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2016 IRSAC Small Business/Self-Employed and Wage & Investment Subgroup Report

INTRODUCTION/EXECUTIVE SUMMARY

The IRSAC Small Business/Self Employed (SB/SE) and Wage & Investment (W&I) Subgroup (hereinafter “SBSE/W&I Subgroup”) consists of a diverse group of tax professionals including attorneys, an enrolled agent, certified public accountants, a state revenue manager, and a software executive. The members of this Subgroup have a wide range of experience in taxation focused in many areas including individual taxpayers, businesses, software, state taxpayers and clients with both high and low incomes. We are honored to serve on the IRS Advisory Council and appreciate the opportunity to submit this report.

The SBSE/W&I Subgroup thanks former SB/SE Commissioner Karen Schiller and W&I Commissioner Debra Holland for their recognition of the value of the Subgroup as part of the IRS. The Subgroup and its predecessors have historically enjoyed a close working relationship with the professionals within various operating divisions of the IRS, and this year was no exception. The SB/SE and W&I divisions of the IRS helpfully provided the information, resources, guidance, and IRS personnel necessary to develop our report. We also appreciate the support provided by our designated liaisons who did a masterful job of helping us navigate the IRS and ensured that we had information necessary to develop our analysis and prepare our report.

The SBSE/W&I Subgroup researched and is reporting on the three issues summarized below. While the Executive Summary is limited to only a few of the recommendations, the full report presents them all.

  1. Fraud Prevention through Individual Taxpayer and Business Master File (BMF) Authentication

IRSAC was asked to make recommendations for authenticating individual and business taxpayers at the point of filing to combat constantly developing tax fraud. The IRS seeks solutions for businesses and individuals that are cost effective, accurate, cover all demographic groups, and include multiple layers of protection without over-burdening taxpayers. These recommendations include improved means to authenticate tax returns such as verifying information from Form W-2 and the bank account before direct depositing a refund. They also include means of preventing theft of individual and business taxpayer information by protecting business identification numbers, means to authenticate the IRS when it contacts taxpayers, and means to expand the IP PIN program. We also recommend that the IRS develop a program to match tax practitioner PTINs with EFINs in order to identify (and interdict) potentially fraudulent tax preparers.

  1. Enhancement of Mobile Applications and Online Accounts

IRSAC was asked to suggest new applications for the IRS mobile application IRS2Go and web-based Online Accounts. The SBSE/W&I Subgroup applauds the IRS’s focus on online enhancements to make tax return preparation and interaction with the IRS a simpler process. Specific recommendations are set forth in the report. Generally speaking, the SBSE/W&I Subgroup believes the goal should be to provide guidance and information more quickly and easily. The IRS currently provides many online tools that are accessed separately, but the agency should move toward providing these tools on an integrated basis (i.e., from a single app or website). While taxpayer and practitioner convenience is a key goal, improvements to online accounts should not be launched until the IRS is confident the improvements are secure.  

  1. Review Current SB/SE Practice of Enclosing IRS Publications in Mailings of Field and Campus Exam Letters

IRS publications provide important information regarding taxpayer rights to explain the examination and appeal process. During the course of a Field or Campus Examination, certain IRS publications are mailed to the taxpayer multiple times. With the goal of improving efficiency and optimally reducing costs, IRSAC was asked to review the current practice of providing multiple copies of publications to a taxpayer and to evaluate the effect of reducing the number of times particular publications are provided.

 

ISSUE ONE:  FRAUD PREVENTION THROUGH INDIVIDUAL TAXPAYER AND BUSINESS MASTER FILE (BMF) AUTHENTICATION

Executive Summary

The IRS continually focuses on ways to combat tax refund fraud. IRSAC was asked to make recommendations for authenticating taxpayers at the point of filing for both electronic and paper returns, with and without the involvement of a tax practitioner or other return preparer. In addition, the IRS has asked for IRSAC’s recommendations on the most effective methods of BMF authentication. The IRS seeks cost-effective and accurate solutions that will encompass all demographic groups and include multiple layers of protection without overburdening taxpayers.

Background

Fraudulently filed returns have dramatically increased affecting the security of taxpayer identity and loss of federal resources through theft of refunds. The IRS estimated that approximately $30 billion of identity theft related refund fraud was attempted in 2013,[1] and approximately $5.8 billion was actually paid out. (Since some refund fraud remained undetected, the government’s actual losses were greater.) These statistics relate to individual returns, and W&I’s Return Integrity and Compliance Services (RICS) group has reported that as a result of W&I’s development of tools and programs to better staunch refund fraud in respect of individual returns, the fraudsters have turned to business returns.

The exponential growth of refund fraud prompted IRS Commissioner John Koskinen to convene the Security Summit in 2015 to design strategies to combat stolen identity refund fraud (SIRF). This group consists of both government and private sector representatives and is charged with identifying steps to validate taxpayer and tax return information at the time of filing. Commissioner Koskinen commented: “Industry, the States and the IRS all have a role to play in this effort.… We all share a common enemy in those stealing personal information and perpetrating refund fraud and we share a common goal of protecting taxpayers. We want to build these changes into the DNA of the entire tax system to make it safer.” [2]

A significant effort is underway at the IRS to authenticate taxpayers to ensure only valid tax returns are processed, but there is a correlative need for the public to be able to authenticate the IRS. While the IRS, other government entities and private businesses are under constant attack, individual taxpayers are subject to numerous attempts at coercing them to share their identity or make invalid payments. With the passage of the 2015 Fixing America’s Surface Transportation Act, (FAST) the issue of authentication has become even more challenging for taxpayers because the new law mandates that the IRS utilize private debt collection agencies to collect “inactive tax receivables.”[3] Without the ability for taxpayers to authenticate that the IRS is actually contacting them they will have no way of knowing if the “debt collector” they are dealing with is truly representing the IRS or is in fact a thief.

Recommendations

To address the constantly evolving authentication issues IRSAC offers the following:

  1. Perform identity authentication and data matching procedures prior to issuance of refunds.

Wage data from tax returns are currently matched against documentation received from the Social Security Administration. It was reported to the SBSE/W&I subgroup that the IRS received much of the W-2 data for tax year 2015 from the Social Security Administration beginning on January 19, 2016. Unfortunately, the data is not processed into data capable of matching until much later in the year. In order to make this matching process more timely, IRSAC recommends that the IRS develop a system to receive W-2 data directly from employers.

Beginning in 2017, employers will be required to submit W-2 information to the IRS by January 31.[4] The matching process may take additional time and the refund processing time could exceed the 21-day time period currently in practice. In an effort to provide the IRS with potential matching information well in advance of filing season, we suggest that employers could provide certain items of key employee information on a quarterly basis when the quarterly Form 941 (Employers Quarterly Federal Tax Return) is filed. Most employers provide detailed employee information on a quarterly basis at the state or local level. At the most basic level, the IRS would be able to simply match employee names to their employers and flag any inconsistencies at a much earlier date. We believe an enhanced matching process is essential to combatting fraud and the resulting increase in refund processing time will provide for more accuracy.

IRSAC also believes that better taxpayer communication and education regarding the refund process is essential. Most taxpayers understand the need for identity security, and with proper communication and education, they are more likely to accept the delay in the processing of their refund. Several states have implemented an extended refund time period to address identity theft issues. For example, in Illinois the combination of an extended refund processing period and a robust taxpayer education and communication effort has resulted in an approximate 50-percent decrease in taxpayer inquiries.[5]

  1. Continue and expand the Form W-2 code pilot program.

IRSAC commends the IRS on the Form W-2 code pilot program that uses verification codes on Forms W-2 to verify that both the information and taxpayer are valid. We understand that approximately 1.5 million Forms W-2 utilized the verification code for the 2015 filing season and that those returns had a 95-percent or greater accuracy rate. We recommend that this initiative be continued and expanded.

  1. Permit truncation of business identification numbers on any reporting forms not sent to the IRS.

Given the increase in business identity theft, it is imperative to limit access to business identification numbers with safeguards and protections similar to those provided for social security numbers. Current guidance permits truncation of identification numbers of payees, but that protection is not currently extended to issuers. Whenever a Form 1099 is issued, the payer shares their identification number with someone they may not know (or trust). The information shared could include a social security number if the issuer does not have a separate business identification number. In addition, identification numbers of preparers of Forms 990 (for non-profit organizations) are published on various websites. IRSAC understands that the truncation of business identification numbers on federal forms may not provide complete security to these identification numbers inasmuch as many states publish these numbers. Nevertheless, some protection is better than none, and if the IRS takes steps to permit truncated numbers, the states may follow. In addition, the IRS’s communication strategy may include encouraging outside agencies that utilize identification numbers to take additional privacy steps. We recommend forming a cross-agency team to examine the issue and provide outside agencies with additional information and recommendations to ensure protections.

  1. Create a method for taxpayers to authenticate valid IRS representatives.

There has been exponential growth in phone scams designed to elicit taxpayer identification and other sensitive information from an unsuspecting taxpayer. To address the onslaught of fraudulent phone calls received by taxpayers, the IRS has clearly communicated that they do not make initial contact with taxpayers by telephone. With the enactment of section 6306 of the FAST ACT relating to mandatory use of private debt collectors in respect of certain tax debts, it is imperative that taxpayers be provided with one or more means to verify they are dealing with properly authorized representatives. Regrettably, the IRS’s use of private debt collectors may provide opportunities for people to fraudulently act as IRS agents. Currently, taxpayers who must authenticate their identity are asked specific questions that only the true taxpayer would be able to answer. A similar process could be implemented whereby taxpayers would ask the IRS representative to verify certain data that only the IRS would know. Since most communication from a private debt collector would relate to a specific issue or correspondence, the questions could be for the IRS representative to identify the issue, the date of any correspondence, the name of the individual who wrote the correspondence, and the name of the an authorized representative.

  1. Modify Form 1040 on Page 1, Line 6 and Page 2 in the signature block to show an existing IP PIN for ALL individuals who have been assigned one by the Internal Revenue Service, including the spouse and all dependents.

As it currently exists, Form 1040 only provides an input area for one IP PIN. In addition, the IRS provides taxpayers with the ability to establish their identity with the IRS and obtain an IP PIN only in certain cases (e.g., where taxpayer information has been compromised and for residents of specific locations where identity theft has been prevalent). The IP PIN program provides taxpayers with a proactive method to establish identity and allow the IRS to verify the return is filed by the legitimate taxpayer. In order for this program to work properly, it is essential that IP PINs be listed for all individuals listed on the return. Based on our research it appears that some tax preparation software provides input areas for all IP PINs, however, taxpayers who do not use a tax preparer and file on paper do not have the ability to provide this information.

  1. Create a pilot program that utilizes outside agencies to assist the IRS with identity verification.

When in-person verification with the IRS is necessary, it can be difficult for taxpayers in many circumstances, such as an inconvenient location or limited hours of the nearest IRS office. We recommend the IRS consider utilizing outside identity verification methods to make verification simpler and more accessible to taxpayers. This could be accomplished through multiple institutions such as the banking industry Medallion program (an established program in the banking industry to establish identity), state departments of revenue, departments of motor vehicles, or Certified Acceptance Agents (CAA). This would not require additional IRS resources and could provide a significant amount of convenience to taxpayers. We recommend creating a pilot program where outside agencies would verify identity and issue a unique code to a verified taxpayer that would then be provided to the IRS and be used in a way similar to the use of an IP PIN.

  1. Match Preparer Tax Identification Numbers (PTINs) with their corresponding Electronic Filing Identification Numbers (EFINs) and flag any inconsistencies.

Each PTIN issued to a tax return preparer is generally associated with a particular EFIN. If a tax return filed with a particular PTIN suddenly shows a new EFIN using it, it could indicate fraud. Alternatively, if a particular PTIN was consistently associated with a particular number of filings and that number of filings suddenly increased significantly that could also be an indicator of potential fraudulent activity.

  1. Provide tax return preparers with a method to verify returns filed under their PTIN and related EFIN as a means to notify the IRS of invalid returns filed using their credentials.

The IRS should provide preparers with education regarding how to monitor tax filings that utilize their PTIN's and EFIN's. Although IRS offers preparers the ability to look up the number of returns filed under their PTIN, this feature has not been sufficiently communicated to the preparer community. We recommend additional outreach to the preparer community to encourage use of this feature so that preparers can help monitor potential fraudulent activity.

  1. Verify taxpayer direct deposit account information with the banking institution before depositing refunds.

In the 2016 report to Congress, the National Taxpayer Advocate addressed the situation where tax preparer fraud resulted in inflation of refunds and diversion of the inflated part of a taxpayer’s refund to an account in the control of the unscrupulous preparer.[6] Adopting this recommendation would ensure that refunds issued via direct deposit are deposited only into an account controlled by the affected taxpayer. The banking industry has significant regulations that must be followed in establishing bank accounts including proper identification of individuals who open bank accounts. We encourage the IRS’s ongoing efforts with the National Automated Clearing House Association (NACHA) to develop a process for rejecting improper direct deposits and ensuring they are coded by the bank as instances of potential identity theft so the IRS can investigate before issuing paper refunds. The State Revenue Departments and the Federation of Tax Administrators are also working collectively on this issue with the financial industry and planning to implement a pilot project on this initiative in the near future.

