Taxpayers face risks from IRS budget and workload problems

— -- A new federal report warned today that the Internal Revenue Service's budget is too small and its workload too heavy for the agency to give taxpayers adequate service or protect their tax rights fully.

The problems have grown so serious that National Taxpayer Advocate Nina Olson, in delivering her office's annual report to Congress, called for enactment of a comprehensive taxpayer bill of rights to protect Americans from being improperly penalized.

"The overriding challenge facing the IRS is that its workload has grown significantly in recent years, while its funding is being cut," Olson said of the findings. "This is causing the IRS to resort to shortcuts that undermine fundamental taxpayer rights and harm taxpayers — and at the same time reduces the IRS' ability to deliver on its core mission of raising revenue."

Driving the IRS workload increase is increasing complexity of federal tax laws and regulations and frequent changes in the tax code — an estimated 579 changes in 2010 alone that had to be explained to taxpayers, entered in IRS computers and added to the agency's auditor training programs.

The IRS also has had to process a host of refundable tax credits enacted in recent years, such as the First-Time Homebuyer Credit and the Health Coverage Tax Credit. Compounding the workload increase, those programs have spawned a rise in bogus refund claims. Many were filed by thieves who stole the identities and financial data of honest taxpayers, the report said.

Simultaneously, Congress has moved to cut IRS funding, the report said, making it harder for the agency to collect all taxes owed — placing a disproportionate burden on compliant taxpayers.

Other problems and threats the report said taxpayers face include:

•Mistakes by automated data-matching systems the IRS uses to identify and target potentially inaccurate or fraudulent tax returns. "By defining these procedures as 'not an examination,' without explaining what they are and what taxpayer rights apply, the IRS abridges longstanding taxpayer rights," the report said.

•IRS decisions to avoid classifying most inquiries as formal taxpayer audits. That leads to loss of audit protections, including the right to avoid repetitive and unnecessary exams and to challenge IRS rulings in U.S. Tax Court before any taxes are assessed.

•The IRS in 2010 issued taxpayer notices correcting 10.6 million purported math errors, with some resulting in smaller tax refunds. But the report said the notices are often vague, making it difficult for taxpayers to determine the changes made to their tax returns and decide whether to challenge the adjustments.

•The percentage of phone calls the IRS answered from taxpayers seeking assistance from an agency employee dropped from 87% in federal fiscal year 2004 to 70% in fiscal year 2011. The report also said the IRS backlog of written correspondence from taxpayers seeking assistance rose by 158% in comparing the same time periods.

"The decline in these key measures is deeply disturbing," the report said. "Few government agencies or businesses would be satisfied if their customer service departments were unable to answer three out of every 10 calls, nor would they be content when nearly half of all correspondence takes more than 6½ weeks to answer."

Although Congress has enacted three taxpayer rights' measures in the past 20 years, the report said a recent survey found that 55% of taxpayer respondents said they didn't believe they had rights in IRS proceedings, and 61% said they didn't know their legal rights in federal tax matters.

Olson's report urged Congress to enact a new code of taxpayer rights grouped under 10 broad principles, including rights to be informed, assisted and be heard by the IRS, and rights of appeal, representation and a fair and just tax system.

"I believe taxpayers and tax administration will benefit from an explicit statement of what taxpayers have a right to expect from their government and what the government has a right to expect from its taxpayers," said Olson.