2006 IRS REPRESENTATION UPDATE©

By Robert E. McKenzie

 

 

1.  CONTINUING  IRS REORGANIZATION 

Areas and Directors

1.10    After reorganization in 2000 we had Area Directors in 16 area offices in charge of collection and exam.  Each area had several Territory Managers who supervised both collection and exam groups.  As of 10/1/04, we now have Area Directors in charge of only collection or exam in each area.  All Territory Managers also specialize in one discipline.  The number of areas has been reduced from 16 to 7.  The Area Directors for collection and exam respectively are in different cities within each of those 7 areas.  The IRS has decided that specialization is a much more efficient method for collecting taxes and examining tax returns than the generalist approach used immediately after reorganization.

 

Submission Processing Centers

1.20    Eight former service centers dedicated to individual returns of individual 1040 returns: Andover, Atlanta, Austin, Fresno, Kansas City, Brookhaven, Memphis, and Philadelphia.

 

Two former service centers dedicated to business returns and TE/GE returns: Cincinnati and Ogden.

 

After 2003 Brookhaven ceased doing return processing.

 

IRS Memphis center ceased doing returns in October 2005.

 

IRS Establishes Office Of Professional Responsibility

1.30    In January, 2003 the Internal Revenue Service announced the creation of a new Office of Professional Responsibility as part of its modernization effort and the appointment of Brien Downing as director.           The Office of Professional Responsibility will be charged with enhancing the oversight of tax professionals. It replaces the office of the Director of Practice. 

 

Director Resigns

1.40    In December, 2003 Cono Namorato was appointed as the second Director of the Office of Professional Responsibility, He has resigned to return to private practice as a lawyer effective April, 2006. On April 4 Stephen Whitlock has been named acting director of the Internal Revenue Service's Office of Professional Responsibility. His office investigates allegations of misconduct and negligence against agents, attorneys, accountants and other professionals representing taxpayers before the IRS. The new office has more than three times the staff that was available under the previous organization.  With the additional resources, the Office of Professional Responsibility is concentrating on enforcing the standards of practice for those who represent taxpayers before the IRS as detailed in Circular 230.

 

New Circular 230 Rules

1.50    In January 2006  the Treasury and the IRS announced new Circular 230 rules. The revisions to Circular 230 proposed today would modify:

 

·        the definition of practice,

·        eligibility for enrollment,

·        unenrolled practice, and

·        the rules concerning contingent fees, conflicts of interest, standards with respect to tax returns and documents, affidavits and other papers, sanctions, discovery, publicity, and appeals.

 

The proposed regulations do not address the standards for written tax advice that were the subject of final amendments to the regulations issued in December 2004 and modified in May 2005.  A hearing on the proposed regulations is scheduled for Wednesday, June 21, 2006 at 10 a.m., in the IRS auditorium.

 

 

IRS Expands Access to e-Services Products

1.60    The Internal Revenue Service has expanded the number of tax professionals who can use its suite of e-Services incentive products. The expansion meets high demand and requests from tax professionals to use these valuable online tools. Effective March 21, 2005 tax professionals who e-file any combination of five or more accepted individual and business tax returns in a calendar year were allowed to use these e-Services products: Disclosure Authorization, Electronic Account Resolution and Transcript Delivery. When first launched in the summer of 2004, the e-Services incentive products were reserved for those who e-filed 100 or more individual returns.

 

e-Services Products for Practitioners

1.70    The IRS developed its e-Services products to meet the needs of the tax practitioner community.

 

Disclosure Authorization (DA)

Eligible tax professionals can complete disclosure authorization forms, view and modify existing forms, all online. Disclosure Authorization allows tax professionals to electronically submit Form 2848, Power of Attorney and Declaration of Representative; and Form 8821, Tax Information Authorization. Disclosure Authorization expedites processing and issues a real-time acknowledgement of accepted submissions. Form 8655, Reporting Agent Authorization for Magnetic Tape/Electronic Filers, may not be submitted using Disclosure Authorization.

