UNITED STATES TAX
ISSUES
In January 2014 the Taxpayer Advocate Service issued its
annual report to Congress. A summary of the most significant issues that it
identified facing taxpayers and the IRS are reproduced below:
TAXPAYER RIGHTS: The IRS Should Adopt a Taxpayer Bill of Rights as
a Framework
for Effective Tax Administration ………… The
U.S. tax system is built on voluntary compliance. For the government, voluntary
compliance is much cheaper than enforced compliance, because the government
does not have to spend money to collect amounts that are voluntarily paid.
Taxpayer rights are central to voluntary compliance. If taxpayers believe they
are treated, or can be treated, in an arbitrary and capricious manner, they
will mistrust the tax system and be less likely to comply with the laws
voluntarily. If taxpayers have confidence in the fairness and integrity of the
tax system, they will be more likely to comply.
IRS BUDGET: The IRS Desperately Needs More Funding to Serve
Taxpayers and
Increase Voluntary
Compliance ……….. The mission of the IRS is to “provide
America’s taxpayers top quality service by helping them understand and meet
their tax responsibilities and by applying the tax law with integrity and
fairness to all” — trumps the missions of all other federal agencies. The IRS
historically has prepared tax returns for taxpayers seeking its help,
particularly for low income, elderly, and disabled taxpayers. Ten years ago, it
prepared some 476,000 returns. That number declined significantly over the
decade, and the IRS recently announced it will no longer prepare returns at
all. Last year, the IRS received about 8.4 million letters from taxpayers
responding to proposed adjustments to their tax liabilities. As of the end of
the fiscal year, 53 percent of taxpayer letters in the IRS’s “adjustments”
inventory were considered “over age” (generally, more than 45 days old). That
compares with “over age” percentages of 12 percent ten years earlier and 28
percent in FY 2010. The IRS recently announced it will only answer “basic” tax
law questions on its telephone lines and in its walk-in sites during the
upcoming filing season and it will not answer any tax law questions after the
filing season, including questions from the millions of taxpayers who obtain
filing extensions and prepare their returns later in the year. Olson made clear
that the deficiencies in taxpayer service are attributable primarily to a lack
of resources. Regardless of cause, she wrote, “it is a sad state of affairs
when the government writes tax laws as complex as ours – and then is unable to
answer any questions beyond ‘basic’ ones from baffled citizens who are doing
their best to comply.”
EMPLOYEE TRAINING: The Drastic Reduction in IRS Employee Training
Impacts
the Ability of the IRS to Assist Taxpayers and Fulfill its Mission
……… The IRS also slashed its overall training budget by a staggering
87 percent, which means the IRS not only has fewer employees than four years
ago, but those who remain are less equipped to perform their jobs and to
understand and respect taxpayer rights
TAXPAYER RIGHTS: Insufficient Education and Training About
Taxpayer Rights
Impairs IRS Employees’ Ability to Assist Taxpayers and Protect
Their Rights ……… While the Internal
Revenue Code guarantees certain rights to taxpayers, many taxpayers are unaware
of their rights, and IRS employees do not always communicate them to taxpayers
at the right times. Training for many IRS employees contains only minimal
instruction on taxpayer rights. For example, the 575-page training guide for
newly hired tax examiners contains only six paragraphs that address discussing taxpayer
rights and the audit process with taxpayers.
REGULATION OF RETURN PREPARERS: Taxpayers and Tax Administration
Remain Vulnerable to Incompetent and Unscrupulous Return Preparers
While the IRS
Is Enjoined from Continuing its Efforts to Effectively Regulate
Return Preparers …….. In tax year 2011,
unregulated tax return preparers prepared over 42 million individual returns,
or more than half of all the returns handled by preparers. As preparers play a
critical role in tax administration, it is essential that the IRS ensure they
are competent, visible, and accountable. The IRS had instituted a program to
impose minimum competency requirements, but a U.S. District Court in Loving
v. Internal Revenue Service enjoined the IRS from enforcing the testing and
continuing education elements of the
program. Unless this ruling is overturned on appeal, taxpayers
will continue to find themselves without meaningful IRS oversight of preparers
in a world where anyone can hang out a shingle as a “tax return preparer” with
no knowledge or experience needed.
