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

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.


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.

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

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.

State Taxpayer Rights Protections – Some Highlights & a Free Online Workshop Series

Today’s post is from Anna Gooch, the ABA Tax Section Public Service Fellow at the Center for Taxpayer Rights.  Over the last year, in conjunction with the ABA Tax Section State and Local Tax Committee and the support of the Rockefeller Foundation, Anna and the Center have been conducting a survey of state and local tax procedures, in order to identify strengths and weaknesses in taxpayer rights protections.  Although the survey is an ongoing process and will be updated periodically, the Center has gathered enough data to convene a free online workshop series, Reimagining Tax Administration: State Tax Practices & Taxpayer Rights.  The workshop series consists of four 2-hour online workshops, between October 25 and November 22, 2022.  The series will cover tax return filing issues; audits, appeals, and adjudications; collection enforcement and collection alternatives; and state funding of LITCs and establishment of state taxpayer advocate/ombuds offices.  You can see the full agenda and register for the free conference here.  Meanwhile, read on to learn about some interesting highlights from the survey. – Nina Olson

Taxpayers in the United States routinely interact with any number of tax systems – the federal income tax; state (including district and territory) income tax; state sales, gross receipts, or franchise tax; and locality (county, city, and school district) property tax. This is not an exhaustive list. Broadly speaking, there are 52-plus unique state, district, and territory tax agencies that taxpayers must engage with in addition to the Internal Revenue Service. Each of these agencies has the ability to strengthen, protect, undermine, and impair taxpayer rights through its choices in tax and benefits administration. With the preliminary results of a survey conducted by the Center for Taxpayer Rights (more on the survey here), we can not only view the combined data for each jurisdiction in one place, but we can also begin to identify practices that work well and areas that would benefit from advocacy. These findings can then be shared among the state tax agencies and state tax practitioners with the hope that learning from each other will inspire positive change.

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With this background in mind, I’d like to share examples of best practices, areas that would benefit from intervention, encouraging statistics, and concerning trends that have emerged as outliers as the Center continues to receive completed surveys from our volunteers.

Best Practices: Oregon’s Office of the Taxpayer Advocate

Oregon is not the only state with a taxpayer advocate’s office; however, Oregon’s office is a standout. The legislation that created the office in 2021 is impressive, and it can serve as a model for other jurisdictions to adopt when creating their own state taxpayer advocate or ombuds offices. Specifically, the legislation sets out in detail the responsibilities and duties of the office. These duties are broad, and they include not only the requirement of assistance to taxpayers who are unable to solve their tax problems through normal channels, but also a requirement that the taxpayer advocate help educate taxpayers and provide easily understandable information about various Department of Revenue procedures. From this extensive list of functions in the legislation, it is clear that the Oregon legislature had taxpayer rights in mind when creating this office.

Needs Improvement: Louisiana’s Driver’s License Suspension

Many state agencies and licensing boards are authorized to suspend or block the renewal of professional (teaching, nursing, attorney, etc.) and recreational (hunting, fishing, etc.) licenses when a licensee owes state taxes. Few states take the suspension of licenses a step further by allowing the department of motor vehicles (or equivalent) to suspend or block the renewal of driver’s licenses for licensees who owe state taxes. In Louisiana, the threshold amount for the recommendation of a suspension is $1,000, and the decision is final and cannot be appealed. For comparison, the state of California may only recommend license suspension when the taxpayer owes more than $100,000 in state taxes and appears on the state’s list of top 500 tax delinquents. Louisiana’s practice is concerning because it not only perpetuates the taxpayer’s inability to pay the tax due by jeopardizing their ability to maintain their income, but it also threatens the taxpayer’s ability to obtain food, medical care, and other necessities. Although intended to scare taxpayers into paying past due tax debt, this practice may only exacerbate harm when the taxpayer cannot afford to pay the tax in the first place without incurring economic hardship.

Concerning Trends: Locating Procedural Information, Specifically in the Audit Context, Is Nearly Impossible

Some questions in the survey can be answered with a quick Google search. Does New York regulate commercial tax return preparers? (Yes). Does Pennsylvania offer innocent spouse relief? (Yes). How often must municipalities in Alaska assess property tax? (Yearly). Some questions, however, seem impossible to answer, especially those concerning audit and appeals procedures. A search asking how to know if a taxpayer is under audit yields no relevant results. States generally do not have a search function for notices or letters like the IRS does. With the exception of New Mexico, publications and other guidance on audits and appeals are rare. Without this information, taxpayers must blindly enter the audit and appeals processes. There are few, if any, resources with easy to digest information, let alone those in languages other than English. This lack of information significantly impairs taxpayer rights, and states should consider improvements both to their audit and appeals procedures and to their communications about these processes.

Encouraging Statistics: Nearly Every State Has a Taxpayer Bill of Rights

As volunteers return completed surveys, one (near) constant has been the answer to Question 111: Does your state have a taxpayer bill of rights?Yes. When I look further into the content of these state taxpayer bills of rights (TBORs), I feel hopeful that state taxpayer rights will be better protected in the future. Some state TBORs are nearly identical to the federal version, but some include protections that are not guaranteed on the federal level. For example, North Dakota’s TBOR includes the right to record conversations between the taxpayer and the Office of the Tax Commissioner. It also includes the right to a waiver of penalties and interest for “good cause.” These two rights are not common, but they show that the state is considering its taxpayers’ unique needs and wants when developing its TBOR. Of course, there is a difference between what a state includes in its TBOR and what is does in practice, but seeing the intent on paper is promising.

