Guest blogger Bob Probasco returns with the first of a three-part post on the ban for recklessly or fraudulently claiming refundable credits. In today’s post Bob looks at how the Tax Court has addressed the ban. Part Two will suggest legislative solutions to the issue of Tax Court jurisdiction. Part Three tackles the ban process.
As Bob mentions, in the recent Special Report to Congress on the EITC that I helped write, we flagged the ban as an issue that potentially jeopardizes taxpayer rights. The Senate Appropriations Committee in a committee report accompanying the IRS funding for FY 2020 directs the IRS to “make the elimination of improper payments an utmost priority.” S. Rep. No. 116-111, at 26-27. At the recent Refundable Credits Summit at the IRS National Office that I attended IRS executives explored ways to reduce overpayments (in addition to increasing participation and improving administration more generally). The ban is part of the IRS toolkit. As Bob highlights today, there are fundamental questions concerning the path that taxpayers can employ to get independent review of an IRS determination. Les
One of Nina Olson’s last acts as National Taxpayer Advocate was the release of the Fiscal Year 2020 Objectives Report to Congress. Volume 3 was a Special Report on the EITC; Les discussed it in a recent post. If you are interested in issues affecting low-income taxpayers, you’ve probably already read it. It’s definitely worth your time. Kudos to Nina and to Les and the rest of the team that worked on the Special Report. There are a lot of innovative, creative suggestions, backed up by thorough research, that would not just improve but transform how the IRS administers this program.
Nina’s preface to the report says that she is “hopeful that it will lead to a serious conversation about how to advance the twin goals of increasing the participation rate of eligible taxpayers and reducing overclaims by ineligible taxpayers.” In that spirt, I’d like to offer my small contribution to the conversation, with additional thoughts about some of their suggestions. The entire Special Report is important, but after a client’s recent “close encounter of the worst kind” with the EITC ban of section 32(k)(1), I have a particular interest in Part V. This post will address the need for judicial review and what the Tax Court is actually doing. Part Two will provide some further thoughts about how the Tax Court’s jurisdiction (when clarified by Congress) should be structured. Part Three will address suggested changes to the ban determination process.
Does the Tax Court have jurisdiction to review the imposition of the ban?
Congress clearly envisioned the opportunity for pre-payment judicial review. According to the legislative history for the Taxpayer Relief Act of 1997, “[t]he determination of fraud or of reckless or intentional disregard of rules or regulations are (sic) made in a deficiency proceeding (which provides for judicial review).” H. Conf. Rpt. 105-220, at 545. But there is no jurisdictional statute that clearly and unequivocally covers this, at least not until the ban is actually imposed in a future year.
The question of Tax Court jurisdiction has been discussed here on Procedurally Taxing several times:
- The Ban on Claiming the EITC: A Problematic Penalty (Les, January 2014)
- Recent Tax Court Case Shows Challenges Administering Civil Penalties and the EITC Ban (Les, July 2014)
- Tax Court Opinion in Ballard Highlights Fundamental Uncertainty of Its Jurisdiction to Rule on the IRS Power to Ban Taxpayers From Claiming Refundable Credits (Les, February 2016)
- Tax Court Jurisdiction and the EITC Ban (William Schmidt, September 2018)
I will follow Les’s terminology and refer to the year in which the taxpayer recklessly or intentionally disregarded rules and regulations by claiming the EITC as the “conduct year,” and to the subsequent years in which the taxpayer is not allowed to claim the credit because of the ban as the “ban years.”
Les and Carl Smith advanced arguments, in the “Problematic Penalty” and “Ballard” blog posts, that the Tax Court does not have jurisdiction to review an EITC ban in a deficiency proceeding for the conduct year. The Tax Court has jurisdiction to redetermine the amount of a deficiency stated in a notice of deficiency as well as accuracy-related penalties applicable to the understatement, but explicitly does not have jurisdiction to determine any overpayment or underpayment for other years. Although the EITC ban looks somewhat like a “penalty,” it does not fall within the scope of penalties that are treated like taxes, which are limited to Chapter 68. Ruling on whether the ban was valid, in a deficiency proceeding for the conduct year, would therefore be a declaratory judgement for which the court has no jurisdiction. The ban years will only be subject to the court’s deficiency jurisdiction if/when a notice of deficiency is issued with respect to them.
