The Taxpayer First Act, signed into law on July 1, 2019, restructures the IRS to better meet taxpayers' needs. Two significant changes of the Act become effective Aug. 16, 2019:
- Notice to third parties
- John Doe summonses
Notice to third parties
If a taxpayer is under exam, the Internal Revenue Code allows the IRS to gather information informally. The IRS may simply ask the taxpayer to provide it – orally or in writing. If the taxpayer does not have it, the agency may request it from third parties. Under the new legislation, the IRS must notify a taxpayer under examination of its intent to contact third-party witnesses at least 45 days before contacting the witnesses. The legislation also requires the IRS to contact the third party within one year of notifying the taxpayer. Treasury Regulations define “third-party contact” as a communication that is: (1) initiated by an IRS employee; (2) extended to a person other than the taxpayer, i.e., a third party; (3) made in context of the determination or collection of the taxpayer’s tax liability; (4) discloses the identity of the taxpayer being investigated; and (5) discloses the association of the IRS employee with the IRS.
Previously, the IRS could provide general notice of its ability to contact third-party witnesses, which it did by providing the taxpayer with IRS Publication 1, “Your Rights as a Taxpayer” at the beginning of the examination. However, Congress determined that advance notification provided to a taxpayer under examination should be more precise. Congress realized that when the IRS contacts third parties regarding a taxpayer’s examination, the investigation can negatively impact the taxpayer’s business and damage the taxpayer’s reputation in the community. As a result, Congress believed that the taxpayer should be given the opportunity to address and resolve the Agency’s issues before the IRS contacted third parties.
Although the new changes provide more precise notification to the taxpayer under exam as it relates to third-party contact, the taxpayer should also be mindful of the exceptions. The IRS is not required to notify the taxpayer in advance if: (1) the taxpayer has previously authorized the IRS to contact the third-party witness; (2) the IRS has good cause to believe that notifying the taxpayer will jeopardize the Agency’s ability to collect the taxpayer’s tax liability; (3) the IRS contacts a government agency – unless it involves the taxpayer’s business with the other government agency; (4 ) the IRS is contacting third parties in the course of a pending court proceeding; (5) the IRS has good cause to believe that notifying the taxpayer may disclose the identity of a confidential informant; (6) the IRS has good cause to believe that notifying the taxpayer may involve reprisal against any person; or (7) the examination involves a criminal tax matter.
John Doe summonses
The Taxpayer First Act also addressed concerns about IRS use of John Doe summonses, governed by section 7609(f). The new legislation now requires the IRS to narrowly tailor the summons, and only request information that relates to the person’s or group of persons’ inability to comply with federal tax law. This will align the IRS use of John Doe summonses with the agency’s stated purpose which is to not use the summons as a “fishing expedition.” The new law will also restrict the use of designated summonses, which are issued to corporations pursuant to section 6503(j).
Previously, when issuing a John Doe summons, the IRS could pursue either a specific, unidentified person or a common group of unidentified persons that the Agency suspected of evading taxes. Once the summons is approved by a court, the IRS could obtain the identities of the suspected persons. The change was prompted by a growing concern about the overly broad requests in John Doe summonses.
As with the advance notice requirement, the change surrounding IRS issuance of summonses also takes effect on Aug. 16, 2019.