The Taxpayer First Act, which is awaiting the president's signature to become law was signed into law on July 1, got a lot of attention for what wasn't in it.
The controversial section that would have codified the Free File Alliance was removed in the bill's revised House version, which was approved by voice vote in that chamber on June 10. Three days later, the Senate approved the reworked bill, also by voice vote, and sent it to the White House.
Opponents of the formalized Free File section argued that it would have prohibited the Internal Revenue Service from creating its own in-house no-fee filing system and that could actually cost taxpayers. The argument was underscored by reports that instead of directing taxpayers to Free File, some Free File Alliance tax prep software makers hid the no-cost option on their commercial websites.
The Free File focus, however, obscured the positive provisions that remained in the bill.
The Taxpayer First Act as it is formally known is the first major piece of IRS reform legislation since the IRS Restructuring and Reform Act of 1998. Here are nine ways this latest IRS reform effort can help taxpayers.
1. Better customer service: The IRS is the federal agency with which most Americans have the most personal contact for better, and too often, for worse. For years, the tax agency has been dogged by reports, acknowledged by the IRS, that taxpayers have trouble getting in touch with agency representatives — who hasn't been on a distressingly long telephone hold while waiting for an IRS rep? — and getting good information once they are connected.
Under the IRS reform bill, the agency must now develop a comprehensive customer service strategy. Part of the process, according to the soon-to-be law, is updated training of IRS workers who deal directly with taxpayers. These changes will be based on the best practices that private sector companies use in their customer service dealings.
2. Independent appeals office: If you disagree with an IRS decision about your tax account, you can appeal it. That process will be improved under the Taxpayer First Act. It establishes an independent administrative appeals function at the IRS that should prevent the cases going to the more costly judicial resolution level.
The appointed independent appeals official will be required to have experience in a broad range of federal tax law controversies and management of large service organizations. Taxpayers also now will get access to the IRS case against them. Specifically, the IRS must provide certain individual and business taxpayers with their case files, if requested, prior to the start of any dispute resolution process. If a request for review is denied, the IRS would have to provide written notice of the reason to the taxpayer and to Congress.
3. Private tax debt collector restrictions: In 2017, the IRS, under order by Congress, once again started using private collection agencies to bring in some unpaid tax bills. Many members of Congress and the National Taxpayer Advocate opposed the resumption private collection agency (PCA) activity, which had failed three previous times.
The new IRS reform bill doesn't do away with PCAs (but expect some members to keep pushing for that). It does, however, prevent private collection agents from going after lower-income taxpayers. The concern, cited most recently in the Taxpayer Advocate's 2018 report to Congress, is that the PCAs pressured these poorer taxpayers into entering into payment plans that they can't afford. The IRS itself faces income-based limits on its collection efforts. The new law will extend these to PCAs.
Once the bill becomes law, the collection agents will be banned from collecting tax from any person with adjusted gross income below 200 percent of the poverty level, which is based on the taxpayer's location and family size. In addition, all taxpayers whose cases are assigned to PCAs would be given more time to pay under installment plans, going from five years to seven.
4. Cheaper ways to partial pay: Taxpayers have the option to propose a settlement with IRS of less than their total due taxes. These Offer in Compromise (OIC) cases allow Uncle Sam to get at least some money without a lot of wasted effort in situations where a taxpayer can show that s/he cannot reasonably fulfill her or his full tax obligation. To get such a deal, the taxpayer must make a reasonable offer, meet other IRS settlement requirements and make partial payment upfront as well as pay an application fee.
While the IRS has the leeway to waive fees for those who can't afford them, it's not a legal requirement. It will be under the new IRS reform bill. The measure will make mandatory waiver of the OIC initial payment and application fee for certain low-income taxpayers.
5. Limits on structuring-related liens: When all else fails in collecting taxes, the IRS resorts to confiscating taxpayer property to satisfy overdue bills. That's going to change in one particular area known as structuring. Here, cash transactions over $10,000 must be reported to the government. To get around that requirement, some people and entities parcel out the payments to stay under the 10K threshold. This is known in legal and tax circles as structuring and often is used, say law enforcement officials, by criminals to hide illegal financial transactions such as money laundering.
In recent years, however, the IRS has faced complaints that it uses the structuring argument to improperly seize taxpayer property unrelated to the transaction. Bills to address these non-structuring seizure situations have regularly been introduced. The legislative language finally made it into the IRS reform bill, which says the agency now can seize taxpayer property only in situations where the property is shown to be derived from an illegal source or the cash transaction was structured for the purpose of concealing criminal activity.
The bill also has a post-seizure notice and hearing requirement to deal with taxpayers whose property was taken by the IRS in connection with reporting violations. And if the property is returned after the hearing, any interest paid the taxpayer would be tax-free.
6. Enhanced identity theft efforts: The Taxpayer First Act includes many provisions designed to discover and stop tax ID theft. Several of them will be under-the-hood actions the IRS will be required to take and which taxpayers won't know are being implemented. However, in some cases, taxpayers will be more involved in the identity theft fight under the Taxpayer First provisions.
Now, taxpayers who've have their identity stolen can request a special identity protection personal identification number, or IP PIN, they can use to file their real returns. That option will be extended within five years to all taxpayers, allowing them to take preemptive steps to stymie criminals who steal Social Security numbers and use them to file fraudulent returns.
The IRS also now will establish a single point of contact within the IRS for any identity theft victim. This specific contact will track the taxpayer's case to completion, as well as work other IRS employees to resolve the taxpayer's ID theft issues. This single point of contact for identity theft victims should reduce citizen frustration, meaning they won't have to reiterate the entire course of their case at the start of every new conversation with a different agent or IRS employee, noted bill sponsor and long-time IRS reform advocate Rep. John Lewis (D-Georgia), chair of the Ways and Means Oversight Subcommittee.
7. Whistleblowers get more safeguards: The IRS' Whistleblower Reward Program has led to the tax agency collecting billions in under- or unpaid taxes that otherwise would have remained hidden. Since the program began in 2006, whistleblowers alerts have helped the IRS recover $5 billion. Those informants have been awarded around $811 million. Despite the potentially lucrative payoff, tax whistleblowers remain reluctant to come forward because there is no federal law protecting them against retaliation. The Taxpayer First Act changes that.
The bill includes what those in the whistleblower world describe as robust protections for tax whistleblowers that are modeled on the whistleblower protection provisions of the Sarbanes-Oxley Act and False Claims Act. The new IRS reform bill protects not only disclosures to the IRS, but also internal disclosures, including an employee's disclosure to a supervisor or "any other person working for the employer who has the authority to investigate, discover, or terminate misconduct." It also prohibits a wide range of retaliatory acts, including "discharging, demoting, suspending, threatening, harassing, or in any other manner discriminating against a whistleblower in the terms and conditions of employment."
8. Volunteer Income Tax Assistance (VITA) gets funding certainty: The Volunteer Income Tax Assistance (VITA) program utilizes IRS-certified volunteer organizations to provide free tax return filing assistance to low-income populations, persons with disabilities, taxpayers with limited English proficiency and other underserved communities. The IRS reform bill permanently authorizes the VITA matching grant program to support the maintenance and expansion of VITA programs.
Under the bill, the Treasury Secretary, unless otherwise provided by specific appropriation, now may allocate from otherwise appropriated funds up to $30 million per year in matching grants to qualified entities for the development, expansion, or continuation of VITA sites.
9. IRS direct credit/debit card payments: The IRS has long encouraged taxpayers to use electronic methods when paying their tax bills. One of the most popular methods, both among the tax collector and taxpayers, is via credit or debit cards. There is, however, a fee for paying your taxes with plastic. It is collected by the companies that process the payments.
Under the new IRS reform bill, the IRS will be allowed to accept credit and debit payments directly. The processing fee paid by the taxpayer, however, will remain. So will the third-party processing options.
But the good news is that when the IRS enters into contracts with the credit card processors, it now must look for ways to minimize the fees the companies charge. The hope is that such negotiations will lead to lower overall credit/debit payment fees.
Focus on Free File to continue: That brings us back to that other, more contentious third-party tax program known Free File. The agreement between the IRS and the dozen or so tax software manufacturers who make up the Free File Alliance is in place through Oct. 31, 2021.
Following the reports of how the Free File program has been circumvented, the IRS says it is committed to working with the Alliance to ensure that eligible taxpayers — that's those whose adjusted gross income this year is $66,000 or less — get adequate information on how they can file for free.
Members of Congress say they will make sure that happens.
There's also renewed interest on Capitol Hill, at least for now, on establishing an IRS-only Free File program.
"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," said Senate Finance Committee Ranking Member Ron Wyden (D-Oregon) in a statement following the upper chamber's passage of the Taxpayer First Bill.
Until then, though, taxpayers can look forward to the improvements to existing IRS services under the Taxpayer First Act.
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