Taxpayer Advocate Service News
  1. NTA Blog: IRS Examinations Continued - The IRS Should Promote Voluntary Compliance and Minimize Taxpayer Burden in the Selection and Conduct of Audits

    Subscribe to the NTA’s Blog and receive updates on the latest blog posts from National Taxpayer Advocate Nina E. Olson. Additional blogs from the National Taxpayer Advocate can be found at www.taxpayeradvocate.irs.gov/blog

    In my recently released Annual Report to Congress, I discussed the need to evaluate the impact of IRS audits on voluntary compliance. Last week’s blog discussed some of the strengths and weaknesses of the three types of traditional IRS audits: correspondence audit, office audit and field audit. In this week’s blog, I will discuss some of the factors that influence voluntary compliance.

    What Factors Influence Voluntary Compliance?

    Traditional voluntary compliance has focused on deterrence theory. However, social science research indicates that the deterrence theory accounts for only a portion of the actual compliance rates and, that social norms, personal values, and attitudes may have a larger impact on taxpayers’ compliance decisions. Studies have shown that to ensure a high level of voluntary tax compliance, taxpayers must have faith and trust in the fairness of the tax system. In this year’s report, I include a research study in Volume II that explores the influence of tax audits on taxpayers’ attitudes and perceptions. Overall, taxpayers in the study who experienced audits reported higher levels of fear, anger, threat, and caution when thinking about the IRS and felt less protected by the IRS. Taxpayers who experienced correspondence exams experienced a lower level of  perceived justice compared to those who underwent office and field exams. The study also found that taxpayers who experienced an audit that resulted in a refund of tax perceived the IRS with less trust after the conclusion of the audit. These findings suggest that when selecting returns and evaluating audit cases, the IRS should research and consider how the audits build taxpayer trust and affect future voluntary compliance.

    What Is the Impact of Traditional IRS Audits on Voluntary Compliance?

    In the three Most Serious Problems in my 2018 report (here, here and here), I expressed concerns that IRS examinations fail to increase future voluntary compliance, do not measure voluntary compliance in terms of taxpayers’ positive attitudes towards the IRS and educating taxpayers, and place undue burdens on taxpayers. The IRS’s traditional audit program has been greatly reduced over the last ten years from a total of nearly 1.75 million audits in fiscal year (FY) 2010 to about 970,000 in FY 2018, as shown in the figure below.
    Number of Correspondence Audits, and Field Audits Closed During Fiscal Years 2009 Through 2018
    For this reason, it is even more critical that the IRS focus on increasing voluntary compliance with the audits that it does conduct. An examination is primarily an education vehicle, so the taxpayer learns the rules, corrects mistakes, and can comply in the future. In fact, the IRS gains about twice as much from the long-term effects of an audit than it does from the actual audit itself.  Yet, a significant number of correspondence audits—about 42 percent in FY 2018—were closed with no personal contact. As a result, the IRS misses opportunities to educate the taxpayer about complicated rules and procedures, and complicated fact situations, or both, as in the case of the Earned Income Tax Credit (EITC).

    The IRS does not know whether its field exams are promoting voluntary compliance because it does not have a measure to track future filing compliance post-audit. Instead, the IRS focuses primarily on the bottom line and the direct effects of a specific audit—measuring closures, cycle time, employee satisfaction, and quality scores.

    The IRS may also be selecting the wrong taxpayers and issues for field audit, given declining resources and high no-change rates—averaging 23 percent for Small Business/Self-Employeed (SB/SE) and 32 percent for Large Business and International (LB&I) field audits in FYs 2010-2018. Research shows that audits proposing no additional tax (“no change” audits) result in greater future noncompliance: a recent study found Schedule C taxpayers reduced their reported income in the three years after a no-change audit by about 37 percent.

    The face-to-face experience in office exams benefits both the taxpayer and the IRS—the taxpayer can, in real time, ask questions and explain his or her position to the IRS, and the IRS employee can immediately see if the taxpayer understands the current examination, next steps to be taken, and how to comply in the future.

    • The IRS could improve office audits by tracking results of audits that are appealed by the taxpayer, educating taxpayers on future compliance by adding taxpayer education as a quality attribute, and increasing the number of tax compliance officers (TCOs) in more locations throughout the United States. 

