National Taxpayer Advocate Nina E. Olson urged the Internal Revenue Service to focus more broadly on steps to increase voluntary compliance.
In the first of this year's two required reports to Congress, she emphasized the role that taxpayer service plays in facilitating voluntary compliance with the tax law, and cautioned that excessive focus on enforcement at the expense of taxpayer service could have the effect of both reducing voluntary compliance and alienating taxpayers.
"Today, the IRS's explicit and primary focus is on increasing its enforcement activity. While this goal is laudable, it is very narrow," she said. "As Congress noted [in 1998 legislation], the IRS is far more than an enforcement agency - it must serve all taxpayers. Thus, the IRS should specifically state that its primary organizational goal is to increase voluntary compliance."
Olson said that the Private Debt Collection Initiative and the Offer-in-Compromise Program would be areas of particular emphasis by her office during the coming year.
Congress gave the IRS the authority to use private debt collectors to collect certain tax debts in the American Jobs Creation Act of 2004. The IRS is currently working to develop and implement this initiative in January 2006. Olson noted that the Private Debt Collection Initiative is a dramatic departure from IRS collection practice and procedure, and impacts many, if not all, of the taxpayer rights built into the federal tax laws and procedures relating to IRS collection practice.
"In addition to the numerous legal and administrative issues that the PDC Initiative raises, private debt collection may also test the broader constitutional issue of tax collection as an inherently governmental function, and the degree of discretion that private debt collectors may exercise," she stated.
The PDC Initiative is part of an overall redevelopment of the IRS collection strategy - known within the IRS as Filing & Payment Compliance - that envisions multiple different treatments for different noncompliant taxpayers depending on taxpayer characteristics, according to Olson.
While the goal of developing a modern collections strategy that tailors different collection strategies to different taxpayers based on their individual circumstances is laudable, she said that she has "significant concerns about supplanting the trained professionals at the IRS with private debt collectors."
"Because private collectors will operate under rules of profit maximization, rather than the IRS's customer service-based policy, private collectors may have less incentive to provide important taxpayer-rights training to their employees," she warned.
E. Martin Davidoff, tax liaison chair of the American Association of Attorney-CPAs, agreed. "Basically, the IRS is going to get private debt collectors, people with limited scope of knowledge but working a high volume of cases. They'll be paid a profit margin, but their first priority will be to maximize that margin."
"The Taxpayer Advocate is simply saying that to prevent abuse, they should observe the same rules that the IRS follows," he added.
To minimize any negative consequences on taxpayers from the PDC Initiative, Olson said that she would focus on two core objectives: Ensuring that the Taxpayer Advocate Service will be a resource for taxpayers who are contacted by private collectors, and that the TAS is involved with the implementation of the initiative.
She identified seven areas for attention: contractor training, policies and procedures, taxpayer privacy, notices, complaint processes, case selection criteria and exclusion codes, and contractor monitoring and case research. She said she would work with the IRS to establish procedures under which taxpayers can seek assistance from her office if they feel that they have been treated unfairly by the debt collectors.
"Congress intended that the TAS will work with private collectors in the same manner that the TAS interacts with the IRS. The IRS has agreed in principle on this point, and the National Taxpayer Advocate continues to work with the IRS to establish procedures to ensure that taxpayers will have access to the TAS," she stated.
"Private collection is a political reality that the IRS is right to go ahead with in light of the fact that Congress won't give them a budget to collect what is owed," said Davidoff.
"But the real answer is to give the IRS the money it needs so they won't have to use private collectors," he said. "To collect everything that's due, they would have to get a really huge bump in their budget, but the returns would more than pay for it - they get seven to 10 times the money on every dollar they spend for collections."
Olson singled out the Offer-in-Compromise Program for special attention next year. She noted that the TAS continues to receive complaints from taxpayers and practitioners concerning the IRS process for determining an acceptable offer amount, especially with regard to the application of allowable expense standards.
She also suggested that the IRS has ignored its mandate to compromise based upon equity, public policy and hardship - the "effective tax administration" provision.
Effective tax administration offers were authorized by Congress in 1998 to compromise on tax debts based on factors such as equity, public policy and hardship. Prior to this provision, offers in compromise were considered only if there was doubt as to the taxpayer's liability for the tax or doubt as to the collectibility of the tax.
Last December, Senate Finance Committee leaders Charles Grassley, R-Iowa, and Max Baucus, D-Mont., charged the IRS with "apparent failure to use the effective tax administration provision enacted as part of the IRS Restructuring and Reform Act of 1998."
In fact, Olson indicated, the ETA provision has been interpreted so narrowly that only a single non-hardship ETA offer was accepted by the IRS in 2004, and only 11 in 2005.
"We believe that the IRS's reluctance to compromise in inequitable situations may lead taxpayers to disregard the law or erode their faith in the fairness of the income tax system," she said.
An example of a non-hardship ETA offer that was rejected out of hand, said the AAA-CPA's Davidoff, were clients who had invested $5,000 to $10,000 in what they believed to be an economic investment, and saved from $3,000 to $6,000 in taxes at the time.
"Twenty years later, they are faced with tax liabilities of $30,000 to $60,000, including interest and penalties, due to delays in the cases going to court via the partnerships," he said. That's a horrific result for people now in their 60s and 70s."
Olson said that since she is not confident that the IRS will, on its own, use its ETA authority in the manner that Congress intended, she would recommend that Congress provide more specific guidance to the agency to ensure that a new "equitable consideration" standard be applied in a broader array of cases.
"In the meantime," she said, "we will continue to work with the IRS to expand the circumstances under which they will compromise based upon ETA."
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