DUPTIN Part III.

March 3, 2023 by 3 Comments

This is the third part in a three-part series on the IRS’s DUPTIN screening procedure and electronic return rejections by Justin Schwegel. Click here for Part I and here for Part II. Keith

To recap parts I and II, the IRS employs an automated screening procedure to reject the second tax return filed electronically that claims a qualifying child or dependent. Rejection of automated electronic returns is subject to three exceptions. These exceptions do not change the IRS presumption that the first return filed rightfully claimed the credit(s) and DUPTIN returns are still subject to IRS audit procedures. These audits are difficult to overcome and results in some taxpayers entitled to credits being denied on the arbitrary ground that they were not the first to file.

The Stakes at Play

Part I had anecdotes demonstrating the dangers of the IRS’s current DUPTIN return screening procedure. However, it is important to understand the entirety of the stakes at play and the negative impact they can have on real people who rely on the benefits Congress has charged the IRS with administering through the tax code.

The U.S. tax system is progressive and allows for additional deductions/exclusions for those supporting children or other dependents. For better or worse, the IRS has also been tasked with administering many social benefits. The credits/benefits available for taxpayers claiming qualifying children are especially generous, so that will be the focus. A taxpayer with a qualifying child often qualifies for greater tax deductions and IRS-administered public benefits in the form of refundable and nonrefundable tax credits.

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To demonstrate the stakes, we can use a hypothetical couple that is married but separated in late 2020 due to domestic violence. This is a common scenario. Let’s say child Caleb was born in early 2021 and lived with wife Wanda for the rest of 2021.

If husband Henry files first and Wanda’s electronic return is rejected, Henry gets Caleb’s child tax credit for 2021 ($3,600 fully refundable). Henry’s claim for an earned income tax credit of up to $3,584 and childcare credits and larger premium tax credits for healthcare if applicable will be accepted by the IRS because he filed first electronically. Due to a quirk in filing status rules, married custodial parents who lived apart from their ex for more than the last 6 months of a year may file as head of household (HOH) while the other spouse must file as married filing separate (MFS), a difference in the standard deduction of $6,250 in 2021. Henry and Wanda both have private student loans and paid $1,000 in interest in 2021, a deduction unavailable for MFS returns. Henry filed first and his head of household filing status and student loan interest deductions will be accepted by the IRS.

If Wanda tries to claim Caleb and her electronic return is rejected, she probably will not know to file a paper return. The result would be financially catastrophic. If Wanda knows to file the paper return, she and Caleb may still wait for months for the return to process. If her return is selected for audit and she forgets to change her address, she will lose the audit by default. She will also miss the notice of deficiency and her right to petition the U.S. Tax Court.

Although this is a hypothetical scenario, it is not far-fetched. Every year taxpayers who are the rightful beneficiaries of family-based credits are denied those credits by IRS default rules and lack the knowledge to file a paper return. In the event taxpayers file a paper return, many will move and never receive an audit notice and will lose an audit by default. Of those who respond to an audit many will lack the capacity to sufficiently substantiate the credits and escape an audit unscathed.  

Numerous social benefits as tax credits are tied to filing status. A common scenario in a recent separation leaves one parent as HOH and the other parent as MFS under the rules in IRS Pub 501. Many tax credits are unavailable to taxpayers who file MFS. In those scenarios the following common credits and deductions are in play:

  • Head of household larger standard deduction
  • Earned income credit (EITC)
  • Child tax credit
  • American opportunity credit
  • Lifetime learning credit
  • Student loan interest deduction
  • Adoption expenses credit
  • Credit for the elderly and disabled.
  • Capital loss carry forward (reduced by $1,500)
  • Child and dependent care credit

The maximum EITC for 2022 is $6,935. Considering other credits and deductions even more may be at stake in a given year. For low-income taxpayers this is a lifechanging amount of money. For low-income taxpayers fleeing domestic violence this could provide the necessary cushion to enable escape.

DUPTIN May Inadvertently Facilitate Financial Abuse

The IRS’s DUPTIN system could unintentionally facilitate financial abuse, a key component in physically and emotionally abusive relationships. An abusive ex can race to file with the objective of blocking the custodial parent from accessing refundable credits they are legally entitled to and forcing them to return to their abuser. If an abuser knows the IRS rules, it can flip the IRS’s presumption that the first return filed is correct on its head. Such a person is more likely, not less, to file the first tax return in order to block or delay their victim’s access to financial resources.

It is impossible to know how many rejected returns are from the taxpayer entitled to the credits. It is also impossible to know how many taxpayers whose returns are rejected know to file a paper return. Other practitioners I have spoken with estimate it is less than half.

When a DUPTIN electronic return is rejected, there is no message advising the taxpayer to file a paper return to claim the credits. An IRS FAQ instructs taxpayers if their return was rejected “there must be an error on your tax return…” The conclusions most taxpayers likely draw is that they must remove the offending taxpayer identification number.

