Taxpayer Advocate Service News
  1. Disaster Relief for Taxpayers Affected by California Wildfires

    Taxpayers affected by the wildfires in California that began October 8, 2017 may qualify for tax relief from the Internal Revenue Service. The President declared that a major disaster exists in the state of California and as of October 16, 2017, the following counties are impacted:

    • Butte
    • Lake
    • Mendocino
    • Napa
    • Nevada
    • Sonoma
    • Yuba

    Taxpayer who reside or have a business in these counties may qualify for tax relief.

    Tax assistance and information is available on the IRS’s website for those impacted by the California wildfires. The IRS continues to update this information as details are available. Please visit this site for new and updated information.

    All California Taxpayer Advocate Service (TAS) offices are open and ready to assist taxpayers. You may visit the TAS website to find your local office under the Contact Us page.

  2. NTA Blog: Affordable Care Act Estimators - The Taxpayer Advocate Service Provides Self-Help Tools to Assist Taxpayers With Complex Affordable Care Act Requirements

    With the open enrollment period for the Health Insurance Marketplace beginning November 1st, it is the appropriate time to remind taxpayers and preparers of the various Affordable Care Act (ACA) estimators the Taxpayer Advocate Service (TAS) has developed and made available to the public. Whether the taxpayer is an individual or employer, we have several tools available to assist in estimating credits and payments related to the ACA. Keep in mind that they only provide estimates, rather than accurate calculations, to use as a guide in making decisions regarding the taxpayer’s tax situation.


    Tools for Individuals


    The Premium Tax Credit (PTC) Change Estimator


    TAS developed the Premium Tax Credit Change Estimator to help estimate how the amount of a taxpayer’s premium tax credit (PTC) will change if his or her income or family size changes during the year.  This is especially important if the taxpayer receives the advanced premium tax credit (APTC). In tax year (TY) 2016, through April 27, 2017, about 4.9 million returns reported APTC. If the taxpayer is an APTC recipient, he or she must reconcile on Form 8962, Premium Tax Credit (PTC), the APTC amount received throughout the tax year with the amount of PTC to which he or she is entitled. The taxpayer must repay any excess APTC received, unless his or her household income is less than 400 percent of the applicable federal poverty line, in which case a repayment limitation may apply.  


    Changes in circumstances that occur at some point during the tax year could impact the amount of PTC to which the taxpayer is entitled. If the taxpayer experiences a significant change in household income, moves to a different zip code, has a birth or death in the family, or change in marital status, the amount of PTC to which he or she is entitled may change. If the taxpayer does not report this change to the Marketplace and continues receiving the same amount of APTC for the remainder of the tax year, he or she may be in for an unpleasant surprise when reconciling the credit on Form 8962. This estimator tool will help determine how much the PTC amount should change if a taxpayer experiences a change in income or family size so he or she can prevent having an unexpected balance due as a result of receiving excess APTC. Keep in mind that the estimator does not provide assistance if the taxpayer moves to another zip code or experiences a change in marital status. In addition, the estimator does not report changes in circumstances to the taxpayer’s Marketplace. To report changes and to adjust the amount of APTC, a taxpayer must contact his or her Health Insurance Marketplace directly.


    Individual Shared Responsibility Provision (ISRP) - Payment Estimator


    Under the ACA, an individual taxpayer and each member of the taxpayer’s tax household must: (1) have qualifying healthcare coverage (known as minimum essential coverage), (2) qualify for a coverage exemption, or (3) make an individual shared responsibility payment (ISRP) when filing a tax return. Individuals use Form 8965, Health Coverage Exemptions, to report a coverage exemption granted by the Marketplace or to claim a coverage exemption on a tax return. In TY 2016, through April 27, 2017, approximately 4 million returns reported the ISRP, of which the average amount was $708. TAS developed the Individual Shared Responsibility Provision – Payment Estimator to assist in estimating the amount a taxpayer may have to pay if he or she did not have minimum essential coverage during the year and does not qualify for any available exemptions. More information about ISRP exemptions is available at Individual Shared Responsibility Provision - Exemptions on irs.gov.

