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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.

National Taxpayer Advocate 2021 Purple Book: Compilation of Legislative Recommendations to Strengthen Taxpayer Rights and Improve Tax Administration

INTRODUCTION

STRENGTHEN TAXPAYER RIGHTS AND TAXPAYER SERVICE

  1. Elevate the Importance of the Taxpayer Bill of Rights by Redesignating It as Section 1 of the Internal Revenue Code
  2. Revamp the IRS Budget Structure and Provide Sufficient Funding to Improve the Taxpayer Experience and Modernize the IRS’s Information Technology Systems

IMPROVE THE FILING PROCESS

  1. Authorize the IRS to Establish Minimum Competency Standards for Federal Tax
  2. Set Goals for Substantially Increasing the Use of the Free File Program by Filing Season 2025 and Replace Free File If Those Goals Are Not Attained
  3. Require the IRS to Work With Tax Software Companies to Incorporate Scanning Technology for Individual Income Tax Returns Prepared Electronically But Filed on Paper
  4. Treat Electronically Submitted Tax Payments and Documents as Timely If Submitted Before the Applicable Deadline
  5. Extend the Time for Small Businesses to Make Subchapter S Elections
  6. Adjust Individual Estimated Tax Payment Deadlines to Occur Quarterly
  7. Harmonize Reporting Requirements for Taxpayers Subject to Both the Report of Foreign Bank and Financial Accounts and the Foreign Account Tax Compliance Act by Eliminating Duplication and Excluding Accounts a U.S. Person Maintains in the Country Where He or She Is a Bona Fide Resident
  8. Adjust the Filing Threshold for Taxpayers Filing as Married Filing Separately and Nonresident Alien Individuals

IMPROVE ASSESSMENT AND COLLECTION PROCEDURES

  1. Continue to Limit the IRS’s Use of “Math Error Authority” to Clear-Cut Categories Specified by Statute
  2. Require Independent Managerial Review and Written Approval Before the IRS May Assert Multiyear Bans Barring Taxpayers From Receiving Certain Tax Credits and Clarify That the Tax Court Has Jurisdiction to Review the Assertion of Multiyear Bans
  3. Allow Additional Time for Taxpayers to Request Abatement of a Math Error Assessment Equal to the Additional Time Allowed to Respond to a Notice of Deficiency When the Math Error Notice Is Addressed to a Person Outside the United States
  4. Require the IRS to Waive User Fees for Taxpayers Who Enter Into Low-Cost Installment Agreements
  5. Improve Offer in Compromise Program Accessibility by Repealing the Partial Payment Requirement and Restructuring the User Fee
  6. Modify the Requirement That the Office of Chief Counsel Review Certain Offers in Compromise
  7. Amend IRC § 7122 to Require the IRS to Refund Any Payment Collected Pursuant to a Federal Tax Lien That Exceeds the Amount of an Accepted Offer in Compromise
  8. Require the IRS to Mail Notices at Least Quarterly to Taxpayers With Delinquent Tax Liabilities
  9. Clarify When the Two-Year Period for Requesting Return of Levy Proceeds Begins
  10. Protect Retirement Funds From IRS Levies, Including So-Called “Voluntary” Levies, in the Absence of “Flagrant Conduct” by a Taxpayer
  11. Toll the Time Periods for Requesting the Return of Levy Proceeds While the Taxpayer or a Pertinent Third Party Is Financially Disabled
  12. Provide Taxpayer Protections Before the IRS Recommends the Filing of a Lien Foreclosure Suit on a Principal Residence
  13. Provide Collection Due Process Rights to Third Parties Holding Legal Title to Property Subject to IRS Collection Actions
  14. Extend the Time Limit for Taxpayers to Sue for Damages for Improper Collection Actions
  15. Direct the IRS to Study the Feasibility of Using an Automated Formula to Identify Taxpayers at Risk of Economic Hardship
  16. Revise the Private Debt Collection Rules to Eliminate the Taxpayers Intended to Be Excluded by the Taxpayer First Act

REFORM PENALTY AND INTEREST PROVISIONS

  1. Convert the Estimated Tax Penalty Into an Interest Provision to Properly Reflect Its Substance
  2. Apply One Interest Rate Per Estimated Tax Underpayment Period
  3. Pay Interest on Estimated Tax Overpayments, Allowing Taxpayers to Help Finance the National Debt While Promoting Tax Compliance and Savings
  4. Reduce the Federal Tax Deposit Penalty Imposed on Taxpayers Who Make Timely Tax Deposits
  5. Extend Reasonable Cause Defense for the Failure-to-File Penalty to Taxpayers Who Rely on Return Preparers to e-File Their Returns
  6. Authorize a Penalty for Tax Return Preparers Who Engage in Fraud or Misconduct by Altering a Taxpayer’s Tax Return
  7. Clarify That Supervisory Approval Is Required Under IRC § 6751(b) Before Proposing Penalties
  8. Require an Employee to Determine and a Supervisor to Approve All Negligence Penalties Under IRC § 6662(b)(1)
  9. Modify the Definition of ‘Willful’ for Purposes of Finding FBAR Violations and Reduce the Maximum Penalty Amounts

