By Ken Berry
National Taxpayer Advocate Nina E. Olson cited the need for comprehensive tax reform as the top priority in her annual report to Congress on January 9 (IR-2013-3). Olson, who was appointed over a decade ago to the head post of the Taxpayer Advocate Service (TAS) – an independent organization within the IRS charged with assisting taxpayers – also focused on inadequate funding of the IRS and various issues relating to taxpayer identification theft.
Need for Tax Reform
The report identifies the complexity of the Internal Revenue Code as the most serious problem facing taxpayers today and advises Congress to take significant steps to simplify matters. "The existing tax code makes compliance difficult, requiring taxpayers to devote excessive time to preparing and filing their returns," Olson said in the report. "It obscures comprehension, leaving many taxpayers unaware how their taxes are computed and what rate of tax they pay; it facilitates tax avoidance by enabling sophisticated taxpayers to reduce their tax liabilities and provides criminals with opportunities to commit tax fraud; and it undermines trust in the system by creating an impression that many taxpayers are not compliant, thereby reducing the incentives that honest taxpayers feel to comply."
According to the report, Congress has made nearly 5,000 changes to the tax code since 2001, an average of more than one a day. The total number of words is approaching a staggering four million.
To reduce taxpayer burden and enhance public confidence in the integrity of the tax system, the report urges Congress to greatly simplify the tax code. Olson emphasized the need to reassess current income exclusions, exemptions, deductions, and credits. She recommended that Congress approach tax reform in a manner similar to zero-based budgeting, eliminating all of these tax expenditures.
The IRS has seen its budget cut in each of the last two fiscal years and future reductions appear likely. Olson wrote in her report, "The IRS is materially different from other discretionary programs in that it serves as the de facto accounts receivable department of the federal government. Each dollar appropriated for the IRS generates substantially more than one dollar in additional revenue. It is therefore ironic and counterproductive that concerns about the deficit are leading to cuts in the IRS budget, when those cuts are making the deficit larger."
Report Addresses Other Serious Problems
The National Taxpayer Advocate is required to identify the "most serious problems" encountered by taxpayers and to make administrative and legislative recommendations mitigating those problems. Among the most serious problems addressed by Olson in this year's report are:
- The IRS' failure to provide tax refunds to victims of preparer fraud.
- The IRS' extremely high audit rate of taxpayers who claim the adoption tax credit.
- The Offshore Voluntary Disclosure programs and the IRS' inability to distinguish taxpayer intent.
- Research study on factors influencing voluntary tax compliance by small businesses.
Olson argues that that the IRS' mission trumps all other agencies' missions because an effective revenue collector is needed to fund those other agencies. "No business would fail to fund a unit that, on average, brought in $7 for every dollar spent. Shareholders would rebel and bring lawsuits, or at least oust the management or board of directors," she said in the preface. "Yet this is precisely what we are doing with the IRS budget."
The report also says that reduced funding is preventing the IRS from meeting taxpayer needs. Since FY 2004, when taxpayer service levels peaked, the IRS' performance in handling telephone calls and correspondence has declined. The IRS answered 87 percent of all calls seeking to reach a live telephone staffer in FY 2004, and the average wait time was just over two and a half minutes. In FY 2012, the IRS answered just 68 percent of its calls, and those who managed to get through waited on hold an average of nearly seventeen minutes. Also, in FY 2012 the IRS received over ten million letters responding to proposed tax adjustments. At the end of the year, 48 percent of all taxpayer correspondence in its inventory had not been processed within established timeframes – up significantly from 12 percent in FY 2004.
Taxpayer ID Theft
Within TAS, the number of tax-related identity theft incidents has skyrocketed in recent years, up by more than 650 percent from FY 2008 to FY 2012. At the end of FY 2012, the IRS had almost 650,000 identity theft cases in its inventory. The problem has only worsened as organized criminals have discovered innovative ways to steal Social Security numbers (SSNs) of taxpayers, file tax returns using those names and SSNs, and obtain fraudulent tax refunds. Subsequently, when the real taxpayer files a tax return claiming the refund, the return is rejected. More than 75 percent of taxpayers filing returns are due refunds, averaging approximately $3,000, and they can't be paid until the IRS fully resolves a case.
Although the IRS has created task forces and implemented other measures in recent years in an attempt to improve relief, taxpayers still face the same "labyrinth of procedures and drawn-out time frames for resolution" they faced five years ago. The IRS now tells ID theft victims that it will take 180 days – half of an entire year – to resolve their cases while complicated cases will take even longer. As a result, the IRS' procedural changes aren't providing relief fast enough to suit Olson.
"Taxpayers need 'one-stop shopping' – a single point of contact they can work with to resolve all issues in their cases – and the IRS needs a 'traffic cop' to make sure that all units complete their actions and that parts of cases do not fall through the cracks," she said. "And six months is an unacceptable period of time to expect taxpayer-victims to wait."
the report online for more information, the executive summary, downloadable infographics on the most serious problems, and videos.