IRS Expands Digital Signature COVID Response

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

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

read more...

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  Since these forms had standard filing procedures, they were outside of the scope of the March 27, 2020 (and superseded with minor changes on June 12th) internal IRS memo that originally permitted electronic signatures on a number of forms used by the IRS to resolved cases at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

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

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

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

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

 

Particularized Need – Obtaining Grand Jury Information

As he has done on many occasions during the past seven years of the existence of this blog, Carl Smith alerted me to recent unpublished decision of the 11th Circuit in Berkun v. United States, No. 19-14006 (11th Cir. 2020).  This case provides insight into the ability of the IRS to obtain grand jury information for use in a civil proceeding following the criminal case stemming from the grand jury. It also involves a taxpayer Carl and I spent some time working on during an earlier phase of his tax journey.  I will talk below about the grand jury issue and why Mr. Berkun failed in his effort to convince the district court and the 11th Circuit to keep the grand jury information from the IRS.  Before getting there, I will take a short detour to provide a tribute to Carl and to discuss Mr. Berkun’s prior Tax Court matter.

Earlier this month Carl notified me and others at PT that he was going into “true retirement.”  He will no longer write posts for PT or send us messages about issues on which we should write.  More importantly for me, he will no longer volunteer with the Tax Clinic at the Legal Services Center of Harvard Law School.  Carl has been an integral member of the writing team of this blog, and he has been an important volunteer at the clinic on the impact litigation in which we engage.  It will be impossible to replace his incredible knowledge of tax procedure, his brief writing productivity and prowess, and his daily effort to read Tax Court orders looking for cases with issues needing further attention.  Please join us in thanking Carl for his dedication to the blog as well as to low income taxpayers and the many issues they face.  He had an extremely productive retirement over the past decade.  We hope for him a wonderful true retirement.

read more...

CDP Case

We have featured Mr. Berkun in a previous post concerning his effort to obtain a Collection Due Process (CDP) hearing which contained an argument a variation of which presents itself as of one of the arguments that is now before the 2d Cir. in the case of Castillo v. Commissioner.  In the Berkun CDP case, discussed here, the 11th Cir. did not issue a ruling on the CDP issue of interest to Carl and me, because it determined that the argument was raised too late, but the 11th Cir. issued a published opinion because it said the argument deserved consideration in some future case. 

The IRS had mailed Berkun a Notice of Intent to Levy (NOIL) to an address that it knew was not his current address (because the IRS had put him in jail, where he was sitting when it mailed the notice to his home address prior to his release from incarceration).  A Revenue Officer (RO) handed him a copy of the NOIL about 2 months later, once he emerged from prison, at an in person meeting.  Berkun filed a request for a CDP hearing Form 12153 within 30 days after the in-person meeting but well after the 30-day period on the notice mailed while he was incarcerated.  The IRS gave him an equivalent hearing, denied his request for relief with a decision letter and Berkun petitioned the Tax Court seeking review of the decision.  The Tax Court dismissed the case on the ground that the address used by the IRS was Berkun’s last known address, so he did not timely request a CDP hearing.  Carl Smith persuaded Mr. Berkun to move to vacate on the new ground that, even if the NOIL was mailed to his last known address, the ’98 Act Conference Committee Report shows Congress wanted a taxpayer in such circumstance (non-receipt of NOIL) to get a CDP hearing, anyway.  The 11th Circuit found the argument worth writing about, albeit raised too late. 

A very similar issue has now arisen again in NYC in a case, Castillo v. Commissioner, in which the Fordham Tax Clinic represents the taxpayer.  In Castillo, the notice of determination following a CDP hearing was mailed to the taxpayer at her last known address, but she did not receive it.  It is still, according to the USPS, in transit.  (Don’t read about the case and the discussion of the postal service delivery problems if you want to keep believing that your ballot will make it to the registrar’s office on time.) 

Before the Tax Court dismissed Castillo’s case for Lack of Jurisdiction as late-filed, the Fordham clinic included an argument that, by analogy to the Committee report language quoted in Berkun, Congress would have wanted a taxpayer to get a Tax Court review if the taxpayer petitioned within 30 days after learning of the NOD (which happened in Castillo’s case).  Despite this argument, the Tax Court dismissed the case.  Ms. Castillo has appealed to the 2nd Circuit.  A copy of the amicus brief filed by the Center for Taxpayer Rights is here.  Ms. Castillo’s opening brief is due in October.  The amicus brief was filed early as one of Carl’s last acts before retirement, as he was the principal drafter of the brief.  Maybe through the Castillo case, Mr. Berken will get some relief knowing that the arguments first raised in his CDP case made a difference.

Grand Jury Case

When the IRS decides to pursue a criminal tax case, it has a choice to do so administratively or through a grand jury.  Each path has its advantages and disadvantages.  One of the disadvantages of a grand jury for the IRS is that the information created for and presented to the grand jury becomes cloaked with a powerful presumption of secrecy.  The IRS can overcome the presumption of secrecy and obtain some of the grand jury material if it can show a particularized need for the information.  It sought to do that in Mr. Berkun’s case. 

The IRS sets its civil liability case against a taxpayer on the backburner when it decides to pursue criminal liability.  It followed its normal procedure in Mr. Berkun’s case.  The grand jury that received information about him did so almost a decade ago, although the government eventually filed an information against him rather than having him indicted.  He pled guilty and was sent to prison.  Afterward, the IRS began pulling together the civil liability.  In doing so, the IRS did not seek the grand jury information during the audit of his returns.  It sent a notice of deficiency back in 2017 and he petitioned the Tax Court.  In defending the Tax Court case, the IRS decided that it wanted some of the information developed by the grand jury in order to assist the individuals at the IRS in the civil case.  On August 25, 2020, the IRS filed, for the fourth calendar in a row, a motion to continue the case.  I did not order the motion but I imagine that the IRS mentions in its motion that it would like to obtain the grand jury material before the trial.  Mr. Berkun joined in earlier motions and did not object to the latest one.

