National Taxpayer Advocate Nina Olson expressed concerns in her latest report to Congress about the IRSs reduced spending on taxpayer service, new 1099 information-reporting burdens, and the IRSs hard-core collection practices.
The report said that as a result of the imbalance between taxpayer demand and IRS resources, the IRS has fallen short of providing adequate taxpayer service in important areas. After answering a high of 87 percent of its calls from taxpayers seeking to reach a telephone assistor in fiscal year 2004, the IRS answered only 53 percent of its calls in FY 2008 and has set of goal of answering only 71 percent in the current fiscal year. The report attributes much of the problem to inadequate funding for taxpayer services, even though funding for IRS enforcement has been increasing in recent years.
The report pointed to delays in processing both the Making Work Pay Credit and the First-Time Homebuyer Credit, as well as inadequate outreach and education.
The report also expressed concern that a new reporting requirement contained in the Patient Protection and Affordable Care Act may impose significant compliance burdens on businesses, charities and government agencies. Beginning in 2012, all businesses, tax-exempt organizations, and federal, state and local government entities will be required to issue Forms 1099 to vendors from whom they purchase goods totaling $600 or more during a calendar year. To meet this requirement, these businesses and entities will have to keep track of all the purchases they make by vendor.
For example, if a self-employed individual makes numerous small purchases from an office supply store during a calendar year that total at least $600, the individual must issue a Form 1099 to the vendor and the IRS showing the exact amount of total purchases. The provision will have a broad impact.
According to a Taxpayer Advocate Service analysis of 2009 IRS data, about 40 million businesses and other entities will be subject to the new requirement, including roughly 26 million non-farm sole proprietorships, 4 million S corporations, 2 million C corporations, 3 million partnerships, 2 million farming businesses, 1 million charities and other tax-exempt organizations, and more than 100,000 government entities. All of these nearly 40 million businesses and other entities are subject to the new reporting requirement.
TAS has not yet reached any conclusions regarding the benefits and burdens of the requirement, but the report expresses concern that the burdens may turn out to be disproportionate as compared with any resulting improvement in tax compliance.
During fiscal year 2011, TAS plans to study the impact of the new reporting requirement more closely and, depending on what its study finds, may propose administrative or legislative recommendations to modify the provision or suggest that Congress consider less burdensome tax gap proposals, including a TAS proposal to require reporting of non-interest bearing bank accounts, to replace it.
The report also expressed continuing concern about IRS collection practices that emphasize collection of past-due liabilities even where doing so inflicts unnecessary or disproportionate harm on taxpayers and jeopardizes future tax collection.
The conventional wisdom seems to be that more hard-core enforcement actions like liens and levies mean more revenue, said Olson. But the data dont bear that out. Since FY 1999, the IRS has increased lien filings by about 475 percent and levies by about 600 percent, yet inflation-adjusted revenue raised by the IRS Collection function has actually declined by about seven percent over that period.
Lien filings can badly damage a taxpayers financial viability because lien filings appear on credit reports, causing the taxpayers credit score to drop an average of about 100 points immediately and causing lasting harm because they typically remain on the taxpayers credit record for at least seven years, the report pointed out. Many employers, mortgage companies, landlords, car dealerships, and credit card issuers check credit reports, so the filing of a tax lien can adversely affect the taxpayers ability to obtain and retain a job, purchase a home, rent an apartment, or obtain credit generally.
Accordingly, a lien filing may reduce the taxpayers income or increase his expenses, thereby impairing his ability to pay tax in the future. Last year, the IRS filed nearly 1 million liens against taxpayers.
The report also noted that the IRS has issued at least four public statements over the past year-and-a-half pledging to assist financially struggling taxpayers who are having difficulty paying their tax bills. Yet the number of liens and levies has continued to rise, the number of offers-in-compromise the IRS is accepting is near an all-time low, and there is little evidence the IRS is changing its collection practices.
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