[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]
IRS NATIONAL ADVOCATE ANNUAL REPORT AND IRS OVERSIGHT BOARD ANNUAL
REPORT
=======================================================================
HEARING
before the
SUBCOMMITTEE ON OVERSIGHT
of the
COMMITTEE ON WAYS AND MEANS
HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTH CONGRESS
SECOND SESSION
__________
FEBRUARY 28, 2002
__________
Serial No. 107-68
__________
Printed for the use of the Committee on Ways and Means
U.S. GOVERNMENT PRINTING OFFICE
79-969 WASHINGTON : 2002
________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpr.gov Phone: toll free (866) 512-1800; (202) 512-1800
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COMMITTEE ON WAYS AND MEANS
BILL THOMAS, California, Chairman
PHILIP M. CRANE, Illinois CHARLES B. RANGEL, New York
E. CLAY SHAW, Jr., Florida FORTNEY PETE STARK, California
NANCY L. JOHNSON, Connecticut ROBERT T. MATSUI, California
AMO HOUGHTON, New York WILLIAM J. COYNE, Pennsylvania
WALLY HERGER, California SANDER M. LEVIN, Michigan
JIM McCRERY, Louisiana BENJAMIN L. CARDIN, Maryland
DAVE CAMP, Michigan JIM McDERMOTT, Washington
JIM RAMSTAD, Minnesota GERALD D. KLECZKA, Wisconsin
JIM NUSSLE, Iowa JOHN LEWIS, Georgia
SAM JOHNSON, Texas RICHARD E. NEAL, Massachusetts
JENNIFER DUNN, Washington MICHAEL R. McNULTY, New York
MAC COLLINS, Georgia WILLIAM J. JEFFERSON, Louisiana
ROB PORTMAN, Ohio JOHN S. TANNER, Tennessee
PHIL ENGLISH, Pennsylvania XAVIER BECERRA, California
WES WATKINS, Oklahoma KAREN L. THURMAN, Florida
J.D. HAYWORTH, Arizona LLOYD DOGGETT, Texas
JERRY WELLER, Illinois EARL POMEROY, North Dakota
KENNY C. HULSHOF, Missouri
SCOTT McINNIS, Colorado
RON LEWIS, Kentucky
MARK FOLEY, Florida
KEVIN BRADY, Texas
PAUL RYAN, Wisconsin
Allison Giles, Chief of Staff
Janice Mays, Minority Chief Counsel
______
Subcommittee on Oversight
AMO HOUGHTON, New York, Chairman
ROB PORTMAN, Ohio WILLIAM J. COYNE, Pennsylvania
JERRY WELLER, Illinois MICHAEL R. McNULTY, New York
KENNY C. HULSHOF, Missouri JOHN LEWIS, Georgia
SCOTT McINNIS, Colorado KAREN L. THURMAN, Florida
MARK FOLEY, Florida EARL POMEROY, North Dakota
SAM JOHNSON, Texas
JENNIFER DUNN, Washington
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 February 20, 2002, announcing the hearing............ 2
WITNESSES
Internal Revenue Service, Nina E. Olson, National Taxpayer
Advocate....................................................... 6
Internal Revenue Service Oversight Board, Hon. Larry Levitan,
Chairman....................................................... 27
SUBMISSION FOR THE RECORD
Neal, Hon. Richard E., a Representative in Congress from the
State of Massachusetts......................................... 39
IRS NATIONAL ADVOCATE ANNUAL REPORT
AND IRS OVERSIGHT BOARD ANNUAL REPORT
----------
THURSDAY, FEBRUARY 28, 2002
House of Representatives,
Committee on Ways and Means,
Subcommittee on Oversight,
Washington, DC.
The Subcommittee met, pursuant to notice, at 2:00 p.m., in
room 1100 Longworth House Office Building, Hon. Amo Houghton,
(Chairman of the Subcommittee) presiding.
[The advisory announcing the hearing follows:]
ADVISORY
FROM THE
COMMITTEE
ON WAYS
AND
MEANS
SUBCOMMITTEE ON OVERSIGHT
CONTACT: (202) 225-7601
FOR IMMEDIATE RELEASE
February 20, 2002
No. OV-8
Houghton Announces Hearing on
IRS National Taxpayer Advocate Annual Report
and IRS Oversight Board Annual Report
Congressman Amo Houghton (R-NY), Chairman, Subcommittee on
Oversight of the Committee on Ways and Means, today announced that the
Subcommittee will hold a hearing on the annual reports of the Internal
Revenue Service (IRS) National Taxpayer Advocate and the IRS Oversight
Board. The hearing will take place on Thursday, February 28, 2002, in
the main Committee hearing room, 1100 Longworth House Office Building,
beginning at 2:00 p.m.
In view of the limited time available to hear witnesses, oral
testimony at this hearing will be from invited witnesses only. 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 position of National Taxpayer Advocate was established by the
1996 Taxpayer Bill of Rights (P.L. 104-168), replacing the original
Taxpayer Ombudsman that had been created by the IRS in 1979. Taxpayers
who believe they are suffering significant hardships or long delays can
appeal to the Taxpayer Advocate Service for assistance. The Taxpayer
Advocate must submit a report each year to the House Committee on Ways
and Means and the Senate Committee on Finance.
Established by the IRS Restructuring and Reform Act of 1998 (P.L.
105-206), following the recommendation of the National Commission on
Restructuring the IRS, the IRS Oversight Board first convened in 2000.
Its purpose is to oversee the IRS in its administration of the
execution and application of internal revenue laws. Now, following its
first full year of operation, the Oversight Board is submitting its
first annual report to Congress.
In announcing the hearing, Chairman Houghton stated, ``The reports
of the IRS Taxpayer Advocate and the Oversight Board provide Congress
with key insights into the operations of the IRS. In our efforts to
improve IRS operations, we welcome the independent recommendations made
in these reports.''
FOCUS OF THE HEARING:
Congress will review the Taxpayer Advocate and Oversight Board
annual reports in order to assess the mission and priorities for the
upcoming year.
DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:
Please Note: Due to the change in House mail policy, any person or
organization wishing to submit a written statement for the printed
record of the hearing should send it electronically to
[email protected], along with a fax copy to
202/225-2610 by the close of business, Thursday, March 14, 2002. Those
filing written statements who wish to have their statements distributed
to the press and interested public at the hearing should deliver their
200 copies to the Subcommittee on Oversight in room 1136 Longworth
House Office Building, in an open and searchable package 48 hours
before the hearing. The U.S. Capitol Police will refuse messenger
deliveries to all House Office Buildings.
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. Due to the change in House mail policy, all statements and any
accompanying exhibits for printing must be submitted electronically to
[email protected], along with a fax copy to
(202) 225-2610, in WordPerfect or MS Word format and MUST NOT exceed a
total of 10 pages including attachments. 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.
Note: All Committee advisories and news releases are available on
the World Wide Web at http://waysandmeans.house.gov.
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 Houghton. Good afternoon everybody. Thank you very
much for coming here and I appreciate the witnesses being at
the witness table. We are going to hear from two obviously very
hard working public servants in our government. They have got
very tough jobs. Our first witness, Nina Olson, who is down
here, navigates the tax laws on behalf of individual taxpayers;
and then our next witness after Ms. Olson is going to be Larry
Levitan who oversees the $10 billion agency that administers
our tax laws.
Each of you recently issued reports to provide us with key
insights into the operation of the Internal Revenue Service
(IRS), and also I would like to take this opportunity to thank
all those employees of the Taxpayer Advocate's Office that
helped write the report. Before coming to Washington, Nina
Olson was a leader in assisting low income taxpayers through
community tax law project enrichment. She has brought her
passion for helping individual taxpayers to a role as National
Taxpayer Advocate.
Ms. Olson has made tax simplification the overall theme of
her annual report, and we applaud you for that. She makes two
dozen excellent recommendations to bring some reason to the
areas of the law that most affect individual taxpayers. In
addition, she details the most serious problems encountered by
taxpayers and offers some great solutions as well.
Like our first witness, Larry Levitan is eminently
qualified for his role as Chairman of the IRS Oversight Board.
Under Mr. Levitan's leadership, the IRS Oversight Board has
become actively engaged in reviewing the IRS' computer
modernization program and the budget needs. In the coming
months, the Oversight Board will face the challenging task of
identifying candidates to serve as the new IRS Commissioner, as
Commissioner Rossotti's term expires next November. I would
like to now yield to our Ranking Democrat, Mr. Coyne.
[The opening statement of Chairman Houghton follows:]
Opening Statement of the Hon. Amo Houghton, a Representative in
Congress from the State of New York, and Chairman, Subcommittee on
Oversight
Today we are going to hear from two of the hardest working public
servants in our government. They have among the toughest jobs too: our
first witness, Nina Olson, navigates the tax laws on behalf of
individual taxpayers; our next witness, Larry Levitan, oversees the 10
billion dollar agency that administers our tax laws. Each of you
recently issued reports that provide us with key insights to the
operations of the IRS.
Before coming to Washington, Nina Olson, was a leader in assisting
low-income taxpayers through the Community Tax Law Project in Richmond,
Virginia. She has brought her passion for helping individual taxpayers
to her role as National Taxpayer Advocate.
Ms. Olson has made tax simplification the overall theme of her
annual report. She makes two dozen excellent recommendations to bring
some reason to areas of the law that most affect individual income
taxpayers. In addition, she details the most serious problems
encountered by taxpayers, and offers solutions as well.
Like our first witness, Larry Levitan is eminently qualified for
his role as Chairman of the IRS Oversight Board. He is a retired
managing partner of Andersen Consulting, the well-known consultant to
America's largest corporations, and an accountant by training.
Under Mr. Levitan's leadership, the IRS Oversight Board has become
actively engaged in reviewing the IRS' computer modernization program
and budget needs. In the coming months, the Oversight Board will face
the challenging task of identifying candidates to serve as the new IRS
Commissioner when Commissioner Rossotti's term expires this November.
I am pleased to yield to our ranking Democrat, Mr. Coyne.
Mr. Coyne. Thank you, Mr. Chairman. Welcome. At this
Subcommittee hearing, I feel it is most appropriate that we
receive the testimony of the IRS National Taxpayer Advocate and
the Chairman of the IRS Oversight Board. The Congress enacted
legislation in 1998 to reform IRS operations and to provide
taxpayers with the more efficient tax administration system. I,
along with Congressman Portman, served as a Member of the
National Commission on Restructuring of the Internal Revenue
Service and supported enactment of the substantial authorities
we granted to both Taxpayer Advocate and the Oversight Board.
Both oversight organizations have proven to be critical to the
success of the IRS' ongoing restructuring efforts and
continuing focus on taxpayer services.
I want to thank both Nina Olson, the Taxpayer Advocate, and
Larry Levitan, the Chairman of the Oversight Board, for their
leadership and commitment to a better IRS. The Subcommittee has
a lot of ground to cover today, and first we will consider the
Advocate's 273-page report on the most serious problems facing
taxpayers, advocacy efforts on behalf of taxpayers and
legislative recommendations the Committee should consider.
Next we will consider the Board's analysis of IRS
operations, short and long term, to understand what the IRS
must do to best meet the needs of taxpayers nationwide. I want
to thank Chairman Houghton for continuing the tradition of
holding annual Oversight hearings on the IRS. Thank you. I look
forward to your testimony.
[The opening statement of Mr. Coyne follows:]
Opening Statement of the Hon. William J. Coyne, a Representative in
Congress from the State of Pennsylvania
As the Oversight Subcommittee's first hearing in 2002, it is most
appropriate that we receive the testimony of the IRS National Taxpayer
Advocate and of the Chairman of the IRS Oversight Board.
The Congress enacted legislation in 1998 to reform IRS operations
and to provide taxpayers with a more efficient tax administration
system. I served as a Member of ``The National Commission on
Restructuring the Internal Revenue Service'' and supported enactment of
the substantial authorities we granted to both the Taxpayer Advocate
and the Oversight Board.
Both oversight organizations have proven to be critical to the
success of the IRS' ongoing restructuring efforts and continuing focus
on taxpayer services. I want to thank both Nina Olson, the Taxpayer
Advocate, and Larry Levitan, Chairman of the Oversight Board, for their
leadership and commitment to a better IRS.
The Subcommittee has a lot of ground to cover today. First, we will
consider the Advocate's 273-page report on the most serious problems
facing taxpayers, advocacy efforts on behalf of taxpayers, and
legislative recommendations the Committee should consider. Next, we
will consider the Board's analysis of IRS operations, short and long
term, to understand what the IRS must do to best meet the needs of
taxpayers nationwide.
I want to thank Chairman Houghton for continuing the tradition of
holding annual oversight hearings on the IRS.
Thank you.
Chairman Houghton. Thanks very much, Mr. Coyne. Now I would
like to ask Mr. Portman for his statement.
Mr. Portman. Thank you, Mr. Chairman and thank you, Ms.
Olson, for being here. Again, I want to join my colleague, Mr.
Coyne, in congratulating both and you Mr. Levitan for your good
work which is consistent with what we had envisioned in the
Commission's report. Mr. Coyne and I spent a couple of years
looking at the problems at the IRS, not all of which have been
solved, but we made progress and came up with structures that
we thought would be helpful. This hearing is, in a sense, one
of them, but structures only work if the right people are in
place and your commitment to this new expanded Taxpayer
Advocate's responsibility, and the more independent role that
Taxpayer Advocates have, and then a more comprehensive report
to us here in Congress as to what the real problems are, is key
to making all of this work.
