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.

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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.

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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.

IRS Moves to Prevent Defrauded Borrowers from Massively Overpaying Taxes Through Adoption of a New Revenue Procedure

We welcome first-time guest blogger Alex Johnson to PT. Alex is a second year law student enrolled in Harvard’s Predatory Lending Clinic.  Prior to law school Alex worked as a financial statement auditor and holds an inactive CPA license.  The Predatory Lending Clinic does amazing work.  It regularly receives press coverage for the work it does on behalf of students who did not receive the education they sought.  You can see some of that coverage here, here and here.  Keith

The IRS recently issued revenue procedure 2020-11 which extends the relief provided under three prior IRS revenue procedures: 2015-57, 2017-24, and 2018-39.  Generally, revenue procedure 2020-11 provides relief to taxpayers who obtain a Federal or private student loan discharge under certain circumstances.  It also provides relief to those taxpayers’ respective creditors who were required to file information returns and payee statements pursuant to section 6050P of the IRC.  Through this revenue procedure the IRS takes the position that all borrowers who have their loans discharged under either a closed school discharge, defense to repayment discharge, or as part of a legal settlement discharging private loans based on claims of school misconduct do not have to include the prior loan amount as gross income.  Further, to prevent confusion and simplify the process of filing taxes, entities normally required to issue a 1099-C will not have to if one of the above situations applies.

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Harvard’s Project on Predatory Student Lending (the Project) represents students asserting their rights against predatory for-profit colleges and the Department of Education.  The Project uses individual cases and class actions to assist individuals who decided to better their life through higher education but were deceived by false promises and predatory practices.  Before the IRS issued this revenue procedure, the Project had taken steps to protect their clients against burdensome 1099-Cs and guard against the possibility that they would pay unnecessary tax on cancelled debt.  In one recent case, the Project worked to obtain a Private Letter Ruling from the IRS regarding a substantial amount of institutional debt cancellation won through litigation.

Defrauded students already face an uphill battle enforcing their legal right to a loan discharge.  Because many people defrauded by the for-profit college industry have high loan balances and low income, even when they were able to discharge their loans the tax consequences could be devastating.

The IRS and consumer advocates have taken multiple steps to try and mitigate this problem.  Prior IRS revenue procedures 2015-57, 2017-24, and 2018-39 provided the same relief that 2020-11 provides, but they only applied to schools owned by Corinthian College, Inc. or American Career Institutes, Inc.  In other cases, lawyers have obtained private letter rulings from the IRS as part of a legal settlement with predatory schools.  A defrauded borrower not covered by prior IRS revenue procedures or a private letter ruling was still likely able to exclude all or substantially all of the discharged amounts based on the insolvency exclusion or disputing the debt.  However, many borrowers are not aware of how to file a form 8725 or 982 and it would be impossible for any direct assistance or advocacy group to identify or contact them all.  This leads to many former borrowers including the discharged debt as income.

Defrauded borrowers’ debts can often be in the tens of thousands of dollars before their loans are discharged.  If their taxable income increases by the amount of the discharged loan it is very likely their higher income will disqualify them from several tax deductions and credits, raising their tax bill by thousands of dollars.  For the millions of Americans who live paycheck to paycheck, an unexpected (and incorrect) tax bill of thousands of dollars can be devastating. 

IRS revenue procedure 2020-11, goes a long way to fixing this problem.  The IRS acknowledged that “most…student loan borrowers [who have debts discharged because of school misconduct or school closure] would be able to exclude from gross income all or substantially all of the discharged amount[.]” They also agree that determining which exclusions to use “would impose a compliance burden on taxpayers, as well as… the IRS, that is excessive in relation to the amount of taxable income that would result.” 

The revenue procedure is retroactive.  It is effective for federal student loans discharged on or after January 1, 2016.  If a taxpayer had student loan debt discharged due to school misconduct after January 1, 2016, and paid taxes on the discharged amount, they should be able to file an amended return to get their money back.  The IRS also announced that taxpayers will not have to amend prior year returns to reduce education tax credits they took in the past.  It should be noted that VITA tax sites will not be able to complete these amended returns as the forms required are outside of their scope of services.

We applaud the IRS for this change.  It drastically reduces risk that borrowers will overpay their taxes and at the same time reducing administrative costs to the government.

