The National Taxpayer Advocate Annual Report to Congress

National Public Accountant, The, June, 2002 by William Stevenson

The National Taxpayer Advocate Annual Report to Congress (FY 2001)

LEGISLATIVE RECOMMENDATIONS

Congress mandates that The National Taxpayer Advocate Office of the IRS
provide a full and substantative analysis of its activities for the
year, including a summary of significant taxpayer problems and
recommendations to solve those problems. Last month's (April/May)
National Public Accountant contained a table outlining the Problems
Encountered by Taxpayers. This table keeps the order of rankings given
by the National Taxpayer Advocate.

Issue                           TAS Recommendation

(1) Uniform definition          A uniform definition of qualifying
    of a "Qualifying            child should be adopted to determine
    Child."                     eligibility for
                                * Dependency Exemption
                                * EITC
                                * Child Credit
                                * Dependent Care Tax Credit
                                * Head of Household Filing Status
                                The provisions in TAS report are
                                intuitively sound.

(2) Means tested Public         Amend the tax law to exclude
    Assistance can              means tested public assistance
    cause taxpayers to          from the computation of support.
    loose dependency
    exemption or Head of
    Household status.

(3) Voluntary release of        Amend the law to clarify that a
    dependency exemption.       custodial parent who is eligible to
                                claim the dependency exemption must
                                voluntarily sign a written release.

(4) Age restrictions for        Eliminate age restrictions. Those
    single, childless           under 25 and over 65 should not
    EITC taxpayers.             be denied EITCs because of their
                                ages.

(5) Head of Household           Allow single or separated non-
    filing status.              custodial parents who are paying
                                substantially all required child
                                support to claim Head of Household
                                status.

(6) Joint and Several           Amend the law to provide guidance
    Liability.                  in determining whether it would be
                                inequitable to hold the taxpayer
                                jointly and severally liable.

(7) Separate Liability.         Allow married individuals to
                                elect to sever their liability
                                by declaring their separate
                                items of income on their original
                                tax return.

(8) Equitable Relief.           Provide guidance about factors to
                                be considered in determining whether
                                it would be inequitable to hold
                                the taxpayers jointly and severally
                                liable for a joint return.

 (9) Credits and Refunds.       Allow for refunds when equitable
                                relief is granted and provide
                                guidance for developing a broader
                                interpretation of the issuance of
                                refunds.

(10) Final Determination        Allow the IRS to rescind a
     Rights.                    determination letter, a letter
                                issued under IRC Sec. 6015. Require
                                the IRS to provide the last date to
                                petition the Tax Court and allow
                                taxpayers to petition the U.S. Tax
                                Court under Sec. 6015(f).

(11) Alternative Minimum        The National Taxpayer Advocate
     Tax for Individuals.       recommends that the AMT be
                                repealed.




(12) Interest Rate and          Repeal the "failure to pay penalty"
     Failure to Pay             provision while allowing for a
     Penalty.                   higher underpayment interest rate.





(13) Interest Abatement         Abate the assessment of all
     on Erroneous               interest on any erroneous refund.
     Refunds.




(14) First-Time Penalty         Authorize the IRS to grant a one-
     Waiver.                    time abatement of the "failure to
                                file" and "failure to pay"
                                penalties for first-time filers.

(15) Home-Based Service         Clarify that HBWs are employees
     Workers (HBWs).            rather than independent
                                contractors.

(16) Returns of Levy or         Extend the period of time in which:
     Sale Proceeds.             1. A third party can request return
                                   of a levied fund or proceeds.
                                2. A proceeding shall begin from
                                   nine months to two years.
                                3. A taxpayers shall request a return
                                   of levied funds or proceeds to
                                   a period of four years.
                                4. Reinstatement of funds to retirement
                                   accounts may be authorized.

(17) Partial Payment            Allow the IRS to enter into installment
     Installment                agreements that do not provide for full
     Agreements.                payment of the tax liability.



(18) Education Credits and      Simplify the education provisions
     Incentives.                by introducing uniformity.



(19) Credit for the Elderly or  Amend the Code to adjust the current
     Permanently and Totally    threshold amount for past inflation
     Disabled.                  and provide for future indexing.

(20) Adjusting Estimated Tax    For purposes of the estimated tax
     Penalty in Accordance      penalty, the return for the taxable
     with Amended Returns       year is the original return or any
                                subsequently filed amended return.

(21) Community Property Laws.   Amend the code to disregard state
                                community property tax laws.




(22) Health Insurance           Allow self-employed individuals to
     Deduction for              deduct the cost of health insurance
     Self-Employed              in computing that profit for
     Individuals.               calculating self employment tax.

(23) Federal Tax Deposit (FTD)  Reduce the current 10% penalty rate for
     Avoidance Penalty.         failure to make an FTD in the manner
                                prescribed to a 2% penalty rate.

(24) Deduction for              Allow unreimbursed employee business
     Unreimbursed Employee      expenses as an above-the-line
     Business Expenses.         adjustment to total income.



(25) Income Averaging for       Provide commercial fishermen
     Commercial Fishermen.      the benefits of income averaging
                                currently available to farmers.

