IRSAC Report Focuses on Penalty Administration, Funding

                        Table of Contents

The IRSAC membership is balanced to include representation from the taxpaying public, the tax professional community, small and large businesses, academia, and the payroll community. The 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 the IRSAC's mission. Accordingly, the 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, the IRSAC reviews existing practices and procedures, and makes recommendations on both existing and emerging tax administration issues. In addition, the 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, the 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 the 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' (and the IRSAC's) mission and for engaging in the meaningful discussions and dialogue that each subgroup held on numerous important issues. The 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 the 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 the IRSAC activities during the year.

The 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 the 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 the 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 Nina Olson (NTA), in February 2016, members of the 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' Future State initiative.

The Chair and Vice Chair's statement, which is attached to this report as Appendix 1, represented not a pronouncement of the 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 the IRSAC colleagues, especially the subgroup chairs, for their counsel, expertise, and assistance with crafting the final statement.

Subgroup Reports

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 the IRS sends to taxpayers and their representatives, which accompany various notices and letters.

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 the IRS the ability to regulate tax preparers under 31 U.S.C. § 330. The Subgroup also recommended that the IRS make necessary changes to Treasury 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.

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.

General Report

Issues covered in the 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 the 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' 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)

Executive Summary

The 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' ability to provide high-quality taxpayer service, the 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.

Background

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 the 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:

IRS Policy Statement 20-1,² 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 the IRSAC itself have all called for improved penalty policies and administration.³

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.

The IRSAC recognizes that the structure and specific provisions of many penalties in the Code constrain the IRS' 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).⁴ 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.⁵

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 the 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 the IRS should make correct penalty assertion decisions in the first instance rather than mechanically asserting penalties and only later correcting cases meriting penalty relief.⁶ This alternative "correct any errors later" approach has been repeatedly criticized by the NTA as creating an inconsistent and unfair environment for taxpayers.⁷

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.⁸ 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' 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."⁹

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.¹⁰ 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.¹¹

The 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.¹²

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, the 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.¹³ Treas. Reg. § 1.6664-4(b) defines the reasonable cause and good faith exception, as follows:

The AUR closed more than 3.7 million cases during 2015 with 1,739 FTE employees in that year.¹⁴ 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.¹⁵

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' administrative waiver program.

Administrative Waiver

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,¹⁶ is a manifestation of this policy, one that we believe could optimally be expanded to other areas. Since the IRS' 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, the 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.

Recommendations:

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

The 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.

2. Enhancement of Mobile Applications and Online Accounts

The 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' 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.

3. 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, the 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. The 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 the 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 2013,¹⁷ 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."¹⁸

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."¹⁹ 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 the 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, the 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 31.²⁰ 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.

The 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.²¹

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

The 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.

3. 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. The 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' 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.

4. 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' 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.

5. 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.

6. 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.

7. 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.

8. 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.

9. 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.²² 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' 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

The 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),²³ the National Taxpayer Advocate,²⁴ the IRS itself in its IRS Future State Initiative,²⁵ and the 2016 Security Summit.²⁶ 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.²⁷ 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.

The 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

Executive Summary

The 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. The 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, the IRSAC was asked to suggest alternative methods of providing the taxpayer with information contained in the publications.

The 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.²⁸ 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,²⁹ the 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.

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

                                                                 Estimated

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.

The 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 the 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.³⁰ 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 the IRSAC members) report receiving attachments in correspondence received pursuant to Form 2848. The 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,³¹ 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.³² 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 million copies distributed service-wide in 2015, ³³ 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.³⁴ Additionally, the Taxpayer Advocate Service provides comparable information.³⁵ 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.³⁶ The IRSAC members' experiences with IRS employees confirms that most IRS employees are aware of and respectful of taxpayer rights. Annual continuing professional education (CPE) training about TBOR is available, but it is not currently mandatory. The 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

The IRSAC Office of Professional Responsibility (OPR) Subgroup (hereinafter "OPR Subgroup") consists of a diverse group of tax professionals, including lawyers, an appraiser, an enrolled agent, a certified public accountant, and a law professor. This year the OPR Subgroup addressed the need for (i) legislation authorizing IRS oversight of tax return preparers and reaffirming IRS oversight of tax "practice" broadly defined, and (ii) revisions and updates to Treasury Circular 230.

The OPR Subgroup has always enjoyed a good working relationship with the Office of Professional Responsibility, and this year was no exception. Director Stephen Whitlock was our principal liaison within the office. Director Whitlock and the entire OPR staff were extremely helpful and cooperative in the subgroup's working sessions, and they contributed data and insights that helped frame our report.

The OPR Subgroup's recommendations on the following two topics are set forth in this Report:

Following the decision in Loving v. IRS, considerable discussion and debate ensued within the tax practitioner and tax policymaking communities concerning (i) the establishment of minimum requirements for unlicensed individuals who prepare tax returns for compensation, and (ii) the extent to which the IRS can establish and enforce professional standards for tax "practice" and the "representation" of taxpayers in the way that tax practitioners (and, to a great degree, Congress) had come to understand and take for granted.⁴⁴ The discussion of what constituted "tax practice" and taxpayer "representation" took place against the backdrop of widespread fraud perpetrated by tax return preparers, the disproportionate number of whom are unlicensed.⁴⁵ Over the last two years, the IRS and the Department of Justice's Tax Division have diligently publicized and prosecuted this fraud, warning both practitioners and taxpayers of the threats posed -- to individual taxpayers as well as to the tax system -- by unscrupulous tax return preparers.⁴⁶ The IRS Taxpayer Advocate has engaged in similar outreach and publicity.⁴⁷

Given the proliferation of preparer fraud and abuse, the IRSAC reaffirms its recommendation of the last two years that all tax return preparers be subject to the competency and ethical standards contained in Treasury Circular 230, and furthermore, that all tax return preparers not already subject to the standards of a bar, accounting, or enrolled agent license be required to demonstrate competency by successfully passing an appropriate test and completing annual continuing education requirements. More specifically, the IRSAC recommends that (i) the Commissioner request that the IRS be granted explicit statutory authority to establish and enforce professional standards for tax return preparers at all stages of tax practice (including both pre-filing and post-filing advice and assistance), and (ii) the Commissioner request that "representation" of taxpayers be defined to include not just acting on a taxpayer's behalf and in a legally binding manner nor only after the taxpayer's return has been selected for audit or the taxpayer challenges proposed adjustments to the return, but also encompassing tax advice, tax planning, tax return preparation, tax return filing, and pre-audit correspondence with the IRS.

ISSUE ONE: STATUTORY AUTHORITY OF THE IRS TO ESTABLISH AND ENFORCE PROFESSIONAL STANDARDS FOR TAX PRACTICE

Executive Summary

It is in the public interest to safeguard the integrity of tax return preparation, tax advice and planning, and tax representation at all stages. The ability of the IRS to accomplish this critical task of tax administration has been hampered by recent court decisions. Thus, the IRSAC recommends for the third year in a row that the Commissioner request that Congress affirm and clarify its support of the IRS' authority to establish and enforce professional standards for tax "practice," broadly defined, by strengthening 31 U.S.C. § 330.

Background

31 U.S.C. § 330 authorizes the Secretary of the Treasury to "regulate the practice of representatives of persons before the Department," including their character, reputation, qualifications, and competency. For decades, under regulations promulgated under Title 31 and published as Treasury Circular 230, the IRS has overseen the professional behavior of attorneys, certified public accountants, enrolled agents, and other credentialed professionals advising and representing taxpayers before the Internal Revenue Service. At times this oversight has been intense, as with respect to tax shelter opinions in the 1980s (see former section 10.33 of Treasury Circular 230) and the written advice standards in the mid-2000s (see former section 10.35 of Treasury Circular 230), while at other times it has been more watchful than assertive. At all times, however, IRS oversight of tax professionals has been guided by the principle that a sound tax system relies on the integrity and competency of tax practitioners.

The IRS Office of Professional Responsibility (OPR) administers all matters related to tax practitioner conduct, including the regulation of "practice" before the IRS and the oversight of all disciplinary proceedings pertaining to tax practitioners found to be in violation of Treasury Circular 230,⁴⁹ the regulations governing practice before the IRS.⁵⁰

Until 1984, Treasury Circular 230 had provided that tax return preparation did not constitute practice before the IRS.⁵¹ However, revisions to Treasury Circular 230 that year removed the provision that explicitly omitted tax return preparation from "practice before the Internal Revenue Service."⁵² As important, the 1984 revisions to Treasury Circular 230 began a thirty-year effort, much of it endorsed and authorized by Congress, to expand the nature and scope of tax practitioner conduct covered by Treasury Circular 230, particularly conduct related to pre-filing planning and advice. The 1984 amendments, for example, significantly increased the diligence requirements under Treasury Circular 230, specifically for practitioners issuing tax shelter opinions.⁵³ Proposed amendments in 1986 recommended further extending enhanced diligence requirements to non-shelter advice pertaining to return positions.⁵⁴ The 1986 amendments also proposed adding section 10.34 to Treasury Circular 230, requiring practitioners to advise taxpayer-clients on the recently enacted "substantial understatement penalty" (originally codified as section 6661, but re-codified as section 6662 in 1989),⁵⁵ while at the same time prohibiting practitioners from advising on return positions that subjected taxpayers to penalty under the new provision.⁵⁶ In 1992, the Treasury withdrew and reissued the proposed amendments,⁵⁷ finalizing them two years later in 1994.⁵⁸ New section 10.34(a)(1) prohibited practitioners from advising on return positions or signing returns reflecting return positions that did not meet the new "realistic possibility of success" standard in section 6662, unless the practitioner reasonably determined that the position was not frivolous and was adequately disclosed on the return.⁵⁹ In addition, new section 10.34(a)(2) required practitioners to advise taxpayers on all potential penalties that might apply to return positions and, furthermore, to any opportunity to avoid penalty through disclosure to the IRS.⁶⁰

Two additional historical examples supporting the IRS authority to oversee tax practice, broadly defined, are worth mentioning. First, in 2004, Congress enacted the American Jobs Creation Act ("Jobs Act"), which, among other things, clarified that the Treasury Department and the IRS may impose disciplinary standards on practitioners for rendering pre-filing written advice relating to matters identified as having a potential for tax avoidance or evasion.⁶¹ The Jobs Act contained sweeping anti-shelter legislation -- including new penalties as well as substantial revision to existing penalties -- nearly all of which took aim at the tax shelter industry by targeting tax practitioners who advised taxpayer-clients on what the IRS and Congress viewed as abusive positions and transactions.⁶² The Treasury subsequently issued final regulations reflecting Congress's intent to aggressively respond to abusive tax practice, including both pre- and post-filing practice.⁶³ Second, in 2008, Congress enacted the Tax Extenders and Alternative Minimum Tax Relief Act, which, among other things, amended the standard of care that tax practitioners must achieve in order to avoid being subject to the tax preparer penalties contained in the Internal Revenue Code.⁶⁴ Three years later, the Treasury Department updated Treasury Circular 230 respecting the standard of care that tax practitioners must meet when advising on and preparing tax returns.⁶⁵

In those same final regulations promulgated in 2011, the Treasury Department sought to include in its oversight the large group of tax return preparers who were unlicensed. Given the methodical and congressionally authorized advance over the previous three decades of IRS authority to require minimum standards for all forms of tax practice (described above), the Treasury reasonably believed that it already possessed that authority. Nonetheless, it felt compelled to enunciate its authority to address this group of tax return preparers after studies revealed that unlicensed preparers regularly committed simple and inexcusable errors on tax returns, which subjected taxpayers to unnecessary expense and liability and otherwise abused the tax compliance system.⁶⁶ These studies showed, for example, that 55 percent of preparers were subject to no oversight (that figure has since jumped to 60 percent⁶⁷), and that tax returns prepared by all preparers had a higher estimated percent of errors (60 percent) than self-prepared returns (50 percent). Significantly, the studies also emphasized that tax return preparers are not required to have any minimum education, knowledge, training, or skill before they are allowed to prepare a tax return for a fee. Or, in the words of IRS Commissioner John Koskinen, "You get your hair cut by someone who has to pass a licensing exam, but [anyone] can prepare your tax return with no requirements at all, no certifications at all."⁶⁸ While unlicensed preparers charge and receive fees from taxpayers with both simple and sophisticated returns, the taxpayers most at risk to being misled and harmed by unlicensed preparers are low-income households possessing little financial literacy. Indeed, according to studies, 60 percent of taxpayers claiming the Earned Income Tax Credit (EITC) use a paid preparer, the same percentage as the general taxpaying population, but, unlike the general taxpayer population, more than 75 percent of EITC preparers are unlicensed and unregulated.⁶⁹ All taxpayers should be able to rely upon competent and credible paid preparers who update their competency with respect to the nation's tax laws on an annual basis, and who behave in accordance with the highest ethical and professional standards, namely those reflected in Treasury Circular 230.

