This item recaps the recommendations of Nina Olson, the National Taxpayer Advocate, for changes within the IRS as presented in her annual report to Congress. A second item, to be published in the October 2009 issue, will outline Olson’s recommended legislative reforms to the tax code and review the most frequently litigated tax issues.
In January 2009, Olson presented her annual report to Congress, outlining the IRS system and legislative suggestions for improving the federal tax system. Some of her suggestions were implemented early in the current presidential administration (e.g., the discontinuation of private debt collection on behalf of the IRS), and more issues are outlined below.
Recommendations for the IRS
The five most serious problems encountered by taxpayers are:
- The complexity of the tax code, which is both costly and “leads to perverse results”;
- The hardship effect of collection enforcement (especially levies and seizures) on economically distressed taxpayers (as opposed to making greater use of offers in compromise and installment agreements);
- The correct reporting of income or exclusion on cancellation of debt, which requires the filing of the little-known Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment), and the unwritten rule (in forms and publications, at least) that a taxpayer must also provide a statement of insolvency;
- The lack of early intervention and the overreach of IRS employment tax policies even where education is likely more effective than enforcement; and
- IRS improvements to assist victims of identity theft.
Note that the IRS has already established an Identity Protection Specialized Unit and a toll-free hotline for victims of identity theft (1-877-438-4338, or 1-877-IDtheft). However, the IRS could possibly give taxpayers the opportunity to review and monitor their tax accounts and allow IRS employees more latitude in determining the rightful owner of a disputed Social Security number.
Taxpayer Service Issues
Olson had several suggestions for improving taxpayer service, including establishing more face-to-face assistance centers in the United States and overseas, expanding the hours at existing sites, and increasing the live (as opposed to internet) education and outreach program for small business/self-employed taxpayers. She would also like the IRS to publicize an employee phone directory with a topical index, provide more toll-free overseas lines, staff efficient operators to route phone calls to the IRS, and provide more secure online access for overseas taxpayers. For domestic U.S. taxpayers ineligible for a Social Security number, Olson urges allowing online applications for individual taxpayer identification numbers.
Compliance issues continue to cause customer service problems, in part, says Olson, because the IRS’s measures of success do not properly balance taxpayer service and enforcement. She recommends creating an IRS Cognitive Learning Lab and streamlining the tax system so that a taxpayer can work with one employee throughout the case. Olson also recommends that the IRS develop better measures and funding for local coordinated issue papers (CIPs) and disseminate those findings more widely. Better measures are also needed to evaluate customer service in the Automated Collection System. In particular, the IRS should examine taxpayer wait times, the inability to fax documents to IRS employees, and other overly burdensome procedures. One emerging issue is the proper reporting of transactions in virtual world economies for which the IRS’s failure to provide guidance could lead to unintended taxpayer noncompliance.
As examinations increase, audit coverage arguably extends to increasingly less-egregious offenders or nonoffenders. Olson argues that the IRS should assume good faith on the part of taxpayers and allow more opportunities to meet taxpayer preferences throughout the exam, including:
- Choosing whether an exam will be correspondence or face to face;
- Requesting a phone conference with the examiner; and
- Setting up a payment agreement for tax due.
Such changes not only increase IRS effectiveness but also reduce disparities between taxpayers that are sophisticated at navigating the tax system and taxpayers in similar situations that are not. Olson recommends five actions to address this problem, including the immediate elimination of the “combination letter” (a letter of initial contact with the taxpayer sent simultaneously with an official examination report). In the correspondence exam process (which represents about 83% of exams), there are disturbing patterns of emphasizing closings over cooperation with the taxpayer as well as delays in responding to taxpayer correspondence followed by premature assessment of tax; this pattern is uncomfortable for the taxpayer and creates needless re-work for the IRS. Instead, Olson urges the IRS to adhere to its own “longstanding quality (audit) standards.”
In general tax administration, Olson cautions that the IRS needs to do a better job of measuring the indirect, “downstream” consequences of centralization for taxpayer service and compliance. The IRS could improve amended return processing if it allowed individual taxpayers to file amended returns electronically, eliminated unnecessary referrals to examination, and created a special unit to resolve cases in which two tax returns were filed with the same taxpayer identification number for a given period. In addition, the file management system (recently reclaimed from outside contractors) is also in need of improvement: the IRS refunded over 40% of the photocopying fees collected because it could not locate the requested taxpayer files. The Service miscalculates the failure-topay penalty on approximately 2 million taxpayers per year, and manual calculations of interest are incorrect nearly onethird of the time. Olson recommends software programming to catch these errors and revising the Internal Revenue Manual to entitle all taxpayers to review the accuracy of penalties and interest. Finally, she recommends sending clarifying notices to employers when the IRS and the Social Security Administration have different wage numbers and providing a phone number for consultations to resolve these issues efficiently.
Olson’s report also makes several legislative recommendations, lists the 10 most commonly litigated tax issues, and provides a summary of key research reports produced in connection with her office. These are available in the full text of the report, available at www.irs.gov/advocate/article/0,,id=202276,00.html.
John Miller is a faculty instructor at Metropolitan Community College in Omaha, NE. Valrie Chambers is an associate professor of accounting at Texas A & M University in Corpus Christi, TX. Mr. Miller and Ms. Chambers are members of the AICPA Tax Division’s IRS Practice and Procedures Committee. For further information about this column, contact Mr. Miller at email@example.com.