Court Tosses Lawsuit Alleging Alleging Hollywood Foreign Press Association Bylaws Inconsistent With Its Tax Exempt Status

A golden globe award: a gold-colored globe on top of a pedestal.

The Hollywood Foreign Press Association (HFPA) is responsible for the Golden Globes. The latest ceremony was last week. Readers wanting a respite from tax procedure can jump to some nice pix and the list of winners here, though as subscribers know, tax is everywhere. And one of this year’s winners sweeps in the story line of an IRS audit, with Michelle Yeoh winning for the heavily praised (but I hated) Everything Everywhere All at Once.  In the movie, Yeoh tries to protect her family laundromat from Jamie Lee Curtis, who played Deirdre Beaubeirdra, an IRS revenue agent. But I digress….

In addition to shining the bright lights on Hollywood’s A-listers, the award show jogged my memory of a Ninth circuit case I read last month, Flaa v Hollywood Foreign Press Association.


The HFPA is no stranger to controversy. The networks, along with many actors and directors, boycotted the ceremony last year, with allegations of corruption, self-dealing and lack of diversity. It appears that the HFPA has changed some of its practices, and its boozy award ceremony is must see for some who find that kind of thing more interesting than the latest TIGTA report on CDP compliance or last week’s  TAS recommendation to divide the worker and child component of the EITC.

Flaa v HFPA primarily involves antitrust claims brought by Kjersti Flaa and Rosa Gamazo Robbins, longtime entertainment journalists who for years unsuccessfully sought admission to HFPA. According to the journalists, membership in the HFPA conferred numerous benefits to its members, and the group unfairly restricted access to keep spoils to members:

Movie studios provide HFPA members with access to Hollywood talent that non-HFPA members lack: HFPA members receive opportunities to interview and interact with popular actors, directors, and producers. Studios grant HFPA members such privileges in order to gain favor with the individuals responsible for voting on the Golden Globe Awards. HFPA members also reap financial benefits. Members receive invitations to all-expenses-paid excursions to film festivals and press junkets, and are paid directly by the HFPA for performing what the complaint describes as trivial, makeweight tasks.

Standards for admission to the HFPA are tight; according to the complaint “a journalist seeking HFPA membership was required to submit two letters of sponsorship from active HFPA members, provide 24 articles written by the applicant in the last three years, demonstrate membership in the Motion Picture Association of America, and receive a majority vote of the HFPA’s active members, among other requirements. The HFPA admitted only one new member in 2018, and no new members in 2019.”  (note HFPA appears to have mended its ways and has opened up membership considerably in the last year, see Tarnished Golden Globes attempt a comeback, after years of controversy).

After both Flaa and Gamazo Robbins were denied admission for multiple years, the journalists filed a suit challenging the HFPA’s membership policies under federal and state antitrust laws and California’s right of fair procedure. For good measure, they also sought a declaratory judgment that the HFPA’s bylaws conflicted with its status as an IRC § 501(c)(6) trade organization (to read more about (c)(6) versus the more well known (c)(3) status see the helpful write up from Marcum summarizing the differences).

Most of the opinion addresses the journalists’ unsuccessful antitrust claims. But as this is a tax blog, the key claim I discuss is how Flaa and Gamazo sought a declaration that the HFPA’s bylaws “are unlawful in light of the HFPA’s commitments and obligations as a tax-exempt Section 501(c)(6) mutual benefit corporation” because the HFPA’s bylaws serve to benefit its members rather than the industry as a whole. 

The court dismissed that claim, holding that the Declaratory Judgment Act limits courts’ jurisdiction to provide the relief they sought:

The Declaratory Judgment Act grants federal courts the power to “declare the rights of any interested party seeking such declaration,” but it expressly provides that declaratory relief is unavailable “with respect to Federal taxes.” 28 U.S.C. § 2201(a). That language creates a jurisdictional bar to declaratory relief related to federal tax controversies….The statute provides an exception to the tax-related jurisdictional bar for “actions brought under section 7428 of the Internal Revenue Code.” 28 U.S.C. § 2201(a). Section 7428, in turn, provides jurisdiction to determine whether an organization is entitled to tax-exempt status, but only in actions brought by the organization itself. See 26 U.S.C. § 7428(a)(1)(E), (b)(1).

The journalists’ argued that the object of their suit was not to challenge the organization’s status or the amount of taxes it might owe but simply to “seek a declaration that the HFPA’s bylaws conflict with the “obligations flowing” from its tax-exempt status.”

The Ninth Circuit disagreed:

[A] declaration that the HFPA’s bylaws conflict with its tax status would be functionally equivalent to a declaration that the organization is violating the tax laws. Such a declaration would necessarily imply that the HFPA is not entitled to its tax-exempt status, and it would serve no purpose but to threaten the HFPA with the loss of that status….The requested declaration is therefore one “with respect to Federal taxes,” so the district court correctly dismissed the claim for lack of subject-matter jurisdiction.