Suit Against H&R Block for Free File Violations

There has been much discussion of the failure of free file to deliver a free tax filing platform for low and moderate income taxpayers as initially promised.  You can find some great articles on the topic here, here and here.

This post does not address whether the IRS and its free file partners have done a good job with the free file program.  Rather, this post examines the attempt by the state of California to sue two of the free file participants under the unfair, fraudulent, and deceptive business practices act in that state.  The Los Angeles city attorney’s office is currently suing (on behalf of California) both H&R Block (complaint here) and Intuit (maker of TurboTax) (complaint here) over their implementation of the free file program.

The existence of suits like those brought by California may have a greater impact on the free file program than the oversight by the IRS which, as described in the articles cited above, seems less than robust.  If so, the lawsuit demonstrates a private litigation mechanism for changing some tax practice outside of the Internal Revenue Code, Congress and the ordinary administrative procedures.  Perhaps the state will succeed and perhaps it will lose, but the existence of lawyers primarily versed in consumer law bringing actions to change tax administration shows another path, in certain cases, to success in changing the system.

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California alleges several things about the free file program and these companies’ actions, which mirror the findings in some of the articles described above.  It alleges that Block & Intuit took affirmative actions to keep the public from appropriate awareness of the program in violation of the terms and spirit of the Free File Agreement.  It alleges that the free online program itself is inferior to another program with an almost identical name and that the companies made that program difficult to find.  It also alleges Block & Intuit made misrepresentations and employed deceptive marketing schemes.

I’ll focus here on the Block litigation, which has been more procedurally complicated than the Intuit suit (which is ongoing in California Superior Court). California brought the suit against Block in state court, but Block removed the case to federal district court on the basis that the state law claim implicates significant federal issues.  In this opinion the state seeks to return the case to state court and the federal district court agrees.

The court states that it must resolve all ambiguity in favor of remand to state court and that the party seeking removal to federal court bears the burden of establishing federal jurisdiction.  For this case to move forward in federal court the party seeking to have it heard in federal court must show, among other things, that a federal question is a necessary element of the state claim.

California argues that its complaint does not necessarily raise a substantial federal issue and resolution in state court remains possible without disrupting the balance of federal and state responsibilities.  Block argues that the relief sought necessarily depends on the interpretation of the Free File Agreement between Block, and other participants, with the IRS, a federal agency.  The court says that mere presence of a federal issue in a state suit does not automatically grant federal question jurisdiction but becomes one of federal jurisdiction when the federal issue raised is “basic, necessary, pivotal, direct or essential to the claim.”

Block sees the federal issue as central since the agreement the state seeks to enforce is an agreement between Block and the IRS.  The court discusses an earlier 9th Circuit case, Lippit v. Raymond James Fin. Servs., 340 F.3d 1033, 1040 (2003) raising an issue of deceptive practices in the selling of securities regulated by the SEC.  In that case the 9th Circuit determined that the plaintiff merely had to show the defendant acted unfairly or fraudulently which did not raise federal issues.

The court finds the suit by California similar to the Lippit case.  The proof of deceptive practices does not require an interpretation of federal law and the state court can properly decide the issue.

In the alternative, Block argued that even if the deceptive practices claim does not involve federal law, the other two claims in the case do.  The court determines that as long as the case could be decided under a state law claim remand to the state is appropriate.  The court looks at the unfairness part of the argument of California and determines that California could prevail on that claim irrespective of whether Block violated its federal agreement.  Similarly, it determined that the fraudulent or deceptive practices claim could be decided without resort to the Free File Agreement.

So, a state court may have a say in what happens to the Free File program and attorney generals have a way to police the program, even if the IRS has fallen down on its job of doing so.  In this somewhat rare area where state consumer law overlaps with IRS oversight, the consumer law provisions may provide a work-around to lax federal action and a path for taxpayers to actually receive the free file programs the program seemed to promise in its inception.

Remembering Dale Kensinger

On January 15, 2020, Dale Kensinger passed away leaving a big hole at the Tax Clinic at Harvard Law School.  You can find his obituary here.  Until very recently Dale put in a few days a week doing volunteer work at the tax clinic, where he had his own dedicated office as part of the supervising team.

