Property Tax Strict Foreclosure – A Final Update

May 31, 2023 by 2 Comments

Guest blogger Anna Gooch of the Center for Taxpayer Rights follows up on prior posts and discusses the Supreme Court’s decision in Tyler v Henepin County. Anna was an early and prescient commentator on how a state’s use of strict foreclosure raises significant constitutional issues. Les

I have twice written (here and here) on strict foreclosure by state and local governments. Strict foreclosure allows the creditor to obtain both the legal and equitable title to the property upon foreclosure, meaning that the owner-debtor never receives any amount received in excess of the amount of debt owed. In my last post, I wrote about several cases, including Tyler v. Hennepin County. On Thursday, May 25, the Supreme Court rendered its decision in Tyler. In a unanimous opinion, the Court delivered a victory for property owners and for taxpayer rights.

Background

A summary of the facts and lower court proceedings is necessary before delving into the Supreme Court’s opinion. Geraldine Tyler, who is currently 94 years old, purchased a condo unit in 1999 in Hennepin County, Minnesota. She lived there by herself until 2010, when she and her family agreed that it would be best for her to move into a senior living community. She retained ownership of her condo, but neither she nor anyone in her family made any property tax payments once she moved out.  By 2015, the amount of unpaid property tax, including penalties and interest, was about $15,000. In that year, pursuant to both Minnesota and Hennepin County law, the county began foreclosure proceedings against Ms. Tyler’s condo to recover the unpaid balance. The county sold the condo for about $40,000. Ms. Tyler never received the difference between the sale proceeds and the unpaid debt, nor did she have an opportunity to request that it be returned to her.

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Minnesota, along with several other states, authorizes counties to pursue strict foreclosure to recover unpaid property tax. This means that in the event of default, the county can take both legal and equitable title to the property. There is no opportunity for the property owner to recover the equity that remained after the sale. Strict foreclosure transfers to the creditor any property interest that the owner had in the property before the foreclosure.

Ms. Tyler sued the county, arguing that strict foreclosure violates both the state and federal constitutions. Specifically, she argued that the practice violated the Fifth Amendment’s Takings Clause and the Eighth Amendment’s Excessive Fines Clause. The District Court and the Court of Appeals both agreed with the county. The Eighth Circuit Court of Appeals affirmed the District Court’s holding that Ms. Tyler failed to state a claim upon which relief could be granted. They agreed that Ms. Tyler no longer had a property interest that could be protected by the Takings Clause. Neither court discussed the Eighth Amendment issue. Ms. Tyler, the named plaintiff in this class action, then appealed to the Supreme Court.

The Supreme Court Opinions – Standing

The unanimous opinion, written by Chief Justice Roberts, first addresses the threshold question of standing and whether Ms. Tyler plausibly stated a claim. The Court quite plainly states that Hennepin County’s refusal to refund to Ms. Tyler the equity that remained after the satisfaction of her property debt “is a classic pocketbook injury sufficient to give her standing.” The Court also addresses a new claim from the County that had not been raised previously. The County now argues that there was a mortgage remaining on the condo, so even if it wanted to, the County could not return the excess proceeds to Ms. Tyler because it would be required to apply those proceeds to the mortgage. The Court rejects this argument on two grounds. First, the County never provided any evidence of any encumbrances to any Court. Second, Minnesota law extinguishes any encumbrances after a tax sale.

The Supreme Court Opinion – Takings Clause

Having determined that Ms. Tyler had standing and that she properly stated a claim, the Court discusses whether the harm that Ms. Tyler suffered was a result of Hennepin County’s violation of the Takings Clause.

Just as the court did in a similar case called Hall, which I blogged about in February, the Supreme Court here focuses on the history of the concept of property and of takings. The Fifth Amendment and the Takings Clause do not define “property.” However, centuries of English and American support the position that an equity interest in property cannot be extinguished without compensation. Indeed, many states have taken affirmative steps to overturn historical practices of strict foreclosure. States cannot legislate around this history, and many have not. Over thirty states and the federal government do not permit strict foreclosure. Similarly, the Court’s precedent indicates that even in extreme circumstances, excess proceeds from tax sales must be returned to the owner. The Court has long held that even when a statute governing tax sales is silent as to the requirement of the return of excess proceeds, it is assumed that proceeds should be returned to the owner, absent an opportunity to request that the proceeds be returned.

