The National Taxpayer Advocate, the watchdog of the Internal Revenue Service, has singled out offers in compromise and refund anticipation loans for special focus in her menu of tax issues to address during the coming year.The "areas of emphasis" detailed in her mid-year report to Congress are critical to the IRS fulfilling its mission to U.S. taxpayers, according to NTA Nina Olson. Other areas she tagged for focus are:
* Rules governing the use or disclosure of tax return information by return preparers;
* IRS guidelines in evaluating non-hardship effective tax administration offers; and,
* Safeguarding taxpayer rights in the face of the new private debt collection initiative.
Olson noted that the IRS is under significant pressure to close the tax gap while maintaining and improving taxpayer service. At the same time, she warned, the IRS is failing to integrate its efforts.
"I am concerned that the IRS is approaching its taxpayer service and enforcement initiatives on almost entirely separate tracks," she said. "That is, in the IRS today, enforcement employees work on enforcement initiatives, and taxpayer service employees work on taxpayer service initiatives, and never the twain shall meet. This 'pipeline' approach is evidenced most clearly by the fact that the Taxpayer Assistance Blueprint focuses entirely on the taxpayer service needs of individuals who earn wages and investment income, despite the fact that the largest segment of the tax gap is attributable to self-employed taxpayers."
Olson cited the offer-in-compromise program as evidence of the IRS's "failure to take a more holistic and integrated approach toward closing the tax gap."
Coupled with the recently enacted TIPRA provision requiring partial payments with submissions of OICs, Olson believes that the program itself is in jeopardy. "The recent enactment of Section 509 of ... the Tax Increase Prevention & Reconciliation Act of 2005 has the potential to eliminate offers in compromise as a viable collection alternative for many taxpayers," she said. "By definition, any taxpayer who submits a viable offer based on doubt as to collectibility does not have liquid assets sufficient to fund the offer."
"Because taxpayers do not have immediate access to future income," she noted, they "must fund their offers with loans, gifts or assets that the IRS would not otherwise be able to reach, and which may be costly to access. Thus, we expect that requiring taxpayers to make such nonrefundable payments will reduce the number of viable offers the IRS receives, increase the number of accounts not resolved, and reduce the revenue collected."
Although the Joint Committee introduced the measure as a revenue raiser, estimating it would produce nearly $2 billion in additional revenue through 2015, Olson said that it is likely to have a different outcome.
"We believe that the IRS's existing processes, which do not result in many accepted offers, are leaving dollars on the table, and are concerned that the legislation, which erects another barrier to the submission and rapid acceptance of reasonable offers, is likely to reduce collections," she said.
E. Martin Davidoff, CPA and chair of the American Association of Attorney-CPAs, agreed. "These changes don't benefit anyone," he said. "The new law will discourage many offers that are now accepted, so taxpayers are much less likely to get a fresh start, and the IRS will see fewer funds collected."
Olson said that she intends to make a recommendation to repeal the requirement in her year-end report to Congress.
RALs in the hot seat
The second volume of the report focuses entirely on the refund anticipation loan industry because, said Olson, approximately 56 percent of RAL consumers also claim the Earned Income Tax Credit, and many of them are unbanked. Olson said that the government has an interest in encouraging unbanked persons to enter the financial mainstream.
"Since tax refunds are often the taxpayer's largest lump receipt during the year, a major focus of 'banking the unbanked' should center on taxpayers receiving refunds," she said.
"RAL consumers pay a hefty price for almost immediate access to cash," Olson explained. "For example, a $3,000 RAL facilitated by H&R Block and offered by HSBC Bank carries a $24.95 bank account set-up fee and a $75 finance charge. Total fees of $99.95 for the bank product do not include return preparation fees, which averaged about $150 per client served in the 2005 filing season."
Since a significant portion of RAL consumers can wait a few more days for their refunds, Olson said that it is in the best interest of taxpayers for the IRS to create an environment where demand for RALs is at an absolute minimum. She suggested several ways to do this:
* Improving the oversight of electronic return originators;
* Eliminating the ability of return preparers to have an ownership interest in RALs;
* Providing refund delivery methods other than checks to the unbanked population;
* Closing the gap between the time it takes to receive RAL proceeds and the time it takes to receive a refund directly from the IRS; and,
* Ensuring that taxpayers are informed of the options and associated timeframes.
The report also weighed in on non-hardship effective tax administration offers. It noted that despite the expanded authority of the IRS to compromise tax debts by considering equity, public policy and hardship in cases where doing so would promote effective administration of the tax laws, only one such offer was accepted in fiscal 2004. As a result of unpublished internal guidance, 30 offers were accepted in 2005.
Olson urged that the guidance be made public and accompanied by training so that IRS employees who screen offers will be able to identify potentially acceptable non-hardship ETA offers and refer them to the group in Austin, Texas, that evaluates them.
Olson opposed the private debt collection initiative currently underway, citing risks to taxpayer privacy and confidence in the federal tax system. In addition, she said, it is not appropriate for private collectors to pursue taxpayers who are already under existing Federal Payment Levy Program levies, some of whom are elderly taxpayers receiving Social Security payments.
"Under the current FPLP program, levies are indiscriminate in as much as the IRS does not employ any type of screen to assess the appropriateness of levies on this vulnerable segment of the population," she said. "Many of these taxpayers are able to find their way to the Taxpayer Advocate Service, which has experienced a recent increase of 165 percent in FPLP cases involving levies on Social Security benefits. When TAS intervenes on behalf of taxpayers whose Social Security benefits are being levied, the IRS often reverses its decision about the appropriateness of the levy, granting taxpayers full relief. ... Private collectors should not be needlessly introduced into what is already a troubled initiative."
She urged the IRS to reverse its decision to allow private collectors to attempt collection from taxpayers already subject to FPLP levies.
Olson also addressed the rules governing the use or disclosure of tax return information by preparers. She suggested some changes to the proposed rules, and urged limiting the use and disclosure of return information solely to instances where it is necessary for tax administration purposes.
