A Free Direct E-filing Tax Return System is a Fundamental Taxpayer Right

May 1, 2023 by 4 Comments

The Inflation Reduction Act (IRA) directed the IRS to a report on “the cost (including options for differential coverage based on taxpayer adjusted gross income and return complexity) of developing and running a free direct efile tax return system, including costs to build and administer each release, with a focus on multi-lingual and mobile-friendly features and safeguards for taxpayer data;” as well as surveys of taxpayer opinions, expectations, and trust and an independent third-party assessment of feasibility, etc. (IRA § 10301(1)(B). The IRA included an appropriation of $15 million toward that effort. The report is due to be delivered to Congress on or before May 16, 2023.  It already has been the subject of much commentary and speculation, and this last week both the Wall Street Journal and Fox News touted findings from a leaked study by MITRE that allegedly reports survey results about taxpayers willingness to utilize an IRS direct file application.  Contrary to what these media reports conclude, the reported survey data (which I have not seen so cannot verify) show that a majority of US taxpayers appear to prefer some type of IRS direct e-file or automatically populated and calculated tax return.  But more on that later.

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I witnessed the inception of the e-filing movement since my days as an unenrolled return preparer and more intimately during my service as the National Taxpayer Advocate.  At the time I entered the IRS, Treasury and the White House wanted the IRS to create a free direct filing program that would be accessible through the WhiteHouse.gov website.  Commissioner Rossotti and Terry Lutes, then director of electronic tax administration, argued the IRS did not have the bandwidth to develop such a project itself and proposed entering into an agreement with commercial software companies to offer their products for free to share of the individual taxpayer population.  This decision was driven by two concerns:  (1) the Congressional mandate to achieve 80% e-filing of all federal tax and information returns by 2007 (IRS Restructuring and Reform Act of 1998 §2001(a)); and (2) the IRS’s limited capacity to handle another major IT project, given it was digging itself out from a major debacle of the 1990s, in which it blew through $4 billion on a tax systems modernization program without much to show for it.  Thus, the Free File Alliance was born.

At the time, I objected, pointing out that putting off direct filing would just end up with us (the taxpayers), twenty years hence, without any free e-filing product available to all taxpayers, once the commercial companies had established market dominance and then pulled out of the agreement.  This has pretty much come to pass.

The concept of direct e-filing has been around for quite some time; here is a post from Les discussing some background and current developments.  In fact, as I reported in my 2012 National Taxpayer Advocate Annual Report to Congress, in the IRS Restructuring Reform Act of 1998, Congress directed the IRS as follows:

Not later than December 31, 2006, the Secretary of the Treasury or the Secretary’s delegate shall develop procedures for the implementation of a return free tax system under which appropriate individuals would be permitted to comply with the Internal Revenue Code of 1986 without making the return required under section 6012 for taxable years beginning after 2007.   (RRA 98 § 2004)

Not later than December 31, 2006, the Secretary of the Treasury or the Secretary’s delegate shall develop procedures under which a taxpayer filing returns electronically (and their designees under section 6103(c) of the Internal Revenue Code of 1986) would be able to review the taxpayer’s account electronically, but only if all necessary safeguards to ensure the privacy of such information are in place.  

RRA 98 § 2005

My thinking about direct file is governed by some first principles that are worth reviewing, before examining some of the arguments raised in opposition to the tax agency providing free direct filing and also sharing an example of what some tax systems are able to deliver to their taxpayers.

First and foremost, no one should have to pay for the privilege of preparing and filing their tax returns.  Let’s not forget that taxes are a public good; they are not a commercial product like potato chips or an airline ticket.  I don’t care how much or how little taxable income you report; the government has an obligation to provide a method for you to prepare and file your tax returns without having to pay someone to help you – if you are so inclined.  Sure, lots of people don’t want to prepare their own tax returns and are perfectly willing to pay someone to do it for you.  I know this because I prepared returns from 1975 right up until I joined the IRS in 2001.  Each year I would try to convince my clients with the simplest returns that they could do it themselves, but still they wanted to pay me to prepare their tax returns for them.  Other taxpayers are comfortable preparing their own return with the assistance of commercial software, that links to their investment or business accounts, or just guides them through the tax maze. Still others use their annual trip to their return preparer as a financial check-up; they discuss retirement or business planning, or just saving for a rainy day.  That’s fine too, but if you don’t want to (or can’t) shell out money for the purpose of contributing to the public fisc, the government needs to provide a way for you to prepare and file your tax returns for free.  Period.

This brings us to the second underlying principle: choice of filing options is good.  The over 160 million US individual taxpayers are a very diverse lot and, as outlined above, they have very different filing preferences.  Their economic position widely varies – from wage-only/non-itemizing returns (about 59.3 million in Tax Year 2016, or 40% of all returns – see Annual Report research study here for more data) to sole proprietors (including gig economy workers) to taxpayers with complex pass-through income and investments.  This large and diverse tax population can and will support a variety of tax products, including one available for free that is provided by the federal government.

This brings us to our third principle: taxpayers should have access to their own tax data.  In the 21st century, data is increasingly available to tax administrators.  According to the IRS Data Book, in Fiscal Year 2022, the IRS received 5.4 billion information returns reporting data about income, deductions, and basis in assets.  Although taxpayers have the responsibility for complying with the tax laws, a fundamental principle of maintaining and increasing voluntary compliance is making it easy for taxpayers to comply.  That includes providing them with the income and other data the IRS receives about them, in order to avoid mistakes and omissions.

Now, the tax world is not static, and neither is the tax preparation environment.  What was not possible for tax agencies, technologically, back in the year 2000, is de rigueur for tax agencies today.  I have visited with many tax agencies over the decades and have witnessed how far ahead of the IRS they are in delivering free and easily accessible taxpayer accounts and tax preparation vehicles.  While some offer fully pre-populated returns, many others offer taxpayers the ability to see the income information the tax agency has about them, and either enter that information into a free online filing app, to be supplemented by other information such as sole-proprietorship income, or download the information to provide to one’s return preparer or import it into commercial tax preparation products.

If you are interested to see what a government-provided tax account with free online filing might look like, take a look at this demo of the Australian Tax Office’s taxpayer account here.  You can access the app on your smart phone, tablet, laptop, etc.  Australia has been building this in chunks since, oh, the early 2000s.  It takes about 15 minutes for taxpayers to file a return on this app, compared to the 8 hours the IRS estimates under the Paperwork Reduction Act for the non-business returns (3 hours for actual preparation).  Australians have choice, but about 37.5% (4.5 million out of 12 million) of individual filers prepare their return via the app for free.  (Les and I visited with ATO officials in late March/early April this year, for a Center for Taxpayer Rights project, and they kindly shared this demo with us then.)

So, what do the critics say about all this?  Some of the arguments are re-hashed from back in the 2000s.

