Selected Issues from the 2013 National Taxpayer Advocate Report *

Transcription

1 Selected Issues from the 2013 National Taxpayer Advocate Report * By William D. Elliott William D. Elliott selects a few topics to examine from The National Taxpayer Advocate 2013 Annual Report to Congress. F or the tax practitioner, there is much to read, learn and absorb and too little time. By the end of a work week, the inbox is filled again with more unread current developments, and the next week will only bring more. Keeping up with current developments is like fishing in a fast moving river. You see a fish and then it s gone, to be replaced by more fish. Most practitioners struggle to keep up with current developments. To read the Taxpayer s Report is akin to taking time to read a big book. The National Taxpayer Advocate 2013 Annual Report ttocto Congress ( 2013 Report ) is essential reading. 1 To assist the busy practitioner, this column will select a few topics to highlight from the 2013 Report, perhaps to stimulate thought. Attached to this column is Exhibit 1, summarizing the major contents of the 2013 Report. The focus of many if not most practitioners who read this magazine and this column is representing taxpayers before the IRS. Naturally, tax collection is a major part of the subjects of interest. The discussion will selectively discuss the most important discussion points of the 2013 Report concerning tax collection, at least in the view of the author. WILLIAM D. ELLIOTT practices tax law in Dallas, Texas, with particular experience in tax procedure and controversy and IRS conflict resolution, and is author of the leading treatise, FEDERAL TAX COL- LECTION, LIENS & LEVIES. Hardship Levies Continue The issue of hardship levies involves whether the IRS is required to release a levy that causes an economic hardship because of the taxpayer s financial condition. The issue is more particularly directed to taxpayers whose incomes are below $27,000 (for single person). In other words, when the IRS levies poor people, when is the IRS required by law to release the levy? 2014 CCH INCORPORATED. ALL RIGHTS RESERVED. APRIL MAY

2 2013 NATIONAL TAXPAYER ADVOCATE REPORT Th e statute in question is Code Sec. 6343(a)(1)(D), which provides that : (1) In general Under regulations prescribed by the Secretary, the Secretary shall release the levy upon all, or part of, the property or rights to property levied upon and shall promptly notify the person upon whom such levy was made (if any) that such levy has been released if... (D) the Secretary has determined that such levy is creating an economic hardship due to the financial condition of the taxpayer By the phrase, the Secretary shall, the IRS is required by law to release the levy if the IRS determines that the levy creates an economic hardship to the financial condition of the taxpayer. While the opening phrase is mandatory, shall, subsection (D) is discretionary. The Secretary must have determined that the levy has the effect described. For the tax practitioner, there is much to read, learn, and absorb b and too little tle time. By the end of a work week, the inbox is filled again with more unread current developments, and the next week will only bring more. In Regulations, the IRS has defined the phrase economic hardship to exist:... when a levy will cause an individual to be unable to pay his or her reasonable living expenses. 3 The dispute concerns taxpayers who have unfiled tax returns, who are poor and whose income is levied. Unfiled returns are a problem for many taxpayers. The Tax Court says that the IRS is not authorized to release a levy that without a doubt imposes economic hardship on the taxpayer solely because of an unfiled return or returns. In K.A. Vinatieri, 4 the Tax Court held in 2009 (in a case of first impression) if, during a Collection Due Process (CDP) hearing, the taxpayer established that a proposed levy would have created an economic hardship, 5 the IRS could not proceed with the proposed levy action as a matter of law even if the taxpayer did not file all required tax returns. The taxpayer was terminally ill. She demonstrated in her financial submission to the IRS that if taxpayer s wages were levied on, she would have been unable to pay her basic living expenses. If her car was levied on, then she would have been unable to work. Taxpayer explained her delinquent tax returns because her ex-husband absconded with the requisite financial information to enable the returns to be prepared