DUPTIN Part III.
This is the third part in a three-part series on the IRS’s DUPTIN screening procedure and electronic return rejections by Justin Schwegel. Click here for Part I and here for Part II. Keith
To recap parts I and II, the IRS employs an automated screening procedure to reject the second tax return filed electronically that claims a qualifying child or dependent. Rejection of automated electronic returns is subject to three exceptions. These exceptions do not change the IRS presumption that the first return filed rightfully claimed the credit(s) and DUPTIN returns are still subject to IRS audit procedures. These audits are difficult to overcome and results in some taxpayers entitled to credits being denied on the arbitrary ground that they were not the first to file.
Part I had anecdotes demonstrating the dangers of the IRS’s current DUPTIN return screening procedure. However, it is important to understand the entirety of the stakes at play and the negative impact they can have on real people who rely on the benefits Congress has charged the IRS with administering through the tax code.
The U.S. tax system is progressive and allows for additional deductions/exclusions for those supporting children or other dependents. For better or worse, the IRS has also been tasked with administering many social benefits. The credits/benefits available for taxpayers claiming qualifying children are especially generous, so that will be the focus. A taxpayer with a qualifying child often qualifies for greater tax deductions and IRS-administered public benefits in the form of refundable and nonrefundable tax credits.
To demonstrate the stakes, we can use a hypothetical couple that is married but separated in late 2020 due to domestic violence. This is a common scenario. Let’s say child Caleb was born in early 2021 and lived with wife Wanda for the rest of 2021.
If husband Henry files first and Wanda’s electronic return is rejected, Henry gets Caleb’s child tax credit for 2021 ($3,600 fully refundable). Henry’s claim for an earned income tax credit of up to $3,584 and childcare credits and larger premium tax credits for healthcare if applicable will be accepted by the IRS because he filed first electronically. Due to a quirk in filing status rules, married custodial parents who lived apart from their ex for more than the last 6 months of a year may file as head of household (HOH) while the other spouse must file as married filing separate (MFS), a difference in the standard deduction of $6,250 in 2021. Henry and Wanda both have private student loans and paid $1,000 in interest in 2021, a deduction unavailable for MFS returns. Henry filed first and his head of household filing status and student loan interest deductions will be accepted by the IRS.
If Wanda tries to claim Caleb and her electronic return is rejected, she probably will not know to file a paper return. The result would be financially catastrophic. If Wanda knows to file the paper return, she and Caleb may still wait for months for the return to process. If her return is selected for audit and she forgets to change her address, she will lose the audit by default. She will also miss the notice of deficiency and her right to petition the U.S. Tax Court.
Although this is a hypothetical scenario, it is not far-fetched. Every year taxpayers who are the rightful beneficiaries of family-based credits are denied those credits by IRS default rules and lack the knowledge to file a paper return. In the event taxpayers file a paper return, many will move and never receive an audit notice and will lose an audit by default. Of those who respond to an audit many will lack the capacity to sufficiently substantiate the credits and escape an audit unscathed.
Numerous social benefits as tax credits are tied to filing status. A common scenario in a recent separation leaves one parent as HOH and the other parent as MFS under the rules in IRS Pub 501. Many tax credits are unavailable to taxpayers who file MFS. In those scenarios the following common credits and deductions are in play:
- Head of household larger standard deduction
- Earned income credit (EITC)
- Child tax credit
- American opportunity credit
- Lifetime learning credit
- Student loan interest deduction
- Adoption expenses credit
- Credit for the elderly and disabled.
- Capital loss carry forward (reduced by $1,500)
- Child and dependent care credit
The maximum EITC for 2022 is $6,935. Considering other credits and deductions even more may be at stake in a given year. For low-income taxpayers this is a lifechanging amount of money. For low-income taxpayers fleeing domestic violence this could provide the necessary cushion to enable escape.
DUPTIN May Inadvertently Facilitate Financial Abuse
The IRS’s DUPTIN system could unintentionally facilitate financial abuse, a key component in physically and emotionally abusive relationships. An abusive ex can race to file with the objective of blocking the custodial parent from accessing refundable credits they are legally entitled to and forcing them to return to their abuser. If an abuser knows the IRS rules, it can flip the IRS’s presumption that the first return filed is correct on its head. Such a person is more likely, not less, to file the first tax return in order to block or delay their victim’s access to financial resources.
It is impossible to know how many rejected returns are from the taxpayer entitled to the credits. It is also impossible to know how many taxpayers whose returns are rejected know to file a paper return. Other practitioners I have spoken with estimate it is less than half.
When a DUPTIN electronic return is rejected, there is no message advising the taxpayer to file a paper return to claim the credits. An IRS FAQ instructs taxpayers if their return was rejected “there must be an error on your tax return…” The conclusions most taxpayers likely draw is that they must remove the offending taxpayer identification number.
For those taxpayers who overcome this first knowledge hurdle many will be audited either because it is the second time they have filed a DUPTIN return or because they have violated a dependent database rule. Many taxpayers who receive audit notices never respond and of those who do most fail to overcome them. The knowledge hurdle and the audit hurdle together mean that many taxpayers legally entitled to claim credits for qualifying children and/or dependents will not get them if someone else claims them first.
