Tax Questions, User Fees, and Private Letter Rulings

November 9, 2020 by 4 Comments

Today we welcome first-time guest blogger Anna Gooch. An alum of the Villanova Federal Tax Clinic (and current Villanova LL.M. student), Anna is an International Tax Consultant at Deloitte in San Francisco. Despite her busy schedule, Anna continues to provide pro bono services through the Tax Clinic.

When taxpayers are frustrated with the IRS, they often turn to their Congressional representatives, who in turn ask the agency (or the Taxpayer Advocate Service) for help. In today’s post, Anna brings a historical perspective to bear on a recent exchange between Senator Marco Rubio’s office and the IRS. Christine

On September 25, 2020, the IRS released an information letter to Senator Marco Rubio regarding a request made by the Senator on behalf of one of his constituents. The constituent wanted help determining the tax treatment of a settlement received for a breach of contract claim and related emotional distress claim. The letter provides general information on sections 61 and 104, but it also gives information about private letter rulings (PLRs). As is the case with all information letters, nothing in this letter is specific to the constituent’s situation, nor is it binding on the constituent or the IRS. For that, this constituent must request a PLR.

An information letter can be useful for educating the public on general tax principles, especially if the taxpayer’s question is not particularly nuanced or unique. Additionally, the IRS issues information letters when a taxpayer fails to properly request a PLR.  Most significantly, information letters are free for all taxpayers, which is likely the reason that this constituent received an information letter rather than a PLR.

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Compared to other programs for which the IRS offers a reduced fee for low-income taxpayers, the “reduced” fee for PLR requests is still significant. Depending on the subject of the PLR, the standard user fee is between $6,000 and $30,000. For taxpayers with gross income of less than $250,000, a reduced user fee of $2,800 will usually apply. Assuming they qualified for the reduction, a PLR on this topic would likely cost Mr. Rubio’s constituent $2,800. This is a price many taxpayers simply cannot afford. Because so many taxpayers cannot afford even the reduced user fee, the only remaining option is to contact the taxpayer’s congressperson to request an information letter, which, as discussed below, will likely not be very helpful.

Because of their cost, very few PLRs are issued on topics that apply to low-income taxpayers. Earlier this year, I combed through every PLR and determination letter issued in 2015 (chosen for its relative neutrality) and tracked which code sections appeared the most frequently. One goal of this project was to identify how many PLRs were issued on topics that might be relevant to low-income taxpayers. One such section was section 104 , the relevant section for this information letter. Of the 1,510 PLRs released for publication in 2015, there were only two PLRs issued on section 104. For comparison, there were 150 PLRs issued that concerned section 4945’s Taxes on Taxable Expenditures, which is a topic whose relevance is limited to wealthier taxpayers.

There are two main advantages of receiving a PLR over an information letter. First, a PLR allows a taxpayer to receive tax advice specific to their situation. The second, and most important benefit, is that the PLR outlines the specific tax treatment of a particular situation or transaction, which is binding on the IRS as to that particular taxpayer. Without a PLR, the taxpayer risks facing an audit that may be too expensive or inconvenient to successfully defend.

A brief history of PLRs, user fees, and customer service at the IRS

The IRS has been answering taxpayer questions since the early 1900s, though with some variation from the current PLR system. In the beginning of the 20th century, the Bureau of Internal Revenue (BIR) had an informal policy of answering every question submitted to it, hypothetical or otherwise. With the increase of the number of Americans subject to income tax in the 1910s, the BIR was forced to narrow its policy to accommodate the increase in volume. In a set of provisions ($) released in 1919, the BIR stated, “It is impossible to answer every question which the invention or ingenuity of the inquirer may devise without neglecting the fundamental duty of determining of tax liability upon the basis of actual happenings.” Consequently, the BIR began to limit its responses to only actual, completed transactions.

Although the system evolved over time, user fee requirements for PLRs did not become part of the Internal Revenue Code until the passage of the Omnibus Budget Reconciliation Act of 1987 and the codification of section 7801. Since then, user fees have increased nearly every year.

Despite the general increase in fees, the IRS has carved out some topics that either have reduced fees or no fee at all. These include letters requesting extensions for making certain elections, changes in certain accounting periods, and letters requested under sections 6104(d)(4) and 514(b)(3). None of these topics are applicable to low-income individuals. There are also exemptions for federal agencies or departments and federal government employees requesting PLRs on withholding issues. Despite these carveouts, there is currently no exemption or reduced fee that would make PLRs accessible for low-income taxpayers.

Using past policies to inspire the future of IRS customer service

The mission of the IRS, which was rewritten in 1998, is to “[p]rovide America’s taxpayers top quality service by helping them understand and meet their tax responsibilities and enforce the law with integrity and fairness to all.” As part of the Taxpayer First Act of 2019, the IRS must develop a plan for improving customer service. The Taxpayer Bill of Rights, codified in 2015, guarantees taxpayers a right to quality service. Each of these initiatives demonstrates a shift in priority from revenue-focused to taxpayer-focused.

