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

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

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

The Secretary of the Treasury is specifically directed to

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Major Change to Offer in Compromise Policy

The only bad thing about the change in IRS policy in Offers in Compromise (OIC) is that it comes too late for me to change a forthcoming law review article on offset.  The inability to update the article which is headed to press matters little.  The new policy regarding offset in OICs represents a significant shift in collection policy for the benefit of taxpayers with accepted offers.  Kudos to the decision makers behind this policy shift.  A recent blog post from the National Taxpayer Advocate sets out the shift in policy and does a nice job of providing background as well as summarizing the new policy.  This post seeks to complement the information provided by the NTA but is somewhat duplicative.  Christine wrote a two-part blog post on offers and refunds, here and here, if you want more background on this subject.

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Offsets after OICs

Section 7122 gives wide discretion to the IRS to enter into an OIC with taxpayers when the IRS finds that doing so serves the best interest of the government.  As we have discussed previously, the IRS generally declined to enter into OICs until a shift in policy three decades ago brought about by the lengthening of the statute of limitations on collection.  Once it decided to accept OICs as a regular part of its collection arsenal, it took the IRS some years to refine the process.  As it did so, it developed language in Form 656, the form on which the taxpayer submits the OIC itself, which committed taxpayers to foregoing the refund for the year in which the IRS accepted the OIC.  If you actually read the entire Form 656 you find it contains many provisions regarding the taxpayer’s commitment in accepting the OIC.

 The specific language developed by the IRS regarding the commitment of the taxpayer to give up their refund in the year of the OIC acceptance is found on page 5 of the form in section 7(e), which states:

The IRS will keep any refund, including interest, that I might be due for tax periods extending through the calendar year in which the IRS accepts my offer. I cannot designate that the refund be applied to estimated tax payments for the following year or the accepted offer amount. If I receive a refund after I submit this offer for any tax period extending through the calendar year in which the IRS accepts my offer, I will return the refund within 30 days of notification.

This provision surprises many taxpayers.  It has caused our clinic to carefully explain to taxpayers what to expect.  The offset sometimes comes a year or more after the acceptance of the offer if the IRS accepts an OIC early in a calendar year.  We would counsel clients to try to manage their taxes for the year of the offer acceptance so that they did not have a refund or, if they did, the refund was small.

Even though the IRS rarely accepted OICs prior to the change in its policy in 1992, it did have an OIC program.  In the Sarmiento case, discussed below, the clinic traced this language back to at least 1964.  At that time, however, refundable credits did not exist and the policy as originally designed would not have been intended to claw them back after OIC acceptance.

The policy fell hard on individuals receiving refundable credits as Congress pushed more and more benefits into the hands of individuals through the tax code.  For some individuals, the offset could take the earned income credit and child tax credit of several thousand dollars even though these refundable credits did not really constitute a tax refund as much as a benefit payment through the tax code.  Because of the way the offset operated in this situations, authors of this blog and others have criticized the taking of these refunds as part of the OIC process. 

Taxpayers have essentially no leverage to negotiate the terms of an OIC.  Even when aware of this provision in the offer contract and aware that it meant the taking of a large refund generated because of refundable credits, taxpayers could not negotiate their way out of the situation.

Now, for OICs accepted after November 1, 2021, the IRS will forego taking the post-OIC acceptance refund for the year of acceptance.  It will still take refunds for the periods leading up to the acceptance of the OIC (subject to the discussion of Offset Bypass Refunds (OBRs) discussed below.)  The benefit to taxpayers varies based on the amount of refund they might have received for the year of OIC acceptance.  The NTA’s blog has some statistics on this; however, the individuals receiving significant refunds based on refundable credits, usually among the poorest of the taxpayers receiving acceptances, will definitely benefit.

The new policy does make clear that the IRS expects to offset any refunds related to pre-OIC acceptance tax years.  This policy makes sense.  It prevents taxpayers from delaying the submission of amended returns until after an OIC acceptance in an effort to circumvent having the refund offset.  In this way, the policy operates similarly to the requirement that taxpayers disclose their interest in potential lawsuits and other claims not yet turned into a definite amount at the time of making the OIC.  The IRS should receive these monies or at least know about them and make a judgment.

Prior Litigation on This Issue

Carl Smith took on the language when he served as the director of the Cardozo Low Income Taxpayer clinic.  Through litigation, the clinic tried to limit the refund offset in the year of acceptance to refunds that were not from refundable credits in Sarmiento v. U.S., 678 F.3d 147 (2d Cir. 2012), and its companion case, Maniolos v. U.S., 469 Fed. Appx. 56 (2d Cir. 2012).  At the time, the OIC language stated that the IRS could keep “any refund, including interest, due to [the taxpayer] because of overpayment of any tax or other liability, for tax periods extending through the calendar year in which the IRS accepts the offer.” Carl and the clinic argued that, in the plain English in which the OIC was written (which they argued should apply instead of Codespeak), a refundable credit is not from any overpayment, and the policy reasons for the offset of refundable credits made no sense from both a history and policy perspective.  The clinic’s brief stated:

Support for this colloquial-English interpretation is found in the alteration that has happened in the particular language regarding “additional consideration” from the time of the 1964 OIC at issue in Robbins Tire & Rubber Co, Inc. v. United States, 462 F.2d 684 (5th Cir. 1972).  The Robbins Tire OIC provided that the United States could retain “any and all amounts of money to which the proponent may be entitled under the internal revenue laws, due through overpayments of any tax or other liability, including interest and penalties, made for periods ending prior to or during the calendar year in which this offer is accepted.”  Id., at 686.  This prior OIC language —“any and all amounts of money to which the proponent may be entitled under the internal revenue laws”—was later replaced in the version that each of the taxpayers signed with the more colloquial English words “any refund, including interest, due to me/us . . .”

Carl notes that the policy reasons for offsetting refunds from actual overpayments make sense as a means of stopping people from overpaying estimated tax payments in the year of OIC acceptance, just to get the excess back after an OIC is accepted based on assets lowered by the excess payments. 

While the policy surprisingly still allows this creative tax planning, the old policy allowed creating planning to avoid having a refund – unless your refund resulted from a refundable credit.  In that sense, the new policy just trades off on incentives and, in my experience, a relatively small number of individuals submitting offers engage in this type of planning. 

The Second Circuit ruled that the word overpayment in the OIC had to be read as defined in the Tax Code, which included refundable credits.  The litigation did cause the IRS to rewrite the OIC form to eliminate the words “because of overpayment”.  Carl says that during the litigation the IRS Director of Collection Policy told Carl he was curious about the cases and would be following them.  Carl felt the IRS sounded open to the ideas at issue in the litigation, though the IRS eventually did not change policy and in fact made the language more airtight to be able to keep all overpayments.

Offset Bypass Refunds

The NTA’s blog describes OBRs.  Something we have done before here in the most visited post of any every written by this blog.  The NTA’s blog announces a new policy regarding OBRs and OICs which appeared on the IRS website two weeks ago with little fanfare.  If a taxpayer files a return during the time an OIC is pending, the IRS will offset any refund generated by the return up to the amount of the outstanding liability.  Previously, a taxpayer with hardship who needed this refund to pay the rent or electricity could not take advantage of the OBR process while the OIC was pending.

OBRs have come under some criticism recently.  TIGTA criticized them in a report discussed by Les in a post here.  Les and I participated in an ABA Tax Section comment that focused on OBRs and made several suggestions seeking to make them more taxpayer friendly and accessible.

