Taxpayer First Act changes the dynamic between IRS and practitioners

On July 1, President Donald Trump signed into law the Taxpayer First Act (TFA), P.L. 116-25. The TFA implements a number of modifications of IRS management, procedures, and oversight in an attempt to make the agency more taxpayer friendly in terms of enforcement, appeals, and customer service.

The TFA includes a wide array of provisions that enhance the agency’s efforts in the realms of cybersecurity and identity theft, address issues regarding the Office of the Taxpayer Advocate, and make changes relating to collections and other important areas that all tax practitioners should review. The TFA also amends Sec. 7803 to establish the IRS Independent Office of Appeals and provides some important taxpayer safeguards.

An independent Appeals Office

The new Independent Office of Appeals continues to operate separately from the compliance functions to resolve tax controversies and review the IRS’s administrative decisions in a fair and impartial manner.

The new law also provides taxpayers a right to review administrative case files and to protest a denial of a referral to the Appeals Office. Specifically, individuals with an adjusted gross income (AGI) of $400,000 or less and businesses with gross receipts of less than $5 million for the tax year at issue are allowed access to nonprivileged portions of their case file by the Appeals Office at least 10 days before their scheduled conference. When designating a notice of deficiency case as ineligible for referral to Appeals, the IRS must provide the taxpayer a written notice with a detailed explanation of the basis for the denial, along with procedures to protest the denial.

This independent office is allowed to obtain legal advice and assistance from the IRS Office of Chief Counsel, but to the extent practicable, that assistance is provided only by counsel staff members who were not involved in advising the IRS employees working directly on the case prior to the referral to the Office of Appeals.

Agency interactions with third parties

A second major item in the TFA for taxpayers is its reform of notice requirements for third-party contacts.

Under prior law, the IRS could not contact any person other than the taxpayer regarding the determination or collection of a taxpayer’s tax liability without providing reasonable notice in advance to the taxpayer that those contacts may be made.

The IRS previously took the position that the reasonable-notice requirement was met when it sent the taxpayer Publication 1, Your Rights as a Taxpayer, at the start of an examination. However, the TFA now requires the agency, under amended Sec. 7602(c)(1), to provide notice to the taxpayer at least 45 days before the beginning of the period of third-party contact, which may not extend longer than one year. Furthermore, the IRS is prohibited from sending the notice to the taxpayer unless the agency intends at the time the notice is issued to contact individuals other than the taxpayer.

A change to debt collection

Practitioners should also take notice of the act’s limit on private debt collection for low-income taxpayers. Sec. 6306 currently permits the IRS to use private debt collection companies to locate and contact taxpayers with inactive tax receivable accounts.

The TFA amends Sec. 6306(d)(3) so that certain individual taxpayer accounts will no longer be eligible for private debt collection. These amendments, which will not be effective until after Dec. 31, 2020, will apply to accounts of taxpayers substantially all of whose income is Social Security disability benefits or supplemental security income benefits under the Social Security Act, or individuals with an AGI for the most recent tax year that does not exceed 200% of the applicable poverty level.

Shifting penalty standards

Another set of provisions that return preparers should review concernsenhanced penalties.

Identity theft by preparer

Secs. 7216 and 6713 provide criminal and civil penalties, respectively, for tax return preparers who disclose or use any information they are provided in connection with a return for any purpose other than to prepare or assist in preparing any such return. The civil penalty is $250 for each unauthorized disclosure or use, up to $10,000 per calendar year. The corresponding criminal penalty is a misdemeanor, with a fine of up to $1,000, one year of imprisonment, or both.

Under the TFA, the penalty is increased for improper use or disclosure in connection with a crime relating to the theft of a taxpayer’s identity (whether or not it involves any tax filing). In these instances, the civil penalty is increased from $250 to $1,000. The calendar-year limitation is also increased, from $10,000 to $50,000. The maximum fine under a criminal penalty for a violation involving identity theft is now increased to $100,000.

Failure to file

Under Sec. 6651(a), if a tax return is filed more than 60 days after its due date and without reasonable cause, the failure-to-file penalty is not less than the lesser of $215 (for returns required to be filed in 2019) or 100% of the amount required to be shown as tax on the return. Under the TFA, effective for returns required to be filed after Dec. 31, 2019, the Sec. 6651(a) statutory minimum threshold will increase to $330 (and be adjusted for inflation).

Toward more satisfactory interactions

The TFA changes are an important step in the right direction that may serve as the impetus for further modifications. More certainly can be done to improve how taxpayers and practitioners interact with the IRS.