updated 1/9/2007 6:20:42 PM ET 2007-01-09T23:20:42

A law meant to crack down on wealthy tax dodgers has instead become the most serious problem facing millions of other taxpayers.

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For the government, meanwhile, the biggest tax problem is the billions of dollars in unpaid taxes, says National Taxpayer Advocate Nina E. Olson. She reported Tuesday to Congress on the hurdles Americans face in meeting their tax obligations.

Olson, who works independently within the Internal Revenue Service, also urged Congress to repeal IRS authority to contract collection activity to private agencies, saying the IRS is better trained and more efficient in going after delinquent taxes.

The advocate is required to submit an annual report to Congress listing at least 20 of the most serious problems encountered by taxpayers.

This year the list was topped by the alternative minimum tax, which was enacted in 1969 to close loopholes that enable the wealthy to avoid paying taxes. But because the law was not indexed for inflation, a provision that originally affected about 20,000 taxpayers now hits tens of millions.

“Today the AMT is left to punish taxpayers for engaging in such ’classic tax-avoidance behavior’ as having children or living in a high-tax state,” the report said in its summary.

Rep. Charles Rangel, D-N.Y., the incoming chairman of the House Ways and Means Committee, and Senate Finance Committee leaders Max Baucus, D-Mont., and Charles Grassley, R-Iowa, have promised to address the AMT issue this year. But repealing the law, under which taxpayers reaching a certain income level lose dependent or state and local tax exemptions, could cost up to $1 trillion over the next decade. There’s no consensus on how to make up for the lost revenues.

Grassley, in a statement, said it was good that the advocate was “joining the chorus” on the AMT, which he described as “taxpayer enemy No. 1.” But he said it was premature to call for ending the private collection program, saying it was just getting off the ground and “we have to make it work.”

The Tax Fairness Coalition, a group representing the agencies contracted to the IRS, said the program has successfully collected $8.4 million in its first 10 weeks. More than 7.4 million Americans owe delinquent taxes but have never heard from the IRS, it said. “PCAs are working closely with the IRS to reach more of those individuals. and, in doing so, recovering vital revenue for government programs,” the group said.

The second most serious problem was the gap between what taxpayers should be paying and what the IRS is collecting, estimated at $290 billion a year. The advocate said that noncompliance by some taxpayers requires good-faith taxpayers to pay an additional $2,200 a year.

It said the gap could be narrowed by tax simplification, third-party information reporting and improved IRS compliance initiatives.

The report said the government loses billions of dollars because it does not intervene at an early stage on delinquent tax accounts, and does not fully utilize collection payment alternatives such as installment agreements.

It said the IRS also fails to provide the meaningful services that low income taxpayers need to meet their obligations regarding delinquencies, doesn’t do enough to help small businesses with tax guidance, and lacks adequate oversight over unenrolled return preparers.

“Simplifying the tax code, particularly by repealing the AMT and reducing the inequities caused by the tax gap, will go a long way to helping America’s taxpayers,” said Olson.

The IRS, in its comments on the report, said it often allows taxpayers in arrears to pay over time, noting there were 2.77 million installment agreements in fiscal 2006, up 5 percent over the previous year.

It also defended the private collection program that was inaugurated last September, saying the program strives to make certain that private collection employees adhere to the same guidelines and restrictions as IRS employees. It said that in fiscal 2007 it expects gross revenues from the program to range from $33.8 million to $62.3 million, with costs between $23 million and $29.3 million.

National Treasury Employees Union President Colleen M. Kelley welcomed the recommendation to end the private collection program, saying paying debt collectors “a bounty of up to 25 percent of the money they collect is a waste of taxpayers’ dollars and exposes taxpayers to the risk of identity theft and overly aggressive collection tactics.”

The advocate recommended that Congress change its budget-writing procedures under which the IRS must compete with other agencies for federal dollars. “The IRS’ lack of resources is a significant impediment to its ability to close the tax gap and thereby to reduce the federal budget deficit,” the report said.

© 2013 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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