National Taxpayer Advocate Nina Olson has released her mid-year report to Congress, in which she urges the Internal Revenue Service to issue refunds to victims of tax preparer fraud and expand the IRS’s recently announced voluntary tax preparer education program to include competency testing.
Olson also encouraged the IRS to place greater emphasis on its recently adopted Taxpayer Bill of Rights and continue to make improvements in the Exempt Organizations area.
The report praised the IRS for implementing her longstanding recommendation to adopt a Taxpayer Bill of Rights. In addition, “the IRS ran a generally successful filing season (although taxpayer services were sub-optimal largely due to staffing limitations), instituted a more equitable approach to its Offshore Voluntary Disclosure initiative, and introduced a voluntary system for educating unenrolled return preparers,” Olson wrote in a preface to the report. “All this is generally good news. But as we note in the report, the good news also raises additional questions and concerns.”
In the report, Olson pointed out that while hundreds of thousands of taxpayers have become victims of tax-related identify theft, a much smaller number of taxpayers have been victimized by unscrupulous tax preparers who have stolen their refunds by fraudulently altering information on their returns.
The IRS has been working hard to issue refunds to identity-theft victims quickly, but in contrast, it has generally declined to issue refunds to victims of preparer fraud at all, according to Olson.
“The IRS has consistently dragged its heels, making one excuse after another, because providing relief to these victims just is not a high enough priority, or more disturbingly, because the IRS simply does not want to provide relief,” she said.
Olson has made similar points in three of her Annual Reports to Congress and elsewhere. In addition, she noted, between 2000 and 2011, the IRS Office of Chief Counsel issued four opinions and other guidance that, read together, authorize the IRS to issue replacement refunds to victims of return preparer fraud. However, no refunds have been issued. The report states that some taxpayers have been waiting since the filing of their 2008 tax returns.
“Nowhere has the IRS failed to abide by the [recently announced Taxpayer Bill of Rights] more than with respect to the issue of return preparer refund fraud,” Olson wrote.
The report states that IRS Commissioner John A. Koskinen decided on March 14 that the IRS will issue refunds to victims of tax preparer fraud who have filed police reports with the appropriate law enforcement agencies and met certain other substantiation requirements. But to date, the IRS has not implemented the decision, saying it must first resolve certain accounting issues and declining to provide a date certain by which it will issue the refunds.
Expanding Standards for Tax Preparers
The National Taxpayer Advocate’s office has called for competency testing of tax preparers since 2002 and in 2010 the IRS began to implement preparer standards on its own, even though Congress had not authorized it to do so. Earlier this year, the U.S. Court of Appeals for the District of Columbia affirmed a lower court decision from last year concluding that the IRS had exceeded its rulemaking authority in acting without a statutory grant of authority. Last month, the IRS announced that lacking the authority to continue its mandatory credentialing program, it would implement a voluntary program for the upcoming 2015 filing season.
Olson’s report argues that minimum standards for return preparers are important to protect taxpayers from incompetent or unscrupulous preparers. More than 140 million individual taxpayers each year file tax returns, and well over half use tax preparers. Of those more than 10 million taxpayers who claim the Earned Income Tax Credit use unregulated preparers to prepare their returns. Because these taxpayers are low income, the report said they often turn to pawn shops, used car dealers, and check-cashing outlets for tax return preparation assistance.
Without meaningful standards, Olson wrote, “we will continue to subject these low-income taxpayers to the actions of incompetent or unscrupulous preparers and we will be unlikely to make progress in reducing the EITC noncompliance rate to an acceptable level, thus harming the public fisc.”
Olson reiterated her longstanding recommendation that a meaningful preparer standards program must contain four components: (1) registration to promote accountability; (2) a one-time “entrance” examination to ensure basic competency in return preparation; (3) continuing education courses to ensure preparers keep up to date with the many frequent tax-law changes; and (4) a taxpayer education campaign to help guide taxpayers to credentialed practitioners (i.e., CPAs, attorneys, and Enrolled Agents) or preparers who have satisfied the above requirements.
The report recommends that Congress pass legislation authorizing the IRS to reinstitute the program it had implemented prior to the U.S. Court of Appeals decision.
Focusing on the 2015 filing season, Olson praised the IRS for adopting a voluntary program that encourages preparers to take continuing education courses. Looking forward, she recommended that the IRS also develop a minimum competency exam as a part of its voluntary program, arguing that the inclusion of individuals who cannot pass a minimum competency exam in a publicly searchable IRS database may confuse or even mislead taxpayer-consumers.
Taxpayer Bill of Rights
On June 10, 2014, the IRS adopted a Taxpayer Bill of Rights, or TBOR, a list of 10 rights that the National Taxpayer Advocate has long recommended to help taxpayers and IRS employees alike gain a better understanding of the dozens of discrete taxpayer rights scattered throughout the multi-million word Tax Code.
A taxpayer survey conducted for the Taxpayer Advocate Service in 2012 found that fewer than half of U.S. taxpayers believe they have rights before the IRS, and only 11 percent said they know what those rights are.
