[House Hearing, 105 Congress]
[From the U.S. Government Publishing Office]



 
RECOMMENDATIONS OF THE NATIONAL COMMISSION ON RESTRUCTURING THE IRS TO 
                EXPAND ELECTRONIC FILING OF TAX RETURNS

=======================================================================

                                HEARING

                               before the

                       SUBCOMMITTEE ON OVERSIGHT

                                 of the

                      COMMITTEE ON WAYS AND MEANS
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED FIFTH CONGRESS

                             FIRST SESSION

                               __________

                           SEPTEMBER 9, 1997

                               __________

                             Serial 105-40

                               __________

         Printed for the use of the Committee on Ways and Means



                      COMMITTEE ON WAYS AND MEANS

                      BILL ARCHER, Texas, Chairman

PHILIP M. CRANE, Illinois            CHARLES B. RANGEL, New York
BILL THOMAS, California              FORTNEY PETE STARK, California
E. CLAY SHAW, Jr., Florida           ROBERT T. MATSUI, California
NANCY L. JOHNSON, Connecticut        BARBARA B. KENNELLY, Connecticut
JIM BUNNING, Kentucky                WILLIAM J. COYNE, Pennsylvania
AMO HOUGHTON, New York               SANDER M. LEVIN, Michigan
WALLY HERGER, California             BENJAMIN L. CARDIN, Maryland
JIM McCRERY, Louisiana               JIM McDERMOTT, Washington
DAVE CAMP, Michigan                  GERALD D. KLECZKA, Wisconsin
JIM RAMSTAD, Minnesota               JOHN LEWIS, Georgia
JIM NUSSLE, Iowa                     RICHARD E. NEAL, Massachusetts
SAM JOHNSON, Texas                   MICHAEL R. McNULTY, New York
JENNIFER DUNN, Washington            WILLIAM J. JEFFERSON, Louisiana
MAC COLLINS, Georgia                 JOHN S. TANNER, Tennessee
ROB PORTMAN, Ohio                    XAVIER BECERRA, California
PHILIP S. ENGLISH, Pennsylvania      KAREN L. THURMAN, Florida
JOHN ENSIGN, Nevada
JON CHRISTENSEN, Nebraska
WES WATKINS, Oklahoma
J.D. HAYWORTH, Arizona
JERRY WELLER, Illinois
KENNY HULSHOF, Missouri

                     A.L. Singleton, Chief of Staff

                  Janice Mays, Minority Chief Counsel

                                 ______

                       Subcommittee on Oversight

                NANCY L. JOHNSON, Connecticut, Chairman

ROB PORTMAN, Ohio                    WILLIAM J. COYNE, Pennsylvania
JIM RAMSTAD, Minnesota               GERALD D. KLECZKA, Wisconsin
JENNIFER DUNN, Washington            MICHAEL R. McNULTY, New York
PHILIP S. ENGLISH, Pennsylvania      JOHN S. TANNER, Tennessee
WES WATKINS, Oklahoma                KAREN L. THURMAN, Florida
JERRY WELLER, Illinois
KENNY HULSHOF, Missouri


Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public 
hearing records of the Committee on Ways and Means are also published 
in electronic form. The printed hearing record remains the official 
version. Because electronic submissions are used to prepare both 
printed and electronic versions of the hearing record, the process of 
converting between various electronic formats may introduce 
unintentional errors or omissions. Such occurrences are inherent in the 
current publication process and should diminish as the process is 
further refined.


                            C O N T E N T S

                               __________

                                                                   Page

Advisory of September 2, 1997, announcing the hearing............     2

                               WITNESSES

Internal Revenue Service, Hon. Michael P. Dolan, Acting 
  Commissioner, accompanied by Terry Lutes, Acting Assistant 
  Commissioner, Electronic Tax Administration....................     7
U.S. Department of the Treasury, Lawrence H. Summers, Deputy 
  Secretary, as presented by Hon. Donald C. Lubick, Acting 
  Assistant Secretary, Tax Policy................................    24

                                 ______

American Payroll Association, Carolyn Kelley.....................   113
H&R Block Tax Services, Inc., Thomas L. Zimmerman................    60
Intuit, Inc., Larry Wolfe........................................    66
Kachina Group, Robert J. Carver..................................    82
National Association of Computerized Tax Processors, Joseph W. 
  Langer.........................................................    76
National Association of Enrolled Agents, Joseph F. Lane..........    95
National Society of Accountants, Roger Harris....................    86

                       SUBMISSIONS FOR THE RECORD

American Bankers Association, statement..........................   134
American Society for Payroll Management, New York, NY, Clark G. 
  Case, letter...................................................   136
Bograd, Harriet, New York, NY, statement.........................   140
National Council of Nonprofit Associations, Ann Mitchell Sackey, 
  statement......................................................   142
National Treasury Employees Union, Robert M. Tobias, statement...   144


RECOMMENDATIONS OF THE NATIONAL COMMISSION ON RESTRUCTURING THE IRS TO 
                EXPAND ELECTRONIC FILING OF TAX RETURNS

                              ----------                              


                       TUESDAY, SEPTEMBER 9, 1997

                  House of Representatives,
                       Committee on Ways and Means,
                                 Subcommittee on Oversight,
                                                    Washington, DC.
    The Subcommittee met, pursuant to call, at 10 a.m. in room 
1100, Longworth House Office Building, Hon. Nancy L. Johnson 
(Chairman of the Subcommittee) presiding.
    [The advisory announcing the hearing follows:]

ADVISORY

FROM THE COMMITTEE ON WAYS AND MEANS

                       SUBCOMMITTEE ON OVERSIGHT

FOR IMMEDIATE RELEASE                                CONTACT: (202) 225-7601
September 2, 1997

No. OV-7

                    Johnson Announces Hearing on the

             Recommendations of the National Commission on

               Restructuring the IRS to Expand Electronic

                         Filing of Tax Returns

    Congresswoman Nancy L. Johnson (R-CT), Chairman, Subcommittee on 
Oversight of the Committee on Ways and Means, today announced that the 
Subcommittee will hold the second in a series of hearings to examine 
the June 25, 1997, report of the National Commission on Restructuring 
the Internal Revenue Service (IRS). The hearing, focusing on the 
Commission's recommendations to expand electronic filing of tax and 
information returns, will take place on Tuesday, September 9, 1997, in 
the main Committee hearing room, 1100 Longworth House Office Building, 
beginning at 10:00 a.m.
      
    Oral testimony at this hearing will be from invited witnesses only. 
Witnesses will include officials from the U.S. Department of the 
Treasury and the IRS, representatives from practitioner organizations, 
and stakeholders who play important roles in tax and information return 
filing. However, any individual or organization not scheduled for an 
oral appearance may submit a written statement for consideration by the 
Subcommittee and for inclusion in the printed record of the hearing.
      

BACKGROUND:

      
    The IRS presently receives approximately 205 million tax returns 
each year. The largest workload associated with processing these 
returns involves the nearly 120 million individual tax returns that are 
received during the tax filing season from January 1 to April 15. The 
IRS uses 10 service centers in different regions of the country to 
process income tax returns. During processing, tax data from each 
return is manually entered into IRS computers by seasonal employees 
hired temporarily during the filing season.
      
    During the 1997 tax filing season, the IRS received approximately 
20 million individual tax returns electronically. Of the 100 million 
individual returns that were submitted in paper format, approximately 
70 million exist in electronic format prior to submission to the IRS. 
Tax practitioners prepare approximately 60 million returns per year, 
almost all of which are prepared using tax preparation software. 
Another 10 million returns are self-prepared by taxpayers using tax 
preparation software on personal computers. The majority of these 
electronically prepared returns are printed out and sent to the IRS in 
paper format, after which they are reconverted to digital form through 
the manual data capture process.
      
    This digital-to-paper-to-digital conversion creates inefficiencies 
that add to the cost of processing paper returns. For example, the 
error rate for the manual data entry process is approximately 20 
percent, half of which is attributable to the IRS, and half to errors 
in taxpayer data. Because electronically filed returns are usually 
prepared using computer software programs with built in accuracy 
checks, undergo pre-screening by the IRS, and experience no key punch 
errors, electronic returns have an error rate of less than one percent. 
In addition, the IRS paper returns processing function still uses 
outmoded equipment that experiences significant downtime and slower 
operator productivity. If the returns prepared in electronic format 
were transmitted directly to the IRS, these redundancies and 
inefficiencies could be avoided.
      
    The Commission concluded that to develop a successful electronic 
filing program, the IRS must put into place a comprehensive plan to 
remove barriers, increase benefits, and broaden the appeal of 
electronic filing to all segments of the taxpayer and practitioner 
population. The Commission recommended that the IRS, Congress, and the 
Administration establish a goal that 80 percent of all tax returns 
should be filed electronically within 10 years, and that IRS's 
leadership should be held accountable for accomplishing that goal.
      
    The Commission's recommendations are embodied in H.R. 2292, which 
was introduced on July 30th by Reps. Rob Portman (R-OH) and Ben Cardin 
(D-MD). The specific provisions in the bill relating to electronic 
filing include: (1) a mandate for the IRS, within 180 days, to 
implement a plan to eliminate barriers, provide incentives, and use 
competitive market forces to increase electronic filing over the next 
10 years; (2) a mandate for the IRS, within 180 days, to develop 
procedures for the payment of incentives to qualified transmitters of 
electronic returns; (3) extension of the filing deadline to May 15th 
for taxpayers who file their returns electronically; and (4) amendments 
to the Internal Revenue Code to facilitate paperless electronic filing.
      
    In announcing the hearing, Chairman Johnson stated: ``A 
comprehensive strategy to encourage electronic filing of tax returns 
holds significant potential not only to make the IRS returns processing 
function more efficient, but also to greatly benefit taxpayers. Errors 
would be reduced, in turn, reducing the number of notices that are 
triggered by errors in the manual data entry process. In addition, 
taxpayers who file their returns electronically would receive 
confirmation from the IRS that their return was received.''
      

FOCUS OF THE HEARING:

      
    The Subcommittee will examine the Commission's recommendations for 
expanding electronic filing and is seeking comment on other actions 
which could be taken to help achieve the goal of receiving 80 percent 
of tax returns electronically within 10 years. It will also examine the 
plans that are currently being developed by the Treasury and IRS to 
expand electronic filing, including the draft Request for Proposals 
(RFP) on Electronic Tax Administration which will be issued by the IRS 
in mid-September. This RFP will solicit proposals from practitioner 
groups and other stakeholders regarding the establishment of strategic 
partnerships with the IRS to facilitate the expansion of electronic 
filing.
      

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

      
    Any person or organization wishing to submit a written statement 
for the printed record of the hearing should submit at least six (6) 
single-space legal-size copies of their statement, along with an IBM 
compatible 3.5-inch diskette in ASCII DOS Text or WordPerfect 5.1 
format only, with their name, address, and hearing date noted on a 
label, by the close of business, Tuesday, September 23, 1997, to A.L. 
Singleton, Chief of Staff, Committee on Ways and Means, U.S. House of 
Representatives, 1102 Longworth House Office Building, Washington, D.C. 
20515. If those filing written statements wish to have their statements 
distributed to the press and interested public at the hearing, they may 
deliver 200 additional copies for this purpose to the Subcommittee on 
Oversight office, room 1136 Longworth House Office Building, at least 
one hour before the hearing begins.
      

FORMATTING REQUIREMENTS:

      
    Each statement presented for printing to the Committee by a 
witness, any written statement or exhibit submitted for the printed 
record or any written comments in response to a request for written 
comments must conform to the guidelines listed below. Any statement or 
exhibit not in compliance with these guidelines will not be printed, 
but will be maintained in the Committee files for review and use by the 
Committee.
      
    1. All statements and any accompanying exhibits for printing must 
be typed in single space on legal-size paper and may not exceed a total 
of 10 pages including attachments. At the same time written statements 
are submitted to the Committee, witnesses are now requested to submit 
their statements on an IBM compatible 3.5-inch diskette in ASCII DOS 
Text or WordPerfect 5.1 format. Witnesses are advised that the 
Committee will rely on electronic submissions for printing the official 
hearing record.
      
    2. Copies of whole documents submitted as exhibit material will not 
be accepted for printing. Instead, exhibit material should be 
referenced and quoted or paraphrased. All exhibit material not meeting 
these specifications will be maintained in the Committee files for 
review and use by the Committee.
      
    3. A witness appearing at a public hearing, or submitting a 
statement for the record of a public hearing, or submitting written 
comments in response to a published request for comments by the 
Committee, must include on his statement or submission a list of all 
clients, persons, or organizations on whose behalf the witness appears.
      
    4. A supplemental sheet must accompany each statement listing the 
name, full address, a telephone number where the witness or the 
designated representative may be reached and a topical outline or 
summary of the comments and recommendations in the full statement. This 
supplemental sheet will not be included in the printed record.
      
    The above restrictions and limitations apply only to material being 
submitted for printing. Statements and exhibits or supplementary 
material submitted solely for distribution to the Members, the press 
and the public during the course of a public hearing may be submitted 
in other forms.
      

    Note: All Committee advisories and news releases are available on 
the World Wide Web at `HTTP://WWW.HOUSE.GOV/WAYS__MEANS/'.
      


    The Committee seeks to make its facilities accessible to persons 
with disabilities. If you are in need of special accommodations, please 
call 202-225-1721 or 202-226-3411 TTD/TTY in advance of the event (four 
business days notice is requested). Questions with regard to special 
accommodation needs in general (including availability of Committee 
materials in alternative formats) may be directed to the Committee as 
noted above.

                                

    Chairman Johnson. Good morning. This is the second in a 
series of hearings to examine the recommendations of the 
National Commission on Restructuring the IRS. Our focus today 
will be on electronic filing of tax and information returns.
    Each year during the tax filing season, the IRS faces a 
monumental task. Day after day, from February through mid-
April, trucks pull into the 10 IRS Service Centers around the 
country, delivering 100 million or more individual paper 
returns. Thousands of temporary workers are hired to open 
stacks of envelopes, sort returns and checks, and assist in the 
process of manually entering the information from each return 
into IRS computers--a process which is both costly and prone to 
error.
    Of the 100 million individual returns submitted on paper 
this year, 70 million existed in electronic form before they 
were printed out and mailed to the IRS. Tax practitioners 
prepare about 60 million returns per year, almost all of which 
are prepared on computers using tax preparation software. 
Another 10 million returns are self-prepared by taxpayers on 
their personal computers using tax preparation software.
    Significant benefits would be derived both by taxpayers and 
the IRS if we could figure out an effective strategy for 
getting all the returns that are prepared each year in an 
electronic form transmitted to the IRS in electronic form.
    Most importantly, taxpayers would be protected from all the 
problems caused by the errors made as data is entered manually 
into IRS computers by temporary employees, because hundreds of 
thousands of computer notices are generated each year as a 
result of the 20-percent error rate in the manual data entry 
process. In addition, all taxpayers who file electronic returns 
would receive confirmations that their returns are received and 
accepted by the IRS. Clearly, electronic filing would save big 
money for the Federal Government and big problems for 
taxpayers. For the IRS the benefits are obvious--lower costs 
and fewer errors.
    The Commission concluded that to develop a successful 
electronic filing program, the IRS must put into place a 
comprehensive plan to remove barriers, increase benefits, and 
broaden the appeal of electronic filing to all segments of the 
taxpayer and practitioner population. Among other things, the 
Commission recommended that the IRS, Congress, and the 
administration should establish a goal that 80 percent of all 
tax returns should be filed electronically within 10 years, and 
IRS' leadership should be accountable for accomplishing that 
goal.
    We will hear from Assistant Treasury Secretary, Donald 
Lubick, and Acting IRS Commissioner, Michael Dolan, regarding 
the administration's plans for Electronic Tax Administration, 
and how those plans relate to the Commission's recommendations. 
We will also hear from tax practitioners and other stakeholders 
who play important roles in tax and information return filing. 
Hopefully, by the end of the hearing we will have a better idea 
of the steps that must be taken to expand the appeal of 
electronic filing.
    I would now like to recognize my Ranking Member, Bill 
Coyne, for his opening statement.
    Mr. Coyne. Thank you, Madam Chairman. We will have the 
opportunity on the Subcommittee on Oversight today to review 
various recommendations for improving and enhancing electronic 
filing of returns.
    During the 1997 tax return filing season approximately 120 
million individual tax returns were filed; 20 million of those 
were filed electronically and 100 million were filed on paper. 
Unfortunately, electronic filing has increased only gradually 
in recent years with the bulk of the increase coming from 
TeleFile and PC returns.
    Much more can be done and now is the time to do it. 
Electronic tax return filing needs to be promoted by the IRS. 
The public needs to understand the advantages of filing error-
free electronic returns directly with the IRS. Also, taxpayers 
need to be assured that electronic filing does not increase the 
likelihood of audit or other contact by the IRS.
    The tax preparer community can also help in promoting and 
facilitating electronic filing. In fact, in many ways tax 
preparers have been the prime promoters of electronic filing. 
For example, many tax preparation firms and accountants have 
been providing electronic filing free of charge.
    Importantly, the IRS' blueprint for modernization is in 
progress and on track. Next week as part of the blueprint 
implementation plan the IRS will issue a request for comments 
on electronic tax administration to solicit from tax 
practitioners ideas and joint IRS/private sector strategies for 
expansion of electronic filing. We should hear about some of 
their ideas at today's hearing. I am pleased that there is 
strong bipartisan support for legislation to enhance electronic 
tax return filing. I look forward to our review of proposals to 
authorize the IRS to promote and advertise the benefits of 
electronic filing, and to allow the acceptance of taxpayer 
signatures and other tax documents in electronic form.
    I commend the Subcommittee Chairman for holding today's 
hearing and look forward to working together with her and other 
Members of the Subcommittee on these issues in a bipartisan 
manner. Thank you.
    Chairman Johnson. The Subcommittee will recess while we 
vote. We will try to keep it to 5 to 7 minutes. We will just go 
over and get right back and start with Mr. Dolan.
    [Recess.]
    Chairman Johnson. The hearing will reconvene. Other Members 
who have opening statements may submit them for the record.
    [The opening statements follow:]

Statement of Hon. Rob Portman, a Representative in Congress from the 
State of Ohio; and Cochairman, National Commission on Restructuring the 
Internal Revenue Service

    Greatly increased electronic filing is an important 
component of the overall effort to revamp the IRS and improve 
taxpayer service. Because it reduces costs and complications 
for each, it's a classic win-win situation for IRS and the 
taxpayer.
    Currently, there is at least a 20 percent error rate on the 
approximately 120 million paper 1040 returns. Half of that 
error rate comes from the IRS--often when employees 
inadvertently misinput numbers. When forms are electronically 
filed with the IRS, there is less than a 1% error rate. By 
reducing unnecessary errors and notices, electronic filing can 
prevent downstream costs and headaches for taxpayers and the 
IRS.
    Increased electronic filing will also save the IRS money--
some experts (including witnesses before the Subcommittee 
today) believe it costs the IRS about $7 to process a paper 
return, and less than $1 to process an electronic return. It 
makes returns easier for the IRS to process, speeding refunds 
for taxpayers and allowing the IRS to spend less time and money 
shuffling paper.
    The IRS Restructuring and Reform Act requires the IRS to 
develop and implement a strategic marketing plan to make 
paperless filing the preferred, most convenient and cost-
efficient form of filing for 80 percent of taxpayers within the 
next ten years. Our legislation provides tangible incentives--
not mandates--to make electronic filing so easy that taxpayers 
will not want to file paper forms. The new management structure 
created by this legislation will provide the accountability, 
continuity and expertise that are needed to ensure that this 
electronic filing plan is successfully implemented.
    By reducing errors and speeding return processing, 
electronic filing has the potential to vastly improve customer 
service. In the long run, it has the potential to produce a 
smaller, more efficient and less intrusive IRS. It's an 
important step in substantially alleviating the frustrations so 
many taxpayers experience with the current system.
      

                                

Statement of Hon. Jim Ramstad, a Representative in Congress from the 
State of Minnesota

    Madame Chairman, thank you for holding this important 
hearing on the recommendations of the National Commission on 
Restructuring the IRS regarding electronic filing.
    I also want to commend our colleagues Mr. Portman and Mr. 
Cardin for their efforts to translate the Commission's 
recommendations into legislative form by introducing H.R. 2292. 
This legislation has already stimulated a healthy debate about 
how we can improve efficiency and customer service at the IRS.
    Clearly, more widespread use of electronic filing will 
increase efficiency, decrease human errors, and save somewhere 
between five and seven dollars per return. A completely 
paperless system would multiply efficiency, accuracy and cost 
savings.
    Sometimes the greatest obstacle to progress is the fear of 
the unknown, so I hope we will be able to effectively educate 
taxpayers about how electronic filing will benefit them, as 
well as their government.
    Again, Madame Chairman, thanks for your leadership in 
holding this hearing. I look forward to the continuing 
examination of IRS restructuring recommendations over the 
coming weeks.
      

                                

    Chairman Johnson. Mr. Lubick, Acting Assistant Secretary 
for Tax Policy, U.S. Department of Treasury.
    Mr. Lubick. Madam Chairman, I would like to ask that Mr. 
Dolan testify first. I think we have coordinated our testimony 
and----
    Chairman Johnson. OK, thank you. I was just going in the 
order on my list.
    Mr. Dolan.

   STATEMENT OF HON. MICHAEL P. DOLAN, ACTING COMMISSIONER, 
 INTERNAL REVENUE SERVICE; ACCOMPANIED BY TERRY LUTES, ACTING 
     ASSISTANT COMMISSIONER, ELECTRONIC TAX ADMINISTRATION

    Mr. Dolan. Thank you, Madam Chairman. It is a pleasure to 
be back with the Subcommittee this morning, particularly on a 
topic like this. I have with me at the table, Terry Lutes, who 
is making his first appearance before the Subcommittee. Terry 
has been acting as our Assistant Commissioner at our newly 
created Electronic Tax Administration organization, so between 
the two of us we hope to be responsive to questions you might 
have later.
    And with your permission, Madam Chairman, I ask that my 
longer statement be accepted in the record, and I will maybe 
just make a few remarks.
    I mentioned that it is a pleasure to be here because I 
think this is one subject around which there is considerable 
alignment, both with respect to the Subcommittee's interest, 
the work of the Restructuring Commission, and many of the 
witnesses that follow us. I think there are perhaps some 
differences in pace and spectrum, but largely there is a 
tremendous conversion and set of interest in moving forward in 
the Electronic Tax Administration, specifically the electronic 
filing arena.
    What I would like to do this morning is cover a couple of 
different areas. One is to, as sort of an extension of prior 
conversations we have had about this, give the Subcommittee a 
picture of how we are approaching the entire umbrella of 
Electronic Tax Administration; talk a little bit then about 
some of the products we already have online. Some of those 
products are products that we have engaged the Subcommittee on 
in the past, and gotten your suggestions to improve.
    Third, I will talk a little bit about what we hope 
taxpayers will experience next filing season as an extension of 
the electronic program as we have in place; and then I will 
discuss what we really are quite excited about, which is a 
major new opportunity to expand the partnering and the whole 
Electronic Tax Administration. Finally, I will also respond to 
your question, that we comment on some of the specific 
proposals made by the Restructuring Commission.
    I do not think, based on both your statement, Madam 
Chairman, and Mr. Coyne's, that there is much disagreement that 
this is a business that government, and specifically the 
Internal Revenue Service, needs to be in. The Electronic Tax 
Administration process produces an outcome that is both faster 
and cheaper. That is measured both by the impacts on the 
customer, the taxpayer, as well as on the government at large.
    Clearly, the quality of interaction, in addition to it 
being faster and cheaper, the quality is vastly enhanced based 
on the statistics that both of you cited in your opening 
statements; and based on what we also know to be the taxpayer's 
ultimate desire in this process--which is, get closure and know 
that there is closure. The quality of that interaction when 
done electronically is one that facilitates that much better 
than the historical paper processes.
    And last, we are clearly in a world today where our 
customers do not differentiate their customer expectations when 
dealing with a government entity versus a financial services 
industry. So essentially what customers are superimposing on 
us, where we can like it or not, is an expectation that we 
offer a quality of interaction, a quality of products and 
services that are analogous to what they have experienced in 
dealing with their credit card companies, banks, insurance 
companies, financial institutions.
    I think what we already have on the docket are some things 
that have begun to make the right advances in the right areas, 
and some of these I will not regale you with all the rats and 
the stats. I think, however, you are quite familiar that our 
electronic filing product is one, that again this last year 
made 19-percent improvement over the prior year in terms of the 
people that participated in it. Somewhere between 14 and 15 
million people will have filed the conventional electronic file 
return this year; 366,000 of them though have done it using 
their individual PCs, which is an opening that we hope to 
continue to be able to exploit. In addition to the very fertile 
marketplace of those 70 percent that are today done on 
computers, and the high percent that are done by practitioners, 
we also want the window of an individual preparer of a tax 
return, based on a software package, to be able to come at us 
through the electronic filing process.
    I think that the TeleFile product is one that has only been 
in the second year of operation. That is a product that clearly 
speaks to one specific segment, the 1040-EZ filer. That is a 
segment though that we found reacted quite nicely to the 
product, based on its ease. It is a product that I think some 
of you know. Almost 5 million people participated in TeleFile 
last year. Essentially an 8-minute telephone call allows people 
to totally satisfy their tax obligation. At the end of that 
transaction on a telephone it allows people to know, by virtue 
of a code that we give them, that their return has been 
accepted. They have the closure and the certitude that they 
have told us and that is so important to them.
    I have a couple of attachments in my prepared testimony and 
a couple of charts over here on the side, which reflect the 
general progress in both the overall TeleFile and in the 
overall ELF and TeleFile. I think those of you who served on 
this Subcommittee over a period of time, know that the dip in 
our progress is, in large part, a function of us collectively 
deciding that we had to respond to what were some pretty 
significant questions about some types of fraud to which the 
system was at risk a couple of years ago. And so, in large 
part, the dip you see in 1995 was a function of a series of 
changes we made to mitigate some of those risks. We are hopeful 
that the trend that is reflected in the two subsequent years is 
a trend that we cannot only sustain at the incremental level, 
but I think we share the interest of doing some geometric 
increases there wherever possible.
    Electronic business returns are something that we came to 
after our initial foray and the individual return filing. To 
date, we have had some reasonably good experience with bringing 
the 941, the employer's quarterly tax return, into the 
electronic process. This year we have piloted, again taking the 
smallest businesses with the less complex kinds of 
transactions, in a 10-State area with putting a TeleFile 
product in front of them as well, and to date we have had 
50,000 returns that have been filed using that TeleFile 
process, with the customer reaction being exactly the same as 
it was on the individual side. In excess of 99 percent of the 
people who have used that have said to us, ``I want that 
product. I like that product. It is an improvement over the way 
I used to do business with you.''
    Based on the experience we have had in this pilot in the 
10-State area we will actually operationalize it and go 
nationwide with it next year, again creating an opportunity for 
the smaller businesses to do those quarterly tax transactions 
on the telephone, rather than using the process of returns and 
coupons as in the past.
    The fifth arena that is frequently not talked about in the 
same breath as electronic filing, but is equally crucial to us, 
is what we have been able to produce in our Web site. We call 
it our Digital Daily. It is indeed the process by which we 
created an electronic window or door, or access to the 
population at large. The last filing season 117 million people 
came through that digital door, often in search of a technical 
tax law answer. They would have otherwise wanted to call us, or 
walk into an office, or do something more arduous to find the 
answer.
    Also notably, 6 million times during the filing season, 
that Digital Daily--our home page--was the source for a copy of 
a form or a copy of a publication. Somebody, presumably at 
their kitchen table on a Sunday or Monday, or the night before 
filing, could access the IRS Web site instead of having to 
traipse off to find that form or publication.
    So we think that that represents the nugget of what will 
still be a considerable opportunity to leverage more fully in 
this Electronic Tax Administration business.
    One facet that we experimented with last year, and we again 
expect to be able to expand on this experiment, is we began to 
take e-mail messages back from taxpayers. Last year in a 
relatively controlled environment, we invited people to ask 
their technical tax questions on e-mail. And of course, that 
again creates a flexibility as to when and where we respond to 
those. That takes some of the contention out of the business 
hours. Somebody might either be trying to get to a walk-in 
counter, or get to our toll-free number. So again, the whole 
ability to leverage the advance of technology on the Web is one 
that we think is a considerable and important part of our 
future.
    Something on which this Subcommittee had an awful lot of 
involvement with us, and on which many of you gave some counsel 
both to me directly, and us collectively, was the whole EFTPS 
process. There was, of course, a fair amount of legitimate 
skepticism. As that electronic tax payment system was first 
introduced there were many who were concerned about the extent 
to which both the users and the custodians of that process were 
ready at the time that it went in place. I am pleased to report 
though that I think the early experience from that is also a 
harbinger of some very good potential with respect to making 
payments electronically.
    As you know, we worried about the extent to which people 
would--those in the mandated category--would indeed be enrolled 
on time, and 96 percent of the 1.1 million people who were 
``mandated,'' are indeed enrolled. In addition to the 96 
percent that are enrolled there are some 500,000 people who are 
voluntarily in the process because of either the sense it makes 
to them, or some appeal to using the system that they have 
identified in the process.
    We have at this point in the year accepted a half trillion 
dollars electronically through the combination of the new EFTPS 
and the phaseout of the old TaxLink process. That represents 
about 46 percent of all deposits that have been made this year. 
The error rate that is being run right now is one-quarter of 1 
percent on those transactions. So I think there are an awful 
lot of people who were vigorous in their participation with us, 
interested in getting this off and getting it off right. We 
took an awful lot of input, not only from the Members of the 
Congress but from small business. There were many, many 
constituencies interested in this thing working right. And I 
think as an opening volley it looks like it does work right; it 
looks like it is an opportunity for us to leverage on, as I 
said, other electronic payment processes.
    One last area is an area also that this Subcommittee has 
been quite interested in, and that is the whole business of how 
do we bring greater effectiveness to telephone access to the 
Internal Revenue Service. In the past the way we might have 
thought about that is, you need more bodies to answer more 
calls. While that is some part of the solution, the other thing 
that we have been experimenting with, and have what we think 
are some reasonably nice early results, is the ability to find 
the kinds of questions and those kinds of inquiries that the 
taxpayer can assist himself to a conclusion. They may not 
require personal interaction in an office or over the 
telephone. And we have put in place something that we call a 
Telephone Routing Interactive System, through which people can 
do such things as call the IRS and set up an installment 
agreement in response to a notice or a bill that they have 
gotten from us.
    They can obtain, for example, most current payoff balance, 
if they are interested in sending us a check or sending us a 
payment that pays off their account. If they are interested in 
the status of their refund, either because they are just 
curious, or because there is some financial transaction that is 
pending receipt of that refund, they can also get that 
information.
    If they desire to get a copy either of their tax return or 
a transcript of their account to be used in a transaction, such 
as a mortgage or student loan application, they can also get 
that under that interactive system. This is something that this 
year we took 2.9 million calls on, and it is not operational 
across the organization yet, but we look forward to being able 
to make it operational systemwide very soon. That is in 
addition to 48 million of what we would have called our more 
classic kinds of computer-assisted calls that come in through 
our TeleTax system today.
    As much as we are proud of what has happened, it is 
building the pattern that reflects the kind of incremental, but 
strong growth, in these products. It is clear to us, and has 
been for some time, that what we really want to do is leverage 
this; not incrementally but exponentially if at all possible. 
And that is what inspired us a better part of a year ago to 
create what we have now created in our Electronic Tax 
Administration, the Assistant Commissionership. In so doing we 
thought we needed to create focus within the organization that 
really was responsible for leveraging the technology, but more 
importantly was to be the exclusive spot for which we could 
stimulate the partnering required to do this and do it right.
    The key premise of how we proceed on a forward going basis 
I think mirrors the Restructuring Commission's recommendation; 
that is, it has to be done in partnership. There are huge 
enablers created by structuring the partnerships with the 
software preparers, with the practitioner community, with the 
various constituencies.
    What we have done in order to create a structure for that 
though, is in addition to creating an organization, we have 
recently had the good fortune of selecting a leader for that 
organization. Some of you have met and worked with Bob Barr, 
formerly with Intuit. Bob happens to be here in the audience 
today and is trying to get himself relocated from San Diego. 
But we have in Bob somebody who brings considerable experience 
from both sides of the ledger, both experience in the business 
of electronic commerce and the creation of software, and 
working with the government. He also has the added benefit of 
having been a tax administrator for the State of South 
Carolina, and has been one of our earliest partners in making 
the electronic filing project a Federal and State product.
    What we will do though as a way of building on this 
premise, the partnership, is this. Last week, on August 27, we 
put an announcement in the Commerce Business Daily that said we 
intended on September 15, as Mr. Coyne mentioned, to release a 
draft RFP. Some question why we issued the draft versus the 
permanent RFP. One of the things we have learned as we have 
looked at the modernization blueprint life, what we realize is 
when you put these things out in draft, you continue to dialog 
with industry in a very positive way.
    So on September 15 we will put a draft RFP out to industry, 
which in large part is designed to take all comers. It is 
designed to say to the constituencies that we have been 
partnering with, and we know are acutely interested, as well as 
every other potential player out there, these are our goals. 
Our goals are to significantly expand the volumes of receipts 
through the Electronic Tax Administration process. And it says 
we want your ideas; your ideas of not only the technologies 
associated with Electronic Tax Administration, but the 
incentives, the quid pro quos, the impediments, the issues that 
that constituency thinks can be addressed and overcome for the 
ultimate benefit of the taxpayer/consumer's ease of filing with 
us electronically.
    So we are putting a considerable stock in the ability of 
that request for proposal--at first the draft and then 
subsequently the formal RFP--is at least the most organized and 
structured way we have ever created to get what we know is a 
very rich burst of feedback from those industry groups. We are 
quite optimistic about the extent to which the kinds of 
responses that it evokes will deal with the hard chestnuts; 
will deal with the issues about signature alternatives and 
authentication strategies; will deal with the capacity to truly 
make these products paperless instead of today's half in/half 
out world; will deal with fraud detection and prevention, 
something in the past that we thought we perhaps had to own the 
total laboring. I think the industries have said to us in a lot 
of formal and informal ways, that they know they belong in that 
business with us, and we expect that the RFP will also produce 
new ideas about how to share the responsibility for mitigating 
risk of fraud.
    Last, one of the areas that the industries have been quite 
vocal with us in the past, is how do we relate to them as a 
group of players. And one of the things we are asking in the 
RFP is for people to come back and talk about the ground rules 
that ought to apply to the regulation, small ``r'' perhaps, of 
the industries that will participate with us in electronic 
commerce. So I think collectively the potential that is 
resonant in the RFP to take us to the places that we all say we 
want to go in this whole electronic arena, is very 
considerable.
    Now, in addition though to minding the results of the RFP, 
there is more. My testimony makes the point.
    The RFP is not designed to be some theoretical exercise 
that says, tell us what we will do in the year 2000, and bump. 
What the RFP is designed to do is say, our objectives are to 
translate the industry's feedback into substantial return 
growths in 1999, namely tax year 1998 returns filed in 1999. So 
it is a very proximate set, very actionable set of 
recommendations that we want from industry; all the while also 
cognizant of the fact that the overall modernization blueprint 
and the capacity to leverage a link to that later on, will give 
us additional opportunities. But the invitation that we have 
extended to the industry today is not one to come back about 
theoretical things to do in the year 2000 plus, but something 
to do with tax year 1998 returns that were received in calendar 
year 1999.
    Now, in advance of that, there are some things we can do in 
the current structure, and we will do them. I made mention of a 
couple of them. I will not spend a lot of time on them. I 
already mentioned that we are going to expand the 941 TeleFile 
in the business community. We are going to take on a couple of 
additional forms in the next year in the regular ELF product 
that practitioners have--one is, in order to be able to claim 
the adoption credit, and the other is to claim the motor fuel 
excise tax credit.
    Beyond that we are looking very hard at the ability to 
expand the current universe of TeleFilers. Today it is limited 
to the EZ filer. We think we are going to be able to do some 
things for sure next year; that we will bring in additional EZ 
filers that this year might not have played, but beyond that we 
are looking at ways of expanding beyond the EZ market into the 
potential 1040-A market, as ways of bringing more taxpayers 
into using this easiest form of transaction with us.
    We are looking at the entire range of forms and schedules 
that today are not included. Some of those are ones that I 
think Don Lubick will at least make a reference in his 
testimony that we may need congressional help to make changes 
and code provisions that today might require schedules or 
certifications, or things which are not readily adaptable to an 
electronic submission. There are a huge number of those; there 
are some of those that we will bring back no doubt to this 
Subcommittee, and ask for your help and sponsorship in 
implementing. But we are going to look at the whole universe of 
things that today cannot be included, and look very carefully 
for opportunities to even bring more in next year.
    And last, with an eye toward 1999 and some of the other 
opportunities we are going to have with the RFP, we are working 
very closely with the FMS, the Financial Management Service, 
for ways of increasing the opportunity for people who today 
file balance-due returns. For the most part, the electronic 
filing product, whether it is the TeleFile or the regular ELF 
product is a product used by somebody who is a refund filer. In 
very large part, the attractiveness is the speed of the refund; 
the accuracy of the refund.
    What we are very aggressively involved with right now, as I 
say with FMS and Treasury, are initiatives that will create 
payment options. We will, for example, do a takeoff of today's 
ACH debit capacity that exists in the EFTPS system; make that 
an easier process for an individual, and create opportunities 
and incentives for somebody who files a balance-due return to 
be equally interested in using electronic filing as a process, 
and perhaps have the benefit of sending us paper 1 day, and 
warehousing and triggering their ACH debit perhaps on another 
date.
    The last arena that I know this Subcommittee has been very 
interested in, and one that is for us at the end of the day a 
substantial, if not a show stopper--certainly show and center--
and that is the whole ability to get to an alternative 
signature. And we are very optimistic that by the time we 
confront the tax year 1998 filing season in 1999 we will have 
the alternatives for signatures and the ability to capture W-2 
information electronically; and, have the ability to truly 
produce a paperless outcome. That, in large part is the 
feedback that we have gotten both from the practitioner 
community and individuals. If you call this an electronic 
process it must truly be an electronic process. You cannot have 
these trailing paper tentacles that we have today. And again, I 
say it looks to us very optimistic that we can achieve that.
    One of the things that I think--Mr. Coyne and maybe Madam 
Chairman, you as well--said in your comments, and it is a place 
that we got some feedback from this Subcommittee when I 
appeared--I think when we talked about the filing season, and 
in connection with EFTPS--you all said to us, you may know 
something about tax administration. You probably do not know as 
much as you should about marketing, and about advancing 
products. I know in the context of the Restructuring 
Commission's work, there was clearly a finding that, with 
respect to some of the products that were placed online we 
acted more like government bureaucrats than we did people 
trying to intelligently introduce a product to our customer 
base.
    One of the things that we are quite excited about this 
coming filing season, is we have used our communications 
contractor to help us develop, not only some products, but some 
approaches to introducing these electronic products in a way 
more professional and more effective than we have in the past.
    Just last week we brought in the practitioner groups and 
other constituencies, and exposed them to what our contractors 
had helped us put together. We received some pretty 
enthusiastic responses from them and some good suggestions as 
well. But I am hoping that with the upcoming filing season we 
will also be able to put a bump on these kinds of numbers by 
virtue of doing a better job of bringing the product to the 
customer on the basis that the customer wants to get it. We 
hope to explain its attributes in terms that are relevant to 
the customer, not in terms that are relevant to perhaps a 
government agency or a bureaucrat.
    Let me spend just the last couple of minutes on specific 
reactions to some parts of the report from the National 
Commission of Restructuring. I think it is pretty self-evident 
that the general thrust of that report is one that not only we 
endorse, but we embrace enthusiastically with respect to the 
desire to increase this entire area.
    There are three or four areas though that we at a minimum 
would want to be circumspect about. The first one is not really 
such an area. The first one recommends that there be such a 
thing called the Electronic Tax Administration Advisory Group. 
On the face of it that is a good idea because it stands for the 
proposition of having people in this together with you. The 
only thing that I would want this Subcommittee to appreciate 
is, we do not think that that statutory call is necessarily the 
only answer to those kinds of partnerships.
    Clearly today, we have a very active set of relationships 
with what we think is the spectrum of groups. We also use the 
Commission's Advisory Group and a liaison group to do that. So 
the notion of making sure that we create a group that creates a 
value as opposed to being a group for group's sake, is probably 
where we would be somewhat careful in that provision.
    The second one would be one in which there has been some 
fair amount of debate, both within the confines of 
restructuring and elsewhere about incentive payments. This is 
something that I think is a considerably dicier proposition 
than some have thought it to be. I think what we would hope to 
persuade the Subcommittee is that, this is a very valid area to 
explore. It is a very interesting area to explore, but it is 
one that probably is best explored in the context of the 
request for proposal that we have out there. So that people who 
respond to us, say to us, Yes, incentives are critical in this 
regard or not in some other regard. Because I think the thing 
that we would not want to do is intersperse incentives in a way 
that artificially affects the way that these products are 
received or acted on by the marketplace.
    The third area that is of some interest to us is the whole 
rearrangement or potential rearrangement of the filing dates. 
Again, it is clear from the work of the Restructuring 
Commission that the idea was to create incentives for people to 
file electronically. And while on the face of this proposal it 
has the potential of doing that, it also has the potential of 
creating a level of confusion or complexity that again we think 
ought to be evaluated very carefully. Because among the things 
that, sort of are constant in our current system is, most 
people relate to April 15 as a pivotal date. Sometimes they do 
not relate to it quite as pivotally as we would hope they 
would, but nonetheless, April 15 is a date in large part that 
is synonymous with meeting a tax obligation. And so to the 
extent that we were to significantly affect that dynamic, at a 
minimum our caution--my caution--would be that we do it very 
carefully and very intelligently, so as to not produce a series 
of unintended consequences.
    I will wrap this up by saying that, clearly I have not 
attempted to say the last word on any of the restructuring 
proposals. I know Don will have additional comments in this 
area. I personally appreciate the kind of support that we have 
gotten, not only from you, Madam Chairman, but from the 
Subcommittee at large, in this area. It is an area where I have 
consistently felt more collegiality and support than I have any 
kind of contention or antagonism. We look forward to your 
continued support, and quite frankly, your ideas, and your 
urgings for us, because we think collectively this is probably 
one of the best metaphors the taxpayers will hold out to both 
you and us with respect to treating them as customers and 
meeting the needs they have. And so with that, I will be 
obviously available for your questions.
    [The prepared statement and attachments follow:]

Statement of Hon. Michael P. Dolan, Acting Commissioner, Internal 
Revenue Service

    Madame Chairman and Distinguished Members of the 
Subcommittee:
    I appreciate the opportunity to appear before you today to 
discuss the Service's progress in and plans for Electronic Tax 
Administration as well as how those relate to recommendations 
made by the Commission on Restructuring the Internal Revenue 
Service. For some time, Electronic Tax Administration has been 
an issue of prime concern in our discussions with the IRS 
Management Board. With me today is Terry Lutes, Acting 
Assistant Commissioner, Electronic Tax Administration.

                            I. Introduction

    While most of the previous dialogue, as well as the 
majority of the Commission's recommendations, has focused on 
our electronic filing program, I would like to talk about 
electronic filing in the larger context of what we are defining 
as Electronic Tax Administration. Electronic Tax Administration 
(ETA) is an umbrella term we are using to describe the two-way 
electronic information exchanges the IRS has with the taxpaying 
public, tax practitioners, employers, and other government 
organizations. Electronic transactions included in our vision 
for ETA include tax returns, information returns, payments, 
correspondence, and government exchange. Since the beginning of 
this year, we have taken some significant strides within the 
IRS to make this vision for ETA a reality.
    Like many large financial services organizations, the IRS 
is in the midst of fundamental change. Even though we continue 
to process information, increasingly that information comes to 
the IRS in electronic form instead of on paper. We, along with 
the Administration, believe that the continued growth of 
electronic transactions is of strategic importance to the 
future of the IRS. Our efforts to provide higher quality, 
faster, and more efficient services to the public depend in 
large part on the exchange of information and tax return data 
in electronic form. Our programs encompass more than just 
electronic filing of tax returns; they are a broader effort to 
provide a wide array of electronic service delivery options to 
the public. At the same time we expand options and access, we 
must assure that we maintain the privacy and security of 
taxpayers' sensitive financial information.
    Today, I would like to speak to you briefly about some of 
the strategic challenges and opportunities confronting the IRS 
in its Electronic Tax Administration programs. I plan to do 
that by discussing our results for ETA programs from the past 
year, outlining our plans for the future, and responding 
directly to your questions concerning the Restructuring 
Commission's recommendations in the area of Electronic Tax 
Administration.

                           II. Recent Results

    As the rest of the financial world has moved toward more 
electronic transactions, the Service has been doing likewise. 
IRS efforts to offer more service options to taxpayers and 
practitioners that do not rely on paper have helped increase 
the number of electronic transactions and decrease the volume 
of paper-based transactions. Results from this most recent 
filing season include the following:
     Our electronic filing (ELF) system allows 
individual taxpayers to file tax returns electronically through 
using an IRS-approved electronic return originator (ERO). More 
than 14 million taxpayers used this program in 1997, a 19% 
increase over 1996. Although most of these taxpayers relied on 
an ERO for the tax preparation, 366,000 of these returns were 
initiated by taxpayers using tax preparation software on 
personal computers. More than 4.3 million of these taxpayers 
who filed electronically also took advantage of the opportunity 
to simultaneously file their state tax return. Electronic 
filing provides significant benefits to the taxpayer and the 
IRS. The error rate for electronically filed returns this year 
was less than 1 percent. This means that taxpayers 
participating in electronic filing were much less likely to get 
a notice from the IRS as a result of mistakes typically 
associated with paper filing. The other advantage is that when 
the return is accepted electronically, the taxpayer received an 
acknowledgment that the return was filed and accepted.
     This year more than 4.7 million taxpayers eligible 
to file 1040EZ returns took advantage of the opportunity to 
file their returns using a simple telephone call to our 
TeleFile system. This was a 65% increase over 1996. Attachment 
1 illustrates the significant growth of this program since its 
nationwide roll out in 1996. Surveys of users of TeleFile show 
that they are extremely satisfied; 99% like the system and 
would use it again. The error rate for TeleFile returns is also 
less than 1 percent and the system is one of the finalists for 
the 1997 ``Innovations in American Government'' award program 
sponsored by the Ford Foundation.
     Attachment 2 shows the growth pattern of ELF and 
TeleFile combined over the past five years. Except for the dip 
which occurred in the initial year of our Revenue Protection 
Strategy, our growth has been steady and one of every six 
individual tax returns was filed electronically in 1997.
     We are also aggressively pursuing getting more 
business returns electronically. In 1997, we are on track to 
receive electronically almost 500,000 Forms 941, Employer's 
Quarterly Federal Tax Return, in addition to the 1.6 million we 
will receive through our magnetic tape program. This spring we 
began a pilot program to allow the smallest businesses to file 
their Form 941s using TeleFile. The pilot has been extremely 
successful with more than 50,000 taxpayers using the system 
during the second quarter with an error rate of less than 1 
percent and a 99% customer satisfaction rate. The IRS intends 
to roll out this system nationwide in the first quarter of 
1998.
     Thus far this year, more than a half a trillion 
dollars have been deposited electronically using our Electronic 
Federal Tax Payment System (EFTPS) and the older Taxlink system 
rather than using paper coupons. This represents 46% of the 
total dollars collected. Of the taxpayers mandated to use 
EFTPS, 1.1 million, 96% of the total, have enrolled as shown in 
Attachment 3. More than 500,000 taxpayers not covered by the 
mandate have also already enrolled and this number is growing. 
The current error rate for these electronic transactions is 
.21%. Attachment 4 shows the growth in the percentage of tax 
dollars collected electronically.
     The Digital Daily, our award-winning home page on 
the World Wide Web experienced more than 117 million hits this 
past filing season which included the downloading of more than 
six million forms and publications. As you know, this service 
is available 24 hours a day and taxpayers can get access to 
needed information in the comfort of their home or business 
upon demand. Additionally, this past filing season we began 
testing the use of the Internet for E-mail customer service 
inquiries and responses. The initial feedback on this service 
has been extremely positive and we will offer this service 
nationwide next year.
    The IRS has also expanded the use of technology to increase 
telephone access to services for taxpayers.
     Thus far this fiscal year, we have had 2.9 million 
calls completed through our Telephone Routing Interactive 
System (TRIS) which provides for resolution of certain customer 
inquiries without human intervention. Currently taxpayers can 
use the system for services such as setting up an installment 
agreement or obtaining payoff information for a balance due 
account, determining the status of a refund and ordering an 
account transcript or copy of their return. Additionally, 48 
million taxpayers accessed our older Teletax system this year 
and received information such as answers to a wide range of 
basic tax law questions and refund inquiries.

