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Recent Tax Court Decision on IHSS payments.

Technical topics regarding tax preparation.
#1
dave829  
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EZTAX wrote:Some clients are worse off because they lost their EIC.

Today, the Tax Court said that taxpayers can get the EIC because the payments are taxable (and thus, Notice 2014-7 is wrong).
https://www.ustaxcourt.gov/USTCInOP/Opi ... x?ID=11863
 

#2
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dave829 wrote:
EZTAX wrote:Some clients are worse off because they lost their EIC.

Today, the Tax Court said that taxpayers can get the EIC because the payments are taxable (and thus, Notice 2014-7 is wrong).
https://www.ustaxcourt.gov/USTCInOP/Opi ... x?ID=11863


This is big news and deserves its own thread if the IRS does not appeal.
 

#3
dave829  
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Well, we will have to wait and see what the IRS does in response to this decision. They could appeal, but they really don't have much of a case since they stipulated in the Tax Court case that the payments weren't taxable. I think it's more likely that they will reverse their position on the taxability of the payments and revoke Notice 2014-7.
 

#4
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My guess (and hope) is that the IRS acquiesces and revises 2014-7 to allow people to decide to exclude it completely, forgoing EIC/ACTC, or include it for both tax and credit purposes. This would be reminiscent of how we can "shuffle" Pell grants to taxable income in order to claim the AOTC.
 

#5
EZTAX  
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Are they really saying that the payments should be taxable or rather that they qualify for EIC if taxable or not? I get that they are questioning the reasoning for the notice regarding the wording around "placed".
 

#6
CathysTaxes  
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MSchmahl wrote:
dave829 wrote:
EZTAX wrote:Some clients are worse off because they lost their EIC.

Today, the Tax Court said that taxpayers can get the EIC because the payments are taxable (and thus, Notice 2014-7 is wrong).
https://www.ustaxcourt.gov/USTCInOP/Opi ... x?ID=11863


This is big news and deserves its own thread if the IRS does not appeal.

This is very big news. Am I correct in assuming that the payments are now taxable? I know many families that will negatively be impacted by this.
Cathy
CathysTaxes
 

#7
dave829  
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The Tax Court is saying that the payments are taxable (based on prior decisions, such as Bannon), but the IRS is saying that they aren't taxable, due to its position stated in Notice 2014-7. In the Feigh case (yesterday's Tax Court decision), the parties had stipulated that the payments weren't taxable due to Notice 2014-7, and the IRS didn't argue, in the alternative, that they were taxable. As a result, the Tax Court didn't have to rule on the taxability issue since the parties had already stipulated to it. The only issue the court had to rule on was the refundable credits. The Tax Court ruled that it didn't have to follow the IRS's position in Notice 2014-7, and that since the payments were taxable, the taxpayer was entitled to the credits. Strange decision.
 

#8
CathysTaxes  
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Very strange indeed.
Cathy
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#9
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dave829 wrote:The Tax Court is saying that the payments are taxable (based on prior decisions, such as Bannon), but the IRS is saying that they aren't taxable, due to its position stated in Notice 2014-7. In the Feigh case (yesterday's Tax Court decision), the parties had stipulated that the payments weren't taxable due to Notice 2014-7, and the IRS didn't argue, in the alternative, that they were taxable. As a result, the Tax Court didn't have to rule on the taxability issue since the parties had already stipulated to it. The only issue the court had to rule on was the refundable credits. The Tax Court ruled that it didn't have to follow the IRS's position in Notice 2014-7, and that since the payments were taxable, the taxpayer was entitled to the credits. Strange decision.



The Tax Court made no decision on the tax ability of the payments:

Our holding addresses the power of the IRS, through a notice, to deem
income otherwise includible as not includible for purposes of calculating a benefit
bestowed by Congress. We do not reach the related issue of whether the IRS may
properly classify income as not includible through a regulation


The simply said that the IRS could not "unclassify" them as earned income via notice, when the plain language of the statue would allow it.
 

