On July 7, Nina Olson released her annual National Taxpayer Advocate Report to Congress. This report outlines the major obstacles facing taxpayer services, new business and tax-exempt organizations reporting requirements and Internal Revenue Service (IRS) collection practices during fiscal year (FY) 2011.

The report highlights three major obstacles facing taxpayers for FY 2011 including the adequacy of IRS taxpayer services, particularly as the IRS begins to implement the health care reform law, about the new information reporting burdens facing small businesses, and about certain IRS collection practices.

According to the report, the IRS does not have enough resources to administer all of its responsibilities—Economic Stimulus payments, Making Work Pay credits, and First-Time Homebuyer credits—and thus, cannot provide outstanding taxpayer services. The report affirms that since 2004, inflation-adjusted funding for IRS enforcement activities has risen by 17.9 percent while spending for taxpayer services programs has decreased by 6.8 percent.

The report states that as a result of the imbalance between taxpayer demand and IRS resources, the IRS has fallen short of providing adequate taxpayer service in important areas. Most notably, after answering a high of 87 percent of its calls from taxpayers seeking to reach a telephone assistor in FY 2004, the IRS answered only 53 percent of its calls in FY 2008 and has set of goal of answering only 71 percent in the current fiscal year.

The report asserts that the problem stems from inadequate funding for taxpayer services. Cuts in taxpayer service spending, challenge tax compliance and limit the IRS’s ability to provide successful social benefit programs. The report notes further that the administration’s FY 2011 budget proposal projects that funding for taxpayer services will decline by another 7.2 percent over the next two years (FY 2012 and FY 2013), while funding for enforcement will increase by an additional 13.7 percent.

The report recommends outreach and education to help taxpayers who are overwhelmed by complex rules. Ms. Olson suggests that the IRS revise its mission statement to take full responsibility of its two roles—both as a tax collector and as a benefit administrator—and attend to both roles with equal merit. In addition, she believes that the IRS should develop a strategic plan to help the IRS perform its two major roles.

Additionally, the report identifies the potential burdens the new reporting requirement contained in the Patient Protection and Affordable Care Act may cause on businesses. Of particular concern to NSBA, beginning in 2012, all businesses will be required to submit a 1099 form for purchases on goods and services made to a vendor at or exceeding $600. Based on analysis of 2009 IRS data, around 40 million businesses and other entities will be subject to this new reporting requirement, including four million S Corporations, two million C Corporations, three million partnerships, two million farming businesses and roughly 26 million non-farm sole proprietorships.

During FY 2011, the Taxpayer Advocate Service (TAS) is planning to study the impact of the new reporting requirement more closely and, depending on what the study finds, may propose administrative or legislative recommendations to modify the provision or suggest that Congress consider less burdensome tax gap proposals to replace it.

The report concludes that some collection policies of the IRS are unnecessary and potentially harmful for taxpayers. Specifically, the report examines two types of tough enforcement actions—liens and levies. Contrary to the belief of the IRS, the report states that these two measures do not generate revenue for the IRS but instead, negatively impact taxpayers.

A lien filing can badly damage a taxpayer’s financial viability because lien filings will automatically appear on credit reports and can stay on a taxpayer’s credit record for an extended period of time—as long as seven months. The lien filing can adversely affect the taxpayer’s ability to obtain and retain a job, purchase a home, or obtain credit. The lien filing may also increase a taxpayer’s expenses and thus limit the taxpayer’s ability to pay his or her taxes in the future. The report concludes that in 2009 the IRS filed nearly one million liens against taxpayers.

The report argues that the IRS has fallen short of its year long promise to help taxpayers who have difficulty paying their taxes. In order to combat this issue, Ms. Olson has repetitively asked the IRS stop its policy of filing tax liens if the IRS determines that the taxpayer’s account should be placed in a "currently not collectable" status because of financial hardships. Also, she asked that the IRS require managerial approval for the filing of liens in cases where the taxpayer owns no assets. Although the IRS is looking into these suggestions, Olson is doubtful that there will be any changes in the immediate future because it will take the IRS substantial time to conduct a comprehensive review.

To view the FY 2010 National Taxpayer Advocate’s Annual Report to Congress, please click here.