                       III. Plans for the Future

    We are extremely encouraged by our success with electronic 
filing systems up to this point. But, to be frank, taxpayers' 
use of the ELF and Telefile systems has not grown as rapidly as 
we had hoped and the potential uses of technology have grown 
far beyond our original concepts. As a result, we are 
formulating a broader strategy for electronic service delivery 
that builds our services through partnership with private 
industry.
    To provide a focus to our plans in this area, this past 
year the IRS established an Electronic Tax Administration (ETA) 
organization devoted solely to the operation and enhancement of 
ETA. As you know, we recently announced the selection of Bob 
Barr as the first permanent Assistant Commissioner to head this 
organization. Bob will join us in October from his position as 
a Vice President for Intuit Corporation, where he worked 
extensively on Federal and State electronic filing programs. 
Bob also has prior experience in tax administration as he 
previously served with the South Carolina State Tax Commission 
and on the IRS Commissioner's Advisory Group and the 
Information Returns Program Advisory Committee (IRPAC). We are 
excited about the impact Bob's extensive program knowledge, 
private and public sector experience, and business savvy will 
have on our ability to move the program forward.
    This is consistent with our efforts to strike strategic 
partnerships with the private sector outlined in the 
Modernization Blueprint and the hiring of a prime integration 
contractor. The IRS is also seeking private, public, and not-
for-profit sector assistance to increase electronic transaction 
volumes in the next several years. We believe that we can best 
address critical issues for ETA such as authentication, fraud 
detection and prevention, third-party ground rules governing 
participation in the electronic filing programs, and accepting 
all forms and schedules by using a structured process to seek 
and evaluate proposals from outside the IRS. To put these 
partnerships in place, the IRS placed a notice in the Commerce 
Business Daily dated August 27, 1997, announcing that the IRS 
will issue a draft Request for Proposals (RFP) on September 15, 
1997. This RFP is being issued in draft form at this time so 
that external ETA partners can provide input into the final 
procurement, resulting in maximum responses to the RFP from 
outside the IRS. We are structuring this RFP in a manner that 
solicits easy to implement proposals which can impact the 1999 
filing season. In addition, it will solicit long term 
partnerships which will help the IRS design systems and 
programs in a manner which will maximize taxpayer and return 
preparer use.
    While we are excited about the possible results of the RFP, 
we are continuing to move ahead with efforts to enhance and 
expand our successful electronic programs where it clearly 
makes sense.
     We will expand our E-mail customer service 
capacity and additional services will be provided through TRIS. 
New TRIS services will include automated determination of the 
status of payments. If additional funding to combat EITC fraud 
is received as expected, TRIS will also provide for releases of 
refunds involving invalid social security numbers.
     We intend to roll out 941 Telefile nationwide in 
1998 and are projecting that more than one million returns will 
be filed through the system in the first year.
     While significant portions of our programming 
resources have been committed to Century Date Change and 
implementation of tax law changes, we will be able to accept 
two additional forms, those involving adoption credits and 
motor fuel excise taxes, as attachments for ELF returns. 
Additionally, returns where either the taxpayer or a dependent 
has an Individual Taxpayer Identification Number (ITIN) or 
Adoption Taxpayer Identification Number (ATIN) will be accepted 
by ELF for the first time.
     We are in the process of initiating a complete 
analysis of all forms and schedules not currently accepted 
through the ELF system to identify all of the issues related to 
each to determine the steps we need to take in order to accept 
them without diminishing the accuracy rate for ELF returns or 
increasing refund fraud. We expect to use the results of this 
analysis, along with the proposals resulting from the RFP, to 
develop during fiscal year 1998 a comprehensive plan for 
accepting all forms and schedules.
     We are in the process of completing a thorough 
analysis of the extent to which we can broaden the range of 
1040 returns accepted through TeleFile without diminishing 
taxpayer satisfaction due to the increased complexity of the 
telephone interaction. This effort will lead to expansion of 
the number of taxpayers eligible to file returns through 
TeleFile for the 1999 filing season.
     We are actively working with the Financial 
Management Service and the private sector to develop payment 
alternatives which would be cost effective for the government 
and give taxpayers a choice in how to make tax payments. By 
working closely with the Department and the Financial 
Management Service, we are developing plans which, beginning in 
1999, will allow taxpayers filing balance due electronic 
returns to pay using an Automated Clearing House (ACH) debit 
payment as part of the electronic return. We will be looking at 
all ACH credit and debit options including home banking and 
telephone payment systems, as well as working with credit card 
companies under the legislation contained in the Taxpayer 
Relief Act of 1997 (P.L. 105-34) to determine the potential for 
payment of federal taxes by credit card.
     Most significantly, plans are now under 
development which we believe will lead us to an alternative 
electronic signature for ELF returns in 1999. This would 
eliminate the most frequent criticism of the program--that the 
system has not up to this point been paperless. Feedback from 
the practitioners' community has been that this alone will 
significantly increase the willingness of tax preparers to file 
returns electronically.
    We have listened to feedback from external stakeholders and 
consultants that we need to do a better job of introducing 
taxpayers and tax practitioners to the benefits of electronic 
transactions. Thus, for the upcoming filing season and the 
longer term, the IRS is going to increase its efforts to inform 
and educate taxpayers and practitioners about the benefits of 
electronic filing. Despite the recent successes in increasing 
electronic filing volumes, we believe that taxpayers and tax 
practitioners have to better understand the benefits of filing 
electronically compared to filing on paper. To that end, we are 
working with an outside marketing firm to develop a strategy 
for increasing public awareness and use of electronic filing 
options for this upcoming filing season. Just last week, we 
provided a preview of this new electronic filing marketing 
strategy for tax year 1997 to practitioner and industry groups. 
Preliminary responses to our efforts to promote the benefits of 
electronic filing in concert with the practitioner community 
have been quite positive. While we are still finalizing this 
strategy, we are confident that it is going to be a substantive 
improvement to our past communications efforts. At the same 
time, we are conducting a comprehensive market research study 
to enable us to better understand taxpayer needs and concerns 
related to electronic tax administration. This will allow us to 
focus our long term marketing efforts as well as to assist us 
in modifying current electronic products and developing future 
ones that meet taxpayer needs.

           IV. IRS Perspective on Commission Recommendations

    As you can see, many of the steps we have underway are 
consistent with the recommendations contained in the Final 
Report of the National Commission on Restructuring the IRS.
    Since the Commission made a significant number of 
recommendations relative to electronic tax administration, I am 
not going to try to address all of them individually in this 
testimony although we will be happy to address any questions 
you have. However, I do want to comment on several of them 
which I have not directly addressed in outlining our plans for 
the future. Additionally, I want to discuss legislative 
proposals relative to ETA that we have been assisting the 
Department in developing.
    First, the Commission recommended that an Electronic Tax 
Administration Advisory Group, consisting of external 
stakeholders, be formed to advise the IRS on ETA programs and 
plans. We have no objection to this proposal and are developing 
plans that would enable us to establish such a group under the 
Federal Advisory Committee Act. However, I want to emphasize 
that the electronic filing program would not be where it is 
today if we did not have regular interaction with the 
stakeholders and give careful consideration to their concerns. 
There would be no ELF program if it were not for the software 
companies, electronic return originators and transmitters. We 
have almost daily informal communications, our current 
Electronic Tax Administration executives have been regular 
participants in meetings of the various trade organizations 
and, where appropriate, we have convened forums of industry 
representatives to address common issues. Additionally, the 
Commissioner's Advisory Group and the Commissioner's Liaison 
Group have frequently provided advice on ETA matters. In 
establishing a separate advisory group for ETA, we want to make 
certain that it is value added, not merely a duplication of 
existing external stakeholder groups.
    Second, much discussion has occurred relative to the 
Commission proposal for payment of incentives to third parties 
for electronic returns. We believe that this is an option well 
worth considering and our RFP will provide a mechanism for 
evaluating such proposals. We are, however, opposed to such 
payments being legislatively required. We need to determine the 
level of savings for electronically received returns compared 
to paper. We need to let the market determine (though the RFP) 
what level and kind of reimbursement third party service 
providers require, and then determine whether using savings 
from increased volumes of electronic filing to reimburse third 
parties is in the best interest of the government. We believe 
that the RFP process is the best tool for answering these 
questions and the market research will help us better 
understand the potential for payments to increase the volume of 
electronic returns. One additional point that must be made is 
that any requirement to make payments out of the IRS budget for 
those 19 million returns currently received through ELF or 
TeleFile would essentially cause us to make a commensurate 
decrease in effort in customer service or compliance programs. 
Our RFP process is being designed to ensure that we only pay 
for the additional volume of returns received.
    Next I would like to point out that we have a number of 
concerns about the proposed realignment of due dates for 
electronic returns. While this proposal might result in some 
increase in the use of electronic filing, it would also add new 
complexity in one area of taxation where there is no 
confusion--the fact that tax returns are due on April 15. It 
would also add complexity to the administration of the tax law 
which always comes with a cost. Finally, I would like to 
reinforce the Department's assessment that the cost of delayed 
receipt of payments on balance due returns would be 
significant.

                             VI. Conclusion

    I have not attempted to specifically address every 
recommendation the Restructuring Commission presented on ETA. 
However, I believe that the progress we have made in increasing 
the volume of electronic transactions as well as the range of 
electronic services available for taxpayers, along with the 
enhancements we have under development, show that we are in 
agreement with the general direction of, and the emphasis 
placed on electronic services by the Commission even if we 
disagree with some of the specific proposals. The continued 
growth of electronic transactions is of strategic importance to 
the future of the IRS. It is our intent to work with the 
Congress and the other interested groups to assure that we 
provide taxpayers with electronic tax administration options 
that are secure, easy to use, and that provide for levels of 
accuracy that minimize the need for taxpayer interaction with 
the IRS to resolve problems.
    Madame Chairman, I want to thank you and the Subcommittee 
for your continued support and for the insight that led you to 
emphasize the important of electronic tax administration by 
making this your initial hearing regarding the Final Report of 
the Commission. I will be happy to answer any questions you may 
have.
      

                                

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    Chairman Johnson. Thank you, Mr. Dolan. In your testimony 
and toward the end of your opening remarks, you do begin to 
address the Commission proposals. First of all, let me say it 
is extremely helpful to have you go through and share with us 
the efforts that the Department is making and the new 
initiatives, and where you are with electronic filing; that is 
very useful, and it is gratifying to know that the majority of 
the mandated filers have now registered, and we will watch that 
process with you with great interest.
    I am pleased that we did relieve the penalties, because 
there are problems yet to be ironed out, as people actually 
start paying through this system, and recognizing that it is 
not just withholding taxes, but it is all taxes. So, we will be 
interested in working with you or following with you the 
progress of that program. And I appreciate the overview that 
you have given us very much.
    In addressing the Commission's recommendations, you discuss 
the Advisory Group proposal, and the use that you have made of 
advisory groups and of regular interaction with stakeholders.
    Is then the bottom line that you oppose establishing in law 
an advisory group?
    Mr. Dolan. No, I think it was more, Madam Chairman, a 
request that, any legislative attempt to codify a partnership 
be one that is cognizant of both the processes that are 
currently in place, and does not establish a group for the sake 
of a group; one that creates the dynamic that we will have it 
be. I think I personally take the position that it is probably 
not necessary. To the extent that somebody codifies it in law, 
my petition would be that it would be done with an eye toward 
being more effective and not be a constant formality.
    Chairman Johnson. In other words, with recognition of what 
has worked for you and your experience in this area.
    On the second recommendation that you discussed--excuse me, 
I misunderstood your comments, Mr. Lubick.
    I know my staff had discussed with you the order in which 
people were going to testify, so we have the order down there, 
but when your comments were made I thought you meant that Mr. 
Dolan was going to present everybody's proposals, and then that 
all of you were going to take part in the questioning.
    Mr. Lubick. I will not trespass on your time very much.
    Chairman Johnson. Now, you would like to comment, and would 
Mr. Lutes like to comment as well?
    Mr. Lubick. I wonder if I might just take a couple of 
minutes----
    Chairman Johnson. You certainly may.
    Mr. Lubick [continuing]. And we can answer questions 
jointly.

    STATEMENT OF LAWRENCE H. SUMMERS, DEPUTY SECRETARY, AS 
PRESENTED BY HON. DONALD C. LUBICK, ACTING ASSISTANT SECRETARY, 
          TAX POLICY, U.S. DEPARTMENT OF THE TREASURY

    Mr. Lubick. As you know I am the pinch-hitter today for 
Deputy Secretary Summers, who is chairing an international 
conference out of the country, and he has prepared a written 
statement, which I ask be included in the record. And I will 
just spend a couple of minutes dealing primarily with the 
legislative aspects that have been raised.
    [The prepared statement of Secretary Summers follows:]

Statement of Hon. Lawrence H. Summers, Deputy Secretary, U.S. 
Department of the Treasury

    I am pleased to be able to submit testimony today on the 
subject of electronic tax administration (ETA). I understand 
that Deputy Commissioner, and currently Acting Commissioner, of 
the Internal Revenue Service, Michael Dolan, and Acting 
Assistant Secretary for Tax Policy, Donald C. Lubick, will be 
appearing before you to testify in more detail on current 
efforts underway at the IRS in this area.
    I would like to focus my comments on three areas. First, I 
would like to describe our overall strategy for increasing the 
level of electronic filing and reporting. Second, I will 
discuss legislation introduced yesterday by Congressman Coyne 
to give us the tools we need to further improve our system of 
electronic tax administration. Finally, I will comment briefly 
on other legislation that has been proposed.

           I. Our Strategy for Electronic Tax Administration

    Since Secretary Rubin and I announced a sharp turn in our 
approach to modernization of the IRS, we have dramatically 
strengthened leadership and increased oversight of the IRS. Our 
goal has been to promote continuity, accountability and 
increased access to outside public and private sector 
expertise.
    As you know, we have identified a new Commissioner for the 
IRS with a background in information technology. We have in 
place a new Chief Information Officer, Art Gross, who has 
assembled a new team to modernize the information architecture 
of the Service. Next month, a new Assistant Commissioner for 
Electronic Tax Administration will assume his duties. All in 
all, we have put new leadership in place with knowledge about 
information technology.
    At the same time, we have significantly expanded our 
partnership with industry. We are in the process of identifying 
a new prime contractor for information technology. Next week, 
we will release a draft Request for Proposals (RFP) for comment 
from a variety of electronic tax administration partners. After 
making necessary changes, we expect to issue the RFP in final 
format by the end of the year. Our new IRS Management Board, 
the successor to the Modernization Management Board (MMB), as 
well as the new Advisory Board, which the President has created 
by Executive Order, will bring outside expertise to the 
administration of our system of taxation.
    While we are committed to deep and significant structural 
reform, we are not waiting for these deeper changes to take 
place to improve the level and quality of electronic tax 
administration.
    Madame Chairman, we believe--in common with many members of 
this body--that electronic transactions are an indispensable 
part of building the IRS of the future. Electronic tax 
administration may offer many advantages to taxpayers and the 
government compared with traditional paper processing. It can 
reduce costs and errors. It speeds up the process of tax 
administration. It expedites refunds. For most Americans who 
have access to computers, it will be generally more efficient 
and economical than paper-based methods.
    Over the last two years, we have begun a process to 
markedly improve the quality and level of electronic service 
for taxpayers. We have seen increases in the use of existing 
electronic products and we are taking steps that will expand 
and enhance those products while at the same planning for new 
products and services. Let me go through a number of specific 
examples.

               II. 1998--Investing in Successful Programs

    The IRS currently has two major programs that permit 
electronic filing. Of the more than 118 million individual tax 
returns filed this year, 14.4 million were filed through the 
Electronic Filing (ELF) program, including 366,000 in which 
taxpayers used a personal computer and tax preparation software 
to file from home through a transmitter. An additional 4.7 
million filers, eligible to file a 1040 EZ return, participated 
in the TeleFile program using a touch tone phone. Both of these 
programs have been expanding at a steady pace. In 1997, 19% 
more taxpayers filed using the ELF program than in 1996, while 
use of TeleFile was up 65%. TeleFile is a finalist for the 1997 
``Innovating in American Government'' award program sponsored 
by the Ford Foundation.
    In 1998, we are committed to investing in and expanding 
these successful programs.

TeleFile

    At present, for fraud control and technical reasons, 
taxpayers who have moved in the last year are unable to file 
using the TeleFile program. Therefore, for 1998 we have 
developed a methodology which will allow us to update our 
TeleFile address directory, making approximately six million 
more taxpayers eligible to use the system.
    Second, based upon a pilot currently underway, we expect 
that next year 25% of the businesses required to file quarterly 
Form 941 returns will be able to use the TeleFile system to 
file those returns with a 10 minute phone call. This group will 
represent smaller businesses, a significant step in our efforts 
to minimize burden for those taxpayers.

Electronic Filing (ELF)

    This year almost 50% of individual taxpayers used a paid 
preparer to complete their returns. Almost all returns prepared 
by these paid preparers are completed using computer programs. 
This makes nearly 60 million taxpayers potentially eligible for 
the ELF program on this basis alone. Approximately eight 
million taxpayers prepared their returns on their home 
computers, many with software that could have been used to 
transmit the return to the IRS electronically. However, most of 
these returns are still filed on paper. A primary focus over 
the next several years will be to get those returns already 
being prepared on a computer program sent to the Service 
electronically.
    Next year we hope to launch a large educational campaign to 
inform more practitioners and taxpayers about the benefits of 
this program and have already awarded a contract for design and 
development of this campaign.
    We are also continuing with steps to assure that the ELF 
system ultimately will be open to all forms and schedules. 
Several new forms are being added for 1998 and the system will 
also be ready to accept Adoption Taxpayer Identification 
Numbers (ATINs) and Individual Taxpayer Identification Numbers 
(ITINS).

                      III. 1999--Paperless Filing

    These are important steps. But looking forward to 1999, we 
have additional improvements in mind. First, we have asked the 
Service to undertake all possible efforts to accept an 
alternative signature for the ELF system for the 1999 filing 
season. The need to send the IRS a paper signature document is 
the most frequently criticized element of the ELF program. 
However, the signature is a legal requirement for a tax return. 
The Department believes that in the electronic age, what we 
need is not a traditional paper signature per se, but rather a 
system for authenticating that the return filed is that of the 
taxpayer identified on the return. The Service, in common with 
many other government agencies, has been using some signature 
alternatives for a number of years and is testing others. We 
believe it time to apply the available technology to the ELF 
program.
    In addition, in 1999 we hope to make it possible for those 
taxpayers filing balance due returns to be able to authorize an 
electronic payment as part of their electronic return. This 
will eliminate the need for paper payments and will represent a 
big step forward in our quest to offer taxpayers a suite of 
electronic options for making tax payments. I should add at 
this point that the IRS is beginning an effort to implement the 
legislation provided in the Taxpayer Relief Act of 1997 to 
accept credit card and debit card payments.

         IV. 2000 and Beyond--Adding Value Through New Services

    In the year 2000 and beyond, we will continue to enhance 
the ELF and TeleFile programs and aggressively market their 
advantages for taxpayers. But we also plan to add additional 
value to our electronic services by incorporating features such 
as an electronic Power of Attorney and, when we are comfortable 
that such a system can adequately protect taxpayer privacy, 
even on-line account access. I must note, however, that we will 
not develop concrete plans for these additional services until 
we see the results of the ETA Request for Proposals (RFP). This 
process will both help us determine what additional services 
taxpayers and other stakeholders value most and help the IRS 
focus its resources on those investments that will receive 
widespread acceptance.

                           V. Our Legislation

    We can and will accomplish most of our goals under current 
law. But to accelerate progress in electronic filing, greater 
flexibility is needed. Yesterday, Representative Coyne 
introduced legislation, supported by the Administration, 
entitled the Internal Revenue Service Improvement Act of 1997, 
to further improve our system of tax collection. In coming 
weeks and months, I expect this proposed legislation to be 
widely discussed. I would like to focus my comments today on 
one section of the bill, section 201, entitled Promotion of 
Electronic Tax Administration.
    Madame Chairman, the IRS has a demonstrated need to inform 
the public about its programs and activities such as electronic 
filing. Yet every year, the Treasury Department appropriations 
specifically bar the use of appropriated funds for promoting 
departmental programs. This has forced the Service to rely 
primarily on free public service advertising to promote the 
advantages of electronic services. We believe, and have been 
advised by stakeholders and consultants, that we need to reach 
a broader audience if we are to see dramatic growth in taxpayer 
use of electronic filing. Proposed subsection 6011(g) would 
explicitly authorize the Secretary to use appropriated funds to 
promote and encourage the use of electronic filing methods.
    The legislation would also authorize the use of 
appropriated funds to provide financial incentives for 
electronic filing. Our RFP will open the door for such 
proposals and we would like clear legislative authority to use 
a portion of the savings gained through electronically filed 
returns to make incentive payments, provided the proposals are 
in the best interest of the government.
    Currently the tax code requires that certain statements and 
supporting documents, which are difficult to accept 
electronically, be filed as part of the return. The legislation 
would permit the Secretary to prescribe alternative ways of 
receiving information necessary to ensure that the return is 
accurately filed.
    The legislation would also explicitly establish that the 
Secretary has the authority to establish signature requirements 
for electronic returns and other forms. It would also clearly 
establish the legal standing of documents authenticated by 
means other than the traditional paper signature. This step is 
necessary if we are to truly move the maximum number of 
transactions to electronic media while maintaining our ability 
to address civil and criminal fraud.
    Finally, the legislation would also enable the Secretary to 
explicitly establish that the acknowledgment of return 
acceptance, which is provided by both the ELF and TeleFile 
systems, constitutes prima facie evidence of filing. This will 
establish a clear legal basis for what we believe to be one of 
the major advantages of electronic filing for the taxpayer: 
proof that the return was, in fact, received and accepted on a 
timely basis by the IRS.
    We believe these provisions will give the IRS the statutory 
authority it needs to dramatically increase electronic filing.

                   VI. Other Legislative Alternatives

    We believe the approach to electronic tax administration 
taken by our bill, combined with the RFP and our proposed 
management structure, is the best one to prepare the IRS for 
the twenty-first century. However, we realize that the 
Subcommittee is also considering the legislation introduced by 
Congressman Portman, based on the report of the National 
Commission on Restructuring the IRS.
    We share the overall goals of that legislation and the 
objective of increasing electronic filing. A comparison of our 
legislation with Senator Kerrey's and Congressman Portman's 
bill will also demonstrate that we agree on many, but not all, 
of the particulars. I believe that there are some key 
principles that should be followed in negotiating this 
legislation.
    First, we must not force people to file electronically. 
Secretary Rubin and I believe the marketplace will work better 
than arbitrary targets or the equivalent of mandates. While 
computer access is steadily climbing, it is important to 
recognize that more than half of Americans do not have computer 
access. Any requirement that taxpayers file electronically 
would force those without a computer to use tax preparers or a 
public computer, for example, in a library. This would unfairly 
disadvantage a large segment of our population. We must 
recognize that paper returns will remain important, and we must 
continue to support paper submissions for the foreseeable 
future. It would be wrong for example to require that some 
specified percentage of forms be filed electronically by a 
certain date.
    Second, we need to be realistic about adding major new 
burdens to the IRS. We should avoid adding major new elements 
of complexity to tax administration.
    Finally, as we all know, the electronic environment and the 
marketplace are evolving rapidly. What works today may not work 
tomorrow. For this reason, it is vital that we retain 
flexibility. The Congress and the Administration should agree 
on objectives and overall direction; however, like the private 
sector, we as a government should not impose rigid targets or 
lock ourselves into solutions that will soon be outdated.
    These principles should guide us in looking at the specific 
proposals included in the Restructuring Commission report and 
the legislation offered by Senator Kerrey and Congressman 
Portman. As I have previously testified, there is much we agree 
with in this report. And we share many of the same goals. We 
do, however, differ in some specific requirements regarding 
electronic filing. Let me briefly discuss some of these 
differences.
    Portions of the proposed legislation would make major 
changes in the overall filing program. In my view, these could 
be disruptive and are unnecessary. Instead, we need to rely on 
the judgment and abilities of taxpayers, government employees 
and the continued strong oversight by Congress and Treasury, 
working in partnership with the IRS, to keep us on track.
    First, the bill mandates the implementation of specific 
programs that have not been tested or evaluated, may expose the 
system to fraud and may entail major new costs. Madame 
Chairman, I do not believe that this is the best way to 
implement public policies. The mandates in the bill do not meet 
the criteria I described above, which I am sure we jointly 
share.
    Second, H.R. 2292 would extend the filing dates for 
electronically filed individual, corporate and information 
returns. This provision would significantly increase the 
complexity of the system, making it harder for taxpayers to 
understand and harder for the IRS to administer. Indeed, Madame 
Chairman, it would devalue what may be one of the IRS's 
greatest intangible assets, the public's knowledge that returns 
are due April 15. The proposal also favors sophisticated, 
balance-due taxpayers over middle and lower income filers who 
are owed refunds. Changing the filing date would cost the 
Federal government several hundred million dollars each year in 
additional interest. We do not believe this is a wise use of 
Federal resources for the purpose of encouraging electronic 
filing.
    The bill would also mandate a program to pay fees to 
transmitters (not preparers) of electronic returns. In the 
absence of clear evidence that these provisions are worth what 
they would cost, we believe they are ill-advised and premature. 
While government may be able to structure incentives to 
encourage electronic filing, these incentives should be 
carefully developed. Our RFP will clearly be open to such 
proposals, and we will pursue them if they prove to be the 
best, most cost-effective method of increasing electronic 
filing.
    Finally, the Kerrey-Portman legislation provides for new 
regulation of return preparers--although we note that it does 
not provide any funding and actually prohibits the IRS from 
administering examinations in order to qualify as a return 
preparer. While there are some clear advantages to the proposed 
regulations, the administrative cost of effective regulation, 
and enforcement of those regulations, covering everyone who 
prepares tax returns for a fee would be significant. We do not 
believe this would represent the best use of the IRS's limited 
resources.

                            VII. Conclusion

    In conclusion, we are making progress on increasing 
electronic filing. But going forward, additional legislative 
authority is required. I have outlined our approach as well as 
the principles that I believe will best guide legislative 
action in this area. As we go forth, we look forward to working 
closely with members of this Subcommittee and others on our 
shared goal of increasing the level of electronic filing.
      

                                

    Mr. Lubick. Commissioner Dolan has explained in detail the 
current efforts underway at the IRS, and the advances that he 
has described reflect, I believe, the first fruits of the 
Treasury Department's increased concern for the revitalization 
for our system of tax administration and our oversight role in 
that.
    We have new leadership in place at the IRS with an 
increased level of knowledge of information technology. Mr. 
Dolan has described the increased reliance on outside 
expertise. The management board on which I sit has been made 
permanent by executive order. And in all of this, nowhere has 
more attention been paid than in this area of Electronic Tax 
Administration, and I think it is very encouraging to see the 
progress that Commissioner Dolan has described.
    There are a few matters involving legislation, and I think 
that, although the improvements that have been made are 
significant, I believe we share the opinion of many of the 
Members of this Subcommittee, that to take electronic filing to 
the potential that it deserves, legislation is appropriate.
    There are apparently two bills on the table. Yesterday 
Congressmen Rangel, Coyne, Hoyer, Waxman, and Matsui introduced 
legislation entitled the IRS Improvement Act of 1997, and of 
course Congressman Portman has introduced a bill, which is the 
outcome of--and Mr. Cardin, which is the outcome of the 
Restructuring Commission.
    The Code currently requires that certain supporting 
documents be provided on paper, and the IRS Improvement Act 
would give the Secretary the explicit authority to prescribe 
alternative methods of verification for electronic returns, and 
would allow electronic receipts to serve as prima facie 
evidence of filing. We believe the tools in that act, in common 
with the legislation proposed by Congressmen Cardin and 
Portman, would give the IRS much needed flexibility to adapt to 
the new information technologies.
    We do have some differences and some concerns about aspects 
of the legislation introduced by Congressmen Portman and 
Cardin, and I think I can summarize them very quickly.
    In particular we are concerned about mandates or their 
functional equivalents through specified targets, and we are 
afraid that this will introduce a rigidity in an area where 
flexibility is really the order of the day. We have seen such 
rapid developments in technology that what appears to be truly 
useful today can indeed be a burden in a relatively short time.
    It is true that more Americans are gaining access to a 
computer daily, but it is unlikely that in the foreseeable 
future all Americans will have that access. We think there 
ought not to be any requirement that everyone file 
electronically; that would be unfair to those without computers 
who choose not to pay for professional assistance. And we think 
that a specified target perhaps would lock us in to areas where 
more flexibility would be necessary.
    Another provision that is inconsistent in our view with 
sound tax policy is, which the Commissioner has referred to, 
the extension of the filing dates for those who file 
electronically. Alternative deadlines we think may well impair 
tax compliance and will certainly cost revenue in favor of 
sophisticated taxpayers who have balances due. Moreover, since 
sophisticated balance-due taxpayers might be more likely to 
file electronically if the deadline were extended, postponing 
that deadline for electronic filers would be unfair compared to 
middle- and low-income working families who are frequently in a 
refund position.
    And again, we probably think it is unwise to mandate 
incentives for transmitters of electronic returns. We agree, 
however, that we do not want to dismiss the notion of 
incentives, and therefore we think it is much sounder to go the 
route of giving authority to develop incentives.
    So in sum, while we, I think, share qualitatively most of 
the provisions of the bills in common, we think in a few areas 
that there should be no mandates, rather authorization, more 
flexibility, no dual filing dates, and no specific percentages. 
This is not to say that we do not think that the work of this 
Subcommittee in monitoring the progress of the IRS in achieving 
these objectives is not necessary; indeed we welcome it and we 
would like to work closely with you, and report to you, so that 
you can constantly see what progress is being made. And we 
think that we can work as partners more effectively on that 
basis.
    We thank you for your interest in this, and I will attempt 
to join Commissioner Dolan in answering any questions which you 
have.
    Chairman Johnson. Mr. Lutes, do you have a statement also?
    Mr. Lutes. No.
    Chairman Johnson. Thank you. In your testimony you 
mentioned that you need to determine the level of savings for 
electronically received returns compared to the cost of paper 
returns.
    Does the IRS have an estimate of the average cost of 
processing a paper tax return, and do you accept the $7 as the 
average cost of processing a paper return? And if not, how far 
are you from knowing these facts?
    Mr. Dolan. I like the last question better than I do the 
first two, because it is one I can answer easier.
    Chairman Johnson. Actually, it is sort of interesting that 
the IRS does not want to deal with numbers.
    Mr. Dolan. It is really more a question of having too many 
numbers. And part of what has been at work here--and frankly I 
am embarrassed that we did not have a way to differentiate 
these numbers better, even for the Restructuring Commission.
    We can tell you what the front-end processing, what the 
difference is between keystroking something, and what the 
difference is between getting a data stream. A part that has 
never been done very effectively is that is clearly not the 
only benefit of getting an electronic stream because there are 
many, many things that happen in perfecting that return, and 
subsequently providing taxpayer customer service. And so our 
deficiency has been in really giving a number that is anything 
more than this sort of simplistic up front number.
    We are in the process--have been for some time, stimulated 
in large part by the interaction we have with the Restructuring 
Commission, of doing a cost assessment, which I believe in late 
September, is supposed to serve up for us at least a far better 
ability to compare than we have today.
    Most of the folks who look at it, strictly with respect to 
the comparisons we made on the front end, think that the 6 to 1 
or $6, $7 savings, is a far exaggerated rate of savings. But I 
do not want to sit here before you today and try to tell you it 
should be something else to 1 until I get the benefit of this 
work in September.
    Chairman Johnson. Thank you. We certainly do need to refine 
those numbers; that is terribly important----
    Mr. Dolan. Absolutely.
    Chairman Johnson [continuing]. And the contrast between 
manually entering and transmitting is just so stark that the 
dollar difference has got to be very significant just on the 
front end. And if 70 million of the 120 million individual 
filings exist on electronic record, at some point in the 
process we ought to be able to take advantage of that, and when 
we do, it ought to have a very significant cost component.
    So, it is imperative that we move forward because that is 
money we can use on technology and so on. This is an issue that 
bears a lot of analysis, scrutiny, and it is just something 
that we must know.
    I am going to yield to my Ranking Member to question. I am 
very interested in the issue of signatures, but I think that 
that will come up amongst the other Members. And so that 
everyone gets a chance, I am going to yield. I am going to tell 
Members that we will not break for this vote. If you will go 
serially so that some toward the end can go now and come back, 
then we can go through the question period and keep our bearing 
on our time schedule.
    So thank you, Mr. Dolan and Mr. Lubick, and Mr. Lutes.
    Mr. Coyne.
    Mr. Coyne. Thank you, Madam Chairman, and thank you, Mr. 
Dolan and Mr. Lubick, for your testimony.
    You indicated that you are going to encourage people to 
file electronically, and you pointed out that one method might 
be the personal computer. I wonder if you could outline for us 
what would be available to the taxpayer--how they would file 
their return if they did not have a personal computer but 
wanted to file electronically.
    Mr. Dolan. Today the principle alternative is obviously the 
use of a practitioner, but there are a series of other 
alternatives, which are, for example, are VITA sites----
    Mr. Coyne. What sites?
    Mr. Dolan. I am sorry, voluntary assistance sites. 
Frequently they also make available an electronic filing 
capacity. But that is sort of a hit and miss proposition today. 
So short of somebody having and utilizing their own computer 
access or utilizing the services of a prepared tax preparer, 
there are not many systematic alternatives for somebody to go 
and use either somebody else's computer or some other 
electronic form of access to the system today.
    Mr. Coyne. You mentioned people who use the electronic 
system to file. You are still having to ask for paperwork from 
them, and you want to totally eliminate that.
    I wonder if you could outline for us what are the more 
prevalent requests for paper that you make of electronic 
filers? In other words, what are the necessary paper files?
    Mr. Dolan. The principle information items that we today 
receive in paper are a signature and wage information. And I 
think it is pretty clear to us that we can resolve the question 
of whether you need to supply W-2 information by paper, and I 
think we can solve that problem on our own.
    The one that has been a little dicier and the one that the 
Chairman alluded to, is the extent to which we can provide an 
alternative to the signature, and that comes packaged a couple 
of different ways.
    One, we want to be very clear that we have a process to 
authenticate the return. We do not want people violating the 
returns on your behalf or my behalf, and us not being able to 
authenticate who the actual initiator of the return is. We also 
have, in a more narrow sense, sort of an open playingfield here 
with respect to our ability in subsequent kind of enforcement 
actions to satisfy the judicial standards, that yes indeed, 
this is a return that was filed by the person who we assert 
filed it.
    As Mr. Lubick indicated, the administration would like to 
see us pin down with certitude that there are some of these 
alternatives to the written paper signature that will have the 
same legal force and effect that today's written signature 
does. Today, the Secretary and the Commissioner have some 
discretions about authorizing alternatives, but I think what 
any bill passed could do is make that unequivocal; there are 
alternatives that are legally defensible and sustainable.
    Mr. Coyne. On the telephone filing system, how many 
taxpayers did the IRS contact to authorize them to do it that 
way this year?
    Mr. Dolan. Twenty-six million then, Mr. Coyne.
    Mr. Coyne. And how many took advantage of it?
    Mr. Dolan. 4.7 million.
    Mr. Coyne. How many?
    Mr. Dolan. 4.7 million.
    Mr. Coyne. And what are your plans for the new tax year 
coming up?
    Mr. Dolan. As I mentioned before, by every matrix we have 
looked at, it is one of our best received products with a 99-
percent satisfaction rate.
    Two things are going to be crucial for us. One, when a 
person gets an invitation or a package from us to do TeleFile, 
it is unique. It does not look like the other tax packages. It 
has a set of unique characteristics. So one of the things that 
our communications contractor has told us is, that we really 
ought to leverage even better our equivalent of a direct mail 
ability to sort out that 26--and we think it is probably going 
to be more than 26 million. So we are going to try to increase 
the effectiveness of the product that is first received to 
alert people that they have something that is different. And we 
have a couple of different schemes that we are in the final 
stages of testing that may help people anticipate this package, 
and may remind them that they have gotten the package, and we 
hope then would get a bigger response rate.
    Second, there were a number of people last year that 
because they moved between the point of their last return and 
their next return, were made ineligible by the criteria that we 
were using to select and invite people. We think we have some 
ways this year to not lose that part of the universe, but 
indeed to invite many of them into the process of using the 
TeleFile product as well.
    So those would be the two things: First, the increased 
effectiveness on the message or the marketing; and, second, the 
expansion of this part of the universe, that those who moved 
would have been eligible last year, and hopefully would have 
participated by at least the same rate that the 25 million did.
    Mr. Coyne. Thank you.
    Mr. Portman. Thank you, Mr. Coyne, and thank you, Mr. 
Dolan, for your work with the Commission with Mr. Coyne and 
myself, and a year's worth of work on this topic, electronic 
filing, and for coming here today--Mr. Lubick, thank you also 
for being here.
    What I thought I would do is, rather than talk more 
generally about some of the issues you have discussed, many of 
which we agree on, is get into some of the specifics of the 
legislation. The charge today really is that this Subcommittee 
is to put together a report on the legislation, H.R. 2292, and 
you have addressed some of the issues.
    I wanted to clarify the record, if I could, to start with 
what is one of the issues apparently where there may be some 
disagreement. Incidentally, I find myself alone again with 
Treasury and the IRS. This will be, I am sure, a much more 
amiable discussion than the last time I found myself here. I am 
outnumbered today among other things.
    Mr. Lubick, you said you do not like H.R. 2292 because you 
should not mandate that everyone file electronically. That is 
the quote I wrote down here. Of course H.R. 2292 does not 
mandate that, and I think the record needs to be clarified. 
This is something we talked about for a year; Mike Dolan knows 
this. We went back and forth on various iterations with the 
IRS, with Treasury. We made a very deliberate decision not to 
mandate electronic filing. So, if it is going to be 
mischaracterized, I think we are going to have a hard time 
getting to points of agreement, even on these few issues where 
we tend to disagree.
    You say also in your testimony--at least your oral 
testimony--that you are happy to have us monitor your progress, 
but we should not set any guidelines. And you also say that 
there should not be mandates to transmitters. There are no 
mandates to transmitters in this legislation. So let us just 
make that clear. What we do provide is some incentives to 
transmitters that you apparently disagree with, and that is 
fine, we can talk about that. But at least we need to clarify 
what the legislation does.
    Just briefly on the reason we came up with this--and then I 
want to get some feedback, if I could, from the IRS and 
Treasury--is an 80-percent goal by 10 years. Now, despite 
efforts over the years to get the IRS to come up with a plan to 
more aggressively pursue electronic filing, we do not have such 
a plan from the IRS still. And the Commission set about its 
task seriously, and put together a plan with the IRS' help that 
we think is a very practical plan that makes it quite easy to 
get 80 percent within 10 years. My personal view is it will 
happen long before 10 years. We have seen the changes in 
technology already in the last year since we have been working 
on this, and we will see more changes, I am convinced. But the 
notion is to set a goal, because if you do not set a goal you 
are less likely to get there. And certainly the experience of 
the last decade would lead us down that track, but there is no 
mandate on individual taxpayers; no mandate on transmitters. 
There is a goal set out very firmly to the IRS to meet that 80-
percent deadline, 80 percent of individual taxpayers filing 
electronically.
    I guess what I would ask, Mr. Dolan, is if you would give 
us your response to that from the IRS point of view, number 
one, whether you think that is an obtainable goal; and number 
two, if you would give us some alternatives to that. In your 
RFP you say you are going to ask that significant expansion of 
electronic filing be sort of the underlying goal. Well, that is 
fine. What is significant expansion?
    In your strategic plan of January of this year in 1997 we 
did not get a goal on electronic filing. Again, August 15, this 
year, your strategic plan for the IRS is very vague about 
electronic filing; the strategic plan encourages electronic 
filing, and I think we agree on that, but how do you feel about 
the goal and what are your alternatives to it if you do not 
think it is appropriate.
    Mr. Dolan. Thanks for the question. I happen, as you know, 
to have the benefit of attending I think what was the last 
session of the Restructuring Commission, where the group was 
wrestling with how to state this, and I know there is dialog 
that I missed about that. But the tension that I saw that day 
is the right tension. Eighty percent, as it expresses what you 
and I might believe is sort of the intuitive right place to be. 
The fact that it was set against 2007, I believe, on the 
surface you would look at that and say, I mean what is not to 
believe about the reasonableness of that.
    Now, to the extent that people are satisfied with that 
level of analysis, then 80 percent may work. I think the part 
that I would urge, Congressman, is that one of our problems in 
the past in thinking about this in some other areas was to kind 
of set an aspirational goal. Now to some extent that works, if 
the aspirational goal is the kind of thing that keeps you 
vigorous about trying new things. But what I guess I hoped 
would happen was that the RFP process would give us an 
opportunity to maybe place, through what we heard in the RFP, 
maybe place the building blocks where you and I could sit 
across the table and say, Hey, this is not about aspiration; 
this is not about hope for good work and luck. This is a series 
of building blocks that the industry has said 80 percent is too 
modest or 2007 is too far off.
    Mr. Portman. Mr. Dolan, I am going to have to run over and 
vote. I am going to actually pass along to my colleagues. But 
it sounds like you and I largely agree, and the question is 
whether the legislation should establish that goal. I think we 
have already heard from the industry, and we have already heard 
from you, we have already heard from Treasury. We know where we 
are. We have reams of testimony; we are going to hear more 
today.
    I personally believe that it is not only attainable in 10 
years, but probably in 5 years, but I think certainly 10 years 
is a reasonable goal.
    With that I would like to move to Ms. Dunn, and then I will 
be back after voting.
    Ms. Dunn. Thank you very much, Mr. Portman. And welcome, 
gentlemen. It has been very interesting, this whole process. 
And Mr. Dolan, we have appreciated your involvement in it.
    Mr. Lubick, I have a concern about your comments. I agree 
with what Mr. Portman said. I do not see the goals and 
objectives that are measurable, that we have set through this 
proposal of 80 percent by the year 2007 as a mandate on the 
taxpayer. I see it as a mandate on the agency, and the agency 
apparently, according to Mr. Dolan, is happy to accept this 
objective. And I do not think you do not get work done unless 
you do have a guideline that tells you what needed to be done 
and what time.
    But I really hope from Treasury that we are going to see 
some coordination with what we are all trying to do to make the 
IRS more efficient, and more effective and more helpful to the 
taxpayer. I know that you lose power for Treasury because of 
the Control Board and other areas, but I would like to think 
that you are going to look at this objectively, and what can we 
do better for the taxpayer. I certainly give the administration 
credit for doing that many areas, and I hope we can count on 
that hereto.
    I have a couple of questions. I would like, Mr. Dolan, have 
you analyzed how many jobs, how many dollars can be--jobs done 
away with dollars saved, paperwork done away with, through this 
particular objective?
    Mr. Dolan. Ms. Dunn, the analysis that I talked about--and 
I am not sure whether you were in the room when the Chairman 
asked me about this--is it 6 to 1, is it 7 to 1.
    I think the analysis that we will produce as a result of 
this product that we should have at the end of September will 
put us in a better place today than what we have had in the 
past. Historically what we have had, and what has actually been 
harvested from our budget, as electronic receipts have gone up, 
we have had the commensurate withdrawal from our budget of the 
dollars and staff years that would have been associated with 
key entry. But beyond that, I think if you put yourself in a 
world that Congressman Portman projected of 80 million filers 
by a date certain, and payments made electronically, we do not 
have a satisfactory picture of what the staffing and production 
impact would be. It would obviously be considerable. And then 
the discussion we want to have is the one the Chairman talked 
about, which is, so what are the choices around those? Are they 
choices about just recouping the dollars totally, or are they 
choices about placing them in some other aspect of customer 
service or compliance?
    Ms. Dunn. Thank you, Mr. Dolan. I see as a primary goal of 
what we are trying to do here in making the IRS more effective, 
of downsizing the IRS. Are you still at 102,000 employees at 
the IRS?
    Mr. Dolan. Yes, we are, Ma'am.
    Ms. Dunn. And certainly making it more of an effective 
partner to the taxpayer.
    Let me ask you a question about the incentives to the 
preparers of tax returns. I would like to know, if you are 
thinking about paying H&R Block and other preparers, $3 per tax 
return for filing electronically. It seems to me it is a huge 
benefit to the taxpayer, and that these folks, these preparers, 
are already out there charging taxpayers $20, $30, $40, $50, 
sometimes more dollars, to prepare an electronic return.
    What is the thinking? I mean why would you not take this $3 
per return, for example, and use it for educating the public to 
get to our goal of 80 percent more quickly than we projected?
    Mr. Dolan. I think Mr. Lubick may have an answer. Let me 
just say, you and I would probably get to the same page in the 
hymnal pretty quickly. I do think it is something we have to 
look at very carefully, as to whether we would use $3 in the 
way that some have urged. And particularly I would be 
concerned, if I were to go back now and pay $3 for the $20 
million that I received last year. That would be $60 million 
out of my budget that would have to come at the direct expense 
of doing work in customer service, or doing other activities 
that those $60 million would have bought. So I do think that 
either that dollar amount or any other dollar amount being 
applied as an incentive, is something that has to be looked at 
very carefully. And Mr. Lubick, I think, may want to comment as 
well.
    Mr. Lubick. Incidentally, Congresswoman Dunn, I did not 
mean to imply that the legislation did mandate that taxpayers 
file electronically. I was simply stating that if we mandate, 
as you said, the agency, that it has to reach 80 percent. It 
seems to me that is unwise to put in legislation. I think it is 
perfectly satisfactory to say, and announce, and have this 
Subcommittee monitor an aspirational goal of achieving 80 
percent, but circumstances change, and I think you ought to 
retain the flexibility to adapt your position to the 
circumstances. You may want to change that goal to more or 
less.
    And the same applies to the question of incentives. I think 
we would favor the authorization of a program of incentives if 
it can be demonstrated that it would be cost beneficial; not 
only taking into account the cost to the Internal Revenue 
Service, but the cost to taxpayers and the cost to preparers. 
There are costs of complying with the tax system that go beyond 
tax administration. They fall on private citizens, and those 
have to be taken into account.
    So, if we mandate the furnishing of incentives to 
transmitters, I am not sure that that is the right expenditure, 
for reasons that have been discussed by Mr. Dolan and suggested 
by you. It may be that you would want to give incentives to the 
taxpayers themselves. It may be that the preparers should be 
given incentives. I think we have to keep open in this, and we 
have to work together as this proceeds, to be flexible and to 
go in the most efficient way to accomplish our mutual and 
exactly congruent objectives. So I think it is flexibility that 
we are urging here, and the avoidance of rigidity. I did not 
mean to suggest that the legislation intended ever--and I do 
not think it could--to require every taxpayer to file 
electronically.
    Ms. Dunn. Good, and I appreciate your comments, Mr. Lubick. 
I certainly think, if anything, that Congress has proved itself 
very resilient in changing goals and objectives. I do not worry 
that we will find ourselves locked into something, and I would 
hope, as Mr. Portman suggested, that we might reach these goals 
much, much more quickly. I would certainly hope so; 10 years is 
a lot.
    Madam Chairman, may I just have one more brief question?
    Chairman Johnson. OK.
    Ms. Dunn. I am very interested in the signature portion of 
the program, and I understand California has a program where 
they have tested, or are in the process of testing filings that 
do not include the signatures, which are going to be such an 
expensive part of our program if we are not able to eliminate 
the personal signature.
    Do we know how the California program is doing? Is there 
fraud involved or is it at a point where we can evaluate it?
    Mr. Dolan. I think the short answer is we do not know much, 
Ms. Dunn. I would be happy to try to find some of that. And 
Terry may want to spend a minute on the relative comparisons 
between the States and our experience, but the direct answer is 
that we do not have much information on California's experience 
at this point.
    Ms. Dunn. Well, it would be a great interest to me, and I 
am sure the Subcommittee. Thank you, Madam Chairman.
    Chairman Johnson. Thank you. Mr. Cardin.
    Mr. Cardin. Thank you, Madam Chairman, and let me thank you 
for your testimony. It is clear that we all share the same 
objective to increase the amount of electronic filing, and the 
legislation that we have introduced moves us rapidly to achieve 
that objective.
    It is interesting. Whenever you have change, people will 
look back later and say, why did we ever do it the other way. 
And I understand that we need to educate the taxpayer, and we 
need to deal with the obstacles that are currently involved to 
make it available for us to do more electronic filing.
    The Commission's recommendation offers a major incentive 
for taxpayers to use electronic filing, by giving them an 
additional 30 days to file their tax returns. I understand the 
administration's bill allows the IRS to come up with financial 
incentives for electronic filing. So, in one instance we are 
trying to be specific to offer an incentive for taxpayers to 
take advantage of electronic filing. The administration desires 
to use incentives, but wants to study and come back, and give 
us some recommendations or implement some changes.
    I would hope that you could be more specific as to what 
type of financial incentives you believe should be considered 
in order to encourage more electronic filing. Because once we 
get our numbers up we will never go back, and people will start 
to understand the advantages, and the financial advantages to a 
taxpayer filing electronically.
    What type of incentives would you consider?
    Mr. Dolan. I think, Mr. Cardin, we will know a lot more 
about this within a couple of months when we have the responses 
to the RFPs, because we will have input from a number of people 
in the private sector who will presumably educate us 
considerably on that. We will have a better handle on what are 
the costs involved, and what are the benefits and how we might 
target incentives.
    I think some sort of a payment would be something that we 
would consider, but to whom it would be paid--whether it would 
be the transmitter or the preparer, or the taxpayer--I do not 
know. I think at this stage my feeling would be that the 
fairest of all might be an incentive that went to taxpayers.
    Mr. Cardin. Might you also consider a different filing 
deadline as an incentive?
    Mr. Dolan. Consider----
    Mr. Cardin. A different deadline for filing. Is that not 
one that is on your list?
    Mr. Dolan. I would be dubious about that right now. I think 
it would be somewhat disruptive of the tax administration not 
to have a uniform filing date.
    Mr. Cardin. If I could just interrupt on that, because that 
seems to me a little bit unusual to say, because we seem to be 
spreading different deadlines in governmental agencies in order 
to manage the workload more effectively. And different 
deadlines, it seems to me, could give you some advantages in 
addition to more electronic filing.
    Mr. Dolan. I would fear that different deadlines might, 
rather than spread the work, might make the work of the IRS 
more difficult. For example, if many returns are filed a month 
later, that is going to cause further delays in processing and 
audit.
    Mr. Cardin. Of course you have an automatic delay now that 
you could get in filing your returns if you paid your taxes. 
You already have that built into the system. I am not sure I 
quite understand the concerns with a 30-day delay, when you can 
get a longer delay in filing tax returns under current rules.
    Let me just caution you. It would be shortsighted to fail 
to quickly move to accept electronic filing because of the 
transition cost. Ultimately, I think we all understand 
electronic filing is going to be less costly, not more costly; 
that ultimately when the system is more efficient it is going 
to be easier for the taxpayer, for the tax preparer, and for 
the government. And I would hope that as we develop financial 
incentives for electronic filing that we do not build into the 
system additional costs that are going to be difficult to back 
out of.
    As we try to spread the workload or look at other issues, I 
think you raise good points. Having a different date is 
something that needs to be considered in addition to just the 
impact it will have on electronic filing, and I agree with your 
concerns there. But to just dismiss it because it sets up a 
different date I think is also wrong.
    What we try to do in the bill that we filed is be specific 
on a financial incentive, to encourage more electronic filing. 
And I would hope that you would be a little bit bolder, and 
come forward with recommendations that will make it easier for 
the taxpayer to take advantage of electronic filing. I have not 
heard enough ideas yet, and I would hope that you would be 
forthcoming with additional suggestions. Thank you, Madam 
Chairman.
    Chairman Johnson. Mr. Ramstad.
    Mr. Ramstad. Madam Chairman. As you know, Mr. Dolan, a few 
months ago this Subcommittee examined the Electronic Federal 
Tax Payment System, and particularly the disastrous 
communication effort by the IRS that I dare say really 
frightened many in the small business community, and I 
appreciate your testimony about the lessons learned by the IRS 
from the EFTPS debacle.
    In looking at that experience, which many reported to me as 
being heavy handed, I would ask you if there is a specific 
marketing plan that is more taxpayer friendly; if you have 
specific steps in mind in marketing electronic filing to 
taxpayers.
    Mr. Dolan. Congressman, we do, and what I would maybe ask 
for is the opportunity, a couple weeks hence, to brief the 
Subcommittee. As I mentioned in the earlier part of one of my 
questions, we exposed just last week the work that our 
communications contractor had done with us, to some of the 
outside groups that will partner with us in this marketing 
approach. We are in the process of taking some of their 
feedback and finalizing our plans, but we have some very 
specific ideas--with respect to the way media would be used, 
and the way we would use, as I mentioned in the TeleFile. 
TeleFile is sort of a direct mail opportunity for us of a 
unique sort, and there are some changes that we are going to 
make in that arena as well. And so, within a couple of weeks I 
would be happy to make available to you or the Subcommittee, 
more broadly what those marketing approaches will look like in 
the next year.
    [The following was subsequently received:]

1998 Filing Season Campaign

                               Background

    In developing our national promotion strategy for the 1998 
filing season, the Internal Revenue Service (IRS) and Treasury 
consulted with Emmerling-Post, our advertising agency. We 
reviewed the results of our TeleFile promotion in 1997 and 
looked at the areas for greatest potential to help the Service 
meet its overall electronic filing goals.
    This year's filing season campaign will promote the use of 
electronic filing options, with primary emphasis on 
practitioner electronic filing. We hope to build on last year's 
successes. During the past filing season, there was an increase 
in the number of returns filed using electronic filing options. 
Not only did the number of TeleFile returns increase, returns 
filed through third party providers also increased. This growth 
provides a good platform for our 1998 electronic filing 
program.

