INTERNAL REVENUE SERVICE ADVISORY COUNCIL
The Internal Revenue Service Advisory Council (IRSAC), the successor to the Commissioner’s Advisory Group which was established in 1953, is chartered as a Federal Advisory Committee. Designed to serve as an advisory body to the Commissioner of the Internal Revenue Service, IRSAC was established to provide an organized public forum between IRS officials and representatives of the public for discussing relevant tax administration issues. IRSAC suggests operational improvements, offers constructive observations about IRS’s current or proposed policies, programs, and procedures, and advises the IRS on particular issues having substantive effect on federal tax administration.
IRSAC membership is balanced to include representation from the taxpaying public, the tax professional community, small and large businesses, academia, and the payroll community. IRSAC currently consists of 20 members with substantial experience and diverse tax backgrounds, many active in professional organizations but all selected in their individual capacities because of their interest in and commitment to improving federal tax administration. Specific subject matter and technical expertise in federal tax administration issues is generally required to advance IRSAC’s mission. Accordingly, IRSAC members usually include enrolled agents, certified public accountants and lawyers, and representatives from academia, businesses, and other organizations of varying sizes. The members are volunteers, and receive no compensation for their service.
Working with IRS leadership, IRSAC reviews existing practices and procedures, and makes recommendations on both existing and emerging tax administration issues. In addition, IRSAC suggests operational improvements, conveys the public’s views on professional standards and best practices for tax professionals and IRS activities, offers constructive observations regarding current or proposed IRS policies, programs, and procedures, and advises the Commissioner and senior IRS executives on substantive tax administration issues.
The members appreciate the invaluable assistance, dedication, and support provided by personnel from the IRS Office of National Public Liaison (NPL) and the operating divisions — Candice Cromling, Director, NPL; Carl Medley, Chief, Liaison Advisory Groups, NPL; Patricia Young, Acting Branch Chief, NPL; Lorenza Wilds, IRSAC Program Manager, NPL; Anna Millikan, NPL; Maria Jaramillo, NPL; Brian Ward, NPL; Johnnie Beale, W&I; Tonjua Menefee, SB/SE; and Kate Gregg, LB&I. Special mention is owing Candice Cromling and Lorenza Wilds who are retiring from the IRS this year. Both of these colleagues leave a legacy of outstanding service to IRSAC and to the tax system as a whole.
The Council is grateful for the support provided by IRS executives and other personnel throughout the year and we thank them for their commitment to the IRS’s (and IRSAC’s) mission and for engaging in the meaningful discussions and dialogue that each subgroup held on numerous important issues. IRSAC members are honored and privileged to have the opportunity to collaborate with and to learn from these dedicated, knowledgeable individuals. Their committed service to IRSAC, the IRS, and the public should be recognized as truly exemplary.
We acknowledge the many challenges that the IRS has recently experienced and, knowing the demands on IRS executives and operating division representatives, we also sincerely appreciate and want to recognize the time and effort devoted by them to IRSAC activities during the year.
IRSAC is currently organized into three subgroups — the Small Business/Self-Employed and Wage and Investment (SBSE/W&I) Subgroup, the Large Business and International (LB&I) Subgroup, and the Office of Professional Responsibility (OPR) Subgroup.
Issues selected for inclusion in this annual report represent those to which IRSAC members have devoted particular attention during three working sessions and ongoing communications via telephone and email throughout the year. Most of the issues covered in this report originated from topics that members deemed particularly important and others were raised by IRS management as deserving attention. Nearly all issues involved extensive research efforts.
Although IRSAC’s charter anticipates that most of its activities will be internally focused, in 2016 we were asked to participate in one public event. Specifically, at the invitation of the National Taxpayer Advocate (NTA), in February 2016, members of IRSAC participated in crafting a statement presented by the Council’s Chair and Vice Chair at the first of a series of public forums devoted to evaluating and improving taxpayer service. The primary purpose of these forums was to garner taxpayer and tax industry perspectives on “what taxpayers want and need from the IRS to comply with the tax laws” and, more specifically, the taxpayer and stakeholder needs and preferences that the IRS should consider as it develops and refines a plan to define the IRS’s “Future State” initiative.
The Chair and Vice Chair’s statement, which is attached to this report as Appendix 1, represented not a pronouncement of IRSAC’s views, but rather their individual views. Nevertheless, the statement benefited from the knowledge, experience, and perspectives of numerous members. The Chair and Vice Chair express their appreciation to NPL executives for their guidance in helping evaluate whether to accept the Taxpayer Advocate’s invitation and thank their IRSAC colleagues, especially the subgroup chairs, for their counsel, expertise, and assistance with crafting the final statement.
