[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]




 
                   TAX RETURN FILING SEASON, INTERNAL
                   REVENUE SERVICE OPERATIONS, FISCAL
                  YEAR 2009 BUDGET PROPOSALS, AND THE
                 IRS NATIONAL TAXPAYER ADVOCATES ANNUAL
                                 REPORT

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

                                HEARING

                               before the

                       SUBCOMMITTEE ON OVERSIGHT

                                 of the

                      COMMITTEE ON WAYS AND MEANS
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION

                               __________

                             MARCH 13, 2008

                               __________

                           Serial No. 110-75

                               __________

         Printed for the use of the Committee on Ways and Means



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                      COMMITTEE ON WAYS AND MEANS

                 CHARLES B. RANGEL, New York, Chairman

FORTNEY PETE STARK, California       JIM McCRERY, Louisiana
SANDER M. LEVIN, Michigan            WALLY HERGER, California
JIM McDERMOTT, Washington            DAVE CAMP, Michigan
JOHN LEWIS, Georgia                  JIM RAMSTAD, Minnesota
RICHARD E. NEAL, Massachusetts       SAM JOHNSON, Texas
MICHAEL R. McNULTY, New York         PHIL ENGLISH, Pennsylvania
JOHN S. TANNER, Tennessee            JERRY WELLER, Illinois
XAVIER BECERRA, California           KENNY HULSHOF, Missouri
LLOYD DOGGETT, Texas                 RON LEWIS, Kentucky
EARL POMEROY, North Dakota           KEVIN BRADY, Texas
STEPHANIE TUBBS JONES, Ohio          THOMAS M. REYNOLDS, New York
MIKE THOMPSON, California            PAUL RYAN, Wisconsin
JOHN B. LARSON, Connecticut          ERIC CANTOR, Virginia
RAHM EMANUEL, Illinois               JOHN LINDER, Georgia
EARL BLUMENAUER, Oregon              DEVIN NUNES, California
RON KIND, Wisconsin                  PAT TIBERI, Ohio
BILL PASCRELL JR., New Jersey        JON PORTER, Nevada
SHELLEY BERKLEY, Nevada
JOSEPH CROWLEY, New York
CHRIS VAN HOLLEN, Maryland
KENDRICK MEEK, Florida
ALLYSON Y. SCHWARTZ, Pennsylvania
ARTUR DAVIS, Alabama

             Janice Mays, Chief Counsel and Staff Director

                  Brett Loper, Minority Staff Director

                                 ______

                       Subcommittee on Oversight

                     JOHN LEWIS, Georgia, Chairman

JOHN S. TANNER, Tennessee            JIM RAMSTAD, Minnesota
RICHARD E. NEAL, Massachusetts       ERIC CANTOR, Virginia
XAVIER BECERRA, California           JOHN LINDER, Georgia
STEPHANIE TUBBS JONES, Ohio          DEVIN NUNES, California
RON KIND, Wisconsin                  PAT TIBERI, Ohio
BILL PASCRELL JR., New Jersey
JOSEPH CROWLEY, New York

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 March 5, 2008, announcing the hearing................     2

                               WITNESSES

Linda Stiff, Acting Commissioner, Internal Revenue Service.......     6
Nina E. Olson, National Taxpayer Advocate, Internal Revenue 
  Service........................................................    30

                       SUBMISSIONS FOR THE RECORD

Benson S. Goldstein, Statement...................................   100
Colleen M. Kelley, Statement.....................................   106
Gerald E. Scorse, Statement......................................   112
IRS Oversight Board, Statement...................................   113


                   TAX RETURN FILING SEASON, INTERNAL
                   REVENUE SERVICE OPERATIONS, FISCAL
                  YEAR 2009 BUDGET PROPOSALS, AND THE
                 IRS NATIONAL TAXPAYER ADVOCATES ANNUAL
                                 REPORT

    THURSDAY, MARCH 13, 2008
             U.S. House of Representatives,
                       Committee on Ways and Means,
                                  Subcommittee on Oversight
                                                    Washington, DC.

    The Subcommittee met, pursuant to notice, at 10:10 a.m., in 
room 1100, Longworth House Office Building, Hon. John Lewis 
(Chairman of the Subcommittee) presiding.
    [The advisory announcing the hearing follows:]

ADVISORY FROM THE COMMITTEE ON WAYS AND MEANS

                       SUBCOMMITTEE ON OVERSIGHT

                                                CONTACT: (202) 225-5522
FOR IMMEDIATE RELEASE
March 06, 2008
OV-7

  Lewis Announces a Hearing on the Tax Return Filing Season, Internal 
Revenue Service Operations, Fiscal Year 2009 Budget Proposals, and the 
             IRS National Taxpayer Advocate's Annual Report

    House Ways and Means Oversight Subcommittee Chairman John Lewis (D-
GA) today announced that the Subcommittee on Oversight will hold a 
hearing on the 2008 tax return filing season, IRS operations, the 
fiscal year 2009 budget proposals, and the National Taxpayer Advocate's 
Annual Report. The hearing will take place on Thursday, March 13, 2008, 
at 10:00 a.m., in the main Committee hearing room, 1100 Longworth House 
Office Building.
      
    In view of the limited time available to hear witnesses, oral 
testimony at this hearing will be from invited witnesses only. Acting 
Commissioner Linda Stiff, Internal Revenue Service, and Nina E. Olson, 
National Taxpayer Advocate, have been invited to testify. However, any 
individual or organization not scheduled for an oral appearance may 
submit a written statement for consideration by the Committee and for 
inclusion in the printed record of the hearing.
      

FOCUS OF THE HEARING:

      
    In 2007, the Internal Revenue Service (``IRS'') collected $2.7 
trillion in taxes and processed nearly 250 million tax returns, 
including 140 million individual income tax returns. The Subcommittee 
will discuss the current tax return filing season with a focus on 
taxpayer service and assistance, earned income tax credit outreach, and 
the status of economic stimulus payments.
      
    The Subcommittee also will review IRS operations not related to the 
filing season. Specifically, the Subcommittee will look at examination 
rates, collection activities, the tax gap, electronic filing, and 
protection of taxpayer information. In July 2007, the IRS established a 
new office to focus on data protection and identity theft, including 
phishing schemes and online fraud. The Subcommittee will discuss 
activities of this office to notify and assist potential victims of 
identity theft and data loss incidents.
      
    As part of its consideration of IRS operations, the Subcommittee 
will discuss the Administration's fiscal year 2009 proposed budget for 
the IRS of $11.4 billion, an increase of 4.3 percent over the fiscal 
year 2008 level. The Subcommittee will examine the Administration's 
priorities with respect to taxpayer services, enforcement, operations 
support, and business systems modernization. Further, the Subcommittee 
will consider the Administration's compliance initiatives and budget 
proposals to close the tax gap.
      
    Finally, the position of National Taxpayer Advocate was established 
by the 1996 Taxpayer Bill of Rights (Public Law 104-168). The purpose 
of the Taxpayer Advocate is to provide an independent system to address 
taxpayer problems not resolved by normal channels and to propose 
changes in the administrative practices of the IRS. The Taxpayer 
Advocate must submit a report each year to the House Committee on Ways 
and Means and the Senate Committee on Finance. The National Taxpayer 
Advocate will highlight key issues and recommendations from the 
December 2007 Report to Congress.
      
    In announcing the hearing, Chairman Lewis said, ``The IRS must 
enforce our tax laws, but it also needs to make taxpayer service a 
priority so that we maximize the numbers of taxpayers who voluntarily 
comply with our tax laws. The Congress must ensure that the IRS 
operates efficiently and fairly for all Americans.''
      

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

      
    Please Note: Any person(s) and/or organization(s) wishing to submit 
comments for the hearing record must follow the appropriate link on the 
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Select the hearing for which you would like to submit, and click on the 
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Once you have followed the online instructions, completing all 
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compliance with the formatting requirements listed below, by close of 
business Thursday, March 27, 2008. Finally, please note that due to the 
change in House mail policy, the U.S. Capitol Police will refuse 
sealed-package deliveries to all House Office Buildings. For questions, 
or if you encounter technical problems, please call (202) 225-1721.
      

FORMATTING REQUIREMENTS:

      
    The Committee relies on electronic submissions for printing the 
official hearing record. As always, submissions will be included in the 
record according to the discretion of the Committee. The Committee will 
not alter the content of your submission, but we reserve the right to 
format it according to our guidelines. Any submission provided to the 
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files for review and use by the Committee.
      
    1. All submissions and supplementary materials must be provided in 
Word or WordPerfect format and MUST NOT exceed a total of 10 pages, 
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Committee relies on electronic submissions for printing the official 
hearing record.
      
    2. Copies of whole documents submitted as exhibit material will not 
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    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 
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materials in alternative formats) may be directed to the Committee as 
noted above.

                                 

    Chairman LEWIS. Good morning. The hearing of the 
Subcommittee will come to order.
    Today the Subcommittee on Oversight is holding its annual 
hearing on IRS operations.
    This morning we will examine the current tax return filing 
season, the IRS budget, and Taxpayer Advocates Annual Report.
    We're very pleased to have Linda Stiff, the IRS Acting 
Commissioner, and Nina Olson, the National Taxpayer Advocate 
appear before this Subcommittee. I welcome you both.
    I look forward to hearing your views about what needs to be 
done to serve the needs of taxpayers, and to improve taxpayer 
compliance.
    I have reviewed the administration's proposed budget, and 
many of us this morning would like to discuss whether it 
strikes the right balance between taxpayer service and 
enforcement.
    We have a tax gap of more than $345 billion. We need to 
explore ways to increase compliance by taxpayers. The 
Subcommittee on Oversight values the views of the witnesses and 
we want to ensure the fairness of our tax system.
    I would like to commend the IRS on the work done this 
filing season. I know your workload has increased this year as 
you prepare to get tax rebates into the hands of people who are 
suffering.
    Many people who don't normally file a tax return will have 
to file a tax return this year in order to receive their tax 
rebate checks. These people will need help in filing their 
returns, and I know you will help.
    I have followed your plans to educate taxpayers about the 
tax rebate checks. I am hopeful that the IRS will make sure 
that all taxpayers who are eligible for this benefit receive 
the service they need to complete and file their returns.
    Finally, I do not know how much longer you will be serving 
as Acting Commissioner, Madam Commissioner of the IRS, Ms. 
Stiff, so I would like to take this chance to thank you for all 
of your good work, on behalf of Members of this Committee, on 
behalf of the Congress and the American people. It has been a 
pleasure to work with you, and you are always welcome back.
    Chairman LEWIS. I am pleased to recognize the distinguished 
Ranking Member, my dear friend, Mr. Ramstad, for his opening 
statement.
    [The prepared statement of Chairman Lewis follows:]

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    Mr. RAMSTAD. Thank you, Mr. Chairman. Thank you for your 
leadership of this Subcommittee and for calling this important 
hearing today.
    I certainly appreciate seeing the Acting Commissioner, as 
well as the taxpayer advocate, and appreciate the fact that 
you're doing, both of you, tough jobs, very well, from 
everything I can ascertain.
    The IRS certainly has its work cut out for you and your 
colleagues at the service, commissioner. The filing season, I 
know, is very different from previous years, with two special 
challenges--the late passage of the AMT patch and the enactment 
of the economic stimulus legislation.
    I know that both added greatly to your workload on top of 
what was already going to be a busy filing statement, and 
that's--filing season--and that's an understatement, I know.
    The IRS, when I look at the magnitude of your mission, it's 
really staggering to this mere mortal, when you think that 
you're going to be processing more than $2.5 trillion in tax 
receipts and pay hundreds of billions of dollars in refunds to 
more than 110 million taxpayers. You obviously have a big 
assignment ahead of you.
    Of course, once the filing season is over, then the service 
will calculate, process, and mail more than $100 billion worth 
of stimulus payments as required by the Stimulus Act.
    The reason for mentioning the magnitude of your mission is, 
I think you'll agree that the IRS, I think everyone will agree, 
must balance service with enforcement, and I hope to hear today 
that the impact of foregoing collection revenue is not serious, 
is not--that we're not foregoing too much in collection 
revenues in lieu of using employees in the service function.
    But I just want to say finally that I'm still concerned 
about the tax gap. I'm glad the President's budget proposes 
several initiatives to close that gap and additional resources 
toward IRS enforcement efforts.
    I remember last year's hearing on the filing season and the 
IRS, we had this discussion, as well as several other hearings, 
and I know that that was asked for by the service, that is, 
more resources toward enforcement, and those will hopefully be 
forthcoming.
    So, thank you again for being here today. Thank you again 
for the jobs that you both do. I certainly look forward to your 
testimony.
    I yield back.
    Chairman LEWIS. Thank you, Mr. Ramstad.
    Now, we will hear from our witnesses. I ask that you limit 
your testimony to 10 minutes. Without objection, your entire 
statement will be included in the record.
    It is now my pleasure to introduce the Acting Commissioner 
of the Internal Revenue Service, Linda Stiff.
    Welcome.

STATEMENT OF LINDA STIFF, ACTING COMMISSIONER, INTERNAL REVENUE 
                            SERVICE

    Ms. STIFF. Good morning, Chairman Lewis, Ranking Member 
Ramstad, and Members of the Subcommittee. Thank you for the 
opportunity to be here today.
    My name is Linda Stiff, and I have served as the Acting 
Commissioner of the IRS since last September. I am a career IRS 
employee, having started as a revenue agent more than 27 years 
ago.
    -- My written statement provides information on a number of 
IRS programs and activities, and I will be happy to respond to 
questions about any of those. However, in the brief time I have 
today, I would like to mention three key areas that I think are 
of interest to the Subcommittee.
    First, allow me to update you on the progress we have made 
on the economic stimulus program enacted by Congress in early 
February.
    Through extraordinary planning efforts and the dedication 
of the IRS work force, we are poised to deliver not only the 
filing season but to distribute stimulus checks just as soon as 
we complete the current filing season.
    We expect the first checks to be deposited electronically 
in taxpayer bank accounts in the first week of May, and for the 
first checks to be mailed to taxpayers who did not choose the 
direct deposit option in the second week of May.
    We are making every effort to keep taxpayers informed about 
the stimulus payments. We have posted a special section on 
IRS.gov designed to answer questions and provide updated 
information.
    This month, we are sending letters to all taxpayers 
reminding them that they must file a 2007 tax return in order 
to be eligible for a stimulus payment.
    In late March, we will send a special mailing to recipients 
of Social Security and Veterans Affairs benefits, because those 
benefits are generally non-taxable and those recipients may not 
ordinarily be required to file a tax return.
    We are reaching out to the Department of Veterans Affairs, 
the Social Security Administration, and private groups, such as 
AARP, to ask that they assist us in reaching those who may be 
eligible for the stimulus payment but who may not be otherwise 
required to file a 2007 return.
    To assist those individuals, we have created a sample Form 
1040-A, with information on how to fill out just a few lines 
that will enable eligible people to receive the stimulus 
payment.
    The second major point I wish to touch on is the current 
filing season.
    We are positioned to deliver yet another successful tax 
filing season. We are on target to process more than 140 
million individual tax returns and issue more than $225 billion 
in tax refunds in the coming weeks.
    I am pleased to report that, based on early results, the 
number of returns filed electronically is once again higher 
than at the same point a year ago; the number of taxpayers 
using Free File is also on the rise, up almost 12 percent 
compared to the same point in time last year.
    I am also pleased to say that we were able to reprogram our 
systems to accommodate the AMT patch that was enacted late last 
year, and we were able to do that far quicker than I could have 
ever imagined.
    That is a credit to the hard work of a number of IRS 
employees who worked nights, weekends, and even holidays.
    As a result, we were able to allow most AMT-impacted 
taxpayers to begin filing in January and all others by February 
11th.
    At the IRS, the most fundamental premise of our compliance 
efforts involves balancing taxpayer service with our 
enforcement programs. Last year, we provided services to more 
than 332 million taxpayers. That was an increase of 10 percent 
year over year.
    We have leveraged technology, improved processes, and 
enhanced work force training to not only increase our service 
capacity but to significantly increase the quality of the 
service to ranges in excess of the 90 percentile.
    This was accomplished across the many service channels that 
we provided at the IRS.
    We saw an 11-percent increase in visits to IRS.gov for tax 
return information.
    On Web services, an application where you and your 
constituents can go online and track the status of your refund 
with the "Where's My Refund" feature, we served more than 32 
million taxpayers accessing that last year. That was a 30-
percent increase over the prior year.
    Through our automated self-assist telephone services and 
telephone assistors, we served 500,000 more taxpayers than we 
did the prior year.
    We served 1 million additional taxpayers through our field 
assistance sites and community-based volunteer efforts.
    I am pleased to report to you today that we are positioned 
to deliver these services again this year in a quality manner 
during the current filing season.
    The third topic I want to touch on is the President's 2009 
Budget request for the IRS. This year's request is an increase 
of $469 million over the budget approved last year.
    Guided by the IRS Tax Gap strategy, this increase will 
enable the IRS to strengthen enforcement programs to address 
compliance by small businesses, the self-employed, and large 
corporations.
    It will allow us to expand our ongoing research of filing, 
payment, and reporting compliance levels.
    This budget request will allow us to expand our efforts to 
identify and address issues relating to globalization and 
offshore activities.
    Additionally, the funding will allow the IRS to expand our 
document matching programs and to implement the legislative 
proposals to reduce the tax gap, submitted as a part of that 
budget.
    We are confident at the IRS that we can do this while 
maintaining a strong taxpayer service program that will allow 
us to continue making progress in implementing the Taxpayer 
Assistance Blueprint.
    In closing, I would also like to share with you the 
continuing progress being made in modernizing IRS systems.
    CADE, the replacement to the Masterfile system, is 
processing almost a quarter of the returns filed thus far this 
year.
    This means that those accounts are being settled in a 24-
hour cycle, comparable to other private sector best practices.
    Refunds for returns processed in CADE are delivered to 
taxpayers an average of 4 days sooner than those not. Early 
releases to the replacement system for accounts management have 
been on time and delivered functionality as promised.
    We have improved our management and governance to ensure 
these successes and are well-positioned to deliver new 
modernized capabilities in the coming years.
    Thank you again for the opportunity to appear before you 
this morning, and I am happy to respond to any questions you 
may have.
    [The prepared statement of Linda Stiff follows:]

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    Chairman LEWIS. Madam Commissioner, thank you very much for 
your testimony.
    Ms. Olson, before we recognize you, we may have to 
interrupt your testimony. At 10:30, we would pause for a moment 
of silence with our colleagues on the House floor in memory of 
our military service people.
    Now, it's my pleasure to introduce the National Taxpayer 
Advocate, Nina Olson.

