How Low Income Taxpayers deal with IRS controversies and what it means in the COVID-19 Era

Most LITC clients come to us after their deadlines have expired – whether it’s 30, 60, or 90 days after key dates. For these clients, to be perfectly frank, the COVID-19-related reductions in IRS service capacity may not impact them much, if there is no urgent need for action on their case. Someone with a shelved collection case who is seeking an OIC will have the same end result whether we can accomplish it now or 6 months later.

Ironically, it is the taxpayers who are ‘mid stream’ and the most engaged in the IRS controversy process that are the most stressed by COVID-19. As of 3/22/2020, 8 state governors have announced “stay in place” orders of some type. The stress and impact are most easily demonstrated by sharing a real case scenario in the context of a local shut down. KYCC’s LITC is located in the city of Los Angeles. The mayor of Los Angeles issued a stay at home executive order on March 19, 2020, Thursday evening that ordered all non-essential businesses to cease operations. We had 24 hours to implement this order. Since assisting people with IRS controversies is not considered an essential business; we scrambled to prepare for the shut-down.

Like any other service industry operation that works with the general public, we had to shut down. So what’s unique to a low income tax controversy shut down? From my perspective, I believe the loss of in-person face to face appointments impacts the lower income demographic disproportionately compared to a regular tax controversy law firm. The demographic we serve are the least well equipped to access technological “work arounds” and the most likely to respond to “user friction” by dropping out and disengaging from the process of resolving their tax controversy.

This is best demonstrated by example.

LITC Case: EIC, CTC, HoH Correspondence Audit Denied

The last Friday (3/20/2020) I was physically at the clinic, we received a letter from the Service’s AUR program denying the Earned Income Tax Credit (“EIC”), Child Tax Credit (“CTC”), and Head of Household (“HoH”) filing status for a taxpayer we are representing. Fortunately, since this client is a native English speaker, I did not need to translate it into a foreign language. Of course, as any subject matter expert has to do in any industry, I still need to act as a cultural broker from “IRS speak” into “what it means for you.”

Prior to COVID-19, this taxpayer already had an uncooperative landlord not willing to find their cash receipt book to supply the additional receipts need to prove that that the taxpayer supported her dependents in tax year 2018.  Now, because of stay in place orders, that same landlord is even less available. Proving support of my client’s dependents will be challenging.

Fortunately, seeking redetermination in Tax Court is still an option. But, this taxpayer is already exhausted and wary of engaging in the government system. “Why,” you ask? To be honest, I do not quite know the answer. I just know she is psychologically fragile. Even at our first meeting where we discussed a response to the audit (back in November 2019), I asked her to obtain receipts from the landlord, it took her about 6 weeks to respond with about six receipts. She was fairly email savvy, so I emailed a request for more receipts. I get no response for two weeks. So, I called her cell.

“I’m sorry, but it would be best to prove more than 6 months, you know, like a “majority” of support. Can you get the rest of the receipts for 2018?”

She sighed and replied, “Maybe I should just give up.”

“Why? I mean, they are your kids and you took care of them. You should get the credit.”

“Well Gina, I saw your email and asked my landlord for more receipts. But he’s unwilling to look up last year’s receipt book. He won’t respond to any of my requests. And I have to work and take care of my kids and there are so many other things I need to do besides this.”

I negotiate with her, “Okay. Instead of giving up, just let me fax everything else we have with the six receipts from him and see how they respond.”

Do you hear her exhaustion? This working single mom of two children is just plain exhausted by life. She works an hourly job, and fighting to obtain proof to show she’s raising her kids is like the proverbial last straw that broke the camel’s back.

In this context, my client receives an IRS response on March 20, 2020 – the day after the mayor of Los Angeles announces stay at home orders. The IRS response essentially tells her, “Nope, we don’t agree. You owe us $5500 + penalties + interest = $7000. You can ask us to reconsider. Or you can go to court. But don’t be late – you’ve got a hard deadline of June 1, 2020.”  Since she doesn’t have the benefit of my colloquial translation (yet), she will likely focus in on the only part of the letter not in legalese, “How to Pay Your Taxes” which includes the final dollar figure.

