How House draft bill would help muni bond Issuers under IRS audit

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WASHINGTON – Appeals of bond audits by the Internal Revenue Service would become more independent and transparent under bipartisan legislation drafted by two House members to reform and modernize IRS operations.

The bill, called the Taxpayer First Act, is only in draft form and does not yet have a bill number. But it could be formally introduced shortly after Congress returns from recess on April 10 and voted on the House floor vote as early as April 17, which is the federal tax filing deadline this year.

The prospect for Senate action is uncertain.

The proposal formally allows all taxpayers to have access to their IRS audit case file prior to dispute resolution hearings, ending the requirement to file a request under the Freedom of Information Act.

That proposed change was welcomed by attorneys who have handled bond audits.

“My experience has been that it is hard to get this sort of information from the IRS, either [the Office of] Appeals or the field, even though this information is legally supposed to be available to the issuer through a freedom of information act request,” said Chas Cardall of Orrick Herrington and Sutcliffe in San Francisco. “They seem to just ignore FOIA requests from issuers under audit.”

“The biggest challenge with bond audits is that because the issuer cannot get to court the IRS does not have to justify its conclusions based on existing legal authorities," Cardell said. "In theory and sometimes in practice they can just say they think the bonds are bad, and in the end there is nothing the issuer can do. The only very limited check that currently exists on that sort of circumstance is an independent office of appeals.”

Rich Moore, also at Orrick in San Francisco and treasurer of the National Association of Bond Lawyers, also views the legislation favorably. NABL doesn’t have an official position on the draft bill.

“More independent review at the office of appeals would be a welcome development for the industry,” Moore said.

Brad Waterman, whose Washington-based legal practice specializes in dispute resolution cases, said, "Appeals is and always has been independent of the IRS examination functions. I assume that the objective merely is to confirm appeals' independence via a statutory mandate. I support that."

That message also was heard by lawmakers on the House Ways and Means Committee, which has held 11 oversight hearings on the IRS since 2015.

“Taxpayers would say they would go in and there would be a case file that both the appeals officer would have and the examination officer would have,” a committee staffer told The Bond Buyer. “But the taxpayer wouldn’t be able to see the file that the IRS individuals were working from.”

The staffer said the bill gives “taxpayers the right to see the file – at least non privileged information – at least 10 days ahead of their scheduled conference.”

Waterman, however, pointed out potential problems with the legislation.

He said that "in nearly all instances" the revenue agent's report to the taxpayer at the end of an examination "adequately tells the story."

"The issue is whether appeals should be required to provide a copy of rest of the non-privileged portion of the case file in every instance," Waterman said. "This would impose an enormous burden on appeals, particularly since appeals – presumably with the assistance of chief counsel – would be required to determine which portions of the case file are privileged and shouldn't be disclosed and to deal with the taxpayer's objections to its conclusion. In short, the malady doesn't justify the proposed cure. "

The draft legislation was proposed on March 26 by Reps. Lynn Jenkins, R-Kansas, and John Lewis, D-Ga., who are the chairwoman and ranking Democrat on the Oversight Subcommittee of the House Ways and Means Committee.

They are seeking public comments filed electronically to through April 6.

Barring any major changes that would need to be made to the draft, the subcommittee or full House and Ways Committee could mark up the bill the legislative week ending April 13.

“This proposed legislation will transform taxpayer interactions with the IRS for the first time since 1998,” the subcommittee announcement said. “Two decades later, it is time to modernize the agency’s information technology, infrastructure, and services. It is time to return the IRS back to its ‘service first’ mission.”

The draft legislation incorporates provisions from at 18 different bills that have been introduced in both the House and Senate, many of them bipartisan.

It directs the IRS to continue participating in the information sharing and analysis center (ISAC) with state and private sector partners to improve cyber-security to prevent identity theft.

The IRS would be required to develop a comprehensive customer service strategy, makes permanent federal grants to nonprofits that operate Volunteer Income Tax Assistance Program clinics for low-income taxpayers and codifies the Free File program.

It also requires the IRS to show probable cause for asset seizures and ends the requirement that taxpayers who are being audited currently must submit documents by mail by ordering the IRS to create an electronic portal for document submissions.

The IRS also would be required to directly accept credit card payments for taxes owed, ending the current practice that uses a third-party for processing.

Democratic lawmakers unsuccessfully sought to end the use of private debt collection agencies by the IRS for delinquencies. The bill instead has a bipartisan measure that exempts households with incomes up to 250% of the poverty threshold from being contacted by debt collectors.

The legislation would be the first major reorganization of the IRS since 1998. But it’s different from the 1998 legislation that restructured the agency by ending geographical districts and replaced them with different divisions based on taxpayer size.

The draft bill “is more a good government approach” to handling taxpayer problems, the staffer said.

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