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 2014, the IRS implemented a policy to only answer tax law questions during the filing season, roughly from January through mid-April of any year.  It justified this abrupt change in policy as a cost-savings effort in a time of budget constraints.  This change does not comport with an agency charged with administering the tax law and focused on the customer experience.

Taxpayers have ever-changing tax situations year-round.  People move, open a business, close a business, get married, get divorced, have children, and experience many other life changes that affect their tax obligations.  Forcing taxpayers into a 3.5-month window to ask questions or making it necessary for them to seek advice from a third-party source can be frustrating and costly to the taxpayer and result in eroded trust and confidence in the IRS.

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The IRS Office of Chief Counsel (OCC) provides advice to headquarters employees called Program Manager Technical Advice (PMTA(s)).  PMTAs must be disclosed to the public pursuant to a settlement with Tax Analysts.  Due to the Tax Cuts and Jobs Act (TCJA), taxpayers need prompt guidance now more than ever.  Notwithstanding their increased need to for guidance, the OCC (1) has been disclosing fewer PMTAs, (2) allows its attorneys to avoid disclosure by issuing advice as an email, rather than a memo; (3) has not issued written guidance to its attorneys describing what must be disclosed as PMTA; and (4) has no systems to ensure all PMTAs are timely identified, processed as PMTAs, and disclosed.

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Taxpayers often have difficulty locating IRS personnel who can provide accurate and responsive information regarding their cases.  The IRS emphasizes its main toll-free phone line, which includes difficult-to-interpret options and often leads to extended hold times.  Even when taxpayers are provided with a specific phone number, most often it is for a group, rather than for an individual employee.  These group numbers make it difficult for taxpayers to have a sense of continuity and rapport with the personnel working their cases. 

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To fulfill its statutory duty to increase electronic filing (e-filing), the IRS partners with Free File, Inc (FFI), a group of 12 private-sector tax return preparation software providers.  This group provides two services—Free File software, which provides online software to guide taxpayers with adjusted gross income of less than $66,000 through return preparation, and Free File Fillable Forms, a tool available for all taxpayers to enter their income tax forms digitally.  Use of the Free File program has steadily declined, and the IRS is devoting minimal resources to oversight and testing of this program to understand why taxpayers aren't using it and how the services offered could be improved. 

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IRS fraud detection systems generate high false positive rates (FPRs) and long processing times, which increase taxpayer burden, generate phone calls to the IRS, and create TAS cases.  Several IRS policies affect the ability of taxpayers to timely receive legitimate refunds, including the IRS’s failure to capture necessary information to evaluate the accuracy and efficiency of its non-IDT and IDT refund fraud programs; its past failure to check for third-party information on a daily, versus weekly, basis; and its failure to implement systemic verification capabilities in its fraud detection systems. 

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When the IRS allows a taxpayer's erroneous claim of the Earned Income Tax Credit (EITC), it makes an "improper payment."  The IRS estimates that 25% of the EITC credits it allowed in Fiscal Year (FY) 2018 were improper payments (23.4%, when considering improper payments the IRS recovered).  A principal cause of the EITC improper payment rate is the complexity of the rules for claiming EITC, yet the IRS does not provide a dedicated telephone help line available year-round for taxpayers to call with questions about EITC.

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In 2018, more than half of the tax returns submitted by return preparers were from individuals who are unregulated by the IRS.  It is a necessary part of the IRS’s duties to ensure that preparers are competent and accountable, since return preparers play such a critical role in tax administration and in promoting tax compliance.  The public needs a way to differentiate between professional, competent, and experienced preparers and their incompetent or unscrupulous counterparts.

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IRS correspondence audits may involve complicated rules and procedures, or complicated fact situations, or both as in the case of the Earned Income Tax Credit (EITC).  Taxpayers in correspondence exams may suffer greater burden because of the difficulty of sending and receiving correspondence; the lack of clarity in IRS correspondence; and the lack of a single employee assigned to the taxpayer's case.  Correspondence examiners do not receive sufficient training on complex issues, and IRS correspondence exam measures do not adequately consider taxpayer needs and preferences. 

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The primary objective in identifying tax returns for examination is to promote the highest degree of voluntary compliance.  Yet the IRS does not know whether its field exams are promoting voluntary compliance because it does not have a measure to track future filing compliance post-audit.  Instead, the IRS focuses primarily on the bottom line and the direct effects of a specific audit—measuring closures, cycle time, employee satisfaction, and quality scores.  The IRS may also be selecting the wrong taxpayers and cases for field audit, given declining resources. 

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Promoting voluntary compliance should be an underlying goal of the IRS examination process; however, failure to appropriately measure the outcomes of examinations and the scope of the office examination program may limit its effectiveness.  Office exams typically examine a limited scope of issues, which provides a structure to the exam and helps the taxpayer focus specifically on how to better comply in the future.  The IRS employee has an opportunity to educate the taxpayer in-person and ensure the taxpayer understands the law going forward.  The face-to-face experience benefits both the taxpayer and the IRS – the taxpayer can, in real time, ask questions and explain his or her position to the IRS, and the IRS employee can immediately see if the taxpayer understands the current examination, next steps to be taken, and how to comply in the future. 

