National Taxpayer Advocate Nina Olson said the IRS needs to do better than answering only 71 percent of the calls it receives from taxpayers, and it should stop filing tax liens against people who don’t have the ability to pay.

Nina Olson

In her office’s annual report to Congress, Olson noted that the IRS has set a target for fiscal year 2010 of answering only 71 percent of calls from taxpayers seeking to speak with a customer service representative about account questions, down from 83 percent in FY 2007.

“In other words, the IRS is planning to be unable to answer about three of every 10 calls it receives,” she said, adding that the IRS expects those who get through will have to wait an average of 12 minutes. “This level of service is unacceptable,” she wrote.

Her report also contains a detailed assessment of IRS examination and collection practices, and concludes that they often harm taxpayers without producing revenue. In particular, the report cites IRS lien-filing policies as the second most serious problem facing taxpayers.

The IRS uses automated systems to file liens against taxpayers, even when the taxpayer possesses little or no property and the lien will do little more than damage the taxpayer’s financial viability and access to credit. A study conducted by Olson’s office, the Taxpayer Advocate Service, found that IRS procedures for determining a taxpayer’s ability to pay outstanding tax liabilities may be driving some taxpayers into long-term noncompliance because the IRS fails to consider other debts such as credit card balances, school loans, and actual hospital or medical bills. Other tax systems, including Sweden’s, consider the taxpayer’s overall financial picture.

“Any taxpayer with these debts will tell you that these creditors don’t go away,” Olson said. “Taxpayers are placed in the intolerable position of agreeing to pay the IRS more than they can actually afford (given their other debts) and then defaulting on the IRS payment arrangements when they channel payments to unsecured creditors in order to get some peace.”

The National Taxpayer Advocate recommends that Congress require the IRS, before imposing a lien, to make a determination that the benefits of filing the lien outweigh the harm to the taxpayer and will not jeopardize the taxpayer’s ability to comply with future tax obligations.

The report also praises the IRS for moving ahead with plans to regulate federal income tax preparers. Olson called the plan that the IRS issued earlier this week a “significant, far-reaching initiative.”

However, she expressed concern that the IRS plan would impose training and registration requirements on preparers who sign tax returns, but not on preparers who meet with taxpayers and prepare their returns if someone else signs them.

To minimize the cost and burden, a return preparation business may decide to employ one “signing” preparer who is certified under the new IRS rules and an unlimited number of “nonsigning” preparers.  The nonsigning preparers would not have to register, pass an exam, or take continuing education courses, and the signing preparer would be unable to thoroughly review every return he signs. Olson noted that the burden of the new rules themselves may cause more return preparation businesses to employ nonsigning preparers.

Olson also recommended that the IRS examine returns more closely before paying refunds. Under current procedures, the IRS processes income tax returns before it processes most information returns, including W-2 and 1099 forms. “This sequence makes little logical sense,” said her report. From a taxpayer perspective, the sequence leads to millions of cases where taxpayers inadvertently make overclaims that the IRS does not identify until months later, exposing the taxpayer not only to a tax liability but to penalties and interest charges as well.

The report recommends that Congress direct the Treasury Department to prepare a report identifying the administrative and legislative steps required to allow the IRS to receive and process information reporting documents before it processes tax returns. It recommends setting a goal of making these changes within six years.