5th International Conference on Taxpayer Rights – Registration is Now Open

Sometimes, in the midst of all that is going on in one’s own professional life, it helps to take a step back and think about first principles of tax administration.  It is also fascinating to learn about tax administration in countries not your own – so that you look at your own tax system with new eyes, and think about how things might be done differently.  That is the underlying rationale of the International Conference on Taxpayer Rights, which I first convened as the National Taxpayer Advocate in 2015, and for which the Center for Taxpayer Rights has picked up the mantle.  So I’m pleased to announce that registration is now open for the 5th International Conference on Taxpayer Rights (ITRC), which will be held online.  You can check out the agenda and register for the conference here.

This year, the Center will convene not one, but two (!) conferences, because we had to move back a year the conference originally scheduled for 2020.  The first ITRC will be held on 26 to 28 May, 2021.  For each conference we try to focus our panels around a general theme, and the 5th ITRC theme is Quality Tax Audits and the Protection of Taxpayer Rights.  This theme will be explored in six panels over two days:

  • Foundational audit principles and applicable taxpayer rights;
  • The conduct of tax audits and the intersection of taxpayer rights: case studies;
  • Audits and taxpayer rights in an environment of cross-border cooperation;
  • Audit selection in the twenty-first century;
  • The impact if audits on future compliance; and
  • Criminal investigations and civil tax audits.
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The moderators and panelists represent 15 countries, and come from different disciplines and roles in tax administration.  We have members of the judiciary, tax agency governors, former commissioners and other agency personnel, tax professionals, and professors of tax, economics, psychology, and anthropology, as well as private practitioners and representatives of international organizations.  This is a cross-cultural and interdisciplinary group, and if past conferences are any indicator, the discussions will be fascinating.

New with this conference is a pre-conference Low Income Taxpayer Clinic Workshop on May 26, focusing on Representing Low Income and Small Business Taxpayers in the COVID-19 Economy.  International interest in clinics for low income and other underrepresented taxpayers has been growing over the years, with the movement expanding to Australia, UK, and Ireland.  Through this workshop, which is free, people can learn about starting an LITC in their country and learn about the work of existing LITCs.  We also plan to continue this workshop as part of future ITRCs, with different topics each year.  You can learn a bit about international LITCs by watching the Center’s Tax Chat! with several directors of LITCs from different countries.  Access the Tax Chat! here.  (By the way, subscribe to our YouTube channel so you can learn about future Tax Chats!)

Normally, we rotate holding the conference in a different part of the world each year, but of course the coronavirus pandemic threw a spanner in the works on that plan.  This year we planned to be in Athens, Greece, and we still have the National and Kapodistrian University of Athens School of Law as our host organization, but we will be holding the conference online.  The hours of the sessions each day are scheduled on Central European Summer Time, which might be early for Pacific Coast folks, but if you register and miss the first session, we will send you a link to the recording the same day so you can watch it then, albeit a bit out of order.

As I mentioned earlier, we plan to hold a second conference this year – the rescheduled 2020 conference.  The theme of the 6th International Conference on Taxpayer Rights is Taxpayer Rights, Human Rights: Issues for Developing Countries.  This will be a fascinating conference, and I am hopeful we all will be able to meet on October 6 and 7, 2021 at the University of Pretoria in South Africa.  You can see the agenda for the 6th ITRC here.  And if you’d like to get a bit of a preview of this conference, check out the Center’s Tax Chat! video with Riel Frantzen, Annet Oguttu, and Asha Ramgobin of the University of Pretoria here.

So.  Please take a look at the conference.  This is not your normal tax practice continuing education program.  It is a venue for thinking about how we might improve tax administration and enhance the protection of taxpayer rights.  It’s an opportunity to learn from other countries, other cultures, other tax administration.  I’ve learned so much from the conferences in the past.  I just wish we could meet in person in Athens!

Hope to “see” you online though – you can register for the conference here.

My IRS Wishlist for 2021 Part 2 – the Economic Hardship Indicator

In recent weeks, the American Bar Association Section of Taxation wrote the IRS, recommending the IRS not exercise its refund offset authority under IRC § 6402 on 2020 individual income tax refunds with respect to three groups:  taxpayers claiming the Earned Income Tax Credit; taxpayers with income below 250% federal poverty level, and taxpayers who have pending offers in compromise.  Last week, the National Taxpayer Advocate released a blog advocating a similar approach.  Because both of these proposals seek to avoid creating economic hardship for taxpayers, I thought it would be a good idea to revisit a proposal I made years ago for the IRS to proactively identify taxpayers who are likely at risk of economic hardship and shield them from potentially devastating collection action.  This in turn has led to my next two wishes on my “IRS wish list”: 

  • That the IRS implement an “economic hardship indicator” that identifies taxpayer accounts with balances due where the taxpayer is at risk of economic hardship as defined by IRC § 6343(a)(1)(D), and use that indicator to trigger further inquiry into the taxpayer’s financial status before issuing levies or placing them into streamlined or other installment agreements; and
  • That the IRS utilize the algorithm underlying the economic hardship indicator (or other proxy such as percentage of federal poverty level) to identify taxpayer refunds where the offset of such refund for past tax liabilities would create economic hardship and proactively not offset those refunds.
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Proactively Using Data to Protect Taxpayer Rights

One of the things that has bothered me over the years is the IRS’s reluctance to use data to minimize taxpayer burden and protect taxpayer rights, despite its eagerness to use data to identify and address areas of noncompliance.  I first confronted this tendency in the first month of my tenure as the National Taxpayer Advocate, when the IRS was ready to implement the provisions of IRC § 6331(h) by offsetting 15% of the monthly social security benefit of any beneficiary who had a tax debt.  Despite years of working on the implementation strategy, the IRS apparently had not completed an analysis of the economic condition of Social Security beneficiaries – including the elderly and disabled – and thus had no plans to filter out taxpayers whose income was insufficient to pay their basic living expenses.  In a memo to Commissioner Rossotti in April, 2001, I outlined my concerns, and the Commissioner put a moratorium on the Federal Payment Levy Program (FPLP) with respect to social security benefits until those concerns could be addressed.  That led to the development of the Low Income Filter, a rudimentary tool which GAO criticized as both over- and under- inclusive.  That is, it allowed levies against many taxpayers who could not afford to pay and it excluded many taxpayers who had the ability to pay.  Based on this criticism, the IRS ceased using the filter.

This experience taught me, very early on, the importance of well-designed applied research studies for driving appropriate tax administration approaches.  Over the years, the research studies published in the National Taxpayer Advocate’s Annual Reports to Congress prompted many changes in IRS policy, simply because the data showed the way.  For example, with respect to the flawed Criminal Investigation Questionable Refund Program, TAS’s 2005 research study stopped it in its tracks and brought about major changes, including moving the program from CI and into W&I.  We revisited the FPLP Low Income Filter in the 2008 NTA Annual Report to Congress (vol. 2, beginning at page 48), showing that FPLP Social Security levies were being applied to taxpayers who could not pay their basic living expenses and therefore the levies must be released under IRC § 6343(a)(1)(D).  As a result of our study, the IRS asked TAS to identify a percentage of Federal Poverty Level (FPL) that could be used as a proxy for the algorithm we developed to identify taxpayers experiencing economic hardship as a result of the levy.  The IRS ultimately agreed to use 250% FPL as a proxy for economic hardship and to exclude taxpayers from the FPLP population.  This measure is known as the “Low Income Filter” or LIF.

The issue of using data to proactively identify taxpayers who are experiencing economic hardship has popped up time and time again – in the context of Private Debt Collection, streamlined installment agreements (IAs), and now, in the age of the coronavirus pandemic, refund offsets.  So it is helpful to review the proposal for an Economic Hardship Indicator and explore the research underlying it. 

The Economic Hardship Indicator

Section § 7122(d)(2)(A) requires the IRS to “develop and publish schedules of national and local allowances designed to provide that taxpayers entering into a compromise have an adequate means to provide for basic living expenses.”    The statute also requires the IRS to not use these schedules of allowances where “such use would result in the taxpayer not having adequate means to provide for basic living expenses.”  IRC § 7122(d)(2)(B). In these cases, the IRS should review the taxpayer’s circumstances on a case-by-case basis.  Treasury regulation 301.7122-1(c)(2)(i) further clarifies what the IRS must do:

A determination of doubt as to collectibility will include a determination of ability to pay. In determining ability to pay, the Secretary will permit taxpayers to retain sufficient funds to pay basic living expenses. The determination of the amount of such basic living expenses will be founded upon an evaluation of the individual facts and circumstances presented by the taxpayer’s case. To guide this determination, guidelines published by the Secretary on national and local living expense standards will be taken into account. [Emphasis added.]

The approach outlined in IRC § 7122(d)(2) and the related regulations gives effect to the taxpayer’s right to a fair and just tax system, which requires the IRS to recognize the taxpayer’s facts and circumstances in determining the ability to pay, and the right to privacy, which requires the IRS to take enforcement actions “no more intrusive than necessary.”  The Commissioner is required to ensure his employees adhere to these rights.  IRC § 7803(a)(3).

