[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]



 
                      IRS ASSISTANCE TO TAXPAYERS
                      FACING ECONOMIC DIFFICULTIES

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

                                HEARING

                               before the

                       SUBCOMMITTEE ON OVERSIGHT

                                 of the

                      COMMITTEE ON WAYS AND MEANS
                     U.S. HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

                           FEBRUARY 26, 2009

                               __________

                            Serial No. 111-2

                               __________

         Printed for the use of the Committee on Ways and Means




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                      COMMITTEE ON WAYS AND MEANS

                         OVERSIGHT SUBCOMMITTEE

                     JOHN LEWIS, Georgia, Chairman

XAVIER BECERRA, California           CHARLES W. BOUSTANY, JR., 
RON KIND, Wisconsin                  Louisiana, Ranking Member
BILL PASCRELL, JR., New Jersey       DAVID G. REICHERT, Washington
JOHN B. LARSON, Connecticut          PETER J. ROSKAM, Illinois
ARTUR DAVIS, Alabama                 PAUL RYAN, Wisconsin
DANNY K. DAVIS, Illinois             JOHN LINDER, Georgia
BOB ETHERIDGE, North Carolina
BRIAN HIGGINS, New York

             Janice Mays, Chief Counsel and Staff Director

                   Jon Traub, Minority Staff Director

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 
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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

                               WITNESSES

Linda E. Stiff, Deputy Commissioner for Services and Enforcement, 
  Internal Revenue Service.......................................     5
Nina E. Olson, National Taxpayer Advocate, Internal Revenue 
  Service........................................................    17

                       SUBMISSIONS FOR THE RECORD

Howard S. Levy, Statement........................................    63
Moira Souza Shiver, Statement....................................    64
National Treasury Employees Union, Statement.....................    67
Santa Barbara Bank and Trust, Letter.............................    69


                      IRS ASSISTANCE TO TAXPAYERS
                      FACING ECONOMIC DIFFICULTIES

                              ----------                              


                      THURSDAY, FEBRUARY 26, 2009

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

    The Subcommittee met, pursuant to notice, at 10:07 a.m. in 
room 1100, Longworth House Office Building, the Honorable 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
February 19, 2009
OV-1

Lewis Announces a Hearing on IRS Assistance for Taxpayers Experiencing 
                         Economic Difficulties

    House Ways and Means Oversight Subcommittee Chairman John Lewis (D-
GA) today announced that the Subcommittee on Oversight will hold a 
hearing on assistance available from the Internal Revenue Service (IRS) 
to taxpayers experiencing economic difficulties. The hearing will take 
place on Thursday, February 26, 2009, 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. The 
National Taxpayer Advocate, Nina E. Olson, and the IRS Deputy 
Commissioner for Services and Enforcement, Linda E. Stiff, have been 
invited to testify. Any individual or organization not scheduled for an 
oral appearance may submit a written statement for consideration by the 
Subcommittee and for inclusion in the printed record of the hearing.
      

FOCUS OF THE HEARING:

      
    During this recession, taxpayers are experiencing financial 
difficulties. In 2008, there were 3.4 million foreclosure filings and 
2.6 million job losses. Many taxpayers are struggling to meet their 
daily living expenses as they face a wide range of financial and 
personal issues, which may make it difficult to meet their tax 
obligations.
      
    On January 6, 2009, the IRS kicked off the 2009 filing season with 
an announcement of steps taken to help financially distressed 
taxpayers. The IRS announced that its employees have greater 
flexibility to assist struggling taxpayers and may be able to adjust 
payments for back taxes, expedite levy releases, or postpone 
collections. Further, the IRS encouraged taxpayers to take advantage of 
new and existing credits (such as the first-time homebuyer credit and 
the earned income tax credit), deductions (such as the standard 
deduction for real estate taxes), and electronic filing options (such 
as Free File Fillable Tax Forms) to maximize and expedite refunds.
      
    The National Taxpayer Advocate, an independent official appointed 
to address taxpayer problems (established in Public Law 104-168), 
indicates that more action may be warranted to address the problems of 
struggling taxpayers. The Taxpayer Advocate's most recent report to 
Congress focused on the challenges to taxpayers and tax administration 
during the economic downturn. The report recommended that the IRS 
change some of its collection practices in order to avoid exacerbating 
the financial distress of taxpayers. The Taxpayer Advocate noted that 
the IRS is underutilizing collection alternatives, particularly offers 
in compromise and partial pay installment agreements, and IRS employees 
need more guidance on how to identify and help distressed taxpayers.
      
    The Subcommittee will discuss the specific problems encountered by 
taxpayers during this recession. The Subcommittee will review the steps 
taken by the IRS to assist struggling taxpayers and consider 
recommendations of the National Taxpayer Advocate.
      
    In announcing the hearing, Chairman Lewis said, ``Americans are 
suffering during these difficult economic times. They are trying to do 
the right thing and pay their taxes, but they may be unable. We need to 
understand their problems. They need to reach out to the IRS for 
assistance. Together, we must find ways to collect the proper amount of 
taxes owed in a manner that is fair and recognizes the problems that 
taxpayers are facing during this recession.''
      

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    Chairman LEWIS. Good morning. The hearing is now called to 
order, the hearing of the oversight Committee.
    People all over the country are ready. A record number of 
people, our friends, our family and our neighbors are losing 
their jobs, losing their homes, and getting in line at food 
banks. People are suffering. These are hard-working people with 
families who for the first time in their lives are struggling 
to stay afloat while their debts increase. We must reach out to 
help them.
    Today, the Ways and Means Subcommittee on Oversight will 
discuss what the Internal Revenue Service can do for taxpayers 
in need. We want people to know that there is help and help 
must be on the way. We need to tell people that they can get 
free help to prepare their tax returns during the following 
season. We want to tell them how to get their refund faster, 
especially if there is an emergency. We want them to know what 
steps to take if they owe taxes, and want to pay but cannot. In 
summary, we want to see the gentler and sweet side of the IRS.
    And I am grateful to our witness for appearing today. We 
look forward to you being here and your testimony. As always, 
we ask you tell us how the Congress can help you during this 
following season and beyond. And I call on the Ranking Member, 
Mr. Boustany for his opening statement.
    Mr. BOUSTANY. Thank you, Mr. Chairman, and I thank you for 
holding this hearing, and I welcome both of our witnesses.
    I think this will be a very productive hearing. With so 
many new Members of this Subcommittee, it is prudent to start 
the congress with a hearing that will focus on the operations 
of the internal revenue service. As Members of the Ways and 
Means Committee, we are asked to consider legislation that 
changes the Tax Code and affects millions of Americans. As 
such, we also need to be cognizant of the IRS' role, and if 
they have the resources to administer and enforce those laws.
    We all met, I think, 2 weeks ago, with the Commissioner, 
and he discussed building a world class organization dedicated 
to taxpayer service while prudently enforcing the law. Their 
mission now includes meeting the substantial challenge of a 
recession with millions of taxpayers losing their jobs, 
resulting in financial hardship that is making it difficult for 
them to fulfill their tax obligations.
    The IRS is trying to help the taxpayers navigate the 
options available and in doing so, of course, with some 
additional resources we recently provided. But at the same time 
this is coming up along with the new tax filing season. So I 
believe this hearing will deepen our understanding of the IRS's 
taxpayer services, their use of enforcement tools, which is 
essential knowledge for all Members of this Subcommittee, and 
more, it will allow us to explore what more can be done for 
financially distressed taxpayers.
    One final note, Mr. Chairman, as a follow-up to yesterday's 
Full Committee hearing: I wanted to offer my full support for 
protecting the jurisdiction of the Ways and Means Committee. I 
know as we look at all these issues, and there will be multiple 
Committees working on some of these, our side is offering full 
support to you and to the Chairman of the Full Committee, and I 
would be glad to work with you if the opportunity arises to use 
this subcommittee to assert our jurisdiction and to work with 
you and the chairman.
    Chairman LEWIS. Well, thank you very much. I know the chair 
of the Full Committee and all the Members would appreciate your 
support and we all look forward to working together.
    Mr. BOUSTANY. Thank you, Mr. Chairman.
    And, finally, before I yield back my time, I want to 
acknowledge Chris Giosa, who is leading our side, as a very 
dedicated and hardworking staffer. He's the Staff Director of 
this Subcommittee. Chris, we want to thank you for all your 
great work, and we wish you all the best in your new role in 
working with our partner, the IRS, and so while we're losing a 
very valuable staffer here and someone who's very knowledgeable 
in this issues, we feel that we'll have a partner working in 
the executive branch. So, Chris, we offer our deep and sincere 
thanks to you.
    Mr. Chairman, I yield back.
    Chairman LEWIS. Mr. Ranking Member, I want to join you in 
wishing Chris the best and thank him for his wonderful years of 
service. And we wish you well in the days to come. Thank you so 
much.
    Now we're going to hear from our witnesses. I ask that you 
limit your testimony to 5 minutes. Without objection your 
entire statement will be included in the record. And now here's 
my great pleasure to introduce the IRS Deputy Commissioner 
Linda Stiff and welcome.

