Exercise Caution When Using Extended Tax Court Due Date

In an earlier post I provided proposed time frames for filing Tax Court petitions based on different due dates.  Circling back to that issue, I wanted to point out the downside of the extension created by the decision in Guralnik v. Commissioner, 146 T.C. 230 (2016)(en banc).  At this point we do not know if the time to file a petition for those with a due date between March 19 and July 15, 2020, will be governed by a combination of Guralnik and Notice 2020-23, just Notice 2020-23 or just Guralnik.  The answer to that question depends, in part, on when the Tax Court clerk’s office reopens.  The previous post presumed that the Tax Court clerk’s office would reopen on June 30 but if it reopens after July 15, 2020, and if the time period for filing a Tax Court petition in Notice 2020-23 is not further extended, then Guralnik will both pre-date and post-date the extension in Notice 2020-23, making the extension in the Notice irrelevant for purposes of Tax Court filing.

Guralnik created a logical rule for a snow storm that is a limited time event but does not work as well with an extended closure, such as the one caused by COVID-19 or the government shutdown of 2018-2019.  The problem with a long shut-down and its impact on the time to timely file a Tax Court petition results from Guralnik’s requirement that the petition be filed when the Tax Court reopens.  Some petitioners will not know the precise date the Tax Court will reopen.  Based on what happened during the 2018-2019 government shutdown, petitioners using private delivery services seemed to have the petitions returned after some failed attempts.  What happens when a private delivery service returns the petition after a failure and the petitioner fails to mail the document to the Court before the reopening date?  The Tax Court has issued conflicting rulings which exacerbates the already difficult situation.

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In the case of McClain v. Commissioner, Dk. No. 2699-19S, a deficiency case involving a pro se petitioner, the Tax Court issued an order that dismissed a petitioner who filed a petition late because of the government shut down in 2018-2019.  Mr. McClain’s petition was filed by the Tax Court on February 4, 2019.  The IRS sent the notice of deficiency on October 9, 2018.  The time for filing a petition would ordinarily have run on Monday, January 7, 2019.  Between December 28, 2018 and January 28, 2019, the Tax Court closed including closure of the clerk’s office triggering the application of Guralnik.

The Tax Court closure triggered the extended time to file in Guralnik but the extended time did not help Mr. McClain.  The cautionary tale here stems from the way Mr. McClain was treated by the Tax Court even though he made an effort to file during the shut-down.  The decision here could have implications for taxpayers have a petition come due during the time the Tax Court is closed due to the pandemic.

Although the petition was filed almost a month after the statutory due date, the due date fell at a time when the court was closed.  Attached to the petition were two FedEx envelopes one of which was shipped on January 8, 2019 and the other on January 15, 2019.  The Tax Court determined that it lacked jurisdiction over Mr. McClain’s case, despite the fact that the taxpayer attempted to mail the petition to the court twice during the period extended by the Guralnik case.  The Tax Court found that despite the two attempts to file while it was closed, the taxpayer was obliged to send a petition to it on January 28, 2019, the date it reopened.  Because the postmark on his petition was February 1, 2019, the Tax Court determined that it lacked jurisdiction. Bryan Camp also recently analyzed this case over on TaxProf Blog, which you can find here.

In McNamee v. Commissioner, T.C. Memo 2020-37, a CDP case in which the petitioner was represented, the Court cited to an announcement on its website that was not mentioned in the order entered in the McClain case.  The Court wrote in the facts:

On December 28, 2018 [a few days before the last date to file], petitioner sent a petition to this Court seeking review of the notice of determination. The petition was sent to the Court via FedEx Priority Overnight service. Because of a lapse in Government funding the Court was closed from December 28, 2018, to January 25, 2019. As a result, the envelope containing the petition was returned to petitioner as undeliverable. The Court’s website at the time instructed taxpayers that, “[i]f a document mailed or sent * * * to the Court has been returned, the party that mailed or sent the document should remail or resend it to the Court with a copy of the envelope or container in which it was first mailed or sent.” Following those instructions, petitioner on January 31, 2019, redelivered to the Court–again by FedEx Priority Overnight service–the petition and the envelope in which it had originally been delivered. The petition was received by the Court and filed on February 1, 2019.

In the discussion section of the opinion, the Court found the petition timely filed, writing:

Petitioner first mailed his petition to the Court via FedEx Priority Overnight service on December 28, 2018, three days before the deadline for filing his petition. Because his petition was timely mailed, it is deemed timely filed, and we thus have jurisdiction over this case.

Both McClain and McNamee sent their petitions to the Tax Court by an approved private delivery service while the court’s Clerk’s Office was closed.  Their petitions were returned.  They resent the petitions a few days after the Clerk’s Office reopened.  About the only difference between the two cases is that McClain first sent his petition one day after the 90-days had expired (not considering Guranik) while McNamee first sent his petition within the 30-day period for filing a CDP petition.  But, still, McClain first sent the petition while the Clerk’s Office was closed, so arguably that should be enough under Guranik and the website instructions.

I find it impossible to reconcile the results of the two cases in which the order and the opinion came out within days of each other.  I believe that the McNamee opinion interprets Guralnik in the manner most consistent with that opinion; however, McClain raises real concerns for anyone trying to provide advice on how to interpret Guralnik.  The Court advises prospective petitioners to watch its site to learn when the Court will reopen.  The Court should give petitioners plenty of warning before it reopens and should clarify its instructions.  While the instructions cited in the McNamee case say to retain a copy of petitions sent during the closure and to provide the returned mail with the petition filed after the Tax Court reopens, the instructions should alert prospective petitioners when mailing a petition during closure will not work.  Mr. McClain at least deserves an explanation why following what appeared to be the Court’s instructions and the intent of the Guralnik case still resulted in dismissal.  His dismissal was especially unfortunate because he was pro se and may not have had the tools to adequately argue his case in the way that Mr. McNamee did. 

Conservation Easement Donation and the Validity of Tax Regulations

Monte Jackel returns to discuss the Tax Court’s latest attempt at squaring the APA and the tax regulation process. Les

In Oakbrook Land Holdings LLC (154 T.C. No. 10, May 12, 2020), the Tax Court, in a reviewed opinion, upheld the validity of a Treasury regulation (reg. §1.170A-14(g)(6)) issued under section 170 of the Code relating to conservation easement donations and the perpetuity requirement. A concurrently issued memorandum opinion issued the same day (T.C. Memo 2020-54) had held that if the regulation was valid, the taxpayer was in violation of it. 

At issue in the opinion was the validity of the regulation at issue. This commentary focuses its attention on the requirement of the Administrative Procedure Act (APA) that a “legislative rule” contain a concise statement of the basis and purpose of the proposed rule. The Chevron doctrine, also addressed by the court, is not discussed here. 

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The majority opinion first stated that the regulation at issue was a legislative rule and not an interpretative one because it set forth a substantive requirement (sharing of proceeds if easement terminated) that was not set forth in the statute and which, if violated, would cause loss of the deduction. 

Underlying this conclusion was the majority’s view of a legislative rule:

“Administrative law distinguishes between interpretive and legislative agency rules. “An interpretive rule merely clarifies or explains preexisting substantive law or regulations….A legislative rule, on the other hand, “creates rights, assigns duties, or imposes obligations, the basic tenor of which is not already outlined in the law itself.”…Legislative rules have “the force and effect of law.”….

The majority then turned to the APA that sets forth the notice and comment requirement for legislative rules:

“Legislative rules are subject to APA notice-and-comment rulemaking procedures. See 5 U.S.C. sec. 553(b)…To issue a legislative regulation consistently with the APA an agency must: (1) publish a notice of proposed rulemaking in the Federal Register; (2) provide “interested persons an opportunity to participate…through submission of written data, views, or arguments”; and (3) “[a]fter consideration of the relevant matter presented,…incorporate in the rules adopted a concise general statement of their basis and purpose.” See 5 U.S.C. sec. 553(b) and (c).”

