The Current State of Taxpayer Service (or Lack Thereof) at the IRS

In my written testimony for a recent hearing before the Ways and Means Subcommittees on Select Revenue Measures and Oversight about the tax gap, I discussed some of the current state of taxpayer service at the Internal Revenue Service (IRS) and the many causes for refunds being delayed in the processing of tax returns.  In a normal filing season, refunds may be stopped because of suspicion of identity theft, or omitted or understated wage income or overstated tax withholding.  They may be stopped for “math error” processing for any number of reasons, including incorrect social security numbers.  As the National Taxpayer Advocate, I regularly focused (here and here) on the high “false positive rates” of these programs.  That is, the IRS froze many more returns that ultimately turned out to be legitimate refund requests than were fraudulent.  For example, for the 2020 filing season, the National Taxpayer Advocate reported that IRS refund fraud filters froze 3.2 million individual income tax returns on suspicion of refund fraud.  Of those 3.2 million refund suspended returns, 66 percent – almost two-thirds — were false positives, meaning they were legitimate refund requests.  (See footnote 19 in NTA report.)  For a quarter of the frozen returns, it took the IRS longer than 56 days to release them to normal processing. 

This year is a far from normal filing season.  The IRS is grappling with reconciling various new provisions including the Rebate Recovery Credit, exclusion of unemployment benefits from income, and the “look-back” provision for the Earned Income Tax Credit.  These provisions have resulted in many more returns being suspended and requiring some form of manual review before processing, posting, and refund issuance can resume.

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The National Taxpayer Advocate has reported (Figure 2, Filing Season Report) that for Filing Season 2021, through May 21, 2021, the IRS received 148 million individual income tax returns and processed 135.7 million such returns.  The remaining 12.3 million were stuck in various stages of review.  This number under review is almost twice the number of returns unprocessed at the end of the 2020 filing season (6.3 million were suspended as of July 15, 2020).  Elsewhere,  the National Taxpayer Advocate has reported that as of May 21, 2021, the IRS had over 35 million individual and business tax returns either suspended or “in process” but requiring manual processing before the return can move along and refunds issued (Figure 3, Filing Season Report).

Included in these “frozen” returns are 9.8 million individual tax returns sitting in the Error Resolution System (ERS), up 544 percent from the 2020 filing season, and 2.1 million individual income tax returns still suspended for Identity verification, up 91 percent from the 2020 filing season.  Trying to get through to the IRS to resolve these issues is nearly impossible.  During the 2021 filing season, the IRS received 167 million calls on all its lines, up 294 percent from the year before; only 15.67 million of those calls reached a live assistor.  On the 1040 phone line, which is the main phone number for individual income tax assistance, the IRS received 85 million calls, up 978 percent from the 2020 filing season, with only 3 percent reaching a live assistor.  (Figure 5, Filing Season Report.)

If a taxpayer’s refund return is selected for identity verification (on suspicion of identity theft), the taxpayer is required to verify their identity through an online tool, or by telephone, or at an appointment at the Taxpayer Assistance Center (TAC).  Taxpayers have reported being unable to verify online, unable to get through to the phone verification system, unable to reach the TAC appointment line, and if they are able to get a TAC appointment, it is 9 weeks later.  The phone identity verification line received over 6 million calls this filing season, with a 19 percent level of service, meaning 4 out of 5 calls could not get through to verify their identity and get their refund released.

What can be done to fix this?  First, technology, artificial intelligence, and data science can play an important role.  Many of the IRS’ fraud detection and questionable refund filters are rule-based.  That is, a fixed rule is broken, then a return is selected and must be manually reviewed; often the taxpayer must supply additional information.  From year to year, the IRS does not do a good job of learning from the cases where its filters incorrectly identified a return.  The IRS needs to work with data scientists and artificial intelligence experts to design a fraud/error detection system that is not rule-based but rather learns from the returns that actually turned out to be fraudulent, as well as those that were frozen and ultimately determined to be legitimate.  In short, IRS systems need a continuous feedback loop so it minimizes the false positive rate and improves on its initial selection of returns.  To date, the IRS has refused to set goals for reducing the false positive rate on its fraud detection system.  The data cited above show the urgent need for the IRS to set these goals and act on them.  Congress should require it to do so.

Second, the IRS can use programming to minimize taxpayer errors.  In the 2009 filing season, in which taxpayers were reporting the Economic Stimulus Payments (ESPs) they received in 2008, the IRS had a system by which taxpayers (and their preparers) could look up the amount of ESP they received.  The IRS did not replicate this system for the 2021 filing season.  Thus, according to the National Taxpayer Advocate, 5 million returns were suspended in Submission Processing to reconcile Economic Impact Payments with Rebate Recovery Credits.  For the 2022 filing season, Congress should require the IRS to create a similar look-up system for the Advanced Child Tax Credit; otherwise we will have the same return backlog in 2022 as we have today.