The DJA, like its cousin the Anti Injunction Act, still serves as a formidable barrier that prevents courts from considering matters that touch on federal taxes. The DJA, like the AIA, serves to shoehorn tax disputes into a traditional tax enforcement path, and prevents nontax disputes from sweeping in issues that touch on federal tax law.

Changing a Penalty – Graev Effect

In Castro v. Commissioner, TC Memo 2022-120 petitioner sought to strike an IRC 6662 accuracy related penalty for failure to meet the requirements of IRC 6751(b).  The Court determined that the manager’s approval met the statutory requirements.  The decision here affirms prior case law holding that the Court will not look behind the signature just as it does not look behind a notice of deficiency.  In effect, the Graev test has a Greenberg Express overlay.  Signing the right form at the right time is the key to success for the IRS not proving that it had a good reason for signing the form.


The manager signed the 30-day letter.  It approved the imposition of an accuracy related penalty.  Later, the IRS revised the penalties.  In doing so a manager approved the change, but the Castros complained that by the time of the change the original penalty proposal had been communicated.  The parties submitted his case fully stipulated under Rule 122 after resolution of all issues except the penalty.  As we have discussed before, this rule allows the parties to avoid the time consuming and messy trial if they can agree to all of the facts necessary for the Court to reach its opinion.

As a result of review of the original revenue agent’s report, the report was revised:

On October 18, 2016, GM Relf signed a Civil Penalty Approval Form with respect to the years at issue. In that form, under the “Assert Penalty” heading, an “X” was marked under the “Yes” column for an addition to tax under section 6651(a)(1) and an accuracy-related penalty for substantial understatement of income tax under section 6662(d) for each year at issue.4 Conversely, under the “Assert Penalty” heading, an [*4] “X” was marked under the “No” column for additions to tax under sections 6651(a)(2) and 6654 for the years at issue.

On October 26, 2016, respondent issued the notice of deficiency underlying this case. The penalties and additions to tax determined in the notice of deficiency corresponded to the penalties and amounts shown in the corrected RAR. Specifically, respondent determined only additions to tax under section 6651(a)(1) and accuracy-related penalties under section 6662(a) (not additions to tax under sections 6651(a)(2) and 6654) for each of the years at issue. The amount of each accuracy-related penalty under section 6662(a), and of each addition to tax under section 6651(a)(1) that had been asserted in the original RAR dated July 6, 2016, was also revised downward to reflect the amount shown in the corrected RAR dated October 5, 2016.

The Tax Court has prior precedent holding that the confusing language in IRC 6751(b) regarding “the ‘initial determination’ of a penalty assessment … is embodied in the document by which the Examination Division formally notifies the taxpayer, in writing, that it has completed its work and made an unequivocal decision to assert penalties.”  That document is usually the 30-day letter.  Here, the original 30-day letter does not match the revised one or the notice of deficiency.  Here, the manager approved the 30-day letter by signing the letter transmitting the report to them.  This was insufficient according to the Castros because other evidence suggests that the manager did not really review the penalty until later:

on the totality of the stipulated record, the signature found on the Letter 950 does not demonstrate written managerial approval of the contents of the enclosed RAR, including the asserted accuracy-related penalties. Specifically, petitioners note that the Letter 950 was mailed to them on July 8, 2016, with an enclosed RAR asserting penalties or additions to tax under four distinct Code provisions. The stipulated record, petitioners argue, proves that the first review of the penalties and additions to tax asserted in the RAR did not occur until August 30, 2016, and, once that occurred, GM Relf found errors with respect to the penalties and additions to tax. Accordingly, petitioners argue that when GM Relf signed the Civil Penalty Approval Form on October 18, 2016, he expressly disapproved of two additions to tax that were purportedly the subject of his approval when he signed the Letter 950 on July 8, 2016, and he approved revised amounts of the other penalties and additions to tax. This later and express disapproval, petitioners contend, is the type of contrary evidence that precludes a conclusion that GM Relf’s signature on the Letter 950 approved the contents of the RAR. On the contrary, petitioners insist that the “most logical conclusion [to be drawn from the stipulated record] is that the group manager did not view the Letter 950 as an approving document and did not view the signing of the Letter 950 as an event which triggered his responsibility to review the penalties.”

The Court finds for the IRS because the evidence showed that the manager signed the initial correspondence.  Basically, the Court harks back to earlier cases in which taxpayers sought to have the court look behind the approval.  The Court has consistently rejected efforts by petitioners to have it look behind the approval to see if the manager made a good decision or an informed decision.  It simply looks to see if the manager signed.  If the manager signs the approval form with his or her eyes closed, that will be good enough. 

