National Taxpayer Advocate Criticizes IRS Liens, Urges Tax Reform

January 07, 2011

National Taxpayer Advocate Nina Olson issued her annual report to Congress this week. Federal law requires the Advocate to identify the 20 most serious problems faced by taxpayers and offer recommendations to fix them. Olson and her staff always do a great job preparing the report and it is essential reading for understanding the costs imposed by our current tax system.

Olson's staff estimates that U.S. taxpayers and businesses spend 6.1 billion hours a year complying with the Internal Revenue Code (actually a drop, thanks to greater use of tax software), or the equivalent of 3 million full-time workers. In 2008, this cost was about $163 billion. In 2010, there were 579 changes to the tax code, and the length of the code (not including regulations) as of February 1, 2010 is up to 3.8 million words.

One highlight this year is a critique of IRS liens:

In FY 2010, the IRS filed liens against 1.1 million taxpayers. When the IRS files a notice of federal tax lien, the taxpayer’s creditworthiness can be badly damaged for the long term.[...] The report says that despite the high unemployment rate and the unusually large number of Americans who are experiencing financial difficulties, the IRS is continuing to ramp up the number of tax liens it files each year. The 1.1 million liens filed in FY 2010 compare with 168,000 in FY 1999, an increase of 550 percent.

The IRS does not have data that show whether, or to what extent, liens further revenue collection. A TAS study conducted in 2009 suggests there is a possibility that lien filings may reduce long-term tax collection. Notably, over the same period that lien filings have increased by 550 percent, annual revenue collected by the IRS’s Collection function on an inflation-adjusted basis has remained flat.

“By filing a lien against a taxpayer with no money and no assets, the IRS often collects nothing, yet it inflicts long-term harm on the taxpayer by making it harder for him to get back on his feet when he does get a job,” Olson said. “Absent data that show liens make a meaningful contribution to revenue collection and especially in this economy, I find it unacceptable that the IRS continues to torment financially struggling taxpayers in this way.”

Olson also issued a call for fundamental tax reform:

“If tax rates are to be substantially lowered, many existing tax breaks will have to be eliminated immediately and others will be phased out,” Olson said. “But I believe most taxpayers will conclude this is a worthwhile trade-off. If tax reform proceeds on a revenue-neutral basis, the average taxpayer’s liability will not change, and we will end up with a tax system that is simpler, more transparent, and easier and cheaper for taxpayers to navigate.”

The report acknowledges that Congress may at some point raise tax revenues to address the nation’s long-term fiscal challenges. However, the report suggests that Congress first enact structural tax reform on a revenue-neutral basis and keep separate the decision whether to adjust tax rates.

The report recommends that Congress approach tax reform in a manner similar to zero-based budgeting. The starting assumption should be that all tax breaks would be eliminated; a tax break would then be retained only if a compelling case can be made that the benefits of providing the tax break outweigh the complexity burdens it creates.

Read the full report here.

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