    • Correspondence audits could be converted into virtual face-to-face audits through the use of webex technology, which has been successfully piloted by the Office of Appeals. 

    • SB/SE’s field auditors could improve the taxpayers’ audit experience by sharing and discussing the audit plan with taxpayers and affording them the opportunity to propose changes to the plan before it is final, notifying taxpayers of any consultations with specialists, and giving them the opportunity to discuss with the specialist any technical conclusions.

    The recommendations provided in my annual report can guide the IRS toward improving taxpayers’ audit experiences, and developing measures of an audit’s impact on future compliance.

    The views expressed in this blog are solely those of the National Taxpayer Advocate. The National Taxpayer Advocate is appointed by the Secretary of the Treasury and reports to the Commissioner of Internal Revenue. However, the National Taxpayer Advocate presents an independent taxpayer perspective that does not necessarily reflect the position of the IRS, the Treasury Department, or the Office of Management and Budget.

  2. Success Story: Through advocacy and perseverance, TAS helped relieve a taxpayer’s hardship

    Every year, the Taxpayer Advocate Service (TAS) helps thousands of people with tax problems. This story is only one of many examples of how TAS helps resolve taxpayer’s tax issues. All personal details are removed to protect the taxpayer’s privacy.

    One of the main reasons TAS exists is to help taxpayers with tax problems who are also suffering financial hardships. When taxpayers owe past due taxes, their refunds automatically offset to pay the amount that they owe. If taxpayers are suffering a hardship and need the refund to pay for necessary living expenses such as rent, utilities or medical expenses, TAS can work with the IRS and get part or all of the refund to help pay for the expenses – in certain situations.  

    The minute TAS can provide relief to a taxpayer in a hardship situation, it acts quickly like it did when helping this taxpayer get part of her refund that the IRS was about to apply to past due federal taxes. When the taxpayer contacted TAS, the case advocate worked closely with the taxpayer to obtain the necessary, required documentation to submit to the IRS, asking it to issue the taxpayer a refund up to the amount of the documented hardship. Once TAS received all the necessary paperwork, it negotiated with the IRS and obtained permission to issue the taxpayer’s refund which TAS quickly prepared and submitted for processing.  

    Although there were some setbacks along the way, TAS did everything it could to have the refund issued to the taxpayer as quickly as possible. The case advocate persisted and after much empathy, advocacy and perseverance, the IRS processed the refund and the taxpayer successfully received it at a time when she needed it most.

    When working with the Taxpayer Advocate Service, each individual or business taxpayer is assigned to an advocate who listens to the problem and helps the taxpayer understand what needs to be done to resolve their tax issue. TAS advocates will do everything they can to help taxpayers and work with them every step of the way. Occasionally TAS features stories of taxpayers and advocates who work together to resolve complex tax issues. Read more TAS success stories.

    Learn more about whether TAS can help you: TAS eligibility.

  3. NTA Blog: There is Still Time to Register for the International Taxpayer Rights Conference

    Subscribe to the NTA’s Blog and receive updates on the latest blog posts from National Taxpayer Advocate Nina E. Olson. Additional blogs from the National Taxpayer Advocate can be found at www.taxpayeradvocate.irs.gov/blog

    We are just weeks away from the 4th International Taxpayer Rights Conference. This year’s conference takes place May 23-24, 2019 at the University of Minnesota Law School in Minneapolis, Minnesota. The conference’s theme is Taxpayer Rights in the Digital Age: Implications for Transparency, Certainty, and Privacy. For two days, an international panel of experts will discuss topics ranging from big data and automation to artificial intelligence and data mining, and how they impact the taxpayer. We will also have panels on transparency and access to administrative guidance, and different countries’ approaches to whistleblowers. The full agenda is available online.

    One of the greatest benefits of this conference is the opportunity to spend time conversing with a global community of scholars, practitioners and government officials about international taxpayer rights. More than 20 countries are represented at this year’s conference. We’ve shared comments from prior conference attendees here.

    You can still register at www.taxpayerrightsconference.com, and I encourage you to do so as registration closes next week on Wednesday, May 15, 2019.

    We have posted full videos and papers from the past conferences on the conference’s website here.

    Visit TaxpayerRightsConference.com today for more information.  For questions, email tprightsconference@irs.gov.



