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The National Taxpayer Advocate Purple Book this year makes 65 recommendations to strengthen taxpayer rights and improve tax administration. Most recommendations in this volume are non-controversial, common-sense reforms. For the first time, we have added a “Summary” section at the beginning of each recommendation that sets out the “Problem” and our suggested “Solution” in concise, layman’s terms. We hope the tax-writing committees and other members of Congress find it useful.

Read the Full Purple Book

We highlight the following legislative recommendations for particular attention, in no specific order:

  • Amend the “Lookback Period” to Allow Tax Refunds for Certain Taxpayers Who Took Advantage of the Postponed Filing Deadlines Due to COVID-19. Because of the pandemic, the IRS postponed the tax return filing deadline to July 15 in 2020 and to May 17 in 2021. These postponements helped taxpayers by giving them more time to file their returns, but they are inadvertently springing a trap on unwary taxpayers and tax professionals that may cause permanent harm by limiting their ability to obtain refunds for tax years 2019 and 2020. Under IRC § 6511, taxpayers generally must meet a two-part test to receive a refund. First, the claim for refund must be timely; it generally must be filed by the later of three years from the date the return was filed or two years from the date the tax was paid. Second, the monies at issue must have been paid within a specified “lookback period.” The lookback period is three years plus the period of any extension of time for filing if the taxpayer filed the claim for refund within three years from the date of filing the return. But a “postponement” of the filing deadline, unlike an “extension” of time to file, does not extend the lookback period. A taxpayer who filed an original return under a “postponement” granted by the IRS because of the federally declared disaster will not be entitled to a refund if the excess amounts were paid (or deemed paid) outside the lookback period.

To illustrate, a taxpayer who filed her 2019 return on the postponed filing deadline of July 15, 2020, might reasonably believe she has until July 15, 2023, to file her claim for refund (three years from the date she filed her return). However, her taxes (withholding and estimated tax payments) were deemed paid on April 15, 2020, which falls outside the lookback period of three years prior to July 15, 2023. The IRS will deny a claim for refund filed after April 15, 2023, in this circumstance. We recommend Congress amend the lookback period so that when the IRS postpones a filing deadline due to a disaster declaration, taxpayers can recover amounts paid within three years plus the period of the postponement, similar to the lookback period when a taxpayer has requested an extension of time to file.

