Information Letter Shows Need for Broader Guidance on Difficulty of Care Exclusion

At the Low-Income Taxpayer Clinic Grantee conference in December, I presented on the tax treatment of state payments for in-home care, alongside Daniel Kempland of Washington University and Sarah Lora of Legal Aid Services of Oregon. The topic will also be discussed at the Pro Bono and Tax Clinics Committee meeting during the ABA Tax Section’s May Meeting. So a related item in February 5th’s Tax Notes caught my eye. IRS Information Letter 2018-0034 responds to questions about “difficulty of care” payments under section 131(c). The letter must have gotten caught by the shutdown on its way out the door; its official release date is 12/28/18. 


Difficulty of Care 

Section 131 promotes community care for severely disabled adults by excluding certain state payments from caregivers’ gross income. Specifically, section 131 excludes from gross income any “qualified foster care payments” and “difficulty of care” payments received by a foster care provider from a state or from a qualified foster care placement agency.  

There are multiple tax questions that arise in this context. When in-home care is provided to adults with disabilities, one question is whether the “difficulty of care” exclusion applies to any of the caregiver’s income. Difficulty of care payments are defined in 131(c) as

payments to individuals which are not [qualified foster care payments], and which— 

(A) are compensation for providing the additional care of a qualified foster individual which is— 

(i) required by reason of a physical, mental, or emotional handicap of such individual with respect to which the State has determined that there is a need for additional compensation, and 

(ii) provided in the home of the foster care provider, and 

(B) are designated by the payor as [difficulty of care payments] 

In health care, community or home care is contrasted with institutional care, e.g. in a nursing home. Government programs that pay for care at home allow people with disabilities to continue living in their communities, where they may enjoy greater “family relations, social contacts, work options, economic independence, educational advancement, and cultural enrichment.” (Olmstead v. L.C., 527 U.S. 581 (1999)) 

For caregivers who are family members or low-wage workers, the gross income exclusion can make a significant difference by freeing up funds for other living expenses. (At certain income levels caregivers may be better off with taxable income for the Earned Income Credit; the tax impact is not uniform.) Also, under the Affordable Care Act adults can qualify for Medicaid based on their modified AGI. Sec. 131 is not one of the modifications, so the difficulty of care exclusion gives some caregivers access to nearly free health care. This is a big deal. 

In several cases in the 1990s and 2000s, the Service challenged the applicability of section 131 to family members who cared for disabled relatives. The general theory was that a biological parent cannot be a “foster parent” within the meaning of the statute. However, in 2014 it reversed this position in Notice 2014-7. For unclear reasons, Notice 2014-7 only addresses one specific type of Medicaid waiver program. It also does not address FICA or FUTA treatment of qualifying payments. Since then, the IRS has not issued any regulations or other guidance under section 131 besides website FAQ and a PLR.  

Unfortunately, the wide variety of state programs, a lack of general reliable guidance from the IRS, and differing levels of state responsiveness to caregiver groups have led to disparate treatment of caregivers’ income depending on where they live. There is much more to say on this topic. For more on Notice 2014-7 and the FAQ, the National Health Law Program has an excellent summary written for health care advocates.

Information Letter 2018-0034  

On September 25, 2018, a requester wrote to the IRS on behalf of  

business clients who provide “Alzheimer, dementia, adult and family care and mental health and residential support services.” Specifically, you asked about the tax treatment of “social security personal care services funding” and “Medicaid waiver payments” received by these clients under a program by the “Division of Social Services via a network of oversight groups.” 

The IRS’s answer is quite short.

Notice 2014-7 specifically addresses payments made under § 1915(c) of the Social Security Act (Act), relating to Home and Community-Based Services waivers, and does not specifically address the tax treatment of other state Medicaid programs. Whether the Internal Revenue Service (IRS) will treat payments received under a state program other than a program under of § 1915(c) of the Act as difficulty of care payments depends on the nature of the payments and the purpose and design of the program. See Q&A1 at 

If your clients would like the IRS to address whether payments described in your letter or other similar payments are excludible from gross income under § 131 of the Code, they may request a private letter ruling. Revenue Procedure 2018-1, 2018-1 I.R.B. 1, (and the first revenue procedure of each year), provides the procedures and fees for a taxpayer to request a private letter ruling. 

This response is likely frustrating for the requester, but it was to be expected.

An Information Letter “provides general statements of well-defined law without applying them to a specific set of facts.” There is no user fee to request one, but the advice given is not binding on the IRS, so it does not protect the taxpayer from audit or penalty. For binding and reliable advice, taxpayers must pay a hefty user fee to get a Private Letter Ruling (PLR). The parties who requested Information Letter 2018-0034 would likely need to pay $30,000 if they wanted a PLR. There are reduced fees for taxpayers with gross income less than $250,000 (a fee of $2,800) and for taxpayers with gross income less than $1 million (a fee of $7,600). One can understand why the requesters tried the free option first.  

