The IRS Taxpayer Advocate Service recently performed a study on refundable tax credits that the IRS has denied by-way of the authorization they’ve been given by Congress to ban certain Taxpayers from claiming credits for two (2) years if the Taxpayer claimed the credit due to reckless or intentional disregard of the rules and regulations, as determined by the IRS.
For background, the 2-year ban can be done either manually through an IRS Audit or automatically, when certain factors are met:
- Taxpayer Response: Both require notice be given to the Taxpayer. It was identified in this study that approximately 46% of Taxpayers who received the ban never responded to the notice. When this is done through an Audit, failure to respond can be used as a factor for the IRS to assert the ban, and the Auditor is not required to attempt to reach the Taxpayer further if the Taxpayer does not respond (this was cause for concern for the Taxpayer Advocate Service). When this is done automatically without Auditor review, unless the Taxpayer responds, the ban will automatically be applied.
- Prior Audit: The IRS also considers whether they’d previously audited the Taxpayer for the same refundable tax credit in question. Approximately 50% of the bans in question had an audit resulting in a disallowance at least 3 years prior, but many times, it was disallowed previously for different reasons. The Taxpayer Advocate Service expressed concern here, as it could be unfair to consider the prior disallowance to be adequate notice of the rules if it was more than 3 years prior or the prior disallowance was for different reasons.
There were 352 cases reviewed in this study that were imposed a 2-year ban in 2022 and/or 2023. From those cases:
- 81% - the IRS did not adequately explain why they imposed the ban to the Taxpayer, as required;
- 30% - the IRS did not previously disallow the same credit for the same reason for which it imposed the ban; and
- 50% of the prior audits took place more than 3 years prior to when the IRS imposed the 2-year ban.
Through this study, in addition to identifying the concerns above where the IRS’ procedure does not support the rationale for imposing the ban, the Taxpayer Advocate Service also identified that the IRS often fails to follow its own policies and procedures when imposing this ban.
As previously mentioned, there were 352 cases reviewed in this study that were imposed a 2-year ban in 2022 and/or 2023. From those cases:
- 76% - IRS failed to obtain Manager Approval.
The Taxpayer Advocate Service gave recommendations to the Congress Research Study to facilitate a resolution to these issues in 2023. These recommendations included:
- Requiring Managerial Review and Approval of all language in the IRS letters sent out that explain the reason for the 2-year ban;
- Only imposing the ban where a prior audit addresses the same rule under consideration in the current review;
- Not imposing the ban on the basis of a prior audit that occurred more than 3 years prior;
- Where the ban is imposed automatically, making additional attempts to reach the Taxpayer before considering the failure to respond as reckless or intentional disregard of the rules and regulations; and
- Require IRS managers to review cases with the 2-year ban to ensure all IRS procedures are followed
Unfortunately, the IRS did not agree to any of these recommendations.
The Taxpayer Advocate Service’s findings indicate that on average, Taxpayers lost approximately $4,100 for each of the 2 years because of the ban.
Have you been contacted by the IRS about a ban on your ability to claim a refundable tax credit? Contact the Bryson Law Firm, LLC today to ensure your rights are protected! We are your local, legal, Tax Resolution firm.