The new policy allows the taxpayer to submit a request for an OBR even while the offer is pending.  Like the policy of offsetting refunds described above, it is another step in the right direction for protecting taxpayers and especially low income taxpayers.  Under the new policy, the IRS will process the OBR just as if the taxpayer had not filed an OIC.  This does not mean that the taxpayer will necessarily receive the refund, or the full amount of the refund, but does give the taxpayer a fighting chance to receive at least a part of the refund during a time of real need.

The NTA’s blog gives an example of how OBRs work.  The blog does not cite to IRM provisions regarding the new policy because those have yet to be written.  It notes that this process is not well known and not easy to find.  The post concludes by saying that TAS is trying to prod the IRS to be more forthcoming about this process:

We continue to encourage the IRS to provide educational material on IRS.gov explaining the benefits of OBRs, the economic hardship requirements, and what taxpayers need to do to timely request an OBR. With the upcoming filing season, we encourage the IRS to get the OBR message out by leveraging its relationships with the public.

No doubt improvements could occur, but I applaud the IRS for acknowledging that taxpayers who have submitted an OIC may need an OBR just as much as those who have not made such a submission.  Because the OBR process itself remains difficult and somewhat opaque, I do not expect that this policy change will open the floodgates.  It will, however, allow some taxpayers in need to find relief.

FAWBU and Dispute Resolution Redux – Part 2

In Part 1 of this posting series, I proposed a 12-step program for getting the IRS to finally embrace its dual mission of collecting revenue and administering various social benefit programs.  There is one more step that must be addressed for the IRS to effect cultural change:  the development of a dispute resolution process for family and worker tax benefits that conforms to principles of due process and minimizes administrative burden.  That is the subject of today’s and my next post.

There is great urgency for addressing this issue, because we are facing a 2022 filing season that promises to be challenging, to put it mildly.  There will be millions of taxpayers who must file a return to claim the remainder of the Child Tax Credit and reconcile advance CTC payments, as well as claiming and reconciling the third round of Economic Impact Payments.  Among these millions are filers who are new to the system.    And there will be many taxpayers who were blocked from receiving the AdvCTC because someone else claimed their child(ren) on a 2020 or 2019 return, or because their 2020 return was delayed in processing by the IRS for one reason or another.  These folks will be coming in and claiming the CTC for TY 2021, and their returns are sure to be flagged and delayed, requiring these “newbie” filers to interact with the agency under circumstances of economic and emotional stress.  Depending on the quality of their interaction and experience with the IRS, these individuals may be discouraged from claiming future tax benefits for which they are eligible, thereby undermining the policy goals for such benefits.

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In assessing the current state of EITC/CTC dispute resolution, it is helpful to do a quick review of the basic principles underlying procedural due process.  The Fifth Amendment of the U.S. Constitution states, in part, that “[n]o person shall . . . be deprived of life, liberty, or property, without due process of law. . . .”  Procedural due process protections are triggered when the government actions bring about grievous loss.  In those instances, “the fundamental requisite of due process of law is the opportunity to be heard.”  (Grannis v. Ordean, 234 U.S. 385, 394 (1914)).

In the tax world, the Supreme Court has long held that pre-deprivation hearings are not a constitutional requirement where taxes are concerned.  ( See Springer v. United States, 102 U.S. 586, 594 (1881).)  Congress has stepped in and created pre-deprivation judicial review mechanisms before the United States Tax Court in deficiency and collection due process proceedings.  But a great deal of harm can be done at the administrative level before such judicial review is triggered. 

This is where Goldberg v Kelly comes in.  In this case, New York State denied individuals currently receiving welfare benefits a hearing prior to terminating those benefits.  The Supreme Court agreed with the District Court that in the welfare context “[t]he stakes are simply too high for the welfare recipient, and the possibility for honest error or irritable misjudgment too great, to allow termination of aid without giving the recipient a chance, if he so desires, to be fully informed of the case against him so that he may contest its basis and produce evidence in rebuttal.” (Goldberg v. Kelly, 397 U.S. 254, 266 (1970), quoting 294 F.Supp. at 904-905.)

The Court analyzed what it means to hold a hearing “at a meaningful time and in a meaningful manner” in the context of welfare benefits termination.  The basic elements are:

  • timely and adequate notice detailing the reasons for a proposed termination;
  • an effective opportunity to defend by confronting any adverse witnesses and by presenting his own arguments and evidence orally; and
  • the opportunity to be heard “tailored to the capacities and circumstances of those who are to be heard“ (397 U.S. 269);
  • “the recipient must be allowed to retain an attorney if he so desires: (397 U.S. 270); and
  • The “decisionmaker should state the reasons for his determination and indicate the evidence he relied on” (397 U.S. 271).

Later cases have limited the sweeping language of Goldberg v. Kelly, and the ruling itself applied to situations where benefits were terminated, not where benefits were applied for but denied.  However, Goldberg’s fundamental principles are a valid, if not constitutionally required, basis for conducting a due process analysis of IRS dispute resolution processes at the administrative level. 

First, we need to define what is a “dispute.”

Years ago, the answer to that question would be easy – an audit, an appeal, or a contested collection action.  Today, as I’ve discussed here, a large and increasing number of IRS challenges occur at the filing and return processing level.  For example, the IRS rejects e-filed returns claiming the EITC and CTC for a child where someone else has already claimed that child on a return.  In this case, the taxpayer has filed a valid refund claim, but the IRS has summarily rejected the e-filed return, creating administrative burden and delay for the taxpayer (and additional work for the IRS) by requiring the taxpayer to file the claim on a paper return. 

Similarly, through the summary assessment (math error) authority under IRC § 6213(b), the IRS summarily assesses tax on millions of returns by adjusting/disallowing various deductions and credits for family benefits.  It stops millions of returns on suspicion of identity theft, questionable refund claims, and unverified wage and withholding reports.  It requires taxpayers who have been denied family-based credits in prior years to file a detailed schedule supporting their claims for such credits in current years, and will summarily reject these returns if such required schedules are not included.  All of these actions constitute disputes, along with the more traditional audit, appeals, and collection matters.  And all of these disputes should be subjected to due process/administrative burden analysis, especially when the return in question reflects a claimed refundable credit like the EITC and CTC.

If your return is lucky enough to survive all of these processes (which are sequential, meaning if your return survives one, it then goes back into the processing pipeline and could be stopped by another process, ad infinitum), the return could still be selected for audit.  Today, about 75% of individual audits, including EITC audits, are conducted by correspondence.  Per Goldberg and later cases like Mathews v Eldridge, given the characteristics of the EITC and refundable CTC population, written submissions likely do not pass due process muster.

So, let’s apply these principles to what will happen in 2022 – both in terms of the filing season and claims for the CTC/AdvCTC reconciliation.

Timely and Adequate Notice Detailing the Reasons for a Proposed Adjustment or Rejection and Statement of Evidence Relied Upon in making the Determination

In the context of return processing, the taxpayer should be informed of the reason for the rejection of any e-filed return.  IRS has rejection codes; it should develop plain-language explanations of those codes and require Electronic Return Originators to provide that information to their customers.  (Code for America already does this; other EROs should follow suit, and IRS should require it.)  IRS should also require these explanations to be provided to taxpayers filing through Free File, Free Fillable Forms or the IRS Nonfiler Portal.

“Where’s my refund?” and similar apps should provide the taxpayer with specific information about where their return is in the processing pipeline, including the specific reason the return has been delayed (e.g., wage verification or identity theft) and should provide the taxpayer with links to specific instructions about any steps the taxpayer can take to resolve the matter.  IRS Customer Service Representatives (CSRs) must have access to this information as well.

Anyone who has received a math error notice or a correspondence audit adjustment report will agree that there is a paucity of information regarding the actual adjustment and reasons therefor.  Because of the underlying constraints of the IRS notice composition system, a single letter may contain vague language that refers to a number of possible reasons for an adjustment, making it difficult for the taxpayer to determine just what the IRS is adjusting and why it is making the adjustment. 

