Taxpayer Proved That She Used Son's Email Account To Correspond with Her Attorney and Therefore Privilege Continues

On January 25, 2022 we posted 3rd Party Family Members Vitiate Privilege, where we discussed that in the case of U.S. v. Barbara Fairbank, the US government has requesting a Florida federal court to compel a woman in a $554,000 foreign bank account reporting violations case to produce emails sent between her attorneys and her son because they aren't protected communications.

Emails between Barbara Fairbank's attorneys and the son, Keith Hagaman, aren't eligible for attorney-client privilege because Hagaman is a third party desirous of remaining neutral who wasn't proved to be an agent either of his mother or her attorneys, the government told the court Thursday.

However the government has withdrawn its motion to compel the emails after reviewing Barbara Fairbank's response and confirming the nature of the documents. 

Fairbank said that she used the son's account because she was visiting California and did not have access to her own email.

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AICPA and Other Organizations Urge IRS To Waive Penalties & Pause Automatic Compliance Enforcement

A coalition of organizations representing tax industry professionals and stakeholders sent a joint letter to IRS Commissioner Chuck Rettig and Treasury Assistant Secretary for Tax Policy Lily Batchelder calling on the IRS to grant taxpayers penalty relief and to pause its compliance activities. The requests follow the IRS's reported failures to timely process returns and provide adequate customer service.

The coalition is made up of the American Institute of CPAs (AICPA), Latino Tax Pro, the National Association of Black Accountants (NABA), National Association of Enrolled Agents (NAEA), National Association of Tax Professionals (NATP), National Conference of CPA Practitioners (NCCPAP), National Society of Accountants (NSA), National Society of Black Certified Public Accountants (NSBCPA), National Society of Tax Professionals (NSTP), Padgett Business Services, and Prosperity Now.

Among the findings in the National Taxpayer Advocate's 2021 Annual Report to Congress was that the IRS took much longer than usual to process taxpayer responses to its notices, in some cases so long that automated systems triggered compliance notices to taxpayers who had been waiting on the IRS to communicate back.

A taxpayer that sent a request for abatement of a math error assessment (of which the IRS sent approximately 14 million in 2021), for example, could have their assessed liability moved to the collection process automatically if the IRS failed to reprogram its system to properly reflect the situation, in which the taxpayer isn't at fault. Though the IRS tried to prevent improper enforcement, "there were gaps," according to the NTA report.

The IRS Last Year Answered Only One of Every Nine Calls
To Its Customer Service Representatives, Resulting In Widespread "Frustration And Dissatisfaction" With How
The Agency Has Handled Taxpayer Correspondence
During The COVID-19 Pandemic, The Report Said.

In its letter, dated January 14, the coalition said it recognized that the IRS is aware taxpayers aren't getting what they need, but it added that "the Service has not taken reasonable actions that would meaningfully reduce unnecessary burdens" entering this tax season.

Because of these shortcomings, the letter requests that the IRS:

• discontinue automated compliance actions until the IRS has the resources to timely resolve the underlying issues contributing to long processing times and lack of transparency

• "align requests for account holds" with penalty abatement request processing times

• grant reasonable cause penalty waivers that do not affect a taxpayer's eligibility for a future first time abatement

• provide "target relief" regarding the underpayment of estimated tax and late payment penalties for tax years 2020 and 2021.

AICPA President and CEO Barry Melancon released a statement January 10 following a call with Treasury officials echoing sentiments in the coalition's letter.

"The AICPA is calling on the IRS to do more than simply state the obvious: Taxpayers and practitioners deserve solutions. We urge Members of Congress to join us in this effort," Melancon said.

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Source

Thomson Reuters

3rd Party Family Members Vitiate Privilege

So often family members want to attend conferences with tax attorneys or want to be copied on emails. This is an area where tax attorneys need to be sensitive that this can cause a waiver of their attorney-client privilege.

This is exactly what happened in the case of U.S. v. Barbara Fairbank, case number 4:20-cv-00132, in the U.S. District Court for the Northern District of Florida, where the US government has now requesting a Florida federal court to compel a woman in a $554,000 foreign bank account reporting violations case to produce emails sent between her attorneys and her son because they aren't protected communications.

Emails between Barbara Fairbank's attorneys and the son, Keith Hagaman, aren't eligible for attorney-client privilege because Hagaman is a third party desirous of remaining neutral who wasn't proved to be an agent either of his mother or her attorneys, the government told the court Thursday.