#10
Chay  
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dave829 wrote:The Tax Court is saying that the payments are taxable (based on prior decisions, such as Bannon), but the IRS is saying that they aren't taxable, due to its position stated in Notice 2014-7.

TaxMonkey wrote:The Tax Court made no decision on the tax ability of the payments:

True, the Tax Court did not rule on "whether the petitioners should have included their Medicaid waiver payment in gross income". However, they did declare that the IRS, by allowing taxpayers not to pay tax on the payments, nevertheless cannot alter the fact that the payments are "includible" in gross income. And this means that by statute, the payments are still considered "includible in gross income". And isn't that exactly what we mean when we say "taxable"?

I think Dave's explanation is accurate as long as we understand it in this context and not in the context of whether the petitioners should now pay tax on the payments or not.

And I don't think the decision is very strange either. It merely confirms that while the IRS has some discretion in enforcing the law, it cannot by sole reason of selective enforcement change the law. For this, the IRS must work within the confines of the Regulations and the power of a consistent and authoritative body of rulings and notices to guide the application of existing law.
 

#11
EZTAX  
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I wanted to start a new discussion on the recent tax court decision regarding IHSS payments and EIC.

A shout out to dave829 who brought this to our attention in a recent thread.

See thread here: viewtopic.php?f=8&t=8783


See tax court decision here: https://www.ustaxcourt.gov/USTCInOP/Opi ... x?ID=11863

I recommend anyone interested in the subject begin by reading the recent threads linked above.

Spidell just sent out a notice recomending filing amended returns for qualifying clients.

Some thoughts. If I amend a return, do i need to show the IHSS payments as taxable income?

This is going to be a problem for many because at least in California, some IHSS providers signed a form stating they lived with the person needing care which resulted in no W-2 forms being issued.

What do you think the IRS will do next? (dave829, I appreciated your thoughts on this in the linked discussion.)

Should be interesting to say the least.
 

#12
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I'm guessing that "a consistent and authoritative body of rulings and notices" would include "the plain language of the statue" too.
 

#13
Chay  
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Actually, no - I'm talking about IRS determinations that don't inherently carry the force of law, not statutes or regulations. Specifically, I'm alluding to the concept of Skidmore deference:

The administrative-law principle that a federal agency's determination is entitled to judicial respect if the determination is authorized by statute and made based on the agency's experience and informed judgment. See Skidmore v. Swift & Co., 323 U.S. 134 (1944). Under Skidmore, the level of deference given to an agency’s interpretation is based on the degree of the agency’s care; the agency’s consistency, formality, and relative expertise; and the persuasiveness of the agency’s position.

https://www.quimbee.com/keyterms/skidmore-deference
 

#14
Chay  
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EZTAX wrote:If I amend a return, do i need to show the IHSS payments as taxable income?

As of right now, the best authorities we have available on the matter are Notice 2014-7, which provides that the payments "are difficulty of care payments excludable under § 131 of the Internal Revenue Code", and Feigh v. Commissioner, which provides that the IRS did not actually alter the fact that the payments are "includible in gross income" by virtue of issuing this notice.

A key point to understand is that Part III of Subchapter B (§§ 101 – 140) tells you that gross income doesn't include the items it describes. So, you can't just disregard the sections as you would with deductions - you must adhere to them and cannot increase your gross income by anything excluded.

In Feigh, the IRS was trying to argue that IHSS payments are described by section 131 due to their notice. They lost. In spite of the fact that IHSS payments are excludable under section 131 due to the notice, they are nevertheless includible because section 131 doesn't actually say otherwise. And being "includible" is all we need under section 32(c)(2)(A)(i) to qualify for the EIC.

If we rely on these authorities, we find that the payments are excludable administratively, meaning we don't have to pay tax on them, but also includible by law, meaning we get the EIC.

I think the IRS is going to try and move swiftly to address this situation, but I don't think their remedy will apply to returns filed before they do.
 

#15
CathysTaxes  
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I moved the posts about the recent court decision from IHSS Payments to this discussion.
Cathy
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