Because a math error notice is both a notification of a “termination” of benefit and the actual determination, it is essential under due process principles that the notice clearly state the reasons for such an assessment.  Math error notices should contain information relating to the exact line on the Form 1040 that is being adjusted, the exact amount of the adjustment on that line, the exact reason for the adjustment, and the Internal Revenue Code section authorizing that adjustment.  Where there is an adjustment of the Rebate Recovery Credit (RRC), the notice should provide sufficient details about the EIP paid out in 2021 so that the taxpayer can determine the accuracy of the adjustment.  With respect to adjustments to any EITC or CTC claimed, the notice should provide the reason for the adjustment, e.g., a duplicate claim for the child, or the correct number and amount of advance CTC payments received and not reported on the return.

Sufficient notice includes timely notice, and a notice will not be timely and afford a meaningful opportunity to challenge government action if it is received only a few days before a deadline.  This is particularly true where the targeted population has literacy and access-to-representation challenges.  The IRS needs to deal with the issue of mailing delays by adjusting the date of the notice to account for at least two weeks in delivery lags (See Ways and Means Chairman Pascrell’s letter in this regard.)

An opportunity to be heard includes effective and meaningful notice of the requirements and manner for requesting a hearing.  Thus, notices that provide deadlines for actions – e.g., 90 days or 60 days – should include the specific due date on which the response should be filed.  In the 21st century, this kind of computation is so technologically elemental, it is shameful the IRS still does not do this (or gets it wrong).  Assisters should be able to see this information with respect to specific taxpayer inquiries.

Effective opportunity to defend by confronting any adverse witnesses, by presenting arguments and evidence orally, and by tailoring the opportunity to be heard  “to the capacities and circumstances of those who are to be heard“

The Goldberg Court reasoned that for a welfare recipient, requiring written submissions is not sufficient, because literacy and education are issues; although informal procedures are allowed, a welfare recipient must be allowed to present their position orally.  And while the Court recognized the government’s legitimate concern with minimizing the risk of erroneous payments and delays, “[m]uch of the drain on fiscal and administrative resources can be reduced by developing procedures for prompt pre-termination hearings and by skillful use of personnel and facilities.”

In the return filing, processing, and audit context, as I’ve discussed elsewhere, these requirements can be met in part by establishing a dedicated Family and Worker Benefit Unit (FAWBU).  Compliance checks and audits should be handled by appointment – with a single employee assigned to the case.  The IRS can learn a lot from federal and state agencies that work with the low income/no income population, including the Social Security Administration and the research arm of the Department of Health and Human Services.  (You can watch the video of the Reimagining Tax Administration workshop here, where we discuss efforts to get people to show up for appointments to receive or maintain benefits.)  

Audits and other compliance checks should provide the taxpayer with the option to mail, fax, or upload documentation.  The use of template affidavits, such as Form 8836 Schedule A, will ease the administrative burden on these taxpayers, but oral testimony is essential with this population.  Thus, taxpayers should be able to present such documentation at virtual or in-person appointments, where oral testimony can be obtained.  IRS research has shown that office audits, where taxpayers can share their documentation and learn what more is needed, have a higher agreed-to rate and lower default rate than correspondence audits.  IRS can utilize accessible technology to facilitate these appointments.

Access to Representation

It should be axiomatic, with the enactment of Taxpayer First Act §1402, amending IRC § 7526 to authorize the IRS to make direct referrals to low income taxpayer clinics (LITCs), that CSRs and IRS audit employees should be equipped with electronic tools to provide taxpayers who are unrepresented and whose income is at or below 250 % federal poverty level with direct referral information to LITCs.  The IRS can program its systems such that when a CSR receives a call from a taxpayer, there is an indicator that the taxpayer’s most recent return or most recent IRP data appears to qualify the taxpayer for LITC assistance.  Similarly, in any case selected for EITC or refundable CTC audit, the auditor should be required to explicitly discuss LITC referral information when the taxpayer is unrepresented.  The IRS has LITC contact information, and if it is truly dedicated to cultural change and incorporating due process principles into tax administration, it will use this information proactively to advise taxpayers of the availability of assistance.

This is just a modest attempt at applying due process principles to tax administration.  In my next post, I’ll look at the proposed dispute resolution mechanism for Advance CTC payments and make design suggestions so the process conforms with these principles.

FAWBU and Dispute Resolution Redux: A 12-Step Program for Culture Change at the IRS – Part 1

Earlier this year I wrote a series of blogs in which I tried to think through the implementation of the newly enacted but temporary Advance Child Tax Credit (AdvCTC).  You can find those blogs here and here and here and here.  We are now several months into the delivery of the AdvCTC, and we have more details on what an extended AdvCTC might look like, by way of Ways and Means Committee Chairman Neal’s mark.  So I thought it would be a good time to review how the program has been doing in terms of implementation and where improvement is called for, going forward.

Moreover, for the last month or so, the Center for Taxpayer Rights has been holding a series of workshops entitled Reimagining Tax Administration: Running Social Programs Through the Tax Code.  Through these workshops, and the stellar panelists and moderators who have graciously agreed to present at them, we are trying to explore the challenges faced by taxpayers and IRS alike when the tax system is used to deliver social benefits to low income and other under-resourced populations.  You can learn more about the workshop series, see the agenda, and register for future sessions here and you can watch videos of past sessions on the Center’s youtube channel here.

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At this point in the process, we’ve identified that there are definite benefits, including political reasons, for administering these programs through the tax system.  But there are also significant challenges, including imperfect data sets and lack of resources dedicated to assistance for these taxpayers.  Rigid definitions of what constitutes a family or household for tax purposes, mired in a Leave-It-To-Beaver mirage, can trip up taxpayers who are actually responsible for the welfare of the child.  We have learned that a significant group of children move from one household to another throughout a given year, and that some countries have developed eligibility requirements for similar programs that address that reality.  For example, by basing the payment on who is the “carer” of the child, and even allowing for two “carers” to split the single credit in a manner agreed between themselves, we may transform many erroneous claims into proper claims.  We have discussed the need for the IRS to receive data from state benefit programs and the possibility of reducing burden by automatically “enrolling” taxpayers on the basis of this data.  (The IRS can certainly pay out the childless worker EITC on the basis of Form W2 and Form 1099-NEC data, checking who is eligible but has not claimed it after the end of the filing season.)

We also know administrative burden, created through policies, procedures, forms, return processing, and authentication and documentation requirements, can block eligible individuals from claiming benefits and avail themselves of rights and protections.  The IRS return processing system alone can result in a taxpayer’s return getting way-laid along the way to being posted, and because the IRS accounts personnel are chronically underfunded, taxpayers may not receive their AdvCTC until many months after the end of the filing season, thus undermining the very rationale for having an AdvCTC in the first place (smoothing out payments throughout the year). 

Finally, notwithstanding additional data and revisions to the eligibility rules, families being families, there will always be disputes about who should claim the child.  For example, according to data on the use of GetCTC, the application developed by Code for America to provide persons below filing threshold with an easy and accessible vehicle to file a 2020 return and claim the AdvCTC, one of the top three reasons e-filed returns were initially rejected by the IRS is because the dependent was claimed on the 2020 return of another person.  The most common reason for rejection was the taxpayer had already filed a 2020 return.  In some cases, this could indicate identity theft, including by a former or separated spouse.

This brings us to the next two workshop sessions in our Reimagining Tax Administration series, which will be held on November 1 and 8, respectively, and to topics I’ve written about previously with respect to the Advance CTC here and here – namely, due process protections, the dispute resolution process, and cultural change in the IRS.