What has the Tax Court actually been doing?
I’m persuaded by Les’s and Carl’s arguments. The Tax Court may not be, though. It has addressed the issue of the ban in seven cases to date: Campbell v. Commissioner (2011 decision concerning 2007-2009 tax years), Garcia v. Commissioner (2013 decision concerning 2008 tax year), Baker v. Commissioner (2014 decision concerning 2011 tax year), Ballard v. Commissioner (2016 decision concerning 2013 tax year), Lopez v. Commissioner (2017 decision concerning 2012-2013 tax years), Griffin v. Commissioner (2017 decision concerning 2013-2014 tax years), and Taylor v. Commissioner (2018 decision concerning 2013 tax year). All were either summary opinions, bench opinions, or orders granting a decision for the government when the taxpayer did not participate.
I’m not going to go into a lot of detail here concerning the cases. The PT blog posts above have already discussed Campbell (in the blog comments only),Garcia, Baker, Ballard, and Taylor – only Lopez and Griffin appear to be new here. (The Lopez case was actually discussed here, but that was with respect to an earlier order dealing with a different issue.) But I do want to summarize how the Tax Court responded to the issue, with a couple of additional observations.
Campbell and Taylor imposed the ban, when the taxpayers did not respond to a Motion to Dismiss for Lack of Prosecution and a Motion for Default Judgment respectively, without any discussion of jurisdiction to do so. In addition to the jurisdictional issue, it’s noteworthy that there was – or could have been – evidence supporting a determination of intentional or reckless disregard of regulations. In Taylor, as previously noted in William Schmidt’s blog post, the court granted a motion to deem Respondent’s allegations, including those relevant to civil fraud and the ban, as admitted when the Petitioners did not respond to the amended answer. (Because the ban was apparently not proposed in the notice of deficiency but was instead asserted in the notice of deficiency, the government would have the burden of proof.) In Campbell, Respondent filed a motion to show cause why statements in a proposed stipulation of facts should not be deemed admitted. The court granted the motion, Petitioners did not respond, and the court could have deemed those statements (which presumably would have covered the ban) as admitted. Instead, the court simply granted the motion to dismiss for lack of prosecution.
These decisions to impose the ban demonstrate an interesting quirk. The Office of Chief Counsel issued Significant Service Center Advice in 2002 (SCA 200245051), concluding that neither the taxpayer’s failure to respond to the audit nor a response that fails to provide adequate substantiation is enough by itself to be considered reckless or intentional disregard of rules and regulations. That conclusion is also set forth in IRM 4.19.14.7.1 (1): “A variety of facts must be considered by the CET [correspondence examination technician] in determining whether the 2-Year Ban should be imposed. A taxpayer’s failure to respond adequately or not respond at all does not in itself indicate that the taxpayer recklessly or intentionally disregarded the rules and regulations.” In these cases, and assuming the taxpayers were equally uncooperative during the audit, arguably the IRS should never have asserted the ban. But that’s during the audit. If the IRS does assert the ban, challenging that in Tax Court (if the taxpayer remains uncooperative) opens the door for deemed admissions supporting the ban. It’s better to cooperate.
Garcia and Baker disallowed the EITC but concluded that claiming the credit was not due to a reckless or intentional disregard of rules and regulations and therefore that the taxpayers were not subject to the ban for following years. Reliance on a paid return preparer was significant for both decisions. Neither case discussed the court’s jurisdiction to rule on the validity of the proposed ban.
Ballard and Griffin declined to rule on the ban. Both made the same argument: there was no information in the record as to whether returns had been filed, and whether the EITC had even been claimed, for the ban years. Further, both pointed out that any ruling in an S-case is not precedential in any other case. It was questionable whether a ruling in a proceeding with respect to the conduct year would have any effect at all in the ban years. Ballard seemed to suggest that this factor was the most critical:
Respondent made that determination for the year in dispute here, but the determination obviously has no consequence to the deficiency determined in the notice – the consequences of the determination take effect in years other than the year before us. Normally, in a deficiency case the Court is reluctant to make findings or rulings that have no tax consequences in the period or periods presently before us. Nevertheless, we can see the attractiveness in making the determination in the same year that the earned income credit is disallowed albeit on other grounds and we have addressed the issue in other non-precedential opinions, see
Section 7463(b).
