WASHINGTON (USA TODAY) - Taxpayers who receive unfair treatment from the Internal Revenue Service should be eligible for $1,000 "apology payments" from the IRS, the agency's own taxpayer advocate proposed Wednesday.
In a special report to Congress following the IRS's targeting of political groups for special scrutiny, National Taxpayer Advocate Nina Olson said the tax agency's Exempt Organizations unit trampled on eight of 10 rights in her Taxpayers Bill of Rights.
"Today, the IRS is an institution in crisis," wrote Olson, who heads a semi-independent unit of the IRS that looks out for taxpayer interests. "As a consequence of this crisis, the IRS gives limited consideration to taxpayer rights or fundamental tax administration principles as it struggles to get its job done."
Olson first proposed apology payments in 2007 as a way for the IRS to restore taxpayer confidence. The mostly symbolic payments would be similar to those issued by tax agencies in the United Kingdom and Australia have. She proposed capping them at a total of $1 million a year.
"The rationale for an apology payment is not to compensate the taxpayer fully for his or her time and frustration, but to serve as a symbolic gesture to show that the government recognizes its mistake and the taxpayer's burden," Olson said. "These payments might enhance the public perception of the IRS and the tax system as just and fair."
And, if taxpayers knew that complaining to the taxpayer advocate about unfair practices could result in a $1,000 payment, the targeting of political groups might have come to light much earlier, she said.
Olson's report comes two days after acting IRS Commissioner Danny Werfel gave his first public report on how the IRS singled out Tea Party groups for added scrutiny and held up their applications for tax-exempt status for more than two years. Werfel's report faulted the IRS for failing to involve the taxpayer advocate as soon as the Tea Party cases got bogged down.
In a statement Wednesday, Werfel said the taxpayer advocate would play an important role in fixing the problem. "In particular, we will work with the advocate's office to improve education inside and outside the IRS about taxpayer rights."
The IRS is supposed to report to the Taxpayer Advocate Service (TAS) any time there's a delay of more than 30 days beyond normal processing times, or any time there's a systemic breakdown. The Exempt Organizations unit did neither -- instead arguing that taxpayer advocates weren't necessary.
Thwerat historical and cultural resistance became a problem when the TAS tried to look into 19 complaints -- mostly from members of Congress -- that tax-exempt applications were being held up.
When the advocate's office tried to get more information on what those issues were, revenue agents would not answer questions or gave misleading responses, Olson said. In at least one case involving a progressive-sounding charity, the IRS said the application was "taking so long due to the name."
Olson's report also identified other systemic problems that contributed to the breakdown:
• Underfunding of the IRS has encouraged "a widget-based approach to tax administration, getting work done in a way that allows as little interference as possible to the employees charged with doing the work."
• No right of appeal: Public charities can appeal to the courts if the IRS doesn't give them a determination within 270 days. But groups applying for tax-exempt status as a social welfare groups -- like many of the the Tea Party groups -- don't have that right. "This fundamental right to an appeal not only would provide the taxpayer with meaningful recourse and impartial oversight of IRS decisions, but it also would help develop case law and additional guidance in a complex area of law," Olson wrote. "Instead, taxpayers' applications languished for months and even years, violating their right to certainty."
• No tracking of applications: The IRS's systems don't allow it to track average case processing times or check up on old cases -- "basic information needed to manage and plan its workload," the report said.
Olson also proposed that the IRS revamp the application forms for tax-exempt status, make guidance available on the Internet, and randomly audit tax-exempt groups to make sure social welfare groups are not primarily engaging in political activity.
She said she would create a liaison in her office to work with the Exempt Organizations unit in Cincinnati, where all applications for tax exemptions are processed.