Let me take cultural change at the IRS first – not because it is easier, but because the dispute resolution processes will not be reformed effectively until cultural change takes place.  Real cultural change is difficult – beyond mere window dressing.  It requires a shift in focus at the very top of the organization, so change can work its way down through the executive ranks to front-line employees and taxpayer interactions.  It requires a realignment of the agency’s mission, vision, and strategic plan and the goals, initiatives, and policies that derive from those high-level statements.  And it requires Congress and the public to hold the IRS accountable for executing this change.

Here is my 12-step program for cultural change:

  1. Adopt a mission statement that explicitly recognizes the IRS has a dual mission of collecting revenue and disbursing social benefits, framed by the duty to protect taxpayer rights.
  2. Establish performance measures and goals that emphasize high participate rates, quality (including accuracy), timely assistance, and first-time issue resolution, and hold executives accountable for achieving these goals.
  3. Create a dedicated unit, the Family and Worker Benefit Unit (FAWBU), that is responsible for all aspects of delivering tax benefits related to families and workers, including taxpayer education, assistance, outreach, and compliance initiatives.
  4. Establish within the FAWBU a dedicated, year-round toll-free assistance line to timely respond to taxpayer questions about eligibility for tax-related family and worker benefits and about return-processing issues, other account issues, and disputes relating to their claims for such benefits.
  5. Hire and staff the FAWBU with employees having expertise in social welfare programs and experience working with beneficiaries of those programs.
  6. Hire staffing necessary to timely resolve returns delayed on account of identity theft, questionable refund claims, duplicate claims relating to a child, and wage and withholding verification, by no later than June 1 of each filing season.
  7. Create a simplified filing portal that is accessible to low income and below-filing-threshold taxpayers claiming such benefits.
  8. Develop programs and algorithms for identifying and automatically determining eligibility for unclaimed credits and other benefits; where data is inconclusive but indicates individuals are likely to be eligible for such benefits, develop strategies to engage these individuals.
  9. Staff a geographically-based outreach, education, and assistance staff, focusing on the delivery of in-person and virtual face-to-face assistance.
  10. Liaise with state and local agencies administering family and worker benefits to their respective populations, and develop plans to utilize state and local agency data to increase participation by eligible taxpayers, including publishing data relating to underserved populations by zip code.
  11. Establish and promote cross-agency coordination with existing federal and state navigator programs to increase participation by eligible taxpayers.
  12. Establish a Federal Advisory Committee under 5a USC 92-463 for the purposes of receiving advice from external experts and advocates serving and studying the beneficiaries of these programs.

While this looks like a huge laundry list of items, all of these things are achievable. Treasury and IRS can establish a joint executive steering committee, with outside advisors and a subordinate working group composed of Treasury and IRS personnel from Treasury Office of Tax Policy and Tax Analysis, IRS Research, Wage and Investment, Taxpayer Advocate Service, Chief Counsel, and Communications. Treasury is going to have establish such a group anyway in order to implement any legislative extension.  In fact, Treasury and the IRS established just such a joint steering committee and working group arrangement in 2002 to address administration of the EITC – I know because I was a member of the steering committee.  The 2002 initiative led to some of the best and most informative experiments with increasing EITC participation and compliance.  This time around, the steering committee should issue a report within 6 months addressing how the IRS will establish the FAWBU, and produce a timeline for implementing these changes within 18 months following the delivery of the report.  The report should include the appropriations estimates, hiring authorities, and information technology improvements required to implement the proposed plan.

And by the way, the mission statement could be changed tomorrow – the IRS has done it before, when in the stealth of the night in 2010 it changed the word “administer” to “enforce” without any publicity or consulting taxpayers or IRS employees.

In my next blog post, I’ll review the dispute resolution process and what we need to be prepared to do in the next filing season to ensure people get the tax benefits they are eligible for.

Updates for ITIN Holders

Two issues have come up recently for ITIN holders that I’d like to flag. Thanks to Sarah Lora of the Lewis & Clark Low Income Taxpayer Clinic for prompting this post and providing much of the content.

1. Earlier this spring, NTA Erin Collins wrote a blog post highlighting the delays caused by the paper-filing requirement for ITIN seekers. This issue has gone on so long that I almost forgot it seems strange to people seeing it for the first time.

Taxpayers needing an ITIN may not file electronically.  They must always file a paper return, attaching the return to their ITIN application and mailing the package with supporting documents to the IRS ITIN unit. The IRS’s reasoning is that the attached tax return demonstrates the taxpayer’s need for an ITIN. Taxpayers needing an ITIN renewal fare slightly better: they may obtain the renewal prior to the filing season, which then allows for an e-filed return.  However, when taxpayers seek help with both filing their return and renewing their ITIN during the filing season, the renewal application must be attached to a paper tax return.

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The requirement to paper file has resulted in extraordinary wait times for taxpayers needing ITINs for themselves or dependents.

During 2021 through March 27, the IRS had received over 150,000 ITIN applications, with over 125,000 submitted with a tax return. This number is expected to grow – in 2020, the IRS received over a million ITIN applications, including about 470,000 applications from new applicants, meaning they had to apply with a paper tax return if they did not meet one of the narrow exceptions. These taxpayers are facing a double-whammy this filing season – first, the delay in having an ITIN application processed and second, the delay in having a paper tax return processed. For the week ending March 27, 2021, ITIN applications submitted with a return were taking 25 business days on average just to be input into the system. During this same week, the ITIN unit started with inventory of almost 67,000 applications to be worked and ended with an inventory of over 74,000, reflecting a growing backlog.

The NTA points out that many ITIN holders have dependent children that qualify for the Child Tax Credit (CTC) or Recovery Rebate Credit, creating delayed refunds for those families most in need.

In the post, the NTA suggests that ITIN applicants should not be required to attach a tax return if they can prove a filing requirement some other way, for example by submitting wage documents from an employer. She notes that accepting ITIN applications throughout the year would “prevent unnecessary delays, encourage voluntary compliance, and reward these individuals for doing the right thing by filing U.S. tax returns.”

2. ITIN holders with children who qualify for the CTC are entitled to the advanced CTC. The implementation of this provision has come with some glitches.  First, the IRS computers were initially programed to disallow the AdvCTC if the taxpayer or spouse was an ITIN holder. This programing error prevented approximately 1.2 million families from receiving the first monthly advanced CTC payment in July.  Advocates raised the issue with the IRS, and it appears that the glitch has been fixed and these families should begin receiving their payments in August 2021. According to the IRS news release, these taxpayers will receive the full amount of their AdvCTC:

Such families who did not receive a July payment are receiving a monthly payment in August, which also includes a portion of the July payment. They will receive the remainder of the July payment in late August.

Finally, advocates recently flagged the issue that the ITIN unit may reject ITIN applications for individuals with qualifying children filing 2020 returns with no income, seeking the advanced CTC. There were several reports of both private and nonprofit Certified Acceptance Agents (CAAs) refusing to submit ITIN applications for these individuals.

Sarah Lora previously wrote a post here discussing the ITIN unit’s flawed policy of rejecting ITIN applications where the accompanying paper tax return does not show what the IRS deems a federal monetary tax benefit. This policy rejects a century of tax policy that provides favorable tax treatment to citizens Canada and Mexico, as Sarah argues in a Tax Notes State article here. Even though a 2020 return is the ticket to receiving the advanced CTC, the ITIN unit’s current policy of blindly looking at monetary federal tax benefits on the attached return before them could lead them to reject ITINs for 2020 $0 income returns, preventing children with social security numbers, the vast majority of which are U.S. Citizens, from receiving the advanced CTC.

