Taxpayer First Act: Important new protections for taxpayer information

By Timothy J. McCormally, J.D., Washington, D.C., former chair of the Internal Revenue Service Advisory Council

Editor: Mary Van Leuven, J.D., LL.M.

Enacted in July 2019, the Taxpayer First Act (TFA), P.L. 116-25, is the most significant legislation affecting the structure and operation of the IRS since 1998. It was described by U.S. Rep. Kevin Brady, R-Texas, the ranking member of the House Ways and Means Committee, as containing "historic reforms [that] will transform the IRS into an agency truly focused on taxpayer service" (House Ways and Means Committee press release (June 10, 2019)). The TFA's goals were to codify, expand, and strengthen taxpayer rights and transform the IRS into a more taxpayer-friendly agency by, among other things, developing a comprehensive customer service strategy, more modern technology, and enhanced cybersecurity.

The coronavirus pandemic may well affect the timing and substance of the IRS's implementation of the TFA. Nevertheless, two things are clear from reviewing the TFA's statutory language and legislative history: First, while comprehensive in scope, many of the TFA's mandates are general in nature, with their ultimate shape being left to the IRS. Indeed, in addition to containing a plethora of granular, nuts-and-bolts provisions relating to taxpayer rights, information gathering and sharing, and a host of other matters, the law mandates that the IRS prepare four strategic plans affecting the agency's core missions and activities: (1) a comprehensive plan to redesign the IRS's organizational structure (due to Congress by Sept. 30, 2020); (2) a comprehensive taxpayer service strategy (due to Congress by July 1, 2020); (3) a comprehensive employee training strategy that includes taxpayer rights training (due to Congress by July 1, 2020); and (4) a multiyear plan to meet the IRS's information technology needs.

Second, for all its laudable provisions, the TFA provided no funding, raising the question of whether Congress "would put its money where its mouth is" by appropriating sufficient funds to implement all the new requirements, procedures, and rights. The Trump administration's proposed budget for fiscal year 2021, released earlier this year, provides a partial answer from its perspective by requesting $106.3 million for implementing the TFA and identifying nine initiatives as the IRS's first-year priorities. (These TFA priorities are set forth in the IRS's Congressional Budget Justification & Annual Performance Report and Plan, which is part of the administration's budget.) Even if the administration's budget is not enacted before the fiscal year begins on Oct. 1, the priorities, analysis, and policy judgments reflected in the agency's work will likely have a real-world effect on taxpayers and their representatives.

The TFA's provisions for the most part became effective upon its July 1, 2019, enactment or, in the case of certain summonses and notices (described below), those served, issued, or made more than 45 days after enactment, i.e., on or after Aug. 16, 2019. Their effect, however, will not be fully felt until implementing rules and procedures are issued and IRS personnel are effectively trained. Even more fundamentally, the true shape of these "historic reforms" will not be known until the IRS releases its four strategic plans and completes complementary technology projects (such as a web-based platform for taxpayers to prepare, file, and distribute Forms 1099).

Nevertheless, several provisions restrict the IRS's authority to gather information or impose an obligation on the agency to share information or documents with taxpayers that can prove beneficial to taxpayers and their representatives now. The balance of this item discusses these provisions.

Access to Appeals administrative file

The Office of Appeals is the settlement arm of the IRS, with a mission to review administrative determinations from the IRS's collection and examination activities and, when possible, to resolve them without litigation. Before the TFA's enactment, there was no statutory right to contest administrative decisions in Appeals, even though a review of administrative actions before payment of any tax underlying a controversy was generally available. (There are exceptions to the taxpayer's access to Appeals — for example, when inadequate time remains on the limitation period for assessment or collection, the taxpayer's arguments are frivolous, or a case has reached the point at which litigation is initiated.)

Perhaps the TFA's most high-profile provision is one that formally enshrines in the Code the independent status of the IRS's administrative appeals process. New Sec. 7803(e)(1) creates the Independent Office of Appeals, and other provisions in Sec. 7803 set forth Appeals' operating rules. For example, Sec. 7803(e)(4) provides that access to Appeals is "generally available" to all taxpayers. Moreover, under Sec. 7803(e)(5), if the IRS wishes to deny a taxpayer's request for an administrative appeal, it must provide the taxpayer with a detailed written explanation (and an option to protest the denial).

Significantly, Sec. 7803(e)(7) requires the IRS to provide access to all nonprivileged portions of the case file at least 10 days before an Appeals conference to individual taxpayers with gross income of $400,000 or less or organizations with gross receipts of $5 million or less (effective for conferences occurring after July 1, 2020). Other taxpayers, however, are ineligible to invoke Sec. 7803(e)(7) to obtain their administrative files but can continue to seek access to the material under the Freedom of Information Act.

The policy rationale for the income-based ceiling on the provision's benefits is unclear, but administratively expanding the provision's reach would likely be quite expensive. Thus, although the Trump administration's fiscal year 2021 budget allocates $7.7 million to make required privilege determinations and format case files under Sec. 7803(e)(7), eliminating the ceiling could doubtless carry a significant cost.

