Congress passes IRS reform legislation

The Senate passed a far-reaching package of IRS reform legislation Thursday known as the Taxpayer First Act only days after it passed the House for the second time, sending it to President Trump’s desk for his signature.

The House passed the widely supported bipartisan legislation for the second time on Monday, after removing a controversial provision codifying the Free File Alliance (see House passes IRS reform bill again, this time without Free File provision).

Among its many provisions, the bill establishes an independent office of appeals within the IRS. It also requires the IRS to submit to Congress plans to redesign the structure of the agency to improve efficiency, modernize its technology systems, enhance its cybersecurity and better meet taxpayer needs.

A view of the U.S. Capitol
The U.S. Capitol stands at sunset in Washington, D.C., U.S., on Thursday, Dec. 12, 2013. A U.S. budget accord is on track to win passage in Congress largely because its most important accomplishment is pushing off automatic spending cuts that neither party likes. Photographer: Andrew Harrer/Bloomberg

The bill also includes a number of provisions to help protect taxpayers from tax-related identity theft and improve their interaction with the IRS if they fall victim to ID theft. The bill also expands to all taxpayers an IRS program that currently only allows victims of tax ID theft to obtain a personalized PIN that better secures their identity. The bill puts in place new safeguards to protect taxpayers against recent IRS enforcement abuses of so-called “structuring laws” that allowed the agency to seize taxpayer assets with civil forfeiture procedures if taxpayers appeared to be making bank deposits in amounts just below $10,000 to avoid bank-reporting requirements.

The bill also improves the IRS whistleblower program by authorizing the IRS to communicate with whistleblowers during the processing of their claims, while also protecting taxpayer privacy, as well as extending anti-retaliation provisions to IRS whistleblowers that are presently afforded to whistleblowers under other laws. In addition, it modifies the private debt collection program to ensure lower-income Americans are not targeted; and codifies the Volunteer Income Tax Assistance, or VITA, program, enabling the IRS to provide up to $30 million in matching grants to qualifying tax preparation sites.

However, the bill drops a provision codifying the Free File Alliance, after a series of reports by the investigative news site ProPublica claimed it would prevent the IRS from developing free tax-filing software of its own.

“This bipartisan, bicameral bill represents years of hard work and consensus building,” said Senate Finance Committee Chairman Chuck Grassley, R-Iowa, in a statement. “It’s a big first step toward strengthening taxpayer protections and turning the IRS into the customer service organization it ought to be. I look forward to President Trump signing it into law so the IRS can begin implementing long overdue reforms that will put taxpayers first.”

Grassley introduced the Taxpayer First Act in the Senate earlier this year with Sen. Ron Wyden, D-Ore., the ranking Democrat on the Senate Finance Committee.

“Americans interact with the IRS more than any other federal agency,” Wyden said in a statement. “Passage of the Taxpayer First Act will modernize the agency, allowing it to better serve taxpayers. Our bill includes critical provisions to improve customer service, protect personal data, preserve tax-preparation services and shield low-income taxpayers from abusive private debt collectors. Going forward, I will be closely tracking the IRS review of the Free File program and working to achieve a public filing program run by the IRS.”

The top Democrat and Republican on the tax-writing House Ways and Means Committee also praised passage of the Taxpayer First Act.

“After years of good-faith, bipartisan work, our IRS reforms are finally going to become law. In this historic legislation, we focused on putting taxpayers first,” said House Ways and Means Committee Chairman Richard Neal, D-Mass., and Kevin Brady, R-Texas, in a joint statement Thursday. “Our reforms authorize the restructuring of the entire IRS in order to better serve taxpayers. We require the IRS to focus on customer service and reign in some of the agency’s enforcement tools. And we provide the agency with needed tools to bring its IT infrastructure into the 21st century. The IRS should prioritize taxpayers’ rights and should be a resource — this legislation meets those goals."

"We want to applaud the leadership of Oversight Chairman John Lewis over the past five years, and want to thank Rep. Mike Kelly for helping bring this legislation over the finish line," they added. "We encourage President Trump to sign these historic reforms into law soon so that our tax administrator is better able to serve taxpayers everywhere.”

Other Provisions

Some of the provisions in the legislation were introduced by Sen. Rob Portman, R-Ohio, and Ben Cardin, D-Md., last year. They include preserving the IRS Oversight Board so Congress can work to reconstitute the board and have it work in the way it was originally intended: to help set the long-term strategic direction of the agency. The bill also establishes an independent Office of Appeals at the IRS and strengthens taxpayers’ right to an appeal, including full notice and protest procedures and open access to case files. It directs the IRS to develop a comprehensive training strategy for their employees to foster a stronger culture at the agency and reinforce taxpayer rights. It requires the IRS to issue uniform guidance for the use of electronic signatures.

