Taxpayer Advocate Outlines Most Serious Problems Facing Taxpayers

I respectfully submit for your consideration the National Taxpayer Advocate's 2012 Annual Report to Congress. Section 7803(c)(2)(B)(ii) of the Internal Revenue Code requires the National Taxpayer Advocate to submit this report each year and in it, among other things, to identify at least 20 of the most serious problems encountered by taxpayers and to make administrative and legislative recommendations to mitigate those problems.

As this report goes to press, it appears an agreement has been reached to patch the Alternative Minimum Tax. For taxpayers and the IRS, that is extremely good news. The IRS systems that process tax returns cannot generally be programmed to accommodate alternative scenarios. As the IRS Commissioner has said, the IRS made a risk-based decision to program its systems on the assumption that an AMT patch would be passed, and if a patch was not enacted, the start of the filing season would have been delayed from January to late March or possibly later for the significant majority of taxpayers. That would have brought about the most chaotic filing season in memory. I am hopeful and relieved that that near-crisis seems to have been averted.

Since the election, the dominant issue before Congress has been the so-called "fiscal cliff." While that term seems to mean different things to different people, it encompasses three critical issues from a tax administration perspective -- tax complexity, the Alternative Minimum Tax, and the risk that sequestration or alternative budget cuts will further weaken the IRS's ability to serve taxpayers and collect the revenue upon which the rest of government depends.

Consider the following:

• Tax Complexity. An analysis of IRS data by the Office of the Taxpayer Advocate shows it takes U.S. taxpayers (both individuals and businesses) more than 6.1 billion hours to complete filings required by a tax code that contains almost four million words and that, on average, has more than one new provision added to it daily. Indeed, few taxpayers complete their returns without assistance. Nearly 60 percent of taxpayers hire paid preparers and another 30 percent rely on commercial software to prepare their returns. To inspire confidence and trust, the tax laws should be comprehensible and the computations of tax should be transparent and relatively simple, yet few taxpayers today can confidently say they understand the tax code or even that they have correctly computed their tax liabilities.¹ In this report, we identify tax complexity as the #1 most serious problem facing taxpayers, and we recommend (as we have in prior reports) that Congress vastly simplify the tax code to make tax compliance easier. We offer both conceptual and specific suggestions for Congress to consider as it moves forward.

• Alternative Minimum Tax. Taxpayers spent about 18 million hours for the 2000 tax year (the most recent year for which we found data) completing and filling out AMT tax forms and determining whether they owed the tax. The AMT was originally enacted to ensure that the wealthiest U.S. taxpayers pay at least some tax each year by adding back into income certain tax benefits known as "tax preferences." Yet in 2008, 87 percent of all tax preferences that gave rise to AMT liabilities was attributable to the disallowance of personal exemptions and the deduction for state and local taxes. Only under the unique logic of the AMT are the acts of having a large family and living in a high-tax state viewed as a tax dodge. As we document in this report, the AMT does not seem to achieve its intended purpose. Many middle and upper-middle class taxpayers pay the AMT, while most wealthy taxpayers do not, and thousands of millionaires pay no income tax at all. At the same time, the AMT adds significant complexity to tax computations, requiring millions of taxpayers essentially to compute their tax liabilities twice -- once under the regular tax rules and again under the AMT rules -- and then to pay the higher of the two tax amounts. Because the AMT largely fails to achieve its objective and because it adds considerable complexity for so many taxpayers, including millions who don't even end up owing it, we identify the AMT as the #2 most serious problem facing taxpayers, and we reiterate our longstanding recommendation that the AMT be repealed.

• IRS Funding. In fiscal year (FY) 2012, the IRS received around 125 million calls. The IRS answered only about two out of three calls from taxpayers trying to reach a live person, and those taxpayers had to wait, on average, about 17 minutes to get through. Meanwhile, at fiscal year end, the IRS had a backlog of more than one million pieces of correspondence (up 188 percent from FY 2004), and almost half of that backlog was overage (up 316 percent from FY 2004). Is it any wonder that some taxpayers give up and stop responding to the IRS?² At the same time that the IRS is not meeting taxpayer needs, it is struggling to close a "tax gap" estimated at nearly $400 billion a year. In this report, we designate the significant and persistent underfunding of the IRS as the #3 most serious problem facing taxpayers.

Yet this is precisely what we are doing with the IRS budget. Last year, the IRS brought in federal revenue of about $2.52 trillion on a budget of $11.8 billion, for a return-on-investment (ROI) of 214:1. If we cut IRS funding, the IRS Commissioner recently estimated in a letter to Congress that we can expect lower tax collections in an amount seven times as much as the budget cuts. That means fewer dollars to put toward deficit reduction, fewer dollars for military funding, fewer dollars for our intelligence services and embassy protection, fewer dollars for an economic safety net, fewer dollars for disaster recovery, fewer dollars for infrastructure renewal, fewer dollars for medical research -- in short, fewer dollars for all the things we believe as a nation we should provide for our citizens. It means real harm to real people.

Since FY 2010, the IRS budget has been declining each year, and absent congressional action, it is likely to be reduced more in the coming years, perhaps significantly so, by sequestration or other budget cuts that replace the sequestration mechanism. More than 90 percent of the IRS's taxpayer service and enforcement budget goes for personnel costs, so budget cuts mean that fewer employees will be available to answer phone calls from taxpayers needing assistance.³ Budget cuts mean that there will be long delays when taxpayers call or write to say there is a mistake on their IRS bill and they don't owe these taxes.⁴ Budget cuts mean that victims of identity theft will have to wait longer than six months to get resolution of their cases and receive their refunds.⁵ Budget cuts mean that because taxpayers couldn't get the assistance they needed when they needed it, they will do things incorrectly. Budget cuts mean that, because of these avoidable problems, taxpayers will face IRS enforcement actions -- liens, levies, seizures, audits -- that will be automated and initiated without so much as a phone call to the actual taxpayer.⁶ And budget cuts mean that the IRS will not have the trained personnel or technology required to administer the laws properly to close the tax gap.

None of this bodes well for taxpayers. But the harm from budget brinksmanship and last-minute tax law changes goes beyond the immediate impacts I've outlined above. As we report in our Volume Two study, Factors Influencing Voluntary Compliance by Small Businesses: Preliminary Survey Results, the factors that are most highly correlated with noncompliance among sole proprietors -- the single largest component of the tax gap -- are distrust of government, distrust of the IRS, and disbelief in the fairness of our tax system. The fiscal cliff drama reinforces taxpayers' belief that government and the tax system are not helping them.

Under our system of government, it may be inevitable that important decisions about tax policy and federal budgeting are sometimes deferred until the last minute. But the extent of the resulting uncertainty about tax rates, people's take-home pay, the AMT, and the prospect of a delay in the delivery of tax refunds resulting from a delay in the start of the filing season produces disappointment, dismay, and cynicism among taxpayers. The IRS budget cuts likely to come about with sequestration (or replacement cuts), and the virtual freeze on hiring and training that has already occurred because of successive years of continuing resolutions and inadequate funding, erode what little taxpayer service remains in IRS operations and all but ensure that IRS technology will remain in the 20^th century, hampering its ability to effectively collect tax and assist taxpayers who are trying to comply. Meanwhile, the complexity creep of the tax code and the menacing shadow of the AMT confirm taxpayers' suspicions that the tax laws are designed to entrap them and obscure what is and is not being taxed.

The fiscal cliff also deflects attention from other priority issues in tax administration, including the 20 other most serious problems we identify in this report. At its most basic level, insufficient funding drives the IRS to reduce its meaningful interaction with taxpayers and replace it with automated enforcement mechanisms. This approach can erode fundamental taxpayer rights and protections. We see evidence of this erosion in the IRS's failure to provide adequate assistance to victims of identity theft or return preparer fraud;⁷ its insistence on draconian penalties against taxpayers with overseas accounts, irrespective of their benign purpose;⁸ its inadequate use of installment agreements and offers in compromise for taxpayers, particularly with respect to business taxpayers and taxpayers experiencing economic hardship;⁹ and its abandonment of an education and compliance presence in local communities.¹⁰ All of these are problems for which solutions exist and about which my office has made practical recommendations.

Yet throughout this report, the IRS responses to our analysis and recommendations often seem to miss the basic point or are otherwise unpersuasive. What underlies these responses is the understandable IRS concern that it does not have the resources to make the improvements that are so obviously needed, so it is better to rationalize the status quo or commit to only those improvements it can afford currently, rather than try to make the case for more funding or for reallocating current funding. The current budget crisis and recurring continuing resolutions exacerbate this IRS tendency.

This is no way to run a tax system. What the IRS -- and its taxpayers -- need is a stable funding mechanism for the IRS that allows it to educate its taxpayers about their tax obligations, provide assistance to taxpayers when they need it, work with taxpayers who are trying to comply but aren't in compliance for one reason or another (including economic hardship), enforce the tax laws against those who seek to evade reporting their taxable income or paying their tax liabilities, and generally seek to increase the amount of taxes paid voluntarily.

What the IRS -- and its taxpayers -- have now is an unstable funding mechanism that treats the IRS like any other government spending program instead of the revenue center or accounts receivable function that it is. The IRS must compete for funding with the rest of the government agencies that rely on IRS collections to accomplish their missions. The plain truth is that the IRS's mission trumps all other agencies' missions -- because without an effective revenue collector you can't fund those other agencies. Certainly, Members of Congress may disagree about the appropriate level of taxation. But whatever level is written into law, there can be little disagreement that taxpayers should receive the assistance they need to comply, and the laws should be enforced so that everyone pays their fair share of tax and we have a level playing field. Without an effective tax collector, honest taxpayers end up paying more to subsidize noncompliance by others, and we don't raise the funds our government requires. And that state of affairs is not sustainable.

In this and previous reports, we have proposed a solution to the problem of IRS funding.¹¹ It is really very simple in concept: fence off -- or "sequester," if you will -- IRS funding from the rest of the federal budget. Determine what level of revenue the IRS needs to collect for the government to do what we want it to do, and then determine what the IRS needs to collect that revenue -- in a way that maximizes (voluntary) compliance, protects taxpayer rights, and minimizes taxpayer burden. The return on investment in the IRS should be guaranteed to be greater than 1 to 1. And if we simultaneously set goals for the IRS in terms of taxpayer service, victim assistance, online services, and voluntary compliance while funding research, development, and innovation, we may well exceed our ROI expectations. We might actually end up with the 21^st century tax administration we deserve rather than the heroically struggling, overwhelmed one that we have.

Looking forward, the year 2013 is shaping up to be an active one from the standpoint of tax policy. As Congress moves forward on these fronts, I urge you to keep in mind the impact of various legislative proposals on the taxpayer and on the IRS's ability to administer the proposals effectively and fairly. As the National Taxpayer Advocate, I hope 2013 brings about fundamental tax simplification, repeal of the Alternative Minimum Tax, and a new approach toward funding the IRS that ensures the agency can do a better job of meeting taxpayer needs and collecting the revenue that funds virtually all other government operations. I also hope the IRS makes progress in addressing the growing problem of tax-related identity theft and particularly improves its performance in providing timely and effective assistance to identity-theft victims and preparer fraud victims as well as taxpayers who are struggling to comply with their tax obligations.

I respectfully submit this report to Congress for your consideration and action, and I stand ready to assist you in any way that I can.

Internal Revenue Code (IRC) § 7803(c)(2)(b)(ii)(III) requires the National Taxpayer Advocate to prepare an Annual Report to Congress which contains a summary of at least 20 of the most serious problems encountered by taxpayers each year. For 2012, the National Taxpayer Advocate has identified, analyzed, and offered recommendations to assist the IRS in resolving 23 such problems. This year's report also includes status updates on six issues previously raised by the National Taxpayer Advocate or addressed in previous Annual Reports.

Each of the most serious problems includes the National Taxpayer Advocate's description of the problem, the IRS's response, and the National Taxpayer Advocate's final comments and recommendations. This format provides a clear picture of which steps have been taken to address the most serious problems and which additional steps the National Taxpayer Advocate believes are required.

The issues described in the report are as follows:

THE MOST SIGNIFICANT ISSUES FACING TAXPAYERS AND THE IRS TODAY

1. The Complexity of the Tax Code

Tax law complexity imposes monetary costs on taxpayers as well. About 59 percent of individual taxpayers pay practitioners to prepare their returns, and another 30 percent use tax software to assist them, with leading software packages costing $50 or more.

Perhaps most troubling, tax law complexity leads to perverse results. On the one hand, taxpayers who honestly seek to comply with the law often make inadvertent errors, causing them to either overpay their tax or become subject to IRS enforcement action for mistaken underpayments. On the other hand, sophisticated taxpayers often find loopholes that enable them to reduce or eliminate their tax liabilities.

In 2012, TAS commissioned a statistically representative national survey of over 3,300 taxpayers who operate businesses as sole proprietors. Only 16 percent said they believe the tax laws are fair. Only 12 percent said they believe taxpayers pay their fair share of taxes. The National Taxpayer Advocate finds this extraordinary lack of public trust in the method by which our government is funded profoundly disturbing.

To reduce taxpayer burden and enhance public confidence in the integrity of the tax system, the National Taxpayer Advocate urges Congress to vastly simplify the tax code. In general, this means paring back the number of income exclusions, exemptions, deductions, and credits (generally known as "tax expenditures"). For fiscal year (FY) 2013, the Joint Committee on Taxation has projected that tax expenditures will total about $1.09 trillion, while individual income tax revenue is projected to be about $1.36 trillion. For perspective, this suggests that if Congress were to eliminate all tax expenditures, it could cut individual income tax rates by about 44 percent and still generate about the same amount of revenue. (If all tax expenditures were eliminated simultaneously, certain mechanical and interactive effects could cause the revenue shift to be somewhat more or less than 44 percent.)

