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Archive for National Taxpayer Advocate

IRS Examinations – The IRS Should Promote Voluntary Compliance And Minimize Taxpayer Burden In The Selection And Conduct Of Audits

National Taxpayer Advocate

In February of 2019, I released the 2018 Annual Report To Congress in which, among other things, I discuss the influence of tax audits on taxpayers’ attitudes and perceptions, and specifically focus on the three primary types of traditional or “real” IRS audits, which can occur through correspondence, at the taxpayer’s home or business, or at an IRS office. In my 2017 Annual Report to Congress and a related blog post around nine months ago, I described IRS audit rates and the distinction between “real” and “unreal” audits. This blog, however, provides an overview of traditional or “real” audit programs, along with some of my findings.

Why are IRS audits important?

The IRS is authorized to examine books, papers, records, or other data and take testimony to determine the correctness of any return and the liability of any person for tax under Internal Revenue Code (IRC) § 7602(a). The IRS’s primary purpose in selecting tax returns for examination or audit is to promote the highest degree of voluntary compliance. IRS audits are intended to detect and correct noncompliance of audited taxpayers, as well as create an environment to encourage non-audited taxpayers to comply voluntarily.

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IRS Has Made Some Improvements, Math Error Notices Continue To Be Unclear And Confusing, Thereby Undermining Taxpayer Rights And Increasing Taxpayer Burden

Nina Olson - Math Errors IRS

With the filing season in full operation, many taxpayers are receiving correspondence from the IRS that convey significant taxpayer rights and require taxpayers to take prompt action. In my April 3rd blog post, I discussed a Literature Review in my 2018 report to Congress that investigated how notices can be improved using insights from the available psychological, cognitive, and behavioral science research. As I noted, a major issue with current IRS notices is that many taxpayers have difficulty understanding them. They may be unsure about what the notice requires them to do, the steps they may need to take, or the rights they have to challenge the IRS’s determination in a notice. In this blog, I will focus on math error notice unclarity, which I identified as one of the Most Serious Problems.

What is the IRS’s math error authority?

Congress has granted the IRS “math error authority,” which allows the IRS to make certain summary adjustments to a taxpayer’s return. If the changes lead to a greater amount of tax, the IRS would make an assessment. These “math error” changes can be made when the IRS determines that the taxpayer has made a mathematical or clerical error that is obvious to fix by looking at the face of the return. The types of issues Congress has allowed to be resolved with math error authority have progressively increased over the years, as a result of IRS lobbying, with the IRS now making summary changes for more and more complex issues. A past TAS research study on math errors committed on individual tax returns found that some of these summary changes have led the IRS to incorrectly deny tax benefits to some taxpayers.

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The Adoption Of A Withholding Code And The Improvement of Free File Fillable Forms Would Streamline Tax Withholding And Reporting

Nina Olson- Streamline Withholding

In last week’s blog, I discussed the potential benefits arising from an expansion of the pay-as-you-earn (PAYE) tax system to incorporate additional income items, as well as credits and deductions.  Such a step would require substantial systemic adjustments and in the recent Annual Report to Congress I recommended that Congress direct the Treasury Department to consult with the IRS and TAS to analyze and report on the feasibility of and steps necessary for expanding withholding at source to encompass seven of the most common types of income. This broader PAYE coverage on the income side could be a precursor to the incorporation of credits and deductions into the PAYE system such that the exact amount of annual tax liability would be collected throughout the course of the year, leaving no subsequent taxes to pay or refunds to collect.

In the meantime, two additional innovations could be considered that would improve the collection of tax at source and streamline the reporting of tax liabilities at year end. As I discussed in a recent blog, redesign of the Form W-4, Employee’s Withholding Allowance Certificate, has generated a range of concerns, including complexity, taxpayer burden, and employee privacy. These issues arise because the U.S. system requires employees to navigate an often-confusing and difficult process to provide employers with their personal information, including other sources of income and marital status, so that the correct amount of tax can be withheld as discussed in TAS’s in-depth 2018 study. Some other countries, such as New Zealand, however, follow an alternative course that could be beneficial for the U.S.

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NTA: The IRS Should Redesign Its Notices Using Psychological, Cognitive, And Behavioral Science Insights To Protect Taxpayer Rights, Enhance Taxpayer Understanding, And Reduce Taxpayer Burden

National Taxpayer Advocate

With the filing season in full operation, many taxpayers are receiving correspondence from the IRS that convey significant taxpayer rights and require taxpayers to take prompt action. As part of my recently released Annual Report to Congress, I included a Literature Review that investigated how notices can be improved using insights from the available psychological, cognitive, and behavioral science research. A major issue with current IRS notices is that many taxpayers have difficulty understanding them. They may be unsure about what the notice requires them to do, the steps they may need to take, or the rights they have to challenge the IRS’s determination in a notice. This, in part, is because the design of IRS notices does not take into account the findings of available literature and research regarding effective notice design.