 

 

Electronic Account Resolution (EAR)

Tax professionals using EAR can quickly resolve clients’ account problems by electronically sending and receiving inquiries about individual or business account problems, refunds, installment agreements, missing payments or notices. Tax professionals must have a power of attorney (Form 2848 only) on file before inquiring into a client’s account. Responses are delivered to a secure electronic mailbox within three business days. Use Disclosure Authorization to submit the Form 2848 to the IRS. Form 8655 authorizations may not be used to access EAR at this time.

 

Transcript Delivery System (TDS)

TDS resolves clients' need for return and account information quickly in a secure, online session. It allows eligible tax professionals, with a power of attorney (Form 2848 only) on file, to request and receive account transcripts, wage and income transcripts, tax return transcripts, and verification of non-filing letters for individual taxpayers and account transcripts for business taxpayers. Use Disclosure Authorization to submit the Form 2848 to the IRS. Form 8655 authorizations may not be used to access TDS at this time.

 

Other e-Services

1.80    Other e-Services products available to all tax professionals include:

 

e-Services Registration

Tax professionals who want to use any of the e-Services products must register online as individuals to create an electronic account. This is a one-time automated process where the user selects a username, password and personal identification number, or PIN. An on-screen acknowledgement confirms the successful initial registration process.

 

Preparer Tax Identification Number (PTIN)

Tax professionals may choose to use a PTIN, instead of a Social Security number on returns they prepare for clients. The PTIN application enables a preparer to apply for and receive online a PTIN or look up a forgotten PTIN.

 

IRS e-file Application

Applicants can complete and submit e-file applications online. Existing participants in IRS e-file can use it to update their applications. Principals of organizations can delegate e-Services authorities to other individuals by identifying them on their IRS e-file application.

 

Taxpayer Identification Number (TIN) Matching

TIN Matching is a pre-filing service offered to payers of income subject to backup withholding who submit any of six information returns (Forms 1099-B, INT, DIV, OID, PATR, and MISC). Payers must be listed in the IRS Payer Account File (PAF) database and must have filed information returns with the IRS in one of the past two tax years.

 

Interactive TIN Matching

Allows authorized payers to match up to 25 payee TIN and name combinations against IRS records and receive results within seconds.

 

Bulk TIN Matching

Allows authorized payers to match up to 100,000 TIN and name combinations and receive results within 24 hours.

 

 

2. TAXPAYER ADVOCATE

 

National Taxpayer Advocate Releases Report To Congress

2.10    In December 2005 National Taxpayer Advocate Nina E. Olson released a report to Congress. Internal Revenue Code § 7803(c)(2)(B)(ii)(III) requires the National Taxpayer Advocate to describe at least 20 of the most serious problems encountered by taxpayers. This year’s report describes 21 problems. In each case, the report includes the National Taxpayer Advocate’s description of the problem, the IRS’s response, and the National Taxpayer Advocate’s final comments and recommendations. This format provides a clear picture of which steps have been taken to address the most serious problems and which additional steps the National Taxpayer Advocate believes are required.  The 21 problems described in the report are as follows:

Trends in Taxpayer Service. As the IRS proposes to allocate more resources to collection, examination, and criminal investigation functions and fewer resources to taxpayer service functions, the IRS is also increasing efforts to “migrate” taxpayers toward electronic services and away from face-to-face contact. Before altering the mix of service and enforcement, the National Taxpayer Advocate believes the IRS should spend more time studying what types of services different taxpayer segments need and how best to deliver these services to help taxpayers remain compliant. The National Taxpayer Advocate recommends that the IRS undertake a research-driven needs-assessment, from the taxpayers’ perspective, to help identify what services taxpayers need and want and how best to deliver them. An assessment of needs will also help identify groups of taxpayers that may be resistant to, or unable to access, certain services. Once the IRS conducts a detailed assessment and understands how any proposed changes to taxpayer service may affect compliance, the IRS should develop a detailed strategy for migrating taxpayers from the current to the proposed model of delivering taxpayer service.