PROBLEMS
FACING INTERNATIONAL TAXPAYERS
INTERNATIONAL TAXPAYER
SERVICE: The IRS Is Taking Important Steps
to Improve International Taxpayer Service Initiatives, But
Sustained Effort Will Be
Required to Maintain Recent Gains . . . . . . . . . . . . . . . .
. . . . U.S. citizens or resident aliens are subject to tax on their worldwide
incomes and have the same general tax reporting requirements whether they live
in the United States or abroad. However, the tax requirements have become so
confusing and the compliance burden so great that taxpayers are giving up their
U.S. citizenship in record numbers. The IRS emphasizes service to international
taxpayers via IRS. gov webpages, but taxpayers still call the IRS for
assistance with account-related matters because online options remain limited.
The IRS is planning improvements to online service delivery, but in view of the
unique communication challenges international taxpayers encounter, the IRS
needs to prioritize initiatives that affect this population. The
International Individual Tax Assistance Team (IITA), created to develop international
taxpayer service initiatives, has yet to be made permanent, which means there
is still no ongoing IRS commitment to improve service to international
taxpayers. Important details about how U.S. taxpayers living abroad can meet
their obligations under the Affordable Care Act remain undeveloped.
INDIVIDUAL TAXPAYER IDENTIFICATION NUMBERS: ITIN Application
Procedures Burden Taxpayers and Create a Barrier to Return Filing
. . . . . . . . . . . In November 2012, the IRS announced permanent changes to
its application procedures for Individual Taxpayer Identification Numbers
(ITINs), which taxpayers who are ineligible for Social Security numbers must
use to meet their filing obligations. Dependent ITIN applicants now face a
substantial burden because they can no longer use a certifying acceptance agent
(CAA) to certify their documents. Dependents must mail original documents or
copies certified by the issuing agency, or have the documents certified at
an IRS taxpayer assistance center (TAC) or at one of just four
U.S. tax attaché offices overseas. From January through October 2013,
applicants filed only one million ITIN applications with returns, compared to
nearly two million during the same period in 2012. During this period, ITIN
applications and accompanying returns declined nearly 50 percent, while the
percentage of applications rejected by the IRS soared to 50.2 percent. One
explanation for these numbers is the burden caused by the new ITIN procedures.
ITIN applicants report problems, including a lack of communication about why
the IRS
suspended or rejected an application, an inability to speak with
IRS employees, a lack of notice about the status of the application, the
rejection of applications with legitimate supporting documents, and lost original
documents. The IRS’s policy of generally accepting ITIN applications only
during the filing season forces the IRS to process applications under short
timelines and does not provide sufficient time to review them for potential
fraud.
OFFSHORE VOLUNTARY DISCLOSURE: The IRS Offshore Voluntary Disclosure
Program Disproportionately Burdens Those Who Make Honest Mistakes
. . . . . . . . . .
The IRS has sought to increase enforcement of Foreign Bank
and Financial Accounts (FBAR) reporting and similar information reporting
requirements in recent years and has offered a series of offshore voluntary
disclosure (OVD) programs to settle with taxpayers who have failed to file the
required forms. However, the report says, the programs impose excessive
penalties on taxpayers whose failure to file was not “willful.” Analyzing
results from the IRS’s 2009 OVD program, the Advocate found the median offshore
penalty was about 381 percent of the additional tax assessed for taxpayers with
median-sized account balances, and 580 percent of the tax assessed for
taxpayers with the smallest account balances (i.e., the bottom 10
percent, with an average $44,855 account balance). Taxpayers who “opted out” of
the OVD program and agreed to subject themselves to audits fared better but
still faced penalties of nearly 70 percent of the tax and interest. While FBAR
penalties are computed as a percentage of account balances rather than tax
liabilities, the report offers the comparison to illustrate that the penalties
are often Draconian and may deter other taxpayers from coming into compliance.
