Each year since passage of the IRS Restructuring and Reform Act of 1998, the National Taxpayer Advocate (TA) has issued a report to Congress identifying the 20 most common problems people face in dealing with the IRS. In mid-January, the TA issued her 2005 report. At nearly 600 pages, it’s one of the most detailed reports to date.
The TA’s report confirms that being honest is simply not good enough when it comes to dealing with the IRS. The reason is that in all but a few instances, the burden is on taxpayers to prove they do not owe taxes. The IRS rarely has to prove a person does owe taxes. The question, moreover, seldom has anything to do with whether the person is a cheater or not.
In every report issued to date, the TA paints the same picture. Honest taxpayers are caught up in a system that’s cumbersome, convoluted, and difficult to navigate. Without some basic knowledge of their rights, honest taxpayers are swallowed by the system every day.
Six Significant Problems
From the pages of the report, here are the six problems I believe to be the most significant.
Penalty assessments. The IRS continues to assess penalties at an excessive rate. Last year the IRS assessed nearly 30 million penalties against individuals and businesses. The TA recognizes the IRS takes a shotgun approach to these assessments, putting the burden on the citizen to seek abatement. The result is that 30 percent of all legal fights with the IRS during 2005 involved individual taxpayers disputing the validity of penalties assessed against them.
Wage levies and economic hardship. The tax code contains a provision to stop wage and bank levies when they cause “economic hardship to taxpayers.” However, the burden is on the taxpayer to prove hardship, and the IRS often does not release levies promptly. As a result, people are unable to pay their monthly living expenses and therefore face serious problems with creditors.
Social Security levies and economic hardship. The IRS has the authority to take up to 15 percent of Social Security benefits from persons deemed to owe taxes or penalties. However, when levying against the benefits of a person on a fixed income, IRS agents are supposed to obtain approval from their supervisor before acting. According to the TA, this requirement is often ignored. Levying against Social Security benefits causes economic hardship for those living on fixed income.
Innocent spouse claims. The tax code provides three different remedies that allow an innocent spouse to be removed from the tax liability of a guilty spouse or former spouse. After reviewing thousands of applications for innocent spouse relief, the TA concluded a significant number of them were improperly rejected. This leads to innocent spouse issues being among the top 10 issues litigated in court. Moreover, the IRS does not clearly communicate to taxpayers what all their rights are under the innocent spouse rules, including the appeals rights that apply to denial of relief.
Installment agreements. The TA reports that the IRS is often inflexible and unreasonable in negotiating installment agreements and cash settlements with delinquent taxpayers through the Offer in Compromise program. Here again, the issue is whether taxpayers know what the IRS is looking for and how it evaluates a person’s capacity to pay.
Taxpayer Assistance. This is one of the most troubling aspects of the TA’s report. As the tax laws become more complicated and taxpayers face more penalties for a wider range of possible errors, the IRS is cutting taxpayer assistance services. The agency is forcing more people to go it alone. What’s worse, the IRS is redirecting more resources to enforcement actions, such as audits and collection. (See “IRS Gets Record Funding to Prosecute Taxpayers,” Budget & Tax News, February 2006.) The IRS is retraining and reassigning massive numbers of workers, moving them into front-line enforcement positions.
Dan Pilla ([email protected]) is a nationally known tax litigation consultant and author of 11 books on IRS abuse prevention and cure and problem-resolution issues. His latest book is The IRS Problem Solver (HarperCollins). He also publishes Dan Pilla’s Confidential Tax Bulletin. His Web site is http://www.taxhelponline.com.
For more information …
The full text of the Taxpayer Advocate’s 2005 Annual Report to Congress is available online at http://www.irs.gov/advocate/index.html.
