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Does Treasury’s Policy Restraining Referrals to Low Income Tax Clinics Harm Individuals and the Tax System?

Posted on Jan. 30, 2014

The government does not want to prefer one law firm or business over another.  The Treasury Department, like other federal departments, has a regulation prohibiting its employees from giving out the names of specific practitioners.  See 5 C.F.R. § 3101.106(a).  Employees of government agencies invariably receive requests from individuals and businesses seeking advice on who might represent them in a matter before a specific agency.  Any firm would love to be on the public or private list receiving referrals in such a situation but strong and legitimate policy reasons prohibit such referrals.

Competing with this valid policy against referrals is another policy seeking to fulfill the need and desire to have indigent unrepresented individuals represented.  Congress passed IRC 7526 to assist in creating representatives for low-income taxpayers involved in a controversy with the IRS because it saw the need for representation for these individuals in order to protect their interests and the interests of the system.  Unrepresented individuals simply do not have the resources to properly meet their needs in this situation.  Section 7526 creates a grant for entities that will represent low-income taxpayers.  These entities are called Low Income Taxpayer Clinics (LITCs).

As Kathryn Sedo’s blog post yesterday pointed out, sometimes individual IRS employees do make specific referrals to a clinic.  This happens because these individuals see the practical need and react in a logical manner in order to make the system work.  Yet, with the possible exception for employees in TAS who I have been told have permission to make referrals to specific low income tax clinics in their geographic area, Treasury employees are not technically supposed to do this.

The IRS annually produces Publication 4134 that lists all of the LITCs receiving these grants.  The IRS encloses this generally available publication in some of the correspondence it sends to taxpayers.  One of my clients received this publication in an envelope advising him that the IRS planned to levy on his Social Security payments.  I do not know all of the circumstances in which the publication is enclosed.  Generally, the correspondence my clients receive comes from a unit handling cases in bulk such as the Automated Collection Sites or Correspondence Exam.  Sending out a publication with a nationwide list from units such as those makes sense although perhaps not as much sense in the case of a represented party.  (The Tax Court only sends out the list to unrepresented petitioners, which makes a great deal more sense.  See discussion below.)  Lists like the one in Publication 4134 may not assist low-income taxpayers as much as one might hope due to the connection between poverty and low literacy but the effort by the IRS still deserves positive recognition.

What happens when an unrepresented individual has a matter before a specific employee at the IRS where the unrepresented individual, and the system, might benefit from representation?  The IRS employees feel constrained by 5 C.F.R. § 3101.106(a) and do not openly advise taxpayers to seek assistance from one of the LITCs.  Instead, the IRS advises its employees to refer the individuals needing assistance to Publication 4134 but not to just give them the name and phone number of the LITC that would actually assist them in the geographical area in which they live.  It may not seem like a stretch for an individual to work through a publication listing all of the LITCs to find the one nearest them but many low-income individuals simply see this as one more form with which they must battle.

In contrast, the United States Tax Court has embraced the Congressional endorsement of the LITCs and specifically notifies anyone who petitions the Tax Court pro se of the specific clinics available in their neighborhood that might assist them.  The Tax Court sends out a letter to the pro se petitioner advising the individual of the clinics that assist individuals and that have signed an agreement with the Court.  Through this system, every individual who files a petition in the Tax Court pro se has the opportunity to contact a local LITC to determine if they qualify for assistance with their Tax Court case.  See ABA Section of Taxation’s NewsQuarterly.  Because about 70% of all Tax Court petitioners file pro se, getting the LITCs involved to assist in representation greatly assists not only the individuals but also the Court and the IRS in working a docket full of cases with petitioners who have little idea how to properly handle their cases.

The National Taxpayer Advocate saw the problem created by the conflicting policies of not wanting the government to refer specific businesses versus wanting unrepresented low-income individuals to receive appropriate representation.  In 2007 she proposed an amendment to IRC 7526 that would have specifically permitted IRS employees to refer individuals to specific LITCs.  See NTA’s 2007 Annual Report to Congress.  That proposal has gone nowhere.

The resolution of the conflict in policies does not require Congressional action.  Treasury could resolve the conflict by amending the controlling regulation.  It does not make sense for Congress to create a system of LITCs to assist low-income individuals and at the same time have the legitimate policy barring specific referrals bar the IRS from easily guiding individuals to the place where they might receive assistance.  Treasury could amend 5 C.F.R. § 3101.106(a) to allow IRS employees to refer individuals to specific LITCs without fear of breaking the rule regarding referrals and to allow the IRS, more globally, to devise a system similar to the Tax Court’s system which guides individuals to the appropriate LITC.  The IRS has taken good first steps by enclosing Publication 4134 in some of its correspondence but given the target population greater flexibility should be given to IRS employees to guide taxpayers to the appropriate LITC for assistance.

Having the IRS provide more meaningful information about access to LITCs should not harm tax practitioners since the individuals receiving assistance from LITCs almost never have the resources to pay for assistance.  They muddle through the tax controversy with the IRS doing the best they can on their own or, in many cases, doing nothing and winding up in the collection system where they again rely upon their own resources.  The first LITC started 40 years ago.  Significant debates took place in the 1970s within the IRS, the ABA, the AICPA, the Tax Court and other places concerning the appropriateness of having LITCs and the appropriate relationship between LITCs and the IRS and the Tax Court.  Those debates should continue as issues arise, but it seems well settled at this point that very little work done by the LITCs adversely impacts the practicing tax community from an economic standpoint while the work does assist the system in resolving cases and creating a sense of fairness.

Instead of stifling referrals, which would aid the tax system, Treasury should embrace LITCs as a positive element in the system and encourage individual IRS employees to provide meaningful and timely information to individuals to assist them in resolving tax disputes.  If anyone reading this post feels inspired to provide some pro bono assistance to low-income taxpayers in your neighborhood, check out Pub 4134 to locate and contact your local LITC.

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