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Bad judgment

Money | Official taxpayer advocate says automated IRS systems are wrecking lives

Issue: "Babies are back," Jan. 29, 2011

Heavy-handed IRS collection policies can inflict "real and lasting harm" on taxpayers, even "destroying people's lives and businesses," the tax agency's ombudsman warned in a Jan. 5 report to Congress. The annual report from National Taxpayer Advocate Nina C. Olson urged adoption of a kinder, gentler approach. "A little human contact and conversation can work wonders in understanding the taxpayer's financial circumstances," she wrote.

Olson complained that the IRS uses automated systems to "substitute for judgment and discretion," often resulting in "decisions and determinations that harm taxpayers and that IRS employees, following the law and their good judgment, would not arrive at."

Specifically, Olson noted that the IRS had ramped up the number of tax liens filed against the property of delinquent taxpayers from 168,000 in 1999 to more than 1 million in 2010-yet with almost no related increase in revenue. Such liens often inflict serious damage to a taxpayer's credit history but "the agency has no idea whether or to what extent liens contribute to the efficient collection of taxes," she wrote.

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The report took Congress to task for making the IRS's job more difficult by mandating that the agency not only collect taxes but also administer government benefits-a role the agency is ill-equipped to handle. That problem will grow more acute in the near future as the IRS is called to "administer large portions of [last year's] health care legislation," the report warned.

The ombudsman's annual report also called for massive simplification of the federal income-tax code, which has expanded from 1.4 million words a decade ago to nearly 4 million words today: "The most serious problem facing taxpayers-and the IRS-is the complexity of the Internal Revenue Code."

Credit chill

A proposed Federal Reserve rule could make it difficult for stay-at-home moms to get credit, according to a report in The Wall Street Journal. The rule, part of the implementation of the 2009 Credit CARD Act, would require credit-card issuers to consider only an applicant's "independent" income-rather than household income-when judging whether to issue a card or increase a credit limit.

Several retail chains, including Dress Barn, The Limited, and Home Depot, are urging the Fed to drop the proposal. The regulation "would unfairly restrict the ability of many consumers, particularly women not working outside the home, to qualify for credit," Dress Barn president and CEO David Jaffe wrote in a letter to the Fed's Board of Governors. John Buell, chief financial officer of Limited Stores LLC, wrote that the rule "would have a chilling effect on the willingness of customers to apply for store credit because of the embarrassment of being denied credit at the point-of-sale."

Growing pains

In a 101-page document sent to a select group of potential investors, privately held Facebook Inc. signaled that it may go public sometime next year. Working with Goldman Sachs Group, the social networking company is planning to increase its number of handpicked shareholders to more than 500 this year, triggering an SEC rule that requires private companies to give details of their financial performance or begin offering shares in the general marketplace. Generally, privately held companies are not required to disclose profits, losses, or executive compensation. Facebook was the No. 1 destination of internet users in 2010.
Joseph Slife is the assistant editor of SoundMindInvesting.com.

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