Part of my job as the National Taxpayer Advocate is to hold the IRS accountable for operating in a manner that is fair, transparent, and efficient while upholding the rights of taxpayers. My 2023 Annual Report to Congress included several recommendations to improve IRS operations and protect taxpayer rights. To its credit, the IRS accepted in full or in part 63 of the 78 recommendations. Unfortunately, the IRS declined some of our recommendations, so we continue to advocate for change.
This year, I’ve decided to highlight what I’m calling the good, the bad, and the concerning from the IRS’s responses to the 78 administrative recommendations TAS made in the 2023 Annual Report to Congress to draw the public’s attention to the 78 recommendations and related IRS responses.
This blog critiques the IRS’s response to two common-sense recommendations: one related to electronically processing paper-filed returns upon rejection and another concerning the requirement for Appeals to share all Appeals Case Memoranda (ACMs) with taxpayers. Both IRS responses fall short of protecting taxpayer rights, and TAS continues to advocate for reconsideration.
Electronically Processing Paper-Filed Returns Upon Rejection
In my 2023 report, I recommended that the IRS electronically process valid returns that taxpayers would otherwise need to paper file upon the IRS’s rejection of the e-filed return. Instead of outright rejection of the electronic return, I recommended that the IRS direct these valid but potentially imperfect e-filed returns to treatment streams for resolution. I made this recommendation because it could reduce the IRS’s significant backlog of paper-filed returns, ease the burden on taxpayers caused by this backlog, and follow the law established in Beard v. Commissioner, 82 T.C. 766 (1984), aff’d, 793 F.2d 139 (6th Cir. 1986) (per curiam).
Although the IRS agreed that it needs to continuously review and evaluate solutions to help taxpayers file valid electronic returns and alleviate processing delays, it declined to accept this recommendation. In doing so, the IRS emphasized its collaboration with the Security Summit, a public-private partnership formed to protect taxpayers and the tax system against identity theft by rejecting fraudulent or duplicate returns.
The IRS’s rejection of this recommendation because of fraud is misguided because it fails to acknowledge the other practical solutions the agency has available to taxpayers to combat fraudulent returns that are less burdensome to taxpayers. Additionally, the IRS’s practice of rejecting valid e-filed returns on the basis stated potentially lacks a defensible legal basis and thus fails to adequately protect taxpayer rights.
Practical Solutions Rejected and Misplaced Priorities
The IRS justifies requiring taxpayers to paper file imperfect e-filed returns by citing to fraud and duplicate returns. However, the IRS cites to no information that would indicate that rejecting a valid e-filed return is a superior way to combat fraud versus, for example, accepting the return, flagging it as potential fraud, and then mailing the taxpayer a letter indicating the follow-up actions they must take to remedy the issue and validate the return. Arguably, the latter method achieves the same result with less burden on both the taxpayer and the IRS because the agency doesn’t add another paper return to the current paper backlog.
While I agree that the government should do everything within its power to prevent fraudulent returns, the IRS’s focus on combatting fraud to the detriment of taxpayer rights and established case law ignores the broader issue of delays caused by the backlog of paper-filed returns. Accepting valid electronic returns even with potential errors for subsequent treatment would significantly reduce the paper backlog.
Lack of Legal Basis
In Beard v. Commissioner, the court outlined a four-part test for a legally processable tax return. In this regard, the IRS’s refusal to accept electronically filed returns that meet the Beard standard for a processable tax return lacks legal foundation. Under Beard, tax returns with errors are still processable. Because filing a tax return is also a significant trigger for determining the application of penalties and the start of assessment and refund statutes, this is an important taxpayer rights issue. Forcing taxpayers to paper file returns that have potential errors is both inefficient and unjust.
The recommendation I outlined in my 2023 report offers a practical solution to a persistent problem. By directing these identified e-filed returns to treatment streams instead of baldly rejecting them, the IRS can resolve issues more efficiently and better protect taxpayer rights without compromising security.
Require Appeals to Share All Appeals Case Memos (ACMs) With Taxpayers
I also recommended revising the Internal Revenue Manual (IRM) to require the IRS Independent Office of Appeals to share all ACMs with taxpayers and establish policies and mandatory procedures to effectively track these efforts. An ACM is a report an Appeals Officer prepares to explain and support the basis for a case’s disposition. Every Appeals case requires an ACM. My recommendation that Appeals share all ACMs with the respective taxpayer aims to improve IRS transparency and build trust in the independence of the Appeals process.
Appeals refused to implement this recommendation, arguing that taxpayers and their representatives should already understand the case resolution from their Appeals conference, therefore eliminating the need to share the ACM. Appeals also cited the procedural burden of coordinating with Area Counsel and the local Disclosure Officer before releasing ACMs to taxpayers. In my 2022 Annual Report to Congress, I made this same recommendation. Appeals refused, arguing that the purpose of the ACM was to educate IRS Compliance, not to share Appeals’ rationale with taxpayers. But is it the Independent Office of Appeals’ mission to educate IRS Compliance?