The Court also discusses the fact that Minnesota law only allows for strict foreclosure when the government is the creditor; no other creditor is permitted to retain equity remaining after a sale. The Court rejects this exceptionalism, stating, “Minnesota may not extinguish a property interest that it recognizes everywhere else to avoid paying just compensation when it is the one doing the taking.”

Finally, the Court addresses the County’s allegation that even if a property owner does not lose their ownership in the equity of the property by the initiation of a foreclosure, Ms. Tyler had long abandoned her interest by not paying property tax. Consequently, the County argues, Ms. Tyler had lost her property interest before the County initiated any proceeding against her. The Court readily rejects this proposition, stating that “the County cites no case suggesting that failing to pay property taxes is itself sufficient for abandonment.” Moreover, “Minnesota’s forfeiture scheme is not about abandonment at all. It gives no weight to the taxpayer’s use of the property.”

The Court easily concludes that Ms. Tyler retained an equity interest in her home when Hennepin County began foreclosure proceedings – the County was not permitted to destroy it by legislation, to alter it by excepting itself, or to deem it abandoned.

The Gorsuch/Jackson Concurrence

Just as we saw in Bittner, Justices Gorsuch and Jackson joined together. Their concurrence addressed Ms. Tyler’s 8th Amendment Excessive Fines claim, which had been addressed by neither the lower courts nor the Supreme Court’s majority. The County argued and the District Court agreed that its strict foreclosure practice did not violate the Excessive Fines Clause because the practice was not punitive. They provided three justifications for this position, all of which the concurrence rejects. First, they asserted that the “primary purpose” of the strict foreclosure law was remedial rather than punitive. The concurrence emphatically responds, “This primary-purpose test finds no support in our law.” Second, the County argued that the law is not punitive because a property owner might end up in a positive position if the County is only able to recover less than the amount of tax owed at the foreclosure sale. The Court responds, “Not has this Court ever held that a scheme producing fines that punishes some individ­uals can escape constitutional scrutiny merely because it does not punish others.” Finally, the District Court held that the law was not punitive because it did not turn on the property owner’s culpability, but rather serves as a deterrent to property owners. The Court responds that it has “never endorsed” such an interpretation. Though merely informative, this concurrence serves as a signal to the state courts that they “should not be quick to emulate” the analysis of the District Court in Tyler.

Conclusion

As the Court points out, strict foreclosure is not common. Neither the federal government nor a majority of states allow the practice. However, the fact that 14 states that did authorize strict foreclosure (before this opinion) is not insignificant. The Court’s unanimous decision in Tyler not only effectively ends the practice of strict foreclosure for unpaid property tax, but it also suggests that the Court is dedicating itself to the protection of taxpayer rights, at the federal, state, and local levels.

Filed Under: Foreclosure Tagged With:

Oral Argument in Culp v. Commissioner

March 7, 2023 by 4 Comments

Guest blogger Anna Gooch brings us this alert.

The oral argument in Culp v. Commissioner before the Third Circuit Court of Appeals will be part of today’s oral argument calendar beginning at 9:00 AM Eastern Time. One case is listed ahead of Culp. The arguments will be livestreamed here.

Keith discussed the case in February, and Carl Smith has written several posts on this case as well, including here and here. The Culps filed an untimely petition with the Tax Court, which dismissed their case for lack of jurisdiction. This dismissal occurred before the recent Hallmark decision. The Culps appealed, arguing that equitable tolling should apply and that they are entitled to a refund. They stated that they never received the Notice of Deficiency and furthermore, when they contacted the Taxpayer Advocate Service for assistance, they were told that no Notice of Deficiency was issued.

Carl and Keith, along with Audrey Patten of the Legal Services Center of Harvard Law School, wrote an amicus brief on behalf of the Center for Taxpayer Rights. Because the Culps were pro se and their brief did not fully address the issues, the court asked the amicus to participate in the oral argument. Keith will argue today on behalf of the Center for Taxpayer Rights. Pro bono counsel Oliver Roberts of Jones Day will be arguing for the Culps.

Once it is available, I will post a link to the recording. 

Update: the oral argument recording may be found here: direct link; main landing page.