The bill also reauthorizes streamlined critical pay authority for IRS information technology employees to make it easier to hire the best technical staffers needed to overhaul the IRS's IT infrastructure. It protects low-income taxpayers by permanently authorizing, and authorizing additional funding for, the Volunteer Income Tax Assistance program. It codifies low-income taxpayer exceptions from fee waivers and lump sum payments associated with IRS payment plans. The legislation also directs the IRS to issue procedures for when direct deposits of tax refunds are sent to the wrong account. In addition, it modifies the IRS’s legal authority to issue a designated summons, or a summons that freezes the statute of limitations for taxpayers, to ensure this enforcement tool is only used for uncooperative taxpayers.

“This bipartisan legislation includes many of the initiatives from my Protecting Taxpayers Act, the IRS reform bill I introduced with Senator Cardin last year,” Portman said in a statement. “In particular, this bill includes reforms that establish an Independent Office of Appeals and strengthen taxpayers’ right to an appeal, an important taxpayer right first established in the 1998 IRS reform legislation that I authored in the House. The bill also preserves the IRS Oversight Board, giving the IRS and Congress a chance to revitalize the board so that it may achieve its original purpose, acting as a board of directors for the agency.”

Other provisions relate to the IRS’s private debt collection program. It creates two new categories of cases not eligible for future referral to private collection agencies: (1) taxpayers whose income is substantially derived from supplemental security income benefits or disability insurance benefit payments and (2) taxpayers with an adjusted gross income of 200 percent of the applicable poverty level and below. The provision ensures that cases involving low-income taxpayers will stay within the IRS and not be referred to the PDC program.

The legislation also changes the definition of inactive tax receivables that can be assigned to the PDC Program to those in which more than two years has passed since assessment of the tax debt and expands the duration of installment agreements between the taxpayer and PDC Program to seven years. This change will give the IRS flexibility in the PDC program, which then give taxpayers more time to pay down their tax debts through more manageable payment plans.

The bill also clarifies that the IRS can use funds generated by the PDC program for the Special Compliance Personnel Program Fund for various program costs, including hiring new IRS collections personnel, improvements to IRS software and technology, and reimbursement of the IRS or other government agencies for the cost of administering the qualified tax collection program. That way, 100 percent of the PDC program costs and oversight are covered by the revenue collected by the program itself.

“We’re very happy to see such a strong bipartisan effort to strengthen and expand the PDC Program,” said Kristin Walter, a spokesperson for the Partnership for Tax Compliance, a group that advocates for the private debt collection agencies that contract with the IRS. “Taxpayers will continue to benefit from the program’s ability to expand the IRS’s customer service capacity, reaching out to provide a broader array of flexible, installment agreement options, and the additional tax dollars collected via the PDC program will go a long way to strengthen the budget and pay for critical federal efforts in the years ahead.”

Another group, which advocates for self-employed taxpayers, also praised the bill. “Every step Congress takes toward streamlining and simplifying the tax code and increasing the efficiency of the Internal Revenue Service is a win for America’s small business and self-employed community,” said Keith Hall, president and CEO of the National Association for the Self-Employed. “An Internal Revenue Service that is modernized and focused on customer service translates into savings of time and money for America’s entrepreneurs. For the self-employed community, every hour spent trying to get answers or on hold with the Internal Revenue Service is time they are unable to devote to growing and expanding their small business. We applaud congressional leaders in both parties for working together to secure swift passage of the Taxpayer First Act and urge President Trump to sign the legislation into law.”

A legal advocacy group, the Institute for Justice, also praised the bill for including provisions that discourage the IRS from seizing taxpayer funds through civil forfeitures. The Taxpayer First Act includes an earlier bill known as the Clyde-Hirsch-Sowers RESPECT Act, named after Institute for Justice clients Jeff Hirsch and Randy Sowers, whose assets were seized by the IRS because of suspicions they were “structuring” their banking transactions to keep them below the $10,000 limit that would trigger bank-reporting requirements. The bill limits forfeiture for currency structuring only when the funds in question come from an illegal source or are used to hide illegal activity, thereby codifying an IRS policy change in 2014 prompted by lawsuits from the Institute for Justice. The bill also allows property owners to challenge a seizure at a prompt, post-seizure hearing. Previously, property owners targeted for structuring had to wait months or years to present their case to a judge.

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