I first met Dale on March 14, 1977, when I started working for Chief Counsel, IRS in Branch 3 of the Refund Litigation Division.  Dale was one of nine attorneys in the branch and was the second most senior.  As a newly minted law school graduate, I remember thinking Dale, who was about 35 at the time, was really old.  He was also extremely knowledgeable, generous with his time and kind.  I was fortunate to start my legal career in a small branch of attorneys that included someone like Dale.

Dale moved on to the Kansas City office of Chief Counsel only nine months after I arrived.  I moved on after just 18 months because of a reorganization that sent all of us to field offices across the country or to other National Office divisions.  Dale worked in the Kansas City office from 1978 to 1999 where he became the Assistant District Counsel.  Other than seeing him at the occasional training program, our paths essentially did not cross during these years though we both worked for the same large organization.

He retired in 1999 and founded the low income taxpayer clinic at University of Missouri – Kansas City.  He also became active in the ABA tax section and quickly rose to leadership in the low income taxpayer committee.  When I retired in 2007 and began teaching at Villanova, I reconnected with Dale through the ABA Tax Section.  Then Dale retired again in 2009 to move from Kansas City to Boston to be near his daughter, Elizabeth.  Following his retirement from the UMKC clinic, Dale became less active with the ABA but he was not finished helping low income taxpayers. 

My colleague at the Legal Services Center at Harvard, Dan Nagin, arrived in 2012 to start a veteran’s clinic and quickly found that he had many clients who needed tax assistance.  Dan searched around for someone who could help these clients and connected with Dale.  Dale worked with volunteer students from Harvard to service the veteran clients until Dan could convince the Harvard faculty to formally start a tax clinic.  When the tax clinic formally started in 2015, I came to Harvard as a visitor to get it going and had the incredibly good fortune to have Dale there already to guide me once again.

Dale served three years in the air force during the Vietnam War.  His time as a veteran, his kind and patient nature as well as his deep knowledge of tax practice, allowed him to fix the tax problems of many veterans, and others, during the five years I worked with him in the tax clinic at Harvard.  He not only handled a substantial docket but he mentored students, fellows and me.  The tax clinic misses him on many levels.  His clients miss him deeply and several have commented to me over the past two months how much he helped them and how much they hoped and prayed for his recovery.

Because of his extraordinary service to low income taxpayers in his retirement, Dale was selected in 2018 as the co-recipient of the Janet Spragens Pro Bono Award which is the only annual award given by the Tax Section.  The ABA Tax Section describes the award and the selection criteria as follows:

This award was established in 2002 to recognize one or more individuals or law firms for outstanding and sustained achievements in pro bono activities in tax law. In 2007 the award was renamed in honor of the late Janet Spragens, who received the award in 2006 in recognition of her dedication to the development of low income taxpayer clinics throughout the United States.

Throughout the 50+ years of his career as a tax lawyer, Dale provided a model of caring about finding the right answer through his legal skills and caring about his clients with his interpersonal skills.  At the tax clinic we are reminded daily of Dale’s work as we try to finish what he started with the clients he was representing.  We were very fortunate to have him as a colleague and a role model for so many years.  I will miss our regular talks about baseball, politics, difficult clients, difficult IRS employees and wonderful granddaughters.  Our thoughts and condolences go out to his family at this time.

9th Circuit Affirms Tax Court’s Ruling in Kollsman Disregarding the Report of Taxpayer’s Appraiser

We welcome back guest blogger Cindy Charleston-Rosenberg. Cindy is a past president and a certified member of the International Society of Appraisers. She and I both posted on the Tax Court’s earlier decision in the Kollsman case. Now, the 9th Circuit, in an unpublished opinion, has affirmed the Tax Court’s opinion. I am somewhat surprised that the taxpayer appealed this case because the burden to overturn the Tax Court’s decision was high. The 9th Circuit seemed to have little trouble finding that the Tax Court correctly relied on the appraiser used by the IRS and dismissing the taxpayer’s appraiser who came burdened with conflict problems and a desire not to use comparables in setting a value. The 9th Circuit stated “The Tax Court did not err in rejecting Wachter’s (the petitioner’s appraiser) opinion in part because he did not support his valuations with comparable sales data.” The 9th Circuit did not directly address the conflict of the taxpayer’s appraiser that greatly influenced the Tax Court to ignore or deeply discount his opinion but instead continued to focus on the deficiencies of his opinion stating “the Tax Court did not err in finding that Wachter failed to explain the nearly fivefold increase in value between his valuation and the sale price.” As Cindy explains and as we discussed in the prior posts, getting the right appraiser makes a huge difference in getting the “right” outcome. Trying to fix a problem with an appraisal through an appeal will generally not end well. Keith