Criminal Investigation Refund Freezes. The IRS Criminal Investigation function (CI), through its Questionable Refund Program (QRP), places a “freeze” on hundreds of thousands of refund claims each year that it believes may contain indicia of fraud. CI personnel currently review the refund claims and “determine” whether they are fraudulent – without notifying taxpayers that their claims are under review and without giving taxpayers an opportunity to present documentation supporting their positions. Last year, the Taxpayer Advocate Service (TAS) received more than 28,000 requests for assistance from taxpayers whose refunds had been frozen. When TAS assisted the taxpayers, CI ultimately agreed to issue the full amount of the refund claimed (or more) in 66 percent of the decided cases and to issue a partial refund in an additional 14 percent of the decided cases. Thus, taxpayers received a full or partial refund in 80 percent of frozen-refund cases brought to TAS.  As a result of the TAS report the IRS has substantially revised its program and taxpayers now receive notice of a refund freeze.

The Cash Economy. Underreported income (and related self-employment tax) from the so called “cash economy” is probably the single largest component of the “tax gap.” It may exceed $100 billion per year. Because income from the cash economy is not subject to information reporting, many of the IRS’s traditional means of enforcement are unlikely to be effective in addressing it. The IRS must develop a comprehensive strategy for addressing the cash economy if it is to significantly reduce the tax gap.

Training of Private Debt Collection Employees. In or around September of 2006, the IRS’s Private Debt Collection (PDC) initiative will go into operation. The National Taxpayer Advocate is concerned about taxpayers interacting with private collection agents who have no understanding of important tax laws and will be trained by the contractors instead of the IRS.

EITC Exam Issues. In the past few years, the IRS has made significant progress in improving the administration of the EITC. Despite this progress, problems still exist for taxpayers subject to EITC examinations and recertification. These problems include delays in exam and recertification procedures, low taxpayer response rates, a lack of standardized treatment in recertification cases, and problems with documentation.

Levies on Social Security Payments. In general, recipients of Social Security benefits are elderly or disabled workers, or the surviving dependents of deceased workers. The IRS continues to process levies on Social Security payments without sufficient managerial review, causing undue burden on a vulnerable population of taxpayers. The National Taxpayer Advocate urges the IRS to implement safeguards that would prevent levies from being imposed on Social Security payments to low income and other at-risk taxpayers.

Appeals Campus Centralization. The IRS Office of Appeals (“Appeals”) has centralized its work on certain types of cases at six IRS campuses; these cases previously were resolved in field offices closer to taxpayers. Appeals campus centralization is aimed at decreasing the time it takes for a taxpayer to resolve a case. While this aim is appropriate and admirable, the National Taxpayer Advocate is concerned that centralizing Appeals case resolution may actually increase taxpayer burden. Centralization may reduce opportunities for taxpayers to have their cases resolved at the local level, diminish working relationships between taxpayers and Appeals employees, increase emphasis on processing at the expense of independent judgment, and diminish service for low income and unrepresented taxpayers. The National Taxpayer Advocate urges Appeals to alleviate these problems and protect taxpayers’ appeal rights by developing specific training that will help employees carry out Appeals’ independent mission in the campus environment. We recommend that Appeals monitor campus activity to ensure that taxpayers – particularly low income taxpayers – receive full and fair consideration of their cases and are adequately notified of their right to request a case transfer to a local Appeals office.

Refund Anticipation Loans: Oversight of the Industry, Cross-Collection Techniques, and Payment Alternatives. Given that a significant percentage of RAL customers are EITC recipients, the IRS has a compelling reason to consider improved oversight of the industry as well as seriously consider alternative refund delivery methods. The IRS contributes to the demand for Refund Anticipation Loans (RALs) by: (1) failing to deliver refunds in the quickest manner possible and (2) failing to provide RAL alternatives for the “unbanked.” It is also unclear if RAL customers fully understand the ramifications of cross-collection provisions in standardized RAL contracts, or if customers would even purchase the products if they were adequately informed of the cross-collection practices. The National Taxpayer Advocate recommends that the IRS review the effect of its Revenue Protection Strategy (RPS) on refund turnaround times and work with the Department of Treasury to develop alternative means of delivering refunds to taxpayers.

Identity Theft. Identity theft occurs when someone uses another individual’s personal information without permission to commit fraud or other crimes. Although the most common type of identity theft involves consumer fraud, an increasing number of identity theft victims find they need to contact the IRS to untangle their tax accounts. The National Taxpayer Advocate urges the IRS to resolve the tax issues faced by victims of identity theft more quickly and efficiently.