For those taxpayers who overcome this first knowledge hurdle many will be audited either because it is the second time they have filed a DUPTIN return or because they have violated a dependent database rule. Many taxpayers who receive audit notices never respond and of those who do most fail to overcome them. The knowledge hurdle and the audit hurdle together mean that many taxpayers legally entitled to claim credits for qualifying children and/or dependents will not get them if someone else claims them first.

Garbage in Garbage out

The IRM DUPTIN procedure probably eliminates many duplicate credit claims. However, when the IRS is the largest benefits administrator in the country, ensuring taxpayers entitled to social benefits (as tax credits) receive those benefits must be just as high a priority as fraud prevention. A rule that erroneously denies public benefits to those entitled to them on the criterion that someone else claimed them first is arbitrary. It both allows erroneous claims and rejects proper claims. The remedy of filing a paper return is a poorly publicized additional administrative burden.

The few exceptions that allow a second taxpayer to file electronically do not change the undue deference the IRS accords to the first return. The second return is still flagged as DUPTIN and subject to audit procedures. The onerous full-scope audit process means many taxpayers entitled to credits fail to make their case successfully to IRS examiners. Bad design yields bad results. 

Possible alternatives

Current DUPTIN Procedures create two problems. The first is that the second electronic return is automatically rejected. Although taxpayers can file a paper return, this knowledge hurdle is often insurmountable for low-income taxpayers. The second problem is that when an audit is triggered by the DUPTIN procedure, there is undue deference given to whichever taxpayer filed first.

Eliminate electronic rejections for related taxpayers

First, the rejected electronic return rule needs to be modified. A different DUPTIN rule could allow a subsequent electronic return to process where the primary or secondary on the DUPTIN return has appeared on any tax return with a qualifying child or dependent in the past, e.g. as primary or secondary or where both TINS were claimed as qualifying children.. This rule could also allow DUPTIN claims to process electronically based on Social Security Administration (SSA) data. The “Enumeration at Birth” program requires the SSA to obtain SSNs of a newborn’s parents. The average processing time for newborn SSNs is two weeks and the SSA has been sharing this data with the IRS since 1999.

The IRS currently allows both returns to process if the second taxpayer files a paper return. Then it sends an exam soft notice. This rule change would eliminate the knowledge/inconvenience/waiting hurdle of filing a paper return for many taxpayers. It would also prevent an abusive partner from leveraging the IRS’s process to deny economic resources to a survivor either temporarily or permanently.

Some taxpayers entitled to credits may still have electronic returns rejected with these DUPTIN changes due to lack of SSA data tying the taxpayer to a qualifying child and lack of filing history with the qualifying child.  A taxpayer who adopts a niece or grandchild would still face problems if the absent father filed first and improperly claimed the child. However, any suggested modifications must still filter tax returns to prevent widespread fraud due to multi-DUPTIN claims. To eliminate the knowledge, hurdle the IRS could require that all tax preparation software advise taxpayers whose electronic returns are rejected to file a paper return to claim the credits and provide specified forms of substantiation of relationship and residency with the paper filed return.

Change audit rules for DUPTIN examinations

IRS correspondence exam statistics show that in most years less than 1 in 5 taxpayers who are audited overcome the audit. This points to a broader problem with the audit process in general. The IRS disproportionally audits low-income taxpayers and more than 40% of those who are audited fail to respond to correspondence exams. Low-income households move more often for many reasons. They are more likely to be renters than home owners and much more likely to face forced displacements like eviction. Low-income taxpayers probably have lower exam response rates due to greater housing instability.

Under the current DUPTIN exam procedures, if a DUPTIN exam is initiated it will probably be a full-scope exam targeting the taxpayer who happened to file second. The taxpayer who is audited must first overcome an examination before the IRS moves on to the other taxpayer. When 80% of taxpayers audited fail to overcome the audit, a rule that gives the first taxpayer to file deference unless the second taxpayer overcomes an audit is manifestly problematic.

New DUPTIN audit procedures could instruct IRS examiners that both a first and second return with a DUPTIN condition could be examined simultaneously rather than in series.  Examiners could also be instructed that there is a rebuttable presumption that one of the returns claiming the credits is entitled to them. The result of both changes would mean an IRS examiner would arbitrate between competing claims for credits. Putting competing claims for credits on an equal footing seems likely to produce better results than examining returns in series with the presumption that the return that was filed first is correct.  

Because of the lag time between return filing and correspondence exams, many taxpayers may move. To ensure each party has a chance to present evidence, IRS records could be updated by pulling contact information from state benefits administrators to contact DUPTIN taxpayers when they are unresponsive.