  1. Direct filing with the IRS will enable the IRS to see all the changes you make in the process of preparing your return.  First of all, this argument shows ignorance of the powers Congress has granted to the IRS to administer the tax law.  The IRS is able to issue summons for any document or record (including electronic records) that is relevant to its investigation of a tax return.  The attorney-client privilege doesn’t apply to return preparation, and there is no absolute federal return preparer privilege.  So, regardless of whether you file electronically or on paper directly with the government, or through a software product, or through a return preparer, if the IRS wants to see the documents, drafts, etc. of what went into preparing a tax return, generally, it can get it.  As the NTA Annual Reports demonstrate year after year after year in reporting on the most litigated issues, quashing an IRS summons through the courts is very difficult.
  2. Direct filing with the IRS will enable the IRS to impose upon you the government’s interpretation of law.  The fear here is the IRS will build into the software certain rules such that will prevent some taxpayers from claiming a particular deduction or credit via an e-filed return.  To some extent this is already happening today – e.g., the IRS rejects e-filing of returns (commercially or otherwise prepared) where the taxpayer or dependent has been claimed on an earlier e-filed return for that year.  The IRS still allows the taxpayer to file a return on paper claiming the child, and then sorting out who is entitled to the child-related benefits later on in the process.  This approach violates the Beard v. Commissioner rule of what constitutes a return.  My understanding is Treasury is aware of this issue.  The way to address this issue is to require open source access to the underlying assumptions of the direct filing tool – that way the tax community can identifying assumptions built into the program.  Another protection is to replace the e-file rejection with a simple pop-up notifying the taxpayer of the issue (duplicate filing of a child, claim for a credit in excess of the number of years allowed, etc.) but allow the taxpayer to proceed with e-filing the original return if they choose to do so.  There are solutions to these concerns that will protect the rights of all taxpayers, not just those who use the IRS direct filing tool.
  3. Direct filing with the IRS competes with the private sector.  This proposition is similar to saying the Government Printing Office has been and is competing with the private sector by printing paper tax forms, instructions, and publication.  Geez, folks, it is a federal tax code, not a private commercial tax code.  In the 21st century, an IRS direct file option is the digital analog to the government-printed paper return of the 20th century.
  4. There already is a free direct filing option – namely, filing on paper.  This argument was floated by a spokesperson for Intuit.  The National Taxpayer Advocate has called paper kryptonite for the IRS.  Anyone who has been anywhere other than hiding under a rock for the last three years knows we need to eliminate as much paper as possible from our tax filing system.  Moreover, for those who rely on refundable tax credits and other refunds in order to meet basic living expenses, filing on paper is not a justifiable option., given the significant delays, even in the best of times, that are associated with paper tax return processing.
  5. Nobody wants to use an IRS direct filing option. This is what the Wall Street Journal editorial and Fox News reported as the ultimate findings of the leaked Mitre survey. I have not seen this survey – I assume it will be provided to Congress and made public along with the IRS and other third party report due May 16th – so I can’t vouch for the accuracy of what is being reported. But taking the reported numbers at face value, the survey actually shows a substantial level of support for an IRS direct filing option. Here are a few data points the media reported: When asked if they would use direct e-file if it included preparation of state returns, 15% of respondents said they would direct e-file; 48% said they would use their current software; and 37% said they would prefer the IRS to automatically file their individual taxes for them (the pre-population option).  (Without the state option, 12% said they would use direct e-file and 60% would use current software.)

So let’s parse these numbers.  In Fiscal Year 2022, the IRS received over 160.5 million individual income tax returns.  Of those, 3.2 million were prepared and filed via the free Free File Alliance option, the products offered up in 2001 as an alternative to the IRS direct filing proposal.  15% of 160.5 million is over 24 million taxpayers, or a 750% increase in free electronic preparation and filing.  12% is 19.2 million taxpayers, or an over 600% increase.  Contrary to how this data has been presented in the press, the survey responses show that a significant number of taxpayers find a direct filing option very desirable, while allowing for alternative choices.  In fact, when including the 37% who say they would like the IRS to automatically calculate their taxes, a majority of US taxpayers see an IRS role in return preparation as a positive thing.

Since 2002 or so, I have publicly advocated for the IRS to provide a free, direct electronic return preparation and filing app that allows taxpayers to download their tax data either into that application, or into commercial and tax preparers’ return preparation products.  This approach honors the government’s fundamental obligation to the taxpayers who fund it, while protecting taxpayer choice and transparency.  Less inclusive approaches impose burden and cost on taxpayers, which in turn breeds taxpayer resentment.  Moreover, the direct filing option is an immediate and natural outgrowth of a robust online taxpayer account, which everyone agrees is a necessary component of a modern tax system.  So, unless you want a tax system that is mired in the mid-20th century, it would be good to keep an open mind when reviewing the upcoming IRS Direct File report.


Filed Under: e-file

Thomas v. Commissioner: Some clarity on “newly discovered evidence” under IRC 6015(e)(7) that comes with a reality check

April 17, 2023 by 1 Comment

PT readers may be interested to join the next free virtual Tax Chat! in the Transforming Tax Administration series hosted and organized by the Center for Taxpayer Rights.  This week’s Tax Chat! is on IRS IT Challenges and will be held on Tuesday April 18 at 1:30 PM EDT.  Guests include GAO’s David Hinchman, Fred Forman (IRS former Associate Commissioner of Business Systems Modernization) and Marina Nitze, former Chief Technology Officer, US Dept. of Veterans Affairs.  The recent GAO report on IRS legacy systems was discussed in https://www.wsj.com/articles/tax-irs-technology-gao-report-1dcdc87?st=sfgal294m8zr5no&reflink=desktopwebshare_permalink.  If you haven’t yet registered for the series, you can do so here.

The Taxpayer First Act amended IRC § 6015(e) to make clear the standard of judicial review in innocent spouse cases was de novo.  At the same time, however, Congress added § 6015(e)(7), which provides that such review shall be limited to the administrative record along with “newly discovered or previously unavailable evidence.”  This latter provision provoked despair among practitioners representing taxpayers seeking § 6015 relief, especially in cases where domestic abuse played a role.  We all knew the administrative record of proceedings arising from the IRS’s Cincinnati Centralized Innocent Spouse Operation (CCISO) is almost always sparse, reflecting the woefully inadequate administrative process.  So the key to obtaining meaningful judicial review would be the Tax Court’s interpretation of the “newly discovered or previously unavailable evidence.”  PT has previously discussed the “Fatty Rule” here and here, relating to previously unavailable evidence, but until recently we have not had insight into the court’s position on newly discovered evidence.

Enter Thomas v. Commissioner, 160 T.C. No. 4 (2023).  Ms. Thomas, representing herself at trial, wanted to introduce some evidence that was not part of the administrative record, and she wanted to block some evidence – professional blogs in which she provided favorable information about her lifestyle and relationship with her spouse during the period before the court — that was not part of the administrative record and that the IRS wanted admitted as newly discovered evidence.  On April 26, 2022, Judge Toro entered an order requiring the parties to brief whether the various pieces of evidence should be admitted despite not being part of the administrative record; he also strongly encouraged Ms. Thomas to obtain pro bono counsel.

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Fast forward to July 25, 2022, by which date Megan Brackney had agreed to represent Ms. Thomas on a pro bono basis, and the Center for Taxpayer Rights, the Community Tax Law Project, the University of California – Hastings Low Income Taxpayer Clinic, and the Villanova Law School Tax Clinic filed an amicus brief in the Tax Court on the matter.

And now we have Judge Toro’s opinion, issued on February 13, 2023 and reviewed by the full court, in which he allows the blogs to be admitted into evidence as ”newly discovered.”  While this result is certainly disappointing to Ms. Thomas, the question of how to weigh this evidence is still open.  Regardless, given the analysis in the ruling, going forward it may very well be more helpful for taxpayers than for the IRS.  Indeed, in footnote 5, the court points out that “our conclusion would be the same if, for example, a requesting spouse were to seek to introduce into evidence posts from a blog that the nonrequesting spouse maintained without the requesting spouse’s knowledge and that the requesting spouse discovered after the IRS had made a determination with respect to the request.”