    The views expressed in this blog are solely those of the National Taxpayer Advocate. The National Taxpayer Advocate is appointed by the Secretary of the Treasury and reports to the Commissioner of Internal Revenue. However, the National Taxpayer Advocate presents an independent taxpayer perspective that does not necessarily reflect the position of the IRS, the Treasury Department, or the Office of Management and Budget.

  4. NTA Blog: IRS Examinations - The IRS Should Promote Voluntary Compliance and Minimize Taxpayer Burden in the Selection and Conduct of Audits

    Subscribe to the NTA’s Blog and receive updates on the latest blog posts from National Taxpayer Advocate Nina E. Olson. Additional blogs from the National Taxpayer Advocate can be found at www.taxpayeradvocate.irs.gov/blog

    In February of 2019, I released the 2018 Annual Report To Congress in which, among other things, I discuss the influence of tax audits on taxpayers’ attitudes and perceptions, and specifically focus on the three primary types of traditional or “real” IRS audits, which can occur through correspondence, at the taxpayer’s home or business, or at an IRS office. In my 2017 Annual Report to Congress and a related blog post around nine months ago, I described IRS audit rates and the distinction between “real” and “unreal” audits. This blog, however, provides an overview of traditional or “real” audit programs, along with some of my findings.


    Why are IRS audits important?


    The IRS is authorized to examine books, papers, records, or other data and take testimony to determine the correctness of any return and the liability of any person for tax under Internal Revenue Code (IRC) § 7602(a). The IRS’s primary purpose in selecting tax returns for examination or audit is to promote the highest degree of voluntary compliance. IRS audits are intended to detect and correct noncompliance of audited taxpayers, as well as create an environment to encourage non-audited taxpayers to comply voluntarily.  


    What Types of Audits are Conducted by the IRS Operating Divisions?


    As stated above, the IRS conducts audits either via correspondence, office, or field audits. Generally, correspondence audits are managed by mail for a single tax year and involve no more than a few issues that the IRS believes can be resolved by reviewing simple documents. A field exam deals with more complex issues and involves a face-to-face meeting between the taxpayer and an IRS revenue agent at the taxpayer’s home or place of business. Finally, an office audit is conducted at a local IRS office and generally involves issues that are more complex than those found in correspondence exams, but less complex than examinations conducted in the field.

    In fiscal year (FY) 2018, the IRS audited almost 970,000 taxpayer’s tax returns (including business and individual returns), approximately 0.5 percent of all returns received that year. Correspondence audits are by far the most common type of audit comprising approximately 76 percent of all audits (business and individual) as shown on the figure below.



    In my report, I discuss examination programs operated by three IRS business operating divisions - Wage & Investment (W&I), Small Business and Self-Employed (SB/SE), and Large Business & International (LB&I).  

    • W&I handles taxpayers who pay taxes through withholding. W&I conducts all its audits via correspondence concerning issues such as refundable credits and some returns containing Schedule C, Profit and Loss from Business. 

    • SB/SE conducts correspondence audits, office audits, and field examinations of small business taxpayers with assets less than $10 million, as well as examinations of self-employed and other individuals with income that extends beyond the level of W&I responsibility. 

    • LB&I is responsible for the tax compliance of businesses with assets of $10 million or more, as well as individuals with high wealth or international tax implications. LB&I conducts field, office, and correspondence audits.  

    An overview of the audit selection process for each business operating division can be found in the Exam Introduction section, of my 2018 Annual Report.


    What Do the Audit Results Show?


    A TAS review of 2018 audit results by audit type reflected some of the strengths and weaknesses of the IRS’s examination programs in terms of promoting voluntary compliance.  

    • IRS office and field audits show high “agreed” rates of about 47 percent on average for each type of audit, but many of the field audits also concluded with “no change” in tax, suggesting that both SB/SE and LB&I are not identifying the correct tax returns or issues for audit. 

    • Combined W&I and SBSE correspondence audit results show a “non-response” rate of 40 percent and a default rate of 20 percent. The 40 percent “non-response” rate indicates that taxpayers did not respond at all to either the IRS’s correspondence audit notice or their resulting statutory notice of deficiency. In addition, another 20 percent of the taxpayers that did respond and participate in these examinations did not sign an agreement or petition the Tax Court after the issuance of the statutory notice of deficiency.  


    Of particular concern, is that most of these correspondence audits involved audits of individual income tax returns of low-income taxpayers with incomes of $25,000 or less who claimed the Earned Income Tax Credit (EITC). The high “non-response” and default rates among these taxpayers suggest that it is especially difficult for taxpayers who claim the EITC to respond to the IRS timely and appropriately for several reasons, including the complexity of EITC eligibility requirements and complicated family living situations.

     

    In effort to determine the effectiveness of the IRS’s audit program, it is essential that we look at the factors that influence voluntary compliance. In next week’s blog, we’ll explore recent research into these factors, especially in the context of audits, and discuss the impact of IRS audits on voluntary compliance.

    The views expressed in this blog are solely those of the National Taxpayer Advocate. The National Taxpayer Advocate is appointed by the Secretary of the Treasury and reports to the Commissioner of Internal Revenue. However, the National Taxpayer Advocate presents an independent taxpayer perspective that does not necessarily reflect the position of the IRS, the Treasury Department, or the Office of Management and Budget.

  5. NTA Blog: Although the IRS Has Made Some Improvements, Math Error Notices Continue to Be Unclear and Confusing, Thereby Undermining Taxpayer Rights and Increasing Taxpayer Burden

    Subscribe to the NTA’s Blog and receive updates on the latest blog posts from National Taxpayer Advocate Nina E. Olson. Additional blogs from the National Taxpayer Advocate can be found at www.taxpayeradvocate.irs.gov/blog

    With the filing season in full operation, many taxpayers are receiving correspondence from the IRS that convey significant taxpayer rights and require taxpayers to take prompt action. In my April 3rd blog post, I discussed a Literature Review in my 2018 report to Congress that investigated how notices can be improved using insights from the available psychological, cognitive, and behavioral science research. As I noted, a major issue with current IRS notices is that many taxpayers have difficulty understanding them. They may be unsure about what the notice requires them to do, the steps they may need to take, or the rights they have to challenge the IRS’s determination in a notice. In this blog, I will focus on math error notice unclarity, which I identified as one of the Most Serious Problems.

    What is the IRS’s math error authority?

    Congress has granted the IRS “math error authority,” which allows the IRS to make certain summary adjustments to a taxpayer’s return. If the changes lead to a greater amount of tax, the IRS would make an assessment. These “math error” changes can be made when the IRS determines that the taxpayer has made a mathematical or clerical error that is obvious to fix by looking at the face of the return. The types of issues Congress has allowed to be resolved with math error authority have progressively increased over the years, as a result of IRS lobbying, with the IRS now making summary changes for more and more complex issues. A past TAS research study on math errors committed on individual tax returns found that some of these summary changes have led the IRS to incorrectly deny tax benefits to some taxpayers.

    Why are math error notices important?

    When the IRS determines that a taxpayer has made a math error, it will send a math error notice, informing the taxpayer of the error, that the IRS changed the taxpayer’s return to correct the error, and any additional tax that the IRS believes the taxpayer owes. However, TAS’s review of some of these notices has shown that they are lacking clarity in many areas, and are not designed with taxpayer rights in mind. Clarity in math error notices is particularly important because taxpayers must respond to these notices within 60 days to preserve their right to petition the Tax Court before paying the assessed tax. Yet some math error notices do not include this right to petition and deadline information on the first page. And despite clear evidence that certain math errors incorrectly denied tax benefits to some taxpayers, the IRS does not track the abatement rates of its math error assessments to see which math error adjustments are causing the most problems and need to be corrected.

    Do notices adequately explain errors to taxpayers?

    When Congress expanded the IRS’s math error authority to include certain “clerical errors,” such as leaving a box on a tax return blank, it instructed the IRS that “the taxpayer must be given an explanation of the asserted error.”  Yet, despite this, math error notices do not always include adequate explanations to the taxpayer about what error he or she made on a tax return. Math error notices are coded by the IRS depending on the type of error. These codes, Taxpayer Notice Codes (TPNCs), come with short proforma explanations of the errors. Multiple errors on a return result in multiple TPNCs on the notice.

    Some TPNCs give enough information for taxpayers to generally understand why they are receiving the notice. For example, notices sent to taxpayers who made a math error regarding their taxable Social Security benefits (the second most common math error in tax years (TYs) 2015-2017) would include this explanation:

    “We changed the amount of taxable social security benefits on page 1 of your tax return because there was an error in the computation of the taxable amount.” 

