Plea for Guidance on Emergency Sick Leave Credit

In this post, guest blogger Bob Rubin identifies guidance urgently needed under the Families First Coronavirus Response Act (FFCRA). Christine

This is a plea for guidance on a national issue for which the rubber hits the road on April 1.

Before I beg, I observe that likely it is only people who read this blog, and Service employees, who understand what a burden the FFCRA and the CARES Act place on the Service.  The entire federal tax deposit system needs to be redesigned, and at the same time the Service has to be ready to process FFCRA “accelerated payment requests” within two weeks, while short-staffed and working remotely.  How do “accelerated payment requests” fit within section 6511?  My hat is off to the Service for undertaking this task while under duress.  We all need to be patient with the Service.  We all need to do what we can to lessen the burdens of the Service, for example by dampening client expectations based upon press reports on the speed at which the Service can act. 

Despite my understanding of the need for patience, I beg for guidance on an issue of immediate importance. 


Governor Newsom issued an Order ordering “all individuals living in the State of California to stay home or at their place of residence, except as needed to maintain continuity of operation of the federal critical infrastructure sectors” on March 19, 2020.  Critical infrastructure includes, “Professional services, such as legal or accounting services, when necessary to assist in compliance with legally mandated activities and critical sector services.”

In response to the Order, we furloughed much of our staff and directed all attorneys to work at home.  If the Order qualifies as a “Federal, State, or local quarantine or isolation order related to COVID-19,” pursuant to section 5102(a)(1) of the Emergency Paid Sick Leave Act (part of FFCRA), then starting on April 1, we are mandated to pay our staff, who cannot work from home, 10 days of emergency sick at a maximum of $511 per day for 10 days, and pursuant to the Tax Credit for Paid Sick and Paid Family and Medical Leave Act, we will get a dollar-for-dollar FICA tax credit for the emergency sick leave wages we pay.  If the credit is in excess of the employer’s share of the tax due in a federal tax deposit, a “request for an accelerated payment” can be made immediately, and the Service “will process these requests in two weeks or less.”  IR-2020-57, March 20, 2020.  I hope my friends in the National Office did not have a severe medical emergency when they read the Information Release. 

There is no guidance on whether the Order is a “Federal, State, or local quarantine or isolation order related to COVID-19.”  The Order is probably very similar to the orders issued in New York, Washington and other states.  So, this is a national issue.

My non-tax partners, based upon the “plain meaning of the Order,” think I am crazy for thinking the Order does not qualify as a “Federal, State, or local quarantine or isolation order related to COVID-19.”  However, there has been no guidance from the Government, the words quarantine or isolation do not appear in the Order and, since lawyers are a part of the critical infrastructure, the Order provisions “to stay home or at their place of residence” do not apply to our employees. 

There are tons of policy reasons for the Government to take the position the Order is a “Federal, State, or local quarantine or isolation order related to COVID-19.”  There is a serious fiscal reason to take a contrary position.  What did Congress intend?  I do not blame the Service for the lack of guidance. The Service probably is awaiting a decision by Treasury.  Please, Treasury, provide guidance to the Service on whether Governor Newsom’s Order is a “Federal, State, or local quarantine or isolation order related to COVID-19.”  Time is critical since the first emergency sick leave wages are payable April 1.  I hope my friends in the National Office can help. 

How Low Income Taxpayers deal with IRS controversies and what it means in the COVID-19 Era

Today we welcome first time guest blogger Gina Ahn. Gina practiced law as In House Counsel and Program Officer for a private operating foundation working internationally before transitioning to low-income tax controversy in 2019 as the managing attorney of the Koreatown Youth and Community Center LITC. In today’s post, she uses a current case to illuminate some of the unique challenges that many low-income taxpayers face in dealing with the IRS, and how the coronavirus shutdowns particularly impact those taxpayers. Christine

Have you ever taken a subway in a foreign country where you don’t speak the language? You plan; you know when you need to get off; you figure out exact change in advance – yet you still get stuck behind a whole group of people blocking your way off. Panic. You don’t know how to say “Please, let me through. I need to get off.” That feeling of helplessness and desperation is the norm for most of the clients I work with at the KYCC Low Income Taxpayer Clinic (“LITC”) in Los Angeles. Navigating the IRS Automated Underreporter (“AUR”) program, responding to the Integrity and Verification Operations (“IVO”) ID verification requests, and working through the Collections Process is difficult. The Taxpayer Advocate Service’s (“TAS”) Roadmap (Publication 5341, Rev. 9/2019) is a helpful guide to understand where one is in the giant IRS machinery. According to TAS’s map, our clinic’s clients are primarily in the Exam (Orange), Collection (Red), Appeal (Purple), and Litigation (Blue) stations.


Most LITC clients come to us after their deadlines have expired – whether it’s 30, 60, or 90 days after key dates. For these clients, to be perfectly frank, the COVID-19-related reductions in IRS service capacity may not impact them much, if there is no urgent need for action on their case. Someone with a shelved collection case who is seeking an OIC will have the same end result whether we can accomplish it now or 6 months later.

Ironically, it is the taxpayers who are ‘mid stream’ and the most engaged in the IRS controversy process that are the most stressed by COVID-19. As of 3/22/2020, 8 state governors have announced “stay in place” orders of some type. The stress and impact are most easily demonstrated by sharing a real case scenario in the context of a local shut down. KYCC’s LITC is located in the city of Los Angeles. The mayor of Los Angeles issued a stay at home executive order on March 19, 2020, Thursday evening that ordered all non-essential businesses to cease operations. We had 24 hours to implement this order. Since assisting people with IRS controversies is not considered an essential business; we scrambled to prepare for the shut-down.

Like any other service industry operation that works with the general public, we had to shut down. So what’s unique to a low income tax controversy shut down? From my perspective, I believe the loss of in-person face to face appointments impacts the lower income demographic disproportionately compared to a regular tax controversy law firm. The demographic we serve are the least well equipped to access technological “work arounds” and the most likely to respond to “user friction” by dropping out and disengaging from the process of resolving their tax controversy.

This is best demonstrated by example.

