In January, 2018 National Taxpayer Advocate (“NTA”), Nina E. Olson, released the 2017 Annual Report to Congress (“Report”). Internal Revenue Code (“IRC”) §7803(c)(2)(B)(iii) requires the NTA to identify at least 20 of the most serious problems faced by taxpayers and outline their administrative and legislative recommendations. In the Report, the NTA identified 21 of the most serious problems for taxpayers, made 11 legislative recommendations and discussed 10 of the most litigated issues and significant decisions. Volume Two, of the Report, includes 7 research studies. The NTA is also introducing the new National Taxpayer Advocate “Purple Book” to assist Congress in its consideration of taxpayer rights and Internal Revenue Service (“IRS”) tax reform.
Major tax legislation implementation is always challenging for the IRS. The IRS has not yet quantified the effect of the new tax law but a preliminary estimate projects the IRS would require $495 million in 2018 and 2019 in additional funding. Challenges faced by the IRS include computer updates, responding to taxpayer questions, publishing new forms, revising regulations, issuing further guidance, training employees and developing new systems of compliance. This preliminary estimate considered 131 filing season systems that will be affected by the new law and reflected the new rates, inflation indexing, changes for deductions and credits, phase-out of affected benefits and fraud detection filters.
The NTA commented on the confusion it is seeing relative to the new withholding rates, tax prepayments, and the ability to make a charitable contribution to a state in lieu of property taxes. Olsen stated that, with more funding, strong leadership and a closer working relationship with Congress, she is convinced the IRS can do the job well.
The Report outlines that funding cuts have greatly affected the IRS’ ability to provide acceptable levels of taxpayer quality service. The IRS has been unable to update technology affecting its ability to improve efficiencies and effectiveness and to maintain programs to promote compliance while protecting taxpayer rights.
The IRS is unable to field the more than 100 million calls received each year. The IRS projects it would only be able to answer about 40% of calls during the fiscal year. Since 2014 the IRS has cut back on the scope of tax law questions it answers responding to only basic questions during filing season and will not answer tax law questions after the April filing deadline. The IRS is also challenged by its workforce reduction and training budget. The training budget has been cut almost 75% since 2009.
The NTA agrees that additional funding is needed, however, it should not be used as an excuse. The IRS can take steps to improve taxpayer service through creativity and innovation.
Private debt collection, as it relates to excessive financial harm to taxpayers and collection efforts, is also addressed in the Report. Although there is a requirement for the IRS to use private collection agencies (“PCA”), the Report recommends that the IRS define terms that apply to statutory requirement to use PCA and the intent that federal tax collection should not leave taxpayers unable to pay for basic living expenses.
Online accounts are supported by the NTA, however, they should not replace telephone or other types of communication. Some taxpayers do not have digital access or are reluctant to interact with the IRS in this manner. In addition, due to security measures implemented by the IRS, taxpayers find it difficult to set up. Only 30% of taxpayers who wanted to set up an online account were able to do so. The Report recommends that the IRS develop a multi-faceted service based on a study of taxpayers needs and preferences.
The streamlined approval process, with the introduction of Form 1023-EZ, Streamlined Application for Recognition of Exemption Under §501(c)(3) of the IRC, was intended to reduce the burden for organizations seeking tax-exempt status. A study of a representative sample of organizations revealed that, in 2015 and 2016, approximately 37% and 26%; respectively, of organizations that obtained favorable rulings did not meet the eligibility requirements of IRC §501(c)(3). In 2017, the rate increased to 42%. The NTA recommends the IRS review narrative statements of actual or planned activities and the taxpayer’s organizing documents before deciding on tax-exempt status.
Other areas that are addressed in the Report include audit rates and passport denial and revocation. There is also a section on special taxpayer populations including those eligible for the earned income tax credit and military and international taxpayers. The right to an independent appeal and revenue protection challenges are also addressed. Legislative recommendations include those such as the timing of refunds, collection due process, user fees, cancelation of student loans and victims of terrorist attacks.
Volume Two focuses on Taxpayer Advocate Service research and related studies. One of these studies was an analysis of tax settlement programs where it was concluded that settlement programs that provide broad amnesty are generally not a reliable way to generate revenue in the long run. However, they can show that the IRS is trustworthy and can avoid controversy and enforcement costs.
As part of the Report the NTA released the Purple Book, which is a new publication containing 50 legislative recommendations for strengthening taxpayer rights and improvements for tax administration. There are some recommendations that have been presented in the past such as improving IRS operations/ IRS reform. The NTA is currently working on a bipartisan plan with the House Ways and Means Subcommittee. New recommendations include that Congress codify both the Taxpayer Bill of Rights and the IRS mission statement in §1 of the IRC.
IRS employees are required to act in accordance with the Taxpayer Bill of Rights, but it is not clear if taxpayers can rely on these rights and whether they should be the foundation for our tax system in the U.S. The Report states that, since taxpayers are self-reporting, they would be more likely to comply voluntarily if they perceive the tax system is fair.
In addition to strengthening Taxpayer’s rights, the Purple Book sets to improve the tax return filing process, improve IRS assessment and collection procedures, reform penalty and interest provisions, strengthen taxpayer appeal rights, enhance confidentiality and protections and strengthen the independence of the NTA.
This Report addresses issues that affect taxpayers basic rights and the way they pay taxes or receive refunds, even if not in a dispute situation with the IRS. The NTA uses the Annual Report to bring these problems to light and offer recommendations to Congress and the highest levels at the IRS.
A full copy of the Report can be accessed here.