Top 10 tax litigated issues

National Taxpayer Advocate identifies top 10 tax litigated issues

The IRS’s cutbacks in taxpayer services could erode voluntary compliance with the tax laws and lower tax revenues, National Taxpayer Advocate Nina Olson has told Congress in her annual report. Olson also discussed tax-related identity theft, services to taxpayers living abroad, user fees, tax-exempt organizations, and identified the top 10 most litigated tax issues.

Compliance and tax revenues

Ninety-eight percent of all tax revenue collected by the IRS is paid voluntarily, Olson reported. Less than two percent is collected through direct enforcement action. If the IRS would collect 10 percent less in enforcement revenue, tax revenue would drop by less than $6 billion. If voluntary payments would decrease by 10 percent, tax revenue would drop by more than $280 billion Olson said.

Identity theft

The IRS’s inventory of tax-related identity theft cases has increased nearly 150 percent from 2014, Olson told lawmakers. Olson said that the IRS has made good progress in helping victims of tax-related identity theft but more work remains to be done, especially in the speedy resolution of cases. Olson recommended that the IRS assign a sole contact person to victims of identity theft to oversee resolution.

Taxpayers living abroad

IRS services have not kept pace with the growing number of U.S. citizens living aboard, Olson told lawmakers. More than 8.7 million U.S. citizens lived abroad in mid-2015 compared to more than 7.6 million in mid-2014. Olson recommended that the IRS reopen international tax offices and fund one local taxpayer advocate position at each location.

User fees

According to Olson, the IRS may adopt user fees without fully considering taxpayer burden and the impact on voluntary compliance. User fees that seem reasonable to the IRS in a vacuum may seem outrageous to taxpayers when added to the costs of recordkeeping, filing and paying taxes, and paying professionals for help in navigating complicated rules and procedures that the government created.

Tax-exempt organizations

In 2014, Olson reported that the IRS began addressing backlogs in its inventory of applications for tax-exempt status by allowing certain organizations to use new Form 1023-EZ, Streamlined Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code. According to Olson, the IRS has in some cases failed to adequately review Forms 1023-EZ. Olson found that 37 percent of applicants for tax-exempt status using Form 1023-EZ between July and September 2015 did not satisfy all of the filing requirements.

Top 10 litigated issues

Olson identified the top 10 most litigated tax issues.

  1. Code Sec. 6662 accuracy-related penalty
  2. Trade or business expenses
  3. Summons enforcement
  4. Gross income
  5. Appeals from Collection Due Process (CDP) hearings
  6. Failure to file penalty and other penalties
  7. Civil actions to enforce federal tax liens
  8. Charitable deductions
  9. Frivolous issues penalty
  10. Innocent spouse relief