Nor are IRS notices designed from a taxpayer rights perspective, which can prevent taxpayers from learning about or exercising their rights—for example, by relegating the segment on their rights to the last page of the notice, which they are least likely to read. In fact, notices are often designed with the goal of increasing revenue rather than adequately informing taxpayers of their rights. In the three Most Serious Problems on notices included in my 2018 Annual Report to Congress (herehere, and here), I provide both critiques of current IRS notices and suggestions for improvement. One of those suggestions is for the IRS to improve taxpayer understanding and decrease taxpayer burden by redesigning its notices using psychological, cognitive, and behavioral science insights. These suggestions are summarized below.

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IRS Efforts To Improve The EITC Improper Payment Rate Harm Taxpayers

Nina Olson- EITC

The Earned Income Tax Credit (EITC) is one of the primary forms of public assistance for low income working taxpayers.  However, the EITC is associated with a high improper payment rate.  According to the Treasury Department’s Fiscal Year (FY) 2018 Agency Financial Report, the FY 2018 EITC improper payment rate is approximately 25 percent.  A principal cause of the EITC improper payment rate is the complexity of the rules for claiming EITC, as reported by the Department of Treasury here and here.  While I recognize the importance of tracking and minimizing improper payments, I am concerned that the focus on “a number” masks both the successes and challenges in improving EITC compliance.  In fact, EITC improper payment estimates are based on audits of tax years four years in the past and do not reflect the most recent remedial measures.  Additionally, the Treasury Inspector General for Tax Administration (TIGTA) reports that the EITC improper payment rate does not take into account that for every dollar of EITC improper payments, 40 cents of EITC went unclaimed by taxpayers who appear to be eligible for the credit.

In this year’s Annual Report to Congress I reported that IRS actions to reduce the EITC improper payment rate are not sufficiently proactive and may unnecessarily burden taxpayers.  For instance, despite the acknowledged complexity of the rules for claiming EITC as a cause of improper EITC claims, IRS and Treasury legislative proposals to address EITC improper payments center on enforcement measures rather than on simplification.

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The IRS Office Of Chief Counsel Is Using Email To Avoid Disclosure Of Program Manager Technical Advice

Nina Olson On The Office Of Chief Counsel

This blog highlights problems with the transparency of the IRS Office of Chief Counsel (OCC), which I discussed in the 2018 Annual Report to Congress (ARC).  I also discussed transparency in the 2006 (p.10), 2007 (p.124), 2010, and 2011 (p. 380) Annual Reports, and in the Fiscal Year Objectives Reports in 2008 (p. xxi) and 2018.

A big part of the OCC’s most recent transparency problem is that it allows its attorneys to avoid disclosure of advice to IRS program managers (called Program Manager Technical Advice or PMTA), by issuing the advice as an email, rather than a memo.  Although I do not know when the OCC created this loophole, the number of PMTA disclosures has been falling in recent years (as shown below).  Compounding the problem is that the OCC has not issued any written guidance describing what must be disclosed as PMTA and most of OCC’s attorneys have not received training on that topic in the last few years.  In addition, the OCC has no systems to monitor whether all PMTAs are timely identified, processed as PMTAs, and disclosed.

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NTA: Recommends Taxpayers Vote On How Tax Dollars Are Spent

Nina Olson - Vote How Tax Dollars Are Spent
Require The IRS To Provide TaxPayers With A “Receipt” Showing How Their Tax Dollars Are Spent

Present Law IRC § 7523 requires the IRS to provide taxpayers with very basic information regarding federal taxes and federal spending. Specifically, the IRS is required to include pie-shaped graphs in its instructions for Forms 1040, 1040A, and 1040EZ showing the relative sizes of major budget outlay categories and major income categories. In the 2017 Form 1040 instructions booklet, the IRS published two graphs on page 103 with data from fiscal year (FY) 2016.

Reasons For Change

IRC § 7523 was enacted for tax years beginning after 1990. The purpose of the statute—namely, to help taxpayers understand the connection between the taxes they pay and the benefits they receive—is important, and it is likely that some taxpayers who perceive that connection will be more compliant with their tax obligations. However, the National Taxpayer Advocate believes the information required by IRC § 7523 is too cursory to achieve its objective. It would be more helpful to provide each taxpayer with personalized information regarding the taxpayer’s own contributions, such as the taxpayer’s marginal tax rate, effective tax rate, and tax benefits claimed.

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Success Story: The Taxpayer Advocate Service Protects Taxpayers’ Rights In IRS Tax Lien Case

Nina Olson- Need Help From The Taxpayer Advocate Service

Every year, the Taxpayer Advocate Service (TAS) helps thousands of people with tax problems. This story is only one of many examples of how TAS helps resolve taxpayer’s tax issues. All personal details are removed to protect the taxpayer’s privacy.

TAS is an advocate for protecting taxpayers’ rights. This success story is an example of how TAS’s advocacy protected a taxpayer’s fundamental Right to a Fair and Just Tax System by negotiating with the IRS to withdraw a tax lien.

