OTHER KEY ISSUES ADDRESSED
Federal law requires the Advocate’s Annual Report to Congress to identify at least 20 of the “most serious problems” encountered by taxpayers and make administrative and legislative recommendations to mitigate those problems. Overall, this year’s report identifies 23 problems, provides updates on six previously identified problems, makes dozens of recommendations for administrative change, makes seven recommendations for legislative change, and analyzes the 10 tax issues most frequently litigated in the federal courts.
Among the “most serious problems" addressed are the following:
- The IRS’s failure to provide tax refunds to victims of preparer fraud. When a taxpayer is victimized by a preparer who receives a fraudulent refund by paper check, the IRS will issue a replacement refund to the taxpayer. However, the IRS will not issue a replacement refund when a taxpayer is victimized by a preparer who receives the fraudulent refund by altering the bank routing number on a direct-deposit request, even though the IRS has received legal advice that it may do so. Olson says the taxpayer-victim is legally entitled to receive the refund, and the IRS has no legal basis for withholding it.
- The IRS’s extraordinarily high audit rate of taxpayers who claim the adoption tax credit. Congress created the adoption tax credit to help low and middle income families afford the costs of an adoption, which are estimated to run as high as $40,000. Yet the IRS, partly using income-based rules, selected 69 percent of tax returns claiming the credit during the 2012 filing season for audit, compared with one percent of returns overall. These audits imposed significant burden on the affected taxpayers for several reasons, most notably because the median refund claim constituted nearly one-quarter of the taxpayers’ adjusted gross income for the year, and the audits on average took over four months. Despite the burden, the payoff was relatively small. The IRS denied only about 10 percent of the amounts claimed in tax year 2010, and as of mid-November had denied only about 1.5 percent of the amounts claimed in tax year 2011. The excessive focus on returns claiming the adoption credit burdened many taxpayers and could have the effect of negating Congress’s intent to encourage adoptions, the report says.
- The IRS’s Offshore Voluntary Disclosure programs and their failure to distinguish adequately between “bad actors” and “benign actors.” The IRS has sought to increase enforcement of Foreign Bank and Financial Accounts (FBAR) reporting requirements in recent years and has offered a series of voluntary disclosure programs designed to settle with taxpayers who had failed to file required FBAR forms. However, the report says, the programs generally applied a “one-size-fits-all” approach that required the payment of significant penalties and did not distinguish between “bad actors” and “benign actors.” By generally requiring taxpayers who make voluntary disclosures to “opt out” of the disclosure program and submit to comprehensive audits in order to avoid draconian penalties, the report argues that the program has caused excessive burden and fear for taxpayers who had reasonable cause for not filing FBAR forms or whose failure to file was inadvertent.
Research Study on Factors Influencing Voluntary Tax Compliance by Small Businesses. Volume 2 of the report contains six research studies, including preliminary results of a survey of sole proprietors that TAS commissioned to better understand factors that may affect income tax reporting compliance. The Advocate’s office undertook the study because the IRS has estimated that only 43 percent of sole proprietor income is reported on tax returns, representing the largest portion of the tax gap (i.e., tax that is owed but is not timely and voluntarily paid). Developing a more complete picture of the attitudes of this category of taxpayers therefore could assist the IRS in improving tax compliance. Based on IRS computer scoring of the likely compliance level of tax returns, the Advocate’s office selected a sample of the most compliant and the least compliant returns and commissioned an anonymous survey of certain groups of these taxpayers to determine attitudinal and other differences. Among the preliminary findings: