IRS Releases Update on Frequently Asked Questions Part 4: The Low-Income Taxpayer Perspective

October 22, 2021 by 3 Comments

Today we welcome back guest blogger Ted Afield, Professor of Law at Georgia State University, with the fourth installment in our mini-series on IRS FAQ.

The IRS’s mission, in its own words, is to “Provide America’s taxpayers top quality service by helping them understand and meet their tax responsibilities and enforce the law with integrity and fairness to all.” Taxpayers reading this mission statement are not being unreasonable in believing that fulfilling the service side of this mission includes at least some obligation to explain to taxpayers what the tax laws are and how taxpayers are expected to comply with them. Indeed, a service-focused mission would also suggest that, to the extent that the IRS does provide an explanation of the tax laws that turns out to be incorrect, the IRS would make at least some effort to mitigate the impact of its mistake, such as through acknowledgement and correction of the error and through ensuring that taxpayers are not penalized for relying on an IRS explanation.

As has been noted numerous times on this blog and elsewhere, however, this has sadly not been the case in the context of one of most commonly utilized IRS methods of explaining the tax law: the FAQ.  Rather, historically, the IRS has taken the position that it would do its best through FAQs to provide quick and clear guidance to taxpayers, but that essentially taxpayers should rely on those FAQs at their peril, as there would be no relief if the guidance turned out to be incorrect.

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As Professors Joshua Blank and Leigh Osofsky have pointed out in an upcoming article in the Vanderbilt Law Review titled, The Inequity of Informal Guidance, that the approach that the IRS taken to this type of informal guidance is “a social justice issue. . . [because] the two tiers of formal and informal tax law systematically disadvantage taxpayers who lack access to sophisticated advisors.”  As Professors Blank and Osofsky correctly observe:

This imbalance occurs irrespective of whether the IRS’s tax guidance contains statements that, if taxpayers followed them, would be taxpayer favorable or unfavorable.  When the guidance contains taxpayer-favorable positions the IRS is not legally bound by these positions and, during an audit, can contradict or ignore them.  When the guidance contains taxpayer-unfriendly positions, taxpayers who rely on them are bound to these interpretations as a practical matter.  Worse yet, these taxpayers have almost no protection against tax penalties for incorrect positions that they claimed based on the IRS’s tax guidance.

While these inequities can of course be experienced by taxpayers at a variety of income levels, they are most acutely felt by the most economically vulnerable members who interact with the tax system.  Furthermore, the inequity is exacerbated by the fact that Congress increasingly uses the tax system to distribute economic relief in periods of economic crisis. This means that new areas of tax law in which the IRS is attempting to provide FAQ guidance as quickly as possible are areas of the law that are specifically designed to provide critical social safety-net benefits to vulnerable taxpayers who are most in need of a clear explanation that shows them what they must do to receive these benefits.  The National Taxpayer Advocate described the extent of this problem as just as it related to the COVID-19 relief provisions here:

The Coronavirus relief provisions provide a good example of the useful role of FAQs. There is no end to the questions that have arisen under the Families First Coronavirus Response Act, the Coronavirus Aid, Relief, and Economic Security Act, and the IRS’s People First Initiative. It would not have been feasible for the IRS to address most of those questions through published guidance, at least not quickly. By our count, the IRS has posted nearly 500 COVID-19-related FAQs on its website, including 94 on the employee retention credit, 93 on the Families First Coronavirus Response Act (via a link to the Department of Labor website), 69 on Economic Impact Payments, 67 on COVID 19-related tax credits, and 40 on filing and payment deadlines.

For a more specific example, see here for a discussion of how the IRS provided incorrect FAQ guidance for the eligibility of incarcerated and non-resident taxpayers for economic impact payments during the first round of COVID-19 stimulus).  This approach represented more than just poor service—it violated at least four of the Taxpayer Bill of Rights: the right to be informed; the right to quality service; the right to pay no more than the correct amount of tax; and the right to a fair and just tax system.  Indeed, as Professors Alice Abreu and Richard Greenstein have noted, given that the IRS would remove and replace FAQs without warning and without an archive, it “may also violate the taxpayers “Right to Challenge the IRS’s Position and Be Heard,’” which would cause it to violate half of the listed taxpayer rights in TBOR.