Therefore, the court should compel her to produce six emails sent between the attorneys and her son that she wishes to withhold, since they aren't eligible for that kind of protection, the government said.

The government sued Fairbank in March 2020, contending that she willfully failed to report her overseas accounts and consequently owes a little more than $554,000 in penalties and interest.

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IRS Office of Chief Counsel To Hire 200 More Attorneys

According to Law360, the Internal Revenue Service Office of Chief Counsel is looking to hire as many as 200 more attorneys to take on abusive tax schemes, the agency said on January 21, 2022.

The IRS said the chief counsel's office is looking to recruit attorneys for jobs at more than 50 locations across the country, including in Washington, D.C., in order to fight tax schemes including abusive microcaptive insurance arrangements and syndicated conservation easements.

Attorneys who are hired will serve on trial teams, handle U.S. Tax Court cases and provide legal advice to IRS staff conducting audits, as well as perform other duties, the agency said.

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"Beard" Saves Taxpayer When IRS Rejected Return

The Tax Court found in Willetts, TC Summary Opinion 2021-39, that an individual was entitled to the refund he claimed on his 2014 return. The Form 1040 the individual mailed to the IRS on April 14, 2018, was a properly filed return even though the IRS rejected it due to possible identity theft.

A taxpayer must submit a refund claim during the "limitations period." The limitations period ends on the later of: (1) three years from the time the relevant return is filed, or (2) two years from the time the tax was paid (limitations period). (Code Sec. 6511(a))

The taxpayer, James Willetts, got an extension, to October 15, 2015, to file his 2014 return. Willetts eventually mailed this return, on which he claimed a refund, to the IRS on April 14, 2018. The IRS received Willetts' 2014 Form 1040 on May 2, 2018, but did not process the return after deeming it "a return that may have been the result of potential identity theft."

The IRS did not dispute that Willetts had an overpayment for 2014. Rather, the IRS argued that Willetts failed to file a refund claim within the limitations period.

According to the IRS, Willetts' 2014 return wasn't "filed" on April 14, 2018, because the IRS rejected that return. Instead, the IRS argued, Willetts filed his 2014 return on July 29, 2019, when he submitted to the IRS a copy of his 2014 Form 1040. Therefore, Willetts failed to file his refund claim before the limitations period ended on October 15, 2018.

The Tax Court Determined That Willetts' 2014 Return Was "Properly Filed" On April 14, 2018.

First, the Tax Court determined that the 2014 Form 1040 Willetts submitted to the IRS on April 14, 2018, was a "return" under the test in Beard, (1984) 82 TC 766. Under the Beard test, a document is a return for limitations purposes if:

1. there is sufficient data to calculate a tax liability,

2. the document purports to be a return,

3. there is an honest and reasonable attempt to satisfy the requirements of the tax law, and

4. the taxpayer executed the document under penalties of perjury.

Next, the Tax Court determined that Willetts' 2014 return was filed on or before May 2, 2018. According to the Court, a return is considered filed when it is "delivered, in the appropriate form, to the specific individual or individuals identified in the Code or Regulations." (Allnut, TC Memo 2002-311)

In addition, a valid return is deemed filed on the day it is delivered, regardless of whether the IRS accepts it. (Blount, (1986) 86 TC 383)

The return Willetts mailed to the IRS on April 14, 2018, was delivered to the IRS on May 2, 2018. Thus, Willetts return was filed on the date it was delivered to the IRS, May 2, 2018. 

Since Willetts refund claim was embedded in his 2014 return his refund claim was filed concurrently with that return. Thus, Willetts' refund claim was filed on May 2, 2018, before the three-year period of limitation expired on October 15, 2018.

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How Wyoming Became One of The World’s Top Tax Havens With Its Version of the ‘‘Cowboy Cocktail’’

The honky-tonk bar under neon lights on the town square serves Grand Teton Amber Ale and Yellowstone Lemonade. The Cowboy Coffee Co. offers bison chili and the Five & Dime General Store sells Stetson hats and souvenirs made from bullets. 

In this tourist-friendly Western town, home to four celebrated arches fashioned from elk antlers, lawyers and estate planners draw customers with something far more exclusive.

