The IRS Taxpayer Advocate Service (TAS) is the IRS’s internal watchdog organization that serves as a voice for taxpayers and works to ensure that taxpayers know and understand their rights and that taxpayers’ interests are protected. The Taxpayer Advocate Service recently released their annual congressional report with recommendations and findings on how the IRS can operate more efficiently and fairly for taxpayers. There is one section in particular that calls attention to critical issues. One issue that they named as one of the “most serious problems” in the report was the IRS’s Third-Party Contact Procedures, which the Taxpayer Advocate believes have significant flaws.
It’s a complex issue, but basically, the Taxpayer Advocate claims that the IRS is using an inefficient, possibly illegal procedure for contacting third parties to get information about taxpayers. While this taxpayer information is often necessary for the IRS to evaluate tax returns and complete audits and other procedures, the Taxpayer Advocate Service says that the current system is potentially harmful to the reputations of taxpayers. As the report states, “The IRS does not empower taxpayers to provide information that would make third-party contacts (TPC) unnecessary. A TAS review found the IRS did not even ask taxpayers for the information before making the TPC in 22.8 percent of field exam cases and in 11.1 percent of field collection cases. Nor does it periodically inform them about the TPCs it made, as required by law, so that they can mitigate damage to their reputations.”
Under the IRS’s current procedures, if your business is subject to an IRS field examination, investigation or collection action, the IRS might contact third parties to get information about your business or personal taxpayer activities – verifying vendor payments, confirming account statuses, etc. – without notifying you about the contacts as required by law. The IRS also might disclose certain information from your tax return in order to conduct their official duties – for example, they might need to tell your business’ customers, employees or partners that you are under investigation by the IRS.
This creates a problem for business owners, because if your vendors or clients start getting contacted by the IRS, it might hurt your reputation or make it look like your business is suspected of wrongdoing. If customers hear that your business is being “investigated” by the IRS, even if it’s a relatively innocent and easily corrected situation, they might decide to stop doing business with you, for fear that your company is cheating on your taxes or has unpaid back taxes or other tax problems.
Instead of contacting third parties without notice and without recourse, the Taxpayer Advocate Service suggests that the IRS should adopt the following reforms:
“The IRS should generally include with a TPC notice a request for information that would make the TPC unnecessary, copy the taxpayer on most requests for information it sends to third parties, provide taxpayers with periodic post-TPC reports as required by law, and strengthen internal controls.”
Dealing with the IRS can be complex and time-consuming, and is rarely a “fun” part of the day for any business owner. But it’s good to know that the Taxpayer Advocate Service is there to provide oversight and advance the interests of everyday taxpayers. If you feel that your business (or personal) reputation has been affected by unfair or reputation-damaging practices from the IRS, please contact the Taxpayer Advocate Service organization.