Now is the Time for IRS to Enhance Digital Services

Today’s guest post features first time contributor Jessica L. Jeane, who is the VP of Tax Policy & Strategic Partnerships, at Western CPE. In this post, Jessica discusses the state of the IRS’s digital services offerings, a key theme in the recently issued  National Taxpayer Advocate’s Annual Report to Congress. As Jessica discusses, the IRS has made some progress for both taxpayers and tax pros, but there is lots of room for improvement. Les

It likely comes as no surprise to readers that the IRS isn’t winning any awards in the digital services realm. A few old adages come to mind when thinking about the long-awaited improvement needed for the IRS’s digital communications or more formally digital tax administration services. Maybe something along the lines of: there’s no time like the present, seize the day, or even in the words of Elvis Presley, “it’s now or never.”

Okay, the last one is probably a little dramatic, but the overarching point here is that now is the time for the IRS to enhance its digital communications tools for taxpayers and tax professionals. But don’t take my word for it, just ask the National Taxpayer Advocate (NTA) Erin M. Collins.


Seize the Day (Or the Funding)

Indeed, the need for improved digital services in both the areas of customer service and compliance has been a consistent concern of Collins’. And she again reiterates the importance of ramping up these digital communications efforts in the Online Access for Taxpayers and Tax Professionals section of the 2022 NTA Annual Report to Congress released earlier this month.

In fact, of all the steps the IRS could take to improve the taxpayer experience, creating robust online accounts should be the highest priority and will prove the most transformational, according to Collins. “Providing tax information and services accessible through a robust online account and seamlessly integrated digital communication tools are essential for taxpayers, their representatives, and IRS employees,” she wrote.

And why is now the time for the IRS to expand its digital services, you may ask. I’ll give you 5 billion reasons. I won’t, but the IRS’s recent funding boost of nearly $80 billion under the Inflation Reduction Act (IRA) (P.L. 117-169) serves as a good one. Specifically, the IRA provided $4.74 billion to the IRS for business systems modernization.

As Collins noted, most taxpayers have been conducting business with various financial institutions digitally for at least the last two decades, and it’s high time the IRS offers online accounts with comparable functionality. Importantly, doing so would eliminate the need for calling the IRS (good luck there) or mailing paper correspondence (the IRS’s Achilles heel).

In that vein, the IRS has been working on (or working toward working on) expanding its digital services for years, and most recently in accordance with statutory requirements since 2019 pursuant to the Taxpayer First Act (TFA) (P.L. 116-25). Under the TFA, the IRS was required to provide Congress a report on its “comprehensive customer service strategy.” And starting on page 41 of the TFA Report to Congress (2021), the IRS details its goals for expanding digital services. Yet as Caleb Smith noted in his Procedurally Taxing post last year, the report contains a lot of aspirational buzzwords rather than a clear path forward. And what’s more, fast forward over two years later (okay, and a pandemic), the IRS is missing the mark. To the IRS’s credit, however, it has made some meaningful advancements in its digital services lineup over the last few years, but it still has a long way to go. Just take a look at the Treasury Inspector General for Tax Administration’s (TIGTA) audit report released last November detailing its less than stellar review of the IRS’s Taxpayer Digital Communications (TDC) program. In case you haven’t read it, I’ll save you the suspense and tell you that TIGTA weighed and measured the IRS’s implementation of the TDC program and it was found wanting.

Generally, the TDC program is intended to enable taxpayers and practitioners to better communicate and securely share information with the IRS. Best laid plans, am I right? Except in this case, the plans weren’t laid out too well, according to TIGTA’s findings, which note that the IRS failed to proactively identify IRS functions or operations for which digital communication may have provided sizable benefits for both taxpayers and IRS employees. TIGTA’s evaluation further concludes that the IRS’s management of the TDC program was more focused on completing various program installations than actually maximizing the IRS’s ability to communicate digitally with taxpayers.

Tax Pros’ Efforts are Instrumental in Effective Tax Administration

While we often focus on the taxpayer implications of various tax procedure and administration issues, it is important to note the impact on the tax professional, as well as not discount that impact’s effect on the taxpayer. Plainly put, the important role tax professionals play in effective tax administration and compliance while minimizing taxpayer burdens cannot be overstated.

And as our tax pros know better than anyone, and let’s just call a spade a spade, communicating with the IRS ain’t easy. During 2022, the IRS answered only 11 percent of calls – an “all-time low.” And 52 percent of correspondence currently remains unprocessed in the IRS’s backlog of inventory that goes beyond standard processing timeframes.

“Taxpayers or their representatives wanting to interact online need and deserve quality service options and quick responses from the IRS,” Collins wrote in the 2022 NTA Annual Report to Congress. “Today, most taxpayers and tax professionals can’t depend on receiving either, causing dissatisfaction that can lead to distrust in tax administration.”

In a solid effort to increase its digital tax services, the IRS rolled out the Tax Pro Account feature in 2021, which at the time was called a “groundbreaking step” by former Commissioner Chuck Rettig. “This is the first, basic step toward a more fully integrated digital tax system that will benefit taxpayers, tax professionals, and the IRS,” Rettig said.

And while the Tax Pro Account certainly received a warm welcome from practitioners, it hasn’t lived up to industry expectations. In fact, Collins refers to its name as a “misnomer,” because it offers only very basic functions for tax pros, such as digitally signing and transmitting a Form 2848, Power of Attorney and Declaration of Representative.

What it fails to provide, however, is secure messaging and the ability to upload documents. According to Collins, needed upgrades to the Tax Pro Account should include practitioners’ ability to:

  • view all clients’ Online Accounts through their Tax Pro Account portal;
  • view all changes and new information posted in the taxpayer’s account;
  • view all notices and letters mailed to the taxpayer;
  • view the status of pending refunds and requests;
  • view information on digital payment options;
  • upload requested documents relating to notices or correspondence on a tax issue; and
  • send messages to an IRS employee working their client’s case.

“Tax professionals are key to a successful tax administration.  The challenges of the past three filing seasons have pushed tax professionals to their limits, raising client doubts in their abilities and creating a loss of trust in the system – often through no fault of the tax professional.”- Collins

Good News

While the digital services situation remains dreary today, the good news is that the IRS not only states that it is committed to expanding digital services, it now has the funding to do it. “The Inflation Reduction Act affords the IRS the funding and opportunity to implement numerous improvements to the online services offered to taxpayers and tax professionals,” the IRS said in its comments included within Collins’ report.

