How Will IRS and Taxpayers Deal with the Administration’s Newfound View that the Entire ACA Is Unconstitutional?

Today we welcome back guest poster Tom Greenaway. Tom is a principal in KPMG’s Tax Controversy Services practice. Tom raises a question about a potential collateral consequence of the Administration’s new litigating position in the ongoing Affordable Care Act litigation. For background on the case and additional implications, I recommend Katie Keith’s Health Affairs blog post. Christine

Last week the Department of Justice signaled that the United States now thinks that the entire Affordable Care Act (Obamacare) is unconstitutional, in a filing in the Texas v. United States case. Eventually that position will be tested and decided by the appellate courts–again–but in the meantime, what will federal agencies like the IRS do?

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For instance, the 3.8 percent tax on net investment income was added to the Internal Revenue Code by the ACA. It generates about $20 billion in revenue each year. Will IRS put out guidance saying that taxpayers don’t need to pay that tax anymore? Doubtful.

Generally, both practitioners and the IRS dismiss, as frivolous, arguments that the federal tax laws are unconstitutional.

Nevertheless, some taxpayers may take the view that if both a district court and DOJ think the entire ACA is unconstitutional, there must be at least a reasonable basis, if not substantial authority, for that position. If so, taxpayers who decline to pay net investment income tax this filing season may avoid penalties in the event that they (and the administration) are proven wrong on the constitutional question.

Does it seem fair for the IRS to impose accuracy-related penalties on taxpayers who take the exact same position on an issue as DOJ?

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The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser. This article represents the views of the author only, and does not necessarily represent the views or professional advice of KPMG LLP.

©2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Damages for Lost Tax Documents = Refund Claim?

We welcome back guest blogger Sarah Lora, Supervising Attorney of the Statewide Tax Project of Legal Aid Services of Oregon. Today Sarah (with the help of 3L Katelynn Clements of Lewis and Clark Law School) examines a recent federal district court decision from Colorado. She argues that the court wrongly categorized a tort claim against the Transportation Security Administration as a tax refund claim, and so should not have dismissed the case for lack of jurisdiction. As we have discussed before on PT, the prerequisites to a successful tax refund suit are insurmountable for many taxpayers. Sarah points out that the taxpayer here may actually have a chance with the IRS. The record does not tell us if he’s tried that route yet. Christine

If the TSA removes from luggage and negligently misplaces tax papers that are essential to prove your claim for refund, sorry friend, you are out of luck. This, according to the federal district court in Schlieker v. Transportation Safety Administration, is the state of the law.

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On February 17, 2016, Mr. John Schlieker flew from Phoenix to Denver on Southwest Airlines. According to his complaint and documents attached to it, Mr. Schlieker checked luggage that contained “a multitude of green hanging files containing manila folders filled with documenting receipts, paperwork, check registers, charitable contribution receipts, medical and dental receipts, property interest confirmation; all the things needed to appropriately file [his 2015] tax return.” When he arrived in Denver, instead of those documents, Mr. Schlieker found a TSA notice of bag inspection stating that his bag “was among those selected for physical inspection.”

On May 19, 2016, Mr. Schlieker filed a claim for damage with the TSA for $5,000, representing the amount of refund he estimated he could have obtained had the TSA not misplaced his papers. TSA sent Mr. Schlieker a letter on December 1, 2016 denying his claim “after careful evaluation of all the evidence” and directing him to file a lawsuit in U.S. District Court if he was dissatisfied with the denial. Mr. Schlieker was dissatisfied. He then filed a lawsuit in the U.S. District Court for the District of Colorado against the TSA under the Federal Tort Claims Act for $5,000.

The court dismissed the lawsuit holding it lacked subject matter jurisdiction because Mr. Schlieker did not claim the refund with the IRS first. Assuming that the allegations in his complaint are true, as the law requires when considering a motion to dismiss, the papers that the TSA lost were necessary to file a claim for refund. Mr. Schlieker stated in his complaint that he could not “completely, honestly, and truthfully” sign a return claiming the refund without the papers the TSA took. How could he file a claim for tax refund when the TSA took the very documents he needed to assert the claim?

Mr. Shlieker’s actions are not unique. In many cases, even for sole proprietorships, a taxpayer may not keep any “books” detailing their profits, losses, or expenses. Instead, the taxpayer will save receipts and other records throughout the year which they then give to their tax preparer every April. This is not ideal, but it happens routinely.

Citing I.R.C. § 7422(a) and a long list of cases dismissing suits based on that statute, the court reasoned that Mr. Schlieker’s lawsuit was really a claim for a tax refund and should therefore be dismissed. The statute reads:

No suit or proceeding shall be maintained in any court for the recovery of any internal revenue tax alleged to have been erroneously or illegally assessed or collected . . . or of any sum alleged to have been excessive or in any manner wrongfully collected, until a claim for refund or credit has been duly filed with the Secretary [of the Treasury], according to the provisions of law in that regard, and the regulations of the Secretary established in pursuance thereof.

The cases the court cites, which cite this statute as the reason for their decision to dismiss, fall into two inapposite categories. The first are cases in which a third party, either an employer or an airline, is acting as an agent of the IRS to collect and pay over taxes. In those cases, the courts have held that § 7422(a) protects those agents, who are required by statute to collect taxes for the government under threat of criminal penalty for failure to do so, from civil lawsuits relating to the collection of those taxes. Sigmon v. Southwest Airlines (dismissing class action against Southwest for improperly charging excise taxes to passengers); see also Kaucky v. Southwest Airlines (same); Chalfin v. St. Joseph’s Healthcare Sys. (dismissing case against employer who improperly withheld FICA from medical residents working at a hospital).

In Mr. Schlieker’s case, the TSA was not acting as an agent of the IRS to collect and pay over taxes. It did not confiscate Mr. Schlieker’s documents in order to perform some duty it believed it owed to the IRS. Assuming the allegations in the complaint are true, the TSA committed a tort, plain and simple, when it took Mr. Schlieker’s documents out of his luggage and did not return them. For that reason, those agency cases are not persuasive.

The second group of cases hold that plaintiff must timely exhaust administrative remedies, by filing a claim for refund, prior to filing suit for the refund of taxes. See United States v. Clintwood Elkhorn Mining Co; United States v. Dalm; Strategic Hous. Fin. Corp. v. United States. The court misses the mark with this line of cases as well. TSA, by means of tortious conduct, took the means for filing a claim for refund away from Mr. Schlieker. To require Mr. Schlieker to file a return without supporting documents violates the letter of IRC §7206(1):

any person who . . . [w]illfully makes and subscribes any return, statement or other document which contains or is verified by a written declaration that it is made under the penalties of perjury, and which he does not believe true and correct as to every material matter . . . shall be guilty of a felony. . . .