On August 26, 2019, well after the filing of the Tax Court case, the IRS made an ex parte request to the district court for the Southern District of Florida for certain grand jury information.  In my experience the request would more normally occur at the examination stage of the case but making it at this stage creates no legal barriers to the request.  The IRS needs the continued cooperation of the Tax Court to postpone the trial while it waits for the information.  The district court said the IRS could have it.  Mr. Berkun brought this appeal seeking to have the 11th Circuit overturn the decision to give the information to the IRS.  The 11th Circuit described the request as follows:

[P]ursuant to Federal Rule of Criminal Procedure 6(e). The government sought documents obtained by grand jury subpoena in Berkun’s prosecution for criminal tax violations; documents prepared by the IRS’s Criminal Investigation Division; and the IRS Special Agent Report and accompanying documents. The government’s memorandum of law accompanying the petition cited the passage of time between the grand jury proceedings and pending Tax Court litigation as grounds for disclosure. The government also claimed that the records obtained and interviews conducted during the grand jury investigation would be very difficult, if not impossible, to recreate.

The district court found that the IRS made the showing of a particularized need and ordered that the IRS could have the documents from the grand jury for use in the Tax Court case.  In addition, it “also permitted IRS attorneys and agents to ‘[u]tilize the services and knowledge of all Government personnel who had access to these matters occurring before the grand jury, for trial preparation and as witnesses” in the Tax Court proceeding.’”  This is a big win for the IRS and will make its Tax Court case much easier to prepare and try.  He moved for reconsideration by the district court and was denied relief in the reconsideration.

On appeal Mr. Berkun first argued that the district court erred by not giving him an opportunity to argue before the court made its decision based on the representations of the government.  The 11th Circuit found:

the government did not proceed ex parte. The Federal Rules of Criminal Procedure therefore required the district court to afford Berkun a “reasonable opportunity to appear and be heard.” Id. Even if the district court failed to comply with this requirement, any error was harmless. See Fed. R. Crim. P. 52(a)… Here, Berkun had the opportunity to present evidence and argument in his motion for reconsideration. The government then stated it would not object to the district court treating the motion as Berkun’s opposition to the request for disclosure. And in its order denying Berkun’s motion for reconsideration, the district court showed that it had considered Berkun’s arguments and rejected them. Given this, Berkun was given a reasonable opportunity to be appear and be heard in opposition to the government’s motion, so any initial error on the district court’s part was “harmless beyond a reasonable doubt.” Roy, 855 F.3d at 1178.

Mr. Berkun also argued that the district court decision denied his due process rights because it did not explain the reason for its decision.  He argued that the district court needed to make specific findings regarding the grand jury information and not just make a general statement regarding particularized need.  The 11th Circuit chided the district court for not being more careful in its findings but held once again for the IRS, stating that the district court should not have simply adopted the IRS arguments. but “the practice does not amount to a due process violation.”

Lastly, he argued that the district court abused its discretion in allowing the turn- over of this information.  The 11th Circuit finds that it did not abuse its discretion and points to the length of time between the grand jury and the request for the information.  It discusses the reason for grand jury secrecy and states that in the situation presented in Mr. Berkun’s case no harm to the grand jury process occurs by allowing the IRS to obtain this information.

The Rule 6(e) order here allowing the turn-over of the information does not surprise me.  The IRS does not always, however, win these cases.  District courts look very carefully at these requests and the IRS must make a strong showing of particularized need in order to obtain the information.  If you represent someone who was the subject of a criminal tax investigation that went through a grand jury, be aware that a request like the one in the Berkun case could come during the examination stage following the criminal case or even later as happened here. 

Senate Investigation Concludes IRS Free File Program is Not Meeting Eligible Taxpayers’ Needs

Today we welcome first time guest blogger Evan Phoenix. Evan is an ABA Tax Section Christine Brunswick Public Service Fellow with Bet Tzedek in Los Angeles. In this post Evan describes a recent senate subcommittee memo on the IRS Free File program. The memo and this post are quite critical of the IRS’s oversight of the program and of certain program members. Needless to say, the Free File Alliance (FFA) and its members likely have a different take. Intuit, for example, points out that the memo “acknowledges Intuit’s voluntary investment in paid advertising of Free File, our email communication with customers beyond what is required, and reiterates findings by the previously published MITRE report and recommendations Intuit has supported, many of which are already enacted in the new MOU between FFA and IRS.” Christine

A recent memorandum by staff of the Senate’s Permanent Subcommittee on Investigations (“PSI Memo”) concludes that deficient IRS oversight of the Free File Program has resulted in the program struggling to meet its mission to provide free tax preparation and e-filing services to economically disadvantaged populations. 

The IRS Free File program has been discussed in previous posts here and here.

The PSI Memo highlights the fact that multiple independent entities have reviewed the Free File program since 2018 and provided clear recommendations for improvement with respect to observed issues. For example, the PSI memo notes that in 2018 the Internal Revenue Service Advisory Council (IRSAC) concluded that “the IRS’s deficient oversight and performance standards for the Free File program put vulnerable taxpayers at risk, and make it difficult to ensure that FFA members are upholding their obligation …”

The need to ameliorate deficiencies in the Free File Program has been exacerbated by the COVID pandemic as many private tax prep businesses and VITA sites have been closed during the tax filing season. Given the uncertainty of the situation, it is incumbent on the IRS to concentrate on protecting economically disadvantaged taxpayers by future-proofing the Free File Program to meet the needs of the vulnerable in our communities. Delays in filing taxes means delays in receiving desperately needed refunds—such as the refundable EITC, which is the largest anti-poverty initiative  in the country—for economically disadvantaged taxpayers fighting to survive the devastating effects of COVID-19. The EITC and the Child Tax Credit greatly reduce poverty for working families. These working family credits lifted an estimated 8.9 million people out of poverty in 2017, more than half of whom were children. However, “paid tax preparer fees are diminishing the EITC” with fees between 12% to 22%, and as high as 25% of the EITC.    