 

It’s called the Cowboy Cocktail, and in recent years, the coveted financial arrangement has attracted a new set of outsiders to the least populated state in America.

 

The cocktail and variations of it — consisting of a Wyoming trust and layers of private companies with concealed ownership— allow the world’s wealthy to move and spend money in extraordinary secrecy, protected by some of the strongest privacy laws in the country and, in some cases, without even the cursory oversight performed by regulators in other states.

 

Millionaires and billionaires from around the world have taken note. In recent years, families from India to Italy to Venezuela abandoned international financial centers for law firms in Wyoming’s ski resorts and mining towns, helping to turn the state into one of the world’s top tax havens.

 

A dozen international clients who created Wyoming trusts were identified in the Pandora Papers, a trove of more than 11.9 million records obtained by the International Consortium of Investigative Journalists and shared with The Washington Post, exposing the movement of wealth around the world. The documents offer a rare look at Wyoming’s discreet financial sector and the people who rely on its services.

 

One was Moscow billionaire Igor Makarov, named under a 2017 law requiring the U.S. Treasury Department to list oligarchs and political figures close to the Russian government. Makarov’s company faced questions in the past about controversial transactions with Russia’s state-owned gas giant and about possible influence peddling involving the daughter of a U.S. congressman.

 

The matriarch of Argentina’s Baggio family, whose beverage company was accused by local officials of dumping industrial waste and whose son is embroiled in a money laundering investigation, also moved the management of its wealth to Wyoming.

 

So did the late Kalil Haché Malkún of the Dominican Republic. The polo player and army officer managed the private estates of reviled Dominican dictator Rafael Trujillo, who ordered the deaths of political enemies and thousands of Haitians.

 

For years, anti-money laundering experts and law enforcement have warned federal and state lawmakers that suspect money was flowing into U.S. tax havens, eluding taxing authorities, creditors and criminal investigators. In Wyoming, with the support of state lawmakers, the industry charged ahead, promoting a suite of financial arrangements to potential customers around the world.

 

At the heart of those arrangements are trusts, legal agreements that allow people to stash away money and other assets so they are protected from creditors and incur few or no tax obligations for themselves or their heirs. In exchange for these benefits, trust owners appoint an independent manager — typically a relative, friend or financial adviser — to determine when and how money is invested and spent.

 

Wyoming is one of a small number of states that allow customers to place a private company — often controlled by family members — at the helm of their trust, ensuring complete control of the assets and an additional layer of financial secrecy.

 

Some of the companies are unregulated, exempt from periodic examinations and other state scrutiny.

 

Customers can also establish a second company inside their trusts to hold the assets, such as property and bank accounts, concealing wealth behind yet another corporate layer.

 

It’s like a wrapped gift inside a wrapped gift. The more wrapping you put on, the harder it is to figure out if there has been tax avoidance or evasion or even financial crime. Very few people know what you’re doing.

— trust and estate expert Allison Tait

 

Using this approach – the Cowboy Cocktail – wealthy people can move money into the United States and invest and spend it with a level of anonymity found in few other tax havens.

 

“Wyoming is advertising itself as the new onshore-offshore — it’s going to get the clientele,” said University of Richmond law professor Allison Tait, a trust and estate expert who has studied the state’s layered financial instruments, including the cocktail.

 

“It’s like a wrapped gift inside a wrapped gift,” she said. “The more wrapping you put on, the harder it is to figure out if there has been tax avoidance or evasion or even financial crime. Very few people know what you’re doing, basically.”

 

The Haché family did not respond to requests for comment. Through his attorney, Makarov said the Treasury Department list was copied from a public source and “widely discredited,” that he has no personal relationship with Russian President Vladimir Putin and that he has never been charged with criminal wrongdoing. The attorney said Makarov’s Wyoming trust was properly disclosed.

 

A representative for the Baggio family declined to comment. The family has previously said that it reported the Wyoming trust to officials in Argentina.

 

There is no evidence in the Pandora Papers documents that the trusts in Wyoming sheltered criminal proceeds.

 

In a competitive global market, Wyoming’s financial incentives have stood out. One trust company 8,700 miles away in downtown Singapore recommended Wyoming on its website as a go-to tax haven that would  “completely shield” clients’ names and assets. “Offshore Wyoming, USA,” noted another firm, this one near the Dnieper River in Ukraine’s bustling capital, Kyiv.