In reality, even if Mr. Schlieker’s claim survived the initial motion to dismiss, he still might have lost or received only limited damages. In a case like this, TSA may argue that its seizure of the records was not the proximate cause of Mr. Schlieker’s loss. After all, with today’s technology, could he not have reconstructed his records well enough to file his tax return? Copies of bank records, dental and medical bills, mortgage interest paid, etc. are likely readily available online. I do not see much in the multitude of green hanging files that he could not replace with some headache and hassle. It is possible he could still get those documents and file his claim for refund before April 15, 2019. Perhaps the damages in a case like this should be measured by the cost to replace the documents, a reasonable estimate of the lost refund attributable to any irreplaceable documents, and perhaps any non-economic damages such as emotional distress.

Refund checks, and other “news” inspired by the IRS

We welcome back guest blogger Bob Kamman. Today Bob delves into the “real-time” tax return statistics available during the filing season. Christine

You might remember February 27, 2019 as the day of a House committee hearing in Washington, or a summit meeting in Hanoi. But for millions of Americans, it was Jackpot Wednesday, when the Treasury made, in one day, seventeen percent of the Form 1040-related payments it will issue all filing season.

The news media have been fascinated more than usual this year by IRS refund checks. They simply disregard that in many cases they are not refunds, and in most cases they are not checks.

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So let’s agree that when we read about “refund checks,” we know what the journalists and IRS itself mean are largely electronic deposits to individual bank accounts, often representing credits claimed by people who pay no federal income tax.

For actual taxpayers, 2019 refund amounts may be more or less than those of previous years because of changes both to tax law, and to the way that wage and pension withholding is calculated. There is anecdotal evidence, and nothing else, that many are receiving smaller amounts.

But for those whose annual budget relies on the earned income credit or the child tax credit, the annual concern is whether IRS will question eligibility and sequester payments until it is sure that there is no fraud or mistake involved. That’s why the February 27 mass payout of $45 billion was good news for the poor and for those who help them with tax procedure.

Last filing season, IRS paid out about $265 billion in “refunds” through April 20. IRS will tell you once a week, how many returns it had processed cumulatively through the previous week. But Treasury will tell you by this afternoon, how much tax money it collected and how much in IRS payouts it made yesterday; so far this month; and to date this fiscal year. The data can be found online in the Daily Treasury Statement.

There is a lag between when IRS counts a refund return, and when Treasury makes the payment. That’s why the IRS weekly report for Friday, February 22, showed a huge increase in refunds, while the Treasury report for February 22 still showed a lag. The following week’s $45-billion payout explained the IRS calculation.

Treasury does not report the number of payments, just the amount. So we must rely on IRS for the “average refund” figure, which answers the question: “Of those who get refunds, what is the average amount?” This figure does not attempt to answer the question: “Of those who file returns, how many owe nothing or must pay?”

However, the March 1, 2019 IRS report shows that the number of refunds was 81.6% of the total returns processed. This was down slightly from 82.1% in the comparable report from March 2, 2018. Half a percentage point is not that much unless you filed one of the 650,000 or so returns which that number represents. Elections have been decided by smaller margins.

IRS does not tell us, until much later this year or next, how many returns showed no tax owed. Nor does it report the average payment with balance-due returns. What we do know from the Daily Treasury Statement is how much money was deposited into its account at the Federal Reserve. (This number also includes employment taxes not paid through the “Federal Tax Deposit” system, but those are mostly from small employers.)

Through March 7, the total “individual income and employment taxes, not withheld” for the fiscal year that began October 1 was $125.3 billion. The comparable amount for the previous year was $123.7 billion. But keep in mind that IRS offers a “file now, pay later” option for electronic filers. Taxpayers can request the balance due be withdrawn from their account on a certain date – for example, April 15. Last year, tax returns were due on Tuesday, April 17. The one-day count on that date for this category was $28.1 billion. The next three days, the checks continued falling out of the envelopes: $11.6 billion on Wednesday, $11.8 billion on Thursday, and $15.2 billion on Friday.

While the weekly IRS reports shed little light on collections, they raise a couple of interesting questions about tax administration. For example:

1) Where have all the practitioners gone?

Through March 1, 2019, the returns prepared by tax professionals had dropped by 1.7 million, or 5.8%. Meanwhile, self-prepared returns had increased by about 371,000. Does this mean the new 1040 forms, and higher standard deduction, have made do-it-yourself an option for more people? Are improvements in commercial software responsible? Are more kitchen-table preparers just refusing to sign off on their work because of the Form 8867 “due diligence checklist” interrogatories?

2) Why did direct-deposit become so popular?

Last year, about 84% of refunds were deposited directly to taxpayer accounts. So far this year, the rate is about 93%. Do Americans trust the financial-services industry more, or the Post Office less?

The Daily Treasury Statement provides some interesting information about tax-related issues, as well. For example:

  • Customs “and certain excise taxes” collected for the fiscal year through March 7 were $35.3 billion, up from $20.3 billion for the same period last year. What could the Treasury do with an extra $15 billion? Well, corporation income tax FTD receipts were down from $94.1 billion to $73.5 billion.
  • FTD’s for “withheld income and employment taxes” are holding steady at $1.108 trillion through March 7, about the same as $1.120 trillion last year.
  • The “Treasury Offset Program” collected nearly $3 million in February from tax refunds that would otherwise have been paid to people who owe federal, state or child-support debts. The amount for February 2018 was $2.4 million.
  • Social Security benefit payments increased from $72.35 billion in February 2018 to $76.83 billion in February 2019. Some of that 6.2% growth can be explained by the 2.8% “cost of living adjustment” this year.
  • “Business” tax refunds so far this fiscal year total $28.9 million, and more than half of them were paid by check, not direct deposit. The comparable amount for FY 2018 is $35.4 million.

How reliable are any of these reports? My confidence was somewhat shaken by the Daily Treasury Statement for Friday, March 8, which showed a negative $32 million for “IRS Tax Refunds Individual (EFT).” A footnote explained, “reported as a negative amount due to a return/reversal of $32 million.”

Well, I suppose if some economists can advocate a negative income tax, others can support a negative income tax refund.

TIGTA’s Report on the Growing Gig Economy

Today we welcome guest blogger Joseph C. Dugan. Joseph is a 2015 graduate of Indiana University Maurer School of Law. During law school, he coordinated IU’s IRS VITA program and worked part-time at a Low-Income Taxpayer Clinic. After graduating, Joseph clerked on the U.S. District Court for the District of Maryland and the U.S. Court of Appeals for the Seventh Circuit before assuming his present position as a trial attorney with the Federal Programs Branch of the Department of Justice, Civil Division. Joseph lives in Maryland with his wife and four-month-old son. Joseph writes in his individual capacity and does not purport to represent the views of the Department of Justice or any of its components.

