Special Castro Report on Taxpayer First Act of 2019
by John Anthony Castro, J.D., LL.M.
Executive Summary: On June 13, the Senate passed by voice vote H.R. 3151, the Taxpayer First Act of 2019 (the Act). The Senate-passed measure is identical to the one passed by the House of Representatives, also by voice vote, on June 10. Thus, the legislation is cleared for the President who signed it into law on July 1. The Act changes the management and oversight of IRS with the aim of improving customer service and the process for assisting taxpayers with appeals; modifies IRS's organization; and provides some new safeguards to taxpayers in their interactions with IRS. It is now Public Law 116-25.
On June 13, the Senate passed by voice vote H.R. 3151, the Taxpayer First Act of 2019 (the Act). The Senate-passed measure is identical to the one passed by the House of Representatives, also by voice vote, on June 10. Thus, the legislation is cleared for the President s expected signature. The Act changes the management and oversight of IRS with the aim of improving customer service and the process for assisting taxpayers with appeals; modifies IRS s organization; and provides some new safeguards to taxpayers in their interactions with IRS.
INDEPENDENT APPEALS PROCESS
Establishment of IRS Independent Office of Appeals
Under pre-Act law, IRS sends taxpayers a report and/or letter that explains proposed adjustments or proposed or taken collection action. The correspondence tells taxpayers of their right to request a conference with the IRS Office of Appeals (Appeals) or a Settlement Officer.
Although the Code makes frequent reference to Appeals, and Section 8 of the Internal Revenue Manual sets out IRS internal rules with respect to Appeals and the appeal process, under pre-Act law, the Code did not set out rules for Appeals.
New law. The Act codifies the requirements of an independent administrative appeals function at IRS. In so doing, it renames the IRS Office of Appeals as the IRS Independent Office of Appeals (Independent Appeals). (Code Sec. 7803(e) as amended Act Sec. 1001)
Independent Appeals is intended to continue to resolve tax controversies and review administrative decisions of IRS in a fair and impartial manner. (Code Sec. 7803(e)(3)), as amended by Act Sec. 1001(a)) Resolution of tax controversies in this manner is generally available to all taxpayers, subject to reasonable exceptions that IRS may provide. (Code Sec. 7803(e)(4)))
The new rules require that the administrative case file referred to Independent Appeals be available to certain individual and small business taxpayers. Eligible taxpayers are those that, for the tax year to which the dispute relates, are: (1) individuals with adjusted gross incomes not exceeding $400,000, and (2) entities with gross receipts not exceeding $5 million for the tax year. (Code Sec. 7803(e)(7))
In cases in which IRS has issued a notice of deficiency to a taxpayer, IRS must prescribe notice and protest procedures for taxpayers whose request for Independent Appeals consideration is denied. (Code Sec. 7803(e)(5))
The Independent Appeals rules are generally effective upon the date of enactment, except with regard to the change allowing taxpayer access to case files, which is effective for cases in which the conference occurs more than one year after the date of enactment. (Act Sec. 1001(e))
IMPROVED IRS SERVICE
Comprehensive customer service strategy
New law. The Act requires IRS to develop a comprehensive strategy for customer service, to submit such plan to Congress not later than the date which is one year after the date of enactment, and to make the plan and training materials available to the public within two years of that date.
The strategy will include, among other things, a plan to determine appropriate levels of online services, telephone call back services, and training of employees providing customer services, based on best practices of businesses and designed to meet reasonable customer expectations. (Act Sec. 1101)
Low-income exceptions regarding offers-in-compromise
Under pre-Act law, IRS is authorized to enter into an offer-in-compromise (OIC) agreement with a taxpayer to settle a tax debt for less than the taxpayer's actual liability. Generally, when proposing an OIC to IRS, the taxpayer must pay an application fee and provide an initial non-refundable lump sum payment. IRS has the authority to waive these payments. Under this authority, IRS does not require taxpayers certified as low-income, defined as those with incomes below 250% of the Federal poverty level, to include the application fee and initial payment.
New law. With respect to offers-in-compromise submitted after the date of enactment, the Act codifies the current low-income taxpayer exception for the user fee or upfront partial payment. The Act also provides that the determination of low income is based on the individual's adjusted gross income as determined for the most recent tax year for which such information is available. (Code Sec. 7122(c)(3) as amended Act Sec. 1103)
Structuring transactions and IRS seizures
The Bank Secrecy Act (BSA) mandates reporting and record-keeping requirements, including reporting currency transactions exceeding $10,000, to assist Federal law enforcement and regulatory agencies in the detection, monitoring, and tracing of certain monetary transactions. To circumvent these reporting requirements, some individuals structure cash transactions to fall below the $10,000 reporting threshold (also known as structuring ). Structuring can be used to conceal illegal cash-generating activities or income earned legally in order to evade the payment of taxes. Structuring (or attempts to structure) for the purpose of evading the reporting and record-keeping requirements is subject to both civil and criminal penalties.