Additionally, the IRS said it is planning expansion of certain digital services available through the Tax Pro Account and has developed a list of enhanced features based directly on feedback from the tax professional community. We’ll cheers to that. 

The Low-Income Taxpayer and Form 1099-K

Today we welcome first-time guest blogger Nicole Appleberry. Professor Appleberry directs the Tax Clinic at the University of Michigan Law School, and she is also of Counsel with Ferguson, Widmayer & Clark PC. In this post she explains how the Forms 1099-K reporting requirements impact low-income taxpayers, and she brings us up to date on new IRS FAQ. Christine

It is a truth universally acknowledged (by tax professionals), that a taxpayer in possession of any income, from whatever source derived, may be in want of a tax advisor. The money is gross income under IRC 61, and tax may be due if it survives the narrowing of this broad river through a series of exclusions and deductions to the narrower stream of taxable income, and then pools above the levels where income and self-employment tax kick in. Along the way, another truth is self-evident: it is a good idea to keep meticulous records, as one generally has the burden of proof to show why all that income isn’t taxable. This could be because it’s excluded (like gifts and inheritances) or reduced by deductions (such as eligible business expenses that have been documented to the extent required).

The lay taxpayer public, who have generally not fully explored the “Internal Revenue Code and its festooned vines of regulations” (Bayless Manning, Hyperlexis and the Law of Conservation of Ambiguity: Thoughts on Section 385, 36 Tax Law. 9 (1982)), sometimes has its own set of tax “truths.” For example, that income is only taxable (and self-employment tax only applies) if you think you’re running a real business, not just a side hustle. If there’s enough cash for it to feel significant in your life. If the IRS finds out about it.


There is, of course, much overlap between the professional and lay conceptions. Unfortunately, however, it is not perfect. Hence the common scenario faced by Low Income Taxpayer Clinic clients across the nation. They drove for Uber, Lyft, or DoorDash. Or maybe they used eBay to sell household items that would have otherwise been offloaded in a garage sale. In any event, they surely didn’t keep complete records showing mileage, basis, or anything else helpful. And just as surely, they didn’t report any of the income on their Form 1040 and were shocked when the IRS nevertheless found out and proposed a tax deficiency.

In the clinics, our job has generally been to search out ways to substantiate any business expenses and prove them to the IRS through whichever procedure is still available (responding to an audit, filing an appeal with the IRS Independent Office of Appeals, litigating in Tax Court, or down the line, submitting an audit reconsideration or an OIC Doubt as to Liability).

These cases have not, however, overwhelmed our clinics because there has been a limit to when the IRS finds out about certain kinds of income. IRC 6041A requires that any business that pays someone $600 or more for their services must file a reporting form (a 1099-MISC through the 2019 tax year; a 1099-NEC thereafter). This catches some folks, yes. But it’s limited because it doesn’t cover individuals who pay other individuals (such as when you hire your teenage neighbor to mow your lawn), and it doesn’t cover payments for goods (as opposed to services).

So the real juice is in IRC 6050W, which addresses the responsibilities of Payment Settlement Entities (PSEs). These are credit card companies and “third party settlement organizations” (TPSOs), which are the businesses like eBay, PayPal, Etsy, etc., that act as intermediaries, ensuring that providers of goods and services get paid by the unrelated purchasers. (Companies like Zelle, who effectuate electronic payments without a contractual relationship with the payees, are not TPSOs.) These PSEs have been required to issue a 1099-K when the year’s worth of payments to someone aggregated to more than $20,000 and there were more than 200 transactions. So, pretty weak juice, actually. It snares some, but still let many oblivious taxpayers proceed with their side gigs, free from unpleasant tax consequences (unless they lived in one of the 9 or so locations that had already imposed lower limits for state income tax purposes).

This little loophole came to an end with the American Rescue Plan Act of 2021, which changed the reporting limit to situations where the aggregate is more than $600, regardless of the number of transactions, initially effective for the 2022 tax year. It was done with little fanfare, and LITCs have been bracing themselves for the surge of new cases.

There’s a whole host of people who might be surprised. To be sure, the people with still-pretty-small side gigs. The new de minimis limit particularly stings because the IRC 6050W regulations provide that what counts are the original payments. Adjustments for credits, refunds, processing, service, or shipping fees are not taken into consideration. Say someone was paid $610, but fees and refunds take them down to $300, and after cost of goods sold they’ve only netted $100. They are likely to think they didn’t even make enough to owe self-employment tax, but if they don’t proactively report the situation on their 1040, the IRS is going to think that they owe both income and self-employment tax on the transaction (for the former, assuming that they have enough other income to lift them above the standard deduction).

There will also be people caught by the new rule who didn’t think they were operating businesses at all – like the folks replacing their garage sales with Facebook Marketplace, who most certainly don’t have documentation for their basis in the items sold. Or those who had enough friends inadvertently tag the Venmos for their share of meal or gift expenses as “goods and services” instead of “friends and family.”

We also expect to see at least some cases from situations where employers pay independent contractors for services using a TPSO. When both a 1099-NEC and a 1099-K might be appropriate, only the 1099-K should be issued. But small employers accustomed to issuing 1099-NECs may continue to do so, causing the income to be reported to the IRS twice. 

All of this is compounded by what we see in the LITCs: many people don’t get their mail, don’t open scary-seeming mail (and anything from the IRS definitely counts), or ignore any tax forms or notices they don’t understand, hoping that they’re not important.

Fortunately, we have one more year to get the word out and bring our professional and lay truths closer together. On December 23 the IRS issued Notice 2023-10 (blogged by Christine here), announcing that they are delaying the implementation of the reporting requirement until tax year 2023. A week later, they also updated their FAQs in Fact Sheet FS-2022-41.

The new FAQ provide more information about how to report the sale of personal items. The FAQ are quite detailed and will be helpful for those taxpayers who do get their notices, do read them, and are capable of navigating their way to the IRS website. So, all you wonderful tax advisors: time to help get the word out!

