National Taxpayer Advocate Nina E. Olson today released
her statutorily mandated mid-year report to Congress that identifies the
priority issues the Taxpayer Advocate Service (TAS) will address during
the upcoming fiscal year. The report expresses particular concern about
the impact of budget cuts on the IRS’s ability to meet taxpayer needs,
the IRS’s unwillingness to issue full refunds to victims of tax return
preparer fraud and shortcomings in IRS procedures for assisting victims
of tax-related identity theft.
In addition, Olson released a special report examining the IRS’s use
of questionable criteria to screen applicants for tax-exempt status. The
special report analyzes the sources of the problem and makes
preliminary recommendations to address them.
“Today, the IRS is an institution in crisis,” Olson wrote. “In my
view, however, the real crisis is not the one generating headlines. The
real crisis facing the IRS — and therefore taxpayers — is a radically
transformed mission coupled with inadequate funding to accomplish that
mission. As a consequence of this crisis, the IRS gives limited
consideration to taxpayer rights or fundamental tax administration
principles as it struggles to get its job done.”
TAS AREAS OF FOCUS
The report identifies the priority issues on which the Office of the
Taxpayer Advocate will focus during the upcoming fiscal year. The report
describes numerous challenges facing the IRS, including:
- Relieving the financial harm suffered by victims of tax return preparer fraud.
- Conducting adequate oversight of the tax return preparer industry.
- Providing effective, timely and taxpayer-centric relief to victims of identity theft.
- Utilizing effective and timely collection alternatives to minimize
taxpayer burden while reducing the number and dollar amount of
balance-due accounts.
- Conducting education and outreach to taxpayers about their responsibilities under the Affordable Care Act.
- Resolving erroneous revocations of the tax-exempt status of small §
501(c)(3) organizations and failing to provide them with a
pre-revocation administrative appeal.
- Establishing less draconian and more reasonable
“settlement initiatives” for the millions of taxpayers who have
legitimate reasons for overseas bank and financial accounts and whose
failure to file reports was merely negligent.
Olson expresses particular concern about the impact of cuts to the
IRS budget on taxpayer services, taxpayer rights and revenue collection.
She recommends that Congress provide sufficient funding for the IRS to
meet taxpayer needs. Notably, she recommends that funding be restored
for employee training, which has been cut by 83 percent since FY 2010,
so IRS employees obtain the education and professional skills they
require to administer the tax system in a manner that respects
taxpayers’ rights. “The last thing a financially struggling taxpayer
should have to face is an under-trained IRS collection apparatus,” she
wrote.
SPECIAL REPORT ON EXEMPT ORGANIZATION REVIEW CONCERNS
In addressing the exempt organization (EO) issues, the Advocate’s
office does not have investigative authority and did not seek to
duplicate other ongoing investigations. The report takes a broad look at
factors that contributed to the use of questionable screening criteria
and processing delays and offers 16 recommendations to address them. The
report groups the contributing factors into four categories: (1) lack
of guidance and transparency; (2) absence of adequate checks and
balances; (3) management and administrative failures; and (4) EO’s
“cultural difficulty” with TAS.
Among other things (and as noted below), Olson recommends that
Congress enact a Taxpayer Bill of Rights. In her preface to the report,
she details how the EO review processing delays violated 8 of those 10
taxpayer rights.
LACK OF GUIDANCE AND TRANSPARENCY
The Legal Standard “Primarily” Is Vague and Undeveloped.
Section 501(c)(4) of the tax code provides that an organization may
qualify for tax-exempt status if it is “operated exclusively for the
promotion of social welfare” (emphasis added). Treasury regulations
provide that an “organization is operated exclusively for the promotion
of social welfare if it is primarily engaged in promoting in some way
the common good and general welfare of the people of the community”
(emphasis added).