If the Court must gauge the depth of a manager’s understanding of the penalty imposition, it would be even more hopelessly tied up by IRC 6751(b) than it is now.  The decision not to look behind the signature, like the decision not to look behind the notice, provides a logical way for the Court to determine whether the requirements of the statute are met without having to get into the mind of the manager.

Petitioners here made logical arguments that the actions of the manager at a later stage indicated that he paid little or no attention to the document at the time he signed it.  Proving that, however, does them no good. 

GAO Report of Refunds and Customer Service

No one reading this blog and probably very few people in the general populace need to be told that the IRS has experienced significant problems recently processing returns, answering calls and filling vacancies.

While IRS is still digging out, this past November the NTA posted an update on the IRS’s progress working through its backlog, noting that IRS was making progress but that for many taxpayers the delays due to the backlog could make them feel like Groundhog Day

GAO, like TAS, provides a gold mine of data helping understand the scope and status of the IRS’s challenges.  This post pulls charts from the recent GAO report entitled “2022 Tax Filing – Backlogs and Ongoing Hiring Challenges Led to Poor Customer Service and Refund Delays.”

The report describes it purpose as follows:

You asked us to assess IRS’s performance during the 2022 filing season. In this report, we assess IRS’s 2022 filing season performance on (1) processing tax returns, (2) providing customer service to taxpayers, and (3) hiring staff to support filing season operations.

In this post we pull out the graphics from the GAO report in order to give you a visual taste of the findings.  Read the report if you want the details behind the problems.

read more…

Exempting the Earned Income Tax Credit from the Bankruptcy Estate

In In re Medina, No. 22-10233 (Bankr. D. N.M 2022) the bankruptcy court held that the portion of the debtor’s refund attributable to the earned income tax credit (EITC) was not exempt from the debtor’s bankruptcy estate.  The case points out a split in the outcome for debtors.  This split is not based upon a split in the interpretation of bankruptcy law but a split in how states approach exemptions.  Guest blogger Phil Rosenkrantz wrote about this several years ago in a post regarding the child tax credit. 

The bankruptcy code allows each state to decide which assets a debtor may choose to exempt from the bankruptcy estate.  Most states have exempted EITC refunds because the payments meet the state definition of payment for the welfare of the individual.  Similarly, most states have exempted the advanced child tax credit (ACTC); however, each state statute stands on its own.  Ms. Medina finds out to her sorrow that New Mexico has not drafted its statutory exemptions in a manner allowing for the exemption of the EITC.  As discussed below, this is an area where Congress should step in.  We should not require a state by state determination of whether to exempt federal anti-poverty payments.


Ms. Medina filed her bankruptcy petition on March 24, 2022, making her 2021 refund a pre-petition asset.  As she filed she claimed an exemption of her federal and state tax refunds for 2021 using New Mexico’s wildcard exemption which is capped at $500.  She chose to use the New Mexico exemptions rather than the federal exemptions provided in BC 522 because she wanted to protect the equity in her home and New Mexico, like most states with a Spanish rather than English colonial heritage, has a generous homestead exemption.

The wildcard exemption did not provide enough protection for her 2021 refunds:

Based on her filed tax returns, Ms. Medina was entitled to a 2021 federal tax refund of $4,845 — out of which $3,618 was due to the federal EITC — and a 2021 state tax refund of $1,016 — out of which $724 was due to New Mexico’s EITC (the Working Families Tax Credit). Ms. Medina’s total 2021 tax refunds were therefore $5,861. The tax preparer fees were 10% of the total refunds.

She did not receive the refunds until after filing her bankruptcy petition – though that fact is not legally significant.  She spent the refunds by April 21, 2022, making “important home repairs such as repairing her air conditioner and hot water heater.”  The trustee objected to exemption of the portion of her refund that exceeded the wildcard amount except that the trustee did not object to the portion of her refund based on the Child Tax Credit (CTC).

In most fights interpreting state law, the EITC has fared better than CTC because CTC is not exclusively an anti-poverty provision.  Taxpayer eligible for the CTC include middle class households as well as households falling into the poverty guidelines of most states.  Usually, the ACTC has a better chance than the CTC of exemption from the estate because of the most restrictive requirements for ACTC.  The trustee’s concession on CTC surprised me.

Although represented at the outset of the case, Ms. Medina was pro se at the time of the fight over the exemptions.  She raised four arguments but only the argument regarding the ability to exempt the EITC portions of the refund bears discussion.

The court describes the EITC and its anti-poverty purpose but ends the descriptive section by stating:

Despite its anti-poverty purpose, Congress has not enacted exemptions for EITC refunds similar to the protections for Social Security benefits under 42 U.S.C. §407 and veterans’ benefits under 38 U.S.C. §5301(a).

