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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.

Most Serious Problems Encountered by Taxpayers


TAXPAYER SERVICE: The IRS Has Developed a Comprehensive “Future State” Plan That Aims to Transform the Way It Interacts With Taxpayers, But Its Plan May Leave Critical Taxpayer Needs and Preferences Unmet

The IRS has developed a “future state” plan that is likely to bring about a fundamental transformation in the way it treats taxpayers. The plan raises two significant concerns. It indicates an intention to substantially reduce telephone and face-to-face service and it indicates an intention to drive taxpayers who need help to tax return preparers and tax software companies – an approach that will increase taxpayer compliance costs. To date, the IRS has ignored TAS’s recommendation to make its plan public and seek taxpayer comments.

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IRS USER FEES: The IRS May Adopt User Fees to Fill Funding Gaps Without Fully Considering Taxpayer Burden and the Impact on Voluntary Compliance

The IRS is considering user fee increases that would replace its declining appropriation. User fees that seem reasonable in a vacuum may seem outrageous to taxpayers when added to the costs of recordkeeping, filing, paying taxes, and paying tax professionals for help with complex rules that the government created. The IRS should avoid fees that discourage taxpayers from using services that further its mission, reduce voluntary compliance, or erode taxpayer rights. It should estimate the effects of any proposed fee, publish its analysis along with a detailed explanation showing the basis for it, and only implement the fee after it revises its proposal to address comments from stakeholders and to avoid such negative effects.

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FORM 1023-EZ: Recognition As a Tax-Exempt Organization Is Now Virtually Automatic for Most Applicants, Which Invites Noncompliance, Diverts Tax Dollars and Taxpayer Donations, and Harms Organizations Later Determined to be Taxable

Form 1023-EZ, Streamlined Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue, requires applicants merely to attest, rather than demonstrate, that they meet fundamental aspects of qualification as an exempt entity. The IRS approves 95% of Form 1023-EZ applications, but once it reviewed documents or basic information from a sample of the applicants, it approved only 77%, and 20% did not qualify for exempt status as a matter of law. TAS’s analysis of a representative sample of approved Form 1023-EZ applicants showed that 37% did not satisfy the legal requirements for exempt status.

The IRS should revise Form 1023-EZ to require most applicants to submit their organizing documents and a description of their actual or planned activities and financial information. The IRS should make a determination only after reviewing the application and these supporting materials.

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REVENUE PROTECTION: Hundreds of Thousands of Taxpayers File Legitimate Tax Returns That Are Incorrectly Flagged and Experience Substantial Delays in Receiving Their Refunds Because of an Increasing Rate of “False Positives” Within the IRS’s Pre-Refund Wage Verification Program

The IRS uses the Pre-Refund Wage Verification Program to temporarily freeze an individual’s refund when it detects potentially false wages and withholding. Despite certain improvements to the IRS’s screening processes, this program continues to harm taxpayers with legitimate returns. The National Taxpayer Advocate acknowledges that any screening method will result in false positives but remains concerned that the IRS does not track the false positive rates for this program. As a result, the taxpayers’ rights to be informed, to quality service, to challenge the IRS’s position and be heard, to privacy, and to a fair and just tax system are jeopardized.

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TAXPAYER ACCESS TO ONLINE ACCOUNT SYSTEM: As the IRS Develops an Online Account System, It May Do Less to Address the Service Needs of Taxpayers Who Wish to Speak with an IRS Employee Due to Preference or Lack of Internet Access or Who Have Issues That Are Not Conducive to Resolution Online

The IRS is moving forward with plans to develop an online taxpayer account system, due to the benefits to both taxpayers and the IRS. However, the IRS cannot ignore the service needs of the taxpayer population who still require more personalized service options, such as face-to-face or telephone services, due to preference, lack of internet access, or having an issue which is not conducive to be resolved online. While in the current budget environment it is tempting to move taxpayer service toward superficially lower-cost self-assistance options, any efforts to significantly reduce personal service options may harm taxpayers and ultimately impair voluntary compliance.

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PREPARER ACCESS TO ONLINE ACCOUNTS: Granting Uncredentialed Preparers Access to an Online Taxpayer Account System Could Create Security Risks and Harm Taxpayers

The IRS has identified online account access as a top initiative to achieve its compliance vision. Online account access would enable taxpayers, preparers, and authorized third parties to securely interact with the IRS to obtain return information, submit payments, and receive status updates. The National Taxpayer Advocate is concerned that taxpayers will be harmed if the IRS does not restrict preparer access to those preparers subject to IRS oversight. In addition, the IRS should clearly define the scope of preparers’ access to online accounts, track such access, and enable the taxpayer to maintain strict control over preparer authorizations.