LITC Case: EIC, CTC, HoH Correspondence Audit Denied

The last Friday (3/20/2020) I was physically at the clinic, we received a letter from the Service’s AUR program denying the Earned Income Tax Credit (“EIC”), Child Tax Credit (“CTC”), and Head of Household (“HoH”) filing status for a taxpayer we are representing. Fortunately, since this client is a native English speaker, I did not need to translate it into a foreign language. Of course, as any subject matter expert has to do in any industry, I still need to act as a cultural broker from “IRS speak” into “what it means for you.”

Prior to COVID-19, this taxpayer already had an uncooperative landlord not willing to find their cash receipt book to supply the additional receipts need to prove that that the taxpayer supported her dependents in tax year 2018.  Now, because of stay in place orders, that same landlord is even less available. Proving support of my client’s dependents will be challenging.

Fortunately, seeking redetermination in Tax Court is still an option. But, this taxpayer is already exhausted and wary of engaging in the government system. “Why,” you ask? To be honest, I do not quite know the answer. I just know she is psychologically fragile. Even at our first meeting where we discussed a response to the audit (back in November 2019), I asked her to obtain receipts from the landlord, it took her about 6 weeks to respond with about six receipts. She was fairly email savvy, so I emailed a request for more receipts. I get no response for two weeks. So, I called her cell.

“I’m sorry, but it would be best to prove more than 6 months, you know, like a “majority” of support. Can you get the rest of the receipts for 2018?”

She sighed and replied, “Maybe I should just give up.”

“Why? I mean, they are your kids and you took care of them. You should get the credit.”

“Well Gina, I saw your email and asked my landlord for more receipts. But he’s unwilling to look up last year’s receipt book. He won’t respond to any of my requests. And I have to work and take care of my kids and there are so many other things I need to do besides this.”

I negotiate with her, “Okay. Instead of giving up, just let me fax everything else we have with the six receipts from him and see how they respond.”

Do you hear her exhaustion? This working single mom of two children is just plain exhausted by life. She works an hourly job, and fighting to obtain proof to show she’s raising her kids is like the proverbial last straw that broke the camel’s back.

In this context, my client receives an IRS response on March 20, 2020 – the day after the mayor of Los Angeles announces stay at home orders. The IRS response essentially tells her, “Nope, we don’t agree. You owe us $5500 + penalties + interest = $7000. You can ask us to reconsider. Or you can go to court. But don’t be late – you’ve got a hard deadline of June 1, 2020.”  Since she doesn’t have the benefit of my colloquial translation (yet), she will likely focus in on the only part of the letter not in legalese, “How to Pay Your Taxes” which includes the final dollar figure.

If she has lost her job; she’s already stressed about how to make ends meet. If she’s fortunate enough to have a job that permits telework; she now has to figure out how to work from home while the kids are at home. Unfortunately, school will likely stay closed until the summer (adding another obstacle to her proving her kids’ residence) and the uncooperative landlord is even less accessible.  And a request for medical records from the doctor’s offices (often used to prove residence) are not going to be top of mind during a pandemic crisis.

Fortunately, my client has 90 days (by June 1, 2020) to petition the Tax Court. Have you ever tried explaining to a client how Tax Court is not Judge Judy and it’s not like the TV show Suits either? Helping her comprehend the reality of what Tax Court involves, how testimony works, and why interacting with appeals officers, IRS counsel, and a judge won’t necessarily be a futile repeat of her prior experience with correspondence examiners is not a conversation that works very well over the phone. The already overwhelming EIC audit has psychologically “beaten” the taxpayer down and taking her case to another level requires an element of “hand holding” with a compassionate explanation.

So you may wonder, “What do ‘hand holding compassionate explanations’ have to do with the implications of COVID-19 on low income taxpayers? Is it any different from how the pandemic impacts middle income America?” This EITC audit is my long-winded anecdotal way to explain a one word answer:  time. This group of taxpayers requires more reminders, phone calls, and face to face in person time than any other demographic I’ve ever worked with. In the past, I’ve worked with developing country NGO grantees, churches, refugees, and private operating foundation directors. All of whom may not have been technologically sophisticated. The low income taxpayer comes with the most ‘defeatist’ perspective that requires time to overcome. Technology is not the panacea that solves all problems. Individuals need a motive and reason to engage with the system. No video conferencing software can give the handshake, acknowledgement, and personal explanation needed.

I’ve had clients who could have snail mailed, faxed, or emailed a single page of a missing tax return to me to respond to an audit, but instead they would ask me if they could bring it into our office. When I first started this job, I was flabbergasted by the request. I would answer, “Of course, but if I happen to be away from my desk or in the middle of an appointment, feel free to leave it with my assistant or in my mailbox.” Often, they would patiently sit there and wait until I finished my call, or sometimes, they’d even wait for me to come back from lunch (!!). Now, I am no longer surprised at the request. I’ve come to realize that for a certain segment of my clientele, the direct handshake, eye contact, and acknowledgment, “I’ve received this document. I have seen you. I will be responsible for your case” – offers a reassurance that is the closest they will ever come to a human being explaining and working with them through the behemoth of the IRS machinery.

I used to disdain this part of my job as horribly inefficient (the billable hour culture of law influence). But now, I see it with more grace. Working through the IRS controversy process can help taxpayers begin to have more faith in the system. In turn, those taxpayers begin to make good faith attempts to re-engage in the system. A system that has, until now (for efficiency’s sake), treated them as a widget in the awe-inspiring revenue machinery of the United States government.

The process of humanizing the machinery of the complex IRS system requires time. So, how does “time” translate into practical IRS procedures and practice? I am sure my LITC colleagues and the ABA Tax Section Pro Bono & Tax Clinics listserv will think of many more practical and substantive tax provisions that would be helpful. But, as a new tax practitioner, I tend to think “functionally” rather than technically – since I am not as familiar with the Code or IRM sections that would have to be considered. Below is a list of practical “functional” needs I can think of that would be practical for my clients.

