TIGTA Report on EITC Audit Procedures Suggests Room for Improvement in IRS Communication and Education Strategy

Today we welcome back guest blogger Anna Gooch. Anna highlights ongoing discussions of the IRS’s communication and education strategy between TIGTA, the IRS, and stakeholder groups. This topic is particularly timely following the President’s executive order on improving customer experience across the federal government, which states in part, that

Agencies should continually improve their understanding of their customers, reduce administrative hurdles and paperwork burdens to minimize “time taxes,” enhance transparency, create greater efficiencies across Government, and redesign compliance-oriented processes to improve customer experience and more directly meet the needs of the people of the United States.

The Secretary of the Treasury is specifically directed to

design and deliver new online tools and services to ease the payment of taxes and provide the option to schedule customer support telephone call-backs.  The Secretary of the Treasury should consider whether such tools and services might include expanded automatic direct deposit refunds based on prior year tax returns, tax credit eligibility tools, and expanded electronic filing options.

Creatively re-thinking taxpayer communication and education will help ensure that the agency’s new online tools and services make a meaningful difference in the taxpayer experience. Christine

In a report issued on September 2, 2021, the Treasury Inspector General for Tax Administration (TIGTA) released a report reviewing the IRS’ EITC audit practices and providing recommendations for improvement. In the report, TIGTA explained:

The IRS’s EITC examination strategy is not part of a larger IRS examination strategy that encompasses all examinations by which resources devoted to EITC examinations can be more easily assessed in the context of other challenges to taxpayer noncompliance. Also, due to IRS processing limitations, the IRS does not prioritize certain high-risk EITC claims for examination. Lastly, the IRS’s examination rates for EITC claims appear disproportionate with respect to certain Southern States; however, the examinations are aligned with tax returns flagged by IRS compliance filters.


Based on these findings, TIGTA made the following recommendations designed to improve the processes by which the IRS selects EITC claims for audit:

1. [C]onsider how refundable credits, including the EITC, would be examined to a different extent if the claims are considered for compliance purposes closer to the proportion that they contribute to the Tax Gap.

2. Evaluate the current programming for the prerefund selection process to ensure that cases identified by both [Questionable Refund Program (QRP)] and [Dependent Database (DDb)] selection pools are prioritized for DDb prerefund selection.

3. Evaluate and revise the scoring process to ensure that the cases with the highest risk are scored as such.  This process should include adding weight to cases with higher QRP and DDb scores and [duplicate TIN filing] repeaters.

4. [T]ailor EITC-related educational efforts for the States with disproportionate error rates.

Of these four recommendations, three are focused on the IRS’ role as a revenue collector. The fourth recommendation, the only recommendation that the IRS did not agree to adopt, concerns the IRS’ role as benefits administrator. In rejecting that recommendation, the IRS relied on its belief that “it already has extensive outreach and education strategy in place,” including EITC Awareness Day and Refundable Credits Summit.

Although this report focuses solely on EITC audits, it provides an opportunity to explore the nature of current IRS outreach and education programs in the context of refundable credit compliance. The Refundable Credits Summit and EITC Awareness Day provide a window into such efforts.

On November 2 and 3, 2021, the IRS held its annual Refundable Credits Summit, a two-day conference hosted by the Wage & Investment Division and Return Integrity & Compliance Services. Commendably, the IRS has been holding these summits for several years now and invites various stakeholders – academics, nonprofits serving the target community, representatives of tax professional groups, LITCs, and tax preparation and VITA entities – to hear presentations from senior IRS leaders on topics relevant to refundable credits and to discuss concerns. The first day of the Fall 2021 Summit provided a summary of legislative and procedural developments regarding the Child Tax Credit and the Earned Income Credit, as well as progress made on advance payments of credits and the various portals associated with those credits. On the second day of the Summit, the IRS hosted a four-hour brainstorming session, requesting suggestions on ways to raise awareness of the availability of refundable credits. During this session, Summit participants offered ways in which the IRS can reach more Americans – posters in laundromats, billboards along highways, ads on local radio stations. There were seemingly endless ideas offered, and while raising awareness of refundable credits is undoubtedly important, this discussion highlighted the IRS’ limited view of “outreach.”

First, based on what was discussed during the Summit (and what was not discussed), it is clear that raising awareness is where the IRS’ plan ends. Reaching as many taxpayers as possible is admirable, but as several participants pointed out during the summit, the lack of a follow up education strategy from the IRS creates a risk that taxpayers will not understand how refundable credits apply to them and their circumstances, nor will they have resources to consult when they encounter a problem.  

Second, it seems the IRS views itself as an information provider and not as the entity that would communicate directly with taxpayers. Rather, though aware of geographic, cultural, and demographic differences among eligible populations, the IRS did not appear to envision any role for itself in communicating with these populations. Instead, the IRS looked to the attendees to conduct community-based outreach using IRS-provided resources. Understandably, the IRS is proud of increasing its stakeholders and the number of eligible individuals it reaches; however, the IRS has no effective way of analyzing whether its materials and efforts are useful or effective because it delegates this responsibility to stakeholders.  

Finally, the IRS failed to consider the importance of using data in its outreach campaigns. There exist data breaking down which areas are most at risk for failing to claim the expanded CTC, even if families in these areas are eligible. These areas should have not only a different, targeted outreach strategy, as TIGTA suggests, but also an intensive education campaign focusing on the communities where specific types of noncompliance occur.  The IRS also doesn’t seem to use data in analyzing its efforts after the fact. As one participant stated during the Summit, the IRS cannot just throw several campaigns out and hope that something sticks. If the IRS wants outreach and education to be effective, it must analyze what works and what doesn’t.

In terms of education, as noted in the recent TIGTA report, the IRS relies on its existing EITC Awareness Day to provide sufficient education to EITC claimants. According to the IRS website, “Awareness Day is an event organized by the IRS and its partners to educate the public about the EITC and requirements to claim the credit. The goal is to raise awareness of EITC to ensure every qualified worker claim and receive [sic] their EITC. We also ask you to join us in getting the right message out about the CTC/ACTC and the AOTC to the right people who deserve the credits” (emphasis added). Despite the IRS’ apparent goal to reach “every qualified worker,” the reach of Awareness Day is quite limited. In 2020, via its 1,500 “supporters,” the IRS reached 2 million individuals on EITC Awareness Day. While the IRS does state that “other activities such as news releases and articles for EITC Awareness Day” were conducted, it is silent as to what exactly these activities are or what their reach is, especially because the IRS relies so heavily on its “partners.” In 2020, 25 million taxpayers claimed the EITC on their return. Two million is 8% of 25 million – not exactly “every qualified worker.” The IRS does not publish much data on EITC Awareness Day, so it’s not entirely clear who is targeted, what the message is, or if there is any follow up, much less what communities the education actually occurred in.  The information that is published suggests that there is room for improvement of EITC (and other refundable credit) education efforts, particularly those targeted toward the 5 million taxpayers who are potentially eligible for the EITC but do not claim it.

The TIGTA report is just one example of where the IRS is failing to embrace its dual role as both revenue collector and benefits administrator, and outreach and education are just a small part of adopting that role. The IRS could begin to improve its educational programs by starting with small pilot programs targeting communities with high noncompliance or nonparticipation, as TIGTA suggests. From these programs, the IRS would be able to test and analyze multiple strategies and approaches to determine the best approach for larger markets. Among other changes, the IRS could revise its mission statement, create a specialized unit dedicated to benefits administration, adjust administrative processes, and improve communications to better reflect the role it has in administering some of the nation’s largest anti-poverty programs. Of course, all of this cannot happen overnight, but as Congress continues to place benefit administration in the IRS, the IRS must adapt accordingly.

Pandemic Relief: Are Welfare States Converging?

Starting this year, I will cover law review articles of interest to PT readers. The goal of my coverage is not to provide a critical review, but rather to make you all aware of thought-provoking research that may serve as an inspiration or enhancement to your own work.

I start with Converging Welfare States, a 2018 keynote address by Prof. Susannah Camic Tahk for the “Always with Us? Taxes, Poverty and Social Policy” symposium at Washington and Lee University, published in the Washington and Lee Journal of Civil Rights and Social Justice (available here.)   She looks at the trajectories of direct-spending welfare programs and tax antipoverty programs, and asks “To what extent can we expect tax programs become more like direct-spending programs, or ‘welfare’ over time?”

read more…

As tax practitioners, we are typically more familiar with tax antipoverty programs, like the earned income credit (“EITC”) and the child tax credit (“CTC”), and less familiar with direct-spending welfare programs, like Temporary Assistance to Needy Families (“TANF”), the Supplemental Nutrition Assistance Program (“SNAP”), and the now repealed Aid to Families with Dependent Children (“AFDC”). In the low-income taxpayer world, our clients can benefit from both types of programs.

In her address, Prof. Tahk asks, “Will the trajectories of the tax antipoverty programs and the direct-spending programs converge?” In light of recently proposed Covid-relief legislation, tax antipoverty programs may start to look more like direct-spending welfare while retaining the hallmarks and benefits of living within the tax code… at least, for now.

The House proposed bills last week included a provision (here at page 22) to make the child tax credit refundable with the option of being paid in advance on a monthly basis for 12 months (but there is already buzz around the idea of making it permanent). The child tax credit changes will purportedly have the effect of decreasing the number of children in poverty by more than 40%.

There is another provision that expands the EITC (here at page 45), with a key aspect that it makes it more generous to childless taxpayers. PT has covered some general EITC issues here and here.

In her address, Prof. Tahk asserts that differences in public opinion, legal framework and administration make tax antipoverty programs more popular, effective and sustainable than direct-spending welfare programs. And she asks if that popularity, effectiveness and sustainability is threatened when tax programs begin to look more like direct-spending welfare?

People may be supportive of programs in which they are more likely to receive the benefit themselves. The House proposal doesn’t alter the TCJA change which made the Child Tax Credit available to those with higher incomes, so joint filers with adjusted gross incomes up to $400,000 would still be entitled to a $2,000 credit. It does, however, impose lower limits on the proposed additional amount of $1,000 to $1,600 per child, i.e. joint filers with adjusted gross incomes of $150,000 begin to be phased out of that portion. Even with a lower limit for the additional amount, a lot of taxpayers will still be eligible.

Prof. Tahk suggests that, “If tax antipoverty programs are popular because they are widely available, more growth to these programs may in fact enhance, rather than diminish, their relative popularity.” 

Many tax antipoverty programs are framed as tax cuts, which Prof. Tahk thinks may also be why the general public is supportive of them. On the other hand, she cites research by others that suggests people don’t mind paying taxes, are proud to do so, and prefer refundable tax credits to direct-spending programs, even when they are explicitly made aware of the welfare-like nature and purpose of refundable tax credits. So, what does that mean for an advanced monthly payment of a tax credit?

Congress has heavily relied upon the tax system to deliver money to people throughout the pandemic. Procedurally Taxing has covered may of the administrative and procedural concerns this creates. In a PT post on the differences between the EIP and the Recovery Rebate Credit (here), Les begins to contemplate the issues that may arise as, “Congress considers the possibility of using the tax system in additional ways to deliver regular benefits in advance of (or even in the absence of) filing a tax return.“

The disproportionate effect the pandemic has had on low income Americans is hard to deny, which is why relief legislation is being used to expand upon existing tax antipoverty programs. But it begs the question, is the tax code the right place for the government to advance its antipoverty agenda?

Prof. Tahk points out that there are more substantial procedural rights found in the tax code than there are in many traditional poverty means-tested  laws, which have eroded over time. For example a 1996 welfare statute banned federally funded legal-services organizations from “participat[ing] in litigation, lobbying or rulemaking involving an effort to reform a Federal or State welfare system,” which has made it far more challenging for poverty law attorneys to assert and expand rights related to direct-spending welfare.

The Taxpayer Bill of Rights and the statutorily rooted protections akin to due process notice and hearing rights found in the tax law, automatically bestow certain rights on recipients of tax antipoverty programs. Additionally, it is significant to Prof. Tahk that the “tax legal framework continues to develop under circumstances where it affects everyone who interacts with the tax code, business and nonbusiness, rich and poor,” because taxpayers with resources can hire attorneys who can defend, assert and expand tax-based rights.

Prof. Tahk is careful to point out that some tax antipoverty provisions are treated differently than other sections of the code, such as the EITC ban under section 32(k) (which PT has covered here and here) and delayed refunds for EITC and CTC recipients. If the trend continues, she postulates, even tax antipoverty law could become its own area of law, but it would still be different from the law that governs direct-spending welfare programs.

Legislated exceptions have already been created for some pandemic-relief provisions, but so far, in ways that benefit taxpayers. Take, for example, carve outs related to Payroll Protection Program loans- forgiven loans are not included as income and expenses paid for with forgiven loans can be deducted. This treatment is contrary to well-established principles in the code under I.R.C. §§ 61(a)(11) and 265.  The provision that prevented EIPs from being offset, except for past due child support, is another example, and could have implications for the treatment of tax antipoverty payments going forward.

It has yet to be seen whether the IRS can or will collect on erroneous Economic Impact Payments, but Caleb has some compelling analysis about it here. Unlike the EIP, the House proposal includes safeguards that protect low-income taxpayers by limiting the amount they are required to repay if advanced CTC payments are erroneously received.

We’ve seen that the IRS is relatively well-suited to deliver cash to people quickly, and it also has data at its disposal (including cross-agency date from the SSA and VA) which can be used to determine eligibility. It’s not perfect, of course, but nothing is. Prof. Tahk also points that there are ways in which the IRS’s infrastructure can be used to reduce problems with noncompliance or improper payments, referencing research and work done by Nina and others in the EITC realm.

If you are interested in more of Prof. Tahk’s research and analysis in the area, I encourage you to read her keynote address and check out her other work.

Proving Your Client’s Marital Status, Not as Simple as It Appears but Crucial for EITC

Today we welcome back guest blogger Gina Ahn. In today’s post Gina explains the importance of marital status for the EITC, and how the stark difference between the childless EITC and the EITC with qualifying children led one taxpayer to pursue an extremely weak Tax Court case. While that taxpayer’s claim of common law marriage did not succeed, common law marriage may be a legitimate claim for residents of common law states. Ultimately though, Gina argues that a better solution would be to expand the EIC for childless workers. Christine

As is often the case in the low income or nonprofit universe, the reverse of common knowledge often proves to be true. When I was in-house counsel of a private operating foundation, it became second nature for me to always look for ways to proactively document expenditure responsibility grants, charitable contributions of donors, travel expenses, or the use of statutory safe harbors in self-dealing transactions. This likely was a natural self-defense mechanism because the founders of the foundation practiced reverse ‘tithing’ (where they would donate 90% of their earnings and keep 10%). This radical giving philosophy often drew the ire and suspicion of auditors who were convinced the foundation was a front for a nefarious sophisticated tax scheme. The plain vanilla explanation that the founders were simply living out their religious convictions was too far-fetched for the examiner to believe. So, naturally, the first time I saw an Earned Income Tax Credit (“EITC”) audit of a schedule C cash business at our Low Income Taxpayer Clinic (“LITC”), I was perplexed. I thought to myself, “Why in the world is the IRS contesting this person’s earnings? Don’t they want more revenue? Would they prefer the taxpayer to say he did NOT work and thus owed no taxes?” Little did I realize that the EITC’s high improper payment rate of 25% and large influence of unregulated (and often unscrupulous) private third party preparers “not acting in the best interest of taxpayers and tax administration” gave the IRS statistically sound reasons to select such taxpayers for examination. Apparently, it is an ‘industry’ secret I am just now learning from my clinic’s clientele that preparers often urge taxpayers to increase earnings by declaring cash income of a ‘miscellaneous’ business, to raise the taxpayer’s AGI to be just high enough to land in the fortuitous ‘sweet spot’ to get the largest EITC refund. Oddly, whether one is a high-income taxpayer who “donates too much” money to charity, or a low income taxpayer who has “too much cash income”; you are both a prime candidates for audit.


Marriage leads to benefits, not a penalty, in the LITC universe

Using the counter intuitive logic of the nonprofit sector, if high income taxpayers normally bemoan the marriage tax penalty; then is there some sort of marriage tax benefit in my alternate LITC universe? Actually, there is – sort of. Childless taxpayers with low income who are de facto (but not legal) stepparents see a substantial EITC increase if they legally marry. For the tax year 2018, a childless taxpayer who supports three children in his household can receive $5912 morein EITC if he is legally married to the mother of the three stepchildren in the household. This is because those who support and care for the children of their cohabitating partner (without marrying their partner)– may not claim any tax benefits from the children. If our example taxpayer is not married, the largest possible EITC for him as a low-income worker without qualifying children is only $518 (see diagram below). By marrying his partner, the children become his qualifying children for the EITC. So, to be more precise, it is not quite a marriage benefit per se. But rather, a legally valid marriage opens the door to a much more lucrative EITC benefit (and other tax benefits that come with qualifying children).

NTA Special Report to Congress, “Earned Income Tax Credit: Making the EITC Work for Taxpayers and the Government, Improving Administration and Protecting Taxpayer Rights

Such is the background for Mr. Brzyski’s Tax Court case, T.C. Summary Opinion 2020-25. (James Creech previously wrote about the social media aspects of the case here.) I am saving this opinion to put in our LITC Volunteer Training Manual/Casebook. It is a methodical parsing of a bread and butter issue that comes up often at our clinic: How much EITC is my client entitled to? What do you do if you don’t have any evidence? Whether one is a seasoned tax practitioner or new law school or LLM graduate, I highly doubt a small tax case without precedential value would ever reach any casebook. My tax casebooks tended to be full of partnerships (inside or outside basis?) and NHL hockey players who did not want to file U.S. tax returns.

Unfortunately, this taxpayer did not have the benefit of an LITC to advise him of the futility of pursuing this case. It becomes quite clear by looking at the chronology of events as described in the opinion that he was grasping at straws. It seems that Mr. Brzyski eventually understood that his entire case depended on whether or not he was legally married to the mother of the two children he claimed on his 2016 tax return. As Judge Copeland writes, “Accordingly, the key to whether [the minors] meet the [stepchild] relationship requirement, as defined by section 152, is whether Mr. Brzyski was married to Daniela [the minors’ mother] in 2016.” The judge does not leave us hanging in suspense. The very next sentence gives her terse (perhaps sardonic? I wish I could have heard her voice) findings of fact: “We find he was not.”

A Melting Pot Federalist System of Governance: Many States and Immigrants

Marriage really ought to be a simple fact to prove. You either have a marriage certificate, or not. If you’ve misplaced it, you can even order one online through a lexis service. But what if you left your country in a state of civil unrest when that country did not maintain birth or marriage records? Then, government agencies offer alternative means to prove your married status. For example, my parents left Korea after the Korean War. At the time they emigrated to the U.S., Korea certainly did not have the luxury of a functioning vital statistics office. However, USCIS and Social Security still figured out an acceptable means to document their marital status in the process of granting their citizenship and social security numbers. However, with this taxpayer in this case, civil unrest was not an impediment to proving his married state. Rather, it was the fact that he did not formally marry in the sense of getting a marriage license or certificate from a civil authority.

