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Special Study: Tax provisions in the “Fixing America’s Surface Transportation (FAST) Act”

Joint Explanatory Statement of the Committee of Conference.

On December 3, one day before the expiration of the previously-passed temporary funding measure, both chambers of Congress passed H.R.22, the “Fixing America’s Surface Transportation (FAST) Act.” The bill was sent to President Obama for his expected signature. In addition to authorizing federal surface transportation programs through fiscal year 2020, the bill contains a number of important tax-related provisions examined in this Special Study.

Revocation or denial of passports to certain delinquent taxpayers

Under pre-Act law, Chapter 75 of the Code, “Crimes, Other Offenses, and Forfeitures,” makes no provision for denying or revoking passports on the basis on unpaid taxes. The only places in the Code where the word “passport” appears are in Code Sec. 877 (which lists never having held a U.S. passport as a condition that must be met to be considered to have no substantial contacts with the U.S.) and Code Sec. 6039E (which requires passport applicants to provide a statement that includes certain tax-related information).

New law. The Act adds a new Code section, Code Sec. 7345, to Chapter 75 of the Code. Under Code Sec. 7345, having a “seriously delinquent tax debt” that exceeds $50,000 is, unless an exception applies, grounds for denial, revocation, or limitation of a passport, effective Jan. 1, 2016.

RIA observation: Passports are handled by the State Department, not IRS. This new provision effectively authorizes disclosure of certain tax information from IRS to the State Department, which in turn will use this information in making passport-related determinations.

A seriously delinquent tax debt is one for which:

i. a notice of lien has been filed under Code Sec. 6323, or a notice of levy has been filed under Code Sec. 6331;
ii. there is no agreement in place to repay the debt under Code Sec. 6159 or Code Sec. 7122;
iii. collection isn’t suspended because of a collection due process hearing under Code Sec. 6330 or because innocent spouse relief under Code Sec. 6015(b), Code Sec. 6015(c), or Code Sec. 6015(f) is requested or pending.

The $50,000 amount will be adjusted by inflation for calendar years beginning after 2016.

The Act provides procedures for, and restrictions on, IRS’s disclosure of the return information for purposes of passport revocation.

New rules mandating IRS use of private debt collectors

Under pre-Act law, IRS is authorized under Code Sec. 6306 to enter into “qualified tax collection contracts” with private debt collection agencies. This provision permits the use of such companies to locate and contact taxpayers owing outstanding tax liabilities and arrange for payment thereof. There must be an assessment pursuant to section 6201 in order for there to be an outstanding tax liability. An assessment is the formal recording of the taxpayer’s tax liability that fixes the amount payable. An assessment must be made before the IRS is permitted to commence enforcement actions to collect the amount payable. In general, an assessment is made at the conclusion of all examination and appeals processes within the IRS.

There are several steps involved in engaging private debt collection companies, and there are a number of safeguards and taxpayer protections in place.

The Omnibus Appropriations Act of 2009, however, included a provision stating that none of the funds made available under it could be used to fund or administer Code Sec. 6306 private tax debt collection activities, and IRS announced in IR 2009-19 that it wouldn’t renew its contracts with two private debt collection agencies, having “determined that the work is best done by IRS employees who have more flexibility handling cases, which is particularly important with many taxpayers currently facing economic hardship.”

RIA observation: The National Taxpayer Advocate has repeatedly criticized prior efforts to use private debt collectors for unpaid taxes, noting that these programs raise significant taxpayer rights concerns and have repeatedly fallen far short of revenue-raising expectations.

New law. The Act adds two new subsections to Code Sec. 6306 (adding new subsections (c) and (d) after the existing (b), and redesignating prior (c) through (f) as (e) through (h), accordingly), both applicable to tax receivables identified by IRS after the enactment date.

New Code Sec. 6306(c) says that IRS shall enter into one or more qualified tax collection contracts for the collection of all outstanding “inactive tax receivables.” An inactive tax receivable is any outstanding assessment that IRS includes in potentially collectible inventory, if:

i. at any time after assessment, IRS removes the receivable from active inventory for lack of resources or inability to locate the taxpayer;
ii. more than ⅓ of the period of the applicable statute of limitation has lapsed and the receivable hasn’t been assigned for collection to any IRS employee; or
iii. for a receivable that has been assigned for collection, over 365 days have passed with interaction with the taxpayer or a third party for purposes of furthering its collection.
RIA observation: The use of the word “shall,” typically construed as mandating a certain action, is a significant departure from the present law version of Code Sec. 6306(a), which contains more permissive language.