IRS Requests Comments on Forms 3520 and 3520-A

We welcome back guest blogger Daniel N. Price. Dan worked in the Office of Chief Counsel of the Internal Revenue Service for almost two decades and is now starting in the private sector in San Antonio, Texas. He recently authored a post on the proposed regulations surrounding the role of Appeals in FOIA disputes. Today, Dan provides some background on the IRS process to fulfill its obligations under the Paperwork Reduction Act and its request for comments last month on Forms 3520 and 3520-A..

On December 16, 2022, the IRS published a request for public comment on Forms 3520 and 3520-A in the Federal Register. The request for public comment is a routine request in the context of periodic OMB approval. Every three years, all forms with OMB numbers must go through the process of OMB review as part of the paperwork reduction act. See That process includes a request for public comment published in the Federal Register.

When I was with the Office of Chief Counsel providing legal support to the IRS units handling the Voluntary Disclosure Practice and the Streamlined Filing Compliance Procedures, I assisted IRS personnel in the process of publishing requests in the Federal Register, analyzing public comments for the IRS, and drafting agency responses to public comments. The process is generally mundane. Inside of the IRS, the process begins with using the last cycle’s approval paperwork as a template. Then, the information on the last cycle’s paperwork might be verified or updated. Sometimes the IRS staff handling requests for public comments do not receive feedback from the business operating unit within the IRS responsible for the forms (at times because designated points of contacts for forms move positions within the IRS or retire). At other times, deadlines necessitate publishing requests for comments using best guesses or the last paperwork from the prior cycle. Over the years, I saw some variance in how these were handled by IRS personnel.

Once public comments are collected, internal discussions within the IRS may occur. In the realm of the voluntary disclosure practice and the Streamlined Filing Compliance Procedures, key players including IRS management and Chief Counsel discussed the public comments. Then, the IRS generally prepares a summary of the public comments and a brief discussion of any changes based on the public comments. The IRS doesn’t make much fanfare of this process, but the IRS’ written discussion of public comments becomes part of the public record available at

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Searching is not intuitive. For example, if you want to pull up the IRS’ official response to public comments on Forms 3520 and 3520-A from the last cycle in 2019, select the “ICR” search option and search for “Form 3520.” Then, sort by date, and poke around for “view supporting statement and other documents” to find the single comment (by a practitioner in the U.K. concerning reducing reporting burdens for taxpayers with foreign pensions) and the IRS’ supporting statement which included agency responses to the public comment.

Although the overall process of soliciting comments for this type of periodic review is rather mundane and mechanical, when meaningful public comments are received, this process helps the IRS improve its forms and update burden estimates. And even if comments are technically beyond the scope of the request for comment, practitioner input may have an impact on the IRS. We have that type of opportunity in the context of the request for public comment pending for Forms 3520 and 3520-A.

One detail in the recent request for public comment on Forms 3520 and 3520-A caught my attention: the estimated number of annual respondents. According to the IRS’ estimate published in the Federal Register, only 1,820 respondents will complete Forms 3520 and 3520-A. But that estimate is grossly understated. Historical data shows 27,431 Forms 3520 were paper filed in 2012. See TIGTA report “A Service-Wide Strategy Is Needed to Increase Business Tax Return Electronic Filing,” September 24, 2014. The ridiculously low estimate appears to be a holdover from the IRS’ prior OMB recertification of these forms. The IRS’ supporting paperwork for the last OMB review contained that exact figure calculated as follows:

Over the last decade, awareness of Forms 3520 and 3520-A has grown exponentially. A decade after the 2012 stats, the actual number of annual filers (respondents) of Form 3520 likely exceeds 50,000, and I would not be surprised by a combined annual filing for Forms 3520 and 3520-A of over 75,000. By materially understating the number of respondents, the IRS is materially understating the overall compliance burden associated with these forms. Also, the IRS welcomes comments on the time estimates per respondent. For these forms the IRS estimates 51 hours and 56 minutes per respondent (which appears to be a weighted average of the two forms)! And the IRS’ burden estimates do not attempt to capture post-filing burdens relating to dealing with IRS penalty assessments post-filing. 

If you have any thoughts on the Forms 3520 and 3520-A, the estimated burdens relating to those forms, and ways to enhance the forms, I urge you to submit comments by February 14, 2023 to

FOIA Appeals and Exception 21

We welcome guest blogger Daniel N. Price. Dan is in the process of opening his own law offices in San Antonio, Texas as he completes a year of pro bono work as in-house counsel with a nonprofit. Before his recent pro bono stint, he served as an attorney for the Office of Chief Counsel of the Internal Revenue Service for over 19 years. Dan’s prior government service included extensive work in the arena of international enforcement and included assisting the IRS in completely revising the Voluntary Disclosure Practice. Dan’s government experience also extended to the OVDPs, the Streamlined Filing Compliance Procedures, foreign bank account reporting, Bank Secrecy Act investigations, various LB&I compliance campaigns, expatriation issues, international collection of taxes, and much more. Today, Dan discusses the role of Appeals in FOIA disputes and exception 21 of the proposed regulations, which he writes provide far too much deference to the Office of Chief Counsel.

On September 13, 2022, the Department of the Treasury and the IRS requested public comments on proposed regulations relating to the Independent Office of Appeals’ resolution of Federal tax controversies. The comment public comment period expired November 14, 2022. Only twelve comments in response to the request for public comments have been posted to I’m surprised by the low number of public comments that are available on Perhaps some practitioners did not upload their comments to and simply mailed comments to the IRS. Uploading comments to certainly makes it easier for the tax press and general public to access and creates a nice public record that the agency cannot ignore.

Tax Notes and other media have extensively written on many of the comments already. Rather than rehash other coverage, this blog briefly discusses comments by the National Federation of Independent Businesses’ (NFIB) about Appeals role in FOIA disputes and an overlooked subset of comments focusing on exception 21 and the role of Rev. Proc. 2016-22.

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NFIB Comments

The NFIB comments focus on the role of Appeals in FOIA disputes. NIFB proposes carving out FOIA disputes from Appeals’ jurisdiction to save resources. I disagree with that suggestion because without having Appeals consider FOIA matters, practitioners will be left in the lurch without FOIA review. Although Appeals perhaps is not the most well equipped body within the IRS to handle FOIA disputes, there is no other competent part of the IRS to handle the work. Appeals certainly can improve in its handling of FOIA disputes because at times Appeals simply rubberstamps IRS FOIA determinations.

