On 1 July 2019, President Trump signed H.R. 3151, the Taxpayer First Act of 2019 (TFA) into law. The TFA was passed by Congress and signed by the President in under a month, but the impetus for the legislation goes back to early 2017, when Republicans made tax reform a key campaign policy issue.
The TFA makes a number of changes to the IRS’s audit and administrative appeals process that are particularly important to large corporate taxpayers. This newsletter provides an overview of four key areas affecting large corporate taxpayers that are impacted by the TFA: (1) the codification of an independent administrative appeals process; (2) the modification of authority to issue designated summonses; (3) the limitation on third-party involvement in IRS examinations; and (4) the reorganization of the IRS’s structure.
Codification of the IRS Independent Office of Appeals
The TFA codifies the IRS’s internal procedural rules regarding its independent appeals function, and renames the IRS Office of Appeals the IRS Independent Office of Appeals (Independent Appeals). The TFA places Independent Appeals under the direction of a “Chief of Appeals” appointed by the Commissioner, and provides that its proceedings should be “generally available to all taxpayers.” The TFA restricts attorneys in the IRS Office of Chief Counsel from assisting in Independent Appeals proceedings if those attorneys participated in the relevant examination, or if they will be involved in preparing the case for litigation.
The TFA also adds procedural safeguards for taxpayers seeking referral to Independent Appeals following receipt of a notice of deficiency. If the IRS denies a taxpayer’s request for a “docketed” referral to Independent Appeals, the IRS must provide the taxpayer with “a detailed description of the facts involved, the basis for the decision to deny the request, and a detailed explanation of how the basis of such decision applies to the facts.” These cases are referred to as “docketed” appeals because they are administrative appeals proceedings for cases concurrently docketed in the United States Tax Court. The Commissioner is instructed to prescribe procedures for the taxpayer to protest the IRS’s decision to deny its request. These TFA provisions, in effect, overrule Rev. Proc. 2016-22, the IRS’s prior procedures for docketed appeals. As an oversight mechanism, the Commissioner is also required to provide Congress with an annual report detailing the number of these cases it determined were not eligible for referral.
These provisions underscore Congress’s emphasis on Independent Appeals as the appropriate forum to resolve most tax controversies and its desire to limit the number of taxpayers denied access to IRS appeals. It is unclear whether the IRS will extend these procedural protections to non-docketed cases (i.e., cases where the IRS has not yet issued a notice of deficiency), or to cases that are not preceded by a notice of deficiency (e.g., partnership cases). Nonetheless, the TFA should promote greater taxpayer access to Independent Appeals, even though individual outcomes at Independent Appeals may not change drastically.
These changes to IRS administrative appeals are effective immediately.
Modification of Authority to Issue Designated Summonses
A designated summons is an administrative summons issued to large corporate taxpayers relating to one or more tax years under examination that serves to suspend the running of the statutory limitations period beginning the day a summons enforcement proceeding is initiated in court and ending on the day of the final resolution.
In promulgating the TFA, Congress sought to reconcile taxpayers’ and the IRS’s opposing views regarding designated summonses. Congress acknowledged taxpayer apprehension that designated summonses, though rarely issued in the past, could become a more frequently-used IRS tool. Pete Sepp, “IRS Reform: Resolving Taxpayer Disputes, National Taxpayers Union” (13 Sept. 2017) (testimony to the Committee on Ways and Means). Taxpayers suggested that the greater use of these summonses could lead to greater abuse, extending indefinitely statutory limitations periods that would otherwise close. However, Congress also appreciated the IRS’s view that designated summonses are an important deterrent to taxpayer non-responsiveness and delay during lengthy and complicated examinations. H. Rep. No. 116-39, at 47 (2019). In an effort to balance these conflicting concerns, Congress retained designated summonses, but determined that IRS “approval and review” of such summonses should be “tightened.” Id.
The TFA significantly enhances the review requirements for designated summonses, and places further safeguards against abuse of the IRS’s authority. Requests to issue a designated summons must now be preceded by a personal review and written approval by both the Chief Counsel for the IRS and the Commissioner of the relevant IRS Operating Division that “states facts clearly establishing that the Secretary has made reasonable requests for the information that is the subject of the summons.” The approval, including the relevant facts, must be attached to the summons. Moreover, the IRS will have burden to demonstrate, in any judicial proceeding to enforce the summons, that it made “reasonable requests” to obtain the information prior to issuing the summons. Future controversies regarding designated summonses will likely focus on this requirement.
These changes take effect on 14 September 2019 (45 days after the enactment of the TFA on 1 July 2019).
Third-Party Exam Involvement
The TFA also provides partial clarity on the involvement of third parties in examinations. The IRS previously sought to formally expand the scope of third-party involvement by issuing, in June 2014, Temp. Treas. Reg. § 301-7602-1T, which permitted the IRS to hire outside contractors, including private law firms, to participate fully in the interview of a witness summoned by the IRS to provide testimony under oath. On 14 July 2016, Treasury finalized Temp. Treas. Reg. § 301-7602-1T as Treas. Reg. § 301.7602-1(b)(3) with no material change. In a later issued Notice of Proposed Rulemaking, Treasury sought to limit the areas in which third-party attorneys could assist the IRS. 83 Fed. Reg. 13206, 13208 (Mar. 28, 2018).
In response to taxpayer concerns regarding the IRS’s extension of its examination power to private parties, Congress placed provisions in the TFA that sharply proscribe the practice of bringing in outside assistance during audits. The TFA provides that “[n]o person other than an officer or employee of the [IRS] or [IRS Chief Counsel] may, on behalf of the Secretary, question a witness under oath” in an examination. Accordingly, Treas. Reg. § 301.7602-1(b)(3) has been effectively overruled.
The TFA’s limitation of third-party involvement in examinations is, however, qualified. While third-party questioning of witnesses under oath is now prohibited, the TFA does not preclude third-party “experts” retained by the IRS from otherwise assisting in examinations.
The IRS Reorganization
The TFA directs the Treasury Secretary to submit a “comprehensive written plan” for reorganizing the IRS in its entirety, based on a customer service strategy, by 30 September 2020. The plan must:
- ensure the successful implementation of the TFA
- prioritize services to ensure taxpayers can easily and readily receive assistance from the IRS;
- streamline the structure of the IRS, which includes minimizing the duplication of services and responsibilities within the agency;
- position the IRS to address cybersecurity and other threats to the IRS; and
- address whether the Criminal Investigation Division of the IRS should report directly to the Commissioner.
The TFA effects important and needed changes in IRS infrastructure and establishes important taxpayer protections. If the TFA is implemented as Congress intended, large corporate taxpayers’ interactions with the IRS should improve.