 STATEMENT OF LINDA E. STIFF, DEPUTY COMMISSIONER FOR SERVICES 
           AND ENFORCEMENT, INTERNAL REVENUE SERVICE

    Ms. STIFF. Thank you. Chairman Lewis, Ranking Member 
Boustany and Members of the Subcommittee, I appreciate the 
opportunity to discuss how the IRS is assisting economically 
distressed taxpayers during this period of great need. This 
country is currently experiencing an economic crisis unlike any 
we have seen in our lifetime.
    Every day we see the fall out with families, friends and 
neighbors struggling to hold on to jobs and homes and provide 
their families with basic necessities. The IRS' effort to 
assist taxpayers during these difficult times are confirmation 
of part of our core mission which is to assist taxpayers in 
every way possible to meet their obligations. Therefore, the 
IRS has taken deliberate and focused actions to provide 
tangible relief to taxpayers in distress, while also helping 
others from straying across the line into non-compliance.
    Let me briefly describe some of those actions. America's 
low income taxpayers have been particularly hard-hit by 
financial hardship. Many of these working families may be 
eligible for the earned income tax credit, which can put money 
in their pockets. The IRS has an aggressive outreach program to 
promote greater community awareness of this refundable credit 
for low-wage taxpayers. This outreach program includes a 
specific day each year devoted to press events, promoting and 
explaining the earned income tax credit.
    I want to thank all of the Committee Members for your 
support in this effort, especially Chairman Lewis for your 
recent help and participation in an event publicizing the EITC 
as well as for the time you took to share the law with the IRS 
family. This year on January 30th more than 80 partners from 
across the country conducted news conferences and over a 
hundred more issued press releases on EITC awareness day. Our 
efforts to make taxpayers aware of the EITC continue throughout 
the year. We send marketing materials to our community partners 
to distribute. We include information in English and Spanish on 
our website, on IRS dot gov, and by a number of media 
opportunities.
    There are also more than 12,000 free tax preparation sites 
for low income individuals, seniors, and other eligible 
taxpayers around the country. When taxpayers visit one of these 
sites, our volunteers can also check to see if they are 
potentially eligible, not just for the EITC, but for other 
credits, deductions and exclusions, such as the child tax 
credit.
    We also understand that taxpayer service can only go so far 
in assisting millions of distressed taxpayers. This year, many 
taxpayers will owe money to the IRS and face difficulties 
paying those amounts. Accordingly, we have given our frontline, 
collection personnel more flexibility to work through these 
issues with taxpayers with a particular focus on previously 
compliant taxpayers, who may find themselves for the first time 
unable to meet the obligation to pay their Federal taxes.
    Depending on their circumstances, these taxpayers may be 
able to adjust payments for back taxes, avoid defaulting on 
payment agreements, or possibly defer collection action. We 
have reminded our frontline employees about offering 
installment agreements at the end of an audit for taxpayers, 
enabling them to minimize interest and penalty charges. Another 
good example involves the offer-in-compromise program, which 
oftentimes is impacted by today's battered real estates market.
    For individual taxpayers, we have responded quickly by 
expediting the process and creating flexibilities for people 
trying to sell or refinance a home. The bottom line is that the 
IRS should not be the reason someone can't get out of a real 
estate jam. We have centralized our process to review home 
equity values in the volatile market, especially in the offer 
in compromise situations.
    We urge all taxpayers to visit our website, IRS dot gov, 
the fastest way to give information from the IRS or get 
questions answered. This year we even added what we call ``what 
if'' scenarios to our website. The ``what if'' scenarios allow 
taxpayers to go through what if A, what if B, to deal with 
payment and other financial problems.
    I would also like to put one issue on the Subcommittee's 
radar screen: the recently enacted stimulus bill includes a 
number of refundable credits. We hope taxpayers will take 
advantage of these. We also recognize that such credits create 
the potential for abuse. We will watch them closely and report 
back to you if we see a problem.
    Thank you again, Mr. Chairman, for the opportunity to 
testify. The IRS is committed to assist America's taxpayers in 
any way it can. You have my commitment and that of Commissioner 
Shulman to work closely with you as we move forward.
    Thank you.
    [The statement of Ms. Stiff follows:]

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    Chairman LEWIS. Well, thank you very much, Ms. Stiff. Your 
testimony and we would look forward to ongoing relationship and 
continue to work with you.
    Now it is my pleasure to introduce the national taxpayer 
advocate, Ms. Nina Olson.

                  STATEMENT OF NINA E. OLSON,
                   NATIONAL TAXPAYER ADVOCATE

    Ms. OLSON. Thank you, Mr. Chairman, Ranking Member 
Boustany, and Members of the Subcommittee.
    Thank you for inviting me to testify today about the 
challenges facing financially struggling taxpayers. The IRS 
itself faces a difficult challenge in trying to balance its 
mission of collecting tax revenue with the fair and 
compassionate treatment of taxpayers who for whatever reason 
are unable to pay their tax bills. The nature of this challenge 
is no different in a recession, but the number of affected 
taxpayers is obviously much greater.
    The IRS has many tools available to help these taxpayers 
and it is now more important than ever that it use these tools 
appropriately and compassionately. The general premise under 
which the IRS operates is that taxpayers should pay the full 
amount of the tax liabilities they owe, but there are times 
when taxpayers experience financial difficulties and can't 
reasonably pay their tax liabilities in full. This may happen 
if a taxpayer has lost a job, become disabled, or experiences 
some other financial setback. When this happens, the IRS' goal 
should be to collect as much of the tax as possible without 
imposing an undue financial burden on the taxpayer or the 
taxpayer's family.
    IRS methods for establishing the priority of collection 
cases has traditionally placed primary emphasis on those cases 
with the greatest total dollar amounts of tax debts. As a 
result, many collection accounts do not receive adequate 
attention until penalties and interest equal or exceed the 
underlying tax due and the total tax bill is so large the 
taxpayer can't ever fully pay. This situation occurs against a 
backdrop of what I would characterize as an institutional 
aversion to any collection method that results in collection of 
less than a hundred percent of the tax the IRS believes is 
owed.
    Consider the following. At the end of fiscal year 2008 
there were more than 2.6 million taxpayers with delinquent 
accounts or accounts reported not collectible because the 
taxpayer had no current means to pay the tax liability. In that 
same fiscal year, the IRS accepted only 10,677 offers in 
compromise and entered into 22,000 partial payment installment 
agreements. In other words, combined, one out of every 78 
taxpayers with a delinquent account was granted one of these 
collection alternatives. It is clearly not the case that 77 out 
of every 78 taxpayers with delinquent accounts were unwilling 
to deal with the IRS. Rather, despite explicit congressional 
support for collection alternatives, the IRS has made these 
options too inaccessible for taxpayers to obtain.
    I am also concerned the IRS does not proactively identify 
taxpayers who may be experiencing economic hardship. Today, for 
example, the IRS automatically levies 15 percent of the monthly 
Social Security benefits of taxpayers who owe Federal taxes 
without any screen for low income tax payers or others who 
might be harmed as a result of the levy. This year, my research 
function developed a model for identifying these taxpayers. Our 
study showed that over one-third of taxpayers subject to an 
ongoing Social Security levy would likely be classified as 
unable to pay based on current IRS allowable expense 
guidelines, and that more than one quarter of these taxpayers 
had incomes at or below poverty levels.
    To minimize harm to economically distressed taxpayers and 
improve collection processes, I recommend that the IRS allocate 
resources to provide earlier intervention on delinquent 
accounts, make collection alternatives more accessible to 
appropriate taxpayers, and implement a hardship screen for 
Social Security levies. I also recommend that congress increase 
the authorization for low income tax payer clinic funding to 
$12 million and explicitly authorize the IRS to refer taxpayers 
to IRS-funded clinics, so that in these difficult times low 
income tax payers can obtain assistance in tax disputes.
    Another important issue: taxpayers whose lender forgives 
their obligation to pay all or some of a debt may face serious 
tax consequences, since the Tax Code requires them to include 
the amount of debt forgiveness in gross income. There are 
exceptions to this cancelation of this debt income rule, 
including when the taxpayer is insolvent or the debt relates to 
certain home mortgages. But the terms of these exclusions are 
complex. Few taxpayers know what the word ``insolvent'' means, 
and taxpayers use their home mortgage proceeds for purposes 
other than buying or improving their homes; for example, to 
consolidated credit card debt or pay education expenses are not 
eligible for the recently enacted home indebtedness exclusion.
    To reduce burden these rules impose on financially 
struggling taxpayers I recommend that congress consider adding 
an exclusion in sections 108(a) of the Code, which provides 
that taxpayers are not required to include canceled debts in 
gross income if the total amount of the canceled debts from all 
sources during the year falls below a specified threshold and 
we no longer require these taxpayers to file a very complex 
form 982.
    I appreciate your interest in these issues, and I would be 
pleased to answer any questions you may have.