And Mr. Levitan, I will have a chance to talk to you later.
I appreciate your work chairing the Oversight Board and again,
being sure that these well-meaning structures and changes in
law actually can be implemented in ways that help taxpayers
receive the service that they deserve. So I thank you all and
look forward to your testimony. Thank you, Mr. Chairman, for
this oversight hearing, and all your commitment to this.
Chairman Houghton. Thank you very much. I would like to
call on Ms. Olson----
Mr. Coyne. Mr. Chairman, if I might, Congressman Neal, our
colleague, had a statement welcoming the Taxpayer Advocate
here, Ms. Olson, today, and I would like unanimous consent to
be able to insert it in the record.
Chairman Houghton. Without objection, approved.
Mr. Coyne. Thank you.
[The statement of Mr. Neal follows:]
Statement of the Hon. Richard E. Neal, a Representative in Congress
from the State of Massachusetts
Mr. Chairman and Mr. Coyne, I am pleased that you have invited the
Taxpayer Advocate, Ms. Olson, to testify today on her annual report,
which includes many suggestions for simplifying the Code.
I can think of no more worthy cause than reducing Tax Code
complexity, benefiting millions of taxpayers.
You may be interested to know that the Advocate recently completed
a particularly difficult case on behalf of one of my constituents.
I look forward to working with her and the Members of the Committee
to find a legislative solution to this case and other important
taxpayer issues.
Chairman Houghton. Thanks very much. Now, Ms. Olson would
you give your testimony.
STATEMENT OF NINA E. OLSON, NATIONAL TAXPAYER ADVOCATE,
INTERNAL REVENUE SERVICE
Ms. Olson. Mr. Chairman and Members of the Committee, thank
you for providing me the opportunity to appear before you today
to discuss the National Taxpayer Advocate's 2001 annual report
to Congress. The report represents the work of many dedicated
Taxpayer Advocate service employees. I am proud of their
efforts and I would like to acknowledge those members of the
report team who are attending the hearing today. The focus of
my remarks today is tax law simplification. I will also be glad
to answer any questions you may have about the top 20 taxpayer
problems.
Many pundits in the tax world say that tax simplification
will never occur because there is no constituency for
simplification. I am not sure what this phrase actually means.
For example, making uniform the provisions that relate to
family status would have simplified tax computations for
taxpayers filing 44 million returns for tax year 2001. In a
Universe comprised of approximately 130 million individual
returns, that is a significant constituency.
Simplification does not require complete revision of the
Code. In fact, we can achieve simplification by identifying
provisions in current law that create taxpayer or
administrative burden for a significant number of taxpayers. We
can focus our efforts on provisions that are actionable
immediately while we work toward a consensus on more difficult
issues. We can agree to focus on different groups of issues
from one year to the next, even while we are addressing the
pressing and immediate issues of the day. This year's annual
report contains 28 legislative proposals, 19 of which are
described in great detail as key recommendations. These
proposals range from extending income averaging to commercial
fishermen to a discussion of equitable relief factors for
innocent spouse relief. They include recommendations as
sweeping as permitting married taxpayers to allocate their
separate items on the face of their jointly filed return,
thereby eliminating joint and several liability.
Some of our proposals have shown up in previous reports;
for example, our proposals for expanding relief for the return
of levy proceeds, including the ability to restore such
proceeds to retirement accounts. Others are just plain common
sense as with the first-time penalty waiver, also known as the
One Time Stupid Act Exception.
To my mind, the most important recommendations in this
year's report are those concerning family status issues. Family
status is most taxpayers' point of entry into the tax system.
On a form 1040, before a taxpayer even enters $1 of wage or
interest income, that taxpayer must determine whether his or
her child qualifies as a dependent or entitles the taxpayer to
claim head of household status or impacts the taxpayer's
marital status determination. These provisions apply different
tests for eligibility with respect to the same child. Further
along in the form, the taxpayer must look up other definitions
or limitations for the child tax credit, the child and
dependent care credit, the earned income credit, and various
education tax incentives.
In order to learn about these provisions, the taxpayer must
read through over 200 pages of IRS publications and
instructions. We propose that for each of six-family status
provisions, we adopt a common definition of qualifying child.
We propose a uniform relationship, place of abode, and age test
as a safe harbor for a type of familial relationship about
which we can be reasonably certain, once this test is met, that
we have correctly awarded a tax benefit.
Under the safe harbor, once a taxpayer establishes that he
or she has a biological, adoptive or stepchild or a descendant,
we need only determine if that child or descendant lived with
the taxpayer for more than half of the tax year, and if that
child or his descendant is of the appropriate age. Both
relationship and age are relatively easy for a taxpayer to
demonstrate in an audit situation. It is easier for the
taxpayer to prove that the child lived with him or her for more
than half the year than it is for the taxpayer to prove that he
or she met the support test or the home maintenance test.
Thus, the key feature of this proposal is that the IRS
would not have to make intrusive inquiries into the most
intimate affairs of its citizens without due cause. It can rely
on a set of verified third party statements that have an
acceptable degree of accuracy and reliability. The IRS can then
apply its limited compliance resources to taxpayers with a
higher risk of error.
We in the Taxpayer Advocate service take our congressional
reporting responsibilities very seriously. As tax
administrators, our focus is the administration of the tax
laws, not the underlying policy considerations. We have limited
our legislative proposals to provisions about which we have
experience and which we believe will significantly simplify
matters for many taxpayers.
I hope you find this report helpful on behalf of the
Taxpayer Advocate service employees. I thank you for this
opportunity to report on these matters both in writing and
before you in person today.
[The prepared statement of Ms. Olson follows:]
Statement of Nina E. Olson, National Taxpayer Advocate, Internal
Revenue Service
Mr. Chairman and Members of the Committee:
Thank you for providing me the opportunity to appear before you
today to discuss the National Taxpayer Advocate's 2001 Annual Report to
Congress. The Report represents the work of many dedicated Taxpayer
Advocate Service employees, and it is my distinct honor to come before
you today to discuss their work. I am truly grateful for and proud of
their efforts.
Today marks the completion of my first year of service as the
National Taxpayer Advocate (NTA), and it has been a very interesting
year, indeed. The National Taxpayer Advocate is fortunate, in that both
the position and the elements of her two Annual Reports to Congress are
established and described in the Internal Revenue Code. Section 7803(c)
clearly establishes that the Annual Reports are considered a direct
communication between the National Taxpayer Advocate and Congress. In
order to preserve the NTA's independence, Congress mandated that the
Reports be delivered to it prior to delivery to the Secretary of the
Treasury or the IRS Commissioner.
While the focus of my remarks today is tax simplification, I would
like to make a few preliminary comments about the Annual Report's
methodology. As you know, when I first assumed this position, I met
with many of the Members of this subcommittee and the Senate Finance
Committee in order to learn, more specifically, what Congress expected
from the Annual Report to Congress. From these discussions I learned
that you view the Annual Report as providing certain information that
will help you resolve taxpayer problems either through legislation or
by oversight of the Internal Revenue Service. You view the Taxpayer
Advocate Service (TAS) as a credible source of this information, given
our unique role within the IRS as an independent and impartial advocate
for taxpayers who are trying to resolve their tax problems.
The independence, impartiality and confidentiality that the
Taxpayer Advocate Service offers is critical to our ability to deliver
this information to you. Without these assurances, taxpayers will not
come to TAS to discuss their problems. In my upcoming June 30th Report
to Congress, I will describe in detail the efforts we have made to
enhance independence, impartiality, and confidentiality in TAS'
operations.
With respect to the Annual Report to Congress, I am pleased to
report to you today that I will soon be recruiting and hiring two
Senior Advisors to the National Taxpayer Advocate. One Senior Advisor
will serve as an advisor for legal matters pertaining to the Annual
Report to Congress, including assisting my employees with development
of legislative proposals.
The second Senior Advisor will oversee all research activities and
establish a research agenda for the Taxpayer Advocate Service,
including the Annual Report to Congress. I hope to fill these positions
in the next four months. Next year's Annual Report will be enhanced by
these additions to the NTA's staff.
I view the information provided in the Annual Report as a
continuum. First, we identify taxpayer problems. Our focus is the
administration of the tax laws, not the underlying policy
considerations. This year, we have developed two lists of ``Top 23''
taxpayer problems--one derived directly from the TAS database of cases
and one that reflects TAS employees' judgement, as informed by their
conversations and outreach with individual and business taxpayers,
practitioners, and other IRS employees. Some of these problems surface
again in our analysis of the ten most litigated issues.
Many of the top taxpayer problems can be addressed administratively
by the Service. Indeed, in many instances the Service has detailed,
long-term plans for addressing these problems. Some solutions require
issuance of guidance, or a different allocation of resources, or even
greater resources. But some problems cannot be fully resolved unless
there is legislative change.
In making our key legislative recommendations, we narrowed our
focus to issues that have the potential to achieve simplification or
reduce taxpayer or administrative burden with respect to a significant
number of taxpayers. We have also focused on proposals that are
``actionable''--that is, with the exception of one proposal, they do
not require major reform of the Code and can be enacted, in one form or
another, immediately.
For each recommendation, we describe the problem, illustrate it
with examples derived from TAS cases (some of which were referred by
Congressional offices), and provide a description of current law and an
explanation of our proposed legislative change. Although others have
suggested some version of these proposals, our recommendations reflect
the viewpoint, experience, and pragmatism of TAS employees who wrestle
with the underlying problems daily in their case inventories.
The Constituency for Simplification
During the past year, I have spoken at many taxpayer, tax
practitioner, and IRS employee meetings about some of our legislative
proposals and the complexity of the Internal Revenue Code. All too
often, I have heard people say that tax simplification will never occur
because there is ``no constituency for simplification.'' I am not sure
what this phrase actually means.
If the lack of constituency refers to the fact that individual
taxpayers do not have special interest groups speaking on their behalf
or are not flooding Congressional switchboards demanding tax
simplification, the statement may be true. But if, for example, we
consider the number of taxpayers positively affected by developing a
uniform definition of a ``child'' for purposes of the Internal Revenue
Code, the statement is false. Making uniform the provisions that relate
to family status would have simplified tax computations for taxpayers
filing 44 million returns for tax year 2001. In a universe comprised of
approximately 130 million individual returns, this is a significant
constituency.
Family Status Issues
Family status is most taxpayers' point of entry into the tax
system. And yet, Treasury Secretary O'Neill has noted, only within the
confines of the Internal Revenue Code would one find five different
definitions of a ``child.'' \1\ On a Form 1040, before a taxpayer even
enters one dollar of wage or interest income, he or she must determine
whether his or her child qualifies as a dependent or entitles the
taxpayer to claim head of household status or be considered not
married.\2\ These provisions apply different tests for eligibility with
respect to the same child. Further along in the form, the taxpayer must
look up other definitions or limitations for the child tax credit, the
child and dependent care credit, the earned income credit, and various
education tax incentives.
---------------------------------------------------------------------------
\1\ O'Neill Claims Simplification, Stimulus Top Priorities, 2002
TNT 36-1.
\2\ IRC Sec. 7703(b).
---------------------------------------------------------------------------
At the end of the day, the taxpayer or his or her preparer is
woefully confused about a subject that is fundamental to one's economic
and tax existence. Each element of variance increases the likelihood of
an honest mistake. In some instances, the differences provide
opportunities for deceit. In all instances, the differences increase
the administrative burden on the IRS to fairly implement the tax laws.
Further, the IRS must conduct intrusive inquiries into the lives of
taxpayers in order to monitor compliance with these non-uniform
provisions.
The Taxpayer Advocate Service's recommendation is really very
simple. However, as with all simplification, the details require
careful attention. We propose that for each of six family status
provisions we adopt a common definition of ``qualifying child.'' Our
proposed definition focuses on a type of familial relationship about
which we can be reasonably certain, once certain tests are met, that we
have correctly awarded a tax benefit, at least with regard to the
``child'' element. Thus, we propose a uniform relationship, place of
abode, and age test. Once a taxpayer has established that he or she has
a child (biological, adoptive, or step) or a descendant, we need only
determine if that child (or descendant) lived with the taxpayer for
more than half of the tax year and if that child (or descendant) is of
the appropriate age.
We suggest that this definition be placed in the definitional
sections of the Code so that it can be easily cross-referenced in the
current tax provisions. As new family status provisions are enacted,
this definition will become the norm.
This definition has several advantages over the current state of
the law. First, both relationship and age are relatively easy for a
taxpayer to demonstrate in an audit situation. Second, it is easier for
the taxpayer to prove that the child lived with him or her for more
than half the year than it is for the taxpayer to prove that he or she
provided more than half the support of the child or more than half the
cost of maintaining a home in which the taxpayer and the child lived
for more than half the year. Finally, by limiting these tests to the
proposed family relationship grouping (parent/child/descendant), we
significantly lessen the chances that the ``wrong'' taxpayer would
receive the tax benefits.
Our proposal differs from the Joint Committee on Taxation's
proposal that the uniform definition of a qualifying child completely
replace the support and household maintenance tests. We do not propose
substituting this relationship/abode/age test for all family
relationships. We believe that there are other family and household
arrangements that should qualify for the various family status
benefits. Yet those family and household arrangements require the
Service to make additional inquiry into the household circumstances in
order to ensure that the special tax benefits are awarded to the
appropriate party.
