Updates for ITIN Holders

August 18, 2021 by 2 Comments

Two issues have come up recently for ITIN holders that I’d like to flag. Thanks to Sarah Lora of the Lewis & Clark Low Income Taxpayer Clinic for prompting this post and providing much of the content.

1. Earlier this spring, NTA Erin Collins wrote a blog post highlighting the delays caused by the paper-filing requirement for ITIN seekers. This issue has gone on so long that I almost forgot it seems strange to people seeing it for the first time.

Taxpayers needing an ITIN may not file electronically.  They must always file a paper return, attaching the return to their ITIN application and mailing the package with supporting documents to the IRS ITIN unit. The IRS’s reasoning is that the attached tax return demonstrates the taxpayer’s need for an ITIN. Taxpayers needing an ITIN renewal fare slightly better: they may obtain the renewal prior to the filing season, which then allows for an e-filed return.  However, when taxpayers seek help with both filing their return and renewing their ITIN during the filing season, the renewal application must be attached to a paper tax return.

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The requirement to paper file has resulted in extraordinary wait times for taxpayers needing ITINs for themselves or dependents.

During 2021 through March 27, the IRS had received over 150,000 ITIN applications, with over 125,000 submitted with a tax return. This number is expected to grow – in 2020, the IRS received over a million ITIN applications, including about 470,000 applications from new applicants, meaning they had to apply with a paper tax return if they did not meet one of the narrow exceptions. These taxpayers are facing a double-whammy this filing season – first, the delay in having an ITIN application processed and second, the delay in having a paper tax return processed. For the week ending March 27, 2021, ITIN applications submitted with a return were taking 25 business days on average just to be input into the system. During this same week, the ITIN unit started with inventory of almost 67,000 applications to be worked and ended with an inventory of over 74,000, reflecting a growing backlog.

The NTA points out that many ITIN holders have dependent children that qualify for the Child Tax Credit (CTC) or Recovery Rebate Credit, creating delayed refunds for those families most in need.

In the post, the NTA suggests that ITIN applicants should not be required to attach a tax return if they can prove a filing requirement some other way, for example by submitting wage documents from an employer. She notes that accepting ITIN applications throughout the year would “prevent unnecessary delays, encourage voluntary compliance, and reward these individuals for doing the right thing by filing U.S. tax returns.”

2. ITIN holders with children who qualify for the CTC are entitled to the advanced CTC. The implementation of this provision has come with some glitches.  First, the IRS computers were initially programed to disallow the AdvCTC if the taxpayer or spouse was an ITIN holder. This programing error prevented approximately 1.2 million families from receiving the first monthly advanced CTC payment in July.  Advocates raised the issue with the IRS, and it appears that the glitch has been fixed and these families should begin receiving their payments in August 2021. According to the IRS news release, these taxpayers will receive the full amount of their AdvCTC:

Such families who did not receive a July payment are receiving a monthly payment in August, which also includes a portion of the July payment. They will receive the remainder of the July payment in late August.

Finally, advocates recently flagged the issue that the ITIN unit may reject ITIN applications for individuals with qualifying children filing 2020 returns with no income, seeking the advanced CTC. There were several reports of both private and nonprofit Certified Acceptance Agents (CAAs) refusing to submit ITIN applications for these individuals.

Sarah Lora previously wrote a post here discussing the ITIN unit’s flawed policy of rejecting ITIN applications where the accompanying paper tax return does not show what the IRS deems a federal monetary tax benefit. This policy rejects a century of tax policy that provides favorable tax treatment to citizens Canada and Mexico, as Sarah argues in a Tax Notes State article here. Even though a 2020 return is the ticket to receiving the advanced CTC, the ITIN unit’s current policy of blindly looking at monetary federal tax benefits on the attached return before them could lead them to reject ITINs for 2020 $0 income returns, preventing children with social security numbers, the vast majority of which are U.S. Citizens, from receiving the advanced CTC.

