We welcome first time guest blogger Sarah Lora. Sarah is a supervising attorney in Legal Aid Services of Oregon located in Portland, Oregon. She is also a vice chair of the ABA Tax Section Pro Bono and Low Income Taxpayer Committee. She represents a high percentage of immigrant taxpayers. Today, she discusses the problems encountered by one of her clients trying to file a proper tax return. The process led to frustration and points to the need for a system that allows clients to have a further hearing when things go wrong. She cites us to the Taxpayer Bill of Rights and to administrative law in her discussion of the search for a clear answer. Julie Preciado, Willamette Law School 2L, helped edit this piece. Keith
Our clinic represents a U.S. legal permanent resident who supports his teenage daughter who resides in Mexico. Our clinic helped the client file his 2015 return tax return. The client rightfully included his daughter as a dependent on the return. The daughter qualifies as a dependent under Section 151 of the code, except that she does not have a TIN as required by Section 151(e). To satisfy that requirement, we helped prepare the W-7 application pursuant to Section 6109(i)(1) with supporting documents of an original birth certificate and school record as allowed by the W-7 instructions. A few weeks passed and we received a notice that stated that the supporting documents submitted were insufficient, without further explanation.
Regarding school records, the W-7 instructions state:
School records will be accepted only if they are for a school term ending no more than 12 months from the date of the Form W-7 application. The school record must consist of an official report card or transcript issued by the school or the equivalent of a Ministry of Education. The school record must also be signed by a school official or ministry official. The record must be dated and contain the student’s name, coursework with grades (unless under age 6), date of grading period(s) (unless under age 6), and school name and address.
I carefully reviewed the documents and the W-7 instructions and could find no problem with the birth certificate. The only discrepancy I could find with the school record is that it contained a grade point average, and not individual coursework. We submitted a detailed explanation as to why the documents substantially complied with the W-7 instructions. The rejection letter came shortly thereafter, again, without explanation. I started to feel like I had entered Dickens’ Office of Circumlocution.
I posted to the ABA listserv requesting feedback from my fellow practitioners about how to appeal a rejected W-7. All the responses were the same: you cannot. The only recourse is to file another application. However, if I do not understand why the ITIN unit rejected the original application, how can I hope to be successful in a second application? Furthermore, the education record had become stale because, according to the W-7 instructions, the records are only acceptable for 12 months from the end of the school term for which the record pertains. To file another W-7 would mean the time-consuming and arduous task of obtaining other documents from Mexico.
The Taxpayer Bill of Rights guarantees my client the right to: challenge the IRS’s position and be heard; appeal an IRS decision in an independent forum; and pay no more than the correct amount of tax. How could we appeal and where could my client be heard? Several weeks later, we received a math error notice stating that my client had erred in calculating the correct amount of tax because he was denied a dependent exemption due to lack of a valid tax identification number for his dependent. A light bulb went off. We could get to the issue of the wrongly denied ITIN by protesting the math error notice!
Section 6109(i)(1) authorizes the Secretary to issue an ITIN, “if the applicant submits an application, using such form as the Secretary may require and including the required documentation.” Section 6109(i)(2) defines required documentation to include “such documentation as the Secretary may require that proves the individual’s identity, foreign status, and residency.” The implementing regulation is found at Section 301.6109-1(b)(3) and states, in relevant part, that the applicant “must apply for [an ITIN] on form W-7.” An ITIN will be assigned to an individual on the basis of information reported on Form W-7 . . . and any such accompanying documentation that may be required by the Internal Revenue Service. An applicant for an [ITIN] must submit such documentary evidence as the Internal Revenue Service may prescribe in order to establish alien status and identity.
The regulation gives latitude to the IRS to prescribe the types of allowable documents. However, that latitude is limited by the APA. Judicial review under the APA allows a court to examine a final agency action, so long as it is not committed to agency discretion or otherwise precluded from review by statute. Section 706 requires that with respect to any agency action, a reviewing court must “hold unlawful and set aside agency action found to be,” among other things, “arbitrary, capricious, [or] an abuse of discretion.”
The arbitrary and capricious standard requires agencies to engage in reasoned decision making prior to issuing a determination. Motor Vehicle Mfr. Ass’n v. State Farm Auto Mut. Ins. Co., 463 U.S. 29, 52 (1983). Courts will invalidate agency determinations that fail to “examine the relevant data and articulate a satisfactory explanation for its action including a rational connection between the facts found and the choice made.” Id. at 43 (internal quotation omitted).
In this case, a reasonable person could make the argument that the denial of my client’s dependent’s ITIN application was arbitrary and capricious under State Farm because the IRS did not articulate a satisfactory explanation for its action, much less show a rational connection between a report card with “coursework and grades” and proving an applicant’s identity. Not only are the W-7 instructions raising barriers for the most vulnerable taxpayers by requiring “coursework” rather than grade point averages, a rational connection with a legitimate state interest is tangential at best. If fraud prevention in supporting documentation is the IRS’s objective, requiring report cards including “coursework with grades” is both under and over inclusive. It excludes more official government issued educational proof documents, such as the one my client submitted with a grade point average, and includes easily falsified commonplace progress reports. The ITIN unit is wrong to offer no explanation for its decisions that create confusion, frustration, and ultimately an inefficient process that wastes taxpayer resources.
Another possibly narrower argument against the ITIN unit’s actions in my case is that the ITIN unit’s interpretation of Treasury Reg. 301.6109-1(b)(3) is “plainly erroneous” as set in Auer v. Robbins, 519 U.S. 452, 461 (1997). Here the ITIN unit’s requirement for specific coursework versus a grade point average (if this is indeed the problem in my case) does not appear to be at all rationally related to the regulation’s requirement that the document show “alien status and identity.”
Creating opaque guidelines for the most vulnerable taxpayers is fundamentally unfair. Administrative agencies have a duty to the public to provide clear guidelines, tied to legitimate state interests. After all, Nina Olson has told us on many occasions that “[a]t their core, taxpayer rights are human rights.”