National Taxpayer Advocate Nina Olson presented her annual report to Congress in January recommending dozens of issues for the IRS and Congress to resolve this year. The report analyzes issues in 26 categories, including collection and tax services, privacy protection and tax preparer standards.
Late tax-law changes. Olson said paper and electronic filers may not be claiming deductions because Form 1040 and its instructions are often finalized after tax preparation software packages have been completed. She recommended the IRS create a formal process to update Congress’ taxwriting committees, starting June 30, about how tax filing might be slowed by late changes to the Tax Code.
Tax gap. The report recommended the IRS establish a “cash economy program office” to improve compliance in the cash economy. The IRS has already rejected this suggestion. The report said the cash economy accounts for about $100 billion of the estimated annual tax gap of between $290 billion and $345 billion, as determined by a 2001 IRS analysis.
Private debt collection. Olson called for repeal of the use of private debt collection agencies to collect back taxes. She estimated the $7.35 million appropriated to this program in fiscal 2008 would result in $30 million in collections, compared with $146 million that could be collected through the IRS’s Automated Collection System.
Apology payments. Taxpayers should be given nontaxable “apology payments” of between $100 and $1,000 if they suffer undue burdens or excessive expenses caused by IRS mistakes or inaction.
Circular 230. The report called on the IRS Office of Professional Responsibility to clarify some aspects of Circular 230, particularly whether tax advice is a “covered opinion,” what constitutes “willful” conduct, and whether a statute of limitations applies to violations.
Tax preparer standards. The report highlighted the risk created by heightened preparer standards of “more likely than not” under IRC § 6694. This change gives a preparer the incentive to choose a course that protects the preparer’s own interests rather than the taxpayer’s.
Tax strategy patents. Olson also called on Congress to pass pending legislation banning tax strategy patents or barring their enforcement (see “On Equal Terms”). If Congress does not outlaw such patents, it should require the U.S. Patent and Trademark Office to refer them to the IRS to review whether their strategies are abusive.
Most-litigated issues. Congress should expand the spousal protections of sections 66 and 6015. The proposed changes would allow defenses under those sections to be raised in a collections action in district court. Current law allows the defenses in district court only in a refund action. Joint and several liability under section 6015 was the ninth most-litigated issue in the past year.
The third most-litigated issue involved summons enforcement under sections 7602, 7604 and 7609. The report listed several cases to illustrate the Service’s more aggressive stand in such matters, including the recent Textron case, in which a lower court granted work product protection to third-party workpapers (see “Tax Matters: Work Product Stands Up to IRS Summons,” JofA, Nov. 07, page 80).
The report is available at www.irs.gov/advocate/article/0,,id=177301,00.html.