  • extend timelines to pay estimated quarterly taxes and monthly installment agreement amounts
  • create a streamlined process to reduce existing installment agreement payments
  • extend VITA (Volunteer Income Tax Assistance) to 7/15/2020
  • extend timelines to respond to notices, including audits and identity verification
  • extend timelines to renew ITINs (or permit the use of ITINs that expired in ty 2019/2020)
  • expand Certifying Acceptance Agents (for ITINs) into VITA programs
  • create a streamlined process for change of address updates (or deputize currently closed VITA volunteers to input address changes with existing ID from prior year returns)
  • lessen documentation (permit verbal?) requirement to qualify for CNC
  • broaden the definition of “experiencing imminent hardship” for TAS

Note: after this post was drafted, the IRS announced its “People First Initiative” in IR-2020-59 dated March 25, 2020, which provides significant relief including some of the items above.

Tax Lawyers Can Fight the Coronavirus Crisis with the Internal Revenue Code

Today, we welcome guest blogger Bob Rubin. Bob practices in Sacramento, California as a partner in Boutin Jones, Inc. While he primarily focuses on tax procedure in both federal and state matters, he gets involved in other tax issues as well. Today, he writes about a possible use of one of the disaster provisions passed by Congress at an earlier time to protect workers today. He and I started working in the same branch of Chief Counsel, IRS 43 years ago this month. Keith

Under section 139, gross income does not include any amount received by an individual as a qualified disaster relief payment. A qualified disaster relief payment is one of four types of payments made to, or for the benefit of, an individual, but only to the extent any expense compensated by the payment is not otherwise compensated for by insurance or otherwise. The first and most relevant type of payment is any amount paid to reimburse or pay reasonable and necessary personal, family, living, or funeral expenses incurred as a result of a qualified disaster. President Trump’s Stafford Act Declaration for New York, California and Washington made section 139 applicable.


The section 139 grants are not income to the employee/grantees, are not subject to employment taxes, are deductible by the employer/grantor and are not subject to information reporting under section 6041. The section 139 plan cannot discriminate based upon length of service or position. The grant cannot be in the nature of income replacement.

Besides section 139, see J. Comm. on Taxation, Technical Explanation of the Victims of Terrorism Relief Act of 2001, JCX-93-01 (Dec. 21, 2001) and Revenue Ruling 2003-12.  This is situation 3 in the revenue ruling:

Situation 3. Employer R makes grants to its employees who are affected by the flood described in Situation 1. The grants will pay or reimburse employees for medical, temporary housing, and transportation expenses they incur as a result of the flood that are not compensated for by insurance or otherwise. R will not require individuals to provide proof of actual expenses to receive a grant payment. R’s program, however, contains requirements (which are described in the program documents) to ensure that the grant amounts are reasonably expected to be commensurate with the amount of unreimbursed reasonable and necessary medical, temporary housing, and transportation expenses R’s employees incur as a result of the flood. The grants are not intended to indemnify all flood-related losses or to reimburse the cost of nonessential, luxury, or decorative items and services. The grants are available to all employees regardless of length or type of service with R.

Section 139 allows employers to assist employees who cannot meet their personal living expenses such as rent, mortgage payments or car payments on a tax-efficient basis. There should be a section 139 plan document that provides the benefits are payable without regard to length of service or position. The plan should require some type of modest substantiation such as a copy of a lease and a signed statement providing that the grantee cannot afford to pay $X of the rent.

California conforms to the income tax provisions of section 139. Employment taxes in California are administered by the California Employment Development Department (“EDD”). EDD Information Sheet State of Emergency or Disaster provides that section 139 grants are not subject to Personal Income Tax Withholding, but are subject to Unemployment Insurance contributions, the Employment Training Tax and State Disability Insurance contributions.

Many employees are being furloughed because they cannot work from home. Others are being furloughed due to a decline in economic activity. Section 139 is a tax-efficient tool employers can use to soften the blow on employees.

In addition to Bob’s thoughts on this subject, we have also gathered thoughts from Omeed Firouzi. Omeed is an ABA Tax Section Christine Brunswick fellow who works with Philadelphia Legal Aid specializing in employment tax issues of low income taxpayers. He prepared this for people working with individuals who receive Form 1099 wages summarizing the FFCRA provisions. Keith

SICK LEAVE for 1099 worker

The credit for COVID-19-related sick leave is 100% of the self-employed person’s “sick-leave equivalent amount” if they themselves are self-quarantined/diagnosed. It is 67% of the SE person’s “sick-leave equivalent amount” if the SE taxpayer is “taking care of [their] child following the closing of the child’s school.”

The “sick-leave equivalent amount” = *to take care of yourself,* the lesser of 1) your average daily SE income or 2) $511 per day for up to 10 days (up to $5,110 in total) OR to *care for a sick family member or your child following the child’s school closure,* $200 per day for up to 10 days ($2,000).

Daily self-employment income in FFCRA is defined as the net earnings for the year divided by 260 (i.e. 260 days).

FAMILY LEAVE for 1099 worker 

The COVID-19-related “emergency family-leave credit” – eligible for up to 50 days – is 100% of the SE taxpayer’s “qualified family leave equivalent.”

The “qualified family leave equivalent” = the lesser of 1) $200 or 2) the average daily SE income for the taxable year per day. As MarketWatch put it, “the maximum total family-leave credit would be $10,000 (50 days times $200 per day).” The House Appropriations Democrats summarized it such that “in calculating the qualified family leave equivalent amount, an eligible self-employed individual may only take into account those days that the individual is unable to work for reasons that would entitle the individual to receive paid leave pursuant to the Emergency Family and Medical Leave Expansion Act.”

Further, there is no “double benefit” allowed for both of these credits. So these credits are “proportionally reduced for any days that the individual also receives qualified sick leave wages from an employer,” so this is especially relevant for our clients who work both W-2 and 1099 jobs simultaneously. ( The statute specifically states that in such a scenario, “your self-employed equivalent benefit ‘shall be reduced (but not below zero) to the extent that the sum of the amount described…exceeds $2,000 ($5,110 in the case of any day any portion of which is paid sick time described in paragraph).”