We also propose to extend a version of the recently amended EITC
``tie-breaker'' rule to the uniform definition of a qualifying child.
That is, where two or more taxpayers having a qualifying relationship
with the child live in the same household, the parental relationship
would trump others. A grandmother, mother, and child may live together,
and the mother may not want to claim the child as dependent or for head
of household status. That is, the mother wishes to ``opt-out'' of the
uniform definition of a qualifying child safe harbor. In these
situations, as under current EITC law, the mother simply does not claim
the child on her return and the grandmother will be able to claim her
grandchild. In other household arrangements outside the relationship
safe harbor, the cohabitator would still have to satisfy the current
statutory tests, including the appropriate support or household
maintenance tests.
Our sensitivity to non-nuclear family arrangements is best
evidenced in our proposed expansion of the definition of ``foster
child.'' Under present law, we have at least three different
definitions of foster child--one for dependency exemptions, one for
head of household status, and one for the Earned Income Tax Credit. We
propose establishing a uniform foster child definition between these
provisions. The foster child must meet either a relationship or
custodial test and must also live with the taxpayer for more than half
the year.
In order to provide more certainty sooner in the administrative
process, we propose a rather narrow relationship test. We define the
term ``child'' as an individual who bears one of the following
relationships to the taxpayer:
LA son/daughter or descendent (e.g. grandchild or great-
grandchild);
LA stepson/stepdaughter or descendent (e.g., step-
grandchild or step-great-grandchild);
LAn adopted child; or
LAn eligible foster child.
We also propose that the taxpayer could demonstrate the ``foster''
relationship by proving that the child was placed in his or her home by
an authorized placement agency as under current law or by showing
custodianship through some other means. We contemplate that the law
would permit a taxpayer to claim a foster child when the taxpayer could
prove that some other Federal, State, or local governmental agency (or
its agent) had made a determination that the child lived with the
taxpayer. Depending on the circumstances, this ``certification'' could
take the form of food stamp certification, of school placement, or of
an award of temporary custody by a family court.
The key feature of this proposal is that the IRS would not have to
make intrusive inquiries. Rather, it is relying on a set of verified
third-party statements that have an acceptable degree of reliability.
This approach--accepting reliable third-party documentation--should be
extended administratively to all family status audits, including those
involving the Earned Income Tax Credit. Such an audit approach removes
the government from having to pry into the most intimate affairs of its
citizens without due cause. I have stated elsewhere how humiliating
such an audit can be. That these audits are routinely visited upon the
poorest and least represented portion of our population represents a
fundamental flaw in the design of the law as well as in our tax
administration system. Middle class and wealthy taxpayers would not
tolerate such intrusions.
Individual Alternative Minimum Tax
Increasingly, middle class taxpayers face a different type of
problem--the individual alternative minimum tax (the AMT). A minimum
tax was first introduced into the Internal Revenue Code in 1969 as a
means to tax high income taxpayers who had gross income and yet paid no
taxes because of various provisions. The first minimum tax listed 14
preferences that were to be added back in to taxable income. In 1978,
the minimum tax was expanded to include additional deductions,
exemptions, and credits; all typically claimed by middle class
taxpayers.
The design of the minimum tax has not achieved its original goals.
The number of high-gross income earners who pay no tax has increased
slightly since 1978. The Alternative Minimum Tax does enhance revenue,
largely by subjecting increasing numbers of middle-income taxpayers to
its requirements. These unintended targets are drawn into the
alternative tax system because they have large families, live in high-
tax cities or states, or earn their income in a variety of ways other
than direct compensation, such as stock options. Today, 1.5 million
taxpayers pay the AMT. The Joint Committee projects that 35.5 million
taxpayers will be subject to the AMT by the year 2010.\3\
---------------------------------------------------------------------------
\3\ U.S. Congress, Joint Committee on Taxation, Estimated Effects
of the Conference Agreement for H.R. 1836 [1] (JCX-51-01) p. 8.
---------------------------------------------------------------------------
As a tax administrator, I view these numbers with concern. Many of
the taxpayers do not even know that an alternative minimum tax system
exists. Thus, in 2010 the Service could be faced with sending out 35.5
million letters to taxpayers who believed they filed a perfectly
accurate tax return and who will learn that they did not.
To avoid this situation, we propose three alternatives to the
recommendation that the individual AMT be repealed. I personally favor
the alternative proposal of establishing a gross income threshold,
below which a taxpayer will not be subject to the AMT. This proposal
has the advantage of providing relief to those taxpayers who must
dedicate 12 hours to simply determining whether they are subject to the
tax at all. Under the gross income proposal, a taxpayer need only look
to a line on his or her return and check it against the threshold for
his or her filing status. The taxpayer will learn from the face of his
or her return whether he or she is subject to the AMT. This proposal
also provides relief to middle income taxpayers who would otherwise be
subject to the AMT because they exercised incentive stock options. If
their gross income was below the threshold, the exercise of these
options would not be subject to the AMT.
Worker Classification
One of the most difficult areas of law within which to strike a
balance between competing interests is worker classification. This
difficulty is in large part attributable to the variety of workers and
type of work that would be affected by any guidelines.
I believe that both the tax law and the tax administration system
can do a far better job addressing this issue. Most businesses and
their workers are capable of reaching agreement on employment
arrangements by themselves. There are, however, groups of workers who
have limited ability to understand and pay self-employment tax.
One such group of workers is known as home-based service workers.
These workers provide home care and services for persons who are
disabled or elderly and who need assistance in daily living activities.
The workers themselves are often low income. Usually these workers are
paid with some combination of State and Federal funds. Most
commentators agree that, under common law, the workers are employees of
the service recipients. And yet the service recipients are usually not
in the position of issuing W-2 forms or 1099-MISC statements. In some
instances, states or localities undertake the issuance of 1099 forms;
some states and localities actually withhold FICA tax from the workers'
pay and issue them W-2 forms.
In the case of home-based service workers, we have proposed deeming
the payor agency to be the ``employer'' solely for purposes of tax
withholding and income reporting. Alternatively, these workers could be
deemed independent contractors but subject to a flat withholding rate
sufficient to pay self-employment tax. Either approach addresses the
critical failures of the current system--where workers receive a 1099
form and have no tax withheld; where they are unable to pay a lump sum
of quarterly or year-end taxes; and where the Service ends up placing
the workers in ``currently not collectible'' status because the workers
cannot afford to pay a pyramiding tax liability.
Removing the burden of tax reporting and withholding from the
service recipients relieves them of the need to file a separate
Schedule H, Household Employment Taxes. This is appropriate because
most service beneficiaries do not have a filing requirement.
Taxpayer Rights
The National Taxpayer Advocate's taxpayer rights proposals include
provisions relating to partial payment installment agreements; the
return of levy proceeds under IRC section 6343(b) and (d); the
realignment of underpayment interest rates simultaneous with the repeal
of the late payment penalty; and a first-time penalty waiver (also
known as the ``one time stupid act'' waiver). Each of these proposals
is discussed in detail in the Annual Report.
I would like to identify, here, two themes that run through these
taxpayer rights proposals. The first is that it is very difficult, in
practice, in a tax system that relies on voluntary compliance to draft
laws and develop procedures that differentiate between habitual or
chronic offenders and taxpayers who simply make a mistake. If the law
is written so broadly that IRS personnel have significant discretion in
implementation, taxpayers may experience disparate results and even
face abuse of that discretion. On the other hand, if we do not permit
IRS personnel to exercise common sense and good judgement--and give
them the tools to help honest taxpayers who have made a mistake get
back into compliance with the system--taxpayers will feel that they are
caught within an ``Alice in Wonderland'' or Kafka-esque system.
The second consideration is how to remedy situations where the IRS
has done something wrong. In many instances, it takes a while for
either a taxpayer or the IRS to figure out that the IRS was wrong in
taking a certain collection action. The usual period for protesting
such actions may have passed--in the case of levies, that period is
nine months from the date of levy. In these instances, should the
Commissioner be permitted to grant relief? Our proposal regarding the
return of levy proceeds is our first attempt to address this issue; we
were unable to develop a proposal that was broader in application.
Joint and Several Liability
The proposal to eliminate joint and several liability on jointly
filed individual income tax returns grew from the awareness that
``innocent spouse'' relief under IRC section 6015 threatens to become
an exception that swallows the rule. Almost 1 percent of the Service's
workforce in 2001 processed innocent spouse cases. I am skeptical of
the IRS projections that show the number of full-time equivalents
(FTEs) dedicated to innocent spouse will drop significantly over the
next two years. As current case law becomes part of the mainstream and
future case law develops under this provision, I believe more taxpayers
will request relief.
It is for these reasons that the Taxpayer Advocate Service took the
bold step of proposing that taxpayers receive all the benefits of a
joint return without incurring joint and several liability for any tax
debt attributable to that return. We developed a prototype Form 1040 M
on which married taxpayers can allocate between themselves their items
of income, deduction, adjustments, credits, and payments. If such an
election is made, it will be dispositive for any later adjustments
relating to those items. Under this proposal, ``innocent spouse''
relief will no longer be available to married taxpayers. However,
taxpayers will still be able to challenge even an allocated liability
under the common law defense of duress.
It is our experience that married couples in fact do allocate items
between themselves, even if not consciously. The advantage of our
proposal is that the allocation occurs at the front end of the filing
process, when the information is fresh in everyone's minds, rather than
years after the filing, when documentation is missing and the married
couple has separated. We also acknowledge that it may be simpler to
require the allocation on joint returns, rather than permitting an
election to allocate. Since we were addressing this problem from an
administrator's point of view, we proposed the narrower solution to the
administrative problem. We believe that requiring married couples to
allocate is a policy decision and beyond the scope of our report.
We recognize that this proposal is the one key legislative
recommendation that cannot be enacted overnight. It amounts to a
significant change to our filing system. We intend to explore the issue
of taxation of married couples from several different perspectives over
the next few years. We will review State community property laws and
their impact on Federal tax law as well as the treatment of tenancy by
the entireties property. Each of these topics raise the truly thorny
question of whether there should be, in this arena, a subset of
property rights that are defined by the Internal Revenue Code and that
trump State property law for purposes of the Code. We are taking a
long-term view and hope to address a different aspect each year, which
will allow for a full development and discussion of the issues.
The Causes of Tax Complexity
Clearly, no one in Congress or in the IRS sat down and said,
``let's try to make the Code so complicated that no one will ever be
able to figure out even basic provisions like family status by
himself.'' Tax complexity creeps up on us--we try to eliminate a
perceived abuse (as with the minimum tax in 1969), or carve out relief
for one special set of circumstances (as with innocent spouse). We keep
adding exceptions, limitations, and rules as other inequities reveal
themselves. Certainly revenue considerations play a role. Sometimes we
actually think we've solved a problem--as with the dependency exemption
between divorced or separated parents under IRC section 152(e) in
1984--only to find that forces outside the Federal tax universe--here,
State courts' interpretation of their domestic relations jurisdiction--
have foiled all our best efforts.
Tax simplification is anything but simple. It requires discipline
and persistence. It really requires us to admit that we tried a
solution that seemed the best at the time, but that it turned out to
need some more tinkering. Perhaps over time, as with the AMT, we will
discover that our first solution missed the mark completely. We need to
keep an open mind, view these provisions as controlled experiments, and
learn from our misjudgements. Above all, we must have a firm resolve
that while we are simplifying current law we do not enact new laws that
further complicate the Code.
The National Taxpayer Advocate's Annual Report to Congress is one
source of information about complexity and simplification. We have
limited our proposals to provisions about which we have experience and
which we believe are ``actionable'' and will significantly simplify
matters for many taxpayers. I hope you find this Report helpful. On
behalf of all the Taxpayer Advocate Service employees, I thank you for
the opportunity to report on these matters, both in writing and before
you in person today.
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[GRAPHIC] [TIFF OMITTED] T9969A.001
MOST SERIOUS PROBLEMS
ENCOUNTERED BY TAXPAYERS
1. LAccess to Customer Service Toll-Free Telephone Service
2. LMultiple Definitions Of ``Qualifying Child''
3. LDetermining Earned Income Tax Credit (EITC) Eligibility
4. LAnswers to Questions on Customer Service Toll-Free Lines
5. LDocumenting Earned Income Tax Credit (EITC) Eligibility
6. LRefund Inquiries
7. LEarned Income Tax Credit (EITC) Examinations
8. LUnderstanding Estimated Tax Payments
9. LExplanations on Math Error Notices
10. LProcessing Claims for Refund
11. LRecertification for Earned Income Tax Credit (EITC)
12. LComputing Income Tax Using Schedule D (Capital Gains & Losses)
13. LAwareness and Understanding Federal Tax Deposits Requirements
14. LObtaining Employer Identification Numbers (EINs)
15. LMisapplied Payments
16. LLack of Access to Free Tax Preparation for Low-Income Taxpayers
17. LProcessing Offer in Compromise Applications
18. LComputing the Alternative Minimum Tax (AMT)
19. LDetermination and Notification of Revised Tax Liability
20. LCost of Electronic Filing for Low-Income Taxpayers
21. LAutomated Underreporter (AUR) Tax Assessments
22. LStatus of Innocent Spouse Claims
23. LDelay in Receiving Requested Documents
Chairman Houghton. Thanks very much, Ms. Olson. Mr. Coyne.