However, because the United States has a federalist system of governance and a Constitution with a full faith and credit clause; there was still a slim chance that perhaps Mr. Brzyski had entered into a common law marriage in one of the nine states that recognizes common law marriage; and thus the IRS would recognize his marital status even without a marriage certificate. (See Reg. § 301.7701-18.) And in fact, “Mr. Brzyski contends that he and Daniela entered into a common law marriage in 2011 when they visited Kansas for dinner.” (p.8) The taxpayer seems to believe that a common law marriage is an informal event where a couple can simply “declare” the state of marriage – something akin to eloping to Las Vegas; but without an officiant or registration required.

As a side note, when I was a claims representative for the Social Security Administration (prior to law school) I used to interview widows to evaluate applications for survivors benefits. I vividly recall one conversation with my mentor instructor, because it made an impression on my young naïve (first job out of college) mind.

SSA Gina: “Why do we ask for ALL their former dates of marriages, locations, and dates of divorce? It makes the interview so slow and I feel bad making them work so hard to recall everything. I mean, isn’t the most important marriage the most recent one?”

SSA Mentor: “We do it because it’s our job to look for the correct benefit amount, and it’s possible that they could receive higher benefits based on the earnings of a former spouse.”

SSA Gina: “Okay, I could see the logic of that. But, why do we ask what city or state?”

SSA Mentor: “Because we have to look for putative marriages or possible marriages in other states that recognize common law marriage.”

SSA Gina: “You mean, they just have to live together in one of those states and they’re magically married, without getting married? Can you accidentally marry someone?”

SSA Mentor: “No Gina. Just living together is not enough. They have to act as if they are married. You know they need show that us things like utility bills with both their names on it. And present themselves to the community as if they were married. Just look it up in the POMS when you get someone who alleges at least ten years in one of those states. Roommates can’t just get magically married, it’s something more.”

This left an impression on me because I thought, “Wow. I work for a very generous government agency that trains its workers to “look for” the highest wage earning husband to base a survivor benefit off of.”

No Marriage Certificate? Did you spend significant time in one of the 9 states that recognizes common law marriage?

The IRS has a similar philosophical approach in that they also want to determine the correct assessment and if a common law marriage will lead to the correct assessment; so be it. However, unlike Social Security, the IRS was not created to function as a federal benefits agency and does not hire “Claims Representatives” to interview taxpayers for EITC refunds (a quasi benefit of sorts). Instead this ‘federal benefit’ application is outsourced to third party paid preparers, who are to submit tax returns including information for the Service to determine and pay out the correct EITC amount. Therein lies the opportunity not only for intentional abuse, but genuinely mistaken under- or overpayments.

A quick read through IRM (12-14-2018), gives succinct instructions for a taxpayer who spends “significant time” in one of the nine common law states: CO, IA, KS, MT, OK, RI, TX, UT and the District of Columbia. A ‘declaratory’ dinner in Kansas will not suffice, as the taxpayer mistakenly believes, “Mr. Brzyski claims that over the Thanksgiving holiday he and Daniela established a common law marriage by driving across the Missouri border to Kansas and declaring their marriage over dinner.” (fn 11).

How NOT to prove your common law marriage

The final flaw in the taxpayer’s argument was his lack of consistency. If we look at the chronology of life events and tax filings; it’s hard to imagine that the judge did not (at least internally) have a skeptical tone. It is difficult to argue, “We’ve been married since 2011” – if the first time you file a joint return is a late filed amendment in June of 2017 for TY2016 (the year in dispute). Below is the chronology of events as described in the opinion:

  • November 2011, taxpayer and mother of stepchildren fly to Missouri to visit taxpayer’s family.
  • November 2011, taxpayer and mother of stepchildren drive to Kansas for dinner to declare their marriage.
  • December 2011 taxpayer’s social media[1] still refers to the mother of stepchildren as his fiancée
  • Sometime on or before April 2013, taxpayer timely filed TY 2012 as Single
  • Sometime on or before April 2014, taxpayer timely filed TY 2013 as Single
  • (No information about 2015)
  • October 2016 taxpayer and mother of stepchildren enter a lease together using taxpayer’s last name (but she signs agreement with her maiden name).
  • February 22, 2017 taxpayer timely filed TY2016 (year in dispute) as Head of Household
  • June 20, 2017 taxpayer sends TY 2016 amendment to change status to Married Filing Joint
  • July 24, 2017 notice of deficiency from IRS for TY2016
  • August 2017 taxpayer files TY 2015 return as Single

What kind of “supporting documentation” would have worked to establish a common law marriage?

Judge Copeland expands on her “we find he is not [married]” conclusion:

Mr. Bryzski has not offered any consistent supporting documentation that he went to Kansas to marry or that he and Daniela held themselves out to be husband and wife following their 2011 Thanksgiving trip. Accordingly, we find that Mr. Brzyski failed to meet his burden of proof to establish that a common law marriage took place in Kansas.

Opinion at 11

Although we will never know the whole story, I cannot help but to wonder what sort of documentation the judge would have accepted (if any), to overcome the taxpayer’s inconsistent filings? We sometimes come across clients at our clinic in the unfortunate situation where a paid preparer had given them wrong advice. E.g. “I was told that as long as we live together for 10 years, it’s recognized in California as being married.” The hapless unmarried couple has a spent significant amount of time together and have been presenting themselves as married to the community. It’s just the wrong community, in that California doesn’t recognize common law marriage. Hypothetically speaking, suppose this unmarried couple had spent some time in CO, IA, KS, MT, OK, RI, TX, UT or DC; what type of documentation would be helpful to establish their common law married status?

IRM (12-14-2018) instructs the IRS compliance employees to “ask the taxpayer to provide at least two of the following types of documentation to substantiate a claim of common law marriage.”

  • Deeds showing title to property held jointly by both parties to the common law marriage
  • Bank statements and voided checks showing joint ownership of the accounts
  • Insurance policies naming the other party as beneficiary
  • Birth certificates naming the taxpayer and the common law spouse as parents of their children
  • Employment records listing the common law spouse as an immediate family member
  • School records listing the names of both common law spouses as parents
  • Joint credit card accounts
  • Loan documents, mortgages, and promissory notes evidencing joint financial obligations
  • Mail addressed to the taxpayer and common law spouse as “Mr. and Mrs.”
  • Any documents showing that one spouse has assumed the surname of the other spouse

It makes me wonder, had Mr. Bryzski opened a bank account in Kansas and some marketing companies had addressed credit card offers to a Kansas address as Mr. & Mrs. Bryzski, could they have persuaded the examiner or the judge?

For unmarried clients with “stepchildren,” now what?

Unless they are willing to get married, there is nothing that can be done. And I’m not sure it’s good advice to begin or end a marriage for solely for an EITC refund. Although this NPR podcast “How Economists Do Valentines” is an entertaining nine minute exchange of two economists who did NOT marry because the (tax) cost benefit analysis of marriage came out negative, I think they are the exception and not the rule. In the midst of the pandemic, where the hardest hit industries include retail, hospitality, food services, and manufacturing, one source of disaster relief to consider is a temporary expansion of the childless EITC refund. This is currently proposed in the HEROES Act. Included in the category of ‘childless’ taxpayers are unmarried stepparents – for whom an additional stimulus check through a revamped EITC would make a substantial impact. The Tax Policy Center explains,

HEROES Act [proposes] changes to the EITC would go to people in the bottom 20 percent of the income distribution, . . . [that] would help people in industries that are being hurt the most by the pandemic.

While not a long-term solution, this could provide a much needed reprieve during difficult times to the working poor, married or not.

Tax Refunds and the Disposable Income Test

We welcome back occasional guest blogger Marilyn Ames, who like me is retired from the Office of Chief Counsel, IRS and who did a lot of bankruptcy work when she worked for the government.  She discusses today a recent 5th Circuit case allowing the debtor to keep an earned income tax credit despite some local rules in Texas requiring her to turn a part of it over.  Although the 5th Circuit does not base its decision on the fact that the refund resulted from the earned income tax credit, that fact plays an important role.  Keith

As illustrated by the Covid-19 payments recently dispersed by the Internal Revenue Service and the use of the IRS to carry out portions of Obamacare, Congress frequently uses the IRS and the Internal Revenue Code as a means of administering social programs that have little or nothing to do with taxes. One of the problems of using the IRS to execute these types of programs is that courts assume that all provisions in the Internal Revenue Code are tax-related, which can, at worst, result in decisions at odds with the purposes of these programs, and at best, create precedent that fails to acknowledge Congressional intent.


The Fifth Circuit’s recent decision in the bankruptcy case of Matter of Diaz (found here or at 2020 WL 5035800) illustrates this issue. While the Fifth Circuit reached what is clearly the right conclusion under the Bankruptcy Code, it did so without recognizing why its decision was correct as a matter of policy. The Diaz case involves the amount of a tax refund that must be turned over as part of a Chapter 13 plan as disposable income, to be paid to general unsecured creditors. The bankruptcy court, the district court and the Fifth Circuit all failed to state why the debtor had a refund, but the Fifth Circuit does provide enough facts for an educated guess to be made that Ms. Diaz’s refund for 2017 resulted from the earned income credit. During 2017, Ms. Diaz worked as a medical assistant, and earned $2,644.16 per month, or a total of $29,791 for the year. During this year, she was a single parent with two children.  She filed bankruptcy on December 1, 2017, but her bankruptcy schedules filed later included her refund for 2017 in the amount of $3,261. Assuming that Ms. Diaz filed a return showing three exemptions and claiming the standard deduction for a head of household of $9,350, her return for 2017 would have showed a taxable income of $8,291 and a tax liability of $828. Making another assumption that she qualified for the earned income credit, the EITC for 2017 would have been $3,208, or about the amount of the refund she claimed on her return. (The tax liability on her return could have been offset by the child tax credit, resulting in a refund of any withholding, and she could also have been entitled to the additional child tax credit, but close enough given the facts available.)