 

Click here to read the full story : International Consortium of Investigative Journalists

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Wife Granted Relief From Taxes Attributable to Ex-Husband

Him A Louisiana doctors' ex-wife isn't on the hook for a deficiency on taxes she and her then-husband filed for 2015, the U.S. Tax Court said in Bradley M. Blappert and Catherine M. Blappert v Commissioner, docket number 10417-18, on January 8, 2022.

Catherine Blappert met Bradley Blappert, a physician, when she was working as a medical sales representative. The Blapperts married in 2005 and had four children during their marriage. In early 2013, Dr. Blappert opened a medical practice, Peak Medical Partners LLC (Peak Medical).

Throughout 2015, the Blapperts were married, and each of them earned income. Dr. Blappert was the primary income earner, and he had income from multiple sources. His medical practice received payments from insurance companies, which was the principal source of income. The practice also received patient copayments by credit card, which were processed using Square, a payment processing service. Dr. Blappert also received nonemployee compensation for providing contract medical services in settings outside his own practice. Ms. Blappert worked part-time as a sales representative for Peak Medical and a surgical center in the same building as Peak Medical for part of 2015. For her work with Peak Medical, she earned wages of $36,479.

Peak Medical employed professionals to handle its bookkeeping and finances. From the outset, Peak Medical employed an office manager to help with finances. The office manager handled both insurance payments and credit card payments. Dr. Blappert also hired a certified public accountant (CPA) for both the medical practice and the preparation of the Blapperts' personal tax return. Ms. Blappert delivered documents to the CPA if Dr. Blappert requested, but she was not otherwise involved with Peak Medical's bookkeeping, finances, or taxes. She did not participate in Dr. Blappert's meetings with the office manager or the CPA.

The Blapperts' have conflicting views of Ms. Blappert's role in Peak Medical's finances. Ms. Blappert characterized herself as having no meaningful role in the finances of Peak Medical, whereas Dr. Blappert characterized Ms. Blappert as "a partner" in the business, as having transacted with and accessed Peak Medical's bank accounts, and as having received a significant portion of Peak Medical's earnings as her wages.

Dr. Blappert's testimony in this regard was not credible. There is no evidence that Ms. Blappert was a partner in the business. Although Peak Medical has the word "partners" in its name, the Blapperts' tax return identifies Peak Medical as a sole proprietorship and Dr. Blappert as the proprietor. Likewise, there is no evidence of Ms. Blappert accessing Peak Medical's accounts while the business was in operation. The only record of Ms. Blappert transacting on behalf of Peak Medical is three withdrawals that she made from Peak Medical's bank accounts after it had wound down its operations. Lastly, at trial, Dr. Blappert characterized Ms. Blappert's approximately $36,000 of wages as a sales representative for Peak Medical as constituting a substantial portion of the business's profit. But the Schedule C, Profit or Loss from Business, shows gross receipts of nearly $650,000, and a net profit of approximately $276,000, after deducting for wages and other expenses. In sum, the documentary record conflicts with Dr. Blappert's testimony; there is no evidence of Ms. Blappert having any role in Peak Medical's finances.

Ms. Blappert's main role in 2015 was in the home. Because Dr. Blappert worked long hours, Ms. Blappert managed the household and served as the primary caregiver for the children, one of whom had special needs. The Blapperts maintained a household account that Ms. Blappert used to pay household expenses. She also made expenditures related to the children, including their Catholic school tuition.

Dr. Blappert began winding down his medical practice the fall of 2015. Peak Medical ceased operations in December 2015, and Dr. Blappert started a new job with Prime Healthcare in January 2016. In December 2016, Ms. Blappert made a total of three withdrawals from Peak Medical's two accounts, which were separate from the Blapperts' household account. She believed that she and Dr. Blappert were closing out the Peak Medical accounts because the business was no longer in operation.

The Blapperts filed a joint tax return for 2015. When Ms. Blappert signed the return, she believed that she and Dr. Blappert reported all of their income, and nothing gave her reason to believe otherwise. She knew Dr. Blappert had income from Peak Medical and contracts for his medical services, but she did not know the amounts. Ms. Blappert signed the return after reviewing the first page. She did not scrutinize the entire return because she did not know about the finances of Peak Medical and because the Blapperts had hired a CPA to prepare the return.

