Sending Notices with Bad Dates

On June 22, 2020 National Taxpayer Advocate Erin Collins issued a blog post advising readers to keep an eye out for notices with expired action dates.  The post notes that “during the shutdown, the IRS generated more than 20 million notices; however, these notices were not mailed.  As a result, the notices bear dates that now have passed, some by several months and some of the notices require taxpayers to respond by deadlines that have also passed.” I will repeat myself once or twice in this post but if I am reading it correctly the IRS is knowingly and intentionally creating a false entry on thousands, perhaps tens of thousands, of taxpayers’ official records of account.

The NTA describes as a silver lining the fact that the IRS is granting additional time to respond before interest or penalties apply and that the IRS is putting inserts with the letters to explain something about the mismatch in the date of mailing and the dates on the letters.  I will talk more about some of the letters the NTA mentions in her blog post.  I found myself wondering about several things that were not explained in the NTA’s blog post.  Why did the IRS print these notices?  Why doesn’t the IRS shred the notices and recycle the paper in order to issue new notices with the proper dates on the notices?  Why hasn’t the IRS issued a news release or Tax Tip about the notices to alert taxpayers and practitioners?  Prior to the NTA blog post, the IRS only released this information though its National Public Liaison (NPL), which, while helpful, does not reach a wide audience. And while many people read the NTA blog posts, I don’t think it has a readership on a par with broadly released statements from the IRS.

The IRS might think it has communicated to practitioners. It pushed this news out through the NPL on June 9. The stakeholder liaison is an inadequate way to disseminate important news. On the day of the stakeholder liaison email, IRS quietly updated the page on IRS operational status to include the information. It also posted this news as a “Statement on Balance Due Notices” here.  I do not want to detract from the important discussion of the decision itself, but it is also worth mentioning that the information the IRS has made public on this situation and the method and medium of making it public, fails to signal the importance of this action.

Yesterday the NTA released her 2021 Objectives Report to Congress, which confirms the information in her blog post. Kudos to the NTA for including the problem of outdated notices in the news release accompanying the report. This will help get the word out to practitioners.

In a letter to Commissioner Rettig, Representatives Neal and Lewis expressed their concern over the outdated notices and suggested that the IRS take steps to “ensure no taxpayers are penalized” for the IRS’s inability to timely process correspondence. For the reasons explained below, this will not be easy to do if the IRS moves forward with its plan to mail the outdated notices.

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The NTA states that several dozen kinds of IRS notices will be mailed in the next month or two.  Maybe there is still time for the IRS to reconsider its decision to send out-of-date notices.  I hope so.  Here, I will discuss a few of the notices she mentioned.  Before starting the specific discussion, I note that many of these notices are required by statute.  I draw a distinction between statutorily required notices and other types of IRS notices.  While the best practice would be to send out notices on the date listed on the notice for all notices, the purposeful mailing of misdated statutorily required notices creates a more serious problem.

No matter what an insert says, the taxpayer will receive a statutorily mandated notice triggering statutorily prescribed duties and response times with the wrong date on the notice and the wrong date(s) for responding.  In the last two sentences of her blog post the NTA mentions that the IRS computer system will show as the business record of the IRS the wrong date.  She says “[c]ompounding confusion surrounding notice dates, IRS transcripts for taxpayers’ accounts will also reflect incorrect dates for some of the notices.” 

This could have grave consequences for both taxpayers and the IRS if the dates on the letters compromise the IRS business records.  First, taxpayers who do not keep the envelope and the letter may have trouble proving that the dates on the letter did not reflect the actual mailing date when making a future challenge.  Second, if the IRS builds a business record which it knows contains inaccurate information it makes all of its records suspect.  Courts regularly rely on certified transcripts from the IRS for the accuracy of the date an action took place.  If the IRS knowingly puts the wrong dates into its system of records, that calls the entire system into question.  This could have consequences for the IRS far beyond the consequences of recycling these letters and making sure that its records accurately reflect actions taken.

Here you have the NTA saying that the IRS business record is inaccurate.  That could be powerful evidence in court to strike at many IRS actions taken that stem from 2020.  It also has the potential to support grounds for damages if certain collection actions occur after a wrongful assessment or wrongful filing of a notice of federal tax lien.  It may present the possibility that in a CDP case a taxpayer may wish to lean on a rights-based failure to inform argument as a grounds to invalidate the proposed collection action.

Notice and Demand

IRC 6303 requires that the IRS send out a notice and demand letter within 60 days of the making of an assessment.  Case law going back at least three decades holds that the failure to send the notice and demand letter within the 60-day period does not invalidate the assessment but there is some possibly contrary case law.  The failure impacts the timing of the creation of the federal tax lien.  IRC 6321 and 6322 provide that the federal tax lien arises upon assessment, notice and demand and failure to pay within the demand period.  Ordinarily, failure to pay within the demand period causes the federal tax lien to relate back to the date of assessment.  If the IRS sends out the notice and demand beyond the 60-day period, the FTL will only arise upon non-payment and will not relate back to assessment.

