New Taxpayer Advocate Report to Congress Addressing, Inter Alia, OVDI/P Concerns (1/10/14; supplemented 1/13/14)

The Taxpayer Advocate has issued a new report addressing concerns, including the administration of OVDI/OVDP.  Taxpayer Advocate FY 2014 Objectives Report to Congress and Special Report to Congress.  The initial page is here.  The Report page is here.  The portion on OVDI/P is here.

The issues covered in the report are:

• The IRS Harms Taxpayers by Refusing to Issue Refunds to Some Victims of Return Preparer Fraud
• The Current Limited Oversight of Return Preparers Makes Taxpayers Vulnerable to Unscrupulous or Incompetent Preparers
• As the IRS Adopts a Specialized Approach to Identity Theft Victim Assistance, Concerns About Complete and Timely Account Resolution Remain
• Implementation of the IRS’s Return Review Program Is at Extreme Risk, Which Could Cause Significant Harm and Cost
• Collection Update: The IRS’s Tepid Approach to Implementing Recent Changes in Collection Policies Has Limited Taxpayer Access to Important Collection Options
• The TAS Collection Case Review Yielded Valuable Insights on How TAS Can Improve Advocacy in Collection Cases
• TAS Prepares for Implementation of Health Care Provisions
• The IRS has Revoked the Exempt Status of Thousands of Organizations in Error, Causing Significant Harm to Taxpayers
• TAS Works to Ensure Taxpayers Know Their Rights and  Obligations
• IRS Offshore Voluntary Disclosure Programs Continue to Burden “Benign Actors” and Damage IRS Credibility
• Shared Jurisdiction and Lack of Coordination between IRS and FinCEN Burdens Taxpayers and Undermines Compliance Efforts
• International Taxpayer Service Initiatives Continue but Need a More Formal Structure
• IRS ITIN Policy Changes Make Return Filing Difficult and Frustrating
• Cuts to IRS Tax Forums Mean Lost Opportunities

Although the report on OVDI/P is short, I just have not had time to study it for comments here.  I do provide the following excerpts from the OVDI/P portion (footnotes omitted):

[T]hese programs apply a one-size fits all approach designed for “bad actors” to “benign actors” who inadvertently violated the rules, requiring them to opt-in and then optout, and subjecting them to lengthy examinations and draconian civil and criminal penalties.

A Government Accountability Office (GAO) analysis shows that the offshore penalty paid by those with the smallest accounts (i.e.,  those in the 10th percentile with accounts of $78,315) was disproportionate – at least 575 percent of the tax, interest, and penalties on their unreported income. It was also disproportionately greater than the amount paid by those with the largest accounts (i.e., those in the 90th percentile with accounts of more than $4 million) who paid 86 percent or less. Moreover, the IRS initially processed applications from benign actors who are expected to opt out much more slowly than others, though it has recently begun to process them more quickly, as shown by the following table. 

JAT Comment (1/13/14):  I think the TA's discussion in the preceding paragraph needs nuance.   It references the GAO report titled Offshore Tax Evasion: IRS Has Collected Billions of Dollars, but May be Missing Continued Evasion , here, which  I  previously discussed on the following blog entries:  More on the GAO Report on IRS Offshore Disclosure Initiatives (Federal Tax Crimes Blog 4/27/13), here; and More on the GAO Report on IRS Offshore Disclosure Initiatives (Federal Tax Crimes Blog 4/27/13), here.  Without attempting to reconcile the GAO report numbers and the TA numbers, at least conceptually, taxpayers in the lower percentiles are likely to be less culpable than those in the higher percentiles.  It would thus make no sense to make their punishment relatively greater than the taxpayers in taxpayers in the higher precentiles. So, I agree with the taxpayer advocate that the phenomenon indicated by the statistics is counter-intuitive.

But, the phenomenon that those in the lower percentiles will incur greater relative costs / punishment than those in the higher percentiles is based on the design of the program when the taxpayers do not opt out.  I think the IRS perceives the opt out as the IRS's fail-safe cure for the problem of higher proportionate penalties if the less culpable taxpayers stay inside the penalty structure without opting out.  The smaller / less culpable taxpayers should get better treatment by opting out.  The larger / more culpable taxpayers better stay in  the program's penalty structure without opting out because that is their best "deal."  However, since the figures do not consider what occurs on the opt out, they really do not present a balanced picture of the real relative costs incurred by the less culpable and the more culpable.

If the opt  out functioned smoothly, then it would be a good fail safe.  However, what mitigates its role as a fail safe is that opting out creates major uncertainty, particularly for unsophisticated taxpayers -- just the type of taxpayer likely to be in the lower percentiles.  Thus, the anomaly is that the opt out is designed to protect them but they are scared to opt out.  Many just want to be done with it -- even with exorbitant penalty cost -- so they just take the program cost structure without opting out.  That, to me, is the design flaw in the program.  If the IRS were more transparent about what would happen on opt out, the opt out process might really serve as a fail safe to smooth the rough edges of the program.

[TABLE II.4 OMITTED} 

JAT Comment (1/13/14):  In the original posting, I  omitted Table II.4, simply because I don't have the programming skills to put it in the blog.  Readers can review the table at the link above.  However, I will state that I had some difficulty discerning precisely what the point of the statistics as presented was.  They do show average days to closure and, I suppose, that is useful.  (I do not, however, that some of the numbers do not compute and seem to me to be off more than can be explained by rounding errors (see, e.g., the open line in the three sets of three that would seem to be the result of the immediately preceding minuends and subtrahends, but that does not seem to work.  For example, the report says

Total certifications applicants	10,792
Closed after certification	10,735
Open certifications	55

The result in the third line probably should be 57.  The same type mistake appears in each of the three sets, with each being off by 2.  Can't figure out why, but I would not think that is rounding error.

[Omit description of the Streamlined Nonresident Initiative] 

Although [the Streamlined Nonrsident Initiative] is a positive change, the National Taxpayer Advocate remains concerned that the IRS does not have a simple and easy method for allowing benign actors who are U.S. residents to resolve past filing delinquencies. Nor has it provided clear guidance about key terms that it has used in its programs, such as when someone will be considered “high risk,” how they may avoid a penalty (e.g., by demonstrating “reasonable cause”), and when they will be subject to the lower penalty applicable to “nonwillful” conduct. The uncertainty surrounding these terms and the consequences of opting out has likely prompted some benign actors to pay more than they should inside the OVD programs.

Those having access to TNT should look at the following article:  Andrew Velarde, Unfairness Plagues Accuracy-Related Penalties and OVDP, Report Finds, 2014 TNT 7-1 (1/10/14)

I am traveling and will likely not be able to add more until Monday.