my website The Taxpayer Advocate Service (TAS) will conduct Problem Solving Day events in communities throughout the country in the coming months and year. During these events, TAS employees from a local office will be available to assist taxpayers in person with tax problems they have not been able to resolve with the IRS. Generally, TAS can assist taxpayers whose problems with the IRS are causing financial difficulties, who’ve tried but haven’t been able to resolve their problems with the IRS, or believe an IRS system or procedure isn’t working as it should. And our service is free.

productively Why is TAS holding Problem Solving Days?

Congress created the Office of the National Taxpayer Advocate as we know it today through the IRS Restructuring and Reform Act of 1998 (RRA 98). The law further strengthened the role of TAS and provided for Local Taxpayer Advocates in each state. TAS maintains a geographic presence in each state, the District of Columbia, and Puerto Rico, and continues to look at changing taxpayer demographics to adjust its footprint to meet taxpayer needs. Recognizing the importance of personal contact, we work one-on-one with taxpayers and their representatives within our area to resolve their tax issues.

As the IRS develops its “Future State” plan that focuses on assisting taxpayers digitally rather than in person, the National Taxpayer Advocate continues to elevate her concerns about the plan through her Reports to Congress. Ms. Olson conducted twelve public forums in 2016 to hear from taxpayers throughout the country on their needs and preferences when dealing with the IRS. A consistent concern raised during the forums was IRS’s continuing trend away from person-to-person and face-to-face taxpayer service and compli­ance activities, including audit, collection, and appeals, as well as a declining geographic IRS presence and increased centralization. The National Taxpayer Advocate included her findings in her 2016 Annual Report to Congress Special Focus which discussed her vision for a taxpayer-centric 21st century tax administration.

We are Your Voice at the IRS. Look for a Problem Solving Day event in your community from the list below. Otherwise, you can contact your local TAS office by visiting

Getting Comfortable With The Home Office Deduction

One of the great things about setting up a home office is that you can make it as comfy as possible. Assuming you’ve done that, another good idea is getting comfortable with the home office deduction.
To qualify for the deduction, you generally must maintain a specific area in your home that you use regularly and exclusively in connection with your business. What’s more, you must use the area as your principal place of business or, if you also conduct business elsewhere, use the area to regularly conduct business, such as meeting clients and handling management and administrative functions. If you’re an employee, your use of the home office must be for your employer’s benefit.
The only option to calculate this tax break used to be the actual expense method. With this method, you deduct a percentage (proportionate to the percentage of square footage used for the home office) of indirect home office expenses, including mortgage interest, property taxes, association fees, insurance premiums, utilities (if you don’t have a separate hookup), security system costs and depreciation (generally over a 39-year period). In addition, you deduct direct expenses, including business-only phone and fax lines, utilities (if you have a separate hookup), office supplies, painting and repairs, and depreciation on office furniture.
But now there’s an easier way to claim the deduction. Under the simplified method, you multiply the square footage of your home office (up to a maximum of 300 square feet) by a fixed rate of $5 per square foot. You can claim up to $1,500 per year using this method. Of course, if your deduction will be larger using the actual expense method, that will save you more tax. Questions? Please give us a call.

Have A Household Employee? Be Sure To Follow The Tax Rules

Many families hire people to work in their homes, such as nannies, housekeepers, cooks, gardeners and health care workers. If you employ a domestic worker, make sure you know the tax rules.

Important distinction

Not everyone who works at your home is considered a household employee for tax purposes. To understand your obligations, determine whether your workers are employees or independent contractors. Independent contractors are responsible for their own employment taxes, while household employers and employees share the responsibility.
Workers are generally considered employees if you control what they do and how they do it. It makes no difference whether you employ them full time or part time, or pay them a salary or an hourly wage.

Social Security and Medicare taxes

If a household worker’s cash wages exceed the domestic employee coverage threshold of $2,000 in 2016, you must pay Social Security and Medicare taxes — 15.3% of wages, which you can either pay entirely or split with the worker. (If you and the worker share the expense, you must withhold his or her share.) But don’t count wages you pay to:

  • Your spouse,
  • Your children under age 21,
  • Your parents (with some exceptions), and
  • Household workers under age 18 (unless working for you is their principal occupation).

The domestic employee coverage threshold is adjusted annually for inflation, and there’s a wage limit on Social Security tax ($118,500 for 2016, adjusted annually for inflation).
Social Security and Medicare taxes apply only to cash wages, which don’t include the value of food, clothing, lodging and other noncash benefits you provide to household employees. You can also exclude reimbursements to employees for certain parking or commuting costs. One way to provide a valuable benefit to household workers while minimizing employment taxes is to provide them with health insurance.