The IRS also applies these allowances in calculating the monthly payment for “non-streamlined” installment agreements, for currently not collectible status, and for determining economic hardship for purposes of releasing levies.  The Allowable Living Expenses, or ALEs, are based on data from the Bureau of Labor Statistics which reflect the actual spending based on family composition and income.  I have written elsewhere about the shortcomings of using BLS data for this purpose, and TAS research has clearly documented the harmful impact of the IRS’s application of ALEs here and here.  But for purposes of the Economic Hardship Indicator, it makes sense to accept the IRS’s ALE figures because they are what the IRS relies on and are very conservative, which should make it easier for the IRS to agree with this approach.  That is, the Economic Hardship Indicator algorithm adopts the very allowances and procedures the IRS lays out in its Internal Revenue Manual instructions to staff for determining ability to pay. 

TAS’s Economic Hardship algorithm essentially used the greater of total positive income from the taxpayer’s most recent tax return (or from a two-year old return if the most recent was not filed), or the total Information Return income reported for the most recent year.  In determining allowable expenses, the algorithm used family composition reported on the most recent tax return, and if no return was on file, it defaulted to a single person household.  The algorithm also took into consideration whether the taxpayer had assets.  The algorithm allowed ownership and operating expenses for one vehicle if a single or head of household return, and two vehicles for married-filing-jointly.  Finally, with respect to home expenses the algorithm used the local allowances based on the zip code shown on the return or income source used as a basis for the income calculation.

To the Injury of Many Taxpayers, the IRS No Longer Conducts Financial Analysis for Most Installment Agreements

With the IRS’s recent expansion of streamlined Installment Agreements (IAs) to seven year terms and liabilities over $25,000, it is clear the IRS wants to drive taxpayers into formulaic IAs rather than engage with them to learn their specific financial circumstances.  While streamlined IAs can be less burdensome for many taxpayers, and certainly minimize the use of IRS staff time, they also can extract payments from taxpayers who do not have the ability to pay.  The Economic Hardship Indicator maximizes the benefits of the streamlined IA while ensuring the IRS takes into consideration the taxpayer’s specific facts and circumstances where warranted by risk of economic hardship.

Over the years, TAS research has demonstrated that automated levies and streamlined installment agreements can harm taxpayers.   In addition to work with the FPLP Low Income Filter, the TAS research studies cited earlier found:

In Fiscal Year (FY) 2018,

  • streamlined IAs constituted 72% of all installment agreements;
  • 40% of those streamlined installment agreements were entered into by taxpayers whose income was below ALEs; and
  • 40% of streamlined IAs entered into by Private Collection Agencies were with taxpayers whose income was below ALEs; and
  • Streamlined IAs had high default rates – between 37% and 39%.

In the 2018 Annual Report to Congress, we proposed the IRS apply the algorithm TAS built and adopt the Economic Hardship Indicator (EHI) as a means to identify taxpayers who might experience economic hardship if the IRS levied upon their payroll or accounts, or placed them in a streamlined IA.  I clearly stated that the EHI was not a determination of economic hardship or currently not collectible status.  Rather, it could be used to program a pop-up screen for IRS phone assistors and collection employees to trigger a few additional questions about the taxpayer’s financial status before placing them in a streamlined IA or issuing a levy.  The EHI algorithm could trigger a similar pop-up where a taxpayer is applying for an online IA, prompting the taxpayer to provide a bit more financial information.  Moreover, the EHI could be a powerful tool applied during filing season to avoid refund offsets.  It would also improve the IRS’s case scoring and selection criteria, so it doesn’t waste resources pursuing uncollectible debts.  Thus, the EHI would serve as a trigger for when the IRS should conduct a case-by-case analysis of the taxpayer’s ability to pay basic living expenses, as outlined in 7122(d)(2)(A), the regulations thereunder, and the Taxpayer Bill of Rights.

Economic Hardship Algorithm and the Federal Poverty Level

As noted above, when TAS first tested its economic hardship algorithm in 2008 for Federal Payment Levies on Social Security recipients, the IRS resisted developing an algorithm, and instead proposed using a percentage of federal poverty level for purposes of the Low Income Filter.  Although I believe the correct approach is for the IRS to build an algorithm that adheres to the procedures used by IRS employees, 250 percent of federal poverty level is an effective proxy for economic hardship.  A chart from one of my last blogs as NTA makes this point:

Comparison of Ability to Pay by Indicated Percent of Federal Poverty Level (Computed on Adjusted Gross Income) to Ability to Pay as Determined by an Analysis of Total Positive Income to ALE

* Single = 1 vehicle allowance; married filing jointly = 2 vehicle allowances

As shown above, using 250% federal poverty level (FPL) as a proxy for the economic hardship algorithm excludes 85% of the taxpayers the algorithm (based on IRS procedures) finds cannot pay a tax debt.  And although 250% FPL also has the highest percentage – 3% — of taxpayers who the algorithm finds can afford to pay the debt, that is a small error rate for the significant taxpayer protection of avoiding profoundly damaging collection action.  And remember, all we are doing with the Economic Hardship Indicator is requiring the IRS to get more information from the taxpayer before it undertakes collection action that is very likely to result in the taxpayer being unable to pay basic living expenses.  (The rationale for using the EHI to bypass refund offsets is slightly different – unlike other collection actions which can be unwound (levy releases) or modified (IAs), the refund offset takes place within a very short window of processing time and cannot be reversed.  Thus, if there is a risk of economic hardship, as indicated by the EHI, the IRS should refrain from offset.)

It is baffling to me why, in the face of all this data (including yet another TAS research study from the 2020 Annual Report to Congress), the IRS refuses to adopt the EHI.  The IRS complains of not having sufficient resources to do collection work.  Well, failure to use the EHI not only harms taxpayers but also results in massive amounts of unnecessary work for those limited IRS collection resources, in the form of defaulted IAs, released levies under IRC § 6343(a)(1)(D) and return of levy proceeds, refund offset bypasses, and unproductive collection work, to name a few.  The time is long past for the IRS to “put taxpayers first” by adopting the EHI and proactively act to avoid harming taxpayers.  If it won’t do this in the midst of a pandemic, I really don’t know what it will take, other than legislative action.  And in fact, per IRC §§ 6343 and 7122, I would argue Congress has already legislated.

My IRS Wishlist for 2021 – Part 1: The mail and return processing backlog

We begin a new year with the IRS pulling off another near-miraculous feat of issuing the second round of COVID-relief stimulus payments almost simultaneously with the President’s signing of the authorizing legislation.  I thought it might be a good time to make up a list of wishes I have regarding tax administration for 2021.  My list has a heavy emphasis on the role the IRS plays in the economic health of our nation; that it is a very major role should be clear to everyone who hasn’t lived under a rock this past year.

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But before I launch into my list, let me do some level setting.  Deep in irs.gov is an interesting webpage IRS Operations during COVID-19: Mission-critical functions continue.  This page is updated periodically with information about the status of return processing, check payment processing, mailing of notices, Power of Attorney processing, and many other items.  Everyone practicing in the field of tax should bookmark this page.

On this page, the IRS informs us that as of November 24, 2020, it had 7.1 million unprocessed individual tax returns and 2.3 million unprocessed business returns in its backlogged mail.  This is an unprecedented number of 2019 returns that have not been processed by the end of the year, and the situation appears to have gotten worse, rather than better, as the year went on.  According to the National Taxpayer Advocate, as of September 19, 2020, the IRS backlog was about 5.8 million pieces of mail, including 2.8 million tax returns.  The IRS says it “expects to issue all refunds for 2019 individual tax returns in 2020 where there are no issues with the return.  For refunds that cannot be issued in 2020 because the tax return is being corrected, reviewed or awaiting correspondence from a taxpayer, the refund will be issued as a paper check in 2021 per our normal processes.”  [Emphasis added.]

Now it is not clear to me why, in the 21st century, the IRS can’t make direct deposits of tax refunds after the filing season for that tax year has passed, e.g., for amended returns that result in a refund.  Maybe it is some programming rule in the submission processing pipeline, or maybe it isn’t the IRS’s problem but some issue with the Bureau of Fiscal Services.  But the problem in the COVID-economy is that many of these taxpayers who filed a 2019 return that has not been processed in 2020 will have moved – even if they aren’t evicted, they may move to less expensive housing, or they may move in with relatives, or they may have become homeless.  So not only will these taxpayers not get a direct deposit, but the paper check, once mailed, will be returned to the IRS.  Taxpayers won’t know anything about this unless they keep checking the “Where’s my refund?” website – the IRS says if a refund check is returned, an option will pop up on that website that allows the taxpayer to enter a change of address.  But even after you enter your address, the check will be mailed yet again, with all the attendant postal service delays. 

So here’s my first wish for 2021: 

The IRS should create a mobile-friendly, multi-lingual digital application for taxpayers to change their address; this application should require only two-factor authentication.

I will save for another day my tirade about the archaic revenue procedure that governs when the IRS is considered to be notified of the taxpayer’s last known address.  I note Keith’s PT post about the Gregory case, in which Keith and his students prevailed against the government on this issue.  It is unconscionable in the 21st century that the IRS should be routinely given 45 days from the date of posting a return to be considered notified of an address change.  Here’s what Rev. Proc. 2010-16 says:

Returns that are not filed in a processible form may require additional processing time.  If additional processing time is required, the 45-day processing period for address changes will begin the day after the error that caused the return to be unprocessible is corrected.

