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.