Washington, D.C.-With millions of Americans needing help to survive the recession, job losses and home foreclosure, Congress is urging the Internal Revenue Service to cut some slack for taxpayers who are "struggling to stay afloat while their debts increase."At new hearings into whether IRS practices and policies are causing unwarranted pain for those suffering through the economic downturn, House Ways and Means Oversight Subcommittee Chairman John Lewis, D-Ga., called on the tax service to let people know what steps to take if they owe taxes and want to pay, but cannot.
"We want to see the gentle side of the IRS," he said.
Suggestions that the service may not have a gentle side to show taxpayers make IRS officials bristle.
Earlier this year, IRS Commissioner Douglas Shulman directed his agency to reach out to taxpayers caught in the economic squeeze. "We need to ensure that we balance our responsibility to enforce the law with the economic realities facing many American citizens today," he said. "We want to go the extra mile to help taxpayers, especially those who've done the right thing in the past and are facing unusual hardships."
In practice, that means that IRS employees now have the flexibility to work with struggling taxpayers to assist them with their situation, Deputy IRS Commissioner Linda Stiff told the House subcommittee: "Depending on the circumstances, taxpayers in hardship situations may be able to adjust payments for back taxes, avoid defaulting on payment agreements or possibly defer collection action."
Options available to assist taxpayers include offering installment agreements, and postponing collection actions in hardship cases. Additionally, Stiff said that the agency's collection staff now has the authority to accept offer-in-compromise settlements in cases where the value of the taxpayer's home previously would have precluded such arrangements.
"With the uncertainty in the housing market, the IRS recognizes that the real estate valuations used to assess ability to pay may not be accurate," she explained. "Where the accuracy of the real estate valuation is in question, the offer will be referred to a specialized group who will conduct a second review to confirm the value of the real property and ensure the reasonable collection potential has been properly determined and revised, if appropriate."
NOT SO HELPFUL
IRS actions to help economically distressed taxpayers drew a decidedly negative appraisal from another witness at the House hearings - National Taxpayer Advocate Nina Olson.
Olson ticked off a series of failures by the IRS to ease the compliance burden on financially strapped Americans, ranging from the agency's reluctance to intervene early in these cases to its habit of seizing the Social Security benefits of seniors who can't afford to pay their taxes.
"Early intervention in collection cases is efficient and benefits taxpayers, but IRS case assignment practices do not promote early intervention," she told Lewis' subcommittee.
The taxpayer advocate also blasted the IRS for continuing procedures that discourage the use of collection alternatives like offers in compromise and partial-payment installment agreements, even in cases where taxpayers cannot pay the full amount of their tax liabilities.
During the 2008 fiscal year, only one out of every 244 taxpayers with a delinquent account received an offer in compromise, while one out of every 115 taxpayers with a delinquent account received a partial-payment installment agreement, she told the panel.
The conclusion, Olson said, is that, "The IRS has made collection alternatives too inaccessible for taxpayers to obtain."
Senior citizens are particularly disadvantaged by the IRS's practice of subjecting taxpayers to levy on their Social Security benefits "with no filter in place to determine whether such levies will cause economic hardship," Olson testified.
Another problem cited by the NTA is the nasty surprise facing taxpayers who have been forced into bankruptcy. "Taxpayers who cannot pay their debts in full may have taxable 'cancellation-of-debt' income, meaning that they may obtain relief from their creditors only to find themselves faced with additional tax and a minefield of reporting obligations" from the IRS, Olson said.
Other problems include the IRS's slow-footed refund process, which forces many financially strapped taxpayers to take out refund anticipation loans, and the convoluted procedures facing those who must make early withdrawals from their retirement funds, she noted.
Olson turned the tables on Lewis and his subcommittee by assigning Congress at least some of the blame for the IRS's heavy-handed treatment of financially struggling taxpayers.
"Late-year changes in the Tax Code present significant challenges for taxpayers and the IRS, particularly for low-income and financially struggling taxpayers," she told the panel, adding, "The Alternative Minimum Tax for individuals continues to baffle and frustrate taxpayers, and it is not good for taxpayers or the IRS to continue to provide one-year 'patches.'"
She also criticized the current budgeting rules in Congress that "chronically under-fund the IRS, depriving the agency of the resources it needs to close the tax gap."
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