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District Court Orders IRS to Rewrite Stimulus Payment FAQ

Posted on Oct. 9, 2020

A federal district court’s order has reinforced prisoners’ claims to economic impact payments (EIPs) with a series of IRS administrative orders just days after the agency extended its online EIP portal deadline.

The U.S. District Court for the Northern District of California October 8 ordered the IRS to update its FAQ on EIPs by October 9 to reflect the court’s earlier order in Scholl v. Mnuchin finding that eligible incarcerated individuals are entitled to EIPs and to instructions on how to get them.

“This is the first time that I am aware of that a judge has ordered the IRS to take down or add to an FAQ,” said James Creech of the Law Offices of James Creech. “I have to wonder if a court order modifying FAQs could potentially have a chilling effect on the IRS issuing FAQs for topics that could prove controversial.”

The IRS didn’t respond to a request for comment.

The court also noted that while the IRS on October 5 extended from October 15 to November 21 the time for people to use the agency’s online nonfiler portal, it continued to expect an October 15 deadline for paper filers. The court ordered the IRS to extend that deadline to October 30.

Nina Olson, executive director of the Center for Taxpayer Rights, noted the rapid progress of the Scholl case.

“The judge is very conscious of time frames,” Olson said. “She is watching very closely and is setting short deadlines given those time frames, and she is not at all tolerant of the IRS’s contradictory messaging — extending a time frame for one group of people and not for others.” 

Bad Precedent? 

Plaintiffs including California inmate Colin Scholl argued that they are entitled to EIPs under the Coronavirus Aid, Relief, and Economic Security Act (P.L. 116-136) because Congress included no specific prohibition against them in the law.

The Scholl plaintiffs also argued, among other things, that the IRS issued confusing and contradictory FAQs and other advice to inmates about their eligibility.

The latest court order could create a hazardous precedent, Creech said.

“By ordering the IRS to write an FAQ a particular way, it creates an FAQ that is binding on the IRS,” Creech said. “The Service can't later say ‘We aren't going to follow FAQ 14,’ because it violates a court order.”

“FAQs pose some barriers to judicial review because of the [Administrative Procedure Act] requirement of final agency action,” Creech noted. The APA requires that binding guidance — which Creech noted FAQs are not — be thoroughly considered, reviewed, and subject to public notice and comment.

“If this becomes a trend, at what point does due diligence on FAQs require a secondary search for court orders requiring the language?” Creech said, asking whether the IRS is obligated to notify taxpayers in the FAQ that it contains judicially ordered language.

“I know Scholl is a preliminary injunction, but I am a little surprised that the judge did not defer to the IRS a little more on the lack of finality,” Creech added. 

Beyond Scholl? 

The Scholl court rejected the government’s position that it can’t notify every incarcerated person of the substance of the court’s EIP orders because its inmate lists aren’t accurate enough, Olson said.

“The list is apparently accurate enough for the IRS to use it to deny EIPs to persons, even though the government thinks the list is inaccurate for notice,” Olson added. “It is deeply disturbing the IRS is using a list that it knows is inaccurate to deny the EIP to otherwise eligible persons in the midst of a pandemic.”

The district court ordered the IRS to distribute notices and documents to state and federal correctional officials about inmates’ EIP eligibility. The IRS was also ordered to mail individualized notices, instructions, and paper forms 1040 or 1040-SR where applicable, to incarcerated individuals for whom the agency has a mailing address.

“Although other CARES Act litigation are not certified class actions at this point, the judge’s specific orders pertaining to the IRS’s obligation to provide specific notice to the class members, and the type and details of the information contained in that [Scholl] notice, will be relevant to other litigation,” Olson said.

The plaintiffs in Scholl v. Mnuchin, No. 4:20-cv-05309 (N.D. Cal. 2020), are represented by Lieff Cabraser Heimann & Bernstein LLP and the Equal Justice Society.

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