Thankfully, the IRS last week took a significant step in rectifying this inequity, with the publication of IR-2021-202 (October 15, 2021).  Through this notice, the IRS has indicated that it will make the following changes to its FAQ practices:

  1. Publishing FAQs as separate Fact Sheets that will be dated so that taxpayers will know when FAQs are modified.
  2. Allowing taxpayers who reasonably rely on FAQ guidance in good faith to have a “reasonable cause” defense against negligence or accuracy related penalties if the FAQ is incorrect as applied to that taxpayer

This notice represents an important change from the “heads, the IRS wins; tails, the taxpayer loses” historical approach to FAQs and is a welcome development for all taxpayers, but particularly so for those taxpayers who lack the resources to pay for professional tax guidance and nevertheless rely on benefits administered through the tax code for their economic security.  Inevitably, however, commentators will turn their attention to the question of whether this fix solves the problem or whether it only represents the first step towards an even more equitable solution.

As Professors Abreu and Greenstein have argued here, perhaps the IRS should be encouraged to go beyond simply allowing reliance for the purposes of penalty protection and should be encouraged to “stand by its [sic] all of its written, publicly announced, positions until it announces that it has changed positions, and it should do so for all purposes, not just for penalty protection.”  There is considerable appeal to this argument, but part of me wonders whether this could potentially backfire on economically vulnerable taxpayers. Requiring that the IRS stand by all written guidance for all purposes until the guidance is changed could end up having the counter-effect of making the IRS more hesitant to release the guidance in the first place.  Even if the IRS did continue to release guidance, allowing taxpayer reliance over and above penalty protection could incentivize the IRS to release guidance in a more taxpayer unfriendly manner, which, as Professors Blank and Osofsky have observed, could cause taxpayers to rely on unfriendly FAQ guidance that puts them in an unfavorable tax position that their reliance causes them not to realize.

While that concern does give me pause in wishing that the IRS had adopted a position that taxpayers are entitled to reliance on FAQs for all purposes, I do find myself still wishing that the IRS had moved more toward the Abreu/Greenstein proposal.  But, perhaps the IRS could have found a middle ground between penalty defense and complete reliance for all taxpayers.  For me, this middle ground would recognize that the service obligations that the IRS owes the economically vulnerable are, frankly, higher than the obligations owed to more sophisticated taxpayers.  It would also recognize that, in addition to failing these taxpayers on the service side, the IRS has also failed these taxpayers on the enforcement side by auditing them at much higher rates than their incomes or percentage of the taxpaying population would justify.

Therefore, while it might be too chilling for the IRS to have to stand behind all written guidance in effect for all taxpayers, is it that unreasonable to ask the IRS to stand behind this guidance for all purposes for taxpayers who are the most likely to depend on FAQ guidance to educate them about social safety-net benefits?  To be specific, I would have liked to have seen the IRS adopt the Abreu/Greenstein model for taxpayers whose incomes for the tax year at issue were below 250 percent of that year’s federal poverty guidelines (the same eligibility standard for LITC representation).  I also would have liked to see the IRS adopt the National Taxpayer Advocate’s recommendation of refusing to assess a penalty for a position taken in reliance on an FAQ in effect for the year in which the return was filed, at least for this subset of taxpayers.  Should the IRS balk at providing this relief towards low-income taxpayers, I would have an extra wrinkle that I would propose—I would give the IRS a way out of having to allow for this heightened level of reliance for these taxpayers by tying it to the IRS’s approach to enforcement against low-income taxpayers. 