These are just a few examples of key takeaways from the Center’s survey, and more will be discussed in more detail during the Center’s Reimagining Tax Administration series later this fall. During those workshops, panelists will discuss their experiences with issues involving state tax return filing, appeals and audit procedures, state tax collections, and state taxpayer rights generally. We hope that in providing a space where practitioners and government officials and policymakers can discuss these issues, we will facilitate the sharing of procedures and strategies designed to protect and enhance taxpayer rights at the state level.

Commenting on Forms

One of the most important services low income taxpayer clinics (LITCs) can provide to their client base is making comments when offered the opportunity and sometimes when not offered the opportunity.  Because low income taxpayers have generally had no voice when the IRS, the Tax Court or other institutions impacting their tax circumstances have called for comments, LITCs serve their clients when using the knowledge gained from individual representation to respond to requests for comments.  We wrote about comments to the Innocent Spouse form that led to a conversation with the form drafters and a real voice in the process here and here.  The comments to the form did not lead to everything requested but did foster improvement.  Perhaps, they also let the form writers know that there are real people who care very much about form design because it has such an impact.

Recently, comments were submitted on two forms – the form for changing an address and the form used for intake of individuals seeking assistance with return preparation at volunteer sites.  The forms are very different and will be discussed separately below.  The goal of the comments, one from an individual LITC and the other from the Center for Taxpayer Rights on behalf of a collection of LITCs, is to let the IRS know what practitioners are thinking and what the IRS should consider in revising the forms.


Change of Address Form

The Tax Clinic at the Legal Services Center of Harvard Law School sent in a comment regarding the proposed change of address form revision.  The principal author, Ben Chanenson, worked in the clinic this summer as an intern and will enter the University of Chicago Law School as a 1L student in the coming days.  Here is the comment submitted.

Form 8822 exists to allow taxpayers to notify the IRS that they have changed their home address. It is important for a taxpayer to notify the IRS when they move so that they can receive notices and other communications from the IRS. If a taxpayer notifies the IRS of a change in address and the IRS sends mail to the wrong address then under IRM a notice may be invalid because the IRS has a statutory requirement to address mail to a taxpayer’s last known address. We have discussed litigation related last known address on this blog before and two years ago the Tax Clinic secured a victory in the Third Circuit over this issue.  

The Tax Clinic offered five recommendations in its letter. These recommendations included ways to simplify the form (by removing unnecessary boxes), use more accessible language (which would allow the form to adhere to the Plain Writing Act of 2010), and better explain the importance of notifying the IRS of a change of address.  The Tax Clinic also suggested that the IRS provide information on alternative ways that the IRS can learn that a taxpayer moves. Form 8822 is not the only option for taxpayers. Writing down a new address on a form 1040 serves to notify the IRS of a change in address. However, it takes considerable time for the IRS to process form 1040 and form 8822. In contrast, if a taxpayer notifies USPS of a change in address then the IRS can access the USPS’s National Change of Address database and update the taxpayer’s address more quickly. Critically, USPS allows people to change their address through an online form while the IRS requires snail mail. The Tax Clinic advocated for making form 8822 into an online form that taxpayers could submit without ever leaving the IRS website. This echoes PT’s Nina Olson’s first wish in her IRS Wishlist for 2021.  

Intake Form

The Center for Taxpayer Rights holds weekly online meetings of clinicians to discuss issues of general interest to the LITC community and to assist in formulating litigation and other strategies for better representation of their clients.  One of the long standing concerns of the LITC community is making connections with taxpayers in need of assistance.  Each LITC engages in outreach efforts in their respective communities in order to make sure that members of their community know about the existence and the purpose of the clinic.  While the Tax Court does a good job of notifying petitioners to its Court of the existence of LITCs and the possibility of representation, many low income taxpayers need assistance during the administrative process of their case and often remain unaware of the possibility of assistance.  The free tax return preparation efforts reach large numbers of community members who may need assistance regarding a prior year’s return.  Despite the fact that Congress has created grant programs for both LITCs and Volunteer Income Tax Assistance (VITA) administered by the IRS, the coordination between VITA programs and LITCs has not fully developed.  The Center’s comments on the intake form seek to foster better coordination so that individuals seeking return preparation assistance know of the ability to obtain controversy assistance if needed.

The Center’s comments on the intake form are here; you can see Form 13614-C, Intake/Interview & Quality Review Sheets, here.  In its comments, the Center suggests ways the form can be revised to more effectively prompt a VITA intake interviewer or preparer to identify a client who may have a tax matter or controversy that would warrant a referral to a LITC.  The first comment focused on the line that reads, “Last Year, Did You (or Your Spouse) … Have Earned Income Credit, Child Tax Credit or American Opportunity Credit disallowed in a prior year?”  Noting that many low income taxpayers do not necessarily know what, specifically, the IRS has changed on their prior year returns, the Center recommended the question be rephrased as, “Did you not receive your refund or have the amount of your refund changed in a prior year?”  If the answer to that question is yes, training and job aids for this line should direct the VITA/TCE volunteer to make a referral to an LITC.  The Center also suggested that an additional line be added to the form where the taxpayer has a balance due on the return, asking whether the taxpayer has the ability to pay the balance.  If the answer is no, then the VITA volunteer should make a referral to an LITC.  Similarly, where the form asks, “Did you, or your spouse if filing jointly, receive a letter from the IRS?,” if the taxpayers answers yes, the training materials should make clear a LITC referral is in order.

The final recommendation addressed the section of the form where demographic data is gathered, including race and ethnicity.  Although the form notes that the VITA sites may need this information in order to receive grant money or federal funding, the clinics on the Center’s weekly calls felt that the form should more clearly state that this information is “for official use only” by the VITA sites alone and will not be recorded by the IRS for other than statistical purposes.