    STATEMENT OF NINA E. OLSON, NATIONAL TAXPAYER ADVOCATE, 
                    INTERNAL REVENUE SERVICE

    Ms. OLSON. Chairman Lewis, Ranking Member Ramstad, and 
Members of the Subcommittee, thank you for inviting me to 
testify today.
    At the outset, I would like to say that the IRS has done an 
admirable job during this filing season, given all the 
challenges it is facing.
    What with late year tax law changes and the recently 
authorized economic stimulus payments, the IRS not only must 
process payments to over 130 million taxpayers who currently 
file income tax returns, but it also must identify and process 
returns from and payments to more than 20 million persons who 
have no filing requirement.
    The IRS has managed to turn on a dime and deliver this 
filing season without significant glitches, an extraordinary 
achievement.
    I must note, however, that now that the IRS has 
demonstrated its ability to change processes virtually 
overnight, I fully expect it to adopt and implement some of the 
recommendations from my annual report to Congress in the same 
timeframe. I will address some of these issues in my following 
remarks.
    First, in my 2007 annual report to Congress, I mark the 
10th anniversary of the IRS Restructuring and Reform Act 1998 
by recommending that Congress address taxpayer rights again, by 
creating a true Taxpayer Bill of Rights that incorporates a 
clear statement of taxpayer rights and a clear statement of 
taxpayer responsibilities.
    Second, I note in my report that identity theft is the 
number one consumer complaint in the United States, far 
outpacing all others.
    Misuse of another person's Social Security number or 
identity generally occurs in tax administration in two 
contexts: first, the filing of a false return to obtain a 
fraudulent refund; and second, the theft and use of another 
person's Social Security number, or SSN, to obtain employment.
    Regardless of motive, identity theft results in serious 
consequences for the innocent taxpayer. Such consequences may 
include the delay or denial of refunds, the assessment of tax 
debts resulting from income reflected on the fraudulent filer's 
return, and the requirement for victims to prove their identity 
to the IRS year after year.
    The IRS has a duty to these taxpayers to expeditiously 
determine the true owner of the SSN, to restore the integrity 
of the affected taxpayer's account, and certainly not to 
exacerbate the victim's injury.
    The IRS does not know how many taxpayers are impacted by 
identity theft. Until recently, the Taxpayer Advocate Service 
was the only IRS function tracking identity theft cases.
    Stolen identity cases within TAS have increased by 644 
percent from fiscal year 2004 to fiscal year 2007, from 447 
cases to 3,327 cases.
    My employees now report that they are receiving calls from 
senior citizens who filed for the economic stimulus payment 
after not filing for years only to find that someone else had 
been using their SSN on tax returns.
    I applaud the IRS for taking some proactive measures to 
assist victims of identity theft. For example, the IRS recently 
implemented a tracking system through which an indicator will 
be placed on an identity theft victim's account once he or she 
has provided verification of identity theft.
    Unfortunately, the IRS has not issued central guidance to 
its employees about how to apply the indicator, thereby 
allowing each function to create its own procedures. Moreover, 
the IRS has no coordinated approach to address an identity 
theft victim's issues from start to finish.
    I have recommended that the IRS develop a dedicated 
centralized unit to handle all identity theft cases, and a 
centralized internal revenue manual to house all identity theft 
procedures. A centralized unit will be able to identify all 
trends and systemic problems and can serve as a central contact 
point for discussions with the Social Security Administration 
to improve processing.
    My third issue involves elderly or disabled persons who 
receive in-home personal and household care under state and 
local government health and welfare programs. Under current 
law, the home care service recipients in these programs are 
often treated as common law employers of the caretakers. As 
such, they are personally responsible for reporting, filing, 
and paying the employment taxes on their caretaker's wages. 
These tasks may be difficult for an elderly or disabled person.
    As a result, government entities often contract with a 
variety of third parties to handle these tax responsibilities.
    One common arrangement is for the government to hire an 
intermediary service organization, or ISO. However, these ISOs 
or other third parties sometimes fail to meet these employment 
tax obligations.
    When that happens, the elderly and disabled home care 
service recipients, as the common law employers, remain liable 
for the tax, interest, and penalties. Such liabilities can 
result in severe hardship.
    Placing employment tax reporting and payment obligations on 
elderly and disabled taxpayers who need government assistance 
for in-home care defies logic and does not reflect good tax 
administration.
    In my written testimony, I make several administrative 
recommendations in this area, but I believe the simplest and 
most elegant solution is to amend the Code to provide that a 
home care service worker is the statutory employee of the 
administrator of the program's funding, be it states, 
localities, their agencies, or ISOs.
    By designating these workers as statutory employees, the 
proposal is neutral as to whether the administrator must treat 
the home care service worker as a common law employee for 
purposes of other employee or retirement benefits, thereby 
addressing some administrators' concerns.
    Next, in my annual reports to Congress and in prior 
testimony, I have expressed significant concerns about the many 
aspects of private debt collection initiative.
    Today, I will focus on the revenue projections and return 
on investment.
    The private debt collection program, or PDC, generates 
about $23 million a year in gross revenue.
    After subtracting out the direct costs of the program, 
$7.65 million, and commissions payable to the collection 
agencies, about $4.6 million, the annual net revenue of the PDC 
program is about $11 million, which translates to a return on 
investment, or ROI, of about 1.45 to 1.
    If we instead allocated the $7.65 million to the IRS 
automated collection system function, the ROI would be much 
greater. Even using the IRS' conservative ROI estimate of 13 to 
1 for ACS, an expenditure of $7.65 million would produce gross 
revenue of $99.45 million and net revenue after costs of $91.8 
million.
    Very simply, the PDC program will cost the government more 
than $81 million in foregone revenue this year, and the cost is 
likely to reach nearly half a billion dollars over the next 6 
years.
    Since the purpose of the PDC program was to raise revenue, 
the fact that it is costing the government at least $80 million 
a year destroys whatever thin rationale might remain for its 
existence. It is time for this program to end.
    My next issue involves the low-income taxpayer clinic 
program, which Congress funded in 1998 after hearing testimony 
about the problems that low-income and English as a second 
language taxpayers encounter in obtaining representation and in 
learning about their rights and responsibilities as taxpayers.
    The importance of LITCs is underscored by a recent study by 
my office showing that taxpayers who are represented in earned 
income tax credit audits were almost twice as likely as 
unrepresented taxpayers to retain all their EITC.
    Despite this program's demonstrated results, IRS employees 
who talk with taxpayers often are reluctant to refer taxpayers 
to LITCs. Although IRS employees can direct taxpayers to the 
LITC Web site, or Publication 4134, the list of LITCs, or read 
a list of clinic names and phone numbers in the taxpayers' 
areas, there is doubt as to whether they can refer a taxpayer 
to a specific LITC.
    Many low-income taxpayers lack access to the Internet, or 
cannot wait to receive a publication by mail before they get 
help. In light of the vital role that representation can play 
in the outcome of a taxpayer's audit, I urge you to consider 
legislation expressly authorizing IRS employees to refer low-
income taxpayers who do not have representation to specific 
LITCs in their locales.
    Finally, for several years, I have highlighted problems 
with the IRS' delivery of face-to-face taxpayer service in the 
taxpayer assistance centers, or TACs.
    I am pleased that the IRS is now reversing its trend in 
recent years of limiting the types of services in the TACs. 
Nevertheless, many challenges remain.
    In 2001, the IRS committed to opening 118 new TACs over the 
next 8 years. None of these TACs were opened. Today, TAC 
offices adequately serve only 60 percent of the U.S. population 
and only 55 percent of TACs are open for 36 to 40 hours per 
week. During the last 3 years, the IRS reduced TAC staffing by 
9 percent leaving most TAC offices with staffing shortages.
    Although the IRS is now hiring seasonal workers to ease the 
staffing crunch, it should make a firm commitment to providing 
a permanent and sufficient level of staffing. Moreover, the IRS 
must conduct appropriate research to determine the taxpayer 
service needs by geographic and demographic factors in order to 
identify the most appropriate number and placement of TACs.
    Moreover, the IRS is still downplaying its role in tax 
preparation, which is a core service for the tax administrator. 
For example, the IRS has declared returns involving cancelation 
of debt income out of scope for both the TACs and volunteer 
preparation sites, even though these subjects are highly likely 
to impact the very taxpayers who are eligible for TAC services, 
whether because of credit card forgiveness or home 
foreclosures. Thus, these low-income taxpayers have no 
alternative but to pay for return preparation, something they 
personally cannot afford to do.
    Thank you for this opportunity to testify today.
    [The prepared statement of Nina E. Olson follows:]

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    Chairman LEWIS. Thank you very much, Ms. Olson, for your 
testimony.
    Let me say to Members of the Committee and to our two 
witnesses and to all of you in the audience, now we will join 
our colleagues on the floor of the House by observing a moment 
of silence in honor of our troops.
    [A moment of silence was observed.]
    Chairman LEWIS. Madam Commissioner, Ms. Olson reports that 
seniors filing for the rebate checks are finding that someone 
else has been using their Social Security number on tax 
returns. There are also tax rebate scams that target the 
elderly.
    What can the IRS do to protect seniors? What happens to 
these seniors? Do they receive a rebate check?
    Ms. STIFF. The identity theft issue that I think all of us 
are facing individually and that has become a concern for other 
financial sector private/public agencies, is certainly a 
growing area.
    I think in Nina's testimony and in our documents she says 
that it's the number one consumer complaint that's registered 
with the Federal Trade Commission.
    We at the IRS take identity theft very seriously. We have 
procedures and processes in place when we identify it.
    We encounter two forms of identity theft as tax 
administrators.
    One is where someone uses your SSN to file a fraudulent 
return to get a refund. In another instance, someone is using 
your SSN to get employment and then the IRS receives a 1099 or 
a W-2 showing income that doesn't belong to you.
    In each of those instances, the taxpayers whose identities 
are stolen become subject to notices, potential bills, and to 
having to work with us to establish, verify, and validate both 
their identity and their address.
    In the past 6 months, we have established an entire 
organization whose sole mission is to help us find ways to 
strengthen our ability to help taxpayers who are victims of 
identity theft from a tax administration standpoint.
    We have simplified the documentation that's required and 
provided taxpayers with the option to fax documentation.
    I think that what we're finding with stimulus, though not 
in any great number of instances except several Nina has run 
into already is where people haven't had a filing requirement 
for years.
    If you're someone who is prone to stealing another 
individual's SSN that makes a good target, because such 
individual is not filing, the ability to be caught and 
identified as doing something criminal is probably somewhat 
reduced.
    So as we're finding these situations, we're trying to deal 
with them on an individual basis. We're reaching out. We've 
told those seniors to contact us.
    We have procedures in place both in the Tax Advocate 
Service and on the IRS side that will enable us to work with 
those seniors to ensure that we get their identities verified 
in our database and that they do indeed receive their stimulus 
payments.
    Chairman LEWIS. Madam Commissioner, have the rebate checks 
affected taxpayer service this filing season?
    Let me just ask, before you respond, why did the IRS shift 
collection employees to answer the telephone?
    It's my understanding that the GAO estimates that the 
foregoing revenue from shifting the collection employees to 
answer the phone would be $681 million.
    Ms. STIFF. Let me provide some context for what we're 
facing as an agency.
    When the stimulus laws were enacted and we said we would be 
able to get the stimulus checks in play in May, I think 
everyone was of a like mind that sooner was better than later, 
if the goal was to stimulate the economy.
    Then we're faced with dealing with taxpayers regarding 
economic stimulus checks, at the same time that we're dealing 
with taxpayers who are trying to file their tax returns.
    Let me just context that.
    134 million individual returns that we'll process between 
now and the end of April; $225 billion in refund checks that we 
want to issue to 100 million taxpayers.
    In any given year, during filing season, we hear from about 
60 million of those taxpayers on our phone lines, seeking 
assistance, either through the self-assisted automated phone 
lines or a personal assistor to help them navigate the tax 
system.
    Now, we've got 135 million taxpayers plus maybe 20 million 
Social Security recipients and Veterans' Affairs benefits 
recipients who are expecting stimulus payments.
    From the time Congress enacted the stimulus provision, up 
until as recently as yesterday, we have been receiving 50,000-
plus calls from taxpayers on a daily basis wanting to talk 
about other stimulus, and we can only imagine those numbers 
increasing the closer it gets to May 2nd.
    So, now we've got the convergence of trying to handle the 
increased stimulus calls at the same time that we're answering 
refund calls.
    We believed it was important, still believe that it's 
important that a senior citizen, a recipient of Veterans' 
Affairs benefits, or any other taxpayer for that matter, should 
be able to call us and get a question answered so they can do 
what they need to do to receive their stimulus payment.
    In order to expand our ability to answer telephones for 
those taxpayers in this compressed timeframe that we're all 
dealing with, we looked to our Automated Collection System, our 
telephone collection operation, because that operation operates 
on the same phone lines that our customer service does, and 
we're able to switch them over on an hour-to-hour basis to 
supplement our toll-free tax assistance to taxpayers.
    So, we worked with the Taxpayer Advocate and we worked with 
our compliance operations, and we made a decision to train our 
ACS assistors to provide that assistance if needed.
    We're monitoring hour-by-hour, day-by-day, and only 
supplementing as the traffic demands it.
    The estimate you have is the top end. If we needed all of 
those people to answer calls every hour of the day, it would be 
up to a $600 million loss on the collections side.
    But thus far, we have been on the low side of the demand. 
We're only having to migrate people over on occasion, as 
opposed to all day long.
    So, we're actually hoping that the impact on the lost 
revenues will be significantly less, but I think, more 
importantly, it's imperative that taxpayers trying to file 
their returns or get their stimulus payments get the answers to 
the questions that they have so that they can get those checks 
in May and June.
    That was the basis of our thinking.
    Chairman LEWIS. Thank you very much, Madam Commissioner.
    Ms. Olson, just one question for you.
    Could you tell Members of the Committee why it is so 
important that the IRS be allowed to refer low-income, 
including EITC taxpayers, for assistance to low-income tax 
clinics? Why is that so important?
    Ms. OLSON. Well, as you know, the low-income taxpayer 
clinics provide representation to taxpayers in controversies.
    We did a study that showed that low-income taxpayers who 
are audited by the IRS for earned income credit, that in those 
exams, if they are represented, they are nearly twice as likely 
to get the earned income tax credit and get almost twice as 
much earned income tax credit than unrepresented taxpayers.
    So, it's clear that representation helps these taxpayers 
navigate our audit procedures.
    We feel it's very important for taxpayers, when they are 
low-income, and they may not be able to navigate the IRS, they 
may speak different languages as their primary language, that 
getting representation really assists them in getting the right 
answer from the IRS, rather than a default answer that is not 
the correct answer.
    So, the IRS employees who have the taxpayer on the phone, 
we really want them to be able to say, "You live in this area, 
and there is a low-income taxpayer clinic that serves this 
area, and they have language capabilities, they have 
translators that can speak your language, so let me give you 
the phone number of this, the intake number for that clinic.''
    We just think that that will improve tax administration 
overall, and get the right answer for these taxpayers.
    Right now, a lot of times, they're getting an answer in an 
audit or a collection issue because--that's the wrong answer--
because they just don't know the right things to give us in 
terms of information.
    Chairman LEWIS. Thank you very much, Ms. Olson.
    We have one non-Subcommittee Member, Mr. Pomeroy, who is a 
Member of the full Committee, and we welcome him here this 
morning to participate in the questioning.
    Now, it is my pleasure to turn to Ranking Member Ramstad 
for his questions.
    Mr. RAMSTAD. Thank you, Mr. Chairman.
    Mr. Chairman, at the request of Mr. Johnson, who had to 
leave the hearing, I would ask unanimous consent that Mr. 
Johnson's questions be submitted, of these two witnesses, be 
submitted for the record.
    Chairman LEWIS. Without objection.
    [The information follows:]