Leaving aside the question how “exclusively” came to be defined as
“primarily” (which is viewed by some commentators as merely 51%), there
is very little guidance to guide IRS employees in determining whether an
organization is operating “primarily” for social welfare purposes or
what level of political campaign activity is permissible. Among the open
questions:
- Is there a fixed percentage that should be used
to measure whether an entity is “primarily” engaged in social welfare
activities (e.g., 51 percent)?
- What factor or factors are controlling? In seeking to measure
whether an entity is “primarily” engaged in social welfare activities,
one could focus on the percentage of the entity’s expenditures, the
percentage of the entity’s time, the percentage of the entity’s email
blasts or advertisements or other factors.
- If the IRS considers multiple factors, should all
factors receive equal weight, and if not, how should the relative
weighting be determined?
The law provides no direct guidance to answer these questions. To
enable the IRS’s EO function to evaluate applicants for Section
501(c)(4) status in a consistent manner, the Advocate recommends that
Congress or the Treasury Department provide clearer standards.
No Judicial Review Is Available for Rejected or Unanswered Section 501(c)(4) Applicants.
If an organization’s application for Section 501(c)(3) status is
rejected or not answered after 270 days, the organization may go to
court to request a declaratory judgment. Applicants for Section
501(c)(4) status have no such right. The Advocate’s report recommends
that Congress authorize judicial recourse for Section 501(c)(4)
applicants. Doing so would give organizations that believe they have
been unfairly treated by the IRS the right to an independent review, and
it would enable the courts to assist in developing guidelines that
would help the IRS in applying the “primarily” standard.
The Application Form for Section 501(c)(4) Organizations Does Not Ask Key Questions.
Applicants for tax-exempt status under Section 501(c)(4) must complete
IRS Form 1024, Application for Recognition of Exemption Under Section
501(a). This form was last updated in 1998 — long before the IRS began
to receive a significant number of applications from organizations that
intend to engage in some political campaign activity. The Advocate
recommends the IRS revise the questions on Form 1024 to elicit necessary
information upon application. Doing so would reduce the need for the
IRS to burden organizations with subsequent requests for information and
would eliminate the appearance of partisanship, since the questions
would be posed to all applicants engaging in any political campaign
activity.
The IRS Rarely Audits the Operations of Section 501(c)(4)
Organizations to Determine Whether They Are, In Fact, Operating
“Primarily” for Permissible Purposes. If the IRS is expected to
ensure that organizations granted Section 501(c)(4) status operate as
they say they will, it must have the ability to conduct periodic audits.
To ensure the IRS’s decisions about which organizations to audit are
objective, the Advocate recommends the IRS conduct a small sample of
reviews and then develop a risk model to use in compliance reviews of
organizations after they have begun operations. The IRS can use the
information developed in these audits to improve guidance and create
outreach and education campaigns.
The EO Function Did Not Post Its Procedures on the Internet, Potentially Violating the Law and Contributing to the Problem.
The IRS is required to post on its website all “instructions to staff
that affect a member of the public,” unless an exemption applies. Even
if an exemption applies, IRS functions should clear most guidance
internally with affected program owners and “specialized reviewers” such
as TAS. EO did not clear with TAS or post on the Internet, even in
redacted form, relevant training materials, form letters used to request
additional information, the screening checksheet used by EO employees
in the determinations process and other key documents. EO’s failure to
clear its procedures with TAS and other stakeholders bypassed an
important safeguard of taxpayer rights.
Had these documents been vetted by TAS, TAS would have had an
opportunity to raise concerns before implementation. Had these documents
been posted on the Internet, members of the public would have had
access to them, providing greater transparency and enabling them to
raise concerns about improper practices. Key EO documents still are not
posted to the Internet, and TAS has not been able to locate them on the
IRS intranet. The Tax Exempt and Government Entities Division (TE/GE),
of which EO is a part, has agreed to share its guidance with TAS. The
Advocate recommends that the IRS adopt more expansive disclosure
policies both in TE/GE and throughout the IRS.