That statement might serve as a basis for seeking a change in the bankruptcy law to provide protection for the anti-poverty payments administered under the IRC.  These payments represent a significant portion of the federal anti-poverty payments.  They should be recognized with the other payments mentioned by the court without the requirement to litigate this issue state by state.

The court notes that many states have passed legislation exempting EITC from the reach of creditors, some states have broad exemptions for public assistance benefits generally and many courts have interpreted EITC to meet the exemptions for public assistance.  The case contains good citations for state laws and court decisions on this subject.  The court did a nice job of researching state law and case law in a pro se case where her submissions would have left big gaps in this research.  See it below in bonus material.

While the court finds that EITC payments are public assistance payments, it finds that New Mexico lacks a broad public assistance exemption.  It carefully analyzes the state statute and then notes that

Other courts have similarly held that an exemption under a public assistance act does not apply to EITC tax refunds where the exemption is limited to public assistance granted under the act because EITC tax refunds are granted under federal and state tax codes. In Nevada, the bankruptcy court held that the Nevada exemption for “assistance awarded pursuant to the provisions of this chapter,” which referred to chapter 422 of the Nevada Revised Statutes, did not include EITC because it was “not paid or payable pursuant to a state-administered public welfare program under Chapter 422.” In re Thompson, 336 B.R. 800, 802 (Bankr. D. Nev. 2005). Similarly, in Arizona, the bankruptcy court concluded that the Arizona exemption for “assistance granted under this title” and “money paid or payable under this title” did not include EITC, because EITC is granted by the federal tax code, not by Arizona’s public assistance statute. In re Builder, 368 B.R. 10, 11-12 (Bankr. D. Ariz. 2007).

So, Ms. Medina cannot exempt the EITC portion of her state or federal refunds, except to the extent of the $500 wildcard exemption, which were the largest portions of those refunds.  The court finds that spending the refunds for necessary expenses does not exempt them.  The court does not say what she must do now that she now longer has the money.  If she cannot repay the money to the estate, I expect that her bankruptcy will be dismissed without her receipt of the discharge of debts she sought in filing.  This is a tough result for her but not one for which the court should be blamed.

Bonus material

For those interested, I copy below the court’s research on the state of the exemption of EITC from both a state law and case law perspective.

State law:

Several states have passed statutes that expressly exempt EITC from the reach of creditors, including Colorado, Indiana, Kansas, Louisiana, Mississippi, Nebraska, and Oklahoma.5 New Mexico has not done so.

5Colorado: Colo. Rev. Stat. Ann. §13-54-102(1)(o) (exempting full amount of any federal or state income tax refund “attributed to an earned income tax credit”); Indiana: Ind. Code Ann. §34-55-10-2(c)(11) (exempting interest in a refund or credit “received or to be received” under federal and Indiana EITC provisions); Kansas: Kan. Stat. Ann §60-2315 (exempting “right to receive” federal and Kansas EITC); Louisiana: La. Rev. Stat. Ann. §13:3881(A)(6) (exempting federal EITC “except for seizure by the Department of Revenue or arrears in child support payments”); Mississippi: Miss. Code Ann. §85-3-1(i) (exempting an amount not to exceed $5,000 of “earned income tax credit proceeds”); Nebraska: Neb. Rev. Stat. Ann. §25-1553 (exempting “full amount of any federal or state earned income tax credit refund”); Oklahoma: Okla. Stat. Ann. tit. 31, §1(A)(23) (exempting “[a]ny amount received pursuant to the federal earned income tax credit”).

Case law:

Many courts hold that EITC tax funds are public assistance within the meaning of state exemptions applicable to public assistance grants generally.6 Such courts reason that “the clear purpose and effect of the earned-income credit is public assistance.” In re Brasher, 253 B.R. 484, 489 (M.D. Ala. 2000). “Economically, the earned-income credit does not function as ‘mere tax relief’ but rather is ‘in essence, a grant.’” Id. (quoting In re Longstreet, 246 B.R. 611, 614 (Bankr. S.D. Iowa 2000)). This view is consistent with the notion that exemptions are to be construed liberally in favor of the debtor. See In re Foah, 482 B.R. 918, 921 (10th Cir. BAP 2012); In re Bushey, 559 B.R. 766, 774 (Bankr. D.N.M. 2016); Hewatt v. Clark, 44 N.M. 453, 1940-NMSC-044, ¶ 15. Such liberal construction effectuates the humanitarian purposes of exemption provisions. Foah, 482 B.R. at 921 (citing In re Carlson, 303 B.R. 478, 482 (10th Cir. BAP 2004)). Generally, the “purpose of having exemptions is to permit a debtor to retain certain necessities . . . without fear of creditors taking them.” In re Warren, 512 F.3d 1241, 1249 (10th Cir. 2008); In re Bushey, 559 B.R. 766, 771 (Bankr. D.N.M. 2016) (quoting Warren). The New Mexico exemption statute in particular was “adopted as a humane policy to prevent families from becoming destitute as the result of misfortune through common debts which generally are unforeseen.” Hewatt v. Clark, 44 N.M. 453, 1940-NMSC-044, ¶ 13 (internal quotation omitted).

