Congress Criticizes Taxpayer Advocate Report
C ongresswoman Nancy L. Johnson (R-Conn.), who chairs the House Ways and Means Committee's Oversight Subcommittee and is the author of Taxpayer Bill of Rights 2 (TBOR 2), told the Internal Revenue Service that the first report of IRS Taxpayer Advocate Lee Monks, submitted last December 31, fell short of providing the recommended solutions sought by Congress. Under TBOR 2, the taxpayer advocate was given new authority to help taxpayers in hardship situations and to strengthen the role of the field problem resolution officers. The advocate must submit to Congress a progress report on December 31 of each year.
Johnson said TBOR 2 required the taxpayer advocate to identify the 20 most serious problems taxpayers experience in dealing with the IRS and to recommend actions to address those problems. "Monks did not propose any concrete solutions," said Johnson. Johnson also expressed concern that the IRS was slow to respond to public complaints and criticized it for an "arrogant and callous attitude that has left Americans understandably frustrated. From fixing computer problems to responding promptly to taxpayers, the IRS just doesn't get it," said Johnson.
Monks told the House subcommittee that his first report lacked substantive recommendations because he had had only a few months to prepare it. He promised the next December 31 report would include stronger legislative recommendations because he would have had a full year to prepare it while he strengthened the office of the taxpayer advocate under TBOR 2 authority. Johnson said the recommendations were necessary to prepare new legislation and that the taxpayer advocate should "not feel inhibited" about telling Congress what is wrong with statutes, legislation or regulation.
In March, the American Institute of CPAs submitted to Congress its comments on the taxpayer advocate's report. The AICPA said that although Monks had identified important areas for IRS improvement, the tenor and tone of the report were those of an IRS self-evaluation. The report said, "Given his role, the taxpayer advocate should be a more zealous advocate of taxpayers, rather than speak for the IRS."
According to regional taxpayer advocates, the top difficulties in dealing with the IRS cited by taxpayers include the complexity of the tax code, the inability to reach the IRS by telephone, erroneous and intimidating IRS notices, the burden on small businesses, the lack of one-stop services and inconvenient times and locations for doing business.
Reminder: Electronic Payment Deadline Approaches
C ompanies reporting annual employment tax obligations of more than $50,000 in 1995 must, by July 1, begin using the Internal Revenue Service's electronic federal tax payment system (EFTPS) to make their tax deposits.
Karen Taylor of the IRS Submission Processing Division said companies must be enrolled in EFTPS to use the system. "It is important that companies enroll as early as possible because it could take as long as 8 to 10 weeks to process enrollment forms," said Taylor. She also said already enrolled companies should not wait until July 1 to start using EFTPS. "We are encouraging taxpayers to start early to make sure there are no problems and they are comfortable with their payment choices."
Early use also allows companies to change payment choices or certain business practices. For example, companies that have chosen the Automatic Clearing House (ACH) debit option on the enrollment form automatically will be enrolled in the ACH credit option; however, companies that enrolled in the ACH credit option must check with their financial institutions to make sure they can initiate ACH credits and are eligible to use the ACH system. Taylor also said it was important that companies check the confirmation package they receive from the IRS to identify and correct any discrepancies.
Other EFTPS start-up facts include the following:
- Companies can file using a phone or a personal computer.
- Companies must initiate payments at least one day before the tax-due date.
- All companies are automatically enrolled for same-day filing.
- All companies that do not use EFTPS after July 1 will incur a 10% penalty for each nonelectronic deposit.
Witnesses Want Simpler Code and Better Taxpayer Rights
T he National Commission on Restructuring the Internal Revenue Service, which wrapped up its public hearings in April, heard a lot of complaints that the tax code was so complex it interfered with the fair and efficient administration of the law. "Witnesses told us the code was too difficult for many taxpayers to comply with and more safeguards were needed to ensure the IRS interacted with taxpayers fairly," said Anita L. Horn, deputy chief of staff of the restructuring commission.
