National Taxpayer Advocate Report Reveals the IRS’s Lack of Sympathy for Financially Struggling Taxpayers
In the National Taxpayer Advocate 2010 Annual Report to Congress, the Taxpayer Advocate Service (TAS) lays out numerous problems with the Internal Revenue Services (IRS) administration of federal income tax. TASs analysis includes counterproductive methods utilized by the IRS, which continue to compromise taxpayers rights. The full text of the report is available here.
Among TASs main concerns is the IRSs failure to recognize that taxpayers are currently “in the worst economy in at least a generation.” While making periodic announcements regarding future plans to assist financially struggling taxpayers, the IRS increased its annual lien filing by 550 percent since 1999. The most significant finding regarding this increase is the lack of a corresponding increase in revenue collection. As stated in the report:
If liens were clearly correlated with substantial increases in revenue collection, one could at least understand the IRSs position. But over the same period that the IRS has increased lien filings by 550 percent, revenue collected by the IRSs Collection function has remained flat . . . In fact, the IRS must pay filing fees to local county clerks offices an incur its own costs, making it questionable whether liens generate much, if any direct revenue.
The drastic increase in lien filing leads TAS to argue that the IRS focuses almost exclusively on tax collection and not on providing services to the taxpayers. Despite the IRSs extensive enforcement efforts, however, the vast majority of tax revenue is collected through the most inexpensive enforcement procedure, voluntary compliance.
The IRSs response portrays an unsupported rationalization for this result.
While we agree that the vast majority of revenue is collected through voluntary compliance, it is likely that the voluntary compliance rate would drop significantly if the IRS did not have a strong enforcement presence.
The IRSs “strong enforcement presence” ignores the likewise “strong enforcement presence” of creditors other than the IRS on taxpayers who are delinquent on their debts. When computing how much it believes the taxpayer can reasonably pay, the IRS makes no allowance for the taxpayer to pay other debts for which they remain liable. TAS, taking the current economy in account, recognizes the severe effects of IRSs computation.
[o]ther creditors will continue to press the taxpayer to repay these debts. A state agency does not stop garnishing a paycheck and a credit card collection company does not stop calling just because the taxpayer has committed to an IRS payment plan. Thus, the IRSs unwillingness to allow for payments to other creditors is often unrealistic.
The IRS easily ignores the debts to other creditors during its attempts to collect its own debts, but has no issues subjecting taxpayers to “discharge of indebtedness” income when it believes taxpayers have been freed from liabilities. TAS describes the IRSs often incorrect assumption regarding Form 1099-C, Cancellation of Debt.
As a general matter, the IRS assumes that when a creditor files a Form 1099-C, Cancellation of Debt, the creditor is reporting the actual cancellation of a debt and the amount shown on the form is correct However, the IRSs assumptions that a debt was cancelled and the amount reported by lenders is accurate may be incorrect for any of these reasons:
- Creditors sometimes issue a Form 1099-C because Treasury regulations provide an incentive to do so or as a means of pressuring a debtor to pay “ even where they are not canceling the debt;
- Creditors sometimes make errors on the forms that debtors then may have to wage an uphill battle to correct; or
- IRS automated systems cannot distinguish taxpayers with canceled debts who have additional income and owe additional tax from taxpayers with canceled debts who are insolvent, have no additional income, and do not owe additional tax. As a consequence, the IRS may sometimes deny legitimate Earned Income Tax Credit (EITC) claims because it believes the taxpayers income is too high.
The IRSs less than helpful actions also include carelessness and manipulation prior to and during Collection Due Process (CDP) hearings. Congress established CDP hearings to provide taxpayers “with an opportunity to have IRS lien filings or proposed levy actions reviewed by an independent Office of Appeals.” Notably, IRC §6330(c)(3)(C) requires that the Office of Appeals considers whether “any proposed collection action balances the need for the efficient collection of taxes with the legitimate concern of the person that any collection action be no more intrusive then necessary.”
TAS described IRS actions that arguably defeat the purpose of the CDP hearing.
In practice, the IRS frequently issues CDP notices without verifying the taxpayers liability or adequately analyzing his or her ability to pay. In addition, the IRS routinely asks taxpayers to withdraw their CDP hearing requests upon resolution of their cases, which imposes pressure on taxpayers and may cause them to forfeit their judicial review rights if their problems are not ultimately resolved.
We previously reported the Treasury Inspector General for Tax Administrations (TIGTA) findings regarding the effectiveness of controls and procedures (or lack thereof) utilized by the Internal Revenue Service (IRS). Notably, TAS reveals similar criticisms of the IRSs current operations.
In addition to reporting IRSs oppressive attitude towards struggling taxpayers, TAS also reveals the ineffective and inaccurate results of the IRSs reliance on automation. Specific instances of this, such as failures in Power of Attorney (POA) processes were mentioned in TASs report.
IRC processes and systems designed to recognize and record power of attorney (POA) form information continue to frustrate taxpayers and their representatives. Problems associated with POA processing can lead to a lack of representation, adverse IRS action (i.e. unnecessary liens and levies) and lengthy delays in processing tax returns and refunds.