The order starts off by determining that the phrase “newly discovered” should be interpreted according to the ordinary meaning of the words, and finds, relying on several dictionaries, that in 2019 (when the subsection was enacted), “newly discovered” meant “recently obtained sight or knowledge of for the first time.”  Since the blogs were discovered by the IRS after the administrative record was closed, even though they had been posted earlier, they were “newly discovered” and thus admissible. 

Ms. Thomas had urged the court to apply the Federal Rule of Civil Procedure (FRCP) 60(b)(2)’s approach to newly discovered evidence.  Under FRCP 60(b)(2), a court could consider a motion for a new trial on the basis of “newly discovered evidence that, with reasonable diligence, could not have been discovered in time to move for a new trial.”  (Emphasis added.)  According to Ms. Thomas, since the blog posts were public and could be discovered with a reasonably diligent search during the administrative proceeding, the evidence should be excluded at trial.  Judge Toro, however, was not persuaded; he noted that the 60(b)(2) language existed at the time IRC § 6015(e)(7) was added, but was not included in the amendment; and at any rate, the court found that the “reasonable diligence” language was not a definition of the phrase “newly discovered” but rather a limitation on its meaning.

On the other hand, IRC § 6015(e)(7) does contain qualifying language:  “any additional newly discovered evidence.”  The court cited the Supreme Court’s position that “any” has an expansive meaning – “one or some indiscriminately of whatever kind.”  Thus, the court found that “any additional” counsels against adopting a limiting interpretation of the phrase “newly discovered.”

The court next noted that this expansive interpretation of “newly discovered” was further supported by the simultaneous grant of de novo review in these cases.  Administrative record cases typically involve an abuse of discretion standard, while de novo review means a fresh record.  Thus, the grant of de novo review supports the conclusion that evidence unknown to the parties in an innocent spouse proceeding should be admissible if offered by a party before the Tax Court.

Finally, distinguishing FRCP 60(b)(2) where the parties have already had an opportunity to conduct discovery, present testimony and subpoena witnesses at trial, such that a reasonable diligence rule makes sense, in the context of the IRS “relatively limited administrative proceeding, . . . .[t]he more permissive rule in section 6015(e)(7) is appropriate in these circumstances.”  And in what the made all of us who participated in drafting the amicus brief stand up and do a happy dance, the court concluded by noting:

Our holding here is generally consistent with the amici’s view that “exceptions to the administrative record rule of § 6015(e)(7) [should] be applied expansively given the de novo review the court must conduct, the requesting spouse’s specific circumstances, and the nature of the IRS’s administrative procedures.” Amicus Br. 2. And as we have already observed, see note 5 above, the rule we adopt today would apply similarly to evidence that is newly discovered by the requesting spouse or the Commissioner.

Now, before we get too excited about all this, we must turn to the concurring opinion – the reality check, so to speak.  Judge Buch, joined by Judges Ashford and Copeland, concurs with the court’s opinion “without reservation” but writes to highlight the gap between what Congress may have intended to achieve by enacting § 6015(e)(7), and what the statutory language actually says.  He gives two examples – one, an abused spouse puts on social media glowing posts about family events and vacations; the other, also an abused spouse, posts comments about the abuse and participates in an online forum for abused spouses, as well as posting photos of her bruises.  In each instance, upon leaving her spouse, she seeks relief under IRC § 6015 but does not submit these social media posts to the IRS for consideration.  Thus, the social media posts are not part of the administrative record before the court. 

In the first example, the Commissioner seeks to admit the glowing social media posts as newly discovered evidence, and as in Thomas, the court is likely to admit them.  In the second example, the Petitioner seeks to admit the posts demonstrating the existence and effects of the abuse.  Here, the Petitioner both created and controlled those posts.  Judge Buch writes that “it may be difficult for her to establish that this potential evidence is newly discovered or previously unavailable to her. As a result, she may be precluded by section 6015(e)(7) from introducing this evidence.”

Judge Buch notes that this result seemingly runs contrary to what Congress was hoping to achieve with the amendment to § 6015 in the Taxpayer First Act, namely resolving the conflicts in the circuit about the de novo standard of review; the amendment was included in a law that was all about enhancing taxpayer protections.

The majority opinion reserves these issues raised by the amicus and the concurrence for another day:  “To the extent the amici raise additional points that go beyond the facts of this case, we need not address them here, and we leave their resolution for another day.” 

So Congress’ work as legislators, and our work as advocates, is not yet done.  No one has come forward on the Hill or from the IRS to explain why the administrative record language was plopped into the statute.  But there is something that can be done, immediately, that doesn’t require legislation.  In his opinion, Judge Toro quotes extensively from amici’s description of the “skeletal” IRS innocent spouse procedures, including the following language:

Taxpayers, particularly pro se taxpayers without sufficient legal knowledge of IRS and court processes, may be unaware of what additional documents or information would support their case. Under the IRS’s innocent spouse processing procedures, CCISO has no requirement to provide a requesting spouse with documents or information supplied by the non-requesting spouse at the pre-Appeals stage. See IRM 25.15.18 (Jan. 15, 2020). To the extent that CCISO relies on information from a non-requesting spouse to deny the requesting spouse’s innocent spouse claim, taxpayers may be unaware of the need to submit additional documents to rebut that information.

The IRS has had 25 years to develop taxpayer-friendly and administratively accessible and inclusive innocent spouse procedures.  It doesn’t need to wait for a legislative fix to change its procedures and avoid the harm Judge Buch identifies in the concurring opinion.  The Thomas case demonstrates that IRS needs to fix things, stat. 

To help the IRS get started with this reform, an upcoming post will discuss comments the Center and two clinics submitted proposing substantial revisions to Form 8857, the IRS form to request innocent spouse relief. These revisions would elicit the necessary information at the administrative stage, leading to more accurate administrative resolutions, or at least a more complete administrative record for the Tax Court to review de novo.

Filed Under: Innocent Spouse

Another Tax Chat! in the Transforming Tax Administration Series

April 12, 2023 by Leave a Comment

We are coming up on the second in our Tax Chat! series on Transforming Tax Administration: Toward an Effective, Trusted, and Inclusive IRS, to be held on Thursday April 13 from noon to 1:30 pm EDT.  You can still register for this free virtual series of 15 conversations about all aspects of tax administration.  The program is free, but you need to register in order to receive the zoom links for each of the sessions.  (You only need to register once, so if you’ve already registered, you don’t need to do it again.)

This week’s Tax Chat! is on the IRS budget.  Ever wondered what is actually included in the budget categories of “Enforcement,” or “Taxpayer Service,” or “Business Modernization”?  Well, this is what we will be discussing, along with how to measure return on investment and other performance measures, and what kind of behavior the budget categories drive.  For background, you can find the President’s FY 2024 Budget-in-Brief for the IRS here. And you can find the IRS Strategic Operating Plan for 2023 to 2031 here.

