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Mid-year National Tax Advocate’s report is wary of IRS’s “Future State”

IR 2016-97

In her 2016 mid-year report to Congress, National Taxpayer Advocate (NTA) Nina Olson has again expressed concern about IRS’s “Future State” plans, which envisions how the agency will operate in five years and beyond. In addition, the NTA presented a review of the 2016 filing season and identified the priority issues that the Taxpayer Advocate Service (TAS) will address during the upcoming fiscal year.

Background. The TAS 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. It is led by the NTA, who 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 second of these reports is submitted at the end of the year and is required to identify at least 20 of the “most serious problems” encountered by taxpayers and to make administrative and legislative recommendations to mitigate those problems.

The NTA’s annual report to Congress creates a dialogue within IRS and the highest levels of government to address taxpayers’ problems, protect taxpayers’ rights, and ease taxpayers’ burden. The NTA delivers her report directly to the tax-writing committees in Congress (the House Committee on Ways and Means and the Senate Committee on Finance), with no prior review by the IRS Commissioner, the Secretary of the Treasury, or the Office of Management and Budget.

NTA’s primary concern. While the NTA praised aspects of IRS’s “Future State” plan, she expressed concern that (1) IRS’s intent in developing online accounts is largely to save money in light of recent budget cuts by reducing telephone and face-to-face assistance; and (2) many taxpayers will not conduct business with IRS through online accounts because they lack Internet access or skills, cannot complete the authentication process required to set up an account, do not trust the security of the IRS system, or would prefer to speak with an IRS employee. As a result, critical taxpayer needs may go unmet under the Future State plan.

The report points out that only about 30% of taxpayers seeking to register for IRS’s “Get Transcript” application over the last month were able to do so because of enhanced authentication measures, which suggests many taxpayers may not even be able to establish online accounts in the current environment.

To provide a vehicle for direct public comment, the NTA held eight Public Forums around the country (and has several more planned), some in conjunction with Members of Congress who serve on committees actively engaged in IRS oversight. The mid-year report contained extended excerpts from the transcripts of the Public Forums, organized around key concerns that the NTA identified in her earlier report or that panelists consistently raised. The NTA announced that TAS will also conduct a nationwide survey of a statistically representative sample of U.S. taxpayers about their needs, preferences, and experiences with IRS taxpayer service and will hold focus groups on the IRS Future State at the IRS Tax Forums this summer.

Overview of the 2016 filing seasons. The report says that IRS delivered a generally successful filing season in 2016. The report noted that in every year since fiscal year (FY) 2008, IRS has received more than 100 million telephone calls. During the 2016 filing season, IRS substantially improved taxpayer service on its toll-free telephone lines, answering 73% of its calls (with a wait time of 11 minutes)—a marked improvement from the 2015 filing season record low of answering only 37% of taxpayer calls (with a wait time of 23 minutes). While the report attributed this improvement both to additional funding provided by Congress and to effective use of that funding by IRS, it cautioned that IRS funding has been reduced by about 19% on an inflation-adjusted basis since FY 2010 and described areas where IRS had limited or eliminated important services.