Conclusion

This series was meant to highlight obvious problems in the IRS’s current administration of the DUPTIN procedure, and the minor suggestions put forward are only meant to demonstrate that change is possible. The IRS has quietly become largest benefits administrator in the United States and where benefits as tax credits are routinely denied erroneously, change is necessary.

The IRS has been structured as a guardian of the treasury and maintains that mentality. In 2017, the National Taxpayer Advocate pointed to an historical IRS culture as “enforcement first” rather than “service first” as demonstrated by both funding decisions and reporting priorities. Correspondence exam statistics hint at that culture. Administering public benefits through the IRS means the agency must embrace its role as benefits administrator with equal vigor to its role as tax code enforcer. 

In a domestic violence context, the benefits administered by the IRS must flow efficiently to those who are entitled to them without knowledge hurdles or undue delay created by the current DUPTIN system. One of the most common reasons why survivors of domestic violence fail to leave abusive relationships and return to abusive relationships after leaving is due to financial instability. The lack of access to alternative housing is especially difficult to overcome for those of limited means. In a country in which more than half of female homicides were the result of intimate partner violence, the failure to effectively administer public benefits can be deadly.

Filed Under: DUPTIN Tagged With:

DUPTIN Part II.

March 2, 2023 by 1 Comment

This is the second part in a three-part series on the IRS’s DUPTIN screening procedure and electronic return rejections by Justin Schwegel. For Part I about Tanya and Alex’s DUPTIN experiences click here. Keith 

DUPTIN Electronic Return Rejections and Exceptions

To recap Part I, the IRS’s DUPTIN review procedure is aimed at preventing fraudulent tax returns and/or improper claims for tax credits. The IRS freezes refunds on returns where the primary or secondary SSN has already been used as a primary/secondary and rejects electronic returns claiming a child or dependent that has already been claimed.

The IRS takes its role as enforcer of the tax code seriously. However, the IRS role as benefits administrator is to ensure that taxpayers who claim benefits they are legally entitled to do not have these claims rejected. This role is just as important as fraud prevention. However, the IRS’s current DUPTIN procedure rejects many taxpayer claims for benefits to which they are entitled.

The IRS rejects a second electronic return if it claims an earned income credit or dependent exemption for an SSN that has already been claimed on another return (IRM 4.19.14.8.1.3). There are three exceptions. They are: 1) if there is a recertification indicator on the account of the taxpayer who filed first; 2) if the taxpayer who filed second has overcome an EITC audit (i.e. received a “no-change” letter) in the past two years; and 3) if the federal case registry shows that the second return belongs to the custodial parent.

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A recertification indicator requires a taxpayer to file form 8862 to recertify eligibility for certain tax credits. This is required if they have had an earned income credit, child tax credit, additional child tax credit, other dependent credit or American opportunity tax credit reversed under examination procedures outlined at Internal Revenue Manual (IRM) 4.19.14.7. A recertification requirement is the lowest bar the IRS can place for someone who has had these credits reversed and is far preferable to more punitive actions the IRS can take such as a 2-year or 10-year ban from claiming the credits.

The second exception shows a taxpayer has undergone an exam for the EITC and demonstrated to the satisfaction of the examiner that they were the rightful person to claim a qualifying child for EITC purposes. A taxpayer who has overcome a recent EITC audit is more likely to be entitled to the credits.

The Federal Case Registry Exception

The third exception relies on the information in the Federal Case Registry (FCR). The FCR is a national database of all child support cases handled by state child support agencies. It contains information about custodial parents for title IV-D and non-Title IV-D cases. Title IV-D cases get their name from Title IV Part D of the Social Security Act (SSA). Title IV-A of the SSA provides grants to states to provide assistance to “needy families with children and for child-welfare services.” Title IV-D allocates money to states to establish paternity and requires states to subrogate the claims of custodial parents against noncustodial parents for child support in order to reimburse state welfare programs. Essentially the federal government funds state welfare programs contingent on the state attempting to collect reimbursement from noncustodial parents who owe support. Non-Title IV-D cases are cases in which a support order has been entered but no claim for public assistance has been made.

States are obligated to maintain state case registries (SCRs) as a condition to receive federal funding. The FCR is built on these SCRs from which they pull information. In Florida, where our LITC is located, the Department of Revenue maintains the registry for Title IV-D cases and relies on 67 different county officials to report information to the state case registry in non-Title IV-D cases.

With so many moving parts, the integrity of the FCR is questionable. In the past the IRS exercised math error authority to reverse earned income credit claims where the claim conflicted with the information in the FCR. An IRS study found that 39% of those math errors were issued improperly and the credits were claimed correctly. Following this study, the IRS determined that the FCR data are not a reliable sword for using math error authority to reverse credit claims. They are also not a reliable shield to protect custodial parents from DUPTIN rejection of electronic returns.

