This Tax Season May Create Many Superseding Returns

April 21, 2020 by 2 Comments

Today we welcome back guest blogger, Nancy Rossner.  Nancy is an attorney with the Community Tax Law project in Richmond, Virginia and a graduate of University of Richmond Law School, my hometown and my alma mater.  She writes to remind everyone of the power of superseding returns and their special importance this year.  Nancy focuses her discussion on spousal abuse situations.  Because of the exclusion from receiving the Cares Act rebate payment in situations in which one of the spouses or dependents on the return lacks a social security number, that is another situation in which superseding returns might be considered.  For additional information see fellow blogger Bryan Camp’s discussion of the one return rule. Keith

The first time I learned of a superseding tax return, I was on the losing side of an income tax controversy case.  My client was on the outs with his wife, but they agreed to file jointly despite no longer living together. He had moved out of the house before the end of the year in question, while his wife remained in the house with their children. They agreed it would be more beneficial to file jointly, as they would be eligible for more credits and benefits related to claiming the children. They were then supposed to share the refund. As it turns out, they filed jointly, but the wife was not happy with the way the refund was ultimately split. She then filed her own separate tax return for the year in question, claiming the children. My client’s tax return was then examined by the IRS, and he contacted our clinic for help. As a then novice tax attorney, I did not realize the significance of the wife filing her own separate tax return prior to the April 15th deadline. However, I quickly learned!

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Superseding returns as defined by the IRM in 21.6.7.4.10 (07-22-2019) are certainly not a new concept. In fact, Keith Fogg wrote about them in a blog post on Procedurally Taxing dating back to 2017. Now is a good time to go back and read that post, as it provides an excellent explanation of what a superseding return actually is and the legal basis for superseding returns. In light of the current coronavirus pandemic, the ability to file a superseding tax return has become increasingly important for taxpayers, especially vulnerable taxpayers like victims of domestic violence. This importance is due to Treasury’s current procedures for issuance of the Economic Impact Payments (“EIPs”), also referred to as the “stimulus payment.” Under the CARES Act, for taxpayers who filed a tax return for 2018 or 2019, the stimulus will generally be issued using the direct deposit information from the most recently filed tax return after January 1, 2018. This includes situations involving married taxpayers who filed jointly in 2019 but are no longer together. The EIP is to be deposited into the bank account listed on the tax return. However, if no account is listed on the tax return and the banking information was not later submitted through the IRS online portal under “Filers: Get Your Payment”, the EIP is supposed to be mailed to the “last known address” the IRS has on file for the taxpayer. This address is usually the address used on the most recently filed tax return. That is unless the taxpayer submitted a Form 8822, Change of Address in time for the IRS to process it before ceasing many operations due to COVID-19, updated their address with the U.S. Postal Service in time for it to be processed before the payment is issued, or the taxpayer updated it via telephone with an IRS representative through oral testimony as permitted by I.R.M. 3.13.5.29 (09-16-2019) prior to IRS ceasing live telephone assistance.

Now, consider a taxpayer who fled an abusive marriage and did not agree to file jointly for 2019 but a joint return was filed anyway or a taxpayer who agreed to file jointly under duress. Yes, there are remedies in the tax code to relieve taxpayers of joint and several liability, such as claims for innocent spouse relief under I.R.C. 6015 in some situations or contesting the validity of the tax return in others. But what of the EIP? In most cases, the EIP of at least $2,400 (for jointly filing taxpayers meeting eligibility for the full amount of the EIP) would be deposited into the bank account listed on the tax return, which is more than likely the account of the abuser. The chances are pretty low that the taxpayer could get her portion of the EIP back from her spouse, if she has fled from the abusive situation. What are the chances the IRS would reissue the taxpayer’s portion of the EIP after disbursing the full amount of the EIP based on the joint tax return? Probably low as well, at least not without a lot of persuasion by the fleeing spouse. Here is where the superseding tax return becomes important.

It would be prudent for a taxpayer in the situation just described to file her own separate and superseding 2019 tax return, whether or not she had income in 2019.  This would serve to reserve her claim to her EIP. She would need to do so by the deadline for filing 2019 individual income tax returns, which was extended to July 15, 2020 via IR 2020-58. Importantly, in the case of a refund or credit being issued with respect to a joint return as per Section 6428(e)(2) of the CARES Act, half of the refund or credit is treated as having been made or allowed to each individual filing the joint return. This is purported to mean that $1,200 would belong to one spouse, and $1,200 would belong to the other spouse. By filing a timely superseding tax return, the taxpayer would essentially reserve her claim to her $1,200 EIP with the IRS. Then, if the IRS incorrectly issues the taxpayer’s EIP to her abusive spouse despite submission of a timely superseding tax return, the taxpayer would still be due her EIP. 

In a situation in which the taxpayer’s SSN was already used on an electronically filed joint tax return, she will likely need to file her superseding tax return by paper (advisably via certified mail to prove timely filing, and with “SUPERSEDING RETURN” clearly written across the top). Unfortunately, at the time of this post, the IRS is not currently processing paper tax returns, but the hope is that the IRS will eventually get back up and running, and begin to process paper tax returns, backdating the tax returns to the date of filing, i.e. the postmark date as per I.R.C. Section 7502.  This makes documentation of mailing extremely important in these situations. 

A late EIP may be better than no EIP, but for victims of domestic violence, this remedy is not good enough. Advocates for this group are already receiving calls that EIPs are being deposited into accounts to which the victims do not have access and there appears to be no immediate remedy. I am hopeful that during these times superseding tax returns can be used as an important tool to protect taxpayers, especially vulnerable taxpayers like victims of domestic violence, though the relief itself will take some time to be received.