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The Tax Chat! on the IRS Budget will be held on Thursday April 13 from noon to 1:30 pm EDT.  Our guests for this Tax Chat! are:

  • Mark Mazur, former Assistant Secretary, Tax Policy, U.S. Department of Treasury and former IRS Director of Research;
  • Ursula Gillis, former IRS Chief Financial Officer;
  • Jessica Lucas Judy, Director, Strategic Issues, Government Accountability Office

You can watch the video of our first Tax Chat!, my conversation with Charles Rossotti, former IRS Commissioner, here.  And just as a quick heads’ up for future Tax Chats!, here are the dates and times of the next few:

Tax Chat! No. 3:  IRS Information Technology Challenges, Tuesday, April 18 from 1:30 to 3 pm EDT.  Guests include Fred Forman, former IRS Chief Technology Officer; Marina Nitze, former Technology Officer, US Department of Veterans’ Affairs; and David B. Hinchman, GAO.

Tax Chat! No. 4:  IRS Workforce, Wednesday, April 26 from noon to 1:30 pm EDT.  Guests include Professor Bob Tobias, American University, former member of IRS Oversight Board and National Commission on Restructuring the IRS; Doreen Greenwald, National Executive Vice President, National Treasury Employees Union; and Lotta Bjorklund Larsen, social anthropologist, Exeter University, UK and author of Shaping Taxpayers: Values in Action at the Swedish Tax Agency.

Tax Chat! No. 5:  Increasing and Maintaining Voluntary Compliance:  Thursday, May 11 from noon to 1:30 pm.  Guests include Jim Alm, Professor Emeritus, Tulane University; Stephen Daly, Senior Lecturer, Kings College, London; Erich Kirchler, Vienna University Department of Applied Psychology, Austria; and Mandi Matlock, Texas Rio Grande Legal Aid LITC.

These are just a few of the sessions we’ll be having over the spring and summer, so please register to make sure you don’t miss any of the fascinating conversations.  And yes, we will be recording them, but you need to register in order to receive a notification that we’ve posted the videos.

Hope to see you at the Tax Chats!

Filed Under: miscellaneous

Join the Center for Taxpayer Rights for a Tax Chat! with former IRS Commissioner Charles Rossotti on 23 March 2023

March 21, 2023 by Leave a Comment

On Thursday March 23 at noon EDT, the Center for Taxpayer Rights is launching its series of virtual Tax Chats! titled Transforming Tax Administration: Toward an Effective, Trusted, and Inclusive IRS.  Our first Tax Chat! in the series will be a conversation between Charles Rossotti, former IRS Commissioner, and me (Nina) about his experience modernizing the IRS in the context of the IRS Restructuring and Reform Act of 1998 (RRA98).  The Tax Chat! is free, but you need to register here to receive the link to the program. 

The last major reform effort for the IRS was pursuant to the Internal Revenue Service Restructuring and Reform Act of 1998 (RRA 98), Public Law 105-206.  RRA 98 was preceded by a bipartisan National Commission on Restructuring the IRS, which held public hearings around the country and heard from scores of tax professionals, academics and government officials on how to improve the agency.  The National Commission’s report provided the basis for approximately nine months of congressional hearings. The Ways & Means Committee originated the legislation and prepared an extensive committee report, followed by the Senate Finance Committee amending the bill and preparing its own committee report; the bill finally went to conference, which also generated a conference report.  RRA 98, then, has extensive legislative history which lays out the clear intent and expectations of Congress in its efforts to reform and restructure the IRS.  Not surprisingly, as a result of all this effort, RRA 98 passed the House with a 402 to 8 vote and the Senate with a 96 to 2 vote.

On the other hand, the Inflation Reduction Act, providing $80 billion for the IRS over 10 years, was a reconciliation bill and preceded by very little legislative background work.  There are no committee reports, much less a national commission with recommendations on how to transform the IRS.  Although the IRS has established transformation offices and Treasury is holding various roundtables with specific stakeholder groups, the IRA does not have the bipartisan in-depth exploration of what is needed to transform the IRS into a tax agency that meets the needs of its diverse taxpayer population while ensuring those taxpayers comply with the law.

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To provide some record and public discussion, the Center for Taxpayer Rights is holding a series of 15 or so free, virtual “Tax Chats” with experts from the private, academic, nonprofit, and government sectors on various aspects of tax administration.  The format of the 1 ½ to 2-hour discussions will be informal and allow for viewer questions.  All the Tax Chats! are free of charge but you must register here in order to receive the link and notifications of future Tax Chats! in the series.  You can also sign up for the Center’s newsletter to receive notifications of future Tax Chats! in the series.  The Chats! are funded by a generous grant from Arnold Ventures.

The inaugural Tax Chat! will be followed by a group of Tax Chats that we view as foundational to any transformation effort, including discussions of the IRS budget structure and process, information technology challenges, and the IRS workforce.  We will then have a conversation about taxpayer behavior and voluntary compliance, and launch into Tax Chats! About specific areas of tax administration, including the use of big data, artificial intelligence, taxpayer service, audit and collection techniques, penalty administration, administrative burden, and interactions with vulnerable populations.  We’ll close with a look at the IRS’s organizational structure, culture, and how to earn taxpayer trust.

The Tax Chats! Will be held over the spring and summer of 2023, culminating in an in-person and virtual day-long conference in September 2023.

Hope to see you at the Tax Chats!

Filed Under: miscellaneous

Racial Disparities in IRS Audits

January 31, 2023 by 2 Comments

Following up on Les’ post yesterday about the upcoming symposium on race and taxes, I want to draw our readers attention to an important study released yesterday, on the racial impact of Internal Revenue Service (IRS) audits, titled Measuring and Mitigating Racial Disparities in Tax Audits.  Now, before I launch into what the study found, let me make my usual disclaimer: I am not an academic nor am I an economist; I have zero expertise in statistics or in computer modelling.  But what I read in this incredibly coherent and well-written study is accessible to and understandable by someone such as myself (mathematical equations notwithstanding). Kudos to the authors!  And everyone should read this.

The study estimated the audit rate for Black taxpayers is .81 to 1.24 percentage points higher than the audit rate of non-Black taxpayers, implying that Black taxpayers are audited between 2.9 to 4.7 times more than the rate of non-Black taxpayers.  Further, the study projected that Black taxpayers claiming the Earned Income Tax Credit (EITC) on their returns are 2.9 to 4.4 times more likely to be audited than non-Black EITC claimants. 

The IRS does not gather racial or ethnicity data of taxpayers, so the researchers had to impute race by various methods that have been used in other studies.  The paper lays out the methodology and identifies the drawbacks to this.  Then, by using various models, the researchers found that racial differences in income, family size, and household structure still don’t explain the large disparity in audit rates.  Instead, it appears that audit selection algorithms based on the mere existence of underreported tax (i.e., a yes/no binary selection) or underreporting of refundable credits such as the EITC, the Additional Child Tax Credit, and the American Opportunity Tax Credit (AOTC) appear to contribute to the racial disparity in audit rates, whereas audit selection algorithms focusing on the predicted total amount of underreporting resulted in Blacks being audited less than non-Blacks.  Thus, the study concludes that the objective of the predictive model underlying audit selection, along with operational considerations such as employee expertise, costs of audits, and congressional or other expectations, can be “critical drivers of disparity.”

