Another Look at 7508A(d) – Impact on Tax Court Jurisdiction

I wrote a post in April asking what does IRC 7508A(d) do. The section seeks to provide an automatic extension of the time to perform certain tax actions so that taxpayers did not have to wait and worry during the early days after a disaster. It was added to the code in late 2019 with little fanfare. When added to the code, no one considered a disaster such as the current pandemic. Based on the language of IRC 7508A(d) and the language of the potential triggering events, the possibility exists of an extension of time to perform certain tax actions not contemplated by the writers of the new provision and not yet acknowledged by the IRS. In April the post simply speculated on what IRC 7508A(d) might mean. A jurisdictional fight in the Tax Court will now test the section.

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The IRS Pronouncement

On November 18, 2020, the IRS announced interim guidance acknowledging the passage of 7508A(d) almost a year earlier. The announcement indicates a goal to place guidance in the IRM within the next two years. While it recognizes that the new statutory provision creates a mandatory 60-day period for relief from certain actions, it does not get specific about the application of 7508A(d) to any particular disaster. It makes no mention of how 7508A(d) might apply to the pandemic. Rather than answering questions regarding the IRS views of the applicability of the legislation, the guidance provides a heads up to IRS employees and leadership that the legislation occurred and must be addressed at some point.

The Tax Court Petition

In contrast to the high level acknowledgment of the existence of 7508A(d) in the interim guidance memo, on November 19, 2020 taxpayers who filed their petition late, under the ordinary definition of late, have filed a brief seeking to have the Tax Court acknowledge that the application of 7508A(d) renders their petition timely because of the extension provided when disaster, in this case the pandemic, strikes.

In the case of Lowe v. Commissioner, Dk. No. 4629-20, the petition was filed on March 9, 2020, the week the US seemed to recognize the threat of the pandemic and life as we previously knew it changed dramatically. Petitioner received a notice of deficiency dated December 2, 2019. The notice removed her self-employment income and as a consequence disallowed part of her earned income tax credit. Because of the potential benefits of the earned income tax credit, the IRS sometimes finds itself in the seemingly odd position of taking the stance that a taxpayer has not received earned income reported on a return since reporting earned income in certain situations can provide a net benefit due to the interplay of the credit and the applicable taxes.

Having received the notice of deficiency on December 2, 2019, Ms. Lowe had 90 days to file a Tax Court petition, which would have been Sunday, March 1, and because the 90th day fell on a Sunday, she had until Monday, March 2, to mail or deliver the petition to the Tax Court. Unfortunate for her but fortunately for blog writers and other followers of tax procedure, she mailed her petition on March 3, one day too late for the timely mailing provisions to protect her filing. The IRS duly filed a motion to dismiss the case for lack of jurisdiction. In response to that motion, Ms. Lowe stated that with young children at home and with the pandemic she was hesitant to meet with her tax preparer and to enter the post office to mail her petition.

The case is assigned to Judge Marshall who is one of two new judges sworn in late this summer. While new to the bench, Judge Marshall has plenty of experience at the Tax Court having served as Counsel to the Chief Judge prior to her appointment.

Prior to the passage of 7508A(d) Ms. Lowe’s concerns about the pandemic would not have assisted her because of the timing of her filing of the petition vis a vis the timing of the closure of the Tax Court clerk’s office and the timing of the IRS shutdown and issuance of postponements by the IRS and Treasury. While we have written several posts on the impact of closures caused by the pandemic, two posts, here and here, most closely relate to Ms. Lowe’s situation. These posts discuss the extended time to file Tax Court petitions. In the spring of 2020, two separate provisions assisted taxpayers with petitions sue. First, the clerk’s office of the Tax Court closed on March 19. This triggered the application of Guralnik. Second, the IRS used its discretion under IRC 7508A(a) on April 9, 2020, when it issued Notice 2020-23 exercising that power and stating that any Tax Court petition due between April 1, 2020 and July 15 2020 was due on July 15, 2020. Of course, both the Tax Court closure triggering Guralnik and the IRS announcement exercising its power under 7508A(a) come just a little bit too late to help Ms. Lowe and that’s where 7508A(d) potentially fills the gap.

