s 2014 recommendations, and is more generous than the federal credit.  Specifically, in 2015 the DC EITC not only increased the benefit for childless workers (100% of the federal credit as opposed to the prior 40%) but also raised the Adjusted Gross Income (AGI) threshold above the IRS maximum ($25,833 for DC versus $15,820 for IRS, with ongoing inflation adjustments), to account for the higher cost of living in the District of Columbia.  Further, the DC EITC includes a component for non-custodial parents.  In 2015, after the adoption of the changes for eligible childless workers and non-custodial parents, DC saw an increase of 10,000 claims, or nearly 27%.

The DC EITC is scheduled to expand even further in the coming years. Set at 70% of the federal EITC for Tax Year (TY) 2022, the credit is scheduled to increase to 85% for TY 2025 and 100% of the federal EITC by TY 2026. Additionally, beginning in 2022, 40% of the DC credit will be paid up-front, and the remainder of payments, if over $600, will be paid in eleven monthly installments. Beginning in 2023, all DC EITC refunds over $1,200, including those to childless workers, will be paid out in monthly installments. Recently, DC approved the use of Individual Taxpayer Identification Numbers (ITINs) for taxpayers claiming the DC EITC.

One downside to basing the DC EITC on the federal EITC is that it incorporates all the complexity housed in the federal rules. Moreover, if the IRS disallows the federal EITC as a result of a math error or an audit, DC law requires the DC taxpayer to file an amended return reflecting the IRS disallowance of the EITC.  Further, the DC Department of Revenue can independently audit the taxpayer’s DC return and disallow the DC credit.  Thus taxpayers navigating the complex credit eligibility rules can face a significant repayment risk, as well as the potential administrative burden of two audits.

Issues with Delivering Benefits Through the Tax Code

Presented by Cathy Livingston, Partner, Jones Day

As the foregoing presentations make clear, there are challenges with delivering family benefit and anti-poverty programs through the tax code.  For example:

  • Retrospective filing requirements limit the reach of these programs. Generally, most individuals report their income to the IRS once at the end of each year; thus, the agency must rely on outdated information on income, filing status, and the presence of qualifying children. Moreover, low income individuals are not required to file at all, so the IRS lacks even an annual snapshot of these individuals’ household information. Because these individuals may still be eligible for the credits, they will be forced into an affirmative interaction with the tax agency that would otherwise not be required.
  • Congress and the IRS view the IRS’s primary role as a revenue collector. Many existing definitions and processes reflect this role, which can be difficult to reconcile with benefit administration.
  • The IRS does not have real time information regarding income, marital status, employer health insurance coverage – information that is necessary for targeting benefits more closely to the time of need.
  • Even when a taxpayer may be eligible for a tax refund from a benefit program, the IRS may offset that refund against a past federal tax debt and federal law requires the IRS to offset the refund for certain other outstanding federal and state debts unless a specific exception applies.
  • Finally, there is the culture issue: a lack of resources (or a lack of willingness to dedicate resources) for education and outreach limits the IRS’ ability to reach the most vulnerable taxpayers. Further, the IRS views itself as an enforcement agency; the emphasis on improper payment reporting plays into the IRS enforcement culture.

Given all these challenges, why even attempt to administer social benefits through the tax code?  One answer is found in the U. S. Constitution, Article 1, Section 9, Clause 7, which states that no monies can be drawn on the Treasury except where appropriated.  The impact of this appropriation requirement for discretionary spending is that funds are appropriated on an annual basis and are subject to political winds.  Even with mandatory spending such as appropriated entitlements, they periodically expire (e.g., Children’s Health Insurance Program expired for 114 days between 2017-2018, and is now funded through FY 2023).

To complicate matters further, Congress at times may “disappropriate” funding for provisions it has previously passed.  This happened with the Risk Corridor Payments enacted by the Affordable Care Act (42 USC 18062), which provided for insurers’ net losses attributable to pricing risks to be paid out of program management appropriations.  In 2015, Congress passed a rider to the annual appropriations bill prohibiting use of program management appropriations for this purpose.  In Maine Community Health Options v. United States, 140 S.Ct. 1308 (2020), the U.S. Supreme Court acknowledged the validity of the rider but held that insurers could sue for payment under the Tucker Act and if successful, the obligations would be paid as a debt of the United States.

In recent years, there have been occasions when all or some of the annual appropriations bills have not been enacted by the start of the fiscal year, leading to what is commonly known as a “government shutdown.”  Under 31 USC 1324, certain tax refunds and tax credits are considered “permanent indefinite appropriations” and shall be paid out regardless of a lapse in annual appropriations.   These include credits included in the Internal Revenue Code before 1978 (such as the EITC), as well as the Child Tax Credit and the Premium Tax Credit.

Thus, one motivation for running social benefit programs through the Internal Revenue Code is to avoid the disruptions of the annual appropriations process or disappropriation of entitlement spending.

CONCLUSION: How to Balance the Trade-offs?

As currently structured the IRS is in a difficult position for administering social benefit programs: it is set up to collect the pennies owed.  It is uncomfortable with designing tax procedures that adopt a “rough justice” approach, whereby IRS can show flexibility in administration toward taxpayers who are acting in good faith and are tripped up by the complexity and rigidity of the law.  Moreover, the inflexibility and precise targeting of definitions in current law create repayment risk. 

One way to minimize complexity is to provide a universal benefit.  This approach eliminates gaming. Another approach is utilized in Australia, where the child benefit can be divided between two main carers, with a default set at 50-50, subject to a different division agreed to between the parties.  Such division has the additional benefit of encouraging both parents to be involved with the child.

Canada has adopted a different eligibility rule: the person with primary responsibility for the child’s care is eligible to receive the credit.  This approach maximizes access for families in flux rather than adopting rigid relationship and residency rules.  But it may also require more administrative capacity than the IRS currently allocates to credit administration as well as program navigators. Even without legislative reform, the IRS can learn from other federal agencies and other countries in order to effectively administer social programs.  It needs to increase its administrative capacity, train its staff in social welfare skills, and accept that because it does not have residence or carer information, it must tolerate some improper payments in order to successfully disburse the benefits to the eligible population. (For a discussion of the cultural changes necessary for the IRS to administer social benefit programs, see Workshop VI.)

RECOMMENDATIONS

  1. Eliminate the requirement to include overpayments of the Earned Income Credit and other family-based refundable credits from reporting as improper payments under the IPIA.  (These overpayments are already accounted for in tax gap calculations.)
  2. Absent making the child tax credit universal, Congress should consider adopting a “primary care giver” definition for purposes of determining eligibility for family tax benefits.  Congress should further consider allowing two main carers to receive the tax benefit, to be divided 50-50 unless otherwise agreed to.
  3. If an advance payment mechanism is enacted, Congress should include a reasonable safe harbor provision;  allow a grace period for change-of-circumstances reporting; provide a look-back or income averaging to account for income volatility; authorize the sharing of residency and caring data from state and local agencies; and provide funding for a cross-agency network of navigators that work with beneficiaries of all social benefit programs, including the EITC and CTC.

Reimagining Tax Administration: Social Programs Through the Tax Code – Workshop 4: Eligibility Rules for EITC/CTC and Other Family Benefit/Anti-Poverty Programs, Part I

Prior blogs in our series giving an advance look at the Center for Taxpayer Rights’ Reimagining Tax Administration workshop briefs have covered the characteristics of the Earned Income Tax Credit/Advance Child Tax Credit population and the impact of administrative burden on that population’s ability to claim and receive those credits.  You can read those blogs here and here.

Today’s blog analyzes whether the eligibility rules for tax benefits targeted to low income households actually fit the characteristics of the target population, and whether these eligibility rules leave benefits on the cutting room floor for some otherwise eligible children.  In Part 2 of this workshop brief (to be published tomorrow), we explore the risks that might arise in using the tax system to deliver these benefits to that population, how other countries have tried to come up with approaches that minimize that risk, and why, even given the risks, we might still want to run such programs through the tax code.