It was the third requirement that was in dispute in the case (the “concise general statement of basis and purpose requirement”). The majority opinion concluded that the concise general statement of basis and purpose requirement was satisfied in this case. 

“The APA provides that a reviewing court shall set aside agency action that is “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.” 5 U.S.C. sec. 706(2)(a). The scope of our review “is a narrow one” because “[t]he court is not empowered to substitute its judgment for that of the agency.”…We consider only whether the agency “articulate[d] a satisfactory explanation for its action.”…. While we cannot provide a reasoned basis for agency action that the agency itself did not supply, we will “uphold a decision of less than ideal clarity if the agency’s path may reasonably be discerned.”….“So long as an agency’s rationale can reasonably be discerned and that rationale coincides with the agency’s authority and obligations under the relevant statute, a reviewing court may not ‘broadly require an agency to consider all policy alternatives in reaching decision.’” …Indeed, “regulations with no statement of basis and purpose have been upheld where the basis and purpose w[ere] considered obvious.”….

The majority concluded that this test had been met even though the final regulation preamble did not specifically address the comment that pertained specifically to the regulation provision at issue. This was so principally because the point raised in the comments was only one comment out of many submitted and that specific comment did not fully address the provision at issue and alternatives to what was proposed. The majority stated:

“[A]n agency cannot reasonably be expected to address every comment it received. The APA “has never been interpreted to require the agency to respond to every comment, or to analyze every issue or alternative raised by the comments, no matter how insubstantial.” …“We do not expect the agency to discuss every item of fact or opinion included in the submissions made to it.” …“An agency need not respond to every comment.”…. In any event, “[t]he administrative record reflects that no substantive alternatives to the final rules were presented for Treasury’s consideration.” …“A comment is * * * more likely to be significant if the commenter suggests a remedy for the purported problem it identifies.”…. The APA requires “consideration of the relevant matter presented” during the rulemaking process. 5 U.S.C. sec. 553(c). 

The majority then laid out the reasons for denying the assertion of an APA violation:

“Our review of the administrative record leaves us with no doubt that Treasury considered the relevant matter presented to it…. And we find equally little merit in petitioner’s assertion that Treasury failed to “incorporate in the rules adopted a concise general statement of their basis and purpose.” See 5 U.S.C. sec. 553(c)…. No court has ever construed the APA to mandate that an agency explain the basis and purpose of each individual component of a regulation separately. “[T]he detail required in a statement of basis and purpose depends on the subject of the regulation and the nature of the comments received.” …This statement need only “contain sufficient information to allow a court to exercise judicial review.”….

There was also a concurring opinion and a dissenting opinion in the case. 

The concurring opinion, among other issues, separately addressed the APA procedural point. After concluding that the text of the statute precluded the deduction, the concurring opinion nevertheless set forth its views on both Chevron and the APA. 

On the latter point, which is the focus of this commentary, the concurrence states:

“Treasury might not have found itself in this predicament under Chevron if it had followed more carefully the APA’s procedural requirements, which are designed to help agencies consider exactly this type of issue before a rule becomes final. 

And then came the dissenting opinion. The dissent, as one would expect, disagreed with the majority’s reasoning on the APA procedural point. It states:

“In today’s case, we hold that the Treasury Department gets to ignore basic principles of administrative law that require an agency “to give reasoned responses to all significant comments in a rulemaking proceeding.” ….A court is supposed to ensure that an agency has taken “a ‘hard look’ at all relevant issues and considered reasonable alternatives.”…But if the majority is right, the Treasury Department can get by with the administrative-state equivalent of a quiet shrug, a knowing wink, and a silent fleeting glance from across a crowded room…. [T]he majority, I fear, has missed the main root of [the taxpayer’s] argument–that at the time of the regulation’s promulgation, commenters made significant comments, and Treasury failed to address them in its statement of the regulation’s basis and purpose…. The Final Rule’s statement of basis and purpose shows absolutely no mention of the [regulation provision at issue]–and no reasoned response to any of the public’s comments on those provisions…. 

The dissent then zeroed in on its objections to the conclusions of the majority:

“[W]hile we don’t demand a perfect explanation for Treasury’s decisionmaking, …we should demand some,… And here, there wasn’t any….. [T]he analysis shouldn’t stop there–what is the nature of a comment that triggers an agency’s obligation to respond? The caselaw tells us to look at a comment’s significance. Agencies must “give reasoned responses to all significant comments in a rulemaking proceeding.”….This is because “the opportunity to comment is meaningless unless the agency responds to significant points raised by the public.”….“It is not in keeping with the rational process [of APA section 553(c)] to leave vital questions, raised by comments which are of cogent materiality, completely unanswered”). So, though an agency doesn’t have to respond to all comments, it must respond to all significant comments.

The dissent then cites a series of Treasury decisions that, as a matter of fact, make the same statement that “all comments were considered” or words of similar import. But, as the dissent states, “the APA,…has no provision for agencies to use ritual incantations to ward off judicial review.” 

Where does this take us? This case shows that the Treasury and IRS need to pay more attention as to (1) what is a legislative rule as compared to an interpretative rule, and (2) has it considered all “significant” public comments and fully addressed them in the final rule. 

And for commenters to regulations, this case seems to indicate that a comment letter should state that the issue is material, fully discuss the issue, and propose a practical alternative if one is available.

All of this is clearly an area to watch in the near future.

The IRS Cracks Open the Door to Electronic Communications

In 2016 the IRS released its Future State vision, featuring seamless electronic interactions between the agency and taxpayers or their representatives. Progress towards this vision has been slow, as IRSAC noted in its 2018 and 2019 reports. (Les also wrote several posts on the Future State, its implications, and related developments.) Today the IRS remains far behind lenders, brokers and banks in the digital customer interactions it offers. While the IRS’s privacy concerns with electronic communications have not abated, faced with the coronavirus pandemic the agency adapted quickly, recognizing the need for digital communications if taxpayers’ matters are to progress as people shelter in place. In today’s post, guest blogger James Creech describes important new IRS parameters for email correspondence and electronic signatures. Christine

On March 27, 2020 as part of the IRS’s response to COVID-19 the IRS issued an internal memorandum temporarily modifying the existing prohibitions against the acceptance of electronic signatures and use of email to send and receive documents. For the Service these modifications were a necessary adjustment to the realities of remote work. It allows many of the cases in progress prior to the People First Initiative to continue to move forward even if it is just to avoid a statute of limitations expiring. It is also an acceptance that many taxpayers who must interact with IRS employees are sheltering in place and may lack access to any technology beyond a smartphone. It is interesting to note that the memorandum does not specify an end date for these temporary procedures unlike many of the other aspects of COVID-19 that expire on July 15, 2020.

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Electronic Signatures

The most important part of the IRS accepting electronic signatures is not how they accept them but rather what types of documents have been approved for electronic signatures. Electronic signatures are temporarily permitted on documents required to extend a statute of limitations or to close an agreed upon matter such as Forms 870 and 872. Beyond those forms, the memorandum only lists a few specific forms by number but it appears that it should be interpreted broadly. As a catch all, it states that long as the form is not normally subject to standard filing procedures, ie a 1040x or 8832, an electronic signature is permitted and the document can be submitted electronically. An IRS employee can request further guidance from their internal policy office on the specific email acceptance policy. Given that the internal guidance is vague it might be incumbent on a practitioner to remind an IRS employee that this option is available should there be some hesitation about accepting particular form.

One other routine document specifically listed by the memorandum is a power of attorney. On the surface the inclusion of the 2848 seems of limited utility. The CAF units are located in service centers that are currently closed, new matters are not being assigned to the field, and adding a power of attorney midway through working through an issue with a Revenue Agent is relatively rare. However for tax clinics and taxpayers who need to either add or change a representative mid stream specifically stating a power of attorney can be filed with an electronic signature is a useful inclusion.

If a document is eligible for an original electronic signature, the signature itself can be submitted in a number of widely used file formats including pdf and jpeg file types.