                            Overall Approach

    This year's campaign will introduce a new name and logo for 
electronic filing options. In their presentation to the 
Service, Emmerling-Post recommended use of the term IRS e-file 
to refer to our electronic filing options. E-file is a commonly 
used phrase on the Internet and is also used by Revenue Canada 
to describe their electronic filing program.

                              Key Messages

     IRS e-file is the quickest way to get refunds. You 
receive refunds in half the time over paper returns--even 
faster with Direct Deposit.
     IRS e-file returns are more accurate and reduce 
the chance of getting an error letter from the IRS.
     IRS e-file options provide acknowledgment your 
return has been accepted.
     IRS e-file is a proven commodity. Over 19 million 
people like you chose an IRS e-file option last year.

                 National IRS e-file Campaign Strategy

     Develop a unified public service campaign and 
supporting materials with the IRS e-file logo to increase 
public awareness of IRS e-file options.
     Use tax practitioners and practitioner groups as 
IRS e-file champions.
     Provide a promotional kit to IRS e-file third 
party providers. The kit will provide third parties with 
materials they can use to promote their IRS e-file service to 
their clients and customers.
     Reinforce messages from the public service 
campaign in the 1040 packages.

                           TeleFile Strategy

     Use the TeleFile booklet as a direct mail 
marketing tool to emphasize the benefits of filing by phone.
     Redesign the TeleFile booklet covers and logo to 
be more effective.
     Test the impact of supplemental post card mailings 
to some TeleFile booklet recipients.
    IRS e-file via a Personal Computer Strategy
     Make taxpayers aware, through the tax package, 
magazine ads and articles and in the software packages, that 
the benefits of IRS e-file are available to individuals who 
prepare their tax return using a personal computer, tax 
preparation software and a modem.
     Partner with software providers to promote IRS e-
file options.

                         External Stakeholders

    A major feature of the promotion effort is building 
partnerships with third party providers and associations to 
enlist their active participation and promotion of IRS e-file 
with their customers and members. On September 4, IRS 
executives met with members of national tax practitioner 
organizations and industry representatives from the Council for 
Economic Revenue Communication Advancement (CERCA). At that 
meeting Emmerling-Post presented an overview of the 
practitioner IRS e-file campaign and the kit for third party 
providers. The kit includes an IRS e-file logo and stickers, a 
letter to clients, posters, and a decal to read ``Authorized 
IRS e-file provider.'' The kit will also include copies of the 
public service campaign. Electronic versions of the kit will be 
available to IRS field offices and practitioner associations in 
October. Hard copies will be sent to Electronic Return 
Originators (ERO) in December.

                      The Public Service Campaign

    A second aspect of Emmerling-Post's recommendations is a 
public service campaign in radio, television and print focusing 
primarily on third party IRS e-file. The messages in the 
materials stress fast refunds through electronic filing. These 
materials will be distributed to print, radio and television 
outlets in December to begin appearing the last week of 
December.
    In January, a video news release will be distributed to 
support the IRS e-file messages. Interviews in the media will 
keep the message prominent throughout the filing season.

                               Follow-up

    This year's campaign includes an evaluation component. In 
May, we plan to survey third party preparers, conduct an 
attitude and awareness survey among taxpayers and do an 
analysis of paid media tests. The IRS will also be conducting a 
survey of taxpayers to provide the quantitative market research 
data for use in developing enhancements to our ETA products. 
The results of each of these evaluations will be used to 
enhance the campaign for the 1999 filing season.
      

                                

    Mr. Ramstad. I think a collaborative effort would be 
helpful. You refer to the communications contractor. I trust it 
is a different communications contractor. You fired the first 
one.
    Mr. Dolan. Well, actually, the first one was kind of an in-
house job, Congressman, so we did not have a contractor to 
fire. That is really the dialog that we had with this group 
before. We were trying to be marketeers.
    Although, I might not use quite the language you did in 
terms of debacles and other things; part of what we learned 
from that lesson was, we also had a number of cooks in that 
broth. We had agents of the government; we had various 
components of the private sector. I think what we are trying to 
do differently on electronic filing is get everybody's vote so 
that we understand our respective roles, and understand the 
convergence of our objectives.
    Mr. Ramstad. Well, I appreciate that approach and that 
recognition of the problem. The term debacle is not mine. It 
came from my constituents, members of my Small Business 
Advisory Committee and others, and that is one of the most 
polite reactions that I heard. So I think it is important--and 
I think you have recognized that this was not a successful 
effort, to put it lightly, and by hiring a communications 
contractor, and by doing it a different way, and by offering to 
be forthcoming with the Subcommittee, and working in a 
collaborative way on the approach the second time around in 
marketing electronic filing, that is very, very encouraging to 
this Member, and I am sure to my colleagues here, and most 
importantly to our bosses, the American taxpayers.
    Thank you, Madam Chairman.
    Chairman Johnson. Thank you, Mr. Ramstad.
    Mr. Kleczka.
    Mr. Kleczka. Thank you, Madam Chair. I think I will pass at 
this time.
    Chairman Johnson. Ms. Thurman.
    Ms. Thurman. Thank you, Madam Chairman. In the information 
you gave us--we break it down in some ways, but I am 
interested--who is filing electronically? Are these people that 
are nonitemizers, itemizers, young, old? Can you tell me who 
this group is out there that is actually doing this.
    Mr. Lutes. Yes. Let me try to answer that. We are currently 
undertaking effort to give us more robust information. We are 
going through our master file and trying to do a complete 
profiling of the people who actually do file electronically 
versus those who do not, which will give us better information. 
But generally--and I think the external stakeholders will 
reinforce this--the biggest population that we have tracked is 
the refund audience who is looking for the fast refund. That 
has been the major appeal the program has had. In fact our 
marketing strategy is going to try to emphasize that point. I 
do not have the percentage with me, we can get you that, but 
the vast majority of the electronic returns are refund filers.
    [The following was subsequently received:]

Percent of Balance Due Returns Filed Electronically

    Total 1997 ELF (Practitioner/On-Line) Returns     
14,450,000
    Balance Due Returns     345,000
    % Balance Due Returns     2%
    Total 1997 TeleFile Returns     4,694,000
    Balance Due Returns     310,000
    % Balance Due Returns     7%
    Total 1997 Electronic Returns     19,144,000
    Balance Due Returns     655,000
    % Balance Due Returns     3%
      

                                

    Mr. Dolan. Which would mean also that they are largely the 
taxpayer who has all or the majority of their wages in some 
kind of withholding environment. That is typically the fact 
pattern that produces the highest likelihood of having a 
refund, which in turn is the appeal of the quicker electronic 
product.
    Now the TeleFile product is a little different, because the 
TeleFile product is one that we are clearly aiming at entrance 
to the work force, because of its nature.
    It is a 1040-EZ, which means that by definition your 
financial life is pretty uncomplicated, your sources of income. 
And so what we are trying to do there is target what we would 
understand would be the profile of a lot of entrants, which 
would be people who are recently out of school; people who are 
genuinely entering the labor force for the first time. We are 
attempting, both in our marketing and in the customization of 
that product, the accountance that that is the profile that 
will likely be the eligible population for the TeleFile 
product. And as Terry said, what we would like to be able to do 
is to better differentiate the demography, so that we know that 
this feature of ELF is more appealing to this particular set of 
demographics than some other.
    Ms. Thurman. The other question that I am kind of curious 
about--and I know it was part of the recommendations, and it 
seems to be in some of the testimony that we are going to hear 
later on, is on the signature issue.
    What safeguards does the taxpayer have, if there is this 
nonsignature, if it is being done electronically? 
Particularly--not that I would think that anybody would do that 
meaningfully or whatever, but just this idea that you send 
something. Is there some kind of protection for them if they 
were sent up and they did not have the signature or did not 
know what had been sent to IRS? I would think there would be a 
concern.
    Mr. Dolan. Clearly there is, and I am going to ask Terry to 
supplement my answer, but as I mentioned earlier, 
authentication is really our crucial interest here, both for 
the sake of the taxpayer and for the system. And that is not 
just so we can recognize the signature, it is because of the 
very point you make. We want to be certain that when this 
transmission comes to us labeled as a filing, or a payment, or 
a request, from a specific taxpayer, that it indeed is what it 
purports to be.
    Now there are a variety of combinations today of technology 
that are being used. Some are being used in less volatile and 
confidential arenas than ours, and others being used on the 
other end of the spectrum, where it is highly confidential. And 
I think what we expect to be able to produce is some 
combination of things like personal identification numbers, and 
combinations of data that might possibly relate to a prior 
return, or might possibly relate to some component that would 
be known to only the individual. So you combine those things in 
a way that you have a reasonably high level of certitude; that 
this really is an authentic verification. And as I say, we do 
not have the answer today but we are virtually certain that the 
work that is out there, both done by others and the work done 
by us, will put us in that position with respect to the tax 
returns that we file, tax year 1998 returns.
    Mr. Lutes. One thing I would add is, is that we probably 
will not have one solution, one replacement for the paper 
signature, because the level of risk depends upon the type 
transaction. The level of risk in a 1040 refund return is very 
different than the risk in submitting information returns, 
which is simply providing information to us. So what our 
process is--and we are working with other government agencies 
who are also tackling the same problem--is to associate the 
level of authentication with the level of risk, associated with 
the particular submission to the service. And what the 
administration's bill has asked for is maximum flexibility for 
the service and the Department. As technology changes, as we 
move down this road, to be able to implement those technologies 
that authenticate at the appropriate level of risk, while at 
the same time obviously enabling us to make certain that the 
information on the return is correct.
    Chairman Johnson. Thank you, Ms. Thurman. Mr. English.
    Mr. English. Thank you, Madam Chair. I have a couple of 
questions, but having listened to the testimony from this 
panel, I would like to make a comment that I hope you will take 
back to the Treasury.
    In the IRS strategic plan through fiscal year 2002, which 
came out in the middle of last month, little was said about 
electronic filing and no quantitative goals have been set. I 
realize in the past the IRS has set quantitative goals, like in 
1993, and has not been able to achieve them. But what troubles 
me is the idea of establishing a goal of 80-percent electronic 
filing in 10 years. This is something that from the perspective 
of people out in the real world, like in my district, is a 
glacial pace.
    Now they have had to respond to a scale of change that is 
much quicker, and I think, given the dollars involved, and that 
we can save literally hundreds of million dollars every year if 
people move into electronic filing, then it seems somehow 
fundamental that we should find a way of getting done and do it 
very promptly. Lay some specifics out, and debate them if you 
want. Consider incentives, consider sanctions if necessary, but 
we need to move people into electronic filing at a time when we 
are moving toward a balanced budget, and hundreds of millions 
of dollars could be much better used, than by pursuing the 
paper trail in the IRS.
    Let me move to my specific questions. Has the IRS Chief 
Counsel expressed an opinion on whether the IRS has an 
authority to go paperless? That is, accept returns without a 
signature document as has been discussed in the Commission 
recommendation. And would you need additional statutory 
authority to waive the signature requirement, Mr. Dolan?
    Mr. Dolan. Thank you for the question. I made a brief 
reference to this earlier. I do believe that the Chief 
Counsel's opinion is, that there is today discretion--and I 
believe it is both in the hands of the Commissioner and the 
Secretary. The Secretary is delegated, so the Commissioner has 
the ability to accept alternative forms.
    The question that is more equivocal is whether or not it 
would not be more helpful to have a explicit provision that 
would make certain that when such a reality found its way into 
the courts or found its way into challenges that herefore have 
not been made----
    Mr. English. But has he issued an opinion indicating that a 
statutory change is not necessary?
    Mr. Dolan. No, I think the opinion that we have--and I 
would like to get back to you make sure that I tell you this 
correctly. I think the opinion that we have is one that 
suggests that the Commissioner currently has the authority to 
authorize various forms of a signature alternative. And what I 
think the legislation would seek, or what we might have a 
mutual interest in, is----
    Mr. English. Would you be able to provide the Subcommittee 
with that opinion?
    Mr. Dolan. I certainly will.
    Mr. English. Thank you.
    [The following was subsequently received:]

Electronic Signatures

    This responds to your request for our views on whether 
current law permits the Service to accept electronic 
signatures. This memorandum also addresses certain additional 
issues that will be present if the Service accepts electronic 
signatures. The Service wants to use electronic signatures, 
instead of traditional pen-to-paper signatures, to authenticate 
and verify electronically filed returns and supporting 
documents. The Commissioner is considering the need for 
legislation.\1\
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    \1\ See proposal two in the Commissioner's January 10, 1995, 
legislative package, ``IRS Legislative Initiatives for Administration's 
Budget.''
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                                 Issues

    1. Does the Commissioner have authority to accept 
electronic signatures to authenticate and verify returns and 
supporting documents under sections 6061, 6062, 6063, 6064, and 
6065 of the Internal Revenue Code of 1986?
    2. Will the electronic signature technologies satisfy the 
``subscription'' and ``written declaration'' requirements of 
section 7206(1) or the ``written'' or ``writing'' requirements 
of section 6103?
    3. Will courts accept electronic signatures as evidence to 
identify, authenticate, and verify returns and supporting 
documents?

                              Conclusions

    1. The Commissioner has authority to accept electronic 
signatures on electronically filed tax returns and supporting 
documents. The Commissioner may promulgate regulations that 
authorize electronic signatures sufficient to authenticate and 
verify electronically filed returns and supporting documents. 
The Commissioner should accept only signatures that reliably 
authenticate and verify a return as that of the filer and do 
not place an unreasonable burden on taxpayers.
    2. Existing signature technologies likely satisfy the 
``subscription'' and ``written declaration'' requirements of 
section 7206(1), although new technologies that use oral 
statements may not satisfy the written declaration requirement. 
However, even if the written declaration requirement is not 
met, persons who willfully file incorrect returns could be 
prosecuted under other statutes that do not require written 
declarations. The Commissioner has authority to prescribe 
regulations that provide for alternatives to the traditional 
pen-to-paper writing media subject to one caveat--an oral 
statement cannot be used to satisfy the writing requirement.
    3. Courts will accept technologically reliable electronic 
signatures as evidence to identify, authenticate, and verify 
returns and supporting documents.

                               Discussion

I. Electronic Signatures

    A. Authentication and Verification
    Section 6001 requires that taxpayers adequately document 
tax liability. The Service prescribes returns and supporting 
documents to verify tax claims. Reflecting the state of 
``writing'' through most of the twentieth century, returns and 
supporting documents were paper. Taxpayers used traditional 
pen-to-paper signatures to authenticate and verify these 
documents.
    A goal of the Tax Systems Modernization (TSM) initiative is 
to convert paper filings to more efficient, electronic 
filings.\2\ To date, the Service has required separate paper 
signatures and declarations to authenticate and verify returns 
and supporting documents filed under the electronic filing 
(ELF) programs. The Service retained the traditional pen-to-
paper signature and declaration, in part, because of 
uncertainty about whether existing statutes permit 
``alternative'' electronic signatures and declarations. As 
discussed below, we conclude that under existing statutory 
authority, the Commissioner may prescribe regulations under 
which electronic signatures can be used to authenticate and 
verify electronically filed returns and supporting documents.
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    \2\ Current Section 6011(e)(1) prohibits the Service from requiring 
any income tax return of an individual, estate, or trust to be other 
than on a paper form furnished by the Service. Despite the Service's 
broad authority to prescribe the verification or define what 
constitutes a signature, legislation would be required to mandate 
electronic filing for individuals, estates or trusts.
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    B. Statutes
    Section 6061 states that, except as otherwise provided by 
sections 6062 and 6063, relating to corporation and partnership 
returns respectively, any return, statement or other document 
required under the internal revenue laws or regulations shall 
be signed in accordance with forms or regulations prescribed by 
the Secretary.
    Section 6062 provides that the return of a corporation with 
respect to income shall be signed by the president, vice 
president, etc., or other officer duly authorized so to act. 
Additionally, section 6062 provides that the fact that an 
individual's name is signed on the return shall be prima facie 
evidence that such individual is authorized to sign the return 
on behalf of the corporation.
    Section 6063 provides that the return of a partnership 
shall be signed by any one of the partners. Additionally, 
section 6063 provides that the fact that an individual's name 
is signed on the return shall be prima facie evidence that such 
individual is authorized to sign the return on behalf of the 
partnership.
    Section 6064 provides that the fact that an individual's 
name is signed to a return, statement, or other document shall 
be prima facie evidence for all purposes that the return, 
statement, or other document was actually signed by such 
individual.
    Section 6065 provides that, except as otherwise provided by 
the Secretary, any return, declaration, statement, or other 
document required to be made by the Code or regulations shall 
contain or be verified by a written declaration that it is made 
under penalties of perjury.
    C. Legislative History
    The current authentication and verification requirements in 
the Code originated in the first modern tax statutes. The 
Revenue Act of 1909 imposed an income tax on corporations, 
joint stock companies or associations organized for profit. 
Section 38 of the Revenue Act of 1909, ch. 6, 36 Stat. 112, 114 
(1909), required that ``a true and accurate return under oath 
or affirmation ... shall be made'' by the taxpayer. The 
subsequent Revenue Acts imposed a similar oath or affirmation 
requirement for attestation on other filers.
    The Internal Revenue Code of 1939, ch. 2, 53 Stat. 1 
(1939), continued to impose the oath or affirmation requirement 
for all filers. Section 51(a) of the 1939 Code required 
individuals to ``make under oath a return''; section 52(a) 
required that ``the [corporation's] return shall be sworn to'' 
by two of the corporation's officers; section 187 stated that 
``the [partnership's] return shall be sworn to by any one of 
the partners''; section 821(a) stated that executors of 
domestic estates ``shall make a return under oath''; section 
864(a) stated that executors of foreign estates ``shall make a 
return under oath''; and section 1006(a) required that gift 
donors ``make a return under oath.''
    Section 136(a) of the Revenue Act of 1942, ch. 619, 56 
Stat. 798, 836 (1942), amended section 51 of the 1939 Code by 
deleting the requirement that returns of individuals be made 
under oath and substituting the requirement that individuals 
attest by written declaration that the return is made under the 
penalties of perjury. The Senate Committee Report indicates 
that the change was made because the oath requirement ``causes 
considerable annoyance and inconvenience to taxpayers in that 
their returns must be sworn to before a notary public or other 
similar officer.'' See S. Rep. No. 1631, 77th Cong., 2d Sess. 5 
(1942), 1942-2 C.B. 507. The 1939 Code retained the requirement 
that a return be made under oath by corporations, partnerships, 
fiduciaries, executors of estates, and donors of gifts. By 
1954, Congress had largely replaced verification by oath with 
verification by signed declaration.
    The 1954 Code made a number of changes. Section 6062 
changed the corporate filing requirements (a) to allow one of 
the described corporate officers to sign a corporate tax return 
(instead of requiring two officers to sign), (b) to allow the 
corporation to designate an officer not specified by statute to 
sign a tax return, and (c) to provide that a person's signed 
name is prima facie evidence that the person is authorized to 
sign. Section 6063 changed the partnership filing requirements 
to provide that a partner's signature on a return is prima 
facie evidence that the partner is authorized to sign for the 
partnership. Section 6064 contained no material change from 
preceding law. The predecessor of section 6065 required all 
returns (except those made by individuals) to be made under 
oath but permitted the Secretary to allow by regulation a 
return to be made by a declaration under penalty of perjury 
instead of by oath. Section 6065 reversed the regulatory 
presumption to favor declarations over oaths. Current section 
6065 requires all returns to be made under penalties of 
perjury, except the Secretary may by regulation permit a return 
to be made without such declaration or the Secretary may 
exercise his or her authority to require verification by oath.
    Section 6065 gives the Secretary very broad interpretative 
authority to prescribe the form of verification. The 
legislative history indicates that Congress intended to allow 
the Secretary to accept less than a written perjury declaration 
as a form of verification. ``Under section 6065, all returns, 
etc., are to be made under penalties of perjury, except that 
the Secretary may permit them to be made without such 
declaration ...'' H.R. Rep. No. 1337, 83rd Cong., 2d Sess., 
A400 (1954); S. Rep. No. 1622, 83rd Cong., 2d Sess., 567 
(1954).
    Administratively, the Service has required a signature to 
authenticate a return since the first revenue acts. The 
original verification, by oath or swearing, included a 
signature. The signature requirement is now codified in section 
6061.\3\
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    \3\ The Code and Treasury regulations require that a tax return be 
signed for two purposes. The purpose in section 6061 and section 
1.6061-1 of the Treasury regulations is the authentication of the 
return as that made by the signer. See Receipt of Tax Data in Machine 
Useable Form, GCM 33879 (Supp.), I-3149 (Aug. 8, 1968) at 2, stating 
that the objective in requiring signatures on returns is to identify a 
return as the return of the taxpayer. Under section 1.6065-1 of the 
Treasury regulations, the purpose of the signature is to verify the 
truth, correctness, and completeness of the return.
    There is a sufficient body of case law with respect to section 6061 
holding that a tax return must be signed to be a valid tax return and 
thus an unsigned tax return is not a ``return'' for purposes of the 
Code. See Dixon v. Commissioner, 28 T.C. 338 (1957); Reaves v. 
Commissioner, 295 F.2d 336 (5th Cir. 1961); and Vaira v. Commissioner, 
444 F.2d 770 (3d Cir. 1971).
---------------------------------------------------------------------------
    Neither the Code nor the legislative history defines 
signature. 1 U.S.C. section 1 provides that ``in determining 
the meaning of any Act of Congress, unless the context 
indicates otherwise, signature includes a mark when the person 
making the same intended it as such.'' Further, the generally 
accepted legal definition of signature is very broad: ``[t]he 
act of putting one's name at the end of an instrument to attest 
its validity; the name thus written. A signature may be written 
by hand, printed, stamped, typewritten, engraved, photographed, 
or cut from one instrument and attached to another, and a 
signature lithographed on an instrument by a party is 
sufficient for the purpose of signing it; it being immaterial 
with what kind of instrument a signature is made.'' (Emphasis 
added.) See Black's Law Dictionary, 1381-82 (6th ed. 1990). 
Nothing in the Code or regulations suggests a narrower 
definition. The common law definition is broad enough to 
encompass electronic signatures.
    D. Regulatory Authority
    In determining the Commissioner's authority to accept 
electronic signatures to authenticate and verify returns and 
supporting documents, it is necessary to review the standards 
for review of such authority. Treasury regulations issued 
pursuant to the Secretary's general authority to prescribe 
``all needful rules and regulations for the enforcement'' of 
the internal revenue laws are considered interpretive 
regulations. Section 7805(a). The Supreme Court has established 
the standard of review for interpretive regulations. The basic 
rule is that if the intent of Congress is clear, the agency 
must give effect to the unambiguously expressed intent of 
Congress. Where Congress has implicitly left a statutory gap 
(to be filled with an interpretive regulation), the standard of 
review is whether the regulation is a ``reasonable 
interpretation'' of the statute. See Chevron U.S.A., Inc. v. 
National Resources Defense Council, Inc., 467 U.S. 837 (1984).
    In describing the standard to be used in reviewing an 
Executive department's construction of a statutory scheme, the 
Court in Chevron stated:
    If this choice represents a reasonable accommodation of 
conflicting policies that were committed to the agency's care 
by the statute, we should not disturb it unless it appears from 
the statute or its legislative history that the accommodation 
is not one that Congress could have sanctioned.
    Chevron, 467 U.S. at 844, citing United States v. Shimer, 
367 U.S. 374, 382-383 (1961). While Chevron undoubtedly stands 
for the principle that deference is to be paid to an 
administrative agency's construction of a statute that it is 
authorized to administer, the opinion stands equally for the 
proposition that such deference is not unlimited. First, there 
must be statutory silence or ambiguity on the point in question 
to trigger such deference. Second, a court will defer to only 
statutory interpretations that are reasonable in light of 
Congressional intent.
    When sections 6061 through 6065 were enacted, there existed 
no technology for signing a return other than a person manually 
signing his or her name or placing an authorized mark on a 
paper. The Service has required pen-to-paper signatures with 
attestations since 1909. The statutory provisions have remained 
substantially unchanged since 1954, but Congress has not 
explicitly defined what constitutes a signature for these 
purposes.
    Sections 6061, 6062, 6063, 6064, and 6065 do not prohibit 
the Commissioner from defining what constitutes an acceptable 
signature. In light of the statutory framework and legislative 
history, a regulation may prescribe the form of signature for 
electronically filed returns.\4\
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    \4\ In fact, the Service currently accepts alternative (facsimile) 
signatures where specific authenticating safeguards are present. See, 
e.g., Rev. Rul. 68-500, 1968-2 C.B. 575; Rev. Rul. 82-29, 1982-1 C.B. 
200; section 1.6695-1(b)(4)(iii) of the Income Tax Regulations. 
Additionally, Temporary Regulation section 1.6061-2T authorized signing 
of returns by voice signatures for certain taxpayers filing 1992 and 
1993 calendar year returns.
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    If the validity of regulations authorizing electronic 
signatures were challenged, a court would closely scrutinize 
the circumstances surrounding the adoption of the regulations. 
The fact that the regulations were promulgated long after 
enactment of the controlling statutes would heighten the degree 
of scrutiny. In light of the legislative history, a court might 
find that an alternative form of signature is unreasonable or 
arbitrary if the technology is not reliable or if the 
regulation imposes an unreasonable burden on taxpayers due to 
increased cost or difficulty of use. For example, a court would 
be more likely to invalidate a regulation mandating a 
particular form of signature, as opposed to providing an 
optional form of signature, because a mandated form imposes a 
definite burden. However, provided that the Commissioner 
promulgates regulations prescribing only signatures that 
reliably authenticate and verify the return as that of the 
filer and do not place an unreasonable burden on taxpayers, we 
believe that regulations that authorize electronic signatures 
for authentication and verification purposes would be upheld as 
a valid exercise of the Commissioner's authority to prescribe 
regulations.

II. Definition of ``written'' under sections 7206(1) and 6103

    A. Section 7206(1)
    Most of the criminal tax provisions in the Code (except 
section 7206(1)) do not focus specifically on the requirement 
of a signature or a written declaration. However, it is often 
necessary in criminal tax cases to ``tie'' a tax return to the 
taxpayer under investigation. In situations where an electronic 
tax return would consist of an electronic transmission and a 
signature, ``tying'' the computer-based transmission to a 
taxpayer may require additional evidence not necessary with 
paper returns.
    Section 7206 of the Code makes it a felony for any person 
to ``willfully make and subscribe any return, statement, or 
other document, which contains or is verified by a written 
declaration that it is made under the penalties of perjury, and 
which he does not believe to be true and correct as to every 
material matter.'' (Emphasis added.)
    In our view, the ``subscribe'' requirement can be satisfied 
by the traditional signature made by ink on paper, or by any of 
the new signature alternative technologies.
    With regard to the section 7206 ``written declaration'' 
requirement, an issue exists as to whether the numerous new 
technologies will meet the ``written declaration'' requirement. 
The term ``written'' has acquired a broader definition than 
traditional pen and ink. See 1 U.S.C. section 1, Fed R. Evid. 
1001. In our view, existing electronic signature technologies 
should be sufficient to satisfy the written declaration 
requirement. However, as other technologies are developed and 
implemented--such as technologies that use oral declarations 
that are transcribed to writing--there is a point at which the 
written declaration requirement no longer will be satisfied. 
Nevertheless, even if such technologies are insufficient to 
satisfy the written declaration requirement, other criminal 
statutes that address false statements or false claims--and 
which do not require a written declarations--could be used to 
prosecute taxpayers who willfully file incorrect returns. See, 
e.g., 18 U.S.C. section 287, 1001.
    B. Section 6103
    The terms ``written,'' ``written request,'' and ``writing'' 
are used numerous times throughout section 6103.\5\ There is no 
definition of writing in section 6103. Similarly, there is no 
legislative history to the 1976 Tax Reform Act, which 
substantially revised section 6103, explaining the meaning of 
the terms ``written'' or ``writing.''
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    \5\ The Regulations have required that certain applications for the 
inspection of tax information be made in writing since 1914.
---------------------------------------------------------------------------
    The legislative history to the 1976 Tax Reform Act 
indicates that, to the extent practical, all disclosures of tax 
information are to be made in documentary form in order to 
protect the privacy of the taxpayer and to protect IRS 
personnel making the disclosure from subsequent charges that 
information was improperly disclosed. S. Rep. No. 938, 94th 
Cong. 2d Sess. 343 (1976), 1976-3 C.B. (Vol. 3) 381. The 
purpose of the written request requirement appears to be the 
same. The initial written request helps maintain accountability 
in the IRS and agencies that are the recipients of tax 
information.
    The only court to address the ``writing'' issue in the 
section 6103 context held that an oral consent was clearly not 
a ``written request for or consent to ... disclosure'' as that 
term is used in section 6103(c). Huckaby v. Internal Revenue 
Service, 794 F.2d 1041 (5th Cir. 1986). The Fifth Circuit noted 
that the purpose of the written form was to assure the 
taxpayer's clear assent before return information is disclosed. 
The court also noted that oral requests like the one at issue 
in that case were subject to misinterpretation.
    The Service has not, for disclosure purposes, interpreted 
the requirement for a written consent to limit written requests 
to traditional writing media, i.e., pen-to-paper. For example, 
the Service currently accepts photocopies and facsimile copies 
of section 6103(c) disclosure consents.
    Under section 6103(q), there is authority to prescribe 
regulations as are necessary to carry out the provisions of 
section 6103. Section 6103(p)(1) provides that requests for the 
inspection or disclosure of tax information shall be made in 
such manner and at such time and place as shall be prescribed 
by the Service. Section 6103(c) also provides for implementing 
regulations to prescribe requirements and conditions to the 
disclosure of tax information pursuant to a written consent.
    We believe that the crux of section 6103's writing 
requirement is to ensure that disclosures are fully documented, 
as opposed to purely oral. As such, given the regulatory 
authority under section 6103 and the purposes which the writing 
requirements in the statute appear to serve, there is authority 
to administratively develop alternatives to the traditional 
pen-to-paper writing media subject to one caveat--an oral 
statement cannot be used to satisfy the writing requirement.
    Having said that broad authority exists to administratively 
define writing in section 6103, it is equally clear that, in 
evaluating alternative forms of writing, the Service should 
carefully consider the ultimate issues of identification, 
reliability, and retrievability (for evidentiary purposes) of 
electronically transmitted requests or consents. For example, 
technologies that utilize transcription may blur the oral/
written distinction. Also, coding and identification number 
technology raise potential custody and security issues. Counsel 
will address such issues as the Service makes business 
decisions on specific technologies.

III. Evidentiary Use of Electronic Signatures

    Electronic signatures are subject to the same evidentiary 
standards that generally govern computer generated, stored, and 
retrieved data. The Service has an established history with its 
computer system. Courts have consistently taken testimony about 
the information that the system contains (or does not contain) 
in evaluating the weight of computer evidence.
    A. Admissibility
    Alternative signatures will be created, transmitted, and 
stored electronically. For litigation purposes, the evidence 
will typically be a printout of the electronically stored 
signature. The admissibility into evidence of alternative 
signature printouts will be determined by the same evidentiary 
standards that generally govern the admissibility of computer 
printouts. Computer-generated evidence has been accepted by the 
courts for many years. Transport Indemnity Co. v. Seib, 178 
Neb. 253, 132 N.W. 253 (1965). In general, under Fed. R. Evid. 
901(a), ``authentication or identification as a precedent to 
admissibility is satisfied by evidence sufficient to support a 
finding that the matter in question is what its proponent 
claims.'' This can be satisfied by a variety of means. 
Authentication of alternative signatures is likely to involve 
Fed. R. Evid. 901(b)(9) evidence regarding the ``process or 
system used to produce a result and showing that the process or 
system produces an accurate result.'' Courts customarily take 
testimony as to the information that the IRS computer system 
contains (or does not contain) as proof of filing or nonfiling. 
United States v. Faris, 517 F.2d 226 (7th Cir. 1975); Fed. R. 
Evid. 901(a)(7). Most common objections could be easily 
overcome in today's jurisprudence.
    Section 6064 provides that an individual's name signed to a 
document is prima facie evidence that the document was signed 
by that person, but additional evidence is necessary to 
establish the validity of the signature. In the final analysis, 
the conclusion of validity will turn upon the weight of all the 
evidence.
    Additional supporting evidence may come from a variety of 
sources. Occasionally, the taxpayer will admit the validity of 
the signature if called to testify under oath. More often, the 
taxpayer will admit the validity of the signature at the time 
the examination was initiated (``Is this your return and 
signature?''). The admission of a party opponent would be 
admissible and persuasive. Fed. R. Evid. 801(d)(2).
    Circumstantial evidence from the Service's records may also 
be very persuasive. Fed. R. Evid. 401, 406. Evidence of other 
signatures of the taxpayer may be admitted and utilized. Fed. 
R. Evid. 901(b)(2). In some cases, it may be necessary to 
secure the testimony of an expert witness to assist the trier 
of fact in reaching a conclusion.
    B. ``Best Evidence'' Rule and Other Objections
    Challenges under Fed. R. Evid. 1002, the ``best evidence 
rule,'' are typically satisfied by reference to Fed. R. Evid. 
1001(3), which defines computer printouts as originals, and to 
section 6103(p)(2) of the Code, which specifically allows the 
Service to use reproductions of returns. Hearsay objections may 
be raised to the extent the underlying computer data was input, 
analyzed, or rearranged by Service personnel. Most such 
objections are overcome, under Fed. R. Evid. 803(6), by the 
hearsay exception for business records. The party opposing the 
introduction of public records has the burden of establishing 
that the records are not reliable. Ellis v. International 
Playtex, Inc., 745 F.2d 292, 302 (4th Cir. 1984). Generally, 
resort to the hearsay exception will not be necessary since the 
typical evidentiary use of a tax return is a nonhearsay use, 
i.e., the return constitutes a statement of the opponent and is 
admitted not for the truth of matters asserted therein.
    C. Probative Value--Scientific Evidence
    Even though it is nearly certain that the printout of an 
alternative signature will be admissible under the Federal 
Rules of Evidence, the key issue is whether the court will 
accept that printout as the signature of a particular taxpayer. 
That is, can the Service establish a link between the admitted 
data and the person to prove that the particular person 
prepared and filed the particular document? To some extent, 
this question is part of the preliminary inquiry of 
admissibility. Fed. R. Evid. 901. However, since authentication 
is a preliminary question with a low threshold (see Fed. R. 
Evid. 104), a court might admit the signature but reserve the 
ultimate issue of whether that signature is the signature of 
the particular person. This latter question is one of 
identification.
    Section 6064 provides that an individual's name signed to a 
document is prima facie evidence that the document was signed 
by that person. See also Fed. R. Evid. 902(10) concerning self-
authentication. Regulations under section 6064 could apply the 
same presumption to alternative signatures. Even so, expert 
testimony may be necessary to establish an alternative 
signature as that of a particular person. The Federal Rules of 
Evidence do not provide for lay testimony about these 
alternative methods. Scientific or technological evidence about 
signature evidence would be governed by Fed. R. Evid. 702. Fed. 
R. Evid. 702 allows for expert testimony, including opinions on 
the ultimate fact question when that evidence would be helpful 
to the fact-finder. The test for acceptance of this testimony 
is established by the recent case of Daubert v. Merrell Dow 
Pharmaceuticals, Inc., 509 U.S.----, 125 L. Ed. 2d 469 (1993), 
where the Court set forth a rather low threshold for acceptance 
of scientific expert testimony. The Court held that scientific 
evidence need not have ``general acceptability'' in the 
scientific community to be presented to a jury. The Court held 
that the trial judge must preliminarily assess the threshold 
question of admissibility of the evidence. However, the Court 
held that the federal rules were intended to be applied 
liberally in order to encourage further development of 
scientific evidence.
    In setting forth the inquiries that the judge should 
consider in allowing evidence, the Daubert Court cited four 
factors for determining the ultimate acceptability of the 
evidence: (1) whether the scientific technique can be (and has 
been) tested, (2) whether the theory has been subjected to peer 
review and publication, (3) the known or potential rate of 
error in the technique, and (4) general acceptance in the 
scientific community. Expert testimony and opinion should 
certainly satisfy the Daubert standard.
    The Service should consider the Daubert factors in 
evaluating potential forms of alternative signatures. In sum, 
technologically reliable signature alternatives could be used 
in court to identify the person who signed the document.

                                   Judith C. Dunn
                                   Eliot D. Fielding
      

                                