All of the workshop sessions are recorded, and the videos are available here on the Center’s website, along with slide decks and other materials. — Nina

Eligibility Rules: Background

Eligibility for the various family benefit and anti-poverty credits is dependent on several factors, including income (e.g., adjusted gross income or earned income), marital and tax filing status, citizenship and residency status, and the number and presence of eligible children. The four-part qualifying child test used for various tax benefit provisions considers the relationship of the child to the taxpayer, where the child resides throughout the year, the age of the child, and (in some cases) the amount of financial support given to the child by the taxpayer. The primary issue regarding tax credit eligibility is whether the adults receiving that benefit have a connection with the child; relationship and residency serve as proxies for determining who cares for and has responsibility for the child.

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Claiming Benefits for a Child

Presented by Elaine Maag, Principal Research Associate, Urban-Brookings Tax Policy Center

Forty percent of all child subsidies come from tax benefits, outstripping traditional benefit programs including Medicaid, Children’s Health Insurance Program (CHIP), and income security programs such as SSI, TANF, Social Security and SNAP.

Chart of federal expenditures on children by category and major programs, 2019.

Due to the difficulty that comes with delivering benefits directly to children, there are several ways in which agencies try to deliver benefits to adults most closely connected to the child:

  • Medicaid and the Children’s Health Insurance Program (CHIP) follows the tax filing relationship;
  • Social Security survivor benefits are provided to the legal representative or designated payee, which may be different from the Medicaid adult;
  • Temporary Assistance for Needy Families (TANF) gives benefits to families regardless of marital status, so the adult can be an unmarried partner living in the household with the child;
  • Supplemental Nutrition Assistance Program (SNAP) grants benefits to those who share meals with the child, which may be the TANF unit or the tax unit; and
  • the Child Tax Credit (CTC) adopts the qualifying child test applied to the dependency exemption (IRC § 151-152).  Unlike the EITC, the CTC/dependency exemption includes a support test.

These different eligibility tests raise the question, in awarding benefits, what criteria should policymakers care about so long as we know the child actually exists?  For example, one goal would be to minimize overlapping claims.  Going beyond the taxable unit so that the benefit can follow the child as the child moves throughout the year could increase duplicate claims, but if the definition is intuitive – e.g., by focusing on providing the benefit to the taxpayer who provides care for the child regardless of the taxpayer’s relationship to the child – overlapping may not be a significant issue.

The existing piecemeal system creates problems for both the applicants and agencies administering the benefits. Confusion arises when the benefit units don’t match.  For example, if an individual is denied benefits under one program’s eligibility rules, that person may be less likely to apply for benefits under another program despite being eligible. Conversely, an individual eligible for benefits under one program might incorrectly claim benefits another program. These mismatches create compliance costs for the agencies.  Further, requiring multiple agencies to determine eligibility for the same households increases administrative costs and applicant burden.

Although there are problems associated with having different eligibility rules for each program, there are also costs associated with creating a uniform eligibility test across all family benefit and anti-poverty programs. First, a uniform definition would create winners and losers – if an individual is ineligible for one program, that individual is ineligible for all programs. Second, while each of these programs is designed to reduce poverty and provide benefits to children, their methods and goals are different. A uniform definition might not coincide with each program’s individual goals.

As discussed in Workshop 2, the tax system’s current test for whether individuals can receive benefits on behalf of children does not adapt to the changing structure of the American family, and thus excludes children and families from receiving much-needed cash benefits. One potential area of focus for policy makers should be to try to determine with whom the child lives and deliver benefits to that household, which could bring a degree of uniformity between the various programs and reduce compliance and learning costs for the taxpayer and administrative costs for the agencies.  (See Workshop 3 for a discussion of administrative burden.)

Social Welfare Considerations of EITC Qualifying Child Noncompliance

Presented by Emily Lin, Financial Economist, Office of Tax Analysis, Department of the Treasury

In Fiscal Year (FY) 2020, according to the IRS, nearly one quarter (24%) of EITC payments, or $16 billion, were made to taxpayers completely or partially ineligible for the credit, with 30% (and half of the dollar amount) of these errors attributable to nonqualifying children. This aggregate data, however, doesn’t provide insight into how to improve administration of the credit or the social welfare loss of noncompliance.  For example, what is the value of an improperly paid EITC dollar, and what is the cost of reducing those errors?  EITC noncompliance is also subject to duplicative reporting, because EITC overclaims are considered elements of the IRS tax gap as well as “improper payments” under Office of Management and Budget (OMB) guidance for the Improper Payments Information Act of 2002 (IPIA).

A summary of EITC errors on Tax Year (TY) 2006 to 2008 returns is shown in the table below.

As shown above, failure to meet the qualifying child test constitutes 30% of returns with EITC errors and over half of dollars incorrectly claimed.  What this data does not provide is answers to the following research questions:

  • Who are the taxpayers incorrectly claiming the EITC?
  • Do they live with the child at all during the year?
  • Do they have a relationship with the child?
  • Why did the correct person not claim the child?
  • What is the social welfare loss and the net revenue loss of the wrong person claiming the credit?

To understand the nature, extent, and impact of EITC errors, the Treasury Department’s Office of Tax Analysis (Treasury) analyzed the IRS National Research Program (NRP) results of a random sample of over 12,000 returns claiming the EITC between 2006 and 2011.  (You can find the study here.) Together with the returns, Treasury analyzed Social Security records and information returns. From the study, Treasury was able to determine the number of improper payments and the amount of money associated with those payments in connection with qualifying child errors.

The charts below summarize the type of qualifying child error in returns incorrectly claiming children for EITC purposes as well as who is making the ineligible claims.

Of the 31.4 million children claimed each year, on average, 4.8 million were claimed in error (based on annual average data above).  Of that 4.8 million children, 3.4 million met the rules relating to children (e.g., the age test).  Thus, 71% of the children claimed in error could be claimed by someone else. This constitutes 38% of all EITC overclaims.

The study further found that in the vast majority of cases, these children met the EITC relationship test with the person incorrectly claiming them on the return.

  • 47% of the children were a son or daughter of the taxpayer;
  • 37% of the children were an other qualifying relative;
  • 15% of the children had lived with the taxpayer at some point during the year; and
  • Only about 12% of the children failed to meet the residency and relationship test.

The researchers then matched the children claimed in error to their non-claiming parents, as follows:

  1. Use Social Security records to identify the non-claiming/non-audited parents of children claimed in error.
  2. Search for the tax and information returns of the non-audited parent. Did this parent file a tax return? Did this parent claim the EITC?
  3. Determine whether the non-audited parent could have claimed the EITC with respect to this child based on income.

Treasury found that for 21% of the children, they could not find Social Security Numbers (SSNs) for any parent (they were deceased, had an ITIN, or were foster parents).  For 20% of the children, the parent on the NRP return was the only parent on record with SSA, and for 19% of the children, they identified one non-audited parent who was not on any return.  Of these latter parents, only 27% had earned income and those who did had very low income.  Thus, 36% or 1.2 million of the children were not claimed by the other parent on a return.  (Only 4% of the children were claimed by both parents – i.e., duplicate claims.)  But could the other parent have claimed the child for EITC?

For Tax Years 2006 through 2011, it appears that 47% (or 0.5 million) of non-claiming parents appeared eligible to claim 0.6 million children.  Of the non-claiming parents who were ineligible to claim the child, in many cases they had already claimed the maximum number of children for EITC purposes, or their income was above the phase-out range for EITC.  Thus, they may have allowed another family member to claim the child.

Treasury then determined the amount of EITC forgone for the sample of 0.6 million children associated with incorrect EITC claims.  The study found that 39% of the $1.449 billion in EITC overclaims could have been claimed by another parent, resulting in $561 million in foregone EITC payments.