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Here are some of the fascinating data points from the study:

  • Black EITC claimants are audited at higher rates than non-Black EITC claimants within each decile of underreported taxes;
  • Black unmarried males with children claiming the EITC are audited at two times the rate of non-Black unmarried males with children claiming the EITC.  Similar audit disparities were found between Black and non-Black joint filers, unmarried females, and unmarried males with no dependents.  These disparities continued even after controlling for demographic characteristics such as filing status, household structure, or income, or the combination and interaction of these characteristics.  Thus, these characteristics alone don’t explain the racial disparity in audit rates.
Figure 6: Audit Rate Disparities by EITC Subgroup
  • Blacks and non-Blacks are audited at similar rates in field and office audits; thus the audit disparity is driven by the dominance of correspondence exams as the IRS tool of choice for individual audits.  As I’ve covered in other blog posts here and here, corr exam procedures and notifications are very problematic.  Add on to those problems the racial disparity, and you have a significant taxpayer rights issue.
  • Audit disparity between Blacks and non-Blacks are larger with respect to pre-refund audits, although the disparity exists in post-refund audits as well.  This is a significant observation; because the IRS is front-loading more compliance activity in the pre-refund environment, it is likely the racial disparity will be exacerbated going forward unless the IRS takes steps to correct for it.  

To test possible factors that might influence the audit disparity, the study’s authors built a risk-prediction model using National Research Program random EITC audit data (rather than the operational audits selected by the IRS automated algorithms).   Without going into all the details – I would probably butcher the description, and besides, you need to read the full study – they tested four methods of selecting taxpayers for audits:

  1. True Underreporting Amount:  returns were ranked by the amount of underreported taxes and then, in descending order, selected for audit until a pre-determined audit rate was achieved.  At each audit rate, the model selected Black taxpayers at a lower rate than non-Black taxpayers.
  2. Predictive Underreporting Amount:  Because at the time of audit selection the IRS does not know the true amount of underreported taxes, the authors built a model to rank returns for predicted underreporting based on what the IRS can see at the time of audit selection, and selected returns in a descending order until a specified audit rate was achieved.  This model detected twice the amount of underreporting as the “status quo” model (thus not sacrificing audit selection accuracy) while selecting Black taxpayers at a lower rate than non-Black taxpayers.
  3. Binary Classification Model:  Here, the authors compared the results of the predictive model (described above) with an algorithm that selected returns simply on whether underreported tax might exist.  The “classification” model selected Black taxpayers for audits at higher rates than non-Black taxpayers.
  4. Refundable Credit Model:  This model was trained to predict the total National Research Program adjustments for the EITC, AOTC, and ACTC, and then selected returns for auditing based on the descending order of the predicted overclaims, up to a specified “budget.”  Comparing this model to the baseline status quo model showed that the refundable credit model detects substantially less total underreporting (i.e., the EITC population has other types of underreporting) and selects Black taxpayers for audit at higher rates for non-Blacks for all budget categories.

Having demonstrated that the objective of the prediction model may be one factor contributing to racial disparity in audit selection, the authors considered what other factors/constraints might influence this disparity.  They identify limitations of employee expertise, the cost of audits, and certain policy goals.  So, for example, if underreported tax was attributable not just to EITC but also the reporting of business income, IRS employees may not be skilled in detecting this underreporting and such audits may need to be done in an office or field environment, which is much more costly than the “cheap” correspondence examinations.  The concern that business EITC audits require expensive and trained resources could push the IRS to conduct less expensive non-business audits.  Since Black taxpayers constitute 21 percent of non-business EITC returns and 11% of business EITC returns, these operational concerns would heighten racial disparity in audit selection.  In another simulation, the study found that operational constraints contributed to higher audit rates for Black taxpayers.

Another constraint is at the policy level — OMB’s classification of the EITC, ACTC, and AOTC as “improper payments,” Congress and the IRS itself have determined that to address these improper payments, IRS must conduct more EITC audits.  As the study shows, selecting based on EITC underreporting alone results in higher audit rates for Blacks.  (Note that nothing in the law governing improper payments requires audits.  Rather, it says agencies must come up with strategies to address these payments; those strategies can include education, outreach, soft compliance touches, and any number of non-audit approaches.) 

Now here is one of the key implications of the study – that even where audit selection processes are largely automated, so that there is no overt/intentional discrimination in audit selection, the focus or objectives of those automated processes can significantly impact racial disparity in audit selection.  By designing algorithms that select for underreported refundable credits rather than the totality of underreported tax, for example, the racial disparity continues. But what is really neat about this study is that it uses algorithms and machine-learning to ferret out what might be creating that disparity, which in turn can be used to improve the actual selection algorithm.

And one final note.  One thing that the study makes the case for and I have been harping about for a long time is the need to focus audit selection on amount underreported rather than specific issues like EITC.  The former approach accepts that dollars are fungible – i.e., a dollar of tax underreported because of unreported income or overreported expenses/deductions is the same as a dollar of tax underreported because of improperly claimed refundable credits.  It is only because of value-laden biases that we treat these two differently.  The study demonstrates the impact of those biases on differing racial groups.

I’ve only scratched the surface of this important paper.  I’m sure I’ve missed some of the points, and I intend to study it further.  There’s much more work to be done here, which is what the authors say in closing their report:

[O]ur analysis of counterfactual audit algorithms does not account for the full set of constraints facing tax authorities like the IRS, such as the types of compliance issues that can be explored through correspondence audit, or differences in audit response rates depending on whether the audit is pre- versus post-refund. A more complete optimal policy analysis would require accounting for these additional objectives and constraints. Finally, audit selection constitutes only one dimension in which tax administration may differently affect taxpayers by race. Disparities may also exist with respect to such processes as collections, appeals, settlements, and guidance (citations omitted). The approach described in this paper can serve as a foundation to explore disparities in these areas as well.

Filed Under: Race and Tax

This Giving Tuesday, Please Support The Work Of The LITC Support Center

November 29, 2022 by Leave a Comment

Today Nina follows up on yesterday’s post discussing the work of the Center For Taxpayer Rights and the considerable accomplishments of the past three years. Today’s post highlights an exciting project, the LITC Support Center. The LITC Support Center fills a needed gap that will ensure greater access to justice for all taxpayers.  Please join me and my fellow board members Keith Fogg, Liz Atkinson, and Alice Abreu in supporting this project and become a charter sponsor. As Nina notes, the board will match up to $8,000 of donations received during the rest of 2022.  Les

As I discussed in yesterday’s post, 2022 was a banner year for the Center for Taxpayer Rights (CTR).  We received operational support from the Rockefeller and Schusterman Family Foundations and a significant grant from the Robert Woods Johnson Foundation to conduct a fascinating two-year study on Improving the IRS’s administration of refundable tax credits and other tax-code benefits for economically excluded populations (more about that in a later post).  Our amicus briefs have been influential in several truly significant decisions, including in Bittner v. U.S., where it was mentioned twice during oral arguments.  The International Conference on Taxpayer Rights continues to bring together administrators, professionals, and academics from around the world to discuss important issues affecting taxpayer rights.  The Reimagining Tax Administration workshops (here and here) have moved into the arena of state taxpayer rights, and we have launched a new Tax Chat! series on the Inflation Reduction Act and Transforming the IRS.  In a later post I will be sharing our plans for 2023, but with this post we are announcing a major fundraising campaign for the LITC Support Center, a project of the Center for Taxpayer Rights that is dedicated to supporting Low Income Taxpayer Clinics and increasing access to justice for low income taxpayers by connecting volunteers with Clinics and providing resources to Clinics.  You can give to the Support Center via CTR’s website here.

