Proving Your Client’s Marital Status, Not as Simple as It Appears but Crucial for EITC

October 2, 2020 by 2 Comments

Today we welcome back guest blogger Gina Ahn. In today’s post Gina explains the importance of marital status for the EITC, and how the stark difference between the childless EITC and the EITC with qualifying children led one taxpayer to pursue an extremely weak Tax Court case. While that taxpayer’s claim of common law marriage did not succeed, common law marriage may be a legitimate claim for residents of common law states. Ultimately though, Gina argues that a better solution would be to expand the EIC for childless workers. Christine

As is often the case in the low income or nonprofit universe, the reverse of common knowledge often proves to be true. When I was in-house counsel of a private operating foundation, it became second nature for me to always look for ways to proactively document expenditure responsibility grants, charitable contributions of donors, travel expenses, or the use of statutory safe harbors in self-dealing transactions. This likely was a natural self-defense mechanism because the founders of the foundation practiced reverse ‘tithing’ (where they would donate 90% of their earnings and keep 10%). This radical giving philosophy often drew the ire and suspicion of auditors who were convinced the foundation was a front for a nefarious sophisticated tax scheme. The plain vanilla explanation that the founders were simply living out their religious convictions was too far-fetched for the examiner to believe. So, naturally, the first time I saw an Earned Income Tax Credit (“EITC”) audit of a schedule C cash business at our Low Income Taxpayer Clinic (“LITC”), I was perplexed. I thought to myself, “Why in the world is the IRS contesting this person’s earnings? Don’t they want more revenue? Would they prefer the taxpayer to say he did NOT work and thus owed no taxes?” Little did I realize that the EITC’s high improper payment rate of 25% and large influence of unregulated (and often unscrupulous) private third party preparers “not acting in the best interest of taxpayers and tax administration” gave the IRS statistically sound reasons to select such taxpayers for examination. Apparently, it is an ‘industry’ secret I am just now learning from my clinic’s clientele that preparers often urge taxpayers to increase earnings by declaring cash income of a ‘miscellaneous’ business, to raise the taxpayer’s AGI to be just high enough to land in the fortuitous ‘sweet spot’ to get the largest EITC refund. Oddly, whether one is a high-income taxpayer who “donates too much” money to charity, or a low income taxpayer who has “too much cash income”; you are both a prime candidates for audit.

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Marriage leads to benefits, not a penalty, in the LITC universe

Using the counter intuitive logic of the nonprofit sector, if high income taxpayers normally bemoan the marriage tax penalty; then is there some sort of marriage tax benefit in my alternate LITC universe? Actually, there is – sort of. Childless taxpayers with low income who are de facto (but not legal) stepparents see a substantial EITC increase if they legally marry. For the tax year 2018, a childless taxpayer who supports three children in his household can receive $5912 morein EITC if he is legally married to the mother of the three stepchildren in the household. This is because those who support and care for the children of their cohabitating partner (without marrying their partner)– may not claim any tax benefits from the children. If our example taxpayer is not married, the largest possible EITC for him as a low-income worker without qualifying children is only $518 (see diagram below). By marrying his partner, the children become his qualifying children for the EITC. So, to be more precise, it is not quite a marriage benefit per se. But rather, a legally valid marriage opens the door to a much more lucrative EITC benefit (and other tax benefits that come with qualifying children).

NTA Special Report to Congress, “Earned Income Tax Credit: Making the EITC Work for Taxpayers and the Government, Improving Administration and Protecting Taxpayer Rights”

Such is the background for Mr. Brzyski’s Tax Court case, T.C. Summary Opinion 2020-25. (James Creech previously wrote about the social media aspects of the case here.) I am saving this opinion to put in our LITC Volunteer Training Manual/Casebook. It is a methodical parsing of a bread and butter issue that comes up often at our clinic: How much EITC is my client entitled to? What do you do if you don’t have any evidence? Whether one is a seasoned tax practitioner or new law school or LLM graduate, I highly doubt a small tax case without precedential value would ever reach any casebook. My tax casebooks tended to be full of partnerships (inside or outside basis?) and NHL hockey players who did not want to file U.S. tax returns.

Unfortunately, this taxpayer did not have the benefit of an LITC to advise him of the futility of pursuing this case. It becomes quite clear by looking at the chronology of events as described in the opinion that he was grasping at straws. It seems that Mr. Brzyski eventually understood that his entire case depended on whether or not he was legally married to the mother of the two children he claimed on his 2016 tax return. As Judge Copeland writes, “Accordingly, the key to whether [the minors] meet the [stepchild] relationship requirement, as defined by section 152, is whether Mr. Brzyski was married to Daniela [the minors’ mother] in 2016.” The judge does not leave us hanging in suspense. The very next sentence gives her terse (perhaps sardonic? I wish I could have heard her voice) findings of fact: “We find he was not.”

A Melting Pot Federalist System of Governance: Many States and Immigrants

Marriage really ought to be a simple fact to prove. You either have a marriage certificate, or not. If you’ve misplaced it, you can even order one online through a lexis service. But what if you left your country in a state of civil unrest when that country did not maintain birth or marriage records? Then, government agencies offer alternative means to prove your married status. For example, my parents left Korea after the Korean War. At the time they emigrated to the U.S., Korea certainly did not have the luxury of a functioning vital statistics office. However, USCIS and Social Security still figured out an acceptable means to document their marital status in the process of granting their citizenship and social security numbers. However, with this taxpayer in this case, civil unrest was not an impediment to proving his married state. Rather, it was the fact that he did not formally marry in the sense of getting a marriage license or certificate from a civil authority.

However, because the United States has a federalist system of governance and a Constitution with a full faith and credit clause; there was still a slim chance that perhaps Mr. Brzyski had entered into a common law marriage in one of the nine states that recognizes common law marriage; and thus the IRS would recognize his marital status even without a marriage certificate. (See Reg. § 301.7701-18.) And in fact, “Mr. Brzyski contends that he and Daniela entered into a common law marriage in 2011 when they visited Kansas for dinner.” (p.8) The taxpayer seems to believe that a common law marriage is an informal event where a couple can simply “declare” the state of marriage – something akin to eloping to Las Vegas; but without an officiant or registration required.

As a side note, when I was a claims representative for the Social Security Administration (prior to law school) I used to interview widows to evaluate applications for survivors benefits. I vividly recall one conversation with my mentor instructor, because it made an impression on my young naïve (first job out of college) mind.

SSA Gina: “Why do we ask for ALL their former dates of marriages, locations, and dates of divorce? It makes the interview so slow and I feel bad making them work so hard to recall everything. I mean, isn’t the most important marriage the most recent one?”

SSA Mentor: “We do it because it’s our job to look for the correct benefit amount, and it’s possible that they could receive higher benefits based on the earnings of a former spouse.”

SSA Gina: “Okay, I could see the logic of that. But, why do we ask what city or state?”

SSA Mentor: “Because we have to look for putative marriages or possible marriages in other states that recognize common law marriage.”

SSA Gina: “You mean, they just have to live together in one of those states and they’re magically married, without getting married? Can you accidentally marry someone?”

SSA Mentor: “No Gina. Just living together is not enough. They have to act as if they are married. You know they need show that us things like utility bills with both their names on it. And present themselves to the community as if they were married. Just look it up in the POMS when you get someone who alleges at least ten years in one of those states. Roommates can’t just get magically married, it’s something more.”

This left an impression on me because I thought, “Wow. I work for a very generous government agency that trains its workers to “look for” the highest wage earning husband to base a survivor benefit off of.”

No Marriage Certificate? Did you spend significant time in one of the 9 states that recognizes common law marriage?

The IRS has a similar philosophical approach in that they also want to determine the correct assessment and if a common law marriage will lead to the correct assessment; so be it. However, unlike Social Security, the IRS was not created to function as a federal benefits agency and does not hire “Claims Representatives” to interview taxpayers for EITC refunds (a quasi benefit of sorts). Instead this ‘federal benefit’ application is outsourced to third party paid preparers, who are to submit tax returns including information for the Service to determine and pay out the correct EITC amount. Therein lies the opportunity not only for intentional abuse, but genuinely mistaken under- or overpayments.

A quick read through IRM 5.19.11.7.1.2.2 (12-14-2018), gives succinct instructions for a taxpayer who spends “significant time” in one of the nine common law states: CO, IA, KS, MT, OK, RI, TX, UT and the District of Columbia. A ‘declaratory’ dinner in Kansas will not suffice, as the taxpayer mistakenly believes, “Mr. Brzyski claims that over the Thanksgiving holiday he and Daniela established a common law marriage by driving across the Missouri border to Kansas and declaring their marriage over dinner.” (fn 11).

