The national taxpayer advocate, Nina Olson, in her annual report to Congress for 2011, cited the IRS’ lack of adequate funding, expanding workload and overreliance on automation as the most serious problems facing taxpayers. She said that, as a result, the IRS cannot adequately meet the needs of taxpayers, cannot adequately detect and address noncompliance and cannot maximize revenue collection.
In her report, she said that the IRS relies too heavily on automation in making changes to taxpayers’ returns, assuming that information from third parties is correct and making changes based on this information without conducting an examination, which would allow taxpayers to invoke rights that normally accrue in an examination. Olson noted that, frequently, it is later established that the taxpayer was, in fact, correct, but the taxpayer often then has difficulty getting the corrections made because the IRS’ understaffing makes it hard to reach the Service by phone or to get a timely written response.
Olson also objected to the IRS’ increased reliance on math error authority, which is an authorization by Congress to correct errors on returns without using the deficiency procedures. Olson added that the notices the IRS sends in math error cases are often incomprehensible and leave taxpayers uncertain of what the IRS is correcting. They are often used inappropriately as well. As an example of the misuse of math error corrections, Olson cited an instance where the IRS improperly used the authority to deny refunds for the first-time homebuyer credit based on third-party information that the taxpayers purchased their houses before the effective date of the credit. (For more on IRS math error correction problems, see “TIGTA: IRS Does Not Timely Resolve Math Error Disputes,” Aug. 24, 2011.)
Another area of concern is the IRS’ use of automation in identifying and flagging what it deems to be fraudulent returns or refund claims, especially in the area of fraudulent wage withholding. Olson notes that the freezes the IRS places on refunds last too long and are exacerbated by delays in receiving matching wage withholding information. In some cases, the IRS “auto-voided” returns that were deemed fraudulent without giving taxpayers any notice; in a number of cases, these returns were later found to be legitimate. She also noted that the IRS’ attempt to deal with the large increase in fraudulent earned income tax refund claims filed by prison inmates by matching the refund information with state prison records increased the risk that people who had been released from prison would mistakenly show up on those records and be denied a legitimate claim.
Among the other issues Olson addressed was the need for a codified taxpayers’ bill of rights because most taxpayers had no idea they had any rights when dealing with the IRS. Olson also mentioned the deleterious effect of tax liens on taxpayer compliance. Finally, in discussing the most serious problems facing the IRS, Olson mentioned, in the area of international taxation, that the IRS’ focus on “stepped-up enforcement without adequate coordination and a corresponding increase in service” was ill-serving international taxpayers, a criticism of the IRS’ controversial overseas voluntary disclosure program, which Olson has strongly criticized elsewhere and which she elaborated upon in the report.
—Sally P. Schreiber (firstname.lastname@example.org) is a JofA senior editor.
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