Complexity of the Employment Tax Deposit System. The Internal Revenue Code places significant responsibilities on employers for depositing, reporting, filing, and paying employment taxes. Recent data shows that the IRS assesses failure to deposit (FTD) penalties on one out of every 16 employment tax returns, yet eventually abates more than 60 percent of the FTD penalty amounts it originally assessed. This suggests that the rules and regulations governing federal employment tax deposits are overly complex.

Automated Collection System Levy Releases. Collection efforts through the IRS’s Automated Collection System (ACS) can result in levies of bank accounts, wages, or other income such as Social Security. In response to these levies, taxpayers will contact the IRS seeking to enter into a collection alternative, such as an installment agreement. The IRS can also designate an account as “currently not collectible” if the taxpayer can demonstrate a financial hardship. The Internal Revenue Code and Treasury Regulations require that the IRS promptly release levies when taxpayers enter into installment agreements or when they demonstrate the existence of a hardship. Some taxpayers encounter problems with the levy release, including clerical errors, delays that result in additional levies on taxpayer assets or income, or the IRS not returning levy proceeds when a delayed levy release results in additional levies. Delays are also due in part to taxpayers’ failure to request expedited levy releases so that the release can be faxed to the third party levy source. We encourage the IRS to consider revising its procedures so that all levy releases are assumed to require expedited procedures.

Regulation of Electronic Return Originators. Electronic Return Originators (EROs), along with return preparers, are taxpayers’ entry point into the tax system and have unprecedented access to taxpayers’ financial data and social security numbers. As such, EROs should be closely monitored to protect taxpayers, but the IRS’s current regulation of EROs is minimal. The National Taxpayer Advocate recommends the IRS increase its efforts, in part by making more visits to EROs, tracking EROs that are not filing any tax returns, and requiring those non-active EROs to recertify. The National Taxpayer Advocate further recommends that the IRS consolidate end-to-end responsibility for EROs, from approval of applications to monitoring ERO activities, in one IRS organization.

Limited Scope of Backup Withholding Program. Underreporting of individual income tax is the single largest source of the tax gap, accounting for over half of the gross tax gap. Backup withholding is one of the tools available to the IRS as it attempts to narrow the gap. The IRS has the authority to require payors to deduct and withhold tax under certain conditions, such as when a recipient fails to furnish a valid Taxpayer Identification Number. However, the IRS has not implemented the backup withholding program effectively.

Accessibility of e-Services for Tax Practitioners. The IRS’s web-based e-Services suite is available to tax practitioners who are active participants in the IRS e-file program and electronically file five or more accepted individual income tax returns in a filing season. The IRS uses e-Services “as a reward and incentive for e-filing” rather than addressing it from a customer service-oriented perspective. This policy of limiting access to e-Services deprives many highly trained and experienced tax practitioners of an extremely useful and efficient tool, and has the unintended result of making the Electronic Account Resolution program available to preparers without regard to their professional qualifications. The National Taxpayer Advocate recommends that the IRS provide access to e-Services to all practitioners qualified to practice before the IRS pursuant to Circular 230. She also recommends that the IRS expand access to the Transcript Delivery System in e-Services to all taxpayers, while taking the necessary security measures to safeguard confidential tax data on the Internet.

Mandatory Briefings for IRS Employees on TAS. Internal Revenue Code § 7803(c)(2)(C)(ii) requires the National Taxpayer Advocate to develop guidance for all IRS officers and employees, outlining the criteria for referral of cases to the Taxpayer Advocate Service (TAS). The IRS has denied the request of the National Taxpayer Advocate to include TAS training among its annual mandatory briefings for all employees The National Taxpayer Advocate urges the IRS to rethink its position and grant her request to make TAS training mandatory for all employees.