Cases of Return Preparer Fraud and Misbehavior Continue Unabated

Fraudulent tax return preparation has become an epidemic. According to the Treasury Inspector General for Tax Administration, the IRS identified more than two million returns from tax year 2014 reflecting fraudulently claimed refunds totaling more than $15.7 billion.⁷⁰ In addition, the U.S. Department of Justice (DOJ) reports that it is seeking and being granted more injunction orders than ever before in its efforts to shut down fraudulent tax return preparers. In 2015, the DOJ permanently shut down more than 35 fraudulent operations, with 2016 on pace to easily surpass that figure.⁷¹ The defendants in these cases include large-scale return preparation franchises, independent return preparers, and everything in between.⁷²

For its part, the IRS has expended considerable resources and effort educating taxpayers about the malicious practices of fraudulent return preparers. During last year's tax filing season, the IRS warned taxpayers "to be on the lookout for unscrupulous return preparers," and identified incompetent and fraudulent preparers as one of the most common "Dirty Dozen" tax scams.⁷³ Moreover, the IRS maintains (and regularly updates) websites that assist taxpayers in "choosing your tax preparer wisely"⁷⁴; that educate taxpayers on the credentials and qualifications of different categories of tax professionals⁷⁵; that provide searchable directories of credentialed federal tax return preparers located throughout the country⁷⁶; that explain how to register a complaint about return preparers⁷⁷ or report suspected fraudulent conduct⁷⁸; and that list and describe the government's investigations and convictions of abusive return preparers.⁷⁹

Reports of unscrupulous return preparers are common in conversations among licensed tax practitioners and members of the public. One recent example of the significant harm caused by unscrupulous and incompetent return preparers involved a group of Baltimore firefighters whose unlicensed and unregistered paid preparer fraudulently claimed hundreds of thousands of dollars in bogus business expenses on the firefighters' tax returns.⁸⁰ According to an investigation conducted by WBAL-TV 11 in March 2015, the firefighters never saw or signed the returns. In addition, the unlicensed return preparer did not list himself as the preparer of record on the returns and instead indicated that the returns were "self-prepared." The firefighters only learned of the preparer's misconduct after being contacted by the Comptroller of Maryland questioning the accuracy of the returns.

Cases like these⁸¹ illustrate the dire need for minimum and mandatory competency standards which all preparers must meet and maintain before they are permitted to render advice, prepare returns, or represent taxpayers at any stage of the pre-filing or post-filing process.

Recent Case Law Interpreting 31 U.S.C. § 330

As noted in the Introduction/Executive Summary of the OPR Subgroup Report, Loving v. IRS⁸² struckdown the IRS' expanded oversight of return preparers, holding that Title 31 did not explicitly grant such authority. In a subsequent case, Ridgely v. Lew,⁸³ the court invalidated Treasury Circular 230's contingent-fee restrictions as applied to "ordinary" refund claims; i.e., amended tax returns filed prior to an examination of the original return. The courts held, respectively, that preparers of tax returns and "ordinary" claims for refund are neither "representing" taxpayers nor "practicing" before the Internal Revenue Service as defined in 31 U.S.C. § 330.

In analyzing whether tax return preparers and refund claim preparers are "representatives" of taxpayers "practicing" before the IRS, the courts stated that tax professionals do not serve taxpayers in such a capacity until a live dispute arises between the IRS and a taxpayer. More specifically, the courts opined that in the normal course of return and claim submissions, before a return is being audited or there is otherwise a dispute between the taxpayer and the IRS, the tax professional is not "practicing" before the IRS in the sense of having a "case" before the IRS, another term of art contained in 31 U.S.C. § 330. According to the courts, a tax professional is not "representing" a taxpayer unless the representative has the power to bind the taxpayer as would an agent for a principal. Accordingly, even though 31 U.S.C. § 330(d) expressly states that nothing in section 330 nor in any other law prevents the IRS from regulating tax advice with respect to an activity that has the potential for tax avoidance or evasion, the court opinions suggest that most tax advice -- including all pre-filing tax advice -- is outside the scope of section 330 oversight. The courts restricted in this manner the forms of tax "practice" that the IRS could regulate even though Congress has affirmed on multiple occasions the Treasury Department's authority to establish and enforce professional standards for pre-filing tax advice under the ambit of Treasury Circular 230 (see "Background" to Issue One of the OPR Subgroup Report).

In addition, both the Loving and Ridgely courts felt that the existing return preparer penalty provisions of the Internal Revenue Code make IRS oversight of tax return preparers surplusage in any event. According to the Loving court, the Code already contains a "carefully articulated existing system for regulating tax return preparers,"⁸⁴ a system that the Ridgely court considered a "comprehensive scheme of penalties to curb the potential abuse in the preparation and filing of both original returns and refund claims."⁸⁵ Whether or not the current penalty system reflects a "carefully articulated" and "comprehensive scheme" for regulating tax return preparers is certainly debatable and subject to specific factual contexts. Unscrupulous practitioners, for example, may simply consider the penalty regime's monetary sanctions a cost of doing business rather than, say, penalties that should be avoided or, if breached, a sign that a practitioner has violated an authoritative standard of care. There can be no debate, however, that the current penalty system has been ineffective in "curb[ing] the potential abuse in the preparation and filing of both original returns and refund claims." Furthermore, if Treasury Circular 230 applies only to practice in the narrow adversarial sense described by the courts in Loving and Ridgely, then the whole tax opinion arena is conceivably beyond the scope of OPR scrutiny. Such a result is flatly at odds with congressional intent reflected in multiple statutes enacted over the last three decades (see discussion above in "Background" to Issue One of the OPR Subgroup Report).

The IRSAC believes that decisions in Loving and Ridgely are inconsistent with the last 30 years of tax practice standards as understood by Congress, the Treasury Department, and tax practitioners who are licensed. As such, and to mitigate the damage caused by these cases with respect to tax administration, tax compliance, and taxpayer rights, the IRSAC recommends that the Commissioner request Congress to amend 31 U.S.C. § 330 to grant the IRS express authority to oversee all phases of federal tax advice, return and document preparation, and dispute resolution.

Legislative Proposals to Clarify and Expand IRS Oversight of Tax Return Preparers

In the wake of Loving and Ridgely, and recognizing the need for IRS oversight of unlicensed tax return preparers, members of Congress have introduced a number of bills designed to clarify and expand the scope of 31 U.S.C. § 330. In particular, the legislative efforts have sought to include "tax return preparers" in 31 U.S.C. § 330 as defined in section 7701(a)(36) of the Internal Revenue Code, and to grant the IRS explicit authority to sanction tax return preparers who run afoul of Treasury Circular 230.⁸⁶ To date, none of the bills has become law. In fact, none of them even got out of Committee. But the proposal sponsored by Senators Ron Wyden (D-OR) and Ben Cardin (D-MD) nearly received enough votes in the Senate Finance Committee in April 2016 to proceed to the full Senate for consideration.⁸⁷ The "Wyden Amendment" (attached to a bill preventing identity theft and tax refund fraud) lost 12-13 with two members who voted against the amendment expressing qualified support for future legislative action on minimum standards for tax return preparers.⁸⁸

The IRSAC applauds the intent of this legislation particularly to the extent it clarifies and expands the scope of 31 U.S.C. § 330 to include unlicensed tax return preparers as professionals practicing before the Internal Revenue Service and thus subject to Treasury Circular 230's standard of conduct. The income tax is generally self-assessed, and paid return preparers are critical to assisting taxpayers in understanding and fulfilling their self-assessment obligations. Given the meager 0.8 percent audit rate for all returns,⁸⁹ more than 99 percent of tax return data go unexamined by the IRS, a fact that means the nation's income tax system is overwhelmingly dependent upon the accuracy of the information originally submitted by taxpayers and their tax professionals.

All paid tax return preparers have an important role in tax administration because they assist taxpayers in complying with their obligations under the tax laws. Incompetent and dishonest tax return preparers increase noncompliance and undermine confidence in the tax system. Equally important, unscrupulous return preparers who prey on unsuspecting clients subject those clients to significant penalties and interest on additional income taxes. Many of these taxpayers cannot afford to incur further costs resulting from a preparer's grossly negligent or fraudulent conduct.

Recommendation

The IRSAC continues to recommend strongly that the Commissioner request Congress to enact legislation expressly affirming the Treasury Department's authority under 31 U.S.C. § 330 to establish and enforce professional standards for both paid tax return preparers and tax "practice" broadly defined. Guidance on the appropriate scope of the legislative grant may be found in section 10.2(a)(4) of current Treasury Circular 230:

Executive Summary

Treasury Circular 230⁹⁰ governs all persons who practice before the Internal Revenue Service. It is relied upon by attorneys, certified public accountants, enrolled agents, and others who represent taxpayers before the Internal Revenue Service as well as by taxpayers who hire these tax professionals.

As discussed in the OPR Subgroup Issue 1, because of the decision in Loving v. IRS,⁹¹ the IRS' mandatory program for regulating unlicensed tax return preparers was halted in 2014. Separate and apart from the potential for legislative action authorizing the IRS to impose minimum standards for individuals who provide tax preparation services -- legislation that the IRSAC very much supports -- parts of Treasury Circular 230 are currently outdated and unenforceable.

The IRSAC recommends updating these outdated parts of Treasury Circular 230. Appendix 3 to this report identifies the specific parts of Treasury Circular 230 that need updating. These updates are purely ministerial, and pertain to parts of the Circular that reflect programs no longer in existence, outmoded procedures, and antiquated dates and deadlines. As such, the IRSAC further recommends that the IRS seek specific authority to address these kind of updates in the future through revenue procedures or other administrative guidance.

Background

Before the 2014 appellate court decision in Loving, the IRS had instituted a mandatory program requiring all tax return preparers who were not otherwise licensed to become "Registered Tax Return Preparers" (RTRPs). Following the Loving decision, the IRS shut down the program and abandoned the RTRP designation. Thus, the RTRP classification no longer has any significance, and the IRS has announced that the RTRP credential is no longer valid and serves no purpose when dealing with the IRS.⁹²

Because Treasury Circular 230 has not been revised to reflect the IRS' termination of the RTRP program, the regulation still contains numerous references to RTRPs -- 54 by our count. In other words, the current version of the Regulations Governing Practice before the Internal Revenue Service reflects provisions that are unenforceable and potentially misleading for practitioners (and others). Appendix 3 to this report contains the current version of Treasury Circular 230, with the sections that need updating marked with strikethrough text.

This recommendation is not driven simply by aesthetic concerns. Treasury Circular 230 addresses conduct subject to sanction. But it also contains useful guidance for tax practitioners regarding their prevailing standard of care, best practices, enrolled agent renewals, and continuing education, as well as other information relating to practice before the IRS. When this information is outdated or incorrect, it detracts from the credibility and usefulness of the overall regulations and could affect compliance adversely.

Apart from the now-moribund RTRP program, Treasury Circular 230 does not refer to a temporary and voluntary program that the IRS has instituted for return preparers. The "Annual Filing Season Program" (AFSP) offers a record of completion and other benefits not available to tax return preparers who do not participate in the program. In addition to the registration, education, and testing requirements to participate in the AFSP, tax preparers must consent to being subject to Subpart B and section 10.51 of Treasury Circular 230 (pertaining to sanctions for "incompetence and disreputable conduct"). Because these requirements are similar to and overlap with some aspects of the RTRP program, the advent of this new category of "AFSP Record of Completion Holders" might confuse tax preparers who still encounter Treasury Circular 230's multiple references to the defunct RTRP designation.

