Unsophisticated taxpayers who lack financial resources are disadvantaged by a shortage of adequate tax advice. The IRS does not have the resources to answer all questions asked, and the IRS’s informal advice comes with no guarantee as to its accuracy and offers the taxpayer no protection when it is mistaken. Furthermore, non-IRS sources of advice have not sufficiently filled the void left by a lack of satisfactory IRS guidance. These biases against unsophisticated taxpayers have been noted by existing literature. This Article contributes to existing literature by proposing several novel reform measures to assist unsophisticated taxpayers.
First, with respect to certain key provisions intended to benefit low-income taxpayers, such as the earned income tax credit, Congress should act to provide unsophisticated taxpayers the protection offered by more formal types of guidance. In order to implement this first proposal, Congress should direct the IRS to verify and stand behind the accuracy of tax software that addressed key provisions, such as the earned income tax credit. The government would stand behind its guarantee of accuracy in two respects. First, if a taxpayer provided accurate information when operating the software and the software indicated, wrongly, that the taxpayer was entitled to certain tax benefits, the IRS would not later assess additional tax liability, interest, or penalties against the taxpayer. Second, if a taxpayer provided accurate information when operating the software, the software indicated, wrongly, that the taxpayer was not entitled to certain tax benefits, and the taxpayer discovered this error after the typical limitations period for filing an amended return had expired, then Congress would grant the taxpayer additional time to amend his or her tax return to claim the benefits to which he or she was, in fact, entitled.
Second, this Article proposes that states should require that certified public accountants either provide a minimum number of hours of pro bono services annually or donate a minimum amount annually to support Volunteer Income Tax Assistance sites. Third, Congress should implement a new procedure for assessing penalties and interest against taxpayers whose incomes are below a certain threshold. Under this new procedure, if the taxpayer’s return was prepared by a paid preparer, any penalties and interest that would otherwise be assessed against the taxpayer should be assessed, instead, against the preparer, unless the preparer could prove either that he or she sought adequate information from the taxpayer and tax consequences were reported correctly based on the information provided by the taxpayer or that the taxpayer knowingly waived the right to have penalties and interest assessed against the preparer. In addition, if a preparer did obtain a waiver, the preparer would be precluded from offering any type of audit insurance (or, stated another way, if the preparer did offer any type of audit insurance, doing so would nullify the waiver).
Accessible Reliable Tax Advice,
U. Mich. J. L. Reform
Available at: https://repository.law.umich.edu/mjlr/vol51/iss3/4