NTA Olson Testifies Today on the Filing Season and Some Personal News From Me

Today at 10 AM EST  National Taxpayer Advocate Nina Olson will be testifying before the House Ways and Means Oversight Subcommittee on the filing season. For those interested, the testimony will be live-streamed; the landing page for the hearing has a link that you can use.

This will be the last filing season that will feature Nina Olson testifying in her capacity as National Taxpayer Advocate. As many of our readers have likely heard, she announced her retirement, effective July 31, 2019. Nina has received countless accolades over the years, including the ABA Tax Section’s Distinguished Service Award and the Spragens Pro Bono Award, and has won recognition from many scholars both inside and outside tax who have looked to her work as a model for a successful ombuds office.

Nina has had a huge impact on my career. In 1997, after attending an ABA Tax Section panel on the importance of clinics that featured her and the late great Janet Spragens, I decided to explore the possibility of directing a tax clinic. I can draw a direct line from that panel presentation to me directing a low-income taxpayer clinic for over ten years. Her writing on issues over the years has also been the single greatest influence on how I think about tax administration.

Underlying her work has been a fierce commitment to give voice to taxpayers, whom Nina has always emphasized are human beings deserving dignity.

It can be easy sometimes to lose sight of that basic insight in the maze of procedural rules and the challenges the IRS faces in administering a complex tax system at a time when there have been (and continue to be) great pressures on the agency. Yet, that theme of recognizing the humanity of taxpayers is a constant chord through the eighteen annual reports she submitted, dozens of appearances before Congress, and in her writings and speeches.  For example, consider her 2013 Woodworth Memorial Lecture:

At their core, taxpayer rights are human rights. They are about our inherent humanity. Particularly when an organization is large, as is the IRS, and has power, as does the IRS, these rights serve as a bulwark against the organization’s tendency to arrange things in ways that are convenient for itself, but actually dehumanize us. Taxpayer rights, then, help ensure that taxpayers are treated in a humane manner.

One essential part of Nina’s legacy will be the constant reminder that taxpayers are human beings, with failings, needs, and most of all an inherent right to be treated with respect.

One final point. As of next week as part of my sabbatical from Villanova I will be working with TAS as a Professor in Residence at the IRS in DC, working on a variety of projects including those involving taxpayer rights and the EITC.  I know in this position I will continue to learn a great deal from Nina, just as I did when I attended that ABA panel over twenty years ago, and just as I will in the future when I reflect back on the lessons of her tenure.

Agenda Announced for the 4th International Conference on Taxpayer Rights “Taxpayer Rights in the Digital Age: Implications for Transparency, Certainty, and Privacy”

The National Taxpayer Advocate asked us to announce that registration is now open for the 4th International Conference on Taxpayer Rights at the University of Minnesota Law School on May 23-24, 2019. This groundbreaking annual conference brings together government officials, scholars, and practitioners (including Keith and Les who are presenting a paper). It is an excellent opportunity to hear about efforts to protect and improve taxpayer rights around the world. Readers interested in taxpayer rights will find a rich archive of papersvideos, and other materials online from the previous International Conferences on Taxpayer Rights. If you are interested in attending the 4th Annual conference, note that past conferences have filled up. Registration is available at www.TaxpayerRightsConference.com 

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The registration flyer summarizes the agenda: 

The 2019 conference will explore the role of taxpayer rights in the digital age, and the implications of the expanding digital environment for transparency, certainty, and privacy in tax administration. Panel discussions will focus on the following and more:  

  • Taxpayer bills of rights around the world, and the foundation of taxpayer rights in human rights  
  • Taxpayer rights and establishing global common standards  
  • Big data, privacy and tax administration  
  • Impact of administrative guidance on taxpayers  
  • The role of “whistleblowers” in tax administration 

The full agenda may be viewed here (pdf version here). 

The National Taxpayer Advocate, in her blog post announcing the 4th Conference, explained: 

Since November 2015, I’ve convened three international conferences with the purpose of bringing together government officials, scholars, and practitioners from around the world, and providing a forum for a multi-disciplinary discussion of the operation of taxpayer rights in theory and practice.  … 

Taxpayer rights serve as the foundation for effective tax administration. Whether expressed through a charter or taxpayer bill of rights, or a declaration of human rights, governments have long recognized that providing taxpayers with assurances of fair treatment and respect, and protections against government overreaching, further voluntary compliance. Please don’t miss your chance to be a part of this global taxpayer rights discussion. 

We at PT wholeheartedly agree.  

 

Is It Time To Reconsider When IRS Guidance Is Subject to Court Review?

