Fund Low-Income State Taxpayer Clinics to Increase Tax Justice

Recovery was hard for a Gulf War veteran who was injured during his military service and then battled alcohol addiction back home. Addiction led to homelessness—and an increasing federal tax debt. When he finally summoned the courage to walk into a Low-Income Taxpayer Clinic, he owed the IRS $20,000.

The clinic he visited was one of many federally supported LITCs devoted to helping disadvantaged taxpayers navigate IRS disputes and to access tax justice. While the veteran returned to college to rebuild his life, clinic volunteers prepared and filed an offer-in-compromise, then negotiated with the IRS to extinguish his debt in exchange for a modest payment that reflected tax justice in light of his situation.

The IRS reports that he “is now IRS debt free, in filing compliance, and living in an apartment. With the help of an LITC, [he] has taken big steps forward on his road to financial recovery.”

During a recent conversation with Nina Olson, who founded the advocacy organization Center for Taxpayer Rights and who served as the IRS National Taxpayer Advocate for nearly two decades, my eyes were opened to the simple fact that, for many low-income Americans, tax justice is procedural as well as substantive.

The Center for Taxpayer Rights is collaborating with LITCs and other activists around the country to strengthen procedural tax justice. They plan to propose models of state legislation that would expand the funding of LITCs—funded by Congress only for IRS tax disputes—to enable those LITCs to address state tax disputes as well.

The Beginning of Access to Tax Justice

The Hofstra University School of Law is credited with creating the nation’s first LITC in the 1970s. The school aimed to serve vulnerable individuals facing the daunting financial and emotional burdens of IRS audits, collections, or appeals; it also sought to provide administrative and judicial appellate experience for its law students. A handful of other schools followed suit.

A decade or so later, in Richmond, Va., Olson opened the first LITC that was unaffiliated with a law school program, making public service its exclusive mission. The perennial need for any organization with a public service mission is funding, particularly when you’re looking to scale a local operation nationally. Olson and Janet Spragens—a law school professor who had opened one of those early university-affiliated LITCs—lobbied Congress to provide a portion of the necessary funds.

Olson and Spragens’ message resonated with the Clinton administration, which recognized the Internal Revenue Code’s utility for delivering social benefit lifelines to underprivileged Americans. Congress included federal funding—up to $100,000 of matching-fund grants each year for a qualifying LITC—in Section 7526, adopted as part of the IRS Restructuring and Reform Act of 1998.

LITC programs—the flip side of voluntary income tax assistance programs that help underserved populations file their federal tax returns—have flourished as a result. Today, more than 130 LITCs provide free or small-fee legal representation in federal tax disputes to people living under 250% of the federal poverty line.

Lady Justice statue made of bronze holding the scales suggesting fairness in law stands guard in the foyer of a conference room

Photographer: Stock photo via Getty Images

Access to State Tax Justice Matters

Federal grants for LITCs only fund federal tax dispute services. That means most clinics have to turn away deserving taxpayers whose tax woes are with their states, not the IRS. This is a serious gap in an important public service because access to tax justice matters, whether it’s federal or state.

Olson and her team are among those who are working to solve this problem. The Center for Taxpayer Rights recently began holding public discussions about its “Reimagining Tax Administration: State Tax Survey,” which identified systemic issues that undermine, impair, or ignore state taxpayer rights, as well as those that protect and strengthen the economic well-being of vulnerable populations facing state tax disputes.

The survey highlights that many state tax audit and appeal procedures hurt the rights of unrepresented low-income taxpayers who, as a practical matter, cannot participate meaningfully in the dispute resolution process. Strikingly, two specific policy areas involve a rare commonality of interest between vulnerable low-income taxpayers and powerful multistate corporate taxpayers. Both seek state tax courts with specialized tax expertise (akin to the US Tax Court). They also both request an elimination of “pay to play” rules that deny taxpayers the right to pursue judicial tax appeals until after they’ve paid the amount that the revenue authority claims to be owed.

The equities in procedural tax justice, of course, are far more serious for the poor. LITC workers in Indiana, for example, point out that a state tax warrant (imposing a lien on property for unpaid taxes) are served in some counties by sheriffs—who are not required to tell the recipient that it’s not an arrest warrant. Tax warrants can be used as a means of harassment. In Massachusetts and other states, revenue department enforcement options include revocation of a driver’s license or professional license, which may take away the vulnerable person’s ability to earn an income to pay the amount owed.

Another example is Ohio’s double-collection problem. Until recently, companies that employed fewer than 250 people weren’t required by law to file W-2s with the state. When employees don’t have a W-2 in their possession at tax filing time, they have no “tax withheld” amount to report on their returns. Department call-line workers often advised low-income taxpayers to “put zero and appeal later,” This shifted the burden of proof to the individual, making recovery of the twice-paid tax exceptionally difficult, if not impossible, for the vulnerable taxpayer.

Let’s Make Procedural State Tax Justice Happen

Substantive tax justice initiatives for the poor do deserve the lion’s share of attention. The Institute on Taxation and Economic Policy points out that temporary expansion of the federal Child Tax Credit during the Covid-19 pandemic cut American child poverty by an astounding 46% before Congress recently allowed it to lapse. Every single state now must step into that breach and adopt or increase CTCs to aid its own share of our nation’s disadvantaged population.

But procedural tax justice matters, too. Expansion of LITC programs to cover state tax disputes is an essential element of tax justice for many low-income Americans who find themselves overwhelmed by tax disputes that—unless resolved with the help of experts—can threaten their economic well-being.

This is a regular column from public interest tax policy analyst Don Griswold, who’s also a senior fellow at the Digital Economist. Look for Griswold’s column on Bloomberg Tax, and follow him on LinkedIn.