Because of this ITIN policy, it is logical for CAAs to think they would be wasting their time submitting applications for nonfilers who have “only” a 2021 tax benefit. Legal services attorney Jen Burdick submitted the issue to TAS through the Systemic Advocacy Management System (SAMS). Happily, Jen reports that there is a workaround. According to the Systemic Advocacy employee with whom Jen corresponded, a nonfiler’s 2020 tax return should be processed and the ITIN issued if the Form 1040 shows “Rev. Proc. 2021-24” written at the top of the first page.

Revenue Procedure 2021-24 sets out procedures for nonfilers to file 2020 tax returns in order to obtain AdvCTC payments, and it mentions ITINs at § 4.03(4)(b). Hopefully the ITIN unit will process applications attached to such returns. Because of the delays described above, it is difficult to say whether the ITIN unit is aware of the special 2020 procedures. Please reach out to Sarah at sarahlora@lclark.edu if you find taxpayers facing an improper ITIN rejection.

The workaround is good news, but it is discouraging that it has not been publicized by the IRS. The IRS needs to get the word out to all CAAs, so taxpayers stop getting turned away and told to wait until the 2022 filing season. A crush of ITIN applications next spring is the last thing that the IRS or taxpayers need.

Treasury Commits to a Permanent and Accessible Simplified Filing Portal for Child Tax Credit Claimants

One of the main stumbling blocks to full distribution of advance child tax credit (AdvCTC) payments has been the relative inaccessibility of the online sign-up tool for individuals who don’t have a 2019 or 2020 tax return on file with the IRS. Today the Treasury Department announced major improvements to the sign-up tool:

Treasury is announcing its commitment — as part of the Administration’s efforts to extend the expanded CTC program — to create a permanent, multi-lingual, and mobile friendly sign-up tool to help more Americans who do not regularly file taxes to claim their CTC. Treasury will work with Congress to ensure the effort is fully resourced. The Administration will also work with Congress to provide the necessary funding for a multi-year effort — leveraging public sector and community-oriented solutions — to reach and sign up more families and children.

In the meantime, Treasury and the White House are announcing a new, mobile-friendly, bilingual sign-up tool created by Code for America — a civic technology non-profit — which will be available in the coming weeks. The Administration will make an all-of government effort to enroll eligible families in the CTC, while also supporting the type of outreach and assistance needed over the long-term to ensure the Child Tax Credit is lifting up all our nation’s children.

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The “sign-up tool” functions as a simplified filing portal, creating a 2020 tax return which the IRS uses to calculate 2021 advance child tax credit payments pursuant to the American Rescue Plan Act. The inability to get a 2020 return “on file” has been a major source of frustration for some nonfilers with children. A more accessible portal will help, although it is just one piece of the puzzle. Individuals will still need help verifying their identity and resolving problems. Next to identity verification and return processing delays, the most common problem we hear from callers is submitting their information only to have it bounce back as someone else has already claimed them or their children on a tax return. But, improvements to the first step should surface these problems earlier.

The press release also includes information on payments made to date, and the impact that the payments are having:

…more than $15 billion were paid to families that include roughly 61 million eligible children in the second monthly payment of the expanded and newly-advanceable Child Tax Credit from the American Rescue Plan passed in March. The number of payments this month increased and cover an additional 1.6 million children. Eligible families received a payment of up to $300 per month for each child under age 6 and up to $250 per month for each child age 6 to 17.

This tax relief is having a real impact on the lives of America’s children. According to the Census Bureau’s Household Pulse Survey data released earlier this week, parents reported having less trouble covering the costs of food and other household expenses after receiving their first CTC payment. The share of families reporting that they sometimes or often did not have enough to eat in the past week dropped to the lowest percentage since the pandemic began. Parents are using their CTC payments to pay for basics for their kids. Roughly half of those who received a July CTC payment reported using it to pay for food and 1 in 4 spent some of their CTC on clothing.

Given the impact on child poverty that the payments appear to be having, the improvements to the simplified filing portal announced today may pave the way for Congress to extend advance CTC payments beyond 2021.

Into the Weeds with the Advance Child Tax Credit – Including Dispute Resolution

Last week, I wrote three blogs, here and here and here, trying to think through how an Advanced Child Tax Credit (AdvCTC) could be administered through the tax system and by the Internal Revenue Service.  Jen Burdick also wrote a very thoughtful post about the need for due process protections associated with the program.  I received a lot of thoughtful comments from folks, and I really appreciate that.  Today, I want to get a little further into the weeds and actually think through how all this would work, and I will also try to address some of the issues raised in the comments.

Regardless of which monthly AdvCTC proposal is ultimately enacted into law – an irrebuttable presumption of eligibility or a rebuttable presumption of eligibility (as I propose), certain administrative elements will be constant, even if their magnitude varies.  These include applying for advance payment of the credit via the annual return filing system; protecting the program from excessive claims; updating changes in circumstances throughout the year; and reconciling advance payments on the next tax return.

Now, into the weeds.

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Applying for the credit 

From the taxpayer perspective, taxpayers need relative ease in applying for and receiving the credit.  Because the CTC is administered through the tax system, the tax return will be the primary vehicle for applying for the CTC.  Taxpayers already receiving the CTC are familiar with this process. On their return for each year, they can affirm, under penalties of perjury, that they are eligible to receive the monthly CTC for the coming year with respect to a particular QC.  If they affirm they are eligible, then they must either elect to receive the monthly CTC or elect not to receive the monthly CTC.  That is, they must tell the IRS how they want to receive the credit – monthly or as a lump sum at year-end.  If they elect to receive the AdvCTC, they mustalso affirm that they understand their obligation to update the IRS about changes in circumstances that might affect their eligibility to receive the credit.  Establishing the obligation to update at the outset of the program both educates the taxpayer about the obligation and also establishes a behavioral norm. 

The 1040 already has a check box next to each dependent’s name and social security number to affirm whether that child is a qualifying child or other relative for the CTC.  It would be hard to fit more checkboxes onto that line and still have it readable.

Image of IRS Form 1040 page 1, section for listing dependents.

Personally, I think there needs to be a separate section on the return in which to make the election, but it could look similar to the above, where the taxpayer lists the dependents for whom an election is being made.  There would be two checkboxes – “Check if qualifies for the Advanced Child Tax Credit” and “Check if opting out of the Advanced Child Tax Credit.”  The check box for opting out is essential if the IRS is to prevent incorrect claims of the AdvCTC – it will need that information to catch other claims for the same child, where a taxpayer already has said they are eligible for the Adv CTC but want a lump sum at year-end.  Finally, there should be a question under the AdvCTC list of dependents, saying “I understand I am required to update the IRS promptly about any changes in circumstances affecting eligibility for the AdvCTC” with a check box.

Taxpayers who trade off claiming the child every other year with the other parent can simply not check the box “Eligible for the Adv CTC” for that child.  If Congress decides to allow taxpayers to allocate the AdvCTC between themselves, this section would be the place to do so.  Taxpayers would be required to enter the name of the other main carer and the percentage allocation.   IRS would have to program its systems to systemically check the matching return before issuing payments according to the allocation.  Alternatively, taxpayers could attach a separate form in which both persons sign and consent to the allocation.  (The IRS already requires a similar form when the custodial parent waives the dependency exemption/CTC in favor of the noncustodial parent, although in that case only the custodial parent’s signature is required.)

To facilitate filing by households who have little or no income, the IRS needs to create a robust simplified filing portal – one that can also obtain the necessary information to pay the childless-worker or with-child EITC on an annual basis as well as serve as the application for the monthly Adv CTC.  The simplified filing portal must be mobile accessible and in multiple languages.  The IRS should either develop it itself or issue a request-for-proposal.  Building this on top of Free Fillable Forms, where the IRS has no ability to mandate additional features like EITC eligibility, creates a sub-par product that increases taxpayer burden and IRS rework.