Filed Under: Disaster, Qualified Offer Tagged With:

IRM Changes to Passport Decertification and Revocation Procedures

August 27, 2019 by 1 Comment

Today we welcome Nancy Rossner who practices with the Community Tax Law Project in Richmond, Virginia.  Nancy is a graduate of the University of Richmond Law School which also happens to be my alma mater.  She recently gave a presentation to the ABA Tax Section Administrative Practice committee as a part of their monthly series of procedure updates and agreed to write this post for us on the topic of her presentation.  We have blogged before about passport revocation here, here, here and here.  As Nancy mentions below, the Tax Court did recently take action to amend the form petition recommended by Carl Smith in one of the earlier post.  Passport cases are now making their way to the Tax Court.  I anticipate we will be blogging about this issue a fair amount over the next couple of years. Keith

Leaving and re-entering the U.S. was made a bit more difficult for Americans by the Fixing America’s Surface Transportation (FAST) Act, signed into law December 4, 2015 and creating IRC Section 7345.  The law requires the IRS to notify the State Department when an individual is certified as owing “seriously delinquent debt,” at which time the State Department then has the authority to deny the individual’s passport application, application for passport renewal, or even revoke any U.S. passport previously issued to that individual.  The IRS recently released a revision to the IRM on July 19, 2019 to provide guidance on passport decertification and revocation. I will be writing about these updates today.  But first, I would like to provide a brief refresher on passport certification and revocation.

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In order to be considered a “seriously delinquent tax debt” resulting in certification to the State Department, the debt must be assessed, unpaid, legally enforceable, in excess of $50,000 (indexed for inflation, which brings it to $52,000 for the current year) and meet other conditions outlined in IRM 5.1.12.27.2.  However, even if a tax debt meets the criteria outlined in IRM 5.1.12.27.2, there are certain statutory exclusions from the certification listed in IRC Section 7345(b)(2).  In addition to the enumerated exclusions in IRC Section 7345(b)(2), the IRS also has discretion under IRC Section 7345 to exclude categories of tax debt from certification, despite meeting the criteria in IRM 5.1.12.27.2. These discretionary exclusions are listed in IRM 5.1.12.27.4.

Now, when the taxpayer is determined to have a seriously delinquent debt, the IRS is supposed to send the taxpayer a Letter CP 508C informing the taxpayer of the debt certification and providing the taxpayer with 30 days to challenge the notice (increased to 90 days if the taxpayer is out of the country).  If the debt remains unresolved, the IRS sends the taxpayer Letter 6152, Notice of Intent to Request U.S. Department of State Revoke Your Passport, to give the taxpayer one last chance to resolve the debt before recommending passport revocation to the State Department. The taxpayer is entitled to appeal the debt certification to the U.S. Tax Court or a U.S. District Court to have a court determine if certification was erroneous or if the IRS failed to reverse the certification under IRC Section 7345(c).  As per the U.S. Tax Court’s press release dated July 15, 2019, the Court adopted final amendments to its Rules of Practice and Procedure and adopted revisions to Form 1(Petition) among other forms.  As a result, Rule 13. Jurisdiction was updated to include “certification actions with respect to passports” and Rule 34. Petition was updated to include “certification actions with respect to passports.”  These changes are also reflected on the new Petition form which now includes a checkbox for “Notice of Certification of Your Seriously Delinquent Tax Debt to the Department of State.”  Yes, Carlton Smith did get his wish from this previous blog post. 

The new IRM guidance also provides some updates to the reversal of certification of seriously delinquent tax debt as well as expedited decertification.  As per IRM 5.1.12.27.8, the IRS will reverse the certification of seriously delinquent tax debt and notify the State Department within 30 days if the previously certified tax debt is fully satisfied, becomes legally unenforceable or ceases to be seriously delinquent debt (previously delinquent debt ceases to be seriously delinquent tax debt when a statutory exclusion is met).  If the certification is found to be erroneous the IRS will notify the State Department “as soon as practicable” and the IRS will notify the taxpayer once the certification is reversed.  One thing that I have learned as a practitioner at an LITC is that “as soon as practicable” can mean many different things to many different people. The U.S. Tax Court or U.S. District Court may also order the IRS to reverse the certification as a result of tax court litigation.

Importantly, taxpayers may also request expedited decertification, which can shorten the processing time by 2-3 weeks, but the taxpayer must meet all three of the following conditions: 1. The taxpayer meets a condition in 5.1.12.27.8 Reversal of Certification; 2. The taxpayer states that they have foreign travel scheduled within 45 days and can provide proof of travel OR the taxpayer lives outside of the US; and 3. The taxpayer has a pending application for a passport or renewal, has received notification their passport was denied or revoked, and provides a denial letter from the State Department (read: not the CP508-C). The updates to the IRM made proof of travel necessary in 2. and a copy of the State Department denial letter necessary in 3.  There is an exception for taxpayers residing out of the United States who do not have imminent travel plans.  If the taxpayer meets the conditions outlined in IRM 5.1.12.27.3 or IRM 5.1.12.27.4 and expresses an urgent need for decertification the IRS is supposed to request expedited decertification.

One last item of note on this topic, according to a recent memo from Acting Taxpayer Advocate Bridget Roberts (TAS-13-0819-0014), effective July 25, 2019, all open TAS cases with a certified taxpayer will be decertified and new TAS taxpayer cases will also be systemically decertified until further notice. This is something for which former NTA Nina Olson advocated prior to leaving office this year.

Filed Under: Passport revocation, Seriously Delinquent Tax Debt, Seriously Delinquent Tax Debt (SDTD) Tagged With: