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IRS Reform

David Stewart: Welcome to the podcast. I'm David Stewart, editor in chief of Worldwide Tax Daily. The weeks leading up to the April 15th — or, in 2018, the April 17th — tax deadline, are the only time most Americans interact with the IRS. To mark that occasion for this year, we're talking about a package of IRS reform bills currently under consideration, including the Taxpayer First Act and the 21st Century IRS Act. Tax Notes Today Editor in Chief Brett Ferguson is here to talk about these efforts. Brett, welcome to the podcast.

Brett Ferguson: Hi, Dave.

David Stewart: So Brett, how do things currently stand with the IRS, and why is there an appetite for reform?

Brett Ferguson: Well, if you look at where things have been the last few years, this whole idea kind of began with the Lois Lerner exempt organizations scandal — the Tea Party scandal that we think of — that dates back to 2013. And that's when Republicans, in particular, really looked at what the IRS was doing and discovered that they really didn't care for the way that the IRS appeared to be managing their people or their money — or, in particular, their computer systems, because in the hearings that followed they were discovering that data retention policies were outdated. There were a number of things that the IRS just didn't have when they went back to look for it, especially email records of what was happening. And it all kind of pointed to a larger theme that the IRS could really use some better technology and better processes. And perhaps more accountability and oversight.

And that's where Republicans really went and focused on. And you saw them do that as part of their 2016 plan in A Better Way, where they also laid out some tax reform ideas. And this is something they've been working on and thinking about for a few years. But they're trying to dial it in a little bit more now and hopefully get something done that they can feel good about, in changing the way the agency operates.

David Stewart: What ideas have been floated to reform the IRS?

Brett Ferguson: Well, it might be easier to go back and look at what happened with the 2016 Better Way plan. And, first of all, I'm not sure if anybody would agree that what we have today is IRS reform. Doesn't mean it's a bad proposal, but it's what Congress is currently looking at. What the House is currently looking at is more of a warmed-over version than a detailed package.

So if you look back at what they did in 2016, they had some pretty bold ideas, and kind of sketched out in a vague outline of things, like creating three separate IRS units — one for families and individuals, another for businesses, and another as a small claims court that was meant to help taxpayers with modest tax debts settle their problems. A Better Way plan also called for more communication options, including doing things online and on paper for a variety of taxpayers, eliminating the IRS Oversight Board, and renaming — maybe one of the better ones — just renaming commissioner to administrator because they wanted to put a focus on the administration role of IRS administering the tax code. Which I suppose makes sense because there's no commission involved at the IRS, so why is there a commissioner? And then, the other thing they wanted to really do is cut unneeded forms and schedules and regulations. That one might be a little tougher because acting IRS Commissioner David Kautter just said yesterday that they expect to release 450 new forms as a result of the Tax Cuts and Jobs Act this summer. So that element of eliminating forms and making things easier has been left out of the latest version.

David Stewart: Now, before we get into the discussion of the current bill, I should note for listeners that we are recording this on April 12th. And this is currently before Congress, so it is subject to change even before we post this as a podcast. So Brett, tell me, what is in the current legislation before Congress?

Brett Ferguson: Well, they still intend to rename the top job as administrator. That part stayed in there. They're also sticking with the elimination of the IRS Oversight Board, which hasn't been active in recent years because it's just lacked a quorum. And the idea for more communications options has survived to some extent because the bill requires the IRS to create online taxpayer accounts and online portals for people to get their information. But the Better Way specifically called for making sure taxpayers have a paper option as well as online communications. And this bill doesn't specifically address that.

David Stewart: You mentioned that the Better Way proposal would break the IRS up into three units. Does this proposed legislation do something similar?

Brett Ferguson: It really doesn't touch on those ideas. Instead, the House is opting for a much less prescriptive approach than what they'd mapped out with A Better Way. Instead, now it’s just telling the IRS they need to put together their own plan for how they're going to modernize computer systems, how they're going to improve taxpayer service, and training of their employees. And one of the elements of those three units was a small claims court.

And this bill, instead, targets the IRS appeals process and would make the Office of Appeals into its own independent organization that's more accountable to Congress. In fact, the appeals changes are some of the most interesting and most focused on by tax professionals because in these changes, it should ensure that most taxpayers can get their case heard on appeal. And it would require IRS appeals to give taxpayers a copy of their non-privileged portions of their case file 10 days before the appeals begin. So as it stands now, taxpayers have to request that information through the Freedom of Information Act. And members of Congress thought that was an added burden for people who are just trying to go through the system. 

So even with those changes, though, the folks that we've talked to, the tax attorneys we've interviewed for stories on this, still have some reservations about the appeals process because it doesn't really address what should happen with the communications between compliance officers and the Office of the Chief Counsel. Those communications could be covered under attorney-client privilege and they wouldn't get shared with the taxpayer. So what people that we've talked to have said is, hey, instead of doing that, if you can't share it with the taxpayer, then you can't share it with appeals, either. That idea didn't make it into the bill. But it's something to kind of keep an eye on as they go forward. The other criticism that people have is that the appeals office would still be allowed to have compliance officers present at the hearings. Some people, including the national taxpayer advocate, have argued that this makes those hearings feel more like a mediation session than an opportunity for people to have their case heard in an independent setting. This bill does make sure that attorneys in the Office of Chief Counsel can't have a stake in the case if they're going to be present at these appeals, to kind of give people a little more feeling that it's an independent process. But the tax attorneys we've talked to say it still falls short.

David Stewart: Over the last several years, the IRS has seen budget cuts. Do any of these plans put more money back in, especially given that they're administrating a new tax law?

Brett Ferguson: Well, that's going to be one of the more contentious points here, because as you go through this new bill, and you look at some of the ideas, it's clear a number of these things are going to cost some money. In particular, there's a lot of ideas as it pertains to cybersecurity and identity theft and the required changes that the IRS would have to to make in modernizing their computer systems. There really isn't any money set aside in the budget for a large-scale modernization. There is a little money that they're asking for and that the House Appropriations Committee has agreed to give to do a little bit of that and to fund some of the Tax Cuts and Jobs Act implementations. But generally speaking, when you talk to House Ways and Means Committee members, for instance, there's a real split on that committee about whether IRS needs or deserves more money. And to some extent here, I think they're waiting to kind of see what happens over the next couple years. Whether IRS can milk things along with the more modest amount of funding than before they go ahead and try to up the amount of money that they're going to get.

David Stewart: Now this was taken up by the House Ways and Means Committee on April 11th. What are the prospects for IRS reform in this Congress?

Brett Ferguson: Well, this is something that actually had a lot of bipartisan support, which is another big change from the original idea that people were pretty critical of. It cruised unanimously through the Ways and Means Committee. It's expected to also ease through the House. The problem that they have is senators haven't really been thinking about IRS reform in any way. And they're much more focused right now on getting nominations done, including the nomination of Charles Rettig to be IRS commissioner or administrator, whatever it works out to be. So the Senate has a full plate right now, and not a lot of legislative days this year. And at the moment, while people have said they would be open — including Senate Finance Committee Chairman Orrin Hatch says he's open to considering IRS reform — but they haven't read the House bill and they're really not overly focused on trying to get it done in this year. So, there's a chance it could happen, but no one is putting a timeline on it.

David Stewart: Well, that's definitely something that we're going to have to keep an eye on. Brett, thank you for being here.

And now, Coming Attractions. Each week we preview commentary that will be appearing in the next issue of the Tax Notes magazines. We're joined by Executive Editor for Commentary, Jasper Smith. Jasper, what do you have for us?

Jasper Smith: Well, as readers might expect, we have quite a bit of analysis of the Tax Cuts and Jobs Act.

In Tax Notes, James Sowell and Jon Finkelstein of KPMG provide a thorough overview of the act as it relates to taxpayers in the real estate industry. The authors conclude that in many ways, it creates a new paradigm for viewing investment in real estate. Also in Tax Notes, Alex Sadler and Doug Norton of Morgan Lewis discuss the TCJA's effect on the research credit, arguing against the prevailing view that the act left the research credit unchanged. Instead, they assert that the credit will change significantly once the new section 174 provisions become effective in 2022.

In State Tax Notes, Professor Emeritus Walter Hellerstein teams up with Jon Sedon of KPMG to analyze the early implications of the TCJA at the state level, focusing on several open questions regarding foreign-source income and state corporate income tax conformity.

Finally, in Tax Notes International, Félicie Bonnet and Harm Mark Pit discuss the peer review process following the implementation of OECD's action 14 minimum standard on making dispute resolutions more effective.

David Stewart: Excellent. You can read all that and a lot more in the April 16th edition of Tax Notes, State Tax Notes, and Tax Notes International.  

That's it for this week. You can follow me on Twitter @TaxStew, that's S-T-E-W. If you have any comments, questions, or suggestions for a future episode, you can email us at podcast@taxanalysts.org. Be sure to subscribe to us on iTunes or Google Play to make sure you get the next episode of Tax Notes Talk.

Tax Analysts Inc. does not provide tax advice or tax preparation services. The information you have seen and heard today represents the views of the presenters, which may not be the same as those of Tax Analysts Inc. It may include information obtained from third parties, and Tax Analysts Inc. makes no warranties or representations of any kind, and is not responsible for any inaccuracies. Nothing in the podcast constitutes legal, accounting, or tax advice. The tax laws change frequently, and neither Tax Analysts Inc. nor the presenters, can guarantee that any information seen or heard is accurate. Also, due to changing tax laws, any information broadcast or downloaded after its original air date may no longer represent the current views of the presenters. If you have any specific questions about any legal or tax matter, you should always consult with your attorney or tax professional. 

 

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