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    Mr. RAMSTAD. Commissioner Stiff, Ms. Olson raised the issue 
of the IRS' private collection program, the PCA program, for 
collecting delinquent tax debts.
    Your predecessors have testified before this Committee that 
even if the IRS were given more resources to hire enforcement 
employees, it wouldn't be used to collect the type of debt 
currently being collected by the PCA program.
    Instead, IRS employees, according to your predecessors, 
would be used for more complex, higher priority cases.
    Is this still the case?
    Ms. STIFF. Yes, it is.
    Mr. RAMSTAD. Then it seems to me there's not really a 
choice between using IRS employees and using private collection 
agencies to collect this debt.
    Isn't the real choice whether we use private collection 
agencies or let these tax debts go uncollected?
    Ms. STIFF. Well, I think, to respond to that, and maybe to 
clarify to what Nina included in her testimony, is that the 
cost that the IRS incurs to support the PCAs is not a choice of 
$7 million to spend on this or on that.
    The PCA work is paying for itself on an annual basis. The 
cost to start the program will be recovered in late 2010.
    What we're doing is, through the PCA program, collecting 
thus far I think roughly $43 million that, as you pointed out, 
otherwise wouldn't be collected, because the competition 
isn't--it's not a choice, they're not mutually exclusive.
    Mr. RAMSTAD. So, do you concur then with the finding of 
the--of our own non-partisan Joint Committee on Taxation, which 
believes that IRS employees would not be used to collect this 
debt, and therefore if we terminate the PCA program, it would 
reduce tax revenues by, again, according to the Joint Committee 
on Taxation, it would reduce tax revenues by over $1 billion 
during the next 10 years?
    Ms. STIFF. I can't confirm their projection there, but we 
would lose what it is that we're getting each year, and the 
Treasury, the FISC is getting 50 percent of what's collected.
    Mr. RAMSTAD. Do you have those numbers?
    Ms. STIFF. I can get it to you back. I'll have to follow 
up.
    Mr. RAMSTAD. Very well.
    I certainly hope we don't take a step backward in our 
efforts to close the tax gap by eliminating a program that's 
obviously working and has, according to the surveys that we all 
saw, has enormous taxpayer satisfaction ratings, certainly 
ratings infinitesimally higher than this body, which is 
unfortunate. I don't say that in a humorous vein at all.
    So, would you care to respond, Ms. Olson?
    Ms. OLSON. Thank you, sir.
    In point of fact, the IRS has a test underway right now 
that is testing what would happen if we used IRS employees to 
collect this very debt, because my contention is that for less 
money, we would be more productive with the same cases.
    It's just the IRS' policy call that they don't want to use 
its employees to collect this debt, which I do not support that 
call.
    Second, the IRS is running out of cases to send to the 
PCAs, and as I speak right now, the IRS is looking at other 
cases that the IRS is working right now, preparer penalty 
cases, ACS, actual cases in ACS inventory that they want to 
ship out to the private debt collection agencies, which are not 
the cases upon which the Congress authorized this program. 
Congress was told that the PCAs would only get easy cases.
    Finally, in terms of the tax gap, our projections show, and 
these are the actual numbers from the IRS' private debt 
collection program, that the net revenue from the PCA program 
is only about $11 million a year.
    We have a $345 billion annual tax gap, and when you do the 
chart that shows the 345 billion and then the 11 million, the 
11 million is a blip on the--it doesn't even show up as a blip 
on the radar screen.
    So, I just remain completely unconvinced that this program 
is worth the expenditure of the resources and the risk that we 
have in sending taxpayer information into the hands of parties 
other than IRS employees.
    Mr. RAMSTAD. Well, certainly, in response, the Joint 
Committee on Taxation disagrees with your assertions.
    They believe that terminating the program would reduce tax 
revenues by over $1 billion in the next 10 years. So there's 
obviously a disagreement there.
    I think we--I just hope we don't eliminate a program that, 
in my judgment, everything I've seen, all the--in trying to 
look at it objectively, all the evidence points to the fact 
that it's working.
    So anyway, I just hope we continue to collect those 
revenues, and I hope they do total over $1 billion over the 
next 10 years, because we need to do everything possible to 
close the tax gap.
    With that, Mr. Chairman, I'll yield back.
    Chairman LEWIS. Thank you.
    I want all of the Members to be aware that we're going to 
be operating under the Gibbons Rule, so no one would think I'm 
not being conscious and peaceful and nonviolent. Okay?
    [Laughter.]
    Chairman LEWIS. Mr. Tanner is now recognized for his 
questions.
    Mr. TANNER. Thank you, Mr. Chairman. I'm glad you're gong 
to be peaceful and nonviolent, since I'm sitting next to you.
    [Laughter.]
    Mr. TANNER. Madam Secretary, we'll be voting on the budget 
resolution later today, I assume, and we have, the blue dogs 
have endorsed the budget, and section 401 provides some 
additional money for tax compliance, what my friend, Mr. 
Ramstad, was saying with respect to the tax gap.
    I'm told that it could be as much as 13 percent of the 
budget, or about $350 billion a year.
    Considering the fact that we are borrowing in all of our 
names from foreign sources over $500 million a day, primarily 
going to wartime expenditures of 10 to 23 billion dollars a 
month in Iraq, I think it becomes a matter of patriotism for 
people to pay what they legally and fairly owe under the law.
    I guess people have been grumbling about paying taxes since 
the 18th century, and certainly I'm not immune to that. We all 
pay whatever it is we legally and equitably and fairly owe.
    I would be curious. In that budget resolution, there's an 
additional appropriation of $490 million for this purpose of 
tax compliance.
    Do you have, if we can make this happen, plans, and if so, 
could you give us an idea of what they might be?
    Ms. STIFF. The budget request that you have before you, as 
I outlined in my opening statement, will allow us to expand our 
compliance efforts and our enforcement programs in a number of 
areas.
    We have a Tax Gap Report, we have a Taxpayer Service 
Blueprint, and we have a Modernization Vision and Strategy.
    Those documents guide our investments, whether they are in 
enforcement services or technology. With any additional 
funding, we would guide those investments by the priorities 
that are outlined in those documents.
    But we're focused on reducing non-compliance in the small 
business arena, and among large corporations and high-wealth 
individuals, and particularly as a result of globalization, we 
are looking at offshore transactions.
    I can tell you that, for every dollar invested in IRS 
enforcement programs, we get on average a 5 to 1 return on 
investment.
    Mr. TANNER. I appreciate you mentioning the offshore 
business.
    We tried to do something with that with respect to paying 
for the AMT fix, as you know, and were unsuccessful. Maybe 
you'll have more success than we did.
    Thank you very much.
    Chairman LEWIS. Now we turn to Mr. Linder for questions.
    Mr. LINDER. Thank you, Mr. Chairman.
    Madam Commissioner, welcome. Ms. Olson, welcome.
    With all these phone calls you're getting from 60 million 
people looking for help on their tax returns, how many are 
getting an accurate response?
    Ms. STIFF. We've undertaken significant efforts in recent 
years to improve the accuracy of our responses.
    Last year, and again this year, the quality, meaning the 
accuracy and the timeliness of the responses, is in the 90 
percentiles, both on the phones and at walk-in sites.
    That's a significantly improved number than where we were 
even 3 years ago.
    Mr. LINDER. Five or 6 years ago, you were at 50 percent.
    Ms. STIFF. Like I said, we've had all hands on deck, a 
number of efforts, both leveraging technology, training, and 
working with our employees and our customers to get those 
numbers up into the 90 percentiles.
    Mr. LINDER. How much are you spending to reach out to 
people with respect to the stimulus?
    Ms. STIFF. Well, I think the appropriation that Congress 
enacted for stimulus for IRS was about $202 million, and I 
don't know that I have the exact number on outreach.
    I suspect that it's probably almost 50 percent of that 
total appropriation.
    Mr. LINDER. Wasn't the first letter about $43 million?
    Ms. STIFF. Yes, sir, it was.
    Mr. LINDER. Okay. Of the $100 billion in underreporting by 
businesses, how much of that is small business?
    Ms. STIFF. Well, our research data shows us--it's quite 
interesting, and you've probably heard the statistic before--it 
says that where we have information reporting, we have about a 
95 percent-plus compliance rate with what happens on the tax 
returns.
    On small businesses, particularly where they're not subject 
to third party information reporting, we're getting about 53 
cents on the dollar.
    Mr. LINDER. What is the compliance rate of the big box 
companies? The Wal-Marts, the Sam's, the----
    Ms. STIFF. Well, our tax gap data in the corporate arena 
has not been refreshed as currently as the other numbers that I 
just gave you, but I think the estimates of corporate 
noncompliance are north of $30 billion annually.
    Mr. LINDER. You have about 200 million filers now, isn't 
that about right?
    Ms. STIFF. About 140 million individual filers----
    Mr. LINDER. But then you have business filers. That's about 
200, isn't it?
    Ms. STIFF. Mm-hmm.
    Mr. LINDER. Would you have better compliance if you had 40 
million filers instead of 200 million filers?
    The way you're arguing here argues for a pure consumption 
tax as opposed to an income tax, where you could reduce the 
number of filers from 200 million to 40 million, you'd have big 
box companies collecting 50 percent of all the revenues, you'd 
have 3.6 percent of all the companies in America collecting 87 
percent of all the revenues.
    If they were honest, you'd have a better collection rate 
than the IRS currently has.
    Ms. STIFF. I certainly couldn't weigh in on that probably 
one way or the other with my lack of experience.
    I know that that's a discussion that appears every time we 
talk about tax reform, and probably one that will continue.
    Mr. LINDER. Do you, as an agency, pay any attention or have 
any policy staff looking into more efficient collection 
systems?
    Ms. STIFF. More efficient collection system?
    Mr. LINDER. Systems, yeah.
    Ms. STIFF. I'm not sure what you mean by that.
    We are constantly looking at improving our collection of 
delinquent taxes and taxes due, but from a policy perspective 
of looking at the broader tax system, I think that Treasury's 
Office of Tax Policy undertakes that work.
    Mr. LINDER. Thank you for your help. Thank you.
    Chairman LEWIS. Now we turn to Mr. Neal for questions.
    Mr. NEAL. Thank you very much, Mr. Chairman.
    Welcome, to our panelists.
    Commissioner Stiff, a number of us have become concerned 
that one prominent defense contractor, KBR, has been able to 
skirt payroll tax liability for American workers in Iraq via an 
offshore subsidiary.
    Can you tell the Committee whether the IRS was ever 
contacted by any official at the Defense Department alerting 
you to the fact that the company and its workers would not be 
making payroll tax payments?
    Ms. STIFF. Sir, I'm unable to comment on any specific case.
    Let me say that we're certainly familiar with the issues 
surrounding that case. We understand that employment taxes is 
an area where we have to stay vigilant to improve compliance.
    We've increased our employment tax programs, enforcement 
efforts, and audits significantly in the last 24 months. We 
continue to do that.
    The issues in the case you raised clearly reflect the 
changing world, with globalization, and more and more workers 
doing business in foreign countries, and how transactions are 
structured and the legality of those transactions, and 
certainly we continue to, as I said be vigilant in trying to 
stay on top of those emerging issues.
    Mr. NEAL. I appreciate the second part of your answer, but 
my response to that would be, we will have a bill for Iraq of 
more than $1 trillion, by conservative estimates, and so the 
follow-up question would go like this:
    In a similar vein, has the IRS opined in any fashion as to 
whether U.S. citizen workers of these war contractors are 
employees or independent contractors for income and employment 
tax purposes?
    Ms. STIFF. We wouldn't have opined, broadly speaking.
    We have a 20-factor test that we use to determine if 
someone is an independent contractor versus an employee, and 
it's a case-by-case determination, taxpayer-by-taxpayer 
decision when you look at it, and it's a complex area, because 
even when one makes those determinations, you have to step back 
and look at the application, if appropriate, of section 530 in 
the Tax Code.
    Mr. NEAL. But would you consider off shoring, in these 
instances here, to be a tax avoidance scheme?
    Ms. STIFF. I don't, without the specific facts and 
circumstances of an individual case, and I couldn't say, 
broadly speaking, that it's tax avoidance.
    Mr. NEAL. Well, a sign on the side of the building with no 
employees inside----
    Ms. STIFF. Not in and of itself would I say that's tax 
evasion.
    I would have to look at the----
    Mr. NEAL. I didn't say evasion, I said avoidance.
    Ms. STIFF. Avoidance.
    I don't even know that that would suggest that there's 
avoidance in and of itself.
    I'd have to look at the facts and circumstances and the 
legality that governed what was reported on the tax return 
versus what was not reported.
    Mr. NEAL. A more specific question.
    A constituent company, which has recently been bought by a 
Canadian entity, asked me if I understood the reporting and 
filing requirements for visiting executives.
    I didn't, but now that I do, I have some questions about 
their utilization and effectiveness.
    Apparently, once an executive exceeds $3,000 in U.S.-
sourced earnings, he or she must file a Form 1040 non-resident 
form.
    For some visiting executives, a week or two of meetings 
here in New York, Boston, or L.A. would trigger that threshold.
    I wonder if you could tell the Committee what the 
compliance rate is.
    Do you believe that all foreigners visiting the U.S. on 
business which exceed this threshold are filing with the IRS, 
and if so are these filings useful for the IRS office in your 
efforts to close the tax gap?
    Ms. STIFF. Let me take the latter first.
    The filings are definitely useful. We were receiving 
roughly 650,000 a year, plus or minus a few, in each of the 
last 3 years.
    What I can't tell you sitting here today is what the 
compliance rate is, because I don't know the universe that 
should be filing. We're undertaking research to look at that.
    As I mentioned earlier, as we see globalization, and we see 
more and more work done cross-border, these issues are taking 
on a greater life than perhaps they had in other decades.
    So we are looking at that.
    Mr. NEAL. Would you judge this to be a priority for 
enforcement?
    Ms. STIFF. It's a priority.
    Particularly, we've redone our international focus this 
past year, and our priorities, and this is certainly one of the 
ones that's being worked while we sit here today.
    Mr. NEAL. As to determine whether or not it's worthwhile?
    Ms. STIFF. I don't know the answer to that yet, because I 
don't know what the compliance levels are.
    We're going to have to incur some cost and research to 
determine whether this is a significant issue or if most people 
are indeed complying.
    Mr. NEAL. Might I suggest that, given the irony of your 
respective responses to the two questions I raised, that having 
a sign on a building that indicates that it's an address when 
it really is not is probably more of a priority in terms of 
enforcement than the idea of a visiting executive who is here 
for a week at a time, and the enthusiasm with which we 
demonstrate our pursuit of those revenues is something that the 
Committee, along the IRS, needs to examine.
    Ms. STIFF. Well, and let me assure you that we recognize 
the issues, particularly in the employment tax arena.
    We've tripled our efforts there in the last 24 months. It's 
on our radar screen.
    Mr. NEAL. Thank you.
    Chairman LEWIS. Thank you very much.
    Now, we recognize Mr. Kind for his questions.
    Mr. KIND. Thank you, Mr. Chairman.
    Ms. Olson, thank you for your testimony here today.
    Ms. Stiff, let me start with you, and I want to follow up 
with something that Mr. Lindner just touched upon briefly with 
you, and that's the IRS notification letters that are going out 
in regards to the tax rebates.
    When I started, you know, reading these articles that 
appeared in the paper over the last week or so, my reaction was 
kind of similar to everyone else who I think was looking at 
this.
    You know, $42 million for the first notification letter 
going out this month, just how necessary is this, and doesn't 
this strike you as an incredible waste of taxpayer dollars?
    I certainly understand the need to do some outreach with 
those who would qualify for the rebate checks that normally 
wouldn't have to file a return, because all this is based on 
tax filings.
    But we're talking about the vast majority of Americans 
receiving the rebate checks are those who have always filed 
returns, they're going to file a return this time.
    Isn't there a way that the IRS can do a better job of 
targeting and still save taxpayer dollars, rather than a 
blanket notification procedure?
    It's my understanding, in reading the IRS letter that's 
going out this month, is it's not just one notification, but 
everyone is going to be receiving a second notification after 
eligibility has been determined already, and it just seems to 
be incredible redundancy and an unnecessary expenditure of tax 
dollars.
    As you indicate in your testimony, you've established your 
own Web site with information.
    Most of us have already established a Web site with 
information about the tax rebates and who would qualify. I know 
my office is doing some outreach in the District, too, to help 
people if they have questions.
    I think there are better ways, and more efficient ways for 
us to get the notice out there, but without just a blanket dual 
notification system for something that they don't even have to 
react to. They just file a return and this stuff goes out 
automatically.
    Could you help me with this a little bit?
    Ms. STIFF. Sure. Those are fair questions.
    Considering all of the discussions that we had as we 
crafted our strategy for informing and educating taxpayers as 
to the stimulus, let me just share with you what drove our 
decision.
    I'm never one to say there's not a better way to do 
anything, because I'm confident there is, and we'll find it.
    But at the time that we made this decision, what we were 
looking at is the scenario that I described earlier.
    This stimulus payment is overlapping with the filing 
season. We have 60 million calls coming in, and now we've got 
135,050,000 calls already before any notice has gone out, of 
taxpayers calling every day.
    Then we look back to our experience. In 2001, we did 
rebates. Mind you, that was identical to the situation you just 
described. There was no Social Security, no VA recipients. It 
was taxpayers who filed and knew they would receive a stimulus 
payment.
    We got 27 million calls in June and July, which caused our 
system to crash and be shut down. We weren't able to answer 
anyone's calls for a period of time.
    Recognizing what happened in 2001, and that we were now 
going to overlay the same economic stimulus of facts in an 
April-May timeframe--when we're at the peak of our filing 
season--with an added 20 million potential non-filers trying to 
get in, we made the decision. We were very fortunate that the 
Congress supported that decision in the appropriation, that was 
a risk too great to take, and that by mailing this notice to 
taxpayers, if we could somehow give them enough information 
that they didn't feel the need to call, that we were going to 
be ahead of the game.
    The second notice is one for recordkeeping requirements, 
and it's to individual taxpayers, specifying what the amount of 
their rebate was, how it was calculated, so that they'll have 
that for subsequent year recordation.
    But had it not been----
    Mr. KIND. Why would they need that? Because the rebate is 
not going to be taxed in the----
    Ms. STIFF. Many of them won't get their full rebate this 
year, and you provided a true-up the following year. They'll 
need that information for their recordkeeping. I think most 
taxpayers want that.
    So that was the convergence of facts, and like I said, 
maybe a good call or a bad call, but we felt it was the prudent 
call, given the risk and the prior experience that we had.
    Mr. KIND. Maybe I'm just underestimating the power of free 
money out there, and what that does to people----
    Ms. STIFF. Yes.
    Mr. KIND [continuing]. In motivating them to make phone 
calls and that, but it just seems to be incredible overlap, and 
if the 42 million applies for the March mailings, I assume it's 
also going to apply for the subsequent mailing that's going to 
go out, the second one.
    Ms. STIFF. I think it's approximately the same.
    Mr. KIND. Is that right?
    Ms. STIFF. I think it's a little less the second time 
around.
    Mr. KIND. Well, if you're going to go ahead do this, was 
there any thought given to including a paragraph about identity 
theft in it?
    Because as Ms. Olson, you know, testified, this could be a 
very major issue that's going to arise with these rebate 
checks, and identity theft, there's simple steps that taxpayers 
can take in order to protect themselves from this.
    Ms. STIFF. I think that's an excellent suggestion, and I 
only wish I had thought of it or we had done it on the front 
end.
    I don't think, when we were planning the mailings that we 
were moving in real-time, but were instead just trying to be 
responsive to getting the checks out in May. I'm not sure that 
we scoped the identity theft as something that we needed to put 
in that letter.
    But what we are doing now is working with the Taxpayer 
Advocate, working with AARP, working with every newspaper, and 
public service announcements, to get the message out.
    Mr. KIND. Well, I see my time has expired, and I may follow 
up with your office in regards to that, but one other issue, 
and I'll follow up because I don't have time, is the slow 
turnaround time as far as the AMT fix, and whether we've got a 
problem with the computer system at the IRS.
    Why can't we get something changed quicker than what we 
encountered?
    I know we fixed it late last year, but there was a lot of 
concern that, with the late date, this was going to slow down 
the whole AMT calculation.
    Ms. STIFF. Are you wanting me to respond----
    Mr. KIND. No, no----
    Ms. STIFF [continuing]. Come back on the record?
    Mr. KIND [continuing]. No. If there's a second round, if 
I'm still here, I may ask about that.
    Thank you.
    Ms. STIFF. Thank you.
    Mr. KIND. Thank you, Mr. Chairman.
    Chairman LEWIS. Thank you very much.
    Now we turn to Mr. Tiberi for his questions.
    Mr. TIBERI. Thank you, Mr. Chairman. Thank you for having 
this hearing today.
    A couple questions of Ms. Olson.
    We have in the United States today an online system, a Free 
File system, and my understanding is that at this point in 
time, this year, it is up 14 percent, yet some have advocated 
getting rid of that system and going to a system where the IRS 
does all filing online, self-administered.
    I believe you're an advocate of doing that. I'd like your 
comments on that.
    At the same time, the system in Britain, which today is 
administered by the British government, the online system 
completely, is looking at going to the American system of 
having a Free File online system for taxpayers, as well. In 
America, that's for taxpayers whose AGI is under about $54,000 
a year.
    My question to you is, why should we eliminate a system 
that appears to be working?
    Ms. OLSON. Well, I would first challenge the statement that 
it appears to be working, with all due respect, but let me try 
to describe my thinking about electronic tax returns.
    I believe that the government has a responsibility to 
develop a free portal for electronic filing for all taxpayers, 
so that no taxpayer has to pay $14.95 or $19.95, or whatever it 
is, just for the act of electronic filing.
    That's silly. They'll spend 42 cents to use a stamp rather 
than pay $14.95, myself included.
    I also believe that the IRS, the government, should provide 
the electronic equivalent of a paper 1040 and what is available 
in paper that the government publishes in electronic format.
    So, I envision, you know, a 1040 with fill-in blanks and 
math, because people make math errors when they do it on paper, 
and for each line, you would click on the line to get linked to 
the instructions, not spiffy things that all the software has, 
but instructions, and if in the instructions we refer to an IRS 
publication, then we link to that publication.
    These are all things that taxpayers can have on paper on 
their desks in front of them if they go to that trouble.
    Then, taxpayers who are not happy with that, as I think 
many taxpayers would like the bells and whistles that the other 
software programs have and the links to their bookkeeping 
software, and all that, then they can go out and purchase those 
other products.
    I think that where the government goes awry with the Free 
File alliance is first of all, it's a closed shop. Free File 
gets to decide who gets to be in that alliance.
    So, just this past filing season, we had a non-profit 
program that had developed an excellent, very modest, but right 
to the point program for free e-filing, and free tax 
preparation, and was used by thousands of taxpayers, and they 
petitioned Free File to be part of the Free File alliance, and 
Free File alliance decided no, they couldn't be part of that 
alliance, and I don't really understand their rationale.
    We also have found that listing all of these programs on 
Free File, it's not clear what they offer up front.
    Taxpayers get part of the way through, and find out that 
what they need is not part of that program, and they have to 
purchase that from the program in order to get the full 
capability. For example, a Schedule C. Some of the programs do 
not allow, you know, listing more dependency exemptions than a 
certain number, so if you have X number of kids, you know, you 
can't include them.
    That's very confusing to the taxpayers, and I think you see 
that in the low numbers of taxpayers are using on the Free File 
alliance. Even though Free File had a 14-percent increase this 
year, they had a decline last year, and the numbers have been 
in the 3 million to 4 million usage, when you have 130 million 
taxpayers.
    Mr. TIBERI. Thank you.
    Let me ask you one other question, because my time is 
expiring.
    Ms. OLSON. Sorry.
    Mr. TIBERI. The issue that the Chairman talked about 
earlier at the very beginning, about seniors being targeted, I 
had heard that actually, with respect to the EITC, with respect 
to the refund, the rebate coming up, that some predators are 
going after people, saying, "I'll take a percentage of your 
return, I'll give you some of it up front if you can sign it 
over to me, your refund to me or your tax rebate to me.''
    Is there anything that this Committee can do or this 
Congress can do to stop that from happening, or that the IRS 
can do?
    Ms. OLSON. I don't know how you stop it.
    That is pure fraud, and there--you know, wherever there's 
money involved, there are going to be people messing with that.
    But the IRS has a very good, you know, publicity campaign 
about these schemes and scams, as we see them, and certainly 
criminal investigation is trying to monitor these schemes and 
scams to the extent that we can find them, and they're doing a 
very good job, in my opinion.
    I would also suggest that, you know, we can get you 
information about these scams so you can put them into your 
newsletters and on your Web sites, because--and as you're 
talking to the press, the more awareness that the public has 
about not buying into these things--they come in as e-mails, 
and you click on them, and it looks legitimate.
    Mr. TIBERI. Thank you. Thank you, Mr. Chairman.
    Chairman LEWIS. Thank you very much.
    Now we turn to Mr. Pascrell for his questioning.
    Mr. PASCRELL. Thank you, Mr. Chairman.
    I want to thank the commissioner. I want to thank Ms. Olson 
for being here today, always astute.
    Commissioner, in September of 2006, the IRS began turning 
over thousands of taxpayer files, which include private and 
sensitive taxpayer information, to private sector debt 
collectors.
    Under the IRS plan----
    [Interruption to the proceedings.]
    Mr. PASCRELL. Isn't that great? Isn't that wonderful? It's 
like a Greek chorus.
    Under the IRS plan, the private collection agencies are 
allowed to keep up to 24 percent of what they collect, 
depending on the size of the case.
    But in testimony before Congress, IRS officials have 
repeatedly acknowledged that using private collection companies 
to collect Federal taxes is more expensive than having IRS do 
the work itself.
    According to the IRS, the return on investment from using 
IRS employees to collect these taxes is 13 to 1, while the ROI 
for the TCAs is just 3 to 1.
    In addition, according to the IRS, after commission 
payments to the PCAs totaling more than $5.5 million, the net 
revenue generated by private collectors for 2007 was just $20 
million.
    Today, after spending $71 million in startup and ongoing 
maintenance costs through the end of fiscal year 2007, the IRS 
private tax collection program has lost $50 million.
    Now, given the drastic disparity in the return on 
investment between the private contractors and the IRS 
employees, and the dismal performance of private collectors to 
date, do you believe it makes sense for the IRS to continue to 
pay private collectors almost 25 cents for every dollar 
collected on the easiest cases in which IRS employees could 
collect much more cost effectively?
    Do you believe we should continue with that practice?
    Ms. STIFF. Sir, private collection agencies are self-
funded.
    I'm not faced with $7 million on the table, and a choice of 
whether to spend it for PCAs or for IRS employees.
    There's not $7 million. PCAs are self-funded through their 
collection processes.
    I think that we've been very candid in saying that IRS 
employees would have a higher return on investment for $7 
million that comes from the PCA program, but the choice has 
never been one or the other.
    Mr. PASCRELL. Well, why should there even be a choice, 
then, if that is the record? Why don't we simply support, 
provide the resources, and have enough of IRS employees to do 
the job?
    If we're not getting the return that we expect or we can 
get from the public employees, why in God's name are we 
continuing this process?
    Ms. STIFF. Well, I think that's a question----
    Mr. PASCRELL. Educate me.
    Ms. STIFF [continuing]. That's a question to be debated 
here, in that our job is to administer this program as 
effectively, as efficiently-----
    Mr. PASCRELL. Madam Commissioner, the debate is not that, 
because every IRS person that's come before us has never, ever 
contradicted those numbers which I provided in the basis of my 
question.
    Are you debating----
    Ms. STIFF. No, I'm not debating the numbers. What I'm 
saying----
    Mr. PASCRELL. Okay, if we're not debating the numbers, then 
why are we continuing the practice?
    Ms. STIFF. This is a collection tool that the Congress 
authorized the IRS to use, and it is bringing in $20 million.
    Mr. PASCRELL. This is ideologically driven, there's no two 
ways about it.
    This process should be ended and ended immediately. It is a 
waste of taxpayers' money. I believe that it is wrong to 
continue.
    My second question is this:
    Since 1995, the total number of IRS employees has been cut 
by more than 27,000.
    Do you believe these staffing reductions have hampered the 
service efforts to close the tax gap? What's your opinion?
    Ms. STIFF. Since 2000, we have achieved double digit 
improvements in our productivity, and we've gotten our audit 
coverage up to where it was through technology, better 
management, and better training.
    We saw dollars collected through the tax system last year--
as a direct result of IRS intervention--increase to almost $60 
billion, from 33 billion in 2003, record numbers.
    So, I think that we're using the resources that were given 
in a way that is producing the end result in the return at a 
higher rate than we've ever seen before.
    Mr. PASCRELL. Yet the amount of--the number of people and 
the amount owed to the government which we're not collecting 
has risen substantially, substantially, since we've lost 27,000 
employees.
    Thank you, Mr. Chairman. I yield back.
    Chairman LEWIS. Thank you very much.
    Mr. Crowley is recognized for his questions.
    Mr. CROWLEY. Thank you, Mr. Chairman, and thank you for 
this hearing today.
    I want to also thank both Ms. Stiff as well as Ms. Olson 
for being here today and for their testimony.
    Ms. Stiff, let me just, before I ask my question to both of 
you, let me just make a quick statement that pertains to Mr. 
Tiberi's statement before about this rebate, and those 
unscrupulous individuals out there who may take advantage of 
those who may be eligible for this.
    I would just want to also suggest that those nationally 
known tax preparers that are out there, and I will not name any 
specific one, but this is a great opportunity, I think, for 
them to show some kindness, as well as build some good public 
relations, and particularly as it pertains to those individuals 
who do not have to file four taxes, but under these 
circumstances, need to in order to avail themselves of the 
rebate--I'm talking specifically of Social Security recipients 
as well as disabled veterans.
    It's been brought to my attention that some of those 
preparers, if not all are charging at least $35 to file on 
behalf of those individuals.
    For some of them, that is about 10 percent or more of the 
rebate that they will be receiving.
    I think, taking into consideration those individuals, the 
level of income is negligible for some of them, this is really 
something that they need to get every penny possible out of, so 
I would ask those, as an act of good will to those individuals, 
to take that into consideration and not charge for this simple 
filing.
    Let me, Ms. Stiff, then go to you first.
    My question pertains to a recommendation in the President's 
fiscal year 2009 Blue Book regarding their recommendation to 
conform penalty standards between preparers and taxpayers.
    Does the IRS agree with this proposal to conform the 
penalty standards for tax preparers and for taxpayers, for 
taxpayers?
    Ms. STIFF. Yes, we do.
    The disparity that exists today presents unique challenges 
and problems both for the taxpayer and for the practitioner.
    Mr. CROWLEY. Thank you very much for your response.
    Ms. STIFF. Thank you.
    Mr. CROWLEY. Ms. Olson, for you, I understand that your 
annual report, which is too heavy to lift up and show to 
everyone here today, and I want to thank you for it, you do 
great work, you also have stated concerns with the current, 
quote, "more likely than not,'' end quote, standard.
    So, do you also support the administration's position on 
this issue, and if so, why?
    Ms. OLSON. Yes. First let me note my report does come in a 
CD ROM, which is lighter.
    [Laughter.]
    Ms. OLSON. We'll be glad to get you one.
    Yes, we do support that those two standards, that the 
preparer and the taxpayer standard be made congruent. It brings 
about all sorts of screwiness, for lack of a better word, in 
the relationship.
    Mr. CROWLEY. Thank you very much.
    I don't have much time, so I'm going to try to bring this 
to a concise point here on this particular question, as it 
pertains to the AMT patch and the discussion that took place 
prior to our passage of a 1-year fix.
    The IRS had noticed that Congress was attempting to fix 
this before we left, and before time ran out, ever so moving 
back the deadline period by which IRS needed to know what the 
intention of Congress was going to be so they can prepare for 
the change in your schedule and your ability to react to the 
AMT fix.
    Is there any way that the IRS, knowing that, having a good 
faith or good sense that the Congress is going to act to 
intercede on behalf of those individuals who are faced with 
AMT, knowing that we were going to somehow divert that, any way 
to prepare prior to our actually taking legislative action, so 
as to not be caught off-guard or offhand, and can we not have a 
way in which we can start that? If Congress fails to act, shame 
on us, but if Congress doesn't fail to act and then it falls 
into your lap, who is the same on at that point?
    Is there any way in which we can work in a more cooperative 
way?
    By the way, you have been incredible cooperative in 
creating an atmosphere between the Committee and the IRS.
    Is there any way we can broaden that out now to kind of 
have a fuller cooperation, not having that threat over our head 
by the White House, not having that threat that if we don't act 
now we can't get it done, knowing that we're going to do 
something?
    Ms. STIFF. The answer has to be yes. I think there's always 
an opportunity to work more closely together.
    I do need to thank you, because we actually were able to 
get some preplanning underway, because of the letter that you 
gave us that provided some specificity as to what to expect.
    I think the challenge is, and is going to continue to be, 
that the tax system is so large, there are so many systems, 
that I don't know that the taxpayers, you or us, would want to 
incur the cost to allow that tax system to be programmed 
multiple, multiple ways for any eventuality, but I think there 
has to be a way to narrow down what the choices are going to 
look like, and get ahead of it a little bit.
    Mr. CROWLEY. I appreciate that.
    So, no--you don't necessarily need legislation to pass in 
order to act?
    Ms. STIFF. I don't want to say that, because we actually do 
need legislation to be able to fully act.
    Mr. CROWLEY. Understood.
    Ms. STIFF. Okay.
    Mr. CROWLEY. But to prepare, you don't need, right?
    Well, thank you. Thank you for your
    Ms. OLSON. Sir, if I might
    Mr. CROWLEY. Yes, please.
    Ms. OLSON [continuing]. Add something, in my annual report, 
I recommend that one thing that Treasury and the IRS could do 
to move the ball rolling faster is to provide during the year, 
early in the year, a list to Congress, to the two tax writing 
Committees, of the expiring provisions, and then an estimate of 
the impact that the expiration would have, plus the drop-dead 
date, when do we need to have a real action by, so that folks 
who really care about these issues can use that information to 
move things along accordingly.
    Mr. CROWLEY. Thank you very much.
    Chairman LEWIS. Now, we turn to Ms. Tubbs Jones for her 
questions.
    Ms. TUBBS JONES. Thank you, Mr. Chairman, and Ms. Olson and 
Ms. Stiff.
    My question is directed to Ms. Stiff.
    I'm a former Cuyohoga County prosecutor, and we contracted 
with the Child Support Enforcement Agency to do work on behalf 
of child support.
    There's been a recent ruling with regard to access to IRS 
information to county governments to lawyering, and in essence, 
the Department of Child and Family Services has been in 
conversation with the IRS about the sharing of this Federal tax 
information, and I would like to have my tax counsel follow up 
your office about our ability to access.
    You know, you create what's called, I think it's a GDF 
process, to limit access of this information, so it doesn't go 
out of those who are supposed to have it.
    As a result of that, there is some conversation as to 
whether or not prosecutors or attorneys that you can contract 
to access this information.
    It's a big deal for 20 counties in the state of Ohio. Child 
support enforcement is a big deal.
    I just want to be able to have my tax counsel follow up 
with your folks and see if we can continue this conversation 
and work that out.
    Ms. STIFF. Will do.
    Ms. TUBBS JONES. Thank you very much, Mr. Chairman. I 
appreciate it. All the people in Ohio will be real happy.
    Chairman LEWIS. Thank you very much.
    The Committee hearing will recess for about 10 minutes, and 
we will return.
    Is that okay?
    Ms. STIFF. Yes, sir.
    Chairman LEWIS. Thank you very much.
    [Recess.]
    Chairman LEWIS. Thank you very much for being patient. Now, 
the hearing will resume.
    Ms. Olson, you noted that over 32,000 elderly have received 
an employment tax notice for workers caring for them in their 
home. Some have had their Social Security payment levied. 
Should this be happening?
    Ms. OLSON. No.
    Chairman LEWIS. Would a change in the statute resolve this 
unbelievable problem?
    Ms. OLSON. Yes.
    The problem is arising from the fact that the recipients of 
the home health care are considered employers under the common 
law rules that Commissioner Stiff talked about earlier, the 20-
factor test, and what that means is, even if the state, for 
example, takes on the payment or the reporting obligations, the 
recipient of the care is still on the hook if something goes 
wrong.
    By making these workers the statutory employees of the 
entity who administers the funding, rather than the elderly 
person receiving the services, you basically make that entity 
responsible for all the reporting and paying and filing 
obligations, and if something goes wrong, we're looking to the 
entity, whether it's the state or an intermediate service 
organization or a local agency, we're looking to them to make 
amends and make the corrections and take the collections, and 
the recipient of the care is protected from levies for these 
employment taxes.
    Chairman LEWIS. Thank you.
    Ms. OLSON. You're welcome.
    Chairman LEWIS. Mr. Pomeroy, my friend, welcome back. You 
are now recognized for your questions.
    Mr. POMEROY. Thank you, Mr. Chairman, and Mr. Ranking 
Member.
    As a former Ranking Member of this Subcommittee, I care 
deeply about the work, and appreciate being allowed to 
participate, even though I'm not on the Subcommittee this 
Congress.
    I well remember the leadership Rob Portman used to provide 
on this Subcommittee.
    He really would get into the weeds of how the IRS got this 
enormous responsibility, this charge, and whether it continued 
to have the resources that it needed.
    I've got so many questions, and not much time. I would 
just--one of the things we discussed during those years was the 
computer, this vast investment in the computer that--it was the 
computer project that was deeply frustrating.
    I mean, among other things, I think one of the takeaways I 
remember is, I guess to this contracting out business again, we 
were so dependent upon our consultants, we didn't have internal 
staff capable of really driving and guiding the project and 
evaluating the quality of work that consultants were bringing 
us, really ultimately resulting in a cost of tens of millions, 
maybe hundreds of millions of dollars extra, and an awful lot 
of delay.
    How is that old computer project coming, and how is your 
internal capacity to deal with it?
    Ms. STIFF. I am very pleased to report to you that, over 
the last 4 years, I think we've turned the corner on the 
project and on the management, even more importantly.
    I think earlier this week, or maybe later this week, but 
sometime this week, GAO is going to issue their first positive 
report on the modernization project. I'm with you. I'll believe 
it when I've got it in my hands.
    But we have significantly improved our management and our 
governance, and as a result, we are, year in/year out,--this 
year being our most successful--producing new functionality, 
and delivering it on time, on schedule, and under cost.
    I mentioned earlier, and I don't know if you were here, but 
our CADE system, the one that's replacing the master file, this 
filing season, as we sit here today, is processing almost 25 
percent of the individual returns filed, and for those returns, 
we're able to settle those account balances in 24 hours, like 
you would experience with your bank or any other financial 
segment.
    So, we're seeing--the list is long of the progress, but 
just an example, and I honestly feel very comfortable saying--
--
    Mr. POMEROY [continuing]. That report, and I'm delighted by 
what you've said.
    To the extent, you know, when you get in this business, 
oversight business, no news is good news sometimes. We hadn't 
heard much about this for a while.
    I'm very pleased that that's the affirmative activity 
taking place underneath it.
    Nina, you mentioned something during your testimony that 
concerns me a lot. I've had some problems with this Free File 
alliance.
    To me, it has--we have given them an unbelievable, 
thoroughly endorsed, moneymaking opportunity, and at the same 
time, what was expected to be delivered by Free File has not 
really ever reached anywhere near the numbers that they're 
talking about, and the 14-percent growth this time off of a 
diminished base from 2006 this isn't anywhere near the 
expectation that we had.
    I'm very concerned by your report that they wouldn't allow 
a very credible product prepared by a nonprofit in, which I 
expect compared very cost-competitively with other products 
available by other Free File members. Is that correct?
    Ms. OLSON. Well, yes, for the service, the things that it 
offers, it is very competitive, just from looking at it, plus 
it is free electronic filing and free cost, and so----
    Mr. POMEROY. Ms. Stiff, I mean--sorry to interrupt, I see 
my time dwindling quickly -I think the service has responded to 
a number of the questions this Subcommittee on Oversight has 
raised over the years about Free File, and you've got some 
standards on products, and things that you didn't used to have. 
That's good.
    How about noncompetitive behavior of this private 
partnership that is our public-private partner?
    Obviously, noncompetitive behavior by Free File alliance is 
certainly repugnant to me, and I expect it would be to the 
service. Is that correct?
    Ms. STIFF. Yes, sir. What we're doing in response to the 
concerns, which emerge each year, take a different form, and 
morph from this to that, is, we've----
    Mr. POMEROY. By the way, I might just say, in business, if 
you got a partner, it's always something. It's just always 
something. You don't have much of a partner.
    So I really think that Free File, in terms of having such 
little policing of its membership, where they're always trying 
to look at some other low route way to make a buck, in 
exploitation of this relationship with the service, they're 
certainly not getting the job done, in my opinion.
    I would like to think Free File is a best practice, its 
policing, uplifting effect, and it certainly has not been my 
view of their work so far.
    Ms. STIFF. Well, I think that they are serving the needs of 
millions of taxpayers each year, but I think more importantly, 
what we're doing now, which will actually, I think, further 
this debate and decisionmaking on a forward-going basis, is 
that we are conducting an advanced e-file study, because as you 
know, you have an expectation that we're going to get to 80 
percent of all returns being e-filed at some point, and so we 
are bringing in internally, an independent third party to help 
us assess what are the best ways to advance our e-file goals.
    That's going to include looking at direct file options. 
That's going to include looking at Free File and what its 
providing. It's going to include looking at 2D bar coding 
options.
    The list of what we're going to cover in that study should 
get at all of the issues that are raised----
    Mr. POMEROY. Frankly, will you be looking at a service 
developed product to be available free?
    Ms. STIFF. We're going to be exploring that option, as 
well.
    Mr. POMEROY. As you do that work, I know--I'm glad you're 
going to do that work, I look forward to seeing it.
    Just to close back on this allegation of, or I won't say 
allegation, because it happened in fact, the appearance of 
anti-competitive activity in Free File alliance to keep out a 
lower-cost product from the offerings allowed by alliance 
members, as the service gets its answers, I would very much 
like the report, and----
    Ms. STIFF. We will follow up with you.
    We did make an intervention when that came to our 
attention, and I believe that partner is currently being 
listed.
    Mr. POMEROY. Is that correct?
    Ms. OLSON. Not on Free File. Not on Free File.
    It's listed on the IRS' site that lists partners, but it is 
not allowed on that site to tell that it is both free filing 
and free preparation, so the fullness of what it offers 
taxpayers is not being advertised on that site----
    Mr. POMEROY. So, we have an entity that wants to offer free 
filing----
    Ms. OLSON. It's a nonprofit.
    Mr. POMEROY [continuing]. By a nonprofit, and the service 
has not made that information publicly available on the Web 
site. Why would that be?
    Ms. STIFF. I think it's available on the Web site.
    Ms. OLSON. It's not. It's on the list.
    It's on the list, but it is not allowed under the rules of 
that Web site to say that it is both free e-filing and free 
preparation software.
    It can only say one of those two things, like, ``This is 
free e-filing,'' and then taxpayers don't know that they don't 
have to pay to do the preparation, or it can say, ``free 
preparation,'' but they don't know that it's free e-filing.
    Those are the rules of that site. That's the listing that 
it's got up there.
    It was not allowed to be listed on the Free File alliance, 
become a member of the Free File alliance, which the IRS is 
actively publicizing as ``Go here for free electronic filing 
and preparation.''
    Mr. POMEROY. I know I'm out of time, Mr. Chairman, but I 
would just say that, as this relationship matures, as products 
become available, broadly, cheaply, I think it does not behoove 
the IRS anymore to basically safeguard the profit opportunities 
for Free File partners.
    I saw the service playing that role, when suddenly they 
allowed, by service action, a maximum of something like 57,000 
or whatever the amount is for a taxpayer using Free File.
    Before it was unlimited. It was the service that put a cap 
in, and basically to enhance the profit opportunity for Free 
File Members.
    Now, this, if there's activity taking place among the Free 
File alliance, basically keeping out lower-cost alternatives in 
any way, and the service is countenancing this activity, I just 
think that's so wrong, and I would hope that that's corrected.
    I would also hope the information, as much information as 
possible about this lower-cost alternative would be available 
to the taxpayers.
    Thank you, Mr. Chairman, for allowing me to----
    Chairman LEWIS. Thank you very much.
    Now we turn to Mr. Becerra for a question. Welcome, my 
friend.
    Mr. BECERRA. Thank you, Mr. Chairman.
    Mr. Chairman, I hope we continue to do these types of 
hearings.
    I think it's so important to have the administrator, to 
have the tax advocate, the commissioner and the tax advocate 
here to help us make sure that the American public understands 
what is being done in terms of taxes and how they can avail 
themselves of whatever services are available.
    No one wants to be hounded by the IRS, and most people, 
fortunately, in this country, do the right thing, and so I 
think it's very important to these oversight hearings, and 
especially because of this rebate, that most Americans qualify 
for.
    I think Ms. Stiff is correct in trying to point out that 
folks need to get this information, and I thank you.
    I hope that the IRS is able to do as much as possible to 
explain to all Americans, including those Americans who weren't 
planning to file a tax return this year, that they should 
consider it, because they may have a rebate coming, even if 
they weren't planning to file for any type of income tax 
refund, or if they didn't think they owed any taxes.
    I'd like to focus on a couple of things, and forgive me. 
I'm suffering from what I think half of the universe is 
suffering from----
    Ms. STIFF. Me, too.
    Mr. BECERRA [continuing]. Yes, this cold.
    Tax preparers--and Ms. Olson, let me ask you, this, going 
directly to some of your testimony.
    In some of your testimony, you mentioned that there is a 
need for a legislative proposal to do, among other things, to 
protect the more than 60 percent of taxpayers who rely on paid 
tax preparers by imposing minimum standards of competence.
    At present, anyone who can Federal tax--I'm sorry.
    ``At present, anyone can prepare Federal tax return. There 
are no standards at all.'' That's a quote from your testimony.
    Should tax preparers register with the Treasury so that we 
know who is involved in the preparation of tax returns?
    Ms. OLSON. Absolutely.
    The tax return is the entry point to the tax system, and we 
have so many people going to preparers, and there are so many 
more programs, just because of software being available, who 
have no training in tax, who can just buy a package off the 
shelf, and prepare returns.
    Although the packages are wonderful, you know, they don't 
replace knowledge of the Tax Code if you are preparing a return 
for a fee.
    Mr. BECERRA. So, give me some recommendations. What would 
you recommend we do to ensure that all preparers are competent?
    Ms. OLSON. Well, certainly many preparers, the attorneys, 
the CPAs, the enrolled agents, are already subject to licensing 
and testing, some kind of testing regime, and usually 
continuing education requirements.
    So, what we're worried about are what we call the 
unenrolled preparers, and those folks need to be registered 
with the IRS. We need to know about them.
    We need to have an entrance examination for them to just 
test their basic level of competency, that they understand the 
basic concepts of tax.
    I know that some folks have said that this might be costly, 
but we have an estimate from the group that runs the California 
preparer regulation system that they have, and they have 
estimated that they can do all of the testing, all of the 
tracking of registration, et cetera, for about $35 per 
preparer, which would be a fee we would pass on to those 
preparers, so it would be paid for by the preparers themselves.
    Mr. BECERRA. Do you think Treasury is capable of managing a 
system that requires some type of competence of these 
preparers?
    Ms. OLSON. I think that--I have thought the Treasury was, 
we were capable of doing that since I proposed it in 2002.
    Mr. BECERRA. Thank you.
    Now, Ms. Olson, I suspect that your workload has increased 
recently as a result of the downturn in the economy, more folks 
trying to figure out what they do, more modest-income folks who 
can't afford to go to a professional tax preparer.
    How many people did you contact, or had contact with your 
office in, say, 2007?
    Ms. OLSON. We had about 248,000 cases, and about--the 
growing issues in our cases are in enforcement issues, because 
the IRS is ramping up enforcement, and then as the economy 
turns down, people have more economic, you know, economic 
pressures on them, and they're not able to deal with paying 
their tax obligations.
    Mr. BECERRA. Are you expecting to have as many or perhaps 
more contacts for 2008?
    Ms. OLSON. We are expecting more contacts in 2008, and 
already seeing that.
    Mr. BECERRA. Ms. Stiff, is there value in the Tax 
Advocate's Office from the perspective of the IRS?
    Ms. STIFF. Absolutely.
    Mr. BECERRA. Give me a sense.
    My understanding is that the administration's budget 
proposal would decrease funding for the Taxpayer Advocate 
Services to a level that's about $8 million below what they got 
last year.
    Is that something the IRS is supporting?
    Ms. STIFF. Let me give you some context with that number, 
because taken out of context, you get a different sense for it.
    From the year 2007 to the year 2009, the taxpayer advocate 
budget will experience a 9-percent increase. Okay?
    Mr. BECERRA. You're not suggesting that they go the money 
and didn't use it well?
    Ms. STIFF. No, no, no, sir. I'm just trying to put some 
perspective
    Mr. BECERRA. Okay.
    Ms. STIFF. They had a 9-percent increase in a 2-year 
period, while the rest of the IRS budget increased 7 percent.
    Mr. BECERRA. I understand.
    But now let me ask Ms. Olson, with that 9-percent increase, 
were you able to adequately handle all the contacts that were 
made to your office?
    Ms. OLSON. My--not really.
    My employees are at the highest case per--highest case 
inventory per case advocate that we have ever been in the 
history of the Taxpayer Advocate Service.
    Mr. BECERRA. I would presume that chances are, Ms. Olson 
could probably use a 90-percent increase in her budget, and 
she'd still find that people are coming, simply because, as you 
and I know, it's become very expensive to get good professional 
advice, and more and more, people are finding that they can't 
afford it.
    You know, you buy the new washing machine that you need to 
clean your kids' clothes, or you get a professional tax 
preparer, and sometimes I think washing clothes beats out the 
tax preparer.
    But I understand that you have constraints. You have to 
live with what the administration provides you to fund all the 
operations within IRS, including the taxpayer advocate.
    But wouldn't it be pound foolish for us to diminish the 
resources that the taxpayer advocate has to make sure that 
people, first, voluntarily comply with their obligation to file 
a tax return, but two, to do it correctly, so that you don't 
have to then use all your personnel later on to make 
corrections to someone who is making modest income, who just 
happened to make an innocent error?
    Ms. STIFF. Sir, I agree that the Taxpayer Advocate provides 
a valuable service, but as the Acting Commissioner, balancing 
all of the enforcement and service needs, I think it's equally 
important that we provide equivalent levels of services across 
the board so that the cases don't end up at the Taxpayer 
Advocate's Office.
    So, it's trying to maintain balance.
    Mr. BECERRA. Yeah. I know that most of us would hate to 
have to sit in your seat to try to respond to some of those 
questions, because you do have to balance all the obligations 
you have with the moneys that you're given.
    I would just hope that, in the process of budgeting, you 
all, not so much you all, but Office of Management and Budget, 
the White House, would not be pennywise and end up being not 
just pound foolish, but foolish with all those taxpayers who 
are already burdened, but are still willing to voluntarily 
comply with their obligation to file a tax return.
    I think it would just be such a sin for us to send a 
message to Americans who have very modest income that we don't 
care to have them comply with something that most of us don't 
wish to have to do, and that is pay our taxes.
    I was shocked when I learned that the President's budget 
called for an $8 million cut to the Taxpayer Advocate's Office.
    Mr. Chairman, I know my time has expired, so I'll just say 
one last thing and won't ask a question.
    The taxpayer assistance centers that you have, same thing.
    To not ramp up those centers where, for the money that we 
pay as taxpayers to fund that program within IRS that gives 
assistance to, again, people who are voluntarily trying to 
comply with their tax requirements, to not have those offices 
open long enough so that people who work long hours can take 
part or participate in those programs that you make available, 
to get good advice so they don't have to then pay someone else 
a pretty big fee to do something very simple, which someone in 
your office, if you had the resources and the staffing, could 
answer, I just--that's what gives us a bad name, both as 
government and as the IRS, when we seem to make it more 
difficult for people to do voluntarily what they know they must 
do.
    I just think that if you move toward doing these things, it 
has such a great return--the Taxpayer Advocate's Office, the 
taxpayer assistance centers, the low-income tax centers--you 
know, we would get much greater response from the American 
people that we're really trying to be helpful, not just take 
their money.
    I thank the Chairman and I thank the two witnesses for 
their time.
    Chairman LEWIS. Thank you very much.
    At this time, I would like to thank the IRS, the Acting 
Commissioner and the National Taxpayer Advocate, for their 
time, and your wonderful and helpful and meaningful testimony.
    The Subcommittee and all of the Members, all of us, 
appreciate your views.
    Is there any other business to come before the 
Subcommittee?
    [No response.]
    Chairman LEWIS. There being no further business, this 
hearing is now adjourned.
    [Whereupon, at 12:10 p.m., the hearing was adjourned.]
    [Questions for the record follow:]

