Most readers at this point are probably aware of the passage of the Protecting Americans from Tax Hikes Act of 2015 (PATH). It has been getting mainstream attention for its (mostly) permanent extension on all sorts of benefits and expenditures embedded in the tax code.
In addition to PATH’s goodies, it has major procedural and administrative implications. Late-enacting legislation presents an administrative headache for IRS as it will be scrambling to get its tax season forms and instructions to line up with the law. Beyond the filing season implications and of particular significance for readers of Procedurally Taxing, the law has many procedural provisions. In this brief post, I will highlight some of the provisions that are directed at reducing errors generally associated with returns claiming refundable credits, as well as offer some brief commentary and suggest posts where we have discussed some of the issues implicated in the provisions. In a future post we will address the other procedural aspects of the legislation, which include provisions addressing venue of appeals of innocent spouse and CDP cases, a provision in response to the Kuretski Where is the Tax Court Located issue and a handful of others.
For those who want more than the summary here, note that the Joint Committee has published a technical explanation of the entire bill; Ways and Means has published a section by section summary as well. The actual language of the bill can be found here. Anthony Nitti over at Forbes has a nice summary of the substantive goodies in the bill, including a breakout of what is permanent and what has an expiration date.
Procedural Quid Pro Quo (Or the Pound of Flesh For the Extensions)
There are a bunch of provisions that can best be thought of as part of the quid pro quo associated with extensions and sweeteners to refundable credits that largely benefit lower-income and more moderate-income taxpayers. I will describe the main ones below.
Effective for the 2016 tax year, Section 207 of PATH expands the due diligence rules that apply to EITC returns to returns with the Child Tax Credit and the American Opportunity Tax Credit to help pay for education expenses. I have written extensively on the due diligence penalty as applied to EITC over the past two years, including posts addressing challenges that IRS has in administering the rules and difficulties preparers face in due diligence audits. See for example Preparers and Due Diligence. The legislation requires Treasury to produce two reports relating to the due diligence rules (one for EITC and the other for CTC and AOTC), including studies on effectiveness and comparing due diligence rules to other measures to address noncompliance. Interestingly the law also requires the study to address whether “due diligence of this type should apply to other methods of tax filing….”, a nod to the issue we discussed in a few posts considering appropriations bill language that directed IRS to require self-prepared returns to have additional questions and schedules for EITC returns (more on that see Legislative Language Directs IRS to Make Self-Prepared EITC Returns More Burdensome).
Extension of Ban and Expansion of Math Error
Section 208 of Path (pages 114-119 of the bill itself) is perhaps the most controversial and onerous of the pound of flesh provisions. It does three main things:
- It extends the two and ten-year ban that applies to EITC taxpayers to also include returns claiming the CTC and AOTC. The ban will bar individuals from claiming the CTC and AOTC for ten years if there is a determination that the claim was due to fraud and for two years if they are found to have recklessly or intentionally disregarded the rules;
- It allows IRS to use math error procedures if a taxpayer claims one of the credits in a year in which the ban is in place; and
- It allows IRS to impose special certification requirements (already in place for EITC) for taxpayers who have had a CTC or AOTC denied through deficiency procedures prior to claiming one of those credits in a future year. Absent certification, IRS can use math error procedures to deny the claimed credits in a year after the credit has been reversed through deficiency procedures (interesting issues lurk here on the intersection of math error and deficiency procedures when the return generating a reversal in that later year also may generate a proposed deficiency).
On numerous occasions I and others have expressed deep reservations about the IRS’s administration of the EITC ban and its use of existing math error powers. See for example a post from last year on possible math error expansion, and a post discussing a case illustrating the difficulties IRS has in administering the ban. I will come back and discuss in a standalone post the reason why this penalty is bad tax administration (and potentially subject to challenge) but at a minimum its expansion requires a major commitment on the IRS’s part in providing detailed standards in imposing the ban and procedures for taxpayers potentially subject to the ban. To that end, I point readers to the study from the National Taxpayer Advocate 2013 annual report, where there is a detailed discussion of IRS often failing to follow procedures in imposing the ban. In that report the NTA notes how “the IRS applies the two-year ban on the basis of unexamined assumptions about the taxpayer’s state of mind or even presupposes reckless or intentional disregard of the rules and regulations, potentially causing significant harm to taxpayers who may be entitled to EITC in a subsequent year.”
Reversal of Rand
Note that Section 209 of the legislation also includes a reversal of Rand so that the definition of underpayment now matches the definition of deficiency. Under the new law, the accuracy-related penalty can be applied to any part of a reduced refundable credit subject to deficiency procedures.
More Focus on Preparers
While the legislation does not give IRS authority to regulate unlicensed preparers, it does in Section 210 increase the penalty applicable to paid tax preparers who engage in willful or reckless conduct. The provision expands the penalty for tax preparers who engage in willful or reckless conduct to the greater of $5,000 or 75 percent of the preparer’s income with respect to the return (it was 50% under prior law). The provision applies to returns prepared for tax years ending after the date of enactment.
On the positive side of the ledger Section 401 requires that IRS employees are familiar with and act in accordance with the taxpayer bill of rights. Those rights include the following:
It remains to be seen whether the IRS’s additional powers to penalize preparers and taxpayers as set forth in PATH can or more accurately will be reconciled with taxpayer rights. The commitment to taxpayer rights requires not just that IRS employees are familiar with those rights, but training and a commitment to procedures that protect those rights. While PATH has opened the door to expanded credits, that door can be easily shut for eligible taxpayers if IRS fails to respect (and Congress does not recognize) the challenges associated with administering those programs.