Archive for National Taxpayer Advocate

End Of The IRS Revenue Officer “Pop-In” Visit

End Of The IRS Revenue Officer “Pop-In” Visit

The IRS announced it is ending the practice of unannounced visits from its revenue officers. The policy change is due to the rise in tax scams and taxpayer confusion over verifying an IRS employee’s identity, leading to safety concerns for both taxpayers and IRS employees. This is good news for taxpayers since they will no longer be caught off guard and unprepared to discuss their unpaid taxes. Additionally, there is the benefit of an improved taxpayer experience when taxpayers receive advance notice and other information in the mail.

The end of unannounced visits does not mean revenue officers have stopped working outstanding tax due cases. It just changes the way they contact taxpayers in person. In the past, a revenue officer would conduct a preliminary investigation and then visit the taxpayer’s home or place of business unannounced. Now, prior to any face-to-face visit, you will generally (there are some rare exceptions) receive an appointment letter, Letter 725-B. Appointments can be held at the IRS office, your home or business, or by telephone. A revenue officer may request subsequent appointments at your home or place of business to secure additional financial information or view assets.

It’s vitally important that you keep the scheduled appointment or call the revenue officer to reschedule. If you don’t, the IRS might levy your bank account or wages.

How will you or your representative know it is actually the IRS writing or calling? The IRS has published this fact sheet to help. If you have any doubts the person is an actual IRS revenue officer, schedule your appointment in person at the IRS office or request the option of sending any information to the IRS via secure messaging using your online account.
Read More

Written by | Posted in IRS Pop-In Visit

Reconsidering The IRS’s Approach To Supervisory Review

Reconsidering The IRS’s Approach To Supervisory Review

Some penalties require supervisory approval before they can be assessed by the IRS. The applicable statute, however, is vague regarding the point at which this approval must occur. This statutory ambiguity has generated conflicting decisions among the courts, which leaves taxpayers unsure about how they should be treated by the IRS and leads to unnecessary litigation that is bad for everyone. In hopes of bringing additional certainty to this area, the IRS has proposed regulations, for which public comments were open until July 10, 2023. The next step in this regulatory process will be a public hearing to be held on September 11, 2023.

TAS has encouraged the IRS and Congress to draw a clear line in the sand to clarify the issue, but our recommendation of where to draw the line is different than the IRS’s approach. The proposed regulations succeed in providing clarity, but it would be nice if they did so in a way that helps taxpayers rather than harming them.

Timing of Supervisory Approval
IRC § 6751(b)(1) generally requires that no penalty be assessed unless the initial penalty determination has been approved in writing by an applicable supervisor. Courts, however, have been all over the map when it comes to interpreting this requirement. For example, the U.S. Tax Court, in Clay v. Commissioner, held that supervisory approval for penalties subject to deficiency procedures was required prior to sending the taxpayer a formal communication that included the right to go to the IRS Independent Office of Appeals. On the other hand, the U.S. Court of Appeals for the Second Circuit held in Chai v. Commissioner that approval for these penalties could occur anytime up until issuance of the statutory notice of deficiency.

Under the proposed regulations, for pre-assessment penalties subject to Tax Court review, supervisory approval can be obtained anytime before issuance of the statutory notice of deficiency. Penalties not subject to pre-assessment Tax Court review can be approved up until the time of the assessment itself. Thus, the proposed regulations establish the broadest possible window and allow the requisite supervisory approval to occur at the latest possible moment. On the other hand, TAS has long urged the IRS to require supervisory approval before a proposed penalty is communicated in writing to a taxpayer.
Read More

Written by | Posted in IRS Audit Review

International Information Return Penalties Impact A Broad Range Of Taxpayers

International Information Return Penalties Impact A Broad Range Of Taxpayers

In a series of earlier blogs, I discussed some of the problematic aspects of the international information return (IIR) penalty regime. In Part 1, I advocated that, especially after the Tax Court’s decision in Farhy v. Commissioner, Congress should make Chapter 61 IIR penalties subject to deficiency procedures. In Part 2, I urged Congress to ensure that the statute of limitations in IRC § 6501(c)(8) governs these IIR penalties, while in Part 3, I reiterated my longtime recommendation that “willfulness” be proven by clear and convincing evidence. In this blog, I will address the broad scope of the IIR penalty regime.