for one of the years and for the other of the years the tax preparation company went out of business and did not return her tax return information. Th e delinquent tax returns caused the IRS to issue the levy. The taxpayer sought pro se Tax Court review. The Tax Court concluded that Code Sec required the levy to be immediately released. The court found that the determination to proceed with the levy was wrong as a matter of law and, therefore, was an abuse of discretion, despite the failure of the taxpayer to file all requisite tax returns. Th e Vinatieri decision is significant because it requires the IRS to release a levy if the levy creates economic hardship on the taxpayer. Yet, the Taxpayer Advocate points out that the IRS continues to levy on taxpayers who exist below the poverty line and fails to release the levy because of an unfiled return or returns. In other words, the IRS is ignoring the Tax Court s ruling. In 2011, the IRS levied on 67,000 taxpayers who were likely to experience economic hardship as a result of the levy. TheTaxpayer Advocate focused on levies on Social Security and Railroad Retirement Board benefits efits of taxpayers whose incomes were less than $27,000 (250 percent of the poverty guideline for single individuals). The actual median income of the taxpayers subject to these specific levies was $17,500 or less. 6 As the Taxpayer Advocate points out, for a single person in 2011, the least of expenses that the IRS would allow under the allowable expense guidelines (ALE) for a single person totaled $17,200. The federal poverty guideline for a single person in 2011 was $10, Since the median income of taxpayers whose income was being levied in 2011 was $17,500, then some of the 67,000 taxpayers selected for levy were likely living in poverty. Additionally, it is further likely, if not probable, that many of the taxpayers levied in 2011 had expenses that exceeded income. 8 A cause of the problem is IRS training. Some Internal Revenue Manual (IRM) provisions were updated following the Tax Court s Vinatieri decision to make clear that unfiled tax returns should not impede the IRS from releasing levies when the taxpayer is in economic hardship. Yet, as the Taxpayer Advocate demonstrates, the IRS effort is incomplete. Automated Collection System 40 JOURNAL OF TAX PRACTICE & PROCEDURE APRIL MAY 2014

3 (ACS) employee training material did not explain this issue. Most levies originate with ACS. Further, the IRS evaluates its Collection employees without giving specific consideration to the employees who evaluate taxpayers who experience economic hardship. 9 Another problem is the continuous levy. Social Security and Railroad Retirement Board benefits are subject to continuous levies. 10 The IRS has attempted to filter out low income taxpayers from the continuous levy program but without success. Some 151,000 taxpayers received Social Security or Railroad Retirement Board benefits in 2011 and had outstanding tax liability and unfiled returns and thus were subject to levy. Of these, the IRS actually levied on Social Security or Railroad Retirement Board benefits of 66,926 taxpayers. Of these, 40,984 or 61 percent were levied solely because they had unfiled tax returns. 11 The Taxpayer Advocate indicates that low-income taxpayer clinics are being successful in obtaining levy releases if they push back by citing the Vinatieri case or the IRM provisions for current not collectible status. For unassisted taxpayers, there is no data but the conclusion would be compelling that they do not experience relief from the levy. Regulation of Tax Return Preparers Another challenge for pro se taxpayers is they often rely on unregulated tax return preparers when more unscrupulous practices can create serious s harm. The issue of unregulated ed tax return rn preparers rers continues nues with the affirmance an of the Loving case on February 11, 2014, by the U.S. Court of Appeals for the D.C. Circuit. 