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The LITC Support Center’s mission and activities

The LITC Support Center is designed to function as the national center for tax clinics and volunteers.  The Support Center’s role is similar to organizations such as the National Consumer Law Center.  That is, the Support Center provides technical support, training, and litigation strategy to Low Income Taxpayer Clinic personnel and volunteers.  The Support Center has developed and maintains LITC Connect, the “dating app” whereby LITCs and tax professionals nationwide who are willing to volunteer can be matched to provide needed assistance to low income taxpayers and LITCs.  The Support Center also focuses on impact litigation and contributes to CTR’s amicus curiae briefs in cases with broad impact for low income taxpayers or taxpayer rights in general. 

Anna Gooch, the ABA Tax Section Public Interest Fellow, is at the heart of the Support Center’s activities.  Anna developed and coordinated our survey of state tax practices and taxpayer rights and helped plan our Reimagining Tax Administration series on that topic; in 2023, she will be writing a final report with recommendations for best practices.   Anna also works on amicus briefs, drafts comments (see our recent comments on the Arkansas’ new Tax Appeals Commission), works with the ABA Tax Section on Tax Court Settlement Days (volunteers who sign up for LITC Connect will be covered by CTR’s professional liability policy), and identifies and develops training programs for clinicians and volunteers.  Anna recently coordinated the writing, preparation, and submission of CTR’s amicus brief in Thomas v. Commissioner, dealing with the administrative record rule of IRC § 6015(e)(7).

LITC Connect: the “dating app” for clinics and tax professional volunteers

The LITC Support Center is the home of LITC Connect, which CTR developed and beta-launched in 2022.  We really were in test mode, and this fall we started on the second phase of development, in which we are making improvements to the user features of the app as well as creating profiles for Volunteer Income Tax Assistance (VITA) sites and nonprofits in areas underserved (or unserved) by LITCs.  By getting referrals from VITA sites and entities such as tribal governments, we can expand access to representation for many low income taxpayers.  We’ll be launching this referral component in pilot mode during the 2023 filing season; if things go well, we will expand participation later in 2023.

In 2022, the Center hired Dulce Mascorro as our bilingual pro bono/training coordinator.  Among many other things, Dulce’s duties include recruiting volunteers nationwide to sign up for LITC Connect, as well as getting all of the federally-funded LITCs signed up to participate in LITC Connect.  In addition, after we made a FOIA request for the contact information for clinic directors and qualified tax experts, Dulce has been personally reaching out to the clinicians and encouraging them join our weekly Litigation Strategy calls.  As a result, we’ve added 36 clinicians to our weekly calls.  Dulce also signed up 36 additional LITCs to receive the in-kind donation of a Tax Notes subscription, bringing the total to 100 LITCs receiving this donation, amounting to over $200,000 annually in total matching funds for the LITCs.  (Thank you, Tax Analysts!!!) Not to rest on these successes, Dulce created a master list of 951 state, local, and law school bar associations, and 468 CPA and Enrolled Agent groups.  She has been working her way through the list, emailing them all and asking to speak with them about LITC Connect, offering to submit newsletter articles, etc.

Why the fundraising campaign for the LITC Support Center?

For next year, we need to raise $100,000 toward an additional staff attorney salary and further development of LITC Connect, to create an online repository of training programs and materials for clinicians and volunteers representing low income taxpayers.  The Support Center fills a unique role – it is independent of the LITC federal funding program.  The Support Center’s mission is to advocate on behalf of the clinics as well as low income taxpayers; we further access to representation of low income taxpayers by increasing pro bono opportunities nationwide.  Coordination of litigation strategy, development of training, undertaking amicus briefs, and high impact litigation are profoundly important and necessary activities, but they are difficult if not impossible for individual LITCs to undertake, given the press of day-to-day casework.  That is where the LITC Support Center fills the void.

The Board is challenging tax professionals and their firms to become charter sponsors in this effort.  The Board has pledged matching funds up to $8,000, and with the support of you and your firms, we can make the necessary software improvements to LITC Connect and support our small but powerful staff in 2023.  Your support also enables us to develop training materials and coordinate national litigation strategy at a time when case law in the area of taxpayer rights is developing rapidly.

We need tax professionals and tax firms to help us in this important work.  Won’t you please give today?  And if your firm is interested in becoming a charter sponsor of the LITC Support Center, please contact me or Dulce and we will be happy to give you more information.  And on behalf of CTR’s board of directors, to those of you who have given in the past, we are so grateful for your generous support.

Filed Under: Center For Taxpayer Rights

The Facebook Pixel and Unauthorized Use and Disclosure of Tax Return and Tax Return Information

November 29, 2022 by 5 Comments

The Facebook Pixel and Unauthorized Use and Disclosure of Tax Return and Tax Return Information

Last week The Markup, an online investigative journalism site, published a report about the presence of a Facebook (or Meta) pixel on various tax software websites that discloses taxpayer identity and financial information, gathered in the course of preparing and filing tax returns online, to Facebook.  The data includes “not only information like names and email addresses but often even more detailed information, including data on users’ income, filing status, refund amounts, and dependents’ college scholarship amounts.” For example, “[o]nce a tax return was filled out on taxact.com, information including an individual’s adjusted gross income, federal refund amount, and number of dependents was sent to Meta via the Meta Pixel.”  According to The Markup, the H&R Block program sent data regarding health savings account and dependent college tuition grants and expenses.

I note at the outset that the implications of this investigative report are far-reaching.  Not only do tens of millions of US taxpayers use online tax preparation software each year to file their returns, but the IRS itself directs taxpayers, via Free File, to online software products implicated in the investigation.  Further, the IRS provides Tax Slayer, one of the software packages embedding the pixel, to Volunteer Income Tax Assistance (VITA) sites.  These latter two tax preparation services – Free File and VITA – are directed toward low income, elderly, and disabled taxpayers.

According to The Markup,

When a website uses the code, data on the visitor is sent back to Facebook and can be used by the business or organization to find an audience for its ads. Facebook also retains that data and can use it for its own advertising purposes—although it’s not always clear what those purposes are. 

So now we have a new investigation that shows the Meta Pixel embedded in tax software, with evidence that return and return information has been disclosed to Facebook and can be used by the companies and Facebook for …. what and under what authorization?  The words “return,” “return information,” “use,” “disclosure,” and “unauthorized” all implicate Internal Revenue Code sections 6103(c), 7216, 6713, and 7431(b).  Let’s try to work through this – stick with me, it is labyrinthine.

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Section 6103 and confidentiality of tax returns and return information

As anyone who works in tax should know, IRC § 6103 provides that tax returns and return information shall be confidential, and shall not be disclosed except as authorized by Title 26 (i.e., the Internal Revenue Code).  “Return” and “return information” are defined very broadly, with the latter term including the taxpayer’s identity.  One of the exceptions for disclosure is contained in § 6103(c), which authorizes the Secretary to prescribe regulations to allow a taxpayer to designate a third party to receive return or return information.  The IRS has established fairly restrictive procedures for taxpayer consent, especially after Congress stepped in with the Taxpayer First Act and required even more protection.  (You can read my legislative recommendation which was largely adopted by Congress here at page 554.)  Section 2202(a) of the Taxpayer First Act amended § 6103(c) by adding the following sentence:

Persons designated by the taxpayer under this subsection to receive return information shall not use the information for any purpose other than the express purpose for which consent was granted and shall not disclose return information to any other person without the express permission of, or request by, the taxpayer.