New law. Effective on the date of enactment, the Act provides that, in the case of a suspected structuring violation, IRS may only pursue seizure or forfeiture of assets if either the property to be seized was derived from an illegal source or the transactions were structured for the purpose of concealing a violation of a criminal law or reg other than rules against structuring.
The Act also establishes post-seizure notice and review procedures for IRS seizures based on suspected structuring violations. (31 USC 5317(c)(2), as amended Act Sec. 1201)
Also, effective for interest received on or after the date of enactment, the Act amends the Code to exclude from gross income any interest received from the Federal government in connection with an action to recover property seized by IRS pursuant to a claimed violation of the structuring provisions of the BSA. (Code Sec. 139H, as added by Act Sec. 1202)
Innocent spouse relief
In general, married couples who file tax returns jointly are both responsible for the entire tax liability that should be reported on the return. However, under certain circumstances, the tax code provides relief from joint liability for certain innocent spouses. (Code Sec. 6015) One such type of relief is equitable relief; this relief is granted only if, taking into account all facts and circumstances, it is inequitable to hold the individual liable for the unpaid portion of tax or for a deficiency with respect to the joint return.
New law. The Act provides that the standard of review for innocent spouse relief by the Tax Court is to be conducted on a de novo basis, meaning that the Tax Court would take a fresh look at the case without taking previous decisions into account. The review would be based on the administrative record and any newly discovered or previously unavailable evidence. (Code Sec. 6015(e)(7), as amended Act Sec. 1203(a)(1))
The Act also allows taxpayers to request equitable relief with respect to any unpaid liability before the expiration of the collection period or, if paid, before the expiration of the applicable limitations period for claiming a refund or credit. (Code Sec. 6015(f), as amended by Act Sec. 1203(a)(2))
The new provisions are effective for petitions or requests filed or pending on or after the date of enactment. (Act Sec. 1203(b))
John Doe summonses
IRS may issue a third-party summons that doesn't identify the taxpayer (a John Doe summons), but only if there has been a court proceeding in which IRS proves that it meets certain requirements. (Code Sec. 7609(f))
New law. Effective for summonses served after the date that is 45 days after the date of enactment, the Act prevents IRS from issuing a John Doe summons unless the information sought to be obtained is narrowly tailored and pertains to the failure (or potential failure) of the person or group or class of persons referred to in the statute to comply with one or more provisions of the Code which have been identified. (Code Sec. 7609(f), as amended Act Sec. 1204(a))
Taxes collected by private collection agencies
The Code permits IRS to establish a program that refers certain inactive tax receivable accounts to private collection agencies. (Code Sec. 6306(a))
The Code defines the term inactive tax receivables. One type of inactive tax receivable is a receivable for which more than one third of the applicable limitations period has lapsed and no IRS employee has been assigned to collect the receivable. (Code Sec. 6306(c)(2)(A))
Certain tax receivables are not eligible for collection by private collection agencies. (Code Sec. 6306(d))
New law. Effective with respect to tax receivables identified by IRS after Dec. 31, 2020:
...The Act makes the following additional tax receivables of individual taxpayers ineligible for collection under qualified tax collection contracts receivables with respect to a taxpayer: (1) substantially all of whose income comes from supplemental security income benefits or disability insurance benefit payments, or (2) whose adjusted gross income does not exceed 200% of the applicable poverty level. (Code Sec. 6306(d)(3), as amended by Act Sec. 1205(a))
...The Act also modifies the definition of inactive tax receivable by replacing the condition that more than 1/3 of the applicable limitations period has lapsed with the requirement that more than two years has passed since assessment. (Code Sec. 6306(c)(2)(A)(ii), as amended by Act Sec. 1205(b))
And, effective for contracts with private collectors that are entered into after the date of enactment, the Act also substitutes seven years for five years in a rule that currently allows private debt collectors to offer a taxpayer an installment agreement providing for payment over a period as long as five years. (Code Sec. 6306(b)(1)(B), as amended by Act Sec. 1205(c))
Notice to taxpayer of IRS contact with third party
IRS may not contact any person other than the taxpayer with respect to the determination or collection of the tax liability of the taxpayer without providing reasonable notice in advance to the taxpayer that IRS may contact persons other than the taxpayer. (Code Sec. 7602(c)(1))