Filed Under: Equitable tolling, Federal Courts - Jurisdiction Tagged With:

Property Tax Strict Foreclosure – A Follow Up

February 10, 2023 by 1 Comment

Guest blogger Anna Gooch of the Center for Taxpayer Rights follows up on a prior post and discusses how other states in addition to Michigan have engaged in the practice of using strict foreclosure to combat delinquent property taxes. As Anna discusses, the practice raises significant constitutional issues, with a case stemming from Minnesota heading to the Supreme Court. Les

In November 2022, I wrote a post about a case, Hall v. Meisner, in which the Sixth Circuit Court of Appeals held that the state of Michigan cannot pursue “strict foreclosure” when a property owner becomes delinquent in property tax payments. Strict foreclosure occurs when a creditor takes both the legal and the equitable title to the debtor’s secured property in the event of default. This means that the creditor can acquire full ownership of property for a sum significantly less than the fair market value of the property. A public sale does not accompany the foreclosure. Strict foreclosure, I thought, is rare throughout the United States, and as the Hall court put it, the practice is “unconscionable” and violative of both the federal and state constitutions. However, since my last post, I have been made aware of several cases with nearly the same facts as those in Hall, including one case recently granted cert by the Supreme Court.

Here is a general overview of the substantially similar facts in Hall v. Meisner, Fair v. Continental Resources, Nieveen v. TAX 106, andTyler v. Hennepin County (throughout this post, I will refer to these four district court cases as the “Hall cases”). Through a series of statute-determined processes, a locality — usually the city or county in which the property is located — determines that a property owner is delinquent in making property tax payments. The property owner is notified of the delinquency and given an opportunity to make the outstanding payment. The timing and nature of the notices varies across states. After a specified amount of time, the locality receives the title through deed transfer or tax certificate sale of the property. After the period for redemption has passed and the former owner has made no attempt to exercise this right, the locality is free to sell or otherwise transfer ownership of the property. At no point during this process does the former property owner receive the fair market value of the property in excess of the tax, penalties, and interest owed. Instead, the government retains the sale proceeds after the outstanding property tax has been paid. In many cases, this is more than 10 times the amount of the tax due.

In my last post, I discussed the reasons that the Sixth Circuit cited in striking down Michigan’s strict foreclosure law. In this post, I review the reasons that lower and other circuit courts are citing in upholding laws substantially the same as Michigan’s. A caveat: I am by no means a SALT expert, nor am I an authority on the state laws mentioned here (those of Nebraska, Minnesota, and Michigan). These cases, however, are significant from a taxpayer rights perspective and deserve attention.

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Generally, there are three main arguments presented by plaintiffs in the Hall cases. The courts’ and the governments’ responses to these arguments in the Hall cases are largely the same.

Takings Clause

The most compelling argument in favor of the petitioners in the Hall cases is that the state’s strict foreclosure law violates the Takings Clause. As a reminder, the Fifth Amendment’s Takings Clause prevents the government from seizing private property for public use without just compensation. To be protected by the Takings Clause, a person must have an “interest” in the property at issue. Common law principles recognize that a property owner has an interest in the equity proceeds of their property.

The courts in the Hall cases find that the Takings Clause does not apply in these strict foreclosure situations for two reasons. First, they say that state law has overridden common law recognition of this property interest and that courts have consistently upheld the application of the state statute. Rejecting the district court’s application of this argument in Hall v. Meisner on appeal, the Sixth Circuit wrote, “The government may not decline to recognize long-established interests in property as a device to take them.” Automatically accepting the terms of a statute without considering how this deference interacts with centuries of common law and with constitutional requirements is a threat to taxpayer rights.

Second, in a rather perplexing argument, the Fair court states that because the Supreme Court has held that taxes are not takings, the steps taken by the state to collect taxes cannot be considered takings either. The Fair court writes, “If taxes, as the U.S. Supreme Court has held, are not takings, we do not see how efforts to collect that tax, whether through the sale of a lien on the property or sale of the property itself, could be characterized as a taking.” This misstates the nature of the plaintiffs’ Takings Clause arguments, namely that the act of foreclosure is not the taking. The taking, in plaintiffs’ view, is the state’s refusal to return the excess equity to the owner. The Fair framing also leads to strange parallels. I think it’s safe to assume that if the IRS levied several thousands of dollars from my bank account to satisfy a $50 debt, we would not argue that the IRS was justified in doing so because it recovered income tax. Indeed, the Tax Code does not permit this result; the IRS must return levy proceeds in excess of the tax liability it was entitled to collect. The Taxpayer Bill of Rights ensures that the taxpayer pays no more than the correct amount of tax, and IRC §§ 6331, 6342, and 6343 support this.