The IRS also could program, as part of the submission processing pipeline, the ability to systemically look back to the 2019 modified adjusted gross income, where a taxpayer claimed the “look back” rule for EITC eligibility.  Instead, millions of returns were suspended for manual review because the IRS did not program this.  While I realize this may not have been possible for the 2021 filing season, given the late enactment of the look back provision, if Congress makes the EITC look back rule permanent, it should require the IRS to systemically check for eligibility.  This approach not only reduces the number of returns that must be manually verified but will also identify returns on which the look back was not but should have been claimed.

On top of all this, the Taxpayer Advocate Service (TAS) has at the top of its homepage on its website a statement as follows: “Refund Delayed? Our ability to help may be limited.”  TAS is supposed to be the safety net for taxpayers experiencing significant hardship; yet TAS is unavailable for most taxpayers experiencing refund delays this year.  This is unacceptable, and a violation of the right to a fair and just tax system.  I do not know why TAS has decided it is unable to help these taxpayers; what I do know is that taxpayers are losing faith in TAS.

Third and most importantly, the IRS taxpayer service functions need a significant and steady funding increase.  Congress should scrutinize the IRS projections for the number of calls it receives.  When refunds are frozen, online services are just not satisfactory; taxpayers want to talk to a live human being.  Congress should require the IRS to tell it how many assistors will be required to answer 85 percent of the calls coming in.  Congress should require the IRS to project how many returns it expects to suspend for identity theft and questionable refund issues, and what level of staffing it needs in ERS and the identity theft/refund fraud units to resolve those issues within 14 days.  Congress should require the National Taxpayer Advocate to project the number of cases they would receive if they were willing to assist taxpayers with refund issues.  With all of this information, Congress can then appropriate the funds necessary to get staffing levels up in all these functions so U.S. taxpayers get the assistance and service they deserve.

These are resolvable problems.  The Commissioner regularly points out in oral testimony that Congress only appropriated funding for a 60 percent level of service in FY 2021.  What the Commissioner omits saying is that the President’s budget for that year only requested funding for that level of service.  (See page 85 of FY 2021 President’s Budget Request for Treasury here.)  Thus, Congress funded 100 percent of what the President/IRS requested.  So, to start transforming taxpayer service, the IRS must be transparent about the abysmal quality of service it is currently providing taxpayers and provide Congress with a budget request that reflects the level of service taxpayers need to comply with the tax laws.  No more of this 60 percent nonsense!  Then, as Michelle Singletary wrote in her recent column, the IRS will be able to pick up the damn phone.

More Clarity on CSED Problem

In January of this year I wrote about a problem with the Collection Statute of Limitations (CSED) that my clinic encountered.  In our quest to resolve the CSED problem, we involved the Local Taxpayer Advocate office.  It confirmed that the CSED had run, despite the fact that the taxpayer’s account was still open, and told us there was a glitch in the system; however, we were not told what the glitch was.  A strong suspect for the glitch has now been identified.

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The recently published National Taxpayer Advocate Objectives Report to Congress (Fiscal Year 2022) provides some information on the glitch.  The glitch was first publicly identified in a blog post by then-NTA Nina Olson.  In that post, Nina said the IRS was working to address a glitch that was causing the IRS computer system not to recognize the CSED in certain cases in which taxpayers had sought installment agreements.  She indicated in her post that the issue surfaced two years prior in 2016 and her office had been working to identify cases. 

Her blog post identified five different buckets of cases in which the IRS was incorrectly calculating the CSED:

  • Bucket 1 = multiple pending IAs with only one corresponding rejected IA determination
  • Bucket 2 = one pending IA and one approved IA where 52 or more weeks have passed
  • Bucket 3 = multiple pending IAs with one approved IA, where 26 or more weeks have passed
  • Bucket 4 = one pending IA with one rejected IA, at least 52 weeks later
  • Bucket 5 = one pending IA, with no other action on the IA request for at least 52 weeks

Prior to her post, the IRS had agreed to review the cases TAS identified in Bucket 3 and found that 83% had incorrect CSEDs.

Three years later and five years after the problem was identified, the recently published objectives report contains Objective 16 which is “CONTINUE ADVOCACY EFFORTS TO CORRECT ERRONEOUS COLLECTION STATUTE EXPIRATION DATES DUE TO PENDING INSTALLMENT AGREEMENTS.”  This section of the report states the following:

In 2017, TAS identified a population of taxpayer accounts with unreversed or improperly reversed pending IAs that led to incorrect CSED calculations and erroneously added time to the tax debt collection period. TAS also found inconsistent IRS procedures related to CSED guidance. The IRS agreed to correct taxpayer accounts with erroneous CSEDs and the underlying problems that led to the miscalculations.

