Will the Commissioner agree that a filing extension is necessary so that all eligible children can claim the enhanced Child Tax Credit?

We welcome guest bloggers Luz Arevalo and Angela Divaris from Greater Boston Legal Services. GBLS is part of a coalition of nonprofit organizations who seek to maximize access to the expanded child tax credit for 2021. Angela and Luz highlight the problem of otherwise-eligible CTC claimants without a US taxpayer identification number who did not file an ITIN application or an extension of the filing deadline by April 18, 2022. Under IRC 24(e)(2), those families will miss out on the credit if nothing is done.

PT has covered barriers to receiving ITINs in several prior posts including last summer when ITIN delays and the cumbersome requirement to paper-file applications were highlighted in the NTA’s 2022 objectives report to Congress. Back in 2016, Patrick Thomas and Lany Villalobos wrote about the impact of the PATH Act and other ITIN issues described in the NTA’s 2015 annual report to Congress.

A related issue recently surfaced which I found interesting as it implicates several different administrative problems facing the IRS. In 2020 and 2021, the IRS encouraged people with expiring ITINs to renew early, separately (and before) filing their tax return to avoid refund delays. This well-intentioned message had unintended consequences, recently revealed in the NTA’s 2023 objectives report to Congress.


The NTA explains that even if an individual submitted an ITIN renewal application well in advance before filing their tax return, due to processing backlogs the IRS computer system may have disallowed the CTC on the return via math error. Many people do not contest a math error notice (for various reasons), and the IRS does not always abate math error changes upon request although it is legally obliged to do so. Frustratingly, the IRS does not automatically restore the disallowed tax benefits when the ITIN unit catches up and restores the taxpayer’s ITIN. One wonders what “the right to a fair and just tax system” means if IRS processing delays can result in permanent disallowance of tax benefits intended to help children in a pandemic. TAS’s 2023 systemic advocacy objective number 13 is to restore tax benefits that were disallowed due to ITIN renewal processing delays.

Interestingly, the NTA notes that as of January 1, 2022 ITIN holders can no longer renew “in advance” – they must submit their renewal application with their tax return. I am not sure this is the best solution to the problem since it requires those families to suffer the refund delays that advance renewals were intended to prevent. Fixing the IRS computer systems to prevent the issuance of math error notices when an ITIN application is pending would seem a more taxpayer-friendly solution. Sadly, IT-based solutions are easier said than done when it comes to the IRS.


Timing is everything.  For many immigrant taxpayers, the time to claim the enhanced Child Tax Credit and the Recovery Rebate Credit ran out on April 18, 2022.  As of this writing, however, we believe that the Service is considering several requests to extend the filing deadline for those immigrant families who did not apply for their taxpayer identification numbers before the filing deadline. 

Section 205 of the 2015 PATH Act requires that a tax filer have been issued a taxpayer identification number or have requested a filing extension before the tax-filing due date (and be issued a TIN by the extended filing deadline) in order to claim a child tax credit.  Many thousands of mixed status households who faced severe obstacles obtaining ITINs or who received their Social Security numbers after the April filing due date are, thus, now tragically prevented from claiming the enhanced Child Tax Credit for their children, most of whom are U.S. citizens, who are otherwise eligible if they had social security numbers.  These immigrant families faced severe pandemic related challenges to filing exacerbated by widespread misinformation regarding their eligibility.

Over 100 organizations signed a letter asking Commissioner Rettig and Secretary Yellen to extend the filing deadline for these households based on the emergency declaration prompted by the COVID-19 pandemic (as authorized by IRC 7508A) and in order to fulfill the legislative intent of the American Rescue Plan Act (ARPA).  Similar requests were made by 7 senators and 28 mayors. The Commissioner has the authority to extend filing deadlines in response to emergency declarations, and the COVID-19 declaration should be considered as grounds to support a one-time filing extension to allow families to claim a one-time emergency benefit.

The 2021 tax year was a critically important one for American families.  The American Rescue Plan Act (ARPA), which was drafted in response to COVID-19 pandemic, directed the IRS to distribute relief funds to the vast majority of families in the country.  Its historic Child Tax Credit expansion has been hailed as a life-line with the potential to slash childhood poverty in the country to its lowest level on record.  There were obvious obstacles in the distribution of the credit to the lowest income households who exist outside the tax system, and especially those in mixed status families.  The IRS recognized that eligibility would not translate into actual access for as many as 2.3 million children.   These low-income households – the ones most needing the refundable credits- were the hardest to reach and became the objects of outreach from the White House down to community groups working on the ground.  It was an impossible task to complete during filing season.  Many of these children who predictably fell through the cracks had a parent who faced the added burden of obtaining an Individual Taxpayer Identification Number (ITIN) and are now out of time.  The equitable administration of ARPA will be served if all the children contemplated continue to enjoy the same access to this historic relief in a time of crisis.

Should this deadline be extended, there will be a need for advocates to reach these deserving children by participating in targeted outreach and filing assistance.

What to Do After Receiving a Notice of Claim Disallowance

The National Taxpayer Advocate wrote a blog post last month highlighting a potential trap for the unwary who receive a notice of claim disallowance and think that they have worked out or are working out a resolution.  In oversized bolded letters, she stated:

If you are working with the IRS or the IRS Independent Office of Appeals (“Appeals”), do not make the mistake and assume that working toward a resolution equates to the IRS’s ability to pay a refund or allow a credit once the IRC § 6532 statute has expired.

The NTA made this statement because IRC 6514(a)(2) “prohibits the IRS from paying the refund or allowing the credit” if more than two years has passed from the notice of claim disallowance.  In order to preserve the right to obtain payment beyond the two-year period, the taxpayer must either file suit or ensure that they and an authorized IRS employee sign a Form 907, Agreement to Extend the Time to Bring Suit.


The NTA felt it necessary to write the post highlighting this issue because of the significant and unusual delays the pandemic has caused.  Taxpayers might think they have worked something out with the IRS to resolve an issue after the notice of claim disallowance, but unless the IRS actually takes action within the two years to pay the refund or allow the credit, the taxpayer can lose out.  In the current climate, matters can take more than two years to resolve.

The advocate lays out the problem in stark terms as she describes the administrative process of contesting a claims disallowance letter:

Once the notice of claim disallowance is received, a taxpayer needs to send a protest to the issuing office contesting the disallowance. This assumes the taxpayer understands the notice and the requirements, as these notices are not always clear. (See the National Taxpayer Advocate 2014 Annual Report to Congress, Refund Disallowance Notices Do Not Provide Adequate Explanations.) With the delays in processing correspondence, these protests may sit for many, many months before being addressed. Once assigned, the IRS employee assigned to the case needs to obtain the administrative file, bundle it with the taxpayer’s protest, and send it to Appeals for consideration. Unfortunately, the backlog adds more delays to this process. Once a protest is assigned to Appeals, it still needs to be assigned to an Appeals Officer and worked, which could be an additional six to 12 months. If the issue involves whether the claim was timely, and the Appeals Officer concludes that it was, the case may be transferred back to Exam for a determination on the merits of the refund claim. If the IRS and the taxpayer do not agree on the merits, the taxpayer can file another protest with Appeals to contest the merits of the underlying claim and the process starts all over. It is not surprising that this process may take over two years to be resolved, exceeding the two-year period in which a refund could have been issued (or a credit allowed).

While the Form 907 extension exists to remove the pressure of the two-year time period in this circumstance, executing that form may not always solve the problem.  The blog also points out that representatives must ensure that their power of attorney designates the Form 907 as an act within their scope of representation.  Of course, the IRS must agree to the Form 907.  A taxpayer cannot unilaterally execute a binding extension agreement.  Look to IRM to find the reasons that will cause the IRS to agree to extend the time.