It’s important to understand what these exceptions to the general DUPTIN electronic rejection mean. The IRS uses available data that demonstrate the second taxpayer to claim a child is possibly the person entitled to claim the child. If the FCR shows the second taxpayer is the custodial parent then it is more likely they really are. The same applies if the first taxpayer has had the credits reversed in the past or if the second taxpayer has recently overcome an audit.

The exceptions to the DUPTIN rejection rule only remove an information hurdle. Taxpayers falling under an exception will not have electronic returns rejected and will not lose out on credits if they do not know to file a paper return. However, the IRM makes clear that the exceptions do not change the fact that the return will still be flagged as DUPTIN and are “still subject to the DUPTIN examination process…” (IRM 4.19.14.8.1.3).

DUPTIN Audits: exam soft notices and full scope exams

A return flagged as DUPTIN will usually be subject to either an exam soft notice or a full scope exam. The first use of a TIN, for e.g. the earned income credit, is not flagged as a duplicate TIN (IRM 4.1.26.3.6(1)). Only returns filed after the first return are considered duplicates and flagged by the IRS software. A taxpayer can successfully submit a DUPTIN return either by paper or by falling under one of the three exceptions outlined above. The IRS’s default presumption is that the taxpayer who wins the race to file is correct. This presumption is transparently arbitrary.

IRM 21.5.10.4.2 and 21.3.1.6.48 describe “exam soft notices” sent to taxpayers whose returns are flagged for DUPTIN for the first time. Notices in the CP 87 series are sent to DUPTIN-flagged taxpayers for “information only” and no adjustments will be made unless the DUPTIN taxpayer initiates them.

Although IRM 4.1.26.3.6 states that taxpayers who have duplicated a TIN for more than one year are considered for audit, IRM 4.19.14.8.1 states that where a Dependent Database Business Rule has been broken the DUPTIN return will be selected. The Dependent Database is described in great detail at IRM 2.3.80 and it is clear that it includes information from past returns, including DUPTIN returns, information from the Social Security Administration, and information from the Federal Case Registry.

Most of IRM 4.19.14.8 describing the how the Dependent Database information will be applied to DUPTIN returns has been redacted. It is notoriously difficult to obtain redacted portions of the IRM because IRS often invokes the Freedom of Information Act (FOIA)  exception for law enforcement techniques and procedures at 5 USC 552(b)(7)(E). However, IRM 4.19.14.8(6) and IRM 4.19.14.8(7) strongly imply that if the information on the DUPTIN return conflicts with the information in the Federal Case Registry the return will be selected for audit, presumably even when it is a taxpayer’s first DUPTIN submission. As noted above, that database is not reliable.

Unfortunately, once a return is selected for audit, subsequent year returns from the same taxpayer flagged as DUPTIN can be audited and have refunds frozen pending the results of the first DUPTIN examination (IRM 4.19.14.8.1(8)).

EITC DUPTIN audits are “full scope” audits. This means the entire return is open to adjustment, including filing status, EITC, child tax credits, child and dependent care credits, student loan interest deductions, American opportunity tax credits, etc.

IRS audits are difficult to overcome. As noted above, where a survivor of domestic violence has changed their address without updating the IRS or Postal Service, they will likely lose by default because they will never receive nor respond to the audit notice.

Gulfcoast Legal Services submitted a FOIA Request for IRS statistics on taxpayer success rates in correspondence exams from 2017 to 2021. The results are concerning:

Source: IRS FOIA Response 2023-01945

About 40% of taxpayers fail to respond to correspondence exam notices. In an average year less than one in five taxpayers were fully successful at overcoming their exams (i.e. receiving a “no-change” letter). For 2021 only 30% of taxpayers who responded to correspondence exams were successful.

Only in the unlikely event that the DUPTIN audit is overcome, i.e. the “determination is made to no-change the case,” will the other taxpayer be audited (4.1.26.3.6(2)).

Other DUPTIN cases

Although the focus above has been on those returns where competing returns claim qualifying children or dependents, this is not the only context in which the IRS’s DUPTIN procedures come into play. IRM 21.6.7.4.5 describes IRS procedures if a taxpayer identification number is used as a primary on one tax return and a secondary on another tax return. The IRS procedure is to post the second return to the master file and freeze any refund on the second return while it requests additional information. These delays alone can cause harm to financially vulnerable taxpayers.

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DUPTIN Part I.

March 1, 2023 by 2 Comments

The IRS’s duplicate taxpayer identification number (DUPTIN) procedure unnecessarily rejects electronic returns and creates harm for individuals seeking to file their taxes.  Guest blogger Justin Schwegel has written a three-part series that explains the process and takes us through some of the problems created when the IRS rejects a valid return because it arrives after an earlier filed return claims as dependents one or more of the persons on the later filed return.  Justin is the director of the low income taxpayer clinic at Gulf Coast Legal Services located in Bradenton, Florida. 