I have been working on an essay that looks at the possible way that Congress could breathe more life into the 2015 codification of the taxpayer bill of rights. My essay Giving Taxpayer Rights a Seat at the Table, which is in draft form and up on SSRN, makes a relatively simple claim: before IRS issues guidance it should be statutorily required to consider whether in its view the guidance is consistent with the taxpayer rights that the IRS adopted in 2014 and that Congress codified in 2015. In making my claim, I acknowledge the limits of the current statutory taxpayer rights framework, which arguably provides no direct way to hold the IRS accountable for actions that violate taxpayer rights unless the right relates to a separate specific cause of action for its violation.*

In researching my article on taxpayer rights, I came back to a stubborn problem with the IRS guidance process and for taxpayers and third parties who believe that the IRS guidance violates a procedural requirement under the Administrative Procedure Act:  there are at times insurmountable obstacles to challenging IRS guidance for procedural adequacy. That problem has led me to think about some interesting and important articles that have addressed this issue in the past few years.

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In the tax world, unlike other areas of federal law, statutes like the Anti-Injunction Act and the Declaratory Judgment Act, have proven formidable barriers to test the adequacy of IRS fidelity to for example the notice and comment requirements under the APA until well after the rule has been in place. In other words, a taxpayer or third party often has to wait for a refund or deficiency case (i.e., an enforcement proceeding) to argue that there was a procedural infirmity that would result in the court’s possibly invalidating the regulation or possibly subregulatory guidance.

This has contributed to some calling for a careful look at the Anti-Injunction Act, with Professor Kristin Hickman and her co-author Gerald Kerska arguing in Restoring the Lost Anti-Injunction Act in the Virginia Law Review (reviewed here by Sonya Watson) that history supports a reading of the AIA that would generally allow pre-enforcement challenges to IRS guidance. The article takes as a starting point that IRS has not always been faithful to APA requirements and not every possible challenge neatly fits into an enforcement proceeding. On top of that, as Professor Hickman has highlighted in prior work as well, it is questionable that there would be an adequate remedy in certain instances even if a court were to find a procedural infirmity in the context of a challenge that arises in a deficiency or refund case.

Despite my sympathy with a reading of current law that would allow for greater pre-enforcement challenges, there are strong legal and policy arguments against courts on their own extending the circumstances when there will be challenges to the procedural adequacy of IRS guidance. For example, expanding the opportunity for procedural challenges will naturally soak precious agency resources.  As Professor Daniel Hemel, in The Living Anti-Injunction Act in the Virginia Law Review online edition argues in an essay responding to Hickman and Kerska’s article, it would be best institutionally for Congress rather than the courts to open the door to pre-enforcement challenges.

Professor Stephanie Hunter McMahon in a 2017 Washington Law Review article Pre-Enforcement Litigation Needed for Taxing Procedures also takes up the subject of challenging IRS guidance. In her article, she sizes up the current landscape:

While Congress only permits procedural challenges late in the tax collection process, this offers little to most taxpayers. The delay in litigating procedural complaints reduces what is challenged and affects taxpayer behavior throughout the period from its promulgation until someone, eventually, challenges the procedures. In the process, delayed litigation requires that taxpayers plan their affairs under the spectre of guidance that might not survive a procedural challenge. Moreover, in deciding whether to follow the tax guidance, taxpayers must not only assess its substance but also the procedures used to create it under procedural requirements that are not consistently interpreted by the courts.

Professor Hunter McMahon drills deeper on the disincentives associated with challenging tax guidance in enforcement proceedings:

Disincentives are increased because, unlike in other areas of law that permit pre-enforcement litigation, people are not suing in post- enforcement tax litigation simply to perfect the agency’s procedures. Instead, they are suing over their own tax obligations. The personal nature of the result and that the costs are already imposed likely changes the way people perceive the litigation. With pre-enforcement litigation, a judge remanding a case to the agency to correct the procedures would be a victory. In a tax refund or deficiency case, remand is insufficient to accomplish the goal of reducing the taxes owed. If courts are likely to remand procedural matters without vacating the rule, the taxpayer has little incentive to challenge the rules because the personal outcome remains the same.

These issues are even more pernicious when the rules in question relate to lower income or marginalized taxpayers, who are less likely to be able to get to court and as Professor Hunter McMahon aptly points out may not have the means or resources to influence the guidance process in the first instance. (That latter point is indirectly highlighted by the draft article “Beyond Notice-and-Comment: The Making of the § 199A Regulations” by Shu-Yi Oei and Leigh Osofsky that Keith discussed recently).

Professor Hunter McMahon proposes a legislative fix. That fix would be to allow an amendment to the Anti-Injunction and Declaratory Judgment Act to allow for a limited time period challenges to the procedural adequacy of the guidance:

[T]his proposal would permit pre- enforcement litigation of procedural requirements and a judicial evaluation of whether the process used, including the clarity of the statement and the comment period, suffices for APA purposes.