The PSI Memo covers five topics—a brief history of the Free File Program, a summary of IRS oversight of the program, a discussion of the importance of online search engines in taxpayers’ selection of tax preparation software, the IRS’s Free File Program marketing strategy, and recent IRS changes to strengthen the program. I will discuss these issues under three headings—(1) Brief History, (2) Recent Improvements to Free File Program, and (3) Future-Proofing Free File Program Benefits.  

read more...

BRIEF HISTORY

Topic one of the PSI Memo discusses the Free File Program history. In 1998, Congress directed the IRS to work with the tax preparation industry to ensure at least 80% of all federal tax returns were electronically filed by 2007. In 2002, the IRS entered into the Free Online Electronic Tax Filing Agreement with several electronic tax prep companies that had banded together as the Free File Alliance (“FFA”).  Under this agreement, FFA members committed to offering free online tax prep and filing services, known as Free File. The IRS and FFA also agreed to coordinate for the marketing of these free offerings to “provide uniformity and maximize public awareness.” In 2005, the IRS and FFA also developed a Memorandum of Understanding (“MOU”) to identify the service standards for Free File members and the procedures for resolving disputes.  The most recent version of the MOU runs through October 31, 2021.

Pursuant to the FFA agreement, private-sector tax prep providers agree to provide tax prep and e-filing services to vulnerable taxpayers at no cost to the taxpayer or the government; in exchange, the government agrees to not compete with FFA members by refraining from offering free online tax prep or e-filing services. Since its inception in 2002, the IRS reports the Free File Program has produced “more than 53 million free returns e-filed and an estimated $1.6 billion in savings to taxpayers.” Despite each stakeholder’s vested interest in the success of the Free File Program, the PSI Memo highlights that the program has come under scrutiny repeatedly for falling short of its objectives. The PSI Memo finds that “[u]ntil recently, the IRS conducted little oversight of the Free File program.”

Topic two of the PSI Memo provides a summary of IRS oversight of the Free File Program in the last decade. The PSI Memo highlights the fact that “[t]hree different independent entities have reviewed the Free File program since 2018 and provided recommendations for improvement, but the program continues to struggle to serve eligible taxpayers.” The PSI Memo reports that TIGTA’s 2007 review of “the effectiveness of the Free File program […] found that the IRS could improve its efforts to evaluate, promote, and administer the Free File program.”

RECENT IRS IMPROVEMENTS TO FREE FILE

Next, I’ll discuss topic five and three of the PSI Memo together. Topic five is an analysis of recent changes the IRS has made to strengthen the Free File program, and topic three discusses the importance of online search engine results in helping taxpayers choose a tax preparation software.

Prior reports revealed that some FFA members had taken deliberate actions to reduce access to the Free File Program by using coding to prevent the program from being populated in organic online web searches, a practice known as de-indexing. This is particularly troublesome because, as the MITRE 2019 assessment report (“MITRE 2019 Report”) of the program revealed, “[m]ost taxpayers find their preferred tax preparation product through online searches using an online search engine.”

The PSI Memo found:

[f]or the first 15 years of the Free File program, the IRS declined to take a position on whether FFA companies should index Free File websites to appear in online search engines, nor did FFA companies seek guidance from the IRS on whether their indexing practices complied with the MOU. As a result, participating FFA companies took different approaches in deciding whether to code their Free File program.

MITRE found that five of the twelve FFA members engaged in non-indexing their Free File websites. Upon questioning by MITRE, “most [FFA] members” stated that they “believed” this practice complied with the MOU terms. The PSI Memo emphasizes that TIGTA agreed with the IRS that the MOU did not explicitly prohibit de-indexing, but stated “it was against the spirit of the Free File program.” Indeed, this practice seems inconsistent with the FFA’s clear mission of providing low-income taxpayers with tax prep services for free, and its agreement with the IRS to “provide uniformity and maximize public awareness.”

Following public reports exposing the FFA members for using coding in this way, in December 2019, the IRS and FFA members agreed to an addendum to the Free File MOU prohibiting any practice that would exclude Free File websites from organic searches and standardizes the naming of Free File offerings to “IRS Free File program delivered by (Member company name or product name).” The PSI memo notes that FFA executives said that they “discover more program violations than the IRS and believe [the FFA] is tougher on their members than the IRS [… and] added that members do “a lot of self-policing” and report violations by other members.”

Recent news of the departure of one of the FFA members has raised many questions. After being a 20-year member, H&R Block recently announced its withdrawal from the FFA. H&R Block was one of the FFA members that engaged in the de-coding practice aimed at steering taxpayers away from the Free File Program. H&R Block will continue to offer its own free-filing options on its website, but it will remove its return filing software from the IRS’s Free File website after the extended filing season ends on October 15, 2020. Nina Olson, executive director of the Center for Taxpayer Rights, told Tax Notes (subscription required) that the withdrawal “is a perfect storm of things—the cumulative effect of the negative articles, the TFA, the [IRS] nonfiler portal, etc.”  Perhaps H&R Block’s performance of MOU requirements or stated position regarding certain requirements foreshadowed its recent announcement to exit the program.  Specifically, the PSI Memo highlights H&R Block’s position regarding marketing, stating it does not believe it should be marketing the program “in any manner;” therefore, it does not engage in any efforts to market the Free File program. H&R Block sends one reminder email, as required by the MOU, to individuals who used the company’s Free File product the prior year. Whereas, Intuit sends six to eight reminder emails each year to previous Fee File users.  

Although H&R Block will withdraw from the FFA, it will continue to benefit from the collective bargaining benefits of the agreement with the remaining eleven members because the IRS will continue to honor its commitment to not compete against the FFA members. H&R Block will have all of the benefits and none of the oversight or accountability. What is to stop other members from following suit?

The MOU addendum is a great step in the right direction, however, as the PSI memo highlights, there is still much more that needs to be done to ensure the program meets the needs of taxpayers.

FUTURE-PROOFING FREE FILE BENEFITS

The PSI Memo notes that,

[d]espite these challenges, the Free File program continues to provide a valuable service for millions of Americans. To support Free File, the IRS should increase its oversight of FFA members and dedicate funding—including increased funding from Congress, if necessary—to market the Free File program. The IRS should ensure FFA members comply with new guidance that attempts to avoid similarities between Free File branding and branding for commercial tax preparation products that could confuse taxpayers.

