Wednesday, January 9, 2013

Taxpayers Advocate's 2012 Annual Report Emphisises: Tax Reform, Identity Theft & Voluntary Disclosure Issues

National Taxpayer Advocate Nina E. Olson today released her 2012 annual report to Congress, identifying the need for tax reform as the overriding priority in tax administration.


The National Taxpayer Advocate’s annual report designates the complexity of the tax code as the #1 most serious problem facing taxpayers and recommends that Congress take significant steps to simplify it. “The existing tax code makes compliance difficult, requiring taxpayers to devote excessive time to preparing and filing their returns,” Olson wrote. “It obscures comprehension, leaving many taxpayers unaware how their taxes are computed and what rate of tax they pay; it facilitates tax avoidance by enabling sophisticated taxpayers to reduce their tax liabilities and provides criminals with opportunities to commit tax fraud; and it undermines trust in the system by creating an impression that many taxpayers are not compliant, thereby reducing the incentives that honest taxpayers feel to comply.”


The number of tax-related identity theft incidents has increased substantially in recent years. Within TAS, identity theft case receipts increased by more than 650 percent from FY 2008 to FY 2012. At the end of FY 2012, the IRS had almost 650,000 identity-theft cases in its inventory servicewide. The problem has grown worse as organized criminal actors have found ways to steal the Social Security numbers (SSNs) of taxpayers, file tax returns using those taxpayers’ names and SSNs, and obtain fraudulent tax refunds. Then, when the real taxpayer files a return claiming the refund, that return is rejected. The impact on victims is significant. More than 75 percent of taxpayers filing returns are due refunds, which average some $3,000 and are not paid until the IRS fully resolves a case.


Federal law requires the Advocate’s Annual Report to Congress to identify at least 20 of the “most serious problems” encountered by taxpayers and make administrative and legislative recommendations to mitigate those problems. Among the “most serious problems" addressed are the following:

  • The IRS’s Offshore Voluntary Disclosure programs and their failure to distinguish adequately between “bad actors” and “benign actors.” The IRS has sought to increase enforcement of Foreign Bank and Financial Accounts (FBAR) reporting requirements in recent years and has offered a series of voluntary disclosure programs designed to settle with taxpayers who had failed to file required FBAR forms. However, the report says, the programs generally applied a “one-size-fits-all” approach that required the payment of significant penalties and did not distinguish between “bad actors” and “benign actors.” By generally requiring taxpayers who make voluntary disclosures to “opt out” of the disclosure program and submit to comprehensive audits in order to avoid draconian penalties, the report argues that the program has caused excessive burden and fear for taxpayers who had reasonable cause for not filing FBAR forms or whose failure to file was inadvertent.
  • The IRS’s failure to provide tax refunds to victims of preparer fraud. When a taxpayer is victimized by a preparer who receives a fraudulent refund by paper check, the IRS will issue a replacement refund to the taxpayer. However, the IRS will not issue a replacement refund when a taxpayer is victimized by a preparer who receives the fraudulent refund by altering the bank routing number on a direct-deposit request, even though the IRS has received legal advice that it may do so. Olson says the taxpayer-victim is legally entitled to receive the refund, and the IRS has no legal basis for withholding it.
  • The IRS’s extraordinarily high audit rate of taxpayers who claim the adoption tax credit. Congress created the adoption tax credit to help low and middle income families afford the costs of an adoption, which are estimated to run as high as $40,000. Yet the IRS, partly using income-based rules, selected 69 percent of tax returns claiming the credit during the 2012 filing season for audit, compared with one percent of returns overall. These audits imposed significant burden on the affected taxpayers for several reasons, most notably because the median refund claim constituted nearly one-quarter of the taxpayers’ adjusted gross income for the year, and the audits on average took over four months. Despite the burden, the payoff was relatively small. The IRS denied only about 10 percent of the amounts claimed in tax year 2010, and as of mid-November had denied only about 1.5 percent of the amounts claimed in tax year 2011. The excessive focus on returns claiming the adoption credit burdened many taxpayers and could have the effect of negating Congress’s intent to encourage adoptions, the report says.
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  1. Pleased to see that the NTA listed again for 2012 the offshore compliance complexity issues in MSP 8 and MSP 15, although, of course, it will not be mentioned in the media like this story at the New York Times....

    Two blogs on the offshore components of this report. The most eloquent by Victoria

    Three Cheers for the Taxpayer Advocate Service

    And this more nuts and bolts about what MSP 8 and MSP 15 are.

    Nina Olson releases the 2012 National Tax Advocate Report to Congress.

    By Marvin Van Horn

  2. One of the major complaints of the 2011 OVDI was that penalty presumed willfulness; which is the government's burden to prove.

    The 2012 OVDP addressed this issue in FAQ 51.1 which provides that benign taxpayers who have reasonable cause for their failure to file certain tax returns may first applying to the OVDP program and subsequently opting out of the civil settlement structure.

    One of the Taxpayer’s Advocate criticisms of IRS's handling of offshore voluntary disclosures is that it requires Taxpayers to opt in the program then opt out of the program. According to this report; this opt in to later opt out causes extended resolution times over smaller amounts, when compared to traditional offshore voluntary disclosure participants

    The average time to resolve OVDP submissions for taxpayers who elected to remain within the program's civil settlement structure was about 300 days. For participants who opted for the path envisaged under FAQ 51.1, the average resolution time was approximately 550 days.