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Individual Tax

President signs Taxpayer First Act, fixing effective date of various provisions

Thomson Reuters Tax & Accounting  

Thomson Reuters Tax & Accounting  

Taxpayer First Act 

On July 1, the President signed into law the Taxpayer First Act of 2019 (the Act) (P.L. 116-25), which 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. As this article explains, the President’s signature sets the effective date of those of its provisions that have an effective date geared to the July 1, 2019 date of enactment, including these more widely applicable provisions:

Establishment of IRS Independent Office of Appeals. The Act codifies the requirements of an independent administrative appeals function at IRS (these rules had been carried in IRS’s internal rules). 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))

Where 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 on July 1, 2019, 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 July 1, 2019. (Act Sec. 1001(e))

Comprehensive customer service strategy. The Act requires IRS to develop a comprehensive strategy for customer service, to submit such plan to Congress not later than July 2, 2020 (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. With respect to offers-in-compromise submitted after July 1, 2019, the Act codifies the current low-income taxpayer exception for the user fee or upfront partial payment for offers in compromise (OIC). Under this exception, 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 when proposing an OIC to IRS. 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. Effective on July 1, 2019, the Act provides that, in the case of a suspected structuring violation (i.e., structuring transactions to avoid Bank Secrecy Act rules), 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.

Also, effective for interest received on or after July 1, 2019, 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. Effective for petitions or requests filed or pending on or after July 1, 2019, review of innocent spouse relief by the Tax Court is to be conducted on a de novo basis, meaning that the Tax Court must take a fresh look at the case without taking previous decisions into account. The review must 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)) Additionally, taxpayers may 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))

John Doe summonses. Effective for summonses served after Aug. 15, 2019 (the date that is 45 days after the date of enactment), the Act prevents IRS from issuing a John Doe summons (one that doesn’t identify the taxpayer) 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. As part of its revision of the rules allowing for tax debts to be collected by private debt collection agencies, the Act provides that, effective for contracts with private collectors that are entered into after July 1, 2019, a qualified tax collection contract is one that (among other requirements) requests full payment from a taxpayer of federal taxes due, and, if such request cannot be met by the taxpayer, offers the taxpayer an installment agreement providing for full payment of the taxes due during a period not to exceed 7 years (had been 5 years under prior law). (Code Sec. 6306(b)(1)(B), as amended by Act Sec. 1205(c))

Notice to taxpayer of IRS contact with third party. Effective for notices provided, and contacts of persons made, after Aug. 15, 2019 (i.e., more than 45 days after the date of enactment), the Act provides that 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 the taxpayer with notice at least 45 days before the beginning of the period of the contact. This replaces a requirement that reasonable notice be provided “in advance” to the taxpayer. 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)

Designated summonses. Effective for summonses issued after Aug. 15, 2019 (i.e., issued more than 45 days after the date of enactment), the Act requires that before issuing a designated summons (an administrative summons issued to a large corporation or person to whom the corporation has transferred the requested books and records), 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. Also, IRS must 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)

Documents released to IRS contractors. Effective on July 1, 2019, and applicable to any tax administration contracts under Code Sec. 6103(n) in effect on that date, 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. (Code Sec. 7602(f), as amended Act Sect 1208(a))

Low income taxpayer clinics. Effective on July 1, 2019, 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)

Seizure and sale of perishable goods. Effective for property seized after July 1, 2019, the Act limits the property that may be sold pursuant to IRS’s authority to seize and sell tangible property to satisfy unpaid taxes, to property that is liable to perish. (Code Sec. 6336, as amended by Act Sec. 1404)

Whistleblower reforms. With respect to disclosures made after July 1, 2019, 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 prohibits whistleblowers from disclosing publicly information they receive from IRS, under penalty of law. (Code Sec. 6103(k)(13), as amended by Act Sec. 1405(a))

In addition, effective on July 1, 2019, 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. Effective on July 1, 2019, 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. The Act requires IRS to prescribe regs, within six months of July 1, 2019, 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)

Information sharing. Effective for disclosures made after July 1, 2019, the Act provides that IRS may disclose specified return information to specified Identity Theft Tax Refund Fraud Information Sharing and Analysis Center (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))

Identity Protection Personal Identification Numbers. Within five years of July 1, 2019, the Treasury Department is required to establish a program to issue an Identity Protection Personal Identification Number (IP PIN) to any U.S. resident individual who requests one. An 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. And, for each calendar year beginning July 1, 2019, 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)

Notification of suspected identity theft. Effective for determinations made after Jan. 2, 2020 (i.e., 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))

IRS management of stolen identity cases. The Act requires that, not later than July 2, 2020 (i.e., not later than one year after the date of enactment), IRS, in consultation with the National Tax Advocate (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. Effective with respect to disclosures or uses made on or after July 1, 2019, 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))

Disclosures for third-party income verification. 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. No later than three years after Jan. 1, 2020 (i.e., 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. Effective for disclosures made after Dec. 28, 2019 (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)

Electronic signatures by taxpayers to authorize action by their practitioner. 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 July 1, 2019. (Code Sec. 6061(b)(3), as amended by Act Sec. 2302)

Payment of taxes by debit and credit cards. Effective on July 1, 2019, the Act removes the prohibition on IRS’s 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. Under the Act, beginning Dec. 28, 2019 (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)

Notification of unauthorized inspection, etc. of returns. Effective for determinations proposed after Dec. 28, 2019 (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)

Expanded E-filing by exempt organizations. Under prior law only the largest and smallest tax-exempt organizations were required to electronically file their annual information returns. 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 July 1, 2019. 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 July 1, 2019. In addition, the Act grants IRS the discretion to delay the effective date not later than tax years beginning two years after July 1, 2019 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))

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