National Taxpayer Advocate Nina E. Olson today released her
statutorily mandated mid-year report to Congress that identifies the
priority issues the Taxpayer Advocate Service (TAS) will address during
the upcoming fiscal year. The report expresses particular concern about
the impact of budget cuts on the IRS’s ability to meet taxpayer needs,
the IRS’s unwillingness to issue full refunds to victims of tax return
preparer fraud and shortcomings in IRS procedures for assisting victims
of tax-related identity theft.
In addition, Olson released a special report examining the IRS’s use of
questionable criteria to screen applicants for tax-exempt status. The
special report analyzes the sources of the problem and makes preliminary
recommendations to address them.
“Today, the IRS is an institution in crisis,” Olson wrote. “In my
view, however, the real crisis is not the one generating headlines. 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.”
The IRS must administer the requirements for tax-exempt status in a nonpartisan and
even-handed manner. When an organization seeks exempt status, it is essentially asking
all other taxpayers for a contribution to its activities. Thus, the IRS has an obligation to
review these applications closely.
According to a report by the Treasury Inspector General for Tax Administration (TIGTA),
IRS Tax Exempt Organization (EO) function employees inappropriately selected for further
review applications for tax-exempt status under Internal Revenue Code (IRC) § 501(c)(4)
from organizations with “Tea Party” or similar terms in their names. These terms were
on a “Be on the Lookout” or BOLO list, which flagged 298 applicants for further review.
According to TIGTA, the IRS also asked the applicants unnecessary questions, including
questions about donors, and delayed processing their applications while awaiting guidance
about how to handle them. TIGTA found that IRS employees used inappropriate selection
criteria because they did not understand the law or believed it was unworkable, and they
created inappropriate job aids and information requests that were not vetted.
TAS has reviewed the TIGTA report, researched the applicable legal standards and IRS
procedures, searched for TAS cases involving these issues, and reviewed known systemic issues
in EO. Although TAS agrees with TIGTA’s recommendations, we reviewed these materials
to further analyze the causes of the problem, and determine why it was not identified
or corrected sooner. Our goal was to develop additional recommendations to help prevent
the problem from recurring and restore trust with the taxpaying public. A summary of
TAS’s findings and recommendations, which fall into four broad categories, follows:
- Lack of Guidance and Transparency
- Absence of Adequate Checks and Balances
- Management and Administrative Failures
- EO’s Cultural Difficulty with TAS
The National Taxpayer Advocate plans to make recommendations on this subject in her
year-end report.8 At a minimum, she recommends that Congress enact a Taxpayer Bill of
Rights that sets forth ten broad rights, modeled on the U.S. Constitution’s Bill of Rights, to
help make existing rights clearer and help taxpayers better understand them. The National Taxpayer Advocate has made this recommendation in prior annual reports, and the treatment
of § 501(c)(4) applicants violated most of the ten proposed taxpayer rights.
We further recommend that Congress authorize the National Taxpayer Advocate to make
symbolic “apology payments” of up to $1,000 to taxpayers where the IRS has caused excessive
expense or undue burden to the taxpayer, and the taxpayer has experienced a significant
hardship. This is something that tax administrations in a number of other countries
already provide for. For present purposes, we offer the following preliminary proposals
for consideration and discussion by Congress and the IRS, which merit additional study,
but are likely to evolve after further analysis.