Exercise Caution When Using Extended Tax Court Due Date

In an earlier post I provided proposed time frames for filing Tax Court petitions based on different due dates.  Circling back to that issue, I wanted to point out the downside of the extension created by the decision in Guralnik v. Commissioner, 146 T.C. 230 (2016)(en banc).  At this point we do not know if the time to file a petition for those with a due date between March 19 and July 15, 2020, will be governed by a combination of Guralnik and Notice 2020-23, just Notice 2020-23 or just Guralnik.  The answer to that question depends, in part, on when the Tax Court clerk’s office reopens.  The previous post presumed that the Tax Court clerk’s office would reopen on June 30 but if it reopens after July 15, 2020, and if the time period for filing a Tax Court petition in Notice 2020-23 is not further extended, then Guralnik will both pre-date and post-date the extension in Notice 2020-23, making the extension in the Notice irrelevant for purposes of Tax Court filing.

Guralnik created a logical rule for a snow storm that is a limited time event but does not work as well with an extended closure, such as the one caused by COVID-19 or the government shutdown of 2018-2019.  The problem with a long shut-down and its impact on the time to timely file a Tax Court petition results from Guralnik’s requirement that the petition be filed when the Tax Court reopens.  Some petitioners will not know the precise date the Tax Court will reopen.  Based on what happened during the 2018-2019 government shutdown, petitioners using private delivery services seemed to have the petitions returned after some failed attempts.  What happens when a private delivery service returns the petition after a failure and the petitioner fails to mail the document to the Court before the reopening date?  The Tax Court has issued conflicting rulings which exacerbates the already difficult situation.

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In the case of McClain v. Commissioner, Dk. No. 2699-19S, a deficiency case involving a pro se petitioner, the Tax Court issued an order that dismissed a petitioner who filed a petition late because of the government shut down in 2018-2019.  Mr. McClain’s petition was filed by the Tax Court on February 4, 2019.  The IRS sent the notice of deficiency on October 9, 2018.  The time for filing a petition would ordinarily have run on Monday, January 7, 2019.  Between December 28, 2018 and January 28, 2019, the Tax Court closed including closure of the clerk’s office triggering the application of Guralnik.

The Tax Court closure triggered the extended time to file in Guralnik but the extended time did not help Mr. McClain.  The cautionary tale here stems from the way Mr. McClain was treated by the Tax Court even though he made an effort to file during the shut-down.  The decision here could have implications for taxpayers have a petition come due during the time the Tax Court is closed due to the pandemic.

Although the petition was filed almost a month after the statutory due date, the due date fell at a time when the court was closed.  Attached to the petition were two FedEx envelopes one of which was shipped on January 8, 2019 and the other on January 15, 2019.  The Tax Court determined that it lacked jurisdiction over Mr. McClain’s case, despite the fact that the taxpayer attempted to mail the petition to the court twice during the period extended by the Guralnik case.  The Tax Court found that despite the two attempts to file while it was closed, the taxpayer was obliged to send a petition to it on January 28, 2019, the date it reopened.  Because the postmark on his petition was February 1, 2019, the Tax Court determined that it lacked jurisdiction. Bryan Camp also recently analyzed this case over on TaxProf Blog, which you can find here.

In McNamee v. Commissioner, T.C. Memo 2020-37, a CDP case in which the petitioner was represented, the Court cited to an announcement on its website that was not mentioned in the order entered in the McClain case.  The Court wrote in the facts:

On December 28, 2018 [a few days before the last date to file], petitioner sent a petition to this Court seeking review of the notice of determination. The petition was sent to the Court via FedEx Priority Overnight service. Because of a lapse in Government funding the Court was closed from December 28, 2018, to January 25, 2019. As a result, the envelope containing the petition was returned to petitioner as undeliverable. The Court’s website at the time instructed taxpayers that, “[i]f a document mailed or sent * * * to the Court has been returned, the party that mailed or sent the document should remail or resend it to the Court with a copy of the envelope or container in which it was first mailed or sent.” Following those instructions, petitioner on January 31, 2019, redelivered to the Court–again by FedEx Priority Overnight service–the petition and the envelope in which it had originally been delivered. The petition was received by the Court and filed on February 1, 2019.

In the discussion section of the opinion, the Court found the petition timely filed, writing:

Petitioner first mailed his petition to the Court via FedEx Priority Overnight service on December 28, 2018, three days before the deadline for filing his petition. Because his petition was timely mailed, it is deemed timely filed, and we thus have jurisdiction over this case.

Both McClain and McNamee sent their petitions to the Tax Court by an approved private delivery service while the court’s Clerk’s Office was closed.  Their petitions were returned.  They resent the petitions a few days after the Clerk’s Office reopened.  About the only difference between the two cases is that McClain first sent his petition one day after the 90-days had expired (not considering Guranik) while McNamee first sent his petition within the 30-day period for filing a CDP petition.  But, still, McClain first sent the petition while the Clerk’s Office was closed, so arguably that should be enough under Guranik and the website instructions.

I find it impossible to reconcile the results of the two cases in which the order and the opinion came out within days of each other.  I believe that the McNamee opinion interprets Guralnik in the manner most consistent with that opinion; however, McClain raises real concerns for anyone trying to provide advice on how to interpret Guralnik.  The Court advises prospective petitioners to watch its site to learn when the Court will reopen.  The Court should give petitioners plenty of warning before it reopens and should clarify its instructions.  While the instructions cited in the McNamee case say to retain a copy of petitions sent during the closure and to provide the returned mail with the petition filed after the Tax Court reopens, the instructions should alert prospective petitioners when mailing a petition during closure will not work.  Mr. McClain at least deserves an explanation why following what appeared to be the Court’s instructions and the intent of the Guralnik case still resulted in dismissal.  His dismissal was especially unfortunate because he was pro se and may not have had the tools to adequately argue his case in the way that Mr. McNamee did. 

The IRS Cracks Open the Door to Electronic Communications

In 2016 the IRS released its Future State vision, featuring seamless electronic interactions between the agency and taxpayers or their representatives. Progress towards this vision has been slow, as IRSAC noted in its 2018 and 2019 reports. (Les also wrote several posts on the Future State, its implications, and related developments.) Today the IRS remains far behind lenders, brokers and banks in the digital customer interactions it offers. While the IRS’s privacy concerns with electronic communications have not abated, faced with the coronavirus pandemic the agency adapted quickly, recognizing the need for digital communications if taxpayers’ matters are to progress as people shelter in place. In today’s post, guest blogger James Creech describes important new IRS parameters for email correspondence and electronic signatures. Christine

On March 27, 2020 as part of the IRS’s response to COVID-19 the IRS issued an internal memorandum temporarily modifying the existing prohibitions against the acceptance of electronic signatures and use of email to send and receive documents. For the Service these modifications were a necessary adjustment to the realities of remote work. It allows many of the cases in progress prior to the People First Initiative to continue to move forward even if it is just to avoid a statute of limitations expiring. It is also an acceptance that many taxpayers who must interact with IRS employees are sheltering in place and may lack access to any technology beyond a smartphone. It is interesting to note that the memorandum does not specify an end date for these temporary procedures unlike many of the other aspects of COVID-19 that expire on July 15, 2020.

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Electronic Signatures

The most important part of the IRS accepting electronic signatures is not how they accept them but rather what types of documents have been approved for electronic signatures. Electronic signatures are temporarily permitted on documents required to extend a statute of limitations or to close an agreed upon matter such as Forms 870 and 872. Beyond those forms, the memorandum only lists a few specific forms by number but it appears that it should be interpreted broadly. As a catch all, it states that long as the form is not normally subject to standard filing procedures, ie a 1040x or 8832, an electronic signature is permitted and the document can be submitted electronically. An IRS employee can request further guidance from their internal policy office on the specific email acceptance policy. Given that the internal guidance is vague it might be incumbent on a practitioner to remind an IRS employee that this option is available should there be some hesitation about accepting particular form.

One other routine document specifically listed by the memorandum is a power of attorney. On the surface the inclusion of the 2848 seems of limited utility. The CAF units are located in service centers that are currently closed, new matters are not being assigned to the field, and adding a power of attorney midway through working through an issue with a Revenue Agent is relatively rare. However for tax clinics and taxpayers who need to either add or change a representative mid stream specifically stating a power of attorney can be filed with an electronic signature is a useful inclusion.