In July 2020, TAS identified and provided the IRS with over 6,000 taxpayer accounts with CSEDs erroneously extended by one year or more. As of December 2020, the IRS had not finished reviewing and correcting these cases. TAS has recently provided the IRS with several thousand more taxpayer accounts that appear to have the CSED incorrectly extended by a year or more. Despite efforts to find and correct unreversed and improperly reversed pending IAs, TAS continues to find errors, resulting in incorrect CSED extensions of a year or more.

I did not include the footnotes contained in this quote, which primarily refer to emails between TAS and an unidentified part of the IRS.

I assume without being sure that the problems described in the Objectives Report detailing a continuation of the issues first publicly identified in the NTA blog post in 2018 resulted in the problem in the case in my clinic.  Now that we know the problem has continued long after it was identified and brought to the attention of the IRS and that it appears to be widespread for those taxpayers who entered into a failed installment agreement, all practitioners should be on the alert for IRS efforts to continue collection past the expiration of the statute of limitations.

This is not a problem that should be ongoing.  The IRS should have fixed this problem long ago.  It should be affirmatively notifying taxpayers and affirmatively refunding money to them.  A high percentage of installment agreements fail.  Employees of the Automated Call Sites routinely convince taxpayers to enter into installment agreements that the taxpayer cannot support over the long haul and taxpayers routinely have a rosier forecast for their financial future than turns out to be the case.  It’s easy to imagine even the best planned installment agreements failing in large numbers over the past 16 months given the impact of the pandemic on employment.

The IRS needs to make public announcements on what it is doing to fix this problem and how it is going to put taxpayers back in the right position.  A problem like this has a disproportionate impact on low income taxpayers who generally lack representation and lack the knowledge to challenge the IRS calculation of the CSED.  Even the most sophisticated taxpayers face challenges in calculating the CSED because of its complexity, as noted in this post from several years ago.  For this problem to continue for half a decade after it was brought to the attention of the IRS is unacceptable.

Category 9 Cases the Taxpayer Advocate Service Will Accept

In TAS-13-0521-0005: Interim Guidance on Accepting Cases Under TAS Case Criteria 9, Public Policy (05/06/2021) the National Taxpayer Advocate (NTA) put out guidance on the public policy cases Taxpayer Advocate Service (TAS) will accept.  The guidance regarding case acceptance expires on May 5, 2023. Under Code Sec. 7803(c)(2)(C)(ii), Congress listed several types of cases in which TAS will assist taxpayer and gave the NTA the authority to determine additional matters in which TAS will assist taxpayers.

TAS wants to assist taxpayers in situations in which it can provide meaningful assistance but does not want to waste time where it cannot help.  A good example of a place where it cannot help has occurred because of the pandemic.  Many taxpayers want to know what has happened to their refund or other correspondence.  TAS cannot provide much assistance because in a high percentage of these cases the correspondence sits in a tractor trailer waiting for someone at the IRS to process the mail.  Until the case gets into the IRS system in a meaningful way, the situation ties the hands of TAS, making those missing or delayed correspondence cases ones where TAS cannot really provide assistance. TAS divides the criteria it uses to decide when it will assist taxpayers (“case acceptance criteria”) into nine categories. (Internal Revenue Manual (IRM) 13.1.7.2)

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Category 9, sometimes known as the public policy assistance category, provides that TAS will assist taxpayers with cases that: 

  1. The NTA determines warrant TAS assistance due to a compelling public policy, and 
  2. Don’t meet the case acceptance criteria for any of the other eight case acceptance categories. (IRM 13.1.7.2.4)

In the recent memo the NTA shares her determination that the TAS will accept the following four issues in its public policy category.  Some of these carry over from prior determinations: 