Poorly designed forms can create administrative burden or confusion and fail to elicit the appropriate responses.  A well designed form, on the other hand, can alert the user to important issues and direct to the next steps, including, in the case of the VITA intake form, to where the user can obtain free representation in resolving a tax dispute.  Both IRS and taxpayers will benefit from members of the tax community sharing their expertise by commenting on forms.

March 2022 Digest

Spring has arrived and the Tax Court has resumed in-person sessions for many locations. In Denver, we have our first in-person calendar call on Monday. I’m looking forward to it, but also need figure out if any of my suits still fit. PT’s March posts focused on issues with examinations, IRS answers, and more.

A Time Sensitive Opportunity

Loretta Collins Argrett Fellowship: The Loretta Collins Argrett Fellowship seeks to support the inclusiveness of the tax profession by encouraging underrepresented individuals to join and actively participate in the ABA Tax Section and Tax Section leadership by providing fellowship opportunities. More information about the fellowships and how to apply are in the post. Applications are due April 3.

Taxpayer Rights

The 7th International Conference on Taxpayer Rights: Tax Collection & Taxpayer Rights in the Post-COVID World: The virtual online conference is from May 18 – 20 and focuses on the actual collection of tax. The agenda and the link to register are in the post. Additionally, the Center for Taxpayer Rights is hosting a free workshop called The Role of Tax Clinics and Taxpayer Ombuds/Advocates in Protecting Taxpayer Rights in Collection Matters on May 16 and a link to register is also in the post.

How Did We Get Here? Correspondence Exams and the Erosion of Fundamental Taxpayer Rights – Part 1: Correspondence exams now account for 85% of all audits, up from about 80% in the previous two years. This post looks at data on correspondence audits and identifies a disproportionate emphasis on EITC audits which burden and harm low income taxpayers. 

How Did We Get Here? Correspondence Exams and the Erosion of Fundamental Taxpayer Rights – Part 2: This post considers the long-term goal of audits, along with recommendations for how the IRS can improve correspondence exams. Such recommendations include utilizing virtual office audits; using plain language, tailored, and helpful audit notices; and assigning the audit to one specific person at the IRS. Making correspondence audits more customer friendly could fall under the purview of the newly created IRS Customer Experience Office.

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Opportunities for Improving Referrals by VITA Sites to LITCs: Taxpayer rights could be better protected if VITA sites better understood when a referral to an LITC may be necessary and how to make such a referral. This post explores opportunities to improve this process, including a training initiative begun by the Center for Taxpayer Rights.

Tax Court Updates and Information

Tax Court is on the Road Again: The Tax Court officially resumed in-person calendars on Monday, February 28, but select calendars are still being conducted remotely. Practitioners who have recently attended in-person calendars share more information about what it’s like to be back.

Ordering Documents from the Tax Court: A “how to” on ordering documents from the Court. Phone requests are currently the only way, but in-person requests may resume once the Court reopens to the public. Both options come with a per page or per document fee.

Tax Court Proposed Rule Changes: The Tax Court has proposed rule changes which are largely intended to clean up language or more closely conform the Tax Court rules to the Federal Rules of Civil Procedure. It invites public comments on the proposals by May 25, 2022.

Tax Court Decisions

Tax Court Takes Almost Five Years to Decide a Dependency Exemption Case: Hicks v. Commissioner highlights the procedures required to claim a qualified child as a dependent when the child does not reside with the taxpayer. The case is noteworthy for the length of time it took the Court to issue an opinion, especially because there were no continuances or other reasons for a delay.

Jeopardy Assessment Case Originating in the Tax Court: The opinion Yerushalmi v. Commissioner is rare because the Tax Court reviews whether jeopardy exists in the first instance, rather than following a district court decision. The post looks at the case, the standard of review, and the facts that can be relevant to the Tax Court when it must decide whether the IRS’s jeopardy assessment was reasonable.

Tax Court Answers

Tax Court Answers: There are issues caused by requiring the IRS to file answers in small tax cases. It delays a review of the case on its merits, the process is slow and impersonal, and there are risks that a taxpayer won’t understand what the answer says. The Court should consider conducting an empirical study, engaging with taxpayer representatives, or forming a judicial advisory committee to identify best practices.

Making the IRS Answer to Taxpayers…By Making the IRS Answer: In the first of a three-part series looking at issues with IRS Counsel answers, Caleb looks at the case of Vermouth v. Commissioner. The case emphasizes the importance of the administrative file during the pleading stages of litigation. Cases involving bad answers and their impact on the burden of proof and burden of production are also discussed.

Making the IRS Answer to Taxpayer Inquiries…By Making the IRS Reasonably Inquire: Tax Court Rule 33(b) requires a signer of a pleading to reasonably inquire into the truth of the facts stated therein. To what degree are IRS Counsel attorneys required to reasonably inquire when filing an answer? This post explores that question and sheds some light on the Court’s expectations.  

Making the IRS Answer to Taxpayer Inquiries…By Making the IRS Reasonably Inquire (Part Two): Continuing the discussion of the IRS’s responsibilities under Rule 33(b), this post looks closer at the consequences to the IRS when a bad answer is filed. Caleb examines the Court’s response in cases where an administrative file was excessively lengthy or not available quickly enough and shares the lessons to be learned.

Circuit Court Decisions

Naked Owners Lose Wrongful Levy Appeal: Goodrich et. al. v. United States demonstrates the interplay of state and federal law upon lien and levy law under the Internal Revenue Code. The 5th Circuit affirmed that a taxpayer’s children had a claim against their father’s property, but only as unsecured creditors according to state law. As a result, the children’s interests were not sufficient to sustain a wrongful levy claim.