Unemployment and federal income taxes

If you pay total cash wages to household employees of $1,000 or more in any calendar quarter in the current or preceding calendar year, you must pay federal unemployment tax (FUTA). Wages you pay to your spouse, children under age 21 and parents are excluded.
The tax is 6% of each household employee’s cash wages up to $7,000 per year. You may also owe state unemployment contributions, but you’re entitled to a FUTA credit for those contributions, up to 5.4% of wages.
You don’t have to withhold federal income tax or, usually, state income tax unless the worker requests it and you agree. In these instances, you must withhold federal income taxes on both cash and noncash wages, except for meals you provide employees for your convenience, lodging you provide in your home for your convenience and as a condition of employment, and certain reimbursed commuting and parking costs (including transit passes, tokens, fare cards, qualifying vanpool transportation and qualified parking at or near the workplace).

Other obligations

As an employer, you have a variety of tax and other legal obligations. This includes obtaining a federal Employer Identification Number (EIN) and having each household employee complete Forms W-4 (for withholding) and I-9 (which documents that he or she is eligible to work in the United States).
After year end, you must file Form W-2 for each household employee to whom you paid more than $2,000 in Social Security and Medicare wages or for whom you withheld federal income tax. And you must comply with federal and state minimum wage and overtime requirements. In some states, you may also have to provide workers’ compensation or disability coverage and fulfill other tax, insurance and reporting requirements.

The details

Having a household employee can make family life easier. Unfortunately, it can also make your tax return a bit more complicated. Let us help you with the details.

IRS Permits High-Earner Roth IRA Rollover Opportunity

Are you a highly compensated employee (HCE) approaching retirement? If so, and you have a 401(k), you should consider a potentially useful tax-efficient IRA rollover technique. The IRS has specific rules about how participants such as you can allocate accumulated 401(k) plan assets based on pretax and after-tax employee contributions between standard IRAs and Roth IRAs.

High-earner dilemma

In 2017, the top pretax contribution that participants can make to a 401(k) is $18,000 ($24,000 for those 50 and older). Plans that permit after-tax contributions (several do) allow participants to contribute a total of $54,000 ($36,000 above the $18,000 pretax contribution limit). While some highly compensated supersavers may have significant accumulations of after-tax contributions in their 401(k) accounts, the tax law income caps block the highest paid HCEs from opening a Roth IRA.

However, under IRS rules, these participants can roll dollars representing their after-tax 401(k) contributions directly into a new Roth IRA when they retire or no longer work for the companies. Thus, they’ll ultimately be able to withdraw the dollars representing the original after-tax contributions — and subsequent earnings on those dollars — tax-free.

An example

Participants can contribute rollover dollars to conventional and Roth IRAs on a pro-rata basis. For example, suppose a retiring participant had $1 million in his 401(k) plan account, $600,000 of which represents contributions. Suppose further that 70% of that $600,000 represents pretax contributions, and 30% is from after-tax contributions. IRS guidance clarifies that the participant can roll $700,000 (70% of the $1 million) into a conventional IRA, and $300,000 (30% of the $1 million) into a Roth IRA.

The IRS rules allow the retiree to roll over not only the after-tax contributions, but the earnings on those after-tax contributions (40% of the $300,000, or $120,000) to the Roth IRA provided that the $120,000 will be taxable for the year of the rollover.

Alternatively, the IRS rules allow the retiree to delay taxation on the earnings attributable to the after-tax contributions ($120,000) until the money is distributed by contributing that amount to a conventional IRA, and the remaining $180,000 to the Roth IRA.

Under each approach, the subsequent growth in the Roth IRA will be tax-free when withdrawn. Partial rollovers can also be made, and the same principles apply.

Golden years ahead

HCEs face some complex decisions when it comes to retirement planning. Let our firm help you make the right moves now for your golden years ahead.

Shifting Capital Gains to Your Children

If you’re an investor looking to save tax dollars, your kids might be able to help you out. Giving appreciated stock or other investments to your children can minimize the impact of capital gains taxes.

For this strategy to work best, however, your child must not be subject to the “kiddie tax.” This tax applies your marginal rate to unearned income in excess of a specified threshold ($2,100 in 2017) received by your child who at the end of the tax year was either: 1) under 18, 2) 18 (but not older) and whose earned income didn’t exceed one-half of his or her own support for the year (excluding scholarships if a full-time student), or 3) a full-time student age 19 to 23 who had earned income that didn’t exceed half of his or her own support (excluding scholarships).

Here’s how it works: Say Bill, who’s in the top tax bracket, wants to help his daughter, Molly, buy a new car. Molly is 22 years old, just out of college, and currently looking for a job — and, for purposes of the example, won’t be considered a dependent for 2017.

Even if she finds a job soon, she’ll likely be in the 10% or 15% tax bracket this year. To finance the car, Bill plans to sell $20,000 of stock that he originally purchased for $2,000. If he sells the stock, he’ll have to pay $3,600 in capital gains tax (20% of $18,000), plus the 3.8% net investment income tax, leaving $15,716 for Molly. But if Bill gives the stock to Molly, she can sell it tax-free and use the entire $20,000 to buy a car. (The capital gains rate for the two lowest tax brackets is generally 0%.)

People occasionally ask me which areas of tax administration worry me the most. There is certainly no shortage of candidates, but if I had to narrow it down, the IRS’s math and clerical error authority under IRC § 6213(b) and (g) would be right up there at the top of the list, along with the IRS correspondence examination program. In fact, I expressed my concerns about the IRS’s administration of its math error authority since my first Annual Report to Congress in 2001, when I was fresh from representing low income taxpayers as Executive Director of a Low Income Taxpayer Clinic. I’ve gone on to write, conduct research studies, and make legislative recommendations about math error authority in my 2002, 2003, 2006, 2011, and 2014 Reports to Congress, as well as congressional testimony in 2011 and 2015. My past concerns take on new meaning, what with the current Administration’s budget proposal echoing the former Obama Administration’s call for the IRS to be granted “correctable error” authority.

While I have offered many proposals to minimize improper payments, I believe Congress should not address the problem by delegating to the Treasury Department the authority to expand the IRS’s power to summarily assess additional tax liabilities, at least not without sufficient limits and oversight. The IRS is currently authorized to assess tax to correct math and clerical errors – arithmetic mistakes and the like – under summary assessment procedures that bypass procedural taxpayer rights protections. The Administration has proposed legislation that would delegate authority for the Treasury Department to expand the IRS’s summary assessment (or “math error”) authority to other “correctable” errors (by regulation) where:

  1. The information provided by the taxpayer does not match the information in government databases;
  2. The taxpayer has exceeded the lifetime limit for claiming a deduction or credit; or
  3. The taxpayer has failed to include with his or her return documentation that is required by statute.

In my opinion, summary assessment authority is appropriate in only one of the instances described above; namely, where there can be no doubt that the taxpayer has claimed amounts in excess of a lifetime limitation, income cap, or age requirement. In fact, Congress’ original legislation back in 1926 was intended to limit the IRS’s authority to summarily assess math errors to situations involving such unambiguous errors. (See H.R. Rep. No. 69-1, at 10-11 (1926); S. Rep. No. 94-938(I), at 375 (1976); H.R. Rep. No. 94-658, at 289 (1976)).

For example, in cases where it is clear on the face of the return that a taxpayer has claimed a credit in excess of a statutory limit, such as overclaiming the American Opportunity Tax Credit (AOTC), then the summary assessment process may be appropriate. The AOTC is a partially-refundable credit for qualified post-secondary education expenditures that is available only for the first four years of a student’s post-secondary education (see IRC § 25A(i).) Because the number of years claimed for each student is apparent on the face of current and past income tax returns, allowing the IRS to use math error procedures to stop the improper payment of capped claims may be appropriate and cost effective, although probably not as cost effective as alerting the taxpayer to the problem before or at filing, through software checks and warnings, and e-filing rejection of the return in real time so it can be corrected and resubmitted.

Without adequate safeguards and congressional oversight, however, significant expansion of the IRS’s math error authority could permit the IRS to take property without adequate due process, as described below. It may also violate taxpayer rights, discourage eligible taxpayers from claiming the Earned Income Tax Credit (EITC) and other credits, and waste resources by requiring taxpayers to contact the IRS to correct the IRS’s errors and inaccurate inferences. In the face of such risks, in my opinion, Congress should not grant the IRS broad discretion to use its summary assessment authority.

The Right to Judicial Review Before Paying an Audit Assessment is the Cornerstone of Due Process in the U.S. Tax System.

Under current law, if the IRS during an audit proposes a deficiency, the IRS must issue a Statutory Notice of Deficiency (SNOD), also known as a “90-day letter.” This letter explains the basis for the proposed deficiency and gives the taxpayer 90 days to file a petition with the Tax Court to contest the proposed deficiency (see IRC § 6213). A taxpayer who misses this deadline for filing a Tax Court petition can only seek judicial review by paying the assessment and filing a claim for refund. If the claim is denied or if no action is taken on the claim within six months, the taxpayer may file a refund suit in the federal district court or the Court of Federal Claims within the limitations period (see IRC §§ 6511, 6532, 7422). Low income taxpayers are less likely to be able to afford to pay the assessment before disputing it or navigate these more complicated procedures.

Empowering taxpayers to seek judicial review in a prepayment forum (i.e., before they pay) protects them from arbitrary administrative actions by the IRS, which might otherwise unjustly deprive them of property without due process. Taxpayers who cannot understand the IRS’s position, determine if they agree or disagree, and respond appropriately within the 30- and 90-day periods may be deprived of this key right. Therefore, even under normal deficiency procedures, confusing IRS correspondence, illiteracy, language barriers, and unequal access to competent tax professionals can cause taxpayers – particularly low income taxpayers – to miss these deadlines and lose access to judicial review in a prepayment forum.

