With the filing season in full operation, many taxpayers are receiving correspondence from the IRS that convey significant taxpayer rights and require taxpayers to take prompt action. In my April 3rd blog post, I discussed a Literature Review in my 2018 report to Congress that investigated how notices can be improved using insights from the available psychological, cognitive, and behavioral science research. As I noted, a major issue with current IRS notices is that many taxpayers have difficulty understanding them. They may be unsure about what the notice requires them to do, the steps they may need to take, or the rights they have to challenge the IRS’s determination in a notice. In this blog, I will focus on math error notice unclarity, which I identified as one of the Most Serious Problems.
What is the IRS’s math error authority?
Congress has granted the IRS “math error authority,” which allows the IRS to make certain summary adjustments to a taxpayer’s return. If the changes lead to a greater amount of tax, the IRS would make an assessment. These “math error” changes can be made when the IRS determines that the taxpayer has made a mathematical or clerical error that is obvious to fix by looking at the face of the return. The types of issues Congress has allowed to be resolved with math error authority have progressively increased over the years, as a result of IRS lobbying, with the IRS now making summary changes for more and more complex issues. A past TAS research study on math errors committed on individual tax returns found that some of these summary changes have led the IRS to incorrectly deny tax benefits to some taxpayers.
Why are math error notices important?
When the IRS determines that a taxpayer has made a math error, it will send a math error notice, informing the taxpayer of the error, that the IRS changed the taxpayer’s return to correct the error, and any additional tax that the IRS believes the taxpayer owes. However, TAS’s review of some of these notices has shown that they are lacking clarity in many areas, and are not designed with taxpayer rights in mind. Clarity in math error notices is particularly important because taxpayers must respond to these notices within 60 days to preserve their right to petition the Tax Court before paying the assessed tax. Yet some math error notices do not include this right to petition and deadline information on the first page. And despite clear evidence that certain math errors incorrectly denied tax benefits to some taxpayers, the IRS does not track the abatement rates of its math error assessments to see which math error adjustments are causing the most problems and need to be corrected.
Do notices adequately explain errors to taxpayers?
When Congress expanded the IRS’s math error authority to include certain “clerical errors,” such as leaving a box on a tax return blank, it instructed the IRS that “the taxpayer must be given an explanation of the asserted error.” Yet, despite this, math error notices do not always include adequate explanations to the taxpayer about what error he or she made on a tax return. Math error notices are coded by the IRS depending on the type of error. These codes, Taxpayer Notice Codes (TPNCs), come with short proforma explanations of the errors. Multiple errors on a return result in multiple TPNCs on the notice.
Some TPNCs give enough information for taxpayers to generally understand why they are receiving the notice. For example, notices sent to taxpayers who made a math error regarding their taxable Social Security benefits (the second most common math error in tax years (TYs) 2015-2017) would include this explanation:
“We changed the amount of taxable social security benefits on page 1 of your tax return because there was an error in the computation of the taxable amount.”
This is fairly straightforward and directs taxpayers to the error they potentially made, including the page number on their tax return. Let’s compare this explanation with TPNC 558, the most common math error in TYs 2016 and 2017, and the third most common math error in TY 2015:
“We changed the refund amount or the amount you owe on your tax return based on the information you provided in response to our previous correspondence.”
Imagine opening a notice from the IRS, trying to figure out why you received the notice, and reading this explanation. What is the error the IRS is claiming you made? If you have had multiple contacts with the IRS, what previous correspondence or information is the IRS referring to? What, if anything, are you supposed to do? This doesn’t fulfill Congress’s intent for providing an explanation of the math error to taxpayers. Congress provided examples about how to write adequate explanations. To be consistent with the examples in the legislative history, the IRS should cite the specific issues and correspondence it is referring to, along with the line numbers and description of what was adjusted, and the amount of increase or decrease in taxable income and tax due.
Notices must be clearer and more specific, so that taxpayers can actually understand what error the IRS has determined they’ve made and what they can do in response to correct it. For TPNC 558, the IRS should:
- Cite the specific issues and correspondence it is referring to, along with the line numbers and description of what was adjusted, and the amount of increase or decrease in taxable income and tax;
- Place these explanations (along with the right to prepayment appeal and the deadline to file it) on the first page of the notice, not the fourth page, which taxpayers are much less likely to read; and
- Frame the first page with taxpayer rights and understanding at the forefront, not framed like a bill.
Math error notices are not collection notices; rather, they are notices to inform taxpayers that the IRS has made some adjustments to their tax return and assessed a tax against them. Most importantly, they afford taxpayers the opportunity to challenge the IRS’s position and be heard, one of the most significant of the ten taxpayer rights codified under Internal Revenue Code § 7803(a). Thus, math error notices should be designed with these purposes in mind.
Obviously, not all of the important information these notices contain can fit on one page, but the first page can include references to the fact that there is other important information and on which page taxpayers may find it (such as the payment options taxpayers have to proceed in response to the notice). TAS is currently working on sample notices to demonstrate how notices can be framed with a taxpayer-rights-centric focus. For example, including references on the first page to the availably of free assistance provided by Low Income Taxpayer Clinics (LITCs) and TAS, which some math error notices entirely omit or relegate to the last page of the notice.
Finally, the IRS does not use data from historical returns to correct possible math errors, even though it has the authority to do so. For example, if a taxpayer inputs their claimed dependent’s taxpayer identification number (TIN) incorrectly on their return, the IRS could summarily deny the taxpayer tax benefits because the claimed dependent’s TIN doesn’t match their records. The IRS would then send a math error notice to the taxpayer. The taxpayer may respond and work with the IRS to fix the incorrect dependent TIN. The taxpayer may also not respond out of confusion, fear, lack of time or resources, and lose their dependent tax benefit that he or she was entitled to. A TAS research study found that this is indeed sometimes the case, with taxpayers losing benefits they should have received. For instance, the TAS research study found that 55 percent of math errors involving claimed dependents were abated. Even worse, in over 50 percent of these cases that received no adjustment, the IRS did not issue any refunds that the taxpayers were at least partially entitled to. The average taxpayer lost $1,274. The IRS could limit these situations from occurring by simply comparing the current questionable item against past return data to verify if the dependent TIN was merely incorrectly typed or written (for example, if the last two digits of the TIN were 12, but the taxpayer wrote 21). This could drastically reduce taxpayer burden in such cases.
The IRS has great authority to make summary changes to taxpayers’ returns for math errors. With such authority, the IRS must ensure it is doing what it can to limit the burdens it may place on taxpayers and that they adequately understand what notices require of them, the services available to help them, and the actions they must take in response to math error notices.