The problem Justin identifies is one mentioned by the National Taxpayer Advocate in her annual report and one that the American Bar Association Tax Section brought up with the Commissioner in the annual courtesy call that occurred in December of 2022.  The Tax Section will provide further written comments on the issue in the near future.  Its brief comments to the Commissioner in advance of the courtesy call stated:

The National Taxpayer Advocate’s 2021 Annual Report to Congress (the “2021 Annual Report”) included e-filing barriers as “Most Serious Problem #8.” For members of the low-income taxpayer community, a common reason for rejected e-filing submissions is where a dependent’s Social Security Number (“SSN”) has already been used in a previously filed return for the same tax year.  The 2021 Annual Report indicates that during the 2021 filing season this was the reason for rejecting over 1.5 million e-filed returns (with mismatched dependent SSNs responsible for almost another 1.5 million rejections).  As the 2021 Annual Report indicates, forcing the taxpayer to paper file a return with an uncorrected error does not improve matters for either the Service or the taxpayer.  We would like to discuss changes to the e-filing system that could address these barriers.

As Justin describes, the current IRS practice fosters a race to file first in order to gain the upper hand.  The system also causes some taxpayers whose returns are rejected to think that they cannot claim dependents they are legally entitled to claim.  I look forward to the ABA comments and to the creation of a system that will better protect taxpayer rights while allowing the IRS to administer the electronic filing of returns in a reasonable manner.  Keith

This is the first part in a three-part series on the IRS’s DUPTIN screening procedure. Part I will explore two case studies where the IRS DUPTIN screening procedure harmed taxpayers whose lawful claims for credits were erroneously rejected. Part II will describe in detail how the IRS’s DUPTIN screening procedure functions.  Part III discusses various credits at stake in DUPTIN rejection cases and proposes some possible solutions.

The IRS’s duplicate taxpayer identification number (DUPTIN) procedure is aimed at preventing fraudulent tax returns and/or improper claims for tax credits. It does this by freezing a refund on the second tax return filed if a social security number for the primary or secondary has already been used on a prior return. It also rejects electronic returns that claim qualifying children or dependents if their social security number has already been used on a prior return. The DUPTIN procedure also triggers heightened scrutiny of these “DUPTIN” returns when certain criteria are met.

The reason for the DUPTIN procedure is logical. It would be a problem if the IRS paid 1,000 tax refunds where 1,000 different returns listed the same social security number for a qualifying child to claim the earned income credit EITC and child tax credit (CTC). Unfortunately, because of how the procedure is structured, many returns are improperly rejected, and many taxpayers are improperly denied credits they are entitled to by law.

The first part of this series will explore the procedural problems these taxpayers can face when trying to overcome the IRS’s DUPTIN process and negative financial consequences they have suffered. Rejecting the second electronic return that is filed is arbitrary. It also creates a knowledge hurdle. Many taxpayers do not know they can still claim the credits by filing a paper return.  Those who do not know they can file a paper return suffer economic harm by not obtaining the tax benefits of claiming a dependent or qualifying child. Those who do file a paper return suffer economic harm caused by the delay in obtaining the refund for which they qualify since it can take months or years for the IRS to process paper returns and issue a refund.

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Improper DUPTIN rejections are a systemic problem that create individual problems for real taxpayers. The two case studies below are real examples of taxpayers who suffered economic harm due to improper DUPTIN rejections. The knock-on effects they experienced are not unique to DUPTIN returns, but they are also not uncommon when untangling DUTPIN problems.

To resolve individual problems created by the systemic DUPTIN problem, the taxpayers were forced to deal with still more systemic problems in a cascade of procedural obstacles. This article is about the IRS DUPTIN screening process. However, the subsequent systemic obstacles taxpayers must overcome due to improper DUPTIN rejections is important context for understanding the scope of the problem created by the improper DUPTIN rejections.

Tanya Price

Tanya Price (pseudonym) got a restraining order against her abusive ex-husband Ed (pseudonym). The restraining order prevented Ed from coming near either herself or their son of whom she was awarded full custody. Tanya and Ed had a $5,000 joint deficiency from a 2020 married-filing joint return, and Tanya is not a good candidate for innocent spouse relief. When a taxpayer owes the IRS money, the IRS will generally not issue a refund to the taxpayer. Rather it will apply the overpayment and use it to pay down deficiency under the Treasury Offset Program.

Because Ms. Price was expected to get a refund of almost $7,000 on her 2021 return, I advised her to wait until after Ed filed. By waiting the IRS would offset his refund to reduce the joint deficiency since it is the IRS policy to collect from any party with a joint liability leaving the remaining parties on that liability with a reduced tax debt.  In March of 2022, Ed must have filed his return and the IRS offset his refund which left about $4,000 of the 2020 deficiency remaining.

