State Level Taxpayer Rights: A Survey of State Tax Administration

We welcome back guest blogger Anna Gooch, who last year joined the the Center for Taxpayer Rights as a Research Fellow. Next fall Anna will begin a Christine A. Brunswick Public Service Fellowship sponsored by the ABA Tax Section, where she will continue working to further taxpayer rights. Christine

Under a grant from the Rockefeller Foundation, the Center for Taxpayer Rights has developed a survey of state tax administration practices and procedures to better understand how taxpayer rights are protected. The survey gathers information relating to income tax (where applicable), property tax, sales tax, and any other statewide tax that the state may have. In each of these sections, the questions are divided into categories, including Assessment, Appeals, Collection, and Litigation. Volunteers are asked to provide an explanation as well as a citation to their response when possible. Once the information is collected, we will make recommendations for administrative procedures for practices that work well, and we will propose model legislation for state funding of low-income taxpayer clinics and the establishment of state taxpayer advocate/ombuds offices. We will also identify areas of deficiency in taxpayer protections and advocate for change where we believe taxpayer rights are in jeopardy.  The Center plans to hold a Reimagining Tax Administration workshop in the fall of 2022 to discuss the survey findings and recommendations.

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Why do a state taxpayer rights survey?  Unlike the federal government, states often operate under balanced budget requirements and cannot create money, so they rely heavily on tax collections to provide services and programs.  They do not have the same infrastructure for tax compliance as the federal government, so they also rely on the IRS to identify taxpayers with audit issues and make parallel adjustments, and they utilize private debt collection agencies to a great extent.  Moreover, states heavily rely on data mining to identify non-compliance and issue automated notices; this approach places burden on taxpayers, especially those who are low income. Most states do not provide the same protections and collection alternatives for taxpayers experiencing economic hardship; several states automatically file notices of tax liens when a debt arises and others revoke drivers’ licenses if a tax debt is above a certain dollar amount.

With the help of the LITC community and the ABA’s State and Local Tax Committee, we have spent the last several months recruiting volunteers to complete the survey for each state. The survey was sent to the first group of volunteers in early January, and we are starting to receive completed responses. As of this writing, we have received responses for five states: Alabama, Illinois, New Jersey, Utah, and Texas. While it is too soon to make any conclusions, I am happy to share some preliminary data from the first few responses. The survey contains about 200 questions in total, but below are some key findings that I find particularly interesting.

Of the five states for which the Center has received a response:

  • Two regulate commercial return preparers (Alabama, Illinois).
  • All regulate property appraisers.
  • Four use private collection agencies for income tax debts (Illinois, New Jersey, Utah, Texas).
  • One state funds LITCs to help taxpayers with state tax issues (Illinois).
  • All have physical locations where taxpayers can receive assistance from the tax agency.
  • Only one state offers forms and guidance in languages other than English (Texas). 
  • Three have state taxpayer advocates that may help taxpayers with income tax and sales tax issues (Alabama, New Jersey, Utah). One has a taxpayer advocate office that may assist taxpayers with property tax issues (Utah).
  • All have a taxpayer bill of rights.

There are still a few states for which we are seeking volunteers. Those states are:

  • Hawaii
  • Montana
  • Nevada
  • North Dakota
  • Oklahoma
  • Vermont
  • West Virginia
  • Wisconsin
  • Wyoming

If you would like to complete the survey for any of the states listed above (or if you know someone else who may be interested), please email anna@taxpayer-rights.org. As noted above, we plan on holding a workshop in the fall to share our findings, as well as best practices and recommendations. Thank you to our volunteers – this project would not be possible without your assistance.

TIGTA Report on EITC Audit Procedures Suggests Room for Improvement in IRS Communication and Education Strategy

Today we welcome back guest blogger Anna Gooch. Anna highlights ongoing discussions of the IRS’s communication and education strategy between TIGTA, the IRS, and stakeholder groups. This topic is particularly timely following the President’s executive order on improving customer experience across the federal government, which states in part, that

Agencies should continually improve their understanding of their customers, reduce administrative hurdles and paperwork burdens to minimize “time taxes,” enhance transparency, create greater efficiencies across Government, and redesign compliance-oriented processes to improve customer experience and more directly meet the needs of the people of the United States.

The Secretary of the Treasury is specifically directed to

design and deliver new online tools and services to ease the payment of taxes and provide the option to schedule customer support telephone call-backs.  The Secretary of the Treasury should consider whether such tools and services might include expanded automatic direct deposit refunds based on prior year tax returns, tax credit eligibility tools, and expanded electronic filing options.

Creatively re-thinking taxpayer communication and education will help ensure that the agency’s new online tools and services make a meaningful difference in the taxpayer experience. Christine

In a report issued on September 2, 2021, the Treasury Inspector General for Tax Administration (TIGTA) released a report reviewing the IRS’ EITC audit practices and providing recommendations for improvement. In the report, TIGTA explained:

The IRS’s EITC examination strategy is not part of a larger IRS examination strategy that encompasses all examinations by which resources devoted to EITC examinations can be more easily assessed in the context of other challenges to taxpayer noncompliance. Also, due to IRS processing limitations, the IRS does not prioritize certain high-risk EITC claims for examination. Lastly, the IRS’s examination rates for EITC claims appear disproportionate with respect to certain Southern States; however, the examinations are aligned with tax returns flagged by IRS compliance filters.

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Based on these findings, TIGTA made the following recommendations designed to improve the processes by which the IRS selects EITC claims for audit:

1. [C]onsider how refundable credits, including the EITC, would be examined to a different extent if the claims are considered for compliance purposes closer to the proportion that they contribute to the Tax Gap.

2. Evaluate the current programming for the prerefund selection process to ensure that cases identified by both [Questionable Refund Program (QRP)] and [Dependent Database (DDb)] selection pools are prioritized for DDb prerefund selection.

