National Taxpayer Advocate (NTA) Nina E. Olson on January 10 released the NTA 2016 Annual Report to Congress. In the report, Olson recommended that the IRS revamp its “Future State” plan in order to adopt a taxpayer-centric focus and urged Congress to emphasize simplification when it considers tax reform in 2017. The report noted that voluntary compliance, worldwide taxpayer services, geographic focus and a Taxpayer Bill of Rights (TBOR) are necessary elements of the Future State. It also contains a list of the most litigated taxpayer issues, Taxpayer Advocate Service (TAS) research and related studies and legislative recommendations.

Olson noted that the IRS was responsive to concerns she raised in the 2015 report to Congress about the Future State, including the Service’s operations and interactions with taxpayer. The Service has made Future State information available on its website and has provided assurances that it will continue to provide telephone and face-to-face services, should taxpayers choose to use them. Despite assurances that the Future State is more of an evolving approach than a static plan, Olson suggested, based on discussions with taxpayers and stakeholders during the 12 public forums held around the country, as well as focus groups and nationwide surveys, that “the IRS adopt a fundamentally different approach to tax administration.”

“This is arguably the most important piece I have written about the IRS in my 15 years serving as the National Taxpayer Advocate,” Olson wrote in the report. She presented a series of proposals intended to improve tax administration, placing particular emphasis on changing the culture of the IRS. “To create an environment that encourages taxpayer trust and confidence, the IRS must change its culture from one that is enforcement-oriented to one that is service-oriented.”

Among the proposals suggested, Olson recommended putting taxpayers first; instead of placing an emphasis on enforcement, funding should be directed toward meeting basic taxpayer needs. Placing an emphasis on service and trust can increase tax compliance, Olson believes. She noted that taxpayers who seek help to comply but do not receive that help are treated as tax evaders. “This treatment in turn breeds resentment and increases the risk that the taxpayer who was willing to comply is no longer willing to do so. In this way, the underlying assumption by the tax agency that taxpayers will evade tax becomes a self-fulfilling proposition. The agency ends up converting a compliant taxpayer into a noncompliant one.”

Tax Simplification

The report noted that the TAS examined the current tax code’s compliance burdens and found that individuals and businesses spend approximately 6-billion hours a year complying with filing requirements, not including IRS audits or notices. Complexity “rewards taxpayers who can afford expensive tax advice and discriminates against taxpayers who cannot,” according to the report.

Several areas of complexity that Congress should address were highlighted, including: repealing the Alternative Minimum Tax for individuals; consolidating the family status provisions in the tax code; consolidating at least 12 incentives to save or spend for education; consolidating at least 15 incentives to save for retirement; simplifying worker classification determinations to minimize employee v. independent contract disputes; eliminating or reducing procedural incentives to enact tax provisions that expire and require periodic renewal (sunsets); eliminating or reducing the gradual phase-out of tax benefits as income rises; and streamlining the more than 170 civil penalties contained in the tax code.

The report also addresses the need for the IRS to further incorporate the Taxpayer Bill of Rights into its operations. In addition, despite improvements in fraud detection and identity theft, the Service needs to improve the accuracy of its determinations to avoid significant refund delays for taxpayers. Finally, the report raises concerns about questionable legal advice given by the IRS Office of Chief Counsel regarding the implementation of the private debt collection program mandated by Congress.