The 2019 return processing delays make glaringly clear the harmful impact of provision and the lack of a quick digital means to update one’s address.  And yes, I know there are legitimate concerns about fraudulent address changes; that is an issue that can be addressed as part of the programming.  But such concerns should not be an obstacle to creating an application that would be available to most, if not all, taxpayers.

Mail delays and my second wish

Now let’s get back to this mail backlog.  The IRS webpage references 2019 returns that have been flagged for further correction, review or taxpayer correspondence (by mail?????).  It states that “[i]f we need more information or need you to verify that it was you who sent the tax return, we will write you a letter.  The resolution of these issues depends on how quickly and accurately you respond, and the IRS staff trained and working under social distancing requirements to complete the processing of your return.”  Now of course, if the taxpayer responds quickly and accurately via the U.S. Postal Service, that response will be sitting in a pile along with the millions of other documents not processed.  The IRS COVID operations website says the IRS is opening mail within 40 days of arrival and is taking 60 days to process (on a first-come, first-served basis).

The Taxpayer Advocate Service has reported that even in “normal” times, the IRS non-identity theft refund fraud filters result in high false positive rates (i.e., the frozen return/refund was actually legitimate) of 81 percent for the period from January 1 to October 3, 2018, and 71 percent from January 1, to October 2, 2019.  [See 2019 NTA Annual Report to Congress, p. 39.]  TAS analysis found that over 75 percent of their cases involving wage verification received in the last week of August, 2019, “waited an average of 141 days from the return filing date for the IRS to screen and determine that it could not verify the information on the returns.  As of October 1, 2019, the IRS had only assigned 36% of those returns to a particular treatment stream for resolution.”  [2019 NTA Annual Report to Congress,  p. 40]

Thus, even before the pandemic, for many taxpayers, the IRS refund resolution processes were overwhelmed and not working.  Can we only imagine what is happening today?  We have not seen the numbers for these returns for the period from January 1 to October 1, 2020 (or December 31, for that matter), but I am willing to bet the backlog is … huge.

Now, what is going to happen to all these taxpayers whose 2019 returns are unprocessed?  First of all, they won’t receive the $600 COVID-relief payments.  Second, when they file their 2020 returns, it is very likely that these returns, too, will be flagged because their 2019 returns have unresolved issues.  This means that two years of refunds, and two rounds of stimulus payments will be frozen.  In. The. Midst. Of. A. Pandemic.

I know the IRS has been working full-tilt trying to get through this nightmare.  But the taxpayers of the United States deserve much more transparency and better information than we are receiving.  We need to know whether the employees who are working in the questionable refund programs are actually working – that is, have they received laptops so they can telework?  Or are there parts of their jobs that require them to be physically present in IRS offices, as the submission processing employees must be?

Which leads me to my second wish for the IRS in 2021:

The Federal government should classify IRS workers whose jobs are related to return and correspondence processing as essential workers and arrange for them to receive the COVID-19 vaccine with the same priority as front-line workers (i.e., after health care workers and nursing homes).

The government can do this – and it should.  I am sure there are many other federal employees in other government agencies who should also be prioritized in this way (umm … meat inspectors in meat processing plants?).  They, too, should be prioritized to receive the vaccine.  But as I said earlier, the IRS’s issuance of tax refunds and stimulus payments in 2020 and refunds and the recovery rebate credits in the 2021 filing season are vital to the economic recovery of hundreds of millions of taxpayers throughout the United States.  To assist that recovery, we need an IRS workforce that is able to do its job.  For it to do its job with the speed and urgency this crisis requires, IRS employees involved in return and correspondence processing and resolution should be prioritized for vaccination.  I hope the incoming Administration makes this a priority.  The taxpayers of the United States will be grateful.

Remember Low Income Taxpayer Clinics and Other Tax Charities on Giving Tuesday

Procedurally Taxing readers are probably being bombarded by fundraising requests from all sorts of nonprofits today, which somehow has become designated as a global “Giving Tuesday”.   No doubt, in this time of the pandemic and economic stress, there are many worthy causes if one is inclined to give.  In the face of job losses, unemployment, illness, and racial injustice, it would be easy to overlook the important work being done by Low Income Taxpayer Clinics (LITCs) and other tax charities like the Tax Assistance Public Service (TAPS) endowment.  I would just like to encourage PT readers to take a moment out of their day and reflect on the work of the LITCs and consider contributing to (and volunteering with) their local clinic.

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2019 was the 20th anniversary of the federal LITC grant program, which was created by the IRS Restructuring and Reform Act of 1998 (RRA 98) and IRC section 7526.  (Full disclosure: I testified before the House Ways and Means Oversight Committee and the Senate Finance Committee during the RRA 98 hearings about the importance of a grant program for LITCs, and the LITC I founded is a grant recipient.  I also oversaw the LITC grant program from 2004 to 2019, as the National Taxpayer Advocate.  So I am little biased in favor of LITCs!)  It is thrilling to see that twenty of the LITCs that were in the first round of grantees in 1999 are still participating in the federal grant program today.  In grant year 2019, the IRS issued $11.7 million in grants to 131 organizations.

As I discussed in my post last week, part of the mission of the Center for Taxpayer Rights is to promote and support the LITCs.  I briefly covered all the work the clinics have been doing on behalf of vulnerable taxpayers throughout the pandemic. Not only have they successfully litigated access to Economic Impact Payments (EIPs) for millions of taxpayers, but on a day-to-day basis LITCs have been up and running, in virtual environments, helping tens of thousands of taxpayers in tax disputes with the IRS.

A quick look at the 2019 LITC Program Report provides some eye-popping statistics – For grant year 2018 (the most recent grant cycle for which numbers are publicly available):

  • 19,513 taxpayers were represented by LITCs in tax controversies with the IRS;
  • 16,595 taxpayers received consultations or advice from LITCs;
  • 3,199 taxpayers were brought into filing compliance by the LITCs; and
  • 4,261 taxpayers were brought into collection compliance.

If those numbers don’t demonstrate the important role LITCs play in the lives of low income taxpayers, maybe these statistics will drive the point home:

  • Over $4.7 million in refunds were secured by LITCs;
  • Over $123 million in tax liabilities were decreased or corrected by LITC representation; and
  • 8,516 taxpayers facing collection action received relief through LITC representation.

Clinics represent taxpayers in all manner of disputes, including collection due process hearings, offers in compromise, currently not collectible classification, non-filers, earned income tax credit and child tax credit audits and audit reconsiderations, and worker classification.  The 2019 LITC Program Report (page 20) contains many “success stories” which everyone should read, but this one really shows the life-changing impact of LITC representation:

LITC Helps a Veteran and His Wife Find Relief From Debt and Saves Their Home

The taxpayers were a senior couple with no children. The husband had served in the military and was disabled during combat operations. He had a construction business, and together he and his wife invested large amounts of time and money into renovating their home into a bed and breakfast.

After years of financial setbacks, the couple lost their home and long-time business, resulting in a large outstanding federal tax debt. The taxpayers filed for bankruptcy. At that time, they were living on a fixed income of Social Security and a small Veterans Administration pension in a subsidized senior apartment that they were told they could not live in if they had more than $10,000 in tax debt.

The couple came to the LITC after they began receiving certified mail notices from the IRS about the federal tax debt. The clinic called the IRS to place a 60-day hold on collection while the clients gathered documents for an OIC. The couple then received a notice of intent to levy their Social Security benefits, and the clinic requested a CDP hearing, where it helped the couple settle their entire federal tax debt with an OIC for $1.

The taxpayers returned a customer satisfaction survey to the LITC and acknowledged the work of the staff attorney by saying, “Wonderful you have such a smart, kind, and caring man on your staff. Thank you so much for everything.”

128 LITCs participated in the Tax Court’s Clinical Program, whereby the Court includes “stuffer letters” from the LITCs in various notices to pro se petitioners and LITCs and other pro bono programs attend calendar calls and pre-calendar settlement days, as well as enter appearances before the court on behalf of low income taxpayers.  Over 9 percent of all LITC cases in grant year 2018 involved litigation, with the majority in Tax Court.

Now, what can PT readers do?  Well, for one, you can contribute.  Remember that LITC federal grant funding is dependent on LITCs raising a dollar-for-dollar match – either through hard cash or the fair market value of in-kind contributions, including volunteer time.  As I mentioned in last week’s post, many small and rural LITCs have a hard time raising matching funds – so your contributions will literally bring in a dollar for every dollar you contribute.  The Taxpayer Advocate Service website has a map that lists all the LITCs currently funded along with their websites, and Publication 4134 contains LITC grantee names, locations, and telephone contact information. 

If there is a clinic in your vicinity, please consider volunteering for their pro bono panel as well as giving – LITCs need help from all manner of taxpayer professionals – attorneys, CPAs, enrolled agents.  And your volunteer time counts as matching funds – in grant year 2018, over 1,887 volunteers gave 56,971 hours.  If there isn’t a clinic near you, consider giving to a rural or other clinic that has not yet received the full $100,000 annual federal grant.  You can find the list of 2020 grantees and the grant award here.