The Small Business/Self Employed Wage and Investment (SBSE/W&I) Subgroup, chaired by Robert Bader, identified and made recommendations on three issues. The Subgroup made numerous recommendations addressing fraud prevention through individual and business authentication at the point of filing, provided input on mobile and electronic applications currently being developed by the IRS, and offered feedback on the number and frequency of publications IRS sends to taxpayers and their representatives, which accompany various Notices and Letters.
The Large Business and International (LB&I) Subgroup, chaired by Thomas Cullinan, made recommendations on two issues in their report. The first issue addresses refining the risk assessment process to acquire better information and more efficiently identify potential compliance risk, so that limited resources are utilized on higher risk taxpayers. At the request of LB&I leadership, the subgroup also provided recommendations to promote and enhance the confidentiality of information disclosed to tax authorities in other countries pursuant to exchange-of-information treaties as part of the new Country-by-Country Reporting regime.
The Office of Professional Responsibility (OPR) Subgroup, chaired by Ronald Aucutt, prepared recommendations on two issues. The first issue reiterates long-held concerns about tax preparer behavior and the need for legislative action to allow IRS the ability to regulate tax preparers under 31 U.S.C. § 330. The subgroup also recommended that the IRS make necessary changes to Circular 230 to remove obsolete language and clarify inconsistent sections by including appraisers, to the extent their inclusion is codified in 31 U.S.C. § 330.
Issues covered in IRSAC’s General Report typically represent topics that have been identified by members as broad and Service-wide and do not fall under the purview of any particular subgroup.
The Council’s General Report for this year addresses IRS-wide Penalty Administration and makes recommendations to evaluate the effects of penalties on voluntary compliance, to create greater fairness and consistency in penalty relief, and to consider developing rules of administrative convenience or other accommodations to improve administration of penalties under section 6662(b)(2).
Second, the Chair appointed a Task Force to study system-wide IRS practices and policies regarding valuations used in estate and gift tax and for charitable deduction purposes. The Task Force did an exemplary job and will continue its work in 2017.
Finally, as IRSAC work proceeded this year, the adverse effects of long-term constriction of resources continued to be felt. Examination rates are low (and taxpayers are aware of it), training has been reduced even though congressional mandates have grown, and telephone assistance, while improved, continues to suffer to the detriment of the taxpayers who need and deserve assistance. Previous IRSAC reports have documented these problems and emphasized the need for increased funding, and while this year’s report does not reiterate the numerous ways in which taxpayers are harmed by the lack of adequate budget resources, we again implore Congress to increase the IRS’s funding.
ISSUE ONE: IRS SHOULD EVALUATE THE EFFECTS OF PENALTIES ON VOLUNTARY COMPLIANCE, STRIVE TO PROVIDE GREATER CONSISTENCY IN PENALTY DETERMINATIONS, AND CONSIDER DEVELOPING ONE OR MORE RULES OF ADMINISTRATIVE CONVENIENCE FOR PROVIDING RELIEF FOR PENALTIES ASSERTED UNDER SECTION 6662(b)(2)
IRSAC has identified several areas in which penalty administration can be strengthened or enhanced to improve the fairness and consistent treatment of taxpayers.
First and foremost, policy decisions need to be consistent with the universally agreed-upon purpose of penalties: encouraging voluntary compliance. To ensure this, the effect of penalty actions on voluntary compliance needs to be clearly understood. With serious budget constraints impairing the IRS’s ability to provide high-quality taxpayer service, IRSAC also believes that the streamlining and modest liberalization of penalty abatement decisions will create greater efficiencies for the IRS, reduce the burden on substantially compliant taxpayers, and increase voluntary compliance.
In 1955, there were only 14 penalty provisions in the Internal Revenue Code. Today, the number of provisions in the Code that either authorize or require the IRS to impose penalties has increased to more than 170.
In November 1987, the Commissioner of IRS established a task force to study civil penalties and develop a fair, consistent, and comprehensive approach to penalty administration. In February 1989, the Commissioner’s Executive Task Force issued a Report on Civil Tax Penalties. The report embraced a philosophy concerning penalties, analyzed three broad categories of penalties (filing of returns, payment of tax, and accuracy of information), and made recommendations to resolve identified inconsistencies. In general, the report recommended that the IRS should take the following actions:
- Develop and adopt a single penalty policy statement emphasizing that civil tax penalties exist for the purpose of encouraging voluntary compliance.
- Develop a single consolidated handbook on penalties for all employees (the handbook should be sufficiently detailed to serve as a practical everyday guide for most issues of penalty administration and provide clear guidance on computing penalties).
- Revise existing training programs to ensure consistent administration of penalties in all functions for the purpose of encouraging voluntary compliance.
- Examine its communications with taxpayers (including penalty notices and publications) to determine whether these communications do the best possible job of explaining why the penalty was imposed and how to avoid the penalty in the future.