New law. Effective for notices provided, and contacts of persons made, more than 45 days after the date of enactment, the Act replaces the above requirement with a requirement that the taxpayer be provided with notice at least 45 days before the beginning of the period of contact. The period of contact may not be greater than one year. The Act requires that notice be provided only if there is a present intent at the time such notice is given for IRS to make such contacts. (Code Sec. 7602(c)(1), as amended Act Sec. 1206)
A designated summons is an administrative summons that is issued to a large corporation (or person to whom the corporation has transferred the requested books and records) with respect to one or more tax periods currently under examination. It has the effect of extending a limitations period on IRS making an assessment against the corporation. (Code Sec. 6503(j))
New law. Effective for summonses issued more than 45 days after the date of enactment, the Act requires that prior to issuing a designated summons, the Commissioner of the relevant operating division of IRS and the Chief Counsel must review and provide written approval of the summons. The written approval must state facts establishing that IRS had previously made reasonable requests for the information and must be attached to the summons. The provision also requires that IRS certify in any subsequent judicial proceedings that a reasonable request for the information were made. (Code Sec. 6503(j), as amended by Act Sec. 1207)
Limits on actions by IRS contractors
Code Sec. 7602(a) provides that IRS is authorized to examine books and records, issue summonses seeking documents and testimony, and take testimony from witnesses under oath. Use of outside specialists, e.g., economists, engineers, and actuaries, is appropriate to assist IRS in determining the correctness of the taxpayer's self-assessed tax liability.
Code Sec. 6103(n) and Reg. 301.6103(n)-1(a) authorize IRS to disclose returns and return information to these specialists. Reg. 301.7602-1(b)(3) provides that persons described in Code Sec. 6103(n) may receive and review books, papers, records, or other data summoned by IRS and, in the presence and under the guidance of an IRS officer or employee, participate fully in the interview of a person who IRS has summoned as a witness to provide testimony under oath. 2018 proposed regs would narrow this authority. (Prop Reg 301.7602-1(b)(3))
New law. The Act provides that IRS cannot, under the authority of Code Sec. 6103(n), provide books and records that IRS obtained under its authority, to a contractor described in Code Sec. 6103(n), other than when the contractor requires such information for the sole purpose of serving as an expert.
This provision also ensures that only IRS employees or the Office of Chief Counsel are able to question a witness under oath, where the witness's testimony was obtained pursuant to Code Sec. 7602. (Code Sec. 7602(f), as amended Act Sect 1208(a))
These changes are generally effective on the date of enactment and apply to any tax administration contracts under Code Sec. 6103(n) in effect on the date of enactment.
ORGANIZATION OF IRS
Office of the Taxpayer Advocate
The Office of the Taxpayer Advocate (OTA) is expected to represent taxpayer interests independently in disputes with IRS. The National Taxpayer Advocate (NTA) supervises the OTA. (Code Sec. 7803(c)(1))
Taxpayer Advocate Directives (TADs) are directives from the NTA to IRS that identify systemic problems and mandate changes to IRS tax administration or other processes. Certain IRS Deputy Commissioners have the authority to modify or rescind a TAD.
New law. The Act requires certain responses to TADs from the IRS Commissioner or Deputy Commissioner and clarifies the time period required for such a response. (Code Sec. 7803(c)(5), as amended by Act Sec. 1301(a)(1))
The Act makes other changes to the NTA s responsibilities. It requires the NTA to report to Congress any TADs not addressed by IRS, requires IRS to provide statistical support to the NTA upon request to the extent practicable, and requires the NTA to coordinate research efforts with the Treasury Inspector General for Tax Administration (TIGTA). (Code Sec. 7803(c)(2), as amended by Act Sec. 1301(b)(2); Code Sec. 6108(d), as amended by Act Sec. 1301(b)(3))
These changes are effective on the date of enactment. (Act Sec. 1301(d)(1))
IRS organizational structure
New law. Under the Act, the Treasury Department is required to submit to Congress by Sept. 30, 2020, a comprehensive written plan to redesign the organization of IRS. The Act requires the plan to, among other things: (a) streamline the structure of the agency including minimizing the duplication of services and responsibilities; (b) best position IRS to combat cybersecurity and other threats to IRS; and (c) address whether the Criminal Division of IRS should report directly to the Commissioner.