Ensuring program integrity and minimizing incorrect payments

To ensure program integrity, because the “application” for the AdvCTC is on the tax return (including the simplified filing portal), it goes through all the IRS questionable refund filters, identity theft systems, and the dependent database.  This enables the IRS to identify any math errors that would disallow the child on the tax return (Year 1) and identify any duplicate claims for the child for that year.  Because the 1st payment of the AdvCTC would not be paid out until May 15th, the IRS will also have time after the April 15th filing deadline to identify any dual AdvCTC applications for the same child for current tax year (Year 2).   Because taxpayers must tell the IRS whether they are prospectively eligible for the CTC for Year 2 even if they elect not to receive it in advance, the IRS will be able to identify and resolve these competing claims as well.

Note that the National Taxpayer Advocate recently reported that in the 2021 filing season (through May 22, 2021) the IRS “selected” 3.78 million individual tax returns on suspicion of identity theft, almost double the 1.9 million selected in the 2020 filing season (through July 16, 2020, the end of the extended filing season).  This increase is probably attributable to the Economic Income Payment/Rebate Recovery Credit claims.  When someone’s return is selected by the Taxpayer Protection Program (TPP) the taxpayer has to either authenticate their identity online or by telephone, or visit a Taxpayer Assistance Center to authenticate (good luck getting an appointment).  This can lead to weeks and even months of delay.  For the 2021 filing season, the National Taxpayer Advocate reports that the TPP phone line received about 6 million calls, and the level of service on that line was 19 percent – meaning 4 out of 5 calls did not get through.

I am concerned that advocates for the AdvCTC are unaware of the significant delays that can occur during the filing season, which will impact the delivery of the AdvCTC.  Advocates for child welfare and poverty eradication remind us that one of the most important features of the credit is that it must “smoothly” deliver benefits – no big ups and downs, no gaps in payment.  Yet for millions of taxpayers, year in and year out, receipt of their refunds is often a traumatic, indefinite process.  Each year the IRS freezes millions of returns – especially from low income taxpayers – on suspicion of fraud or error and requires taxpayers to interact with an understaffed, technologically challenged agency to clear up the problem.  In a good year it takes the IRS until July or August to clear up the majority of these suspended returns.  The IRS has not had a good year since 2017 or so; and for Tax Year 2019, the IRS is still digging itself out of this frozen return backlog.  If a return’s processing is suspended, there will be no AdvCTC paid out until the underlying matter is resolved and the return (and AdvCTC election) is finally posted to the IRS system.

If taxpayers find themselves not being able to count on the timely delivery of the AdvCTC, or if they have to navigate an unfriendly system to receive the AdvCTC, they just may elect to not participate in the system.  That would be a tragedy.  To avert this tragedy, the Administration needs to propose and Congress needs to enact a robust taxpayer service budget to handle the calls and resolve the disputes.  IRS needs to staff up these units for quick issue resolution; even more important, IRS needs to improve its fraud selection systems and establish specific goals to reduce false positives in that selection process.

At any rate, barring any dueling or ineligible claims for the AdvCTC, or any questionable refund flags in the return processing system, a taxpayer who elects to receive the Year 2 AdvCTC on a Year 1 return should expect to receive the first payment on May 15th.  The May payment would be for the month of April and is 1/12th of the full amount of the credit.  Under most AdvCTC proposals, once the taxpayer passes through return processing, the taxpayer is presumed to be eligible for the AdvCTC for the year, unless and until the taxpayer reports a change of circumstances that affects eligibility or a competing claim is filed for the same child during the year.

Change of Circumstances Portal and Dispute Resolution 

The change of circumstances portal needs to be accessible, mobile adapted, and in English and Spanish, and eventually in other major languages.  Any new household coming in during the year and claiming a child would input the child’s name and social security number and other relevant information such as the taxpayer’s financial account; the system would automatically check if another taxpayer was receiving or had elected out of receiving AdvCTC for that child.  If no one else was claiming the child, the system would also run that request through the IRS’ various questionable refund, identity theft, and dependent database filters. 

The system would then provide an automated response – for example, the taxpayer is eligible for AdvCTC as of this month and the first payment will be issued on that date.  If another household is receiving AdvCTC for that child, the new applicant will receive an automated response stating that another household is receiving AdvCTC for that child and if the new applicant disagrees, then the applicant has 30 days within which to provide the IRS information demonstrating the child is living with the new applicant.  At the same time, the IRS issues a “soft” notice to the original AdvCTC recipient advising them IRS has received information that may indicate the child’s living arrangements have changed, and if this is the case, the notice reminds the household of the obligation to update via the change-of-circumstances portal or by telephone in order to avoid clawbacks of the payments.  No additional information is required of the original claimant at this time; the notice serves as a “nudge” and helps minimize incorrect payments and clawbacks.

I have wrestled with whether the original AdvCTC recipient should be required to submit additional information early in the dispute resolution process or that information should be requested only after the IRS has determined the new applicant is eligible for the AdvCTC.  If the new applicant is ineligible, then there is no reason to burden the original recipient with supplying information.  On the other hand, if the IRS preliminarily determines the new applicant is eligible for the AdvCTC, it is important to provide the old household with an opportunity to challenge that determination and also to do that speedily so as to minimize erroneous payments and avoid clawbacks.

Let’s call the original AdvCTC recipient “Household 1” and the new AdvCTC applicant “Household 2.”  As noted earlier, if IRS systemically denies Household 2 because Household 1 is receiving the AdvCTC, Household 2 is provided the opportunity to request administrative review within 30 days.  Legislation should specifically instruct the IRS to develop an affidavit form that taxpayers can use to make such a request.  On the affidavit form, the taxpayer could state, under penalties of perjury, the child has been living with Household 2 since a specific date; the affidavit would also be signed, under penalties of perjury, by an official third party with knowledge of the child’s residence.  The IRS developed just such an affidavit for a test of residency for EITC purposes in 2004 (Form 8836 and Form 8836 Schedule A), and this affidavit could be modified for AdvCTC disputes.  (You can read the report of this pilot here – Form 8836 Schedule A is included this report.)  Third parties included case workers, school or medical personnel, court and law enforcement officials, members of the clergy, and others; the affiants certified they had either personal or records-based knowledge of the child’s residence.  Using an affidavit minimizes the administrative burden on the applicant but provides some third party evidence of the child’s location.  Of course, taxpayers could also submit other documentation, including protective orders.

If Household 2 submits this information within 30 days, the IRS immediately issues a notice to Household 1, asking them to provide information within 30 days, about the residency of the child, usually via the affidavit form.  Thus, by 60 days, the IRS will have the necessary information with which to make a decision, and while waiting for Household 1’s information it can contact the affiants for Household 2 and verify the affidavit, if necessary.  The IRS will have an additional 30 days to make a final eligibility determination.  In this way, Household 1 is not burdened unless and until Household 2 actually requests an administrative review and submits the affidavit or other documentation.

If Household 1 is ultimately determined to be ineligible, a safe harbor  — I’ve proposed 3 months — should protect Household 1 from any clawbacks attributable to the dispute resolution process.  If the IRS takes longer than 30 days to make the final determination, Household 1 would be protected from clawbacks during that extended period.  Under the rebuttable presumption model, Household 1 would generally have clawbacks (more than 1 month) only if Household 1 delayed submitting change of circumstances for a significant length of time.