                       Questions from Mr. Johnson

[GRAPHIC] [TIFF OMITTED] T9992A.057

[GRAPHIC] [TIFF OMITTED] T9992A.058


                                 

                       Questions from Mr. Cantor

[GRAPHIC] [TIFF OMITTED] T9992A.059

[GRAPHIC] [TIFF OMITTED] T9992A.060


                                 
    [Submissions for the Record follow:]

                    Statement of Benson S. Goldstein

    The American Institute of Certified Public Accountants thanks the 
House Ways and Means Subcommittee on Oversight for the opportunity to 
submit this statement for the record of the public hearing on the 2008 
tax return filing season, IRS operations, the Administration's fiscal 
year 2009 budget proposals, and the National Taxpayer Advocate's 2007 
Annual Report to Congress, held on March 13, 2008.
    The AICPA is the national, professional organization of certified 
public accountants comprised of approximately 350,000 members. Our 
members advise clients on federal, state, and international tax matters 
and prepare income and other tax returns for millions of Americans. 
They provide services to individuals, not-for-profit organizations, 
small and medium-sized businesses, as well as America's largest 
businesses. It is from this broad perspective that we offer our 
comments today.

GENERAL COMMENTS ON THE FILING SEASON

    We are pleased to report that the 2008 filing season is generally 
progressing without any significant problems. The AICPA has received a 
few reports by CPAs about difficulties taxpayers have experienced as a 
result of enactment of the Alternative Minimum Tax ``patch'' in late 
2007. These scattered reports of difficulties stem from the resultant 
delays in IRS's release of certain forms, which caused processing 
delays (through February 11, 2008) for the returns of about 13.5 
million taxpayers.
    Our members are receiving a moderate number of questions from 
clients regarding the economic stimulus program enacted in February 
2008, a cash payment from the government to about 130 million 
households starting in May. While some taxpayers may be confused by the 
eligibility rules for the stimulus payments, we believe the IRS is 
generally doing a very commendable job in terms of publicity for the 
program and getting the necessary guidance out to the public.
    The AICPA appreciates that the Treasury and IRS promptly issued 
Notice 2008-32 in February 2008 following the January 16, 2008 U.S. 
Supreme Court decision in Knight v. CIR. \1\  The notice, in providing 
interim guidance for 2007 tax returns, does not require trustees to 
determine the portion of a bundled fee that is subject to the 2-percent 
floor under Internal Revenue Code Section 67 for tax years prior to 
2008. We note the certainty, clarity and helpfulness of the guidance 
for taxpayers and practitioners who are in the process of preparing 
2007 tax returns. We also appreciate that the IRS and Treasury have 
opened a new three month comment period with respect to prop. reg. 
section 1.67-4, which was issued prior to the Supreme Court ruling.
---------------------------------------------------------------------------
    \1\ Knight v. CIR, S.Ct. Docket No. 06-1286 (January 16, 2008).
---------------------------------------------------------------------------
    Our additional comments focus on a number of issues impacting on 
IRS operations and tax administration; specifically: (1) the Form 1065, 
Schedule K-1 due date; (2) IRS's e-file strategy; (3) the tax gap and 
stakeholder outreach; (4) the National Taxpayer Advocate; (5) the 
section 6694 preparer penalty; (6) tax strategy patents; (7) federal 
regulation of tax return preparers; and (8) the section 7216 
regulations.
             FORM 1065, SCHEDULE K-1 DUE DATE
    One of the most significant filing season problems of recent years 
involves the receipt of ``last minute'' Form 1065, Schedules K-1, a 
problem that has perplexed taxpayers whose returns (Forms 1040, 1065, 
1120 and 1120S) must include Schedule K-1 information. While the AICPA 
believes that this issue might be addressed ultimately and more 
completely through legislative changes, we believe a simple regulatory 
change would quickly assist a significant percentage of taxpayers 
presently burdened by the late receipt of Schedules K-1. Accordingly, 
we recommend changing temp. reg. section 1.6081-2T, the automatic 
extension of time to file certain returns by partnerships; a temporary 
regulation that expires on November 4, 2008.
    Under temp. reg. section 1.6081-2T, partnerships are generally 
allowed an automatic six month extension of time (from April 15 to 
October 15 for calendar year partnerships) to file Form 1065, U.S. 
Partnership Return of Income, or Form 8804, Annual Return for 
Partnership Withholding Tax, as long as the partnership submits the 
appropriate form for extension. This regulation has, unfortunately, 
contributed to the problem of a large number of calendar year 
partnerships completing and sending Schedules K-1 to taxpayers just 
prior to or after the due dates of the partners' tax returns. Receiving 
Schedules K-1 on October 13 or 14 makes it very difficult for tax 
preparers and taxpayers to complete their returns by October 15, in the 
case of an individual or other partnership tax return, and impossible 
for corporate returns (both S and C) which have an extended due date of 
September 15.
    We have had discussions with the Service regarding a regulation 
project to: (1) address the difficulties taxpayers face when receiving 
delayed Schedules K-1 and (2) move the extended due date for 
partnership returns from October 15 to September 15, thus providing a 
maximum extension of five months.
             IRS's e-file strategy
    The AICPA appreciates: (1) the benefits electronic filing offers to 
tax administration and taxpayers; and (2) the successes the IRS has had 
with its electronic tax filing (e-filing) program during recent filing 
seasons, successes due in large part to the Service's vigorous efforts 
to gain the input and involvement of affected parties.
    The IRS closely collaborated with the AICPA during the 2006 and 
2007 filing seasons on the Service's rollout of the mandatory large 
corporate and exempt organizations e-file programs on the MeF platform; 
and also with respect to its rollout during the 2007 filing season of 
the large partnership e-file program on the MeF platform. With respect 
to these e-file programs, the AICPA played a proactive role in 
surfacing issues and solutions that ultimately contributed to the 
success of e-file. We plan to continuing working closely with the 
Service to meet its expectations for these programs for the 2008 filing 
season; and with respect to its future rollout of the Form 1040 MeF 
program.\2\
---------------------------------------------------------------------------
    \2\ See IRS Modernized e-File Form 1040 Status Report, dated 
January 2008, as provided by the IRS to the AICPA and posted to 
aicpa.org at URL: http://tax.aicpa.org/NR/rdonlyres/8F52D6AA-A50D-466D-
BD91-2C62C73FB8BD/0/1040_MeF_Overview_AICPA_012008.ppt
---------------------------------------------------------------------------
    We support using the AICPA/IRS collaborative model for e-file for 
other customer outreach initiatives involving the Service, especially 
from the perspective of encouraging voluntary compliance. In general, 
we wholeheartedly support efforts by the Service to reach out to the 
AICPA and other stakeholders as much in advance as possible prior to 
the Service's implementation date for a new program. By doing this the 
IRS will receive constructive feedback about the pending new program, 
input that will likely improve the program upon implementation; and 
such stakeholder outreach is likely to garner a higher degree of 
stakeholder ``buy-in'' or support for the program.
              the Tax gap and stakeholder outreach
    The AICPA supports the suggestion by National Taxpayer Advocate 
Nina Olson that the IRS place a significant effort on understanding the 
tax gap and the non-compliance rates associated with small business 
taxpayers. According to IRS statistics, non-compliance by small 
business is the single largest component of the tax gap, representing 
about 44 percent of the gross federal tax gap of $345 billion.\3\
---------------------------------------------------------------------------
    \3\ See the National Taxpayer Advocate's 2006 Annual Report to 
Congress, December 31, 2006, page 174.
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    While we support the concept of increased enforcement to address 
the tax gap, we recognize (like the National Taxpayer Advocate) that 
the IRS should increase its focus on educating small businesses as 
opposed to solely relying on its enforcement apparatus. In Ms. Olson's 
2006 report to Congress, she suggests increasing the scope and reach to 
the small business community of the Small Business/Self-Employed 
Division's Communication, Liaison, and Disclosure (CLD) function. We 
support an increase in resources for CLD, as well as enhancement of 
CLD's educational component.
    CLD is doing a very commendable job in serving the small business 
and tax professional communities in terms of its stakeholder outreach 
efforts despite the reduction in staff and resources that took place a 
few years ago. We do believe a further commitment to programs like the 
Service's Small Business Tax Workshops and its online resources such as 
the Small Business and Self-Employed Online Classroom, Small Business 
Resource Guide, and the Virtual Small Business Tax Forum are positive 
endeavors. In order to enhance further development of these types of 
products, it would be helpful for the SB/SE Division to study the 
market penetration and use of these programs by small firms.
    The AICPA does recognize that the Service heavily relies on irs.gov 
and the Internet to accomplish much of its ``customer outreach'' to 
small business. We appreciate the Service's understanding that a 
substantial majority of small businesses rely on CPAs and other tax 
professionals to prepare their tax returns and provide professional 
advice. For this reason, the Service heavily utilizes the AICPA and 
other professional associations to assist the government in its 
outreach efforts to the business community on key tax administration 
issues.
              NATIONAL TAXPAYER ADVOCATE
    From our perspective, the National Taxpayer Advocate is one of the 
best customer service oriented programs within the IRS. We find the two 
yearly reports issued by the National Taxpayer Advocate to be excellent 
compendiums of systemic problems and evolving trends within the tax 
administration and tax policy implementation arenas.\4\ We note that 
the Advocate's 2007 Annual Report to Congress: (1) raises concerns 
about the potential conflicts of interest that could occur between 
preparers and their clients due to the higher standards of conduct put 
in place by last year's modifications in IRC section 6694; and (2) 
recommends enactment of legislation to ban tax strategy patents.\5\ The 
section 6694 preparer penalty and tax strategy patent issues are 
described in more detail below.
---------------------------------------------------------------------------
    \4\ See ``The National Taxpayer Advocate's Fiscal Year 2007 
Objectives to Congress,'' July 19, 2007; and the ``National Taxpayer 
Advocate, 2007 Annual Report to Congress,'' December 31, 2007.
    \5\ See the ``National Taxpayer Advocate, 2007 Annual Report to 
Congress,'' December 31, 2007, Volume 1, pages 140-160 and 512-524.
---------------------------------------------------------------------------
    In addition to systemic advocacy, the Taxpayer Advocate's office 
performs a vital function by providing taxpayers with an independent 
channel for resolving individual tax problems. The Advocate assists 
taxpayers by reviewing requests for assistance with respect to 
enforcement related cases involving ``significant hardship,'' and where 
appropriate, helps craft solutions to relieve such hardship.
              Section 6694 Preparer Penalty
    The AICPA strongly supports H.R. 4318, legislation introduced by 
Representative Joseph Crowley, with Representative Jim Ramstad joining 
as an original cosponsor. H.R. 4318 is designed to reverse the negative 
impact of a tax provision enacted into law as part of the U.S. Troop, 
Readiness, Veterans' Care, Katrina Recovery, and Iraq Accountability 
Appropriations Act of 2007 (``the Act''). This provision--passed last 
year without hearings or public comment--increased the tax return 
reporting standards applicable to tax return preparers under section 
6694 for undisclosed items, from the ``realistic possibility of 
success'' standard to the ``more likely than not'' standard. As under 
prior law, if that reporting standard cannot be satisfied and the 
preparer wants protection from the possible imposition of an 
understatement penalty, a disclosure of the item on the return is 
necessary.
    The 2007 law raises the tax return reporting standard for preparers 
above the reporting standard for taxpayers (which is ``substantial 
authority''), creating the potential for conflicts of interest between 
preparers and their clients (as pointed out by the National Taxpayer 
Advocate above). It also creates the potential for the IRS being 
overwhelmed by excessive disclosures filed for routine items, thus 
defeating the purpose of the IRS disclosure system.
    Representative Crowley's bill, H.R. 4318, would restore the role of 
CPAs as advocates for taxpayers by equalizing the tax return reporting 
standards for preparers and taxpayers at the substantial authority 
level. In introducing the legislation, Representative Crowley stated 
``The legislation ends the potential conflict between the tax preparer 
and the taxpayer, and it will reduce the paperwork backlog that 
prevents taxpayers from claiming deductions or credits.'' Enactment of 
H.R. 4318 would restore a commonsense approach and perspective to 
section 6694. Treasury also supports a similar position, as noted in 
the Blue Book regarding the Administration's fiscal year 2009 revenue 
proposals.
              STRATEGY Patents
    To date, at least 65 patents for tax strategies have been granted 
and 107 patent applications for tax planning methods are pending. 
Patents for tax planning methods have already been granted in a variety 
of areas, including the use of financial products, charitable giving, 
estate and gift tax, pension plans, tax-deferred exchanges, and 
deferred compensation. One patent granted is for the process of 
computing and disclosing the federal income tax consequences involved 
in the conversion from a standard Individual Retirement Account (IRA) 
to a Roth IRA. We expect many more tax planning method patents to be 
issued, directly targeting average taxpayers in a host of areas, 
including: (1) income tax minimization; (2) alternative minimum tax 
(AMT) minimization; and (3) income tax itemized deduction maximization.
The AICPA Position
    Patents for tax planning methods undermine the integrity, fairness, 
and administration of the tax system and are contrary to sound public 
policy. Consistent with this perspective, we believe patents granted 
for tax planning methods:

          Limit the ability of taxpayers to fully utilize 
        interpretations of tax law intended by Congress;
          May cause some taxpayers to pay more tax than 
        Congress intended and may cause other taxpayers to pay more tax 
        than others similarly situated;
          Complicate the provision of tax advice by 
        professionals;
          Hinder compliance by taxpayers; and
          Mislead taxpayers into believing that a patented 
        strategy is valid under the tax law.

AICPA Legislative Recommendations

    AICPA supports S. 2369, as introduced in the Senate; and H.R. 1908, 
the Patent Reform Act of 2007, as passed by the House of 
Representatives, which (among other provisions) prohibits the granting 
of tax planning method patents. Both bills would generally exempt tax 
preparation software, with the intended effect of not impacting the 
development and sale of products like TurboTax and TaxCut.
    The AICPA also supports H.R. 2365, introduced by Representatives 
Rick Boucher, Bob Goodlatte, and Steve Chabot. The legislation still 
allows the patenting of tax strategy patents. However, it provides 
immunity from patent infringement liability for taxpayers and tax 
practitioners. H.R. 2365 exempts tax preparation software, just like 
the bills described in the preceding paragraph.
              Federal Regulation of Tax Returns Preparers
    This section provides the AICPA's comments on the federal 
regulation of tax return preparers. In drafting these comments, we 
recognize that Senator Jeff Bingaman introduced legislation last year 
(S. 1219, the Taxpayer Protection and Assistance Act of 2007) that 
specifically addresses some of these issues. When this section refers 
to the ``preparer registration proposal,'' we are referring to the 
general concept of the regulation of tax return preparers, and at other 
times, we will specifically refer to S. 1219.

The AICPA Commitment to Professional Ethics

    The AICPA strongly supports the implementation of high professional 
standards for tax practitioners; and for this reason, we are 
sympathetic to the underlying reasons driving support for the federal 
regulation of tax return preparers. Our longstanding track record 
regarding high professional standards for CPAs, includes the AICPA Code 
of Professional Conduct and our enforceable Statements on Standards for 
Tax Services. These standards provide meaningful guidance to CPA 
members in performing their professional responsibilities.
    While the AICPA strongly supports initiatives designed to ensure 
high professional standards among tax professionals, we are not 
convinced that Congressional proposals calling for the regulation of 
unlicensed tax practitioners will accomplish the stated objectives 
advanced by the proponents of such proposals. We believe that there is 
a need to better understand the nature of the problem before coming to 
any particular conclusions as to the best solution.
    The AICPA also notes that the preparer registration legislation is 
being promoted at a time when the government is reviewing the current 
regulatory framework governing tax return preparer penalties, their 
interrelationship to taxpayer penalties, and the regulations governing 
practice before the IRS (i.e., Circular 230).\6\ Treasury's call for a 
review of the regulatory regime governing preparer penalties is 
consistent with our concern that the preparer registration legislation 
warrants further evaluation.
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    \6\ See IRS Notice 2008-13 regarding ``Guidance Under the Preparer 
Penalty Provisions of the Small Business and Work Opportunity Act of 
2007.''

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Addressing EITC and Refund Anticipation Loan Problems

    Legislation to regulate preparers has generally been proposed by 
members of Congress as a partial response to: (1) the high error rate 
associated with Earned Income Tax Credit (EITC) claims; and (2) 
consumer protection concerns associated with refund anticipation loans.
    We share the concerns regarding the high error rate associated with 
EITC claims and with the proliferation of high-interest, short-term 
refund anticipation loans (RALs). According to the Treasury Inspector 
General, an IRS study of 1999 tax returns suggests that--out of the $31 
billion in EITC claims by taxpayers that year--between 27 and 32 
percent of those claims were erroneous.\7\ With respect to the RALs, 
many commercial preparers aggressively encourage the use of RALs by low 
income taxpayers, often misleading these taxpayers about the true cost 
of such loans. These concerns have resulted in the introduction of 
bills such as S. 1219. Among other provisions, S. 1219 provides for the 
regulation of what the bill refers to as ``federal tax return 
preparers'' and ``refund anticipation loan facilitators.''
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    \7\ Testimony of J. Russell George, Treasury Inspector General for 
Tax Administration, Hearing on IRS's Fiscal 2006 Budget Request; Senate 
Committee on Appropriations, Subcommittee on Transportation, Treasury, 
the Judiciary, Housing, and Urban Development, and Related Agencies, 
April 7, 2005.
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    Before seriously considering legislation to regulate tax return 
preparers, the AICPA recommends Congress consider proposals that 
narrowly focus on solutions to address issues associated with the EITC 
program and the consumer protection issues surrounding refund 
anticipation loans. By creating solutions targeted to the specific 
problems associated with the EITC and RALs programs, we believe such 
proposals may result in more tangible increases in compliance than a 
preparer registration proposal might alone yield.
    The AICPA also believes the IRS currently has at its disposal tools 
that, if utilized and enforced, would achieve: (1) immediate reductions 
in fraudulent return preparation; and (2) long-run compliance 
improvements with respect to unregulated tax preparers. Any 
introduction of a new preparer regulation regime is premature and could 
potentially take years to see any possible rewards.
Enforcement through Existing Regulatory Authority
    The AICPA believes the Service already has sufficient authority to 
regulate federal tax return preparers without the need for new 
legislation. First, the IRS has authority to regulate tax preparers 
through the penalty authority under current law. The Internal Revenue 
Code permits the Service to assess (among others) penalties for the 
understatement of a taxpayer's liability (section 6694); the failure to 
furnish a copy or to sign the return (section 6695); the promotion of 
abusive tax shelters and gross valuation overstatements (section 6700); 
the aiding and abetting of the understatement of tax liability (section 
6701); and actions to enjoin certain conduct by preparers or promoters 
(sections 7407 and 7408).
    The government also regulates practitioners through the IRS's 
Office of Professional Responsibility (OPR). OPR enforces Circular 230 
which governs the practice by certified public accountants (CPAs), 
attorneys, and enrolled agents (EA) before the Service. OPR has the 
authority to discipline these Circular 230 practitioners through 
disbarment and other sanctions. One of the largest sources of referrals 
to OPR is through information referrals from IRS compliance 
personnel.\8\
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    \8\ The Internal Revenue Manual (IRM) requires IRS to refer all 
practitioners subject to section 6694 penalties to OPR.
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    While unlicensed preparers are not subject to Circular 230, they 
are subject to a number of civil penalties, including the section 6694 
understatement of taxpayer's liability penalty. We believe the recent 
modifications to section 6694, including the marked increase in the 
dollar amount of the penalty from $250 to a level of $1,000 or more--
should provide the Service with significant authority to regulate 
``unethical'' or incompetent unlicensed preparers.

Public Awareness Campaign

    The AICPA strongly supports the Service's annual news release of 
tips advising taxpayers how to choose a competent paid federal income 
tax return preparer. This publicity campaign receives wide coverage by 
U.S. newspapers and media outlets. It is an excellent foundation for 
any further efforts by the Service to educate the public about 
unethical and incompetent practices by preparers. The Service's current 
media plan is crafted in a very positive way; it provides general tips 
on picking a competent preparer without putting itself in the difficult 
and likely un-winnable position of choosing sides between preparers who 
are not regulated by Circular 230, as well as the differing 
constituencies currently regulated under Circular 230 (i.e., CPAs, 
attorneys, and enrolled agents).

Electronic Return Originator Application Process

    The AICPA recommends that Congress and the IRS review the current 
electronic return originator (ERO) application process. The ERO process 
significantly overlaps and may even duplicate any ``limited'' 
registration process to address unregulated tax return preparers. Under 
the current ERO application process, the IRS conducts a background 
check of principals and responsible officials affiliated with a tax 
return preparer's firm. This background check includes: (1) an FBI 
criminal background review; (2) a credit history check; and (3) an IRS 
records check with respect to the preparer and the firm's adherence to 
tax return and tax payment compliance requirements, including a review 
of any prior non-compliance under the IRS e-file program.
    In its September 2007 report on the ERO program, the Treasury 
Inspector General for Tax Administration (TIGTA) points out that 
certain inadequacies exist within the current IRS procedures for 
screening and monitoring EROs and that such inadequacies increase the 
risk to the public and to the Federal Government for potential losses 
due to unscrupulous e-file providers. The AICPA supports the 
implementation of new procedures with respect to EROs in order to 
mitigate any risks to the public and government; however, we believe 
the enactment of a wholly new tax return regulation regime (one that 
shares common administrative features to the current ERO program) will 
not likely reduce the risks associated with unscrupulous tax preparers. 
Instead, we believe it would be far more constructive (and resource 
efficient) to improve on and build onto the current ERO program, as 
opposed to implementing a largely duplicative regulatory-required 
administrative machine.\9\
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    \9\ The Treasury Inspector General for Tax Administration Report on 
``Better Screening and Monitoring of E-File Providers Is Needed to 
Minimize the Risk of Unscrupulous Providers Participating in the E-File 
Program,'' Reference No. 2007-40-176, September 19, 2007.

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Exception for CPAs, Attorney

    The AICPA continues to support language contained in S. 1219 that 
would require the IRS to, within one year of enactment, prescribe 
regulations that will regulate compensated return preparers not 
otherwise regulated under 31 USC 330 (the enabling legislation upon 
which Circular 230 is issued). Since they are already regulated by 
Circular 230, CPAs, attorneys, and EAs should be exempt from any new 
regulation regime imposed on currently unlicensed preparers. Previously 
proposed legislation has properly recognized that CPAs, attorneys, and 
EAs are already subject to regulation and professional standards 
imposed upon them by state boards of accountancy, state bars, court 
systems, and Circular 230, and we recommend that any proposal continue 
to include such exemption.
              Section 7216 Regulations
    The AICPA Tax Division has formed a task force to review the impact 
of TD 9375, final regulations released by Treasury and the IRS in 
January 2008, involving the disclosure and use of tax return 
information by tax return preparers under Internal Revenue Code section 
7216. According to Treasury and the IRS, the regulations are designed 
to ``strengthen taxpayers' ability to control their tax return by 
requiring that tax return preparers give specific information--to allow 
taxpayers to make knowing, informed, and voluntary decisions over the 
disclosure or use of their tax information by their preparer.'' The new 
(final) regulations have been issued as a follow-up to proposed 
regulations the Service released about two years ago.
    In our public comments dated March 8, 2006, the AICPA raised three 
primary concerns about the scope of the proposed regulations. First, we 
raised a concern about the extent to which the regulations fashioned 
``an entirely new consent regime for any return preparation activities 
involving parties located outside the borders of the United States. 
Second, our 2006 comments suggested that a civil penalty is a more 
practical mechanism for regulating a practitioner's everyday disclosure 
and use of taxpayer information, as opposed to reliance on a criminal 
statute like IRC section 7216.
    Our third concern, as expressed in our 2006 comments, involves tax 
preparation for U.S multinationals, non-U.S. multinationals, and U.S. 
Citizens (expatriates) located overseas. It is very typical for a tax 
professional located in the U.S. to consult with a tax professional 
located overseas in order to complete a business' tax return or an 
expatriate's Form 1040 tax return. A tax preparer should generally not 
be required to obtain consent from the taxpayer because the taxpayer 
anticipates that their tax information will be disclosed outside the 
United States. In this context, we stated we believe that adopting the 
current AICPA professional ethics rules regarding a member's 
responsibilities when outsourcing services to third-party service 
providers are a far more preferable way of dealing with professional 
services offered by accountants and attorneys across borders.
    Some of the major tenets or provisions of the TD 9375 (the final 
regulations) are as follows:

          Within appropriate limits and safeguards, the 
        regulations validate that the taxpayer continues to maintain 
        the ability and the right to direct a preparer to disclose most 
        tax return information as the taxpayer sees fit.
          The regulations clarify that return preparers may 
        disclose return information to the IRS for any purpose.
          The disclosure of tax return information to a 
        preparer located outside the U.S. is generally a permissible 
        disclosure if the taxpayer consents to such disclosure. 
        However, a preparer located inside U.S. is not permitted to 
        obtain consent to disclose a taxpayer's Social Security Number 
        to a preparer located outside the U.S. Instead, the U.S. based 
        preparer must redact or otherwise mask the taxpayer's SSN 
        before the return information can be disclosed to the overseas 
        preparer. While we are still evaluating this provision, our 
        initial assessment suggests that this provision will likely 
        prove extremely problematic to the many firms and practitioners 
        who have well established expatriate practices. As it currently 
        stands, this provision has the potential of injecting 
        additional cost, complexity and increased security risks that 
        actually run contrary to what we expect was the public policy 
        motivation behind the original ``redaction'' proposal.
          With respect to large corporations and other ``large 
        taxpayers,'' tax return preparers are permitted to obtain the 
        taxpayer's consent for the disclosure or use of return 
        information through the use of an engagement letter.
          The Service has released Rev. Proc. 2008-12, which 
        generally complements TD 9375 by providing guidance regarding 
        the content of certain consents to disclose and use tax return 
        information.

