IRS Revamp Must Navigate Sparse 2018 Calendar

A bipartisan bill to restructure the agency has a chance to make it to the president’s desk, but there will be pitfalls.

March 27, 2018, 8 p.m.

Just months after overhauling the tax code, House lawmakers have released a draft bill to reorganize the Internal Revenue Service. And while some Democrats are backing the new legislation, its path through Congress will still be challenging, analysts say.

The House Ways and Means Oversight Subcommittee released the biggest IRS-restructuring bill in two decades on Monday, a sweeping measure designed to reform customer service, efficiency, and information technology at the agency. And what’s more, Subcommittee Chairwoman Lynn Jenkins has bipartisan support for the legislation. Ranking member John Lewis has signed on, calling it a “serious, thoughtful bill that puts the taxpayer first” in a joint statement with Jenkins.

But whether the bill makes it out of Congress is contingent on a few things, analysts say: whether it can avoid being attached to more controversial provisions, and whether Senate Democrats are on board with the restructuring legislation.

“There are very few legislative vehicles leaving the station in the remainder of 2018, and a bipartisan restructuring bill no doubt faces some challenges,” said Jon Traub, a managing principal at Deloitte and a former staff member on the Ways and Means Committee. “But the fact that it has sign-off of [Ways and Means Chairman] Kevin Brady and Lynn Jenkins and John Lewis no doubt suggests it might have a bright future in the House.”

The tight vote math in the Senate is always a question, despite the largely noncontroversial provisions in the draft bill. Senate Democrats have yet to weigh in on the House version, and the Senate Finance Committee hasn’t announced its own IRS-restructuring legislation.

“This is clearly a priority for the committee, and ultimately for the House, but I think the issue will be whether the Senate will be on board with moving forward,” said Dave Camp, a former Ways and Means chairman and currently a senior policy adviser at the Washington National Tax Services division of PwC.

Camp added that it’s so far unclear whether the measure could move as a stand-alone piece of legislation, but attaching it to must-pass legislation—of which few examples remain this year—may create more problems.

And Brady has another item on his agenda: “phase two” of the tax-code overhaul passed last year. Brady said on CNBC last week that he wants to make permanent many of the individual breaks in the new tax law that are set to expire in 2025, along with adding more provisions for savings and retirement.

Attaching those two bills together is unlikely, as it could make both more difficult to pass, especially in the Senate.

Congressional Republicans passed last year’s tax bill using a parliamentary maneuver called budget reconciliation, enabling them to move the legislation with a simple majority in the Senate. But Senate rules require reconciliation bills to have budgetary impacts, and an IRS reorganization may not meet those requirements, meaning those provisions would require 60 votes to pass.

Traub said Congress likely couldn’t move a “phase two” of the tax overhaul without using reconciliation, which would require lawmakers to also pass a fiscal 2019 budget resolution, setting out the rules for the reconciliation process.

“And I have not heard anybody credibly say there is a path or a plan to do an FY 19 budget resolution this year,” Traub said.

It’s been 20 years since Congress took on a major revamp of its tax-collection agency. The 1998 IRS Restructuring and Reform Act turned the agency into what it is today. The bill organized the IRS into its current four operating divisions, among other major changes. And an overhaul of the agency just after a major rewrite of the tax code isn’t without precedent, either. Congress restructured the IRS shortly after passing the major tax-code rewrite in 1986, as well.

The draft legislation contains a number of changes that tax writers on both sides of the aisle have championed for years, including information-technology improvements, tweaks to the way the agency seizes money based on certain suspicious banking transactions, and changes to the way taxpayers appeal tax liability, among other provisions.

“It’s really allowing for the flexibility for the IRS to create a comprehensive strategy for modernization efforts: customer service, information technology, and improved structure. And they are giving flexibility to the IRS to do that,” said Rose Sereti, managing director of the Washington National Tax and Tax Controversy Services groups at Deloitte.

In a summary provided by the Ways and Means Committee, the draft would codify the position of the IRS chief information officer and mandate that the agency develop and implement a strategic information-technology plan, as well as develop secure online accounts for taxpayers and tax preparers by 2023.

The bill would codify the agency’s appeals process, guaranteeing most taxpayers have access to an independent administrative-review process and a hearing over their tax dispute.

The draft also seeks to change the way the IRS enforces rules on structuring, the process of intentionally making bank deposits below $10,000 to avoid the threshold at which banks must report a transaction to authorities. If the IRS finds that a taxpayer makes such deposits, it can seize the funds in the account.

The rule is meant to prevent money laundering and tax evasion, but an April 2017 Treasury Inspector General for Tax Administration report found that in 91 percent of investigations into structuring, the businesses or individuals obtained the money legally. Small businesses have complained that their frequent cash deposits are being caught up in structuring investigations.

The draft bill would require the IRS to provide probable cause indicating that funds were connected to illegal activity before seizure.

While tax writers made a small change to the way the IRS uses private-debt collection agencies, the measure does keep the program, an issue that Lewis mentioned in his joint statement and one that may pose a roadblock for progressive Senate Democrats.

The controversial private debt-collection program restarted in April 2017, but a January report from National Taxpayer Advocate Nina Olson found that the program has so far lost $13 million after it was projected to raise $187 million. Both Brady and Jenkins have said they would review the debt program’s implementation.

The draft bill would, however, address one of Olson’s key criticisms—that the program hit the poorest taxpayers hardest. The report said some 44 percent of debtors referred to the collections agencies had incomes below 250 percent of the federal poverty line. The draft bill would exempt those taxpayers from referral to private debt collectors.

But these changes would require both time and money, which the agency has in short supply as it works to implement the sweeping new tax overhaul. In the most recent omnibus spending bill, Congress appropriated $320 million to the perpetually cash-strapped IRS for implementation of last year’s tax bill. If Jenkins and others manage to get the new IRS bill through Capitol Hill, the agency could again call for more implementation funds.

“It requires additional funding,” Sereti said. “It’s going to be difficult to accomplish given the limited resources, and there’s already a number of people who have been pulled off to deal with the recent new tax law.”

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