Procedural Due Process

A second argument made in the Hall cases is that the state violates the 14th Amendment’s Due Process clause in not providing adequate notice to the property owner in advance of the strict foreclosure proceedings. In each of the state statutes at issue here, there are several points during the process at which the locality must notify the property owner of the delinquency, of the consequences of a foreclosure, and of the right to redeem. Generally, the courts conclude that as long as adequate notice is provided to the property owner, there is no taking. Across these cases, the courts find that enough time was provided between the initial notices and the closing of the sale or redemption period, so no violation of due process rights occurred.

Excessive Fines

Though this argument has not been successful for the plaintiffs in any of the strict foreclosure cases I’ve read, all the plaintiffs have made an Eighth Amendment claim, arguing that in retaining the equity in excess of the property tax (plus costs, fees and interest), the government violates the Eighth Amendment’s Excessive Fines clause.

Finding that the state’s retention of the property owner’s equity is valid, the district court relies on a 1993 Supreme Court case, Austin v. United States, which established that the “fines” encompassed by the Eighth Amendment are limited to those intended to punish. The Supreme Court wrote, “The Cruel and Unusual Punishments Clause is self-evidently concerned with punishment. The Excessive Fines Clause limits the government’s power to extract payments, whether in cash or in kind, ‘as punishment for some offense.’” The Supreme Court’s analysis distinguishes between punitive fines and remedial fines. A remedial fine is not subject to the limitations of the Eighth Amendment.

In the Hall cases, the courts explain that the equity retained by the government is not a punitive fine for two main reasons. First, just because the government recovers a lot of money doesn’t mean the fine is punitive. Second, the fines targeted in the Eighth Amendment have historically been tied to criminal offenses. Here, the courts find that the state did not intend to punish the property owners for non-payment of property tax; rather, the payment in question is merely to remedy the non-payment. Therefore, according to the courts, the Eighth Amendment does not apply. 

Once again, I don’t agree with the courts’ analysis here. I think that a penalty added to a tax is intended to punish the taxpayer. A payment of the outstanding tax, interest, and penalties would remedy the government’s unsatisfied interest; retaining the equity beyond this amount goes beyond remedy.

Conclusion

Of these cases, Hall has received a decision in favor of the taxpayer (and of all Michigan property owners) from the Sixth Circuit Court of Appeals. Meanwhile, the Tyler case out of Minnesota is heading to the Supreme Court. I will keep you all updated on these and other cases as they unfold.

Filed Under: Foreclosure, Levy Tagged With:

Hall v. Meisner: An Overreach of State Tax Collection Activity

November 21, 2022 by 2 Comments

This week, guest blogger Anna Gooch of the Center for Taxpayer Rights returns with a post about a fascinating 6th Circuit case dealing with the seizure powers of states and the Constitution’s Takings Clause.  Anna has been coordinating the Center’s nationwide survey of state taxpayer rights as well as the Center’s current workshop series, Reimagining Tax Administration: State Tax Practices & Taxpayer Rights.  All of us tax folks who only focus on federal tax controversies should especially read on – state tax practice is fascinating!  — Nina Olson

Federal tax practitioners are frequently reminded of the awesome powers the United States is given as a super-creditor – federal tax liens apply to all of a taxpayer’s interest in present and future property, and the reach of levies is much more expansive than that of private creditors. With the strength of the federal government a seemingly ever-present concern for taxpayers (exacerbated by politicians and the media), the ability of state and local governments to wreak havoc on taxpayers’ lives can easily slip through the cracks. Perhaps due to balanced budget requirements and limited scrutiny from practitioners and oversight groups, state governments are free to exercise their power with impunity – usually. In one recent case, the Sixth Circuit held that a Michigan law allowing strict foreclosure in the case of overdue property taxes oversteps not only the U.S. Constitution, but also the limitations established by over 800 years of legal precedent.

