National Taxpayer Advocate Nina E. Olson testified before the House Subcommittee on Health Care, Benefits, and Administrative Rules and Subcommittee on Government Operations Committee on Oversight and Government Reform on Oversight today at a hearing entitled, “Continued Oversight Over the Internal Revenue Service.”
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.
In the first blog in this series we discussed how those who participate in amnesties also tend to be people who made inadvertent errors, that is, “benign” actors, rather than bad actors. We discussed how it can make sense to offer some form of amnesty before implementing a sudden increase in penalties or enforcement. Otherwise, the increase is more likely to be viewed as unfair and erode trust for the government. Moreover, a decline in trust can erode voluntary compliance.
In the second blog, we cited data showing that, consistent with the research on amnesties, IRS’s first amnesty alternative – the Offshore Voluntary Compliance Initiative (OVCI) – generally attracted people who failed to report offshore accounts but had paid their taxes or had under-reported small amounts. Read More
The other day, I came across an interesting item in the news, describing that for the first time in its history, Macy’s was only letting people with appointments visit its famous Santa. I was interested in this because, for all intents and purposes, the Internal Revenue Service (IRS) had been “appointment only” in its Taxpayer Assistance Centers (TACs) since November 2016. So on the face of it, the IRS was in the vanguard of customer service.
In this blog post, I will discuss how the IRS has been dealing with a growing sector of our economy called the “sharing” economy (also known as the gig economy). Proponents of the sharing economy believe it promotes marketplace efficiency by enabling individuals to generate revenue from assets while the assets are not being used personally. For example, a vacation home owner may rent out her home while she is not using it. Airbnb (short-term home rentals) and Uber (shared car services) are two of the more prominent companies that facilitate a sharing economy.
Unlike private creditors, the IRS has wide discretion to exercise its administrative levy powers. Internal Revenue Code (IRC) § 6331(a) says the IRS can generally “levy upon all property and rights to property.” The IRS must make notice and demand for payment and in most instances provide collection due process (CDP) rights prior to levy. And under IRC § 6334, the IRS is prohibited from levying on certain sources of payments, such as unemployment benefits and child support. But overall, the IRS can cast a large net when it chooses to levy a taxpayer’s property, including funds in retirement accounts. Read More
In last week’s blog, I discussed my concerns regarding the failure of the IRS Office of Appeals (Appeals) and Wage & Investment (W&I) to adequately identify the particular frivolous position prompting mailing of a notification letter. This letter provides taxpayers with 30 days to withdraw the frivolous position included on an income tax return or in a submission to the IRS, and thereby avoid application of the $5,000 frivolous return penalty imposed by IRC § 6702. The lack of clear identification regarding the objectionable issue, however, can sometimes make it very difficult for taxpayers to timely determine and correct the frivolous position.
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 issues. All personal details are removed to protect the privacy of the taxpayer.
In the early 1980’s, Congress became concerned with the rapid growth of deliberate defiance of the tax laws by taxpayers objecting to the payment of tax on frivolous grounds or through reliance on obviously unsupportable tax positions. As a result, Congress passed Internal Revenue Code (IRC) § 6702, which, as currently formulated, generally imposes an immediately assessable $5,000 penalty on tax returns adopting a position that the IRS has identified as frivolous or reflecting a desire to delay or impede the administration of Federal tax laws. This penalty, however, was primarily intended to address “protest” returns and was not aimed at taxpayers who were unintentionally non-compliant, such as in the case of innocent mathematical or clerical errors. The goal was to establish a regime that discouraged obstructive returns, but not one that adopted punitive measures against potentially good-faith taxpayers.
Taxpayers affected by the wildfires in California that began October 8, 2017 may qualify for tax relief from the Internal Revenue Service. The President declared that a major disaster exists in the state of California and as of October 16, 2017, the following counties are impacted:
With the open enrollment period for the Health Insurance Marketplace beginning November 1st, it is the appropriate time to remind taxpayers and preparers of the various Affordable Care Act (ACA) estimators the Taxpayer Advocate Service (TAS) has developed and made available to the public. Whether the taxpayer is an individual or employer, we have several tools available to assist in estimating credits and payments related to the ACA. Keep in mind that they only provide estimates, rather than accurate calculations, to use as a guide in making decisions regarding the taxpayer’s tax situation.