- Finalize its review and analysis of the quality and clarity of machine-generated letters and notices used in various areas within the IRS.
- Consider ways to develop better information concerning the administration and effects of penalties.
- Develop a Master File database to provide statistical information regarding the administration of penalties. The information in this database should be continuously reviewed for the purpose of suggesting changes in compliance programs, educational programs, penalty design, and penalty administration.
Following the IRS’s report, Congress passed the Improved Penalty Administration and Compliance Tax Act of 1989 (IMPACT), which affirmed that civil tax penalties exist for the purpose of encouraging voluntary compliance. In addition, IMPACT required the IRS to develop a policy statement emphasizing that civil tax penalties exist for the purpose of encouraging voluntary compliance and to develop a handbook on penalties for employees.
IRS Policy Statement 20-1, attached as Appendix 2, directs the IRS to evaluate penalties’ effect on compliance, and establishes a structure within which the IRS may create administrative penalty waivers as part of an IRS-wide strategy to encourage both compliance and prompt, efficient resolution of cases.
Evaluating Penalties’ Effect on Voluntary Compliance
In recent years, there has been no shortage of reports, as well as myriad anecdotal reports, documenting the need for streamlining and otherwise generally improving implementation of the penalty provisions of the Internal Revenue Code. In the quarter century since IMPACT was passed, the National Taxpayer Advocate (NTA), the Government Accountability Office (GAO), the Treasury Inspector General for Tax Administration (TIGTA), professional associations such as the American Institute of Certified Public Accountants and the American Bar Association’s Section of Taxation, and IRSAC itself have all called for improved penalty policies and administration.
Virtually every one of these reports has embraced the principle that the sole purpose of civil tax penalties should be to encourage voluntary compliance, not to raise revenue, punish noncompliant behavior, or reimburse the government for the cost of compliance programs.
IRSAC recognizes that the structure and specific provisions of many penalties in the Code constrain the IRS’s authority to act. We also acknowledge that the agency has been criticized for either not asserting certain penalties or for abating them (or for not abating them). That said, the IRS clearly has the authority to improve the implementation and fair administration of the Code’s penalty regime.
Office of Servicewide Penalties
The mission of the Office of Servicewide Penalties (OSP) is to promote fair, consistent, and effective administration of the application of the Code’s civil penalties across the entire IRS. To accomplish this mission, the OSP is charged with, among other things, soliciting and analyzing internal and external stakeholders’ input and views on the effect of civil penalties on taxpayer compliance and incorporating that information in formulating policy and guidance.
The OSP has been operating under extreme budget constraints over the past few years which has affected its ability to adequately analyze and evaluate the repercussions of broad penalty policy and administration. The NTA’s 2014 Annual Report to Congress documented the detrimental effect of severe funding limitations on OSP and recommended that the IRS ensure the OSP has sufficient resources and support to conduct and publish appropriate studies. Although the OSP remains understaffed, key roles have been filled during 2016, and IRSAC strongly believes the crucial function of IRS-wide evaluation and oversight should be a top priority of OSP.
Administration of Accuracy-Related Penalties under Section 6662(b)(2)
When a penalty under section 6662(b)(2) is proposed or assessed, taxpayers may request relief under the “reasonable cause” exception of section 6664(c). The disposition of requests for reasonable cause relief, however, varies widely. This is due not only to differences in the particular taxpayer’s situation, but also to the training and experience of the IRS personnel making the determination whether the taxpayer’s “facts and circumstances” merit relief. In addition, the automatic, computer-generated assertion of penalties in numerous cases has the effect of undermining the congressional directive that IRS should make correct penalty assertion decisions in the first instance rather than mechanically asserting penalties and only later correcting cases meriting penalty relief. This alternative “correct any errors later” approach has been repeatedly criticized by the NTA as creating an inconsistent and unfair environment for taxpayers.
The Automated Underreporter (AUR) Program is a technology-based program that identifies discrepancies between the amounts of income that taxpayers reported on their returns and what income payors reported via Form W-2, Form 1099, and other information returns. Although section 6751(b)(1) provides the general rule that IRS employees must have written supervisory approval before assessing any penalty, section 6751(b)(2)(B) allows an exception for situations where the IRS can calculate a penalty automatically “through electronic means.” The IRS interprets this exception as allowing the use of its AUR system to propose the substantial understatement and negligence components of the accuracy-related penalty without human review. Only if a taxpayer responds to an AUR-generated proposed assessment will the IRS involve its employees to determine whether the penalty is appropriate. If the taxpayer does not respond timely to the initial notice, the computers automatically convert the proposed penalty to an assessment.