Appeals’ response is unsatisfactory for several reasons. It further dissolves the perception of Appeals as transparent and independent, flies in the face of best practices, and ignores existing IRM requirements concerning ACMs.
Transparency and Independence
Providing ACMs to taxpayers would greatly enhance transparency and build trust in the independence of the Appeals process. Taxpayers have a fundamental right to fully understand Appeals’ decisions affecting their case. Also, I hold now as I did last year that as an independent office, Appeals’ primary role is to serve taxpayers, not IRS compliance. This confusion is just one more reason why many practitioners and taxpayers perceive Appeals as having a compliance culture that may be independent from the IRS in name, but not in action. In the alternative, Appeals can use the ACM as an internal form to document and support the basis and resolution of the case but not share with the Compliance function. Its current position makes one ask if Appeals is truly independent or is it just another unit within the IRS assisting the Compliance function.
Best Practices
Like the medical profession, which provides detailed written information after patient consultations, the IRS Appeals process should include written documentation for taxpayers in addition to the Appeals conference. This will ensure taxpayers retain the information discussed during the conference for the current year and when appropriate, as a basis for positions taken on future tax returns, as not all taxpayers digest information aurally.
Additionally, ACMs will help taxpayers understand the strengths and weaknesses of their case based on potential litigation risks. This analysis could lead to fewer taxpayer lawsuits because taxpayers will better understand the substance of their issue, resulting in increased future compliance.
Existing Internal Revenue Manual Requirements
But the biggest hole in Appeals’ argument is that the current IRM already requires Appeals to release an ACM to a taxpayer upon an informal request. Specifically, IRM 8.1.1.6.4(2), Requests for Appeals to Produce Records, states that “Appeals case memos may also be requested by taxpayers either informally or pursuant to the Freedom of Information Act (FOIA).” This section clearly allows taxpayers to make an informal request for a copy of their ACM without making a formal FOIA request. The language of the IRM is explicit in its allowance for informal requests, thereby providing a straightforward mechanism for taxpayers to access their ACMs without the bureaucratic hurdles involved with FOIA for the taxpayer and the IRS.
Moreover, the IRM does not make this action optional for Appeals. Instead, the IRM provides specific instructions on how Appeals should proceed if a taxpayer makes an informal request. It directs Appeals to coordinate with Area Counsel and the local Disclosure Officer, ensuring that Appeals handles the request properly. That the IRM outlines the procedural steps Appeals should follow in response to an informal ACM request reflects the intention that Appeals should honor such requests rather than casually dismissing them.
And yet, contrary to these clear instructions, practitioners report to TAS that when they make an informal request for their client’s ACM pursuant to IRM 8.1.1.6.4(2), the typical response is that Appeals doesn’t share ACMs. This response flouts the explicit instructions in the IRM but also undermines the transparency and fairness that Appeals is supposed to uphold. The IRM nowhere states that a blanket refusal is an acceptable response to an informal request for an ACM. In fact, such refusals suggest a broader issue of non-compliance within the Appeals function. If Appeals is refusing to comply with informal requests for an ACM pursuant to IRM 8.1.1.6.4(2), it is both violating its own published processes and disregarding the rights of taxpayers to be fully informed about decisions impacting their cases.
This presents a simple question: If the IRM already allows for a copy of an ACM, why does Appeals continue to dismiss our recommendation to amend the IRM to produce a copy of the ACM for all taxpayers? The current IRM provisions already support the practice of providing ACMs to taxpayers, reflecting an acknowledgment of the importance of transparency and informed decision-making. The current IRM requirement that a taxpayer must make an informal request before receiving a copy of the ACM creates an unjustifiable burden. Therefore, Appeals should immediately implement IRM revisions that further institutionalize ACM transparency and protect taxpayer rights.
Conclusion
This blog highlights two recommendations in which the IRS declined TAS’s suggestions to improve taxpayer service. The IRS should reconsider its stance and adopt the recommendation to electronically process valid returns that otherwise require the taxpayer to paper file the return upon rejection. This change will enhance efficiency, reduce backlogs, and ensure taxpayers receive timely refunds and resolutions to their tax issues, thus protecting taxpayer rights.
Further, Appeals should revise the IRM to mandate sharing ACMs with all taxpayers, ensuring transparency, adherence to best practices, and compliance with existing agency procedures. This change will reinforce taxpayer trust in the independence of the Appeals process and uphold the taxpayer right to be informed.
The refusal to implement these two recommendations reflects a troubling reluctance to embrace common-sense changes that would significantly benefit taxpayers. I urge the IRS to reconsider and work toward a more effective, transparent, and just tax system.
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The views expressed in this blog are solely those of the National Taxpayer Advocate. The National Taxpayer Advocate presents an independent taxpayer perspective that does not necessarily reflect the position of the IRS, the Treasury Department, or the Office of Management and Budget.