National Taxpayer Advocate Nina E. Olson provided the 2015 annual report to Congress in the first week of 2016. The report made several key points concerning delayed refunds, the pay-to-play environment and customer calls increasing despite e-filing rates increasing. The report also revealed that over the past decade, the IRS increased the individual tax return e-filing rate from 54 percent to 85 percent, added substantial content to IRS.gov and enhanced the “Where’s My Refund” tool, while the number of taxpayer calls to IRS customer service actually increased by 59 percent. The IRS anti-fraud filters will delay refunds to legitimate taxpayers. The tax returns filters uncover improper refund claims. Returns with bogus wage or withholding amounts and those suspicious of identity theft are filtered out. The wide net also catches legitimate returns. These high “false positive” rates cause refund delays to your clients. Compounding the problem is that the IRS is answering fewer than 10 percent of taxpayer calls to the telephone line designated for taxpayers to use to get their returns unfrozen.
The reduction in IRS customer service has led the IRS to direct taxpayers with questions to tax preparers. Between fiscal 2010 and fiscal 2015, when the IRS’s appropriation was reduced, its user fee revenue rose 34 percent. According to Olson, this creates a “pay-to-play” tax system where only taxpayers who can afford to pay for tax advice receive service.
Since taxpayers pay the bills for our government, they deserve a say in how the tax collection agency will treat them, Olson explained, announcing plans to invite taxpayers to public hearings around the country. Taxpayers will include sole proprietors and other small businesses. Circular 230 practitioners and tax return preparers who are not enrolled are also invited to attend and offer ways the IRS can help them comply with tax laws.
The report highlighted data security concerns about the consequences of giving unregulated return preparers more access to taxpayer accounts. The report states that the IRS makes shortsighted decisions when addressing reduced funding, which creates additional work for itself and increases taxpayer burden. For example, the IRS collects revenue when delinquent taxpayers agree to pay their liabilities voluntarily, even if they can only pay in installments rather than in a lump sum. Under an installment agreement, tax is collected without using IRS enforcement resources, yet the IRS charges taxpayers a user fee for entering into installment agreements.
The “Most Serious Problems” section of the report highlighted the adequacy of taxpayer service for taxpayers living abroad, the whistleblower program, the administration of the Affordable Care Act and EITC compliance. The report comments on more effective use of audits, and greater emphasis on how tax return preparers can promote compliance.
Additionally, the Taxpayer Advocate report to Congress contains four new research studies. Two of the studies are on IRS enforcement programs. One study found different post-audit compliance results for self-employed taxpayers. Although “audits have important long-term revenue implications,” the study revealed different results when comparing the resultant behavior of taxpayers. Previously non-compliant taxpayers who were audited increased their reporting compliance of taxable income by 120 percent three years later. However, taxpayers who were compliant prior to their audit subsequently reported less income.
The IRS’ collectability curve was also studied. The IRS assigns delinquencies to the Taxpayer Delinquent Account (TDA) status within five months after it assesses liability. After assessment, the IRS sends out a series of notices to the delinquent taxpayer. Interestingly, the volume of TDAs may delay collection actions. The IRS is most successful collecting liabilities soon after TDA assignment. While collections continue to occur through the 10-year statutory collection period, the payment rate is significantly reduced over time.
Private collection agencies (PCAs) report similar results. However, IRS procedures prioritize collecting larger accounts. The irony is many small balance accounts become large balance accounts because the IRS delays collection. The IRS allows penalties and interest to accrue, which ultimately make the accounts more difficult to resolve. The report did not comment on the Congressional mandate for the IRS to use PCAs after separate contradicting reports about whether prior results of using PCAs were successful.