For example, in the high profile pending criminal case involving Mark Gyetvay, his attorneys made FOIA requests and appealed the IRS production to Appeals on May 24, 2022. Appeals acknowledged the appeal on June 2, 2022, and on June 14, 2022 Appeals sustained the IRS FOIA production. The FOIA complaint in the matter alleged: “[T]he June 14, 2022 decision of IRS Appeals similarly failed to respond to the requests in any meaningful way, and again failed to describe the nature of the withheld responsive records or identify which FOIA exemptions or exceptions applied to specific documents withheld from Mr. Gyetvay.” ¶ 21.

About the same time as the events outlined in the Gyetvay FOIA case, I experienced similar rubberstamping by Appeals of a FOIA matter. I submitted my FOIA appeal letter to Appeals on May 18, 2022 and quickly received a final determination dated June 8, 2022 rubberstamping the IRS’ FOIA production. After I received the June 8, 2022 letter from Appeals, I called and begged the Appeals Team Manager (ATM) for an opportunity to discuss Appeals’ FOIA determinations. But the ATM refused to even entertain a ten-minute phone call with the Appeals Officer who “handled” the case.

Even though Appeals may at times struggle with conducting meaningful FOIA review, the simple fact remains that no other alternative exists for FOIA review within the IRS. Some may assert that the Office of Government Information Services (OGIS) could fulfill Appeals’ role since OGIS’ “mission also includes resolving FOIA disputes between Federal agencies and requesters.” From my personal experience with OGIS’ in attempting to mediate a FOIA dispute with the IRS, mediation with OGIS is a complete waste of time.

FOIA is an integral part of tax controversy work. If there is no review process for the IRS’ often inadequate and ill-informed FOIA determinations, taxpayers will ultimately be burdened with even more costly district court litigation. From my perspective in the tax controversy trenches relying on FOIA to piece together IRS actions, the NFIB suggestion to eliminate Appeals from FOIA matters doesn’t help taxpayers at all. Appeals, notwithstanding its occasional struggles with FOIA matters, is still best suited to handle FOIA appeals because of Appeals’ independence and structure within the agency.

Exception 21

Exception 21 of the proposed regs provides far too much deference to Chief Counsel in depriving taxpayers of their right to present their tax controversies to Appeals. If Appeals is truly independent and Congress intended for the TFA to expand taxpayer access to Appeals, then proposed exception 21 in the draft regulations must be amended. Specifically, only cases designated for litigation should be included in exception 21.

Exception 21 reads as follows:

Any case or issue designated for litigation, or withheld from Appeals in accordance with guidance regarding designating or withholding a case or issue. For purposes of this section, designation for litigation means that the Federal tax controversy, comprising an issue or issues in a case, will not be resolved without a full concession by the taxpayer or by decision of the court.

At first blush, exception 21 seems narrowly tailored and focuses on cases designated for litigation. Designating a case for litigation is a very formal process that culminates in the Chief Counsel making that decision. See generally CCDM 33.3.6. The formal process has various levels of review and because the process must be approved by the Chief Counsel, that ensures that only the most serious issues are actually designated for litigation. But another clause of exception 21 builds on authorization by lower level Chief Counsel personnel to deprive taxpayers of their statutory right to Appeals.

The following portion of exception 21 must be deleted to protect taxpayer rights: “or withheld from Appeals consideration in a Tax Court case in accordance with guidance regarding designating or withholding a case or issue.” The portion of this phrase – “in accordance with guidance regarding designating or withholding a case or issue” relates to the long-standing deference to Chief Counsel to withhold cases from Appeals consideration based on procedures in Rev. Proc. 2016-22.

Put simply, Rev. Proc. 2016-22 provides too many opportunities for Chief Counsel to withhold cases (or materially delay cases) from Appeals. Rev. Proc. 2016-22 sec. 3.03 provides an exception to Appeals’ consideration for cases not designated for litigation where “Division Counsel or a higher level Counsel official determines that referral is not in the interest of sound tax administration.” This exception too easily allows Division Counsels to withhold access to Appeals. Division Counsels generally defer to the judgment of their lower level attorney managers and the line attorneys making the recommendations.

Further, Rev. Proc. 2016-22 sec. 3.04 grants significant discretion to materially delay providing access to Appeals under the guise of trial preparation or filing dispositive motions (most commonly motions for partial summary judgment). Delay in this context is tantamount to denying access to Appeals. Delaying access to Appeals while Chief Counsel pursues dispositive motions can be used to improperly force taxpayers into settlements based on cost-benefit analysis of the attorney’s fees required for early motions practice. That tactic is inappropriate and degrades taxpayer rights under the TFA.

Chief Counsel has exercised its ability to restrict access to Appeals in cases large and small for decades. Recently in a small dollar pro bono case I handled in Tax Court involving a withheld refundable credit, the Chief Counsel attorney and his manager (an associate area counsel) refused to send the case to Appeals and refused to put their reasons in writing. The Chief Counsel attorney and manager are both in the Boston office. The case did not involve any frivolous legal arguments or otherwise meet any known criteria which would prohibit consideration by Appeals. I cited the TFA and requested a written position from them for their refusal to promptly send the case to Appeals after Chief Counsel filed its answer. But the Chief Counsel attorney and his manager refused to provide any written position. The attorney simply stated orally over the phone that he was planning on filing a dispositive motion and would only send the case to Appeals if he lost the motion. This type of conduct by Chief Counsel in withholding a small, non-frivolous case from Appeals is a type of situation the TFA was passed to stop. And from my nearly two decades as an attorney and manager in Chief Counsel, I observed other times where Chief Counsel attorneys refused to forward cases to Appeals where they saw opportunities to pursue motions for summary judgment (or partial summary judgment) or they justified not sending cases to Appeals on other grounds.