 

Allowable Expense Standards for Collection Decisions. Each year the IRS publishes schedules of national and local expense allowance standards. These standards reduce the subjectivity involved when IRS employees consider the collection alternative to pursue when a taxpayer is having difficulty paying the IRS (e.g., an offer-in-compromise, installment agreement, or suspension of collection). However, for any given taxpayer, the expense amounts provided by the standards will not necessarily cover his or her reasonable basic living expenses. The IRS relies on the subjective judgment of its employees to allow more than the standard amounts when appropriate. Many practitioners report that the IRS often fails to allow such additional amounts and uses the standards as an excuse to reject reasonable collection alternatives. The report discusses a number of reasons that the standards are often inadequate and provides recommendations for improving them, encourages IRS employees to allow additional amounts when appropriate, and addresses practitioner concerns.

Inadequate Taxpayer Service to Exempt Organizations, Resulting in Unnecessary Penalties. Most tax exempt organizations are very small entities with meager resources and modest budgets that rely largely on the services of volunteers. Tax filing requirements for these organizations are complicated and time consuming. The IRS automatically assesses penalties on these organizations when they do not comply precisely with these complex requirements. The National Taxpayer Advocate urges the IRS to reconsider its funding decisions with respect to exempt organization customer service and better utilize the resources available.

Direct Deposit of Income Tax Refunds. Under present law, there are no procedures for the IRS, the government’s Financial Management Service, and financial institutions to address inadvertent errors by taxpayers relating to direct deposits of tax refund checks. The taxpayer and the financial institution must resolve any dispute over the accuracy of a direct deposit refund, with little assistance from the IRS. The National Taxpayer Advocate recommends that the IRS consider all of the recommendations put forth by the Direct Deposit Task Force as well as other procedural improvements that can eliminate the potential for a misdirected direct deposit refund. The National Taxpayer Advocate also encourages the IRS to continue to work with financial institutions in an effort to recover misdirected funds.

Innocent Spouse Claims. One spouse (called the “innocent spouse”) may apply to the IRS for relief from joint liability for deficiencies or underpayments attributable to the other spouse. The IRS has difficulty communicating with taxpayers regarding the requirements for relief and how to fill out related forms. As a result, the IRS is able to grant fewer than three in ten requests for relief, and despite recent cuts in processing time, the IRS collectively takes more than two years to process requests that are appealed. Various IRS computer systems contain inconsistent information about innocent spouse claims processed by the Appeals function. These inconsistencies make it more difficult for the IRS to identify the source of any processing delays.

Limitations of Collection Account Databases. The lack of access to full taxpayer account histories in one place makes it difficult for IRS contact employees to respond to taxpayers’ questions or provide proper guidance on potential case resolutions. The Desktop Integration (DI) system provides IRS employees with greater access to the information needed, but not all systems interface with DI and not all IRS employees are required to use DI. The National Taxpayer Advocate urges the IRS to expand the number of systems interfacing with DI as well as requiring all IRS contact employees to use DI.

Reasonable Cause Assistant (RCA). The IRS does not utilize the Reasonable Cause Assistant (RCA) program -- a computer-based decision support tool -- for all determinations of penalty abatements for reasonable cause. In addition, the high rate of RCA abatement conclusions indicates that the IRS needs to eliminate unnecessary penalty assessments.  Because existing IRS data does not sufficiently differentiate RCA cases from non-RCA cases, the IRS cannot effectively analyze the penalty systems in place. The low rate at which RCA users abort the program’s conclusions may indicate that RCA does not encourage users to override an RCA decision even when appropriate. The National Taxpayer Advocate urges the IRS to review RCA and all related training and guidance materials to determine whether the application actually gives the user the flexibility to fully consider unique facts and circumstances.

 

 