You might say “so what,” because who cares about the FTL.  Only after the IRS filed the notice of federal tax lien (NFTL) does the IRS create a perfected lien.  The unperfected FTL still, however, has meaning.  For example, it attaches to property transferred for less than full value.  If a fight arises regarding the attachment of the FTL, the actual date of the mailing of the notice and demand letter matters.  Because of the pandemic, the IRS could not avoid sending out many notice and demand letters after the 60-day period.  Sending them out beyond the time frame must occur due to no fault of the IRS but sending a significantly backdated letter will undoubtedly confuse many recipients and may cause some to even challenge the validity of a notice which on its face asks the taxpayer to do something impossible.  If the notice and demand letter is invalid, the IRS has real problems because it would not have created the FTL, which has many consequences, including but certainly not limited to violating disclosure of a taxpayer’s liability if the IRS records a notice of federal tax lien when no underlying lien exists.

There is also the problem of the address.  The IRS must mail the notice and demand letter to the taxpayer’s last known address.  The IRS must use the taxpayer’s address as shown on the taxpayers most recently filed and properly processed return, unless clear and concise notification of a different address is provided. See, e.g., Duplicki v. Comm’r, T.C. Summary Opinion 2012-117.If these notices have been sitting in the bowels of a service center for months during the filing season, it is quite possible that many taxpayers have filed returns between the time of the creation of the notice and demand letter and the mailing of that letter.  The NTA does not mention if the insert changes the address on the letter.  I imagine it does not.  While many paper returns filed in the past few months remain in the parking lots of the service centers to which they were sent, the vast majority of taxpayers filed electronically.  Many of those returns will have gone through processing, and the IRS will know the taxpayer’s new address before these musty notices get mailed.  Mailing the notice and demand letters to something other than the taxpayer’s last known address will create an invalid notice and demand letter creating the same problems described above.  Maybe these are all notice and demand letters based on returns filed with insufficient remittance and processed early in the filing season, so the notice on the letter is the address on the most recent return.  If these notices do not come from that source, the likelihood that a fair percentage will bear an address other than the last known address is reasonably high.  This means taxpayers should be prepared to challenge the notices on this basis, which is not often done.

Math Error Notices

As most readers know the name math error notice is a misnomer.  Subsection 6213(g)(2) provides the definition of math error notice.  Sixteen different actions trigger the sending of a math error notice only one of which is 1+1=3.  Earlier this year, Les updated Chapter 10 of the treatise “IRS Practice and Procedure” and adopted the practice of the Taxpayer Advocate Service of calling this notice the summary assessment authority notice.  For this post I will stick with the misleading language of the statute, but errors in math play a small role in these notices.

The math error notice provides an exception to the need for the IRS to send a notice of deficiency in order to make an assessment.  Instead of a 90-day letter offering the chance to go to Tax Court, the taxpayer receiving a math error notice has 60 days to write back to the IRS expressing disagreement or the IRS will make the assessment.  We have not written enough about math error notices but some of our prior posts on this topic exists here, here, here and here.  Nina Olson wrote often about these notices as the NTA.  Find some of her writings here, here, here and here

This notice cuts off rights.  Most taxpayers fail to respond giving the IRS a shorter, easier path to assessment than the notice of deficiency.  Math error notices confuse taxpayers in the best of times as discussed in some of the NTA annual reports.  If you couple the ordinary confusion of these notices with dates that make no sense, the likelihood of a failure to response undoubtedly goes up.

Note that the math error notice must be mailed to the taxpayer’s last known address and the discussion above concerning notices with something other than the last known address applies here.  If the math error notice goes to the wrong address but the IRS makes an assessment following a failure of the taxpayer to respond, then the IRS has a bad assessment and all of the things that flow from a bad assessment.  These “things” can take a lot of time and effort to unwind.  They can also cause the IRS to lose the right to assess if the unwinding occurs after the statute of limitations on assessment has passed.

On a smaller scale the government faced a similar problem in the government shutdowns of 2013 and 2018-2019.  The system seems to generate notices automatically at certain points in time.  The system does not understand when the government ceases to operate.  In the prior shutdowns it sent out notices of deficiency and collection due process notices while the government was closed, but those letters didn’t have the wrong date and the taxpayer could still file a Tax Court petition or CDP request in the right time frame.

Collection Due Process Notices  

I wrote a blog post in 2018 about a CDP case in which the Revenue Officer went to the taxpayer’s house to deliver the CDP notice but the taxpayer’s dog deterred the RO from making delivery.  He went back to his office and mailed the CDP notice to the taxpayer to avoid bodily injury; however, he mailed the notice two days later.  When he mailed the notice, it still bore the date of his canine-thwarted personal delivery effort.  The Tax Court concluded that the time to make a CDP request runs from the date of mailing (or delivery) and not the date on the CDP notice.

Now the IRS will throw into the system potentially thousands of wrongly dated CDP notices, causing the recipients confusion and filing dates that may or may not fall within 30 days of the actual date of mailing.  How many taxpayers will keep the letter and the envelope?  Will the IRS have the correct date of mailing in its database or the original date of mailing?  Remember that these mailings result not from a single RO working a case but from a mass-produced effort at the service centers.