If a document is eligible for an original electronic signature, the signature itself can be submitted in a number of widely used file formats including pdf and jpeg file types.

The real value for practitioners in the modification is the ability to send in photographs of a signature, or to have a client electronically sign a document on smartphone without the need to print the document at all, and still have it accepted by the IRS. Without this ability many taxpayers could potentially have to either have to physically meet their representative in order to sign a document, or worse yet many pro se taxpayers could be unable to meaningfully participate in moving cases forward because they lack access to a printer or a scanner.

Emailed Documents

The IRS now allows employees to both send and receive emails, including emails with attachments. For practitioners receiving emails the procedures are similar to receiving a physical copy of information from the IRS. The attachment is sent as a standalone email in an encrypted SecureZip. The 12 character password is then relayed to the practitioner over the phone, or by some other means than email, and the attachment can then be opened.

Sending documents to the IRS is a little more complicated. In order to protect the IRS, incoming email is not being accepted without an established relationship between the taxpayer or their representative. The IRS employee must also first request that the documents be sent through the normal e-fax channels prior to offering the use of email.

If the taxpayer is unable to send an e-fax or wishes to use email the employee must still take steps to dissuade them from doing so. They must advise the taxpayer that email is not secure. They must request that all attachments should be encrypted to the best of the taxpayer’s ability and baring that any information must be in a valid format. Links to files in the cloud are not accepted. Finally they should advise the body and subject line of the email must not contain any sensitive or identifying information. All of these steps are perfectly reasonable for security purposes but may be intimidating to some taxpayers.

If the taxpayer is sending a document that contains an electronic signature the taxpayer must attest to the signature by including a statement similar to “The attached [name of document] includes [name of taxpayer]’s valid signature and the taxpayer intends to transmit the attached document to the IRS.” It is worth noting that if there are technical issues with the .gov email address, IRS employees are prohibited from using personal email addresses as a back up.

Privacy Concerns

Part of the reluctance on behalf of the Service to accept emailed documents in the past has been a well-founded worry about introducing viruses into a secure system. From the IRS’s point of view requiring a known taxpayer to opt in to email, and follow the required procedures and formats, should greatly reduce this risk.

Email for the practitioner has its own set of privacy concerns. From a technical perspective sending an email to the IRS is no different than an e-fax. E-faxes are routed to IRS employees’ email addresses so the only difference is the terms of service for the e-fax vs the email provider.

Slightly different is what happens to the data once it is on a laptop in the IRS employee’s home. Fortunately for taxpayers the IRS has a robust set of data privacy protections that can be found in Section 6103. Generally speaking the IRS has done a good job of training employees on the importance of Section 6103. Without going into much detail, Section 6103 prohibits the disclosure or inspection of sensitive taxpayer information by anyone who is not authorized to view the material. The punishment for violations of Section 6103 can range from potential criminal charges for willful disclosures to administrative sanctions, including termination, for less serious breaches. Violations of Section 6103 also give taxpayers a right to a civil cause of action against the United States under IRC Section 7431.

Section 7431 was given additional teeth in the Taxpayer First Act of 2019 that is especially relevant right now given that all IRS employees are working remotely. Even though the IRS has safeguards in place to protect taxpayer information, such as requiring that laptops containing sensitive data are encrypted, accidents do happen.

Prior to the Taxpayer First Act taxpayers were only notified of a Section 6103 disclosure violation if the violation resulted in criminal charges. This left many taxpayers in the dark if return information was disclosed in a non willful manner. The Taxpayer First Act significantly broadened this disclosure to impacted taxpayers, including when IRS “proposes an administrative determination as to disciplinary or adverse action against an employee arising from the employee’s unauthorized inspection or disclosure of the taxpayer’s return or return information” and it requires that the IRS affirmatively inform taxpayers of the civil cause of action against the government. It remains to be seen whether there will be an uptick in Section 6103 violations but if expanded use of email does not trigger a wave of taxpayer notifications, then privacy may not be such a barrier to making this modification permanent.

While the limited acceptance of electronic signatures and use of email was expanded to benefit IRS employees during this difficult time, it is impossible to see this as anything but beneficial for taxpayers. Even with the required hurdles it makes engagement with the IRS easier, quicker, and more approachable to anyone who does not have a scanner and an e-fax service.

Analyzing the IRS FAQs on Incarcerated and Non-Resident Taxpayers

On May 6, the IRS released four new FAQs (FAQ 10, 11, 12, and 41) relating to deceased, non-resident alien, and incarcerated individuals with respect to economic impact payments. The FAQs provide advice regarding both eligibility for payments (FAQ 10-12) and detailed procedures for returning payments that an individual should not have received (FAQ 41).

FAQs 10 – 12 provide that deceased, non-resident, and incarcerated taxpayers are not eligible for payments. In this post, I discuss the (lack of a) legal rationale for the Service’s conclusion with respect to incarcerated and non-resident taxpayers, along with practical problems the IRS is likely to encounter. In a subsequent post, Nina Olson will discuss similar issues with respect to deceased taxpayers.

For incarcerated taxpayers, the IRS advice strikes me as contravening the clear statutory language that Congress enacted. The question is more complicated for stimulus recipients who are non-resident aliens, but similarly lacks a solid legal foundation.

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Section 6428 Overview

As Carl Smith explained in one of our first posts on the economic impact payments, the payments are provided in section 2201(a) of the CARES Act and codified in section 6428 of the Code. Section 6428(a) & (b) provide the payments as a refundable credit for the 2020 tax year. Section 6428(c) provides AGI limitations. Finally, one must be an “eligible individual” under 6428(d). This includes “any individual other than (1) [a] non-resident alien . . . (2) an individual with respect to whom a deduction under section 151 is allowable to another taxpayer . . . and (3) an estate or trust.”

But as nearly everyone now knows, so that taxpayers don’t have to wait to receive the credit when filing their 2020 tax returns in 2021, the IRS is providing those payments in advance; by April 17, the IRS had issued nearly 90 million payments. Section 6428(f) authorizes this advance payment mechanism.

Section 6428(f)(1) provides that “each individual who was an eligible individual for such individual’s first taxable year beginning in 2019 shall be treated as having made a payment against [their income] tax . . . for such taxable year in an amount equal to the advance refund amount for such taxable year.” So, we look to see whether, in 2019, an individual met the “eligible individual” definition. If so, they get the “advance refund amount”, which section 6428(f)(2) defines as the amount that would have been allowed as a credit under section 6428(a) if it had been enacted for 2019. Section 6428(f)(3) directs the Secretary to issue the advance payments as quickly as possible. Finally, if a taxpayer hasn’t filed a return for 2019, the Secretary may use a 2018 return in a similar manner (and similarly determine whether the taxpayer was an “eligible individual” in that tax year); otherwise, they may use information provided on Forms SSA-1099 and RRB-1099 issued in 2019 to send out the payments. See I.R.C. § 6428(f)(5).

The key point, however, in section 6428(f) is that if the individual is an “eligible individual” for 2019 (or 2018), they should get the advance payment, regardless of their eligibility in 2020. Section 6428(f)(1) states that “an eligible individual for such individual’s first taxable year beginning in 2019 [or 2018] shall be treated as having made a payment against the tax imposed . . . for such taxable year.” Note also that this does not say “each eligible individual who was an eligible for such individual’s first taxable year…” It just says “individual.” This section, as I read it and explain below, applies equally to the incarcerated, non-resident, and deceased taxpayers that the IRS declares ineligible (the latter of which Nina Olson blogged about yesterday).

What happens if the advance payment is more than what the taxpayer should have received? Section 6428(e) provides that the 2020 credit is reduced, but not below zero. That’s critical, as this language means that taxpayers don’t have to pay back the credit. For example, if a taxpayer’s 2019 AGI qualified them for a full advance credit of $1,200, but their 2020 AGI bumps them into the phaseout range, they don’t have to pay back the difference.

With the background out of the way, let’s dive into the categories of folks the IRS has excluded from 6428. I believe the IRS FAQs are incorrect in all of these cases, but for different reasons.  

