Congress Passes IRS Reform Act with Bipartisan Support

(Parker Tax Publishing June 2019)

On June 13, 2019, the Senate passed The Taxpayer First Act, which had previously been passed by the House and which President Trump is expected to sign. The legislation passed with bipartisan support and is aimed at (1) changing management and oversight of the IRS with the aim of improving customer service and the process for assisting taxpayers with appeals; (2) restricting certain IRS enforcement activities, including the use of private debt collectors in certain cases; and (3) modernizing the IRS's organization. H.R. 3151.

Background

On June 6, 2019, Rep. John Lewis (D-Ga) introduced H.R. 3151, The Taxpayer First Act (TFA). H.R. 3151 amends the Internal Revenue Code of 1986 to modernize and improve the IRS, as well as for other purposes. The bill was agreed to in the House by a voice vote on June 10 and three days later, on June 13, 2019, was passed by the Senate also by a voice vote. President Trump is expected to sign the bill. The following are some of the more important changes contained in the TFA.

Independent Appeals Office Created

The TFA amends Code Sec. 7803 to establish an IRS Independent Office of Appeals, which will be led by the Chief of Appeals, who will report to, and be appointed by, the IRS Commissioner. The IRS Independent Office of Appeals is tasked with resolving federal tax controversies, without litigation, on a basis which (1) is fair and impartial to both the government and the taxpayer; (2) promotes a consistent application and interpretation of, and voluntary compliance with, the federal tax laws, and (3) enhances public confidence in the integrity and efficiency of the IRS. The provision (1) seeks to ensure that generally all taxpayers are able to access the administrative review process, allowing for their cases to be heard by an independent decision maker, and (2) provides for notice and protest procedures as well as additional Congressional oversight for taxpayers precluded from using the administrative-review process.

In addition, the provision also ensures that staff working in the Independent Office of Appeals generally do not receive advice from the Office of Chief Counsel employees working on the case prior to its referral for administrative review. Further, taxpayers will have access to "the case against them." This provision requires the IRS to provide certain individual and business taxpayers with their case files, if requested, prior to the start of any dispute resolution process.

Increased Penalties on Tax Return Preparers for Improper Return Disclosures

The TFA amends Code Sec. 6713 to increase the penalty for improper disclosure or use of information by tax return preparers. The increased monetary penalty is imposed for the disclosure of taxpayer identity information by a return preparer in cases where such information is used in an identity theft crime, whether or not related to the filing of a tax return. The provision is intended to provide a strong incentive for tax preparers to secure client records, thereby decreasing the likelihood of those records being stolen by identity theft criminals.

Increased Penalty for Failing to File Tax Returns

The TFA increases the minimum penalty for failing to file a tax return to the lesser of $330 (up from $205) (indexed for inflation) or 100 percent of the amount required to be shown on the return. This is effective for returns required to be filed after December 31, 2019.

Improved Services to Taxpayers

Part of the goal of the TFA is to improve service to taxpayers. Under the TFA, within one year of enactment, the IRS is required to develop and submit to Congress a comprehensive customer service strategy. The strategy must address how the IRS intends to provide assistance to taxpayers, in part by ensuring adequate customer service training for its own employees and taking into account best practices from the private sector. The strategy must also establish metrics and benchmarks for measuring the IRS's success in implementing this strategy.

The TFA codifies the existing Free File program and requires the IRS to continue to work with private stakeholders to maintain, improve, and expand the program. The provision also requires Free File program members to continue to provide basic fillable forms to all taxpayers.

Under the TFA, the IRS is authorized to enter into an offer-in-compromise (OIC) agreement with a taxpayer to settle a tax debt at a lower amount than what the taxpayer generally owes. Generally, when proposing an OIC to the IRS, the taxpayer must pay an application fee and provide an initial non-refundable lump sum payment. The IRS has the authority to waive these payments. Typically, the IRS does not require taxpayers certified as low-income, defined as those with incomes below 250 percent of the federal poverty level, to include the application fee and initial payment. The TFA codifies the existing low-income exception with respect to any user fee or upfront partial payment imposed with respect to any OIC.

Changes Relating to Electronic Filing Requirement and Electronic Signatures

Currently, the IRS can only require individuals filing more than 250 returns to file them electronically. The TFA eventually lowers that threshold to 10 or more returns. This requirement will be phased in between the years 2019 and 2021. In the case of a partnership, the applicable number is 200 in the case of calendar year 2018, 150 in the case of calendar year 2019, and 100 in the case of calendar year 2020. An exception to this requirement is provided for tax preparers located in geographic areas with limited or no internet access.