 

ISSUE TWO:  ENHANCEMENT OF MOBILE APPLICATIONS AND ONLINE ACCOUNTS

Executive Summary

IRSAC was asked to provide recommendations regarding the IRS mobile application (IRS2Go) and Taxpayer Online Account application for individuals. We recommend applications, features, and functionalities that would be helpful to taxpayers and tax professionals and thereby improve the overall taxpayer experience. As these features are developed, they should provide taxpayers with a secure online system with reliable, efficient, and user-friendly applications.

Background

The IRS is developing its technology to provide online taxpayer services and tax administration. These efforts are being undertaken by various IRS departments and agencies and have been reported by the Electronic Tax Administration Advisory Committee (ETAAC),[7] the National Taxpayer Advocate,[8] the IRS itself in its IRS Future State Initiative,[9] and the 2016 Security Summit.[10] Developing these systems is an opportunity to make taxpayer interaction with the IRS simpler, more accurate and likely to save IRS resources.

Currently, the IRS offers several separate, independent online applications, tools, webpages, and publications.[11] Taxpayers often need to search in many locations for information and applications. Each program or interaction is helpful, but could involve a different means of accessing the information — neither separately nor together do they guide the taxpayer to the information required based on their circumstances. Integrating all these processes in one, easily accessible, online account that combines various applications and directs a taxpayer to certain features will make the interaction simpler and likely more efficient and satisfying.

Also, taxpayers are currently unable to easily review their complete tax account or retrieve particular tax documents, such as Form W-2 and Form 1099, posted to their account on a timely basis. Having access to such information through the online account could assist taxpayers with the preparation of their annual tax returns and likely reduce errors. This should save IRS resources used to correct returns, issue notices, or process amended returns.

An online account should also provide taxpayers with a quick, easy, and automated means to authorize approved third parties to access their tax account and provide any needed assistance or support.

Any mobile or online account application that integrates these functions should be secure and protect taxpayer data from fraud and identity theft. Proper authentication must be in place. While online accounts will be helpful, they must not be released if they cannot be made secure.

Applications should enhance customer service and provide detailed account information to taxpayers. Increased compliance and cost savings that may come from such improved technology and digital services should not adversely affect the overall taxpayer experience and should not dramatically reduce or eliminate the current methods of customer service. Taxpayers and tax practitioners with access to information online will invariably still need to talk with IRS representatives when their questions are not answered online or they need assurance regarding an issue, or assistance with complex tax situations. In addition, person-to-person services are still needed for those taxpayers who do not have internet access, mistrust technology, or lack basic computer skills.

IRSAC’s recommendations include the most important features we believe should be included on the IRS mobile application, IRS2Go, and Online Account application. Implementing these recommendations will likely require substantial funding to upgrade technology, implement security systems and procedures, and hire then educate qualified IRS personnel to ensure the best and safest taxpayer experience is provided, as well as to educate taxpayers and practitioners on the use, safety, and benefits of online account applications. Finally, the IRS should consider reaching out to state tax departments that currently utilize taxpayer online accounts, such as California, New York, and Massachusetts, and obtain information that may assist the IRS as they develop and improve their own online systems. The IRS should lead in the development of these systems and give taxpayers the option to utilize and depend on their online accounts for most IRS services.