As Professor Hunter McMahon notes, the benefit of allowing a limited time to challenge to procedural adequacy is that it could focus attention on procedural issues early in the life of the guidance, which would allow for consistency in application of the substantive rules. A second part of Professor Hunter McMahon’s legislative fix is for Congress to delineate more specifically which forms of guidance are required to go through notice and comment—she focuses on guidance that is intended to change taxpayer behavior rather than define prior action as the candidate for a default requirement to go through the notice and comment process.

Conclusion

I believe that Professor Hunter McMahon’s approach merits serious consideration. I am reflecting further on my proposal about ways to give the taxpayer rights provisions more teeth -my proposal relies heavily on the Taxpayer Advocate Service and enhancing its institutional role in the guidance process, including giving the National Taxpayer Advocate specific authority to comment on regulations (something that the NTA herself as recommended in both Purple Books that accompanied the last two annual reports). As Congress signals a further willingness to take on IRS reform issues, I believe that it should directly address the current reach of the Anti-Injunction Act and the issue of when and to what extent taxpayers and third parties should be able to test the adequacy of IRS guidance conforming to APA requirements.

As part of this approach I am intrigued by the possibility of tying in the IRS’s fidelity to taxpayer rights principles in the rulemaking process. I would be grateful for comments on my draft article or reactions to any of the issues raised in this post.

*An example of how a taxpayer right relates to a specific cause of action is taxpayer right number 7, the right to privacy, and Section 7213, which authorizes a suit for unauthorized disclosure of a taxpayer’s any tax return or return information. An example of a taxpayer right that does not so relate to a cause of action is right number 5, the right to appeal an IRS decision in an independent forum, which as we discussed last year in connection with the Facebook case does not seem to carry with it a direct way to challenge IRS action that arguably conflicts with that right.

 

 

NTA Releases 2019 Objectives Report Highlights Challenges With Private Debt Collection Program

Last week the National Taxpayer Advocate released her FY 2019 Objectives Report to Congress. This is the second report the NTA releases annually; the first is issued in January. In Volume 1 of the Objectives Report the NTA highlights key aspects of the past filing season, and in Volume 2 she presents the IRS responses to prior recommendations regarding most serious problems she identified in the end of year annual report.

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Volume 1 presents lots of statistics and data on how IRS performed on some of its key tasks. This year Volume 1 also details 12 priority issues the NTA will be focusing on in the upcoming year, a fascinating window into TAS research projects (including a look at the impact of behavioral messaging and educational letters on tax compliance), and five appendices providing history on TAS and some internal measures of its performance.

As usual, the report has lots to offer, but here in the words of TAS is the snapshot summary of the review of the past filing season:

During the 2018 filing season, the IRS processed most returns successfully, but taxpayers needing help from the IRS faced a more challenging experience. The IRS could not answer the majority of the calls it received, especially on its compliance telephone lines. It served fewer taxpayers who sought help at Taxpayer Assistance Centers (TACs) and continued to answer only a limited scope of tax law questions.  Its identity theft and pre-refund wage verification filters and certain processing glitches significantly delayed refunds for hundreds of thousands of taxpayers who filed legitimate returns, harming some taxpayers and creating additional work for the IRS.

The select areas of focus in the report include discussions on the following:

  • Private debt collection (highlighting the program’s challenges, including its net loss and taxpayer burdens; more on this in Volume 2 of the report);
  • The need for guidance following the 2017 tax legislation;
  • The false detection rate associated with IRS fraud and identity theft detection measures;
  • The due process rights jeopardized by the newly implemented passport denial and revocation program;
  • The need for IRS to emphasize what the NTA calls an omnichannel approach to taxpayer service (essentially an understanding that many taxpayers are ill-equipped to use online self-help tools and may need a more personal touch); and
  • A plea for a well-funded and implemented IRS IT function.

Volume 2: Tax Administration Transparency and Private Debt Collection

I am in the middle of reading Volume 2 of the report. In this volume, IRS offers written responses to past NTA recommendations and NTA replies to those responses. This to me is one of the most interesting and important parts of the report. It has its origins in the statutory mandate of the NTA, which is required to submit reports directly to Congress “without any prior review or comment from the Commissioner, the Secretary of the Treasury, the Oversight Board, any other officer or employee of the Department of the Treasury, or the Office of Management and Budget.”

The statute also provides that the Commissioner “establish procedures requiring a formal response to all recommendations submitted to the Commissioner by the National Taxpayer Advocate within three months after submission to the Commissioner.”

The IRS written responses in the Objectives Report are part of the procedures for the Commissioner’s response to the Annual Report.  This inside view of the back and forth between TAS and IRS on some of the key tax administration issues of the day is a fascinating window into the challenges associated with administering differing parts of the tax law.

For example, the first part of Volume 2 includes very different perspectives that TAS and IRS have on the private debt collection program (a topic Keith has discussed). The report includes copies of the NTA Taxpayer Advocate Directive ordering IRS not to assign to private debt collectors taxpayers with incomes under 250% of federal poverty guidelines and, in response, an IRS appeal of the TAD, all almost in real time with the latest IRS correspondence on the issue issued in late June. In addition, Volume 2 reveals that IRS is not allowing TAS employees to monitor phone interactions between private debt collection agency employees and taxpayers, leading the NTA to conclude that she is prevented from doing her job of ensuring that the IRS treats taxpayers fairly and respects their rights.

Going deeper on the private debt collection issue, Volume 2 details how IRS has no systemic method of screening out vulnerable taxpayers for assignment to debt collectors (including those getting SSDI and SSI), and how those taxpayers are essentially on their own to make the case with the private debt collectors that they should not be assigned to the debt collection agency or enter into an installment agreement.

More on this from the NTA:

[W]here there are methods to systemically identify recipients of SSDI or SSI benefits, it is profoundly negligent on the part of the IRS to allow the determination of whether a case is returned to the IRS to turn on whether a taxpayer, in talking with a PCA [Private Collection Agency] employee, happens to mention that he or she receives SSDI or SSI benefits. SSDI and SSI recipients are among the most vulnerable taxpayers the IRS deals with. They may be fearful that challenging a PCA may result in levies on or loss of their benefits, and thus agree to amounts they cannot afford to pay. This, in fact, is what the data discussed in the 2017 Annual Report to Congress show. Moreover, it is an abdication of the IRS’s oversight responsibilities to rely on PCAs to return these taxpayers’ debts, which would require the PCA to forego a potential commission on a payment. The IRS can and should systemically prevent the debts of SSDI taxpayers from being assigned to PCAs and should work with SSA to identify the debts of taxpayers who receive SSI.

This issue typifies the trade offs that tax administrators make when dealing with the most vulnerable taxpayers and illustrates the challenges of giving life to taxpayer rights. The statute authorizing transfer of cases to debt collectors allows IRS to assign cases with “potentially collectible inventory.” This requires a deeper consideration of the meaning of “potentially collectible.” In a post from 2017 Keith recounted his meeting with the Commissioner that covered some of this ground in this report, including the importance of programming to effectuate policy decisions not to assign certain cases to debt collectors. The Objectives Report makes a compelling case for a fuller consideration of systemically excluding from the category of “potentially collectible” all taxpayers who are likely vulnerable and who are unlikely to either fully pay or be able to comply with the terms of a payment plan.

The IRS response on this issue states that to build into its IT capability a way to systemically screen out vulnerable taxpayers (like SSDI recipients) would require resources and it is not required to do so by law.

It is not easy to quantify the costs of unfair collection procedures (though no doubt those costs are very real and tangible for those affected) whereas there are scarce dollars at issue in building out an IT system that would limit the assignment of vulnerable taxpayers to private debt collectors. Forcing the IRS to justify its approach and explain is a key way to expose trade offs when an agency, as IRS does here, declines to apply the resources as the NTA suggests. As the report reveals, the risks to taxpayers are still present. The real value of this part of the report is that absent a process such as this it is almost certain that the taxpayers whose rights are impacted would be mostly invisible. Visibility is a necessary but not sufficient means of protecting taxpayers. Absent a change in policy by the IRS itself, it will be left to Congress and perhaps the courts to ensure that the rights the NTA flags are protected.

Data from ABA Tax Section Meeting

February 8-10 the Tax Section held its mid-year meeting in San Diego. Here are a few items of interest from the meeting concerning the Tax Court, the Department of Justice Tax Division, the revocation of passports and the National Taxpayer Advocate’s annual report.

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Tax Court

The Court had about 22,000 cases pending at the end of October. It continues to close cases faster than it receives them. There are three openings at the moment to fill the empty seats on the 19 judge roster of the court and there are three nominations pending. I got the impression from a separate conversation that perhaps the nominations would move forward in late March based on the current schedule in the Senate. Tax Court nominations go through the Senate Finance Committee rather than through the Judiciary Committee. In addition to the three current openings, Chief Judge Marvel reported that she anticipates the possibility of three additional openings on the Court this year because one judge will turn 70 – the mandatory age for Tax Court judges and the point at which a Tax Court judge turns into a senior judge or retires altogether – and two judges come to the end of their 15-year terms. Chief Judge Marvel observed that it is possible that the makeup of the Court will change by almost 1/3, depending on how the administration deals with the judges whose terms are expiring, and that would be an extraordinary amount of turnover for the Court. (Some administrations have almost automatically reappointed Tax Court judges as their terms expired and some have almost automatically replaced judges as their terms expired. We will soon find out how the current administration approaches the matter.)