How NOT to prove your common law marriage

The final flaw in the taxpayer’s argument was his lack of consistency. If we look at the chronology of life events and tax filings; it’s hard to imagine that the judge did not (at least internally) have a skeptical tone. It is difficult to argue, “We’ve been married since 2011” – if the first time you file a joint return is a late filed amendment in June of 2017 for TY2016 (the year in dispute). Below is the chronology of events as described in the opinion:

  • November 2011, taxpayer and mother of stepchildren fly to Missouri to visit taxpayer’s family.
  • November 2011, taxpayer and mother of stepchildren drive to Kansas for dinner to declare their marriage.
  • December 2011 taxpayer’s social media[1] still refers to the mother of stepchildren as his fiancée
  • Sometime on or before April 2013, taxpayer timely filed TY 2012 as Single
  • Sometime on or before April 2014, taxpayer timely filed TY 2013 as Single
  • (No information about 2015)
  • October 2016 taxpayer and mother of stepchildren enter a lease together using taxpayer’s last name (but she signs agreement with her maiden name).
  • February 22, 2017 taxpayer timely filed TY2016 (year in dispute) as Head of Household
  • June 20, 2017 taxpayer sends TY 2016 amendment to change status to Married Filing Joint
  • July 24, 2017 notice of deficiency from IRS for TY2016
  • August 2017 taxpayer files TY 2015 return as Single

What kind of “supporting documentation” would have worked to establish a common law marriage?

Judge Copeland expands on her “we find he is not [married]” conclusion:

Mr. Bryzski has not offered any consistent supporting documentation that he went to Kansas to marry or that he and Daniela held themselves out to be husband and wife following their 2011 Thanksgiving trip. Accordingly, we find that Mr. Brzyski failed to meet his burden of proof to establish that a common law marriage took place in Kansas.

Opinion at 11

Although we will never know the whole story, I cannot help but to wonder what sort of documentation the judge would have accepted (if any), to overcome the taxpayer’s inconsistent filings? We sometimes come across clients at our clinic in the unfortunate situation where a paid preparer had given them wrong advice. E.g. “I was told that as long as we live together for 10 years, it’s recognized in California as being married.” The hapless unmarried couple has a spent significant amount of time together and have been presenting themselves as married to the community. It’s just the wrong community, in that California doesn’t recognize common law marriage. Hypothetically speaking, suppose this unmarried couple had spent some time in CO, IA, KS, MT, OK, RI, TX, UT or DC; what type of documentation would be helpful to establish their common law married status?

IRM 5.19.11.7.1.2.2 (12-14-2018) instructs the IRS compliance employees to “ask the taxpayer to provide at least two of the following types of documentation to substantiate a claim of common law marriage.”

  • Deeds showing title to property held jointly by both parties to the common law marriage
  • Bank statements and voided checks showing joint ownership of the accounts
  • Insurance policies naming the other party as beneficiary
  • Birth certificates naming the taxpayer and the common law spouse as parents of their children
  • Employment records listing the common law spouse as an immediate family member
  • School records listing the names of both common law spouses as parents
  • Joint credit card accounts
  • Loan documents, mortgages, and promissory notes evidencing joint financial obligations
  • Mail addressed to the taxpayer and common law spouse as “Mr. and Mrs.”
  • Any documents showing that one spouse has assumed the surname of the other spouse

It makes me wonder, had Mr. Bryzski opened a bank account in Kansas and some marketing companies had addressed credit card offers to a Kansas address as Mr. & Mrs. Bryzski, could they have persuaded the examiner or the judge?

For unmarried clients with “stepchildren,” now what?

Unless they are willing to get married, there is nothing that can be done. And I’m not sure it’s good advice to begin or end a marriage for solely for an EITC refund. Although this NPR podcast “How Economists Do Valentines” is an entertaining nine minute exchange of two economists who did NOT marry because the (tax) cost benefit analysis of marriage came out negative, I think they are the exception and not the rule. In the midst of the pandemic, where the hardest hit industries include retail, hospitality, food services, and manufacturing, one source of disaster relief to consider is a temporary expansion of the childless EITC refund. This is currently proposed in the HEROES Act. Included in the category of ‘childless’ taxpayers are unmarried stepparents – for whom an additional stimulus check through a revamped EITC would make a substantial impact. The Tax Policy Center explains,

HEROES Act [proposes] changes to the EITC would go to people in the bottom 20 percent of the income distribution, . . . [that] would help people in industries that are being hurt the most by the pandemic.

While not a long-term solution, this could provide a much needed reprieve during difficult times to the working poor, married or not.