However, at least one court has held that EITC tax refunds do not fall within a broad state exemption for “public assistance” because an EITC tax refund is a “tax overpayment” and not a “welfare grant.” See In re Trudeau, 237 B.R. 803, 807 (10th Cir. BAP 1999). This Court disagrees.7 An EITC tax refund is not dependent on the amount of tax paid and is available even to a qualified taxpayer who pays no tax at all. The EITC is not a refund attributable to an actual tax overpayment.

6E.g., In re James, 406 F.3d 1340, 1343-45 (11th Cir. 2005) (holding that EITC was exempt under Alabama exemption for “public assistance for needy persons”); In re Corbett, No. 13-60042, 2013 WL 1344717, at *2-3 (Bankr. W.D. Mo. Apr. 2, 2013) (holding that EITC was exempt under Missouri exemption for “public assistance benefit”); In re Fish, 224 B.R. 82, 84-85 (Bankr. S.D. Ill. 1998) (holding that EITC was exempt under Illinois exemption for “public assistance benefit”); In re Tomczyk, 295 B.R. 894, 896-97 (Bankr. D. Minn. 2003) (holding that EITC was exempt under Minnesota exemption for “all relief based on need”); In re Moreno, 629 B.R. 923, 932-34 (Bankr. W.D. Wash. 2021), aff’d, No. WW-21-1124-LBS, 2021 WL 6140115 (9th Cir. BAP Dec. 23, 2021) (holding that EITC was exempt under Washington exemption for “assistance”); Flanery v. Mathison, 289 B.R. 624, 628-29 (W.D. Ky. 2003) (holding that EITC was exempt under Kentucky statute exempting “public assistance benefits”); In re Longstreet, 246 B.R. 611, 617 (Bankr. S.D. Iowa 2000) (holding that EITC was exempt under Iowa exemption for “public assistance benefit”); In re Jones, 107 B.R. 751, 751-52 (Bankr. D. Idaho 1989) (holding that EITC was exempt under Idaho exemption for benefits provided by “public assistance legislation”).

The Low-Income Taxpayer and Form 1099-K

Today we welcome first-time guest blogger Nicole Appleberry. Professor Appleberry directs the Tax Clinic at the University of Michigan Law School, and she is also of Counsel with Ferguson, Widmayer & Clark PC. In this post she explains how the Forms 1099-K reporting requirements impact low-income taxpayers, and she brings us up to date on new IRS FAQ. Christine

It is a truth universally acknowledged (by tax professionals), that a taxpayer in possession of any income, from whatever source derived, may be in want of a tax advisor. The money is gross income under IRC 61, and tax may be due if it survives the narrowing of this broad river through a series of exclusions and deductions to the narrower stream of taxable income, and then pools above the levels where income and self-employment tax kick in. Along the way, another truth is self-evident: it is a good idea to keep meticulous records, as one generally has the burden of proof to show why all that income isn’t taxable. This could be because it’s excluded (like gifts and inheritances) or reduced by deductions (such as eligible business expenses that have been documented to the extent required).

The lay taxpayer public, who have generally not fully explored the “Internal Revenue Code and its festooned vines of regulations” (Bayless Manning, Hyperlexis and the Law of Conservation of Ambiguity: Thoughts on Section 385, 36 Tax Law. 9 (1982)), sometimes has its own set of tax “truths.” For example, that income is only taxable (and self-employment tax only applies) if you think you’re running a real business, not just a side hustle. If there’s enough cash for it to feel significant in your life. If the IRS finds out about it.


There is, of course, much overlap between the professional and lay conceptions. Unfortunately, however, it is not perfect. Hence the common scenario faced by Low Income Taxpayer Clinic clients across the nation. They drove for Uber, Lyft, or DoorDash. Or maybe they used eBay to sell household items that would have otherwise been offloaded in a garage sale. In any event, they surely didn’t keep complete records showing mileage, basis, or anything else helpful. And just as surely, they didn’t report any of the income on their Form 1040 and were shocked when the IRS nevertheless found out and proposed a tax deficiency.

In the clinics, our job has generally been to search out ways to substantiate any business expenses and prove them to the IRS through whichever procedure is still available (responding to an audit, filing an appeal with the IRS Independent Office of Appeals, litigating in Tax Court, or down the line, submitting an audit reconsideration or an OIC Doubt as to Liability).

