The Taxpayer First Act is comprehensive new legislation designed to improve IRS efficiency and provide more taxpayer protections. It was passed by the US Senate on June 13, 2019, and signed into law by President Trump on July 1, 2019. The new law features several IRS improvements that aim to benefit taxpayers, including modernized IRS technology, enhanced cybersecurity, and new taxpayer identity protections.
Following are a few highlights of the Taxpayer First Act and another recent IRS enhancement, the Large Corporate Compliance Program, which will help the IRS identify complex and large corporations for examination.
Identity Theft Protections
A central component of the Taxpayer First Act is better identity theft protection for taxpayers. The new law requires the IRS take the following measures to increase safeguards against identity theft. In the event of suspected or confirmed unauthorized use of a taxpayer’s identity, the IRS will now:
- Notify the taxpayer
- Provide the taxpayer with information regarding actions taken to protect them from harm
- Establish a single point of contact at the IRS who will track the identity victim’s case to completion
- Provide the taxpayer with instructions regarding how to report unauthorized identity use to law enforcement
- Inform the taxpayer of steps they should take to allow law enforcement to access their personal information during an investigation
If a taxpayer’s tax identity is used without authorization, the IRS must comply with the above criteria and communicate any investigation findings. They must also notify the taxpayer if a referral or action for criminal prosecution is taken against the unauthorized individual.
Under prior law, only victims of tax identity theft received an Identity Protection Personal Identification Number (IP PIN). The IP PIN helps the IRS verify a taxpayer’s identity, and it’s required for electronic or paper tax return filings. However, the Taxpayer First Act requires the IRS to establish a program within five years to make a similar service available to all taxpayers when filing their tax returns.
Stronger Taxpayer Appeal Rights
The Taxpayer First Act provides greater appeal rights to taxpayers by putting the IRS Independent Office of Appeals into law. This resource will be available to all taxpayers who have a legitimate claim, as determined by the administrative review process.
If a taxpayer’s claim to request an appeal is denied, the IRS must provide the taxpayer with written notice that includes the basis for the denial, a description of the facts, and an explanation of how the basis was applied to the facts. They must also provide resources for disputing the denial.
Under prior law, taxpayers were required to file a Freedom of Information Act (FOIA) request to gain access to their case files. The Taxpayer First Act allows taxpayers who are under IRS review to request access to nonprivileged portions of their case without filing the FOIA formal request. The IRS must provide the information no later than 10 days before the scheduled conference date.
This more transparent approach should be a welcome change for taxpayers expecting to appeal an examination result because it allows for easier access to workpapers that support an exam’s position. Taxpayers should generally review these workpapers prior to a conference with IRS appeals.
Corporate Compliance Programs
In May 2019, the IRS announced replacement of its Large Business and International Coordinated Industry Case (CIC) program with a more data-driven Large Corporate Compliance (LCC) program. This shift will drastically affect how the IRS identifies large corporations for examination.
Under the prior CIC program, the IRS used specific criteria to identify large cases for audit on a manual and subjective basis. The LCC program, on the other hand, uses data analytics called pointing criteria, which are data points assigned to various taxpayer characteristics. This system is intended to more objectively select cases for audit and allow for a more streamlined selection process.
The IRS expects that using pointing-criteria data analytics will allow it to select returns that “pose the highest compliance risk,” according to the IRS press release announcing the change.
Some taxpayer characteristics used as pointing criteria include the following:
- Gross assets and gross receipts
- Operating entities
- Total foreign assets
- Total related transactions
- Foreign tax
- Multiple-industry status
Each taxpayer characteristic is assigned a point value. If a taxpayer’s points exceed the threshold amount, the taxpayer qualifies as an LCC case. After the LCC population is determined, the returns that pose the highest compliance risk will likely receive an IRS audit.
The LCC program begins with the 2017 tax year. Prior CIC cases will be completed and closed as CIC cases, and taxpayers that participate in the IRS Compliance Assurance Process (CAP) aren’t included in the LCC program.
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For additional information about IRS changes or how they may affect you or your business, contact your Moss Adams professional.