IRS Starts Mopping Up Congress's Tax-Reporting Mess

From CNNMoney.com:

With a new mandate looming that will require business owners to file millions more tax forms, the Internal Revenue Service has begun the daunting process of figuring out how to turn the law's sweeping demands into actual rules for taxpayers.

The new regulations, which kick in at the start of 2012, require any taxpayer with business income to issue 1099 forms to all vendors from whom they purchased more than $600 of goods and services that year. That promises to launch a fusillade of new paperwork: An estimated 40 million taxpayers will be subject to the requirement, including 26 million who run sole proprietorships, according to a report released this week by National Taxpayer Advocate Nina Olson.

Olson's office, which operates independently within the IRS, flagged the new reporting requirements as one of its priority issues for the next year. Like many who have delved into the details of the new rules, Olson is concerned about their far-reaching scope and potential unintended consequences.

"The new reporting burden, particularly as it falls on small businesses, may turn out to be disproportionate as compared with any resulting improvement in tax compliance," the Taxpayer Advocate Service wrote in a report released this week.

The new rules are aimed at reducing the "tax gap" between what individuals and businesses owe and what they actually pay. The federal government misses out on estimated $300 billion each year from tax underpayment. The expanded reporting requirements, which Congress slipped into the landmark health care reform bill passed in March, are an attempt to create a paper trail of 1099s exposing business-to-business payments that might otherwise stay off the radar.

The Joy of Tax

As thousands of Americans across the country are spending hours working on their tax returns to meet the tax deadline, Nina Olson – the National Taxpayer Advocate – is once again calling on Congress to simplify the U.S. tax code. Although Olson makes this request every year, according to the Economist she has reportedly become fed up that her professional opinion is being ignored.

The federal tax code, which was 400 pages long in 1913, has swollen to about 70,000. Americans now spend 7.6 billion hours a year grappling with an incomprehensible tangle of deductions, loopholes and arcane reporting requirements. That is the equivalent of 3.8m skilled workers toiling full-time, year-round, just to handle the paperwork. By this measure, the tax-compliance industry is six times larger than car-making.

Every year, the national taxpayer advocate issues a report begging Congress to simplify the system. In her most recent one, published on December 31st, Ms Olson frets that she is repeating herself. She refers Congress to what she said the previous year. An incredible 82% of taxpayers are so flummoxed that they pay for help. Some 60% hire an accountant or tax preparer, while another 22% use tax software. She might have added that even the head of the Internal Revenue Service, Douglas Shulman, gets someone else to do his taxes.

President Barack Obama says he wants to simplify the tax code. But he has just added a ton of health-care-related provisions to the system. And even if he were zealous about simplification, he would find it hard.

IRS Outlines Steps to Assist Taxpayers?

In this new press release, the IRS explains the tactics they are using to assist “unemployed taxpayers and others,” however as one of the attorneys at my law firm pointed out some of the statements they make are nearly identical to ones they made in this press release—published a year ago.

Last year, the IRS promised to provide assistance in the following areas:

• Postponement of Collection Actions
• Added Flexibility for Missed Payments
• Additional Review for Offers in Compromise on Home Values
• Prevention of Offer in Compromise Defaults
• Expedited Levy Releases

Then in this new release the IRS now promises to help taxpayers in the following ways:

• Postponement of collection actions in certain hardship cases
• Added flexibility for missed payments on installment agreements and offers in compromise
• Additional review of home values for offers in compromise
• Accelerated levy releases for taxpayers facing economic hardship

Is the IRS really putting extra effort into helping unemployed taxpayers, or just reusing an old press release? Either way, actions speak louder than words and I just have not seen any real action on these objectives.

Austin Incident Does Not Affect Tax Return Processing

According to the IRS, the recent Austin tragedy will not affect filing season activities, including tax return processing. In a new press release they reassured taxpayers that they do “not process tax returns or issue refunds at the Echelon 1 Building at 9430 Research Blvd. in Austin, Texas.”

Why Can’t the I.R.S. Help Fill in the Blanks?

In a new business story on NYTimes.com author Randall Stross wonders why in the digital age, taxpayers are still being forced to take the task of preparing a tax return from scratch. Stross argues that since government computers already have important data from employers and financial institutions, the IRS should help taxpayers with their returns.

Requiring taxpayers to file returns without being told what the government already knows makes as much sense “as if Visa sent customers a blank piece of paper, requiring that they assemble their receipts, list their purchases — and pay a fine if they forget one,” said Joseph Bankman, a professor at the Stanford Law School.

Many developed countries now offer taxpayers a return containing all information collected by the taxing authority — to “get the ball rolling by telling you what it knows,” Mr. Bankman says.