 This post originally appeared here on the Surly Subgroup blog. We highly recommend adding it to your regular blog reads. Christine

On February 14, 2019, the Treasury Inspector General for Tax Administration (TIGTA) released a Valentine’s Day treat: a comprehensive report following a TIGTA audit concerning self-employment tax compliance by taxpayers in the emerging “gig economy.”

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As Forbes noted last year, over one-third of American workers participate in the gig economy, doing freelance or part-time work to supplement their regular incomes or stringing together a series of “gigs” to displace traditional employment. Popular gig services include ride-sharing giants Uber and Lyft; arts-and-crafts hub Etsy; food delivery services GrubHub and Postmates; and domestic support networks Care.com and TaskRabbit. Even Amazon.com, the second-largest retailer in the world and a traditional employer to many thousands of workers in Seattle and at Amazon distribution centers worldwide, has gotten in on the gig economy with its Amazon Flex service. And for those interested in more professional work experience to pad their resumes, Fiverr connects businesses with freelance copywriters, marketers, and graphic designers. The power of smartphones and social media, coupled with flat wage growth in recent years, makes the digital side hustle appealing and, for many households, necessary.

From a tax revenue perspective, the gig economy is great: it is creating billions of dollars of additional wealth and helping to replenish government coffers that the so-called Tax Cuts and Jobs Act (TCJA) has left a little emptier than usual. From a tax compliance perspective, however, the gig economy presents new challenges. Gig payers generally treat their workers as independent contractors, which means that the payers do not withhold income tax and do not pay the employer portion of FICA. Instead, the contractor is required to remit quarterly estimated income tax payments to the IRS and to pay the regressive self-employment tax, which works out to 15.3% on the first $128,400 in net earnings during TY2018, and 2.9% to 3.8% on additional net earnings. That self-employment tax applies even for low-income freelancers (i.e., it cannot be canceled out by the standard deduction or nonrefundable credits).

While the proper classification of gig workers is a legal question subject to some debate, platforms hiring these workers generally treat them as independent contractors. Taxpayers new to the gig economy and unfamiliar with Schedules C and SE may not be aware of their self-employment tax obligations. If they are aware, they may not be too eager to pay, especially if back-of-the-envelope planning during the tax year failed to account for this additional, costly tax.

In light of this emerging economic narrative and evidence that the portion of the Tax Gap attributable to self-employment tax underreporting is on the rise, TIGTA undertook an audit. TIGTA identified a population of 3,779,329 taxpayers who received a Form 1099-K (an information return commonly used by gig economy payers, as discussed below) from one of nine major payers between TY2012 and TY2016. The audit found that 25% of those taxpayers did not report income on either Schedule C (where self-employment income should be reported) or Form 1040 line 21 (where self-employment income is often incorrectly reported). The TIGTA audit further found that, after adjusting for taxpayers who filed Schedule C with a profit of less than $400 (who may not owe self-employment tax) and taxpayers who earned less than $400 on combined Forms 1099-K received by the IRS, 13% of taxpayers did not file a Schedule SE and did not pay self-employment taxes.

These TIGTA findings are revealing. As Leandra Lederman and I discuss in a forthcoming article, Information Matters in Tax Enforcement, there is a host of evidence that information reporting increases tax compliance. As a suggestive starting point, according to IRS statistics, the voluntary individual compliance rate for income subject to substantial information reporting is 93%, while the voluntary individual compliance rate for income subject to little or no reporting is under 37%. TIGTA’s report does not provide percentages that permit a direct comparison with overall IRS compliance estimates. However, the high rates of complete failure to report income tax and employment tax by gig workers receiving a 1099-K seem to suggest that the 1099-K requirement is not as effective as its drafters hoped. Given the transparency of the earnings to the IRS, a likely explanation for this failure is that some gig workers simply do not understand their tax obligations.

But there’s another problem: a substantial amount of gig income is not clearly subject to an information reporting requirement at all. Back in the day, if a payer hired an independent contractor and paid the contractor over $600 during the tax year, the payer was required under Code section 6041(a) and IRS guidance to file Form 1099-MISC, an information return that put both the IRS and the taxpayer on notice of the income. In 2008, however, Congress enacted Code section 6050W, which, upon its effective date in 2011, required “third-party settlement organizations” (TPSOs) to report payments on what is now Form 1099-K, subject to a generous $20,000/200 transaction threshold. A tiebreaker rule set forth in Treas. Reg. § 1.6041-1(a)(1)(iv) provides that a payer subject to reporting requirements under both Code section 6050W and Code section 6041(a) should comply with the former provision only. As a practical matter, this means that payers who consider themselves to be TPSOs (the definition of which is ambiguous and obviously drafted without reference to the emerging gig economy) can report payments for their higher-earning contractors while leaving contractors with under $20,000 or under 200 transactions invisible to the IRS. What are the chances that an Uber driver who earns a few hundred bucks a month in compensation for rides might genuinely, or conveniently, forget to report those receipts come tax time if she hasn’t received a 1099? Pretty good, if prior Tax Gap research is any indication.

My coauthor, Leandra Lederman, presaged some of the problems with Code section 6050W and Form 1099-K reporting in a 2010 article, in which she identified factors that inform the determination whether additional information reporting might be successful. As Leandra and I observe in Information Matters, Form 1099-K held little promise from the outset. And the problems inherent in the TPSO reporting regime have only worsened as the worker economy has transitioned more and more toward lean, diversified gigs.

As if all of this weren’t concerning enough, TIGTA also found serious problems with the way the IRS goes about assessing self-employment tax compliance. Due to resource constraints, the IRS’s Automated Underreporter (AUR) program, the first line of offense against noncompliant taxpayers subject to information reporting, only selects and works a fraction of returns flagged for discrepancies by the Information Reporting and Document Matching Case Inventory Selection and Analytics (IRDM CISA) system (an acronym that only a bureaucrat could love). The idea is for AUR examiners to focus on cases that may yield the highest assessments while also pursuing repeat offenders and providing balanced coverage across AUR inventories. Yet, even as the discrepancy rate involving Forms 1099-K issued by the nine gig economy companies at the center of the TIGTA study increased by 237% between 2012 and 2015, the AUR program selected just 41% of these cases for review.

That review is not necessarily robust. TIGTA found that, for TY2011 through TY2013, 57 percent of all self-employment cases selected to be worked by AUR examiners were screened out—that is, closed without further action. Yet for cases not screened out, 45% were assessed additional self-employment tax; and TIGTA estimates that about $44 million in further self-employment tax could have been assessed during TY2013 alone if the screened-out cases had been worked and resolved similarly to those that were not screened out.