One of the most important facets of customer service is answering customer questions. However, the IRS’s services designed to answer these questions are flawed. In both 2018 and 2019, the National Taxpayer Advocate labeled the lack of access to quality service and education as a Most Serious Problem. In 2018, TAS conducted a study in which callers asked various tax law questions to test the IRS response. The study revealed serious shortcomings in the tax law phone advice offered by the IRS. Former NTA Nina Olson wrote:

TAS callers experienced inconsistent service, even when asking questions about changes under the TCJA, which the IRS previously indicated it would now answer year-round. Several callers reported the same script being read over the phone, telling the callers:

“There is no tax law personnel at this time due to budgetary cuts. This tax topic cannot be answered at this time. The employees that will be able to answer this question will be available beginning January 2, 2019 through April 15, 2019.”

This is particularly concerning given the IRS is supposed to be answering TCJA calls year-round. In one instance, a caller was told she needed to hire a paid professional to answer her question. On many calls, the employee told the caller the call would be transferred, and the transfer ended in a pre-recorded message telling the caller the question was out-of-scope and then disconnecting the call.

Without access to reliable information either online or through a phone line, taxpayers are left with few options. The only remaining free option for taxpayers is to contact their local representative, who only has the power to request an information letter on the taxpayer’s behalf. Of course, neither information provided by customer service representatives nor information letters offer taxpayers finality because they are not binding on the IRS.

To receive tax law advice that is binding on the taxpayer and the IRS, the taxpayer must request a PLR. However, the PLR system currently does not effectively serve all taxpayers. This violates the spirit of TBOR and the Taxpayer First Act. Given the IRS’s renewed focus on providing quality service to taxpayers, both internally and through Congressional direction, shouldn’t low-income taxpayers be able to receive PLRs just like taxpayers who can afford to pay?

The IRS could draw from its own history to implement a more accurate and more accessible system for answering taxpayer questions. Certainly, administrative costs will prevent the IRS from being able to issue a PLR for every question that it receives as it was able to until 1919. However, modeling a customer service plan on the IRS of the past might give some answers to the people like Senator Rubio’s constituent, who need yet cannot currently afford them. 

Filed Under: User Fee Tagged With:

IRS Announces New PTIN User Fee in Proposed Regulations

April 28, 2020 by 5 Comments

Today we welcome guest blogger Clinical Professor Frank Colella who teaches at Pace University in the Lubin School of Business.  He has been closely following the litigation concerning the fees that the IRS can charge practitioners and recently published an article on the subject in the Houston Business & Tax Law Journal.  Today he provides background on the newly proposed PTIN regulation regarding user fees.  For further background, Les has written on PT in the past about this topic here, here, here and here. Keith

The IRS has announced, in Notice of Proposed Rulemaking REG-117138-17, the imposition of a new PTIN (practitioner tax identification number) user fee. The proposed regulations require tax practitioners to pay $21 (plus a vendor fee) to obtain, or renew, their PTIN.  This is a marked reduction from the previous (pre-suspension) $33 fee, which itself had been a significant reduction from the original PTIN fee of $50 (plus the vendor fee).  After the district court in Steele held the IRS lacked the authority to impose the fee, they briefly suspended the issuance of PTINs altogether. However, the Service quickly resumed issuance of the PTIN – without charging the corresponding user fee. Last year, in Montrois, the D.C. Circuit reversed Steele and held the IRS could properly impose a PTIN user fee.  Unresolved, however, was the question of how much could be charged for the PTIN.  That issue was remanded to the district court for determination.

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While the newly announced PTIN fee does not come as a surprise in the wake of the news last month that the Office of Management and Budget had completed its review of the proposed regulations (fee), the timing of the decision is nevertheless a surprise.  Despite the IRS victory in Montrois, the case was, nevertheless, still before the district court on remand.  The Court had to determine what the appropriate PTIN fee should be in light of the various factors discussed by the Panel.  Moreover, in late October 2019, shortly after the Supreme Court denied the taxpayers’ Petition for Certiorari, the parties entered into a stipulation that provided for a detailed discovery schedule – that extends well into 2020.

The proposed discovery schedule, before the outbreak of the COVID-19 crisis, anticipated that the discovery phase of the remand litigation would extend through the summer of 2020 (and perhaps longer).  Among some of the items cited in the stipulation were the voluminous number of documents to be examined and the reluctance of some people (together with the outright opposition of others) to be deposed.  Whether judicial approval of the revised PTIN fee is desirable or, more importantly, whether such approval is a prerequisite to the imposition of the new fee, is an open question.  Given the newly promulgated proposed regulations, the answer to that question seems moot.