The real value for practitioners in the modification is the ability to send in photographs of a signature, or to have a client electronically sign a document on smartphone without the need to print the document at all, and still have it accepted by the IRS. Without this ability many taxpayers could potentially have to either have to physically meet their representative in order to sign a document, or worse yet many pro se taxpayers could be unable to meaningfully participate in moving cases forward because they lack access to a printer or a scanner.

Emailed Documents

The IRS now allows employees to both send and receive emails, including emails with attachments. For practitioners receiving emails the procedures are similar to receiving a physical copy of information from the IRS. The attachment is sent as a standalone email in an encrypted SecureZip. The 12 character password is then relayed to the practitioner over the phone, or by some other means than email, and the attachment can then be opened.

Sending documents to the IRS is a little more complicated. In order to protect the IRS, incoming email is not being accepted without an established relationship between the taxpayer or their representative. The IRS employee must also first request that the documents be sent through the normal e-fax channels prior to offering the use of email.

If the taxpayer is unable to send an e-fax or wishes to use email the employee must still take steps to dissuade them from doing so. They must advise the taxpayer that email is not secure. They must request that all attachments should be encrypted to the best of the taxpayer’s ability and baring that any information must be in a valid format. Links to files in the cloud are not accepted. Finally they should advise the body and subject line of the email must not contain any sensitive or identifying information. All of these steps are perfectly reasonable for security purposes but may be intimidating to some taxpayers.

If the taxpayer is sending a document that contains an electronic signature the taxpayer must attest to the signature by including a statement similar to “The attached [name of document] includes [name of taxpayer]’s valid signature and the taxpayer intends to transmit the attached document to the IRS.” It is worth noting that if there are technical issues with the .gov email address, IRS employees are prohibited from using personal email addresses as a back up.

Privacy Concerns

Part of the reluctance on behalf of the Service to accept emailed documents in the past has been a well-founded worry about introducing viruses into a secure system. From the IRS’s point of view requiring a known taxpayer to opt in to email, and follow the required procedures and formats, should greatly reduce this risk.

Email for the practitioner has its own set of privacy concerns. From a technical perspective sending an email to the IRS is no different than an e-fax. E-faxes are routed to IRS employees’ email addresses so the only difference is the terms of service for the e-fax vs the email provider.

Slightly different is what happens to the data once it is on a laptop in the IRS employee’s home. Fortunately for taxpayers the IRS has a robust set of data privacy protections that can be found in Section 6103. Generally speaking the IRS has done a good job of training employees on the importance of Section 6103. Without going into much detail, Section 6103 prohibits the disclosure or inspection of sensitive taxpayer information by anyone who is not authorized to view the material. The punishment for violations of Section 6103 can range from potential criminal charges for willful disclosures to administrative sanctions, including termination, for less serious breaches. Violations of Section 6103 also give taxpayers a right to a civil cause of action against the United States under IRC Section 7431.

Section 7431 was given additional teeth in the Taxpayer First Act of 2019 that is especially relevant right now given that all IRS employees are working remotely. Even though the IRS has safeguards in place to protect taxpayer information, such as requiring that laptops containing sensitive data are encrypted, accidents do happen.

Prior to the Taxpayer First Act taxpayers were only notified of a Section 6103 disclosure violation if the violation resulted in criminal charges. This left many taxpayers in the dark if return information was disclosed in a non willful manner. The Taxpayer First Act significantly broadened this disclosure to impacted taxpayers, including when IRS “proposes an administrative determination as to disciplinary or adverse action against an employee arising from the employee’s unauthorized inspection or disclosure of the taxpayer’s return or return information” and it requires that the IRS affirmatively inform taxpayers of the civil cause of action against the government. It remains to be seen whether there will be an uptick in Section 6103 violations but if expanded use of email does not trigger a wave of taxpayer notifications, then privacy may not be such a barrier to making this modification permanent.

While the limited acceptance of electronic signatures and use of email was expanded to benefit IRS employees during this difficult time, it is impossible to see this as anything but beneficial for taxpayers. Even with the required hurdles it makes engagement with the IRS easier, quicker, and more approachable to anyone who does not have a scanner and an e-fax service.

Federal Circuit Panel Calls For Reconsidering the Court’s Precedent Holding Refund Claim Filing and Timing Requirements Jurisdictional to a Refund Suit

In posts too numerous to cite, I have been calling for the courts to reexamine their prior precedents calling many tax filing deadlines and administrative exhaustion requirements jurisdictional.  In non-tax opinions issued by the Supreme Court since 2004, the Court has changed its precedent and held that “claims processing rules” that merely move litigation along are now almost never jurisdictional.  See, e,g. United States v. Wong, 575 U.S. 402 (2015) (Federal Tort Claims Act suit filing deadlines in agency and courts are not jurisdictional and are subject to equitable tolling); Fort Bend County v. Davis, 139 S. Ct. 1843 (2019) (Title VII charge filing requirement is not jurisdictional) (see here for my thoughts on the implications of Fort Bend to the tax world).  Now, a panel of the Federal Circuit in a pro se tax protester case, Walby v. United States, 2020 U.S. App. LEXIS 13711 (Apr. 29, 2020), has joined a panel of the Seventh Circuit in Gillepsie v. United States, 670 F. App’x 393, 394–95 (7th Cir. 2016), in questioning their Circuit’s precedent holding that the administrative tax refund claim filing requirement at section 7422(a) is a jurisdictional requirement to the brining of a refund suit.  Further, the Federal Circuit panel in the Walby opinion stated it believes that the filing deadlines for tax refund administrative claims at section 6511(a) are no longer jurisdictional, also calling for overturning its Circuit’s precedent.

It will take an en banc Federal Circuit opinion to overrule the Circuit’s prior precedents, so the panels’ opinion in Walby doesn’t change that court’s precedents, yet.  But, it certainly makes it likely that the issues will reach an en banc panel soon.

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What is perhaps most surprising about the Walby panel’s statements is that the opinion below did not raise these concerns about recent Supreme Court opinions, but simply followed the Federal Circuit precedents holding that sections 6511(a)’s and 7422(a)’s requirements are jurisdictional.  Further, the DOJ brief in Walby in the Federal Circuit did not discuss the potential impact of the recent Supreme Court case law on this question, but merely cited prior Federal Circuit precedent.  And the pro se taxpayer, of course, did not complain about the Circuit precedents.  So, the panel on its own chose to research these issues and make its statement in a published opinion.

Here is what the Federal Circuit panel wrote in Walby on these issues:

In Walby’s case, her 2014 claims were deemed paid on April 15, 2015 because withheld income taxes are deemed to have been paid on April 15th of the following year. I.R.C. § 6513(b). To be timely, her administrative refund claim should have been filed with the IRS by April 15, 2017. But Walby did not file her refund claim until December 22, 2017. Walby’s 2014 refund claim was, therefore, untimely and the Claims Court properly dismissed that claim.

There is one aspect of the court’s conclusion regarding this claim, however, that warrants additional examination. The Claims Court concluded that, because Walby’s 2014 administrative refund claim was untimely, pursuant to 26 U.S.C. § 7422(a), it lacked subject matter jurisdiction over that claim. Although this conclusion is correct under our existing case law, see, e.g.Stephens v. United States, 884 F.3d 1151, 1156 (Fed. Cir. 2018), it may be time to reexamine that case law in light of the Supreme Court’s clarification that so-called “statutory standing” defects — i.e., whether a party can sue under a given statute — do not implicate a court’s subject matter jurisdiction. Lexmark Int’l, Inc. v. Static Control Components, Inc., 572 U.S. 118, 128 n.4 (2014)see also Lone Star Silicon Innovations LLC v. Nanya Tech. Corp., 925 F.3d 1225, 1235 (Fed. Cir. 2019) (recognizing that, following Lexmark, it is incorrect to classify “so-called” statutory-standing defects as jurisdictional).

