Guest blogger Bob Probasco returns with the second of a three-part post on the ban for recklessly or fraudulently claiming refundable credits. In today’s post Bob looks at legislative solutions to the issue of Tax Court jurisdiction.
My last post summarized previous arguments by Les and Carl Smith that the Tax Court lacks jurisdiction to review the proposed imposition of the EITC ban and then examined what the Tax Court is actually doing. Some cases have ruled on the ban, but some cases have expressed uneasiness about this area and have declined to rule at all. Congress has clearly stated its intent that judicial review would be available, but it’s appropriate to clarify that by an explicit grant of jurisdiction – preferably in a deficiency proceeding for the year in which the alleged conduct – the taxpayer intentionally or recklessly disregarded rules and regulations – occurred. The National Taxpayer Advocate’s Special Report on the EITC recommended that Congress provide an explicit grant of jurisdiction to the Tax Court to review the ban determination. This post offers suggestions – some sparked by Tax Court decisions and/or previous posts here on PT – about exactly how that should be implemented. The point at which recommendations turn into legislation is a danger zone where flawed solutions can create problems that take years to fix.
Grant Tax Court jurisdiction in a deficiency proceeding for the “conduct year,” not the “ban years”
Les explained the benefits of this approach in his “Problematic Penalty” blog post. Ballard saw the “attractiveness,” as do I. It’s even more attractive today. Although challenging the ban in a proceeding with respect to the conduct year is a better solution, back in 2014 taxpayers at least would have the opportunity to challenge the ban in a proceeding with respect to the ban year. (The “conduct year” is the year for which the taxpayer recklessly or intentionally disregarded rules or regulations to improperly claim the EITC and the “ban year” is a subsequent year for which the taxpayer cannot claim the EITC.) As Les pointed out, and the Office of Chief Counsel explained in 2002 guidance (SCA 200228021), summary assessment procedures were available for post-ban years (for failure to re-certify) but the IRS would have to issue a notice of deficiency to disallow EITC in a ban year. But since then, 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. There is still an opportunity for judicial review after a summary assessment, but that opportunity has a lot of problems, as described in the Special Report.
The Special Report, Part IV, also recommends changes in summary assessment authority, under which some adjustments are not subject to the deficiency procedures, for an initial determination in the conduct year that the taxpayer is not entitled to the EITC. Although I’m not entirely sure, I think the report is not recommending any change to the summary assessment authority under section 6213(g)(2)(K) for automatic disallowances in the ban year. That’s understandable, as normally the correct application of the ban will be straight-forward and not require a separate examination in the ban year. But there may some instances where the ban shouldn’t be applied automatically. I’ll return to that below in the discussion of the application of the determination in the ban year.
Require that the proposed ban be set forth in a notice of deficiency for the conduct year
Of course, judicial review will be difficult if not impossible unless imposition of the ban is explicitly asserted and at issue in a case for the conduct year. In all seven of the Tax Court cases discussed in my last post, the ban was explicitly asserted in an amended answer (Taylor) or the NOD itself (the other cases). But that doesn’t always happen.
Carl Smith mentioned, in comments to the “Ballard” blog post, seeing a lot of cases where the ban was imposed by letter (presumably Notice CP79) rather than NOD. I’ll quote his final sentence:
I wonder why some 32(k) sanctions are imposed by a simple letter and others (though apparently very few) are imposed in notices of deficiency.
My answer might be along the lines of: “Because the IRS thinks it can do that, unless Congress explicitly says otherwise, and it’s easier.” My experiences with the EITC ban have made me more cynical.
My experience is consistent with Carl’s. In just the past couple of years, my clinic has had four cases in which the IRS imposed the ban and issued Notice CP79. Only one of the NOD’s explicitly stated the intent to impose the EITC ban. In the other three cases, there was no indication whatsoever.
In fact, in one case, there was an indication that an examiner had decided not to impose the ban. After the NOD was issued, the taxpayer provided additional information and received a response from the IRS declining to change the proposed tax increase. The letter included Form 886-A Explanation of Items that, again, did not propose the ban. It also included a separate attachment, explaining why the additional information provided was insufficient. That attachment stated at one point (emphasis added):
For future reference on the EITC BAN (Earned Income Tax Credit Ban) – The ban was considered. If you continue to claim XXXXXXX for the credit and disallowed for no relationship, you could be subject to a 2-year earned income tax ban if you are found reckless and intentionally disregard the tax laws, rules and regulations. You must meet the relationship test, residency test, age test and support test to be eligible for the credits.
That certainly sounds as though the determination required for the ban had not been made when the NOD was issued. Nevertheless, when the taxpayer failed to file a petition timely, the IRS imposed the ban.