Limited Appearance Rule Expands Access to Representation

We welcome first time guest blogger Attorney Karen Lapekas to Procedurally Taxing. Karen is the pro bono coordinator for the U.S. Tax Court Calendar Call Program for Miami. She was a Senior Attorney at the IRS Office of Chief Counsel before founding her own tax controversy firm. In today’s post Karen describes her experience with the Tax Court’s new limited entry of appearance rule, in a case we blogged here. Karen echoes the sentiments of guest blogger and pro bono attorney James Creech, who in a prior PT post urged the Court to permit limited entries of appearance at Calendar Call. Christine

Years ago, as an IRS Chief Counsel attorney, I watched an attorney file an appearance for a pro se petitioner during a Tax Court calendar call. The attorney had just met his client that morning. While witnessing this, I recall looking to my colleague and whispering, “Is he out of his mind?”  We shook our heads in admiration and disbelief. We understood the scale of the commitment. He was signing up not only for trial, but also for the most dreadful task that followed: preparing and filing briefs.

At that time, the attorney did not have the option of representing the petitioner for a limited amount of time. That was long before the Tax Court’s May 10, 2019 Administrative Order 2019-01. That well-received Order provides a procedure through which practitioners may represent a petitioner during a limited time period within a scheduled trial session.


The Order provides that, with petitioner’s concurrence, a practitioner in good standing that is admitted to practice before the Court can file a Limited Entry of Appearance. He can do so by filing a form no earlier than the start of a scheduled trial session and by serving it on all parties.

Before the May 10, 2019 Order permitted a limited entry of appearance, a practitioner could enter an appearance in a case only by signing and filing a petition or by filing a standard entry of appearance. T.C. Rule 24. The entry of appearance stayed in effect until the end of the case or until the Court granted a practitioner’s request to withdraw. In other words, once a practitioner was in, he was in for the long haul. He was committed to the case until he filed, and was granted, a motion to withdraw. There was little flexibility for practitioners who wanted to assist a pro se practitioner at trial but could not commit to the unknown amount of work following the trial.

Now, a practitioner can limit his appearance to a specific date or dates during a scheduled trial session. (See Tax Court’s FAQ, here.) The limited appearance automatically terminates at the earlier of the specified day(s) or the end of the trial session (unless the Court directs an earlier termination). It can only be filed in person at the trial session. In fact, the Tax Court will strike any limited entry of appearance forms that are filed electronically or before the start of the trial session. If, after filing the limited entry of appearance, the practitioner wishes to end his appearance even sooner, the practitioner would have to ask the Court for leave to withdraw.

The Limited Entry of Appearance leaves open the possibility for a practitioner to later file a standard entry of appearance. A practitioner who files a standard entry of appearance or who filed a petition in the case cannot later file a limited entry of appearance (unless he was previously allowed to withdraw). Whereas, a practitioner may file a standard entry of appearance after filing a limited entry of appearance. This gives pro bono practitioners the option — but not the obligation — to represent petitioners beyond specific dates during the trial session.

The trial clerk will have copies of the Limited Entry of Appearance form at the trial session. Unlike a standard Entry of Appearance form, the Limited Entry of Appearance is signed by both the practitioner and the petitioner.

Prior to the Tax Court permitting limited appearances, as a pro bono attorney at calendar calls, I often felt like a coach to wary Gladiators before their first battle in the arena. I told them when to arrive, where to stand, how to present their case, and what they needed to prevail. However, at the end of the conversation, I could give no more than a figurative pat on the back and an encouraging “Go get em’ Tiger!” Without being able to actually show up for petitioners in Court, the only “win” I could achieve was mediating a settlement or encouraging them to settle the case on its merits (thus sparing them the time and stress of trial).

Yet, there were cases that needed to go to trial, either because there were sincere questions of fact or law, or because, in my opinion, the IRS was wrong. In those cases, despite urging them to go forward because they “had a good case,” I witnessed many petitioners concede. Without the support of an attorney by their side, they were either intimidated by the trial process or did not believe they could prevail against such a goliath.

The Limited Entry of Appearance form makes it easier for pro bono practitioners to represent petitioners. However, it does not address another problem I personally face as a regular volunteer and the one I overcame the first time I filed the form in Tax Court. That problem? Prejudice.

Being a regular volunteer at calendar calls has its pros. With experience, it becomes easier to approach a pro se petitioner, find the right words to assuage their fears, and pinpoint the sticking point keeping the parties from reaching an agreement. But it has one “con” that I consciously fight: the suspicion that most pro se cases that reach calendar call unresolved only do so because the petitioner either did not participate in the Branerton process or their arguments lack merit. While it’s true that the vast majority of Tax Court cases are decided in favor of the government, in the same way that a judge cannot fairly decide a case with this presumption, a pro bono attorney with this mindset may overlook a meritorious issue and cause a petitioner to be further disillusioned by the process or concede an otherwise winning case.

I am embarrassed to admit that when I first consulted with pro se petitioner, Eberto Cue, at the Miami Tax Court calendar call in November, I was eager to finish quickly and return to the office. Seeing that Mr. Cue had a CDP case and wasn’t disputing the liability, I expected to explain the abuse-of-discretion standard and how difficult it is to overcome. I expected to tell him that the tax lien would not be withdrawn, and he should save his time and concede the case.

However, just two minutes into Mr. Cue’s story, I knew that I would not be going back to the office for several hours, and I knew that Mr. Cue had nowhere else to be that day. Why? Because the IRS’s refusal to withdraw a lien against him caused him to lose his job and he was still unemployed. The IRS refused to withdraw a lien even though it agreed Mr. Cue was “currently not collectible.” Regardless, it insisted that it would only withdraw the lien if Mr. Cue  either paid the balance in full, entered into a full-pay installment agreement of $475 month, or he provide documentation showing he would lose his job if the Notice of Federal Tax Lien was not withdrawn. Mr. Cue provided the documentation demonstrating that he would lose his job. The settlement officer did not seriously consider it.  As of the date of calendar call, the lien remained, effectively preventing Mr. Cue from getting another job in the industry that he loved: banking.

It turns out, Mr. Cue was not optimistic about my meeting with him either. He indicated he had consulted with at least two other attorneys who told him that he should concede the case. He expected that I would try to convince him to do the same. Fortunately, neither of our expectations materialized. I quickly believed in a case that I had expected to dismiss, and Mr. Cue believed in an attorney that he expected would dismiss him.