Tanya attempted to file her 2021 tax return using popular online tax processing software. She was surprised when her return was rejected because someone else had already claimed her son. Tanya called the tax software company’s customer support which told her that she would simply have to take her son off the return and file without him. When she asked if there was any way to file an amended return later to claim the credits for the son who had lived with her for all of 2021, a representative told her that no, unfortunately nothing could be done.

Fortunately for Tanya, she was already an LITC client, and we helped her submit a paper return before April 15, 2022. We preemptively included a copy of the restraining order and a judge’s findings from her divorce proceedings that her son stayed with her all but one night after her separation from Ed in March of 2021.  In September 2022, $4,000 of her refund was offset to settle the 2020 deficiency and Tanya received a $3,000 refund. Many taxpayers in Tanya’s position receive an audit notice instead of a refund check.

Failure to pay and file penalties of $500 had accrued for 2020. The first-time abatement procedures described in the internal revenue manual (IRM) allow practitioners to request first-time abatements over the phone. However, after abatement, the failure to pay penalty can continue to accrue. Subsequent abatement requests can be made for the same year, but they must be made in writing using form 843.

Due to the DUPTIN rejection Ms. Price had to file a paper return. Other paper returns our LITC helped file had processing times exceeding one year. To avoid an additional penalty accrual, (and because getting through the IRS Practitioner line was nearly impossible) we waited until her 2021 return, which would pay off 2020, was received on her 2021 transcript. We called the practitioner priority service line to request abatement, but unfortunately, the return processed before the abatement request.

When the IRS processed the abatement, there was a $500 credit on the 2020 tax module, a year in which a joint return was filed. This credit was offset under the Treasury Offset Program to pay for Ed’s past due child support from a different relationship. Although the local taxpayer advocate was sympathetic to Ms. Price, first-time penalty abatement is not considered “apportionable” for injured spouse relief. Tanya was out $500.

Alex Black

Alex Black (pseudonym) thought his wife Wendy filed joint returns for 2015 and 2016 like she had for 2014. After their 2017 divorce Alex began to receive notices from the IRS enquiring about unfiled returns. Alex tried to file 2015 and 2016 returns electronically at a Volunteer Income Tax Assistance Center (VITA). That was when he learned Wendy had already claimed their children on a married filing separate return. His electronic returns were rejected due to DUPTIN. The VITA volunteer advised him to remove the children and submit the return.

In 2021 Alex came to our LITC for assistance in reestablishing an installment agreement to pay off his 2016 deficiency. The deficiency that arose, in part, because he had not claimed any qualifying children and his withholdings were insufficient. We reviewed his case and discussed his financial status and living arrangements in 2015 and 2016. He and his wife lived together for all of 2015 and 2016 until they moved apart halfway through 2017. Alex earned more and won the tiebreaker rules for which parent can claim qualifying children under IRC 152(c)(4)(B).

We assisted Alex in filing 2015 and 2016 amended returns in September of 2021. Alex had a large deficiency for 2016, but an amended return would result in a significant abatement under IRC 6404. Alex had already paid off his 2015 deficiency. Under the statute of limitations outlined at IRC 6511(a) we could only request a refund of payments made after September 2019. The original 2015 deficiency was $3,500 when it should have been closer to $250. Alex had paid off more than $4,500 he never should have owed including penalties and interest due to the DUPTIN electronic rejection. We could only request a refund of the $2,000 he had paid within the past two years.

Alex filed his 2016 amended return on September 9th, 2021. It was processed on August 8th, 2022 and the tax due was reduced from $4,000 to $1,000. However, the failure to file penalty which is capped at 25% of the amount of tax owed remained at $1,000, $750 more than the statute allows. We attempted to fix the penalty issue verbally over the practitioner hotline and failed. We submitted a written abatement request on form 843 and failed. The penalty was finally adjusted with assistance from the very helpful Clearwater, FL TAS office.

Unfortunately, the 2015 refund request was not so easy. The 2015 1040x was also submitted on September 9, 2021. The refund request explicitly cited the statute of limitations and limited the refund request to only those payments on or after October 1st, 2019, the first payment the taxpayer had made within the statute of limitations period.

In October 2022, Alex received a 105C letter from the IRS’s Kansas City campus advising that the refund request was rejected for being past the statute of limitations. I am compelled to note that September 9, 2021 is less than two years after October 1st 2019. The 105C also notified Alex of appeal rights. We submitted an appeal within a week.

In mid-January, the IRS sent a second 105C letter exactly the same as the first, but from the IRS’s Fresno campus. We submitted our second appeal to the IRS campus in Fresno on February 2, 2023. Yes, it was on Groundhog Day.

Examples of a bigger problem

Tanya and Alex are not alone. Every year the Gulfcoast Legal Services LITC and other LITCs around the country deal with similar complaints. Taxpayers file their tax returns electronically by default. In 2020, more than 94% of individuals who filed a 1040 did so electronically.  However, with few exceptions, the IRS rejects electronic returns that claim credits or exemptions for a child or dependent if another taxpayer has already claimed the same child or dependent. This is usually done by a different parent in the case of parents who are not together.