Confusion Over Attorney’s Fees in Ninth Circuit Stems from Statute and Regulation…: In Dang v. Commissioner the parties debated the starting point in which reasonable administrative costs are incurred in the context of a CDP hearing. The IRS argued it’s after the notice of determination. Petitioners argued it’s after the 30-day notice which provides the right to request a CDP hearing. The Court decided no costs were incurred before the commencement date of the relevant proceeding without deciding when that date was. The case provides another reason why the statute and regulation involving the recovery of administrative costs from administrative proceedings should be changed.

Attorney’s Fees Cases in the Ninth Circuit and Requesting a Retirement Account Levy: The concurring judge in Dang demonstrates that he understands the entire argument and finds that the exclusion of collection action from the definition of administrative proceedings is contrary to the plain language of the statute. 

Oh Mann: The Sixth Circuit Holds IRS Notice Issued in Violation of the APA; District Court in CIC Services Finds Case is Binding Precedent: The decision Mann v. United States is binding on CIC Services and is examined more closely in this post. In Mann, the Sixth Circuit found that the IRS notice at issue was invalid because the public was not provided a notice and comment opportunity. The case is significant because it is another circuit court opinion that applies general administrative law principles to the IRS.

You Call That “Notice”? Seriously?:  General Mills, Inc. v. United States involves refund claims that were made within the two-year period under section 6511, but outside of the six-month period which starts when a notice of computational adjustment is issued to partners. The Court seemingly concluded that notices, unless misleading, need only to comport with statutory requirements regardless of due process considerations. The post also evaluates and discusses the adequacy of common notices in relation to the notice of computational adjustment.

No Rehearing En Banc for Goldring: Is Supreme Court Review Possible?: The issue in Goldring was how underpayment interest should be computed on a later assessed deficiency when a taxpayer elects to credit forward an overpayment from an earlier filed return. The government’s rehearing en banc petition was denied leaving in place the circuit split. IRS Counsel has advised that there are thousands of similar cases, which could result in refunds of multiple millions of dollars, so it is yet to been seen if the government will petition the Supreme Court.

Challenging Levy Compliance: In Nicholson v. Unify Financial Credit Union the Fourth Circuit affirmed the dismissal of a suit to stop a levy brought by a taxpayer against his credit union. The law requires a third party to turn over the property to the IRS and then allows the taxpayer whose property was wrongfully taken to seek the return of that property from the IRS, so suing the credit union is not an effective avenue.

Offers in Compromise

Suspension of Statute of Limitations Due to an Offer in Compromise: The statute of limitations on when the IRS can bring suit to reduce a liability to judgment is at issue in United States v. Park. An offer in compromise suspends the collection statute and can give the IRS more time than a taxpayer would expect. It’s good idea to consider the risks before submitting an offer.

Public Policy and Not in the Best Interest of the Government Offer in Compromise Rejections: Cases where the IRS rejects an offer in compromise based on public policy or for not being in the best interest of the government are reviewed to better understand the reasons for such rejections. The IRS may look at past and future voluntary compliance and criminal tax convictions. The IRS should make offer decisions easily reviewable to provide more transparency in this area.

Correction on Making Offers in Compromise Public: Keith has learned that the IRS has updated the way in which the public can inspect accepted offers. It is by requesting an Offer Acceptance Report by fax or mail. The report, however, only contains limited and targeted information, so FOIA is still the only way to receive broad and general information.

Bankruptcy and Taxes

General Discharge Denial in Chapter 7 Based on Taxes: In Kresock v. United States, a bankruptcy court’s denial of discharge was sustained by an appellate panel due tothe debtor’s bad behavior in connection with his tax debts. It is seemingly unusual for a general discharge denial to occur where the basis for denial is tax related.


The Passing of Michael Mulroney: Les and Keith share remembrances of Michael Mulroney, an emeritus professor at Villanova Law School.

Congress Should Make 2022 Donations to Ukraine Relief Deductible in 2021: In order to encourage taxpayers to make donations in support of Ukraine, this post recommends that Congress create a deduction similar to the one permitted for the Indian Ocean Tsunami Act, which allowed deductions made in the current tax year to be claimed on the prior year’s return.

The 7th International Conference on Taxpayer Rights: Tax Collection & Taxpayer Rights in the Post-COVID World

On May 18-20, 2022, the Center for Taxpayer Rights will be convening the 7th International Conference on Taxpayer Rights, once again in a virtual online format.  We are very excited about this year’s conference, which will focus on an under-studied area of tax administration, namely the actual collection of tax.  I have always believed that for many taxpayers, especially low- and moderate-income individuals and small businesses, the audit process and assessment of additional tax liabilities is theoretical.  It is when the tax agency starts levying on one’s bank account, or garnishing one’s paycheck, that taxes become real.

That’s where taxpayer rights have an important role to play.  And that is what we will explore during the 7th International Conference on Taxpayer Rights: Tax Collection & Taxpayer Rights in the Post-COVID World.  You can see the full agenda and register for the conference here.


We will also be holding a free workshop on The Role of Tax Clinics and Taxpayer Ombuds/Advocates in Protecting Taxpayer Rights in Collection Matters.  This free online workshop will be held on May 16, 2022 and will include clinics and taxpayer advocates and ombuds from around the world.  Anyone interested in starting a clinic or encouraging one’s country or state to create a taxpayer ombuds/advocate will find this workshop helpful and interesting.  It’s also a great forum for sharing experiences and learning from one another.  You can register for the free workshop here.

As noted above, while an audit may result in a tax liability, it is still theoretical until the tax bill actually arrives and payment is expected (or extracted).  And while tax policy attempts to take into account taxpayers’ ability to pay in the form of living allowances and household or child exemptions or credits, individual financial circumstances are often not addressed by either policy or administrative procedures.  Requirements such as pay first, resolve later can seriously impair taxpayers’ access to administrative and judicial review of agency determinations. 