Because of this ITIN policy, it is logical for CAAs to think they would be wasting their time submitting applications for nonfilers who have “only” a 2021 tax benefit. Legal services attorney Jen Burdick submitted the issue to TAS through the Systemic Advocacy Management System (SAMS). Happily, Jen reports that there is a workaround. According to the Systemic Advocacy employee with whom Jen corresponded, a nonfiler’s 2020 tax return should be processed and the ITIN issued if the Form 1040 shows “Rev. Proc. 2021-24” written at the top of the first page.

Revenue Procedure 2021-24 sets out procedures for nonfilers to file 2020 tax returns in order to obtain AdvCTC payments, and it mentions ITINs at § 4.03(4)(b). Hopefully the ITIN unit will process applications attached to such returns. Because of the delays described above, it is difficult to say whether the ITIN unit is aware of the special 2020 procedures. Please reach out to Sarah at sarahlora@lclark.edu if you find taxpayers facing an improper ITIN rejection.

The workaround is good news, but it is discouraging that it has not been publicized by the IRS. The IRS needs to get the word out to all CAAs, so taxpayers stop getting turned away and told to wait until the 2022 filing season. A crush of ITIN applications next spring is the last thing that the IRS or taxpayers need.

Filed Under: Individual Taxpayer Identification Number (ITIN), Refundable Credits Tagged With:

Further Trials and Tribulations in the ITIN Unit

January 20, 2021 by 4 Comments

We welcome back Sarah Lora, Assistant Clinical Professor and Director of Lewis and Clark’s Low Income Taxpayer Clinic. In this post Sarah discusses an ITIN issue that highlights how many state and federal benefit programs rely upon the federal income tax return for eligibility purposes. The interwoven nature of tax and public benefits has implications for taxpayer rights, particularly in circumstances where the taxpayer lacks a clear path to judicial review of the IRS’s actions. Christine

Today I write about relatively recent changes to processes at the ITIN unit related to issuing ITINs to dependents in Canada and Mexico. I previously wrote about my Dickensian experience with the ITIN unit here. Now I write about policy changes at the ITIN unit related to its interpretation of the TCJA.

Since the TCJA passed, the ITIN unit has begun to require proof of U.S. residency for dependents outside the U.S. prior to issuing an ITIN. These policies are not required by the statute or regulations and have perhaps some unintended consequences to vulnerable communities, particularly as it relates to the calculation of family size for the numerous federal and state agencies that use the tax return for this purpose. These policies also contradict the Form 1040 instructions which instruct taxpayers to include dependents from Mexico and Canada on the return.

Unfortunately for ITIN applicants, there is not an easy way to appeal a rejection of an ITIN application, making these changes especially burdensome. In my previous post, I wrote that requesting an abatement of the math error notice that is issued after an ITIN rejection was likely the only way to appeal a rejected ITIN application. However, because the current policy denies ITINs in situations where the inclusion of the ITIN applicant on the return does not change the amount of tax due, no math error notice will issue. Creative litigators will have to figure out what remedies are available for a wrongfully denied ITIN application under these circumstances.

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Code Section 152(b)(3) allows dependent exemptions to include residents of the United States, and countries contiguous to the United States: i.e., Canada, or Mexico. The TCJA did not change this. Notwithstanding, the ITIN unit began rejecting applications after the TCJA for applicants from Canada and Mexico for lack of proof of U.S. Residency. The W-7 instructions and IRM indicate that the reason for the rejection is because those applicants do not confer an “allowable tax benefit” on the taxpayer, presumably due to the reduction of the exemption amount to $0 for dependents under 151(d)(5)(A).

The IRM lists the following as “allowable tax benefits” for the purposes of issuing an ITIN to dependents from Canada or Mexico: (1) American Opportunity Tax Credit, (2) Head of Household, (3) spouse filing a joint return, or (4) Premium Tax Credit. However, in my experience, it is a struggle to obtain ITINs even in these circumstances. One of the most common scenarios is a rejection of an ITIN for a parent residing in Mexico who is a qualifying relative under IRC § 152(d) and qualifies the taxpayer for Head of Household filing status. While this is clearly an allowable tax benefit under the IRM, the ITIN unit frequently rejects such ITIN applications, resulting in delayed refunds, confusion, and frustration.

