January 22, 2014

Tax season can be a very confusing and frustrating time for many Americans, especially in recent years as the IRS has implemented several changes that have impacted United States taxpayers.

Since 2010 the IRS has had its funding cut by 8%, including an 87% drop in their training budget, and have cut nearly 8,000 full time positions. Congress has meanwhile increased the responsibilities of the IRS which now plays a key role in the administration of Obamacare. When you also factor in the complications of last October’s government shutdown and automatic spending cuts imposed, it’s no wonder that many Americans dread having to have any dealings with the IRS.

The Taxpayer Advocate Report

But fortunately taxpayers have a resource fighting on their behalf in the Office of the Taxpayer Advocate, an independent office within the IRS that was created under the Taxpayer Bill of Rights 2 in 1996.  Nina Olson, current US Taxpayer Advocate, identifies the major problems that taxpayers face throughout the year and offers ideas and solutions for each of them in an annual report which is released each December. In addition to reporting these findings to the IRS, Olson is also the only IRS employee authorized to make legislative proposals directly to Congress.

In Olson’s most recent Taxpayer Advocate Service (TAS) report released last month, she identified the most serious problem that taxpayers face is trying to comprehend the complex and often changing IRS tax code. The TAS analyzed IRS data and found that taxpayers spend around 6.1 billion hours a year in attempting to comply with filing requirements. The report states that “if tax compliance were an industry, it would be one of the largest in the United States. To consume 6.1 billion hours, the ‘tax industry’ requires the equivalent of more than three million full-time workers.”

The report also states that “according to a tally compiled by a leading publisher of tax information, there have been approximately 4,680 changes to the tax code since 2001, an average of more than one a day.” This constantly evolving set of rules and regulations makes it difficult for honest taxpayers to keep up with the latest laws and much easier for criminals to commit tax fraud. The TAS report has suggested to both the IRS and Congress for a number of years that the current complex tax code needs to be simplified, and since it has been 28 years since the last fundamental tax reform enacted by Congress, it is perhaps long overdue.

Another major problem the TAS report addresses involves the impact of the IRS budget cuts on their ability to serve the American taxpayers. Because of the funding shortages that the IRS is dealing with, they are unable to answer millions of taxpayer’s phone calls each year, and only able to respond to about 47% of correspondence submitted by taxpayers. Last year the IRS was only able to field about 61% of their incoming phone calls and the average wait time to get through to a representative was nearly 18 minutes.

“The IRS mails over 200 million pieces of correspondence to taxpayers each year, yet it does not track how much of this mail is annually returned as “undeliverable as addressed.” — National Advocate Report

TAS Recommendations

The TAS report recommends that Congress establish new guidelines when setting the IRS budget, and significantly increase their current operating budget to allow better customer service to taxpayers who are honestly trying to file their return. This recommendation is critical due to the fact that the US tax system is based on voluntary compliance, and the IRS has a moral obligation to taxpayers to make compliance as simple as possible. The fact that nearly 43 million phone calls to the IRS go unanswered each year, and that 53% of written correspondence to the IRS is ignored, is unacceptable and fails to serve the needs of the very people who are attempting to honestly comply with IRS regulations.

The report also points out the fact that since the IRS is essentially the “Accounts Receivable” department of the United States government, it is crucial that this department have sufficient funding to perform its duties. In 2013 the IRS had a budget of only $11.2 billion yet it collected a total of $2.86 trillion tax dollars – translating roughly to a rate of return of $255 for every $1 spent. This demonstrates the significance of how an increase in budget levels could impact potential increases in revenue collection and could even help reduce the overall economic deficit that America is dealing with today.

Another serious and growing problem facing American taxpayers these days is tax-related identity theft. In 2012 the IRS received almost 450,000 cases claiming issues surrounding stolen identity. Usually, a tax-related identity theft occurs when someone uses the personal information of another person without their knowledge or permission to collect a fraudulent refund. This causes a series of major problems which could take many months to resolve.

In order to address the increasing problem of tax-related identity theft, the IRS created the Identity Protection Specialized Unit (IPSU) in October of 2008. While the original intent of this unit was to provide a central point of contact for identity theft victims to resolve their tax-related issues quickly and efficiently, the results that taxpayers receive are anything but effective and timely.

The time required to have identity theft related tax cases resolved by the IRS averages 312 days, delaying proper refunds to victims, causing problems to overlap tax years, and requiring a number of different units within the IPSU to be involved before a final solution can be found. There are currently more than 20 separate divisions within the IPSU that are required to coordinate and pass information along to each other in order for a case to be resolved. While the original intent of creating the IPSU was to provide a stream-lining of sorts for these types of cases, its internal complexity of different units has only made the process more time consuming.

The TAS report recommends that the IRS review the structure of the IPSU and make appropriate changes so that the process of addressing identity theft can truly be stream-lined as the unit was originally intended. In addition, the report recommends increasing the funding to this division of the IRS so that the increasing volume of cases coming in can be resolved in a more timely manner.

Conclusion

Dealing with the IRS can be a dreadful time for many taxpayers each year. Whether it’s trying to keep up with the always changing tax-code, resolving identity theft issues, or attempting to contact the IRS with questions, there are many hurdles that Americans face when attempting to comply with US tax requirements. Fortunately, the Taxpayer Advocate Service exists for the sole purpose of serving as the “voice of the people,” offering assistance to taxpayers while making recommendations for improvement to the IRS and Congress.

For more information about the Taxpayer Advocate Service or to view the full 2012 TAS report, visit http://www.taxpayeradvocate.irs.gov.

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