The COVID-19 pandemic has brought to the forefront the challenge of balancing the state’s collective need for tax revenue to fulfill its responsibility to provide for its citizens with the need to recognize the “slings and arrows of outrageous fortune” that might affect an individual’s ability to contribute to that collective need.  This balancing also applies to business entities where the added factor of competitive advantage or disadvantage comes into play.  A further challenge is addressing the imbalance between tax collection from taxpayers who have limited assets or income that nevertheless are easy to identify and levy, and taxpayers who have significant assets and the means to hide those assets or put them beyond the reach of tax authorities.

At the conference we will explore how agencies can address these challenges while respecting taxpayer rights.  We will cover various aspects of tax collection, including the state’s authority to collect, the statutory periods of limitation for collection, the exemption of income and assets from collection, the availability of alternatives to full payment of tax, the use of amnesties, settlements, and bankruptcy, and the availability of judicial review of agency collection actions.  We will also look at the tools available for international collection, the use of artificial intelligence and data mining to identify both those who are at risk of not affording basic living expenses and those who have the ability to pay.  Finally, we will discuss the impact of enforced collection actions and other approaches to collection on taxpayers’ willingness to pay and on tax morale.  The framework for these analyses will be the application of taxpayer and human rights principles to the collection of tax.

The 7th International Conference on Taxpayer Rights (ICTR) is part of a series in which we covered taxpayer protections in the audit process at the 5th ICTR in May 2021 and taxpayer rights as human rights at the 6th ICTR in October 2021, and will cover access to judicial review at the 8th ICTR in May 2023.  We have a number of really interesting videos of panel discussions from the 5th ICTR and 6th ICTR posted on our website and YouTube channel.  You really should check them out.

So, click here to see the agenda and register.  We’ve kept the registration fees very low and have discounts for JD/LLM/PhD students as well as for attendees from non-OECD countries.  The ICTR is a unique experience – people from all over the world attend to discuss taxpayer rights.  I hope to “see” you there! 

How Did We Get Here? Correspondence Exams and the Erosion of Fundamental Taxpayer Rights – Part 2

In my last post, I reviewed compelling IRS data, including from the National Taxpayer Advocate’s 2021 Annual Report to Congress, that show the IRS Automated Correspondence Exam (ACE) system disproportionately harms low income taxpayers and is desperately in need of a fix.  The IRS maintains the batch processing approach to correspondence (corr) examinations is efficient.  But the long-term goal of an audit should be to educate the taxpayer about what they did wrong (or for the IRS to learn what it got wrong), so the taxpayer (or IRS) does not repeat the mistake.  If the taxpayer never responds, or does not understand why additional tax is assessed, then the audit may result in more tax dollars, but from a voluntary compliance and taxpayer rights perspective the audit is a failure.  Correspondence exam, with its batch processing, assembly-line approach, may result in a high number of audits and assessments, but it does not promote understanding and in some cases has a negative compliance effect.  Moreover, researchers report that taxpayers who experience a correspondence audit report relatively low perceived levels of procedural, informational, interpersonal, and distributive justice.


If the IRS were truly taxpayer-centric and designed its compliance programs from a taxpayer-rights foundation, it would look at the data presented by the Taxpayer Advocate Service in this year’s report, as well as all the past reports, and conclude that the process isn’t working for the lowest income taxpayers.  It would ask itself how it could improve the audit process so that taxpayers engage with the auditor and learn what, if any, error they made and how to avoid it going forward.  That engagement and education is at the heart of voluntary compliance, and while it appears to require more upfront resources, it is way more cost effective in the long run than current correspondence exams, which have little educational value.  For example, in a 2007 TAS survey of taxpayers who experienced correspondence examinations for EITC claims, 45% did not understand how the documents requested by the IRS related to the questions the IRS had.  One study found that only 39.7% of Schedule C taxpayers audited by correspondence recalled being audited at all, as compared to 72% of field audited taxpayers and nearly 80% of office audited taxpayers.

The IRS doesn’t need to look far or use much more in the form of resources to be both more effective and in greater compliance with taxpayer rights.  In this post I will set several recommendations for improving the correspondence exam process.  All of these can be accomplished with a modicum of resources, and you can pay for the rest by minimizing, if not eliminating, the expensive downstream work caused by poorly handled correspondence exams (for a sense of this downstream cost, see Figure 2.9.7, page 156 of the 2021 Most Serious Problems for a chart of average pay of downstream employees).

First, the IRS should rename correspondence exam as “virtual office exam.”  Specifically, the IRS should reap the benefits of the pandemic-spurred “zoom” revolution by designing a virtual correspondence exam process that more closely follows in-person office exam procedures.  With this approach the IRS would still send the taxpayer an audit initiation letter, with a suggested date and time for a virtual audit appointment.  Behavioral researchers have found that people are more likely to respond when an appointment time is set, even if the response is to request a different appointment time. 

Second, the audit initiation letter should set out – in common parlance/plain language — the issue that is being examined (since IRS insists correspondence exams are “single issue” exams) and describe the types of documentation that may be helpful to establish eligibility for a credit or deduction.  Here’s an excerpt of an actual Notice CP-75 (correspondence exam audit initiation letter) sent to a low income taxpayer in February 2022:

Notice how vague the letter is about what, precisely, the IRS is auditing; the letter lists 5 different possible issues, each of which have different eligibility criteria.  This sure doesn’t look like a single-issue audit to me.