Congress added 7508A(d) at the end of 2019 by putting it onto an appropriations bill. As discussed in our prior post on this subsection, it went unnoticed. The Congressional intent in passing 7508A(d) was to create a time period at the beginning of a disaster when taxpayers would receive relief without having to wait for the IRS pronunciation, wondering when relief might start and which obligations might be extended. Under subsection (d) the triggering event occurs automatically on the earliest incident date specified in the Stafford Act disaster declaration.

Ms. Lowe lives in New Jersey. President Trump declared the State of New Jersey a disaster area “beginning on January 20, 2020.” According to Ms. Lowe, triggered by this declaration residents of New Jersey get a 60-day extension to perform certain actions, including filing a petition in Tax Court. If she is correct about the operation of 7508A(d) in her situation, Ms. Lowe’s petition to the Tax Court changes from untimely to timely.

In its motion to dismiss the IRS failed to mention 7508A and how it impacted the timeliness of the petition. Now that it has been brought to their attention, perhaps the IRS will withdraw its motion and agree with Ms. Lowe that the operation of 7508A(d) did extend her time to file her Tax Court petition. Of course, even if the IRS withdraws its motion in acknowledgment of the statute, the Tax Court will still want to make its own jurisdictional determination since the IRS cannot confer jurisdiction on the court by withdrawing its objection.

As discussed in our prior post, the situation presents an unusual application of the statute because no one anticipated a nationwide disaster at the time of writing the statute. The brief filed by the Villanova clinic does an excellent job of explaining the statute and why, in this circumstance, the Tax Court has jurisdiction over Ms. Lowe’s case. There is no room in this post to cover all of the arguments made in the brief explaining the operation of 7508A(d). I will briefly mention a few of the important concepts.

Disaster Area

In deciding the scope of relief the covered area presents the first issue. The brief describes the use of this term in the statute:

Subsection (d) references the term “disaster area” twice: in defining who qualifies for the mandatory postponement, and in defining the length of the postponement period. The term “disaster area” is itself defined by reference to section 165(i) (5). Under that provision, a disaster area is an area “determined by the President of the United States to warrant assistance by the Federal Government under the Robert T. Stafford Disaster Relief and Emergency Assistance Act.”

There are two types of Stafford Act declarations, which the statutory language does not appear to distinguish: emergency declarations under Title V of the Stafford Act, and major disaster declarations under Title IV. (The ABA Tax Section noted some concern about this ambiguity in an April 3, 2020 comment letter.)

Sometimes an emergency declaration and a disaster declaration will both be issued. The two declarations may have the same incident date (e.g. these Hurricane Sally emergency and disaster declarations), but the Stafford Act does not require it. In the case of the Covid-19 pandemic, there is a national emergency declaration which does not contain an incident date, and there are major disaster declarations for each state and territory which contain the beginning incident date of January 20.

While the statute does not distinguish between the two types of Stafford declarations, it is helpful that the Stafford Act is specified. Various other declarations and proclamations relating to the pandemic have been issued in addition to the Stafford Act declarations.

Postponement Period

Subsection 7508A(d) references a 60 day extension but the period can be long. Tom Greenaway discussed this aspect of the statute in an earlier post. The brief states:

The period to be disregarded begins “on the earliest incident date specified in the declaration to which the disaster area … relates” and ends on “the date which is 60 days after the latest incident date so specified.” Neither section 7508A nor section 165 provide a definition of “incident date” or “declaration”.

The period of postponement created by 7508A(d) is where the statute and the pandemic cause many to pause. While some disagreement might exist concerning the starting point for the extension period, the starting point is easy to identify compared to the end point in the case of a disaster such as a pandemic. FEMA often amends disaster declarations later to provide for a closing incident date. (E.g. see the first amendment to the disaster declaration for Hurricane Sally in Florida.) Currently, all of the covid-19 disaster declarations state that the disaster incident period is “beginning on January 20, 2020 and continuing.” Eventually these declarations will hopefully be amended to close the indecent period, but when this will happen is unknown. While we all hope that the coming vaccines will allow the pandemic to come to a relatively swift conclusion, not even Dr. Fauci knows exactly when the pandemic will end. By comparison a national emergency was declared on September 11, 2001 that is still in effect.

