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MSP #2: IRS USER FEES

The IRS May Adopt User Fees to Fill Funding Gaps Without Fully Considering Taxpayer Burden and the Impact on Voluntary Compliance.

TAS Recommendations and IRS Responses

1
1.

TAS RECOMMENDATION #2-1

Revise the IRM to require the IRS to avoid adopting (or retaining) a fee that would:

A-Have a significant negative impact on the IRS’s service-oriented mission, voluntary compliance, or taxpayer rights and burden (including other compliance burdens taxpayers may face, such as the costs of hiring preparers or other third parties); or
B-Include fixed or indirect costs when demand for a service is in flux or that make the fee disproportionate to the value received.

IRS RESPONSE TO RECOMMENDATION: 2-1-A: NTA Recommendation Not Adopted as Written, but IRS Actions Taken to Address Issues Raised by NTA.  The IRS is currently working closely with NTA on a revision to IRM 1.32.19 that includes references to analyzing the impact of the fee in various contexts, including on low-income taxpayers, taxpayer rights, cost of collection, and tax administration generally.

2-1-B: NTA Recommendation Not Adopted.  No actions planned, as pursuit of this recommendation would conflict with the letter and spirit of OMB Circular A-25, particularly how costs are determined and reconsidered.

CORRECTIVE ACTION: The IRS is currently working closely with NTA on a revision to IRM 1.32.19 that includes references to analyzing the impact of the fee in various contexts, including on low-income taxpayers, taxpayer rights, cost of collection, and tax administration generally.

TAS RESPONSE: 2-1a:  The National Taxpayer Advocate commends the IRS for working with TAS to improve the user fee IRM. As described above, the IRS is not required to set fees at full cost when demand for a service is in flux or that make the fee disproportionate to the value received, even for fees covered by OMB Circular A-26. Circular A-25 states that fees must be “fair” and based, in part, on the “public policy or interest served,” and agencies can seek a waiver to set a lower fee based on anything that “in the opinion of the agency
head or his designee, justifies an exception.”

2-1b: In past years IRS employees have proposed that the IRS set fees below full costs for these reasons, whether through a waiver or otherwise. Recommendation 2-1(b) is intended to formalize the IRS’s past practice in this area, and we hope that the IRS reconsiders its position, which would seem to require BUs to discontinue that practice.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Partially Adopted

OPEN or CLOSED: Closed

DUE DATE FOR ACTION (if left open): N/A

2
2.

TAS RECOMMENDATION #2-2

Before establishing or raising any user fee, estimate the effect of the fee on demand for service, as needed to determine if the fee would impair the IRS mission, voluntary compliance, or taxpayer rights. This analysis should also demonstrate that the proposed fee does not pass along indirect or fixed costs or combine with other costs that would make it seem excessive from the taxpayer’s perspective.

IRS RESPONSE TO RECOMMENDATION: ​NTA Recommendation Not Adopted as Written, but IRS Actions Taken to Address Issues Raised by NTA. As noted above, the IRS is currently working closely with NTA on a revision to the user fee IRM that includes references to analyzing the impact of the fee in various contexts, including on low-income taxpayers, taxpayer rights, cost of collection, and tax administration generally. The determination of whether a fee “seem(s) excessive” is, however, largely subjective and not something contemplated by the OMB Circular or statute.

CORRECTIVE ACTION: N/A

TAS RESPONSE: The National Taxpayer Advocate appreciates that the IRS recently worked with TAS to improve the user fee IRM.  As noted above, however, OMB Circular A-26 states that fees must be “fair” and based, in part, on the “public policy or interest served,” and agencies can seek a waiver to set a lower fee based on anything that “in the opinion of the agency head or his designee, justifies an exception.”  As a result, the Circular arguably requires the IRS to consider whether a fee would be viewed as excessive and, thus, unfair in the opinion of the IRS or the public when evaluating whether to request a waiver.  The IRS has not adopted this recommendation or addressed the National Taxpayer Advocate’s concern.  It should reconsider its apparent intention to ignore OMB Circular A-26.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Not Adopted

OPEN or CLOSED: Closed

DUE DATE FOR ACTION (if left open): N/A

3
3.

TAS RECOMMENDATION #2-3

Publish the user fee analysis (described above) and address any comments from internal and external stakeholders before adopting or increasing a fee.

IRS RESPONSE TO RECOMMENDATION: National Taxpayer Advocate Recommendation Not Adopted as Written, but IRS Actions Taken to Address Issues Raised by the National Taxpayer Advocate. In appropriate cases where the IRS publishes a notice of proposed rulemaking adopting or increasing a user fee, the IRS will set forth in that notice a description of how the proposed user fee was computed and will solicit public comment regarding the computation. As with all notices of proposed rulemaking, stakeholders may request a public hearing to comment on the proposed rule.  All public comments will be considered before the publication of final regulations adopting the user fee.

CORRECTIVE ACTION: N/A

TAS RESPONSE: The IRS has agreed to solicit comments “in appropriate cases” on the computation of the subset of user fees that it sets by regulation.  However, it should ask for and consider public comments on all aspects of a proposed fee (e.g., effect of the fee on voluntary compliance, taxpayer burden, and taxpayer rights), rather than just computational issues.  It should also solicit comments on fees that it sets without promulgating a regulation.  If it does not disclose all aspects of its analysis and consider public comments to the analysis before adopting a fee, it is more likely to make ill- informed decisions that are inconsistent with its mission, impose excessive burden, violate taxpayer rights, and erode voluntary compliance.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Not Adopted

OPEN or CLOSED: Closed

DUE DATE FOR ACTION (if left open): N/A

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