Because prepayment judicial review is a cornerstone of due process in our tax system, any limitations on affording taxpayers access to prepayment judicial forums should be made in only the most compelling circumstances and when no other reasonable alternative solutions to a compliance problem exist.

Math Error Assessments Place the Burden on Taxpayers to Ask for the Right to Petition the Tax Court, Rather than Automatically Receiving That Right Under Normal IRS Procedures.

IRC §§ 6213(b) and (g) authorize the IRS to use its math error authority to summarily assess and immediately collect tax without first providing the taxpayer the right access to the Tax Court. If the taxpayer wants to preserve her right to petition the Tax Court, she must request an abatement of the assessment within 60 days. Initially Congress limited this summary assessment authority to situations involving mathematical errors (e.g., 2+2=5), (see Revenue Act of 1926, enacting IRC § 274(f); H.R. Rep. No. 69-1, at 10-11 (1926)). Congress later expanded math error authority to address “clerical errors” (e.g., inconsistent entries on the face of the return), and other circumstances where a return is clearly incorrect (e.g., omits a required Taxpayer Identification Number, uses a Social Security Number that does not match the one in the Social Security Administration’s Numident database, or claims tax credits in excess of statutory maximums).

Math Error Adjustments Are Intended to Allow Correction of Unambiguous Errors That Are Easy to Explain.

As I noted in my 2014 report, Congress was concerned about removing more situations from the deficiency procedures and placing them under the summary assessment procedures, particularly in the case of complicated errors. If taxpayers do not understand the supposed error, they may have difficulty deciding whether to request an abatement (assuming they understand that requesting an abatement is an option), and they are less likely to request an abatement within the shorter 60-day period applicable to summary assessments. Accordingly, Congress enacted IRC § 6213(b)(1), requiring that “[e]ach notice under this paragraph shall set forth the error alleged and an explanation thereof.”

In legislative history, Congress provided an example of how simple it expected math error notices to be, which we have paraphrased below:

Example from Legislative History: You entered six dependents on line x but listed a total of seven dependents on line y. We are using six. If there is one more, please provide corrected information.

Although the IRS has been working to simplify these notices for nearly 40 years, even its current notice on this very issue (i.e., inconsistent number of dependents on the return) does not identify the discrepancy as clearly as Congress envisioned. The notice states:

Current Math Error Notice (Document 6209): “We changed your total exemption amount on page 2 of your tax return because there was an error in the:

  • number of exemptions provided on lines 6a – 6d and/or
  • computation of your total exemption amount.”

Other math error notices are inscrutable. The IRS’s problem with math error notice clarity is a serious, longstanding, and well-documented problem that disproportionately affects low income taxpayers – the very taxpayers that Congress intends to claim the EITC and similar credits. Moreover, unclear math error notices jeopardize the taxpayer’s rights to be informed, to challenge the IRS’s position and be heard, and to appeal an IRS decision in an independent forum.

The IRS Should Attempt to Resolve Minor Inconsistencies With Third-Party Data Before Burdening Taxpayers and Issuing Math Error Notices.

Not every return that contains a typo or similar error contains an understatement. For example, the IRS should not automatically conclude that a taxpayer does not have a qualifying child just because the Taxpayer Identification Number (TIN) of the child listed on the return does not match a TIN in the IRS’s database. Such mismatches can be typos.

As reported in a research study published in my 2011 Annual Report to Congress, TAS studied a statistically valid sample of tax year 2009 accounts in which the IRS reversed all or part of its dependent TIN math error corrections. The IRS ended up abating all or part of the math error in 55 percent of the returns in which it originally assessed additional tax. Further, the study found that the IRS could have resolved 56 percent of these errors using information already in its possession (e.g., the correct TIN listed on a prior year return), rather than charging a math error and asking the taxpayer to explain the apparent discrepancy. In other words, the IRS imposed a burden on taxpayers in a large percentage of math error cases, generating phone calls and letters it could not timely handle, rather than investing a few minutes of research at the front end.

Based on this study, in 2011 I recommended that even if it finds a mismatch between the return and a reliable database, the IRS should not use summary assessment procedures before taking additional steps to reconcile the mismatch. The same holds true today. Until the IRS decides to (1) develop clear, specific and informative math error notices as Congress has directed at least since 1976; and (2) uses the data it has in its own possession to identify easily resolvable typographic errors without resorting to summary assessment authority, Congress should be very wary about granting the IRS additional authority.

In my next blog, I will discuss my concerns about specific aspects of the correctible error proposal. Stay tuned!

At TAS, we help taxpayers from all walks of life. When it comes to taxpayers with tax debt, some taxpayers have the resources to pay their debt. This blog focusses on the method the IRS uses to determine the amount of basic living expenses it should take into account if a taxpayer needs to pay his or her tax debt over time.

Congress directed the IRS to make sure taxpayers who enter into offers in compromise still have enough money to cover their basic expenses. Specifically, in Internal Revenue Code (IRC) § 7122(d)(2)(A), Congress told the IRS to “develop and publish schedules of national and local allowances designed to provide that taxpayers entering into a compromise have an adequate means to provide for basic living expenses.” The resulting Allowable Living Expense (ALE) standards have come to play a large role in many types of collection cases. For instance, if you want a non-streamlined installment agreement or are claiming an economic hardship, the IRS will want you to give them the information found on IRS Form 433-F, Collection Information Statement. IRS Form 433-F relies on the ALE standards to calculate a taxpayer’s monthly expenses, which in turn affects the resolution of the taxpayer’s case because it reflects how much he or she can afford to pay the IRS. ALEs cover common expenses such as food, clothing, transportation, housing, and utilities.

In its efforts to base the ALEs on reliable and consistent data, the IRS relies heavily on the Bureau of Labor Statistics. In particular, the IRS uses the Consumer Expenditure Survey (CES), which measures what people spend to live. I’ve identified these problems with the current ALE standards:

  • The standards are based on what taxpayers pay, not what it costs to live. And since many of the IRS standards are based on average expenditures, there is a chance the taxpayer’s expense is greater than the survey average. There is also a chance the taxpayer’s spending will be less than the survey average.
  • Spending habits are not consistent over income levels. For instance, while housing costs now account for about 25 percent of a family’s pre-tax income, among low income renters, some may spend up to half of their pre-tax income on rent.
  • The ALE standards are outdated and should include all expenses necessary to maintain the health and welfare of households today, including an allocation for digital technology access, child care, and retirement savings.
  • The IRS decreased the amounts for some of the expenses in 2016 based on its belief that expenses are going down. This was done despite the fact that the IRS and TAS reached a joint agreement in 2007 saying “the allowance amount for any ALE category cannot be decreased unless something economic changes significantly, such as a major sustained recession or depression.” Even with TAS’s concerns with the IRS decision last year, the IRS again decreased ALE standards in 2017. All of our research shows that costs are going up. More importantly, the average taxpayer is facing more financial strain. When income levels are broken into thirds, the typical household in the middle third found its financial slack drop from $17,000 in 2004 to $6,000 in 2014. This means that middle income families now have less opportunity to create a cushion for unexpected expenses, bouts with unemployment or long-term illness, or to make long-term savings a reality.

The IRS claims a lack of data prevents it from updating the ALE standards. But it’s hard to imagine taxpayers today surviving without daycare, a basic home computer, or retirement savings. Furthermore, Congress gave a clear directive. Congress didn’t intend for the IRS to develop a system that was “good enough” based on available information for the average taxpayer. Congress wants all taxpayers protected.

The case of Leago v. Commissioner demonstrates the degree of harm that can result from ALEs that don’t meet the needs of taxpayers. Mr. Leago suffered from a brain tumor that required surgery estimated to cost $100,000. Mr. Leago had no health insurance. In calculating how much Mr. Leago could afford to pay on his tax liability, the IRS refused to allow the cost of Mr. Leago’s operation because it wasn’t an expense he was currently paying. The Tax Court remanded this case back to Appeals twice and there is no further information after the second remand. However, it is clear from the record that the IRS expected Mr. Leago to forego any real possibility of surgery until he paid his IRS debt. A taxpayer with the resources to pay for the surgery would likely see a different outcome.

I’ve offered some alternatives to the IRS. For instance, the IRS could consider an alternative approach to determining household health and welfare, such as the family budget or self-sufficiency standard. My suggestions aren’t perfect; however, they’re a starting point. Until there is improvement, the ALE standards won’t truly capture what it costs for a taxpayer to pay for basic expenses. And any taxpayer who is unable to resolve their tax debt will be vulnerable to IRS collection action otherwise prohibited by Congress.

At a recent hearing before the Subcommittee on Oversight of the Committee on Ways and Means, I was asked a seemingly simple question about what types of guidance taxpayers can rely on. Unfortunately, the answer is not simple at all.

Generally speaking, there are three buckets of tax guidance:

1. Regulations – Treasury (tax) regulations are subject to a public notice-and-comment period pursuant to the Administrative Procedures Act (APA). Accordingly, Treasury regulations are deemed to be binding on both the IRS and taxpayers, except in rare instances where a taxpayer is able to persuade a court to invalidate the regulation. Treasury (tax) regulations are published in the Federal Register.

2. Other “Official” Tax Guidance – The IRS publishes various forms of guidance in the Internal Revenue Bulletin (IRB). This is referred to as “published guidance” and includes revenue rulings, revenue procedures, notices, and announcements. Documents published in the IRB generally do not go through a notice-and-comment process. The IRS is generally required to follow published guidance and to administer the law in accordance with it. However, it represents merely the IRS’s interpretation of the law, so taxpayers may challenge the position in court and seek to persuade a judge that their own interpretation of the law is correct.