Beginning one year after the date on which the plan is submitted to Congress, a requirement, contained in earlier legislation, that IRS's organizational structure feature operating units serving particular groups of taxpayers with similar needs, will cease to apply. (Act Sec. 1302)
Community Volunteer Income Tax Assistance programs
IRS, through its Volunteer Income Tax Assistance (VITA) Program, currently partners with IRS-certified volunteer organizations to provide free tax return filing assistance to low-income populations, persons with disabilities, taxpayers with limited English proficiency, and other underserved communities.
New law. The Act codifies the VITA program. The Secretary of the Treasury, unless otherwise provided by specific appropriation, may allocate from otherwise appropriated funds up to $30 million per year in matching grants to qualified entities for the development, expansion, or continuation of qualified tax return preparation programs assisting low-income taxpayers and members of underserved populations. Additionally, the provision allows IRS to use mass communications and other means to promote the benefits and encourage the use of the program. (Code Sec. 7526A, as added by Act Sec. 1401)
Low Income Taxpayer Clinics
The Code provides that IRS may provide up to $6 million per year in matching grants to Low Income Taxpayer Clinics which assist low-income taxpayerswith representation and controversies with IRS. (Code Sec. 7526) 5 CFR 3101.106(a) prohibits Treasury Department personnel from referring taxpayers to qualified low-income taxpayer clinics for advice and assistance.
New law. Effective on the date of enactment, the Act allows Treasury Department personnel to advise taxpayers of the availability of, and eligibility requirements for receiving, advice and assistance from qualified low-income taxpayer clinics that receive funding under the Code, and to provide location and contact information for such clinics. (Code Sec. 7526(c), as amended by Act Sec. 1402)
Taxpayer assistance center closures
IRS operates taxpayer assistance centers (TACs) around the country to provide face-to-face assistance with preparing tax returns and understanding tax laws.
New law. The Act requires IRS to provide public notice, including by non-electronic means, to affected taxpayers 90 days prior to the closure of a TAC. The notice must include information on alternative forms of assistance available for affected taxpayers and the date of the proposed closure. (Act Sec. 1403)
Seizure and sale of perishable goods
Under pre-Act law, if it is determined that any tangible property seized to satisfy unpaid taxes: (1) is liable to perish, (2) is liable to become greatly reduced in price or value by keeping, or (3) cannot be kept without great expense, the property may be sold after it has been appraised and the owner has been given an opportunity to pay the appraised value or furnish bond for payment. The general procedures governing the sale of seized property do not apply.
New law. Effective for property seized after the date of enactment, the Act limits the property that may be sold pursuant to the above procedures to property that is liable to perish. (Code Sec. 6336, as amended by Act Sec. 1404)
Under Code Sec. 7623, individuals who submit information leading to detection of underpayment of tax or to detection, trial, and punishment of persons guilty of violating internal revenue laws, may file a claim for an award.
New law. With respect to disclosures made after the date of enactment, the Act allows IRS to exchange information with whistleblowers where doing so would be helpful to an investigation. It also requires IRS to notify whistleblowers of the status of their claims at certain points in the review process and authorizes, but does not require, IRS to provide status updates at other times upon written request of the whistleblower. To protect taxpayer privacy, it would prohibit whistleblowers from disclosing publicly information they receive from IRS, under penalty of law. (Code Sec. 6103(k)(13), as amended by ActSec. 1405(a))
In addition, effective on the date of enactment, the Act amends the Code to extend anti-retaliation provisions to IRS whistleblowers similar to those that are provided to whistleblowers under the False Claims Act and the Sarbanes-Oxley Act. (Code Sec. 7623(d) as amended by Act Sec. 1405(b))
Information IRS is to provide during phone calls
New law. Effective on the date of enactment, the Act requires IRS to provide the following information over the telephone, while taxpayers are on hold with the IRS call center: information about common tax scams, direction to the taxpayer on where and how to report such activity, and tips on how to protect against identity theft and tax scams. (Act Sec. 1406)
Misdirected tax refund deposits
New law. The Act requires IRS to prescribe regs, within six months of the date of enactment, to establish procedures to allow taxpayers to report instances in which a refund made by electronic funds transfer was not transferred to the account of the taxpayer, to coordinate with financial institutions to identify and recover these payments, and to deliver refunds to the correct accounts of taxpayers. (Code Sec. 6402(n) as amended Act Sec. 1407)
CYBERSECURITY AND IDENTITY PROTECTION
Public-private partnership to address refund fraud
New law. The Act requires IRS to work collaboratively with the public and private sectors to protect taxpayers from identity theft refund fraud. (Act Sec. 2001)
Electronic Tax Administration Advisory Committee
'98 tax legislation authorized the Electronic Tax Administration Advisory Committee (ETAAC); ETAAC provides input to IRS on electronic tax administration.
