Congress examines revamping the IRS appeals process
The House Ways and Means Oversight Subcommittee held a hearing this week to look at reforming the way the Internal Revenue Service resolves taxpayer disputes and appeals.
One of the witnesses at Wednesday’s hearing was Chastity Wilson, vice chair of the AICPA’s IRS Advocacy and Relations Committee and a principal at CliftonLarsonAllen’s National Tax Office. She recommended the IRS improve its appeals process and how it deals with penalty abatements.
“It has been our experience that there is no consistency across the IRS divisions on the application of penalty relief provisions,” Wilson said in her testimony. “There is also concern that the IRS personnel assigned to penalty notices often do not have the necessary training or expertise to review the taxpayer’s submission for penalty relief.”
She suggested the IRS Office of Appeals leadership “undertake a review of the penalty notice processes with other IRS divisions to identify necessary training, systemic problems and duplication of efforts to ensure a consistent settlement process of penalties.”
Wilson urged the IRS to provide independent delegated settlement authority to the case leader, and get rid of an extra approval process recently added by the IRS so taxpayers can resolve disputes fairly and efficiently. “A customer-focused service approach should extend beyond the dispute resolution process and to all IRS taxpayer services, including a dedicated tax practitioner services unit,” said Wilson. “With a mindset of understanding the taxpayer perspective, the Service will enhance voluntary compliance and increase the public confidence in the integrity of the Service.”
House Ways and Means Oversight Subcommittee chairman Vern Buchanan, R-Fla., said there needs to be an administrative review process for IRS appeals. “In a system of voluntary tax compliance, even with the simplest of tax codes—and ours is currently not one of those—there are bound to be disputes between taxpayers and the IRS … Ensuring the independence and availability of this administrative review process for taxpayer disputes remains a top priority of this Subcommittee. … For most taxpayers, their only interaction with the IRS is when they file their taxes once a year. But when taxpayers do find themselves in a dispute with the agency, they deserve a fair and prompt process.”
Rep. John Lewis, D-Ga., the ranking Democrat on the subcommittee, pointed out the IRS is dealing with budget cuts, including in its Appeals Office. “We must approach this effort to reform and improve the IRS with a great deal of care and thoughtfulness,” he said. “I hope we will take our time to develop bipartisan solutions that serve the best interests of both taxpayers and the agency. For many years, I have cautioned that we cannot get blood from a turnip. As you know, Congress cut the IRS budget by almost $1 billion since 2010. Over the last three years, the budget for the IRS Appeals Office dropped 11 percent, and there are about 24 percent fewer hearing officers.”
Byron Shinn, managing partner of Shinn & Co., a CPA and business consulting firm in Bradenton, Florida, pointed to the difficulties of reaching the IRS by phone and in person. “There are a lot of taxpayers out there that don’t have access,” he said. “Having the opportunity to walk in and talk at the local agent office level and having that face-to-face humanizes the circumstances.”
Kathy Petronchak, a CPA who is director of IRS practice and procedure at the tax consulting firm alliantgroup, spoke about the challenges that business taxpayers face when dealing with the IRS.
“We believe there is some inconsistent treatment of small versus large businesses by the IRS, as well as differing procedures being used in audits of these businesses,” she said. “It is vitally important to remember that America’s small businesses do indeed have needs, interests, and resources that may differ significantly from those of larger businesses. However, some of the procedures utilized in large business audits provide added transparency that would bring greater fairness to the small business examination. If these procedures were adopted for all taxpayers, the IRS can improve transparency in its examination of small businesses and better ensure they are treated fairly.”
National Taxpayer Union president Pete Sepp observed that the complex appeals process often discourages taxpayers from attempting to resolve a dispute with the IRS, and they often end up paying more taxes than needed. Less than 5 percent of small businesses appeal an IRS audit. “Is this apparent low frequency of disputes simply attributable to the IRS being correct in the position it takes from the vast majority of examinations?” he asked. “Numerous authorities, from prominent members of the tax advisory community, to the Government Accountability Office … would answer, not at all.”
“One of the rights enshrined in the ‘Taxpayer Bill of Rights’ is the right to pay no more than the correct amount of tax,” said Rep. Jackie Walorski, R-Ind. “A big reason for [the low rate of appeals] is that taxpayers believe it’s cheaper to just give up and pay the IRS than appeal. This is incredibly disheartening. If a taxpayer thinks they are paying more than they should, my advice is, absolutely fight it!”