The NTA also points out that sometimes no one at the IRS has the case under assignment.  In that situation the taxpayer will struggle to find someone at the IRS willing and authorized to sign Form 907.  For this reason, the NTA suggests starting the process of getting the Form 907 filed 4-6 months before the running of the two-year period. 

If a taxpayer cannot obtain the necessary signature as the two-year period approaches, filing a refund suit may provide the taxpayer’s only option.  The NTA states the IRS could extend the time period by exercising its authority under IRC 7508 as it has done for several pandemic-related matters; however, it has not done so for the two-year period for refund.

Be aware that filing a refund suit has slightly different timing rules than the filing of a petition in Tax Court.  The timely mailing is timely filing rule of IRC 7502 does not apply.  Carl discussed this in a post a few years ago.  A recent unpublished opinion of the Federal Circuit also addresses this issue.  In Weston v. United States, No. 22-1179 (Fed Cir. 2022), an unpublished opinion [appearing in Tax Notes Federal on April 14, 2022], the Fed. Circuit affirmed the dismissal of a pro se complaint for Lack of Jurisdiction for late filing under the 2-year rule of 6532(a).  No new law was made, and there was no way the taxpayer could have won her case under 6511, anyway.  The taxpayer filed joint 2012 and 2013 returns with her deceased husband in mid-2017 – more than 3 years late.  The returns showed overpayments.  The claims were timely under 6511(a) (filed on the same day as the returns), but would be limited to zero under 6511(b)(2)(A).  The IRS sent her notifications of claim disallowance on April 4, 2018 (for 2013) and April 11, 2018 (for 2012).  She mailed a complaint to the Court of Federal Claims on April 11, 2020, which arrived at the CFC and was filed on April 20, 2020.  Of course, the 2013 disallowance 2-year period ran before she mailed.  But, she argued for timely filing for the 2012 year because of timely mailing of the complaint.  She lost because 7502 applies to filings with the IRS and the Tax Court, but not with any other court. 

The NTA’s post provides a good reminder of yet another hurdle created by the pandemic.  Don’t let this hurdle prevent your client from obtaining a refund.

How Did We Get Here? Correspondence Exams and the Erosion of Fundamental Taxpayer Rights – Part 2

In my last post, I reviewed compelling IRS data, including from the National Taxpayer Advocate’s 2021 Annual Report to Congress, that show the IRS Automated Correspondence Exam (ACE) system disproportionately harms low income taxpayers and is desperately in need of a fix.  The IRS maintains the batch processing approach to correspondence (corr) examinations is efficient.  But the long-term goal of an audit should be to educate the taxpayer about what they did wrong (or for the IRS to learn what it got wrong), so the taxpayer (or IRS) does not repeat the mistake.  If the taxpayer never responds, or does not understand why additional tax is assessed, then the audit may result in more tax dollars, but from a voluntary compliance and taxpayer rights perspective the audit is a failure.  Correspondence exam, with its batch processing, assembly-line approach, may result in a high number of audits and assessments, but it does not promote understanding and in some cases has a negative compliance effect.  Moreover, researchers report that taxpayers who experience a correspondence audit report relatively low perceived levels of procedural, informational, interpersonal, and distributive justice.


If the IRS were truly taxpayer-centric and designed its compliance programs from a taxpayer-rights foundation, it would look at the data presented by the Taxpayer Advocate Service in this year’s report, as well as all the past reports, and conclude that the process isn’t working for the lowest income taxpayers.  It would ask itself how it could improve the audit process so that taxpayers engage with the auditor and learn what, if any, error they made and how to avoid it going forward.  That engagement and education is at the heart of voluntary compliance, and while it appears to require more upfront resources, it is way more cost effective in the long run than current correspondence exams, which have little educational value.  For example, in a 2007 TAS survey of taxpayers who experienced correspondence examinations for EITC claims, 45% did not understand how the documents requested by the IRS related to the questions the IRS had.  One study found that only 39.7% of Schedule C taxpayers audited by correspondence recalled being audited at all, as compared to 72% of field audited taxpayers and nearly 80% of office audited taxpayers.

The IRS doesn’t need to look far or use much more in the form of resources to be both more effective and in greater compliance with taxpayer rights.  In this post I will set several recommendations for improving the correspondence exam process.  All of these can be accomplished with a modicum of resources, and you can pay for the rest by minimizing, if not eliminating, the expensive downstream work caused by poorly handled correspondence exams (for a sense of this downstream cost, see Figure 2.9.7, page 156 of the 2021 Most Serious Problems for a chart of average pay of downstream employees).

First, the IRS should rename correspondence exam as “virtual office exam.”  Specifically, the IRS should reap the benefits of the pandemic-spurred “zoom” revolution by designing a virtual correspondence exam process that more closely follows in-person office exam procedures.  With this approach the IRS would still send the taxpayer an audit initiation letter, with a suggested date and time for a virtual audit appointment.  Behavioral researchers have found that people are more likely to respond when an appointment time is set, even if the response is to request a different appointment time. 

Second, the audit initiation letter should set out – in common parlance/plain language — the issue that is being examined (since IRS insists correspondence exams are “single issue” exams) and describe the types of documentation that may be helpful to establish eligibility for a credit or deduction.  Here’s an excerpt of an actual Notice CP-75 (correspondence exam audit initiation letter) sent to a low income taxpayer in February 2022:

Notice how vague the letter is about what, precisely, the IRS is auditing; the letter lists 5 different possible issues, each of which have different eligibility criteria.  This sure doesn’t look like a single-issue audit to me.

This notice goes on to identify the “audit items that require documentation” to be: EIC, Dependents, Filing Status, AOC, CDC Credit.  The notice helpfully includes the following enclosures:

According to the 2021 Annual Report to Congress, only 3% of taxpayers with Total Positive Income under $50,000 were represented in individual correspondence exams.  For unrepresented taxpayers, the above enclosures will be overwhelming and the sheer volume of them could lead an unrepresented taxpayer to just give up.  It is no wonder that the no-response rate for correspondence exam is higher than any other form of exam.  The inability to reach a live assistor to ask questions increases the administrative burden exponentially.  (In FY 2019, IRS answered the correspondence exam phone line 40% of the time.) 

Third, the IRS should completely trash its current notice system and use some of the IT funding it is getting for FY 2022 to replace it with a 21st century system that is flexible and graphically robust in terms of layout, type, and design.  IRS letter format is currently dictated by an aged, obsolete correspondence system that is completely inflexible.  Trying to get a change in wording to an IRS letter can take more than a year of endless reviews and negotiations, and even then you have to wait for the programming to be complete.  There is lots of good research, some conducted by IRS and TAS, about how to communicate complex information.  The benefits field, in particular, has lots of studies about how to plan effective communication.  IRS needs to apply that research to its correspondence exam notices and make them salient to the taxpayer’s specific situation.  Presumably, the IRS knows the exact reason the taxpayer’s return was selected for audit.  The audit initiation letter should include that specific reason, not a list of “and/or” possibilities.  The enclosures should relate to that specific reason.  (If there is more than one reason, then the audit should be conducted as an office or field exam, per the IRS’s own justification for “single issue” correspondence exams.)  The IRS should apply its IT resources to get this done, ASAP.

Fourth, the IRS should assign one audit employee to each case.  The audit initiation letter should include the name, badge number, and phone number of the employee to whom the case is assigned, as is required by IRC §7602(a).  Providing this information “personalizes” the process.  It reassures the taxpayer there is a live human being who will work with you on the case, rather than the impersonal, faceless IRS.  The letter should also encourage taxpayers to contact the office immediately if they need to reschedule or would prefer to conduct the audit by phone or correspondence.  By inviting the taxpayer to call to state their preference, the IRS not only signals its willingness to meet the needs of the taxpayer but also gains an opportunity to talk to the taxpayer about the issues.  This approach also increases IRS accountability.  As it stands today, no one employee is accountable for the conduct of a correspondence exam.  If the taxpayer does not respond, the assigned audit employee should be required to make at least two outbound call attempts (or emails/texts if that is available) at different days of the week and times of day. 