The Blapperts led a lifestyle in 2015 that was commensurate with their reported income. Their largest expenditure was for their children's Catholic school tuition.

According to information reported to the Commissioner by third parties, the Blapperts underreported Peak Medical's income by $108,318. The Commissioner mailed the Blapperts a notice of deficiency determining an income tax deficiency of $41,204. The Commissioner also determined a substantial understatement penalty under section 6662 and an addition to tax under section 6651(a)(1). The Blapperts resided in Louisiana when they timely filed a petition for redetermination.

After filing the petition, the Blapperts separated. They began living apart in January 2019. In June 2020, they divorced. While this deficiency case has been pending, Ms. Blappert submitted to the Commissioner a Form 8857, Request for Innocent Spouse Relief.

Catherine Blappert neither knew nor had reason to know that her ex-husband had underreported income from the medical practice he owned in 2015, so she is eligible for innocent spouse relief, the Tax Court said. The court said it was reasonable for Blappert to be unaware of the underreporting because she wasn't involved in the practice's bookkeeping or finances, and the couple lived a life commensurate with the reported income.

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Taxpayer Advocate's Report To Congress & Focuses on Taxpayer Impact of Processing and Refund Delays

National Taxpayer Advocate Erin M. Collins today released her 2021 Annual Report to Congress, calling calendar year 2021 “the most challenging year taxpayers and tax professionals have ever experienced.” The report says tens of millions of taxpayers experienced delays in the processing of their returns, and with 77 percent of individual taxpayers receiving refunds, “processing delays translated directly into refund delays.”

The report says “[t]he imbalance between the IRS’s workload and its resources has never been greater.” Since fiscal year (FY) 2010, the IRS’s workforce has shrunk by 17 percent, while its workload – as measured by the number of individual return filings – has increased by 19 percent. The report reiterates the National Taxpayer Advocate’s longstanding recommendation that Congress provide the IRS with sufficient funding to serve taxpayers well.

Major challenges for taxpayers

“There is no way to sugarcoat the year 2021 in tax administration,“ Collins wrote. “The year 2021 provided no shortage of taxpayer problems.”

“While my report focuses primarily on the problems of 2021, I am deeply concerned about the upcoming filing season,” Collins added in releasing the report. 

“Paper Is The IRS’s Kryptonite, And
The Agency Is Still Buried In It.”

As of late December, the IRS had backlogs of 6 million unprocessed original individual returns (Forms 1040), 2.3 million unprocessed amended individual returns (Forms 1040-X), more than 2 million unprocessed employer’s quarterly tax returns (Forms 941 and 941-X), and about 5 million pieces of taxpayer correspondence – with some of these submissions dating back at least to April and many taxpayers still waiting for their refunds nine months later.

Although e-filed returns fared better than paper returns, the report says millions of e-filed returns were suspended during processing due to discrepancies between amounts claimed on the returns and amounts reflected on IRS records.

The report says processing delays led to a cascade of customer service problems:

The IRS’s “Where’s My Refund?” tool often could not answer the question. Taxpayers attempted to check the status of their refunds on IRS.gov more than 632 million times last year, but “Where’s My Refund?” does not provide information on unprocessed returns, and it does not explain any status delays, the reasons for delays, where returns stand in the processing pipeline, or what actions taxpayers need to take, if any. For taxpayers who experienced significant refund delays, the tool often did not do its job.

Telephone service was the worst it has ever been. The combination of processing delays and questions about new programs like the AdvCTC caused call volumes to almost triple from the prior year to a record 282 million telephone calls. Customer service representatives (CSRs) only answered about 32 million, or 11 percent, of those calls. As a result, most callers could not obtain answers to their tax law questions, get help with account problems, or speak with a CSR about a compliance notice. “Among the lucky one in nine callers who was able to reach a CSR, the IRS reported that hold times averaged 23 minutes,” the report says. “Practitioners and taxpayers have reported that hold times were often much longer, and frustration and dissatisfaction was high throughout the year with the low level of phone service.”

The IRS took months to process taxpayer responses to its notices, further delaying refunds. The IRS sent tens of millions of notices to taxpayers during 2021. These included nearly 14 million math error notices, Automated Underreporter notices (where an amount reported on a tax return did not match the corresponding amount reported to the IRS on a Form 1099 or other information reporting document), notices requesting a taxpayer authenticate his or her identity where IRS filters flagged a return as potentially fraudulent, correspondence examination notices and collection notices. In many cases, taxpayer responses were required, and if the IRS did not process a response, its automated processes could take adverse action or not release the refund claimed on the tax return. The IRS received 6.2 million taxpayer responses to proposed adjustments and took an average of 199 days to process them – up from 74 days in FY 2019, the most recent pre-pandemic year.

