Finally, taxpayers who are unable to make their tax payments and face enforced collection action will generally qualify for assistance from the Taxpayer Advocate Service (TAS), which Olson heads. (See information below about contacting TAS.)
Olson reiterates her longstanding recommendation that Congress regulate unenrolled tax preparers to protect taxpayers from preparer errors and exploitation. She notes that 62 percent of taxpayers use preparers, yet anyone can now be a “preparer” — with no training, no licensing and no oversight required.
The report also proposes a comprehensive framework for reforming the penalty provisions in the tax code, which have increased from about 14 in 1954 to more than 130 today. More specifically, the report recommends quick congressional action to remedy particularly harsh consequences of a penalty enacted in 2004 to combat tax shelters. Section 6707A of the tax code imposes a penalty of $100,000 per individual per year and $200,000 per entity per year for failure to make special disclosures of a “listed transaction.”
The penalty creates what Olson calls “unconscionable” results and may have the effect of bankrupting middle class families who had no intention of entering into a tax shelter. Under the law, the IRS must impose the penalty where a taxpayer fails to make the special disclosures – even if the taxpayer had no knowledge that the transaction was listed or even questionable, even if the taxpayer derived no tax savings from the transaction, and even if the transaction is not “listed” until years after the taxpayer entered into it and filed a return reflecting the transaction. A taxpayer who does business through a wholly owned S corporation is subject to a penalty of $300,000 ($200,000 at the entity level and $100,000 at the individual level) for each year in which the transaction is reflected on a return. The IRS is currently considering this penalty in hundreds of cases.
Overall, the report discusses 21 problems facing taxpayers, makes dozens of recommendations for administrative change, proposes 17 recommendations for legislative change and analyzes the 10 tax issues most frequently litigated in the federal courts during the past fiscal year. It also contains a second volume that presents in-depth studies on three subjects — the penalty regime in the tax code, the development of a “filter” to protect low income Social Security recipients from automated levies and strategies to improve tax compliance by tax preparers and their clients.
More information about the IRS Taxpayer Advocate Service is at www.irs.gov/advocate.