The perennial challenge in enacting fundamental tax reform is that while most taxpayers support a simpler tax code in concept, many of us are reluctant to give up our existing tax breaks, often believing that tax rates could be cut if "loopholes" were eliminated. The term "loophole," however, is typically used to describe tax expenditures that benefit others, while terms like "incentives" or "sound government policy" are used to describe tax expenditures that benefit ourselves. In practice, the largest tax expenditures by dollar benefit the masses and enjoy broad popular support -- the exclusion of employer contributions for medical insurance premiums and medical care; the exclusion for retirement plan contributions and earnings; the mortgage interest deduction; the reduced rates of tax on long-term capital gains and qualified dividends; and the deduction for state and local taxes.

When proposals to reduce tax expenditures are made, affected groups and industries often mobilize quickly to try to generate public opposition. To build broad support for tax reform, it is therefore essential to engage the public in a substantive dialogue about the required tradeoffs between tax rates and tax breaks. An uninformed taxpayer who hears he may lose a tax break will instinctively want to keep it to prevent his tax bill from rising. An informed taxpayer who understands that tax rates will be substantially lowered in exchange for losing tax breaks often will have a very different reaction.

The argument regarding tradeoffs is easier to make if tax reform proceeds on a revenue-neutral basis, as it did in 1986. In the current budget environment, we understand that Congress may decide to raise revenue in the course of reforming the tax code. However, if the choice is between raising a given amount of revenue through increasing tax rates or eliminating tax expenditures, the same structural tradeoffs apply. Once Congress sets its revenue targets, it can hit those targets by setting relatively high tax rates that continue to be offset by a bewildering array of exclusions, exemptions, deductions, and credits, or it can hit its targets by enacting relatively low tax rates and minimizing the number of tax breaks it permits. (Our office takes no position regarding the broader economic effects of raising or lowering marginal tax rates.)

2. The Alternative Minimum Tax Corrodes Both the Tax System and the Democratic Process

The AMT is difficult to repeal because it is projected to raise a large amount of revenue. However, AMT patches have always prevented the AMT from raising these projected amounts. In other words, we have a law that grants popular tax benefits (the regular tax code), another law (the AMT) that eliminates the benefits, and then another law that undoes the elimination of benefits (the patches), usually at the last minute -- a legislative Rube Goldberg contraption of unnecessary complexity. In addition, the AMT reduces the transparency of the tax reform debate. For example, any revenue estimate for the proposal must be compared to the illusory revenue supposedly generated by expiration of the AMT patch under current law. Thus, the AMT corrodes the both the tax system and the democratic process.

3. The IRS Is Significantly Underfunded to Serve Taxpayers and Collect Tax

To improve tax compliance, the IRS requires more funding to strengthen front-end taxpayer services, including outreach and education, as well as its back-end enforcement activities. On a few occasions, Congress has channeled additional funding to the IRS outside the otherwise applicable spending caps by using a mechanism known as a "program integrity cap adjustment." To date, however, funds provided under this cap-adjustment mechanism have been used solely for enforcement activities, skewing the delicate balance that should exist between taxpayer services and enforcement.

VICTIMS OF IDENTITY THEFT AND OTHER VULNERABLE TAXPAYERS

4. The IRS Has Failed to Provide Effective and Timely Assistance to Victims of Identity Theft

5. The IRS Harms Victims of Return Preparer Misconduct by Failing to Resolve Their Accounts Fully

6. Despite Some Improvements, the IRS Continues to Harm Taxpayers by Unreasonably Delaying the Processing of Valid Refund Claims that Happen to Trigger Systemic Filters

7. The IRS's Compliance Strategy for the Expanded Adoption Credit Has Resulted in Excessive Delays to Taxpayers, Has Increased Costs for the IRS, and Does Not Bode Well for Future Credit Administration

PROTECTION OF TAXPAYER RIGHTS IN COMPLIANCE INITIATIVES

8. The IRS Offshore Voluntary Disclosure Programs Discourage Voluntary Compliance by Those who Inadvertently Failed to Report Foreign Accounts

Benign actors were required to "opt out" to get a fair result -- at the risk of facing draconian penalties. Afraid to opt out, some paid more than they should -- extortion in their view. Others declined to address the problem. While an estimated five to seven million U.S. citizens reside abroad, and many more U.S. residents have FBAR filing requirements, the IRS received only 741,249 FBAR filings in 2011, and as of September 29, 2012, it had received fewer than 28,000 OVD submissions. Thus, OVD programs have both infringed taxpayer rights and failed to address significant FBAR compliance problems.

The IRS recently identified a few situations in which a taxpayer could opt out without penalty. In addition, on September 1, 2012, it established a Streamlined Nonresident Filing Initiative that allows certain nonresidents to correct errors outside of the OVD programs. However, as the IRS identifies more FBAR noncompliance, it will face the choice of whether to devote more enforcement resources to address it, expand its outreach and self-correction options, or ignore the noncompliance altogether.

9. The IRS's Handling of ITIN Applications Imposes an Onerous Burden on ITIN Applicants, Discourages Compliance, and Negatively Affects the IRS's Ability to Detect and Deter Fraud

10. The Preservation of Fundamental Taxpayer Rights Is Critical as the IRS Develops a Real-Time Tax System

11. Overextended IRS Resources and IRS Errors in the Automatic Revocation and Reinstatement Process Are Burdening Tax-Exempt Organizations

TAXPAYER SERVICE IN THE TWENTY-FIRST CENTURY

Introduction to Taxpayer Service Problems: The IRS Must Confront Challenges to Delivering High Quality Taxpayer Service in the Twenty-First Century

Most Serious Problems

The following Most Serious Problems relate to taxpayer service:

• The IRS Telephone and Correspondence Services Have Deteriorated over the Last Decade and Must Improve to Meet Taxpayer Needs

• The IRS Has Failed to Make Free Return Preparation and Free Electronic Filing Available to All Individual Taxpayers

• The IRS Is Striving to Meet Taxpayers' Increasing Demand for Online Services, Yet More Needs to Be Done

• Challenges Persist for International Taxpayers as the IRS Moves Slowly to Address Their Needs

• IRS Processing Flaws and Service Delays Continue to Undermine Fundamental Taxpayer Rights to Representation

• The IRS Lacks a Servicewide Strategy that Identifies Effective and Efficient Means of Delivering Face-to-Face Taxpayer Services

• The IRS Is Substantially Reducing both the Amount and Scope of its Direct Education and Outreach to Taxpayers and Does Not Measure the Effectiveness of its Remaining Outreach Activities, Thereby Risking Increased Noncompliance

• A Proactive Approach to Developing a Government-Issued Debit Card to Receive Tax Refunds Will Benefit Unbanked Taxpayers

• The IRS received over 100 million calls in fiscal year (FY) 2012 and more than 30 percent went unanswered.

• The IRS received about 10.5 million pieces of correspondence, and at the end of the last week of FY 2012, nearly 48 percent was "overage."

• In FY 2012, the IRS answered almost 68 percent of taxpayer calls and in FY 2013 set a goal of answering only 63 percent, a seven percent decrease.

• Wait time to speak to an IRS representative was nearly 17 minutes in FY 2012, compared with under three minutes in FY 2004, an increase of over 500 percent.

• In FY 2012, the IRS received calls to some lines from over 75,000,000 unique telephone numbers with an average of two calls per phone number.

13. The IRS Has Failed to Make Free Return Preparation and Free Electronic Filing Available to All Individual Taxpayers

14. The IRS Is Striving to Meet Taxpayers' Increasing Demand for Online Services, Yet More Needs To Be Done

15. Challenges Persist for International Taxpayers as the IRS Moves Slowly to Address Their Needs

16. IRS Processing Flaws and Service Delays Continue to Undermine Fundamental Taxpayer Rights to Representation

17. The IRS Lacks a Servicewide Strategy that Identifies Effective and Efficient Means of Delivering Face-To-Face Taxpayer Services

Although technology may fill some of the gaps, taxpayers who visit the IRS in person are experiencing increased difficulties, including long travel times, insufficient staffing, and a lack of services. By failing to pursue research into the impact of its policy shifts, the IRS continues to make these changes in a vacuum without fully understanding their effect and burden on taxpayers, including re-work for both the taxpayer and the IRS.

18. The IRS Is Substantially Reducing Both the Amount and Scope of its Direct Education and Outreach to Taxpayers and Does Not Measure the Effectiveness of its Remaining Outreach Activities, Thereby Risking Increased Noncompliance

19. A Proactive Approach To Developing a Government Issued Debit Card to Receive Tax Refunds Will Benefit Unbanked Taxpayers

TAXPAYER SERVICE WITHIN COLLECTION

Introduction to Collection Issues: The IRS "Fresh Start" Initiative Has Produced Significant Improvements in Some Collection Policies; However, Significantly More Emphasis on Service Delivery Is Necessary to Realize the Full Benefits of These Important Changes

The IRS needs to build a service-oriented Collection climate onto the foundation established by the "Fresh Start" initiative. The IRS needs to expand the scope of the initiative, while removing procedural and cultural barriers that limit taxpayer access to these collection tools. Further, the IRS needs to better promote the "Fresh Start" initiative in its internal Collection training and external communication strategies, as well as allocate adequate resources to its functions to ensure the benefits of the initiative are real and sustainable. It is very important to note that the "Fresh Start" initiative did not "fix" Collection. Rather, it produced a number of meaningful policy changes that can serve as a foundation for further improvements. In this section of the Annual Report, the National Taxpayer Advocate sincerely urges the IRS to build on this foundation by creating an environment that actually embraces service delivery as a critically important component of effective tax collection.

20. The Diminishing Role of the Revenue Officer Has Been Detrimental to the Overall Effectiveness of IRS Collection Operations

21. The Automated Collection System Must Emphasize Taxpayer Service Initiatives to Resolve Collection Workload More Effectively

22. Although the IRS "Fresh Start" Initiative Has Reduced The Number of Liens Filed, the IRS Has Failed To Determine Whether its Lien-Filing Policies Are Clearly Supported by Increases in Revenue and Taxpayer Compliance

The results of a 2012 TAS study show that NFTL filings during the study period (calendar years (CYs) 2002-2004) had a negative effect on the payment behavior and liabilities of affected taxpayers. Taxpayers with NFTLs filed against them generally paid less and ended up owing more than non-lien taxpayers:

• Taxpayers with NFTLs paid an average of $25,845, or about 69 percent of their original liabilities. Non-lien taxpayers paid $38,477, equivalent to about 111 percent of their original liabilities.

• At the end of the study period (CY 2010), taxpayers with NFTLs owed 21 percent more on average than they owed when the lien was filed (they incurred their original liabilities in 2002). Non-lien taxpayers owed 11 percent more than they owed on their original liabilities.

23. Early Intervention, Offers in Compromise, and Proactive Outreach Can Help Victims of Failed Payroll Service Providers and Increase Employment Tax Compliance

Status Updates

1. Underfunding of IRS Initiatives to Modernize its Taxpayer Address Systems Undermines Taxpayers' Statutory Rights and Impedes Efficient Resource Allocation

2. Federal Tax Questions Continue to Trouble Domestic Partners and Same-Sex Spouses

3. The IRS's Reliance on Automated "Enforcement Assessments" Has Declined Significantly, But Concerns Remain

4. The IRS Should Expand Virtual Face-To-Face Service to Meet Taxpayer Needs and Improve Compliance

5. The IRS Has Improved Training and Procedures to Account for Collection Statute Expiration Dates

6. The Combined Annual Wage Reporting Program Continues to Impose a Burden on Employers Despite IRS Improvements

Legislative Recommendations

Section 7803(c)(2)(B)(ii)(VIII) of the Internal Revenue Code (IRC) requires the National Taxpayer Advocate to include in her Annual Report to Congress, among other things, legislative recommendations to resolve problems encountered by taxpayers.

The National Taxpayer Advocate places a high priority on working with the tax-writing committees and other interested parties to try to resolve problems encountered by taxpayers. In addition to submitting legislative proposals in each Annual Report, the National Taxpayer Advocate meets regularly with members of Congress and their staffs and testifies at hearings on the problems faced by taxpayers to ensure that Congress considers a taxpayer perspective.

FAMILY STATUS RECOMMENDATIONS

1. Simplify the National Status and Related Requirements for Qualifying Children

• May reside in the U.S., Canada, or Mexico for the first provision;

• Must reside in the U.S. for the second; and

• Must reside in the U.S. with a Social Security number (SSN) for the third.

• Consolidate the dependency deduction and CTC (nonrefundable portion) with head of household filing status into a Family Credit.

• Consolidate and modify the EITC with the additional CTC into a Worker Credit not contingent on qualifying children.

• For the Family Credit, apply the contiguous country rule encompassing the U.S., Canada, and Mexico.

• For the Worker Credit, require an SSN valid for work.

• Repeal as obsolete the residence rule that requires the child to be a citizen, national, or otherwise in the U.S., thus resolving the confusion surrounding the national status of children who qualify for a refundable credit.