The NTA has emphasized in several of her Annual Reports to Congress that “Although automation has allowed the IRS to more efficiently identify and determine when such underreporting occurs, the IRS’s over-reliance on automated systems rather than personal contact has led to insufficient levels of customer service for taxpayers subject to AUR. It has also resulted in audit reconsideration and tax abatement rates that are significantly higher than those of all other IRS examination programs.”
While relief from AUR-generated penalties is theoretically available once these penalties have been asserted, the procedure for taxpayers to request abatement from the AUR Unit that processed the assessment is burdensome for taxpayers and also strains IRS resources. Policy Statement 20-1 states that “examiners and their managers must consider the elements of each potentially applicable penalty and then fully develop the facts to support the application of the penalty, or to establish that the penalty does not apply, when the initial consideration indicates that penalties should apply.” However, this principle is regrettably bypassed in the case of penalties which are automatically generated, as are those asserted in the AUR.
For this reason (and others related to penalty administration), the National Taxpayer Advocate identified the administration of the accuracy-related penalties in section 6662(b) as a Most Serious Problem, as well as the single most litigated tax issue, in her Annual Reports to Congress for each of the past three years. Failure to provide fair and balanced determinations of reasonable cause when abatement is requested has been cited repeatedly in the NTA Annual Reports to Congress as well.
IRSAC believes it is imperative for the IRS to address inconsistencies in the assertion and abatement of section 6662(b)(2) penalties. Discrepancies in treatment are attributable to the origins of the assertion of the penalties and are exacerbated by the divergent experience and expertise of employees making “facts and circumstances” decisions. For example, the employees who process requests for non-assertion or abatement in AUR Units are charged with determining whether facts and circumstances establish reasonable cause, but they typically do not have the experience, training, or the authority required to accomplish the complex decision-making process as spelled out in the IRM.
Reasonable Cause Determinations
One example of the need for system-wide review of penalties is the lack of consistency in the application of the reasonable cause exception in section 6664(c). While there are cases fully justifying the assertion of the section 6662 penalties, IRSAC remains concerned about the difficulties that compliant (or substantially compliant), honest taxpayers encounter when making diligent, good faith attempts to calculate and pay the correct amount of tax. Deficiencies subject to penalties under section 6662(b)(2) may be the result of misunderstanding because of the complexity in the tax code, reliance on a generally competent but mistaken tax professional, or a simple mistake despite an overall history of diligence and compliance.
Reasonable cause is the category of relief most commonly used to abate penalties. Treas. Reg. § 1.6664-4(b) defines the reasonable cause and good faith exception, as follows:
The determination of whether a taxpayer acted with reasonable cause and in good faith is made on a case by case basis, taking into account all pertinent facts and circumstances…. Generally, the most important factor is the extent of the taxpayer’s effort to assess the taxpayer’s proper tax liability. Circumstances that may indicate reasonable cause and good faith include an honest misunderstanding of fact or law that is reasonable in light of all of the facts and circumstances, including the experience, knowledge, and education of the taxpayer. An isolated computational or transcriptional error generally is not inconsistent with reasonable cause and good faith. Reliance on an information return or on the advice of a professional tax advisor or an appraiser does not necessarily demonstrate reasonable cause and good faith. Similarly, reasonable cause and good faith is not necessarily indicated by reliance on facts that, unknown to the taxpayer, are incorrect. Reliance on an information return, professional advice, or other facts, however, constitutes reasonable cause and good faith if, under all the circumstances, such reliance was reasonable and the taxpayer acted in good faith.
The evenhanded nature of the regulations is often undercut in practice, especially in respect of penalty assertions generated by the AUR Program.
The AUR closed more than 3.7 million cases during 2015 with 1,739 FTE employees in that year. TIGTA reported that in 2013 the AUR was only able to review a fraction of the returns it identified as having mismatches between income reported on the return and income reported on information returns. In fact, during 2013, the AUR reviewed less than a quarter of the potential cases identified by the program’s inventory selection process.
Given the relatively small number of employees in the AUR Units and the substantial training, judgment, and documentation necessary to determine and process a case when a reasonable cause exception applies, it is not surprising that — as the National Taxpayer Advocate has concluded — relief is frequently denied in meritorious cases. We suggest that a more streamlined approach may be in order, specifically, the possible expansion of the IRS’s administrative waiver program.
Policy Statement 20-1 allows for administrative remedies, stating that “[i]n limited circumstances where doing so will promote sound and efficient tax administration, the Service may approve a reduction of otherwise applicable penalties or penalty waiver for a group or class of taxpayers as part of a Service-wide resolution strategy to encourage efficient and prompt resolution of cases of noncompliant taxpayers.”