Are CDP notices sent by the IRS with knowingly wrong dates valid CDP notices?  If invalid, it makes all downstream levy actions wrongful.  Will the CDP notices be sent to the taxpayer’s last known address or to some other address?  If sent to something other than the taxpayer’s last known address, the CDP notices are not good.

Conclusion

The IRS should throw away these letters.  (Recycle them please with appropriate taxpayer identification precautions.)  Send new letters in which the dates on the letters match the dates of mailing.  Yes, this will be expensive in cost of production of the letters and the time it takes to create the new letters.  But it may prove less expensive than the alternative.  It certainly will create less confusion among the taxpayers receiving the letters, the representatives trying to assist the letters, and the courts interpreting the IRS actions.

Love, Legal Fees, and the Origin of the Claim: Designated Orders September 23 – September 27, 2019

Despite a relatively small number of orders designated during the week of September 23, they were diverse and interesting. I discuss three below, but the orders not discussed addressed: IRS’s motion for summary judgment in a case where petitioner cited the book, “Cracking the Code” to support his position (here); and a motion to stay (here) and a motion to dismiss for lack of jurisdiction (here) from petitioners in a consolidated docket case involving converted partnership items.

Docket No. 15277-17, Maria G. Leslie v. C.I.R. (order here)

This first order piqued my interest because it covers a topic that comes up in the individual income tax class that I teach every year. The order addresses the IRS’s motion for summary judgment and the case involves alimony and the deduction for legal fees under section 212. The Tax Cuts and Jobs Act separately impacted both of these issues by eliminating the income inclusion (and corresponding deduction) of alimony for divorces decreed post-2019, and by suspending miscellaneous itemized deductions (so below-the-line attorney’s fees cannot currently be deducted). The analysis in this order is still helpful and relevant to past, and perhaps, future years.

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A deduction for legal fees is allowed when the fees are incurred to produce or collect income. Since alimony is considered income by virtue of section 71(c) legal fees related to alimony could be deducted, prior to the TCJA changes. Legal fees related to other costs of divorce are not deductible, so it is important that taxpayers (or more importantly, their divorce attorneys) distinguish between the fees paid for each cause of action.

To determine whether the fees are deductible, the Court must look to the origin of the claim and not the taxpayer’s purpose or desired outcome in the case.

In this specific case, there is a lot at stake for the petitioner. Her ex-husband worked with the firm that handled the class action lawsuit against Enron and for which he received a $50 million fee after the marriage ended.

Originally, a marital settlement agreement (“MSA”) was reached which entitled petitioner to 10% of her ex-husband’s earnings. The amount received under the MSA was determined to be alimony income to the petitioner in an earlier Tax Court case.

Later, petitioner had second thoughts about the MSA and incurred legal fees in three separate proceedings: 1) to set aside the MSA for lack of legal capacity, 2) for an order to show cause as to why she should receive the percentage of earnings as dictated by the MSA nevertheless (her ex-husband deposited her percentage into a trust account for her benefit, but she was barred from accessing it), and 3) for damages for breach of fiduciary duty to her with respect to the MSA negotiations under California Family Code which allows a suit for damages if a breach by her ex-husband results in impairment to her undivided one-half interest in the community estate.

The Court looked to origin of the claim for each proceeding and determined that petitioner was only entitled to deduct legal fees for the second proceeding, because it related to the alimony income in the trust account and her ability to collect it. The IRS’s motion for summary judgment was denied with respect to this part.

The other proceedings were not entitled to a legal fee deduction because the origin of the claim in the first proceeding was related to a flaw in the MSA, and in the third proceeding arose from a duty that her ex-husband had to her as a result of their marriage. In other words, the origin of the first and third claims did not involve the production or collection of income. The IRS’s motion for summary judgement was granted with respect to these parts.

The parties were ordered to submit settlement documents or a status report by the end of November.

Docket No. 6446-19L, Wendell C. Robinson & May T. Jung-Robinson (order here)

In this order the petitioners have filed a motion for summary judgment because they believe they have already paid their 2012 liability of $88,000 with a combination of withholding and a check sent with their return. They argue that as a result of the liability being paid in full, and since the assessment statute is closed, the IRS’s proposed levy cannot be sustained.

In response, the IRS explains that the petitioners’ return contained mathematical errors, so they owed $13,267.20 more than what their return originally reflected. The IRS used its math error authority to correct the returns, so no notice of deficiency was issued. There has been considerable coverage by PT on various math error authority issues (for example: here and here) and it was an “Area of Focus” in former NTA, Nina Olson’s Fiscal Year 2019 Objectives Report to Congress.

The Court has an issue with the IRS’s use of math error authority in this case – mainly that Appeals’ notice of determination makes no mention of the mathematical corrections permitted by section 6213(b)(1), nor of whether the petitioners were notified of the corrections, as required, to give them an opportunity to request abatement. Abatement can be requested under section 6213(b)(2)(A) and doing so entitles the taxpayer to deficiency procedures.