In addition, the IRSAC identified several other issues within Treasury Circular 230 that should be addressed:

• Appraisers should be added as a profession to the other listed practitioners authorized to practice before the IRS in section 10.0, 10.2(a) and 10.3. Appraisers are specifically mentioned in 31 U.S.C. § 330⁹³ and are subject to the rules and "Sanctions for Violation of Regulations" in Subpart C.⁹⁴

• The language in section 10.6(d)(2) regarding Renewal for Enrolled Agents should be updated. Thus, the rolling renewal schedule which dates to July 2002 should instead be a simple reference to where information on renewal cycles can be found on the IRS website or in other published guidance.

• Sections 10.6(f)(1) & (2) pertaining to Continuing Education (CE) are outdated, because enrolled agents no longer determine the validity of their own CE. Rather, a valid Course Approval Number issued by the IRS is the only criterion for valid CE for enrolled agents. Outdated language in this section should be removed (or moved to § 10.9) with the exception of § 10.6(f)(2)(ii)(D) pertaining to qualified continuing education programs.

The IRSAC recommends the IRS issue proposed revisions to Treasury Circular 230 that:

The IRSAC Large Business & International (LB&I) Subgroup (hereinafter "LB&I Subgroup") consists of six tax professionals with a variety of experience in large corporate tax departments, public accounting and law firms, and academia. We have been honored to serve on the Council and appreciate the opportunity to submit this report.

The LB&I Subgroup has had the opportunity to discuss several topics throughout the year with LB&I management. This report is a summary of those discussions and the Subgroup's recommendations on two topics -- (1) how LB&I should identify potential compliance risks and how those compliance risks should be considered in determining potential "campaigns"; and (2) how the IRS can enhance taxpayer confidentiality and protect against misuse of data relating to information automatically exchanged with tax authorities in other countries as part of the Organisation for Economic Co-operation and Development's (OECD's) Base Erosion and Profit-Shifting (BEPS) project.

Before turning to our recommendations, we express our appreciation to LB&I Commissioner Doug O'Donnell and the professionals on his staff (and from the Office of Chief Counsel) for the time and effort expended on these topics and for their valuable input and feedback. Special thanks are owing to Kathy Robbins, Director of LB&I's Enterprise Activities Practice Area (who served as our principal liaison) as well as to Anna Millikan, our liaison from the Office of National Public Liaison, and Kathryn Gregg, LB&I Stakeholder Liaison Program Manager.

1. Risk Assessment

A. LB&I should consider making changes to relevant tax forms to solicit documentation and other information to identify potential compliance risks with a goal of focusing valuable resources on high-risk issues and away from low-risk taxpayers and issues.

B. LB&I should centrally devise questions regarding specific subject matter areas that leverage the expertise developed in International Practice Networks (IPNs) and Issue Practice Groups (IPGs) -- now called Practice Networks -- and devise a process for appropriately trained personnel to centrally screen and analyze the responses.

C. LB&I should consider changes to Form 1120X and related instructions to require additional information or documentation related to refund claims that LB&I has identified as high-priority examination issues and study how this additional information can be stored in an accessible, user-friendly format.

2. Promoting Confidentiality of Treaty-Exchanged Information

A. The IRS should take additional steps to promote its commitment to maintaining taxpayer confidentiality, for example, by:

• Expanding its website notice to include links to relevant materials, including its International Data Safeguards & Infrastructure Workbook and the OECD's Keeping It Safe guide.

• Elaborating (on its website notice and elsewhere) on what is meant by the term "misuse" and explaining what the consequences will be to a receiving country that either discloses or inappropriately uses exchanged information. Specifically, the IRS should confirm that where it is determined that information has been misused, the automatic exchange of information with that country will be suspended.

• Considering whether to include specific reference to its commitment to ensure taxpayer confidentiality, along with its Exchange of Information Disclosure mailbox, in the instructions to Form 8975 and other documents sent to taxpayers.

ISSUE ONE: RISK ASSESSMENT

Executive Summary

The IRSAC recommends that LB&I consider making changes to Form 1120 (and other forms commonly filed by LB&I taxpayers) and related instructions to solicit information or documentation for purposes of identifying potential compliance risk with a goal of focusing valuable resources on high-risk issues and away from low-risk taxpayers and issues. We also recommend that LB&I centrally devise the questions leveraging the use of expertise developed in International Practice Networks (IPNs) and Issue Practice Groups (IPGs), now known as Practice Groups, regarding specific subject matter areas, and that responses be centrally screened and analyzed by appropriately trained personnel. Finally, the IRSAC recommends that LB&I consider changes to Form 1120X and related instructions to require additional information or documentation related to refund claims that LB&I has identified as high-priority examination issues and study how this additional information can be stored in an accessible, user-friendly format.

Background

LB&I management asked the LB&I Subgroup to consider how LB&I should identify potential compliance risks and how those compliance risks should be considered in determining potential campaigns. LB&I management requested that the LB&I Subgroup focus on traditional and non-traditional methods of identifying compliance risk.

Prefatorily, the LB&I Subgroup previously issued recommendations regarding risk assessment in both its 2013 and 2014 reports. The Subgroup's 2013 recommendations were based on the principle that "as both the IRS and large business taxpayers have limited resources, each would benefit from IRS risk assessing taxpayers and their filed returns prior to examination. In this manner, only high risk taxpayers would require significant IRS examination."

The 2013 report discussed the methods employed by the Australian Taxation Office (ATO) and the United Kingdom HM Revenue & Customs (HMRC), both of which have adopted risk assessment processes and classification systems that guide the extent of their examinations of large businesses. The report noted that LB&I would face significant challenges in adopting a similar system, given the subjective nature of some of the risk assessment factors, and because IRS personnel are not trained in risk assessment methods. Nevertheless, the 2013 LB&I Subgroup recommended that, if IRS were to adopt an approach similar to the ATO and HMRC, IRS should co-develop and evaluate the proposed risk assessment methods with "a select group of large taxpayers currently participating in the CAP program" and "the initial request for data should be in the form of a 'yes or no' list of indicators that is part of the filed tax return." The 2013 LB&I Subgroup also recommended, as part of a more subjective analysis of the taxpayer's overall risk assessment, that LB&I consider 17 factors in assessing large businesses (e.g., oversight by board of directors, presence in tax havens, and low effective tax rates).

Following up on its 2013 recommendations, LB&I asked the 2014 LB&I Subgroup to review the best practices of other countries (such as Australia, New Zealand, and Canada) and to develop recommendations to enhance LB&I's risk assessment protocols, such as refining the recommendations contained in the 2013 IRSAC report. The 2014 report summarized (i) the Co-operative Compliance: A Framework report published by the Organisation for Economic Co-operation and Development (OECD); (ii) the risk assessment approaches of the ATO, Canada Revenue Agency (CRA), and New Zealand Inland Revenue (NZIR); and (iii) LB&I's Compliance Management Operations Program (CMO).

Building on its 2013 recommendations, the 2014 LB&I Subgroup:

• Endorsed the decision of ATO to recognize formally the fundamental differences -- especially in respect of the effectiveness of a company's Tax Control Framework -- between publicly held and other taxpayers. The report emphasized the importance of the tax authority's leveraging of the enhanced scrutiny paid to public companies by their independent authorities as well as other government bodies (such as the Securities and Exchange Commission).

• Recommended that the IRS revise Schedule UTP to collect additional information from large corporations on their tax governance practices, and that it consider expanding the class of taxpayers required to file that schedule. The 2014 LB&I Subgroup recommended that the questions be framed as requiring "yes or no" responses, and made several recommendations regarding the types of questions that the IRS might ask to identify those taxpayers that might bear less or more tax risk.

• Recommended that the information be collected and analyzed centrally by trained screeners as part of centralized risk assessment process, rather than be used by the field to determine audit risk on a case-by-case basis.

Since the LB&I Subgroup last considered LB&I's risk-assessment procedures and protocols, LB&I has undertaken a major reorganization, a principal aspect of which is a transition from an essentially enterprise-based audit system to more of an issue-based system. At a high level, LB&I intends to transition from its historical focus on comprehensive audits of the largest businesses to a new approach focused primarily on centrally identified tax compliance risk issues. The comprehensive enterprise-wide audits will not go away entirely, but they will ultimately constitute a smaller percentage of LB&I's work. To implement its new focus, LB&I has restructured itself into nine practice areas. The practice areas come in two types. Four are organized on a geographic basis and the other five are oriented to specific subject-matters. LB&I representatives have confirmed in speeches and other public statements that the subject matter organizations are to be deeply involved in identifying and addressing the "risk" issues. Generally speaking, in the former organizational structure, once a taxpayer was selected for examination, the selection of transactions and issues to be examined was determined largely by the examination team.

LB&I has candidly acknowledged that a key driver of the new design is LB&I's desire to exercise more control over how it spends its resources. Rather than automatically committing personnel and other resources to recurring cycles of the same large case audits, the new approach is intended to make LB&I more agile and strategic in addressing emerging compliance risks no matter where they exist. As envisioned, agents and specialists will be assigned to "campaigns" and "tailored treatments" that concentrate on an inventory of specific centrally identified risk issues.

LB&I is committed to change in order to create an organization that "continuously evolves to keep pace with LB&I taxpayers operating in a global environment." To this end, LB&I intends to use data analysis as well as feedback from examiners to identify areas of potential non-compliance and design campaigns to address key compliance risks. Campaigns are focused on specific issues using a combination of "treatment streams" to achieve the intended compliance outcome.⁹⁵ Nevertheless, the current LB&I Subgroup believes that the recommendations made in its 2013 and 2014 report are worthy of consideration, though several may need to be refined to take into account LB&I's overall new approach. In particular, the current LB&I Subgroup believes that "yes or no" questions are an appropriate means for LB&I to assess risk, for purposes of both selecting and deselecting issues for "campaigns."

LB&I selects the majority of the returns for examination using three methods:

• First, IRS relies on algorithms and models to identify tax returns that may be a compliance risk and selects those returns for examination. Specifically, LB&I uses the Discriminant Analysis System (DAS), which scores corporate returns with assets above $10 million. These returns are slotted into quartiles based on their scores. The returns are assigned to the field based on these quartiles. At the group level, the returns are risk assessed and a decision is made on whether to proceed with the exam or survey. LB&I uses proprietary models to identify Forms 1120S and 1065 with assets over $10 million.

• Second, compliance check initiatives select particular returns to examine based on a particular issue that may have been determined to be a widespread issue among the return population. Compliance check initiatives, as well as prior audit results, may lead to changes in algorithms which are updated periodically.

• Third, claims for refund that exceed $5 million, which statutorily must be reviewed by the Joint Committee on Taxation (JCT), are scrutinized by a special group of IRS professionals. These refund claims include the refund claims reported on Form 1120X, Amended U.S. Corporation Income Tax Return, and Form 1139, Corporation Application for Tentative Refund Claim.⁹⁶

Recommendations

The IRSAC commends LB&I for its efforts to evolve to keep pace with LB&I taxpayers. One of LB&I's guiding principles in establishing its future foundation is "Selection of Better Work." The LB&I Subgroup's recommendations are centered on assisting LB&I with gathering better information from LB&I taxpayers so it can risk assess and select "better work" to examine. In making our recommendations, we believe it fitting to reprise the opening statement in our 2013 report:

We recognize that tax forms may not be particularly well suited to identifying emerging issues, given the time lag in revising tax forms, and that the IRS must carefully analyze the burden revisions would impose on taxpayers relative to the benefits of obtaining the requested information. We therefore also recommend that LB&I conduct a study regarding ways that it might more nimbly change forms or instructions in the manner that is least burdensome to taxpayers while still obtaining the desired information.