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The four plaintiffs in Hall et al. v. Meisner et al. each owned property in the city of Southfield, Oakland County, Michigan. When each owner failed to pay the property tax due, the county initiated foreclosure proceedings pursuant to the Michigan General Property Tax Act. The county then conveyed the properties to the city for the amount of the overdue tax (plus penalties and interest). In turn, the city transferred the properties to a for-profit entity for a nominal amount. This entity then sold the properties at fair market value. At no point during any of these transactions did any of the plaintiffs receive a refund of the equity they had in their property. The General Property Tax Act permits this. When a Michigan government entity is the creditor, as it is in the case of property tax, the government can pursue “strict foreclosure,” where the government receives absolute title to the property without a sale. The plaintiffs then sued, claiming that this practice violates the Takings Clause of the 5th Amendment.

Before I discuss the court’s explanation of why Michigan’s actions here violated the Takings Clause, an explanation of the Michigan General Property Tax Act is warranted. I found that the process set out in the act is best understood with a timeline.

  1. March 1, Year 1: Overdue property tax assessed in Year 0 becomes “delinquent.”
  2. March 1, Year 2: The county may begin foreclosure proceedings. If the county chooses not to, the state may initiate the foreclosure instead.
  3. June 15, Year 2: The county (or the state) must file a petition for foreclosure. The property owner is notified of their right of redemption.
  4. March 31, Year 3: A judgment for foreclosure is entered, giving the county (or the state) absolute title to the property.

Assuming the county is the foreclosing entity, the state has right of first refusal to purchase the property at either fair market value or the value of the tax due, whichever is greater. If the state declined this right, the city or locality in which the property is located could purchase the property for the amount of the tax due. The entity that ends up owning the party, whether the state, county, or city, is then permitted to conduct a public sale of the property. The original property owner is never entitled to receive a refund of their equity in the property. 

The court found that Michigan violated the Takings Clause by writing the General Property Tax Act by “defining away” the property interest that the plaintiffs had as equitable title. By ipse dixit (shoutout to my high school Latin teacher), Michigan wrote the law in such a way that ensures that the Takings Clause does not apply. According to the state and the district court, “The foreclosing governmental unit – the County – had not obtained any surplus at all from its disposition of the plaintiffs’ homes, because it conveyed them (to the City of Southfield) for merely the amounts of their tax deficiencies.” Because the General Property Tax Act allows strict foreclosures when the government is the party that initiates the foreclosure, the equitable title to the property is transferred with the legal title when the county (or state) receives absolute title to the property. Thus, there is no remaining property interest to take. Citing the U.S. Supreme Court, the Sixth Circuit finds that “a State may not sidestep the Takings Clause by disavowing traditional property interests long recognized under the law.”

So, which traditional property interests did Michigan disavow? The court readily found the practice of strict foreclosure afforded to government entities violates hundreds of years of British and American legal principles. Beginning with the 12th century introduction of mortgages into European law, the court emphasized that throughout history, the unilateral elimination of equitable title was considered “an intolerably harsh sanction.”  Before the practice of foreclosure by sale became the standard, courts (and the drafters of the Magna Carta) recognized the importance of reimbursing a defaulting property owner for the loss of the value of the property to the extent the value exceeded the debt. One solution to this was (and remains) the right of redemption given to property owners. For European courts, a mortgage was just a mortgage, just as a debt is just a debt – there is no inherent right to additional equity that accompanies either.

American courts agreed with their European predecessors. Describing the history, the Hall court writes that “American courts were uniformly hostile to strict foreclosure” where absolute title was awarded to the creditor, citing cases that found the practice “unconscionable” and with “no appropriate place” in a legal system where a default on a mortgage or debt does not convey legal title to the creditor. To satisfy the competing interests of the creditor’s interest in its security and the landowner’s equitable interest, American courts – including those in Michigan — almost uniformly adopted foreclosure by sale, which was generally required to be public. The practice of foreclosure by sale extended not only to mortgages, but also to tax debts. The U.S. Supreme Court firmly agreed with this position. Holding that a creditor is entitled only to the value of the debt owed, “a tax collector had ‘unquestionably exceeded his authority’ when he had sold more land than ‘necessary to pay the tax in arrear.’” Put bluntly, “According to the long-settled rules of law and equity in all the states whose jurisprudence has been modelled upon the common law, legal title to the premises in question vested in the creditor upon the debtor’s default, yet the landowner still held ‘equitable title’ to the property.”