    Mr. Dolan. If you do not mind, Mr. English, can I double 
back on your principle point?
    Mr. English. I would prefer to go on because I have limited 
time.
    Mr. Dolan. Very good.
    Mr. English. It is my understanding that about 30 percent 
of all return filers have a balance due. How do you intend to 
attract balance-due filers to file electronically, given that 
under the current filing system--I am not sure what the 
motivation for a taxpayer with a balance-due return would be to 
file electronically.
    Mr. Dolan. Well, I think the motivations overlap to a 
considerable extent. Obviously, a quick refund is not one of 
the motivations, but the same sense of closure, clarity, 
accuracy of the transaction may be. The same benefit of a 
minuscule error rate or a balance due, for a refund filer is 
there. And secondarily, as we mentioned earlier, and I believe 
Mr. Lutes elaborated on, when we create this ACH debit capacity 
for somebody, he or she does not have to worry about writing us 
a check that catches up with the electronic return. When you 
have the ability to both send the return electronically and 
initiate a payment, potentially a payment suspended for a later 
date, if he or she decides to file before April 15, the 
additional motivation may be there. There will be the 
incentives of an accurate return, a high quality transaction, 
and knowing that there is closure will help motivate.
    Mr. English. Thank you, Mr. Dolan. Mr. Lubick, it is always 
a pleasure to see you here, and we appreciate your testimony.
    Again, I want to reemphasize, I think it is very difficult 
for us to go back to the real world, to the districts we 
represent, and tell them that it is very difficult somehow for 
the Treasury and the IRS over 10 years to move to a system 
which saves hundreds of million dollars a year that could be 
better allocated to other things or could simply shrink the 
deficit, and I thank you.
    Chairman Johnson. Thank you, Mr. English.
    Mr. Kleczka.
    Mr. Kleczka. Thank you, Madam Chairman.
    Commissioner Dolan, a couple of quick questions. One of the 
problems that we have to find a resolution for is the 
electronic signature question. However, I note that the 
TeleFilers have grown to about 5 million per year, and I assume 
that the bulk of the people who use that method are in a refund 
situation. Now, there is no signature accompanying the TeleFile 
filing. Why has that not been a problem up to now, and why do 
we foresee such a grave problem in the regular electronic 
filing with no signature?
    Mr. Dolan. It goes back a little bit to the answer that 
Terry gave a moment ago. There is an authentication process 
used in TeleFile.
    Mr. Kleczka. The number that is given to the tax filer.
    Mr. Dolan. First of all, you start with a very defined 
parameter. Unlike the ELF world in general, we initially invite 
a group of people into the TeleFile relationship with us based 
on the attributes of their financial life. And so there are 
some parameters that clearly on the front end defines that 
population in a way that mitigates risk on the front end. 
Secondarily, we use a process of authentication; while it is 
not the written signature, that additionally takes that risk 
and mitigates it further.
    Mr. Kleczka. I missed the last point.
    Mr. Dolan. By virtue of using the PIN interaction with 
other data, we take the risk that has already been limited by 
having a define and confine universe, and limit it still 
further, which is a slightly different technique than you would 
have if you said, any member of the 120 million filers can 
choose to file electronically. In those cases there will be 
different standards for wanting to be certain that we can 
authenticate that this person is the person they purport to be.
    Mr. Kleczka. Well, that is something we are going to have 
to discuss further. But I think the system can be expanded. It 
just makes no sense to electronically file and follow up with a 
piece of paper.
    Mr. Dolan. It clearly can be expanded, and we want to do 
that.
    Mr. Kleczka. The other question is, how many filers use the 
form 1040-PC? Is that a growing area that is getting a lot of 
interest?
    Mr. Lutes. A little over 8 million taxpayers this past year 
filed paper returns using the 1040-PC, so that is growing also 
as a method of filing one's tax returns.
    Mr. Kleczka. Yes, it is growing somewhat. Has any thought 
been given by the service to provide an option to filers to 
submit a floppy disk to the service. That would be an area 
where you could probably utilize, for example, with an amount-
due check attached.
    Has there been any thought to giving filers the option of 
providing a floppy?
    Mr. Lutes. We have not done a detailed analysis on that.
    Mr. Kleczka. How about in your thought?
    Mr. Dolan. There clearly has been thought and there has 
actually been a couple of experiments done in our Philadelphia 
Service Center. One of the difficulties is, if you can jump 
that step--if you can avoid the need to manage the receipt of 
disks and inventories----
    Mr. Kleczka. Another thing to handle, so electronic would 
still be the preferred option.
    Mr. Dolan. Yes, absolutely. It is absolutely a step to be 
jumped if you can do it.
    Mr. Lutes. At one point you emphasized the 1040 PC filers--
that use software. They do have the ability to use that same 
software to transmit this return electronically.
    Mr. Kleczka. OK, thank you.
    Chairman Johnson. Thank you very much.
    Mr. Watkins.
    Mr. Watkins. Mr. Dolan and Mr. Lutes, and Mr. Lubick, I am 
glad to see you back. And I reflect. I just returned from 
traveling 21 counties in my district for townhall meetings, and 
a lot of people came up to me and said, You know, we sure would 
not have your job. And I reflect a little bit about your job, 
and I sure would not want your job, because even biblically it 
talks about tax collectors, and I do not know if you are in a 
win situation out there.
    But there is a great alarm out there with a lot of people. 
I know Mr. English talks about electronic filing and some of 
the technology moving in that direction. There are a lot of mom 
and pop businesses which are concerned about being forced into 
electronic filing, because they are not equipped with high 
technology. And they are concerned about how they are going to 
handle it, and many of them are probably doing their own taxes, 
or trying to do their own taxes, without having CPAs. Some of 
them would be using public accountants or CPAs.
    So I think one of the big things in my area is trying to 
provide some kind of information out there so they feel like 
they are not forced into something.
    Do you have anything planned, such as an educational 
program, to inform some of these people?
    Mr. Dolan. Mr. Watkins, I think the point you make kind of 
dovetails to an earlier part of the conversation.
    Mr. Watkins. And I apologize, I am redundant.
    Mr. Dolan. Oh, that is fine. Congressman Portman said, and 
said accurately, there is no such thing on the table right now 
as a mandate. But one of the things I think you heard maybe 
from Mr. Lubick and I both is that, I think we all expect that 
the optimism expressed here, and the comment made by Mr. 
English about letting us get on with this. That is where the 
world is going. I think most of us in this room can sit here 
and intellectually accept that is where this thing is headed. 
At the end of the day I think the test for us and for us 
cumulatively is, can we put this product in front of the 
taxpayer, the customer, in a way that they say, hey, this works 
for me. This is a logical way to do my business with the 
government, versus saying, the government tells you, you have 
to do this.
    We had a little discussion about EFTPS before and lessons 
learned. One of the things that we collectively take away from 
that is that the people do not like it much when somebody says, 
you do it this different way. And so one of my hopes would be--
I mean people today, we would say are maybe not technologically 
adept. I think the world is going to move them more and more, 
whether it is through their television sets, or interaction 
with their banks. And there will be a point in which some will 
still say, I do not want to play that world, and for those 
people we ought to still have it as easy a process as possible.
    Mr. Watkins. I hope you recognize there are some in the 
economically depressed areas which are not worried about 
participating in the technology world. I stop at the businesses 
and have a cup of coffee with them; some are the greatest 
people in the world.
    In addition, I know the Association of Enrolled Agents had 
some testimony earlier, and they proposed a new incentive to 
encourage the individual taxpayers to file electronically, 
modifying the statutory period for examination of an individual 
income tax from 36 months to 24 months if the return is filed 
electronically, by the due date. There is no mismatch with the 
other information return programs, data that has been received 
by the IRS.
    Do you have any immediate reaction to that suggestion?
    Mr. Dolan. First of all, I just read it shortly before the 
hearing, and my reaction is, it is an interesting proposal. It 
is of exactly the stripe that we would expect we would hear 
more of when we put this RFP out. And it also makes the point, 
I think, that maybe Mr. Lubick was making earlier. I suspect at 
the end of the day there are going to be lots of incentives 
that people tell us exist that are not necessarily paying 
somebody $3 or paying somebody $4. Part of what we deal with, 
and it may be exactly the concern you raised earlier, that is, 
a lot of people today say, one of my reasons that I do not want 
to file electronically is that I fear that my susceptibility to 
audit is greater. And so maybe there is some connection between 
agreeing that somebody who files electronically will have his 
business or her business finished with us, by an earlier date 
certain. And that might actually be a more appealing way to 
think about it than the discussion we were having earlier about 
moving filing dates around. Maybe there is a promise of earlier 
certainty if you come to us electronically. But those are 
exactly the kinds of proposals we hope to see in the RFP.
    Mr. Lubick. I would worry about that change. I think this 
reflects my conversation earlier with Mr. Cardin. I think the 
rules of the game ought to be the same for all taxpayers, what 
their obligations are, when they have to satisfy them, what the 
period is for reviewing it. I think electronic filing should 
prevail based on market-based incentives; it is a better way to 
do it; it is more efficient; it is easier; it is going to be 
error reduced greatly. And so I would be very reluctant to 
change the statutory rules that favor one taxpayer over 
another. I would be reluctant to see a shortening of the 
statute of limitations, which is basically what that proposal 
is.
    Mr. Watkins. Thank you, Madam Chair. I do have another one, 
but maybe I better ask it privately after awhile.
    Chairman Johnson. Thank you, Mr. Watkins. I would like to 
follow Mr. Watkins' question with another issue that will be 
raised in follow-on testimony.
    The National Association of Accountants indicates that the 
electronic filing compliance visitation is a significant 
deterrent to the electronic filing program.
    Could you explain to us how this compliance visitation 
works? How the IRS handles compliance visitations for big 
electronic preparer filing corporations, like H&R Block? How 
does the IRS handle visitations for a small accounting business 
that files its clients' returns electronically through a third-
party transmitter? And do you believe that the number of 
visitation checks will increase as the growth in the number of 
practitioners filing electronic returns increases? I think this 
is a very important issue.
    Mr. Lutes. Let me address that if I could, Madam Chairman. 
We initiated these visitations back a couple years ago when we 
were dealing with the refund fraud issue that we worked with 
the Congress on, and I think those steps were necessary and I 
think they made a point at that time. Since that initial year 
1995 filing season we have been gradually decreasing the number 
of those visits. I do not have the 1995 number, but the number 
of visits between 1996 and 1997 dropped by about 40 percent, 
and the majority of the visits that were made this year were 
for cause. We received complaints from taxpayers. We saw 
patterns in the filings from particular offices. However, we do 
still conduct random educational assistance visits to attempt 
to spot patterns in the industry during those visits. But 
again, the majority of visits that we are doing now are for 
cause. And when we do the monitoring visits, we make them more 
educational assistance visits; looking for questions we can 
answer, trying to make them supportive of the ERO and 
practitioner community.
    Chairman Johnson. Well, thank you. I also wanted to get 
your reaction to the National Association of Enrolled Agents 
testimony in regard to their recommendation; their belief that 
there are four incentives that could ensure greater electronic 
filing participation by enrolled agents.
    First, permit electronic communications between the IRS 
offices and practitioners on client account issues; permit 
alternative forms of tax payments; permit the online submission 
of installment agreement requests and collection information 
statements; and permit the electronic submission of powers of 
attorney and transcript requests.
    Mr. Dolan. Madam Chairman, those are all good ideas. The 
only question is, in what sequence is that a part of what total 
set of initiatives. There is not a one of those that is a bad 
idea. They are ones that we have had dialog with the enrolled 
agents. I know they have been frustrated that we have not been 
able to prioritize some of those quicker than we have. The 
ideas are all sound ones, and I think we will ultimately want 
to look at them, as those and other ideas come back in response 
to the RFP. There will have to be some prioritization of both 
investment and use of our intellectual capital to get them 
done, but not a one of those is a bad idea.
    Chairman Johnson. Mr. Dolan, in terms of timeframes, I 
think your RFP, being flexible, was a very good idea. On the 
other hand, clearly none of the ideas you are going to get back 
are ideas that we are hearing today or ideas that you have 
already heard.
    Do you have any idea how long it will take you to evaluate 
those things, and particularly in the light of Mr. Lubick's 
comments, whether or not you are really going to be able to 
move ahead with flexibility as I think some of us conceive it?
    Mr. Dolan. Well, I tried--perhaps not effectively--earlier 
to make that the point that the target that will be in the RFP 
is, tell us what you can do, and what you think we need to do, 
to have a substantial impact on the returns that are filed in 
1999. So it means, not the most immediate next filing season, 
but for the filing season thereafter. So the trust we hope of 
both the ideas we get and the nature of our responses will be 
targeted for----
    Chairman Johnson. What is the response deadline?
    Mr. Lutes. Well, the initial RFP that will be issued next 
week is a draft. This was at the request of the industry. They 
wanted the opportunity to help us craft the final product.
    Chairman Johnson. I appreciate that.
    Mr. Lutes. We anticipate, based upon all the procurement 
processes, it would be some time in the spring, probably late 
spring.
    Chairman Johnson. So you expect it will take you 6 months.
    Mr. Lutes. Yes.
    Chairman Johnson. You will wait 6 months for the responses 
to the September 15 proposal. You will allow 6 months for 
responses?
    Mr. Lutes. No, the draft will be out there for 30 days. The 
industry will provide us with feedback. We will take that 
feedback, and build it into a final request for proposals, that 
will then go out on the street for input in the form of final 
proposals, which we will then have a regular structured process 
to evaluate, and make the determination to----
    Chairman Johnson. And your spring estimate gives you about 
7 months to evaluate ideas that are coming back.
    Mr. Lutes. Yes. Let me expand on something Mr. Dolan said a 
moment ago. We are looking for impact on the 1999 filing 
season. Obviously for the 1999 filing season at that point in 
time I think your concern is, we are not going to be able to 
build any major new systems over that 7-month period. So what 
we are looking for is ideas, and again some of the incentives 
that are mentioned are things that could clearly be done; if we 
were to pay an incentive for returns, that clearly could be 
done in that short of time.
    But at the same time we are open and asking folks for 
longer term proposals that, as Mike mentioned earlier, would 
enable us to maybe even modify the modernization blueprint to 
build systems that would involve for example some of the ideas 
that the NAEA has raised around powers of attorney and so 
forth. But with the limited funds we have, we have to choose 
which ones of those systems to spend those funds on.
    Chairman Johnson. By what date would you have to make a 
decision for something to affect the 1998 filing?
    Mr. Lutes. The 1998 filing season? In terms of any changes 
to our systems we are well past that point. That software is in 
final testing now. The software companies remember, need our 
final products so they can develop their products also. So 1998 
is essentially in the bag at this point.
    Chairman Johnson. And 1999?
    Mr. Lutes. For 1999, we would be looking at spring, early 
summer, so that we can then make the programming changes to our 
existing systems to effect them for 1998.
    Chairman Johnson. Well, I certainly would want to work with 
you for you to report to us on changes that are going to be 
made for the 1999 filing season early enough so that we can 
have input and understand what your plans are. And I think that 
might help focus your process in a timeframe that we get some 
real good work done for the 1999 season.
    Mr. Dolan. Madam Chairman, the other points you highlight 
here, is that this is not for us--this is not like going and 
buying a piece of furniture or a piece of gear. This is for us 
a unique RFP arrangement. Because we are basically using the 
sort of classic commercial products, it is necessary to go to 
people and say, not only give us your ideas, but give us some 
financially binding commitments. We structured this 
relationship with you, and a lot has been said about how many 
of these returns are prepared in software, and how many are 
prepared by practitioners.
    What we expect to see back are some fairly imaginative 
proposals that say, OK, I have the capability of giving you a 
stream of these kinds of returns. And in return these are the 
kinds of interactions I would want to have, or these are kinds 
of cross-commitments I would like. So it is an adaptation of 
something that is used typically more at the commodity level, 
and so it is going to be a very interesting and exciting 
process I think to see what people tell us in the context of 
that kind of request.
    Chairman Johnson. I think it is interesting, and I think it 
is an exciting process. I do not want it to bog down so that it 
is the year 2000 or 2001, before we get any benefit from it.
    Mr. Dolan. Agreed.
    Chairman Johnson. It clearly is going to have enormous 
economic costs and implications, as well as benefit 
implications for taxpayers. I think it is really beholden upon 
us to move rapidly enough, so the decisions are made in a 
timeframe that the changes can be marketed well, and we get 
real advances by the 1999 filing season.
    Now, since I did raise a couple of additional questions 
myself, if there are other questions from Members of the 
Subcommittee before we let our experts go, I would be happy to 
recognize you.
    Mr. Cardin.
    Mr. Cardin. If I could just quickly--I notice that in the 
bill that the administration filed that you seek explicit 
authority to use appropriated funds to promote and encourage 
the use of electronic filing. And the explanation, as I 
understand it, is that there annually are prohibitions in the 
appropriation process to promote programs explicitly approved 
by Congress.
    Could you just for the record tell us how important that 
authority is to be granted, or whether you have sufficient 
authority now to promote electronic filing.
    Mr. Lubick. Well, as I understand it we have been promoting 
electronic authority through donations of time, and not using 
appropriated funds, relying upon public interest. As I 
understand it, we now feel we can undertake legally a 
promotional effort, using funds out of our appropriation, and 
therefore if we are to do that type of marketing that is 
indicated that will be very appropriate to the success of the 
transition, we need this authority.
    Mr. Cardin. Well, I would like to work with you with some 
language, because I think obviously we do not want to restrict 
our ability to carry out policy for more electronic filings.
    One other quick point. The legislation that was filed on 
behalf of the Commission's recommendation, spells out a goal, 
as you pointed out, of 80-percent filings by the next 10 years; 
and it spells it as a goal. It seems to me that it is 
appropriate for Congress to spell out what it hopes will be 
achieved. And I am just curious as to whether you think that is 
a reasonable expectation--that in 10 years that we should be 
able to achieve 80 percent filing electronically; or whether 
you have a different percentage that you would think should be 
expected if the rest of the authority is given to you, 
including changing some of the obstacles that are in current 
law.
    Mr. Lubick. Well, our record on achieving goals is such 
that I am very wary of stating what I think the appropriate one 
should be. Maybe Mike would like to do that. And I do not have 
any objection to there being a goal and to having----
    Mr. Cardin. I want to stop you. I think the record of this 
administration on trying to change the IRS has been good. So I 
would not downplay your success.
    Mr. Lubick. I would be glad to be recognized for having 
outdistanced our targets, but from time to time we have been 
chastised for the opposite result, and maybe we are just being 
gun shy.
    Mr. Dolan. If I could rise to the bait a little bit here, 
Mr. Cardin, I think particularly in the light of Mr. English's 
comment, the last thing I want to do is to leave this table, 
conveying an impression that we are trying to play safe here. I 
mean I personally think that trying to move this reality to the 
80-percent world makes a heck of a lot of sense, and over a 10-
year period, all that we know around us, seems like that is not 
an extraordinary or a reckless kind of goal. And certainly for 
the Congress to say to the IRS, that is our vision, that is 
what we would like you guys to add, and we like your commitment 
to get there--all those seem like the right sorts of 
conversations to have.
    Now typically though, most of us when we go back and set a 
goal, we expect, we are going to deploy this goal. I am going 
to take this percent of the goal, and this year certain, and I 
want to see how this maps out. I just do not want to light 
candles and say prayers; I want to have some idea of, a 
followed by b, followed by c. And what you are hearing from me 
is more the reservation about thinking that when we get back 
some of what we are going to get from the RFP, and we get a 
little better understanding of some of the research that is 
being done now, I think I will be able to map to that goal with 
a lot more precision than I can today. But I do not shrink 
from--as I call it--the aspirational or the notional objective 
that that is the right place to be in that 10th year or the 9th 
year.
    Mr. Cardin. I appreciate that. I think that is a good 
point. And remember, this is just one part of the restructuring 
act, and it depends upon the entire program, I think, being 
implemented, and the support that you need in order to carry 
out these goals, and that obviously is hard to predict for the 
next 10 years. But I am glad to see that we all can agree that 
80-percent filing in 10 years is a reasonable goal for us to 
set as a Nation. I think that is what it is about. It is not 
just what you can accomplish; it is what we can accomplish 
together. If you do not have the cooperation of Congress you 
are not going to be able to achieve this, and I cannot tell you 
what this Congress is going to do, let alone the next Congress. 
So hopefully we can set a mutual goal of at least 80-percent 
filing in 10 years, and then we can make sure that we do 
everything we can to see that that goal is carried out. Thank 
you.
    Chairman Johnson. I would like to say that I think the 
point that Mr. Cardin raises is a very, very important one, and 
one we will discuss with you thoroughly. I am very pleased at 
the aggressive efforts you are making. I think the work that is 
going on is truly commendable, but it is also true that in 
1993, 4 years ago, the IRS established an electronic filing 
goal of 80 million returns by 2001, and that program never got 
clearly implemented, no clear strategy, and no clear 
achievements.
    And in your plan released August 15, 1997, you certainly do 
talk about electronic filing, but it is a matter of encouraging 
it through product development and market improvements. There 
are not quantitative goals or strategic plans laid out. There 
are going to be successive people out there implementing this 
plan, like there will be successive Congresses in backing it 
up. And I think you really ought to think about it being in 
your interest as well as ours, to be a little bit more specific 
than simply encouraging something we know is important to do, 
and is a good thing, both for the government and the taxpayers.
    I think we do have a challenge before us in this regard, 
and being somewhat more specific, because it has in the past 
focused at least the Congress' attention, and I think it tends 
to focus the executive branch's attention as well. So we will 
look forward to discussing those matters with you.
     Mr. Portman.
    Mr. Portman. Thank you, Madam Chair. I just have a few 
followups and maybe some clarifications. Again, we have talked 
about the 80-percent goal. I think that is not only doable, but 
probably can be done sooner given your new expertise with Mr. 
Barr. And I want to commend you for bringing in someone of his 
experience and knowledge. I think that will be a tremendous 
benefit to the service.
    With regard to the transmitting fee, we have gone over that 
quite a bit. I think Mr. Lubick preferred that incentives for 
electronic filing should be market based, and we should not 
have additional monetary incentives. Let us just keep in mind 
what we are talking about here. We have a much more expensive 
system now, which is paper returns. Others have talked about 
it, and we have talked about it, perhaps ad nauseam, over the 
last year. We want to provide these incentives because it is 
good for the IRS and good for the taxpayer.
    If the paper return now costs $7, and the electronic return 
costs $1, it is worth it, Mr. Lubick to have the government 
engage in providing incentives. Let us say it is $2.68--what 
you think it is--it is still worth it. So if we are going to 
talk about markets, I think we need to talk about the taxpayer 
and the cost to you and to the service.
    I will also say, just to clarify what is in the 
legislation, we do not say it should be $1, $2 or $3; we say 
fair market cost to the transmitters. I would love not to get 
into it now, because we have a lot of things I would like to 
get into, but I would like to comment on Mr. Lubick's 
suggestion that the incentive be paid to individuals. I think 
that would be a big mistake. And if the IRS could get back to 
us very soon on that, as in the next week, that would be great. 
In H.R. 2292 the incentive is paid to transmitters, which I 
think is where we all come out, and not to 120 million 
individual taxpayers.
    Let's just quickly discuss signature requirements. We all 
know there is Form 8453 that must be signed and submitted. It 
does not make any sense. Those of us who visited service 
centers have seen it. Most of the cost of electronic filing is 
associated with this signature requirement.
    Mr. Lutes has said there is no one way to deal with it. 
Well, H.R. 2292 has one very specific way to deal with it. And 
I still have not heard the Treasury Department's opinion as to 
that, nor the IRS opinion. What we say is very simple. H.R. 
2292 only requires that the taxpayer retain the signature on 
file. And I think it makes a lot of sense. Seventeen States do. 
We talked about California earlier, and the IRS did not have 
any thoughts as to what the California experience is, good or 
bad. We have 17 States that do it. Now Australia does it, 
Canada does it. The SEC does it. If the SEC can do it maybe the 
IRS can consider it.
    I just think it makes so much sense for you all, when you 
go to those service centers and you see the hassle that the 
current signature requires, to have it at least on an interim 
basis, so you can perfect some kind of electronic signature. It 
seems to make a lot of sense. That is the specific proposal 
before us today. You need to tell us specifically how you feel 
about that.
    Finally, with regard to the extension of the filing 
deadline, Mr. Lubick said it would be unfair to middle- and 
low-income working families and taxpayers. I hope Treasury is 
not trying to inject class warfare into electronic filing; God 
forbid, we have had enough of that in the last couple of 
months.
    Because you raised it, let us get into the fairness issue a 
little bit. Is it fair if you are a refund taxpayer--which I 
guess is what you are referring to when you say low- and 
middle-income working families. If you are a refund taxpayer, 
you are able to file electronically and get your refund 
therefore in 2 weeks, rather than 6 weeks, but there is no 
comparable shift for balance-due taxpayers. If you are going to 
talk about fairness, this is certainly a fairness issue that 
would mitigate toward extending the filing deadline for 
balance-due taxpayers, so that they could have some of that 
same benefit. I mean, if we are going to talk about fairness, I 
think your argument is exactly contrary to where we ought to 
move.
    I would just say one more thing about the extension. Mr. 
Lutes, in his response earlier to the questions regarding why 
people file electronically, said it is because they get a 
refund sooner. What are you going to do for 30 percent of the 
taxpayers who are balance-due filers? How are we going to meet 
our 80-percent goal, Mr. Dolan, if we do not do something for 
the 30 percent of taxpayers who are balance-due taxpayers. We 
have to do something for them. I have heard no good ideas today 
except extending that deadline for 30 days. And I understand 
that April 15 is sacrosanct, and it is an important date and so 
on. It will remain an important date for all but those who are 
willing to file electronically.
    If you look at the data it shows quite clearly that this is 
going to have an impact--and probably the only thing we can do, 
in terms incentive for the balance-due--If we do not get to the 
balance-due folks, we would not have solved the problem here, 
because there will still be those 30 percent taxpayers 
outstanding. They do tend to be the most complex returns. 
Therefore, guess what? They are the highest cost to the IRS. Is 
that correct, Mr. Dolan?
    Mr. Dolan. Sure it is, but at this point you said that you 
heard no good ideas.
    Mr. Portman. For the balance-due taxpayer.
    Mr. Dolan. Yes, we talked about the balance-due taxpayers, 
and perhaps it was when you were out. I think, creating the ACH 
debit capacity will help motivate them. One of the other 
feedbacks for us is, Why should I send you electronic--since I 
have to send you this paper check.
    Mr. Portman. You have an indication that that will move a 
lot of balance-due taxpayers into electronic filing?
    Mr. Dolan. I do not have a way of comparing that to the 
sliding filing dates. But all I would want to stipulate is, 
that I agree with you. Not only for the goal, but for good tax 
administration, we have to find ways to bring that balance-due 
taxpayer in. I think some combination of the ACH debit, and 
continuing to perfect the things we know are good about this 
system. It is still a cleaner, less error-prone, more 
certainty-packed transaction to do that, whether you are 
balance due or refund, electronically.
    Mr. Portman. Is it less than one-quarter of 1 percent error 
rate that you are experiencing in the EFTPS for electronic 
filing?
    Mr. Dolan. I would like to point out that the refund 
taxpayer is getting back money which the IRS has been holding 
all year; that was really his. And the balance-due taxpayer--we 
are after all theoretically on a pay-as-you-go system--has been 
holding money from the IRS.
    Mr. Portman. This is a longer discussion, but what is the 
unfairness of allowing anyone who wants to, to have this 
extension if they file electronically? Again, the benefits of 
electronic filing, Mr. Lutes has said very clearly, goes to 
those who are refund taxpayers. It is true. If you talk to 
people and if you look at surveys that is the answer. So, if we 
all have the same goal we need to address the balance-due 
taxpayer.
    Mr. Dolan. Well, I want to address the balance-due 
taxpayer. I share your goal on that; we should do it. But 
nevertheless if there is an accounting date when we settle 
accounts between taxpayers and IRS, it seems to me that that 
fairness dictates that that be uniform, whether you are refund 
or balance due.
    Mr. Portman. If you file electronically, it is for either 
type.
    Mr. Dolan. But it seems to me, why do you want to give a 
slow-pay person an incentive to be slower pay?
    Mr. Portman. Well, if you are talking about the revenue 
impact to the government we can get into that discussion.
    Mr. Dolan. That is a different question.
    Mr. Portman. I think strongly that the revenue impact will 
be positive in the end because of the cost savings the IRS will 
have because of electronic filing. So if that is your argument, 
not the fairness argument, we can get into that.
    Mr. Dolan. Well, I was not getting to that, but I am not 
sure that is true. I think we will have to see. But it seems to 
me that the same rules of when you have to pay and what time 
you have to be audited--all of those questions that have been 
raised ought to be uniform for all taxpayers.
    Mr. Portman. They will be uniform. The differentiation will 
be electronic versus nonelectronic, which is in the interest of 
the Federal Government, but certainly of Treasury and the IRS.
    Mr. Dolan. That is turning on something different from 
whether you are a taxpayer or not. It turns on how you file 
your return. I just do not see that as a criterion for 
differentiating between your obligations.
    Mr. Portman. I thank the witnesses. I look forward to 
ongoing dialog and for responses to some of those specific 
questions, because we do have a requirement at the Subcommittee 
to provide this report to the Full Committee on the 
legislation.
    Chairman Johnson. Thank you, Mr. Portman, and I urge you in 
the strongest terms possible that you do provide specific 
responses to the specific recommendations. I thought frankly 
that you would do that today. You chose to give a background, 
an update, and responses to a couple of the major ones, but it 
is very important that we get your written response to the 
individual recommendations of the Commission in a timely 
fashion. We would appreciate that.
    I want to announce that we are going to combine the last 
two panels, so that Members returning from this vote will have 
the opportunity to hear the testimony of everyone. And then if 
they cannot all stay for questioning, that is unfortunate, but 
I am anxious that they at least get a chance to hear the 
testimony of the seven remaining invited guests. And so we will 
combine the last two panels and resume in about 10 minutes. 
Thank you.
    [Recess.]
    Chairman Johnson. If the two concluding panels will both 
join us at the table, Mr. Zimmerman, Mr. Wolfe, Mr. Langer, Mr. 
Carver, Mr. Harris, Mr. Lane, and Ms. Kelley.
    We will start with Mr. Zimmerman, president of H&R Block 
Tax Services. Welcome, and thank you for being with us.

  STATEMENT OF THOMAS L. ZIMMERMAN, PRESIDENT, H&R BLOCK TAX 
             SERVICES, INC., KANSAS CITY, MISSOURI

    Mr. Zimmerman. Chairman Johnson, Ranking Member Coyne, and 
Members of the Subcommittee.
    Thank you for inviting us to testify. With your permission 
I would like to submit my statement for the record and 
summarize it briefly.
    Chairman Johnson. All of the testimony----
    Mr. Zimmerman. What is that?
    Chairman Johnson. All of the testimony will be included in 
the record, and you each will have the opportunity to make the 
points that you think most important to us. Thank you.
    Mr. Zimmerman. Thank you.
    I am Tom Zimmerman, president of H&R Block Tax Services 
Inc., the tax services subsidiary of H&R Block. Among our other 
subsidiaries is Block Financial, which distributes Kiplinger 
Tax Cut, tax preparation software.
    To highlight our views, I would like to make four points.
    First, we strongly support electronic filing. We provide 
the majority of the 15 million electronic returns the IRS now 
receives, and are working to expand that number.
    Second, the government and the private sector must work 
together to clear away obstacles to electronic filing that 
include cumbersome IRS procedures and public resistance based 
on inadequate information, fears, and, in some cases, cost.
    Third, the key to increasing electronic filing is massive 
IRS marketing, promotion and public education, which has been 
missing. Taxpayers, not tax preparers, must be convinced of the 
advantages.
    And fourth, while we support most of the Commissioner's 
recommendations for electronic filing, we strongly believe that 
Federal subsidies for electronic return transmitters and 
extending the tax filing deadlines for electronically filed 
returns are unneeded and unwise.
    First, H&R Block's role. H&R Block handles more than 18 
million returns in the United States, Canada, and Australia. 
All of our returns are filed electronically in Australia and 
over 65 percent in Canada. In the United States, where we 
process returns for 1 out of every 7 individual taxpayers, we 
provide 7.3 million, or about half, of the electronic returns 
the IRS receives from commercial practitioners.
    To promote electronic filing, we spend $2.4 million on 
television ads, have window banners in our 8,500 U.S. offices, 
distribute more than 5 million brochures in English and 
Spanish, target direct mail to 11.5 million prior clients, and 
highlight the benefits on our Web site, on a CompuServe forum, 
and in our ``Ask Henry'' syndicated newspaper column.
    Electronic filing is provided free as part of the enhanced 
services we offer at our 600 H&R Block Premium Offices and by 
some of our franchisees. On March 1 we generally lower our 
electronic filing fee from $25 to $15 at our other offices.
    We plan to reduce fees in steps over several years as 
volume increases. We will be reducing electronic filing fees by 
one-third for returns we prepare in the coming tax season.
    In addition, we recently concluded a 3-year agreement with 
CompuServe to upgrade their system to provide capacity to 
transmit up to 40 million electronic returns, an investment we 
believe shows our strong commitment to increased future 
electronic filing.
    Second, government and the private sector must work 
together to communicate the advantages of electronic filing and 
to clear away IRS obstacles and public misunderstanding. There 
are a number of advantages to filing electronically and a 
number of reasons taxpayers do not do so. For most of our 
clients, the compelling advantage and only driving force for 
electronic filing is a quick refund. Because of the desire for 
a quick refund, over 70% of our customers file early. Despite 
the advantages, most taxpayers who receive refunds still do not 
file electronically.
    In H&R Block's case, all of our returns are prepared on 
computer but only half are filed electronically. Nationally, 
half of all individual tax returns are prepared on computer, 
but only 13 percent are filed electronically.
     Reasons for the fall off vary.
    Many clients do not have enough information or have 
misinformation. Some fear an increased possibility of audit, 
worry about invasion of privacy, distrust computers, or are 
more comfortable with the familiar ritual of a trip to the post 
office.
    For some taxpayers cost may be a factor, although we 
believe this is less than might be expected. A recent USA 
Today/Gallup Poll from April 2, 1997, finds only 24 percent of 
paper filers cite fees as a reason for not filing 
electronically. The vast majority give other reasons.
    We tested free filing over several years in about one-third 
of our offices and found 60 percent of our clients preferred 
paper filing. So cultural factors, misinformation, or a lack of 
perceived value may be more significant barriers than cost.
     IRS procedures also add difficulty to electronic filing. 
Cumbersome paperwork, signature requirements for electronic 
returns, paperwork gluts over applications, revisions to 
participate in the electronic filing program, and delayed 
confirmation of electronic filer identification numbers could 
all be eliminated or streamlined.
    The application to become an electronic filer, for example, 
cannot be filed electronically.
    To clear these obstacles, government and industry must work 
together.
    My third point is that, short of mandating electronic 
filing, the key to increasing electronic filing is massive IRS 
marketing, promotion and public education, which has been 
missing. The emphasis must be on persuading taxpayers and just 
not tax preparers.
    The 1040 booklet most taxpayers receive covers many issues, 
but it has never emphasized the benefits of electronic filing. 
We recommend that page 1 of each 1040 booklet have a large, 
highlighted area asking taxpayers directly to, Please return 
electronically for faster refunds, fewer errors and followup 
letters, no greater audit risk, proof of filing, and lower IRS 
data entry costs which saves tax dollars.
    We are encouraged by plans being developed to launch an IRS 
public service television campaign next year with tie-in 
printed materials. Congress can help by relaxing appropriations 
restrictions on the use of IRS funds for paid advertising.
    Which brings me to my last point. We support most of the 
Commission's recommendations for electronic filing, but we 
strongly believe that Federal subsidies to electronic return 
transmitters and extending tax filing deadlines are unneeded, 
unwise, and divert resources from where our focus should be.
    We support the Commission's recommendations for realistic 
goals, clear strategy, private sector advice, and lower 
barriers to paperless filing and payment.
    But we do not believe a subsidy to electronic return 
transmitters of up to $3 per return for taxpayers not charged a 
fee is needed or appropriate, especially given pressures on the 
IRS budget.
    First, market forces are already moving to lower filing 
fees. In some cases electronic filing fees is already offered 
free, meaning subsidies would be a windfall for some firms. And 
electronic filing is up 19 percent this year without subsidy.
    Second, a subsidy of up to $3 per electronically filed 
return may cost the IRS money since the average data entry 
costs for paper return are less according to the IRS.
    Third, electronic return transmitters are ill equipped to 
verify whether their customers, mostly commercial electronic 
return originators, are actually providing free filing, and the 
program would be difficult to police.
    We believe subsidies are a bad idea, but if any are 
provided, they should go to taxpayers as a tax credit or to the 
70,000 plus electronic return originators who have the ability 
to enlist their customers, not to transmitters, most of whom 
have no direct contact with taxpayers.
    We also do not believe it is cost effective to extend the 
tax filing deadline to May 15 for electronic returns.
    If the primary target is the balance-due filer, who files 
late in the season and might see some advantage in slower 
payment, delaying that revenue by 1 month could cost the 
Treasury as much as $100 million, adding to the deficit.
    The taxpayer is already able to file for an automatic 
extension if he needs more time, so the only incentive is the 
benefit of slower payment, which increases Treasury borrowing 
costs. The benefit would be greatest for large balance-due 
filers.
    We believe the IRS should focus more productively on the 71 
percent of taxpayers that get a refund and have a stronger 
incentive to file electronically because they may want it 
quickly.
    Electronic filing is growing, even without an extended 
season or subsidies. We believe the key to further increases is 
not to lose focus on the need for a massive IRS marketing 
campaign that parallels private sector advances.
    We look forward to working with the Subcommittee on these 
issues. We are proud of the contribution we now make, and hope 
to build on it in the future. I am happy to respond to your 
questions.
    [The prepared statement follows:]

Statement of Thomas L. Zimmerman, President, H&R Block Tax Services, 
Inc., Kansas City, Missouri

    Thank you for inviting us to testify on the recommendations 
of the IRS Restructuring Commission to increase the number of 
electronically filed (ELF) tax returns.
    I'm Tom Zimmerman, president of H&R Block Tax Services, 
Inc., the tax services subsidiary of H&R Block. Among our other 
subsidiaries is Block Financial, which distributes Kiplinger 
TaxCut tax preparation software. I have worked in the 
tax preparation industry for 24 years, starting as a tax 
preparer and rising to district manager, regional director, 
divisional director, and executive vice president before 
assuming my present position.
    We strongly support electronic filing. We have worked 
closely over the past decade with the IRS and more recently 
with the Commission to accomplish that goal. We agree with many 
of the Commission's electronic filing recommendations, but 
believe that two of their recommendations--delaying tax filing 
deadlines and subsidizing private-sector tax return 
transmitters--would misplace priorities and resources. We do 
not agree that they are cost-effective ways to increase 
electronic filing.

                            H&R Block's Role

    H&R Block handles more than 18 million returns in the 
United States, Canada and Australia. All of our returns are 
filed electronically in Australia and over 65% in Canada. In 
the U.S., where we process returns for one out of every seven 
individual taxpayers, we provide 7.3 million, or about half, of 
the electronic returns the IRS receives from commercial 
practitioners. This year, the number of electronic returns we 
filed increased by 15.7%.
    To promote electronic filing, we spend $2.4 million on 
television ads, have window banners in our 8,500 U.S. offices, 
distribute more than 5 million brochures in English and 
Spanish, target direct mail to 11.5 million prior clients, and 
highlight the benefits on our web site, on a CompuServe forum, 
and in our ``Ask Henry'' syndicated newspaper column.
    Electronic filing is provided free as part of the enhanced 
service we offer at our 600 H&R Block Premium Offices and by 
some of our franchisees, and on March 1 we generally lower our 
electronic filing fee from $25 to $15 at our other offices. We 
plan to reduce fees in steps over several years as volume 
increases.
    We will be reducing electronic filing fees by a third for 
returns we prepare in the coming tax season. In addition, we 
recently concluded a three year agreement with CompuServe to 
upgrade their system to provide capacity to transmit up to 40 
million electronic returns, an investment we believe shows our 
strong commitment to increased future electronic filing.

                   Five Electronic Filing Advantages

    Five advantages of electronic filing are clear: (1) refunds 
in less than half the time of paper returns; (2) reduced 
follow-up IRS correspondence as social security number, math 
and IRS transcription errors are caught or eliminated [20%+ 
error rates for paper returns vs. less than 1% for electronic 
returns]; (3) no greater risk of audit; (4) proof the return 
has been filed; and (5) savings for the IRS with reduced data-
entry costs.
    For most of our clients, however, the compelling advantage 
and only driving force for electronic filing is a quick refund. 
Because of the desire for a quick refund, over 70% of our 
customers file early.

                     Obstacles to Electronic Filing

    Despite the advantages, most taxpayers who receive refunds 
still don't file electronically. In H&R Block's case, all of 
our returns are prepared on computer but only half are filed 
electronically. Nationally, half of all individual tax returns 
are prepared on computer, but only 13% are filed 
electronically. Reasons vary. Many clients don't have enough 
information or have misinformation. Some fear an increased 
possibility of audit, worry about invasion of privacy, distrust 
computers, or are more comfortable with the familiar ritual of 
a trip to the post office.
    For some taxpayers, cost may be a factor-although we 
believe this is less than might be expected. A recent USA 
Today/Gallup poll (4/2/97) finds only 24% of paper filers cite 
fees as a reason for not filing electronically while the vast 
majority give other reasons. We tested free filing over several 
years in about a third of our offices and found 60% of our 
clients still preferred paper filing. So cultural factors, 
misinformation, or a lack of perceived value may be more 
significant barriers than cost. We continue to search for the 
right mix of incentives and information to enable growing 
numbers of taxpayers to benefit from electronic filing.
    IRS procedures also add difficulty to electronic filing. 
Cumbersome signature requirements (Form 8453), paperwork gluts 
over applications and revisions to participate in the 
electronic filing program (Form 8633), and delayed confirmation 
of electronic filer identification numbers could all be 
eliminated or streamlined. The application to become an 
electronic filer, for example, can't be filed electronically. 
To clear these obstacles, government and industry must work 
together.

                         Where Focus Should Be

    Short of mandating electronic filing, we believe what is 
most needed is a massive IRS campaign, reinforced by the 
private sector, promoting and marketing electronic filing and 
educating taxpayers to the advantages.
    The 1040 booklet most taxpayers receive covers many issues, 
but it has never emphasized the benefits of electronic filing. 
We recommend that page one of each 1040 booklet have a large, 
highlighted area asking taxpayers directly to--

    Please file your return electronically for--
     Faster refunds
     Fewer errors and follow-up letters
     No greater audit risk
     Proof of filing
     Lower IRS data-entry costs which saves tax dollars
    See pages ____________ for more information.

    On subsequent pages, there would be a strong sales pitch.
    We are encouraged by plans being developed to launch an IRS 
public service TV campaign next year with tie-in printed 
materials and more information in the 1040 booklets. Past 
promotion of TeleFile has successfully boosted use by those who 
file simple returns. The emphasis must be on persuading 
taxpayers, not just tax preparers.
    Congress can help by relaxing appropriations restrictions 
on the use of IRS funds for paid advertising.
    We are also encouraged by renewed efforts at IRS. A history 
of inflated estimates, attempts at strategic plans, and delays 
in acting on repeated recommendations all suggest that IRS 
needed a spur to action. A new combination of IRS personnel 
changes, Treasury oversight, Congressional criticism, and 
Commission efforts may finally yield results. The problem with 
electronic filing has been less one of uncertain strategy than 
lack of resources and execution.
    We support the Commission's recommendations for realistic 
goals, clear strategy, private-sector advice, and lower 
barriers to paperless filing and payment. We strongly believe, 
however, that federal subsidies to electronic return 
transmitters and extending tax filing deadlines are unneeded, 
unwise, and divert resources from where our focus should be to 
increase electronic filing.

          Subsidizing Electronic Return Transmitters Unneeded

    We don't believe a subsidy to electronic return 
transmitters of up to $3 per return for taxpayers not charged a 
fee is needed or appropriate, especially given pressures on the 
IRS budget. First, market forces are already moving to lower 
filing fees-in some cases electronic filing is already offered 
free, meaning subsidies would be a windfall for some firms. 
Electronic filing is up 19% this year without subsidy. Second, 
subsidies may undermine the incentives some preparers now have 
to invest fees in electronic filing start-up costs including 
advertising and promotion, which could be counterproductive. 
Third, a subsidy of up to $3 per electronically filed return 
may cost the IRS money since average data entry costs for a 
paper return are less ($2.65 vs. $4.15), according to the IRS. 
And, fourth, electronic return transmitters are ill equipped to 
verify whether their customers-mostly commercial electronic 
return originators-are actually providing ``free'' filing, and 
the program would be difficult to police.
    We believe subsidies are a bad idea, but if any are 
provided, they should go to taxpayers as a credit or to the 
70,000+ electronic return originators who have the ability to 
enlist their customers, not to transmitters most of whom have 
no direct contact with taxpayers. Any subsidies should also be 
targeted as an incentive to new filers, not used to reward 
existing electronic filers.

                 Extending Tax Filing Deadlines Unwise

    We also don't believe it is cost-effective to extend the 
tax filing deadline to May 15 for electronic returns. If the 
primary target is the balance-due filer of a complex return who 
files late in the season and might see some advantage in slower 
payment, delaying that revenue by a month could cost the 
Treasury as much as $100 million, adding to the deficit. The 
taxpayer is already able to file for an automatic extension if 
he needs more time (although payment in full should be made by 
April 15), so the only incentive is the benefit of slower 
payment-which increases Treasury borrowing costs. The benefit 
would be greatest for large balance-due filers.
    New dates and a longer filing season would also add 
complexity, create taxpayer confusion, and, by diminishing the 
single focus on April 15 as the national deadline, contribute 
to weakened compliance.
    We believe the IRS should focus more productively on the 
71% of taxpayers that get a refund and have a considerably 
stronger incentive to file because they may want it quickly. 
They have a built-in incentive to file electronically--if we 
can educate them and promote the service.
    Electronic filing is growing now even without an extended 
season or subsidies. We believe the key to further increases is 
not to lose focus on the need for a massive IRS marketing 
campaign that parallels private-sector advances.
    We look forward to working with the Subcommittee on these 
issues. We're proud of the contribution we now make and hope to 
build on it in the future.
      

                                

    Chairman Johnson. Thank you.
    Mr. Wolfe.

 STATEMENT OF LARRY WOLFE, SENIOR VICE PRESIDENT, TAX PRODUCTS 
         DIVISION, INTUIT, INC., SAN DIEGO, CALIFORNIA

    Mr. Wolfe. Madam Chairman, Ranking Member Coyne, 
Representative Portman, other distinguished Members, it is an 
honor to make my first appearance before this Subcommittee, 
and, in fact, before any Committee of Congress.
    My name is Larry Wolfe. I am a CPA and vice president of 
the tax products division of Intuit, a U.S.-based software 
company, which produces a variety of tax and personal finance 
products, including TurboTax and MacIntax, the Nation's leading 
and best selling tax preparation software.
    More than 14 million tax returns were prepared using Intuit 
software last year. We followed closely and with great 
enthusiasm, the work done by the National Commission of the 
Restructuring of the IRS, led by Congressman Portman and 
Senator Kerrey. The Commission got it right.
    The Commission's report on electronic filing, taken as a 
whole, is an excellent and balanced set of recommendations, and 
it deserves Congress' support. There is uniform agreement that 
electronic filing of tax returns is desired. Paper returns are 
expensive to process, and while hard costs have proven 
difficult to determine, the best estimates of processing costs 
are about $7 per return, while truly paperless returns on the 
other hand cost only pennies.
    So what is keeping this from happening and what can 
Congress do to help achieve these goals? We believe two things 
need to be done. First, we need to eliminate everything that 
makes electronic filing less attractive than the current method 
of sending it in with simply a postage stamp. However, this is 
not enough. To simply get to the point where taxpayers see both 
methods as equal will not drive substantial increases in 
electronic filing. We must make electronic filing the preferred 
method of filing tax returns.
    H.R. 2292 directs the Secretary of Treasury to implement a 
plan to eliminate barriers, provide incentives, and use 
competitive market forces to increase electronic filing. Intuit 
supports this directive and encourages Congress to ensure that 
every barrier is removed, and that taxpayers are incentivised 
to file electronically.
    Specifically here are the barriers that we would like to 
see removed. First, eliminate the 8453 form; second, eliminate 
the requirement to file paper copies of W-2 forms; third, 
ensure that the IRS can accept all tax returns electronically; 
fourth, eliminate the need to send in a check with a balance-
due return; fifth, work to eliminate public skepticism of 
electronic filing. Taxpayers are uncertain about electronic 
filing, and need to be assured through IRS promotional 
campaigns that electronic filing does not increase the risk of 
audit, and is a safe efficient way to file the returns. We are 
delighted that the IRS is already working on this, and we 
believe that they will see benefits from that.
    Finally, most taxpayers pay between $10 and $25 to 
electronically file their returns. This amount must be reduced 
to zero in order to compete with the 32 cent stamp. The bill 
includes a provision that requires the Secretary to implement 
procedures to provide for the payments of incentives to 
transmitters if they make electronic filing free for their 
customers.
    Collectively, these provisions are dramatic, and Intuit 
fully supports all of them. They, however, will only make 
taxpayers ambivalent about whether to file on paper or 
electronically. In our opinion the IRS will not see the huge 
increases in electronic filing that they are looking for simply 
as a result of leveling the playingfield.
    The second step must be to make electronic filing the 
preferred method. We believe the following items are necessary 
to create a real movement to electronic filing:
    The first already exists. Only electronically filed returns 
get an acknowledgment of receipt from the IRS. Second, allow 
taxpayers who file electronically to view in a secure way 
certain information about their accounts with the IRS. Third, 
and most important, is to extend the filing deadline for 
electronic returns. This will be the catalyst that causes 
taxpayers to push the file electronically button, rather than 
the print button on their keyboards. We support this filing 
extension because we believe it is the most significant 
incentive for people who have balances due.
    We commend the Commission's work, and H.R. 2292 that 
resulted from it. We encourage Congress to support the 
provisions as a total package. As I conclude, I would be remiss 
if I did not mention how impressed we are with the markedly 
increased level of dialog, openness, and outreach by the senior 
Treasury and IRS officials. We have enjoyed those 
communications, and we believe that they will bear much fruit 
in the future. Thank you very much.
    [The prepared statement follows:]

Statement of Larry Wolfe, Senior Vice President, Tax Products Division, 
Intuit, Inc., San Diego, California

    Madame Chairman, Ranking Member Coyne, Representative 
Portman and other distinguished Members of the Committee: My 
name is Larry Wolfe. I am Senior Vice-President, Tax Products 
Division of Intuit, Inc., a U.S. based software company which 
produces a variety of tax and personal finance products 
including TurboTax and MacInTax, a personal and professional 
tax product that is the best selling tax preparation software 
in the United States. Fourteen million tax returns are prepared 
using our software. More generally, Intuit's mission is to 
improve the way individuals and small businesses manage their 
financial affairs. To that end, Intuit develops, markets and 
supports personal finance, small business accounting, tax 
preparation and other consumer software products. We provide 
related supplies and electronic financial services that enable 
individuals, professionals and small businesses to automate 
commonly performed financial tasks and better organize, 
understand, manage and plan their financial lives. It is an 
honor to appear before the Subcommittee.
    We followed closely, and with enthusiasm, the electronic 
filing review and recommendations made by the National 
Commission on Restructuring the IRS (``the Commission'') led by 
Senator Kerrey and Congressman Portman. The Commission got it 
right. The Commission's report on electronic filing, taken as a 
whole, is an excellent and balanced set of recommendations. It 
deserves Congress' support and we hope you will see that the 
IRS, who are making strides of their own in the same direction, 
is asked to implement it.

                     Benefits of Electronic Filing

    Chairman Johnson's statement announcing this hearing 
squarely addressed why incentives are needed. For Tax Year 
1996, approximately 120 million individual tax returns were 
filed. More than half, and probably as many as 60 million 
returns, were prepared by paid tax preparers using a variety of 
tax preparation software. In addition, at least 10 million tax 
returns were completed by individual self preparers who use 
consumer-oriented tax preparation software products such as 
Intuit's. Only a small percentage of these electronically 
prepared tax returns, less than 20 million, were submitted to 
the government in an electronic format, and, we have been told 
the majority of electronically submitted tax returns are 
RAL's--refund anticipation loan recipients. Collectively, most 
current electronic filers were receiving refunds. For these 
reasons, the number of electronically submitted returns, while 
increasing, is generally static when compared with the total 
number of returns that could be returned in electronic format.
    The Commission, the IRS and this Subcommittee have 
recognized that there is an enormous financial and service 
benefit to the government in electronically receiving the 
returns currently prepared in electronic format, a number which 
is growing each year. Although approximately 70 million returns 
(out of the 120 million returns received by IRS) currently are 
prepared electronically, approximately 60 million taxpayers 
using PC's, or preparers, print out their tax return on paper 
and mail it in. The IRS is then required to pay approximately 
8,000 full time and, more importantly, 21,000 seasonally hired 
workers to manually enter only 40% of the information contained 
in these paper returns on IRS computers. This manual handling 
of paper returns delays processing and introduces new errors to 
the process.
    The IRS figures reported regarding labor costs vary widely. 
Assuming all returns take roughly equivalent time, the total 
process of labor and service center cost to IRS is $7 per paper 
return. During the press conference releasing the Commission's 
report, Co-Chair of the Commission, Congressman Portman, 
emphasized that the Commission found the $7 figure to be the 
best available estimate.
    In addition, the Commissions Report found that the error 
rate for manually prepared paper returns is approximately 20%. 
Addressing a return with errors requires multiple handling in 
data processing, and consequently the cost of each wrong return 
is far more than the estimated $7 average. Because 
electronically filed returns usually are prepared by computer 
programs with built in software checks, undergo pre-screening 
by the IRS, and experience no key punch errors, the Commission 
estimated the error rate for electronically filed returns to be 
less than one percent. This low error volume will translate 
into a huge cost savings if electronic returns grow.
    Moreover, the actual cost of inputting such returns 
requires aggregating labor, facility costs and computing. For 
example, for every 15 million additional returns obtained 
electronically, IRS could eliminate the cost of building and 
maintaining one major service center.
    As Chairman Johnson's announcement statement accurately 
described and the Commission reported, returns prepared and 
received electronically actually have a significantly lower 
cost to process and have a higher accuracy rate than those 
returns that are prepared manually. The Commissions Report 
estimated that the cost of processing electronic returns was at 
$1.15 per return, including the processing of additional 
documents to authenticate the return, which costs H.R. 2292 
will hopefully reduce.

 Intuit Supports Commission Recommendations In the Proposed Legislation

    Specifically, we believe the following six recommendations, 
made by the Commission and already included in Title II of H.R. 
2292, are critical and necessary:
    First, the requirement to file the 8453 signature document 
is being dropped. A signature alternative will be identified 
and enabled. This will eliminate a significant barrier to 
electronic filing that remains both for returns professionally 
prepared and those self prepared. Under the Telefile program, 
IRS already has evolved a way to provide personal PIN numbers 
to taxpayers. Some method must be utilized to authenticate each 
return and remove the current need to require signature forms, 
or mailing a paper return for matching with an electronic 
record. This will remove a barrier in the current system.
    Second, the bill permits a limited power of attorney 
permitting the taxpayer to authorize the IRS to speak to their 
professional tax preparer with respect to an electronically 
filed individual return. This will provide an incentive for 
preparers to encourage electronic returns.
    Third, moving towards secure account inquiry by individual 
taxpayers is appropriately recognized, as is the need to 
protect private information. This will provide an incentive for 
taxpayers and encourage filing of electronic returns.
    Fourth, an extension of 30 days for electronically filed 
returns is being offered, and paperless payment options are 
being enabled. This is a major incentive to taxpayers to 
electronically file. In concert, the balance due filer, who 
today has no incentive to file electronically, will find it 
easier and more attractive to file electronically.
    Fifth, the bill requires IRS to incorporate market 
incentives for electronic filing to bring the cost of 
electronic filing into equality with a $.32 stamp. I will 
return to this issue for some additional comments, but cost to 
taxpayers is a key barrier to electronic filing.
    Finally, a strategic pe industries increased confidence 
that the IRS understands the challenge, the benefits and the 
opportunities to make electronic filing and payment the 
preferred and most convenient means of filing.

 Commission Recommendations That Intuit Believes Should Be Included in 
                     the Subcommittee's Legislation

    There are four recommendations identified in the report of 
the National Commission on Restructuring the IRS: A Vision for 
a New IRS, that H.R. 2292 has not, as yet, embraced. We would 
recommend that four additional issues be included prior to 
passage of the bill. These include:
    The first, and most critical, is the need to eliminate the 
requirement to file a W2 for electronically filed returns. 
Paper W2s are currently attached to the paper 8453 signature 
document when the electronic filing method is used. Eliminating 
the requirement to file a paper 8453 document without also 
eliminating the requirement to file paper W2s will not truly 
provide a paperless filing. This barrier to electronic filing 
must be removed.
    Second, the Commission recommended expanding the range of 
1040 returns that can be filed electronically. Today, there are 
limitations in the electronic filing program (for example, the 
number of stock transactions which can be reported on an 
electronically filed return) which exclude a number of 1040s 
from the electronic filing process. The returns excluded are 
typically the more complex, and therefore, more costly to 
keypunch. The IRS should be required, over a reasonable period 
of time, to find ways for all returns to be permitted to be 
electronically filed. This will remove an unnecessary barrier 
to electronic filing.
    Third, the extension incentive for balance due filers 
should be accelerated. This is a huge incentive to a group that 
will not otherwise file electronically, and the Committee 
should clarify the effective date of this provision.
    Finally, the Commission recommended permitting the IRS to 
promote electronic filing. Today, the only promotional avenue 
the IRS has for electronic filing is public service 
announcements. These rarely run during prime time. To 
aggressively advance and promote electronic filing, the IRS 
should be authorized and funded to promote this program in 
magazines, newsparrier to IRS effectiveness should be removed.