In testimony before the commission last February, Congressman Richard K. Armey (R-Texas) urged the commission to recommend a simpler tax code. He said he supported proposals to provide additional taxpayer protection and safeguards against IRS abuse but that "taxpayers could expect profound changes in the nature of their relationship with the IRS only if Congress dramatically simplified the tax system."
Other testimony at the February hearings focused on the many compliance problems inherent in an overly complex tax code. Michael E. Mares, chairman of the American Institute of CPAs tax executive committee, recommended to the commission a number of ways to improve the IRS's administration of the tax laws, including improvements to the examinations, collections and penalty and interest procedures. Mares told the commission the IRS needed to be more consistent when it implemented new policies designed to assist taxpayers, and he recommended that revenue agents be required to prove there was a "realistic possibility of success" before proposing adjustments against taxpayers.
The commission also heard from Janet Spragens, a law professor at American University, Washington, D.C., who testified about the needs of low-income taxpayers. Spragens said there was a common misconception in Congress that low-income taxpayers had few compliance problems. "Tens of thousands of low-income taxpayer returns are audited each year," said Spragens. She said the topics at the center of the compliance problems were the earned income tax credit, dependency exemptions, tip income and employee vs. independent contractor issues. Spragens called for more funding for taxpayer education and low-income taxpayer assistance programs. "Provisions in the tax code intended to help low-income taxpayers lose their significance when the population for whom they were intended is faced with an administrative and judicial system they cannot deal with," said Spragens.
Problems inside the IRS
John J. Monaco, Price Waterhouse national director-tax strategies and a former IRS assistant commissioner (examinations), told the commission that the quality of examinations would suffer if the IRS did not improve its systems for hiring, training, equipping, evaluating, promoting and terminating its examinations employees. He said the IRS was not hiring the "best-qualified" people to fill new positions. "Changes have to be made to the standards for job qualifications for various occupations in examinations," said Monaco.
The Inflated Tax Code"The number of words in the income tax code increased to 771,632 in 1993 from 234,746 in 1964, and tax regulations currently exceed 7,000 pages."
Richard K. Armey (R-Texas)
He also said congressionally mandated budget constraints were forcing the IRS to cut important continuing education programs for its agents. "Most of the continuing education in the international tax area was canceled in 1996," said Monaco. "How, then, in this most complex area of tax is the quality of the end work product to reach the point of excellence that everyone expects?"
Horn said the commission would recommend to Congress methods by
which the tax code could be simplified. "We have heard that the
quality of contact between taxpayers and the IRS needs to be
improved," said Horn. "We want to recommend ways to make
the IRS more efficient, accountable and taxpayer-friendly." The
commission will present its report to Congress on July 1.
IRS Says No to Deductions for Marijuana
T he Internal Revenue Service ruled that an amount paid to obtain marijuana for medical purposes is not a deductible medical expense, even if the marijuana was obtained with a prescription issued by a physician in accordance with state law.
Under Internal Revenue Code section 213, medical expenses can be deducted if they exceed 7.5% of a taxpayer's adjusted gross income. Some states allow use of marijuana for medical purposes; however, the Clinton administration has publicly stated it is opposed to medical use of marijuana even though some medical professionals believe its use eases the patient's pain and suffering.
Under revenue ruling 97-8, a taxpayer purchased marijuana and used it to treat a disease in accordance with state law. The IRS said that because marijuana was listed as a controlled substance on schedule I of the federal Controlled Substances Act (CSA)- which supersedes the state's authority-it was not "legally procured" and the taxpayer could not deduct as a medical expense the amount paid to purchase it. Generally, the CSA does not permit the possession of controlled substances listed, even for medical purposes and even with a physician's prescription.
This ruling also makes obsolete a previous revenue ruling (78-325), which held that payments for laetrile for the purpose of treating cancer-related illness were deductible under section 213 when purchased and used in a locality where it was legal.
