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.

IRS Extends Time to Request Economic Impact Payment During 2020

Late today the IRS announced that the time to request an economic impact payment this year has been extended from October 15 to November 21.  There are still a fair number of people who have not requested the EIP.  The Commissioner has been making outreach efforts to provide these individuals with an opportunity before the window closes.  The additional time is limited to individuals who otherwise would not need to file a tax return.

An Update on the Post Reporting on the sending of Notices with Bad Dates

On June 30, 2020, I wrote a post discussing the IRS’s decision to send out millions of notices with bad dates.  I believe this was a bad idea for the reasons articulated in the post; however, new information suggests that the problem did not extend as far as I reported in the June post.  Last week, I was on a panel at the ABA Tax Section meeting regarding these notices.  One of my co-panelist, Julie Payne, who serves as the Tax Litigation deputy to the head of the SBSE division of Chief Counsel, had updated information on the notices I wrote about in the earlier post.  In that post I relied for my information on a post by the National Taxpayer Advocate.  Based on Julie’s information, the IRS did not send out as many notices with bad dates as was first thought.  In this post I will explain what happened in the sending of the notices with bad dates in greater detail based on the information now available to me.

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The initial reporting of this issue placed the number of notices with bad dates as exceeding 20 million.  The IRS term for these notices is backlogged.  Some have described them as backdated.  The IRS computers generated these notices during the period of the IRS shut down.  When IRS employees began returning to work, they found that the computer system had queued the notices waiting for the employees to print and mail them.  The computer had not caused the printing of the notices and the IRS had to decide whether to print them or not but, if printed, they would bear the date the computer generated the notice and not the date the IRS printed them for mailing.  The IRS decided not to print the vast majority of the notices but to regenerate those notices at a future time with a date coextensive with their mailing.

Apparently, the IRS decided to print certain statutorily mandated notices.  I imagine the IRS obtained a legal opinion concerning the printing of these notices with dates as much as three and one half months before the time of mailing.  I have not seen the legal advice rendered.  The IRS mailed most, and maybe all, of the notices with the bad dates on July 14, 2020.  These statutorily mandated notices came in three types: 1) notice and demand – letters CP14 (individuals) and CP16 (businesses); 2) math error/notice and demand combination letters; and 3) CDP levy notices – letters CP90; 90C; 297; 297-A and 297-C.  Instead of printing 20 million notices with wrong dates, it printed and mailed about 1.5 million notices from these three types.  The vast majority of the notices the IRS printed and mailed were notice and demand letters.  That makes sense because the statute requires the sending of that notice with every assessment where an outstanding balance exists.

Notice and Demand

Knowing it was sending out notices with bad dates, the IRS created an insert, or stuffer, to go in each envelope.  Each type of letter had a different insert.  The notice and demand letter had Notice 1052-A inserted into the envelope.  This notice tells the recipient that for certain liabilities, including 2019 income taxes, the IRS will not charge interest and penalties if the taxpayers pay the liability prior to July 15, 2020.  For assessments based on older liabilities or certain types of taxes, such as employment taxes, the taxpayer needed to pay by July 10 to avoid penalties.  Of course, taxpayers would receive the letter after these dates have passed if the letters, together with the inserts, were mailed on July 14.  So, the insert to the notice and demand letter would alert taxpayers that interest and penalties would not run from the date on the letter, but the insert would not have given the taxpayer the opportunity to pay prior to the time interest and penalties would begin to run.  The timing of interest and penalties here is governed by the invocation of IRC 7508A as we discussed here in Notices 2020-18 and 2020-20.  To change that timing the IRS would have had to issue another notice like Notice 2020-18 giving taxpayers more time to pay and it did not do that.

Math Error Notices

In the envelope containing the Math Error notices, the IRS inserted Notice 1052-B.  Like the notice inserted into the Notice and Demand letter envelope, this notice explains that the pandemic has caused the IRS to mail the Math Error notice later than the date on the letter and notes that the 60 days from the letter may have already run.  The insert gives the taxpayers until August 21 to respond to the Math Error notice instead of the date 60 days from the date on the Math Error notice itself.  IRC 6213(b)(2) gives a taxpayer 60 days to request an abatement of a math error assessment:

(2) Abatement of assessment of mathematical or clerical errors

(A) Request for abatement

Notwithstanding section 6404(b), a taxpayer may file with the Secretary within 60 days after notice is sent under paragraph (1) a request for an abatement of any assessment specified in such notice, and upon receipt of such request, the Secretary shall abate the assessment. Any reassessment of the tax with respect to which an abatement is made under this subparagraph shall be subject to the deficiency procedures prescribed by this subchapter.