The most important thing to know about the Limited Entry of Appearance is that it exists. At the November calendar call, that’s all I knew. Though I read the May 10, 2019 Order, I had not read it closely, nor had I brought with me a copy of the Court’s Limited Entry of Appearance form. I did not plan on actually using it — at least, not so soon! (The Tax Court actually does not expect practitioners to bring this form to trial sessions. It is not available on the Tax Court’s Forms page and the copy published with the Order has a watermark, so it can’t be used. The Court will have blank copies available at trial sessions.)

Thus, when Mr. Cue’s case was called for trial, I stood up, admitted my ignorance, but expressed my desire to enter a limited appearance. The form was in my hand in seconds and I was addressing the Court with an opening statement just minutes later. Three days thereafter, Mr. Cue sat in Tax Court and heard the Court conclude his case by reading aloud the following words,

“Therefore, a decision will be entered for the petitioner.”

I can’t say that my representation of Mr. Cue effected the case. But I do believe that having an attorney stand up, believe in him, and support his conviction that he suffered an unwarranted loss due to the settlement officer’s capricious dismissal of his arguments, gave Mr. Cue a bit of confidence to proceed. At the very least, I believe it renewed his confidence that the legal system works, and that justice does prevail, no matter how “small” a matter may seem. The option of filing a Limited Entry of Appearance made that possible.

IRS Must Implement Measures in Support of Small Businesses Through Coronavirus Pandemic

Since our last post on the Covid-19 emergency, much has happened. Today, first-time guest blogger Noah McGraw, J.D., E.A. reviews IRS options in light of the national emergency and argues for the extension of deadlines. I expect the IRS’s coronavirus response webpage to be updated shortly as the agency finalizes its response. In other news, the U.S. Tax Court has canceled its April trial sessions, and other courts are closing as well.

Unfortunately, tax issues associated with natural disasters will be important in the coming months. The ABA Tax Section has collected several resources here, including webinars and free access to the disaster chapter of Effectively Representing Your Client Before the IRS. We will highlight resources and ways our readers can help as events develop. Christine

As President Trump declares a National Emergency for the COVID-19 outbreak, this pandemic affects not only public health, but the health of the very engine of our economy, small business. We are beginning to see historic impacts from the Coronavirus on our country, and it would be in the best interest of the government and citizens to lessen economic damage by providing small business and self-employed taxpayers with much needed relief.

As of this morning the dedicated webpage,, merely relays the Coronavirus will be covered by high-deductible health care plans. This will not suffice.

IRS protocol during any natural disaster should be used to allow taxpayers relief. IRM 25.16.1 provides thorough directives already in place with the Service that could be utilized for this crisis. The Service also recently declared that the citizens of Nashville would receive a reprieve after their recent tornado damage.


While the Coronavirus pandemic may not bring physical destruction, as natural or other declared disasters, which have previously caused these rules to be invoked, the economic impact from the coronavirus will be a lasting effect felt for many months, if not years. The virus is already impacting small businesses across all industries, who have seen a reduction of revenue in only a few weeks’ time due to customer caution, fear, self- or government-imposed quarantine.

The retail, restaurant, hospitality, travel, and entertainment industries are among the hardest hit by the pandemic. These labor-intensive sectors require employment of individuals to perform work, and therefore their Form 941 payroll tax burdens may lead to layoffs. Further, once massive 941 penalties are assessed for failure to timely deposit, they often place small businesses in a financial tailspin.

Per IRM 3(a), “The objectives of the Disaster Program Office are to: a. ensure eligible taxpayers receive the appropriate level of federal tax relief when they are impacted by a federally declared disaster,” and “c. timely and effectively communicate IRS disaster relief decisions to external and internal customers.”

In consideration of the level of escalation experienced over the past week, now is the time for the Service to follow the guideline and provide taxpayers with relief on this latest disaster affecting the country.

The Service should invoke IRC Section 7508A (“Authority to postpone certain deadlines by reason of Presidentially declared disaster or terroristic or military actions”) for tax returns and liabilities at least until such time that the Coronavirus could be considered by relevant health experts to be “past the peak” of the outbreak. An additional 90 days beyond this peak would be even more helpful to those businesses who are facing extreme drops in demand for their services as individuals self-quarantine across the country.

This relief necessarily should include extending the filing date for individual and business income tax returns, the Quarterly filing date for businesses’ payroll returns, as well as the non-assessment of penalty and interest against taxpayers who are unable to meet the Federal Tax Deposit payment deadline, or the Estimated Tax payment deadlines.

Our focus as a country needs to be on the health and wellness of our immediate families and communities. If the Service does not establish a scheme of relief from penalties and interest, the economic impact to small business and employees will only be compounded. At this critical time, taxpayers do not need the additional stress of tax season and potentially racking up severe penalties and interest for not having the capacity to dedicate toward tax filings and timely payments during this historic and difficult time.

IRS Moves to Prevent Defrauded Borrowers from Massively Overpaying Taxes Through Adoption of a New Revenue Procedure

We welcome first-time guest blogger Alex Johnson to PT. Alex is a second year law student enrolled in Harvard’s Predatory Lending Clinic.  Prior to law school Alex worked as a financial statement auditor and holds an inactive CPA license.  The Predatory Lending Clinic does amazing work.  It regularly receives press coverage for the work it does on behalf of students who did not receive the education they sought.  You can see some of that coverage here, here and here.  Keith

The IRS recently issued revenue procedure 2020-11 which extends the relief provided under three prior IRS revenue procedures: 2015-57, 2017-24, and 2018-39.  Generally, revenue procedure 2020-11 provides relief to taxpayers who obtain a Federal or private student loan discharge under certain circumstances.  It also provides relief to those taxpayers’ respective creditors who were required to file information returns and payee statements pursuant to section 6050P of the IRC.  Through this revenue procedure the IRS takes the position that all borrowers who have their loans discharged under either a closed school discharge, defense to repayment discharge, or as part of a legal settlement discharging private loans based on claims of school misconduct do not have to include the prior loan amount as gross income.  Further, to prevent confusion and simplify the process of filing taxes, entities normally required to issue a 1099-C will not have to if one of the above situations applies.


