If you ever have clients or friends who need assistance with a federal tax controversy issue, you need to know about Low Income Taxpayer Clinics (LITCs). This year marks the 40th anniversary of the founding of the first LITC. Today, about 140 LITCs exist in total with at least one in almost every state. To find the nearest LITC, look at IRS Publication 4123 which the IRS updates annually.
This post seeks to provide you with enough information to know when making a referral of someone to an LITC may succeed and to alert you to some limitations that will prevent a successful referral.read more...
Most LITCs operate under a grant from Congress administered by the IRS – specifically by an office within the Taxpayer Advocate Service. The grant resulted from 1998 legislation creating IRC 7526 and the goals and limitations of clinics primarily trace themselves to the language of that statute. Congress wanted clinics to represent taxpayers who had a controversy with the IRS and sought to have clinic assist low income taxpayers which it defined as those whose income fell below 250% of poverty.
For purposes of this provision, controversy requires some problem with the IRS beyond the problem of filing a tax return. Typically, a controversy exists if the taxpayer has an audit, appeal from an audit or Tax Court case going in which the IRS seeks additional taxes. It also exists if the taxpayer seeks to work out a collection alternative to immediate payment of the tax. Controversy matters also include some affirmative actions such as refund suits or damage suits such as IRC 7433.
Controversy does not include preparation of tax returns unless the preparation of the returns directly relates to the controversy. Taxpayers seeking assistance with the current year’s return should go to a VITA or an AARP site rather than to an LITC. If the taxpayer seeks to obtain an offer in compromise and the taxpayer has outstanding returns, the LITC can prepare those past due returns as a part of resolving the controversy concerning the collection from the taxpayer.
The income limitation placed by the statute focuses on the taxpayer’s income at the time the taxpayer seeks assistance from the LITC. A taxpayer who previously had a more robust salary but now has no job or a low paying job may qualify for the services of an LITC even though they have not lived a life in poverty. For 2014, 250% of poverty is approximately $29,000. If a taxpayer has dependents, the amount of income a taxpayer may earn and still qualify for the services of an LITC increases by approximately $9,000 for each dependent. So, it is possible that a family of four could have income slightly in excess of $50,000 and still qualify for the 250% limitation.
The income limitation in the statute does not mention assets. A taxpayer with valuable assets but low income may qualify under the statute despite the existence of the assets. Some clinics, particularly those affiliated with legal services, may place additional restrictions on the taxpayer’s assets as part of the qualification process. Nothing in the grant prohibits an LITC from being more restrictive in the income limitation of prospective clients or in creating an asset test.
The statute allows LITCs to accept no more than 10% of its clients with income in excess of 250% of poverty. In general, LITCs accept very few cases above 250% of poverty because sufficient cases exist below that amount where the clients have almost no ability to hire representatives. An academic clinic may use this 10% window to take cases that provide a good teaching opportunity or to accept a taxpayer with a very compelling story even though the income exceeds normal guidelines.
LITCs that are part of the legal services corporation (LSC) have restrictions on the cases they can take that go beyond IRC 7526. For example, they may not represent undocumented individuals because of restrictions in the LSC grant even though IRC 7526 does not contain a similar restriction. About half of all LITCs operate with an LSC office. So, sometimes you may need to look for an LITC that is operated independently or that is operated as an academic clinic.
Academic clinics operate within the restrictions of the school calendar. While they may have some staff covering cases throughout the year, their ability to handle cases during the summer or other school breaks, may be limited or almost nonexistent. So, you may encounter times with an LITC will close intake because it has a full caseload or because of a limited number of workers. If you get to know your local LITC director, you can develop a sense of when the LITC can or cannot handle additional cases.
Many LITCs work on a very limited budget and with limited staff. They may limit the type of cases handled depending on the expertise of the individuals working at the LITC.
The statute creating the grant contemplates that the LITCs will represent individuals and not entities. This creates another barrier that prevents LITCs from assisting tax exempt organizations and other potentially deserving organizations with tax problems and little income or assets to pay for assistance.
Essentially, three types of LITCs exist: academic, LSC and independent. Each has some strengths and weaknesses that may impact the acceptance of a referral or the work done on the case. Academic clinics generally have a director with significant tax knowledge and the research resources of a law school. Students work the cases and have limited hours each week to work on their cases. So, cases generally move slowly through academic clinics but receive lots of attention.
LSC clinics operate within the structure of a larger firm working on a variety of issues impacting low income individuals. This can provide synergy on other issues impacting the low income taxpayer. As mention above, they can also have more restrictions on who can qualify as a client both from and income/asset standpoint and from a legal status one. Many of the attorneys working in an LITC with an LSC organization are the only tax person within the organizations. That can make it difficult for the attorney to develop expertise because of the lack of other tax professionals with whom to interact. LSC clinics generally have greater research resources than independent clinics and worse research resources than an academic clinic.
Independent clinics vary greatly in their makeup. Some operate as standalone organizations and sometimes with a specific focus that caused them to come into existence. Others operate within the structure of another organization. The individuals doing the tax work frequently have tax expertise but many of the independent LITCs have very few research resources. Almost all LSC and independent LITCs use pro bono panels to assist with the cases. So, it is possible that one of these clinics will do the intake on the case but use a local attorney who volunteers to handle the case.
When advising someone to contact an LITC, let them know that just because the LITC exists that does not mean it can take their case. For all of the reasons mentioned above, the referral may not work; however, LITCs take many cases and may provide significant assistance to someone who would otherwise go unrepresented. Try to get to know your local LITC so that you can assist in making appropriate referrals. Also consider joining the pro bono panel of your local LITC. Doing that not only assists the individual you represent but assists the LITC in meeting its matching grant requirement so that your one case may allow the LITC to help many others.