This notice goes on to identify the “audit items that require documentation” to be: EIC, Dependents, Filing Status, AOC, CDC Credit.  The notice helpfully includes the following enclosures:

According to the 2021 Annual Report to Congress, only 3% of taxpayers with Total Positive Income under $50,000 were represented in individual correspondence exams.  For unrepresented taxpayers, the above enclosures will be overwhelming and the sheer volume of them could lead an unrepresented taxpayer to just give up.  It is no wonder that the no-response rate for correspondence exam is higher than any other form of exam.  The inability to reach a live assistor to ask questions increases the administrative burden exponentially.  (In FY 2019, IRS answered the correspondence exam phone line 40% of the time.) 

Third, the IRS should completely trash its current notice system and use some of the IT funding it is getting for FY 2022 to replace it with a 21st century system that is flexible and graphically robust in terms of layout, type, and design.  IRS letter format is currently dictated by an aged, obsolete correspondence system that is completely inflexible.  Trying to get a change in wording to an IRS letter can take more than a year of endless reviews and negotiations, and even then you have to wait for the programming to be complete.  There is lots of good research, some conducted by IRS and TAS, about how to communicate complex information.  The benefits field, in particular, has lots of studies about how to plan effective communication.  IRS needs to apply that research to its correspondence exam notices and make them salient to the taxpayer’s specific situation.  Presumably, the IRS knows the exact reason the taxpayer’s return was selected for audit.  The audit initiation letter should include that specific reason, not a list of “and/or” possibilities.  The enclosures should relate to that specific reason.  (If there is more than one reason, then the audit should be conducted as an office or field exam, per the IRS’s own justification for “single issue” correspondence exams.)  The IRS should apply its IT resources to get this done, ASAP.

Fourth, the IRS should assign one audit employee to each case.  The audit initiation letter should include the name, badge number, and phone number of the employee to whom the case is assigned, as is required by IRC §7602(a).  Providing this information “personalizes” the process.  It reassures the taxpayer there is a live human being who will work with you on the case, rather than the impersonal, faceless IRS.  The letter should also encourage taxpayers to contact the office immediately if they need to reschedule or would prefer to conduct the audit by phone or correspondence.  By inviting the taxpayer to call to state their preference, the IRS not only signals its willingness to meet the needs of the taxpayer but also gains an opportunity to talk to the taxpayer about the issues.  This approach also increases IRS accountability.  As it stands today, no one employee is accountable for the conduct of a correspondence exam.  If the taxpayer does not respond, the assigned audit employee should be required to make at least two outbound call attempts (or emails/texts if that is available) at different days of the week and times of day. 

(I note that the IRS frequently justifies its “next available assistor” approach to correspondence exam by saying it is good for the taxpayer.  But all IRS functions where employees maintain case inventories – field exam and collection, Appeals, Counsel, and the Taxpayer Advocate Service – have established some type of buddy system to cover for vacations, sick leave, or training.  And the IRS could treat these taxpayers as adults and give them the choice of speaking to their assigned auditor or the next available assistor.)

Fifth, the audit initiation letter should also include a separate sheet providing information for signing on to the virtual appointment, including the requirement for a phone or other device that has a camera, and providing a contact for the taxpayer to discuss any technological challenges the taxpayer may face.  This is where QR code technology could be helpful, providing links to appropriate sites and information.  If the taxpayer is unable to sign on via a device with a camera, a telephone appointment should be arranged.  When the taxpayer requires specific reasonable accommodations, the audit should be converted to an in-person office exam or conducted via telephone, whichever is best for the taxpayer.

Sixth, when the taxpayer attends the virtual office audit appointment, the auditor should iteratively explain the specific issue that is being reviewed and what the IRS needs to see to establish eligibility.  If the taxpayer has documentation, the IRS auditor should look at it via the taxpayer’s device camera and instruct the taxpayer on how to upload, email or fax it.  As with an in-person office audit, at the close of the appointment the taxpayer should know what additional documentation, if any, is needed to prove eligibility.  The employee should memorialize the requested additional documentation in a letter to the taxpayer (or email if allowed).

Seventh, in order for this approach to work, the IRS must test its Documentation Upload Tool (DUT) or similar technology (such as the virtual office platform) with low income taxpayers to determine whether they are able to access and utilize it.  It should work with both the National Institute of Standards and Technology (NIST) and other government agencies and external groups to identify secure but accessible methods for low income taxpayers to sign on and submit information and documentation digitally.

Eighth, the IRS should adopt in correspondence exams the same procedures it uses in office and field exams for identifying alternative mailing addresses.  This approach will minimize the number of default assessments due to taxpayers moving around, especially low income taxpayers who comprise more than half of the correspondence exam population.

Ninth, with respect to all CTC/EITC audits, the IRS should allow taxpayers to establish proof of residency by using Form 8836 and its accompanying Schedule A.  These forms walk taxpayers through how to prove their child or relative lived with them for more than 6 months by having certain officials or professionals attesting under penalties of perjury and completing the periods of time they either have personal or official-records knowledge of the child’s residence.  In an exhaustive 2005 IRS study, this form was shown to be more reliable and probative than the usual documents and notarized statements the IRS currently accepts.  Since that time, I have recommended the IRS use this form in all EITC audits, which the IRS has steadfastly refused to do.  Given its obvious benefits, including reducing taxpayer burden, the IRS’s refusal is just plain baffling and counterproductive.

Tenth, the IRS should conduct a research study to test the effectiveness of certain messages in eliciting a response from low income taxpayers.  Several studies have already been conducted, including one by Day Manoli and Nicholas Turner on Nudges and Learning: Evidence from Informational Interventions for Low-Income Taxpayers.  This study found that timely reminder notices about the availability of the EITC increased take up of the childless worker EITC by 80% among the test population in the year of the notice.  A similar study designed around increasing responsiveness to correspondence exams, including focus groups exploring how letter recipients perceived the messages, could greatly enhance taxpayer communication and participation. 