The implementation of the First Time Abate (FTA) waiver program, currently available for automatic abatement of the Failure to Pay (FTP), Failure to File (FTF), and Failure to Deposit (FTD) Penalties, is a manifestation of this policy, one that we believe could optimally be expanded to other areas. Since the IRS’s constrained resources simply do not allow AUR to pursue the vast majority of potential cases, logic suggests that the current FTA administrative waiver permits enhanced efficiencies of resources, permitting AUR to focus on more cases.
Specifically, IRSAC recommends that OSP evaluate the feasibility of developing one or more rules of administrative convenience to abate section 6662 (b)(2) penalties in particular circumstances, for example, where the taxpayer has a history of prior good behavior and has not previously been penalized.
- Consistent with Policy Statement 20-1, items 2 and 12, IRSAC recommends that the Office of Servicewide Penalties be directed to evaluate penalty programs, and in doing so:
- Undertake studies, soliciting and incorporating stakeholder input, to determine the effectiveness of penalties in promoting voluntary compliance.
- Evaluate the equity and consistency of penalty application and abatement across all divisions of the IRS.
- Consider developing rules of administrative convenience or other accommodations, consistent with Policy Statement 20-1, item 7, to empower IRS personnel to abate penalties to encourage efficient prompt resolution where the taxpayer has shown a history of substantial compliance.
Statement of IRSAC Chair and Vice Chair to NTA Public Forum
On February 23, 2015, Jennifer MacMillan and Timothy McCormally, Chair and Vice Chair of the Internal Revenue Service Advisory Council, presented the following statement in connection with a Public Forum held by the National Taxpayer Advocate on Taxpayer and Stakeholder Needs and Preferences.
Jennifer MacMillan and Timothy McCormally serve, respectively, as chair and vice-chair of the Internal Revenue Service Advisory Council, or IRSAC, and are pleased to participate in today’s Taxpayer Advocate Public Forum on “what taxpayers want and need from the IRS to comply with the tax laws” and, more specifically, the taxpayer and stakeholder needs and preferences that the IRS should consider as it develops and refines a plan to define the IRS’s “Future State” initiative.
Because IRSAC has been invited to present its views outside of our annual report submitted to the Commissioner of Internal Revenue, we believe it fitting to provide some background on IRSAC, its charter, membership, and decision-making model. Because IRSAC’s historical role has been to advise the Commissioner, this statement reflects our individual views.
Chartered to provide an organized public forum for discussion of tax administration issues between IRS officials and representatives of the public, IRSAC currently has 18 members who were appointed to convey the public’s perception of professional standards and best practices for tax professionals and IRS activities, offer constructive observations regarding current or proposed IRS policies, programs, and procedures, and suggest improvements to IRS operations.
The successor to an advisory committee first established in 1953, IRSAC includes members from all facets of the tax professional community (drawn from firms of all sizes and types), small and large businesses. Our members come from diverse backgrounds and have substantial experience; our membership includes accountants, lawyers, appraisers, enrolled agents, and academics. Many provide tax advice to clients, others manage their large employer’s tax affairs, and many are active in the volunteer income tax community.
In addition to coming from different-sized organizations, industries, and geographic regions of the United States, members work in occupations that interact with the IRS and the tax community in a variety of ways. Each member has a unique perspective on tax administration, but we all share a commitment to providing consequential input and objective, balanced feedback to the Commissioner and the IRS with the goal of improving tax administration and the quality of service provided to taxpayers, both directly and indirectly, by the IRS.
IRSAC members generally serve for three-year terms, and members are currently assigned to one of three subgroups — the Small Business/Self-Employed and Wage and Investment Subgroup, the Large Business and International Subgroup, and the Office of Professional Responsibility Subgroup. IRSAC, both as a whole and through its subgroups, works with the IRS Operating Divisions and personnel from across the IRS to identify and discuss issues of concern and to develop recommendations to improve federal tax administration. More specifically, our charter states that IRSAC “researches, analyzes, considers, recommends, and advises IRS on issues that include customer service, compliance, taxpayer segment-specific issues, and factors regarding noncompliance.” IRSAC’s recommendations are compiled in an annual report, which is submitted to the Commissioner at a public meeting in November and subsequently posted on the IRS’s website.
IRSAC operates on a consensus basis, with its report (including the subgroups’ recommendations) being reviewed and approved by the entire group. New members were appointed in January, and our subgroups are currently in the process of refining the issues we will address during 2016. Although this statement has been reviewed by all IRSAC members, it does not represent an official statement of IRSAC.
We begin by reiterating the principal general recommendation contained in IRSAC’s 2015 report — namely, the need for the IRS to have sufficient funding to operate efficiently and effectively, to provide timely and useful guidance and assistance to taxpayers, and to enforce current law, so that the integrity of, and respect for, our voluntary tax system is maintained.