  • Authorize the IRS to Establish Minimum Competency Standards for Federal Tax Return Preparers. The IRS receives over 160 million individual income tax returns each year, and tax return preparers prepare the majority of them. Both taxpayers and the tax system depend heavily on the ability of preparers to prepare accurate tax returns. Yet no one is required to pass a competency test to become a federal tax return preparer, and numerous studies have found that non-credentialed tax return preparers routinely prepare inaccurate returns, which harms taxpayers and tax administration. To protect the public, federal and state laws generally require lawyers, doctors, securities dealers, financial planners, actuaries, appraisers, contractors, motor vehicle operators, and even barbers and beauticians to obtain licenses or certifications and, in most cases, to pass competency tests. Taxpayers and the tax system would benefit from requiring federal tax return preparers to do so as well. The IRS sought to implement minimum standards beginning in 2011, including passing a basic competency test, but a U.S. Court of Appeals affirmed a U.S. district court opinion that the IRS lacked the authority to impose preparer standards without statutory authorization. The plan the IRS rolled out in 2011 was developed after extensive consultation with stakeholders and was supported by almost all such stakeholders. We recommend Congress authorize the IRS to reinstitute minimum competency standards.
  • Expand the Tax Court’s Jurisdiction to Hear Refund Cases and Assessable Penalties. 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 liability and are seeking a refund must sue in a U.S. district court or the U.S. Court of Federal Claims. Although this dichotomy between deficiency cases and refund cases has existed for decades, we recommend Congress give taxpayers the option to litigate both deficiency and refund disputes in the U.S. Tax Court. Due to the tax expertise of its judges, the Tax Court is often better equipped to consider tax controversies than other courts. It is also more accessible to unsophisticated and unrepresented taxpayers than other courts because it uses informal procedures, particularly in disputes that do not exceed $50,000 for one tax year or period.
  • Restructure the Earned Income Tax Credit to Make It Simpler for Taxpayers and Reduce the Improper Payments Rate. TAS has long advocated for dividing the EITC into two credits: (i) a refundable worker credit based on each individual worker’s earned income, despite 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 claims on tax returns against Forms W-2, reducing the improper payment 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 larger family credit. The National Taxpayer Advocate published a detailed report making this recommendation in 2019, and we continue to advocate for it.
  • Expand the Protection of Taxpayer Rights by Strengthening the Low Income Taxpayer Clinic (LITC) Program. The LITC Program is an effective means to assist low-income taxpayers and taxpayers who speak English as a second language. When the LITC Program was established as part of the IRS Restructuring and Reform Act of 1998, IRC § 7526 limited annual grants to no more than $100,000 per clinic. The law also imposed a 100 percent “match” requirement so a clinic cannot receive more in grants than it raises from other sources. The nature and scope of the LITC Program has evolved considerably since 1998, and those requirements are preventing the program from expanding assistance to the largest possible universe of eligible taxpayers. We recommend that Congress remove the per-clinic cap and allow the IRS to reduce the match requirement to 25 percent if doing so would provide coverage for additional taxpayers.
  • Modify the Requirement That Written Receipts Acknowledging Charitable Contributions Must Pre-Date the Filing of a Tax Return. To claim a charitable contribution, a taxpayer must receive a written acknowledgement from the donee organization before filing a tax return. For example, if a taxpayer contributes $5,000 to a church, synagogue, or mosque, files a tax return claiming the deduction on February 1, and receives a written acknowledgement on February 2, the deduction is not allowed – even if the taxpayer had credit card receipts and other documentation that fully and unambiguously substantiates the deduction. This requirement is inconsistent with congressional policy to encourage charitable giving. We recommend that Congress modify the substantiation rules to require reliable – but not necessarily advance – acknowledgement from the donee organization.
  • Clarify That Supervisory Approval Is Required Under IRC § 6751(b) Before Proposing 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… .” At first, it seems a requirement that an “initial determination” be approved by a supervisor would mean the approval must occur before the penalty is proposed. However, the timing of this requirement has been the subject of considerable litigation, with some courts holding that the supervisor’s approval might be timely even if provided after a case has gone through the IRS Independent Office of Appeals and is in litigation. Very few taxpayers litigate their tax disputes. Therefore, to effectuate Congress’s intent that the IRS not penalize taxpayers in certain circumstances without supervisory approval, the approval must be required earlier in the process. We recommend that Congress amend IRC § 6751(b)(1) to require that written supervisory approval be provided before the IRS sends a written communication to the taxpayer proposing a penalty.
  • Require That Math Error Notices Describe the Reason(s) for the Adjustment With Specificity, Inform Taxpayers They May Request Abatement Within 60 Days, and Be Mailed by Certified or Registered Mail. Under IRC § 6213(b), the IRS may make a summary assessment of tax arising from a mathematical or clerical error. When the IRS does so, it must send the taxpayer a notice describing “the error alleged and an explanation thereof.” By law, the taxpayer has 60 days from the date of the notice to request that the summary assessment be abated. However, many taxpayers do not understand that failing to respond to an IRS math error notice within 60 days means they have conceded the adjustment and forfeited their right to challenge the IRS’s position in the U.S. Tax Court. To ensure taxpayers understand the adjustment and their rights to contest it, we recommend that Congress amend IRC § 6213(b) to require that the IRS specifically describe the error causing the adjustment and inform taxpayers they have 60 days to request the summary assessment be abated. Additionally, requiring that the notice be sent either by certified or registered mail would underscore the significance of the notice and provide an additional safeguard to ensure that taxpayers receive this critical information.
  • Provide That “an Opportunity to Dispute” an Underlying Liability Means an Opportunity to Dispute Such Liability in a Prepayment Judicial Forum. IRC §§ 6320(b) and 6330(b) provide taxpayers with the right to request an independent review of either a Notice of Federal Tax Lien (NFTL) filed by the IRS or a proposed levy action. The purpose of this collection due process (CDP) right is to give taxpayers adequate notice of IRS collection activity and provide a meaningful hearing to determine whether the IRS properly filed an NFTL or proposed or initiated a levy. The IRS and the courts interpret the current law to mean that an opportunity to dispute the underlying liability includes a prior opportunity for a conference with the IRS Independent Office of Appeals offered either before or after assessment of the liability, even where there is no opportunity for judicial review of the Appeals conference. The value of CDP proceedings is undermined when taxpayers who have never had an opportunity to dispute the underlying liability in a prepayment judicial forum are precluded from doing so during their CDP hearing. These taxpayers have no alternative but to pay the tax and then seek a refund by suing in a U.S. district court or the U.S. Court of Federal Claims – an option that not all taxpayers can afford. In our view, judicial and administrative interpretations limiting a taxpayer’s ability to challenge the IRS’s liability determination in a CDP hearing are inconsistent with Congress’s intent when it enacted CDP procedures. We recommend that Congress modify these provisions to ensure taxpayers have a right to pre-payment judicial review.
  • Provide That Assessable Penalties Are Subject to Deficiency Procedures. IRC § 6212 requires the IRS to issue a “notice of deficiency” before assessing certain liabilities. IRC § 6671(a) authorizes the IRS to assess some penalties without first issuing a notice of deficiency. These penalties are generally subject to judicial review only if taxpayers first pay the penalties and then sue for a refund. Assessable penalties can be substantial, sometimes running into the millions of dollars. Under the IRS’s interpretation, these penalties include, but are not limited to, foreign information reporting penalties under IRC §§ 6038, 6038A, 6038B, 6038C, and 6038D. The inability of taxpayers to obtain judicial review on a pre-assessment basis and the requirement that taxpayers pay the penalties in full to obtain judicial review on a post-assessment basis can effectively deprive taxpayers of the right to judicial review at all. To ensure taxpayers have an opportunity to obtain judicial review before they are required to pay often substantial penalties that they do not believe they owe, we recommend that Congress require the IRS to issue a notice of deficiency before imposing assessable penalties.