Incarcerated Taxpayers

IRS FAQ 12 provides:

Q12. Does someone who is incarcerated qualify for the Payment? (added May 6, 2020)

A12. No. A Payment made to someone who is incarcerated should be returned to the IRS by following the instructions about repayments. A person is incarcerated if he or she is described in one or more of clauses (i) through (v) of Section 202(x)(1)(A) of the Social Security Act (42 U.S.C. § 402(x)(1)(A)(i) through (v)). For a Payment made with respect to a joint return where only one spouse is incarcerated, you only need to return the portion of the Payment made on account of the incarcerated spouse. This amount will be $1,200 unless adjusted gross income exceeded $150,000.

This presents the easiest case. The Service’s position is flat wrong. Nothing in section 2201 of the CARES Act generally prevents payments to incarcerated individuals. An “eligible individual” is defined as “any individual”, so long as the individual is not (1) a non-resident alien, (2) a dependent, or (3) an estate or trust. There could potentially be situations where incarcerated individuals qualify as dependents under section 151; however, those are individualized determinations not subject to a general rule.

Why would the IRS have made this sort of clear error? I suspect it harkens back to the 2009 Stimulus (hat tip to Seth Hanlon who keyed me into these provisions on Twitter). In section 2201(a)(4) of the American Recovery and Reinvestment Act, Congress excluded incarcerated individuals and non-U.S. citizens not lawfully present in the United States from receiving stimulus payments. It did so through referencing provisions of the Social Security Act that similarly exclude these individual from receiving Social Security payments: 42 U.S.C. § 402(x) and (y). There are a number of conditions under 42 U.S.C. § 402(x), but suffice to say it excludes many incarcerated individuals from receiving payment. Beyond the provisions in the Social Security Act, various other incarceration-related triggers excluded payments to incarcerated individuals. See American Recovery and Reinvestment Act § 2201(a)(4)(A)-(C).

No such provision appears in section 2201 of the CARES Act, or indeed, anywhere within the CARES Act. To check, I performed a text search on the PDF version of the CARES Act for every provision referenced in the 2009 Act. None appears.

Perhaps the IRS is concerned with these payments not supporting the type of spending that Congress intended. Congress enacted the stimulus payments to stimulate the economy with consumer spending, but did not prescribe the type of consumer spending for these payments. Congress did not say “spend the money in the mainstream economy.” Incarcerated individuals face spending needs too. They have families. They may have child support obligations to which the stimulus payment would be offset, or their spouses may be struggling to maintain the family home to which the individual may be released. The IRS provides no explanation as to why it decided to harm these non-incarcerated individuals.

The FAQ also harms those who may be exonerated, and who might be forever deprived of the stimulus payment under the IRS’s guidance. Incarcerated wrongly, they are also wrongly deprived of the payment. With the statute’s temporal limitation on the issuance of the stimulus payments, those exonerated two years from now, for example, will not have the payments they should have received had they not been wrongly incarcerated.

Filing a 2020 tax return next year to remedy this situation provides only an incomplete solution. Just as the unemployed or underemployed worker needs the stimulus payment now, so do those incarcerated individuals whom the IRS is prohibiting from receiving the stimulus payment.

The FAQ also rests on the faulty presumption that incarceration is a permanent lifestyle choice. Yet even the Tax Court recognizes that not all new residences are permanent homes: the inquiry is whether the taxpayer faces a temporary absence due to special circumstances. Incarceration is merely the involuntary removal from the taxpayer’s principal place of abode with no manifestation of intent to change abode. See Rowe v. Commissioner, 128 T.C. 13, 27 (2007) (Goeke, J., concurring). Even a resident near death in a nursing home is considered to be temporarily absent from his home. See Hein v. Commissioner, 28 T.C. 826 (1957).

Putting the reasons for, harms of, and the faulty premises of the FAQ aside, many practitioners are wondering about what periods of incarceration trigger the exclusion to incarcerated individuals. These questions are largely answered in the statute the FAQ cites: 42 U.S.C. § 402(x). Generally, someone has to be incarcerated pursuant to a conviction for more than 30 days. 42 U.S.C. § 402(x)(1)(A)(i). But what does that mean for how the IRS is deciding not to issue payments? What period does the IRS use to make this determination? The FAQ is also silent as to which year matters. Is it 2019 (or 2018 in the absence of the 2019 return), the year for which the IRS will search for taxpayer information? Is it 2020, the tax year for which the stimulus acts as a credit? Does it matter if the taxpayer is in pre-trial detention? What if the taxpayer is incarcerated for less than twelve months? What if the taxpayer is in home detention? With the release of non-violent prisoners to home detention to avert the spread of COVID-19, this population is growing. What if the taxpayer is in a work-release program, a state of semi-detention? The IRS must define the population it has determined should not receive the stimulus payment if it wants to limit the ability of a group to receive that benefit. In this regard, the FAQ raises more questions than it answers.

Finally, there are a couple of downstream consequences to note, absent further action from the IRS or Congress. First, while this is an incomplete remedy, incarcerated taxpayers who do not receive an advance payment should nevertheless file a tax return for 2020 to claim the 2020 refundable credit (to the extent they are not excluded as dependents under 6428(d)(2)). Second, those receiving payments on behalf of incarcerated taxpayers should consider disregarding the IRS FAQ, since it contravenes the clear statutory text that Congress provided.

Non-Resident Taxpayers

IRS FAQ 11 provides:

Q11. Does someone who is a resident alien qualify for the Payment? (added May 6, 2020)

[A]11. A person who is a non-resident alien in 2020 is not eligible for the Payment. A person who is a qualifying resident alien with a valid SSN is eligible for the Payment only if he or she is a qualifying resident alien in 2020 and could not be claimed as a dependent of another taxpayer for 2020. Aliens who received a Payment but are not qualifying resident aliens for 2020 should return the Payment to the IRS by following the instructions about repayments.

Unlike incarcerated taxpayers, Congress clearly indicated that non-resident aliens (i.e., non-U.S. citizens who do not have a green card, meet the substantial presence test, or otherwise qualify as resident aliens under section 7701(b)(1)(A)) are not “eligible individuals.” See I.R.C. § 6428(d)(1). So, if you’re a non-resident alien who files a 2020 tax return, no credit will be allowed. Clear enough.

But what if the IRS sent you a check anyway? The IRS FAQ indicates that 2020 non-resident aliens who received a payment should return it. That advice isn’t necessarily wrong, but it appears incomplete.

As noted above, section 6428(f) provides advance payments depending on whether one is an eligible individual in 2019 or 2018, as the case may be. There are circumstances where a resident alien in 2019 could become a non-resident alien in 2020 (e.g., meeting the substantial presence test in one year but not the other). If an individual legitimately was a resident alien in 2019, however, section 6428(f)(1) treats the taxpayer as having made a payment in 2019 and compels the Secretary to refund that amount to the taxpayer. And while no payment is authorized for 2020, section 6428(e)(1) provides only a reduction of the 2020 payment, capped at $0. There are no other repayment provisions provided in the statute. Therefore, for taxpayers who were resident aliens under section 7701 in 2019, the IRS appears to lack any statutory basis for compelling these taxpayers to return these payments.

The question is more complicated if an individual appeared to be an eligible individual for 2019, but was not. For example, I’ve heard anecdotes of international students mistakenly filing resident tax returns for tax year 2019, thereby receiving the stimulus payment. In reality, they should not have been treated as residents due to section 7701(b)(5)(A)(iii). In these limited situations, I think the IRS has sounder legal footing to request a return of the payment.

Moreover, because the substantial presence test counts the days a taxpayer is physically present in the United States, many taxpayers may not yet know whether they will be classified as resident or non-resident aliens in 2020. Given worldwide travel restrictions, it’s perhaps easier for these taxpayers to guess where they’ll be physically present through the end of 2020 (I, for one, plan to spend the foreseeable future at my dining room table in South Bend). But the FAQ still asks taxpayers to predict the future to some extent.

Here’s the bottom line, pending further Congressional action. The IRS FAQs for incarcerated taxpayers lack any grounding in statute. If they haven’t received an advanced payment, incarcerated taxpayers should file 2020 returns claiming the credit. If they have received an advanced payment, incarcerated taxpayers should consider disregarding the IRS FAQ.