Although Chief Counsel attorneys generally don’t rely on Rev. Proc. 2016-22 sec. 3.04 to withhold Tax Court cases from Appeals based on trial preparation or filing dispositive motions, the fact remains they have discretion to do so under Rev. Proc. 2016-22. The status quo of Rev. Proc. 2016-22 is not sufficient to implement Congress’ desire to expand access to Appeals under the TFA. If the legislative history and purpose of the TFA have any meaning whatsoever, then the discretion provided to Chief Counsel in Rev. Proc. 2016-22 must be curtailed, and exception 21 in the proposed regulations must be redrafted.  Let’s see if Chief Counsel and Treasury listen to the written comments submitted on this point.

The IRS Audits Trump

With the release of the former President’s tax returns due today, Professor Andy Grewal offers his views on the likely reasons behind the IRS’s failure to commence mandatory audits as well as practical ideas for reform. This post originally appeared in the Notice & Comment blog on December 26, 2022. Les

In a widely anticipated move, the House Ways & Means Committee released a report on how the IRS audited Donald Trump’s tax returns. The W&M report along with the related Joint Committee on Taxation report show that Trump had ongoing audits with the IRS before he assumed office. The IRS continued those audits throughout the Trump presidency. However, the IRS did not immediately commence “mandatory” audits for returns that Trump filed after becoming President. 

The W&M report has led to some heated commentary about whether the IRS failed to do its job. With that backdrop, this post will explain the mandatory audit program for Presidents, discuss some reasons that the IRS might have focused on Trump’s ongoing audits, and explore some reforms.


The Mandatory Review Program. The W&M report raises concerns about how the IRS’s audits of Trump relate to the mandatory procedures for Presidential returns. The mandatory procedures contemplate what might be called a “special review” team for those returns. More specifically, the Internal Revenue Manual states that the Small Business Division Examination Director will receive the President’s returns. See IRM (04-23-2014) & IRM (11-17-2020). That director will then transfer the President’s returns to a specific IRS manager in the proper area. That manager will then assign the returns to a field group, and IRS personnel, including potentially IRS specialists, will examine the President’s returns. This examination must happen even if the President’s return does not present red flags.

The W&M and JCT reports do not show that the IRS transferred Trump’s Presidential returns (i.e., the 2016-2019 returns) to the Small Business Division Examination Director or that the IRS otherwise followed the Internal Revenue Manual procedures. Those procedures were mentioned only for the 2016 return. See JCT Report, p.11. For the non-Presidential returns, the IRS continued its audits. They currently remain open.

Reasons for Delay. The IRS has not publicly explained why it maintained a nearly exclusive focus on Trump’s non-Presidential returns. If the IRS offered a public explanation, the agency would likely violate restrictions on the release of confidential tax return information. See 26 U.S.C. §§ 6103(a) & (b)(2). Thus, the IRS probably will not make announcements about its audits of Trump. However, the JCT report states that IRS personnel wanted to “catch up” on Trump’s older returns before turning to the Presidential returns. See JCT Report, p.11. 

In theory, the IRS could have immediately established the special review team described in the Internal Revenue Manual. However, issues related to expertise or efficiency might help explain why the agency did not do so.

Regarding expertise, President’s Trump’s wide holdings would seem best reviewed by the IRS’s Large Business & International division. Presumably, that division has run Trump’s audits for years, rather than the Small Business Division described in the mandatory procedures. See also I.R.M. (09-24-2020) (describing the LBI division’s Global High Wealth group, which “take[s] a unified look at the entire web of business entities controlled by a high wealth individual to assess the risk such arrangements pose to tax compliance and the integrity of our tax system”); JCT report, p. 38 (noting that IRS handling of some Trump audits was consistent with the IRS global high wealth audit program).

Regarding efficiency, it may have been helpful to have continuity in audits between the non-Presidential and the Presidential returns. This would be the case for tax items that relate to multiple returns. For example, to determine whether the “net operating loss carryover” claimed on the 2017 return is valid (JCT Report, p. 13), the IRS would first need to determine whether the source of that deduction, shown on an earlier return, was valid. If the IRS assembled a review team to immediately audit the 2017 return, it is unclear how they could complete their work, unless and until issues on prior years’ returns were resolved.

Whatever the reason for the IRS’s delayed audits, they do not appear to be politically motivated. The delays, after all, were not limited to the Trump Administration. The IRS, under the Biden Administration, did not select Trump’s 2019 return for audit until April 2022. Trump’s 2020 return still has not been selected for audit. 

Luckily, these delays do not seem prejudicial to the government. The IRS apparently secured numerous consents from Trump to extend the government’s statute of limitations on assessment. See W&M Report, p.18. Thus, the Biden Administration can audit all the returns that Trump filed as President. Additionally, the IRS did not close any of the audits that existed when Trump took office. The Biden Administration can continue to audit the non-Presidential returns.

Reform Opportunities. If the IRS and Congress establish new rules on Presidential audits, they should take into account complex returns. An expeditious audit may be possible for only simple returns. If Congress set a short statutory deadline for the IRS to complete Presidential audits, that would create risks related to missed issues. 

On the agency side, the IRS might consider flexibility in the personnel assigned to the audit team for the President’s returns. The Internal Revenue Manual’s assignment to the Small Business Division might make sense in some cases but it apparently does not work universally. Treasury and IRS officials even acknowledged that the agency’s practices differ from those in the Internal Revenue Manual. See W&M Report, p.15. The IRS should update the manual such that it reflects current practices, given the public interest in proper audits of the President. 

The W&M committee recommends that the IRS more broadly staff review teams for Presidential returns.

Specifically, the report announces that review teams “must be comprised of two senior IRS  agents,  a  partnership  specialist,  a  foreign  specialist,  and  a  financial  products  specialist.” W&M Report, p.25. The committee has, perhaps unsurprisingly, gerrymandered its recommendations around Trump. However, any congressional proposal in this area should broadly serve tax policy. Congress, if it addresses the Presidential audit program in a targeted manner, should allow the IRS flexibility when it staffs a review team. A proposal that ensures proper funding for Presidential audits would be stronger than one that tries to identify specific IRS personnel to perform those audits.

Section 7436 Notice Not Jurisdictional Requirement for Employers to Appeal Certain Determinations in Tax Court

We welcome back guest blogger Omeed Firouzi, who works as a staff attorney at the Taxpayer Support Clinic at Philadelphia Legal Assistance. In this post, Omeed discusses a revenue procedure from earlier this year that clarifies the process for employers to appeal IRS worker reclassification.