It is crucial to note that the language of “allowable tax benefit” does not appear in the statute or the regulation. It is language that appears nowhere else except the IRM and the W-7 instructions – sub regulatory guidance that has had a negative impact on the immigrant community needing an accurate family size count on their tax returns.

The statute allows the Secretary broad discretion to issue ITINs. There is nothing restrictive in the statute: “The Secretary is authorized to issue an individual taxpayer identification number to an individual only if the applicant submits an application, using such form as the Secretary may require . . .” The regulations provide that the Secretary is authorized to issue an ITIN “for use in connection with filing requirements under this title” and “for any individual who . . . is required to furnish a taxpayer identifying number.” That filing “requirement” can be found at code section 151(e) “No exemption shall be allowed unless the TIN of such individual is included on the return claiming the exemption.”

So the IRS can issue these ITINs, but why should they?

First, for an accurate family size count. For better or for worse many state and federal agencies rely on the 1040 to provide accurate family size to calculate eligibility for many non-tax federal and state programs. These include immigration related applications (for example to determine whether an immigrant could be a “public charge”), FAFSA for student loans and aid, emergency Medicaid applications, and state tax returns, particularly where the state exemption amount remains above $0 for dependents satisfying section 152.

Recently, an advocate posted on the ABA listserv that her client was unable to include several qualifying relatives on her tax return, artificially reducing her family size, resulting in a denial of healthcare benefits worth $26,000. Similarly, Oregon is one of many states that allows a deduction on the state tax return for dependents satisfying the requirements of 152(d), but only if the dependents are listed on Form 1040. Without ITINs for their dependents, these taxpayers are not paying the correct amount of state tax.

Additionally, the IRS should issue these ITINs for the sake of efficiency. The Service has been issuing ITINs to these dependents since 1996. Continuing to do so will impose no additional costs (and in fact would save the costs related to scrutinizing of applications and returns for “allowable tax benefits”). It will also create efficiencies for the Service in the future because ITINs not renewed by the Service now will expire and require renewal in 2025 when these provision of the TCJA sunset.

Anyone who has had the opportunity to hear Commissioner Rettig speak knows that he is genuinely committed to serving underrepresented communities and has led while the IRS has taken a number of momentous steps to show that commitment. For example, the IRS recently translated the Form 1040 into Spanish for the first time. I believe issuing ITINs to residents of Canada and Mexico as is permitted under the law is right in line with this commitment and will demonstrate the Service’s desire to support underrepresented communities.

Filed Under: Individual Taxpayer Identification Number (ITIN) Tagged With:

Innocent Spouse Survives Motion to Dismiss in Jurisdictional Fight with the IRS

September 18, 2019 by 2 Comments

We welcome Sarah Lora, Assistant Clinical Professor and Director of Lewis and Clark’s Low Income Taxpayer Clinic and Kevin Fann, 3L at Lewis and Clark Law School.  Their clinic just won an important victory in the innocent spouse arena overcoming an argument from the trial section of the Department of Justice Tax Division that completely disagrees with the arguments made by the appellate section of the Tax Division.  Keith

In his Opinion and Order issued last month in Hockin v. United States, Oregon District Court Judge Michael Simon rejected in part a magistrate judge’s findings and recommendations to dismiss and rejected the DOJ’s argument that the government had not waived sovereign immunity to be sued, holding that a taxpayer could bring an innocent spouse claim in federal district court as part of her larger tax refund claim against the IRS.

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The dispute concerned whether an alleged innocent spouse could follow the Flora rule of “pay first, litigate later” in her § 6015(f) claim.  In the past, the DOJ has presented contradictory arguments for and against the Flora rule in these innocent spouse refund cases, a contradiction highlighted by several advocates, including former NTA Nina Olson as well as Keith and Carl from Harvard’s Low-Income Taxpayer Clinic. In previous cases against clients at Harvard LITC , the DOJ insisted that taxpayers who miss the chance to file in U.S. Tax Court could still pay the assessment and litigate a refund claim in federal district court. In Hockin and several other cases, however, the DOJ turned a 180, arguing exactly the opposite, that the district court has no jurisdiction in innocent spouse refund suits.

Several years ago, Plaintiff Kimberly Hockin filed a claim with the IRS for innocent spouse relief of joint and several liability for tax years 2007 and 2008.  The claims for each year were based on the same facts: she did not sign the return and, in the alternative, she should be relieved of liability anyway based on § 6015(f).  The IRS granted her 2008 claim, but it denied the 2007 claim with no clear explanation for the different outcomes.

Ms. Hockin attempted to appeal the decision by filing a petition in U.S. Tax Court, but she had missed the filing deadline by 555 days. After the Tax Court’s dismissal, Ms. Hockin sought the assistance of the Lewis & Clark Law School LITC. By the time she contacted us, Ms. Hockin had paid the full balance due for 2007 through offset refunds over the years. After filing for a refund administratively, the LITC filed a complaint in U.S. District Court, led by volunteer attorney Scott Moede of the Office of the City Attorney in Portland, Oregon. The complaint sought a refund of her payments for 2007 made within the last two years, citing jurisdictional statutes 28 U.S.C. § 1346(a)(1) and IRC § 7422(a), for three reasons:

  1. Ms. Hockin never signed the return;
  2. the IRS is barred from collecting the tax liability for 2007 under the theory of quasi-estoppel (i.e. it granted relief for tax year 2008 but not 2007 under the same facts); and
  3. the United States erroneously collected taxes she should have been relieved of paying under the rules of innocent spouse relief.

The United States filed a motion to dismiss, arguing that the taxes had not been “illegally or erroneously collected” as required by § 1346(a)(1) for the district court to have subject matter jurisdiction. 

After extensive briefing, including an amicus curiae brief filed by Keith and Carl of the LITC at Harvard Law School, magistrate Judge Jolie Russo held oral arguments. The United States conceded the first claim should go forward. After all, there was a genuine dispute of fact about whether the return had been signed, and no copy of the return had been produced by Ms. Hockin, the IRS, or the ex-spouse. On the claims of quasi-estoppel and innocent spouse, Judge Russo said she leaned toward granting the government’s motion to dismiss and asked Attorney Moede and Lewis and Clark law student John MacMorris-Adix ’19 to convince her otherwise.  Within a few weeks, Judge Russo issued her Findings and Recommendations (F & Rs). She had granted the government’s motion to dismiss the quasi-estoppel and innocent spouse relief.

Undeterred, the clinic objected to Russo’s F & Rs.  The Article III review Judge Michael Simon requested additional briefing, citing part of the government’s original motion to dismiss, which admitted that, if plaintiff had filed her claims in both U.S. Tax Court and U.S. District Court, § 6015(e)(1)(A) cedes jurisdiction to the District Court. Simon asked the parties to answer several questions, including, “[W]hy isn’t Plaintiff’s failure to file a timely petition in U.S. Tax Court excusable neglect of an administrative technicality?” We tried not to get too excited, since it is rare for an Article III judge to disagree with a magistrate’s F & R.

The parties briefed Judge Simon’s questions within about two weeks. Two days after briefing, he issued his ruling, granting the Government’s motion as to the quasi-estoppel claim but denying the Government’s motion as to both the unsigned return and the innocent spouse claim! The opinion relied primarily on Flora v. United States, Wilson v. Comm’r, and Merriam-Webster’s plain-language definition of “wrongfully.”

The court held:

The IRS may grant innocent spouse relief even when the amount of tax assessed or collected was precisely the correct amount that the married couple owed given their financial circumstances. But 28 U.S.C. § 1346(a)(1) and 26 U.S.C. § 7422(a) do not waive sovereign immunity and provide a cause of action solely for claims that a tax was erroneously or illegally assessed. They also apply to claims that the tax was “in any manner wrongfully co[ll]ected.” A claim that “it is inequitable to hold the individual liable” falls within the scope of an allegation that a tax was “in any manner wrongfully collected,” giving “wrongfully” its plain meaning, which would include unfairly or unjustly. See Wrongful, MERRIAM-WEBSTER.COM, https://www.merriam-webster.com/dictionary/wrongful (last visited August 14, 2019) (definition: wrong, unjust).

In addition to the plain-meaning definition of “wrongful,” the court also resisted the Government’s strained logic when it pointed to clear and basic principles of justice and economy. On that point, the court held that tax refund cases could obviously contemplate innocent spouse relief at the same time, because if the two issues were tried separately under separate jurisdictions, contradictory results might occur. The court stated, “If Plaintiff wins on her refund claim, then she must lose on her innocent spouse claim. Were this dispute adjudicated in two different forums, the result could be contradictory rulings.” The Government had produced dozens of pages of logical loopty-loops about why that simple judicial principle should not apply. In the end, the court did not buy it.

The question still arises, however, as to whether this ruling extends to stand-alone innocent spouse claims. Although the court stated that “[n]othing in the innocent spouse statute, or elsewhere in the Tax Code, suggests that a claimant seeking innocent spouse relief cannot opt to ‘pay first [and] litigate later’ in district court,” the court also made a point to recognize that this was not a stand-alone case, because it also involves a “jurisdictionally valid refund claim” for lack of a signature on the return. 

The Hockin case will be set for trial in federal district court early in 2020.

Filed Under: Federal Courts - Jurisdiction, Innocent Spouse Tagged With:

Damages for Lost Tax Documents = Refund Claim?

March 19, 2019 by 2 Comments

We welcome back guest blogger Sarah Lora, Supervising Attorney of the Statewide Tax Project of Legal Aid Services of Oregon. Today Sarah (with the help of 3L Katelynn Clements of Lewis and Clark Law School) examines a recent federal district court decision from Colorado. She argues that the court wrongly categorized a tort claim against the Transportation Security Administration as a tax refund claim, and so should not have dismissed the case for lack of jurisdiction. As we have discussed before on PT, the prerequisites to a successful tax refund suit are insurmountable for many taxpayers. Sarah points out that the taxpayer here may actually have a chance with the IRS. The record does not tell us if he’s tried that route yet. Christine

If the TSA removes from luggage and negligently misplaces tax papers that are essential to prove your claim for refund, sorry friend, you are out of luck. This, according to the federal district court in Schlieker v. Transportation Safety Administration, is the state of the law.

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On February 17, 2016, Mr. John Schlieker flew from Phoenix to Denver on Southwest Airlines. According to his complaint and documents attached to it, Mr. Schlieker checked luggage that contained “a multitude of green hanging files containing manila folders filled with documenting receipts, paperwork, check registers, charitable contribution receipts, medical and dental receipts, property interest confirmation; all the things needed to appropriately file [his 2015] tax return.” When he arrived in Denver, instead of those documents, Mr. Schlieker found a TSA notice of bag inspection stating that his bag “was among those selected for physical inspection.”

On May 19, 2016, Mr. Schlieker filed a claim for damage with the TSA for $5,000, representing the amount of refund he estimated he could have obtained had the TSA not misplaced his papers. TSA sent Mr. Schlieker a letter on December 1, 2016 denying his claim “after careful evaluation of all the evidence” and directing him to file a lawsuit in U.S. District Court if he was dissatisfied with the denial. Mr. Schlieker was dissatisfied. He then filed a lawsuit in the U.S. District Court for the District of Colorado against the TSA under the Federal Tort Claims Act for $5,000.

The court dismissed the lawsuit holding it lacked subject matter jurisdiction because Mr. Schlieker did not claim the refund with the IRS first. Assuming that the allegations in his complaint are true, as the law requires when considering a motion to dismiss, the papers that the TSA lost were necessary to file a claim for refund. Mr. Schlieker stated in his complaint that he could not “completely, honestly, and truthfully” sign a return claiming the refund without the papers the TSA took. How could he file a claim for tax refund when the TSA took the very documents he needed to assert the claim?

Mr. Shlieker’s actions are not unique. In many cases, even for sole proprietorships, a taxpayer may not keep any “books” detailing their profits, losses, or expenses. Instead, the taxpayer will save receipts and other records throughout the year which they then give to their tax preparer every April. This is not ideal, but it happens routinely.

Citing I.R.C. § 7422(a) and a long list of cases dismissing suits based on that statute, the court reasoned that Mr. Schlieker’s lawsuit was really a claim for a tax refund and should therefore be dismissed. The statute reads:

No suit or proceeding shall be maintained in any court for the recovery of any internal revenue tax alleged to have been erroneously or illegally assessed or collected . . . or of any sum alleged to have been excessive or in any manner wrongfully collected, until a claim for refund or credit has been duly filed with the Secretary [of the Treasury], according to the provisions of law in that regard, and the regulations of the Secretary established in pursuance thereof.

The cases the court cites, which cite this statute as the reason for their decision to dismiss, fall into two inapposite categories. The first are cases in which a third party, either an employer or an airline, is acting as an agent of the IRS to collect and pay over taxes. In those cases, the courts have held that § 7422(a) protects those agents, who are required by statute to collect taxes for the government under threat of criminal penalty for failure to do so, from civil lawsuits relating to the collection of those taxes. Sigmon v. Southwest Airlines (dismissing class action against Southwest for improperly charging excise taxes to passengers); see also Kaucky v. Southwest Airlines (same); Chalfin v. St. Joseph’s Healthcare Sys. (dismissing case against employer who improperly withheld FICA from medical residents working at a hospital).

In Mr. Schlieker’s case, the TSA was not acting as an agent of the IRS to collect and pay over taxes. It did not confiscate Mr. Schlieker’s documents in order to perform some duty it believed it owed to the IRS. Assuming the allegations in the complaint are true, the TSA committed a tort, plain and simple, when it took Mr. Schlieker’s documents out of his luggage and did not return them. For that reason, those agency cases are not persuasive.

The second group of cases hold that plaintiff must timely exhaust administrative remedies, by filing a claim for refund, prior to filing suit for the refund of taxes. See United States v. Clintwood Elkhorn Mining Co; United States v. Dalm; Strategic Hous. Fin. Corp. v. United States. The court misses the mark with this line of cases as well. TSA, by means of tortious conduct, took the means for filing a claim for refund away from Mr. Schlieker. To require Mr. Schlieker to file a return without supporting documents violates the letter of IRC §7206(1):

any person who . . . [w]illfully makes and subscribes any return, statement or other document which contains or is verified by a written declaration that it is made under the penalties of perjury, and which he does not believe true and correct as to every material matter . . . shall be guilty of a felony. . . .

In reality, even if Mr. Schlieker’s claim survived the initial motion to dismiss, he still might have lost or received only limited damages. In a case like this, TSA may argue that its seizure of the records was not the proximate cause of Mr. Schlieker’s loss. After all, with today’s technology, could he not have reconstructed his records well enough to file his tax return? Copies of bank records, dental and medical bills, mortgage interest paid, etc. are likely readily available online. I do not see much in the multitude of green hanging files that he could not replace with some headache and hassle. It is possible he could still get those documents and file his claim for refund before April 15, 2019. Perhaps the damages in a case like this should be measured by the cost to replace the documents, a reasonable estimate of the lost refund attributable to any irreplaceable documents, and perhaps any non-economic damages such as emotional distress.

Filed Under: refund claim Tagged With:

Claiming Refunds for Veterans Where Disability Severance Pay Was Improperly Withheld

February 26, 2019 by 3 Comments

Today we welcome guest blogger Sarah Lora. Sarah has been the Supervising Attorney of the Statewide Tax Project of Legal Aid Services of Oregon since April 2016.  Prior to that that, she worked for 13 years as an attorney in Legal Aid’s Farmworker Program where she concentrated her practice on employment litigation and tax controversy. Sarah is also a vice-chair of the pro bono and tax clinics committee of the ABA Tax Section. At the most recent Tax Section meeting she participated in a panel presenting on the issue of obtaining tax refunds for veterans. The blog has previously brought attention to the special extended time frame for filing refund claims by exonerees, here and here. In a similar fashion to exonerees, who needed to file refund claims long after the normal statute of limitations had expired, many veterans face the same issue because of a mistake by the Department of Defense that went unnoticed. Sarah explains the problem and the efforts being made to assist veterans in getting back the money they overpaid to the Treasury. With exonerees the need was for people to assist in filing the claims. For the veterans, perhaps the biggest need is identifying the individuals entitled to the refunds. While the Department of Defense is seeking to notify the veterans, it has lost contact with many of the individuals. Keith

Over 130,000 veterans have the right to a refund of over $717 million. So far only 26,000 have made claims and the time period for making claims for many of those veterans in nearly over. The NTA blogged about this issue last November here. In this post I will summarize the issues discussed by the NTA, as we seek to reach all affected taxpayers, and to provide resources for outreach efforts.

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Summary of Issue: Since 1991 the Department of Defense has been improperly withholding federal income taxes and issuing information returns for disability severance payments, also known as “DSP.” A DSP is a one-time lump sum payment made to service members separated due to medical disability. DOD’s withholding of federal income taxes from DSP was improper because the payments are excluded from income under Section 104(a)(4). See St. Clair v. United States. According to the IRS, the DOD improperly withheld approximately $717 million from over 130,000 veterans. These numbers would be higher if they included veterans who served in the military reserves.

To recoup the wrongfully withheld funds, veterans must file an amended tax return with the IRS. However, many taxpayers missed the 3-year deadline for claims for refund under Section 6511(a). To remedy this, Congress passed a law called the Combat-Injured Veterans Tax Fairness Act in 2016, which allows veterans to file an amended return within 1 year after the Department of Defense provides the taxpayer with a letter describing their right to a refund of improperly withheld amounts. As of October 2018, according to TAS, 13,000 letters have been returned as undeliverable. The IRS has advised that the 1-year time period does not begin to run on undeliverable letters. According to TAS, as of October 26, 2018, only 26,000 of the 130,000 veterans had made refund claims for the improperly withheld taxes.

What You Can Do: Reach out to your community partners, veterans groups, and other allies to make sure we help all qualified veterans get the refunds they deserve. Some ideas: post information to your facebook page, send information to your community partners, set up a table at a Stand Down event in your area, or request to give a presentation at your local Purple Heart chapter.

Resources Available: The resources below, created by TAS, are available for dissemination.

For any readers who have already engaged in an effort to obtain refunds for these veterans, we welcome your comments on how the effort is going or your advice on how to make the effort more effective.

 

Filed Under: refund claim Tagged With:

Trials and Tribulations in the ITIN Unit

November 6, 2018 by 9 Comments

We welcome first time guest blogger Sarah Lora. Sarah is a supervising attorney in Legal Aid Services of Oregon located in Portland, Oregon. She is also a vice chair of the ABA Tax Section Pro Bono and Low Income Taxpayer Committee. She represents a high percentage of immigrant taxpayers. Today, she discusses the problems encountered by one of her clients trying to file a proper tax return. The process led to frustration and points to the need for a system that allows clients to have a further hearing when things go wrong. She cites us to the Taxpayer Bill of Rights and to administrative law in her discussion of the search for a clear answer. Julie Preciado, Willamette Law School 2L, helped edit this piece. Keith

Our clinic represents a U.S. legal permanent resident who supports his teenage daughter who resides in Mexico. Our clinic helped the client file his 2015 return tax return. The client rightfully included his daughter as a dependent on the return. The daughter qualifies as a dependent under Section 151 of the code, except that she does not have a TIN as required by Section 151(e). To satisfy that requirement, we helped prepare the W-7 application pursuant to Section 6109(i)(1) with supporting documents of an original birth certificate and school record as allowed by the W-7 instructions. A few weeks passed and we received a notice that stated that the supporting documents submitted were insufficient, without further explanation.

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Regarding school records, the W-7 instructions state:

School records will be accepted only if they are for a school term ending no more than 12 months from the date of the Form W-7 application. The school record must consist of an official report card or transcript issued by the school or the equivalent of a Ministry of Education. The school record must also be signed by a school official or ministry official. The record must be dated and contain the student’s name, coursework with grades (unless under age 6), date of grading period(s) (unless under age 6), and school name and address.

I carefully reviewed the documents and the W-7 instructions and could find no problem with the birth certificate. The only discrepancy I could find with the school record is that it contained a grade point average, and not individual coursework. We submitted a detailed explanation as to why the documents substantially complied with the W-7 instructions. The rejection letter came shortly thereafter, again, without explanation. I started to feel like I had entered Dickens’ Office of Circumlocution.