For non-residents taxpayers, those who are non-residents in 2020 definitely can’t claim a credit on their 2020 tax return. But those who were “eligible individuals” in 2018 or 2019 have a good argument to retain the advance payments they’ve already received.

If the IRS doesn’t rescind the guidance in the FAQ, then more questions will arise. Will it issue notices of deficiency to taxpayers who received these payments? A longer post is necessary to address this question, but suffice to say that if the IRS is correct in its statutory argument (and I am wrong), then the IRS may not have authority to issue notices of deficiency. See United States v. O’Bryant, 49 F.3d 340 (7th Cir. 1995). Will it then really proceed with erroneous refund litigation over $1,200 payments? The IRS should think twice before maintaining this legally dubious guidance, let alone litigating these issues.

Of Mountains and Molehills: A Further Analysis of EIP To Dead People

Earlier today Nina Olson discussed EIP being issued to deceased taxpayers. Professor Bryan Camp responds to that post below. Les

I agree with much of Nina Olson’s thoughtful post this morning on PT.  However, I also think both Nina’s analysis and the IRS FAQ may be wrong to make no distinction between people who died before or after January 1, 2020.  

This post will first explain why date of death may be an important distinction.  It will then argue that concerns about the IRS making erroneous EIP payments to dead people is making a mountain out of a molehill.

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(1) It May Matter When Death Occurred

Section 6428(a) creates an entitlement to a refundable credit for tax years starting in 2020.  My take is to start with the entitlement.  The question of who is entitled to what amount of refundable credit is covered by (a).  It allows an “eligible individual” a “credit against the tax imposed by subtitle A for the first taxable year beginning in 2020.”  

I do not read §6428(f) as creating an entitlement separate from subsection (a). Its purpose is to authorize the advance payment of that to which an “eligible individual” is entitled.  It both authorizes the IRS to send out a payment of the 2020 refundable credit in advance of taxpayers claiming the credit and it requires the IRS to figure to whom it should send the advance credit based on 2019 or 2018 returns.    

Supporting my reading of how these two subsections work together is the true-up language in subsection (e).  It creates a one-way ratchet that directs taxpayers to offset their claimed 2020 credits against the advanced payments they actually received.  Thus advanced payments will reduce the amount of credit taxpayers can claim on the 2020 returns.  Importantly, however, the amount offset cannot reduce their 2020 credit below zero.  That permits taxpayers to keep excess advance payments while being able to claim underpaid credits. 

The true up provisions are the reasons why taxpayers whose 2018 or 2019 returns show the existence of a dependent do not have to return the $500 they receive if the dependent has ceased being a dependent in 2020, for whatever reason (including death of the dependent).  The $500 will have turned out to have been erroneous because—again go to (a)—the basic entitlement is that this is a refundable credit for tax year 2020.  

I think it important to note that the true-up (and consequent forgiveness of erroneous advance payment) occurs only when determining the tax obligations for 2020, which for most people will happen on a 2020 return.

Folks who died before January 1, 2020, are not entitled to the refundable credit authorized by subsection (a).  Perhaps obviously, neither will such folks be able to file a return for 2020 on which to have errors forgiven by the subsection (f) true up provisions.  

Ms. Olson references the definition of “eligible individual” in §6428(d)(1).  That provision says that an “eligible individual” must actually be an individual.  It seems to me pretty plain that taxpayers who died before 2020 are no longer individuals in 2020.  Therefore, they cannot be “eligible” individuals.   

In short, I do not agree that (f) creates a separate entitlement to an amount.  It creates an entitlement to timing of an amount.  But that is just my reading.  I think Ms. Olson and others have a reasonable position that taxpayers who died in 2018 or 2019 are indeed eligible to receive the advance payment of the 2020 refundable credit.  You get there by reading subsection (f) as creating an entirely separate entitlement from subsection (a).  The strongest support for doing that is the language in subsection (f)(1) and (f)(2) that seems to create a counter-factual that pretends the credit allowed by (a) “would have been allowed as a credit under this section for such taxable year.”  

I disagree with that interpretation but for purposes of keeping this post short let’s just leave it that this: I think everyone agrees (or should agree) that EIP payments sent to taxpayers who died after January 1, 2020 are proper but there is disagreement about the legality of payments made to taxpayers who died before January 1, 2020.  Given that, the more important question is perhaps, what should be done?

Here’s my answer.

(2) Chill

Assuming some payments to dead people are erroneous, what should the IRS or Congress do about it and what should taxpayers do about it?

(A) IRS and Congress

The IRS does an amazing and fantastic job in determining and collection the correct tax for taxpayers.   But when you are dealing with over 150 million individual taxpayers and trillions of tax dollars, a small percentage of error looks like a really big number.  That is the political game that Congress and others repeatedly and disingenuously play with the IRS.  Various so-called “oversight” functions repeatedly express horror! horror! that the IRS either erroneously over-collects or erroneously under-collects billions of dollars per year. 

Get a grip.  Chill out.  If you want perfection, die and go to Heaven.  Otherwise, you have to evaluate the nature of the errors and what it costs to fix them.  

So it is here.  In 2018 this CDC report said about 2.8 million people died.  Let’s say 2.5 million of them were taxpayers.  And let’s say another 2.5 million died in 2019.  So that’s 5 million erroneous payments of $1,200 each.  Looking at the back of my envelope that adds up to $6 billion in erroneous refunds.  Max.  Heck, I bet that’s just a drop compared to the money Congress wastes in spending each year. 

The IRS has more important matters to deal with than to go chasing some theoretical 5 million payments made to taxpayers who died in 2018 or 2019.    

Also, the IRS has extremely limited tools to collect back those amounts.  That is because these erroneous EIP payments are very much like non-rebate erroneous refunds.  When the IRS sends an erroneous refund because of some error in determining a taxpayer’s correct tax (such as mistakenly allowing a deduction or exclusion that should not have been allowed) such refunds create a deficiency that the IRS can get back by either acting with the appropriate limitation period to re-assess the tax (and then collect administratively by offset or lien or levy) or by filing suit to recover the erroneous refund under §7422 within the time permitted by §6532.  

In contrast, erroneous refunds that result from some action that is not connected to a determination of liability (such as a clerical error in inputting a $100 as $1,000 and sending $900 back to the taxpayer) are called non-rebate erroneous refunds and those may only be collected by filing suit. United States v. O’Bryant, 49 F.3d 340 (7th Cir. 1995)(“The money the O’Bryants have now is not the money that the IRS’ original assessment contemplated, since that amount was already paid.  Rather, it is a payment the IRS accidentally sent them. They owe it to the government because they have been unjustly enriched by it, not because they have not paid their taxes.”).

I think the EIPs sent to folks who died before 2020 would be, technically, rebate refunds because they would be connected to a substantive determination that they were entitled to the refund, based on their 2018 or 2019 filed returns.  The determination would be erroneous.  But they would be, functionally, like non-rebate refunds because a TP who died before Jan 2020 cannot, by definition, have a deficiency of tax for 2020.  So forget re-assessment. Also, fun fact: that also means there is no transferee liability for the heir or family member who cashed the EIP check and used the erroneous EIP payment.

So if my reading is correct, there is no opportunity to re-assess and the only action the IRS can take is to beg the Department of Justice Tax Division to file suit.

Good luck with that.  The DOJ is unlikely to file suit.  It’s a busy place and filing a suit for $1,200 is just not worth their time and effort.  

So to the IRS I would say: Chill out.  Let it go.  To Congress I say: move on.  Go do some actual oversight on the huge opportunities you have created for graft and corruption in the distribution of various relief funds you created.  Leave the dead alone.  

(B) Taxpayers 

Just because the IRS may not have the proper tools to collect an erroneous refund, however, does not mean a taxpayer has no legal duty to return it.  

I would advise a client who received an EIP check or direct deposit for a taxpayer who died before January 1, 2020 to contact the Service for instructions on how to return the EIP.  My reading of the law is that the client has a legal duty to return the money.  The notion that there is no legal duty to return a payment made to you in error by the federal government is not only a dangerous notion, it is flat out wrong.  Taking something that is not yours and to which you have no right to is generally called stealing.  The notion that you cannot steal from the federal government denigrates the rule of law by suggesting legal rules do not apply as between a citizen and the government.  