3. Other “Unpublished” Guidance – The IRS provides guidance in many other forms. It issues tax forms and instructions as well as publications. It issues press releases. And it posts Frequently Asked Questions (FAQs) and answers on These forms of guidance are generally not reviewed by the Treasury Department, and sometimes do not even go through an internal review process. For that reason, the IRS takes the position that taxpayers may not rely on them and that the IRS may change its position at any time.

Many FAQs are posted on and therefore are not considered to be “published guidance.” However, some FAQs are published in the IRB and are considered binding on the IRS. For example, the IRS virtual currency guidance instructing taxpayers to treat virtual currencies as property was only issued in FAQ form. These FAQs were included as part of a notice that was published in the IRB. Accordingly, they represent the official position of the IRS, and the IRS is bound to maintain the position taken in the virtual currency FAQs unless and until it publishes further guidance in the IRB modifying or revoking them.

If an FAQ is not published in the IRB, the IRS may change its position at any time. Indeed, the IRS recently reminded its examiners that FAQs “and other items posted on that have not been published in the Internal Revenue Bulletin are not legal authority . . . and should not be used to sustain a position unless the items (e.g., FAQs) explicitly indicate otherwise or the IRS indicates otherwise by press release or by notice or announcement published in the Bulletin.” However, the fact that an FAQ had been posted may provide taxpayers with some degree of protection from penalties. In general, under IRC section 6662(d) and related regulations, a taxpayer may avoid penalties if it is determined he or she had “substantial authority” for the position taken, and “IRS information or press releases” are considered “authorities” for this purpose. But note the “in general” caveat, because the regulations regarding “substantial authority” are too complex to cover in a blog posting.

Apart from penalties, however, the IRS may change the answer to an FAQ (or unexpectedly reinterpret an FAQ) to the detriment of taxpayers who rely on them. One recent example that illustrates the problem with FAQs involves the Offshore Voluntary Disclosure Programs (OVDPs). The OVDPs are a series of IRS settlement programs. In the past, the IRS published its settlement programs in the IRB after incorporating comments from stakeholders and obtaining approval from the Treasury Department. Beginning March 23, 2009, however, the IRS issued an internal memorandum and a series of FAQs to promulgate the 2009 OVDP terms, which were not vetted by internal or external stakeholders or approved by the Treasury Department. All subsequent OVDPs have been governed by FAQs posted to the IRS website, rather than published in the IRB. (I’ve discussed this issue in detail in previous Annual Reports to Congress.)

The OVDP FAQs were issued in such haste and so poorly drafted that the IRS had to clarify them repeatedly. As a result, they treated similarly situated taxpayers inconsistently. These FAQs are frequently the subject of disputes. The IRS changes them regularly without providing any formal record of what changed and when. For example, between March 1, 2011, and August 29, 2011, the IRS made twelve changes to the 2011 Offshore Voluntary Disclosure Initiative FAQs, which were entirely removed from the IRS’s website in 2016. And as I noted in my recent FY 2018 Objectives Report to Congress, only certain practitioners know how the IRS interprets them. Disputes arise when it does not interpret them in accordance with their plain language. Taxpayers and practitioners who do not work on OVDP cases often are at a disadvantage because they do not know how the IRS interprets its OVDP FAQs.

This approach is unfair to taxpayers. Although the IRS may have felt an urgent need to provide OVDP guidance as FAQs in 2009, I see no compelling justification for continuing to run its OVDPs this way over seven years later. At the very least, the IRS should publish its FAQs and all updates to them in the IRB. It should also give serious consideration to issuing the OVDP FAQs using the notice and comment process established under the APA. Such a procedure could help avoid the problems large numbers of taxpayers have experienced with the OVDPs to date.

More generally, my view is that the IRS should use FAQs when there is a need to provide guidance on an emergency or highly expedited basis. Examples include relief provided to victims of Hurricane Katrina or victims of the Bernard Madoff Ponzi scheme. However, my recommendation is that the IRS converts FAQs into published guidance as quickly as possible whenever an issue affects a significant number of taxpayers or will have continuing application. U.S. taxpayers are entitled to finality, and the prospect that the IRS may change its position and assess additional tax after a tax return has been filed in reliance on an IRS’s position is simply unfair.

In addition, to ensure taxpayers understand the limitations of FAQs and other unpublished guidance, we recommend the IRS prominently display a disclaimer near such guidance that says something along the following lines: “Taxpayers may only rely on official guidance that is published in the Internal Revenue Bulletin. Various IRS functions try to provide unofficial guidance to taxpayers by posting Frequently Asked Questions (FAQs) and other information on Unless otherwise indicated, however, this information is not binding, and taxpayers may not rely on it because it may not represent the IRS’s official position.”