3. Amend the Adoption Credit to Acknowledge Jurisdiction of Native American Tribes

TAXPAYER RIGHTS RECOMMENDATIONS

4. Amend IRC § 7701 to Provide a Definition of "Last Known Address," and Require the IRS to Mail Duplicate Notices to Credible Alternate Addresses

5. Amend IRC § 7403 to Provide Taxpayer Protections Before Lien Foreclosure Suits on Principal Residences

6. Amend IRC §§ 6320 and 6330 to Provide Collection Due Process Rights to Third Parties (Known As Nominees, Alter Egos, and Transferees) Holding Legal Title to Property Subject to IRS Collection Actions

7. Protect Taxpayers and the Public Fisc from Third-Party Misappropriation of Payroll Taxes

The Most Litigated Issues

Internal Revenue Code (IRC) § 7803(c)(2)(B)(ii)(X) requires the National Taxpayer Advocate to include in her Annual Report to Congress the ten tax issues most litigated in the federal courts, classified by the types of taxpayers affected. The cases we reviewed were decided during the 12-month period beginning on June 1, 2011, and ending on May 31, 2012.

Internal Revenue Code (IRC) § 7803(c)(2)(B)(ii)(X) requires the National Taxpayer Advocate to include in her Annual Report to Congress the ten tax issues most litigated in the federal courts, classified by the types of taxpayers affected. The cases we reviewed were decided during the 12-month period beginning on June 1, 2011, and ending on May 31, 2012.

SIGNIFICANT CASES

At the outset, we describe certain judicial decisions that generally do not involve any of the ten Most Litigated Issues, but nonetheless highlight important issues relevant to tax administration. This year, we discuss nine cases, including two from the United States Supreme Court, one from the United States Tax Court, and six from United States Courts of Appeals.

1. Summons Enforcement Under IRC §§ 7602, 7604, and 7609

Enforcement of summonses generated the greatest number of federal court decisions this year. The IRS may examine any books, records, or other data relevant to an investigation of a civil or criminal tax liability. To obtain this information, the IRS may serve a summons directly on the individual who is the subject of the investigation or any third party who may possess relevant information. A person who has a summons served on him or her may contest its legality if the government petitions a court to enforce it. If the IRS serves a summons on a third party, any person entitled to notice of the summons may challenge its legality by filing a motion to quash or by intervening in any proceeding regarding the summons. Generally, the taxpayer has a difficult burden to establish the illegality of the summons. We reviewed 153 federal court cases that included issues of IRS summons enforcement. The IRS prevailed in full in 152 cases, with one case resulting in a split decision.

2. Accuracy-Related Penalty Under IRC §§ 6662(b)(1) and (2)

IRC §§ 6662(b)(1) and (2) authorize the IRS to impose a penalty if a taxpayer's negligence or disregard of rules or regulations caused an underpayment of tax, or if an underpayment exceeded a computational threshold, called a substantial understatement. IRC § 6662(b) also authorizes the IRS to impose three other accuracy-related penalties, which we did not analyze because they were litigated less frequently.

Cases with accuracy-related penalty issues increased more than110 percent this year, from 55 in 2011 to 117 in 2012. The IRS prevailed in full in 77 cases, the taxpayers prevailed in full in 29 cases, and 11 resulted in split decisions.

3. Appeals from Collection Due Process Hearings Under IRC §§ 6320 and 6330

Collection Due Process (CDP) hearings provide taxpayers with an independent review by the IRS Office of Appeals (Appeals) of the decision to file a Notice of Federal Tax Lien (NFTL) or the IRS's proposal to undertake a levy action. In other words, a CDP hearing gives taxpayers an opportunity for a meaningful hearing before the IRS issues its first levy or immediately after it files its first lien with respect to a particular tax liability. At the hearing, the taxpayer has the statutory right to raise any relevant issues related to the unpaid tax, the lien, or the proposed levy, including the appropriateness of collection action, collection alternatives, spousal defenses, and under certain circumstances, the underlying tax liability. Taxpayers have the right to judicial review of Appeals' determinations provided they timely petition the Tax Court. CDP has appeared as one of the Most Litigated Issues every year since 2003. This year, we identified 116 cases in which taxpayers petitioned the Tax Court to redetermine IRS decisions in CDP hearings. Taxpayers prevailed in full in eight of these cases and in part in seven others with the IRS prevailing in all other cases.

4. Trade or Business Expenses Under IRC § 162 and Related Sections

IRC § 162 allows taxpayers to take deductions for ordinary and necessary trade or business expenses paid or incurred during a taxable year. Some of the most common issues litigated in cases involving trade or business expenses include whether the taxpayer could substantiate the expenses, whether expenses were business or personal, and whether the taxpayer could establish that he or she was carrying on a trade or business. This year we identified 115 cases involving a trade or business expense issue. The courts affirmed the IRS position in the majority (approximately 70 percent) of cases, while taxpayers prevailed about five percent of the time. The remaining cases resulted in split decisions.

5. Gross Income Under IRC § 61 and Related Sections

When preparing tax returns, taxpayers must calculate gross income for the taxable year to determine the tax they must pay. The gross income cases analyzed in this report include issues that most often fall into two categories: (1) what is included in gross income under IRC § 61, and (2) what can be excluded under other statutory provisions. We reviewed 92 cases, with issues that include:

• Damage awards;

• Discharge of indebtedness;

• Loan Proceeds; and

• Parsonage income.

6. Failure to File Penalty Under IRC § 6651(a)(1), Failure to Pay Penalty Under IRC § 6651(A)(2), and Estimated Tax Penalty Under IRC § 6654

The IRS must impose the failure to file penalty if a taxpayer fails to file a return on or before its due date (including extensions) unless the failure was due to reasonable cause and not willful neglect. In addition, the IRS must impose the failure to pay penalty if a taxpayer fails to pay the amount of tax due shown on a return unless the taxpayer can demonstrate the failure was due to reasonable cause and not willful neglect. The estimated tax penalty is also a mandatory penalty that applies when a taxpayer does not pay the required installment of estimated tax, unless the individual can meet one of the statutory exceptions. In any court proceeding, the IRS has the initial burden of providing sufficient evidence that it appropriately imposed either of these penalties.

This year we reviewed 74 cases involving the failure to file penalty, the failure to pay penalty, the estimated tax penalty, or combinations of the penalties. Seventeen cases involved the imposition of the estimated tax penalty in conjunction with the failure to file and failure to pay penalties, three cases involved only the estimated tax penalty, five cases involved only the failure to pay penalty, and 34 cases involved only the failure to file penalty. The IRS prevailed in the majority of the 74 cases, with the taxpayer only prevailing in full in three cases and five others resulting in split decisions.

7. Civil Actions to Enforce Federal Tax Liens or to Subject Property to Payment of Tax Under IRC § 7403

IRC § 7403 authorizes the United States to file a civil action in a United States District Court against a taxpayer who has refused or neglected to pay any tax to enforce a federal tax lien or to subject any of the delinquent taxpayer's property to the payment of the tax. We identified 48 opinions that involved civil actions to enforce federal tax liens under IRC § 7403. The courts affirmed the position of the United States in most of these cases, as taxpayers prevailed in only one case and one other resulted in a split decision.