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How Low Income Taxpayers deal with IRS controversies and what it means in the COVID-19 Era

March 26, 2020 by 5 Comments

Today we welcome first time guest blogger Gina Ahn. Gina practiced law as In House Counsel and Program Officer for a private operating foundation working internationally before transitioning to low-income tax controversy in 2019 as the managing attorney of the Koreatown Youth and Community Center LITC. In today’s post, she uses a current case to illuminate some of the unique challenges that many low-income taxpayers face in dealing with the IRS, and how the coronavirus shutdowns particularly impact those taxpayers. Christine

Have you ever taken a subway in a foreign country where you don’t speak the language? You plan; you know when you need to get off; you figure out exact change in advance – yet you still get stuck behind a whole group of people blocking your way off. Panic. You don’t know how to say “Please, let me through. I need to get off.” That feeling of helplessness and desperation is the norm for most of the clients I work with at the KYCC Low Income Taxpayer Clinic (“LITC”) in Los Angeles. Navigating the IRS Automated Underreporter (“AUR”) program, responding to the Integrity and Verification Operations (“IVO”) ID verification requests, and working through the Collections Process is difficult. The Taxpayer Advocate Service’s (“TAS”) Roadmap (Publication 5341, Rev. 9/2019) is a helpful guide to understand where one is in the giant IRS machinery. According to TAS’s map, our clinic’s clients are primarily in the Exam (Orange), Collection (Red), Appeal (Purple), and Litigation (Blue) stations.

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Most LITC clients come to us after their deadlines have expired – whether it’s 30, 60, or 90 days after key dates. For these clients, to be perfectly frank, the COVID-19-related reductions in IRS service capacity may not impact them much, if there is no urgent need for action on their case. Someone with a shelved collection case who is seeking an OIC will have the same end result whether we can accomplish it now or 6 months later.

Ironically, it is the taxpayers who are ‘mid stream’ and the most engaged in the IRS controversy process that are the most stressed by COVID-19. As of 3/22/2020, 8 state governors have announced “stay in place” orders of some type. The stress and impact are most easily demonstrated by sharing a real case scenario in the context of a local shut down. KYCC’s LITC is located in the city of Los Angeles. The mayor of Los Angeles issued a stay at home executive order on March 19, 2020, Thursday evening that ordered all non-essential businesses to cease operations. We had 24 hours to implement this order. Since assisting people with IRS controversies is not considered an essential business; we scrambled to prepare for the shut-down.

Like any other service industry operation that works with the general public, we had to shut down. So what’s unique to a low income tax controversy shut down? From my perspective, I believe the loss of in-person face to face appointments impacts the lower income demographic disproportionately compared to a regular tax controversy law firm. The demographic we serve are the least well equipped to access technological “work arounds” and the most likely to respond to “user friction” by dropping out and disengaging from the process of resolving their tax controversy.

This is best demonstrated by example.

LITC Case: EIC, CTC, HoH Correspondence Audit Denied

The last Friday (3/20/2020) I was physically at the clinic, we received a letter from the Service’s AUR program denying the Earned Income Tax Credit (“EIC”), Child Tax Credit (“CTC”), and Head of Household (“HoH”) filing status for a taxpayer we are representing. Fortunately, since this client is a native English speaker, I did not need to translate it into a foreign language. Of course, as any subject matter expert has to do in any industry, I still need to act as a cultural broker from “IRS speak” into “what it means for you.”

Prior to COVID-19, this taxpayer already had an uncooperative landlord not willing to find their cash receipt book to supply the additional receipts need to prove that that the taxpayer supported her dependents in tax year 2018.  Now, because of stay in place orders, that same landlord is even less available. Proving support of my client’s dependents will be challenging.

Fortunately, seeking redetermination in Tax Court is still an option. But, this taxpayer is already exhausted and wary of engaging in the government system. “Why,” you ask? To be honest, I do not quite know the answer. I just know she is psychologically fragile. Even at our first meeting where we discussed a response to the audit (back in November 2019), I asked her to obtain receipts from the landlord, it took her about 6 weeks to respond with about six receipts. She was fairly email savvy, so I emailed a request for more receipts. I get no response for two weeks. So, I called her cell.

“I’m sorry, but it would be best to prove more than 6 months, you know, like a “majority” of support. Can you get the rest of the receipts for 2018?”

She sighed and replied, “Maybe I should just give up.”

“Why? I mean, they are your kids and you took care of them. You should get the credit.”

“Well Gina, I saw your email and asked my landlord for more receipts. But he’s unwilling to look up last year’s receipt book. He won’t respond to any of my requests. And I have to work and take care of my kids and there are so many other things I need to do besides this.”

I negotiate with her, “Okay. Instead of giving up, just let me fax everything else we have with the six receipts from him and see how they respond.”

Do you hear her exhaustion? This working single mom of two children is just plain exhausted by life. She works an hourly job, and fighting to obtain proof to show she’s raising her kids is like the proverbial last straw that broke the camel’s back.