Based on this study, the researchers were able to make several conclusions about the nature of improper EITC payments. First, the official EITC improper payment rates overstate the revenue loss to the government because they do not take account of forgone claims. Second, most improperly claimed children are claimed by a relative, not by a stranger or a friend. About 11% of these children are claimed by a relative they live with for all or part of the year, meaning this taxpayer would be eligible to claim the child but for their relationship to the child. Third, the research indicated that while some errors appear to be accidental, most improper payments reflect a credit-maximizing motive. Finally, about 2 million of the 3.4 million children claimed in error could not have been claimed by a tax-filing parent under the current eligibility rules. While some of these children may not be the intended beneficiaries of the credit, more research is necessary to determine the social welfare loss associated with the exclusion of these children.

Reimagining Tax Administration: Social Programs Through the Tax Code – Workshop 3: Design Theory and Administrative Burden

Today we continue our series giving an advance look at the Center for Taxpayer Rights’ Reimagining Tax Administration workshop briefs. An earlier post here explored the social safety net, including the role of refundable tax credits in lifting children out of poverty, and the characteristics of the population claiming the Earned Income Tax Credit (EITC) and Advance Child Tax Credit (CTC).

In the brief today, we explore the impact of program design and administrative burden on that population’s ability to understand and navigate application procedures and other bureaucratic apparatus, and how that apparatus might deter the targeted population from receiving benefits for which they are eligible.  We also learn about some interesting experiments in trying to communicate complex administrative requirements and legal issues to program beneficiaries.

All of the workshop sessions are recorded, and the videos are available here on the Center’s website, along with slide decks and other materials.

Administrative Burden: Policymaking by Other Means

Presented by Pamela Herd & Donald Moynihan, Professors, McCord School of Public Policy, Georgetown University

Administrative burdens occur when an individual’s experience with policy implementation is onerous. Administrative burden can occur in any context where the state regulates private behavior or structures access to services, and it can apply to either a consumer of government services or a government employee. Administrative burdens are distributive in that certain groups experience more benefits or burdens than others. In the context of the tax system, lower income groups often experience the most disadvantages. These burdens are also constructed, as they reflect the preferences of political actors and their constituents regarding policy. As the product of administrative or political choices, these burdens are often presented as technical fixes or aspects of broad concerns, such as reducing fraud.  Note, however, that just as administrative burdens can be designed into a program, they can also be designed out.

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Administrative burden reflects people’s experience of the state. That experience includes three categories of costs – learning, compliance, and psychological. Learning costs are the costs people face when searching for information about government-provided services. Compliance costs are those encountered when trying to comply with a program’s rules and regulations. Psychological costs are related to the stress, lack of autonomy, or stigma experienced when learning about a program or complying with its requirements.

The table below provides examples of each cost and how they operate in the context of the Advance Child Tax Credit (Advance CTC):

Cost:Learning CostsCompliance CostsPsychological Costs
Description & Examples:– Engaging in the search process to collect information about public services, as this knowledge is not innate.
– Evaluating how services are relevant to the individual.
– Examples: learning a program exists, determining eligibility, considering the benefit, researching how to apply.
– Following administrative rules or requirements
– Examples: submitting forms, providing documentation, completing recertification process, hiring legal help.
– Stigma associated with applying for or participating in a program with negative perceptions.
– Loss of personal power or autonomy in interactions with the state.
– Stress of dealing with administrative processes or potential loss of benefit.
Advance CTC Context:– Mitigated by automatic enrollment, via previously filed returns or nonfiler information provided through a portal, and outreach efforts.
– Information about enrollment not clear on IRS website.
– Significant portion of nonfiler population not familiar with tax system.
– Requires large outreach effort, which is not a core IRS skill.
– Low compliance costs for those automatically enrolled.
– Early versions of nonfiler portal not available in mobile-friendly version.
– Early versions of nonfiler portal not available in non-English languages.
– Limited ability to modify eligibility information via portal.
– Applications through nonfiler portal do not always result in receipt of credit, and no explanation provided or resources to remedy.
– Low psychological costs due to broad eligibility across income groups.
– No need to apply for the benefit in person.
– Benefit was provided in cash (rather than voucher or card).

These burdens will likely change as taxpayers are required to reconcile the Child Tax Credit and receive the remaining credit during the 2022 filing season. Individuals with limited or no experience with the tax system must file a return to receive the remainder of the credit, and easy to use filing portals will not be available until after April 15th. Measures instituted to protect against improper payments may raise impose significant administrative burden.  Additionally, the nature and extent of burdens in future years is still unclear, as the existence of the Advance Child Tax Credit is uncertain beyond the 2021 tax year. The addition of a work requirement will increase burden, both in terms of accessibility of the credit and the challenge of documenting work status.

Applying Behavioral Economics to Human services

Presented by Emily Schmitt, Office of Planning, Research, and Evaluation, Administration for Children and Families, U.S. Department of Health and Human Services

Administrative burdens can be mitigated or eliminated by applying modern understandings of human behavior to the administration of social services, including those administered by the IRS. Under traditional theories of human decision-making, consumers are treated as rational decision-makers who use all available information to make decisions that maximize their well-being. Under this approach, where the benefit outweighs the cost of applying or compliance with requirements, people will apply for the benefit.

However, behavioral economics and psychology have brought additional insights into how humans interact with systems and make decisions.  These insights include the following observations, which can be applied to reduce administrative burden:

  • People can only pay attention to and understand a limited amount of information at a time;
  • People give more weight to the present than to the future;
  • People may place more importance on smaller factors, giving them an outsized influence;
  • People are influenced by how they see themselves and others; and
  • People are more motivated by loss than they are by gain.

In 2010 the Administration for Children and Families of the U.S. Department of Health and Human Services launched the Behavioral Interventions to Advance Self-Sufficiency (BIAS) initiative, to determine whether applying behavioral economics principles to programs under its purview can have a large impact with small, low cost changes. (In Fiscal Year 2021 ACF provided grants totaling $120 billion in 60 programs, including child care, Head Start, Temporary Assistance to Needy Families (TANF), refugee resettlement, and child support enforcement.)  Under the BIAS approach, human services should be redesigned based on the characteristics of decision-making using the following steps:

  1. Define: Identify problems of interest with a program or agency.
  2. Diagnose: Gather data, create a process map, identify drop-off points, and hypothesize bottlenecks.
  3. Design: Propose behavioral interventions to address these bottlenecks.
  4. Test: Ideally, conduct Rapid Cycle Evaluation using random assignment.

The BIAS portfolio applied this approach in three domains (work support, child support, and child care), seven states, and 15 tests.  In these tests the agency was trying to zoom in on specific places where people drop out of the application or recertification process and identify particular design interventions, mostly in the way agencies communicated with people.  Using this system, administrative burdens have been reduced by taking the following actions:

  • Simplifying messaging so it is more easily and quickly understood, including consolidating important information on the first page;
  • Including information about how people can plan how they will interact with the system, for example by providing information about how to get to a meeting via public transportation;
  • Adding personalization to materials, for example by adding sticky notes from case workers to agency letters;
  • Making deadlines and other important dates prominent; and
  • Experimenting with highlighting the potential loss or gain that comes with the consumer’s choices.

Through randomized tests and demonstration projects, BIAS identified very low cost and scalable small changes that improved program administration. In one such program, BIAS redesigned communication sent to New York City residents who may be eligible for an EITC-like payment. To receive the payment, residents were required to attend a meeting and provide information in the year before the payment was administered. To increase awareness of the payment and of the steps required to guarantee eligibility, BIAS designed a postcard and text messages sent to residents by the city. In the modified postcards, steps for eligibility were simplified and the information was condensed to make the process as simple and clear as possible for recipients. BIAS found that residents who received both the simplified postcard and the text message were more likely to attend the meeting required for eligibility. (For more information about “the power of prompts,” see the ACF report here.) For the next round of projects, ACF will focus on changing program and staff level processes and practices in small but important ways.  Ultimately, adapting messaging based on human behavior is low cost and increases participation in important social programs because consumers experience fewer burdens as they navigate the complex processes.