Though the Hall court does not discuss federal foreclosure procedures, it is important to note the difference between the government foreclosure process in the Michigan Property Tax Act and that in federal law. The law governing IRS foreclosures and the proceeds from those foreclosures conforms with the centuries of European and American law discussed in this case because it requires that the IRS return any remaining equity to the taxpayer-owner. Moreover, it mandates that the IRS take additional steps before allowing seizure and sale.  Both the Internal Revenue Code and the IRM provide that in the event that there are excess proceeds from the sale, those proceeds should either be returned to the property owner or given to junior creditors, whoever is entitled to them under the applicable state law. This is the key difference, and one that protects taxpayer rights in a way that the Michigan law does not. Regardless of whether the IRS chooses to pursue an administrative foreclosure or a judicial foreclosure, there are several steps that must be taken before the action can begin. Indeed, foreclosure must be a last resort for the IRS where other collection mechanisms have failed. Christine discusses what proving this involves here. Additionally, the IRS must give notice not only to the property owner, but also to those who occupy the property. The IRS’ procedures for initiating and conducting a foreclosure sale are not perfect, as discussed by the Taxpayer Advocate here, but they are in line with centuries of law designed to protect property owners and their equitable interest in their property.  

Equitable title arises before a sale or other transfer; in not holding a public sale, Michigan ignores rather than extinguishes equitable title when the government initiates foreclosure proceedings in response to unpaid tax debt. Internationally, there is a rich history in this area, with near unanimity in the conclusion that strict foreclosure improperly discards the owner’s equity in their land. Michigan’s General Property Tax Act and the lawsuit that followed are just one example of the power that state governments have when collecting tax debts and the importance of advocacy to keep this power in control and to protect taxpayer rights at the state and local levels.

Filed Under: Collection Activity Tagged With:

State Taxpayer Rights Protections – Some Highlights & a Free Online Workshop Series

October 12, 2022 by 1 Comment

Today’s post is from Anna Gooch, the ABA Tax Section Public Service Fellow at the Center for Taxpayer Rights.  Over the last year, in conjunction with the ABA Tax Section State and Local Tax Committee and the support of the Rockefeller Foundation, Anna and the Center have been conducting a survey of state and local tax procedures, in order to identify strengths and weaknesses in taxpayer rights protections.  Although the survey is an ongoing process and will be updated periodically, the Center has gathered enough data to convene a free online workshop series, Reimagining Tax Administration: State Tax Practices & Taxpayer Rights.  The workshop series consists of four 2-hour online workshops, between October 25 and November 22, 2022.  The series will cover tax return filing issues; audits, appeals, and adjudications; collection enforcement and collection alternatives; and state funding of LITCs and establishment of state taxpayer advocate/ombuds offices.  You can see the full agenda and register for the free conference here.  Meanwhile, read on to learn about some interesting highlights from the survey. – Nina Olson

Taxpayers in the United States routinely interact with any number of tax systems – the federal income tax; state (including district and territory) income tax; state sales, gross receipts, or franchise tax; and locality (county, city, and school district) property tax. This is not an exhaustive list. Broadly speaking, there are 52-plus unique state, district, and territory tax agencies that taxpayers must engage with in addition to the Internal Revenue Service. Each of these agencies has the ability to strengthen, protect, undermine, and impair taxpayer rights through its choices in tax and benefits administration. With the preliminary results of a survey conducted by the Center for Taxpayer Rights (more on the survey here), we can not only view the combined data for each jurisdiction in one place, but we can also begin to identify practices that work well and areas that would benefit from advocacy. These findings can then be shared among the state tax agencies and state tax practitioners with the hope that learning from each other will inspire positive change.

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With this background in mind, I’d like to share examples of best practices, areas that would benefit from intervention, encouraging statistics, and concerning trends that have emerged as outliers as the Center continues to receive completed surveys from our volunteers.