The Internal Revenue Service issued Rev. Proc. 2022-13, effective on February 7, 2022, regarding how employers can petition the U.S. Tax Court for review of a determination under Section 7436. Under Section 7436, employers who issue 1099-NECs (or 1099-MISCs reporting non-employee compensation) to their workers can petition for review before the Tax Court. Such review would come after the IRS makes a determination that the employer wrongly classified their employees as independent contractors or that the employer is not entitled to Section 530 “safe harbor” relief that would shield the employer from employment tax liability.

These determinations must be determinations employers receive in connection with an examination involving an actual controversy with the IRS. Crucially, an employer cannot directly appeal a Form SS-8 determination that its workers are employees (similarly, individuals also cannot appeal negative SS-8 determinations, an issue former National Taxpayer Advocate Nina Olson flagged in one of her annual reports to Congress).

There would have to be an examination and controversy that is associated with or resultant from the SS-8 determination for an employer to contest an SS-8 determination (even so, it would be a petition to the Tax Court). Technically then, an SS-8 determination that an employer misclassified its workers *could* serve as a “determination” for purposes of Sec. 7436 – but again only if the statutory requirements are met that the determination was in connection with an examination and involved a controversy. Two Tax Court cases, SECC Corp. v. Commissioner, 142 T.C. 225 (2014), and American Airlines, Inc. v. Commissioner, 144 T.C. 24 (2015), established this principle. Therefore, this is a means of appeal of an SS-8 determination for employers for which there is no equivalent for workers.


When the IRS issues a 7436 Notice after an examination, this notice serves as the employer’s equivalent of an individual taxpayer’s Statutory Notice of Deficiency (SNOD). As described by Tax Analysts, a 7436 Notice is issued only if the IRS “has determined that (a) one or more individuals performing services for the taxpayer are subject to reclassification as employees and (b) that the taxpayer is not entitled to relief from employment tax obligations under Section 530” (more on that later). Just like the SNOD for individuals, an employer has 90 days to petition the Tax Court in response to this notice – or 150 days if the employer is outside of the United States. Again, as is the case with individuals, the IRS cannot prematurely assess an employer’s tax liability after the Tax Court petition has been filed while the case is pending.

Importantly for our purposes though, those same aforementioned Tax Court cases – SECC Corp. and American Airlinesbroadened Tax Court jurisdiction to make it such that a Section 7436 Notice is not a *requirement* for an employer to petition the Tax Court. This Rev. Proc. aims to reconcile the discrepancy between this case law, that says a 7436 Notice is not a jurisdictional requirement, and a 2002 Rev. Proc. (Notice 2002-5, now superseded here) that said a 7436 Notice must be issued before taxpayers petition the Tax Court. Here, the Service makes clear in the new Rev. Proc. that the IRS does not need to issue a 7436 Notice to officially render a reviewable determination. Now, in response to a determination of employment tax liability without safe harbor relief – even without a notice and so long as the determination is in connection with an examination that involves a controversy – an employer can petition for review before the Tax Court.

My perspective here is as someone who has represented dozens of workers misclassified by their employers as independent contractors. At first glance, the impact of this Rev. Proc. may be limited. After all, Tax Court precedent already established that a 7436 Notice is not required for an employer to petition the Tax Court. But it could potentially mean, now that the IRS has officially clarified this matter in a Rev. Proc., that employers will feel there is one less administrative burden for them to seek relief from employment tax obligations. At the same time, workers are without much recourse if they get an unfavorable SS-8 determination. Moreover, workers cannot be parties to a 7436 case even though a 7436-related determination can affect a whole class of workers. On the other hand, when a worker files an SS-8, that SS-8 determination only applies to that worker.

It should be noted too that one of the causes of action for an employer to seek 7436 review is if they were denied Section 530 relief. Section 530 of the Internal Revenue Act of 1978 provides a so-called “safe harbor” for employers to avoid paying employment taxes (including the employer share of Social Security and Medicare taxes). They can qualify for safe harbor if they demonstrate reporting and substantive consistency and a reasonable basis for their classification of workers. It is a requirement for the Service to ask about safe harbor in examinations of employers’ classification of workers. Meanwhile, employees remain on the hook for their own uncollected employee share of FICA taxes.

Employers can also avail themselves of the Voluntary Classification Settlement Program to avoid full liability. Per the Taxpayer Inspector General for Tax Administration, there is also a history of employers not abiding by SS-8 determinations at all, waning audit referrals from the SS-8 Unit, and a decline in enforcement actions against employers. It remains to be seen if this trend will continue in the aftermath of the increased IRS enforcement funding in the Inflation Reduction Act (IRA). If the Biden administration’s language on prioritization of closing the tax gap when it comes to high-net-worth individuals and businesses bears fruit, it stands to reason there would be more enforcement here.

This most recent Rev. Proc. is part of a concerning inconsistency between the appeal rights that employers – who contribute to the tax gap here by misclassifying their workers – enjoy and the appeal rights individual working taxpayers enjoy in the realm of worker classification. Consider this same exact issue that this Rev. Proc. deals with and how the analogous situation is for individual taxpayers. It is a jurisdictional requirement for a statutory notice of deficiency to be issued for an individual worker to petition the Tax Court. A petition in a deficiency case that is filed before the Service issues a notice of deficiency does not confer jurisdiction on the Tax Court. So, in summation: if an employer wants to appeal an adverse worker classification determination to the Tax Court, they need not wait for a specific notice to be issued by the Tax Court. But if an employee wants to appeal an IRS determination that they owe taxes, they must wait for a notice before petitioning the Tax Court.

This incongruity between employer and employee appeal rights in worker classification is a problem Nina Olson identified in testimony before the Senate Finance Committee in June 2011. Olson urged Congress at the time to “amend Section 7436 to allow both employers and employees to request classification determinations and seek recourse in the Tax Court.” However, no congressional action has occurred on this front since then. We shall see if that changes now with the publication of this Rev. Proc.