    [The statement of Ms. Olson follows:]

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    Chairman LEWIS. Ms. Olson, thank you again for being here 
and thank you for your testimony.
    At this time I will open the hearing for questions. I ask 
that each Member follow the 5-minutes rule. If the witnesses 
will respond with short answers, all Members should have the 
time to ask question.
    I would like to remind Members that the Subcommittee will 
follow the Gibbons rule for questions. Members who were here 
before the gavel will be recognized in seniority order. Members 
arriving after the gavel are recognized by the time of arrival. 
Since we have so many new Members, I felt it was necessary to 
state that just to be reminded.
    Madam Deputy Director, the IRS has given its employees 
greater flexibility to deal with taxpayers while struggling to 
pay what they owe them. Have privates debt collectors also been 
given more flexibility to help taxpayers?
    Ms. STIFF. So we've taken a number of steps to increase the 
ability of our employees to resolve issues with taxpayers with 
minimal amounts of documentation or burden on those taxpayers 
in making the decision on how to handle those accounts. And the 
PCAs, the cases they get, those authorities that we've given to 
our people generally won't be necessary in the situation of the 
PCAs, because by definition the private debt collectors are 
working cases where the taxpayers can either full pay or they 
choose to enter into an installment agreement. And, anything 
beyond that, the case comes back to the IRS and the 
flexibilities would be applied there.
    Chairman LEWIS. I thank you, Ms. Stiff.
    Ms. Olson, why is it so important for taxpayers to deal 
directly with the IRS and not private collection agency when 
trying to pay their taxes?
    Ms. OLSON. Well, as Ms. Stiff said, the private collection 
agency employees don't have the ability to place taxpayers into 
currently not collectible status to process an offer in 
compromise, to really make any decision that requires the 
exercise of judgment and discretion. Our screens on these cases 
aren't sophisticated enough to pick-up taxpayers in those 
circumstances, so many of the taxpayers that the private 
collections agencies get have to be referred back to the IRS 
for processing. It's a duplication of effort.
    Chairman LEWIS. Let me now yield to the Ranking Member for 
question, Mr. Boustany.
    Mr. BOUSTANY. Thank you, Mr. Chairman.
    Deputy Commissioner Stiff, the taxpayer advocate sites data 
in her written testimony that valid offers and compromises have 
fallen and that her analysis suggests more valid offers were 
deterred rather than frivolous ones. Do you concur with that 
analysis?
    Ms. OLSON. I know that the data would say that there's a 
fewer number of offers coming into the agency today, and I 
guess the position I'd like to take on that, and I spent a lot 
of time thinking about this over the weekend, because over the 
past four to 5 years I think Nina and the IRS have spoken 
numerous times to Members of this body and other Members of the 
Congress on the offer in compromise program. We've taken 
extraordinary steps and measures to improve it. Nevertheless, I 
think the most important fact that I focus on is the fact that 
last year roughly 50,000 taxpayers came in and requested to be 
a part of the offer in compromise process.
    I think that suggests that there's a disconnect between 
what's available to taxpayers and what they're availing 
themselves of, so I've asked our staff last night. I said I 
think it's appropriate that we're going to bring in a third 
party to do an assessment of how we're doing our work to help 
us figure out where we may be putting impediments or barriers 
that we're not even recognizing. And, more importantly, I want 
to bring in a third party who can help us determine, who are. 
That's what they do for a living is determine how to reach a 
customer base or a taxpayer's base and figure out how we can 
improve our communications, how we can improve what we're doing 
at each step so that an offer in compromise becomes a viable 
collection tool, not just for IRS employees, but in the minds 
of taxpayers and preparers.
    So I think what I'd like to say here today is that we've 
been talking about this for a long time and I think it's time 
now to take another step and bring in some outside expertise to 
help us expand and see if we can't let the American public see 
the offers in compromise are a viable option in the appropriate 
circumstances.
    Mr. BOUSTANY. Thank you, and Ms. Olson in your testimony 
you discussed your research on the affect of the 2006 
legislation which required taxpayers making an offer to make a 
downpayment of 20 percent of the offered amount. As a result, 
the number of offers fell 21 percent based on your testimony. I 
see that the receipt from offers also fell by roughly the same 
amount.
    The Joint Committee on Taxation estimated that this 
legislation would raise 160 million in the first fiscal year 
after its enactment. Were there some other actions or events 
that could have contributed to this decline in offers, or was 
the fall caused solely by the legislation?
    Ms. OLSON. I actually think that that fall was caused by 
the legislation. If you look at the table we have in our 
testimony, the number of accepted offers between 2000 and 2008 
fell by 72 percent. And the first fall was attributable to what 
I believe are the IRS' burdensome procedures. Then we imposed a 
user fee and then this 20 percent down requirement came in. And 
we did a study that found that the taxpayers who submitted good 
offers--offers that were accepted right before the legislation 
was passed--in 56 percent of those cases taxpayers got their 
money for the offer for people other than themselves, from 
their family, from friends, from churches, from employers. So 
the legislation itself, nobody's going to give somebody money 
to put down on an offer that you don't know is going to be 
accepted or not. It's only when you know it's going to be 
accepted that you'll give that money. So we lost out.
    Mr. BOUSTANY. Would you expect receipts from offers to 
return to previous levels if we suspended that 20 percent 
downpayment? In other words, do we have 30 million per year as 
a revenue raiser on our hands?
    Ms. OLSON. I think it has to be coupled with a vigorous 
outreach campaign. And, I have to add this: I personally don't 
think we need an outside expert to tell us how to run the offer 
program. We have models how to run the offer program correctly. 
Most practitioners believe that the offer program is dead, and 
so they go to bankruptcy for the clients rather than going into 
the offer in compromise program. And we lose money. So it has 
to be eliminating the 20 percent down and vigorously telling 
taxpayers we want to get good offers, and then changing our 
procedures so we receive good offers. We don't stop them at the 
door like we are now.
    Mr. BOUSTANY. Thank you.
    Deputy Commissioner, would you like to respond?
    Ms. STIFF. I believe as I said earlier that there are 
literally millions of accounts receivables, taxpayers owing 
delinquent debts. Only 50,000 came in last year to apply for 
the offer program. I think that the program we have works. I 
think we're actually granting as many offers pro ratably that 
we've ever granted.
    I think the issue for me is there's a gap between taxpayers 
that are availing themselves of the program, and that suggests 
to me two things: one, that perhaps we're not introducing the 
program or making it available in a way that it resonates; and, 
two, that I need to be doing something that touches the hearts 
and minds of taxpayers so they realize the program is there and 
they can use it.
    Mr. BOUSTANY. Thank you.
    I yield back.
    Chairman LEWIS. I am pleased to recognize Mr. Etheridge for 
questions.
    Mr. ETHERIDGE. Thank you, also, for having this hearing and 
for our witnesses for joining us today.
    Madam Deputy Commissioner, I applaud your efforts to aid 
the taxpayers that are facing economic difficulty in light of 
the current economy, because it really is tough as you indicate 
in your testimony. And over the last several years there's 
really been a sharp increase in the fund anticipation loans 
that people have taken out anticipating a loan.
    So with that and with the current recession being even 
deeper, there may be even more taxpayers who borrow against 
those expected tax refunds to save their money a little 
quicker. And my question to you, are you seeing an increase in 
these types of loans already this year or can you tell yet. Is 
it too early to know?
    Ms. STIFF. It's too early for me to definitively say that 
there are more or less RAU ones. I do think in the first few 
weeks of the filing season we had a slight increase in the 
number of returns file claiming EITC credits, and generally 
speaking, that's where you see the RAU activity. But it's so 
early that the increase isn't statistically suggestive or to be 
relied on at this time.
    Mr. ETHERIDGE. The reason I asked that question is because 
I feel that some of these loans create a problem for some of 
these taxpayers, so my question is this. Are there steps that 
the IRS is taking or can take that might minimize the number of 
taxpayers who choose to participate in these refunds, 
anticipate the loans that will help the taxpayer. Because 
that's really what it's about; that they don't wind up with 
less than they could have had because they've had to 
participate in these programs.
    Ms. STIFF. I absolutely agree with you. It's a sad state. 
Unfortunately, it occurs where taxpayers actually are willing 
to engage in the loan and pay the interest on the loan so that 
they can have the money instantaneously. We are trying to 
modernize our systems so that we will be able to accelerate the 
timeframe for refunds.
    If you file electronically, you'll get your refund within 
seven to ten days. Our CADE system, which is our new modernized 
platform, processed last year roughly 35 million of the 140 
million individual returns on that new system, and it provides 
the refund in roughly four to 6 days. Sadly, there are still 
taxpayers for whom four to 6 days is longer than they're 
willing to wait, and so they still avail themselves of the 
RAUs.
    Mr. ETHERIDGE. I thank you, because I think this is an area 
where we can have as much impact on people who really have the 
greatest need, probably anything we can do to speed this up and 
minimize that drag time certainly puts money in the pocket of 
taxpayers quickly.
    Ms. Olson, do you have a comment on that?
    Ms. OLSON. Yes, I think that what Ms. Stiff said about the 
CADE is very important and I think if congress authorized the 
IRS to do an advertising campaign that informed taxpayers of 
the different options, because right now there's so much 
advertising about these immediate loans, us simply saying it in 
a press release is not going to be enough to get the message 
across.
    Secondly, I think the government needs to create stored 
value cards for taxpayers. We do it with Social Security, and 
26 some odd states do it for unemployment compensation where 
taxpayers who don't have bank accounts can get what is 
essentially an ATM card. They can go to any bank and could get 
their refund downloaded. We already have the technology, and I 
think we just need to do something like that. There are 
taxpayers working at large companies that get their payroll on 
these stored value cards. They could write that information in 
and we could get their refund out very quickly within these 
four to 6 days.
    Mr. ETHERIDGE. I thank you.
    And Mr. Chairman, I think this is an area where we can have 
a real impact on a lot of folks who have tremendous needs and 
it will be a hug savings. In the little time I have left, let 
me ask one final question. Are there more taxpayers calling IRS 
for assistance now than there were last year at this time? And 
is it increasing? And I guess my question would be what are 
taxpayers asking that we can help with.
    Ms. STIFF. Okay. The answer to that question is yes. More 
taxpayers are calling us than they did last year, and that in 
itself is a significant statement, because as you know, last 
year we were kind of crushed with the number of phone calls 
calling about stimulus. There are a couple of things that are 
impacting the calls that we're having this year. First of all 
is that if you were eligible, well, if you were a taxpayer and 
you got stimulus last year, and you got a reduced amount or you 
didn't get it, but over the course of the year you became 
eligible for more than you got, you have an opportunity this 
year to claim that additional amount on your tax return. It's 
called the rebate recovery program.
    Unfortunately, because of the way the law was crafted 
that's a somewhat complex computation and an inordinate number 
of taxpayers who have tried to do that have experienced errors, 
and so we find them calling. Secondly, you know, in our e-file 
program, you can electronically file and you can submit your 
return; and, in the past, I'm hoping you all e-file or that 
someone is e-filing for you. But, if you e-filed it, then 
subsequently you had to send the IRS a form with your signature 
on it.
    We made a change this year at the urging of just about 
everybody and anybody involved in it that you shouldn't need to 
send that form, that you could rely on a pin. That process of 
using the pin to file requires you to know your AGI or your 
adjusted gross income from the prior year. And, I guess, unlike 
myself, a lot of taxpayers don't have their prior year returns 
in a desk drawer and go look up their AGI. Instead, they pick 
up the phone and they're calling the IRS and saying can you 
tell me my AGI so I can e-file this year. So we've had an 
inordinate amount of that kind of traffic.
    The third area that we're experiencing, and I think it 
really makes good sense and I think if I'm the taxpayers 
instead of the IRS I would probably do the same thing. They 
have been bombarded on the media, in the news, on the TV, with 
talk of stimulus, with talk of bailouts, with talk of checks. 
We have thousands of taxpayers calling us a week saying am I 
entitled to anything. Should I be getting something? What do I 
need to do to get something? And I don't think it's clear to 
them how that works, and so we are receiving an inordinate 
amount of phone calls.
    Mr. ETHERIDGE. Mr. Chairman, thank you for your indulgence, 
and this rates as a real issue that might need to consider. 
They do need some money to do some advertising to help get.
    Chairman LEWIS. Thank you very much.
    Mr. ETHERIDGE. Thank you, Mr. Chairman.
    I yield back.
    Chairman LEWIS. Well, thank you.
    I think that is very helpful.
    Mr. Roskam is recognized for question
    Mr. ROSKAM. Thank you, Mr. Chairman.
    And welcome. Thank you. It's an honor to be here.
    Ms. Stiff, Chairman Lewis pointed out, I think accurately, 
that we're going to be getting a lot more inquiries in our 
district offices. More and more people are hurting. There's 
this looming tax liability that's out there and I represent a 
district in the West and Northwest suburbs of Chicago that has 
an expectation of what's good is good for the gander, just fair 
play.
    I am going to ask you to comment on Secretary Geitner's 
treatment by the IRS, because it was a highly celebrated. Well, 
not celebrated. It got a great deal of attention. I'm obviously 
not going to ask you to comment on anything that's in a 
confidential file, but the facts and figures are in the public 
domain. So there's an expectation that I am going to be hearing 
from constituents when they incur a tax liability and incur 
interest, and, presumably incur a penalty that they're going to 
be treated and sort of get the Geitner rule applied to them.
    Can you comment on what their expectation is? What their 
expectation should be? The calculation that the IRS made as it 
related to Secretary Geitner's tax liability and the decision 
not to pursue a penalty and to let him off by simply writing a 
check for the tax liability and the interest. And, what is it 
that animates the decisionmaking at the IRS, and how does it 
apply to the district that I represent?
    MS. STIFF. Okay. Clearly, I can't speak to any of the facts 
specific to Secretary Geitner's individual tax matter. What 
your constituents should expect, that if they owe an amount for 
their tax, that they're going to be charged with the amount of 
tax they owe. that their going to be charged with interest and 
penalties to the extent they're applicable.
    If your taxpayers believe there's a reason that those 
penalties shouldn't apply that they meet the reasonable cause 
standard, then they should expect to be prepared to explain 
that to us and engage with us in a discussion, and those 
decisions are individual facts and circumstances based on the 
penalties that would apply in their case.
    Then, thirdly, they should expect that once those amounts 
have been determined and agreed-to, that if they're 
experiencing difficulties in coming up with ways to pay that 
that they need to engage with us to talk through what payment 
plan options there might be, what alternatives they would have 
that would allow them to resolve their tax debts in a way that 
isn't overly burdensome to them as an individual.
    Mr. ROSKAM. Okay. Let's assume for the sake of argument 
that someone has the ability to pay the liability as Secretary 
Geitner did. And let's further assume that there is a similar 
self-employment issue. Let's say I have a constituent that 
worked for the International Monetary Fund and didn't pay their 
taxes. Is it an expectation that that taxpayer that I represent 
would be treated in that same way, not pay the penalty, 
regardless of whether they sort of, you know, pull out a 
laminated hall pass that says my accountant said this even 
though I got a letter from the IRS. I mean, how is that?
    Ms. STIFF. First of all, and I'm not trying to be coy. I'll 
be perfectly honest with you. I don't know the specific facts 
of Secretary Geitner's case, but I can tell you that if a 
taxpayer failed to pay self-employment tax we would expect them 
to report it, pay the taxes they owe. They're going to be 
subject clearly to the interest that flows with that. And the 
penalty that they may or may not be subject to will be 
dependent on the facts and circumstances of their case and the 
reasons for why they found themselves in that situation or not.
    Mr. ROSKAM. Okay. Our time is coming to a close. Two 
questions: could you follow-up; and, I'd like to hear from you 
once you do know the facts of the case. And at some point in 
the future within the next couple of weeks, could my office 
hear from you on that?
    That's question number one; and question number two is what 
is it that creates the predictability for how a taxpayer is 
going to be treated and is this an area that needs further 
inquiry into the future. Because if it's completely within the 
discretion of the internal revenue service and you're bound by 
a confidentiality that says you can't disclose, and I would 
submit sometimes that's handy and sometimes that's a burden. 
Right? And you'd even acknowledge that.
    Ms. STIFF. Be happy----
    Mr. ROSKAM. Let me just finish, because my time is winding 
up.
    I think it's very important moving forward in this 
environment where, I think, there's going to be more and more 
concern about people being treated fairly in the same way in 
which powerful people are treated in this country.
    Mr. Chairman, with that, I yield back, because my time has 
expired.
    Chairman LEWIS. Deputy Commissioner Stiff, do you care to 
respond?
    Ms. STIFF. I'll respond by saying we'll be happy to get 
back with you and I don't want to suggest that the application 
of interest and penalties is discretionary. It's a part of 
what's expected. The discretion or the judgment comes in if 
there's a reasonable basis that it shouldn't be applied. But 
we'll come back to you and we'll talk more in detail about 
that.
    Mr. ROSKAM. I'm out of time. I'd love to engage you 
further. Thank you.
    Chairman LEWIS. Mr. Higgins is recognized for question.
    Mr. HIGGINS. Thank you very much, Mr. Chairman. First of 
all, Ms. Stiff, in your testimony you had indicated that the 
good news is in this economic contraction that working families 
may be eligible for the earned income tax credit which will put 
money in their pockets. The bad news is that as many as one in 
four eligible taxpayers are not claiming the credit.
    You go on to talk about the initiatives the IRS is making 
to go into those economically distressed areas with free tax 
preparers, does the IRS have a goal relative to insuring that 
people do in fact claim the credit and is there a period of 
time within which that goal is anticipated to be achieved?
    Ms. STIFF. Let me just provide a little bit of background 
to what you're saying. I mean our goal clearly would be that 
every taxpayer that's entitled to that credit would know it, 
claim it, and get the benefit of it. Having said that, the one 
in four number I itself, there's more behind that. There is 
about approximately an 86, 85 percent participation rate with 
the EITC credit for people who are eligible with two children. 
So the reason for that is at that level the value of the credit 
can go as high as $4800 for a family.
    The participation rate for taxpayers with no children, so 
the averages kind of mask that, is roughly 56 percent; and, the 
reason for that is the credit at that amount can be as low as 
$430. So there's a different incentive and a different interest 
in making that claim, not that $430 isn't a significant amount 
of money at those income levels.
    So where we find ourselves now is we've spent years trying 
to up the total participation, and what we're finding now is we 
need to make this remaining lift in the participation rate, 
that we're going to have to have targeted outreach. And it may 
have to be different for the 56 percent with no children than 
it is to get the additional 40 percent on the families with two 
children.
    Mr. HIGGINS. What was it 5 years ago?
    Ms. STIFF. I don't know the answer off the top of my head, 
sir. I'd have to get back to you on that.
    Mr. HIGGINS. But improved?
    Ms. STIFF. I think the overall rate was between 68 and 75, 
so the IRS has done extraordinarily well with families with 
children and I think what you find in what we call the 
childless worker population is that many of those people have 
marginal wages, so they may not even be getting large refunds. 
They may not even be filing returns; and, so, they don't even 
find out that they could get this $450 credit which would 
offset the Social Security that's taken out of their checks.
    Mr. HIGGINS. Okay. Ms. Olson, what do you see as the most 
complex aspect of the Tax Code for individual taxpayers, 
particularly during this economic downturn?
    Ms. OLSON. You know, that's such a hard question to answer 
because the law is so complex. You know, there are different 
things that impact different taxpayers. Again, we just had the 
discussion about the single worker who doesn't even know 
there's this benefit out there he can get.
    We have in the retirement provisions people who may need to 
take early withdrawals from their accounts, and they may be 
taxed. They'll not only be taxed on those early withdrawals, 
but depending on the kind of retirement plan they have, they 
may get an additional 10 percent tax. You know, that's a real 
trap for the unwary.
    I think that the indicator of just how complex the law is 
is that over 80 percent of individual taxpayers pay for 
assistance in preparing their returns. Over 60 percent go to 
paid commercial preparers and another 22 percent by software; 
and that's not counting the people who go and get the free tax 
preparation. So it's just the sheer size of complexity is just 
overwhelming.
    Mr. HIGGINS. Yeah, well, as a taxpayers advocate, what are 
suggestions, you know, you would have for simplification of the 
process?
    Ms. OLSON. Well, we have certainly recommended in the 
report additional simplification of the family provisions so 
that instead of having six different provisions that people 
have to wade through we really have a basic family credit and a 
basic worker's credit. We've recommended simplification of the 
education incentive so people don't have to have a degree to 
figure out which one's the right one for them. And, again, as I 
talked about the retirement incentives and I would have to say 
you have to eliminate the alternative minimum tax.
    Mr. HIGGINS. Thank you, Mr. Chairman.
    Chairman LEWIS. Among this group, Members I don't think 
would be in too much disagreement with that. I think that would 
be a proper consensus among the Members of the Committee--not 
just the Subcommittee, but the Full Committee--that we must 
find a way to eliminate this tax; and, one day--one day--we 
will find the courage to do just that or find the means to do 
it.
    Mr. KIND. We shall overcome, Mr. Chairman.
    Chairman LEWIS. We shall overcome some day--someday.
    Mr. Reichert is recognized for question.
