Taxpayer First Act - H.R. 5444

Improve IRS Customer Service — HR 5444, Taxpayer First Act. The bipartisan bill makes numerous modifications to IRS organization, services and enforcement authorities in an effort to modernize the agency and improve the way it interacts with taxpayers. Among its provisions, it requires the development of a comprehensive customer service strategy, provides for modernizing the organizational structure of the IRS so that taxpayer services are prioritized, requires expansion of the IRS electronic free file program, modifies IRS enforcement authorities including the manner in which the IRS may seize property, and prohibits private debt collectors through 2019 from trying to collect unpaid taxes from low-income individuals. The measure is expected to be considered under a closed rule that prohibits amendments.

Summary

H.R. 5444 makes numerous changes to reorganize the Internal Revenue Service (IRS) in an attempt to focus the agencies efforts more on taxpayer service. Specifically, the bill does the following:

• Creates an independent appeals process to improve the dispute resolution process within the agency.
• Requires the IRS to submit to Congress a comprehensive plan to improve its customer service strategy, based on best practices from the private sector.
• Requires the IRS to maintain the IRS Free File Program that provides free individual income tax preparation and electronic filing services to the lowest 70 percent of taxpayers by adjusted gross income.
• Ensures taxpayers have access to the same information as the IRS during the dispute resolution process, in an attempt to level the playing field.
• Requires the IRS to submit to Congress a plan to redesign the structure of the agency to improve efficiency, enhance cyber security, and better meet the needs of taxpayers.
• Ensures that the IRS sends notice to the actual taxpayer when conducting an audit before contacting friends, neighbors, and clients.
• Restructures the IRS’s enforcement tools to ensures taxpayers do not have their assets seized without proper, timely, and fair notice.
• Changes the head position at the IRS from a Commissioner to an Administrator.

   

Background

The Internal Revenue Service (IRS) collects the vast share of the revenue to fund the federal government and enforces federal tax laws. In FY2017, the IRS processed 245.4 million returns and related documents for all federal taxes and collected $3.4 trillion in gross revenue.

Appropriations account for nearly all of the funds available to the IRS for obligation. In FY2017, the most recent year for which enacted figures are available, 94% of those funds came from appropriations. 

Establishment of Internal Revenue Service Independent Office of Appeals

The IRS Reform and Restructuring Act of 1998 (“RRA98”) directed the Commissioner of Internal Revenue to restructure the IRS by establishing and implementing an organizational structure that features operating units serving particular groups of taxpayers with similar needs and which ensured an independent appeals function within the IRS. Although the Code does not mandate the existence of an independent office within the IRS to review administrative determinations, it does require an independent administrative review of certain determinations, and further requires that the Commissioner ensure that the duties of IRS employees are executed in a manner consistent with rights inferred from other Code provisions.

Under the general authority of the Secretary to interpret the Code and that of the Commissioner to administer the Code and to employ the persons necessary to do so, the IRS includes an Office of Appeals (“Appeals”), headed by a Chief, Appeals. That office traditionally functions as the settlement arm of the IRS. In doing so, it reviews administrative determinations arising both from collection and examination activities, and attempts to resolve them without need for litigation. 

The bill codifies the requirement of an independent administrative appeals function by establishing within the Internal Revenue Service an office to be known as the Internal Revenue Service Independent Office of Appeals (“Independent Appeals”), and to be headed by an official known as the Chief of Appeals, as described below. The purposes and duties of the office, as well as the taxpayers’ general right to seek consideration by that office, subject to certain limitations, are also outlined in this bill.

Comprehensive customer service strategy

The IRS processes more than 150 million individual tax returns and dispurses approximately 100 million tax refunds during the tax filing season.[4]  The IRS accomplishes this in part by providing taxpayers with customer service through telephone, written correspondence, and it website.  Tens of millions of phone calls and millions of pieces of correspondence are received by the IRS every year; however, the agency does not have a customer service strategy.[5]  The Government Accountability Office (GAO) has routinely recommended that the IRS develop and implement a customer service strategy that is modeled after the best in the business.

The bill requires the Secretary, in consultation with the National Taxpayer Advocate (“NTA”), to develop a comprehensive strategy for customer service and to submit such plan to Congress not later than the date which is one year after the date of enactment.