  1. Cases involving the automatic revocation of an organization’s tax-exempt status for failure to file an annual return or notice for three consecutive years.  This one goes back for several years when the IRS first came out with his plan for purging exempt organizations that seemed to no longer exist or, at least, no longer communicate with the IRS; 
  2. Cases involving any tax account-related issue referred to TAS from a Congressional office.  Going to a Congressional office as your entrée into the IRS generally greases the skids.  TAS is especially responsive to Congressional correspondence and makes regular visits to local and national Congressional offices.  Note that even though TAS wants to do everything it can to please the Congressional offices, it creates exceptions here to reflect its utter inability to accomplish certain tasks where the IRS has not processed correspondence: 
    1. Cases involving Economic Impact Payment (EIP) issues, and 
    2. Cases involving the exclusion from income of unemployment compensation received during tax year 2020 under Section 9042 of the American Rescue Plan Act of 2021 (ARPA, ARP Act; PL 117-2), where the taxpayer who filed their tax year 2020 return before ARPA was enacted; 
  3. Cases involving revocation, limitation, or denial of a passport because, under Code Sec. 7345, the taxpayer has a seriously delinquent tax liability (i.e. a tax liability of more than $50,000, adjusted for inflation).  It added this one when the legislation because effective.  You can find blog posts by the NTA through this link even though the title of our post indicates a discussion of private debt collection.  It can make a big difference to have TAS advocating for you on this issue if you need a fix in a hurry.  Keep in mind that TAS cannot perform magic here.  The taxpayer needs to be able to show that a seriously delinquent tax liability does not exist or that the taxpayer has made the necessary payment to resolve the liability; and 
  4. Cases that have been referred to a Private Collection Agency for collection of a federal tax debt under Code Sec. 6306.  This one has been around since private debt collection returned.  Nina Olson did not like private debt collection.  She is not alone.  See here and here.  She pushed to eliminate it the first time it came into existence.  She created this exception when Congress resurrected private debt collection and it has remained on the list.

The changes to the list are really changes to criteria 2. to reflect TAS’ inability to fix something.  Keeping up with the public policy list allows you to know when you can successfully obtain the assistance of TAS to advocate for a position within the IRS.  Of course, knowing the criteria other than Number 9 can also be quite helpful.  For those needing a reminder, here is a list of the other bases for seeking TAS assistance:

Economic Burden. Economic burden cases are those involving a financial difficulty to the taxpayer: an IRS action or inaction has caused or will cause negative financial consequences or have a long-term adverse impact on the taxpayer. 

  • Criteria 1: The taxpayer is experiencing economic harm or is about to suffer economic harm.
  • Criteria 2: The taxpayer is facing an immediate threat of adverse action.
  • Criteria 3: The taxpayer will incur significant costs if relief is not granted (including fees for professional representation).
  • Criteria 4: The taxpayer will suffer irreparable injury or long-term adverse impact if relief is not granted.

Systemic Burden. Systemic burden cases are those in which an IRS process, system, or procedure has failed to operate as intended, and as a result the IRS has failed to timely respond to or resolve a taxpayer issue.

  • Criteria 5: The taxpayer has experienced a delay of more than 30 days to resolve a tax account problem.
  • Criteria 6: The taxpayer has not received a response or resolution to the problem or inquiry by the date promised.
  • Criteria 7: A system or procedure has either failed to operate as intended, or failed to resolve the taxpayer’s problem or dispute within the IRS.

Best Interest of the Taxpayer. TAS acceptance of these cases will help ensure that taxpayers receive fair and equitable treatment and that their rights as taxpayers are protected.

  • Criteria 8: The manner in which the tax laws are being administered raises considerations of equity, or has impaired or will impair the taxpayer’s rights.

A Motivating Reminder

Nina Olson identified a need, which created a movement and changed the landscape of America’s tax system forever. She started the Community Tax Law Project in 1992 and the Revenue Restructuring Act, (“RRA”), which ushered in a new era for taxpayer advocacy (including the Taxpayer Advocate Service and the role of National Taxpayer Advocate (“NTA”)) was passed in 1998.

The Pittsburgh Tax Review’s Fall 2020 publication focuses on different facets of Nina’s life and career. It features articles from Nina’s esteemed colleagues and friends, including Keith and Les. It is an incredibly inspiring symposium, especially during this time when it’s easy to feel overwhelmed and burnt out. I touch on some of highlights, but each of the articles are worth reading in full- especially if you are an LITC practitioner. The entire publication is available here.

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There were many times reading through the publication that I could envision the energy of the moments. There are gems throughout (even in the footnotes): the car rides shared by Nina and Keith, their remarkable and supportive friendship, the discussions by the Senate Finance Committee about the role of the Taxpayer Advocate in the Department of Treasury’s hierarchy, the growing pains of transforming TAS into what it is today, and the ripple effects Nina has created with her work.

The tribute is an insight into the way that Nina thinks, works, and approaches challenges and it is incredible. Stories about Nina’s profound impact on people (tax practitioners and taxpayers, alike) are interwoven with stories of her profound impact on policies and procedures.

Many of the stories allowed me to revisit the period in my life when I stumbled upon the LITC world and the excitement I felt after learning that I could be the type of lawyer that I had always wanted to be. I could practice tax law, truly help people, and hopefully have a positive impact on the world.

Nina ran a tax preparation and accounting business for nearly as long as she was the NTA, and then went on to graduate from law school only ten years before becoming the NTA.

In an article written by Nina, she reflects on the opportunity to become the NTA and how it aligned with her plans and passion to continue advocating for taxpayers after ensuring that the Community Tax Law Project was well-established and self-sufficient. She acknowledges the work of the teams of people that made her successes possible. She also humbly states that the intention of her article is merely to recount her experience and her thoughts. It is, of course, much more than that- and it is a rare and exciting look at the life experience of a zealous leader.