Mr. Coyne. Thank you, Mr. Chairman. I was wondering, has
Treasury reviewed your report and expressed support for any of
the legislative recommendations that are made?
Ms. Olson. Well, as you know, in the statute that governs
the writing of the annual report, we are not supposed to submit
this report either to the Commissioner or to Treasury prior to
delivering it to you. But immediately after we delivered it to
Congress on January 2 this year, I met with various members of
Treasury as well as with the Commissioner and discussed these
provisions in detail. They were very supportive of our
provisions, and since that time, both the Commissioner and the
Secretary have come out talking in particular about the
uniformed definition of a qualifying child.
I would also note that in the President's budget, there is
language discussing their interest, their dedication to
simplification, and they do discuss the uniform definition of
the qualifying child. They do say that they are looking at
provisions about alternative minimum tax (AMT) relief and
various other items. So I can say that there is definitely
support for our proposals.
Mr. Coyne. Are any of your recommendations included in the
Administration's fiscal year 2003 budget?
Ms. Olson. Not as line items is my understanding.
Mr. Coyne. How about the Commissioner? Has he taken any
administrative action as a result of your report?
Ms. Olson. The Commissioner read my report in full, and I
have been told by my peers in the IRS senior leadership team
that they have all received e-mails from him directing them to
look at certain provisions and act upon them. So I think that
judging from the ripple effect throughout the Internal Revenue
Service leadership team, that there has been quite an amount of
attention paid to the report.
Mr. Coyne. Do you have any recommendations to this
Subcommittee and the full Committee relative to reforming the
Earned Income Tax Credit (EITC)?
Ms. Olson. I have to say that I think at this point, the
problems with the earned income credit are primarily
administrative. We need to figure out what to do about our
audit situation. The legislative changes I believe that need to
be made have to do with conforming the other family-related
provisions to the definition of a qualifying child in the
earned income credit, and I do think that there are things that
we can do administratively much better with the earned income
credit.
The Commissioner today is testifying that he is convening
with Treasury a team, a task force, and a steering committee, a
high-level steering committee on which I will serve together
with the Commissioner and the Assistant Secretary for Tax
Policy, Mark Weinberger, to look at the entire earned income
credit process, the audit process, and come up with ways in
which we can streamline this process, get better results at it
and intrude less on taxpayers who have a right to claim the
credit. And I think that is really where our attention needs to
be right now.
The only fix that I would say that I would like to see is a
more expanded definition of foster child in terms of the
placement agency requirement. You know, we changed the law a
year ago, I believe, to say that a foster child could be one
that was placed in a home by a licensed or certified placement
agency, and I believe that in the households of people who are
eligible for that earned income credit, that does not happen
very often. Placement is more informal, and what I would like
to see is that we expand that definition to say where there is
some sort of governmental agency, third party agency
certification, that that child is living in the home, where we
can rely on a local or State agency that has looked at that
household arrangement, that we should be able to say yes, that
child is a foster child in an informal sense. I think we can
get there with that kind of certification, but we need a
legislative change to fix that.
Mr. Coyne. Are you far enough along with this
recommendation relative to EITC to put a price on it, price
tag?
Ms. Olson. We are currently looking at that right now.
Mr. Coyne. What are the problems that taxpayers face in
calculating capital gains tax?
Ms. Olson. Well, there are several different rates and the
form itself is very complicated and what we noted in our report
was that 2 of the top 10 most common errors on the 1040 form
are attributable to the schedule D, which is the capital gains
schedule. Those errors are that people use the wrong
percentage, the wrong tax rate, to calculate the tax, and then
interestingly, the other error is that they are transferring
one number to another line or form and they make an error in
the transfer. If you have ever looked at the schedule D, there
are a lot of lines there in addition to a worksheet and it is
easy to get confused about the instructions for those lines.
Now, the service went back this past year and eliminated 12
or 14 lines off of the return and so they made it a simpler
return in terms of that, but it still is a very complicated
calculation.
Mr. Coyne. Thank you very much. Thank you.
Chairman Houghton. Thank you, Mr. Coyne. Mr. Portman.
Mr. Portman. Mr. Chairman, thank you very much. And Ms.
Olson, I think you have provided us a great service. First just
to clarify one issue that might be confusing to some, and that
is, why you did not talk to the Treasury Department, tax policy
people, or to the Commissioner in preparation of your report.
It is because we asked you not to, and the reason we asked you
not to is because we want this to be an independent appraisal
by the Taxpayer Advocate. Sometimes there are tax policy
reasons, some driven by complexity concerns, some different
driven by political concerns that lead the Treasury Department
down one path or another, and we wanted to be sure this was the
unvarnished view of the Taxpayer Advocate as to what the major
problems were, and I am delighted that this year you have
focused not just on that, but on simplification ideas for the
Tax Code that would make sense.
You have given us, I think, 23 of them and they are related
and it is obvious in your report. We appreciate the way that
you laid it out. For example, when you were talking about
problems, problem number two was the multiple definitions of
qualifying child and you described why that was a problem for
people, that 44 percent over 3 million people who had math
errors had them attributable to 5 Code provisions that provide
basic benefits to taxpayers with children.
So clearly, there is a nexus between Tax Code complexity
and problems that people are bringing to you and your Taxpayer
Advocates out in the field around the country.
So I think this is a very appropriate way for us to get
into the simplification issues. I will say that you have done
two things with your report that came out in January. One is
you have inspired the Treasury to be more focused on
simplification than it might have otherwise been, and we have
learned recently through this Committee that the Treasury
Department is likely to send us some specific examples, if not
legislative recommendations, over the next several months.
Perhaps not all at once, Mr. Chairman, but they are going to
give us some specific ideas.
You have also inspired some of us to get to work, and I
have put together legislation, as you know, working with you
and with Treasury. We have 36 items in our bill right now and
almost each of your 23 is in here, not precisely the way you
had them, but very close in almost every case, including the
uniform definition of a qualifying child. I know this
Subcommittee, Mr. Houghton and Mr. Coyne, are interested in
this because there is not the issue of the flat tax or sales
tax, which are very difficult political issues, frankly, to get
through the system. It is very important to taxpayers to just
take the Code as we have it, and get under the hood and look at
the mess that we have created through legislation over the
years where you have, for example, several definitions of child
when you could greatly simplify it for taxpayers by having one.
So I really appreciate the service you have given, and I am
glad you did it independently.
I do have some questions for you, but I will wait and see
if we get a second round as my time has now expired. Thank you,
Mr. Chairman.
Ms. Olson. Thank you.
Chairman Houghton. Thank you, Mr. Portman. Mrs. Thurman.
Mrs. Thurman. Thank you, Mr. Chairman. Ms. Olson, we
welcome you back and certainly appreciate the work that you
have done, and as always, my district staff thanks your office
for the work they do for our constituency and the information
that you have provided us, in fact, to help folks out there. So
we do appreciate that being an arm of it.
So again, we thank you. Maybe to follow up on Mr. Coyne's
issue on the EITC, and particularly from a standpoint that, you
know, the numbers we hear up here, a lot of people don't even
know about it, don't file for it. Are we making any headway at
all with employee/employer opportunities for the employee to
sign up with an employer? Are we seeing any changes in numbers
there at all?
Ms. Olson. With the advanced EITC, I would have to say we
are not. The IRS did, several years ago, do an intensive
campaign and having represented taxpayers in this population
and tried to talk them into utilizing, you know, face to face.
I have had very intensive conversations about the benefits and
how doing the calculations and saying this could go toward
rent, there is a really strong behavioral urge to using the IRS
as a bank. Taxpayers want that lump sum at the end of the year,
and I am not sure what it would take to get that behavioral
change.
I think that tendency would be very interesting to study,
and I know that the IRS is beginning to do some behavioral
economic types of studies, what drives taxpayers to do a
certain thing, and certainly one of the most perplexing things
has been people over withholding using the IRS as a bank. You
see it very much in the earned income credit population.
The other thing I don't know about is that people in that
population tend to be transient in their jobs, and they may be
nervous that because they change jobs so much or they hold more
than one job at one time, that they may end up owing at the end
of the year, which I am not sure whether that could happen or
not, but they may be afraid. So there is probably a chilling
effect from that as well.
Mrs. Thurman. And I know you talk about tax simplification,
which always is something we talk about, and I guess even in
your report, there were some that said there is no constituency
out there for that. Could you give me some ideas about what we
might--could do? I mean, you simply just talk about definition
of a child for the purposes of making some things easier. Where
are some other things that we can look at that would be just as
easy?
Ms. Olson. I don't think--I don't know whether this would
be as easy, but we are starting to look at the education
incentives in the Code, and we listed that as one of our
additional issues, that there are right now eight different tax
incentives for education, and they have all sorts of different
requirements. I am not sure whether you couldn't simplify them
down to at least maybe a pot of three or four that would serve
very different things.
So a taxpayer--I think many taxpayers feel frankly like
chumps because they go through this list of things and they
can't really tell whether they have got the right provision
that would work the best for them, and maybe there is something
else out there that would be better, but they just don't know
and they can't figure it out, and I think sometimes it is an
example of giving people too many choices is not a good thing.
Giving them some choice is, and where the choices are discrete
and they serve very clear purposes, that is very helpful, but
when they serve shades of purposes, that adds complexity that
taxpayers, as a rule, can't deal with.
Other areas we are looking at are the phase ins, phase
outs, and again, the education incentives are a good example.
There are different phase ins and phase outs for those
provisions, and how does somebody walk their way through that?
I will say something about the uniform definition of a
qualifying child. I decided to sit down with my return for the
2000 year. I have an adult son who is living with me right now.
He is medically disabled right now, and I claimed him, as a
head of household, for a dependent and I said well, I will just
go through the forms that someone would have to do. It took me
8 hours one day to add up all my expenses in order to entitle
me to those provisions, and it took me 6 hours the next day to
fill out the form, and the documentation that would have been
required of me in an audit and that is how long it took someone
who has a Master's of Law in Taxation and a few other things
under her belt.
So if you want the big ticket item on simplification, it
really is the uniform definition of a qualifying child. You
have the area of the alternative minimum tax which is a big
area and really needs to be looked at. We had a phone call from
someone the other day who had a son who was 8 years old, his
father had died, and the son was receiving his father's pension
benefits, and because the child was under 14, that pulled him
into the alternative minimum tax under the kiddie tax system,
so he ended up paying AMT on this income that was coming to him
in that situation and you just--what can I say?
Mrs. Thurman. Thank you.
Chairman Houghton. Thanks. Mr. Foley.
Mr. Foley. Thank you, Mr. Chairman. Some of my colleagues
have made a sport out of bashing the IRS and at times it may be
warranted, but it seems like we have a responsibility as well.
Where do you think Congress has failed or at least how have
they created some of the complexities that you described?
Ms. Olson. I take the point of view, and I have spoken
about this, that complexity isn't necessarily a failure. It
creeps up on us. You know, that when these new provisions, for
example for a child, come in there is a reason why Congress did
these differences, whether it was a revenue reason, or that you
were trying to target it for a particular population, but it
does create that complexity, and then there is no moment in
time where you stand back and say what have we done here to the
rest of the Code?
And I think that there needs to be some sort of device that
is built into our system where we just sit back and say whoa,
Nelly, let us take the overview and just see whether over a
period of 5 years we have created some things that are having
unintended consequences. I think the unintended consequences of
tax law are the greatest source of complexity, and we have no
mechanism built in to review these tax laws and come together
like a hearing here to say what have we done, and do we need to
regroup.
Mr. Foley. That is an interesting suggestion because in the
legislature, we always had sunset provisions on laws that we
would establish, so at least in 5 year periods, we could
reflect on the need for it at the time and does that need still
exist, but there is no mechanism, and it seems like every week
we are adding some new dilemma to the Tax Code by changing
something, maybe beneficial for some, maybe not.
I was noticing in your report, though, you had some very
significant recommendations on AMT and we all, again, on this
Committee, talk about AMT, and yet we never really seem to
figure out how to really fix it. You have what I think is a
very significant and simple way to do it. Would you elaborate?
Ms. Olson. Well, we approached the AMT from the Tax
Administrator point of view, which I think I identified pretty
well in the report which was looking at the Joint Committee on
Taxation's estimate that 35\1/2\ million taxpayers would become
subject to it in 2010. And the people who will become subject
are middle class taxpayers, most of whom do not know that the
AMT exists, and so what I was looking at as a Tax
Administrator, was we are going to be sending out 35\1/2\
million notices to people saying you thought you filed your
return correctly but surprise, you owe more tax. That is not
going to sit well with these people, and it is going to really
foul up our system in trying to collect that.
So we thought, well, if you cannot repeal the AMT in full,
there may be three ways that you could go at it to peel off
some taxpayers without quite the large price tag that a full
repeal would have, and the first one was to say that the
exemptions on the AMT had not been indexed for inflation
really, since they were first enacted in the 1980s, and if you
indexed them for inflation, you peeled off about anywhere from
400 to 500,000 taxpayers based in 1998. If there were about
900,000 taxpayers paying AMT in 1998, you could peel off about
4- or 500,000, and that only had a revenue impact of about 25
percent of the AMT revenue.
