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WASHINGTON -
National Taxpayer Advocate Nina E. Olson today released her
annual report to Congress, designating the alternative
minimum tax for individuals (AMT) and the federal tax gap as
the most serious problems facing taxpayers. The report also
focuses extensively on concerns about IRS collection
policies and the transparency of IRS information to the
taxpaying public.
The AMT was designated as the most serious problem in the
Advocate’s report both in its own right and because it
symbolizes the broader problem of tax-law complexity. The
tax gap remains a high priority because noncompliance by
some taxpayers requires every compliant taxpayer to pay, on
average, more than $2,200 in extra tax each year to
subsidize that noncompliance.
“With a new Congress convening, I am pleased to see these
issues have been identified as priorities by the leadership
of the House and Senate tax-writing committees,” Olson said.
“Simplifying the tax code, particularly by repealing the
AMT, and reducing the inequities caused by the tax gap will
go a long way to helping America’s taxpayers.”
Concerns About IRS Collection Policies
By statute, the National Taxpayer Advocate each year is
required to identify at least 20 of the most serious
problems encountered by taxpayers. Seven of the most serious
problems discussed in this year’s report relate to IRS
collection policies. “Rather than intervening early and
making personal contact with taxpayers,” Olson said, “the
IRS often waits until taxpayers’ debts become so large that
they warrant the intervention of much more expensive IRS
field collection personnel.”
The report noted the following:
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The lack of early, meaningful interventions by the IRS
on delinquent tax accounts contributes to long-term
financial problems for many taxpayers and costs the
government billions of dollars in lost revenue.
Taxpayers are harmed because many taxpayers could pay
off all or most of the original debt if contacted
promptly but are unable to pay off the debt by the time
the IRS personally contacts them after interest and
penalties have accrued. The government is harmed because
the IRS collects only about 15 cents on the dollar on
tax debts that are two years old and virtually nothing
on tax debts that are older than three years.
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In FY 2006, the IRS reported more delinquent tax dollars
as “currently not collectible” (CNC) than it actually
collected on active balance due accounts, installment
agreement accounts, and offers in compromise combined.
Once accounts are designated with CNC status, IRS data
for the preceding six years show the agency collected
less than 2 percent of the amounts due.
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The IRS is failing to make adequate use of collection
alternatives. While some may view collection
alternatives as a “give away” of tax dollars, an
analysis of the data suggests they often are an
excellent deal for both taxpayers and the government.
For example, when the IRS accepts an “offer in
compromise,” taxpayers are able to clear up their debts
and make a fresh start. The government generally
collects far more from offers than it would collect if
the accounts were placed into CNC status, and equally
important, the taxpayer is required to remain in
compliance for the succeeding five years, or the
original tax debt will be reinstated in full. About 80
percent of taxpayers with accepted offers remain in full
compliance during this 5-year period.
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"Virtually any debt-collection operation will acknowledge
that as delinquent accounts receivable age, their collection
potential declines," Olson said. "Yet it appears that as IRS
collection cases age, IRS policies and procedures make it
very difficult for taxpayers to obtain reasonable collection
alternatives, with the result that the IRS often collects
nothing."
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The IRS uses automated processes, such as the Federal
Payment Levy Program (FPLP), to impose levies against
taxpayers who owe tax debts. However, about 84 percent
of FPLP levies historically have been imposed against
Social Security payments to the elderly or disabled,
many of whom are fully dependent on these benefits to
cover their basic living expenses. Despite the National
Taxpayer Advocate’s repeated urging, the IRS does not
have screens in place to protect vulnerable, low income
taxpayers from these automated levies.
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The report raises numerous concerns about the
outsourcing of tax collection that began in September
2006. The report notes that one of the premises on which
the program was based was a “level playing field” —
meaning that rules that apply to the IRS and IRS
employees would also apply to private collection
agencies (PCAs) and PCA employees. In practice, the
program has deviated from this “level playing field,”
Olson said. For example, the report notes the procedures
that IRS employees follow when collecting tax debts are
set forth in the Internal Revenue Manual and are
available to the public. By contrast, PCAs maintain
operational plans and calling scripts that describe such
things as psychological techniques to coax debtors into
paying, and these scripts are considered “proprietary
information” that Olson’s office was not permitted to
disclose. The report’s analysis of the costs and
benefits of the private debt collection initiative leads
Olson to conclude that the revenue benefits of the
program are limited and the potential for taxpayer
rights violations is significant. She recommends that
Congress repeal the IRS’s authority to outsource tax
collection.