These cases have not, however, overwhelmed our clinics because there has been a limit to when the IRS finds out about certain kinds of income. IRC 6041A requires that any business that pays someone $600 or more for their services must file a reporting form (a 1099-MISC through the 2019 tax year; a 1099-NEC thereafter). This catches some folks, yes. But it’s limited because it doesn’t cover individuals who pay other individuals (such as when you hire your teenage neighbor to mow your lawn), and it doesn’t cover payments for goods (as opposed to services).

So the real juice is in IRC 6050W, which addresses the responsibilities of Payment Settlement Entities (PSEs). These are credit card companies and “third party settlement organizations” (TPSOs), which are the businesses like eBay, PayPal, Etsy, etc., that act as intermediaries, ensuring that providers of goods and services get paid by the unrelated purchasers. (Companies like Zelle, who effectuate electronic payments without a contractual relationship with the payees, are not TPSOs.) These PSEs have been required to issue a 1099-K when the year’s worth of payments to someone aggregated to more than $20,000 and there were more than 200 transactions. So, pretty weak juice, actually. It snares some, but still let many oblivious taxpayers proceed with their side gigs, free from unpleasant tax consequences (unless they lived in one of the 9 or so locations that had already imposed lower limits for state income tax purposes).

This little loophole came to an end with the American Rescue Plan Act of 2021, which changed the reporting limit to situations where the aggregate is more than $600, regardless of the number of transactions, initially effective for the 2022 tax year. It was done with little fanfare, and LITCs have been bracing themselves for the surge of new cases.

There’s a whole host of people who might be surprised. To be sure, the people with still-pretty-small side gigs. The new de minimis limit particularly stings because the IRC 6050W regulations provide that what counts are the original payments. Adjustments for credits, refunds, processing, service, or shipping fees are not taken into consideration. Say someone was paid $610, but fees and refunds take them down to $300, and after cost of goods sold they’ve only netted $100. They are likely to think they didn’t even make enough to owe self-employment tax, but if they don’t proactively report the situation on their 1040, the IRS is going to think that they owe both income and self-employment tax on the transaction (for the former, assuming that they have enough other income to lift them above the standard deduction).

There will also be people caught by the new rule who didn’t think they were operating businesses at all – like the folks replacing their garage sales with Facebook Marketplace, who most certainly don’t have documentation for their basis in the items sold. Or those who had enough friends inadvertently tag the Venmos for their share of meal or gift expenses as “goods and services” instead of “friends and family.”

We also expect to see at least some cases from situations where employers pay independent contractors for services using a TPSO. When both a 1099-NEC and a 1099-K might be appropriate, only the 1099-K should be issued. But small employers accustomed to issuing 1099-NECs may continue to do so, causing the income to be reported to the IRS twice. 

All of this is compounded by what we see in the LITCs: many people don’t get their mail, don’t open scary-seeming mail (and anything from the IRS definitely counts), or ignore any tax forms or notices they don’t understand, hoping that they’re not important.

Fortunately, we have one more year to get the word out and bring our professional and lay truths closer together. On December 23 the IRS issued Notice 2023-10 (blogged by Christine here), announcing that they are delaying the implementation of the reporting requirement until tax year 2023. A week later, they also updated their FAQs in Fact Sheet FS-2022-41.

The new FAQ provide more information about how to report the sale of personal items. The FAQ are quite detailed and will be helpful for those taxpayers who do get their notices, do read them, and are capable of navigating their way to the IRS website. So, all you wonderful tax advisors: time to help get the word out!

Math Error and Limited Taxpayer Remedies

Last year I gave two talks about math errors, one for an ABA Tax Section meeting and the other for the annual conference the IRS sponsors for tax clinics. I also worked on a refresh of the math error subchapter in Saltzman and Book, IRS Practice & Procedure.

In doing this work last year I noted a few points that I think practitioners should consider.


As readers may know, when there is an adjustment that fits within the definition of a “mathematical or clerical error” IRS can assess without issuing a 90-day letter.  The statute requires the IRS to explain the error.

Taxpayers have the right to request an abatement within 60-days; if they do request an abatement, IRS is required statutorily to honor the request. If IRS believes that the item that gave rise to the original mathematical or clerical error is incorrect, it is required to issue a 90-day letter, thus subjecting the adjustment to the pre-assessment deficiency procedures.

What happens if IRS fails to honor a taxpayer request to abate the assessment? Or if the IRS fails to explain the math error assessment? These appear to be more than academic questions based on what I am hearing from practitioners and sources within IRS. And, with math error assessments growing exponentially following the COVID benefits distributed through the tax system (and likely to grow more given the Inflation Reduction Act’s adding categories of math error adjustments tied to the slate of new green credits for car purchases and home improvements) this will be a major issue for years to come.