Qualified Taxpayers

Six ways exist for a taxpayer to qualify as having a connection with the disaster area including individuals whose principal residence is located in the disaster area. This is a relatively detailed and straightforward part of subsection (d) and it does not seem likely to be disputed in this case.

Mandatory Postponement for Qualified Taxpayers

This is another tricky spot. The statute provides that for qualified taxpayers the postponement period “shall be disregarded in the same manner as a period specified under 7508A(a)”; however, 7508A(d) does not otherwise specify which time sensitive acts are postponed (other than for pensions) nor does it provide any more detail on the triggering of the postponement period.

Ms. Lowe argues that subsection (d) automatically postpones her petition deadline because it automatically postpones all of the time-sensitive acts listed under subsection (a)(1)-(3). This is a broad list and the government may balk at the postponing of so many obligations for a currently unknown length of time. However, the statute provides no means for a Court to pick and choose between the acts listed in subsection (a). Despite its seemingly broad impact, Ms. Lowe argues that subsection (d) means what it says and that Congress meant business in providing mandatory and automatic relief to taxpayers in disaster areas.

Conclusion

The brief goes into much more detail that a blog post can. This case will be interesting to watch because of the significant implications it has for others who may have filed late during the period after the disaster began and because of other time periods that might be impacted by 7508A(d). I understand there is at least one other case making these arguments regarding a petition that was otherwise filed late in early March 2020. We welcome comments and information about further cases to which the suspension may apply.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

● Protective and/or restraining order. 

● Police report.

● Doctor’s report or letter.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

IRS Request for Stay Pending Appeal in Case of EIP for Incarcerated Individuals

We recently wrote about the significant victory for incarcerated individuals.  The victory opens the door for these individuals to receive the EIP reversing the position the IRS took in an FAQ it first published in May which FAQ reversed the initial position of the IRS regarding the payment of EIP to incarcerated individuals.

Earlier this week the government filed an emergency motion seeking a stay of the district court’s order pending appeal arguing that if a stay was not granted by 1:00 today the IRS would have to take action and warning that the action would be irreversible because it would be unable to recover the payments made to incarcerated individuals.  The government does not focus on the basis for its position that the incarcerated individuals are not entitled to EIP but relies on procedural arguments for its position that it should not be ordered to make payments. 

Counsel for the incarcerated individuals filed a responsive brief yesterday in this super expedited case.  Perhaps by early afternoon, the 9th Circuit will have ruled regarding this unusual request.

Update: The government has filed its reply to plaintiffs’ opposition to the stay.

Summary Judgment Victory for Incarcerated Individuals

Two more victories have come in for incarcerated individuals in the short time since our last post on this subject.  Rarely does a case move so fast and so favorably.  It helps that the IRS took a position unsupported by the statute and that it inexplicably reached this position after reversing itself.  Still, it’s been a swift road to justice, up to this point, for incarcerated individuals.  You can access our prior posts on this case here and here.  You can access our initial post on this issue expressing incredulity at the flipped position of the IRS regarding the ability of incarcerated individuals to receive the EIP here.

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Yesterday, the district court for the Northern District of California granted summary judgment in Scholl v. Mnuchin and made the preliminary injunction permanent.  For a case initially filed on August 1, 2020, getting summary judgment in 75 days can make your head spin if you are primarily a Tax Court practitioner but even if you regularly practice in district court.  You can access the decision here.

On Friday the 9th Circuit ruled in an emergency appeal brought by the IRS that the IRS needed to follow an earlier order from the district court and send out notice to the incarcerated individuals.  You can find that opinion here.

Yesterday’s district court opinion follows the path set out by the order granting the preliminary injunction.  First, it addressed standing and ripeness.

In both their stay motion and opposition to plaintiffs’ motion for summary judgment, defendants explain at length why the court’s analysis of title 26 U.S.C. § 6428 was in error and incarcerated individuals are not entitled to an advance refund. See Mtn. at 3–7; Dkt. 70 at 8–11. From that premise, defendants argue that if their interpretation of section 6428 is correct, so too are their arguments regarding ripeness and standing. Mtn. at 7. In other words, if plaintiffs’ interpretation of the CARES Act is correct, then standing would exist. If, however, defendants’ interpretation of the CARES Act is correct, then standing would not exist because if no advance refund is presently owed, then any harm was not actual or imminent.

