Scott R. Frick, CPA P.C.

National Taxpayer Advocate’s Annual Report

National Taxpayer Advocate (NTA) Nina Olson has issued her mid-year report to Congress. In it, she: a) makes the case that IRS is in crisis due to the fact that its mission has greatly expanded without a corresponding increase in funding; b) includes a special report on issues involving IRS’s exempt organization (EO) section; and c) sets out the priorities of the Taxpayer Advocate Service.

Background. The NTA is required by statute to submit two annual reports to the House Committee on Ways and Means and the Senate Committee on Finance. The first of these reports, submitted mid-year, identifies the objectives of the Office of the Taxpayer Advocate for the fiscal year beginning in that calendar year. The Taxpayer Advocate Service is an independent organization within IRS whose employees assist taxpayers who are experiencing economic harm, who are seeking help in resolving tax problems that have not been resolved through normal channels, or who believe that an IRS system or procedure is not working as it should.

IRS in crisis. The main report states, “[T]he real crisis is not the one generating headlines. The real crisis facing the IRS – and therefore taxpayers – is a radically transformed mission coupled with inadequate funding to accomplish that mission.”

Although the vast majority of her report supports her crisis thesis, the most specific points that Olson makes in that regard are:

• “Mission creep” and reduced funding. IRS has, over the years, increasingly become responsible for administering social benefits programs—e.g., the “second largest federal antipoverty program” (the earned income tax credit)—as well as retirement, education, and health care policies. And, its budget was cut 8% over three years, including an 83% training budget decrease. As a result: “to put it mildly, bad things will happen to taxpayers.”
• Taxpayer Bill of Rights. The mission creep/reduced funding phenomenon has led to an IRS philosophy of getting work done in a way that allows as few interferences as possible to IRS employees. That has led to, among other things, automation to eliminate taxpayer interaction and giving short shrift to the needs of taxpayers and their specific circumstances. While acknowledging that Congress has previously enacted legislation called the Taxpayer Bill of Rights, the report recommends that Congress enact a Taxpayer Bill of Rights that takes the dozens of existing taxpayer rights embedded in the Code and groups them into ten broad categories, modeled on the U.S. Constitution’s Bill of Rights. These “rights,” in substance, would be labels designed to make existing rights clearer and more accessible to taxpayers and IRS employees.

Exempt organization issues. While noting that the Advocate’s office does not have investigative authority and did not seek to duplicate other ongoing investigations, the “Special Report to Congress: Political Activity and the Rights of Applicants for Tax-Exempt Status” takes a broad look at factors that contributed to the use of questionable screening criteria and processing delays in the reviews of exempt organizations. The report groups the contributing factors into four categories: (1) lack of guidance and transparency; (2) absence of adequate checks and balances; (3) management and administrative failures; and (4) EO’s “cultural difficulty” with the Taxpayer Advocate Service. Key factors include:

1. Lack of guidance as to the definition of “primarily” in the Code Sec. 501(c)(4) reg that requires organizations to be primarily engaged in promoting the common good and general welfare of the people of the community.
2. Unlike Code Sec. 501(c)(3) organizations, no judicial review is available for rejected or unanswered Code Sec. 501(c)(4) applicants.
3. The application form for Code Sec. 501(c)(4) organizations does not ask key questions.
4. IRS rarely audits the operations of Code Sec. 501(c)(4) organizations to determine whether they are, in fact, operating “primarily” for permissible purposes.
5. EO management did not maintain an adequate inventory management system.

Other areas of focus. The NTA listed additional IRS challenges that her office will be focused on in the coming year. Among these are:

• Relieving the financial harm suffered by victims of tax return preparer fraud.
• Conducting adequate oversight of the tax return preparer industry.
• Providing effective, timely and taxpayer-centric relief to victims of identity theft.
• Utilizing effective and timely collection alternatives to minimize taxpayer burden while reducing the number and dollar amount of balance-due accounts.
• Conducting education and outreach to taxpayers about their responsibilities under the Affordable Care Act.
• Resolving erroneous revocations of the tax-exempt status of small Code Sec. 501(c)(3) organizations and failures to provide them with pre-revocation administrative appeals.
• Establishing less draconian and more reasonable “settlement initiatives” for the millions of taxpayers who have legitimate reasons for overseas bank and financial accounts and whose failure to file reports was merely negligent.