TIGTA also found that, while the IRS has implemented several tiers of quality review within the AUR program, little action is being taken to identify and correct error trends, and the review processes themselves are prone to error and mismanagement due in part to a lack of centralized coordination. One unfortunate consequence of these shortcomings in the AUR program is that gig workers who are already confused about their obligations are receiving inaccurate CP 2000 notices (the standard notice that informs a taxpayer of an error detected through AUR). In fact, TIGTA estimates that the AUR program sent taxpayers 23,481 inaccurate CP 2000 notices about their self-employment taxes in FY2017. That error rate is not only bad for taxpayers, it is bad for the government: if self-employment tax is inadvertently omitted from a CP 2000 notice, as a matter of policy the IRS is generally unable to correct that omission even if the IRS later detects the mistake. That additional revenue is simply forfeited.

So, despite all its wonderful potential to increase both economic opportunity for hard-working Americans and access to valuable services for those willing to pay for them, the gig economy has created some new challenges for tax administration. Gig workers are unsure of (or noncompliant with) their self-employment tax obligations; gig payers are unsure of (or taking advantage of) their status as TPSOs; and the AUR program is not keeping up with the changing times. TIGTA proposes a host of corrective actions in the February 14 report, most of which the IRS has endorsed. Among these corrective actions, three that strike me as particularly important are Recommendation 3 (revise the Internal Revenue Manual to clarify those circumstances in which an AUR examiner should enter a note justifying a screen-out decision); Recommendation 10 (develop IRS guidance on how taxpayers should classify themselves under Code section 6050W); and Recommendation 11 (work with Treasury to pursue regulatory or legislative change regarding the Code section 6050W reporting thresholds). The IRS disagrees with Recommendation 10, asserting that the problem is better addressed through a Treasury Regulation than IRS guidance and complaining that the IRS is preoccupied with issuing guidance under the TCJA and reducing regulatory burdens pursuant to E.O. 13,789. That may well be the case, but revenues are being lost every year that gig payers and workers misunderstand, or misapply, their reporting and payment obligations. There is no reason to suppose that the gig economy will start contracting any time soon, so it would be prudent for the IRS and Treasury to allocate resources to address this problem expeditiously. (Yes, I appreciate that the IRS is chronically underfunded and forced to make very difficult choices about how to staff projects. This is a problem that Congress largely created and Congress alone can fix.)

Ultimately, the best course here might be for Congress either to tailor the definition of TPSOs to a narrower subset of payers for whom the higher thresholds actually make sense (e.g., platforms like eBay, whose casual sellers may not net any income through their online rummage sales) or to lower those thresholds to make gig earnings more transparent to the IRS. So long as we maintain the regressive self-employment tax, we ought to ensure that all taxpayers liable for the tax—even tech-savvy taxpayers Ubering their way through the emerging economy—pay their fare share.

Claiming Refunds for Veterans Where Disability Severance Pay Was Improperly Withheld

Today we welcome guest blogger Sarah Lora. Sarah has been the Supervising Attorney of the Statewide Tax Project of Legal Aid Services of Oregon since April 2016.  Prior to that that, she worked for 13 years as an attorney in Legal Aid’s Farmworker Program where she concentrated her practice on employment litigation and tax controversy. Sarah is also a vice-chair of the pro bono and tax clinics committee of the ABA Tax Section. At the most recent Tax Section meeting she participated in a panel presenting on the issue of obtaining tax refunds for veterans. The blog has previously brought attention to the special extended time frame for filing refund claims by exonerees, here and here. In a similar fashion to exonerees, who needed to file refund claims long after the normal statute of limitations had expired, many veterans face the same issue because of a mistake by the Department of Defense that went unnoticed. Sarah explains the problem and the efforts being made to assist veterans in getting back the money they overpaid to the Treasury. With exonerees the need was for people to assist in filing the claims. For the veterans, perhaps the biggest need is identifying the individuals entitled to the refunds. While the Department of Defense is seeking to notify the veterans, it has lost contact with many of the individuals. Keith

Over 130,000 veterans have the right to a refund of over $717 million. So far only 26,000 have made claims and the time period for making claims for many of those veterans in nearly over. The NTA blogged about this issue last November here. In this post I will summarize the issues discussed by the NTA, as we seek to reach all affected taxpayers, and to provide resources for outreach efforts.

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Summary of Issue: Since 1991 the Department of Defense has been improperly withholding federal income taxes and issuing information returns for disability severance payments, also known as “DSP.” A DSP is a one-time lump sum payment made to service members separated due to medical disability. DOD’s withholding of federal income taxes from DSP was improper because the payments are excluded from income under Section 104(a)(4). See St. Clair v. United States. According to the IRS, the DOD improperly withheld approximately $717 million from over 130,000 veterans. These numbers would be higher if they included veterans who served in the military reserves.

To recoup the wrongfully withheld funds, veterans must file an amended tax return with the IRS. However, many taxpayers missed the 3-year deadline for claims for refund under Section 6511(a). To remedy this, Congress passed a law called the Combat-Injured Veterans Tax Fairness Act in 2016, which allows veterans to file an amended return within 1 year after the Department of Defense provides the taxpayer with a letter describing their right to a refund of improperly withheld amounts. As of October 2018, according to TAS, 13,000 letters have been returned as undeliverable. The IRS has advised that the 1-year time period does not begin to run on undeliverable letters. According to TAS, as of October 26, 2018, only 26,000 of the 130,000 veterans had made refund claims for the improperly withheld taxes.

What You Can Do: Reach out to your community partners, veterans groups, and other allies to make sure we help all qualified veterans get the refunds they deserve. Some ideas: post information to your facebook page, send information to your community partners, set up a table at a Stand Down event in your area, or request to give a presentation at your local Purple Heart chapter.

Resources Available: The resources below, created by TAS, are available for dissemination.

For any readers who have already engaged in an effort to obtain refunds for these veterans, we welcome your comments on how the effort is going or your advice on how to make the effort more effective.