Ms. Diaz filed bankruptcy in the Western District of Texas, which uses a standard form for Chapter 13 plans. Section 4.1 of the standard form provides that the debtor must turn over any tax refunds in excess of $2,000 to be disbursed to creditors pursuant to the plan by the Chapter 13 trustee. The only exception to turning over these funds is if the debtor’s plan provides for payment of 100% of the general unsecured claims, the debtor files a notice requesting that she be permitted to keep the excess refund amount, and the trustee does not object. Ms. Diaz could not make such a request, as her plan provided for only 12% of the general unsecured claims to be paid. Rather than filing a plan providing for the excess amount of $1,261 from her 2017 refund to be turned over to the Chapter 13 trustee, Ms. Diaz filed a plan that divided the total amount of her refund by 12 months, and then included that portion in her monthly income.  Provision 4.1 of the standard form was then stricken through. When the refund was included as part of her monthly income, the plan was adequate to meet the requirements of the Bankruptcy Code.

This gerrymandering did not sit well with the Chapter 13 trustee, who objected to the plan as it did not meet the provisions of Section 4.1 of the standard plan.  Ms. Diaz argued that the plan violated both the Bankruptcy Code and the Federal Rules of Bankruptcy Procedure. The bankruptcy court and the district court for the Western District of Texas disagreed, holding that the district court had authority to require that a standard Chapter 13 plan be used pursuant to the provisions of Federal Rule of Bankruptcy Procedure 3015.1, and that tax refunds are disposable income under Bankruptcy Code § 1325(b)(2) that must be included in the plan. The bankruptcy court rejected the debtor’s argument that her tax refund was similar to payments received for dependent adult children that are excludable from a debtor’s disposable income, apparently not recognizing that all or part of the debtor’s refund was probably attributable to the EITC, which is computed based on the number of dependents a taxpayer has. The district court affirmed the ruling of the bankruptcy court with even less consideration of why the debtor was entitled to a refund.  The bankruptcy court opinion can be found here (586 BR 588) and the district court opinion can be found here (2019 WL 4545613).

The Fifth Circuit disagreed that the debtor was required to turn over the refund, relying on Bankruptcy Code § 1325. If a plan does not provide for an allowed unsecured claim pursuant to § 1325(a), the plan cannot be confirmed unless the debtor includes all projected disposable income to be paid out to general unsecured creditors. Ms. Diaz’s plan did not provide for her unsecured creditors pursuant to § 1325(a), so she could only have a plan confirmed that included all projected disposable income. Noting that district courts may not adopt local rules or create standard plans that abridge, enlarge or modify any substantive right, the Fifth Circuit focused on whether the tax refund in excess of $2,000 was part of the debtor’s projected disposable income that had to be turned over to the Chapter 13 trustee.

Although the Bankruptcy Code does not define projected disposable income, § 1325(b)(1)(B) does state how it is to be calculated. Disposable income is the current monthly income received by the debtor, less “amounts reasonably necessary to be expended” for the debtor’s maintenance and support, plus any qualifying charitable contributions and business expenditures. Current monthly income is calculated by averaging the debtor’s monthly income in the six full months preceding the bankruptcy petition. The definition of “amounts reasonably necessary to be expended” is included in §1325(b)(3), and is different depending on whether the debtor has monthly income, when calculated for a year, greater than the median family income of the applicable state.  This amount can vary depending on the number of individuals in the household. If the debtor has current monthly income, when calculated over 12 months, greater than the applicable state median family income, only those expenses included in Bankruptcy Code § 707(b)(2) are included as amounts reasonably necessary.  If the debtor has less than the applicable median amount, all amounts for the maintenance or support of the debtor or the debtor’s dependents are included.

In the Diaz case, Ms. Diaz’s current monthly income, projected over 12 months, was less than $59,570, the median income for a family of her size in Texas in 2017. The expenses she claimed on her bankruptcy schedules totaled far less than the IRS National Standards for a family of the same size.  The Fifth Circuit concluded that “[W]e find it entirely plausible that Debtor will use her ‘excess’ tax refund of $1,261 for expenses that are reasonably necessary for her family’s maintenance and support.” Because the standard form required Ms. Diaz to turn over the tax refund in excess of $2,000 without determining whether the excess was an amount reasonably necessary to be expended, it violated her substantive right as a below-median income debtor to retain any refund reasonably necessary to be expended for her family’s support.

Although reaching the correct decision under the Bankruptcy Code, the Fifth Circuit failed to consider whether the refund was generated by the EITC and, if so, whether that fact should be considered in determining whether a debtor should be required to include these funds. The earned income tax credit was enacted in part to provide relief for low-income families. Hopefully, the provisions of Bankruptcy Code § 1325(b)(1)(B) expanding the amounts that can be considered to be amounts reasonably necessary to be expended for the maintenance and support of families with incomes below the median income of the state will be sufficient to continue to protect the relief Congress granted to low-income families through the EITC provisions. However, the fact that Ms. Diaz was required to appeal her case to the Fifth Circuit in order to protect her rights argues for an opinion that more explicitly recognizes the purposes of the EITC.

Going Forward – Refundable Credits in the 2021 Filing Season and Beyond

In my last post I called on the IRS to reopen its non-filer portal for recipients of federal benefits who have dependents and issue supplemental Economic Impact Payments for those dependents. On August 14th, the IRS announced on that it would do that very thing, responding to congressional and public pressure and facing what promised to be an adverse ruling in pending litigation.  This is truly an important development that will provide much-needed financial assistance to vulnerable families in the midst of a pandemic.  It also provides a foundation for the IRS to build on in future filing seasons.


A second proposal I made in that post received some interesting comments.  I proposed the IRS use its internal Form W-2 and 1099-MISC-NEC data to identify those taxpayers who appeared to qualify for the childless worker Earned Income Tax Credit (EITC) and automatically pay out the amount of EITC based on those earnings.  By now, the IRS has received almost all of the wage and information returns for 2019.  The National Taxpayer Advocate reports that by February 28, 2020, the IRS had received 3.9 percent more W2s and 12.8 percent more 1099-MISC forms than the year before.  (For comparison, the IRS received 219 million W2s by February 4, 2019.)    IRS also can determine whether the taxpayer was claimed as a dependent on another’s return, so the risk of noncompliance is very low.  In fact, in 2018 the Treasury Inspector General for Tax Administration, whose job is to ferret out fraud, waste, and abuse in the tax administration, actually recommended the IRS automatically calculate and pay out the EITC.

One comment questioned how someone could live on, say, $7,000 a year and cited an example of a client who, upon questioning, ceded that he had unreported cash income.  Another noted that one of his clients had low wage income but was receiving a significant amount of income that was reported on an estate’s Schedule K-1, which likely would not be in the IRS’s systems yet.  I will address the issue of living off of $7,000 a year below, but as to the K-1 income, my response is something I have said to the IRS for decades:  you design tax administration around the 95 percent of the taxpayers who are trying to comply, not around the 5 percent who are not.  No aspect of tax administration will have zero errors or noncompliance; you have to accept some people will slip through.  Otherwise, you end up with the byzantine tax administration we have now. 

The proposals outlined in my earlier post don’t solve all the problems with unclaimed EITC or missed EIPs.  They addressed emergency situations and provided a one-time way to get much needed dollars out to the most vulnerable populations in our society, populations that are most impacted by the coronavirus and pandemic-related job loss.  For 2021 and beyond, the IRS can build on its EIP initiatives this year to increase the EITC participation rate while minimizing taxpayer burden.  But before I discuss these proposals, let’s take a high-level look at poverty in America.

Refundable tax credits play an important role in reducing poverty in America

According to the US Census Bureau, the 2018 official poverty rate was 11.8 percent, with 38.1 million people in poverty.  The official definition of poverty is established by the Office of Management and Budget in Statistical Poverty Directive 14 and is used to determine eligibility for various government programs.  Here are some rather stunning statistics from the U.S. Census Bureau report, Income and Poverty in the United States: 2018, (the 2019 poverty statistics will be issued on September 15, 2020).  For purposes of determining family poverty, Census defines a family as “a group of two or more people related by birth, marriage, or adoption and living together.”

  • The 2018 poverty rate for primary families (i.e., a family that includes a householder) was 9.0 percent.
    • For female householder families, the rate was 24.9%.
    • For married couples, the rate was 8.1%.
  • The 2018 poverty rate for unrelated individuals not in families was 20.2%.  (This is a cohort of the childless worker EITC population.)
    • For unrelated male individuals not in families, the rate was 17.7%.
    • For unrelated female individuals not in families, the rate was 22.6%.
  • The 2018 poverty rates varied significantly by race:
    • For Blacks, the rate was 20.8%.
    • For Hispanics, the rate was 17.6%.
    • For non-Hispanic Whites, the rate was 8.1%.
  • The 2018 poverty rate varied by sex:
    • For males, the rate was 10.6%.
    • For females, the rate was 12.9%
  • The 2018 poverty rate varied significantly by age:
    • For children under the age of 18, the rate was 16.2%.
    • For persons age 65 or older, the rate was 9.7%.
  • The 2018 poverty rate for workers was 5.1%.
    • For full-time year-round workers, the rate was 2.3%.
    • For less-than-full-time year-round workers, the rate was 12.7%.
    • For workers who did not work at least 1 full week, the rate was 29.7%.