REPORTING REQUIREMENTS: The
Foreign Account Tax Compliance Act Has the
Potential to Be Burdensome, Overly Broad, and Detrimental to
Taxpayer Rights . . . . . . . The
Foreign Account Tax Compliance Act (FATCA), which Congress enacted in 2010, fundamentally
changes the reporting of foreign assets. FATCA tries to reduce revenue loss by
imposing a broad range of additional reporting obligations, along with
potential sanctions on U.S. taxpayers and residents, foreign entities, and
withholding agents. One goal of FATCA is international data sharing with global
information transparency. Questions remain, however, regarding whether such a
course is advisable, whether the
information being compiled is necessary and will be effectively
used, whether the enforcement benefits of FATCA justify the compliance burdens
and economic hardships it imposes, and whether the due process rights of
taxpayers will be preserved in the process. The IRS has not spelled out
reasonable cause defenses or other relief procedures to distinguish between bad
actors and benign non-filers. This lack of guidance exposes good faith
non-filers to FATCA’s severe penalties. Similarly, errors in collecting and
reporting information on account holders by foreign financial institutions (FFIs)
could cause significant difficulties for taxpayers unless the IRS develops a
timely and effective mechanism for addressing such inaccurate information
reporting. Additionally, although the IRS has been responsive to some comments
and suggestions throughout the development of the FATCA regime, it has failed
to act on advice from other well-informed stakeholders.
ONLINE
SERVICES: The IRS’s Sudden Discontinuance of the Disclosure Authorization and
Electronic Account Resolution Applications in E-Services Left Practitioners
Without Adequate Alternatives ……..The IRS has a strategic goal of expanding electronic service
options for its tax partners, including practitioners, who can interact with
the IRS through an e-Services suite of web-based products. In early 2013, the
IRS discontinued the Disclosure Authorization (DA) and Electronic Account
Resolution (EAR)
applications without discussing the matter with the practitioner
community in advance. The IRS cited low usage and increased operating costs as
reasons for ending the programs. However, almost immediately after the IRS
announced the decision, practitioners expressed significant concerns. The
National Taxpayer Advocate believes the decision process lacked strategic
planning and stakeholder engagement, and increased burden on taxpayers and
their representatives. The IRS discontinued the e-Services applications without
providing practitioners with acceptable online options, despite practitioners’
clear demand for more electronic services and the IRS Strategic Plan’s
objective to expand e-Services. Once the IRS retired the two programs,
practitioners who used DA reverted to mailing or faxing their paper disclosure
authorization forms to the Centralized Authorization File, which has a record
of long processing times due its outdated systems.
COMMENTARY…The above report is contained in two volumes covering
656 pages. It is likely just the tip of the iceberg with respect to the issues
facing the Internal Revenue Service. It is frustrating to clients and even more
frustrating to tax practitioners that they are unable to resolve minor issues
in a minimum of time. It takes 6 to 12 months to obtain an answer to a letter
and the response might not actually address the question, but there is no phone
number on the letter to actually call a person back. And as noted in the above
summary, if you do reach a live person by phone, they likely do not know the
answer to your question or who does. Even emails to the IRS must be sent
multiple times before a frustrating reply is received. A recent email to the
IRS that required a “yes” or “no” answer came back stating that the IRS could
not respond to a complex question and that we should consult a tax
practitioner. They obviously never looked at our email address.
Pursuant to the
requirements relating to practice before the Internal Revenue Service, any tax
advice in this communication is not intended to be used, and cannot be used,
for the purpose of (i) avoiding penalties imposed under the United States
Internal Revenue Code, or (ii) promoting, marketing or recommending to another
person any tax related manner.
The tax advice given by this column is, by necessity,
general in nature. You should, of course, check with your own U.S. tax consultant as to how
specific transactions affect you since tax advice varies with individual
circumstances.
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