Recommendations

  1. Security — All mobile and online applications must include unparalleled security features and taxpayer authentication. The applications must not be introduced until it is clear the system is secure.
  2. Integration — Most, if not all, of the features of the mobile and online account applications should eventually be integrated into one robust and secure system to provide taxpayers with a positive experience.
  3. Digital Communication with the IRS — Online accounts should allow for secure electronic communication between taxpayers, their representatives, and the IRS to resolve certain tax situations, answer specific questions, obtain additional information regarding a tax issue, or provide requested information including backup documentation. Online or video chats with IRS representatives may be very useful in obtaining clarification or updates regarding the status of an ongoing issue. If such communication is not likely to be available from within a taxpayer’s online account in the near future, we recommend the IRS develop systems to communicate digitally with taxpayers and representatives then preserve the communication on the taxpayer record. Digital communication is efficient and cost effective and is a high priority for many tax practitioners.
  4. Account Balances — Account balances, the status of any outstanding tax issues, past compliance and the name of the IRS department currently handling an issue should be available at all times. Open tax years, unpaid balances, unclaimed refunds, and outstanding levies or liens should be predominately displayed when a taxpayer accesses their online account. Any amounts owed should include a link to related tax notices explaining the tax issues involved and should also include a detailed breakdown of the tax, penalty, and interest.
  5. Payments — Taxpayers should be given the option to securely store bank account information within their online account to simplify initiation and modification of one-time or recurring payments. Currently, payments can be made through IRS DirectPay but taxpayer information and authentication has to be entered each time a payment is made. Also, detailed payment history, including prior year overpayments applied to future tax years, should be available within their online account for a certain number of years. Such payment history would be extremely helpful if the IRS develops online accounts for business taxpayers. We also encourage providing a 36-month history for EFTPS payments to determine if a taxpayer is eligible for First Time Penalty Abatement.
  6. Installment Agreements — Online Accounts should allow taxpayers to enter into installment agreements if they are under a certain dollar amount. Installment agreements are currently completed through www.irs.gov. We encourage it to be available through the taxpayer’s online account. The IRS should consider reducing or waiving the regular installment agreement user fee as an incentive for taxpayers to submit their installment agreement request from within their online account.
  7. Amendments and Corrections — Simple amendments should be available online including the ability to self-correct certain items reported or missed on a previously filed tax return. For example, a dependent adjusting their return when they inadvertently claim themselves for exemption purposes or to account for a small missed Form 1099.
  8. Transcripts — Online access to transcripts should be uncomplicated, easy to process then download or print from within a taxpayer’s online account.
  9. Tax documents — Form W-2, Form 1099, and Form 1098 information should be posted to a taxpayer’s online account in time to assist them in the preparation of their annual tax returns. This will enhance the taxpayer experience by making the collection of documents simpler and help ensure they have not missed any important tax documents. It will also assist the IRS as tax returns will be more complete and accurate.
  10. 3rd Party Authorization and Online Power of Attorney (POA) — A secure system should be in place to allow certain qualified third-parties, such as Circular 230 practitioners, to have approved access to a taxpayer’s online account. Also, a secure way to immediately provide an automated Power of Attorney would allow approved representatives to resolve a tax issue as quickly as possible. Separate online accounts for approved representatives that link to taxpayer online accounts would be extremely helpful to those retained to assist taxpayers. Improved, secure authentication and possible limitations to account access need to be developed to ensure unapproved representatives do not take advantage of the IRS and taxpayers.
  11. Notifications — Taxpayer notifications such as filing deadlines, IRS alerts, and issuance of notices should be posted to a taxpayer’s online account and supported by email or text messages announcing such notifications. If a message requiring action is not manually confirmed as received, a notification should be sent by mail.
  12. Tax Calculators and Calendars — Links to various tax calculators and tax calendars such as the W-4 calculator, the Earned Income Credit calculator, Affordable Care Act calculator, and the General Tax Calendar should be available from within a taxpayer’s online account. If possible, the calculators could use information from the taxpayer's account to help taxpayers complete them.
  13. Taxpayer Education and Alerts — Online accounts should be used to educate and alert taxpayers about issues that are specific to them. For example, the IRS may be able to provide information to a taxpayer regarding education credits based on the ages of a taxpayer’s dependents or the need to update their Form W-4 if the IRS becomes aware they have changed employers or have an additional employer.
  14. Change of Information — Taxpayers should be allowed to update their personal information online at any time. This could include information such as change of address or marital status.
  15. Sensitive Taxpayer Information — Once a taxpayer’s online account is established, individual identification numbers and other sensitive information such as bank account numbers should be truncated throughout the entire online account.
  16. Account Locking Feature — Any mobile or online account should provide taxpayers with the ability to “lock” their account for a variety of reasons including suspicion of identity theft, previous unauthorized access to their account, or other circumstances that make them feel insecure with the protection of their identity such as a recent divorce.


 

ISSUE THREE:  REVIEW CURRENT SB/SE PRACTICE OF ENCLOSING IRS PUBLICATIONS IN MAILINGS OF FIELD AND CAMPUS EXAM LETTERS

Executive Summary

IRSAC was asked to review the current SB/SE practice of providing multiple print copies of IRS publications to taxpayers during the course of Field and Campus Examinations. These publications provide important information that taxpayers are entitled to receive regarding their rights and the examination, collection, and appeal processes.

The efficiency of IRS operations would be improved and the costs of operations would be decreased if the IRS were able to reduce the number of printed copies mailed to taxpayers. IRSAC was asked to review the requirements for providing print copies, to evaluate if the number of publications provided to a taxpayer could be reduced, and to comment on the effect of such changes on the taxpayer. Further, IRSAC was asked to suggest alternative methods of providing the taxpayer with information contained in the publications.

IRSAC believes that the IRS has an opportunity to reduce costs while maintaining the effectiveness of IRS communications by strategically selecting when to provide print copies, providing taxpayers with alternative means to access important and necessary information, and continuing to emphasize taxpayer rights in the training of IRS employees.

