IRS future state is not a one size fits all

Two letters and four months—that’s how long it took for a practitioner to resolve an IRS notice for a client.

While there was no error on the return, the IRS needed additional information to verify the capital gains income was properly reported. The CPA did not bother calling the IRS to resolve what was a simple information-matching issue because he did not trust that the person on the other line would have sufficient training or tools to be able to help. In this case, the practitioner was Troy Lewis, CPA, chair of the AICPA’s Tax Executive Committee. Lewis recited this story in calling for better training and technology as part of the IRS Future State at a May 17 forum in Washington.

Nina Olson, the national taxpayer advocate (NTA), hosted the forum, one of many around the United States, to discuss the IRS’s vision for future taxpayer service. The Future State as outlined by the IRS is a broad, ambitious blueprint for modernizing taxpayer services, using “approaches to tax administration that are more proactive, accessible and interactive.” The plan has many themes, including a “well-equipped, diverse, skilled, and flexible [IRS] workforce” and better understanding of noncompliant behavior. At the center of the Future State and the NTA’s concerns is a proposal for online accounts that would allow taxpayers access to information and the ability to resolve certain issues independently.

While the panelists differed on some of their priorities for IRS improvements, there was consensus among most that mail correspondence is inadequate and plagued with problems. For taxpayers abroad, according to Marylouise Serrato, executive director of American Citizens Abroad, the mail may arrive after the due date for action, resulting in penalties. But will online accounts, as envisioned in the draft future state, be the answer to improving service?

Representatives of the professional tax community, including the AICPA, supported the concept with caveats. Lewis stressed that overall, the IRS Future State should be developed in conjunction with input from stakeholders, not developed and presented after the fact. “It ought not be rushed to market,” he said. Any changes should include systems that talk to each other, panelists agreed, in light of the fact that the IRS has three dozen systems that do not talk to each other. Lewis and others also emphasized the need for services now, such as an electronic power of attorney, to expedite taxpayer administration.

Robert Kerr, representing the National Association of Enrolled Agents, recommended that practitioner accounts also be developed: “We are extremely concerned,” he said, if accounts are available only to taxpayers, they will pay balances that the IRS suggests are due, making it difficult for their practitioner to pursue due process rights later.

Uneasiness remains about whether nonregulated preparers—those who are not authorized to represent taxpayers under Circular 230—should be allowed access to these accounts with clients’ permission. Kerr was emphatic that only Circular 230 practitioners be authorized to represent clients with online accounts for the foreseeable future, suggesting that the IRS consider allowing other preparers access only if the Service creates a steep hurdle to ensure protection of taxpayer data.

A significant concern is the lack of internet access for many Americans, including those living overseas. Right now, without walk-in service, “it is the wild, Wild West for low-income taxpayers,” said Johnette Hartnett, senior director of the National Disability Institute. A tool such as a “My IRS Account” needs to be customized to socioeconomic profile and experience, she noted, as many barriers to adequate service and information already exist for those who are deaf or blind, have limited English language skills, or have mental health or cognitive challenges. She reported that internet use among those with a disability is significantly lower, as much as 30% or more lower than internet use by those without a disability.

Other concerns that panelists raised at the forum included:

• Tax collection: Private debt collection is about to intensify, thanks to the Fixing America’s Surface Transportation Act, P.L. 114-94, a law passed last year that requires the IRS to use third-party debt collectors. Eric Green, Esq., representing the American Bar Association, was frank in his assessment, stating that the “questionable quality” of persons in that field raises concern about turning over taxpayer data in order to collect unpaid tax debts. Green also questioned the IRS’s policy of rejecting an offer in compromise (OIC) if a taxpayer shows the ability to pay before the expiration of the statute of limitation. As collectibility drops significantly after four years, the IRS should consider revising the rule to reject an OIC only if the taxpayer is able to pay within 48 months.
• Shared economy compliance:  Over 2.5 million Americans are earning income in the on-demand or sharing economy, but many have no idea what their filing responsibilities are, according to Caroline Bruckner, managing director of American University’s Kogod Tax Policy Center. The Center surveyed those who offer services such as rides or lodging (e.g., through Lyft or Airbnb) and found that 36% were unaware of the records they needed to keep. An almost equal amount did not know that they were supposed to file quarterly tax payments. Consequently, any IRS strategic plan should include outreach to, and focus on compliance challenges for, these small business owners, Bruckner said.
• Identity theft: The issue of security of taxpayer information under the current system and the envisioned online transactions surfaced repeatedly. John G. Ams, executive vice president of the National Society of Accountants, pointed out that many taxpayers do not use the internet because they are concerned about computer hacking. Marylouise Serrato said American Citizens Abroad supports online accounts to allow taxpayers to self-correct problems but also observed security concerns are even greater for those in other countries with weaker data monitoring infrastructure; also, Americans abroad are at increased risk of being targeted for terrorist actions, making data breaches even more dire.

—Ann Marie Maloney (amaloney@aicpa.org) is an AICPA communications manager–tax.