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Stimulus Law Termed A 'Significant' Challenge For IRS

WASHINGTON -(Dow Jones)- The $787 billion economic stimulus package signed into law this year by President Barack Obama poses "significant administrative challenges" for the Internal Revenue Service, according to a report issued Tuesday.

In a mid-year report to Congress, IRS Taxpayer Advocate Nina Olson said the new and expanded tax credits in the stimulus law will require the IRS to strike a delicate balance between processing returns speedily while clamping down on potential fraud.

"On the one hand, if the IRS does not do enough to detect and prevent fraud, it may pay out billions of dollars as a result of false and fraudulent claims," Olson said in a statement. On the other hand, she said if it cracks down too hard, it's possible that millions of taxpayers, mostly low-income earners, will not receive timely tax refunds.

The stimulus bill includes numerous tax changes intended to spur spending. First-time homebuyers may be eligible for a new $8,000 refundable tax credit under the law, which also created a Making Work Pay tax credit and temporarily increased the Earned Income Tax Credit and existing tax credits for child care expenses. While such changes are "entirely reasonable from a policy standpoint, " Olson said they might increase the potential for tax fraud.

The report cited three other challenges for the IRS: improving taxpayer services, tightening oversight of tax preparers and expanding efforts to help financially struggling individuals to pay what they can afford to clear up back taxes and make a fresh start.

Congress has raised concerns previously about the level of service offered to taxpayers, and Olson pointed to fresh signs of trouble, a steep decline in the number of taxpayers able to get help from the IRS's toll-free telephone assistance lines. As recently as fiscal 2007, 82% of callers managed to get telephone assistance from the IRS, yet only 53% did in fiscal 2008, Olson noted. The IRS blames the decline on a spike in taxpayer questions about the stimulus law, but Olson said its failure to answer many of those calls "does not bode well for taxpayer compliance."

Olson reiterated her recommendation for stricter oversight of tax return preparers, including requiring them to use a unique preparer tax identification number on all returns they file on behalf of taxpayers, making it easier for the IRS to flag potential enforcement problems.

Separately, Olson faulted the IRS's "offer in compromise" program, saying hard-pressed taxpayers who would qualify to take part are avoiding it because the IRS application requires them to provide too much information. The IRS is examining the program and Olson said she will continue to focus on ways to make the program more accessible to qualifying taxpayers.

-By Judith Burns, Dow Jones Newswires; 202-862-6692; Judith.Burns@dowjones.com

  (END) Dow Jones Newswires
  06-30-091151ET
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