Confusion arises when taxpayers receive different deductions or credits depending on the location or national status of their children. The dependency deduction, Child Tax Credit, and Earned Income Tax Credit, all of which relate to the cost of raising children, have different requirements. A child who is not an American citizen or national generally must:

• Reside in the U.S., Canada, or Mexico for the dependency exemption.
• Reside in the U.S. for the Child Tax Credit.
• Reside in the U.S. and have a Social Security number valid for work for the Earned Income Tax Credit.

Taxpayers may fail to claim the correct deductions or credits due to the inconsistency of these requirements. The National Taxpayer Advocate recommends simplifying the three-part children’s national requirements to conform to the overall simplification of family tax benefits.

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To encourage adoption and help ease the potentially high expenses that adoptive parents face, Congress passed the adoption tax credit, and gradually increased the amount to encourage adoption of special needs children. Taxpayers claiming the credit for these children must attach a letter from their state certifying the child meets the definition of “special needs.” However, the word “state” does not include Native American tribes.

The National Taxpayer Advocate recommends the IRS should have the authority to accept a determination letter from a Native American tribe for adoptive parents to claim the credit.

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The IRS has two methods to take a taxpayer’s principal residence: an administrative seizure or a suit to foreclose the tax lien. While taxpayers have certain statutory protections related to the administrative seizure of a principal residence, taxpayers do not have the same protections when the IRS files suit to foreclose a tax lien on a principal residence.

The National Taxpayer Advocate recommends that Congress amend the tax code to stop the IRS from foreclosing the federal tax lien against a taxpayer’s principal residence, unless:

• The employee’s manager has approved the foreclosure.
• The taxpayer’s other property is not sufficient to pay the amount due.
• The foreclosure and sale will not create financial difficulties.

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The payroll processing industry provides a valuable service to employers, especially small businesses, by helping them comply with complex employment tax requirements. Employers have created various contractual arrangements with third-party payers (TPPs), which handle some or all of their federal employment tax withholding, reporting, and payment duties. While most TPPs are legitimate and trustworthy, a few have defrauded their clients and tarnished the image of the industry. Because employers remain liable for payroll taxes, these victims (especially small business taxpayers) may be forced to pay the amount twice – once to the TPP that embezzled or dissipated funds and a second time to the IRS. This financial burden drives some of these taxpayers out of business. The National Taxpayer Advocate recommends Congress change the law to protect employers harmed by some TPPs.

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Until 2004, the tax code contained numerous definitions of a qualifying child for dependency exemptions. The 2004 uniform definition of a qualifying child (UDOC) simplified and unified a number of related provisions, including the Child Tax Credit, the Earned Income Tax Credit, the Child and Dependent Care Credit, and Head of Household filing status.

However, the provision that determines taxpayers’ marital status has remained essentially unchanged since 1984 and causes some married couples to lose their eligibility for EITC simply because they separate after July 1. The provision requires taxpayers to live in separate households for the last six months of the year, and if they separate any time during those months, they are not eligible for the credit unless they file a joint return.

The National Taxpayer Advocate recommends that Congress amend the code to permit taxpayers who have a legally binding separation agreement and who live apart on the last day of the tax year to be considered “not married” for filing status purposes and therefore able to file separate returns and still be eligible for EITC.

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The IRS informs taxpayers of important rights by mailing notices or letters to their “last known address.” The taxpayers often must claim these rights within strict time limits, which start when the IRS mails the notice or letter, not when the taxpayer receives it. As long as the IRS sends correspondence to the taxpayer’s “last known address,” the letter or notice is legally effective when sent.

However, the IRS definition of that term is based on mid-20th century technology. The IRS has not kept up with the information age, in which it could easily check available data when it learns its own records don’t reflect a current address. The National Taxpayer Advocate recommends that Congress direct the Secretary of Treasury to develop procedures to check third-party databases for credible alternate addresses, and if one is found, mail notices simultaneously to the “last known” and alternate addresses.

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Some taxpayers may fraudulently transfer their property to friends or relatives to avoid taxes. Others legitimately transfer property before the IRS assesses tax. The IRS files Notices of Federal Tax Lien and issues levies against the property of third parties who allegedly hold property that the IRS believes belongs to taxpayers.

However, these third parties are not provided with collection due process rights. The IRS can file in the public record a Notice of Federal Tax Lien against their property before notifying the third parties or giving them a chance to respond. Likewise, the IRS can serve a levy on the third party’s property without giving the third party collection due process rights at the time the levy is served.

The IRS Collection Due Process hearing was designed to protect taxpayers against such actions and allow them to show whether they truly owe the debt. The National Taxpayer Advocate recommends amending the tax code to provide third parties the same collection due process rights that are available to taxpayers.

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