If she has lost her job; she’s already stressed about how to make ends meet. If she’s fortunate enough to have a job that permits telework; she now has to figure out how to work from home while the kids are at home. Unfortunately, school will likely stay closed until the summer (adding another obstacle to her proving her kids’ residence) and the uncooperative landlord is even less accessible.  And a request for medical records from the doctor’s offices (often used to prove residence) are not going to be top of mind during a pandemic crisis.

Fortunately, my client has 90 days (by June 1, 2020) to petition the Tax Court. Have you ever tried explaining to a client how Tax Court is not Judge Judy and it’s not like the TV show Suits either? Helping her comprehend the reality of what Tax Court involves, how testimony works, and why interacting with appeals officers, IRS counsel, and a judge won’t necessarily be a futile repeat of her prior experience with correspondence examiners is not a conversation that works very well over the phone. The already overwhelming EIC audit has psychologically “beaten” the taxpayer down and taking her case to another level requires an element of “hand holding” with a compassionate explanation.

So you may wonder, “What do ‘hand holding compassionate explanations’ have to do with the implications of COVID-19 on low income taxpayers? Is it any different from how the pandemic impacts middle income America?” This EITC audit is my long-winded anecdotal way to explain a one word answer:  time. This group of taxpayers requires more reminders, phone calls, and face to face in person time than any other demographic I’ve ever worked with. In the past, I’ve worked with developing country NGO grantees, churches, refugees, and private operating foundation directors. All of whom may not have been technologically sophisticated. The low income taxpayer comes with the most ‘defeatist’ perspective that requires time to overcome. Technology is not the panacea that solves all problems. Individuals need a motive and reason to engage with the system. No video conferencing software can give the handshake, acknowledgement, and personal explanation needed.

I’ve had clients who could have snail mailed, faxed, or emailed a single page of a missing tax return to me to respond to an audit, but instead they would ask me if they could bring it into our office. When I first started this job, I was flabbergasted by the request. I would answer, “Of course, but if I happen to be away from my desk or in the middle of an appointment, feel free to leave it with my assistant or in my mailbox.” Often, they would patiently sit there and wait until I finished my call, or sometimes, they’d even wait for me to come back from lunch (!!). Now, I am no longer surprised at the request. I’ve come to realize that for a certain segment of my clientele, the direct handshake, eye contact, and acknowledgment, “I’ve received this document. I have seen you. I will be responsible for your case” – offers a reassurance that is the closest they will ever come to a human being explaining and working with them through the behemoth of the IRS machinery.

I used to disdain this part of my job as horribly inefficient (the billable hour culture of law influence). But now, I see it with more grace. Working through the IRS controversy process can help taxpayers begin to have more faith in the system. In turn, those taxpayers begin to make good faith attempts to re-engage in the system. A system that has, until now (for efficiency’s sake), treated them as a widget in the awe-inspiring revenue machinery of the United States government.

The process of humanizing the machinery of the complex IRS system requires time. So, how does “time” translate into practical IRS procedures and practice? I am sure my LITC colleagues and the ABA Tax Section Pro Bono & Tax Clinics listserv will think of many more practical and substantive tax provisions that would be helpful. But, as a new tax practitioner, I tend to think “functionally” rather than technically – since I am not as familiar with the Code or IRM sections that would have to be considered. Below is a list of practical “functional” needs I can think of that would be practical for my clients.

• extend timelines to pay estimated quarterly taxes and monthly installment agreement amounts
• create a streamlined process to reduce existing installment agreement payments
• extend VITA (Volunteer Income Tax Assistance) to 7/15/2020
• extend timelines to respond to notices, including audits and identity verification
• extend timelines to renew ITINs (or permit the use of ITINs that expired in ty 2019/2020)
• expand Certifying Acceptance Agents (for ITINs) into VITA programs
• create a streamlined process for change of address updates (or deputize currently closed VITA volunteers to input address changes with existing ID from prior year returns)
• lessen documentation (permit verbal?) requirement to qualify for CNC
• broaden the definition of “experiencing imminent hardship” for TAS

Note: after this post was drafted, the IRS announced its “People First Initiative” in IR-2020-59 dated March 25, 2020, which provides significant relief including some of the items above.