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IRS Releases Update on Frequently Asked Questions Part 4: The Low-Income Taxpayer Perspective

Posted on Oct. 22, 2021

Today we welcome back guest blogger Ted Afield, Professor of Law at Georgia State University, with the fourth installment in our mini-series on IRS FAQ.

The IRS’s mission, in its own words, is to “Provide America’s taxpayers top quality service by helping them understand and meet their tax responsibilities and enforce the law with integrity and fairness to all.” Taxpayers reading this mission statement are not being unreasonable in believing that fulfilling the service side of this mission includes at least some obligation to explain to taxpayers what the tax laws are and how taxpayers are expected to comply with them. Indeed, a service-focused mission would also suggest that, to the extent that the IRS does provide an explanation of the tax laws that turns out to be incorrect, the IRS would make at least some effort to mitigate the impact of its mistake, such as through acknowledgement and correction of the error and through ensuring that taxpayers are not penalized for relying on an IRS explanation.

As has been noted numerous times on this blog and elsewhere, however, this has sadly not been the case in the context of one of most commonly utilized IRS methods of explaining the tax law: the FAQ. Rather, historically, the IRS has taken the position that it would do its best through FAQs to provide quick and clear guidance to taxpayers, but that essentially taxpayers should rely on those FAQs at their peril, as there would be no relief if the guidance turned out to be incorrect.

As Professors Joshua Blank and Leigh Osofsky have pointed out in an upcoming article in the Vanderbilt Law Review titled, The Inequity of Informal Guidance, that the approach that the IRS taken to this type of informal guidance is “a social justice issue. . . [because] the two tiers of formal and informal tax law systematically disadvantage taxpayers who lack access to sophisticated advisors.” As Professors Blank and Osofsky correctly observe:

This imbalance occurs irrespective of whether the IRS’s tax guidance contains statements that, if taxpayers followed them, would be taxpayer favorable or unfavorable. When the guidance contains taxpayer-favorable positions the IRS is not legally bound by these positions and, during an audit, can contradict or ignore them. When the guidance contains taxpayer-unfriendly positions, taxpayers who rely on them are bound to these interpretations as a practical matter. Worse yet, these taxpayers have almost no protection against tax penalties for incorrect positions that they claimed based on the IRS’s tax guidance.

While these inequities can of course be experienced by taxpayers at a variety of income levels, they are most acutely felt by the most economically vulnerable members who interact with the tax system. Furthermore, the inequity is exacerbated by the fact that Congress increasingly uses the tax system to distribute economic relief in periods of economic crisis. This means that new areas of tax law in which the IRS is attempting to provide FAQ guidance as quickly as possible are areas of the law that are specifically designed to provide critical social safety-net benefits to vulnerable taxpayers who are most in need of a clear explanation that shows them what they must do to receive these benefits. The National Taxpayer Advocate described the extent of this problem as just as it related to the COVID-19 relief provisions here:

The Coronavirus relief provisions provide a good example of the useful role of FAQs. There is no end to the questions that have arisen under the Families First Coronavirus Response Act, the Coronavirus Aid, Relief, and Economic Security Act, and the IRS’s People First Initiative. It would not have been feasible for the IRS to address most of those questions through published guidance, at least not quickly. By our count, the IRS has posted nearly 500 COVID-19-related FAQs on its website, including 94 on the employee retention credit, 93 on the Families First Coronavirus Response Act (via a link to the Department of Labor website), 69 on Economic Impact Payments, 67 on COVID 19-related tax credits, and 40 on filing and payment deadlines.

For a more specific example, see here for a discussion of how the IRS provided incorrect FAQ guidance for the eligibility of incarcerated and non-resident taxpayers for economic impact payments during the first round of COVID-19 stimulus). This approach represented more than just poor service—it violated at least four of the Taxpayer Bill of Rights: the right to be informed; the right to quality service; the right to pay no more than the correct amount of tax; and the right to a fair and just tax system. Indeed, as Professors Alice Abreu and Richard Greenstein have noted, given that the IRS would remove and replace FAQs without warning and without an archive, it “may also violate the taxpayers “Right to Challenge the IRS’s Position and Be Heard,’” which would cause it to violate half of the listed taxpayer rights in TBOR.

