Taxpayers have the right to expect prompt service and accurate information from the Internal Revenue Service, yet the No. 1 problem last year was finding the right office or person to answer a question or resolve an issue, according to the government’s taxpayer advocate.
“Our theme this year is taxpayer rights,” Nina E. Olson said in remarks prepared for a House Ways and Means oversight subcommittee hearing yesterday.
“We are, after all, asking taxpayers to voluntarily pay over their taxes to us,” she said. “We should not make it difficult for them to do so.”
It being tax-filing season, and Miss Olson was discussing her annual report to Congress, which highlights ways to make it easier for people to figure out and pay their federal income taxes. The IRS expects to receive 132 million income-tax returns this year.
The advocate is part of the IRS and serves as a watchdog over and problem solver for the federal tax system. Congress enhanced the power of the advocate’s office when lawmakers overhauled the IRS in 1998.
The 400-plus-page report listed the 22 most serious problems faced by individual and business taxpayers. “Navigating the IRS” was at the top, and a third of the problems dealt with the administration of the Earned Income Tax Credit program.
Miss Olson recommended that the IRS develop a user-friendly and easily accessible list of its chain of command and programs for which it is responsible. She also suggested that it include names, addresses and telephone numbers for every IRS function.
The report urges Congress to mandate that paid preparers of federal returns be licensed and to simplify the tax reporting and record-keeping requirements for husbands and wives who jointly own and operate businesses.
There are no national standards for paid preparers, meaning anyone can prepare a return for a fee. That is a problem, Miss Olson said, because more than half of all taxpayers many of whom feel intimidated by the complexity of the tax code pay someone to prepare their returns, and that person may know only as much or, in some cases, as little about the process as the taxpayer.
Among paid preparers, only lawyers, certified public accountants and “enrolled agents” are subject to regulation, either by the IRS or a state licensing agency. Enrolled agents have passed an IRS exam about their knowledge of tax law and procedure and practice before the agency.
The report suggests that a licensing, registration and enforcement program be created for anyone other than a lawyer, CPA or enrolled agent who is paid to prepare more than five federal returns in a calendar year. About 300,000 to 600,000 tax preparers could be affected by the proposal.
As for married couples who jointly own an unincorporated business, federal tax law classifies these businesses as partnerships, subjecting them to complex and time-consuming record-keeping and tax-filing requirements. But in practice, many of these businesses owners file tax forms suggesting that only one spouse is the proprietor.
As a result, only that spouse can file other required tax forms and receive credit for paying Social Security and Medicare taxes a costly oversight that can lead to the loss of these benefits for the surviving spouse, the report says. And, depending on state law, there can be adverse consequences during a divorce from inaccurately classifying a jointly owned business as a sole proprietorship.
Congress should change the law so that these couples can choose not to file the more complex partnership return. They could file simpler forms and also divide net profits or losses between them, giving each one credit toward Social Security and Medicare.