Why muni audit appeals may not be covered by a House IRS reform bill

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WASHINGTON – The House Ways and Means Committee approved bipartisan legislation Wednesday that would make audit appeals by the Internal Revenue Service more transparent for taxpayers and create an Independent Office of Appeals.

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

But unlike the original draft released last month that applied to all taxpayers, the bill approved Wednesday won’t have much effect on municipal bond audits because a key provision applies to entities with gross receipts under $5 million.

The provision also applies to individuals with adjusted gross incomes below $400,000.

Those qualifying entities and individuals would be able to “review the non-privileged portions of materials developed by the IRS for its administrative case file not later than ten days prior to the first conference with [the] independent appeals” officer, according to the congressional Joint Committee on Taxation.

The bill, the Taxpayer First Act (H.R. 5444), was passed by a voice vote and could be voted on by the full House on April 17, the date most individuals' tax returns are due, with several other IRS related bills approved by the committee.

Despite the limitations added to the legislation Wednesday by the committee, the legislation remains “a welcome development” for the muni industry, according to Rich Moore, a partner at Orrick in San Francisco and treasurer of the National Association of Bond Lawyers.

“I am not sure a lot of issuers would qualify for access to the case file under this provision, but I still think the crux of the bill is the establishment of the IRS Independent Office of Appeals,” Moore said. “That should be a positive for the industry.”

Brad Waterman, whose Washington-based legal practice specializes in dispute resolution cases, said that the appeals process already is independent so the impact of the legislation would be to make it statutory.

But Waterman thinks the requirement for sharing case files with the taxpayer “would impose an enormous burden on appeals.”

“Limiting the case file production requirement as envisioned by the markup is a step in the right direction – but not much of a step,” Waterman said.

“I continue to believe based on my experience that this is a solution in search of a problem,” he said. “The key points being that the examination function's report adequately tells the story in nearly all instances and that the FOIA process generally works well in those instances in which the taxpayer needs or wants more information.”

The legislation's sponsors, Reps. Lynn Jenkins, R-Kansas, and John Lewis, D-Ga., incorporated provisions from at 18 different bills that have been introduced in both the House and Senate. Some of the provisions were broken out this week into separate bills once again that were approved by the committee.

There is no Senate version of the bill, nor has Senate Finance Committee Chairman Orrin Hatch, R-Utah, given any indication whether his chamber might have an opportunity to vote on any similar legislation this year.

Hatch, however, said in a press statement, “ensuring the IRS has greater flexibility and bringing it into the 21st Century continues to be a top priority for Congress.”

“The administrative reforms included in the House bills that were introduced this week are a welcome step forward,” Hatch said. “I look forward to examining each measure in more detail and working with my colleagues in Congress to implement these ideas, along with other smart, bipartisan reforms in other areas such as retirement security.”

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Tax audits Munis Tax-exempt bonds Finance, investment and tax-related legislation Tax reform Enforcement IRS Washington DC