National Taxpayer Advocate's June 30, 2015 Report To Congress

Twice a year the National Taxpayer Advocate submits a report to Congress. The Advocate is required to submit these without prior review by the Commissioner of the Internal Revenue Service, the Secretary of the Treasury or the Office of Management and Budget. A report was issued June 30, and it identified the objectives of the Advocate’s office for the upcoming fiscal year.

The National Taxpayer Advocate is Nina E. Olson. We have spoken of her before, and I am a fan.  

The following caught my eye:

The most serious problem facing U.S. taxpayers is the declining quality of service provided to them by the IRS when they seek to comply with their tax filing and payment obligations."

Given that this is a co-equal reason for the IRS to exist (the other being to collect revenue), this is a rather serious charge.

Consider the following:

·         The IRS hung up on approximately 8.8 million taxpayers during this year’s filing season. The IRS dryly refers to these as “courtesy disconnects,” ostensibly as proof that they too have read Orwell’s 1984.

o   This number was up from 544,000 hang-ups during the 2014 filing season.

·         Only 37% of people using toll-free lines were able to speak with a human being.

o   Down from 71% last year.

·          The IRS has announced that it will no longer answer any tax law questions at all.

·         The IRS will eliminate tax preparation altogether.

o   It used to maintain approximately 400 walk-in sites and helped taxpayers prepare around 500,000 tax returns annually.

·         The IRS answered only 17% of the calls from people whose account was blocked on suspicion of identity theft.

·         Don’t expect that hiring a tax professional will resolve the logjam. Professionals were able get through less than 50% of the time.

From the perspective of a practicing tax CPA, I found interacting with the IRS this filing season to be unpleasant, if not futile. I find myself with divided opinions: many of the examiners and officers I have met and worked with over the years are responsible and likeable enough. Gather them together however and you have an organization that has lost the trust and confidence of a sizeable number of taxpaying citizens.

Ms. Olson does point out that the IRS has been charged with additional tasks in recent years, such as pursuing foreign assets (FATCA) and "assisting" the American public with their health insurance (ObamaCare). There has simultaneously been a reduction in agency funding.The GAO has reported that IRS funding declined approximately $900 million since fiscal year 2010, for example, resulting in the elimination of approximately 10,000 full-time equivalent positions.

Let’s be frank: under this Congress there will not be – nor should there be – additional funding for an agency that has been weaponized for political purposes. Paul Caron, a Pepperdine tax law professor, maintains a count and compendium of IRS misbehavior at TaxProfBlog  (http://taxprof.typepad.com/taxprof_blog/irs-scandal). He is perilously close to 800 days and will likely exceed that count by the time you read this. If smoke indicates fire, then someone must have burned down the warehouse district to generate that much smoke.

Is there a solution? Yes, but it will probably have to wait until November, 2016. But you already knew that.

Taxpayer Advocate Reports That Taxes Are Too Complicated

In the Taxpayer Advocate 2012 Annual Report to Congress, Nina Olson states that it takes U.S. taxpayers more than 6.1 billion hours to complete all the tax filings required by the tax system.

Think about this for a moment. It takes more than 3 million full-time employees to administer the U.S. tax system.

I am one, of course. Still, ... good grief!

Here are other observations:

• Individual taxpayers find return preparation so overwhelming that about 59 percent now pay preparers to do it for them. Among unincorporated business taxpayers, the figure rises to about 71 percent."
• According to a tally compiled by a leading publisher of tax information, there have been approximately 4,680 changes to the tax code since 2001, an average of more than one a day."
• From FY 2004 to FY 2012, the number of calls the IRS received from taxpayers ...increased from 71 million to 108 million, yet the number of calls answered ... declined from 36 million to 31 million."
•  ... among  the callers who got through, the average time ... waiting on hold increased from just over 2½ minutes in FY 2004 to nearly 17 minutes in FY 2012."
• The IRS receives more than ten million letters from taxpayers each year responding to IRS adjustment notices. ... the IRS ... cannot timely process nearly half of its pending correspondence...."
• In 2012, TAS conducted a statistically representative national survey of over 3,300 ... sole proprietors. Only 16 percent said they believe the tax laws are fair. Only 12 percent said they believe taxpayers pay their fair share of taxes."

 Here is one that gave me pause:

• ·        We believe it is important to increase taxpayer awareness of the connection between taxes paid and benefits received. We have recommended that Congress direct the IRS to provide all taxpayers with a “taxpayer receipt” showing how their tax dollars are being spent. This “taxpayer receipt” ... should be provided directly to each taxpayer in connection with the filing of a tax return.”

 And you knew this one was coming:

• In each of the last two fiscal years, the IRS budget has been reduced, and it appears the IRS budget will be cut further in the current year. The continued underfunding of the IRS poses one of the greatest long-term risks to tax administration today.”

My Take? I believe that the IRS is underfunded, and that such underfunding represents a risk. I point out, however, that the underfunding is greatly attributable to governmental overreach, although it may be fair to say that the President and Congress have left the overreach on the IRS’s doorstep. 