The LB&I Subgroup recommends that LB&I management review the process followed by the State of California. The California Franchise Tax Board (CA FTB) has proposed the regulation (California Prop. Reg. § 19322) intended to improve its risk assessment of refund claims. The following is the proposed regulation governing California refund claims:

ISSUE TWO: PROMOTING CONFIDENTIALITY OF TREATY-EXCHANGED INFORMATION

Executive Summary

Given the imminent implementation of a program of automatic exchanges of tax information between the Internal Revenue Service and tax authorities in other countries pursuant to the Organisation for Economic Co-operation and Development's (OECD's) Base Erosion and Profit-Shifting (BEPS) project, LB&I management asked the LB&I Subgroup to develop recommendations to reinforce and advance taxpayer confidence that the data will not be misused and that it will remain confidential as guaranteed by section 6103 of the Internal Revenue Code. Specifically, the LB&I Subgroup considered how the IRS can promote taxpayer confidentiality relating to information automatically exchanged with tax authorities in other countries pursuant to the country-by-country (CbC) reporting initiative set forth in BEPS Action 13. We also addressed what steps might be taken to ensure that automatically exchanged CbC information is not used inappropriately by the receiving tax authority.

The IRSAC recommends that the IRS take additional steps to promote its commitment to maintaining taxpayer confidentiality, for example, by:

• Expanding its website notice to include links to relevant materials, including its International Data Safeguards & Infrastructure Workbook and the OECD's Keeping It Safe guide.

• Elaborating (on its website notice and elsewhere) on what is meant by the term "misuse" and explaining what the consequences will be to a receiving country that either discloses or inappropriately uses exchanged information. Specifically, the IRS should confirm that where it is determined that information has been misused, the automatic exchange of information with that country will be suspended.

• Considering whether to include specific reference to its commitment to ensure taxpayer confidentiality, along with its Exchange of Information Disclosure mailbox, in the instructions to Form 8975 and other documents sent to taxpayers.

Discussion

1. Implementation of Country-by-Country Reporting

Generally speaking, "base erosion and profit shifting (BEPS)" refers to tax planning strategies that exploit gaps and mismatches in tax rules to make profits "disappear" for tax purposes or to shift profits to locations where there is little or no real activity but the taxes are low, resulting in little or no overall corporate tax being paid.⁹⁷ The OECD's project, which has been embraced by the Finance Ministers of the G20, was intended to bring a coordinated approach to the challenge of BEPS, and involved 15 different action plans.⁹⁸ One of the more consequential actions recommended by the OECD relates to so-called County-by-Country (CbC) reporting.

Specifically, BEPS Action 13 provides a template for multinational enterprises to report annually, on a country-by-country basis, information on the global enterprise's overall activities. As explained in the OECD's BEPS FAQ 79 --

As part of its efforts to implement BEPS in respect of U.S. taxpayers, in June 2016, the IRS issued final regulations requiring CbC reporting by U.S. persons that are the ultimate parent entity of a multinational enterprise (MNE) group with revenue of $850 million or more in the preceding accounting year.¹⁰¹ The final regulations, set forth in Treas. Reg. § 1.6038-4, require these U.S. persons to file annual reports containing information on a CbC basis of a MNE group's income, taxes paid, and certain indicators of the location of economic activity. The new reporting requirements apply to all parent entities with taxable years beginning on or after June 30, 2016. The final regulations will require reporting on new Form 8975, the "Country-by-Country Report." The IRS has estimated that CbC reports will be filed by approximately 1,800 U.S.-parented MNEs.

Assuming the United States has an exchange-of-information treaty or similar agreement with a foreign jurisdiction in which the U.S. multinational group operates, the CbC reports filed with the IRS will be exchanged automatically with tax authorities in that country.¹⁰² The goal of the exchange is to provide greater transparency into the operations and tax positions taken by the MNE. While CbC reports will not themselves constitute conclusive evidence of income tax or transfer pricing violations (indeed, the exchange-of-information agreements proscribe their use for that purpose), they are intended to advance the tax jurisdiction's risk assessment efforts, for example, by prompting inquiries into transfer pricing practices or other tax matters.

Every information exchange agreement to which the United States is a party requires both parties to treat the information as confidential, to implement data safeguards, and to use the information only for tax administration purposes. The United States will stop automatic exchanges with tax jurisdictions violating those requirements until the violations are cured.¹⁰³

2. Confidentiality of Taxpayer Information (including Treaty-Exchanged Information)

Confidentiality of tax returns and taxpayer information has been a foundational principle of tax systems around the world for decades. In the United States, the principle of keeping taxpayer information sacrosanct has been enshrined in the Internal Revenue Code since the 1976 enactment of section 6103. The provision mandates that tax returns and tax-related information be kept confidential and not subject to disclosure, except in certain limited circumstances.

Laws in other countries similarly protect taxpayer privacy. What undergirds section 6103 in the United States and taxpayer privacy protections in other countries is the principle that, in order to have confidence in their tax system and to comply with their obligations under the law, taxpayers need to know that the information on their tax returns and other tax records -- often sensitive financial and other propriety information -- will be safeguarded and protected from intentional or inadvertent disclosure. Violations of section 6103 are illegal: hence, section 7231 makes it a crime to make an unauthorized disclosure of information; section 7231A punishes the unauthorized inspection of returns or return information; and section 7431 empowers affected taxpayers to bring a civil suit against a federal employee or other person for unauthorized inspection or disclosure of returns and return information.¹⁰⁴

The exceptions in section 6103 (and comparable legislation in other countries) are aimed at promoting the administration of tax laws and assisting various branches and levels of government in carrying out their respective purposes. Thus, section 6103(k)(4) provides: "A return or return information may be disclosed to a competent authority of a foreign government which has an income tax or gift and estate tax convention, or other convention or bilateral agreement relating to the exchange of tax information, with the United States but only to the extent provided in, and subject to the terms and conditions of, such convention or bilateral agreement."

Key to disclosure of taxpayer information under section 6103(k)(4) are the provisions of the applicable tax convention or similar bilateral agreement relating to the exchange of information. Article 26(2) of the U.S. Model Income Tax Convention provides:

Article 22 of TIEA confirms the confidentiality of any exchanged information, stating that it shall be treated as secret and protected in the same manner as information obtained under the domestic law of that Party and, to the extent needed to ensure the necessary level of protection of personal data, in accordance with the safeguards that may be specified by the supplying Party as required under its domestic law.

The absolute necessity of the receiving country's implementing safeguards being consonant with those of the supplying country has been explained by the OECD in a document entitled Keeping it Safe: The OECD Guide on the Protection of Confidentiality of Information Exchanged for Tax Purpose:¹⁰⁵

• A treaty or other exchange of information mechanism is in place and provides for the confidentiality of tax information.

• Domestic legislation is in place to adequately protect the confidentiality of tax information.

• Domestic legislation includes sufficient sanctions for breaches of confidentiality.

• A comprehensive policy on confidentiality of tax information is in place and endorsed at the top level of the administration.

• A specified person is responsible for implementing the comprehensive policy.

• The comprehensive policy addresses: (a) background checks and security screening of employees, (b) employment contracts, (c) training, (d) access to premises, (e) access to electronic and physical records, (f) departure policies, (g) information disposal policies, and (h) managing unauthorized disclosures.

• All aspects of the policy have been implemented in practice.¹⁰⁶

LB&I management confirms that there have been precious few instances where concerns have been raised about the disclosure or inappropriate use of exchanged information. Where a concern is raised (either directly by the affected taxpayer or by the taxpayer's representative), the IRS' response is to put further exchanges with the affected jurisdiction on hold, consult with the taxpayer or representative, and -- if the concern is deemed to have credence -- engage in a dialogue with the other country. Under applicable tax treaties, there is no sanction for violating the confidentiality provisions; that is to say, an aggrieved taxpayer cannot sue for damages, force the return of the information, or prevent the other authority's use of the information. That said, the IRSAC understands that in such a situation, the IRS will suspend the exchange-of-information provisions of the treaty until the IRS validates that future breeches will not occur. Because section 6105 cloaks "tax convention information" with a confidentiality akin to that accorded taxpayers under section 6103, however, the IRS' ability to keep the aggrieved taxpayer apprised of its discussions with the other country may be constrained. That said, section 6105(b)(3) does permit the disclosure of such information if the foreign government consents in writing, and during our discussions with LB&I, the Subgroup was informed that such consent is frequently given.

Moreover, if the exchanged information is misused (i.e., not used solely for risk assessment purposes), the receiving country will be obliged to concede the issue in any consequent mutual assistance proceeding. Thus, section 5 of the OECD's Competent Authority Agreement on the Exchange of Country-by-Country Reports on the Basis of a Tax Information Exchange Agreement¹⁰⁸ provides:

Recommendations

Because automatic exchanges of information contained in taxpayers' CbC reports have not yet commenced, concerns about the confidentiality or misuse of exchanged taxpayer information remain anticipatory. The LB&I Subgroup commends LB&I management for emphasizing the IRS' ongoing commitment to ensure taxpayer confidentiality and the proper use of their data. We applaud, for example, the posting of a notice on the IRS' website captioned "Reporting Unauthorized Disclosure or Misuse of Tax Information Exchanged Under an International Agreement."¹¹⁰ After explaining that the IRS will exchange information with treaty partners, as specifically requested, automatically, or spontaneously, the notice states:

• The IRS expand its website notice to include links to relevant materials, including its International Data Safeguards & Infrastructure Workbook and the OECD's Keeping It Safe guide.

• The IRS elaborate (on its website notice and elsewhere) on what is meant by the term "misuse" and explain what the consequences will be to a receiving country that either discloses or inappropriately uses exchanged information. Specifically, the IRS should confirm that where it is determined that information has been misused, the automatic exchange of information with that country will be suspended.

• The IRS consider whether to include specific reference to its commitment to ensure taxpayer confidentiality, along with its Exchange of Information Disclosure mailbox, in the instructions to Form 8975 and other documents sent to taxpayers.

Steps such as these would not only underscore the IRS' commitment to ensuring taxpayer confidentiality and the appropriate use of their data, but would also communicate that transparency is not a one-way street, thereby buttressing taxpayers' faith in the integrity of the tax system.

 

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[ Editor's Note: Appendices omitted. To view the Appendices,

 

see , p.103.]

 

 

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Internal Revenue Service Advisory Council 2016 Member

 

Biographies

 

Ms. Atwood, ASA, an accredited appraiser specializing in antiques, decorative arts and clocks, is the owner of Timely Antique Appraisals, LLC, in Rockford, IL. Her firm provides valuations for insurance coverage, damage/loss claims, equitable property division, estate tax and planning and charitable contributions. A current member of the Appraisal Standards Board of The Appraisal Foundation, she also teaches Principles of Valuation courses for the American Society of Appraisers (ASA) where she is an Accredited Senior Appraiser. Ms. Atwood served previously on the ASA International Personal Property Committee and was president of the ASA Chicago Chapter. Ms. Atwood holds a B.A. from Cornell University, an M.A. from Columbia University and an M.A. from Princeton University. (OPR Subgroup)

Ronald D. Aucutt

Mr. Aucutt, J.D., has 41 years' experience in taxation and is a partner with McGuireWoods, LLP, in Tysons Corner, VA. Mr. Aucutt's past experience includes corporate reorganizations, the investment tax credit, tax-exempt financing, TEFRA partnership audits and tax treatment of inventories, as well as tax-exempt organizations, estate and gift taxes and the income taxation of estate and trusts, which in time became his areas of concentration. Prior to joining McGuireWoods, LLP, he was a partner with Miller & Chevalier, where he handled tax planning matters and tax audits and appeals throughout the country. He compiled the factual background and analysis that was adopted by the Senate Finance Committee in changing the effective date of the first generation-skipping transfer (GST) tax in the Tax Reform Act of 1976 to June 12, 1976. Mr. Aucutt is a member and past President (2003-2004) of the American College of Trust and Estate Counsel (ACTEC) and the past Chair of its Washington Affairs Committee (2009-2013). He is also a member of the American Bar Association. He holds a J.D. and a BA from the University of Minnesota. (OPR Subgroup Chair)

