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Tag 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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National Taxpayer Advocate: Tax Responsibilities Of US Citizens And Resident Aliens Living Abroad

Nina Olson-National

If you’re a U.S. citizen or resident alien, the rules for filing income tax returns and paying estimated tax are generally the same whether you’re in the United States or abroad. No matter where you live, your worldwide income is subject to U.S. tax.

To understand and fulfill your tax responsibilities as a U.S. Citizen and resident alien living abroad, there are a few things you need to do:

  • Figure out if you’re required to file – this generally depends on your income, filing status, and age.
  • Consider which exclusions and deductions for income and housing that you may qualify for.
  • Know how your type of employment may affect your tax liability.
  • Have what you need and know where to file your tax return.

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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 Second Circuit In Borenstein Helped To Close The Gap In The Tax Court’s Refund Jurisdiction, But Only For Taxpayers In That Circuit

In 2017, the U.S. Tax Court decided the case of Borenstein v. Commissioner by applying a technical reading of a statutory rule that produced a gap in its refund jurisdiction. Because this gap may deprive taxpayers of overpayments and is inconsistent with legislative intent, TAS proposed a legislative fix in our 2018 Annual Report to Congressand 2019 Purple Book. Earlier this month, the U.S. Court of Appeals for the Second Circuit reversed the Tax Court’s decision in an opinion that includes significant commentary about principles of statutory interpretation (here). [The Federal Tax Clinic at Harvard Law School (Keith Fogg and Simona Altshuler) and the Philip C. Cook Low Income Taxpayer Clinic in Atlanta, Georgia, (Edward Afield) deserve kudos for submitting amicus briefs.]

At the risk of mild overstatement, the court effectively said, “Tie goes to the taxpayer.” While the Second Circuit’s decision solves the problem for taxpayers within its jurisdiction, the Tax Court does not have to follow the Second Circuit’s decision in cases arising in other circuits under the rule announced in Golsen. For this reason, the Tax Court or the Congress still needs to fix the problem.

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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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NTA: IRS Free File Program Is Failing To Achieve Its Objectives And Should be Substantially Improved Or Eliminated

National Taxpayer Advocate - Nina Olson

In this week’s National Taxpayer Advocate blog, I highlight my concerns with the IRS Free File program, which I also discussed in my 2018 Annual Report to Congress and my recent testimony before the House Ways and Means Subcommittee on Oversight. I also describe my personal experience using Free Fillable Forms and make some recommendations for improving these products. This is a bit of a long post, but the topic requires some background discussion to understand how we got to where we are today.

Background

The IRS Restructuring and Reform Act of 1998 directed the IRS to set a goal of increasing the e-file rate to at least 80 percent by 2007. In 2002, the IRS entered into an agreement with a consortium of tax software companies, known as Free File, Inc. (FFI), under which the companies would provide free tax return software to a certain percentage of U.S. taxpayers, and in exchange, the IRS would not compete with these companies by providing its own software to taxpayers. The agreement has been renewed at regular intervals, and for at least the past decade, the agreement has provided that the consortium would make free tax return software available for 70 percent of taxpayers (currently, about 105 million), particularly focusing on increasing access for economically disadvantaged and underserved communities, as measured by adjusted gross income.

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NTA Suggests Greater Transparency – Great Ideas!

Annette Nellen - Greater Transparency For Taxpayers

The IRS National Taxpayer Advocate’s Annual Report to Congress released in February ( IR-2019-11 (2/12/19) + Report) includes the 2nd edition of the “Purple Book” with 59 legislative recommendations to improve taxpayer rights and tax administration. Two of the recommendations aim to strengthen taxpayer rights. They also improve the transparency of the tax system, which is a principle of good tax policy.

The two recommendations:

1. Codify as Section 1 of the Internal Revenue Code:
a. The Taxpayer Bill of Rights (at present, see Section 7803(a)(3)).
b. A Taxpayer Rights Training Requirement, and
c. The IRS Mission Statement

2. Require the IRS to issue all taxpayers a “receipt” that shows how their tax dollars are spent.

For details, see links and all 59 recommendations here.

These are great ideas as they bring greater attention to these important items to help taxpayers better understand the tax system and the federal budget.

I recommend they go farther:

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National Taxpayer Advocate Nina Olson’s Personal Message

Nina Olson Personal Message

On this date eighteen years ago – March 1st, 2001 – I walked through the doors of the IRS headquarters building in Washington, DC to begin my tenure as National Taxpayer Advocate of the United States.  It was the beginning of an always fascinating, usually complicated, and yes, sometimes frustrating journey.  Along the way, I have been privileged – and I use that word in every sense – to have worked with extraordinary people – in the Taxpayer Advocate Service, in the IRS, in Treasury, in Congress, and most importantly, directly with taxpayers and their representatives.

In addition to celebrating my March 1st anniversary, I crossed another milestone a few weeks ago.  In the eyes of the Internal Revenue Code, I am now “elderly” – that is, I am now of the age to qualify for the additional credit for the elderly under IRC § 22.  This has caused me to reflect on how I want to proceed with the remaining stages of my life, and I have concluded that I am ready to move on to a new stage.

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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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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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