Divorced Man Can't Defer Gain on Sale of Former Residence
W hile married, Perry lived with his wife and daughter in a house in city A. In June 1984, he moved out but continued to pay the mortgage and other household expenses. Later that year, Perry moved to city B to live with a woman he ultimately married in 1987. Perry and his wife got divorced in December 1985. Part of the divorce agreement was that Perry's former wife and their daughter would continue to live in the house until December 1987, when it would be sold and the proceeds split. The house was sold in March 1988, and the proceeds were divided according to the divorce agreement.
On his 1988 tax return, Perry reported the sale of the house in city A but not any gain from the sale. He claimed the sale came under Internal Revenue Code section 1034, which allows a taxpayer to roll over the gain from the sale of a home if (1) it is his or her principal residence, (2) the taxpayer purchases a new residence within two years-before or after-the date the old residence is sold and (3) the cost of the new residence is equal to or greater than the adjusted sales price of the old residence. A taxpayer has to recognize gain only to the extent the cost of the new residence is less than the adjusted sales price of the old residence.
Result: For the IRS. Both the Tax Court and the Ninth Circuit Court of Appeals upheld the IRS decision. The Ninth Circuit found that Perry did not meet the condition that the home sold be his principal residence. To be a principal residence, a taxpayer has to use the premises as his or her actual home and must intend to stay there. In this case, Perry had long since ceased living in the house, had no intention of returning, had given exclusive use to his former wife and had made his "home" elsewhere since 1984. The court found the taxpayer's financial maintenance of the house alone did not make it his principal residence. In addition, one year after the sale of the house Perry and his second wife received nonrecognition treatment for the gain on the sale of their house in city B, where Perry had been residing since 1984. The court said that for purposes of the tax code, a person can have only "one" principal residence.
Taxpayers Can Use Direct and Circumstantial Evidence to Show Timely Filing
I n 1993, the Lewises filed for an automatic extension to file their 1992 federal tax return. They maintained they had mailed the extension request, along with a $5,000 payment, sometime before noon on April 15, 1993, in a specially designated box at a U.S. post office. The taxpayers also claimed they had mailed their California state tax return at the same time. The IRS said the application had not been received until April 26, 1993, considered it late and denied the extension request.
When the Lewises filed their return in September, the IRS assessed a late filing penalty and put a lien on the taxpayers' bank account. When the taxpayers filed a refund suit in district court, the IRS filed a motion to dismiss the case, arguing the taxpayers could not prove a timely postmark, because they had no "direct" evidence, such as a certified or registered mail receipt.
The Lewises admitted they had no direct evidence but did prove that the California Franchise Tax Board had received their payment on April 16, 1993, and that both the check made out to the state and the check to the IRS were dated April 15, 1997. The taxpayers also showed they later had mailed a different form to the IRS by registered mail, which was signed for by the IRS Ogden, Utah, center as received on one date but was stamped "received" seven days later.
The IRS also had no direct evidence in the case, because it had lost the envelope containing the extension request. The IRS did, however, try to prove late filing by using U.S. Postal Service statistics. The statistics showed it should have taken two to six days for the extension request to get to the IRS Ogden center, but a date stamp used by the IRS showed that the bag containing the taxpayers' extension request was "received" April 26, 1996-11 days later. The IRS also presented as proof an IRS declaration stating it was the practice of its Ogden center to stamp all mail in a given bag as received on the date the bag was delivered by the Postal Service rather than the date the envelope was opened.
Result: For the taxpayers. The district court denied the IRS motion to dismiss and said any taxpayer may present, as proof of timely filing, both direct and indirect evidence to show that a timely postmark was stamped on the return or other form. The court found the Lewises had enough evidence to convince a fact finder at trial that their envelope was postmarked on April 15, 1993. The court thought it was unfair to distinguish between taxpayers who mail their returns through a postal window and those who use the special box for tax returns at the post office. The court also thought it was unfair that a taxpayer is so disadvantaged because the IRS lost an envelope.
- Lewis v. U.S. (DC ECalif, 9/24/96).
Edited by Maria Luzarraga Albanese , JD, LLM, editor, AICPA client newsletters.