F. Robert Bader

Mr. Bader, J.D., EA, is the Director of Tax Operations for the Baltimore CASH Campaign in Baltimore, Maryland. Mr. Bader was introduced to free tax preparation services while managing a partner program of the Baltimore CASH Campaign. In 2008, he became Director of its tax programs and now coordinates organizations throughout the Baltimore area that prepare returns for 8,000-10,000 low-income working families. Mr. Bader is an active member of the Taxpayer Opportunity Network (TON), an organization that represents Volunteer Income Tax Assistance (VITA) programs and Low Income Tax Clinics (LITCs). In addition, Mr. Bader is Chair of the Maryland Board of Individual Tax Preparers and a member of the Maryland Society of Accounting and Tax Professionals. He is a member of the Maryland bar and previously represented low-income individuals as a legal aid attorney in Massachusetts and Pennsylvania. He served in the United States Peace Corps in the countries of Côte d'Ivoire and Ghana. He holds a J.D. from the University of Toledo School of Law and a B.A. in Political Science with a certificate in Peace Studies from Siena College. (SBSE/W&I Subgroup Chair)

Brenda M. Bianculli

Ms. Bianculli has worked in the tax field for more than 25 years and is the owner of Brenda M. Bianculli, CPA, LLC, in Charlton, MA. Her firm handles complex tax and business issues for a variety of clients and specializes in the real estate and service industries. Several of her clients are owners of small to mid-size businesses and she works closely with them on various tax preparation and planning issues. She has experience with issues relating to multi-state tax reporting, business sales and acquisitions, stock redemptions, incentive stock options, and estate, gift and trust taxes. Her firm also prepares financial statements and represents clients to resolve income and sales tax matters with the IRS and various state agencies. Ms. Bianculli is currently on the Board of Advisors for Nichols College, a Corporator for Southbridge Savings Bank, and the Treasurer of Woman in Business, Inc. She is a member of the American Institute of Certified Public Accountants and the Massachusetts Society of Certified Public Accountants. Ms. Bianculli holds a B.S. in Business Administration (major accounting) from Nichols College in Dudley, MA, and a Master of Science Degree in Taxation (M.S.T.) from Bentley College in Waltham, MA. (SBSE/W&I Subgroup)

Eunkyong Choi

Ms. Choi, J.D., LL.M, is the New York City Taxpayer Advocate in New York, NY. She is a business-oriented attorney with diverse experience in developing and delivering complex tax planning strategies. Prior to joining city government, she served as a Lecturer in Law and Supervising Attorney for the Washington University School of Law Low Income Taxpayer Clinic where she represented low income taxpayers in state and federal administrative and proceeding including the IRS and the U.S. Tax Court. Prior to that, she served as the Program Director and Supervising Attorney for the Nevada Legal Services Low Income Taxpayer Program. In addition to her advocacy on behalf of low income taxpayers, Ms. Choi has served in numerous tax leadership and mentorship roles. Ms. Choi is also a co-founder and member of the Asian American Advocacy Clinic ("AAAC") in Las Vegas, Nevada, the first and only Asian and Pacific Islander legal aid organization. Asian American Advocacy Clinic was founded in 2012 with goal of providing access to justice to members of the Nevada Asian and Pacific Islander community. Ms. Choi holds an LL.M in Taxation and J.D. from Washington University School of Law School in St. Louis Missouri. (SBSE/W&I Subgroup)

Thomas A. Cullinan

Mr. Cullinan, J.D., is a Partner with Sutherland Asbill & Brennan LLP in Atlanta, GA. Mr. Cullinan is a member of Sutherland's Tax Practice Group, who focuses his practice on tax controversies against the Internal Revenue Service (IRS). He has represented a large number of corporations, partnerships, and high net-worth individuals in all phases of tax controversy, including IRS audits, appeals, and tax litigation. Mr. Cullinan has extensive experience settling tax cases and is well-versed in tax litigation when the parties cannot agree to an administrative resolution. He has worked on cases involving the research tax credit, the foreign tax credit, corporate-owned life insurance, "tax shelters" and "listed" transactions, and transactions alleged to lack economic substance, among many others. In addition, he has extensive experience in TEFRA (i.e., partnership) audits and litigation and in defending against the imposition of accuracy-related penalties. He has practiced in front of several U.S. district courts, the U.S. Tax Court, the Court of Federal Claims, and several appellate courts, and he is a frequent speaker on tax-related topics. Mr. Cullinan is an active participant on three different committees of the Section of Taxation of the American Bar Association. He is also a fellow of the American College of Tax Counsel (ACTC) and a member of the American Association of Attorney-CPAs (AAA-CPA). Mr. Cullinan holds a B.S. from State University of New York at Geneseo, an M.S. from State University of New York at Albany, and a J.D. from Vanderbilt University Law School. (LB&I Subgroup Chair)

Estarre (Star) Fischer

Ms. Fischer, CPA, is a Partner with Moss Adams LLP, in Seattle, WA. Ms. Fischer has over 15 years' experience in taxation as a CPA. Her primary responsibility is to provide clients with tax consulting services regarding the tax treatment of R&D expenditures. Ms. Fischer's specialties include R&D Tax Credit (IRC 41), R&D Expenditures (IRS 174), General Business Credits (IRC 38 & 39), IRS various state examination defense regarding R&D credits and expenditures. Her client base is predominately comprised of middle-market companies. Although she has been involved in R&D tax credit analyses for all entity types and sizes, the focus on middle-market companies has allowed her to gain experience in the complexities of S-corporations and partnerships claiming the R&D credits. She partners with the IRS Examination and Appeals functions to help resolve complex cases. Ms. Fischer is a member of the American Institute of Certified Public Accountants (AICPA) and the Washington Society of Certified Public Accountants (WSCPA). Ms. Fischer holds a B.S. (Accounting) from Central Washington University. (LB&I Subgroup)

Neil H. Fishman

Neil H. Fishman, CPA, CFE, FCPA, CAMS, is Vice President/co-owner of Fishman Associates, CPAs, PA, in Boynton Beach, Fl. Mr. Fishman has over 25 years' experience in taxation, specializing in the preparation of federal, state and local corporate, partnership, fiduciary, gift, estate, not-for-profit and personal income tax returns. Mr. Fishman's firm also prepares business and personal financial statements, in addition to representing clients before taxing authorities. Mr. Fishman has been a presenter at various tax seminars and has written several articles on occupational fraud having appeared in various CPA Journals. He is a licensed CPA in both New York and Florida, and is also a Certified Fraud Examiner, Forensic Certified Public Accountant and Certified Anti-Money Laundering Specialist. Mr. Fishman is a member of the National Conference of CPA Practitioners (NCCPAP), and have served in many capacities on the National Board since 2004, including Chairman of the Tax Policy Committee from 2008-2011. Currently, he serves as Executive Vice President of NCCPAP. Mr. Fishman holds a B.A. from the State University of New York College at Oneonta. (SBSE/W&I Subgroup)

Cheri H. Freeh

Ms. Freeh, CPA, CGMA, is a principal with Hutchinson, Gillahan & Freeh, P.C., in Quakertown, PA. Ms. Freeh has over 30 years' experience in the field of accounting for privately-held businesses, non-profit organizations, local governments, estates, trusts and individuals. Her firm specializes in small businesses (most gross receipts under $1 million), mostly middle class individuals, small estates and trusts, governments, non-profits and overall the CPA practitioner community. She is a Past President of the Pennsylvania Institute of CPAs (PICPA) and the governing council of the AICPA. She currently serves on the AICPA Internal Revenue Service Advocacy and Relations Committee and the PICPA State Taxation and Legislation Committees. She also serves as a member of the Pennsylvania State Department of Community and Economic Development's Act 32 advisory committee and the advisory committee on the local earned income tax register for the Governor's Center for local Government. Ms. Freeh serves as a director on several boards, including a bank board and several non-profit organization boards. Ms. Freeh is one of the few individuals invited by the Pennsylvania House of Representatives to provide private training sessions to both the Republican and Democratic caucuses and is regularly consulted by legislators and Department of Revenue officials regarding tax law and policy issues for Pennsylvania. Ms. Freeh was named one of the 25 most powerful women in accounting in the United States for both 2012 and 2014 by the CPA Practice Advisor magazine in conjunction with the American Society of Women Accountants. Ms. Freeh holds a B.S. in Business Administration with an accounting specialization from Thomas A. Edison State College. (SBSE/W&I Subgroup)

Stuart M. Hurwitz

Mr. Hurwitz, J.D., LL.M, operates his own tax law practice, Stuart M. Hurwitz, APC dba CPA & Law Offices, in San Diego, CA. He has over 45 years of experience in business and taxation. His legal and tax practice serves a wide-breadth of U.S. citizens and persons and entities of various nationalities from those with a high net worth to many of more modest means who are involved in or want to enter the United States business environment, who may have foreign bank accounts, foreign business investments, real estate, estate and gift, employment, and income related issues. He has authored numerous articles and papers which have appeared in national law journals and which he has presented to officials at the IRS, U.S. Treasury, Judges of the U.S. Tax Court, and to the staffs of the Senate and House tax writing committees. Mr. Hurwitz's diverse and disparate work experience (in addition to that of a tax attorney) include that of a U.S. Army prosecutor and contracting officer, land developer and home builder, and president of a non-profit. His tax practice prepares tax returns of every type at both the Federal and State levels including individual, partnership, corporate, estate, gift, trust, pension, non-profit, sales and use, and payroll. In addition, he and his staff are continually involved in tax audits, tax appeals, and tax litigation for his clients. He has served on numerous occasions as an expert witness for tax and accounting issues in both Federal and State Courts. As a result of his education and work experience, he is familiar with a very wide range of business and tax related issues. Mr. Hurwitz is certified by the State Bar of California as a Tax Specialist and is a Chair Emeritus of the 3,200+ member Taxation Section of the State Bar of California. He has been repeatedly honored as a Super Lawyer, one of San Diego's Best Attorneys (by the Union Tribune), and a 5 Star Wealth Manager. His education includes a B.S. in Business Administration with a major in accounting from the Ohio State University, a J.D. from the University of Nebraska, School of Law, and an LL.M. in Taxation from the University of San Diego, School of Law. (LB&I Subgroup)

Jennifer MacMillan

Ms. MacMillan, EA, is the owner of Jennifer MacMillan EA in Santa Barbara, CA. Ms. MacMillan has over 25 years' experience in taxation. As an Enrolled Agent, she is licensed to represent taxpayers before the Internal Revenue Service and specializes in representing individual and small business taxpayers in tax examinations, collection matters, and appeals, and also provides individual income tax preparation and planning services. Ms. MacMillan became a Fellow of the National Association of Enrolled Agents' National Tax Practice Institute (NTPI) in 2001 and subsequently was a discussion leader and instructor for NTPI, teaching advanced representation skills to Treasury Circular 230 practitioners. In addition, she teaches two-hour ethics courses for many practitioner groups, giving hundreds of Enrolled Agents and tax preparers in-depth interpretations of Treasury Circular 230 and real-world applications that relate to the daily challenges that arise in their practices. Ms. MacMillan has written numerous articles for NAEA's EA Journal, California Enrolled Agent magazine, and has been a contributing author for Spidell Publishing and CCH's Journal of Tax Practice and Procedure. Ms. MacMillan has appeared on NBC's Today Show, offering last-minute tax tips to viewers, and has been a panelist on Tax Talk Today (IRS' monthly webcast) on two occasions. She is a member of the NAEA Government Relations Committee and a Past President of the California Society of Enrolled Agents. (IRSAC Chair and OPR Subgroup)

Timothy J. McCormally

Mr. McCormally, J.D., is the Director in the Washington National Tax practice of KPMG, LLP, in Washington, DC. He has 40 years' experience as a tax attorney. Before joining KPMG, he spent 30 years on the staff of Tax Executive Institute, first as General Counsel and then as Executive Director. At TEI, his responsibilities included the overall administration of the professional association of 7,000 in-house tax professionals from around the world. He also participated in the Institute's extensive advocacy program, contributing to comments submitted to the IRS, Treasury Department, Canada Revenue Agency, the Canadian Department of Finance, and the Organisation for Economic Co-operation and Development. Mr. McCormally is a contributor to numerous publications and has recently written or co-written articles on Treasury Circular 230 and tax ethics generally, tax whistleblowing, FBAR reporting, and IRS efforts to risk-assess taxpayers. He is a member of ABA, Section of Taxation (Administrative Practice and Employment Tax Committees) and the American College of Tax Counsel. Mr. McCormally holds a J.D. from Georgetown University Law Center, and a B.A. from the University of Iowa. (IRSAC Vice Chair and LB&I Subgroup)