It is a stunningly reasonable idea. When you prepare your return, why can’t you first download whatever data the Internal Revenue Service has received about you and, if your return is simple, learn what the I.R.S.’s calculation of your taxes would be? You’d have the chance to check whether the information was accurate, correct it as needed and add any pertinent details — that you’re newly married, for example, or have a new child — before sending it. Far better to discover problems early with the I.R.S., whose say matters more than third-party software’s best guess.

The I.R.S., however, isn’t rushing to offer returns that are already filled in. In the 2009 report to Congress of its Taxpayer Advocate Service, it noted that during the 2008 presidential campaign, Barack Obama proposed giving taxpayers “the option of pre-filled tax forms to verify, sign and return.” The report said “it is not feasible at this time” because the agency receives W-2 data from the Social Security Administration and 1099 data from financial institutions too late in the filing season, “much later than most eligible taxpayers would be willing to wait.”

Continued at NYTimes.com…

Stuck in the Mud: IRS Spins its Wheels on Electronic Modernization

The popularity of electronic tax return filing has increased drastically over the past few years, and it has certainly not escaped the attention of the IRS. In an attempt to keep up with the trend and improve efficiency, the Customer Account Data Engine (CADE), a branch of the IRS began creation on a modern processing system that would get refunds back to taxpayers eight days faster than before. However, new obstacles are coming up which means the system may not be ready as quickly as the government had hoped. Checkout the following article from GCN.com on the struggle to get the system implemented.

The number of taxpayers filing electronic federal tax returns has increased steadily since 2005, accounting for more than two thirds of returns during the 2009 filing season. However, as the Internal Revenue Service enters the 2010 filing season, it is curtailing development of a major element of its modernization program and rethinking its strategy for delivering electronic services.

The Customer Account Data Engine (CADE), a part of the IRS Business Modernization Program that is intended eventually to replace the legacy Master File processing system, processed 40 million returns in 2009, producing taxpayer refunds from one to eight days faster than the older system. CADE originally was to be completed by 2012, but increasing complexities have extended that date.

“After over 5 years and $400 million, CADE is only processing about 15 percent of the functionality originally planned for completion by 2012,” a Government Accountability Office report says.

Each successive release of the system was expected to process more complex returns, but several technical challenges in the system had not been dealt with. The IRS estimated that full implementation would not be achieved until at least 2018, and possibly as late as 2028.

Continue reading at GCN.com…

IRS Announces Streamlined and Simplified Notices to Taxpayers

From the IRS Newsroom:

Today, the Internal Revenue Service unveiled its first redesigned notices that are part of an on-going effort to improve the way it corresponds with taxpayers.

The nine new notices are among the first to be reviewed and revised for clarity, effectiveness and efficiency. The agency also will create an office that ensures the effort to improve communications is on-going and permanent.

“One of my priorities is to ensure that we have clear and simple communication with taxpayers. In the past, our notices often looked more like legal documents and not an effort to communicate clearly. The differences between the old and new notices are like night and day. They show the potential of our on-going effort in this area,” said IRS Commissioner Doug Shulman.

In July 2008, Shulman appointed the Taxpayer Communications Taskgroup to review IRS correspondence. The task group found that IRS notices have different looks, messages and do not use consistent language. Because of this, some notices are creating unnecessary confusion for taxpayers.

Nine notices will feature the new design format beginning in January. These notices account for approximately 2 million pieces of correspondence with individuals, businesses and exempt organizations. A revised web page is available at www.irs.gov/notices.

The new format includes a plain language explanation of the nature of the correspondence, clearly states what action the taxpayer must take and presents a consistent, clean design. The new format also guides taxpayers to appropriate pages on IRS.gov where they can find accurate and relevant information quickly and easily.

Watchdog Warns IRS Is Overburdened

A government watchdog delivered a report to Congress earlier today warning that the IRS is being stretched too thin taking on new duties, and will not be able to serve taxpayers sufficiently this tax season. Among topics of concern were the IRS response rate, and their strategy for collecting owed tax debts.

The IRS's goal of responding to 71% of taxpayer calls in 2010 is "unacceptable," said Nina E. Olson, the National Taxpayer Advocate, in her annual report to Congress.

"In other words, the IRS is planning to be unable to answer about three of every 10 calls it receives," she wrote. Ms. Olson identified the IRS lack of responsiveness to telephone calls as the number-one problem currently facing taxpayers.

She also said the IRS lacks a successful strategy for collecting debts owed. One key problem is that the IRS uses an automated system to file liens against taxpayers, even when there are no assets for the lien to attach to and little chance of collecting the debt, Ms. Olson wrote.

