There is great urgency for addressing this issue, because we are facing a 2022 filing season that promises to be challenging, to put it mildly. There will be millions of taxpayers who must file a return to claim the remainder of the Child Tax Credit and reconcile advance CTC payments, as well as claiming and reconciling the third round of Economic Impact Payments. Among these millions are filers who are new to the system. And there will be many taxpayers who were blocked from receiving the AdvCTC because someone else claimed their child(ren) on a 2020 or 2019 return, or because their 2020 return was delayed in processing by the IRS for one reason or another. These folks will be coming in and claiming the CTC for TY 2021, and their returns are sure to be flagged and delayed, requiring these “newbie” filers to interact with the agency under circumstances of economic and emotional stress. Depending on the quality of their interaction and experience with the IRS, these individuals may be discouraged from claiming future tax benefits for which they are eligible, thereby undermining the policy goals for such benefits.
In assessing the current state of EITC/CTC dispute resolution, it is helpful to do a quick review of the basic principles underlying procedural due process. The Fifth Amendment of the U.S. Constitution states, in part, that “[n]o person shall . . . be deprived of life, liberty, or property, without due process of law. . . .” Procedural due process protections are triggered when the government actions bring about grievous loss. In those instances, “the fundamental requisite of due process of law is the opportunity to be heard.” (Grannis v. Ordean, 234 U.S. 385, 394 (1914)).
In the tax world, the Supreme Court has long held that pre-deprivation hearings are not a constitutional requirement where taxes are concerned. ( See Springer v. United States, 102 U.S. 586, 594 (1881).) Congress has stepped in and created pre-deprivation judicial review mechanisms before the United States Tax Court in deficiency and collection due process proceedings. But a great deal of harm can be done at the administrative level before such judicial review is triggered.
This is where Goldberg v Kelly comes in. In this case, New York State denied individuals currently receiving welfare benefits a hearing prior to terminating those benefits. The Supreme Court agreed with the District Court that in the welfare context “[t]he stakes are simply too high for the welfare recipient, and the possibility for honest error or irritable misjudgment too great, to allow termination of aid without giving the recipient a chance, if he so desires, to be fully informed of the case against him so that he may contest its basis and produce evidence in rebuttal.” (Goldberg v. Kelly, 397 U.S. 254, 266 (1970), quoting 294 F.Supp. at 904-905.)
The Court analyzed what it means to hold a hearing “at a meaningful time and in a meaningful manner” in the context of welfare benefits termination. The basic elements are:
- timely and adequate notice detailing the reasons for a proposed termination;
- an effective opportunity to defend by confronting any adverse witnesses and by presenting his own arguments and evidence orally; and
- the opportunity to be heard “tailored to the capacities and circumstances of those who are to be heard“ (397 U.S. 269);
- “the recipient must be allowed to retain an attorney if he so desires: (397 U.S. 270); and
- The “decisionmaker should state the reasons for his determination and indicate the evidence he relied on” (397 U.S. 271).
Later cases have limited the sweeping language of Goldberg v. Kelly, and the ruling itself applied to situations where benefits were terminated, not where benefits were applied for but denied. However, Goldberg’s fundamental principles are a valid, if not constitutionally required, basis for conducting a due process analysis of IRS dispute resolution processes at the administrative level.
First, we need to define what is a “dispute.”
Years ago, the answer to that question would be easy – an audit, an appeal, or a contested collection action. Today, as I’ve discussed here, a large and increasing number of IRS challenges occur at the filing and return processing level. For example, the IRS rejects e-filed returns claiming the EITC and CTC for a child where someone else has already claimed that child on a return. In this case, the taxpayer has filed a valid refund claim, but the IRS has summarily rejected the e-filed return, creating administrative burden and delay for the taxpayer (and additional work for the IRS) by requiring the taxpayer to file the claim on a paper return.
Similarly, through the summary assessment (math error) authority under IRC § 6213(b), the IRS summarily assesses tax on millions of returns by adjusting/disallowing various deductions and credits for family benefits. It stops millions of returns on suspicion of identity theft, questionable refund claims, and unverified wage and withholding reports. It requires taxpayers who have been denied family-based credits in prior years to file a detailed schedule supporting their claims for such credits in current years, and will summarily reject these returns if such required schedules are not included. All of these actions constitute disputes, along with the more traditional audit, appeals, and collection matters. And all of these disputes should be subjected to due process/administrative burden analysis, especially when the return in question reflects a claimed refundable credit like the EITC and CTC.
If your return is lucky enough to survive all of these processes (which are sequential, meaning if your return survives one, it then goes back into the processing pipeline and could be stopped by another process, ad infinitum), the return could still be selected for audit. Today, about 75% of individual audits, including EITC audits, are conducted by correspondence. Per Goldberg and later cases like Mathews v Eldridge, given the characteristics of the EITC and refundable CTC population, written submissions likely do not pass due process muster.
So, let’s apply these principles to what will happen in 2022 – both in terms of the filing season and claims for the CTC/AdvCTC reconciliation.
