Editor: John L. Miller, CPA
Nina Olson, the national taxpayer advocate (NTA), has presented her 2009 annual report to Congress. Her bottom-line finding is that “fundamental tax simplification is desperately needed.” Part of her report includes her identification and analysis of the most serious problems taxpayers are facing and her recommendations for alleviating these problems. This item categorizes her proposals into three areas, according to whom the proposals are most likely to affect in the short term.
Proposals Affecting the Practitioner Community
According to the NTA report, about 58% of individual taxpayers and 80% of small businesses use paid tax preparers, but the General Accounting Office is concerned about preparer accuracy. Olson supports the IRS’s proposal that all unenrolled preparers pass a basic tax return preparation exam and thereafter complete continuing education in order to be able to file clients’ tax returns. In addition, she proposes a public awareness campaign to educate taxpayers about preparer requirements and the creation of a publicly available database listing all authorized preparers.
Olson also recommends increased preparer due diligence and a large-scale program of IRS preparer visits, which the IRS subsequently executed in the form of the “10,000 letters program.” Under this program, 10,000 preparers received letters in January and February 2010 to promote compliance and professional ethics. However, many CPAs were troubled by the perceived tone of the letter, an increase in the substantiation requirements for Schedule C expenses, and a request for a follow-up visit to the CPA’s office during the busy tax-filing season (see letter from Alan Einhorn, chair of the AICPA’s Tax Executive Committee, to SBSE Commissioner Chris Wagner (April 2, 2010), http://tinyurl.com/EinhornLetter).
Olson proposes that all persons who prepare tax returns and interact with taxpayers should obtain and use a unique preparer tax identification number (PTIN), not just paid preparers signing the tax return. Subsequent to her report, the IRS issued proposed rules (REG-134235-08) defining anyone who must obtain a PTIN as “an individual who is compensated for preparing, or assisting in the preparation of, all or substantially all of a tax return or claim for refund of tax.” That is, whether or not a tax preparer signs a return, anyone preparing substantially all of the tax return must get a PTIN; it is possible that more than one party will be a tax preparer on a single return. In a March 25 news release (IR-2010-37), the IRS announced a new PTIN system to take effect later in 2010 in which all preparers will be required to register, including those who already have PTINs.
Proposals Likely to Affect Clients / Taxpayers
Automatic tax lien filing affects taxpayers’ credit as well as their ability to obtain financing, find and/or retain a job, and secure affordable housing and insurance. Therefore, the taxpayer’s ultimate ability to pay current and future tax bills depends in part on his or her credit. While addressing participants of the AICPA’s October 2009 National CPA/IRS Tax Issues Meeting, Olson noted that these effects can be long term if a subsequently paid lien is accompanied by a lien release but is not also accompanied by a lien withdrawal, because credit agencies retain information on the existence and release of liens for years after the release but erase information when a lien is withdrawn. Sec. 6323(j) enumerates several circumstances under which validly applied liens may be subsequently withdrawn, including the establishment of an installment payment plan in which a withdrawal would facilitate collection of a tax liability or would be in the best interest of the taxpayer (as determined by the NTA) (Secs. 6323(j)(1)(B)–(D)).
Since 1999, the number of liens filed has increased, but the number of real dollars collected has fallen. The NTA report questions the effectiveness of current lien policies, and in particular whether the policies fall short of protecting a taxpayer’s right to a thorough supervisor’s review of taxpayer circumstances prior to the filing of a lien (§3421 of the IRS Restructuring and Reform Act of 1998).
Proposals for the IRS’s Next Moves
There were many recommendations that, if adopted, would mainly affect the IRS internally over the next year, or at least until adopted or executed. The recommendations can be grouped into system proposals, program proposals, and guidance and procedures.
- Restore the service level on the toll-free telephone service so that 85% of callers are served within a five-minute hold time (roughly where service was in the 2007 filing season), an improvement over its current 64% service level and average hold time of almost nine minutes. Dedicate a line to national disasters and late-year or one-time tax law changes.
- Develop a comprehensive e-services strategy that would allow taxpayers to receive refunds in the form of stored value cards and enable taxpayers to monitor and resolve their tax account issues via the internet.
- Create an expanded database that includes gross receipts, assets, credit card information, sales tax, and currency transaction reports.
- Halt the expansion of correspondence exams pending further research and resolution of current problems.
- Eliminate system flaws in the power of attorney (POA) procedures to distinguish cases in which a POA is applicable to only one taxpayer on a joint return.
- Track the frequent changing of POAs affiliated with low-income taxpayer clinics.
- Identify and monitor taxpayers’ circumstances when and where joint filers are likely to subsequently require separate accounts.
- Simplify the offer in compromise (OIC) process (conforming it to Policy Statement P-5-100) and, where a tax liability has existed for more than three years, attempt to resolve tax problems through increased use of OICs.
- Provide outreach and education for tax-exempt organizations.
- Establish web services, more international facilities, and a reduced-fee prefiling program for U.S. individual and small business taxpayers who are conducting business abroad.
- Develop an in-house cognitive research laboratory on taxpayer behavior, which is likely to result in programs that are more effective.
Guidance and Procedures
- Adjust the priorities and staffing of Appeals toward greater coverage in local offices and overall increased service and satisfaction.
- Offer guidance to Ponzi scheme victims regarding the effect of intermediaries on tax deductibility, when to amend prior-year returns to eliminate phantom income, how to report clawbacks, and how to apply private foundation distribution rules and applicable jeopardy tax.
- Refine the compliance initiative projects so they interact better both internally and externally, especially with local data sources regarding cash economies. Develop practical measures to evaluate the effectiveness of using state and local data.
- Explain and enforce policies on when the IRS will collect tax debt discharged in bankruptcy by enforcing its lien interests. Improve communication with bankrupt taxpayers about their dischargeable and nondischargeable debts.
- Write off any balance due on accounts outstanding longer than the original statute of limitation date plus five years, absent other allowable extensions.
- Divide Schedule C reporting between income reported on Forms 1099 and other gross receipts (similar to how many professional tax preparer software programs currently process reporting of income).
- Improve the IRS’s ability to detect the omission of gross receipts for taxpayers not subject to information reporting (without regard to offshore or intentional aspects of any underreporting).
Most of the NTA’s proposals require IRS action, but those affecting the tax preparer community most directly have already been initiated. While few preparers have been directly and immediately affected, the effects on those who have been have sometimes been profound. Among the proposals in the other categories, most remain unaddressed, but as the 10,000-letter program showed, the IRS can develop and implement changes quickly when motivated to do so. Thus, practitioners should continually monitor these areas for developments that may affect their clients.
John Miller is a faculty instructor at Metropolitan Community College in Omaha, NE. Valrie Chambers is a professor of accounting at Texas A&M University in Corpus Christi, TX, and is a member of the AICPA Tax Division’s IRS Practice and Procedures Committee. For further information about this column, contact Mr. Miller at email@example.com.