New Code Sec. 6306(d) renders certain tax receivables ineligible for collection by private collectors, including those that, among other things, are subject to a pending or active offer-in-compromise or installment agreement, are classified as an innocent spouse case, or involve taxpayers that are deceased, under age 18, or identity theft victims.

The Act also adds Code Sec. 6103(k)(11) to provide procedures and restrictions on the disclosure of return information to qualified tax collection contractors.

Establishment of special compliance personnel program

Under pre-Act law, Code Sec. 6306(c) (to be re-designated as Code Sec. 6306(e), as described above) allows IRS to keep and use up to 25% of the amount collected under a qualified tax collection contract for the costs of services performed under the contract, and up to an additional 25% of the amount collected “for collection enforcement activities of the Internal Revenue Service” (emphasis added).

New law. The Act strikes the italicized language above and replaces it with “to fund the special compliance personnel program account under section 6307.”

The Act adds a new section to Subchapter A, General Provisions, of Chapter 64, Collection, of the Code. New Code Sec. 6307 provides for the establishment of such an account, funded exclusively by transfers under new Code Sec. 6306(e)(2), described above.

The IRS Commissioner is directed to report to the designated Congressional committees, by March of each year, on: the funding of such accounts, the program costs, the program personnel, and the amount of revenue actually collected for the previous fiscal year; actual and estimated funding, costs, personnel, and collected revenues for the current fiscal year; and estimates for the following fiscal year.

“Special compliance personnel” are individuals employed by IRS as field collection officers or in a similar position, or employed to collect taxes using the automated collection system or an equivalent replacement system.

Repeal of automatic extension of return due date for certain employee benefit plans

An employer that maintains a pension, annuity, stock bonus, profit-sharing or other funded deferred compensation plan (or the plan administrator of the plan) is required to file an annual return containing information with respect to the plan’s qualification, financial condition, and operation of the plan. (Code Sec. 6058) The forms required for this purpose are those in the 5500 series.

Plan administrators who fail to timely file Form 5500 series annual returns/reports can be subject to penalties under both Title I of the Employee Retirement Income Security Act of ’74 (ERISA) and the Code. However, an administrator or sponsor of such a plan can apply for an automatic extension of time for filing the return.

Under pre-Act law, for returns for tax years beginning after Dec. 31, 2015, the maximum extension for the returns of employee benefit plans filing Form 5500 was to be an automatic 3½-month period ending on Nov. 15 for calendar year filers. This 3 1/2 -month period was recently enacted as part of the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 (P.L. 114-41; i.e., the 3-month stopgap extension of the Highway Trust Fund ). Before that, a 2 1/2-month period applied.

New law.The Act repeals the automatic 3 1/2-month extension, restoring the former 2½-month period.

Extension of various highway, etc, tax provisions

The Highway Trust Fund (HTF) program is financed by the imposition of six separate excise taxes. Three of these are imposed on highway motor fuels: one on gasoline (18.3¢ per gallon); one on diesel fuel and kerosene (24.3¢ per gallon); and one on alternative fuels (generally 18.3¢ or 24.3¢ per gallon). The other three are non-fuel HTF excise taxes imposed on heavy highway vehicles and tires: a 12% excise tax on the first retail sale of heavy highway vehicles, tractors, and trailers; a 0.945¢ tax imposed on highway tires with a rated load capacity exceeding 3,500 pounds; and an annual use tax of $550 per year imposed on vehicles having a taxable gross weight over 75,000 pounds.

Under pre-Act law, Highway Trust fund expenditures were authorized through Dec. 4, 2015; the annual use tax on heavy vehicles was to expire Oct. 1, 2017; and the remaining taxes are scheduled to expire after Oct. 1, 2016.

New law. The Act extends, through Oct. 1, 2021, the general expenditure authority for the HTF, including expenditure authority for the Sport Fish Restoration and Boating Trust Fund and the Leaking Underground Storage Tank (LUST) Trust Fund. It also extends the other taxes listed above through Sept. 30, 2022, except that the heavy vehicle use tax is extended through Sept. 30, 2023.

 

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