Case Study: Cancellation of debt self-help materials

Presented by Jim Greiner, Honorable S. William Green Professor of Public Law, Faculty Director, Access to Justice Lab, Harvard Law School

Experiments with materials distributed to taxpayers with cancelled debt illustrate the benefits – and the disadvantages – of designing benefit administration in accordance with the principles of behavioral economics. The goal of these experiments was to get people to show up to court to contest credit card debts.  The proceedings involve legal terms and procedures that can increase administrative burden. In this experiment, researchers designed educational materials intended to increase participation in administrative proceedings relating to cancelled debt. Drawing on adult education literature and techniques used by junk mail purveyors and working with the Access to Justice Lab, these materials relied heavily on cartoons and other images, and characters were designed to convey certain messages to the consumer.

For example, the taxpayer character, named Blob, is intended to be “everyperson” — raceless, genderless, and shapeless to remove any potential bias. The attorney character is designed to be friendly and inviting to encourage participants to seek legal help when self-help is not enough.

Although participation rates after publication of these materials are still low, the addition of these materials resulted in a tripling of the participation rate for these proceedings. Additionally, producing material like this is low-cost, and it proved beneficial where an individual might be hesitant to retain legal help or where legal assistance is not scalable. Especially where data sharing among agencies is limited (meaning individuals must participate more to provide information the agency does gather itself), more self-help materials are necessary to help individuals navigate complex procedures.

Although the benefits are clear, there remain some challenges to producing self-help materials like this. First, because the law and processes covered are so complex, the materials are quite lengthy (in the credit card sits, the paper-based self-help document was 91 pages long). Additionally, determining when self-help is not enough and an individual should seek legal help is problematic, as the benefits of self-help and of free legal assistance can vary based on the nature and extent of the proceeding.  One promising approach is that of blended self-help, such as that used by upsolve.org to help people get through the bankruptcy process.  This tool uses online guided interviews to gather information that will then be presented to a bankruptcy lawyer in the proper format to prepare documents for filing.

CONCLUSION

How the agency approaches its role as benefits administrator can have significant impact on administrative burden.  For example, one state unemployment agency tried to make the claims filing and hearing process less burdensome by requiring the claims adjuster to obtain the employment file directly from the employer rather than requiring the claimant to submit it.  In this way, the agency conducts its own discovery and the adjudicator asks questions.  This approach to the proceeding is inquisitorial rather than adversarial, which reduces the learning, compliance, and psychological costs of the proceeding.

Further, interventions differ depending on one’s goal.  Is the goal to increase participation by 5 percent or to get to universal participation?  The latter goal may require policy simplification, or better collaboration by data-sharing between state and federal agencies or between federal agencies.  And where data-sharing doesn’t achieve the desired improvements, intensive outreach may be required – not just by the agency but on-the-ground third parties assisting individuals.  Further, the type of intervention depends on where you are in the policy process and also on the nature of the problem.  For example, information nudges work well where the key problem is learning costs.

To bring about changes in the organizational culture, which can result in larger scale reduction of administrative burden, agencies must be willing to experiment and work on institutionalizing these values by creating an ethic of experimentalism and continuous learning.  Nudging can be a gateway to cultural change – it shows how difficult it is for people to navigate existing processes and opens the door to systemic change.

RECOMMENDATIONS

In attempting to minimize administrative burden in programs that benefit low income and historically under-represented populations, policy makers and administrative agencies should consider the following design elements when making policy choices:

  • Design programs that incorporate automatic enrollment and default elections;
  • Incorporate data-sharing among state and federal agencies into program design to determine eligibility and further auto-enrollment, subject to necessary protections on use and disclosure of data;
  • Draft eligibility rules that are able to be expressed in non-legal common parlance and do not create barriers to participation by the eligible population;
  • Establish programs of on-the-ground personal assistance, including partnerships with stakeholders trusted by the eligible population;
  • Articulate explicitly the costs and benefits of improper payment/fraud detection protections, including the impact of these measures on the eligible population by deterring them from participating in the program.
  • Establish inquisitorial, non-adversarial dispute resolution processes; and
  • Establish an agency culture of experimentation and continuous learning that considers design and administrative burden at all stages of administration.

Reimagining Tax Administration: Social Programs Through the Tax Code – Characteristics of the EITC/Advance CTC Population

In the fall of 2021, the Center for Taxpayer Rights held an online workshop series titled Reimagining Tax Administration: Social Programs Through the Tax Code.  The goal of the series, funded by the Rockefeller Foundation, was to bring together tax professionals, researchers, and administrators not only to understand the current federal tax administration approach to administering social benefits through the tax system but also to explore and discuss alternative approaches.  The Center will be publishing a report based on these workshops, but we thought readers of PT would like to get a preview of this work.

All of the workshop sessions are recorded, and the videos are available here on the Center’s website, along with slide decks and other materials.

Today we are sharing with you the brief from the second workshop in the series.  In 2021, the EITC, Advance CTC and Economic Impact Payments (EIPs) combined were the largest federal program lifting children out of poverty.  This session explores the characteristics of the EITC/CTC population and the implications of those characteristics for administering such major social benefits by the Internal Revenue Service.  Later sessions build on this fundamental information to “reimagine” eligibility rules, administrative burden and due process protections, agency culture and, ultimately, proposals for change.  We’ll be sharing these briefs with PT readers over the rest of this week and beginning of the next, so stay tuned! 

THE SOCIAL SAFETY NET

Presented by Hilary Hoynes, Professor of Economic & Public Policy, Haas Distinguished Chair of Economic Disparities, University of California, Berkeley

Both the Earned Income Tax Credit (EITC) and the Advance Child Tax Credit (Advance CTC) fall within the United States’ social safety net. Programs in the social safety net can be divided into two categories: social insurance programs and public assistance programs. Eligibility for social insurance programs is determined by work history and amounts paid in while working, not on current income. Conversely, eligibility for public assistance programs is determined based on income and, in some instances, assets. Benefits from programs in each category can be given in cash, tax credits or refunds, or in kind, such as health insurance or vouchers. These programs can be administered through a number of systems, including by the Internal Revenue Service through the tax system.

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Who are the disadvantaged and how are social safety net programs helping?

In the United States, children under 18 experience the highest poverty rate at 9.7%, followed closely by older Americans at 9.5% (reduced significantly by Social Security). These rates are higher among Black and Hispanic Americans, female heads of household, and foreign-born non-citizens.

A chart of monthly and annual social safety net participation by program. Medicare, Medicaid, and Social Security are highest.

The largest programs in the social safety net – in terms of participation – are Medicare/Medicaid, Supplemental Nutritional Assistance Program (SNAP), Social Security, and refundable tax credits. Although Social Security pulls more Americans out of poverty than any other anti-poverty program, its effect on children is not as drastic. Refundable tax credits and SNAP are the largest anti-poverty programs for American children. The charts below show this distinction.

Change in number of people in poverty after including each element of public assistance, 2020.
Source: U.S. Census Bureau, Supplemental Poverty Survey 2020, Figure 8
"what if" child poverty rates with the elimination of selected federal programs.
Source: National Academy of Sciences, A Roadmap to Reducing Child Poverty (2019)

Despite the success of these programs in reducing poverty from 11.4% to 9.1% in 2020, child poverty in the United States is higher than the OECD average, and higher than in similarly situated countries after taxes and government benefits. This disparity is due to the following problems:

  • Benefits are not universal. Adults without children and undocumented immigrants are often excluded.
  • Cash is the most useful form of assistance, but many programs provide benefits in non-cash forms.
  • Many programs in the social safety net are conditioned on work, which can be a difficult requirement to meet.
  • The United States spends less as a percentage of GDP on social safety net programs compared to OECD countries, and the child poverty rate remains high after taking into account tax and transfer programs compared to economically similar countries. Taxes and government benefit programs reduced child poverty by only 7% in 2015 (from 27% to 20%). The charts below show the comparison.