    Anticipating that the regulations could dramatically impact the 
office operations and procedures of tax return preparers, Treasury and 
IRS have established a January 1, 2009 effective date for the 
regulations, providing preparers one year to make any necessary changes 
in their professional practices. The AICPA is currently reviewing the 
final regulations to assess the impact on the tax return preparation 
practices of CPAs, and expects to meet with Treasury and IRS to obtain 
clarification of the scope of some of the provisions of the 
regulations.
    The section 7216 regulations will also cause the AICPA to assess 
the impact of these tax regulations on the AICPA's current professional 
ethics rules, particularly with respect to the outsourcing of tax 
return information to a location outside the U.S. The current AICPA 
rules, including Rules 102, 201, 202, and 301 of the Code of 
Professional Conduct, generally provide that prior to sharing 
confidential client information (such as a tax return) with a third-
party service provider, the AICPA member must inform the client, 
preferably in writing, that he or she may be using a third-party 
service provider when providing professional services to the client. In 
contrast to the AICPA professional ethics rules, Rev. Proc. 2008-12 
provides for a specific written consent (which must be signed by the 
client) before tax return information can be transmitted to the third-
party service provider.
    Treasury and the IRS have also released a notice of proposed 
rulemaking (REG-136596-07) in January 2008, requesting comments on 
whether a tax return preparer should effectively be prohibited from 
obtaining consent for the disclosure or use of tax return information 
in the solicitation of refund anticipation loans (RALs) for taxpayers. 
The AICPA is currently reviewing this proposed rule, particularly in 
light of the perceived usurious nature of RALs, and the potential 
negative impacts that RALs may have on promoting tax compliance.
    The AICPA will keep the Subcommittee on Oversight informed about 
the impact of the recently released (final) section 7216 regulations on 
tax preparation.
    Thank you for the opportunity to share these views with you.

                                 
                     Statement of Colleen M. Kelley

    Chairman Lewis, Ranking Member Ramstad, and distinguished members 
of the Subcommittee, I would like to thank you for allowing me to 
provide comments on the Administration's FY '09 budget request for the 
Internal Revenue Service (IRS). As President of the National Treasury 
Employees Union (NTEU), I have the honor of representing over 150,000 
federal workers in 31 agencies, including the men and women at the IRS.
IRS FY '09 Budget Request
    Mr. Chairman, the IRS and its employees represent the face of U.S. 
government to more American citizens than any other government agency. 
The IRS is responsible for helping all of America's taxpayers 
understand and meet their tax responsibilities and collects 96 percent 
of the revenues that fund the Federal Government. Without an adequate 
budget, the IRS cannot expect to continue providing taxpayers with top 
quality service and will be hampered in its effort to enhance taxpayer 
compliance and close the tax gap.
    And while acknowledging that IRS employees continue to provide 
world class customer service and are as efficient as ever in collecting 
taxes and enforcing tax law, the Administration continues to put forth 
insufficient and unrealistic budget requests that fail to allow the 
service to meet its customer service and enforcement challenges.
    Insufficient funding from Congress is not the problem. Over the 
past seven years, Congress has been supportive of IRS's efforts to 
improve service to taxpayers and increase enforcement staff and IRS has 
succeeded at the former. However, despite budgets that were almost 
fully funded, IRS enforcement staff is still down far below 1995 
levels.
    The decline in IRS personnel, particularly enforcement staff can be 
attributed to unrealistic budget requests which since 2003 have 
contemplated internally generated savings or ``efficiency savings'' to 
help fund proposed increased staffing for enforcement. For FY '09, the 
budget request identifies ``efficiency savings'' of more than $94 
million at the cost of almost 976 FTEs. If, as sometimes has been the 
case in previous years, IRS fails to realize all expected savings then 
the funds available for new enforcement personnel spending would be 
further reduced.
    And although it's widely recognized that additional funding for 
enforcement provides a great return on the investment, the IRS has 
repeatedly told Congress that the IRS does not need any additional 
funding above the President' budget request.
    Employee productivity is not the issue. Despite the significant 
decline in enforcement staff over the past ten years, enforcement 
revenue has increased significantly reaching $59.2 billion in 2007, up 
from $48.7 billion in 2006 and an increase of $46 billion since 2000. 
The $59.2 billion in collections in 2007 represents a 5.6 to 1 return 
on investment for all IRS activities.
    Yet, between 1995 and 2007, the total number of employees has 
shrunk from 114,064 to 86,638. Even more alarming is that during that 
period, revenue officers and revenue agents--two groups critical to 
reducing the tax gap--have shrunk by 33 and 20 percent respectively. 
Revenue officers went from 8,139 to 5,468 and revenue agents fell from 
16,078 to 13,026. These drastic cuts have come at a time when the IRS 
workload has increased dramatically. According to IRS's own annual 
reports and data, taxpayers filed 114.6 million returns in 1995. After 
a steady annual climb, eleven years later, the Service saw 134.4 
million returns filed. In addition, between 1997 and 2007, the number 
of individual tax returns with $100,000 in reported income, which are 
generally more complex returns, increased by 103 percent.
    Unfortunately, instead of recognizing that the dramatic cuts to the 
IRS workforce are straining the ability of IRS employees to handle the 
increasing workload, the IRS has continued to reduce its workforce. 
Further exacerbating the dire staffing situation at the Service is the 
aging of the IRS workforce. Approximately 4,000 of its employees are 
retiring annually presenting the Service with the difficult challenge 
of replacing a large portion of its workforce each year and the 
institutional knowledge they take with them. These retirements of some 
of the Services' most experienced personnel will only further stress 
the current IRS workforce already straining under a rising workload.
    Amazingly, IRS efforts to reduce the overall workforce have 
targeted some of the Service's most productive employees. These include 
the recent re-organization of the Estate and Gift Tax Program which 
sought the elimination of 157 of the agency's 345 estate and gift tax 
attorneys--almost half of the agency's estate tax lawyers--who audit 
some of the wealthiest Americans. The Service pursued this drastic 
course of action despite internal data showing that estate and gift 
attorneys are among the most productive enforcement personnel at the 
IRS, collecting $2,200 in taxes for each hour of work. It is difficult 
to understand why the IRS sought the elimination of key workforce 
positions in an area that could produce significant revenue to the 
general treasury.
    In addition, the Service continues to move forward with its plan to 
close five of its ten paper tax return submission facilities by 2011. 
The IRS originally sought the closings of the five paper return 
submission centers due to the rise in the use of electronic filing (e-
filing) and in order to comply with the IRS Restructuring and Reform 
Act of 1998 (RRA 98) which established a goal for the IRS to have 80 
percent of Federal tax and information returns filed electronically by 
2007. But the IRS recently reported that in 2007 just 57 percent of 
Federal tax returns were filed electronically and has previously 
acknowledged that it is getting harder to convert additional taxpayers 
to e-filing as those might convert most readily have already done so.
    The continued slow migration of taxpayers to e-filing recently 
caused the IRS Oversight Board to call on Congress to extend the 80 
percent deadline to 2012 in their recent report to Congress on e-
filing.
    In addition, while the IRS has stated that it will receive millions 
of dollars in cost savings as a result of the paper submission 
consolidation effort, an August 2007 report by the Treasury Inspector 
General for Tax Administration (TIGTA) found that the agency's business 
decision to consolidate sites did not even include a cost-benefit 
analysis (TIGTA Report Number: 2007-40-165). Furthermore, the report 
found that the IRS had not adequately updated or monitored financial 
information on the personnel costs of consolidations and had included 
savings not attributable to site consolidation in some of its analyses. 
What is most disturbing is that while the IRS acknowledged some of the 
assumptions used to determine the consolidation plan may have changed, 
they refused to complete a cost-benefit analysis to determine if the 
existing plan is optimal or if alternatives need to be considered.
    Mr. Chairman, while overall use of e-filing may be on the rise, it 
is clear that the number of taxpayers opting to use this type of return 
is not increasing as rapidly as the IRS had originally projected. 
Combined with the fact that the IRS consolidation strategy rests on an 
incomplete business plan which did not include any type of cost-benefit 
analysis, NTEU believes that the IRS should immediately postpone 
further site consolidations until a comprehensive cost-benefit analysis 
can be completed to ensure that the existing plan is optimal in terms 
of cost savings and benefits.
    It is clear that drastic reductions in some of the agency's most 
productive tax law enforcement employees directly contradict the 
Service's stated enforcement priority to discourage and deter non-
compliance. In addition, we believe these staffing cuts have greatly 
undermined agency efforts to close the tax gap which the IRS recently 
estimated at $345 billion. As Nina Olson, the National Taxpayer 
Advocate noted, this amounts to a per-taxpayer ``surtax'' of some 
$2,000 per year to subsidize noncompliance. And while the agency has 
made small inroads and the overall compliance rate through the 
voluntary compliance system remains high, much more can and should be 
done. NTEU believes that in order to close the tax gap and handle a 
rising workload, the IRS needs additional employees on the frontlines 
of tax compliance and customer service. In addition, we believe 
Congress should establish a dedicated funding stream to provide 
adequate resources for those employees.

NTEU Staffing Proposal

    In order to address the staffing shortage at the IRS, NTEU believes 
the workforce should be gradually increased to its pre-1996 levels. 
Specifically, we support a 3 percent annual net increase in staffing 
(roughly 2,600 positions per year) over a five-year period to gradually 
rebuild the depleted IRS workforce to its pre-1996 levels from its 
current level of 86,638. Because it takes time and careful management 
to hire, train, and deploy qualified professional staff, consistent but 
modest annual increases are necessary. A similar idea was proposed by 
former IRS Commissioner Charles Rossotti in a 2002 report to the IRS 
Oversight Board. In the report, Rossotti quantified the workload gap in 
non-compliance, that is, the number of cases that should have been, but 
could not be acted upon because of resource limitations. Rossotti 
pointed out that in the area of known tax debts, assigning additional 
employees to collection work could bring in roughly $30 for every $1 
spent. The Rossotti report recognized the importance of increased IRS 
staffing noting that due to the continued growth in IRS' workload 
(averaging about 1.5 to 2.0 percent per year) and the large accumulated 
increase in work that should be done but could not be, even aggressive 
productivity growth could not possibly close the compliance gap. 
Rossotti also recognized that for this approach to work, the budget 
must provide for a net increase in staffing on a sustained yearly basis 
and not take a ``one time approach.''
    Adding staff to handle an increasing workload at the IRS is not a 
new concept. In its 2001 budget request, IRS asked for funding for the 
Staffing Tax Administration for Balance and Equity program (STABLE), an 
initiative aimed at restoring IRS staffing to mid-1990s levels and 
strengthening the Service's tax compliance and customer service 
functions. The STABLE initiative envisioned hiring nearly 4,000 new 
employees to help increase compliance and improve customer service. The 
proposal sought to boost staff in Field Offices, where IRS employees 
provide direct, in-person service to taxpayers, and Service Center/Call 
Sites, where service is typically provided via telephone and 
correspondence. Hiring requirements for the Field Offices was to be 
determined based on projected workload in the office's geographic area, 
and existing staff capabilities. Conversely, Service Center/Call Site 
workload would be planned on a nationwide basis due to the nature of 
the work, and staffing allocations based upon physical space and local 
labor market conditions around the center in question.
    Although such a staffing initiative would require a substantial 
financial commitment, the potential for increasing revenues, enhancing 
compliance and shrinking the tax gap makes it very sound budget policy. 
One option for funding a new staffing initiative would be to allow the 
IRS to hire personnel off-budget, or outside of the ordinary budget 
process. This is not unprecedented. In fact, Congress took exactly the 
same approach to funding in 1994 when Congress provided funding for the 
Administration's IRS Tax Compliance Initiative which sought the 
addition of 5,000 compliance positions for the IRS. The initiative was 
expected to generate in excess of $9 billion in new revenue over five 
years while spending only about $2 billion during the same period. 
Because of the initiative's potential to dramatically increase federal 
revenue, spending for the positions was not considered in calculating 
appropriations that must come within annual caps.
    A second option for providing funding to hire additional IRS 
personnel outside the ordinary budget process could be to allow IRS to 
retain a small portion of the revenue it collects. The statute that 
gives the IRS the authority to use private collection companies to 
collect taxes allows 25 percent of collected revenue to be returned to 
the companies as payment, thereby circumventing the appropriations 
process altogether. Clearly, there is nothing magical about revenues 
collected by private collection companies. If those revenues can be 
dedicated directly to contract payments, there is no reason some small 
portion of other revenues collected by the IRS could not be dedicated 
to funding additional staff positions to strengthen enforcement.
    While NTEU agrees with IRS' stated goal of enhancing tax compliance 
and enforcement, we don't agree with the approach of sacrificing 
taxpayer service in order to pay for additional compliance efforts. 
That is why we were disappointed to see that the President's proposed 
budget calls for a $31 million cut in funding for Taxpayer Assistance 
Center (TACs) at a cost of 262 FTEs. NTEU believes providing quality 
services to taxpayers is an important part of any overall strategy to 
improve compliance and that reducing the number of employees dedicated 
to assisting taxpayers meet their obligations will only hurt those 
efforts. It is clear that IRS employees are continuing to provide 
quality customer service to American taxpayers. 2007 year end data from 
the IRS shows that IRS' customer assistance centers met the 82 percent 
level of service goal, with an accuracy rate of 91 percent for tax law 
questions. And while these numbers show that employees providing 
taxpayer services are helping taxpayers understand and meet their tax 
responsibilities, more can and should be done.
    Mr. Chairman, in order to continue to make improvements in taxpayer 
services while handling a growing workload and increasing collections, 
it is imperative to reverse the severe cuts in IRS staffing levels and 
begin providing adequate resources to meet these challenges. With the 
future workload only expected to continue to rise, the IRS will be 
under a great deal of pressure to improve customer service standards 
while simultaneously enforcing the nation's tax laws. NTEU strongly 
believes that providing additional staffing resources would permit IRS 
to meet the rising workload level, stabilize and strengthen tax 
compliance and customer service programs and allow the Service to 
address the tax gap in a serious and meaningful way.

Private Tax Collection

    Mr. Chairman, as stated previously, if provided the necessary 
resources, IRS employees have the expertise and knowledge to ensure 
taxpayers are complying with their tax obligations. That is why NTEU 
continues to strongly oppose the Administration's private tax 
collection program. NTEU believes this misguided proposal is a waste of 
taxpayer's dollars, invites overly aggressive collection techniques, 
jeopardizes the financial privacy of American taxpayers and may 
ultimately serve to undermine efforts to close the tax gap.
    NTEU strongly believes the collection of taxes is an inherently 
governmental function that should be restricted to properly trained and 
proficient IRS personnel. When supported with the tools and resources 
they need to do their jobs, there is no one who is more reliable and 
who can do the work of the IRS better than IRS employees.
    As you know, in September 2006, the IRS began turning over 
delinquent taxpayer accounts to private collection agencies (PCAs) who 
are permitted to keep up to 24 percent of the money they collect. NTEU 
strongly believes the collection of taxes is an inherently governmental 
function that should be restricted to properly trained and proficient 
IRS personnel.
    NTEU believes this misguided proposal is a waste of taxpayer's 
dollars, invites overly aggressive collection techniques, jeopardizes 
the financial privacy of American taxpayers and may ultimately serve to 
undermine efforts to close the tax gap.
    While supporters of the program and IRS officials claim that the 
use of private collectors is a sensible and cost efficient way to help 
collect delinquent taxes, recent data from the IRS makes clear that the 
program is not working. According to the IRS, in FY '07, the PCAs 
brought in just $31 million in gross revenue, far below their original 
projections of up to $65 million. After deducting commission payments 
to the PCAs, the true net revenue from PCA (non-IRS) collection 
activity was just $20 million. Therefore, after spending $71 million in 
start up and ongoing maintenance costs through the end of FY '07, the 
IRS private tax collection program lost $50 million.
    According to the National Taxpayer Advocate's 2007 Annual Report to 
Congress, the dismal performance of the private collectors resulted in 
the IRS revising its original ten-year projection for the program. The 
report notes that as recently as last May, the IRS projected the 
program would bring in between $1.5 and $2.2 billion in gross revenue 
(before commissions) over the next ten years. To meet this projection 
the IRS would need to average $185 million per year. The PCA initiative 
only collected $31 million in gross revenue for FY 2007 and is 
projected to collect only $23 million to $30 million for FY 2008.
    NTEU also believes that sky high commission payments to the private 
contractors for work on the easiest to collect cases is unjustified and 
unnecessary. Under current contracts, private collection firms are 
eligible to retain 21% to 24% of what they collect. The legislation 
authorizing the program actually allows PCAs to retain up to 25% of 
amounts collected. These commission rates were never put up for 
competition. Before the initial bid solicitations went out, the IRS set 
commission rates at 21 to 24 percent of the revenue collected by 
contractors, denying bidders an opportunity to make offers on terms 
that would have resulted in the IRS getting a greater share of the 
collected revenue. Consequently, one of the companies that lost its bid 
for a contract filed a protest with GAO and noted in its bid protest 
that ``offerors were given no credit for proposing lower fees than the 
'target' percentages recommended by the IRS.''
    The problem of excessive commission rates was recently addressed by 
Congress in legislation overhauling the Department of Education's 
student loan program, which the IRS has consistently held up as a model 
for the IRS private collection program. Amid charges that student aid 
lenders have engaged in abusive and potentially illegal collection 
tactics including charging excessively high collection fees, coercing 
consumers into payment plans they could not afford and misrepresenting 
themselves as Department of Education employees, the House and Senate 
approved H.R. 2669, the ``Higher Education Access Act of 2007,'' which 
lowers from 23 percent to 16 percent the amount of recovered money that 
private guaranty agencies contracted by the government can retain on 
defaulted loans.
    Mr. Chairman, in addition to being fiscally unsound, the idea of 
allowing PCAs to collect tax debt on a commission basis also flies in 
the face of the tenets of the IRS Restructuring and Reform Act of 1998 
(RRA 98) which specifically prevents employees or supervisors at the 
IRS from being evaluated on the amount of collections they bring in. 
But now, the IRS has agreed to pay PCAs out of their tax collection 
proceeds, which will clearly encourage overly aggressive tax collection 
techniques, the exact dynamic the 1998 law sought to avoid.
    The fear that allowing PCAs to collect tax debt on a commission 
basis would lead to contractor abuse was realized when the IRS recently 
confirmed that that the agency had received more than five dozen 
taxpayer complaints against the PCAs, including violations of the 
taxpayer privacy laws under Code section 6103. At least one of those 
complaints was confirmed by an IRS Complaint Panel to be a serious 
violation of law. In addition, penalties totaling $10,000 have been 
imposed by the IRS on the PCAs for taxpayer violations. In one 
instance, private collectors made 150 calls to the elderly parents of a 
taxpayer after the collection agency was notified he was no longer at 
that address. And one of the three private contractors was dropped by 
the IRS for dubious practices despite the Service's previous assurance 
that its oversight would prevent abuse.
    Mr. Chairman, NTEU is not alone in our opposition to the private 
tax collection program. Opposition to the IRS tax debt collection 
program has also been voiced by a growing number of major public 
interest groups, tax experts, two former IRS Commissioners as well as 
the National Taxpayer Advocacy Panel, whose members are appointed by 
the Internal Revenue Service (IRS) and the Treasury Department. In 
addition, the National Taxpayer Advocate, an independent official 
within the IRS previously identified the IRS private tax collection 
initiative as one of the most serious problems facing taxpayers and 
recently renewed her prior call for Congress to immediately repeal the 
IRS' authority to outsource tax collection work to private debt 
collectors.
    Opposition to the program has also been growing within Congress. 
Since granting IRS the authority to use PCAs in the American Jobs 
Creation Act of 2004, the House of Representatives, with bi-partisan 
support, has twice passed language prohibiting the IRS from moving 
forward with its private collection initiative. In addition, last 
session, the House overwhelmingly approved two separate tax bills (H.R. 
3056, the ``Tax Collection Responsibility Act of 2007'' & H.R. 3996, 
the ``Temporary Tax Relief Act of 2007'') that contain language that 
would repeal IRS' authority to use private debt collectors to pursue 
tax debts.
    In the Senate, stand alone legislation (S. 335) introduced by 
Senator Byron Dorgan (D-ND) that would force the IRS to immediately and 
permanently suspend its plan to outsource part of its tax debt 
collection responsibilities to PCAs and prohibit the use of any IRS 
funds for that purpose has 24 co-sponsors.
    Mr. Chairman, instead of rushing to privatize tax collection 
functions which jeopardizes taxpayer information, reduces potential 
revenue for the Federal Government and undermines efforts to close the 
tax gap, NTEU believes the IRS should increase compliance staffing 
levels at the agency to ensure that the collection of taxes is 
restricted to properly trained and proficient IRS personnel.
    While proponents of the program have argued that the IRS does not 
currently have the infrastructure or technological capabilities to work 
the type of cases being turned over to the private companies, the facts 
say otherwise. The IRS already has a significant collection 
infrastructure with thousands of trained employees, including fourteen 
Automated Collection System (ACS) sites which allow the IRS to contact 
taxpayers by telephone and collect delinquent taxes.
    The ACS function is a critical Collection operation, collecting 
nearly $1.49 million per employee per year. The IRS itself has 
analogized the use of private collectors to the ACS, where IRS 
collection representatives interact with taxpayers on the telephone. 
But unlike the private collectors, ACS personnel are able to analyze 
financial statement information, research assets, enter into 
installment agreements, make currently not collectible determinations, 
and can take lien and/or levy enforcement actions. ACS employees also 
receive training that is far more comprehensive and rigorous than that 
of the private collectors. In addition, these employees undergo 
mandatory annual training on topics such as confidentiality and privacy 
of taxpayer information, ethics awareness, taxpayer rights and computer 
security.
    Unfortunately, inadequate staffing at ACS sites has prevented the 
IRS from using its current systems to proactively contact taxpayers by 
telephone to resolve delinquent accounts. The need for the IRS to 
expand ACS' use of outbound calls has been recognized by IRS management 
and at least two recent internal IRS study groups have recommended 
making more outbound calls as a way to make the ACS operation more 
effective and efficient.
    The IRS requested $7.35 million to run the private collection 
program in FY '08. We believe this $7.35 million could fund roughly 98 
additional ACS employees that could return more than $146 million to 
the Treasury annually. By comparison, the IRS is now projecting the 
PCAs to bring in between just $23 million to $30 million in gross 
revenue in FY '08, far less than its original estimate of $88 million.
    NTEU believes that increasing the number of ACS personnel would 
allow the IRS to maximize its ability to proactively resolve delinquent 
accounts by contacting taxpayers directly. This would also help ensure 
that the high level of customer service to those taxpayers who call the 
ACS seeking account resolution is preserved. The IRS has acknowledged 
that ACS employees are already performing admirably noting that in 
2006, ACS customer service and quality ranged between 89.5 to 99.5 
percent (pg. 54--IRS response to Olson '06 Report to Congress). These 
exceptional ratings are all the more impressive when you consider ACS 
employees generally work on much more complex and often contentious 
cases than those being worked by the private collectors and that the 
total number of cases worked by ACS employees dwarfs those worked by 
the private collectors.
    Mr. Chairman, NTEU understands and commends efforts to ensure that 
all taxpayers pay their fair share of taxes. Without a doubt, rank and 
file IRS employees are committed to achieving this goal in the most 
cost-effective manner while providing a high level of customer service 
to American taxpayers. But the facts make clear that the use of private 
tax collection companies is not in the best interest of American 
taxpayers, could potentially undermine future efforts to close the tax 
gap, and should be terminated immediately.

