National Taxpayer Advocate Nina E. Olson today released her
2013 annual report to Congress, urging the Internal Revenue Service to adopt a
comprehensive Taxpayer Bill of Rights – a step she said would increase trust in
the agency and, more generally, strengthen its ability to serve taxpayers and
collect tax. The Advocate also expressed deep concern that the IRS is not
adequately funded to serve taxpayers, pointing out that the IRS annually
receives more than 100 million telephone calls from taxpayers and that, in
fiscal year 2013, the IRS could only answer 61 percent of calls from taxpayers
seeking to speak with an IRS customer service representative.
“The year 2013 was a very challenging one for the IRS. Because of
sequestration, the IRS’s funding was substantially cut, which translated into a
reduction in taxpayer service,” Olson said in releasing the report. “Public
trust in its fairness and impartiality was called into question because of
reports the IRS subjected certain applicants for tax-exempt status to greater
review based on political-sounding names. And because of the 16-day government
shutdown, the agency could not complete preparations for the upcoming tax
filing season on time, delaying the date on which taxpayers can first file
returns and claim refunds.”
Olson continued: “From challenges can come opportunities, and this report
presents a ‘21st century vision’ designed to meet taxpayer needs and enhance
voluntary tax compliance.”
TAXPAYER BILL OF RIGHTS RECOMMENDED
The report reiterates the Advocate’s longstanding recommendation that the
IRS adopt a Taxpayer Bill of Rights (TBOR). In a prior report, Olson analyzed
the IRS’s processing of applications for tax-exempt status and concluded its
procedures violated eight of the ten taxpayer rights she has proposed. Today’s
report argues that the rationale for a TBOR is much broader.
“Taxpayer rights are central to voluntary compliance,” the report says. “If
taxpayers believe they are treated, or can be treated, in an arbitrary and
capricious manner, they will mistrust the tax system and be less likely to
comply with the laws voluntarily. If taxpayers have confidence in the fairness
and integrity of the system, they will be more likely to comply.”
The report emphasizes that the U.S. tax system is built on voluntary
compliance. Ninety-eight percent of all tax revenue the IRS collects is paid
timely and voluntarily. Only 2 percent results from IRS enforcement actions.
For the taxpayer, voluntary compliance means not having to face IRS
enforcement. For the government, voluntary compliance is cheapest, because
enforced compliance requires the IRS to devote resources to detecting and
collecting amounts that are not voluntarily reported or paid.
While arguing that knowledge of taxpayer rights promotes voluntary
compliance, the report cites a survey of U.S. taxpayers conducted for TAS in
2012 that found less than half of respondents believed they have rights before
the IRS and only 11 percent said they knew what those rights are.
“The Internal Revenue Code provides dozens of real, substantive taxpayer
rights,” the report says. “However, these rights are scattered throughout the
Code and are not presented in a coherent way. Consequently, most taxpayers have
no idea what their rights are and therefore often cannot take advantage of
them.”
The report calls on the IRS to take the taxpayer rights that already exist
and group them into ten broad categories, modeled on the U.S. Constitution’s
Bill of Rights. The report says the “simplicity and clarity” of a thematic,
principle-based Taxpayer Bill of Rights would help taxpayers understand their
rights in general terms.
“A Taxpayer Bill of Rights would serve as an organizing principle for tax
administrators in establishing agency goals and performance measures, provide
foundational principles to guide IRS employees in their dealings with
taxpayers, and provide information to taxpayers to assist them in their
dealings with the IRS,” the report says.
The ten rights the Advocate is proposing are detailed in the report. Olson
has been in discussions with senior IRS officials about publishing a TBOR, and
TAS has just completed a series of focus groups with taxpayers and preparers to
gauge reaction to, and comprehension of, the proposed list. Olson said the IRS
has been open to publishing a proposed TBOR, and she will continue to work with
the IRS leadership to refine and publish a TBOR during the coming year.
IRS FUNDING INADEQUATE
The report identifies the lack of adequate IRS funding as a top problem for
taxpayers. Each year, more than 100 million taxpayers call the IRS for help and
millions more visit IRS walk-in sites or send correspondence. Key metrics show
the agency is increasingly unable to keep up with taxpayers’ demand for help in
complying with their tax obligations.
“The requirement to pay taxes is generally the most significant burden a
government imposes on its citizens,” the report says. “The National Taxpayer
Advocate believes the government has a practical and moral obligation to make
compliance as simple and painless as possible.” The report also points out that
federal spending cuts, which are designed to reduce the budget deficit, have
the effect of increasing the deficit when applied to the revenue collection
agency.
