by Dean Zerbe Former Senior Counsel to the U.S. Senate Finance Committee; Partner at ZMF Law
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The Inflation Reduction Act recently signed into law by President Biden provides for $80 billion in increased IRS funding over ten years. This increased budget will provide for the hiring of tens of thousands of additional and replacement IRS employees.
Despite the claim that new enforcement is to focus on higher income taxpayers, Republicans in Congress are, in general, less than happy about the significant new dollars for the IRS fearing that it will lead to an IRS agent-in-every-pot and unnecessary grind on taxpayers and business owners (the CBO has estimated the new funding will increase revenues by $180 billion –so a net of $100 billion in additional revenue). However, Republicans face a significant challenge to unwind these new dollars in the immediate future – even with a good election night – given they would face objections (i.e., possible veto) from the Biden administration as well as potentially having to overcome Senate Democrat objections (60 vote barrier).
A different approach (which could become law) to address (if even partially) the concerns of a larger IRS would be for Congress to pass legislation that would strengthen the rights of taxpayers (as well as strengthening the IRS whistleblower program which helps focus on the IRS on the worst actors). Taxpayer rights has been a bipartisan issue for Congress for years – starting with my old boss, Senator Grassley (R-IA) and his colleague Senator Pryor (D-AR) – and most recently with the Putting Taxpayer First Act of 2019 (Grassley and Chairman Neal (D-MA)). Republicans can point to providing some relief for taxpayers from a potentially overbearing IRS and knowledgeable Democrats recognize that having the IRS color within the lines as to taxpayer rights is key to keeping in place the new IRS funding over the long-term.
Small Business Taxpayer Bill of Rights Act of 2022
The Congress in the lame duck (or early next year) should give consideration to enacting robust reforms to protect taxpayers and small business owners. A good starting point would be the bicameral legislation introduced by Senator Cornyn (R-TX) and Congressman Kustoff (R-TN) — the “Small Business Taxpayer Bill of Rights Act”.
This legislation has a number of important provisions. Especially noteworthy is an expansion for when a taxpayer will be awarded costs and fees if they prevail over the IRS in a dispute. Right now, the relief is available for only the smallest of taxpayers – and the reimbursement is very limited under Section 7430 of the tax code. The bill would update this relief and make it far more meaningful for small business owners and taxpayers. Too often small business owners and taxpayers throw in the towel in a dispute with the IRS because the costs for defending their position – even when the taxpayer is right — are so great. This change in law will go a small way in balancing the playing field between the IRS and taxpayers in disputes.
The legislation also updates the amount of damages that taxpayers can receive if the IRS is reckless or intentionally disregards the internal revenue laws. Taxpayers face significant penalties if they engage in intentional disregard of the internal revenue laws – the IRS should similarly be held responsible.
In addition, the proposed legislation enhances the IRS appeals process and alternative dispute resolution procedures – all taxpayer friendly – and build on the Putting Taxpayer First Act’s creation of the independent IRS appeals office. Although there is an Independent Office of Appeals it is not clear that just renaming them as “independent” has resulted in true independence as Congress envisioned. For example, some appeals officers have stated that they cannot do anything else on the case in terms of resolution as they don’t want to deal with examination comments on the back end. Congress needs to ensure that Appeals is not feeling pressure from examination in determining resolutions. The IRS Appeals office is vital in providing taxpayers a cost-efficient opportunity to have their issues heard and hopefully resolved fairly.
While not included, I would urge Congress to consider making it easier for taxpayers to enforce their rights anonymously before the courts. Too often, the tax code provides taxpayers a right – but to enforce the right the taxpayer must lay it all out publicly in court. Having their finances – and troubles with the IRS – exposed to the world strongly discourages taxpayers from coming forward to protect their rights even in the most egregious of situations. For example, the IRS has the right to go to third parties for information about a taxpayer’s audit (ex. contacting a taxpayer’s bank) – with the IRS in theory having to take certain steps first prior to contacting the third party to protect a taxpayer’s rights. In order to complain about the IRS not following proper procedures as to a third party request for information, a taxpayer must go to court and admit they are under IRS review, a real blow to ongoing business operations.
Taxpayer Advocate Proposals
In the most recent annual report, the Taxpayer Advocate outlines a number of proposals that Congress should also give strong consideration to enacting. The taxpayer advocate has over 68 recommendations – covering a broad range of issues from third-party notices; independence of IRS appeals; penalty reform; etc. Congress should certainly give the proposals a hard eye to consider enacting.
Lastly, one of the best ways to encourage the IRS to focus its new resources on the bad actors seeking to evade tax (and leave in peace honest taxpayers) is to strengthen the IRS whistleblower program. While perhaps counterintuitive at first, as I’ve written in detail elsewhere, the IRS whistleblower program is an extremely cost-efficient means of targeting those seeking to evade tax. The IRS Whistleblower program is heads and shoulders above other IRS efforts at identifying those taxpayers that are evading tax — thus, the whistleblower program is also a real benefit to honest taxpayers who just want to be left alone.
The IRS has shown its support for the whistleblower program with the naming of a new Director, John Hinman – who is off to a promising start. However, there are some key reforms to the whistleblower statute that should be enacted to make a good program even better. Happily, these reforms — the IRS Whistleblower Program Improvement Act of 2021 — benefits from bipartisan, bicameral support by Senators Wyden (D-OR) and Grassley as well as Congressmen Thompson (D CA) and Kelly (R PA). Congress should enact these reforms promptly.
When I was on the staff of the IRS Restructuring Commission years ago, I found it useful to think of the IRS as a three-legged stool. For the IRS to maintain the support of Congress and the public over an expanded period — there has to be a balance between enforcement; taxpayer rights; and service. With the IRS seeing a significant increase in funding, including for enforcement – it is critical that steps are taken to ensure that taxpayers are treated fairly and that services are improved. Congress can take steps now to improve taxpayer rights with good commonsense reforms (as well as reforms to the whistleblower program that will better target IRS exam resources on the worst actors) that can be supported on a bi-partisan basis.
About the Author
Dean Zerbe represented alliantgroup’s National Managing Director based in the firm’s Washington D.C. office. Prior to joining alliantgroup, Mr. Zerbe was Senior Counsel and Tax Counsel to the U.S. Senate Committee on Finance. He worked closely with then-Chairman and current Ranking Member of the Finance Committee, Senator Charles Grassley (R-IA), on tax legislation. During his tenure on the Finance Committee, Mr. Zerbe was intimately involved with nearly every major piece of tax legislation that was signed into law – including the 2001 and 2003 tax reconciliation bills, the JOBS bill in 2004 (corporate tax reform), and the Pension Protection Act. Mr. Zerbe is a frequent speaker and author on the outlook for short-term and long-term changes in tax policy, as well as ways accounting firms can help their clients lower their tax bill. He holds an LL.M. in Taxation from NYU and a J.D. from George Mason University.