Thankfully, the IRS last week took a significant step in rectifying this inequity, with the publication of IR-2021-202 (October 15, 2021). Through this notice, the IRS has indicated that it will make the following changes to its FAQ practices:

  1. Publishing FAQs as separate Fact Sheets that will be dated so that taxpayers will know when FAQs are modified.
  2. Allowing taxpayers who reasonably rely on FAQ guidance in good faith to have a “reasonable cause” defense against negligence or accuracy related penalties if the FAQ is incorrect as applied to that taxpayer

This notice represents an important change from the “heads, the IRS wins; tails, the taxpayer loses” historical approach to FAQs and is a welcome development for all taxpayers, but particularly so for those taxpayers who lack the resources to pay for professional tax guidance and nevertheless rely on benefits administered through the tax code for their economic security. Inevitably, however, commentators will turn their attention to the question of whether this fix solves the problem or whether it only represents the first step towards an even more equitable solution.

As Professors Abreu and Greenstein have argued here, perhaps the IRS should be encouraged to go beyond simply allowing reliance for the purposes of penalty protection and should be encouraged to “stand by its [sic] all of its written, publicly announced, positions until it announces that it has changed positions, and it should do so for all purposes, not just for penalty protection.” There is considerable appeal to this argument, but part of me wonders whether this could potentially backfire on economically vulnerable taxpayers. Requiring that the IRS stand by all written guidance for all purposes until the guidance is changed could end up having the counter-effect of making the IRS more hesitant to release the guidance in the first place. Even if the IRS did continue to release guidance, allowing taxpayer reliance over and above penalty protection could incentivize the IRS to release guidance in a more taxpayer unfriendly manner, which, as Professors Blank and Osofsky have observed, could cause taxpayers to rely on unfriendly FAQ guidance that puts them in an unfavorable tax position that their reliance causes them not to realize.

While that concern does give me pause in wishing that the IRS had adopted a position that taxpayers are entitled to reliance on FAQs for all purposes, I do find myself still wishing that the IRS had moved more toward the Abreu/Greenstein proposal. But, perhaps the IRS could have found a middle ground between penalty defense and complete reliance for all taxpayers. For me, this middle ground would recognize that the service obligations that the IRS owes the economically vulnerable are, frankly, higher than the obligations owed to more sophisticated taxpayers. It would also recognize that, in addition to failing these taxpayers on the service side, the IRS has also failed these taxpayers on the enforcement side by auditing them at much higher rates than their incomes or percentage of the taxpaying population would justify.

Therefore, while it might be too chilling for the IRS to have to stand behind all written guidance in effect for all taxpayers, is it that unreasonable to ask the IRS to stand behind this guidance for all purposes for taxpayers who are the most likely to depend on FAQ guidance to educate them about social safety-net benefits? To be specific, I would have liked to have seen the IRS adopt the Abreu/Greenstein model for taxpayers whose incomes for the tax year at issue were below 250 percent of that year’s federal poverty guidelines (the same eligibility standard for LITC representation). I also would have liked to see the IRS adopt the National Taxpayer Advocate’s recommendation of refusing to assess a penalty for a position taken in reliance on an FAQ in effect for the year in which the return was filed, at least for this subset of taxpayers.  Should the IRS balk at providing this relief towards low-income taxpayers, I would have an extra wrinkle that I would propose—I would give the IRS a way out of having to allow for this heightened level of reliance for these taxpayers by tying it to the IRS’s approach to enforcement against low-income taxpayers.

My added wrinkle is that the IRS should permit low-income taxpayers to have a higher level of reliance protection for FAQs for as long as the IRS chooses to subject them to heightened levels of enforcement. As Kim Bloomquist has persuasively demonstrated, “the IRS audits EITC filers at a rate four times higher than non-EITC filers with similar incomes.” That disparity in audit rates is uncontroversially unjustifiable, and allowing low-income taxpayers to have a higher degree of reliance on all published IRS guidance for as long as this enforcement disparity persists would be a small step towards IRS perhaps recognizing that it in fact has its priorities exactly backwards when it provides more enforcement and less service towards the economically vulnerable.

The IRS took an important step last week towards making its use of FAQ’s much fairer to all taxpayers, and the IRS deserves to be celebrated for this. Nevertheless, I do hope like other commentators that this might represent the first step towards a more just use of FAQs and, specifically, an acknowledgement that, if the IRS is going to provide heightened enforcement scrutiny of low-income taxpayers, it should be providing heightened service that it stands behind as well.

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