Edited and posted by Harold Goedde CPA, CMA, Ph.D.
Nina Olsen is the IRS’s National Taxpayer Advocate. Since 2001, she has led the Taxpayer Advocate Service (TAS), a nationwide organization of approximately 2,000 taxpayer advocates who help U.S. individual and business taxpayers resolve problems and work with the IRS to correct systemic and procedural problems. In this capacity, she reports to Congress annually on the most serious problems taxpayers face in dealing with the IRS and proposes solutions. Recently, she took time to talk to Journal of Accountancy Senior Editor Paul Bonner about her work with TAS and taxpayer issues, especially those of taxpayers represented by CPAs.
Bonner: For taxpayers represented by CPAs who come to TAS with their problems, what can CPAs do to help their clients’ chances of getting a favorable outcome?
Olson: About 35% to 40% of our cases have representatives. In fact, Congress anticipated and wrote into the law, in Sec. 7811, that one of the definitions of a significant hardship [for which the Office of the Taxpayer Advocate may issue a taxpayer assistance order] is where the cost of representation in a particular issue is great and would incur a significant hardship. You can see that happen where a representative is trying to solve a problem by staying on the phone with the IRS and running up billable hours. If it’s a simple problem that isn’t getting resolved, then, of course, they should go to the Taxpayer Advocate Service.
And then we have others, I have to say, that once they get through to TAS, their case advocate is their new best friend. They get that case advocate’s number, and they come to them for every single problem. We are a resource for you, but it’s a limited resource, and people should exercise their judgment as to whether it’s necessary.
Bonner: What kinds of issues should taxpayers and representatives come to you with?
Olson: We see very simple cases where there’s just no one at home at the IRS who will engage with the CPA to hear the facts, to hear what needs to be done. And we also see a lot of what I call the “not my job” syndrome, where the CPA knows precisely what needs to be done to correct this account; they have all the information that makes it very clear why this account needs to be adjusted, and yet there’s no one in the IRS who will accept responsibility for doing it because it requires this function to do this little thing and another function to do another thing. That is precisely the kind of case that you should go to TAS about, because then we operate as the traffic cop, and we’ll stick with the case and get it all the way through.
And then we have cases on which there is a fundamental disagreement, whether on the facts of the case, the law, or its application to the facts. First, we try to exercise independent judgment. Once we can figure out with the taxpayer or the taxpayer’s representative or CPA what we think is the right answer in that case, we should be advocating that answer, and that means taking it all the way up the chain. A lot of these are cases of first impression, where the IRS has a general rule, and you’re trying to fit a set of circumstances to the general rule, and it doesn’t fit. So you have to come up with a new rule or an exception to the general rule, knowing that the front line of the IRS isn’t necessarily going to tackle that one. It’s going to unfortunately have to go up a chain. That’s fine, as long as we’re doing our job, as long as we’re advocating for what we think is the right answer, not walking away from it, and saying, “Well, the IRS says this, and there’s nothing more we can do.” Until it lands on my desk and until the commissioner has overturned what I say, there’s always something more we can do.
Bonner: Haven’t you had to restrict the kinds of cases you can accept in recent years, just to deal with caseloads?
Olson: We went through several really difficult years going up to 2011, where between the economic stimulus payment, making work pay credit, and first-time home buyer credit, our inventories for the first time reached 300,000 cases. Meanwhile, my staffing was declining, just because of the IRS budget situation, so my people really were struggling to keep up. We took a hard look at our inventory and decided that some cases that we were accepting met the criteria, but we actually didn’t need to be involved. The IRS would get the right answer; it was just taking longer than it used to, because it had more work as well. Where there’s no economic hardship or harm involved, we don’t need to be involved, so we identified four categories of cases where we said we’re not going to take them unless the taxpayer insists, where there’s no economic emergency, no economic harm involved, it’s just that the systems are moving slowly: processing original returns, amended returns, and refund claims, and problems with the return posting. It was a hard decision, but we really had to say TAS needs to be involved in those cases where only TAS can make a difference.