These recommendations echo those made previously by TIGTA, MITRE, and the National Taxpayer Advocate.

Increase Member Oversight and Accountability

A February 2020 Treasury Inspector General For Tax Administration Report (TIGTA 2020 Report) concluded that complexity, confusion, and a lack of taxpayer awareness about the Free File program led to low levels of eligible taxpayer participation, and that this was partially due to the IRS’s insufficient oversight of the Free File Program. These findings are consistent with those in the NTA 2019 Annual Report to Congress (“2019 ARC”), presented in a section titled, “Substantial Free File Program Changes Are Necessary to Meet the Needs of Eligible Taxpayers.” 

Among other things, TIGTA recommended that IRS management update its testing review guide to ensure adherence to the MOU by FFA members. Increasing member oversight and accountability will help ensure consistency to the FFA mission that will benefit the program. The IRS partially agreed with this recommendation.

Dedicate Funds to Marketing

Topic four in the PSI Memo is a discussion of the IRS marketing strategy for the Free File program. The PSI Memo finds that “[a] lack of investment in marketing by the IRS likely led to a lack of consumer awareness that hampered participation in the Free File program.” The TIGTA 2020 Report explains that in addition to deterring effects of the confusion of the Free File Program, the lack of taxpayer awareness about the operation and requirements contributes to lack of participation by eligible taxpayers.  The TIGTA Report explains that insufficient actions have been taken to educate taxpayers that the only way to participate in the Free File Program is through the IRS website.  “To participate in the Program, taxpayers must access the IRS.gov Free File web page and select a link on this web page directing them to a Free File Inc. member’s website. However, this provision is not in the […] MOU and most taxpayers are unaware of this requirement.” The PSI memo also highlights that the lack of taxpayer awareness is directly related to the fact that the IRS has no budget for marketing the Free File program, and Congress has not appropriated funds for it. 

TIGTA made several recommendations connected to marketing and taxpayer education. First, TIGTA recommended that the IRS “develop and implement a comprehensive outreach and advertising plan to inform eligible taxpayers about the Free File program and how to participate.” (Recommendation 1) The IRS agreed with this recommendation. Second, TIGTA recommended that the IRS.gov Free File page contain comprehensive eligibility criteria for each product. (Recommendation 2) The IRS agreed, but stated this was already the case. Importantly, TIGTA also recommended that the IRS inform taxpayers of their right to be free from cross-marketing or upselling of fee-based services on Free File program software. (Recommendation 7) This practice confuses taxpayers and gives the specious impression of IRS endorsement. The IRS agreed with this recommendation, and in response created a new webpage, Know Your Protections Under the IRS Free File Program. Whether taxpayers will find this information without additional marketing seems doubtful. We will hopefully see the new comprehensive outreach and advertising plan by the next filing season.

CONCLUSION

I personally have used Free File software, and I definitely saw how certain parts can be confusing. Thanks to my experience as a VITA volunteer and coordinator, I was able to work through it, but it is unlikely that most eligible taxpayers have VITA training and experience.

One example of a confusing surprise that confronts taxpayers is the fee for a state tax return. Free File allows eligible taxpayers to file their federal tax return for free, but there can be a fee ranging from $14.99 to $54.95 to prepare your state tax return for some taxpayers. When the payment request popped up for my state return, I backtracked to the first page to double check if there were any disclosures about payments associated with state tax returns or if I had unknowingly navigated away from the Free File program. The main page says “free state return options are available,” but nothing about payments. The payment is disclosed once you choose a product to use. The products generally break down into two groups—the first group says “No free state tax preparation in any states,” and the second group says “Free state return, for some states.” California is not on the list of states eligible for free state tax preparation.

However, I recommend checking the website of your state taxing authority for free state tax preparation software if your state is not eligible for free state tax preparation services. California, for example, provides CalFile to e-file your state tax return directly to the Franchise Tax Board for free. Realistically, I think most eligible taxpayers will eat the costs to avoid going through the daunting task of preparing their state tax return from scratch when the federal tax software can transfer the information over to the state if they pay.

Another point of confusion is the constant upselling gimmicks promising a better refund gives the impression that the Free File program may be inferior to the paid software, giving me cause to think that my refund could be higher if I paid for another product. Thankfully, I know better, but these gimmicks are likely to successfully steer vulnerable taxpayers with little or no understanding of tax preparation away from the beneficial Free File program that will save them a substantial sum of money.

Given the enormous potential of the Free File Program to meet its mission of best serving vulnerable taxpayers’ needs, one can only hope the IRS heeds the constructive criticism outlined in the PSI Memo, which echoes previously reported issues. The IRS has risen to the challenge of meeting taxpayers’ needs many times before, e.g., the implementation of IRS Settlement days and the commendable rapid mobilization and implementation of the EIP initiative in response to COVID-19. I’m confident the IRS can rise to the challenge of making the necessary improvements to the Free File Program to meet the needs of eligible taxpayers. The question is, when?

A Sun Has Set: Reflections on the Honorable John Lewis

Over the next days, weeks, months, and years, there will be many tributes to Congressman John Lewis, who passed away on July 17, 2020.  Historians and advocates will assess his enormous contributions in the fields of human and civil rights.  Here, today, I just want to share how John Lewis affected my life and my work.

read more...

I was seven years old when John Lewis boarded the bus south in the first wave of Freedom Riders, and I have no memories of hearing about them.  But even at that age I was acutely aware of racial prejudice; my mother had been raised in Mississippi and I could sense her fear and anxiety over racial matters.  I had personally experienced scorn and ridicule at school because of my family’s religious beliefs and practices, so I knew some measure of cruelty people could inflict because of perceived differences.  I also knew religious beliefs were a matter of free exercise, whereas skin color was not.  I was not sure what all that meant, but I was aware, from my own home environment, that people of color experienced discrimination in ways I did not.

