Great news for US taxpayers—Congress passed, and the President signed an expansion and strengthening of taxpayer rights (on July 1, 2019). The Taxpayer First Act (TFA), also known as H.R. 3151, represents three years of bi-partisan work. It contains numerous provisions and updates that affect both the IRS and taxpayers in general. TFA includes a focus on cyber-security and protection from identity theft for taxpayers.
What is The Taxpayer First Act?
TFA is an amendment to the Internal Revenue Code of 1986. It contains four sections.
- Title I–Putting Taxpayers First
- Title II–21st Century IRS
- Title III–Miscellaneous Provisions
- Title IV–Budgetary Effects
The purpose of the act is “to modernize and improve the Internal Revenue Service.” Below you will find more details on each of the four sections.
Details on Taxpayer First Act, Title I: Increased Transparency
This section of the Taxpayer First Act addresses the following topics: Appeals, Customer Services, Enforcement, Organizational Structure, Low-Income Taxpayers, Seizure Rules, Whistleblower Reforms, and Misdirected Refund Deposits.
Independent Office of Appeals
The IRS now reports to an Independent Office of Appeals. The Chief of Appeals will run this office. The Chief will be appointed by and report directly to the Commissioner of the IRS. The goal of the office is to resolve tax controversy matters without going to court. TFA provides the broad strokes of how this will run.
For taxpayers, the two biggest takeaways of this section are as follows: (1) the IRS will have to provide notice to a taxpayer if they are denied access to this new office and (2) if a conference is scheduled with this office upon request, the non-privileged portion of their case file will be provided to a taxpayer within 10 days.
This is a significant change in the usual method of exchange of information between the IRS and a taxpayer. This increased transparency will allow taxpayers (and their designated representatives) to quickly and more accurately gauge the specific tax controversy matters at issue and potential methods for resolution. In turn, this should hopefully reduce representation time, representation fees, and eliminate wasteful communications between the IRS and taxpayers.
Improved Customer Service
TFA mandates that the Secretary of the Treasury submit a “written comprehensive customer service strategy” for the IRS within one year, i.e., by July 1, 2020. In essence, this strategy should “pull back the curtain” to allow taxpayers full transparency on how to detail with the IRS based on their issue(s). TFA provides a Gantt chart timeline of three-, five-, and 10-year plans to improve customer service. TFA closes on this topic by indicating within two years, i.e., July 1, 2021, formal guidance and training materials are issued to IRS employees.
Modernization of the IRS
TFA mandates that the IRS must respond within 90 days to any Taxpayer Advocate Directives. There can be only one of three responses: (1) accept the directive with modifications, (2) rescind the directive, or (3) accept the directive in full and ensure compliance. In summary, the IRS cannot leave the Taxpayer Advocate waiting in limbo on issued Directives.
TFA requests a full “redesign of the organization” of the IRS. This redesign will focus on the Congressional and Taxpayer priorities, elimination of waste, and cyber-security protections. The last time the IRS had a “major restructuring” of this scope was in 1988 (Internal Revenue Service Restructuring and Reform Act of 1998).
Other Notable Aspects:
- TFA officially removes the user fee(s) for Offer in Compromise submissions for low-income taxpayers (income does not exceed 250% of the poverty level).
- TFA provides taxpayers a “post-seizure” hearing within 30 days of a seizure occurring by the IRS. It also ensures that the property seized must be returned by the IRS to the taxpayer unless an adversarial hearing determines otherwise.
- TFA added two new provisions for innocent spouse relief related to the standard of review by the US Tax Court and the statute of limitations for equitable relief.
- TFA increased the installment agreement period for private debt collections from five years to seven years. This is in alignment with usual IRS collections practice.
- TFA updates the requirements that the IRS must follow when making a summons upon a taxpayer for information.
- The Volunteer Income Tax Assistance (VITA) is now codified in law under TFA.
- TFA provides protections against retaliation for whistle-blowers through the Secretary of Labor. The remedies include compensatory damages with such provisions as 200% of back pay and 100% of lost benefits plus interest.
- TFA states that the IRS will issue regulations related to refunds that were electronically deposited in the wrong taxpayer account.
Details on Taxpayer First Act, Title II: 21st Century IRS
This section of The Taxpayer First Act contains five areas encompassing the following “major” topics: Cyber-security, Identity Theft, and other Information Technology-related provisions.
Cybersecurity and Identity Protection
TFA proscribes the basic framework for information sharing of taxpayer and tax preparer data to help assist with identity theft detection. It addresses the rules under which personal identification information (PII) can be shared. TFA continues the annual trend associated with issuing new identity theft pins. But it narrows the point of contact within the IRS to a “single point” for individuals affected by identity theft.
Other notable protections include:
- An increase in the penalties against tax preparers for improperly disclosing taxpayer information.
- The creation of a position called Chief Information Officer. This individual will be responsible for an array of information technology-related duties and report directly to the commissioner.
- The requirement that the IRS will publish guidance “to establish uniform standards.” This is related to electronic signatures for tax returns, information returns, miscellaneous forms (such as IRS Form 2848), and Power of Attorney.
- An order for the Secretary of the Treasury to reduce the “user fees” associated with paying taxes using a credit or debit card.
Details on the Taxpayer First Act, Title III: Miscellaneous Provisions
This section of the Taxpayer First Act contains three subtitles encompassing the following several major topics. These include Rules for IRS Employees, Requiring Non-Profits to Electronically File Tax Returns, and Increasing the Failure-to-File Penalty.
Rules for IRS Employees
In reaction to news earlier this year that the IRS re-hired employees that were previously terminated for misconduct, TFA officially stipulates that this is no longer allowed. Also, the IRS is now required to notify a taxpayer if an IRS employee has conducted an unauthorized inspection or disclosure of that taxpayer’s information.
Non-Profits Must File Online
TFA proscribes that non-profits are now required to file their tax returns electronically. Also, the IRS must provide written notice before revocation the tax-exempt status of non-profit for failing to file tax returns.
The Taxpayer First Act is an essential bill on many levels. It addresses significant issues raised in the last couple of years related to providing complete transparency to the nature of interactions between the IRS and taxpayers. It also formalizes true independence for the IRS appeals function, updating the cyber-security, identity theft, and e-signature protocols of the IRS. There is also more accountability on the IRS for improper hiring and taxpayer identity disclosures. And as it is bipartisan, members of Congress on both sides of the aisle have nothing but good things to say about this bill.
For all the positive news, many in the tax practitioner community feel this bill misses on several items, including the following (non-exhaustive list):
- Updating IRS notices and correspondence that are unintelligible, generally over-broad, and/or timelines for responses that are too short.
- The continued requirement by the IRS to paper file (as opposed to electronic filing) certain International Informational Reports, such as Forms 3520 and 3520-A.
- The broad assessment of significant International Informational Report penalties without proper details of the assessment in the corresponding notices, proper methods of assessment of basis for the penalty within the IRS, single-source contact, and method of appeals.
- Providing clarity on how to make payments to the IRS from non-US bank accounts or for taxpayers residing in non-US locations.
- Providing clarity on the “mail-box” rule for taxpayers that are filing paper tax returns and/or international informational reports from non-US locations.
- An explanation or plan on how to address the lack of Taxpayer Assistance Centers (TACs) in non-US locations.
The Taxpayer Advocate likely has a laundry list of other items (both domestic and international) that would dovetail with this list. One good thing that came out of this bill is the 90-day response time the IRS has for Taxpayer Advocate Directives. Perhaps, this new statutory response will trigger more clarification, more clear expectations, and more open communication from the IRS.
If you have questions about how TFA affects you, please contact us.