The Tucker Act grants the Claims Court jurisdiction to render judgment “upon any claim against the United States founded either upon the Constitution, or any Act of Congress . . . in cases not sounding in tort.” 28 U.S.C. § 1491(a)(1). Additionally, 28 U.S.C. § 1346(a) provides that the Claims Court shall have original jurisdiction (concurrent with the district courts) of “[a]ny civil action against the United States for the recovery of any internal-revenue tax alleged to have been erroneously or illegally assessed or collected.” As such, Walby’s failure to meet the § 7422(a) statutory requirement of a timely administrative claim for her 2014 tax claim would not seem to implicate the Claims Court’s subject matter jurisdiction; rather, it appears to be a simple failure to meet the statutory precondition to maintain a suit against the government with respect to those taxes.

The Supreme Court has not addressed § 7422(a) following Lexmark. We note, however, that the Court’s most recent discussion of § 7422(a) does not describe it as “jurisdictional.” See Clintwood Elkhorn Mining Co., 553 U.S. 1 at 4–5, 11–12. And, although our court has continued to refer to this statute as jurisdictional following Lexmark, we have not yet addressed the implications of that case and the many Supreme Court cases applying it.2

In view of the Supreme Court’s guidance in Lexmark, it may be improper to continue to refer to the administrative exhaustion requirements of § 7422(a) and § 6511 as “jurisdictional prerequisites.” That these provisions concern the United States’ consent to be sued would not seem to change this conclusion. The Supreme Court has “made plain that most time bars are nonjurisdictional.” United States v. Kwai Fun Wong, 575 U.S. 402, 410 (2015). In Kwai Fun, the Court held that the time bar in the Federal Tort Claims Act is nonjurisdictional. In doing so, it rejected the Government’s argument that, because that time bar is a precondition to the FTCA’s waiver of sovereign immunity, the time bar must be jurisdictional. As it had in Lexmark, the Court distinguished jurisdictional statutes from “quintessential claim-processing rules which seek to promote the orderly progress of litigation, but do not deprive a court of authority to hear a case.” Id. (internal quotation marks omitted). It did not except statutes that implicate the government’s waiver of sovereign immunity from that distinction.

In reaching this conclusion, the Court relied on Arbaugh v. Y&H Corp., where, finding Title VII’s numerical employee threshold nonjurisdictional, the Supreme Court stated:

“If the Legislature clearly states that a threshold limitation on a statute’s scope shall count as jurisdictional, then courts and litigants will be duly instructed and will not be left to wrestle with the issue. But when Congress does not rank a statutory limitation on coverage as jurisdictional, courts should treat the restriction as nonjurisdictional in character.”

546 U.S. 500, 515–16 (2006). This “clear statement” rule “does not mean Congress must incant magic words. But traditional tools of statutory construction must plainly show that Congress imbued a procedural bar with jurisdictional consequences.” Kwai Fun, 575 U.S. at 410 (internal quotation marks omitted). There is no such clear statement apparent in the statutes at issue here, 28 U.S.C. § 7422(a) and § 6511(a).3 Other courts also have begun to question whether the time limits and administrative exhaustion requirements in these and other tax provisions should continue to be deemed jurisdictional. See Gillespie v. United States, 670 F. App’x 393, 394–95 (7th Cir. 2016) (whether § 7422(a) is jurisdictional); Bullock v. I.R.S, 602 F. App’x 58, 60 n.3 (3d Cir. 2015) (whether I.R.C. § 7433 is jurisdictional). As to at least one administrative exhaustion requirement, one court has held that it should not be deemed jurisdictional. See Gray v. United States, 723 F.3d 795, 798 (7th Cir. 2013) (I.R.C. § 7433 “contains no language suggesting that Congress intended to strip federal courts of jurisdiction when plaintiffs do not exhaust administrative remedies”); cf. Duggan v. Comm’r of Internal Revenue, 879 F.3d 1029, 1034 (9th Cir. 2018) (I.R.C. § 6630(d)(1)‘s 30-day filing deadline “expressly contemplates the Tax Court’s jurisdiction . . . the filing deadline is given in the same breath as the grant of jurisdiction.”).

Accordingly, although the Claims Court properly dismissed Walby’s 2014 refund claim because she did not meet the prerequisite for bringing such a claim, we think that, under LexmarkArbaugh, and their progeny, the court likely did not lack subject matter jurisdiction over this claim.

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2. See, e.g., Stephens v. United States, 884 F.3d 1151, 1156 (Fed. Cir. 2018); see also Ellis v. United States, 796 F. App’x 749, 750 (Fed. Cir. 2020); Langley v. United States, 716 F. App’x 960, 963 (Fed. Cir. 2017).

3. We are mindful of the Supreme Court’s pre-Lexmark jurisprudence concerning § 7422(a). In United States v. Dalm, the Court held that the district court lacked jurisdiction over gift tax refund suit because “[d]espite its spacious terms, § 1346(a)(1) must be read in conformity with [§ 7422(a) and § 6511(a)] which qualify a taxpayer’s right to bring a refund suit upon compliance with certain conditions.” 494 U.S. 596, 601 (1990). The Court referred to the statutes as “controlling jurisdictional statutes.” Id. at 611. But this view was a departure from the Court’s prior commentary on a predecessor to § 7422(a), recognizing that it “was not a jurisdictional statute at all; it simply specified that suits for recovery of taxes, penalties, or sums could not be maintained until after a claim for refund had been submitted.” Flora v. United States, 362 U.S. 145 (1960).

If you would like to read a little of the Gillespie opinion of the Seventh Circuit, see my post on it here.  It was the statements within Gillespie questioning whether section 7422(a)’s claim-filing requirement is still jurisdictional that the DOJ cited for its decision, post-oral argument, in Tilden v. Commissioner, 846 F.3d 882 (7th Cir. 2017), to file a memorandum of law arguing that the section 6213(a) Tax Court deficiency jurisdiction filing deadline is still jurisdictional – a point with which the Seventh Circuit in Tilden agreed, despite Gillepsie.  See my post on Tilden here.  Of course, as I have noted before, the Harvard tax clinic continues to litigate the issues under section 6213(a) of whether the filing deadlines are still jurisdictional or subject to equitable tolling; companion cases on that issue are currently pending in the Ninth Circuit (and have been pending for over 6 months after oral argument there).

Observations

For most refund suit plaintiffs, it will make little difference whether the section 6511(a) and 7422(a) requirements are jurisdictional, since no one expects the Supreme Court to overturn its ruling in United States v. Brockamp, 519 U.S. 347 (1997), that the filing deadline of section 6511(a) is, in any case, not subject to equitable tolling.  So, who might benefit from making these two requirements nonjurisdictional?  Well, there are always a small number of cases where the DOJ could make an argument that the refund claim filing deadline was missed or that a refund claim was not in proper form, but the DOJ either chose not to raise those issues or just missed that the DOJ had potential arguments under those provisions.  Under current law, treating the requirements as jurisdictional, courts should step in in such cases and police their jurisdiction by raising issues not raised by the DOJ.  But, if the claim filing requirement and claim filing deadline are not jurisdictional to a refund suit, then, in such cases, the court will no longer worry about the issues if the DOJ never raises them.  Non-jurisdictional conditions of suit are merely affirmative defenses.  If the DOJ doesn’t raise an affirmative defense (either accidentally or knowingly), it simply forfeits or waives the defense.  Indeed, if the DOJ wanted to expeditiously litigate a test case brought by a plaintiff who hadn’t yet filed a refund claim, if the claim filing requirements is no longer jurisdictional, the DOJ could choose to waive any argument that a claim should have been filed before suit was brought.

Analyzing the IRS FAQs on Incarcerated and Non-Resident Taxpayers

On May 6, the IRS released four new FAQs (FAQ 10, 11, 12, and 41) relating to deceased, non-resident alien, and incarcerated individuals with respect to economic impact payments. The FAQs provide advice regarding both eligibility for payments (FAQ 10-12) and detailed procedures for returning payments that an individual should not have received (FAQ 41).