New law. Effective on the date of enactment, the act adds the following to the current requirements regarding ETAAC: ETAAC is to study and make recommendations to IRS regarding methods to prevent identity theft and refund fraud. (Act Sec 2002)
Information Sharing and Analysis Center
The Security Summit, a partnership of IRS, State tax agencies, and the private-sector tax industry to address tax refund fraud caused by identity theft, in 2016, created an Identity Theft Tax Refund Fraud Information Sharing and Analysis Center (ISAC). The ISAC enables IRS and the States to work together with external third parties to serve as an early warning system for tax refund fraud, identity theft schemes, and cybersecurity issues.
New law. Effective on the date of enactment, the Act authorizes IRS to participate in the ISAC. (Act Sec. 2003(a))
Effective for disclosures made after the date of enactment, the Act provides that IRS may disclose specified return information to specified ISAC participants if such disclosure is in furtherance of effective Federal tax administration relating to the following: (1) the detection or prevention of identity theft tax refund fraud; (2) validation of taxpayer identity; (3) authentication of taxpayer returns; or (4) the detection or prevention of cybersecurity threats to IRS. (Code Sec. 6103(k)(14), as amended Act Sec. 2003(c))
Confidentiality safeguards for Federal, state contractors
Code Sec. 6103 permits the disclosure of returns and return information to State agencies, as well as to other Federal agencies for specified purposes.
Employees of a State tax agency may disclose returns and return information to contractors for tax administration purposes. (Code Sec. 6103(n)) These disclosures can be made only to the extent necessary to contractually procure equipment, other property, or services, related to tax administration. The contractors can make re-disclosures of returns and return information to their employees as necessary to accomplish the tax administration purposes of the contract. (Reg. 31.6013(n)-1)
New law. Effective for disclosures made after Dec. 31, 2022, the Act provides that IRS will not be able to provide taxpayer information to any contractors or other agents of a Federal, state, or local agency unless the contractor has safeguards in place to protect the confidentiality of return information and agrees to conduct on-site compliance reviews every three years. The Federal, state, or local agency is required to submit a report of its findings to IRS and certify annually that such contractors and other agents are in compliance with the requirements to safeguard the confidentiality of Federal returns and return information. (Code Sec. 6103(p)(9), as amended by Act Sec. 2004(a))
Identity Protection Personal Identification Numbers
An Identity Protection Personal Identification Number (IP PIN) is a 6-digit number assigned to eligible taxpayers that allows their tax returns/refunds to be processed without delay and helps prevent the misuse of their Social Security Numbers (SSNs) on fraudulent Federal income tax returns. While the IP PIN program was initially restricted to taxpayers affected by identity theft, as a result of expansion that begun in 2014, the program is now also available to taxpayers in nine states plus the District of Columbia who request an IP PIN.
New law. Within five years of the date of enactment, the Treasury Department is required to establish a program to issue an IP PIN to any U.S. resident individual who requests one. And, for each calendar year beginning after the date of enactment, the Treasury Department is required to expand the issuance of IP PINs to individuals residing in such states as IRS deems appropriate, provided that the total number of states served by the program continues to increase. (Act Sec. 2005)
Point of contact for identity theft victims
New law. Responding to concerns over the lack of continuity of assistance when taxpayers are victims of tax-related identity theft, the Act, effective on the date of enactment, requires IRS to establish procedures to implement a single point of contact for taxpayers adversely affected by identity theft. (Act Sec. 2006)
Notification of suspected identity theft
Often identity theft and refund fraud victims may be unaware that their identity has been used fraudulently or, when they are aware, may not be fully informed of the outcome of their case.
New law. Effective for determinations made after the date that is six months after the date of enactment, the Act requires IRS to notify a taxpayer if it determines there has been any suspected unauthorized use of a taxpayer s identity, or that of the taxpayer s dependents, if an investigation has been initiated and its status, whether the investigation substantiated any unauthorized use of the taxpayer s identity, and whether any action has been taken (such as a referral for prosecution). Furthermore, when an individual is charged with a crime, IRS must notify the victim as soon as possible, giving such victims the ability to pursue civil action against the perpetrators. (Code Sec. 7529(a), as added by Act Sec. 2007(a))
For purposes of this provision, the unauthorized use of the identity of an individual includes the unauthorized use of the identity of the individual to obtain employment. (Code Sec. 7529(b), as added by Act Sec. 2007(a))
IRS management of stolen identity cases
The National Tax Advocate has noted that identity theft victims are often required to deal with multiple persons within IRS to resolve their issues.