Impact on Taxpayer Service. The report says the
IRS’s workload has increased over the past decade, and since FY 2010, IRS
funding and staffing have been cut by 8 percent. The report highlights key
areas in which the quality of taxpayer service has dropped to unacceptable
levels:
- Last year, the IRS could only answer 61 percent of
calls from taxpayers seeking to speak with a customer service representative
(CSR). That’s down from 87 percent ten years earlier, with half the
decline occurring since FY 2010. In FY 2013, 39 percent of calls (some 20
million) simply did not get through.
- Taxpayers who did get through had to wait on hold
approximately 17.6 minutes before speaking with a CSR. That’s up from 2.6
minutes ten years earlier, a nearly six-fold increase, with nearly half
the increase occurring since FY 2010.
- Millions of taxpayers visit IRS walk-in sites each year
for assistance. Ten years ago, the IRS answered some 795,000 tax law
questions in the sites during the filing season. Last year, it handled
about 110,000 tax law questions during the filing season – a reduction of
86 percent.
- The IRS historically has prepared tax returns for
taxpayers seeking its help, particularly for low income, elderly, and
disabled taxpayers. Ten years ago, it prepared some 476,000 returns. That
number declined significantly over the decade, and the IRS recently
announced it will no longer prepare returns at all.
- Last year, the IRS received about 8.4 million letters
from taxpayers responding to proposed adjustments to their tax
liabilities. As of the end of the fiscal year, 53 percent of taxpayer
letters in the IRS’s “adjustments” inventory were considered “over age”
(generally, more than 45 days old). That compares with “over age”
percentages of 12 percent ten years earlier and 28 percent in FY 2010.
- The IRS recently announced it will only answer “basic”
tax law questions on its telephone lines and in its walk-in sites during
the upcoming filing season and it will not answer any tax law questions
after the filing season, including questions from the millions of
taxpayers who obtain filing extensions and prepare their returns later in
the year.
Olson made clear that the deficiencies in taxpayer service are attributable
primarily to a lack of resources. Regardless of cause, she wrote, “it is a sad
state of affairs when the government writes tax laws as complex as ours – and
then is unable to answer any questions beyond ‘basic’ ones from baffled
citizens who are doing their best to comply.”
The Advocate expressed particular concern about the magnitude and impact of
cuts to the IRS’s training budget. Since FY 2010, the IRS’s training budget has
been cut from $172 million to $22 million. “If IRS customer service
representatives are not well trained, taxpayers calling for help are more
likely to receive incorrect information or no information,” the report says.
“If IRS enforcement employees are not well trained, auditors may make inappropriate
adjustments and assessments, and collection employees may issue inappropriate
levies or file inappropriate liens.”
Impact on Voluntary Compliance and Revenue Collection.
The report notes that the cuts to IRS funding since FY 2010 have been made as
part of across-the-board reductions to federal discretionary spending designed
to reduce the budget deficit. But “the logic behind budget cuts simply does not
apply to the funding of the IRS,” the report says. The IRS collected $255 for
each $1 it received in appropriated funds in FY 2013. “If the Chief Executive
Officer of a Fortune 500 company were told that each dollar allocated to his
company’s Accounts Receivable Department would generate multiple dollars in
return,” the report says, “it is difficult to see how the CEO would keep his
job if he chose not to provide the department with the funding it needed. Yet
that is essentially what has been happening with respect to IRS funding for
years.”
Olson said IRS funding is shortchanged because the federal budget rules
treat the IRS the same way they treat all spending programs – with no “credit”
given for the revenue it collects. “This procedure makes little sense
when applied to the IRS,” she wrote. “For virtually every other spending
program, a dollar spent is just that – it increases the deficit by one dollar.
But a dollar spent on the IRS generates substantially more than one dollar in
return – it reduces the budget deficit.”
The report reiterates the Advocate’s longstanding recommendation that the
relevant congressional committees work together to develop new procedures to
fund the IRS, with the goal of maximizing tax compliance, particularly
voluntary compliance, with due regard for protecting taxpayer rights and
minimizing taxpayer burden.
OTHER KEY ISSUES ADDRESSED
Federal law requires the Annual Report to Congress to identify at least 20
of the “most serious problems” encountered by taxpayers and to make
administrative and legislative recommendations to mitigate those problems.
Overall, this year’s report identifies 25 problems, makes dozens of
recommendations for administrative change, makes five recommendations for
legislative change, and analyzes the 10 tax issues most frequently litigated in
the federal courts.