Expanding the EITC to include more childfree adults, as well as permanently implementing the Advance CTC, can begin to address these gaps.

CHARACTERISTICS OF THE EITC/CTC POPULATION

Presented by Margot Crandall-Hollick, Specialist in Public Finance, The Congressional Research Service

Background: Why Benefits Are Administered by the Internal Revenue Service

Traditionally, the IRS is a revenue collector. However, because the agency has access to most income and personal information, it is also in the best position to administer benefits to the public. With each tax return, the IRS gains access to the financial and personal information of the filer and any individuals associated with that taxpayer’s return, such as a spouse or any dependents. Additionally, because filing requirements are determined without regard to immigration status, the IRS can collect information on non-citizens and other residents. From tax returns and third party information reporting, the IRS receives information for 86 percent of Americans.  Given this breadth of information, Congress has placed administration of two significant anti-poverty programs, the EITC and the CTC, within the IRS.

There are limits to the IRS’ reach, as some populations have no reason to interact with the IRS and its data collection procedures. The Tax Reform Act of 1986 limited the contact IRS has with the very low-income population by eliminating the need for many in this population to file tax returns. While this measure eliminated a burden, it created challenges for administering benefits to this population, as demonstrated when Congress chose the IRS to administer Economic Impact Payments (EIPs) during the COVID-19 pandemic. Of the 14% of Americans whose information is not available from tax returns, many are older Americans earning only Social Security income. For these individuals, the IRS was able to partner with the Social Security Administration to gather the data it needed to administer EIPs.

To administer benefits to the individuals who do not file tax returns or who are not known to the Social Security Administration (or another federal agency), the IRS has created a series of temporary portals through which nonfilers can provide their information, discussed in workshops 1 and 6.

The Earned Income Tax Credit

Created in 1975, the Earned Income Tax Credit (EITC) has always been conditioned on work, although its eligibility rules have been expanded to consider filing status, number of qualifying children, and income.

The EITC phases in and out based on these factors. The chart below shows the credit amount for 2021, both with and without the expansion for childfree workers under the American Rescue Plan Act:

According to the Congressional Research Service, (CRS) the highest participation, both in terms of percentage of eligible claims made and dollars received, is among taxpayers with more than one qualifying child. In terms of household adjusted gross income, the highest participation rates come from households with AGI between $10,000 and $15,000, and the highest credit amounts are received by families with AGI between $15,000 and $20,000.

Among childless workers, only 65% of eligible taxpayers claim the EITC. This disparity may be because the taxpayer is below the filing threshold discussed in Workshop 1, and the cost of preparing the return is high compared to the amount of the credit – the highest amount a childless worker could receive before the enactment of the American Relief Plan Act (ARPA) was $543, compared to several thousand dollars potentially available for those with children. ARPA expanded the childless worker EITC to $1,502 for Tax Year 2021.

To satisfy the earned-income requirement, a majority of taxpayers reported W-2 income, with some also reporting self-employment income. Regardless of the type of job, about 60% of EITC claimants work multiple jobs throughout the year.

The Child Tax Credit

Like the EITC, eligibility for the Child Tax Credit (CTC) is dependent on number of qualifying children and income. However, the CTC differs from the EITC in that it is not dependent on filing status and, at least for 2021, eligibility does not require earned income – extending eligibility to the 5% of children who live in a household without earned income. The American Rescue Plan Act (ARPA), which eliminated the earned income requirement, also made the credit fully refundable for 2021 and increased the maximum amount an individual can receive — $3,600 for each qualifying child under six and $3,000 for each qualifying child under 17, with half of the credit paid in monthly installments in advance in 2021. The chart below from CRS summarizes the credit for 2021 (and for years not covered by ARPA’s expansion):

Although the exact impact of ARPA is not yet known, CRS has estimated the reach of the Child Tax Credit as well as its effect on the child poverty rate. The graphs below show the estimated increase in the number of families with children benefitting from the credit, both overall and for those in poverty:

In addition to reaching more families and children generally, CRS estimates that the ARPA expansion of the Child Tax Credit will result in a higher credit amount for all families, but especially for families living below the federal poverty line. CRS estimates that nearly 20 million children live in households below 200% of the federal poverty line, 4.7 million of whom live below the poverty line. A detailed breakdown of the expected credit increase by income level is below:

CRS has also predicted the ARPA expansion’s impact across races and ethnicities, with black and Hispanic children experiencing the largest decrease in poverty. For all children, the ARPA expansion is predicted to nearly halve the child poverty rate. Predicted reductions in child poverty rates by race and ethnicity are shown below:

EVOLVING HOUSEHOLD COMPOSITION & IMPLICATIONS FOR CREDIT ADMINISTRATION  

Presented by Elaine Maag, Principal Research Associate, Urban-Brookings Tax Policy Center 

As a result of the COVID-19 pandemic, families already struggling financially faced increased income volatility and food insecurity, missed or delayed healthcare, childcare problems, and an inability to meet basic needs. Both existing programs and new COVID relief programs provide cash or in-kind benefits to address these problems. Historically, the tax system has been taxed with redistributing income through these programs – through taxation of high-income individuals as well as through delivery of safety net benefits. Although there are benefits to using the tax system to administer certain benefits, IRS procedures have not kept up with changing family structures.

Advantages of Using the Tax System to Administer Benefits

 About 40% of benefits for children is administered through the tax system. As discussed above, the IRS has access to information needed to determine eligibility for benefits based on tax returns. Because benefits are claimed when a tax return is filed, there is no additional administrative step necessary – individuals do not need to schedule an appointment or fill out another application to claim tax benefits. Perhaps because these benefits are claimed via a tax return, there is little or no stigma associated with receiving tax benefits, which can serve as a barrier to claiming benefits administered by other agencies.

Disadvantages of Using the Tax System to Administer Benefits

Despite these advantages, there are problems with administering benefits through the tax system. Aid can be administered as transfer benefits or as taxes. Transfer benefits consider the household, can change throughout the year, and are based on need at the time of eligibility determination. Conversely, taxes are based on taxable unit (legal relationships), are usually constant throughout the year, and eligibility is determined after the tax year ends. Benefits as taxes do not always provide assistance directly to the individual who needs it most and when it is needed most.

The rigidity of the tax system prevents some from receiving benefits when needed – both in terms of timing and eligibility. With the exception of the Advance Child Tax Credit in 2021, the IRS provides cash assistance in one lump sum several months after the eligibility period ends. This approach does not help individuals who lose or change their jobs throughout the year, as aid is delivered after the hardship is experienced. Additionally, Congress has provided strict and unrealistic eligibility based on legal relationship. Despite a changing social landscape, the IRS uses a traditional family model when determining eligibility for tax credits. These rules prevent 300,000 children from receiving benefits from the IRS because the households in which they live do not reflect the legal definitions required for credit eligibility.

The current tax code is based on a traditional familiy composition of childbearing/rearing within marriage, married parents, and low divorce rates.  Yet relationships of families and children in the United States are changing — married parents are becoming less common, increasingly children are born outside of marriage and couples are cohabiting, children are moving between households throughout the year, and multigenerational households are becoming more common. The charts below, excerpted from an important Tax Policy Center report, summarize how familial structure has changed in the United States:

Household income is also changing throughout the year. Income volatility is not considered when the IRS administers yearly tax credit payments. Forty percent of families living under 200% of the federal poverty line experience a 25% change in income for six months throughout the year. The chart below, from another TPC report, summarizes income volatility for all households and for those with incomes below 200% of the federal poverty line:

Yearly lump sum payments have certain advantages, but providing periodic payments in advance of the close of the tax year (the period for determining eligibility) can lessen the burden for families experiencing repeated income volatility throughout the year.

