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Does Rev. Proc. 99-21 Validly Restrict Proof of Financial Disability, for Purposes of Extending the Refund Claim SOL, to Letters From Doctors of Medicine and Osteopathy? Part 2

Posted on June 25, 2015

Yesterday, frequent guest blogger Carl Smith took us through the statute and Rev. Proc. 99-21 in setting the scene for Judge Gustafson’s March order in the Kurko case and its importance. Today, Carl picks up where he left off and shows how the current revenue procedure misses the mark. Because the IRS has never given the public the opportunity to comment on the procedure and because it does not explain how it decided upon the procedure, the procedure not only needs changing but also appears vulnerable to attack. That attack will have to come in some future case, though, as the IRS recently conceded the issue as presented in Kurko – without first getting a judicial ruling either way on the issue. Keith

Proof of “Disability” for SSDI Purposes

I am no expert in SSDI disability benefits litigation, so I went to one for information.  Prof. Toby Golick of Cardozo has for decades headed a Cardozo clinic that regularly wins SSDI benefits cases before the Social Security Administration.

Toby told me the following:

The language of § 6511(h) derives from the SSDI provisions at 42 U.S.C. § 423(d)(1)(A), which generally defines “disability” as “inability to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months”. (The same definition is used for SSI benefits, but without the requirement of past FICA contributions for sufficient quarters.)  There are two separate questions, however — (1) whether the individual has a physical or mental impairment and (2) whether the individual’s impairment prevents her from working.  Regulations specify that to establish an impairment, evidence is needed from an “acceptable medical source”, limited to licensed physicians, osteopaths, licensed psychologists, optometrists, podiatrists, and speech pathologists. 20 C.F.R. § 404.1513(a). After the impairment is established, the agency will consider pretty much anything to establish the effect of the impairment on the ability to work.  20 C.F.R. § 404.1513(d) lists the following sources for the second inquiry:

(1)  Medical sources not listed in paragraph (a) of this section (for example, nurse-practitioners, physicians’ assistants, naturopaths, chiropractors, audiologists, and therapists);

(2)  Educational personnel (for example, school teachers, counselors, early intervention team members, developmental center workers, and daycare center workers);

(3)  Public and private social welfare agency personnel; and

(4)  Other non-medical sources (for example, spouses, parents and other caregivers, siblings, other relatives, friends, neighbors, and clergy).

20 C.F.R.  § 404.1527 explains how opinion evidence of disability is weighed, with more, or sometimes controlling, weight being accorded to treating physicians.  Toby says:  “The bottom line is that the Social Security disability determination is (wisely) based on all the relevant evidence, not merely a physician certification.”  Why didn’t the IRS adopt the SSDI procedures for proving disability?

Proof of Disability for Purposes of Early Withdrawal Penalty at § 72(t)

An exception to the 10% penalty for early withdrawals from qualified retirement plans has similar language to § 6511(h).  Section 72(t)’s penalty does not apply to distributions attributable to a taxpayer’s being disabled within the meaning of § 72(m)(7).  § 72(t)(2)(A)(iii).  Section 72(m)(7) describes “disability” largely the same was as § 6511(h) does and states:  “An individual shall not be considered to be disabled unless he furnishes proof of the existence thereof in such manner as the Secretary may require.”  While the IRS has promulgated a regulation at § 1.72-17A(f) that elaborates on the definition of “disability” for this purpose, there is nothing in the regulation that states how disability must be proved, and no Rev. Proc. fills that gap either.  Case law suggests that the taxpayer’s own testimony in Tax Court, coupled with some testimony from a medical professional (of a type not specified) is helpful to the court’s making a de novo determination of qualification for this exception – as indeed was indicated just this week in Trainito v. Commissioner, T.C. Summary Op. 2015-37, where the court, while accepting into evidence medical records of a diabetic coma, bemoaned the absence of any additional medical records — or testimony from medical professionals — regarding the taxpayer’s diabetes or alleged depression. Why isn’t it good enough for proving disability for purposes of extending the refund claim statute of limitations to just introduce taxpayer testimony and (unspecified) medical personnel testimony at trial, as is done in section 72(t) cases?