FAQs 10 – 12 provide that deceased, non-resident, and incarcerated taxpayers are not eligible for payments. In this post, I discuss the (lack of a) legal rationale for the Service’s conclusion with respect to incarcerated and non-resident taxpayers, along with practical problems the IRS is likely to encounter. In a subsequent post, Nina Olson will discuss similar issues with respect to deceased taxpayers.

For incarcerated taxpayers, the IRS advice strikes me as contravening the clear statutory language that Congress enacted. The question is more complicated for stimulus recipients who are non-resident aliens, but similarly lacks a solid legal foundation.

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Section 6428 Overview

As Carl Smith explained in one of our first posts on the economic impact payments, the payments are provided in section 2201(a) of the CARES Act and codified in section 6428 of the Code. Section 6428(a) & (b) provide the payments as a refundable credit for the 2020 tax year. Section 6428(c) provides AGI limitations. Finally, one must be an “eligible individual” under 6428(d). This includes “any individual other than (1) [a] non-resident alien . . . (2) an individual with respect to whom a deduction under section 151 is allowable to another taxpayer . . . and (3) an estate or trust.”

But as nearly everyone now knows, so that taxpayers don’t have to wait to receive the credit when filing their 2020 tax returns in 2021, the IRS is providing those payments in advance; by April 17, the IRS had issued nearly 90 million payments. Section 6428(f) authorizes this advance payment mechanism.

Section 6428(f)(1) provides that “each individual who was an eligible individual for such individual’s first taxable year beginning in 2019 shall be treated as having made a payment against [their income] tax . . . for such taxable year in an amount equal to the advance refund amount for such taxable year.” So, we look to see whether, in 2019, an individual met the “eligible individual” definition. If so, they get the “advance refund amount”, which section 6428(f)(2) defines as the amount that would have been allowed as a credit under section 6428(a) if it had been enacted for 2019. Section 6428(f)(3) directs the Secretary to issue the advance payments as quickly as possible. Finally, if a taxpayer hasn’t filed a return for 2019, the Secretary may use a 2018 return in a similar manner (and similarly determine whether the taxpayer was an “eligible individual” in that tax year); otherwise, they may use information provided on Forms SSA-1099 and RRB-1099 issued in 2019 to send out the payments. See I.R.C. § 6428(f)(5).

The key point, however, in section 6428(f) is that if the individual is an “eligible individual” for 2019 (or 2018), they should get the advance payment, regardless of their eligibility in 2020. Section 6428(f)(1) states that “an eligible individual for such individual’s first taxable year beginning in 2019 [or 2018] shall be treated as having made a payment against the tax imposed . . . for such taxable year.” Note also that this does not say “each eligible individual who was an eligible for such individual’s first taxable year…” It just says “individual.” This section, as I read it and explain below, applies equally to the incarcerated, non-resident, and deceased taxpayers that the IRS declares ineligible (the latter of which Nina Olson blogged about yesterday).

What happens if the advance payment is more than what the taxpayer should have received? Section 6428(e) provides that the 2020 credit is reduced, but not below zero. That’s critical, as this language means that taxpayers don’t have to pay back the credit. For example, if a taxpayer’s 2019 AGI qualified them for a full advance credit of $1,200, but their 2020 AGI bumps them into the phaseout range, they don’t have to pay back the difference.

With the background out of the way, let’s dive into the categories of folks the IRS has excluded from 6428. I believe the IRS FAQs are incorrect in all of these cases, but for different reasons.  

Incarcerated Taxpayers

IRS FAQ 12 provides:

Q12. Does someone who is incarcerated qualify for the Payment? (added May 6, 2020)

A12. No. A Payment made to someone who is incarcerated should be returned to the IRS by following the instructions about repayments. A person is incarcerated if he or she is described in one or more of clauses (i) through (v) of Section 202(x)(1)(A) of the Social Security Act (42 U.S.C. § 402(x)(1)(A)(i) through (v)). For a Payment made with respect to a joint return where only one spouse is incarcerated, you only need to return the portion of the Payment made on account of the incarcerated spouse. This amount will be $1,200 unless adjusted gross income exceeded $150,000.

This presents the easiest case. The Service’s position is flat wrong. Nothing in section 2201 of the CARES Act generally prevents payments to incarcerated individuals. An “eligible individual” is defined as “any individual”, so long as the individual is not (1) a non-resident alien, (2) a dependent, or (3) an estate or trust. There could potentially be situations where incarcerated individuals qualify as dependents under section 151; however, those are individualized determinations not subject to a general rule.

Why would the IRS have made this sort of clear error? I suspect it harkens back to the 2009 Stimulus (hat tip to Seth Hanlon who keyed me into these provisions on Twitter). In section 2201(a)(4) of the American Recovery and Reinvestment Act, Congress excluded incarcerated individuals and non-U.S. citizens not lawfully present in the United States from receiving stimulus payments. It did so through referencing provisions of the Social Security Act that similarly exclude these individual from receiving Social Security payments: 42 U.S.C. § 402(x) and (y). There are a number of conditions under 42 U.S.C. § 402(x), but suffice to say it excludes many incarcerated individuals from receiving payment. Beyond the provisions in the Social Security Act, various other incarceration-related triggers excluded payments to incarcerated individuals. See American Recovery and Reinvestment Act § 2201(a)(4)(A)-(C).

No such provision appears in section 2201 of the CARES Act, or indeed, anywhere within the CARES Act. To check, I performed a text search on the PDF version of the CARES Act for every provision referenced in the 2009 Act. None appears.

Perhaps the IRS is concerned with these payments not supporting the type of spending that Congress intended. Congress enacted the stimulus payments to stimulate the economy with consumer spending, but did not prescribe the type of consumer spending for these payments. Congress did not say “spend the money in the mainstream economy.” Incarcerated individuals face spending needs too. They have families. They may have child support obligations to which the stimulus payment would be offset, or their spouses may be struggling to maintain the family home to which the individual may be released. The IRS provides no explanation as to why it decided to harm these non-incarcerated individuals.

The FAQ also harms those who may be exonerated, and who might be forever deprived of the stimulus payment under the IRS’s guidance. Incarcerated wrongly, they are also wrongly deprived of the payment. With the statute’s temporal limitation on the issuance of the stimulus payments, those exonerated two years from now, for example, will not have the payments they should have received had they not been wrongly incarcerated.

Filing a 2020 tax return next year to remedy this situation provides only an incomplete solution. Just as the unemployed or underemployed worker needs the stimulus payment now, so do those incarcerated individuals whom the IRS is prohibiting from receiving the stimulus payment.

The FAQ also rests on the faulty presumption that incarceration is a permanent lifestyle choice. Yet even the Tax Court recognizes that not all new residences are permanent homes: the inquiry is whether the taxpayer faces a temporary absence due to special circumstances. Incarceration is merely the involuntary removal from the taxpayer’s principal place of abode with no manifestation of intent to change abode. See Rowe v. Commissioner, 128 T.C. 13, 27 (2007) (Goeke, J., concurring). Even a resident near death in a nursing home is considered to be temporarily absent from his home. See Hein v. Commissioner, 28 T.C. 826 (1957).

Putting the reasons for, harms of, and the faulty premises of the FAQ aside, many practitioners are wondering about what periods of incarceration trigger the exclusion to incarcerated individuals. These questions are largely answered in the statute the FAQ cites: 42 U.S.C. § 402(x). Generally, someone has to be incarcerated pursuant to a conviction for more than 30 days. 42 U.S.C. § 402(x)(1)(A)(i). But what does that mean for how the IRS is deciding not to issue payments? What period does the IRS use to make this determination? The FAQ is also silent as to which year matters. Is it 2019 (or 2018 in the absence of the 2019 return), the year for which the IRS will search for taxpayer information? Is it 2020, the tax year for which the stimulus acts as a credit? Does it matter if the taxpayer is in pre-trial detention? What if the taxpayer is incarcerated for less than twelve months? What if the taxpayer is in home detention? With the release of non-violent prisoners to home detention to avert the spread of COVID-19, this population is growing. What if the taxpayer is in a work-release program, a state of semi-detention? The IRS must define the population it has determined should not receive the stimulus payment if it wants to limit the ability of a group to receive that benefit. In this regard, the FAQ raises more questions than it answers.