3. Evaluate and revise the scoring process to ensure that the cases with the highest risk are scored as such.  This process should include adding weight to cases with higher QRP and DDb scores and [duplicate TIN filing] repeaters.

4. [T]ailor EITC-related educational efforts for the States with disproportionate error rates.

Of these four recommendations, three are focused on the IRS’ role as a revenue collector. The fourth recommendation, the only recommendation that the IRS did not agree to adopt, concerns the IRS’ role as benefits administrator. In rejecting that recommendation, the IRS relied on its belief that “it already has extensive outreach and education strategy in place,” including EITC Awareness Day and Refundable Credits Summit.

Although this report focuses solely on EITC audits, it provides an opportunity to explore the nature of current IRS outreach and education programs in the context of refundable credit compliance. The Refundable Credits Summit and EITC Awareness Day provide a window into such efforts.

On November 2 and 3, 2021, the IRS held its annual Refundable Credits Summit, a two-day conference hosted by the Wage & Investment Division and Return Integrity & Compliance Services. Commendably, the IRS has been holding these summits for several years now and invites various stakeholders – academics, nonprofits serving the target community, representatives of tax professional groups, LITCs, and tax preparation and VITA entities – to hear presentations from senior IRS leaders on topics relevant to refundable credits and to discuss concerns. The first day of the Fall 2021 Summit provided a summary of legislative and procedural developments regarding the Child Tax Credit and the Earned Income Credit, as well as progress made on advance payments of credits and the various portals associated with those credits. On the second day of the Summit, the IRS hosted a four-hour brainstorming session, requesting suggestions on ways to raise awareness of the availability of refundable credits. During this session, Summit participants offered ways in which the IRS can reach more Americans – posters in laundromats, billboards along highways, ads on local radio stations. There were seemingly endless ideas offered, and while raising awareness of refundable credits is undoubtedly important, this discussion highlighted the IRS’ limited view of “outreach.”

First, based on what was discussed during the Summit (and what was not discussed), it is clear that raising awareness is where the IRS’ plan ends. Reaching as many taxpayers as possible is admirable, but as several participants pointed out during the summit, the lack of a follow up education strategy from the IRS creates a risk that taxpayers will not understand how refundable credits apply to them and their circumstances, nor will they have resources to consult when they encounter a problem.  

Second, it seems the IRS views itself as an information provider and not as the entity that would communicate directly with taxpayers. Rather, though aware of geographic, cultural, and demographic differences among eligible populations, the IRS did not appear to envision any role for itself in communicating with these populations. Instead, the IRS looked to the attendees to conduct community-based outreach using IRS-provided resources. Understandably, the IRS is proud of increasing its stakeholders and the number of eligible individuals it reaches; however, the IRS has no effective way of analyzing whether its materials and efforts are useful or effective because it delegates this responsibility to stakeholders.  

Finally, the IRS failed to consider the importance of using data in its outreach campaigns. There exist data breaking down which areas are most at risk for failing to claim the expanded CTC, even if families in these areas are eligible. These areas should have not only a different, targeted outreach strategy, as TIGTA suggests, but also an intensive education campaign focusing on the communities where specific types of noncompliance occur.  The IRS also doesn’t seem to use data in analyzing its efforts after the fact. As one participant stated during the Summit, the IRS cannot just throw several campaigns out and hope that something sticks. If the IRS wants outreach and education to be effective, it must analyze what works and what doesn’t.

In terms of education, as noted in the recent TIGTA report, the IRS relies on its existing EITC Awareness Day to provide sufficient education to EITC claimants. According to the IRS website, “Awareness Day is an event organized by the IRS and its partners to educate the public about the EITC and requirements to claim the credit. The goal is to raise awareness of EITC to ensure every qualified worker claim and receive [sic] their EITC. We also ask you to join us in getting the right message out about the CTC/ACTC and the AOTC to the right people who deserve the credits” (emphasis added). Despite the IRS’ apparent goal to reach “every qualified worker,” the reach of Awareness Day is quite limited. In 2020, via its 1,500 “supporters,” the IRS reached 2 million individuals on EITC Awareness Day. While the IRS does state that “other activities such as news releases and articles for EITC Awareness Day” were conducted, it is silent as to what exactly these activities are or what their reach is, especially because the IRS relies so heavily on its “partners.” In 2020, 25 million taxpayers claimed the EITC on their return. Two million is 8% of 25 million – not exactly “every qualified worker.” The IRS does not publish much data on EITC Awareness Day, so it’s not entirely clear who is targeted, what the message is, or if there is any follow up, much less what communities the education actually occurred in.  The information that is published suggests that there is room for improvement of EITC (and other refundable credit) education efforts, particularly those targeted toward the 5 million taxpayers who are potentially eligible for the EITC but do not claim it.

The TIGTA report is just one example of where the IRS is failing to embrace its dual role as both revenue collector and benefits administrator, and outreach and education are just a small part of adopting that role. The IRS could begin to improve its educational programs by starting with small pilot programs targeting communities with high noncompliance or nonparticipation, as TIGTA suggests. From these programs, the IRS would be able to test and analyze multiple strategies and approaches to determine the best approach for larger markets. Among other changes, the IRS could revise its mission statement, create a specialized unit dedicated to benefits administration, adjust administrative processes, and improve communications to better reflect the role it has in administering some of the nation’s largest anti-poverty programs. Of course, all of this cannot happen overnight, but as Congress continues to place benefit administration in the IRS, the IRS must adapt accordingly.

Tax Questions, User Fees, and Private Letter Rulings

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

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

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

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

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

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

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

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

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

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

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

Using past policies to inspire the future of IRS customer service

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

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

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

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

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

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

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

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