Conclusion

    It is indisputable that the IRS workforce is getting mixed signals 
regarding its value to the mission of the Service and the level of 
workforce investment the Service is willing to make. Without a doubt, 
the frontline employees are committed to working with management to 
increase efficiency and customer satisfaction.
    But NTEU believes that until the Administration begins proposing 
realistic budget requests for the Service, reverses drastic staffing 
cuts that have targeted some of the IRS' most productive employees and 
ceases its' reliance on outside contractors to handle inherently 
governmental activities such as the collection of taxes, the agency's 
ability to fulfill its tax enforcement and customer service missions 
will be severely challenged.

                                 
                     Statement of Gerald E. Scorse

    Honorable Chairman Lewis and other members of the Subcommittee:
    In the United States in 2008, the federal income tax on the wages 
of average Americans is higher than the tax on long-term capital gains.
    It seems to me inequitable on its face to tax earned income (wages) 
at a higher rate than unearned income (capital gains). In addition, the 
standard rationale for this preferential tax treatment is demonstrably 
false; propaganda is its only reason for being.
    The following article addresses this tax inequity. The article will 
also remind the Subcommittee of President Ronald Reagan's Tax Reform 
Act of 1986, and how it addressed the very same issue.
    I think you'll be interested.
    Tax Policy Loves Investors, Squeezes Wage Earners
    Over the last ten years, nobody has gotten more love from 
Washington than investors. It's time to stop and ask if the love is 
misplaced.
    Investor-love settled in on the Potomac in 1997, when President 
Clinton cut the tax on long-term capital gains from 28% to 20%. In 
2003, President Bush kept the love coming from the GOP side. He took 
another 5% off the capital gains rate and slashed the levy on corporate 
dividends as well.
    All this love has worked splendidly for the loved. The tax on long-
term gains and qualified dividends has been driven down to 15%. That's 
a 70-year low, and it's less than the rate on the wages of average 
Americans. As the multi-billionaire Warren Buffett abashedly confessed, 
the secretaries in his office now pay taxes at a higher rate than he 
does.
    Buffett was quickly called out for coming up short on investor-
love. Maria Bartiromo, an anchor on the business channel CNBC, labeled 
his remark ``misleading''.
    Misleading? Hardly, compared to the claim that buyers of stocks 
drive the U.S. economy by growing jobs and new businesses. If so, 
investor-love might be deserved. Let's look in on the market and 
analyze what takes place.
    Billions of shares change hands daily on the major exchanges. On 
any given day, only a minute fraction of those shares grows anything. 
Days can pass without a bona fide investment; the sounds you hear are 
aftermarket noise and the closing bell.
    In short, ``investors'' do not grow jobs (except in the financial 
sector). The seed money that nourishes start-ups and expansions comes 
from a tiny subset of real investors; the rest of us merely place our 
bets at the tables down on Wall Street.
    What's the problem with investor-love? First, Warren Buffett has it 
right: it's wrong for income from work to be taxed at a higher rate 
than income from wealth. Second, investor-love has no reason for being; 
it's a tax policy shaped by propaganda.
    Lawmakers might better follow the policy shaped by Ronald Reagan.
    Reagan's 1981 tax cuts tilted toward the wealthy and made him a 
supply-side icon. But Reagan could also be fair, and fairness would 
permeate his last fiscal legacy. In the landmark Tax Reform Act of 
1986, nearly three years in the drafting, Reagan again cut marginal 
rates but raised taxes sharply on investors.
    The reform ended preferential tax treatment of capital gains. The 
tax rate on long-term gains leapt from 20% to 28%, nearly double the 
current levy. Higher-income taxpayers could pay as much as 31% on their 
gains.
    Reagan hailed the bill as ``the dream of America's fair-share tax 
plan.'' He also called it ``the best job creation program ever to come 
out of the Congress''; hyperbole, but evidence that he expected no 
growth falloff from higher capital gains taxes. The new 28% rate held 
until '97, when a GOP-controlled Congress and a Democratic president 
fell under the spell of investor-love.
    Republican presidential candidate John McCain stays miles away from 
the fact that Reagan equalized taxes on income from wages and income 
from wealth. But Barack Obama (and John Edwards, before dropping out) 
have pointed to it with relish.
    In their bones they know what's fair, just like The Gipper did.

                                 
                    Statement of IRS Oversight Board

    The IRS Oversight Board thanks Chairman Lewis and Ranking Member 
Ramstad for the opportunity to submit its views on the Internal Revenue 
Service's operations and its FY2009 budget. Created as part of the IRS 
Restructuring and Reform Act of 1998 (RRA 98), the Oversight Board's 
responsibilities include overseeing the IRS in its administration, 
management, conduct, direction and supervision of the execution and 
application of the internal revenue laws. The Board is also responsible 
for ensuring that the IRS' organization and operations allow the agency 
to carry out its mission. To this end, the Board was given specific 
responsibilities for reviewing and approving annual budgets and 
strategic plans.
    Given the mission of the Board to provide governance over the IRS, 
it is most appropriate for the Board to focus its comments on the 
progress that IRS operations have made since the passage of RRA 98, the 
strategic challenges which the IRS still faces, and its recommendations 
for the IRS' FY2009 budget.
IRS Operations and Challenges
    It is now almost a decade since the enactment of the IRS 
Restructuring and Reform Act of 1998 and the IRS Oversight Board is 
pleased to report that the IRS has made steady progress in meeting the 
letter and spirit of that landmark legislation.
    Over the past nine years, the IRS has reorganized and modernized 
itself to think strategically and operate with a customer-centric 
focus. It is becoming a performance-driven, results-oriented 
organization that provides taxpayers with quality service through a 
variety of channels, including Internet, telephone, and in-person.
    It is doing a better and more efficient job of enforcing the tax 
laws and collecting the taxes owed the Federal Government. The IRS has 
improved its ability to interact with taxpayers electronically and is 
now delivering benefits to all types of taxpayers. For example, the IRS 
can now accept electronically many types of returns including all the 
major tax forms and offers more Internet-based self-serve options than 
ever before.
    The Oversight Board praises the IRS for this improvement. The IRS 
has demonstrated to its skeptics that it can change for the better. 
However, it still faces many challenges and must not become complacent. 
The existence of an annual $290 billion net tax gap, the difference 
between what is legally owed and what is actually paid, is a stark 
reminder that improvements in tax administration are still needed.
    The IRS should not settle for good performance--it must set its 
sights on great performance. In the Board's view, taking that important 
step will require increased management focus and potential ``breakout'' 
performances in four key areas: (1) customer service, (2) enforcement, 
(3) human capital, and (4) information technology.
    To take customer service to the next level, the IRS must do more 
than respond to taxpayer inquires. It must understand taxpayers' needs 
better through new research and implement education and outreach 
services tailored to the needs of specific groups of taxpayers. Great 
service requires that the IRS proactively provide taxpayers with 
information that helps them easily understand their tax obligations, 
provides more self-service applications, simplifies information 
sharing, and facilitates electronic filing. On a limited basis, the IRS 
has demonstrated that it can form community partnerships that perform 
effective outreach to taxpayers, such as the Volunteers in Tax 
Assistance (VITA) program. Such programs should be expanded.
    Through modern electronic tax administration (ETA) services, the 
IRS can provide more opportunities for taxpayers and tax professionals 
to interact quickly, efficiently and accurately with the IRS. Great 
service will entail a broader use of secure electronic interactions 
over the Internet between taxpayers, practitioners and the IRS, such as 
account management and issue resolution, than is offered today. These 
capabilities are much along the lines of what large financial 
institutions already offer their customers.
    The IRS must apply the results of its research program to increase 
the effectiveness and efficiency of its enforcement activity. In 
selecting taxpayers for audits, the IRS should have a high degree of 
confidence that an audit is necessary. High no-change rates for audits 
place unnecessary burdens on taxpayers and waste IRS resources. The 
Oversight Board expects that the IRS will use the results of the 
National Research Program (NRP) to focus its audit programs where they 
will be the most effective. Collection cases must also be worked as 
effectively as possible, with cases assigned to different treatment 
streams based on the optimum assignment of resources for the expected 
return and impact on compliance.
    Today, enforcement is a major part of the IRS' mission but does not 
dwarf customer service as it did in the early--to mid-1990s. In this 
regard, the IRS is to be commended for doing a better job enforcing the 
Tax Code in a manner consistent with RRA 98's safeguards. As customer 
service improved, more resources were appropriately shifted to support 
enforcement activities. Key performance measures for enforcement, such 
as audits of individuals with higher incomes are up and enforcement 
revenues have increased, while taxpayer service measures such as level 
of service have remained stable.
    Through its annual taxpayer attitude survey, the Board has also 
found that 94 percent of taxpayers believe it is every American's civic 
duty to pay their fair share of taxes. Around 86 percent cite personal 
integrity as a principal factor influencing whether they report and pay 
their taxes honestly, while only 54 percent of taxpayers indicate they 
are influenced by fear of an audit.
    The Board encourages the IRS to find ways to leverage this strong 
support for voluntary tax compliance and personal integrity and 
reinforce the message that tax compliance is a ``social norm,'' much 
like obeying laws against shoplifting or drunk driving. The Board is 
particularly concerned that this message be reinforced with America's 
young people. Previous surveys have shown they are more willing to 
accept cheating ``a little here or there'' on their taxes.
    Another area that must be addressed for the IRS to achieve great 
performance is workforce development. Employees are the IRS' greatest 
asset but the aging of the workforce represents an enormous challenge; 
approximately 4,000 of its employees are retiring annually. Many of 
them possess unique skills and institutional knowledge that are not 
captured when they leave, and the IRS has found it difficult to recruit 
a sufficient number of skilled employees to replace them.
    The IRS must devote more attention to the total career development 
of its workforce, from hiring to retiring. It should emphasize career 
development throughout the entire ``work life'' of employees. It should 
recruit more like the private sector and employ proven ``best 
practices'' to improve employee recruitment, retention, training, and 
succession planning. Employees should have clearly defined career 
development opportunities throughout their employment.
    More progress must also be made in the IRS' efforts to modernize 
its information technology (IT). The IRS has made slow but steady 
progress in replacing its antiquated IT systems. The most noticeable 
improvements to taxpayers include electronic filing of tax returns and 
Internet self-service tools such as ``Where's my Refund?'', ``Donde 
esta mi reembolso?'', and Practitioner e-Services. Infrastructure 
improvements have also allowed the IRS to improve toll-free telephone 
level of service through more effective call routing. However, IRS 
performance is still hampered by archaic IT systems used for central 
record-keeping that update taxpayer account information on a weekly 
instead of a daily basis.
    The IRS will not be able to achieve great performance until it can 
update its central records on a daily basis, much like any other modern 
financial institution. Such a capability is needed to modernize both 
its customer service and enforcement functions. Daily updating of 
records will provide current information to taxpayers, tax 
professionals, and IRS employees, improve IRS efficiency, and reduce 
taxpayer burden.
    It is critical that the IRS make real progress each year to reach 
its three strategic goals. However, it is also vitally important that 
specific quantitative measures for these long-term goals be set to 
follow the IRS' performance in key areas. In March 2007, the Oversight 
Board approved five long-term measures with target values and requested 
the IRS to identify an additional set of measures for employee 
engagement and customer satisfaction, along with a measure to assess 
progress in modernizing its technology systems. The Board is pleased to 
see the IRS make progress in measuring the achievement of its strategic 
goals.

FY2009 IRS Budget Recommendations

    One of the IRS Oversight Board's most important statutory 
responsibilities is to ensure that the IRS' budget request supports the 
agency's annual and long-term strategic plans. A budget request is more 
than a mechanism for appropriating funding; it's also a plan and a 
commitment. Not only does a proposed budget request funding, it also 
describes the activities the IRS will perform, how those activities 
align with the long-range strategic plan, and identifies measures to 
evaluate the expected results. A performance budget is more than money, 
it's a performance management tool, and properly used, enhances the 
ability of the IRS to meet its short-term performance targets and the 
agency's three strategic plan goals: (1) improve customer service; (2) 
enhance enforcement of the tax law; and (3) modernize the IRS through 
its people, processes and technology.
    Achieving these three strategic goals will enable the IRS to 
address the most serious problem facing tax administration today--
reducing the tax gap, the difference between what taxpayers should be 
paying and what they actually pay in a timely manner. The size of the 
tax gap is significant, with the IRS' most recent estimates placing it 
at approximately $290 billion (net) annually, based on 2001 tax 
returns. The imperative for closing the tax gap has never been greater. 
An annual net tax gap of $290 billion averages to about $2,200 per 
individual tax return, an enormous burden for the average taxpayer, and 
one that should not be tolerated by honest taxpayers. It is far too 
large to be dismissed lightly--it imposes a large burden on all 
taxpayers and undermines respect for tax administration.
    The IRS Oversight Board recommends an IRS FY2009 budget of $11.737 
billion, an increase of $845 million over the enacted FY2008 amount of 
$10.892 billion, as summarized in Table 1.

Table 1: IRS Oversight Board's Recommended FY2009 IRS Budget

    (all dollars in millions)

------------------------------------------------------------------------

------------------------------------------------------------------------
FY2008 Enacted Appropriation                                 $10,892.38
------------------------------------------------------------------------
    Base Adjustments                                            $262.62
------------------------------------------------------------------------
    Savings/Reinvestments                                      ($61.65)
------------------------------------------------------------------------
FY2008 Base Budget                                           $11,093.35
------------------------------------------------------------------------
Initiatives
------------------------------------------------------------------------
Enforcement
------------------------------------------------------------------------
Reduce the Tax Gap for Small Business/Self-Employed              $120.7
------------------------------------------------------------------------
Increase Reporting Compliance of Domestic Taxpayers               $16.4
 with Offshore Activity
------------------------------------------------------------------------
Reduce the Tax Gap for Large Businesses                           $52.0
------------------------------------------------------------------------
Expand Federal Payment Levy Program                               $17.3
------------------------------------------------------------------------
Reduce Tax Fraud                                                  $72.2
------------------------------------------------------------------------
Enhance Financial Investigations of Narcotics                     $24.0
 Trafficking Organizations
------------------------------------------------------------------------
Enhance BSA Compliance Program                                     $3.4
------------------------------------------------------------------------
Address Complexity through Up-Front Guidance,                      $8.9
 Education, and Correction Opportunities
------------------------------------------------------------------------
Expand Examination of Tax Exempt Organizations                    $28.6
------------------------------------------------------------------------
Increase Tax Court Litigation                                      $5.8
------------------------------------------------------------------------
Implement New Procedural Tax Court Requirements                    $3.4
------------------------------------------------------------------------
Improve Tax Gap Estimates, Measurement, and                       $11.1
 Detection of Non-Compliance
------------------------------------------------------------------------
Increase Monitoring of Preparers                                   $2.5
------------------------------------------------------------------------
Total Enforcement                                                $366.3
------------------------------------------------------------------------
Taxpayer Services                                           Dollars (M)
------------------------------------------------------------------------
Maintain Processing of Critical Pension Plan Returns               $6.3
------------------------------------------------------------------------
Research Taxpayer Burden, Complexity, and Compliance              $10.0
------------------------------------------------------------------------
Expand Volunteer Income Tax Assistance and Low                    $10.0
 Income Tax Clinics
------------------------------------------------------------------------
Total Service                                                     $26.3
------------------------------------------------------------------------
Infrastructure/IT                                           Dollars (M)
------------------------------------------------------------------------
Enhance IT Security                                               $16.7
------------------------------------------------------------------------
Enhance Contingency Planning and Disaster Recovery                 $8.7
------------------------------------------------------------------------
Implement Security Auditing                                        $6.8
------------------------------------------------------------------------
Redesign Form 990 for Tax Exempt Organizations                    $23.5
------------------------------------------------------------------------
Preserve Quality IT Workforce in Applications                     $36.8
 Development
------------------------------------------------------------------------
Build Alternate Power Supply for the Computing                    $11.0
 Centers
------------------------------------------------------------------------
Infrastructure/IT Initiatives Subtotal                           $103.5
------------------------------------------------------------------------
Business Systems Modernization (BSM)                             $142.4
------------------------------------------------------------------------
HITCA                                                             $5.50
------------------------------------------------------------------------
Total Initiatives                                               $644.00
------------------------------------------------------------------------
FY2009 Budget Request                                        $11,737.35
------------------------------------------------------------------------
FY2009 Request Increase over FY2008 Base                        $844.97
------------------------------------------------------------------------
FY2009 President's Request for IRS                           $11,361.51
------------------------------------------------------------------------
Increase Over President's Budget Request                         $375.8
------------------------------------------------------------------------


    The recommended budget takes a long-term view of IRS needs. Despite 
the severity of the tax gap, the Board believes such a view is both 
warranted and needed. In submitting its FY2009 budget recommendations 
to the Treasury Department in June 2007, the Board identified increased 
funding for Business Systems Modernization (BSM), security, 
infrastructure, and research as high priorities. These initiatives 
offer the best opportunity to reduce the tax gap in the long term.
    By following this approach, the Board's recommended budget 
maintains balance at its core: enforcement, taxpayer service, business 
systems modernization, and employee development must be adequately 
funded for the IRS to succeed in all parts of its mission and to ensure 
the long--term health of our tax administration system.
    The Board's recommended IRS budget compares to the President's 
request of $11.361 billion, an increase of $469 million over the FY2008 
enacted appropriation. Although the two budgets are within 3.3 percent, 
they take different approaches to funding priority program initiatives 
at the margin. The Board recommends a total of $644 million in program 
initiatives, spread among four areas: enforcement, taxpayer service, 
infrastructure and IT, and BSM. The President's budget requests a 
nearly identical amount of funding for enforcement initiatives as the 
Board, but cuts taxpayer service and BSM funds, and includes no program 
initiatives for infrastructure and IT. Figure 2 shows the differences 
in graphic form.

[GRAPHIC] [TIFF OMITTED] T9992A.061


    Although both budgets have as a core objective the reduction of the 
tax gap, the Board recommends funding initiatives across the full range 
of IRS functions and taxpayer segments. In contrast, the President's 
budget has as its central focus a short-term effort to build up IRS 
revenue-producing enforcement staffing at a time when the IRS is hard-
pressed to replace the high number of experienced employees who are 
retiring. Increased staffing is important, but the Oversight Board 
believes the IRS cannot ``audit its way out of the tax gap,'' and 
should avoid the temptation to close the tax gap with large staffing 
increases in revenue-producing functions that cannot be absorbed 
effectively. The Board believes its recommended budget avoids this 
problem by focusing on ways to make the IRS more efficient in the long 
term, and putting more resources into technology, infrastructure, and 
service as well as enforcement.
    Because reducing the tax gap is of critical importance, the Board 
has identified a subset of its recommended initiatives as having the 
highest priority. These initiatives are generally infrastructure and 
research intensive and will have the greatest effect on reducing the 
tax gap in the long term, and are identified in Table 2.

Table 2. IRS Oversight Board Highest Priority Initiatives

----------------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------------------
Technology/Infrastructure                                                                           Dollars (in
                                                                                                      millions)
----------------------------------------------------------------------------------------------------------------
Fund Business Systems Modernization in Line with Current Strategy                                        $141.0
----------------------------------------------------------------------------------------------------------------
Enhance IT Security                                                                                       $16.7
----------------------------------------------------------------------------------------------------------------
Enhance Contingency Planning and Disaster Recovery                                                         $8.7
----------------------------------------------------------------------------------------------------------------
Implement Security Auditing                                                                                $6.8
----------------------------------------------------------------------------------------------------------------
Preserve quality IT workforce in applications development                                                 $36.8
----------------------------------------------------------------------------------------------------------------
Build alternate power supply for computing center                                                         $11.0
----------------------------------------------------------------------------------------------------------------
Technology/Infrastructure Subtotal                                                                       $221.2
----------------------------------------------------------------------------------------------------------------
Enforcement
----------------------------------------------------------------------------------------------------------------
Improve tax gap estimates, measurement, and detection of non-compliance                                   $11.1
----------------------------------------------------------------------------------------------------------------
Taxpayer Service
----------------------------------------------------------------------------------------------------------------
Research Taxpayer Burden, Complexity, and Compliance                                                      $10.0
----------------------------------------------------------------------------------------------------------------
Total Highest Priority Initiatives                                                                       $242.3
----------------------------------------------------------------------------------------------------------------


    None of these initiatives, except the enforcement initiative for 
improving tax gap estimates, are funded in the President's budget. 
Moreover, as shown in Figure 2, the BSM program and taxpayer service 
programs undergo reductions of $45 million and $47 million, 
respectively. The Board recommends that the appropriated IRS FY2009 
budget closely follow the priorities and balance reflected in this 
statement.
    The following sections discuss the Board's budget recommendations 
in the context of each of the IRS' strategic goals.