Most taxpayers likely do not know they can still claim a qualifying child or dependent after an electronic return is rejected. This can be done by filing a paper return. The requirement to file a paper return is a knowledge hurdle that prevents many parents legally entitled to claim credits for their children, like Alex and Tanya, from receiving the credits.  As discussed in these scenarios, the knowledge hurdle exists at VITA sites and among practitioners as well as taxpayers.

Many parents who know that they can file a paper return have paper returns audited and lack the capacity to overcome an audit. Where there is domestic violence, survivors may move away from an abusive spouse or partner and not update their address. Some victims fear an ex will discover their new address through forwarding information. If they file a paper return due to a DUPTIN rejection and are audited they may lose by default because they do not respond.

GLS has had several cases where IRS DUPTIN procedures prevented a survivor of domestic violence from getting a refund they were entitled to under statute. We have also had cases where the parent entitled to credits was audited under the IRS’s DUPTIN procedures. It is important to keep in mind the domestic violence context when examining the IRS’s DUPTIN procedures.

Filed Under: DUPTIN Tagged With:

Revisiting the IRS’s Erroneous EIP Guidance for Nonresident Aliens

December 24, 2020 by Leave a Comment

We welcome first-time guest blogger Justin Schwegel. Justin is a Sarasota, Florida-based attorney. His academic interests include international economic justice, agricultural policy, and government integrity. Today Justin offers thoughts regarding economic impact payments to nonresident aliens. This issue and related administrative law considerations will be addressed in more depth in an article to be published in the CUNY Law Review’s Footnote Forum. When the link becomes available it will be linked here. Christine

On March 27, in response to the economic crisis caused by Covid-19, Congress passed bipartisan stimulus legislation that included enhanced unemployment benefits, relief for small businesses, financial support for state, local, and tribal governments, and a one-time stimulus payment for eligible individuals. On May 6, the IRS issued guidance on its Economic Impact Payment Information Center website instructing incarcerated individuals, nonresident aliens (even if they were resident aliens in 2019), and the family members of the deceased taxpayers that they should return economic impact payments they received from the IRS. This guidance is wrong, and has the potential to harm vulnerable migrant workers, some of whom will see a tax residency status change as a result of the global pandemic.

Following the recent success of incarcerated individuals in getting a permanent injunction enjoining the IRS from withholding their CARES Act Economic Impact Payments, it is worth revisiting similar erroneous guidance the IRS provided to another class of individuals, nonresident aliens. Nina Olson has already explained why the guidance is wrong with respect to the families of deceased taxpayers, and Patrick Thomas explored this topic briefly in May, but the issue warrants a deeper dive.

Most nonresident aliens who received economic impact payments in 2020 did so because based on 2018 or 2019 tax filings they were resident aliens, and consequently, “eligible individuals.” H-2A (nonimmigrant agricultural guest workers) and H-2B (nonimmigrant unskilled guest workers) visa holders who returned to their country of origin could be particularly impacted by the guidance. In 2019, there were almost 258,000 H-2A workers, while the H-2B program is capped at 66,000 annually.

Many H-2A employees list their labor camp as their address on their tax filings, while many H-2B employees list the residence they have while working in the United States. Both visa categories have many people who are unbanked. Consequently, for many H-2A and H-2B workers who were resident aliens in 2019, but not in 2020, payments were likely sent in the form of physical checks to either labor camps where the workers no longer live or to other housing that is no longer current and would have been returned as undeliverable. Requesting a new physical check from an administrative agency that believes you are not entitled to a payment, and asking that it be delivered to a different address is probably an insurmountable barrier for most aliens who have undergone a tax residency change.

IRS Guidance

The IRS guidance is inconsistent with past guidance and inconsistent with the statutory language of the CARES Act. On April 17, the IRS issued several Q and A responses on its Economic Impact Payment Information Center. Most interesting for the purpose of this post:

Q17. I received an additional $500 payment in 2020 for my qualifying child.  However, he just turned 17.  Will I have to pay back the $500 next year when I file my 2020 tax return?

A17. No, there is no provision in the law requiring repayment of a Payment…

This guidance was renumbered several times, but remained largely unchanged until August. On May 6, the IRS published guidance stating that incarcerated individuals, nonresident aliens, and relatives of deceased taxpayers should make repayment of a payment. This means that for months, the IRS had guidance on its Economic Impact Payment Information Center stating both that there “is no provision in the law requiring repayment of a payment” and advising three different categories of individuals that they should repay a payment.

On August 3, the IRS issued new guidance on repaying economic impact payments.

Q J3. I received an Economic Impact Payment. Do I need to pay back all or some of the Payment if, based on the information reported on my 2020 tax return, I don’t qualify for the amount that I already received??