                    Incentives: A Critical Component

    H.R. 2292, Section 201(c) embraces a version of the 
Commission's recommendation on incentives, an issue that the 
Commission found is of paramount importance in increasing the 
number of electronically filed returns.
    From an individual taxpayers perspective, there is little 
or no economic incentive to file electronically. Taxpayers are 
generally charged service fees ranging from $10 to $25 for 
electronic filing. Occasional temporary promotions of 
electronic filing at lower or no cost are just that--promotions 
that are not likely to be continued. Therefore, a rational 
taxpayer will continue to choose a $.32 stamp to mail a printed 
return. A series of customer surveys conducted by independent 
third parties have stated that cost is the single greatest 
impediment to electronic filing. (A copy of one such polling 
study, and another reported in USA Today are attached). We have 
heard other companies say that cost of electronic filing is not 
the main issue for their customers. We strongly disagree, and 
would suggest that the Committee seek hard data if cost is not 
perceived to be the most important issue. We do agree cost is 
not the only issue.
    In fact, in the polling data, 53% of these people surveyed 
said economic incentives should be used to drive up electronic 
filing, 40% said they didn't have an opinion, and only 7% 
opposed use of economic incentives.
    An economic incentive approach is appropriate for the 
following reasons:
    First, a proposed incentive system reduces governmental and 
taxpayer risk to a minimum. IRS should only be asked to pay for 
tax returns it actually received in the desired format. IRS 
currently acknowledges receipt for filings it receives from 
third parties. Electronic filing actually results in greater 
certainty for taxpayers because they will have a record of 
actual receipt of their return by IRS. (Paper returns do not 
result in such receipts.) Currently, service providers and the 
IRS are already doing this exact function for millions of 
returns--the Commission proposed shifting a very high cost from 
the individual taxpayer to a much smaller cost borne by all 
taxpayers, in order to reduce total expenditures on IRS 
operations. The IRS has stated that it has the ability to 
accept as many as 100 million electronically filed returns 
annually without requiring any new systems development effort. 
Current IRS standards appropriately require suitability checks 
of the transmitter--such as the technical background of the 
concern, credit worthiness, and necessary background checks on 
employees.
    Second, this incentive does not require the IRS to enable 
Internet access. Instead, transmitters would send their batched 
returns on the public telephone network through a dedicated 
connection to the IRS--as they currently do for the returns IRS 
already obtains electronically. As Internet security and 
encryption concerns are satisfied, the service providers can 
utilize the Internet.
    Finally, it makes economic sense once all costs of manually 
processing paper returns are accumulated, that the IRS will 
still net as much as $4 per return electronically filed, even 
if it pays a $3 incentive fee per return, for every return, 
every single year. The savings obviously would multiply if 10 
million, 20 million, or more additional returns, already in 
electronic format, were obtained in this manner.
    It is the transmitters who have the costs, for example, of 
telephone lines, servers, and staff at call centers to make 
electronic filing work. Intuit would be pleased with the 
incentive being paid wherever it will be effective, but it is 
not clear how payments or credits to taxpayers will solve the 
cost problem of transmitters.
    The Commission's recommended incentive proposal would 
permit a variety of vendors to provide electronic filing free 
to the taxpayers. The resulting surge in ELF should save the 
government substantial sums, year after year.

                           Drafting Comments

    We note that Section 201(c)(2)(c) appears to distinguish 
between preparer returns and self-prepared returns. We see no 
policy reason to make such a distinction.
    As a matter of drafting the numerous effective dates in the 
bill, we were uncertain whether Section 202 contained an 
effective date for corporate and individual returns.

                   No Competition with Private Sector

    There is one other area where the Subcommittee could 
clarify existing law and practice. Intuit and other software 
companies, and I believe the preparer community, have no 
objection to IRS aggressively making their forms available on 
line. We and others spend tens of millions of dollars 
integrating a software package that we warrant and that 
responds to our customer needs. This bill should include simple 
language indicating it is congressional policy to rely upon 
value added private concerns to continue to service this 
private market without government competition. We believe such 
a firm policy guide would be useful, and consistent with OMB 
policy circulars.

                     Dialogue with Treasury and IRS

    The level of dialogue, openness and outreach by senior 
Treasury and IRS officials has markedly increased in the past 
year. We believe Congress should be made aware of this valuable 
open channel between the stakeholders in the system.

                               Conclusion

    While the IRS has stated they have sufficient legal 
authority to implement this proposal, H.R. 2292 will provide 
the necessary final push. Intuit believes the House Ways and 
Means Committee's efforts are critical in assisting the IRS.
      

                                

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    Chairman Johnson. Thank you very much.
     Mr. Langer.

STATEMENT OF JOSEPH W. LANGER, PRESIDENT, NATIONAL ASSOCIATION 
      OF COMPUTERIZED TAX PROCESSORS, GREEN BAY, WISCONSIN

    Mr. Langer. Madam Chairman, Members of the Oversight 
Subcommittee, I appreciate the opportunity to testify on the 
issue of electronic tax filing. The work done by the National 
Commission on Restructuring the Internal Revenue Service, as 
well as the changes recommended in H.R. 2292, are sweeping and 
appropriate, and they address the issues facing electronic 
filing today.
    My name is Joe Langer. I am the president of the National 
Association of Computerized Tax Processors, and for the last 8 
years, I have been the chair of the electronic filing committee 
of this association. And my profession, I am president of 
Nelco, Inc., an electronic filing service provider and tax form 
provider from Green Bay, Wisconsin. Our products are used by 
over 100 companies throughout the country; different tax 
preparation software companies.
    Through my term as electronic filing chair, we have worked 
with the IRS and State agencies to promote standards and make 
recommendations to simplify and enhance electronic filing. This 
past year alone we submitted a paper making 22 recommendations 
to the Internal Revenue Service. The NACTP as an organization 
continues to promote professional standards for software 
development, and to promote a consistent method of automated 
tax filing.
    Over the life of the Federal electronic filing system, the 
IRS has considered various types of signature alternatives. 
While this consideration continues, States are enabling 
paperless electronic filing systems, which either require no 
signature document for filing, or require the return--to retain 
a copy of the electronic return.
    Today the State of Montana requires no signature document 
at all, and 17 States require the signature document to be 
prepared, but not submitted. It is time the IRS accepts one of 
these alternatives.
    Digital signatures using public and private keys are not 
fully perfected to be implemented on a nationwide basis. 
Personal identification numbers are not yet developed for tax 
filing, and some have recommended a separate PIN for each type 
of filing. Until these systems are updated, or a new system can 
be made available to all taxpayers, another alternative, such 
as those being implemented at the State level must be deployed.
    True paperless filing will be a great benefit to electronic 
filing, and promote its use over paper filing. Eliminating 
paper will reduce the cost to both individual and tax 
preparers. However, to be truly paperless the IRS must 
eliminate the need for filing Form 8453. The electronic filing 
system must accept all forms, all schedules. In addition, all 
forms, including the W-2 worksheets or explanation, which are 
attached to an electronic return must be submitted 
electronically, not on paper. For the true paperless system, 
electronic filing will grow substantially. The only way to 
accomplish this goal is to invest in the technology for the 
electronic filing system.
    The proposed legislation in the Commission's report called 
for an incentive to electronic filing transmitter. Our 
membership believes to quickly change filing behavior and 
achieve the highest long-term results, the taxpayer should 
receive the incentive to file electronically. However, because 
of the administrative ability of such an effort and the 
perceived inequity with paper filers, and incentive-targeted 
electronic filing infrastructures, those offering the service 
will accomplish growth in electronic filing, and reduce the 
burden on the professional tax preparer.
    There are currently over 60,000 registered professional 
electronic filers today. Only 2,500 transmit direct to the IRS. 
The remaining 75,000 plus use a value-added network, such as a 
third-party transmitter. Third-party transmitters charge tax 
practitioners, from nothing for free electronic line to $10 a 
return. Some include their electronic filing costs for software 
development, product support and electronic transmission; in a 
lump sum, the software. Most like to charge a separate fee for 
the returns transmitted.
    An incentive proposed of $1 to $2 will not cover these 
costs. Third-party transmitters will pass these incentives on 
to the tax practitioner clients, and continue to compete on a 
basis of the products and services that they offer. 
Practitioners costs include these electronic filing costs, as 
well as the additional processing costs for an electronically 
filed return.
    Because not every return can be filed electronically, and 
an electronic return is not paperless, the practitioner must 
sort returns into paper, and electronic, and fill out forms for 
every electronic returns. Practitioners will welcome these 
incentives. However, without changes to the electronic filing 
system to accept all forms, and to become entirely paperless, 
the tax practitioners will not fully embrace electronic filing.
    Consumers can purchase the software to prepare the return, 
and file electronically. Companies today charge between $10 and 
$15 to file electronically. With an incentive, the companies 
offering electronic--to consumers can reduce their cost for 
development, support and transmission. However, because there 
is a separate fee charged for electronic filing, the remaining 
costs will be added to the cost of the package, resulting in 
higher software costs.
    Legislation proposes extensions for electronic file 
returns. NACTP has actively recommended creating nonfinancial 
incentives to promote electronic filing. Because there is no 
IRS data required for an electronic filed return, we support 
extensions to file electronically filed returns.
    In addition, allowing electronic return originators to 
communicate electronically, file returns will also benefit for 
the electronic filer. NACTP has recommended the electronic 
communication of notices, delays in processing, and requests 
for additional information to be sent electronically to the 
electronic filer. By doing this the tax professional can 
quickly satisfy the request from the IRS, and eliminate 
additional burden on taxpayers.
    Balance-due filers have not yet been attracted to the 
electronic filing system. The ability to accept credit cards, 
debit cards, as well as electronic funds transfer should 
encourage balance-due filers. However, the major impetus behind 
balance-due filing will occur when practitioners include 
electronic filing as their standard method of filing all 
returns.
    Access to a taxpayer's account through a secure and private 
method will add to the attractiveness of electronic filing. 
Taxpayers can obtain answers to their questions regarding their 
return and refund status, rather than calling the IRS.
    During 1995 and 1996 I served on the IRS Commissioner's 
Advisory Group while participating on the Commissioner's 
Advisory Group and many subcommittees on such broad topics as 
taxpayer privacy, taxpayer service, and electronic filing.
    For electronic filing the occasional topic and meeting did 
not serve to address the serious issues facing this system. We 
vigorously endorse the recommendation to establish a separate 
Electronic Commerce Advisory Group. This group must be 
comprised by the IRS, a tax practitioner and computerized 
processor group. It is a blend of these inputs which will 
result in active and growing electronic filing. The issues must 
be definable and discussed openly. The IRS just accepts these 
recommendations and acts on them with the full support of the 
service. Electronic filing only works with a strong 
relationship with external stakeholders.
    Today there exist an inequity between professional paper 
return filers and electronic return filers. Electronic return 
filers must go through an application process, including 
fingerprinting and background checks, credit checks, and IRS 
suitability. Paper return filers have no such requirement.
    During my tenure on the Commissioner's Advisory Group we 
recommended, along with the help of the director of practice, a 
system of registering all tax preparers. In fact, Joe Lane has 
the recommendation at the back of his testimony.
    Our intention was to require registration of all paper and 
electronic filers to create one process for all tax----
    Chairman Johnson. Mr. Langer, I have to ask you to kind of 
wrap up, so that we can get to more people before we have to go 
vote.
    Mr. Langer. In summary, the National Association of 
Computerized Tax Processors actively endorses division for the 
new IRS, published by the National Commission on Restructuring 
the IRS. The pending legislation capitalizes these 
recommendations, and seeks for a way to promote electronic 
filing. Through electronic filing service to the taxpayer can 
be greatly enhanced and the cost of the service reduced. Thank 
you.
    [The prepared statement follows:]

Statement of Joseph W. Langer, President, National Association of 
Computerized Tax Processors, Green Bay, Wisconsin

                              Introduction

    Madame Chairman and members of the Oversight Subcommittee, 
I appreciate the opportunity to testify before this committee 
on the issue of Electronic Tax Filing. The work done by the 
National Commission on Restructuring the Internal Revenue 
Service, as well as the changes recommended in Bill H.R. 2292, 
are very sweeping, and appropriately address the issues facing 
electronic filing today.
    My name is Joseph W. Langer, and I am president of the 
National Association of Computerized Tax Processors (NACTP) and 
for the last 8 years I have been Chairman of the NACTP's 
Committee on Electronic Tax Filing. In my profession, I am 
President of Nelco, Inc., an electronic filing service provider 
and tax form provider based out of Green Bay, Wisconsin. Our 
products are used in over 100 tax software companies throughout 
the country. Over my term as Electronic Filing chair, we have 
worked with IRS and state agencies to promote standards and 
make recommendations to simplify and enhance the electronic 
filing system. This past year alone, we submitted a paper 
outlining 22 recommendations to the IRS.
    The National Association of Computerized Tax Processors 
(NACTP) was founded in 1969 as a cooperative effort of 
competing tax service bureaus to create standards in tax 
processing and establish formal links with federal and state 
agencies. Over the past 28 years, the NACTP has grown to an 
organization of 50 companies offering tax preparation software, 
electronic filing services, and tax form services. Our 
organization continues to promote professional standards for 
software development and consistent methods of tax filing. We 
look for ways to encourage and simplify automated filing.

                  Digital Signatures/Paperless Filing

    Over the life of Federal electronic filing, the IRS has 
considered various types of signature alternatives. While this 
consideration continues, states are enabling paperless 
electronic filing systems which either require no signature 
document for filing or require the return originator to retain 
a signed copy of an electronic return. Today, one state (the 
state of Montana) requires no signature document and 17 states 
require the signature document to be prepared but not 
submitted. It is time the IRS accepts one of these 
alternatives.
    Digital signatures, using public and private keys, are not 
fully perfected to be implemented on a nationwide basis. 
Personal identification numbers (PIN numbers) are not yet 
developed for tax filing and may require a separate PIN for 
each type of filing. Until these systems are updated, or a new 
system can be made available to all taxpayers, another 
alternative, such as those being implemented at the state 
level, must be deployed.
    True paperless filing will be a great benefit to electronic 
filing and promote its use over paper filing. Eliminating paper 
will reduce costs for both individuals and tax preparers. 
However, to be truly paperless, the IRS must eliminate the 
requirement for filing Form 8453. The electronic filing system 
must accept all forms and schedules. In addition, other forms, 
worksheets, or explanations attached to an electronic return 
must be able to be submitted electronically, not on paper. With 
a true paperless system, electronic filing will grow 
substantially. The only way to accomplish these goals is to 
invest in technology for the electronic filing system.

                          Financial Incentives

    The proposed legislation and the Commission's report called 
for an incentive to the electronic filing transmitter. Our 
membership believes to quickly change filing behavior and 
achieve the highest long-term results, the taxpayer should 
receive the incentive to file electronically. However, because 
of the administrability of this type of effort and the 
perceived inequity with paper filers, an incentive targeted at 
the electronic filing infrastructure will accomplish a growth 
in electronic submissions by reducing the burden on the 
professional tax practitioner.

Practitioner ELF 

    There are currently over 60,000 registered professional 
electronic filers. Only about 2,500 transmit directly to the 
IRS. The remaining 57,000 plus use a value added network call a 
``third-party transmitter.'' Third-party transmitters charge 
tax practitioners from $0 (that is, free electronic filing) to 
$10 per return. Some bury their electronic filing costs for 
software development, product support, and electronic 
transmissions in a lump sum software cost. Most elect to charge 
a separate fee for each return transmitted to cover these 
costs.
    The incentive proposed of $1-$2 will not cover these costs. 
Because of this, third-party transmitters will pass on these 
incentives to their tax practitioner clients and continue to 
compete based on the products and services they offer. 
Practitioner's costs include the electronic filing fees and the 
additional processing costs required for an electronically 
filed return. Because not every return can be filed 
electronically and an electronic return is not paperless, the 
practitioners sort returns into paper and electronic and fill 
out paper forms for each electronic return.
    Practitioners will welcome these incentives. However, 
without changes to the electronic filing system to accept all 
returns and to become entirely paperless, tax practitioners 
will not fully embrace electronic filing.

Online Filing (Non-Practitioner ELF) 

    Consumers can purchase software to prepare their tax return 
and file their return electronically. Companies charge $9.95 to 
$14.95 to file electronically. With an incentive, companies 
offering electronic filing to consumers can reduce their costs 
for development, support and transmission. Because a separate 
fee cannot be charged for electronic filing, the remaining 
costs will be added to the cost of the package resulting in 
higher software costs.

                        Non-Financial Incentives

    The legislation proposes extensions for electronically 
filed returns. The NACTP has actively recommended creating non-
financial incentives to promote electronic filing. Because 
there is no IRS data entry required for an electronically filed 
return, we support extensions to file for electronically filed 
returns.
    In addition, allowing the electronic return originator to 
communicate on electronically filed returns will also be a 
benefit for the electronic filer. The NACTP has recommended the 
electronic communication of notices, delays in processing, and 
requests for additional information be sent electronically to 
the electronic filer. By doing this, the tax professional can 
quickly satisfy the request from the IRS as well as eliminating 
additional burden on the taxpayer.
    Balance due filers have not yet been attracted to the 
electronic filing system. The ability to accept credit or debit 
cards, as well as electronic funds transfer, should encourage 
balance due filers. The major impetus behind balance due filing 
will occur when a practitioner includes electronic filing as 
their standard offer.
    Access to a taxpayer's account through a secure and private 
method will add to the attractiveness of electronic filing. 
Taxpayers can obtain answers to their questions regarding 
return and refund status rather than calling the IRS. This 
would be another benefit for electronic filing. 

                   Electronic Commerce Advisory Group

    During 1995 and 1996, I served on the IRS Commissioner's 
Advisory Group (CAG). While on the CAG, I participated in many 
subgroups on such topics as taxpayer privacy, taxpayer service, 
and electronic filing. With the broad approach to this group, 
no single topic received a strong focus. For electronic filing, 
the occasional topic and meeting did not serve to address the 
serious issues facing the system.
    We vigorously endorse the recommendation to establish a 
separate Electronic Commerce Advisory Group (ECAG). This group 
must be comprised of the IRS, tax practitioner, and 
computerized tax processor groups. It is a blend of these 
inputs, which result in an active and growing electronic filing 
partnership.
    The issues must be definable and discussed openly. The 
members of the group must be selected to contribute to the 
process and search for real solutions to the electronic filing 
challenges. The IRS must accept these recommendations and act 
on them with the full support of the Service. Electronic filing 
only works with a strong relationship with external 
stakeholders.

                        Regulating Tax Preparers

    Today, there exists an inequity between paper return filers 
and electronic return filers. Electronic return filers must go 
through an application process that includes fingerprinting 
with background checks, credit checks, and IRS suitability 
processing. Paper return filers have no such requirements. 
During my tenure on the Commissioner's Advisory Group, we 
recommended, along with the help of the Director of Practice, a 
system of registering all tax preparers. Our intention was to 
require registration of all paper and electronic filers to 
create one process that all tax preparers could use. We would 
require a minimum of continuing education for all tax 
preparers.
    The legislation envisions regulating all tax preparers 
under Circular 230. While this can be the ultimate goal, many 
tax practitioners who are not affiliated with a national 
professional organization are not looking to represent their 
clients before the Internal Revenue Service. Therefore, we 
believe some type of registration for all preparers is 
appropriate. Regulation through Circular 230 can be an ultimate 
goal, but steps can be taken prior to imposing Circular 230 on 
all tax preparers. When this happens, the current electronic 
filing application process should be eliminated. 

                               Conclusion

    The National Association of Computerized Tax Processors 
actively endorses The Vision For A New IRS, published by the 
National Commission on Restructuring the Internal Revenue 
Service. The pending legislation capsulizes these 
recommendations and seeks ways to promote electronic filing. 
Through electronic filing, service to the taxpayer can be 
greatly enhanced and cost for the Internal Revenue Service can 
be reduced. This results in a system of mutual benefit for the 
taxpayer, the IRS, and the American public.
    Thank you for this opportunity today.
      

                                

    Chairman Johnson. Your testimony, Mr. Harris' testimony. So 
if you will; try to notice when the light turns red and wrap it 
up. You have about 6 minutes, then we can go over and vote, 
about 7 minutes, and hear the last two.

   STATEMENT OF ROBERT J. CARVER, CONSULTANT, KACHINA GROUP, 
                      ANNAPOLIS, MARYLAND

    Mr. Carver. I would be happy to do that. Madam Chair, I am 
happy to be here today to talk a little bit about why 
electronic filing is important to the IRS.
    My name is Robert Carver, and for 30 years I was in the 
service center operations of the IRS. My last job was managing 
the 10 computer centers in the service centers.
    The effectiveness of IRS is directly related to the quality 
of the information they can get their hands on. While we are 
all talking about exploding information age and all the rest of 
it, the IRS must keep up with that explosion and make some 
sense out of it. the way I like to describe this, is in the 
fifties the popular press said that most couples had 2.5 
children, and in the nineties we found ourselves, most children 
have 2.5 parents, and those parents have 2.5 employers, and 
keep their money and so forth in 2 or 3 banks. And the world is 
certainly getting more complicated.
    Businesses now have independent contractors, part-time 
helpers, consultants. They are multinational, they are 
interstate, and in the past they were a lot easier to keep 
track of for the IRS.
    Now the IRS expects each of these taxpayers and businesses 
to send a report in once a year so that the correct amount of 
tax can be determined and paid. The IRS then must validate 
information on those tax returns between and among them; 
between the businesses, the banks, the pension funds, and the 
individuals filing their return.
    We expect this annual validation to be done every year, and 
we expect it to be done without bothering the taxpayers, who 
have sent this information in. IRS would love that same 
ability, but they need information to do that. Lacking that 
information, they must bother each of us to ask for more 
information during the processes they go through to validate.
    To get back to my enthusiasm for electronic filing however, 
I would like to describe a little bit about how IRS gets the 
information they use. Presently the IRS only uses about 40 
percent of the data that the Internal Revenue Code desires, and 
we as taxpayers pay our time and money to send into them. And 
this sad fact is a result of two things that are well known.
    The first is the state of the IRS computers that were 
designed in the sixties; and the second is the high cost of 
transcribing paper tax returns to get the information into 
electronic format. And I have to add, I only see more complex 
information being regarded by the IRS in the future, so this 
will only get worse.
    When it is all said and done, there are only three ways the 
IRS can get the information it needs to do its job. The first 
is to hire more and more transcribers, and at the present time 
to change that 40-percent figure they would need at least two 
to three times the number they presently have in today's 
environment. These transcribers require typing skills, a skill 
that is not taught by our schools anymore, and not utilized in 
the business environment, so the pool of trained transcribers 
is diminishing rapidly.
    The second way to get this information to the IRS is to 
optically scan or image the paper tax returns. My experience 
with this particular technology is, that on a handwritten 
document the best anybody can do is about 50-percent 
recognition. If you want the rest of the data you have to send 
it over to somebody to again, transcribe the additional amount 
in. The rate's a little better on computer-generated 
information, but it is still nowhere near 100 percent.
    The only feasible way for IRS to receive, validate, and 
manipulate all this data is through electronic filing. The data 
exists in electronic formats in businesses, and in taxpayers' 
computers, and in other government agencies' computers. To 
continue to convert these electronic files to printed paper, 
send it to the IRS, who must then transcribe or otherwise scan 
it back into an electronic format is at best, time consuming 
and very costly.
    In addition, since there will never be enough funding to 
hire all the transcribers necessary, the IRS will not be able 
to do the job we expect it to do. The IRS needs vast amounts of 
information to do its job. We should all encourage using the 
most cost-effective and data-rich system available. In my 
opinion, electronic filing is the only system that satisfies 
that need. Thank you.
    [The prepared statement follows:]

Statement of Robert J. Carver, Consultant, Kachina Group, Annapolis, 
Maryland; and former Executive Officer, Service Center Operations, 
Internal Revenue Service

                              Introduction

    I am pleased to address the Subcommittee today on the 
subject of the importance of electronic filing to the Internal 
Revenue Service. My 30-year career with IRS has been involved 
with the returns processing operation. I also held a position 
as a Revenue Officer, but the majority of my time has been 
spent in the ten Returns Processing Service Centers. My last 
position before retiring in October 1995 was that of Executive 
Officer for Service Center operations. That assignment involved 
managing the ten processing centers with an annual operating 
budget of $1.3 billion. I was responsible for the performance 
of approximately 60,000 employees. In addition, I served on the 
President's Welfare Reform Commission in 1995 as the IRS 
representative.
    At present, I am working with the Council for Electronic 
Revenue Communication Advancement (CERCA), which is an 
organization of companies to further electronic transmission 
and processing of tax information. This organization is not 
limited to dealing with the IRS but involves other Federal 
taxing and State agencies. CERCA is a two-year old association 
representing a broad cross-section of private companies and 
Government agencies leading in the movement toward electronic 
financial services. In addition, I am presently consulting with 
a leading software company, a financial institution, and a 
major accounting firm; but, my comments today are mine and are 
based on my 30 years experience with IRS and, specifically, 
with the experience I have had with managing the returns 
processing operation.

                         IRS Mission and Needs

    IRS' Mission is compliance; they must:
    Ensure that all taxpayers file tax returns and reports, 
report all income, expenses, deductions, and information 
correctly, pay the correct amount of taxes, penalties, and 
interest for domestic and international taxpayers.
    Administer social programs; i.e., earned income tax credit.
    Gather and validate data for statistics of income (SOI).
    Interact with others; i.e., third parties (banks, 
employers, other financial institutions), 50 states, other 
government agencies, and other countries' government agencies.
    Provide service to taxpayers using telephones, computers, 
and written correspondence.
    To accomplish this mission, the IRS must gather and 
manipulate vast amounts of information, and the future only 
holds promise of ever more data. This data manipulation 
naturally falls into two phases of data processing.
     The first is accumulation and validation.
     The second is manipulation/comparison.
    I will concentrate on the first phase for my testimony 
today but, before I do, I would like to briefly outline the 
several discrete information realities facing the IRS.

Taxpayer Service

    Responsibilities: Receive and process 200+ million tax 
returns and 3+ billion information documents (for tax and 
statistics of income), provide customer service for tax law 
questions and account questions.
    Taxpayer Service Needs: The ability to research return 
information, third party information, and modify (adjust) that 
data.

Collection

    Responsibilities: Payment of all types of taxes (income, 
excise, pension, estate, etc.); oversight of trust funds (FICA, 
SSA, etc.); validation of accounting methods used by businesses 
(employee-employer relationships); enforcement of payments due 
(seizures, sale, garnishment of wages and financial accounts). 
Collection Needs: Access to business, financial, and state 
data, and local property and licensing information. Access to 
federal, state, and local legal services, sheriffs, and other 
process servers.

Examination (Audit)

    Responsibilities: Ensure taxpayers use valid accounting 
practices for income and tax liability determinations; identify 
and correct underreporting of income, bartering transactions, 
and other schemes to avoid payment of taxes; evaluate foreign 
and domestic tax treaties to ensure compliance with U.S. laws; 
monitor, evaluate and correct tax treatments of businesses 
involved in tax exempt and pension organizations. Examination 
Needs: Access to all relevant tax and financial information on 
taxpayers; such as, individual and business financial data 
bases in banks, other financial institutions, state and local 
tax data, international tax information held by foreign 
governments. Ability to coordinate enforcement actions with tax 
partners, foreign and domestic. Ability to apply computerized 
evaluation programs (artificial intelligence) to data bases, 
both within and outside the IRS.

Criminal Investigation

    Responsibilities: Discovery and correction of fraud, 
willful omissions, money laundering, income from drug, gang, 
and other illegal operations. Criminal Investigation Needs: 
Access to legal and illegal data bases. Ability to apply 
computerized detection programs; such as, pattern recognition, 
anomaly detection, and other artificial intelligence routines 
to those data bases. Ability to coordinate investigation 
activities with federal, state, local and foreign enforcement 
organizations. Ability to share information with U.S. attorneys 
and other judicial organizations. Ability to protect 
information if all parties are not legally authorized to 
receive such information.

Chief Counsel

    Responsibilities: As the legal arm of the IRS, rules on 
laws and regulations, acts as legal counsel to executives of 
IRS in performance of their duties. Chief Counsel Needs: Access 
to legal opinions, rulings, and judgments for tax matters. 
Research capabilities in data bases in federal, state, and 
local tax jurisdictions. 

                    Importance of Electronic Filing

    The reason I described the information needs of the major 
IRS functions was to show how information on tax returns and 
other documents (that often seems more than necessary to 
satisfy a taxpayer's tax responsibility) is needed to carry out 
the other responsibilities in the IRS mission.
    At the present time, only about 40% of the data IRS 
requires and taxpayers spend time and money providing is posted 
to the main IRS files. This sad fact is due to the state of 
sophistication of the IRS computer system (designed in the late 
1960's) and the costs of paying people to transcribe the data 
from paper returns and documents to usable electronic formats. 
The result of this shortfall in data requested versus data 
ultimately used is that IRS Auditors, Agents, and Officers, in 
the performance of their duties, often must ask taxpayers for 
copies of returns and documents (copies with all the data 
intact). 
    We have watched, over the past years, as IRS tried 
unsuccessfully to modernize its computer systems. It is my 
opinion that one of the main reasons for these stumbles is the 
reliance on the need to have paper tax returns and documents 
converted to electronic formats. It seems that a paper return 
with its signature is a concept the IRS has been unable to give 
up. This is changing, but at a snails pace.
    At this point in time, two things are true. The 
availability of trained transcribers (typists) is nearly zero; 
schools do not teach typing and businesses don't hire typists. 
The state of the art of electronic scanning equipment to read, 
interpret, and record data from computer generated, and 
especially hand written, documents is less than acceptable for 
the job IRS has before it. 
    This leaves only Electronic Filing of tax information the 
``Best in Class'' option for IRS to accomplish its mission. The 
state of the art of computer technology is ready, most 
taxpayers are ready (more than 50% of individual tax returns 
are prepared by third parties using computers and most 
businesses use computers), and the computer industry is ready. 

 Transitioning from a Paper-Based Data Capture System to an Electronic-
                              Rich System

    As IRS, or any large organization, makes this transition, 
careful oversight will be needed to ensure complete success, a 
success that is both effective and efficient. For electronic 
filing to be cost effective for taxpayers, we must ensure the 
current high costs of the manual transcription system are truly 
eliminated as electronic filing increases. As the need for 
skilled typists decreases, the costs are transferred to the 
public, either by the individual entering data on a home 
personal computer, or by the tax practitioner or business 
employee entering data on a computer. In addition, the costs of 
accumulating electronic tax returns by electronic transmitters 
also increase. This eventuality will require some compensation 
or other incentive to be effective.
    As the volume of electronic returns increase, the physical 
plant (space, machines, etc.) the IRS needs will decrease. 
Oversight will be required to ensure that remaining workload 
doesn't expand into the vacuum, thereby eliminating the 
savings.
    Before I retired from the IRS, I was responsible for the 
operation of the 10 service centers. Among other things, the 
service centers receive, perfect, and process all the tax 
returns and documents received by IRS. My budget was about 26% 
of the total IRS operating budget. Of that, over half was spent 
transcribing (converting paper information to electronic) tax 
information. In today's world, that expense can be eliminated. 
If the IRS were to receive the bulk of tax information 
electronically, it could use its budget for ensuring compliance 
with tax laws and providing service to taxpayers.

                                Summary

    The major functions of the IRS need information on all 
taxpayers, third party businesses, international, federal, 
state, and local taxing authorities. This information changes 
every year and, in some instances, almost daily. This massive 
undertaking is what the modernization effort should be about. 
    The only feasible way to enable IRS to receive, validate 
and manipulate this data is through electronic filing. The data 
exists in electronic format in taxpayers, businesses, and 
governmental files. To continue to convert these electronic 
files to printed paper format, send to IRS, and have IRS scan, 
transcribe or otherwise convert it back to electronic format 
is, at best, time wasting and very costly. In addition, since 
there will never be enough funding to convert all the paper, 
the IRS will not be able to accomplish its mission.
    The IRS needs access to vast amounts of data, and we all 
should encourage using the most cost effective and data rich 
system available. It is my opinion that the use of electronic 
filing is the only way to meet that goal.
    Thank you.
      

                                

    Chairman Johnson. Thank you very much, Mr. Carver.
    Mr. Harris.

  STATEMENT OF ROGER HARRIS, VICE CHAIRMAN, FEDERAL TAXATION 
           COMMITTEE, NATIONAL SOCIETY OF ACCOUNTANTS

    Mr. Harris. Good afternoon, Madam Chairman. Thanks for the 
opportunity to be back here today, speaking on electronic 
filing. My name is Roger Harris, and I am vice chairman of the 
Federal Tax Committee of the National Society of Accountants. 
NSA represents over 16,000 independent accountants, who provide 
accounting, business planning and tax preparation services, to 
an estimated 4 million individuals with small businesses.
    According to a recent survey of our membership, nearly 90 
percent of our members have and use computers for accounting 
and tax preparation services. However, only 22 percent of the 
returns that are eligible to be filed electronically by our 
members are actually filed electronically.
    I also am president of Pagent Business Services. We have 
been providing accounting services to small business for over 
30 years. Our 400 franchises prepare hundreds of thousands of 
tax returns, and yet only 5 percent of our franchises currently 
file returns electronically.
    I think these numbers indicate that we are the group of 
people who need to be motivated if the 80-percent goal of 
electronic filed tax returns is to be reached. Most of the 
returns that we prepare are prepared by computer, but they are 
printed out on paper, mailed in, and then ultimately put back 
into a computer by IRS personnel. Clearly in the interest of 
saving both time and money the IRS would rather see these 
returns transmitted electronically. However, many practitioners 
currently refuse, for many reasons, to embrace the electronic 
filing program. To make this program successful, the IRS needs 
to enlist the support of the practitioner community by 
addressing all the reasons that they are currently staying away 
from electronic filing.
    The National Society of Accountants and Pagent Business 
Services both support the underlying goals of the electronic 
filing provision of H.R. 2292. We applaud the approach taken in 
the legislation of letting the marketplace become the engine 
for the future growth.
    I think we all learned from the EFTPS Program, that even a 
good program does not work well and is not well accepted when 
it is mandated. We support the measures that you have 
initiated, such as the elimination of the 8453, the current 
signature form, until a truly digital system can be developed. 
Perhaps a checkoff box on electronic returns, enabling 
taxpayers to authorize the preparation of electronically filed 
returns to communicate with the IRS.
    The regulation of all preparers of paper, electronic and 
information returns; and the creation of a procedure, allowing 
for practitioners to transmit statements and schedules to make 
the filing of more difficult returns possible. These measures 
do in fact address some of the concerns practitioners have.
    Other measures, such as extending the deadline to May 15, 
will also cause some practitioners and some taxpayers to 
embrace electronic filing. But it will not, in and of itself, 
move us near the 80-percent goal.
    It also creates a potential problem that we are not clear 
the legislation addresses, such as, on April 15 our taxpayers 
are faced with the decision to file electronically by May 15 
and therefore give up their opportunity to file an extension. 
If this is the choice then many of them will opt for the 
extension and will choose not to file electronically, because 
they only have 30 days to make that decision.
    We also strongly support the implementation of the 
Electronic Commerce Advisory Group, consisting of 
representatives from the tax practitioner, preparer, and 
computerized tax processor communities. We view this group as 
an essential component of any strategy designed to foster 
growth in the use of electronically filed returns. We do, 
however, recommend two additional ways to strengthen the 
effectiveness of this group.
    The first recommendation is for small business 
representation on this group. The current legislation provides 
for the panel to receive input solely from tax practitioners 
and elements of the electronic filing industry, and none from 
the average small business owner. Because our membership and 
our clients are both small business, we would emphasize that 
small business input, in the early stages, of any new 
electronic filing program would be valuable. And such input 
would allow the IRS to gain insight, and perhaps avoid some of 
the problems that we saw with EFTPS.
    A second recommendation is that the IRS should be 
encouraged to get out of the box thinking in this group. Look 
for ways to solve these problems. For it to be widely accepted 
electronic filing must benefit practitioners, taxpayers, and 
small business as well as the IRS. Creating this type of 
environment requires that the ECAG be empowered to think 
creatively and outside the current paradigms.
    While our members recognize that electronic transmission of 
return will be savings to the IRS----
    Chairman Johnson. I am sorry to interrupt you, Mr. Harris. 
We only have 3 minutes left on this vote. I thought we had a 
little more time left. It would be better if you wrapped up 
when you came back. Save your conclusion. We will be back in 
about 6 or 7 minutes.
    [Recess.]
    Mr. Harris. NFA's members recognize that the electronic 
transmission of returns will bring savings to the IRS, but they 
are also asking what advantage would they gain by becoming 
electronic transmitters. Practitioners have the ability to move 
large numbers of tax return filers into the electronic world. 
We talk to our clients throughout the year and have an ongoing 
relationship with them. I believe a practitioner has greater 
influence over the client and recommending electronic filing as 
the preferred method than any marketing campaign, regardless of 
its focus. But practitioners are first and foremost business 
men and women. Any change in their operating procedure must 
have a valid business reason. If the IRS can develop a plan for 
electronic filing that saves practitioners either time, money 
or both, practitioners can then deliver to the Internal Revenue 
Service millions of electronically filed returns.
    The IRS should give serious consideration to adopting a 
multilevel marketing campaign, focusing on incentives for 
practitioners as well as individuals. In this way the goal of 
80 percent I believe can easily be reached in 10 years.
    While H.R. 2292 moves in a significant direction toward an 
improved electronic environment, more needs to be done to 
address the many reasons practitioners are reluctant to file 
electronically, such as registration procedures for return 
originators and electronic filing compliance visitation. These 
problems that impede practitioners' use of electronic methods 
must be worked out in a way that is mutually satisfactory to 
both the IRS and the practitioner community.
    In conclusion, I would like to emphasize NSA support for 
the proposed improvements in the electronic filing program. 
Over the next 10 years we will encounter opportunities that we 
cannot even envision today. By thinking creatively and working 
in partnership with the IRS, we hope to contribute to the 
development of an electronic filing program that is mutually 
beneficial to all parties involved.
    We thank you for the opportunity to be here today, and look 
forward to answering any questions that you may have.
    [The prepared statement follows:]

Statement of Roger Harris, Vice Chairman, Federal Taxation Committee, 
National Society of Accountants

    The National Society of Accountants (NSA) is pleased to 
testify on H.R. 2292, The Internal Revenue Service 
Restructuring and Reform Act of 1997. NSA commends 
Representative Rob Portman and Benjamin Cardin for introducing 
H.R. 2292. The legislation, modeled on the recommendations 
found in the report of the National Commission on Restructuring 
the IRS, greatly elevates the prospects for modernization, 
improvement in agency efficiency, and enhancement of taxpayer 
services.
    The National Society of Accountants is an individual 
membership organization representing approximately 16,000 
practicing accountants located throughout the United States. 
NSA members are for the most part either sole practitioners or 
partners in moderately-sized public accounting firms who 
provide accounting, tax return preparation, representation 
before the Internal Revenue Service, tax planning, financial 
planning and managerial advisory services to an estimated four 
million individual and small business clients. The members of 
NSA are pledged to a strict code of professional ethics and 
rules of professional conduct. As our members serve a sizable 
small business constituency, NSA is in a unique position to 
address the impact of electronic filing both upon tax 
practitioners as well as individual taxpayers.

                           Electronic Filing

Overview of Electronic Filing

    The National Society supports the underlying goals of the 
electronic filing provisions of H.R. 2292. Most practitioners use a 
computer to prepare tax returns; however, instead of electronically 
transmitting the information directly to the IRS, many of those 
practitioners print out paper returns which are mailed to IRS where it 
is re-keyed into another computer. One of the keys to the success of 
the electronic filing program is to entice the practitioner community 
to embrace electronic tax information transmission.
    The bill, while not mandating electronic filing, sets a goal that 
80 percent of all returns filed by the year 2007 be filed 
electronically. Of significant note, the bill sponsors rejected a 
proposal requiring preparers by the year 2004 to file returns only 
electronically. By rejecting the urge to mandate the electronic filing 
of tax returns, Congress and the IRS are likely to avoid many of the 
perception problems which have impeded implementation of the Electronic 
Federal Tax Deposit System (EFTPS) over the last two years.
    The EFTPS system is an excellent program and NSA supports its full 
implementation. Nevertheless, the fact that EFTPS is largely a 
mandatory system has resulted in resistance and perhaps hostility 
toward the program by some small business persons and practitioners. 
The drafters of H.R. 2292 have chosen the wiser course of letting the 
market place become the engine for the future growth in the overall 
electronic filing program rather than by mandating it.
    Under the legislation, the IRS is required to develop within 180 
days of enactment a plan ``to eliminate barriers, provide incentives, 
and use competitive market forces to increase electronic filing 
gradually over the next 10 years...'' To facilitate development and 
implementation of the plan, the bill requires the IRS to establish an 
Electronic Commerce Advisory Group to receive input from the private 
sector. The IRS also is required to implement procedures for providing 
incentive payments to transmitters of electronically filed returns, 
incentives which would be based on the fair market value of costs 
associated with electronically transmitted returns.
    The National Society views the overall thrust of the requirement--
that the IRS develop a plan to spur growth in the use of electronic 
filing--as being very positive. We hope that this plan will be 
responsive to many of the concerns practitioners have had with 
utilization of electronic filing in the past. According to previous 
surveys of our membership only about 35 percent of NSA members transmit 
electronic returns on behalf of their clients. In this connection, tax 
practitioners who prepare complex returns are the least apt to use 
electronic filing. The IRS' electronic filing program to date has 
focused principally on the filing of simple returns by taxpayers 
expecting a refund. H.R. 2292 clearly attempts to rectify these 
problems by making significant attempts to reach out to the 
practitioner community. We support this and look forward to being of 
assistance to the government in making the system work as it should.

Checkoff Box and Regulation of Preparers

    The National Society also is in complete support of the conceptual 
provisions of H.R. 2292 relative to a checkoff box on electronic 
returns and the initiative to regulate all preparers of paper, 
electronic tax, and information returns. Under the legislation's 
checkoff provision, the IRS is required to establish procedures 
enabling taxpayers to authorize the preparer of electronically filed 
returns to communicate with the IRS on matters concerning such returns.
    According to the National Commission report, uniform requirements 
of these kinds ``will increase professionalism, encourage continuing 
education, improve ethics, and better enable the IRS to prevent 
unscrupulous tax preparers from operating.'' We consider the goals 
meritorious and concur in them. However, in the case of the checkoff 
box provision, we strongly recommend that the provision be extended to 
cover all types of returns, whether filed by paper or electronically. 
The same principles and goals underlying the checkoff for paperless 
returns also apply to paper returns.

Electronic Commerce Advisory Committee

    As stated above, the legislation requires the IRS to convene an 
Electronic Commerce Advisory Group (ECAG). It further requires that the 
panel include representatives from the ``tax practitioner, preparer, 
and computerized tax processor communities and other representatives 
from the electronic filing industry.'' We strongly support 
implementation of this electronic advisory group. NSA views the group 
as an essential component of any strategy designed to foster growth in 
the use of electronically filed tax returns.
    The National Society recommends one additional way to strengthen 
the effectiveness of the Electronic Commerce Advisory Committee. The 
current legislation provides for the panel to receive input solely from 
tax professionals and elements of the electronic filing industry, and 
none from the average taxpayer or business establishment. We suggest 
that the panel also include small business representation. By including 
small business input at the early stages of development of any ``new'' 
electronic filing program, the IRS will gain additional insight and 
might avoid some of the public relations mistakes the agency has made 
with respect to its electronic return programs, such as the 
implementation of EFTPS.
    NSA views the ECAG as a vehicle where practitioners can work with 
the IRS in developing an electronic system they can enthusiastically 
adopt, allowing IRS to reach its goal of 80% electronic returns by the 
year 2007. While NSA's members recognize that electronic transmission 
of returns will bring savings to IRS, they also ask what advantage they 
would gain by becoming electronic transmitters. Practitioners have the 
ability to move large numbers of complex return filers into an 
electronic environment. A practitioner has greater influence over his 
client in recommending electronic filing as ``the preferred method'' of 
filing than any marketing campaign regardless of its focus. But 
practitioners are first and foremost businessmen and women. Any change 
in their operating procedures must have a valid business reason. We 
hope the ECAG will serve as a means to develop incentives to encourage 
practitioners to switch to electronic means, as well as a platform for 
discussion and solution of remaining problem areas that inhibit 
practitioner participation in electronic programs.

Extension of the Due Date for Electronically Filed Tax Returns

    For the purpose of ``encouraging'' more persons to file returns 
electronically, H.R. 2292 provides taxpayers with an additional month 
to file income tax returns if such returns are filed electronically. 
This change in the due date involves electronically filed tax returns 
for individuals, corporations, partnerships, and other information 
returns. Payers would still be required by the legislation to provide 
information returns to payees by January 31.
    The National Society recognizes the Restructuring Commission made 
the recommendation to realign the due dates in order to simplify return 
processing and to foster paperless filing. NSA has not had a chance to 
poll our membership regarding their position on the extension of due 
dates for electronically filed returns. Nevertheless, should this 
provision become law, NSA urges caution against granting taxpayers only 
a one month extension for choosing an electronic filing method at the 
expense of the current automatic four-month extension available to all 
filers.

Procedures for Facilitating Truly Paperless Electronic Filing

    For purposes of facilitating truly paperless electronic filing, 
H.R. 2292 requires the IRS to develop procedures for the acceptance of 
digital signatures. Until the IRS develops a method for acceptance of 
digital signatures, the bill mandates that the IRS accept electronic 
filed returns without signatures as long as the taxpayer retains a 
signed copy of the original until the expiration of the applicable 
statute of limitations.
    The National Society supports the elimination of Form 8453, the 
current signature form for electronic returns. We believe this not only 
will help expedite the filing process for practitioners, but will 
eliminate a step in such process that practitioners have found 
daunting. Consequently, this would be a positive step in enhancing 
electronic filing.
    NSA urges the IRS to closely consult with tax practitioners before 
implementing any procedures under electronic filing requiring the 
taxpayer to retain copies of signed returns. We are concerned that to 
the extent this requirement is not implemented properly and carefully, 
it may increase the professional liability exposure of return 
preparers, thereby negating any real prospects for spurring the use of 
electronic filing overall.
    Under the legislation, the IRS also is required to establish 
procedures to receive explanatory statements or schedules in electronic 
form for the purpose of eliminating the need for paper statements or 
schedules. We believe this is a positive provision, one which is 
designed to facilitate the filing of complex tax returns 
electronically.

Availability of Credit Cards For Payment of Taxes

    H.R. 2292 authorizes the IRS to accept payment of taxes by 
commercially acceptable means, including credit cards. While the 
National Society is supportive of this provision, we do raise two 
issues relative to a taxpayer using a credit card to pay taxes. This 
first issue concerns bankruptcy. Currently, credit card debt is treated 
as an unsecured debt dischargeable in bankruptcy proceedings, while 
income tax liability attributable to a tax return due within three 
years prior to the bankruptcy filing may not be discharged. It is 
conceivable that unpaid taxes charged on a credit card would be treated 
differently from taxes that were simply not paid. The second issue 
concerns the cost of processing the credit card payments, usually borne 
by the merchant offering a credit card payment option. Although the 
bill prohibits passing those costs on to taxpayers, the question 
remains as to who will bear the processing costs for credit card 
payments of income taxes. It is NSA's recommendation that the 
protective language of the bill be very clear so that ultimately the 
costs not be passed back to the taxpayer using the credit card payment 
option.

IRS Electronic Filer Visitations

    While not contained in H.R. 2292, NSA is concerned about a practice 
used by the IRS in recent years as a means to address potential fraud 
problems in the electronic filing program. We realize that the Service 
must take steps to limit abuse of the system. Our members have 
expressed concern that draconian efforts to stop fraudulent 
practitioners may hamper the ability of honest practitioners to conduct 
their practices during busy season. This is at variance with the 
enhancement of the electronic program.
    An example of this problem is a procedure known as an ``electronic 
filing compliance visitation.'' During a compliance visitation, Service 
personnel come into the practitioner's office--often unannounced--to 
review the signature documents and W-2 forms the practitioner is 
required to keep on file and review security measures regarding the use 
of the electronic filing identification number (EFIN). After initially 
performing all visits unannounced, the Service improved the visitations 
by scheduling appointments with practitioners where no suspicion of 
criminal activity exists. The past filing season was relatively 
uneventful in this respect; however, practitioners remain concerned 
about the electronic filing compliance checks that have caused problems 
in past years. 
    NSA understands the reasons for conducting these checks and 
acknowledges the need to perform them unannounced in certain 
circumstances. What we must emphasize is that practitioners are already 
``swamped'' at the time of year the visitations have taken place. 
Consequently, the intrusion must be kept to a minimum. It often creates 
an unfavorable impression with tax clients who are waiting to have 
their tax interview. Further, the interviews must be delayed by the 
practitioner who is constrained to take time out to meet with Internal 
Revenue employees from Collection, Examination, and/or the Criminal 
Investigation Divisions. The Service achieves the goal of completing a 
compliance check at the expense of another valued goal, i.e. promoting 
goodwill and open communication between the Service and electronic 
filers. If the House Ways and Means Committee is interested in 
investigating additional impediments to the growth and expansion of the 
electronic filing program, the National Society recommends that the 
Committee review the IRS' use of electronic filer visitation checks. We 
believe that the visitation program is a significant deterrent to the 
electronic filing program. 