There is a misconception that IIR penalties affect primarily bad-faith, wealthy taxpayers who are experiencing consequences of their own making. Reality, however, is much different. The IIR penalty regime disproportionately affects individuals and businesses of more moderate resources, and is by no means just a rich person’s problem. Wealthy individuals and large businesses tend to have knowledgeable and well-informed representation and as a result have fewer foot faults. Immigrants, small businesses, and low-income individuals may not be as well-informed about IIR penalties and may not have return preparers with the same technical expertise on international penalties.
Read More

Written by | Posted in International Information Return Penalties • National Taxpayer Advocate

Chapter 61 Foreign Information Penalties: Taxpayers and Tax Administration Need Finality, Which Requires Legislation (Part Two)

Chapter 61 Foreign Information Penalties: Taxpayers and Tax Administration Need Finality, Which Requires Legislation (Part Two)

Due process requires that matters be resolved according to established rules and principles and that taxpayers be treated fairly. The international information return (IIR) penalty regime under IRC Chapter 61, Subchapter A, Part III, Subpart A does not adhere to this fundamental mandate. Now is the time for Congress to fix this broken system by providing a clear path for implementation of these penalties. This fix, which would provide much-needed clarity and finality, will require legislation.

The need for this legislation has been brought to a head by the U.S. Tax Court’s recent decision in Farhy v. Commissioner, which holds that the IRS lacks statutory authority to assess and collect penalties under IRC § 6038(b). In part one of this series, I provide a discussion of this decision and a recommendation that would protect the rights of both taxpayers and the government.

Since assuming the role of National Taxpayer Advocate, I have recommended that the IRS cease systemic assessment of these penalties, and I have requested that Congress enact legislation providing the IRS the ability to utilize deficiency procedures for IIR penalties. Among other things, deficiency procedures allow for judicial review in the Tax Court prior to the assessment and payment of the asserted penalties.

Compared to other courts, the Tax Court is more accessible for taxpayers and is by far the least expensive and easiest to navigate for low-income taxpayers. Amending the IRC to implement deficiency procedures would solve the problem highlighted by the Tax Court in Farhy. Nevertheless, there remains a separate and important issue regarding Chapter 61 IIR penalties that also needs a legislative fix.

Chapter 61 International Information Return Penalties Require Finality

Taxpayers are entitled to finality and a fair and just tax system. Protection of these rights is a bedrock aspect of quality tax administration.
Read More

Written by | Posted in National Taxpayer Advocate

Chapter 61 Foreign Information Penalties: Part One: Taxpayers and Tax Administration Need A Legislation Fix

Chapter 61 Foreign Information Penalties: Part One: Taxpayers and Tax Administration Need A Legislation Fix

This blog specifically addresses information reporting penalties in Chapter 61, Subchapter A, Part III, Subpart A (hereafter referred to as Chapter 61 for brevity’s sake).

Taxpayers who receive foreign gifts or control certain foreign corporations and partnerships and fail to file required information returns are subject to penalties under IRC §§ 6038 and 6039 (which are in Chapter 61 of the IRC). IRC § 6038 is one of several code sections that require similar filings and provide for similar penalties for taxpayers with various types of foreign corporations, partnerships, assets, and accounts. These Chapter 61 penalties are peculiar in that each section specifically imposes the penalties but provides no authority to assess and collect the penalties. I raised this concern in my 2020 Annual Report to Congress and recommended that the IRS take steps to protect the government fisc and also taxpayer rights by maximizing taxpayers’ access to administrative and judicial review.

Farhy v. Commissioner
The ability of the IRS to assess a Chapter 61 penalty was recently challenged before the U.S. Tax Court in Farhy v. Commissioner and, in a precedential decision, the court held that the IRS lacks statutory authority to assess and collect penalties under IRC § 6038(b).

