Accounting Today - February 2012

The IRS’s burden
taxnews
Taxypayer advocate sees a threat in the increased IRS workload

BY ROGER RUSSELL / WASHINGTON, D.C.

The result, the report noted, is inadequate taxpayer service, erosion of taxpayer rights, and reduced tax compliance. Olson expres sed her continuing concern that the IRS’s ex panding use of automated processes to adjust tax liabilities is causing harm to taxpayers, and recommended that Congress enact a comprehensive Taxpayer Bill of Rights.

“The overriding challenge facing the IRS is that its workload has grown significantly in recent years, while its funding is being cut,” Olson said in releasing the report. “This is causing the IRS to resort to shortcuts that undermine fundamental taxpayer rights and harm taxpayers — and at the same time reduces the IRS’s ability to deliver on its core mission of raising revenue.”

National Taxpayer Advocate Nina E. Olson’s annual report to
Congress highlighted the combination of an expanding IRS
workload and declining resources as the most serious problem
facing taxpayers.

dits, so these protections often do not apply.
Throughout the report, Olson describes IRS
practices that “harm taxpayers by acting on
assumptions of noncompliance arrived at
by automated processes that do not solicit,
encourage or allow taxpayer response.”
Olson noted that under a program de
signed to detect returns relating to a scheme

BLAME CONGRESS

The sharp increase in the IRS’s workload is due to several factors, including the increas ing complexity of the Tax Code and the code’s frequent changes, the need to provide service to an increasingly diverse taxpayer popula tion, the IRS’s increasing responsibility for administering economic and social policies, a surge in refund fraud and taxrelated identi ty theft, and the implementation of new third party information reporting requirements.

Highlighting the complexity of the Internal Revenue Code, the report noted that some 4,428 changes have been made to the 3. 8 mil lionword code over the past 10 years, includ ing an estimated 579 changes in 2010 alone.

To keep up with its rising workload, the IRS is increasingly relying on automated data matching procedures to identify potentially inaccurate claims and adjust tax liabilities. However, automated processes are inherent ly imperfect, so the taxpayer’s return position often turns out to be correct. Moreover, tax payers subject to audits are entitled to estab lished protections, but an increasing number of IRS adjustments are not classified as au

Inadequate
funding
means the
IRS cannot
pursue unpaid
tax liabilities.
IRS BOOSTS AUDITS OF
HIGH-INCOME TAXPAYERS

WASHINGTON, D.C. — The Internal Revenue Service has increased its audits of taxpayers at upper-income levels.

According to IRS statistics, 12.48 percent of taxpayers with income of $1 million or higher were subjected to audits in fiscal year 2011, compared to 8. 36 percent in 2010. Those with incomes of $200,000 or higher were audited at a rate of 3.93 percent, compared to 3. 10 percent in 2010. In contrast, 1.02 percent of taxpayers with incomes below $200,000 a year were audited in fiscal 2011, compared to 1.04 percent in 2010.

Large corporations were also audited at a higher rate, with 17. 6 percent of those with assets of $10 million and more audited in 2011, compared to 16. 6 percent in 2010. Those with assets of $250 million and more were audited at a rate of 27. 6 percent in 2011, compared to 25. 3 percent in 2010. Smaller corporations with assets under $10 million were also audited at a greater rate, at 1.02 percent in 2011, compared to 0.94 percent in 2010.

known as “Operation Mass Mail,” the IRS declined to process about 900,000 returns in 2011. In most situations where the IRS identi fies questionable claims, it sends notices to the affected taxpayers to give them an oppor tunity to contest the IRS’s position. In some cases, however, the IRS simply “autovoided” the returns, providing the individuals who had submitted them with no notice of the IRS action. Yet in tens of thousands of these cases, the IRS later marked the accounts with a code that indicated it had erred and the re turn had been submitted by a legitimate tax payer. The report expresses concern that this “autovoid” procedure violates fundamental notions of due process, as individuals whom the government suspects of fraud — a serious charge — normally are given notice and an opportunity to respond before the govern ment takes adverse action.

THEIR CHANCE TO RESPOND

“While today’s report includes a number of helpful suggestions, the link described in the report between a challenging budget envi ronment and alleged erosions in taxpayer rights is inaccurate and without basis in fact,” the IRS said in a statement.

The report says that inadequate funding for the IRS contributes to many of these prob lems and means the IRS cannot adequately pursue unpaid tax liabilities. The report points out that the IRS functions as the “Ac counts Receivable Department” of the fed eral government, as it collects more than 90 percent of all federal revenue and therefore provides the funds that make almost all other federal spending possible.

On a budget of $12.1 billion, the IRS col lected $2.42 trillion in fiscal year 2011. In oth er words, for every $1 that Congress appropri ated for the IRS, the IRS collected about $200 in return. However, current federal budgeting rules do not take into account that a dollar appropriated for the IRS typically generates substantially more than a dollar in additional tax collections, leaving the agency substan tially underfunded to do its job and limiting its ability to close the tax gap and thereby help reduce the federal budget deficit.

Its budget this year is $11.8 billion, roughly $300 million below last year and $1.5 billion less than requested by President Obama.

In light of the IRS’s unique role as the fed eral revenue collector, the National Taxpayer Advocate recommends that Congress devel op new budget procedures designed to fund the IRS at a level that will enable it to meet taxpayer needs and maximize tax compli ance, with due regard for protecting taxpayer rights and minimizing taxpayer burden.

The report also urges Congress to codify a Taxpayer Bill of Rights that would clearly list the major rights and responsibilities of taxpayers. “The U.S. tax system is based on a social contract between the government and its taxpayers,” Olson wrote. “Taxpayers agree to report and pay the taxes they owe and the government agrees to provide the service and oversight necessary to ensure that taxpayers can and will do so.” AT

NASBA OKAYED AS
TAX EDUCATION PROVIDER

NASHVILLE, TENN. — The IRS has approved the National Association of State Boards of Accountancy and NASBA’s National Registry of CPE Sponsors as the first organizations to receive qualified accrediting status to provide continuing education as part of the IRS’s Registered Tax Return Preparer Program.

NASBA National Registry sponsors will only be required to complete a brief registration process with the IRS in order to obtain a Continuing Education Provider number and course numbers, and will not be required to complete a separate approval process.

NASBA said that it anticipated great demand for continuing education providers who can offer courses in current subject matters in federal taxation or related matters, including federal tax law updates and ethics or professional conduct. Currently, more than 400,000 registered preparers are required to obtain 15 hours of CE annually.