It’s that time of year: the National Taxpayer Advocate, Nina Olson, has submitted her mid-year report to the House Committee on Ways and Means and the Senate Committee on Finance. The Taxpayer Advocate is required by statute to submit two reports each year. Those reports are submitted directly to Congress without any prior review or comment from the Internal Revenue Service (IRS) Commissioner, the Secretary of the Treasury, the IRS Oversight Board, any other officer or employee of the Department of the Treasury, or the Office of Management and Budget.
The first of the two reports are due on June 30 of each year (that’s this one) and focuses on the objectives of the Taxpayer Advocate for the fiscal year. The second report, due on December 31 of each year, identifies at least 20 of the most serious problems encountered by taxpayers, discusses the ten tax issues most frequently litigated in the courts, and outlines administrative and legislative recommendations (you can read about the most recent report here).
This year, Olson’s mid-year report focused on the new Taxpayer Bill of Rights, return preparer fraud, exempt organizations, and the recently announced voluntary return preparer certification program.
The Taxpayer Bill of Rights is a list of 10 rights that already exist in the Tax Code but are not incorporated into manageable bites for taxpayers. The Tax Advocate has long supported making a list of rights accessible to taxpayers, saying, “Taxpayer knowledge and education is the best taxpayer protection there is.”
This year, the IRS incorporated the Taxpayer Bill of Rights into its reworked version of Publication 1, Your Rights as a Taxpayer (downloads as a pdf), available on the IRS web site. The IRS and the Taxpayer Advocate Service have also each created pages on their web sites so that taxpayers can find them quickly and easily. Olson says that these steps will bring into focus areas where there are gaps between rights and remedies, notably with respect to the right to quality service.
Tax-related identity theft is a huge challenge for the IRS, landing it at the top of the Dirty Dozen Tax Scams for 2014. Garnering less attention is the number of taxpayers victimized by unscrupulous preparers who have stolen their refunds by fraudulently altering information on returns: often, the preparer will change the bank account routing number so the refund is transmitted to the preparer’s own account. While the IRS has made efforts to issue refunds to identity theft victims, it has generally declined to issue refunds to victims of preparer fraud. That, according to Olson, needs to change. She writes, “the IRS has consistently dragged its heels, making one excuse after another, because providing relief to these victims just is not a high enough priority, or more disturbingly, because the IRS simply does not want to provide relief.” Olson notes that IRS Commissioner John Koskinen announced intentions to issue refunds to victims of preparer fraud who have taken steps to substantiate the fraud. To date, however, the IRS has not issued any refunds.
Also making headlines this year? The IRS treatment of tax-exempt organization applications. The Advocate highlighted a proposal that could provide a clearer test to determine whether an organization seeking exempt status under IRC § 501(c)(4) is operating “primarily” for social welfare purposes: that question triggered the scandal in a post-Citizens United world. The Advocate noted that Congress enacted IRC §501(h) to provide §501(c)(3) organizations with a test focusing on expenditures. The same sort of test could, the Advocate suggested, be used for IRC §501(c)(4) organizations. The Advocate writes that “organizations requesting the right to receive contributions exempt from tax should be evaluated on how they expend those contributions. Under this analysis, as with the 501(h) election, volunteer time and activity, which do not generate taxable income for which tax exemption would be available in the first instance, are irrelevant to this determination.”
The IRS has attempted to resolve some of the concerns about the tax-exempt application process with the introduction of a new EO application, form 1023-EZ. While the Advocate has previously supported a simplified tax-exempt organization application, she has concerns about the new form, as introduced. Specifically, the Advocate notes that the new form doesn’t require organizations to describe their mission and activities or send in formation documents, such as bylaws and Articles of Organization, for review by IRS.
The Advocate also addressed the new voluntary program for tax preparers which was recently unveiled by the IRS (yes, the one that the AICPA sued to bar). The Advocate supports the idea of minimum standards for return preparers in order to protect taxpayers from incompetent or unscrupulous preparers. Olson stresses that a meaningful preparer standards program must contain four components:
- registration to promote accountability;
- a one-time “entrance” examination to ensure basic competency in return preparation;
- continuing education courses to ensure preparers keep up to date with the many frequent tax-law changes; and
- a taxpayer education campaign to help guide taxpayers to credentialed practitioners (i.e., CPAs, attorneys, and Enrolled Agents) or preparers who have satisfied the above requirements.
For the upcoming filing season, Olson praised the IRS for the introduction of the new voluntary program. However, she recommends that the IRS also develop a consistent, minimum competency exam as a part of the voluntary program: that piece is currently lacking. The Advocate also urged Congress to work to pass legislation to give IRS the authority to regulate preparers, an authority they currently lack, as determined by the courts.
Overall, the Advocate gave the IRS kudos for a “generally successful filing season” despite a lack of resources and for taking a more equitable approach to the Offshore Voluntary Disclosure Program. There is, however, she noted, more work to be done.
The Taxpayer Advocate Service is an independent organization within the IRS. The Taxpayer Advocate Services helps resolve issues that taxpayers haven’t been able to fix on their own. They also address large-scale, systemic issues that affect groups of taxpayers. For more information, visit TaxpayerAdvocate.irs.gov or irs.gov/advocate. You can also find the TAS on social media via Facebook, Twitter, and YouTube.com.