IRS Announces It Will Start Following the Law (With Respect to Identifying Some Listed Transactions)

Today’s guest post is from Jonathan Black, a senior associate in the Washington DC office of Caplin & Drysdale. Jon discusses the IRS’s latest efforts to address conservation easements, a topic that has generated considerable litigation and discussion on the blog. As Jon notes, the implications of the IRS’s actions this week may have significance in areas beyond listed transactions. Les

On December 6, 2022, less than a month after its prognosticated loss in the Tax Court case of Green Valley Investors LLC v. Commissioner, 159 T.C. No. 5 (2022), the IRS released Announcement 2022-28, IRB 2022-52, identifying certain syndicated conservation easement (“SCE”) transactions as listed transactions.  Is anyone having Déjà vu?

If the IRS had just issued an announcement, we would simply be seeing Notice 2017-10 all over again.  That is not the case, however.  Instead of merely issuing an Announcement, IRB Notice, News Release, Post-it note, table-napkin scrawling, or other “sub-regulatory” guidance, the IRS also filed for publication with the Federal Register a Notice of Proposed Rulemaking (“NPRM”) – REG-106134-22, Syndicated Conservation Easement Transactions as Listed Transactions – formally designating SCEs as listed transactions in proposed regulations.  The NPRM announced a 60-day public comment period, to be followed by a public hearing, after which the government promises to issue final regulations in 2023.  Surprisingly, the NPRM was not accompanied by a temporary regulation purporting to have immediate efficacy.  As an early holiday gift to taxpayers and practitioners, the IRS also announced that it would soon be publishing more notices of proposed rulemaking to identify other listed transactions.

In other words, the IRS is actually going to follow the law.


As background, the Administrative Procedure Act (“APA”) generally requires that, for a government agency to issue Rules, the agency must first publish an NPRM in the Federal Register and provide the public an opportunity to comment.  The agency must then consider the public comments and publish a short explanation of whether it agrees with those comments when it publishes the final Rule.  Unless the agency publishes with the Rule a statement of good cause for why the rule must be effective sooner, a Rule that can be enforced against the public (as opposed to one that relieves a restriction or merely states the agency’s position) cannot be effective until at least 30 days after its publication in the Federal Register.  In the case of Treasury Regulations, I.R.C. section 7805 contains additional restrictions on when a regulation may be effective.  The IRS has traditionally relied on section 7805(e) as authority for publishing immediately effective temporary regulations simultaneously with its NPRMs without complying with the APA, and continued to do so even after it lost Chamber of Commerce v. Commissioner, No. 1:16-CV-944-LY, 2017 WL 4682050 (W.D. Tex. Sept. 29, 2017). The IRS is a sizable organization, and it has built up some inertia; it changes its position about as readily as the fabled political uncle at the Thanksgiving table.  Since at least as early as CIC

Services, LLC brought its original suit against the IRS seeking to set aside Notice 2016-66 in December of 2016, the IRS has been on notice that its preferred method of identifying reportable transactions (and, by extension, listed transactions)—publishing IRB Notices—does not comply with the APA.  Yet the IRS resolutely refused to change its procedures, lest tax practitioners take note and treat its “protective” use of Federal Register publication, statements of good cause, and the opportunity for public comment as an admission that it had been doing things wrong all along.

The proverbial chickens have come home to roost.  This year, the IRS lost a slew of APA cases, including CIC Services, LLC v. Commissioner, No. 3:17-cv-110, slip op. (E.D. Tenn. Mar. 21, 2022) (setting aside Notice 2016-66, which identified certain captive insurance arrangements as transactions of interest (a type of reportable transaction)), Mann Construction, Inc. v. United States, 27 F.4th 1138 (6th Cir. 2022) (setting aside Notice 2007-83, which identifies certain employee benefit plans with cash-value life insurance policies as listed transactions); Green Valley Investors, LLC v. Commissioner (setting aside Notice 2017-10, which identified certain SCEs as listed transactions); and GBX Associates, LLC v. United States, No. 1:22-cv-401, slip op. (N.D. Ohio Nov. 14, 2022) (same).  Finally, although the IRS purports to disagree with the holdings in these cases, it is issuing proposed regulations “to eliminate any confusion and ensure consistent enforcement of the tax laws throughout the nation.”

Certainly, taxpayers who have paid penalties for failure to file the myriad reports required for participation in various reportable transactions should consider filing protective claims for refund, because the period of limitations on refund may be running.  But the same reasoning that is causing the courts to reject reportable transactions and their associated penalties may also apply in other situations.  For example, taxpayers who receive gifts from foreign persons or distributions from trusts, and taxpayers treated as the United States owners of foreign trusts, but who were unaware of the existence of Forms 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts, and 3520-A, Annual Information Return of Foreign Trust With a U.S. Owner, may have found themselves subject to astronomical penalties as the IRS has taken a hard line on information reporting penalties in recent years.  As the IRS recognizes that that it is not above the law where reportable transactions are concerned, it may reevaluate the hazards posed by its reliance on Notice 97-34, Information Reporting on Transactions With Foreign Trusts and on Large Foreign Gifts, which has served as its basis for requiring taxpayers to file these forms.

May the magic of the holiday season continue to inspire you and yours (and the IRS) to comply with the law!

The IRS’s Aggressive Enforcement of Foreign Information Return Penalties Has Created Ethical Dilemmas For Practitioners (Part 2)

In today’s post, Megan L. Brackney.turns to the challenging issues that practitioners must confront when faced with a client or potential client’s failure to file foreign information returns. Les

Ethical Standards Related to a Client’s Non-Compliance With Foreign Information Reporting

In yesterday’s post, I discussed some common penalties for failing to file foreign information returns and the practical and legal challenges associated with establishing that a client is entitled to relief from those penalties. Today we focus on how this penalty regime raises difficult ethical issues for practitioners who want to zealously represent their clients but also want to practice in a way that is consistent with their responsibilities and duties.

Circular 230 governs attorneys, CPA’s, enrolled agents, and others who practice before the IRS. On the subject of a taxpayer’s error or omission, Circular 230, Section 10.21 states as follows:

A practitioner who . . . knows that the client has not complied with the revenue laws of the United States or has made an error in or omission from any return . . . must advise the client promptly of the fact of such noncompliance, error, or omission.” 

