January 13, 2014

IRS Scandals Fueled by Lack of Funds, Taxpayer Advocate Says

In her annual report to Congress, Nina Olson adds call for taxpayer bill of rights she says might have prevented the political targeting scandal

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The Internal Revenue Service’s internal watchdog says “unstable and chronic underfunding” of the agency is “the major problem facing the IRS today.”

In its congressionally mandated 2013 annual report, released Thursday, National Taxpayer Advocate Nina Olson offers details on the 25 “most serious” problems — the law requires her to identify at least 20 — and funding issues are seen as a gateway to broader problems, including the scandal involving targeting of politically conservative groups.

The targeting of Tea Party and other groups at odds with the Obama administration policy is addressed in a technical sense in the report’s 15th problem, which details the IRS' erroneous revocation of exempt status for tax-exempt organizations.

However, in its very first plank, the taxpayer advocate’s report deals with the issue in calling on its parent agency to adopt a taxpayer bill of rights whose existence might forestall the kind of tampering that embroiled the agency and led to the early retirement or resignation of Exempt Organizations director Lois Lerner and two other senior officials.

In a footnote to the bill of rights portion of the report — many of the report’s sections are hundreds of pages, and its executive summary alone weighs in at 76 pages — Olson cites a previous analysis from her office arguing that the IRS’ political targeting violated eight out of 10 items in her bill of rights.

“Had there been a published taxpayer bill of rights, organizations applying for tax-exempt status, IRS employees processing their applications, IRS executives overseeing the program and congressional offices receiving complaints likely would have flagged the inconsistencies between the applicants’ rights and the IRS’ actions more quickly," the report says. "There is no guarantee that would have happened, of course, but the existence and broad awareness of a taxpayer bill of rights would have substantially increased the odds that the problems would have surfaced and been addressed sooner.”

For example, item No. 4 of her proposed bill of rights is “the right to challenge the IRS’ position and be heard,” which includes receipt of a written response from the agency if it rejects a challenge; and item No. 5 is “the right to appeal an IRS decision in an independent forum,” which again includes a written response if an appeal fails and the right to further court challenges.

The Office of the Taxpayer Advocate, with some 2,000 employees, doesn’t seem to address its own role or absence thereof in the political targeting crisis. In May, in the heat of the scandal, former Democratic Sen. Bob Kerrey, an author of 1990s legislation revamping the IRS, criticized Olson’s office for failing to pay attention to complaints from conservative groups having difficulty with their tax-exempt status:

“That was the whole idea of the creation of the taxpayer advocate — that somebody could intervene on behalf of the taxpayer, and it looks like the intervention didn’t happen,” Kerrey told Politico at the time.

From Olson’s point of view, the key underlying problem is the IRS underfunding. She cited three years of across-the-board budget reductions and the severe recent effects of sequestration. The result has been a situation in which the can answer just 61% of the 109 million annual calls from taxpayers, who waited an average of 17.6 minutes to talk to a customer representative in 2013.

Because it is so pressed, the agency will now answer only “basic” questions from taxpayers accessing representatives by phone, mail or walk-in to one of its agencies and will not be answering any tax law questions (even “basic” ones) after the coming tax season ends in April.

"At the risk of vast understatement, it is a sad state of affairs when the government writes tax laws as complex as ours — and then is unable to answer any questions beyond ‘basic’ ones from baffled citizens who are doing their best to comply,” Olson writes.

Some of the other “most serious” issues identified by Olson this year included the difficulty of complying with U.S. tax law for Americans living abroad and the need for tax guidance to assist Bitcoin users.

The independent office within the IRS has labored largely in obscurity since its creation in 1996 as part of the Taxpayer Bill of Rights act, though each year it issues an annual report on systemic problems within the IRS. It achieved greater than usual notoriety last year as a result of one attention-getting recommendation that U.S. tax rates could be cut 44% without any ensuing loss of revenue.

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Check out IRS Says 44% Cut in Tax Rates OK With Us on ThinkAdvisor.

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