Finally, there are a couple of downstream consequences to note, absent further action from the IRS or Congress. First, while this is an incomplete remedy, incarcerated taxpayers who do not receive an advance payment should nevertheless file a tax return for 2020 to claim the 2020 refundable credit (to the extent they are not excluded as dependents under 6428(d)(2)). Second, those receiving payments on behalf of incarcerated taxpayers should consider disregarding the IRS FAQ, since it contravenes the clear statutory text that Congress provided.

Non-Resident Taxpayers

IRS FAQ 11 provides:

Q11. Does someone who is a resident alien qualify for the Payment? (added May 6, 2020)

[A]11. A person who is a non-resident alien in 2020 is not eligible for the Payment. A person who is a qualifying resident alien with a valid SSN is eligible for the Payment only if he or she is a qualifying resident alien in 2020 and could not be claimed as a dependent of another taxpayer for 2020. Aliens who received a Payment but are not qualifying resident aliens for 2020 should return the Payment to the IRS by following the instructions about repayments.

Unlike incarcerated taxpayers, Congress clearly indicated that non-resident aliens (i.e., non-U.S. citizens who do not have a green card, meet the substantial presence test, or otherwise qualify as resident aliens under section 7701(b)(1)(A)) are not “eligible individuals.” See I.R.C. § 6428(d)(1). So, if you’re a non-resident alien who files a 2020 tax return, no credit will be allowed. Clear enough.

But what if the IRS sent you a check anyway? The IRS FAQ indicates that 2020 non-resident aliens who received a payment should return it. That advice isn’t necessarily wrong, but it appears incomplete.

As noted above, section 6428(f) provides advance payments depending on whether one is an eligible individual in 2019 or 2018, as the case may be. There are circumstances where a resident alien in 2019 could become a non-resident alien in 2020 (e.g., meeting the substantial presence test in one year but not the other). If an individual legitimately was a resident alien in 2019, however, section 6428(f)(1) treats the taxpayer as having made a payment in 2019 and compels the Secretary to refund that amount to the taxpayer. And while no payment is authorized for 2020, section 6428(e)(1) provides only a reduction of the 2020 payment, capped at $0. There are no other repayment provisions provided in the statute. Therefore, for taxpayers who were resident aliens under section 7701 in 2019, the IRS appears to lack any statutory basis for compelling these taxpayers to return these payments.

The question is more complicated if an individual appeared to be an eligible individual for 2019, but was not. For example, I’ve heard anecdotes of international students mistakenly filing resident tax returns for tax year 2019, thereby receiving the stimulus payment. In reality, they should not have been treated as residents due to section 7701(b)(5)(A)(iii). In these limited situations, I think the IRS has sounder legal footing to request a return of the payment.

Moreover, because the substantial presence test counts the days a taxpayer is physically present in the United States, many taxpayers may not yet know whether they will be classified as resident or non-resident aliens in 2020. Given worldwide travel restrictions, it’s perhaps easier for these taxpayers to guess where they’ll be physically present through the end of 2020 (I, for one, plan to spend the foreseeable future at my dining room table in South Bend). But the FAQ still asks taxpayers to predict the future to some extent.

Here’s the bottom line, pending further Congressional action. The IRS FAQs for incarcerated taxpayers lack any grounding in statute. If they haven’t received an advanced payment, incarcerated taxpayers should file 2020 returns claiming the credit. If they have received an advanced payment, incarcerated taxpayers should consider disregarding the IRS FAQ.

For non-residents taxpayers, those who are non-residents in 2020 definitely can’t claim a credit on their 2020 tax return. But those who were “eligible individuals” in 2018 or 2019 have a good argument to retain the advance payments they’ve already received.

If the IRS doesn’t rescind the guidance in the FAQ, then more questions will arise. Will it issue notices of deficiency to taxpayers who received these payments? A longer post is necessary to address this question, but suffice to say that if the IRS is correct in its statutory argument (and I am wrong), then the IRS may not have authority to issue notices of deficiency. See United States v. O’Bryant, 49 F.3d 340 (7th Cir. 1995). Will it then really proceed with erroneous refund litigation over $1,200 payments? The IRS should think twice before maintaining this legally dubious guidance, let alone litigating these issues.

Of Mountains and Molehills: A Further Analysis of EIP To Dead People

Earlier today Nina Olson discussed EIP being issued to deceased taxpayers. Professor Bryan Camp responds to that post below. Les

I agree with much of Nina Olson’s thoughtful post this morning on PT.  However, I also think both Nina’s analysis and the IRS FAQ may be wrong to make no distinction between people who died before or after January 1, 2020.  

This post will first explain why date of death may be an important distinction.  It will then argue that concerns about the IRS making erroneous EIP payments to dead people is making a mountain out of a molehill.

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(1) It May Matter When Death Occurred

Section 6428(a) creates an entitlement to a refundable credit for tax years starting in 2020.  My take is to start with the entitlement.  The question of who is entitled to what amount of refundable credit is covered by (a).  It allows an “eligible individual” a “credit against the tax imposed by subtitle A for the first taxable year beginning in 2020.”  

I do not read §6428(f) as creating an entitlement separate from subsection (a). Its purpose is to authorize the advance payment of that to which an “eligible individual” is entitled.  It both authorizes the IRS to send out a payment of the 2020 refundable credit in advance of taxpayers claiming the credit and it requires the IRS to figure to whom it should send the advance credit based on 2019 or 2018 returns.    

Supporting my reading of how these two subsections work together is the true-up language in subsection (e).  It creates a one-way ratchet that directs taxpayers to offset their claimed 2020 credits against the advanced payments they actually received.  Thus advanced payments will reduce the amount of credit taxpayers can claim on the 2020 returns.  Importantly, however, the amount offset cannot reduce their 2020 credit below zero.  That permits taxpayers to keep excess advance payments while being able to claim underpaid credits. 

The true up provisions are the reasons why taxpayers whose 2018 or 2019 returns show the existence of a dependent do not have to return the $500 they receive if the dependent has ceased being a dependent in 2020, for whatever reason (including death of the dependent).  The $500 will have turned out to have been erroneous because—again go to (a)—the basic entitlement is that this is a refundable credit for tax year 2020.  

I think it important to note that the true-up (and consequent forgiveness of erroneous advance payment) occurs only when determining the tax obligations for 2020, which for most people will happen on a 2020 return.

Folks who died before January 1, 2020, are not entitled to the refundable credit authorized by subsection (a).  Perhaps obviously, neither will such folks be able to file a return for 2020 on which to have errors forgiven by the subsection (f) true up provisions.  

Ms. Olson references the definition of “eligible individual” in §6428(d)(1).  That provision says that an “eligible individual” must actually be an individual.  It seems to me pretty plain that taxpayers who died before 2020 are no longer individuals in 2020.  Therefore, they cannot be “eligible” individuals.   

In short, I do not agree that (f) creates a separate entitlement to an amount.  It creates an entitlement to timing of an amount.  But that is just my reading.  I think Ms. Olson and others have a reasonable position that taxpayers who died in 2018 or 2019 are indeed eligible to receive the advance payment of the 2020 refundable credit.  You get there by reading subsection (f) as creating an entirely separate entitlement from subsection (a).  The strongest support for doing that is the language in subsection (f)(1) and (f)(2) that seems to create a counter-factual that pretends the credit allowed by (a) “would have been allowed as a credit under this section for such taxable year.”  