Proof of Disability for Purposes of “Reasonable Cause” for Penalties

In setting the § 6511(h) financial disability procedures, the IRS should also have considered the much more lax rules that apply to a very similar situation — when a taxpayer seeks relief from a late-filing penalty (say, at § 6651(a)(1)) on the grounds of “reasonable cause and not willful neglect”.  In United States v. Boyle, 469 U.S. 241 (1985), the Supreme Court observed, in dicta, that “disability alone could well be an acceptable excuse for a late filing.”  Id., at 248 n.6.  For relief on the basis of “reasonable cause”, regulations only state that

a taxpayer who wishes to avoid the addition to the tax for failure to file a tax return or pay tax must make an affirmative showing of all facts alleged as a reasonable cause for his failure to file such return or pay such tax on time in the form of a written statement containing a declaration that it is made under penalties of perjury. Such statement should be filed with the district director or the director of the service center with whom the return is required to be filed . . . . [Treas. Reg. § 301.6651-1(c)(1)]

There is nothing in the regulations requiring that, for proof of reasonable cause on the ground of disability or other ill health, any medical-field worker provide a letter.  However, in practice, I have often had my Cardozo Tax Clinic clients obtain a letter from some third-party medical worker to attach to any submission under the regulation.  In my experience, such letters are fairly easily obtained (in the case of mental health issues) from a therapist who the taxpayer regularly sees, but are hard to get from doctors (such as psychiatrists), who have busy practices, see the patient infrequently, and who are uncomfortable in making any statement beyond the taxpayer’s medical diagnosis.  For examples of letters from physicians that were too waffly to qualify taxpayers for tolling under § 6511(h), see. e.g., Pleconis v. IRS, 2011 U.S. Dist. LEXIS 88471 (D.N.J. 2011); Henry v. United States, 2006 U.S. Dist. LEXIS 93038 (N.D. TX. 2006).

Even the requirement that the taxpayer’s reasonable cause statement for removing penalties must be made under penalties of perjury is permitted to be ignored by IRS employees.  The requirement that such a statement be sworn is not included in IRS Notice 746 (“Information About Your Notice, Penalty and Interest”) (rev. 2011), which states:

Reasonable Cause. The law lets us remove or reduce the penalties we explain in this notice if you have an acceptable reason. If you believe you have an acceptable reason, you may send us a signed statement explaining your reason. We will review it and let you know if we accept your explanation as reasonable cause to remove or reduce your penalty.

And the Internal Revenue Manual indicates that for some, unspecified small penalty amounts (the figure is redacted), IRS employees may find reasonable cause to exist either (1) even where a reasonable cause statement is unsigned or (2) based only on oral conversations with the taxpayer.  See IRM (rev. 8/5/14).

Finally, there is no requirement that the reasonable cause statement be filed with the tax return, although it is recommended that the taxpayer do so in the instructions.  See, e.g., 2014 Form 1040 Instructions at p. 92.

When a reasonable cause statement is not accepted by the IRS (or not received), it is typical in court cases (deficiency or CDP) that the court decides the issue of reasonable cause because of physical or mental health reasons on a de novo record and under a de novo standard.   For examples of where the Tax Court has found reasonable cause for late filing because of health issues, see, e.g., Meyer v. Commissioner, T.C. Memo. 2003-12; Shaffer v. Commissioner, T.C. Memo. 1994-618; Carnahan v. Commissioner, T.C. Memo. 1994-163.

Proof of Physical and Mental Health Issues in Innocent Spouse Cases

When a person files for innocent spouse relief under § 6015, he or she does so on a Form 8857.  Under section 4.03(g) of Rev. Proc. 2013-34, 2013-2 C.B. 397, one of the factors considered by the IRS in the case of “equitable” relief under subsection (f) is the requesting spouse’s mental or physical health.  Of this factor, the IRS wrote in that section as follows:

Whether the requesting spouse was in poor physical or mental health. This factor will weigh in favor of relief if the requesting spouse was in poor mental or physical health at the time the return or returns for which the request for relief relates were filed (or at the time the requesting spouse reasonably believed the return or returns were filed), or at the time the requesting spouse requested relief. The Service will consider the nature, extent, and duration of the condition, including the ongoing economic impact of the illness. If the requesting spouse was in neither poor physical nor poor mental health, this factor is neutral.

Note that there is no requirement that any medical professional submit a letter (with the Form 8857 or at a later time) that discusses the taxpayer’s health issues.