    Mr. REICHERT. Thank you, Mr. Chairman.
    And I echo Mr. Roskam's statement in honor to be here and 
an honor to serve with you and the rest of the colleagues here.
    Chairman LEWIS. Thank you for being here.
    Mr. REICHERT. My pleasure. I wanted to follow-up if I could 
on Mr. Roskam's line of questioning, just with a couple of 
thoughts. So talking about owed tax, interest and penalties, 
and there's disagreements with that, then I think Ms. Stiff, 
you said there should be an engagement between the IRS and the 
taxpayer. And then hopefully you come to some agreement.
    How does this process take place? Is there a mediator? What 
if there's no agreement? What happens? Is there a mediator that 
comes in that's bipartisan personality?
    Ms. STIFF. I don't know that I would say that there's a 
mediator in the sense that you're probably referring to. If 
taxpayers owe us money and they want to debate the amount of 
money they owe as a result of an audit, they do have due 
process. There's an appeals process, which does bring in third-
party to look at the facts of the case and reach a conclusion. 
Taxpayers can always exercise their options to go to court.
    On a collection action, if we're proposing a lien or a levy 
as a result of the failure to pay, they have an ability to 
appeal that process. Most of where that discussion is to the 
reasonableness around penalties, which is the issue that he was 
raising, takes place at the frontline, either between the 
individual that's interacting with the taxpayer as to the facts 
and circumstances. And we recently made some systems changes 
and some process changes, actually, at Nina's urging in her 
report, to ensure that taxpayers aren't being penalized during 
the period of time that we're having that debate.
    Mr. REICHERT. I would assume that some time in this process 
of discussing the disagreements that exist, someone makes the 
decision whether or not there's a criminal offense that's 
occurred. Did that sometimes happen?
    Ms. STIFF. Yes, sir, we do. We have an active what we call 
a ``fraud referral process,'' so that either in the collection 
or the examination stream, if our personnel identify what we 
call the badges of fraud, which are a series of indicators, 
then when we feel that we've got enough there. Then we'll cease 
on our civil activity, and we'll actually refer that case over 
to our criminal investigators so they can evaluate it for its 
criminal potential.
    Mr. REICHERT. This is where the Miranda warnings then come 
in?
    Ms. STIFF. Yes, sir, it is.
    Mr. REICHERT. Thank you.
    I want to just follow-up to on some comments that you 
mentioned there were increased calls. I'm just wondering by 
thousands of calls, have you asked for additional staff. Is 
there a need for additional staff?
    Ms. STIFF. We've been very fortunate. You and your 
colleagues, and in particular Chairman Lewis, have taken steps 
to assure that the stimulus bill that you just passed included 
funding that is going to supplement our staff which should help 
in responding to some of the calls that are related to the 
stimulus.
    Mr. REICHERT. Will there be a need for additional staff, do 
you think?
    Ms. STIFF. It's probably too soon for me to say that. I 
think that what we've asked for and with the passage of an '09, 
the omnibus, will position us to get us out from under the CR, 
and it also provides for some additional funds to handle the 
phone traffic as a follow-up to last year's. I think when we 
get that money we should be positioned to respond to what's 
coming at us.
    Mr. REICHERT. Great. Ms. Olson, you mentioned the tax gap 
in your testimony and that the IRS' lack of resources is 
significant. And it's an impediment to your ability to really 
get your job done and it creates this tax gap. You mentioned 
that the complexity of the Tax Code in your testimony for 
example regarding AMT.
    Do you think the complexity of the Tax Code contributes to 
the tax gap?
    Ms. OLSON. I think that it contributes to a part of it. 
There are so many causes for that, and in a way I believe that 
that goes to how we should treat taxpayers. If you have someone 
who is actually undertaking fraudulent activity, that's going 
to require a very vigorous response from the IRS in terms of 
enforcement action and criminal investigation action and 
criminal charges.
    On the other hand, if you have someone who is just confused 
and has made a mistake you really have to look at what's the 
right approach for that person: clearly, educating them; making 
sure they don't do that again; and then making sure that they 
pay the tax and the interest to the extent that they're able to 
that gets into the penalty discussion.
    You know, I recommended a few years ago the proposal that 
was called the one-time, stupid act penalty abatement, where 
you basically give people a pass the first time. Because the 
goal of the penalty really is to make sure that they stay in 
voluntary compliance, so let's educate them and say go and sin 
no more. You do it again, expect a penalty.
    Mr. REICHERT. Thank you. Thank you Mr. Chairman.
    Chairman LEWIS. Thank you very much.
    Mr. Kind is recognized for question.
    Mr. KIND. Thank you, Mr. Chairman.
    I want to thank our two invited guests here today for your 
testimony and thank you for holding this very important 
hearing. We have a lot of important issues coming up that gives 
us a lot of opportunity to delve into, many of it with you, one 
of which is obviously the recently enacted Economic Recovery 
and Investment Act (ERIA). There's a lot of tax credits and 
deductions, exclusions, things of that nature; and Ms. Stiff, 
maybe we could start with you.
    In regards to the type of public education awareness 
campaign that needs to take place so people understand this 
more and know what they can take advantage of now, it is 
somewhat complicated and I'm just wondering what steps the IRS 
is taking in order to help with that public education campaign.
    Ms. STIFF. The IRS has actually been working feverishly in 
anticipation of the passage of the legislation. Clearly, it was 
impossible to finalize what you're going to communicate and 
what's the best way to communicates it 'til you knew what was 
there. So we were well-positioned when the bill passed to drop 
in, kind of, what the provisions are, the rules.
    We've got to have forms. We've got to have pubs. We need to 
get information out to taxpayers swiftly. We're working on that 
and I think we're days away from being able in a number of 
those provisions to be fully loaded for Bear in terms of 
communication, not weeks or months.
    Mr. KIND. And a user friendly website, I assume, will go to 
IRS?
    Ms. STIFF. Yes, absolutely everything will go to IRS dot 
gov.
    Mr. KIND. Is this something our offices will be able to 
link to, because we're already getting inquiries, my 
constituents.
    Ms. STIFF. Yes, sir. Clearly, we're still having on some of 
the provisions, we're still having to flush exactly how it's 
going to be administered, and so we want to have the 
information when we get it out there, be as useful as we can. 
But I think given that the passage has been in recent days, I 
would expect that within just a very short, few days, that 
we'll have at least for the provisions that are affected or 
affect taxpayers who are trying to file their tax returns this 
year, we'll have that out there.
    Mr. KIND. And can we assume that the various software 
entities that exist for tax preparation purposes are going to 
be able to update all that? Because we're already in tax filing 
season.
    Ms. STIFF. Yes, sir. We have been working with them again 
since before the holidays to ready for this. They face that 
same problem we did until it was passed. They couldn't complete 
programming. We are talking to them multiple times a week and 
en masse and individually. And at this point, I think by and 
large we'll all be prepared to move in time to get done what 
needs to be done, what you've asked us to do this year.
    Mr. KIND. Now, the making work pay tax provision in the 
recovery package, that's going to be dealt with through the 
employers not taking as much withholdings out of the paychecks. 
What do you suspect the compliance rate will be with that?
    Will the employers be able to make that quick adjustment? 
Because this is my understanding kick in, in April already, and 
last throughout the rest of the year.
    Ms. STIFF. I think that for that type of provision we 
generally find that most employers are able to respond quickly 
and nimbly to that and aren't expecting a lot of compliance 
issues there.
    We expect this time next year as taxpayers are trying to 
reconcile what was withheld and what they owe, we may see some 
additional issues or questions then. But, our experience is 
that our employers are as a general rule prepared to respond to 
a change.
    Mr. KIND. What about employees with multiple paychecks or 
multiple jobs?
    Ms. STIFF. That's where it gets complex, because which 
withholding gets adjusted. Where, and is the employee going to 
be left as I said earlier at the end of this year, either 
having been over withheld more than they wanted or under 
withheld; and, part of our communication strategy will be to 
alert taxpayers to that. But I'm confident that with 140 
million individual filers this year, there will be some that 
will encounter that difficulty.
    Mr. KIND. Let me ask you too. I know it's a small item, but 
it's one that nevertheless tends to bother me from time to 
time. I notice that in the tax rebate notification process last 
year, but it's my understanding the IRS is going to be sending 
out some tax withholding reports to nine million employers 
starting in mid-March, mailing it out.
    How much is that going to cost and is it necessary to have 
to actually mail those reports out to nine million employers, 
when my guess is all of them are automated anyway and they can 
get this information off the Internet?
    Ms. STIFF. I don't know that it's nine million or not, so I 
won't dispute your number. But I don't, off the top of my head, 
actually know.
    Mr. KIND. At least that's what been reported.
    Ms. STIFF. It hasn't been. Okay. I'll say two things. We 
will have the tables on the web, in fact, they may be on the 
web. I've lost track in the last few days here. We'll have the 
tables on the web for employers to begin accessing almost 
immediately.
    Mr. KIND. Right.
    Ms. STIFF. We also feel that we do have to distribute the 
tables, because there's 20 something million small businesses 
in this country; and, to assume all of those, particularly some 
of the very small, are necessarily going to use the web.
    I don't think that you or anyone would want--you're 
intending for this money to get to these taxpayers--and we need 
to ensure that we equip the employers with the information they 
need to make that happen. I don't know the cost, but I probably 
can get that.
    Mr. KIND. Well, I would like to follow-up with you on that, 
because we are in the 21st century now; and with all due 
respect, technology is a major part of what's going on in the 
economy. And it just seems, you know, nine million withholding 
tables being mailed out individually. It seems to be an 
incredible waste of resources and money.
    I mean, last year, Mr. Chairman, you may recall there were 
two IRS notifications on the tax rebate check to the vast 
majority of people telling them you don't have to do anything. 
And it cost us a hundred million dollars to do those two 
mailings for that. So I'm just wondering if the IRS is thinking 
through this, how we can best utilize technology for cost 
savings; and, granted, the withholding tables may not be that 
expense to mail out and there may be certain segments that need 
that and show up in their doorstep. But I would hope that as 
we're moving forward, given the budget crunch, Your Honor, we 
try to streamline some of this.
    And, finally, Ms. Olson, I couldn't agree with you more on 
tax simplification and would love to begin a dialog with you, 
especially with the education and the savings complexity in the 
Code right now and how we can streamline that and consolidate 
it. I know you and your organization has done a lot of work on 
that, and some of those issues where you mention it and 
everyone's head goes up and down in vast agreement, you've just 
got to start doing it.
    Ms. OLSON. Thank you.
    Ms. STIFF. Thank you.
    Chairman LEWIS. Mr. Davis is now recognized for question.
    Mr. DAVIS. Thank you, Mr. Chairman.
    Ms. Stiff, unlike Mr. Roskam I don't have any constituents 