The Court would like more evidence on this issue, so it denies petitioner’s motion.

Docket No. 17799-18L, Michael Balice v. C.I.R. (order here)

This case involves an interesting scenario in the CDP world that I have not encountered – it is one where a taxpayer timely requests a CDP hearing but is not provided with one. Keith covered the topic in 2015 (here), and in 2016 (here) after the IRS provided guidance on how its attorneys should handle the issue in Chief Counsel Notice (“CC”) 2016-008. The issue has also come up in at least one other designated order post (here).

In this order, it appears that Counsel may not have adhered its own guidance and the IRS has moved to dismiss the case alleging that the petitioner took only frivolous positions in his CDP requests for a levy and lien.

The IRS argues that the Court should grant summary judgment in their favor because they did not violate petitioner’s due process rights by denying him a CDP hearing. In the IRS’s view, petitioner had an opportunity to raise issues regarding his liability and the validity of the lien in other courts (because the DOJ had the case for a period of time) and petitioner’s request was properly disregarded because it only raised frivolous issues. IRS also argues that there is no benefit to remanding the case to Appeals, which the Court may be permitted to do, because of petitioner’s frivolous arguments and because Appeals lacks the authority to compromise petitioner’s liability due to the DOJ’s involvement.

The Court isn’t convinced by the IRS’s arguments and reviews the history of the case. Earlier on, as a result of the Office of Appeals’ view that the petitioner’s request was frivolous, it did not communicate with the petitioner in any of the usual ways. The petitioner did not receive an explanation of the process and Appeals did not request any financial information.

The only correspondence Appeals sent to petitioner was a notice of determination sustaining the NFTL (petitioner’s request related to his proposed levy was not timely). This denial of a CDP hearing is permitted under section 6330(g), but Thornberrypermits the Tax Court to review the “non-hearing” for an abuse of discretion.

That opportunity for review is potentially helpful for petitioner in this case. The Court reviews the form letter that petitioner submitted with his CDP request and nothing seems frivolous about it.  If only some portions of petitioner’s request are frivolous, then Appeals may have abused its discretion in denying the CDP hearing. The Court also identifies a section 6751 supervisory approval issue and the IRS has not demonstrated it has met its burden. As a result, rather than grant the IRS’s motion, the Court sets the motion for argument during the upcoming trial session.

Retroactive Math Error Notices May Be on the Horizon

Earlier this week the IRS publicly released a Program Manager Technical Advice (PMTA) memo evaluating the time limits on math error assessment authority. (POSTS-129453-17, 4/10/18) In it, the IRS concludes that it can lawfully make a math error assessment at any time within the assessment statute of limitations. The IRS currently and traditionally uses its math error authority to make corrections during the initial processing of returns. The potential for a change in this practice is the subject of the National Taxpayer Advocate’s 2019 Objectives Report, Area of Focus #7 

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Section 6213(b)(1) allows the IRS to make a streamlined assessment without issuing a Notice of Deficiency if the assessment arises from a math or clerical error. This is not as straightforward as it seems. Congress has gradually expanded the definition of a math error in section 6213(g)(2) to encompass situations that do not fit the commonsense definition or a math or clerical error. Math error authority is attractive to Congress and the IRS because theoretically it prevents clearly erroneous spending at a fraction of the cost of a correspondence audit. However, it is not always that simple, as the National Taxpayer Advocate has repeatedly pointed out. Les has discussed the issues on PT here and here 

Background 

The April 10th PMTA was written in response to TIGTA Report 2017-40-042 (July 17, 2017). On pages 5-7 of that report, TIGTA dings the IRS for not incorporating PATH Act restrictions into its return processing procedures for the 2016 filing season. Specifically, the PATH Act prohibited taxpayers from claiming certain credits unless the TINs used to qualify for the credits were issued prior to the due date of the return. The IRS has math error authority to reject claims without the required TIN, but it was unable to put math error procedures in place for the PATH Act TIN requirements until the 2017 filing season. 

The IRS points out that the new restrictions were enacted 32 days before the start of the filing season, which was simply not enough time to adjust its processes and inter-agency agreements. The IRS simply did not have TIN issuance dates available during the 2016 filing season. However understandable the situation, the IRS acknowledged that due to the time crunch it issued improper refunds during the 2016 filing season, and it agreed with TIGTA’s recommendation that it take steps to recover the improper refunds. The PMTA is one such step.

Time Limits on Math Error Assessment 

Both the PMTA and the NTA’s response in the 2019 Objectives Report are well worth reading for a deeper understanding of the history of math error assessments and the administrative and policy considerations involved in their use. While the PMTA indicates that the IRS is considering the use of math error authority to recover the specific post-PATH Act refunds identified by TIGTA, its analysis is not limited to that situation.  

The memo points out that section 6213 places no time limits on math error assessments. Likewise, section 6501 setting time limits on assessments does not mention math error assessments or set a different rule for them. Given this statutory structure, and Congress’s repeated expansion of math error authority, the memo concludes that use of math error after return processing is consistent with Congressional intent.