New law. The Act requires that, not later than one year after the date of enactment, IRS, in consultation with the NTA, develop and implement publicly available caseworker guidelines that reduce the burdens for identity theft tax refund fraud (IDTTRF) victims as they work with IRS to sort out their tax affairs. The guidelines may include procedures to reduce the amount of time victims would have to wait to receive their tax refunds, the number of IRS employees with whom victims would need to interact, and the timeframe within which the issues related to the IDTTRF should be resolved. (Act Sec. 2008)
Improper disclosure by return preparers
A tax return preparer who discloses any information furnished to the preparer for, or in connection with, the preparation of a return or uses such information for any purpose other than to prepare or assist in preparing, any such return, is subject to penalty. There is a $250 civil penalty for each unauthorized disclosure or use up to $10,000 per calendar year. (Code Sec. 6713) The corresponding criminal penalty under Code Sec. 7216 provides that knowing or reckless conduct is a misdemeanor, subject to a fine up to $1,000, one year of imprisonment, or both, together with the costs of prosecution.
New law. Effective with respect to disclosures or uses made on or after the date of enactment, the Act increases the civil penalty for the unauthorized disclosure or use of information by tax return preparers from $250 to $1,000 for cases in which the disclosure or use is made in connection with a crime relating to the misappropriation of another person's taxpayer identity (taxpayer identity theft). The proposal also increases the calendar year limitation from $10,000 to $50,000. The calendar year limitation is applied separately with respect to disclosures or uses made in connection with taxpayer identity theft. (Code Sec. 6713(b), as amended by Act Sec. 2009(a)(2))
The Act also increases the criminal penalty for knowing or reckless conduct to $100,000 in the case of disclosures or uses in connection with taxpayer identity theft. (Code Sec. 7216(a), as amended by Act Sec. 2009(b))
IRS INFORMATION TECHNOLOGY
Management of IRS information technology
New law. Effective on the date of enactment, the IRS Commissioner is required to appoint an IRS Chief Information Officer (CIO). The IRS CIO will be responsible for, among other things, the development, implementation, and maintenance of information technology for IRS, ensuring that the information technology of IRS is secure and integrated, maintaining operational control of all information technology for IRS, and acting as the principal advocate for the information technology needs of IRS. (Code Sec. 7803(f), as amended by Act Sec. 2101(a))
Also, IRS must finish its plans for the completion of the Customer Account Data Engine (CADE 2) and have a third party independently verify and validate planning for CADE 2 and Enterprise Case Management system(s) generally within a year of enactment. (Act Sec. 2101(b))
Internet platform for Form 1099 filings
New law. The Act requires IRS to, by Jan. 1, 2023, develop an internet portal that facilitates taxpayers filing Forms 1099 with IRS. The internet portal is to be modeled after a Social Security Administration (SSA) system that allows individuals to file Forms W-2 with SSA. The website will provide taxpayers with access to resources and guidance provided by IRS, and allow taxpayers to prepare, file, and distribute Forms 1099, and create and maintain taxpayerrecords. (Act Sec. 2102)
IRS information technology jobs
'98 legislation provided IRS with certain personnel flexibilities, one of which was the streamlined critical pay (SCP) authority. The purpose of the SCP authority was to provide IRS a management tool to quickly recruit and retain employees with high levels of expertise in technical or professional fields critical to the success of IRS s restructuring efforts. The authority was originally authorized for ten years and extended two times.
New law. The Act reauthorizes SCP authority for IRS but only with respect to IT positions. Such authority is effective on the date of the enactment and ends on Sept. 30, 2025. (Code Sec. 7812, as added by Act Sec. 2103)
CONSENT-BASED DISCLOSURES OF RETURN INFORMATION
Disclosures for third-party income verification
Under Code Sec. 6103(c), the IRS may disclose the return or return information of a taxpayer to a third party designated by the taxpayer in a request for or consent to such disclosure.
The Income Verification Express Service (IVES) is a program run by IRS, which is used to verify a taxpayer s income. The program is most often used when a taxpayer is applying for a mortgage or other loan and the lender is seeking to verify the taxpayer s income. The current IVES program requires that transcript information requests be submitted to the IRS by fax.
New law. No later than three years after the first day of the sixth calendar month after enactment, the Act requires IRS to develop an automated system to receive these forms in lieu of the current system, which relies on the forms to be sent to IRS via secure fax.