Timely and Adequate Notice Detailing the Reasons for a Proposed Adjustment or Rejection and Statement of Evidence Relied Upon in making the Determination
In the context of return processing, the taxpayer should be informed of the reason for the rejection of any e-filed return. IRS has rejection codes; it should develop plain-language explanations of those codes and require Electronic Return Originators to provide that information to their customers. (Code for America already does this; other EROs should follow suit, and IRS should require it.) IRS should also require these explanations to be provided to taxpayers filing through Free File, Free Fillable Forms or the IRS Nonfiler Portal.
“Where’s my refund?” and similar apps should provide the taxpayer with specific information about where their return is in the processing pipeline, including the specific reason the return has been delayed (e.g., wage verification or identity theft) and should provide the taxpayer with links to specific instructions about any steps the taxpayer can take to resolve the matter. IRS Customer Service Representatives (CSRs) must have access to this information as well.
Anyone who has received a math error notice or a correspondence audit adjustment report will agree that there is a paucity of information regarding the actual adjustment and reasons therefor. Because of the underlying constraints of the IRS notice composition system, a single letter may contain vague language that refers to a number of possible reasons for an adjustment, making it difficult for the taxpayer to determine just what the IRS is adjusting and why it is making the adjustment.
Because a math error notice is both a notification of a “termination” of benefit and the actual determination, it is essential under due process principles that the notice clearly state the reasons for such an assessment. Math error notices should contain information relating to the exact line on the Form 1040 that is being adjusted, the exact amount of the adjustment on that line, the exact reason for the adjustment, and the Internal Revenue Code section authorizing that adjustment. Where there is an adjustment of the Rebate Recovery Credit (RRC), the notice should provide sufficient details about the EIP paid out in 2021 so that the taxpayer can determine the accuracy of the adjustment. With respect to adjustments to any EITC or CTC claimed, the notice should provide the reason for the adjustment, e.g., a duplicate claim for the child, or the correct number and amount of advance CTC payments received and not reported on the return.
Sufficient notice includes timely notice, and a notice will not be timely and afford a meaningful opportunity to challenge government action if it is received only a few days before a deadline. This is particularly true where the targeted population has literacy and access-to-representation challenges. The IRS needs to deal with the issue of mailing delays by adjusting the date of the notice to account for at least two weeks in delivery lags (See Ways and Means Chairman Pascrell’s letter in this regard.)
An opportunity to be heard includes effective and meaningful notice of the requirements and manner for requesting a hearing. Thus, notices that provide deadlines for actions – e.g., 90 days or 60 days – should include the specific due date on which the response should be filed. In the 21st century, this kind of computation is so technologically elemental, it is shameful the IRS still does not do this (or gets it wrong). Assisters should be able to see this information with respect to specific taxpayer inquiries.
Effective opportunity to defend by confronting any adverse witnesses, by presenting arguments and evidence orally, and by tailoring the opportunity to be heard “to the capacities and circumstances of those who are to be heard“
The Goldberg Court reasoned that for a welfare recipient, requiring written submissions is not sufficient, because literacy and education are issues; although informal procedures are allowed, a welfare recipient must be allowed to present their position orally. And while the Court recognized the government’s legitimate concern with minimizing the risk of erroneous payments and delays, “[m]uch of the drain on fiscal and administrative resources can be reduced by developing procedures for prompt pre-termination hearings and by skillful use of personnel and facilities.”
In the return filing, processing, and audit context, as I’ve discussed elsewhere, these requirements can be met in part by establishing a dedicated Family and Worker Benefit Unit (FAWBU). Compliance checks and audits should be handled by appointment – with a single employee assigned to the case. The IRS can learn a lot from federal and state agencies that work with the low income/no income population, including the Social Security Administration and the research arm of the Department of Health and Human Services. (You can watch the video of the Reimagining Tax Administration workshop here, where we discuss efforts to get people to show up for appointments to receive or maintain benefits.)
Audits and other compliance checks should provide the taxpayer with the option to mail, fax, or upload documentation. The use of template affidavits, such as Form 8836 Schedule A, will ease the administrative burden on these taxpayers, but oral testimony is essential with this population. Thus, taxpayers should be able to present such documentation at virtual or in-person appointments, where oral testimony can be obtained. IRS research has shown that office audits, where taxpayers can share their documentation and learn what more is needed, have a higher agreed-to rate and lower default rate than correspondence audits. IRS can utilize accessible technology to facilitate these appointments.
Access to Representation
It should be axiomatic, with the enactment of Taxpayer First Act §1402, amending IRC § 7526 to authorize the IRS to make direct referrals to low income taxpayer clinics (LITCs), that CSRs and IRS audit employees should be equipped with electronic tools to provide taxpayers who are unrepresented and whose income is at or below 250 % federal poverty level with direct referral information to LITCs. The IRS can program its systems such that when a CSR receives a call from a taxpayer, there is an indicator that the taxpayer’s most recent return or most recent IRP data appears to qualify the taxpayer for LITC assistance. Similarly, in any case selected for EITC or refundable CTC audit, the auditor should be required to explicitly discuss LITC referral information when the taxpayer is unrepresented. The IRS has LITC contact information, and if it is truly dedicated to cultural change and incorporating due process principles into tax administration, it will use this information proactively to advise taxpayers of the availability of assistance.
This is just a modest attempt at applying due process principles to tax administration. In my next post, I’ll look at the proposed dispute resolution mechanism for Advance CTC payments and make design suggestions so the process conforms with these principles.