I am concerned about this if I understand the timing of the mailing correctly. Consider an example: if the IRS computer generated a Math Error notice with a date of April 10 giving the taxpayer 60 days to respond, and thus triggering the sending of a statutory notice of deficiency, is instead sent on July 14 ((i.e., until the August 21 date I mention above). I do not understand why the recipient would not have 60 days from July 14 instead of 38 days.  I am unsure if I misunderstood the date of mailing of these Math Error notices with bad dates or if the IRS chose to give taxpayers less than the statutorily mandated time to respond to the Math Error notice or if some other explanation exists.  I do not see how the IRS could cut short the time within which the taxpayer could object to the Math Error notice no matter what date appears on the notice itself.

CDP Notices

In the envelope containing the CDP notices the IRS inserted Notice 1052-C.  This insert also explains to the taxpayer that the taxpayer should not be concerned by the date on the CDP notice itself and gives the taxpayer until August 13, 2020, to file a CDP request that will result in a hearing that will allow the taxpayer to go to Tax Court if the taxpayer does not agree with the result.  In other words, the taxpayer has until August 13 to request a CDP hearing rather than an equivalent hearing.  Here the date the IRS provides in the stuffer for timely requesting a CDP hearing perfectly matches with the timing of mailing of the CDP notice on July 14.  This provides support for the timing of the mailing of the documents on that date.

As we have discussed before, the date to request a CDP hearing is not a date that creates a jurisdictional time frame.  Taxpayers might miss this date for good reason and still request a CDP hearing.  Tomorrow, I will discuss how the IRS made mistakes in the mailing of the CDP notices and how it corrected the mistakes giving taxpayers more time to make the CDP request.  Keep in mind that even that additional time might have the possibility of extension under the right circumstances based on the arguments in the post linked above.

Incarcerated Individuals Win Big Victory

On Thursday, September 24, 2020, the District Court for the Northern District of California issued an order granting a sweeping victory for incarcerated individuals with regard to the stimulus payments Congress ordered the IRS to issue as quickly as possible.  In Scholl v. Mnuchin, Dk. No. 20-cv-05309-PJH the judge agreed with every argument made by attorneys Kelly Dermody, Yaman Salahi, and Jallé Dafa of the San Francisco firm of Lieff Cabraser Heimann & Bernstein,LLP together with Eva Paterson of the Equal Justice Society (see their press release here).

I will discuss each of the decision points in more detail below, but the decision determines first that the court had jurisdiction, going through all of the necessary components, then determines that there was immediate need for action, preliminarily enjoins the IRS from withholding the stimulus payments to incarcerated individuals, and creates a class appointing the attorneys named above as class counsel.  We puzzled in a blog post at the IRS flip flop on the prisoner issue when it came out with its FAQ on this subject six weeks after passage of the CARES Act.  The court found the flip flop puzzling as well, coupled with the additional flip in the litigation regarding incarcerated individuals released in 2020.  It will take a fair amount of effort to put the $1,200 payment into the hands of the over two million individuals incarcerated in the United States but this is a big first step.

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The complaint in this case was filed on August 1 and the motion decided here was filed just three days later.  The court and the parties were on a fast train.  Plaintiffs, individuals injured by the position of the IRS, asserted three causes of action: 1) a violation of the Administrative Procedure Act (APA) 5 USC 706(1); 2) violation of the APA 5 USC 702 and 706(2); and 3) violation of the CARES Act and the Little Tucker Act.

In providing the history of events here the court pointed out that a Treasury Inspector General for Tax Administration report dated June 30 chastised the IRS for sending out checks to incarcerated individuals in the initial wave of payments.  In response to that report the IRS said basically that it was required to do so by the CARES Act.  Yet, a couple weeks later, for reasons it has never made public and which do not appear anywhere in the statute, the IRS changed its position completely and issued an FAQ stating that incarcerated individuals were not entitled to stimulus payments.  It did this at the same time it completely reversed its position on payments to decedents which we discussed here. The court returns to the issue at a later point to discuss the differences between earlier stimulus payment legislation and the 2020 legislation in further support of the broad grant of parties targeted for receipt of stimulus payments in 2020.

As you would expect the government argued that the court lacked jurisdiction to grant a preliminary injunction.  It argued the court lacked standing, the case was not ripe and that sovereign immunity barred the requested relief.  On the standing issue the government argued that the plaintiffs did not have a right to relief in 2020 but rather needed to wait until they filed their 2020 returns in 2021.  No right exists the government said to an advanced refund.  The court pointed to the language in the statute directing the IRS to make the payments quickly and observed that “the deprivation of a monetary benefit is precisely the sort of economic injury that normally satisfies the injury in fact requirement.”

The court primarily relied on the findings it made with regard to standing, the immediacy of the monetary benefit promised in the legislation and the economic situation creating that immediacy, to find the case ripe for adjudication.  The government argued again that the plaintiffs could seek their money when filing the 2020 return.

The court found a waiver of sovereign immunity in the APA.  The government argued that the FAQs did not satisfy the final agency action element necessary but the court looked at the government’s own statements regarding the finality of its decision.  It also found that the refund alternative being offered by the government was on which would “entail years of delay to file a tax return, file administrative clams, exhaust those claims, and then file in court.”

Once past the jurisdictional defenses, the court moved on to the defenses to the injunction starting with the likelihood of success on the merits.  It started by pointing out that though the statute invited it to do so, the IRS had not issued regulations on the subject that would meet the Chevron test.  It’s easy to have some sympathy for the IRS on this point given the timing of its decisions and the events surrounding the decisions, but it loses the opportunity for the leg up that regulations can provide given the deference given to regulations.  That leads the court back to the statute and the rather plain language that includes almost everyone in the benefit pool for the stimulus payments.

Next the court discussed whether the decision to exclude prisoners was arbitrary and capricious.  Did the IRS give adequate reasons for its decision?  In response to this inquiry it found that here “the IRS has put forward virtually no public explanation concerning its decision to withhold payments to incarcerated persons.”  The FAQ on this subject “does not describe why or how the IRS arrived at its decision to deny payments to incarcerated persons.”  It also noted further that the FAQ reversed its earlier position without explanation.  On this point it states that “defendants have not directed the court to any other evidence indicating that the Treasury Department or IRS gave any reason for its decision, much less an adequate one.” (emphasis in original)

On the issue of irreparable harm the court pointed to the loss of funds here by the delay and how in the circumstance of the individuals in this class such a delay could have serious consequences.  It detailed the economic situation of incarcerated individuals and their need for funds.  Plaintiff’s counsel did an excellent job of document the economic plight of prisoners including the high cost of phone use and the inability to have visitors during the pandemic.

In balancing the equities of the damage to the parties, the court cited back to its irreparable harm discussion regarding the incarcerated individuals and compared that against the administrative difficulties that the IRS will face in making the payments.  It found that some facts mitigate the difficulty the IRS will face citing to the already demonstrated ability of the IRS to make payments to this group.

The court determined that this case is appropriate for class certification given the common interest of incarcerated individuals.  It went through the factors necessary for class certification and found each present.  It then appointed plaintiffs’ counsel as class counsel.

The court required the IRS and Treasury to take the following actions:

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, 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, 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, defendants shall file a declaration confirming these steps have been implemented, including data regarding the number and amount of benefits that have been disbursed.

The case involving the government’s interpretation of how the CARES Act will be implemented with respect to incarcerated individuals is only one of several involving challenges to various aspects of this law.  The government suffers a total defeat in this action.  That does not mean it will start working on making these payments.  The battle is far from over.

The success here may embolden those seeking payments for deceased individuals and for those already engaged in litigation with the government concerning the scope and interpretation of the legislation.  This opinion, as well as recent opinions involving payments to US citizens if a parent or spouse is undocumented, illustrate that the normal avenue for challenging IRS determinations relating to refunds do not provide adequate or the exclusive means for court review.  The opinions recognize that constitutional challenges to the statute or APA challenges to the manner in which the IRS interprets or administers the CARES Act provisions need not take years to get to court.