                      The IRS Management Structure

Internal Revenue Service Oversight Board

    NSA knows that the House Ways and Means Committee is well aware of 
the national press surrounding the provision found in H.R. 2292 
regarding an independent Internal Revenue Service Oversight Board. We 
believe an independent Oversight Board is one of the legislation's most 
important contributions to the issue of making the IRS a more customer 
service oriented agency. An independent Oversight Board has the 
potential of affording the IRS the opportunity to take an objective 
look at the agency's procedures and programs--as well as creating a 
real opportunity for overcoming problems concerning them.
    The legislation calls for the establishment of a 9 member Oversight 
Board, two of whom are to be the Secretary of the Treasury (or the 
Deputy Secretary) and a representative of the IRS employees union. 
Under the bill, the other 7 Board members will be appointed on the 
basis of their professional experience and expertise in the areas of 
management of large service organizations, customer service, 
compliance, information technology, organization development, and the 
needs and concerns of taxpayers. H.R. 2292 provides that all members of 
the Board may be removed at the will of the President of the United 
States.
    The National Society believes the independent Oversight Board will 
contribute to the agency's ability to achieve a higher level of 
customer service. An emphasis on customer service as part of IRS' 
mission statement is what NSA believes is needed to significantly 
improve the federal tax administration process. NSA's 16,000 members 
and 4 million individual and small business clients salute the emphasis 
of H.R. 2292 on improved customer service. In connection with the 
Oversight Board, we have a recommendation we believe is important. 

Small Business Representation on the IRS Oversight Board

    NSA believes that the frustrations of small taxpayers and small 
business persons played a critical role in the reasons for formation of 
the IRS Restructuring Commission. All of us have heard the stories of 
small business people working 60 to 80 hours a week in their business. 
Small business persons are notorious for wearing many hats in the firm. 
They are the firm's salespeople, marketing agents, bill collectors, and 
service providers. At the same time, they must comply with complicated 
federal tax laws and regulations. Because a small business owner is 
often a jack-of-all-trades yet master of none, he will simply pay an 
assessed tax penalty rather than take time away from the business to 
fight it. In many cases, a small business person who lacks resources 
available to larger corporations often pays--proportionately--a greater 
level of tax penalties than large businesses. Large business 
establishments are better able to afford and contest a tax matter as 
opposed to the average small business person.
    NSA's membership consists of small business owners who provide 
accounting services for a small business clientele. Our experience in 
this respect leads us to strongly recommend that final legislation 
include small business representation on the IRS Oversight Board. H.R. 
2292 already mandates that large businesses be represented on the 
Oversight Board as reflected by a requirement that Board members have 
professional experience and expertise in the area (among others) of 
``management of large service organizations.'' Small business must be 
provided with direct representation on the Board as well. Small 
business has been described as the engine that drives our economy. 
Without representation on the Oversight Board by small business, there 
might not be input from a key and critical constituent group. We 
believe small business representation on the Oversight Board is the 
best way to ensure that the needs and concerns of all taxpayers are 
heard. 

Office of IRS Commissioner

    NSA supports the establishment of a five-year appointment for the 
Commissioner of Internal Revenue position. We also support the 
provisions of the legislation giving the Commissioner greater 
flexibility in the hiring, firing, and salary decisions involved with 
IRS' senior management.
    H.R. 2292 states that the appointment of the Commissioner ``shall 
be made on the basis of demonstrated ability in management and without 
regard to political affiliation or activity.'' The National Society 
supports and appreciates the legislative intent underlying this 
particular sentence of the legislation. The legislation strives to 
ensure that any new Commissioner has the capacity and expertise to 
manage a large establishment or entity--in a similar fashion to a chief 
executive officer (CEO) managing and running a Fortune 500 company. 
Nevertheless, we believe that safeguards be built into the legislation 
in order for any new Commissioner to recognize the unique needs of 
small taxpayers and small businesses. Thus, NSA recommends that the 
final legislation (or report language) stress the need for the 
Commissioner to focus on the needs of small business and meet on a 
regular basis with representatives of the small business community and 
those who serve it. 

                            Customer Service

Overview of Customer Service

    One of the major objectives of the National Commission's report and 
of the legislation is to enhance the level of customer service provided 
by the IRS. The tax practitioner community is an important stakeholder 
relative to customer service. A great number of taxpayers deal with the 
IRS through their representatives. Consequently, they experience IRS 
customer services at all levels, from telephone contacts through 
examinations, collections, and appeals. Based on their repeated and 
varied contacts with the IRS, practitioners have a unique perspective 
on customer service.
    The legislation emphasizes the concept of customer service over 
compliance. This is unlike the traditional public view that the IRS' 
main mission is tax compliance, i.e. audits and collections. While the 
importance of compliance obviously is clear, NSA agrees that the 
service component should be the primary engine which drives the 
agency's mission. We believe that a customer service oriented mission 
will bring out the best in all who deal with the tax system. This is 
what the public wants, and it is what we believe IRS employees want as 
well.
    There should be improvement in all aspects of IRS' customer 
service. For example, from the public's perspective, the front lines in 
IRS customer service is their principal experience when dealing with an 
IRS representative on the telephone. The quality of the IRS' telephone 
systems, as well as the way in which the IRS employees answer the 
telephone, has shown substantial improvement in recent years. 
Nevertheless, the IRS telephone system and customer relations process 
continue to cry out for further and dramatic improvement.
    The proper training of IRS employees and providing them with 
technology are important keys to quality customer service. The 
Commission's report strives to portray IRS employees as competent, 
hard-working employees who want nothing more than to deliver the 
highest quality in service to the public. In order to turn around the 
supertanker we call the IRS, there needs to be a change in the 
Service's management structure along the principles described above. 
This includes better training of IRS employees. They also need to be 
provided with more of the basic technology tools of the 1990s, tools 
which NSA's members often take for granted. This includes providing 
employees with more fax machines, copiers, and computers. Such tools 
should be at a level to take them into the next millennium. 

Office of Taxpayer Advocate

    The National Society commends the sponsors of H.R. 2292 for 
providing for certain meaningful improvements in the office of Taxpayer 
Advocate. We view this provision as being critical in improving IRS 
customer service. It must be stated at the outset that the Service's 
problem resolution program is viewed by NSA membership as viable and 
deserving of high marks. Nothing should be done to diminish its 
availability.
    The legislation builds on the beneficial customer service 
provisions found in the Taxpayer Bill of Rights II (P.L. 104-168). The 
Taxpayer Bill of Rights II (TBORII) established the office of Taxpayer 
Advocate within the Internal Revenue Service. It empowered the Advocate 
to resolve individual taxpayer problems, to analyze problems of the tax 
system, to propose legislative and administrative solutions to those 
problems, and to report to Congress on the operations of the Advocate's 
office. Moreover, TBORII gave the Advocate broad authority to take any 
action as permitted by law with respect to taxpayers who would 
otherwise suffer a significant hardship as the result of IRS action. 
    In testimony earlier this year, NSA stated that in order for the 
Taxpayer Advocate to be successful, he or she must possess an intimate 
knowledge of the functioning of the IRS. This knowledge is best gained 
from years of experience within the Service. At the same time, we also 
stated that in order to truly be the taxpayer's advocate, this 
individual must be willing to question, publicly as well as internally, 
the functioning of the very agency to which his or her career has been 
devoted.
    NSA believes H.R. 2292 strikes the right balance in ensuring that 
the Taxpayer Advocate is successful in his job within the IRS. The 
legislation provides that the Taxpayer Advocate will be appointed by 
and report directly to the Commissioner of Internal Revenue, with the 
approval of the Internal Revenue Service Oversight Board. H.R. 2292 
also provides that the Advocate must have substantial experience 
representing taxpayers before the Internal Revenue Service or with 
taxpayer rights issues. For a person who becomes the Advocate, but one 
who has worked for a significant period of time for the IRS previously, 
the legislation requires that the Advocate agree not to accept any 
employment with the IRS for at least 5 years after ceasing to be the 
Taxpayer Advocate.
    From a positive perspective, we believe H.R. 2292 is carefully 
crafted in that taxpayers are not foreclosed from benefitting from the 
appointment of a Taxpayer Advocate who may happen to have the 
experience and insight of an IRS veteran. Ironically, the IRS veteran 
may in fact be the person best situated to ``fill the shoes'' of the 
Taxpayer Advocate. By requiring that any IRS veteran interested in the 
Taxpayer Advocate take an oath that he or she will not work for the IRS 
for at least 5 years after leaving the Advocate post, the legislation 
has taken critical steps to ensure that the Advocate is willing and 
able to report openly about potentially sensitive issues within the 
IRS. 
    H.R. 2292 broadens the scope of the Taxpayer Advocate's annual 
report to identify areas of the tax law that impose significant 
compliance burdens on taxpayers or the IRS. In addition, the scope of 
the report must identify--in conjunction with the National Director of 
Appeals--the 10 most litigated issues for each category of taxpayers 
with recommendations for mitigating such disputes. The legislation also 
makes certain improvements in the selection process, geographic 
allocation, and career opportunities of problem resolution officers. 
NSA strongly supports these improvements. We particularly support the 
requirement that the Advocate take steps to ensure that local telephone 
numbers for the problem resolution officers be published and made 
available to taxpayers. 

Performance Awards

    H.R. 2292 requires the IRS to establish a performance management 
system that covers all IRS employees, with the exception of members of 
the IRS Governance Board, the Commissioner, and the Chief Counsel. As 
part of this performance management system, the bill generally gives 
the IRS flexibility in granting awards to employees. More specifically, 
the legislation provides that ``A cash award...may not be based solely 
on tax enforcement results.'' While this particular sentence appears to 
be well intentioned, the National Society believes that the sentence 
could be misconstrued to authorize IRS officials to make cash awards to 
employees principally on tax enforcement results.
    NSA believes that the legislation's criteria for cash awards should 
be redrafted to highlight the point that customer service should be 
considered an important determinative factor with respect to any 
determination to make a cash award to an IRS employee. Tax enforcement 
should be considered as only one factor in a determination of making a 
cash award to such employee. We believe this change in the bill's 
language is consistent with the spirit of the IRS Restructuring 
Commission report encouraging the IRS to place greater reliance on 
customer service and less on enforcement. We believe this kind of 
change in the bill's language is good for tax compliance and for 
taxpayers as well. 

                       Taxpayer Protection Rights

    The National Society is very supportive of the provisions 
contained in Title III of H.R. 2292 which are designed to 
expand and protect taxpayer rights. The following taxpayer 
rights measures are considered some of the more significant 
provisions from the perspective of NSA's membership.

Expansion of the Authority to Issue Taxpayer Assistance Orders

    In order for a problem resolution officer (PRO) to issue a 
Taxpayer Assistance Order under current law, the PRO must 
determine whether the taxpayer is suffering or is about to 
suffer a significant hardship. If a significant hardship is 
deemed to exist, then the PRO makes a determination as to 
whether the IRS action warrants being changed. The tax 
regulations define a significant hardship as meaning a serious 
deprivation caused or about to be caused to the taxpayer as a 
result of IRS administration of the tax law.
    H.R. 2292 modifies the current definition of significant 
hardship by requiring the Taxpayer Advocate to consider whether 
IRS employees followed applicable administrative guidance 
(including the Internal Revenue Manual); whether there is an 
immediate threat of adverse action; whether there has been a 
delay of more than 30 days in resolving taxpayer account 
problems; and whether the taxpayer will have to pay significant 
professional fees for representation. NSA considers these to be 
positive modifications which should help resolve a taxpayer's 
problems in a reasonable and constructive fashion.

Offers in Compromise

    The legislation provides for the IRS to develop and publish 
schedules of national and local allowances to ensure that 
taxpayers entering into a compromise can provide for basic 
living expenses. While we feel this provision attempts to 
address a real problem underlying the IRS collection process, 
we are concerned that the provision (as currently drafted) does 
not provide any practical relief to taxpayers. 
    NSA members believe that the current allowable expense 
standards for Offers in Compromise and Installment Agreements 
are inconsistent with the real cost of living for families. 
Practitioners have informed NSA about their concerns that the 
expense standards do not adequately compensate for such factors 
as family size, housing and utility allowances, and the cost of 
car ownership. With respect to the Offer in Compromise process, 
these practitioners also are concerned that IRS Revenue 
Officers are principally using the expense standards as strict 
rules as opposed to general guidance.
    The National Society believes guidance should be given to 
IRS collection personnel that they are authorized to make 
exceptions with respect to a taxpayer's expenses under an Offer 
in Compromise, particularly when a reasonable basis exists 
relative to the taxpayer's state of health or his or her 
ability to generate income. Further, IRS Revenue Officers 
should be given the authority to weigh available options for 
achieving the most desirable result. Often taxpayers who cannot 
negotiate an Offer in Compromise simply file bankruptcy, 
causing the IRS to recover even less than if the taxpayer's 
offer had been accepted. 
    We also feel that there must be consistency throughout the 
nation for the program. The internal cultural change concerning 
Offers in Compromise has made this difficult to achieve. More 
training and oversight are positive ways to accomplish this. We 
encourage these steps.

Problems with Interest and Penalties

    The bill makes a number of positive changes in the law with 
respect to interest and penalties. First, the bill eliminates 
the differential in the interest rates for overpayments and 
underpayments ``in a revenue neutral manner.'' Second, the bill 
tolls the application of the failure to pay penalty while a 
taxpayer is making payments under an IRS installment agreement. 
Third, the legislation establishes procedures for a safe harbor 
for taxpayers to qualify for an installment agreement should 
the outstanding tax liability be under $10,000. While NSA 
understands that the installment agreement provision is drafted 
as a safe harbor, we recommend that the legislative report 
language be drafted to declare that the provision does not in 
any way restrict other available settlement options with the 
IRS collection division, including other available options to 
obtain an installment agreement. NSA commends the bill sponsors 
for including these pro-taxpayer measures as part of the 
legislation.

Other Pro-Taxpayer Initiatives

    H.R. 2292 includes a number of positive provisions to 
enable taxpayers to recover certain costs and fees when they 
prevail and the position of the IRS was not substantially 
justified. Other positive, pro-taxpayer provisions in the 
legislation include grants for the development, expansion, or 
continuation of qualified low income taxpayer clinics, certain 
modifications with respect to the U.S. Tax Court's 
jurisdiction, and procedures for cataloguing and reviewing 
taxpayer complaints regarding the misconduct of IRS employees. 

Tax Penalty Reform

    NSA is very supportive of the provision mandating a study 
by the Taxpayer Advocate on tax penalties by July 30, 1998. The 
legislation calls for the Advocate to review the administration 
and implementation of penalty reform recommendations made by 
Congress in 1989, including legislative and administrative 
recommendations to simplify penalty administration and reduce 
taxpayer burden.
    NSA believes that tax penalty reform should become the next 
serious phase of IRS restructuring. Moreover, we strongly 
recommend the bill be clarified so that the Advocate is 
required to review the extent to which the federal government 
relies on tax penalties for revenue raising purposes.

Removal of Preparer's Social Security Number from Tax Returns

    The practitioner community is becoming increasingly 
concerned about the requirement that a paid preparer's Social 
Security number must appear on returns. Currently, 
practitioners are required to include their Social Security 
number on every return they prepare for a fee. Revenue Ruling 
79-243 states that under Section 6109(a)(4) of the Internal 
Revenue Code, ``any return or claim for refund prepared by an 
income tax return preparer must bear the identifying number of 
the preparer, the preparer's employer, or both ...(and) that 
the identifying number of an individual shall be the 
individual's Social Security number.'' Revenue Ruling 78-317 
gives some relief by stating that ``an income tax return 
preparer is not required to sign and affix an identification 
number to the taxpayers copy of a federal income tax return,'' 
being required only to affix his Social Security number to the 
copy of the tax return that is filed with the Internal Revenue 
Service.
    In today's world of instant access to volumes of sensitive 
information about an individual, including even credit reports 
accessible over the Internet, practitioners understandably are 
very concerned that their Social Security number could be the 
key to unauthorized release of their own sensitive financial 
information. NSA's members feel that the requirement they 
include their Social Security number on returns violates their 
privacy, as it could provide a possibly unscrupulous taxpayer 
with the opportunity to access certain records that otherwise 
would not be available. Once the taxpayer leaves the 
practitioner's office, there is no guarantee that he will 
immediately file the original copy of the tax return with the 
IRS, without first making additional copies. There is always 
the possibility those copies could end up in an undesirable 
location. As part of the House Ways and Means Committee's 
deliberations on H.R. 2292, NSA suggests that the Committee 
review this requirement with the Internal Revenue Service and 
recommend development of a separate system for identifying tax 
practitioners.
    In conclusion, the National Society of Accountants supports 
the legislation restructuring the Internal Revenue Service and 
applauds the Subcommittee for addressing the important issue of 
electronic filing of tax returns. Thank you for the opportunity 
to contribute to this effort.
      

                                

    Chairman Johnson. Thank you, Mr. Harris.
    Mr. Lane.

     STATEMENT OF JOSEPH F. LANE, ENROLLED AGENT, NATIONAL 
                 ASSOCIATION OF ENROLLED AGENTS

    Mr. Lane. Thank you, Madam Chairman. The NAEA testified 
five times before the National Commission on Restructuring, and 
provided testimony written for the record for a sixth hearing. 
We support entirely the report of the Commission. We believe 
that some of the most far-reaching and innovative suggestions 
are included in its electronic filing package. We are here 
today to testify on the specifics. I think the Commission has 
had a dramatic impact on forcing the Service to try to confront 
some of the issues and problems that have been raised to them 
by practitioner groups and taxpayer groups, and the data 
processing industry over the last several years. I have to say, 
we have been critical of the Service in the past for not 
providing the kind of management we would like to see in the 
Electronic Tax Administration arena. I think as a direct result 
of the Commission, we now see things like the appointment of 
Bob Barr, who will be the next Assistant Commissioner for the 
Electronic Tax Administration, and that is a very, very 
significant deviation from what their practice has been in the 
past, and we applaud that. I think the Service is starting to 
learn its lesson, and starting to focus on the need to broaden 
the amount of input they are getting, and to be more inclusive 
in their decisionmaking process. We urge them to continue that 
effort.
    We also believe their blueprint for implementing the 
modernization of the data systems will take into account the 
views of the people represented at this table, and the other 
people in the practitioner community, to a far greater degree 
than they would have had the Commission not been present.
    Some of the discussion that happened this morning about 
whether or not it should be the year 1999 or 2000 before some 
of these considerations get online is of concern to us as well. 
One of the concerns that we have about this request for 
proposals going out, is the time delay it builds in just 
because of the process that has been involved.
    We are not talking rocket science here. There are a lot of 
suggestions that everybody already knows as a result of a 
year's worth of Commission testimony, that the IRS could 
implement tomorrow to increase significantly the number of 
electronically filed returns in the 1998 filing season. I think 
we ought to take a look at what is submitted in the proposal 
process, and maybe the Subcommittee could urge them to go out 
front a little more on some suggestions; liberalize some of the 
provisions that we are talking about here today, and have it 
affect next tax season.
    We outline in our written statement some specific programs 
which we proposed to IRS 1\1/2\ years ago, which had they 
followed would have resulted in about 1,800 additional 
practitioners from our organization filing electronically this 
past filing season. I think the Service needs to pay attention 
to that.
    We support, without reservation, the establishment of an 
electronic commerce advisory group. We think that E-CAG will be 
the focal point for IRS and industry communication, and help 
the guidance and direction of the Service in its efforts to 
establish a paperless filing system.
    We also think that the Commission recommendations are a 
continuously woven cloth. We have had some criticism today, and 
some attention paid to the different pieces of whether or not 
balance-due taxpayers will be attracted by it, an extension of 
the filing date, and whether or not we should offer incentives. 
I think each one of these things has brought out a certain 
percentage. In order to get to the 80 percent, we need to 
attract a certain percent of taxpayers who are motivated by 
different realities. And I think the Commission's 
recommendations, when they are considered as a whole, 
accomplish that. It is important not to try to pick and choose 
which one of these provisions you want to throw out or keep in. 
I think as an experiment it makes sense to just bring the whole 
package forward, because it is, as we see it, a continuously 
woven cloth.
    Particularly important, I think, is an indication of some 
of the testimony we had today from Treasury. It reminds me of a 
story when I worked here in the IRS National Office in 1972. I 
had a meeting scheduled with someone at Treasury, and I spoke 
to him the day before and confirmed the meeting for 2 the next 
afternoon. I had to call the following morning to talk about 
something, and his secretary said to me, ``Oh, he is in Red 
China.'' This was about 1 month before Kissinger and everybody 
else had gone to China, so it was all on the news here, and 
everybody was saying, ``Wow, China.''
    And I said, ``Well, I guess then we will postpone the 
meeting until he gets back.'' And she said, ``No, he will be 
back at 2 for your meeting.'' I said, ``Wait 1 minute, he was 
in the office yesterday when I spoke to him, and he is in Red 
China this morning, and he will be back this afternoon?'' And 
she laughed and said, ``You do not realize; I forget you do not 
work here. That is what we call the IRS.''
    And I said, ``Why do you call IRS Red China?'' And they 
said, ``Because it is big; it is huge; it is full of people, 
and nobody knows what goes on over there.''
    I think it was pretty obvious this morning. Maybe we should 
have a reorganization of the Treasury Department next after we 
finish this reorganization of the IRS, because they are not 
bringing the innovative ideas to the table that we are talking 
about. When they start to say that we cannot consider 
incentives, and we cannot consider extensions of the filing 
season, I bet you if you go back into the memorable notes of 
this Subcommittee, back in the thirties and forties, when we 
had a March 15 filing date, and we changed it to April 15, you 
had the same testimony from the Treasury Department you had 
this meeting, about moving it to May 15. So I think if you go 
back into your records you are going to find the same 
objections.
    I was really concerned about the lack of responsiveness on 
the part of Treasury. I believe that the IRS people are being 
forced into a situation where they have to sort of go along 
with that because that is their boss, but we are not happy 
about that.
    I think the 80-percent goal in the next 10 years is 
imminently achievable. We got to the moon in less time. Why 
they object to having specific goals and percentages is beyond 
comprehension to me. I think in any business you cannot get 
anywhere without setting a firm goal and shooting for it. And 
if we wind up going all the way down the track, and committing 
ourselves to that goal, and we only achieve 75 percent, I do 
not think that is a failure; I think that is a dramatic 
improvement in what we are doing.
    So we support that. And quite frankly, I have to agree with 
Roger. I think the 800-pound gorilla in the electronic filing 
is the practitioner community. Fifty percent of your volume is 
with practitioners. If you incentivise the system so 
practitioners will get onboard with it, it will get you a long 
way to that 80 percent a lot sooner than the year 2005. The 
best way to incentivise that system is to turn around the 
attitude of practitioners.
    We polled our members. Over 90 percent of our members 
prepare tax returns on computers; only 14 percent of them file 
electronically. The primary motivation and the primary reason 
why such a limited number participate is because of the fact 
that they cannot file all tax returns electronically. One of 
the most expensive things for practitioners to do, and anybody 
that is representing a practitioner organization on this panel 
can confirm this today, is to run parallel systems in their 
office. Most practitioners have 300 to 400 clients. They have 
to hire part-time people for the tax season. These are not 
people that come back every year. So when you hire someone and 
you teach them a process--here is how you process a tax return 
and get it outside of the office--if you have to have one 
system for electronically filed returns and one system for 
paper returns, you are going to look out and say, Well if only 
30 percent of my returns can be filed electronically, and the 
other 70 percent have to be handled on paper, I am not going to 
do anything electronically.
    I am going to set up one system, have one uniform way of 
processing this stuff so it goes out the door correctly. And if 
IRS ever gets around saying they will accept 100 percent, then 
I will consider switching over. That incentive is going to be 
the greatest incentive you can give, accepting all tax returns.
    The way you motivate practitioners is to motivate 
taxpayers. And one of the suggestions we make at the end of our 
testimony is the easiest way we know to motivate taxpayers is 
to use the fear effect that IRS has on everybody today to your 
advantage, basically by changing the statute and saying, that 
if you file a timely filed return electronically, that your 
exposure for audit will be 24 months instead of 36 months, I 
guarantee you that will motivate taxpayers to create demand, 
and what practitioners will serve first before anything else is 
client demand.
    If a taxpayer comes in to a practitioner and says, I want 
this filed electronically, because then IRS only has 24 months 
to audit me instead of 36 months, you have a couple of effects 
right away.
    First, practitioners will get onboard. Second, 
practitioners' malpractice carriers will get onboard, because 
they will come back to the practitioner and say, you are going 
to tell us why you are not filing electronically, because we do 
not want the exposure for another year, if we do not have to 
have it unnecessarily. And the other thing quite frankly, if 
you put the provision in that if the return is filed timely 
electronically, and there are no mismatches with your IRP data, 
your information returns data, it also puts pressure on the 
filers of those 1099s and W-2s to get the data right, because 
they could leave themselves open to a tort claim from the 
taxpayer if they gave wrong information to the Service, and as 
a result it kept the statute open another year.
    So you perfect your data all the way down the line, and as 
tax administrators, the Treasury and the IRS should be willing 
to accept this, because they can argue they are getting the 
data in purer form. They should be able to do a cross-reference 
much quicker on the electronically filed data that they are 
getting from the payers of the Information Return Program. 
Quite frankly, you only have a 1-percent audit rate, so what 
are you giving away? You really are not giving away much of 
anything.
    The other suggestion we would urge the Treasury to consider 
or IRS, is to deal with the Federation of Tax Administrators, 
which is right here in Washington, which represents the 43 
State tax administrators that are around and have income tax 
programs, and work out a unique program that allows an 
electronic filer to file one tax return to satisfy a State and 
Federal obligation. That would definitely attract taxpayers to 
lower their accounting costs. They have less tax returns to pay 
for in terms of preparation costs.
    I think if those two things, coupled with the fact that IRS 
has to accept all tax return data, all tax schedules, and white 
paper schedules, submitted electronically would boost 
electronic filing.
    The interim recommendation in the package is a good one. 
That is basically saying that if it cannot be accepted 
electronically, then that schedule or paper will be treated as 
a workpaper that will be maintained by the accountant and by 
the taxpayer.
    That is a good suggestion, but it is only an interim 
suggestion. It cannot be a final suggestion. If it is the final 
suggestion, what IRS has done is move the documentation and 
filing responsibilities of the service centers into the 
taxpayer's offices and the practitioner's offices, and there is 
some real concern about that from the practitioner standpoint, 
in terms of client-record retention. And from a taxpayer 
standpoint--I mean, I cannot tell you how many times taxpayers 
call me up at work--I know my clients--and say, can you send me 
a copy of last year's tax return because I lost mine.
    So we cannot rely on taxpayers to maintain their records. 
And to have sort of an open-ended liability for practitioners, 
you will not get any support on that. So as an interim measure 
it is a good idea, but I think basically if the IRS decides it 
is important enough to have a form or schedule, and they want 
the information, then they ought to be forced to take it 
electronically.
    [The prepared statement and attachments follow:]

Statement of Joseph F. Lane, Enrolled Agent, National Association of 
Enrolled Agents

    Madame Chair and members of the Oversight Subcommittee, my 
name is Joseph F. Lane, EA. I am an Enrolled Agent engaged in 
private practice in Menlo Park, California. I am the Chairman 
of the Government Relations Committee of the National 
Association of Enrolled Agents and I am pleased to have this 
opportunity to present testimony on behalf of NAEA's over 9,000 
Members on the electronic filing provisions of H.R. 2292. NAEA 
receives no federal contracts or grants.
    As you know, Enrolled Agents are licensed by the Treasury 
to represent taxpayers before the Internal Revenue Service. 
Enrolled Agents were created by legislation signed into law by 
President Chester Arthur in 1884 to remedy problems arising 
from claims brought to the Treasury after the Civil War. We 
represent taxpayers at all administrative levels of the IRS. 
Since we collectively work with millions of taxpayers and small 
businesses each year, Enrolled Agents are truly at the front 
lines of tax administration.
    Representatives of NAEA testified at five public hearings 
conducted by the National Commission on Restructuring the IRS 
and we submitted written testimony for the record for a sixth 
hearing. In addition, our National staff attended numerous 
informal meetings with Commission staffers and Commissioners. 
We praise the work done by the Commission in focusing on 
constructive ways of improving our tax administration system 
and making the IRS more responsive to taxpayer input. Of all 
the Commission's recommendations, we believe those connected 
with electronic tax administration are among the most far-
reaching and innovative. If adopted, they will revolutionize 
the way in which tax practitioners conduct their business in 
the next decade and beyond and will have a profound effect on 
American taxpayers as well.
    The major focus of the Commission report was that the IRS 
must become more business-like and must adopt new strategies in 
handling its work, particularly in the area of electronic 
information systems. The Service has begun in the last year or 
so some major initiatives to help them reach these objectives.
    As you know, in past testimony we have been critical of the 
Service for its lack of dynamic, innovative management in the 
area of electronic tax administration. However, we think the 
Service deserves to be recognized when it begins to transform 
its decision making process by making it more inclusive. Last 
year's executive appointment of Arthur Gross to be Chief 
Information Officer and last month's appointment of Bob Barr to 
be Assistant Commissioner of Electronic Tax Administration are 
solid indications that the Service has heard the complaints of 
taxpayers, tax practitioners, Congress and data processing 
professionals and has opened up its ``inner sanctum'' to 
outside input. We applaud these moves and encourage many more 
efforts to reach out and recruit individuals with the technical 
and marketing backgrounds necessary to once again make the 
Service a significant force in information systems expertise.
    We believe the recently announced ``blueprint'' for 
implementing modernization of IRS data systems will take into 
account the views of numerous outside stakeholders to a much 
more serious degree than past plans. We expect the soon to be 
issued Request for Proposals seeking input from the 
practitioner, tax software and tax publishing industries will 
further the process of inviting the best minds to the table in 
formulating a methodology for enhancing electronic tax 
administration.
    For the past two years, the IRS has operated a state of the 
art web site which makes available forms, publications, 
regulations, and press releases to anyone who can access the 
Internet. This is an extremely important service to taxpayers 
and practitioners because it is available 24 hours a day, 7 
days a week.
    IRS is reaching out more substantively to the practitioner 
community for ideas on how to operate more effectively and 
efficiently through the Commissioner's Advisory Group and the 
Information Reporting Program Advisory Committee as well as 
various task forces and focus groups. We especially endorse the 
establishment of a unique Electronic Commerce Advisory Group. 
The proposed E-CAG would serve as a focal point for IRS-
industry communication in this vital area and we believe 
provide the necessary guidance and direction to the Service's 
efforts to move toward the goal of a paperless filing system by 
2005. Given the revitalization of IRS' Electronic Tax 
Administration, we would recommend that the E-CAG be located 
within the Commissioner's office and aligned with ETA, rather 
than placed in Treasury.
    We have been heartened to hear that IRS wants to put in 
place as much of the Commission's recommendations as it can 
administratively. This is indicative of an acceptance of some 
of the valid criticisms leveled over the past year and we 
commend the Service for its undefensive posture. We are 
concerned however that there be no lessening of the forward 
momentum toward enactment of the legislative proposals 
advancing the Commission's recommendations which cannot be 
administratively adopted without a law change. The Commission's 
recommendations in the electronic tax administration area are a 
continuously woven cloth. Each piece is critical to the 
achievement of the goal of a paperless filing system. It would 
not be possible to achieve the goal for instance if the IRS did 
not accept all tax forms and schedules and notes via electronic 
media or if it could not accept alternative forms of tax 
payment via electronic funds transfers or if it still insisted 
on actual taxpayer signatures rather than some other validation 
process.
    One of the most important recommendations is that paperless 
filing should be the preferred and most convenient means of 
filing tax and information returns. The American taxpayers, 
their tax practitioners and the IRS are awash in paper, a 
situation which simply cannot continue unless we are prepared 
to see a complete breakdown in tax administration, not to 
mention the environmental consequences of the need for all that 
paper. Enrolled Agents, who are on the front lines of tax 
administration, are seeing the beginnings of this breakdown 
now. Our Members tell us that they are contending with more 
errors in IRS paperwork than ever before, and it takes a great 
deal of time and taxpayer money to untangle these errors. With 
electronic filing, the error rates can be as low as 1% versus 
as much as 20% for paper returns.
    The benchmarks required in the Commission report--that 
within the next 10 years 80% of returns be filed 
electronically--are realistic only if certain changes are made 
to the way the Service and tax practitioners interact. I would 
like to share with you some demographic information reflecting 
the situation of NAEA Members. During our 1996 annual 
membership renewal period, we included a survey on the back of 
the renewal form. More than 75% of our Members replied. Of that 
group, almost all use a computer in tax preparation and the 
overwhelming majority have a modem and CD-Rom. (In fact it's 
pretty hard these days to find new computers that don't have 
these items as part of the basic package.) One third of our 
Members are online so they have access to the Internet and have 
an e-mail address. We expect those numbers to increase 
dramatically in the very near future. To illustrate, two years 
ago, when NAEA began offering online communications to our 
Members, we had only a couple of hundred Members online. Today 
we have more than 3,000, ranging from our first President, Syd 
Schuldiner, who is in his eighties, to newly minted EAs in 
their twenties and thirties.
    Since the vast majority of our Members use computers to 
prepare tax returns, the information is already in digital 
format. Yet our previous surveys have indicated that only 14% 
of our Members file electronically. We have been studying the 
reasons for this disparity for the past two years and have 
formulated a strategy to effect a change in practitioner 
perceptions about EF. In the course of our work we have 
identified the following areas as the primary contributing 
causes for practitioner nonparticipation in EF:

                Forms Unacceptable for Electronic Filing

    Many forms are not available to be filed electronically. As 
one of our Members testified at the Commission's Des Moines 
field hearing, she could have sent many more tax returns in 
electronically if she had been able to handle the fuel excise 
tax form, a form that is particularly important to her clients 
who are farmers. Since it was not available electronically, she 
had to file paper returns. We later heard the reason that 
particular form was not available was because of revenue 
protection concerns. However, we were never told how widespread 
that problem was and were never asked to provide assistance in 
correcting the problem.
    The Commission report neatly handles the problem of forms 
being unavailable for electronic filing by stating that those 
schedules and attachments not available in electronic format 
can be retained as worksheets in the taxpayer's files. We 
believe this will be an effective interim measure until the 
Service can reprogram the system to accept all forms and 
schedules in the near future but do not recommend this be seen 
as the final answer to this problem. There are too many 
concerns about practitioner liability issues, multi-year file 
retention requirements and client records retention habits. 
There is also the very real possibility that this procedure 
will trigger unnecessary audits because IRS will not be seeing 
a complete return. If the IRS wants the data, it designs a form 
or schedule for it. It should be required to accept it 
electronically and not shift the burden for keeping some of its 
records in the offices and files of practitioners and 
taxpayers.

                    Lack of Incentives for Preparers

    The traditional view of most practitioners was there was no 
benefit to be derived by themselves or by taxpayers by filing 
electronically, with the possible exception of those clients 
interested in refund anticipation loans.
    Indeed, their tax return processing costs were 
significantly increased by opting to support electronic filing 
because of the additional $.20 to $20.00 per return fees 
imposed by tax preparation software vendors for using their 
electronic filing option; by the initial insistence on 
expensive, non-standard modems by the IRS; by the number of tax 
forms the IRS would not accept electronically; and by the 
additional record keeping requirements imposed by program 
participation. These factors coupled with the primary IRS 
marketing thrust of ``do it because it helps us'' failed to 
elicit much response from the industry.
    Today, the average practitioner with two or three hundred 
returns must, in most cases, pay a substantial fee relative to 
the average cost for their services to file electronically. 
This additional fee is the per unit cost charged by the tax 
preparation software vendor for utilizing the electronic filing 
option.
    NAEA believes that there needs to be a clear delineation 
between the separate acts of preparing a tax return and 
submitting a tax return. No one argues that software publishers 
are entitled to be compensated for usage of their preparation 
program. But, to permit them to additionally control the method 
of submission is tantamount to permitting them to require that 
all income tax returns prepared using their software must be 
mailed via Federal Express at the cost of $15.00 per package 
rather than via US Mail for $.32. The current situation is akin 
to the early days of franchising when you had to buy all your 
cups and paper goods from the franchiser at exorbitant rates 
relative to the true market value.
    We believe the IRS standard for electronic filing 
submissions should be written to an unencrypted, open document 
standard and that the practitioner-consumers be given the 
option of utilizing whatever electronic filing transmission 
service they select based on market place pricing. The process 
already is in place to require all tax preparation software 
vendors to make their program output conform to IRS 
specifications. To add the additional requirement that they 
provide open access to the data file needed for electronic 
filing is relatively simple. The continuance of software 
vendors hegemony must end if electronic filing is to receive 
the fair test it deserves and the American taxpayers are to 
recognize the return on their investment made in IRS computing 
power.
    The current bill provides incentives for preparers to 
submit returns electronically by requiring paid preparers to do 
so for all returns filed Jan 1, 2005. If we are going to reduce 
the error rate and halt the sea of paper being sent to IRS, 
then the move toward electronic filing incentives is 
praiseworthy. We would suggest that it doesn't go far enough 
and omits some details which can make a significant difference 
in participation rates. We also believe that the amounts of the 
proposed credits are too low to attract the support of the 
majority of tax practitioners who after all have average 
practice sizes of approximately 300 clients. For an average 
practice of 300 taxpayers the total credits available of 
$600.00 would do little to offset the tech support necessary to 
resolve all EF issues.
    We have found in our talks with members over the past few 
years that there are many other incentives which would insure 
greater EF participation. We proposed these to the IRS last 
year in our pilot test proposal. They are:
    1. Permit electronic communication between IRS offices and 
practitioners on client account issues. This would permit e-
mail to be exchanged between IRS employees and practitioners to 
expedite resolution of account problems. This is not available 
in the vast majority of IRS offices!
    2. Permit alternative forms of tax payments, including 
credit cards
    3. Permit the online submission of the Installment 
Agreement request and Collection Information Statements
    4. Permit the electronic submission of Powers of Attorney 
and Transcript Requests
    Currently tax return preparers are required to list their 
personal Social Security numbers for identification on tax 
returns they prepare. As an access to the most confidential 
information, i.e., identity, credit and personal history, the 
Social Security number is potentially the most damaging of 
information to be disclosed in an uncontrolled environment. And 
in fact, several cases have come to light in which criminals 
lifted the SSN and used the information to create fictitious 
identities, acquire credit cards, and run up huge bills. The 
practitioners then had to hire legal counsel to straighten out 
the situation. If a way can be devised to permit tax 
practitioners who file electronically to avoid this 
requirement, it would certainly be a powerful inducement to use 
electronic filing.
    We believe if these suggestions were adopted and the IRS is 
required to accept all forms and schedules electronically and 
the software publishers are forced to adhere to an open, 
unencrypted file output standard then the market forces alone 
will be sufficient to drive up EF participation rates. We also 
believe that once these obstacles are cleared away--a 
compelling case could be made in the name of good government 
and cost effectiveness to require EF submission of returns by 
practitioners who exceed a certain annual threshold in number 
of returns prepared.

                Oversight of Electronic Filing Preparers

    One major IRS concern has always been the susceptibility of 
the electronic filing system to fraud. This has led to problems 
with the way electronic filing preparers have been treated and 
we have had member complaints about the means employed by IRS 
EF Revenue Protection efforts. While our Members' complaints 
have abated over the last filing period about the approach some 
IRS offices have taken in their revenue protection effort we 
have to note that in some cases the overzealousness of some IRS 
employees has fermented a very serious practitioner backlash 
against EF We believe that providing oversight for ALL paid 
preparers is an effective way to ensure the integrity of the 
system. NAEA has long advocated the registration and regulation 
of all paid tax preparers. IRS' own research repeatedly has 
shown that those tax practitioners regulated under Circular 230 
are rarely involved in tax refund scams. An IRS study of EITC 
fraud done two years ago showed that 96% of the fraudulent 
cases involved unregulated tax preparers. There are tens of 
thousands of unregulated tax preparers each filing season. Many 
of them are what we call card table guys who show up in a 
storefront on January 1 and disappear on April 16. What kind of 
accountability do you think someone like that has? And yet they 
are involved in a system that collects $1.6 trillion in tax 
revenues annually. Does this make sense?
    While over-regulation has been a problem in many government 
agencies for many years, I would argue that one of the basic 
rights of taxpayers is the right to have accurate and timely 
information so that they can be confident that they are in 
compliance at all times. This includes the right to receive 
correct information from IRS and it includes the right to 
receive accurate returns and tax information from those who 
hold themselves out to the public as tax practitioners. We have 
the rather perverse situation in today's tax administration 
system where those of us who have made the most commitment to 
the tax profession: Enrolled Agents, CPAs and Attorneys, are 
the most regulated. While those who have not bothered to get 
the education necessary to stay current with the laws, have 
made no commitment to supporting a professional organization 
with established codes of ethics and standards of practice, and 
have no substantial investment in a practice in terms of 
equipment, libraries, etc. are completely unregulated by IRS. 
We require more qualifications from barbers than we do 
unregulated preparers and you can recover from a bad haircut in 
three weeks!
    There must be a level playing field among all tax 
preparers. The Service should focus as much effort on paper 
filers as they do electronic filers. They should make more 
effort to listen to the problems their own procedures cause for 
EF participants and resolve to implement changes which would 
ease the burden on EF supporters. We look forward to working 
with Bob Barr in this effort as he is intimately aware of the 
marketplace concerns and problems with the IRS management of 
this effort.
    We accept the Commission's recommendations as the starting 
point, but believe the current bill does not go far enough in 
ensuring the accountability of commercial tax preparers. For 
further information, we have attached the report of the IRS 
Commissioner's Advisory Group (CAG) on this subject, a report 
completed in 1994, prior to the outbreak of the fraudulent EITC 
activity in the 1995 filing season. We urge the Committee to 
consider inclusion of this recommendation in the current bill.

                         Extended Filing Dates

    We are aware that the Commission staff conducted taxpayer 
surveys which indicated a certain percentage of taxpayers would 
support EF if granted extended due dates for filing and paying 
taxes. Since we are in favor of increasing the number of EF 
returns we would concur with this change. However, we have 
several reservations about just what kind of volume increase 
could be expected from this modification. When we polled our 
members, we heard many concerns raised about how this would 
just provide the procrastinators with another month to get into 
their offices and about what liability there would be for tax 
practitioners who assumed clients could file electronically 
only to find in May they could not and now were faced with a 
delinquent return situation. We could see some benefits for 
this proposal only if the issue of IRS accepting all forms and 
schedules was resolved either along the work paper route or 
reprogramming to accept via EF. Additional concerns raised by 
our Members include the coordination of an extended filing date 
with filing deadlines for states and computation of estimated 
tax payments.
    One of the reasons for extending the due date was to permit 
those filers of 1099s and K-1s to complete their work. In our 
opinion, Congress should revisit the question of requiring all 
partnerships and personal service corporations to have December 
31 year ends. This change was implemented as a one year revenue 
fix several years back and it has caused immense problems for 
practitioners and taxpayers alike ever since. It would be far 
preferable to require June 30 year ends for these entities. 
This would insure that even on maximum extension that all K-1 
data would be available before the individual tax filing date. 
It would also prevent any income shifting games since 
distributions would certainly fall in the taxpayer's tax year.

             Relocation of Director of Practice to Treasury

    Since the issue of moving the Director of Practice Office 
is one addressed in the electronic filing section of the bill, 
we felt the need to comment on it here, due to our prior 
recommendation that all practitioners who file electronically 
be covered under Cir. 230 and our frequent interaction with 
that office. We have had experience working with the DOP's 
office when it was part of Treasury and since it has been part 
of the IRS. In our opinion having it within the organizational 
plan of IRS works better than it did when it was headquartered 
at Main Treasury. The DOP is responsible for running the 
Special Enrollment Examination, background checks for the EA 
candidates, monitoring and auditing Continuing Professional 
Education reports, and enforcing the regulations under Cir. 
230. Much of the administrative work is run out of IRS' Detroit 
Computing Center. The last renewal cycle was the smoothest 
we've ever experienced. It is our view that Detroit has 
performed well and proved itself. Since most of the work 
involves tax administration which is the focus of the IRS, 
rather than tax policy which is the focus of Treasury, then it 
seems logical that the Director of Practice should remain at 
IRS and not revert back to the department.

         Additional NAEA Recommendations for Legislative Action

    We believe the Committee in the course of its deliberations 
should consider these additional suggestions for increasing 
Electronic Filing:
     modify the statutory period for examination of an 
income tax return from 36 months to 24 months provided that the 
return is filed electronically by the due date and there is no 
mismatch with other Information Returns Program data received 
by the Service. This achieves a triple effect: first--it 
motivates taxpayers to have their return filed electronically--
practitioners will service client demand first above all else; 
second--it motivates IRP filers to perfect their data since 
they could be liable to their clients should they misreport 
information; and third--it motivates practitioner malpractice 
insurers to pressure practitioners to file electronically
     eliminate the requirement for an actual taxpayer 
signature on a tax return and for the submission of the Form 
8453 by the EF preparer
     provide for joint Federal/State income tax filing 
on one return for electronic filers--this would motivate 
taxpayers who want to reduce their accounting costs each year 
and may prove attractive to states since many now receive 
copies of state and federal returns with all the attendant 
costs of paper handling and storage
    We believe that if these changes were incorporated into 
this current bill that the 50% of all tax returns that are 
prepared by tax practitioners would rapidly be converted from 
paper submissions to electronic submissions well before 2005.

                                Summary

    We appreciate the opportunity to appear before you to offer 
our insights and views on the Commission's legislative 
recommendations. The IRS has long talked about partnerships in 
tax administration with the practitioner community. The time 
has come for this talk to become reality and foster true 
working relationships that provide for valued input and benefit 
to both sides. There are many hard working, dedicated employees 
within the IRS who share this desire for progress. We are 
confident this legislation will provide the necessary framework 
for more successful IRS/practitioner interactions and for a 
more effective electronic tax administration system.
    I will be happy to respond to any questions you may have.
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    Chairman Johnson. Thank you very much, Mr. Lane.
    Ms. Kelley.

