The Taxpayer Advocacy Panel has released its 2005 Annual Report summarizing its new recommendations for improvements in the way the Internal Revenue Service does business.The report forwarded suggestions to the IRS representing a variety of concerns, including six suggestions regarding refunds and refund anticipation loans, and recommendations to change the instructions for offers in compromise.
The TAP recommended that the instructions for Form 656, Offer in Compromise, "(1) inform taxpayers that an OIC based on doubt as to collectibility will not be considered if the IRS determines that the taxpayer could pay the full tax liability under an installment agreement over the remaining period of the collection statute of limitations, (2) explain how a taxpayer can estimate that capability, (3) more clearly state that an OIC will also be rejected if the IRS determines that the taxpayer has sufficient assets to pay the tax in full immediately or within a short period of time, and (4) exclude distracting information that is not germane to completing the form."
"These are good points," agreed E. Martin Davidoff, tax liaison chair with the American Association of Attorney-CPAs. "[But] the instructions are not clear. People have the perception that you can pay less than what you owe and less than your net worth. Even the popular media have it wrong - absent special circumstances, you're going to have to pay in full."
A 20 percent down-payment provision in the just-passed Tax Increase Prevention and Reconciliation Act may make the issue moot, according to Davidoff. The act adds a requirement that any lump-sum offer must be accompanied by the payment of 20 percent of the amount of the offer.
"This will kill the program or make it a very minor one," he said. "How can a practitioner reasonably submit an offer with a 20 percent deposit when there is a five-in-six chance that the offer will be returned or rejected and the funds retained by the IRS?" he asked.
Since the panel's creation in 2002, the TAP has forwarded 187 recommendations to the IRS. Of these, 53 have been fully or partially accepted, and 61 are still under consideration.
Previous TAP recommendations that have been implemented include revised forms that make it easier and less time-consuming for individuals and corporations to request an automatic six-month extension for filing tax returns; proposed guidance requiring taxpayer consent before preparers outsource tax information offshore; simplification and clarification of employment tax forms; and a strategy to deliver taxpayer and financial literacy education and free return preparation to rural populations eligible for the Earned Income Tax Credit.
Rallying against RALs
The TAP took aim at refund anticipation loans in a number of recommendations elevated to the IRS during the past year. (Recommendations are designated as "elevated" when they are passed to the IRS.)
The panel noted that many taxpayers are not aware that RALs are not actually a refund, but loans that carry substantial risks if they do not receive the refund against which they have borrowed.
To counter this, the TAP recommended that electronic return originators be required to prominently display a RAL information poster that states: "A RAL or 'Refund Anticipation Loan' is a loan that carries an interest charge. It is not the taxpayer's actual refund, but is less than the actual refund. Furthermore, taxpayers who fail to receive their full anticipated refund must still pay back the entire RAL with interest."
Providers of RALs do not always provide other than cursory information to taxpayers regarding the nature and risks of RALs, according to the TAP. Therefore, the panel recommended that the IRS increase the number of site visits and impose penalties on EROs that are not in compliance with RAL disclosure requirements. The TAP recommended increasing the site visits, at a minimum, to 3 percent for 2006 and 5 percent for 2007. Additionally, the TAP recommended increasing severity if there are multiple noncompliance issues identified in one site visit or repetitive instances of noncompliance over several site visits to the same location.
The TAP also recommended that the IRS direct its advertising toward educating taxpayers on how to speed up their tax refunds through the use of early filing, e-filing and direct deposit. In another recommendation, the TAP noted that RALs appeal to taxpayers because the IRS cannot process returns as promptly as taxpayers need funds. Therefore, the panel proposed that the IRS speed up the processing of e-filed returns and direct deposit of refunds into taxpayer bank accounts.
"Initially, the IRS should strive to process returns and direct deposit refunds within 48 hours of submission," the panel said. "Ultimately, the IRS's goal should be to process returns and direct deposit refunds within 24 hours of submission."
This proposal would greatly diminish the number of RALs, according to Matawan, N.J.-based CPA Salim Omar.
"The time of seven to 10 days to get a refund is much better now than in the past, but many of the people who do RALs don't have bank accounts," he said. "If the turnaround time can be further lessened, it wouldn't be necessary for them to do a one- or two-day RAL."
Omar said that his practice is less than 5 percent RALs. "We just offer it as a convenience," he said. "We don't push it at all, like the tax prep chains."
Innocence and injury
In other areas, the panel noted that confusion exists among taxpayers over the terms "injured spouse" and "innocent spouse." It recommended that the terminology for "Injured Spouse Relief" become "Relief from Denied Spouse
Refund." In a response, the program manager said that the Office of Taxpayer Burden Reduction is working on a redesign of Form 8857, Request for Innocent Spouse Relief, and Form 12510, Questionnaire for Requesting Spouse.
In addition, many taxpayers who seek innocent spouse relief from joint liability on a joint return are unaware that the law requires the IRS to notify the non-requesting spouse of the request for relief, according to the TAP. It recommended that Form 8857 be revised to include a bold-face sentence advising the requestor of this fact. The IRS indicated that the suggestion has merit and that it will consider making the change in 2006, when it next plans to revise the form.
Although the IRS Web page, www.irs.gov, contains two links to the Internal Revenue Code, neither of them contains the most recent changes, according to the TAP. This has the effect of "potentially misleading those who seek to access the code from the IRS Web page and [can result] in serious errors," the panel said.
The TAP suggested making current the information to which these links take the user, or placing a current version of the code on the Web site.
IRS director of electronic tax administration Bert W. Dumars agreed that it would be ideal if the external IRC resource sites that the IRS links to provided current information. "Unfortunately," he said, "there is no public domain copy available of a completely current codified IRC. Instead, all such copies are provided by private vendors for a fee per user."
In addition, said Dumars, "Congress has traditionally disfavored the IRS acting in competition with services provided by the private business sector. This is a major barrier that prevents the IRS from implementing the TAP's recommendation to place the current IRC on IRS.gov."
"Even if that barrier could be overcome," said Dumars, "the IRS does not internally maintain the current codified IRC, so does not have the information available to post. Keeping a codified copy of the IRC up to date is a major undertaking, which explains the current success of the fee-based services," he said.
Finally, the TAP said that the similarity between its name and the Taxpayer Advocate Service causes confusion, and that the two are perceived as synonymous by the public.
Its recommendation for a name change was rejected. The Treasury said that the TAP, as a new organization, would initially have recognition issues.
Consequently, it formed a new committee, the TAP Communication Issue Committee, to brand the TAP name.