Nina testified before Congress, before she ever imagined being the NTA, about the role the NTA should play and the need for strong leadership, without realizing that she was describing herself – a self-fulfilling prophecy of sorts. She states, “Little did I know then that I would have that responsibility one day […] the furthest thing from my mind was to become the National Taxpayer Advocate. In 1998, my sole focus was building The Community Tax Law Project.”

Things that many practitioners now take for granted were so hard fought, won, and paved the way for the ability of TAS and LITCs to advocate for taxpayer rights. Any difficulties Nina encountered were transformed into opportunities to learn and improve

The stories contained in the tribute demonstrate Nina’s relentless passion for advocacy, her ability to call the IRS out on its absurdities and remain steadfast to TAS’s purpose and mission, which she helped develop.

Nina recognizes that conventional wisdom typically states to “choose your battles wisely” but that is not possible when it comes to taxpayer rights and being too selective about battles only makes it harder to get things accomplished later.

Some of the stories highlight how Nina’s quick wit is one of her best weapons. For example, Nina reflected on the frustration she felt at the underutilization of Taxpayer Assistance Orders early in her time as NTA. She recalled that, at a TAS training symposium, “A member of the audience approached the microphone and said that many of them had good relationships with IRS employees and issuing a TAO would harm those relationships going forward.”[Nina] was silent for a minute, and then said, “If issuing a TAO will harm that relationship, then you don’t have a ‘relationship’—you have unrequited love.”

And there was the time when an IRS Operating Division advisor had asked her to look at things from his perspective. She countered that it is her job and she is required by law, to look at things from the taxpayer’s perspective, the rest of the IRS can look at it from the IRS’s perspective.

Everything boils down to the impact Nina has had on the lives of America’s taxpayers, which includes all of us. As Caroline Ciraolo writes, “[b}ehind every legal issue is a taxpayer, a family, or a community that will benefit from our efforts,” as Prof. Lipman writes, “the federal income tax system exists for people,” and as Prof. Cords writes, “taxpayer rights are human rights.”

The pandemic has shown us that we are all interconnected, and not caring for the most vulnerable of our population can leave us all more vulnerable. Nina’s work advocating for low-income taxpayer, for credits that help lift children and families out of poverty, and for the Taxpayer Bill of Rights, among other things, helps the most vulnerable and positively impacts us all.

The fight for taxpayer rights never ends and resistance by the powers that be- in the name of cost and efficiency- never wanes, but Nina and what she has created, and continues to create, empowers tax practitioners to feel like we can effectuate real and meaningful change. The tribute to her in the Pittsburgh Tax Review was wonderful and motivational reminder of that.

More Trouble with Notices and More Discussion of Offsets

We have written about the two rounds of misstated notices the IRS has sent out because of delays resulting from the pandemic.  You can find those posts, here and here.  In both instances, the National Taxpayer Advocate through her blog provided the alert or at least the alert that we noticed.  Another problem with notices has occurred and again the NTA has blogged on the problem, providing a window into IRS action not otherwise available.  The latest correspondence problem does not implicate statutory time frames the way the earlier misdated notices did.  Instead, this problem simply involves the IRS sending 109,000 taxpayers a notice with wrong information.  The notice not only wrongly tells the taxpayer of action the IRS did not take but contains a typographical error that will compound confusion.

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According to the NTA, the IRS sent Notice CP21C informing taxpayers that the IRS was offsetting their Economic Impact Payment (EIP) to satisfy outstanding debt.  Here is the critical language from the notice as recounted in the NTA blog post:

We applied a credit to your 2007 [that is not a typographical error!] tax account due to new legislation. We used (offset) all or part of your economic stimulus payment to pay your federal tax as the law allows … As a result, you don’t owe us any money, nor are you due a refund.

The IRS did not offset their EIP and tax year 2007 has nothing to do with the issue. 

The people receiving this notice appear to be people who did not have a 2018 return on file and who filed their 2019 return too late for the IRS to process their EIP before the end of 2020.  For these individuals, the ability to obtain an EIP turned into an ability to receive a Recovery Rebate Credit (RRC) upon the filing of their 2020 return.  If these individuals only need to file a 2020 return in order to claim the RRC, they may be sufficiently confused by the notice to forego the opportunity to file a 2020 return to obtain the recovery check Congress intended for them to receive. The letter directs them to the IRS phone number to call with questions; however, as the NTA points out in her blog post, they may have as much luck getting through to that number as they will getting through to CVS to try to schedule a vaccine (well she doesn’t exactly put it that way but you get the idea.)