My added wrinkle is that the IRS should permit low-income taxpayers to have a higher level of reliance protection for FAQs for as long as the IRS chooses to subject them to heightened levels of enforcement.  As Kim Bloomquist has persuasively demonstrated, “the IRS audits EITC filers at a rate four times higher than non-EITC filers with similar incomes.”  That disparity in audit rates is uncontroversially unjustifiable, and allowing low-income taxpayers to have a higher degree of reliance on all published IRS guidance for as long as this enforcement disparity persists would be a small step towards IRS perhaps recognizing that it in fact has its priorities exactly backwards when it provides more enforcement and less service towards the economically vulnerable.

The IRS took an important step last week towards making its use of FAQ’s much fairer to all taxpayers, and the IRS deserves to be celebrated for this.  Nevertheless, I do hope like other commentators that this might represent the first step towards a more just use of FAQs and, specifically, an acknowledgement that, if the IRS is going to provide heightened enforcement scrutiny of low-income taxpayers, it should be providing heightened service that it stands behind as well.

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Reflections on Nina Olson from Ted Afield

July 15, 2019 by Leave a Comment

We welcome Ted Afield to provide his thoughts on Nina’s impact.  Ted is an associate clinical professor of law and the Mark and Evelyn Trammell Professor and Director of the Philip C. Cook Low-Income Taxpayer Clinic at Georgia State Law School.  Ted and his clinic have partnered with the tax clinic at Harvard on several amicus briefs. The Georgia State tax clinic has been around for a while, has developed a terrific web site that serves many taxpayers and clinicians and covers a broad geographic area in Georgia.  Keith

Unlike some of the other folks who have posted wonderful reflections about Nina, I do not have as long of a personal history with her. I am still a relative newcomer in the low-income taxpayer clinic community.  While I am new, my clinic, however, is not.  I am fortunate to direct a clinic with a long and proud history behind it.  Accordingly, not long after I started at Georgia State, I found myself wanting to celebrate our clinic’s twenty-fifth anniversary.  I had gotten to know Keith, and I asked him if he could perhaps pave the way by introducing me to Nina so that I could see if I could convince her to take the time out of her schedule to fly down to Atlanta to be the speaker at our twenty-fifth anniversary event.  Keith said I should just e-mail her directly.  Now, I assume that Nina must get significantly more e-mails in a day than most of us do.  Like Rob Nassau, I had never met Nina before, and so I thought there was a very good chance that my e-mail might get lost in the shuffle (as it very likely would have had I been on the receiving end).  I couldn’t have been more wrong.  Nina replied immediately and readily agreed to come down and speak at our event.  I still assumed that, given how busy she was, she would likely have to give her speech and then leave relatively quickly.  Nina made me 0 for 2 in my assumptions.  She insisted on getting to know our clinic students (and we have a lot of them), and she took the time to speak with all of them, to share her thoughts with them about their careers, and to really listen to their experiences in the clinic and what they perceived to be the most pressing issues facing low-income taxpayers.  While speakers can often time revert to chatting with faculty and distinguished guests in the audience, Nina was laser focused on wanting to communicate with our students so that she could make sure that she could influence them to always be thinking of how the tax system could be inadvertently hurting the most vulnerable among us.  And, unsurprisingly, she also gave an incredibly dynamic and impassioned speech indicating that she was intimately familiar with the history of our clinic and how it fit in the larger work of the low-income taxpayer community, the Taxpayer Advocate Service, and her work as the National Taxpayer Advocate.  She was able to command the attention of an audience that consisted of students, academics, IRS attorneys, and private practitioners, which is not easy to do.

I mention this story because, while Nina’s energy, creativity, and tireless advocacy have been rightly praised by so many, what I think is a bit underappreciated about Nina, especially outside the academic community, is how critical she has been towards creating an environment in which academic tax clinics could thrive.  While the grant funding that she helped secure is of course incredibly important to academic institutions that always have one (sometimes all) eyes on the budget when considering whether to start a clinic, what is even more important is how Nina approached her job as one that would engage both the academic and practitioner communities simultaneously and would look for ways to apply academic theory and research to practical problems impacting the most vulnerable in our society.  She moves seamlessly between the IRS, academic, and practitioner communities, and I think we might all take that a bit for granted given how rare that is.  Her ability to do this has been critical, however, for demonstrating that tax issues are social justice issues and that applied tax research is critical towards improving the lives of vulnerable populations.