Conclusion

The IRS is a natural choice for administering benefits to families – it has access to information from tax returns and other agencies, and it is equipped to provide billions of dollars to Americans. Additionally, administration through the IRS is easier for individuals and comes with a decreased social stigma. However, using the IRS comes with challenges.  First, the tax system has not fully embraced the adjustments necessary to administer advance, periodic payments rather than lump sum payments at year end.

Second, a significant population of low income households do not interact with the tax agency, including the lowest-income individuals with no obligation to file a tax return and children living in households that do not meet the rigid relationship tests currently in place. Although safeguards against fraud and misuse must be in place, using data from external sources (states and other administrative agencies), the IRS can incorporate these individuals without creating too great a burden on itself or these individuals. For example, SNAP has information regarding family composition of some households not currently part of the tax system.  With these improvements, the IRS can decrease the effects of child poverty on American children and their families.

RECOMMENDATIONS

  1.  Retain the Tax Year 2021 dollar and age expansion of the childless worker EITC for future years.
  2. Amend EITC eligibility rules and revise administrative procedures to be more responsive to the structure of today’s families.
  3. With appropriate safeguards, utilize state and other agency data to identify non-filer households that are potentially eligible for the EITC and CTC.
  4. Increase the capacity of IRS systems to issue monthly or periodic advance payments, building on the EIP and Advance Child Tax Credit experience.
  5. Quantify the long-term effects on child welfare and labor participation of benefits administered through the tax system.

When Will the Tax Court Redact?

An order in the case of Boateng v. Commissioner, Dk. No. 37647-21 issued on July 26, 2022, shows the Tax Court’s willingness to redact personal information that the petitioner should have but failed to redact.  Thanks to Carl Smith for bringing this to my attention and to his additional research.

Tax Court Rule 27(a) requires parties to redact certain information such as taxpayer identification numbers and financial account numbers when submitting pleadings and documents to the Court.  Maggie Goff and I published an article in Tax Notes two years ago entitled “Nonparty Remote Electronic Access to Tax Court Records.”  The article suggests that the Tax Court make its records more electronically accessible while still protecting the privacy of individuals in an appropriate manner.  We included slides and information complied by Judge Buch showing how poorly both pro se petitioners and practitioners comply with this rule, regularly placing into the Court’s records information the Rule requires they redact.  Judge Buch cited the poor compliance with this rule as a basis for the Court’s decision not to make its records electronically available.

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Historically, the Court did not redact for petitioners who failed to do so but that seems to be changing.  In the Boateng case, Special Trial Judge Choi identifies documents the petitioners should have redacted.  The case came to her on a motion filed by the IRS to dismiss the case for failure to state a claim.  Petitioners sent to the Court an unredacted copy of the notice of deficiency they received for 2019 together with copies of tax forms for that year.  In reviewing the motion, Judge Choi noticed the non-compliance with the redaction rules which puts the petitioners’ information into a public record.

Judge Choi ordered petitioners to file amended pleadings using the Court’s form petition so they could perfect their imperfect petition and she ordered payment of the filing fee (or the fee waiver form.)  I have written about imperfect petitions previously, here.  The Court then took the IRS motion under advisement pending receipt from petitioners of a corrected or perfected petition.  If they file using the Court’s form, I anticipate the Court will deny the motion.  If they fail to act, it will eventually grant the motion.

In addition to addressing the motion, Judge Choi identifies and addresses the unredacted information.  She states:

Due to the unredacted personal identifying information appearing in the Petition, the Court will take steps to seal petitioners’ petition to protect their information. 

It was this sentence that caught Carl’s eye because he found it unusual, as did I.  In looking further, however, Carl found that at least some judges on the Court had been sealing unredacted information for some time.

He went to DAWSON and put in the word “redact,” searching orders and found 28 orders redacting things in cases during the first four weeks of July 2022.  In the month of January 2021, Judge Leyden redacted two petitions on her own motion.  In January 2022 it appears the Court sealed 10 petitions for failure to properly redact.  It looks like there is a steady trend to redact.

This movement seems to reflect a change in Court policy or may just be the adoption of a practice to redact by certain judges.  From the time of filing until the calendaring of a case, petitions generally sit unassigned in the general portfolio of the Chief Judge.  So, absent an effort by the Chief Judge to root out improperly redacted submissions, orders like the one in the Boateng will be ad hoc.  There was no order in the docket list assigning the Boateng case to Judge Choi but maybe orders are not needed to assign cases to a special trial judge to respond to a motion filed by the IRS.

In any event, the Boateng order suggests an attention to redaction and sealing that is relatively recent and welcome.  The number of redaction orders in no way reflects the number of cases with improper redactions but is still a benefit to the identified petitioners.  It also suggests that some of the judges on the Court are thinking about ways to protect petitioners other than making it difficult to access public records.  District Courts and Circuit Courts routinely require a certification when filing electronically filing documents that the person filing the documents has complied with the redaction rules.  I do not know if requiring the certification would reduce the non-compliance at least among practitioners but it might be worth a try if the Tax Court wanted to look for additional ways to improve compliance with the redaction rule.

Latest Round in PTIN Litigation With District Court Finding For Government In Steele v US

Longtime readers may recall a series of blog posts discussing the class action litigation challenging the IRS’s statutory authority to charge a fee for PTIN issuance and renewal. After an initial plaintiff victory in district court, the DC Circuit Court of Appeals held that the IRS was within its authority to charge the PTIN fees but remanded the case to determine whether the amount charged was excessive. For more on the DC Circuit opinion, as well as prior rounds in the skirmish, see In Major Victory for IRS DC Circuit Upholds IRS Annual Filing Program.

Late last month in the latest round in Steele v US the district court issued an order on discovery issues. The order includes some strong language about both parties, but the order reflects a decisive government win though the case awaits a resolution on the merits.

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The latest issue concerns the plaintiffs’ motion to compel discovery about the creation and implementation of the original PTIN program. The government alleged that some of the requested information was protected by the deliberative process privilege. In addition, the court considered the sufficiency of government’s responses to interrogatories.

As to deliberative process, as the opinion describes, that privilege protects from discovery “advisory opinions, recommendations and deliberations comprising part of a process by which governmental decisions and policies are formulated.” To benefit from it, the party asserting the privilege must demonstrate that the information is predecisional and deliberative.

The opinion nicely summarizes DC Circuit law on the substance and means for the government to assert deliberative process. It requires proof that the requested document was part of assisting an agency decisionmaker in making the decision, rather than supporting a decision that was already made.

In addition, case law provides the following three elements to benefit from the privilege:

  • A formal claim of privilege by the head of the department possessing control over the requested information,
  • An assertion of the privilege based on actual personal consideration by that official, and
  • Details regarding the information for which the privilege is claimed, along with an explanation why it properly falls within the scope of the privilege.

The major issue that the plaintiffs raised with respect to the government’s assertion of deliberative process was that the government failed to assert the privilege with sufficient detail, instead relying on “boilerplate descriptions” of the withheld documents. The remedy that the plaintiffs sought was discovery of every document withheld solely under the deliberative process privilege.

In strong language, the court disagreed. Calling the proposed remedy “incredible” the court criticized the motion for failing to evaluate the documents and asserted privilege on their own terms:

Plaintiffs’ compact motion shuns individual analysis of the documents in question, instead taking a blanket approach where one bad privilege log entry spoils the bunch.

The order also held that it was  “insincere of plaintiffs to argue that the government has failed to meet its burden in asserting the privilege for every privilege log entry” given that the given the declaration by the IRS’s Deputy Associate Chief Counsel that provided “details why twenty-six of the log entries were withheld.”

