Ibrahim v Comm’r: A Procedural Trap for Unrepresented Taxpayers

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[Today’s post is written by Professor Kathryn Sedo of the University of Minnesota Law School and Frank DiPietro, a third-year student attorney at the University Of Minnesota Tax Clinic. Frank litigated the case of Ibrahim v Commissioner under Professor Sedo’s supervision. The case highlights the pitfalls of unrepresented taxpayers facing IRS compliance action and in particular raises another aspect of the complexities facing taxpayers claiming the EITC. The procedural issue in the case is whether a taxpayer can change filing status to MFJ from HOH after filing a petition to Tax Court. That alone caught our attention.  The way the IRS and Tax Court are interpreting Section 6013(b)(2)(B) puts lots of pressure on taxpayers to know the procedural traps of filing a petition before fixing marital status on tax returns.  The case also raises issues about when IRS should or can refer people to tax clinics. Keith will have more to say on that in tomorrow’s post.]

On January 13, the Tax Court decided the case of Ibrahim v. Comm’r, T.C. Memo 2014-8.  The primary issue in this case was whether a taxpayer may amend his personal income tax return to change his filing status from “Head of Household” to “Married Filing Jointly” after he has received a notice of deficiency from the IRS and filed a petition in Tax Court.  The issue is complicated because the language of the applicable statute is ambiguous and there is a split between the only appellate court (the 5th circuit) that has ruled on directly on this issue and Tax Court decisions.  The result of the Tax Court’s decision in this case is to deny Mr. Ibrahim married filing jointly filing status and bar him from claiming the Earned Income Tax Credit (EITC).  He was required to file as married filing separate and allowed the claimed dependents and child tax credits.  However, instead of receiving a large refund, this decision creates a tax liability for Mr. Ibrahim.

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The petitioner in this matter was Isaak Abdi Ibrahim, an immigrant from Somalia with almost no proficiency of the English language.  Mr. Ibrahim retained a tax preparer to prepare and file his 2011 tax return.  The tax preparer (who not surprisingly cannot now be found) filed returns with incorrect filing status for both Mr. Ibrahim and his wife, despite being advised by them of their marital status and living situation.   Mr. Ibrahim and his wife completely relied on the expertise and knowledge of their tax preparer when preparing their income tax returns as they cannot read English.

Mr. Ibrahim’s filing status, claimed exemptions and credits were contested by the IRS, and his Earned Income Credit frozen.  Ultimately a Notice of Deficiency was issued on October 1st, 2012 challenging his filing status, disallowing his two dependents and the child tax and earned income credits for those dependents.  Mr. Ibrahim filed a tax court petition pro se on November 16th, 2012.  Subsequently, Mr. Ibrahim was contacted by the St. Paul Appeals office of the IRS and was notified, based on the evidence provided by Mr. Ibrahim, that his filing status was incorrect but he could claim his two dependents.  The St. Paul Appeals office also referred Mr. Ibrahim to the University of Minnesota Tax Clinic for representation.

Upon review of the circumstances and consultation with our client, we determined the primary issue in that matter was whether section 6013(b)(2)(B) applies and would it prevent our client from amending his personal income tax return.  Section 6013(b)(2)(B) prevents a taxpayer from electing to file a joint return after filing a separate return once  “there has been mailed to either spouse, with respect to such taxable year, a notice of deficiency under section 6212, if the spouse, as to such notice, files a petition with the Tax Court within the time prescribed in section 6213.”  The question becomes whether filing a return with the status of “Head of Household” is considered filing a “separate return” under section 6013(b)(2)(B).

The IRS and Tax Court properly conceded that if this case was in the 5th or 11th circuits, the decision would be in our clients favor allowing him to amend his return.  The 5th Circuit ruled in Glaze v. United States, 641 F.2d 339 (5th Cir. 1981) that a “separate return” refers to only the filing status of “Married, filing separately” and not to any other election such as “Head of Household”.  Therefore, following the logic in Glaze, our client should be allowed to amend his return as he did not file a “separate return” under section 6013(b)(2)(B).  The 11th Circuit adopted all prior decisions of the Court of Appeals for the 5th Circuit in Bonner v. City of Prichard, 661 F.2d 1206 (11th Cir. 1981).

However, only the 5th Circuit has ruled directly on this issue.  The Tax Court in numerous T.C. Memo decisions has ruled against petitioners with similar filing status situations.  (See e.g., Currie v. Comm’r, T.C. Memo. 1986-71; Blumenthal v. Comm’r, T.C. Memo. 1983-737; Saniewski v. Comm’r, T.C. Memo. 1979-337; Phillips v. Comm’r, 86 T.C. 433, 439 (1986))  In addition, the IRS stated in its Action on Decision in relation to Glaze that it would decline to follow it circuits beyond the 5th (AOD 1981-140 (IRS AOD), 1981 WL 176193).

The Tax Court found for the respondent in this matter holding prior Tax Court precedent that “section 6013(b)(2)(B) bars a taxpayer who has filed a return with single or head of household filing status for a tax year and in response to a notice of deficiency for that year filed a petition with this Court from changing his filing status to married filing jointly.”  (Ibrahim at 7) In addition, the court supported its position with the rationale that “Congress enacted the predecessor statute to section 6013(b) in 1951 but did not establish a separate rate structure for married taxpayers filing separately until 1969.” The Tax Reform Act of 1969 created the separate rate structure between “single” and “married, filing separately”.  However, this separate rate structure was created to help avoid the marriage penalty.  We do not feel the addition of the “married, filing separately” tax rate relates in any way to section 6013(b).

We find this decision troubling for numerous reasons.  The IRS concedes a proper filing status if section 6013(b)(2)(B) did not apply for our client is “Married Filing Jointly”.   This filing status would allow him to claim the Earned Income Tax Credit.  Taxpayers who filed with the status of Married filing Separate cannot claim the Earned Income Credit.  However, because our client did not amend his tax return, even after a notice of deficiency was issued but prior to him filing in tax court, he is barred from this credit.  Thus unrepresented and limited English proficient taxpayers who are not aware of section 6013(b)(2)(B) fall into the trap of filing a Tax Court petition instead of amending their returns.  The Tax Court and IRS reading of section 6013(b)(2)(B) works a substantial hardship on this group of taxpayers.

We believe there has been a significant increase in the appearance of this issue after discussion with several of our colleagues.  Low-income taxpayers, especially those that cannot understand English, cannot hope to understand a complex statutory scheme such as the one at issue in this case.  These taxpayers rely on paid preparers who may not understand or choose to properly file their clients’ tax returns.  In this particular case, an unrepresented taxpayer relied on his tax preparer and upon receipt of the notice of deficiency filed a tax petition believing he was following proper procedure.  In trying to follow proper IRS and Tax Court procedures, he prevented himself from obtaining those very refunds he was trying to protect.

We will be speaking with our client in the near future to determine our next course of action.  This may include an appeal to the 8th circuit.  As the 8th circuit has not directly ruled on this issue, we hope to obtain a more favorable result if we appeal.

 

 

 

 

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