More importantly the notion is also belied by 18 USC §641.  That statute makes it a felony to steal more than $1,000 from the federal government.  

This type of scenario is not limited to EIP.  The IRS sends out billions of non-rebate erroneous refunds each year.  I tell my students that they need to advise their clients who receive a non-rebate erroneous refund to contact the Service for instructions on how to return the money.  They should explain 18 USC 641 to their clients.  There is, in fact, a legal duty to return that to which you are not entitled.  

So yes, taxpayers who got EIP payments for folks who died in 2018 or 2019 do, IMHO, have a legal duty to return the money. However, the IRS is unlikely to be able to enforce it.  That is why the FAQ uses the word “should” which is similar to the language that the Service uses in letters to TPs asking them to return non-rebate erroneous refunds.  

But to say that a taxpayer has no legal duty just because the IRS cannot easily enforce the duty is not good.  It undermines the rule of law to say one need not comply with the law just because one is unlikely to get caught or punished.  We already have a HUUUGE problem with the guy currently stinking up the White House undermining the rule of law in this country.  Just because he is corrupt does not mean we have to be.  

The Uncertainty of Death and Taxes: Economic Stimulus Payments to Deceased Individuals

In today’s post Contributor Nina Olson explores the issue of stimulus payments being issued to deceased individuals.

For the last month or so, media reports have highlighted the fact that Economic Impact Payments (EIPs) were sent to deceased taxpayers.   After weeks of silence, on May 6, 2020, the Internal Revenue Service added FAQ 10 to its coronavirus tips website, which follows:

Q10:  Does someone who has died qualify for the Payment?

A10:  No.  A Payment made to someone who died before receipt of the Payment should be returned to the IRS by following the instructions in the Q&A about repayments.  Return the entire Payment unless the Payment was made to joint filers and one spouse had not died before receipt of the Payment, in which case, you only need to return the portion of the Payment made on account of the decedent.  This amount will be $1,200 unless adjusted gross income exceeded $150,000. (Emphasis added)

Now, leaving aside that the FAQ does not tell you what you should do if your income exceeds $150,000 – Should you keep the money?  Return even more of the EIP? What? – the FAQ contains some very strange language.  First of all, it sounds admonishing.  This to survivors of loved ones who died in 2020, 2019, or 2018 and did nothing to receive this payment other than open the mail or check their bank accounts.  Second, it is not couched in the language of a legal requirement.  Instead, it says you “should” return the payment.  As in, you should eat your vegetables.

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As Bob Kamman pointed out in an earlier PT post this spring, I have something of a history with the issue of stimulus payments to decedents.  During a June 2008 Ways and Means Oversight Subcommittee hearing on the economic stimulus payments (ESPs) under the Economic Stimulus Act, Congressman Doggett asked me why these payments were going to deceased individuals, including his mother.  Up until that point I was blissfully ignorant of this occurrence, but my wonderful staff quickly located the IRS FAQ explaining that, in fact, such payments were absolutely legitimate.  Here is the language of the 2008 FAQ, updated on March 17, 2008.

Q. If an individual dies, what happens to his or her direct deposit or stimulus check?

A. Stimulus payments will be issued in the name of the individual eligible for payment on a filed 2007 income tax return or to the account designated by the individual on that return.  This includes situations where a person dies after filing a return or where the final 2007 income tax return was filed by a personal representative or surviving spouse.  Any issues or concerns involving a decedent’s filed return or the related stimulus payment should be addressed by the legal representative of the decedent’s estate.  See Publication 559 for more useful information for survivors and personal representatives.

So, in 2008, the IRS position was that ESPs would be correctly paid to a decedent based on information on the 2007 return.  The IRS also directed taxpayers to confer with the estate’s legal representative to figure out what to do with the payment – i.e., how to divide it up.

This spring, as EIPs were being issued, I began to get calls and emails from reporters and taxpayers, saying that EIPs were going to decedents.  Having this issue seared into my brain from the 2008 experience, I checked the 2020 statutory language and compared it to the 2008 language.  The statutes are identical in terms of who is an eligible individual.  Here’s the 2020 language from IRC § 6428(d)(1):

For purposes of this section, the term ‘eligible individual’ means any individual other than —
  (1) any nonresident alien individual,
  (2) any individual with respect to whom a deduction under section 151 is allowable to another taxpayer for a taxable year beginning in the calendar year in which the individual’s taxable year begins, and
  (3) an estate or trust.

How could the IRS come up with two completely contradictory interpretations of identical language in just 12 short years?  Is there no one in the IRS that remembers 2008?  Or did everyone just prefer to forget about it, since the President and Treasury Secretary said the funds should be returned. 

Of course, the government is entitled to change its mind and reverse its position.  But when it does so, due process insists that it explain this reversal. To date we have received no explanation, just this conclusory, precatory instruction.  This instruction – couched, in FAQ 10, in terms of “should” – is even more bizarre when one reads on to FAQ 26 on the same 2020 IRS webpage:

Q26.  I received an additional $500 payment in 2020 for my qualifying child.  However, he just turned 17.  Will I have to pay back the $500 next year when I file my 2020 tax return?

A26.  No, there is no provision in the law requiring repayment of a Payment.  When you file next year, you can claim additional credits on your 2020 tax return if you are eligible for them, for example if your child is born in 2020.  But, you won’t be required to repay any Payment when filing your 2020 tax return even if your qualifying child turns 17 in 2020 or your adjusted gross income increases in 2020 above the thresholds listed above.  [Emphasis added]

Here the IRS is acknowledging that the law does not require any repayment of an EIP.  This is correct – IRC § 6428(e)(1) states the EIP credit claimed on 2020 returns “shall be reduced” by the amount of the advance EIPs “but not below zero”.  The FAQ is also saying it is perfectly okay for the EIP to go someone who in 2020 will not be an “eligible individual.” 

This is so, apparently, only if you are living in 2020 after the EIP was issued.  Somehow the IRS has decided that, without any statutory justification, it alone can pick winners and losers.  So a 17 year old’s parents can keep the $500, or a person who made less than $75,000 in 2018 or 2019 can keep the $1,200 despite making $200,000 in 2020, but the surviving spouse of a person who died in 2019 and who has two young children “should” return the $1,200.   

The phrasing of FAQ 10 gets weirder as one applies it to different scenarios.  By saying the payment should be returned if the person died before receipt of the EIP, it includes persons dying in 2020 whose personal representatives will be filing final individual tax returns on their behalf in 2021.  This means, if someone died on March 1, 2020 of Covid-19, and the EIP was direct deposited into that person’s account on April 15, 2020, the grieving surviving spouse should repay the $1,200.  Really?  This is just downright cruel. 

Finally, FAQ 10 ignores a longtime provision in the Internal Revenue Code for “qualifying widows and widowers.”  IRC § 2(a) provides a surviving spouse who has not remarried with whom a dependent child has resided for the entire year and who has provided more than half the cost of maintaining that home, may file as married filing jointly in the two years following the death of the spouse.  This statute represents Congress’ recognition that the death of a spouse or parent can have a devastating impact on one’s financial wellbeing, and that should be taken into account when calculating the household’s tax burden.  Yet according to FAQ 10, these qualifying widows/widowers must repay the $1,200 EIP for the deceased spouse.

What is the basis of any of these choices in the legislation?  Answer: the IRS has articulated none.  In fact, there is even more justification to make these payments to survivors of decedents in 2020 than there was in 2008 – we are in the midst of a pandemic with unprecedented levels of unemployment. 

One final point.  Let’s say the IRS finally produces some sort of legal justification for its 180 degree turn from 2008.  (Let’s also hope there is a legal opinion somewhere on this point and someday it will be made public.)  What is it going to do to recover all these EIPs that have been issued to deceased individuals?  Other than shaming grieving people into giving back this money, it must make a determination that it can use the deficiency process to obtain an assessment of this amount or refer the case to the Department of Justice to bring an erroneous refund suit under IRC § 7405.  Do you think the Tax Division of the Department of Justice will bring a case for $1,200 against a grieving widow/widower of a deceased COVID-19 victim?  (You can find some previous PT discussions of erroneous refunds here and here.)