In the wake of Notice 2014-7, the State of California paid for a PLR (PLR-127776-15), and it now has guidance on the applicability of section 131 to its four programs that support in-home care for disabled adults. But not every state or company can afford $30,000. For many individual caregivers, the reduced fee of $2,800 may as well be $30,000. Also, technically only the requester can rely on a PLR. The letter to the State of California posted by the IRS is redacted so the public cannot see which specific programs were at issue. If the state had not posted an unredacted version, California families would not be able to tell whether the guidance applied to their program.

The analysis in California’s PLR has uniform application to thousands of individual taxpayers. Yet in order to rely on it, each caregiver needs to request their own PLR. This is an inefficient system; the PLR is simply not the right tool for issues that have broad, relatively uniform application to third party taxpayers.

It is not clear why the 2014 guidance was so narrow in scope. While caregiver programs do vary by state, the IRS has identified principles in its FAQ that could provide a basis for broad national guidance. I hope the IRS will develop a regulation project or a broader guidance project on the difficulty of care exclusion. IRS and Treasury Department resources are stretched thin and have been for many years. However, the government should prioritize guidance for issues that have a deep impact on thousands of low-income taxpayers and that are not suitable for individual guidance through the PLR process.

IRS Increases User Fee for Enrolled Agent Exam by 700 Percent

In today’s guest post Stu Bassin discusses the IRS’s recent decision to increase user fees on enrolled agents. Stu, a practitioner based in DC with an extensive controversy practice, recently took the lead on updating and revising the confidentiality and disclosure material in the Thomson Reuters Saltzman and Book IRS Practice & Procedure treatise that has just been released in print and on Checkpoint. Les

“Enrolled agents” are tax specialists authorized by the IRS to represent taxpayers in tax disputes in many of the same ways as tax attorneys and CPAs. To obtain an “enrolled agent” designation, an applicant must pass an IRS competency examination. Earlier this month, the IRS issued a regulation massively increasing the user fee applicants must pay to take the examination. Under the new regulation, applicants must pay two fees for each portion of the three-part examination–(1) an $81 fee imposed by the IRS for each portion of the examination, and (2) a $100+ fee for each portion imposed by the contractor retained by the IRS to administer the examination. Combined, applicants will now be required to pay fees of $243 (previous fee was $33) to the IRS and over $300 to the contractor to take the required exams.


Not surprisingly, enrolled agents have opposed the proposed increase throughout the rulemaking process and must now decide whether to challenge the new regulation in the courts—the route successfully pursued by tax return preparers opposed to an IRS registration and licensing scheme. See Steele v. United States (discussed in PT here; note that this week the DOJ filed a motion for a stay of the court’s order that had enjoined IRS from charging any fee to issue or renew PTINs; the government’s memo in support of that motion is here) and Loving v. United States. A challenge by enrolled agents to the regulation could follow two primary paths. They can argue that the IRS does not have legal authority to license and regulate enrolled agents under 31 U.S.C. Sec. 330—an avenue that enrolled agents have not previously pursued. Alternatively, they can argue that the amount of the user fee imposed by the IRS upon applicants is unlawfully excessive.

The legality of a “user fee” like the IRS examination fee is governed by 31 U.S.C. Sec. 9701. That statute authorizes agencies to impose user fees to recover the cost of services they provide which confer special benefits on identifiable recipients which are not available to the general public. The case law authorizes agencies like the IRS to impose fees tied to the agency’s actual costs, but prohibits larger fees which can be used to fund other agency activity like public education or consumer protection. (The theory underlying these cases is that a larger fee employed to fund other agency activities would constitute a “tax” imposed by an agency—a violation of the constitutional limitation of the taxing power to Congress.) Were enrolled agents to pursue this avenue, the legal issue which would be presented is whether the IRS can demonstrate that its fee is not excessive.

During the rulemaking process, the IRS attempted to justify the fee increase by reference to its internal cost estimates for the enrolled agent examination. The IRS identified three principal components to the cost estimates—(1) an estimate of the IRS employee time which was devoted to the enrolled agent examination, (2) the direct cost of the employee labor, employee benefits, and a 68% overhead factor, and (3) the cost of conducting background checks on the contractor hired by IRS to administer the examination. The reasonableness of the IRS cost estimates, like most cost accounting estimates, can be debated. And, past experience leads this blogger to suspect that elements of these estimates could be inflated to include costs not directly related to the enrolled agent examination and that these estimates would provide fertile ground for judicial review of the new regulation.

The question is whether enrolled agents will pursue such a challenge.