Buchanan concluded the hearing by pledging to continue to work on the matter. “I’m concerned about the person who gets the $1,000, $1,500, $2,000 small business or individual tax bill,” he said. “How do we resolve that without putting them into bankruptcy or into a bad situation … This is an area we need to work on.”
Taxpayer Bill of Rights Enhancement Act
On Thursday, Sen. Chuck Grassley, R-Iowa, and Sen. John Thune, R-S.D., introduced the Taxpayer Bill of Rights Enhancement Act of 2017, which updates an earlier version of the bill, parts of which were enacted into law in earlier congressional terms. The bill would allow taxpayers to bring a cause of action against the IRS for unauthorized collections actions, as well as increase the time period in which taxpayers could seek to have proceeds from the sale of wrongfully levied property returned to them. It also would provide relief to taxpayers who voluntarily work toward paying off their tax debts through the use of automated installment payments. In addition, it would protect a taxpayer’s retirement savings in cases where the IRS improperly levied on a taxpayer’s IRA or employer-sponsored retirement plan. The bill would eliminate red tape for taxpayers facing financial hardship to settle their tax debt through an offer-in-compromise. It also would provide penalty relief to taxpayers by raising the threshold at which a penalty is imposed for the underpayment of estimated taxes, expanding its application and simplifying related calculations. The legislation would provide former spouses greater access to information about collection activities related to joint returns filed during their marriage. In addition, the bill would ensure low-income and elderly taxpayers continue to have access to free services to file their annual tax return.
The bill would give taxpayers more convenient access to appeals by requiring the IRS to locate at least one appeals officer and settlement officer in each state. And the bill would require tax-exempt organizations to file Form 990 electronically and mandates that the IRS make such information available in a timely manner.
“The IRS has never been anyone’s favorite agency,” Grassley said in a statement. “It has a long way to come back from scandals and declining customer service. Taxpayers shouldn’t be at a disadvantage with an agency that has tremendous power over their money. The IRS has to answer taxpayers’ questions, protect their privacy, and help people meet their tax obligations with fairness and respect.”
The bill also would significantly increase civil damages for the unauthorized disclosure or inspection of tax return information and significantly increases civil damages for improper IRS collection activities.
“Taxpayers have wrongfully suffered under the IRS for too long, and it’s time to restore some integrity back into this agency,” said Thune. “Our bill addresses these problems by strengthening taxpayer protections, which would allow Americans to rest easy, knowing they will get fair treatment when dealing with the IRS.”
Inspector General Report
The Treasury Inspector General for Tax Administration also released a report this week on the IRS’s Collection Due Process program in its Office of Appeals. TIGTA does an annual report on the program. During this year’s audit, TIGTA said it identified similar deficiencies in the IRS’s processing of Collection Due Process cases as previously reported. It found the Office of Appeals did not always classify taxpayer requests properly and, as a result, and some taxpayers received the wrong type of hearing. In two statistically valid samples, TIGTA found six taxpayer cases that were misclassified, a slight increase from the five misclassified taxpayer cases identified in last year’s review.
In addition, TIGTA said it continued to identify errors related to the determination of the Collection Statute Expiration Date on taxpayer accounts. From two statistically valid samples, TIGTA identified 11 taxpayer cases that had an incorrect expiration date. For the 11 taxpayer cases TIGTA identified, the IRS incorrectly extended the time period in five of the taxpayer cases, allowing the IRS additional time it should not have had to collect the delinquent taxes. In the other six taxpayer cases, the IRS incorrectly decreased the time to collect the delinquent taxes. That represented a slight increase from the 10 taxpayer accounts with CSED errors that were identified in the prior year’s review.
On top of that, TIGTA found that from the prior three audit reports, the IRS had not properly updated a total of nine of the 41 taxpayer accounts identified with expiration date errors. According to IRS Appeals Office management, processing errors or systemic errors could have resulted in the expiration dates not being updated.
The IRS said it is reviewing the 11 taxpayer accounts identified with expiration date errors and taking action to correct them. It is also investigating whether the inaccurate suspension start or stop dates for the 11 taxpayer accounts were the results of input errors or some other cause. The IRS also plans to evaluate the process used by its Appeals staff to input expiration date corrections for the suspension start or stop dates to ensure that the corrections are updated to the IRS Master File. The IRS is also reviewing the nine taxpayer accounts identified with the errors from 2014 through 2016 that weren’t updated on the IRS Master File and taking the necessary actions to correct them.