The National Taxpayer Advocate acknowledges that the statute is silent, but she takes issue with the IRS’s ability to significantly expand its use of math error authority after 92 years without explicit Congressional approval or at least a public notice and comment period. She disputes the memo’s interpretation of the 1926 legislative history, since from 1926 to 1976 math error authority was limited to actual arithmetic errors. Congress may never have anticipated that the IRS would change its use of math error procedures so dramatically.  

Finally, the IRS and the National Taxpayer Advocate disagree over whether the use of math error procedures after return processing is necessarily consistent with constitutional due process rights guaranteed by the 5th Amendment. This issue deserves its own post so I will only flag it here. The National Taxpayer Advocate does not claim that retroactive use of math error can never be constitutional, but she urges the IRS to more seriously consider the hurdles and limitations faced by the targeted taxpayers, as well as the importance to the taxpayers of the tax credits being targeted. These factors affect not only policy considerations, she argues, but also constitutional due process analysis.  

Policy and Fairness Concerns 

Erroneous math error assessments abridge taxpayer rights and cause hardships. The NTA does not argue that taxpayers who received erroneous refunds should be allowed to keep them. Her concern is systemic: even a fact as simple as a TIN issuance date is subject to error. The 2019 Objectives Report cites a study from the 2011 Annual Report to Congress in which 55% of TIN-based “math errors” were subsequently reversed at least in part. The July 2017 TIGTA report also raises concerns about the accuracy of the IRS’s TIN issuance data (“The Methodology for Recreating the Individual Taxpayer Identification Number Issuance Date Resulted in Errors).  

The 2019 Objectives Report notes several other concerns: 

As discussed in prior reports, the IRS’s pre-existing [math error authority] raises the following concerns when the resulting assessments are (or may be) erroneous:  

  • The IRS does not try to resolve apparent discrepancies before burdening taxpayers with summary assessments that they are expected to disprove; 

  • IRS communication difficulties, fewer letters (i.e., one math error notice vs. three or more letters from exam), and shorter deadlines (i.e., 60 days vs. more than 120 days in an exam) make it more difficult for taxpayers to respond timely (e.g., because they want to call the IRS to make sure they understand the letter before responding);  

  • Because it is easier to miss math error deadlines, more taxpayers — particularly low income taxpayers — will lose access to the Tax Court; and  

  • Internal Revenue Code § 7605(b) generally prohibits the IRS from examining a return more than once, but the IRS can examine a return after making a math error adjustment. 

(footnotes omitted). The expansion of math error to post-processing situations only heightens these concerns. As the NTA explains,  

Post-processing adjustments make it more difficult for taxpayers to:  

  • Discuss the issue with a preparer who could help them respond;  

  • Access underlying documentation to demonstrate eligibility;  

  • Recall and explain relevant facts;  

  • Return any refunds (or endure an offset) without experiencing an economic hardship; and  

  • Learn how to avoid the problem before the next filing season. 

The PMTA acknowledges that there are legitimate fairness concerns associated with post-processing math error assessments, and notes that the IRS could choose as a matter of policy to take a different approach to the errors identified in the TIGTA report.

Are Math Error Notices Coming Soon for Returns Filed in 2016? 

When the PMTA was written last April, the IRS was contemplating using math error authority to reclaim erroneous credits issued in 2016. For example, a 2014 return filed in spring 2016 with an EIC claim, if some SSNs on the return were issued after the original due date of the 2014 return. This was kosher before the PATH Act but not after. The assessment statute of limitations for that return is coming up next spring, so IRS will need to decide what to do soon, if it has not already decided.  

Before the IRS starts using math error authority 2 ½ years after issuing a refund, I hope it will seriously consider the National Taxpayer Advocate’s concerns and solicit public comments. Many of the taxpayers affected by the PATH Act changes are immigrants. The need for more Spanish-language and other translated correspondence has been a concern since the PATH Act and is just one example of an issue likely to be raised in public comments.  

The erroneous credits flagged by TIGTA primary affect immigrant taxpayers, but the issues raised by the PMTA and the 2019 Objectives Report affect all taxpayers. Once the IRS begins to use math error notices in post-refund situations, further expansion may be irresistible.  

TIGTA Report Makes (Incomplete) Case For Expanded Math Error Authority

An earlier version of this post appeared on the Forbes PT site on May 20, 2016

TIGTA just released a report called Without Expanded Error Correction Authority, Billions of Dollars in Identified Potentially Erroneous Earned Income Credit Claims Will Continue to Go Unaddressed Each Year. The report is sure to generate headlines, as it details some eye popping numbers about EITC improper payment rate and the IRS’s failure to take action on EITC-claiming returns it knows are likely to contain errors. On the surface TIGTA makes a compelling case but I do not understand why the default solution TIGTA proposes is one that effectively treats EITC claiming individuals as a suspect class that is not entitled to the same due process protections as other individuals who file income tax returns. Our tax system is built on individuals having procedural protections in the form of pre-assessment Tax Court review rights through deficiency procedures. TIGTA’s proposals amount to a possible rejection of protections for millions of individuals least likely to be in a position to protect themselves against IRS overreaching.