According to the NTA’s post

The IRS added Questions and Answers(Q/A) to its coronavirus tax relief site on January 28 which explains that the notices were issued in error. The Q/A says the notice was intended to inform taxpayers that the IRS must mail or issue EIP1 by December 31, 2020, and that the IRS was unable to process their 2019 tax return in time to issue EIP1.

Of course, not everyone goes to the IRS website or reads an NTA post.  The NTA indicates she is negotiating with the IRS to send a second letter to these individuals alerting them to ignore the first letter.  Even assuming the IRS has the bandwidth to do that during the filing season, the second letter may cause even more confusion.

The NTA also notes that for those among the 109,000 who do file a 2020 return claiming the RRC, the general pass on offset (except for past due child support) that existed for EIP does not exist for payments made as RRC.  So, for individuals pushed into obtaining the recovery through their 2020 return, outstanding federal taxes from other years (even possibly including 2007), as well as other debts subject to offset under the Treasury Offset Program (TOP), will cause the taxpayer to miss out on actual receipt of the payment as it is applied to the outstanding debt.

The NTA went on to mention that she is pushing to convince the IRS to voluntarily waive offset of RRC payments.  The IRS has that authority under IRC 6402.  It could make a decision on a blanket basis to let refunds based on RRC go out to taxpayers without being offset to outstanding federal tax debt.  That would be a good thing and create consistency for taxpayers receiving their recovery payment this year.  It would line up with one of the suggestions made by the ABA Tax Section in its recent comments to the IRS concerning how to administer taxes in a time of pandemic.  (You can find a link to the report in a recent post by Nina.)  It would not prevent the offset of the RRC against debts other than federal taxes, because IRC 6402 only gives the IRS discretion to waive offset against federal taxes and not all of the other debts to which TOP applies.

In other potentially encouraging offset news, it was reported yesterday that IRS Deputy Commissioner Sunita Lough stated that the IRS was considering how it will administer the offset bypass refund (OBR) program.  She talked about consistency in application of the program, which was a criticism of the program in a recent Treasury Inspector General for Tax Administration (TIGTA) report discussed here by Les.  OBRs were also the subject of the recent comment from the ABA Tax Section to the IRS in which Les and I participated, which is linked above through Nina’s post.

Offset has received much attention in the past year.  Not only did Congress acknowledge the important role that offset plays by giving taxpayers a pass on almost all offset provisions in the CARES Act, but a portal snafu by the IRS with respect to injured spouses created the most commented upon blog posts we have had during the existence of this blog.  Look at the hundreds of comments, still coming in, from this one post last spring by Caleb.

Getting correspondence right is a critical function of the IRS.  The latest NTA blog post recounts yet another, and perhaps the least excusable, of the IRS mass correspondence problems during the past year.  Administering the tax laws requires giving taxpayers accurate information.  When specific correspondence gives wrong information, it creates a real problem of trust in the system.  Let’s hope that the IRS can avoid future correspondence problems of this type.  Let’s also hope that one of the positive developments of the pandemic is a new way to look at offsets.  Michael Waalkes and I have an article on offset I intend to post soon.  This is a silent but important collection tool in the IRS collection arsenal that comes with many policy issues deserving consideration in the manner of its implementation.

Misdated Notices Continue

Last summer the National Taxpayer Advocate reported that the IRS was sending out millions of notices to taxpayers with dates that bore no relationship to the date of actual mailing.  I wrote a post about it here criticizing the decision to send out these notices, not only because they would confuse many recipients but also because the IRS database shows the date of the notice generation rather than the date of mailing.  I updated the information in an October post after gaining more information.  This type of broad based improper recordkeeping will have the effect of casting doubt on the accuracy of IRS records that could have lasting impact for the IRS when it tries to prove some event occurs and relies on a certified transcript.

In the last section of the post I will mention a disturbing recent interaction with the IRS regarding the collection statute of limitations and request anyone with a similar interaction to provide comments.

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The original batch of wrongly dated notices resulted from the closure of the IRS Service Centers due to the pandemic.  As bad as sending out the wrongly dated notices is for taxpayers and for the IRS, at the time the story first broke it appeared to be a once and done as a result of the pandemic lockdown.  Last month, the National Taxpayer Advocate issued a second blog describing a second round of misdated or backdated notices the IRS starting sending out this fall and continuing into January.  The IRS announced this second round of back dated notices here.  So, now we learn that instead of sending out bad notices in one batch because of the shutdown, the problem continues and may occur again in the future creating ongoing confusion for taxpayers and an even greater threat to the integrity of the IRS database system.

