On July 1, 2019, President Trump signed into law the Taxpayer First Act of 2019 (TFA), enacting changes to the IRS’s organizational structure, customer service, enforcement procedures, management of information technology, and use of electronic systems, with a focus on improving its interactions with taxpayers. This article discusses 10 of the most important changes in the TFA and their likely effects on taxpayers’ relations with the IRS.
Establish IRS Independent Office of Appeals
The TFA formally codifies the IRS Office of Appeals. Previously, Appeals was organized by the IRS to comply with the obligation for independent administrative review of determination of tax adjustments. Taxpayers often believed that the Appeals function operated as a “rubber stamp.” The purpose of this new codification for Appeals and its related requirements is to provide greater reassurance to taxpayers that the review of their tax issues will be more independent.
To this end, certain new procedures have been created. Specifically, the Office of Appeals can continue to consult with the IRS Chief Counsel’s Office, but should not include attorneys who were involved in advising IRS employees working directly on the case prior to the appeal. There is also a provision for certain taxpayers to have access to a nonprivileged portion of case materials developed by the IRS not later than 10 days prior to a requested conference with Appeals. This access is limited to individuals with adjusted gross income of $400,000 or less and entities with gross receipts of $5 million or less for the year of the dispute. For purposes of the entity’s gross income, the aggregation rules of Internal Revenue Code (IRC) section 448(c)(2) will apply.
In certain cases where a request for Appeals consideration is denied, the IRS must notify taxpayers of the denial with a written statement explaining the reasons for the denial. The notice also must advise the taxpayer how to protest the denial of the request.
Overall, these procedures should make taxpayers believe that the Appeals function is more independent. These should also make more information available to taxpayers on how adjustments were determined. Because there will likely be more audits of partnerships, the gross receipts test of $5 million or less for such entities should allow partnerships increased access to IRS information.
Improve IRS Service
The TFA requires the Treasury Department to develop a comprehensive strategy for customer service and submit its plan to Congress within one year of enactment. The plan should include customer expectations, long-term improvements, and plans to update guidance.
The purpose of this change is to make the IRS more focused on its goals and customers, both in the short term and long term. One challenge in implementing this change is that the IRS training materials are based on the tax code, which is often unclear. The TFA, however, requires guidance to be “in a manner so as to be easily understood by customer service employees of the Internal Revenue Service and shall provide clear instructions” [TFA section 1101(b)].
Modify Enforcement Procedures
The Bank Secrecy Act mandates reporting of certain cash transactions. Individuals sometimes structure cash transactions to fall below the $10,000 reporting threshold; such structuring is subject to both civil and criminal penalties. Current law authorizes forfeiture of property involved in such transactions. The TFA limits the authority of IRS enforcement, requiring it to show probable cause that funds subject to forfeiture and structuring were derived from an illegal source or connected to other criminal activity before seizure. The modified procedures also create a postseizure notice and review.
Strengthen IRS National Taxpayer Advocate
The TFA provides procedures to require additional attention to the suggestions of the National Taxpayer Advocate that address groups of taxpayers, known as Taxpayer Advocate Directives (TAD). This is distinguished from Taxpayer Assistance Orders (TAO), which affect individual taxpayers.
The TFA requires a timely response mechanism to TADs and the sharing of statistics. To minimize duplication of supervision, there is a mechanism to coordinate with the Treasury Inspector General for Tax Administration. There is also a requirement to report on the 10 most serious problems encountered by taxpayers.
Overall, the effect is to provide an increased role for the Taxpayer Advocate Service. The local offices have been known to be particularly responsive and service-minded in resolving issues created by IRS procedures. They not only take action when feasible, but also regularly call preparers with updates.
Expand Electronic Filing and Payments
Taxpayers filing a certain number of returns must file electronically. The TFA reduces this threshold from 250 in 2020 to 100 in 2021, and 10 in 2022. For partnerships, the threshold is 150 in 2019, 100 in 2020, and 50 in 2021. This does not affect the existing requirement for partnerships with more than 100 partners to file an electronic income tax return.