12 The appeals court also invalidated the IRS return preparer parer regulations and enjoined enforcement of those rules. The court found that the IRS does not have legal authority under 31 U.S.C. 330 to regulate tax return preparers. Section 330 provides the IRS with authority to regulate the practice of representatives of persons before the Department of the Treasury. The appeals court concluded that return preparers assist taxpayers but do not represent taxpayers, nor do the return preparers practice before the Treasury. Commentary on the Loving district court case was substantial and the appeals court decisions can be expected to produce similar substantial analysis and comment. Among the most cogent comment so far on the appeals court decision is from Lawrence B. Gibbs, former IRS Commissioner, who said: [T]he holding, rationale, and language in the two Loving decisions... represent a clear loss for the IRS with respect to its authority under Circular 230 as it s now written to regulate the conduct of unregulated commercial tax return preparers. [The two opinions are] likely to cause the IRS additional difficulty in administering the provisions of Circular 230 and attempting to regulate conduct of practitioners before the agency, Th e National Taxpayer Advocate spoke to the issue of regulating tax return preparers in her 2013 Report. While the issue of unregulated tax return preparers does not directly impact tax practitioners who would read this periodical, there are numerous concerns of interest raised by the National Taxpayer Advocate s 2013 Report. There is no other resource available to practitioners which does as thorough a job of explaining topics impacting tax practice as the Advocate s annual reports to Congress. Th e problem associated with unregulated tax return preparers is huge. For tax year 2012, of the total of 142 million Forms 1040-series individual tax returns filed, more than 79 million of these returns were prepared by persons paid to prepare e them. Of these, 42 million, or over half, were prepared pared by unregulated ed tax return rn preparers. The quality of work the incompetence and misconduct of tax return preparers is of concern to almost everyone interested in the tax system. Tax return preparation software created a low barrier to entry for anyone wishing to prepare tax returns for compensation regardless of experience or knowledge. The courts are enjoining the IRS from further enforcing the testing and continuing education components of the program adopted by the IRS to impose minimum competency requirements on the tax preparation profession. Thus, the National Taxpayer Advocate suggested a six-part program: 1. Offer unenrolled preparers the opportunity to earn a voluntary examination and continuing education certificate. 2. Restrict the ability of unenrolled preparers to represent taxpayers in audits of returns they prepared unless they earn the voluntary examination and continuing education certificate. 3. Restrict the ability to name an unenrolled preparer as a Third Party Designee on Form 1040, U.S. Individual Income Tax Return. APRIL MAY CCH INCORPORATED. ALL RIGHTS RESERVED. 41

4 2013 NATIONAL TAXPAYER ADVOCATE REPORT 4. Mount a consumer protection campaign to educate taxpayers about the need to select competent preparers who can demonstrate competency. 5. Develop a research-driven IRS preparer compliance strategy similar in nature to the Earned Income Tax Credit (EITC) preparer compliance strategy. 6. Recommend that Congress revise 31 U.S.C. 330(a) (2) to clarify that the IRS has the authority to regulate unenrolled preparers. 14 These targeted outreach and education initiatives are among the few suggested strategies available to the IRS at the moment. Collection Procedures Against Business Taxpayers The backbone of the U.S. tax system is trust fund taxes. Approximately 70 percent of total tax revenues collected by the IRS represent trust fund taxes. 15 The National Taxpayer Advocate s 2013 Report highlights the failure of the IRS Collection system to deal adequately with business taxpayers who are delinquent on their tax obligations. The challenges on the IRS are substantial but delinquent trust fund cases are going to require a more nimble and efficient IRS. The primary IRS Collection strategies for business taxpayers are notices and the ACS. At the end of fiscal year 2013: approximately three quarters of the open inventory of trust fund tax cases involved multiple tax delinquencies; almost half involved four or more delinquent tax periods; and over 70 percent of the delinquent trust fund inventory involved debts for tax years at least three years old. The uncollectible amounts for delinquent trust fund taxes are high at the end of FY 2013 the IRS reports an average of $4.2 billion per year in uncollectible trust fund taxes which is roughly 150 percent of the amount the IRS collected on these delinquent accounts, including refund offsets and installment agreements. 