User Fees

The National Taxpayer Advocate recently wrote a 10 page comment on the proposal to raise the user fee on offers in compromise. She does not like the increase but, more than just the increase, she does not like the fact that the IRS has decided to charge for a basic government service. The fee charged for offers is just one of many fees that the IRS now charges. A non-exclusive list of other fees include those for: installment agreements, requests for exempt status, private letter rulings, offers in compromise, electronic payments of user fees, payments of taxes by credit or debit card, and pre-filing agreements. We wrote recently about how the dramatic increase in the fee charged for a private letter ruling has driven an excellent change in the way taxpayers request forgiveness for failing to timely roll over their IRA. We also wrote this year on the incentive Congress has given to the IRS to make private debt collection work. The amount of money the IRS collects each year in fees and charges has reached a level that it has an impact on the IRS operating budget.

Aside from the question of how much the IRS should charge for a particular service and whether it should differentiate between services in deciding which ones should have a fee and which should not, the more fundamental question concerns the use of fees, at all, to fund the IRS. Does the increased use of fees signal a slipping back into the pre-1954 world of tax collection where the tax collector had an incentive to collect more money? Does the use of fees undercut the decision in 1954 to create a tax collection agency with only one political appointee in order to remove the IRS from monetary considerations? Does it undercut the Congressional decision in 1998 to cause the IRS to avoid evaluating employees on the basis of productivity measurements pegged to dollars collected or dollars assessed?


In this context, the policy and practical concerns raised by the NTA deserve attention.

Before I turn to the specific concerns raised by the NTA, I want to interject a personal story from two decades ago that attests to the longstanding concerns that the NTA has had in the area of offers. Two decades ago I was the District Counsel for the IRS in Richmond and Nina Olson was the director of the Community Tax Law Project, the first non-academic low income taxpayer clinic. [For more information on this segment of Nina’s career and her role in clinic formation, you might read my article on the history of tax clinics.] We had a case in our office in which Nina represented the taxpayer. The case involved a significant amount of money and the IRS had imposed the fraud penalty. We both estimated that the trial of the case would take two or three weeks which would put a lot of pressure on the resources of her office and my office in a situation in which the taxpayer had little or no money. I suggested that we use the offer in compromise process to avoid fighting about the amount of the liability and focus on the very real collectability issue present.

Nina agreed with my concept but we then had a dispute about the amount of the offer. I wanted something more than a nominal amount and she felt that was not fair to this taxpayer, or low income taxpayers generally. We reached an agreement, but my concerns that a taxpayer seeking an offer must pay an amount that justified the IRS effort in working the offer conflicted with her view that the IRS should allow any taxpayer to compromise their taxes no matter how much they could pay to the IRS in the offer process. Shortly thereafter, she testified before Congress leading up to the changes in the Restructuring and Reform Act of 1998 and convinced Congress to insert IRC 7122(d)(3). So, you do not need to convince me how serious the NTA is about making sure the offer process is fair to all.

The NTA raises seven specific concerns about the increase in user fees and I will address each one in turn:

  • Offers should not be subject to fees because the IRS generally does not charge for fundamental government services that primarily benefit the general public.
  • Congress’ decision to impose “constraints on IRS resources” is an inadequate justification for increasing the OIC fee.
  • Public policy weighs in favor of eliminating the OIC fee.
  • The OIC fee is likely to cost more – in lost tax revenue and increased enforcement costs – than it will generate in user fees.
  • The OIC fee is an accounting “device” that the IRS is pursuing due to a conflict of interest.
  • To help mitigate its conflict, the IRS should conduct a cost benefit analysis before moving forward with the OIC fee NPRM, as it has agreed to do for future user fee proposals and which may also be required by Executive Order 13563.
  • If the IRS charges an OIC fee, it should minimize the burden for taxpayers.

Charging for Basic Services

The NTA views offers as a basic service and, as such, something which the IRS should offer at no cost. She looks at the legislative history of basic versus special services and provides reasons why the offer should fall into the basic services box. She cites to many benefits the IRS obtains from working offers, as well as some comparative services for which it does not charge.

Because the IRS essentially ignored offers until 1992 and only began the current offer program 25 years ago for selfish reasons I have discussed previously, I have trouble jumping on the basic services bandwagon. For many of the reasons discussed by the NTA, I think the IRS, as well as taxpayers, benefits from a robust offer program even if it is not considered a basic service.

Charging because Congress has cut the IRS Budget

The NTA points out that the IRS justification for raising the cost of applying for an offer does not provide an appropriate justification. The Independent Offices Appropriations Act of 1952 (IOAA), codified at 31 U.S.C. § 9701, specifies that

“[E]ach charge shall be— (1) fair; and (2) based on— (A) the costs to the Government; (B) the value of the service or thing to the recipient; (C) public policy or interest served; and (D) other relevant facts…. However, the NPRM justifies the OIC fee increase based on “constraints on IRS resources.”20 The NPRM does not explain how Congress’s decision to reduce the IRS’s funding is relevant to the guidelines provided by the IOAA.”