The proposed regulations do, however, explain how the new fee was arrived at by the Service.  While a background in cost accounting would be helpful, the explanation that accompanies the proposed regulations describes the direct costs that were used in the computation, together with an overhead component that was also included as part of the fee.  The computational methodology followed the guidance of SFFAS #4: Managerial Cost Accounting Standards and Concepts.  The Service estimated that there would be approximately 800,000 PTIN users (2,400,000 applications/renewals over a three-year period) to arrive at the $21 per tax return preparer fee.  Whether these figures would correspond to the numbers that would have been reached at the completion of the discovery phase of the remand litigation is unknown.

On remand, the district court was responsible for determining whether the fee was reasonable.  The determination would include not only the reasonableness of the fee based upon the direct costs associated with the PTIN program, but would also examine whether the direct costs used to calculate to PTIN fee included amounts for services and charges that went beyond the IRS’s authority to regulate the tax preparation industry.  It was not enough to identify the overall costs of the PTIN program; the court had to also determine the whether the individual cost components were properly within the IRS’s authority.

Apart from the IRS’s sua sponte decision to reduce the PTIN fee in 2015, the only courts that directly ruled on the reasonableness of the PTIN fee was the district court in Buckley (the subsequent appeal in the 11th Circuit was voluntarily dismissed with prejudice by the appellants).Despite the district court’s decision in Loving, the Buckley court nevertheless concluded that the original $50 PTIN user fee was reasonable.  In reaching that conclusion, Buckley did not provide any analysis, nor did it consider any of the components that should be included (or excluded) in the determination of the fee.  Other courts did not consider the fee itself, only whether the IRS was authorized to impose one.

Steele did, however, discuss what costs the PTIN fee should include and, more importantly, exclude from consideration.  Specifically, Steele I held, that under the Independent Offices Appropriations Act, the IRS may only consider the fees it incurs in providing the PTIN service: “the prevailing (and binding) interpretation of section 9701, which states, again, ‘the measure of fees [imposed under section 9701] is the cost of the government of providing the service, not the intrinsic value of the service to the recipients.’” (citing Seafarers Int’l Union of N. Am. v. U.S. Coast Guard, 81 F.3d 179, 185 (D.C. Cir. 1996)).

The IRS may not consider the benefit derived by individual class members from the use of the PTINs – it must be a uniform fee for all tax return preparers.  That holding served as the legal basis for the Steele litigation to proceed as a class action and, likewise, ordering relief on a class-wide basis.  “[T]he IRS has stated time and again that the cost of issuing a PTIN is the same regardless of whether the pin number is issued to an attorney, CPA, or uncertified tax return preparer.  As plaintiffs note, that is why the IRS decided in the first place to impose a uniform fee for every PTIN it issued — regardless of the recipient’s professional status.”

As noted above, the IRS cannot include costs, via the PTIN fee, that not are properly associated with the PTIN program. The plaintiffs alleged that, even following the IRS’s voluntary reduction of the fee in 2015, the amount charged nevertheless included impermissible components. “The IRS has also continued to use the fees to fund activities related to tax compliance, background checks, the voluntary certification program established after Loving, and many other things unrelated to issuing a number.”  The Panel agreed that any costs associated with activities found invalid pursuant to Loving should be reviewed on remand.

Interestingly, however, after Loving was decided but prior to the Montrois opinion, the D.C. Circuit decided AICPA, which held that the IRS could implement a voluntary program to regulate tax return preparers.  While Montrois did not discuss the impact of the AICPA decision, the costs associated with the voluntary program, which by necessity also utilizes the PTINs, should arguably be included in the direct costs of the PTIN program.  The costs associated with the voluntary program will undoubtedly benefit tax return preparers as a whole (if only by increasing the pool of better prepared preparers).

Finally, an additional question that should be examined on remand is the vendor fee itself, paid directly to third party administrators, which is imposed directly on the tax return preparers.  Thus, the original fee was not $50 but rather $64.25 when the processing charge was included.  The prior fee was not $33.00, but rather $50, with the addition of the vendor fee (increased from $14.25 to $17 per application/renewal).  And, the newly announce $21 fee is, in actuality, a $35.95 PTIN user fee because of the additional $14.95 vendor fee that must be paid to obtain (or renew) it. As succinctly, and somewhat rhetorically, stated by plaintiffs in their motion for summary judgement: “And if Accenture [the third party vendor] does everything necessary to issue a PTIN, then what benefit is the government providing to tax-return preparers?”

Filed Under: User Fee Tagged With:

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

February 21, 2019 by 2 Comments

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. 

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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 www.irs.gov/Individuals/Certain-Medicaid-Waiver-Payments-May-Be-Excludable-From-Income. 

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.

Filed Under: miscellaneous, User Fee

IRS Increases User Fee for Enrolled Agent Exam by 700 Percent

July 26, 2017 by 3 Comments

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.

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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.

Filed Under: User Fee Tagged With:

User Fees

December 14, 2016 by Leave a Comment

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?

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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.

Conclusion

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.

Filed Under: User Fee