The court finds again that the failure to disburse the advance refund to the incarcerated individuals created an actual economic injury to them.  While it says that the incarcerated individuals did not need to establish that they were in fact entitled to the injury on the merits to move forward on the standing issue it determines that “they have established a legally cognizable right in the payments that defendants issued and then either intercepted or required to be repaid.”

With respect to ripeness the IRS again argued that the FAQ stating that the incarcerated individuals were not entitled to advance credit in 2020 did not create a reviewable agency act, because the plaintiffs can file their 2020 returns in 2021 seeking the credit.  The IRS also argued that the FAQs were not sufficiently formal administrative action, even though high level officials had stated that these would be the only pronunciations on the CARES Act.  Because the IRS has “already taken concrete action applying their determination to incarcerated individuals,” the court found ripeness satisfied.

It again finds a waiver of sovereign immunity in the APA, that the IRS had taken final agency action regarding the incarcerated individuals, and that no adequate alternative remedy exists, because filing the 2020 return, having the credit denied and suing for refund is quite different than getting a quick injection of cash during an economic crisis.  The court finds staying the action would create irreparable harm.  Because it is granting the motion for summary judgment, the court finds it appropriate to make the injunction permanent.

The court denied the first basis for summary judgment which plaintiffs requested under section 706(1) of the APA.  It did so because it finds that the IRS acted on the CARES Act as a whole.  Based on case law, even if it acted arbitrarily and incorrectly the fact that it acted is sufficient to satisfy the requirements of this provision:

Here, the IRS carried out its statutory responsibility by issuing advance refund payments to millions of Americans. It also acted with regard to incarcerated individuals; the agency initially issued EIPs to incarcerated individuals then changed its decision. Purposefully excluding incarcerated individuals from receiving advance refund payments is akin to drawing a boundary. That boundary might be arbitrary and capricious or contrary to law, but at the very least the agency acted.  

The second APA claim involves section 706(2)(A) and whether the IRS acted contrary to the law and in excess of statutory authority.  Here, the plaintiffs win.  The court addresses the “novel” statutory argument advanced by the IRS.  In doing so it looks back to litigation under the stimulus payment enacted by Congress during the great recession upon which the current stimulus legislation is based.  It finds that the advance refund is a special payment requiring the IRS to send it out as quickly as possible.  It rejects several arguments advanced by the IRS regarding the interpretation of the CARES Act legislation and the timing of the payments.  Then it rejects any argument the IRS may have regarding coverage of the CARES Act and incarcerated individuals.  It finds the action of the IRS to be arbitrary and capricious and reaffirms it prior holding.  It also reaffirms the class certification.  It orders the following:

For the foregoing reasons, defendants’ motion for stay pending appeal is DENIED. Plaintiffs’ motion for summary judgment of their first claim is DENIED and their motion for summary judgment of their second claim is GRANTED. As discussed herein, the court finds and declares that defendants’ policy violated the APA and is hereby VACATED. The Court also vacates the provisional certification of the class and certifies a litigation class for all purposes. Finally, the court enters the following permanent injunction.

PERMANENT INJUNCTION

Defendants Steven Mnuchin, in his official capacity as the Secretary of the U.S. Department of Treasury; Charles Rettig, in his official capacity as U.S. Commissioner of Internal Revenue; the U.S. Department of the Treasury; the U.S. Internal Revenue Service; and the United States of America, are hereby enjoined from withholding benefits pursuant to 26 U.S.C. § 6428 from plaintiffs or any class member on the sole basis of their incarcerated status. Within 30 days of the court’s September 24, 2020 order, defendants shall reconsider advance refund payments to those who are entitled to such payment based on information available in the IRS’s records (i.e., 2018 or 2019 tax returns), but from whom benefits have thus far been withheld, intercepted, or returned on the sole basis of their incarcerated status. Within 30 days of the court’s September 24, 2020 order, defendants shall reconsider any claim filed through the “non-filer” online portal or otherwise that was previously denied solely on the basis of the claimant’s incarcerated status. Defendants shall take all necessary steps to effectuate these reconsiderations, including updates to the IRS website and communicating to federal and state correctional facilities. Within 45 days of the court’s September 24, 2020 order, defendants shall file a declaration confirming these steps have been implemented, including data regarding the number and amount of benefits that have been disbursed.