Harvard’s Project on Predatory Student Lending (the Project) represents students asserting their rights against predatory for-profit colleges and the Department of Education.  The Project uses individual cases and class actions to assist individuals who decided to better their life through higher education but were deceived by false promises and predatory practices.  Before the IRS issued this revenue procedure, the Project had taken steps to protect their clients against burdensome 1099-Cs and guard against the possibility that they would pay unnecessary tax on cancelled debt.  In one recent case, the Project worked to obtain a Private Letter Ruling from the IRS regarding a substantial amount of institutional debt cancellation won through litigation.

Defrauded students already face an uphill battle enforcing their legal right to a loan discharge.  Because many people defrauded by the for-profit college industry have high loan balances and low income, even when they were able to discharge their loans the tax consequences could be devastating.

The IRS and consumer advocates have taken multiple steps to try and mitigate this problem.  Prior IRS revenue procedures 2015-57, 2017-24, and 2018-39 provided the same relief that 2020-11 provides, but they only applied to schools owned by Corinthian College, Inc. or American Career Institutes, Inc.  In other cases, lawyers have obtained private letter rulings from the IRS as part of a legal settlement with predatory schools.  A defrauded borrower not covered by prior IRS revenue procedures or a private letter ruling was still likely able to exclude all or substantially all of the discharged amounts based on the insolvency exclusion or disputing the debt.  However, many borrowers are not aware of how to file a form 8725 or 982 and it would be impossible for any direct assistance or advocacy group to identify or contact them all.  This leads to many former borrowers including the discharged debt as income.

Defrauded borrowers’ debts can often be in the tens of thousands of dollars before their loans are discharged.  If their taxable income increases by the amount of the discharged loan it is very likely their higher income will disqualify them from several tax deductions and credits, raising their tax bill by thousands of dollars.  For the millions of Americans who live paycheck to paycheck, an unexpected (and incorrect) tax bill of thousands of dollars can be devastating. 

IRS revenue procedure 2020-11, goes a long way to fixing this problem.  The IRS acknowledged that “most…student loan borrowers [who have debts discharged because of school misconduct or school closure] would be able to exclude from gross income all or substantially all of the discharged amount[.]” They also agree that determining which exclusions to use “would impose a compliance burden on taxpayers, as well as… the IRS, that is excessive in relation to the amount of taxable income that would result.” 

The revenue procedure is retroactive.  It is effective for federal student loans discharged on or after January 1, 2016.  If a taxpayer had student loan debt discharged due to school misconduct after January 1, 2016, and paid taxes on the discharged amount, they should be able to file an amended return to get their money back.  The IRS also announced that taxpayers will not have to amend prior year returns to reduce education tax credits they took in the past.  It should be noted that VITA tax sites will not be able to complete these amended returns as the forms required are outside of their scope of services.

We applaud the IRS for this change.  It drastically reduces risk that borrowers will overpay their taxes and at the same time reducing administrative costs to the government.

Working Through an Employer’s Failure to File Form W-2 or 1099 with the IRS

We welcome guest blogger Omeed Firouzi to PT. Omeed is a Christine A. Brunswick public service fellow with Philadelphia Legal Assistance’s low-income taxpayer clinic, and he is an alum of the Villanova Law Clinical Program. His fellowship project focuses on worker classification. In this post, Omeed examines a recent case where the taxpayer unsuccessfully sought relief under section 7434 for her employer’s failure to report her compensation to the government at all. Litigation in this area is likely to continue. Christine

Tax season is upon us so I would be remiss if I did not cite fellow Philadelphian Ben Franklin’s famous maxim that “in this world nothing can be said to be certain, except death and taxes.” But whether you are filing your return as soon as possible or at 11:59 PM on April 15, there is one thing that is uncertain for many taxpayers: whether your employer filed an information return.

As we have seen in our clinic at Philadelphia Legal Assistance and more broadly, employers are increasingly not filing income reporting information returns with the Social Security Administration (SSA) and the Internal Revenue Service (IRS). The Internal Revenue Manual, at IRM, describes the proper procedure for IRS employees to follow should a taxpayer not receive an information return. The IRS website also provides tips and tools for how taxpayers should proceed in such situations.

Under the Internal Revenue Code and regulations promulgated under the Code, employers could be held liable – and subject to penalties – for failure to file correct information returns. However, the IRC and its accompanying regulations lack a clearly defined legal recourse for individual taxpayers when the employer fails to file any information return at all. No explicit cause of action exists for workers in this predicament. Recently, a taxpayer in New York unsuccessfully tried to make the case that 26 U.S.C. Section 7434 encompasses this situation.


The statute states, in part:

If any person willfully files a fraudulent information return with respect to payments purported to be made to any other person, such other person may bring a civil action for damages against the person so filing such return.

This statute has been the subject of several previous Procedurally Taxing posts. As these posts described in detail, courts are in consensus that the statute at least encompasses an employer’s willful misstatement on an information return of the amount of money paid to a worker. The legislative history of Section 7434 reveals that when Congress drafted the legislation in 1996, its authors were concerned with the prospect of “taxpayers suffer[ing] significant personal loss and inconvenience as the result of the IRS receiving fraudulent information returns, which have been filed by persons intent on either defrauding the IRS or harassing taxpayers.” 

The case law is split on whether misclassified taxpayers can use Section 7434 to file suit against their employers for fraudulently filing a 1099-MISC rather than a W-2, if the dollar amount reported is correct. No circuit court has ruled on the issue but most courts have followed the lead of the U.S. District Court for the Eastern District of Virginia and its Liverett decision that found that Section 7434 does not apply to misclassification.

However, one aspect of Section 7434 where there is judicial consensus is that the statute does not encompass the non-filing of an information return.

The U.S. District Court for the Eastern District of New York recently joined the chorus of courts on this issue. In Francisco v. Nytex Care, Inc., the aforementioned New York taxpayer argued that her former employer, NYTex Care, Inc., violated Section 7434 by “failing to report payments made” to the taxpayer and other workers. The facts of the case are straightforward. Taxpayer Herlinda Francisco alleged NYTex Care, a dry cleaning business, “fail[ed] to identify [her] and other employees as employees” by failing to file information returns for tax years 2010, 2011, 2012, 2013, 2014, 2015, and 2016. Francisco filed suit under Section 7434 alleging that NYTex “willfully and fraudulently filed false returns…by failing to report” employees’ income.

