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Congress Enacts Significant IRS Reform to Better Protect Taxpayers (summary)

The second time around was the charm for the Taxpayer First Act (TFA), legislation that makes taxpayer-friendly improvements at the IRS. After passing the House for the second time, the Senate signed off on the taxpayer-friendly bill on June 13 with expectations that the president would sign the new legislation into law.

Significantly, the TFA, which had strong bipartisan support, reflects recent calls for greater taxpayer protections. Key changes include establishing an independent office of appeals within the IRS, requiring the agency to modernize its infrastructure and adopting enhanced cybersecurity measures.

“It’s a big first step toward strengthening taxpayer protections and turning the IRS into the customer service organization it ought to be,” said Senate Finance Committee Chairman Chuck Grassley (R-Iowa). “I look forward to President Trump signing it into law so the IRS can begin implementing long overdue reforms that will put taxpayers first.”

Some of the highlights of the far-reaching new legislation are as follows:

  • The IRS will offer an independent appeals process to all taxpayers with a legitimate claim. If a request for review is denied, the IRS must provide written notice of the reason.
  • The IRS is required to submit to Congress plans to redesign the structure of the agency to improve its efficiency and modernize technology systems.
  • An automatic waiver for initial fees applies to certain low-income taxpayers making an offer in compromise (OIC). The waiver is available to taxpayers with an adjusted gross income (AGI) below 250% of the poverty level based on location and size of the family.
  • The TFA directs the IRS to create an online platform to allow taxpayers to prepare and file Forms 1099.
  • Currently, the IRS can seize property for failing to report cash transactions over $10,000. Such seizures are now limited to instances where the property was derived from an illegal source or the transaction was structured to conceal criminal activity.
  • Critics have complained about the IRS using private collection agencies to pressure low-income taxpayers. The new law bans private companies from collecting tax from anyone with an AGI below 200% of the poverty level based on location and size of the family.
  • There are several anti-identity theft measures included in the new law. For example, a single point of contact within the IRS is available for any identity theft victim. Similarly, the IRS must notify a taxpayer if it detects or suspects the unauthorized use of his or her identity.
  • The IRS has used a third-party processor to accept credit or debit card payments for taxes. Now the IRS can accept direct tax payments from taxpayers on these cards.
  • The bill authorizes the IRS to communicate with whistleblowers during the processing of their claims while protecting their privacy. It also extends anti-retaliation provisions available to whistleblowers under other laws to these whistleblowers.

Note that the first House-passed bill included a provision that would have codified the Free File Alliance of tax preparation software companies offering free software to certain taxpayers. But the IRS was accused of using this as an excuse for not developing its own free tax filing software. The provision on the Free File Alliance was eliminated from the version of the law that passed the House the second go-round.

Despite the taxpayer-friendly provisions of the TFA, taxpayers should remain informed about their rights in interacting with the IRS or defending themselves in IRS defense matters.

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