Department of Justice

The Tax Division of the Department of Justice was ably led by Dave Hubbert for many months while it was without a political appointee. Dave continues to serve as the deputy in charge of Civil Matters as he did, since 2012, before he was acting as the head of the Tax Division. On December 17, 2017, Richard Zuckerman joined the Tax Division as the Deputy Assistant Attorney General for Criminal Matters and became the Division’s Principal Deputy in charge of the Division. Read more about him here. The Tax Division has three priorities for the coming year: 1) offshore compliance; 2) employment taxes; and 3) return preparers. These priorities are not especially new but continue as areas of emphasis in enforcing the tax laws.

Passports

I attended a panel discussion devoted to the enforcement of the provision which will revoke or deny a passport for individuals with seriously delinquent tax debt. The principal panelist was Drita Tonuzi, the Deputy Chief Counsel for Operations. Drita has held this position for almost one year. So, the panel could hardly have been more authoritative. We have discussed this issue before here and here. The IRS will certify taxpayers to the State Department if the taxpayer owes more than $50,000 and their CDP rights are exhausted, except for taxpayers who fall into certain statutory and administrative exceptions.

The statutory exceptions listed in IRC 7435(b)(2) include debts being paid in an installment agreement (IA) or offer in compromise (OIC) on which the taxpayer is up to date, debts being contested in a Collection Due Process (CDP) hearing and in an innocent spouse request. The manual also notes that the IRS will not refer taxpayers currently serving in a combat zone because of the suspension of action against these individuals in IRC 7508(a). The IRS has created a list of eight administrative exceptions in IRM 5.1.12.27.4 which it published on December 12, 2017. These exceptions are cases in currently not collectible status; cases involving identity theft; cases in which a bankruptcy case is pending; debt of a deceased taxpayer (the IRM specifically limits this exception to the deceased taxpayer himself or herself and makes me wonder how many of these taxpayers have concerns about their passports but I will refrain from making further remarks on this exception); pending OICs and IAs; pending adjustments that will fully pay the liability and taxpayers residing in a disaster zone.

The panel indicated that the letters would be going to the State Department “soon,” which may mean before the end of February.

When the IRS sends a certification to the State Department that a taxpayer is seriously delinquent, it simultaneously will send a letter to the taxpayer. This letter, which will be sent by regular (not certified) mail to the taxpayer’s last known address will give the taxpayer the opportunity to file a petition in Tax Court to contest the decision. The taxpayer has the right to file a petition in Tax Court or in the District Court. The panel stated that the time to go to court is open-ended. It also speculated that most taxpayers will go to District Court because of the desire for speed that would not be afforded under normal Tax Court procedures. The panel stressed that the IRS is just one part of this process and the State Department is the place where the denial or the revocation of the passport occurs. For IRS procedures, look at IRM 5.1.12.27.

National Taxpayer Advocate’s Report

I was extremely glad that the government shutdown that occurred during the Tax Section meeting lasted only a few hours. Had the shutdown continued, I was slated to attempt to fill in for the National Taxpayer Advocate on a couple of panels and that would not have been good for those attending. Since the shutdown ended, the National Taxpayer Advocate was able to deliver the presentation about her report. This will be a glancing blow on the topics covered and I hope to have some individual posts regarding some of the topics needing a longer discussion.

One of her findings this year concerned the reports we have become accustomed to hearing that the IRS audits less than 1% of the returns filed. In her annual report and her discussion, she debunked this myth by pointing out the actual number of returns on which the IRS makes adjustments approaches 7%. She also pointed out that 76% of audits are done by correspondence and that we should be focusing on not just the number of contacts made by the IRS but the nature of the contacts. The contacts are an opportunity for the IRS to educate and to bring taxpayers into long-term compliance but contacts by correspondence have much less of a chance of accomplishing this purpose.

The IRS has decided that it has authority to do retroactive math error adjustments. In 2017, there were a number of filers who used ITINs without updating them as instructed. Chief Counsel has issued an opinion that nothing prohibits retroactive math error adjustments. The IRS intends to send such notices to the individuals who used invalid ITINs in 2017 and then just summarily assess liabilities against the individuals who received refunds.

The 2017 filing season was the first one in which the IRS held up refunds in which the taxpayer sought refundable credits until February 15th. The purpose of the delay in issuing the refunds until that date was to give the IRS time to match third-party data against the returns to cull out bad refund claims. By February 15th, the IRS still did not have the data it needed in order to perform the match with respect to many taxpayers. If the employer or other third party submitted the information returns by paper, the IRS did not have time to transfer that information into its digital file in order to perform the match. The NTA recommends reducing the number of employees, from 50 to 5, an employer can have and still use paper.