Availability of Judicial Review

One thing I haven’t worked out is whether we need judicial review during the year or whether such a right would arise when the tax return is filed at year end.  In the benefits context, I have been told that adjudication takes about 18 months to become final; by then tax returns have been filed and the IRS may need to make decisions about whether to award the Earned Income Tax Credit or Child and Dependent Care Tax Credit for the child tied up in litigation.  Can the IRS make that decision if the issue of where the child resided for more than 6 of the 12 months of that year is the subject of judicial review?  I may be wrong, but I don’t think so.  For that reason, one approach would grant administrative review during the year, and then provide deficiency jurisdiction (not math error) for a final monthly CTC determination upon the filing of a tax return.

Because disputes based on a past year’s tax return may not be resolved in time for the current year’s payment of AdvCTC, the IRS could require that taxpayer to submit the affidavit form or even a recertification in order to receive the AdvCTC for the current year.  While this creates some administrative burden for the taxpayer, it does not deny them the AdvCTC outright for the current year pending resolution of litigation.  Recertification is already required with the EITC context.  (But see my comments about the current recertification form below.)

On the other hand, Congress could establish a new jurisdiction for the United States Tax Court, specifically for review of AdvCTC claims.  The legislation would set forth specific timeframes within which the Court must render a decision.  Given the logistical challenges with judicial review of monthly payments in the context of an annual tax system, I come down on the side of providing judicial review arising from the reconciliation on the income tax return.  This allows for all the issues relating to family status and child benefits to be decided in one cause of action.  It isn’t perfect, I know.

Paid Preparer Due Diligence

Unlike traditional social benefit programs, the IRS has taken itself out of the application process for programs like the EITC and CTC.  Taxpayers have the obligation to file returns; over half of returns claiming EITC are filed by paid preparers.  Return preparers are required to sign and date any return they prepare for compensation, and they can be subject to a monetary penalty if they fail to meet this and other requirements.  We don’t know how many returns are filed by ghost preparers – i.e., paid preparers who do not sign the return. 

For returns that involve the family-status provisions of the Internal Revenue Code, paid preparers must meet statutory due diligence requirements and complete Form 8867, Paid Preparer’s Due Diligence Checklist and file that with the return.  If they don’t file the form, they will be subject to a $540 penalty (per omission).  The due diligence requirements apply to the EIC, the CTC, the Additional CTC, the American Opportunity Tax Credit, the Credit for Other Dependents, and Head of Household filing status.

If you haven’t taken a look at this form and the requirements, you should.  Preparers have commented that it is difficult enough to ascertain that a child lived with a taxpayer for more than half the year, much less try to determine the child lived with a taxpayer more than half of a month, on a month-by-month basis.

I am sympathetic with this plight.  One thing that might help is my proposed Form 1099-CTC, which would indicate the months for which the taxpayer received Adv CTC.  Form 8867 already requires the preparer to ask if any of the various credits had been disallowed or reduced in prior years.  If so, the preparer must complete Form 8862, Information to Claim Certain Credits after Disallowance.   This is an insane form and needs to be completely redesigned.  Here is where the affidavit, Form 8836 Schedule A, can be very helpful.  The point is, if the CTC has not been reduced or disallowed in prior years, the preparer is still going to have to do basic due diligence for various other credits that rely on the 6-months-and-a-day rule.  If there is nothing to alert the preparer to eligibility concerns under those credits, then it seems to me the IRS should be comfortable with the preparer relying on the IRS-issued Form 1099-CTC in preparing the return.  If something triggered greater scrutiny (problems with the other credits, or a prior disallowance or reduction), then the taxpayer could provide the Form 8836, Schedule A to show residence, and the preparer could rely on that.  But again, this whole due diligence process needs to be revised.

There is, however, the issue of unscrupulous preparers.  It goes without saying that because there is a lot of money involved, there will be incompetent or unscrupulous people willing to help the low/no income population with applying for the AdvCTC.  This includes so-called preparers siphoning off the AdvCTC to their own accounts.  Congress needs to pass legislation that requires unenrolled preparers to register with the IRS, take a one-time tax law competency exam, and complete annual continuing education courses.  It was urgent before the AdvCTC, but it is a necessity now if you don’t want vulnerable taxpayers preyed upon.

I know my “in the weeds” suggestions will not satisfy everyone; but I have tried to think through how all this might work, in the context of the IRS.  Because of the interaction with other family-based credits, I believe there needs to be the ability to reconcile.  In earlier posts, I’ve proposed ways to minimize, if not eliminate, clawbacks.  I’m going to think about various scenarios, how this and other approaches might play out.  And we’ll soon learn where Congress lands on this issue.

The Importance of Notice and Hearing Rights for the Advanced Child Tax Credit

Today we welcome first-time guest blogger Jennifer Burdick. Jen is an attorney with Community Legal Services of Philadelphia focusing on SSI benefits. In this post, she explains the notice and appeal rights that typically apply in public benefit programs, and why they are crucial to her clients’ accessing the benefits that they qualify for. She then addresses the promise and shortfalls of the American Rescue Plan’s child tax credit expansion. Christine

Notice and Hearing Rights in Public Benefits: an Example

Jacob is a five-year-old child who receives SSI, a modest Social Security income support for children with disabilities. His mother receives a notice that Jacob is no longer eligible for SSI because a data match shows that his mother has too much money in the bank. In fact, the Social Security Administration (SSA) is mistaken — that’s not her bank account.

The notice of the termination, which SSA must send mom prior to stopping Jacob’s benefits, provides instructions for how she can appeal by seeking reconsideration. 20 C.F.R. § 416.1336. She is given 60 days, plus five for mailing, to appeal the decision. Id. All she has to do to appeal is send in the provided form (or any writing) disagreeing with the termination. She does not have to write much – one or two sentences is sufficient, and she does not need to use any magic words like “appeal,” or even sign the form. POMS SI 04020.020. If she appeals within ten days, plus five for mailing, Jacob’s benefits will remain on during the appeal, until there is a reconsideration decision. 20 C.F.R. § 416.1336(b).

Once Jacob’s mother requests reconsideration, an SSA claims representative who was not involved in the initial termination decision must review the case and issue a new written determination. 20 C.F.R. §§ 416.1413 & 416.1422. As part of that review, Jacob’s mother can select if she wants SSA to do a case review, or if she wants to attend an informal conference; in certain circumstances a formal conference is also available. 20 C.F.R. § 416.1413a. In a case review, SSA will allow Jacob’s mother to review SSA’s evidence, and present additional oral or written evidence, but typically these cases are decided by re-reviewing the case file. 20 C.F.R. § 1413(a). At an informal conference, Jacob’s mother will attend, can testify, and can additionally present witnesses. Id.  SSA regulations indicate the reconsideration proceeding should be scheduled within fifteen days of her request at her local office, either by phone or in person based on Jacob’s mom’s preference. 20 C.F.R. § 416.1413c. Jacob’s mother can bring an attorney or representative to the meeting. A summary of the informal or formal conference will be included in the record. 20 C.F.R. § 416.1413.

If, after the reconsideration proceeding, the SSA claims representative reaffirms the termination of benefits, Jacob’s mother once again has 60 days, plus five days for mailing, to appeal the decision with the opportunity for benefit continuation pending appeal. This time, the Social Security Act entitles her a hearing before a qualified administrative law judge within 90 days. She’s entitled to bring an attorney or other representative to the hearing.

Importantly, throughout this process SSA shares with Jacob’s mother the duty to develop the record in her case. 42 U.S.C. § 423(d)(5)(B). So as long as Jacob’s mother tells SSA about evidence that might support her claim for benefits, SSA has to help her get it if she cannot. Regulations governing SSA proceedings provide they are inquisitorial rather than adversarial. Carr v. Saul, 19-1442, 593 U.S. (2021). The shared duty to develop the evidence and the inquisitorial nature of the proceedings is critical because many claimants appear without the assistance of counsel, although legal services programs do represent claimants as resources allow. Following the hearing, she receives a written decision with further appeal rights if she loses.