The other one that I particularly liked because it went to
simplification in two ways was to say could we take a number
off the face of the return, and just say if your income was
under this amount, then you are not into the AMT?
And we took a look at where the people who were paying AMT
in 1998 were clustered, and it seemed like there was a
threshold of about 200,000 of gross income where we could peel
off people. The interesting thing about the AMT is that it was
originally designed to get the very wealthy who were not paying
taxes, and in fact, we have as many, if not more, of that
category of people today who are not paying taxes, and we are
not catching them in the AMT.
So what we are doing with the AMT is we are catching the
middle class, and we are not catching the people it was
originally enacted to catch back in the 1970s.
Mr. Foley. So you basically have a bracketing approach? You
look at a number and decide whether you are eligible?
Ms. Olson. Yes.
Mr. Foley. Let me ask one other question, because our time
will expire, and I will have a chance to ask others. The IRS is
planning to implement the National Research Program (NRP),
which is a nice academic name for plain old random audits.
Given past taxpayers' complaints about the random policing, if
you will, how can we make sure that this area of audits aren't
going to be subjected to the harassment aspect that some
taxpayers view it as?
Ms. Olson. I am very sensitive to this issue because as a
tax practitioner, I have sat through and represented taxpayers
in the old Taxpayer Compliance Measurement Program (TCMP)
audits, and they were, in fact, excruciating. They were no fun
for the taxpayer, for myself or for the auditor for that
matter. I was briefed early on in the NRP program and raised
several concerns which the Service did, in fact, address in
their current proposal. The truly random audits are limited to
a very small number, and I think where you can avoid the--what
might feel like harassment is to do reviews of those as they
are going along so that there is no trailing time between when
the audit is completed and a review is done. Someone, a
disinterested person is looking at what happened and can stop
it if something is going on that would look like harassment.
I am comfortable, and I say this with some thinking about
it, that the Service has really listened to what Congress and
practitioners have said about the old TCMP audits, and has
really tried to come up with an approach that will give us some
current data without doing the invasive techniques that we did
before.
Mr. Foley. Thank you.
Chairman Houghton. Thanks, Mr. Foley. I have got sort of a
broad question here. You say on page 8 of your testimony that
it is a very difficult practice, and the tax system relies on
voluntary compliance to draft laws to develop procedures that
differentiate between habitual or chronic offenders and the
taxpayers who simply make a mistake. Elaborate on that a little
bit, will you.
Ms. Olson. Well, we really need to have a better approach
to our audit approach, and I think that complexity lets people
make easy mistakes and then they are easy also for us to catch
and we put our resources to those easy mistakes rather than to
the ones that are causing people to feel like you are catching
me, and I know so and so down the block is doing something even
more egregious, and you are not even finding him. That really
is a backwards way of administering our tax system, and I think
complexity to some degree breeds that.
Chairman Houghton. Okay. We will have another chance to get
another question.
Mr. Coyne. No.
Chairman Houghton. No questions. All right. Mr. Portman.
Mr. Portman. Thank you, Mr. Chairman. I can't leave our Tax
Advocate without talking about telephone assistance. You did
list it as, I think, the first and fourth most serious problems
still facing taxpayers. This has been a huge frustration for
many of us including me. In our Commission report, we focused a
lot on the fact that you are never going to get an IRS that
works well until you deal with that frontline taxpayer issue,
calling on the phone, which is the way most taxpayers access
the system.
You also need to simplify the Tax Code which we talked
about a lot in our report, but we have got to figure out a way
to get these phone trees to work better and so on. I know we
have made improvements in the last 3 or 4 years, in fact,
fairly dramatic improvements, but still there is a huge problem
when such a high percentage of taxpayers can't get through. I
have seen the U.S. General Accounting Office (GAO) study and I
have seen other studies and I don't know if I should throw a
number out, but it is close to half of the taxpayers are having
some frustration when they call, they can't get through or they
are getting responses that are not accurate. Your report,
again, highlights it as a problem both in terms of access and
responses.
Can you give us just your personal view this afternoon as
to what the IRS needs to do right now in terms of enhancing its
phone service?
Ms. Olson. Well, we have created an advocacy project to
monitor this, and we have decided to take pieces of the phone
service to see what we can learn from it and then make
recommendations. So I am speaking a little prematurely about
where we may come out as a result of that advocacy project. I
have talked to a lot of people about this. They tell me that we
have, you know, new technology that is in place or is going to
be in place that will help us get to a better response rate,
accuracy rate, you know--well, response rate on the phones.
The second thing they tell me is that the specialization of
training the assistors will help so that when you do get to
somebody on the phone, you are dealing with someone who knows
the answer or can find it. Historically, what they did was they
had a big book in front of them and they needed to know every
answer to everything, and now we are trying to make sure that
the people who are answering the phone are being--they are
receiving the calls that they are trained specifically to
answer, so that there is a greater chance that you will get a
correct answer.
I think it has got to be that we stay on course with what
we are doing now, and not let up, and frankly the oversight
function of you all and of GAO does serve a purpose because it
drives us forward on that. I think Chairman Levitan can speak
to a greater depth about the kinds of additional resources that
we might need, but what I see is we need the wherewithal to
stay on course, keep training those people and keep watching,
not letting up.
Mr. Portman. What do you believe the percentage is of
taxpayers who do not get through?
Ms. Olson. I don't know whether I can--the percentage, I
have pulled some numbers and it varies from day-to-day.
Taxpayers who get through averages 70, 69 percent. Last Monday
we had 1.2 million calls. The only day in the history, since we
have been recording this, of the IRS where we had over a
million calls, was last summer when there was an announcement
about the advanced payment of taxes. This filing season, we
have had 2 days, a Monday and Friday, where we have had 1.2
million calls, and that response rate went down for a while in
the 20's because we just can't deal with that kind of volume,
and what you also see is that the wait time is a very long
time, and then your abandon rates go up.
What we did with that advanced rebate, those calls, when we
realized that there was some confusion about the advanced
payment and people were calling us on our refund line, huge
numbers of people calling us on our refund line, was we put out
a press release, but we also changed the script on the refund
line so we could explain very clearly before they had to go
anywhere further into the system, and maybe get their answer
just right up front, and we found that, in fact, that made a
big difference once you started tracking those numbers.
Mr. Portman. If the Chair would indulge me, I think that is
an important issue to get your perspective on because there is
a lot of confusion out there over the $300, $500, $600 checks
that went out last summer. These were rate reduction credits.
Some people are now believing that this will result in their
having to pay higher taxes on their 2001 income tax returns.
That is not true. They will retain the benefit of those credits
for the 2001 taxes. In fact, their taxes will remain lower and
continue to be lower because of the tax relief we put in place.
It is an advanced payment that went into effect January 1 of
last year.
Can you explain this afternoon to just set the record
straight so that taxpayers who might be watching this or those
of us who might be in a position to get out there and talk
about it can understand it better as to what the real story is,
and what those taxpayers should be doing with those returns?
Ms. Olson. Well, that line on the return is only to be used
by those taxpayers who did not receive that credit earlier in
2001 mailed out to them as a separate check.
Mr. Portman. And again, this is the $300 for individual or
$500 for household or $600 for couples checks that went out
last summer.
Ms. Olson. Right. And so it is an opportunity for them to
claim it on this year. They are not required to put what they
received in 2001 as an advanced payment on that line and add it
back in as a payment and have it subtracted out from their
refund. If they received the money earlier, they are not to put
anything on that line. One of our press releases says
specifically that your tax return preparer may ask for that
information, but that is only to make sure that you either
received it or they need to put an entry on that line, don't
get confused by that.
So we have tried very hard to explain what it is, but it is
a new line and there has been a lot of misinformation out about
there. What we do see is people filling this out incorrectly,
and we have had to pull returns off line and do adjustments,
spend our staff time to deal with these.
The Taxpayer Advocate Service, since the checks first
started going out last fall, have had about 3,400 cases dealing
with the advanced payment, and we currently have 228 open cases
where people are confused, they haven't gotten it, they don't
know what is happening with their payment, whether they claimed
it on their return and they shouldn't have or they didn't claim
it on their return and they should have, and they have already
filed their return.
Mr. Portman. But it is clear that does not need to be
filled out----
Ms. Olson. It does not.
Mr. Portman. If somebody indeed did receive it and that is
line 47 on the 1040?
Ms. Olson. Correct.
Mr. Portman. Thank you very much. Thank you, Mr. Chairman.
Chairman Houghton. Thank you. Mr. Foley.
Mr. Foley. Thanks again, Mr. Chairman. One further question
relative to the IRS service. It seems they have made
significant progress, and one thing I feel terrible for is some
of the agents in the field and those who make a great living
working for the U.S. Government and the taxpayers but are
somewhat put upon because of the constant finger pointing,
again, at whatever. I sense there has been reform, I sense we
are making progress, I know we are not perfect, but have you
noticed that their response to inquiry from taxpayers, their
helpfulness in the 800 numbers, the weekend opportunities
people can go to the IRS, is that starting to take effect with
the culture?
Ms. Olson. I think it is making a difference. You know,
everyone has recognized that we need to work harder on our
field assistance. I think what people are seeing, though, that
the two really important initiatives have actually started
working now, which are TEC (Taxpayer Education and
Communication) and SPEC (Stakeholder Partnerships, Education
and Communication), which are the prefiling educational
function of the wage and investment division and the small
business self-employed, and they are really geared to going out
to taxpayers even before they walk into walk-in centers with
problems, to tell them how they should be going about ordering
their affairs to avoid problems later on, and it is very
important in the small business community to have that kind of
proactive approach rather than wait until the return filing
day, and I think just being out there among taxpayer groups,
practitioner groups, helps enormously in terms of when you
actually do have a problem, you are not feeling that you have
been attacked necessarily, that maybe there is someone that you
can call up, it is part of a continuing--the IRS wants to help
you rather than the IRS wants to get you.
Mr. Foley. Another issue that came up recently is from the
private sector the entrepreneurial businesses that prepare
things like Quicken Books and things that help taxpayers
prepare their taxes. They use automation, they use computer
models and what have you, and they help you expeditiously
prepare your own taxes. There has been a proposal, I
understand, by the IRS, to do that themselves in-house, and of
course, that reaches and causes hackles amongst those who are
in the entrepreneurial sector.
As they say, it has been done in Europe before and they
were fraught with error problem, the system was unable to
really process, there was no user fee services where they can
call up that 800 and get help with it.
Do you think that is the right course for the IRS to
compete against these companies and create their own online
filing service?
Ms. Olson. Well, the approach that I would like us to take
is that we are not competing, that we are actually partnering
with them. I had a very interesting briefing with some folks
from Oklahoma, the Oklahoma State Tax Agency, and what they
have done is that they have decided that they want to make on-
line filing available to the citizens of Oklahoma for their
State returns, but they have contracted that out with the
private sector. So they are not creating the software, the
private sector is, in fact, creating it and they are paying a
fee per return.
They just contracted out an agreed amount for the original
return and then X amount for each additional page that is
submitted through these portals that are basically coming into
the agency. So the agency gets the benefit of electronically-
filed returns, the taxpayers get the benefit of not paying a
fee to file, and then the private entities are actually the
people who are delivering the software.
I think that there are combinations of that kind of
service. If we did a bare bones return like that, I think that
that would appeal to a group of taxpayers, but there are always
going to be people that want the tax preparation services and
the ongoing relationship with the preparers.
The Commissioner and folks from Treasury did meet with
Members of the software community last week, a couple of weeks
ago, and I was told it was a very, very productive meeting
where we talked about how we could partner together rather than
looking at it as competition, and I will do everything I can to
encourage that because I think that that will drive us again to
that goal of achieving electronic filing.
Mr. Foley. I think that is helpful because I think if we
endeavor to do it ourselves in-house in the IRS, then there
will be a lot of problems where at least in these other
sectors, they can call and get backup and software updates and
all the things. So I urge you to make that recommendation to
Treasury. The final question, and I see it in your package
here, your presentation, joint and several liability, and it
was unusual, but I got a call on Monday on this very issue
where a woman I have known for years, who will remain nameless,
her husband had a business, an ongoing business, and incurred
significant liabilities for whatever reasons. I don't know all
the background. But she is in tears because she was told by the
agent who she was talking to relative to these payments that
the only way to separate herself was to go ahead and get a
divorce.
Now, she has been married 30 years, and that was not the
intention when she was making the inquiry. I don't want to get
out of my relationship. I would like to keep my relationship,
but why am I being brought into this arrangement since I am not
a shareholder of the company and my husband has had problems,
yes, but now you are talking about garnishing my wages. You
mentioned the innocent spouse provision, relief under IRC,
Internal Revenue Code, section 6015, threatens to become an
exception that swallows the rule.
How in theory or practice can we assure that men or women,
regardless, it could be the other way around, the woman could
own the business, how do we ensure that that spouse who is
doing everything they are supposed to be doing, they are making
their payroll taxes, they are doing all, isn't brought into
that kind of web because of the other spouse's negligence,
failure to remit?
Ms. Olson. The proposal that we came up with, which was an
attempt to avoid all the inquiry into whether the tax--the one
spouse knew or had constructive knowledge about this business
or that they didn't report all the income that they had, which
are truly intrusive inquiries, was to go to the front-end and
let us allocate out the items on a joint return. What we are
doing with the divorced and separated spouses under current
innocent spouse relief, going back after the fact and saying
okay, you can allocate it out and we will only hold you liable
for this portion of it, that is very difficult to do because
you are usually years down the road, and it is a result of the
divorce, so sometimes you don't have records and things like
that.
