National Taxpayer Advocate Nina Olson released her annual report January 10,
condemning IRS service cuts and pressing Congress to tap into a thriving
underground cash economy.

Olson took a stand on many contentious issues,
pointing out problems with private debt collection, refund anticipation loan
oversight, earned income tax credit administration, and an IRS program that
freezes hundreds of thousands of refunds every year.

But it comes as no
surprise that Olson’s criticism of IRS taxpayer service tops her list of the 21
most serious problems facing taxpayers. Olson spent much of the last year
battling the IRS over service cuts.

According to Olson, there is an
unmistakable trend emerging. In 2005 the IRS tried to close 68 walk-in service
centers, proposed cutting telephone help-line hours, and eliminated Telefile,
Tax Fax, and Package X. The IRS’s 2006 budget request proposed a 1 percent cut
in funding for service, but an 8 percent boost in enforcement.

“The IRS
justifies this reduction in service funding by the need to dedicate more
resources to IRS enforcement functions,” Olson said. “Yet the IRS is doing
little to address the largest component of the tax gap -- the cash
economy.”

But more disturbing, Olson said, are IRS efforts to “dumb down”
service goals. Olson acknowledged that the IRS has hit “level of service”
targets in the last several years, but said the “numbers hide the IRS’s decision
to weed out the more difficult questions from the measured base and declare them
“‘out-of-scope.’”

Olson said an “underground cash economy” that makes up
the lion’s share of the tax gap is likely costing America upwards of $100
billion a year.

“Every taxpayer is forced to pay a $2000 surtax each year
to subsidize noncompliance,” Olson said in her report.

According to
Olson, the underground economy comprises hundreds of thousands of workers paid
in cash and droves of self-employed taxpayers who “operate ‘off the books’ on a
cash basis in areas such as street vending, door-to-door sales, or moonlighting
in a trade or profession.” Jobs in which most of the income arrives in tips also
breed rampant underreporting, the report said.

Never a proponent of
controversial IRS plans to outsource debt collection, Olson urged the IRS to
directly train any private collectors. After enduring protests from several
sources, the IRS is preparing to contract with private collectors and hand over
a number of cases in the summer of 2006.

After a spending a rare year off
of the taxpayer advocate’s annual list, the EITC came back due to what Olson
characterized as delays, documentation problems, low taxpayer response rates,
and varied taxpayer treatment.

She suggested improving EITC
administration by revamping oversight of the refund anticipation loan (RAL)
industry, “given the significant percentage of RAL customers are EITC
recipients.”