ABSENCE OF ADEQUATE CHECKS AND BALANCES
The IRS’s Processing of Section 501(c)(4) Applications Violated Fundamental Taxpayer Rights.
The National Taxpayer Advocate has long recommended that Congress enact
a Taxpayer Bill of Rights (TBOR). Modeled after the U.S. Constitution’s
Bill of Rights, they would include the following: (1) the right to be
informed; (2) the right to be assisted; (3) the right to be heard;
(4) the right to pay no more than the correct amount of tax; (5) the
right of appeal; (6) the right to certainty; (7) the right to privacy;
(8) the right to confidentiality; (9) the right to representation; and
(10) the right to a fair and just tax system. The intent of a Taxpayer
Bill of Rights is not primarily to create new rights, but to group the
dozens of existing taxpayer rights into categories that members of the
public and IRS employees alike can understand and remember. In her
preface to the report, Olson details how the IRS’s processing of Section
501(c)(4) applications violated 8 of these 10 rights. “If these rights
were enacted and publicized . . . applicants for exemption may have
complained more promptly and the violations might have been addressed
more quickly,” the report says.
Applicants for Exempt Status (and Other Taxpayers) Have No Easily Available Remedy for the Violation of Their Rights.
Several other countries, notably Australia and the United Kingdom, have
authorized “apology payments” (or an equivalent) as a remedy for the
violation of taxpayer rights. The National Taxpayer Advocate has
previously proposed that Congress authorize the Advocate to make a
payment of up to $1,000 to a taxpayer in cases where the action or
inaction of the IRS caused excessive expense or undue burden and the
taxpayer has experienced a “significant hardship” within the meaning of
Section 7811 of the tax code. The total would be capped, perhaps at $1
million per year. Apology payments would serve as a symbolic gesture to
show that the government recognizes its mistake and the taxpayer’s
burden. The Advocate recommends that Congress enact this proposal.
Congress No Longer Holds Joint Annual Oversight Hearings to Review IRS Challenges and Performance.
After Congress passed the IRS Restructuring and Reform Act of 1998, it
held annual oversight hearings to review the IRS’s performance. Each
hearing was conducted jointly by majority and minority members of the
House Committees on Ways and Means, Appropriations, and Government
Reform and Oversight and the Senate Committees on Finance,
Appropriations, and Governmental Affairs. The last joint oversight
hearing was held about 10 years ago. The Advocate recommends that
Congress reinstate joint annual oversight hearings to help identify and
address problem areas, with specific focus on how the IRS is meeting the
needs of particular taxpayer segments, including individuals, small
businesses and exempt organizations, and how it is protecting taxpayer
rights.
MANAGEMENT AND ADMINISTRATIVE FAILURES
EO Management Did Not Maintain an Adequate Inventory Management System.
EO apparently did not have the meaningful performance measures required
for effective management oversight, such as how long it takes, on
average, to process applications that cannot be disposed of during
initial screening and what percentage of inventory was over-aged. The
Advocate recommends that EO adopt better metrics to enable management to
identify problems more quickly.
EO Management Did Not Ensure that Requests for Guidance Received a Timely Response.
The recent report by the Treasury Inspector General for Tax
Administration (TIGTA) report found that “the Determinations Unit waited
more than 20 months (from February 2010 to November 2011) to receive
draft written guidance from the Technical Unit for processing potential
political cases.” It appears EO management did not have a system to
ensure management followed up on requests for guidance or assistance
that were not timely fulfilled. The Advocate recommends that
EO track
requests for guidance or assistance from the EO Technical Unit so
management can assess the timeliness and quality of the guidance and
assistance it provides to both Determinations Unit employees and the
public.