who work for the IMF so I won't waste your time on that. Let me 
though talk about something that's a little bit more relevant 
to my constituents. The University of Alabama runs an 
organization called the Center for Ethics and Social 
Responsibility; and the very talented young man who runs it 
happens to be the grandson of the former Supreme Court Justice, 
the late Hugo Black.
    And several months ago the Center conducted a sting 
operation. They used law students to go to tax preparer sites 
in the state of Alabama. All of these tax preparer sites 
purported that they would help you get an anticipatory refund 
in very short order. Sting operation was done in these 13 
sites. Virtually every single one of them was engaging in some 
kind of negligent practice or some kind of practice that was an 
outright misrepresentation--virtually every single one of the 
13.
    So Mr. Black has put together a legislative proposal at the 
Alabama legislature is currently considering, and it has 
several interesting components I want to get your reaction to. 
One of the things that this legislation would require is that 
for tax preparers, first of all, would have to be licensed by 
the state of Alabama. The second thing is that after being 
licensed as with lawyers, as with doctors, as I understand is 
the case with accountants, they would have CLE obligations. 
They would have to regularly take courses to update their 
knowledge of the shifting sands of tax law; and, in addition to 
that, they would have to pass a proficiency exam before they 
could be licensed at all to be tax preparers.
    Could I get some reaction from you, Ms. Stiff, and from you 
Ms. Olson, as to the advisability of a legislature passing that 
kind of remedial action to protect people from tax preparer 
services? Ms. Stiff, I'll start with you.
    Ms. STIFF. Yeah, I'll say a couple things. Nina will 
probably be in a position to respond probably more completely 
than you are because in the role of the IRS we generally 
enforce and don't advocate laws. But I will say we are 
concerned.
    People that hold themselves out to the public and take on 
that fiduciary responsibility that they conduct themselves in 
an appropriate manner and we're taking steps to strengthen our 
own monitoring of that universe and where we're developing a 
preparer strategy in outreach, I know there's been much debate 
by this body and on the Senate side as well around the merits 
of registering of licensing of monitoring; and, I think that 
there's pros and cons to that.
    I am confident that there's administerability issues with 
doing any and all of what you're saying, and I think there are 
folks that will say to some extent it will help. To other 
extent, it tends to make it more difficult for the already 
compliant and drive the non-compliant further underground. So I 
think there's a lot of debate to be had on the issue.
    Mr. DAVIS. Ms. Olson, would you like to weigh in?
    Ms. OLSON. Well, in 2002 one of my legislative 
recommendations was to do exactly what you suggested: register, 
test, and require continued testing of what I call unenrolled 
preparers; people who are not attorneys, certified public 
accounts or enrolled agents who already have a testing and 
annual continuing education proposal. That provision has been 
passed several times by the Senate.
    Congressman Becerra had a bill last year that had the most 
recent version of it and I think there's actually very little 
debate on this at this point.
    Mr. DAVIS. Unless you're in the Alabama legislature.
    Ms. OLSON. Well, every single major practitioner group, 
including these unenrolled preparers nationally have come out 
in support of this proposal. There are little things around the 
margin that they're concerned about.
    I just say to me the worst thing that could happen is to 
have 50 different regimes around the United States for the 
Federal tax law so that people who prepares from one state to 
another have to meet all of those requirements. This is a 
Federal law and I think we need to make sure that the people 
who are making their living by preparing returns, Federal tax 
returns, meet a basic level of competency; and we have to have 
the regime for that.
    Mr. DAVIS. And I would just conclude, Mr. Chairman, by 
saying Ms. Olson I suspect you're right. An ideal world there 
would be a Federal standard in place. For various reasons that 
has not happened. I think it should happen and until we get to 
that point, it seems eminently reasonable to me that states 
would regulate in this area. As a matter of just common sense, 
it seems to me if you're preparing tax returns for people and 
holding yourself out by definition as someone who has expertise 
that you ought to have to pass some exam that says that you 
have that expertise.
    As we've established, tax law changes constantly. This body 
has made changes. The last several years have been very 
impactful, so it seems reasonable that you ought to have to 
know about those things. And last comment, what has predictably 
happened in my state is that there was a lot of momentum around 
it. It was moving in a particular direction, and now a lobbying 
group has formed in the state of Alabama to fight for the right 
to prepare returns without being licensed. Not surprisingly, 
the lead entity in that lobbying front happens to be the 
company that have the most egregious violations and the sting 
operation that was conducted.
    Thank you, Mr. Chairman.
    Chairman LEWIS. Thank the gentleman, Mr. Davis from 
Alabama, for raising the issue. I think that concern would have 
been before us before, that you have this little fly by-night 
tax preparer that comes around during filing season, and a sort 
of rip-off to taxpayers. And then I've heard they sort of 
disappear.
    Mr. Becerra, who I want to yield to has been involved in 
the issues. I yield.
    Mr. BECERRA. Mr. Chairman, thank you very much.
    Mr. Chairman, I think this type of hearing, in fact, I 
think informal sessions with both Ms. Stiff and Ms. Olson would 
be very worthwhile for us. So first thank you for being here, 
your testimony, your observations; and, once again, Ms. Olson, 
thank you for your excellent recommendations on what we could 
try to do.
    I think much of what you said includes actions that could 
be taken without legislative authority; and, perhaps we could 
work with you on trying to help move in that direction with 
some of these activities.
    Mr. Chairman, Ms. Olson has in her testimony a figure that 
I think is important for us to note. There were more than 
2,600,000 taxpayers with delinquent accounts that or non-
collectible accounts in 2008. That same year, the IRS accepted 
about 10,600 offers in compromise, negotiated settlement, with 
some of these taxpayers who were delinquent. Interests have 
been trying to resolve it. Another 22,500 or so were taxpayers 
given a chance to arrange partial payment installment 
arrangements.
    That means that only one of every 78 taxpayers, who is 
delinquent or has an account that's non-collectible, had an 
opportunity to try to resolve this without facing some further 
legal challenges or consequences. I am gratified to hear that 
the IRS is trying to do a little bit more and that recently you 
announced that you were going to try to deal with this 
situation economic distress that many taxpayers find themselves 
in to try to be more accommodating for those who are reasonably 
trying to do what they can to pay their share of taxes that 
they owe.
    But, I have a question that I'd like to ask Ms. Stiff and 
Ms. Olson. Actually, let me direct it to Ms. Olson for now. 
Those private collection agencies that are collecting from many 
of the most distressed families out there, because many of the 
accounts that these collection agencies have are people with 
modest incomes whose tax obligation is quite low. But for them 
it's a big debt. These collection agencies don't fall into the 
same requirements and responsibility that IRS personnel do to 
try to provide taxpayers with information about what they can 
do to try to make it easier for them to pay their taxes owed.
    Do those agencies have those same types of requirements?
    Ms. OLSON. No. The only thing that those agencies can do is 
ask the taxpayer if they can full-pay or if they can pay within 
3 years. And anything else, the case has to go back to the IRS; 
and, clearly, the incentive is there that you would in ever so 
subtle ways, you would want to keep the case, because that's 
what your commission is basically based on. The agency's 
commission is based on the collections from the full payments 
or the installment agreements that they bring in, not that the 
IRS brings it.
    Mr. BECERRA. So first these private tax collection agencies 
are not required to inform these taxpayers that they could 
actually use the IRS directly to try to resolve their problems 
if they're wishing to try to pay their taxes.
    Ms. OLSON. They are required to tell the taxpayer that they 
can opt-out. I do not know if that's in their scripts. It is in 
the first letter that the taxpayer gets. But it doesn't say 
that you can opt-out and talk to the IRS about an offer in 
compromise.
    Mr. BECERRA. And are they required to tell these taxpayers 
of the new steps that the IRS is taking to assist taxpayers 
facing difficulty paying their taxes?
    Ms. OLSON. Not to my knowledge.
    Mr. BECERRA. And then secondly we find that these tax 
collection agencies earn their money. They make their profit by 
making sure the collection occurs.
    Ms. OLSON. Right.
    Mr. BECERRA. So if they get a cut of the collection, it's 
not in their interest to send them over to the IRS. They get no 
cut if they just send them over to the IRS. They are the ones 
that have to collect. So it's almost in their interest not to 
inform taxpayers of the services that the IRS provides free to 
try to help them make arrangements to collect their taxes, 
which I think is especially in this time of economic hardship 
just the wrong way to go.
    Ms. Stiff, I know many of us have concerns with private 
collection agencies for quite some time in this regard, and I 
hope that we have an opportunity to talk more specifically with 
the agency about this, because I think this is the worst time 
for us to be having headhunters out there looking for people 
who might be willing to pay their taxes but aren't being given 
all the information that should be out there for them to try to 
help them deal with all their economic circumstances that they 
faced right now.
    Mr. Chairman, I know my time has expired, but if I may just 
make one other point, it concerns me to no end to know that a 
Social Security recipient can have his or her Social Security 
monthly stipend levied against based on an IRS claim. Now, 
we're all taxpayers, and we all have to pay what we owe the 
government. And if it's not a voluntary system, we're in real 
trouble and we have to encourage people to be forthcoming and 
participatory.
    But, I've got to believe there's a way for the IRS to work 
with recipients or taxpayers who are recipients of Social 
Security and probably for their main source of income to work 
with them to make sure that as we collect the debt they owe the 
government through taxes that we do it in a way that 
accommodates their need to continue living, especially if the 
Social Security check is their main form of income.
    I know that there are limits that you can place on other 
types of levies, but there is apparently no limitation on at 
what level you can dig into the pocket of someone who receives 
Social Security payments. And I hope that we can examine that a 
little closer, because this is probably not the time to hit 
people who live off of Social Security to pay their taxes.
    I suspect that they would be more than willing to help make 
their payments if we could reach some accommodation with them; 
and, so, if we could follow-up with that, I would very much 
appreciate it.
    Ms. STIFF. Sure.
    Chairman LEWIS. Let me just ask the two of you. If there 
anything that you want to tell us that you think we should know 
during this filing season? Do you think we have all the 
information that we need?
    What is your greatest concern during this filing season?
    Ms. OLSON. I'm going to say something, because I think 
Linda is in an awkward position to say this.
    Chairman LEWIS. You don't think she had the courage to 
speak?
    Ms. OLSON. I think that in her position she's not able to 
say very clearly the resource demands on the IRS about the last 
couple of years with the economic stimulus payment and now the 