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A snapshot of the numbers from the TIGTA report shows that the improper payment rate hovering between 23 and 27% for the past six years, with 2015 estimates looking at about IRS improperly paying out $15.6 billion out of a total $62.3 billion claimed for a 24% improper payment rate. TIGTA also notes that the IRS has identified millions of EITC returns which it believes are likely erroneous but due to resource constraints (and perhaps other reasons) IRS fails to take action and prevent the outflow of improper credits. For example, for 2014 TIGTA estimates that IRS identified over 5.7 million EITC returns with over $20 billion claimed that were likely containing improper claims but due to resource issues IRS only “systematically corrected” about 166,000 of the returns:

We continue to report that IRS compliance resources are limited. Consequently, the IRS does not address the majority of potentially erroneous EITC claims despite having established processes that identify billions of dollars in potentially erroneous EITC payments. For example, the IRS identified approximately 5.7 million potentially erroneous EITC claims totaling approximately $20.7 billion in Tax Year 2014 for which it does not have error correction authority to address.

The TIGTA solution is one that the President has proposed in recent budget proposals, an expanded ability to use summary math error assessment procedures to disallow the credits without allowing people the same pre-assessment right to notice and Tax Court review that everyone else enjoys.

It has been a couple of years since I have discussed TIGTA math error proposals, but the TIGTA discussion brings to mind a post from December 2014 Annual TIGTA Review of IRS Erroneous Payments and The Possible Expansion of Math Error Powers. In that post I go into some more detail regarding the efficiency issues that the government points to in making the case for expanded math error procedures (it is on the surface way cheaper to use math error powers than to give taxpayers a stat notice and full blown deficiency rights). Back in 2014 I referred to TIGTA’s dollars and cents discussion:

While the IRS has the authority to audit potentially erroneous EITC claims for which it does not have math error authority, doing so is more costly than the math error process. The IRS estimates that it costs $1.50 to resolve an erroneous EITC claim using math error authority compared to $278 to conduct a prerefund audit. In addition, the number of potentially erroneous EITC claims the IRS can audit is further reduced by its need to allocate its limited resources among the various segments of taxpayer noncompliance to provide a balanced tax enforcement program. As a result, billions of dollars in potentially erroneous EITC claims go unaddressed each year.

The TIGTA report both now and in 2014 fails however to address some of the criticism of the proposals for expanded powers. In my 2014 post I argued for caution in this area:

If the administration is successful in getting its expanded summary assessment procedures, I hope that IRS carefully studies its impact (as it seems to have done with child support data), establishes clear guidelines for employees, and drafts simple understandable correspondence to allow taxpayers to unwind the assessment and get back in line for deficiency procedures. Some lower-income taxpayers may be less equipped to contest erroneous assessments; telephone wait times are long, and taxpayers who are lower-income are often more transient and less likely to receive correspondence. Add to the mix language and literacy obstacles and you have a potential recipe for real harm.

Congress’ continued use of the Internal Revenue Code to deliver social benefits combined with pressure on IRS to reduce error rates may lead to the IRS taking additional compliance steps without an ability to serve taxpayers who may be inadvertently caught in the compliance crosshairs. Even an agency intent on balancing competing interests must reflect the budget realities that are likely going to jeopardize those taxpayers least likely to be able to withstand erroneous IRS determinations.

In the 2015 NTA Report to Congress a section called Authorize the IRS to Summarily Assess Math and “Correctable” Errors Only in Appropriate Circumstances makes a systematic case for at least some more caution in this area before giving IRS expanded math error powers. That report suggests that before giving IRS expanded powers the following must take place:

  1. There is a mismatch between the return and unquestionably reliable data (rather than the IRS’s estimate about the mere probability of an error).
  2. The IRS’s math error notice clearly describes the discrepancy and how taxpayers may contest the proposed change.
  3. The IRS has researched all of the information in its possession (e.g., information provided on prior- year returns) that could reconcile the apparent discrepancy.
  4. The IRS does not have to analyze facts and circumstances or weigh the adequacy of information submitted by the taxpayer (e.g., whether sufficient documentation is attached) to determine if the return contains an error.
  5. The abatement rate for a particular issue or type of inconsistency is below a specified threshold for those taxpayers who respond.
  1. For any new data or criteria, the Department of Treasury, in conjunction with the National Taxpayer Advocate, has evaluated and publicly reported to Congress on the reliability of the data or criteria for purposes of assessing tax using math error procedures The report should analyze the burdens and benefits of the proposed use of math error authority, considering downstream costs
    to taxpayers (e.g., time, paperwork, representation) and the IRS (e.g., processing taxpayer calls and letters, requests for audit reconsideration, amended returns, appeals, and TAS intervention).

