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Recommendations to Congress

The Annual Report to Congress includes recommendations for new federal tax laws or changes to current ones.

The National Taxpayer Advocate (NTA) places a high priority on working with the tax-writing committees in Congress. In addition to submitting legislative proposals in each Annual Report, the NTA meets regularly with members of Congress and their staffs, and testifies at hearings on the problems faced by taxpayers to give Congress an opportunity to receive and consider the taxpayer’s perspective.

Recommendations to Congress


STATUTE OF LIMITATIONS: Repeal or Fix Statute Suspension Under IRC § 7811(d)

When a taxpayer applies for a Taxpayer Assistance Order (TAO), Internal Revenue Code (IRC) § 7811(d) extends the deadline for the IRS to assess or collect tax. Thus, if the IRS significantly harms the taxpayer financially and he or she must ask TAS for assistance, IRC § 7811(d) rewards the IRS and punishes the taxpayer. The law is a trap for the uninformed because it only applies to taxpayers who ask for assistance in writing, not to those who call the toll-free line. The IRS has thus far not implemented § 7811(d) because it is unnecessary and impossible to administer. However, a recent decision will generate litigation about whether IRC § 7811(d) extends a taxpayer’s deadlines, and if so, for how long, bringing the issue to a head. Congress should either repeal or fix IRC § 7811(d).

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MATH ERROR AUTHORITY: Authorize the IRS to Summarily Assess Math and “Correctable” Errors Only in Appropriate Circumstances

The IRS has asked Congress to expand its authority (called “math error” authority) to summarily assess tax without following its normal deficiency procedures. If used to address more complex or unstudied issues, the assessments are more likely to be wrong, and confusing math error notices are likely to become even more difficult to understand. Those who miss the accelerated deadline for responding to math error notices (60, rather than at least 90 days) lose the opportunity to challenge the adjustment in court before paying. An inappropriate expansion of math error authority would allow the IRS to adjust more accurate returns, waste resources, unnecessarily burden taxpayers, and erode taxpayer rights.

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LEVIES ON RETIREMENT ACCOUNTS: Amend IRC § 6334 to Include a Definition of Flagrancy and Require Consideration of Basic Living Expenses at Retirement Before Levying on Retirement Accounts

The IRS guidance explaining the steps required before a retirement account can be levied contains inadequate detail and is insufficient to protect taxpayer rights. For instance, the determination of whether flagrant behavior has occurred is a prerequisite for levying on a retirement account, but there is no on-point definition of what constitutes “flagrant behavior” in the Internal Revenue Code, regulations, or the Internal Revenue Manual. The determination of flagrancy is left to subjective judgment by IRS employees. Furthermore, the IRS is not required to consider the taxpayer’s ability to pay basic living expenses at the time of retirement. Congress should amend the Internal Revenue Code to include a definition of flagrancy and consider basic living expenses at retirement as requirements prior to allowing a levy on retirement accounts.

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CHAPTER 3 AND CHAPTER 4 CREDITS AND REFUNDS: Protect Taxpayer Rights by Aligning the Rules Governing Credits and Refunds for Domestic and International Withholding

Based on unsubstantiated concerns regarding fraud, the IRS has frozen all refunds of amounts withheld in the international context (Internal Revenue Code Chapters 3 and 4) for up to one year while each claim is investigated. Further, the IRS has proposed regulations generally allowing Chapter 3 and 4 credits and refunds of withheld amounts only to the extent that taxpayers’ withholding agents properly remit all deposits for all taxpayers. This shift from a compliance-based to an enforcement-based model of taxation is unjustified and ill-advised. Congress should consider aligning the international withholding regime with the more reasonable rules surrounding refunds of domestic withholding.