The Department of Health and Human Services publishes the poverty guidelines each year in the Federal Register.  The 2020 poverty guidelines are below:

Since 2011, in collaboration with the Bureau of Labor Statistics, the Census Bureau has also computed and published the Supplemental Poverty Measure (SPM), which takes into account the impact of government benefit programs for low income persons and families – including food stamps, school lunches, housing assistance and refundable tax credits —  as well as deductions for certain necessary expenses, including taxes, child care, commuting, health insurance premiums and co-pays, and child support, that are not included in calculating the official poverty rate.  Here are a few eye-opening factoids from the SPM:

  • For 2018, the Supplemental Poverty Measure was 12.8 %, a full percentage point higher than the official poverty rate.
  • Social Security benefits moved 27.2 million persons out of poverty in 2018.
  • Refundable tax credits moved 8.9 million persons out of poverty in 2018.
  • If the EITC and the refundable portion of the Child Tax Credit were not included in the SMP calculation, the 2018 SPM poverty rate would have been 15.5 % rather than 12.8 % — meaning the tax code accounts for an almost 4 percentage point reduction in the official poverty rate of 11.8 %.

The Supplemental Poverty Measure shows that it is possible for someone to live on earnings of $7,000 a year by receiving federal benefits, including the Earned Income Tax Credit.  In fact, according the U.S. Census Bureau, 10.2 percent of over 128 million householders had money income under $15,000 in 2018.  That is the reality for over 13 million Americans.

Going forward, the IRS needs to take more proactive steps to get the EITC and other refundable credits into the hands of eligible taxpayers

The stunning data presented above should give us all pause to reflect on the significant role the tax code and IRS play in lifting Americans out of poverty.  Although some complain that the IRS should not be in the benefits business (or, more cynically, it should only be administering social benefits to home-owners and businesses), it turns out the EITC is an efficient and effective program.  Yes, there are plenty of things that need fixing about the EITC, and I personally have made scores of recommendations in that regard.  But folks who wish for a past time when the EITC didn’t exist need to just get over it.  And that includes the IRS – it needs to embrace its role as deliverer of social benefits.

The IRS can begin its embrace in the 2021 filing season and beyond, by keeping the non-filer portal and enhance it by adding a screen and checkboxes designed to determine eligibility for the EITC.  The IRS’s own data show that through April 17, 2020, 5.631 million filers used Free File, a 110 percent increase over 2019, largely attributable to taxpayers who used the non-filer portal and thus bumped up the abysmal Free File usage rates.  [See National Taxpayer Advocate Fiscal Year 2021 Objectives Report to Congress, pages 97-98.]  Usage would increase even more if the portal were made available on mobile devices as well as in other languages.  Moreover, the IRS could consider a telefile version of the nonfiler portal – which would really help out those households who don’t have broadband or any internet access in their homes.

In 2018, TIGTA recommended the IRS modify Form 1040 to capture information that would allow it to automatically issue the EITC to taxpayers who filed a return.  Although the IRS ultimately declined to go along with this recommendation, it is a good idea that should be adopted.  Here is TIGTA’s suggested mock-up for the pre-“simplified” Form 1040:

In addition to adding these boxes to the face of the Form 1040, IRS should add to the non-filer portal a few extra checkboxes:  Did you (and your spouse, if filing married-filing-jointly) have your principal residence in the US for more than six months of the year?  Would you like the IRS to compute your eligibility for and amount of the Earned Income Tax Credit?  If a taxpayer enters dependents on the nonfiler portal, another checkbox can pop up:  Did this child live with you in the US for more than six months of the year?  These questions, along with retaining the checkbox question about being claimed as a dependent on another’s return and IRS internal databases and filters, provide all the information the IRS needs to get the EITC out to eligible households.

Second, as TIGTA recommended in 2018, the IRS should study how best to use CP-09 and CP-27 letters, the EITC reminder notices IRS sends to taxpayers with children and without children, respectively.  Today, IRS sends out these letters to only a fraction of taxpayers it believes are eligible for underclaimed EITC, and it completely ignores those who have not filed a return.  According to TIGTA, for Tax Year 2014, IRS estimated 5 million households were potentially eligible for EITC totaling $7.3 billion.  Of those 5 million taxpayers, 1.7 million filed returns but did not claim the EITC.  TIGTA reported the IRS annually spends $2 million issuing notices to potentially eligible taxpayers, but the notices were sent to only 361,000 of the 1.7 million filers (and none to the nonfilers).  The response rate to these letters was 28 percent for taxpayers with children, and 57 percent for taxpayers without children.   The CP-09 and CP-27 letters may not be necessary for filers if the IRS adopted TIGTA’s and this post’s recommendations to modify the Form 1040 and the non-filer portal.  Instead, these letters (or postcards) could be sent at the beginning of the filing season to prompt nonfilers to file and claim the EITC.   

As TIGTA noted, the CP-09 and CP-27 letters historically have had low response rates.  But thousands of businesses and political campaigns have figured out that direct marketing, done correctly, actually has an impact.  The IRS possesses a mother lode of data on nonfilers – it has Forms W-2 and 1099s; all of those forms have taxpayer addresses.  The IRS could use this address data to send the letters, or generic postcards, to EITC nonfilers.  A postcard with a generic message about EITC eligibility, can be written so as to not violate IRC § 6103.  For example: 

The EITC is a tax credit for low income workers with or without children. To learn whether you are eligible for the credit, go to [website] or call [toll-free dedicated number]. If you haven’t filed a return, you may be able to use the non-filer portal to claim the EITC.

It may be people don’t open IRS letters, but they will read a generic postcard about needing to file in order to get the EITC.  This is worth experimenting with. 

The IRS could also send letters to potentially eligible filers and nonfilers immediately before the opening of the next filing season, urging people to check out the EITC; a TAS study found that educational letters, sent to taxpayers who appeared ineligible for the EITC in the previous year but were not audited, with the words “important tax information” on the envelopes and mailed right when W-2s were being issued, resulted in significant taxpayer behavior changes.  Recipients apparently opened the envelopes and read them. 

IRS also could promote the non-filer portal during its EITC Awareness Day events every January.  Moreover, since the non-filer portal is built upon the Free File Alliance’s Free Fillable Forms portal, as discussed here, it won’t run afoul of the IRS-FFA agreement.

In the past, the IRS cited lack of resources to be able to handle the responses to more of the  CP-09 and CP-27 notices.  As I’ve noted in other posts, I understand all too well the problem of diminished resources.  But EITC funds are lifelines to these taxpayers and should be prioritized as much as enforcement hires.  If the IRS were to adopt a dual-role mission statement, as I’ve recommended since 2010, it and the Administration would develop a budget proposal to provide the resources and staffing necessary to issue the notices and process responses.  Moreover, if the IRS maintains and improves the portal, nonfilers would use the portal instead of mailing in a response, so the resource demand would be minimized.  Congress has a role to play here, too.  It can nudge the IRS in the right direction and provide it with dedicated funding to increase the EITC participation rate.  With the pandemic showing the vital role the IRS plays in the delivery of economic benefits, Census data showing the important role of refundable tax credits in lifting millions of Americans out of poverty, and Congress finally aware of what years of underfunding have done to tax administration, now is the time to make the case for robust and proactive taxpayer assistance. 

IRS, we applaud your work and we feel your pain, but we need you to do more to get dollars out to vulnerable taxpayers

As Congress and the Administration debate the shape and scope of the next coronavirus relief package and unemployment benefits end or are delayed, the Internal Revenue Code already provides another way to get dollars into low income workers’ pockets – the childless worker Earned Income Tax Credit (EITC).  The IRS can and should pay out this credit to every taxpayer who appears eligible for it based on 2019 return filings, including through the non-filer portal.


Before I launch into a discussion of how this could be done, and because the IRS seems particularly sensitive right now about any criticism of its performance in implementing CARES Act and other economic stimulus provisions, I want to stipulate the IRS accomplished a near-miracle in getting over 160 million payments out to needy households, and it should be congratulated on that act.  We all recognize the challenges the IRS faced, and still faces, with its workforce hobbled by the pandemic closures of offices, and the precautions necessary as it tries to get back to some semblance of normal work.  And we applaud the sacrifices IRS employees made to program IRS systems and develop new applications and issue guidance.

However, because these are extraordinary times, more is being asked of the IRS.  Those asking for more are not being mean-spirited or ungrateful or even ungracious.  They are advocating for various populations who have been left out in the cold. 

For example, while it is understandable and even commendable the IRS wanted to get automated Economic Impact Payments (EIPs) out to elderly and disabled Social Security beneficiaries very quickly and thus set a 40-hour deadline for these individuals to enter their dependents into the nonfiler portal, it is inexcusable for the IRS not to provide an ongoing option for those individuals who missed the short deadline to be able to obtain the EIP for their dependents now, not in 2021.  We are in the midst of a pandemic and an unprecedented economic turndown, for heaven’s sake, and 2021 is just too far away.  These payments are a lifeline for many of the most vulnerable members of our society and they cannot wait. 

In fact, in a recent communication to its employees, and as the National Taxpayer Advocate (NTA) confirmed in a recent blog, the IRS advised that the programming will be completed by August 13, 2020, that will enable it to issue dependent payments for those who actually entered their information into the nonfiler portal but failed to receive the payments due to a programming bug.  If the IRS is able to “perform automated recovery” procedures for these payments, it can surely allow those who missed the April 22 deadline to now enter their dependent information into the nonfiler portal and apply the “automated recovery” procedures here, too.  Since it has already developed the programming, it cannot claim it does not have the resources.

