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Sunday, July 22, 2018

20th Anniversary IRS Restructuring & Reform Act

Picture of IRS Building at 1111 Constitution Ave. NW, Wash. DC; taken by the blogger.
Inscription about the door reads "Taxes are what we pay for civilized society"
 (per Justice Holmes in a 1927 dissenting opinion).
On July 22, 1998, the IRS Restructuring and Reform Act of 1998 was signed into law (PL 105-206 + JCT summary of conference report). It was called for by an appropriations bill in November 1995 (PL 104-52).  The Commission members were appointed in May 1996 and a final report was issued in June 1997. Key concerns were the organizational structure of the IRS including how the Commissioner is appointed, insufficient focus on taxpayer needs, and the complexity of the law which made the IRS's work challenging.

There is still interest and need for some changes in tax administration, including appropriate funding of this very important federal agency that has the job of enforcing the tax law and collecting over $3 trillion of tax dollars annually!

There was a lot in the legislation. I actually found some notes I still had (in a word doc) from a presentation I made in 1998.  Here they are:

IRS Organizational Structure

  • Concern - lack of appropriate attention to t/p needs
  • Solution: Restructure by eliminating or substantially modifying current 3-tier geographic structure (National, Regional, and District Offices) and replace with structure featuring operating units serving particular groups of taxpayers.  Rosotti plan:
  • Individual taxpayers with wage and investment income
  • Small business and self-employed taxpayers
  • Large business taxpayers
  • Employee plans/exempt organizations and state and local governments

IRS Mission

  • Revise current mission statement to provide greater emphasis on serving public and meeting taxpayer needs.
  • Commissioner Rosotti has already issued 2 new drafts and solicited comments 

Oversight Board

  • §7802
  • Part of Treasury Dept.
  • 9 members: Treasury Secretary, CIR, full-time federal employee or rep of employees appointed by President, 6 non-federal EEs
  • 6 public members must have qualification in 1 or more of these areas:
    • mgmt of large organizations
    • customer service
    • federal tax laws, include admin and compliance
    • info technology
    • org development
    • needs and concerns of taxpayers
    • needs and concerns of small businesses
  • 5-year terms - staggered, may be reappointed
  • Purpose - oversee IRS in its admin, mgmt, conduct, direction, and supervision of the execution and application of the laws or related statutes and tax conventions; ensure that org and operation of IRS allows it to carry out its mission, BUT - no role in federal tax policy
  • President to submit names w/i 6 months

Commissioner

  • Appointed by President for 5-year terms, can be reappointed - with advice and consent of Senate
  • Must have demonstrated ability in mgmt
  • May be removed at will of the President

Other Organizational Changes

  • National Taxpayer Advocate - strengthen tasks, identify admin and leg possibilities to eliminate t/p problems
  • Improvements in personnel flexibilities - related to merit pay system, granting of awards, termination of employment for misconduct

Electronic Filing

  • Goal - by 2007, at least 80% of returns filed electronically. Afterwards - return-free system (prepare report on this first for Congress)
  • Form electronic commerce advisory group

TAXPAYER RIGHTS

Shift in Burden of Proof

  • Significance to entire bill: $2.7 billion cost over 10 years (assumed that more cases will be settled at appeals), strong support in Congress regardless of concerns raised by IRS and tax practitioners
  • Burden shifts to IRS in court wrt factual issue if 1) t/p has complied with IRC requirements to substantiate any item, 2) t/p has maintained records required by IRC and regs, 3) t/p has cooperated with reasonable requests by IRS, and 4) net worth req met - non-individuals have net worth of $7 million or less.
  • Effective date: court proceedings arising for exams that begin after 7/22/98

Confidentiality privilege

  • Added section 7525, Confidentiality privileges related to taxpayer communications. Provides privilege to enrolled practitioners (attorneys (who already have a privilege), CPAs and Enrolled Agents), in non-criminal matters. Note: since tax information provided to these folks is usually intended to be disclosed to the IRS, the tax privilege is limited - even for attorneys.

Innocent spouse changes

  • Innocent spouse relief easier to get + ability for spouse to elect to have separate liability determined
Other tax changes
  • Requires the Joint Committee on Taxation to prepare a "tax complexity analysis" for changes to the tax law.
  • Technical corrections to TRA’97
  • Some revenue offsets - Example: Repeal of Schmidt Baking
  • Includes 4 revenue offsets that raise about $14 billion over 10 years (capital gain change costs $2 billion, burden of proof costs about $2.7 billion, suspension of interest and penalties if IRS fails contact t/p within 12 months after timely-filed return costs $2.3 billion; rest of items are small)
The JCT's revenue estimates presents a nice list of all of the provisions in the legislation.

Modern News

On April 11, 2018, the House Ways and Means Committee held a mark-up hearing on several bills related to IRS reforms. And Senators Hatch and Wyden have a bipartisan bill with a few reforms - S.3246 - A bill to provide enhanced protections for taxpayers from fraud and other illegal activities, and for other purposes.

In April 2017, the AICPA along with a few other practitioner groups issued recommendations for a modern-functioning IRS for the 21st century.

And be sure to see the anniversary blog post by Ed Karl, VP Taxation for the AICPA on history and current reform efforts.

What should be in the next IRS Restructuring and Reform Act, if you think one is needed?  What do you think?