Additionally, the provision authorizes IRS to charge a separate user fee over a two-year period on all IVES requests, in order to fund the development of the new system. (Act Sec. 2201)
Limit on re-disclosures of consent-based disclosures
Under Code Sec. 6103(c), a taxpayer may designate in a request or consent to the disclosure by IRS of his or her return or return information to a third party.
New law. Effective for disclosures made after 180 days after the date of enactment, the Act provides that persons designated by the taxpayer to receive return information must not use the information for any purpose other than the express purpose for which consent was granted and must not disclose return information to any other person without the express permission of, or request by, the taxpayer. (Code Sec. 6103(c), as amended by Act Sec. 2202)
EXPANDED USE OF ELECTRONIC SYSTEMS
Electronic filing of returns
The Code requires that Federal income tax returns prepared by tax return preparers be filed electronically other than returns prepared by any preparer that reasonably expects to file 10 or fewer individual tax returns during the calendar year. (Code Sec. 6011(e)(3).
For taxpayers other than partnerships, the statute prohibits any requirement that persons who file fewer than 250 returns during a calendar year file electronically. (Code Sec. 6011(e)(2)(A)) For partnerships, a lower number than 250 applies; the exact number goes from 200 in 2018 to 20 for calendar years after 2021. (Code Sec. 6011(e)(5)(A)) Notwithstanding Code Sec. 6011(e)(2)(A) and Code Sec. 6011(e)(5)(A), all partnerships with more than 100 partners are required to file electronically. (Code Sec. 6011(e)(5)(B))
New law. Under the Act, the above 250 amount is reduced to 100 in the case of calendar year 2021, and from 100 to 10 in the case of calendar years after 2021. (Code Sec. 6011(e)(2)(A), as amended by Act Sec. 2301(a); Code Sec. 6011(e)(5)(A), as amended by Act Sec. 2301(b)) The Act maintains the pre-Act rules regarding partnerships, except that it substitutes 50 for 20 in the above rule regarding calendar years after 2021. (Code Sec. 6011(e)(5)(B) and Code Sec. 6011(e)(6), as amended by Act Sec. 2301(b))
The Act also authorizes IRS to waive the requirement that a Federal income tax return prepared by a tax return preparer be filed electronically; such a waiver applies where the tax return preparer applies for a waiver and demonstrates that the inability to file electronically is due to lack of internet availability (other than dial-up or satellite service) in the geographic location in which the return preparation business is operated. (Code Sec. 6011(e)(3)(D), as amended by ActSec. 2301(c))
Electronic signatures by taxpayers to authorize action by their practitioner
New law. For a request for disclosure to a practitioner with consent of the taxpayer, or for any power of attorney granted by a taxpayer to a practitioner, the Act requires IRS to publish guidance to establish uniform standards and procedures for the acceptance of taxpayers' signatures appearing in electronic form with respect to such requests or power of attorney. Such guidance must be published within six months of the date of enactment. (Code Sec. 6061(b)(3), as amended by Act Sec. 2302)
Payment of taxes by debit and credit cards The Code generally permits the payment of taxes by commercially acceptable means such as credit cards. (Code Sec. 6311) IRS may not pay any fee or provide any other consideration in connection with the use of credit, debit, or charge cards for the payment of income taxes. (Code Sec. 6311(d)(2))
New law. Effective on the date of enactment, the Act removes the prohibition on paying any fees or providing any other consideration in connection with the use of credit, debit, or charge cards for the payment of income taxes to the extent the fees, etc. are fully recouped by IRS in the form of fees paid to IRS by persons paying taxes. (Code Sec. 6311(d)(2), as amended by Act Sec. 2303)
Authentication of users of IRS E-Services accounts
In the past, unscrupulous tax return preparers have used IRS s suite of electronic services (eServices) to perpetrate tax refund fraud.
New law. Beginning 180 days after the date of enactment, the Act requires IRS to verify the identity of any individual opening an e-Services account before he is able to use such services. (Act Sec. 2304)
OTHER IRS PROVISIONS
Repeal of requirements regarding return-free tax system
'98 legislation requires IRS to study the feasibility of, and develop procedures for, the implementation of a return-free tax system for appropriate individuals for tax years beginning after 2007. IRS is required annually to report on the progress of the development of such system.