The IRS has sufficient information to pay out the childless worker EITC automatically

The idea of automating the childless worker EITC has bounced around for years.  As the NTA, I recommended it in my 2016 Annual Report to Congress, here.  The Treasury Inspector General for Tax Administration (TIGTA) recommended it in April, 2018, here.  TIGTA’s report, The Internal Revenue Service Should Consider Modifying the Form 1040 to Increase Earned Income Tax Credit Participation by Eligible Filers, notes that for Tax Year 2014, the IRS estimated 5 million households were potentially eligible for the EITC, leaving $7.3 billion unclaimed.  Of those 5 million taxpayers, 1.7 million actually filed returns and did not claim the EITC.  In recommending that the IRS modify the Form 1040 to capture information that would allow it to automatically issue the EITC to taxpayers who failed to claim it, TIGTA noted the IRS annually spends $2 million issuing notices to potentially eligible taxpayers, but the notices were sent to only 361,000 of the 1.7 million filers (and none to the non-filers), and only 28 percent of the eligible-with-children responded and 57 percent of the eligible-without-children responded.  TIGTA even provided a nifty mock-up of how the 1040 could be modified.

On January 31, 2020, Senators Sherrod Brown and Catherine Cortez Masto wrote Commissioner Rettig asking why the childless worker EITC could not be paid out automatically based on available wage and other income data.  In the letter, here, the Senators cited the TIGTA report discussed above and asked whether the IRS had studied TIGTA’s recommendation and if so, why it had not implemented the recommendation.

In his response to the Senators, the Commissioner stated that

 [i]n 2018, the IRS and Treasury began developing a shorter, streamlined Form 1040 with the goal of simplifying the experience for taxpayers and partners in the tax industry.  Adding additional information to the Form 1040 for EITC purposes would not align with the new simplified Form 1040 strategic approach. 

The Commissioner then cited this very absence of such information, and the consequent risk of improper payments, as the reasons IRS could not automatically issue EITC refunds to childless workers: 

For example, based on the information on the Form 1040, the IRS cannot determine if a taxpayer can be claimed as a dependent on another return or if the taxpayer lived in the United States for more than six months.

Before we explore the IRS’s position a little more closely, a little bit of background is helpful.  The childless worker EITC is available to taxpayers who are at least 25 years of age and under 65 years of age.  For Tax Year 2019, eligible taxpayers filing as single or head of household must have less than $15,570 adjusted gross income (AGI); married-filing jointly taxpayers must have AGI below $21,370.  (Married-filing-separately taxpayers are not eligible for the credit.)  Both the childless and child-based EITC require earned income, which means that income will be reported and on file with the IRS on Forms W-2 or Forms 1099-MISC.  The IRS has announced that for 2021 filing season, a new Form 1099-NEC will be required, which should make it even easier to identify non-employee compensation.  IRC § 6071 requires both of these forms to be filed by January 31 of each year.  By now, pandemic notwithstanding, the IRS should have this earned income information for Tax Year 2019 for almost every single worker in the United States.

Other than earned income, the requirements for the childless worker EITC are that the person claiming the credit (1) not be claimed as a “qualifying child” of another person; (2) not be claimed as a dependent on someone else’s tax return; (3) have the principal residence in the United States for more than half the year; (4) have the appropriate Social Security Number (SSN); and (5) have less than $3,600 in investment income.  The IRS can check all of these requirements against its internal databases, except for the principal residence test.

In fact, taxpayers who file a Form 1040 must check a box on the front of that form declaring that they cannot be claimed as a dependent on someone else’s tax return.   Similarly, one of the questions taxpayers must answer when they complete the IRS’s nonfiler portal is whether you can be claimed as a dependent on someone else’s tax return.  So the IRS has affirmations of this status requirement for hundreds of millions of taxpayers, made under penalties of perjury.  (As I noted in an earlier post here, the nonfiler portal requires the submitter to affirm the jurat.)

What’s more, any return filed claiming a refund passes through innumerable filters and databases designed to identify questionable and fraudulent claims, including duplicate claims of qualifying children (one of the Commissioner’s concerns in his letter to the Senators).  It has Social Security databases matching name, age, and parentage of social security number holders, among other information.  Regardless of what people claim on their returns, the IRS checks those claims against its databases.  It is doing that even as I write this.  Thus, the IRS has internal processes in place to prevent improper automated payments of the childless worker EITC.

Okay.  So, as of today, the IRS has earned income and other income information necessary for computing EITC eligibility for most taxpayers.  It also has a sworn statement from the vast majority of taxpayers as to their status of being claimed as a dependent on another’s return.  And the IRS has internal databases that can check the taxpayer’s SSN, age, and status as dependent/qualifying child on another’s return.  All that is left to verify is the “more than 6 months U.S. residence” status.

I propose a two-prong approach for this last test.  I’ll discuss how to handle this for Tax Year 2020 returns later in this blog, but for 2019 returns, filed in 2020, the IRS could administratively deem this requirement to be met unless the IRS has clear and convincing evidence to the contrary.  The IRS uses “tolerances” all the time in letting errors go unchallenged, and if there were ever a time to use tolerance, today is the time.  Thus, by administratively deeming taxpayers with a US address on their returns to have lived in the US for more than 6 months of the tax year, the IRS can create an “automated recovery” algorithm that computes and pays out the childless worker EITC to taxpayers who filed returns (including the nonfiler portal) without requiring an amended return.  This approach saves the IRS resources dedicated to processing amended (paper) returns as well as the letters it sends out to potentially eligible childless workers.

If IRS is nervous exercising its administrative discretion in this way, let me point out that nowhere on the Form 1040 or any of its schedules does the IRS require the taxpayer to aver its principal residence was in the US for more than six months of the year, and yet it stills pays out the childless worker EIC to people who claim it on the return.  To claim the childless worker EITC, you do not attach any schedule whatsoever, you simply write in the amount, per a look-up chart, on line 18a of the Form 1040.  Buried in the 17 page EITC section of the Form 1040, Step 4, Question 3 asks: “Was your main home, and your spouse’s if filing a joint return, in the United States for more than half of 2019?”  If the answer is “no,” you can’t take the credit.  In fact, the IRS instructs you to write “no” next to line 18a, presumably because it does use data on returns to identify potentially eligible EITC recipients that it can contact, via Letter CP-27!  Since the IRS is already using return data to identify some eligible taxpayers and send them CP-27 letters, it can use the same algorithm to identify, calculate, and pay out the childless worker EITC.

The maximum amount of the 2019 childless worker EITC, for earned income between $6,950 and $8,649, is $529, nothing to sneeze at in the midst of the pandemic.  As anyone who has practiced in the field of poverty law can tell you, to truly understand the impact of money to a low income person, add a zero.  $529 to them is as $5,290 to more affluent persons.

The Nonfiler Portal Created a “Filing Trap” for Households with Income Below the Filing Threshold

The IRS actually inadvertently exacerbated EITC underclaims via its nonfiler portal.  Again, this observation is not meant to be piling on to the IRS (I will say this over and over and over …).  It created the portal in record time, and it has been a useful tool.  But the nonfiler portal created what Gabriel Zucker of New America has called the “filing trap.”  People who used the portal were not given the option to compute the EITC – either the childless EITC or the child-based EITC.  For a family of four – two parents and two qualifying children – with income between $23,950 and $23,999, entering their dependents into the non-filer portal meant they lost out on $4,787 of EITC (they would lose $2,736 for 1 child, and $5,515 for 3 children).  Similarly, childless workers with income of $11,999 and filing through the nonfiler portal did not have the option to request $275 of EITC benefits.  To receive it now, they will have to file a paper amended 2019 Form 1040.   Good luck getting that processed.  And does the IRS really want to receive all those paper Forms 1040X?  (The IRS has announced that electronic filing for those forms is coming, but it’s not here yet, so that’s not much help for folks who need their EITC now.)

There is a better way.  As discussed above, for the childless worker filers, whether on a Form 1040 or through the nonfiler portal, the IRS can automatically calculate the childless worker EITC from information it has available to it in-house.  For the child-based EITC, it can use its internal data and the information about dependents provided on the non-filer portal to compute the appropriate amount of EITC.  For this extraordinary filing season, for once the IRS can use its internal data and filters for the good of these vulnerable taxpayers.  It can identify duplicate claims, etc., but it can also compute the EITC for taxpayers who appear eligible and which the IRS’s own system, which it encouraged taxpayers to use, blocked them from claiming.

Going Forward – Filing Season 2021 and Beyond

The proposals outlined above don’t solve all the problems with unclaimed EITC or missed EIPs.  They address emergency situations and provide a way to get much needed dollars out to the most vulnerable populations in our society, populations that are most impacted by the coronavirus and pandemic-related job loss.  For 2021 and beyond, the IRS can build on what it has created this year to increase the EITC participation rate while minimizing taxpayer burden.  In my next blog post, I’ll explore how the IRS can keep the non-filer portal and expand its utility, as well as how it could improve the use of CP-09 and CP-27 letters.  Oddly enough, the pandemic opens the door for the IRS to embrace its role in delivering social benefits.  It would be more than a shame if it did not seize that opportunity.

Is IRS Too Soft on People Claiming EITC? Treasury Says Yes and Also Suggests No

The pressure on the IRS to deliver the economic impact payment (EIP) highlights some of the general challenges the IRS faces when Congress tasks the IRS to deliver benefits.  With respect to the EIP, faced with a public that needs the money that Congress has earmarked, IRS has had to move quickly. In times like these, when balancing speed with accuracy, IRS should and admirably has erred on the side of speed.  With lives upended and millions of Americans struggling, this is the right call. 