The TFA requires the IRS to publish regulations and other guidelines that allow for electronic signatures to be used to request taxpayer return information for the purposes of disclosures to a practitioner or to execute a power of attorney.

Under current law, the IRS cannot directly accept credit and debit card payments for taxes because of a restriction on the payment of fees charged by the card issuer. As a result, the IRS must use a third-party processor to accept credit and debit card payments. Under the TFA, the IRS is allowed to directly accept credit and debit card payments for taxes, provided that the fee is paid by the taxpayer. The IRS is directed to seek to minimize these fees when entering into contracts to process credit and debit card payments.

Changes Relating to Exempt Organizations

In general, only the largest and smallest tax-exempt organizations are required to file their annual information returns electronically. The TFA extends the requirement to file electronically to all tax-exempt organizations required to file statements or returns in the Form 990 series or Form 8872, Political Organization Report of Contributions and Expenditures.

Charities and other nonprofits automatically lose their tax-exempt status if they do not file annual information returns for three consecutive years. Once revoked, the organization must refile for exempt status. The TFA requires the IRS to notify an organization after the organization's second consecutive failure to file an information return in order to give the organization time to file an information return and prevent its tax-exempt status from being revoked.

Changes Relating to Structuring Transactions

The Bank Secrecy Act (BSA) mandates reporting and recordkeeping requirements, including the reporting of currency transactions exceeding $10,000. To circumvent these reporting requirements, individuals may structure cash transactions to fall below the $10,000 reporting threshold (also known as "structuring"). Structuring can be used to conceal illegal cash-generating activities, such as the selling of narcotics, or income earned legally in order to evade the payment of taxes. Structuring (or attempts to structure) for the purpose of evading the reporting and record-keeping requirements is subject to both civil and criminal penalties.

Under the TFA, the IRS must now show probable cause that funds believed to have been structured to avoid BSA reporting requirements are derived from an illegal source or are connected to another criminal activity. This provision also provides important procedural protections for individuals, including a post-seizure hearing within 30 days of the seizure.

In addition, if a court determines the federal government should return funds and interest to an individual whose funds were seized by the IRS based on allegations of structuring, new Code Sec. 139H provides that any interest paid by the federal government with respect to such funds will be exempt from income tax.

Changes Relating to Innocent Spouse Determinations

The TFA amends Code Sec. 6015 to clarify that the Tax Court has jurisdiction to redetermine equitable claims for relief from joint liability and that the standard of review for such relief by the Tax Court must be conducted on a de novo basis, meaning that the Tax Court will take a fresh look at the case without taking previous decisions into account. The review will be based on the administrative record and any newly discovered or previously unavailable evidence. The provision also clarifies the time frame in which claims for equitable relief can be brought.

Changes to Private Collection Agency Referrals

The TFA creates two additional categories of cases not eligible for referral to private collection agencies: (1) taxpayers whose income is substantially derived from supplemental security income benefits or disability insurance benefit payments, or (2) taxpayers with an adjusted gross income of 200 percent of the applicable poverty level and below. The provision also alters the definition of inactive tax receivables that can be assigned to private debt collection agencies to those in which more than two years have passed since assessment of the tax debt and limits installment agreements between the taxpayer and private debt collection agencies to seven years.

Volunteer and Low-Income Tax Preparation Programs and Clinics

The TFA provides certainty for Volunteer Income Tax Assistance (VITA) organizations and taxpayers by permanently authorizing in new Code Sec. 7526A the VITA matching grant program to support the maintenance and expansion of VITA programs. The Secretary of the Treasury, unless otherwise provided by specific appropriation, may allocate from otherwise appropriated funds up to $30 million per year in matching grants to qualified entities for the development, expansion, or continuation of qualified tax return preparation programs assisting low-income taxpayers and members of underserved populations.

The TFA added Code Sec. 7526(c)(6), which clarifies that IRS employees are able to provide taxpayers in need of such assistance with information about the availability of and eligibility requirements for low-income taxpayer clinics (LITCs). IRS employees also may provide LITC location and contact information to taxpayers.

Under the TFA, the IRS is required to provide public notice, including by non-electronic means, to affected taxpayers 90 days prior to the closure of a Taxpayer Assistance Center. The notice must include information on alternative forms of assistance available for affected taxpayers and the date of the proposed closure. The IRS also must notify Congress and provide the reasons for the closure.

