Before drinking the egg nog and lighting a few more candles on our menorah here is a brief post on TIGTA, which continues to deliver lumps of coal in the IRS’s stocking.
While I have not followed in detail much of the substance in the end of year tax legislation (with the exception of the very interesting legislation on professional employer organizations, which I hope to discuss soon), the IRS’s budget cuts will have a major impact on IRS’s operations. I read with interest the recent TIGTA report discussing the EITC’s improper payment rate. This TIGTA report looks at the erroneous payments with the Advanced Child Tax Credit (ACTC) as well as the EITC. The report raises the possibility of an expansion of IRS math error powers, and it is that possible expansion I mainly discuss in this brief post.
TIGTA Calls on Expanded Summary Assessment of EITC Errors
I will not drill into the report’s statistics nor discuss the implications of expanding TIGTA’s annual erroneous payment study to ACTC in addition to EITC. I have previously discussed last year’s OMB overclaim stats here and recent IRS EITC compliance studies here. In addition, others, such as Accounting Today, have summarized the overall report. Instead, I highlight an interesting part of the report that relates to IRS compliance resources.
TIGTA in this report states that IRS believes that it cannot meaningfully reduce EITC error rate using the traditional compliance method of auditing returns. IRS has stated this for some time. IRS’s belief that traditional compliance tools are inadequate for EITC is in part why the EITC is home to some unique (for tax anyway) compliance measures, such as the ban under 32(k) for reckless or fraudulent claims and the 6695(g) EITC due diligence rules; topics that I have likewise addressed this year and which are worthy of continued scrutiny. The IRS’s botched efforts to regulate unlicensed preparers are also best understood in part as reflecting the IRS’s justifiable belief that it cannot meaningfully reduce credit error rates using traditional compliance tools.
What is on IRS’s wish list this year in terms of additional nontraditional compliance tools in dealing with the EITC? It is safe to say that it is unlikely this Congress will give the IRS legislative authority to regulate unlicensed preparers. Next on the list and possibly more likely to get enacted is expanded summary assessment powers.
As I discussed earlier in the year when I summarized the President’s budget request, the administration has previously asked for legislative authority to expand what is effectively a summary assessment procedure when it detects certain classes of potential errors in EITC returns:
The proposal would remove the existing specific grants of math error authority, and provide that “math error authority” will refer only to computational errors and the incorrect use of any table provided by the IRS. In addition, the proposal would add a new category of “correctable errors.” Under this new category, Treasury would have regulatory authority to permit the IRS to correct errors in cases where (1) the information provided by the taxpayer does not match the information contained in government databases, (2) the taxpayer has exceeded the lifetime limit for claiming a deduction or credit, or (3) the taxpayer has failed to include with his or her return documentation that is required by statute.
The current TIGTA report discusses the benefit of summary assessment like math error assessments, noting the major difference in cost to IRS in using a summary math error assessment as compared to going through the correspondence deficiency process:
Currently, under the Internal Revenue Code, the IRS can use its math error authority to address erroneous EITC claims by systemically correcting mathematical or clerical errors on EITC claims, such as correcting entries made on the wrong line on the tax return or mathematical errors in computing income or the EITC. In addition, the IRS can use math error authority to adjust an EITC claim if a qualifying child’s SSN is not valid. However, the majority of potentially erroneous EITC claims the IRS identifies do not contain the types of errors for which it has math error authority. For example, the IRS identified approximately 6.6 million potentially erroneous EITC claims totaling approximately $21.6 billion in Tax Year 2011 for which it does not have math error authority. In Tax Year 2011, the IRS used math error authority to identify and systemically correct only 270,492 (.009 or less than 1 percent) of more than 27.4 million EITC claims. The 270,492 returns claimed the EITC totaling $314 million.
While the IRS has the authority to audit potentially erroneous EITC claims for which it does not have math error authority, doing so is more costly than the math error process. The IRS estimates that it costs $1.50 to resolve an erroneous EITC claim using math error authority compared to $278 to conduct a prerefund audit. In addition, the number of potentially erroneous EITC claims the IRS can audit is further reduced by its need to allocate its limited resources among the various segments of taxpayer noncompliance to provide a balanced tax enforcement program. As a result, billions of dollars in potentially erroneous EITC claims go unaddressed each year.