And a receipt?! No thank you. I am aware of how my money is spent. That is a big part of the problem.

I have very much come to like Nina Olson. No one in Washington will listen to this report, however. Not this crowd. Not this year.

The IRS and Identity Theft

One of the downsides of increased electronic tax filing is increased identity theft. We had one of our e-filings intercepted this year by the IRS for identity mismatch. The IRS did not accept the e-file and instead required a paper return with Form 14039, Identity Theft Affidavit, attached.

I was looking at (OK, I was skimming) a report from the Treasury Inspector General for Tax Administration issued May 3rd. Imagine my surprise to learn that the IRS has no special procedures for our return with Form 14039 attached.

The IRS considers the paper filing to be a duplicate return and does not immediately process it. An employee enters a transaction code into the taxpayer file to memorialize receipt. The return then goes to a separate queue to be worked on, possibly after April 15 when the filing season has ended. The IRS transfers the file to Duplicate function for initial review. If Duplicate considers it an identity theft case, the file is again transferred, quite likely to the Accounts Management function. It is there assigned an assistor, who requests copies of the original tax returns and begins the process, including correspondence, of determining who the legitimate taxpayer is.

This process is slow and the refund can be delayed until late in the year or even the following year. The average case resolution is 414 days.

The assistor very likely works in Accounts Management. The problem is that these employees also answer the toll-free telephone lines during busy season. According to TIGTA, 87% of assistors working identity fraud also answered the phones, and 60% stated that they worked the toll-free line exclusively. TIGTA considers the optimal assistor inventory (that is, caseload) to be 100 to 125 per assistor, but the average assistor had an inventory exceeding 300 cases.

The identity problem is new enough that IRS guidelines are spread out over almost 40 sections in the Internal Revenue Manual. Sometimes the guidelines are inconsistent. The IRS in addition does not have procedures to spot trends which could be useful in detecting or preventing future fraud. One problem, for example, is sending notices to the last address of record, which could just be the person perpetrating the fraud.

Training has also been an issue. TIGTA’s survey showed that almost half of the assistors believed that their training was not sufficient. In one office, 13% of assistors had received no identity theft training.

To be fair, the IRS has agreed with TIGTA’s findings and has begun implementation of many recommendations. For example, there will be specialized units in Accounts Management to work only identity fraud cases.

Then we have Congress. Three representatives this week introduced the “Fighting Fraud Act,” which would double the current penalties for tax preparers who are involved with identity theft. The intent is to give the IRS greater incentive to prosecute this type of theft, presumably because the potential payoff is greater.

Really? This is the best the mandarin class can dream up? Here is an idea: the IRS assigns a PIN to every preparer. Require every professionally-prepared return to require the preparer’s PIN. If a preparer is involved with this type of nonsense, the IRS revokes the PIN and bans the preparer from working before the IRS.

Will this stop the completely unscrupulous? Here is a question in return: in human history, has it ever been possible to stop the completely unscrupulous?

The IRS May Allow Videoconferencing

I am just finished reading Nina Olson’s most recent blog post. Nina Olson is the National Taxpayer Advocate with the IRS. The Advocate’s office is independent from the IRS, although it works with the IRS to resolve tax problems. I have worked with the Advocate’s office before, and in general I have been pleased. Recent contacts have concerned me, though. It sounds to me that they are being overworked, at least here in Cincinnati. I suspect they are feeling IRS budget restrictions.

Ms Olson commented on taxpayer frustrations with “corr exams.” These are correspondence exams and frequently address areas using computer matching. You may get a “corr” notice concerning missing dividends or interest income, for example, or possibly the sale of stock. The corr notices are notorious and can frequently take multiple contacts to resolve. Why? Well, a key reason is that no single examiner is assigned to work on your case. Rather, it floats in a pool, and when you send a letter it gets randomly assigned to an examiner. Say that the letter resolves many, but not all, the issues. The IRS sends out another notice. You respond, but it will not go to the same person who earlier worked on your file. There is no continuity in the corr exam process.

Ms Olson is proposing the use of videoconferencing in conjunction with corr exams. Upon receiving a notice, a taxpayer would have the option of making an appointment for an online meeting. The taxpayer gets a PIN and logs on from his home or office computer. If the taxpayer does not have a computer, he/she could alternatively go to the local IRS office or perhaps to a specially designated room at another government building. With a high-resolution camera, the examiner could even read a document that the taxpayer brought to the videoconference. The examiner would retain the case, and all future correspondence would contain his/her name, phone number and e-mail address.

Here is how Ms Olson phrased it:

As anyone who has looked at both the literacy levels of the United States population and the poor quality of IRS exam notices can attest, there is not a whole lot of communicating going on in IRS correspondence exams.”

A virtual face-to-face meeting would allow for diversity in taxpayers’ ability to read, write and express themselves verbally. The taxpayer would be able to explain himself and the examiner could better explain any necessary documentation without the back-and-forth of a correspondence exam.

What does this tax CPA think? Great idea! I am becoming quite the fan of Nina Olson.