IRS Expands Digital Signature COVID Response

Today guest blogger James Creech returns with an update to his previous post on IRS acceptance of digital signatures. As James notes, there continues to be confusion over which forms may be accepted with a digital signature, and for what purpose. Christine

The IRS recently made two announcements dated August 28, 2020 and September 10, 2020 expanding the list of documents that are temporary eligible to be filed using electronic signature due to the ongoing pandemic.  These two announcements add 16 forms to the list of documents that can be submitted with electronic signatures. 

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What is notable about these forms, is that they are forms that were previously barred from using an electronic signature because they were subject to standard filing procedures.  Since these forms had standard filing procedures, they were outside of the scope of the March 27, 2020 (and superseded with minor changes on June 12th) internal IRS memo that originally permitted electronic signatures on a number of forms used by the IRS to resolved cases at the exam or collection stages.  A full list of the forms can be found here.

The expanded use of electronic signatures for more routine forms is a welcome development even if, as the memo notes, it does not “represent the full universe of forms filed or retainer on paper that taxpayers and their representatives would like to see covered”.   Some of the forms such as the 706 family of tax returns are particularly useful because they allow an executor who may be at high risk from COVID to sign the return without having to come into contact either with other people by having to travel to the return preparer’s office or without having to physically go into the post office.  

The expanded use of electronic signatures does not change any of the other filing requirements.  Generally speaking most of the document on the expanded electronic signatures list still require that they be physically mailed to the IRS although some of the forms such as Form 3115 are also subject to temporary acceptance by fax.  The current expiration for electronic signature acceptance on both the listed forms as well as for documents provided for exam and collection is December 31, 2020.  In the case of a form filed though normal channels an electronic signature is valid as long as the form is signed and postmarked prior to January 1, 2021. 

These announcements by the IRS are a recognition that while life is returning to normal it is not the normal that existed in January.  Overall the IRS has done a good job of adjusting to our shared existence of social distancing.  The agency’s flexibility with electronic signatures, accepting documents via email, expanding e-filing for forms such as the 1040x are all recognition that the tools for remote work exist and have value. 

While the rollout of the prior electronic signatures has not gone without its hitches, such as continued CAF rejections of 2848’s due to electronic signatures despite the form being specifically identified as eligible for electronic signature is in the March 27th memo, and there are some tradeoffs with security and identity verification, these changes are a net positive.  Hopefully the IRS spends some of the next few months working out ways to reduce these risks to acceptable levels so that when taxpayers and their representatives can safely meet again they will not have to return to signing paper forms. 

 

Questioning the Portal: Why the Beard Test Matters

A few months ago, Nina Olson wrote What is this thing called portal?, in which she analyzed the IRS non-filer portal under the Beard test for determining when a submission to the IRS is considered a tax return.

After that post was published, the IRS confirmed what the screenshots in Nina’s post show – that functionally, the portal e-files a 2019 federal income tax return reporting $1 of interest income. Because many people who used the portal actually should have filed a full tax return instead, the IRS created a process for people to file their real 2019 tax return and signal to the IRS that they had mistakenly used the portal, via a submission which the IRS calls an “Amended EIP Return”. The IRS website states:

Tax Professionals please note that returns labeled “Amended EIP Return” will be processed as superseding returns if submitted before July 15 or, with a valid extension, before Oct. 15.

So we know that practically, the IRS computer system is treating a portal submission as a 2019 tax return. But is the legal question settled? A recent post by Gina Ahn on the ABA Tax Section’s listserv for the Pro Bono & Tax Clinics community highlights one taxpayer’s predicament and reminds us why the legal question matters.

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The facts presented are roughly as follows:

A domestic violence survivor fled her husband to live in a shelter, where among other services she connected with an LITC with the goal of seeking innocent spouse relief for her 2018 joint tax debt. The client’s husband runs a sole proprietorship and the 2018 joint liability consists of his unpaid self-employment taxes.

The husband and wife are both in touch with the tax professional who prepared their past joint tax returns and had been hired to prepare their 2019 tax returns. The spouses had arranged with the preparer to file Married Filing Separate returns for both of them for 2019.

At some point after the CARES Act passed, the tax preparer told the spouses that he could use the nonfiler portal for them to “get the stimulus checks faster,” and they all agreed he should do this.

The preparer later tried to e-file the wife’s MFS tax return for 2019, but the IRS rejected the e-file submission as a duplicate, due to the previous nonfiler portal submission.

