The primary goal of the Internal Revenue Service is to collect the taxes that are owed to the federal government under current tax law. Reducing the difference between taxes legally owed and taxes actually paid in a timely manner– referred to as the “tax gap”–is a key objective of the IRS’s collection and examination efforts. A recent Tax Talk Today Webcast featured an expert panel of tax practitioners and IRS officials discussing the IRS’s efforts to encourage voluntary compliance with tax law.
The IRS estimates that, for tax year 2001, the gross tax gap had reached $345 billion. Three categories of non-compliant taxpayers make up the tax gap:
- Non-filing–the taxpayer files returns late, or not at all;
- Underpayment–the taxpayer files on time, but does not pay the full tax liability;
- Underreporting–the taxpayer files on time, but does not report her correct tax liability, often by overstating exemptions and deductions, or understating income.
How does the IRS propose to close the tax gap? Among other moves, it is stepping up activities in examination and collection, as well as proposing new federal legislation. The latest numbers on federal tax enforcement illustrate the IRS’s commitment to improve in this area (see sidebar). Kevin Brown, deputy commissioner for services and enforcement and the acting IRS commissioner, said that overall revenues are up, and the IRS is “quite pleased” with the level of service provided to taxpayers in a time when enforcement activities are increasingly successful.
“We need a balance between service and enforcement,” said Brown. “We can’t neglect one at the expense of the other, and we’re constantly seeking to improve in both areas.”
Brown and other IRS officials list these areas slated for change.
1) Examination. The IRS plans to improve its examination processes with a focus on two broad categories: balanced audit coverage, based on patterns of noncompliance; and egregious noncompliance, which would include abusive transactions. Expect to see an emphasis on examinations of high-risk taxpayers– including small businesses, self-employed individuals, and high-income individuals –that often have more complex returns and have exhibited a noticeable degree of noncompliance in the past.
“All of these are again designed around the tax gap…where examination appears to be the best way in closing the tax gap,” said Steve Burgess, director of examination in the small business/self-employed division of the IRS.
2) Collection. Taxpayers of all kinds tend to ignore or deny initial collection notices from the IRS, but waiting doesn’t change anything except the total amount of interest and penalties.
“The same ways to resolve a case are available at any point in collection,” said David Alito, director of collection in the small business/self-employed division.
The IRS currently uses two private debt collection agencies to assist with collection activities, although there have been several hearings on the program. While collection activities appear to be in a positive trend right now, the IRS is constantly looking for ways to improve its processes.
“We know we’re not going to get there one case at a time in collections, so we’re trying to take a step back,” said Alito.
3) Legislation. The IRS has 16 legislative proposals included in President Bush’s 2008 budget that were designed to improve information reporting and thus encourage voluntary compliance with tax law. Two key areas that may be affected by this proposed legislation are credit and debit card receipt reporting by merchants and basis reporting for publicly traded securities that are reported for capital gains transactions. By bolstering information reporting, the IRS expects to see an improvement in compliance.
“We know that, where there is information reporting, compliance is just much higher,” said Mark Mazur, director, research, analysis and statistics, in the national headquarters of the IRS.
Issue Resolution With the IRS
Any discussion of IRS efforts to improve examination and collection should also include a look at what options are available for issue resolution, the topic addressed in another recent Tax Talk Today Webcast. Depending upon the issue at hand, a variety of options for interaction with the IRS are available. The panel of IRS officials and tax professionals examined some of the current resolution systems and how they work, in particular, the Taxpayer Advocate Service.
The Taxpayer Advocate Service operates independently of the IRS and offers two distinct options for resolving federal tax issues: case advocacy and systemic advocacy. The type of advocacy needed depends on the type of case in question.
In case advocacy, local taxpayer advocates work with the tax practitioner or the taxpayer to resolve individual cases. Typical qualifying cases usually involve economic burden, such as a person on a fixed, limited income placed under levy; or systemic burden, in which the taxpayer has encountered an IRS process that is not working as intended. Extreme processing delays might qualify as a systemic burden. To submit a case for consideration, simply file a completed Form 911 with the Taxpayer Advocate Service.
The Taxpayer Advocate Service’s Office of Systemic Advocacy addresses larger problems that may arise within the IRS and create multiple, recurring problems for taxpayers. Systemic advocacy even provides an Internet-based system which taxpayers and tax practitioners alike can use to report suspected systemic problems. The link for reporting systemic problems can be found at www.irs.gov/advocate, but remember, the Office of Systemic Advocacy is not for case-specific problems. Tax Talk Today panelist Benson Goldstein, technical manager, taxation, with the American Institute of Certified Public Accountants, commented that AICPA often receives calls from tax pros about supposed systemic problems that actually are case-specific and should be dealt with by filing a Form 911 with the Taxpayer Advocate Service. Under systemic advocacy, the Taxpayer Advocate Service also provides an annual report to Congress, presented by the National Taxpayer Advocate, on the 20 (or more) most serious problems affecting taxpayers.
For both case and systemic advocacy, the Taxpayer Advocate Service has the authority to issue Taxpayer Assistance Orders for the benefit of the taxpayer. But the IRS cautions that not every troubled case will receive assistance from the Taxpayer Advocate Service. “Not every interaction that a taxpayer has with the IRS is necessarily a Taxpayer Advocate Service case,” said Matthew Weir, director of advocacy projects, systemic advocacy, with the IRS’s National Taxpayer Service. “Not every IRS levy is going to result in a Taxpayer Advocate Service case.”
The Taxpayer Advocate Service also takes certain cases that meet public policy criteria, such as issues associated with the IRS’ new private debt collection initiative.
The Office of Taxpayer Burden Reduction, while not a specific issue-resolution solution for the individual taxpayer, focuses on identifying ways in which the IRS can alleviate taxpayer burden. This office of the IRS is responsible for form simplification, process simplification, and the identification of new regulations that would streamline the taxpayer’s engagement with the IRS. The Office of Taxpayer Burden Reduction also helps to develop new legislative proposals for the Department of Treasury to consider as additional ways to ease the taxpayer burden. More ideas are always welcome, according to the IRS. “We do look to our tax professionals to give us ideas on simplification initiatives,” said Beth Tucker, director of communications, liaison and disclosure in the IRS’s small business/self-employed division.
For more on these and other federal tax topics, links to Webcast archives and show transcripts can be found at www.investmentadvisor.com or at www.taxtalktoday.tv. Free podcasts of recent Tax Talk Today Webcasts can be downloaded directly from the Tax Talk Today Web site–just register and download–or at www.iTunes.com.
Tax Talk Today moderator Les Witmer served with the IRS for 23 years, and is currently a communications consultant in Atlanta. For additional information, visit www.IRS.gov, or www.taxtalktoday.tv.