09 January 2008

Taxpayer Advocate Legislative Recommendations

The National Taxpayer Advocate, a ombudsman for taxpayers dealing with the IRS, makes legislative recommendations each year.

First, one from prior years that was adopted when I wasn't looking. The law has been changed (I don't have the effective date) to allow married couples who co-own businesses to use Schedule C or F (normally used for non-farm sole proprietorships and farm sole proprietorships respectively), and allocate self-employment income between them.

Now, onto this year's thoughtful recommendations:

* De minimus Apology payments:
[T]he National Taxpayer Advocate recommends that Congress enact a Taxpayer Bill of Rights setting forth the fundamental rights and obligations of U.S. taxpayers. Congress should require the Secretary to publish these fundamental rights and obligations in a document that also links specific statutory protections to the Taxpayer Bill of Rights. The National Taxpayer Advocate also recommends that Congress grant the National Taxpayer Advocate the discretionary, nondelegable authority to compensate taxpayers where the action or inaction of the IRS has caused excessive expense or undue burden to the taxpayer, and the taxpayer meets the IRC § 7811 definition of significant hardship. Discretionary payments should be excluded from gross income and range from a minimum of $100 up to a maximum of $1,000, indexed for inflation.

* Cash economy compliance:
1. Increase use of the IRS’s electronic payment system for estimated tax payments;
2. Authorize voluntary withholding agreements;
3. Eliminate the corporate exception to information reporting for small corporations, if the IRS’s National Research Program shows significant noncompliance;
4. Accelerate the taxpayer identification number validation process;
5. Provide for withholding on payments to noncompliant contractors;
6. Require information reporting by financial institutions on credit and other “payment card” receipts; and
7. Require financial institutions to report all accounts to the IRS by eliminating the $10 minimum on interest reporting.

* Home office deduction:
[C]reate an optional standard home office deduction. The legislative provision would direct the Secretary of the Treasury to draft regulations which calculate the deduction by multiplying an applicable standard rate, as determined and published by the Commissioner of the IRS on a periodic basis, by the applicable square footage of the portion of the dwelling unit described in IRC § 280A(c).

* Eliminate tax strategy patents.

* Provisional non-profit status: Extend provisional status as a public charity for organizations that have applied for an IRS determination of their status which the IRS has delayed in ruling upon, to give charities at least an eight month lead time period before their provisional charity status expires.

* Small non-profit compliance:
More than 73 percent of public charities reported annual expenses of less than $500,000 in 2004. Approximately half of all exempt organizations have all-volunteer staffs and another third have fewer than ten employees. The National Taxpayer recommends that Congress lessen the burden on these small exempt organizations by: amending the Code to provide that non-private foundations with gross receipts not normally more than $25,000 may submit a short-form application for recognition of IRC § 501(c)(3) status (i.e., a Form 1023-EZ), requiring the IRS to continue to offer a separate short-form (“EZ”) version of Form990 that may be filed by small exempt organizations in lieu of the long-form Form 990 or parts thereof, and requiring the IRS to create a broad-based, formal, and ongoing voluntary compliance program for exempt organizations similar to those offered in the areas of employee plans, tax-exempt bonds, and Indian tribal governments by September 30, 2008.

* Increase regulation of third parties responsible for paying withholding taxes to address the growing problem of payroll service embezzlements from clients.

* Allow identity theft victims assigned temporary tax ID numbers to obtain tax benefits contingent upon providing a taxpayer identification number.

* Allow the IRS to issue regulations imposing civil but not criminal penalties for minor violations of disclosure laws by tax preparers. The status quo has discouraged the IRS from issuing regulations that have both civil and criminal penalties.

* Expand access to innocent spouse protections, for example, allowing them to be raised as a defense in collection suits.

* Allow the IRS to refer people to certain low income taxpayer clinics.

* Limit disclosure of tax returns obtained for a specific transaction to use in that transaction.

* Treat government funded home care service workers who help disabled or elderly persons with personal care or household chores as government employees, rather than as client employees, for tax compliance purposes.

The "old business" of recommendations that are in the legislative process but have not been adopted at this time include:

* Simplify the alternative minimum tax so that it doesn't impact taxpayers with no unusual deductions or exemptions.

* Require "brokers to keep track of an investor’s basis, transfer basis to a successor broker, and report basis information (and proceeds generated by any sale) to the taxpayer and the IRS."

* End the private debt collection of tax debts. The results of the current private debt collection efforts are unimpressive.
[P]rivate companies were paid $6.3 million to pursue delinquent taxpayers in the first year of the program and collected $29 million in back taxes (3.7% of the $787 million in back taxes assigned to the companies by the IRS).

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