And please don’t forget the Tax Assistance Public Service (TAPS) Endowment.  PT has long been an advocate for this important program, as witnessed by the link button on PT’s website.  Through the TAPS endowment fund, the American Bar Association Section of Taxation provides stable, long-term funding for its tax-related public service programs. The TAPS endowment fund primarily supports the Christine A. Brunswick Public Service Fellowship program, which provides two-year fellowships for recent law school graduates to work for non-profit organizations offering tax-related legal assistance to underserved communities.

In its four-year existence, the TAPS endowment fund has supported 20 fellows. Not only have the fellows produced impressive results, but many have secured positions in the field of low-income tax assistance and continue to serve low-income communities and train a new generation of law students to provide these services. Other fellows have clerked for judges of the U.S. Tax Court who value their experiences working with underserved taxpayers and their perspectives gained from their first-hand involvement in low-income tax issues. Fellows who practice tax law in other settings such as major law firms and the government, continue to contribute to the Tax Section by remaining active in pro bono initiatives, speaking on panels, leading committees, drafting comments, and mentoring fellows and other new lawyers. This program has been incredibly successful both in serving taxpayers who otherwise might not have representation, making systemic change in local communities and in providing a springboard to careers in low-income tax services. Consider giving to the TAPS endowment fund today by clicking on the button on the PT website.

Of course, Keith, Les and I also would welcome any contributions to the Center for Taxpayer Rights as well – the Center now has its own “donate” button on this blog – but your contribution to any of the these LITCs not only will provide much-needed funds but also will show the hard-working clinicians that their work on behalf of low income taxpayers is deeply appreciated by the entire tax community.

So.  On this Giving Tuesday, or really any other day, those of us in the tax profession have a broad array of opportunities for giving in the tax field.  We, more than anyone else, know the difference representation can make in the lives of taxpayers.  Please take a moment out of your day to look at the website of your local LITC and consider giving.  Even the smallest donation can help with an IRS match and other expenses.  And, on behalf of Procedurally Taxing, thank you!

An Update on the Center for Taxpayer Rights

It’s been a little over a year since the Center for Taxpayer Rights (CTR) began operations, and Keith, Les and I thought it might be a good time to give a short update on the Center’s activities over the last fifteen months.  Soon there will be a new “button” on PT’s homepage, which takes you to the Center’s “donate” webpage … but more on that later.

Visitors to the Center’s website can learn about the International Conference on Taxpayer Rights, sign up for the Taxpayer Rights Digest, and learn about the amicus briefs filed on behalf of the Center by the Harvard Law School Federal Tax Clinic and others.  We are committed to raising taxpayer rights issues in the courts via amicus briefs; the Center and LITCs are particularly well-situated to explain the impact of various holdings on low and moderate income taxpayers, analyses and consequences that might not otherwise be raised in litigation.

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With respect to the International Conference on Taxpayer Rights, because of the pandemic we now have two conferences scheduled for 2021 – one in May 2021 which we are hoping we can physically convene in Athens, Greece, and one in October 2021, in Pretoria, South Africa (which was originally scheduled for this past October, but oh well, the pandemic intervened).  The theme of the Athens conference is Quality Tax Audits and the Protection of Fundamental Rights; its agenda will be published in December.  The theme of the Pretoria conference is Taxpayer Rights, Human Rights: Issues for Developing Countries; that agenda is now up for viewing on our website!  Both of the 2021 conferences will be live-streamed, so we can expand our reach, not just because of the pandemic but also because we want more folks from less affluent countries, and young scholars or students, to be able to participate, albeit virtually.

Because we had to postpone the 2020 Pretoria conference, we decided to launch Tax Chat!, a monthly series of conversations between myself and folks from an array of disciplines who are working in the field of tax and tax administration.  So far, we’ve had three Tax Chats!  Our topics have included the International Observatory on the Protection of Taxpayer Rights; Taxpayer Rights, Human Rights, and Achieving Sustainable Development Goals; and the Anthropology of Tax.  All of the Tax Chats! are recorded; you can access them on the Center’s YouTube channel.  They really are interesting, and they really are a chat – no power points allowed, just a good conversation about tax.

You can learn about all this and get notifications about upcoming events by signing up for the Taxpayer Rights Digest, the Center’s newsletter.  We promise not to clutter your email box; we’ll only communicate when there actually is news.

The Low Income Taxpayer Clinic Support Center When I was executive director of The Community Tax Law Project, I hoped to establish a national resource center for the growing Low Income Taxpayer Clinic movement, but my appointment as the National Taxpayer Advocate sidetracked that plan a bit.  Well, now we’re back on track – the Center has established the Low Income Taxpayer Clinic Support Center, which supports and encourages the expansion of Low Income Taxpayer Clinics (LITCs) domestically and internationally.  The idea for the LITC Support Center borrows on the practice in other areas of poverty law, which have established national support centers, including the National Consumer Law Center, the National Immigration Law Center, and the National Homelessness Law Center.  An LITC Advisory Board, drawn from the diverse LITC community and including representatives of academic, legal aid, and community-based LITCs, advises the Center on the type of support or research activities that LITCs could benefit from, including the development of training for new volunteers and conducting surveys to determine the needs of low income taxpayers. 

Perhaps the most significant aspect of the LITC Support Center’s activities is the establishment of the CTR Litigation Strategy Group.  This group, with about forty members, meets weekly to discuss ongoing casework and litigation and to identify areas of law affecting low income taxpayers that might be ripe for challenge.  The goal of the CTR Litigation Strategy Group is to help the LITCs to operate along the lines of a national law firm, working together throughout the circuits to litigate taxpayer rights and other issues affecting low income taxpayers.  We started by focusing on aspects of the IRS’s implementation of Economic Impact Payments, which, as readers of PT are well aware, drew several significant challenges, including on behalf of incarcerated individuals; US citizen spouses and children of undocumented persons; and federal beneficiaries with dependent children.  Attorneys for the plaintiffs in many of these cases are members of the CTR Litigation Strategy Group.  On our weekly calls, we also have met with attorneys raising procedural due process issues in the context of federal benefits programs; we are identifying and developing potential procedural due process challenges in tax litigation.  So … stay tuned! 

Now, here is our “ask” …..

As readers of PT know, LITCs are central to ensuring two key taxpayer rights – the right to retain representation, and the right to a fair and just tax system.  By providing pro bono representation of low income taxpayers and educating low income taxpayer about their rights and responsibilities, LITCs ensure that tax disputes are decided on the merits and not by default.  Moreover, through litigation of cases, comments on regulations and IRS notices and initiatives, and articles, research, and conferences, LITCs ensure the tax law takes into consideration the facts and circumstances of low income and other vulnerable populations, not just the affluent or corporations.

Today, there are over 130 LITCs throughout the United States, receiving a total of approximately $12 million in IRS grants annually pursuant to IRC § 7526.  To receive an IRS grant, LITCs must demonstrate a dollar-for-dollar match, in the form of either cash or in-kind contributions.  One of the challenges for many LITCs, however, is the ability to raise matching cash funds.  This is particularly the case for LITCs serving taxpayers in rural areas.  While donated volunteer attorney, CPA, and Enrolled Agent time can count as an in-kind match, for many clinics located in rural states, there may be few volunteer tax professionals available.

To address these unmet needs, in 2021, the Center plans to establish the LITC Pro Bono Referral Network, which will build upon existing informal efforts for recruiting attorneys nationally and creating a database of willing pro bono volunteers with tax expertise.  The Referral Network will also identify LITCs that are serving rural or vulnerable populations in need of pro bono attorney expertise not available in their service areas. The Network’s website will enable LITCs to request pro bono support, identifying the specific issue and the expertise required, and the Network will then connect the LITC to a qualified and available attorney.  Attorneys who are uncomfortable litigating can sign up to provide technical advice and assistance to LITCs or can volunteer to help with training (virtually).

The Network will not only enable the provision of direct assistance to low income taxpayers in tax disputes with the IRS but it will also generate matching funds for the LITCs so they can request additional funding from the IRS.  This additional funding, in turn, can be used to improve the direct delivery of service to low income taxpayers by funding more staff attorney time at the LITCs.  A win-win for everyone.

This is where we need your help – up until now, the Center has run as an all-volunteer organization.  But as we launch the LITC Pro Bono Referral Network, we need to contract programming services and secure data storage, and more importantly, we need a staff person to do the volunteer vetting, matching, answering questions, and general program duties for the Network.

So.  Please help us expand access to legal assistance for low income taxpayers – we need your financial support to help us build the Network, and we’ll later enlist your volunteer efforts to protect low income taxpayers’ rights to retain representation and to a fair and just tax system.  You can donate to the Center here.

Thank you!