But nothing prepared me, at the age of eleven, for the events shown on the news the night of March 7, 1965, when I watched peaceful human beings be bludgeoned and set upon by dogs, simply because they wanted to cross a bridge.  More astonishing to me, though, was the courage of those human beings, moving forward even as they knew they would face violence.  The conviction and strength of their beliefs affected me profoundly.  They showed they could speak truth to power and were willing to accept the consequences.  I took that lesson to heart, and it altered the trajectory of my life.

Fast forward several decades to 2011, the 50th anniversary of the Freedom Riders.  By that time, as National Taxpayer Advocate, I had testified before the Ways and Means Committee, and its Subcommittee on Oversight, about ten times, and had testified before Congress about forty times.  For much of that time Congressman Lewis was either chair or ranking member of the Oversight Subcommittee.  I had worked with his staff on numerous occasions on legislative proposals, many incorporating the recommendations in the National Taxpayer Advocate’s Annual Reports to Congress.  One of my most treasured possessions is a copy of the Taxpayer First Act signed by Chairman Neal and inscribed – yes, inscribed – by John Lewis.

Whenever I testified, regardless of which party was in control of the House or Senate, I was a bipartisan witness, asked to testify by both the Chair and the Ranking Member.  But for the hearing on May 25, 2011, for the first and only time in my career, I was a Democratic witness at a hearing on “Improper Payments in the Administration of Refundable Tax Credits”.  I was understandably nervous about the hearing; the subject of improper payments and the Earned Income Tax Credit is very politically charged and I was aware many people wanted more enforcement focus on the EITC. I knew I was going to have to present a persuasive case for a more nuanced approach, and I was going to have to do that even as the members of one party did not want me there.

As fortune would have it, the week before, on May 16, 2011, PBS aired the documentary Freedom Riders, a film by Stanley Nelson, based on Raymond Arsenault’s book, “Freedom Riders: 1961 and the struggle for Racial Justice.”  I had watched that film, curled up in fetal position through most of it.  It was with the memories of that film and those events fresh in my mind that I approached the hearing.  Also during that week, I had listened to radio and television interviews with Congressman Lewis, as he reflected on past and current times.  As I approached the hearing, I kept in my mind’s eye the deliberate courage and peaceful strength of those individuals who created a movement.  I knew, too, the steely determination and strategy it took to survive such events.  What I was facing was child’s play, but they were my role models.

The hearing went very well and respectfully.  After the hearing, Congressman Lewis came over to thank me.  The room was buzzing, with side conversations and people milling about.  Reporters were leaving the room, the court reporter was packing up.  I mumbled some thanks about the invitation, and then told the Congressman that I had seen his interviews and seen the film and that I was just so profoundly grateful for his work.  He took both my hands in his and looked me in the eyes and for the next five minutes or longer just spoke to me, never moving his eyes, talking about those events and the challenges today.  The world just stopped for me.  And apparently it did for others, too, because out of the corner of my eye I could see people stop moving and then slowly edge toward us, to listen in.

The moments ended, the Congressman had to move on, and so did I.  Well, almost.  Anyone who has felt the strength of those hands and of that gaze is not the same.  They impart compassion, yes,  but they urge you on and they do not accept excuses.

Occasionally, as a person in a position of some authority, I could use that authority to accomplish something that might not happen under normal circumstances.  Later in 2011, all of the Local Taxpayer Advocates (LTAs) were going to be in Washington DC for a leadership training meeting.  I had been frustrated how many of the LTAs seemed burned out and were not advocating as vigorously on various issues as I would like them to.  It kept coming to me that they needed more courage.

In the weeks leading up to the showing of the film Freedom Riders in the spring of 2011, there were posters on the Washington DC Metro promoting the film, with a picture of a bombed out bus, and the tagline, “Would you get on the bus?”  That line kept going through my mind all summer; it made it clear that societal and systemic change starts with individual acts of courage and conviction.  That is what the LTAs needed to understand – that despite all the roadblocks put in front of them by their colleagues at the IRS, it was their responsibility to stand fast, and they needed to muster their courage to do that.

Well.  I decided that we would show the Freedom Riders film mid-way through the leadership meeting.  My staff thought I was nuts, but I insisted: we would dedicate an entire afternoon to the film.  We printed up “tickets” that said, Would you get on the bus?  I asked three LTAs, who were African American and were over the TAS offices in the deep south, to be on a panel after the film.  I introduced the film by saying I just wanted people to watch it and think about the courage these people showed, what it took for them to do what they did, and how that would apply to them.  I could tell that everyone thought this was just another crazy NTA thing they had to go along with, and many of the African Americans in the room were suspicious; what was the subtext here?

After the film, there was absolute silence.  And then the three LTAs on the panel started speaking.  They shared their experiences, their families’ experiences, what they experienced to that day, in terms of racism.  They spoke about the quiet courage required every single day of their existence, to assert their humanity and go through life with dignity.  Then others in the audience stood up and spoke; people talked about how the film affected them, how it made them reflect on their own beliefs and actions, and also how it made them look at their work with renewed commitment.  People broke for the day and carried those conversations on at dinner and the next day.

There were no miracles after that – no all-of-a-sudden people showed more courage.  But some did.  It was a small step, and it mattered.

On March 7, 2019, I had my final hearing before Congressman Lewis as chair of the Ways and Means Oversight Subcommittee.  Seven days before, I had announced my pending retirement as National Taxpayer Advocate.  At the end of the hearing, I approached the dais to thank the Chairman.  Again, he took my both my hands, looked in my eyes, and said, “A sun is setting.”  We hugged.  (You can watch the hearing here.)

Hon. John Lewis and Nina Olson embrace following her testimony on March 7, 2019.
Screen shot of Hon. John Lewis and Nina Olson embracing following a Congressional hearing on March 7, 2019.

Over the course of John Lewis’ long life, he saw many a sun set.  But what John Lewis knew, and I learned from him, is after each sun has set, there is a new dawn.  It is up to each and every one of us to determine what the new dawn brings. To mix metaphors, will you get on that bus?