 

National Taxpayer Advocate 2023 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

IMPROVE THE FILING PROCESS

  1. Treat Electronically Submitted Tax Payments and Documents as Timely If Submitted Before the Applicable Deadline
  2. Authorize the IRS to Establish Minimum Competency Standards for Federal Tax Return Preparers
  3. Extend the Time for Small Businesses to Make Subchapter S Elections
  4. Adjust Individual Estimated Tax Payment Deadlines to Occur Quarterly
  5. Eliminate Duplicative Reporting Requirements Imposed by the Bank Secrecy Act and the Foreign Account Tax Compliance Act

IMPROVE ASSESSMENT AND COLLECTION PROCEDURES

  1. Require That Math Error Notices Describe the Reason(s) for the Adjustment With Specificity, Inform Taxpayers They May Request Abatement Within 60 Days, and Be Mailed by Certified Mail
  2. Continue to Limit the IRS’s Use of “Math Error Authority” to Clear-Cut Categories Specified by Statute
  3. 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
  4. 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
  5. Provide That Assessable Penalties Are Subject to Deficiency Procedures
  6. Direct the IRS to Implement an Automated Formula to Identify Taxpayers at Risk of Economic Hardship
  7. Provide That “an Opportunity to Dispute” an Underlying Liability Means an Opportunity to Dispute Such Liability in the U.S. Tax Court
  8. Prohibit Offset of the Earned Income Tax Credit (EITC) Portion of a Tax Refund to Past-Due Federal Tax Liabilities
  9. Require the IRS to Waive User Fees for Taxpayers Who Enter Into Low-Cost Installment Agreements or Who Have an Adjusted Gross Income Equal to or Less Than 250 Percent of the Federal Poverty Level
  10. Improve Offer in Compromise Program Accessibility by Repealing the Partial Payment Requirement and Restructuring the User Fee
  11. Modify the Requirement That the Office of Chief Counsel Review Certain Offers in Compromise
  12. Require the IRS to Refund Any Payment Collected Pursuant to a Federal Tax Lien That Exceeds the Amount of an Accepted Offer in Compromise
  13. Require the IRS to Release All Levies Upon Acceptance of an Offer in Compromise and Return to the Taxpayer Any Amount Collected Pursuant to the Levies in Excess of the Agreed Payment Amount
  14. Require the IRS to Mail Notices at Least Quarterly to Taxpayers With Delinquent Tax Liabilities
  15. Clarify When the Two-Year Period for Requesting Return of Levy Proceeds Begins
  16. Protect Retirement Funds From IRS Levies, Including So-Called “Voluntary” Levies, in the Absence of “Flagrant Conduct” by a Taxpayer
  17. Provide Taxpayer Protections Before the IRS Recommends the Filing of a Lien Foreclosure Suit on a Principal Residence
  18. Provide Collection Due Process Rights to Third Parties Holding Legal Title to Property Subject to IRS Collection Actions
  19. Extend the Time Limit for Taxpayers to Sue for Damages for Improper Collection Actions
  20. 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 to Taxpayers on Excess Payments of Estimated Tax to the Same Extent Taxpayers Must Pay a Penalty on Underpayments of Estimated Tax
  4. Extend Reasonable Cause Defense for the Failure-to-File Penalty to Taxpayers Who Rely on Return Preparers to E-File Their Returns .Reduce the Federal Tax Deposit Penalty Imposed on Taxpayers Who Make Timely Tax Deposits
  5. Authorize a Penalty for Tax Return Preparers Who Engage in Fraud or Misconduct by Altering a Taxpayer’s Tax Return
  6. Clarify That Supervisory Approval Is Required Under IRC § 6751(b) Before Proposing Penalties
  7. Require an Employee to Determine and a Supervisor to Approve All Negligence Penalties Under IRC § 6662(b)(1)
  8. Modify the Definition of “Willful” for Purposes of Finding Report of Foreign Bank and Financial Accounts Violations and Reduce the Maximum Penalty Amounts