But we have talked about this a great deal and really felt
that if you gave taxpayers the option, that those taxpayers
actually do think about well, this is his sole proprietorship,
this is my W-2, and they would be--most taxpayers really would
be able to fill out two columns, and in fact, many States have
those two columns on their forms and taxpayers have the option
of filling out two columns and then combining their payment at
the end of--their taxes at the end of the day.
The big issue in that kind of filing system is if you are
getting rid of joint and several liability in that way, by
saying that you get to, on the form, allocate out your items
just on the tax return, is what do you do about jointly held
property and tenancy by the entireties property, and we
basically punted on that and said that's a big issue, the
Supreme Court is hearing a case this session, you know, maybe
that will be answered; if not, we will take a stab at it. It is
a big issue and it is a hard one, but we didn't think that it
was something that should stop us from discussing this----
Mr. Foley. I am sure certain there are issues where a
spouse has been actively engaged in the business and probably
deserves to be held liable for their tax due, but----
Ms. Olson. Right. If you have been engaged then maybe that
should be on your column.
Mr. Foley. Right. But is that now our fault at the IRS for
not having that documentation early enough where they are able
to discern up front what their liabilities will be, because it
seems if you file jointly as a couple and don't predetermine
this, and that then you are falling into a trap not set by
yourself but set by the form.
Ms. Olson. It is set by the law because the law says joint
filing, and we really have no authority to allocate it out, and
currently the only relief we could give a married taxpayer
under innocent spouse, under 6015, is if that taxpayer had no
actual knowledge of what was either underreported or over-
deducted on the return or had no reason to know.
Mr. Foley. That is an area, I hope Mr. Portman, as he looks
at his bill and talks about that, this is a significant area
and hope you will consider that.
Chairman Houghton. Mrs. Thurman.
Mrs. Thurman. Thank you, Mr. Chairman.
Ms. Olson, I noticed in your document that one of the
things you also talk about is penalty and interest issues, and
we know about those from hearings from before, and you had
suggested maybe to have the ability to waive penalties for a
first time offender. Over the course of the years, we all get
constituent cases, and I had--you may remember this case, but
whatever.
What about having the ability to provide refunds for
innocent mistakes or when 1040's have been lost through no
fault of their own, like hurricanes and some other things? We
had an awful case that we had just been working on and working
on, and we have never been able to resolve it. His papers were
destroyed, although he had some information that he should have
been able to receive the dollars back of what he had paid in,
and they have just said no. Would we also look at those
penalties being waived but in this case, look at ways where
somebody could prove that they deserved a refund, that that
would be an opportunity for them to ask for some kind of a
waiver as well?
Ms. Olson. Well, you know, to me, that is less a waiver
question than it is how we are training our employees, because
as a person who formerly represented taxpayers, and took,
often, many cases like that to Tax Court, you would go through
audit and you would come up with the worst result possible. The
answer was, well, I can reconstruct these records, or I can
sort of demonstrate it by third party evidence or my mileage--
and they would say no, no, no.
And when you would get to court and you would be sitting
opposite an attorney who had settlement authority, you know,
you would work out some deal and often it would come out that
maybe the taxpayer was entitled to a refund, and you could get
it that way. I would like to see that approach moved further
down along the administrative system so people aren't having to
go to court because many don't.
Mrs. Thurman. They can't.
Ms. Olson. They fall out. They can't afford it, they are
scared, they give up. How can we get to that, to the front line
employee who is handling those things? And there is probably a
break-even point where that kind of discretion should rest, but
you need that.
So I don't know that we need a waiver then, just that we
need better guidance to our employees about how to handle those
kinds of cases.
Mrs. Thurman. Thank you.
Chairman Houghton. Thanks. I have just got a couple of
questions to wrap this up. You, in your previous life, were
founder of a thing called Community Tax Law Project, which was
really interested in low income tax payers, and I wonder
whether some of the low income tax payers are being caught
here, people who do not speak English, and particularly ones
who are exposed to our complex tax laws. Do you want to
elaborate on that a little bit?
Ms. Olson. I think, particularly for the low income tax
payers, the family status provisions are the big playing item
for them. They may have so little income that they cannot, in
an audit situation, prove that they provided more than half the
support, and many of them keep paying things in cash. They
don't have checking accounts. They don't have documentation.
For the ESL, English as a second language, taxpayers, some
of them have immigration issues. So there is this basic fear of
the Internal Revenue Service, and we see nonfilers or we see
that they can't get Social Security numbers, and they are
making up Social Security numbers.
It is very difficult to deal with these populations and
bring them in the fold. And complexity for them, I mean, you
have someone who is able--if you live in Mexico and you can
claim your child as a dependent, if you are working in the
United States and your child is in Mexico and you are sending
every dollar you make down to Mexico, you can claim your child
as a dependent, but your co-worker may be from El Salvador, and
he may be sending every penny down too, but he can't claim his
child as a dependent because that is the way our law is
written. That leads to mistakes. Their co-workers, they will
talk about it, they will go to their tax preparer. The El
Salvadorian will say I want to claim my child. Now you have got
a mistake and we have to audit it. We have to pick it out and
deny it. And in many instances, those people have gotten loans
against their refunds, you know.
Chairman Houghton. This was a 501(c)(3) operation that you
had----
Ms. Olson. Yes.
Chairman Houghton. But is there anything you feel the
government should do more in that regard?
Ms. Olson. Yes. With regard to----
Chairman Houghton. With regard to helping the low income--
--
Ms. Olson. Yes. Absolutely.
Chairman Houghton. People who were totally buffaloed by the
complexity of the system.
Ms. Olson. Absolutely. The Taxpayer Advocate Service has
been doing a research project to find out what are the best
ways for us, ourselves, to do outreach to that community, and I
mentioned SPEC, Stakeholder Partnership Education and
Communication, earlier today, the outreach part of wage and
investment. They are truly focusing on that and working with
Health and Human Service agencies in the State and local level
to find ways to get information out to welfare populations,
working with various Hispanic groups and other immigrant groups
to get information out. So I think there is very much a
consciousness of that.
Chairman Houghton. Okay. Well, thank you very much. I have
got just one last question. We have kept you too long here and
I appreciate it. I have got a piece of paper here that says the
most serious problems encountered by taxpayers--it came out
from your office, and there are 23 issues but if you were to
give us the top three, what would they be?
Ms. Olson. Well, you know, we have said the phone service,
we have said the earned income credit eligibility, and I guess
even though I say I don't want to say it, but the complexity of
the tax law, the uniform definition of a qualifying child, it
just trips everybody up. That is a legal issue. The earned
income credit eligibility I think is an audit procedure issue.
It is something we can fix, and the phone service is something
we can fix.
Chairman Houghton. Right. Well, thanks, Ms. Olson, very
much.
Ms. Olson. Thank you.
Chairman Houghton. We appreciate your time and you have
been very helpful to us and hope to see you again. Now what I
would like to do is ask Mr. Levitan to come up and testify. Mr.
Levitan, as everyone knows, is Chairman of the Oversight Board.
Thank you for coming, and you can begin your testimony anytime
you want.
STATEMENT OF THE HON. LARRY LEVITAN, CHAIRMAN, INTERNAL REVENUE
SERVICE OVERSIGHT BOARD
Mr. Levitan. Mr. Chairman and Members of the Subcommittee,
thank you for holding this hearing and inviting me to testify.
It is an honor to appear before you today on behalf of the IRS
Oversight Board and to discuss our first annual report. Let me
preface my remarks by acknowledging the role that this
Committee had in the passage of the IRS Restructuring and
Reform Act 1998. That legislation created the IRS Oversight
Board, and more importantly established a strong foundation for
a new and greatly improved IRS.
Since its inception in September 2000, the Oversight Board
has acted to meet its responsibilities as defined in that
landmark legislation. The report I am discussing today reflects
what the Board has learned during its first year of operation.
I would like to summarize my written statement and focus on
areas that are particular interest to this Subcommittee. Two
major topics addressed in our annual report were an evaluation
of the current state of the IRS and an assessment of how the
IRS got into that state.
To briefly summarize the Board's finding on the state of
the IRS, we found that it is still not effectively and
efficiently serving the needs of the American taxpayers,
although it has made significant progress since 1997.
For example, customer service, although improved, has not
risen to desired levels, and enforcement activity has fallen
for many years to what we now believe is a dangerous level.
These problems are compounded by outmoded computer systems that
handicapped IRS workers and prevent effective service from
being delivered. On the positive side, we found that the IRS is
making progress and has put in place several key elements that
establish a foundation for further progress, including a
commissioner with a fixed term and a management background, a
major reorganization designed to better focus on customer needs
and provide clear accountability, a strengthened senior
management team and a business systems modernization program
that will eventually provide modern business processes and
tools for employees and taxpayers.
I want to dwell a moment on modernization, because the
Board believes that the IRS cannot continue to operate with its
current technology and methods of doing business. These
problems cannot be fixed with short-term improvements. Real and
lasting improvement will only be realized with the successful
implementation of the modernization program. The Board is
pleased that the modernization effort is being conducted in
accordance with the logical and well-thought out strategic
plan. The challenge for the IRS, and I am afraid that it is a
significant challenge with many risks, is to execute that plan
effectively.
The Board's report presented data on four factors that
influenced how the IRS got into this current state of
operations: Number one, growth of the number of transactions,
especially complex transactions, complex tax returns; decline
in the number of IRS employees; past failures to modernize its
outdated technology; and finally, the complexity and the
growing complexity of the Tax Code.
I know that this Subcommittee is particularly interested in
Tax Code complexity and its impact on tax administration.
Although the Board's charter is tax administration, not tax
policy, there is clearly a relationship between the two.
Although it would be inappropriate to say that complexity is
the cause of the IRS's performance problem, it is fair to say
that Tax Code complexity is the enemy of efficient tax
administration. Complexity negatively impacts customer service,
enforcement and public attitudes.
One way that complexity affects customer service is by
increasing the need of taxpayers to contact the IRS and
lengthening the duration of their calls. It can affect
enforcement by delaying the resolution of cases, stretching IRS
resources, and adding interest and penalty costs to taxpayers.
The effect of complexity on taxpayer attitudes can be
insidious. The infamous Forbes Magazine of last year entitled
``Are you a Chump?'' identifies complexity as a causative
factor in the rise of aggressive tax shelters and erosion of
public confidence in our tax system.
To test taxpayer attitudes, the Board had a survey
conducted last year. The results are in our report, but the
bottom line was that a significant drop in attitudes about the
acceptability of cheating occurred from 1999 to 2001. My
comments on the complexity of the Tax Code and the need for
simplification is not new news, and I am sure not a surprise to
anyone.
Every taxpayer in the country knows that the Tax Code is
ridiculously complex. Every Member of Congress knows the same
thing. Many of you speak frequently and eloquently about the
need to fix this serious problem. Despite this widespread
understanding, the problem remains and grows worse every year.
Only Congress can fix it. The IRS Oversight Board strongly
supports Tax Code simplification. It will be good for the IRS,
it will be good for the overburdened taxpayers, and it will be
good for the country. The time for meaningful action is long
overdue. I want to thank you again for this opportunity to
testify, and I would be pleased to answer any questions.
Chairman Houghton. Thanks very much, sir.
[The prepared statement of Mr. Levitan follows:]
Statement of the Hon. Larry Levitan, Chairman, Internal Revenue Service
Oversight Board
Mr. Chairman, and Members of the Subcommittee, thank you for
holding this hearing and inviting me to testify. It is an honor for me
to appear before your Committee today on behalf of the IRS Oversight
Board to discuss our first annual report to Congress.
Let me preface my remarks by acknowledging the role that this
Committee had in the passage of the IRS Restructuring and Reform Act of
1998. Since its inception in September 2000, the Oversight Board has
acted to meet its responsibilities as defined in that landmark
legislation. The report that I am discussing today reflects what the
Board has learned after its first year of operation.
The Oversight Board has found that the IRS is still not effectively
and efficiently serving the needs of the American taxpayers, although
it has made significant progress since 1997. Customer service, although
improved, has not risen to desired levels and enforcement activity has
fallen for many years. These problems are compounded by outmoded
computer systems that handicap IRS workers and prevent effective
service from being delivered. It is not surprising that this
environment has resulted in dissatisfied taxpayers and inadequate job
satisfaction among IRS employees.
On the positive side, the IRS is making progress and has put in
place several key elements that establish a foundation for further
progress, including a Commissioner with a fixed term and a management
background, a major reorganization designed to better focus on customer
needs and provide clear accountability, a strengthened senior
management team, and a business systems modernization program that will
eventually provide modern business processes and tools for employees
and taxpayers. The entire modernization effort is being conducted in
accordance with a strategic plan that has been approved by the
Oversight Board, and monitored by balanced performance measures that
will provide Congress, the Administration, the Oversight Board and
other stakeholders a quantitative means to evaluate progress.
Neither the IRS nor the Oversight Board is satisfied with the
current state of IRS' performance. The Board's report presents data
that indicate the IRS needs to improve its performance in three
dimensions: productivity, customer satisfaction, and employee
satisfaction.
