Pending rules that would shorten third-party notice requirements by allowing the IRS broader discretion in excepting the 45-day window under the Taxpayer First Act (TFA) would “unfairly erode an important taxpayer protection,” according to National Taxpayer Advocate Erin Collins.
Background.
The IRS Restructuring and Reform Act of 1998 added “taxpayer protections in circumstances where the IRS intends to contact a person other than the taxpayer (a third party) to obtain information that will assist the IRS in assessing or collecting a tax,” Collins explained in a November 7 blog post.
The TFA further amended Code Sec. 7602(c) by changing the requirement for the IRS to provide “reasonable notice” to taxpayers before contacting a third party to an established 45-day minimum. Certain exceptions apply, such as when the contact is part of a criminal investigation.
Proposed Regs.
The IRS proposed regs in March providing that IRS officers or employees may not contact third parties with respect to the determination or collection of a taxpayer’s liability unless Section 7602(c) requirements are satisfied. The regs would also add exceptions to the 45-day advance notice requirement in certain circumstances, including those involving the:
- fuel compliance program,
- nonjudicial redemption investigations, and
- assessment or collection of tax (but only in limited time-sensitive circumstances).
Warning from the Taxpayer Advocate.
“The IRS may find itself attempting to assess or collect taxes within one year of the statute of limitations for a number of reasons that have nothing to do with actions or events controllable by the taxpayer,” wrote Collins in critiquing the regs for their potential harmful ramifications for taxpayers.
The regs self-grant the IRS the authority to sometimes contact third parties without advance notice to taxpayers, which would be problematic “in instances when there is one year or less remaining on the statute of limitations,” Collins explained. This runs afoul of the Taxpayer Bill of Rights because it would deprive taxpayers of their right to finality, or “the right to know the maximum amount of time the IRS has to audit a particular tax year or to collect a tax debt.”
In providing an alternative to the regs, Collins pointed to recommendations detailed in her 2024 “Purple Book,” a compilation of legislative suggestions from the Taxpayer Advocate Office. Among the ideas presented in the most recent report was the recommendation to “require the IRS to provide taxpayers with a tailored notice that identifies the specific information it plans to request from a third party.” Outside of an exception under Code Sec. 7602(c)(3), taxpayers should have a “reasonable period of time” to respond to notices, Collins said in the Purple Book.
She argued that a more specific and transparent notice tailored to the taxpayer’s specific situation as opposed to a generic notice would be in the best interest of the protection of taxpayer rights, as well as voluntary compliance. Tailored notices would be “consistent with a taxpayer’s rights to be informed and to privacy, which includes the right to expect enforcement to be no more intrusive than necessary,” the taxpayer advocate said.
For more on the requirements and timing of advance notice of third-party contact, see Checkpoint’s Federal Tax Coordinator ¶T-1139.1.
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