As an administrator that regularly gets taken to task when it comes to its administration of refundable credits like the EITC, IRS faces a similar trade off in its more routine day to day work.  IRS knows that millions of Americans rely on those Code-based benefits. At the same time, about 25% of the EITC is classified as an improper payment, as Congress has been sure to remind Commissioner Rettig when he has been up on the Hill.

Two recent publications highlight the competing pressures the IRS faces as a result of it having responsibility for administering the EITC.  One is a TIGTA report taking the IRS to task for failing to impose civil penalties and bans on individuals who appear to be improperly claiming the EITC. The other is a Treasury Office of Tax Analysis (OTA) working paper that emphasizes that the vast majority of people claiming the EITC have an eligible familial relationship with a claimed qualifying child.

For folks who are looking for differing perspectives on an issue I suggest that you read both, back to back.  If reading TIGTA reports and OTA working papers is not your ideal way of spending an afternoon, in this post I will discuss the highlights of both.


TIGTA: IRS Not Doing Enough to Deter and Punish Improper Claimants

First, the TIGTA Report. TIGTA’s steady drumbeat on EITC and refundable credits is that IRS is not using the enforcement tools that Congress has given to it. 

Congress provided the IRS with tools to address taxpayers identified as submitting fraudulent or reckless refundable credit claims. These tools include the authority to assess the erroneous refund penalty and require taxpayers to recertify that they meet refundable credit eligibility requirements for credits claimed on a return filed subsequent to disallowance of a credit, and the ability to apply two-year or 10-year bans on taxpayers who disregard credit eligibility rules. However, the IRS does not use these tools to the extent possible to address erroneous credit payments. 

What are the consequences of IRS not using its robust power to sanction taxpayers? In TIGTA’s view,

[t]he ineffective use of the various authorities provided in the I.R.C. is a contributing factor in the high rate of improper payments. The IRS estimates that 25 percent ($18.4 billion) of EITC payments made in Fiscal Year 2018 were improper payments. The IRS also estimates that nearly 33 percent ($8.7 billion) of ACTC payments made during Tax Years 2009 through 2011, and more than 31 percent ($5.3 billion) of AOTC payments made during Tax Year 2012, were potentially improper. 

The main gripe TIGTA emphasizes is that the IRS has failed to use its power to impose a 20% erroneous refund penalty under Section 6676, a power that Congress amended a few years ago to specifically apply to individuals erroneously claiming refundable credits like the EITC:

In Years 2015, 2016, and 2017, the IRS assessed the erroneous refund penalty on 3,190 erroneous claims totaling $2.7 million. However, our analysis identified 494,555 withholding and refundable credits disallowed for Tax Years 2015, 2016, and 2017 (as of December 27, 2018). These taxpayers filed 798,504 tax returns that claimed more than $2.6 billion in improper withholding or refundable credits. Applying the 20 percent erroneous penalty rate to the disallowed credits computes to almost $534.7 million in penalties that the IRS potentially could have assessed. 

TIGTA goes on state that IRS has studied the impact of the few cases when IRS has in fact imposed the 6676 penalty, and it appears that IRS is teeing up some recommendations based upon its study (FYI – I have not seen the study nor do I know if IRS is planning on releasing it; it would be interesting as well to see how much tax is collected out of previously assessed penalties—I suspect not much). 

The report also criticizes IRS for failing to systematically impose a two-year ban on taxpayers who in TIGTA’s view are recklessly or intentionally disregarding rules and faulty IRS processes for allowing individuals to recertify eligibility for the EITC (and other disallowed credits). As to the ban, TIGTA notes that in successive years people appear to be incorrectly claiming the EITC. ( Note: as advocates know appearances may be misleading as claimants may be unaware of the rules or simply not able to document meeting eligibility criteria. For more on the ban, see Bob Probasco’s excellent three part series, The EITC Ban-Further Thoughts Part 1Part 2 and Part 3.) In a heavily redacted section, TIGTA suggests that the IRS should impose the ban earlier and more frequently. This would free scarce audit resources to investigate other individuals and prevent erroneous claims.

The TIGTA report also discusses recertification. For individuals who have had credits denied through deficiency procedures, Section 32(k) provides that “no credit shall be allowed under this section for any subsequent taxable year unless the taxpayer provides such information as the Secretary may require to demonstrate eligibility for such credit.” TIGTA highlights IRS problems with its processes to ensure that taxpayers who recertify are in fact eligible for the claimed credits.

OTA: The “Improper” EITC Claimants Look Like the Proper Claimants

The OTA paper looks at the EITC very a different perspective. While noting the stubborn 25% or so improper payment rate, OTA attempts to study the characteristics of the people who are not eligible or who appear to be overclaiming the credit. The reason for the inquiry is to help frame the debate around improper payment rates. As OTA notes, 

from the social welfare perspective, policymakers might view a case where a child lived with her low-income grandmother for 6 months of the year differently from a case where an unrelated person claimed a child she did not live with at all; but, both cases would be counted equally in computing the EITC error rate.

What the improper payment rates alone fail to tell us is context. 

When a taxpayer fails to meet the qualifying child tests for an EITC claim, it is generally unknown how closely this taxpayer is related to the child and whether another taxpayer could have correctly claimed the child. 

It is possible for more than one taxpayer to have provided some care for the child during the year, but no single taxpayer to be eligible to claim the EITC for that child under the law (e.g., the child does not live with any taxpayer for more than half the year). In other cases, the erroneous claim may have precluded the actual caregiver from claiming the child. 

What OTA does in the paper is to provide more detail to allow for a “more nuanced consideration of EITC qualifying child errors and the associated social welfare implications.”

What kind of nuance did OTA look to identify? Essentially OTA looked to see if there was a family relationship between the adult and the child claimed as a qualifying child:

Specifically, we analyzed the intensity of the familial relationship between the child and the actual claimant as well as the length of the shared residency, providing information about whether the claim, despite being erroneous, might nonetheless have supported a low-income worker caring for a child. In addition, we studied possible reasons why the “wrong” taxpayer may have claimed the child—whether this occurred due to complicated family circumstances, intentional credit-maximizing behavior, or other reasons—to better understand the causes of EITC noncompliance. Finally, we estimated the credit that could have been received by the parent who did not already claim the child and was potentially the actual caregiver. This result offers an insight into the extent to which the EITC improper payment estimates may overstate not only the social welfare loss but also the monetary loss to the government. 

OTA’s study showed that in the overwhelming number of cases, when there was an error, there still was a close familial relationship between the adult and the child or children, though typically the adult was not the child’s biological parent:

Our analysis suggests an intense relationship between the child and the claiming taxpayer in most cases. About 87 percent of the children, despite being claimed with qualifying child errors, had a valid familial relationship (84 percent) or lived with the taxpayer for more than half of the year (7 percent) or both. However, compared to children who met all of the qualifying child tests, the children in our sample were much less likely to be the son or daughter of the taxpayer, and more likely to have other valid familial relationships (e.g., grandchild or nephew/niece) with the taxpayer. 

The whole paper deserves a careful read, but the bottom line conclusion is that the majority of children claimed with qualifying child errors had an eligible familial relationship with their claimants and in a majority of the cases there was no parent who under current eligibility criteria could in fact be eligible to claim a child.

Furthermore, about 60 percent of the children did not appear to have a parent who could be the “right” taxpayer, as stipulated by law, who could file a claim. We conclude that a substantial portion of erroneous EITC claims likely helped support children in low-income families despite those children being claimed in error. Parents of another 4 percent of children were found to have filed a duplicate claim with the taxpayer under audit. For the remaining 36 percent of children, who had a tax-filing parent not already claiming the child, the family members’ filing patterns were consistent with the credit-maximizing motive in 85 percent of cases. We offer a few explanations, including taxpayer confusion about EITC rules or law changes, to account for the claiming pattern of the remaining 15 percent of cases. Finally, we estimate that the forgone credit that could have been received by non-claiming parents amounted to about 10 percent of the total overclaims attributable to qualifying child errors, or 4 percent of all EITC overclaims. Taken together, these results suggest that the official improper payment rate overstates the social welfare loss and monetary loss to the government.  (emphasis added)


At the end of the day, the OTA study and TIGTA report are likely to appeal to differing parts of the trade off I discussed in the introduction. It could very well be that administrators (and readers and Congress for that matter) do not necessarily value social welfare concerns in the same way that I or others do.  People could place a higher value on rule following. After all, Congress is responsible for determining the eligibility criteria, and it could change the criteria to reach some of the adults who are improperly claiming the credit (I and others have suggested this in past papers, most recently from me in the special report to Congress on the EITC that was part of the TAS FY 2020 Objectives Report). 

How does the current pandemic and economic crisis influence this issue? If I were in the IRS now, I would be strongly advocating for the IRS to slow down on the TIGTA recommendation to impose more civil penalties and sanctions on EITC claimants. Context matters. People are struggling. While it should not mean a green light for allowing erroneous claims to go out of the door, OTA helps us understand that the overwhelming majority of Americans who appear to be improperly claiming the credit have a close family relationship with the children identified on their tax return. 

When the current crisis clears, Congress should take a hard look at the EITC and other credits. It could help the IRS by boosting the childless EITC, which in addition to helping millions of working Americans will also likely decrease incentives for people to share children to ensure eligibility. Congress should also reconsider the eligibility requirements that are difficult and expensive for the IRS to verify and which make less sense in today’s world, like pegging eligibility on arbitrary residency rules that 1) may understate the importance of family members who are connected financially and emotionally but who do not live with a child for more than 6 months and 2) do not work well when there are multigenerational families living together.