STRENGTHEN TAXPAYER RIGHTS BEFORE THE OFFICE OF APPEALS

  1. 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. Expand the Tax Court’s Jurisdiction to Hear Refund Cases
  2. Authorize the Tax Court to Order Refunds or Credits in Collection Due Process Proceedings Where Liability Is at Issue
  3. Promote Consistency With the Supreme Court’s Boechler Decision by Making the Time Limits for Bringing All Tax Litigation Subject to Equitable Judicial Doctrines
  4. Extend the Deadline for Taxpayers to Bring a Refund Suit When They Have Requested Appeals Reconsideration of a Notice of Claim Disallowance But the IRS Has Not Acted Timely to Decide Their Claims
  5. Authorize the Tax Court to Sign Subpoenas for the Production of Records Held by a Third Party Prior to a Scheduled Hearing
  6. Provide That the Scope of Judicial Review of “Innocent Spouse” Determinations Under IRC § 6015 Is De Novo
  7. Clarify That Taxpayers May Raise Innocent Spouse Relief as a Defense in Collection, Bankruptcy, and Refund Cases
  8. Fix the Donut Hole in the Tax Court’s Jurisdiction to Determine Overpayments by Non-Filers With Filing Extensions

MISCELLANEOUS RECOMMENDATIONS

  1. Restructure the Earned Income Tax Credit (EITC) to Make It Simpler for Taxpayers and Reduce Improper Payments
  2. Adopt a Consistent and More Modern Definition of “Qualifying Child” Throughout the Internal Revenue Code
  3. Allow Taxpayers the Option of Using Prior Year Income to Claim the Earned Income Tax Credit (EITC) During Federally Declared Disasters
  4. Exclude Taxpayers in Specific Circumstances From the Requirement to Provide a Social Security Number for Their Children to Claim the Child Tax Credit
  5. Clarify Whether Dependents Are Required to Have Taxpayer Identification Numbers for Purposes of the Credit for Other Dependents
  6. Allow Members of Certain Religious Sects That Do Not Participate in Social Security and Medicare to Obtain Employment Tax Refunds
  7. Amend the Lookback Period for Allowing Tax Credits or Refunds to Include the Period of Any Postponement or Additional or Disregarded Time for Timely Filing a Tax Return
  8. Modify the Requirement That Written Receipts Acknowledging Charitable Contributions Must Pre-Date the Filing of a Tax Return
  9. Make Standard Mileage Rates Consistent
  10. Eliminate the Marriage Penalty for Nonresident Aliens Who Otherwise Qualify for the Premium Tax Credit
  11. Encourage and Authorize Independent Contractors and Service Recipients to Enter Into Voluntary Withholding Agreements
  12. Require the IRS to Specify the Information Needed in Third-Party Contact Notices
  13. Expand the Protection of Taxpayer Rights by Strengthening the Low Income Taxpayer Clinic Program
  14. Compensate Taxpayers for “No Change” National Research Program Audits
  15. 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

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