Garbage in Garbage out
The IRM DUPTIN procedure probably eliminates many duplicate credit claims. However, when the IRS is the largest benefits administrator in the country, ensuring taxpayers entitled to social benefits (as tax credits) receive those benefits must be just as high a priority as fraud prevention. A rule that erroneously denies public benefits to those entitled to them on the criterion that someone else claimed them first is arbitrary. It both allows erroneous claims and rejects proper claims. The remedy of filing a paper return is a poorly publicized additional administrative burden.
The few exceptions that allow a second taxpayer to file electronically do not change the undue deference the IRS accords to the first return. The second return is still flagged as DUPTIN and subject to audit procedures. The onerous full-scope audit process means many taxpayers entitled to credits fail to make their case successfully to IRS examiners. Bad design yields bad results.
Current DUPTIN Procedures create two problems. The first is that the second electronic return is automatically rejected. Although taxpayers can file a paper return, this knowledge hurdle is often insurmountable for low-income taxpayers. The second problem is that when an audit is triggered by the DUPTIN procedure, there is undue deference given to whichever taxpayer filed first.
Eliminate electronic rejections for related taxpayers
First, the rejected electronic return rule needs to be modified. A different DUPTIN rule could allow a subsequent electronic return to process where the primary or secondary on the DUPTIN return has appeared on any tax return with a qualifying child or dependent in the past, e.g. as primary or secondary or where both TINS were claimed as qualifying children.. This rule could also allow DUPTIN claims to process electronically based on Social Security Administration (SSA) data. The “Enumeration at Birth” program requires the SSA to obtain SSNs of a newborn’s parents. The average processing time for newborn SSNs is two weeks and the SSA has been sharing this data with the IRS since 1999.
The IRS currently allows both returns to process if the second taxpayer files a paper return. Then it sends an exam soft notice. This rule change would eliminate the knowledge/inconvenience/waiting hurdle of filing a paper return for many taxpayers. It would also prevent an abusive partner from leveraging the IRS’s process to deny economic resources to a survivor either temporarily or permanently.
Some taxpayers entitled to credits may still have electronic returns rejected with these DUPTIN changes due to lack of SSA data tying the taxpayer to a qualifying child and lack of filing history with the qualifying child. A taxpayer who adopts a niece or grandchild would still face problems if the absent father filed first and improperly claimed the child. However, any suggested modifications must still filter tax returns to prevent widespread fraud due to multi-DUPTIN claims. To eliminate the knowledge, hurdle the IRS could require that all tax preparation software advise taxpayers whose electronic returns are rejected to file a paper return to claim the credits and provide specified forms of substantiation of relationship and residency with the paper filed return.
Change audit rules for DUPTIN examinations
IRS correspondence exam statistics show that in most years less than 1 in 5 taxpayers who are audited overcome the audit. This points to a broader problem with the audit process in general. The IRS disproportionally audits low-income taxpayers and more than 40% of those who are audited fail to respond to correspondence exams. Low-income households move more often for many reasons. They are more likely to be renters than home owners and much more likely to face forced displacements like eviction. Low-income taxpayers probably have lower exam response rates due to greater housing instability.
Under the current DUPTIN exam procedures, if a DUPTIN exam is initiated it will probably be a full-scope exam targeting the taxpayer who happened to file second. The taxpayer who is audited must first overcome an examination before the IRS moves on to the other taxpayer. When 80% of taxpayers audited fail to overcome the audit, a rule that gives the first taxpayer to file deference unless the second taxpayer overcomes an audit is manifestly problematic.
New DUPTIN audit procedures could instruct IRS examiners that both a first and second return with a DUPTIN condition could be examined simultaneously rather than in series. Examiners could also be instructed that there is a rebuttable presumption that one of the returns claiming the credits is entitled to them. The result of both changes would mean an IRS examiner would arbitrate between competing claims for credits. Putting competing claims for credits on an equal footing seems likely to produce better results than examining returns in series with the presumption that the return that was filed first is correct.
Because of the lag time between return filing and correspondence exams, many taxpayers may move. To ensure each party has a chance to present evidence, IRS records could be updated by pulling contact information from state benefits administrators to contact DUPTIN taxpayers when they are unresponsive.
This series was meant to highlight obvious problems in the IRS’s current administration of the DUPTIN procedure, and the minor suggestions put forward are only meant to demonstrate that change is possible. The IRS has quietly become largest benefits administrator in the United States and where benefits as tax credits are routinely denied erroneously, change is necessary.
The IRS has been structured as a guardian of the treasury and maintains that mentality. In 2017, the National Taxpayer Advocate pointed to an historical IRS culture as “enforcement first” rather than “service first” as demonstrated by both funding decisions and reporting priorities. Correspondence exam statistics hint at that culture. Administering public benefits through the IRS means the agency must embrace its role as benefits administrator with equal vigor to its role as tax code enforcer.
In a domestic violence context, the benefits administered by the IRS must flow efficiently to those who are entitled to them without knowledge hurdles or undue delay created by the current DUPTIN system. One of the most common reasons why survivors of domestic violence fail to leave abusive relationships and return to abusive relationships after leaving is due to financial instability. The lack of access to alternative housing is especially difficult to overcome for those of limited means. In a country in which more than half of female homicides were the result of intimate partner violence, the failure to effectively administer public benefits can be deadly.