new provisions that are coming in. And I just thought giving 
some information about the level of service on the phones. Last 
year was a record level of service meaning calls came in and 
essentially roughly what percentage of the calls were we able 
actually to get to. And I'm not even talking about the wait 
time that taxpayers have before we can get there.
    But, through February 7th of this year, their overall level 
of service was at 55 percent and a year ago even with the 
difficult filing season the same time it was at 79 percent. On 
the main 1040 number, through February 2nd of this year, the 
level of service--this is the main number for individuals--is 
at 50 percent, and a year ago it was at 80 percent. And my own 
phone number, my own toll free number for the taxpayer advocate 
service, where we get the cases where taxpayers are having the 
difficulties, you know, with these things. This is answered by 
another part of the IRS. It's part of the main phone system, 
but it's a dedicated line.
    We are at 69 percent level of service and a year ago we are 
at 83 percent; and I think that as we look to the IRS to 
deliver programs, deliver stimulus to the economy, become a 
method for helping people with health insurance who've been 
unemployed, we have to really think hard about what the IRS 
needs and resources in order to be able to do this job. There 
are lots of reasons for why the IRS should do the job, because 
we have that contact with taxpayers.
    But, on the other hand, if we're doing all these other jobs 
and not able to deliver our core ability to process the 
returns, answer tax law questions, deal with account questions, 
collect money when taxpayers are calling us, you know, then all 
of us are harmed. And I just want to make the case for perhaps 
this Committee weighing in with the appropriators about, you 
know, the need for really adequate funding for the IRS in 
interfacing with the taxpayers of the United States.
    Chairman LEWIS. Ms. Olson, I appreciate your comments and I 
appreciate you sharing those with us; and, I'm sure my 
colleagues appreciate it and the IRS appreciate it also.
    Mr. KIND. Mr. Chairman, could you yield on just that one 
point?
    Chairman LEWIS. I assume the same applies to that low-
income taxpayer clinics that are being established and the 
increase in demand for assistance and help with those clinics 
in preparation?
    Ms. OLSON. Yes, and I'm so proud of their growth that we're 
up to 160 now, and we get applications. We do a survey, a needs 
assessment of United States low-income taxpayers, to identify 
areas where there are populations of taxpayers that we believe 
need the assistance. And there are many places out there that I 
think we could get a program started with other community 
groups.
    Ms. STIFF. May I just insert I think there may be the issue 
isn't just how much or how many. The issue is that we are now 
on about an 18-month run of asking the workforce or the IRS to 
do a very heavy lift over and above what their core mission, as 
Nina put it, and a lot of nights, weekends, holidays, vacations 
sacrificed for doing that. And I think that like any business 
at some level when you do that for so long you just increase 
the risk of people's ability, their alertness, those things. So 
I think when you say what do we worry about, I think that's an 
issue that continues to be something that the Commissioner and 
I are both cognizant of.
    Chairman LEWIS. Thank you. We appreciate it.
    I want to yield and recognize the Ranking Member, Dr. 
Boustany, for in addition the question and statement you'd like 
to make.
    Mr. BOUSTANY. Thank you, Mr. Chairman. And that is, Ms. 
Stiff, I'm glad to see that the IRS is recognizing the upheaval 
and uncertainty in the housing market. And there are going to 
be difficulties with valuations of properties, predictably as 
we look at the offers in compromise agreements. And in your 
testimony you refer to or you suggest that some of these cases 
will be referred to a specialized group. Could you elaborate a 
little bit on that?
    Ms. STIFF. Yes, what we're doing is kind of instilling. 
I'll consider it a fail-safe for the taxpayers. It's that in an 
offer in compromise situation, if there's real estate involved, 
the valuation of that real estate, the decisions that are made, 
could hinge on that. And so we want to ensure that if for any 
reason we're denying or that our information about the 
valuation runs contrary to that of what the taxpayer believes 
it is, that those cases will go to a specialized unit of 
people--I think they're located in Texas--whereby, they'll take 
the extra step and make sure that the valuation we're relying 
on is based on the best facts and come back to it that way. So 
it provides what I would describe as the fail-safe for the 
taxpayer.
    Mr. BOUSTANY. I thank you.
    And, finally, our colleague, Mr. Roskam did raise some 
important questions regarding fairness and the public 
perception of fairness. And he referenced the case of Secretary 
Geitner. And I think it's important, and I think your term as 
he was ending his line of questioning was having a reasonable 
basis for not applying certain penalties, finds and so forth. 
It would be helpful to us to have some general guidelines on 
how that is carried out, particularly in high profile cases. 
And I'm not going to put you on the spot now with it, but if 
you could get back to us in writing on that, it might be 
helpful.
    Ms. STIFF. Will do!
    Mr. BOUSTANY. Thank you.
    With that, Mr. Chairman, I am happy to yield back. I don't 
know if my colleague here has an additional question with your 
indulgence.
    Chairman LEWIS. Yes, you are recognized.
    Mr. REICHERT. Thank you, Mr. Chairman.
    I won't take up the full 5 minutes but I just want to 
quickly comment that I do understand the difficulty in 
answering some of these questions. I was Sheriff in Seattle 
prior to coming here to Congress and I testified both as an 
appointed sheriff and an elected sheriff in front of my county 
counsel. So I understand the difference in your ability to 
share freely, but I am a little disappointed that that my 
question I asked earlier was, I think, initially addressed 
until the Chairman pressed it, just a little bit as far as 
staffing and the need for staffing additional funding and how 
much that might cost.
    So I want to focus on comments made about the offer in 
compromise program. There was, I think, Ms. Stiff. You 
mentioned that you wanted a third party assessment and are you 
thinking of process mapping effort in that program? Is that 
what you're looking at?
    Ms. STIFF. Well, that will be part of it, but it's actually 
less. We've spent a good deal of time in the last 4 years re-
engineering our internal processes, process mapping, looking at 
where the work needs to be done. And, while there remain, you 
know, as with any program and opportunity for improvements 
there, I think the bigger question for me now isn't what 
happens when they get in. It's increasing the number of people 
who are availing themselves of the program and then assuring 
they're being treated in a fair and equitable way once they're 
in.
    Mr. REICHERT. What would be the cost of that, do you think?
    Ms. STIFF. Of the study?
    Mr. BOUSTANY. Yes, of your third party assessment?
    Ms. STIFF. I don't know off the top of my head.
    Mr. BOUSTANY. And so you've been talking about this for a 
while though. How long has this discussion in the IRS been 
going on?
    Ms. STIFF. Oh, actually not. As I said earlier, when I was 
going through everything last night and looking at what we've 
done, we've been working with Nina. We've been working with 
practitioners and preparers. It's a perennial issue everywhere 
we go, and it occurred to me that it may be time for us to look 
at it differently than we've been looking at it if we're going 
to solve it.
    Mr. REICHERT. Would this be expanded beyond the offer in 
compromise program? It seems to me that the IRS overall could 
use a third party assessment.
    Ms. STIFF. I'm not sure specifically to what your question 
is. We have independent assessments ongoing at any given time 
in specific program areas. We also have ongoing oversight by 
GAO into specific programs.
    Mr. REICHERT. Is GAO considered to be a third-party 
assessment for you?
    Ms. STIFF. Yes.
    Mr. REICHERT. Yeah. Okay, thank you, Mr. Chairman.
    Chairman LEWIS. I would like to thank the IRS Deputy 
Commissioner and the national taxpayer advocate for the time 
and testimony.
    The Subcommittee appreciates your views. Thank you for 
being here today. We look forward to seeing you again; maybe 
not soon, but sometime later. There's more business to come 
before the Committee. This hearing is now adjourned.
    Thank you very much.
    [Whereupon, at 11:28 a.m., the Subcommittee was adjourned.]
    [Submissions for the Record follow:]
         STATEMENT OF HOWARD S. LEVY, FORMER IRS TRIAL ATTORNEY
    I am a former IRS attorney who has helped everyday people work 
through IRS economic difficulties for almost 20 years. I have seen 
through the eyes of the government, and have seen the faces of 
taxpayers in distress. I appreciate the opportunity share my 
observations and recommendations.
    The problems of taxpayers who are in the system are well-
documented. The IRS offer in compromise program is broken; IRS expenses 
allowances make obtaining installment agreements virtually impossible. 
Older IRS tax debt sits uncollected, leaving taxpayers in financial 
limbo for years.
    My clients who are in the system are increasingly using bankruptcy 
to eliminate IRS difficulties, a course of action that cannot be good 
for the client, the government, or the economy.
    But the weight of the 6.1 million taxpayers who are out of the 
system deserves equal attention.
    I urge you to offer amnesty to the 6.1 million IRS non-filers if 
they come forward and pay the taxes they owe. This will strengthen, not 
weaken, our tax system. It will alleviate economic hardship on 
taxpayers. It will also bring the Treasury billions of needed dollars 
not just now, but into the future.
    For most, life situations lead to dropping out of the tax system, 
not a desire to gain an advantage. It could be divorce, medical 
problems, or the challenges of a business during these hard economic 
times. If the taxes cannot be paid, the returns are often not filed.
    Once behind, interest and penalties escalate to the point that a 
taxpayer can never catch up. The failure to act is magnified by the 
fact that interest and penalties double the original tax liability 
every five years. I have seen the discouraged faces of hard-working 
Americans--paying $100 monthly on a $20,000 tax debt--when they 
discover that the amount they owe is actually increasing, not 
decreasing, because of the interest and penalties.
    For taxpayers who come forward with their taxes, provide amnesty 
relief from the interest and penalties if the returns are filed and the 
tax is paid over an agreed upon payment plan. To ensure future 
compliance, implement a five year probationary period to stay current 
on all future obligations. Those suspected of tax crimes would not be 
eligible.
    In addition to the non-filers, there are millions of taxpayers who 
have filed and owe money. They badly want to repay their debt. They try 
to pay it, but can never break free from the weight of interest and 
penalties. It holds back their businesses, their lives and the economy. 
Provide the same relief to them.
    Tax amnesty works. States offering non-filer amnesty have been 
highly successful raising money and bringing taxpayers back into the 
system. Nevada recently collected nearly $41 million between July and 
October, 2008 from amnesty. Oklahoma generated about twice what it 
expected, raising $82 million in 90 days.
    If two states could generate $123 million in less than four months, 
imagine the benefit by including everyone back into the Federal system?
    Tax debt puts lives and economies on hold for years. Employment 
opportunities are lost and new business ventures delayed; home 
ownership is an impossibility.
    People want a fresh start. We as a country are now dedicated to 
reclaiming financial stability. To achieve that, encourage those who 
are out of the system to come back in. Implement IRS collection 
policies that encourage taxpayers who are in the system to stay there.
    I would be happy to meet with Committee Members to discuss this 
Statement. My contact information is Voorhees & Levy, LLC, 11159 
Kenwood Road, Cincinnati, OH 45242, [email protected]; 
www.howardlevyirslawyer.com.