Well, it depends.  If the IRS fails to abate and issue a notice of deficiency, it appears that the Tax Court does not have deficiency jurisdiction. Nor does it generally have the statutory power to enjoin the IRS from collecting or compel the IRS to issue a 90-day letter. 

How about in district court? Some courts have held that while the Anti Injunction Act and Declaratory Judgment Act do not deprive the court of jurisdiction, a taxpayer must still prove there is no adequate remedy. That is a problem, as some courts view the refund procedures as a sufficient remedy at law, with courts essentially stating that an IRS violation of the statute triggers no immediate right to remedy in the absence of full payment. See, for example, Deacon v. United States, 71A AFTR2d 93-4718, (CD CA 1990).

On the other hand, if IRS proceeds to take collection action as a result of the mistake, the Tax Court has held in a couple of nonprecedential CDP cases that the mistake can invalidate an assessment. See, for example  Robinson v Commissioner, Docket No. 6446-19L (Jan. 10, 2022) (Judge Gustafson Bench Opinion). While this can be helpful, the need to use the CDP procedures provides no relief for taxpayers if the IRS does not issue a notice of intent to levy or file a NFTL. With offsets not triggering CDP rights, and the most common form of enforced collection, IRS essentially gets a free pass.

Some may say this is unfair. And it is.

What about procedural due process and the constitution? Well courts have maintained that there is no procedural due process right to a predeprivation hearing when it comes to taxes, leaving taxpayers complaining about math error and the constitution to hold an empty bag. See, Polsky v Werfel  844 F.3d 170 (3rd Cir. 2016).

And while I and others (like Nina Olson) have argued that procedural due process doctrine when it comes to taxes needs a refresh, for now it faces some steep headwinds, though the right court might treat the constitutional issues differently for a math error stemming from an adjusted refundable credit as contrasted with say a math error triggering a positive tax liability. And perhaps a challenge that focuses on inadequate notice rather than hearing may have more traction.

For readers who want more on this, with my colleagues Anna Gooch and Marilyn Ames I will be updating even further the IRS Practice & Procedure with more discussion of the above, as well as some possible ideas for challenging errors.

In the meantime Congress could help by expanding the Tax Court’s jurisdiction to allow for power to enjoin when the IRS makes a math error mistake. Or to have jurisdiction if the IRS fails to abate within a defined time of a taxpayer request.

For now, lots of taxpayers seem to be sitting on a right with a very limited remedy.

IRS Requests Comments on Forms 3520 and 3520-A

We welcome back guest blogger Daniel N. Price. Dan worked in the Office of Chief Counsel of the Internal Revenue Service for almost two decades and is now starting in the private sector in San Antonio, Texas. He recently authored a post on the proposed regulations surrounding the role of Appeals in FOIA disputes. Today, Dan provides some background on the IRS process to fulfill its obligations under the Paperwork Reduction Act and its request for comments last month on Forms 3520 and 3520-A..

On December 16, 2022, the IRS published a request for public comment on Forms 3520 and 3520-A in the Federal Register. The request for public comment is a routine request in the context of periodic OMB approval. Every three years, all forms with OMB numbers must go through the process of OMB review as part of the paperwork reduction act. See That process includes a request for public comment published in the Federal Register.

When I was with the Office of Chief Counsel providing legal support to the IRS units handling the Voluntary Disclosure Practice and the Streamlined Filing Compliance Procedures, I assisted IRS personnel in the process of publishing requests in the Federal Register, analyzing public comments for the IRS, and drafting agency responses to public comments. The process is generally mundane. Inside of the IRS, the process begins with using the last cycle’s approval paperwork as a template. Then, the information on the last cycle’s paperwork might be verified or updated. Sometimes the IRS staff handling requests for public comments do not receive feedback from the business operating unit within the IRS responsible for the forms (at times because designated points of contacts for forms move positions within the IRS or retire). At other times, deadlines necessitate publishing requests for comments using best guesses or the last paperwork from the prior cycle. Over the years, I saw some variance in how these were handled by IRS personnel.

Once public comments are collected, internal discussions within the IRS may occur. In the realm of the voluntary disclosure practice and the Streamlined Filing Compliance Procedures, key players including IRS management and Chief Counsel discussed the public comments. Then, the IRS generally prepares a summary of the public comments and a brief discussion of any changes based on the public comments. The IRS doesn’t make much fanfare of this process, but the IRS’ written discussion of public comments becomes part of the public record available at

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Searching is not intuitive. For example, if you want to pull up the IRS’ official response to public comments on Forms 3520 and 3520-A from the last cycle in 2019, select the “ICR” search option and search for “Form 3520.” Then, sort by date, and poke around for “view supporting statement and other documents” to find the single comment (by a practitioner in the U.K. concerning reducing reporting burdens for taxpayers with foreign pensions) and the IRS’ supporting statement which included agency responses to the public comment.