8. Frivolous Issues Penalty Under IRC § 6673 and Related Appellate-Level Sanctions

The IRS requested imposition of the frivolous issues penalty and related penalties on the grounds that taxpayers maintained cases primarily for delay, raised frivolous arguments, unreasonably failed to pursue administrative remedies, or filed frivolous appeals. In addition, the Tax Court or a United States District Court raised IRC § 6673 sua sponte in a number of cases. During the 12-month review period, the federal courts decided at least 38 cases involving the IRC § 6673 "frivolous issues" penalty, and at least six cases involving an analogous penalty at the appellate level. Many of the taxpayers in these cases escaped liability for the penalty but were warned they could face sanctions for similar conduct in the future. Taxpayers prevailed in only four cases where the IRS requested imposition of the penalty.

9. Relief from Joint and Several Liability Under IRC § 6015

Married couples may elect to file their federal income tax returns jointly or separately; spouses filing joint returns are jointly and severally liable for any deficiency or tax due. Joint and several liability permits the IRS to collect the entire amount due from either taxpayer. IRC § 6015 provides three avenues for relief from joint and several liability.

10. Limitations on Assessment Under IRC § 6501

The general statute of limitations on assessment of tax, governed by IRC § 6501(a), is three years, extended to six years in certain circumstances. This statute of limitations does not apply in other circumstances, such as when a taxpayer files a false or fraudulent return, willfully attempts to defeat or evade tax, or fails to file a return altogether. In these cases, the IRS can assess tax or begin a collection proceeding in court at any time.

This is the first year that limitations on assessment has been analyzed as a Most Litigated Issue in the National Taxpayer Advocate's Annual Report to Congress. We reviewed 33 federal court opinions issued between June 1, 2011 and May 31, 2012 involving limitations on assessment. The IRS prevailed in full in 19 cases, the taxpayers prevailed in full in 11 cases, and three cases resulted in split decisions.

Volume 2: TAS Research and Related Studies

1. Factors Influencing Voluntary Compliance by Small Businesses: Preliminary Survey Results

The Taxpayer Advocate Service (TAS) surveyed sole proprietors (i.e., those filing Form 1040, U.S. Individual Income Tax Return, Schedule C) to better understand the factors that may affect their income tax reporting compliance. Identifying how to improve compliance among this segment is particularly important because sole proprietor income is generally not subject to information reporting, is difficult for the IRS to detect, and represents the largest portion of the tax gap -- tax that is not timely and voluntarily paid.

Because actual reporting compliance is difficult to measure, TAS used IRS tax compliance estimates to identify sole proprietors most likely to have high or low levels of reporting compliance. Unlike researchers outside the IRS, TAS was uniquely positioned to know these IRS estimates. TAS surveyed a stratified random national sample of each group (the "National Survey").

As discussed in prior reports, a large body of research discusses the potential effect of various factors on tax compliance, but this study is the first to link survey responses to IRS estimates of the respondent's actual tax compliance. Thus, the National Survey provides an unprecedented look at the differences between the views of the Schedule C filers that are the most and least compliant, at least according to IRS estimates.

Because some of the factors thought to influence compliance could be affected by local conditions and attitudes, TAS also sought to identify geographic communities where a disproportionate number of taxpayers were in the high- or low-compliance group. TAS surveyed taxpayers at random in certain communities (the "Community Survey") using the same survey questions.

TAS designed survey questions to reveal the effect, if any, on reporting compliance of various factors, such as deterrence, tax morale, compliance norms, trust in the government and the tax administration process, complexity and the convenience of complying, and the influence of preparers. TAS contracted with a consulting firm, Russell Research, to refine the questions and conduct the surveys by telephone.

TAS's preliminary analysis of the National Survey results revealed the following key findings:

• Taxpayers in the high-compliance group expressed more trust in government and the IRS.

• Those in the low-compliance group expressed less trust in preparers. Although most used a preparer, they were less likely to follow the preparer's advice.

• Taxpayers in the low-compliance group were more likely to participate in local organizations. They were also significantly more likely to report that other participants view the law and the IRS negatively.

• Both groups professed a "moral" obligation to report income accurately.

• Responses do not show that economic deterrence motivates compliance decisions. Those in the low-compliance group were less likely to agree that noncompliance goes unpunished.

• Most respondents agreed the tax rules are so complicated that it is very difficult to get a tax return exactly right. Those in the high-compliance group were somewhat more likely to agree with this statement, potentially suggesting they were more concerned about getting a return exactly right.

• There were more low-compliance communities than high compliance communities because taxpayers with high compliance were not concentrated in communities.

• Respondents from the low-compliance communities were suspicious of the tax system and its fairness, whereas those from the high-compliance communities viewed government positively.

• Respondents from the high-compliance communities were more likely to rely on preparers.

• Among business classifications, the biggest cluster in low-compliance communities was under "professional, scientific, or technical services"; in high-compliance communities, the "other" service industry (e.g., repair & maintenance, personal & laundry, and private household services).

• The low-compliance community respondents reported more participation in civic institutions than their high-compliance counterparts.

• The high-compliance community respondents were motivated by morals and deterrence.

• The effect on compliance of financial concerns was unclear.

• Those in the high- and low-compliance communities responded similarly to questions addressing tax complexity.

Specifically, the results of both surveys associate distrust of the national government and the IRS with the low-compliance groups and communities. For example, respondents from the low-compliance group were more likely to report that the government is too big and wastes tax dollars, that tax laws are unfair, and that the IRS is unfair (e.g., often believing the IRS is more concerned with collecting as much as possible instead of the correct amount, and indicating less satisfaction with IRS services).

The community survey selection process also revealed that those with low compliance levels clustered in geographic communities, while those with high compliance levels were more dispersed. Perhaps those with low levels of compliance are more likely to associate with each other.

In addition, those in the low-compliance group and communities were more likely to participate in local organizations and to report that other members of those organizations believe the law and the IRS are unfair. The closer association with local organizations by members of the low-compliance group and communities could have undermined their connection with the nation and the national tax system as a whole. The negative views they attributed to other members appeared to mirror their own views. In other words, they affiliated with others who reinforced noncompliance norms locally, feeling a closer connection here than nationally.

Those in the low-compliance group were somewhat more likely to use a preparer, who could have persuaded them to comply or facilitated noncompliance. However, they were also less likely to follow the preparer's advice than those in the high-compliance group, potentially weakening any positive influence that the preparer may have sought to exert.

These preliminary findings may suggest that traditional enforcement measures designed to deter could be ineffective, both because those likely to respond may be predisposed to comply and because the survey results did not suggest that asocial behavior (i.e., behavior that may be addressed by increasing deterrence) is prevalent. Rather, they may suggest that the government could improve reporting compliance by improving the perceived fairness and efficiency of the government, the tax law, and the IRS; and by simplifying the tax code, improving procedural protections, and minimizing the IRS's reliance on procedures that may seem unfair (e.g., excessive automation and lack of personal contact). As a practical matter, this might include tax simplification, an expansion of taxpayer protections and remedies, improved or expanded tax services, and taxpayer education.