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INTERNATIONAL TAXPAYER SERVICE: The IRS’s Strategy for Service on Demand Fails to Compensate for the Closure of International Tax Attaché Offices and Does Not Sufficiently Address the Unique Needs of International Taxpayers

The IRS recently eliminated the last four tax attaché posts abroad. International taxpayers now must either call an overwhelmed, tolled IRS telephone number in the United States or obtain information from IRS.gov. Apart from the attachés, the only free option for taxpayers to ask a specific question and receive a response from an IRS employee was the Electronic Tax Law Assistance Program (ETLA), which the IRS terminated in October 2015. The IRS has removed the dialogue and shut itself off from international taxpayers with no way of knowing whether it is providing the service taxpayers need.

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APPEALS: The Appeals Judicial Approach and Culture Project Is Reducing the Quality and Extent of Substantive Administrative Appeals Available to Taxpayers

Appeals recently implemented the Appeals Judicial Approach and Culture (AJAC) project in hopes of enhancing customer perceptions of fairness and independence. However, AJAC is being used as a justification by Compliance to intimidate taxpayers and deny their right to an administrative appeal. Further, if taxpayers are able to get to Appeals, they are subjected to an AJAC regime that is causing cases to bounce back and forth between Appeals and Compliance and resulting in curtailed review by Hearing Officers of the cases they retain. The IRS should take steps to preserve taxpayers’ rights to obtain a quality substantive review.

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COLLECTION APPEALS PROGRAM (CAP): The CAP Provides Inadequate Review and Insufficient Protections for Taxpayers Facing Collection Actions

The Collection Appeals Program (CAP) provides only limited procedural protections to taxpayers in the case of certain Collection actions and has been underutilized in comparison with Collection Due Process (CDP) appeals, which allow for a much broader range of review. Likely as a result of the limited review and remedies provided by the CAP process, taxpayers seldom prevail in, and infrequently seek, CAP hearings. The IRS should expand the usefulness of CAP by providing Hearing Officers with additional authority and time to review Collection alternatives and remand cases to Collection for consideration of those alternatives.

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LEVIES ON ASSETS IN RETIREMENT ACCOUNTS: Current IRS Guidance Regarding the Levy of Retirement Accounts Does Not Adequately Protect Taxpayer Rights and Conflicts with Retirement Security Public Policy

The IRS guidance that explains the steps required before a retirement account can be levied contains inadequate detail and is insufficient to protect taxpayer rights or enable taxpayers to meet basic living expenses in retirement.

Current Internal Revenue Manual (IRM) guidance lacks a definition for flagrant conduct (a prerequisite for the levy) and contains inadequate instruction for analyzing future retirement calculations. The IRS recently proposed a levy pilot program within its Automated Collection System (ACS) unit focusing on the Thrift Savings Plan (TSP), a retirement contribution plan for government employees. It could automate much of the decision to levy on a TSP retirement account, and would result in disparate collection treatment of TSP accounts compared to other retirement accounts.

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NOTICES OF FEDERAL TAX LIEN (NFTL): The IRS Files Most NFTLs Based on Arbitrary Dollar Thresholds Rather Than on a Thorough Analysis of a Taxpayer’s Financial Circumstances and the Impact on Future Compliance and Overall Revenue Collection

The IRS files most Notices of Federal Tax Liens (NFTLs) based on an arbitrary dollar threshold of the unpaid liability. Over 21% of liens are filed without human involvement in determining lien filing, rather than conducting a thorough analysis of the taxpayer’s individual circumstances and financial situation, or consideration of the NFTL’s impact on future compliance and collected revenue. The current policy can have a negative impact on taxpayers’ economic viability, ability to pay the past debt, and comply in the future.

The IRS should modify the current NFTL filing procedures to require multiple attempts to initiate meaningful personal contact, along with an increase in the timeframe for filing; adopt an early intervention policy; incorporate credit scoring and automated asset verification into the financial analysis for making NFTL determinations and conduct; and incorporate the results of the lien pilot study (a study which will examine if lowering the automated collection system NFTL threshold and an increase in meaningful contact results in enhanced protection of the government’s interest and would facilitate the collection of delinquent tax liabilities, without unnecessarily harming the taxpayer).