A number of organizations have geared up over the past week to assist incarcerated individuals in filing to get their request for the EIP in before the portal closes.  The IRS has not stated what it will do with these requests as they arrive.  For a number of reasons, it would be best for the incarcerated individuals to submit their requests this year but they will face significant hurdles in doing so, not taking into account the hurdle of having the IRS approve the payment.  This issue is not over yet both for practical and legal reasons.  Kudos to the district court for acting so quickly that it is possible for many of the incarcerated individuals to make the requests for the EIP.  With over two million incarcerated individuals in the United States, there are a lot of forms to prepare in a short time.

Latest Update on Providing Stimulus Payments to Incarcerated Individuals

A couple weeks ago I blogged about the significant victory achieved on behalf of prisoners with the grant of a preliminary injunction ordering the IRS to stop denying stimulus payments to incarcerated individuals.  As discussed previously, the denial of refunds to incarcerated individuals makes little sense when the statutory language provides no basis for excluding them.  The behavior of the IRS here allowing the payments and then deciding about six weeks after the passage of the CARES Act to exclude them also makes for a puzzling situation.  As discussed in the prior post, the judge swatted away all of the arguments made by DOJ in granting a complete victory for the incarcerated individuals.

The government appealed the case on October 1.

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On October 7, 2020, the Court issued its next ruling.  This time it focused on relief.  In its initial ruling the court asked the parties to confer and, if possible, propose agreed upon relief measures.  The parties did not reach agreement but proposed separate plans.  Once again the court did not find the DOJ argument availing. 

Website

The first issue concerned the information on the IRS website about incarcerated individuals.  The FAQ first published by the IRS in early May told incarcerated individuals they were ineligible for the stimulus payment.  The parties were not far apart on how to fix this but the IRS had not gone far enough so:

the court ORDERS defendants to update the IRS.gov website (and any other related page) to state that incarcerated individuals who have not received the advanced refund payment may provide information to the IRS to allow the IRS to consider the individual’s eligibility for the refund. The website shall indicate that individuals may file using the online non-filers tool or by mailing a simplified paper tax return to the IRS. Defendants shall update all FAQs and any other pages that discuss the eligibility of incarcerated individuals for an EIP to reflect the court’s order.

The court gave the IRS until October 8, 2020 to update its website and additionally provided:

Defendants shall also communicate to IRS employees or other federal employees who interact with the public to answer questions regarding EIP in accordance with the guidance posted on the IRS.gov website and the court’s orders.

I know the word is getting out, because we have received calls to the tax clinic from individuals seeking help for their incarcerated family or friends.  Similar messages have appeared elsewhere in LITC information site.

Communication with Prison Officials

Before the litigation the IRS had affirmatively gone out to prison officials to make it clear that incarcerated individuals should not receive the stimulus payments and to solicit their support in intercepting any stimulus payments headed to incarcerated individuals.  Reversing this message is needed not only to allow the incarcerated individuals to receive the checks but also to keep them from any disciplinary measures that might result from requesting the stimulus payment in the face of the IRS position regarding their entitlement prior to the litigation.  The parties again were not miles apart in their request, but the request made by the attorneys representing the incarcerated individuals contained significantly more detail, much of which the court adopted:

the court ORDERS defendants to distribute the following documents to all state and federal correctional facilities for which it maintains any communication channel: (1) a cover letter that includes2 the four main points addressed by plaintiffs in the proposed plan; (2) an electronic version of the simplified paper return (Form 1040/1040-SR) referred to in Rev. Proc. 2020-28 with instructions on how to complete the simplified form; and (3) legal notice, as described below.

The court did not order a specific date by which the this had to occur but ordered the parties to work together expeditiously.

Mailed Notice to Class Members

Here the parties had significant differences of opinion.  Plaintiffs’ lawyers pointed out that the IRS has a database of incarcerated individuals updated at least to October, 2019.  The IRS argued that it did not have current or last known addresses for individuals incarcerated earlier this year but how have been released.  The IRS also said:

in their opposition to plaintiffs’ motion for notice to class, defendants detailed significant obstacles to providing effective individualized notice including outdated addresses, unformatted and invalidated data, and incomplete data. Dkt. 56 at 7. Ordering the IRS to provide individualized notice would force the IRS to reallocate resources from its other commitments to disbursing advance refund payments for eligible individuals. Id. Finally, any mailed notice will not arrive in time to postmark a simplified paper return by October 15, 2020.