Where There is a Will, There is a Way: Economic Impact Payments for Victims of Domestic Violence and Abuse – Part II

As I discussed in Part I of this blog, many victims of domestic violence and abuse (DVAA) have not received Economic Impact Payments (EIPs) for themselves or their qualifying children under the CARES Act because the IRS has already issued an EIP based on a joint return and (1) either directly deposited the EIP into an account controlled by the abusive spouse, who has converted it for his or her own use, or (2) issued a check based on the joint return, which was then cashed by the abuser, often under a forged signature of the victim, or deposited into an account to which the victim has no access.  Even where DVAA victims have filed timely superseding returns, the IRS has declined to issue EIPs, because such payments have already been issued.  DVAA victims will likely be denied the Rebate Recovery Credit (RRC) on their 2020 returns because IRS records show an EIP has been paid in 2020. 

DVAA victims are unable to use legal means to secure their share of the EIP, such as small claims courts, because it will expose them to further abuse and risk of harm.  As the Center For Disease Control has described in its publication Preventing Intimate Partner Violence Across the Lifespan: A Technical Package of Programs, Policies, and Practices,

IPV [intimate partner violence] (also commonly referred to as domestic violence) includes ‘physical violence, sexual violence, stalking, and psychological aggression (including coercive tactics) by a current or former intimate partner (i.e., spouse, boyfriend/ girlfriend, dating partner, or ongoing sexual partner).’   Some forms of IPV (e.g., aspects of sexual violence, psychological aggression, including coercive tactics, and stalking) can be perpetrated electronically through mobile devices and social media sites, as well as, in person.

A recent survey by the Instituted for Women’s Policy Research,  Dreams Deferred: A Survey on the Impact of Intimate Partner Violence on Survivors’ Education, Careers, and Economic Security, highlights the economic impact of domestic violence.   The survey reveals how the economic dimensions of abuse permeate survivors’ lives, creating a complex set of needs that make it difficult to exit abusive relationships and move forward in recovery. Seventy-three percent of respondents said they had stayed with an abusive partner longer than they wanted or returned to them for economic reasons.  Many of those surveyed, however, expressed optimism that with the right resources, they will flourish and thrive.  These publications make clear the necessity and urgency for the IRS to issue replacement EIPs to DVAA victims.

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The IRS has decades of experience determining when a taxpayer is or has been a victim of domestic violence or abuse.

The Internal Revenue Code has long provided some form of relief from joint and several liability for taxpayers whose spouses have been less than honest and who have a resulting tax liability.  IRC § 6013(e) was enacted in 1971, updated in 1984, and finally replaced by § 6015 of the Internal Revenue Service Restructuring and Reform Act of 1998 (RRA 98).  Leading up to the enactment of RRA 98, at a hearing dedicated to “innocent spouse” relief, the Senate heard from both victims and their representatives about the situations that should warrant relief, including domestic violence and abuse.

In June 2000, as the IRS was implementing innocent spouse relief, as the Executive Director of The Community Tax Law Project, I convened a day-long Continuing Legal Education Program titled “Life After Domestic Violence: Escaping the Tax Consequences.”  The faculty for that program included the Chief Special Trial Judge for the United States Tax Court; the Deputy Associate Chief Counsel, Domestic Field Services;  the Counsel to the National Taxpayer Advocate (later the Deputy Commissioner, Services and Enforcement); the Senior Project Manager for the IRS Innocent Spouse Project; the analyst for the IRS Innocent Spouse Project; and the Assistant District Counsel for the IRS Virginia-West Virginia District.  The program faculty also included representatives from the Virginia Poverty Law Center, the Catholic Legal Immigration Network, Inc., and the Wellspring Psychotherapy Center, all of whom worked with victims of domestic violence.  As a result of the program, the IRS invited the conference’s domestic violence experts to help the IRS train its Innocent Spouse Project employees on the cycle of domestic violence and its impact on tax filing.

In later years, the IRS Cincinnati Centralized Innocent Spouse Operation (CCISO) partnered with me (as the National Taxpayer Advocate) and the Taxpayer Advocate Service to develop training materials and a video for the CIS employees handling IRC § 6015 relief.  The video included the Executive Director of the Washington, DC Coalition on Domestic Violence, an LITC attorney specializing in representation of victims of domestic violence and abuse, a Taxpayer Advocate Service attorney-advisor, and myself.

The IRS now has procedures in place to determine if someone has been the victim of domestic violence or abuse in the context of granting relief from joint and several liability, upon submission of Form 8857, Request for Innocent Spouse Relief.  Because IRC § 6015 requires the IRS to provide the non-requesting spouse an opportunity to submit information, the IRS centralizes innocent spouse abuse claims to protect the location of the requesting taxpayer.  The IRS has a procedure by which its phone assistors may place a DVAA victim indicator on the taxpayer’s account to protect against disclosure of the victim’s location to the abuser.  (IRS refers to this notation as the Victim of Domestic Violence (VODV) indicator.  See IRM 21.1.2.11.2 and IRM 25.25.18.9.2.6.)   IRM 25.15.1.2 has procedures for adjusting returns where the return was filed under duress or there was a forged signature, as well as obtaining a married filing separate return if the taxpayer may be entitled to a refund.  (IRM 25.25.18.5.2.13 sets forth the procedures the IRS should follow where relief is fully allowed and a refund is due to the requesting spouse.)

In Publication 3865, last revised in October 2017, the IRS provides “Tax Information for Survivors of Domestic Abuse.”  This publication states, “Domestic abuse is not just physical abuse.  It often includes economic control.  As a survivor of domestic abuse, you can take control of your finances.  An important part of managing your finances is understanding your tax rights and responsibilities.”  [Emphasis added.]  The publication then outlines many of the rights available to DVAA victims, including relief from joint and several liability under IRC § 6015.

The IRS, then, understands very well the contours, manifestations, and consequences of domestic violence and abuse.  It is to its credit that it has created administrative processes to assist those victims and mitigate their risks.

The IRS and Treasury have created special administrative provisions for DVAA victims to provide exceptions to statutory requirements that would otherwise exclude them from receiving tax benefits.

While IRC § 6015 is a statutory provision, in other instances Treasury and the IRS have created special, non-statutory procedures for DVAA victims in order for them to claim federal benefits administered through the Internal Revenue Code.  For example, in order to obtain the Affordable Care Act’s (ACA) Premium Tax Credit (PTC) under IRC § 36B (and the associated Advanced Premium Tax Credit (APTC)), married persons must claim Married Filing Jointly (MFJ) status on the return for the year used to calculate the PTC and the APTC.  However, Treasury and the IRS early recognized that there will be instances where a taxpayer would not be able to file MFJ because of the risk of domestic violence or abuse.  Accordingly, without any explicit statutory authorization, it developed procedures whereby DVAA victims could inform the IRS and CMS that they could not file jointly; under these procedures the DVAA victims would still be eligible for the PTC/APTC.  (Alice Abreu and Richard Greenstein, in Tax as Everylaw: Interpretation, Enforcement, and the Legitimacy of the IRS, cite this as an example of the IRS not only using its interpretive authority broadly but also publicly using enforcement discretion in a manner that “takes the form of categorical nonenforcement.”)

According to these non-statutory procedures, CMS allows persons who are victims of spousal abuse to qualify for a special enrollment period to get health insurance for themselves, and thus qualify for the APTC and PTC (see Assisting Victims of Domestic Violence (August 2019)).   These taxpayers are then supposed to file MFS (unless they qualify for Head of Household status) and attach IRS Form 8962 to their Forms 1040.  Also, the August 2019 CMS publication states that to obtain the special enrollment period, persons do not “have to show medical or legal records or other proof that they have experienced domestic violence or spousal abandonment in order to qualify for this special enrollment period.”

 The first line of IRS Form 8962 states, “You cannot take the Premium Tax Credit if your filing status is married filing separately unless you qualify for an exception (see instructions).  If you qualify, check the box —>”

The instructions to Form 8962 have a definition of domestic abuse and then say “Do not attach any documentation you may have with your tax return.  Keep any documentation you may have with your tax return records.  For examples of what documentation to keep, see Publication 974.”  (Emphasis added)

IRS Publication 974 provides the following information about the (non-statutory) exception to the requirement for MFJ status:

Domestic abuse. Domestic abuse includes physical, psychological, sexual, or emotional abuse, including efforts to control, isolate, humiliate, and intimidate, or to undermine the victim’s ability to reason independently. All the facts and circumstances are considered in determining whether an individual is abused, including the effects of alcohol or drug abuse by the victim’s spouse. Depending on the facts and circumstances, abuse of an individual’s child or other family member living in the household may constitute abuse of the individual.

Spousal abandonment. A taxpayer is a victim of spousal abandonment for a tax year if, taking into account all facts and circumstances, the taxpayer is unable to locate his or her spouse after reasonable diligence. 

Records of domestic abuse and spousal abandonment. If you checked the box in the upper right corner of Form 8962 indicating that you are eligible for the PTC despite having a filing status of married filing separately, you should keep records relating to your situation, like with all aspects of your tax return. What you have available may depend on your circumstances. However, the following list provides some examples of records that may be useful. (Do not attach these records to your tax return.) 

● Protective and/or restraining order. 

● Police report.

● Doctor’s report or letter.

● A statement from someone who was aware of, or who witnessed, the abuse or the results of the abuse. The statement should be notarized if possible. 

● A statement from someone who knows of the abandonment. The statement should be notarized if possible.

