Keith Fogg is a contributing author with Tax Analysts through the Procedurally Taxing blog, which he co-founded in 2013. He is an emeritus clinical professor at Harvard Law School where he founded the low-income tax clinic in 2015. He is a principal contributing author for the treatise IRS Practice and Procedure, originally authored by Michael Saltzman.
In this article, Fogg examines a recent report from the Treasury Inspector General for Tax Administration on the number of taxpayers that the IRS mistakenly classifies as deceased.
It’s not every day I get to write about death and taxes. A Treasury Inspector General for Tax Administration report dated August 7, 2023, with the catchy title, “Indicators Used to Prevent Filing of Tax Returns for Deceased Taxpayers Were Incorrectly Placed on Some Taxpayer Accounts” drew my attention to the issues raised in today’s article.
In order to prevent bad people from inappropriately using the Social Security numbers of deceased individuals to obtain tax benefits, the IRS has developed an indicator code that gets attached to the deceased taxpayers’ accounts. A similar code exists for incarcerated individuals, which Procedurally Taxing has written about before. The death indicator code, like the prisoner code, seems like a great idea for thwarting thieves and no doubt does a good job of stopping them from obtaining some fraudulent refunds; however, the IRS occasionally puts the marker on a not-yet-deceased taxpayer’s account. Doing so prevents the still-living person from obtaining tax refunds to which they are entitled. A few years ago, Les and I were quoted in an article about an Indiana man who was struggling to get Economic Impact Payments due to the IRS improperly classifying him as dead.
The TIGTA report didn’t say what the IRS does if the allegedly deceased individual seeks to pay additional taxes. My guess is that the IRS cashes the check. I also wonder how many people would like to be dead to the IRS. Mistakes in this regard could have pluses as well as minuses depending on your circumstances.
TIGTA reported that as of January 20, 2023, the IRS had placed the death indicator on 52.5 million taxpayer accounts. It continued:
Our analysis of tax account information through January 1, 2022, identified 77,868 taxpayers with potentially erroneous deceased account locks. In these instances, the Social Security Administration's (SSA) data did not indicate that the taxpayer was deceased, i.e., there was no date of death present. Further analysis determined that the deceased account locks were input because of the filing of a return or other actions taken by the IRS.
The IRS confirmed that 20,222 taxpayer accounts were incorrectly locked due to both human error and computer programming issues when identifying the appropriate taxpayer accounts to be locked.
TIGTA kept looking and found another 14,193 such accounts between the beginning of 2022 and October 29, 2022.
TIGTA made seven recommendations to the IRS to avoid erroneously classifying individuals as deceased. The IRS agreed with six, but balked at providing taxpayers a clear path within the IRS to resolve their status as alive rather than dead. Instead, the IRS wants taxpayers to resolve their alive status with Social Security first.
Social Security is an important player because it maintains the death master file. Each week it sends to the IRS a list of deceased taxpayers. That list plays an important role in determining who is alive and who is dead. For anyone unfamiliar with the death master file, here is some information on it and how the IRS uses it. The Social Security death master file didn’t exist during Mark Twain’s life when he famously wrote that the incorrect reports of his death were an “exaggeration.” For better or for worse, he didn’t have to prove his continued existence in an age of computers. Some people must engage in strenuous efforts to prove their continued existence to Social Security.
The IRS sometimes obtains its information about someone’s death from sources other than the death master file. The collection function sometimes identifies that a taxpayer has passed away, or a tax return gets filed stating that it’s a final return because of the taxpayer’s death death. Accounts management and the audit functions also identify deceased taxpayers. I suppose the IRS must carefully check these death claims since there could be some individuals motivated by the desire to have the IRS think they have died.
COVID presented unique problems for the IRS and taxpayers as the IRS tried to deliver Economic Impact Payments to many individuals who did not file tax returns.
In response to the TIGTA audit, the IRS looked at the accounts that had the death indicator TIGTA identified as a concern. It found that 20,222 of the 77,868 accounts identified by TIGTA erroneously contained the indicator. In addition to the initial batch of accounts that concerned TIGTA, it found an additional 14,000 for the first 10 months of 2022. The IRS agreed to take a close look at these accounts but had not resolved them by the time of the report.
TIGTA’s fourth recommendation seeks to address the underlying problem and find solutions that will avoid misidentifying accounts in the future:
Recommendation 4: Evaluate the taxpayer accounts that were improperly locked to identify the cause of the erroneous actions and provide clarification and/or training to eliminate or reduce further input of erroneous actions.
Management's Response: IRS management agreed with the recommendation and has reviewed the accounts provided to them. Their review identified a mix of employee and taxpayer errors as the primary causes of the accounts locked in error. Upon completion of their analysis, the findings will be shared with the affected internal stakeholders to develop appropriate training, procedural guidance, and take other appropriate action.
The IRS has adopted a procedure to conduct an annual review of the accounts with this indicator to perform a computer reconciliation followed by a manual review for accounts that aren’t present in the Social Security data. This year it identified almost 5,000 accounts for manual review.
The report doesn’t talk about how the IRS’s actions might benefit Social Security, but to the extent the IRS identifies deceased individuals Social Security didn’t know about and notifies Social Security, that action could have an impact on payments from Social Security to deceased individuals.
When the IRS receives a return listing as the taxpayer or a taxpayer someone with a death indicator, it sends out a CP01H notice. TIGTA found that 71% of the notices sent through January 1, 2022, involved situations in which the account was inappropriately locked. The notice tells taxpayers to contact Social Security to fix the error and then, after fixing the error with Social Security — where it may or may not be an error — to provide the following information to the IRS:
A copy of the CP01H notice.
A written request to unlock the account.
Proof of identity, e.g., passport, driver's license, social security card, other valid federal or state government-issued identification.
Tax return with original signatures.
TIGTA pointed out that the error was not always at Social Security, but the IRS responded that it still wanted everyone receiving this notice to go to Social Security first.
The report didn’t indicate how long it takes the IRS to correct the account after it receives the information it wants. I hope the process moves relatively quickly. I know that some clinics found it quicker to file a refund suit to recover earned income tax credit refunds that IRS had frozen. If the process to convince the IRS that you are alive takes a long time and you want a refund from the IRS, resorting to refund litigation is a possibility here as well. For those who owe the IRS, I expect that speed in determining their status is not an issue.