The Court accepted the IRS position that it did not have good addresses for everyone but ordered it to send individualized notices to everyone for whom it did have a good address by October 15, 2020.  That puts a lot of pressure on the IRS.  Of course, there is also a fair amount of pressure on the incarcerated individuals if they want to receive the stimulus payment in 2019.

Deadline to Submit Simplified Paper Returns

The IRS had already moved the deadline for seeking the stimulus payment through its portal from October 15 to November 21 but the deadline for paper returns remains at October 15.  Because of their location, incarcerated individuals will struggle to get to an online portal.  Plaintiff’s attorneys sought an ability to submit the request for the stimulus payments by paper at a later date.

The Court pointed to an IRS publication to community organizations extending the time to file by paper to October 30.  Here is a copy of that publication:

Based on the IRS granting to community organizations the deadline of October 30, the court granted to incarcerated individuals that deadline as well.  This is still a tight deadline but is feasible for many.  Of course, missing the deadline does not preclude individuals from obtaining the credit on their 2020 returns filed next year.  Since a high percentage of the incarcerated individuals do not have a return filing obligation, getting the stimulus payment through the submission of a form now provides greater relief.

As with the first order, the judge not only acted quickly but provided almost full relief for the incarcerated individuals.

Acting on the momentum of the earlier decisions, plaintiff’s attorneys filed a motion for summary judgment on September 29.  The government filed its response on October 7.  Plaintiffs filed a reply on October 9 and the Tax Clinic at the Legal Services Center of Harvard Law School filed an amicus brief on behalf of the Center for Taxpayer Rights in support of plaintiffs on that date.  Because the court has acted quickly in its prior decisions, this decision could occur very soon.

The government has not explained why it flip flopped regarding incarcerated individuals last spring (and regarding decedents).  In testimony last week, the Commissioner suggested to the House Committee before whom he was testifying that this was a question best asked of the Treasury Department.  Perhaps the IRS determination of the CARES Act was overruled by Treasury or some higher authority.  So far, this mystery remains unexplained.  Whoever in the government made the decision to flip flop on this issue in the face of very plain language in the statute is learning that at least the district court in the Northern District of California is not buying their interpretation.

Collection Issues Discussed at Recent ABA Meeting

As mentioned in the prior two posts, here and here, I participated in a panel at last week’s ABA Tax Section meeting on which we discussed the notices sent out with computer generated dates going back to the beginning of the IRS shut down due to the pandemic.  In addition to discussing those notices, the panel discussed a variety of additional collection issues worth their own post.  In this post I will go over the additional collection issues worth consideration.

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Premature assessment of Tax Court Cases

I wrote a post on this issue in June when the issue first caught my eye.  Read that post if you need to come to an understanding of premature assessments.  Here, I seek only to provide an update on what Chief Counsel’s office has done to address the problem.  As I mentioned in that post, Chief Counsel attorneys do a great job of fixing premature assessments brought to their attention.  Because they know of the scope of the problem caused by the pandemic, Chief Counsel’s office has taken proactive measures to find and fix any premature assessments.  They are watching the new petitions to try to catch these assessments.  They have also created an email address that taxpayers can use to send in a problem regarding premature assessments that will cause the case to be worked immediately.  The address is taxcourt.petitioner.premature.assessment@irs.gov.  They ask that this address only be used to report a problem with a premature assessment and not to report other systemic or case related problems.

Suspension of Collection Notices

On August 21, 2020, the IRS temporarily stopped sending balance due notices and announced the scope of this temporary halt. The notice does not say how long the stop will last but this is a welcome development.  As I wrote previously, even though many in the IRS collection function went back to work in mid-July, these collection individuals do not know what a taxpayer might have done during the period of the IRS closure since the IRS continues to work through its backlog of correspondence including checks, requests for an OIC and other correspondence that could impact the need for collection action or the type of collection action.  It makes sense to hold off on many types of collection action until the IRS catches up with the correspondence and knows if anything happened during the period of closure that could impact the need for collection or the type of collection needed.

