The WasteWatcher: The Staff Blog of Citizens Against Government Waste

A Pathway to Change at the IRS

The WasteWatcher is the staff blog of Citizens Against Government Waste (CAGW) and the Council for Citizens Against Government Waste (CCAGW). For questions, contact

Because of the delicate, private, and proprietary nature of information provided by individuals and businesses to the Internal Revenue Service (IRS) on tax returns, audits are an inherently governmental function that should be conducted solely by government employees.  This confidential process should not be handed over to outside individuals or organizations.  However, that is exactly the situation that Microsoft Corporation found itself in May 2014, when the IRS decided to hire an outside litigation firm to conduct an audit of the company’s international division, and then proscriptively issued regulations allowing the agency to take such action. 

On May 13, 2015, Senate Finance Committee Chairman Orrin Hatch (R-Utah) wrote to  the IRS demanding to know how the IRS derived the authority to hire outside counsel to audit a taxpayer on the IRS’s behalf.  The IRS’s action was challenged because it “1) appears to violate federal law and the express will of the Congress; 2) removes taxpayer protections by allowing the performance of inherently governmental functions by private contractors; and 3) calls into question the IRS’s use of its limited resources.”

In a September 24, 2015 column in The Hill, CAGW President Tom Schatz cited the waste of taxpayer dollars that could have been used for improving taxpayer services at the IRS instead of hiring an outside contractor to perform an obviously governmental activity.  On April 13, 2016, the Council for Citizens Against Government Waste (CCAGW) led a coalition of 13 organizations in signing a letter to provide the Senate Finance Committee several recommendations for reform at the IRS.  On April 20, 2016, CCAGW co-signed a letter with the National Taxpayers Union (NTU), which provided additional guidance to the Senate Finance Committee for IRS and taxpayer protection reforms. 

The CCAGW–NTU recommendations included:  avoid implementing taxation schemes such as the Marketplace Fairness Act, or adding unnecessary or heavy-handed regulations on tax preparers, and avoid “return-free” schemes that would allow the IRS to complete a taxpayer’s return and send a bill for what the IRS deems would be owed.  CCAGW and NTU encouraged the committee to support a number of reforms that would protect taxpayers from identity theft by requiring the IRS to develop guidelines for assisting identity theft and refund fraud victims; creating a safe harbor for de minimis errors on information returns, payee statements, and withholding; create an internet platform for 1099 filings by 2020; and, require the Government Accountability Office to study the language in applicable ID theft notices to citizens to address the current shortcomings in IRS notifications to taxpayers.  The two organizations also recommended that the IRS tighten its information technology controls through improved software asset management.

On July 12, 2016, Senator Hatch introduced S. 3156, the Taxpayer Bill of Rights Act of 2016.  This legislation addresses many contentious issues.  It would hold the agency accountable for inexplicable extended auditing times, require the IRS to provide assistance for filing returns to low-income taxpayers, create a single point of contact for identity theft victims, and protect taxpayers from telephone scams.  In addition, the legislation would provide whistleblower protections, prohibit the IRS from rehiring former employees who were involuntarily separated for misconduct, and remove or transfer senior IRS executives who fail in their performance or who engage in serious misconduct.  H.R. 3156 would also limit the participation of third-party contractors for sworn testimony taken pursuant to a summons from the IRS, similar to what occurred in the Microsoft case.  The bill also prohibits the IRS to use its funding for political targeting, and requires notification to exempt organizations prior to revoking their exempt status for failing to file information returns.

This legislation is a very good first step toward protecting taxpayers against the growing bureaucratic morass at the IRS.  Taxpayers, regardless of type or size, should have certain rights when undergoing an IRS audit including the right to appeal a decision, the ability to obtain certain tax status without undue delays, and the knowledge that IRS employees cannot abuse their position.  It is encouraging that Congress is taking IRS taxpayer protection reform seriously, and working to mitigate the frustrating and oftentimes fearful nature of an IRS audit. 


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