    This is fairly straightforward and directs taxpayers to the error they potentially made, including the page number on their tax return. Let’s compare this explanation with TPNC 558, the most common math error in TYs 2016 and 2017, and the third most common math error in TY 2015:

    “We changed the refund amount or the amount you owe on your tax return based on the information you provided in response to our previous correspondence.”

    Imagine opening a notice from the IRS, trying to figure out why you received the notice, and reading this explanation. What is the error the IRS is claiming you made?  If you have had multiple contacts with the IRS, what previous correspondence or information is the IRS referring to?  What, if anything, are you supposed to do?  This doesn’t fulfill Congress’s intent for providing an explanation of the math error to taxpayers. Congress provided examples about how to write adequate explanations. To be consistent with the examples in the legislative history, the IRS should cite the specific issues and correspondence it is referring to, along with the line numbers and description of what was adjusted, and the amount of increase or decrease in taxable income and tax due.

    Notices must be clearer and more specific, so that taxpayers can actually understand what error the IRS has determined they’ve made and what they can do in response to correct it. For TPNC 558, the IRS should:

      • Cite the specific issues and correspondence it is referring to, along with the line numbers and description of what was adjusted, and the amount of increase or decrease in taxable income and tax;
      • Place these explanations (along with the right to prepayment appeal and the deadline to file it) on the first page of the notice, not the fourth page, which taxpayers are much less likely to read; and
      • Frame the first page with taxpayer rights and understanding at the forefront, not framed like a bill.

      Math error notices are not collection notices; rather, they are notices to inform taxpayers that the IRS has made some adjustments to their tax return and assessed a tax against them. Most importantly, they afford taxpayers the opportunity to challenge the IRS’s position and be heard, one of the most significant of the ten taxpayer rights codified under Internal Revenue Code § 7803(a). Thus, math error notices should be designed with these purposes in mind.

      Obviously, not all of the important information these notices contain can fit on one page, but the first page can include references to the fact that there is other important information and on which page taxpayers may find it (such as the payment options taxpayers have to proceed in response to the notice). TAS is currently working on sample notices to demonstrate how notices can be framed with a taxpayer-rights-centric focus. For example, including references on the first page to the availably of free assistance provided by Low Income Taxpayer Clinics (LITCs) and TAS, which some math error notices entirely omit or relegate to the last page of the notice.

      Finally, the IRS does not use data from historical returns to correct possible math errors, even though it has the authority to do so. For example, if a taxpayer inputs their claimed dependent’s taxpayer identification number (TIN) incorrectly on their return, the IRS could summarily deny the taxpayer tax benefits because the claimed dependent’s TIN doesn’t match their records. The IRS would then send a math error notice to the taxpayer. The taxpayer may respond and work with the IRS to fix the incorrect dependent TIN. The taxpayer may also not respond out of confusion, fear, lack of time or resources, and lose their dependent tax benefit that he or she was entitled to. A TAS research study found that this is indeed sometimes the case, with taxpayers losing benefits they should have received. For instance, the TAS research study found that 55 percent of math errors involving claimed dependents were abated. Even worse, in over 50 percent of these cases that received no adjustment, the IRS did not issue any refunds that the taxpayers were at least partially entitled to. The average taxpayer lost $1,274. The IRS could limit these situations from occurring by simply comparing the current questionable item against past return data to verify if the dependent TIN was merely incorrectly typed or written (for example, if the last two digits of the TIN were 12, but the taxpayer wrote 21). This could drastically reduce taxpayer burden in such cases.

      The IRS has great authority to make summary changes to taxpayers’ returns for math errors. With such authority, the IRS must ensure it is doing what it can to limit the burdens it may place on taxpayers and that they adequately understand what notices require of them, the services available to help them, and the actions they must take in response to math error notices.

      The views expressed in this blog are solely those of the National Taxpayer Advocate. The National Taxpayer Advocate is appointed by the Secretary of the Treasury and reports to the Commissioner of Internal Revenue. However, the National Taxpayer Advocate presents an independent taxpayer perspective that does not necessarily reflect the position of the IRS, the Treasury Department, or the Office of Management and Budget.