FAQ Disclaimers: Balancing the Need for Guidance and Taxpayer Reliance on FAQs

Today we follow up on Alice G. Abreu and Richard K. Greenstein‘s post discussing the recent NTA blog on IRS FAQ with some additional thoughts from guest blogger James Creech. As yesterday’s post noted, IRS FAQs have grown more important since the coronavirus hit, as the IRS responded to the urgent need for a high volume of guidance by increasing its use of website FAQs in place of IRB guidance.

While IRS FAQs are particularly voluminous and consequential right now, recent observations build on years of criticism. For example, in 2012 Robert Horwitz and Annette Nellen authored a policy paper for the State Bar of California’s Taxation Section. This paper recounts the evolution of the IRS’s use of website FAQs and proposes solutions to concerns, including “(1) the lack of transparency, (2) the lack of accountability, (3) the lack of input by the public, (4) the difficulty in finding specific FAQs on the IRS website, (5) whether FAQs are binding on IRS personnel, and (6) the extent to which FAQs can be relied upon by taxpayers and tax practitioners.” I recommend reading this paper not only for the history of IRS website FAQs but for the authors’ proposals to address these concerns without scrapping the practice or reducing its utility as a quick method of communication to taxpayers.

Former NTA Nina Olson also addressed IRS FAQ in reports to Congress and in Congressional testimony, as discussed and linked in this 2017 blog post.

In addition to her recent blog post discussed yesterday, NTA Erin Collins addressed FAQ in several sections of her 2021 Objectives Report to Congress. The report discusses the pros and cons of informal guidance “in the face of widespread closures of core IRS functions as well as the enactment of the FFCRA and CARES Act,” and notes that by June 10, the IRS had issued 273 FAQ relating to pandemic tax relief. That number has continued to grow in the last four weeks. Due to the uncertainties facing taxpayers, the NTA argues that “if the IRS continues issuing and relying on FAQs, the regulations under IRC § 6662 need to be amended to clarify that FAQs can be used to establish reasonable cause for relief from the accuracy-related penalty.” I wholeheartedly agree. Christine

The IRS has routinely used FAQs as a way inform the public about some of the nuances of tax administration. However as part of the COVID-19 FAQs something new has emerged. The IRS has started to put disclaimers at the beginning of some recently issued FAQs. For example the preamble to the Employee Retention Credit FAQs states:

This FAQ is not included in the Internal Revenue Bulletin, and therefore may not be relied upon as legal authority. This means that the information cannot be used to support a legal argument in a court case.

and the preamble to the COVID Opportunity Zone FAQs states:

These Q&As do not constitute legal authority and may not be relied upon as such. They do not amend, modify or add to the Income Tax Regulations or any other legal authority.

read more...

As discussed in some detail in a previous post by Monte Jackel, these disclaimers are necessary because of the lack of weight given to these otherwise official sounding pronouncements. Technically speaking, FAQs are considered unpublished guidance because they are not printed in the Internal Revenue Bulletin like Notices and Revenue Rulings. They are not binding on the IRS. They are not binding on the taxpayer and cannot be used by a taxpayer as substantial authority when taking a legal position or penalty protection. FAQs are subject to change at any time (which is why practitioners should print any on point FAQs instead of bookmarking the webpage) and are frequently revised based upon real world feedback.

Yet despite these limitations, FAQs have real value because they allow the IRS to push out guidance faster without the worry of unintended consequences. For taxpayers they can offer some comfort that their interpretation of how to approach a murky situation is not at odds with the IRS’s approach. The trouble is that for many taxpayers there is no recognizable difference between FAQs published on IRS.gov and a Notice (published in the Internal Revenue Bulletin) done in FAQ format and also published on IRS.gov.

While including disclaimers on some of the COVID guidance is a good start, it is a little disappointing that the disclaimers are not uniform and are not part of every set of FAQs regardless of when they were issued. Recognizing, of course that this is not the right time for the IRS to start new projects, even the COVID specific FAQs are haphazard. Surprisingly the FAQs regarding the Economic Impact Payments (at the time this article was written) do not have a disclaimer. This is despite the target audience being individual taxpayers who may be less able to parse statutory language when compared to sophisticated opportunity zone investors.

For an FAQ disclaimer to be effective for all taxpayers it should be written in plain English in a manner understandable to all taxpayers. The Employee Retention Credit disclaimer for example does not make it clear that the FAQs are not binding on the IRS. Unless the reader knows the importance of publication in the Internal Revenue Bulletin, the statement that the FAQs “cannot be used to support a legal argument in a court case” could seem to indicate that a taxpayer could cite to the FAQ during an administrative dispute regarding the credit.

A better disclaimer might read “These FAQs are informational purposes only and are subject to change at any time. Taxpayers cannot rely on these FAQs as the official position of the IRS and cannot be cited as legal authority. FAQs do not change the Internal Revenue Code or Treasury Regulations. For more information on FAQs click here”

Effective FAQs are an important element of agency communication and like it or not they are here to stay. However getting them right means not only drafting answers that reflect the law but giving taxpayers the tools to understand exactly what they can and cannot rely on.

Global Pandemics and Economic Uncertainty: The Importance of Error-Correction Mechanisms in Crisis

Today’s guest post is from my colleague Orli Oren-Kolbinger, a Visiting Assistant Professor at Villanova University Charles Widger School of Law. In this post, Orli discusses problems with the tax law’s failure to allow taxpayers to unwind certain elections, including the inability to change filing status from filing jointly to separately. In this post and in her longer work in progress The Error Cost of Marriage Orli suggests ways to fix the problems associated with elections. Les

This blog post seeks to explain why the ability to correct tax election errors is especially important during times of global pandemic and economic uncertainty. Focusing on married taxpayers’ filing status election, I discuss the archaic and asymmetric error-correction rule that applies when married taxpayers seek to correct a tax election after the due date has passed. I conclude by offering a solution to this problem. The following is based on my recent work-in-progress The Error Cost of Marriage. I welcome any and all comments.

read more...

