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Business Tax

Chief Counsel Memo Discusses Fees for Income Verification

In a redacted Program Manager Technical Advice (PMTA) memo, IRS Chief Counsel has addressed the fees for income verification required by the Taxpayer First Act.

Background.

Section 2201(d) of the Taxpayer First Act (TFA, PL 116-25) requires the IRS, for a two-year period, to assess a separate user fee for “qualified disclosures.” The Section 2201(d) fee is intended to cover the cost of infrastructure and technology necessary to fully automate the IRS’s qualified disclosure process, i.e., Income Verification Express Services (IVES).

A “qualified disclosure” is defined as “a disclosure under Code Sec. 6103(c) of returns or return information by the IRS to a person seeking to verify the income or creditworthiness (“income verification”) of a taxpayer who is a borrower in the process of a loan application.” (TFA Section 2201(b))

Code Sec. 6103(p) allows the IRS to charge a “reasonable fee” for income verification services but does not define the term “reasonable fee.” However, the Office of Management and Budget (OMB) instructs federal agencies to base their fees on their cost providing services to the user. (“OMB fee guidance”). (OMB Circular A-25, Sec. 6)

Facts.

According to the PMTA, the vast majority of IVES users are lenders (e.g. mortgage lenders) and lender representatives seeking to verify the income of a taxpayer who has applied for a loan. A small portion of IVES users are non-lender entities seeking to verify taxpayer income and return information for other purposes, such as background checks, licensing, benefits eligibility, tax preparation, and insurance litigation.

IVES users submit their disclosure requests by fax and receive disclosures electronically. Thus, only the delivery portion of the IVES program is currently automated. The IRS imposes a $2.00 user fee for each IVES disclosure. This user fee is imposed pursuant to the IRS’s authority to charge “a reasonable fee” for disclosures of returns and return information under Code Sec. 6103(p). (IVES FAQs)

Issue.

Is the term “qualified disclosure” limited to income verification related to a taxpayer’s loan application, or does it cover disclosures for other purposes provided through IVES?

Conclusion.

The plain language of Section 2201 limits the term “qualified disclosure” to income verification disclosures made for lending purposes. However, both the Joint Committee on Taxation’s JCX 15-19 and the Senate Finance Committee Report on the Taxpayer First Act interpret Section 2201 to authorize the IRS to charge the Section 2201(d) user fee on all IVES requests.

The PMTA notes that who must pay the Section 2201(d) fee is important because the statute directs the IRS to recover from “qualified disclosures” the entire cost of developing a fully automated disclosure program. So, if only a subset of IVES disclosures (e.g. disclosures for lending purposes) are “qualified disclosures” for which the IRS must charge a Section 2201(d) fee, the IRS may need to adjust the amount of the fee to ensure that the costs of fully automating the IVES program are covered.

The PMTA also noted that, consistent with the OMB’s definition of a “reasonable fee,” the IRS may not establish different user fees for similarly situated customers unless disparate fees are justified by a difference in the cost of service.

Checkmark Observation.

If the IRS charges only lenders the Section 2201(d) fee, then lenders will pay a higher disclosure fee than non-lenders for the same service in order to cover the cost of implementing the new fully automated IVES system, even though non-lenders will also benefit from that system.

To continue your research on more about the income verification express service program, see FTC 2d/FIN ¶ S-6407.

 

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