(I note that the IRS frequently justifies its “next available assistor” approach to correspondence exam by saying it is good for the taxpayer.  But all IRS functions where employees maintain case inventories – field exam and collection, Appeals, Counsel, and the Taxpayer Advocate Service – have established some type of buddy system to cover for vacations, sick leave, or training.  And the IRS could treat these taxpayers as adults and give them the choice of speaking to their assigned auditor or the next available assistor.)

Fifth, the audit initiation letter should also include a separate sheet providing information for signing on to the virtual appointment, including the requirement for a phone or other device that has a camera, and providing a contact for the taxpayer to discuss any technological challenges the taxpayer may face.  This is where QR code technology could be helpful, providing links to appropriate sites and information.  If the taxpayer is unable to sign on via a device with a camera, a telephone appointment should be arranged.  When the taxpayer requires specific reasonable accommodations, the audit should be converted to an in-person office exam or conducted via telephone, whichever is best for the taxpayer.

Sixth, when the taxpayer attends the virtual office audit appointment, the auditor should iteratively explain the specific issue that is being reviewed and what the IRS needs to see to establish eligibility.  If the taxpayer has documentation, the IRS auditor should look at it via the taxpayer’s device camera and instruct the taxpayer on how to upload, email or fax it.  As with an in-person office audit, at the close of the appointment the taxpayer should know what additional documentation, if any, is needed to prove eligibility.  The employee should memorialize the requested additional documentation in a letter to the taxpayer (or email if allowed).

Seventh, in order for this approach to work, the IRS must test its Documentation Upload Tool (DUT) or similar technology (such as the virtual office platform) with low income taxpayers to determine whether they are able to access and utilize it.  It should work with both the National Institute of Standards and Technology (NIST) and other government agencies and external groups to identify secure but accessible methods for low income taxpayers to sign on and submit information and documentation digitally.

Eighth, the IRS should adopt in correspondence exams the same procedures it uses in office and field exams for identifying alternative mailing addresses.  This approach will minimize the number of default assessments due to taxpayers moving around, especially low income taxpayers who comprise more than half of the correspondence exam population.

Ninth, with respect to all CTC/EITC audits, the IRS should allow taxpayers to establish proof of residency by using Form 8836 and its accompanying Schedule A.  These forms walk taxpayers through how to prove their child or relative lived with them for more than 6 months by having certain officials or professionals attesting under penalties of perjury and completing the periods of time they either have personal or official-records knowledge of the child’s residence.  In an exhaustive 2005 IRS study, this form was shown to be more reliable and probative than the usual documents and notarized statements the IRS currently accepts.  Since that time, I have recommended the IRS use this form in all EITC audits, which the IRS has steadfastly refused to do.  Given its obvious benefits, including reducing taxpayer burden, the IRS’s refusal is just plain baffling and counterproductive.

Tenth, the IRS should conduct a research study to test the effectiveness of certain messages in eliciting a response from low income taxpayers.  Several studies have already been conducted, including one by Day Manoli and Nicholas Turner on Nudges and Learning: Evidence from Informational Interventions for Low-Income Taxpayers.  This study found that timely reminder notices about the availability of the EITC increased take up of the childless worker EITC by 80% among the test population in the year of the notice.  A similar study designed around increasing responsiveness to correspondence exams, including focus groups exploring how letter recipients perceived the messages, could greatly enhance taxpayer communication and participation. 

The IRS should also build upon the important research conducted by TAS in 2016 and 2017 in which it sent out educational letters, under the signature of the NTA, to taxpayers whose returns claiming children had broken certain rules in the Dependent Database.  The letter referenced the specific issue and explained the eligibility rule in plain language.  One part of the study offered a toll-free Extra Help line to get questions about eligibility for the EITC and the CTC.  The letters had significant future compliance effects in several areas, without the cost of an audit.  The IRS should conduct a follow up study including focus groups to determine whether taxpayers understood the eligibility rules as a result of the letter.

The IRS recently announced the permanent establishment of the Customer Experience Office.  From the announcement, it appears the office will primarily focus on taxpayer service.  I hope the office defines “taxpayer service” more broadly, to include how taxpayers are served by the audit and collection process of the IRS (answer = poorly).  If it does so, the correspondence exam process is a good place to start.  While it is at it, the office can look at how to create a ”feedback loop” so correspondence auditors can learn what happens to the cases after they leave correspondence exam, as this post suggests.  Taxpayers who are under audit, and their representatives, will be enormously grateful for any improvements, and the rest of us taxpayers will be very happy that the IRS no longer wastes resources and violates taxpayer rights in this audit process.

How Did We Get Here? Correspondence Exams and the Erosion of Fundamental Taxpayer Rights – Part 1

Over the past several decades, correspondence examinations have become the IRS’s primary method for auditing individual taxpayers.  The Transactional Records Access Clearinghouse (TRAC) at Syracuse University just reported that of the 659,003 individual audits conducted by the IRS in Fiscal Year (FY) 2021, all but 100,000 were conducted by correspondence.  TRAC reports that correspondence exams now account for 85% of all audits, up from about 80% in the previous two years.

Originally designed for “less complex” matters, correspondence exams are now used for complex factual issues including the child tax credit, earned income tax credit, self-employment income (gross receipts and expenditures), and charitable deductions.  Correspondence is also the only method applied in “unreal” audits – examinations that the IRS doesn’t count as “audits” under IRC § 7602 because it says they don’t arise to an examination of the taxpayer’s books and records.  Through the Automated Correspondence Examination (ACE) system, unless the taxpayer responds in writing, a correspondence exam automatically moves from one stage to the next, up to the issuance of a Notice of Deficiency, without any human intervention.

IRS maintains that correspondence exams are an efficient and cost-effective method of conducting audits.  For example, in a summer 2021 release, the IRS justifies the low cost of these audits ($150 for the IRS!) by highlighting the minimal burden on taxpayers.  This blog will show just how wrong the IRS is about the burdens correspondence audits impose on taxpayers and their consequences.


Over the decades, advocates for taxpayers, myself included, have consistently criticized this method and maintained it does not adequately protect taxpayer rights, including the right to be informed, to pay no more than the correct amount of tax, to challenge the IRS and be heard, and to a fair and just tax system.  Recently, The Tax Law Center at New York University and the Center for Taxpayer Rights published a paper about this topic, Exclusionary Effects of the IRS Correspondence Audit Process Warrant Further Study, in which we question the effectiveness of correspondence exams and propose additional research and pilots.

To get a sense of the disproportionate impact the IRS overall audit strategy has on Earned Income Tax Credit taxpayers, and why it is so important not only to revise that strategy but also to reform the audit process, please take a look at some rather stunning statistics from the IRS Statistics of Income compliance webpage.  Table 17 sets forth Exam Coverage and Recommended Additional Tax After Exam, by Type and Size of Return, for Tax Years 2010-2018.  (I am using Tax Year (TY) 2018 because it best aligns with the NTA Annual Report numbers, which use Fiscal Year (FY) 2019, discussed later in this post). 

Total TY 2018 individual tax returns filed:                                                      153,927,628

Total TY 2018 individual tax returns with EITC:                                              26,492,486

EITC returns are 17.2% of all TY 2018 individual returns.

Total audit closures of TY 2018 individual tax returns:                                  234,543

Total TY 2018 individual tax return audit closures selected for EITC:            165,611

EITC returns are 70.6% of all TY 2018 individual audit closures.

Total TY 2018 individual audit closures with no change:                                41,276

Total TY 2018 individual audit closures, selected for EITC,with no change: 28,277

EITC returns are 68.5% of all TY 2018 individual no-change audits.