Although Nina came out of the practitioner rather than the academic community, she from her earliest years as National Taxpayer Advocate recognized the importance of developing academic partnerships with people like Keith, Les, and other early critical tax theorists who focused on the intersection of poverty and tax law and who were among the early academics who built out the theoretical support for practical policy solutions for which Nina could advocate.  Indeed, she infused her annual reports with rigorous empirical research and qualitative theoretical and applied analysis to make sure that her policy proposals could never be effectively attacked for being based solely on anecdotal evidence or on partisan political consideration.  For those who criticize the academy for sometimes being too far removed from issues that touch people’s lives directly or that directly impact the practitioner community, the practical research and policy advocacy that came out of this work and that improved the lives of countless taxpayers serves as a stark rebuke.

Nina’s efforts created an environment in which academic tax clinics can present themselves as being exemplars of what an academic clinic should be.  As a result, academic tax clinics now occupy a space in which they can serve as an effective bridge between academic research and issues that directly impact individual taxpayers.  As a result, the future of academic clinics is bright.  Looking around at many of the country’s academic clinics, what you will find is that a new generation of tax academics is arriving to take them over, eager to build on this pioneering work by training future attorneys with a strong sense of why tax is a social justice issue, by helping to identify issues that could be ripe for legislative change, and by conducting academic research to further flesh out the theoretical basis for enhancing tax justice and taxpayer rights.  Academic clinics predate Nina’s work as National Taxpayer Advocate, but her efforts have ensured their future for decades to come.  As someone who is one of the recent arrivals in the academic LITC community, I am incredibly grateful, and I also feel a tremendous sense of responsibility.  Nina showed what could be done by a gifted researcher and advocate who wanted to make the tax system more just and fair whenever she could.  It’s an impossible standard to live up to, but I’m looking forward to all of our efforts to do so in the years ahead.

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IRS Can File a Proof of Claim in Bankruptcy Court for the Full Amount of Tax Liability Even After an Accepted Offer in Compromise

June 13, 2019 by 1 Comment

Guest blogger Ted Afield today discusses the intersection of offers in compromise with bankruptcy. Professor Afield (with co-author Nancy Ryan) will be creating a chapter on Offers in Compromise for the next edition of Effectively Representing Your Client Before the IRS. Christine

In our clinic at GSU, we do a lot of collections work and routinely submit offers in compromise, which the IRS often accepts, on behalf of our clients. While our hope is always that the accepted offer will be a critical step that allows the taxpayer to get back in compliance with his or her tax obligations and get out from under the weight of a detrimental financial liability, unfortunately the accepted offer is sometimes not enough to prevent a taxpayer from continuing to be overwhelmed by other financial obligations. In situations like these, the taxpayer may in fact file bankruptcy during the 5-year compliance window for the offer in compromise. If this happens, the IRS potentially has a claim in the bankruptcy proceeding because the offer in compromise may have already been defaulted or may be defaulted in the future if the taxpayer fails to file tax returns and timely pay taxes. Accordingly, the IRS will file a proof of claim in the bankruptcy proceeding, which raises the question of should this proof of claim be for the full amount of the tax liability or for the compromised amount of the tax liability.

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This was the question recently taken up in a memorandum opinion by the Bankruptcy Court for the Southern District of Texas, Houston Division, in In Re: Curtis Cole, No: 18-35182 (May 29, 2019). In this case, Mr. Cole and the IRS had entered into a compromise of tax liabilities for 2003-2014 totaling over $100,000 for the much more manageable sum of $1,000. During the five-year monitoring period, Mr. Cole started off well and timely filed and paid his 2016 income tax. For 2017, however, Mr. Cole recognized that he would not be able to timely file a return, and he accordingly requested and was granted an extension. Mr. Cole did then file his 2017 return and pay his 2017 tax bill on October 15, 2018.

