Tax Administration

Under the Low-Income Taxpayer Clinic Program, the Internal Revenue Service (IRS) is authorized to award matching grants to organizations that (1) provide legal assistance to low-income taxpayers in controversies with IRS or (2) inform persons for whom English is a second language of their tax rights and responsibilities. This report discusses (1) the steps that IRS has taken to implement the program, (2) the key tax problems facing low-income taxpayers served by the clinics and the reasons for these problems, (3) the role that the program plays in addressing these taxpayers' problems, and (4) other steps that IRS or Congress could take to address the types of tax problems that the clinics now face.

GAO noted that: (1) IRS has taken a number of actions to implement the Low-Income Taxpayer Clinic Program; (2) after passage of the Restructuring Act in July 1998, IRS (which had limited experience in operating grant programs) sought input from tax practitioners and others regarding the design and operation of the program; (3) it also developed a grant application package and selection and reporting procedures, and put a staff in place to administer the program; (4) between January and June 1999, IRS published its proposed grant application, finalized and made the application publicly available, and awarded the first grants--totalling nearly $1.5 million--for fiscal year 1999; (5) 24 grants went to existing clinics and 10 to new clinics; (6) in the opinion of the directors GAO contacted, the key tax problems facing taxpayers served by their clinics involved the Earned Income Credit (EIC), dependency exemptions, and filing status; (7) in the directors' view, problems in these areas resulted primarily because low-income taxpayers have great difficulty understanding and complying with the complexity of the tax laws, particularly as they relate to EIC; (8) other reasons mentioned by clinic directors included the taxpayers' failure to respond to IRS notices, nontraditional living arrangements, lack of education, and paid preparer fraud and error; (9) among taxpayers for whom English was a second language, the directors said that language difficulties also contributed to the taxpayers' tax problems; (10) clinic directors believed that the Low-Income Taxpayer Clinic Program played an important role by helping some taxpayers resolve tax problems with IRS and promoting compliance through taxpayer education and assistance; (11) in addition, the clinic directors that were affiliated with law schools or graduate accounting and business programs reported that participating students also benefited by gaining valuable educational and practical experience dealing with clients and preparing cases; (12) in considering the role clinics might play, it is important to know that they are labor-intensive to operate and, as such, can serve only a small number of low-income taxpayers who are involved in controversies with IRS; and (13) the clinic directors suggested actions that IRS and Congress could consider to address the types of problems facing low-income taxpayers served by their clinics.