What this data tell us is that over 70% of all IRS individual audit closures for TY 2018 returns involved EITC despite the fact that only 17.2% of individual income tax returns claim the EITC.  This is up from what I reported in the 2005 Annual Report to Congress, when 48% of IRS individual examinations involved the EITC despite only 17% of individual income tax returns claim the EITC.  And remember – these “audit” numbers don’t include “unreal audits” involving EITC, such as math errors under IRC § 6213.  Further, EITC audits constitute more than 2/3 of the no-change individual audit closures.  Now, this figure does not take into account downstream adjustments to proposed assessments in appeals or Tax Court, or abatements in audit reconsiderations.  Given the low response rate for correspondence exams, that there are any no-change audits is stunning to me.  At any rate, the IRS spent resources forcing 28,000 people – 12% of all TY 2018 EITC audit closures! — to produce documentation of eligibility, when they were eligible all along.

These numbers are all the more outrageous when you consider the fact that the dollar amount of EITC improper payments are only $16 billion or 3.6% of the IRS’s current $441 billion gross tax gap estimate.  (It is only 1.6 % if you buy the Commissioner’s $1 trillion tax gap estimate, which I don’t).  Why would the IRS focus so much on low income taxpayers?  Certainly, the fact that EITC is subject to improper payment reporting requires the IRS to audit some EITC returns.  But the requirement to audit some returns is not a justification for adopting an assembly-line approach to the most low-income taxpayers.  Could it possibly be the IRS uses that approach because it beefs up the overall audit coverage rate and the number of audits, at really low cost?

Now comes the National Taxpayer Advocate’s 2021 Annual Report to Congress, with its 9th Most Serious Problem focusing on Correspondence Exams.  Let’s take a look at some of the data (relating to FY 2019) presented in the report: 

  • 53% of individual (IMF) audits were on taxpayers with Total Positive Income (TPI) under $50,000. Of this 53%, 82% of the taxpayers claimed refundable credits including the EITC.  (TPI includes “only total positive income values from wages, interest, dividends, other income, distributions, Schedule C net profits, and Schedule F net profits.  Losses are treated as zero.”  MSP #9, endnote 7.)
  • 92% of IMF audits on taxpayers with TPI under $50,000 were conducted by correspondence exam. 
  • The average direct time spent by an IRS auditor on a correspondence exam for taxpayers with TPI under $50k was 2 hours, compared to 11 hours for office exam and 41 hours for field exam.
  • 4% of Wage & Investment Division correspondence exam resources was spent answering phone calls; 96% was spent on handling correspondence.  The Level of Service on the correspondence exam line was 40.7% (Note that this is for 2019, so it is pre-pandemic ….)
  • 35% of 361,000 IMF audits closed in FY 19 for taxpayers with TPI under $50,000 were the result of no taxpayer participation, of which 14% involved undeliverable mail.
  • Unlike field auditors, who can use both internal and external sources, including USPS trace, to locate better addresses, correspondence examiners can only use internal sources.
  • Only 3% of taxpayers with TPI under $50,000 were represented in correspondence audits.
  • Of the 24,700 petitions to Tax Court in FY 19, 17,700 originated in correspondence exam.
  • 94% of audit reconsiderations originated in correspondence exam; 44% of these original audits closed because there was either no record of a taxpayer response or IRS correspondence was undeliverable.
  • 88,000 of taxpayers audited in FY 19 with TPI under $50,000 were placed in collection; 45% of these were in Currently Not Collectible-Hardship status as of 10/28/21.

So.  The primary method of auditing low income individual taxpayers is by correspondence.  If you are more affluent, you are more likely to have a single auditor assigned to your case in office or field exam, but not if you are low income – i.e., in correspondence exam, no one employee is assigned to your case.  If you are more affluent, the IRS is more likely to spend more time looking at your documentation, and communicating with you.  Not so if you are low income.  If you are more affluent, the IRS makes more of an effort to actually locate a more current address if mail is returned undeliverable.  Not so if you are low income.

It’s not just that mail is undeliverable.  IRS audit notices are incomprehensible to taxpayers.  In 2007, the Taxpayer Advocate Service did a survey of a representative sample of taxpayers who had been audited about their EITC claims.  More than 25 % of those taxpayers said they did not understand from the initial letter that they were under audit.  More than 70% said the audit letter was difficult to understand, including they did not understand what documentation the IRS wanted them to provide.  If you don’t understand you are under audit, that will affect your response.  And if you don’t understand what you should send in to prove your eligibility, that will affect your audit outcome.

And in fact, we see this in the no-response and agreed rates of audits of low income taxpayers versus more affluent ones, who are more likely to have a single auditor assigned to the case.  Here’s a chart from the 2021 Annual Report to Congress:

To make matters worse, past TAS studies have compellingly shown that correspondence exam procedures actively harm taxpayers.  In 2012 TAS reviewed a representative sample of taxpayers whose EITC claims were disallowed in correspondence exam and later conceded in full by Chief Counsel when the taxpayer filed a United States Tax Court petition.  In that study we found that these taxpayers, on average, contacted the IRS five times during the audit (one taxpayer contacted the IRS 21 times!).  78 % were ultimately able to submit documentation that was accepted by IRS appeals officers or counsel attorneys after the Tax Court petition was filed.  In 20% of those cases, appeals/counsel accepted documented that IRS auditors had rejected. 

Correspondence exams have been a recurring topic in the Annual Reports to Congress when I was the National Taxpayer Advocate.  At a quick glance, I found Most Serious Problems on various aspects of correspondence exam in Annual Reports from 2001 (my first), 2002, 2003, 2005, 2006, 2007, 2008, 2009, 2011, 2013, 2014, 2015, 2016, 2018, 2019, and 2020.  (My recollection is, in the years we didn’t write about some aspect of correspondence exam, we were just tired of it and decided to give it a rest for one year.)  TAS has conducted numerous research studies on the topic.  And yet the IRS response has been unchanged over the years.

Why does the IRS persist in believing correspondence exam is an efficient, cost-effective method of auditing?  First of all, because it defines efficiency and cost-effectiveness from the IRS perspective – that is, correspondence exam works for the IRS.  It doesn’t have to dedicate (human) resources to the task; it can churn out a lot of audits and get a lot of assessments, all of which feed into its reports of audit coverage and enforcement results.

In fact, correspondence exams are a classic example of IRS assessing efficiency from a superficial cost-benefit analysis, disregarding the administrative burden these exams impose on taxpayers, especially low income taxpayers.  As Les, Keith and I discuss in an upcoming article, the learning, compliance, and psychological burdens of an administrative process can significantly undermine the policy goals of a program, and can even be used to deliberately deter eligible taxpayers from benefitting from a program.

In this blog post, we’ve seen that IRS intransigence over years regarding the correspondence exam process has created a procedural justice nightmare for taxpayers, especially low income ones, as well as generating lots of unnecessary and expensive downstream work for itself.  In part 2 of this “How Did We Get Here?,” I’ll discuss some recommendations for fixing this mess.

How a Low Income Tax Clinic Can Help You and Vice Versa

We are approaching the 50th anniversary of low income tax clinics (LITCs) which began in 1974 at Hofstra Law School.  Read more about the history here.  In addition, we are approaching the 25th anniversary of the jolt to the idea that propelled a ten-fold increase in the number of LITCs and brought them to communities across the country – IRC 7526 added to the Code as a part of the Restructuring and Reform Act of 1998 thanks to the testimony of Janet Spragens and Nina Olson.  So, LITCs are not a new thing but many tax practitioners still may not know how vital LITCs are to the operation of our tax system.  LITCs are vital, but because of current funding restraints are limited in what they can do.  This post seeks to explain the importance of LITCs and encourage practitioners not only to refer clients as appropriate but also to volunteer.