    Keep in mind that this tool can only provide an estimate of the ISRP. For an accurate determination of the ISRP amount due, taxpayers or their preparers must use the Shared Responsibility Payment Worksheet in the instructions for Form 8965.


    Tools for Employers


    Employer Shared Responsibility Provision (ESRP) Estimator


    TAS recently developed a tool to help employers understand how the employer shared responsibility provision (ESRP) under Internal Revenue Code §4980H apply to their organization. As background, the ESRP applies to applicable large employers (ALEs) - generally, that means employers that had an average of at least 50 full-time employees (including full-time equivalent employees - FTEs), during the preceding calendar year. Employers can use the Employer Shared Responsibility Provision Estimator to determine:

    • The number of the organization’s full-time employees, including FTEs,
    • Whether the organization might be an ALE, and
    • If the organization is an ALE, an estimate of the maximum amount of the potential liability for the ESRP that could apply to it based on the number of FTEs that it reports if it fails to offer coverage to its full-time employees.

    The estimator will not report a payment estimate to the IRS or interact with the employer’s tax return or tax account information. It is intended only as a guide to help employers understand the ESRP. Employers will not report or include an ESRP payment with any tax return or information return they may file. Instead, based on information from the organization’s tax return and from its employees’ tax returns, the IRS will calculate the potential ESRP payment and contact the employer to inform it of any potential liability. The employer will then have an opportunity to respond before any assessment or notice and demand for payment is made.

    This estimator is designed only for 2016 and forward. For 2015, transition rules are applied in determining the payment. For information about these rules and how to determine the payment for 2015, see the ESRP Regulations.


    Small Business Health Care Tax Credit (SBHCTC) Estimator


    TAS developed the Small Business Health Care Tax Credit Estimator to help small businesses and their preparers navigate the complex rules to determine eligibility for the SBHCTC. The estimator will also estimate the amount of the credit a small business taxpayer might receive. If a taxpayer is an eligible small employer, the SBHCTC can help the taxpayer provide health insurance coverage to its employees. For tax years beginning in 2014 or later, the credit can be up to 50 percent of the premiums the employer paid for health insurance coverage under a qualifying arrangement, or, if the organization is an eligible tax-exempt employer, up to 35 percent of premiums it paid.

    This tool provides small businesses (including eligible exempt organizations) with an estimate for TY 2014 and beyond; however, some figures used in determining the credit are indexed for inflation. Because of this, for future years, the estimator cannot provide a detailed estimate. To calculate the actual credit, the employer must use Form 8941, Credit for Small Employer Health Insurance Premiums. In addition, this estimator does not determine whether the health insurance coverage offered by the employer is an eligible plan. It also does not determine which employees are considered employees for purposes of determining the credit.

    Subscribe to the NTA’s Blog and receive updates on the latest blog posts from National Taxpayer Advocate Nina E. Olson. Additional blogs from the National Taxpayer Advocate can be found at www.taxpayeradvocate.irs.gov/blog.

    The views expressed in this blog are solely those of the National Taxpayer Advocate. The National Taxpayer Advocate is appointed by the Secretary of the Treasury and reports to the Commissioner of Internal Revenue. However, the National Taxpayer Advocate presents an independent taxpayer perspective that does not necessarily reflect the position of the IRS, the Treasury Department, or the Office of Management and Budget.

  3. NTA Blog: Earned Income Tax Credit (EITC)- TAS Study Finds Informing Taxpayers Can Help Avert Future Noncompliance

    Earned Income Tax Credit (EITC): TAS Study Finds that Sending an Informative, Tailored Letter to Taxpayers Who Appear to Have Erroneously Claimed EITC Can Avert Future Noncompliance

    Taxpayers can claim the Earned Income Tax Credit (EITC) in more than one tax year, so using the audit as an opportunity to educate them about the requirements for claiming EITC is of particular benefit to them and to the IRS. If a taxpayer claims the credit in error but understands whythere was an error, he or she can not only become compliant for the year of any audit, but remain compliant going forward. However, audits are expensive for both the IRS and taxpayers, and are intrusive and intimidating for the taxpayer. There are many EITC returns the IRS does notaudit but identifies as containing an error. Thus, while the IRS may not have the resources to audit these taxpayers, through other cost-effective approaches, it can educate them about why they appear to have erroneously claimed EITC, and avert future noncompliance.