Parting Thoughts

I recognize that there is a compelling interest in reducing error rates for programs such as the EITC. Underlying the NTA suggestion for caution is that with expanded math error powers comes the distinct likelihood that millions of Americans who may claim the credit are the same Americans who need the procedural protections that come with the regular right to Tax Court pre-assessment review. Due process at its core reflects a balancing of interests between the government and its legitimate right to ensuring program integrity and the general right to protect against erroneous government determinations that deprive people of protected property rights. The NTA proposal to carefully study and consider the effect of expanded math error powers reflects a respect for the individual.  Congress has increasingly given IRS special powers when it comes to trying to nudge down the improper payment rate for the EITC. Congress would be well-served from stepping back and rather than continuing to add piecemeal provisions study individual noncompliance more generally and consider what is likely to work and what are the full consequences of additional IRS powers.

 

Annual TIGTA Review of IRS Erroneous Payments and The Possible Expansion of Math Error Powers

Before drinking the egg nog and lighting a few more candles on our menorah here is a brief post on TIGTA, which continues to deliver lumps of coal in the IRS’s stocking.

While I have not followed in detail much of the substance in the end of year tax legislation (with the exception of the very interesting legislation on professional employer organizations, which I hope to discuss soon), the IRS’s budget cuts will have a major impact on IRS’s operations. I read with interest the recent TIGTA report discussing the EITC’s improper payment rate. This TIGTA report looks at the erroneous payments with the Advanced Child Tax Credit (ACTC) as well as the EITC. The report raises the possibility of an expansion of IRS math error powers, and it is that possible expansion I mainly discuss in this brief post.

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TIGTA Calls on Expanded Summary Assessment of EITC Errors

I will not drill into the report’s statistics nor discuss the implications of expanding TIGTA’s annual erroneous payment study to ACTC in addition to EITC. I have previously discussed last year’s OMB overclaim stats here and recent IRS EITC compliance studies here. In addition, others, such as Accounting Today, have summarized the overall report. Instead, I highlight an interesting part of the report that relates to IRS compliance resources.

TIGTA in this report states that IRS believes that it cannot meaningfully reduce EITC error rate using the traditional compliance method of auditing returns. IRS has stated this for some time. IRS’s belief that traditional compliance tools are inadequate for EITC is in part why the EITC is home to some unique (for tax anyway) compliance measures, such as the ban under 32(k) for reckless or fraudulent claims and the 6695(g) EITC due diligence rules; topics that I have likewise addressed this year and which are worthy of continued scrutiny. The IRS’s botched efforts to regulate unlicensed preparers are also best understood in part as reflecting the IRS’s justifiable belief that it cannot meaningfully reduce credit error rates using traditional compliance tools.

What is on IRS’s wish list this year in terms of additional nontraditional compliance tools in dealing with the EITC? It is safe to say that it is unlikely this Congress will give the IRS legislative authority to regulate unlicensed preparers. Next on the list and possibly more likely to get enacted is expanded summary assessment powers.

As I discussed earlier in the year when I summarized the President’s budget request, the administration has previously asked for legislative authority to expand what is effectively a summary assessment procedure when it detects certain classes of potential errors in EITC returns:

The proposal would remove the existing specific grants of math error authority, and provide that “math error authority” will refer only to computational errors and the incorrect use of any table provided by the IRS. In addition, the proposal would add a new category of “correctable errors.” Under this new category, Treasury would have regulatory authority to permit the IRS to correct errors in cases where (1) the information provided by the taxpayer does not match the information contained in government databases, (2) the taxpayer has exceeded the lifetime limit for claiming a deduction or credit, or (3) the taxpayer has failed to include with his or her return documentation that is required by statute.

The current TIGTA report discusses the benefit of summary assessment like math error assessments, noting the major difference in cost to IRS in using a summary math error assessment as compared to going through the correspondence deficiency process:

Currently, under the Internal Revenue Code, the IRS can use its math error authority to address erroneous EITC claims by systemically correcting mathematical or clerical errors on EITC claims, such as correcting entries made on the wrong line on the tax return or mathematical errors in computing income or the EITC. In addition, the IRS can use math error authority to adjust an EITC claim if a qualifying child’s SSN is not valid. However, the majority of potentially erroneous EITC claims the IRS identifies do not contain the types of errors for which it has math error authority. For example, the IRS identified approximately 6.6 million potentially erroneous EITC claims totaling approximately $21.6 billion in Tax Year 2011 for which it does not have math error authority. In Tax Year 2011, the IRS used math error authority to identify and systemically correct only 270,492 (.009 or less than 1 percent) of more than 27.4 million EITC claims. The 270,492 returns claimed the EITC totaling $314 million.

While the IRS has the authority to audit potentially erroneous EITC claims for which it does not have math error authority, doing so is more costly than the math error process. The IRS estimates that it costs $1.50 to resolve an erroneous EITC claim using math error authority compared to $278 to conduct a prerefund audit. In addition, the number of potentially erroneous EITC claims the IRS can audit is further reduced by its need to allocate its limited resources among the various segments of taxpayer noncompliance to provide a balanced tax enforcement program. As a result, billions of dollars in potentially erroneous EITC claims go unaddressed each year.