In Farhy, the taxpayer had a reporting requirement under IRC § 6038(a) to report his ownership interests in two foreign corporations but failed to file required Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations, for multiple tax years. The IRS assessed an initial penalty under IRC § 6038(b)(1) for each year and continuation penalties under IRC § 6038(b)(2). The IRS sought to collect the penalties via levy, and the taxpayer timely filed a petition with the Tax Court challenging the IRS’s authority to assess and attempt to collect via levy.
Read More

Written by | Posted in National Taxpayer Advocate

Disaster Relief: What The IRS Giveth, The IRS Taketh Away(Part One)

Disaster Relief: What The IRS Giveth, The IRS Taketh Away(Part One)

Disaster Relief: What the IRS giveth, the IRS taketh away. Or so it seems for disaster relief taxpayers until you get to page 4 of the collection notice (Part One)

Imagine you live in a county that has been battered by storms or wildfires so severe that the federal government has included your county in a disaster declaration. Imagine that the IRS grants you an extra four or six months to file your tax return and make your tax payment. Then imagine you file your return early but properly decide to hold off on making payment until the postponed deadline. That is what an estimated one million taxpayers living in California and seven other states (Alabama, Arkansas, Florida, Georgia, Indiana, Mississippi, and Tennessee) have done in the last few months. To their surprise and dismay – and contrary to IRS guidance and press releases – those taxpayers are now receiving “notice and demand” collection letters from the IRS telling them their payments are currently due and the IRS will begin to charge interest and penalties if the taxpayer doesn’t pay by a specified date on the notice which is months earlier than IRS guidance permits. Confused taxpayers and practitioners are wondering why they are receiving a balance due notice since they live in a disaster relief area and had months of additional time to pay.

Short answer: Disaster area taxpayers can ignore the CP14 collection notice when the original due dates fall within the postponement period. The payment due date on the collection notice is wrong. The correct payment due date is stated on the disaster declaration. Taxpayers can verify the correct payment due date by checking irs.gov.

If you want to understand this perplexing situation, read on, but it involves several twists and turns.
Read More

Written by | Posted in National Taxpayer Advocate

Tax Court Moves Toward Greater Transparency With Expanded Online Access But Could Do More

Tax Court Moves Toward Greater Transparency With Expanded Online Access But Could Do More

On May 5, 2023, the U.S. Tax Court released Administrative Order 2023-02, announcing changes to the Tax Court’s electronic filing and case management system that will protect taxpayers’ right to be informed. Beginning August 1, 2023, the Tax Court’s electronic filing and case management system will make all newly filed posttrial briefs filed by government and non-government practitioners admitted to practice before the Tax Court and all newly filed amicus briefs filed pursuant to Rule 151.1 of the Tax Court Rules of Practice and Procedure in non-sealed cases available to the public remotely. This is a welcome step forward. With limited exceptions, all non-sealed documents are “public records open to the inspection of the public,” pursuant to IRC § 7461, and maintaining easy access to those public records is important for tax practitioners as well as non-practitioners. The Administrative Order limited the posting of briefs to those filed by “practitioners admitted to practice before the Court.” In fiscal year 2022, taxpayers petitioned the Tax Court without a practitioner representing them in about 90 percent of cases so that will limit the number of petitioner briefs available for electronic viewing. But this should not limit the number of briefs filed by the government available for remote viewing, as its attorneys are admitted to practice before the Tax Court.

The Tax Court’s electronic filing and case management system, Docket Access Within A Secure Online Network (DAWSON), was launched in December 2020. DAWSON offers some of the same features as Public Access to Court Electronic Records (PACER), the system that provides for dockets in other U.S. courts. For example, DAWSON and PACER provide an online option for parties to a case to file and process documents and manage cases. DAWSON also has a public search feature that allows the public to search for cases, orders, and opinions that are not sealed. However, unlike PACER, DAWSON does not allow nonparties (i.e., the public) online access to anything beyond opinions and orders.
Read More

Written by | Posted in Electronic Filing System • Tax Court

National Taxpayer Advocate: Small Business Filing And Recordkeeping Requirements

National Taxpayer Advocate: Small Business Filing And Recordkeeping Requirements

There are about 57 million small businesses and self-employed taxpayers in the United States, including:

