IRS taxpayer advocate: Congress is biggest problem

Congress creates the most serious problem facing taxpayers with frequent tax code changes made late in the year, said Nina Olson, the Internal Revenue Service’s national taxpayer advocate, in her annual report released today.

Last-minute revisions cause IRS to delay processing tax returns and divert thinly stretched resources to accommodate systems re-programming, she said.

IRS recently said that more than 13 million taxpayers may have to wait to file their returns until Feb. 11 so IRS can implement changes Congress enacted last month. The tax season typically starts in mid-January.

The additional work to provide updates for tax assistance online, in person and via phone, requires IRS to pull personnel off other priority projects to perform these tasks twice – once under the law as it existed for most of the year and a second time to incorporate late changes.

Last month, Congress provided an alternative minimum tax “patch” of credits and exemptions to protect about 20 million additional taxpayers from the AMT. In 2006, Congress extended several popular tax deductions, which could not be included in the Form 1040 individual tax packages when they were sent out in November. Software companies finalized their tax preparation products at about the same time. More than a million taxpayers may not have claimed tax deductions to which they were entitled for 2006 simply because they did not know about them.

“When taxpayers do not claim tax benefits because they do not know about them," she said, "Congress’ intent in providing the tax benefits is undermined, and taxpayers understandably question the fairness of the tax system.”

When the filing season is delayed, it imposes a hardship on many taxpayers, who must wait for anticipated refunds.

“For some taxpayers, a delay of two to four weeks in receiving their refund could mean eviction, inability to pay the high heating bills that arise during winter, or defaulting on credit card bills from the holiday season,” Olson said.

The Treasury Department and tax-writing congressional committees should create a process through which IRS identifies and estimates the filing-season impact of significant tax legislation and transmits that information to the committees at several points during the year, perhaps on June 30, Sept. 30 and monthly thereafter, Olson said.

When it comes to identity theft, IRS is supposed to determine as soon as possible the true owner of the Social Security number and restore the integrity of the affected taxpayer’s account. Although the agency has taken steps to improve some of these processes, it often exacerbates the difficulties these taxpayers experience by using procedures and systems that ignore common-sense evidence as to whom the number belongs; assigns temporary IRS numbers in lieu of the compromised numbers for victims to use to file tax returns, then denies their tax benefits because they did not use numbers; and provides inadequate authentication processes for the electronic filing system.

Identity theft victims with federal tax problems may have to interact with IRS’ accounts management, criminal investigation and examination offices, but IRS has not centralized or coordinated functions specializing in these cases. The agency has taken positive steps, such as adopting the taxpayer advocate’s recommendation to use an electronic indicator on its master files to mark the accounts of taxpayers who have verified that they have been victims of identity theft. However, there has not been enough attention paid to processes that are unnecessarily burdensome to taxpayers.

IRS also needs a coordinated approach to combat noncompliance in the cash economy, which makes up the largest portion of the tax gap, she said.

“It is particularly disturbing that, for the third year running, the IRS declines to create a Cash Economy Program Office to coordinate its various initiatives,” Olson said. “Ad hoc measures will not get the job done.”

She recommended wider use of IRS’ electronic payments system for estimated tax payments and voluntary withholding agreements as steps to increase tax compliance.

The report stresses the need to identify new approaches to reduce the tax gap without imposing undue compliance burdens or undermining taxpayer rights. Olson also urged Congress to enact a Taxpayer Bill of Rights and to authorize symbolic “apology payments” in egregious cases where taxpayers suffer significant harm or burden as a result of IRS errors.

The U.S. tax system is based on a social contract between the government and its taxpayers. In the past two decades, Congress has enacted three significant taxpayer rights’ bills, but the number of bills and the lack of publicity have muddled the message, Olson said.

The apology payments would not be designed to compensate the taxpayer for costs incurred but simply to acknowledge error in a tangible way. Olson recommended that Congress authorize up to $1 million a year for the national taxpayer advocate to make such payments, which would range from $100 to $1,000.

Olson again called for the repeal of IRS’ Private Debt Collection program, which is failing in most respects, including revenue projections. Under the program, private companies take over collection of simple tax debt cases. Tax collection, however, is inherently a government function, she said.

“The Private Debt Collection program, as currently administered, turns the concept of taxpayer rights on its head,” Olson said.

It has been up to Olson to make sure that taxpayer protections applicable to IRS collection personnel apply with equal force to private collection personnel. She cited the lack of transparency in the program. IRS collection procedures are publicly available and subject to review by taxpayers and Congress.

“By contrast," she said, "the private collection agencies have designated comparable information, including calling scripts and training materials, as proprietary.”

IRS has declined to insist on a contractual term to make them publicly available. As a result, Olson is prohibited from describing them in her reports to Congress, and the materials are not subject to public scrutiny.

To date, the costs of the program have exceeded the revenue the program has generated, and she cannot project when the program will break even, Olson said.

In May, IRS estimated that the program would raise gross revenue of between $1.5 billion and $2.2 billion in the next 10 years. IRS now says the program will not hit these targets. Gross revenue totaled $31 million in fiscal 2007, is projected to be slightly less this year and is not now projected to rise sharply in future years.

About the Author

Mary Mosquera is a reporter for Federal Computer Week.

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