 

Nominal Qualified Offers and TEFRA

We welcome guest blogger Ted Afield. Professor Afield directs the low income taxpayer clinic at Georgia State. The Georgia State tax clinic serves more clients that almost any clinic in the country and provides them with high quality service. The tax clinic at the Legal Services Center at Harvard and the Georgia State tax clinic have partnered on several amicus briefs and it’s always a pleasure to work with their clinic. The case discussed by Professor Afield provides important precedent for successful litigants seeking to recover fees after making a qualified offer. Paying attorney’s fees to a partnership that engaged in an abusive tax shelter promotion makes for a tough pill for the government to swallow which, I believe, caused it to argue the issues discussed here so vigorously. Even though I do not support the underlying tax position taken by the partnership, it had the winning issue on the statute of limitations and that formed the basis for successful litigation on the attorney’s fees issue. Perhaps the benefit of this opinion for parties seeking fees will outweigh the loss to a tax shelter promoter. Keith

The United States Court of Appeals for the Federal Circuit recently issued an opinion in BASR Partnership, William F. Pettinati, Sr., Tax Matters Partner v. United States, in which the court determined whether a partnership was entitled to recover its reasonable litigation costs from the government when it submitted a nominal $1 qualified offer to the government in tax controversy litigation and subsequently prevailed at summary judgment.   This case was a Son of Boss case in which the IRS waited a decade before issuing a Final Partnership Administrative Adjustment (FPAA) disallowing BASR Partnership’s tax benefits.  Accordingly, the tax matters partner, William Pettinati, Sr., challenged the FPAA as untimely pursuant to the three year statute of limitations in IRC § 6501(a).  Given the confidence that the BASR partners had in their statute of limitations argument, they submitted a $1.00 qualified offer to the government, which the government rejected.  As it turns out, the BASR partners’ confidence was indeed justified, and they prevailed on summary judgment and then moved for an award of litigation costs under IRC § 7430(c)(4)(E), which the trial court granted. 

On appeal, the government raised five arguments for why the court should not have awarded litigation costs, three of which being of particular interest in that they explore the relationship between TEFRA and qualified offers as well as whether nominal offers are in fact permissible.  The government’s first argument was that BASR was not a “party” in the litigation because of TEFRA and therefore could not be a “prevailing party” as required under the qualified offer statute.  The government’s second and third arguments were that, even if BASR was a “party,” the tax liability was not “in issue” and BASR did not incur any litigation costs during the underlying TEFRA proceeding.  The government’s remaining arguments were that, even if IRC § 7430(a)’s eligibility requirements were satisfied, the trial court did not apply the real-party-in-interest doctrine and abused its discretion in granting the award.  These arguments presented an opportunity for the Federal Circuit to examine how the TEFRA and qualified offer rules interact with each other and, of particular interest to me and Keith, presented an opportunity for the court to determine whether nominal qualified offers, which are often utilized by low-income taxpayer clinics, would be considered per se unreasonable. 

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The Underlying Partnership is a Prevailing Party 

 The court rejected the government’s argument that only individual partners, rather than the partnership itself, can be parties in a TEFRA proceeding and that, accordingly, BASR Partnership could not be a “prevailing party.”  The court noted that the language in IRC § 6226 that permits individual partners to participate in the proceeding should be read inclusively rather than exclusively (i.e., just because the statute specifically indicates that partners can be parties, that does not mean that it prevents the partnership itself from also being a party).  The court noted that the cost-shifting language of IRC § 7430(c)(4)(A)(ii) supported this interpretation of IRC § 6226 because it specifically contemplated “any partnership” as being included in the definition of “prevailing party.” 

Tax Liability is “In Issue” in a TEFRA Proceeding 

 After determining that BASR Partnership could indeed be a prevailing party, the court next had to consider whether the tax liability was “in issue” in a TEFRA proceeding.  The government contended that the liability was not “in issue” because the tax liability is determined at the partner level rather than at the partnership level in such proceedings.  The Court rejected this narrow reading of the phrase “in issue”, however, and held that actual liability would not have to be determined at the partnership level for it to be “in issue”—rather, it was sufficient that the partnership determination would impact the partners’ individual tax liability. 

The partnership incurred litigation costs despite the fact that the costs were incurred in the partner’s name, and the partnership was the “real party in interest” 

Because the resolution turned more on an issue of contract and state partnership law than an issue of tax procedure, I will not overly dwell on the government’s argument that the partnership did not incur any litigation costs because the costs were incurred by the managing partner individually and the argument that the “real party in interest” doctrine prevented a recovery of costs because the real parties in interest were the partners, whose net worth would have made them ineligible to recover costs under IRC § 7430.  Suffice to say that the court rejected these arguments because the managing partner had brought an action in his capacity as tax matters partner under IRC § 6226, and the partnership agreement and the relevant state partnership law (in this case, it was Texas) obligated the partners to reimburse him for litigation costs.  It is worth noting, however, that the “real party in interest” issue is the one that provoked a dissenting opinion arguing that the fact that the partners were entitled to have their litigation costs reimbursed by the partnership made them the true beneficiaries of the award and thus the real parties in interest. 

Awarding litigation costs was not an abuse of discretion (i.e., the issue causing low-income taxpayer clinics to weigh in) 

The government’s final argument was that awarding litigation costs constituted an abuse of discretion because the taxpayer’s nominal $1.00 qualified offer “was not made in a good-faith attempt to produce a settlement.”  This was the argument that got Keith’s and my attention, because it seemed to us that the government was attempting to argue that nominal qualified offers were per se invalid.  If successful, this argument could have severely hindered a common litigation strategy that low-income taxpayers employ in frozen refund litigation.   

 Accordingly, our clinics (the Philip C. Cook Low-Income Taxpayer Clinic of Georgia State University College of Law and the Harvard Federal Tax Clinic) filed a joint amicus brief in this case solely on the issue of whether taxpayers should be denied reasonable litigation and administrative costs based on the dollar value of a qualified offer.  The clinics argued that none of the requirements of IRC § 7430 state that an offer must be of a minimum amount or of a minimum percentage of the taxpayer’s possible liability in order to be valid.  The clinics were particularly concerned with the potential impact that a rule requiring a minimum qualified offer amount would have on low-income taxpayers, which motived them to submit the brief. Low-income taxpayers who have had their refunds frozen often submit $1 qualified offers when they believe that they will prevail in a tax court case in order to shorten the time it takes for them to resolve their case and receive their frozen refund.  Obtaining these frozen refunds is of critical importance to these vulnerable taxpayers because they often need the tax refunds generated by the earned income tax credit to meet their basic living expenses.  Submitting a qualified offer puts pressure on the government to consider the low-income taxpayer’s case more quickly than it otherwise would because of the risk that the government would have to pay fees and costs if the taxpayer prevails.   

 In looking at this issue, the court agreed that a nominal $1 qualified offer can be reasonable and that awarding litigation fees was not an abuse of discretion.  While the court did not discuss the impacts to low-income taxpayers directly in its opinion, the clinics are pleased that the court reached this result and that nominal qualified offers will remain a viable litigation tool for low-income taxpayers who rely on them to obtain improperly frozen refunds as quickly as possible. 