The LITC attorney learns these facts in August. 

What advice would you give?

Before we go further, remember that Treasury Regulation § 1.6013-1(a)(1) provides:

For any taxable year with respect to which a joint return has been filed, separate returns shall not be made by the spouses after the time for filing the return of either has expired.

The IRS interprets “the time for filing the return” to mean the due date of the return without regard to any extension of time to file. (See e.g. PMTA 2020-17.) So, although we do not know if an extension was filed for either spouse, it probably does not matter.

If a valid joint return was filed before July 15, the spouses in our scenario are stuck with a joint tax return for 2019. They would need to file an amended return if they wanted to report their actual 2019 income and tax liability. This likely means that at some point down the road, the wife will be requesting innocent spouse relief from the husband’s 2019 self-employment tax liability.

However, if the portal submission was not a joint return, then the spouses are free to file separate returns for 2019 as they had originally planned. These would need to be submitted on paper, but they would be legally valid separate returns.

Was the Portal Filing a Valid Joint Return?

As Nina explained, “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.”

Nina then applied the Beard test to the portal, and concluded that the test is probably met. “If it walks like a duck, and quacks like a duck, maybe it actually is a duck.” I recommend viewing the screenshots in her post to see what she means.

If the nonfiler portal could be a return when completed by the taxpayer, does it still qualify as a return given that the taxpayers here never laid eyes on the portal or their purported joint return?

It’s worth mentioning that the nonfiler portal is not set up for tax preparers or any other assister to use on behalf of an individual. There is no option to enter your PTIN. In fact, the Form 1040 generated by the portal specifically says “Not for use by paid preparer” and “self-prepared” on the second page.

It seems to me that the analysis should come out differently in this case, than in Nina’s hypothetical case of a taxpayer using the portal for himself. The wife (and maybe also the husband) in our scenario always intended to file a separate tax return for 2019. She did not know that allowing the tax preparer to use the portal meant that, practically speaking in the e-filing system of the IRS, she was filing a joint 2019 tax return. She did not use the portal herself, see the jurat or the final 1040 that the portal generated, or have any basis to question whether the preparer’s suggestion was appropriate.

A tax administrator might not like that subjective analysis, but it’s not too far off from the analysis employed when one spouse contests the joint status of a return filed by the other. For example, in a 2017 summary opinion Judge Wherry explained:

Whether an income tax return is a joint return or a separate return of the other spouse is a question of fact. Harrington v. Commissioner, at *8 (citing Heim v. Commissioner, 27 T.C. 270 (1956), aff’d, 251 F.2d 44 (8th Cir. 1958)). The focus of our inquiry is whether [the nonsigning spouse] intended to file and be bound by the return in question. See Shea v. Commissioner, 780 F.2d 561 (6th Cir. 1986), aff’g in part, rev’g in part T.C. Memo. 1984-310.

The courts have considered various factors in determining whether a nonsigning spouse intended to file a joint return, including (1) whether the returns were prepared pursuant to an established practice of preparing and filing a joint return, (2) whether the nonsigning spouse failed to object to the filing of a joint return, (3) whether an affirmative act was taken indicating an intention to file other than jointly, (4) whether one spouse entirely relied on the other spouse to file returns, (5) whether the spouse examined returns presented for a signature, (6) whether separate returns were filed, (7) whether the returns included the income and deductions of the nonsigning spouse, and (8) and whether the nonsigning spouse was aware of the contents of the purported returns. See, e.g., Estate of Campbell v. Commissioner, 56 T.C. at 12-13; Howell v. Commissioner, 10 T.C. 859 (1948), aff’d per curiam, 175 F.2d 240 (6th Cir. 1949); Boyle v. Commissioner, T.C. Memo. 1994-294; Evans v. Commissioner, T.C. Memo. 1982- 700; Crew v. Commissioner, T.C. Memo. 1982-535.

Here, the tax preparer essentially played the role of the signing spouse. The tax preparer in this case should have known better than to use the portal for taxpayers who had 2019 filing requirements. We do not have enough facts to understand why the preparer thought this would cause the EIP to arrive sooner.

This case also highlights another pitfall of the nonfiler portal – the only filing statuses allowed are Single and Married Filing Jointly. If Married Filing Separately had been available, this taxpayer’s dilemma might have been avoided.