Creating Tax Policy and Tax Procedure on the Fly

The current situation allows us to observe the creation of new tax procedures based on new polices in real time.  Listservs and web sites are alive with discussion of what to do as the IRS tries to figure out procedures in a matter of days after passage of legislation creating new and immediately applicable tax provisions in the middle of tax filing season with most of its employees sitting on the sidelines.  We all have empathy for the people at the IRS trying to push out procedures to address the new provisions while at the same time feeling frustration based on the lack of guidance. 

A recent exchange on the ABA Tax Section listserv for Pro Bono and Tax Clinics caught my eye as a good example of the types of issues practitioners seek to work out in order to guide clients.  Some of our recent posts written by Nina Olson, Carl Smith, Barbara Heggie and Bob Rubin also address these same types of concerns.  We welcome guest posts that raise procedural issues that need answers.  We hope that perhaps the blog can serve as another outlet for passing questions that need answering to those at the IRS trying hard to provide those answers. 

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It’s interesting, but not surprising, that many answers to the questions of procedure that require an immediate answer are driven not so much by policy as by computer capability.  Since the IRS has what some people might describe as a third world class computer system, some of the procedures that will apply will result from the quality, or lack thereof, of the computer system used by the IRS.  The computer capabilities at the IRS not only drive some of these decisions but are also hampering the IRS from having its employees work during this time when many are continuing to work from home.  Because many of the IRS employees do not have laptops they can use from home, they have been sent home not to work to help through this difficult time but just to sit.

Francine Lipman, William S. Boyd Professor of Law at University of Nevada, Las Vegas, William S. Boyd School of Law, writes first raising a few of the many unanswered questions concerning who will receive the rebates that the IRS will start sending out any day.

[w]e need guidance from US Treasury.

1) Will the IRS age adjust qualifying children to 2020? Or does a QC that is 16 in 2018 qualify for a $500 EIP if no 2019 tax return filed? And not qualify if a 2019 tax return is filed?

2) If one taxpayer claims a QC on her 2018 tax return and another claims the same QC on their 2019 tax return. What is the tie-breaker? 2019 > 2018? I do not believe they both get the $500 QC amount. What if someone else claims the QC in 2020?

3) If a taxpayer claims a 16 year old QC for 2018 and no 2019 tax return on record, will the 18 year old (former QC) nondependent get the full $1,200 when she files her 2020 income tax return or does she only receive $700 ($1,200 – $500)?

It seems to me that one long-standing rule of thumb that I believe will be applied to these EIPs is that the maximum amount of EIP per SSN will be $1,200. Thus, I believe these fact patterns will be interpreted to respect that long-standing guideline.

Responding to Francine, Bob Probasco, Director, Tax Dispute Resolution Clinic at Texas A&M University School of Law, responds.

Thanks, Francine.  There are those open questions and probably several others.

I suspect that the decisions – most of which have already been made or won’t be in time for advance refunds – will be driven by factors other than what makes sense from a tax law perspective.  They will be driven in part by:

● What has to be programmed now versus a year from now for processing 2020 tax returns

● Ease of programming in an antiquated system (Nina’s post on Procedurally Taxing, procedurallytaxing.com/…, Is particularly scary)

● What can be programmed and tested and have a relatively low likelihood of significant glitches when they flip the switch

That is, we need to think about these issues not just from a legal perspective and from looking at the desired results but also from a programming perspective, what can be accomplished.  That may turn out to be a bigger factor than equity and legal interpretation.

The IRS certainly was starting their programming efforts before the final legislation was enacted but I’m not sure how much of a jump they had.  And they’re aiming at sending out the first batch of payments (by direct deposit) in a week to 10 days.  That very likely means that the small teams of IT people and IRS attorneys and whoever else had to make very quick decisions without the normal level of vetting we expect for guidance.  They had no choice if they were going to meet the deadline.  They didn’t have time to think through and identify all the issues – heck, the experienced tax practitioners here are still identifying nuances and will be for quite some time – and some issues they identified may have been too difficult to program easily.