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Concerns about IRS Transparency
In her preface, Olson states that the primary theme of this
year’s report is transparency and the important role it
plays in tax administration. The report notes that the
Freedom of Information Act (FOIA) requires the IRS to make
certain procedures and guidance available to the public. The
report credits the IRS with improving its compliance with
FOIA requirements in recent years but concludes that further
improvements are needed. “It goes without saying that the
IRS needs to comply with the requirements of the law,” Olson
said. “But we believe FOIA represents a floor on
transparency, not a ceiling. Transparency benefits taxpayers
and the IRS. It benefits taxpayers because they are entitled
to know what legal standards and procedures the IRS is
applying, and it benefits the IRS because we can improve our
procedures when we receive meaningful feedback from informed
taxpayers and practitioners,” she said.
Legislative Recommendations
Among 15 legislative recommendations, the report proposes
that Congress revise its budget procedures to improve IRS
funding decisions. The report states the current federal
budget procedures treat the IRS as a classic
government-spending program and pit the IRS
dollar-for-dollar against many other federal programs for
resources. The report points out, however, that the IRS is
effectively the accounts receivable department of the
federal government, collecting $2.24 trillion a year on a
budget of $10.6 billion — a 210:1 return on investment.
Studies show that each additional dollar appropriated for
the IRS would generate far more than a dollar in additional
federal revenue. The report suggests a set of guidelines for
making IRS funding decisions that recognizes the IRS’s
unique role as the revenue generator for the federal
government and seeks to maximize tax compliance, especially
voluntary tax compliance, with due regard for protecting
taxpayer rights and minimizing taxpayer burden.
Among other legislative recommendations, the report
recommends that Congress make certain changes to improve the
uniform definition of a qualifying child, eliminate or
simplify income “phase-outs,” and increase the annual gross
receipts threshold that triggers a return-filing obligation
for tax-exempt organizations from $25,000 to $50,000.
Concerns about Taxpayer Service
The report also presents Olson’s perspective on a “Taxpayer
Assistance Blueprint” the IRS has been preparing, pursuant
to a congressional directive, in conjunction with her office
and the IRS Oversight Board. Olson calls this ongoing
project to develop a five-year strategic plan for taxpayer
service a “bright spot” in tax administration this year.
“With the publication of the Taxpayer Assistance Blueprint,
the IRS will make available its first strategic plan for
delivering taxpayer service, one that is based on current
research and envisions further studies and refinements,”
Olson writes. However, Olson is concerned that the IRS
appears inclined to shift significant responsibility for
meeting certain taxpayer service needs to third-party
"partners," such as Volunteer Income Tax Assistance (VITA)
sites and other community-based organizations, in a manner
that exceeds the capacity of these organizations to handle
and that constitutes an abdication of certain core functions
that the government itself should continue to perform.
The Advocate’s report contains a second volume that
describes the results of two research studies the Office of
the Taxpayer Advocate has conducted — one on taxpayer needs
and preferences for taxpayer service and one on factors that
drive taxpayers into the hands of the Taxpayer Advocate
Service (referred to as the “downstream consequences”
study). The first study draws on several recent IRS research
initiatives to identify taxpayers’ needs for assistance,
their preferences and willingness to use various IRS
services, and barriers to taxpayers’ effective use of IRS
services. The study’s conclusions affect not only the IRS
current strategies for providing taxpayer service but also
any efforts to eliminate services that taxpayers need in
order to meet their tax obligations. The second study will
enable the Taxpayer Advocate Service to more accurately
project its future workload as well as identify trends and
emerging problems for taxpayers.
About the Taxpayer Advocate Service
The Taxpayer Advocate Service is an independent organization
within the IRS that assists 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. Taxpayers may be eligible for
assistance if:
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They are experiencing economic harm or significant cost
(including fees for professional representation)
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They have experienced a delay of more than 30 days to
resolve a tax issue; or
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They have not received a response or resolution to their
problem by the date promised by the IRS.
The service is free, confidential, tailored to meet
taxpayers’ needs, and available for businesses as well as
individuals. There is at least one local taxpayer advocate
in each state, the District of Columbia and Puerto Rico.
Taxpayers can contact the Taxpayer Advocate Service by
calling a toll-free case intake line at 1-877-777-4778 or
TTY/TTD 1-800-829-4059 to determine whether they are
eligible for assistance. They can also call or write to
their local taxpayer advocate, whose phone number and
address are listed in the local telephone directory and in
Publication 1546, The Taxpayer Advocate Service of the IRS -
How to Get Help With Unresolved Tax Problems, which is
available on the IRS Web site at IRS.gov.
Attachment: 2006 Annual Report to Congress Executive Summary
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