Thus, at least with respect to the PTC and APTC, the IRS and Treasury have determined that DVAA victims do not have to provide advance documentation of domestic violence or abuse in order to receive these credits.  It relies on its fraud detection and audit selection algorithms to identify abuses, rather than imposing burden on all DVAA victims.  (See also, Department of Treasury Fact Sheet: Addressing the Needs of Domestic Abuse under the Affordable Care Act, March 6, 2014:  “For victims of domestic abuse, contacting a spouse for purposes of filing a joint return may pose a risk of injury or trauma or, if the spouse is subject to a restraining order, may be legally prohibited.”)

The IRS routinely issues replacement payments where refunds have been stolen or otherwise converted.

In a paper prepared by Nancy Rossner, Melina Milazzo, and myself, A roadmap to delivering Economic Impact Payments/Rebate Recovery Credit to Victims of Domestic Violence, and submitted to various members and committees of the House and Senate, we noted the IRS has ample administrative authority to address the needs of DVAA victims in the context of the EIP/RRC.  IRC § 6428(e)(2) provides that “with respect to a joint return, half of such refund or credit shall be treated as having been made or allowed to each individual filing such return,” thus creating an individual property interest of each joint filer in his or her share of the credit.

As IRS IRM 25.15 acknowledges, joint returns may be filed as a result of duress, or under forged signatures.  It is well established in case law that these returns do not constitute a valid return of the taxpayer.  In these instances, similar to the procedures under Identity Theft and Return Preparer Fraud, the taxpayer should be able to file an original MFS return (or Head of Household return, if eligible) and receive her or his own EIP or RRC.  In some instances, DVAA victims may already have filed superseding returns claiming that status.

If the joint return from 2019 or 2018 that was used to determine eligibility for the EIP is a valid return, the DVAA victim’s circumstances may have changed since the filing of that return; specifically, the DVAA victim may have fled the abuser and is now living apart (with relatives or friends, in a shelter, or even homeless) and has lost access to the financial accounts in which the EIP was deposited.  (Note that, as the IRS has recognized, financial abuse and control is one common aspect of DVAA.  Therefore, even when the victim was living with the abuser, he or she may not have had access to the financial account.)  As Treasury, IRS, and CMS acknowledge, the DVAA victim cannot contact the abuser without serious risk of harm to self or to their children.  The abuser has essentially converted the EIP, similar to the identity thief or the fraudulent return preparer.

Where there is a will, there is a way:  the IRS can issue replacement checks to victims of domestic violence, if it wants to.

As outlined above, the IRS has ample procedures to address these situations.  The best course of action would be to allow the DVAA victim to submit a simple affidavit, modelled after the Form 8857, Part II, questions 8 and 10, and Part V.  This form acknowledges the taxpayer may be afraid to provide documentation, and the IRS has procedures under IRM 25.15 to handle such situations.  The IRS either can route these affidavits to the CCISO for review or have them reviewed by some other Accounts Management unit; this review should adopt the approach taken by the PTC/APTC procedures, namely accepting the claims at face value except where the evidence indicates fraud or attempts to game the system.

Unlike IRC § 6015, there is no requirement, nor need, to notify the other spouse.  The CARES Act contemplates overpayments of the EIP.  IRC § 6428(e)(1) provides: “The amount of credit which would (but for this paragraph) be allowable under this section shall be reduced (but not below zero) by the aggregate refunds and credits made or allowed to the taxpayer under subsection (f).”  (Emphasis added.) The IRS can utilize erroneous refund procedures under IRC § 7405 to recoup the refund from the other spouse, if it desires.

Because of the December 31, 2020 deadline for issuance of EIPs, the IRS may not be able to implement these procedures before this date.  However, it stills needs to put in place these procedures because the DVAA victim’s 2020 account reflects the payment of an EIP and thus his or her claim for a RRC on the 2020 Form 1040 will be denied.  The affidavit could flag these returns for the appropriate IRS unit to review and adjust.  The IRS should route these returns/claims to a specific unit or group in order to minimize delays, because by then these DVAA victims will have been waiting a year or more for the EIP/RRC.

Moreover, as discussed in the July 9, 2009 Office of Chief Counsel Memorandum, Replacement Checks for 2008 Economic Stimulus Payments, the IRS can provide replacement checks to taxpayers whose circumstances changed between 2019 (or 2018) and 2020, and either are not eligible for the 2020 RRC or for a lesser amount than the EIP based on 2019/2018 returns.  The key issues are whether the EIP was “made or allowed” before January 1, 2021.  Under the Chief Counsel memorandum’s reasoning, if an EIP payment was made or allowed before January 1, 2021, the IRS can issue a replacement check in the amount of the difference between the RRC claimed on the 2020 return and the amount of the EIP originally made or allowed to the taxpayer in 2020 – namely the DVAA victim’s share of the 2020 EIP that she or he never received.

While all of these steps require some dedication of resources, they are all things that should have been anticipated by the IRS based on its experience with the 2008 ESP and 2008 RRC.  The procedures proposed here build upon policies and procedures already used by the IRS, with employees already trained in these matters.  It has a cadre of employees already experienced with DVAA victim circumstances, and it has other employees trained to make adjustments to returns that involve identity theft and return preparer fraud.  There are already procedures in place for processing returns that include Form 14039 for victims of identity theft.  It can adopt those procedures for returns from victims of domestic violence and abuse; failure to do so perpetuates the harm visited upon them by their abusers.

Where There is a Will, There is a Way: Economic Impact Payments for Victims of Domestic Violence and Abuse – Part I

As the IRS ramps up for its final push to get Economic Impact Payments out to nonfilers and to those populations it unjustly denied earlier (e.g., incarcerated individuals, discussed here, here, here, and here, and federal beneficiaries with dependents, discussed here and here), there is one population that Treasury and the IRS have inexplicably denied assistance.  Consider the following scenario:

Susan is a victim of domestic violence and abuse.  In 2019, her husband prepared a married-filing-jointly 2018 Form 1040, which she signed.  In early 2020, before a 2019 return could be filed, Susan fled her abusive spouse and found short-term housing for herself and her children in a domestic violence shelter.  In March 2020 the pandemic hit, and Susan was desperate to get separate housing, even in a hotel, for herself and her two children.  To do that, she needed her 2019 tax refund.  However, all of her financial records were sent to her former home and she could not contact her spouse or have them forwarded out of fear of harm.  The IRS was not answering its phones, no Taxpayer Assistance Centers were open, VITA and TCE were not functioning, and she had no funds to pay a professional return preparer. 

In early April, the IRS issued the Economic Impact Payment (EIP) to Susan’s spouse and herself, based on the 2018 MFJ return.  The payment was directly deposited into a financial account controlled exclusively by Susan’s abusive spouse.  Susan cannot contact her spouse to obtain her share of the EIP without exposing herself to physical and mental abuse.  Well-meaning friends who have attempted to secure Susan’s EIP from the abusive spouse have met with refusals and threats.  Susan is afraid that if anyone else contacts him in an effort to help her, they will inadvertently disclose her location, so she has asked friends to stop intervening.  Nor can she seek redress in small claims court without significant physical risk to herself and her children.

In the meantime, Susan has now filed a timely Married-filing-separately 2019 return for herself and her children.  The IRS customer service representative told Susan that because an EIP was already issued for her and her children based on the 2018 MFJ return, Susan will not receive an EIP based on the 2019 return.  The IRS assistor advised Susan she could attempt to claim the rebate recovery credit (RRC) when Susan files her 2020 return.  However, because Susan’s 2020 account shows that an EIP has already been issued under her social security number and for her children, the IRS will disallow the RRC claim on her 2020 return.  Susan is desperate because she needs the EIP and her refund to obtain safe housing for herself and her children, and so she can begin to build her life after years of abuse.

The example above is not an unusual case — it is well documented that domestic violence and abuse has increased under the economic stress, social distancing, and shut down restrictions resulting from the coronavirus pandemic.  In fact, according to the National Institutes of Health, 1 in 3 women and 1 in 10  men 18 years of age or older experience domestic violence at some point in their lives.  

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It’s not as if Treasury and the IRS haven’t known about this issue.  Since the very beginning of the pandemic, advocates for victims of domestic violence and abuse (DVAA) (also called intimate partner violence or IPA) have called on the Department of Treasury and the IRS to create a process for DVAA victims to identify themselves and obtain replacement EIPs. 

  • Early in the pandemic, Nancy Rossner of The Community Tax Law Project wrote about this issue and the importance of filing superseding returns in Procedurally Taxing here.
  • On May 8, 2020, Senator Jeanne Shaheen wrote to the Secretary of the Treasury and the IRS Commissioner, asking how the Treasury and IRS planned to deliver EIPs to victims of domestic violence.  You can read the letter here
  • On June 19, 2020, Senator Cortez Masto, along with 35 other Senators, wrote the Secretary of the Treasury and the IRS Commissioner, requesting they create a way for this population to receive EIPs.  You can read the letter here.  The Commissioner, both in his written response and in a later Senate hearing, (at 1:46:15) expressed sympathy but did not commit to any relief. 
  • In a mid-September meeting with myself, Nancy Rossner, Melina Milazzo of the National Network to End Domestic Violence, and members of Senator Cortez Masto’s staff, the IRS Deputy Commissioner for Services and Enforcement said the IRS was very sympathetic but was concerned about documentation and whether the IRS had the authority to do anything. 
  • On September 30, Congressmen Raskin and Fitzpatrick and Congresswoman Gwen Moore, along with 103 other members of the House, wrote the Secretary and the Commissioner requesting they find a way to issue EIPs to victims of domestic violence.  You can read the letter here
  • During an October 7th hearing before the Subcommittee on Government Operations of the House Committee on Oversight and Government Reform, Congressman Raskin asked the Commissioner about this issue; the Commissioner stated, “The CARES Act does not provide the IRS the discretion to add an additional, say in this context, $1200 to the victim of domestic violence.”  You can watch the hearing here (see the domestic violence discussion at 1:25:07).