In this case not only does the application of section 32(k) have no tax consequence to Petitioner’s Federal income tax liability for the year before us, the record does not reveal whether a finding or ruling on the point would have any Federal tax consequence in either 2014 or 2015.
The court “is reluctant,” rather than “has no jurisdiction,” and even that is qualified as “normally.” The court’s concern may have been jurisdiction but the language in the opinion suggests that the court might have been willing to rule if the record included appropriate information about the future years. As far as I know, though, Campbell, Taylor, Garcia, and Baker also did not have such information in the record.
Ballard did, however, rule that the petitioner (who relied on a paid return preparer) was not liable for an accuracy-related penalty for negligence. That strongly suggested that the ban should not apply; if the taxpayer was not negligent with respect to erroneously claiming the EITC, how would the IRS demonstrate the higher culpability of “reckless or intentional”?
Lopez also declined to rule on the ban, for a slightly different stated reason. The IRS had disallowed the total gross receipts reported on Schedule C, eliminating the earned income required for claiming EITC. The court allowed gross receipts in an amount less than the taxpayer had claimed. With respect to the ban, it said: “It would appear that our findings will result in the reduction of petitioner’s claimed earned income tax credit for each year, but we expect that the credit will not be entirely disallowed for either year. Consequently, we make no comment in this proceeding regarding the application of section 32(k).”
Thus, in four cases the court ruled on the ban – two upholding it and two rejecting it – apparently without considering the jurisdictional issue. Although Ballard, Griffin, and Lopez all declined to rule on the ban, none of them simply stated that the court had no jurisdiction with respect to the proposed ban. Ballard and Griffin pointed out that a decision would not be precedential in an S-case. The court, however, explained the primary justification not as lack of jurisdiction but what appears to be more like a concern about ripeness. Lopez, on the other hand, did not mention that a summary opinion has no precedential effect for any other case. Although far from clear, that decision sounds as though it assumed an implicit requirement for the ban – that it applies only when the credit was improperly claimed, not when it was properly claimed but in an excessive amount. (I’ll return to that point in my next post.)
Despite the court (sometimes) being willing to rule on the issue, it would be better if the court’s jurisdiction to do so were firmly established. The lack of explicit jurisdiction creates a serious problem. What happens if the IRS asserts the ban in a notice of deficiency, the court disallows at least a portion of the EITC, but the court does not rule on the ban? I suspect that the IRS will impose the ban in the future years. It would be interesting to know what happened to Mr. Ballard, after the strong hint in the bench opinion.
The taxpayer could still contest the validity of the ban in a deficiency proceeding for a ban year; that clearly would come within the scope of section 6214. But the “Problematic Penalty” blog post pointed out pragmatic problems with that solution, which lead Les to conclude that it wouldn’t make sense from a policy perspective. Since that blog post, an additional problem has arisen, making that solution even worse. Summary assessment authority for the ban years was added by the PATH Act of 2015, in section 6213(g)(2)(K), and the IRS is using it. Although the taxpayer still has an opportunity for judicial review after a summary assessment, the opportunity is less obvious than with a notice of deficiency and may be missed by unrepresented taxpayers. It also comes with a shorter time to respond.
Thus, we are left with two alternatives for Tax Court review of the assertion of the ban. Doing so in a deficiency proceeding for the conduct year is by far the best alternative and is consistent with Congress granting summary assessment authority for the ban years. I suspect that is what Congress had in mind, but if so, it forgot to clearly grant jurisdiction. Reviewing the assertion of the ban in a deficiency proceeding for a ban year has the advantage of fitting within the Tax Court’s existing jurisdiction but is a horrible solution for a number of reasons.
Even if the court were willing to rely on the legislative history as implicit jurisdiction to address the ban in a deficiency proceeding for the conduct year, it would still be worthwhile to establish appropriate guidelines. There are some obvious questions about exactly how the entire process should work. Setting those guidelines proactively in legislation or regulation would also be helpful for the vast majority of these cases that never make it to Tax Court.
The Special Report recommends a ban determination process independent of the audit process. That is a great idea that would go a long way in solving some of the problems the report points out. But for simplicity, and in case the IRS is reluctant to implement the Special Report’s recommendation, Part Two will discuss how Tax Court jurisdiction could be structured within the framework of a deficiency proceeding for the conduct year.