Taxpayer Advocate Issues Directive to IRS Commissioner

I am starting to like Nina Olson, the National Taxpayer Advocate.

I have been negative on the IRS program called the Offshore Voluntary Disclosure Program (OVDI).  This was the government reaction to the UBS and offshore bank account scandals. That however was tax fraud committed by the extraordinarily wealthy.  My background has been the Foreign Service and expat community, primarily because my wife is the daughter of a (retired) Foreign Service officer. These are rather ordinary folk who just happen to live overseas.

Tax advisors who work this area know that the IRS pulled a bait-and-switch a year ago - on March, 2011 - with taxpayers trying to comply with the freshly-resurrected foreign reporting requirements.  The FBAR has, for example, been out there since at least the early 70s, but at no time did Treasury want to confiscate 50% or more of your highest account balance for not filing a one-page form. The IRS was waist-deep with 2009 OVDI and had previously encouraged taxpayers to enter the program with lures of reduced penalties for non-willful violations.

EXAMPLE:  You have expatriated to Costa Rica. You have next-to-no ties in the United States and pay little attention to tax developments here. You have even learned to like soccer (but why?). The requirement to file an FBAR comes as quite the surprise to you. You first thought it absurd that such reporting would apply to the most ordinary of taxpayers. Surely that is for rich people only. You have to qualify as non-willful, right?

Then last March the IRS trotted-out a memo directive that it would not consider non-willfulness, reasonable cause, or the mitigation guidelines in applying the offshore penalty. Let me phrase that a different way: the IRS instructed its examiners to assume that the violation was willful unless the taxpayer could prove that it was not. Would you further believe that, at first, the memo was kept secret?

Huh? Are you kidding? O.J. Simpson received more “benefit of the doubt” than the IRS was willing to provide.

Then in August Nina Olson issued a Taxpayer Advocate Directive ordering IRS division commissioners to revoke this position and direct examiners to live up to their own promises to thousands of affected taxpayers.  The IRS division commissioners blew her off.

What?

Tax Analysts now reports that the main IRS commissioner – Douglas Shulman – has no intention of responding to Nina Olson on this matter. To aggravate the matter, there is a statutory requirement that the IRS commissioner respond to the Taxpayer Advocate within 90 days.  Do laws mean nothing to this crowd?

Is this a specialized tax area? Yes. Does it have greater import? I believe it does. It does because the tax attorney and tax CPA community – people such as me – pay attention, and this behavior diminishes confidence in the IRS and any trust in its word. The consequences are subtle, injurious and lasting. And for what purpose? To extract a penalty from someone whose only crime was not paying attention to increasingly obscure and inane U.S. tax law?

Congress Speaks Up on Innocent Spouse Tax Relief

I am glad to see that Congress is addressing the IRS’s position concerning innocent spouse and litigated in Cathy Marie Lantz v. Commissioner.

Here is a summary of the issue:

There are three “types” of innocent spouse claims. Let’s refer to them by the Code subsections they are presented under: (b), (c) and (f). Type (b) is the classic innocent spouse: the erroneous items belong to one spouse; the other spouse did not know or have reason to know. Type (c) is for divorced spouses and allows each spouse to determine his/her liability as if the spouse had filed a separate return.

Type (f) is more of an expansive innocent spouse rule. It was passed years after the original provisions (it was passed in 1998), and it seeks to provide an opportunity for spouses who cannot meet the (sometimes technical) requirements of (b) and (c).

What (b) and (c) have in common is that the spouse has to file the innocent spouse claim within two years of contact by the IRS. What happens, though, if the one spouse is not told by the other spouse of the contact? Could happen. Some would say it will happen. Say further that two years go by. The spouse then learns of the problem and tries to pursue innocent spouse relief under (f). Does the two year rule apply to an (f) filing?

Interestingly, Congress did not include a two year rule in (f), a point which many practitioners, including myself, interpret to mean that Congress did not mean to include a two year rule in (f). Seems straightforward. The law was in place; Congress was aware of the law and chose not to include the two year requirement.

The IRS does not agree. The IRS argues that Congress delegated authority to it to write administrative Regulations for (f), and that, after consulting with Carnac the Magnificent, it believes that Congress intended for there to be a two-year requirement under (f). Congress just forgot to write it in to the law.

There was a case last year,Cathy Marie Lantz v. Commissioner, which unfortunately agreed with the IRS. To be fair, there is a technical argument, and the argument can be persuasive. Unfortunately, it does not pass the “common sense” test.

Congress has now chimed in and 49 Representatives — including all the Democrats who sit on the tax-writing House Ways and Means Committee — have told the IRS Commissioner that the IRS had “violated the spirit of the original law” in limiting relief to two years. Three Democratic senators — Max Baucus of Montana, the chairman of the Finance Committee; Tom Harkin of Iowa; and Sherrod Brown of Ohio — have sounded the same theme.

The national IRS taxpayer advocate - Nina Olson – has also asked for the two year limit to be extended or revoked.

Let’s hope something comes of this.