The order also included snippets of the government’s privilege log, which in its view also provided sufficient description beyond boilerplate. Some of the included details identified the contractor working with the IRS in setting up the PTIN program, the date, the topic, and who in the government was the intended recipient.  While some of the government’s language was repetitive, the order found that the government met its burden in establishing the elements for the privilege.

While there may have been a question as to whether the government was entitled to rely on deliberative process with specific documents the plaintiffs’ failure to drill down individually was fatal:

Because plaintiffs did not produce “a set of objections that identifies each log entry” that they challenge and because this Court cannot agree that each log entry is insufficient—especially given Goldman’s accompanying declaration—plaintiffs are essentially asking this Court to engage in an entry-by-entry analysis of the privilege log to evaluate whether the government has fulfilled its burden.

The second category of information in this discovery dispute related to interrogatories about the amount of time that IRS employees spent on PTIN-related tasks.  The government argued that the requests were irrelevant and in any event asked for information that the government did not in fact have. As to relevance, information about time spent could be helpful in establishing that the original fees in the PTIN program were excessive, and the court found that the low relevance bar was easily met. 

Unfortunately for the plaintiffs, however, the government prevailed on this challenge. As the order described, the plaintiffs were not really looking for an order forcing a response, but were in fact looking for an order requiring a “different response.”

The government has already provided plaintiffs with numerous declarations from various employees regarding staffing and PTIN work, including some time allocation breakdowns.  However, not all employees kept contemporaneous time records. The government contends that if the information sought by plaintiffs is not included in those materials already provided, it does not exist. 

The court chided the government, stating it “should have stated the nonexistence of this information more clearly in their actual interrogatory answers, instead of in their response to plaintiffs’ letter alleging deficiencies.” Despite that deficiency, the court declined to compel any additional responses, and agreed that “forcing employees and former employees to produce a detailed record of time spent on PTIN tasks over the last ten years based on memory alone is absurd.”

Conclusion

With this round over for now, the case slowly marches towards a resolution, though perhaps other more targeted discovery challenges await. In the meantime, a couple of years ago IRS reworked the PTIN user fees (see IRS Announces New PTIN User Fee in Proposed Regulations), with the fee now at $35.95 for initial applications and renewals. 

Another Update on Boechler Follow-on Litigation – Part 2

This is Part 2 of my post-Boechler litigation update.  Part 1, involving deficiency litigation, ran on August 1, 2022, and can be found here

Today’s post addresses what is happening in the many CDP cases (including Boechler) that are before the courts where the IRS had argued to the Tax Court that the cases should be dismissed for lack of jurisdiction on account of late filing.  As I noted in my Part 1 introduction, the courts have not yet issued any rulings in CDP cases about whether equitable tolling applies on the facts of any case, and I expect we won’t see the first such ruling until 2023.

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Boechler

The taxpayer in Boechler did not put into the record any information as to why it filed late and so deserved equitable tolling.  In its opinion dated April 21, 2022, the Supreme Court remanded the case to the Eighth Circuit to address whether equitable tolling applied on the facts.  There is a May 23, 2022, entry on the Tax Court docket sheet for Boechler (Docket No. 18578-17L) stating, “U.S.C.A. 8th Circuit mandate is recalled, and case is reopened”.  But there have been no further filings in the case in the Tax Court since that date. 

Since the IRS moved to dismiss Boechler before the IRS filed an answer, the next step in the case will be for the IRS to file an answer in which, if it wants, it will plead late filing as a statute of limitations defense.  Tax Court Rule 39 provides that statute of limitations defenses and equitable arguments are “special matters” that the parties must plead.  If the IRS in its answer raises a statute of limitations defense, the taxpayer will have to respond by filing a reply in which the taxpayer pleads equitable tolling and sets out some facts in support. 

It is far from clear that Boechler will ever generate a ruling on whether the facts therein justify equitable tolling.  Recall that parties at any time can settle non-jurisdictional issues, such as late filing or the merits.  My hunch is that the Boechler case settles on remand after the IRS attorney for the first time looks at the taxpayer’s proof that it filed W-2s with the Social Security Administration.  Boechler merely involves a penalty for alleged non-filing with that agency.

Castillo

On May 11, 2022, Les did a post on a district court opinion in Castillo.  In that case, the IRS mailed out a CDP notice of determination to the taxpayer and a copy to the taxpayer’s former POA, but not to her current POA.  USPS records reflect that the notice was never delivered to the taxpayer (it’s still listed as “in transit”), and if the prior POA received his copy of the notice, he never alerted the taxpayer or the current POA. 

The current POA is Elizabeth Maresca, the director of the tax clinic at Fordham.  She was puzzled why she hadn’t seen the notice of determination that she had been expecting, so she ordered a transcript of account and discovered thereon an entry for the issuance of such a notice many months before.  Within 30 days after seeing the transcript (but still not having yet seen a copy of the notice), Elizabeth filed a Tax Court petition and sought equitable tolling of the filing deadline.  She also brought suit against the government in district court for the IRS’ wrongful disclosure of tax information to the prior POA.  Les’ post concerns that wrongful disclosure suit.

The IRS in the Castillo Tax Court case (Docket No. 18336-19L) initially filed an answer.  After the court brought to the IRS’ attention the probable late filing of the petition, the IRS then filed a motion to dismiss for lack of jurisdiction.  The Tax Court then dismissed the case for lack of jurisdiction, and Ms. Castillo appealed to the Second Circuit (Docket No. 20-1635).  In the Second Circuit, the parties briefed the issue of whether the CDP petition filing deadline is jurisdictional or subject to equitable tolling, but then asked the Second Circuit to hold the case in abeyance pending the Supreme Court’s ruling in Boechler

Five days after the Supreme Court issued its Boechler ruling, Ms. Castillo moved the Second Circuit to rule by summary reversal, that her Tax Court petition was timely under equitable tolling and to remand the case to the Tax Court for it to consider the merits of her CDP arguments.  On April 29, 2022, the DOJ responded to the motion and agreed that Boechler applied and that the case should be remanded to the Tax Court, but the DOJ argued that the Tax Court, in the first instance, should decide whether the facts justified equitable tolling.

On August 2, 2022, a 3-judge motions panel of the Second Circuit (with one judge mysteriously recusing himself) issued an order vacating the Tax Court’s dismissal order, denying summary reversal, and remanding the case to the Tax Court “for further proceedings in light of the Supreme Court’s decision in Boechler”.

The Tax Court has long held that non-receipt of a properly-addressed notice of deficiency during the 90-day period to file is no excuse for late filing a Tax Court petition, and all those courts of appeal to have faced the issue have agreed.  See, e.g., Guthrie v. Sawyer, 970 F.2d 733, 737 (10th Cir. 1992); Follum v. Commissioner, 128 F.3d 118, 120 (2d Cir. 1997); United States v. Goldston, 324 F. App’x 835, 837 (11th Cir. 2009) (per curiam) (collecting cases).  In Weber v. Commissioner, 122 T.C. 258 (2004), the Tax Court extended this holding to cover properly-addressed CDP notices of determination not received during the 30-day period to file. 

In her initial Tax Court filings and in the Second Circuit briefing, Ms. Castillo argued that, based on legislative history and the structure of CDP, it was wrong of the Tax Court to extend the deficiency precedent to CDP.  I think that for Ms. Castillo to win on remand, she will also have to get the Tax Court to overrule Weber.  In the Second Circuit, The Center for Taxpayer Rights’ amicus brief was devoted entirely to expanding upon the anti-Weber argument.  While the Second Circuit had once, in an unpublished opinion, followed Weber; Kaplan v. Commissioner, 552 Fed. Appx. 77 (2d Cir. 2014); it did so without discussing whether Congress might have wanted a different rule in CDP cases from the rule in deficiency cases.  And Kaplan was litigated by a pro se taxpayer who never argued that Weber was wrongly decided.  The Weber issue has not yet been addressed in any published opinion of any Circuit court. 

