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Tax Planning

Insider Interview: IRS Taxpayer Advocate Nina Olson

Nina Olson isn’t a household name, but she referees disputes between taxpayers and the IRS and argues for tax reform.

Nina Olson is your voice at the Internal Revenue Service. You may have never heard of her, but Olson has been the national taxpayer advocate for the past ten years. Her role is twofold: to intercede for taxpayers when normal IRS channels aren’t working, and to identify harmful tax policies and practices that should be changed. A tax attorney and former tax preparer, Olson uses her semiannual reports to Congress to recommend legislative or administrative solutions -- and to get the last word when the IRS doesn’t heed her suggestions.

You could say that Olson’s job is to bite the hand that feeds her. So it’s fitting that her office, housed inside the stately IRS headquarters in Washington, D.C., is crowded with toy bulldogs. The stuffed animals are tributes from Olson’s staff in recognition of her ongoing battle to protect taxpayers from heavy-handed collection tactics. Kiplinger editors Janet Bodnar, Mary Beth Franklin and Joy Taylor sat down with Olson to discuss current tax policies and the need for tax reform -- and why every taxpayer has a dog in this fight.

Kiplinger’s: Who do you help, and how do taxpayers contact you?
Olson: The Taxpayer Advocate Service is an independent organization within the IRS. We help people who are trying to resolve a problem with the IRS and who believe the system is not working as it should. We also help individuals and businesses in cases where the IRS is taking actions that are causing them significant financial hardships. We have at least one local taxpayer advocate office in every state, Washington, D.C., and Puerto Rico. Taxpayers can call their local office or our toll-free number [877-777-4778]. If you qualify for our services, we’ll assign one person to stick with you from start to finish. You may not get the resolution you want, but at least we’ll explain what we can and can’t do.

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What’s the cause of most tax disputes? Automation. Most tax examinations are now conducted by mail. The taxpayer often doesn’t understand what documentation is needed, and with continuing IRS budget cuts, there are more automated phone trees and fewer live conversations with taxpayers. We get in there and translate. We’re successful in about 70% or more of those types of cases. In other situations, we might argue that based on the facts and circumstances, the IRS should provide relief to a taxpayer or make an exception to a rule. That’s much harder because the people on the front lines are rule-based. They are great at following instructions, but whenever you bring something that requires the exercise of judgment and discretion, they don’t do as well with it.

Do you have any real power? The Taxpayer Advocate Service has enormous power. I can order the IRS to do something, not do something or to stop doing something. And when that doesn’t work, I can issue a Taxpayer Assistance Order to intervene in specific cases. We have issued more than 240 orders so far this year. At this rate, we will issue nearly as many orders this year as we have over the past ten years combined.

You’ve criticized the IRS for automatically slapping liens on delinquent taxpayers’ property. Why? The IRS filed liens against 1.1 million taxpayers last year, up 14% from the previous year, in the midst of the worst economy in a generation. It’s inflicting enormous hardship on millions of financially struggling taxpayers without determining whether they have any assets to pay the tax debt. Despite the perception that hardcore collection tactics translate into more revenue, liens recover just a small fraction of the money owed. I issued a directive to the IRS to stop this automated nonsense. The IRS announced some changes to its lien policies earlier this year, but it didn’t go far enough. I’ve directed my staff to tackle lien filings on a case-by-case basis while we continue to work for systematic relief.

What’s the most frustrating part of your job? At the moment, it’s dealing with the First-Time Homebuyers’ Tax Credit. People who claimed the initial $7,500 interest-free loan in 2008 were required to start repaying it in 2010 in $500 increments over 15 years. The IRS has never had to handle repayments before on the tax forms. There were enormous problems with the computer programming. We have tens of thousands of cases in which people are paying us money back and we can’t process their returns and send them their refunds. There are some very angry taxpayers out there. Some of them banded together to create a Facebook page -- and included my e-mail address. Their stories are heartbreaking. We’ve set up a taxpayer advocate’s group to review them, and if they’re in really desperate straits -- their utilities are about to be shut off or a spouse is being deployed -- we can override the system and issue a refund manually. But it’s a real nightmare and causes other problems down the road.

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Tell us about one of your recent successes. New rules requiring tax preparers to register with the IRS and pass a competency exam took effect this year. The IRS had objected when we first proposed the rules in 2002. About 60% of individuals pay practitioners to prepare their returns. When a preparer makes a mistake, the taxpayer gets left holding the bag if there’s an audit. We want practitioners to realize that they’re in the profession of preparing tax returns. We want them to be trained, to be competent and to meet continuing-education requirements. Returns that are more accurate will reduce all sorts of problems.

What’s wrong with the current tax code? It’s too complex. It leads to innocent errors and creates opportunities for smart people to exploit loopholes. It also favors people who can afford representation and counsel and discriminates against people who can’t afford to pay for advice. At some point, the great voluntary tax compliance that we’re so proud of could erode. Although 99% of wage earners who receive W-2 forms from their employers report that income on their tax returns, compliance drops to less than 50% among self-employed workers who are not subject to tax withholding. They are responsible for nearly half of the $345 billion gap each year in taxes that are owed but not paid. That hurts everybody because it results in higher taxes. Tax simplification would go a long way toward closing the tax gap.

What’s the biggest myth about tax reform? Narrow tax breaks certainly exist, but the reality is that the biggest “special interests” are us -- the vast majority of U.S. taxpayers. We must under­stand that in exchange for lower tax rates, some tax breaks will be eliminated. Taxpayers can submit their suggestions about tax reform at our Web site [www.taxpayeradvocate.irs.gov]. I’ll write an occasional blog to discuss some of those ideas. It’s our attempt to drag our office into the 21st century.