IRS In-House Critic Paid to Tell Tax Collecting Agency of Flaws

The lowest point in Terry and Stephanie McClung’s lives exposed the couple to the ways the U.S. tax system can be abused.

In February 2010, about eight months after the sudden death of their infant daughter, Kaitlyn, the Finksburg, Md., couple said they discovered that someone stole the baby’s Social Security number and used it to claim her as a dependent. The McClungs' 2009 federal tax return, on which they had already claimed Kaitlyn as a dependent, was rejected because the false return had been filed using the same Social Security number.

Terry McClung says he became lost in the maze of the Internal Revenue Service, spending days on the phone seeking answers. In all of the phone calls, no one told him about the Taxpayer Advocate Service housed inside the agency. When he stumbled upon it through the assistance of Sen. Barbara Mikulski’s office, he said it illustrated to him how tough it is for taxpayers with concerns to get help from the IRS.

“I wish they would have told me about the advocate’s office,” Terry McClung, a television production assistant, told Bloomberg Government. “Nobody could point us in the right direction.”

The McClungs are precisely the type of people the Taxpayer Advocate Service was created in 1998 to help. They were two of almost 300,000 taxpayers to seek its assistance in 2010. About 2,000 employees stationed in every state field complaints about rejected returns, the collections process and tax liens or penalties imposed by the agency.

Nina Olson, a lawyer and former tax preparer, has run the office since March 2001 and has become one of the toughest critics of the agency’s treatment of taxpayers. In an interview in her office at IRS headquarters in Washington, Olson said the agency “really sort of hunkers down and types people and just doesn’t listen.”

“It’s understandable if you’re in the enforcement side of the IRS and what you see are problems with enforcement, you tend to think that a lot of taxpayers are pulling a fast one,” she said. “To me, the vast majority of noncompliance is non- purposeful.”

Doug Shulman, the third permanent IRS commissioner to whom Olson has reported, said the “taxpayer advocate is a very important position in the U.S. tax system.”

“Nina Olson has provided valuable input as we continually work to improve service to taxpayers,” he said in an emailed statement.

Her needling has led the IRS to make significant changes to its rules. She spent seven years pressing for more regulation of the tax-preparation industry, including companies such as H&R Block Inc. and Jackson Hewitt Tax Service Inc.

Olson, 57, operates in an unusual sphere within the IRS. She was appointed by Larry Summers in 2001 when he was the Treasury secretary and she doesn’t have a specified term. The IRS commissioner is her boss and sets her salary, and still he can’t review or block the reports she delivers to Congress each year, which often detail the agency’s shortcomings.

“She takes an organization that is oftentimes referred to as the most feared and hated, and then you’re the person that has to deal with the worst complaints,” said Pamela Olson, an attorney at Skadden Arps LLP who isn’t related to Nina Olson and was an assistant Treasury secretary for tax policy during the George W. Bush administration.

Congress created Olson’s office as part of legislation restructuring the IRS that was signed into law in 1998. The office was envisioned as a way to allow taxpayers to be heard by the agency.

Given that, the tension inherent in her role is necessary, Olson said.

“There are people who say you could do this job without conflict and to those people, I say that’s impossible,” she said. “In a large bureaucracy, one of the key things you need is some internal dissent, an internal critic.”

She said her pestering can pay off. She persuaded IRS leaders to reverse the agency’s position recently on so-called innocent spouse rules. Shulman announced last month that the agency will give some spouses of accused tax cheats and tax delinquents more time to limit their liability.

“The announcement on the innocent spouse rule is a perfect example of the kinds of issues she’s good at elevating that get the attention of people outside and inside the IRS to force the IRS to rethink their position,” said Christopher Rizek, an attorney at Caplin & Drysdale in Washington.

Olson also persuaded the IRS to regulate the tax preparation industry, requiring preparers to become certified and take continuing education courses each year. She began pressing for regulation in 2002; the IRS made the change in 2009. Olson said it shouldn’t have taken the IRS so long to act.

Tax Preparer Regulations

“That’s ridiculous that for seven years, they said no, we don’t need this,” she said. “I have no patience for that.”

Since the IRS began certifying tax preparers last fall, about 712,000 preparers have registered, according to the agency. Regulation of the tax preparation sector is one of Olson’s pet interests as she prepared tax returns between 1975 and 1991, and remembers mistakes she made.

“Once I had gone to law school, I had realized lots of things that I had done wrong,” she said.