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SF #05: TAXPAYER RIGHTS AND THE FUTURE STATE

 

TAS Recommendations and IRS Responses

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SPECIAL FOCUS #5-1

The Office of Chief Counsel, in collaboration with the National Taxpayer Advocate, immediately undertake a comprehensive review of key taxpayer rights provisions in the IRC and issue proposed guidance for public comment, updating these provisions to protect taxpayer rights in the digital environment envisioned by the IRS Future State. These provisions include the application of the mailbox rule and the erroneous advice rule to digital communications, and the definition of an “examination” or “audit” in light of the substantial pre-refund review activity envisioned by the Future State.

IRS RESPONSE TO RECOMMENDATION: The Office of Chief Counsel is committed to protecting taxpayer rights and will work with the NTA to identify issues or problem areas that may impact taxpayer rights as the IRS undertakes to move to a more digital environment.  There is adequate guidance on the issues raised regarding the mailbox rule and erroneous advice, but we are open to addressing more specific issues or problems as they are identified.  With respect to the definition of an examination, the existing guidance strikes the appropriate balance between the rights of taxpayers and the burden on the IRS.

Mailbox Rule
Under common law, the date of delivery or filing is the date of receipt.  See United States v. Lombardo, 241 U.S. 73, 76, 78 (1916).  Section 7502 is an exception to this common law rule, using a postmark date as the date of delivery in certain circumstances.  Section 7502 applies only when the internal revenue laws prescribe that the document must be filed or payment must be made within a prescribed period or before a prescribed date.  Treas. Reg. § 301.7502-1(d) was promulgated under the authority of section 7502(c)(2) to provide rules for treating certain electronically filed documents as delivered as of the date of the authorized electronic postmark.  Section 7502 does not apply to electronic filings other than those currently described in the regulation.

Electronic communications are generally designed to be instantaneous or near instantaneous methods of delivering communications.  Accordingly, timely mailing and timely filing issues should be rare with electronically filed documents.  The existing regulations are designed to accommodate specific items that are approved for electronic filing, while they preserve the need to ensure the accuracy of the information provided to the taxpayer and to the IRS as to the date and time of the transmittal.  We would consider issuing guidance to the extent necessary to accommodate other approved electronic submissions.

Erroneous Advice Rule: Section 6404(f) provides that the IRS will abate any portion of any penalty or addition to tax attributable to erroneous advice furnished to the taxpayer in writing by an officer or employee of the IRS if (1) the written advice is reasonably relied upon by the taxpayer and was in response of a specific written request of the taxpayer, and (2) the portion of the penalty or addition to tax did not result from a failure by the taxpayer to provide adequate or accurate information.

Under section 301.6404-3(e)(1) of the Treasury Regulations, written advice will be considered advice for section 6404(f) abatement only if the response applies the tax laws to the specific facts submitted in writing by the taxpayer and provides a conclusion regarding the tax treatment to be accorded the taxpayer upon the application of the tax law to those facts.

Section 301.6404-3(b)(3) of the regulations provides that no abatement will be allowed unless the penalty or addition to tax is attributable to advice issued in response to a specific written request for advice by the taxpayer.  For advice unrelated to an item on a tax return, the taxpayer is not considered to have reasonably relied upon the advice if the taxpayer received the advice after the act or omission that is the basis for the penalty or addition to tax. § 301.6404-3(b)(2)(iv).

We have not taken the position that email advice is not written advice.  In fact, email advice is processed for release to the public in the same way as Chief Counsel advice, which advice is included in the definition of a written determination in section 6110.  Assuming the other requirements of section 6404(f) were met, we believe erroneous advice provided via email would be subject to the erroneous advice rule without the need to amend the existing regulation.