I posted to the ABA listserv requesting feedback from my fellow practitioners about how to appeal a rejected W-7. All the responses were the same: you cannot. The only recourse is to file another application. However, if I do not understand why the ITIN unit rejected the original application, how can I hope to be successful in a second application? Furthermore, the education record had become stale because, according to the W-7 instructions, the records are only acceptable for 12 months from the end of the school term for which the record pertains. To file another W-7 would mean the time-consuming and arduous task of obtaining other documents from Mexico.

The Taxpayer Bill of Rights guarantees my client the right to: challenge the IRS’s position and be heard; appeal an IRS decision in an independent forum; and pay no more than the correct amount of tax. How could we appeal and where could my client be heard? Several weeks later, we received a math error notice stating that my client had erred in calculating the correct amount of tax because he was denied a dependent exemption due to lack of a valid tax identification number for his dependent. A light bulb went off. We could get to the issue of the wrongly denied ITIN by protesting the math error notice!

Section 6109(i)(1) authorizes the Secretary to issue an ITIN, “if the applicant submits an application, using such form as the Secretary may require and including the required documentation.” Section 6109(i)(2) defines required documentation to include “such documentation as the Secretary may require that proves the individual’s identity, foreign status, and residency.” The implementing regulation is found at Section 301.6109-1(b)(3) and states, in relevant part, that the applicant “must apply for [an ITIN] on form W-7.” An ITIN will be assigned to an individual on the basis of information reported on Form W-7 . . . and any such accompanying documentation that may be required by the Internal Revenue Service. An applicant for an [ITIN] must submit such documentary evidence as the Internal Revenue Service may prescribe in order to establish alien status and identity.

The regulation gives latitude to the IRS to prescribe the types of allowable documents. However, that latitude is limited by the APA. Judicial review under the APA allows a court to examine a final agency action, so long as it is not committed to agency discretion or otherwise precluded from review by statute. Section 706 requires that with respect to any agency action, a reviewing court must “hold unlawful and set aside agency action found to be,” among other things, “arbitrary, capricious, [or] an abuse of discretion.”

The arbitrary and capricious standard requires agencies to engage in reasoned decision making prior to issuing a determination. Motor Vehicle Mfr. Ass’n v. State Farm Auto Mut. Ins. Co., 463 U.S. 29, 52 (1983). Courts will invalidate agency determinations that fail to “examine the relevant data and articulate a satisfactory explanation for its action including a rational connection between the facts found and the choice made.” Id. at 43 (internal quotation omitted).

In this case, a reasonable person could make the argument that the denial of my client’s dependent’s ITIN application was arbitrary and capricious under State Farm because the IRS did not articulate a satisfactory explanation for its action, much less show a rational connection between a report card with “coursework and grades” and proving an applicant’s identity. Not only are the W-7 instructions raising barriers for the most vulnerable taxpayers by requiring “coursework” rather than grade point averages, a rational connection with a legitimate state interest is tangential at best. If fraud prevention in supporting documentation is the IRS’s objective, requiring report cards including “coursework with grades” is both under and over inclusive. It excludes more official government issued educational proof documents, such as the one my client submitted with a grade point average, and includes easily falsified commonplace progress reports. The ITIN unit is wrong to offer no explanation for its decisions that create confusion, frustration, and ultimately an inefficient process that wastes taxpayer resources.

Another possibly narrower argument against the ITIN unit’s actions in my case is that the ITIN unit’s interpretation of Treasury Reg. 301.6109-1(b)(3) is “plainly erroneous” as set in Auer v. Robbins, 519 U.S. 452, 461 (1997). Here the ITIN unit’s requirement for specific coursework versus a grade point average (if this is indeed the problem in my case) does not appear to be at all rationally related to the regulation’s requirement that the document show “alien status and identity.”

Creating opaque guidelines for the most vulnerable taxpayers is fundamentally unfair. Administrative agencies have a duty to the public to provide clear guidelines, tied to legitimate state interests. After all, Nina Olson has told us on many occasions that “[a]t their core, taxpayer rights are human rights.”

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