5 taxpayer traps for 2008

NEW YORK (CNNMoney.com) -- Delayed tax returns and late tax code changes are among the most serious problems facing taxpayers today, according to taxpayer advocate Nina Olson in an annual report to Congress Wednesday.

The National Taxpayer Advocate is appointed by the Treasury Secretary and is charged with representing taxpayer interests before the IRS and Congress.

Among 29 of the most serious taxpayer problems outlined in the report, here are five that Olson detailed:

Late-year tax law changes, and delays in processing those changes, mean some payers could miss out on tax deductions.

The IRS finalizes its Form 1040 and form 1040A in November. If law changes are made later in the year, taxpayers might not receive updated forms and could file inaccurate returns, Olson said. Taxpayers using tax preparation software face the same problem.

While middle-class taxpayers welcome last month's approved alternative minimum tax patch, which shields them from an old tax law for the wealthy not adjusted for inflation, the late tax law change could affect taxpayers claiming the Child and Dependent Care Credit or other credits, Olson said. This also means tax refund delays for millions.

About 80 percent of taxpayers receive a refund when they file their returns, Olson said, citing the IRS, and for low-income families, refunds are particularly important.

Taxpayers who take the Earned Income Tax Credit, for example, could be significantly impacted by refund delays.

"For some taxpayers, a delay of two to four weeks in receiving the refund could mean eviction, inability to pay the high heating bills that arise during winter, or defaulting on credit card bills from the holiday season," Olson wrote in her report to Congress.

Among families receiving EITC benefits for the 2005 tax year, the average refund amount was $3,093.46, or about 20 percent of the average adjusted gross income, $15,484.52, of those taking the credit, Olson noted.

Refund anticipation loans sold by tax preparers are "disproportionately targeted toward low-income taxpayers and may exploit those taxpayers' trust in their preparers as well as their lack of financial sophistication," according to Olson.

In addition, some tax preparers have a financial incentive to inappropriately inflate refund amounts, and taxpayers might not completely understand that the refund anticipation loan is separate from filing a tax return, she wrote.

The IRS says it is proposing steps to restrict these practices among tax preparers.

Too often, victims of identity theft receive more scrutiny from the IRS than the perpetrators of identity theft, Olson wrote, noting that identity theft could lead to the delay or denial of refunds, the assessment of tax debts reflecting a fraudulent filer's return, and victims being required to prove their identity to the IRS every year.

If a thief uses another's social security number to report false wages, the IRS system doesn't interpret the duplicate filing as identity theft situation, she said. Instead, the innocent taxpayer's refund is reduced, frozen or the system creates a balance due, according to the advocate's report.

If there is a balance due as a result of two returns filed under the same social security number, the IRS will begin collection actions against the innocent taxpayer, her report notes.

While it has made some improvements, "The IRS has not done enough to improve identity theft procedures for victims of identity theft or to secure its filing system from fraudulent filers," Olson said.

Shortcomings at IRS-sponsored taxpayer assistance centers are making it difficult for taxpayers requiring face-to-face assistance to get help with their tax returns, the report said.

Taxpayers seeking assistance face inconvenient locations, lack of services, payment problems, and questions deemed by the center to be "out-of-scope," or too complex for IRS employees or volunteers to answer, according to Olson.

While the IRS now acknowledges that there will always taxpayers that require face-to-face assistance in order to comply with tax laws, "the next step is to ensure that Taxpayer Assistance Centers are adequately staffed to meet the needs of that population and adequately trained to answer the questions most likely to be asked by that population," Olson wrote.

Additionally, Olson said a taxpayer bill of rights, outlining what taxpayers have a right to expect from their government's tax system and what the government has a right to expect from its taxpayers, will benefit both taxpayers and tax administration.

The full annual report to Congress from the National Taxpayer Advocate can be found here on the IRS Web site.