A word about deficiency procedures and the EIP.  The CARES Act provides “there shall be allowed as a credit against tax … for the first taxable year beginning in 2020 ….”  Consistent with this language, I understand the IRS has programmed its systems to credit the advance EIP against the taxpayer’s 2020 1040 tax module.  (As Carl Smith discussed here a few weeks ago, it is unclear for bankruptcy purposes to which year the credit applies – the year in which it was paid or the year in which it is claimed on the tax return.)

If a taxpayer has died in 2018 or 2019 and receives the EIP, there is no one for whom a Form 1040 can be filed, so against what can the IRS assess a deficiency?  If the taxpayer died in 2020, then there may be a final Form 1040 return filing requirement for the decedent.  In that case, under IRC § 6428, the math goes like this: subtract the amount of EIP paid in 2020 from the amount of EIP the taxpayer is eligible for based on 2020 circumstances, but do not go below zero.  Here that would be zero – 1200 = -1200 but don’t go below zero, so = zero.  Where is the deficiency?

At any rate, all of this is completely avoidable.  Instead of putting more burden on taxpayers who are already anxious about their economic and physical health, today and in the future, the IRS could have adopted the approach of the 2008 FAQs, and added, “If you would like to return the funds, please send them [here].”  Then, just as in 2008, the survivors who didn’t need the funds could (and did) return them. But those who needed the funds were not made to feel like criminals if they retained them.

The Wavering Due Date For Tax Returns

Today’s guest post is by Monte A. Jackel, a practitioner at Jackel Tax Law, Silver Spring, Maryland, with decades of experience in the private and public sector whose expertise includes procedural issues and a deep knowledge of Subchapter K. Part 2 of this post will run tomorrow. Les

Introduction

I will be addressing two recent developments. First, in Part 1, I will discuss the relevant extended due dates for filing returns, paying tax and related matters due to the coronavirus pandemic. And second, which will run tomorrow in Part 2, I will discuss the ability of the IRS to force a taxpayer to make a retroactive law change when the tax return when filed was true, correct and consistent with applicable law at that time. 

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Extended Due Dates

Section 7508A(a) authorizes the Treasury Secretary or his delegate to extend the due date of certain acts, such as the filing of the individual income tax return and the payment of the tax, for up to one year in the case of a federally declared disaster. In addition, added as part of P.L. 116-94 in December 2019, new section 7508A(d) mandates a sixty-day period after the latest incident date to perform such acts. 

Both the Joint Committee on Taxation explanation (JCX-30-19, June 18, 2019, pp. 86-88) and the House Report to P.L. 116-94 (H.R. Rpt. 116-379, Jan. 21, 2020, pp. 97-100) indicate that the 60-day period referred to in section 7508A(d) “is in addition to, or concurrent with, as the case may be, any period of suspension provided by the Secretary [under section 7508A(a) and (b)].” 

Section 7508A(d) generally provides that, in the case of any qualifying taxpayer, the period beginning on the earliest incident date specified in the disaster area declaration and ending on the date that is 60 days after the latest incident date shall not count in determining the due dates for the acts specified in section 7508(a). Generally, a qualifying taxpayer is a person whose principal connection is with the United States. 

The president declared a national disaster for the coronavirus on March 13, 2020. The declaration consisted of a one-page declaration and a three-page letter. Together, these documents indicate a beginning date for the emergency of March 1, 2020, and indicate coverage throughout the United States.

FEMA followed up by issuing more specific guidance. However, it is not perfectly clear that the FEMA noticeshave the legal effect of modifying the terms of the presidential disaster declaration although that is presumably the end result that makes the most sense. 

The language used in section 7508A(d) does not appear amenable to an emergency such as a pandemic which is continuing in nature with no objectively determinable beginning or ending dates. For example, if there is no ending incident date for the emergency, it would appear that the ending date would remain perpetually open and the specified due dates would never occur. 

This, of course, makes no sense. And yet, recently issued pension regulations relating to the coronaviruscontain examples assuming both a beginning and ending date for the coronavirus pandemic and contain a general 60 day extension rule. Although section 7508A(d) is not cited in these regulations, the 60-day period seems more than a coincidence. 

On April 29, the ABA Tax Section submitted a letter to the IRS with comments on the extension of various due dates relating to the coronavirus pandemic. It is a good and thorough letter. However, I would note that if the due dates are extended to the later of July 15, 2020 or 60 days from the end of the pandemic, as the report recommends, the IRS notices and revenue procedures already issued would need to be rewritten, supplemented and revised. For example, Notice 2020-23 is the key date extension guidance. It provides for a July 15 extended due date and does not cite or mention in any way section 7508A(d).

I was told from reliable informed sources inside the government that section 7508A(d) did not apply to the coronavirus pandemic because there was no “declaration date” in the presidential declaration and there was no “incident date” in this crisis like there would be for a hurricane or other natural disaster that is objectively determinable. That proposition is debatable. The JCT explanation, JCX-30-19, at pp. 87-88, discusses the statute but does not address a case like this although, literally, the JCT report could be read as mandatorily tacking on another 60 days at the end of the period regardless of the definitional terms in section 7508A(d) (incident date and declaration date). The House Report, H.R. Rep. 116-379, at p. 100, says more or less the same thing and does not clarify matters. 

How likely is that to be done on a voluntary basis? Section 7508A(d) uses terms of art that specifically address specific objectively determinable disaster situations, such as a hurricane. I would not plan into using section 7508A(d) to obtain a date beyond July 15, 2020, but I would clearly raise the issue in an audit or in court. It is likely that a court will push to apply section 7508A(d) because, in cases such as the pandemic, the provision could otherwise be completely neutered. 

What Does IRC 7508A(d) Do?

The pandemic has brought lots more attention to IRC 7508A which allows the IRS to extend deadlines in the event of certain disasters.  Using its authority under IRC 7508A(a) the IRS first announced the extended time to pay taxes, then it announced the extended time to file taxes and then it announced broad extensions including the time to file Tax Court petitions and numerous other acts outlined in Rev. Proc. 2018-58.  We have talked about these extensions here and here.  Note that the IRS issued expanded FAQs last week regarding the scope and meaning of its Notices granting relief.

Last week I received a question from Sheri Dillon a partner at Morgan Lewis who carries a heavy caseload but does lots of pro bono work.  Sheri asked me about 7508A(d).  I had never seen or heard of it before.

In December, 2019 Congress passed legislation adding a new subsection IRC 7508A(d) to the extension provisions.  Little attention has been paid to (d) at this point and little is known about exactly how it works and how the IRS thinks it works.  A brief article and a Twitter post by the prolific Dan Hemel raises some issues and the potentially sweeping impact (d) could have.  Another article on the topic appeared in the Wall Street Journal with its tax writer Richard Rubin noting that the IRS rejects the interpretation that (d) has a sweeping impact in the current disaster.

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Depending on how (d) is interpreted, it offers significant relief or maybe no relief in the current situation.  In the absence of guidance on the meaning of (d), it may be that we will find out what it means through litigation as taxpayers seeking additional time to perform certain acts or to pay certain taxes turn to (d) to provide the relief they seek.  If you haven’t read (d) and pondered on its meaning, here is the statute itself:

I.R.C. § 7508A(d) Mandatory 60-Day Extension.—

(d)(1) In General. — In the case of any qualified taxpayer, the period—
(d)(1)(A) — beginning on the earliest incident date specified in the declaration to which the disaster area referred to in paragraph (2) relates, and
(d)(1)(B) — ending on the date which is 60 days after the latest incident date so specified, shall be disregarded in the same manner as a period specified under subsection (a).

(d)(2) Qualified Taxpayer.— For purposes of this subsection, the term “qualified taxpayer” means—
(d)(2)(A) — any individual whose principal residence (for purposes of section 1033(h)(4)) is located in a disaster area,
(d)(2)(B) — any taxpayer if the taxpayer’s principal place of business (other than the business of performing services as an employee) is located in a disaster area,
(d)(2)(C) — any individual who is a relief worker affiliated with a recognized government or philanthropic organization and who is assisting in a disaster area,
(d)(2)(D) — any taxpayer whose records necessary to meet a deadline for an act described in section 7508(a)(1) are maintained in a disaster area,
(d)(2)(E) — any individual visiting a disaster area who was killed or injured as a result of the disaster, and
(d)(2)(F) — solely with respect to a joint return, any spouse of an individual described in any preceding subparagraph of this paragraph.

