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.

Miscellaneous

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.

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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.

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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.

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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.

How a Low Income Tax Clinic Can Help You and Vice Versa

We are approaching the 50th anniversary of low income tax clinics (LITCs) which began in 1974 at Hofstra Law School.  Read more about the history here.  In addition, we are approaching the 25th anniversary of the jolt to the idea that propelled a ten-fold increase in the number of LITCs and brought them to communities across the country – IRC 7526 added to the Code as a part of the Restructuring and Reform Act of 1998 thanks to the testimony of Janet Spragens and Nina Olson.  So, LITCs are not a new thing but many tax practitioners still may not know how vital LITCs are to the operation of our tax system.  LITCs are vital, but because of current funding restraints are limited in what they can do.  This post seeks to explain the importance of LITCs and encourage practitioners not only to refer clients as appropriate but also to volunteer.

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Income Guidelines

LITCs represent individuals, not entities, who make less than 250% of the federal poverty guidelines and have a tax controversy with the IRS.  In 2022 that amount is $33,975 for a single person living alone.  If the household has more than one person, for each additional person in the house the dollar amount increases by $11,800 but the income of the additional household members must also be included in determining qualification.  For example, a family of four in which the father makes $22,000 and the mother makes $25,000 would qualify because the total household income is $47,000 and the family size of four means that the 250% of poverty level for the family is $69,375.  Each LITC questions incoming prospective clients to ascertain their income level, something not always straightforward, in making the decision on eligibility.  The statute also permits LITCs to represent up to 10% of their clients making an amount in excess of 250% of poverty – more on that later.

The income guidelines exist to ensure that LITCs represent individuals who would otherwise go unrepresented but also that LITCs do not compete for clients with attorneys, CPAs and enrolled agents.  For those tax professionals, understanding the limitations and practice areas of an LITC can provide a basis for making referrals to an LITC when an otherwise worthy client who lacks the means to pay for services can be served by an LITC at no cost, allowing the tax professional to triage someone with a problem and assist them by helping to place them in an LITC.

Scope of LITC Services

In addition to understanding the income qualifications of LITC clients, it is important to understand the type of work that LITCs do and don’t do.  LITCs do not exist to prepare tax returns or ITIN applications.  For free tax return preparation go to VITA. Many VITA sites also prepare ITIN applications as part of the tax return filing process.

LITCs exist to represent individuals in some type of tax controversy with the government, either in determining how much they owe or how much they can pay.  LITCs assist clients in audits, appeals, and Tax Court and other judicial fora in trying to find the right dollar amount owed for a specific year.

Once a liability is determined, LITCs help people navigate the very complicated tangle of laws, regulations, and agency practices to obtain relief from the IRS through such measures as a currently not collectible determination, an installment agreement, or an offer in compromise.  LITCs also assist clients in filing amended returns, audit reconsideration, and innocent spouse determinations when an assessed liability inappropriately puts the burden on a taxpayer.  Most taxpayers are not even aware of the multiple avenues for them to correct their or the IRS’s errors regarding their taxes. 

In general, the transition from VITA to LITC services will happen after a person has received a letter from the IRS about an issue. LITCs can consult with VITA preparers and their clients to figure out the best way to file a return, but LITCs generally cannot prepare the return or open a case for representation before the IRS has gotten involved. The intersection of LITC and VITA services is ripe for closer collaboration.

LITCs Play an Important Role in the Tax System

LITCs also help the IRS.  They facilitate an orderly and reliable resolution of many taxpayers’ problems by enabling taxpayers to file the correct forms with the correct offices and provide the IRS with the correct information necessary to resolve a problem.  By doing this LITCs reduce IRS workload and conserve IRS resources.

The reach of LITCs, however, is limited.  Each year LITCs apply for a grant funded by Congress and administered by an office within the National Taxpayer Advocate function of the IRS.  The total amount of grants that can be awarded is limited and the amount given to any one LITC has been capped at $100,000 since 1998.  Some movement exists to increase the grant to reflect the passage of time and the need to increase services as the IRS engages more and more with low income individuals, generating more and more tax controversy work with this part of the population.  The program office with the National Taxpayer Advocate that administers the grant takes the information it receives each year and produces a publication detailing the work of LITCs.  Here is a link to the most recent publication.

