Archive for National Taxpayer Advocate

Treasury FY 2025 Green Book Proposes To Essentially Eliminate Written Supervisory Approval For Penalties

Treasury FY 2025 Green Book Proposes to Essentially Eliminate Written Supervisory Approval for Penalties

International information return penalties are often thought of as primarily affecting rich people or multinational corporations with significant overseas assets. This is not true. Taxpayers – many of whom are lower- and middle-income individuals, small and midsize business owners, and immigrants – face significant and potentially life-changing penalties, even when they voluntarily comply, for failing to meet obscure and complex foreign information reporting requirements.

As I have discussed in prior blogs and my Annual Report to Congress, these penalties overwhelmingly impact lower- and middle-income individuals and small and midsize businesses who voluntarily come forward. For example, the IRS assesses 71 percent of individual IRC § 6038 penalties against lower- and middle-income taxpayers (those reporting under $400,000 in income). Likewise, it assesses 83 percent of systemic business IRC §§ 6038 and 6038A penalties against small and midsize businesses. These penalties can be huge. For instance, in the foreign gift context, the average penalty for 2018-2021 was more than $235,000 for taxpayers who reported $400,000 or less in income. Many of these penalties bear no relation to any underlying taxable income or liability.

Courts continue to litigate whether IRC § 6038(b) gives the IRS the authority to assess foreign information penalties and whether it can take administrative collection actions against taxpayers. These issues will take time to resolve with finality. (See Farhy v. Commissioner (Tax Court opinion and D.C. Circuit Court of Appeals opinion) and Mukhi v. Commissioner).

The IRS and Congress can and should act now to fix the unfair, draconian penalty regime taxpayers experience with these international information returns. I continue to advocate for the IRS and Congress to apply these penalties in a fair manner by providing taxpayers their rights prior to assessment of the penalties.

What Is the Problem?

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TAS Tax Tip: Why Do I Owe A Penalty And Interest And What Can I Do About It?

TAS Tax Tip: Why Do I Owe A Penalty And Interest And What Can I Do About It?

There are many reasons why the IRS may charge penalties on your tax account. The IRS is legally required, under IRC § 6601(a), to charge interest when you fail to pay the full amount you owe on time. Interest may also accrue on penalties. Interest, and any applicable penalties, will continue to accrue until you pay your balance due in full. Here are some of the most common penalties, information on why they may have been charged, and how to request penalty abatement (removal) if applicable.

First let’s talk about some common penalty charges on individual accounts, along with interest, and why the IRS charges them.

Common penalties include:

  • Failure to file – you didn’t file your tax return by the return due date or extended due date if an extension to file is requested and approved.
  • Failure to pay – you didn’t pay the taxes reported on your tax return in full by the due date of the original tax return. An extension to file doesn’t extend the time to pay, so you must pay your taxes by the original due date of the tax return even if you have requested an extension of time to file your tax return. In addition, the IRS may charge a failure to pay penalty if the IRS sends a request for payment and you fail to pay on time.
  • Failure to pay proper estimated tax – you didn’t pay enough taxes due for the year with your quarterly estimated tax payments, or through withholding, when required.
  • Bad check – your bank doesn’t honor your check or other form of payment.
Interest

The IRS is required to charge interest on any unpaid balance owed until it is paid in full. Learn more on the IRS’s Interest page, or view the latest interest rates.

How can I dispute IRS penalties?

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National Taxpayer Advocate Delivers Annual Report to Congress

National Taxpayer Advocate Delivers Annual Report to Congress

National Taxpayer Advocate Erin M. Collins today released her 2023 Annual Report to Congress, describing 2023 as a year of “extraordinary transition for the IRS and therefore for taxpayers.” The report credits the IRS with substantially improving taxpayer services and developing plans to transform the taxpayer experience in the coming years, but it identifies paper processing as an area of continuing weakness.  

Most Serious Problems

By law, the Advocate’s report is required to identify the ten most serious problems taxpayers are experiencing in their dealings with the IRS and to make administrative and legislative recommendations to address those problems. Before cataloging taxpayer challenges, however, Collins praised the IRS for taking notable strides forward. However, paper processing is an area of continuing weakness. The areas in which taxpayers continued to experience delays were primarily those that required employees to process tax returns and taxpayer correspondence, including:  

  • Extraordinary delays in assisting victims of identity theft;  
  • Delays in processing amended tax returns and taxpayer correspondence;  
  • Challenges in receiving telephone assistance despite overall improvements; and  
  • Employee Retention Credit (ERC) processing. 
Administrative Recommendations 

At the end of each of the ten most serious problem sections in the report, the National Taxpayer Advocate makes administrative recommendations to address the problems. Among her key recommendations: 

  • Prioritize the improvement of online accounts for individual taxpayers, business taxpayers, and tax professionals to provide functionality comparable to that of private financial institutions; 
  • Improve the IRS’s ability to attract, hire, and retain qualified employees; 
  • Ensure all IRS employees – particularly customer-facing employees – are well-trained; 
  • Upgrade the back end of the Document Upload Tool (DUT) to fully automate the processing of taxpayer correspondence;  
  • Enable all taxpayers to e-file their federal tax returns; and  
  • Extend eligibility for first-time penalty abatement to all international information return penalties. 
Legislative Recommendations: The “Purple Book” 

The National Taxpayer Advocate’s 2024 Purple Book proposes 66 legislative recommendations intended to strengthen taxpayer rights and improve tax administration. Among the recommendations: 

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National Taxpayer Advocate Objectives Report To Congress: Fiscal Year 2024

National Taxpayer Report Objectives Report To Congress For 2024

The Internal Revenue Code requires the National Taxpayer Advocate to submit two annual reports to the House Committee on Ways and Means and the Senate Committee on Finance. The National Taxpayer Advocate is required to submit these reports directly to the Committees without any prior review or comment from the Commissioner of Internal Revenue, the Secretary of the Treasury, or the Office of Management and Budget. The first report, due by June 30 of each year, must identify the objectives of the Office of the Taxpayer Advocate for the fiscal year beginning in that calendar year.

FY 2024 Objectives Report To Congress

PREFACE: The National Taxpayer Advocate’s Introductory Remarks

REVIEW OF THE 2023 FILING SEASON

TAS SYSTEMIC ADVOCACY OBJECTIVES
Introduction

  1. Protect Taxpayer Rights as the IRS Implements Its Strategic Operating Plan
  2. Protect Taxpayer Privacy and Ensure the IRS Does Not Disclose Taxpayer Information Without Consent
  3. Improve Correspondence Audit Processes, Taxpayer Participation, and Agreement and Default Rates
  4. Implement Systemic First Time Abatement But Allow Substitution of Reasonable Cause
  5. Reduce Burden on Taxpayers Applying for an Individual Taxpayer Identification Number
  6. Formalize 45-Day Response Time From All IRS Functions to Recommendations Made by the Taxpayer Advocacy Panel
  7. Eliminate Systemic Assessments and Offer a First Time Abatement Waiver for International Information Return Penalties
  8. Modernize IRS Paper Processing Procedures
  9. Continue to Propose Simplification of the Tax Code and IRS Procedures to Reduce Taxpayer Compliance Burden
  10. Improve IRS Hiring, Recruitment, and Training Strategies
  11. Improve Taxpayer Access to Telephone and Face-to-Face Assistance
  12. Increase Accessibility and Improve Functionality of Digital Services for Individual and Business Taxpayers and Tax Professionals
  13. Improve Tax Return Processing by Eliminating Barriers to E-Filing
  14. Improve IRS Transparency
  15. Identify Data to Support Minimum Competency Standards for Paid Return Preparers of Federal Tax Returns
  16. Improve the Staffing and Culture of the IRS Independent Office of Appeals
  17. Reduce Compliance Barriers for Overseas Taxpayers

TAS CASE ADVOCACY AND OTHER BUSINESS OBJECTIVES

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Student-Athletes Involved In Name Image Likeness (NIL) Agreements Should Be Aware Of Their Tax Obligations

Student-Athletes Involved In Name Image Likeness (NIL) Agreements Should Be Aware Of Their Tax Obligations

Collegiate athletics is a competitive and popular multibillion dollar business industry. With television rights deals, conference realignment, recruitment, and much more, collegiate athletics garner significant media coverage. One topic receiving significant recent attention is the area of Name, Image, and Likeness (NIL) agreements, which allow student-athletes to financially benefit from their NIL. Because of the growing influence of student-athletes as celebrities in social media and their communities, the attention surrounding NIL is not surprising. NIL opportunities have provided new revenue sources for student-athletes that, in some instances, may reach significant sums according to some media outlet rankings of the highest estimated financial value of student-athlete NIL agreements. Due to the potential tax consequences, student-athletes should exercise appropriate due diligence before entering into NIL agreements. It is crucial to follow relevant IRS and state guidance on how to report and pay taxes on NIL income.

TAS has developed and published educational tax resources for student-athletes on our NIL Get Help page to highlight general information, including federal tax reporting, federal tax withholding, estimated tax payment, and return filing requirements associated with NIL income. I want to bring additional attention to this issue to help educate prospective and current student-athletes and their families regarding important federal tax considerations.

National Collegiate Athletic Association Case Law and NIL Interim Policy Create New Challenges

NIL contracts are a relatively new phenomenon, which may have legal implications on all parties involved. The landscape of collegiate athletics changed on June 21, 2021, when the U.S. Supreme Court ruled in National Collegiate Athletic Association v. Alston that student-athletes could benefit from their NIL. After Alston, the National Collegiate Athletic Association (NCAA) enacted an Interim NIL Policy, many states enacted NIL legislation, and for the first time, student-athletes were able to benefit from their NIL. On October 26, 2022, the NCAA issued new guidance clarifying institutional involvement in enrolled student-athletes’ NIL activities.

With so much activity during its infancy, it did not take long for NIL agreements to present complicated issues, including governing legal authority. In some instances, respective state NIL laws may conflict with the NCAA’s universally applied NIL legislation and policies. On June 27, 2023, the NCAA published an NIL Update Memo providing answers to frequently asked questions and maintaining that NCAA legislation and policy is the governing authority when applicable state NIL laws conflict.

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National Taxpayer Advocate Objectives Report To Congress 2024

National Taxpayer Advocate Report To Congress 2024

The Internal Revenue Code requires the National Taxpayer Advocate to submit two annual reports to the House Committee on Ways and Means and the Senate Committee on Finance. The National Taxpayer Advocate is required to submit these reports directly to the Committees without any prior review or comment from the Commissioner of Internal Revenue, the Secretary of the Treasury, or the Office of Management and Budget. The first report, due by June 30 of each year, must identify the objectives of the Office of the Taxpayer Advocate for the fiscal year beginning in that calendar year.

FY 2024 Objectives Report To Congress

PREFACE: The National Taxpayer Advocate’s Introductory Remarks

REVIEW OF THE 2023 FILING SEASON

TAS SYSTEMIC ADVOCACY OBJECTIVES
Introduction

  1. Protect Taxpayer Rights as the IRS Implements Its Strategic Operating Plan
  2. Protect Taxpayer Privacy and Ensure the IRS Does Not Disclose Taxpayer Information Without Consent
  3. Improve Correspondence Audit Processes, Taxpayer Participation, and Agreement and Default Rates
  4. Implement Systemic First Time Abatement But Allow Substitution of Reasonable Cause
  5. Reduce Burden on Taxpayers Applying for an Individual Taxpayer Identification Number
  6. Formalize 45-Day Response Time From All IRS Functions to Recommendations Made by the Taxpayer Advocacy Panel
  7. Eliminate Systemic Assessments and Offer a First Time Abatement Waiver for International Information Return Penalties
  8. Modernize IRS Paper Processing Procedures
  9. Continue to Propose Simplification of the Tax Code and IRS Procedures to Reduce Taxpayer Compliance Burden
  10. Improve IRS Hiring, Recruitment, and Training Strategies
  11. Improve Taxpayer Access to Telephone and Face-to-Face Assistance
  12. Increase Accessibility and Improve Functionality of Digital Services for Individual and Business Taxpayers and Tax Professionals
  13. Improve Tax Return Processing by Eliminating Barriers to E-Filing
  14. Improve IRS Transparency
  15. Identify Data to Support Minimum Competency Standards for Paid Return Preparers of Federal Tax Returns
  16. Improve the Staffing and Culture of the IRS Independent Office of Appeals
  17. Reduce Compliance Barriers for Overseas Taxpayers

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Earned Income Tax Credit Studies

Earned Income Tax Credit Studies

Written By National Taxpayer Advocate

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NTA: Filing And Payment Relief for Taxpayers Affected By The Terroristic Action In The State Of Israel

ERIN COLLINS - NATIONAL TAXPAYER ADVOCATE

As the National Taxpayer Advocate, I advocate for all taxpayers, regardless of whether they reside in the United States or abroad. Our hearts go out to the impacted people in Israel, the West Bank, and Gaza because of the terrorist attacks beginning on October 7, 2023. I applaud the IRS for quickly providing filing and some payment relief for these taxpayers.

IRS Notice 2023-71

On Friday, October 13, 2023, the IRS issued Notice 2023-71, which provides a postponement of the due dates for filing tax returns and making payments. Affected taxpayers will have until October 7, 2024, to file tax returns, make tax payments, and perform certain time-sensitive acts listed in Treas. Reg. § 301.7508A-1(c)(1) and Rev. Proc. 2018-58, 2018-50 I.R.B. 990 (December 10, 2018), that are due to be performed on or after October 7, 2023, and before October 7, 2024.

The affected taxpayers are:

  • Any individual whose principal residence, and any business entity or sole proprietor whose principal place of business, is located in the State of Israel, the West Bank or Gaza (covered area);
  • Any individual affiliated with a recognized government or philanthropic organization and who is assisting in the covered area, such as a relief worker;
  • Any individual, business entity or sole proprietor, or estate or trust whose tax return preparer or records necessary to meet a deadline for postponed acts are located in the covered area;
  • Any spouse of an affected taxpayer, solely with regard to a joint return of two married individuals; and
  • Any individual visiting the covered area who was killed, injured, or taken hostage as a result of the October 7, 2023, terrorist attacks.

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Taxpayer Advocate Will Not Be Permitted To Help Taxpayers If Government Shuts Down

Taxpayer Advocate Will Not Be Permitted To Help Taxpayers If Government Shuts Down

As of today, it appears Congress may not approve appropriations legislation to fund parts of the government, including the IRS, by the start of the fiscal year that begins on Sunday, October 1st. As a result, today is the last workday I can post a blog before a potential shutdown.

Taxpayers and their representatives should be aware that if there is a lapse in appropriations, the Taxpayer Advocate Service (TAS) will not be permitted to assist taxpayers until the government reopens.

That means that if the IRS has already issued a notice requiring an employer to garnish a taxpayer’s paycheck or requiring a bank to levy on a taxpayer’s bank account and those collections actions cause an economic hardship for the taxpayer, the taxpayer will have no way to get help from TAS.

This is a terrible result for taxpayers who are experiencing economic hardships and will not be able to obtain relief from TAS.

Here is a quick primer on why this is so: Article I of the Constitution provides that “No Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law.” To implement this requirement, Congress has passed several statutes, most notably the Antideficiency Act (ADA). The ADA generally prohibits the U.S. government from making or authorizing an expenditure or obligation unless funding has previously been made available through an appropriation or other funding mechanism. The ADA contains a general prohibition against the acceptance of voluntary services (i.e., services for which compensation has not yet been paid or obligated), except for “emergencies involving the safety of human life or the protection of property.” (Emphasis added.)

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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.
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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.
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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.
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