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FOREIGN ACCOUNT REPORTING: Eliminate Duplicative Reporting of Certain Foreign Financial Assets and Adopt a Same-Country Exception for Reporting Financial Assets Held in the Country in Which a U.S. Taxpayer Is a Bona Fide Resident

Many U.S taxpayers abroad have incurred increased compliance burdens and costs as a result of Foreign Account Tax Compliance Act (FATCA) reporting obligations that significantly overlap with the Foreign Bank Account Report (FBAR) filing requirements. For several years, the National Taxpayer Advocate and other stakeholders have expressed concerns about the overlap which increases confusion and adds to the compliance burden for taxpayers. While having statutory authority to issue guidance for the purpose of eliminating duplicative reporting, the IRS repeatedly declined to adopt the National Taxpayer Advocate’s recommendations to forego duplicative reporting, and to allow a same-country exception for reporting financial accounts held in the country in which a U.S. taxpayer is a bona fide resident. Congress should amend the Internal Revenue Code to specifically eliminate duplicative reporting of assets, and to adopt a same-country exception for U.S. taxpayers who are bona fide residents.

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Indian Tribal Governments (ITGs) are treated as States for certain federal tax purposes but not for Social Security taxes. This inconsistency creates compliance burdens for ITGs and their employees. In particular, ITGs may not be able to recruit and retain tribal police officers by offering participation in favorable State pension plans. This places an economic burden on ITGs and frustrates congressional intent to deal with crime on tribal lands. Congress should amend IRC § 7871(a) to include IRC § 3121(b)(7)(F) in the list of IRC sections for which ITGs are treated as a “State.”


TAXPAYER RIGHTS: Toll the Time Period for Financially Disabled Taxpayers to Request Return of Levy Proceeds to Better Protect Their Right to a Fair and Just Tax System

The IRS can return to a taxpayer or an individual wrongfully or erroneously levied property. A request for return of levied money must be made within nine months from the date of levy. If an individual or taxpayer files a request after the nine-month period has expired, such a claim cannot be considered. There is no provision that tolls this nine-month time period when an individual has a physical or mental impairment that prevents them from filing a request. The absence of suspension of the nine-month time period when a taxpayer is financially disabled fails to protect taxpayer rights.


THE FRIVOLOUS RETURN PENALTY: Protect Good Faith Taxpayers by Expanding the Availability of Penalty Reductions, Establishing Specific Penalty Abatement Procedures, and Providing Appeal Rights

The Internal Revenue Code (IRC) § 6702 penalty was intended to address frivolous returns and was not aimed at taxpayers acting erroneously and in good faith. However, the IRS is now applying the penalty so broadly as to encompass unintentional tax reporting errors and occasionally to undermine Constitutional protections. Moreover, the IRS has needlessly narrowed or eliminated opportunities for reduction, abatement, or appeal of the penalty. As a result, TAS recommends that Congress consider lengthening the time allowed for correction of these returns, expanding opportunities for reduction and abatement of the penalty, and guaranteeing appeal rights with respect to the frivolous return penalty.


AFFORDABLE CARE ACT INFORMATION REPORTING: Allow Taxpayer Identification Number Matching for Filers of Information Returns Under IRC §§ 6055 and 6056

The IRS relies on information reports to verify data relevant to a number of provisions in the Affordable Care Act. The IRS expects to receive over 120 million information returns from health insurance providers and applicable large employers during the 2016 filing season. The law does not permit the providers and employers to verify Taxpayer Identification Numbers (TINs) with the IRS prior to filing. If the information provided is inaccurate, it will inhibit the IRS’s ability to accurately implement the ACA. An expansion of the TIN matching program to filers of Forms 1095-B and 1095-C will reduce errors in information reported.

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EXEMPT ORGANIZATIONS (EOs): Require More Frequent Updates to Publicly Available Databases of EOs

The IRS maintains a list of tax exempt organizations on two online databases. However, it does not update them in a timely manner, so organizations that had their status automatically revoked and then reinstated may not appear on these online lists, causing them to potentially lose out on donations or grants. Congress should amend Internal Revenue Code (IRC) § 6033 to require the IRS to update its online databases on a weekly basis and implement an emergency process that allows for manual database updates within 24 hours of the restoration of exempt status. Until appropriate programming changes can be made, Congress should direct the IRS to do manual database updates.