Definition of Examination or Audit: Section 7605(b) provides that “[n]o taxpayer shall be subjected to unnecessary examination or investigations, and only one inspection of a taxpayer’s books of account shall be made for each taxable year unless” the IRS notifies the taxpayer in writing that an additional inspection is necessary.  In the 2016 Annual Report to Congress, the NTA recommended that the IRS define the concept of “examination” or “audit” with a focus on the IRS’s return processing (pre-refund) procedures used to identify and resolve specific types of possible errors appearing on a taxpayer’s return.  Specifically, the NTA recommends that any pre-refund inquiry requiring the taxpayer to provide “some level of documentation” be considered an examination or audit.

An “examination” is not defined in the Code or in the regulations under section 7605.  Nor is the concept defined in IRS Procedural Rule § 601.105(b).  Case law provides no comprehensive definition.  At best, case law defines certain activities as not constituting an examination.  See, e.g., Ellis v. Commissioner, 94 T.C.M. (CCH) 112 (2007) No. 19766–05, 2007 WL 2188098 (July 31, 2007), aff’d in part, rev’d in part on other grounds, 346 Fed. Appx. 346 (10th Cir. 2009) (letter to taxpayer from the Service Center, seeking explanation of discrepancy between income reported on return and that reported by third-party payor, to which taxpayer responded with explanation and documents did not constitute an examination or an inspection of books of account).

Rev. Proc. 2005-32, section 4.03(1)(a) – (d) provides guidelines and illustrative examples of other limited contacts with taxpayers that are not considered examinations.

When the IRS can identify a likely error on a return, as is done with the information return matching programs, and resolve it by seeking an explanation from the taxpayer, both the taxpayer and the IRS benefit from enhanced efficiency.  The taxpayer is spared the more rigorous and burdensome experience of an examination and is able to reach resolution in a more timely manner.  Similarly, the IRS is able to resolve a single matter, often a simple matter, more quickly and with far fewer resources than required to conduct an audit.  It would neither be beneficial to the IRS nor to the majority of taxpayers to force the IRS to conduct an audit to resolve minor discrepancies on a return, some of which result in adjustments in the taxpayer’s favor.

CORRECTIVE ACTION: N/A

TAS RESPONSE: The National Taxpayer Advocate appreciates the IRS’s thoughtful responses regarding the Mailbox Rule, the Erroneous Advice rule, and the definition of an examination or audit. She further appreciates the IRS’s commitment to continue to address these issues further as problems are identified.

With regard to the Mailbox Rule, technology glitches are not infrequent, and there will inevitably be occasions — whether due to a taxpayer’s computer, an ISP provider, or the IRS’s network – where email delivery will not be instantaneous. We believe it is important for the IRS to develop appropriate guidelines to address these situations before they occur. Otherwise, taxpayers and practitioners would be better advised to submit time-limited responses by certified mail, so they can prove the date of submission.

With regard to the Erroneous Advice rule, we note that the IRS currently receives millions of tax law questions on its telephone lines and in its TACs. If the IRS is successful in migrating large numbers of taxpayers online, those same tax-law questions will be submitted electronically and will presumably be answered electronically. It will be critical to adopt clear guidelines — which are understood by taxpayers as well as IRS employees – regarding which written responses taxpayers may rely on for purposes of avoiding penalties and which responses may not be relied on for that purpose.

With regard to the definition of an examination, we appreciate the IRS’s observation that identifying problems in the pre-refund environment may be simpler for both the IRS and the taxpayer. We agree. But it is also the case that Congress generally limits the IRS to one inspection of a taxpayer’s books of account for each tax year. The purpose of that provision is to protect taxpayers from the time and expense of responding to multiple reviews of the same return. To the extent that a taxpayer will be required to submit substantiation in response to a pre-refund verification request that the taxpayer may also need to submit in response to a subsequent audit, the IRS procedures will run directly contrary to congressional intent. More work is required to ensure those situations are minimized.

We encourage the IRS to continue to refine its approach to these issues, working in conjunction with both the IRS Office of Chief Counsel and the Office of the Taxpayer Advocate.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Partially Adopted

OPEN or CLOSED: Closed

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

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