- The Role of the IRS Budget in Shaping the Future State. The Taxpayer Advocate has articulated the compelling need for the Internal Revenue Service to be adequately funded by, among other things, documenting the detrimental effects of inadequate funding on taxpayer service, as well as its enforcement efforts, in recent years. As the chair and vice chair of IRSAC, we commend the Taxpayer Advocate for shining a bright light on the short- and long-term consequences of inadequate funding, and we attribute Congress’s decision to increase the IRS’s Fiscal Year 2016 budget in part to her efforts, as well as those of Commissioner Koskinen and others.
It would be a mistake in our view, however, to consider enactment of the first budget increase in six years as signaling the end of the IRS’s budget woes. Even with the FY 2016 increases, the IRS workforce will drop by between 2,000 and 3,000 this year, and hence be at 17,000 full-time-equivalents below the FY 2010 level. In short, the changes necessitated by the long-term constriction of the IRS’s budget have forced the IRS to curtail worthwhile programs. Moreover, they have significantly impaired the IRS’s ability to recruit, train, and retain experienced employees, threatening a serious void in both skilled leadership and experienced line employees. The IRS has acknowledged that its Future State efforts have been informed by, among other things, the current funding environment.
While IRS welcomes the positive comments of numerous lawmakers about the need for high-quality taxpayer service (which have been cited by the Taxpayer Advocate), we hope that the rhetorical support voiced for taxpayer service will be matched by future budgetary support. To be sure, accountability and appropriate oversight are essential to the efficient operation of the IRS, and complex challenges cannot be overcome simply by throwing money at them. Without adequate (i.e., increased) funding, however — to hire and train staff, to improve and develop digital tools, and to develop a balanced mix of face-to-face, voice-to-voice, and digital-to-digital solutions — the IRS will be unable to fulfill its traditional mission, much less administer new programs, such as the Affordable Care Act (ACA) and the Foreign Account Tax Compliance Act (FATCA), as required by law.
- Overview of the Future State Initiative … and the Need for a New Vocabulary. Because of our historical involvement with myriad IRS initiatives, we do not generally subscribe to the view that the Future State initiative represents a “secret plan” that — once unveiled — cannot and will not be modified. Rather, we view the Future State plan not as secret but an unfinished work-in-progress, and in its efforts to date, we do not see willful disregard of taxpayer needs and preferences by the agency. Regrettably, we do believe the IRS’s nomenclature — its resort to “consultant speak” (“ConOps” and “Future State” being just two examples) — may have contributed to the perception that something untoward, worthy of Tom Clancy, Philip K. Dick, or George Orwell, is afoot. Based on our experiences, not only in respect of the current initiative but previous ones (including the reorganization that occurred in connection with the IRS Restructuring and Reform Act of 1998), we believe the explanation is more benign: Many aspects of the IRS’s Future State planning remain in an evolving, developmental stage.
As summarized by the Chief Counsel (and reproduced in the Taxpayer Advocate’s 2015 Annual Report), the seven themes of the IRS’s Future State initiative are, as follows:
- Facilitate voluntary compliance by empowering taxpayers with secure innovative tools and support.
- Understand non-compliant taxpayer behavior and develop approaches to deter and change it.
- Leverage and collaborate with external stakeholders.
- Cultivate a well-equipped, diverse, skilled, and flexible workforce.
- Select highest value work using data analytics and robust feedback loops.
- Drive more agility, efficiency, and effectiveness in IRS operations.
- Strengthen cyber defense and prevent identity theft and refund fraud.
None of these themes is new or surprising, and they are all laudable. Tax practitioners have long played an indispensable role in promoting voluntary compliance, and the IRS has developed and deployed numerous digital services and tools for many years. Accordingly, while ongoing budget constraints and the efforts of the Taxpayer Advocate, congressional committees, and various stakeholder groups have added urgency and focus to the IRS’s efforts, IRSAC views most of the components of the Future State initiative as a continuation — and rationalization — of the agency’s ongoing efforts.
For example, IRSAC’s LB&I Subgroup has worked with the Large Business & International Division for several years to refine its risk assessment efforts and to develop strategies for effectively migrating from “enterprise-wide” to more “issue-based” examinations. (Other stakeholders —including the American Institute of Certified Public Accountants, American Bar Association Tax Section, and Tax Executives Institute — have also collaborated with LB&I in these efforts.) Similarly, in recent years IRSAC’s SBSE/W&I Subgroup has engaged with numerous personnel at the IRS on topics such as the agency’s ID theft prevention and authentication efforts, improving customer satisfaction with the Automated Underreporter program, the Fresh Start Initiative, and development of smartphone apps and other digital tools. And, given the role of tax practitioners and other professionals in assisting taxpayers in meeting their tax obligations, IRSAC’s OPR Subgroup has stressed the need for their effective oversight.