The NTA also talked about the new “Purple Book” that was issued as a part of her report. The color was chosen as a blend of red and blue to signify the bi-partisan nature of the legislative suggestions. The book puts together the suggestions from a compilation of suggestions made during the period of the NTA’s service in that position and it provides the suggestions to Congress in a ready to use format. The NTA credits Ken Drexler, who heads up the legislative liaison work in her office, for the idea but noted that its inclusion caused a lot of additional work for the staff. Two of the provisions in the book were passed by Congress during the Tax Section meeting and I will talk about those provisions in a separate post.

 

What is a Taxpayer Assistance Order?

A recent Program Manager Technical Assistance (PMTA) opinion (CC:NTA-POSTN-132247-16) issued by the attorney to the National Taxpayer Advocate provides insight on taxpayer assistance orders (TAOs).  Only select employees of the Taxpayer Advocate Service (TAS) can issue TAOs.  Taxpayer representatives benefit from understanding TAOs because having the authorized TAS employee issue a TAO on behalf of your client can go a long way toward resolving a case in which the IRS has taken an incorrect or unreasonable position that you cannot otherwise convince it to reverse.  The PMTA does not describe how to obtain a TAO but instead describes the process within TAS and the operating division after the issuance of a TAO.  This post will discuss the process of obtaining a TAO and then the path that the TAO might follow.

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Around the country there are Local Taxpayer Advocates (LTAs) in every state.  Larger states have more than one and every service center has one.  There are a total of 84 LTAs.  If you do not know the LTA for your area, you might want to get to know them because this person will assist you when your client has a serious hardship.  Better to know your LTA and develop a relationship of trust before you face the pressure of seeking their assistance with a time sensitive hardship matter.  The LTAs constantly have outreach efforts so that representatives in the area of their geographical coverage do know who they are and what they can accomplish.

If your taxpayer experiences significant hardship because of IRS action, and this does not just include collection action, although that is traditionally a source of hardship, and if your client’s case meets TAS case criteria for acceptance, then the LTA can initiate a TAO ordering the appropriate IRS operating unit to take action or to stop action in order to alleviate the hardship.  The power of the LTA to do this derives from IRC 7811 and delegation from the National Taxpayer Advocate.  The delegation does not go below the LTA so case advocates working the case with the taxpayer or the representative do not have the authority to issue a TAO but must convince the head of their office, the LTA, to do so.

The LTA will only issue the TAO if convinced that the operating division has acted incorrectly based on the Code or, more likely, the Internal Revenue Manual.  The more research you provide to the TAS caseworker and the LTA showing that the IRS has acted inappropriately, the more likely the LTA will consider a TAO.  The LTA does not want to issue a TAO and have the operating division point out the basis for the TAO is incorrect since the LTA will lose credibility.    Some LTAs issue TAOs regularly and some almost never.  In addition to getting to know your LTA, you want to get a sense of whether your LTA has demonstrated a willingness to issue TAOs and under what circumstances.

The PMTA describes the process of what happens after TAS issues the TAO.  Before issuing the TAO, the LTA will call the impacted operating division.  Let’s say that your small business client was the victim of a fraudulent payroll services provider similar to the unfortunate McDonald’s franchisee I blogged about last year.  Your client now owes $40,000 in payroll taxes to the IRS it paid to the payroll services provider but which was stolen.  Your client’s business has more than $40,000 in equity and income resources so that it does not qualify for an offer in compromise on doubt as to collectability; however, if it pays over another $40,000 the payment will severely cripple the company.  The company makes an effective tax administration offer in compromise of $5,000 which the special OIC unit for ETA offers rejects.  You bring the case to the LTA and point out the IRM provisions that suggest the IRS will consider an ETA under these circumstances.

The LTA can issue a TAO to the OIC unit that considers ETA offers asking that it reconsider the OIC taking into account the IRM provisions.  First, the LTA will call.  After being rebuffed, the LTA will write up the TAO citing to the IRM provisions and detailing the hardship created by the embezzlement.  If the manager of the OIC unit refuses to reconsider the OIC, the normal path is for the LTA to forward the TAO to his or her manager, the Deputy Executive Director Case Advocacy (DEDCA).  The refusal process may involve phone discussions between the LTA and the OIC manager after receipt of the TAO or it may simply involve a written response denying (appealing) the requested action in the TAO.  The LTA cannot accept the OIC but can only use the TAO process to direct and persuade the appropriate function within the IRS to take the action that the LTA thinks would appropriately follow the rules and regulations governing the IRS.  When the LTA receives the appeal of the TAO from the operating unit, the LTA can modify or rescind the TAO, or sustain the appeal.  If the LTA disagrees with the response, the LTA forwards the appealed TAO to the DEDCA for review.  The PMTA describes the process in detail.