    To investigate this possibility, in 2016 the Taxpayer Advocate Service (TAS) conducted a study to see whether providing taxpayers with more tailored information about their claims for EITC, which appeared to be erroneous, would help them avoid making errors in the future. (Our methodology is described below.) We learned that this approach does avert noncompliance, especially when the taxpayer’s apparent mistake was not meeting the relationship requirement for claiming EITC. Actually, we projected that sending an educational letter to all taxpayers whose 2014 returns appeared to be erroneous because the relationship test was not met would have averted about $47 million of erroneous EITC claims on these taxpayers’ 2015 returns.     

    Here is how we carried out the study. We selected a representative sample of taxpayers the IRS had identified as having erred in claiming EITC on their 2014 returns via its Dependent Database (DDb) rules, but whose 2014 returns were not audited. There were over 1.9 million taxpayers who tripped only the DDb rules we studied; only about 6,500 of these taxpayers were actually audited. We sent over 7,000 taxpayers one of three versions of an educational letter. The letter was sent out under my signature and was mailed during the first few weeks of January, before the start of the 2016 filing season. In fact, to enhance the saliency of the communication, TAS sent the letter in envelopes printed with “Important Tax Information Inside,” in red, so taxpayers expecting Forms W-2 might actually open the envelope and read the letter. 

    Depending on the DDb rule broken, the letter identified the error the taxpayer appeared to have made on the 2014 return as: the relationship test was not met, the residency test was not met, or another taxpayer claimed the credit with respect to the same qualifying child or children. We then described, in plain English, the basic eligibility requirements related to the relevant error. In addition, we reminded each taxpayer that if he or she received Temporary Assistance to Needy Families (TANF), food stamps, or other public benefits for a given child, that did not necessarily mean the taxpayer qualified for EITC with respect to that child. I have not seen any other IRS publication or communication alerting taxpayers to this basic fact. We also told taxpayers that this was not an audit – we were simply contacting them to prevent future problems and help educate them.

    Our control group consisted of a representative sample of over 14,000 taxpayers whose 2014 returns were also not audited and had similar characteristics as the returns of taxpayers who received the TAS letter, but who were not sent the TAS letter. The study compared the level of compliance shown on 2015 returns filed by taxpayers who were sent the TAS letter to compliance shown on the 2015 returns filed by taxpayers in the control group, as well as to the 2015 returns of those taxpayers who were actually audited for breaking the same DDb rule on their 2014 returns. Our findings for the population studied are statistically valid at the 95 percent confidence level.   

    The study showed that the taxpayer’s improved compliance behavior depended on the type of DDb rule that was broken. For example, when the error on the 2014 return appeared to be that the relationship test was not met, taxpayers who were sent the TAS letter were less likely to repeat that error on their 2015 returns than taxpayers in the control group. Specifically, those in the control group repeated their error 77.3 percent of the time, compared to 74.7 percent for the TAS group, an improvement of 2.6 percent, which is statistically significant. Taking into account the number of 2014 returns that appeared to repeat this error (and only this error) in 2015, the TAS letter averted about 20,000 erroneous EITC claims in 2015. The average amount of EITC paid to 2014 claimants was more than $2,400, so we projected that sending the TAS letter to all taxpayers who did not appear to meet the relationship test would have averted about $47 million of erroneous EITC claims. We did not quantify the cost of sending letters to the nearly 1.2 million taxpayers who appeared to have made this error, but even if the cost would be $2 per letter, for a total cost of $2.4 million, the cost of sending the letter would be far outweighed by the increased compliance.