The court principally cited Second Circuit precedent, set in Katzman v. Essex Waterfront Owners LLC, 660 F.3d 565 [108 AFTR 2d 2011-7039] (2d Cir. 2011) (per curiam), in dismissing the case. Katzman established that Section 7434 “plainly does not encompass an alleged failure to file a required information return.” In Nytex, the employer “did not report payments made” to the taxpayer and other employees but the court found that Section 7434 was not the appropriate remedy.

More broadly, the Nytex court examined the plain language of Section 7434, its legislative history, and other relevant case law in foreclosing this claim. The plain text of the statute, the court noted, necessitates a filing by definition; there must be a filed information return in order for it to be fraudulent. The court also looked to Katzman’s parsing of congressional intent for guidance; in Katzman, the Second Circuit ruled explicitly that “nothing in the legislative history suggests that Congress wished to extend the private right of action it created to circumstances where the defendant allegedly failed to file an information return.”

Further, the court even relied upon another case the same plaintiffs’ attorney brought in the Southern District of New York. In Pacheco v. Chickpea at 14th Street, Inc., the plaintiff there also brought suit under Section 7434 on the basis of the failure of their employer to file information returns but the Southern District “found [that situation] was not covered by the statute.” Ultimately, the Nytex court granted the Defendants’ motion to dismiss for failure to state a claim upon which relief can be granted because the court found no cognizable claim for alleged failure to file an information return under Section 7434.

The result in Nytex leaves it frustratingly unclear what remedies exist for workers who find themselves in this taxpayer’s predicament. Had the employer here actually filed a 1099-MISC with the IRS, a potential argument could’ve been made about misclassification and whether that is encompassed by Section 7434. There is more division in the courts about that issue as opposed to the question posed in Nytex. Had the employer willfully overstated the amount the taxpayer was paid, the court could’ve found a clear Section 7434 violation, based on the reporting of a fraudulent amount.

Of course, neither of those things happened here. Instead, there is an aggrieved taxpayer ultimately unable to rely on a statute that is both ambiguous and seemingly limiting all at once. Practically, she is left with no clear way to sort out her own tax filing obligations when no information returns were filed. The court interestingly does not identify an alternative course of action, or judicial remedy, the taxpayer could seek.

In relying on congressional intent, the court leaves the reader wondering if Congress ever envisioned that an employer’s failure to file an information return could cause “significant personal loss and inconvenience” to the worker. If it means a frozen refund check as part of an IRS examination, there is certainly loss and inconvenience there. As Stephen Olsen described at length previously, courts have deeply examined the statutory language in terms of whether the phrase “with respect to payments made” only modifies “fraudulent” or if the information return itself could be fraudulent even if the payment amount is correct.

That discussion raises an interesting question as it relates to Nytex: if a court found an actionable claim for non-filing under section 7434, how would it determine whether the failure to file was fraudulent or whether there was willfulness in the non-filing? Since there would be no information return, would the court be forced to look at what kind of regular pay the taxpayer got to ascertain what the information return likely would’ve been?

Then, the court would have to find that there was “willfulness” on the part of the employer, not merely an inadvertent oversight. To make matters more complex, the court would have to likely wrestle with how there could be a willful act in a case where the employer did not even act at all. If a court found willfulness, a potential argument could be that a non-filing is analogous to filing an information return with all zeroes on it thus leading the court to say it is, in effect, fraudulent in the amount.

For now though: what can a taxpayer do in such a situation? When employers fail to provide or file information returns, the IRS recommends that workers attempt to get information returns from their employers. If that fails, the IRS advises workers to request letters on their employer’s letterhead describing the pay and withholding. Should an employer not comply with these requests, the IRS can seek this information from an employer while taxpayers can file Substitute W-2s attaching other proof of income and withholding – such as bank statements, paychecks, and paystubs. If a taxpayer got an information return but the employer never filed it with the government, that might ease the burden on the taxpayer but the IRS will still seek additional verification.

Even then, taxpayers could get mired in lengthy audits and examinations all while waiting for a critical refund check they rely on to make ends meet every year. We have seen this pattern play out in our own clinic and I suspect as it befalls more taxpayers, there may be either a congressional or judicial reexamination of Section 7434 or another effort to address the problem of non-filing of information returns.

Logic Loses in Taxpayer’s Effort to Recover Attorneys’ Fees

We welcome first-time guest blogger Professor Linda Galler to PT. Professor Galler is a co-author of the chapter, “Recovering Fees and Costs When a Taxpayer Prevails” in the forthcoming edition of Effectively Representing Your Client Before the IRS. Among Professor Galler’s many consulting, teaching, and scholarly pursuits, she directs the tax clinic at Hofstra University’s Maurice A. Deane School of Law.

In this post Professor Galler examines a recent decision denying a taxpayer fees and costs against the IRS. (Bryan Camp also covered the case here.) For those galvanized to learn more about qualified offers after reading this post, I recommend guest blogger Professor Ted Afield’s post on nominal offers, and Stephen Olsen’s grab bag of cautionary tales. Christine

Taxpayers rarely recover attorneys’ fees in tax cases despite the existence of a statute specifically providing for such recoveries. The Tax Court’s recent decision in Klopfenstein v. Commissioner, TC Memo 2019-156 (Dec. 9, 2019), is an example of why: the statutory requirements and the manner in which they are interpreted are overly exacting and counterintuitive. Klopfenstein involved a settlement of assessed penalties at Appeals for ten cents on the dollar – a 90 percent reduction in an assessed penalty – clearly raising the question of whether the government’s position in the case was substantially justified. Yet, in an opinion that relied heavily on established precedent, the court concluded that the IRS never took a “position” within the meaning of the statute and therefore that the taxpayer could not recover attorneys’ fees.


This essay does not argue the merits of recovery in Klopfenstein or in general. Clearly, there are policy arguments on both sides. Rather, the point is to both demonstrate the fruitlessness of seeking attorneys’ fees and to commend the taxpayer’s attorneys for having tried nonetheless.