 

 

Rethinking Free File

Today’s post is written by Frank DiPietro, LITC Director at Indiana Legal Services, Inc., and Sarah Taylor, a third-year law student at Indiana University Mauer School of Law. Frank and Sarah review the development of the Free File program and examine possible reasons for its extremely low take-up rate. As Frank and Sarah mention, the National Taxpayer Advocate’s 2018 Annual Report to Congress identifies deficits in the Free File program as the fourth most serious problem facing taxpayers.

One issue of concern to the NTA (and today’s guest bloggers) is the upselling of paid products. While the Memorandum of Understanding governing the Free File program has provisions designed to protect taxpayers from upselling, these protections are limited and they don’t apply to non-Free File preparers. To address this, the 2019 Purple Book includes a recommendation that Congress amend section 6713 so the Treasury Department could write regulations designating the “use of tax return information for certain questionable business practices or the sale of certain products with high abuse potential as civil violations without also making them criminal violations.” Christine

On January 28th, tax filing season officially began. It is estimated by the Internal Revenue Service (IRS) that over 150 million individual tax returns will be filed for tax year 2018. The majority of these tax returns could be prepared and filed electronically for free. According to the Free File, Inc., formally Free File Alliance (Alliance), an organization composed of the largest tax preparation software companies, 70% of taxpayers are eligible to prepare their tax returns and file electronically for free. However, it is estimated that only 3% of those eligible will utilize this service. This post evaluates some of the reasons the Free File program has failed to provide free online preparation and filing for the majority of taxpayers and suggests alternative approaches to addressing the tax preparation needs of the most vulnerable taxpayers.

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The IRS and the Free File Alliance (members include H&R Block, Intuit, Liberty Tax) entered into a memorandum of understanding (MOU) in 2002 to allow financially eligible taxpayers to prepare and electronically file tax returns using Free File Alliance members’ tax preparation software for free. Section 2004 of the IRS Restructuring and Reform Act of 1998 (RRA ’98) mandated that the IRS develop a return-free tax system under which eligible individuals could comply with their filing obligations without preparing a tax return for all returns filed after December 31, 2007. However, in a 2003 report to Congress, the Secretary of the Treasury stressed that such a system would not be feasible without a significant increase in electronic filing and may not actually reduce administrative costs or compliance burdens for low- to middle-income taxpayers. Instead of developing the return-free system Congress envisioned, under the direction and guidance of the Department of the Treasury and the Office of Management and Budget, the IRS entered into the Free File MOU with an intention to increase access to online tax preparation software and free electronic filing options. Yet, over 15 years later, almost all eligible taxpayers still pay tax preparation and electronic filing fees, use of the Free File program is actually declining, and the Secretary of the Treasury has not implemented the return-free mandate for eligible taxpayers or continued to annually update Congress on its development as required by RRA ’98.

The reasons behind the failure of the Free File program are numerous. The National Taxpayer Advocate, Nina Olson, once described it as “a bit like living in the Wild, Wild West.” Each member of the Alliance (currently there are 12) has its own specific eligibility requirements, and eligibility may not be determinable until the return is started or nearly completed. Examples of these varying requirements include active duty military status, differing income and age eligibility requirements, foreign address filing, or required associated tax forms or schedules. Although the IRS website attempts to address this concern with its Free File Software Lookup Tool, the tool is overinclusive in that it only screens for adjusted gross income, age, state of residency, military service, and a self-assessment of whether the taxpayer is eligible for the earned income tax credit. The result is that many Schedule C filers or filers with complicated dependency issues, for instance, may inadvertently think they are eligible for a free version of a specific software when in fact they are not.

Unfortunately, the only way for many filers to discover their ineligibility is to first create an online account with the software company, begin entering their data, and then see if their situation is covered. For instance, H&R Block currently does not support free Schedule C preparation online. However, a taxpayer would not discover this ineligibility until attempting to enter 1099-MISC or other self-employment income data, which could happen well into the process of completing the return. In these situations, the current MOU with the Alliance requires the software company, at this point, to re-direct the taxpayer back to the IRS’s Free File website. Additionally, the company may offer to let the taxpayer continue if he or she agrees to pay to the proposed fee (H&R Block starts at $49.99 for a federal return). Thus, a taxpayer in this situation must determine whether he or she wants to restart the entire process or pay the fee to continue.

Another reason most taxpayers do not use the Free File program is taxpayers may simply not know it exists. Although an Alliance spokesperson stated a lack of an Alliance advertising budget is partly to blame for this awareness issue, a recently filed tax return (available through GuideStar.org) for the nonprofit organization suggests its revenue is steadily increasing. Regardless, according to terms of the MOU, it is ultimately the responsibility of the IRS to advertise and promote the program, and this advertising budget has reportedly been eliminated.

Additionally, unless taxpayers begin their search for the appropriate Free File software from the IRS’s Free File website, which is accessible through the IRS’s homepage, they may never learn of the different software options. A simple “Google” search for “free file” only reveals some advertisements by some of the providers, and the IRS’s website only appears below those advertisements. This can result in taxpayers directly choosing to visit a provider’s page without ever visiting the IRS’s Free File website. If the taxpayer has chosen a provider that he is not eligible for, he may not know there are other options with different eligibility requirements.

Moreover, if the taxpayer has not accessed the provider’s website through the IRS Free File website, he may never land on the “Member Free File Landing Page.” This is a critical step in the functioning of the program because only these “landing pages” are regulated by the MOU. Thus, a software provider may advertise its free filing option in any way it chooses, or not at all, anywhere else on its website, and it is not required to notify taxpayers that they are eligible for a free return if those taxpayers have selected a purchased version of the software.

Finally, the providers are not required to screen Free File eligible taxpayers who enter their websites via any method other than the Member Free File Landing Page. For instance, the TurboTax website offers new users the option of letting the website choose which software is best for them based on taxpayers selecting certain criteria that are applicable to them. But, by choosing the first option “I want to maximize deductions and credits,” the taxpayer is already disqualified for a “Free Edition” version of the software. Even though TurboTax is the leading software provider of taxpayers who use the Free File program, it is not obligated to offer its Free File software anywhere except the Member Free File Landing Page. As another example, Liberty Tax does not advertise its associated Free File software – esmart tax – on its online filing homepage or associated links, nor does it appear on its comparison of its online tax filing products.

It should be apparent by now that the opportunities available and utilized by Free File members to steer otherwise eligible taxpayers into paid versions of their software or other products are numerous. Past practices by these software providers have been well documented and reported, and they include the use of “value add” links promoting products such as audit protection services, refund advance loans, and refund transfer services, charging to file corresponding state returns even if a free filing option is available for that state, and failing to advertise or link to the company’s free file edition from its homepage.

