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TAS’s statutory mission is to resolve problems taxpayers encounter as a result of the way the IRS administers the nation’s tax code. In this blog, I would like to call attention to TAS’s efforts to correct an error in an IRS publication that may have led some taxpayers with a filing requirement to fail to file their returns.
Under section 6012(a) of the Internal Revenue Code (IRC), the filing threshold for married taxpayers filing separate returns from their spouses is the personal exemption amount, which was $4,050 in tax year (TY) 2017. In December 2017, the Tax Cuts and Jobs Act of 2017 (TCJA) suspended the personal exemption for TYs 2018-2025 (effectively reducing it to zero). As a result, taxpayers using this filing status face a filing requirement regardless of whether they worked or earned income in TYs 2018-2025. In light of Congressional intent underlying the TCJA, the IRS provided relief to married taxpayers filing separately by setting the filing requirement at $5. Both the IRS web site and the 2018 Instructions to Form 1040 indicate that a married filing separately taxpayer must file a tax return if the individual’s gross income is at least $5.
On January 25, 2019, the IRS released Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad, for the 2018 tax year. This publication is used by U.S. citizens and resident aliens who work abroad or who have income earned in foreign countries. The publication incorrectly stated that married taxpayers filing separately must file a return only if the individual filer’s gross income equals or exceeds $12,000, the amount of the standard deduction. This error may be attributable to the longest federal government shutdown in U.S. history, which condensed review times for IRS publications.
Regardless of cause, an estimated nine million U.S. taxpayers living abroad may have relied on Publication 54 to navigate extremely complex U.S. tax laws and regulations, including the filing requirements. Noncompliance may result in harsh consequences, including hefty penalties.
TAS learned of this error after an annual meeting with organizations representing the interests of U.S. taxpayers abroad and immediately worked with the IRS to address the mistake. On September 6, 2019, the IRS disclosed the error in the publication on IRS.gov. To date, however, the IRS has not issued a public press release, revised the publication, or issued an announcement to acknowledge the problem and clarify the filing requirement. What’s more, it has not provided automatic penalty relief to affected taxpayers. While married U.S. taxpayers abroad filing separate returns with zero income may not have penalty exposure, many others with tax due will be assessed the failure to file penalty.
There may also be non-tax ramifications to lawful permanent resident (LPR) taxpayers. They are required to show good moral character, including timely filing required tax returns, to keep their LPR status.
While I am pleased the IRS has disclosed the error, I believe it can and should do more to inform taxpayers and waive penalties. At the very least, the IRS should revise Publication 54 as soon as possible and issue a press release informing taxpayers about the correction, including detailed instructions for requesting reasonable cause penalty abatement.
Just as the IRS waived estimated tax penalties for more than 400,000 eligible taxpayers whose tax withholding and estimated tax payments did not meet the legal requirements in TY 2018 as a result of confusion associated with the TCJA, the IRS should automatically waive penalties for married filing separately taxpayers who did not file or did not file timely in reliance on Publication 54. By doing so, the IRS will avoid harming taxpayers who relied on IRS guidance in a good-faith attempt to comply with the law, and it will act in accordance with two core provisions in the Taxpayer Bill of Rights – the right to be informed and the right to a fair and just tax system.
Note: Shortly after this blog was posted on Dec. 13, 2019, the IRS revised Pub. 54 for Tax Year 2018 returns to correct this mistake. The IRS also corrected this mistake in the version of Pub. 54 intended for use with Tax Year 2019 returns that was released on November 26, 2019. Updated 12/16/2019
The views expressed in this blog are solely those of the National Taxpayer Advocate. The National Taxpayer Advocate presents an independent taxpayer perspective that does not necessarily reflect the position of the IRS, the Treasury Department, or the Office of Management and Budget.
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