PT readers who do a lot of OIC work will immediately recognize the potential problem that Mr. Cole created for his offer because an extension of time to file is not an extension of the time to pay taxes, raising the possibility that the IRS would default Mr. Cole’s offer for failing to pay his 2017 taxes in a timely manner. Compounding the problem was that Mr. Cole had filed for Chapter 13 bankruptcy one month earlier, on September 15, 2018. As a result, the IRS filed a proof of claim in the bankruptcy proceeding for the full amount of the original tax liability that was compromised under exactly that theory (i.e., that Mr. Cole’s late payment of 2017 taxes caused his offer to default and thus caused the amount of the IRS’s claim to be the full amount of the tax liability).

Mr. Cole was not happy with this development and attempted to raise a couple of equitable arguments that did not have much of a leg to stand on. Mr. Cole’s first hope was that he would be simply forgiven his confusion over whether a filing extension also constituted a payment extension. This did not have much resonance in light of the fact that it is well established that filing extensions are not in fact payment extensions. Mr. Cole also attempted to argue that he effectively had rights under the Internal Revenue Manual by asserting that the IRS violated its own procedures when it did not offer him any opportunity to cure his late payment before declaring the offer to be in default. See I.R.M. 5.19.7.2.20, which states that in the event of a breach of the offer’s terms, the IRS should send the taxpayer a notice letter and provide an opportunity to cure before defaulting the offer. Again, this argument could not carry much weight in light of the well-established principle that the IRM does not give taxpayers any rights, and thus the IRS was not obligated to provide an opportunity to cure the default. Ghandour v. United States, 37 Fed. Cl. 121, 126 n.14 (1997).

Mr. Cole’s strongest argument was based on his reliance on a bankruptcy court opinion from the Eastern District of North Carolina that had ruled on a similar issue and had concluded that the proof of claim should be for the compromised amount rather than the full amount of the tax liability. In re Mead, No. 12-01222-8-JRL, 2013 WL 64758 (Bankr. E.D.N.C. Jan. 4, 2013). The Mead court found that the contractual language in Form 656 stating that the IRS may file a “tax claim” for the full amount of the tax liability if a taxpayer files for bankruptcy before the offer’s terms expire is ambiguous in regards to whether the “tax claim” refers to the full liability or the compromise amount. Accordingly, the Mead court held that the IRS violated the nondiscrimination rule of 11 U.S.C. § 525(a), on the grounds that it appeared that the IRS was trying to collect the full amount of the tax liability, rather than the compromised amount, solely because the taxpayer was in bankruptcy.

The Cole court, however, was not persuaded by its sister court in North Carolina and held that Mead was both distinguishable and simply incorrect.  Mead was distinguishable because, unlike in Cole, there was not an issue of whether the offer had been defaulted. However, even without that distinguishing characteristic, the Cole court noted that the outcome would be the same. In other words, regardless of whether the offer was in default, if the terms of the offer had not yet expired, the IRS would still need to file a proof of claim for the full amount of the tax liability in order to preserve its rights in case the taxpayer did subsequently default the offer. This is why the terms of the offer explicitly state in Section 7: “If I file for bankruptcy before the terms and conditions of the offer are met, I agree that the IRS may file a claim for the full amount of the tax liability, accrued penalties and interest, and that any claim the IRS files in the bankruptcy proceeding will be a tax claim.” I do not agree with the Mead court’s assertion that this language is ambiguous.

It’s not that the issue of whether the offer has been defaulted is irrelevant. Rather, that issue is simply premature at the moment when the IRS files its proof of claim. Even if the offer has unequivocally not yet been defaulted, the IRS must file a proof of claim for the full amount of the liability to protect its right to recover the full amount, should a default occur. So when can Mr. Cole attempt to make his likely to be very uphill arguments that he has not defaulted the offer? As the court notes, he does this when he submits his Chapter 13 plan, in which he will propose how to treat the IRS’s claim. If he believes he has not defaulted his offer, he can propose that the IRS only receive what it is owed if the offer is still in force. The IRS can then object if it believes that the offer is in default, and the issue can then be decided.