EO’S CULTURAL DIFFICULTY WITH TAS
EO Executives Resisted TAS’s Authority to Order Expedited
Processing of Tax-Exemption Applications, and Thereby Isolated EO from
TAS. Congress has given the National Taxpayer Advocate the authority
to issue Taxpayer Assistance Orders (TAOs) directing the IRS to take an
action or refrain from taking an action with respect to taxpayers who
have experienced a “significant hardship” as defined by statute. When
EO’s backlog of applications for exempt status grew around 2007, TAS
issued TAOs directing EO to process certain “significant hardship” cases
quickly. EO management pushed back, arguing that the Advocate’s
authority to issue TAOs did not apply to EO cases. The attitude that EO
does not have to be responsive to TAS has permeated EO and persists to
this day, the report says. The Advocate has recommended and the new
TE/GE leadership has agreed that TAS provide training to EO employees
regarding TAS’s authority to order expedited processing of exemption
applications.
EO Employees Did Not Refer Over-Aged Cases to TAS. The tax
code provides that the National Taxpayer Advocate shall “develop
guidance to be distributed to all Internal Revenue Service officers and
employees outlining the criteria for referral of taxpayer inquiries to
local offices of taxpayer advocates.” One criterion is that “[t]he
taxpayer has experienced a delay of more than 30 days [beyond the IRS’s
normal processing time] to resolve a tax account problem.” Although
other IRS divisions routinely refer cases to TAS and although every case
identified by TIGTA was delayed much more than 30 days, EO did not
refer any of these cases to TAS. The Advocate has recommended and the
new TE/GE leadership has agreed that TAS provide guidance and training
to EO employees regarding when to refer cases to TAS.
EO Employees Did Not Report the Systemic Delays in EO Processing to TAS.
TAS maintains a system known as the Systemic Advocacy Management System
(SAMS) through which IRS employees and members of the public can report
systemic IRS problems. TAS receives hundreds of submissions each year,
including many from IRS employees. However, no EO employee (or anyone
else) alerted TAS to this issue while the cases were on hold. Had TAS
been alerted, it would likely have uncovered the significant delays and
confusion in processing these applications during the pendency of the
problem. The Advocate recommends that TAS provide guidance and training
to EO employees regarding when to refer systemic issues to TAS.
TAS CASES
Following the release of the TIGTA report, TAS searched its databases
for the period from January 1, 2010 through May 17, 2013. It identified
19 cases that may have involved the “Be on the Lookout” (BOLO)
selection criteria out of over 915,000 total case receipts during that
period. The 19 cases were received by ten TAS offices in nine states.
Eleven organizations were granted exempt status, three withdrew their
applications, three cases were closed because the applicants did not
respond to requests for additional information, and two cases are still
open in EO and are assigned to a reviewer.
The report says that faced with an average of more than 270,000 cases
a year, it is difficult for TAS to identify systemic issues that arise
in a small number of cases. However, the report says steps can be taken
to increase the odds of earlier issue identification. As described
above, EO leadership has agreed to allow TAS to train its employees
regarding case referrals and SAMS submissions. If TAS had received a
significant number of case referrals from EO or if the systemic
processing delays had been reported on SAMS by any EO employee who was
aware of the issue, TAS likely would have identified the problem sooner.
In addition, the National Taxpayer Advocate will provide additional
training to TAS employees regarding EO issues, and TAS will participate
in a task force with TE/GE to identify and address systemic EO issues in
the future.
* * * * * * *
The National Taxpayer Advocate is required by statute to submit two
annual reports to the House Committee on Ways and Means and the Senate
Committee on Finance. The statute requires these reports to be submitted
directly to the Committees without any prior review or comment from the
Commissioner of Internal Revenue, the Secretary of the Treasury, the
IRS Oversight Board, any other officer or employee of the Department of
the Treasury, or the Office of Management and Budget. The first report
is due on June 30 of each year and must identify the objectives of the
Office of the Taxpayer Advocate for the fiscal year beginning in that
calendar year. The second report, due on December 31 of each year, must
identify at least 20 of the most serious problems encountered by
taxpayers, discuss the ten tax issues most frequently litigated in the
courts and make administrative and legislative recommendations to
resolve taxpayer problems.
