Nina E. Olson, the official appointed to speak out on behalf of U.S. taxpayers, has a few major gripes about the Internal Revenue Service. Among them, she believes the agency needs to better protect victims of tax-related identity theft and should get more information out to homeowners about a new law eliminating taxes on debt canceled as a result of foreclosure.
Olson, who is the national taxpayer advocate, issued a summer report to Congress identifying areas of concern the IRS needs to focus on in the 2009 fiscal year.
This year marks the 10th anniversary of the IRS Restructuring and Reform Act of 1998, which created the Office of the Taxpayer Advocate in order to identify problems within the IRS and help taxpayers resolve conflicts with the agency.
Olson has served as the taxpayer advocate for the past seven years. She is an attorney licensed in Virginia and North Carolina and the founder of the Community Tax Law Project, a low-income taxpayer clinic. It was her experience working with taxpayer disputes that has helped her appreciate the frustration so many people have had with the IRS.
"By 1997, I had logged more time on telephone holds with the IRS, listening to a constantly repeating 'Nutcracker Suite,' than have most IRS employees," Olson wrote in her recent report.
Olson has three major areas to focus on in 2009:
Olson said identity theft targeted at taxpayers is a serious problem. In one type of scam, an identity thief may file a return using a victim's Social Security number. The motive is refund fraud. The identity thief will use the personal information belonging to someone else to file a false return, typically early in the filing season before the innocent taxpayer files his or her own legitimate return. If the real taxpayer files electronically, the IRS will automatically reject the return because the system only accepts one electronic filing per Social Security number for each tax period.
Olson's report faults the IRS for not having adequate procedures in place to assist victims of identity theft.
"While the IRS is reforming some aspects of its approach to identity theft, its procedures for dealing with victims have been a significant part of the problem," Olson wrote in her report.
To help alleviate this problem, the IRS is implementing a new servicewide identity theft indicator that tracks taxpayer accounts. Beginning in January 2009, returns filed using Social Security numbers associated with accounts that are coded with a universal identity theft indicator will be filtered to help distinguish legitimate returns from fraudulent ones.
Canceling debt income
When an individual or business borrows money and the debt is canceled, the borrower generally must include the amount of the canceled debt in gross income. This often-unexpected tax hit can affect borrowers who lose their homes to foreclosure or who default on car loans or credit card debts. Last year, Congress passed a law giving temporary tax relief to homeowners who had mortgage debt canceled. The Mortgage Forgiveness Debt Relief Act allows a taxpayer to exclude from income qualified home loan debt forgiven in 2007, 2008 or 2009. The debt must have been used to buy, build or substantially improve your principal residence and must have been secured by that residence.
Here's the problem. The tax relief isn't given automatically. You have to file IRS Form 982 "Reduction of Tax Attributes Due to Discharge of Indebtedness," and the form has to be attached to the federal tax return.
Many people entitled to this tax break aren't filing the form. Olson said she wants to work with IRS to get the word out to more people.
IRS collection practices
Olson remains concerned about collection issues, including the seizure of assets before other collection alternatives have been exhausted.
If you are having trouble resolving a tax problem, contact the taxpayer advocate service by calling toll-free 1-877-777-4778 or TTY/TDD 1-800-829-4059. The service is free and confidential. For more information online, go to www.irs.gov/advocate.
Olson's report is fair to the IRS but also tough. If the agency implements even a fraction of what she recommends, taxpayers will be better treated by one of the most feared agencies in the government.