Best Practices: Oregon’s Office of the Taxpayer Advocate

Oregon is not the only state with a taxpayer advocate’s office; however, Oregon’s office is a standout. The legislation that created the office in 2021 is impressive, and it can serve as a model for other jurisdictions to adopt when creating their own state taxpayer advocate or ombuds offices. Specifically, the legislation sets out in detail the responsibilities and duties of the office. These duties are broad, and they include not only the requirement of assistance to taxpayers who are unable to solve their tax problems through normal channels, but also a requirement that the taxpayer advocate help educate taxpayers and provide easily understandable information about various Department of Revenue procedures. From this extensive list of functions in the legislation, it is clear that the Oregon legislature had taxpayer rights in mind when creating this office.

Needs Improvement: Louisiana’s Driver’s License Suspension

Many state agencies and licensing boards are authorized to suspend or block the renewal of professional (teaching, nursing, attorney, etc.) and recreational (hunting, fishing, etc.) licenses when a licensee owes state taxes. Few states take the suspension of licenses a step further by allowing the department of motor vehicles (or equivalent) to suspend or block the renewal of driver’s licenses for licensees who owe state taxes. In Louisiana, the threshold amount for the recommendation of a suspension is $1,000, and the decision is final and cannot be appealed. For comparison, the state of California may only recommend license suspension when the taxpayer owes more than $100,000 in state taxes and appears on the state’s list of top 500 tax delinquents. Louisiana’s practice is concerning because it not only perpetuates the taxpayer’s inability to pay the tax due by jeopardizing their ability to maintain their income, but it also threatens the taxpayer’s ability to obtain food, medical care, and other necessities. Although intended to scare taxpayers into paying past due tax debt, this practice may only exacerbate harm when the taxpayer cannot afford to pay the tax in the first place without incurring economic hardship.

Concerning Trends: Locating Procedural Information, Specifically in the Audit Context, Is Nearly Impossible

Some questions in the survey can be answered with a quick Google search. Does New York regulate commercial tax return preparers? (Yes). Does Pennsylvania offer innocent spouse relief? (Yes). How often must municipalities in Alaska assess property tax? (Yearly). Some questions, however, seem impossible to answer, especially those concerning audit and appeals procedures. A search asking how to know if a taxpayer is under audit yields no relevant results. States generally do not have a search function for notices or letters like the IRS does. With the exception of New Mexico, publications and other guidance on audits and appeals are rare. Without this information, taxpayers must blindly enter the audit and appeals processes. There are few, if any, resources with easy to digest information, let alone those in languages other than English. This lack of information significantly impairs taxpayer rights, and states should consider improvements both to their audit and appeals procedures and to their communications about these processes.

Encouraging Statistics: Nearly Every State Has a Taxpayer Bill of Rights

As volunteers return completed surveys, one (near) constant has been the answer to Question 111: Does your state have a taxpayer bill of rights? – Yes. When I look further into the content of these state taxpayer bills of rights (TBORs), I feel hopeful that state taxpayer rights will be better protected in the future. Some state TBORs are nearly identical to the federal version, but some include protections that are not guaranteed on the federal level. For example, North Dakota’s TBOR includes the right to record conversations between the taxpayer and the Office of the Tax Commissioner. It also includes the right to a waiver of penalties and interest for “good cause.” These two rights are not common, but they show that the state is considering its taxpayers’ unique needs and wants when developing its TBOR. Of course, there is a difference between what a state includes in its TBOR and what is does in practice, but seeing the intent on paper is promising.

These are just a few examples of key takeaways from the Center’s survey, and more will be discussed in more detail during the Center’s Reimagining Tax Administration series later this fall. During those workshops, panelists will discuss their experiences with issues involving state tax return filing, appeals and audit procedures, state tax collections, and state taxpayer rights generally. We hope that in providing a space where practitioners and government officials and policymakers can discuss these issues, we will facilitate the sharing of procedures and strategies designed to protect and enhance taxpayer rights at the state level.

Filed Under: Center For Taxpayer Rights Tagged With:

State Level Taxpayer Rights: A Survey of State Tax Administration

April 4, 2022 by Leave a Comment

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.

Filed Under: TBOR Tagged With:

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

December 20, 2021 by Leave a Comment

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.

Filed Under: Earned Income Credit, Refundable Credits Tagged With:

Tax Questions, User Fees, and Private Letter Rulings

November 9, 2020 by 4 Comments

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. 

Filed Under: User Fee Tagged With: