Modernizing the IRS With the Taxpayer First Act

by Legislative Vehicle 'Junkyard' | 6.6.20

After a similar version of the Taxpayer First Act was introduced and eventually enacted into law, the Senate amended H.R. 1957 to serve as the legislative vehicle for a bipartisan public lands maintenance package. The summary below is of the original version of the Taxpayer First Act.

What is House Bill H.R. 1957?

This bill — the Taxpayer First Act — would aim to modernize the Internal Revenue Service’s (IRS) information technology systems, infrastructure, and services to improve taxpayers’ experience with the agency. It would codify an independent appeals process for taxpayers, bolster enforcement of tax laws, and reform the tax court.

Independent Appeals Process

This section would codify the IRS Independent Office of Appeals into law and provide for additional congressional oversight over decisions to withhold taxpayers from the administrative review process. The IRS had been required to establish an independent appeals process, but after doing so increasingly withheld certain taxpayers from accessing the review process.

The IRS would be required to provide taxpayers with their case file prior to the start of any dispute resolution process. Under current law taxpayers have to file a Freedom of Information Act (FOIA) request to access their file.

Improved Service

The IRS would be required to develop and submit to Congress a comprehensive customer service strategy which addresses how the IRS will assist taxpayers, which will include metrics and benchmarks for measuring success.

The existing Free File Program, which offers free tax preparation software from private sector businesses and electronically fillable forms, would be codified into law. Programs providing free tax return assistance for low-income populations, persons with disabilities, taxpayers with limited English proficiency, and other underserved communities would be permanently -- rather than temporarily -- funded with matching grants.

Sensible Enforcement

The IRS would have to show probable cause that funds believed to have been structured to avoid Bank Secrecy Act reporting requirements were derived from an illegal source or connected to criminal activity before seizing those funds. A post-seizure hearing would have to occur within 30 days of the seizure. If it’s determined that the funds and interest should be returned, the interest would be exempt from income tax.

The IRS would only be permitted to deem seized property as “perishable” if it’s liable to perish, as current law allows it to be so deemed if the property would lose value by being kept or can’t be kept without great expense. That leads to property being sold without minimum bid requirements and for significantly less than could be received at auction.

A taxpayer under audit would have to be notified by an IRS employee before the IRS initiates third party contacts during the audit. Currently this notice typically occurs at the beginning of an audit, early enough that it doesn’t function as a notice of impending contact.

It would be prohibited for a person other than an IRS officer or employee from examining books, records, and witness testimony as part of an examination other than when serving as an expert.

Cyber Security & Identity Protection

Recent IRS efforts aimed at combating identity theft tax refund fraud (IDTTRF) through public-private partnerships would be codified into law. Recommendations by the Electronic Tax Administration Advisory Committee to address the threat of IDTTRF.

The IRS would also participate in an IDTTRF information sharing and analysis center (ISAC) with state and private sector partners. Limited return information could be shared, such as IP address and the speed at which the return was filed, with paid return preparers who are members of the ISAC.

Modernization

The IRS would require individuals filing 10 or more returns would be required to file them electronically, with the requirement phased in between 2021 and 2024 (the current threshold for this requirement is 250 returns). All tax-exempt organizations that are required to file annual returns would have to submit them electronically. The IRS would be allowed to directly accept credit and debit card payments for taxes as long as the fee is paid by the taxpayer.

The IRS would be required to develop and implement an IT strategic plan in alignment with the IRS’s overall goals to ensure adequate consideration and planning for the IRS’s long-term IT needs. Robust and secure online accounts for taxpayers and their preparers would have to be developed by 2023 in order to supplement (not replace) other taxpayer services offered by the IRS, in addition to an internet portal for filing Forms 1099.

The Office of the National Taxpayer Advocate (NTA) issues Taxpayer Advocate Directives (TADs), and this bill would strengthen TADs by requiring the IRS Commissioner or Deputy Commissioner to respond within a specified timeframe. Any TADs not honored by the IRS would have to be reported to Congress. The IRS Oversight Board, which has been ineffective because of the lack of a quorum for a few years, would be permanently eliminated.

Tax Court

Judges in the Tax Court would be subject to the same grounds for disqualification as judges of other federal courts to ensure independence and impartiality. The judicial terminology of “opinion”, “judgment”, and “magistrate judges” used by other federal courts would be adopted by the Tax Court to provide greater clarity. References in current law to the Board of Tax Appeals would be eliminated as they’re “deadwood” (ie obsolete).

Argument In Favor

This commonsense, bipartisan bill would modernize the IRS for the first time in decades by improving the independent appeals process, taxpayers services, and enforcement.

Argument Against

Lawmakers in Congress from both sides of the aisle should leave the IRS alone, it may not be perfect but there’s no need for this sweeping of a modernization.

Impact

Taxpayers; the IRS; and Congress.

Cost of House Bill H.R. 1957

In the 115th Congress, the CBO and JCT estimated that on net, this bill would increase deficits by $52 million over the period 2019-2028.

More Information

In-Depth: Rep. John Lewis (D-GA) reintroduced this bill from the 115th Congress to reform the Internal Revenue Service (IRS). In a joint statement with original cosponsor Rep. Mike Kelly (R-PA), House Ways and Means Committee Chairman Richard Neal (D-MA) and House Ways and Means Committee Ranking Member Kevin Brady (R-TX), Rep. Lewis said: 

"The House Ways and Means Committee and the Senate Finance Committee have carefully and thoughtfully developed this legislation over several years, after numerous hearings and roundtables, in a bipartisan, bicameral manner. The goal of the legislation is to modernize the IRS, putting taxpayers first. The commonsense provisions in this bill will protect low-income taxpayers, provide sensible enforcement reforms, and ensure the IRS provides taxpayers and small businesses the assistance they deserve."

Rep. Kelly added: 

"The IRS is one of the few federal agencies that has a constant relationship with Americans throughout their lives. Unfortunately, over the years that relationship has become one of fear and distrust. We can restore Americans’ faith and trust in the IRS by ensuring that the agency is acting as an advocate and meeting the needs of taxpayers."

After this bill passed the House Ways and Means Committee, Rep. Kelly said: 

"The bipartisan support these bills have received is a notable win for all Americans and a proud moment for this committee. Today was a giant step toward two long-standing goals of mine: to reform the tax code to help and incentivize Americans to prepare for retirement, and to reform the IRS for the first time in decades to reorient its mission as a service-first agency."

In a speech on the Senate floor, Senate Finance Committee Sen. Chuck Grassley (R-IA) praised this bill as "truly a bipartisan package that adopts provisions authored by committee members on both sides of the aisle of the House and the Senate."

Last Congress, Rep. Lynn Jenkins (R-KS) introduced this bill to modernize the IRS:

“I ran for Congress to reform our broken tax code and I am honored to have played a part in the most significant tax reform in 30 years. However, tax reform was only half of our promise. Our attention must now turn to modernizing the IRS and improving the taxpayer experience. As a CPA, I know from experience the IRS can be very frustrating to deal with. I am proud of the work this subcommittee has done to advance this initiative in a bipartisan fashion. The IRS reform bill we are releasing today will be a giant step forward in improving the taxpayer experience.”

In the 115th Congress, Rep. Lewis, who was an original cosponsor of this bill, added:

“The Oversight Subcommittee took our time and conducted thoughtful, bipartisan work to improve taxpayer administration. We held eight public hearings and hosted five roundtable discussions on many of the legislative proposals included in this draft bill. As a result, this is the first time in many years that we will have a bipartisan taxpayer services bill ready for Tax Day. Unfortunately, the bill does not repeal the private debt collection program, but it makes good progress in protecting low- and middle-income taxpayers from harassment and abuse. Overall, this experience reminds me of the way that our Committee used to function, and it was wonderful. We produced a serious, thoughtful bill that puts the taxpayer first. I am proud of the process and product, and I hope that we will maintain the bipartisan spirit throughout Committee and Floor consideration.”

Americans for Tax Reform expressed its support for this bill in the 115th Congress: 

"Reforms that safeguard the American people against abuse from IRS career bureaucrats [are] long overdue. The Taxpayer First Act is an excellent first step in reforming and modernizing the troubled agency and should be supported by all members of Congress."

Jay Starkman, CPA argues that this bill doesn't address the major issues facing the IRS, chief of which is underfunding: 

"Congress is again proposing to modernize and reform the IRS. This is timely, but it fails to address the root problem facing the IRS: inadequate funding. Two related major problems are poor taxpayer service and outdated technology. The IRS generally has good management, but it is hamstrung by massive underfunding... Congress keeps reducing the IRS appropriation as the workload increases and complex new tax laws must be implemented.... IRS employment is less than 80,000, down from almost 117,000 in 1992. Except for IT, the IRS has had a hiring freeze for seven years. Thus, just 3,000 employees are under age 30, making it a challenge to find the next generation of IRS managers and executives. For comparison, in their U.S. offices alone, EY, KPMG, PwC, and Deloitte each have more than 50,000 employees with much higher average salaries. The IRS budget is further strained from implementing new complex tax laws, employing bilingual agents, and translating forms and publications. E-filing has not brought the efficiency to warrant a reduced IRS budget. Filing and account services that cost $1.6 billion in 2013 consumed $1.8 billion in 2017. [Current bills] do very little to address the issues that have recently plagued the IRS — not the severe budget constraints; not the Lerner scandal; not a good fix for the defunct IRS Oversight Board. Many of the bills’ provisions are recommendations of the national taxpayer advocate, but many more of her recommendations have been ignored... Tax professionals have urged Congress to provide adequate funding for the IRS far in excess of a stingy $11 billion-$12 billion so that it can modernize its ancient technology and hire adequate staff... The IRS is America’s favorite Public Enemy No. 1, yet we couldn’t exist as a nation without it. Proper funding can make the IRS easier to deal with. Congress might even get fewer complaints from constituents."

Writing in Politico after this bill passed the House in the 115th Congress, Joseph Bankman, a professor of law and business at Stanford Law School; Daniel Hemel, an assistant professor at the University of Chicago Law School; and Dennis Ventry, a professor of law at the University of California, Davis, School of Law, argued that this bill hurts a long-term goal of having the federal government offer a robust free filing option for taxes: 

"[Although] the bill is titled the 'Taxpayer First Act,'...  the provision codifying Free File puts tax-preparation companies first and taxpayers last. And beyond the title, the text of the statute is amazingly sly. To understand the bill’s impact on the IRS’ ability to offer its own free tax preparation tool and to support state-funded options, the user would need to refer to pages 5 and 15 of the latest 24-page memorandum of understanding between the IRS and the tax preparation companies. When legislation hides the ball like that, you know that something is awry. So far, industry lobbyists have succeeded in advancing their anti-taxpayer agenda without attracting much notice. The Taxpayer First Act passed the House in April without a single dissenting vote. The provision that locked the flawed Free File arrangement in place was bundled with a number of other measures to modernize the IRS and reform the enforcement process, and some House members who voted for the bill may have done so because they supported the other elements of the legislation and did not fully appreciate its effect on free tax preparation tools. But even after an exposé by the nonprofit investigative organization ProPublica and the digital news site Quartz in June 2018 shed light on the bill’s buried provisions, only one lawmaker—Senator Elizabeth Warren of Massachusetts—publicly denounced the bid to block the IRS from offering its own free product... The codification of Free File in the Taxpayer First Act and the extended ban on pre-populated returns in the appropriations bill are steps in precisely the wrong direction. Instead of barring the IRS from offering its own Free File alternative, Congress should direct the agency to provide taxpayers with free online tax preparation and filing software... Meanwhile, senators should insist that the Taxpayer First Act be amended so that the bill doesn’t freeze Free File in place, and they should ensure that the ban on pre-populated returns is stricken from the 2019 appropriations bill. The tax preparation industry will no doubt pour millions of dollars into efforts to kill these measures. And there is no pro-simplification lobby to oppose them: No one profits from making it truly free for you to file your taxes each year. But ultimately, H&R Block and Intuit do not get to vote—taxpayers do. Once voters start calling their senators and representatives to demand meaningful tax filing reform, lawmakers will realize that supporters of easier tax filing far outnumber opponents. And if members of Congress can be convinced that siding with the tax preparation industry will lead to negative electoral consequences, millions of Americans may finally find that filing taxes is as simple as sending a postcard."

This bill passed the House Ways and Means Committee with the support of  16 bipartisan cosponsors, including nine Democrats and seven Republicans, in the 116th Congress. A Senate version (S. 928) has been introduced by Sen. Chuck Grassley (R-IA) with the support of one cosponsor, Rep. Ron Wyden (D-OR).

In the 115th Congress, this legislation passed the House unanimously with the support of four bipartisan cosponsors evenly divided between Republicans and Democrats. However, it didn't receive a Senate vote.

Media:

• House Ways and Committee Press Release
• Original Cosponsor Rep. Mike Kelly (R-PA) Press Release (116th Congress)
• Original Cosponsor Rep. Mike Kelly (R-PA) Press Release After Committee Passage (116th Congress)
• Cosponsoring Rep. John Lewis (D-GA) Press Release (115th Congress)
• CBO Cost Estimate (115th Congress)
• Americans for Tax Reform Press Release (In Favor)
• Politico Op-Ed (Opposed)
• The Hill
• Financial Reg News
• CFO
• Accounting Today
• Section-by-Section
• Joint Committee on Taxation Technical Explanation (115th Congress)

Summary by Eric Revell

(Photo Credit: alfexe / iStock)