The advocate states in the current environment, it is critical for the IRS to direct its resources where they have the greatest positive effect on achieving tax compliance, particularly voluntary tax compliance. Over the long run, voluntary compliance is the least expensive form of compliance to maintain. It is also the least burdensome from the taxpayer’s perspective. Importantly, voluntary tax compliance is heavily linked to customer service and the customer experience.
Twenty years ago this week, the IRS Restructuring and Reform Act of 1998 was enacted. This landmark legislation created significant taxpayer rights – including the office of the National Taxpayer Advocate and Local Taxpayer Advocate offices, Low Income Taxpayer Clinics (more on that in next week’s blog); Collection Due Process hearings (the first time taxpayers had meaningful access to courts to challenge the appropriateness of IRS lien and levy actions), “innocent spouse” relief expansion to provide for separate liability and equitable relief; expansion of offer in compromise relief on grounds of economic hardship, equity, and public policy; protection against lifestyle and repetitive audits. Some provisions are only now being clarified, as in the Graev and Chai line of cases. Other provisions still have not been properly implemented, such as the requirement that a specific employee’s name, phone number, and unique identifying number be placed on manually-generated correspondence. Nevertheless, RRA 98 changed tax administration as we know it, and, in my opinion, moved the United States in the forefront of taxpayer protections.
Around five months ago, in my 2017 Annual Report to Congress, I identified IRS audit rates and the distinction between “real” and “unreal” audits, as the fourth Most Serious Problem facing taxpayers. I had previously written about this topic in my 2011 and 2016 Annual Reports to Congress, and discussed it in a blog post six years ago.
So, what’s the deal with “real vs. “unreal” audits and why should you care? I need to first give you a little background. Under section 7602 of the Internal Revenue Code (IRC), the IRS has the authority to examine any books, papers, records, or other data that may be relevant to ascertain the correctness of any return. I call these types of examinations, which can occur through correspondence, at the taxpayer’s home or business, or at an IRS office, “real” or traditional audits.
However, “real” audits don’t quite end the story. The IRS has several other types of compliance contacts with taxpayers that it does not consider to be “real” audits. These types of contacts, which I call “unreal” audits, include math error corrections, Automated Underreporter (AUR) (a document matching program), identity and wage verification, and Automated Substitute for Return (ASFR) (a non-filer program). Why are these types of contacts, which constitute the majority of IRS compliance contacts, important? First of all, they require taxpayers to provide documentation or information to the IRS and may feel very much like a “real” examination to taxpayers. More importantly, “unreal” audits lack taxpayer protections typically found in “real” audits, such as the opportunity to generally seek an administrative review with the IRS Office of Appeals (Appeals) or the statutory prohibition against repeat examinations. And in case you are curious, the IRS is planning for the increased use of “unreal” audits through automated means with its “Future State” Initiative.
Thank you for inviting me to testify at your hearing today on IRS operations. As you know, I lead the Taxpayer Advocate Service (TAS), an independent organization within the IRS that advocates for taxpayers. TAS has two main functions – “case advocacy” and “systemic advocacy.” In most years our case advocacy operations
assist more than 200,000 taxpayers in resolving account problems with the IRS.2 On the systemic side, TAS identifies problems that are harming groups of taxpayers, and we make administrative and legislative recommendations to mitigate those problems.
By statute, I am required to submit two annual reports to the congressional tax-writing committees each year, and I describe, and make recommendations to mitigate, the “most serious problems” facing taxpayers in my December 31 report.