To address the perception by members of local organizations that the tax law and the IRS are unfair, the IRS might retain a local presence and conduct outreach and education events, particularly in low-compliance communities. Such treatments might pay for themselves if they improve reporting compliance by those responsible for the largest portion of the tax gap and most resistant to other treatments.

2. Study of Tax Court Cases in Which the IRS Conceded the Taxpayer Was Entitled to the Earned Income Tax Credit (EITC)

When the IRS takes a "second look" at denied EITC claims, taxpayers often recover part or all of the credit. In the meantime, however, they are burdened by uncertainty, the cost of contesting the IRS's position, and refund delays. The IRS in turn is burdened by the cost of handling contested cases through increasingly higher paid employees and interest charges on delayed refunds. The Taxpayer Advocate Service (TAS) undertook a study to examine a random sample of cases in which the taxpayer petitioned the Tax Court for review of IRS disallowance of the EITC and the IRS conceded the EITC issue in full without trial. The objective of the study is to identify impediments that prevent the IRS from conceding cases before the taxpayer filed the Tax Court petition.

The study found that taxpayers often had to wait almost a year and a half to receive the EITC refunds to which they were entitled. The average EITC claimed was $3,479 and taxpayers' average adjusted gross income was $17,024. For more than half the taxpayers, the claimed EITC represented more than a quarter of their adjusted gross incomes. The government paid interest on delayed refunds in more than a third of the cases, amounting to about $200 per return.

In most cases, taxpayers try to resolve their cases by repeatedly calling the IRS before they file their Tax Court petitions. They also submit documentation, but usually after petitioning Tax Court. However, taxpayers who submit their documents after petitioning the Tax Court have usually spoken with an IRS examiner beforehand, five times on average. Evidently, taxpayers do not receive from examiners adequate explanations of what documents are needed, but they do receive adequate explanations once they have exited the examination phase of the case. Only infrequently do taxpayers not speak to the IRS or submit any documentation until after they file their Tax Court petitions.

Even when taxpayers submit documentation before petitioning Tax Court, the case may be unnecessarily prolonged. In about a fifth of the cases, taxpayers submit documentation before filing a Tax Court petition that the examiner rejects but an Appeals Officer or Chief Counsel attorney later accepts. The documentation is usually listed in the Internal Revenue Manual (IRM) as acceptable substantiation of the claim. Moreover, examiners sometimes deny EITC because they misapply the law -- this happened five percent of the time.

Appeals Officers and Chief Counsel attorneys do not often accept testimony as a substitute for documents, and the cases are rarely conceded due to the hazards of litigation. The findings suggest that taxpayers are willing to talk with the IRS before they petition the Tax Court and are able to provide acceptable supporting documentation, but do not obtain the information about how to substantiate their claims from their conversations with examiners. Moreover, it appears that Appeals Officers and Chief Counsel employees are more adept at evaluating the documents taxpayers provide or more willing to elicit additional documentation as necessary, or both.

3. Investigating the Impact of Liens on Taxpayer Liabilities and Payment Behavior

Last year, TAS Research published its lien study, "Estimating the Impact of Liens on Taxpayer Compliance Behavior and Income," in Volume 2 of the 2011 Annual Report to Congress. TAS Research completed this study in response to the National Taxpayer Advocate's concern that the IRS's use of the Notice of Federal Tax Lien (NFTL) may be harming taxpayers, especially those experiencing economic hardships, while not significantly enhancing the IRS's ability to collect liabilities.

The study examined the impact of lien filing on taxpayer compliance behavior and income. To conduct it, TAS Research analyzed a cohort of delinquent individual tax return filers (those who file Forms 1040, U.S. Individual Income Tax Return) in taxpayer delinquent account (TDA) status who incurred unpaid tax liabilities in 2002 and had no such liabilities at the beginning of 2002. We identified the subgroup of these taxpayers against whom IRS filed liens between 2002 and 2004, as well as a comparable subgroup against whom the IRS did not file liens.

In the current study, we analyze the impact of lien filing on the tax liabilities and revenue collected from these taxpayers and whether the installment agreement (IA) and offer in compromise (OIC) collection alternatives can improve these outcomes for both taxpayers and the IRS. We also update the 2011 propensity scoring model to incorporate some model enhancements.

The subgroups with IA and OIC collection alternatives had better outcomes for taxpayers and the IRS. Over 50 percent of IA taxpayers and over 70 percent of OIC taxpayers were out of debt to the IRS at the end of the study period. Further, the IRS collected about 45 percent more tax revenue from IA taxpayers than from those without IAs, and almost twice as much in percentage terms based on the amount owed at the time of lien filing or proxy lien filing.

While the IRS collected significantly less from taxpayers with approved OICs than from the other taxpayers included in this study, the accepted offer amount represents the full amount the IRS estimated it could collect from these taxpayers. Moreover, when we looked at CNC hardship taxpayers, the study group with the most unfavorable outcomes for both the taxpayer and the IRS, we found that they paid considerably more to the IRS if they were granted OICs and were generally out of debt at the end of the study period.

These study findings demonstrate the need for continued study of IRS lien filing criteria to maximize the benefits of lien filing to the IRS and minimize its adverse effects on taxpayers. Additionally, the findings underscore the benefits of active promotion and use of the IA and OIC collection alternatives and highlight the likely benefits to the IRS and taxpayers of increased use of OICs for CNC hardship taxpayers.

4. Options for Expanding the Remedies to Address Taxpayer Rights Violations

Most U.S. taxpayers willingly meet their obligation to tell the government about their filing status, family structure, earnings, investments, expenses, and losses in an honest effort to pay the correct amount of tax. This willingness places a heavy responsibility on the IRS to treat these taxpayers fairly -- in ways that comport with concepts of procedural justice. Failure to do so reduces our tax system to one based on compulsion alone, undermining our system of voluntary compliance. Moreover, survey results suggest that the perception that the IRS is fair promotes voluntary compliance. Thus, strengthening taxpayer rights could both make the tax system more fair and raise revenue.

While Congress has enacted various taxpayer rights, survey results suggest that less than 50 percent of taxpayers believe they have rights, and even fewer know what their rights are. Perhaps taxpayer rights are easy to forget because taxpayers feel they have no recourse when the IRS violates them. While remedies exist for some, they may be too costly or time consuming for many to pursue.

This study discusses ways to improve remedies available for the violation of taxpayer rights. One option adopted by the Republic of Chile is to expand the authority of the judiciary to quickly and efficiently remedy violations of taxpayer rights. Another option adopted by Australia and the United Kingdom is to empower the tax administrator -- or the National Taxpayer Advocate -- to make de minimis "apology" payments to those whose rights were violated, as previously recommended by the National Taxpayer Advocate.