16 The notices used by the IRS for delinquent business taxpayers resolve almost 39 percent of the cases on which notices are utilized. Thus, most (over 60 percent) delinquent trust fund taxes were not resolved during the notice process, representing $5.7 billion in delinquent taxes. IRS Collection employees are limited in their training and restricted by outmoded procedures, said the Advocate, so that the IRS has limited success in resolving these delinquent accounts early in the process. Of the trust fund cases passing through ACS, 65 percent are not resolved there and are transferred to the Queue, the Field or are deferred. ACS collects only 11 percent of trust fund cases in ACS. A signifi cant problem highlighted by the Taxpayer Advocate s report is the slowness of IRS reaction to these delinquent trust fund accounts. At the end of fiscal year 2013, 55 percent of current trust fund delinquent accounts were over three years old. She advocates faster attention to these accounts. Trust Fund Recovery Penalties (TFRP) are emphasized by the IRS in dealing with large, old trust fund cases. The Advocate points out that this strategy has been unproductive. In fiscal year 2012, $4.9 billion in TFRP assessments were delinquent accounts, but only $199 million was collected or 11 percent. The National Taxpayer Advocate urges the IRS to improve use of Collection options earlier in the Collection process. From fiscal year 2011 to fiscal year 2013, the use of installment agreements by the IRS against business master file cases declined 17 percent. In fiscal year 2013, only 1.6 percent of cases receiving final notices (Letter CP 504B) were resolved with installment agreements. A contributing factor to these surprising statistics is the IRS policy of not entering into an installment agreement with a taxpayer who has unfiled tax returns. Collection on Due Process s Hearings Do Not Provide Taxpayers with Fair and Impartial Hearing Th e Taxpayer Advocate contends that Collection Due Process (CDP) hearings are not working as intended. 17 Surprisingly, only 1.31 percent of CDP notices issued in fiscal year 2012 (3.6 million CDP notices) led to CDP hearing requests (47,500). The Advocate argues that CDP is being under-utilized. CDP hearings have three major elements: 1. To provide an independent review of IRS Collection action by an Appeals employee 2. To verify that Collection has followed any applicable law or administrative procedure 3. To ensure any proposed collection action balances the need for the efficient collection of taxes with the legitimate concern of the person that any collection action be no more intrusive than necessary 18 CDP hearings are the largest single source of Appeals cases. Almost 38 percent in fiscal year 2012 and 36 percent in fiscal year 2013 of all incoming cases to Appeals were 42 JOURNAL OF TAX PRACTICE & PROCEDURE APRIL MAY 2014

5 CDP hearings. 19 Yet almost 34 percent of notices of intent to levy and 6.5 percent of lien notices were unclaimed, refused or undeliverable. 20 The Advocate highlights the early notice protocols as a contributing factor to the under-utilization on CDP hearings to resolve tax delinquencies. For tax lien filings, the IRS decides whether to file a tax lien notice within 10 days after the IRS s first attempt to contact a taxpayer. For levies, the IRS is not required to contact a taxpayer before levying. The IRS can levy as early as 10 days after notice of assessment and demand for payment. The notice to taxpayers about the CDP hearing availability occurs too early in the notice system. When a taxpayer reaches agreement with Collection, the IRS asks the taxpayer to withdraw the CDP request, which then causes the taxpayer to lose the opportunity for independent review of whether the IRS followed the law and procedures. Th e Advocate has written extensively over the years about CDP-related issues and asserts in her 2013 Report that the CDP hearing is a meaningful taxpayer right, but for a variety of reasons, it is not being realized. EXHIBIT 1. ORGANIZATION OF REPORT Volume 1 contains subsections dealing with the following major topics: The Most Serious Problems Encountered by Taxpayers (discussing 25 issues): 1 The Most Significant Issues Facing Taxpayers and the IRS Today 1. TAXPAYER RIGHTS: The IRS Should Adopt a Taxpayer Bill of Rights as a Framework for Effective Tax Administration 2. IRS BUDGET: The IRS Desperately Needs More Funding to Serve Taxpayers and Increase Voluntary Compliance 3. EMPLOYEE TRAINING: The Drastic Reduction in IRS Employee Training Impacts the Ability of the IRS to Assist Taxpayers and Fulfill its Mission 4. TAXPAYER RIGHTS: Insufficient Education and Training About Taxpayer Rights Impairs IRS Employees Ability to Assist Taxpayers and Protect Their Rights 5. 