Income Guidelines

LITCs represent individuals, not entities, who make less than 250% of the federal poverty guidelines and have a tax controversy with the IRS.  In 2022 that amount is $33,975 for a single person living alone.  If the household has more than one person, for each additional person in the house the dollar amount increases by $11,800 but the income of the additional household members must also be included in determining qualification.  For example, a family of four in which the father makes $22,000 and the mother makes $25,000 would qualify because the total household income is $47,000 and the family size of four means that the 250% of poverty level for the family is $69,375.  Each LITC questions incoming prospective clients to ascertain their income level, something not always straightforward, in making the decision on eligibility.  The statute also permits LITCs to represent up to 10% of their clients making an amount in excess of 250% of poverty – more on that later.

The income guidelines exist to ensure that LITCs represent individuals who would otherwise go unrepresented but also that LITCs do not compete for clients with attorneys, CPAs and enrolled agents.  For those tax professionals, understanding the limitations and practice areas of an LITC can provide a basis for making referrals to an LITC when an otherwise worthy client who lacks the means to pay for services can be served by an LITC at no cost, allowing the tax professional to triage someone with a problem and assist them by helping to place them in an LITC.

Scope of LITC Services

In addition to understanding the income qualifications of LITC clients, it is important to understand the type of work that LITCs do and don’t do.  LITCs do not exist to prepare tax returns or ITIN applications.  For free tax return preparation go to VITA. Many VITA sites also prepare ITIN applications as part of the tax return filing process.

LITCs exist to represent individuals in some type of tax controversy with the government, either in determining how much they owe or how much they can pay.  LITCs assist clients in audits, appeals, and Tax Court and other judicial fora in trying to find the right dollar amount owed for a specific year.

Once a liability is determined, LITCs help people navigate the very complicated tangle of laws, regulations, and agency practices to obtain relief from the IRS through such measures as a currently not collectible determination, an installment agreement, or an offer in compromise.  LITCs also assist clients in filing amended returns, audit reconsideration, and innocent spouse determinations when an assessed liability inappropriately puts the burden on a taxpayer.  Most taxpayers are not even aware of the multiple avenues for them to correct their or the IRS’s errors regarding their taxes. 

In general, the transition from VITA to LITC services will happen after a person has received a letter from the IRS about an issue. LITCs can consult with VITA preparers and their clients to figure out the best way to file a return, but LITCs generally cannot prepare the return or open a case for representation before the IRS has gotten involved. The intersection of LITC and VITA services is ripe for closer collaboration.

LITCs Play an Important Role in the Tax System

LITCs also help the IRS.  They facilitate an orderly and reliable resolution of many taxpayers’ problems by enabling taxpayers to file the correct forms with the correct offices and provide the IRS with the correct information necessary to resolve a problem.  By doing this LITCs reduce IRS workload and conserve IRS resources.

The reach of LITCs, however, is limited.  Each year LITCs apply for a grant funded by Congress and administered by an office within the National Taxpayer Advocate function of the IRS.  The total amount of grants that can be awarded is limited and the amount given to any one LITC has been capped at $100,000 since 1998.  Some movement exists to increase the grant to reflect the passage of time and the need to increase services as the IRS engages more and more with low income individuals, generating more and more tax controversy work with this part of the population.  The program office with the National Taxpayer Advocate that administers the grant takes the information it receives each year and produces a publication detailing the work of LITCs.  Here is a link to the most recent publication.

LITCs come in a variety of flavors.  The original LITCs formed as part of law school clinical programs and about 25% of LITCs still exist in that configuration.  In some ways, academic LITCs have the most freedom because they do not generally have geographical restrictions on case acceptance and they have directors who generally have a fair amount of tax experience.  These LITCs are best positioned to take on impact cases that push the law through litigation or comment on regulations and rulings impacting low income taxpayers.  Some clinics exist in independent organizations and many of these LITCs rely on pro bono assistance from tax professionals in their community.  A great example of this type of LITC is the Community Tax Law Project founded by Nina Olson in 1992 in Richmond, Virginia.  Most LITCs exist in legal services organizations around the country.  These organizations are natural hosts for LITCs because they already serve a variety of needs for civil legal services of community members, and the tax clinics round out the line-up of services to these clients.  Usually, LITCs in legal services organizations have geographical restrictions on client acceptance, may have other income restrictions over-laying IRC 7526, and some have other restrictions imposed by Congress.

LITCs can use 10% of their cases to find and push issues for clients who may make more than 250% of poverty but who do not have the ability to fund litigation in Tax Court, in the circuit courts or on to the Supreme Court.  LITCs can file amicus briefs in support of higher income individuals or entities moving forward with tax issues that impact the low income taxpayer community.  LITCs regularly comment on IRS regulations, new Tax Court Rules or other matters offered for comment because otherwise, low income taxpayers would have no voice in the formation of administrative or court rules that could greatly impact them.  The ABA Tax Section has been extremely supportive of LITCs and provides an excellent platform for making some of these comments.

Connecting with an LITC

The LITC Support Center is a new resource for both LITCs and tax professionals wishing to volunteer.  A project of the Center for Taxpayer Rights, the Support Center hosts weekly litigation strategy calls for LITCs and provides technical support and training for LITCs and their volunteers.  It also runs LITC Connect, a “dating app” for LITCs and tax professionals, whereby both LITCs and prospective volunteers create profiles.  When an LITC needs to find a volunteer for a particular case, or for technical advice, or for training, it can submit an Assistance Request and the algorithm identifies potential volunteers.  The Support Center reaches out to the volunteers and … voila! … with luck a match is made.  (FYI: the Support Center also has a “Resources for Taxpayers” page which includes helpful information and PDFs for taxpayers who are trying to navigate this filing season.)

You can find the LITC nearest you in Publication 4134.  In addition to finding their location, I encourage you to get to know the director of the LITC in order to find out how to best make referrals and, if desired, how to volunteer.  Invite the director to come and speak to your professional organization or a community event to explore the ways an LITC could best serve the community.  As we approach a couple of important anniversaries for LITCs, it’s time to get to know the one serving your community or to help bring one into your community if it is underserved.  LITCs provide a great resource for individuals who would otherwise face the tax system unrepresented.  Don’t overlook the ability of an LITC to assist you or you to assist it.

Pro Se Petitions in Tax Court

The National Taxpayer Advocate’s (NTA) annual report has an interesting section focusing on pro se litigation.  Perhaps it’s only interesting to me because I run a low income taxpayer clinic (LITC) but I hope that this post will help you consider how it should be of some interest to you even if you represent clients who can pay for their representation.


One thing that surprised me in the annual report was the percentage of pro se cases in the Tax Court.  Instead of the approximately 75% of petitions reported by the Tax Court itself, the report places the figure above 80% for most of the past decade and 86% last year.  I cannot explain the discrepancy.  Looking at the chart provided, the percentage has crept up recently but is not outside of historical norms as calculated by the NTA.

In addition to a chart showing percentages, the report also provides a chart showing total cases petitioned by pro se and represented taxpayers.

One of the reasons one might care that so many petitioners go to the Tax Court pro se is that a percentage of these cases end up litigated in somewhat one-sided circumstances since most pro se petitioners do not do a great job of presenting their case.  The problem with that, aside from the problem it places on the individual pro se litigant, is that some of these litigated cases end up as precedential opinions which impact everyone who has the same issue.  While many of the issues brought by pro se petitioners do not impact high income taxpayers or entity taxpayers, some do.  It’s for that reason that all taxpayers have a stake in the litigation of pro se taxpayers and a desire to ensure that the Tax Court has the best arguments on the taxpayer’s side for reaching a conclusion.  Once the Tax Court renders a precedential opinion, subsequent taxpayers, even when well-represented, will struggle to undo the precedent.