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THIRD PARTY CONTACTS: IRS Third Party Contact Procedures Do Not Follow the Law and May Unnecessarily Damage Taxpayers’ Businesses and Reputations

The IRS does not empower taxpayers to provide information that would make third-party contacts (TPC) unnecessary. A TAS review found the IRS did not even ask taxpayers for the information before making the TPC in 22.8% of field exam cases and in 11.1% of field collection cases. Nor does it periodically inform them about the TPCs it made, as required by law, so that they can mitigate damage to their reputations. The IRS should generally include with a TPC notice a request for information that would make the TPC unnecessary, copy the taxpayer on most requests for information it sends to third parties, provide taxpayers with periodic post-TPC reports as required by law, and strengthen internal controls.

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WHISTLEBLOWER PROGRAM: The IRS Whistleblower Program Does Not Meet Whistleblowers’ Need for Information During Lengthy Processing Times and Does Not Sufficiently Protect Taxpayers’ Confidential Information From Re-Disclosure by Whistleblowers

Audits initiated on the basis of whistleblower information are an efficient means of recovering unpaid tax liabilities, but may create risks for the subject of the whistleblower claim. The IRS has never availed itself of an exception to the statutory prohibition on disclosing confidential taxpayer information that would not only allow the IRS to update whistleblowers on the status of their claims during the years it is pending, but would also protect taxpayers’ confidential information from re-disclosure by the whistleblower. The IRS relies on other exceptions to the statutory prohibition on disclosure which do not adequately protect taxpayers from such re-disclosure.

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AFFORDABLE CARE ACT (ACA) – BUSINESS: The IRS Faces Challenges in Implementing the Employer Provisions of the ACA While Protecting Taxpayer Rights and Minimizing Burden

The IRS is charged with implementing complex Affordable Care Act (ACA) provisions. For tax years 2015 and beyond, certain provisions of the ACA impacting employers become effective. Employers not in compliance with these provisions may be subject to an assessable payment, referred to as the Employer Shared Responsibility Payment (ESRP). The IRS will process an estimated 77 million new information returns from employers during the 2016 tax year and use this information to assess ESRP. If the IRS receives inaccurate data regarding coverage, it may erroneously assess ESRP, which can be costly and time-consuming for both employers and the IRS to rectify.

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AFFORDABLE CARE ACT (ACA) – INDIVIDUALS: The IRS Is Compromising Taxpayer Rights As It Continues to Administer the Premium Tax Credit and Individual Shared Responsibility Payment Provisions

The 2015 filing season presented difficult challenges as the IRS implemented the first stages of the Affordable Care Act. While the IRS performed well overall, several developments will likely result in significant burden imposed on both taxpayers and the IRS in future years. For example, the pre-refund Automated Questionable Credit (AQC) procedures for Premium Tax Credit (PTC) mismatches are identical to and impose the same burden as post-refund PTC examinations, yet the IRS maintains it can conduct both a pre-refund AQC review and a post-refund audit of another issue, thereby undermining the important statutory protection against multiple audits.

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IDENTITY THEFT (IDT): The IRS’s Procedures for Assisting Victims of IDT, While Improved, Still Impose Excessive Burden and Delay Refunds for Too Long

Tax-related identity theft (IDT) occurs when one individual intentionally uses the personal identifying information of another to file a falsified tax return with the intention of obtaining an unauthorized refund. In July 2015 the IRS reorganized its IDT victim assistance functions, centralizing them within the Wage and Investment division. In September 2015, the IRS convened the IDT Re-engineering Team, a group of employees from across various functions tasked to review current procedures and make recommendations to improve the processing of IDT cases. We will work with the new Identity Theft Victim Assistance unit to further improve service to this vulnerable population.

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AUTOMATED SUBSTITUTE FOR RETURN (ASFR) PROGRAM: Current Selection Criteria for Cases in the ASFR Program Create Rework and Impose Undue Taxpayer Burden

When a taxpayer who has a filing requirement fails to file a tax return, the IRS can use third-party information to determine and assess a tax liability. The IRS will assess a liability based on the third-party information, but it does not allow any itemized deductions or credits that might be supported by third-party information, and only allows a filing status of single or married filing separately. This program has poor collection results and a high abatement rate, which shows that ASFR’s selection criteria are inefficient and lead to inflated liabilities that are later abated.

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INDIVIDUAL TAXPAYER IDENTIFICATION NUMBERS (ITINs): IRS Processes Create Barriers to Filing and Paying for Taxpayers Who Cannot Obtain Social Security Numbers

Problems obtaining Individual Taxpayer Identification Numbers (ITINs) have long plagued taxpayers who are ineligible for Social Security numbers (SSNs). The requirements to apply for an ITIN during the filing season and submit original documents (subject to limited alternatives) burdens applicants, creates delays, leads to lost returns and documents, creates additional work for the IRS, and hampers the IRS’s ability to detect and prevent fraud. Concerns about ITIN refund fraud are legitimate; the IRS’s solutions, however, do not effectively target the fraud nor do they balance the anti-fraud regime with the taxpayer’s need for a process no more intrusive than necessary.