I disagree with that interpretation but for purposes of keeping this post short let’s just leave it that this: I think everyone agrees (or should agree) that EIP payments sent to taxpayers who died after January 1, 2020 are proper but there is disagreement about the legality of payments made to taxpayers who died before January 1, 2020.  Given that, the more important question is perhaps, what should be done?

Here’s my answer.

(2) Chill

Assuming some payments to dead people are erroneous, what should the IRS or Congress do about it and what should taxpayers do about it?

(A) IRS and Congress

The IRS does an amazing and fantastic job in determining and collection the correct tax for taxpayers.   But when you are dealing with over 150 million individual taxpayers and trillions of tax dollars, a small percentage of error looks like a really big number.  That is the political game that Congress and others repeatedly and disingenuously play with the IRS.  Various so-called “oversight” functions repeatedly express horror! horror! that the IRS either erroneously over-collects or erroneously under-collects billions of dollars per year. 

Get a grip.  Chill out.  If you want perfection, die and go to Heaven.  Otherwise, you have to evaluate the nature of the errors and what it costs to fix them.  

So it is here.  In 2018 this CDC report said about 2.8 million people died.  Let’s say 2.5 million of them were taxpayers.  And let’s say another 2.5 million died in 2019.  So that’s 5 million erroneous payments of $1,200 each.  Looking at the back of my envelope that adds up to $6 billion in erroneous refunds.  Max.  Heck, I bet that’s just a drop compared to the money Congress wastes in spending each year. 

The IRS has more important matters to deal with than to go chasing some theoretical 5 million payments made to taxpayers who died in 2018 or 2019.    

Also, the IRS has extremely limited tools to collect back those amounts.  That is because these erroneous EIP payments are very much like non-rebate erroneous refunds.  When the IRS sends an erroneous refund because of some error in determining a taxpayer’s correct tax (such as mistakenly allowing a deduction or exclusion that should not have been allowed) such refunds create a deficiency that the IRS can get back by either acting with the appropriate limitation period to re-assess the tax (and then collect administratively by offset or lien or levy) or by filing suit to recover the erroneous refund under §7422 within the time permitted by §6532.  

In contrast, erroneous refunds that result from some action that is not connected to a determination of liability (such as a clerical error in inputting a $100 as $1,000 and sending $900 back to the taxpayer) are called non-rebate erroneous refunds and those may only be collected by filing suit. United States v. O’Bryant, 49 F.3d 340 (7th Cir. 1995)(“The money the O’Bryants have now is not the money that the IRS’ original assessment contemplated, since that amount was already paid.  Rather, it is a payment the IRS accidentally sent them. They owe it to the government because they have been unjustly enriched by it, not because they have not paid their taxes.”).

I think the EIPs sent to folks who died before 2020 would be, technically, rebate refunds because they would be connected to a substantive determination that they were entitled to the refund, based on their 2018 or 2019 filed returns.  The determination would be erroneous.  But they would be, functionally, like non-rebate refunds because a TP who died before Jan 2020 cannot, by definition, have a deficiency of tax for 2020.  So forget re-assessment. Also, fun fact: that also means there is no transferee liability for the heir or family member who cashed the EIP check and used the erroneous EIP payment.

So if my reading is correct, there is no opportunity to re-assess and the only action the IRS can take is to beg the Department of Justice Tax Division to file suit.

Good luck with that.  The DOJ is unlikely to file suit.  It’s a busy place and filing a suit for $1,200 is just not worth their time and effort.  

So to the IRS I would say: Chill out.  Let it go.  To Congress I say: move on.  Go do some actual oversight on the huge opportunities you have created for graft and corruption in the distribution of various relief funds you created.  Leave the dead alone.  

(B) Taxpayers 

Just because the IRS may not have the proper tools to collect an erroneous refund, however, does not mean a taxpayer has no legal duty to return it.  

I would advise a client who received an EIP check or direct deposit for a taxpayer who died before January 1, 2020 to contact the Service for instructions on how to return the EIP.  My reading of the law is that the client has a legal duty to return the money.  The notion that there is no legal duty to return a payment made to you in error by the federal government is not only a dangerous notion, it is flat out wrong.  Taking something that is not yours and to which you have no right to is generally called stealing.  The notion that you cannot steal from the federal government denigrates the rule of law by suggesting legal rules do not apply as between a citizen and the government.  

More importantly the notion is also belied by 18 USC §641.  That statute makes it a felony to steal more than $1,000 from the federal government.  

This type of scenario is not limited to EIP.  The IRS sends out billions of non-rebate erroneous refunds each year.  I tell my students that they need to advise their clients who receive a non-rebate erroneous refund to contact the Service for instructions on how to return the money.  They should explain 18 USC 641 to their clients.  There is, in fact, a legal duty to return that to which you are not entitled.  

So yes, taxpayers who got EIP payments for folks who died in 2018 or 2019 do, IMHO, have a legal duty to return the money. However, the IRS is unlikely to be able to enforce it.  That is why the FAQ uses the word “should” which is similar to the language that the Service uses in letters to TPs asking them to return non-rebate erroneous refunds.  

But to say that a taxpayer has no legal duty just because the IRS cannot easily enforce the duty is not good.  It undermines the rule of law to say one need not comply with the law just because one is unlikely to get caught or punished.  We already have a HUUUGE problem with the guy currently stinking up the White House undermining the rule of law in this country.  Just because he is corrupt does not mean we have to be.  

The Uncertainty of Death and Taxes: Economic Stimulus Payments to Deceased Individuals

In today’s post Contributor Nina Olson explores the issue of stimulus payments being issued to deceased individuals.

For the last month or so, media reports have highlighted the fact that Economic Impact Payments (EIPs) were sent to deceased taxpayers.   After weeks of silence, on May 6, 2020, the Internal Revenue Service added FAQ 10 to its coronavirus tips website, which follows:

Q10:  Does someone who has died qualify for the Payment?

A10:  No.  A Payment made to someone who died before receipt of the Payment should be returned to the IRS by following the instructions in the Q&A about repayments.  Return the entire Payment unless the Payment was made to joint filers and one spouse had not died before receipt of the Payment, in which case, you only need to return the portion of the Payment made on account of the decedent.  This amount will be $1,200 unless adjusted gross income exceeded $150,000. (Emphasis added)

Now, leaving aside that the FAQ does not tell you what you should do if your income exceeds $150,000 – Should you keep the money?  Return even more of the EIP? What? – the FAQ contains some very strange language.  First of all, it sounds admonishing.  This to survivors of loved ones who died in 2020, 2019, or 2018 and did nothing to receive this payment other than open the mail or check their bank accounts.  Second, it is not couched in the language of a legal requirement.  Instead, it says you “should” return the payment.  As in, you should eat your vegetables.

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As Bob Kamman pointed out in an earlier PT post this spring, I have something of a history with the issue of stimulus payments to decedents.  During a June 2008 Ways and Means Oversight Subcommittee hearing on the economic stimulus payments (ESPs) under the Economic Stimulus Act, Congressman Doggett asked me why these payments were going to deceased individuals, including his mother.  Up until that point I was blissfully ignorant of this occurrence, but my wonderful staff quickly located the IRS FAQ explaining that, in fact, such payments were absolutely legitimate.  Here is the language of the 2008 FAQ, updated on March 17, 2008.

Q. If an individual dies, what happens to his or her direct deposit or stimulus check?

A. Stimulus payments will be issued in the name of the individual eligible for payment on a filed 2007 income tax return or to the account designated by the individual on that return.  This includes situations where a person dies after filing a return or where the final 2007 income tax return was filed by a personal representative or surviving spouse.  Any issues or concerns involving a decedent’s filed return or the related stimulus payment should be addressed by the legal representative of the decedent’s estate.  See Publication 559 for more useful information for survivors and personal representatives.

So, in 2008, the IRS position was that ESPs would be correctly paid to a decedent based on information on the 2007 return.  The IRS also directed taxpayers to confer with the estate’s legal representative to figure out what to do with the payment – i.e., how to divide it up.