Strategic Goal 1--Improve Taxpayer Service

    IRS customer service has made consistent gains since FY2002. For 
example, Toll-Free Tax Law Accuracy and Accounts Accuracy are at 91 
percent and 93 percent respectively in FY2007, as compared to 84.4 
percent and 90 percent five years ago. Of particular note, overall 
customer satisfaction with IRS Toll-Free Service has held steady at 94 
percent for four consecutive years. Such stability is most welcome and 
a good indicator that best practices have taken root.
    As a result, a more pressing challenge is to deliver more extensive 
electronic self-assistance tools and to perform research that 
identifies innovative ways to expand taxpayer education and outreach to 
all taxpayer segments, especially those who are now under served.
    To a large degree, many of the IRS' customer service activities are 
designed to respond to taxpayer inquiries. Examples include toll-free 
telephone service and Taxpayer Assistance Centers. Overall, the IRS has 
done a good job fielding and answering questions, whether via toll-free 
telephone, the Internet, or in person at Taxpayer Assistance Centers.
    The IRS expends considerably fewer resources on education and 
outreach services. A broader approach to customer service would entail 
giving taxpayers access to self-service applications so they could 
``pull'' specific information on accounts or tax law, and ``pushing'' 
answers, information and updates to taxpayers, practitioners and other 
affected parties as the need for such information became apparent. 
Lastly, the IRS must seize opportunities to provide innovative 
outreach, education and community partnerships. For example, given 
limited resources and elimination of programs such as TeleFile, the IRS 
must also work to broaden and strengthen partnerships, such as 
Volunteers in Tax Assistance (VITA).
    To take customer service to the next level, the IRS must better 
understand the taxpayers they serve. The IRS must conduct more 
insightful research, and based on this analysis, develop services 
better tailored to the specific needs of particular taxpayer segments. 
By better understanding taxpayers, the IRS can focus both its service 
and enforcement efforts to increase compliance through targeted pre-
filing, filing, and post-filing efforts. The IRS must find out what 
kind of information and assistance taxpayers need and the most 
effective ways of delivering that information to them.
    In the last two years, the IRS has put considerable effort into 
developing the Taxpayer Assistance Blueprint (TAB), which establishes a 
five-year plan for delivering service to taxpayers. This vision entails 
a much broader use of electronic interactions between taxpayers, 
practitioners and the IRS, such as account management and the ability 
to resolve taxpayer issues securely over the Internet. The TAB 
describes an IRS that is an ``interactive and fully integrated, online 
tax administration Agency'' with the capability ``for any exchange or 
transaction that occurs face-to-face, over the phone, or in writing to 
be completed electronically.'' These types of services are much along 
the lines of what customers of large financial institutions already 
experience today but are still for the most part unavailable to 
taxpayers.
    The vision of great customer service is clear, but to go from good 
to great the IRS must execute the five-year strategic plan articulated 
in the TAB to improve service beyond what is familiar and available 
today.
    The Oversight Board disagrees with the President's program 
reductions for taxpayer service and recommends that the following three 
initiatives be funded for a total of $26.3 million:

          Maintain Processing of Critical Pension Plan Returns 
        ($6.3 million)
          Research Taxpayer Burden, Complexity, and Compliance 
        ($10 million)
          Expand Volunteer Income Tax Assistance and Low Income 
        Tax Clinics ($10 million)

    The first initiative supports customer service by providing funds 
to maintain processing of essential pension plan return information 
while transitioning to a new mandated electronic filing system 
``EFAST2'' in 2010. It also enables processing of residual returns that 
are IRS-only forms and not part of the mandated EFAST2 system (Form 
5500EZ and Schedule SSA filings).
    The second initiative provides funding to enhance understanding of 
the interaction between taxpayer burden, complexity of the tax law and 
process, and taxpayer compliance. This research will help improve 
understanding of these inter-relationships, in keeping with strategies 
put forth in the Taxpayer Assistance Blueprint (TAB) and the Department 
of the Treasury report, A Comprehensive Strategy for Reducing the Tax 
Gap.
    The third initiative provides funding to enhance two programs to 
improve service delivery to two taxpayer segments with specifically 
identified needs: the growing number of elderly and the ethnically 
diverse. These taxpayer segments face unique challenges in meeting 
their tax obligations because of limited access to or inability to use 
all of the channels offered for service delivery. Additional resources 
will enhance the IRS's volunteer return preparation and other services 
provided by the Volunteer Income Tax Assistance (VITA) and the Low 
Income Tax Clinic programs with emphasis on both targeted taxpayer 
segments. Such services help created a more fair and just tax system.

Strategic Goal 2--Enhance Enforcement of the Tax Law

    Increases in IRS enforcement activity intended to produce gains in 
direct revenue collection must be balanced with a broad view of the tax 
gap. The Board recognizes that increased enforcement activity over the 
past five years has produced noticeable results--enforcement revenue 
has increased from $34.1 billion in FY2002 to $59.2 billion in FY2007, 
a gain of nearly 74 percent. The IRS estimates that it can produce more 
than a four-to-one return on every dollar invested in additional 
enforcement resources, a fact that the Board believes warrants the 
appropriation of additional enforcement funding.
    However, while the Board applauds the increases in enforcement 
activity and revenue, it also recognizes that the IRS cannot ``audit 
its way out'' of the tax gap. There is wide belief, as evidenced by the 
Board's recommendations for reducing the tax gap and the aforementioned 
Treasury Department's tax gap strategy, A Comprehensive Strategy for 
Reducing the Tax Gap, that an integrated set of comprehensive actions 
is needed. Even a large infusion of resources for more enforcement 
personnel--something highly unlikely--would not eliminate the tax gap. 
There are many reasons for taxpayer non-compliance. Only a balanced 
program that promotes voluntary compliance across a broad continuum of 
taxpayers, from education and service for those who want to comply, to 
enforcement and even criminal prosecutions for those who refuse to 
comply, can be effective.
    Table 3 below compares the Board's and President's enforcement 
initiatives. Although very close in dollars, the President's 
initiatives place more emphasis on enforcement resources that can be 
shown to produce revenue in the short term. The Board takes a broader 
view of enforcement, and recommends program increases in such areas as 
expanded collection of proper taxes from recipients of federal 
payments, investigation of tax-related criminal activity, Bank Secrecy 
Act compliance, tax exempt organization examination, more published 
guidance for Tax Exempt taxpayers, additional litigation staff, and tax 
preparer monitoring.

Table 3. Comparison of Enforcement Initiatives for Board's and 
        President's Budgets


------------------------------------------------------------------------
  Oversight Board's                    President's Budget
  Budget Enforcement    Dollars (M)       Enforcement        Dollars (M)
     Initiatives                          Initiatives
------------------------------------------------------------------------
Reduce the Tax Gap          $120.7   Reduce the Tax Gap         $168.50
 for Small Business/                  for Small Business/
 Self-Employed                        Self-Employed
------------------------------------------------------------------------
Increase Reporting           $16.4   Improve Reporting           $13.70
 Compliance of                        Compliance of U.S.
 Domestic Taxpayers                   Taxpayers with
 with Offshore                        Offshore Activity
 Activity
------------------------------------------------------------------------
Reduce the Tax Gap           $52.0   Reduce the Tax Gap          $69.49
 for Large Businesses                 for Large Business
------------------------------------------------------------------------
Expand Federal               $17.3
 Payment Levy Program
------------------------------------------------------------------------
Reduce Tax Fraud             $72.2
------------------------------------------------------------------------
Enhance Financial            $24.0
 Investigations of
 Narcotics
 Trafficking
 Organizations
------------------------------------------------------------------------
Enhance BSA                   $3.4
 Compliance Program
------------------------------------------------------------------------
Address Complexity            $8.9
 through Up-Front
 Guidance, Education,
 and Correction
 Opportunities
------------------------------------------------------------------------
Expand Examination of        $28.6
 Tax Exempt
 Organizations
------------------------------------------------------------------------
Increase Tax Court            $5.8
 Litigation
------------------------------------------------------------------------
Implement New                 $3.4
 Procedural Tax Court
 Requirements
------------------------------------------------------------------------
Improve Tax Gap              $11.1   Improve Tax Gap             $51.06
 Estimates,                           Estimates,
 Measurement, and                     Measurement, and
 Detection of Non-                    Detection of Non-
 Compliance                           Compliance
------------------------------------------------------------------------
Increase Monitoring           $2.5
 of Preparers
------------------------------------------------------------------------
                                     Expand Document             $35.06
                                      Matching
------------------------------------------------------------------------
                                     Implement Legislative       $23.05
                                      Proposals to Improve
                                      Compliance
------------------------------------------------------------------------
Total Enforcement           $366.3                              $360.85
------------------------------------------------------------------------


    Additional enforcement resources produce a positive return on 
investment and result in short-term benefits, so the benefits of 
increased enforcement are apparent. However, increases in enforcement 
resources must also be balanced with more systemic long-range actions 
that improve voluntary compliance, and priorities must be considered as 
budget resources are limited. The Oversight Board considers technology 
modernization and research a higher priority than additional 
enforcement resources, in recognition of the long-term impact that 
technology modernization and research have on the IRS' ability to work 
more efficiently to reduce the tax gap and to be better able to focus 
both its service and enforcement resources optimally.
    Another factor that must be considered is the degree to which 
additional staffing can be absorbed into various IRS organizational 
units. Figure 3 depicts the distribution of new hires in major IRS 
organizations that are required by the President's and Board's budget. 
The Board believes its budget strikes a more balanced posture across 
all IRS organizational units and expands enforcement resources for a 
range of activities that are important elements of IRS enforcement, 
although they do not generate revenue directly, such as examination of 
tax exempt organization reporting, regulation of pension plans, and 
criminal investigation of tax fraud and abusive tax shelters. These 
activities are all part of a balanced, enforcement program that has as 
a goal the promotion of voluntary compliance among all taxpayer 
segments.
    To better understand the organizational implications of the Small 
Business/Self-Employed (SB/SE) and Large and Mid-Sized Business (LMSB) 
divisions' hiring requirements inherent in both budgets, the Board 
examined hiring requirements during FY2009 for the SB/SE and LMSB 
divisions. Table 4 shows the number of Mission Critical Occupation 
(MCO) employees projected to be on-rolls as of September 30, 2008, as 
well as the hiring requirements contained in both budgets. The Board 
has used a rule of thumb that 15 percent new hires is a reasonable 
limit on the amount of new employees that can be effectively 
accommodated into an organization in a year. It had concerns with the 
hiring implications of its own budget on SB/SE, but thought this risk 
could be mitigated. The President's budget would increase the 
percentage of new hires in SB/SE to over 23 percent of its employees in 
FY2009, and over 16 percent for LMSB.

[GRAPHIC] [TIFF OMITTED] T9992A.062


Table 4. SB/SE and LMSB Hiring Requirements in the Board's and 
        President's FY2009 Budgets



                                                                          Projected
                                            Projected on    Projected   New Hires in      Total      Percent of
      Operating Unit Mission Critical        rolls as of    Attrition     FY2009 to     Attrition     Hires to
                Occupations                   9/30/2008     Hires in     Meet Budget    Hires and     total MCO
                                                             FY2009        Request      New Hires    population

Oversight Board Budget
SB/SE                                            19,394         2,612         1,177         3,789         19.5%
LMSB                                              5,126           403           273           676         13.2%
President's Budget
SB/SE                                            19,394         2,612         1,918          4530         23.4%
LMSB                                              5,126           403           433           836         16.3%



    As in FY2006 through FY2008, the Administration proposes to include 
its requested enforcement increases as a Budget Enforcement Act program 
integrity cap adjustment. The Oversight Board's recommended enforcement 
initiatives would also qualify for such treatment, should Congress 
decide to make such an adjustment.

Strategic Goal 3--Modernize the IRS Through its People, Processes and 
        Technology

    The most effective strategy for reducing the tax gap in the long 
term is to provide the IRS with modern technology that enables it to 
operate at a high performance level. The Board has no doubts that a 
high performing organization with high service, quality, and 
satisfaction levels also minimizes taxpayer burden. Under such 
conditions, service and enforcement activities are prompt, efficient, 
and correct.
    The Board has identified program initiatives for IT and 
infrastructure activities that are funded under the BSM and Operations 
Support accounts. These initiatives will further modernize the IRS core 
IT systems used for tax administration, upgrade its infrastructure, and 
improve its security posture.

Business Systems Modernization Program Initiative

    Tax administration is a knowledge-intensive activity and the IRS 
depends heavily on information technology (IT) to leverage the 
knowledge and perform its mission. The IRS has made slow but steady 
progress in replacing its antiquated IT systems. The most noticeable 
improvements to taxpayers have been increased use of electronic 
products and services to interact with the IRS. However, the IRS' 
performance is still hampered by archaic IT systems used for central 
record-keeping that update taxpayer account information on a weekly 
instead of a daily basis.
    The Oversight Board has long advocated that the BSM program be 
funded at a higher level so progress could be made more quickly. 
Admittedly the program experienced a series of cost and schedule 
overruns during its first several years, and the result has been to 
slow down the funding stream to levels that dictate only modest 
progress can be made in modernizing the core IRS master files and 
account management systems. Because of its long-term effect on reducing 
the tax gap, the Board considers increasing BSM funding so that the 
pace of IT modernization can be increased as having the highest 
priority.
    Figure 4 compares the BSM budget recommended by the Oversight 
Board, the amount requested by the President, and the BSM funding 
appropriated by Congress for fiscal years 2003 to 2008. BSM funding 
needs to be restored to the levels realized in FY2003 and FY2004 to 
make progress faster. Had the Board's funding recommendations been 
followed, the IRS would be closer to the day when it could update its 
central records on a daily basis.

[GRAPHIC] [TIFF OMITTED] T9992A.063


    Note: FY2008 and FY2009 amounts contain $45.2 and $56.9 million of 
labor costs not contained in prior years.

Table 5. Application of FY2009 BSM Funding to Projects in the IRS 
        Oversight Board and President's Budgets


----------------------------------------------------------------------------------------------------------------
                                                                         Dollars (M)
----------------------------------------------------------------------------------------------------------------
                                                                Oversight Board                President
----------------------------------------------------------------------------------------------------------------
                                                                          Increase                    Increase
            Project Activities                 FY2008        FY2009      over FY2008     FY2009      over FY2008
----------------------------------------------------------------------------------------------------------------
Customer Account Data Engine                      $58.5         $80.0         $21.5         $58.8          $0.3
----------------------------------------------------------------------------------------------------------------
Accounts Management Services                      $29.0         $47.4         $18.4         $26.2        ($2.8)
----------------------------------------------------------------------------------------------------------------
Modernized e-File                                 $55.8         $25.0       ($30.8)
----------------------------------------------------------------------------------------------------------------
Common Services Project                            $0.0         $16.0         $16.0          $0.0          $0.0
----------------------------------------------------------------------------------------------------------------
Integrated Financial System                        $0.0         $73.0         $73.0          $0.0          $0.0
----------------------------------------------------------------------------------------------------------------
Core Infrastructure; Architecture                 $78.6         $98.1         $19.5         $69.3        ($9.3)
 Integration & Management; and Management
 Reserve
----------------------------------------------------------------------------------------------------------------
Subtotal Capital Investments                     $221.8        $350.6        $128.8        $179.3       ($42.6)
----------------------------------------------------------------------------------------------------------------
BSM Labor                                         $45.2         $56.7         $11.5         $43.4        ($1.8)
----------------------------------------------------------------------------------------------------------------
BSM Program Total                                $267.1         407.3        $140.2        $222.7       ($44.4)
----------------------------------------------------------------------------------------------------------------


    Note: BSM program excludes $1.2 M of corporate costs in Operations 
Support.

    The Board believes that when implemented, modernized IT systems 
will literally save taxpayers billions of dollars in burden reduction 
and make the IRS much more efficient. For example, replacement of the 
Individual Master File by the Customer Account Data Engine (CADE) will 
allow the IRS to update the tax accounts for individuals on a daily 
basis, instead of its current weekly update process. The Oversight 
Board expects that a rapid refund from the IRS of three to five days 
will reduce the number of Refund Anticipation Loans (RALs). The 
National Consumer Law Center and Consumer Federation of American 
estimate that approximately 12 million American taxpayers spent an 
unnecessary $1.6 billion on RALs in 2004 (the latest year for which 
data is available) to obtain their refund monies faster by two weeks. 
Moreover, daily updating of account records will give IRS employees and 
taxpayers access to the most current taxpayer account data, eliminating 
the problems associated with having various data bases with less than 
current status. The Oversight Board expects that daily posting of 
account information will improve the IRS' analysis capability and 
greatly reduce the burdens associated with the account resolution 
process.
    The Modernized e-File system not only makes it easier for taxpayers 
to file tax returns with the IRS, it reduces the human resources needed 
to receive and process tax returns and eliminates the error-prone 
transcription process. For corporate filers, it helps the LMSB division 
improve currency and cycle time in working large corporate tax cases. 
When implemented for individual tax returns, it will make the 
electronic filing process even simpler than it is today with the 
current legacy electronic filing system.
    The Integrated Financial System (IFS) will provide necessary 
improvements to the system the IRS uses to manage its financial 
resources, clearly a must for any agency, especially one that is 
responsible for managing taxpayers' accounts as well as its own 
appropriated resources. The IFS upgrade is needed to ensure that the 
IRS remains in compliance with federal accounting and other financial 
management requirements. The additional funding for the IFS initiative 
will enable the IRS to add procurement and asset management modules to 
the existing IFS application and integrate related business processes 
with core accounting and financial management operations. The funding 
will also provide for the subsequent transfer of IFS to a Shared 
Service Center and thereby maintain its longer term viability.
    The Board believes that funding for the BSM program should be 
accelerated, not slowed down. Failure to fund the IRS BSM program at 
higher levels, in the view of the Board, is a case of being penny-wise 
and pound foolish.

Information Technology/Infrastructure Program Initiatives

    The IRS must be held to the highest standards for security and data 
integrity while increasing its engagement in the electronic world in 
which most taxpayers already live. Meeting this dual challenge of high 
security and a high degree of electronic interaction with taxpayers 
demands that the IRS have a modern information systems and 
infrastructure.
    The Board recommends six program initiatives for a total of $103 
million that will improve the IRS' operations by allowing it to make 
critical improvements to its technology and personnel infrastructure. 
By comparison, the President's budget contains no initiatives for IRS 
infrastructure.
    Three of the initiatives, totaling $32.2 million, enhance the IRS' 
security posture as the way the IRS does business continues to evolve 
and security threats seem to increase on a daily basis. Data security 
has taken on an expanded meaning in a post 9/11 world. Terrorists from 
around the globe are actively working to exploit weaknesses in 
government IT security systems with the intent of producing both great 
physical and economic harm. Disrupting IRS returns processing and 
stealing sensitive information could wreak havoc on the economy and 
financial markets. The IRS cannot be complacent with respect to 
security, and the Board recommends the following security initiatives:

          Enhance IT Security ($16.7 million)
          Enhance Contingency Planning and Disaster Recovery 
        ($8.7 million)
          Implement Security Auditing ($6.8 million)

    The first initiative enables the IRS to further implement key IT 
security and privacy safeguards to assure the integrity of sensitive 
taxpayer and employee data and supporting infrastructure processes. 
Protecting taxpayer data is paramount. The second initiative is to 
enhance the IRS enterprise-wide contingency planning and disaster 
recovery capabilities to support critical business systems. Any 
unavailability of critical IRS business systems poses an unacceptably 
high risk to the nation's security. The third initiative, Security 
Auditing, will allow the IRS to more effectively monitor key networks 
and systems to identify any unauthorized activities.
    The remaining three initiatives, for a total of $71.3 million, 
allow the IRS to improve other elements of its infrastructure. They 
are:

          Redesign Form 990 for Tax Exempt Organizations ($23.5 
        million)
          Preserve Quality IT Workforce in Applications 
        Development ($36.8 million)
          Build Alternate Power Supply for the Computing 
        Centers ($11.0 million)

    The first initiative, the only one that is not considered high 
priority, is recommended because it brings new efficiencies to tax 
filing for a segment of taxpayers who are frequently ignored because 
their tax returns do not produce revenue--tax exempt organizations. The 
Form 990 tax return is difficult to complete for tax exempt 
organizations to complete and for reviewers to comprehend. Worse, it 
fails to provide the IRS with sufficient information to detect and 
analyze compliance trends in the sector and target enforcement actions 
as needed.
    The second initiative will give the IRS better tools to retain its 
IT workforce by mitigating intellectual and experiential loss through a 
series of supporting strategies such as workforce re-tooling, 
succession planning, and retention. The third initiative provides 
alternate power supply for three of the IRS's computing centers. 
Currently there is but a single power supply facility at each of the 
computing centers. An alternate power supply capability at each of the 
three computing centers would ensure the continuous operation of, and 
continuous access to, tax processing systems at the computing centers 
during unplanned emergencies and planned power supply tests, and avoid 
the revenue loss and overtime expense associated with the current 
process that requires total shut down periods.

Investing in IRS is a Good Business Decision Supported by the Public

    In spite of recommendations made by the IRS Oversight Board, the 
IRS has not been funded at the most effective levels to achieve its 
strategic objectives. Figure 5 illustrates funding recommendations made 
by the Board since its inception, the President's budget request during 
this same time frame, and the funding appropriated by Congress. One of 
the principal reasons for this so-called ``resource gap'' is the budget 
process which treats the IRS the same as it does all other 
discretionary spending requests. It does not credit the IRS with 
bringing in 95 percent of all the revenue to fund the Federal 
Government, nor does it recognize the previously discussed four-to-one 
return on every dollar invested in tax enforcement.

[GRAPHIC] [TIFF OMITTED] T9992A.064


    The Oversight Board has urged previously Congress to view funding 
of the IRS as an investment.\1\ Other members of the tax administration 
community, such as the National Taxpayer Advocate and the National 
Treasury Employees Union, have made similar recommendations.\2\
---------------------------------------------------------------------------
    \1\ IRS Oversight Board reports, FY2006 IRS Budget Recommendations/
Special Report, FY2007 IRS Budget Recommendations/Special Report, and 
FY2008 IRS Budget Recommendations/Special Report.
    \2\ NTA, 2006 Report to Congress, Section 2, p. 445, and Statement 
of Colleen M. Kelley, President, National Treasury Employees Union, 
Testimony Before the House Committee on Ways and Means, May 23, 2007.
---------------------------------------------------------------------------
    There are a number of approaches that Congress could take to 
achieve this result, such as funding the IRS outside of budget caps, 
and the Board believes that the implementation of such a change is best 
left for Congress to decide. The Board would be remiss, however, if it 
didn't point out providing additional funds to the IRS has been 
consistently supported by nearly two out of three members of the 
public. In its annual Taxpayer Attitude Survey, the Board has asked 
taxpayers whether they support additional funding for the IRS. The 
results for 2005 through 2007 are shown in Table 6.

Table 6. Results of Taxpayer Attitude Survey on IRS Funding


------------------------------------------------------------------------
                             Percent                    Percent
                   -----------------------------------------------------
Survey Question 11       Completely Agree             Mostly Agree
                   -----------------------------------------------------
                      2007     2006     2005     2007     2006     2005
------------------------------------------------------------------------
The IRS should          24       24       20       40       39       43
 receive extra
 funding to
 enforce tax laws
 and ensure
 taxpayers pay
 what they owe
------------------------------------------------------------------------
The IRS should          21       24       22       42       42       44
 receive extra
 funding so it can
 assist more
 taxpayers over
 the phone and in
 person
------------------------------------------------------------------------


    The Board believes such strong support indicates the public 
understands the need for effective tax administration and realizes 
that, ultimately, it pays for itself.

Conclusion

    Approving a budget is not just about money; it's also about 
choices. The Board believes its budget recommendations, if implemented, 
will put the IRS on an effective long-term path to achieving the IRS 
strategic goals, improving voluntary compliance, and reducing the tax 
gap.
    Although the Board's recommended budget is $375 million more than 
the President's request, there are some important decisions that must 
be made with respect to priorities and balance. The Congress must not 
only decide the amounts to be appropriated, but must also choose 
whether it wants to pursue short-term growth in enforcement activity 
over a more balanced path that stresses the benefits of long-term 
investments in technology, infrastructure, service, and research.

                                  