The remand order says nothing about this anti-Weber argument.  I presume that the anti-Weber argument can be considered by the Tax Court under the terms of the Second Circuit’s remand order, but I am not 100% certain, as the order makes no reference to the argument.

In Part 1 of this post, I discussed the Culp case, which is a notice of deficiency case where the taxpayers did not receive the notice during the 90-day period to file.  In their brief to the Third Circuit, the Culps go farther and argue that the deficiency precedent should no longer survive Boechler, since there is precedent outside the tax area that non-receipt or late receipt of governmental “tickets” to court are circumstances beyond the plaintiff’s control that can justify equitable tolling.  See, e.g., Checo v. Shinseki, 748 F.3d 1373 (Fed. Cir. 2014) (en banc) (120-day period to file in the Court of Appeals for Veterans Claims); Kramer v. Commissioner of Soc. Sec., 461 Fed. Appx. 167 (3d Cir. 2012) (60-day period in 42 U.S.C. § 405(g) to challenge denial of Social Security disability benefits in district court).

Amanasu Environment Corp.

 In Amanasu Environment Corp. v Commissioner, Docket No. 5192-20L, on December 13, 2019, the IRS issued a CDP notice of determination to a taxpayer having an address in Vancouver, British Columbia.  Presumably because this was international mail, records of the USPS and Canada Post show that the taxpayer did not receive the notice until January 18, 2020 – several days after the 30-day Tax Court petition filing deadline passed.  On March 13, 2020, the taxpayer mailed a petition to the Tax Court, accompanied by a request for New York City as the place of trial.  On March 17, 2020, the Tax Court received and filed the petition and request.  On September 2, 2020, the IRS surprisingly filed an answer in the case.  (The initial filing of answers in the CDP cases of Castillo and Amanasu and the deficiency case of Gruis — discussed in Part 1 of this post — shows, among other things, how often IRS lawyers miss late filing of petitions.)  On November 19, 2020, the IRS woke up and moved to dismiss the case for lack of jurisdiction for late filing. 

Frank Agostino represents the taxpayer, having picked up the case at a New York City calendar call.  Frank responded to the motion to dismiss by arguing that the CDP filing deadline is not jurisdictional and is subject to equitable tolling and should be tolled in this case.  The Tax Court held the motion in abeyance pending the ruling in Boechler.  On May 18, 2022, Judge Carluzzo issued an order, reading in full:

For the reasons set forth in Boechler, P.C. v. Commissioner, No. 20-1472 (U.S. April 21, 2022), it is

ORDERED that respondent’s motion to dismiss for lack of jurisdiction, filed November 19, 2020 is denied.

It is further ORDERED that jurisdiction in this case is no longer retained by the undersigned.

It is further ORDERED that this case is restored to the general docket for trial or other disposition.

On June 22, 2022, the IRS submitted an unopposed motion for leave to file an amendment to its answer in which it raised the statute of limitations defense.  On July 22, 2022, the Tax Court granted the motion.  Frank will be filing a reply to the amendment to the answer, raising equitable tolling as the taxpayer’s defense to the IRS statute of limitations defense.  Since no one has ever seen what such an amendment to answer pleading a statute of limitations defense on account of a petition’s late filing looks like, I attach a copy of the amendment to answer here, courtesy of Frank.

Myers

The filing deadline under IRC 7623(b)(4) for a Tax Court whistleblower award petition was held not jurisdictional and subject to equitable tolling in Myers v. Commissioner, 928 F.3d 1025 (D.C. Cir. 2019).  However, as in CDP, to date, the Tax Court has not issued a ruling on whether equitable tolling applies on the facts of Myers or any other such whistleblower award case. 

It is my understanding that the Tax Court held off on making any ruling on equitable tolling in Myers, just in case the Supreme Court ruled for the IRS in Boechler.  Had the Supreme Court ruled for the IRS in Boechler, effectively, that would likely have overruled the Myers opinion, since the two filing deadline statutes are worded so similarly. 

In June 2020, the IRS filed an amended answer raising late filing as a statute of limitations defense, and the taxpayer filed a reply seeking equitable tolling.  In November 2020, the IRS moved for summary judgment that the facts alleged in the reply do not give rise to equitable tolling.  That motion is currently pending before Judge Ashford.

Other Cases

By an order dated September 30, 2021, the Supreme Court agreed to hear Boechler.  Shortly thereafter, the Tax Court stopped dismissing late-filed CDP cases for lack of jurisdiction, pending the Supreme Court’s ruling in Boechler

In May and June 2022, after the Supreme Court decided Boechler, the Tax Court issued orders in all of the cases where the motions had been held in abeyance.  There were about 30 such orders, and they all look like the terse order Judge Carluzzo issued in Amanasu (which was one of the 30-or-so cases). 

That there were only about 30 CDP cases with this issue over 7 months confirms that the IRS and DOJ have always vastly overstated to the courts the number of Tax Court cases that would be affected by Boechler annually.  In oral argument at the Supreme Court, the lawyer arguing the case on behalf of the Solicitor General told Justice Thomas that the government estimated that 300 cases a year would be affected by the Boechler ruling.  That figure was obviously wrong because it was an estimate of how many CDP cases are dismissed each year for lack of jurisdiction for any reason, not how many cases are dismissed for lack of jurisdiction for late filing.  Typically, two-thirds of dismissals for lack of jurisdiction are only for failure to pay the filing fee or obtain a fee waiver. 

Keith and I knew that far fewer than 100 CDP cases each year would be affected by Boechler and that the primary effect of the Boechler ruling would be to eliminate the Tax Court’s sua sponte issuing orders to show cause why a CDP case should not be dismissed for lack of jurisdiction for late filing.  Probably a quarter of all dismissals of late-filed CDP and deficiency cases come after the Tax Court has pointed out to the IRS, in an order to show cause, the probable late filing of the petition – a fact which the IRS hadn’t noticed.  After Boechler, such orders to show cause in CDP will be a thing of the past, and so a small but significant number of taxpayers who filed late will stay in the Tax Court, even without having to argue for, or even having facts plausibly justifying, equitable tolling.

In the roughly 30 CDP cases where the IRS moved to dismiss for lack of jurisdiction or the Tax Court issued an order to show cause, the IRS will now have to file answers or amendments to answers if it wants to argue for dismissal for late filing.  Other than Amanasu, I haven’t looked an any of these cases’ docket sheets to see whether the IRS has yet done so.  It is my expectation that the IRS will again complain of late filing in nearly all of these cases.  And it is my further expectation, based on the usual lack of response by taxpayers to motions to dismiss for late filing, that only about 5% of taxpayers will respond with what could be termed an equitable tolling excuse for late filing.  Five percent of 30 is 1.5 cases, and one of those cases is Amanasu.  So, I expect extremely few of the other 30-or-so cases to become litigating vehicles for equitable tolling.  (The number of deficiency equitable tolling cases, if Hallmark goes the taxpayer’s way, will be an order of magnitude higher, though still not back-breaking for the IRS or Tax Court.) 

I think the Tax Court will issue a precedential opinion the first time that it considers whether the facts in any CDP or whistleblower award case qualify for equitable tolling.  A published opinion is needed because it is unclear what law on equitable tolling would apply in the Tax Court.  There appears to be a federal common law of equitable tolling generated outside the tax law that I suspect the Tax Court will adopt.  Among other things, I hope the Tax Court looks to equitable tolling opinions coming out of the Article I Court of Appeals for Veterans Claims and its reviewing court, the Federal Circuit, that have been applied to late-filed petitions in the Veterans Court for decades. 

My guess is that the initial ruling of how the Tax Court will apply the doctrine of equitable tolling will come in Amanasu or Myers, which are furthest along on the newly-required pleading of the issues.  I also guess that the first equitable tolling ruling will come out in 2023.