When § 6015(f) cases are litigated in the Tax Court, the Tax Court decides the issue of equity both on a de novo standard and a de novo record. Porter v. Commissioner, 130 T.C. 115, 117 (2008) and 132 T.C. 203, 210 (2009), and “consults”, but is not bound by, the Rev. Proc.’s factors.  Pullins v. Commissioner, 136 T.C. 432, 439 (2011).  When health issues are raised, the Tax Court does not require any medical testimony (though, I am sure it might appreciate some in close cases).  Indeed, in the Pullins case — decided by Judge Gustafson — the judge wrote as follows about the physical or mental health factor:

There is no evidence that Ms. Pullins was ill when she signed the returns in issue or when she requested relief in April of 2008. See id. sec. 4.03(2)(b)(ii). This factor ordinarily would not weigh in favor of or against granting relief in the IRS’s analysis. See id. sec. 4.03(2)(b). However, having observed Ms. Pullins at trial in September 2009, we conclude that she is now disabled and unable to work and earn income and that she may be permanently so. We find that her obviously impaired health at the time of the trial de novo is relevant, and we conclude that this factor weighs in favor of granting relief. [Id. at 454]

So, just the judge eyeballing and listening to the taxpayer at trial is apparently enough evidence to prove health to be a positive factor for innocent spouse relief under subsection (f).

It is frankly baffling why the IRS should have imposed a stricter proof regime in Rev. Proc. 99-21 for § 6511(h) for obtaining financial disability relief from the refund claim statute of limitations than the equally-consequential-to-the-government determinations made concerning whether a taxpayer is entitled to SSDI, had reasonable cause for avoiding a late-filing penalty, or was entitled to innocent spouse relief.  In any redo of the required § 6511(h) procedures, I would urge the IRS to consider three things:  (1) whether it is really necessary to obtain a letter from a medical professional, (2) who that professional might be, and (3) when that letter must be provided to the IRS.  It is this last issue that leads to my final observations.

The Requirement to Attach Proof of Financial Disability to the Return

One of the odd things about the Kurko case was that neither the IRS nor the judge seems to object to the late receipt of a “physician” letter and statement from the taxpayer.  Under the Rev. Proc. quoted in yesterday’s post, both are required to be attached to the refund claim (in this case, that would be Ms. Kurko’s late original 2008 income tax return, which was filed in mid-2013).  In the supplemental notice of determination, the Settlement Officer did not raise late receipt as a reason for turning down the benefits of § 6511(h) tolling.  Since she did not do so, the doctrine of SEC v. Chenery, Corp., 318 U.S. 80, 93-95 (1943), which prohibits a court from affirming on a ground not articulated by the agency, applies and would have stopped the judge and IRS attorneys from raising the lateness argument. See Salahuddin v. Commissioner, T.C. Memo. 2012-141 at *16 (citing Chenery and stating: “our role under section 6330(d) is to review actions that the IRS took, not the actions that it could have taken”) (Gustafson, J.).

In any redo of Rev. Proc. 99-21 (hopefully through the notice and comment regulation process), I would hope that the IRS reconsiders whether it is really too draconian a sanction to impose this timing requirement on taxpayers — one that is not imposed in the penalty “reasonable cause” or innocent spouse areas.  Remember that these § 6511(h) taxpayers, even if they have somehow managed to file a late return, are (because of their illnesses) likely not good about reading or complying with IRS instructions that would tell them about this proof timing requirement.  These are the last taxpayers on whom I would impose a requirement that everything be perfect on the return when it is filed.

And, remember that the Supreme Court has previously held that informal refund claims are sufficient to stop the refund claim statute of limitations, and that a perfected refund claim later on (after the statute has run) is normally sufficient.  United States v. Kales, 314 U.S. 186, 194 (1941).

Further, if IRS employees don’t want to enforce this timing requirement in some cases (like Kurko), why state the timing requirement as mandatory at all?  Leaving the submission of the physician’s statement as mandatory at the time of the filing of the return when the IRS has shown that it can overlook that mandatory requirement simply allows for IRS employees to impose the requirement at whim, which is a recipe for abuse of discretion.


Congress passed § 6511(h) to assist a very vulnerable population. Most of the persons impacted by the financial disability provisions face mental and not physical impairments preventing them from easily complying with the procedures for filing returns and refund claims. Rather than creating difficult barriers for this group to navigate, the IRS should adopt procedures that impose barriers to the extension of the statute of limitations only for those who cannot demonstrate financial disability, while allowing the former individuals the full opportunity to demonstrate the bases for their claims.

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