Given all the evidence that the IRS is asserting the ban without ever mentioning it in a notice of deficiency, the grant of jurisdiction to the Tax Court should be carefully crafted. It should include not just jurisdiction to review the determination but also incorporate safeguards like those found in Section 6213(a) for tax assessments:
- The determination required by section 32(k) is not a final determination until: (a) a notice of deficiency setting forth the determination has been properly mailed to the taxpayer; and (b) the expiration of the 90-day or 150-day period or, if a petition is filed in Tax Court, the decision of the Tax Court has become final.
- Any disallowance of the credit in subsequent years based on the ban, before the determination is final, can be enjoined by a court proceeding, including in the Tax Court, despite the Anti-Injunction Act.
Applying the ban in the ban year
The cases I discussed in the last post suggested some specific issues that may need to be addressed when legislation is drafted to grant Tax Court jurisdiction to review the ban. The first is obvious and fairly straight-forward. Congress may need to modify section 7463(b) to specify that the determination in a small case with respect to the ban will be treated as binding for a proceeding in a future ban year.
How do we address the problem (discussed in Ballard and Griffin) that the court may not know yet whether the ban even had an effect in the ban years, because (for example) the taxpayer may not yet have filed returns claiming the credit for those years? I don’t consider this concern an insurmountable obstacle. Consider an analogy to the TEFRA partnership rules. Under those rules, the court makes a redetermination of proposed adjustments on one return (the partnership’s). The effect of that adjustment on other returns (the partners’) is authorized by provisions for computational adjustments. The redetermination might turn out to have no effect on the partners’ returns, but the court doesn’t have to consider that in making its ruling in the partnership proceeding.
Currently, any credit claimed in the ban years can be disallowed automatically through the summary assessment authority in section 6213(g)(2)(K). I don’t like that solution and think that instead Congress and/or the IRS should consider an approach similar to that in TEFRA: providing for some assessments without requiring a notice of deficiency in the ban year, but in other circumstances requiring a notice of deficiency because new fact determinations are needed.
Why might new fact determinations be needed? Primarily because some exceptions or limitations should be carved out. An all-or-nothing approach simply doesn’t make sense all the time. What if:
A. The credit was reduced, but not disallowed, because some of the taxpayer’s earned income was disallowed.
B. The credit was claimed for 3 children and was only disallowed with respect to one.
C. The credit was disallowed because Husband’s earned income could not be verified. Husband later married Wife, who has earned income and children from a previous marriage, and filed a joint return. (See page 48 of the Special Report.)
Should we consider for future years, in situations like those: (A) allowing the credit but solely with respect to the taxpayer’s earned income from a Form W-2; (B) allowing the credit solely with respect to the children who qualified in the conduct year; or (C) allowing the credit but solely with respect to Wife’s earned income and qualifying children?
Lopez (situation A) suggested that there might be an exception for a partial disallowance:
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).
A recent CCA (situation B) mentioned in Les’s blog post, however, concluded that partial disallowance was enough to trigger the ban. The CCA’s reasoning was that section 32(k) doesn’t prohibit imposition of the ban for partial disallowances; thus, any disallowance is enough to trigger the ban. “Disallowance” is not explicitly restricted to “total disallowance.”
Fair enough, but that doesn’t seem to be how Lopez interpreted the statute. I don’t think it is entirely clear under current law. Section 32(k) doesn’t refer to a disallowance (without explicitly specifying “total”) in the conduct year; it refers to the taxpayer’s “claim of credit” due to disregard of rules and regulations. If the taxpayer could not legitimately claim any credit at all, that could meet the requirement (if done intentionally or recklessly). In Lopez, was the “claim of credit” contrary to rules and regulations? Or was the “claim of [at least some amount of] credit” consistent with rules and regulations but the amount excessive? Lopez suggests the latter. Does the answer depend on the reason for the excessive amount? These questions deserve more thought. The conclusion in the CCA may not be the best answer.
Another wrinkle came up in Griffin. The court found the taxpayer was not entitled to EITC at all for 2013 because the taxpayer did not establish that any of the claimed dependents met the necessary tests. However, the court found the taxpayer might be entitled to EITC for 2014, subject to applicable AGI limitations and thresholds after adjustments, because one of the two dependents claimed as qualifying children did meet all of the tests. Should the ban be imposed if the taxpayer is not entitled to the EITC at all for one year but is entitled to at least some EITC in another year included in the same NOD, particularly if it’s the latest year included in the NOD?
Even if the CCA above is correct, current law is not immutable. Congress should consider carving out exceptions or limitations to the ban. If it doesn’t, we can try to change the law by persuading a court concerning the proper interpretation of the statute. If the law changes, either through Congress or a court decision, we may want to use a more nuanced approach, like that in TEFRA, rather than blanket summary assessment authority.
Conclusion
This finishes my discussion of judicial review. Establishing robust judicial review with all the flourishes will provide significant protection to low-income taxpayers who claim the EITC.
Some protection but, given current IRS practices, not enough. Not all cases even go to Tax Court, so our primary goal should be to reduce the need for judicial review by improving the ban determination process in Exam. The Special Report offered several suggestions along those lines. I have some additional thoughts, coming up in Part Three of this series.