In her mid-year report to Congress, National Taxpayer Advocate (NTA) Nina Olson has identified the priority issues that the Taxpayer Advocate Service (TAS) will focus on during the upcoming fiscal year. In particular, the report focuses on the adverse impact of expired and expiring tax provisions; the rise in tax fraud and tax-related identity theft; and attempts to limit the NTA’s input on issues that affect taxpayer rights.
Background. The NTA is required by statute to submit two annual reports to the House Committee on Ways and Means and the Senate Committee on Finance. The first of these reports, submitted mid-year, identifies the objectives of the Office of the Taxpayer Advocate for the fiscal year beginning in that calendar year. TAS is an independent organization within IRS whose employees assist taxpayers who are experiencing economic harm, who are seeking help in resolving tax problems that have not been resolved through normal channels, or who believe that an IRS system or procedure is not working as it should.
Expired and expiring tax laws. The NTA said that “[t]he continual enactment of significant tax law and extender provisions late in the year has led to IRS delays in handling millions of taxpayers’ returns and caused many taxpayers to underclaim benefits because they did not know what the law was.” Further, she said that because of the magnitude of these challenges and the uncertainty about such a large number of important provisions, the 2013 filing season is already at risk.
The NTA advised that the 2013 filing season is likely to pose problems for IRS and many (if not most) taxpayers if Congress doesn’t act soon on the many provisions that either have or soon will expire.
The NTA surmised that Congress will likely extend many of the expired provisions retroactive to Jan. 1, 2012, but neither IRS nor the taxpayers can know for certain if this will happen. As a result, taxpayers cannot make plans. The expired provisions include:
- … The increase in the exemption amount for the alternative minimum tax (i.e., the “AMT patch”);
- … The deduction for state and local taxes;
- … The deduction for mortgage insurance premiums; and
- … The provision allowing persons over age 70 1/2 to make tax-free withdrawals from their Individual Retirement Accounts (IRAs) for charitable contributions.
The expiring provisions include the Bush-era cuts in marginal tax rates, reduced tax rates on dividends and long-term capital gains, marriage penalty relief provisions, certain components of the child tax credit, the earned income tax credit, and the adoption credit, and the moratoria on the phase-outs of itemized deductions and personal exemptions.
Tax fraud and tax-related identity theft. The NTA noted that tax fraud and tax-related identity theft, although distinct problems, often overlap and present similar challenges for IRS and taxpayers. While not all fraudulent returns involve identity theft, many do. Both problems are growing. IRS faces competing pressures to issue refunds quickly and investigate suspicious claims. IRS processed about 145 million returns last year, including some 109 million refund claims, which some families used to pay rent or winter heating bills. At the same time, IRS had to investigate more than two million potentially fraudulent claims.
The report noted that IRS’s automated fraud-detection filters are inherently imperfect. Among the roughly two million refund claims that IRS held, tens of thousands were legitimate. The NTA called for IRS to create procedures that would allow honest taxpayers with legitimate refund claims to receive their money without unnecessary delay.
For example, where IRS seeks to verify suspect wage and withholding information, its now places “hard freezes” on cases it can’t handle within an 11-week time period, meaning that claimed refunds must be manually released to be paid. The report expressed concern that IRS has little incentive to prioritize a case once a hard freeze has been imposed, resulting in harm to honest taxpayers whose returns inadvertently tripped a filter.
Constraints on its resources are also limiting IRS’s ability to assist victims of tax-related identity theft. Identity theft can impose a significant burden on its victims, whose legitimate refund claims are blocked and who often must spend months or longer trying to convince IRS that they are victims and then working with IRS to untangle their account problems.
Attempts to limit NTA’s role. Congress gave the NTA the authority to issue Taxpayer Assistance Orders (TAOs) to IRS ordering it to take an action or refrain from taking an action in taxpayer cases. The NTA has also been given parallel administrative authority to issue Taxpayer Advocate Directives (TADs) to the IRS, directing it to take action on systemic issues to protect taxpayer rights, prevent undue burden, ensure equitable treatment, or provide an essential service to taxpayers. Over the past year, the report said, IRS has ignored and sought to limit the NTA’s authority to issue TADs.
In June of 2011, the NTA issued a proposed TAD to the head of an IRS operating division directing him to issue guidance and implement a procedure for adjusting the accounts of taxpayers who have been victimized by fraudulent return preparers. He did not comply, prompting the NTA to issue a final TAD on the same issue in January of 2012. The operating division has still not issued comprehensive guidance or implemented procedures to assist taxpayer victims of preparer fraud.
In January of 2012, the NTA issued a TAD to address problems taxpayers were facing in connection with the correspondence examination process as described in a TAS study, including problems caused by obsolete regs. IRS challenged the NTA’s authority to issue a TAD to the Chief Counsel or to interpret the law. IRS’s position significantly reduces the utility of these directives and undermines the purpose for which they were created.
Other Areas of Focus. The NTA listed additional areas that will be focused on in the coming year. Among these are: (1) IRS’s increasing use of automated examination and other tax adjustment procedures, which limit opportunities for taxpayers to interact directly with an IRS employee; and (2) the impact of IRS’s crackdown on persons with offshore accounts, which often subjects individuals who were not engaged in tax evasion to draconian penalties.
Source: Thomson & Reuters 7/5/2012