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When a return appears to contain one of 17 types of errors (misleadingly called math errors), the IRS can summarily assess additional tax without first giving the taxpayer a notice of deficiency, which triggers the right to petition the Tax Court.  This “math error authority” (MEA) can deprive taxpayers of benefits to which they are entitled and leave them with no realistic opportunity for judicial review.  The taxpayer is best equipped to address the IRS’s questions immediately after filing. 

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Math error authority allows the IRS to summarily resolve mathematical and clerical errors with taxpayers’ tax returns that are obvious just by looking at the face of the return. However, the range of issues that fall under these definitions has steadily expanded and the IRS is using math error authority to summarily resolve more complex issues. Concerned with protecting taxpayer rights, Congress directed the IRS to provide taxpayers with an explanation when it makes an adjustment to taxpayers’ returns. The IRS does this by sending taxpayers a math error notice.

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The statutory notice of deficiency (SNOD) notifies the taxpayer there is a proposed additional tax due, identifying the type of tax, and period involved, and that the taxpayer has the right to bring suit in the United States Tax Court before assessment and payment.  If the taxpayer does not petition the Tax Court, after the 90 days (or 150 days if the taxpayer resides outside the United States) expires, the IRS will assess the tax, send the taxpayer a tax bill, and start collection.  The SNOD is the taxpayer’s “ticket” to the Tax Court, the only pre-payment judicial forum where the taxpayer can appeal an IRS decision. 

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Collection Due Process (CDP) rights provide taxpayers with an independent review by the IRS Office of Appeals of the decision to file a Notice of Federal Tax Lien (NFTL) or the IRS’s proposal to undertake a levy action, which can be appealed to Tax Court.  The IRS communicates these important rights during two critical times.  The IRS communicates the right to request a CDP administrative hearing with the intent to levy notice or the Notice of Federal Tax Lien.  Following the CDP hearing, the IRS communicates its determination to the taxpayer via a notice of determination.  Perhaps because the notices provide confusing instructions regarding the due date to file a response, the response rate for CDP notices ranges from under one percent to over ten percent. 

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Economic hardship, as defined in Treasury regulations and the Internal Revenue Manual, occurs when an individual is “unable to pay his or her reasonable basic living expenses.”  Although Congress requires the IRS to halt some collection actions, like a levy, if a taxpayer is in economic hardship, the IRS is not proactive in identifying these taxpayers throughout the collection process.  This means that the IRS does not have a method to alert collection employees that a taxpayer may be at risk of economic hardship and, when responding to taxpayer inquiries, to ask questions about the taxpayer’s finances to determine an appropriate collection action or alternative.  As a result, taxpayers may be lured into entering installment agreements (IAs) they cannot afford.

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Field Collection works cases that have not been resolved through the notice stream or through the Automated Collection System (ACS).  In general, to resolve cases, Revenue Officers can file a lien, issue a levy, seize assets, recommend suits to foreclose on a federal tax lien or reduce the tax debt to judgment.  Notwithstanding their responsibility to collect tax, Revenue Officers must adhere to taxpayers’ right to privacy and right to a fair and just tax system, and they have the responsibility to educate the taxpayer in order to avert future noncompliance.  The current state of Field Collection has impaired the ability of Revenue Officers to fulfill their mission in accord with the Taxpayer Bill of Rights. 

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The Automated Collection System (ACS) is a major IRS automated collection inventory system used to send notices demanding payment, and to issue notices of federal tax lien (NFTLs) and levies.  ACS employees also answer taxpayer telephone calls to resolve balance due accounts and delinquencies.  In recent years, ACS has drifted away from its philosophy of understanding the cause of the tax debt, considering collection alternatives, and ensuring that these collection alternatives enable future voluntary compliance. 

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This year, the National Taxpayer Advocate studied business offers in compromise (OICs) out of concern that the IRS is not doing enough to help business taxpayers file successful OICs.  Additionally, the IRS made changes that create barriers to all taxpayers from submitting successful OICs.  First, not every state has an OIC Specialist, creating a situation where circumstances unique to a particular area are not always known by the employee reviewing the OIC.  Also, the IRS now returns OICs as not processable when submitted by taxpayers who have not filed all necessary tax returns, instead of holding on to them for a period as leverage for the taxpayer to cure the filing defects. 

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The IRS implemented its current Private Debt Collection (PDC) initiative in April 2017.  As of September 13, 2018, about $5.7 billion in debts of more than 600,000 taxpayers were in the hands of private collection agencies (PCAs).  Thus, PCA inventory is fast becoming a substitute of the IRS collection queue.

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Taxpayers unable to afford representation to defend against a potential IRS assessment or collection action may believe there are only two courses of action: do nothing, or proceed unrepresented. When it comes to civil justice problems involving money or housing, poor households are twice as likely to do nothing than moderate-income households, according to legal scholars. The National Taxpayer Advocate is concerned efforts to provide unrepresented petitioners access to free, competent advice are being undercut and underused because of ineffective outreach and lack of consistent guidance between the IRS Chief Counsel and pro bono representatives which undermine the taxpayers’ rights to be informed, to retain representation, and to a fair and just tax system, and increases the burden on the Tax Court.

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Status Update: To its credit, Appeals, responding to the urgings of the National Taxpayer Advocate and other stakeholders, has recently changed its policy and reinstituted the right of campus taxpayers to transfer their cases to field offices in order to accommodate an in-person conference.  We applaud Appeals' taking this important step.  Notwithstanding this progress, campus taxpayers continue to receive demonstrably different treatment from that afforded to field taxpayers. 

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