In an earlier blog I discussed my concern about how the IRS’s private debt collection (PDC) program affects taxpayers who are likely experiencing economic hardship. In this blog, I want to share my concern that the IRS is not making good business decisions as it implements the PDC initiative.

Since 2004, Internal Revenue Code (IRC) § 6306 has authorized the IRS to outsource tax debts to private collection agencies (PCAs). The IRS can pay the PCAs a fee of up to 25 percent of the amount they collect and the IRS itself is permitted to retain up to 25 percent of the amount PCAs collect. In 2015, Congress amended IRC § 6306 to require the IRS to assign “inactive tax receivables” to PCAs. The statute doesn’t require the IRS to assign recent assessments to PCAs, but if the taxpayer already has a debt assigned to the PCA, any new assessments will also be assigned. Here’s an example of how the process will work:

  • A taxpayer owes income taxes for 2012 and the IRS transfers that liability to a PCA on April 10, 2017;
    The same taxpayer files a return for 2016 on April 15, 2017. The return shows a liability of $5,000 but the liability is not paid with the return;
  • If the taxpayer does not pay the 2016 liability by May 15, 2017, the IRS issues Notice CP 14, a demand for payment of the $5,000 liability;
  • If payment is not received, the IRS assigns the $5,000 to the PCA, notifies the taxpayer of the assignment, and will pay commissions to the PCA on payments the taxpayer makes with respect to the 2016 liability on or after July 14, 2017.
  • The taxpayer’s 2016 liability in this example would not be an “inactive tax receivable,” so the IRS is not required by IRC § 6306 to assign it to a PCA, but it will exercise its discretion to do so.

Assigning the recent assessment to PCAs means the taxpayer will not get the usual IRS demands for payment, a process which takes place over about six months and consists of a series of four notices. IRS Notice CP 14 is the first such notice, and is the only notice the IRS intends to issue in the example. In Fiscal Year 2016, the Notice CP 14 resulted in $3.8 billion of payments. Notices generated after the CP 14, however, resulted in $4.7 billion of payments. The IRS plans to suppress those notices, allow the PCAs to solicit payments that might have been made in response to them, and pay the PCAs a commission on the amounts collected. Here is a chart showing the amounts the IRS receives for each of the four notices it issues to taxpayers whose debts are not assigned to PCAs.

I question whether, in light of actual taxpayer behavior, it makes good business sense to treat the same taxpayer’s liabilities differently for purposes of assigning them to PCAs. If the amount of the taxpayer’s recent debt ($5,000 in the example) is less than the older debt that was already assigned to a PCA, the taxpayer might be able to pay the recent tax debt while it is still in the notice stream, which would mean the IRS would not have to pay a commission to a PCA. Moreover, the new $5,000 liability in the example is self-assessed, not the result of an audit or other assessment process. As a recent TAS study demonstrated, the IRS is more likely to collect self-reported liabilities than other types of assessments. For example, it collects self-assessed liabilities at a rate at least twice as great as it collects audit assessments.

So, by bypassing the notice stream, the IRS:

Circumvents its normal procedures for collecting new debts which have proven to be effective;
Exercises its authority to outsource tax debt to treat taxpayers whose debts were assigned to PCAs differently than taxpayers whose debts were not assigned;
Treats the same taxpayer’s tax liabilities differently depending on when and how they arose; and
Imposes unnecessary costs on taxpayers and the public fisc in the form of commissions it pays PCAs.
The IRS, however, benefits from this approach because it retains 25 percent of the amount PCAs collect. Thus, the PCAs and IRS benefit from this truncated procedure while the public fisc, on the other hand, does not.

Every year the Taxpayer Advocate Service (TAS) helps thousands of people with tax problems. This story is only one of many examples of how TAS helps resolve taxpayer issues. All personal details are removed to protect the privacy of the taxpayer.

TAS assisted a taxpayer who had been waiting over two years for the IRS to return levied funds. The IRS levied a large amount of the taxpayer’s state refund for balance due amounts from prior year tax returns. TAS assisted the taxpayer with submitting amended tax returns for several years which reduced the balance owed each subsequent year. The case advocate worked diligently for the taxpayer and did not give up until the IRS finally processed the taxpayer’s amended tax returns and returned the levied funds.

When working with the Taxpayer Advocate Service, each individual or business taxpayer is assigned to an advocate who listens to the problem and helps the taxpayer understand what needs to be done to resolve their tax issue. TAS advocates will do everything they can to help taxpayers and work with them every step of the way. Occasionally we feature stories of taxpayers and advocates who work together to resolve complex tax issues. Read more TAS success stories.