It is unclear why Treasury and the IRS are digging in their heels and taking this position.  I understand and am sympathetic to the concern of having to take on more work in the context of a pandemic, but its position flies in the face of what the IRS has done in similar situations in the past, without any express statutory authority.  The IRS has current processes in place that can be utilized to issue EIPs and RRCs to DVAA victims.  It does not need to re-invent the wheel and it does not need statutory authorization to do so. It also has systems in place to identify questionable claims.  In short, the IRS can implement a procedure whereby DVAA victims

  1. may attest they are victims of domestic violence and abuse, similar to the procedures adopted by IRS and Centers for Medicare and Medicaid Services (CMS) pursuant to Treas. Reg. 1.36B-2(b),
  2. may submit an affidavit, similar to that used for victims of identity theft (Form 14039) and return preparer fraud (Form 14157A) and
  3. may provide supporting information or documentation similar to that requested on Form 8857, Part V (see also, Part II, Questions 8 and 10). 

In this and my next blog, I will take a deeper dive into how the IRS can actually do this, without the need for legislation.  I want to thank Nancy Rossner and Melina Milazzo for their insights and help in developing this “roadmap” and, more importantly, for their advocacy on behalf of victims of domestic violence.

The IRS has the authority to issue replacement payments where refunds have been stolen or otherwise converted.

On multiple occasions the IRS has concluded it has the authority to issue a payment where the original payment was issued as a result of fraud or duress, or was converted.  Moreover, in each of these instances, there is no explicit statutory authorization for issuance of a replacement check.  For example, a taxpayer who is a victim of tax-related identity theft (e.g., an identity theft filing and obtaining a refund by posing as the taxpayer) may submit an identity theft affidavit (Form 14039) to the IRS along with or after filing his or her paper Form 1040.  Upon review of the affidavit and any accompanying information and validation of the taxpayer’s identity, the IRS shall adjust the taxpayer’s account by removing the false return, posting the incorrect payment to a holding/dummy account, and process the taxpayer’s correct return and issue the correct refund.  (See generally, IRM 25.23, Identity Protection and Victim Assistance.)  The basis for these corrections is that the false return filed by the identity thief (or altered return filed by a return preparer) does not meet the Beard requirements for constituting a valid return of the taxpayer.  (As a recap, Beard v. Commissioner held that for a return to be valid for purposes of the statutory period of limitations, “[f]irst, there must be sufficient data to calculate tax liability; second, the document must purport to be a return; third, there must be an honest and reasonable attempt to satisfy the requirements of the tax law; and fourth, the taxpayer must execute the return under penalties of perjury.”)

On the other hand, where a taxpayer alleges a return preparer has altered the return by directing the refund to the preparer’s account and then not paying over that refund to the taxpayer (aka “return preparer fraud”), per IRM 25.24, the taxpayer may file an affidavit (Form 14157A) with the IRS along with a police report, and after reviewing accompanying information and documentation, the IRS may move the original, converted refund payment to a separate account and issue a correct refund to the taxpayer.  Although the return in question may meet the requirements of the Beard test and constitute a return of the taxpayer, IRS Chief Counsel has concluded there is no legal prohibition to issuing a replacement refund where the taxpayer can show the refund was converted.  Thus, for example, IRM 25.24.1.1.4(1)(i)(4) provides as follows:

Category 4: Misdirected Refund Only and Taxpayer Requesting Additional Refund. The taxpayer was in contact with a preparer for the year of filing and did authorize a return filing, but states although no tax data was altered, the direct deposit information or mailing address for the refund check was altered diverting all or a portion of the refund to the preparer.
The taxpayer states that he/she only received a portion of the refund or he/she received no refund.
Potential relief/resolution: The IRS will administratively remove the portion of the refund misdirected to the preparer and the taxpayer shall receive a refund for the entire amount due from the original valid return, less any amounts already received. [Emphasis added.]

In the context of the 2008 Economic Stimulus Payment (ESP), the IRS had procedures to issue replacement payments to victims of identity theft, where payments where issued based on returns submitted by identity thieves or were sent to bank accounts controlled by the identity thief.  The IRS has similar procedures in place for the 2020 EIP.  (“Additionally, if individuals have not received the EIP because they suspect they are victims of identity theft, taxpayers should submit Form 14039, Identity Theft Affidavit, and notate “Stolen EIP” at the top of the form.” National Taxpayer Advocate, Fiscal Year 2021 Objectives Report to Congress, at 58).  For example, IRM 25.23.4.20.4(9) provides:

When the amount of EIP allowed based on an invalid (IDT) return, mixed entity (MXEN), or invalid joint election (IJE) is the same as the amount of EIP the valid taxpayer is entitled to, an adjustment to EIP is not necessary. Input TC 290 .00 with BS 05, SC 0, and HC 3. Use RC 139 for IDT cases. Use RC 099 for MXEN and IJE cases. When the EIP has been issued to someone other than the CN owner, follow the applicable procedures below:

Streamline IDT cases: Follow procedures in IRM 25.25.4.7, Reversing Identity Theft (IDT) Lost Refunds, to resolve an EIP issued to the invalid taxpayer.

Non-streamline IDT cases: Create a Dummy tax year 2020 module for the IRSN. Follow procedures in IRM 21.5.2.4.23.10, Moving Refunds, to move the EIP to the 2020 module for the IRSN.

○ MXEN and IJE cases: Create a Dummy tax year 2020 module for the other TIN. Follow procedures in IRM 21.5.2.4.23.10, Moving Refunds, to move the EIP to the 2020 module for the other TIN.

None of the examples and procedures cited above are based on explicit statutory authority.  They are based on determinations of fraud or conversion perpetrated by third parties, whether that fraud involves the filing of a false return that does not constitute the return of the taxpayer or the conversion of a refund due to the taxpayer.

In my next blog, I’ll discuss the IRS’s experience with victims of domestic violence in the context of IRC § 6015 relief and other IRC provisions.  And I’ll explain in greater detail how the IRS can utilize its existing procedures to issue EIPs or RRCs to DVVA victims.

Going Forward – Refundable Credits in the 2021 Filing Season and Beyond

In my last post I called on the IRS to reopen its non-filer portal for recipients of federal benefits who have dependents and issue supplemental Economic Impact Payments for those dependents. On August 14th, the IRS announced on that it would do that very thing, responding to congressional and public pressure and facing what promised to be an adverse ruling in pending litigation.  This is truly an important development that will provide much-needed financial assistance to vulnerable families in the midst of a pandemic.  It also provides a foundation for the IRS to build on in future filing seasons.

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A second proposal I made in that post received some interesting comments.  I proposed the IRS use its internal Form W-2 and 1099-MISC-NEC data to identify those taxpayers who appeared to qualify for the childless worker Earned Income Tax Credit (EITC) and automatically pay out the amount of EITC based on those earnings.  By now, the IRS has received almost all of the wage and information returns for 2019.  The National Taxpayer Advocate reports that by February 28, 2020, the IRS had received 3.9 percent more W2s and 12.8 percent more 1099-MISC forms than the year before.  (For comparison, the IRS received 219 million W2s by February 4, 2019.)    IRS also can determine whether the taxpayer was claimed as a dependent on another’s return, so the risk of noncompliance is very low.  In fact, in 2018 the Treasury Inspector General for Tax Administration, whose job is to ferret out fraud, waste, and abuse in the tax administration, actually recommended the IRS automatically calculate and pay out the EITC.

One comment questioned how someone could live on, say, $7,000 a year and cited an example of a client who, upon questioning, ceded that he had unreported cash income.  Another noted that one of his clients had low wage income but was receiving a significant amount of income that was reported on an estate’s Schedule K-1, which likely would not be in the IRS’s systems yet.  I will address the issue of living off of $7,000 a year below, but as to the K-1 income, my response is something I have said to the IRS for decades:  you design tax administration around the 95 percent of the taxpayers who are trying to comply, not around the 5 percent who are not.  No aspect of tax administration will have zero errors or noncompliance; you have to accept some people will slip through.  Otherwise, you end up with the byzantine tax administration we have now. 

The proposals outlined in my earlier post don’t solve all the problems with unclaimed EITC or missed EIPs.  They addressed emergency situations and provided a one-time way to get much needed dollars out to the most vulnerable populations in our society, populations that are most impacted by the coronavirus and pandemic-related job loss.  For 2021 and beyond, the IRS can build on its EIP initiatives this year to increase the EITC participation rate while minimizing taxpayer burden.  But before I discuss these proposals, let’s take a high-level look at poverty in America.