Corporations and partnerships with assets less than $10 million
-Sole proprietors
-Independent contractors
-Members of a partnership that carries on a trade or business
-Others in business for themselves, even if the business is part-time
-Gig workers (i.e., Uber/Lyft drivers, owners of Airbnb rentals, delivery services, etc.)
-The Taxpayer Advocate Service is sharing the following information with small business taxpayers to:

Help you meet their filing requirements
Share resources for information and tax return preparation
Help you file accurate returns
Small Business Filing Requirements

Generally, the federal tax forms you will need to file vary depending on the type of business:
Read More

Written by | Posted in National Taxpayer Advocate • TaxConnections

Standard Mileage Deduction Rates Should Be Consistent For All Taxpayers

Standard Mileage Deduction Rates Should Be Consistent For All Taxpayers

The IRS released a Strategic Operating Plan (SOP) outlining how it intends to use the nearly $80 billion in additional funding received as part of the Inflation Reduction Act of 2022 (IRA) to improve the taxpayer experience, modernize its information technology (IT) systems, and strengthen tax compliance programs in a fair and equitable manner.

This is a game changer to transform how the U.S. government administers the tax laws in a more helpful and efficient manner while focusing on providing the service taxpayers deserve.

However, of the nearly $80 billion in supplemental IRA funding, only $3.2 billion was allocated for Taxpayer Services and $4.8 billion was allocated for the IRS Business Systems Modernization (BSM) projects. Combined, that’s just ten percent of the total. By contrast, 90 percent was allocated for Enforcement ($45.6 billion) and Operations Support ($25.3 billion). The additional long-term funding provided by the IRA, while appreciated and welcomed, is disproportionately allocated for enforcement activities, and I believe Congress should reallocate IRS funding to achieve a better balance with taxpayer service needs and IT modernization.

As discussed in the Estimated Allocation of Funds section of the SOP, the additional resources the IRS has deployed to meet current taxpayer service needs will deplete the entire $3.2 billion IRA allocation for Taxpayer Services in less than four years if additional annual appropriations or supplemental funding is not provided. The SOP also expresses concern about the adequacy of BSM funding to modernize the agency’s antiquated IT systems.
Read More

Written by | Posted in National Taxpayer Advocate

Chapter 61 Foreign Information Penalties: Taxpayers and Tax Administration Need Finality (Part 2)

Chapter 61 Foreign Information Penalties: Taxpayers and Tax Administration Need Finality (Part 2)

Due process requires that matters be resolved according to established rules and principles and that taxpayers be treated fairly. The international information return (IIR) penalty regime under IRC Chapter 61, Subchapter A, Part III, Subpart A does not adhere to this fundamental mandate. Now is the time for Congress to fix this broken system by providing a clear path for implementation of these penalties. This fix, which would provide much-needed clarity and finality, will require legislation.

The need for this legislation has been brought to a head by the U.S. Tax Court’s recent decision in Farhy v. Commissioner, which holds that the IRS lacks statutory authority to assess and collect penalties under IRC § 6038(b). In part one of this series, I provide a discussion of this decision and a recommendation that would protect the rights of both taxpayers and the government.

Since assuming the role of National Taxpayer Advocate, I have recommended that the IRS cease systemic assessment of these penalties, and I have requested that Congress enact legislation providing the IRS the ability to utilize deficiency procedures for IIR penalties. Among other things, deficiency procedures allow for judicial review in the Tax Court prior to the assessment and payment of the asserted penalties.

Compared to other courts, the Tax Court is more accessible for taxpayers and is by far the least expensive and easiest to navigate for low-income taxpayers. Amending the IRC to implement deficiency procedures would solve the problem highlighted by the Tax Court in Farhy. Nevertheless, there remains a separate and important issue regarding Chapter 61 IIR penalties that also needs a legislative fix.

Chapter 61 International Information Return Penalties Require Finality
Taxpayers are entitled to finality and a fair and just tax system. Protection of these rights is a bedrock aspect of quality tax administration.

The failure to provide a clear statute of limitations for some Chapter 61 penalties represents a defect in the IRC. Unlike most other penalty provisions in the code, there is no explicit statute of limitations impacting some Chapter 61 penalties. Nothing in the code specifically prohibits the IRS from imposing penalties going all the way back to the enactment of some code sections. That being said, the Court noted in Farhy, “28 U.S.C. § 2461(a) expressly provides that ‘[w]henever a civil fine, penalty or pecuniary forfeiture is prescribed for violation of an Act of Congress without specifying the mode of recovery or enforcement thereof, it may be recovered in a civil act.’” 28 U.S.C. § 2462 provides that a suit to enforce penalties must be commenced within five years.
Read More

Written by | Posted in TaxConnections

Chapter 61 Foreign Information Penalties: Part One: Taxpayers And Tax Administration Need A Legislation Fix ( Part 1)

Chapter 61 Foreign Information Penalties: Part One: Taxpayers And Tax Administration Need A Legislation Fix

Since 2020, I have repeatedly recommended a legislative change under which Congress would make foreign information return penalties and assessable penalties subject to deficiency procedures for the benefit of both the IRS and taxpayers. This change would provide taxpayers with a more efficient, less costly, and more equitable regime governing the initial imposition of these penalties, as well as the mechanisms by which they can be challenged by taxpayers.

This blog specifically addresses information reporting penalties in Chapter 61, Subchapter A, Part III, Subpart A (hereafter referred to as Chapter 61 for brevity’s sake).

Taxpayers who receive foreign gifts or control certain foreign corporations and partnerships and fail to file required information returns are subject to penalties under IRC §§ 6038 and 6039 (which are in Chapter 61 of the IRC). IRC § 6038 is one of several code sections that require similar filings and provide for similar penalties for taxpayers with various types of foreign corporations, partnerships, assets, and accounts. These Chapter 61 penalties are peculiar in that each section specifically imposes the penalties but provides no authority to assess and collect the penalties. I raised this concern in my 2020 Annual Report to Congress and recommended that the IRS take steps to protect the government fisc and also taxpayer rights by maximizing taxpayers’ access to administrative and judicial review.

Farhy v. Commissioner
The ability of the IRS to assess a Chapter 61 penalty was recently challenged before the U.S. Tax Court in Farhy v. Commissioner and, in a precedential decision, the court held that the IRS lacks statutory authority to assess and collect penalties under IRC § 6038(b).
Read More

Written by | Posted in Foreign information Penalties

Lookback Rule: The IRS Fixes The Refund Trap For The Unwary

Lookback Rule: The IRS Fixes The Refund Trap For The Unwary

For tax year (TY) 2019, there were nearly 34 million returns filed between the postponed period of April 16, 2020, and July 15, 2020, and for TY 2020, there were nearly 29 million returns filed between the postponed period of April 16, 2021, and May 17, 2021. Without IRS intervention, any claims for credit or refund filed during the postponed period three years later that included withholding or estimated taxes would have been denied because the withheld amount(s) would have been credited to the taxpayer’s account as of April 15, outside the three-year lookback period.

Good news: Earlier today the IRS issued Notice 2023-21 addressing the mismatch between the time for filing a claim for credit or refund and the three-year lookback period caused by postponing certain filing deadlines for filing seasons 2020 and 2021, which would result in the denial of timely claims for credit or refund for those taxpayers who took advantage of the postponed deadlines and who had withholding or estimated payments. Taxpayers will never know this was a potential problem as the IRS did the right thing and proactively fixed the lookback period to eliminate challenges and refund denials for taxpayers.

I first raised this issue internally after the IRS postponed the filing date for the 2020 filing season (TY 2019 returns). On May 11, 2021, I posted a blog, in which I publicly suggested the IRS publish guidance to remedy this problem and submitted a recommendation to include in the U.S. Department of the Treasury/Internal Revenue Service Priority Guidance Plan. I also provided a legislative recommendation as to how Congress could remedy this issue for these tax years and for all future instances when the filing deadline is postponed. This notice resolves the issue for the 2020 and 2021 COVID-19 disaster relief, yet it does not provide relief for other disaster filing postponements.
Read More

Written by | Posted in IRS
« Older Entries