In recent years, the Tax Court has significantly reduced the number of precedential opinions from the levels of the 1970s and 1980s.  In a forthcoming article linked below, I display a chart of precedential opinions by year.  Just for comparison, in the 1970s the Tax Court averaged publishing almost 200 precedential opinions a year and in the 2010s it averaged about 50 each year.  This is an issue Professor Grewal addresses in his article The Un-Precedented Tax Court, 101 Iowa L. Rev. 2065 (2016) which he highlighted for readers of PT in a series of blog posts here, here, here and here.  The number of opinions generally is low and precedential opinions quite low, making each precedential opinion all the more important.  Over the years 2018 through 2020, pro se petitioners took 137 cases to trial and opinion. The breakdown of these cases is relatively similar to the breakdown of Tax Court cases overall: 65.0% are memorandum opinion cases, 32.1% are summary opinion cases, and 2.9% are published “T.C.” opinions. This means that 2.9% (or four cases) argued by pro se petitioners over the three- year period resulted in a precedential opinion.

In 2021 alone, the Tax Court issued eight precedential opinions in cases in which the taxpayer was unrepresented out of a total of 24 precedential opinions for the year.  The precedential opinions were as follows (pro se opinions are marked with an asterisk): Ramey v. Commissioner of Internal Revenue*; Adams Challenge (UK) Limited v. Commissioner of Internal Revenue; Grajales v. Commissioner of Internal Revenue; Wellness v. Commissioner of Internal Revenue; Beland v. Commissioner of Internal Revenue; McCrory v. Commissioner of Internal Revenue*;  Mainstay Business Solutions v. Commissioner of Internal Revenue; Rowen v. Commissioner of Internal Revenue; De Los Santos v. Commissioner of Internal Revenue; Mylan, Inc. & Subsidiaries v. Commissioner of Internal Revenue; Stein v. Commissioner of Internal Revenue; Hussey v. Commissioner of Internal Revenue; Garcia v. Commissioner of Internal Revenue*; Belair v. Commissioner of Internal Revenue*, Rogers v. Commissioner of Internal Revenue*; Toulouse v. Commissioner of Internal Revenue; Lissack v. Commissioner of Internal Revenue; Vera v. Commissioner of Internal Revenue*; Leyh v. Commissioner of Internal Revenue*; Insinga v. Commissioner of Internal Revenue; Ruhaak v. Commissioner of Internal Revenue*; McNulty v. Commissioner of Internal Revenue; Sand Investment Co., LLC v. Commissioner of Internal Revenue; Coggin v. Commissioner of Internal Revenue.

I do not know why there were so many precedential opinions in 2021 or so many pro se precedential opinions.  Perhaps the pandemic gave the Court more time to write important opinions, perhaps new legislation has resulted in more decisions on previously undecided issues, perhaps the Court is shifting its view of what should be classified as precedential, or perhaps other factors are at play.

Let’s look at the eight precedential opinions of the pro se taxpayers, some of which we have previously blogged.  I will discuss the cases in the order in which they were published:

Ramey v. Commissioner, 156 T.C. No. 1 – The Tax Court determined that when the IRS issues a notice of decision rather than a notice of determination and the taxpayer has filed the collection due process (CDP) request late, the Court lacks jurisdiction to hear the case.  The taxpayer, a lawyer, represented himself and pegged his arguments to last known address rather than jurisdiction.  Nonetheless, the decision expands the Court’s narrow view of jurisdiction to another setting without addressing the Supreme Court precedent on jurisdiction and its impact on the timing of the filing of documents.  See post here.

McCrory v. Commissioner, 156 T.C. No. 6 – This is a whistleblower case in which the IRS issued a preliminary determination and the court holds that he cannot petition from such a determination.  See post here.

Garcia v. Commissioner, 157 T.C. No. 1 – A passport case in which the Court finds the simultaneous denial or revocation of passports to a married couple can result in a joint Tax Court petition; however, here the husband passed away after filing the petition, rendering his petition moot, and the IRS accepted an offer in compromise for processing from the wife, causing it to send a withdrawal letter to the State Department rendering her case moot.  See post here.

Belair v. Commissioner, 157 T.C. No. 2 – Taxpayer requested a CDP hearing under IRC 6320 following the filing of a notice of federal tax lien.  The Tax Court granted summary judgment relief to the IRS based on the administrative record rule due to the application of the Golsen rule in the Ninth Circuit.

Rogers v. Commissioner, 157 T.C. No. 3 – Another whistleblower case in which the court finds that the determination letter issued to the taxpayer was not consistent with the regulations and was an abuse of discretion.  See post here.

Vera v. Commissioner, 157 T.C. No. 6 – Taxpayer requested innocent spouse relief for year one.  IRS denied relief and taxpayer did not petition the Tax Court.  Taxpayer submitted another request for innocent spouse relief seeking it for year one and year two.  The IRS denied relief again and in the notice of determination listed both years.  The Court decided that even though it would ordinarily not have had jurisdiction over year one after taxpayer missed the deadline, the inclusion of year one in the subsequent notice of determination gave the Court jurisdiction over both years.

Leyh v. Commissioner, 157 T.C. No. 7 – The Court determined that the taxpayer could deduct as alimony the health insurance payments he made to provide coverage for his ex-wife.

Ruhaak v. Commissioner, 157 T.C. No. 9 – Taxpayer sent his CDP request form, Form 12153, to the IRS within 30 days of the CDP notice.  He checked the box that he wanted an equivalent hearing rather than a CDP hearing; however, the IRS stated that because he made the request within 30 days, it must provide a CDP rather than equivalent hearing.  The Tax Court agreed with the IRS. See post here.

You could look at these opinions and say the Tax Court got it right every time.  Maybe it did.  You will notice among these cases several procedural issues that could impact low income or higher income individuals and that the CDP cases could impact entities as well as individuals.  Caitlin Hird, a 3L at Harvard Law School, and I have written a draft paper suggesting (requesting) that when the Tax Court identifies a pro se case as one in which it wishes to enter a precedential opinion that it considers seeking an amicus brief so that the Court will have legal arguments on both sides of the issue.  We think such a practice would not only benefit the Court by providing it with a more adversarial situation and benefit the individual taxpayer but also provide a benefit to the downstream litigants who might encounter the same issue but must contend with a precedential opinion in which the Court only heard from the IRS in a meaningful way.  You can read a draft of our paper on SSRN here if you are interested.

January 2022 Digest

A lot has happened in the tax world since the year began, then filing season began last week, and the ABA Tax Section 2022 Virtual Midyear Meeting began yesterday. There are no signs that things will slow down soon, except for (maybe) IRS notices.

Procedurally Taxing will continually provide comprehensive updates and information, but if you fall behind with your reading or struggle to keep up- I’ll be digesting each month’s posts from here on out.

January’s posts highlighted the NTA’s Report, the ongoing impact of the pandemic, and recent Circuit splits.

National Taxpayer Advocate’s Report

NTA Report Released: Essential Reading: The Report is available and contains new features, including an enhanced summary of the Ten Most Serious Problems and a change in the methodology used to determine the Most Litigated Issues.

What are the Most Litigated Issues and What’s Happening in Collection?: A closer look at the Most Litigated Issues. EITC issues are often petitioned but rarely result in an opinion, suggesting that most are settled before trial. In Collection, lien cases referred to the DOJ have declined substantially over the years corresponding with the decline in Revenue Officers and resources.

Who Settles Cases – Appeals or Counsel (and Why?): An analysis of data on the number of Tax Court cases settled by Appeals or Counsel. An increasing percentage of settlements are handled by Counsel, but why? Possible reasons and possible solutions are considered.

read more…

Where Have Tax Court Deficiency Cases Come from in the Past Decade?: Most deficiency cases have come from correspondence exams of low- and middle-income pro se taxpayers. The focus of IRS examinations over the past decade has influenced the cases that end up in Tax Court. A shift in focus may be coming as IRS seeks to hire attorneys to specifically combat syndicated conservation easements, abusive micro-captive insurance arrangements and other tax schemes.