Review of 2019 (Part 2)

In the last two weeks of 2019 we are running material which we have primarily covered during the year but which discusses the important developments during this year.  As we reflect on what has transpired during the year, let’s also think about how we can improve the tax procedure process going forward.


2017 Tax Legislation

The Tax Cuts and Jobs Act (TCJA) has already had significant effects on taxpayers in the first two years since its enactment. The law almost doubles the standard deduction for taxpayers, while mostly eliminating personal exemptions and limiting or eliminating certain personal deductions. Of particular relevance in the LITC context, the Child Tax Credit (CTC) was doubled from $1,000 to $2,000 per qualifying child (though only $1,400 is refundable). While the elimination of the personal exemption for dependents largely makes this a wash for many taxpayers, low income taxpayers may actually be advantaged by the change, since the CTC is partially refundable, and exemptions are of less benefit to those with low marginal rates. Finally, beginning in 2019, the TCJA eliminates the shared responsibility penalty assessed on taxpayers who fail to enroll in qualified health insurance plans under the Affordable Care Act.

The TCJA has also led to another potentially unintended consequence for some taxpayers seeking ITINs for their dependents. Since the dependency exemption is now worth $0 and because (almost) all tax benefits attributed to an ITIN dependent requires that they physically live in the United States (see e.g. IRC 24(h)(4)(B)), the IRS is now reluctant to issue ITINs to dependents outside of the US unless a specific tax benefit is demonstrated. (See W7 Instructions, “What’s New”). This causes serious problems for taxpayers that live in “non-conforming” states (like Minnesota) where a dependency exemption is still worth something on the state return, but their dependent lived in Mexico the whole year. These taxpayers can’t get an ITIN for the dependent because there is arguably no federal tax reason, and they can’t put their dependent on the state return because they don’t have a federally issued ITIN. The University of Minnesota LITC has dealt with this issue and had some success by working with a VITA site that issues ITINs. In at least one instance, the clinic was able to get an ITIN issued based on an issued position letter that argued that there was a federal benefit to an ITIN.

Leslie Book, Suggestions to Get Up to Speed on (Some) Issues With the New Tax Law, Procedurally Taxing (Dec. 17, 2017), https://procedurallytaxing.com/suggestions-to-get-up-to-speed-on-some-issues-with-the-new-tax-law/

Third party contacts

Until the TFA was enacted, a 9th Circuit case, J.B. v. United States, represented anew obstacle for IRS making contact with third-parties during an audit. During the course of the audit of the petitioner and his wife, the IRS issued a summons to a third-party (incidentally, the California Supreme Court), seeking information on compensation issued to the petitioner. The petitioner then moved to quash the summons, on the basis that the IRS failed to give reasonable advance notice of the third-party contact (in accordance with IRC § 7602(c)(1)) when it sent Publication 1, a pamphlet included with the initial notice of audit. Publication 1 is a generic publication that broadly gives advance notice of the possibility that the IRS will make contact with a third party.

The 9th Circuit held that the publication was insufficient as not reasonably calculated to inform the taxpayer of the contact. The court based its decision on a number of factors, including the two-year length between the issuing of Publication 1 and the contact, the possibility of privileged information being included in the summons, and the extensive contact between the taxpayers and IRS. Perhaps most relevantly, the court suggested in a footnote that Publication 1 alone may never be sufficient to provide reasonable notice due to its broad language and lack of certainty regarding the chance of contact.  But see, High Desert Relief, Inc. v. United States, 917 F.3d 1170, 1193 (10th Cir. 2019) (assuming, without deciding after J.B., that Publication 1, in substance, did provide sufficient notice under section 7602(c)(1)). 

Following a 2017 National Taxpayer Advocate report discussion of TPCs, Section 1206 of the Taxpayer First Act (TFA) amended IRC § 7602(c) by repealing the requirement for the IRS to provide “reasonable notice,” making J.B. less relevant.  It clarified that the IRS may provide this third-party contact (TPC) notice only if it intends to make a TPC during the period specified in the notice, which may not exceed one year.  Generally, the IRS must send the notice at least 45 days before making the TPC.  TAS has been advocating that an IDR be included with the TPC notice so that the taxpayer has a realistic opportunity to avoid a TPC that seeks new information by providing the information requested.

See Leslie Book, Ninth Circuit Rejects IRS’s Approach to Notifying Taxpayers of Third Party Contacts, Procedurally Taxing (Mar. 4, 2019), https://procedurallytaxing.com/ninth-circuit-rejects-irss-approach-to-notifying-taxpayers-of-third-party-contacts/


Special Report to Congress

Before leaving her post as National Taxpayer Advocate, Nina Olson issued a Special Report on the Earned Income Tax Credit as part of her annual report to Congress. The report makes a number of recommendations to improve administration of the EITC, notably including that the IRS develop an examination process for EITC bans and that Congress legislate whether the Tax Court has jurisdiction over EITC ban cases. Under the current situation, taxpayers are left with little recourse or due process opportunity when the IRS imposes such a ban.

See Bob Probasco, The EITC Ban – Further Thoughts, Part One, Procedurally Taxing (Sep. 27, 2019), https://procedurallytaxing.com/the-eitc-ban-further-thoughts-part-one/

Leslie Book, EITC Ban: NTA Report Recommends Changes and IRS Advises on its Application to Partial Disallowances, Procedurally Taxing (Aug. 8, 2019), https://procedurallytaxing.com/eitc-ban-nta-report-recommends-changes-and-irs-advises-on-its-application-to-partial-disallowances/

Earned Income for EITC but not for Income Taxes

Feigh v. Commissioner involved a novel issue of law: the interplay between the exclusion of Medicaid Waiver Payments from income (a change made via notice in 2014) and the EITC. The petitioners in Feigh would have been able to exclude these received payments from their income, but it actually would have made them worse off by removing the “earned income” necessary for them to qualify for the EITC and Child Tax Credit (“CTC”). The IRS rationale was that it was preventing the provision of a double tax benefit not intended by Congress. The Tax Court applied Skidmore deference to the IRS notice changing the waiver treatment and found that the notice was not persuasive that payments were excludible under IRC 131. The court then held that the IRS could not reclassify the status of the payments via notice as a means to eliminate the benefits of the EITC and CTC.

See Caleb Smith, Invalidating an IRS Notice: Lessons and What’s to Come from Feigh v. C.I.R., Procedurally Taxing (June 17, 2019), https://procedurallytaxing.com/invalidating-an-irs-notice-lessons-and-whats-to-come-from-feigh-v-c-i-r/

Innocent Spouse

Jurisdiction of District Court to hear refund

The question of whether taxpayers can bring an innocent spouse claim as part of a refund suit is an increasingly litigated issue. Under the long-time rule of Flora v. United States, taxpayers must pay their assessment first in order to bring a refund claim in federal district court. But whether such taxpayers could litigate the merits of their innocent spouse claims in such an action has been unclear. In 2018, a Texas district rejected the argument that an innocent spouse claim could proceed in a refund suit in Chandler v. United States. But in the more recent case of Hockin v. United States, an Oregon district court allowed a refund suit involving such a claim to proceed. Hockin is set for trial in early 2020 and may prove an interesting test case for this issue.  Ms. Hockin was represented by the tax clinic at Lewis & Clark and the tax clinic at the Legal Services Center of Harvard Law School filed an amicus brief in this case on behalf of Ms. Hockin.

See Sarah Lora & Kevin Fann, Innocent Spouse Survives Motion to Dismiss in Jurisdictional Fight with the IRS, Procedurally Taxing (Sep. 18, 2019), https://procedurallytaxing.com/innocent-spouse-survives-motion-to-dismiss-in-jurisdictional-fight-with-the-irs/

Carlton Smith, Another District Court Holds It Lacks Jurisdiction to Consider Innocent Spouse Refund Suits – at Least for Section 6015(f) Underpayment Cases, Procedurally Taxing (May 3, 2019), https://procedurallytaxing.com/another-district-court-holds-it-lacks-jurisdiction-to-consider-innocent-spouse-refund-suits-at-least-for-section-6015f-underpayment-cases/

Carlton Smith, Update: Can District Courts Hear Innocent Spouse Refund Suits?, Procedurally Taxing (Dec. 24, 2018), https://procedurallytaxing.com/update-can-district-courts-hear-innocent-spouse-refund-suits/

Innocent Spouse and Rev Proc.

Under Rev. Proc. 2013-34, actual knowledge of a spouse’s omission of income does not preclude equitable innocent spouse relief under IRC 6015(f). A recent case litigated by the tax clinic at the Legal Services Center of Harvard Law School has sought to reinforce the availability of equitable relief to such taxpayers. In Jacobsen v. Commissioner in the 7th Circuit, the petitioner has challenged the Tax Court’s denial of his appeal of an innocent spouse determination. The petitioner had four positive factors for relief under the statute, but the Tax Court found that his actual knowledge of embezzled income outweighed those factors thus not entitling him to relief. Oral argument was held in September 2019, and the case is currently pending.  Since the oral argument in Jacobsen two additional Tax Court cases have ruled against individuals claiming innocent spouse status where there was three positive factors and knowledge was the sole negative factor.  The Tax Court seems to be placing a heavy thumb on the scale when knowledge exists.

See Carlton Smith, Seventh Circuit to Hear First Case about Applying Latest Innocent Spouse Equitable Rev. Proc., Procedurally Taxing (July 30, 2019), https://procedurallytaxing.com/seventh-circuit-to-hear-first-case-about-applying-latest-innocent-spouse-equitable-rev-proc/