Performance measures for the key areas of customer service and
enforcement were troubling to the Oversight Board. Customer service
metrics pertaining to both level of service and quality associated with
toll-free telephone operations need considerable improvement. Quality
levels at IRS walk-in sites are just being baselined and need
attention. Because of the link between employee and taxpayer
satisfaction, employee satisfaction levels for these and other
operations also need improvement.
An effective IRS is an important part of our government, and the
IRS can ill afford to fall behind. Old technology, a growing economy
with more tax transactions, reduced IRS staffing levels, and an
increasingly complex Tax Code have created a situation where the IRS
must make up a lot of ground. The Board believes that a private sector
company that fell behind this dramatically would find its very survival
threatened. However, failure is not an option for the IRS. Our society
depends on a tax administration agency that can help taxpayers
understand and meet their tax obligations and effectively enforce the
tax laws.
I know that this Subcommittee is particularly interested in Tax
Code complexity and its impact on tax administration. My fellow
panelist, Nina Olson, the IRS Taxpayer Advocate, has made a compelling
case in her annual report that Tax Code complexity negatively affects
the American taxpayer.
The Oversight Board is concerned that the broad decline in
enforcement activity increases our reliance on voluntary compliance,
and fears that the public's attitude towards voluntary compliance is
beginning to erode. Because of this concern, the Oversight Board
initiated a survey to obtain data on taxpayers' attitudes regarding
their obligations to report and pay their fair share of taxes. The
survey, taken in August 2001, asked two questions from an earlier 1999
IRS survey and three new questions.
The survey results are included in the annual report, but the most
troubling result was in response to a question that asked how much, if
any, do you think is an acceptable amount to cheat on your income
taxes. In 1999, 87 percent of the respondents replied ``not at all.''
In 2001, the percentage of respondents who selected that answer fell to
76 percent.
The Oversight Board is reluctant to assign too much importance to a
single survey, but intends to repeat the survey in 2002 using the same
questions. There is cause for alarm if this trend continues.
To better understand compliance issues, the Oversight Board
believes there is an urgent need for the IRS to increase its research
on taxpayer compliance so it can identify and correct broad areas of
taxpayer noncompliance. The IRS is developing a new program, the
National Research Program (NRP), that will provide the necessary
research. Past approaches were viewed by Congress and taxpayers as too
intrusive, and the IRS is designing the NRP to lessen taxpayer burden
while still obtaining a sample sufficient to produce meaningful
results. The Oversight Board supports the NRP and requests
Congressional support for this program.
The long-range solution to many of the IRS' problems is to
modernize its business processes and information technology. The IRS'
Business Systems Modernization (BSM) program is designed to transform
both IRS' business processes and information technology into modern,
efficient processes and systems that incorporate world-class best
practices. The BSM program has been progressing slowly, limited
primarily by IRS' capacity to manage the program. Efforts from
inception to date have focused on establishing an enterprise life
cycle, a standard architecture, and low-risk projects. In 2002,
however, several major deliverables are scheduled, and the upcoming
year will be a test of the IRS' ability to manage this program.
The longer it takes the IRS to modernize, the longer taxpayers will
be deprived of the benefits of improved IRS processes and systems, and
be forced to endure the inadequacies of antiquated systems in place
today. Even under the best of circumstances, it will take the IRS far
too long to complete its modernization program. The Oversight Board
recommends that BSM be accomplished as quickly as possible, consistent
with the IRS' ability to manage the program and absorb change. The
private sector has already learned that accomplishing programs in as
short a period as practical actually lessens overall cost and risk. To
increase the pace of modernization, all organizations involved in BSM
must do a better job. The Oversight Board's recommendations for key
organizations include:
LThe IRS must improve its program management ability, work
more effectively with the PRIME Contractor, and manage/implement change
more effectively.
LThe PRIME Contractor must understand and achieve its
responsibilities to deliver business results within budget and on
schedule and improve its breadth and depth of skills.
LThe Administration must understand the importance and
critical nature of the situation, support the long term plan, including
increased investment levels, and hold the IRS responsible for meeting
the plan.
LThe Congress must accomplish the same tasks as the
Administration, and, in addition, speed up the process for review and
release of BSM funding.
Oversight organizations must rationalize their roles to the extent
possible and eliminate unnecessary overlap, leverage assets to advise
in a more effective manner; and recognize that quality cannot be
achieved by repetitious, and at times, inefficient inspection.
Notwithstanding the need for a long-term modernization program, the
IRS must also improve in the short term. Potential means of realizing
short-term improvements may be organizational changes, process
improvements, or modifications to the legacy technology base.
An IRS that performs better requires adequate funding as its
workload continues to increase. As discussed in our interim report on
the FY2002 budget, inadequate funding and resources will make it
impossible for the IRS to meet any of its strategic objectives. The IRS
still has a long way to go to reach the level of performance envisioned
by both the IRS Restructuring Commission and the IRS Restructuring and
Reform Act. Failure to provide adequate funding will deprive the IRS of
resources it needs to make improvements in customer service and
compliance.
Chairman Houghton. Mr. Portman.
Mr. Portman. I thank you, Mr. Chairman and thank you, Mr.
Coyne, for allowing me to go first. I have another meeting I
have to go chair, and I apologize I can't stay for your entire
question and answer period, but I want to start by, again,
thanking you for stepping up to the plate and be willing to
take on this arduous task. It is a very important task as well
as difficult, and frankly I am a little discouraged by your
report. I am an eternal optimist and I had hoped that by this
time, having passed the legislation in 1998, hoping that the
Oversight Board would have gotten in place a year and a half
before it did, that we would have better news. At the same
time, you did point out two things that are interesting.
One is that there is restructuring going on that is a
positive, and there are a number of positive management or
reorganizations efforts taking place; second, that
modernization is taking place. We have made huge strides there.
At the same time you acknowledge we have a long way to go.
Second, you talk about some of the external factors that are
affecting this, and it is almost as if as we are beginning to
get the IRS back up on its feet and as we are getting some
better feedback back from taxpayers as to service, additional
problems are arising that make it even more difficult to stay
above the course, and just stay above water. One is, just the
number of returns we are getting and the amount of money coming
in.
I think in the last 10 years the amount of money has almost
doubled that comes in from taxpayers in a period of time of
just 2 years. I think you point out in your report 1998 to
2000, we had an increase of 18 percent on the number of tax
returns, and during that same time, the number tax returns
examined decreased by 60 percent. And that is partly because we
put more funding into taxpayer service, front line activities
as well as a modernization efforts which are extremely
important, and that is the only way, long term, we are going to
see the kind of improvements you would like to see is through
modernization.
Then you also talk about complexity, and I am glad you have
added your voice to that this afternoon. We don't expect you to
give us the answers. That is more in our bailiwick Treasury and
Taxpayer Advocate, perhaps, given the nexus we talked about
earlier. We need you to tell us how to make this thing work
with the bad system we have but your voice is appreciated, and
it is heard by this Subcommittee, and as I said, we are working
on legislation to try to at least get through what we can in
this budget environment because a lot of that complexity,
simplification of those complex rules will result in additional
revenue being needed and that is difficult to find.
Obviously, the best example of that is alternative minimum
tax which may be $300, $400, or $500 billion in lost revenue
over a 10-year period we look at. My question to you is this:
Given what I view as your kind of mixed picture of results at
the IRS, first in general, are we on the right track, at least
given all these external factors and the other things that I
discussed, number one; and number two, is the Board working?
Again it got in place because of some foot-dragging, I believe,
by the Clinton Administration and perhaps the Senate to a
certain extent, but once you got in place, it seems to me you
found the right people, you have got a great Board, you have
got people with experience and knowledge and commitment
including yourself.
Is the Board working as you envisioned it, and as was
envisioned in the report that Mr. Coyne and I were a part of?
If you can answer those two questions, I know they are general,
but it would be most appreciated.
Mr. Levitan. Mr. Congressman, the IRS is on the right
track. The first thing that they have put into place, and I am
very pleased with this, is a very logical, very thorough, and
very meaningful strategic plan. I have dealt with troubled
organizations my entire career, and typically they fall into a
number of categories. Many of them don't even know they are in
trouble. Others know they are in trouble but don't know how to
fix it.
Others are developing a plan to fix their problems and then
finally executing the plan. The IRS knows they are in trouble,
knows what the problems are, has an excellent plan to fix it
and is in the process of executing that plan. We have seen and
we monitor that
execution on a continuous basis. We would like to see it move fa
ster.
We would like to see more results more quickly and one of
the things that I have learned during our year and a half in
office, is that we have to be patient. It does take a long time
because of the size and complexity of things we are talking
about. But the IRS should be held to strict standards of
executing that plan. We think they are doing that. As it
relates to the Board, I am obviously not completely objective
in this matter, but I think we are doing a fine job.
We went into business September 2000. I am very pleased
with my fellow Board Members. They are bright, hard-working,
dedicated and interested. We have been very much involved in
all of the elements of the IRS operations, their strategic
plan, their budgeting process, their modernization, the ongoing
and daily operations. We provide oversight of that. We are in
constant communication with the Commissioner and with his other
senior executives. We think we have a good relationship with
all of them. We believe they listen to us and we believe that
that communication is effective.
So I think we are making progress. I am also convinced that
as the Board gains additional experience, learns more and more
about the operations of this very complex organization that we
will become even more effective in the future.
Mr. Portman. Again, I thank you, Chairman Levitan. And let
me make one final comment, if I might. The purpose of this
unique public/private Oversight Board of a Federal agency was
to bring continuity, expertise, and accountability to the
system and I know you are focused on all three of those. The
continuity comes in now because as Chairman Houghton said, we
are nearing the end of the Commissioner's term. My own view is
that he has been an excellent Commissioner, because he is
focused on management and the real problems that underlie the
lack of good taxpayer service, but my understanding is that he
will not seek an additional term. I wish he were seeking an
additional term.
But this puts you in two positions. One is the position of
recommending to the President under our statutory framework
this Committee reported out, a recommendation to the President
as to who the Commissioner ought to be. So you have a role in
finding somebody who is good. But second is that continuity
function. The reason we wanted these 5-year staggered terms was
that somebody knew what the heck was going on, because as we
looked back over the last 30 and 40 years at the IRS, we found
that every 2 years there was a great reorganization, a great
reform effort, but then it just kind of got lost in the shuffle
without that continuity and accountability that comes with
that.
So we appreciate the fact that you are, as you say, gaining
that experience and knowledge, we will be in a better position,
but also you have that continuity to be able to do to be there
after this commissioner has left and continue to promote the
reforms that we have finally begun starting really in late
1997. Thank you for being here and thank you for your service.
Chairman Houghton. Thank you, Mr. Portman. Mr. Coyne.
Mr. Coyne. Thank you. Thank you, Mr. Chairman. Mr.
Chairman, I would just like to follow up on Congressman
Portman's questioning relative to the Commissioner, and wonder
what official role does the Board play in selecting or
recommending a successor to Mr. Rossotti?
Mr. Levitan. We are very actively involved in the process
of finding Commissioner Rossotti's replacement. We started on
this process a number of months ago. The Board is very
concerned that we get an individual who has the right
qualifications. We felt it was important to start the process
quickly and to get everybody working together. We went to
Treasury, and we said we want to do a search for a set of
candidates together with Treasury. They agreed to work with us
and that partnership has now been ongoing a number of months.
The first thing we did is we developed a detailed set of
specifications for the job and you probably won't be surprised
to know that they were patterned to a great degree around some
of the--many of the qualifications that Commissioner Rossotti
has. We had complete agreement on those specifications between
Treasury and the Board. We then went out and jointly hired an
executive search firm to do a search for candidates and the
Board is paying for that executive search firm. That search
firm has now been working for about a month and a half. They
have started to bring us a preliminary list of names of
individuals who they believe are both qualified and have
expressed some interest in the position. I will tell you that
it is very hard to find someone qualified. It is even more
difficult to find someone qualified who is willing to take on
this very difficult job. That process is ongoing. We hope to in
a relatively short time have a list of qualified names to pass
on to the White House.
Mr. Coyne. Will you and the Board be able to interview
prospective candidates?
Mr. Levitan. Absolutely.
Mr. Coyne. You will?
Mr. Levitan. Yes.
Mr. Coyne. As you pointed out in your testimony, the
results in your report are not entirely satisfactory as you
would like to see them relative to the improvements in the IRS.
What budget level do you recommend for the IRS in fiscal year
2003?
Mr. Levitan. The budget process for 2003 was quite
different from 2002. In this case also, we worked very closely
with Treasury in evaluating the budget needs of the IRS and
determining what budget to recommend. The recommendation that
we made was for a 2003 budget of $10,056,000,000. That number
is really not completely comparable to the Administration's
budget. There are a whole series of reconciling items but the
bottom line is that we are recommending $92 million more than
the Administration. This is significantly less of a difference
than the 2002 budget and we feel much better about both the
process that has been gone through this year and the end
results.
Mr. Coyne. So the difference between your budget, your
request, and what the Administration has budgeted is about $92
million?
Mr. Levitan. Ninety-two million dollars, yes.
Mr. Coyne. Thank you.
Chairman Houghton. Thanks, Mr. Coyne. Mr. Foley.
Mr. Foley. Thank you very much. Welcome to the hearing.
Commissioner Rossotti's term ends in November 2002, and I
understand you are engaged in a search for candidates for new
IRS commissioner. What skills do you believe the new
commissioner should have?