Bonner: All the same, taxpayer assistance orders are increasing. How effective are they?
Olson: We have a really high relief rate in general for our cases. Our taxpayer assistance orders also have a very high relief rate; over 80% of the orders are agreed to. We’ve issued almost 500 for 2012, and that’s by far the highest number we’ve ever issued. I myself have 26 taxpayer assistance orders about to be issued on return preparer fraud alone—cases where the IRS is refusing to issue refunds to taxpayers who have been victims. That’s a very high number; that’s more than I’ve ever had elevated to me in the entire history of the Taxpayer Advocate Service.
Bonner: Why, would you say, is it difficult for the IRS to handle these identity theft and blatant fraud cases?
Olson: In the fraud cases, where the preparer has absconded with all or part of the taxpayer’s refund, they believe it’s between the taxpayer and the preparer, and the taxpayer should sue the preparer to get that money back. And we’re saying these are altered returns, they are not valid returns, they are not the returns the taxpayer signed, and therefore you need to let the taxpayer file the correct return, and you need to issue a new refund to the taxpayer. And then the IRS needs to go after the preparer.
Identity theft cases have increased by over 650% since 2008 and now make up about a quarter of our case receipts, which is just astonishing. The IRS itself has seen this great influx of these cases, and it’s been struggling to figure out how to handle it. It has never done what we have recommended since 2004, that it have a centralized place to act as traffic cop, to monitor all identity theft cases, and make sure that the functions are working on them in the correct order and things are moving through quickly. In fact, the IRS is now going backward; it has decided it will have 21 units embedded in its different functions, all with their own little unit to work identity theft cases. On the one hand, I think that’s not a bad idea, to have people in each function who are experts. But, on the other hand, will the taxpayer fall between the cracks, which is what we’ve been seeing over the past few years? So I am not sanguine about what’s going to happen with identity theft next year, and I think that TAS will continue to get a high volume of cases. The IRS about a month ago was telling employees to tell taxpayers it will be six months before they can resolve these cases. That’s harming the taxpayers, and so we really objected to that.
Bonner: How does it affect your own operations when Congress extends provisions late in the tax year, some of them retroactively?
Olson: For the IRS, it’s having to decide how to program their machines. When you don’t have a law enacted, how do you program them? Several years ago, the IRS took the position they couldn’t program their machines for the AMT [alternative minimum tax] patch, because they didn’t know what the law was and so they had to delay the filing season. Now the IRS has informed the Hill that it’s programming with the best guess as to what it thinks it will be, and then if it’s wrong, they’ll have to delay the filing season to program the changes that actually turn out. So the norm becomes that we’re getting late-year tax legislation, and the IRS is adapting to it, which is just an insane norm to adapt to. No one should run their business in this way, much less the government.
Also, TAS and other IRS offices are theoretically using December to train our employees for the upcoming filing season. But we don’t know what’s going to be in the law, so we have to reserve the first two weeks of January, which is not a good time to be training, immediately before people are going to be applying what they learn.
Third, the IRS always has glitches in whatever it has to program at the last minute. Some of those glitches are significant, and it generates huge numbers of cases in TAS, so we see spikes during the filing season, waves of things that we start seeing showing up in our case receipts that are indicating that there is a programming or processing glitch. We’ve developed a culture of taxpayers who expect their refunds immediately; we’ve done that to sell e-filing. So now, when there are glitches with it, the taxpayers are frantic because they’ve lived their lives thinking they’re going to get this large chunk of money very quickly within a short time of filing their returns. So it creates stress.
Bonner: Let’s talk about liens. Are you seeing effects from the IRS’s Fresh Start relief initiative?