5. Research Prospectus: Comparing the Impact of Revenue Officers and the Automated Collection System on Future Compliance

When a taxpayer does not pay his or her tax liability, the IRS may assign the case to a revenue officer (RO) in the Collection Field function (CFf), to a group of Automated Collection System (ACS) employees in centralized call sites, or to the "queue" to wait until collection resources become available to work the case. Thus, the IRS has to decide which cases to assign to ROs, ACS, or the "queue," and which to prioritize.

Direct comparisons between ACS employees and ROs present challenges. The IRS-wide measures -- Collection Coverage and Collection Efficiency -- assume that ACS is more effective than ROs because ACS generally works "fresh" cases, and closes them using fewer resources and lower-graded employees. These measures create an incentive for IRS executives to divert resources from the CFf to ACS, even though ROs could bring in more dollars by protecting revenue (e.g., preventing future delinquencies) and increasing voluntary compliance.

The importance of voluntary compliance cannot be overstated. Taxpayers voluntarily and timely pay about 34 times as much as the IRS collects through enforcement and voluntary late payments. Moreover, about 78 percent of all late payments come in voluntarily as the result of a notice or an installment agreement, meaning only about 22 percent of all late payments -- less than one percent of all dollars collected -- come in through less voluntary means of enforcement. For example, ROs work priority Federal Tax Deposit (FTD) Alerts -- cases where employment tax deposits have inexplicably dropped. One recent IRS study found that ROs working these cases improved the likelihood that the taxpayer would become compliant by 12 percentage points (from 28 percent to 40 percent); increased future tax deposits by an average of $1,832 per case over a 12-month period; and reduced the average penalties assessed against the taxpayer, as compared to priority Alerts that were not worked. It also concluded that every dollar spent on ROs working FTD Alerts brought in $69 by preventing future FTD non-compliance.

ACS employees do not undertake similar proactive activities. Thus, the IRS needs to know the relative impact of ACS and ROs on voluntary compliance for different types of cases. Such information could help to improve both IRS "decision analytics" and "business rules" used to assign cases, as well as collection performance measures. Without it, the IRS's collection function is operating based on unproven assumptions, assigning cases and allocating resources inefficiently, and potentially undermining long-term voluntary compliance.

Specifically, TAS Research plans to identify similar cases that were assigned to an RO, the ACS, or the queue, and then compare the collection results. Not only will this analysis compare direct collections, but also the revenue protected, penalties assessed, and future payment compliance by each group of taxpayers.

6. Research Prospectus: When Do Accuracy-Related Penalties Improve Future Reporting Compliance by Schedule C Filers?

The National Taxpayer Advocate and other stakeholders have long urged the IRS to research the effect of penalties on voluntary compliance. Given the large number of penalties, the likelihood that each one may affect different taxpayer groups in different ways, and IRS data limitations, TAS will focus on the taxpayers and penalties that could have the greatest impact on the tax gap: accuracy-related penalties applied to Schedule C filers.

One objective of this study is to determine if an accuracy-related penalty assessment improves reporting compliance by the taxpayer in the future. In light of the IRS's increasing use of automated processes to assess penalties before communicating with the taxpayer, this study will also try to measure the effect of "default" penalty assessments, those appealed by the taxpayer (i.e., through an audit reconsideration or the IRS Appeals function), and those that the IRS ultimately abates.

²See Most Serious Problem: The IRS is Significantly Underfunded to Serve Taxpayers and Collect Tax, infra.

³See Most Serious Problem: The IRS Telephone and Correspondence Services Have Deteriorated Over the Last Decade and Must Improve to Meet Taxpayer Needs, infra.

⁴See Most Serious Problem: The Automated Collection System Must Emphasize Taxpayer Service Initiatives to Resolve Collection Workload More Effectively, infra.

⁵See Most Serious Problem: The IRS Has Failed to Provide Effective and Timely Assistance to Victims of Identity Theft, infra.

⁶See Introduction: The IRS "Fresh Start" Initiative Has Produced Significant Improvements in Some Collection Policies; However, Significantly More Emphasis on Service Delivery Is Necessary to Realize the Full Benefits of These Important Changes, infra; Most Serious Problem: The Diminishing Role of the Revenue Officer Has Been Detrimental To The Overall Effectiveness Of IRS Collection Operations, infra; Most Serious Problem: The Automated Collection System Must Emphasize Taxpayer Service Initiatives to Resolve Collection Workload More Effectively, infra; Most Serious Problem: Although the IRS "Fresh Start" Initiative Has Reduced The Number Of Lien Notices Filed, the IRS Has Failed To Determine Whether Its Lien Policies Are Clearly Supported by Either Increased Taxpayer Compliance or Revenue, infra; Most Serious Problem: Early Intervention, Offers in Compromise, and Proactive Outreach Can Help Victims of Failed Payroll Service Providers and Increase Employment Tax Compliance, infra; Study: Study of Tax Court Cases In Which the IRS Conceded the Taxpayer Was Entitled to the Earned Income Tax Credit (EITC), infra; and Study: Investigating the Impact of Liens on Taxpayer Liabilities and Payment Behavior, infra.

⁷See Most Serious Problem: The IRS Has Failed to Provide Effective and Timely Assistance to Victims of Identity Theft, infra; Most Serious Problem: The IRS Harms Victims of Return Preparer Misconduct by Failing to Resolve Their Accounts Fully, infra.

⁸See Most Serious Problem: The IRS's Offshore Voluntary Disclosure Programs Discourage Voluntary Compliance by Those Who Inadvertently Failed to Report Foreign Accounts, infra.

⁹See Introduction: The IRS "Fresh Start" Initiative Has Produced Significant Improvements in Some Collection Policies; However, Significantly More Emphasis on Service Delivery Is Necessary to Realize the Full Benefits of These Important Changes, infra; Most Serious Problem: The Diminishing Role of the Revenue Officer Has Been Detrimental To The Overall Effectiveness Of IRS Collection Operations, infra; Most Serious Problem: Early Intervention, Offers in Compromise, and Proactive Outreach Can Help Victims of Failed Payroll Service Providers and Increase Employment Tax Compliance, infra.

¹⁰See Most Serious Problem: The IRS Is Substantially Reducing Both the Amount and Scope of Its Direct Education and Outreach to Taxpayers and Does Not Measure the Effectiveness of Its Remaining Outreach Activities, Thereby Risking Increased Noncompliance, infra.

¹¹See Most Serious Problem: The IRS Is Significantly Underfunded to Serve Taxpayers and Collect Tax, infra; see also National Taxpayer Advocate 2006 Annual Report to Congress 442-457 (Legislative Recommendation: Revising Congressional Budget Procedures to Improve IRS Funding Decisions).