Mr. Klopfenstein’s court filings describe him as an “investor, investment banker, and merchant banker” who “earned an MBA in finance and accounting from Emory University” and “is licensed as a CPA and as an investment banker.” In 2005, the IRS commenced a tax shelter investigation for 1998 through 2001 with respect to entities that Mr. Klopfenstein controlled. In November 2014, Exam issued a Notice of Proposed Adjustment (“NOPA”) asserting that Mr. Klopfenstein was a material advisor who failed to disclose reportable transactions as required by section 6111. The NOPA referenced more than 24 alleged transactions, which the IRS asserted should have been registered as tax shelters, and proposed penalties under section 6707 in excess of $1.6 million.

Mr. Klopfenstein timely requested that his case be considered by Appeals, which assigned the case to an Appeals Officer (“AO”) in October 2015. The penalties were assessed in March 2016 and the IRS immediately began collection efforts, culminating in the filing of notices of federal tax lien in two states. Meanwhile, the AO held a pre-conference meeting with Mr. Klopfenstein, his attorneys and Exam personnel in June 2016 and a settlement conference in August. A settlement was reached under which Mr. Klopfenstein agreed that he was liable for a section 6707 penalty of approximately $170,000 for 1998 and that he was not liable for penalties in an any other year. The settlement was memorialized in a closing agreement, which was returned to Mr. Klopfenstein, signed, on November 30, 2016. The following month, the IRS abated more than $1.4 million of the assessed penalties, roughly 90% of the original assessment.

On February 27, 2017, Mr. Klopfenstein submitted a request for reasonable administrative costs (attorneys’ fees) under section 7430(a)(1), contending that he was a “prevailing party” and therefore was entitled to an award for attorneys’ fees and costs incurred during the administrative proceeding. The IRS denied the request and Mr. Klopfenstein filed a petition with the Tax Court seeking review of the IRS’s action. Both parties filed motions for summary judgment limited to the question whether Mr. Klopfenstein was a prevailing party within the meaning of section 7430.

A taxpayer may recover costs under section 7430 by satisfying four requirements:

  1. The costs must be incurred in an administrative or court proceeding in connection with the determination, collection, or refund of tax, interest, or penalties;
  2. the taxpayer must exhaust all administrative remedies;
  3. the taxpayer must not unreasonably protract the proceedings; and
  4. the taxpayer must be the prevailing party.

(In addition, only taxpayers who satisfy certain net worth requirements qualify.) The term “prevailing party” is defined in section 7430(c)(4)(A) as the party who has substantially prevailed with respect to either the amount in controversy or the most significant issue or set of issues presented. Given the difference between the penalties asserted and those ultimately agreed upon in the settlement, the IRS agreed that Mr. Klopfenstein had substantially prevailed with respect to the amount in controversy.

Under section 7430(c)(4)(B), a party may not be considered the prevailing party if the government establishes that its position in the proceeding was substantially justified. Section 7430(c)(4)(B) defines the government’s position in an administrative proceeding as its position on the earlier of (i) the date on which the taxpayer received Appeals’ notice of decision or (ii) the date of the notice of deficiency. The court held in the government’s favor, explaining that a party can never be a prevailing party unless the IRS has taken a position that is “crystallized” into either one of those documents. As to the first, Mr. Klopfenstein’s case was settled at Appeals so no decision was issued. As to the second, taxpayers can never recover fees under this prong in proceedings involving assessed penalties, where a notice of deficiency is not issued. Consequently, Mr. Klopfenstein could not have been a prevailing party.

Mr. Klopfenstein’s losing argument was based on the structure of the statute. Section 7430(c)(4)(B) is an exception to the definition of prevailing party in section 7430(c)(4)(B). (Indeed, it is captioned as an exception.) Thus, if Mr. Klopfenstein substantially prevailed with respect to the amount in controversy (which the government conceded), he is the prevailing party unless the government establishes that its position was substantially justified. Logically, in Mr. Klopfenstein’s view, if the government never took a position (which the government also conceded), then Mr. Klopfenstein must be a prevailing party.

Mr. Klopfenstein’s argument is logical, reasonable and consistent with the statutory language. Indeed, a commonsense definition of “prevailing party” in the context of litigation likely would encompass a party whose adversary “lost” with respect to 90 percent of its claim. Thus, whether or not a denial of attorneys’ fees in cases such as this makes sense as a matter of policy, the viewpoint adopted by this court (based though it was on precedent) is awkward at best.

Had the government conceded that it took a position in the case, Mr. Klopfenstein might not have succeeded in recovering fees in any event. Under section 7430(c)(4)(B), attorneys’ fees are not awarded if the government establishes that its position was “substantially justified.” Substantial justification is a relatively low standard. It requires merely that the position have a reasonable basis in law and in fact. Treas. Reg. § 301.7430-5(d).

The best way to overcome the substantial justification hurdle is to make a qualified offer. Simply stated, if the IRS does not accept a taxpayer’s qualified offer to settle a case and the taxpayer receives a judgment that is equal to or less than the offer, the taxpayer is deemed to be the prevailing party; whether the government’s position was substantially justified or not is irrelevant. (The qualified offer rule is set forth in section 7430(c)(4)(E).) Unfortunately for Mr. Klopfenstein, however, the qualified offer rule applies only if a judgment is entered in a court proceeding. Because the case was settled before a court proceeding had commenced, the qualified offer rule did not apply.

Addendum: The Tax Court has jurisdiction to review IRS decisions whether to grant or deny (in whole or in part) requests for attorneys’ fees. Section 7430(f)(2); Tax Ct. R. 271. In docketed cases, the taxpayer must raise the claim during the case itself; res judicata precludes consideration of costs in a subsequent proceeding to the extent that the issue could have been pursued in the earlier case. Gustafson v. Commissioner, 97 T.C. 85 (1991); Foote v. Commissioner, T.C. Memo. 2013-276. Where the matter has been resolved administratively, the taxpayer must file a petition with the Tax Court within 90 days after the date on which the IRS mails a notice of decision. The taxpayer, not the attorney, is the proper party to file the claim. Greenberg v. Commissioner, 147 T.C. 382 (2016).