What accountants can do to help. And 20 other problems.
By Rick Telberg
The Internal Revenue Tax Code requires the National Tax Advocate to prepare an annual report to Congress that summarizes at least 20 of the most serious problems encountered by taxpayers.
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The IRS watchdog solved that problem by going thematically. This year it picked five themes and focused on problems relating to them. The themes for the 2017 Annual Report to Congress are:
- Tax Administration
- The Right to Quality Service
- Special Taxpayer Populations
- Independent Administration Appeal
- Revenue Protection
Twenty, it turned out, wasn’t enough. The advocate couldn’t resist going for 21. It ranked them as best it could under such criteria as
- impact on taxpayer rights,
- number of taxpayers affected,
- interest, sensitivity and visibility,
- barriers these problems present to compliance,
- revenue impact and
- trends picked up by the NTA management information system.
#1 Top Problem
Accountants, CPAs and tax practitioners should be aware of what bobbed up to the top of the ranking under this year’s themes: private debt collection.
In 2015, Congress required the IRS to start outsourcing its “inactive tax receivables.” And look what happened: In 2017, the IRS spent $20 million administering the outsourcing program but collected only $6.7 million in receivables. Private collection agencies recouped only 1 percent of the $920 million of inactive debt receivables assigned to them. The IRS collected 40 percent as much as the debt collectors simply by sending out a letter informing taxpayers that their debts had been assigned to a collection agency.
That may be a rotten deal for the IRS and taxpayers, but there’s good news for the collection agencies. They get their commission whether the taxes were paid due to their own action or that of the IRS. PCAs can get a commission of up to 25 percent. And the IRS (rather than the national treasury) gets to keep another 25 percent.
As predicted by the NTA back in 2015, the program fell most heavily on taxpayers suffering economic hardship. Of the 4,100 taxpayers who made payments after their debt was outsourced,
- Median income was about $41,000;
- Over 1,100 taxpayers – 28 percent – had incomes below $20,000;
- 19 percent had incomes below the federal poverty level;
- 44 percent had incomes below 250 percent of the federal poverty level;
- Five percent were receiving Social Security income and had a median income of $14,365 (and, by law, being Social Security recipients, should not have been turned over to collection agencies); and
- Of the 1,700 taxpayers who entered installment agreements, 45 percent had income below their allowable living expenses. In other words, they promised more than they could afford
The National Taxpayer Advocate recommended seven corrective actions the IRS should take. As for CPA firms and tax preparers, any clients being turned over to a PCA should be made aware that either the IRS or a PCA may be abusing their taxpayer rights. This is a great opportunity for CPAs and preparers to put their knowledge to good use.