The National Taxpayer Advocate, Nina Olson, in her annual report to Congress for 2011, cited the IRS’ lack of adequate funding, expanding workload and overreliance on automation as the most serious problems facing taxpayers. She said that, as a result, the IRS cannot adequately meet the needs of taxpayers, cannot adequately detect and address noncompliance and cannot maximize revenue collection.
In her report, she said that the IRS relies too heavily on automation in making changes to taxpayers’ returns, assuming that information from third parties is correct and making changes based on this information without conducting an examination, which would allow taxpayers to invoke rights that normally accrue in an examination. Olson noted that, frequently, it is later established that the taxpayer was, in fact, correct, but the taxpayer often then has difficulty getting the corrections made because the IRS’ understaffing makes it hard to reach the Service by phone or to get a timely written response.
Olson also objected
to the IRS’ increased reliance on math error authority, which
is an authorization by Congress to correct errors on returns
without using the deficiency procedures. Olson added that the
notices the IRS sends in math error cases are often
incomprehensible and leave taxpayers uncertain of what the IRS
is correcting. They are often used inappropriately as well. As
an example of the misuse of math error corrections, Olson
cited an instance where the IRS improperly used the authority
to deny refunds for the first-time homebuyer credit based on
third-party information that the taxpayers purchased their
houses before the effective date of the credit. (For more on
IRS math error correction problems, see “TIGTA:
IRS Does Not Timely Resolve Math Error Disputes.”)
Another area of concern is the IRS’ use of
automation in identifying and flagging what it deems to be
fraudulent returns or refund claims, especially in the area of
fraudulent wage withholding. Olson notes that the freezes the
IRS places on refunds last too long and are exacerbated by
delays in receiving matching wage withholding information. In
some cases, the IRS “auto-voided” returns that were deemed
fraudulent without giving taxpayers any notice; in a number of
cases, these returns were later found to be legitimate. She
also noted that the IRS’ attempt to deal with the large
increase in fraudulent earned income tax refund claims filed
by prison inmates by matching the refund information with
state prison records increased the risk that people who had
been released from prison would mistakenly show up on those
records and be denied a legitimate claim.
Among the other issues Olson addressed was the need for a codified taxpayers’ bill of rights because most taxpayers had no idea they had any rights when dealing with the IRS. Olson also mentioned the deleterious effect of tax liens on taxpayer compliance. Finally, in discussing the most serious problems facing the IRS, Olson mentioned, in the area of international taxation, that the IRS’ focus on “stepped-up enforcement without adequate coordination and a corresponding increase in service” was ill-serving international taxpayers, a criticism of the IRS’ controversial overseas voluntary disclosure program, which Olson has strongly criticized elsewhere and which she elaborated upon in the report.