Unauthorized use or disclosure of tax return or return information by a tax return preparer

Persons, including software packages, that assist in preparing federal tax returns receive some of the most sensitive financial information a taxpayer possesses.  So what happens if a tax return preparer uses or discloses return or return information without the consent of the taxpayer?  One place we can turn to is IRC § 7216, a criminal statute that demonstrates Congress’ clear concern about the potential for misuse and abuse of taxpayers’ sensitive financial information by return preparers.  Section 7216 applies to

“[a]ny person who is engaged in the business of preparing, or providing services in connection with the preparation of, returns of the tax imposed by chapter 1, or any person who for compensation prepares any such return for any other person, and who knowingly or recklessly—

(1) discloses any information furnished to him for, or in connection with, the preparation of any such return, or

(2) uses any such information for any purpose other than to prepare, or assist in preparing, any such return

Section 7216 carves out some limited exceptions to this broad protection and also authorizes the Secretary to create more exceptions via regulation.  Section 6713 is a parallel civil penalty, however the regulatory authority arises in the criminal statute.  (In 2007, I made a legislative recommendation to Congress to move the regulatory authority into the civil section (see page 547 here), a recommendation that remains in the National Taxpayer Advocate’s Purple Book today.)

In 2005 and 2006, as National Taxpayer Advocate, I and TAS attorney-advisors worked closely with Treasury and Chief Counsel in drafting and promulgating regulations implementing § 7216.  We all met with many groups representing those “engaged in the business of preparing” etc. tax returns. The final regulations were carefully crafted to ensure the greatest protection of tax return and return information while not hamstringing legitimate business practices of return preparers.  We were concerned about the use of taxpayer information to sell taxpayers mortgage refinancing or various other services or products not related to tax return preparation.  And what with the rise of identity theft and international hacking, we were also concerned about the increasing use of offshore preparers and the transfer of sensitive taxpayer data like social security numbers offshore.  You see all of these concerns directly addressed in the final regulations.

Treasury Regulations promulgated under IRC § 7216

Treasury Regulation 301.7216-1 broadly defines a tax return preparer to include “[a]ny person who is engaged in the business of providing auxiliary services in connection with the preparation of tax returns, including a person who develops software that is used to prepare or file a tax return and any Authorized IRS e-file Provider…” [Emphasis added.]

The term “tax return information” is also defined broadly in the regulation to provide the taxpayer maximum protection.  Example 1 of 301.7216-1 demonstrates the broad scope protection granted in the interaction between the return preparer and tax return information definitions.  Note that under the regulation, information provided in the course of registering of one’s purchase of tax preparation software is tax return information.

Example 1.

Taxpayer A purchases computer software designed to assist with the preparation and filing of her income tax return. When A loads the software onto her computer, it prompts her to register her purchase of the software. In this situation, the software provider is a tax return preparer under paragraph (b)(2)(i)(B) of this section and the information that A provides to register her purchase is tax return information because she is providing it in connection with the preparation of a tax return.

Further key to our analysis of this situation is the regulation’s definition of “disclosure:”

Disclosure. The term disclosure means the act of making tax return information known to any person in any manner whatever. To the extent that a taxpayer’s use of a hyperlink results in the transmission of tax return information, this transmission of tax return information is a disclosure by the tax return preparer  subject to penalty under section 7216 if not authorized by regulation.

When would a disclosure by a tax return preparer be authorized by regulation and thus not subject to criminal penalty under IRC § 7216?  Regulation 301-7216-2 sets forth the instances where disclosure or use can be made by a return preparer in the course of preparing a tax return without the consent of the taxpayer.  And Regulation 301-7216-3 describes when disclosure or use is permitted only with the taxpayer’s consent.

Specifically, such use or disclosure may occur only when the taxpayer has provided written consent that is knowing and voluntary.  “[C]onditioning the provision of any services on the taxpayer’s furnishing consent will make the consent involuntary, and the consent will not satisfy the requirements of this section.”   (There’s an exception to this rule where the preparer wants to share with another preparer for purposes of preparing the return or for ancillary services.  This exception again demonstrates the effort in the regulation to allow for legitimate and reasonable tax preparation practices.)

§301.7216-3(a)(3) lays out the requirements that must be satisfied for a consent to be valid, including:

  • The consent must specify the tax return information to be disclosed or used;
  • The consent must identify the specific recipient or recipients to which the information will be disclosed;
  • The consent must identify the particular use authorized;
  • The consent must be signed and dated; and
  • The consent may specify a duration but if no duration is specified, the consent is limited to one year from the date of signing.

The regulation also requires one consent document for uses, and a separate consent document for disclosure.  Where such documents seek consent for multiple uses or multiple disclosures, they must list each such use or consent specifically.

With respect to the Form 1040 series of tax returns, the regulation authorizes the Secretary to issue additional guidance regarding the form of consent, which has been done in Revenue Procedure 2013-14.  This notice prescribes the exact look of the consent – the format, type size, etc. both on paper and in the virtual (software) environment, requiring a single page or separate window, and requiring specific language to alert the taxpayer about the risks of consent to use and disclosure, the voluntary nature of the consent, and the duration of the consent.  Further, for virtual consents, “[a]ll of the text placed by the preparer on each screen must pertain solely to the disclosure or use of tax return information authorized by the consent, except for computer navigation tools.”  Finally, the Revenue Procedure requires all consents to include information about contacting the Treasury Inspector General for Tax Administration (TIGTA).

Where does the Meta Pixel fit into all this?

Given this review of the requirements of § 7216 for use and disclosure of tax return/information by tax return preparers, including tax software companies, where does the Meta pixel come in? 

First of all, we know that § 7216 applies from the moment the taxpayer enters their name in to register the software – that is tax return and tax return information.  Hypothetically, it seems to me an alleged § 7216 violation occurs if the Meta Pixel captures that data and sends it to Facebook before a separate pop-up screen appears requesting the taxpayer’s consent to send covered data to Facebook (the disclosure consent).  A second violation allegedly occurs if the data is sent without a separate pop-up outlining how, specifically, Facebook and the tax software propose to use the data disclosed (the use consent).  A further violation allegedly occurs if those consents don’t include the mandatory language.  Under the regulations, none of these alleged violations can be cured by getting a consent after the disclosure or use, or adding the mandatory language later. 

Tax Software companies know about § 7216 because they commented on and participated in discussions about the regulations.  They have developed pop-ups to obtain taxpayer consent for various uses or disclosures, and their legal departments most assuredly have reviewed them for compliance with § 7216.  But do the legal departments even know about the embedding of the Mega Pixel?  The Department of Education did not know it was embedded in the FAFSA.

As noted earlier, the IRS makes Tax Slayer, one of the tax software programs implicated in The Markup’s investigation, available for free to Volunteer Income Tax Assistance sites.  I think it would be really interesting to see if the IRS-provided software has the Mega pixel embedded in it, or if the pixel must be activated by each VITA site.  I’ve asked folks to check with any VITA sites they work with.  In fact, the privacy statement on taxslayerpro.com says:

Similarly, our website (www.taxslayerpro.com) may include social media features such as the Facebook Like button (and widgets such as the Share button or interactive miniprograms that run on our site). These social media features may collect your IP address and which page you are visiting on our site, and may set a cookie to enable the feature to function properly. Social media features and widgets are either hosted directly on our site or by a third party. Your interactions with a feature or widget is governed by the privacy policy of the company providing it. For more information about cookies and to opt out, click here.