Refundable tax credits play an important role in reducing poverty in America

According to the US Census Bureau, the 2018 official poverty rate was 11.8 percent, with 38.1 million people in poverty.  The official definition of poverty is established by the Office of Management and Budget in Statistical Poverty Directive 14 and is used to determine eligibility for various government programs.  Here are some rather stunning statistics from the U.S. Census Bureau report, Income and Poverty in the United States: 2018, (the 2019 poverty statistics will be issued on September 15, 2020).  For purposes of determining family poverty, Census defines a family as “a group of two or more people related by birth, marriage, or adoption and living together.”

  • The 2018 poverty rate for primary families (i.e., a family that includes a householder) was 9.0 percent.
    • For female householder families, the rate was 24.9%.
    • For married couples, the rate was 8.1%.
  • The 2018 poverty rate for unrelated individuals not in families was 20.2%.  (This is a cohort of the childless worker EITC population.)
    • For unrelated male individuals not in families, the rate was 17.7%.
    • For unrelated female individuals not in families, the rate was 22.6%.
  • The 2018 poverty rates varied significantly by race:
    • For Blacks, the rate was 20.8%.
    • For Hispanics, the rate was 17.6%.
    • For non-Hispanic Whites, the rate was 8.1%.
  • The 2018 poverty rate varied by sex:
    • For males, the rate was 10.6%.
    • For females, the rate was 12.9%
  • The 2018 poverty rate varied significantly by age:
    • For children under the age of 18, the rate was 16.2%.
    • For persons age 65 or older, the rate was 9.7%.
  • The 2018 poverty rate for workers was 5.1%.
    • For full-time year-round workers, the rate was 2.3%.
    • For less-than-full-time year-round workers, the rate was 12.7%.
    • For workers who did not work at least 1 full week, the rate was 29.7%.

The Department of Health and Human Services publishes the poverty guidelines each year in the Federal Register.  The 2020 poverty guidelines are below:

Since 2011, in collaboration with the Bureau of Labor Statistics, the Census Bureau has also computed and published the Supplemental Poverty Measure (SPM), which takes into account the impact of government benefit programs for low income persons and families – including food stamps, school lunches, housing assistance and refundable tax credits —  as well as deductions for certain necessary expenses, including taxes, child care, commuting, health insurance premiums and co-pays, and child support, that are not included in calculating the official poverty rate.  Here are a few eye-opening factoids from the SPM:

  • For 2018, the Supplemental Poverty Measure was 12.8 %, a full percentage point higher than the official poverty rate.
  • Social Security benefits moved 27.2 million persons out of poverty in 2018.
  • Refundable tax credits moved 8.9 million persons out of poverty in 2018.
  • If the EITC and the refundable portion of the Child Tax Credit were not included in the SMP calculation, the 2018 SPM poverty rate would have been 15.5 % rather than 12.8 % — meaning the tax code accounts for an almost 4 percentage point reduction in the official poverty rate of 11.8 %.

The Supplemental Poverty Measure shows that it is possible for someone to live on earnings of $7,000 a year by receiving federal benefits, including the Earned Income Tax Credit.  In fact, according the U.S. Census Bureau, 10.2 percent of over 128 million householders had money income under $15,000 in 2018.  That is the reality for over 13 million Americans.

Going forward, the IRS needs to take more proactive steps to get the EITC and other refundable credits into the hands of eligible taxpayers

The stunning data presented above should give us all pause to reflect on the significant role the tax code and IRS play in lifting Americans out of poverty.  Although some complain that the IRS should not be in the benefits business (or, more cynically, it should only be administering social benefits to home-owners and businesses), it turns out the EITC is an efficient and effective program.  Yes, there are plenty of things that need fixing about the EITC, and I personally have made scores of recommendations in that regard.  But folks who wish for a past time when the EITC didn’t exist need to just get over it.  And that includes the IRS – it needs to embrace its role as deliverer of social benefits.

The IRS can begin its embrace in the 2021 filing season and beyond, by keeping the non-filer portal and enhance it by adding a screen and checkboxes designed to determine eligibility for the EITC.  The IRS’s own data show that through April 17, 2020, 5.631 million filers used Free File, a 110 percent increase over 2019, largely attributable to taxpayers who used the non-filer portal and thus bumped up the abysmal Free File usage rates.  [See National Taxpayer Advocate Fiscal Year 2021 Objectives Report to Congress, pages 97-98.]  Usage would increase even more if the portal were made available on mobile devices as well as in other languages.  Moreover, the IRS could consider a telefile version of the nonfiler portal – which would really help out those households who don’t have broadband or any internet access in their homes.

In 2018, TIGTA recommended the IRS modify Form 1040 to capture information that would allow it to automatically issue the EITC to taxpayers who filed a return.  Although the IRS ultimately declined to go along with this recommendation, it is a good idea that should be adopted.  Here is TIGTA’s suggested mock-up for the pre-“simplified” Form 1040:

In addition to adding these boxes to the face of the Form 1040, IRS should add to the non-filer portal a few extra checkboxes:  Did you (and your spouse, if filing married-filing-jointly) have your principal residence in the US for more than six months of the year?  Would you like the IRS to compute your eligibility for and amount of the Earned Income Tax Credit?  If a taxpayer enters dependents on the nonfiler portal, another checkbox can pop up:  Did this child live with you in the US for more than six months of the year?  These questions, along with retaining the checkbox question about being claimed as a dependent on another’s return and IRS internal databases and filters, provide all the information the IRS needs to get the EITC out to eligible households.

Second, as TIGTA recommended in 2018, the IRS should study how best to use CP-09 and CP-27 letters, the EITC reminder notices IRS sends to taxpayers with children and without children, respectively.  Today, IRS sends out these letters to only a fraction of taxpayers it believes are eligible for underclaimed EITC, and it completely ignores those who have not filed a return.  According to TIGTA, for Tax Year 2014, IRS estimated 5 million households were potentially eligible for EITC totaling $7.3 billion.  Of those 5 million taxpayers, 1.7 million filed returns but did not claim the EITC.  TIGTA reported the IRS annually spends $2 million issuing notices to potentially eligible taxpayers, but the notices were sent to only 361,000 of the 1.7 million filers (and none to the nonfilers).  The response rate to these letters was 28 percent for taxpayers with children, and 57 percent for taxpayers without children.   The CP-09 and CP-27 letters may not be necessary for filers if the IRS adopted TIGTA’s and this post’s recommendations to modify the Form 1040 and the non-filer portal.  Instead, these letters (or postcards) could be sent at the beginning of the filing season to prompt nonfilers to file and claim the EITC.   

As TIGTA noted, the CP-09 and CP-27 letters historically have had low response rates.  But thousands of businesses and political campaigns have figured out that direct marketing, done correctly, actually has an impact.  The IRS possesses a mother lode of data on nonfilers – it has Forms W-2 and 1099s; all of those forms have taxpayer addresses.  The IRS could use this address data to send the letters, or generic postcards, to EITC nonfilers.  A postcard with a generic message about EITC eligibility, can be written so as to not violate IRC § 6103.  For example: 

The EITC is a tax credit for low income workers with or without children. To learn whether you are eligible for the credit, go to [website] or call [toll-free dedicated number]. If you haven’t filed a return, you may be able to use the non-filer portal to claim the EITC.

It may be people don’t open IRS letters, but they will read a generic postcard about needing to file in order to get the EITC.  This is worth experimenting with. 

The IRS could also send letters to potentially eligible filers and nonfilers immediately before the opening of the next filing season, urging people to check out the EITC; a TAS study found that educational letters, sent to taxpayers who appeared ineligible for the EITC in the previous year but were not audited, with the words “important tax information” on the envelopes and mailed right when W-2s were being issued, resulted in significant taxpayer behavior changes.  Recipients apparently opened the envelopes and read them. 

IRS also could promote the non-filer portal during its EITC Awareness Day events every January.  Moreover, since the non-filer portal is built upon the Free File Alliance’s Free Fillable Forms portal, as discussed here, it won’t run afoul of the IRS-FFA agreement.

In the past, the IRS cited lack of resources to be able to handle the responses to more of the  CP-09 and CP-27 notices.  As I’ve noted in other posts, I understand all too well the problem of diminished resources.  But EITC funds are lifelines to these taxpayers and should be prioritized as much as enforcement hires.  If the IRS were to adopt a dual-role mission statement, as I’ve recommended since 2010, it and the Administration would develop a budget proposal to provide the resources and staffing necessary to issue the notices and process responses.  Moreover, if the IRS maintains and improves the portal, nonfilers would use the portal instead of mailing in a response, so the resource demand would be minimized.  Congress has a role to play here, too.  It can nudge the IRS in the right direction and provide it with dedicated funding to increase the EITC participation rate.  With the pandemic showing the vital role the IRS plays in the delivery of economic benefits, Census data showing the important role of refundable tax credits in lifting millions of Americans out of poverty, and Congress finally aware of what years of underfunding have done to tax administration, now is the time to make the case for robust and proactive taxpayer assistance.