(26) Disclosure Regarding       Allow the IRS to contact and provide
     Suicide Threats.           necessary return information to
                                specified tax law enforcement agencies
                                and local suicide prevention
                                authorities, in addition to federal and
                                state law enforcement agencies in
                                situations involving danger of death
                                or physical injury.

Issue                           NSA View

(1) Uniform definition          Fixing the problem will help smooth some
    of a "Qualifying            of the rough edges created by ill-
    Child."                     thought-out legislation. Simplifying
                                this overly complex aspect of tax law
                                will greatly reduce the burden for the
                                average taxpayer. The Tax Act of 2001
                                adopted a simplified definition of a
                                child for purposes of the EITC.



(2) Means tested Public         The low-income taxpayer should not
    Assistance can              be penalized for receiving public
    cause taxpayers to          assistance. The Tax Act of 2001
    loose dependency            excludes non-taxable employee
    exemption or Head of        compensation from the definition of
    Household status.           earned income for EITC purposes.

(3) Voluntary release of        The TAS recommendation would
    dependency exemption.       eliminate state law from being
                                able to trump federal law.


(4) Age restrictions for        The EITC program is a welfare
    single, childless           program and is as valid for those
    EITC taxpayers.             under 25 and over 65 as it is for
                                those between 25 and 65.

(5) Head of Household           TAS recommendation is a monument
    filing status.              to common sense and recognizes
                                certain realities in our society.



(6) Joint and Several           IRS employees historically have
    Liability.                  difficulty in working in subjective
                                areas such as equitability.


(7) Separate Liability.         Even though taxpayers may choose
                                to sever their liability, the
                                IRS can still challenge them. The
                                rules should be changed, but their
                                administration should be simple.

(8) Equitable Relief.           It appears that making determinations
                                in areas dealing with equity requires
                                a high quality work force that is
                                empowered to make decisions.


 (9) Credits and Refunds.       This is another common sense
                                recommendation.




(10) Final Determination        These recommendations are more
     Rights.                    common sense ideas that need to be
                                included in a separate tax
                                simplification and equity package.




(11) Alternative Minimum        The AMT should be recalled just
     Tax for Individuals.       like poorly manufactured tires and
                                baby toys. In a major product
                                recall, the government is not
                                concerned with costs nor should it
                                be with the repeal of the AMT.

(12) Interest Rate and          The record should show that most
     Failure to Pay             penalties and interest payments come
     Penalty.                   from typically compliant taxpayers.
                                Non-compliant taxpayers pay neither
                                penalties, interest or taxes! There is
                                a difference between "Non-Compliance"
                                and "Out of Compliance."

(13) Interest Abatement         If taxpayers timely return erroneous
     on Erroneous               refunds, they should not be charged
     Refunds.                   interest. The TAS expects taxpayers
                                to calls the IRS if they receive an
                                erroneous refund of $5,000 . Have
                                you tried to call the IRS lately?

(14) First-Time Penalty         Add this common sense suggestion to
     Waiver.                    the new Tax Equity legislation.



(15) Home-Based Service         If adopted, this rule will drive
     Workers (HBWs).            more taxpayers underground and/or
                                increase non-compliance for some.

(16) Returns of Levy or         More common sense recommendations
     Sale Proceeds.             from the TAS.









(17) Partial Payment            In conjunction with repairing the
     Installment                OIC program, NSA would make the
     Agreements.                installment agreement recommendation
                                one of the top priorities that need
                                to be addressed immediately.

(18) Education Credits and      NSA totally agrees with both TAS and
     Incentives.                JCT. There should be no difficulty
                                shoe-horning these common sense
                                recommendations into a large

(19) Credit for the Elderly or  Congress should look for ways
     Permanently and Totally    to help those who cannot help
     Disabled.                  themselves.

(20) Adjusting Estimated Tax    Another common sense recommendation
     Penalty in Accordance      to the equity tax package.
     with Amended Returns


(21) Community Property Laws.   This important suggestion will grant
                                relief to joint filers from community
                                property states. Currently, relief
                                from taxes does not provide relief
                                from liens on property.

(22) Health Insurance           This is a pro small business
     Deduction for              recommendation.
     Self-Employed
     Individuals.

(23) Federal Tax Deposit (FTD)  Most penalties are paid by
     Avoidance Penalty.         typically compliant taxpayers.
                                The current system is abusive.

(24) Deduction for              TAS' recommendation would relieve some
     Unreimbursed Employee      taxpayers from exposure to the AMT.
     Business Expenses.         Most taxpayers will benefit from this
                                recommendation due to the 2% floor
                                applicable to miscellaneous expenses.

(25) Income Averaging for       This is a taxpayer friendly
     Commercial Fishermen.      recommendation. Perhaps we should
                                bring averaging back for everyone.

(26) Disclosure Regarding       NSA totally supports the
     Suicide Threats.           suicide threat recommendation.







Bill Stevenson heads the federal taxation area of NSA's Right to
Practice Committee. He was selected Accountant of the Year for 2001.