If the TAO moves from the LTA to the DEDCA, the DEDCA reviews the TAO to determine its correctness.  This process might involve a fair amount of back and forth between the LTA and the DEDCA.  Just as the LTA must be persuaded that issuing the TAO will not create an embarrassment, so must the LTA now persuade the DEDCA.  The more persuasive the LTA can present the facts and the law (or the IRM) the more likely that the LTA will convince the DEDCA that the TAO should be sustained.  If the DEDCA agrees with the TAO, the DEDCA will raise it to the level of the territory manager.  The manager of the offer unit knows that this is a possibility from the start and knows that if the OIC unit has followed the wrong process or made a boneheaded decision, this process will shine a light on that fact.  Conversely, if the head of the OIC unit feels strongly that they have correctly interpreted the applicable rules and evaluated the circumstances surrounding the OIC, the manager will deny the TAO and stand ready to face the scrutiny from the territory manager.  The elevation of the TAO will cause one or more conversations between the territory manager and the OIC manager about the case which may result in acceptance of the TAO or rejection and the rejection may, or may not, include new facts not previously mentioned.

If the territory manager rejects the TAO, then the DEDCA must decide whether to send it to the NTA.  If the TAO goes forward to the NTA, she raises it to the Commissioner or Deputy Commissioner.  The process provides an interesting dance of competing bureaucratic emotions.  The operating divisions hate being told what to do and that they have done something wrong.  Many can be quite smug about the correctness with which they handle the matters coming through their office but at the same time they also hate shining the light on their practices to their boss and their boss’ boss.  The practice can have good effect of fixing bad practices, it can expose TAS as too overbearing if it pushes a TAO not properly grounded and it can create animosity between TAS and the operating division rather than a spirit of cooperation to reach the right result.  Sometimes, TAS becomes more the “enemy” than the taxpayer.

The PMTA focuses on what to do when new facts come to light during the process of the TAO.  Because the TAO causes the operating division to carefully look at what it did and to justify its actions, the possibility exists that the action it took was correct for a reason it did not mention to the taxpayer or even to the LTA when the TAO was first issued.  The PMTA opines that when the operating division raises new facts in response to a TAO or the appeal of a TAO, the appropriate person within TAS has the ability to go back to same level of employee within the operating division with a supplemental memo “to the same official addressing the concerns raised in the response and ordering that the official reconsider the matter again in light of the new information before modifying or sustain the TAO to the next level IRS official for further consideration.”

The current IRM does not address the situation of sending the case back from the same level for reconsideration.  The IRM contemplates a back and forth but does not mention this formal move seeking reconsideration.  The guidance here is not radical and simply formalizes what probably was happening in a less formal way.  It does provide a formal opportunity for clarification and resolution of the issue at lower levels.  Such a resolution is good for the taxpayer and the IRS.  Because the TAS is a voice for taxpayers behind the curtain of the IRS, we do not get to see what goes on between the two sides in the TAO disputes.  The PMTA gives a good description of the process.  For taxpayers being “represented” by TAS in this process and for taxpayers or representatives considering the use of TAS to resolve a problem, understanding the process and the possibilities makes use of the process more possible.  If done correctly, it has the ability to greatly assist taxpayers, to fix systemic problems within the IRS and to avoid litigation or feelings of utter frustration.

Taxpayer Rights: Measuring IRS Performance

There is a lot to digest in the 2016 National Taxpayer Advocate Annual Report that was released earlier this month. One of the new parts of the 2016 report was the creation of a taxpayer rights assessment, which reviews IRS performance measures and data organized around the ten taxpayer rights embedded in the Taxpayer Bill of Rights. The general idea is to further cement the notions of taxpayer rights into the calculus of good tax administration.

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As the report discusses, this is a work in progress, both in identifying what are the appropriate ways to illustrate IRS performance relating to taxpayer rights and in ensuring that IRS or an outside group can observe and report on those tasks.

The initial assessment compares and reports on FY 2015 and 2016 metrics, including the following:

  • percentage of phone calls to IRS answered,
  • the no change, agreed and non response rate for correspondence, field and office exams,
  • the numbers of e-filed and paper filed returns by preparers and taxpayers directly,
  • numbers of returns submitted through the Free File consortium, by VITA and other volunteer groups,
  • the average days needed to resolve EITC and other correspondence examinations,
  • the numbers of submitted and accepted collection alternatives like offers and installment agreements,
  • and the number of tax clinics and volunteers hours at those clinics.

There are lots of items identified where there was no data available, such as numbers of math error adjustments that were abated, the percentage of taxpayers who felt their issues were resolved after contacting IRS by phone, and satisfaction relating to a variety of Appeals functions.

