Most Serious Problems

Every year, the National Taxpayer Advocate’s Annual Report to Congress identifies at least 20 of the nation’s most serious tax problems. These issues can affect taxpayers’ basic rights and the ways they pay taxes or receive refunds, even if they’re not involved in a dispute with the IRS.

As your voice at the IRS, the National Taxpayer Advocate uses the Annual Report to elevate these problems and recommend solutions to Congress and the highest levels of the IRS.

In 2015, Congress enacted legislation requiring the IRS to outsource the collection of certain tax debt. The IRS began assigning tax debts to private collection agencies (PCAs) in April 2017. According to the IRS, for Fiscal Year 2017 the Private Debt Collection program generated $6.7 million of payments from taxpayers, but cost $20 million. At the same time, the IRS pays commissions to PCAs on payments from taxpayers that are attributable to IRS, rather than PCA, action. The recent returns of approximately 4,100 taxpayers who made payments to the IRS after their debts were assigned to PCAs show: Median income was about $41,000; 28 percent had incomes below $20,000; and 44 percent had incomes below 250 percent of the federal poverty level.  

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The IRS is treating its telephone operations as a dying relic of taxpayer service as it moves forward with its “Future State” plan to reduce telephone interactions with taxpayers and rely instead on more web-based services and tax practitioners. As a part of the right to quality service, taxpayers should be able to contact the IRS over the channel that best meets their needs and have their inquiries fully addressed. Because of the IRS’s archaic telephone technology and operations, taxpayers face long wait times with the worry that the IRS’s telephone assistors will not be able to answer their questions if they are able to get through. Failing to provide high quality service to taxpayers over the phone has the potential to reduce voluntary compliance. 

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The National Taxpayer Advocate believes that the IRS should develop a multi-faceted omnichannel service strategy based on the needs and preferences of taxpayers. We fully support the IRS in its efforts to develop online accounts for individuals and their authorized representatives. However, with approximately 41 million U.S. taxpayers without broadband at home and almost 14 million with no internet access at all at home, the IRS must continue to fully staff other service channels and it needs to upgrade its telephone technology to 21st century. 

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The IRS has the authority to examine, in what can be termed a “real” or traditional audit, any books, papers, records, or other data that may be relevant to ascertain the correctness of any return. However, the IRS does not consider a significant number of compliance contacts with taxpayers to be “real” audits, including math error corrections, Automated Underreporter (AUR), identity and wage verification, and Automated Substitute for Return (ASFR). Yet these contacts, or “unreal” audits, require taxpayers to provide documentation or information to the IRS, comprise the majority of compliance contacts, and feel very much like a “real” examination to taxpayers.  “Unreal” audits lack taxpayer protections typically found in “real” audits.

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Form 1023-EZ was adopted in large part to reduce inventory backlogs for processing Form 1023. Today, Form 1023-EZ applications exceed Form 1023 applications, and the IRS approves virtually all Form 1023-EZ applications it receives. Taxpayer Advocate Service studies carried out in 2015 and 2016 showed, respectively, that 37 percent and 26 percent of approved entities in one of 20 states that post articles of incorporation online did not meet the organizational test for qualification as an IRC § 501(c)(3) organization. This year’s TAS study of a representative sample of approved Form 1023-EZ applicants from those same 20 states found an erroneous approval rate of 42 percent 

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A 2015 law requires the Department of State to deny an individual’s passport application and allows it to revoke or limit an individual’s passport if the IRS has certified the individual as having a seriously delinquent tax debt (i.e. tax debt exceeding $50,000 (adjusted for inflation), including assessed interest and penalties). Although the IRS will not implement the program until early 2018, its proposed procedures and policies raise concerns. The failure to provide adequate notice and to exclude taxpayers exercising certain administrative rights will harm taxpayers. Although the Department of State will hold passport applications open for 90 days before rejecting them, this may not be enough time for taxpayers to resolve their debts and be decertified.

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The IRS has reduced its employee training budget by nearly 75 percent since fiscal year (FY) 2009. Not only has the budget for training drastically declined, but the way in which employees receive that training has shifted from in-person face-to-face training to virtual training. IRS employees cannot be expected to provide competent advice and adequate service to taxpayers who present myriad issues when they do not receive training timely or effectively. Employees must receive timely, comprehensive, and effective training in order to protect taxpayer rights and provide top quality service to taxpayers.