LITCs come in a variety of flavors.  The original LITCs formed as part of law school clinical programs and about 25% of LITCs still exist in that configuration.  In some ways, academic LITCs have the most freedom because they do not generally have geographical restrictions on case acceptance and they have directors who generally have a fair amount of tax experience.  These LITCs are best positioned to take on impact cases that push the law through litigation or comment on regulations and rulings impacting low income taxpayers.  Some clinics exist in independent organizations and many of these LITCs rely on pro bono assistance from tax professionals in their community.  A great example of this type of LITC is the Community Tax Law Project founded by Nina Olson in 1992 in Richmond, Virginia.  Most LITCs exist in legal services organizations around the country.  These organizations are natural hosts for LITCs because they already serve a variety of needs for civil legal services of community members, and the tax clinics round out the line-up of services to these clients.  Usually, LITCs in legal services organizations have geographical restrictions on client acceptance, may have other income restrictions over-laying IRC 7526, and some have other restrictions imposed by Congress.

LITCs can use 10% of their cases to find and push issues for clients who may make more than 250% of poverty but who do not have the ability to fund litigation in Tax Court, in the circuit courts or on to the Supreme Court.  LITCs can file amicus briefs in support of higher income individuals or entities moving forward with tax issues that impact the low income taxpayer community.  LITCs regularly comment on IRS regulations, new Tax Court Rules or other matters offered for comment because otherwise, low income taxpayers would have no voice in the formation of administrative or court rules that could greatly impact them.  The ABA Tax Section has been extremely supportive of LITCs and provides an excellent platform for making some of these comments.

Connecting with an LITC

The LITC Support Center is a new resource for both LITCs and tax professionals wishing to volunteer.  A project of the Center for Taxpayer Rights, the Support Center hosts weekly litigation strategy calls for LITCs and provides technical support and training for LITCs and their volunteers.  It also runs LITC Connect, a “dating app” for LITCs and tax professionals, whereby both LITCs and prospective volunteers create profiles.  When an LITC needs to find a volunteer for a particular case, or for technical advice, or for training, it can submit an Assistance Request and the algorithm identifies potential volunteers.  The Support Center reaches out to the volunteers and … voila! … with luck a match is made.  (FYI: the Support Center also has a “Resources for Taxpayers” page which includes helpful information and PDFs for taxpayers who are trying to navigate this filing season.)

You can find the LITC nearest you in Publication 4134.  In addition to finding their location, I encourage you to get to know the director of the LITC in order to find out how to best make referrals and, if desired, how to volunteer.  Invite the director to come and speak to your professional organization or a community event to explore the ways an LITC could best serve the community.  As we approach a couple of important anniversaries for LITCs, it’s time to get to know the one serving your community or to help bring one into your community if it is underserved.  LITCs provide a great resource for individuals who would otherwise face the tax system unrepresented.  Don’t overlook the ability of an LITC to assist you or you to assist it.

It’s (A)Live! LITC Connect Is Up And Running (Sort Of!)

After nine months of gestation, the Center for Taxpayer Rights has a new offspring … the LITC Support Center.  Today, the Support Center’s website is live, including the “dating app” for LITCs and prospective volunteers, LITC Connect.  Yay!  And a huge sigh of relief.

To recap:  since the days when I was the executive director of The Community Tax Law Project, it’s been clear the Low Income Taxpayer Clinic community, including its volunteers, have needed a resource center to provide technical support, litigation strategy, research, and systemic advocacy.  The Center started providing this support throughout the pandemic, hosting weekly Litigation Strategy calls with LITCs, assisting in several of the Economic Impact Payment lawsuits, and submitting amicus briefs on issues affecting low income taxpayers, as discussed here and here and here.

