News

Legislation Introduced to Improve IRS Audits and Exams

The Preserving Taxpayers’ Rights Act aims to streamline and improve IRS audit processes and restore a more collaborative approach to resolution of disputes between taxpayers and the agency.

In recent years, many large companies have experienced frustration in dealing with the Internal Revenue Service’s audit practices, as the agency has increasingly invoked litigation tactics that limit the taxpayer’s use of the independent IRS appeals process.  Companies involved in audits have also expressed concern about the IRS practice of outsourcing audits of confidential taxpayer information to private law firms or other contractors.

Those frustrations and concerns may now be addressed by new legislation in the House of Representatives. Introduced by Representative Jason Smith (R-MO) and Representative Terri Sewell (D-AL) on July 13, the Preserving Taxpayers’ Rights Act (H.R. 3220) aims to streamline and improve IRS audit processes and restore a more collaborative approach to resolution of disputes between taxpayers and the agency.

Introduced with bipartisan support — the bill has 3 Republican and 4 Democratic cosponsors — the legislation has four main objectives to improve IRS audit processes. First, it would give taxpayers a legal right to have their case heard by the independent and impartial IRS Office of Appeals to ensure the timely, efficient, and cost-effective resolution of any tax disputes that may arise between a taxpayer and the IRS.

Second, the bill would ensure that cases the IRS “designates for litigation,” which is a procedure that removes a case from the process that otherwise would lead to Appeals, can only be used where the matter involves a tax abuse that is a recurring, significant legal issue affecting a large number of taxpayers.

Third, the bill would further ensure that the extraordinary use of designated summonses that extend the time period for the IRS to assess a tax liability are properly authorized and only used when taxpayers are uncooperative and refuse to provide information requested by the IRS.

And fourth, the bill would prevent the IRS from outsourcing federal tax audits of private taxpayers to outside law firms. The bill thus prevents a recent development, and a practice unprecedented in the history of the IRS, from becoming routine.

The legislation specifically addresses the following litigation tactics the IRS has used to deny or delay taxpayer access to Appeals:

Issuing a statutory notice of deficiency (“90-day letter”) without first issuing a 30-day letter, which provides the taxpayer the opportunity to resolve its case with Appeals before filing a Tax Court petition.

  • The bill provides a statutory right to review by Appeals, in most cases before the issuance of a notice of deficiency.

Designating a case for litigation, thereby precluding access to Appeals or the Competent Authority process, even though other similarly taxpayers are afforded those opportunities.

  • The bill restricts the IRS’s ability to designate cases for litigation to listed tax shelter transactions.

Using a designated summons to request information obtainable through other means, which suspends the statute of limitations and delays access to Appeals.

  • The bill requires written approval by the Commissioner of the Large Business & International Division of the IRS as well as Division Counsel of the Office of Chief Counsel and that such written approval be attached to the summons.
  • The bill requires that the Secretary bear the burden of demonstrating that the taxpayer did not reasonably cooperate with reasonable requests for witnesses, information, documents, meetings, and interviews.

IRS use of a law firm to participate in an audit of a taxpayer.

  • The bill prohibits the taking of testimony and examination of books and witnesses by outside contractors.

While the IRS has become mired in political controversy on Capitol Hill in recent years, with conservative House Republicans even pushing for the impeachment of IRS Commissioner John Koskinen last fall, supporters of the legislation emphasize that their aim is to reinstitute “good government” by restoring an audit process that was generally collaborative between taxpayers and the IRS, reducing costs for the IRS, courts and taxpayers, and reinvigorating the IRS’ mission of helping taxpayers meet their tax responsibilities. The bill would also help the agency to manage better with its limited resources and help taxpayers experience swifter resolution of their concerns, according to supporters.

In addition to bipartisan support on Capitol Hill, the legislation is strongly supported by the business community. The FEI-administered Coalition for Effective and Efficient Tax Administration (CEETA), a group of trade associations and companies working together to effect adoption of more tax administration within the IRS, lauded the introduction of the measure. The bill has also been praised by a number of organizations including the U.S. Chamber of Commerce, National Foreign Trade Council, National Taxpayers Union. CEETA members will work in the coming weeks to educate House members and their staffs on the benefits of the legislation and will work for its introduction in the Senate as well.