Taxpayer Advocate Thinks the IRS Owes Apologies and $1,000
Thursday, January 10, 2008
The Internal Revenue Service should issue "apology payments" of up to $1,000 to taxpayers whose cases are mishandled, the National Taxpayer Advocate told Congress yesterday.
Nina E. Olson, a federal official appointed by the Treasury secretary, said Congress should also enact a Taxpayer Bill of Rights.
"I believe taxpayers and tax administration will benefit from an explicit statement of what taxpayers have a right to expect from their government and what the government has a right to expect from its taxpayers," Olson said.
In her annual report to Congress, Olson urged lawmakers to authorize up to $1 million a year for the National Taxpayer Advocate to make payments ranging from $100 to $1,000, adjusted for inflation, to people who experience some sort of "excessive expense or undue burden" because of IRS errors. The payments would be excluded from gross income, she said. Britain and Australia have such systems.
"A fair and just tax system should acknowledge IRS mistakes and delays in taxpayer issue resolution," she said.
Her proposal was met with some criticism.
"It sounds like something where they could assuage people who know enough to go to the taxpayer advocate and complain very loudly, but there are potentially a lot of people who are damaged by things that happen at the IRS," said Len Burman, director of the Tax Policy Center, a joint project of the Brookings Institution and Urban Institute. "One million [dollars] in apology payments just seems really ad hoc and I don't see any way that could be administered in a fair way."
The office of the taxpayer advocate was created by Congress in 1998 to identify problems within the IRS and help taxpayers resolve conflicts with the agency. Olson, a Virginia tax lawyer and college professor who founded a low-income taxpayer clinic, has held the job since 2001. She works independently within the IRS.
In addition to providing a list of recommendations, Olson's annual report, which is required by law, outlines 26 of the worst problems that taxpayers encounter. The biggest one, Olson said, is making year-end changes to the tax code, which Congress has done each of the past two years. "Both taxpayers and tax administrators need certainty," Olson said. "The constant changing of tax laws and procedures confuses taxpayers and leads to their making errors or not claiming deductions or credits to which they are entitled under the law."
More than 1 million taxpayers may not have claimed tax deductions they were entitled to in 2006 because they did not even know about them, she said. That's because Congress waited until December to extend several popular tax deductions, such as write-offs for educator expenses and post-secondary tuition and fees, after the IRS had already published Form 1040.
On top of that, many low-income taxpayers who rely on the earned income tax credit, which averages more than $3,000, had to wait longer for refunds while the IRS reprogrammed its computers, Olson said.
And just last month, lawmakers approved a one-year repair, or "patch," of the alternative minimum tax, which had threatened to increase taxes on about 20 million middle- and upper-middle-income households. That tax had been intended for the wealthy.
The IRS recently announced that more than 13 million taxpayers might have to wait until Feb. 11 to file their returns to give the agency enough time to reprogram its computers once again. The filing season normally starts around Jan. 15.
Olson took the IRS to task for other matters.
She criticized the agency for not doing enough to clamp down on the cash economy, in which income from legal activities is not reported by third parties. More than $100 billion never makes it into the Treasury because of unreported income, she said.
In addition, the agency should have a clearer policy for setting and waiving user fees, which account for about $180 million in receipts annually, she said. The IRS often neglects or is too slow to waive fees for low-income taxpayers, she said.
She also said the IRS has not adequately explained exceptions to the taxation of canceled debts. When a taxpayer borrows money and the debt is canceled, he or she generally has to report it as gross income. But many taxpayers, she said, might not know that they are exempt.
And she harshly criticized the private debt collection program, in which the IRS farms out some collections to private agencies. She said it is "failing in most respects" because it has fallen far short of revenue projections and is not transparent enough. She reiterated her earlier stated stance that the program should be repealed.