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Taxpayer Advocate Service Issues Mid-Year Report With a Focus on IRS Fairness to the Taxpayer

On June 29, 2011, National Taxpayer Advocate Nina E. Olson released a report to Congress that identifies several issues the Taxpayer Advocate Service plans to address during the coming fiscal year. The Taxpayer Advocate Service is an independent office within the Internal Revenue Service. It is under the supervision and direction of the Taxpayer Advocate who is appointed by and reports directly to the Commissioner of Internal Revenue. The Taxpayer Advocate Service identifies systemic problems that exist within the Internal Revenue Service and, to the extent possible, propose changes in the administrative practices which may be appropriate to mitigate such problems.

The 2011 mid-year report expresses particular concern about the impact of IRS budget cuts on taxpayer service and tax compliance. The National Taxpayer Advocate has previously suggested that the IRS generally be exempt from budget caps or reductions.

With respect to IRS collection practices, the report praises several recent changes the IRS has announced, including making lien withdrawals available to taxpayers in a wider range of cases. However, the report expresses continuing concern about the IRS’s practice of automatically filing tax liens based on a dollar threshold instead of basing lien-filing decisions on an analysis of the taxpayer’s financial situation. The National Taxpayer Advocate believes that such an analysis “should balance the need to protect the government’s interests in the taxpayer’s assets with a corresponding concern for the financial harm the lien will create for that taxpayer.” In situations where the IRS has determined a taxpayer is suffering an economic hardship or possesses no significant assets, the filing of a lien is unlikely to further tax collection but will further damage a taxpayer’s credit rating.

In addition, The Taxpayer Advocate Service announced it planned to focus on the following areas in the upcoming year:

Tax Reform and Tax Complexity. The Taxpayer Advocate Service will continue to engage the public in a discussion about fundamental tax simplification. The Taxpayer Advocate Service has established an electronic suggestion box to solicit comments from taxpayers on tax simplification.

Earned Income Tax Credit Improvements. Taxpayers frequently face difficulty in substantiating their Earned Income Credit claims to the satisfaction of the IRS, notably by proving that a qualified child lived with the taxpayer for more than half the year and bears the requisite familial relationship. The Taxpayer Advocate Service wishes to aid taxpayers in making their substantiation problems easier to prove.

Tax-Related Identity Theft. The IRS continues to experience difficulties in expeditiously resolving tax identity theft-related cases, which continue to increase. The Taxpayer Advocate Service will continue to work with the IRS to mitigate identity theft problems, improve identity theft case processing, and follow up on previous recommendations in this area.

Innocent Spouse Relief. The IRC currently contains “innocent spouse” rules designed to shield individuals from responsibility for joint tax liabilities generally attributable to their spouse (or former spouse) in appropriate cases. However, equitable relief for otherwise eligible taxpayers is barred if an “innocent spouse” request is not filed within two years from the date of the first IRS collection action. The two-year rule can lead to poor and unfair results for true innocent spouses. The Taxpayer Advocate Service looks forward to working with the IRS to improve this rule.