The ten most serious problems encountered by taxpayers. By statute, the National Taxpayer Advocate is required to identify the ten most serious problems encountered by taxpayers in their dealings with the IRS. This year’s report details the following problems: processing and refund delays; challenges in employee recruitment, hiring, and training; telephone and in-person taxpayer service; transparency and clarity; filing season delays; limitations of online taxpayer accounts; limitations in digital taxpayer communications, including e-mail; e-filing barriers; correspondence audits; and the impact of collection policies on low-income taxpayers. For each problem, the report includes an IRS response.

Taxpayer Advocate Service administrative recommendations to the IRS

The report makes numerous recommendations to address taxpayer problems, including the following:

• Utilize scanning technology and reduce barriers to e-filing. The IRS could reduce its backlog of paper tax returns by using scanning technology to machine read returns, as many state tax agencies have been doing for more than ten years. In addition, some taxpayers who try to e file their returns are blocked for several reasons, including when they need to file certain tax forms that the IRS has not programmed its systems to receive electronically. These Taxpayer Advocate Service (TAS) recommendations would reduce the need for IRS employees to manually transcribe the data from paper returns – the primary cause of the backlog and of transcription errors that led to math error notices and refund delays. For individual taxpayers who filed on paper, the report says “roughly one out of every four returns had a transcription error that could trigger an unwarranted compliance action or an erroneous refund that the IRS might later seek to recover.”
• Deploy “customer callback” technology on all telephone lines, so taxpayers and tax professionals don’t have to wait on hold and can receive a return call when the next CSR is available. Customer callback technology is not a cure-all for IRS telephone operations because if the IRS workforce only has the capacity to answer 32 million telephone calls, as it did last year, customer callback will not enable the IRS to handle the 250 million calls that went unanswered. However, many taxpayers call the IRS multiple times before they get through, and if effectively used, customer callback technology could substantially reduce the need for repeat calls.
• Improve online taxpayer accounts and allow taxpayers to communicate with the IRS routinely by secure email. The report says online taxpayer accounts are plagued by limited functionality. For example, taxpayers generally cannot use their online accounts to view images of past tax returns, most IRS notices, or proposed assessments; file documents; or update their addresses. Similarly, the IRS generally does not communicate with taxpayers by email. Limitations on communicating with the IRS electronically frustrate taxpayers who have been conducting comparable transactions with financial institutions for more than two decades. This increases the number of telephone calls and pieces of correspondence the IRS receives and leads to more paper processing delays.
• Create and update a weekly “dashboard” on IRS.gov to provide the public with specific information about delays. The IRS has created a webpage, IRS Operations During COVID-19: Mission-critical functions continue, that provides certain high-level information. However, it does not provide detailed information on processing backlogs, saying for amended returns only that “[t]he current timeframe can be more than 20 weeks.” It does not provide detailed information on correspondence backlogs, saying only that processing mail “is taking longer than usual,” and “[t]he exact timeframe varies depending on the type of issue.” It does not provide information on recent telephone delays, even though doing so would give taxpayers a better sense of whether they should devote the time to calling. TAS recommends that the IRS post a filing season dashboard, updated at least weekly, that lists each category of work and the length of time it is taking to complete it. This should include the number of weeks to process original paper tax returns and amended paper tax returns, the number of weeks to process math error and other taxpayer correspondence by category, and the percentage of taxpayers who called the IRS the previous week and reached an employee.    