We can speculate, for example, whether the programming is structured to crunch all the information for all taxpayers, do cross-checks between different returns, before making the final decisions which returns get how much money.  That’s complex, but doable.  It might lead to inequitable results, of course. 

As a trivial example, right now when two divorced parents each claim the same qualifying child for the same tax year, the IRS may not identify the discrepancy and follow up until a year or so later.  At that point, there may be a correspondence exam and a long process – including Tax Court – before a final determination of which parent is entitled to claim the qualifying child.  Lots of due process.  We have a case like that now.  But in the context of the advance refunds, they need to make a determination before sending payments out this month.  There are only two choices that appear even feasible as a matter of programming.  A, apply the AGI tie-breaker rule automatically.  B, allow both parents the $500.  Alas, choice A (1) increases the complexity of the programming and (2) raises additional due process questions.  How does the losing parent challenge that?  That might be difficult to impossible other than through the audit process applied to the 2020 tax returns.  But that delays receipt of the money for someone who may really need it and may not even come up in 2020 if the qualifying child has “aged out.”  It also invites gaming the system, particularly since a parent who improperly claimed the qualifying child but got the $500 this month apparently would not have to give it back on the 2020 tax return.  (Is there an exception to the “no claw back” rule for improperly claiming a qualifying child, or was that primarily intended for changes in AGI?)

And I’m not at all sure what happens in that trivial example if the 2018 return was joint, parent A files a 2019 single return before the first batch of direct deposit advance refunds, and parent B files a 2019 single return after parent A receives the advance refund.  Is “first past the post” (in the horse racing, not electoral, sense) an equitable way to decide who gets the $500??

These kinds of issues abound.  The programming team won’t have identified all the issues, and won’t have identified all the nuances and potential problems arising from different solutions.  There’s no way they can/could in a very limited time.

They also will likely be pre-disposed to simple decision trees rather than complex, nuanced ones.  The latter is risky.  Several years ago, in my pre-law school career, I managed a small team (IT folks and accountants from the user group) on a systems development project.  That system was much more straight-forward than anything we’re talking about here and the volumes of data we were working with were several orders of magnitude less than what the IRS will be dealing with.  We spent over nine months on the project.  (Maybe more, this was at least 30 years ago and my memory is a little bit fuzzy.)  At the end, after extensive testing, we flipped the switch to go live – and it didn’t work.  The people at the IRS are a lot smarter than I am but the task they’re facing is also light years more difficult.  So I expect them to err on the side of simplicity rather than complexity/nuance.

A totally uneducated guess (and your guess is better than mine) for those examples you raised:

1. Seems the most likely to be addressed in the programming (not sure in which direction) if the age information is easily accessible from the Form 1040.  (I should know whether it is but I’m drawing a blank at the moment.)

2. Assuming they do a complete crunch of all the tax returns and cross-check before deciding the advance refund amounts – which itself is a herculean task – they can resolve that.  But it becomes a legal issue in addition to a programming issue, and either way they decide it will be subject to second-guessing.  What would be the logical basis for deciding one way or another?  I’m not sure there is one – it would have to be a fairly arbitrary choice.  They might even duck the question and give the credit to both; it will be – relatively speaking – a small subset of qualifying children, and overpaying might insulate them from a lot of criticism based on sympathetic taxpayers.  Then they will have more time to decide what to do when the 2020 tax return rolls around.

3. Depends on the resolution of #1?  I suspect that if this is an issue, they will take their time to decide what to do when the 2020 tax return rolls around.  This isn’t a decision that needs to be made this month.

And, one final thought.  We may not get “guidance” in the normal sense.  They’re making the decisions about the advance refunds – indeed, they already have.  We don’t need to know in order to apply for an advance refund in the normal sense of “apply.”  And I’m not sure they envision a mechanism for taxpayers to challenge the amount of their advance refunds.  In which case, we don’t need guidance in the normal sense for the challenge process.  All they do in the short term may be to tell us “if you can’t figure out how we arrived at the amount of the advance refund you received, here is our decision tree; but you can’t challenge it now.  We’ll provide more guidance in the next several months and by then it may have changed.”