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In 2014, the IRS officially adopted the Taxpayer Bill of Rights (TBOR), and in late 2015, Congress amended IRC § 7803(a)(3) to state: “In discharging his duties, the Commissioner shall ensure that employees of the Internal Revenue Service are familiar with and act in accord with taxpayer rights as afforded by other provisions of this title, including—.” This section then lists the ten fundamental rights that comprise the TBOR. This language shows Congress’s intent to ensure the IRS is held accountable for putting these rights into practice. However, the IRS has not adequately incorporated the TBOR into its measures or quality review criteria, making it difficult to evaluate the extent to which IRS employees are considering a taxpayer’s right to a fair and just tax system in daily work. 

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The IRS has held a longstanding position that taxpayer outreach and education is essential to voluntary compliance. Yet, it continues to shift outreach and education responsibilities to third-party partners. In addition, the IRS is increasingly relying on digital channels to distribute outreach and education information. While digital distribution channels and leveraging third-party partners may enable the IRS to reach large taxpayer populations in a cost-effective manner, it still leaves significant populations of taxpayers behind. It also eliminates the two-way exchange, and in conjunction with the trend away from geographic presence in the taxpayer communities, results in a one-way, filtered, education strategy as well as a remote, impersonal IRS.

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Taxpayer Assistance Centers, formerly called walk-in sites, became the primary local face of the IRS after it reorganized. Recent changes to TACs have chipped away at the services provided and the ability of taxpayers to receive prompt, in-person service. As the IRS moves towards online self-service it must consider taxpayers who cannot complete tasks online or prefer not to use the internet for interacting with the IRS. The strategy of reducing a service to the point that taxpayers can no longer easily access it, then declaring no one uses the service and eliminating it entirely has proven successful for the IRS in the past, and it appears the IRS is moving in the same direction with TACs.

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Restrictions and limitations the IRS imposes on Volunteer Income Tax Assistance (VITA) and Tax Counseling for the Elderly (TCE) sites, compounded with the elimination of tax preparation services at Taxpayer Assistance Centers, increase taxpayer burden and may adversely impact low income, disabled, rural, and elderly taxpayers. Several IRS policies affect taxpayers’ ability to obtain free tax return preparation services and meet their reporting obligations, including “out-of-scope” restrictions; income limits failing to account for family size; the lack of IRS tracking volunteers certified in specific “in-scope” law issues; the unavailability of most VITA and TCE sites after April 15; and restrictions IRS places on grant funds that cannot be used to compensate for services provided by screeners, quality reviewers, and Certified Acceptance Agents.

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The Earned Income Tax Credit (EITC) is a tax credit targeted at low income workers (primarily workers with children). As a result of its complex rules and the ever-changing population of eligible taxpayers, the EITC is associated with a high improper payment rate. Despite reaching out to a broad array of experts via its two EITC Summits and working jointly with TAS on the EITC Audit Improvement team, the IRS’s primary tool to combat the improper payment rate thus far has been the audit process.  

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There are about 1.3 million active duty service members and over 800,000 Reserves and National Guard personnel in the United States. Tax issues pertaining to the military are complex and very few military tax experts outside the IRS are available to assist the active and reserve military taxpayers preparing returns and other tax issues. The IRS does not have employees assigned solely to assist service members or dedicated telephone lines for military taxpayers to call with questions. The IRS’s service to the military population is generally limited to posting information on the web, and providing tax software and training to military partners who prepare tax returns at installations around the world. Members of the military and their families face unusual difficulties in meeting their tax obligations and need specialized assistance.      

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The “sharing” economy, or gig economy, links a willing provider to a consumer of goods or services (coordinated through a community-based online service). Nearly a quarter of the U.S. population earns money from the sharing economy.  However, many of the service providers are not familiar with tax filing and recordkeeping requirements. The majority of them do not receive any tax information from the sharing economy platform they used to earn their income. This demonstrates both the need for guidance from the IRS and the opportunity to create a culture of tax compliance among participants in the sharing economy from the outset. 