Require E-filing by Tax-Exempt Organizations
Previously, tax-exempt organizations with assets of $10 million or more filing at least 250 returns during a calendar year had to file their Form 990 electronically. To expand the access to Form 990 information, all tax-exempt organizations will now be required to electronically file Form 990 for taxable years beginning after July 1, 2019. Small tax-exempt organizations, defined as those with annual gross receipts of less than $200,000 and gross assets at year-end of less than $500,000, will be required to file Form 990 electronically beginning after July 1, 2021.
Clarify Equitable Relief from Joint Liability
The downside of a joint income tax return is joint liability. The tax code provides some relief for innocent spouses:
- General relief, which has specific standards
- Relief for persons no longer married, in limited circumstances
- Equitable relief.
If equitable relief is denied by the IRS, a taxpayer can petition the Tax Court to review the determination. There are, however, differences in how the courts have interpreted the standard of review applicable to the Tax Court. Some courts have held that the Tax Court standard of review should be whether the IRS abused its discretion based on the court’s review of the administrative record; other courts have held that the standard should be a de novo standard. One court explained that the need to make a determination requires a de novo review, and not just a review of an IRS action.
To reduce conflict in court decisions, the TFA clarifies IRC section 6015 so that equitable relief cases are not limited to the administrative record and not limited to a review of an abuse of discretion. In other words, the court’s review standard should be de novo. This will allow the Tax Court to review previous evidence and consider newly discovered evidence.
This provision applies to petitions or requests filed or pending on or after July 1, 2019. In addition, it clarifies that taxpayers can request equitable relief from the IRS with respect to any unpaid liability before the expiration of the collection period (i.e., 10 years after the assessment of tax). Prior to the TFA, IRS regulations provided that taxpayers could petition for equitable relief within two years from the date of first collection activity [Treasury Regulations section 1.6015-(b)]. In Notice 2011-70, the IRS anticipated new regulations that would remove this two-year deadline and announced it would consider petitions for equitable relief while the collection period remains open. Thus, the TFA codifies the time to petition for relief to be consistent with Notice 2011-70.
Reform Whistleblowers Program
The TFA allows the IRS to exchange information with whistleblowers, rather than merely receive it from them; the recipient of such information, however, will become subject to rules of confidentiality. Whistleblowers will also be entitled to status updates of their claims, and there are specific antiretaliation provisions that are similar to protection for other types of whistleblowers. The effect of these provisions should be more whistleblower claims. The TFA implies that Congress supports the reporting of corruption to the IRS and wishes to encourage more of it.
Increase Focus on Cybersecurity and Identity Protection
Provisions in the TFA will allow for more information sharing between both state and private sector partners, which should help to identify more cases of identity theft and tax refund fraud. To reduce identity theft, there will be easier access to identity protection personal identification numbers. For victims of tax-related theft, the IRS will establish a “single point of contact.”
There will be increased penalties for disclosure of taxpayer identity information by a return preparer. Preparers should take steps to secure the records of taxpayers.
The TFA also restores the IRS’s authority to use “streamlined critical pay,” allowing the IRS to hire more quickly and to offer more money to highly needed employees.
Improve Information Technology
The TFA is intended to strengthen the IRS’s accountability for its information technology spending. In addition, there may be Internet platforms for Form 1099 filings.
As the IRS increases its information-sharing activities, there may be increased application of artificial intelligence, which may allow for improved identity theft solutions and better detection of taxpayer fraud. The IRS can be expected to use computer data analytics to more frequently identify income tax avoidance and fraud. Don Fort, chief, IRS Criminal Investigation, has stated: “Data analytics and other technologies like ‘predictive policing’ help give law enforcement a clearer picture and are quickly becoming an everyday tool for CI” (IRS Criminal Investigation Annual Report 2018, http://bit.ly/2LC3Y2b). With this expected increased focus from the IRS, more targeted, predictive examinations should become common practice in the near future.
Putting Taxpayers First?
The TFA was designed to make interacting with the IRS easier for taxpayers. Time will tell whether or not it meets this goal. In the meantime, informing taxpayers about these changes is an excellent way for CPAs to reinforce their position as trusted advisors.