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 Problems Facing Vulnerable Taxpayer Populations 6. IDENTITY THEFT: The IRS Should Adopt a New Approach to Identity Theft Victim Assistance that Minimizes Burden and Anxiety for Such Taxpayers 7. HARDSHIP HIP LEVIES: Four Years After the Tax Court s Holding in Vinatieri ieri v. Commissioner, missio the IRS Continues to Levy on Taxpayers ayers it Acknowledges Are in Economic Hardship and Then Fails to Release e the Levies 8. RETURN PREPARER FRAUD: The IRS Still Refuses s to Issue Refunds to Victims of Return Preparer rer Misconduct Despite Ample Guidance Allowing the Payment of Such Refunds 9. EARNED INCOME TAX CREDIT: The IRS Inappropriately Bans Many Taxpayers from Claiming EITC 10. INDIAN TRIBAL TAXPAYERS: AYERS Inadequate Consideration of Their Unique Needs Causes Burdens Problems Relating to IRS SCollection Policies and Practices 11. COLLECTION STRATEGY: The Automated Collection System s Case Selection and Processes Result in Low Collection Yields and Poor Case Resolution, Thereby Harming Taxpayers and the Public Fisc 12. COLLECTION PROCESS: IRS Collection Procedures Harm Business Taxpayers and Contribute to Substantial Amounts of Lost Revenue 13. COLLECTION STATUTE EXPIRATION DATES: The IRS Lacks a Process to Resolve Taxpayer Accounts with Extensions Exceeding its Current Policy Limits 14. COLLECTION DUE PROCESS HEARINGS: Current Procedures Allow Undue Deference to the Collection Function and Do Not Provide the Taxpayer a Fair and Impartial Hearing Problems Causing Increased Taxpayer Burden 15. EXEMPT ORGANIZATIONS: The IRS Continues to Struggle with Revocation Processes and Erroneous Revocations of Exempt Status 16. REVENUE PROTECTION: Ongoing Problems with IRS Refund Fraud Programs Harm Taxpayers by Delaying Valid Refunds 17. ACCURACY-RELATED PENALTIES: The IRS Assessed Penalties Improperly, Refused to Abate Them, and Still Assesses Penalties Automatically 18. ONLINE SERVICES: The IRS s Sudden Discontinuance of the Disclosure Authorization and Electronic Account Resolution Applications Left Practitioners Without Adequate Alternatives 19. IRS WORKER CLASSIFICATION PROGRAM: Current Procedures Cause Delays and Hardships for Businesses and Workers by Failing to Provide Determinations Timely and Not Affording Independent Review of Adverse Decisions APRIL MAY CCH INCORPORATED. ALL RIGHTS RESERVED. 43

6 2013 NATIONAL TAXPAYER ADVOCATE REPORT EXHIBIT 1. ORGANIZATION OF REPORT (CONTINUED) Problems Facing International Taxpayers 20. 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 21. INDIVIDUAL TAXPAYER IDENTIFICATION NUMBERS: ITIN Application Procedures Burden Taxpayers and Create a Barrier to Return Filing 22. OFFSHORE VOLUNTARY DISCLOSURE: The IRS Offshore Voluntary Disclosure Program Disproportionately Burdens Those Who Make Honest Mistakes 23. REPORTING REQUIREMENTS: The Foreign Account Tax Compliance Act Has the Potential to Be Burdensome, Overly Broad, and Detrimental to Taxpayer Rights Problems Requiring Additional Guidance 24. DIGITAL CURRENCY: The IRS Should Issue Guidance to Assist Users of Digital Currency 25. DEFENSE OF MARRIAGE ACT: IRS, Domestic Partners, and Same-Sex Couples Need Additional Guidance Legislative Recommendations (discussing 5 recommendations) 1. Repeal the Alternative Minimum Tax 2. Broaden Relief from Timeframes for Filing a Claim for Refund for Taxpayers with Physical or Mental Impairments 3. Allocate to the IRS the Burden of Proving it Properly Imposed the Two-Year Ban on Claiming the Earned Income Tax Credit 4. Premium Tax Credit: Adjust the Affordability Threshold Based on Type of Coverage 5. Allow Taxpayer Identification Number Matching by Colleges The Most Litigated Issues (discussing 10 issues) 1. Accuracy-Related Penalty Under Code Sec. 6662(b)(1) and (2) 2. Trade or Business Expenses Under Code Sec. 162(a) and Related Code Sections 3. Gross income Under Code Sec. 61 and Related Code Sections 4. Summons Enforcement Under Code Secs. 7602(a), 7604(a), and 7609(a) 5. Collection Due Process Hearings Under Code Secs and 6330) 6. Failure to File Penalty Under Code Sec. 6651(a)(1), Failure to Pay Penalty Under Code Sec. 6651(a)(2), and Estimated Tax Penalty Under Code Sec Charitable able Deductions Under Code Sec Frivolous Issues Penalty Under Code Sec and Related Appellate-Level Sanctions 9. Civil Actions to Enforce Federal Tax Liens or to Subject Property to Payment of Tax Under Code Sec Relief from Joint and Several Liability for Spouses Under Code Sec Volume 2ist the research rc report rt volume and contains ns six detailed studies: 1. Do Accuracy-Related Penalties Improve Future Reporting Compliance by Schedule C Filers? 