IRS National Taxpayer Advocate Cites Concerns
By Chandra Walker, Washington Staff Writer
IRS National Taxpayer Advocate Nina Olson has delivered her annual report to Congress and she is concerned about three particular federal taxation issues: the deleterious impact of late-year tax law changes, taxpayer confusion over the rule governing cancellation of debt income, and the lending practice of having taxpayers sign blank requests for tax return transcripts.
Tax Law Changes
Late-year tax law changes in 2006 significantly impact the 2007 tax filing season, Olson reported. She sees signs already that late 2007 legislation, especially the alternative minimum tax (AMT) "patch," threatens to do the same in 2008.
She specifically blamed to the Tax Relief and Health Care Act of 2006 for the 2007 filing season delays because of its extension of three tax deductions--the state and local sales taxes, educator expenses, and post-secondary tuition and fees--at the end of the year. Taxpayers claiming the deductions had to wait until three weeks into the 2007 filing season to file their returns. The data revealed that 1.4 million fewer taxpayers claimed the deductions in 2006 than in 2005 and the only explanation was that taxpayers were unaware of the last minute tax law changes, according to Olson.
Olson said that the increasing use of sunset provisions (provisions that expire in a certain number of years) has exacerbated the problem. "Sunset provisions are currently being used as a revenue fix or accounting device." She sees late-year legislation as a problem that will persist unless more attention is given to the problem by Congress earlier in the year.
Cancellation of Debt Income
In general, when a taxpayer borrows money and then is unable to repay, the amount of any loan cancellation is taxable income with certain exceptions. According to Olson, the IRS does not provide sufficient information to taxpayers about cancellation of indebtedness income.
For example, if the borrower is insolvent when a credit card company writes off a debt or if the debt involves a mortgage on a principal residence, certain exceptions to forgiveness of indebtedness income may apply. Olson expressed concern that the lack of information could result in taxpayers paying more tax than they owe.
"There is a real problem here." The Taxpayer Advocate Service (TAS) is working with IRS to create a new Form 982, Reduction of Tax Attributes Due to Discharger of Indebtedness (and Section 1082 Basis Adjustment), Olson reported. "It's not perfect but it does tell a taxpayers what to do if their car is repossessed or what box to check if their house is foreclosed."
Tax Return Transcripts
When a taxpayer purchases a residence financed by a mortgage, he or she is required to sign a copy of Form 4506 or 4506-T, Request for Transcript of Tax Return, which gives the lender access to certain tax information for a limited amount of time. Olson explained that such forms are usually blank when presented to the borrower, which gives rise to several privacy issues despite any innocent intention to merely facilitate paperwork.
Olson reported that she will be mailing letters to a sizeable group of lending associations informing them that they cannot force or intimidate a taxpayer into sign blank Forms 4506 or 4506-T. TAS is also working on brochures to educate taxpayers about the issue. "It's a great consumer tip in the heat of the subprime mortgage crisis," Olson added.
Olson made her remarks during the American Bar Association Taxation Section sponsored teleconference entitled "Report of the National Taxpayer Advocate Nina Olson" on February 27. The National Taxpayer Advocate released her 2007 Annual Report to Congress several weeks ago.
For more help with the many tax changes that may affect you for the 2007 tax filing season and beyond, take a look at the Toolkit Tax Guide 2008. This easy-to-understand book helps taxpayers--including individuals and entrepreneurs--manage their taxes so they can better prepare their 2007 tax returns, as well as begin planning for 2008. It also includes free income tax preparation of a state and federal return and e-filing with CompleteTaxTM, CCH's easy-to-use online tax return service for individuals. Toolkit Tax Guide 2008 is available in major retail and online bookstores nationwide; via the Business Owner's Toolkit bookstore; or by calling 1-800-248-3248.
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Posted March 14, 2008.
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