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BASIS REPORTING: Reduce Taxpayer Burden and Improve Tax Compliance by Requiring Partnerships and S Corporations to Report Each Partner’s or Shareholder’s Adjusted Basis Annually on Schedules K-1

Pass-through entities are becoming the preferred way to structure businesses. These entities are required to send their partners and shareholders a Schedule K-1 annually, but the Schedule K-1 does not list “adjusted basis.” Taxpayers often lack the specialized knowledge needed to accurately calculate basis, which results in errors and can lead to an overstatement of basis and underpayment of tax, or an understatement of basis and overpayment of tax. Due to the complexity of these basis computations and the inconsistent reporting of adjusted basis, Congress should require annual adjusted basis reporting on Schedule K-1s issued to each partner or shareholder.

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HARDSHIP WITHDRAWALS: Provide a Uniform Definition of a Hardship Withdrawal From Tax-Advantaged Retirement Arrangements

The Internal Revenue Code (IRC) contains a myriad of tax-advantaged arrangements to encourage taxpayers to save for retirement. However, there is no uniform definition of “hardship” among the various tax-advantaged retirement arrangements that would enable a participant to easily determine when an early withdrawal is allowable. Further, even if one does allow for hardship withdrawals, participants must deal with inconsistent rules for triggering the ten percent additional tax imposed by IRC § 72(t). By establishing uniform rules, Congress will reduce complexity and eliminate meaningless distinctions between the types of tax-advantaged retirement arrangements that may be offered by employers.

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WHISTLEBLOWER PROGRAM: Enact Anti-Retaliation Legislation to Protect Tax Whistleblowers

The Internal Revenue Code (IRC), like the False Claims Act, permits awards to those who report wrongdoing. However, unlike the False Claims Act and whistleblower statutes that apply in other areas of the law, the IRC does not protect tax whistleblowers from retaliation. This lack of protection could impede employees, who may have unique skills and insights, from reporting underpayments to the government. It may also impede whistleblowers who do come forward from pursuing administrative and judicial review of the IRS’s award determination. Congress should add a new provision to the IRC modeled on the anti-retaliation provisions of the False Claims Act.

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WHISTLEBLOWER PROGRAM: Make Unauthorized Disclosures of Return Information by Whistleblowers Subject to the Penalties of IRC §§ 7431, 7213, and 7213A, Substantially Increase the Amount of Such Penalties, and Make Whistleblowers Subject to the Safeguarding Requirement of IRC § 6103(p)

Whistleblowers may legitimately acquire return information from the IRS pursuant to an exception to the nondisclosure rules of Internal Revenue Code (IRC) § 6103, yet IRC § 6103 does not generally restrict disclosures by whistleblowers. Congress should amend IRC §§ 7431, 7213, and 7213A to provide that any whistleblower who receives a taxpayer’s return or return information pursuant to an exception under section 6103 is subject to the civil and criminal penalty provisions of sections 7431, 7213, and 7213A for the unauthorized inspection or disclosure of that information. Congress should increase the amount of statutory damages and fines under these provisions.

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WHISTLEBLOWER PROGRAM: Amend IRC §§ 7623 and 6103 to Provide Consistent Treatment of Recovered Foreign Account Tax Compliance Act (FATCA) and Report of Foreign Bank and Financial Accounts (FBAR) Penalties for Whistleblower Award Purposes

In making awards to whistleblowers under IRC § 7623, recovered Foreign Account Tax Compliance Act (FATCA) penalties are taken into account, but recovered Report of Foreign Bank and Financial Accounts (FBAR) penalties are not.

Congress should amend IRC § 7623 to provide that the terms “proceeds of amounts collected” and “collected proceeds” include penalties for failing to file an FBAR. Information the IRS receives as part of its FBAR investigation should be designated as IRC § 6103 return or return information and whistleblowers should be subject to existing penalties for the unauthorized use or re-disclosure of such information.

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