Through individual donors’ support, we have been able to raise the funds for development and programming of our new website and, most importantly, LITC Connect.  I’ve written about LITC Connect last month, but now it is a reality. It’s not as elegant design-wise as I want it to be, but now that the site is up, I will be able to work on the actual design.  What’s important is, the skeleton has some flesh on it!  YAY!  (I know, I’m using mixed metaphors here, but give me a break.)

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Through LITC Connect, LITCs are now able to create a profile and submit “Assistance Requests” when they need volunteer assistance.  The most common requests will be for volunteer pro bono representation of a client; however, LITCs can also request volunteers for mentors, technical advice, outreach and education assistance, and developing training materials or conducting training.

Prospective volunteers can also create profiles, describing the volunteer work they would like to do.  They can not only select the types of services they would like to provide (e.g., representation, training, mentoring) but they can also select the types of representation (e.g., audit, appeals, litigation, collection) and the types of issues (e.g, EITC audits, nonfilers, offer in compromise, collection due process).  Volunteers can also indicate the issues on which they would like additional training before they accept case referrals in that area.

Once an LITC submits an Assistance Request, LITC Connect’s algorithm chugs along and matches the request with the most promising volunteer candidates, based on their profiles.  The Center will then review the information and reach out to the best candidate personally, through email, and hopefully make the match and referral to the LITC.  Voila!

Now, a word of caution.  The website and algorithm are in their first iteration.  We’ve tested and tested, but I’m sure we will find things that are ungainly and need to be improved.  We’ve already identified two improvements that we’re contracting with the programmers to complete in the next few weeks that will make creating a profile easier (e.g., using checkboxes next to lists of issues rather than a drop down you have to scroll through and use key combinations to select multiple items).  We want to know how this is working, and we really want to hear from you.  You can write us at litc@taxpayer-rights.org.

We also have a lot of content we need to add to the site.  We are in the process for creating pages for training videos, materials, and templates for filings/government submissions, as well as links to other resources and pages for our FOIA requests and IRS responses.  We are creating materials for VITA sites and taxpayers about problems they may encounter during this upcoming filing season (a lot of them) and what they can do via self-help and when they need to reach out to an LITC for assistance.  And, in conjunction with the ABA Tax Section, in February 2022 we will be doing a training for volunteers about representing survivors of domestic violence.  The recording of this training, along with others, will be posted on the LITC Support Center website.

So.  What do we need from you?

First, LITCs need to sign up and create a password-protected profile.  Please do this now, for two reasons:  (1) so we can learn from your experience setting up your profile and improve the process; and (2) so you are ready to submit an Assistance Request when the urgent need arises.  We’re not yet accepting referrals, but you need to be in the system so when we do so, you are ready!

Second, volunteers need to sign up and create a password-protected profile.  Attorneys, certified public accountants, and enrolled agents are all eligible to be a volunteer.  In creating a profile, we ask a number of questions; we’ve tried to make it as simple as possible, but the information we ask is necessary to get the best matches and improve the algorithm.  We really need you to sign up so we have a volunteer pool for when the millions of math error notices and frozen returns attributable to reconciliation of the Rebate Recovery Credit and the Child Tax Credit start surfacing this filing season.  And we need you in the system so we can offer you free training on this specific issue.  For those of you who are retired, all of the LITCs registered with us will have professional liability coverage for their volunteers (that is one of our LITC profile questions).  The LITC Support Center is also obtaining professional liability coverage for those cases that it retains for representation.

Third, please consider making a contribution to support the work of the LITC Support Center.  Now that we have the first stage of our app built, we need to hire a Pro Bono Coordinator.  Although the app will identify good potential matches, we want the human touch in making the final decision and by staying in touch with both the LITC and the volunteer to ensure the referral is going smoothy.  So please help us help us by donating to the Center for Taxpayer Rights.

The LITC Support Center has been germinating since 1992; today, the seedling has popped above the surface.  I look forward to watching it grow.  (End of metaphors.)  Thank you, to everyone who has worked for and supported LITCs over the years.