- The Need for Greater Transparency and Engagement. Regardless of the words used to describe the Future State initiative, we fully agree with the Taxpayer Advocate that more engagement with taxpayers and stakeholders about the IRS’s plans would be beneficial. Outreach to taxpayers and stakeholders clearly characterized the Internal Revenue Service’s major reorganization following the enactment of the IRS Restructuring and Reform Act of 1998. At that time, the IRS held briefings, created task forces (whose membership included both IRS employees and representatives of affected stakeholders), held hearings, sponsored town-hall meetings, and otherwise involved taxpayers and the tax community in its plans. The goal of all the outreach efforts was — and, with respect to the Future State initiative, should be — not merely to share the IRS’s decisions, but to inform them.
To the question, “When should stakeholders be involved?,” our default answer is “the earlier, the better.” To be sure, there may be legitimate issues of “sequencing” involved, and many instances in which the premature release of still fluid, “not ready for prime time” proposals could be counterproductive, bringing not light but heat to the discussion, energizing and galvanizing opposition to possible plans, cutting off discussion rather than facilitating it. That said, we strongly believe that greater transparency in the development of plans to reorganize Operating Divisions or create, refine, or end particular programs cannot help but be beneficial, even if a consequence of the IRS’s greater engagement is delay.
When the process is opened up, and how it is opened up, will likely not be the same for all aspects of the Future State initiative. For example, a major reorganization of the Large Business & International Division was announced last September, and the new structure “stood up” earlier this month. The changes have prompted myriad questions about existing LB&I programs — such as its well-regarded Compliance Assurance Process (CAP). We commend LB&I for its outreach to date, which has included stakeholder and other briefings about the new structure as well as numerous speeches and interviews.
Because change and uncertainty can be unsettling, however, the lack of certainty and specificity has prompted many questions and much anxiety about how the new structure will affect taxpayers, tax practitioners, and IRS employees themselves. We believe that the process could benefit from greater transparency and continuing engagement. Not only might taxpayers and other stakeholders identify issues or offer perspectives that have not yet been considered, but they may have suggestions or even solutions to seemingly vexing problems. Since tax administration unavoidably involves tradeoffs — between service and enforcement, speed versus safety (for example, between expeditiously processing refunds and ensuring against identity theft), and transparency and privacy — we believe that opening up the decision-making process will contribute to the development of a better, more balanced system. Not insignificantly, we also believe greater outreach in respect of all aspects of the Future State initiative could lead to greater taxpayer confidence in the fairness and integrity of the tax system.
- The Indispensable Role of Taxpayer Representatives. Surveys show that nearly 60 percent of taxpayers use a tax professional for their compliance needs, and one of the themes of the Future State initiative is for the IRS to leverage and collaborate with external stakeholders. As an organization whose members are tax professionals, we agree that theme should be advanced in the Future State initiative. We also believe the IRS should continue to refine its digital presence (and develop digital tools) to efficiently deliver information and assistance, just as private sector enterprises have.
More fundamentally, we regret that the term “pay to play” may improperly cause the issue to be framed as binary, as us-versus-them. Greater transparency will better inform the IRS’s plans and allay legitimate concerns about those potentially “left behind” or ill-served if face-to-face or telephone assistance programs are supplanted by “virtual” ones. (Who among us hasn’t been caught in a frustrating telephone queue, listening to endless automated options while seeking human contact from a business that created these tools “for our convenience”?)
We believe that the IRS can team effectively with tax professionals to develop digital tools and efficiently provide quality taxpayer service. We also believe that practitioners can and do play an important role in ensuring taxpayer compliance. Therefore, cutting services such as the Practitioner Priority Service (formerly known as the practitioner hotline) would cause outsized detriment to the tax system. Expansion of practitioner e-services to provide more tools, including automated Disclosure Authorization capabilities, serves the best interests of taxpayers and the IRS, as well as practitioners themselves. Stated simply, the more that practitioners can do without having to interact directly with IRS personnel, the more those IRS employees can devote to assisting taxpayers directly or other duties. Digital tools fully accessible to unrepresented taxpayers are critically important, as are the agency’s continuing efforts to communicate effectively with taxpayers (through myriad means) when rules and requirements change.
Finally, we agree that the need for face-to-face, voice-to-voice communications and interactions will not disappear regardless of the depth, breadth, and quality of the digital tools deployed by the IRS. The range of necessary explanations, guidance, and problem resolution on myriad issues will always require knowledgeable assistors who can advise taxpayers on the best solutions to their queries, especially in the post-filing environment.