Notably, the Internal Revenue Manuel §188.8.131.52.2 (08-21-2006) states that taxpayers have a right to representation in tax matters. Thus, these failures in POA processes continue to jeopardize taxpayer rights.
Also discussed by TAS is the overwhelming inaccuracy of the IRSs Reasonable Cause Assistant (RCA) program. RCA is “an interactive decision support program” used to “evaluate taxpayers request for abatement of certain penalties.”
[a] study conducted by the IRS itself found that RCA determinations were accurate in only 45 percent of the cases examined, even though all employees thought their determinations were correct. In other words, a coin flip would have procedures nearly the same level of accuracy as the RCA.
In its response to this, the IRS stated that it “is aware of issues related to the RCA and is taking steps to address this issue.” Significantly, the IRS response does not include any explanations for the failure, or the actual “steps” that will be taken in this matter. On numerous occasions, the IRSs response indicated that its software and programs were “up to industry standards.” Notably, however, the IRS has no response as to why its employees are relying almost entirely on automation to make decisions that severely affect taxpayers.
As TAS points out, IRS employees have no incentive to produce accurate results. In fact, the incentive systems currently in place reward those employees that perform their work as quickly as possible; not taking into account the IRSs need to later take corrective actions due to careless mistakes of its rushed employees.
An overemphasis on cycle time creates incentives for IRS employees to take actions quickly, even where doing so produces inaccurate results or delays the final resolution of problems. As a consequence, taxpayers may face inaccurate audit determinations or unwarranted collection actions.
The IRS clearly has no interest in “keeping track” of increases in corrective actions. As discussed by TAS:
Although the number of audit reconsiderations and tax abatements has significantly increased over the past three years, the IRS does not measure the impact of the growing number of audit reconsiderations and does not use the outcomes to improve procedures for original audits.
Notably, the IRS avoids responding to the increases in audit reconsiderations. Instead, in its response, the IRS defends itself by arguing the usefulness of a “cycle time” incentive system.
This analysis presumes that a given measure cannot serve multiple purposes . . . Clearly, cycle time is also closely related to “timelineness” as maintaining timely interactions throughout the collection process is an essential component of delivering cycle time goals. Moreover /timeliness/cycle time is a significant customer concern. The “amount of time you had to spend on this collection issue” was the top improvement priority for collection customers on the most recent collection customer satisfaction survey.
Although taxpayers may appreciate “timely interactions” during their collection procedures, the IRSs response does not take into account the numerous taxpayers who are the victims of inaccurate audit determinations and unwarranted collection actions.
IRS practices seem to suggest that its “concerns” do not revolve around customer satisfaction. Significantly, even if the IRS intends to provide taxpayers with at least satisfactory customer service, it is virtually impossible for it do so with its current resources. TAS provides an example of this in its report.
Taxpayer Assistant Centers (TACs) are the main form of face to face IRS customer service available to taxpayers. However, the IRSs 401 TACs are within a 30 minute drive of only 60 percent of the taxpaying population. TACs remain out of reach for many rural taxpayers as most are located in more populous areas and only 55 percent are open 36 to 40 hours per week.
TAS continuously emphasizes the ineffectiveness of oppressive practices and reliance on automation. Although the IRS seems to believe otherwise, neither of these philosophies results in efficient tax collection. Research seems to suggest that the IRSs “strong enforcement presence” is less helpful than it believes.
In 2007, TAS examined tax compliance literature to identify factors that affect voluntary compliance. As discussed in TASs report:
Broadly speaking, the factors identified by the 2007 Study and other research include not only the expected likelihood and cost of getting caught cheating (called “economic deterrence”) , but other factors such as compliance norms, trust in the government, and the tax administration process, complexity and convenience of complying, and the influence of preparers. Perhaps surprisingly, this literature suggests that factors other than deterrence may have the greatest impact.
Current IRS practices arguably create additional distrust in the government and tax administration. As it is unlikely that the Internal Revenue Code will become any less complex, change in current IRS procedures, controls, and practices may be the only method to increase efficiency in tax collection. The IRS has to learn to balance “enforcement” with “service,” especially because tax collection is no longer its only role.
As the IRS prepares to administer large portions of the health care legislation, it will have to shift from being an enforcement agency that primarily says, in effect, “you owe us” into an agency that places much greater emphasis on hiring and training caseworkers to help eligible taxpayers receive benefits and work one-on-one with taxpayers to resolve legitimate disagreements.
This new role requires the IRS to oversee the distribution of social benefits to eligible taxpayers. TASs report shows how this function simply cannot be performed by an oppressive and collection-minded agency. Among other recommendations, TAS suggested that the IRS revise its mission statement “to reflect the two distinct administrative roles of tax collection and social benefits delivery.”
The IRS disagreed, stating,
While there are a number of very thoughtful and constructive ideas outlined in the Office of the National Taxpayer Advocates articulation of these issues, the IRS does not agree that the wording of the IRSs mission statement is one of the “most serious problems” faced by taxpayers.”
Here, the IRS once again avoids the issue presented by TAS. If the IRS does not consider the problems presented by TAS, it is unlikely that either of its roles will be effectively administered in the coming year.
If you have any questions regarding TASs report, IRS procedures, or any other tax provision, please contact Fuerst Ittleman, PL at firstname.lastname@example.org.