2. A Comparison of Revenue e Officers and the Automated Collection System in Addressing Similar Employment Tax Delinquencies 3. Small Business Compliance: Further Analysis of Influential Factors 4. The Service Priorities Project: Developing a Methodology for Optimizing the Delivery of Taxpayer Services 5. Fundamental Changes to Return Filing and Processing Will Assist Taxpayers in Return Preparation and Decrease Improper Payments 6. The IRS Private Debt Collection Program A Comparison of Private Sector and IRS Collections While Working Private Collection Agency Inventory ENDNOTE 1 Code Sec. 7803(c)(2)(B)(ii)(III) requires the National Taxpayer Advocate to prepare an Annual Report to Congress that contains a summary of at least 20 of the most serious problems encountered by taxpayers each year. For 2013, the National Taxpayer Advocate identified, analyzed, and offered recommendations to assist the IRS and Congress in resolving 25 such problems. Conclusion Th e National Taxpayer Advocate 2013 Annual Report to Congress is beneficial reading for tax practitioners. There is no other resource available to practitioners that does as thorough a job of explaining topics impacting tax practice as the Advocate s annual reports to Congress. Unfortunately, the Advocate s annual reports represent a substantial commitment, and the 2013 Report is no exception. She combines relevant statistics, case and statutory law discussion and a practical discussion of IRS bureaucracy not seen anywhere else. The National Taxpayer Advocate highlighted and discussed in her 2013 Report the 25 most serious problems. Four of these 25 problems were selected for discussion in this article. Attempting to be brief, the discussion of the 44 JOURNAL OF TAX PRACTICE & PROCEDURE APRIL MAY 2014

7 four problems was condensed. Hopefully, the four problems selected here are among those of greatest interest to the average tax practitioner. Hardship levies, tax return preparer regulation, collection procedures directed to business taxpayers, and finally CDP hearings are topics encountered by tax practitioners routinely. ENDNOTES * This article first appeared in TAXES THE TAX MAGA- ZINE, May Nina E. Olson, National Taxpayer Advocate 2013 Annual Report to Congress, Dec. 31, Code Sec. 6343(a)(1)(D). 3 Reg (b)(4). 4 K.A. Vinatieri, 133 TC 16, Dec. 58,026 (2009). 5 Within the meaning of Code Sec. 6343(a)(1)(D) Report at 84, n The IRS s statistics indicate that the federal poverty level in 2011 was $10,890 for a single person, $14,710 for a couple, $18,530 for a family of three and $22,350 for a family of four Report, at Report, at 84. In light of the fact that IRS published expense guidelines are based on average, actual taxpayer expenses, varying by geographic region, the Taxpayer Advocate computed the lowest allowed housing expense and the lowest allowable vehicle operation cost to compute a likely ALE for a single taxpayer. The hypothetical taxpayer here could not have experienced this result because the Taxpayer Advocate was selecting numbers from different geographical regions, while a taxpayer would have only used one region s numbers. Nevertheless, the Taxpayer Advocate is engaging in a useful exercise to make the point Report, at Code Sec. 6331(h)(2) ; IRM (2) (Aug. 28, 2012) Report, at S. Loving, CA-DC, USTC 50,175, aff g, DC-DC, USTC 50,156, 917 FSupp2d Matthew R. Madara, Appeals Court Affirms Loving, Disallowing Preparer Requirements, 2014 TNT 29-1, Feb. 12, Report, at Report, at Report, at Report, at Code Sec. 6330(c) Report, at Report, at 158, n. 23. This article is reprinted with the publisher s permission from the JOURNAL OF TAX PRACTICE & PROCEDURE, a bi-monthly journal published by CCH, a part of Wolters Kluwer. Copying or distribution without the publisher s permission is prohibited. To subscribe to the JOURNAL OF TAX PRACTICE & PROCEDURE or other CCH, a part of Wolters Kluwer Journals please call or visit CCHGroup.com. All views expressed in the articles and columns are those of the author and not necessarily those of CCH, a part of Wolters Kluwer or any other person. APRIL MAY CCH INCORPORATED. ALL RIGHTS RESERVED. 45