Congress Plays Small Ball With Tax Filing

President Trump signed the Taxpayer First Act into law (P.L. 116-25) on July 1, 2019. The title is disingenuous since it weakens some taxpayer protections even while strengthening others.

The legislation increases penalties for failure to file a return. It mandates electronic filing for even the smallest charitable organizations, many of which rely on volunteers to prepare tax returns, and 32% of which file on paper. It legislates that instead of music, you will hear "helpful information" on identity theft and tax scams while waiting an average 45 minutes on hold when phoning IRS. It also increase the threat of identity theft by allowing returns to be disclosed to "any contractor or other agent of a Federal, State, or local agency" that meets specific requirements, meaning taxpayer data may pass through a greater number of more vulnerable hands.

There are some new protections. Low-income taxpayers will no longer have to pay a nonrefundable 20% down payment when submitting an offer-in-compromise to resolve tax disputes, and the law would shield such filers from private tax-debt collectors, who often badger taxpayers into signing installment-payment agreements that they cannot fulfill. Property seizures by IRS are slightly restricted. More help will be available for taxpayers whose tax refunds are deposited into someone else's bank account. Innocent spouse protection from joint tax liability is clarified. Volunteer Income Tax Assistance and Low Income Taxpayer Clinics will be better funded.

Yet the new law omits many field-tested, practical reforms in a way that overshadows its improvements. Most important, an ideal "taxpayer first" policy would allow individuals with simple tax situations to elect to have the Internal Revenue Service prepare their returns. California ran a popular pilot project in this vein for several years called ReadyReturn, which sent taxpayers a bill without the need to prepare a return. The program died in part because of lobbying from Intuit, maker of TurboTax. Instead of building on the success of ReadyReturn, the Taxpayer First Act repeals the 1998 statute requiring study of a return-free tax system, a provision the IRS has failed for more than two decades to implement.

The centerpiece of the act is the authorization of a new Independent Office of Appeals within the IRS for taxpayers to dispute tax assessments. But how this will benefit taxpayers is unclear. As a tax practitioner for over 40 years, I have always felt that IRS Appeals was independent-minded and usually gives a fair hearing. Most of these new appeals "conferences" will simply be a short phone call with an appeals officer, sometimes of questionable competence, and then discover that you have no further appeal. For serious claims, filing a petition in Tax Court remains taxpayers' best course of action. Each petition automatically triggers an appeals hearing, followed by district counsel review, followed by a judge. The Tax Court website makes it straightforward to docket a case.

Congress has also failed to resurrect and strengthen the IRS Oversight Board, established under the 1998 IRS Restructuring Act. It was intended as a board of directors to guide the agency. The Treasury Department opposed it and for 20 years, presidents have treated it with disdain, appointing anthropologists, archaeologists, cattle ranchers, and political friends. The board has effectively been defunct since 2014 because it lacks a quorum — neither President Obama nor President Trump nominated members. Even its telephone system has been disconnected.

The IRS's problems are likely to worsen. The agency has endured a hiring freeze for eight years. Out of 80,000 employees, only about 5,000 are under 30, making it a challenge to find the next generation of managers.

Congress has long starved the IRS of funds, though that attitude may be changing. More money is needed to improve the agency in a way that will put taxpayers first.

A version of this article was originally published in The Wall Street Journal on July 2, 2019, p. A13.