IRS’s “Future State” Plans for Tax Services is Top Concern in National Taxpayer Advocate’s Annual Report to Congress

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IRS’s “Future State” plans for tax services tops the list of concerns in National Taxpayer Advocate Nina E. Olson’s 2015 Annual Report to Congress. The report outlines and provides recommendations on major tax issues affecting Americans, including contemplated reductions in IRS service levels and their implications for taxpayer rights.

2015 Annual Report to Congress Cover Image
U.S. taxpayers pay the bills for our government. U.S. taxpayers deserve a say in how the tax collection agency will treat them.

National Taxpayer Advocate Nina E. Olson released her 2015 Annual Report to Congress today, expressing concern that the IRS may be on the verge of dramatically scaling back telephone and face-to-face tax services it has provided for decades to assist the nation’s 150 million individual taxpayers and 11 million business entities in complying with the tax code.

The report reiterates a recommendation made in June that the IRS release its “Future State” plan documents, provide additional detail about their anticipated impact on taxpayer service operations, and solicit comments from the public. The report addresses the following key topics:

  • The IRS “Future State” Plan: Recently, the IRS developed a “Future State” plan, which involved significant participation by virtually all IRS business units and the engagement of management consultants, at a cost of several million dollars. To date, the IRS has chosen not to make this plan public. The National Taxpayer Advocate’s report urges the IRS to publicly release the plan and indicates there are many positive components to the plan, including the goal of creating online taxpayer accounts.
  • Reduced Service Levels: The report expresses concern about IRS intentions regarding what is not stated in the plan. “Implicit in the plan – and explicit in internal discussion – is an intention on the part of the IRS to substantially reduce telephone and face-to-face interaction with taxpayers,” the report says. “The key unanswered question is by how much… It is incumbent on the IRS to be much more specific about how much personal taxpayer assistance it expects to provide in its ‘future state.’” Since fiscal year 2008, the IRS has annually received more than 100 million taxpayer phone calls and provided face-to-face assistance to more than five million taxpayers across the nation. As the IRS has reduced tax services in recent years, the report urges the IRS to share its “Future State” plan before making any additional service reductions.
  • “Pay to Play” Tax System: The National Taxpayer Advocate characterizes the combination of reductions in personal service and plans to direct taxpayers with questions on their tax returns to preparers and other third parties, along with the expansion of user fees, as creating a “pay to play” tax system, where only taxpayers who can afford to pay for tax advice will receive personal service, while others will be left struggling for themselves.
  • Data Security Concerns: The National Taxpayer Advocate warns of the consequences of giving tax return preparers more access to taxpayer accounts in order to provide increased assistance: “...through a single-minded emphasis on online accounts, the IRS creates a situation where it will face enormous pressure to open up taxpayer account access to unregulated return preparers.”
  • Need for Transparency, More Details and Public Discussion: Because the contemplated reductions in service are significant yet undefined, the National Taxpayer Advocate calls on the IRS to release its plans and solicit taxpayer comments. “U.S. taxpayers pay the bills for our government. U.S. taxpayers deserve a say in how the tax collection agency will treat them,” the report says.
  • Public Hearings on Tax Service Needs: “For the IRS to do its job well it must start from the perspective of what government is about – namely, it is of the people, by the people and for the people,” Olson wrote. “Therefore, the future state vision of the IRS needs to be designed around the needs of the people.” To assist the IRS in developing a plan that is responsive to the needs of U.S. taxpayers, Olson announced plans to conduct public hearings around the country in the coming months to learn what taxpayers need from the IRS to help them comply with the tax code.

Federal law requires the Annual Report to Congress to identify at least 20 of the “most serious problems” encountered by taxpayers and to make administrative and legislative recommendations to mitigate those problems. This year’s report identifies 24 problems, makes dozens of recommendations for administrative change, makes 15 recommendations for legislative change and analyzes the ten tax issues most frequently litigated in the federal courts. Among the problems addressed are the following:

  • IRS User Fee Decisions May Impose Heavy Taxpayer Burden: Like other federal agencies, the IRS is authorized to charge user fees for services that convey “special benefits.” Between FY 2010 and FY 2015, the IRS’s appropriation was reduced by about ten percent, while its user fee revenue rose by 34 percent. The report states the IRS is actively considering user fee increases that would further mitigate the cuts to its budget. The report recommends the IRS make its user fee analysis public before adopting fee increases and refrain from charging fees that have a significant negative impact on the IRS’s service-oriented mission, voluntary compliance or taxpayer rights.
  • Form 1023-EZ Process Allows Unqualified Entities to Obtain Tax-Exempt Status: Form 1023-EZ adopts a checkbox approach that requires applicants for tax-exempt status merely to attest, rather than demonstrate, that they qualify for exempt status. The IRS approves about 95 percent of applications submitted on Form 1023-EZ; however, the IRS’s own data shows it approves only about 77 percent of applications when it reviews supporting documentation. The report recommends that the IRS revise the form to require additional information supporting the application and review this information before deciding whether to approve exemption applications.
  • IRS Anti-Fraud Filters Delay Refunds for Hundreds of Thousands of Legitimate Taxpayers, with One Major Program Having a False Positive Rate of 36 Percent: The IRS operates several programs that filter tax returns to ferret out improper claims. While these are critical programs, the filters have high false positive rates, causing substantial refund delays to hundreds of thousands of legitimate taxpayers. The report recommends the IRS begin tracking the false positive rate of all screening programs, monitor and adjust filters, and establish maximum false positive rates for each filter.
  • Other Most Serious Problems: Other issues analyzed in this section of the report include tax services for taxpayers living abroad, the whistleblower program, the IRS’s administration of the Patient Protection and Affordable Care Act, victim assistance in tax-related ID theft cases, and several problems related to Earned Income Tax Credit compliance issues.

Thorough research and analysis of current tax issues and trends is a vital part of the annual report. Volume II of the report contains four new research studies that examine tax issues and provides data-driven conclusions used throughout the report. This year’s studies examine taxpayers that obtained tax-exempt recognition based on filing a Form 1023-EZ; the “IRS collectibility curve” which captures how the rate of collection changes as the number of years since the Taxpayer Delinquent Account (TDA) issuance increases; the interaction between Hispanic taxpayers with limited English proficiency and the IRS; as well as the impact of IRS audits on subsequent tax reporting behavior.

Please visit http://www.taxpayeradvocate.irs.gov/2015AnnualReport for more information about this report, including an Executive Summary and downloadable graphics on key report features.

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About the Taxpayer Advocate Service
The Taxpayer Advocate Service (TAS) is an independent organization within the Internal Revenue Service (IRS) that helps taxpayers and protects taxpayer rights. Your local advocate’s number is in your local directory and at taxpayeradvocate.irs.gov. You can also call TAS toll-free at 1–877–777–4778. TAS can help if you need assistance resolving an IRS problem, if your problem is causing financial difficulty, or if you believe an IRS system or procedure isn’t working as it should. And our service is free. For more information about TAS and your rights under the Taxpayer Bill of Rights, go to taxpayeradvocate.irs.gov.

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