Limitation on 'John Doe' summonses

While the Code grants the IRS broad authority to obtain information in the course of an examination, it includes safeguards in instances when the agency does not know the identity of a possibly noncompliant taxpayer and consequently seeks assistance from a third party such as a bank through the issuance of a "John Doe" summons. Specifically, both before and after the TFA, Sec. 7609(f) requires that the government establish that the information sought via the summons pertains to an ascertainable group of taxpayers, there is a reasonable basis to believe members of the group may fail or may have failed to comply with any provision of the Code, and the sought information is not otherwise readily available.

Concerns that the IRS may have used John Doe summonses to engage in "fishing expeditions" led Congress in the TFA to clarify — and narrow — the required showing under Sec. 7609(f). Thus, the provision now requires that the summons be "narrowly tailored" to information that pertains to the failure or potential failure of the person (or group or class of persons) to comply with one or more specifically identified provisions of the Code.

Third-party contact: Specificity of required advance notice

The Code gives the IRS authority to seek information about an identified taxpayer from third parties, such as a neighbor, bank, or employer, when efforts to secure the information directly from the taxpayer prove unsuccessful. Because of congressional concerns about the possible chilling effect that third-party contacts could have on a taxpayer's business or reputation in the community, Sec. 7602(c) has historically required that the taxpayer be given advance notice of any third-party outreach as well as periodic updates on whom the IRS has contacted.

Differences of opinion on what constitutes "reasonable notice in advance" (the term used in Sec. 7602(c)(1)) — with the IRS boldly asserting in litigation that it was sufficient for the IRS to provide a general statement at the beginning of an audit that third-party contacts were possible — led Congress in the TFA to significantly revise the notification requirement. (In J.B., 916 F.3d 1161 (9th Cir. 2019), the government unsuccessfully argued that the notice requirement was satisfied by sending the taxpayer a copy of IRS Publication 1, Your Rights as a Taxpayer, which contains a general statement about the situations in which the IRS may seek information from third parties.)

Under the TFA, general notices are no longer acceptable. Revised Sec. 7602(c) generally requires taxpayers to be notified at least 45 days before the beginning of a contact period. The period of contact covered by the notice cannot exceed one year. Sec. 7602(c) as amended also forbids the IRS from issuing such a notice unless it intends at that time to make third-party contacts. (In satisfying this present-intent requirement, the IRS can assume that the information sought will not be obtained by other means — e.g., from the taxpayer directly — before the third-party contact.)

Designated summonses

A designated summons is an administrative summons that is issued to a corporation in the IRS's large-case program in which the agency audits the largest corporations. (In recent years, the formal name of this IRS compliance program has changed from "coordinated examination program" to "coordinated industry case program" to (as of May 2019) "large corporate compliance program.")

Before the TFA's enactment, a designated summons was any summons the issuance of which was reviewed by the regional counsel of the Office of Chief Counsel for the region in which the examination of the corporation was being conducted before the summons was issued. Assuming these conditions were met, the designated summons effectively suspended the statute of limitation, giving the IRS more time to examine a taxpayer, which may have been necessary because of the complexity of the taxpayer's activities, voluminous nature of records, large number of witnesses, or lack of taxpayer cooperation. Although only three designated summonses have been issued in the past 25 years (most recently in 2014), the potential suspension of the statute of limitation likely affected taxpayer behavior in some cases, spawned significant taxpayer concern, and prompted a congressional response in the TFA.

Under Sec. 6503(j) as amended by the TFA, the approval and review of designated summonses are now more high-level and rigorous. A summons must be reviewed and approved in writing by both the commissioner of the IRS's Large Business & International Division and the Chief Counsel's office, and the approval must state facts clearly establishing that the IRS has made reasonable requests for the information that is the subject of the summons and be attached to the summons. The summons must also be issued at least 60 days before the expiration of the statute of limitation and formally be designated as a designated summons.

Finally, in any judicial proceeding to enforce a designated summons, the burden of proving that reasonable requests have in fact been made is on the government.

Limitation on access of non-IRS employees to taxpayer information

Usually, IRS examinations are conducted by government employees who are subject to strict rules (and potential penalties) relating to confidentiality and taxpayer privacy. Under Sec. 6103(n) and attendant regulations, the IRS may use the services of "tax administration contractors," such as translators, economists, valuation experts, and other contractors (including attorneys), not only to review documents, but also to interview taxpayers and others. This authority flows from a recognition that IRS personnel may not always possess the specialized expertise needed in particular cases.

Because of concerns about the IRS's use of outside attorneys as contractors, the TFA limits the IRS's use of third parties in examinations. In particular, Sec. 7602(f) now provides that the IRS may not provide a tax administration contractor with access to tax return or related information except when the contractor needs the information "for the sole purpose of providing expert evaluation and assistance" to the IRS. In addition, Sec. 7602(f) states that no person other than an officer or employee of the IRS or the Office of Chief Counsel may question a witness under oath whose testimony was obtained pursuant to Sec. 7602.


Mary Van Leuven, J.D., LL.M., is a director, Washington National Tax, at KPMG LLP in Washington, D.C.

For additional information about these items, contact Ms. Van Leuven at 202-533-4750 or

Unless otherwise noted, contributors are members of or associated with KPMG LLP.

These articles represent the views of the author(s) only, and do not necessarily represent the views or professional advice of KPMG LLP. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.

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