Background

In 2015 the SB/SE division mailed an estimated 13.6 million letters to taxpayers regarding adjustments and collection issues.[12] The mailings usually include a letter regarding the particular issue that precipitated the correspondence as well as IRS publications and notices that provide important information regarding taxpayer rights and procedures. During the course of correspondence and field exams, multiple letters are sent and some documents are provided more than once. While some of the attachments are required by law,[13] IRSAC has not addressed the question of the legal obligation to provide particular notices or other documents to taxpayers, but we do have several recommendations.

 

IRSAC reviewed the following publications and notices for content and for frequency of mailing:

Publication or Notice Number Title Revision Date No. of Pages Estimated Frequency of Issuance FY 2015
Pub 1 Your Rights as a Taxpayer Rev. 12-2014 2 7,498,000
Pub 5 Your Appeal Rights and How to Prepare a Protest if You Don’t Agree Rev. 01-1999 2 217,000
Pub 556 Examination of Returns, Appeal Rights, and Claims for Refund Rev. 09-2013 20 217,000
Pub 594 The IRS Collection Due Process Rev. 01-2015 8 217,000
Pub 1660 Collection Appeal Rights Rev. 02-2014 4 n/a
Pub 3498 The Examination Process Rev. 11-2014 8 511,000
Pub 4134 Low Income Taxpayer Clinic List Rev. 01-2016 4 984,000
Notice 609 Privacy Act Notice Rev. 10-2013 2 289,000
Notice 746 Information About Your Notice, Penalty and Interest Rev. 04-2016 4 n/a
Notice 1219 Notice of Potential Third Party Contact Rev. 08-2005 1 n/a
Notice 9465 Installment Agreement Request Rev. 12-2013 2 106,000

 

IRSAC concludes that these publications and notices are generally well written, informative, and useful to the taxpayer and practitioners. All of the publications can be readily found and accessed at www.irs.gov.

While it is intuitive that a reduction of publications and mailings would reduce costs, the IRS does not track distribution, printing, and mailing costs in a manner that permits an analysis of exactly which publications might be cut and the savings that might result. Mapping of letter streams indicates that Publication 1 is mailed to a taxpayer as many as three times during the course of a field or campus audit. Publication 3498 is another document that is often provided more than once. The multiple mailings of Publications 1 and 3498 appear to be intentional to ensure compliance with legal notice requirements. Data indicate opportunity exists to cut costs, but additional information needs to be developed to identify publications that can be reduced without adversely affecting taxpayers and the resulting cost savings.

IRSAC notes one area where publications and notices might be reduced: eliminating them as attachments in copies of correspondence mailed to taxpayer representatives and appointees. Tax practitioners (including members of IRSAC) uniformly acknowledge discarding attachments to IRS letters because they are familiar with the information and otherwise have ready access to the attachments either from professional tax services or www.irs.gov. It appears the IRS has a policy of not providing attachments to taxpayer representatives and appointees.[14] The instructions for line 2 of Form 2848 (Power of Attorney and Declaration of Representative) and a notation to line 5a of Form 8821(Tax Information Authorization) both state that a representative or appointee “will not receive forms, publications, and other related materials” with the copies of the correspondence sent to the taxpayer. Nevertheless, tax practitioners (including IRSAC members) report receiving attachments in correspondence received pursuant to Form 2848. IRSAC believes it should be sufficient for a tax practitioner to be informed of the attachments provided to the taxpayer by listing on the letter sent to the taxpayer the attachments included with the letter. We therefore recommend that the IRS review its procedures to ensure adherence to its stated IRS policy of not routinely providing attachments to taxpayer representatives.

In considering the effect on taxpayers, more is not necessarily better when providing information to a taxpayer. Of importance is the relevance and timeliness of the information. Many taxpayers fear the IRS and receipt of an unexpected letter provokes anxiety. Taxpayers want and need to know as clearly as possible what the issue is and what they need to do about it. Excess information can be overwhelming and wasteful of a taxpayer’s mental and emotional energy and result in the taxpayer ignoring important information because of the fear the excess information engenders. For example, a Privacy Act Notice is required by law,[15] but while important in terms of apprising taxpayers of their rights, does nothing to assist the taxpayer address the relevant and pressing tax matter. Yet the taxpayer is compelled to read the notice. While Congress mandates certain statements be provided to a taxpayer, it further instructs action should be taken to ensure that duplicate statements not be sent to any one taxpayer.[16] In seeking to reduce duplication of publications and notices sent to taxpayers, IRS can minimize adverse effect, and perhaps improve the taxpayer experience, by providing publications and notices only when the information is most relevant and useful to the taxpayer.