  • IRS maintains approximately 375 Taxpayer Assistance Centers (TACs) around the country that collectively serve more than 5 million taxpayers annually. However, IRS plans to eliminate virtually all walk-in service and require that taxpayers schedule advance appointments in all TAC locations by the end of the year. The report is concerned that this requirement will cause particular harm to (a) taxpayers who don’t know the TACs have shifted to appointment-only scheduling and travel sometimes considerable distances to seek personal assistance, and (b) taxpayers who need assistance urgently and cannot wait to obtain an appointment.
  • Both on its phone lines and in its TACs, IRS continued recent restrictions on answering tax-law questions, answering only “basic” questions during the filing season. After the filing season, IRS isn’t answering any tax-law questions at all.
  • When IRS identifies a return claiming a refund as possibly being submitted by identity thieves, it generally sends the submitter a letter requiring him to verify his identity before it will release the refund. Because the false positive rate of this program (the Taxpayer Protection Program (TPP)) was 36.6% in 2015, IRS stopped more than 760,000 returns filed by legitimate taxpayers. Noting that the impact of refund delays can range from mere inconvenience to extreme financial hardship, particularly on low-income taxpayers, the NTA has recommended that IRS refine its TPP filters to reduce the false-positive rate. However, it doesn’t appear that improvements have been made. During the first five months of 2016, IRS was projecting a similar 36% false positive rate, and taxpayers attempting to verify their identities by calling IRS encountered extreme difficulty getting through (IRS answered just 22.7% of calls on its TPP telephone line), causing many to wait extended periods of time to receive their refunds.
  • The NTA is concerned IRS is providing fewer options for international taxpayers even as the population of U.S. citizens abroad grows, and these taxpayers are facing greater challenges in voluntarily meeting their tax obligations, partly as a result of the Foreign Account Tax Compliance Act (FATCA), Foreign Bank and Financial Accounts (FBAR) reporting rules, and the Affordable Care Act (ACA). The number of U.S. citizens living abroad was estimated at about 9 million in mid-2016, and many non-citizens have a U.S. tax filing obligation. Yet taxpayer service options for these taxpayers are limited and continue to be reduced. Taxpayers located overseas generally cannot call U.S. toll-free telephone lines. Almost two years ago, IRS closed the last four tax attaché posts abroad, eliminating face-to-face service as an option. For the 2016 filing season, IRS eliminated its Electronic Tax Law Assistance program through which taxpayers could submit tax-law questions and receive a response via email.

Priority issues for FY 2017. In addition to the IRS Future State plan, the report identifies a number of other priority issues that TAS plans to focus on during the upcoming fiscal year:

FATCA burden. While implementing FATCA and similar international withholding provisions, IRS has withheld refunds from tens of thousands of U.S. taxpayers who were entitled to them. TAS will advocate for the IRS to improve the accuracy of its data-matching procedures to reduce the number of freezes placed on legitimate international refund claims.

Private debt collection implementation. In late 2015, Congress passed legislation that generally requires IRS to assign delinquent tax accounts it is not actively seeking to collect to private debt collection agencies. TAS will be actively involved in the implementation of the program to ensure the program rules follow the law without infringing on taxpayer rights.

IRS levies on retirement accounts. While IRS generally doesn’t levy on retirement assets as a matter of policy unless it determines a taxpayer has acted flagrantly in seeking to evade the collection of the tax, there is presently no clear definition of “flagrant” (only a list of examples of flagrant conduct). TAS is working with IRS to develop such a definition that allows levies to be made in extreme cases but continues to shield retirement assets in cases where a taxpayer is simply unable to pay.

Online taxpayer accounts. While supporting IRS’s development of online taxpayer accounts as a valuable addition to the IRS’s taxpayer service offerings, the NTA has concerns about the program, including IRS’s envisioned granting of account access to tax return preparers, most of whom are not currently licensed. TAS plans to work with IRS to ensure it maintains adequate security protocols to protect taxpayer information, restricts taxpayer account access to credentialed preparers, and continues to provide telephone and face-to-face service to taxpayers who need or prefer to speak with an IRS employee.

EITC compliance. The earned income tax credit (EITC), one of the government’s largest means-tested, anti-poverty programs, has a high improper payments rate. At the same time, eligible taxpayers often have difficulty proving their eligibility due to the complexity of the law, challenges in providing traditional documentation, and IRS’s reluctance to accept alternative documentation sources. The NTA plans to expand on prior recommendations to reform the eligibility requirements and administration of the EITC in order to reduce improper payments while maintaining a high participation rate among eligible individuals.

Identity theft victim assistance procedures. The problem of stolen identity refund fraud requires that IRS improve both its detection of fraudulent returns and its procedures to assist taxpayers who have been victimized by identity theft. While IRS has made significant strides in both areas, the false positive rate in the TPP (as noted above) remains high. TAS will work with IRS to improve victim assistance, including by shortening the time to resolve cases and issue refunds. TAS will also continue to urge IRS to assign a single employee to work with identity-theft victims whose cases involve multiple issues or span multiple tax years.