Taxpayer Advocate Service: Your Voice at the IRS

National Taxpayer Advocate Annual Report to Congress

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National Taxpayer Advocate Delivers Annual Report to Congress; Focuses on Tax Reform, IRS Funding and Identity Theft

IR-2013-3, Jan. 9, 2013

WASHINGTON — National Taxpayer Advocate Nina E. Olson today released her 2012 Annual Report to Congress, identifying the need for tax reform as the overriding priority in tax administration. The Advocate also expressed concern that the IRS is not adequately funded to serve taxpayers and collect tax, and identified ways in which this chronic underfunding harms taxpayers and the public fisc. She also found that the IRS is not doing enough to assist victims of tax-related identity theft and return preparer fraud.

TAX REFORM

The National Taxpayer Advocate’s annual report designates the complexity of the tax code as the #1 most serious problem facing taxpayers and recommends that Congress take significant steps to simplify it. “The existing tax code makes compliance difficult, requiring taxpayers to devote excessive time to preparing and filing their returns,” Olson wrote. “It obscures comprehension, leaving many taxpayers unaware how their taxes are computed and what rate of tax they pay; it facilitates tax avoidance by enabling sophisticated taxpayers to reduce their tax liabilities and provides criminals with opportunities to commit tax fraud; and it undermines trust in the system by creating an impression that many taxpayers are not compliant, thereby reducing the incentives that honest taxpayers feel to comply.”

Compliance Burdens. The report states that the tax code imposes a “significant, even unconscionable, burden on taxpayers.” Since 2001, Congress has made nearly 5,000 changes to the tax code, an average of more than one a day, and the number of words in the code appears to have reached nearly four million.

An analysis of IRS data by the Taxpayer Advocate Service (TAS) shows that individuals and businesses spend about 6.1 billion hours a year complying with tax-filing requirements. “If tax compliance were an industry, it would be one of the largest in the United States,” the report says. “To consume 6.1 billion hours, the ‘tax industry’ requires the equivalent of more than three million full-time workers.”

Individual taxpayers find return preparation so overwhelming that few do it on their own. Nearly 60 percent of taxpayers hire paid preparers, and another 30 percent rely on commercial software, with leading software packages costing $50 or more. In other words, taxpayers must spend money just to figure out how much money they owe.

Magnitude of “Tax Expenditures.” To reduce taxpayer burden and enhance public confidence in the integrity of the tax system, the report urges Congress to greatly simplify the tax code. In general, this means Congress should reassess the need for existing income exclusions, exemptions, deductions, and credits (generally known as “tax expenditures”). For fiscal year (FY) 2013, the Joint Committee on Taxation has projected that tax expenditures will come to about $1.09 trillion, while individual income tax revenue is projected to be about $1.36 trillion. To put these numbers in perspective, if Congress were to eliminate all tax expenditures, straight math indicates it could cut individual income tax rates by 44 percent and still generate the same amount of revenue it collects under current rules.

Tax Policy Decisions and Revenue Decisions Should Be Made Separately and Then Married Up. The report recommends that Congress approach tax reform in a manner similar to zero-based budgeting. The starting assumption would be that all tax expenditures would be eliminated. A tax break would be retained only if a compelling case can be made that the benefits of that break outweigh the complexity burden it creates. “In performing this analysis,” Olson said in releasing the report, “we should look at each provision in the code and ask questions like: ‘Does this government incentive make sense?’; ‘If it does, is it better administered through the tax code or as a direct spending program?’; ‘However well intentioned, is it doing what it was intended to do?’; and ‘If yes, can it be administered without imposing unreasonable burdens on taxpayers or the IRS?’. At the same time, Congress can separately consider how much revenue it wants to raise, and it can then marry up our optimally designed tax system with our revenue needs by setting tax rates accordingly.”

Recommendations. The report recommends that Members of Congress take several steps, including:

  1. Lay the groundwork for tax reform by holding meetings with constituents to discuss the complexity of the existing tax code and the trade-offs between tax rates and tax breaks that tax reform will require.
  2. Apply a “zero-based budgeting” approach to comprehensive tax reform that starts out with the assumption that all tax benefits will be eliminated and then adds a benefit back only if Members conclude that, on balance, the public policy benefits of providing that benefit through the tax code outweigh the complexity it imposes on taxpayers.

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Recent Coverage

  • Identity theft and the IRS, or, Who got my refund?
    (Reuters, March 13, 2013)

    While the IRS has recently stepped up prosecution of identity theft cases, National Taxpayer Advocate Nina Olson points out in her 2012 Annual Report to Congress that there are still 650,000 unresolved cases at the IRS and it often takes six months to a year for individual taxpayers to have their cases resolved. This article provides several tips for protecting one’s self from identity theft.

  • For Tax Identity Thieves and Phishers, Business Is Booming
    (AdvisorOne, March 7, 2013)

    Identity theft has become the crime du jour; in fact, the NTA’s Annual Report to Congress calls it one of the most serious problems facing taxpayers today. As a result, the IRS has issued warnings to taxpayers with tips to discover, prevent and report this trending crime. Although the IRS cautions taxpayers, TAS reports the agency’s ability to handle these issues is worsening. 

  • Federal Drive Interviews: Nina Olson
    (Federal News Radio, Feb. 15, 2013)
    In response to an injunction issued by the U.S. District Court for the District of Columbia on January 18, 2013, the IRS Return Preparer Office has stopped enforcing regulatory requirements for registered preparers. This means preparers covered by this program are not currently required to register with the IRS or complete competency testing or continuing education. The injunction only affects registered return preparers.  It does not impact requirements for CPAs, attorneys, enrolled agents, enrolled retirement plan agents, or enrolled actuaries.
     
    On Friday, Feb. 1, the court modified its order to clarify that the order does not affect the requirement for all paid tax return preparers to obtain a Preparer Tax Identification Number (PTIN). 
     
    National Taxpayer Advocate (NTA) Nina Olson spoke to Federal News Radio about this issue.
     

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Executive Summary

The Executive Summary contains a concise breakdown of all the key issues in the report. Get a quick update on the most serious problems facing taxpayers today, proposals for new legislation to solve them, important tax cases in the federal courts, and extensive studies on easing taxpayers’ burden.

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Read the 2012 Annual Report to Congress