(d)(3) Disaster Area.— For purposes of this subsection, the term ‘disaster area’ has the meaning given such term under subparagraph (B) of section 165(i)(5) with respect to a Federally declared disaster (as defined in subparagraph (A) of such section).

(d)(4) Application To Rules Regarding Pensions.— In the case of any person described in subsection (b), a rule similar to the rule of paragraph (1) shall apply for purposes of subsection (b) with respect to—
(d)(4)(A) — making contributions to a qualified retirement plan (within the meaning of section 4974(c)) under section 219(f)(3), 404(a)(6), 404(h)(1)(B), or 404(m)(2),
(d)(4)(B) — making distributions under section 408(d)(4),
(d)(4)(C) — recharacterizing contributions under section 408A(d)(6), and
(d)(4)(D) — making a rollover under section 402(c), 403(a)(4), 40 3(b)(8), or 408(d)(3).

(d)(5) Coordination With Periods Specified By The Secretary.— Any period described in paragraph (1) with respect to any person (including by reason of the application of paragraph (4)) shall be in addition to (or concurrent with, as the case maybe) any period specified under subsection (a) or (b) with respect to such person.

You can see there are a number of terms that require interpretation as applied to a disaster declaration in order to determine if (d) applies and the scope of any application.  Because this provision starts out with the phrase ‘mandatory’, it catches the eye.  Application of this provision in a disaster such as COVID-19 could cause a very long period of suspension and it could start much earlier than the 7508A(a) based Notices that the IRS has issued.  Some of the disaster declarations date to January 20, 2020.

This post does not seek to tell you what the new provision means but merely to raise (d) as something that deserves your consideration in deciding the length and scope of the current disaster’s impact on tax deadlines.  Even if (d) does not apply to the COVID-19 disaster, it may be important in extending deadlines in more localized disasters of the type probably envisioned in its passing.

What is this thing called … Portal?

In today’s post Contributor Nina Olson offers views on what happens when taxpayers use the portal.

What is this thing called … portal?
This funny thing called … portal?
Just who can solve this mystery?
Why should it make a fool of me?

With apologies to Cole Porter, over the last two weeks, a few of us at Procedurally Taxing have been noodling over what, precisely, is this thing the IRS has created called the “non-filer tool.”  I have been insisting that the “tool” actually creates and files a tax return on behalf of the taxpayer, while Les, for various reasons, was holding out for it being something akin to a tentative application for refund similar to Form 1139.  After declaring the entire discussion was giving him a headache, Les finally threw in the towel, and agreed that the “non-filer tool” is a return. But then Les, Keith and I had another conversation and now we are thoroughly confused.  This blog is an attempt to identify and explore the sources of that confusion.  We welcome comments and observations.

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The Non-filer Tool:  A Creature with Many Names

According to the irs.gov, the full name of this “tool” is “Non-Filers: Enter Payment Info Here tool.”  Before I get into the analysis of why it may be a return, and the consequences of that status, let’s look at how the IRS has described this tool on its website:

What to Expect

Follow these steps in order to provide your information:


• Create an account by providing your email address and phone number; and establishing a user ID and password.
• You will be directed to a screen where you will input your filing status (Single or Married filing jointly) and personal information.
Note: Make sure you have a valid Social Security number for you (and your spouse if you were married at the end of 2019) unless you are filing “Married Filing Jointly” with a 2019 member of the military. Make sure you have a valid Social Security number or Adoption Taxpayer Identification Number for each dependent you want to claim for the Economic Impact Payment.
• Check the “box” if someone can claim you as a dependent or your spouse as a dependent.
• Complete your bank information (otherwise we will send you a check).
• You will be directed to another screen where you will enter personal information to verify yourself. Simply follow the instructions. You will need your driver’s license (or state-issued ID) information. If you don’t have one, leave it blank.

You will receive an e-mail from Customer Service at Free File Fillable Forms that either acknowledges you have successfully submitted your information, or that tells you there is a problem and how to correct it. Free File Fillable forms will use the information to automatically complete a Form 1040 and transmit it to the IRS to compute and send you a payment.

Now, note the last paragraph of this website excerpt: it tells the taxpayer that Free Fillable Forms will acknowledge the successful submission of information and it “will use the information to automatically complete a Form 1040 and transmit it to the IRS to compute” and then send a payment.  [Emphasis added.]

Why is it the IRS website uses all sorts of words – “tool”, “submitted your information” “register” – as if filling in this tool is some innocuous act?  If this document is actually a Form 1040, submitted under penalties of perjury, it will trigger the statutory period of limitations for assessing tax and possible penalties; if it is not a tax return, the taxpayer remains fully exposed for later assessment of tax and potential failure to file penalties.

The first clue about what the “tool” might be came in the Treasury announcement of the “tool”, where it was described as a “web portal where Americans who did not file a tax return in 2018 or 2019 can submit basic personal information to the IRS so that they can receive payments.” [Emphasis added.]  So now the “tool” is a portal.  But what is it a portal to?  The basic personal information provided by the taxpayer has to enter the Return Processing Pipeline (RPP) at some point, or payments won’t be issued.  Recall that in 2008 the IRS required nonfilers claiming the Economic Stimulus Payment to complete a Form 1040EZ, and IRS e-filing systems required those returns to report at least $1.00 of Adjusted Gross Income.  (See my 2008 congressional testimony on this point here.)

At any rate, we’ve learned that the portal is actually just an interface on top of Free Fillable Forms, the fillable 1040 that the Free File Alliance and Intuit created in response to my advocacy for a  digital analog of the paper Form 1040 that could be prepared and e-filed for free, regardless of the taxpayer’s income.  (See discussion starting on page 236 here.)  Now, I am one of the few human beings on the planet who has used Free Fillable Forms since its inception to file my income tax return. (I hate the idea of having to pay for a software package for the privilege of filing and paying my taxes.)  So I am very familiar with the product that is lurking behind the non-filer portal/interface.

The second clue as to the portal’s identity was the IRS language quoted above, saying Free Fillable Forms will “automatically complete a Form 1040” and transmit it on to the IRS.  Hmmm …. So was this just taking the information, putting it into the Form 1040 in order to get it in a format that could be processed by the IRS, or was it creating an actual return?   The IRS is silent on this point.  In all its commendable efforts of issuing guidance and FAQs about carryback of NOLs and other items impacting wealthy and corporate taxpayers, the IRS has not explained to the most vulnerable taxpayers among us the actual legal status and significance of using the portal.

The Portal and the Beard Test

In Beard v. Commissioner, the Tax Court outlined the basic requirements of what constitutes a valid return for statute of limitations purposes:

“First, there must be sufficient data to calculate tax liability; second, the document must purport to be a return; third, there must be an honest and reasonable attempt to satisfy the requirements of the tax law; and fourth, the taxpayer must execute the return under penalties of perjury.”

Let’s apply the Beard test to the non-filer portal. 

Step 1:  Sufficient data to calculate tax liability:  According to the IRS, if the information is successfully submitted, the IRS “will compute and then send a payment.”  Here’s the welcome screen to the Free Fillable Forms portal:

Both the IRS and Free Fillable Forms (FFF) websites lay out the criteria for using the portal in negative terms.  For example, you cannot use the portal if your 2019 gross income exceeds $12,200 ($24,400 if married filing jointly).  You cannot use the portal if “other reasons” require you to file a 2019 Form 1040.  So according to the IRS and FFF, if you meet these requirements and fill out the portal, there will be sufficient data to calculate … what?  The tax liability, or the amount of the EIP?  Since the EIP is contingent on filing status and Adjusted Gross Income, among other things, the IRS has to compute your taxable income (and tax liability) for 2019 in order to calculate the amount of the payment. 