Mr. Levitan. First and primary are leadership skills, very,
very strong leadership skills. We would like to see that having
been demonstrated in an individual who has run a very large
organization. The IRS is an organization of 100,000 people
spread over the entire country in a very complex organization.
We are looking for a person who knows how and has the
experience in managing and providing leadership to an
organization like that.
Second, one thing that is going on at the IRS at the
present time and will go on for a long time to come is change.
Change is difficult, large and complex change is very
difficult. So therefore, we are looking for an individual who
understands the process of change, who has managed change in a
large and complex organization. Much of that change will come
through technology. While we feel that the IRS was very
fortunate in having a technologist in its present Commissioner
and that would be a plus, we don't think that it is an absolute
necessity, but we feel that the individual does have to have an
understanding of how to use technology to change an
organization.
We believe the individual needs to have very strong
communication skills to communicate down through an
organization that needs constant communication and at the same
time communicate effectively up through the Administration,
Treasury, OMB or Office of Management and Budget, the White
House, as well as the very important communication to Congress.
And finally, we think it is critical that whatever
individual we find have a lot of patience. This is a job that
requires patience and I have talked about this to people and
they have chuckled at that and they have said that this one is
a little difficult because an awful lot of the very effective
Chief Executive Officers (CEOs) of this country, who I worked
with over the years, very often get to their position because
they don't have a lot of patience and that job does demand that
in addition to all of those other qualifications.
Mr. Foley. I guess it is finding somebody that fits the
profile, if you will, and it is difficult because I view the
IRS much like a utility company. I mean you have to get the
power from them. You don't have a choice. They bill you, tell
you what you have used. You have got to assume they are
correct. And if you take another model, not a utility company,
but a CEO from a service company like Home Depot, for instance,
where service and quality and satisfaction are the hallmarks in
order to get repeat customers, that is the two different models
you operate under.
One can guide the company through sheer power and
determination, and one has to adapt to the consumer's
preferences and decide what is best and where we are heading.
It would be interesting if you found somebody who had a little
hands-on experience with customers because I think one of the
fallbacks is--and the complaints we get isn't necessarily--and
it is the complexity.
I mean, everybody complains about that, but they more often
talk about the hostility that seems to be from the get-go. It
is adversarial and sometimes it seems when you review their
files, you find out it may have been an interpretation error.
It wasn't an attempt to be noncompliant, it was simply they
mistakenly assumed that was the right response in that box. Do
you find the IRS is moving toward a more--and I seem to see it
but I am wondering your advocacy there, if you think it is
starting to be more consumer friendly?
Mr. Levitan. I think the IRS is definitely making progress
and definitely has goals and very quantified objectives in
order to go that way. If you look at the initiatives in what
they are trying to accomplish through both their recent
reorganization, through the measurements they have put in place
throughout the organization, customer service is a major focus.
And if you look at some of the statistics over the past few
years, they have made some meaningful progress in the customer
service area. They have a long way to go, but they are getting
better at it, and they are very much focused on accomplishing
that.
Mr. Foley. Mr. Chairman, will you indulge another question?
Chairman Houghton. Yes.
Mr. Foley. Thank you. I guess my conflict at government at
times, the structure of government, is the difficulty in which
to gather information. It may relate to immigration, finding
out if somebody is legally here, and they are going to work,
and we are finding out if they are taxpayers and if they have a
Social Security number. I can put my debit card in a machine in
Europe and find out if I have money available. They will
convert it to the currency in the country I am in and do it all
within 7 seconds.
And it seems like every computer model or any system we
have in government you never get that answer that quickly. How
do you find their internal abilities via computer technology?
Is it up to date? Are we making progress? Because it seems like
we could clear up a lot of these unintended consequences,
whether they are Medicare over-reimbursement. There are just so
many things that technology seems to have a better model and it
is not used often in government.
Mr. Levitan. You are exactly right. If you look at the
foundation of the IRS' systems, they were built when John F.
Kennedy was President. They are old, they are outdated, they
are outmoded, they are inefficient to operate and maintain.
They are extremely difficult to utilize. And many of the issues
with the poor service that the IRS provides is because of that
old and outmoded technology.
As you are, I am sure aware, the IRS has made previous
attempts to update and modernize that technology, and those
attempts in the past have failed at the cost of billions of
dollars. Three years ago a new modernization program was
started. There is a detailed strategy and plan and blueprint to
carry out the modernization, to replace all of that old
technology and to provide the kinds of service that you
describe, the kinds of service that can be provided through
updated technology. That program, as I said, has been under way
for 3 years. Some progress has been made. It has not been
without bumps and stops and starts and some issues and
problems. However, they are on the right track and they need to
be supported in the execution of that modernization program.
The strategy, the approach, the design of that program is
excellent. The need to execute the plan effectively is their
major challenge at this point in time.
Mr. Foley. Why is that? I mean corporate America couldn't
exist under the way we do these rubrics. Every Member now has a
Blackberry. We carry around the latest technology. Because we
wanted them, we got them. So why aren't we fulfilling our
mission for the IRS by giving them the money necessary for the
upgrade?
Mr. Levitan. I would not say you are not giving them the
money that they need. You have given them a lot of money to do
the modernization. Unfortunately, things have gotten so bad
over such a long period of time and these systems are so large
and so complex that they cannot be replaced in 1, 2, 3, or even
5 years. Unfortunately, it will take a long time and a lot of
money to get this change fully in place. They have made
progress but it is going to take a long time.
If you just think of the complexity of it--let me start--
think of the complexity of the Tax Code and then translate that
into the complexity of a set of commuter systems. Think of the
size of the number of tax returns that come in, multiply that
by the complexity of the systems. This is a more complex
computer environment than virtually any environment of any
business in this country. And where you find modern, even large
complex corporations like General Motors or Citicorp spending
large amounts on technology, they are updating their technology
on a continuous basis. They never have to completely replace
everything that they have at the present time. And that is the
position that the IRS has found itself in and is trying to work
its way out of. But the objectives are clearly to get to the
point that technology is doing what you described.
Mr. Foley. One more?
One more quickly. The situation with the bank in
Pennsylvania where the returns were basically set aside, have
we had more instances of that kind of subcontractor problems?
Mr. Levitan. If we are talking about the specific situation
with processing of payments, this is the only problem that I am
aware of. I am not aware of any problems with any of the other
contractors who are processing payments.
Mr. Foley. Have you pursued an audit claim on all the other
vendors to make certain that that is not a typical----
Mr. Levitan. We know there is an ongoing review and
evaluation of all of the contractors. We know that TIGTA, the
Treasury Inspector General for Tax Administration, has looked
at this. The Board itself has not gotten into the issue of
other contractors and what they are doing.
Mr. Foley. Thank you, Mr. Chairman.
Chairman Houghton. Thank you, Mr. Foley.
I am interested in trends. And what I think you are saying
is despite the fact that the IRS has had difficulty in
organizing itself, getting enough money, getting the right
people, getting the right equipment, that you feel this
modernization program is on track, is that right?
Mr. Levitan. I feel the modernization program is on the
right track. Now it is a question of the speed in which it can
move down that track.
Chairman Houghton. Given the resources they have got and
that we have given to them, what do you think is a reasonable
terminal point for being up to date and modernized?
Mr. Levitan. Unfortunately, it is going to take a long
time. Exactly how long I don't know, probably close to 7 to 10
years. But during that period it is not that we won't see any
improvements until the end, we should see fairly continuous
improvements.
One way you might think about it is building these new set
of systems is somewhat like building a huge building. And if
you watch someone build a huge building for a long time you
don't see anything. You know, people are just digging a big
hole in the ground and filling it full of cement, and that is
necessary. That is most of what they have been doing over the
past 3 years is getting the foundations built. And now just in
this year we are starting to see applications being delivered
that will provide some improvements in customer service.
Chairman Houghton. Let me try to interrupt here just a
minute, so I understand that. You are building the base, you
start from the cellar on up, and you really haven't seen an
awful lot of improvements yet but you will. I think the issue
that I am interested in is as you move along here, let's say it
takes 7 to 10 years, by that time a lot of the stuff you put in
know will be, well, obsolete. What are the crisis points that
we are going to be meeting because we do not have or have not
had the amount of funds to modernize this program earlier?
Mr. Levitan. I think the risks that we face, and there are
significant risks with the existing systems, I think that the
IRS does a yeoman job in keeping the existing systems running
on a day-to-day, week-to-week basis. In getting us through the
filing season every year. As we add changes to the Tax Code and
new requirements on top of that on a continuing basis, it does
add risk on the ability of those systems to handle it.
In addition, we are very dependent on a relatively small
number of aging employees who are maintaining those old systems
that are written in computer languages that aren't even taught
in the schools today. So there is a risk of keeping that
infrastructure running. And that is one of the major reasons
why we need to keep this program moving ahead as quickly as
possible.
Chairman Houghton. Let me put words in your mouth, and you
correct me. What you are saying is that we have a good program,
we are going to do a good job on it, but, Congress, do not
further complicate our mission as we go along.
Mr. Levitan. I wouldn't put it that way. In our report we
laid out what we thought were the major things that different
players needed to do to make modernization effective and make
it successful more quickly.
Number one, the IRS needs to improve its ability to manage
the program. You have heard from GAO on what the status of the
IRS' management capability is. We think GAO's reports are very
accurate and very helpful. Again, they have made progress here.
They need to continue that progress. They have strengthened
their capability. They need to strengthen it further.
The prime contractor who has significant responsibility to
build and implement the technology needs to get better on
delivering product on schedule, on budget, and with the right
level of quality. We think that the prime contractor also is
addressing this, has strengthened their team.
We believe that the Administration and Congress needs to
understand that this is a difficult program, it is not going to
be all successes. There are going to be some bumps in the road.
You need to understand it. You need to hold the IRS responsible
for doing a quality job, but also have some patience and to
provide adequate funding for them to get the job done.
Chairman Houghton. Let me switch the subject matter. I want
to talk about attitude. There is some disturbing evidence that
you brought up that 25 percent of the people who file returns
now feel that it may be acceptable to cheat on those returns?
And also, from an internal standpoint, that was an indication
that the attitude of the people in the IRS was not up to what
you would hope it to be.
Mr. Levitan. Well, first let me talk about taxpayer
attitudes. We did a survey last summer where we had a survey
organization go out and ask four questions. Two of those
questions had been asked in prior surveys by the IRS.
Chairman Houghton. One of the survey questions indicated
that a number of taxpayers who believe it is not at all
acceptable to cheat on income tax declined from 87 percent in
1999 to 75 percent in 2001.
Mr. Levitan. That was the most concerning result of that
questionnaire. This was a one-time survey. We are not sure that
it is a real trend but we are concerned about it. We are going
to repeat this survey this summer. If that trend continues then
we think it is a concern.
It is a well-known fact that enforcement activity at the
IRS has declined significantly. We believe that there very well
may be an attitude that, hey, I can cheat, the guy down the
street is cheating, you know, the IRS isn't doing much
checking, maybe I can try to do this. We are concerned if that
is the case and we think that it needs to be looked at and
addressed.
Chairman Houghton. Do you think the lack of checking has
something to do with the fact that we are not doing the audits
the way we used to?
Mr. Levitan. I think there are a lot of factors that may be
causing this attitude. I think the complexity of the Tax Code
certainly doesn't help it. I think the fact that we are doing
less auditing, and it is well known that we are doing less
auditing, may have an impact on it.
We believe that the IRS should be doing more auditing than
they are doing now and that they need additional resources to
do that. In addition, we feel that they should be doing smarter
auditing. We believe that they should be doing more and better
document matching. For example----
Chairman Houghton. That can be done all within the confines
of their present budget?
Mr. Levitan. No. The level of what they do is to a great
extent impacted by their budget. They get an amount of money,
there are certain things that they have to do. They have to
process the tax returns. They need to provide some level of
service and do enforcement. But when there is more and more
work and less people and limited new technology to make them
more efficient, what happens is they get less of the work done.
That will be greatly helped as we get new technology to make
them more efficient. But that will take time. They also can do
more and better document matching with such things like K-1s in
a more budget effective manner. But the number of people they
have to do this work, which has been declining for the past
decade, has certainly impacted it.
Chairman Houghton. Okay. Mr. Foley, would you like to ask
another question? I have got one more question. This is an
important Board. It is a brand new Board. You are the head of
it. What is the most important thing you can do this next year?
Mr. Levitan. The most important thing that we can do this
next year is to assist in choosing a new Commissioner that can
lead this organization in the way that it needs to be led.
Chairman Houghton. Thank you very much, Mr. Levitan. Thank
you very much for your patience.
Thank you, Mr. Foley. Good to be with you. Hearing
adjourned.
[Whereupon, at 3:42 p.m., the hearing was adjourned.]
[A submission for the record follows:]
Statement of the Hon. Richard E. Neal, a Representative in Congress
from the State of Massachusetts
Mr. Chairman and Mr. Coyne, I am pleased that you have invited the
Taxpayer Advocate, Ms. Olson, to testify today on her annual report,
which includes many suggestions for simplifying the Code.
I can think of no more worthy cause than reducing Tax Code
complexity, benefiting millions of taxpayers.
You may be interested to know that the Advocate recently completed
a particularly difficult case on behalf of one of my constituents.
I look forward to working with her and the Members of the Committee
to find a legislative solution to this case and other important
taxpayer issues.