Publication 1, Your Rights as a Taxpayer, is the predominant publication with an estimated 26.4 millioncopies distributed service-wide in 2015,[17] and with nearly 7.5 million copies enclosed with letters mailed in the course of campus and field exams. The IRS uses Publication 1 to comply with a legal requirement to provide the taxpayer with a statement setting forth the rights of a taxpayer during an audit.

At the time the IRS makes initial contact, it is important that taxpayers receive information informing them they have rights and there is a standard of conduct they are entitled to receive from IRS employees. This information helps relieve the taxpayer’s anxiety of dealing with the IRS and encourages the taxpayer to participate in the process to resolve the tax matter.

Taxpayer access to the Taxpayer Bill of Rights (TBOR) and expanded explanations of what the rights mean are readily available at www.irs.gov.[18] Additionally, the Taxpayer Advocate Service (TAS) provides comparable information.[19] While Publication 1 is dedicated to taxpayer rights, a notice of taxpayer rights, similar to Publication 1, is included in other publications. If taxpayers are provided a copy of Publication 1 when the IRS makes initial contact and informed to keep the publication for future reference, the distribution of duplicate copies or versions of Publication 1 can be eliminated without adversely affecting them. This is particularly true if other publications, such as Form 3498, contain a notice of taxpayer rights, and if subsequent letters advise how to access TBOR information at www.irs.gov.

The taxpayer’s ability to enforce rights during the audit and collection process is limited to a request to speak to a manager or apply to the Taxpayer Advocate for a taxpayer assistance order. Access to IRS appeals, Tax Court, Court of Claims, and U.S. District Court is available only after the audit has been completed at the examinations level. An appeal to the IRS or the courts is fraught with technicalities, delay, and expense requiring additional publications such as the 20-page Publication 556 to adequately inform and advise the taxpayer of the processes. The IRS needs to take action beyond sending notices so the realities of protecting taxpayers’ rights are not illusory.

The most effective means of protecting taxpayer rights is for TBOR to be diligently observed and complied with by the IRS. To this end, Congress made it a statutory duty of the Commissioner to ensure that employees of the IRS are familiar with and act in accord with taxpayer rights.[20] IRSAC members’ experiences with IRS employees confirms that most IRS employees are aware of and respectful of taxpayer rights. Annual CPE training about TBOR is available, but it is not currently mandatory. IRSAC understands that SB/SE is considering making TBOR training a universal CPE mandatory topic. We support the mandatory training which emphasizes TBOR as a core value of IRS operations.

Recommendations

  1. Study IRS operations to compile data necessary to identify duplicative publication and mailing costs and determine potential cost savings.
  2. Review legal requirements for providing information contained in IRS publications and limit mailing of printed copies to meet the legal requirements and needs of taxpayers for timely, relevant information.
  3. Provide a prominent notice to the taxpayer to retain a copy of all publications until the tax matter for which the taxpayer received a letter from the IRS has been resolved. The notice might be part of the initial contact letter or it might be a separate notice enclosed with the publication. The notice should inform the taxpayer that it contains important information for the taxpayer and only one print copy will be automatically provided. For example, a notice accompanying Publication 1 might say, “You have rights as a taxpayer. Enclosed with this correspondence is Publication 1 which explains your rights. You should retain this copy of Publication 1 until your tax matter has been resolved. This is the only printed copy that will be provided to you unless you request another copy. Additional information regarding your rights can be found at www.irs.gov.”
  4. Provide a list of attachments previously sent to the taxpayer in all subsequent letters together with information on how the taxpayer can alternatively access the attachments, such as by visiting www.irs.gov, by calling or writing to request a copy, by picking up a copy at a local IRS office, or by requesting a copy or assistance in obtaining a copy from the taxpayer’s representative.
  5. Review IRS operations to determine if copies of attachments, such as publications and notices, are being provided to taxpayer representatives and appointees despite statements to the contrary in instructions to Form 2848 and on Form 8821. IRSAC endorses the stated IRS practice of not routinely providing copies of attachments to taxpayer representatives and appointees as being efficient and effective for both the IRS and the taxpayer appointees.
  6. Inform taxpayer representatives of attachments that were provided to the taxpayer by causing the letter to the taxpayer, a copy of which will be sent to the taxpayer appointee, to include a list of attachments. This would also be accomplished by implementing Recommendation 4 above.
  7. Make training emphasizing taxpayer rights a universal CPE mandatory topic for all IRS employees with taxpayer contact and evaluate the employees regarding their compliance with TBOR.

