Every year the National Taxpayer Advocate -– Nina E. Olson -- submits a report to Congress which takes a critical look at the IRS. It’s her job to identify at least the 20 most serious issues taxpayers face in dealing with the tax agency, and to recommend solutions. After an in-depth look, Olson says that overall, the IRS had a successful year, but there are big problems. This year Olson pinpointed 21 problems, updates on two previous issues, and recommended dozens of administrative and legislative changes. Superimposed over this long list of problems is her concern about the IRS as a whole. As the House and Senate work to reconcile their version of the health reform bill, Congress is poised to add significant new areas of responsibility to the IRS. This comes at a time when the tax agency is already beleaguered by budget cuts, staffing shortages, an outdated computer system, and, based on this year’s list, an inability to meet current obligations with a high degree of effectiveness.
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Here are some of the highlights of Olson’s report:
Telephone Assistance for Taxpayers
Problem: The IRS has a declining ability to answer taxpayer phone calls on the toll-free lines, even as demand for assistance is rising. For 2010, the agency’s goal is to answer 71 percent of calls. Olson points out that this means three out of ten callers will not get the help they need. “This level of service is unacceptable,” she says. In 2007 the answer rate was 83 percent.
Recommendation: The report advises the IRS to staff its toll free lines sufficiently to raise the answer rate to 85 percent. The report also advises the IRS to create a dedicated phone line manned by those trained to deal with national disasters, late year, or one-time tax law changes.
Examinations and Collections
Problem: There is no “overarching strategy” governing the process of examinations and collections, according to the report. The policies have, instead, been hammered together piecemeal. Olson is concerned that the way the IRS seeks to collect unpaid tax liabilities causes harm to taxpayers, damaging them financially and impairing their ability to get credit, while not raising tax revenue. She speculates that the harshness of the IRS collection process may drive many taxpayers into “long-term noncompliance.”
Of particular concern is lien filing, which the report cites as the second most serious problem facing taxpayers. Liens are filed through an automated system, even in some cases where there is no property to encumber. Over the last decade, the IRS has increased lien filings by nearly 475 percent, yet, adjusted-for-inflation, revenue from collections fell by 7.4 percent over the same period.
Recommendation: The NTA report recommends that Congress instruct the IRS to change the method of lien filing and take the “automatic” element out. That is, before a lien is filed, to assess whether the benefits of the lien outweigh the harm to the taxpayer and whether the lien will jeopardize the taxpayer’s ability to pay future taxes. Another related study shows that the IRS fails to consider a taxpayer’s other debts, such as credit cards, school loans, and medical bills. “Any taxpayer with these debts will tell you that these creditors don’t go away,” Olson said. “Taxpayers are placed in the intolerable position of agreeing to pay the IRS more than they can actually afford (given their other debts) and then defaulting on the IRS payment arrangements when they channel payments to unsecured creditors in order to get some peace.”
Unenrolled Nonsigning Tax Preparers
Problem: Current law allows anyone to prepare tax returns for compensation, with virtually no training or licensing requirements and no oversight. Since 2002, Olson has been trying to change that. After years of proposing that preparers of federal tax returns should be subject to regulation, her report included praise for the IRS for moving forward with a plan to do just that. This represents a “significant, far-reaching initiative” she said. But her praise was not unqualified. She sees a loophole which she predicts will be widely exploited. The IRS intends to regulate tax preparers who sign tax returns. However, tax preparers who meet with taxpayers and who prepare tax returns but do not sign them, will not be subject to these regulations. Olson predicts that tax preparation businesses will employ a minimum number of preparers qualified to sign returns and an unlimited number of those without signing capability. “We are concerned that excluding nonsigning preparers could create an exception that swallows the rule,” the report states.
Recommendation: The IRS should consider extending the new rules to include unenrolled nonsigning preparers.
Problem: As it stands, the IRS processes tax returns before they process information returns such as W-2s and 1099s. “This sequence makes little logical sense,” the report says. Once the information returns are processed, the IRS learns that millions of taxpayers made erroneous claims, and may have received inflated refunds or underpaid their true tax liabilities. It takes a minimum of many months for the IRS to identify these errors, during which time taxpayers may be subject to penalties and interest charges. That situation then puts the IRS in a position of having to collect money that should have been paid with the return, or to recapture money that should not have been paid out in refunds.
Recommendation: The Treasury Department needs to identify the administrative and legislative steps necessary to authorize the IRS to process information documents before it processes tax returns. The report urges Congress to set this in motion.
Social Programs and the Tax System
Problem: There is a tendency in government to run social programs through the tax code, often using refundable credits. The report took a special look at these refundable credits, which have high overclaim rates. The incidence of noncompliance is not because the credits are refundable, says the report, but related to the design of the credit.
Recommendation: Because the flaw is in the design, the solution is most likely also in the design of the provision for the credit. The report proposes certain changes, including the ability of the IRS to verify credit eligibility criteria by automation.
Here are some previous articles that shed more light on the ways that the IRS has been unable to administer credits without a high level of errors and/or fraud, based on investigations by the Treasury Inspector General of Tax Administration.