The Internal Revenue Service Advisory Council’s (IRSAC) most recent report addressed some of these concerns, including “the IRS’s deficient oversight and performance standards” for the program which “put vulnerable taxpayers at risk.” The Free File MOU was revised to address some of these concerns, including how members may communicate with previous free file users and how products are advertised on the Member Free File Landing Page and within the Free File version of the member’s software. Additionally, in the most recent Annual Report to Congress, the National Taxpayer Advocate addresses the underutilization and lack of oversight of the Free File program as a “most serious problem” facing taxpayers. The report notes, “With no effective goals, measures, or budget, the IRS’s Free File program in its current format has become an ineffective relic of early efforts to increase e-filing.” It urges the IRS to develop actionable goals and increase its oversight of the program or otherwise discontinue its use.

Given calls for increased federal oversight, why do the for-profit Alliance members continue to offer versions of their tax preparation and filing software for free? In short, it keeps the IRS out of the tax preparation business. The current non-compete agreement, which extends the terms of the MOU until October 31, 2021, ensures Alliance members that if individuals wish to self-prepare and electronically file their tax returns for free, they must use Alliance software. During fiscal year 2017, this amounted to approximately 53 million self-prepared and electronically filed tax returns, of which only 2.5 million were filed for free using the Free File program. Given the fact that a significant majority of eligible free file taxpayers still pay, how can the IRS expect these for-profit companies to direct most of their paying customers towards a free version of their software? Also, the current partnership with the IRS and Alliance does nothing to address the return-free mandate of 1998.

The privatization of tax return preparation has created an industry fundamentally at odds with the objectives of the IRS. While the IRS wants citizens to file and pay the correct amount of tax, the software industry wants to generate its own revenue, which does not necessarily entail ensuring legally correct tax returns. For instance, in an evaluation of the various Free File software options, the Taxpayer Advocate Service noted a lack of consistency in the amount of assistance the software versions provide to taxpayers, which can result in filing incorrect returns. Additionally, scholars such as Jay A. Soled and Kathleen DeLaney Thomas have raised concerns with other features of the software, such as displaying the running refund total or balance due throughout the return preparation. Although the Free File program requires members to guarantee their calculations, it does not require any level of assistance to assure taxpayers are claiming legally correct tax positions. This feature of continuously displaying the refund may make taxpayers more susceptible to filing incorrectly in an attempt to game the system.

Realizing the regressive costs of tax return preparation on low- and middle-income individuals, Congress directed the IRS to develop a system that would allow eligible individuals to comply with their filing obligations without the need for preparing a return. One such system implemented in Mexico provides pre-populated tax returns to its citizens – also known as a type of tax agency reconciliation filing system – using cloud-based technology provided by Microsoft’s Azure. The results were that taxpayers were able to complete their returns often in a matter of minutes, and the revenue agency experienced an increase in overall revenue collections by as much as fifteen percent in a single year. This example calls into question whether a complete reliance on industry software and services as the “financial gatekeepers of the income tax system” is the most efficient method for the IRS to administer electronic tax return preparation and filing.

However, in its final annual report to Congress on the matter, the Secretary of the Treasury stressed the need for tax simplification as a pre-requisite to implementation of an American return-free system. The Tax Cuts and Jobs Act of 2017 is expected to significantly reduce the number of individuals who itemize their deductions. Treasury Secretary Mnuchin touted the simplification of the “postcard” sized new IRS Form 1040 for tax year 2018. Could this be the necessary simplification the IRS requires to finally implement the return-free mandate?

Meanwhile, the future of the Free File program is currently undecided. Both houses of Congress have offered vastly different options going forward. The House of Representatives passed the Taxpayer First Act on December 20, 2018 and referred it to the Senate. This bill would have codified the Free File program to guarantee its perpetuity. Alternatively, Senator Elizabeth Warren, along with 11 co-sponsors, presented a drastically different direction for tax return preparation in the Tax Filing Simplification Act of 2017. This act would have prohibited future agreements from barring the IRS from developing its own preparation software and would have provided for optional government preparation of individual tax returns for eligible taxpayers. Neither bill has been voted on in the Senate.

For now, however, the Free File program remains the only option for taxpayers to self-prepare and electronically file a free tax return. Without an advertising budget, it also remains one of the IRS’s best kept secrets. In its current form, an overwhelming majority of taxpayers who are eligible for Free File will never use it.

After The Shutdown: Dealing with Time Limitations, Part IV — Equity

In Part IV of the series “After the Shutdown,” Professor Bryan Camp examines the role of equity in addressing time limitations that have become tangled by the shutdown. Christine

It is unconscionable to enforce against taxpayers a statutory time limitation when Congress itself denied taxpayers the ability to protect their rights during all or part of that time period by forcing the closure of the IRS and the Tax Court.  That is, Congress failed to fund either the Tax Court or the IRS, causing both to shut down for between 31 (Tax Court) and 35 (IRS) days.  This failure caused both the agency and the Court to be closed to taxpayer’s attempts to resolve disputes about either the determination or collection of tax.  This failure is an act of Congress just as much as the statutory limitations periods are acts of Congress.  And Congress should not be able to demand that a taxpayer act within a certain time period while at the same time denying the taxpayer any ability to act during all or part of that time period.  Equity should, and I believe can, prevent that result.

The above proposition is the basis for this, my last Post in the “After the Shutdown” series.  Part I discussed how a reopened Tax Court might apply the Guralnik case to ostensibly late-filed petitions.  Part II explained the new thinking about how jurisdictional time periods differ from non-jurisdictional.  Part III explained why the time period to petition the Tax Court in §6213 should no longer be viewed as a jurisdictional limitation.  I invite those readers interested in how the new thinking would apply to the time periods in §6330(d) and §6015(e) to look at my paper posted on SSRN, which I am trying to get published in a Law Review.  Legal academics must publish or perish and, apparently, blogging does not count.

Today’s post explores why the Tax Court should be able to apply equitable principles to evaluate the timeliness of taxpayer petitions filed after the shutdown, regardless of whether any of the applicable limitations periods are jurisdictional or not.

Before diving in to equity, I wanted to point out that Congress itself could actually save a lot of litigation here by passing a very simple off-Code statute that says something like: “For purposes of computing  time limitations imposed in Title 26 on taxpayers to petition the Tax Court, the days between December 22, 2018 and January 28, 2019 shall be disregarded.”  Congress could do that.  Congress should do that (for the reasons I explain below).  But you can bet you sweet bippy that Congress won’t do that.  It made this mess.  But it is unlikely to clean it up.  So it will fall to the Tax Court to sort through cases.  When it does so, I believe the circumstances of the shutdown strongly support the extraordinary remedy of equitable tolling.