Another problem is a preference for correspondence audits, which can produce more errors than face-to-face exams, she said.

At the root of some of these problems, Ms. Olson said, is that Congress keeps piling duties on the IRS through temporary stimulus programs and new social programs administered through the tax code.

Continue reading at WJS.com…

The IRS Needs to Better Manage the Tax Debt Collection Process

Last week, the Government Accountability Office published a report asserting that the IRS needs to do a better job of managing the tax debt collection process. I have included a segment of their report below, but you can download the full PDF at “Tax Debt Collection: IRS Needs to Better Manage the Collection Notices Sent to Individuals.”

According to the IRS, $23 billion in unpaid individual income tax debt existed in 2001, its most recent estimate. The notice phase is the first of IRS’s three-phase process to collect unpaid debt. IRS annually sends notices to millions of individual taxpayers about billions of dollars of unpaid tax debt.

Congress and others have questioned IRS’s collection process’s effectiveness. As requested, GAO is reporting on (1) how well IRS has established objectives, performance measures, and responsibility for reviewing notice-phase performance, and (2) how well IRS’s business rules for sending notices to individuals help assure that the collection notice phase is achieving desired results at the lowest costs. To address these objectives, GAO compared the evidence obtained from IRS documents and responsible IRS collection officials to applicable guidance for internal control standards.

Although the notice phase is a key part of IRS’s approach and strategy for resolving billions of dollars of individuals’ unpaid tax debt, IRS lacks certain internal controls to assure that notices to individuals are achieving the most benefits—such as debt collected or unpaid debt cases otherwise resolved—with the resources being used. Management controls like clearly defined objectives, performance measures, and clear responsibility for reviewing program performance help provide reasonable assurance that the objectives of an agency are being achieved effectively and efficiently. However, IRS has no documented objectives for the notice phase and no performance measures to indicate how well the phase is performing in resolving debt cases or achieving other potential desired results. Further, IRS has not established responsibility for reviewing the performance of the complete notice phase.

IRS lacks documentation for and evaluations of its business rules for notices to individuals to assure that the collection notice phase is achieving desired results. According to IRS officials, to make the best use of collection resources, IRS uses its business rules to—based on certain dollar thresholds and individual tax debt case characteristics—vary the number and types of notices sent to taxpayers and determine whether unresolved cases will be sent for further collection action or further action will be deferred. However, as shown in the table, in almost all cases, for the five business rules that IRS identified as affecting the most taxpayers, IRS did not have information on the date the rules were established, the rationale for the rule, or data supporting the rationale. IRS collection officials also lacked documentation describing the business rules and how they operate. Further, even though IRS officials estimated that the business rules had been established for years, IRS had documentation for an evaluation of only one of the five business rules. Without relevant evaluations IRS lacks assurance that the notice phase achieves desired collection results at the least cost.

National Taxpayer Advocate Submits Mid-Year Report to Congress

The IRS posted a new press release recently announcing that the National Taxpayer Advocate Service (TAS) had delivered their mid-year report to congress earlier this week. In the report, the TAS emphasizes the importance of tax preparer oversight, improving taxpayer services, improving access to the offer in compromise program, and improving the IRS’s ability to effectively deliver refundable tax credits. You can read a segment of the release below, but the full text can be read by visiting the IRS’s newsroom.

The report notes that FY 2010 will mark the ten-year anniversary of the Taxpayer Advocate Service, which began operations in March of 2000. “As TAS enters its tenth year, both TAS and the IRS face a difficult environment for achieving what is, in essence, the same mission – ensuring that the IRS treats taxpayers fairly and identifying ways to increase voluntary compliance while addressing noncompliance,” Olson said. She identified the collection of tax revenue at a time when “increasing numbers of taxpayers have difficulty paying their daily living expenses” as a principal challenge.

The Advocate’s report, which is required by law, sets out the objectives of the Office of the Taxpayer Advocate for the upcoming fiscal year and provides substantive analysis of issues and statistical information. Among the areas the report identifies for particular emphasis in FY 2010 are the following:

1. Taxpayer Services. The report notes that the IRS created a five-year strategic plan for taxpayer service (known as the Taxpayer Assistance Blueprint, or “TAB”) in response to a directive from the House and Senate Appropriations Committees in FY 2006. The directive was originally motivated by concern that IRS taxpayer services were often ad hoc and not sufficiently coordinated or research-driven. The Advocate’s report expresses concern that the momentum to implement and refine the TAB recommendations has abated. It recommends that the IRS reinvigorate its efforts to pursue cross-functional, research-driven service improvements.