The House Appropriations Committee (HAC) yesterday released the fiscal 2018 Financial Services and General Government Appropriations bill, which sets forth proposed annual funding for the Treasury Department, the Judiciary, the Small Business Administration, the Securities and Exchange Commission, and other related agencies. The proposal will be considered in the subcommittee today. For text of the bill, see here.

In its press release, the HAC described the bill as one that would “slash the IRS, fund US courts, invest in programs to boost economic opportunity, and scale back harmful regulations.” See here for the press release. The HAC was particularly hard on the Internal Revenue Service (IRS), proposing to cut its budget by $149 million. These cuts come after successive reductions in the IRS’s budget for the last several years. The draft legislation contains several provisions that the HAC believed necessary “to address underperformance and previous poor management and decision-making at the IRS,” including:

  • A prohibition on a proposed regulation related to political activities and the tax-exempt status of IRC section 501(c)(4) organizations. The proposed regulation could jeopardize the tax-exempt status of many nonprofit organizations, and inhibit citizens from exercising their right to freedom of speech;
  • A prohibition on funds for bonuses or to rehire former employees unless employee conduct and tax compliance is given consideration;
  • A prohibition on funds for the IRS to target groups for regulatory scrutiny based on their ideological beliefs;
  • A prohibition on funds for the IRS to target individuals for exercising their First Amendment rights;
  • A prohibition on funds for the production of inappropriate videos and conferences;
  • A new prohibition on funds to implement new IRS guidance on conservation easements;
  • A new prohibition on funds to determine church exemptions, unless the IRS Commissioner has consented and Congress has been notified; and
  • A requirement for extensive reporting on IRS spending and information technology.

Despite reducing the IRS’s overall budget, the draft legislation expressed a desire for funding to improve taxpayer services, including pre-filing assistance and education, filing and account services, and taxpayer advocacy services. For example, the IRS is directed to maintain an employee training program that includes “taxpayers’ rights, dealing courteously with taxpayers, cross-cultural relations, ethics, and the impartial application of tax law.” As we have previously discussed (see here and here), taxpayers’ right is a hot topic in both the US and around the world.

We will continue to monitor this matter and report back on the final budget in the future. Needless to say, reductions in the IRS’s budget will likely continue the trend of decreased enforcement activity and more uncertainty for taxpayers. Additionally, without additional resources and the imminent retirement of a large portion of IRS employees, the IRS will continue to be forced to operate in an environment of substantially decreased resources. On the front lines, we are seeing a substantial reduction in the numbers and breadth of audits of some of the nation’s largest taxpayers. Moreover, with the decrease in IRS personnel, IRS Examinations and Appeals are lasting longer than ever before, and previously beneficial alternative dispute resolution techniques may be losing some of their benefits.

In October 2016, the Internal Revenue Service (IRS) revised the Internal Revenue Manual (Manual) 8.6.1.4.4 to provide IRS Appeals Division (Appeals) with discretion to invite representatives from the IRS Examination Division (Exam) and IRS Office of Chief Counsel (Counsel) to the Appeals conference. Many tax practitioners opposed this change, believing that it undermines the independence of Appeals and may lead to a breakdown in the settlement process.

In May 2017, the American Bar Association (ABA) Section of Taxation submitted comments recommending the reinstatement of the long-standing Manual provision regarding the limited circumstances for attendance by representatives from Exam and Counsel at settlement conferences. Additionally, the Tax Section’s comments were critical of the practice whereby some Appeals Team Case Leaders (ATCLs) in traditional Appeals cases are “strongly encouraging” IRS Exam and the taxpayer to conduct settlement negotiations similar to Rapid Appeals or Fast Track Settlement, such that many taxpayers do not feel they can decline such overtures. The Tax Section comments suggested that the use of Rapid Appeals Process and Fast Track Settlement should be a voluntary decision of both the taxpayer and IRS Exam and the use of these processes should be the exception rather than the rule. Continue Reading Appeals Large Case Pilot Program Draws Criticism