The 2012 National Taxpayer Advocate (NTA) Annual Report to Congress criticized current IRS practices in…
President Trump Revamps the IRS through his 2019 Taxpayer First Act
President Trump recently signed the Taxpayer First Act (TFA) of 2019, which for the first time in decades, will dramatically restructure, modernize and (hopefully) improve the Internal Revenue Service. There are several ways the new taxpayer-friendly law will reform the IRS and improve the IRS’ generally bad reputation. The TFA has many welcome developments regarding IRS customer service and modernization designed to bring the IRS’s technology into the 21st century. The TFA changes are numerous, so only several highlights follow.
Creation of an Independent Office of Appeals
The TFA establishes a new fair and impartial Internal Revenue Service Independent Office of Appeals that is under the direction of a new Chief of Appeals. The new office is set up to be a genuinely independent appellate administrative office to listen to taxpayers present their cases to the IRS. The office will work to resolve tax issues (i.e., unagreed income tax audit determination) without litigation.
The right of appeal is mandated to be “generally available to all taxpayers.” There is an intent to liberally allow IRS appeals. In case of a denial of a procedural right to appeal (as opposed to the substantive denial of the petition itself), the IRS is now required to provide a written notice containing a detailed description of the facts involved and a detailed explanation of the reason for the denial. A taxpayer may protest a decision to deny the request. Also, the IRS must provide an annual written report to Congress, including the number of rejected requests and the reasons for denial.
Also, the TFA provides that taxpayers must be given access to nonprivileged portions of the administrative file regarding the disputed issues no later than 10 days before the IRS Appeals conference. As a result, the taxpayer will have the same information as the IRS. In the past, taxpayers needed to request the administrative file from the IRS examiner or file a Freedom of Information Act request, which was administratively burdensome and time-consuming. The right to access the IRS administrative file is limited only to individuals whose adjusted gross income does not exceed $400,000 and to entities whose gross receipts do not exceed $5 million.
The TFA also provides that IRS lawyers who render advice to IRS Appeals should “to the extent practicable” not be the same lawyers who were initially involved in the case and should not be involved in preparing the case for litigation.
The changes to the IRS Appeals process are generally beneficial to taxpayers. However, many of the changes to the IRS Appeals process are mere guidelines and may not be followed by the IRS.
Improvement of IRS Service
The National Taxpayer Advocate, in her annual reports, has repeatedly criticized the IRS for its poor customer service. The TFA requires the IRS to be more businesslike in its customer service. The IRS must formulate and submit a comprehensive customer service strategy within one year. The plan is to provide reasonable taxpayer services for online service, telephone callback services, and employee customer service training. IRS guidance and training materials must be updated as well to be “written in a manner so as to be easily understood by customer service employees.” Another provision, in what would seem to be a no-brainer, is that the IRS is prohibited from rehiring IRS employees who ere previously fired for misconduct.
IRS Summonses to Third Parties
Especially important and favorable to small business owners under examination, the TFA limits the IRS from contacting third parties (i.e., banks, customers, contractors) for information instead of first going to the taxpayer. The TFA requires the IRS to provide reasonable notice in advance to the taxpayer of a third-party summons, at least 45 days before the beginning of contact and not greater than one year before. This new provision allows the taxpayer to provide the requested information (probably on more favorable terms) and strategically understand the issue at hand.
Fewer “John Doe” Summonses
When the IRS thinks someone is not paying taxes but does not know his or her identity (e.g., holders of offshore bank accounts), it can issue a summons (a “John Doe summons”) to a bank or other third party to get the names of the suspected tax cheats. To restrict such IRS unlimited fishing expeditions, the
TFA prevents the IRS from issuing a John Doe summons unless the information sought is narrowly tailored and closely related to the tax noncompliance, and it identifies a specific tax law violation. It is unlikely that this additional IRS burden will significantly affect IRS enforcement activities, especially in identifying noncompliant foreign bank accounts.
Limits on Cash Structuring transactions and IRS seizures
The Bank Secrecy Act requires reporting of cash transactions of $10,000 or more. Some individuals and businesses “structure” transactions to fall below the $10,000 threshold in the hopes of avoiding government detection(known as “structuring”). Structuring can be used to conceal illegal cash-generating activities or cash income earned legally to evade the payment of taxes.
In the past, the IRS has assumed this was done for unlawful reasons and has seized bank accounts even though there have been no charges or convictions.
The TFA requires the IRS to have probable cause that the structuring is derived from an illegal source or connected to criminal activity before making a seizure. The new law also establishes post-seizure notice and review procedures for IRS seizures based on suspected structuring violations. If there is a seizure, a taxpayer can have a hearing in federal court within 30 days of the seizure. If the IRS fails to show probable cause, any seized funds must be returned.
These are just some of the highlights of the Taxpayer First Act, most of which are good news for taxpayers. The implementation of the new law means there likely will be a lot of future IRS guidance and regulations to come. Hopefully, all of these changes will improve taxpayers’ and tax advisors’ dealings with the IRS.