The results of TAS’s studies appear each year in Volume 2 of this Report. This year’s studies deal with issues like surveying sole proprietors to better understand the factors that affect their reporting compliance, the impact of lien filings, and analyzing EITC Tax Court cases.
For the IRS to maximize the rate at which taxpayers pay their taxes voluntarily, it needs to understand why they comply. The Taxpayer Advocate Service surveyed sole proprietors (i.e., those filing Form 1040, U.S. Individual Income Tax Return, Schedule C) to better understand the factors that may affect their income tax reporting compliance. This is particularly important because sole proprietor income is generally not subject to information reporting, is difficult for the IRS to detect, and represents the largest portion of the tax gap – tax that is not timely and voluntarily paid. The results of our surveys suggest that norms and distrust of the national government, the law, and the IRS may promote noncompliance. Consistently, the results also suggest that tax morale and trust in government, the law, the IRS, and preparers may promote compliance.
TAS Research began studying the impact of liens on taxpayers’ compliance behavior in response to the National Taxpayer Advocate’s concern that the IRS’s use of the Notice of Federal Tax Lien may be harming taxpayers, especially those experiencing economic hardships, while not significantly enhancing the IRS’s ability to collect liabilities. In this study, we analyze the impact of lien filing on the tax liabilities and revenue collected from these taxpayers and whether the installment agreement (IA) and offer in compromise (OIC) can improve these conditions.
Our results show that in general, lien filing was associated with unfavorable outcomes for both the IRS and the taxpayer: the IRS collected significantly less revenue from lien taxpayers and their total tax liabilities increased more. This problem was most severe for taxpayers in the IRS’s hardship (currently not collectible) status. These findings demonstrate the need for continued study of IRS lien filing criteria to maximize the benefits of lien filing to the IRS and minimize its adverse effects on taxpayers.
When a taxpayer doesn’t pay what he or she owes, the IRS can assign the case to a tax collector in the field or its automated collection system, or can shelve the case until later (put it in the “queue”). TAS Research plans to identify similar cases that were assigned to Revenue Officers (the collectors), the automated system, or the queue, and then compare the collection results.
When the IRS takes a “second look” at denied Earned Income Tax Credit (EITC) claims from low income taxpayers, the taxpayers often receive all or part of the credit. The Taxpayer Advocate Service looked at cases where the taxpayer petitioned the Tax Court to review the denial, and the IRS conceded the EITC issue without full trial. The objective of the study is to see what stopped the IRS from allowing the credit before the Tax Court petition. The study found IRS examiners often don’t explain what documentation they need from the taxpayers to show their eligibility for EITC, or consider alternative documentation, but that more experienced employees later in the process do these things. The study also found that taxpayers often had to wait almost a year and a half to get their refunds. For over half of these taxpayers, the EITC was more than a quarter of their adjusted gross income.
The study concludes that if the IRS engaged taxpayers in meaningful conversations earlier in the process, more cases could be resolved earlier. The National Taxpayer Advocate recommends more training for examiners.
Most U.S. taxpayers willingly tell the government what’s needed to pay their taxes. This places a heavy responsibility on the IRS to treat these taxpayers fairly and respect their rights. Studies show that most taxpayers don’t know they have rights or what they are. Taxpayer rights may be easy to forget because taxpayers feel they have no recourse if the IRS violates them. This study discusses how to improve the remedies available for the violation of taxpayer rights.
The National Taxpayer Advocate has long urged the IRS to research the effect of penalties on voluntary tax compliance. This study will focus on accuracy-related penalties, and whether they improve compliance in light of the IRS’s increasing use of automated processes to assess penalties – before the IRS even communicates with the taxpayer.