(TIGTA Report at page 16, emphasis added, footnotes omitted)
Math Error and Policy Considerations Beyond Efficiency
That cost differential is enough to make an IRS administrator with responsibility for driving down error rates take notice, even if the administrator is weighing a taxpayer’s right to challenge the IRS’s actions. After all, math error procedures do not eliminate a taxpayer’s right to a deficiency notice; instead, a taxpayer who gets a math error notice has the right under Section 6213(b)(2)(A) to inform IRS that he wants to abate the assessment. Informing within the 60-day period generally triggers the return of the deficiency procedures with respect to the adjustment. A taxpayer who thinks the IRS adjustment is wrong but who misses the 60-day deadline to request abatement of a math error assessment can then pursue refund litigation or effectively request administrative reconsideration of the assessment.
The possibility of giving the IRS the right to assess and effectively ask questions later via math error abatement procedures may offend some sense of procedural fairness and even suggest constitutional due process issues. The Supreme Court has long ago poo-pooed constitutional procedural due process pre-deprivation hearing protections when it comes to taxpayers, admittedly taxpayers who were not challenging procedures relating to statutory entitlements with defined eligibility criteria. (Some may also note that taxpayers do not have an established property right in changing statutory entitlements in the form of tax credits anyway, a topic I may revisit when I have finished grading exams or have the appetite to dig into procedural due process jurisprudence). Yet, deficiency procedures are the starting point to ensure that taxpayers are protected before having to reach into their pockets and challenge IRS administrative determinations relating to income tax. Even while most of the EITC is refunded, the IRS applies a significant portion of the claimed EITC against taxpayers’ income taxes and their share of employment taxes. Moreover, many have come to rely on Uncle Sam’s refund to meet basic living expenses in light of wages in low paying jobs that are insufficient to keep families out of poverty, thus highlighting the individual’s interest in ensuring that adequate procedures are in place to protect against erroneous IRS determinations.
Reports in the past have raised questions about whether the IRS’s use of math error procedures puts taxpayers at undue risk. See for example a 2011 report from the Taxpayer Advocate Service called Expansion of Math Error Authority and Lack of Notice Clarity Create Unnecessary Burden and Jeopardize Taxpayer Rights. A few years ago GAO in looking at possible math error expansion commented that there are steps Congress and IRS can take to ensure that taxpayer rights are protected if in fact there is expanded use of math error procedures, such as requiring IRS to study and report on the impact of its math error adjustments.
I have not dug deep into the research on accuracy of the information that may trigger expanded summary assessment powers. However, if Congress goes in this direction and legislates expanded math error powers for IRS, and if IRS takes up the legislative power, I do hope that there is a careful review of the impact and accuracy of any adjustments.
What are some of the risks? Again, I am not in the trenches, but I worry that IRS’s compliance filters and external databases may produce false positives.
IRS for example has been wary of using its powers to rely on certain databases that it is authorized to use to make math error adjustments because there were concerns over the accuracy of the data. For example, the recent TIGTA report discusses how the IRS has had the legislative power to use information from the Federal Case Registry (FCR) [national database that “consists of records that identify children, custodial parties, noncustodial parents, and putative (assumed) parents along with other relevant information”] to make math error adjustments with respect to EITC. It has declined to do so because, as TIGTA reported, IRS analyzed the information included in the FCR and “found that, although the information in the registry provides information as to a child’s custodial/noncustodial parent, the database cannot be solely relied upon to systemically adjust a potentially erroneous EITC claim.”
If the administration is successful in getting its expanded summary assessment procedures, I hope that IRS carefully studies its impact (as it seems to have done with child support data), establishes clear guidelines for employees, and drafts simple understandable correspondence to allow taxpayers to unwind the assessment and get back in line for deficiency procedures. Some lower-income taxpayers may be less equipped to contest erroneous assessments; telephone wait times are long, and taxpayers who are lower-income are often more transient and less likely to receive correspondence. Add to the mix language and literacy obstacles and you have a potential recipe for real harm.
Congress’ continued use of the Internal Revenue Code to deliver social benefits combined with pressure on IRS to reduce error rates may lead to the IRS taking additional compliance steps without an ability to serve taxpayers who may be inadvertently caught in the compliance crosshairs. Even an agency intent on balancing competing interests must reflect the budget realities that are likely going to jeopardize those taxpayers least likely to be able to withstand erroneous IRS determinations.
It also seems somewhat unfair that on the one hand IRS is asking for more automatic assessment rights, but at the same time it fails to notify taxpayers or unwind the erroneous assessments it has made with respect to accuracy related penalties imposed on reversed refundable credits in excess of income tax liability; the so-called Rand issue we have discussed before. The Code as a social delivery mechanism for lower-income taxpayers may be an odd fit and may justify additional IRS powers such as summary assessment; yet when IRS makes mistakes and refuses to fix those errors or even tell taxpayers about those errors it seems unfair to require taxpayers to go through hoops to receive the same procedural protections everyone else is presumptively entitled to receive.