Francine responded to Bob with the following brief message:

I agree 100% about [the] lack of forthcoming traditional “guidance.” Perfect is the enemy of the good here and the theory of second or even third, fourth best certainly applies now with a global pandemic and a corresponding economic free fall.

Thanks Bob and Francine for giving all of us issues to think about as we navigate how to guide clients in the absence of guidance from the IRS and thanks to everyone engaging in these types of discussions that may eventually impact decisions.  Thanks to the IRS employees working hard to implement legislation passed in the middle of the filing season and in the midst of extremely trying circumstances.  Do the best you can under a situation never faced before.

Seasons of Taxpayer Rights

We welcome Francine J. Lipman as our guest blogger today with her reflection on the tenure of Nina Olson as National Taxpayer Advocate.  Francine is the William S. Boyd Professor of Law at the University of Nevada, Las Vegas.  Francine is also a terrific (and creative) writer as you will see when you read this post and she is a tireless advocate for low income taxpayers from her position as a doctrinal professor.  Keith

(sing to Seasons of Love from Rent by Mr. Jonathan D. Larson)

Nine million, four sixty thousand, eight hundred minutes.
Nine million, four sixty thousand, eight hundred moments in a career.
Nine million, four sixty thousand, eight hundred minutes.
How do you measure.
Measure NTA Olson’s career?

In tax refunds?
In blog posts?
In reports to Congress?
In reforms, in speeches, in analytics?
In nine million, four sixty thousand, eight hundred minutes.
How do you measure eighteen years of a stellar career?

How about taxpayers?
How about LTAs?
How about LITCs?
Measure in rights …
Seasons of taxpayer rights ….
Seasons of taxpayer rights …

Nine million, four sixty thousand, eight hundred minutes.
Nine million, four sixty thousand, eight hundred words in her plans.
Nine million, four sixty thousand, eight hundred minutes.
How do you measure a career of a woman so grand?

In truths that we learned,
Or in times that she heard?
In bridges that she built,
Or the respect that she earned?

It’s time now to sing out,
though public service never ends.
Let’s celebrate eighteen years of advocacy we must commend.

Remember passion …
(Oh, you’ve got to you’ve got to remember taxpayer rights)
Remember tax maps …
(You know the rights are a gift from Congress)
Remember tireless service
and tax vans
(Share rights, give rights, protect rights, measure Nina’s career in rights)
Seasons of taxpayer rights …
Seasons of taxpayer rights …

Post Script

Dear National Taxpayer Advocate Nina E. Olson:

Thank you for the nine million, four sixty thousand, eight hundred minutes in which you have inspired, mentored, driven, pushed, prodded, probed, analyzed, sacrificed, written, crunched, calculated, blogged, testified, criticized, applauded and lead generations of passion warriors for tax justice from sea to shining sea and across the globe to be the best we can be. In nine million, four sixty thousand, eight hundred minutes you have touched countless lives (including uncountable kids) and exponentially changed the world for the better. For this alone our gratitude is immeasurable and our respect for all that you have accomplished immense.

As Maya (Angelou), said, “When someone shows you who they are believe them, the first time.” Like Christine (A. Brunswick) and Janet (R. Spragens) you showed us who you were when you called Keith Fogg at IRS’ Chief Counsel and pitched your epiphany about a low-income taxpayer clinic in the 1990s. And the rest is “herstory,” your incredible tax story. We are in shock and awe at what you have accomplished for a greater good. And know that your public service will never end.

“Never doubt that a small group of thoughtful, committed, citizens can change the world.” Margaret Mead

Because you have …

With gratitude, appreciation, and nine million, four sixty thousand, eight hundred thank yous,

Francine J. Lipman (one of nine million, four sixty thousand, eight hundred indebted #TeamNina foreverfans)