In comparing Cole and Mead, I think the Cole court likely has the better argument. The contractual language in Form 656 pretty unambiguously gives the IRS the right to file a claim for the full amount of the tax liability in a bankruptcy proceeding during the five-year monitoring period. That does not mean that the IRS will recover the full amount if the offer is not in default, but taxpayers should certainly expect such a claim to be filed and that they will have to litigate whether the offer is defaulted when they propose their bankruptcy plan.

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Nominal Qualified Offers and TEFRA

February 25, 2019 by Leave a Comment

We welcome guest blogger Ted Afield. Professor Afield directs the low income taxpayer clinic at Georgia State. The Georgia State tax clinic serves more clients that almost any clinic in the country and provides them with high quality service. The tax clinic at the Legal Services Center at Harvard and the Georgia State tax clinic have partnered on several amicus briefs and it’s always a pleasure to work with their clinic. The case discussed by Professor Afield provides important precedent for successful litigants seeking to recover fees after making a qualified offer. Paying attorney’s fees to a partnership that engaged in an abusive tax shelter promotion makes for a tough pill for the government to swallow which, I believe, caused it to argue the issues discussed here so vigorously. Even though I do not support the underlying tax position taken by the partnership, it had the winning issue on the statute of limitations and that formed the basis for successful litigation on the attorney’s fees issue. Perhaps the benefit of this opinion for parties seeking fees will outweigh the loss to a tax shelter promoter. Keith

The United States Court of Appeals for the Federal Circuit recently issued an opinion in BASR Partnership, William F. Pettinati, Sr., Tax Matters Partner v. United States, in which the court determined whether a partnership was entitled to recover its reasonable litigation costs from the government when it submitted a nominal $1 qualified offer to the government in tax controversy litigation and subsequently prevailed at summary judgment.   This case was a Son of Boss case in which the IRS waited a decade before issuing a Final Partnership Administrative Adjustment (FPAA) disallowing BASR Partnership’s tax benefits.  Accordingly, the tax matters partner, William Pettinati, Sr., challenged the FPAA as untimely pursuant to the three year statute of limitations in IRC § 6501(a).  Given the confidence that the BASR partners had in their statute of limitations argument, they submitted a $1.00 qualified offer to the government, which the government rejected.  As it turns out, the BASR partners’ confidence was indeed justified, and they prevailed on summary judgment and then moved for an award of litigation costs under IRC § 7430(c)(4)(E), which the trial court granted. 

On appeal, the government raised five arguments for why the court should not have awarded litigation costs, three of which being of particular interest in that they explore the relationship between TEFRA and qualified offers as well as whether nominal offers are in fact permissible.  The government’s first argument was that BASR was not a “party” in the litigation because of TEFRA and therefore could not be a “prevailing party” as required under the qualified offer statute.  The government’s second and third arguments were that, even if BASR was a “party,” the tax liability was not “in issue” and BASR did not incur any litigation costs during the underlying TEFRA proceeding.  The government’s remaining arguments were that, even if IRC § 7430(a)’s eligibility requirements were satisfied, the trial court did not apply the real-party-in-interest doctrine and abused its discretion in granting the award.  These arguments presented an opportunity for the Federal Circuit to examine how the TEFRA and qualified offer rules interact with each other and, of particular interest to me and Keith, presented an opportunity for the court to determine whether nominal qualified offers, which are often utilized by low-income taxpayer clinics, would be considered per se unreasonable. 

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The Underlying Partnership is a Prevailing Party 

 The court rejected the government’s argument that only individual partners, rather than the partnership itself, can be parties in a TEFRA proceeding and that, accordingly, BASR Partnership could not be a “prevailing party.”  The court noted that the language in IRC § 6226 that permits individual partners to participate in the proceeding should be read inclusively rather than exclusively (i.e., just because the statute specifically indicates that partners can be parties, that does not mean that it prevents the partnership itself from also being a party).  The court noted that the cost-shifting language of IRC § 7430(c)(4)(A)(ii) supported this interpretation of IRC § 6226 because it specifically contemplated “any partnership” as being included in the definition of “prevailing party.” 