STRENGTHEN TAXPAYER RIGHTS BEFORE THE OFFICE OF APPEALS

  1. Require That at Least One Appeals Officer and One Settlement Officer Be Located and Permanently Available in Each State, the District of Columbia, and Puerto Rico
  2. Require Taxpayers’ Consent Before Allowing IRS Counsel or Compliance Personnel to Participate in Appeals Conferences

STRENGTHEN THE OFFICE OF THE TAXPAYER ADVOCATE

  1. Clarify That the National Taxpayer Advocate May Hire Legal Counsel to Enable Her to Advocate More Effectively for Taxpayers
  2. Clarify the Authority of the National Taxpayer Advocate to Make Personnel Decisions to Protect the Independence of the Office of the Taxpayer Advocate
  3. Clarify the Taxpayer Advocate Service’s Access to Files, Meetings, and Other Information
  4. Authorize the National Taxpayer Advocate to File Amicus Briefs
  5. Require the IRS to Address the National Taxpayer Advocate’s Comments in Final Rules
  6. Authorize the Office of the Taxpayer Advocate to Assist Certain Taxpayers During a Lapse in Appropriations
  7. Repeal Statute Suspension Under IRC § 7811(d) for Taxpayers Seeking Assistance from the Taxpayer Advocate Service

STRENGTHEN TAXPAYER RIGHTS IN JUDICIAL PROCEEDINGS

  1. Repeal Flora and Expand the Tax Court’s Jurisdiction, Giving Taxpayers Who Cannot Pay the Same Access to Judicial Review as Those Who Can
  2. Authorize the Tax Court to Order Refunds or Credits in Collection Due Process Proceedings Where Liability Is at Issue
  3. Provide That the Time Limits for Bringing Tax Litigation Are Subject to the Judicial Doctrines of Forfeiture, Waiver, Estoppel, and Equitable Tolling
  4. Amend IRC § 7456(a) to Authorize the Tax Court to Sign Subpoenas for the Production of Records Held by a Third Party Prior to a Scheduled Hearing
  5. Provide That the Scope of Judicial Review of Determinations Under IRC § 6015 Is De Novo
  6. Clarify That Taxpayers May Raise Innocent Spouse Relief as a Defense in Collection Proceedings and Bankruptcy Cases
  7. Clarify That Taxpayers May Seek Innocent Spouse Relief in Refund Suits
  8. Fix the Donut Hole in the Tax Court’s Jurisdiction to Determine Overpayments byNon-Filers Wi th Filing Extensions

MISCELLANEOUS RECOMMENDATIONS

  1. Restructure the Earned Income Tax Credit (EITC) to Make It Simpler for Taxpayers and Reduce Improper Payments
  2. Provide Earned Income Tax Credit (EITC) Relief During National Disasters
  3. Exclude Taxpayers in Specific Circumstances From the Requirement to Provide a Social Security Number for Their Children to Claim the Child Tax Credit
  4. Clarify Whether Dependents Are Required to Have Taxpayer Identification Numbers for Purposes of the Credit for Other Dependents
  5. Allow Members of Certain Religious Sects That Do Not Participate in Social Security and Medicare to Obtain Employment Tax Refunds
  6. Amend IRC § 36B(d)(2) to Prevent Individuals From Losing Some or All of Their Premium Tax Credits When Receiving Lump-Sum Social Security Benefits Attributable to a Prior Year
  7. Amend IRC §§ 108(a) and 6050P to Provide That Gross Income Does Not Include, and the Department of Education Is Not Required to Report, Income From the Cancellation of Student Loans Under the Coronavirus Aid, Relief and Economic Security Act
  8. Amend the Combat-Injured Veterans Tax Fairness Act of 2016 to Allow Veterans of the Coast Guard to Exclude Disability Severance Pay From Gross Income and File Claims for Credit or Refund for Taxes Withheld From Excluded Income
  9. Encourage and Authorize Independent Contractors and Service Recipients to Enter Into Voluntary Withholding Agreements
  10. Require the IRS to Specify the Information Needed in Third-Party Contact Notices
  11. Authorize the Treasury Department to Issue Guidance Specific to IRC § 6713 Regarding the Disclosure or Use of Tax Return Information by Preparers
  12. Increase the Individual Low Income Taxpayer Clinic Grant Cap and Index It for Inflation
  13. Compensate Taxpayers for “No Change” National Research Program Audits
  14. Establish the Position of IRS Historian Within the Internal Revenue Service to Record and Publish Its History

Appendix 1: Additional Reference Materials for Legislative Recommendations in This Volume

Appendix 2: Prior National Taxpayer Advocate Legislative Recommendations Enacted Into Law