“Taxpayer knowledge and education is the best taxpayer protection there is,” the report said. “A comprehensive public outreach campaign is crucial to overcome taxpayers’ lack of knowledge about their rights and inform them that the IRS has adopted a TBOR. These initiatives will require a variety of communication plans and tools, all with the goal of making taxpayer rights a part of every IRS communication with the taxpayer.”
The IRS has already incorporated the TBOR into a revamped version of Publication 1, Your Rights as a Taxpayer, which is the main vehicle for explaining taxpayer rights to taxpayers. The IRS has also created special sections on its public Web site and its internal Web site to highlight the 10 taxpayer rights. In addition, TAS has created a Web page that links existing statutory and administrative remedies to each of the 10 rights.
The TBOR, Olson wrote, “has the potential to be an important milestone in tax administration.” She notes that some commentators have questioned the significance of a TBOR, given the lack of enforcement mechanisms. In response, she says that one benefit of articulating taxpayer rights clearly is that doing so will bring into focus areas where there are gaps between rights and remedies, notably with respect to the right to quality service.
“TAS will be very active in FY 2015 and years to come in advocating for and working with Congress and the IRS to fill those gaps, and educating taxpayers about those rights,” Olson wrote. “This activity is central to our mission.”
Exempt Organization Issues
The report contains a detailed discussion of several issues relating to Exempt Organizations, which have become a controversial topic for the IRS since last year.
In 2013, the National Taxpayer Advocate delivered her mid-year Objectives Report to Congress the month after the disclosure that the EO unit was using questionable criteria to screen applicants for tax-exempt status. The Advocate’s report contained a separate volume, Special Report: Political Activity and the Rights of Applicants for Tax-Exempt Status, that took a broad look at factors that contributed to the use of the questionable screening criteria and associated processing delays and offered 16 recommendations to address them.
The report released today provides a status update on those recommendations.
In the report, the Advocate outlines a proposal that could provide a clearer test to determine whether an organization seeking exempt status under Section 501(c)(4) of the Tax Code is operating “primarily” for social welfare purposes. There is currently very little guidance to help make that determination. Among other unresolved issues, one could focus on the percentage of the entity’s expenditures, the percentage of the entity’s time allocations, the percentage of the entity’s advertisements, or other factors.
The report said that an analogous issue arises for organizations seeking exempt status under IRC § 501(c)(3), because if they engage in lobbying activity, the amount of lobbying must be “insubstantial.”
To provide 501(c)(3) organizations with a bright-line option, Congress enacted Section 501(h), which allows them to use a numeric test that focuses solely on expenditures. The same option could be made available to organizations applying under Section 501(c)(4).
“The National Taxpayer Advocate believes organizations requesting the right to receive contributions exempt from tax should be evaluated on how they expend those contributions,” the report said. “Under this analysis, as with the 501(h) election, volunteer time and activity, which do not generate taxable income for which tax exemption would be available in the first instance, are irrelevant to this determination.”
The National Taxpayer Advocate plans to refine this proposal and include a legislative recommendation in her year-end report to Congress.
The report also expresses concern about the IRS’s recently announced decision to adopt a new EO application, Form 1023-EZ. Although the Advocate previously recommended development of a simplified Form 1023-EZ, she objects to the new form because it does not require organizations to describe their mission and activities or send in their formation documents for review.
The Taxpayer Advocate Service said it would attempt to monitor the effects of the streamlined standards and recommend modifications as needed.
Other Issues Covered in Report
The National Taxpayer Advocate’s FY 2015 Objectives Report to Congress also identifies 10 other areas of focus for the upcoming year, reviews the 2014 filing season, describes TAS’s efforts to improve its advocacy for and service to taxpayers, summarizes pending TAS research initiatives, and provides an update on TAS’s efforts to implement an integrated technology system.
Volume 2 of the report contains the IRS’s responses to the administrative recommendations the National Taxpayer Advocate made in her 2013 annual report to Congress, along with additional TAS comments. Overall, the report made 113 administrative recommendations. The IRS says it has implemented, is implementing, or will implement 69 of the recommendations, although its agreement to do so is contingent on resources in some cases.
Meanwhile, the IRS is facing the possibility of budget cuts next year after the House voted Monday to cut its funding by 13 percent (see IRS Budget Sliced 13% as U.S. House Constrains Tax Agency). The head of the union representing IRS employees warned about the possible effects if the budget cuts are carried out, pointing to the National Taxpayer Advocate’s latest report. National Treasury Employees Union president Colleen M. Kelley noted that budget-driven customer service issues proved very difficult for taxpayers during the recent tax-filing season and will worsen moving forward.
“The Taxpayer Advocate’s report confirms that taxpayers experienced a significant reduction in IRS services this filing season making it more difficult and more expensive for them to meet their tax obligations,” Kelley said in a statement. “Any way you look at it, underfunding the IRS is a disaster for the country.”