Tax Liability is “In Issue” in a TEFRA Proceeding 

 After determining that BASR Partnership could indeed be a prevailing party, the court next had to consider whether the tax liability was “in issue” in a TEFRA proceeding.  The government contended that the liability was not “in issue” because the tax liability is determined at the partner level rather than at the partnership level in such proceedings.  The Court rejected this narrow reading of the phrase “in issue”, however, and held that actual liability would not have to be determined at the partnership level for it to be “in issue”—rather, it was sufficient that the partnership determination would impact the partners’ individual tax liability. 

The partnership incurred litigation costs despite the fact that the costs were incurred in the partner’s name, and the partnership was the “real party in interest” 

Because the resolution turned more on an issue of contract and state partnership law than an issue of tax procedure, I will not overly dwell on the government’s argument that the partnership did not incur any litigation costs because the costs were incurred by the managing partner individually and the argument that the “real party in interest” doctrine prevented a recovery of costs because the real parties in interest were the partners, whose net worth would have made them ineligible to recover costs under IRC § 7430.  Suffice to say that the court rejected these arguments because the managing partner had brought an action in his capacity as tax matters partner under IRC § 6226, and the partnership agreement and the relevant state partnership law (in this case, it was Texas) obligated the partners to reimburse him for litigation costs.  It is worth noting, however, that the “real party in interest” issue is the one that provoked a dissenting opinion arguing that the fact that the partners were entitled to have their litigation costs reimbursed by the partnership made them the true beneficiaries of the award and thus the real parties in interest. 

Awarding litigation costs was not an abuse of discretion (i.e., the issue causing low-income taxpayer clinics to weigh in) 

The government’s final argument was that awarding litigation costs constituted an abuse of discretion because the taxpayer’s nominal $1.00 qualified offer “was not made in a good-faith attempt to produce a settlement.”  This was the argument that got Keith’s and my attention, because it seemed to us that the government was attempting to argue that nominal qualified offers were per se invalid.  If successful, this argument could have severely hindered a common litigation strategy that low-income taxpayers employ in frozen refund litigation.   

 Accordingly, our clinics (the Philip C. Cook Low-Income Taxpayer Clinic of Georgia State University College of Law and the Harvard Federal Tax Clinic) filed a joint amicus brief in this case solely on the issue of whether taxpayers should be denied reasonable litigation and administrative costs based on the dollar value of a qualified offer.  The clinics argued that none of the requirements of IRC § 7430 state that an offer must be of a minimum amount or of a minimum percentage of the taxpayer’s possible liability in order to be valid.  The clinics were particularly concerned with the potential impact that a rule requiring a minimum qualified offer amount would have on low-income taxpayers, which motived them to submit the brief. Low-income taxpayers who have had their refunds frozen often submit $1 qualified offers when they believe that they will prevail in a tax court case in order to shorten the time it takes for them to resolve their case and receive their frozen refund.  Obtaining these frozen refunds is of critical importance to these vulnerable taxpayers because they often need the tax refunds generated by the earned income tax credit to meet their basic living expenses.  Submitting a qualified offer puts pressure on the government to consider the low-income taxpayer’s case more quickly than it otherwise would because of the risk that the government would have to pay fees and costs if the taxpayer prevails.   

 In looking at this issue, the court agreed that a nominal $1 qualified offer can be reasonable and that awarding litigation fees was not an abuse of discretion.  While the court did not discuss the impacts to low-income taxpayers directly in its opinion, the clinics are pleased that the court reached this result and that nominal qualified offers will remain a viable litigation tool for low-income taxpayers who rely on them to obtain improperly frozen refunds as quickly as possible. 

 

 

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