National Taxpayer Advocate “Purple Book” of legislative recommendations

The National Taxpayer Advocate’s 2022 Purple Book proposes 68 legislative recommendations for consideration by Congress. Among them are the following:

• Provide sufficient funding for the IRS to improve taxpayer service and modernize its information technology systems. The IRS receives its annual appropriation in four accounts: Taxpayer Services, Enforcement, Operations Support, and Business Systems Modernization. During the past year, there has been considerable discussion about substantially increasing funding for the Enforcement account and related activities in the Operations Support account. To address taxpayer problems identified in this report, TAS recommends that Congress substantially increase funding for the Taxpayer Services account.
• Extend the period for receiving refunds when the IRS postpones the tax filing deadline. When a taxpayer files a timely refund claim, the IRS generally is permitted to refund only amounts paid within the preceding three years. If a taxpayer files a return on April 15 in Year 1, the IRS generally may issue a refund until April 15 in Year 4. In 2020, the IRS postponed the filing deadline for tax year 2019 tax returns from April 15 to July 15 due to the COVID-19 pandemic. Taxpayers who filed their returns on July 15, 2020, may reasonably believe they have until July 15, 2023, to obtain full refunds. However, income tax withholding and estimated tax payments for tax year 2019 are deemed paid on April 15, 2020. As a result, refund claims filed after April 15, 2023, will be limited to the amounts taxpayers paid or were deemed to have paid by April 15, 2020. A similar issue will arise in 2024 because the IRS postponed the 2021 filing deadline to May 17. This result was not anticipated and will prevent some taxpayers from receiving the full refunds to which they are otherwise entitled. TAS recommends Congress clarify that a postponement of the filing deadline extends the lookback period for paying refunds.
• Authorize the IRS to establish minimum standards for paid tax return preparers. Most taxpayers hire tax return preparers to complete their returns, and visits to preparers by Government Accountability Office and Treasury Inspector General for Tax Administration auditors posing as taxpayers, as well as IRS compliance studies, have found paid preparers make significant errors that both harm taxpayers and reduce tax compliance. Ten years ago, the IRS sought to implement minimum preparer standards, including requiring otherwise non-credentialed preparers to pass a basic competency test, but a federal court concluded the IRS could not do so without statutory authorization. TAS recommends Congress provide that authorization.
• Expand the U.S. Tax Court’s jurisdiction to hear refund cases. Under current law, taxpayers who owe tax and wish to litigate a dispute with the IRS must go to the U.S. Tax Court, while taxpayers who have paid their tax and are seeking a refund must file suit in a U.S. district court or the U.S. Court of Federal Claims. The Tax Court is an easier forum to navigate, and it has established relationships with the Low Income Taxpayer Clinics and other pro bono programs that assist taxpayers when they litigate their cases in Tax Court. TAS recommends that taxpayers be given the option to litigate all tax disputes in the U.S. Tax Court.
• Restructure the Earned Income Tax Credit (EITC) to make it simpler for taxpayers and reduce improper payments. TAS has long advocated for dividing the EITC into two credits: (i) a refundable worker credit based on each individual worker’s earned income unrelated to the presence of qualifying children and (ii) a refundable child credit. For wage earners, claims for the worker credit could be verified with nearly 100 percent accuracy by matching claims on tax returns against Forms W-2, reducing the improper payments rate on those claims to nearly zero. The portion of the EITC that currently varies based on family size would be combined with a child credit into a larger family credit. The National Taxpayer Advocate published a report making this recommendation in 2019, and TAS continues to advocate for it.
• Expand the protection of taxpayer rights by strengthening the Low Income Taxpayer Clinic (LITC) program. The LITC program effectively assists low-income taxpayers and taxpayers who speak English as a second language. When the LITC grant program was established in 1998, the law limited annual grants to no more than $100,000 per clinic. The law also imposed a 100 percent “match” requirement (meaning a clinic cannot receive more in LITC grant funds than it is able to match on its own). The nature and scope of the LITC program has evolved considerably since 1998, and those requirements are preventing the program from providing high quality assistance to eligible taxpayers. TAS recommends that Congress remove the per-clinic cap and allow the IRS to reduce the match requirement to 50 percent where doing so would provide coverage for additional taxpayers.

Other sections in the report

The report contains a taxpayer rights assessment that presents performance measures and other relevant data, a description of TAS’s case advocacy operations during FY 2021, a summary of key TAS systemic advocacy accomplishments, and a discussion of the ten federal tax issues most frequently litigated during the preceding year. The section on most litigated tax issues for the first time contains an analysis of substantially all cases petitioned in the Tax Court rather than simply decided cases, providing a much broader view of issues taxpayers bring to court. Also for the first time, the report includes a section titled “At a Glance,” which provides concise summaries of the ten “most serious problems.” It is intended to give readers a quick overview of each issue so they can decide which ones they want to read about in depth. 

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