Under current law, the IRS may seize and sell a taxpayer's property on the same day if the IRS deems it to be "perishable." Perishable goods are defined as those that (1) are liable to perish, (2) become greatly reduced in price or value by keeping, or (3) cannot be kept without great expense to the IRS. Deeming property as "perishable" also allows the IRS to forgo minimum bid requirements, which can lead to seized property being sold for significantly less than a normal auction would allow. The TFA limits the IRS's ability to seize a taxpayer's property and hold a same-day auction to only property that is likely to perish. Property that is greatly reduced in price or value by being held or that cannot be held without great expense would no longer be eligible to be sold on the same day by deeming it "perishable."

The TFA also makes some reforms to the whistleblower rules. For example, in order to improve IRS communications with whistleblowers, the TFA allows the IRS to exchange information with whistleblowers where doing so would be helpful to an investigation.

The TFA directs the IRS to establish procedures for taxpayers to report instances where they did not receive an anticipated electronic fund transfer or a refund was erroneously delivered to the wrong taxpayer, and also to ensure the IRS will recover the erroneous refunds and deliver them to the correct taxpayer.

Cybersecurity and Identity Protection

The TFA codifies recent efforts of the IRS, through the Security Summit, to foster a partnership aimed at combatting identity theft tax refund fraud with public and private stakeholders.

The TFA amends Code Sec. 6103(p) to provide additional confidentiality safeguards on return information provided to contractors. Under this provision, the IRS cannot provide taxpayer information to any contractors or other agents of a federal, state, or local agency unless the contractor has safeguards in place to protect the confidentiality of return information and agrees to conduct on-site compliance reviews every three years.

While the IRS issued approximately 1.2 million identity protection personal identification numbers (IP PINs) to identity theft victims for the 2014 filing season, the IP PIN program fails to protect victims whose identities have been stolen but have not yet had their tax account compromised. The TFA requires the IRS to set up a program under which any concerned taxpayer - regardless of his or her state of residence - can request an IP PIN to use in filing his or her return. TFA expands voluntary access to IP PINs nationwide over five years.

The TFA adds new Code Sec. 7529 which establishes a single point of contact within the IRS for any taxpayer who is a victim of identity theft. The single point of contact will be responsible for tracking the taxpayer's case to completion and coordinating with other units to resolve the taxpayer's issues as quickly as possible. This provision is intended to address concerns over the lack of continuity of assistance when taxpayers are victims of tax related identity theft.

Under the TFA, the IRS is required to notify a taxpayer if there has been any suspected unauthorized use of a taxpayer's identity or that of the taxpayer's dependents, if an investigation has been initiated and its status, whether the investigation substantiated any unauthorized use of the taxpayer's identity, and whether any action has been taken (such as a referral for prosecution). Furthermore, when an individual is charged with a crime, the IRS must notify the victim as soon as possible, giving such victims the ability to pursue civil action against the perpetrators.

Development of Information Technology to Facilitate Form 1099 Filings

Under the TFA, the IRS is required to develop an internet portal that facilitates taxpayers filing Forms 1099 with the IRS. The internet portal is to be modeled after a Social Security Administration (SSA) system that allows individuals to file Forms W-2 with SSA. The website will provide taxpayers with access to resources and guidance provided by the IRS, and allow taxpayers to prepare, file, and distribute Forms 1099, and create and maintain taxpayer records.

Modernization of Consent-Based Income Verification System

The Income Verification Express Service (IVES) is a program run by the IRS, which is used to verify a taxpayer's income. The program is most often used when a taxpayer is applying for a mortgage and the mortgage lender is seeking to verify the taxpayer's income. The TFA authorizes the IRS to develop an automated system to receive these forms in lieu of the current system, which relies on the forms to be sent to the IRS via secure fax. Additionally, the TFA authorizes the IRS to charge a separate user fee over a two-year period on all IVES requests to fund the development of the new system.

The TFA limits tax return information redisclosures by the taxpayer's designee to only those redisclosures to which the taxpayer has expressly consented.

Reform of Laws Governing IRS Employees

In 2014, the Treasury Inspector General for Tax Administration found that the IRS had rehired hundreds of employees who had been involuntarily separated for serious, severable offenses, such as fraud, failure to file a return, falsification of documents, and unauthorized access to taxpayer information. The TFA prohibits the IRS Commissioner from rehiring any employee of the IRS who has been involuntarily separated for misconduct.

Under the TFA, a taxpayer is required to be notified by the Secretary of the Treasury if any disciplinary or adverse action is taken against an IRS employee or employee of any other federal or state agency for unauthorized inspection or disclosure with respect to the taxpayer's information.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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