The IRS’s reductions in direct taxpayer service in recent years, spawned by severe budget cuts, have illuminated the need for human assistance to taxpayers. Indeed, the Taxpayer Advocate’s Report powerfully documents it. Average taxpayers feel — and sometimes are — unfairly treated when they receive a communication from the IRS and cannot reach a knowledgeable, trained human who can explain the issue or assist them in the resolution of the matter. In short, the will to voluntarily comply with their tax obligations may be strained, if not compromised.
As the chair and vice chair of the Internal Revenue Service Advisory Council, we commend the Taxpayer Advocate for holding today’s public forum and more generally for highlighting the challenges facing the tax system and the desirability of the IRS more fully engaging with taxpayers and other stakeholders as it develops and refines a plan to define its Future State initiative. We would be pleased to respond to any questions.
IRS Policy Statement 20-1
Policy Statement 20-1 (Formerly P–1–18)
- Penalties are used to enhance voluntary compliance
- The Internal Revenue Service has a responsibility to collect the proper amount of tax revenue in the most efficient manner. Penalties provide the Service with an important tool to achieve that goal because they enhance voluntary compliance by taxpayers. In order to make the most efficient use of penalties, the Service will design, administer, and evaluate penalty programs based on how those programs can most efficiently encourage voluntary compliance.
- Penalties encourage voluntary compliance by:
- demonstrating the fairness of the tax system to compliant taxpayers; and
- increasing the cost of noncompliance.
- In order to effectively use penalties to encourage compliant conduct, examiners and their managers must consider the applicability of penalties in each case, and fully develop the penalty issue when the initial consideration indicates that penalties should apply. That is, examiners and their managers must consider the elements of each potentially applicable penalty and then fully develop the facts to support the application of the penalty, or to establish that the penalty does not apply, when the initial consideration indicates that penalties should apply. Full development of the penalty issue is important for Appeals to sustain a penalty and for Counsel to successfully defend that penalty in litigation.
- Abusive transactions, frivolous returns, and other abusive taxpayer conduct undermine the fairness and integrity of the federal tax system and undercut voluntary compliance. Thus, it is particularly important in those cases for examiners and their managers to consider the potential applicability of penalties, and to develop fully the facts to either support the application of the penalty or to demonstrate that penalties should not apply. Consistent development and proper application of the accuracy-related and fraud penalties in abusive transaction cases will help curb this activity by imposing tangible economic consequences on taxpayers who engage in those transactions. In addition, consistent development and proper application of the promoter and preparer penalties in abusive transaction cases will help curb this activity by providing an economic deterrent for promoting abusive transactions and preparing returns claiming tax benefits from abusive transactions. An abusive transaction is one where a significant purpose of the transaction is the avoidance or evasion of Federal tax.
- Special Rule for Listed Transactions. The Service will fully develop accuracy-related or fraud penalties in all cases where an underpayment of tax is attributable to a listed transaction. For purposes of this Policy Statement, a listed transaction is a transaction the Service has identified as a listed transaction pursuant to the regulations under IRC § 6011.
- In limited circumstances where doing so will promote sound and efficient tax administration, the Service may approve a reduction of otherwise applicable penalties or penalty waiver for a group or class of taxpayers as part of a Service-wide resolution strategy to encourage efficient and prompt resolution of cases of noncompliant taxpayers.
- In considering the application of penalties to a particular case, all Service functions must develop procedures that will promote:
- Consistency in the application of penalties compared to similar cases;
- Unbiased analysis of the facts in each case; and
- The proper application of the law to the facts of the case.
- The Service will demonstrate the fairness of the tax system to all taxpayers by:
- Providing every taxpayer against whom the Service proposes to assess penalties with a reasonable opportunity to provide evidence that the penalty should not apply;
- Giving full and fair consideration to evidence in favor of not imposing the penalty, even after the Service’s initial consideration supports imposition of a penalty; and
- Determining penalties when a full and fair consideration of the facts and the law support doing so.
Note: This means that penalties are not a "bargaining point" in resolving the taxpayer’s other tax adjustments. Rather, the imposition of penalties in appropriate cases serves as an incentive for taxpayers to avoid careless or overly aggressive tax reporting positions.
- The Service will continue to develop, monitor, and revise programs to help taxpayers voluntarily comply with the law and avoid penalties.
- To promote consistent development, consideration, and application of penalties, the Service prescribes guidelines in a Penalty Handbook that all operating divisions and functions will follow. The Office of Penalty and Interest Administration must review and approve changes to the Penalty Handbook for consistency with Service Policy before making recommended changes.
- The Service collects statistical and demographic information to evaluate penalties and penalty administration, and to determine the effectiveness of penalties in promoting voluntary compliance. The Service continually evaluates the impact of the penalty program on compliance and recommends changes when the Internal Revenue Code or penalty administration does not effectively promote voluntary compliance.