A taxpayer had an IRS balance due, but paid the tax bill. After the taxpayer paid the IRS balance, the IRS filed a Notice of Federal Tax Lien which jeopardized the taxpayer’s employment. Although the IRS released the lien, it remained a matter of public record. The IRS refused to withdraw the lien even though the IRS filed it after the taxpayer paid the balance in full. TAS got involved and negotiated with the IRS on behalf of the taxpayer to successfully obtain a lien withdrawal.

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The Offshore Voluntary Disclosure Programs Still Lack Focus #3 Transparency, Violating the Right to Be Informed

Offshore Voluntary Disclosure Program

TAXPAYER RIGHTS IMPACTED

■ The Right to Be Informed

■ The Right to Quality Service

■ The Right to Challenge the IRS’s Position and Be Heard

■ The Right to Privacy

■ The Right to a Fair and Just Tax System

DISCUSSION

Beginning in 2009, the IRS established a series of Offshore Voluntary Disclosure Programs (OVDPs), which allow certain people who have not reported all of their foreign assets and income to settle with the IRS by paying taxes, interest, penalties, plus a “miscellaneous offshore penalty” (MOP). It also established a “streamlined” program for those who could certify their violations were not willful. These programs are governed by frequently asked questions (FAQs) posted on the IRS website. 2 The Large Business and International (LB&I) Division Withholding and International Individual Compliance (WIIC) Director can approve minor changes to the FAQs, but the Commissioner or Deputy Commissioner must approve significant ones. 3 IRS examiners interpret the FAQs with assistance from technical advisors and Small Business/Self-Employed (SB/SE) Counsel.  They may also access training materials and job aids posted to a secure SharePoint intranet site.

The IRS Does Not Disclose Interpretations of OVDP Frequently Asked Questions (FAQs)

Chief Counsel Advice from (or coordinated with) national office attorneys must be disclosed under IRC § 6110. 6 Other “instructions to staff” that affect the public must be disclosed under the Freedom of Information Act (FOIA). 7 However, the IRS does not disclose its interpretations of FAQs. For example, when the IRS first established the 2009 OVDP, it did not disclose how it interpreted FAQ #35, which addressed how to compute the “offshore penalty.” The guidance memo was only disclosed in response to a Taxpayer Advocate Directive. 8 Practitioners have highlighted other undisclosed and counterintuitive FAQ interpretations.9

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National Taxpayer Advocate Report To Congress FY 2018

National Taxpayer Advocate Report To Congress

The Internal Revenue Code requires the National Taxpayer Advocate to submit two annual reports to the House Committee on Ways and Means and the Senate Committee on Finance. The National Taxpayer Advocate is required to submit these reports directly to the Committees without any prior review or comment from the Commissioner of Internal Revenue, the Secretary of the Treasury, or the Office of Management and Budget. The first report, due by June 30 of each year, must identify the objectives of the Office of the Taxpayer Advocate for the fiscal year beginning in that calendar year.

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IRS Fraud Detection – A Process That Is Challenging For Taxpayers To Navigate An Outdated Case Management System Resulting In Significant Delays Of Legitimate Refunds – Part 1

Nina Olson - IRS Fraud Detection

As we approach the filing season, I thought it would be a good idea to discuss an issue that affects many taxpayer returns, namely the IRS processes for identifying and stopping refund fraud. Attempted refund fraud has become a significant problem in our tax system. According to the most recent figures available, in calendar year (CY) 2016, identity theft (IDT), refund fraud alone, cost the government roughly $1.7 billion. I fully support the IRS’s efforts to reduce refund fraud and protect revenue. However, I have expressed concern over several years that the refund fraud false positive rate (FPR) is too high and that the IRS takes far too long to process legitimate taxpayers’ returns once it has determined that they have been inaccurately selected. For some taxpayers who rely on their tax refund to pay for necessary living expenses, their anxiety increases every day that their refund is delayed.

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When Evaluating The Pilot Program On The Participation Of Counsel And Compliance, IRS Appeals Should Be Transparent

Nina Olson, National Taxpayer Advocate

Over the years, I have expressed significant concern with the continuing erosion of taxpayers’ right to appeal an IRS decision in an independent forum. (IRC § 7803(a)(3)). Of late, one of the major challenges to this right and to the independence of Appeals has been Appeals’ express desire to include IRS Counsel and Compliance in conferences regardless of whether taxpayers consent to this expanded participation. I have blogged about this before and also raised the subject in my Fiscal Year 2019 Objectives Report to Congress. Nevertheless, the issue continues to exist and I believe it is important to revisit the concerns and suggest a transparent, data-driven way forward.

In October 2016, Appeals revised its Internal Revenue Manual (IRM) guidance to encourage the inclusion of Counsel and Compliance in conferences (IRM 8.6.1.4.4). Beyond my own misgivings, this emphasis generated substantial uneasiness within the tax practitioner community.

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