The Melt – Cases That Drop Away in Tax Court: Around 20% of Tax Court cases get dismissed each year- likely due, in part, to untimely filed petitions. Also due to a failure to prosecute, that is the petitioner abandoned the process somewhere along the way. Ways to address this issue are worth exploring, such as increasing access to representation and implementing a model utilized by the Veterans Court of Appeals.

Supreme Court Updates and Information

Who Qualifies as Press and the Boechler Supreme Court Argument Today: Being consider a member of the press comes with benefits, including the option to attend Supreme Court arguments with a press day pass when Covid-restrictions end. In lieu of being there in person, real-time broadcast links of Oral Arguments are made available on the Supreme Court website.

Transcript of Boechler Oral Argument: A link to the transcript of the Boechler Oral Argument is provided and Keith shares his in-person experiences observing the Supreme Court and the options available to others who are interested in doing so when Covid-restrictions end.

Pandemic-Related Considerations

Refund Claims and Section 7508A: A well-informed analysis of the disaster area suspensions under section 7508A and the refund lookback limits. Does the language in section 7508A allow for an extended lookback period? The IRS Office of Chief Counsel doesn’t think so, but TAS has recommended that Congress amend section 6511(b)(2)(A) for that purpose, and there is an argument that a regulatory solution is already available.

 Making Additional Work for Yourself and Others: The IRS has been cashing taxpayer payments without acknowledging receipt of the associated return. This improper recordkeeping resulted in the IRS sending CP80 notices to taxpayers requesting duplicate returns. This created more work for the IRS, practitioners, and clients. The IRS, however, recently announced it would stop doing this, as summarized directly below.

IRS Announces Stoppage of Notice to Paper Filers Who Remitted Payment and Tax Court Announces Continued Zooming: The IRS will stop requesting duplicate returns from paper filers who remitted payments with their original returns. Members of Congress also made specific requests to the IRS with the goal of providing relief to taxpayers until the IRS backlog is resolved, including temporarily halting automated collections, among other things. The Tax Court announced all February trial sessions will be by Zoom.

Practice and Procedure Considerations

“But I’ve Always Done It That Way!” Practitioner Considerations on Subsequent Year Exams: A TIGTA recommended change to IRS procedure may increase the audit risk for taxpayers who do not respond to audit notices. There is no blanket prohibition on telling clients about audit rates and general likelihoods of audit, so practitioners should be able to advise their clients of this potentially emerging risk and ways to avoid it.

New Rules in Effect for Refund Claims For Section 41 Research Credits Raise A Number of Procedural Issues: New rules for research credit refund claims require extensive documentation which increases costs and the risk of a deficient claim determination. Procedures for determinations were issued at the beginning of the month and have generated concern among practitioners because a determination cannot be challenged with a traditional refund suit and because the IRS modified regulatory requirements without utilizing formal notice and comment procedures.

Tax Court News

Tax Court Going Remote for the Remainder of January[and February]: January calendars (and now February, as mentioned above) scheduled in-person sessions have switched to remote sessions due to ongoing Covid-concerns.

Tax Court Orders and Decisions

The Tacit Consent Doctrine May Extend Far Beyond Signing a Joint Return: The Court in Soni v. Commissioner, allowed the tacit consent doctrine (where facts and circumstances led to finding of consent on the part of a non-signing spouse) to apply to returns, power of attorney authorizations and forms 872. The doctrine could be expanded in future cases, so it should be kept in mind when representing innocent spouses.

Timely TFRP Appeal?: The administrative 60-day deadline to respond to TFRP notices is discussed in an order requesting that the IRS supplement its motion for summary judgment. The origin of a deadline is important. Jurisdictional deadlines are different from administrative deadlines, and cases involving administrative deadlines can be reviewed for abuse of discretion.

Circuit Court Decisions

Eleventh Circuit finds Regulation Invalid under APA: The Eleventh Circuit, in Hewitt, calls into question who has the burden to show that a comment made during a notice and comment period: 1) was significant, and 2) consideration of it was adequate. The Tax Courts says it’s the taxpayer, the Eleventh Circuit says it’s the IRS, but what does this mean for everyone else?

The Fifth Circuit Parts Ways with the Ninth Circuit Regarding the Non-Willful FBAR Penalty: A difference in statutory interpretation results in a recent split between the Ninth and Fifth Circuits over whether the non-willful penalty under section 5321(a)(5)(A) should be assessed on a per-form or per-account basis. The Ninth Circuit held that legislative history, purpose, and fairness support a per-form penalty, but the Fifth Circuit held that Congress’ intent and the objective of the penalty support a finding that it’s per-account.

Goldring is Back with a Circuit Split: The Fifth Circuit addresses how underpayment interest should be computed on a later assessed deficiency when a taxpayer elects to credit forward an overpayment from an earlier filed return. It held “a taxpayer is liable for interest only when the Government does not have the use of money it is lawfully due.” This contrasts with other Circuits which have decided that the law allows the IRS to begin computing interest when an amount is “due and unpaid.”

Polselli v US: Circuit Split on Notice Rules for Summonses to Aid Collection: A recent Sixth Circuit decision continues a circuit split on a fundamental issue in IRS summons practice: does the IRS have to give notice when it issues a summons on accounts owned by third parties in the aid of collecting an assessed tax? The Sixth, Seventh and Tenth Circuits read section 7609 notice requirements and its exclusion without limitations, which contrasts with the Ninth Circuit’s more narrow interpretation.

D.C. Circuit Narrows Tax Court Whistleblower Award Jurisdiction: The D.C. Circuit overturns Tax Court precedent by holding that the Tax Court lacks jurisdiction over appeals of threshold rejections of whistleblower requests. Since all appeals of whistleblower cases go to the D.C. Circuit, the Tax Court is bound by the decision unless the Supreme Court takes up the issue. 

Liens and Judgments

Local Taxes and the Federal Tax Lien: The effect of the Tax Lien Act of 1966 was reiterated in United States v. Tilley.  Section 6323(a) sets up the first in time rule of law, but 6323(b) provides ten exceptions, including one for local property taxes, which allows a local lien to defeat a federal tax lien even when the local lien comes later in time.

Tax Judgments and Quiet Titles: Tax judgments can benefit the IRS beyond the 10-year federal collection statute of limitations. Boykin v. United States, like Tilley, involves real property held by nominal owners. The taxpayer brought suit to quiet title, the IRS counterclaimed that the money used to purchase the property was fraudulently transferred, and the taxpayer argued that a state statute of limitations prevented the IRS’s argument. The Boykin Court disagreed with the taxpayer relying upon Supreme Court precedent that state statutes do not override controlling federal statutes.

Bankruptcy and Taxes

Diving Beneath the Surface of In re Webb: An in-depth analysis of a technical bankruptcy issue that can impact taxes involving an election under section 1305, which allows postpetition tax claims to be deemed prepetition claims. The classification of the claims impacts whether a subsequent IRS refund offset violates a debtor’s rights.

The Melt – Cases That Drop Away in Tax Court

Continuing to build on data reported in the National Taxpayer Advocate’s annual report, this post is about a graph from her report appearing on page 197 that shows “Cases Dismissed, Settled, and Tried in the Tax Court, FYs 2012 -2021”. The chart basically shows that almost 80% of cases settle.  I displayed a prior chart from the report in a recent post discussing where the cases settle between Counsel and Appeals.  It shows that 1-2% of the petitioned cases get tried.  Today’s post will focus on the almost 20% of cases that melt away as the result of dismissals.  This seems like a high number but it is a number consistent across the decade of reported information in the graph displayed and, I think, consistent historically.  Should we care that one out of every five taxpayers gets dismissed without having their case resolved by settlement or opinion?


Here is the graph from the NTA report:

Why do so many cases get dismissed each year?  Is it because of the high number of pro se taxpayers who don’t know when to file or don’t follow through to properly prosecute their cases?  Is the number of dismissals of Tax Court cases different than the percentage of dismissals at other courts?  Is this just a normal litigation melt?  If it is abnormal, is there something that could be done to keep more of these petitioners on track to a merits resolution of their case?