Extended Dates to Respond to Misdated Notices

If you have not already read the NTA’s second post on this issue you should do so as the issues created by the second round of bad notices are still playing out.  The NTA notes that once again the IRS is placing into the envelope with the misdated notice a stuffer providing additional information and additional time.  Here are the three types of misdated notices in which a stuffer will be placed:

The notices scheduled to include the Notice 1052-D insert are:

  • IRC § 6303 Notice and Demands that informs taxpayers of tax due and demands payment;
  • IRC § 7524 Annual Reminder Notices that remind the taxpayer of an existing balance due; or
  • IRC § 6213(b) Math Error Notices that inform taxpayers of a change to their return.

The insert provides the taxpayer a new due date, January 29, 2021, to make a payment to avoid additional interest, and additional failure-to-pay penalties, if applicable. The insert also provides taxpayers with math error adjustments until March 9, 2021, to contact the IRS and request the math error be reversed.

The annual reminder notices, while required by statute, do not create the same type of issues as the notice and demand letter or the math error notices.  I discussed the consequences of delayed math error notices in my original post on this issue.  The stuffer provides the taxpayer with additional time to pay until January 29, 2021, which means that there is additional time before the federal tax lien comes into existence.  The stuffer provided in the math error notices give taxpayers until March 9, 2021, to object to the assessment based on math error and trigger the sending of a notice of deficiency (or convince the IRS the original return position was correct.)

The NTA post alerts taxpayers that the notices the IRS sends out in the collection stream may arrive out of order because of the failure to send out the notices timely during November.  For individual taxpayers this should not create a significant problem as the second notice in the collection stream is not statutorily required.  The result may be different for business taxpayers if they received the notice of intent to levy before receipt of notice and demand.

Prior Misdated Notices

The NTA circles back at the end of her post to talk about the prior round of misdated notices:

During the spring and summer of 2020, the IRS digitally created approximately 31.2 million notices that it was unable to mail on the dates planned. Of these, the IRS purged approximately 12.3 million notices as they were not statutorily required. Of the remaining late notices, only a small percentage included an insert notifying the taxpayer of additional time to act. Originally, the IRS identified 1.8 million notices requiring an insert providing an extension of time for the taxpayer to act. Unfortunately, some notices containing statutory deadlines didn’t include the necessary insert. Once identified, the IRS sent supplemental letters to taxpayers informing them of additional extensions. For example, taxpayers who originally did not receive an insert providing additional time to request a Collection Due Process hearing received another letter providing more time. Similarly, taxpayers receiving late-mailed notices of refund disallowance were subsequently sent a supplemental letter clarifying the two-year period to challenge the refund disallowance in court. Although the IRS made efforts to provide additional time for taxpayers to respond, it created much confusion for taxpayers and practitioners. After all of the challenges the IRS and taxpayers faced during the previous backlog, it is difficult to understand how the IRS finds itself in the same position. Let’s hope this backlog mailing goes more smoothly.

It is surprising that the NTA does not understand how the second round of misdated notices occurred.  TIGTA or GAO needs to take a hard look at what has happened here leading to the inability to send out notices on dates that match the date on the statutorily required notice and the decision making for knowingly sending out these notices rather than stopping the process and getting it right.  Someone at the IRS should be able to explain why this has happened again; how many more time we might expect it to happen; and when the system might be fixed to prevent it from happening.

At the Mid-Winter ABA Tax Section meeting there will be a panel discussing the late issued notices on Thursday January 28 from 3-4:00 ET.

TIGTA Report Criticizes TAS’s Approach to Offset Bypass Refunds

Last month TIGTA released a report reviewing the Taxpayer Advocate Service’s role when taxpayers request an offset bypass refund. In the report TIGTA found 1) that TAS offices inconsistently treated taxpayers seeking OBRs, 2) some TAS failures to honor requests as to how taxpayers wished to receive their refunds (paper check, direct deposit to the taxpayer’s account, or direct deposit to a third-party financial institution), 3) some TAS actions that exceeded its delegated authority, especially when a taxpayer seeking an OBR had an open matter with another IRS function, and 4) TAS failed to record fully its processed OBRs. 

In this post I will focus on the first item relating to TIGTA’s findings concerning inconsistencies in the process and standards used to evaluate OBR requests.

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Offset bypass refunds allow taxpayers to receive a refund when the IRS would otherwise apply an overpayment to past due tax liabilities. TAS case advocates are delegated authority to generate an OBR for a taxpayer if the taxpayer has no other debt subject to mandatory offset under Section 6402 and the taxpayer establishes that she is unable to pay reasonable living expenses if the IRS were to offset the overpayment against a past due tax debt.