Table 24 -- Taxpayer Advocate Service: Post-Filing Taxpayer Assistance Program,
by Type of Relief and Issues, Fiscal Year 2005
		Percentage
Type of relief and issues	Number	of
		total
Total applications for taxpayer assistance [1]	190,153	100
Taxpayer Assistance Order issued [2]	20	[3]
Relief provided to taxpayer:
Total	129,560	68
Taxpayer Assistance Order issued [2, 4]:
Complied	12	[3]
Sustained	**	**
Modified	**	**
No Taxpayer Assistance Order issued:
Full relief	119,237	63
Individual issue [5]	105,197	55
Systemic issue [6]	14,040	7
Partial relief	10,309	6
Individual issue [5]	9,398	5
Systemic issue [6]	911	[3]
No relief provided to taxpayer:
Total	57,133	30
Taxpayer Assistance Order issued:
Rescinded [2, 7]	4	[3]
No Taxpayer Assistance Order issued:
No relief (no response from taxpayer)	23,388	12
Advocate does not deem relief appropriate	18,114	10
Relief provided prior to Taxpayer Advocate
Service intervention	8,584	5
Relief not required (taxpayer rescinded request)	2,789	1
No relief (hardship not proven)	1,611	1
Relief not required (hardship not related to revenue laws)	1,391	1
No relief (tax law precluded relief)	1,252	1
Relief not identified [8]	3,460	2
Congressional inquiries [9]	11,532	N/A
Issues:
Total	190,153	100
Criminal investigation	26,505	14
Earned income tax credit [10]	14,180	7
Processing amended returns	11,919	6
Levies	10,131	5
Processing original returns	8,866	5
Substitute for return program [11]	7,425	4
Expedite refund requests	6,931	4
Injured spouse claim	6,283	3
Underreporter program [12]	5,816	3
Copies of returns, transcripts, reports, and Freedom
of Information requests	5,449	3
All others	86,648	46

 

3.  ENFORCEMENT

 

Highlights of 2005 Enforcement

3.10 Enforcement highlights for the fiscal year ended September 30th include the following:

 

·        Enforcement revenues – the monies from collection, examination, and document matching activities – increased by 10% to a record $47.3 billion.

 

·        Total individual returns audited increased by over 20% to 1,216,000 from 1,008,000 in 2004.  The number completed is back to a level last achieved in 1998.

 

·        Audits of individuals with incomes over $100,000 surpassed 221,000, the highest figure in 10 years, and well over double the 92,000 completed in fiscal year 2001.  The coverage rate in this category is still too low, but at 1.58% is double what it was four years ago.

 

·        Audits of small businesses organized as corporations turned up after years of decline.  17,867 were completed in 2005 against 7,294 a year earlier.

 

·        IRS data shows that 11,715 individuals earning more than $1 million were audited in FY 2005. — or 5.2 percent — of the 225,000 Americans who reported incomes of more than $1 million in 2005.

 

·        Audits of larger corporations – those with assets over $10 million – also increased, up 14% from a year ago to 10,878.  The coverage rate of 20% has rebounded significantly from that of 12% just two years ago.

 

·        Generated more than $4.7 billion in revenue in FY 2005 through two prominent settlement initiatives aimed at reducing examination and litigation expenses while deterring the use of abusive tax shelters,

 

·        In collection activities, levies and liens have recovered to pre-RRA ’98 levels.  Seizures remain a little used tool but have increased from last year.

 

·        Increased collection case closures by 12 percent and dollars collected by 14 percent from FY 2004,

 

·        Increase levies from 2,029,613 to 2,743,577 a 35% increase.

 

·        Criminal prosecutions recommended to the Justice Department did show a modest decline of 6% from a year ago.  The decline is attributable to lower numbers of narcotics and money laundering cases.  Tax and tax-related cases were flat year over year.

 

·        Increased convictions to 2,151 in 2005 (from 1,926 in 2002) through increased productivity.

 

·        CADE will ultimately replace the IRS’ antiquated Master File system, which is the repository of taxpayer information. CADE allows faster refunds (processing refunds on a daily basis), improved taxpayer service, faster issue detection, more timely account settlement, and a robust foundation for integrated and flexible modernized systems. CADE posted more than 1.4 million returns and generated more than $427 million in refunds. In FY 2006, CADE processed 4 million returns (with an anticipated 33 million in FY2007) and will be the single authoritative repository for account and return data for those returns.

 

Table 3
IRS Audits of Corporate Returns

 

Table 2
IRS Staff

 

 

 

 

 

IRS Enforcement Activities Continue To Recover Enhanced Enforcement Has Not Come At The Expense Of Service

 

 

Table 10 -- Examination Coverage: Recommended and Average Recommended Additional Tax After
Examination, by Type and Size of Return, Fiscal Year 2005
[Money amounts are in thousands of dollars, except as indicated.]