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IRS policy is that nonresident aliens, 1042-S filers, are only entitled to credits and refunds when the information on Forms 1040NR, U.S. Nonresident Alien Income Tax Return, substantially matches the information on Forms 1042-S, Foreign Person's U.S. Source Income Subject to Withholding, issued directly to the IRS by withholding agents. This approach, however, does not appear to be firmly grounded in comprehensive statistical analysis. Rather than using available data to focus compliance and enforcement efforts on high-risk taxpayers, the IRS has adopted an undifferentiated approach to 1042-S filers that wastes resources, needlessly burdens compliant taxpayers, and treats 1042-S filers inconsistently from analogous domestic taxpayers. 

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Individuals who are ineligible for Social Security numbers need Individual Taxpayer Identification Numbers (ITINs) to file required returns and pay taxes. The IRS fails to adequately analyze the characteristics of the ITIN population, including where they live, how they file taxes, what language they speak, and what community resources are available to help them meet their tax obligations. Nor does the IRS communicate effectively with ITIN taxpayers by providing sufficient notices in the taxpayer’s language and targeted outreach to underserved taxpayers. The IRS continues to overlook necessary changes and make others that prevent taxpayers from obtaining ITINs, filing their returns, and receiving tax benefits to which they may be entitled. 

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Appeals changed its policies in 2016 to establish a default telephone conference rule, remove taxpayers’ right to choose an in-person conference, and restrict the circumstances under which a Hearing Officer could elect to hold such a conference. These changes negatively impacted the ability of many taxpayers to adequately present their cases. Appeals recently announced that it would return to making in-person Appeals conferences available in Field cases. Nevertheless, a number of important restrictions on in-person conferences are still in place. These limitations on in-person Appeals conferences are unnecessary in light of prevailing trends, should be replaced by quality conference alternatives, and could do substantial harm to taxpayers and the IRS.

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Effective October 2016, Appeals implemented guidance explicitly allowing Hearing Officers to invite IRS Counsel and Compliance to participate in Appeals conferences. This step, however, may have far-reaching negative consequences for Appeals’ effectiveness in resolving cases with taxpayers.  Among other things, Appeals’ emphasis on expanding participation of Counsel and Compliance in conferences will fundamentally change the nature of conferences, jeopardize both the real and perceived independence of Appeals, and generate additional costs for taxpayers and the government.

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The IRS has made significant strides in revamping its identity theft victim assistance procedures, including centralizing its identity theft victim assistance units. Tax-related identity theft has been on the decline in recent years. We believe that improvements to the IRS’s identity theft filters and earlier access to information return data, coupled with the IRS’s changed approach to identity theft victim assistance, have led to this decline. However, the IRS’s Identity Theft Global Report underrepresents the volume of unresolved identity theft cases. Recently, the IRS changed its procedures to designate a single employee as the sole contact person for an identity theft victim, from beginning to end. However, this privilege does not extend to identity theft victims facing multiple issues and dealing with multiple IRS functions – the taxpayers most likely to have their cases fall between the cracks. 

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The IRS fraud detection system identifies illegitimate returns and prevents improper refunds from being issued. Over the past 14 years, the National Taxpayer Advocate has consistently advocated for taxpayers whose legitimate refunds have been unreasonably delayed by the IRS, and recommended improvements to reduce taxpayer burden while preventing refund fraud. Despite some improvements in recent years, this system remains highly inaccurate with a false positive rate (FPR) of about 66 percent.  This resulted in about 60,000 legitimate returns being improperly selected and refunds being delayed. These delays are exacerbated by the inability of taxpayers to reach a live assistor in the IRS unit dealing with income and wage verification. 

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Demand for refund anticipation loans (RALs) has more than tripled over the past year. Over 90 percent of the returns filed with RAL indicators were filed by February 15. This substantial increase in demand coincides with the effective date of the provision in § 201 of the Protecting Americans from Tax Hikes Act of 2015 (PATH Act) that requires the IRS to hold all refunds that include Earned Income Tax Credit and Additional Child Tax Credit until February 15. Such delay in refund issuance improves tax administration, but taxpayers are absorbing the costs of these short-term loans and, in many cases, they might not even realize the true cost due to the hidden nature of the indirect fees. 

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