This spring, as EIPs were being issued, I began to get calls and emails from reporters and taxpayers, saying that EIPs were going to decedents.  Having this issue seared into my brain from the 2008 experience, I checked the 2020 statutory language and compared it to the 2008 language.  The statutes are identical in terms of who is an eligible individual.  Here’s the 2020 language from IRC § 6428(d)(1):

For purposes of this section, the term ‘eligible individual’ means any individual other than —
  (1) any nonresident alien individual,
  (2) any individual with respect to whom a deduction under section 151 is allowable to another taxpayer for a taxable year beginning in the calendar year in which the individual’s taxable year begins, and
  (3) an estate or trust.

How could the IRS come up with two completely contradictory interpretations of identical language in just 12 short years?  Is there no one in the IRS that remembers 2008?  Or did everyone just prefer to forget about it, since the President and Treasury Secretary said the funds should be returned. 

Of course, the government is entitled to change its mind and reverse its position.  But when it does so, due process insists that it explain this reversal. To date we have received no explanation, just this conclusory, precatory instruction.  This instruction – couched, in FAQ 10, in terms of “should” – is even more bizarre when one reads on to FAQ 26 on the same 2020 IRS webpage:

Q26.  I received an additional $500 payment in 2020 for my qualifying child.  However, he just turned 17.  Will I have to pay back the $500 next year when I file my 2020 tax return?

A26.  No, there is no provision in the law requiring repayment of a Payment.  When you file next year, you can claim additional credits on your 2020 tax return if you are eligible for them, for example if your child is born in 2020.  But, you won’t be required to repay any Payment when filing your 2020 tax return even if your qualifying child turns 17 in 2020 or your adjusted gross income increases in 2020 above the thresholds listed above.  [Emphasis added]

Here the IRS is acknowledging that the law does not require any repayment of an EIP.  This is correct – IRC § 6428(e)(1) states the EIP credit claimed on 2020 returns “shall be reduced” by the amount of the advance EIPs “but not below zero”.  The FAQ is also saying it is perfectly okay for the EIP to go someone who in 2020 will not be an “eligible individual.” 

This is so, apparently, only if you are living in 2020 after the EIP was issued.  Somehow the IRS has decided that, without any statutory justification, it alone can pick winners and losers.  So a 17 year old’s parents can keep the $500, or a person who made less than $75,000 in 2018 or 2019 can keep the $1,200 despite making $200,000 in 2020, but the surviving spouse of a person who died in 2019 and who has two young children “should” return the $1,200.   

The phrasing of FAQ 10 gets weirder as one applies it to different scenarios.  By saying the payment should be returned if the person died before receipt of the EIP, it includes persons dying in 2020 whose personal representatives will be filing final individual tax returns on their behalf in 2021.  This means, if someone died on March 1, 2020 of Covid-19, and the EIP was direct deposited into that person’s account on April 15, 2020, the grieving surviving spouse should repay the $1,200.  Really?  This is just downright cruel. 

Finally, FAQ 10 ignores a longtime provision in the Internal Revenue Code for “qualifying widows and widowers.”  IRC § 2(a) provides a surviving spouse who has not remarried with whom a dependent child has resided for the entire year and who has provided more than half the cost of maintaining that home, may file as married filing jointly in the two years following the death of the spouse.  This statute represents Congress’ recognition that the death of a spouse or parent can have a devastating impact on one’s financial wellbeing, and that should be taken into account when calculating the household’s tax burden.  Yet according to FAQ 10, these qualifying widows/widowers must repay the $1,200 EIP for the deceased spouse.

What is the basis of any of these choices in the legislation?  Answer: the IRS has articulated none.  In fact, there is even more justification to make these payments to survivors of decedents in 2020 than there was in 2008 – we are in the midst of a pandemic with unprecedented levels of unemployment. 

One final point.  Let’s say the IRS finally produces some sort of legal justification for its 180 degree turn from 2008.  (Let’s also hope there is a legal opinion somewhere on this point and someday it will be made public.)  What is it going to do to recover all these EIPs that have been issued to deceased individuals?  Other than shaming grieving people into giving back this money, it must make a determination that it can use the deficiency process to obtain an assessment of this amount or refer the case to the Department of Justice to bring an erroneous refund suit under IRC § 7405.  Do you think the Tax Division of the Department of Justice will bring a case for $1,200 against a grieving widow/widower of a deceased COVID-19 victim?  (You can find some previous PT discussions of erroneous refunds here and here.)

A word about deficiency procedures and the EIP.  The CARES Act provides “there shall be allowed as a credit against tax … for the first taxable year beginning in 2020 ….”  Consistent with this language, I understand the IRS has programmed its systems to credit the advance EIP against the taxpayer’s 2020 1040 tax module.  (As Carl Smith discussed here a few weeks ago, it is unclear for bankruptcy purposes to which year the credit applies – the year in which it was paid or the year in which it is claimed on the tax return.)

If a taxpayer has died in 2018 or 2019 and receives the EIP, there is no one for whom a Form 1040 can be filed, so against what can the IRS assess a deficiency?  If the taxpayer died in 2020, then there may be a final Form 1040 return filing requirement for the decedent.  In that case, under IRC § 6428, the math goes like this: subtract the amount of EIP paid in 2020 from the amount of EIP the taxpayer is eligible for based on 2020 circumstances, but do not go below zero.  Here that would be zero – 1200 = -1200 but don’t go below zero, so = zero.  Where is the deficiency?

At any rate, all of this is completely avoidable.  Instead of putting more burden on taxpayers who are already anxious about their economic and physical health, today and in the future, the IRS could have adopted the approach of the 2008 FAQs, and added, “If you would like to return the funds, please send them [here].”  Then, just as in 2008, the survivors who didn’t need the funds could (and did) return them. But those who needed the funds were not made to feel like criminals if they retained them.

Offset of Injured Spouse Stimulus Payment

On Friday, May 8, the IRS posted Economic Impact Payment FAQ #31 acknowledging that it was aware of the problem that many couples have encountered with the EIP payments.  The FAQ indicates that the IRS is working to fix the problem and taxpayers do not need to do anything to cause the IRS to fix their problem.  That’s good because I am not sure what they can do at the moment.  Caleb Smith wrote a post on this issue that has been the most highly read and commented upon post since it went up.  It is clear from the comments that lots of readers have encountered this problem.  While it is understandable that programming errors would occur when the IRS put together its system so quickly under intense pressure, this issue has created significant financial (and no doubt marital) problems for those impacted.  The FAQ does not indicate when the payments will be undone and checks issued to the injured spouse.  One decision that will not please injured spouses is that EIP dependent amounts will be split between the two spouses rather than paid out in full.  Here’s the FAQ unvarnished by my take on it:

Q31. If I owe tax, or have a Payment agreement with the IRS, or owe other federal or state debts or past-due child support, will my Payment be reduced or offset? (updated May 8, 2020)

A31. No, with one exception. The Payment may have been offset only by past-due child support. The Bureau of the Fiscal Service will send you a notice if an offset occurs.

If you are married filing jointly and you filed an injured spouse claim with your 2019 tax return (or 2018 tax return if you haven’t filed your 2019 tax return), half of the total Payment will be sent to each spouse and your spouse’s Payment will be offset only for past-due child support. There is no need to file another injured spouse claim for the Payment.

The IRS is aware that in some instances a portion of the payment sent to a spouse who filed an injured spouse claim with his or her 2019 tax return (or 2018 tax return if no 2019 tax return has been filed) has been offset by the non-injured spouse’s past-due child support. The IRS is working with the Bureau of Fiscal Service and the U.S. Department of Health and Human Services, Office of Child Support Enforcement, to resolve this issue as quickly as possible. If you filed an injured spouse claim with your return and are impacted by this issue, you do not need to take any action. The injured spouse will receive their unpaid half of the total payment when the issue is resolved. We apologize for any inconvenience this may have caused.