Fortunately, though, she doesn’t need to appeal: the judge agrees that she does not have too much money in the bank, and Jacob’s disability income remains intact.

Implications for the Advanced Child Tax Credit

Among Social Security applicants and recipients, Jacob and his mother’s experiences are utterly commonplace, enshrined in decades of constitutional and statutory law that guarantee basic due process rights. Yet with the tax system, which is increasingly administering the American safety net, there is no similar inquisitorial process.  Instead, people with similar issues related to their tax payments and refund face adversarial process. But Congress can fix this. In the coming weeks, it should draft legislation providing notice and hearing rights to taxpayers seeking the refundable advanced Child Tax Credit (AdvCTC), as expanded in the American Rescue Plan (ARP).

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The expansion of the Child Tax Credit (CTC), coupled with making it fully refundable and available monthly to sync its availability to need, has the potential to revolutionize the social safety net. If this advanced tax credit is successfully distributed to those eligible, including Jacob and his mother, it will be literally life changing. Millions of families will rely on this benefit to help them pay for life’s necessities. My clients, low-income families where either a caregiver or child has a severe disability qualifying them for SSI, are excited because monthly payments bring the promise of helping them cover recurring expenses including the rent and utility expenses. One of my clients, Mr. McGruder hopes it will allow him to get his grandsons a cable subscription.

The problem is that ARP does not provides for necessary procedural protections in the event someone seeking to claim the advanced CTC credit is denied, or has their advanced payment reduced or ceased. The only legally required notice provided to families under the ARP is one letter, to be provided in January 2022 (after the receipt of any AdvCTC payments), which will list the total amount of advanced CTC the taxpayer received in 2021. IRC Sec. 7527A(b)(3). To be fair, IRS has elected to provide additional notice to families, sending letters to 36 million families who may qualify for AdvCTC payments, and announcing their intention to send a second personalized letter listing an estimate of their monthly payment. However, there is no provision in ARP, and the IRS has not committed, to send written notices at other key moments:

  1. if a family seeks advanced payments and is determined eligible for less than the full amount;
  2. if a family is determined completely ineligible; or
  3. if IRS will use their unilateral power to reduce or stop AdvCTC that the family has been receiving.

As a result, if a taxpayer is denied access to complete AdvCTC payments, or the Secretary uses the modification powers outlined in the ARP to modify or stop the advanced payment (IRC Sec. 7527A(b)(3)), a taxpayer may experience unexpected interruptions in those payments without any sort of advanced warning that the payment isn’t coming, or any information about an opportunity to appeal. In that event, the taxpayer won’t be able to easily contact IRS customer service, as IRS staff are already struggling to answer the current call volume and IRS directs that people not call in with CTC questions.

Can you imagine anything more frustrating? Imagine if Jacob’s mother, based on the promise of the AdvCTC’s additional $250 a month, secures a larger apartment so she and Jacob can have separate bedrooms, affording him the personal space that is recommended by this therapist. After relying on these payments to offset the additional rent, without receiving any notice, the payment does not come in September due to an internal IRS decision. She will no doubt try to call the IRS, but even the IRS website instructs people not to call for assistance.  If she does call and connect to a human, there is a decent chance she will be connected to a contractor who is unable to give her specific information about her tax case.  She will reach out to me, a legal aid lawyer, who will have to inform her that there is no clear avenue for appeal. Hopefully this will not result in their eviction and all the adverse consequences that follow.

There should be legislation, not litigation, creating detailed notice and hearings rights. In the public benefits context, the Fifth Amendment to the U.S. Constitution’s promise that “[n]o person shall be deprived of life, liberty, or property without due process of law” has been interpreted to convey both applicants and recipients a property interest in government benefits, including cash payments like the AdvCTC. U.S. Const. amend V. Because of this property interest, applicants and recipients are entitled to notice and an opportunity to appeal a denial, reduction, or termination of benefits, in many cases before the reduction or termination takes place. U.S. Const. amend V.; Goldberg v. Kelly, 397 U.S. 254 (1970).

Many poverty advocates, public benefits lawyers, and policy analysts have been surprised to learn that the Supreme Court does not necessarily believe that Fifth Amendment’s promise of pre-deprivation due process applies with the same force to tax refunds and credits. See Leslie Book, The IRS’s EITC Compliance Regime: Taxpayers Caught in the Net, 81 Or. L. Rev. 351, n.9 (2002), (reviewing relevant due process and tax cases, and finding that “the Supreme Court has long held that the collection of tax is so essential to the nation’s lifeline that IRS adjudicative actions should remain largely untouched by procedural protections inherent in the Fifth Amendment Due Process Clause”); Nina Olson, Erwin N. Griswald Lecture Before the American College of Tax Counsel: Taking the Bull by its Horns: Some Thoughts on Constitutional Due Process in Tax Collection, Tax Lawyer Vol 63, No. 3, 2010, at  n. 24.

Although there is some legal basis to support a finding that there is a protectable property interest that would confer due process rights on tax benefits that target alleviating poverty like the AdvCTC, the jurisprudence in this area is murky. Compare, e.g., In re Hardy, 787 F.3d 1189, 1190-91 (8th Cir. 2015) (holding child tax credit qualified as a “public assistance benefit”); Flanery v. Mathison, 289 B.R. 624, 628 (W.D. Ky. 2003) (recognizing trend that refundable tax credits fall within the classification of public assistance designed to combat poverty and are not merely tax refunds); In re Vazquez, 516 B.R. 523, 526 (Bankr. N.D. Ill. 2014) (holding child tax credits can be claimed as exempt public assistance benefits); with, Phillips v. Comm’r, 283 U.S. 589, 596-97 (1931).

Because of the complex legal ground in this area, it would be helpful if Congress would legislate a notice and hearing process. This process must include the following elements:

  1. Plain language notice of approval, denial, termination, or reduction of advance CTC payments, with the reason for the approval, denial, termination, or reduction of the payment;
  2. A clear deadline to protest (or appeal) an adverse action (denial, reduction, or termination), with an additional explanation that if the taxpayer disagrees they can still file a tax return claiming the CTC, which would then be subject to deficiency procedures;
  3. With each notice of payment denial, reduction or termination, a plain language worksheet and sample affidavits to allow claimants to easily file a written protest, with no requirements that people use *magic words* to appeal;
  4. An appeals conference (in person, or over the phone) with an impartial officer must be scheduled promptly after receipt of a protest;
  5. A plain language notice to appellants with the conference information, including its time and date, information about what to have on hand, what to expect, and how to reschedule;
  6. The ability to attend the conference virtually or by phone, plus an in-person option if public health measures allow;
  7. Information to appellants detailing their right to an authorized representative of their choice (including an LITC representative) via phone or video conferencing;
  8. Written procedures for conduct of the conference, including use of interpreters and assistive technology;
  9. Appeals to issue a decision within 30 days of the conference, as well as notification making it clear that the denial does not mean the underlying CTC is decided, and does not prevent the taxpayer from seeking it through a subsequent tax return.

The creation of an accessible appeal conference is critical. Some of the disputes about the ability to claim the AdvCTC will revolve around which caregiver a child lives with, and from whom the child gets more support. These may seem like a straightforward questions, but many families are complex. Real disputes may exist: for example, do you know where a child’s official residence is if she has a bedroom at her mother’s house, but usually sleeps at her grandmother’s house because her mother works overnight shifts? These sorts of questions will not likely be resolvable with dueling pieces of paper, but will require testimony and possibly witnesses. Absent the creation of notice and hearing rights, many children who most need the support the AdvCTC promises may be unable to benefit.