Among the “most serious problems" addressed are the following:
Need for Return Preparer Oversight. In 2002, the
National Taxpayer Advocate began advocating for regulation of unenrolled tax
preparers to protect taxpayers from incompetent and unscrupulous preparers. In
2011, the IRS began implementing regulations to register, test, and require
continuing education for unenrolled preparers. In 2013, a U.S. District Court
invalidated regulations governing the IRS’s testing and continuing education
requirements, holding that they exceeded the authority of the Treasury
Department to impose absent authorizing legislation. If the district court’s
decision is upheld on appeal, the Advocate urges the IRS to adopt a
multi-pronged strategy to protect taxpayers by pursuing education and
enforcement options that are unambiguously within its purview. Of particular
note, the Advocate recommends that the IRS give unenrolled preparers an
opportunity to earn a voluntary testing and continuing education certificate
and limit the ability of unenrolled preparers who do not earn the certificate
to represent taxpayers in audits of returns they prepare. The Advocate also
recommends Congress enact legislation to clarify that the IRS may regulate
unenrolled paid preparers directly.
The IRS’s Conceptual Approach Toward Collection of Delinquent Tax
Liabilities. The report urges the IRS to fundamentally reassess
its traditional approach toward Collection. In her preface to the report, Olson
cites third-party studies that often use the number of levies served and liens
filed as a measure of the Collection function’s effectiveness. Contrary to this
“conventional wisdom,” she notes, IRS Collection revenue actually increased in
the aftermath of the IRS Restructuring and Reform Act of 1998 when the IRS
reduced levies served by 94 percent and liens filed by 47 percent. Similarly,
she notes that Collection revenue has increased slightly over the last few
years, despite a 51 percent reduction in levies since FY 2011 and a 45 percent
reduction in liens since FY 2010. Olson says that earlier personal contacts
with delinquent taxpayers and more flexible use of payment options for
financially struggling taxpayers, such as installment agreements and offers in
compromise, would be more effective than increasing the number of levies and
liens filed by automation. The report acknowledges that the use of levies,
liens, and seizures remains appropriate with respect to taxpayers who can
afford to pay their tax liabilities but refuse to do so.
The Impact of the IRS’s Offshore Voluntary Disclosure Programs on
Taxpayers Who Make Honest Mistakes. The IRS has sought to increase
enforcement of Foreign Bank and Financial Accounts (FBAR) reporting and similar
information reporting requirements in recent years and has offered a series of
offshore voluntary disclosure (OVD) programs to settle with taxpayers who have
failed to file the required forms. However, the report says, the programs
impose excessive penalties on taxpayers whose failure to file was not
“willful.” Analyzing results from the IRS’s 2009 OVD program, the Advocate
found the median offshore penalty was about 381 percent of the additional tax
assessed for taxpayers with median-sized account balances, and 580 percent of
the tax assessed for taxpayers with the smallest account balances (i.e., the bottom
10 percent, with an average $44,855 account balance). Taxpayers who “opted out”
of the OVD program and agreed to subject themselves to audits fared better but
still faced penalties of nearly 70
percent of the tax and interest. While FBAR penalties are computed as a
percentage of account balances rather than tax liabilities, the report offers
the comparison to illustrate that the penalties are often Draconian and may
deter other taxpayers from coming into compliance.
New TAS Research Studies on Tax Compliance. Volume 2
of the report contains six research studies, including three that relate
directly to tax compliance:
- An assessment of accuracy-related penalties imposed on
Schedule C filers found that penalties do not increase future reporting
compliance.
- A comparison of the effectiveness of Revenue Officers
(ROs) and the IRS’s Automated Collection System (ACS) in addressing
employment tax liabilities found that ROs collected more dollars and
resolved delinquencies more quickly than ACS, but neither channel was
effective at promoting future tax compliance.
- A study regarding tax compliance by sole proprietors
found that taxpayer service and social norms were the two most influential
factors affecting compliance behavior. Contrary to expectation, the
study found that traditional deterrence theory did not play a role in promoting
compliance, possibly because sole proprietors were particularly motivated
by short-term cash flow needs.
Volume 2 also contains an analysis designed to further the National Taxpayer
Advocate’s 2009 recommendation that the IRS develop a plan and timeline to
achieve an accelerated third-party information reporting and document-matching
system. The analysis describes the steps that must be taken and the benefits to
taxpayers and the IRS of accelerating receipt and processing of third-party
information reports, such as Forms W-2 and 1099.
