IRS on autopilot

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NEW YORK (CNNMoney) — The IRS is discovering vastly more mistakes on tax returns than it used to.

In 2010, it flagged 10.6 million math and clerical errors, up from 4 million in 2005, according to a government report from National Taxpayer Advocate Nina Olson released Wednesday.

The reason: The IRS has greatly increased its use of automated systems to ferret out mismatches between what an individual reports on his return and the third-party data the IRS receives for that person, such as pay information from employers or data from the Social Security Administration.

Sometimes that can work to the taxpayer’s advantage, the IRS said in response to Olson’s report.

That’s what happened with Making Work Pay, a refundable tax credit that was part of the Recovery Act. The IRS said the “vast majority” of the errors it discovered in relation to that credit “increased the credit for the taxpayer.”

And the Making Work Pay credit accounted for more than half of the 10.6 million errors flagged in 2010, the IRS said.

But the reliance on automated systems can yield errors of its own.

Sometimes those IRS errors are discovered and corrected.

Key tax deductions left hanging

For instance, the IRS dinged 300,000 returns in 2010 for supposed math errors related to the exemption taxpayers can take for dependent children — and then reversed its decision to disallow that exemption for 55% of those cases, Olson said in her annual report to Congress.

But trying to get a correction made can be a time-consuming, frustrating experience for taxpayers, whose refunds are likely to be delayed, if not also reduced, as a result.

When an error pops up in the IRS system, a letter is sent to the tax filer. But those letters don’t always explain the problem clearly, said Olson, a government official whose job is to highlight the most serious problems facing taxpayers.

So some taxpayers may not respond to the IRS because they don’t know what they’re being asked, she said.

The IRS disputes that its letters aren’t clear, noting that it uses plain language and includes line numbers from the tax form to help the taxpayer find the error the agency is flagging.

According to Olson, when taxpayers do respond to the IRS letter, the agency is late in responding about 40% of the time. Phoning the agency isn’t a big help, either. Only about three-quarters of calls are answered, and when they are the issue is rarely resolved.

What’s more, Olson said, these automated procedures are not considered real audits by the IRS, so the usual taxpayer rights in an audit don’t apply. One is the right to avoid repetitive examinations of the same return. And taxpayers have less time to respond to the letter before losing their right to appeal the IRS’s decision than they would in a real audit.

If a taxpayer disputes a claim in the time given, the IRS will automatically reverse its decision. But that reversal may be temporary because the agency may then conduct a formal audit on the return.

Olson notes there are several things the IRS can do to improve its automated error-finding missions, such as using only the most reliable third-party data, doing a better job explaining the discrepancies and making it easier for taxpayers to communicate with the agency.

Tempting though it may be to cuss out the IRS for making it harder on some filers to get the refunds they deserve, a little compassion might be in order.

The agency is being asked to do more and more without being funded commensurately. In fact, IRS funding is being cut by $305 million for fiscal year 2012.

Among the items on the IRS to-do list: Ferret our identity thieves, catch more tax cheats at home and abroad, and turn on a dime to administer complex, temporary tax breaks Congress frequently passes at the last minute.

In fact, by Olson’s count, Congress has added an average of more than one change a day to the tax code over the past decade, with 579 of those changes in 2010 alone.

Indeed, she said, “the most serious problem facing U.S. taxpayers is the combination of the IRS’s expanding workload and the limited resources available to the IRS to handle it.”.

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  • Back in the 1950s and 1960s, under Eisenhower, JFK, LBJ and very conservative Republican and Democratic (Southern, laeglry) Congressional leadership, the top federal tax rate topped 90 percent, the federal debt as fraction of GDP was declining sharply, inflation was low, and economic growth superb. We simply are not serious about paying down the debt anymore.The top 400 taxpayers barely pay more in income taxes than Joe Schmoe anymore, as a percent of income. Jeez, when you consider than people under $100k in income usually pay 7 percent Social Security taxes on every dollar earned, these figures actually suggest a regressive federal tax system. Add another 7 percent in employer taxes in Social Security.I actually like the flat tax idea–if we move Social Security and Medicare under the flat tax. That is, a single flat federal tax on all income, plus a real whack at income of more than $10 million a year.