We have discussed OBRs a few times, including one of our most viewed posts all time, a 2015 post Keith wrote discussing the OBR process. In one of our recent posts on OBRs from this past April, Barbara Heggie discusses challenges that taxpayers face securing the needed documents to prove the financial hardship necessary to get an OBR. In her post, Barbara refers to TAS guidance that allows TAS employees to dispense with third-party documentation: 

Many taxpayers seeking an Offset Bypass Refund will not have access or the ability to secure hardship documentation such as eviction notices, late bills, etc. Determine whether the taxpayer can validate the hardship circumstances through oral testimony or a third-party contact. If so, discuss the case with your LTA to determine if a written statement signed by the LTA confirming that the hardship was validated is appropriate.

The TAS guidance reflects experience that sometimes taxpayers facing hardship have a difficult time providing a full set of documents or record that would prove the hardship.  

In its report, TIGTA found that TAS’s flexibility led to inconsistencies across TAS offices in how TAS case advocates reviewed and decided on OBR requests:

We determined that most OBR cases did not include an analysis of the taxpayer’s income and expenses before an OBR was issued. In addition, we identified cases in which OBRs were provided to taxpayers based on supporting documentation that was not current orreasonable. However, in other cases, TAS case advocatesrequired a full review of the taxpayer’s income and expenses, as well as applied stricter supporting documentation criteria, before determining whether the taxpayer should be issued an OBR. 

The TIGTA report noted specific inconsistencies, including how one office created a detailed processing form to review compliance history and prior OBR requests, while other offices did not consider those factors, and how some offices did not verify supporting documentation. To be sure, TIGTA used only a judgmental sampling approach, which is a non-probability sampling technique, but its auditor observed a pattern of inconsistencies across offices (the report does not discuss why TIGTA did not do a deeper dive). Despite the limits in auditing technique, in TIGTA’s view, the inconsistencies stemmed from a lack of detailed centralized guidance, which led to inconsistent treatment of similarly situated taxpayers. This leads to an increased “risk of abuse by individuals seeking to avoid payment of their outstanding tax liabilities.” 

The report includes are other specific examples of inconsistencies, some of which reflect a lack of use of financial hardship criteria or processes associated with assessing reasonable collection potential that IRS generally requires when considering alternatives to enforced collection. TIGTA makes a number of recommendations, including floating the idea that TAS should create OBR specialists who would have more experience. It also contrasts the TAS OBR process with other more centralized review functions, such as the innocent spouse unit.

TAS’s response to the report reflects a different perspective on its role. In addition to noting that the TIGTA observations only reflected “just a few cases” it noted that centralization could create additional taxpayer burdens. In addition, the lack of detailed process, in TAS view, was by design, and it worried that a too detailed approach in the IRM on OBRs is “unnecessary and that more specific IRM guidance will lead to employees failing to think critically.”

Conclusion

The report reflects very differing perspectives on the OBR process and on tax administration generally.  It reminds me of Gina Ahn’s recent guest post Proving Your Client’s Marital Status, Not as Simple as It Appears but Crucial for EITC where she contrasted Social Security and IRS employees in how they evaluate marital status.  SSA’s perspective is based on ensuring that people receive the maximum benefits they are entitled to receive whereas the IRS perspective is more enforcement based, with a concern that taxpayers may be gaming marital status to generate an improper refund.  TIGTA, consistent with its mission, is primarily concerned with reducing fraud and waste. TAS, consistent with its mission, is attempting to help taxpayers, especially for taxpayers who may be facing financial hardship.

In addition, TAS has offices nationwide. Unlike the post RRA 98 IRS, its employees are meant to work with and assist taxpayers who live and work in the same region as TAS employees.  The lack of centralization within TAS is by design. TAS’s decentralized structure helps ensure that its employees are more likely familiar with the circumstances of people it is charged to assist. 

To be sure, finding the right balance between uniformity and flexibility is a challenge.  Providing relief from an offset or collection action is also a challenge, as we generally accept that while IRS should have extraordinary collection powers those powers should not render taxpayers unable to meet life’s necessities. Within this framework, OBRs exist in a shadowy world of tax procedure, and the report highlights that within the shadows there is a great likelihood of disparate treatment of similarly situated taxpayers. 

What could be done to address the issues TIGTA flagged, while at the same time possibly preserving a role for TAS? In discussing the issue with Keith he raises the important issue as to whether TAS should be the initial point of contact on OBRs. Instead, perhaps IRS could centralize administration of OBRs and local taxpayer advocates could issue a directive if the centralized IRS office failed to 1) take into account the appropriate weighing of a more definitive listing of factors or 2) address unique local circumstances that may create hardships for taxpayers that employees in a centralized location might miss.  Such an approach would take some filing season pressure off of TAS, create standardization, and leave TAS to be creative when needed.  This approach may make additional sense given that during the filing season the IRS typically has additional employees, while TAS typically does not hire up for the filing season and that period creates a lot of extra work for it.

A Sun Has Set: Reflections on the Honorable John Lewis

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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