In this context, my client receives an IRS response on March 20, 2020 – the day after the mayor of Los Angeles announces stay at home orders. The IRS response essentially tells her, “Nope, we don’t agree. You owe us $5500 + penalties + interest = $7000. You can ask us to reconsider. Or you can go to court. But don’t be late – you’ve got a hard deadline of June 1, 2020.”  Since she doesn’t have the benefit of my colloquial translation (yet), she will likely focus in on the only part of the letter not in legalese, “How to Pay Your Taxes” which includes the final dollar figure.

If she has lost her job; she’s already stressed about how to make ends meet. If she’s fortunate enough to have a job that permits telework; she now has to figure out how to work from home while the kids are at home. Unfortunately, school will likely stay closed until the summer (adding another obstacle to her proving her kids’ residence) and the uncooperative landlord is even less accessible.  And a request for medical records from the doctor’s offices (often used to prove residence) are not going to be top of mind during a pandemic crisis.

Fortunately, my client has 90 days (by June 1, 2020) to petition the Tax Court. Have you ever tried explaining to a client how Tax Court is not Judge Judy and it’s not like the TV show Suits either? Helping her comprehend the reality of what Tax Court involves, how testimony works, and why interacting with appeals officers, IRS counsel, and a judge won’t necessarily be a futile repeat of her prior experience with correspondence examiners is not a conversation that works very well over the phone. The already overwhelming EIC audit has psychologically “beaten” the taxpayer down and taking her case to another level requires an element of “hand holding” with a compassionate explanation.

So you may wonder, “What do ‘hand holding compassionate explanations’ have to do with the implications of COVID-19 on low income taxpayers? Is it any different from how the pandemic impacts middle income America?” This EITC audit is my long-winded anecdotal way to explain a one word answer:  time. This group of taxpayers requires more reminders, phone calls, and face to face in person time than any other demographic I’ve ever worked with. In the past, I’ve worked with developing country NGO grantees, churches, refugees, and private operating foundation directors. All of whom may not have been technologically sophisticated. The low income taxpayer comes with the most ‘defeatist’ perspective that requires time to overcome. Technology is not the panacea that solves all problems. Individuals need a motive and reason to engage with the system. No video conferencing software can give the handshake, acknowledgement, and personal explanation needed.

I’ve had clients who could have snail mailed, faxed, or emailed a single page of a missing tax return to me to respond to an audit, but instead they would ask me if they could bring it into our office. When I first started this job, I was flabbergasted by the request. I would answer, “Of course, but if I happen to be away from my desk or in the middle of an appointment, feel free to leave it with my assistant or in my mailbox.” Often, they would patiently sit there and wait until I finished my call, or sometimes, they’d even wait for me to come back from lunch (!!). Now, I am no longer surprised at the request. I’ve come to realize that for a certain segment of my clientele, the direct handshake, eye contact, and acknowledgment, “I’ve received this document. I have seen you. I will be responsible for your case” – offers a reassurance that is the closest they will ever come to a human being explaining and working with them through the behemoth of the IRS machinery.

I used to disdain this part of my job as horribly inefficient (the billable hour culture of law influence). But now, I see it with more grace. Working through the IRS controversy process can help taxpayers begin to have more faith in the system. In turn, those taxpayers begin to make good faith attempts to re-engage in the system. A system that has, until now (for efficiency’s sake), treated them as a widget in the awe-inspiring revenue machinery of the United States government.

The process of humanizing the machinery of the complex IRS system requires time. So, how does “time” translate into practical IRS procedures and practice? I am sure my LITC colleagues and the ABA Tax Section Pro Bono & Tax Clinics listserv will think of many more practical and substantive tax provisions that would be helpful. But, as a new tax practitioner, I tend to think “functionally” rather than technically – since I am not as familiar with the Code or IRM sections that would have to be considered. Below is a list of practical “functional” needs I can think of that would be practical for my clients.

  • extend timelines to pay estimated quarterly taxes and monthly installment agreement amounts
  • create a streamlined process to reduce existing installment agreement payments
  • extend VITA (Volunteer Income Tax Assistance) to 7/15/2020
  • extend timelines to respond to notices, including audits and identity verification
  • extend timelines to renew ITINs (or permit the use of ITINs that expired in ty 2019/2020)
  • expand Certifying Acceptance Agents (for ITINs) into VITA programs
  • create a streamlined process for change of address updates (or deputize currently closed VITA volunteers to input address changes with existing ID from prior year returns)
  • lessen documentation (permit verbal?) requirement to qualify for CNC
  • broaden the definition of “experiencing imminent hardship” for TAS

Note: after this post was drafted, the IRS announced its “People First Initiative” in IR-2020-59 dated March 25, 2020, which provides significant relief including some of the items above.

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