by Roger Russell

The office of the National Taxpayer Advocate, the watchdog of the Internal Revenue Service, has a broad menu of tax issues to address in the form of special initiatives during the coming fiscal year.

The special initiatives, detailed in a report to Congress, are designed to correct weaknesses that the NTA, Nina E. Olson, said are hurting certain programs. Three of the most prominent areas she intends to focus on are:

● The Earned-Income Tax Credit;

● The Offer in Compromise Program; and,

● The Free File Alliance.

The NTA office “continues to be concerned with the level of taxpayer burden imposed by the current EITC examination process,” said Olson. “The length of time needed to complete these examinations, and the frequent lack of taxpayer contact and participation in the examination process, contribute to problems in administering the EITC for both taxpayers and the IRS.”

The EITC initiative will focus on improving the timeliness and accuracy of examinations, and the clarity and helpfulness of notices. It will include a pilot study in which the IRS will ask 45,000 taxpayers for whom the IRS is unable to verify the EITC residency requirement to demonstrate eligibility either before or during the tax filing season.

According to the report, a successful EITC pre-certification program would result in a significantly reduced EITC examination program. Instead of the current EITC examination program that pulls in too many taxpayers who are eligible for the credit and subjects them to multi-year examinations, Olson said, “The EITC examination of the future should be narrowly focused on specific abuses.”

Olson urged partnering with community groups, so that the IRS can help bring taxpayers into the banking system.

Under her plan, between July and December of each year, taxpayers would go to a central community site, receive help in preparing EITC certification information, open a low-fee checking account, receive basic financial literacy training and be prepared for direct deposit of their refund in the next filing season - thereby eliminating the need for a refund anticipation loan.

Meanwhile, Olson sees improvement in the IRS Small Business/Self-Employed Operating Division’s handling of offer-in-compromise cases. Inventory backlog was steadily reduced during 2003, and through streamlined procedures at its two centralized offer-in-compromise sites, inventories are now current.

However, Olson said that SB/SE’s centralized quality review of offer-in-compromise cases indicates that quality remains a problem. The review shows correct decisions on financial analysis are made at a 72.1 percent rate, future ability to pay at 58.7 percent, and correct determination of the offer amount at just 54.3 percent. In fiscal year 2004, she said, the Taxpayer Advocate Service will be monitoring the division’s revised quality measures for both case processing and outcome.

According to the report, OIC proponents charge that SB/SE employees stick too closely to Internal Revenue Manual procedures that mechanically score a taxpayer’s “reasonable collection potential” without considering the specific circumstances of the taxpayer or whether the taxpayer is afforded reasonable basic living expenses under the RCP formula.

Olson suggested that there is a “disconnect” between the application of the financial analysis guidelines - which allow deviations - and actual practice. “As a result,” she said, “many offer-in-compromise proponents simply await their opportunity to have the offer considered in Appeals.”

Because the eventual collection of rejected offers has never been tracked, the formula for RCP has not been validated, according to Olson. As a result, she said, “It is not known whether the IRS is accurately calculating reasonable collection potential or is missing opportunities to collect tax at the earliest possible time.”

She continued: “Always viewing an installment agreement as preferable to a compromise does not take into account the particular facts and circumstances of the taxpayer, nor does it account for the historical default rate or collection activity on such long-term installment agreements.”

“We’re fortunate to have a taxpayer advocate who is savvy enough to be raising these issues in the first place,” said Marty Davidoff, CPA and chairman of the IRS Liaison Committee of the American Association of Attorney-CPAs. “But I hope the next time this comes around, she addresses the issue of returned offers.”

“The whole reason the IRS backlog is down is because they doubled the number of returned offers,” he said. “There’s no appeal right when the offer is returned.”

“From one year, the number of returned offers went from 27,751 to 50,492,” said Davidoff. “At the same time, the number of offers they accepted actually went down - from 52,619 to 46,092 - so they lowered their inventory by throwing cases in the garbage, on the backs of taxpayers’ rights.”

“For example,” he said, “a taxpayer who has requested an offer might receive a letter requesting a, b, c, d, e, f and g in additional information. If he sends back everything but g, they’ll return the offer even though g might be completely irrelevant to the decision.”

He added, “The additional information might be something like verification of $123 per month in medical bills when, without even considering the bills, the taxpayer has a shortfall. They look at excess income plus assets, so if a taxpayer has zero or negative excess income it should be irrelevant, yet they’ll return the offer.”

Filing questions

Olson also took aim at the Free File Alliance, despite its success in attracting additional e-filers. Not everyone who goes to the Web site qualifies for free filing, she noted. “Given that e-filing saves the IRS money and furthers the agency’s computer modernization objectives, an inability to provide a free file option to all taxpayers does not make sense.”

Olson objected to the fact that taxpayers are redirected from the IRS site to the commercial sites of the consortium members, where the software provider or an affiliate might offer additional products.

“Among the products sold to taxpayers who begin their e-filing journey on the IRS Web site are audit protection, refund anticipation loans, individual retirement accounts and mortgage refinancings,” she said. “The NTA does not believe that the IRS should allow private industry to sell RALs and other commercial products to taxpayers who are going to the IRS Web site to file their tax returns electronically.”

At the launch of the alliance on Jan. 16, 2003, the IRS’s director of electronic tax administration, Terry Lutes, observed, “Obviously we do not endorse ‘instant refunds.’ They were available before e-filing, and companies that offer them cannot offer them as refunds, but as loans.”

Moreover, Lutes noted, “Most people who use financial products actually go to a tax professional. In the online market there are not a lot of RALs despite the fact that they are contained in some of the products. Taxpayers need to be able to make their own choices.”

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