 

 
[1] IDENTITY THEFT AND TAX FRAUD: Enhanced Authentication Could Combat Refund Fraud, but IRS Lacks an Estimate of Costs, Benefits and Risks, GAO-15-119 (January 20, 2015), available at http://www.gao.gov/products/GAO-15-119.
[2] “Industry, States Take New Steps Together to Fight Identity Theft, Protect Taxpayers,” 87 (June 11, 2015),available at /uac/newsroom/irs-and-industry-and-states-take-new-steps-together-to-fight-identity-theft-and-protect-taxpayers.
[3] I.R.C. § 6306; see Public Law No. 114-94 (2015).   

[4] Sections 201 and 202 of the Protecting Americans from Tax Hikes (PATH) Act of 2015, enacted as part of the Consolidated Appropriations Act of 2016, Public Law No. 114-113, adjusted the due dates for Forms W-2 and 1099.

 

[6]  See National Taxpayer Advocate Fiscal Year 2016 Objectives Report to Congress 22 (The IRS Agrees It Should Issue Refunds to Victims of Return Preparer Fraud But It Has Been Slow to Develop Necessary Procedures), available at http://taxpayeradvocate.irs.gov/Media/Default/Documents/2016-JRC/Area_of_Focus_2_Refunds_for_Return_Preparer_Fraud_Victims.pdf.
[7] The ETAAC was formed in 1998 to provide input to the IRS on the development and implementation of the IRS strategic plan for electronic tax administration.  See Electronic Tax Administration Advisory Annual Report to Congress (June 2016), available at /pub/irs-pdf/p3415.pdf (includes recommendations to improve tax administration and the need for end-to-end capabilities in online accounts for taxpayers and tax professionals).
[8] See National Taxpayer Advocate, Annual Report to Congress (2015) Vol 1: page 56
[10]The 2016 Security Summit is a partnership between leaders from the IRS, state agencies, and representatives from the private sector who addressed a variety of issues including security and authentication, improved information sharing, greater education, and outreach to the public. 
[11] Some of these online tools are Get Transcript, Get IP Pin, Free File, Electronic Filing PIN, Where’s My Refund, Interactive Tax Assistant, Direct Pay and Online Payment Agreement, Tax Map, Electronic Federal Tax Payment System (EFTPS), Earned Income Tax Credit Assistant, Withholding Calculator, and E-Services for Tax Professionals.
[12]  SB/SE does not track the exact number of letters that are issued.  Estimates provided by SB/SE are based upon printings at the Correspondence Productions Services (CPS) print sites. Estimates are thought to be low because they do not include printings done at sites other than CPS.  Accurate cost information for publications and mailings was not available.

[13] Section 6627 of the 1988 Omnibus Taxpayer Bill of Rights (enacted as part of the Technical and Miscellaneous Revenue Act of 1988 and published as a note to section 7801 of the Code) requires the Secretary of the Treasury to distribute to all taxpayers contacted with respect to the collection or determination of any tax a statement that sets forth in simple and nontechnical terms  (i) the rights of a taxpayer and the obligations of the IRS during audit, (ii) the procedures by which a taxpayer may appeal any adverse decisions of the IRS, including  administrative and judicial appeals, (iii) the procedures for prosecuting refund claims and filing of taxpayer complaints, and (iv) the procedures which the IRS may use in enforcing the internal revenue laws including assessment, jeopardy assessments, levy, and distraint, and enforcement of liens.  In addition, section 7521(b)(1) of the Code requires, in the case of an in person interview regarding the determination or collection of any tax, that the IRS employee provide to the taxpayer an explanation of the collection process and the taxpayer’s rights under such process.  See also section 3201(d) of the Internal Revenue Restructuring and Reform Act of 1998 (published as a note to section 6013 of the Code) , which requires that any notice relating to a joint return must be sent separately to each individual filing the joint return.  See also 5 U.S.C. § 522(e)(3) for Privacy Act Notice requirements.

 

[14] IRS Media & Publications Distribution, Office of Taxpayer Correspondence informed IRSAC that taxpayer representatives pursuant to a Power of Attorney (Form 2848) do not normally receive attachments with copies of taxpayer correspondence.
[15] See 5 U.S.C. § 522(e)(3) for Privacy Act Notice requirements.
[16] Section 6227(c) of the 1988 Omnibus Taxpayer Bill of Rights provides, “The Secretary shall take such actions as the Secretary deems necessary to ensure that such distribution does not result in multiple statements being sent to any one taxpayer.”
[17] Estimate provided by IRS Office of Taxpayer Correspondence.
[18] /taxpayer-bill-of-rights#service.
[19]http://taxpayeradvocate.irs.gov/About-TAS/Taxpayer-Rights?_ga=1.103244992.1768099976.1473106793
[20]  I.R.C. § 7803(a)(3).