    When the error was that there were duplicate claims (i.e., another person claimed the same qualifying child or children), the TAS letter prevented taxpayers from filing returns on which they claimed EITC, compared to the control group. Audited taxpayers were no more likely to file EITC returns compared to taxpayers who received the TAS letter, and were less likely to file EITC returns compared to the control group. However, audited taxpayers were more likely to trip an EITC DDb rule on those returns than taxpayers who received the TAS letter or taxpayers in the control group.  

    When the error on the 2014 return appeared to be that the residency test was not met, taxpayers who received the TAS letter were slightly less likely to repeat the same error on their 2015 returns than taxpayers in the control group, but this result was not statistically significant.    

     We conducted a similar study in 2017 prior to the filing season. The educational letter we are using is the same as in the 2016 study, except that this year’s letter also reminds taxpayers that if they cannot claim a child for the EITC, they may still be able to receive the “childless worker” EITC. In addition, in a letter to a separate group of taxpayers who appeared to not meet the residency test we offered an additional resource: a toll-free phone number the taxpayer can call to talk with a TAS employee about their eligibility for the EITC.  

    Because it appears that taxpayers failing the residency test are not as responsive to the educational letter as other taxpayer groups, it may make sense to follow up the letter experiment with focus groups of these taxpayers. We could then learn how they perceived and understood the information the letter provided. Moreover, this population might be sensitive to repetitive multi-year touches, as residency tends to change within years and between years. Nevertheless, the 2016 TAS study shows that for a minimal expense of sending an informative, direct, personal, tailored letter, there can be a significant compliance impact in at least some situations. 


    Additional blogs from the National Taxpayer Advocate can be found at www.taxpayeradvocate.irs.gov/blog.

    The views expressed in this blog are solely those of the National Taxpayer Advocate. The National Taxpayer Advocate is appointed by the Secretary of the Treasury and reports to the Commissioner of Internal Revenue. However, the National Taxpayer Advocate presents an independent taxpayer perspective that does not necessarily reflect the position of the IRS, the Treasury Department, or the Office of Management and Budget.

  4. NTA Blog: IRS policy weakens requirements for penalties

    IRS Administrative Policy and Recent Litigation Weaken Supervisory Approval Requirement for Penalties

    In the past, I’ve written extensively about penalties – touching on topics of fairness, equity, and whether penalties are effective in promoting taxpayer compliance. See my 2014 Most Serious Problem and my 2008 study: A Framework for Reforming the Penalty Regime. Today, I want to focus on a procedural requirement the IRS must follow in order to assess a penalty. In 1998, Congress added Section 6751 to the Internal Revenue Code (IRC), and subsection (b) provides that no penalty “shall be assessed unless the initial determination of such assessment is personally approved (in writing) by the immediate supervisor of the employee making the penalty determination.” This provision protects a taxpayer’s right to a fair and just tax system by ensuring penalty decisions are appropriate in light of the facts and circumstances. There is an exception for penalties automatically calculated through electronic means. The IRS has interpreted this exception to include any penalties calculated through its Automated Under Reporter (AUR) program, which matches income reported on a taxpayer’s return with income reported to the IRS by third-party payors.

    In this blog, I’d like to discuss one of my past legislative recommendations, which answers the question: should an accuracy-related penalty imposed on the basis of negligence be calculated through electronic means and exempt from the supervisory approval requirement? I also want to delve into some recent court decisions discussing two key questions regarding IRC § 6751(b): When does this supervisory approval have to occur? And, can a taxpayer challenge the IRS’s failure to obtain supervisory approval when the tax has not yet been assessed? Although my legislative recommendation makes the case that accuracy-related penalties based on negligence should always require supervisory approval, the U.S. Tax Court and the Court of Appeals for the Second Circuit are currently split on when the supervisory approval has to occur and when a failure to obtain it may be challenged. 

    Should accuracy-related penalties based on negligence be automatically calculated through electronic means and be exempt from the supervisory approval requirement? 

    The IRS maintains that penalties calculated through its AUR program are automatically calculated through electronic means and thus do not require supervisory approval under IRC § 6751(b). However, in determining whether to assert the accuracy-related penalty based on negligence, the IRS should examine whether the taxpayer’s actions constituted a reasonable attempt to comply with the tax laws, which can be demonstrated by the taxpayer’s facts and circumstances. Under IRC § 6664(c)(1), the negligence penalty does not apply to any portion of an underpayment if the taxpayer had reasonable cause and acted in good faith. By using an automated process to assert these penalties and not having a supervisor review the determinations, the IRS does not consider the facts and circumstances of a case until the taxpayer contacts the IRS to challenge the proposed penalty. Taxpayers who did make reasonable attempts to comply and acted in good faith must take extra, burdensome steps to rid themselves of arbitrary penalties.  

    I would argue that the IRS should never rely solely on its electronic systems to automatically calculate a penalty based on negligence without the involvement of an employee. For example, the IRS should not assume that a taxpayer’s failure to include third-party information returns for two consecutive years means the taxpayer didn’t exercise ordinary and reasonable care in the preparation of the return – which is how the AUR system was programmed to assert the penalty based on negligence. In 2013, TAS performed a study to determine whether accuracy-related penalties increased compliance and found that Schedule C filers receiving accuracy-related penalties by default assessment or who appealed the penalties actually had worse compliance for years thereafter. Thus, it is entirely possible that by assessing penalties automatically, the IRS is signaling that it believes taxpayers are bad actors and taxpayers increase their future noncompliance to conform to that belief. I call this the “Oh yeah? Well, I show you” response.

    Even if the IRS maintains that it can program certain facts into its systems to identify negligence, at a bare minimum, these determinations should be reviewed by a supervisor. This provides a check on penalty determinations calculated by the AUR, where the programming cannot take into account a taxpayer’s unique facts and circumstances. As I recommended to Congress, the Code should require managerial approval prior to assessment of the accuracy-related penalty imposed on the portion of underpayment attributable to negligence or disregard of rules or regulations under IRC § 6662(b)(1).

    When does the supervisory approval required by IRC § 6751(b) have to occur and when may a taxpayer challenge the IRS’s failure to obtain supervisory approval?

    Because IRC § 6751(b) requires supervisory approval of the “initial determination of such assessment” before the IRS can assess a penalty, there is a question as to whether this approval may occur at any time up until assessment.  However, as detailed in the dissent in Graev v. Commissioner, allowing the approval to occur at any time leads to a troubling result when the IRS no longer has the discretion to change the assessment and the taxpayer can’t challenge the IRS’s failure to comply with it in court.  

    In Graev v. Commissioner, the IRS disallowed a charitable deduction for the donation of a façade easement, and the revenue agent’s manager approved a 40 percent gross valuation misstatement penalty under IRC § 6662(h). IRS Counsel subsequently recommended the IRS assert, in the alternative, the 20 percent accuracy-related penalty under IRC § 6662(a), which was included on the notice of deficiency, but not submitted for supervisory approval. The taxpayers argued the IRS could not assess the 20 percent penalty because it failed to comply with the IRC § 6751(b)(1) requirement for supervisory approval.  

    Focusing on the plain language of the statute, a majority of the U.S. Tax Court held that it was premature to conclude the IRS had failed to comply with the supervisory approval requirement because the penalty had not yet been assessed. The written approval of the initial determination of the assessment could occur at any time before the assessment is made. In this case, assessment could not happen until the Tax Court’s decision became final and unappealable.

    According to the dissent in Graev, “[t]he fact that a rule is cast as a bar on ‘assessment’ does not preclude pre-assessment consideration of compliance with that rule.”  The dissent held that part of the IRS’s burden of production under IRC § 7491(c) in penalty deficiency cases is showing compliance with IRC § 6751(b). Moreover, the statute requires approval by a revenue agent’s supervisor at a time when the supervisor still has the ability to approve or disapprove the penalty. Such approval would be meaningless once the taxpayer petitions the Tax Court because it is the Tax Court that now determines the amount of the liability that will be assessed

    After Graev was decided, the Second Circuit held in Chai v. Commissioner that:

    (1)    IRC § 6751(b)(1) requires a supervisor to approve an IRS employee’s penalty determination before the IRS first asserts penalties by issuing a notice of deficiency (or filing an answer or amended answer), and
    (2)    The IRS has the burden to establish that it complied with IRC § 6751(b)(1) in deficiency cases under IRC § 7491(c).

