How New IRS Reform Affects Taxpayers

Earlier this year, Congress enacted, with substantial bipartisan support, the 100-page Taxpayer First Act of 2019 to modernize and improve the Internal Revenue Service (IRS). The eleven provisions most relevant to churches and their employees are summarized below. Church leaders should make sure their employees are informed of these provisions.

The tax code does not presently require the IRS to make available an internet platform for the preparation or filing of information returns, such as the Form 1099 series. The Act embodies the philosophy that it is desirable to provide a simple and secure manner for small employers to file tax information returns electronically, and that an online platform for submitting information returns to the IRS, similar to SSA Business Services Online, could improve compliance of small employers while reducing their administrative burden.

Accordingly, the Act allows small employers to prepare and file information returns such as IRS Form 1099–MISC online while preparing the payee statements and creating necessary business records. The Act requires the Secretary of the Treasury (or his or her delegate) to make available, by January 1, 2023, an internet website or other electronic medium (the ‘‘website’’), with a user interface and functionality similar to the Business Services Online.

A taxpayer who fails to file a tax return on or before its due date is subject to a penalty equal to 5 percent of the net amount of tax due for each month that the return is not filed, up to a maximum of 25 percent of the net amount. If the failure to file a return is fraudulent, the taxpayer is subject to a penalty equal to 15 percent of the net amount of tax due for each month the return is not filed, up to a maximum of 75 percent of the net amount. The penalty does not apply if it is shown that the failure to file was due to reasonable cause and not willful neglect. If a return is filed more than 60 days after its due date, and unless it is shown that such failure is due to reasonable cause, then the failure-to-file penalty may not be less than the lesser of $205 or 100 percent of the amount required to be shown as tax on the return. These penalties for failing to file tax returns have not been increased in several years. Congress concluded that an increase was in order and would encourage the filing of timely and accurate returns.

The Act provides that if a return is filed more than 60 days after its due date, then the failure-to-file penalty may not be less than the lesser of $330 (adjusted for inflation) or 100 percent of the amount required to be shown as tax on the return.

Under current law, the IRS cannot accept credit and debit card payments for taxes directly due to a restriction on the payment of fees charged by the card issuer. As a result, the IRS must use a third-party processor to accept credit and debit card payments. This Act allows the IRS to directly accept credit and debit card payments for taxes, provided that the fee is paid by the taxpayer. The IRS is directed to seek to minimize these fees when entering into contracts to process credit and debit cards.

The Act codifies the requirement of an independent administrative appeals function at the IRS. The Act seeks to generally ensure that all taxpayers are able to access the administrative review process, allowing for their cases to be heard by an independent decision maker. The Act also ensures that staff working in the Independent Office of Appeals generally do not receive advice from the Office of Chief Counsel employees working on the case prior to its referral for administrative review. Further, the Act provides taxpayers access to “the case against them.” This provision would require the IRS to provide certain individual and business taxpayers with their case files, if requested, prior to the start of any dispute resolution process.

The IRS is required to develop and submit to Congress a comprehensive customer service strategy. The strategy must address how the IRS intends to provide assistance to taxpayers, in part by ensuring adequate customer service training for its own employees and taking into account best practices from the private sector. The strategy must also establish metrics and benchmarks for measuring the IRS’s success in implementing this strategy.

The IRS currently works with electronic tax preparation services to provide free tax preparation software and electronically fillable forms. This program is known as the IRS Free File program. Generally, there is no fee for taxpayers using the Free File program provided they meet certain income thresholds. The Act codifies the existing Free File program and requires the IRS to continue to work with private tax software providers to maintain, improve, and expand the program. The Act also requires Free File program members to continue to provide basic fillable forms to all taxpayers.

The IRS is authorized to enter into an offer-in-compromise (OIC) agreement with a taxpayer to settle a tax debt at a lower amount than what the taxpayer generally owes. Generally, when proposing an OIC to the IRS, the taxpayer must pay an application fee and provide an initial nonrefundable lump sum payment. The IRS has the authority to waive these payments. Typically, the IRS does not require taxpayers certified as low-income (defined as those with incomes below 250 percent of the federal poverty level) to include the application fee and initial payment. The Act codifies the existing low-income exception with respect to any user fee or upfront partial payment imposed with respect to any OIC.

The Bank Secrecy Act (BSA) mandates reporting and record-keeping requirements, including the reporting of currency transactions exceeding $10,000, to assist federal law enforcement and regulatory agencies in the detection, monitoring, and tracing of certain monetary transactions. To circumvent these reporting requirements, individuals may structure cash transactions to fall below the $10,000 reporting threshold (also known as “structuring”). Structuring can be used to conceal illegal cash-generating activities, such as selling of narcotics, or income earned legally in order to evade the payment of taxes. Structuring (or attempts to structure) for the purpose of evading the reporting and record-keeping requirements is subject to both civil and criminal penalties. The Act requires the IRS to show probable cause that funds believed to have been structured to avoid BSA reporting requirements are derived from an illegal source or are connected to another criminal activity. This provision also provides important procedural protections for individuals, including a post-seizure hearing within 30 days of the seizure.

This Act directs the IRS to establish procedures for taxpayers to report instances where they did not receive an anticipated electronic fund transfer or a refund was erroneously delivered to the wrong taxpayer, and also to ensure the IRS will recover the erroneous refunds and deliver them to the correct taxpayer.

Identity theft and refund fraud victims often may be unaware that their identity has been used fraudulently or, when they are aware, may not be fully informed of the outcome of their case. The Act requires the IRS to notify a taxpayer if there has been any suspected unauthorized use of a taxpayer’s identity or that of the taxpayer’s dependents; if an investigation has been initiated and its status; whether the investigation substantiated any unauthorized use of the taxpayer’s identity; and whether any action has been taken (such as a referral for prosecution). Furthermore, when an individual is charged with a crime, the IRS must notify the victim as soon as possible, giving such victims the ability to pursue civil action against the perpetrators.

In 2014, Congress found that the IRS had rehired hundreds of employees who had been involuntarily separated for serious offenses such as fraud, failure to file a return, falsification of documents, and unauthorized access to taxpayer information. The Act prohibits the IRS from rehiring any employee of the IRS who has been involuntarily separated for misconduct.

Richard R. Hammar is senior editor of ChurchLawAndTax.com.