John F. McDermott

Mr. McDermott, J.D., LL.M., is an Attorney/Partner with Taylor, Porter, Brooks & Philips, LLP, in Baton Rouge, LA. He has 35 years' experience in taxation. His primary area of practice is tax planning and advice, including business and individual income tax, payroll tax, franchise tax, excise tax, ad valorem tax, sales and use tax, and gift and estate tax. He has assisted tax-exempt organizations make application for and obtain status under IRC section 501(c). He has represented individuals, business entities, trusts and estates with controversies before the IRS at the examination and appeals levels, in Tax Court and U.S. District Court. He has made applications to the Taxpayer Advocate, assisted clients in collections, and with preparation and presentation of offers in compromise, installment payment arrangements, and with tax liens and levies. He has also represented clients in BLIPS transactions and has applied for and obtained PLR's. In addition to his primary practice of taxation, Mr. McDermott handles succession, probate, and estate administration matters. Mr. McDermott has been a CPA since 1985. He is a member of the Baton Rouge and Louisiana State Bar Associations, National Lawyers Association, Baton Rouge Estate and Business Planning Council, and The Society of Louisiana Certified Public Accountants. Mr. McDermott holds a B.S. in Business Administration and a J.D. from Louisiana State University and an LL.M. from Georgetown University. (SBSE/W&I Subgroup)

Shawn R. O'Brien

Mr. O'Brien has over 18 years' experience in practicing tax law. Mr. O'Brien is a tax partner with Mayer Brown, LLP, in Houston, Texas. His tax practice includes representing clients in all types of tax disputes with taxing authorities on international, federal and state levels. Mr. O'Brien routinely advises clients on various tax issues during tax examinations, in administrative appeals and as an advocate in trial and appellate litigation before the U.S. Tax Court, U.S. District Courts and U.S. Court of Federal Claims. Mr. O'Brien's tax controversy and litigation experience spans a broad range of areas, including transfer pricing controversies, debt v. equity issues, international withholdings, advance pricing agreements, "tax shelter" disallowances, research and development tax credits, excise taxes, and changes in accounting methods. Mr. O'Brien advises foreign and domestic corporations, partnerships, MLPs, and LLCs seeking corporate and tax advice in connection with various types of foreign and domestic transactions, including 1031 exchanges, mergers and acquisitions, restructurings, divestitures, leveraged buyouts, structured financings, and oil and gas transactions. He is a CPA licensed in Louisiana. In addition, he is particularly focused on a variety of tax issues facing the energy industry including tax controversy, joint ventures, restructuring acquisitions and disposition of energy assets. Mr. O'Brien served as Chair of the Energy and Natural Resources Committee of the State Bar of Texas Tax Section from 2011 to 2013, and currently serves the State Bar of Texas Tax Section as Chair of the General Tax Committee. He has written numerous tax articles and regularly presents to tax groups. Mr. O'Brien is a member of the Tax Section of American Bar Association, Houston Bar Association Tax Section, International Tax Roundtable, and Federal Tax Procedure Group. Mr. O'Brien holds a B.B. A. in Accounting from Millsaps College in Jackson, Mississippi, a J.D. from Loyola University School of Law in New Orleans, LA, and an LL.M, Taxation, from New York University School of Law in New York, New York. (LB&I Subgroup)

Walter Pagano

Mr. Pagano, CPA, has worked in the tax field for more than 35 years and is a Tax Partner with EisnerAmper LLP, Accountants and Advisors in New York, NY. Mr. Pagano concentrates his practice in tax controversy examinations and investigations, commercial and civil litigation, accounting investigations, internal investigations, financial statement omissions, misrepresentations and fraud, with an emphasis on civil and criminal tax controversy, white collar defense, corruption, professional conduct and tax standards, accounting errors and irregularities, post-closing adjustments, management and employee fraud, and third party asset misappropriation. Mr. Pagano has successfully negotiated agreed upon civil closings in federal and state civil and criminal tax controversies, assisted attorneys in a wide variety of white-collar financial and accounting investigations, commercial litigation, public corruption, IRS practice and procedure, corrupt practices, GAAP and accounting representations and warranties cases. He has been associated for a number of years with the Forensic & Valuation Services section of the AICPA as well as the Tax Section of the ABA's annual Criminal Tax and Tax Controversy Institute, Georgia Southern University's Fraud and Forensic Accounting Conference and EisnerAmper University's Tax College as a speaker of tax ethics and professional standards governing CPAs. A common denominator shared by these diverse organizations with respect to tax ethics and professional standards is their concern and commitment for each tax professional's obligation to follow the authoritative guidance for practitioners found in Treasury Circular 230, Internal Revenue Code sections 6694, 6713, 7216, and the AICPA's Statements on Standards for Tax Services. Mr. Pagano holds a B.S. (Accounting) from St. Joseph's University in Philadelphia, PA, and a Master of Public Administration (MPA) from New York University in New York, NY. (OPR Subgroup)

Donald H. Read

Mr. Read, J.D., LL.M., is an attorney and is certified as a taxation law specialist by the Board of Legal Specialization of the State Bar of California. He has worked in the tax field for more than 40 years. A former Attorney-Adviser in the Treasury Department's Office of Tax Legislative Counsel, he has been a tax partner in law firms in Honolulu, San Diego and San Francisco. He is currently the owner of the Law Office of Donald H. Read, in Berkeley, CA, and tax counsel to both Lakin-Spears in Palo Alto and Severson & Werson in San Francisco. His recent practice focuses on advising family law attorneys on tax issues related to divorce and the tax problems of same-sex couples. In 2010, he obtained a landmark private letter ruling in which the IRS first recognized community property rights of registered domestic partners. Mr. Read also advises clients on general individual and business tax matters and has obtained private letter rulings for his clients in areas as diverse s partnerships, S corporations, stock redemptions, like-kind exchanges, stock options, deferred compensation and ommunity property income of registered domestic partners. He is a former adjunct professor at the USF School of Law, former chair of the Taxation Committee of Family Law Section of the American Bar Association, and former vice-chair of the Domestic Relations Committee of the ABA's Taxation Section. He is a member of the East Bay Tax Club and QDRONES. A graduate of Deep Springs College (of which he was later a member of the Board of Trustees), Mr. Read holds a B.A. from the University of California at Berkeley; a J.D. cum laude, from Columbia University and an LL.M. (in taxation) from New York University. (OPR Subgroup)

Kevin A. Richards

Mr. Richards, of Springfield, IL, is the manager of the Account Processing Program Area at the Illinois Department of Revenue. Mr. Richards, who is in his 28th year at the department, had previously managed the Electronic Commerce Division for the last 18 years. In April 2016 he was promoted to the Program Administrator position and is now over the Account Processing Program Area for the agency. The Account Processing Administration (APA) consists of two bureaus, the Returns and Deposit Operations Bureau and the Central Processing Bureau. APA is responsible for processing 76 different state and local taxes. APA employs 420 of IDOR's 1,670 total employees with an annual budget of approximately $31.4 million (Fiscal Year 2015). In fiscal year 2016, Account Processing oversaw the processing of more than 20 million returns and payments totaling over $38 billion in deposits. Mr. Richards earned a B.S. in Finance from Eastern Illinois University and an MBA from the University of Illinois-Springfield. Mr. Richards is also the president of the local chapter of the Association of Government Accountants. (SBSE/W&I Subgroup)

Stephanie Salavejus

Ms. Salavejus is vice president with Peninsula Software (PenSoft) in Newport News, VA. She is responsible for software solutions and product requirements for clients. She has 28 years of experience in electronic filing of tax reports and software development. Ms. Salavejus regularly speaks on tax administration topics related to payroll. She is also a member of the American Payroll Association and the National Association of Computerized Tax Processors. (SBSE/W&I Subgroup)

Dr. Dave Thompson, Jr

Dr. Thompson has over 38 years' experience in taxation. He currently serves as the Director/Master of Accounting and Interim Chair of the Accounting and Finance Department for Alabama State University in Montgomery, Alabama. Dr. Thompson has been in the education profession for over 15 years. He teaches the Masters of Accountancy Program where he prepares students for professional careers in public accounting and management and government. This program helps students to achieve professional certifications in accounting, such as Certified Public Accountant (CPA), Certified Internal Auditor (CIA), and Certified Management Accountant (CMA); and to pursue terminal or Ph.D. degrees. He is also serving as an AICPA Academic Champion. Dr. Thompson has had the opportunity to work with such CPA firms as KPMG, Ernst and Young and Arthur Andersen to solve many tax issues facing these corporations, which included mergers and consolidated issues, pensions and compensation, and deferred tax problems. In addition, he worked as a private lawyer in the law firm of Thompson & Searight, P.C., where he worked with small business clients on corporate tax issues. He was also authorized to practice before the tax courts. Prior to owning his own business, he was a corporate vice president, where he helped to develop many strategic management plans which resulted in savings of millions of dollars for the company. Dr. Thompson has helped to coordinate partnership efforts for many colleges as one of the leaders who formed the "Path To Financial Independence" group. This group provided partnerships between over 20 different "Historical Black Colleges" and corporations to bring financial literacy education to thousands all over the United States. In addition, he helped put together partnerships with banks, financial institutions and philanthropic organizations to provide tax services and financial education. For example, one partnership resulted in a $300,000 grant from the Kellogg Foundation to provide financial literacy and tax service to the community. Dr. Thompson holds a B.S. (Accounting) from Birmingham-Southern College, an MBA (MA concentration in Management/Accounting) from Samford University in Birmingham, AL, a J.D. from Birmingham School of Law and a Ph.D., from Jackson State University in Jackson, MS. (LB&I Subgroup)

Dr. Dennis J. Ventry, Jr

Dr. Ventry has worked in the tax field for over 20 years and is a Professor of Law at UC Davis School of Law in Davis, CA. Dr. Ventry's areas of specialization include Standards of Tax Practice, Tax Administration and Compliance, Tax Expenditure Analysis, Tax Policy, Legal & Professional Ethics, Whistleblower Law, Family Taxation, and U.S. Economic, Legal, and Tax History. He has published dozens of articles, contributed chapters to books, authored edited volumes, and is co-author of a federal income tax casebook whose original author was legendary Harvard law professor Stanley Surrey. Dr. Ventry participates in federal and state tax debates over tax reform, administration, and policy through public testimony and amici curiae briefs, face-to-face meetings with tax officials, legislators, and legislative staff, and as a member of tax commissions, workgroups, and committees. In addition, Dr. Ventry serves as an expert consulting/testifying witness in matters involving the standard of care for tax practitioners, and he also teaches CLE/CPE classes on standards of tax practice. Dr. Ventry is a member of the American Bar Association, the Association of American Law Schools, the Law and Society Association, and the National Tax Association. Dr. Ventry holds a J.D. from New York University School of Law, a Ph.D. in History (U.S. Economic & Legal) from the University of California, Santa Barbara, an M.A. in History from the University of California, Santa Barbara, and a B.A. in History with a specialization in Business Administration from the University of California, Los Angeles. (OPR Subgroup)

² IRS Policy Statement 20-1 (6/24/09) (formerly P-1-18).

³ In her 2014 report, the Taxpayer's Advocate identified penalty administration as the eighth most significant problem in the tax system in a chapter of her report entitled "The IRS Does Not Ensure Penalties Promote Voluntary Compliance, as Recommended by Congress and Others." In that document, she cites and summarizes the research and recommendations made by the General Accountability Office, Treasury Inspector General for Tax Administration, AICPA, ABA, and other organizations. Available at https://taxpayeradvocate.irs.gov/Media/Default/Documents/2014-Annual-Report/PENALTY-STUDIES-The-IRS-Does-Not-Ensure-Penalties-Promote-Voluntary-Compliance-as-Recommended-by-Congress-and-Others.pdf.

⁴See Treasury Inspector General for Tax Administration, Improvements Are Needed in Assessing and Enforcing Internal Revenue Code Section 6694 Paid Preparer Penalties, Report No. 2013-30-075 (September 9, 2013); Treasury Inspector General for Tax Administration, Systemic Penalties on Late-Filed Forms Related to Certain Foreign Corporations Were Properly Assessed, but the Abatement Process Needs Improvement, Report No. 2013-30-111 (September 25, 2013); Treasury Inspector General for Tax Administration, The Law Which Penalizes Erroneous Refund and Credit Claims Was Not Properly Implemented, Report No. 2013-40-123 (September 26, 2013).

⁵ IRM 1.1.16.4.5.2.

⁶ H.R. Rep. No. 101-386, 101^st Cong., 1^st Sess. 661 (1989) (Conf. Rep).

⁷ Taxpayer Advocate Service -- 2013, 2014, 2015 Annual Reports to Congress, Pub 2104.

⁸See IRM 4.19.2, Liability Determination, IMF Automated Underreporter (AUR) Control (Aug. 16, 2013).

⁹See National Taxpayer Advocate, 2007 Annual Report to Congress.

¹⁰ Taxpayer Advocate Service -- 2013, 2014, 2015 Annual Reports to Congress.

¹¹ NTA 2013 Annual Report to Congress: "Do Accuracy-Related Penalties Improve Future Reporting Compliance Specific NTA studies include the 2014 Most Serious Problem (MSP) #8 -- PENALTY STUDIES: The IRS Does Not Ensure Penalties Promote Voluntary Compliance, as Recommended by Congress and Others; and 2013 MSP #17 -- ACCURACY-RELATED Penalties: The IRS Assessed Penalties Improperly, Refused to Abate Them, and Still Assesses Penalties Automatically.by Schedule C Filers?"

¹² IRM 20.1, Penalty Handbook.

¹³ TIGTA Report: Automated Underreporter Program Tax Assessments Have Increased Significantly; However, Accuracy-Related Penalties Were Not Always Assessed When Warranted (May 8, 2015) Reference Number: 2015-30-037.

¹⁴ IRS Data Book 2015, Table 14

¹⁵Id at 13.

¹⁶ Penalty relief for the FTF (sections 6651(a)(1), 6698(a)(1), and 6699(a)(1)); FTP (sections 6651(a)(2) and 6651(a)(3)); and FTD (section 6656) penalties.

¹⁷ 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.

¹⁸"Industry, States Take New Steps Together to Fight Identity Theft, Protect Taxpayers," 87 (June 11,2015), available at https://www.irs.gov/uac/newsroom/irs-and-industry-and-states-take-new-steps-together-to-fight-identity-theft-and-protect-taxpayers.

¹⁹ I.R.C. § 6306; see Public Law No. 114-94 (2015).

²⁰ 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.

²¹See http://tax.illinois.gov/AboutIdor/PressReleases/PR-2016-01-04.pdf.

²²See 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.

²³ 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 https://www.irs.gov/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).

²⁴See National Taxpayer Advocate, Annual Report to Congress (2015) Vol 1: page 56

²⁵See https://www.irs.gov/uac/newsroom/future-state-initiative.

²⁶ 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.

²⁷ 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.

²⁸ 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.

²⁹ 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.

³⁰ IRS Media & Publications Distribution, Office of Taxpayer Correspondence informed the IRSAC that taxpayer representatives pursuant to a Power of Attorney (Form 2848) do not normally receive attachments with copies of taxpayer correspondence.

³¹See 5 U.S.C. § 522(e)(3) for Privacy Act Notice requirements.

³² 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."

³³ Estimate provided by IRS Office of Taxpayer Correspondence.

³⁴https://www.irs.gov/taxpayer-bill-of-rights-service

³⁵http://taxpayeradvocate.irs.gov/About-TAS/Taxpayer-Rights?_ga=1.103244992.1768099976.1473106793

³⁶ I.R.C. § 7803(a)(3).

³⁷See 76 Fed. Reg. 32286 (2011). See also 75 Fed. Reg. 60309 (2010) and 75 Fed. Reg. 60316 (2010).

³⁸See IRS Publication 4832, "Return Preparer Review" (December 2009).

³⁹ 742 F.3d 1013 (D.C. Cir. 2014), affg, 920 F. Supp. 2d 108 (D.D.C. 2013).

⁴⁰Id. at 1015.

⁴¹Id. at 1017.

⁴²Id. at 1019.

⁴³See "Background" to Issue One of the OPR Subgroup Report.

⁴⁴See e.g., William Hoffman, "EAs May Hold Keys to Preparer Regulation Post-Loving," 142 Tax Notes809 (2014); William R. Davis, and Jaime Arora, "Legislation Needed to Strengthen Circular 230, Hawkins Says," 145 Tax Notes 492 (2014); Michelle Lyon Drumbl, "When Helpers Hurt: Protecting Taxpayers from Preparers," 145 Tax Notes 1365 (2014); Steve R. Johnson, "How Far Does Circular 230 Exceed Treasury's Statutory Authority?" 146 Tax Notes 221 (2015); Amanda Athanasion, "OPR Suffering from Circular 230 Challenges, Hawkins Says," 146 Tax Notes 596 (2015); Lee Sheppard, "Does the IRS Have the Power to Regulate Preparers?" 147 Tax Notes 1225 (2015); Dennis Drapkin, "Loving and Ridgely: Implications for Practitioners," 148 Tax Notes 319 (2015); Bryan T. Camp, "How the IRS Can Regulate Return Preparers without New Law," 148 Tax Notes 1335 (2015); Nathan Richman, "IRS Officials See Annual Filing Season Program as Steppingstone," 151 Tax Notes 851 (2016); William Hoffman, "IRS Brings ID Theft War to Small Tax Return Preparers," 152 Tax Notes 472 (2016).

⁴⁵See William Hoffman, "Koskinen Urges Senate Finance to Reconsider Preparer Regulation," 143 TaxNotes 171, 171 (2014) (quoting Commissioner Koskinen as reporting that lawyers, CPAs, and Enrolled Agents make up only 40 percent of the paid preparer community, leaving "60 percent [of paid preparers] preparing returns with little or no federal oversight").

⁴⁶See, e.g., IRS, "Examples of Abusive Return Preparer Investigations, Fiscal Year 2016," available at https://www.irs.gov/uac/examples-of-abusive-return-preparer-investigations-fiscal-year-2016 (describing hundreds of investigations and convictions of abusive return preparers, including links to fiscal years 2014 and 2015); IRS Press Release, "Identify Theft an Ongoing Concern on the IRS Annual 'Dirty Dozen' List of Tax Scams to Avoid," IR 2016-16 (February 4, 2016), available at https://www.irs.gov/uac/newsroom/identity-theft-an-ongoing-concern-on-the-irs-annual-dirty-dozen-list-of-tax-scams-to-avoid; IRS, "Choose Your Tax Preparer Wisely," IRS Tax Tip 2016-06 (January 26, 2016, updated February 2016), available at https://www.irs.gov/uac/choose-your-tax-preparer-wisely; IRS, "General IRS Guidance on Choosing a Tax Professional" (updated September 1, 2016), available at https://www.irs.gov/tax-professionals/e-file-providers-partners/choose-a-tax-professional; IRS, "Tax Time Guide: Online Tools Help Taxpayers Choose a Qualified Tax Professional," IR-2016-46 (March 22, 2016), available at https://www.irs.gov/uac/newsroom/tax-time-guide-online-tools-help-taxpayers-choose-a-qualified-tax-professional; IRS, "Understanding Tax Return Preparer Credentials and Qualifications" (updated March 2016), available at https://www.irs.gov/tax-professionals/understanding-tax-return-preparer-credentials-and-qualifications; IRS, "Who Can Represent You Before the IRS?" IRS Special Edition Tax Tip 2016-02 (January 15, 2016, updated February 12, 2016), available at https://www.irs.gov/uac/who-can-represent-you-before-the-irs; IRS, "Directory of Federal Tax Return Preparers with Credentials and Select Qualifications" (updated almost daily), available at http://irs.treasury.gov/rpo/rpo.jsf; USDOJ, Office of Public Affairs, "Justice Department Warns Public to Beware of Fraudulent Tax Return Preparers and Tax Scheme Promoters, Urges Taxpayers to Pay Federal Income Taxes on Time and in Full" (March 31, 2016), available at https://www.justice.gov/opa/pr/justice-department-warns-public-beware-fraudulent-tax-return-preparers-and-tax-scheme; USDOJ, Tax Division, "Tax Division Press Releases," available at https://www.justice.gov/tax/tax-division-press-releases (listing over 3,000 press releases dating to 2009 with the vast majority pertaining to fraudulent tax return preparers); USDOJ, "Program to Shut Down Schemes and Scams," available at https://www.justice.gov/tax/program-shut-down-schemes-and-scams (listing hundreds of injunctions obtained between 2004-16 shutting down fraudulent tax return preparers, with more recent years reflecting a marked increase in the number of injunctions).

⁴⁷See e.g., National Taxpayer Advocate, Return Preparer Fraud, available at http://taxpayeradvocate.irs.gov/get-help/return-preparer-fraud.

⁴⁸Id. at 3.

⁴⁹ In January 2003, the Treasury Department established the Office of Professional Responsibility, before which time (and since 1954) the Director of Practice administered the regulations governing practice before the IRS. See 71 Fed. Reg. 6421, 6422 (2006).

⁵⁰See 31 C.F.R. §§ 10.0-.93 (2014).

⁵¹See e.g., 31 Fed. Reg. 10773, 10774 (1966) (stating in 31 U.S.C. § 10.2(a), "Neither the preparation of a tax return, nor the appearance of an individual as a witness for the taxpayer, nor the furnishing of information at the request of the IRS or any of its officers or employees is considered practice before the IRS").

⁵²See 49 Fed. Reg. 6719, 6722 (1984) (removing the third sentence in 31 U.S.C. § 10.2(a), which previously stated that tax return preparation was not considered practice before the IRS).

⁵³Id. at 6720, 6722-23.

⁵⁴ 51 Fed. Reg. 29113, 29113-14 (1986).

⁵⁵Id. at 29114, 29115.

⁵⁶Id.

⁵⁷See 57 Fed. Reg. 46356 (1992).

⁵⁸See 59 Fed. Reg. 31523 (1994).

⁵⁹Id. at 31523-24, 31527.

⁶⁰Id.

⁶¹See Pub. L. 108-357, 118 Stat. 1418, 1587 (2004).

⁶²See e.g., I.R.C. § 6707A (penalty for failure to disclose reportable transactions); § 6662A (accuracy-related penalty on understatements with respect to reportable transactions); § 6700 (promoter penalty); § 6707 (penalty for failure to furnish information respecting reportable transactions); § 6708 (list maintenance penalty respecting taxpayer-clients invested in reportable transactions); § 6111 (requirement that "material advisors" disclose information respecting reportable transactions); § 6112 (list maintenance requirement for material advisors with respect to potentially abusive tax shelters).

⁶³See 69 Fed. Reg. 75839, 75842-44 (2004); 70 Fed. Reg. 28824 (2005) (revising final regulations basedon public comments received prior to effective date of final regulations issued in December 2004); 72 Fed. Reg. 54540, 54545 (2007) (finalizing regulations respecting the clarified authority and including such authority in section 10.2(a)(4), "Practice Before the Internal Revenue Service").

⁶⁴See Pub. L. 110-343 (Division C), 122 Stat. 3765, 3880 (2008). See also 73 Fed. Reg. 78430 (2008)(issuance of final regulations to reflect the legislative changes to paid preparer penalties).

⁶⁵ 76 Fed. Reg. 32286, 32307-08 (2011).

⁶⁶ Government Accountability Office, "Paid Tax Return Preparers: In a Limited Study, Preparers Made Significant Errors," GAO-14-467T (April 8, 2014) (testimony before the Senate Finance Committee); IRS Tax Return Preparer Review in 2009 and 2010; IRS Publication 4832, "Return Preparer Review" (December 2009). See also IRS, "Return Preparer Review Leads to Recommendations for New Requirements of Paid Tax Return Preparers," FS-2010-1 (January 2010).

⁶⁷See William Hoffman, "Koskinen Urges Senate Finance to Reconsider Preparer Regulation," 143 Tax Notes 171, 171 (2014) (quoting Commissioner Koskinen as saying that lawyers, CPAs, and Enrolled Agents make up only 40 percent of the paid preparer community, leaving "60 percent [of paid preparers] preparing returns with little or no federal oversight").

