Each year, the National Taxpayer Advocate (NTA) makes an annual report to Congress. The report is required by law under Section 7803(c)(2)(B)(ii) of the Internal Revenue Code which mandates that the NTA identify at least 20 of the most serious problems encountered by taxpayers and make administrative and legislative recommendations.
The most serious problems, as identified by the NTA, together with their recommendations are:
1. The IRS’ failure to answer the right tax law questions at the right time harms taxpayers, erodes taxpayer rights, and undermines confidence in the IRS.
In 2014, the IRS implemented a policy to only answer tax law questions during the filing season (January through mid-April). The change was budget-driven and was not a reflection of reality since taxpayers have questions throughout the year. This, the NTA, points out, doesn’t make sense. It’s important to provide timely and accurate answers when problems arise, and not just during filing season.
To resolve the issue, the NTA recommends that the IRS answer certain tax law questions year-round, as well as develop a method to respond to unusual or complex matters. The latter could be achieved through email or phones, perhaps using Artificial Intelligence and pattern recognition technology.
2. Counsel is keeping more of its analysis secret, just when taxpayers need guidance more than ever.
The IRS Office of Chief Counsel (OCC) provides advice to headquarters employees and that advice must be disclosed to the public. However, the NTA says that the OCC has been making less information available.
The NTA recommends that the OCC should develop clear written guidance for disclosing advice, and it should not withhold advice based on its form (e.g., email versus a memo).
3. Taxpayers have difficulty navigating the IRS, reaching the right personnel to resolve their tax issues, and holding IRS employees accountable.
Taxpayers often have difficulty finding answers to questions regarding their cases. Specifically, the phone line system is difficult to understand and results in long hold times, and questions are shuffled to groups instead of individual employees.
The NTA recommends that the IRS provide the IRS Telephone Directory for Practitioners or a similar directory to the general public, as well as institute a 311-type system where an operator can transfer a taxpayer to the specific IRS office (if you’ve ever called the IRS, you know that typically you cannot be transferred between departments). The NTA also recommends that a single employee should be assigned to the IRS with a complaint tracker to monitor and record requests to speak with supervisors, subsequent follow-up, and other results.
4. The IRS’ Free File offerings are underutilized, and the IRS has failed to set standards for improvement.
As part of its statutory duty to increase e-filing, the IRS partners with Free File, a free online software program available through IRS.gov. With Free File, taxpayers with income below $66,000 in 2018 typically have access to free tax prep software (eligibility may vary). That means that up to 100 million taxpayers, or 70% of filers, are eligible to use Free File. Taxpayers with income above $66,000 have access to fillable, electronic versions of the paper forms.
(You can read more about FreeFile here.)
However, the use of the Free File program has steadily declined. During the last fiscal year, only about 2.5 million people filed returns using Free File software, even though e-filing has increased. Age and language limitations in the software may have contributed to the decline.
The NTA recommends that the IRS develop actionable goals for Free File, including creating measures to evaluate taxpayer satisfaction and test each return preparation software’s ability to complete various forms, schedules, and deductions, and a clear advertising and outreach plan to make taxpayers, particularly in underserved communities, aware of the services. If these recommendations are not adopted, the NTA recommends that the IRS scrap the Free File Program.
5. The IRS’ fraud detection systems are marred by high false-positive rates, long processing times, and unwieldy processes which continue to plague the IRS and harm legitimate taxpayers.
IRS fraud detection systems are meant to prevent tax refund fraud. However, they generate high false-positive rates (FPRs) and long processing times and affect the ability of taxpayers to receive their refunds.
The NTA recommends that the IRS use better metrics to more accurately reflect the number of legitimate refunds that take more than four weeks to resolve, in addition to studying why it takes some taxpayers longer to authenticate their identities so that they can ensure a timely resolution to FPR-related delays.
6. Measures the IRS takes to reduce improper earned income tax credit (EITC) payments are not sufficiently proactive and may unnecessarily burden taxpayers.
The IRS estimates that 25% of The EITC credits it allowed in fiscal year (FY) 2018 were improper payments. The EITC is complicated and yet, the IRS doesn’t have a dedicated telephone helpline available year-round for taxpayers to call with questions about EITC. Also, for every dollar of EITC improper payments, 40 cents of EITC went unclaimed by taxpayers who appear to be eligible for the credit.
The NTA recommends that the IRS take steps to educate taxpayers about the EITC, including collaborating with TAS to determine how to best identify eligible taxpayers who do not claim EITC, easier-to-understand EITC notices, and a dedicated, year-round toll-free helpline staffed by IRS personnel trained to respond to EITC and Child Tax Credit questions.
7. The IRS lacks a coordinated approach to its oversight of return preparers and does not analyze the impact of penalties imposed on preparers.
The IRS has made efforts to regulate tax preparers but lost those battles in court. Today, the IRS cannot require that tax return preparers pass competency tests or undergo continuing education.
(You can read more about the court case and the fall-out here and here.)
The NTA recommends that the IRS invite representatives from TAS to assist in developing a coordinated strategy to provide effective oversight of return preparers and to communicate strategy to preparers. The NTA also recommends that the IRS figure out how to educate vulnerable taxpayer populations about how to select a competent return preparer and the risks of return preparer fraud.
8. The IRS’ correspondence examination procedures burden taxpayers and are not effective in educating the taxpayer and promoting future voluntary compliance.
IRS correspondence audits can be complicated. In fiscal year (FY) 2017, the IRS audited almost 1.1 million tax returns; approximately 71% of all those audits were correspondence audits. Of those, the IRS took more than 65 days to respond to the majority of taxpayer replies in refundable credit cases, answered the Small Business/Self-Employed (SB/SE) division exam phone only about 35% of the time and closed 42% of correspondence audits (42%) with no personal contact. If the idea is to assist taxpayers so that they can learn the rules, correct their mistakes, and remain compliant, the NTA believes there is room for improvement.
The NTA recommends that the IRS take steps to improve correspondence audit communication, including requiring at least one personal contact between an IRS employee and the taxpayer before closing the exam, as well as assigning a single employee for a correspondence exam.
9. The IRS’ field examination program burdens taxpayers and yields high no change rates, which waste IRS resources and may discourage voluntary compliance.
The IRS has conducted fewer field exams (sometimes called in-person exams) in recent years, with approximately 272,000 field exams in fiscal year (FY) 2010 compared to 156,000 field exams in FY 2018. With limited resources, the IRS may need to be more discriminating in choosing cases.
Currently, field exams have unacceptably high no change rates (no change audits negatively affect voluntary compliance) and field exam programs do not have a formal centralized system to track taxpayer complaints and requests to speak to a manager.
The NTA recommends that the IRS periodically survey taxpayers after field exams to determine the impact taxpayers, as well as notify taxpayers during an audit of any consultations with specialists and provide an opportunity for taxpayers to discuss the results.
10. The IRS does not know whether its office examination program increases voluntary compliance or educates the audited taxpayers about how to comply in the future.
Promoting voluntary compliance should be the goal of an IRS exam (or audit). According to the NTA, a face-to-face experience benefits both the taxpayer and the IRS since the taxpayer can ask questions and explain his or her position to the IRS, and the IRS employee can immediately see if the taxpayer understands the answers. This is different from a correspondence exam where a taxpayer may never have personal contact with the IRS.
The NTA recommends that the IRS develop measures to track audits by type of exam, as well as track results of audits that are appealed by type of exam. The NTA also recommends that the IRS make educating the taxpayers on future compliance a key part of the exam, as well as expanding opportunities for office exams.
11. The IRS has failed to exercise self-restraint in its use of math error authority, thereby harming taxpayers.
When a return appears to contain one of 17 types of errors (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. Last year, the IRS concluded that it could use this authority to reverse and recover refundable credits for students, children, and the working poor on 17,691 returns – some nearly two years after the returns were filed. According to the Treasury Inspector General for Tax Administration (TIGTA), the IRS improperly denied credits to 289 taxpayers and sent 113 taxpayers the wrong letters to explain why their credits were disallowed.
The NTA recommends that the IRS adopt a policy statement or similar guidance which voluntarily limits the circumstances in which it will use this authority, and require the IRS to alert taxpayers to any discrepancies as early as possible.
12. Although the IRS has made some improvements, math error notices continue to be unclear and confusing, thereby undermining taxpayer rights and increasing taxpayer burden.
Math error authority allows the IRS to summarily resolve mathematical and clerical errors with taxpayers’ tax returns that are obvious. However, the NTA says that the IRS is using this authority to resolve more complex issues.
When the IRS adjusts a return, it sends a notice to the taxpayer. However, many notices are confusing. This makes it difficult for taxpayers to determine what the IRS might have corrected and what their options might be.
The NTA recommends that the IRS explain the errors in the notices more clearly, noting the exact line on the tax return where it made a change and the reason for the change. The notice should also explain the taxpayer’s options important deadlines for accepting or appealing a change.
13. The IRS fails to clearly convey critical information in statutory notices of deficiency, making it difficult for taxpayers to understand and exercise their rights, thereby diminishing customer service quality, eroding voluntary compliance, and impeding case resolution.
If you owe tax, the IRS sends a statutory notice of deficiency (sometimes called a 90-day letter). The notice is supposed to identify the type of tax, the tax year (or period involved), and an explanation of the taxpayer’s right to appeal the decision in the United States Tax Court. However, many of these notices are confusing (and frightening).
(You can find out more about Tax Court here.)
The NTA recommends that the IRS redesign the notices of deficiency to make them easier to read. The NTA also recommends that the notices and any follow-up actions be tracked so that the IRS can develop strategies for assisting taxpayers before a matter proceeds to court.
14. Despite recent changes to collection due process notices, taxpayers are still at risk for not understanding important procedures and deadlines, thereby missing their right to an independent hearing and tax court review.
