National Taxpayer Advocate 2021 Purple Book
The National Taxpayer Advocate is releasing the National Taxpayer Advocate 2021 Purple Book. In it, she presents a concise summary of 66 legislative recommendations that she believes will strengthen taxpayer rights and improve tax administration. Most of the recommendations have been made in detail in prior reports, but others are presented in this book for the first time. She believes that most of the recommendations presented in this volume are non-controversial, common sense reforms that the tax-writing committees and other Members of Congress may find useful.
Among the 66 legislative recommendations for consideration by Congress are:
• Provide the IRS with sufficient funding to meet taxpayer needs and improve tax compliance. Since fiscal year (FY) 2010, the IRS’s budget has been reduced by about 20 percent after adjusting for inflation. As a result, the IRS has been unable to meet taxpayer needs (e.g., the IRS received over 100 million telephone calls in FY 2020, yet employees were only able to answer about 24 percent). IRS also has been unable to modernize its information technology (IT) systems. In FY 2020, the IRS collected about $3.5 trillion on a budget of about $11.51 billion, producing a remarkable return on investment of more than 300:1.
• Authorize the IRS to establish minimum standards for tax return preparers. Most taxpayers hire tax return preparers to complete their returns, and visits to preparers by Government Accountability Office and Treasury Inspector General for Tax Administration auditors posing as taxpayers, as well as IRS compliance studies, have found preparers make significant errors that both harm taxpayers and reduce tax compliance. Nearly ten years ago, the IRS sought to implement minimum preparer standards, including requiring otherwise non-credentialed preparers to pass a basic competency test, but a federal court concluded the IRS could not do so without statutory authorization. TAS recommends Congress provide that authorization.
• Expand the U.S. Tax Court’s jurisdiction to hear refund cases. Under current law, taxpayers who owe tax and wish to litigate a dispute with the IRS must go to the U.S. Tax Court, while taxpayers who have paid their tax and are seeking a refund must file suit in a U.S. district court or the U.S. Court of Federal Claims. TAS recommends that all taxpayers be given the option to litigate their tax disputes in the U.S. Tax Court.
• Restructure the Earned Income Tax Credit (EITC) to make it simpler for taxpayers and reduce improper payments. TAS has long advocated for dividing the EITC into two separate credits: (i) a refundable worker credit based on each individual worker’s earned income, irrespective of the presence of a qualifying child, and (ii) a refundable child credit that would reflect the costs of caring for one or more children. For wage earners, claims for the worker credit could be verified with nearly 100 percent accuracy by matching income information on tax returns against income information on Forms W-2, thereby reducing the improper payments rate on those claims to nearly zero. The portion of the EITC that varies based on family size would be combined with the child tax credit into a single family credit.
• Increase the annual award cap for Low Income Taxpayer Clinics (LITCs). When the LITC matching grant program was established as part of the IRS Restructuring and Reform Act of 1998, Internal Revenue Code (IRC) § 7526 limited annual grants to no more than $100,000 per clinic. The cap was not indexed for inflation, and as a result, the per-clinic grant maximum is worth much less today. In light of the significant value LITCs provide, TAS recommends that Congress increase the per-clinic cap to $150,000 and index it to rise with inflation.
• Clarify that supervisory approval is required before the IRS imposes certain penalties. IRC § 6751(b)(1) states: “No penalty under this title shall be assessed unless the initial determination of such assessment is personally approved (in writing) by the immediate supervisor of the individual making such determination….” While it may appear requiring that an “initial determination” be approved by a supervisor would mean the approval must occur before the penalty is proposed, the timing of this requirement has been the subject of considerable litigation.
• Require taxpayer consent before allowing IRS Counsel or Compliance personnel to participate in IRS Independent Office of Appeals conferences. Historically, the IRS’s Counsel and Compliance functions provided input into Appeals conferences via taxpayer case files and, if a case was particularly large or complex, at a pre-conference. However, they generally did not attend Appeals conferences with taxpayers. In October 2016, Appeals revised its rules to allow Appeals Officers to include personnel from Counsel and Compliance in taxpayer conferences as a matter of routine. The report says this change undermines Congress’s intent to “reassure taxpayers of the independence” of Appeals. TAS recommends that Congress require Appeals to obtain advance taxpayer consent before including Counsel or Compliance personnel in any conference between Appeals and a taxpayer.
• Clarify that taxpayers may raise innocent spouse relief as a defense in collection proceedings and bankruptcy cases. Congress has enacted rules to relieve “innocent spouses” from joint and several liability in certain circumstances. If the IRS denies a taxpayer’s request for innocent spouse relief, the taxpayer generally may seek review of the adverse determination in the Tax Court. However, the Tax Court does not have jurisdiction over collection suits arising under IRC §§ 7402 or 7403, or over bankruptcy proceedings arising under Title 11 of the U.S. Code.
• Amend the Combat-Injured Veterans Tax Fairness Act of 2016 to allow veterans of the Coast Guard to file claims for credit or refund of taxes improperly withheld from disability. The 2016 Act created an exception from the statute of limitations to allow otherwise time-barred refunds in cases where the Secretary of Defense wrongfully withheld tax from severance payments to wounded veterans. Although the tax code’s definition of “military or naval forces of the United States” includes the Coast Guard, the Act as drafted excluded veterans of the Coast Guard from its scope. It appears that omitting the Coast Guard from the DSP tax relief provision may have resulted from a drafting error.
• Clarify that the National Taxpayer Advocate may hire independent legal counsel. IRC § 7803(c) requires the National Taxpayer Advocate to operate independently of the IRS in key respects. To help ensure this independence, the conference committee report accompanying RRA 98 stated: “The conferees intend that the National Taxpayer Advocate be able to hire and consult counsel as appropriate.” Until 2015, the National Taxpayer Advocate was able to hire attorneys to advise her, advocate for taxpayers, and write key sections of her two statutorily-mandated reports to Congress. To continue to advocate for taxpayers effectively and independently, the National Taxpayer Advocate requires statutory authorization to hire attorney-advisors who do not report to other agency officials.