I have always had concerns about outsourcing tax debts to private collection agencies (PCAs). First, I believe tax collection is an “inherently governmental function” within the meaning of section five of the 1998 FEAR Act that should be performed only by federal employees. Second, as a TAS study of the last private debt collection (PDC) initiative showed, the IRS is more efficient at collecting tax debt than PCAs are. Now that Internal Revenue Code (IRC) § 6306(c) requires the IRS to outsource some tax debt, my job is to ensure that its PDC program operates in accordance with the law and respects taxpayers’ rights. As I described in my 2016 Annual Report to Congress and in my recently released Fiscal Year 2018 Objectives Report to Congress, I believe the new PDC initiative inappropriately burdens taxpayers who are likely experiencing economic hardship, including those with incomes at or below the federal poverty level.

As of May 17, 2017, the IRS had assigned to PCAs the debts of approximately 9,600 taxpayers, approximately 5,900 of whom filed a recent return. The returns show:

  • These taxpayers’ median annual income is $31,689;
  • More than half have incomes below 250 percent of the federal poverty level; and
  • More than a fifth have incomes below the federal poverty level.

Here is the income distribution of taxpayers whose liabilities were assigned to PCAs as of May 17, 2017, compared to the federal poverty level.

As the Figure shows, more taxpayers belong to the income category of less than $10,000 than to any other category. These 1,041 taxpayers comprise 18 percent of the total, and the incomes of all but eight of them are below the federal poverty level. Almost half of the taxpayers – 2,827 or 48 percent – have incomes of $30,000 or less. Of these taxpayers, only 45 percent have incomes equal to or more than 250 percent of the federal poverty level.

Taxpayers at these low income levels are more likely to be vulnerable – more likely to speak another language, have a disability, be elderly, and have a lower level of education – as compared to taxpayers with higher incomes. They are also more likely to be perplexed or scared and more likely to make unnecessary payments. For this year’s Annual Report to Congress, we’ll be analyzing the accounts of taxpayers who have made payments to PCAs or entered into installment agreements. We’ll see how those arrangements stack up in terms of the federal poverty level and whether they leave taxpayers with less income than their allowable living expenses.

Even if the PCA is unsuccessful in collecting from the taxpayer and sends the case back to the IRS, the case will likely sit on the shelf in inactive status. The taxpayer will have to contact the IRS directly and provide financials to get into Currently Not Collectable (CNC) Hardship status. An IRS assistor, on the other hand, is more likely to unearth the fact that the taxpayer would likely meet CNC Hardship status and would then inform the taxpayer of what steps to take to avert enforcement action.

To its credit, at my urging, the IRS agreed to not assign to PCAs the liabilities of taxpayers who receive Social Security Disability Income (SSDI). These taxpayers by definition generally cannot earn more than $1,170 per month ($1,950 if he or she is blind) without having their SSDI payments reduced. Because of the IRS’s earlier refusal to exclude these debts, however, the necessary programming was not in place by the time the IRS began assigning tax liabilities to PCAs. Thus, as of May 17, 2017:

The debts of 445 taxpayers who received SSDI in 2016 were assigned to PCAs;
Of these 445 taxpayers, 160 filed recent returns; the median income shown on these returns was less than $10,600.
I also urged the IRS to consider not assigning to PCAs the liabilities of taxpayers who were not subject to levies on their Social Security Administration (SSA) retirement payments pursuant to the Federal Payment Levy Program because their incomes were at or below 250 percent of the federal poverty level (see IRM, Low Income Filter (LIF) Exclusion). The 250 percent measure operates as a proxy for economic hardship. In response, the IRS decided that for the first six months of the PDC program, these taxpayers’ debts would be included in the PCA inventory. The idea was that during that time, the IRS could explore how to identify taxpayers in this group who also have substantial assets. However, the IRS recently informed us that it intends to continue assigning these taxpayers’ debts to PCAs. As of May 17, 2017:

The IRS assigned to PCAs the liabilities of 875 taxpayers who received SSA in 2016;
Of these 875 taxpayers, 326 filed recent returns; the median income shown on these returns was less than $13,200.
The liabilities of taxpayers at these low income levels are so likely to be uncollectible that it is shameful the IRS doesn’t use this data to place these taxpayers’ accounts in CNC Hardship status instead of sending them to PCAs that cannot place the accounts into CNC Hardship status or assist with any other collection alternative. They will simply solicit payments the taxpayer may not be able to afford.

In light of the impact the current PDC initiative is having on taxpayers, particularly those experiencing economic hardship, I have determined that a compelling public policy warrants assistance to taxpayers whose debts have been assigned to PCAs. That means that these taxpayers qualify for assistance from TAS even if they don’t meet our usual criteria for case acceptance. In a later blog, I’ll explain why I believe the IRS in implementing the PDC program might also not be making good business decisions.

Read more about the Private Debt Collection (Part 1of 3).
Read more about the Private Debt Collection: Recent Debts (Part 3 of 3).