On July 26, 2019, The Appraisal Foundation released a press statement urging legal advisors and wealth managers, in light of the recent affirmation of Kollsman v Commissioner, (T.C. Memo. 2017-40) to recognize the primacy of the personal property appraisal profession. The Appraisal Foundation is the nation’s foremost authority on valuation services, authorized by Congress as the source of appraisal standards and appraiser qualification criteria.

The 9th Circuit affirmation of Kollsman establishes that attorneys and other allied professionals should, as a minimum standard of care, recognize appraising as a professional discipline distinct from other types of art market expertise. From the Foundation’s release: 

with this ruling, the competency and professionalism of personal property appraisers has been confirmed for the second time by the judicial system in the United States … wealth managers and estate attorneys now have a greater fiduciary duty to their clients to fully understand appraiser qualification criteria and appraisal standards when vetting personal property appraisal experts.

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The Tax Court decision in Kollsman essentially disregarded an appraisal submitted by a high ranking executive of a premiere auction house as lacking basic qualification, credibility, support and objectivity. The decision relied almost exclusively on the opinion of the IRS expert, who was a relevantly credentialed, professional appraiser. The 9th Circuit opinion found the Tax Court did not err in rejecting the auction house expert’s opinion, in part because it was not supported by comparable sales data and failed to consider relevant past sales. In disregard to established caselaw and standard professional appraisal practice, the auctioneer testified that when he arrived at his valuations, he was “not interested” in comparables, and had only reviewed comparables after the IRS challenged his methodology. In finding the auction house appraisal to be “unreliable and unpersuasive” the Tax Court opinion deemed the omission of comparables supporting the valuations to be “remarkable”, stating; “we have repeatedly found sale prices for comparable works quite important to determining the value of art”. In contrast, the court found the credentialed appraiser engaged by the IRS explained his methodology, relied on comparables, and conducted research as to the impact of the subject property’s condition to an expected level of professional performance and objectivity. 

To help ensure a trustworthy level of professional competency, The Appraisal Foundation’s sponsoring professional personal property organizations, the International Society of Appraisers, the Appraisers Association of America, and the American Society of Appraisers, have embraced and are bound to implement the Personal Property Appraiser Minimum Qualification Criteria in issuing credentials to members. Each organization maintains a public registry where the appraiser’s level of credentialing, areas of specialization, education and experience may be accessed and confirmed. Members of these associations earn their credentials through a stringent admissions, training and testing process. They are required to comply with IRS guidelines and the Appraisal Foundation’s Uniform Standards of Professional Appraisal Practice (USPAP), are bound to continuing education requirements and to submit to the oversight of their professional organization’s ethics committee. 

As a member of the Appraisal Foundation’s Board of Trustees, I welcome the opportunity to collaborate with the legal and wealth management professions on best practices in identifying and engaging qualified appraisers, particularly for IRS use appraisals. As we see here, every appraisal report submitted to the IRS has the potential to become the subject of litigation. Procedurally Taxing readers are invited to review my earlier post for an in-depth analysis of the implications of the original ruling, and Keith Fogg’s earlier coverage of this case highlighting the avoidable perception of bias when engaging an expert seeking any involvement in the sale of purchase of the subject of an appraisal. 

Last September the American College of Trust and Estate Counsel (ACTEC) Regional Meeting in Baltimore hosted a panel addressing this issue. The feedback from the considerable post-presentation engagement from attendees was that the qualification criteria for real property appraisers are well understood by the legal profession. However, qualification criteria and practice standards for personal property and business valuation experts, sourced by the same authority, are clearly less so, often with devastating outcomes for consumers.

In the wake of the Kollsman affirmation,particularly as the ruling applies to the benefits of engaging relevantly credentialed experts for IRS valuations, and critically, the Appraisal Foundation’s now public stance on this issue, it will be increasingly difficult for tax and legal advisors to defend engagement of less than fully qualified valuation experts.