A Brief Primer on Elections

United States taxpayers make many explicit elections each year. Clearly, from time to time taxpayers elect the less beneficial option to them. I refer to these inferior elections as Election Errors.” These errors may result in additional tax liability. As previously discussed here and here, taxpayers are unable to fix an election error with a superseding return after the due date for the election has passed. They can, however, file an amended return to fix some election errors using the error-correction mechanisms set forth in the Internal Revenue Code. Nonetheless, error-correction mechanisms that are available to a taxpayer in the Code are inconsistent and at times asymmetrically applied among similarly situated taxpayers.

In addition, tax elections are “sticky.” When taxpayers face an election they have already made in the past—e.g., filing status election married taxpayers are required to make every year—they maybe cautious or resistant to such a change. Taxpayers in this situation may also fail to consider the alternative election available to them, even if the alternative would make them better off.

Taxpayer elections tend to be sticky during ordinary times, but even more so during times of economic and public health uncertainties. Consider your actions in regards to renewing your car insurance, reenrolling in employee benefits, or even ordering groceries online. You would probably prefer to avoid making significant changes to your previous elections as much as you can. This behavioral pattern can lead to errors, too, and is exacerbated during times of crises. Therefore, allowing taxpayers the option to correct an election error is a critical component of any decision-making process, including within the tax system.

The Inconsistent Approach to Fixing Election Errors

When looking to identify and classify error-correction mechanisms available to taxpayers in the Internal Revenue Code, the mechanisms available are inconsistent. Moreover, some benefit taxpayers and some do not. Hereinafter, I introduce three error-correction mechanisms that apply to married taxpayers’ filing status election. I then focus my analysis on the latter two.

Under one mechanism, the IRS initiates and corrects taxpayers’ errors for them without charging them of any fee to do so. For example, if a married taxpayer fails to file a tax return, the IRS automatically defaults them to “Married, Filing Separately” status (MFS) in the substitute return the IRS prepares.

Under a second mechanism, taxpayers can file an amended return to correct election errors. For example, married taxpayers are permitted to amend their filing status from MFS to “Married, Filing Jointly” (MFJ) after the due date for that tax year has passed, if they fulfill the requirements listed in IRC § 6013(b). When doing so, however, taxpayers produce an externality. It is an externality because the IRS now needs to reallocate resources to process an additional return for an already closed tax year only because the taxpayers previously elected an inferior alternative. Even so, the IRS does not charge a fee to process the amended return, despite its limited resources. As a result, taxpayers do not internalize the cost of correcting that election error. Moreover, this mechanism allows married taxpayers to receive a late tax refund—or at least a non-monetary or declaratory benefit (e.g., in the case of same-sex marriage)—for a closed tax year. Otherwise, taxpayers will not pursue it.  

Under a third mechanism, taxpayers are not permitted to correct their election errors.  For example, given the language of IRC § 6013(b) married taxpayers cannot change their filing status from MFJ to MFS, although the latter is the default filing status for married taxpayers. The only exceptions are “innocent spouse relief” under § 6015 and if the MFJ election is void (e.g., if the taxpayer is not eligible for this status), which are different scenarios than the one I refer to in this text.

The second and third mechanisms generate an “Asymmetric Error-Correction Rules (AECR).”

A Little History on Changing Filing Status Elections

When diving into the historical developments that led to the AECR, we find that from the introduction of joint filing in 1918 and until 1951, a taxpayer’s election of filing status was irrevocable. Meaning that married taxpayers could not change their filing status after the due date for filing the return has passed. However, in 1951, Congress enacted what is currently § 6013(b) [previously § 51(g)]. This provision permits taxpayers—under certain circumstances—to file joint returns after already having filed separate returns for a certain year. As reflected in the legislative history, the reasoning for the change was that “a proper election frequently requires informed tax knowledge not possessed by the average person.” Therefore, disallowing taxpayers to elect the MFJ status and maintain the MFS status “may result in substantially excessive taxes.” Congress did not address possible changes in the other direction, from MFJ back to the default of MFS.

Throughout the years, taxpayers have petitioned the Tax Court after the IRS denied their requests to change their filing status from MFJ to MFS. In Ladden v. Commissioner, 38 TC 530 (1962) as well as other cases, the Tax Court stated that although Congress has explicitly authorized spouses filing separately to change their filing status to filing jointly, such authorization does not mean that it implicitly allows the inverse.

These asymmetric limitations on changing married taxpayers’ filing status generate the aforementioned AECR. On the one hand, those who elected MFS status and later realized it was an inferior election, can correct it to MFJ without incurring a fee and enjoy any associated late benefits. On the other hand, those who elected MFJ status are not afforded the ability to correct the election to MFS status. This AECR is problematic for two main reasons. First, it has an adverse effect on horizontal equity. Similarly situated taxpayers are treated differently based on their ability to correct an election error. Second, it has an adverse effect on the administrability of the tax system. This is because the IRS needs to reallocate resources to process the amended return and it does not impose that cost on the taxpayers.

A Reminder As to Why All of This Matters—And Even More So Today

The U.S. tax system incentivizes married taxpayers to elect the MFJ status by generally offering monetary benefits to those who elect to do so. Such incentives include preferential tax rates and specific tax credits that are not available to married taxpayers filing separately. In addition, there are limitations on itemizing deductions for separate filers, e.g., allowing one spouse to elect to itemize their deductions only if the other spouse also elects to itemize.

Moreover, the U.S. tax system inherently frames the MFJ status as the preferred status for married taxpayers. As a matter of fact, 95% of married taxpayers elect the MFJ status. This means that a disproportionally large number of taxpayers in the U.S. are not able to correct filing status election errors. Because elections are sticky and because many believe MFJ is the only option for married taxpayers, taxpayers are unlikely to revisit a prior election despite a change in their financial circumstances. As a result, taxpayers may be unknowingly locked into an inferior election and are therefore not maximizing their tax benefits.

There are various scenarios in which MFS status is beneficial for a married couple. In general, if both spouses earn similar incomes, the incentive to file a joint return phases-out. A more specific scenario is when a taxpayer has itemized deductions that are dependent upon their adjusted gross income (AGI). For example, consider unreimbursed medical expenses, as defined in IRC § 213. Taxpayers can deduct a larger portion of their medical expenses if their AGI is smaller. Another example is IRC §67(a) miscellaneous itemized deductions, that are currently suspended. These depend on the taxpayer’s AGI, and the size of the benefit increases as AGI decreases.