So it seems to me the portal might meet Step 1 of the Beard test.  What’s holding me back?  That language regarding “other reasons” requiring you to file a 2019 Form 1040.  This statement implies that the IRS believes the document filed through the portal is not the 2019 individual income tax return.  On the other hand, as noted above, the IRS’s website says “Free File Fillable forms will use the information to automatically complete a Form 1040.”  Is the Form 1040 a tax return?  Only if it meets the Beard requirements.  Arghh … this circular reasoning is giving me a headache too.

What might some of those “other reasons” be, for filing a 2019 tax return? Well, you may have income below the filing threshold but have qualifying children for purposes of claiming the EITC, or you qualify for the childless worker EITC.  Or you may have $10,000 in self-employment income.   Apparently, you can’t use the portal, because you have to file a Schedule C and then compute self-employment (SE) tax.  The IRS hasn’t been very clear about this, and I doubt low income folks are pouring over every FAQ on the website.   If you tried to use the portal, as you’ll see later in this blog, there’s nothing that asks you about your income.  So conceivably, if your self-employment income is below the AGI caps, you could just file through the portal and not pay your SE tax.  Would that mean it isn’t a return?  I think it could still be considered a return, despite the website language.  After all, many low income self-employed taxpayers don’t complete Schedule SE when they file a return with a Schedule C.  That’s why IRS has summary assessment authority under IRC § 6213(g)(2)(G) to summarily compute and assess SE tax on returns claiming EITC.  At any rate, even if an individual wanted to identify SE income on the portal, there is no way to do so.  Similarly, many other taxpayers who file non-portal Forms 1040 leave off Non-employee Compensation reported on Form 1099-MISC and the IRS proposes adjustments to income and assesses additional tax, including SE tax, through its underreporter program.  In both of those situations, you still have an original (inaccurate) return.

Step 2: The document must purport to be a returnOnce you hit the “get started” button and successfully create an account with a password, you get to the following screen titled Step 1, Fill Out Your Tax Forms. 

Although FFF is just a software program, with this language a user of the program could reasonably conclude that the information input into these fields is being used to prepare a tax return.  Note that nowhere on this form is the taxpayer asked what his income is.  If all the IRS needed was a few bits of information, it could have created a different form that wasn’t labelled a return.  By having the “portal filing” going through FFF, I believe the file moves through the entire Return Processing Pipeline.  If you want to take a high-level look at the steps included in that journey, see the Taxpayer Advocate Service’s Taxpayer Roadmap.  The journey includes math error checks, Identity theft filters, the dependent database (if children are included) and pre-refund wage verification. This latter step includes a process whereby the IRS checks a refund return against the Forms W-2 it has received to date.  It seems to me the entire point of using FFF behind the portal is to get the “portal filings” to go through these error and fraud detection filters.  Otherwise the IRS would be paying out billions to identity thieves and scam artists.

Note that the next tab says: Step 2: E-file Your Tax Forms.  It really would be difficult at this point to not think you were filing a return, notwithstanding the confusing and conflicting website language about “other reasons” for filing a 2019 return and FFF preparing a Form 1040 for you.

The IRS might hang its hat on a “purpose-based” analysis – that is, the purpose of this form is to apply or register for the EIP rather than to report liability under subtitle A.  If that is its reasoning, then it needs to make it abundantly clear, because all labeling on this portal militates against that argument, especially as we get to the product at the end of the submission.

Step 3: There must be an honest and reasonable attempt to satisfy the requirements of the tax law.  This step in the Beard analysis has been the subject of a great deal of litigation.  Les discussed this requirement in his blog about New Capital Fire v. Commissioner, where the Tax Court found the taxpayer only failed to meet this test if the purported return was “false or fraudulent with intent to evade tax.”  For our purposes, I think we can say that because the Treasury Department and IRS are practically begging taxpayers with no filing requirement to use this portal, and because it was developed in close partnership and consultation with Treasury and the IRS, if the taxpayer provides the information requested on these screens, and believes she meets the requirements for use of the nonfiling portal, one could easily conclude there was an honest and reasonable attempt to satisfy the requirements of the tax law.

Step 4:  The taxpayer must execute the return under penalties of perjury.  Well, this is an easy one to meet.  After the taxpayer fills out Personal Verification and E-signature sections shown above, she can click the button to e-file.  And look what pops up! A jurat!

It seems to me the portal meets 3.5 to 3.75 of the four Beard requirements.  The confusion is created by the IRS’s (and FFF’s) conflicting website language, as to whether the portal submission purports to be a return.  Fortunately, the site itself has some pretty conclusive evidence, which was provided us by an enterprising LITC attorney, who managed to create a dummy return and make it all the way through the nonfiling portal, answering questions, and saving and printing (but not e-filing) the following document.

I don’t know — if it walks like a duck, and quacks like a duck, maybe it actually is a duck.

We Need More Transparency on This Question.

Some additional thoughts:

Despite all my efforts to think through this thing called “Portal”, I think I’ve acquired Les’ headache.  I have no doubt that somewhere in the IRS, Chief Counsel has opined on what this thing is.  I hope it isn’t in some kind of “white paper” that Counsel believes is exempt from disclosure.  I hope we will see the reasoning some day soon in the form of a PMTA or email required to be disclosed under a settlement agreement with Tax Analysts.  For a discussion of Chief Counsel transparency, see here.

To add to the confusion, an IRS notice issued April 24th, 2020 states:

“If they [SSI and VA recipients] have children and aren’t required to file a tax return, both groups are urged to use the Non-Filers tool as soon as possible before the May 5 deadline. Once the deadline passes and processing begins on the $1,200 payment, they will not be eligible to use the Non-Filers tool to add eligible children. Their payment will be $1,200 and, by law, the additional $500 per eligible child amount would be paid in association with a return filing for tax year 2020.”

Further on, the notice says:

“For SSA/RRB beneficiaries who don’t normally file a tax return and have a child but did not register on the IRS Non-Filers tool by April 22, they will still receive their automatic $1,200 beginning next week. Given the deadline has passed, by law, the additional $500 per eligible child amount would be paid in association with filing a tax return for 2020. This group can no longer use the Non-Filers tool to add eligible children.”

What does this language imply?  First of all, there is that really weird “did not register” language in the quote above.  “Register” by filing a form that is a Form 1040, under penalties of perjury?  Huh?  What is that?

Second, I don’t see why a person can’t file a return for 2019 claiming qualifying children after either the April 22nd or May 5th deadline.  The IRS has peremptorily stated this prohibition is required “by law” but I have seen no published guidance, no explanatory FAQ, and no PMTA on this point.  On the most basic questions pertaining to the most vulnerable taxpayers, the IRS has not been transparent.

I am wondering whether, in order to generate the automatic EIPs to SSA/SSDI/SSI/VA beneficiaries, the IRS is secretly creating returns.  If that is the case, I would understand it saying you can’t efile a 2019 return after automatically processing the EIP.  The IRS has long maintained that once you e-file a return, you cannot e-file another one.  The system will reject it.  Thus, victims of identity theft must file a paper return if the identify thief has e-filed before them.

But the IRS isn’t just saying you can’t e-file a return.  It is saying, without any transparent legal analysis or explanation, you can’t file a 2019 return at all in order to claim the $500 EIP for qualifying children; instead you much wait until 2020.  Well, if the nonfiler portal is just a “registration” of some sort, then you should be able to file a paper 2019 Form 1040 as an original return and be issued an additional EIP for your children.  You just need to do it in time for the IRS to issue the advanced EIP before December 31, 2020.  That’s the only statutory deadline in the CARES Act.  Alternatively, if the nonfiler portal actually generates a return under Beard, you can file a superseding 2019 return before July 15, 2020, the filing deadline, as Nancy Rossner discussed in a recent PT post.

My personal hunch is the IRS is swamped and really worried about how it will dig itself out of all of this.  It didn’t want to issue automatic payments; recall it initially stated  that SSA and RRB and SSI and VA folks would have to file returns, just like in 2008.  It doesn’t want to have to process supplemental advanced EIPs.  I get that.  It is a lot of work, when the IRS is already reeling from the impact of the pandemic.  But so are the low income individuals and families of the United States.  They shouldn’t have to wait until 2021 to get the additional EIP for their children.  And that doesn’t depend on whether the portal is a return or … a mystery.