The IRS should also build upon the important research conducted by TAS in 2016 and 2017 in which it sent out educational letters, under the signature of the NTA, to taxpayers whose returns claiming children had broken certain rules in the Dependent Database.  The letter referenced the specific issue and explained the eligibility rule in plain language.  One part of the study offered a toll-free Extra Help line to get questions about eligibility for the EITC and the CTC.  The letters had significant future compliance effects in several areas, without the cost of an audit.  The IRS should conduct a follow up study including focus groups to determine whether taxpayers understood the eligibility rules as a result of the letter.

The IRS recently announced the permanent establishment of the Customer Experience Office.  From the announcement, it appears the office will primarily focus on taxpayer service.  I hope the office defines “taxpayer service” more broadly, to include how taxpayers are served by the audit and collection process of the IRS (answer = poorly).  If it does so, the correspondence exam process is a good place to start.  While it is at it, the office can look at how to create a ”feedback loop” so correspondence auditors can learn what happens to the cases after they leave correspondence exam, as this post suggests.  Taxpayers who are under audit, and their representatives, will be enormously grateful for any improvements, and the rest of us taxpayers will be very happy that the IRS no longer wastes resources and violates taxpayer rights in this audit process.

How Did We Get Here? Correspondence Exams and the Erosion of Fundamental Taxpayer Rights – Part 1

Over the past several decades, correspondence examinations have become the IRS’s primary method for auditing individual taxpayers.  The Transactional Records Access Clearinghouse (TRAC) at Syracuse University just reported that of the 659,003 individual audits conducted by the IRS in Fiscal Year (FY) 2021, all but 100,000 were conducted by correspondence.  TRAC reports that correspondence exams now account for 85% of all audits, up from about 80% in the previous two years.

Originally designed for “less complex” matters, correspondence exams are now used for complex factual issues including the child tax credit, earned income tax credit, self-employment income (gross receipts and expenditures), and charitable deductions.  Correspondence is also the only method applied in “unreal” audits – examinations that the IRS doesn’t count as “audits” under IRC § 7602 because it says they don’t arise to an examination of the taxpayer’s books and records.  Through the Automated Correspondence Examination (ACE) system, unless the taxpayer responds in writing, a correspondence exam automatically moves from one stage to the next, up to the issuance of a Notice of Deficiency, without any human intervention.

IRS maintains that correspondence exams are an efficient and cost-effective method of conducting audits.  For example, in a summer 2021 release, the IRS justifies the low cost of these audits ($150 for the IRS!) by highlighting the minimal burden on taxpayers.  This blog will show just how wrong the IRS is about the burdens correspondence audits impose on taxpayers and their consequences.


Over the decades, advocates for taxpayers, myself included, have consistently criticized this method and maintained it does not adequately protect taxpayer rights, including the right to be informed, to pay no more than the correct amount of tax, to challenge the IRS and be heard, and to a fair and just tax system.  Recently, The Tax Law Center at New York University and the Center for Taxpayer Rights published a paper about this topic, Exclusionary Effects of the IRS Correspondence Audit Process Warrant Further Study, in which we question the effectiveness of correspondence exams and propose additional research and pilots.

To get a sense of the disproportionate impact the IRS overall audit strategy has on Earned Income Tax Credit taxpayers, and why it is so important not only to revise that strategy but also to reform the audit process, please take a look at some rather stunning statistics from the IRS Statistics of Income compliance webpage.  Table 17 sets forth Exam Coverage and Recommended Additional Tax After Exam, by Type and Size of Return, for Tax Years 2010-2018.  (I am using Tax Year (TY) 2018 because it best aligns with the NTA Annual Report numbers, which use Fiscal Year (FY) 2019, discussed later in this post). 

Total TY 2018 individual tax returns filed:                                                      153,927,628

Total TY 2018 individual tax returns with EITC:                                              26,492,486

EITC returns are 17.2% of all TY 2018 individual returns.

Total audit closures of TY 2018 individual tax returns:                                  234,543

Total TY 2018 individual tax return audit closures selected for EITC:            165,611

EITC returns are 70.6% of all TY 2018 individual audit closures.

Total TY 2018 individual audit closures with no change:                                41,276

Total TY 2018 individual audit closures, selected for EITC,with no change: 28,277

EITC returns are 68.5% of all TY 2018 individual no-change audits.

What this data tell us is that over 70% of all IRS individual audit closures for TY 2018 returns involved EITC despite the fact that only 17.2% of individual income tax returns claim the EITC.  This is up from what I reported in the 2005 Annual Report to Congress, when 48% of IRS individual examinations involved the EITC despite only 17% of individual income tax returns claim the EITC.  And remember – these “audit” numbers don’t include “unreal audits” involving EITC, such as math errors under IRC § 6213.  Further, EITC audits constitute more than 2/3 of the no-change individual audit closures.  Now, this figure does not take into account downstream adjustments to proposed assessments in appeals or Tax Court, or abatements in audit reconsiderations.  Given the low response rate for correspondence exams, that there are any no-change audits is stunning to me.  At any rate, the IRS spent resources forcing 28,000 people – 12% of all TY 2018 EITC audit closures! — to produce documentation of eligibility, when they were eligible all along.

These numbers are all the more outrageous when you consider the fact that the dollar amount of EITC improper payments are only $16 billion or 3.6% of the IRS’s current $441 billion gross tax gap estimate.  (It is only 1.6 % if you buy the Commissioner’s $1 trillion tax gap estimate, which I don’t).  Why would the IRS focus so much on low income taxpayers?  Certainly, the fact that EITC is subject to improper payment reporting requires the IRS to audit some EITC returns.  But the requirement to audit some returns is not a justification for adopting an assembly-line approach to the most low-income taxpayers.  Could it possibly be the IRS uses that approach because it beefs up the overall audit coverage rate and the number of audits, at really low cost?