It is interesting that TaxSlayer seems to indicate that folks have to opt in to the Facebook information sharing on their privacy page.   https://www.taxslayerpro.com/company/privacy.  Although opting in could be consent for privacy purposes, for 7216 purposes the consent (“share-button or interactive miniprograms”) would have to meet the requirements of 7216, be on a separate screen, and have the mandatory revenue procedure language.  You can’t bury the information in a privacy statement.

So, if there is a violation of Section 7216, and tax return information has been disclosed or used by a return preparer without the taxpayer’s consent, what avenue does the taxpayer have for relief other than waiting for the Department of Justice to bring an action against the software company?  Well, there is always IRC § 7431(a)(2), which authorizes a civil action for damages in the US District Court against “any person” who knowingly or by reason of negligence inspects or discloses any return or return information with respect to that taxpayer in violation of IRC § 6103.

Unfortunately, it appears that all of the software products involved have mandatory arbitration clauses in the “terms of use” boilerplate language that has to be agreed to before the taxpayer can begin to use the product.  Thus, as a condition of using the product, the software companies are requiring taxpayers to give up the very means Congress granted them to protect their sensitive tax returns and return information from unlawful use and disclosure.  

Congress and the IRS need to act on this matter.  At the very least, the IRS should prohibit all who are considered a “tax return preparer” under IRC § 7216 from requiring mandatory arbitration with respect to any claim that may be brought pursuant to IRC § 7431(a)(2).  Taxpayers should not be forced to give up important taxpayer rights protections and remedies just for the privilege of preparing and filing their taxes.

And certainly TIGTA and the Department of Justice should be investigating what happened here, including the IRS’s apparently lax oversight of tax preparation software companies’ use of the pixel.

Stay tuned.  This is clearly a developing story.  We at PT will be following it closely.

Filed Under: Disclosure

A Successful Year For The Center for Taxpayer Rights In Our Work To Protect Taxpayer Rights

November 28, 2022 by Leave a Comment

Today, Nina Olson brings us an update on the activities of the Center for Taxpayer Rights over the past year.  As the President of the board, I could not be prouder of the accomplishments of the Center in its first three years of operation.  I hope that after reading about the actions the Center has taken and plans to take, you will join board members Alice Abreu, Liz Atkinson, Les Book and me in supporting the work of the center in support of taxpayer rights in the United States and beyond.  Keith

It is hard to believe the Center for Taxpayer Rights (CTR) has only been in existence for a little over three years.  So much has happened since August 1, 2019, when CTR began operations.  The pandemic demonstrated the importance of the tax code and the Internal Revenue Service as a vehicle for ensuring the welfare and health of the nation’s residents, in case folks had missed that point in the preceding three decades.  It also showed how important Low Income Taxpayer Clinics (LITCs) are for ensuring that those with the least means can receive the benefits to which they are entitled and enjoy taxpayer rights protections.  The pandemic also helped CTR achieve a personal goal I set in founding the nonprofit – that we would expand the base of funding for advocacy on low income taxpayer issues beyond the legal/tax community.

Today, the Center is honored to receive operational funding from the Rockefeller Foundation and the Schusterman Family Foundation, as well as dedicated project funding from the ABA Tax Section and the Robert Woods Johnson Foundation (more on this in future posts).  This funding has enabled us to expand our staff to include our Tax Section Public Service Fellow, Anna Gooch, and our bilingual Pro Bono/Training Coordinator, Dulce Mascorro.  

To build on this success, on Giving Tuesday, and into 2023, CTR’s board of directors is launching a campaign to raise funds specifically for the LITC Support Center, a project of CTR.  You can give to the Support Center here.  In tomorrow’s post I will describe the work of the Support Center and explain why we are launching this campaign, but for now I’d like to share with you some of CTR’s accomplishments over the last year.

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Amicus Briefs: 

In 2021, on behalf of CTR, the Harvard Federal Tax Clinic filed an amicus brief inBoechler v. Commissioner, which PT has covered extensively.  On April 21, 2022, the US Supreme Court unanimously ruled in favor of the taxpayer, turning traditional “wisdom” about Tax Court filing deadlines on its proverbial head.  Since that time, the Harvard clinic and CTR have filed amicus briefs in Boechler progeny cases, notably Culp v. Commissioner and Frutiger v. Commissioner, arguing that Boechler’s reasoning should apply to deficiency and innocent spouse cases.

In 2022, CTR, represented pro bono by the Moore Law Firm, filed an amicus in Bittner v. United States, which is also before the US Supreme Court. (As noted in the brief, I am recused from participating in this case, so CTR board members Alice Abreu and Liz Atkinson assisted in the brief.)  During oral arguments, CTR’s brief was cited twice in support of the petitioner, which made us all very proud.

Also in 2022, CTR and a number of other clinics filed an amicus with the Tax Court in Thomas v. Commissioner, which focuses on the interpretation of the “administrative record” rule of IRC  6015(e)(7), enacted in the Taxpayer First Act.

Reimagining Tax Administration: State Tax Practices & Taxpayer Rights 

For the last year, with funding from Rockefeller and the ABA Tax Section fellowship, CTR has been conducting a nationwide survey of state tax practices and taxpayer rights.  Volunteers from the ABA Tax Section and LITCs, among others, have answered over 200 questions about state tax practices dealing with filing, tax credits, audits, appeals, adjudication, collection enforcement and alternatives, and taxpayer advocates and state funding of LITCs.  The project ultimately will result in a report with recommendations of best practices.

While the survey work is ongoing, this fall we held a series of four workshops highlighting the practices and challenges we have identified so far.  You can access the workshop videos and materials here – they really are fascinating, and we have a great line up of panelists.  When it comes to the protection of taxpayer rights, the diversity of practices among the states is really something we should all be concerned about.

International Conference on Taxpayer Rights: 

In May 2022, over three days, we held our 7th International Conference on Taxpayer Rights, as a virtual program.  The theme of the conference was Tax Collection & Taxpayer Rights in the Post-COVID World.  For 2023, we are planning the 8th ICTR, which will be in Santiago, Chile and also livestreamed.  The upcoming conference’s theme is Access to Justice: Judicial Review & Alternative Dispute Resolution.  The conference will be held on 24 to 26 May, 2023; registration will open in late January.

Tax Chat! 

In November, we brought back our popular Tax Chats!, which are free online conversations with interesting people from around the world who are working in the field of taxation.  The Tax Chat! on November 14th covered the Inflation Reduction Act’s appropriation of $15 million for the IRS to study a direct tax preparation and e-filing application.  (You can watch past Tax Chats! here; the E-filing video will be posted shortly.)

The Direct E-filing video is the inaugural program in a Tax Chat! series we will continue into 2023 about the Inflation Reduction Act and the IRS appropriation of $80 billion over the next ten years.  We plan to explore how the IRS could transform itself with that funding, hearing from tax administrators, tax and other professionals, and researchers from US and international tax systems as well as the private and public sectors.  Stay tuned – we think this will be a fascinating series.

In December I will post a blog with all we have planned for 2023 – I’ve previewed some highlights in this post regarding LITC Connect, the Tax Chat! series, and the International Conference on Taxpayer Rights. We also have planned a new Reimagining Tax Administration workshop series, two really exciting research studies, a tax education project in North Carolina public schools, and more.

But for now, we need your support for the LITC Support Center.  Won’t you please give today?  And if your firm is interested in becoming a charter sponsoring member, please contact me or Dulce Mascorro and we will be happy to give you more information.  And to those of you who have given in the past, we are so grateful for your generous support.

Filed Under: Center For Taxpayer Rights
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