Although the overall process of soliciting comments for this type of periodic review is rather mundane and mechanical, when meaningful public comments are received, this process helps the IRS improve its forms and update burden estimates. And even if comments are technically beyond the scope of the request for comment, practitioner input may have an impact on the IRS. We have that type of opportunity in the context of the request for public comment pending for Forms 3520 and 3520-A.

One detail in the recent request for public comment on Forms 3520 and 3520-A caught my attention: the estimated number of annual respondents. According to the IRS’ estimate published in the Federal Register, only 1,820 respondents will complete Forms 3520 and 3520-A. But that estimate is grossly understated. Historical data shows 27,431 Forms 3520 were paper filed in 2012. See TIGTA report “A Service-Wide Strategy Is Needed to Increase Business Tax Return Electronic Filing,” September 24, 2014. The ridiculously low estimate appears to be a holdover from the IRS’ prior OMB recertification of these forms. The IRS’ supporting paperwork for the last OMB review contained that exact figure calculated as follows:

Over the last decade, awareness of Forms 3520 and 3520-A has grown exponentially. A decade after the 2012 stats, the actual number of annual filers (respondents) of Form 3520 likely exceeds 50,000, and I would not be surprised by a combined annual filing for Forms 3520 and 3520-A of over 75,000. By materially understating the number of respondents, the IRS is materially understating the overall compliance burden associated with these forms. Also, the IRS welcomes comments on the time estimates per respondent. For these forms the IRS estimates 51 hours and 56 minutes per respondent (which appears to be a weighted average of the two forms)! And the IRS’ burden estimates do not attempt to capture post-filing burdens relating to dealing with IRS penalty assessments post-filing. 

If you have any thoughts on the Forms 3520 and 3520-A, the estimated burdens relating to those forms, and ways to enhance the forms, I urge you to submit comments by February 14, 2023 to

Polselli Summons Case Heads To Supreme Court

Last January in Circuit Split on Notice Rules For Summonses to Aid Collection I discussed how the Sixth Circuit case Polselli v United States resulted in a split in the circuits on a fundamental issue in IRS summons practice: does the IRS have to give notice when it issues a summons in the aid of collecting an assessed tax? The Sixth Circuit, in contrast with the Ninth Circuit in Ip v US, held that the taxpayer has no right to notice so long as the summons followed an assessment or judgment and it was issued in the aid of collecting the tax.

Notice is key, because under the statute the government’s waiver of sovereign immunity is tied to notice, and thus a court lacks jurisdiction to hear a challenge if a party is not entitled to notice.


After the defeat the taxpayer filed a cert petition; the government opposed the petition. The Center for Taxpayer Right, with counsel Latham & Watkins, filed an amicus brief  in support of the petition (disclosure: I am on the Board of the Center; Keith is President and also on the Board; Nina is the Founder, Executive Director and Treasurer and also a Board Member).

Last month the Supreme Court granted cert over the government’s opposition.

In Polselli, the Sixth Circuit held that Section 7609(c)(2)(D)(i) “unequivocally provides that the IRS may summon the third-party recordkeeper of any person without notice to that person if (1) an assessment was made or a judgment was entered against a delinquent taxpayer and (2) the summons was issued “in aid of the collection” of that delinquency.”

The taxpayer’s cert petition identifies the question presented as “whether the § 7609(c)(2)(D)(i) exception applies only when the delinquent taxpayer owns or has a legal interest in the summonsed records (as the Ninth Circuit holds), or whether the exception applies to a summons for anyone’s records whenever the IRS thinks that person’s records might somehow help it collect a delinquent taxpayer’s liability (as the Sixth Circuit, joining the Seventh Circuit, held below).”

As the petition noted, the government’s summons reached two of the taxpayer’s law firms and his wife, raising privacy interests and possible privilege issues.

Under the government’s and Sixth Circuit’s view, the statute gives the IRS the absolute right to issue a collection summons without notice or right to challenge.

As the Center’s amicus brief highlights, the government and Sixth Circuit’s position effectively provides that the exception to notice in Section 7609 swallows the rule and subverts the balance between privacy and the government’s interest in tax collection:

The Sixth Circuit’s interpretation of one exception leaves a gaping hole in Section 7609’s protections and swallows the general rule of notice. The Sixth Circuit held that the IRS may issue a summons seeking the records of people who do not owe the IRS a penny, without notice, so long as the IRS issued the summons to aid in the collection of someone else’s tax liability. This interpretation places virtually no limits on the IRS’s ability to seek records without notice. And without notice, an innocent person whose records are sought lacks any meaningful opportunity to prevent disclosure of her private information. The Sixth Circuit’s interpretation nullifies the right to protect private information from IRS overreach.

Stay tuned, as this is the latest in a series of important procedural issues reaching the Court.