Offers in Compromise

One of the areas of greatest concern to me was offers, because the tax clinic where I work submitted offers during the pandemic and as much as we try to explain to our clients the potential impact of the pandemic on IRS actions, we cannot sufficiently comfort them regarding the collection action the IRS might take while such action should be suspended during the period of the offer.  The basic problem for these clients is that the offer will not suspend collection until the IRS knows an offer exists.  It will not know of the existence of an offer until it can process its mail.  Just in the past week, the clinic has received notification of the receipt of offers mailed to the IRS six months ago.  Fortunately, in those cases no collection action occurred before the IRS opened its mail and input the receipt of the offers.

We have written before about offers timing out due to the 24-month provision in IRC 7122.  I have wondered how this period is impacted by the pandemic.  If a taxpayer mailed an offer in April 2020 that the IRS opens in October 2020, have six of the 24 months run or does the time period only start in October?  This is more of an academic question than practical one because few offers get even close to the 24-month period, but it is the kind of thing professors can debate.  A related issue is whether the statute of limitations on collection ran during the six-month period while the IRS had the offer but had not opened its mail.  My guess is that the IRS would not treat the statute as suspended during period and that it would not start the 24-month clock running until it opened the mail.

Last week the panel discussed some of the other pandemic issues with offers.  On March 30, 2020, the Director, Headquarters Collection issued a memo providing: 1) taxpayers had until July 15, 2020 to provide information to support pending offers; 2) Pending OIC requests would not be closed before July 15 without taxpayer’s consent; 3) OICs would not be defaulted if the 2018 return was not filed prior to July 15, 2020; and 4) taxpayer could suspend payments on accepted and pending OICs until July 15.  I did not see the OIC unit pushing during the period leading up to July 15.  Since that date I have been contacted by offer examiners on cases.  The examiners have been more generous than usual in the time frames for submission of additional documentation.  Frank Agostino suggested during our panel that the OIC unit had loosened its standards a bit because of the pandemic.  I have not seen enough cases to have an opinion on any change in standards, but it’s a nice thought.

Posting of Payments

The IRS had adopted a taxpayer beneficial position regarding the posting of payments received during the pandemic.  As it opens the vast backlog of mail, it gives taxpayers a payment posting date of date received by the IRS and not the date of opening.  It is also providing relief from the bad check penalty for dishonored checks received between March 1 and July 15, 2020.  It is easy to imagine that someone who sent the IRS a check in April might not be able to cover that check when processed in September or October, 2020.

Equitable Tolling

The panel briefly discussed equitable tolling and the prospect that the pandemic has brought on many opportunities for arguing equitable tolling.  Perhaps a more accurate description would be to say I used the panel as an opportunity to discuss this issue.  My fellow panelists sat politely while I talked about equitable tolling. 

There are two pending cases worth watching both of which involve an effort to have the Tax Court accept late filed CDP cases.  The Castillo case is just getting underway in the Second Circuit.  We wrote briefly about this case here (if you follow the link don’t stop just because the heading of the post concerns grand jury issues.)  So far the amicus brief filed by the tax clinic at Harvard is the only filing of substance in that appeal.  The other case to watch is in the Eighth Circuit where a petition for rehearing en banc was filed in Boechler which we discussed here.  The Eighth Circuit did not dismiss the petition out of hand but has ordered the Department of Justice to respond to the request filed by the petitioner (supported by an amicus brief from the tax clinic at Harvard.)  

Bad Dates Followed by Bad Inserts

One of the excuses the IRS put forward in conjunction with the relatively quiet announcement that it would send out a high volume of notices with bad dates involved the stuffers that it would put in each envelope. As I wrote yesterday, these stuffers explained that the taxpayer should not pay attention to the date on the letter (and in the IRS case management database) but rather rely on the stuffer for guidance on which the taxpayer must perform the statutorily mandated action related to the notice. The stuffers themselves raised some questions discussed in yesterday’s post.

