National Taxpayer Advocate Releases Reports to Congress, Calls for $1,000 'Apology Payments' to Taxpayers Abused by the IRS

National Taxpayer Advocate Nina Olson today released (IR-2013-63) her semi-annual report to Congress on Fiscal Year 2014 Objectives as well as a special report to Congress on Political Activity and the Rights of Applicants for Tax-Exempt Status:

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.”

National Taxpayer Advocate Report to Congress: Fiscal Year 2014 Objectives:

Table of Contents

Preface

Areas of Focus

• The IRS Harms Taxpayers by Refusing to Issue Refunds to Some Victims of Return Preparer Fraud
• The Current Limited Oversight of Return Preparers Makes Taxpayers Vulnerable to Unscrupulous or Incompetent Preparers
• As the IRS Adopts a Specialized Approach to Identity Theft Victim Assistance, Concerns About Complete and Timely Account Resolution Remain
• Implementation of the IRS’s Return Review Program Is at Extreme Risk, Which Could Cause Significant Harm and Cost
• Collection Update: The IRS’s Tepid Approach to Implementing Recent Changes in Collection Policies Has Limited Taxpayer Access to Important Collection Options
• The TAS Collection Case Review Yielded Valuable Insights on How TAS Can Improve Advocacy in Collection Cases
• TAS Prepares for Implementation of Health Care Provisions
• The IRS has Revoked the Exempt Status of Thousands of Organizations in Error, Causing Significant Harm to Taxpayers
• TAS Works to Ensure Taxpayers Know Their Rights and  Obligations
• IRS Offshore Voluntary Disclosure Programs Continue to Burden “Benign Actors” and Damage IRS Credibility
• Shared Jurisdiction and Lack of Coordination between IRS and FinCEN Burdens Taxpayers and Undermines Compliance Efforts
• International Taxpayer Service Initiatives Continue but Need a More Formal Structure
• IRS ITIN Policy Changes Make Return Filing Difficult and Frustrating
• Cuts to IRS Tax Forums Mean Lost Opportunities

Filing Season Review

TAS Research Initiatives

Case Advocacy

Systemic Advocacy

Integrated TAS Technology

Advancing a Climate of Advocacy Through New Approaches to Education

Appendices

National Taxpayer Advocate Special Report to Congress: Political Activity and the Rights of Applicants for Tax-Exempt Status:

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:

1. Lack of Guidance and Transparency
2. Absence of Adequate Checks and Balances
3. Management and Administrative Failures
4. 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.