Now comes the National Taxpayer Advocate’s 2021 Annual Report to Congress, with its 9th Most Serious Problem focusing on Correspondence Exams.  Let’s take a look at some of the data (relating to FY 2019) presented in the report: 

  • 53% of individual (IMF) audits were on taxpayers with Total Positive Income (TPI) under $50,000. Of this 53%, 82% of the taxpayers claimed refundable credits including the EITC.  (TPI includes “only total positive income values from wages, interest, dividends, other income, distributions, Schedule C net profits, and Schedule F net profits.  Losses are treated as zero.”  MSP #9, endnote 7.)
  • 92% of IMF audits on taxpayers with TPI under $50,000 were conducted by correspondence exam. 
  • The average direct time spent by an IRS auditor on a correspondence exam for taxpayers with TPI under $50k was 2 hours, compared to 11 hours for office exam and 41 hours for field exam.
  • 4% of Wage & Investment Division correspondence exam resources was spent answering phone calls; 96% was spent on handling correspondence.  The Level of Service on the correspondence exam line was 40.7% (Note that this is for 2019, so it is pre-pandemic ….)
  • 35% of 361,000 IMF audits closed in FY 19 for taxpayers with TPI under $50,000 were the result of no taxpayer participation, of which 14% involved undeliverable mail.
  • Unlike field auditors, who can use both internal and external sources, including USPS trace, to locate better addresses, correspondence examiners can only use internal sources.
  • Only 3% of taxpayers with TPI under $50,000 were represented in correspondence audits.
  • Of the 24,700 petitions to Tax Court in FY 19, 17,700 originated in correspondence exam.
  • 94% of audit reconsiderations originated in correspondence exam; 44% of these original audits closed because there was either no record of a taxpayer response or IRS correspondence was undeliverable.
  • 88,000 of taxpayers audited in FY 19 with TPI under $50,000 were placed in collection; 45% of these were in Currently Not Collectible-Hardship status as of 10/28/21.

So.  The primary method of auditing low income individual taxpayers is by correspondence.  If you are more affluent, you are more likely to have a single auditor assigned to your case in office or field exam, but not if you are low income – i.e., in correspondence exam, no one employee is assigned to your case.  If you are more affluent, the IRS is more likely to spend more time looking at your documentation, and communicating with you.  Not so if you are low income.  If you are more affluent, the IRS makes more of an effort to actually locate a more current address if mail is returned undeliverable.  Not so if you are low income.

It’s not just that mail is undeliverable.  IRS audit notices are incomprehensible to taxpayers.  In 2007, the Taxpayer Advocate Service did a survey of a representative sample of taxpayers who had been audited about their EITC claims.  More than 25 % of those taxpayers said they did not understand from the initial letter that they were under audit.  More than 70% said the audit letter was difficult to understand, including they did not understand what documentation the IRS wanted them to provide.  If you don’t understand you are under audit, that will affect your response.  And if you don’t understand what you should send in to prove your eligibility, that will affect your audit outcome.

And in fact, we see this in the no-response and agreed rates of audits of low income taxpayers versus more affluent ones, who are more likely to have a single auditor assigned to the case.  Here’s a chart from the 2021 Annual Report to Congress:

To make matters worse, past TAS studies have compellingly shown that correspondence exam procedures actively harm taxpayers.  In 2012 TAS reviewed a representative sample of taxpayers whose EITC claims were disallowed in correspondence exam and later conceded in full by Chief Counsel when the taxpayer filed a United States Tax Court petition.  In that study we found that these taxpayers, on average, contacted the IRS five times during the audit (one taxpayer contacted the IRS 21 times!).  78 % were ultimately able to submit documentation that was accepted by IRS appeals officers or counsel attorneys after the Tax Court petition was filed.  In 20% of those cases, appeals/counsel accepted documented that IRS auditors had rejected. 

Correspondence exams have been a recurring topic in the Annual Reports to Congress when I was the National Taxpayer Advocate.  At a quick glance, I found Most Serious Problems on various aspects of correspondence exam in Annual Reports from 2001 (my first), 2002, 2003, 2005, 2006, 2007, 2008, 2009, 2011, 2013, 2014, 2015, 2016, 2018, 2019, and 2020.  (My recollection is, in the years we didn’t write about some aspect of correspondence exam, we were just tired of it and decided to give it a rest for one year.)  TAS has conducted numerous research studies on the topic.  And yet the IRS response has been unchanged over the years.

Why does the IRS persist in believing correspondence exam is an efficient, cost-effective method of auditing?  First of all, because it defines efficiency and cost-effectiveness from the IRS perspective – that is, correspondence exam works for the IRS.  It doesn’t have to dedicate (human) resources to the task; it can churn out a lot of audits and get a lot of assessments, all of which feed into its reports of audit coverage and enforcement results.

In fact, correspondence exams are a classic example of IRS assessing efficiency from a superficial cost-benefit analysis, disregarding the administrative burden these exams impose on taxpayers, especially low income taxpayers.  As Les, Keith and I discuss in an upcoming article, the learning, compliance, and psychological burdens of an administrative process can significantly undermine the policy goals of a program, and can even be used to deliberately deter eligible taxpayers from benefitting from a program.

In this blog post, we’ve seen that IRS intransigence over years regarding the correspondence exam process has created a procedural justice nightmare for taxpayers, especially low income ones, as well as generating lots of unnecessary and expensive downstream work for itself.  In part 2 of this “How Did We Get Here?,” I’ll discuss some recommendations for fixing this mess.