New law. Effective on the date of enactment, the Act repeals these requirements. (Act Sec. 2401)
Training of IRS employees
New law. Not later than one year after the date of enactment, the Act requires IRS to submit to Congress a written report providing a comprehensive training strategy for IRS employees. (Act Sec. 2402)
Prohibition on IRS rehiring certain fired employees
New law. Effective with respect to the hiring of employees after the date of enactment, the Act prohibits IRS from rehiring any employee of IRS who has been involuntarily separated for misconduct. (Code Sec. 7804(d), as amended by Act Sec. 3001)
Notification of unauthorized inspection, etc. of returns
Code Sec. 7431 provides for civil damages resulting from an unauthorized disclosure or inspection of returns or return information.
New law. Effective for determinations proposed after 180 days after the date of enactment, the Act requires IRS to notify a taxpayer if IRS or a Federal or State agency (upon notice to IRS by such Federal or State agency) proposes an administrative determination as to disciplinary or adverse action against an employee arising from the employee's unauthorized inspection or disclosure of the taxpayer's return or return information. (Code Sec. 7431(e), as amended by Act Sec. 3002)
EXEMPT ORGANIZATION PROVISIONS
E-filing by exempt organizations
In general, only the largest and smallest tax-exempt organizations are required to electronically file their annual information returns. Tax-exempt corporations that have assets of $10 million or more and that file at least 250 returns during a calendar year must electronically file their Form 990 information returns. (Reg. 301.6011-5 and Reg. 301.6033-4(a)) Private foundations and charitable trusts, regardless of asset size, that file at least 250 returns during a calendar year are required to file electronically their Form 990-PF information returns. (Reg. 301.6033-4(a)) Finally, organizations that file Form 990-N (the e-postcard) also must electronically file. (Instructions for Form 990-N)
New law. The Act extends the requirement to e-file to all tax-exempt organizations required to file statements or returns in the Form 990 series or Form 8872 (Political Organization Report of Contributions and Expenditures). (Code Sec. 6033(n), as amended by Act Sec. 3101(a))
The Act also requires that IRS make the information provided on the forms available to the public (consistent with the disclosure rules of Code Sec. 6104) in a machine-readable format as soon as practicable. (Code Sec. 6104(b), as amended Act Sec. 3101(c))
These changes are generally effective for tax years beginning after the date of enactment. Transition relief is provided for certain organizations. First, for certain small organizations or other organizations for which IRS determines that application of the e-filing requirement would constitute an undue hardship in the absence of additional transitional time, the requirement to file electronically must be implemented not later than tax years beginning two years following the date of enactment. In addition, the Act grants IRS the discretion to delay the effective date not later than tax years beginning two years after the date of enactment for the filing of Form 990-T (reports of unrelated business taxable income or the payment of proxy tax under Code Sec. 6033(e)). (Act Sec. 3101(d))
IRS notice to tax-exempt organizations that fail to file
Charities and other nonprofits automatically lose their tax-exempt status if they do not file annual information returns including the e-postcard return for very small organizations for three consecutive years. Once revoked, the organization must refile for exempt status. (Code Sec. 6033(j))
New law. The Act requires that IRS provide notice to an organization that fails to file a Form 990-series return or postcard for two consecutive years. The notice must state that IRS has no record of having received such a return or postcard from the organization for two consecutive years and inform the organization that the organization's tax-exempt status will be revoked if the organization fails to file such a return or postcard by the due date for the next such return or postcard. The notice must also contain information about how to comply with the annual information return and postcard requirements. (Code Sec. 6033(j)(1), as amended by Act Sec. 3102(a))
This provision applies to failures to file returns or postcards for two consecutive years if the return or postcard for the second year is required to be filed after Dec. 31, 2019. (Act Sec. 3102(b))
Penalty for failure to file
If a return is filed more than 60 days after its due date, and unless it is shown that such failure is due to reasonable cause, the failure to file penalty may not be less than the lesser of $205 or 100% of the amount required to be shown as tax on the return. (Code Sec. 6651(a)) The $205 amount is subject to an inflation adjustment. (Code Sec. 6651(j))
New law. Effective for returns required to be filed after Dec. 31, 2019, $330 (adjusted for inflation for returns required to be filed in a calendar year beginning after 2020) is substituted for $205 in the above rule. (Code Sec. 6651(a) and Code Sec. 6651(j), as amended Act Sec. 3201)
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About the Author
John Anthony Castro, J.D., LL.M., is the Managing Partner of Castro & Co., the author of International Taxation in Plain English as well as International Estate Planning in Plain English, an esteemed graduate of Georgetown University Law Center in Washington DC, an OPM Fellow at Harvard Business School, and an internationally recognized tax attorney with offices in New York, Los Angeles, Miami, Chicago, Dallas, and Washington DC.
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