EITC Ban: NTA Report Recommends Changes and IRS Advises on its Application to Partial Disallowances

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The following brief post discusses two recent developments relating to the EITC ban. The first is a report that the recently retired NTA submitted to Congress that contained administrative and legislative recommendations to improve the penalty. The second is informal IRS advice concerning its application to partial EITC disallowances.

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Report to Congress Proposes Changes to Ban Procedures

We have written frequently about problems with the authority that the IRS has to ban taxpayers from claiming the EITC (and now CTC and AOTC) following improper claims. Just last fall guest poster Bob Probasco in The EITC Ban—It’s Worse Than You Realizedaptly equated one of his client’s experiences in navigating the ban process to victims of 1970’s Hollywood disaster movies. I spent much of this past spring at IRS TAS as a Professor in Residence working on a report recommending improvements to the EITC that Nina Olson as NTA submitted in her final report to Congress.  The report, Making the EITC Work for Taxpayers and Government: Improving Administration and Protecting Taxpayer Rightsbecame Volume 3 of the FY 2020 Objectives Report to Congress. 

Part V of the report addresses the problematic ban provision. After detailing the process the IRS uses for imposing the ban we concluded on page 45 that the current system raises serious concerns and jeopardizes taxpayer rights: 

The processes described above are complicated for even seasoned tax lawyers much less unrepresented EITC recipients. The IRS path during the ban proposal and imposition period is marked by a series of notices with limited explanation. No rules or notices pertaining to the effect on a taxpayer who files jointly with a banned taxpayer exist, and there may be limited opportunities for audit reconsideration where a significant amount of time has passed since the ban was imposed. Adding to this confusion, there is some uncertainty as to whether, and when, the Tax Court has jurisdiction to consider the ban 

To address the risks to taxpayer rights, we provide two key recommendations. First, we recommend that the IRS develop a ban examination process that is separate from the audit process. That process should focus on whether the taxpayer’s conduct justifies the IRS to impose the ban. Second, we suggest that Congress clarify when the Tax Court has jurisdiction over the ban and require that the burden is on the IRS to prove that imposing the ban was appropriate.

While the IRS has imposed the ban relatively infrequently over the past few years, Congress recently expanded the opportunities for IRS to impose the ban by giving the IRS to exercise its authority for improper child tax credit and American Opportunity Tax Credit claims. Unfortunately Congress did so without addressing any of the issues we discuss in the report to Congress. This only exacerbates the problems Bob and others have identified when taxpayers are potentially subject to the ban. 

IRS Email Advice Discusses How Ban Can Apply to Partial Disallowances

A recent IRS informal opinionaddresses the possibility of the IRS imposing the ban when there is only a partial disallowance of the EITC:

[Taxpayer] claims 3 children, 1 child disallowed. TP continues to claim the 1 child for consecutive years when they know that they are not entitle[d] to claim the child. Can the TP be subject to the 2-year ban, even though they are entitled to the EIC for the other 2 kids? 

 The opinion concludes that the ban can apply in this situation:

Section 32(k)(1) states that no credit shall be allowed under § 32 for any taxable year during the disallowance periods, which are 2 years for reckless and intentional disregard and 10 years for fraud. Section 32(k)(1)(B)(ii), regarding the 2-year ban for reckless or intentional disregard of rules and regulations, does not prohibit imposition of the ban for partial disallowances. Accordingly, if any taxpayer’s claim for the EIC is partially disallowed because of reckless or intentional disregard of rules and regulations, the IRS may asset the 2-year ban under § 32(k)(1)(B)(ii) on the taxpayer claiming any EIC during the 2 years.

Technically, this conclusion makes sense yet I have concerns with the IRS’s ability to make fair and accurate determinations of taxpayers’ intentions. Family lives are complex. It is difficult for taxpayers to reach the IRS during the correspondence examination process. Getting through to IRS by phone requires persistence, patience and time. Many of the taxpayers who the IRS has imposed or asserted a ban used paid preparers, further complicating questions of intent.  

As we discuss in the report, the correspondence the IRS uses when it has imposed the ban does not adequately discuss how taxpayers can challenge the IRS ban determination. To be sure, improper claims are a problem with the EITC and other credits. Yet basic fairness suggests that before the IRS imposes the ban there is a straightforward and clear path to challenge the ban. 

Leslie Book About Leslie Book

Professor Book is a Professor of Law at the Villanova University Charles Widger School of Law.

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