⁶⁸ Kat Lucero, "IRS Launches Online Directory of Tax Return Preparers," 146 Tax Notes 715, 716 (2016).

⁶⁹See Alexandra Thornton and Rebecca Vallas, "Three Reasons Why We Should Certify All Paid Tax Preparers" (Apr. 20, 2016), available at https://www.americanprogress.org/issues/tax-reform/news/2016/04/20/136022/3-reasons-why-we-should-certify-all-paid-tax-preparers/.

⁷⁰ USDOJ, Office of Public Affairs, "Justice Department Warns Public to Beware of Fraudulent Tax Return Preparers and Tax Scheme Promoters, Urges Taxpayers to Pay Federal Income Taxes on Time and in Full" (March 31, 2016), available at https://www.justice.gov/opa/pr/justice-department-warns-public-beware-fraudulent-tax-return-preparers-and-tax-scheme.

⁷¹See USDOJ, "Program to Shut Down Schemes and Scams," available at https://www.justice.gov/tax/program-shut-down-schemes-and-scams (listing hundreds of injunctions obtained between 2004-16 shutting down fraudulent tax return preparers, with more recent years reflecting an explosion in the number of injunctions). See also USDOJ, Tax Division, "Tax Division Press Releases," available at https://www.justice.gov/tax/tax-division-press-releases (listing over 3,000 press releases dating to 2009 with the vast majority pertaining to fraudulent tax return preparers).

⁷²See note 35.

⁷³ IRS Press Release, "Identify Theft an Ongoing Concern on the IRS Annual 'Dirty Dozen' List of Tax Scams to Avoid," IR 2016-16 (February 4, 2016), available at https://www.irs.gov/uac/newsroom/identity-theft-an-ongoing-concern-on-the-irs-annual-dirty-dozen-list-of-tax-scams-to-avoid.

⁷⁴ See IRS, "Choose Your Tax Preparer Wisely," IRS Tax Tip 2016-06 (January 26, 2016, updated February 2016), available at https://www.irs.gov/uac/choose-your-tax-preparer-wisely; IRS, "General IRS Guidance on Choosing a Tax Professional" (updated September 1, 2016), available at https://www.irs.gov/tax-professionals/e-file-providers-partners/choose-a-tax-professional (includes a tutorial video on "How to Use the Tax Return Preparer Directory"); IRS, "Tax Time Guide: Online Tools Help Taxpayers Choose a Qualified Tax Professional," IR-2016-46 (March 22, 2016), available at https://www.irs.gov/uac/newsroom/tax-time-guide-online-tools-help-taxpayers-choose-a-qualified-tax-professional; IRS, "IRS Urges Taxpayers to Choose a Tax Preparer Wisely for the Filing Season Ahead," FS-2014-11 (December 2014, updated December 2, 2015), available at https://www.irs.gov/uac/newsroom/irs-urges-taxpayers-to-choose-a-tax-preparer-wisely-for-the-filing-season-ahead.

⁷⁵See IRS, "Understanding Tax Return Preparer Credentials and Qualifications" (updated March 2016), available at https://www.irs.gov/tax-professionals/understanding-tax-return-preparer-credentials-and-qualifications; IRS, "Who Can Represent You Before the IRS?" IRS Special Edition Tax Tip 2016-02 (January 15, 2016, updated February 12, 2016), available at https://www.irs.gov/uac/who-can-represent-you-before-the-irs.

⁷⁶ IRS, "Directory of Federal Tax Return Preparers with Credentials and Select Qualifications" (updated almost daily), available at http://irs.treasury.gov/rpo/rpo.jsf.

⁷⁷See IRS, "Make a Complaint About a Tax Return Preparer" (March 8, 2016), available at https://www.irs.gov/tax-professionals/make-a-complaint-about-a-tax-return-preparer.

⁷⁸See IRS, "How Do You Report Suspected Tax Fraud Activity" (January 11, 2016), available at https://www.irs.gov/individuals/how-do-you-report-suspected-tax-fraud-activity.

⁷⁹ IRS, "Examples of Abusive Return Preparer Investigations, Fiscal Year 2016," available at https://www.irs.gov/uac/examples-of-abusive-return-preparer-investigations-fiscal-year-2016 (includes links to fiscal years 2014 and 2015).

⁸⁰See Barry Simms, "Firefighters: Tax Preparer Lied on Forms, Now We Owe," WBAL-TV11 (March 1, 2015), available at http://www.wbaltv.com/news/firefighters-tax-preparer-lied-on-forms-now-we-owe/31474772. See also Barry Simms, "More Taxpayers Claim Tax preparer Filed Bogus Claims," WBAL-TV11 (March 19, 2015), available at http://www.wbaltv.com/money/more-taxpayers-claim-tax-preparer-filed-bogus-claims/31868422 (reporting additional Maryland taxpayers having been defrauded by the same unregistered preparer).

⁸¹ For a tip-of-the-iceberg view of the fraudulent tax preparation epidemic, see IRS, "Examples of Abusive Return Preparer Investigations, Fiscal Year 2016," available at https://www.irs.gov/uac/examples-of-abusive-return-preparer-investigations-fiscal-year-2016 (describing in detail hundreds of cases pertaining to abusive return preparer investigations and convictions from fiscal years 2014, 2015, and 2016).

⁸² 742 F.3d 1013 (D.C. Cir. 2014), affg, 920 F. Supp. 2d 108 (D.D.C. 2013).

⁸³ 55 F. Supp. 3d 89 (D.D.C. 2014).

⁸⁴ 742 F.3d at 1020.

⁸⁵ 55 F. Supp.3d at 96.

⁸⁶See e.g., S. 137, Taxpayer Protection and Preparer Proficiency Act of 2015 (introduced and co-sponsored by Sens. Wyden and Cardin); H.R. 1609, Tax Return Preparer Accountability Act of 2015 (co-sponsored by Cohen, Scott, Norton, Maloney); H.R. 1778, Tax Refund Protection Act of 2015 (introduced by Bonamici); S. 935 (companion bill to H.R. 1778), Tax Refund Protection Act of 2015 (introduced by Booker); H.R. 4141, Tax Return Preparer Competency Act of 2015 (introduced by Black).

⁸⁷ William Hoffman and Jonathan Curry, "Senate Finance Passes ID Theft, Tax Administration Bills," 151 Tax Notes 436 (2015). For the multi-year odyssey undertaken by Wyden and Cardin to enact legislation explicitly authorizing the IRS to regulate tax return preparers, see William Hoffman, "Wyden, Cardin Introduce Bill to Regulate Paid Return Preparers," 146 Tax Notes 345 (2015); Kat Lucero, "Finance Democrats Push Return Preparer Standards," 2016 TNT 767 (2015).

⁸⁸See Hoffman and Curry, supra note 51, at 436 (Chair Orrin Hatch (R-UT) stated after the vote, "While I support minimum standards for paid tax return preparers, I will vote against this amendment today because I want to work with my Republican colleagues to assuage some of their well-founded concerns about the broad scope of authority provided to the Treasury Department in this proposal." Meanwhile, Dan Coats (R-IN) said, "The decision today doesn't take this issue off the table, at least from my perspective. But it's clear to me that adoption of this would undermine our ability to take this all the way through the Senate and move it to statutory approval."). For an explanation of the Wyden Amendment, see "Wyden Amendment to the Second Modification to a Bill to Prevent Identify Theft and Tax Refund Fraud" (co-sponsored by Cardin, Carper, Wyden) Tax Analysts Doc. 2016-8272.

⁸⁹See IRS, IRS Data Book 21 (2015).

⁹⁰See 31 C.F.R. §§ 10.0-.93 (2014).

⁹¹ 742 F.3d 1013 (D.C. Cir. 2014), affg, 920 F. Supp. 2d 108 (D.D.C. 2013).

⁹²See Registered Tax Return Preparer (RTRP) Test Fee Refunds -- Frequently Asked Questions (updated May 11, 2016), available at https://www.irs.gov/tax-professionals/registered-tax-return-preparer-test-refunds.

⁹³See 31 U.S.C. § 330 (c):

⁹⁵ LB&I officials have stated that "tailored treatments" could range from the revision of forms and instructions and the issuance of regulatory or other administrative guidance, to full-bore examinations, litigation, and legislation, if necessary.

⁹⁶ Taxpayers (or issues) may also be selected for examination through other means, such as disclosures on Schedule UTP, Form 8275, or a whistleblower claim under section 7623. In addition, LB&I may select returns for examination based on third-party reporting or other filters.

⁹⁷ OECD's BEPS FAQ 119, available at http://www.oecd.org/ctp/beps-frequentlyaskedquestions.htm#background. The OECD has observed that BEPS is not a problem created by one or more specific companies. "Largely they just take advantage of current rules that are still grounded in a bricks and mortar economic environment rather than today's environment of global players which is characterised by the increasing importance of intangibles and risk management." (FAQ 120.) "Business cannot be faulted for using the rules that governments have put in place. It is therefore governments' responsibility to revise the rules or introduce new rules." (FAQ 123.)

⁹⁸ Not all of the BEPS Action Plans resulted in the adoption of formal recommendations by the OECD.

⁹⁹Available at http://www.oecd.org/ctp/beps-frequentlyaskedquestions.htm#Action13.

¹⁰⁰ The OECD's Model Legislation relating to CbC reporting states (in Article 4) that the following must be included in the CbC report: "(i) Aggregate information relating to the amount of revenue, profit (loss) before income tax, income tax paid, income tax accrued, stated capital, accumulated earnings, number of employees, and tangible assets other than cash or cash equivalents with regard to each jurisdiction in which the MNE Group operates; [and] (ii) An identification of each Constituent Entity of the MNE Group setting out the jurisdiction of tax residence of such Constituent Entity, and where different from such jurisdiction of tax residence, the jurisdiction under the laws of which such Constituent Entity is organised, and the nature of the main business activity or activities of such Constituent Entity." Available at https://www.oecd.org/ctp/transfer-pricing/beps-action-13-country-by-country-reporting-implementation-package.pdf.

¹⁰¹Available at https://www.irs.gov/irb/2016-29_IRB/ar05.html.

¹⁰² More than 80 countries (including the dependent territories to which it has been extended) have signed the OECD Mutual Assistance Convention, and some 61 have proposed to participate in the mutual agreement on automatic exchange of information made pursuant to that convention. In addition, many countries have agreed to exchange tax information pursuant to bilateral treaties patterned on the OECD Model.

¹⁰³ The preamble to the proposed CbC regulations provides:

¹⁰⁵Available at http://www.oecd.org/ctp/exchange-of-tax-information/keeping-it-safe.htm.

¹⁰⁶ The final item on the OECD checklist is a series of questions relating to confidentiality breaches: (a) have any breaches occurred; (b) if so, has the breach been investigated; (c) was a report with recommendations prepared; (d) did the recommendations in the report result in a high degree of confidence that the changes, once implemented, would ensure that a similar breach would not occur; (e) were the recommendations effectively implemented; and (f) were the sanctions provided for in domestic law applied to the person or persons responsible in a manner that will deter future breaches.

¹⁰⁷ The OECD's Global Forum on Transparency and Exchange of Information for Tax Purposes has both adopted a Standard for Automatic Exchange of Financial Account Information and is creating a peer review process to both OECD members and relevant non-member jurisdictions to be evaluated for the effectiveness of the implementation, including the meeting of confidentiality and data safeguard requirements. See http://www.oecd.org/tax/transparency/automaticexchangeofinformation.htm.

¹⁰⁸Available at https://www.oecd.org/ctp/transfer-pricing/beps-action-13-country-by-country-reporting-implementation-package.pdf.

¹⁰⁹Available at https://www.irs.gov/pub/fatca/IntlSafeguardsWorkbook.pdf.

¹¹⁰See https://www.irs.gov/businesses/corporations/reporting-unauthorized-disclosure-or-misuse-of-tax-information-exchanged-under-an-international-agreement. The notice was posted shortly after the issuance of the final CbC regulations.

¹¹¹ Addressing the taxpayer's right to be kept informed would be akin to "victim's rights" provision in section 7431(e), which provides that an aggrieved taxpayer shall be notified if any person is criminally charged with improperly inspecting or disclosing the taxpayer's return.