    The Second Circuit concluded that IRC § 6751(b)(1) was ambiguous because, quoting the dissent in Graev, “one cannot ‘determine’ an ‘assessment.’” The court considered the legislative history, which indicated the statute was intended to discourage IRS agents from threatening unjustified penalties in an effort to encourage taxpayers to settle. It found the Tax Court’s review of penalty determinations does not prevent this problem because taxpayers can be pressured to settle before the Tax Court gives its decision. Further, once the Tax Court issues an opinion, the supervisor no longer has discretion to give or withhold approval of the penalty because it is final. For IRC § 6751(b)(1) to have any effect, supervisory approval must be obtained before the IRS issues a notice of deficiency (or asserts penalties in court).  

    Following Chai, the IRS requested, and the Tax Court agreed, to vacate the Graev decision because Graev was appealable to the Second Circuit. However, the Tax Court continues to follow Graev in cases not appealable to the Second Circuit.

    I am troubled by the IRS’s above position, articulated in the Tax Court’s holding in Graev, because it seems to contravene the intent of the statute and takes away the ability for a taxpayer to challenge the supervisory approval requirement in court.  As the dissent in Graev pointed out, once the opinion is final, the IRS no longer has the discretion to change the penalty, so the supervisory approval serves no purpose.  Furthermore, if it is determined after the assessment that the IRS had not complied with the supervisory approval requirement, what venue would the taxpayer have for challenging that failure?  Interestingly, in a footnote, the Graev decision suggests a post assessment Collection Due Process (CDP) hearing might provide an option for a taxpayer because the Appeals Officer must verify that the requirements of applicable law or administrative procedure have been met.  However, I wonder if this is a viable option if the Tax Court has decided the case given the fact that under section 6215(a) once the Tax Court’s decision becomes final the IRS shall assess the deficiency suggesting that the IRS would not have the authority to abate the penalty.

    The supervisory approval requirement is an important part of the taxpayer’s right to a fair and just tax system. The IRS’s current interpretation allows it to sidestep considering the taxpayer’s facts and circumstances in those situations where they are most important – where the IRS asserts negligence based on an automatic calculation. Under Graev, there is little incentive for the IRS to comply with the requirement if the taxpayer cannot challenge the IRS’s failure to comply in a deficiency proceeding in Tax Court. Although the IRS could solve the first problem by administratively adopting my legislative recommendation, the second issue will likely continue to be played out in the courts unless Congress clarifies the law. Stay tuned for the Most Litigated Issues section of my upcoming Annual Report to Congress, which will discuss these issues further.

    Additional blogs from the National Taxpayer Advocate can be found at www.taxpayeradvocate.irs.gov/blog.

    The views expressed in this blog are solely those of the National Taxpayer Advocate. The National Taxpayer Advocate is appointed by the Secretary of the Treasury and reports to the Commissioner of Internal Revenue. However, the National Taxpayer Advocate presents an independent taxpayer perspective that does not necessarily reflect the position of the IRS, the Treasury Department, or the Office of Management and Budget.

  5. Assistance available for taxpayers impacted by Hurricanes Harvey, Irma and Maria

    The Taxpayer Advocate Service Puerto Rico office reopened Thursday, Oct. 12. However, the office is not open for regular TAS operations at this time. We ask for your patience during this difficult time as our employees, their families and the local community of Puerto Rico work to recover and repair from the storm damages.

    Tax assistance and information is available for those impacted by Hurricane Maria:

    The IRS has information on tax relief for those taxpayers affected by the recent hurricanes.


    IRS information for those taxpayers impacted by Hurricane Harvey: IRS.gov/hurricaneharvey 

    IRS information for those taxpayers impacted by Hurricane Irma: IRS.gov/hurricaneirma

    IRS information for those taxpayers impacted by Hurricanes Irma and Maria: https://www.irs.gov/newsroom/help-for-victims-of-hurricanes-irma-and-maria