A J3. No, there is no provision in the law that would require individuals who qualify for a Payment based on their 2018 or 2019 tax returns, to pay back all or part of the payment, if based on the information reported on their 2020 tax returns, they no longer qualify for that amount or would qualify for a lesser amount…

This modification seems aimed at allowing the IRS to distinguish between an individual who changes from an “eligible individual” to an “ineligible individual” between 2019 and 2020 and a filer who remains an “eligible individual” but no longer qualifies for a payment. The eligibility criteria are written negatively such that any individual who is not 1) a nonresident alien, 2) an individual who could be claimed as a dependent by another taxpayer or 3) an estate or trust, is an eligible individual so long as they also provide the requisite Social Security Numbers on their taxes. One can shift from being an eligible individual because they have died, changed tax residency status, or become a dependent. Not all eligible individuals qualify for payment. If an eligible individual (filing single) has an AGI that exceeds $99,000, they are an eligible individual, but do not qualify for the payment. Likewise an individual who has a dependent who turns 17 in 2020 no longer qualifies for the additional $500 payment they received as an advance payment in 2020. Answer J3 is couched exclusively in terms of qualifying for payment rather than status as an eligible individual. The IRS assures these individuals who simply no longer qualify for a payment that they need not worry about making repayment.

The new guidance would allow the IRS to maintain consistency when it seeks to require repayment from the families of deceased taxpayers and 2019 resident aliens who undergo a tax residency status change in 2020. This distinction cannot be supported by statutory text that clearly delineates the time at which eligibility criteria must be met, i.e. in 2019.

The IRS has not sought repayment from all individuals who have changed from eligible to ineligible between 2019 and 2020. Specifically, individuals who filed taxes independently in 2019, but can be claimed as a dependent in 2020 have not been instructed to return the 2019 payments. This predominantly includes elderly individuals who were eligible individuals based on 2018 or 2019 tax filings, but who can now be claimed as a dependent by e.g. their child. It also includes children between the ages of 19 and 24 who return to school in 2020.

This seems conspicuous, because the IRS is aware of this situation and addresses some questions regarding newly dependent adults on its Economic Impact Information Center. If the IRS’s position is that individuals who received advance refunds because they were eligible in 2019 must return them if they become ineligible in 2020, for consistency it must require adults who become dependents in 2020 to do so as well. Perhaps the IRS overlooked this category of individuals in instructions to return economic impact payments. It seems more likely that the Trump Administration was aware that such a move would be politically toxic.

Statutory text

IRS guidance notwithstanding, the plain language of the CARES Act makes it clear that if a person was a resident alien in 2019, they need not return payment just because their tax residency status changed in 2020.

Section 2101 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) added a new section to the tax code at 26 U.S.C. 6428 governing EIPs. This section created a refundable tax credit for the 2020 tax year called a “recovery rebate” and defined the eligibility criteria. Eligibility criteria were defined negatively, i.e. all classes of ineligible individuals were listed. An ineligible individual is any individual who in 2020 is a nonresident alien, an individual who could be claimed as a dependent, and an estate or trust. Individuals must also file their taxes with a social security number, their spouse’s social security number if filing jointly, and their child’s social security number if claiming a dependent child.

26 U.S.C. 6428 also created an “advance refund” with eligibility criteria identical to the eligibility criteria for the 2020 recovery rebate in all ways except timing. If an individual was an eligible individual in 2019 the individual is eligible for an an advance refund so long as they are not excluded by the limitation based on adjusted gross income. Those who were eligible individuals in 2019 are treated as having made an income tax payment “in an amount equal to the advance refund amount for such taxable year.” Consequently, the advance refund functions as a refund of an overpayment of 2019 taxes. 26 U.S.C. 6428(e) coordinates the advance refund with the 2020 recovery rebate so that the 2020 rebate is reduced, but not below zero, by the amount of the advance refund.

Most H-2A and H-2B guest workers are required to file taxes as resident aliens under the arcane substantial presence test outlined in publication 519, though the terms of relevant bilateral tax treaties control and can be difficult for workers to navigate.  These workers are also eligible to receive social security numbers. These workers are eligible to receive social security numbers and many do have them. It is risible that the IRS asked 2019 resident aliens who received an economic impact payment to guess at the beginning of May, during an unprecedented global pandemic, whether over the next eight months they would meet the complicated substantial presence test, and return the payment if not.

With the exception of a few foreign nationals who filed their income taxes incorrectly, economic impact payments made to aliens were made because they were eligible based on 2018 or 2019 tax filings. There is no provision in the CARES Act that requires an individual to repay an economic impact payment made under the CARES Act. Indeed, the advance refunds function as a reimbursement of overpayment of 2019 taxes. It is bizarre that the IRS has asked individuals who, in effect, received a refund for overpayment of 2019 taxes to return the refund with no rational explanation why.

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