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The Tax Court is truly a unique court. It is neither fish nor fowl, as Prof. Brant Hellwig so nicely explains in his article “The Constitutional Nature of the U.S. Tax Court,” 35 Va. Tax Rev. 269 (2015). That is, all efforts to type the Tax Court as part of the Legislative Branch, Judicial Branch, or Executive Branch of the federal government are flawed, both as a matter of theory and as a matter of practice. Channeling Felix Cohen and other Legal Realists, Brant sensibly concludes that we don’t really need to worry about “where” the Tax Court belongs in the Constitutional structure. It’s indeterminate position poses no threat to the structural integrity of the federal government, and its useful work in resolving taxpayer disputes with the IRS does not depend on its precise location in any branch.

But there is no doubt that the Tax Court exercises the “judicial power” of the United States. The Supreme Court said so in Freytag v. Commissioner, 501 U.S. 868 (1991). And part of that “judicial power” is the power to apply equitable principles and doctrines to the disputes that are properly brought before the Court for resolution. Prof. Leandra Lederman has a lovely article on this subject: “Equity and the Article I Court: Is the Tax Court’s. Exercise of Equitable Powers Constitutional?” 5 Fla. Tax Rev. 357 (2001).

It is important to remember that equitable doctrines are not simply free-floating grants of power. Equitable doctrines are linked to, and bounded by, a set of principles. But what distinguishes equitable principles from legal rules is that the application of equity is highly contingent on the facts before the court. The great legal historian F. W. Maitland put it this way in his 1910 Lectures On Equity: “I do not think that any one has expounded or ever will expound equity as a single, consistent system, an articulate body of law. It is a collection of appendixes between which there is no very close connection.” (p. 19) And in this 1913 law review article, Professor Wesley Newcomb Hohfeld discussed the difficulty of teaching equity as a system of rules separate from legal rules. I think it this way: equity fixes problems that legal rules cannot fix.

One equitable doctrine that might apply here is equitable tolling. When litigants show that, despite diligent efforts, some extraordinary circumstance prevented them from protecting their rights by timely filing within a period of limitations, a court will equitably toll the limitation period. See e.g. Holland v. Florida, 560 U.S. 631 (2010). The idea of “tolling” means that the limitations period is suspended for the tolling period. That is, it stops running and then starts running again when the tolling period ends, picking up where it left off. Artis v. District of Columbia, 138 S.Ct. 594 (2018).

Remember, this is equity, not a hard and fast legal rule or doctrine. So how much diligence a litigant must show varies with circumstances. Similarly, how extraordinary the barrier had to be also varies with circumstance. If the Tax Court applies that doctrine, it could decide—consistent with the logic of my very first paragraph—that the days in which Congress’s failure to fund the Court forced it to shut its doors should stop the running of any applicable limitation period. The Court may decline to apply equitable tolling, however, for two reasons.

First, the Tax Court has repeatedly said it cannot equitably toll jurisdictional time periods and it believes that the relevant time periods in the Tax Code are jurisdictional. I believe the Tax Court is simply wrong that the deficiency and CDP time periods are jurisdictional. That’s what I explained in the prior blog posts and in my SSRN paper.

Even if the time periods are jurisdictional, however, I believe there is good authority to toll them nonetheless. The authority is from the Supreme Court. In Honda v. Clark, 386 U.S. 484 (1967), 4,100 plaintiffs of Japanese descent whose assets had been seized by the U.S. during World War II sued for recovery years after the applicable limitation period had ended. The district court dismissed the cases “on the ground that the court lacked jurisdiction over the subject matter of the actions because they were not commenced within the time set forth in section 34(f) of the Trading with the Enemy Act.” 356 F.2d 351, 355 (D.C. Cir. 1966). Both the district court and the D.C. Circuit dismissed their suit for the standard reason: equitable principles did not apply to when limitation periods were a waiver of sovereign immunity. The D.C. Circuit gave the standard analysis: “All conditions of the sovereign’s consent to be sued must be complied with, and the failure to satisfy any such condition is fatal to the court’s jurisdiction.” 356 F.2d at 356.

The Supreme Court disagreed. While noting the general rule, it characterized the rule as a presumption and said that one needed to look at the particular statutory scheme at issue to discern purpose. Whether or not the time period was jurisdictional was totally absent from the Court’s approach to applying equitable tolling. The Court concluded it was “much more consistent with the overall congressional purpose to apply a traditional equitable tolling principle, aptly suited to the particular facts of this case and nowhere eschewed by Congress, to preserve petitioners’ cause of action.” 386 U.S. at 501.

The Supreme Court’s focus in Honda (and later in other cases, as I explain in my paper) was on the relationship between Congress and the limitation period. When you approach the limitation periods in §6213 and §6330(d) in that way, I believe the approach used by the Supreme Court in Honda strongly support application of equitable tolling, in two ways.

First, as I have argued here, the Tax Court itself has relied upon the great remedial purposes of §6213 and §6330 to in fact enlarge what it believes are jurisdictional time periods under certain circumstances. A careful reading of its cases shows that what animates its decisions is the remedial purpose of the statutory scheme that allows taxpayers a day in court before either (1) being forced face a tax assessment and its consequences or (2) being forced to pay an assessed tax. To count the shutdown days as part of a limitations period would run counter to that remedial purpose.

Second, I again restate the idea of my first paragraph. This is not a situation where a taxpayer would seek equitable tolling because of some individual government employee’s bad behavior. This is Congressional bad behavior. Another way to think of the relationship is this: if the time periods are part of Congress’s waiver of Sovereign Immunity, and if only Congress can waive Sovereign Immunity, then one can reasonably find that Congress itself has here waived its immunity by ceasing to fund the government.

The second reason that the Tax Court might look askance at applying equitable tolling here is that the doctrine usually applies in a fact pattern where the party seeking tolling has done all it can. Here, there may be instances where that is not true. For example, a taxpayer may not have even attempted to file a petition when the last day ran during the shutdown period. Or the taxpayer may not have even been prepared to file during the shutdown period and only prepares and files once the shutdown period ends. Most importantly, a taxpayer’s period might have been disrupted by the shutdown period but may not have ended during the shutdown period. How is the Tax Court supposed to measure a taxpayer’s diligence in that situation, when no one knew until Friday that the government would reopen on Monday?

I do not know the answer to these questions because equity is a case-by-case determination. The Tax Court can help avoid the time and effort of applying equitable tolling by applying a uniform counting rule that simply disregards the shutdown days, based on the idea underlying FRCP 6, as I will argue in an article I hope to publish in Tax Notes soon. Even there, however, there will be cases that are not covered even by a broad reading of FRCP 6. That will be the cases where the last day of the period came after the shutdown ended. Yet there may be such cases that command the sympathy of the Tax Court. I think the Court has the power to act and to apply equitable tolling in the cases where the circumstances support it.