IR 2019-11, 2/12/2019
In her 2018 Annual Report to Congress, National Taxpayer Advocate (NTA) Nina Olson described challenges IRS is facing as a result of the recent government shutdown and recommended that Congress provide IRS with additional multi-year funding to replace its core 1960s-era information technology (IT) systems.
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 (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.
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 its 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.
Report issued late because of government shutdown. Whereas the statute requires the NTA to have submitted the report by Dec. 31, 2018, the lapse in IRS funding during the shutdown meant that no TAS employees were available to work on finalizing the report. Therefore, it was issued late.
Impact of the government shutdown on IRS operations and taxpayer rights. In the preface to the report, Olson discusses the impact of the recent government shutdown. A major point of discussion before and during the shutdown was the permissible scope of IRS activities. Under the Anti-Deficiency Act, federal funds may not be spent in the absence of an appropriation except where otherwise provided by law. One exception provided by law is for “emergencies involving the safety of human life or the protection of property.” Although not stated in the law or Justice Department guidance, the IRS Office of Chief Counsel has interpreted the “protection of property” exception to apply only to the protection of government property and not to taxpayers’ property.
The report says this narrow interpretation can cause severe harm to taxpayers. When IRS issues a levy to a bank, the bank must freeze the taxpayer’s account for 21 days, and then if the levy has not been released, the bank must turn the funds over to IRS. The Code requires IRS to release a levy if it has determined the levy “is creating an economic hardship due to the financial condition of the taxpayer.” However, IRS’s legal interpretation of the Anti-Deficiency Act would not permit personnel to release levies even in extreme cases, such as where a taxpayer needs the levied funds “to pay for basic living expenses or even a life-saving operation,” Olson wrote.
If IRS does not change its interpretation of the Anti-Deficiency Act, the report recommends Congress amend the Act to ensure that taxpayer protections and rights enacted by Congress remain available when IRS takes enforcement action against a taxpayer during, or has taken enforcement action just prior to, a shutdown.
The report says the shutdown has had a significant impact on IRS operations. IRS opened the 2019 filing season immediately after the shutdown ended, and a comparison of IRS telephone service during the first week of the 2019 filing season and the first week of the 2018 filing season shows taxpayers are having greater difficulty getting help this year. For example, during the first week of the 2018 filing season, IRS answered 86% of calls routed to an Accounts Management telephone assistor, and the average wait time was about four minutes. During the first week of this year’s filing season, IRS answered only 48% of its calls, and the average wait time was 17 minutes.
During the shutdown, correspondence inventories ballooned. By January 24, IRS had more than five million pieces of mail waiting to be processed; it had 80,000 responses to fiscal year 2018 Earned Income Tax Credit (EITC) audits that had not been addressed (likely causing eligible taxpayers to have their legitimate EITC claims frozen during the 2019 filing season); and it had 87,000 amended returns waiting to be manually processed.
Funding for IT modernization. The report’s #1 legislative recommendation is that Congress provide significantly more funding for IRS to replace its antiquated core IT systems. IRS systems that hold the official records of taxpayer accounts — the Individual Master File and the Business Master File — date to the 1960s and are the oldest major IT systems still in use in the federal government. In addition, taxpayer information is stored in over 60 separate case management systems that generally do not communicate with each other. There is no database that holds or provides a 360-degree view of the taxpayer’s account and interactions with IRS.
The report also says that IRS’s system does not provide the means to make sure IRS is focusing on the right taxpayers and the right issues in its outreach, audit and collection activities. It notes that the “no change” rate, which reflects the percentage of audits that do not change a taxpayers liability, was 23% for field audits conducted by the Small Business/Self-Employed Division and 32% for field audits conducted by the Large Business and International Division. With better technology, the report says, IRS audit functions could do a better job of selecting productive cases.
The report says congressional funding for the Business Systems Modernization account has been limited in part because IRS historically has not done an effective job of planning and executing technology upgrades. To address that concern, the report recommends that additional funding be provided, subject to accountability measures.
20 most serious problems. The report meets its responsibility to identify at least 20 of the most serious problems encountered by taxpayers. Among the problems addressed are the following:
…. Obtaining answers to tax law questions. In 2014, IRS implemented a policy under which it is only answering tax-law questions during the filing season (January through mid-April). It also narrowed the scope of questions it is answering during the filing season by expanding its list of “out-of-scope” topics.
The report recommends IRS answer tax-law questions year-round; that it deem all questions relating to major new tax legislation as “in scope” for at least two years; and that it track calls and contacts about out-of-scope topics, so it can provide additional guidance on frequently raised issues.
…Lack of disclosure of Chief Counsel Legal Advice. The report is critical of the fact that the IRS Office of Chief Counsel releases relatively few Program Manager Technical Advice (PMTA) memos.
The report recommends the Office of Chief Counsel develop clear written guidance that defines when advice constitutes PMTA; that it eliminate the loophole that allows attorneys to keep advice secret if they transmit it by email; and that it establish a process to ensure that advice that should be disclosed as PMTA is identified and disclosed in a timely manner.
…Underutilization of IRS Free File program. IRS has an agreement with a consortium of tax software companies under which the companies provide free tax return software to a certain percentage of U.S. taxpayers, and in exchange, IRS agrees not to compete with these companies by providing its own software to taxpayers.
In 2018, about 106 million taxpayers qualified to use free tax return software. Yet fewer than 2.5 million taxpayers chose to use a Free File product, with tens of millions of Free File-eligible taxpayers choosing to purchase tax return software instead.
The report makes various recommendations to improve that situation. It also recommends that, if the Free File Program is not substantially improved, IRS terminate it and instead work with the software industry to improve Free Fillable Forms (the digital equivalent of paper forms) for taxpayers who wish to use them.
The National Taxpayer Advocate Purple Book. As part of the report, the Advocate has released the second edition of “The Purple Book,” which presents 58 legislative recommendations intended to strengthen taxpayer rights and improve tax administration.