  STATEMENT OF CAROLYN KELLEY, DIRECTOR, GOVERNMENT AFFAIRS, 
                  AMERICAN PAYROLL ASSOCIATION

    Ms. Kelley. Thank you Madam Chair, and the Subcommittee, 
for the important work you have done in this area of electronic 
filing. I am honored to be here.
    The APA Reports represent more than 14,000 U.S. businesses 
on issues related to payroll tax reporting, withholding and 
depositing. As such, APA's members are responsible for 
submitting hundreds of millions of the more than 1.4 billion 
wage information and employment returns received annually by 
the IRS and Social Security Administration.
    APA agrees with just about everyone here today; that 
electronic filing of individual tax documents will result in 
lower cost and increase compliance for both the public and 
private sector. However, we are here to urge Congress to 
aggressively broaden this goal of expanding electronic filing, 
to include the filings required of U.S. businesses. That is, 
the over 1.4 billion information and payroll tax returns 
submitted by U.S. businesses each year.
    Many of these documents do not have the complex attachments 
that make automating individual tax returns difficult 
sometimes. APA recommends that any strategy for increasing 
electronic filing of business returns and information reports, 
should be developed with the input of private sector 
stakeholders, and I think we have heard that a lot here today.
    Thus we believe that that creation of an Electronic 
Commerce Advisory Group is a good idea, and should be monitored 
by Congress to ensure its recommendations are implemented when 
appropriate.
    I am the former chair of the Information Reporting Program 
Advisory Committee, and a member of the Commissioner's Advisory 
Group, and I am proud of the good work we did there, but I do 
feel that Congress should monitor these advisory Committees to 
make sure that suggestions can be implemented where 
appropriate.
    APA's other recommendations for increasing electronic 
submission of business information and employment returns 
include nationwide standards should be developed for all 
electronic data formats, including signature alternatives and 
transmissions procedures.
    Underscoring Mr. Cardin's earlier comment, these standards 
should be easy and inexpensive for taxpayers to implement and 
use, and should be tested by both the public and the private 
sector before being implemented. For instance, one of the most 
distressing parts of the EFTPS implementation before the 
first--was IRS' insistence that the system had been tested, 
when in fact not one single taxpayer had put a payment through 
the system about to be mandated. Internal testing of systems is 
not enough. We need to go out and test with the Nation's tax 
collectors and tax preparers.
    Our second recommendation is we agreed that IRS should 
remove electronic signature barriers to electronic, PC modem to 
modem, and magnetic media filing of information and tax 
returns. We support the Commission's provision in the 
legislation calling for electronic signature development.
    IRS should resolve the security barriers surrounding 
electronic filing of information returns specifically. IRS has 
stated that in no instance has the fate of a tax claim relied 
on the validity of a signature on an information return. To us 
this means that hundreds of millions of these documents can 
potentially begin to be transmitted electronically without a 
paper signature attachment, using a signature alternative.
    APA believes that technological solutions exist today that 
do this with a PIN. And we direct you to examine the current 
automated W-4 program. EFTPS uses PINs and SSA is currently 
starting to develop its electronic infrastructure, using them 
for receipt of wage information.
    I share the frustrations expressed today. The fact is, we 
can withdraw money everyday from our banks using PINs, so the 
technology must exist for us to give information, and we do not 
understand these barriers.
    According to SSA, of the 5.5 million employers filing 
today, only about 10 percent are filing either returns or 
information reporting documents electronically. However, as Mr. 
Harris has pointed out, 50 percent of the remaining 5 million 
are filing on paper, which has been created by a computer.
    Because this information is already in an electronic 
format, it could easily be submitted to IRS by modem. This is a 
tremendous opportunity, and is being blocked by the lack of an 
electronic signature alternative.
    Further, we are very concerned that that States are 
beginning to develop methods for electronic signatures and 
programs to receive tax and information returns electronically 
that are not standard; they vary from State to State. We need 
to move to develop national procedures and standards quickly, 
and hopefully the States will follow.
    Another recommendation is that, new electronic procedures 
for taxpayers should never be mandated under penalty. On this 
we agree with the Commission and appreciate your movement in 
this direction. Instead the pubic and private sector should 
work together to develop systems that work for businesses, and 
then businesses will flock to them to use the increased 
efficiency and the cost savings.
    Using EFTPS again, the mandate did not work as the 
extremely harsh 10-percent penalty assessed for failure to use 
the system provoked a predictable public outcry and resistance 
to adopt it. Further, although U.S. businesses were mandated 
under penalty, the U.S. Government was not, and when the system 
was not ready on the effective date, taxpayers were set up to 
be penalized for reasons out of their control.
    This is crazy. We should be working together to improve tax 
administration in this country, and we believe that the 
Commission's recommendations go a far way to facilitate that.
    I want to be clear though; we do not object to mandates, 
just mandates of brandnew technology. Instead of these kinds of 
mandated situations new electronic processes should first be 
marketed to the segments of the business community where the 
most savings and increased compliance would be realized, using 
various incentives. Other segments will follow as they perceive 
the advantages, especially if this marketing is done in 
partnership with the private sector. Congress and IRS should 
allow realistic deadlines for compliance with new electronic 
requirements, and that means the system changes that the 
taxpayers have to go through.
    IRS also should provide business with several choices of 
methods to use to file information and tax returns 
electronically, including magnetic media and PC modem to modem 
methods. For example, electronic data interchange equipment is 
expensive, and available for tax use and only a very small 
number of businesses. Larger businesses are reluctant to make 
that kind of investment in payroll departments, and the cost to 
small businesses could be prohibitive.
    Our last recommendation I think has been discussed here, so 
I will skip it, and ask that you should provide the same kind 
of incentives to business filers as to personal filers. We want 
to applaud you for the legislation's provisions to allow 
businesses that file electronically an additional month to 
submit Form W-2 information to SSA. This was easier done than 
to move the individual date because the W-2 is still going to 
the employee on January 31, so the employee is not affected. 
But what this allows businesses to do, is catch the mistakes, 
and then submit cleaner information to SSA. It is a very good 
idea, and it was an innovative solution.
    IRS should outsource when appropriate expertise is not 
available within IRS, and APA is also glad to hear Mr. Barr is 
coming on. Or when working on projects inside the agency is 
going to delay them. I started working on an electronic 941 4 
years ago, and we are dumfounded as to why that is taking so 
long.
    Finally, we support the Commission's recommendations on 
single point filing, and we thank the Subcommittee for the 
opportunity to comment today.
    [The prepared statement follows:]

Statement of Carolyn Kelley, Director of Government Affairs, American 
Payroll Association

    The American Payroll Association congratulates the National 
Commission on Restructuring the Internal Revenue Service on its 
important work and interest in expanding electronic filing of 
individual tax returns in the United States. The APA represents 
more than 14,000 U.S. businesses on issues relating to payroll 
tax reporting, withholding, and depositing. According to the 
Service's own calculations, more than 70 percent of all federal 
revenue is collected through income tax withholding. As such, 
APA's members are the nation's tax collectors. Moreover, 
payroll departments are responsible for submitting hundreds of 
millions of the more than 1.4 billion information returns 
received annually by the IRS and Social Security Administration 
(SSA). These include wage reporting forms (Form W-2, ``Wage and 
Tax Statement'' and Form W-3, ``Transmittal of Wage and Tax 
Statements''), Forms 1099-MISC, ``Miscellaneous Income,'' for 
reporting payments made to independent contractors, and 
employment tax returns, including quarterly Forms 941, 
``Employer's Quarterly Federal Tax Return,'' (covering income 
tax withholding and FICA taxes), and Form 940, ``Employer's 
Annual Federal Unemployment Tax Return,'' (reporting 
unemployment taxes).
    APA agrees with the Commission that electronic filing of 
individual tax documents will result in lowered costs and 
increased compliance for both the public and private sector. 
Insofar as individual tax returns are concerned, APA leaves 
comments to our colleagues who are expert in that area.
    Instead, we urge Congress to broaden this expansion of 
electronic filing to include the filings required of U.S. 
businesses. Any strategy for expansion of electronic 
submissions should include the over 1.4 billion information and 
payroll tax returns submitted by U.S. businesses each year. 
Many of these documents do not have the kind of complicated 
attachments that make automating individual tax returns 
difficult.
    APA recommends that any strategy for increasing electronic 
filing of business returns and information reports should be 
developed with the input of the private sector stakeholders. 
The strategy development team should include, at a minimum, 
U.S. businesses, payroll service bureaus (who process, report 
and deposit a significant percentage of U.S. payroll taxes), 
the software designers who supply U.S. businesses with the 
software needed to stay in compliance, tax practitioners, 
Treasury, IRS, the Social Security Administration (which 
administers some payroll taxes and performs complex balancing 
processes with IRS), and the state tax administrators.
    As far as a business strategy is concerned, the 180-day 
period stated in the proposed legislation should be expanded at 
least six months to allow for the development of the kind of 
public/private partnership necessary for success. Congress 
should monitor this to ensure that public input is being acted 
upon where appropriate. We believe that the creation of an 
Electronic Commerce Advisory Group is a good idea and should 
include representatives expert in the processing of business 
information and tax returns and be monitored by Congress to 
ensure its recommendations are implemented where appropriate.

                            Recommendations:

     IRS should work with the private sector in 
articulating a strategy and invite users of the tax system and 
software designers to lend their expertise. Any organization 
that does not involve the expected users of processes before 
building them is setting itself up for predictable, but 
avoidable, failure. Only by involving the front-end users in 
the design process can serious implementation problems be 
avoided.
     The public and private sector must work together 
during all phases of system design, implementation, and 
testing. Congress should provide oversight of this process to 
ensure that the needs of the taxpayer are being met and should 
remove barriers in the Federal Advisory Committee Act and any 
other legislation which prevent such a process.
     Reasonable standards should be developed for all 
electronic data formats, signature alternatives, transmission 
procedures, etc. These standards should be easy and inexpensive 
for the private sector to implement and use, and should be 
tested by both the public and private sector before being 
implemented. One of the most distressing parts of EFTPS 
implementation was IRS' insistence that the system had been 
``tested'' when in fact, not a single taxpayer had put a 
payment through the system about to be mandated.
     IRS should remove electronic signature barriers to 
electronic, PC modem-to-modem, and magnetic media filing of 
information and tax returns and work with the private sector 
and the states to ensure nationwide standards. We support the 
legislation's provision calling for electronic signature 
development. This standard signature alternative should be easy 
and inexpensive for the private sector to implement and use, 
and it should be tested before rolled out.
     IRS should resolve the security barriers 
surrounding electronic filing of information returns.
    IRS has stated that in no instance has the fate of a tax 
claim relied on the validity of a signature on an information 
return. This means that hundreds of millions of these 
information reporting documents can potentially be transmitted 
electronically without a paper signature attachment. We thus 
believe that most, if not all, of the (perceived) security 
problems surrounding moving information returns electronically 
to and from the IRS should be resolvable, without adding to the 
years of delay that have already occurred. APA believes the 
technological solutions exist today. IRS has to articulate 
requirements, work with their ``stakeholders,'' and create 
pilots in order to successfully implement programs.
    For example, SSA already has begun receiving Forms W-2 
electronically, using a bulletin board for smaller employers 
and high speed bulk data transfer processes for larger 
employers. It's our understanding that the growth of SSA's 
program has been inhibited by the Service's delay in 
establishing a method for electronic signatures and removing 
the perceived security barriers.
    According to SSA, of the 5.5 million employers filing 
today, only about 10 percent are filing either returns or 
information reporting documents electronically. However, 50 
percent of the remaining five million are filing on paper 
created by a personal computer. Because this information is 
already in an electronic format, it could easily be submitted 
to the IRS by modem. This is a tremendous opportunity. It 
should be pursued, not held up by lack of electronic signature 
methods or by concerns regarding security which may be 
unnecessary.
    APA believes the technology exists to do this with the use 
of PINs. For example, EFTPS uses PINs. We are concerned that 
the states are beginning to develop methods for electronic 
signatures and programs to receive tax and information return 
documents electronically that are not standard. IRS should 
partner immediately with the SSA, the state tax and employment 
agencies, the private sector and American National Standards 
Institute (ANSI) to develop national procedures and standards.
    Currently, the SSA is meeting with the private sector to 
develop its electronic infrastructure. As digital signatures 
and other methods are not yet available, SSA is examining the 
feasibility of a PIN system. Challenges include how to validate 
the employer's EIN and company name as it appears on the IRS' 
business masterfile. We understand that IRS is not yet ready to 
participate in developing a common system. We urge Congress to 
urge IRS to work with SSA on this project.
     After being designed, implemented, and tested in 
partnership with the private sector, new electronic processes 
should be marketed to the segments of the business community 
where the most savings and increased compliance would be 
realized. Other segments will follow as they perceive the 
advantages.
     New electronic procedures should never be mandated 
under penalty. Nothing will kill private sector cooperation 
more quickly than being penalized for making mistakes in the 
new electronic environment. Mistakes will be made in any new 
system as taxpayers are educated in new processes. (See below.) 
If systems work for businesses, businesses will flock to use 
them to increase efficiency and lower costs. For example, the 
EFTPS mandate did not work, as the extremely harsh ten-percent 
penalty assessed for failure to use the system provoked the 
predictable public outcry and resistance to adopt the system. 
Further, although U.S. businesses were mandated under penalty, 
the United States government was not, and when the system 
wasn't ready, taxpayers were set up to be penalized for reasons 
out of their control. This is insanity. We should be working 
together to improve tax administration in this country.
     Congress and IRS should allow realistic deadlines 
for compliance with new electronic requirements. From our prior 
testimony on the Commission's report, we repeat the following 
list of time periods which must be incorporated into any 
successful implementation schedule:
    1. The time it takes the regulatory agencies to produce 
regulations.
    2. The time it takes to educate the business community 
about their obligations, especially in the case of small 
businesses that may not have access to information and 
professional expertise available to larger businesses. After 
regulations, it takes some time before taxpayers are educated 
about requirements, especially if regulations are complex or 
require significant changes to existing practices.
    3. The amount of time it takes for software design and 
testing. Most U.S. businesses buy their tax processing software 
from outside vendors. If these vendors do not have enough time 
to develop products, businesses pay with costly custom systems 
changes and/or manual or exception systems. If the business 
does not buy commercial software, the amount of time it takes 
to assess and then make changes to existing systems must be 
taken into account. The more complex the regulations, the more 
time businesses need to prepare for compliance.
    4. The amount of time it takes to test system changes to 
ensure correct deposits and/or the reporting of clean, accurate 
information to the government agencies.
    5. The amount of time it takes for government to design of 
pilot programs to test transactions and transmission among the 
various users before roll out.
    It is important to note that these processes must be 
accomplished in a linear fashion and cannot be accomplished at 
the same time. Congress should work with the private and public 
sectors to design realistic implementation schedules and then 
ensure that the IRS is able to build their systems, produce 
regulations, and train staff on schedule.
     IRS should provide businesses with alternative 
methods to file information and tax returns electronically 
including magnetic media and PC modem-to-modem methods.
    It is important that the government provide users with 
alternative methods for automated filing. For example, 
Electronic Data Interchange (EDI) equipment is expensive and 
available for tax use in only a very small number of 
businesses. Businesses are reluctant to make that kind of 
investment in payroll departments, and the cost to small 
businesses could be prohibitive.
     Congress should provide businesses with incentives 
to file electronically.
    We applaud the legislation's provision to allow businesses 
that file electronically an additional month to submit Form W-2 
wage information to SSA. This will allow businesses to discover 
and correct any problems before they submit wage information to 
SSA. This saves both the SSA and employers the expense and 
inefficiency of going through the W-2c correction process.
    APA recommends that similar incentives be provided to 
third-party processors of electronic business filings and 
reporting as has been suggested for third-party processors of 
electronic individual returns.
     IRS should outsource when appropriate expertise is 
not available within IRS, or, when working on projects inside 
the agency will delay critical pieces of an electronic 
implementation strategy.
    We thank the Subcommittee for the opportunity to comment 
today, and I'm happy to answer any questions you may have.
      

                                

    Chairman Johnson. Thank you. And I thank the panel for your 
excellent testimony. It was really very helpful, and will 
provide a lot of food for thought.
    I would like to ask those on the panel that support a 
delayed date for electronic filing to discuss why they think 
that will be effective in more detail. I understand the 
opponent's argument. I do not understand as well the 
proponent's argument.
    Mr. Wolfe.
    Mr. Wolfe. We believe that right now there are very few 
incentives for balance-due filers to file electronically. The 
extension of the filing date would be one huge incentive for 
them to do that.
    Chairman Johnson. Why is that an incentive for them to do 
that, when they can just file for an extension of their due 
date, and not have the month limitation?
    Mr. Wolfe. Our understanding is that an extended deadline 
permits taxpayers to wait if they are procrastinators, for 
another couple of weeks before they actually filed a return. 
Another reason--it is a little more complex to explain--is that 
if we keep an April 15 deadline for both electronic and paper 
filers it actually penalizes electronic filers. Because if we 
allow them to electronically pay their taxes that are due, that 
debit would happen on April 15. And if they filed with paper 
the check would probably wait a minimum of 1 week before it 
would get to their bank account. So it would take away a 
barrier, to some extent, by delaying the filing date.
    Chairman Johnson. Thank you, that is very helpful.
    Mr. Lane. Could I come in on that as well?
    Chairman Johnson. You certainly can, Mr. Lane.
    Mr. Lane. I believe it not only calls for the extension of 
filing, but also the payment of the tax. Is that not correct? 
So you have a real savings there of someone not having to pay 
for the additional 30 days the balance due. So there is a real 
incentive for someone then to file electronically, knowing that 
they will be deferring the payment of whatever taxes would be 
due without penalty or interest for that 30-day period.
    And obviously, as I agree with what the Intuit spokesman 
said, the issue is that there were very few incentives in here 
to get the 30 percent of taxpayers who have balances due. Quite 
frankly, our suggestion about limiting the audited exposure 
period would be very attractive to balance-due taxpayers, since 
they are the bulk of the people that get audited. They tend to 
be the more complex returns. They tend to be the people who 
have the higher audit rate than the one-tenth of 1 percent of 
1040-EZs or 1040-As, that get audited.
    So I think incentivising the balance-due taxpayer, which is 
a big area of concern for anybody who is trying to get more 
people to file electronically; that whole shortening of that 
audit window would have a very very dramatic impact on those 
taxpayers.
    Chairman Johnson. Are there other comments?
    Mr. Langer.
    Mr. Langer. In the standard filing season some 30 million 
returns are filed within the last 2 weeks, so I would suggest 
that even refund filers would take that extra time and file 
electronically if they had another month. And it does sort of 
play into the day of filing mentality that people have, but at 
the same time it will be attractive to refund filers and 
balance-due filers as well. If they have an additional month if 
they file electronically, I believe they would take that time.
    Chairman Johnson. Mr. Harris.
    Mr. Harris. I think the extended deadline is one of many 
reasons that we can approach these balance-due filers and 
encourage them. There are a certain group of people who always 
want to wait until the last minute to do everything, and giving 
them 30 more days, only if they file electronically will 
clearly motivate that group of people. It is not, I think, 
enough to get to the 80 percent, but I think it is one of the 
many issues that we have to address. And I have heard nothing 
but really good suggestions here today.
    Chairman Johnson. And would you eliminate their right to 
ask them for the right to file later, to defer their filing?
    Mr. Langer. I think that that is the problem. If you do not 
offer them an extension on May 15 to be equal to a paper 
extension, you may in fact hurt some of the incentive, in that 
now they are faced with a 30-day window, and they have no 
options after that. So I would like to see that they still have 
an option on May 15, if factors exist, that they could still 
get an extension beyond that.
    Mr. Harris. I agree with that. You need to provide the 
provision someplace--it may be in the Code or just in the 
regulations that come out afterward. But you need to provide 
the opportunity on May 15. If they are not in the position of 
filing a tax return at that point, because there is a K-1 
missing or whatever, that they would be able to secure an 
extension, even though they are committing to file that 
extension electronically; that is fine. The return will come in 
electronically, but you cannot have it--if you leave it set up 
the way it is now, where, either they file for an extension on 
April 15, or they just do not file for the extension and assume 
that they have until the May 15 filing date, and then they do 
not have all the data.
    Or worse, you get to a point where for some reason they 
cannot file electronically. This all assumes, before you 
implement this, that the IRS has to accept all returns that can 
now only be filed using paper. I assume that is what the 
thinking of the Subcommittee is. The way the legislation is 
drafted, they would have to be able to accept all tax returns. 
You need to provide something for that person or you are going 
to kill the incentive, because they will instead go back and 
get a protective extension.
    Chairman Johnson. Thank you. Mr. Carver, what is your 
evaluation of the estimate that has been made, that a paper 
return costs $7 for the IRS to process?
    Mr. Carver. This is a real snakepit. I have been working 
some with the Commission. I spent a lot of time working in the 
Service before that, trying to come up with a cost.
    My budget to run the 10 service centers was about $1.3 
billion a year. Of that, about half--I am saying $700 to $800 
million of that was for the returns processing, and that is 
taking returns in, stacking them and sorting them to transcribe 
the information in the usual format. That includes this error 
loop that was discussed earlier.
    But if you have 200 million returns--the 1040s are the main 
cost factor. There are business returns, the 941 returns are 
processed very inexpensively because there is not much data, so 
most of the cost is 1040s. If you take that $700 or $800 
million, and said there are 100 million tax returns, you are 
pretty close to $7 or $8 a piece for labor costs. It does not 
include the capital costs of those service center buildings; 
the capital costs of the equipment that is purchased.
    The budget I have was maintenance, some power and water, 
and mostly salaries. So the cost of $7 or $8 is in my mind 
pretty close. The danger to IRS though, by saying $7 to $8, and 
have somebody cut their budget, that is too big a risk because 
you do not know what the volume of returns are coming in. You 
cannot close one of those service centers if you get a 10-
percent volume decline. You have to do something like saying, 
OK, in 5 years, this is the plan, this is the volume you will 
have, and you must close five service centers in that period of 
time and be ready for it at that time. That is why I really 
agree with setting goals, because it forces these capital goals 
to come along with it. It is a tough figure though.
    Chairman Johnson. In other words the effect on the whole 
structure, the bureaucracy and its physical facilities, will be 
so dramatic by the time we reach the 80 percent that it needs 
to be planned for in advance.
    Mr. Carver. Yes, ma'am, carefully and in phases. Some of 
the numbers we developed earlier on a failed modernization 
effort that was supposed to be in place by 1996. The numbers 
that we were using for service center employees; that is, the 
temporary people that we hire to transcribe and so forth, those 
numbers are running $20,000 to $28,000. The system that was not 
delivered last year and was supposed to be, would have 
eliminated it.
    So the numbers are much higher than that for electronic 
filing, because it saves all of that work in the centers.
    Chairman Johnson. And last, and then I will yield to my 
colleagues. It does seem to me that 10 years is a long time to 
reach 80 percent, given how may people are already doing a lot 
of this that could be translated.
    I think you look at the pace of technological change, and 
the amount we at least know about what is currently happening, 
it seems to me that our goal should be 5 years.
    Mr. Carver. I agree. I think the 10-year figure is probably 
going to be good for people who do not now have computers, and 
cannot see themselves ever becoming automated. That gives them 
enough cushion that they be will be comfortable for the rest--
--
    Chairman Johnson. Does the 20 percent not give them cushion 
anyway?
    Mr. Carver. Yes, I think 5 years is good.
    Chairman Johnson. Mr. Lane.
    Mr. Lane. Can I just add something on? It seems to me--I 
have been coming to these hearings for about 1\1/2\ years, and 
I have heard the IRS asked what it costs to process a tax 
return, at almost every one of those hearings. It is 
inconceivable to me that 1\1/2\ years later we do not have a 
firm number on that.
    GAO ought to look into it. If they cannot come up with a 
number then somebody someplace has to be able to say, Here is 
what it costs to process this paper return. And we have heard 
numbers. I agree with Bob, you take his number and it is $7 or 
$8 a piece. If you say that to IRS, they say Well, no, somebody 
said it was $1.17 at the Commission hearings. And the reaction 
on that was, well, where did that number come from?
    You know, there is an answer here, and it is not that 
difficult to get at. I am sure there are going to be qualifiers 
that go on, and explaining what the numbers should be, but if 
they can't come up with it in 1\1/2\ years, then maybe you 
ought to send GAO in, or ask for a committee of volunteer 
auditors from our organizations; we would be happy to provide 
it. But somebody ought to come up with that number so we can 
know what we are talking about.
    Chairman Johnson. I was disappointed in Mr. Lubick's 
comment this morning, about the $7 being way way high. Because 
when you look at the impact on the hiring of temporary 
employees, I mean known high costs investments, it is really 
hard to imagine that it is not going to save an enormous amount 
of money, and increase the accuracy of the whole process. This 
Subcommittee has spent years on how we should help taxpayers 
protect themselves when they have a difficulty with the IRS. 
Anything we can do to reduce the error rate is going to be very 
good, not only for the taxpayers but for the bureaucracy.
    When you look at the impact that complexity has had on our 
tax system, it is very discouraging. That is only going to 
dissolve slowly and over time. So anything we can do to ensure 
accuracy of data going into the system, protection for the 
taxpayer, I think this issue of guaranteeing 24 months 
protection from audit instead of 36 months exposure is a very 
thoughtful recommendation. You are right, that will motivate 
people. And you only qualify if your data is accurate, and that 
that accuracy is affirmed by the IRS through its own matching 
processes so you are exposed to an intense scrutiny to be sure 
that your data is accurate.
    Frankly, I do not think we have a right to keep people in 
jeopardy for 3 years in today's world, and that I think is a 
very thoughtful suggestion. We appreciate your comments today. 
While there are many more questions that could be asked by me, 
I am going to yield to my Ranking Member, Mr. Coyne.
    Mr. Coyne. Thank you, Madam Chairman. I would like to 
address my question to the preparers or people who are 
representing preparers.
    Is there any category of the 120 million filers that 
electronic filing is not necessary for or not desirable for, or 
just is the wrong ticket for them?
    Mr. Harris. Under the current system I think the numbers 
speak for themselves. There is a great many people right now 
that see no advantage in filing electronically. What we have to 
do is create incentives for all of those people now to find 
benefits in electronic filing. We see it working in the refund 
market. There is a benefit to the taxpayer. There is a benefit 
to the preparer to build their business.
    Outside of that right now, most practitioners and most 
taxpayers see absolutely no benefit in it. I think we should be 
able to create benefit for all taxpayers if we really are 
thoughtful in thinking in the future.
    Mr. Coyne. What would our motive be for doing that? Why 
would we want to do that?
    Mr. Harris. To motivate all taxpayers?
    Mr. Coyne. Yes.
    Mr. Harris. Well, I think clearly, whatever the savings is, 
whether it is $1 or $6, I think certainly we have a more 
effective system.
    I think also one of the things that we have to recognize is 
one of the efforts of this Commission was to offer a better 
service IRS, more service oriented. I think taxpayers play a 
role in that. I think if they expect answers on a timely and 
efficient manner, they should always be willing to furnish 
information the same way. And it is not practical to be able to 
ask someone to give me information immediately when I file my 
tax return in a very inefficient manner. So I think the 
taxpayers, if they really want good service, have a role to 
play.
    Mr. Coyne. And when you say save money by encouraging 
electronic filing, you mean save money for the Service, for the 
government.
    Mr. Harris. Certainly there is a savings there. I think we 
have to offer some incentive to others. Certainly it cannot 
cost more to file electronically to the taxpayer. The tax 
practitioners must be able to either find a way to save money 
or use electronic filing as an incentive to build their 
practice.
    One of the problems with electronic filing initially was 
that the initial focus was on the refund taxpayers. IRS could 
input millions of 1040-As in the time it takes to do a couple 
hundred thousand complex 1040s. So what the Service did was 
focus on volume, which is all the little stuff--the 5 or 6, or 
15 data elements.
    For example, not a single tax return I prepared last year 
could be filed electronically
    Mr. Coyne. Could be.
    Mr. Harris. Could be. They did not qualify, primarily 
because the type of tax returns I do tend to have more Schedule 
Cs or more partnerships than are allowable. There were 
tolerance levels built into the system. So really what the IRS 
needs to do is focus on--to answer your first question. There 
is no segment of that $120 million that we would not benefit by 
having go in electronically. Everybody would benefit from it. 
The practitioners benefit from it because there is one path to 
get everything in. You get a benefit you do not get now, which 
is a confirmation back IRS got it.
    I think I alone support the post office on certified mail 
receipts. I mean, we send everything certified, return receipt 
requested. I think everybody at the table probably does the 
same thing. So there are real incentives to have everything 
going electronically. The bigger the returns--the more complex 
the data entry elements for IRS, the more expensive it is for 
IRS to process that return. I think Bob Carver could back that 
up. So why not emphasize on getting those tax returns first. So 
there are real incentives for everybody to do it.
    Mr. Coyne. Mr. Zimmerman, I wanted to clarify something 
that I think you said. You had offered a free electronic filing 
service and only 60 percent of your clients took advantage of 
it, is that right?
    Mr. Zimmerman. Forty percent of our clients took advantage 
of it, 60 percent did not. What we have to come up with is a 
way to show that there is a perceived value to the clients to 
file electronically. They have to want to do this. There has to 
be a reason to do this. Just to save the IRS money is not a 
good enough incentive for a taxpayer. There has to be something 
in it for them. And I think it is part of the education 
procedure.
    One of the things that we find is a majority of our younger 
clients will take electronic filing. The older clients are much 
more hesitant to file their returns electronically. That is why 
it is an education procedure. That is why we suggest that the 
IRS mount a massive campaign to educate the public on why it is 
important to do so and what the benefits are.
    People just get into the habit of mailing that tax return. 
They like to take it home. They like to review it before they 
drop it into the mailbox. When it is electronically filed, we 
push the button, it is gone, and for all intents and purposes, 
they do not get another opportunity to look at that tax return. 
So, again, it is just educating the general public on the 
benefits of electronic filing. And certainly one benefit is 
those returns are correct. The paper error rate of 20 percent 
is reduced to less than 1 percent on electronic returns. That 
really gives a client peace of mind, knowing that that return 
is accepted, has been received by the IRS, and it is, for all 
intents and purposes, correct.
    Mr. Lane. Can I add something to that? There is a 
tremendous--and we talked about this before in hearings--There 
is a tremendous mythology among the taxpayers about their 
dealings with IRS, and a sizable percentage out there will say, 
Well, I do not want it to go electronically to IRS because I 
have a higher chance of getting audited, that is true. We 
still, 25 years later, are explaining to people, if you use the 
label from the tax package it does not mean you have a higher 
chance of audit. But they absolutely believe those three codes 
up there, that are basically a check digit so IRS can save some 
keystrokes, actually code their return for audit, so they throw 
it away.
    We have this tremendous mythology built up. It is almost 
like saying, as long as I have had this Ways and Means pitcher 
here, a bat has not flown into the room, so that keeps bats 
away, and it is crazy. But that is the logic they have. So what 
we have to do is focus on educating the taxpayers, and the best 
thing the Service could do would be to come out and say, We 
have less audits on electronically filed returns than we do on 
other returns, you would get a stampede of people in to file 
electronically, and they need to publicize that. The problem is 
that the Service would be reluctant to do that because they 
would think they would be putting out a full-page ad for 
anybody that wanted to do a tax refund fraud scheme to just 
start filing electronically.
    But that is the case. Tom is right. It is an education 
issue with taxpayers.
    Mr. Coyne. Thank you.
    Chairman Johnson. Mr. Portman.
    Mr. Portman. Thank you, Madam Chair, and thanks to all of 
you for being here. I noticed in looking at the Commission 
testimony in preparation for this, that each one of you also 
has testified before the Commission, with the exception of Mr. 
Wolfe and Mr. Zimmerman, who were represented by your able 
senior executives. One of them is sitting behind you, Mr. 
Zimmerman, who did a great job for H&R Block. But I appreciate 
all the time and effort that you have put into this.
    This is really exciting because there are very few things 
in the world that are truly win-win, and this is win-win for 
the taxpayer and the IRS. It is unbelievable to me that we are 
in this situation where we have not made more progress, because 
it is so clearly a classic win-win situation. And Joe Lane 
mentioned that it took us less time to get to the moon than we 
are laying out for this 80-percent filing. It took us 8 years 
to get to the moon, and since Joe is surely as charismatic as 
John Kennedy, maybe we should shift from 10 to 8 years.
    But this is just a great example, I think, of being able to 
do something that is good for the taxpayer, that also happens 
to help the government and the IRS quite a bit.
    Let me just ask Mr. Carver one general question, because 
you have been great before this Subcommittee and the Commission 
on arriving at cost data and so on. I have a more general 
question though, because you did run the service centers and 
have real institutional knowledge of the Service.
    Just personally, if you do not mind--we are off the record 
here, right? Why has the IRS not moved more aggressively over 
the last decade and a half in the electronic filing area? What 
is your personal view of that?
    Mr. Carver. I have probably a half dozen personal views. I 
think the simplest reason was, the beginning of their 
modernization effort, the technology they envisioned was 
scanning and optical recognition. Every return that came in 
electronically removed returns from that, and their business 
case and how to pay for it. I think that was some of the 
beginning.
    The second part of it though is, we talk about taxpayers 
being reluctant to do electronic filings; revenue agents and 
criminal investigators who do statistics of income are having a 
tough time figuring out how not to have a piece of paper that 
somebody signed, knowing what they were signing, with that 
penalty of perjury. They just do not believe you are going to 
get the truth, and they are having a tough time managing their 
world of audit, or statistics, or criminal investigation 
without paper and evidence. And that is a smaller group, but 
that smaller group is at the senior levels of every 
organization. And it is the large car/small car syndrome, I 
think. I really believe that is it.
    Mr. Portman. One of the outcomes of successful enhanced 
electronic filing would be fewer temporary employees at the 
service centers, and fewer service centers, I suppose.
    Mr. Carver. Yes.
    Mr. Portman. And I honestly do not think that is the reason 
we have not moved as aggressively although one might surmise 
that having more employees at the IRS might have been one of 
the motivations for not moving to this, because you will have a 
smaller and more efficient IRS--I do not think that was the 
reason. I think there are other reasons. You stated cultural 
reasons; the fact that certain technologies were viewed as the 
preferred method. But again, we have an opportunity here to 
meet all of those concerns, and I think have benefits to the 
Service, the taxpayer and so on.
    There are a lot of questions I would love to ask, and maybe 
I can talk about them in private later. But this Subcommittee 
has to come up with this report, and Ms. Johnson has asked most 
of the good questions. I think we have gotten good answers. The 
two key ones are the fee and the extension, I think, that we 
still need a little more input on.
    Let me just be clear. I think H&R Block stated its position 
clearly on the fee and the extension. In terms of the general 
notion--let us stick with the fee for a second--of paying a 
fee--forget who it is paid to--do we have agreement from the 
other panelists that that would be a good incentive to put in 
place?
    Mr. Harris. The payment to the practitioner or the 
transmitter?
    Mr. Portman. Yes.
    Mr. Harris. I think there needs to be an incentive. That 
would help. I mean it would certainly move some people to give 
them $2 or $3, or whatever the number is for each return they 
file electronically.
    Mr. Portman. In the legislation though there is no 
stipulation as to the amount; it is a fair market cost.
    Mr. Harris. I think there has to be clear incentive to the 
practitioner community that this is in their best interest. I 
do not know what that number is. I am not even sure what that 
incentive is. It could be something as out of the box as 
furnishing them the software at no charge to electronically 
file the returns, but there needs to be incentive to move 
people into electronic filing.
    Mr. Portman. OK. Extension of deadline. I am sorry. Mr. 
Carver.
    Mr. Carver. Just a quick one. The realities of those people 
that work in the service centers now--the temporary employees--
if you do that same entry work, because you have to sit there 
and enter every item in the software, whether it is at your 
home PC or whether it is in the H&R Block office of a 
practitioner's office, there is a labor cost. And I think it is 
fair, that if the government is getting a much better quality 
product, and able to do their job better, that they split some 
of the savings they are having for not doing that labor, back 
with the people they are transferring the labor costs to. That 
is my personal feeling about it.
    Mr. Lane. Can I come in under fee issue? The fee issue, as 
we have pointed out in our testimony, there are other ways to 
incentivise practitioners to get involved in this. The fee is 
an interesting concept, and as I said, we see the package as a 
consistently woven cloth. It is a toolbox, and there are 10 
tools in it, and they are all needed for different things.
    The problem you have with the restriction on $2 or $3, 
whatever it is, but if they cannot be charging the client for 
electronic filing--The problem you have with that, is that for 
a small practitioner with 200 or 300 clients, you are talking 
about a $600 payment, and in exchange for taking on all of this 
additional processing work, which if they are not able to 
charge the fee to the client, they are going to be paying a 
transmitter, because they do not transmit themselves; they are 
going to be paying a fee to some transmitter.
    So the problem you have is the technical support, if it is 
not bundled into their software package--some software packages 
provide the electronic filing option for no additional charge. 
And I think what will happen is--we happen to support a 
marketplace resolution to this problem. I think what will 
happen is, if the IRS accepts all forms, and incentivises it 
along the lines that are suggestions we proposed in our pilot 
test--let us file powers of attorney electronically, let us 
file transfer requests electronically, let us file balance-due 
returns on March 15, and not transfer the credit until April 
15. I mean there are all sorts of incentives you can build in. 
The market will exist. You will get a tremendous increase in 
electronic filing, without the necessity of having to have the 
Treasury shell out this money.
    I have some concerns and our members have some concerns, 
about taking away the ability to get the technical support you 
need to support filing these things electronically, because 
they are complicated processes; they are not just pushing a 
button and sending it off in many cases. Sometimes they bounce 
back, and then somebody has to do the work on resolving that.
    That whole issue for the average firm, of $600 that they 
would get back is probably not worthwhile. It would be a 
disincentive to the practitioner. But as we see it; there are 
some cases it is going to be an incentive, so we did not object 
to it, but I think we have some problems the way it was worked.
    Mr. Portman. It is part of the woven fabric, plus over time 
those fee structures will adjust to take that into account.
    Mr. Lane. Exactly. The marketplace will determine what the 
pricing structure will be.
    Mr. Portman. My time is up. Just on the extension, and Mr. 
Zimmerman, I understand you are opposed to the fee and opposed 
to the extension. Let me just ask a general question on the 
extension.
    As part of this woven fabric as Joe said, because it is a 
combination of many different incentives, is there any 
objection specifically to the extension as part of this series 
of incentives?
    If I have a moment, Mr. Zimmerman, I will let you speak, 
subject to the Chair's cutting me off because my time is up, as 
to your concerns on the extension.
    Chairman Johnson. You can respond.
    Mr. Portman. Your concerns on the extension, and again, I 
thank you all for your work.
    Mr. Zimmerman. Yes, I think there is excess capacity in the 
system now, certainly in the many operations out there. It is 
certainly true in H&R Block offices. We've got excess capacity 
from the middle of February clear to the 1st of April to file 
more returns electronically, prepare more returns 
electronically. So I do not believe moving the deadline is 
going to be that large of an incentive or that it is really 
going to dramatically increase the number of returns.
    The fee issue is something that I think is important, and 
the first step that we need to do, before any incentives are 
discussed, is to figure out exactly what we are dealing with. 
How much does it actually cost us to process a return at the 
IRS? Before we can start divvying up the money and the savings, 
it would really be nice to know exactly how many dollars that 
is. And then, if there are sufficient dollars, and it makes 
good business sense to do that, incentives might be the way to 
go. But certainly, just throwing this out on the table, and not 
knowing where to start does not seem to be too prudent to me.
    Chairman Johnson. Ms. Thurman.
    Ms. Thurman. You have not really had much input into this, 
and you actually are one of those that proposed the $3 or 
whatever fee. Maybe you would like to explain to us, and I 
realize your position is a little different because you are a 
transmitter, and not necessarily one who puts everything 
together. You just kind of bundle it and send it to us. So 
maybe you would like to give us some explanation on your 
reason.
    Mr. Wolfe. This idea is something that the Commission came 
up with. We supported the Commission's position.
    We believe that cost is the number one, or most significant 
reason people do not file electronically. We would like to get 
that cost down to zero. One of the ways that we think would be 
most effective is to pay an incentive. Specifically we believe 
the incentive should be paid to the transmitter, because the 
costs of electronic filing--not what taxpayers pay, but the 
real costs of doing it--are primarily incurred by the 
transmitters. Transmitters have the computer systems, the 
programmers, the customer service staff, the technical support 
staff that make this happen. We believe over time volume will 
increase so that we can get the actual cost of transmitting the 
returns down to just several dollars. Our belief is that if 
that can happen, and if an incentive then is paid to cover 
those costs, there is no reason that we as a company should not 
provide that free to all of our customers, including 
professional preparers, as well as in consumers. If electronic 
filing is provided for free, then hopefully that will extend 
all the way out to the individual taxpayers.
    Ms. Thurman. I am not sure that I understand all of this. 
If my accountant decides to send my tax return by electronic 
transfer, he cannot just do that? Do I have to go through 
somebody? Is that by law?
    Mr. Harris. Some can. Some have made the decision to have 
the ability to do it themselves.
    Ms. Thurman. What is the cost to them to do that if they 
decide to do it in-house, without anybody else in the middle?
    Mr. Lane. It depends on the software product they have.
    Ms. Thurman. I am sorry?
    Mr. Harris. It can vary from software product to software 
product.
    Mr. Lane. It depends on the software product. It can be 20 
cents, it can be $20, depending on the package that you 
purchase. Some of the software vendors have an additional 
charge for each tax return that is submitted electronically. 
And it also depends on whether or not there are any financial 
products in connection with it. For example, if there is a 
refund anticipation loan that is connected with it, there are 
additional fees on top of that. And then that has to go through 
a transmitter because there is not a direct transmission from 
the practitioner's office to the Service, because there is a 
bank involved, and then there is a financial product involved. 
So it has to go through a transmission source, and then the 
bank. So there is a controlling element that is outside the 
practitioner's office when that refund comes back through.
    I confused you more.
    Ms. Thurman. I do not know that I am confused necessarily, 
as much as that I think there is a lot more to this whole idea 
of transmitting electronically that is outside of the realm of 
IRS, as much as it is within the business world in itself.
    Mr. Lane. That is right.
    Mr. Harris. It is more than just pushing a button. I think 
the perception is the software that we use to prepare manual 
returns or paper returns, all you would have to do is push a 
button and it would go electronically, and it is not that 
simple. There is more work involved. There is more cost 
involved that the practitioners now have to charge for to make 
money, or they have to have the increase in business, which 
right now the refund marketplace provides.
    Ms. Thurman. So who then controls all of this? I think what 
I am trying to get to is that it seems that it is easy for us 
to talk about IRS on this end as far as the electronic filing, 
but what I am hearing you say is there are a lot of other steps 
that are incurred that really have nothing to do with IRS at 
all, and so then, if that is controlled, who controls that, and 
who stops those barriers from happening, and how do I get to 
that point that I can push that button and send my filing?
    Mr. Harris. I think that the ECAG that this bill is putting 
in place is extremely important. It has to bring all parties 
together to develop a program that is beneficial to everyone, 
including the taxpayer, the practitioner, and the IRS. And I 
just do not think that program exists today.
    Ms. Thurman. So where is Bill Gates when we need him?
    Mr. Langer. That program really does exist today with many 
of the software packages. There is a lot of integration done 
with tax packages and transmitters and all electronic filers, 
trying to make that as easy as possible. There is a cost to 
develop the software; there is a cost for support, which is 
mentioned here. And the cost for the telephone communication is 
actually probably the smallest cost of that whole process. And 
so that can happen today. Companies like Intuit, other tax 
preparation companies, actually do have it, where you can 
basically press a button; the file is created. It goes through 
validation. It is transmitted either directly to the IRS or to 
the transmitter, and then goes on from there. So that really 
does happen today.
    Mr. Wolfe. To give you a quick example, with TurboTax and 
people who file from home, our costs last year to actually 
process a complete electronically filed return were $10. We 
believe that we can drive those costs down dramatically. But 
those costs included computer costs, costs that we paid to 
outside companies, such as Nelco and NUTS, as well as the 
significant costs of Intuit personnel in call centers that take 
calls, and are answering questions from individual taxpayers 
about how electronic filing works.
    Ms. Kelley. And if I can make the comment, that is true in 
businesses as well, business taxpayers. They cannot just flip a 
switch, and there is a significant amount of internal 
preparation that goes into that as we saw with the EFTPS.
    Mr. Lane. Let me give you an example, just of some of the 
additional strokes you have to do. When you file a paper return 
most practitioners do not key in all of the W-2 data; they only 
key in the wage data on there, because for calculation purposes 
that is all you need. But if you file an electronic return you 
have to rekey everything that is on the W-2 because that has to 
get transmitted electronically. So there are additional 
keystrokes in the practitioner's office.
    This is what I was talking about before, where when you 
start to do parallel systems in an office you have a tremendous 
potential to mess up and have it come back, if the part-time 
person you have working for you does not understand the 
difference between an electronically filed return, what path 
that follows once it leaves the preparer's office as opposed to 
a paper return. So there are additional steps that complicate 
it.
    Mr. Zimmerman. Let me run down just a couple of things 
here. These are some of the steps in the electronic filing 
process. We have our preparers, 85,000 of them, that we have to 
train and educate on how to electronically file returns. We 
have our software development group that develops our 
electronic filing package. We have our support group which 
supports that electronic filing package because the returns 
that we send to the IRS are bounced back because of errors, and 
we have to correct those.
    We have all of our phone lines in our 8,500 offices, 
several thousand of them out there that we use to file directly 
from our offices to our third-party transmitter. We have all of 
our advertising that I mentioned, that we spend up front to get 
people interested in coming in to electronically file their 
return. We have our transmitter cost that we pay to a third 
party. We've got all of our back office costs of bundling up 
all the 8453s, attaching the W-2s, and mailing all that 
information to the IRS; getting letters back from them saying 
that we are missing 8453s and W-2s; going back out to the 
client, getting that information; remailing that information 
back in to IRS so they can do their verification. And the 
paperwork nightmare of the 8633s. Every time we move a district 
manager around I have to sign off on all of these forms so that 
we can electronically file returns.
    So, if you start putting all those costs together, and if 
you have a good high quality electronic filing product, it is 
not inexpensive.
    Mr. Carver. I just need to add one thing. This is a 
transition cost. As the IRS is going to have downsize as 
electronic goes up, and change the way they do it, the industry 
on the outside is going to do it. I think Joe's case is very 
clear about two filing lines. When it gets to be one all the 
software people in the country will have to provide that, and 
so it will be seamless at that point. But in the meantime there 
is some transition costs. So I think if you make it 10 years, 
these costs will hang around a long time. If it is a shorter 
period of time than that it is amazing how fast the software 
and the rest of the industry can adapt to what their customers 
want. It is incredibly fast.
    Ms. Kelley. And the same thing is true with businesses, and 
I say with complete confidence, that to the extent that 
business can work with government on these electronic programs, 
their costs will go down.
    Chairman Johnson. Will the gentlelady yield.
    Ms. Kelley. All right.
    Chairman Johnson. I understand the point about two systems 
and the problems that that creates, and the inevitability of 
the two systems situation during the transition. But I do not 
quite understand Mr. Zimmerman's comments in the light of Mr. 
Wolfe's comments.
    Many of the costs that you point to, Mr. Zimmerman, you 
also have with paper filings. And what are the unique costs, 
over and above, for an electronically filed return, and are 
there any offsetting savings?
    And Mr. Wolfe, when you say $10, are you saying that it 
cost you $10 over and above what it would cost you to file that 
same return manually, through paper?
    Mr. Zimmerman. It is very hard right now for us to break 
out these costs between our electronically filed returns and 
our paper returns, just because they are dual systems, and most 
of it is all blended together. So I cannot give you an exact 
cost of what it cost to file a return electronically versus on 
paper.
    Hopefully, once we get systems that are integrated, it will 
be less expensive, we can charge less, and certainly we are 
going to lower our fees this year and we are going to see if 
that helps drive more business in, and helps us increase the 
number of electronically filed returns.
    Chairman Johnson. But for instance in advertising, you are 
going to advertise anyway. It is a question of what you say in 
the advertisement, and you are going to advertise in a way that 
you think will maximize your position in the market. And if you 
are advertising electronic filing in your advertising, it is 
because you think it is going to expand your customer base.
    So I do not know that we can attribute your advertising 
costs to the cost of electronic filing.
    Mr. Lane. Could I add something? He does have a cost. The 
way the current system is set up, if he does a 1040-EZ for 
somebody, and files it, that is a 1-page form. If he files it 
electronically, he still has to send IRS the 8463--I mean the 
thing with the signature, and the W-2s, so he has in effect 
doubled his costs by sending that to you electronically, 
because he still has to send in a piece of paper and a W-2 
attached to it, which he might as well just have done with the 
1040-EZ. So he has incurred twice the costs to file that return 
electronically than it would have been to just sent it to you 
on paper.
    Mr. Zimmerman. There are incremental costs to doing this, 
and again, I think as we work together we can drive those costs 
down, so it becomes cost effective for both the IRS and for 
taxpayers to transmit their returns electronically.
    Mr. Lutes. Our company only does electronic filing, and we 
create software only to electronic file. And we have a 
development center of about 25 programmers that do Federal and 
State electronic filing software, and that is all we do. And we 
also have support staff to have customers call in about only 
electronic filing issues. We work with companies like Intuit. 
They handle all of the tax preparation calls; we handle the 
electronic filing costs. And so the costs of what we have done 
really is the electronic filing cost alone. So we can identify 
that cost very easily.
    Chairman Johnson. And what is your cost per return?
    Mr. Lutes. It kind of varies, based on the company a little 
bit, but it can range from anywhere from $4 to $7.
    Chairman Johnson. Mr. Wolfe.
    Mr. Wolfe. The $10 number that we quoted is for people 
using our product at home. We find that people that use it the 
first time generally have more questions, and it costs money to 
answer their questions. When electronic filing is being done 
through a professional preparer, they get very good at it, and 
so there are fewer questions that are asked of us.
    Our software is perfectly capable out of the box of 
printing a paper return, so the costs that we incur, the $10 
that we incur for electronic filing, are all incremental costs. 
We believe, as several others have testified, that we can drive 
those costs down dramatically. We are implementing new systems 
that will be fully functional this year, and even more 
functional next year, if that is possible. And we think that 
those costs are going to come down to the $3 range very very 
quickly as volume increases.
    Chairman Johnson. Thank you.
    Ms. Thurman. I think you made a very good point about this 
issue, that the longer we linger, the longer it is going to 
take people to really get into this. And so, with the 
Commission--and there have been these recommendations for IRS 
and what they should be doing--if you were given the 
opportunity to tell those people out there in the world that 
were trying to get this done electronically, what would you 
tell them that they needed to do quickly? What kind of 
recommendations would you be giving them?
    Mr. Carver. Of the 70 percent that are already in 
electronic format today--and we are talking about 
practitioners, we are talking about the business returns and so 
forth. And I would start this meeting process, this committee 
process, to meet with those people to find out what it would 
take them--how quickly they could do it.
    Ms. Thurman. And they have not done that to this point.
    Mr. Carver. They have not done that, and they need to hear 
from those people, what it would take to get there in 2 years, 
or 3 years, or 5 years. And if you want to pay what it takes 
for 2 years, then you could do that. If you think the 5 year or 
the 3 year is a better one, then that is the way you go.
    Then the next step would have to be for those people who 
are not presently filing electronically, or do not have a 
computer, and then you need a separate kind of scale for them. 
But to say 10 years for everybody misses this opportunity of 70 
or 80 percent of the volume that is there, ready for some 
significant work; some hard work, but some quick work.
    Ms. Thurman. I want to ask Mr. Lane one other question 
because you emphasize this point in your testimony about the 
issue of the window period of time, from the 24 to 36 months.
    Quite frankly, what I do not know is what the answer from 
IRS would be. Maybe you can help me with this, since they are 
not here. But if we were to say that that was the incentive 
instead of money incentives or other, which is a lot easier 
probably to carry out, why would they tell you that that is--or 
they may not tell you that that is not something that could 
happen.
    Mr. Lane. Well, putting myself, in the guise of speaking 
for the IRS--I did that at one point; I do not do it anymore.
    Ms. Thurman. Oh, but give it a shot.
    Mr. Lane. I would suggest that their initial reaction from 
a cop perspective would be to resist it. The reality is, they 
are giving away nothing if they analyze it with a cold eye, and 
look at it unemotionally.
    Very few tax audits are started in the third year of the 
statute, most of them are started in the year after filing or 
the second year after filing. Very few are open in the third 
year after filing. Very few electronically filed returns are 
audited to begin with, and they have an overall audit rate at 1 
percent. So you are not looking at a significant giveaway. I 
think they would resist it, but if they were forced to look at 
it and really consider it, they might go along with it.
    Mr. Carver. If I may just add a quick comment. I think they 
would be very supportive of it. They cannot do their audit 
until they get the data through, and that data takes 18 months 
today. When you guarantee them the data is there in 6 months 
they will be ready and willing to change it, but not until.
    Ms. Thurman. Mr. Carver, I agree, and in fact that has been 
a contention that I have talked with some other folks about, 
because there has been some legislation that has been 
introduced. But some are saying, well, if we do not get the 
information how can you do this, and why would you limit us. So 
there is a lot of controversy over that.
    Madam Chairperson, I appreciate you giving me this 
opportunity to do extended questions, and thank the panel.
    Chairman Johnson. Thank you, Ms. Thurman. I do want to just 
ask you one other question. Repeatedly the issue of the forms 
that cannot be received electronically have come up, and Mr. 
Lane, you particularly have mentioned over and over again that 
we need to be able to get all the forms on. And clearly the 
whole 1040 community is the biggest community, and their forms 
are not acceptable yet.
    I do not see that we can reach the 80 percent unless we can 
get more forms on, because 80 percent of the taxpayers are not 
going to be eligible. So at what pace do you think the forms 
could be accepted by the IRS. What timeframe would we be 
looking at? Because clearly 100 percent of form acceptance is 
going to be really important to getting this system moving, and 
all the taxpayers involved.
    Mr. Carver, do you have any thoughts of that, and then I 
will open it to all of you.
    Mr. Carver. Yes, I do. The reason that there are so many 
forms and schedules now that are not on there, is because of 
the state of the equipment they have inside the service 
centers. It is old computer equipment that cannot handle any 
more complexity----
    Chairman Johnson. But just to stop right there 1 minute. 
That is going to take us quite a few years to fix, is it not?
    Mr. Carver. No, ma'am. I think that the equipment they need 
to replace it with is off-the-shelf kind of equipment that 
exists today. It is a matter of putting enough programmers on 
it to include that into the program. If you wanted to farm it 
out to the private community, they could probably do it a lot 
quicker. I mean, I just think it is a matter of how many 
resources you can get----
    Chairman Johnson. Do you think this is a couple of years 
project to get all the forms on?
    Mr. Carver. Absolutely. At the outside?
    Chairman Johnson. At the outside. The rest of you.
    Mr. Langer. I made a recommendation to the Service this 
spring, on how they could accept all forms electronically this 
year. They have the ability to accept what they call 
unformatted statement. And with any software company they have 
the ability to print the return, and print it basically in an 
unformatted way, much like the form would appear, but only in a 
text format. And that would allow any form to be filed 
electronically, and really not change the process that they 
already have; just allow more statements to be attached to the 
form electronically.
    They like the idea; they have not acted on it at this 
point.
    Ms. Kelley. Ms. Johnson, if I may. I think as well the 
expansion of electronic filing into business returns and 
business information documents, can really spike up what IRS is 
receiving, because as I stated before, some of those returns do 
not have the kind of complex schedules that some of these 
individual tax returns have.
    Also, if you take a look at market segmenting, when I was 
on IRPAC, the IRS Information Reporting Program Advisory 
Committee, there was a gentleman from a major financial 
institution that raised his hand and said they could give IRS 
50 million returns tomorrow, if they had the equipment to 
accept it. So, I think if the IRS looked at, instead of 
mandating everyone, look at the kind of companies that are 
willing to give them large volumes, and go after things in an 
incremental fashion, which seems to go against their 
implementation philosophies to date, that you might see a very 
large return in a shorter amount of time, than trying to figure 
out the entire universe. And again, working with the gentlemen 
here and other kinds of companies that can provide you with 
that large return on a smaller investment, I think I would be 
beneficial to upping your volume.
    Chairman Johnson. I appreciate your patience in this rather 
long hearing, but we do very much appreciate your input. Thank 
you. The hearing is adjourned.
    [Whereupon, at 2:28 p.m., the hearing was adjourned.]
    [Submissions for the record follow:]