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Subsequent to the sending of the letters with bad dates on July 14, 2020, the IRS announced that “whoops”, it failed to put the stuffer notice into certain of the Collection Due Process (CDP) notices it sent.  Of course, the CDP notice creates a very short window for the taxpayer to take action in order to preserve their rights.  After failing to put the stuffer notice into these statutorily mandated letters with dates that might have been two or three months before the mailing (or longer), the IRS sought to correct that mistake by sending out a subsequent letter informing these taxpayers that they had more time.  Unfortunately, this correcting letter had the wrong date for the last date to perform the statutorily mandated act.  I will let the IRS letter do the talking:

To correct this issue with the CP90, CP90C and CP297 notices, a supplemental Letter 544-C was generated on August 6, 2020 and mailed on August 7, 2020, advising taxpayers that they have until September 8, 2020 to request a CDP hearing. In some cases, the Letter 544-C advised taxpayers they had until September 7, 2020. September 7 is Labor Day and pursuant to IRC section 7503 the due date for the hearing is the next business day, which is September 8. Issuance of the Letter 544-C is posted on IDRS command code ENMOD with the literal 0544CLTR for the date generated. Refer to IRM 5.19.9.3.3, FPLP Systemic Processes and Indicators, and IRM 5.19.9.2.4, SITLP Notices, for information regarding TC 971 action codes associated with SITLP and FPLP notices.

The Memorandum for Director, Campus Collection and Director, Field Collection from the Acting Director of Collection Policy detailing the snafu is dated September 3, 2020 and is linked here.  The Memorandum does contain a copy of the supplement letter.  It is not at all clear that the envelope containing the supplemental letter included a copy of the original backdated CDP notice.  Let’s look at what these taxpayers will have received.

On July 14, 2020, the IRS mailed CDP notices to taxpayers that had queued up in its computer system for months during the period of time the IRS employees stayed home due to the pandemic.  The CDP notices could have been dated as early as March.  That CDP notice would have told the taxpayer they had until 30 days after the date of the notice to request a CDP hearing.  So, for example, a letter dated March 30 and arriving sometime in mid-July to late July would have told the taxpayer to request a hearing by April 29.  Since there was no stuffer notice in the envelope the taxpayer, who probably doesn’t subscribe to PT or the National Taxpayer Advocate’s blog or other sources of news about the millions of letters sent out with wrong dates, would possibly give up assuming it was a missed opportunity.

Then, three or four weeks later the taxpayer would receive another letter of some type stating that they had until September 7 or September 8 to file a CDP request.  (The IRS sent the “new” CDP letters on August, 7 and that’s why it calculated the last date as September 7, a Monday since 30 days from August 7 would have fallen on Sunday, September 6.  Unfortunately, the creator of the stuffer notices did not fully appreciate the calendar.  Because September 7 was Labor day, the last day to request a CDP hearing would fall on the next working day, per IRC 7503, which would be September 8, 2020.) This could have created significant confusion among the taxpayers I represent.  This is just one of the many problems created by mass mailing notices with the wrong dates.  On top of this problem the IRS is out potentially collecting on these individuals because they did not request a CDP hearing by April 29.  (Tomorrow’s post will talk about a postponement of collection for some that might have benefited these taxpayers.)

The pandemic put the IRS in a bad spot, but it is making things much worse for itself and others by sending out bad notices and by sending out its collectors before it finishes going through the backlog of mail.  It would be nice to see them push the reset button and figure out how to protect taxpayer rights during a pandemic.  By failing to include the stuffer in all of the notices and by failing to calculate the proper date on the notices the IRS compounded the mistake created by its decision to send out notices with bad dates. 

The confusion surrounding the dates on the notices and the dates on the stuffers may provide a basis for requesting a CDP hearing beyond the date on the notices.  In partial recognition of the confusion, a September 3, 2020 memo by SBSE stated that all CDP requests filed on or Before September 8, 2020 where the IRS issued letters CP90, CP 90C, or CP297 dated in the period April 3, 2020 to July 13, 2020 would be deemed timely.  The SBSE memo shows that the IRS has the ability, without even invoking IRC 7508A, to extend the time for a taxpayer to receive a CDP hearing.  The IRS should be generous in its determination of CDP requests and err on the side of accepting such requests during this period rather than reverting to its practice of denying such requests if a day late.  Similarly, taxpayers should push back if denied a CDP hearing given the confusion that has occurred because of the pandemic.