(TIGTA Report at page 16, emphasis added, footnotes omitted)

Math Error and Policy Considerations Beyond Efficiency

That cost differential is enough to make an IRS administrator with responsibility for driving down error rates take notice, even if the administrator is weighing a taxpayer’s right to challenge the IRS’s actions. After all, math error procedures do not eliminate a taxpayer’s right to a deficiency notice; instead, a taxpayer who gets a math error notice has the right under Section 6213(b)(2)(A) to inform IRS that he wants to abate the assessment. Informing within the 60-day period generally triggers the return of the deficiency procedures with respect to the adjustment. A taxpayer who thinks the IRS adjustment is wrong but who misses the 60-day deadline to request abatement of a math error assessment can then pursue refund litigation or effectively request administrative reconsideration of the assessment.

The possibility of giving the IRS the right to assess and effectively ask questions later via math error abatement procedures may offend some sense of procedural fairness and even suggest constitutional due process issues. The Supreme Court has long ago poo-pooed constitutional procedural due process pre-deprivation hearing protections when it comes to taxpayers, admittedly taxpayers who were not challenging procedures relating to statutory entitlements with defined eligibility criteria. (Some may also note that taxpayers do not have an established property right in changing statutory entitlements in the form of tax credits anyway, a topic I may revisit when I have finished grading exams or have the appetite to dig into procedural due process jurisprudence). Yet, deficiency procedures are the starting point to ensure that taxpayers are protected before having to reach into their pockets and challenge IRS administrative determinations relating to income tax. Even while most of the EITC is refunded, the IRS applies a significant portion of the claimed EITC against taxpayers’ income taxes and their share of employment taxes. Moreover, many have come to rely on Uncle Sam’s refund to meet basic living expenses in light of wages in low paying jobs that are insufficient to keep families out of poverty, thus highlighting the individual’s interest in ensuring that adequate procedures are in place to protect against erroneous IRS determinations.

Reports in the past have raised questions about whether the IRS’s use of math error procedures puts taxpayers at undue risk. See for example a 2011 report from the Taxpayer Advocate Service called Expansion of Math Error Authority and Lack of Notice Clarity Create Unnecessary Burden and Jeopardize Taxpayer Rights. A few years ago GAO in looking at possible math error expansion commented that there are steps Congress and IRS can take to ensure that taxpayer rights are protected if in fact there is expanded use of math error procedures, such as requiring IRS to study and report on the impact of its math error adjustments.

I have not dug deep into the research on accuracy of the information that may trigger expanded summary assessment powers. However, if Congress goes in this direction and legislates expanded math error powers for IRS, and if IRS takes up the legislative power, I do hope that there is a careful review of the impact and accuracy of any adjustments.

What are some of the risks? Again, I am not in the trenches, but I worry that IRS’s compliance filters and external databases may produce false positives.

IRS for example has been wary of using its powers to rely on certain databases that it is authorized to use to make math error adjustments because there were concerns over the accuracy of the data. For example, the recent TIGTA report discusses how the IRS has had the legislative power to use information from the Federal Case Registry (FCR) [national database that “consists of records that identify children, custodial parties, noncustodial parents, and putative (assumed) parents along with other relevant information”] to make math error adjustments with respect to EITC. It has declined to do so because, as TIGTA reported, IRS analyzed the information included in the FCR and “found that, although the information in the registry provides information as to a child’s custodial/noncustodial parent, the database cannot be solely relied upon to systemically adjust a potentially erroneous EITC claim.”

If the administration is successful in getting its expanded summary assessment procedures, I hope that IRS carefully studies its impact (as it seems to have done with child support data), establishes clear guidelines for employees, and drafts simple understandable correspondence to allow taxpayers to unwind the assessment and get back in line for deficiency procedures. Some lower-income taxpayers may be less equipped to contest erroneous assessments; telephone wait times are long, and taxpayers who are lower-income are often more transient and less likely to receive correspondence. Add to the mix language and literacy obstacles and you have a potential recipe for real harm.

Congress’ continued use of the Internal Revenue Code to deliver social benefits combined with pressure on IRS to reduce error rates may lead to the IRS taking additional compliance steps without an ability to serve taxpayers who may be inadvertently caught in the compliance crosshairs. Even an agency intent on balancing competing interests must reflect the budget realities that are likely going to jeopardize those taxpayers least likely to be able to withstand erroneous IRS determinations.

It also seems somewhat unfair that on the one hand IRS is asking for more automatic assessment rights, but at the same time it fails to notify taxpayers or unwind the erroneous assessments it has made with respect to accuracy related penalties imposed on reversed refundable credits in excess of income tax liability; the so-called Rand issue we have discussed before. The Code as a social delivery mechanism for lower-income taxpayers may be an odd fit and may justify additional IRS powers such as summary assessment; yet when IRS makes mistakes and refuses to fix those errors or even tell taxpayers about those errors it seems unfair to require taxpayers to go through hoops to receive the same procedural protections everyone else is presumptively entitled to receive.