This section goes on to say that “the practitioner must advise the client of the consequences as provided under the Code and regulations of such noncompliance, error, or omission.”   It does not, however, require the practitioner to advise the client to self-correct. 

The Statements on Standards for Tax Services (“SSTS”),SSTS No. 6 contains a slightly different iteration of the duties concerning knowledge of a client’s error or omission:

A member should inform the taxpayer promptly upon becoming aware of an error in a previously filed return, an error in a return that is the subject of an administrative proceeding, or a taxpayer’s failure to file a required return.  A member also should advise the taxpayer of the potential consequences of the error and recommend the corrective measures to be taken.

In SSTS No. 6(13) (Explanation).  the AICPA explains, however, that the SSTS do not require CPAs to advise clients to amend if “an error has no more than an insignificant effect on the taxpayer’s tax liability,” a question which  “is left to the professional judgment of the member based on all the facts and circumstances known to the member.”

On the taxpayer’s side, it is generally understood that taxpayers do not have an obligation to file amended returns. As stated in Badaracco v. Comm’r, 464 U.S. 386, 393 (1984), “[t]he Internal Revenue Code does not explicitly provide either for a taxpayer’s filing, or for the Commissioner’s acceptance, of an amended return; instead, an amended return is a creature of administrative origin and grace.”)

It is also generally understood that a tax practitioner cannot advise a client not to file a return that is currently due.  There is no guidance on whether the same is true for a delinquent return once the filing deadline has passed.  Do tax practitioners have an unending obligation to recommend that their clients file delinquent returns? 


The IRS’s policy is to solicit unfiled income tax returns for the prior six years. See IRS Policy Statement 5-133, Delinquent returns—enforcement of filing requirements (IRM (08-04-2006) ( “Normally, application of the above criteria will result in enforcement of delinquency procedures for not more than six (6) years. Enforcement beyond such period will not be undertaken without prior managerial approval.”). This indicates that there may be some period of time after which we would not view a practitioner’s advice not to file a tax return as unethical but this is by no means a clear standard (Last season’s Form 1040? Ten years ago?). 

Another aspect of the practitioner’s ethical duties is the prohibition on basing advice on the likelihood of audit.  For purposes of advising a client on a return position, it is clear that the tax practitioner cannot consider the likelihood of audit but must instead determine whether the position is objectively reasonable.I.R.C. § 6694(a)(2); Circular 230 10.34; SSTS No. 1(4), (5).   Circular 230, Section 10.37(a)(2) states that “the Practitioner must not, in evaluating a Federal tax matter, take into account the possibility that a tax return will not be audited or that a matter will not be raised on audit.”See also Regulations Governing Practice Before the Internal Revenue Service, 79 FR 33685-01 (“Treasury and the IRS agree that audit risk should not be considered by practitioners in the course of advising a client on a Federal tax matter, regardless of the form in which the advice is given.” ).

Does this rule apply when advising on whether to correct a past failure to file? 

What Advice Can We Give? 

fter considering the above ethical standards, if we return to the example of the college student, we know it is highly likely that if she files the Form 3520, the IRS will impose the maximum penalty.  If she does not self-correct, given the low audit rates and the fact that her non-compliance was several years ago, there is a very strong chance that the IRS will never audit this tax year.  Are we doing this client a disservice by not providing her with this information when as she decides whether or not to file the Form 3520 now?  Do the ethical standards for tax practitioners actually require me to lead my client into financial ruin in order to correct a five-year old mistake that caused no actual harm? 

It is not clear how the ethical rules apply in this context.  Is a taxpayer who previously filed an income return but failed to file a foreign information return more like a taxpayer filing an amended return or filing a delinquent return?   Certain foreign information returns, like Forms 5471 and 8938, are attached to the income tax return. And, the IRS has instructed that when taxpayers file these returns late, they be accompanied with a Form 1040X, even if there are no changes to the income tax return.   

One could argue that a practitioner does not have an ethical duty to advise clients to file delinquent Forms 5471 and 8938 and other foreign information returns filed with the income tax returns because that would be the equivalent of filing an amended return. 

But what about Form 3520?  As the instructions provide, Form 3520 is not filed with the income tax return, but separately filed with the IRS Service Center in Ogden, Utah. Is filing a Form 3520 more like filing a delinquent income tax return?

I have difficult time believing that there should be different ethical rules for forms attached to the income tax return, such as Form 8938, and a free-standing form like the Form 3520.  That is slicing it a bit too thin.  And many practitioners would say that for a delinquent return, after the filing deadline has passed, the situation is similar to that of an amended return, and they are not obligated to recommend that the client self-correct.  I think that this is a reasonable interpretation of the ethical rules, and that the Circular 230 practitioner is not required to recommend self-correction but should fully advise the client on the potential penalties, and the CPA should recommend self-correction if the failure to file a particular foreign information return is material.

What about the likelihood that a taxpayer will be audited in the future, after the non-compliance has already occurred?  Is it unethical for a practitioner to advise the client in our example ho failed to file the Form 3520 five years ago that there is almost no chance that the IRS will audit this issue?  The statute of limitations for assessment does not close until the taxpayer files all required foreign information returns.  I.R.C. § 6501(c)(8).  The same is true for income tax returns, for which the statute of limitations does not begin to run until the return is filed, but nonetheless the standard advice for long-term non-filers is to just file returns for the preceding six years.              

As to discussing the likelihood of audits, this information is publicly available,and we should be able to discuss it if a client asks.  However, I would still not base my advice on the likelihood of audit, as even with the currently low rates, I cannot accurately predict whether a particular client will be audited.  However, we can advise our clients on the potential outcomes if they are audited so that they can weight the cost of voluntarily compliance versus waiting to be contacted by the IRS. 

I believe practitioners should be able to use their professional judgment to advise clients while still upholding their ethical obligations to the IRS and the tax system.  On the other side, the IRS should re-think its enforcement of these penalties in order to encourage, rather than punish, voluntary compliance, and, as the IRM provides, live up to its own obligations to ensure that penalties “encourage noncompliant taxpayers to comply,” and are “objectively proportioned to the offense.” I genuinely want to encourage tax compliance, but it is challenging when it is so harshly penalized.  The IRS could help tax practitioners, as well as taxpayers, by providing some reasonable options for correcting past failures to file foreign information returns.