Taxpayers’ AGI and unreimbursed medical expenses fluctuate over time. This point is especially true for some taxpayers in the current climate. During a pandemic that is coupled with an economic crisis, many married taxpayers are incurring income reductions and increased medical expenses of all sorts. If married taxpayers reelect the MFJ status for tax year 2020 solely because they have traditionally done so in the past, they are potentially creating a larger tax burden for themselves. Even if they realize they have made an election error, they will not be allowed to correct this error after the due date for filing their 2020 tax return has passed.

Another timely example is the recent Economic Impact Payment (EIP) benefit. In filing their 2019 return, low income married taxpayers may be better off maintaining MFS status if one spouse lacks an SSN. This is because the EIP is available to married taxpayers filing jointly only if both have an SSN.

A Solution to the Problem: The Pigouvian All Approach

In my opinion, there are three potential solutions for this overarching problem.

First, an “ALL” approach. To promote fairness, the current § 6013(b) error-correction rule should be expanded, allowing all married taxpayers to change their election from MFS to MFJ and from MFJ to MFS. In both cases, both spouses should agree to making the change. This is in comparison with the current error-correction rule that is available only to a fraction of married taxpayers. This has been the primary argument of taxpayers who have petitioned the Tax Court. Under this approach, however, taxpayers would still not internalize the administrative cost of processing the additional tax return(s). If so, the incentive to think through one’s election ex-ante diminishes. For this reason, this approach is insufficient.

Second, a “NOTHING” approach. This approach would prohibit married taxpayers from correcting a filing status election error from MFS to MFJ and from MFJ to MFS. On the one hand, this would eliminate the asymmetry created by § 6013(b), which as you may remember allows taxpayers in certain situations to switch their status from MFS to MFJ. This solution prioritizes the need for taxpayers to consider the possible ramifications of their filing election choice. On the other hand, this approach is also insufficient because humans make inferior elections and there should be at least some room for error correction.

Therefore, I propose a third approach, which I refer to as “A PIGOUVIAN ALL APPROACH.” This approach acknowledges and promotes both the fairness and administrability principles of tax policy. It is similar to the “ALL” approach, in the sense that the error-correction rule in § 6013(b) will apply to married taxpayers, whether their initial filing status election was MFS or MFJ. In addition, I propose to apply a processing fee that will be deducted from the potential refund the requesting taxpayer(s) is seeking. This way the party who made the error internalizes the administrative costs for correcting it. If the expected refund is lower than the fee, the taxpayer should refrain from correcting the error. In any case, this will increase the salience of the election even if the taxpayer will not correct it this time around.

To conclude, error-correction rules should be consistently applied to all taxpayers. Therefore, it is time to revisit this AECR after almost 70 years since its enactment have passed and the current crisis amplifies the need to do so. In my opinion, applying the existing error-correction rule more broadly combined with a processing fee would reflect better tax policy.

Uplifting Letter from My State Bar

When I moved to Harvard a few years ago, I waived into the Massachusetts Bar.  This is the third bar to which I have belonged, having started in the Virginia Bar in 1977 where I remain a member though inactive.  When I joined the Villanova faculty, I became a member of the Pennsylvania Bar.  To join that bar I had to take the ethics exam.  That exam which is now standard for every state did not exist in the 1970s.  My effort to convince the Pennsylvania Bar that I should be grandfathered into not having to take that test probably still causes them to chuckle.  I studied for that exam because I did not want the first thing my new employer knew about me was my failure to pass the ethics exam.  When I took the exam in a room filled with 25 year olds, I saw them looking at me as someone who must have done something really bad to have to take the ethics exam at my age.  Fortunately, even though it had been 30 years since my previous multiple choice standardized test, I did manage to pass.

If only I moved to Kentucky and joined the bar of that state, I could claim the distinction of belonging to the state bar of every Commonwealth.  It will not happen.

The Massachusetts bar has very favorably impressed me.  It has much tradition of which it is proud, but so do Virginia and Pennsylvania.  Massachusetts also displays a lot of common sense and good communication skills.  I had the opportunity to sit on a jury for a criminal trial in Boston last December.  The judge and the other judicial officers did a great job of running the trial, using the jury’s time wisely and protecting the interests of the parties.

Things have not been going so well lately.  Times are difficult for courts as well as for everyone else.  A few weeks ago the judges who head the Massachusetts courts took the time to write and send out the letter below.  It does a good job of informing members of the bar, inspiring them and thanking them.  I have not seen this type of letter from a court to its members and thought it was worth sharing.  Thanks to Rochelle Hodes and Les Book for inspiring me to write this short post sharing the letter.  Perhaps we can all work together to create a better tax world and, in turn, a better spinning wheel on which to spin out justice.

ABA Tax Section Law Student Challenge

The ABA Tax Section is beginning its planning for this year’s Law Student Tax Challenge and is looking for law school faculty who would be interested in providing feedback to the drafting committee. The commitment is not burdensome and is really important in helping ensure that the problems are pitched at the right level for students!

The general experience has been that law school faculty have a good feel for the level of difficulty that is appropriate, and that even after one or two years in practice, tax lawyers may not realize how much they have learned in practice since they graduated from law school.

If you are interested in helping out on this — or would just like to learn more — please contact Diane Ring  (ringdi@bc.edu).

If you want to know more about the law student challenge, here is a link describing this year’s winners, the challenge itself and winners from past years.  The first year I taught in a law school I was a visiting professor at the University of Arizona with about 12 years of experience as a Chief Counsel attorney.  I will never forget the shock of reading the exams after that semester and realizing how little I seemed to have imparted to my students.  I spoke shortly thereafter to one of my former law school professors who said reading the exams could be an existential experience that made you question your existence.  I mention this only to reinforce Diane’s point that working with students really does give you a sense of what is realistic to expect from them.  While it’s always nice to be surprised, remembering their limitations, as well as your own as a professor, is helpful.  I encourage you to assist in this project.  The students who participate are always excited at the challenge.