Statement of American Bankers Association

    The American Bankers Association (ABA) is pleased to submit 
this statement for the record in connection with the September 
9, 1997 hearing before the Subcommittee on Oversight of the 
Committee on Ways and Means of the United States House of 
Representatives on the recommendations of the National 
Commission on Restructuring the Internal Revenue Service 
(Commission) to expand electronic filing of tax returns.
    The ABA brings together all elements of the banking 
community to best represent the interests of this rapidly 
changing industry. Its membership--which includes community, 
regional, and money center banks and holding companies, as well 
as savings associations, trust companies, savings banks and 
thrifts--makes ABA the largest banking trade association in the 
country.
    At the outset, we would like to commend Chairman Nancy 
Johnson (R-CT) for holding this hearing to further examine the 
June 25, 1997 report of the Commission. We would also like to 
commend Representative Rob Portman (R-OH) for his work as co-
chairman of the Commission and for the introduction, along with 
Ben Cardin (D-MD), of the ``Internal Revenue Service 
Restructuring and Reform Act of 1997'' (H.R. 2292). This 
important legislation would provide a number of incentives to 
encourage the electronic filing of tax and information returns. 
It would also authorize appropriate amendments to the Internal 
Revenue Code to ``facilitate paperless electronic filing.''
    The ABA has worked closely with the Commission to develop 
proposals to improve compliance through the effective use of 
advanced technology. The ABA particularly supports the 
Commission's recommendations to expand electronic filing of tax 
and information returns. Electronic filing would significantly 
improve efficiencies and promote the goals of the financial 
services industry to expand new products and services while 
also promoting Internal Revenue Service (IRS) efficiency and 
other objectives.
    The Taxpayer Relief Act of 1997 (P.L. 105-34) [hereinafter 
TRA] contains a provision, which if left uncorrected, will 
impede rather than encourage electronic filing. A critical 
component of the streamlining of the electronic filing process 
is reducing the number of paper checks written by taxpayers to 
the IRS. The payment of taxes by credit card is an important 
subcomponent of reaching that goal. Permitting taxpayers to 
make tax payments by credit card is also expected to improve 
taxpayer convenience and satisfaction. The TRA permits the 
payment of taxes by credit card but prohibits the payment of 
any fees by the IRS for use of a credit card tax payment 
service. By contrast, the instant legislation, H.R. 2292, 
introduced prior to passage of the TRA, contains a comparable 
provision that would also provide for a separate budget 
appropriation for payment of credit card fees. ABA urges you to 
correct the current law and pass legislation that would allow 
the IRS to pay appropriate merchant fees in connection with 
credit card payment of taxes.
    We believe that most taxpayers will not be able to use 
their credit cards to pay taxes under the TRA provisions. 
Typically, one bank is responsible for processing a merchant's 
charges and for servicing the merchant's account. Credit card 
companies incur costs and receive payments from merchants for 
those services, and we believe the IRS will not be able to 
receive those services free of charge.\1\
---------------------------------------------------------------------------
    \1\ By way of background, there are generally two parts to a bank 
credit card transaction. The credit card ``issuing bank'' handles card 
issuance and the cardholder relationship. It receives income from 
consumers to cover its operational and processing expenses. The 
``acquiring bank'' handles processing for the merchant (in the instant 
case, the IRS) and receives income primarily from a ``merchant discount 
fee'' to cover operational and processing expenses, credit risk, and 
expenses to support the merchant (including authorization, merchant 
accounting, customer service and supplies).
---------------------------------------------------------------------------
    It is axiomatic that anyone buying a service should pay a 
fair value for said service. There should be no special 
legislative exception made for the IRS. We believe that the 
implication that corporate taxpayers should provide financial 
services to the IRS, at no cost to the IRS, establishes a 
dangerous precedent with respect to the financial services 
industry and others. It has been suggested that the costs of 
providing credit card services be passed on to the taxpayer/
customer. We do not believe that is the proper solution. The 
IRS will likely receive a negative reaction from taxpayers that 
will only serve to increase taxpayer dissatisfaction with the 
IRS and the entire income tax process. Our proposal to permit 
IRS payment of credit card merchant fees would not provide any 
special treatment for banks. Indeed, it would simply restore 
the level business playing field that the TRA inadvertently 
upset.
    Currently, governmental entities at all levels, state and 
local as well as federal, are allowing taxpayers to make 
payment by credit card. The TRA provision prohibiting the IRS 
from paying ordinary merchant fees departs from current 
practice and prevents credit card banks from being able to 
offer card services to the IRS and, ultimately, to consumers 
who wish to expedite the filing and payment of federal taxes 
through the use of credit cards.

                               Conclusion

    The ABA urges you to pass legislation that will allow the 
IRS to pay the appropriate merchant fees in connection with tax 
payments made by credit card. Without modification, the current 
law will continue to impede and discourage the full 
implementation of electronic filing of tax and information 
returns.
    We appreciate having this opportunity to present our views.
      

                                

                American Society for Payroll Management    
                                         New York, NY 10025
                                                 September 18, 1997

A. L. Singleton
Chief of Staff
Committee on Ways and Means
U.S. House of Representatives
1102 Longworth House Office Building
Washington, DC 20515

    Honorable Ways and Means Committee Members:

    ASPM is a professional association of the senior managers who 
control the preparation of payroll and employment taxes for large 
employers in the United States. We represent large employers, systems 
vendors and tax service providers. As a group, we collect and account 
for a major proportion of the income and employment taxes the Internal 
Revenue Service receives.
    We take great pride in collecting and paying the taxes exactly as 
required by law in a cost-efficient and timely manner. However, 
Congress and the IRS could make our tasks easier by changing many of 
the ways they do business.
    Although there are many areas in which IRS restructuring may be 
appropriate, ASPM would like to see them attack Simplification and 
Reduction of Reporting Burden first. There are several initiatives 
which could significantly reduce employer burden as well as streamline 
IRS into a more effective operation. Some of the best initiatives, such 
as the Simplified Tax and Wage Reporting System (STAWRS) have stalled 
before the complexity of reforming the existing system and because of 
the inability of federal and state agencies to agree to standardized 
approaches. We believe that Congress must keep initiatives to simplify 
and standardize reporting systems alive, if the cost of tax collection 
is to be reduced. It is not desirable for Congress to issue mandates 
for new reporting programs to the states and employers. However, it is 
very important that Congress empower the IRS and SSA with the ability 
to set standard formats and definitions for all employers and federal 
and state agencies to use. State and federal agencies should be 
encouraged to exchange data in these standard formats, where 
appropriate, rather than require employers to report the same 
information repeatedly to different agencies in slightly different 
formats. Tax simplification will be difficult, if not impossible to 
achieve without standardization of formats or input requirements. SSA 
and IRS have a partnership in the collection of wage and tax 
information that needs to be streamlined and strengthened. We believe 
that state and federal agencies, such as INS, should leverage their 
efforts from these existing systems and not require additional, 
duplicate layers of reporting. Congress, not IRS, is responsible for 
ensuring duplication does not happen. No real progress will be made on 
tax simplification and reduction of employer reporting burden until 
Congress mandates a national harmonized wage code.
    ASPM believes a steady program of systems modernization must be 
pursued at IRS. Employers are rapidly changing and developing new 
technologies for exchanging data, imaging and networking. We have 
readily partnered with IRS and SSA in moving to new technologies, but 
IRS must pursue its upgrades in a deliberate fashion. We can support a 
limited number of enhancements each year, so it is incumbent upon IRS 
to move ahead steadily and avoid falling behind the current 
technologies and then trying to suddenly leap ahead. It is the crash 
modernization program that leads to millions of dollars of wasted 
modernization efforts. We strongly urge Congressional, OMB and IRS 
budget makers to keep IRS systems modernization efforts funded at 
consistent and proper levels, while requiring IRS to rationalize and 
automate these systems. This modernization effort is a partnership 
between employers and the government agencies, because it reduces the 
administrative cost and it lessens the burden of tax collection. Goals 
for electronic filing will not be met if IRS does not pursue a measured 
and planned systems modernization effort.
    ASPM believes IRS should strengthen its out-reach programs aimed at 
employers. Since employers collect the vast majority of the tax, it is 
clear employers must have timely, accurate and understandable 
regulations, guidance and publications, if we are to fully comply with 
the law. Without its partnership with the employer community, the IRS 
could not function. Yet, much of IRS regulation is aimed at levying 
egregious penalties for minor compliance failures, such as the late or 
insufficient deposit penalties. Severe penalties should be limited to 
chronically non-compliance employers, the fraudulent taxpayer, or 
grossly negligent taxpayer. The consistently compliant employer should 
not be subject to egregious penalties for minor or rare human errors. 
The complexity of the laws that employers are expected to administer is 
mind-boggling to anyone who is not regularly involved. It requires a 
great deal of effort to know all of the restrictions, reporting and 
deposit requirements. Compliance and collections can be helped only by 
the IRS taking a proactive and positive role in educating employers 
about current requirements and involving employers in pending changes. 
Improvement in the numbers of employers using electronic filing options 
can increase only if outreach programs educate them about the 
advantages and technical requirements of electronic filing. It is very 
interesting that IRS is proposing closing its Martinsburg Computing 
Center telephone support center at the same time it is starting 
initiatives aimed at improving customer service. The Martinsburg phone 
support center has traditionally been very responsive and has delivered 
high quality customer service to employers and other electronic filers. 
Martinsburg is widely considered to be one of IRS's most successful 
call sites.
    With OMB and Congress constantly searching for new revenue sources, 
such as non-cash employee benefits and ever faster deposit deadlines, 
the complexity and difficulty of the payroll and employment tax job is 
increasing all the time. It is extremely difficult to withhold more 
than an employee was paid to cover a non-cash employee benefit and to 
make that deposit on time. Congress and IRS in writing the legislation 
and regulations need to keep in mind the business systems that underlie 
these processes. It is very difficult for a payroll system to process 
payments made from the Accounts Payable department, which may be in 
another office or even in another city. While payroll withholding is an 
extremely effective tax collection tool, it cannot be used in such a 
way that it requires the employer to take on the employee's role in 
proper withholding election, nor can it require the employer to use 
information that it does not have. Out-reach programs, such as employer 
conferences, improved publications, improved communications and high 
quality telephone support more than pay for themselves in improved 
compliance and reduced efforts spent on error correction and prompt tax 
collection. ASPM believes that Congress should either encourage or 
require the IRS to work with industry representatives, such as ASPM, in 
designing processes, developing procedures, and implementing 
legislation that affects a specific industry or segment of industries. 
Too often, IRS develops a process or writes a regulation and then asks 
for public reaction after the fact. It would be far more efficient for 
the IRS to have those affected working with the IRS. This would reduce 
the likelihood of major flaws, the need to rewrite or redesign and 
would increase industry buy-in.
    The Internal Revenue Service frequently takes the blame for things 
that Congress does. It is very tempting for Congress to use tax 
penalties or loss of tax exemption for benefits in order to enforce 
social causes. This places IRS in the position of enforcing provisions, 
such as discrimination testing of benefits plans. ASPM urges you to 
place enforcement of social goals with the enforcement organization in 
the department or agency responsible for that function, such as DOL or 
INS. It is important for the cost-effectiveness and efficiency of the 
IRS that it stay focused on its core mission; revenue collection. Such 
unrelated regulatory requirements make electronic filing of information 
and tax returns from employers much more difficult and error prone.
    It is important that Congress pass legislation that is clear and 
enforceable. It is just as important that IRS write timely regulations 
that allow employer compliance to be effectively and efficiently 
implemented. It is important that Congress empower IRS to reward 
compliance and punish noncompliance. The worst thing Congress can do 
from a compliance perspective is to pass retroactive changes to the tax 
law. This almost always rewards the non-compliance employer and 
punishes the compliant employer. The repeated lapsing of the tax 
exemption for educational assistance and its retroactive extension has 
encouraged employers to take a wait and see approach toward compliance. 
It has also greatly complicated the job of developing automated systems 
to perform electronic filing.
    We would like to recognize the progress SSA and IRS have made in 
electronic reporting of W2 information, especially the download of 
state information from SSA/IRS files to state revenue offices. 
Currently, employers are sending W2 information by magnetic media or 
paper to the Social Security Administration (SSA). SSA captures federal 
and state data from the W2s, then passes the data to the IRS. SSA or 
IRS could transmit the data directly to the States. Getting the 
information in bulk and a standard format would have to be much more 
efficient and effective for the states than receiving large numbers of 
separate transmissions from thousands of employers. The current process 
utilizes very old technology requiring the manual loading of tapes and 
the processing of batch programs. This causes long delays. IRS 
frequently does not get the electronic submission information until six 
months after we submit the information. This time lag needs to be 
greatly reduced. The transmission from the federal agencies could be 
made via electronic file transfers and automated to eliminate a large 
number of what are now manual tasks. It would also benefit employers, 
especially large employers that do business in many states. Currently, 
employers must create magnetic tapes, cartridges or paper for each 
state and file this information separately with a different set of 
requirements for each state. This is a very costly year-end mandate for 
employers and for the states receiving the information. It would take 
federal leadership to mandate a standard format, but would not require 
significantly more federal or state effort.
    Electronic submission of W2 information is in pilot and should be 
put on a fast track, so it could be made available to all employers. 
Many employers are rapidly moving into newer, client-server 
technologies and the old tape formats are not even available on their 
newer equipment. When budget cuts were made last year, the IRS systems 
modernization project was heavily reduced. This makes no sense for 
employers nor for the federal government. Meaningful modernization of 
these systems is essential, if IRS is to continue to receive electronic 
information from employers without placing an extreme burden on 
employers to keep and maintain obsolete equipment solely to report to 
SSA and IRS. Budget funds should be redirected to meaningful 
modernization efforts and not just reduced.
    For all reporting requirements, the form of the reporting should 
follow the function being performed. Employers do not mind reporting at 
the state level, but such reports should be submitted to the employer's 
state who should in turn distribute the information to the other 
states. Things like child support should be sent to one central state 
agency, not to counties. Each state should distribute to the other 
states and to its own counties. If information is required to go to the 
federal government, then it should only go to one place in the federal 
government and then be distributed electronically to the other federal 
agencies, the states, and their agencies.
    ASPM would like to see IRS and SSA work more closely together. SSA 
and IRS also need to work more closely with the states. For example, 
SSA has asked IRS to accelerate W2 filings for employers going out of 
business. Paper forms for 1997 have been issued, but magnetic media 
formats have not been issued and won't be until July or August, 1997. 
The TY 1996 magnetic media format cannot be used because of 1997 format 
changes. When an employer with more than 250 employees goes out of 
business, they must still file on magnetic media. SSA recommends that 
the employer going out of business go back to IRS and apply for an 
exemption to allow them to file on paper. This is a lot to expect of an 
employer going out of business.
    On the pilot W2 magions for 1998, pilot project employers will be 
using the magnetic media specifications. Has SSA coordinated with the 
states that are still expecting the old federal format? Anyone helping 
IRS and SSA with a pilot must now consider if they will be incurring an 
extra expense of filing with both formats. This is still in the early 
``discovery stage'' as bulk filers contemplate participating in the 
pilot TY 1998 SSA program, but these questions should already have been 
answered.
    IRS should continue and emphasize development of a unified 
reporting standards specification for federal and state wage forms as 
they have done in the past with the TIGERS group within ANSI X12. 
Currently, federal and state specifications vary from agency to agency. 
This causes employers to spend endless hours in maintaining and 
conforming to the different specifications. The continued development 
of Electronic Data Interchange (EDI) is recommended. Also, federal and 
state ID numbering is just as varied. It would be more efficient to 
replace the current federal and state agency IDs, with a single 
employer ID.
    The Simplified Tax And Wage Reporting System initiative (STAWRS) 
was making great progress toward standardization and automation of 
reporting. There has been a tendency in the current administration to 
de-emphasize this effort because of the changing political climate and 
resistance from the state government agencies.
    ASPM and the members involved with STAWRS strongly support this 
initiative and recommend that it not only be continued but re-
emphasized. This program has been supported and funded by both 
Democratic and Republican administrations and is essentially a 
nonpartisan issue. It is a program that would greatly reduce tax and 
information reporting burden on large employers and bulk reporters who 
collect the great majority of taxes and report the greatest volumes of 
information to government.
    STAWRS really consists of two primary proposals:
    1.) Single-point filing and processing of tax related information.
    Congress needs to mandate that a single federal agency (like IRS, 
the most logical choice), be the sole collection point for all tax 
related information. If this mandate is given to IRS, the legislation 
would have to make it a specific part of the agency's mission, so any 
funds at the agency's disposal could be used to pay for the costs of 
collecting and distributing the information. Specific empowerment to 
distribute the information for legitimate governmental purposes to 
other government agencies with specific safe-guards on the 
confidentially of the information would need to be included. All other 
agencies would need to have a mandate to cooperate with the effort to 
build the centralized collection point and would need to be given 
incentives for using the centralized collection agency.
    There are significant disparities between the interests of federal 
agencies and various state agencies and they will not willingly 
cooperate unless there is something in it for them. Low cost or no cost 
distribution and rapid distribution of revenues collected through 
centralized single-point filing would be required to overcome state 
objections. If incentives are provided and data dissemination is rapid, 
then the various states would have substantial reasons for joining 
voluntarily, especially in areas that have traditionally resisted 
single-point filing proposals in the past, such as state unemployment 
tax agencies.
    Any single-point filing project would need to be phased in over a 
period of years as state agencies choose to join. We would recommend 
starting with W2 and Unemployment information and operating a pilot for 
large employers and bulk filers. Then expand the program to 
increasingly larger numbers of employers. Such participation would have 
to be voluntary, but we think a surprising number of businesses would 
participate.
    Each state could have one record for each employee in a 
standardized format that every state would have to accept. The format 
would include income tax and unemployment data. The content of the data 
in the fields could be calculated differently for each state. The 
record format of the data would be exactly the same. Any state 
participating would have to use the standard file format, such as the'S 
record in the current W2 filing. In this manner, a 50 state employer 
would submit 4 files each year for processing all of the tax related 
information, instead of the 251 tapes that presently can be required. 
Most large employers do not have employees in all 50 states, but even 
an employer who does business in only 16 states would see a reduction 
to 4 files from 81 files. The cost savings to business and government 
would be very substantial resulting in higher profits, more employment, 
more productivity, lower tax rates, and increased tax collections. It 
will also result in better relationships between employers and the 
government. More profits and more employment income results in more 
federal revenue, while lower government costs should result in lower 
tax rates. This results in a big win for state and federal government 
and a big win for employers.
    2.) Harmonized federal and state wage code.
    The main reason that STAWRS has politically stalled out is the lack 
of a standardized or harmonized national wage code. The federal 
government and each state have set their own definition of taxable 
wages. Each state has also set up its own definition of wages that are 
covered for fement taxes. This has resulted in 51 different systems and 
methods for calculating unemployment wages. Each is reported quarterly. 
Many of the states have independently settled on the same calculations 
and many states already use the federal definition of taxable income 
for income tax purposes. Many states have voluntarily moved toward 
using federal information in the ANSI X12 program, because it makes so 
much sense to do so. Unfortunately, many other states have not. The 
Congress has the power to mandate that the states use a uniform 
calculation and format for calculating unemployment wages and taxable 
income wages for income tax purposes. The Congress could also mandate 
that the states convene and settle amongst themselves upon a standard 
format and calculation by a certain date or face the federal government 
deciding for them. This would allow businesses to use the same 
calculations for every state and would greatly reduce the cost and 
complexity of the computer programs used to produce the information, 
while greatly reducing errors and noncompliance. Reduced costs and 
improved collections would have many of the same economic benefits 
discussed under single-point filing above.
    For state and federal income taxes, the federal taxable income is 
the obvious standard that should be used. We believe the Congress 
should mandate that states with income taxes must use the federal 
taxable wage as the starting point for their own income taxes. They 
could make whatever adjustments they wanted from that point, but this 
should be the only taxable wage that they could demand of employers and 
would be required to accept the standard format. Once they are required 
to use the standard format and the federal wage, using a single-point 
filing service is a smart move.
    It is difficult or impossible for any one state or even a group of 
states to show the leadership necessary to bring all of the states 
together, especially when there are so many diverse interests involved. 
Therefore, it falls to the Congress to show the leadership necessary to 
remove unnecessary costs and reporting burdens from business and 
taxpayers. It is a compelling national interest that our economy and 
tax systems operate as efficiently as possible, if we are going to 
compete effectively in world markets through the next century.
    It is our understanding that Form 941 is in a pilot test for 
electronic filing. It should be opened up to all employers. Also, an 
electronic vehicle should be developed to file 940 and 945. The primary 
employer concern about 941 filing is how IRS calculates penalties. IRS 
applies penalties based upon applying the amount necessary to make up 
the short payment from a portion of the next payment received. This has 
the effect of making each subsequent payment also delinquent. Under the 
current method the penalties can be pretty egregious. If a mistake was 
made early in a quarter the error (underpayment), if not found, could 
create enormous penalties. There needs to be some kind of relief on the 
penalties for late deposit procedures under the IRS regulations. IRS 
needs a better process for determining if payments are timely. There is 
potential for re-engineering this process that would be a win for both 
the IRS and employers.
    The magnetic filing of Form 945 has been dropped by IRS for lack of 
volume and cost-efficiency. Thus, EDI filing of 945 is unlikely. IRS 
asked the bulk return filers to do a pilot magnetic media filing for 
Form 940 and bulk filer test partners declined, until IRS has worked 
out the bugs on the EDI for Form 941 and has it ready for a wider 
release. The bulk filers also needed to get beyond the implementation 
of EFTPS. The employer/taxpayer community can only support a limited 
number of system changes each year, so it is extremely important that 
IRS maintain a steady continuing modernization program rather than 
sudden massive changes.

            Respectfully submitted,
                                   Clark G. Case
                                           Financial Systems and 
                                               Employee Accounting 
                                               Manager, City of 
                                               Winston-Salem, NC, Vice 
                                               President of The 
                                               American Society For 
                                               Payroll Management, 
                                               Government Relations 
                                               Committee Chair

cc: Dan Glum, ASPM President
ASPM Board Members
ASPM Government Relations Committee Members

Contact Information:, Clark G. Case, P.O. Box 2511, Winston-Salem, NC 
27102, Phone: 910 727-2660, Fax: 910 727-8299, Internet: 
[email protected]
      

                                

Statement of Harriet Bograd, Attorney, New York, New York

                             Introduction:

    I am Harriet Bograd, attorney and consultant to nonprofit 
organizations. I am the founder and coordinator of the 
``Nonprofit Cyber-Accountability'' listserv, an e-mail 
discussion group on how information technology can help make 
nonprofit organizations more accountable. In the past two years 
I collaborated with Peter Swords of the Nonprofit Coordinating 
Committee of New York on a research project on ``Accountability 
in the Nonprofit Sector.'' I am also a Research Affiliate at 
Yale University's Program on Nonprofit Organizations.
    The ideas submitted here are my own, but they have been 
informed by three years of daily discussions with hundreds of 
people. The Nonprofit Cyber-Accountability listserv, currently 
with 280 members, makes it possible for an ever-widening circle 
of state and federal officials, nonprofit leaders, scholars, 
accountants, attorneys, journalists, grantmakers, fundraisers, 
and ordinary citizens to engage in a consensus-building 
dialogue on nonprofit accountability.
    This testimony starts by stating my recommendations, 
discusses why these are important, answers possible objections 
to these proposals, and finally lists resources for learning 
more about ``nonprofit cyber-accountability.''
    I endorse today's testimony of the National Council of 
Nonprofit Associations, which discusses in greater depth the 
Form 990 and its uses.

  Recommendations: Electronic filing of Form 990, publishing Form 990 
  data on the web, and a staggered schedule for mandatory electronic 
                          filing of Form 990.

    H.R. 2292 offers a great opportunity for Congress to take 
steps which would cost little but would make a big difference 
to the nonprofit sector. I urge you to direct the IRS to accept 
electronic filing of Form 990 very soon, to publish all 
electronically filed data from Form 990's on the World Wide 
Web, and to make electronic filing mandatory for charitable 
nonprofits and private foundations, according to a staggered 
schedule based on gross receipts.
    Here is a more detailed statement of these recommendations.
    Congress should:
    1) Direct the IRS to accept electronic filing of Form 990 
for 501(c)(3) organizations starting with fiscal years ending 
on or after 12/31/98;
    2) Require the IRS to make all electronically filed data 
from Form 990's and Form 990-PF's available to the public on 
the Internet, in a searchable database [exception: data about 
donors need not be disclosed by nonprofits, and should not be 
published on the Web]; and
    3) Require nonprofit organizations to file electronically, 
according to a timetable staggered by the gross receipts of the 
organization. Electronic filing of Form 990 and Form 990-PF 
(for private foundations) should be mandated at least for those 
``charitable'' nonprofits which are tax exempt under Section 
501(c)(3).
    The following is a suggested schedule for mandatory 
electronic filing of Form 990:
    IRS should accept electronic filing of Form 990 and Form 
990-PF for fiscal years ending on or after 12/31/98. For the 
first year, all electronic filing should be voluntary, as 
groups get used to the system, and problems are worked out.
    After this, electronic filing should be mandatory according 
to the following schedule [a similar schedule should be 
developed for private foundations]:
    Nonprofits with annual gross receipts over $10 million 
should be required to file electronically for fiscal years 
ending on or after 12/31/99.
    Nonprofits with gross receipts over $1 million should be 
required to file electronically for fiscal years ending on or 
after 12/31/2000.
    Nonprofits with gross receipts over $500,000 should be 
required to file electronically for fiscal years ending on or 
after 12/31/2001.
    Starting with fiscal year ending on or after 12/31/2002, 
all groups which are required to file Form 990 or Form 990 EZ 
should be required to file electronically.
    The IRS Commissioner should have discretion to delay the 
effective date of mandatory electronic filing for the last two 
groups (the groups not over $1 million) if the Commissioner 
concludes that such a requirement would impose a hardship on 
such groups. In making this decision, the Commissioner should 
consider the accessibility of computers, necessary software, 
Internet connections, or other services which would facilitate 
electronic filing for such groups.
    I am suggesting that this schedule of mandatory electronic 
filing be included in the legislation itself, rather than in 
regulations. It has been distressing that the Treasury has not 
yet been able to issue even draft regulations on disclosure of 
Form 990, even though more than a year has passed since 
Congress called for these regulations in the Taxpayer Bill of 
Rights 2. Because of the risk of similar delays, I suggest that 
Congress simply set the schedule for mandatory electronic 
filing in the legislation.

                Why these recommendations are important:

    As members of Congress consider issues of electronic filing 
and the IRS, I urge you to pay attentio opportunities related 
to electronic filing of Form 990. Form 990 is the annual 
information return which nonprofits must file each year with 
the Internal Revenue Service, and the information in it is of 
great importance for nonprofit accountability. In contrast to 
other tax forms which are confidential, the information on the 
Form 990 (except for lists of donors) is required to be made 
available to the public. Yet it has been notoriously difficult 
to obtain copies of Form 990 either from many nonprofits or 
from the Internal Revenue Service. Furthermore, many people 
(such as employees, clients, or board members) who have 
concerns about nonprofit accountability issues are hesitant to 
ask for copies of Form 990 from the organization, for fear that 
they might be risking their jobs or benefits or confronting 
socially awkward situations.
    Information technology offers a powerful and inexpensive 
solution to this problem. Form 990's can be filed 
electronically, and the information collected can automatically 
be posted in a searchable database on the World Wide Web. With 
such a system in place, valuable data about nonprofits would be 
easily accessible to board members, employees, journalists, 
state government officials, and scholars. Easy access to Form 
990 data would help people prevent, identify, and correct 
abuses, make better decisions, and find out more about the 
nonprofit sector.

     Alleged obstacles to mandatory electronic filing of Form 990:

    What are the obstacles that have made it difficult for the 
IRS to move forward with electronic filing of Form 990?
    First, as H.R. 2292 recognizes, the Exempt Organization 
Division has had inadequate resources to do its current job, 
let alone to work on new initiatives. As of 1996, the Exempt 
Organizations Division was responsible for supervising 1.2 
million nonprofits with only 400 agents and a budget of $62 
million per year. In other words, the IRS had one agent for 
every three thousand nonprofits. Since the 1996 data was 
compiled, IRS staffing has rther staffing cutbacks are planned. 
The contrast with the Securities and Exchange Commission is 
daunting; the SEC has a budget of about $300 million to 
supervise between 9,000 and 14,000 publicly-traded 
corporations.
    I strongly support those provisions in H.R. 2292 which 
would provide the Exempt Organization Division with more 
adequate resources. Yet the IRS resources will continue to be 
much more modest than those of the SEC, for example. Making 
Form 990 accessible on the Web (with mandatory electronic 
filing) will allow many citizens to become ``voluntary 
auditors'' who assist the IRS and the state regulators in the 
oversight of the nonprofit sector.
    Second, there has been an erroneous fear that mandating 
electronic filing would be politically unpopular--that the 
nonprofit groups would object to such a requirement. I have 
discussed this issue with hundreds of people, including people 
who work with nonprofits of all sizes, and I expect that there 
would be surprisingly little resistance if electronic filing 
were mandated on a staggered schedule. The vast majority of 
nonprofit groups are ethical and responsible, and want to 
support systems of accountability that will give the public 
greater confidence in the nonprofit sector. More and more 
nonprofits are rapidly gaining access to computers and to 
modems or the Internet, either in their own offices or in the 
offices of their tax preparers. As people get used to 
electronic filing of personal and corporate tax returns, 
electronic filing of Form 990 will become a simple and 
inexpensive step to take.
    Third, when the IRS forms processors set a ``queue'' for 
which forms to convert for electronic filing, they start with 
the forms that the IRS spends the most time processing. Since 
the Exempt Organizations Division has not had the resources to 
keypunch the paper forms it receives, Form 990 becomes low on 
the ``queue. But this means that the information in Form 990's 
has been inaccessible and, in essence, squandered. The IRS 
personnel have not even keypunched them, let alone reviewed 
them, and the public has had difficulty getting to see them.
    Although the volume of Form 990's processed by the IRS may 
be lower than the volume of some other forms, the public nature 
of these documents, and their importance for the health and 
integrity of the nonprofit sector must be reckoned in setting 
priorities for electronic filing. Although it is true that they 
are not now keypunching much of the Form 990's, IRS and state 
government agencies which oversee nonprofits could do a much 
more efficient and effective job if they had all the data from 
Form 990's accessible in a searchable database. An electronic 
filing/Web posting system would dramatically reduce the costs 
of making Form 990 data available to government he public. It 
would ease the burdens for nonprofit filers and eliminate 
keypunching errors introduced when government officials process 
these forms. Form 990's would be more accurate and complete, 
because preparation software would handle calculations and 
check that essential fields were completed.
      

                                

Statement of Ann Mitchell Sackey, Executive Director, The National 
Council of Nonprofit Associations

    We offer this testimony to urge Congress to assign the 
Office of the Assistant Commissioner of Employee Plans and 
Exempt Organizations responsibility for the development of a 
system through which nonprofit organizations would 
electronically file their Form 990 (Return of Organization 
Exempt From Income Tax), thus creating complete accessibility 
to all filed Form 990s on the Internet. We believe that the 
filing and disclosure requirements for nonprofit organizations 
should be a high priority for Congress. Our focus is limited to 
nonprofits which are organized and operated for the public 
benefit, as described under section 501(c)(3) of the Internal 
Revenue Code of 1986, as amended.
    We believe that the filing and disclosure requirements of 
public-benefit nonprofits should receive a high priority in 
Congress because of their importance to the nation. In 1992, 
over one million nonprofits existed and nonprofits generated 
more than $500 billion in annual funds. They created 6.5 
percent of the national income in 1992. Including full time 
employees and full time equivalent volunteers, nonprofits 
employed nearly 11 percent of the total U.S. employment in 
1992. In 1994, nonprofits employed 15.1 million people. (These 
are the most recent statistics on the sector as documented by 
the INDEPENDENT SECTOR, an umbrella group of national nonprofit 
organizations.)
    Electronic filing (posting all Form 990s on an IRS Web 
site) would provide enormous benefits for detecting and 
stopping abuses, for supporting better decision-making about 
nonprofits, and for conducting research. Electronic access 
would save money for the IRS and state charities regulators, 
who now spend large amounts of time shuffling and filing papers 
and keypunching data for analysis.
    Each year, every nonprofit must file an IRS Form 990, an 
annual information return. About forty states also require some 
or all charitable nonprofits to file a copy of the Form 990 
with them. With its attached Schedule A, the form is 10 pages 
long. It includes a variety of information about the 
organization, including: identifying information (e.g., name, 
address, phone, employer identification number); detailed 
financial information; program service accomplishments; list of 
officers; directors; trustees; and key employees; executive 
compensation; payments to independent contractors; 
relationships with other taxable and tax-exempt entities; and 
more.
    The Form 990 is a valuable data collection tool and must be 
viewed as such. The U.S. Internal Revenue Service, state 
charities officials, and representatives of the nonprofit 
community have worked together over the years to refine and 
improve Form 990. The data in the collected Form 990s provides 
a uniform baseline of information about individual nonprofits 
and the nonprofit sector in general. Many efforts seek to 
continuously improve the quality of the data and to enable 
people to more effectively use the reported information.
    There are three basic uses of 990 data. First, the 
information can help identify, prevent, and punish abuses. 
State charities officials, journalists, concerned board 
members, employees, and clients can find valuable information 
in Form 990 to prevent or uncover abuses such as self-dealing, 
quasi-looting, excessive compensation or improper engagement in 
political activities. These users must be able to review Form 
990s without nonprofits knowing that they are being 
investigated.
    Second, stakeholders can use the information to make better 
informed decisions. With Form 990 information, potential 
donors, managers, and board members (as well as all the other 
players listed above) can compare present and past financial 
performance and benchmark one group's financial performance 
with others in its field.
    Third, practitioners, policy-makers, and researchers can 
apply Form 990 data to investigations on the composition and 
history of the nonprofit sector, its sources and uses of funds, 
its financial vulnerability and debt management, and its 
economic performance.
    A public-benefit nonprofit must show its Form 990s, for its 
most recent three years, to those who come into its office and 
ask to see them. Soon, they will have to be mailed out upon 
request. These means of accessing the Form 990, however, take 
time and have the further disadvantage of revealing to the 
organization who is asking to see their Form 990. The system we 
are urging you to consider answers both these objections.
    To summarize, the Form 990 is the basic nonprofit 
disclosure form that is used by both the IRS and state 
charities offices. It provides the base of nonprofit 
accountability. We believe that providing all 990s on the 
Internet will promote nonprofit accountability and will enable 
everyone to access an organization's 990 without notifying the 
organization. Staff, board members, or other semi-insiders who 
suspect improper activities will be able to look at the 990 to 
see whether the activities have been disclosed or whether the 
990 has been filed fraudulently. Would-be malefactors, knowing 
that their 990 is electronically available to the public, may 
approach filing their 990 more seriously. Many refer to such a 
system as cyber-accountability. While cyber-accountability 
might be implemented through a number of means, we offer a 
simple, inexpensive explanation. (It enjoys the further virtue 
of being almost developed.) Cyber-accountability would be 
constructed through the following process:
    1. The EO Division of the IRS would maintain a 990 Web 
site, available to anyone with access to the Internet. By going 
to the Web site, a user could request a 990 form for 
completion. It would appear on the user's screen in a format 
similar to the paper-copy Form 990. S/he could then complete 
the 990 by key-punching in the data elicited. When the 990 is 
completed, the user could electronically transmit it to the 
IRS.
    2. The 990 Web site would receive and store in a database 
each 990 filed.
    3. By accessing the 990 Web site, any 990s could be viewed 
by the public immediately after it was filed. This could be 
done by entering the organization's name or Employer 
Identification Number (E.I.N.)
    4. Seconds later, the organization's 990 would appear on 
her screen. She would be able to download it and print it out. 
At the end of this process, she would have a hard-copy of the 
organization's 990. This could be done for one organization or 
for many. For example, all of the day care centers located in 
three or four contiguous zip codes could be accessed at once. 
The user could easily copy the data on the 990 Web site to a 
file, using a standard database format. The data could then be 
sent anywhere. The Exempt Organizations Division of the Office 
of the Assistant Commissioner of Employee Plans and Exempt 
Organizations and state charities offices could easily transfer 
this data to their system.
    As of this writing, the pages of the 990 have been encoded 
into the language of the Web, converted to HTML. The next step 
will involve writing programs to store and retrieve submitted 
information. A demonstration project, now underway, will help 
to produce the system. If requested, the completed system could 
be loaded into a computer and made available to the IRS for 
less than $25,000, requiring nothing more than plugging into a 
power outlet and connecting to the Internet via a phone line. 
Several states have expressed an interest in the system; New 
Hampshire will most likely install it next spring.
    A little over a year ago, the Taxpayers Bill of Rights 
(H.R. 2337) was signed into law. Among other things, it 
requires public-benefit nonprofits to give or mail copies of 
their annual Form 990s to anyone who requests them via mail or 
in person, for a reasonable cost. A group risks hefty penalties 
if it does not comply. However, this disclosure requirement 
will not go into effect until the Secretary of the Treasury 
issues regulations that spell out an exception: if a group 
makes its Form 990 ``widely available,'' then it does not have 
to give out or mail copies. We believe the system described 
above would largely satisfy this ``widely available'' 
requirement.
      

                                

Statement of Robert M. Tobias, National President, National Treasury 
Employees Union

    Madam Chairwoman, Members of the Subcommittee, thank you 
for this further opportunity to present the views of the 
National Treasury Employees Union (NTEU), the exclusive 
representative of IRS employees, on the Report of the National 
Commission on Restructuring the Internal Revenue Service. As 
NTEU's National President, I welcome this opportunity to share 
our thoughts on the electronic filing of tax returns at the 
Service.
    The IRS processes 205 million tax returns each year; l20 
million of these are individual tax returns. In order for the 
IRS to effectively collect the taxes that run our government, 
the taxpaying public must find the IRS to be not only fair, but 
efficient. Although it still has a ways to go, the IRS has come 
a long way in improving its operations in recent years. The 
IRS, and the employees who make it run, perform remarkably well 
despite its faults.
    The guiding principle of the Commission Report was that 
customer service and taxpayer satisfaction must become 
paramount at the Internal Revenue Service (IRS). NTEU 
wholeheartedly agrees. Customer service must become the engine 
which drives the Service. Expanding, demystifying and removing 
the barriers to electronic filing not only carries with it the 
ability to improve service to IRS customers, but compliance as 
well.
    But, Madam Chairwoman, I must tell you that I remain deeply 
troubled by reports in the press that indicate this whole 
exercise may be little more than a political smokescreen and 
fundraising tool based on ridiculing the Service. Today's Wall 
Street Journal makes clear that IRS bashing is alive and well, 
quoting the Senate Majority Leader as stating in a recent radio 
address, ``The IRS is intrusive, abusive and out of control.'' 
Senator Lott's comments are by no means the first of this 
nature, but they ought to be the last. How do we restore the 
IRS' credibility with the public when their elected officials 
routinely, unfairly and unjustly denigrate the agency and its 
mission?
    The purpose of today's hearing is to explore ways to 
encourage electronic filing. I do not believe any of us have 
the power to inspire commitment to electronic filing and 
confidence in the IRS while remaining silent when elected 
officials unfairly bash the IRS as if it is collectively 
abusive, inefficient and can only be improved by being 
scrapped.
    The Members of Congress who introduced IRS restructuring 
legislation, based on the Restructuring Commission's report, 
recognize that they have a responsibility to educate their 
colleagues that disparaging remarks have an effect opposite to 
that which their legislation suggests. They know IRS bashing 
promotes the view that the government's tax collection agency 
is to be ridiculed and that paying one's federal taxes need not 
be taken seriously.
    Hearing comments such as Senator Lott's, why then would an 
individual be compelled to even try electronic filing? Why 
would they believe the IRS can be trusted to receive and 
accurately process their return electronically? Why would they 
believe the assurances they have been given that electronic 
filing does not lead to additional audits? What they hear from 
their elected representatives is just the opposite--the IRS 
cannot be trusted.
    As the President of NTEU, I am committed to the path which 
my colleagues on the Commission and I have embarked on--to make 
the IRS a world class, respected organization. It is time for 
Congress to make a similar commitment and to leave the rhetoric 
behind.
    There are several specific recommendations contained in the 
Commission Report on which I wish to comment relevant to 
today's hearing. While the Commission Report suggests that 
expanding the number of taxpayers who file electronically has 
the potential to increase cost savings and compliance, it also 
points out that it cannot be accomplished without a 
comprehensive plan. NTEU believes that it also cannot be 
accomplished without the appropriate financial resources. While 
the Commission Report states that electronic filing ``holds 
great potential to increase cost savings and compliance with 
only a small investment by the IRS,'' NTEU believes that to 
reach its goal of more universal acceptance of electronic 
filing, the IRS will require a sizable investment--both 
financially and in terms of a comprehensive overhaul of how the 
IRS promotes the benefits of electronic filing and how it 
interacts with its customers.
    The Internal Revenue Service reports that l4 million 
taxpayers filed their tax returns electronically in l997, a l9 
percent increase over l996. Moreover, the IRS estimates that 
l9.2 million Americans will file electronically in l998, almost 
double the number who filed electronically in l995. The IRS is 
clearly moving in the right direction.
    The Commission Report rightly suggests that only a 
comprehensive plan that appeals to all segments of the taxpayer 
and practitioner population will make electronic filing the 
preferred method of tax return filing. The Commissioners 
envision formation of a partnership between the IRS and 
practitioner community, elimination of the necessity to file a 
signature form with electronic returns, the establishment of 
uniform requirements for preparers, and electronic acceptance 
of all tax forms as good starting points. The Report also 
emphasizes the need to establish paperless payment methods and 
realigned due dates as inducements to electronic filing. I note 
that the IRS has expressed some concern regarding the proposal 
to extend due dates for electronic filers, adding that this is 
the one area where there is presently no confusion--tax returns 
are due on April l5. I urge the Committee to review this area 
carefully.
    Those currently taking advantage of electronic filing 
methods typically are due a refund and tend to be clustered in 
the lower income levels. A l99l IRS research study showed that 
the ability to receive an earlier refund was the greatest 
inducement to filing electronically. There is currently little 
or no incentive for taxpayers owing taxes to file by this 
method.
    In March of l995, the publication Tax Notes reported that 
taxpayers filing forms l040A and l040EZ represented almost 77 
percent of electronic returns. These, they reported, are also 
the returns with the lowest processing cost savings for the 
IRS. The greatest savings potential lies with the Form l040 
returns, however, this same report found that only 2.8 million 
of the 62.7 million taxpayers in this group chose to file 
electronically.
    The Commission Report also states that financial incentives 
may be necessary to induce a greater number of individuals to 
file electronically. For many individual taxpayers, there is 
little or no incentive to file electronically. Fees for ELF 
filing are usually in the neighborhood of $25, yet it only 
costs .32 cents to mail a paper return. Clearly, cost is one of 
the largest disincentives to electronic filing and may be a key 
barrier preventing more taxpayers from taking advantage of ELF. 
A May, l997 national survey of l,035 adults by The Mellman 
Group found that ``interest in electronic filing increases 
dramatically when it is positioned as a no cost option to the 
taxpayer.'' Twenty-two percent of their respondents reported 
that they would be almost certain to file electronically if it 
were free.
    The Commission recommendation that transmitters receive a 
financial incentive that is shared with taxpayers is worthy of 
further consideration. However, there are other electronic 
filing inducements that I believe make even more sense and 
encourage Congress to consider as well.
    To establish electronic filing as the preferred method of 
tax filing, it must be made available to a much broader segment 
of taxpayers. It must be easily understood, simple to 
accomplish and available at free and convenient locations. For 
example, terminals with user friendly software could be made 
available to taxpayers at local IRS walk-in offices. Customer 
service personnel staffing these offices could be available to 
answer questions and provide guidance. Even libraries, post 
offices, and banks could be outfitted with IRS-connected 
terminals. These venues typically make IRS forms available now, 
it only makes sense that as part of a comprehensive plan to 
stress both customer service and encourage electronic filing, 
these same locations should provide electronic filing 
capability.
    Moreover, what could be more customer-service oriented than 
providing taxpayers with free and convenient locations to file 
their taxes electronically? To promote acceptance of electronic 
filing among a broader group of individual taxpayers, customer 
service must be part of the equation. For those taxpayers 
wishing to file electronically from their homes, user-friendly 
software should also be considered. Just as tax forms are 
distributed free of charge, free electronic filing software for 
use with home computers should also be considered.
    While some seek expansion of electronic filing because of 
the allure of the possibility of reduced labor and overhead 
costs, they ignore the main principle underlying the 
Restructuring Commission's Report: Customer Service and 
Taxpayer Satisfaction must become paramount. Electronic filing 
holds the potential to improve both, but only if the savings 
achieved from its expansion are reinvested in the Service. To 
do otherwise ignores the basic principles of the Commission 
Report.
    NTEU supports the expansion of electronic filing. It is the 
future. We believe equally as strongly that the efficiency 
savings that result must be reinvested in compliance and 
customer service functions at the agency. It is not as though 
the compliance rate is so high that there is nothing further to 
accomplish. And, it is not as though the IRS' customer service 
effort is so complete that we can afford to remove staff 
resources from the agency. Positions that become excess to the 
agency's needs with advances in electronic filing should be 
shifted to customer service functions. That is the answer to 
improving IRS customer service satisfaction and compliance 
levels while simultaneously improving acceptance of electronic 
filing.
    NTEU is committed to making the IRS the world-class, 
respected organization it must become. I hope that Congress is 
equally committed to providing the resources necessary to make 
this a reality. Funding shortfalls and the vagaries of the 
annual budget process have played havoc with the IRS and its 
ability to effectively plan in the past. I look forward to 
working with this Committee and the others that oversee the IRS 
to insure that our joint goals become reality.
    Thank you.