Collection Due Process (CDP) rights afford taxpayers an independent review by the IRS Office of Appeals of the decision to file lien or levy.
The NTA believes that the notices do not properly explain what a hearing is, why a taxpayer would want to request one, and what an equivalent hearing is. Additionally, the notices do not clearly mention important information, such as a deadline by which to file a hearing request or offer a specific date by which to file a petition in Tax Court.
Taxpayers are more likely to read material if it is salient to them, so the NTA recommends that the IRS improve the notices to be easier to read, including making it easier to find the date by which the taxpayer must file a petition in Tax Court. Some fixes could be as simple as highlighting deadlines early in the notices and in bold font.
15. The IRS does not proactively use internal data to identify taxpayers at risk of economic hardship throughout the collection process.
Congress requires the IRS to halt some collection actions, like a levy, if a taxpayer is in economic hardship, but the IRS is not proactive in identifying these taxpayers throughout the collection process.
The NTA recommends that the IRS implement processes to better evaluate a taxpayer’s financial situation, including identifying a taxpayer at risk of economic hardship. These cases may need to be removed for collections, or educated on collection alternatives and additional assistance available, including TAS and the Low Income Taxpayer Clinics (LITCs). The NTA also suggests a new helpline dedicated to responding to taxpayers at risk of economic hardship and helping them determine the most appropriate collection alternatives.
16. The IRS has not appropriately staffed and trained its field collection function to minimize taxpayer burden and ensure taxpayer rights are protected.
Field Collection cases that have not been resolved may be subject to a lien, levy, seizure or other legal action to collect. By the time a taxpayer makes contact with a Revenue Officer who might carry out those functions, the taxpayer may be unable to pay because the debt has grown so large as a result of accrued penalties and interest, or because the taxpayer’s financial condition has deteriorated.
The NTA recommends that Revenue Officers receive more training with a focus on early intervention, as well as offer outreach events to provide information on policy and procedures.
17. ACS lacks a taxpayer-centered approach, resulting in a challenging taxpayer experience and generating less than optimal collection outcomes for the IRS.
The Automated Collection System (ACS) is used to send notices demanding payment and notify taxpayers about federal tax lien and levies. ACS employees also answer taxpayer telephone calls to resolve balance due accounts and delinquencies.
According to the NTA, ACS is actively trying to avoid person-to-person interaction with taxpayers. The NTA notes that ACS issues LT16: Request for Taxpayer to Contact ACS, and proposed ACS notices now omit the name and phone number of an individual ACS employee.
The NTA recommends that the IRS assign an ACS employee located in the same geographic region as the taxpayer to a case and provide contact information on each notice sent to the taxpayer. The
NTA also recommends that the IRS send monthly reminders showing the accrued penalties and interest and advise employees that when a taxpayer’s account bears an economic hardship indicator to consider all possible avenues for resolution.
18. Policy changes made by the IRS to the Offer In Compromise program make it more difficult for taxpayers to submit acceptable offers.
The IRS is not doing enough to help taxpayers submit successful Offers in Compromise (OICs). The acceptance rate for individual OICs is at just 44% while business OICs have an acceptance rate of just 24%.
The NTA recommends that the IRS expand its geographic presence for OIC analysis, as well as change its policy for dealing with taxpayers, including those missing returns or other information (instead of merely bouncing the OIC).
19. The IRS’ expanding private debt collection program continues to burden taxpayers who are likely experiencing economic hardship while inactive PCA inventory accumulates.
In 2017, Congress forced the IRS to hand over some collections to private debt collectors. The law was pushed through despite the failures of past privatization efforts and despite concerns about what privatization efforts might mean for taxpayers (including those recently expressed by Treasury Inspector General for Tax Administration J. Russell George and NTA Nina Olson). In some instances, private debt collectors are targeting taxpayers who are experiencing economic hardship.
(You can read more about private debt collections here.)
The NTA recommends that the IRS should not transfer debts of taxpayers with incomes are at or below certain minimum standards, as well as debts of taxpayers who are SSDI and Supplemental Security Income (SSI) recipients to private debt collectors. The NTA also suggests that IRS have a policy requiring the review of some cases and a return of others.
20. Insufficient access to available pro bono assistance resources impedes unrepresented taxpayers from reaching a pre-trial settlement and achieving a favorable outcome.
Taxpayers who cannot 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.
Unrepresented taxpayers bring more than 80% of cases in Tax Court; the rate is almost 94% for small tax case (S Case) treatment (generally, for amounts under $50,000). When unrepresented taxpayers have better access to pro bono (free) assistance, it eases the burden on the Tax Court and IRS Counsel, can help taxpayers avoid procedural and other errors, and achieve a better outcome.
The NTA recommends that the IRS consider different methods for communicating with unrepresented taxpayers in Tax Court and hold more events to encourage pre-trial resolution. The NTA also encourages the development of one-stop resolution options for pro se (self-represented) taxpayers.
You can find the full report here.
You can read what the NTA says about challenges facing the IRS here.