In her first of two reports to Congress this year, National Tax-payer Advocate Nina olson identified the priority issues that her office will address during the coming year, and included a special report on "Political Activity and the Rights of Applicants for Tax-exempt status."
The National Taxpayer Advocate submits two annual reports to the Ways and Means Committee and the Senate Finance Committee each year.
The first one, due June 30, identifies the objectives of the NTA for the upcoming fiscal year. The second one, due on December 31, identifies at least 20 of the most serious problems encountered by taxpayers, and discusses the 10 recommendations to resolve taxpayers' problems.
In the preface to her special report, Olson describes the IRS as "an institution in crisis." However, she explains that the real crisis is not the one generating headlines of the IRS targeting and the harassment of conservative groups. Rather, she said, "The real crisis facing the IRS -- and therefore taxpayers -- is a radically transformed mission coupled with inadequate funding to accomplish that mission. As a consequence of this crisis, the IRS gives limited consideration to taxpayer rights or fundamental tax administration principles as it struggles to get its job done."
This underfunding produces a "widget-based approach to tax administration," getting work done in a way that allows as little interference as possible with the employees charged with doing the work, according to Olson. "Interference is viewed as any number of things -- interactions with taxpayers, intervention by the Taxpayer Advocate Service, even proposed process improvements that require learning new steps or approaches," she said. "Anything that can be automated to eliminate taxpayer interaction and move work along will be automated. The result is a tax system that gives short shrift to the legitimate needs of taxpayers and their specific circumstances."
MISPLACED PENALTIES?
The crisis Olson describes is daunting, according to Marty Davidoff, CPA, Esq., of Dayton, N.J.-based E. Martin Davidoff & Associates. "I cannot stress how critical this is," said Davidoff. "Their budget is down 8 percent in three years and they're faced with ever-increasing complexity in their mission. Congress is tying their hands, making it impossible for them to do their job. They ignore the fact that every dollar you give the IRS gets seven to 10 dollars in return."
"There is a danger of an over-reaction to the IRS scandals," agreed Roger Harris, president of Padgett Business Services and former chair of the IRS Advisory Council. "Money shouldn't be taken away from the IRS just to punish it," he said. "They clearly need to train their people. Of course, when they put out Star Trek videos, it's hard to make the argument as to how that helps training."
"The problem is the necessary part gets penalized," he observed. "Clearly we want well-trained and experienced personnel to deal with at the IRS. It's not an efficient way to handle a matter when you deal with someone who has not been effectively trained or who lacks experience. Their budget may be cut because we're mad at them, but the things you need to do to make the system work more efficiently get cut as well."
"At the end of the day, the budget constraints will hurt the agency," said Robert Kerr, senior director of government relations at the National Association of Enrolled Agents. "Principal deputy commissioner [Danny] Werfel's recent request to Congress for an additional billion dollars in funding was greeted with the sound of one hand clapping. But 70 percent of the service's budget is just people. We're getting to the place where difficult discussions need to happen about what the agency is able to do with the budget it has, especially when you look at the things it is being asked to do that it didn't do five years ago."
OPPOSING LOVING
Harris cited the registration of tax preparers as a key issue on which Olson said that she will focus, even with the Loving decision invalidating the IRS testing and continuing education requirements under the Registered Tax Return Preparer program. "Despite the lawsuit, most of us think that some sort of regulation is a good thing," said Harris. "At some point it will come back, either through reversal or legislation."
Olson believes that the district court's decision in Loving was based partly on an outdated understanding of return preparation and filing. "The return preparation industry has changed substantially over the last few decades as a result of the ready availability of return preparation software, refundable credits, and refund-based loans," Olson stated. "These changes underscore the significance of tax return preparers in our self-assessment system and the role of the tax return in making claims against the government."
"The National Taxpayer Advocate's main focus continues to be the retention of minimum standards for return preparation," Olson continued. "The reinstatement or reissuance of the IRS preparer oversight rules would promote tax compliance by imposing minimum competency standards."
"I believe the agency will win the appeal," said Kerr. "The approach was completely vetted within the agency. I don't believe they would have gone down this path [of registration, licensing and regulation of return preparers] if they didn't think they had the authority to do this."
Moreover, Kerr noted, "There are other routes to get to what the service wants to do. Congress can make it clear that the IRS has this authority, and always has had it."
Davidoff agreed that the IRS should have Circular 230 oversight over all preparers, but stopped short of the licensing and testing requirements central to the Loving decision. "Have the taxpayer signing the Form 8879 [e-file signature authorization], verify whether or not a paid preparer prepared the return. It's fine for the IRS to register paid preparers, but once they cross the line from registering to certifying and testing, they've gone from a business they should be in to one they should not."
"The CPE requirements are dumb," he continued. "Under the requirements, preparers don't get credit for learning about state tax, yet one fourth of preparer errors can be on state returns. Licensing is just not the appropriate function for the IRS. They should take the registration fee and run undercover operations to ferret out the cheats and unregistered preparers."
Nevertheless, the consensus is that the service will eventually get what it wants, either through a reversal of the decision in Loving or congressional action. "If the Court of Appeals reverses the district court's ruling in Loving, the IRS would reinstate the rules requiring certain preparers to take a competency exam and complete continuing education credits," Olson said. "If the district court ruling stands, the National Taxpayer Advocate will urge members of Congress to support remedial legislation to authorize the IRS to re-issue its rules to protect taxpayers. ... Questionable preparers would have less opportunity and incentive to engage in misconduct or fraud ... with registration, testing, and continuing education requirements coupled with an extensive public awareness campaign."