Olson: We’re seeing fewer liens being filed, and we are seeing more lien withdrawals being done. We’ve had a multi-year study about the impact of lien filing on taxpayers and on their ability to comply in the future, both to pay the existing debt and not incur future tax debts and to file in the future. Also what it does to their income in the future, does it have a negative impact? And we’ve found, in fact, that in most instances, it does. What the Fresh Start did was, instead of saying, file a lien at $5,000 debt, file it at $10,000. My concern about that is, you still end up not having anyone who can look at a taxpayer’s facts and circumstances and say, “Your debt is over $10,000, but you have the ability to pay the full thing, and you don’t have any history of noncompliance, and the reason you have this debt is because there was a medical emergency. And so why should we destroy your credit rating and your future ability to earn income? It will make you have to pay higher interest when you buy a car or whatever, for this one-off instance.” There’s nobody in the IRS on the collections side who can truly have that kind of conversation.
We are also seeing a lack of things like business installment agreements, where Fresh Start was supposed to make things a little bit easier for businesses. The amount of debt attributable to employment tax has mushroomed over the last few years, and we think because business employment taxes are being channeled first to the automated collection system rather than being promptly sent out to the revenue officers. They go out to the queue and sit there for a year to two, while taxes are pyramiding, and by the time they get in the revenue officers’ hands, the taxes are so large, there’s no way that the business can get out of that mound of debt.
Bonner: Many of our members have expressed frustration with correspondence audits. What should they know?
Olson: Systemically, I issued a taxpayer advocate directive after I covered the correspondence exam in the 2011 annual report, in which we did a really comprehensive study. The IRS began assigning core exam cases to individuals who worked them all the way through, making outbound calls in the correspondence exam function, making appointments, and other changes. The IRS also agreed to convene a group that has been studying the correspondence exam process. We’re represented on it, and we have made sure they have talked to taxpayers, to taxpayer representatives, and low-income taxpayer clinics. I have some reason to be modestly optimistic that there will be some positive recommendations coming out of this.
One of the things that we’re really pushing, when the IRS actually makes a contact with the taxpayer, to keep that case with that employee, so the taxpayer doesn’t have to keep explaining the same thing over and over again.
Another promising thing I am very optimistic about is a project we call virtual service delivery. It has been tested this past year in some of the walk-in sites for VITA [Volunteer Income Tax Assistance] and in two low-income taxpayer clinics, and for certain hearings. Next year, the IRS has agreed to roll this technology out to many more sites, and correspondence exam is testing it. So taxpayers in certain locations could make an appointment to come in to an IRS location and bring their documentation and see their correspondence exam person by camera on a computer screen. We’re working to get better camera technology so a taxpayer could hold up their documentation and that could be shown on the screen for the IRS employee to see in real time and decide whether it was sufficient. I am very hopeful about that technology, which can actually make correspondence exams like office exams. To me, the next step is that we make similar software available to practitioners. It would be in a form of encryption so that no one could hack into that hearing and get confidential taxpayer information. And then the third step would be to make this available to taxpayers themselves.
Bonner: What do you think is the biggest challenge facing the next IRS commissioner?
Olson: I really think that the biggest challenge for the tax system, and therefore for the commissioner, is the lack of trust and respect for the tax system as a whole. The complexity of the tax law has not helped, and the failure to fund the IRS appropriately has not helped. But somehow we need to just convince people that taxes really are the price we pay for a civilized society. Then, in the organization itself, I just see that it is more and more siloed. It has moved too far away from having people know what’s going on in the communities where taxpayers live. In getting rid of the districts and the regions, it moved away from its geographic presence completely and replaced it with this centralized structure. I think we are over a hump in our computer system modernization, and we’ve proven we can do it, so I think the next commissioner just really needs to ride that to make sure we don’t go backward. And then to focus on how we communicate with taxpayers, can we really use this virtual world to have face-to-face communications? I just think that it’s really important that our employees realize they’re talking to taxpayers and not pieces of paper.
[Paul Bonner, senior editor, tax. Journal of Accountancy, January 17, 2013]
CIRCULAR 230 DISCLOSURE:Pursuant to regulations governing practice before the IRS, any tax advice contained herein is not intended or written to be used and cannot be used by the taxpayer for the purpose of avoiding tax penalties that may be imposed on the taxpayer.
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