A taxpayer rights assessment is a great idea. One of the common critiques of taxpayer rights provisions is that in some cases an agency that violates a taxpayer’s rights may not lead to the taxpayer enjoying a specific remedy. No doubt when Congress wants to get an agency’s attention it can be specific in providing a consequence, such as monetary damages or a shift in the burden of proof if a dispute finds its way in court.

Yet the absence of a remedy does not mean that there are no other ways to encourage good agency practice. My research in the ways that agencies interact with regulated parties outside the tax system suggests that softer notions like employee training and mission statements that specifically address aspirational conduct and respect for the rights of those who are regulated can have an impact on rights that agencies should aspire to protect. In addition, transparency surrounding agency performance can influence agency conduct. An annual taxpayer rights assessment has the potential for  encouraging the IRS to do the right thing in the absence of a specific statutory consequence for failing to do so.

I am working on a paper discussing the role of taxpayer rights and compliance. Part of my paper focuses on how IRS metrics on its audits justifiably key in on revenue protected and on important metrics like the percentage of taxpayers who fail to respond to IRS correspondence audits and agree with IRS proposed adjustments. Absent from the equation has been the percentage of taxpayers who following an adjustment understand why in fact their return as filed was incorrect or whether the taxpayer felt that she had a fair shake in presenting information to justify a tax return position or explain why the taxpayer may have taken a position on a return.

To be sure, measuring taxpayer reaction is costly, and IRS has lots on its plate. It seems to me that good administration includes trying to assess more methodically how IRS is doing around the rights that are reflected in the 2014 Taxpayer Bill of Rights. I look forward to this hopefully becoming a regular part of the annual reports and more importantly it becoming inculcated in how IRS thinks it is doing in administering the tax laws.

For our prior post on the 2016 Report generally as well as links to the different volumes of the Report see NTA Releases Annual Report.

Sidebar: Taxpayer Rights Conference

The Institute for Austrian and International Tax Law at WU (Vienna University of Economics and Business) is hosting the second international taxpayer rights conference in Vienna on March 13 and 14. The conference is convened by the National Taxpayer Advocate and is sponsored in part by Tax Analysts. The conference promises to bring together an eclectic group of scholars and tax administrators. Details on the conference can be found here.

NTA Releases Mid-Year Report

Last week the NTA released her mid-year report. As all of the TAS reports, it is required information for those interested in tax administration and tax procedure. The first volume of the report has three main areas: an update on the public forums that the NTA has been conducting over the last year on the IRS’s Future State plans, an overview of the IRS’s 2016 filing season performance, and selected areas of focus, including FATCA, private debt collection, EITC compliance, identity theft assistance procedures, and levies on retirement accounts.

Volume 2 contains the IRS’s response to the administrative recommendations that the NTA made in her 2015 annual report.

As usual, there is lots in the report. I provide the links with the hope that I will come back to this in a future post.   Some quick things jump out, however.

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The NTA is hoping to get additional input on the needs of taxpayers as the IRS continues with its plans to modernize the way in interacts with taxpayers. Given the importance of this issue to tax administration, the NTA in its press release states that Future State is “its most important area of focus.” The public forums will continue and TAS will be conducting a nationwide survey to learn more about taxpayer “needs, preferences, and experience with IRS taxpayer service and will hold focus groups on the IRS Future State at the IRS Tax Forums this summer.”

The press release summarizes the good news when looking at the last filing season:

The report says the IRS delivered a generally successful filing season in 2016. Of particular note, the IRS substantially improved taxpayer service on its toll-free telephone lines as compared with 2015. In every year since FY 2008, the IRS has received more than 100 million telephone calls. During the 2015 filing season, IRS telephone service reached a low; the IRS answered only 37 percent of taxpayer calls routed to customer service representatives overall, and the wait time for taxpayers who got through averaged 23 minutes. During the 2016 filing season, the IRS answered 73 percent of its calls, and the wait time dropped to 11 minutes. Thus, the IRS nearly doubled the percentage of calls it answered and reduced wait times by more than half.

Volume 2 contains the IRS’s response to the recommendations in the 2015 year end report. According to the press release, “IRS has implemented or agreed to implement 65 of the Advocate’s recommendations, or 56 percent.” The volume also contains in some instances replies from TAS to IRS responses. As the NTA notes, this exchange is important:

People who work in the field of tax administration and taxpayers generally can benefit greatly from reading the agency responses to our report,” Ms. Olson said. “Tax administration is a complex field with many trade-offs required. Reading both my office’s critique and IRS’s responses in combination will provide readers with a broader perspective on key issues, the IRS’s rationale for its policies and procedures, and alternative options we recommend.”

Kudos to TAS and IRS for engaging with the key issues of tax administration and providing a forum for an exchange of views and greater transparency in tax administration.