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PRACTITIONER SERVICES: Reductions in the Practitioner Priority Service Phone Line Staffing and Other Services Burden Practitioners and the IRS

The Practitioner Priority Service (PPS) was designed to be the first point of contact with the IRS for practitioners. The IRS has reduced the scope of provided services and eliminated necessary staffing to the PPS. As a result, practitioners calling the PPS line spend more time on hold, have a lower chance of getting through to a live customer service representative, and use the PPS for fewer services than in previous years. The IRS should restore staffing levels to the PPS to eliminate lengthy hold times and allow practitioners to resolve their client’s account related issues as needed.

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IRS COLLECTION EFFECTIVENESS: The IRS’s Failure to Accurately Input Designated Payment Codes for All Payments Compromises Its Ability to Evaluate Which Actions Are Most Effective in Generating Payments

IRS employees are directed to input two-digit Designated Payment Codes (DPC) identifying payments, applying payments to specific liabilities, and identifying events that precipitated the payments. This provides a way to track taxpayer behavior and future compliance. DPCs are not being consistently or accurately applied, reducing the IRS’s ability to assess the effectiveness of its collection actions, and preventing it from measuring what actions were successful in getting taxpayers to pay on their accounts. Consequently, the IRS is blindly applying collection powers and resources rather than analyzing accurate information to determine funding priorities, causing IRS actions to be intrusive, and undermining compliance.

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EXEMPT ORGANIZATIONS (EOs): The IRS’s Delay in Updating Publicly Available Lists of EOs Harms Reinstated Organizations and Misleads Taxpayers

The IRS maintains a list of tax exempt organizations on two online databases. However, it does not update them timely, causing reinstated automatically revoked organizations that do not appear on these online lists to potentially lose out on donations or grants. To address this problem, the IRS should update its online databases on a weekly basis. Until appropriate programming changes can be made, the IRS should do manual database updates. It should also implement an emergency process that, even when there is weekly updating, allows for manual database updates within 24 hours of the restoration of exempt status.

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EARNED INCOME TAX CREDIT (EITC): The IRS Does Not Do Enough Taxpayer Education in the Pre-Filing Environment to Improve EITC Compliance and Should Establish a Telephone Helpline Dedicated to Answering Pre-Filing Questions From Low Income Taxpayers About Their EITC Eligibility

One third of the Earned Income Tax Credit (EITC) population cycles in and out of eligibility each year, making it difficult for taxpayers to understand what the EITC eligibility rules are and how the rules apply to the taxpayer’s particular circumstances. Also, the IRS does not accommodate low income taxpayers’ communication behaviors, and largely ignores what channels these taxpayers need or prefer to use. The National Taxpayer Advocate recommends the IRS establish a dedicated helpline for EITC questions. The IRS should also study how low income taxpayers prefer to work with the IRS. Based on the results of that study, the current procedures should be revamped.

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EARNED INCOME TAX CREDIT (EITC): The IRS Is Not Adequately Using the EITC Examination Process As an Educational Tool and Is Not Auditing Returns With the Greatest Indirect Potential for Improving EITC Compliance

The IRS persists in using correspondence audits as its primary Earned Income Tax Credit (EITC) compliance tool despite many challenges faced by taxpayers. The EITC audit program has a no-response rate of over 40%, raising questions about the accuracy of some default assessments and of the audit’s effectiveness as an educational tool. Additionally, the IRS may not be auditing the group of EITC returns that have the most non-compliance, thereby diminishing the effectiveness of IRS efforts to improve future compliance and creating a burden for taxpayers. Improving the EITC audit program is an important step to improving compliance and reducing taxpayer burden.

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EARNED INCOME TAX CREDIT (EITC): The IRS’s EITC Return Preparer Strategy Does Not Adequately Address the Role of Preparers in EITC Noncompliance

Fifty-five percent of returns claiming EITC were prepared by paid return preparers in tax year 2013 and yet the EITC suffers from a high noncompliance rate. The IRS has created an EITC Return Preparer Strategy to address this. However, the strategy overlooks opportunities to reach unscrupulous return preparers, which impacts the measure of its success. Without a true measure of success, the IRS cannot determine if the strategy is taking the most effective approach. Additionally, the strategy lacks an outreach program specifically to address unscrupulous preparers and should couple its efforts to treat preparers with a campaign to educate taxpayers.

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