I start by saying that I don’t know why so many petitioners get dismissed.  There are certainly a fair number who file late (or early) and deserve to be dismissed because they have not properly invoked the Tax Court’s jurisdiction.  Other than possibly clearer notice of the deadlines, something Congress tried to address in 1998 by requiring the IRS to put into the notice of deficiency the actual last date to timely file the petition, I don’t have any suggestions for this portion of the melt.  Deficiency cases make up the vast majority of Tax Court petitions.  Those petitioners, since 1998, are not only told they have 90 days to petition but if they look on the first page of the notice are also told the actual date.  Petitioners to the Tax Court in other types of cases do not receive the same treatment and that would be a suggestion for improvement.  Without legislation on this point, the IRS was reluctant in the past to put a date on the notices from which a taxpayer could petition the Court, since a bad date offered the taxpayer no protection.  That could change in the aftermath of Boechler, depending on its outcome, and might provide a basis for the IRS reconsidering its administrative decision on this point since reliance on an incorrect date provides a potential basis for equitable tolling.

I have not done the empirical work needed to determine the percentage of the 20% of dismissals that result from untimely petitions.  I do not think that untimely petitions provide the only meaningful basis for dismissals.  My guess is that dismissals for something other than an untimely petition make up enough of the dismissals to warrant closer review.  In a meeting between Tax Court judges, members of the low income taxpayer clinic community, and Chief Counsel lawyers a decade ago, Susan Morgenstern raised this issue.  I do not know of a study that has occurred which would provide answers.  This post simply raises that question again and suggests that thought be given to the problem because I think it is a problem that primarily impacts low income petitioners.

For anyone who has regularly attended Tax Court calendars, one basis for the melt becomes clear – dismissals for failure to properly prosecute.  At almost every calendar call a handful of cases get dismissed because the taxpayer simply fails to show up and did not follow through with the IRS after filing the petition.  Chief Counsel attorneys generally try harder than might be expected or required to find and engage petitioners who drop out after filing the petition.  They also generally give a break to petitioners who have worked with Appeals or Chief Counsel toward resolution of the case after the filing of the petition but do not appear in Tax Court on the day of the calendar.  Many of the Tax Court judges also try hard to keep petitioners from these types of dismissals.  Nonetheless, I believe this type dismissal makes up a reasonably substantial portion of the 20% melt and it deserves study.  I also believe that the vast majority of petitioners in this part of the melt are unrepresented and most will have filed their petition electing the small tax case procedure.

My non-empirically based observation of one big reason why people who have enough energy and interest to file a Tax Court petition (only 3% of recipients of a notice of deficiency do this and only about 1% of the recipients of a CDP notice of determination do this) end up losing interest is that their cases go dark for a substantial period of time after filing the petition.  Re-starting 15 years ago, Chief Counsel must file an answer in small tax cases where the vast majority of petitioners are unrepresented.  In most cases involving the 75-80% of unrepresented Tax Court petitioners, the answer provides little benefit to the petitioner or, because of the quality of the petition and the general practice of Chief Counsel to deny almost everything, the case as a whole.  It does fill a part of the void I refer to when I say the cases go dark.  During the almost 25-year period that the Tax Court waived the filing of an answer in small tax cases, this six to ten-month period of darkness when the petitioners hear nothing caused many of them to call the Tax Court asking what was happening.  A big reason the Tax Court reinstituted the relatively meaningless answer requirement in small tax cases was to fill the void and to give the petitioners a contact point at Chief Counsel rather than the Court.  [Another big, and certainly legitimate, reason was to force Chief Counsel to look at the petition and raise jurisdictional issues where appropriate, taking some of that burden off of the Court.]

Unrepresented petitioners receiving the answer that denies just about everything they have said sometimes feel they have lost the case at that point, not understanding the role of the answer.  Chief Counsel’s Office sends out a letter to the Petitioner when they mail a copy of the answer, and the letter provides good information to the petitioner.  This also gives petitioners a contact point in Chief Counsel’s office.

After the answer, their case reenters the void because it can take several months before they hear from Appeals.  My concern is that many petitioners lose interest in their case during this period and that’s something that deserves study and perhaps remedy.  I would prefer a system that required Chief Counsel not to file a mostly meaningless answer in small cases but to relatively quickly file a statement of jurisdiction and a notification to petitioner of the person assigned in Counsel and Appeals.  That way the Court knows Counsel reviewed the petition for jurisdictional defects and those can be addressed at the beginning rather than the end of the case and the petitioner knows who to work with.  Remember that most of these petitioners are coming to the Tax Court from Correspondence Examination where they have no one to work with.  The whole process is a black box to them with no human.  Give them a human with whom to interact and they will be more engaged.

An even better system would involve engaging clinics at the outset of the case.  The Tax Court sends out a letter at the outset of the case that does a nice job of describing the process and that, in the same envelope, includes a message about the clinics in the area in which the petitioner has requested place of trial or lives if no request was made.  Chief Counsel also sends out a letter, linked above, with the answer pointing to the clinics.  So, it’s not as though petitioners are not given information about clinics at the outset, but we now know from many years of these notices going out that a relatively low percentage of petitioners reach out to clinics at this stage.  A better model might be to provide the clinics with information about the petitioners that would allow the clinics to reach out and offer their services. 

This doesn’t happen in the current system for two reasons.  First, Chief Counsel’s office feels constrained by the disclosure laws against providing this information to the clinics even though it is at this point public information.  I understand because there are cases applying those laws to public information.  There has been recent movement allowing Chief Counsel and IRS employees to refer taxpayers to specific clinics rather than just point them to Publication 4134.  Perhaps there could be additional adjustment to the disclosure laws to allow Chief Counsel to notify the appropriate clinics as new cases arise.

Second, the Court interprets the privacy of petitioners as paramount to the public’s right to know in a meaningful way, and so keeps the information public in a way that clinics cannot easily access it without going to the clerk’s office (something not even possible during the pandemic) or paying for the information.  Even if a clinic wanted to pay for the information and reach out to petitioners, it doesn’t know which petitioners come from their area and so would need to buy information about every individual petitioner and then sift through to find the relevant petitioners.  The Court could change its practice of providing information which is something I have discussed previously

Prior to the pandemic I tried to go to the clerk’s office shortly after each calendar for my city was published in order to spend a few hours there and look at every case on the calendar to cull the ones I thought met the income criteria and may need the assistance of the clinic.  For those cases the clinic then reached out.  I could only do this if I happened to be in DC and had extra time.  For a brief period, the students at the law school at University of District of Columbia did this research in person, but that project was not sustained.  Even doing this, however, the clinic contact with petitioners only occurred at the point of a calendar and not at the outset of the case.

The Veterans Court of Appeals handles petitioners differently and has a much lower melt.  The electronic docket there allows parties to see information upon which a preliminary case evaluation is possible and the petitioner can be contacted.  The Veteran’s Consortium Pro Bono Program seeks to assign attorneys to most cases.  While the statistics require more explanation than I can provide in this post, you can see from the 2020 annual report that the melt is lower and my understanding is that even the cases that appear as possible melt, like the voluntary dismissals, are generally the result of case resolution.  The Veterans Court also has Central Legal Staff attorneys who conduct mediation between the parties, unlike the tax system which relies on IRS Appeals to do something somewhat similar.  The Veterans Court also sends out a letter at the outset similar to the one sent by the Tax Court but one that might provide the basis for some discussion between the Tax Court and the bar on how it could fashion its opening correspondence.

If we care about the melt in Tax Court, the system might benefit from a review of ways the IRS, the Court and the bar/clinics could more effectively serve the pro se petitioners.  The Court of Veteran Appeals offers one model.