The Internal Revenue Service Advisory Council (IRSAC) serves as an advisory body to the Commissioner of the Internal Revenue Service (IRS or Service), making recommendations about tax administration and advising about the public’s expectations of the IRS. This year’s Council has 34 members with significant experience in providing tax advice and preparing taxes.
The IRSAC issued its annual Public Report on November 16, 2022. The Report first offers general recommendations about two issues: (1) IRS funding and modernization, and (2) the electronic filing threshold for information return filers. The report “stresses the need for consistent and multi-year funding for the IRS to achieve its goals of providing efficient, effective, modern service to the nation’s taxpayers.” Taxes are the primary source of the federal government’s income; the IRS collected more than $4 trillion in gross taxes in FY 2021. The Report describes taxpayers’ questions about why IRS technology is far behind technology in other aspects of their lives, which is increasingly on-demand and easy to use. The Report advises that IRS funding and modernization may now be more important than ever, since the COVID-19 pandemic has (1) shrunk the Service’s budget while increasing its responsibilities and (2) exacerbated the IRS’s backlog of unprocessed tax returns and unanswered correspondence.
With respect to businesses and employers that are required to file information returns, The Taxpayer First Act (2019) authorized the IRS to reduce the existing 250-form electronic filing threshold to 100 for 2019 and 10 for 2020. However, the IRS did not issue proposed regulations until July of 2021, and proposed to reduce the threshold for 2021 and 2022. These regulations were never finalized, however, so taxpayers remained subject to the 250-form threshold in 2021. The IRSAC recommends that the IRS provide safe harbor relief for 2022 returns for businesses who make a good faith effort to comply with electronic filing requirements. Conversely, the IRSAC advised the IRS to establish an automatic approval process for Form 8508, Request for Waiver from Filing Information Returns Electronically; these forms are currently processed manually.
The IRSAC also notes that Large Business and International (LB&I) taxpayers experience substantial delays in receiving Form 6166, Certification of U.S. Tax Residency, in part because the application process is paper-based. These delays prevent American investors from taking advantage of treaty benefits, while the U.S. Treasury bears the cost of foreign taxes that cannot be recovered. The IRSAC suggests that the IRS adopt electronic application processing.
The Report also recognizes that a corporation may have different tax functions at different locations. However, when a corporate taxpayer files Form 8822-B, Change of Address or Responsible Party – Business, the IRS sends all future communications for all types of taxes to the new address. The IRSAC recommends that the IRS (1) update its systems to accept different addresses for different taxes and (2) redesign Form 8822-B accordingly.
For LB&I taxpayers, the IRSAC also recommends that the IRS develop procedures for domestic corporations that are also partners in multiple partnerships, and that, generally through no fault of their own, fail to receive a significant number of Schedules K-1 to incorporate into timely corporate income tax returns. Currently, these large domestic corporate taxpayers that are also partners have no administrative relief from the receipt of late Schedules K-1 beyond the filing of numerous amended federal income tax returns, which creates a material burden on the taxpayer and the IRS. The IRSAC recommends that the IRS consider allowing good faith estimates with respect to late received Schedules K-1 and subsequent year true-up procedures.
For Small Business and Self-Employed (SB/SE) taxpayers, the IRSAC again focused on how the IRS can benefit from modernization. The Report advises the IRS to enhance the IRS’s Online Account to make it a “one-stop-shop” through which taxpayers can obtain tailored online service, satisfy their obligations, and interface with IRS representatives. IRSAC also suggests that the IRS (1) develop adaptive forms that will indicate to taxpayers in real time if information is missing or if something on the form requires clarification and (2) enable taxpayers to upload documentation (e.g., mileage logs) to their IRS account throughout the year.
The IRSAC also explains that the IRS’s correspondence examination and automated underreporter functions may result in taxpayers receiving a Statutory Notice of Deficiency (SNOD). If a taxpayer petitions the U.S. Tax Court in response, the IRS Office of Chief Counsel may file a responsive pleading and assign the case to the IRS Independent Office of Appeals for potential settlement. Appeals is not normally required to determine the facts of a matter, but when Counsel assigns a case to Appeals, and the taxpayer presents arguments that may not have been heard by IRS compliance functions, Appeals becomes the initial fact-finder. The IRSAC encourages the IRS to (1) more often rescind SNODs when the statute of limitations on assessment is not an issue and (2) alter the process so that Counsel remands docketed cases where fact-finding has not occurred or minimally occurred back to the compliance function instead of to Appeals.
View the full IRSAC Public Report here.