The National Taxpayer Advocate recently released its 2013 annual report to Congress on the performance of the IRS. Here is my two-cents on three of the most serious problems at the IRS according the Taxpayer Advocate:
1. The IRS should adopt a taxpayer bill of rights.
I agree whole heartedly there should be a taxpayer bill of rights. However, the IRS already has a “Declaration of Taxpayer Rights” found in IRS Publication 1. Taxpayers are supposedly entitled to an explanation of rights and protection of those rights by the IRS. Another declared right is privacy and confidentiality. I see and hear about instances where the IRS disregards these basic declared rights all the time. There will always be the isolated incident, but the stories about the IRS disregarding rights of taxpayers seem far too common these days.
The problem with an IRS adopted taxpayer bill of rights is there will be no enforcement when taxpayer rights are disregarded and will, as a result, do no good to taxpayers. A taxpayer bill of rights should be adopted by Congress and severe penalties imposed on the IRS and on IRS employees when they fail to honor basic taxpayer rights. Penalties should include damages to make taxpayers whole when they have suffered financial loss at the hands of the IRS and IRS employees who disregarded their rights. A taxpayer bill of rights is meaningless unless there are teeth to enforce enumerated rights.
The Taxpayer Advocate writes “the Internal Revenue Code includes specific provisions that are crafted to ensure fair and just tax system and protect all taxpayers from potential IRS abuse. However, the Code contains no organizing principles or formal acknowledgment of the fundamental taxpayer rights…” Thus, it is not stretch for Congress do its job and keep an executive function in check by centralizing and codifying taxpayer rights.
2. IRS budget cuts diminish taxpayer service.
While the IRS’s workload is growing, its budget is shrinking. Fewer employees with less training is a recipe for disaster. Training of IRS employees has been reduced by 87%. That is EIGHTY-SEVEN percent since 2010 (and they were undertrained then)! The IRS has also reduced its workforce by about 8,000 full-time employees in that same time. How does Congress expect the IRS to keep up when they add new complexities to the IRS work-load like Obamacare and the Foreign Account Tax Compliance Act (FATCA)? I for one am baffled.
There is a laundry list of symptoms from understaffing and a lack of training too long to list. A few are: IRS employees applying law incorrectly; IRS employees violating basic taxpayer rights; inefficiency because IRS employees are not familiar with IRS procedures.
There are a lot of very talented, honest, and hardworking IRS Employees. However, too many are put in positions where they are set-up to fail the taxpaying public because they are grossly undertrained an/or overwhelmed by the volume of work. Honest hardworking people don’t like to be put in those types of positions and they usually don’t stay in them long. That in turn can lead to a talent drain.
It’s no wonder so many taxpayers seek out tax professionals so frequently to help them with tax problems. Far too often issues have to be escalated to management, IRS Appeals, or the Tax Court to resolve them. In many instances, that escalation is completely unnecessary, but for the IRS’s inadequate staffing and training. In short, the lack of training and staffing actually compounds matters by creating inefficiencies that in turn chew up more money both from the consumption of resources that would not otherwise be required and from lost tax revenue.
3. The IRS Offshore Voluntary Disclosure Program disproportionately burdens those who make honest mistakes.
The taxpayer advocate is, again, spot-on. The IRS Offshore Voluntary Disclosure Program (OVDP) is a great program for some, but horrible for others. (For the purpose of this blog, I am omitting details of FBAR reporting, its consequences, and various options available to address FBAR compliance.) The administration of FBAR reporting penalties lack fundamental fairness and parity. What’s the solution? I am not sure I know. This is an extremely complex problem with many moving parts. There are taxpayers with varying degrees of culpability, ranging from guilty-as-hell to very innocent omissions and everything in between.
The IRS says that it frowns upon “quiet disclosures.” So, taxpayers that have made an honest mistake and have clear reasonable cause defenses are left with few options. It’s clear that the IRS wants taxpayers entering OVDP to resolve FBAR compliance issues. This gives me the uneasy feeling the IRS is going to come down with a heavy hand on those that have made quiet disclosures. I would not want to be one of the quiet disclosures that is picked up for examination. Be prepared…
Maybe a taxpayer can make a streamlined disclosure, but the qualifying criteria for a streamlined disclosure is so narrow that few qualify leaving this an almost meaningless option. With the IRS’s distaste for the quiet disclosure and very few qualifying for a streamlined disclosure, the IRS seems to be forcing taxpayer into OVDP and eating a 27.5% penalty on certain foreign assets or opting-out of OVDP. When a taxpayer opts-out, the IRS has intimated that there will be a full-blown examination. There is significant uncertainty when opting-out of the OVDP on nearly the same level as making a quiet disclosure. Presumably, those opting out are the far less culpable than those staying in the program, yet they have to take on the risk of greater penalties than those assessable inside of OVDP and incur greater costs of representation by going through a more involved process. This is flat wrong, but the IRS just doesn’t see it.
The suggestion of the Taxpayer Advocate to create a tiered system for evaluating penalties within OVDP is a very good suggestion. Currently the IRS allows no discretion on the amount of the OVDP penalty assessed within the program. A tiered system will give some flexibility for the IRS to assert penalties scaled to taxpayer’s culpability. The tiered system should begin with a tier for zero OVDP penalties for the cases with truly innocent errors to the highest tiers assessing the maximum penalty of 27.5% within the program. I would take this a step further and provide for an appeals procedure within OVDP. There should be a system under which taxpayers are afforded some degree of independent administrative review before being forced to opt-out of OVDP.