The NTA makes an excellent point. Having the IRS justify a fee increase because of resource constraints opens the door to having it charge for just about anything the IRS does. We have posted before on several occasions about the poor Congressional decision-making regarding the IRS budget; however, that should not turn every experience with the IRS into one for which it charges. Charging for private letter rulings makes sense if for no other reason than to cause the party making the request to pause before calling upon IRS resources for an opinion; however, charging for collection relief requests like offers and installment agreements takes on a different tenor, and, when the justification for charging cites to resource constraints, government begins to have a totally fee-based feel rather than something we pay for with our taxes.

Public Policy and the Fee

The NTA cites three good policy reasons in support of her argument that the fee charged here makes bad policy. First, she cites the newly enacted taxpayer bill of rights. While the rights listed there do not include the right to not have a fee charged for every interaction with the IRS, they do include rights that implicate the taxpayer’s reasonable expectation of services without the type of barriers imposed by fees. Second, the NTA cites to the legislative history of the Restructuring and Reform Act of 1998 (RRA 98) in which Congress made some changes to the offer provisions, including the one discussed above, and exhorted the IRS to make offers available. The Congressional discussion in 1998 marked the first real comments after the IRS created its modern approach to offers earlier in that decade. Third, she cites to the logic offered in 2003 when the IRS first started charging a fee for offers. At that time, it justified the newly imposed fee because of concerns with frivolous offers that could clog its system. That justification has merit; however, in the intervening years other rules related to frivolous submissions would seem to make the need for the offer fee smaller rather than greater. The IRS seems to have allowed the camel’s nose in the tent with a reasonable argument for a nominal fee and, now that the fee exists, has expanded the cost with an entirely different and not satisfactory explanation.

The True Cost of the Fee

The NTA argues that the reduced number of offers resulting from the fee will cost the IRS more in lost revenues and increased collection costs than the fee will generate. I think the down payment stops more offer requests than the fee but as the fee increases it undoubtedly becomes a barrier to entry. If the offer program effectively gets taxpayers back on track with their taxes, creating barriers has consequences to the ability of the IRS to move taxpayers from those in the pool requiring enforcement to those requiring no effort. To get to the true benefit of offers requires a more detailed study of all of the consequences than I think we have at this point but the theory behind the offer program makes us want people to go through it so they can restart their relationship with the IRS and become good taxpayers again. A recent article about the true cost of getting the TSA Pre designation has an interesting take on the negative impact of government fees and their true cost.

The User Fee is an Accounting Device

When the IRS collects a user fee, it gets to keep the money for use in the IRS budget. When the IRS collects a tax dollar, the money goes into the general treasury and does not directly impact the IRS budget. The NTA argues that the IRS move to greater user fees reflects a move to protect its budget. The more the IRS budget comes from fees and not from appropriations, the more the IRS will have incentives to jack up fees and move to a pay for services method of operating which hurts those who have trouble paying for services and should trouble everyone. Congress should want to fund the IRS at appropriate levels in order to collect revenue in an orderly fashion and provide for enforcement across the board. As Congress has abdicated fair funding of the IRS despite the loss of revenue and the loss of fairness, it drives the IRS to seek alternative sources of funding. I cannot blame the IRS for trying to find funding sources. Every organization seeks funding sources, but Congress should stop this both by adequately funding the IRS so that it does not need to do this and by telling the IRS not to do this. The IRS should not be a fee-based service. Going in the direction of fees for services at the IRS creates many dangerous policies. The NTA rightly points out the dangers when the charges get imposed on a service related to collection.

Conducting a Cost Benefit Analysis

Much of what I have to say here is included in the section above on the true cost of the fee. I agree with the NTA that the cost of the fee here may outweigh the benefits and conducting an analysis of the true cost would provide essential data for making the decision. Because of pressures to increase income, the IRS may have the wrong incentives in place.

If the IRS Charges a Fee It Should Minimize Taxpayer Burden

The NTA suggests that the way the IRS goes about collecting the fee also creates a burden. The collection of the offer fee up front establishes a barrier that can prevent a taxpayer from pursuing an offer. In collecting the installment agreement fee, the IRS takes the fee from the installment payments and does not require the fee as a cost of coming through the door. Changing the way it collects the fee, if it must charge one, can also have an impact on those to whom it charges the fee. When the offer fee came into existence, it made sense to use it as a fee for entry because the goal of the fee related to stopping frivolous submission of offers. If the goal of the fee has changed to one of revenue raising, then the IRS should look at the way it collects the fee.


The NTA has many thoughtful suggestions. The pressures on the IRS to raise revenue for its budget needs provide a bad incentive for adoption of user fees. While the ultimate problem here may lie with Congressional budget decisions, the IRS must take care not to allow itself to go back to pre-1954 ways and the scandals that evolved from the wrong types of incentives.