IRS Free File Program

The IRS has entered into cooperative relationships with commercial return preparation service providers (known as the Free File Alliance) to provide free Federal tax preparation and electronic filing services to eligible low-income or elderly taxpayers. Some of these providers also offer free State tax preparation. This arrangement is commonly known as the Free File Program. Taxpayers generally must select a designated service provider through the IRS’s website to access commercial online software provided by the Free File Alliance companies to prepare and file their tax returns.

To qualify, taxpayers must have adjusted gross income (AGI) of $66,000 or less (for 2017 returns). Each participating company sets its own eligibility requirements and not all taxpayers will qualify to use the software of all companies. There is no fee for taxpayers using the Free File Program, and Free File Alliance companies also do not pay any fee to the IRS to participate in the program. The bill requires the Secretary, or the Secretary’s delegate, in cooperation with the private sector, to maintain the current IRS Free File Program that provides free individual income tax preparation and electronic filing services to the lowest 70 percent of taxpayers by adjusted gross income as ranked by the prior year taxpayer adjusted gross income data.[9]

Internal Revenue Service seizure requirements with respect to structuring transactions

The Federal government, including the IRS, is able to use civil procedures to seize assets the government believes are involved in illegal activity without ever having to prove that the owners of the assets actually were engaged in criminal activity. The Ways and Means Subcommittee on Oversight found IRS Criminal Investigation (IRS CI) was seizing funds that appeared to have been used in transactions “structured” to be under $10,000 to avoid Bank Secrecy Act reporting requirements.

The Committee found that numerous small business owners had legitimate reasons for keeping their transactions under $10,000, including insurance policies that only protected cash-on-hand up to $10,000 and bank tellers who told the small business owners to keep their deposits under $10,000 to reduce paperwork. When business owners tried to get their money back, their cases would be sent to the Department of Justice (DOJ); frequently, DOJ attorneys would hold the funds long enough that the business owners felt compelled to settle the cases and give up a portion of the funds to get the remainder returned to them.

The IRS changed its policy in October 2014 to restrict civil asset forfeitures based on allegations of structuring to only seize assets involved in other criminal activity, except in exceptional circumstances.

The bill establishes new requirements for the use of this tool. Specifically, in the case of a suspected structuring violation, the 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 regulation other than rules against structuring. The proposal establishes post-seizure notice and review procedures for IRS seizures based on suspected structuring violations.

Reform of notice of contact of third parties

The 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 the IRS may contact persons other than the taxpayer. The bill requires the IRS to notify the taxpayer, at least 45 days before the beginning of the period of contact, notice that contacts with persons other than the taxpayer.

Modification of title of Commissioner of Internal Revenue and related officials

Under current law, two officials at the IRS require appointment by the President and confirmation by the Senate, i.e., the Commissioner of Internal Revenue and a Chief Counsel to the IRS. The bill replaces the title “Commissioner of Internal Revenue” with “Administrator of Internal Revenue.”

Taxpayer access to case files

Under current law, a taxpayer must file a Freedom of Information Act (FOIA) request in order to obtain from the IRS the file of information on his or her case. The bill requires that the administrative case file referred to Independent Appeals be available to certain individual and small business taxpayers. Eligible taxpayers are individuals with adjusted gross income below $400,000 and entities with gross receipts below $5 million. Under the proposal, eligible taxpayers may review the non-privileged portions of materials developed by the IRS for its administrative case file not later than ten days prior to the first conference with Independent Appeals. In providing the materials, the IRS need not produce for the taxpayer the documents that were initially provided to the IRS by the taxpayer. In addition, the taxpayer may elect to waive the ten-day period and accept access to the materials on the date of the scheduled conference.

Cost

The Joint Committee on Taxation estimates enacting the bill will reduce revenues by approximately $52 million for the period 2018 through 2028.

###

House Democratic Whip Steny Hoyer:

This bipartisan legislation redesigns IRS customer service and the IRS appeals process, provides additional taxpayer protections in collections and enforcement, provides flexibility to the agency to restructure its design, and updates Tax Court procedures.
 
H.R. 5444 also temporarily prevents private debt collectors who are under contract with the IRS from pursuing tax collections against individuals whose incomes fall below 250% of the federal poverty level (FPL), codifies the FreeFile program, and would make the Offer-In-Compromise program more accessible to low-income taxpayers by waiving application and initial payment obligations for those with incomes below 250% of the FPL.

###

In the engrossment of H.R. 5444, add the text of H.R. 2901, H.R. 5437, H.R. 5438, H.R. 5439, H.R. 5440, H.R. 5443, H.R. 5445, H.R. 5446, most of which passed the House under suspension of the Rules earlier this week.