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All Contents © 2019The Kiplinger Washington Editors
By Rocky Mengle, Tax Editor
| December 28, 2018
Let’s face it…the IRS isn’t the most popular government agency out there. It’s not just that they take your money. They also have a (undeserved?) reputation for tough stances on deductions and credits, aggressive tax collectors, poor customer service and generally being difficult if you happen to disagree with them.
Wouldn’t it be nice to have a kinder, gentler IRS? You’d still have to pay your taxes, but at least you wouldn’t have to deal with some of the IRS’s rougher edges anymore. Well, guess what… Congress is kicking around a few ideas that would make the IRS a little more taxpayer-friendly. There’s bipartisan support for improving the IRS, so we may actually see some of them enacted.
Here are the 10 best proposals from a bill recently passed by the House that could improve the IRS’s bad reputation (in no particular order).
You claim a sizable deduction on your tax return, but an IRS auditor says you’re not eligible or that the amount deducted is too high. You go back and forth with the auditor, but you remain at an impasse. To avoid the hassle of litigation, you ask for an independent review of the auditor’s decision by the IRS Office of Appeals…but they say no. Looks like it’s off to court you go!
The IRS already has a process for reviewing its own decisions, but the law doesn’t guarantee access to it. As a result, many tax disputes don’t get a second look by the IRS before going to court. One proposal would make sure the IRS independent appeals process is available to all taxpayers with a legitimate claim. If a request for review is denied, the IRS would have to provide written notice of the reason to the taxpayer and to Congress.
Before the dispute is reviewed, the IRS would also have to turn over its case file to individual taxpayers with adjusted gross income of $400,000 or less in the contested tax year (or business taxpayers with gross receipts of $5 million or less). This could make a big difference for taxpayers with limited resources who are up against the might of the IRS.
It’s bad enough to be told that the IRS is digging into your tax return…but frustration levels go through the roof if you’re tied up with an IRS customer-service representative who can’t help you or runs you around in circles. That’s why some lawmakers want to force the IRS to develop a comprehensive customer service strategy. Among other things, the IRS would have to adopt best practices of private sector customer-service providers, update guidance and training materials for customer-service employees, and develop metrics and benchmarks for quantitatively measuring the progress of its customer-service strategy.
If you can’t pay your tax bill, the IRS might be willing to settle for a lesser amount under the Offer-in-Compromise (OIC) program. However, an up-front payment and application fee are required before the IRS will look at your offer. These payments and fees are generally waived for low-income taxpayers… but the IRS isn’t required by law to do so. One of the proposals Congress is looking at would make the OIC initial payment/application fee waiver mandatory for certain low-income taxpayers. It would apply to any taxpayer with adjusted gross income below 250% of the poverty level, which is based on location and size of the family.
The ability to take your property is one of the IRS’s most powerful enforcement tools…and it doesn’t just apply when you fail to pay your taxes. For example, cash transactions over $10,000 must be reported to the government. If you break up payments or structure them in some other way to get around the reporting requirement, the IRS can seize any related property. Some members of Congress want to limit this type of property seizure to situations where the property taken derived from an illegal source or the cash transaction was structured for the purpose of concealing criminal activity (e.g., money laundering). New post-seizure notice and hearing requirements would also be put in place to protect taxpayers who had property taken by the IRS for violating the reporting rules. Plus, if you get your property back after a hearing, any interest that comes along with it would be tax-free.
When a joint return is filed, it’s not unusual for one spouse to sign the return without really knowing what’s on it. But what happens when the spouse who completes the return cheats on the couple’s taxes…is the other spouse responsible for any unpaid tax?
Generally, the answer is “yes” …but the tax code includes three types of “innocent spouse” provisions that can be used to get the spouse who simply signed the return off the hook. If the first two methods don’t apply, the third can provide relief if, considering all the facts and circumstances, it is “inequitable” (i.e., unfair) to hold the unaware spouse liable for the taxes owed. Congress is looking at making it easier for innocent spouses to get this kind of equitable relief.
Courts reviewing an IRS denial of equitable relief could also consider newly discovered or previously unavailable evidence. Currently, there is no set rule allowing this, so spouses in one state might be able to introduce new evidence while spouses in another state cannot. Spouses could also request equitable relief for any unpaid tax before the statute of limitations expires or for any tax already paid before the time limit for claiming a refund or credit ends.
When the IRS thinks someone is not paying taxes but doesn’t know his or her identity (e.g., holders of offshore bank accounts or investors in a tax shelter), it can issue a summons to a bank or other third party to get the name of the suspected tax cheat. This is called a “John Doe” summons. However, some members of Congress believe the IRS uses John Doe summonses to conduct unlawful fishing expeditions. To stop this practice, a proposal before Congress would prevent the IRS from issuing a John Doe summons unless the information it seeks is closely related to the failure (or potential failure) to comply with the tax law and it identifies a specific tax code provision that is being violated.
Did you know that the IRS hires private companies to help them collect unpaid taxes? They started outsourcing some tax collection duties in April 2017. However, as you may have guessed, there have been some problems with the program. One problem Congress is worried about is low-income taxpayers entering into payment plans with the private companies that they can’t afford. To prevent this from happening, there’s a proposal in Congress to ban private companies from collecting tax from any person with adjusted gross income below 200% of the poverty level, which is based on location and size of the family. Certain taxpayers on disability would be protected from private debt collectors, too. Taxpayers would also be given more time to pay under installment plans offered by private companies…from a maximum of five years to seven years.
Say you’re a business owner and your tax return is being audited. As part of its examination, the IRS wants to question one of your customers about a few transactions, which they can do. That could have a devastating impact on your business and reputation. Under current law, the IRS at least has to give you “reasonable notice” before contacting other people. But that’s such a squishy requirement. What’s “reasonable” …a week, a day, an hour?
A proposal before Congress would do away with the “reasonable” standard and establish a hard, 45-day notice requirement before contact with a third-party can be made. In addition, the contact period with each third-party would be limited to one year. This would give you more time to reach out to the other person in advance to explain the situation, and prevent the IRS from hounding them forever.
Tax returns and other taxpayer information are generally confidential and can’t be disclosed to non-IRS employees. This is an important protection for taxpayers, but there are exceptions. For instance, outside attorneys and other contractors hired to help in special situations (such as complex litigation) can access taxpayer books, records, papers and other data obtained by summons. They can also participate in the questioning of witnesses summoned by the IRS.
Some lawmakers want to clamp down on the disclosure of taxpayer information to these contractors. Under a proposal before Congress, contractors wouldn’t be allowed access to any books, papers, records or other data obtained by summons, except when they need the information to provide expert evaluation and assistance to the IRS. In addition, only IRS employees would be able to question a summoned witness under oath.
The National Taxpayer Advocate (NTA) is on your side. This person is an IRS employee, but his or her job is to make sure all taxpayers are treated fairly and understand their rights. When the NTA identifies a problem affecting a group of taxpayers, he or she can issue a Taxpayer Advocate Directive requiring the IRS to make administrative or procedural changes to protect the rights of taxpayers, prevent an undue burden, ensure fair treatment or provide an essential service to taxpayers. However, there’s concern about the IRS not paying enough attention to NTA directives. That’s not good for taxpayers.
To make the IRS more responsive to NTA directives, a proposal before Congress would force the IRS to modify, reject or ensure compliance with any NTA directive within 90 days. The NTA would also be able to appeal any modification or rejection. The IRS would then have to either ensure compliance with the directive or provide the reason for other action. The NTA’s annual report to Congress would also identify any directive that is not honored by the IRS in a timely manner.