Howard S. Levy

                                 

 STATEMENT OF INVESTMENT FRAUD VICTIM'S TAX RELIEF THROUGH IRC SECTION 
                               165(c)(2)
    Victims, taxpayers and citizens, in general, are experiencing an 
extraordinary chapter in American financial history. Economic 
challenges, budget deficits and tax implications lead the list of many 
issues confronting citizens and legislators. Surfacing in the midst of 
what appears to be mass chaos is yet another disturbing issue--victims 
of investment theft suffering irrecoverable losses in their life 
savings. One bright spot, with the uncovering of these massive 
investment scams, the media is finally bringing attention to the fact 
that there are hundreds of thousands of people across this great 
country who are suffering tremendously at no fault of their own.
    For the last ten years, I have been fighting for financial recovery 
for victims of investment theft. There's been a law on the books since 
1954 that helps some victims, but most often it ignores the truly needy 
in favor of the wealthy. Unfortunately, it also requires a monumental 
struggle with the IRS to get the deserved relief. The pain and 
suffering these issues caused demanded I shift my focus and become an 
advocate for victims in three ways:
  Investment Fraud Prevention Through Education
  Maximize Recovery Through Legitimate Sources
  Changes in the Tax Code to Carry Out the Intention of the Law

PROBLEM_LACK OF CLARITY, COUNTLESS (MIS)INTERPRETATIONS & INEXPERIENCED 
        PROFESSIONALS
    The $50 billion dollar Bernard Madoff Ponzi Scheme brought this 
subject to the public, but sadly, and very importantly, it also 
surfaced so-called experts that began advising victims on the recovery 
option under Internal Revenue Code Section 165(c)(2). Adding to the 
tragedy of these losses is the fact that those same experts are 
supplying incorrect information. As an example: Stanford Law School and 
a former senior tax attorney for the IRS are both normally sources you 
can depend on for tax law advice. They are both valuable sources of 
information, but in trying to help victims of investment fraud, they 
recently published information that could cause more problems than they 
solve.
    An article, Long And Winding Path To Tax Relief For Madoff Victims, 
appeared on accountingweb.com dated February 19, 2009. Stanford 
University provided information on the IRC 165(c)(2) tax deduction, 
quoting a former IRS official. This article is an example of a long 
list of experts serving up misconceptions, serious omissions, wrong 
answers and lost opportunities. Add The Wall Street Journal, MSN, the 
New York Times and even the IRS to your list of experts providing 
incorrect information, and you begin to understand the seriousness of 
the problem.
FACTS_CURRENT TAX LAW HELPING VICTIMS OF INVESTMENT THEFT
    Current law includes but is not limited to, the following facts:

IRC 165(c)(2)

          Law was established in 1954 to help investment fraud 
        victims recover a portion of their losses through tax benefits 
        (much like that of natural disaster loss victims or casualty 
        losses such as a destroyed automobile not covered by 
        insurance). It was readdressed in 1984 by the Tax Reform Act, 
        which did away with the 10 percent exclusion/$100 per item 
        reduction.
          Deduction allows qualifying victims to take their 
        total net loss against ordinary income in a single year.
          Deduction allows for the taxpayer to go back three 
        years after declaring the loss in the ``Year of Discovery'' if 
        a Net Operating Loss (NOL) remains, or, they can waive their 
        right to go back, and carry the NOL forward up to 20 years.
          Deduction allows for up to a 20 year carry forward, 
        with the exception of when the 3 year carry back is utilized, 
        which subsequently creates the potential for a 23 year benefit.
          Losses in IRA and Pension Funds Do Not Qualify.
          The taxpayer must prove the investment was made and 
        lost by reasons of theft as defined in the state where the 
        transaction took place.
          Taxpayer must exhaust all reasonable means of 
        recovery.
          Taxpayer must be able to prove privity (Private or 
        joint knowledge of a private matter; especially:cognizance 
        implying concurrence (Merriam-Webster) or in practical terms, 
        there was a first hand relationship between the thief and the 
        victim) in order to qualify. Ponzi scheme victims are generally 
        not held to this requirement but that I'm aware, that exception 
        is not written as fact.
          (Some) IRS agents consider any form of pending legal 
        action (individual, class action, Federal indictments, 
        bankruptcy or receivership) as potential recovery and will deny 
        a claim until such time as that open pursuit of recovery is 
        resolved.
          IRS requires a victim to provide proof of cost basis 
        (copies of checks, front and back, wire transfer confirmations, 
        disbursements, withdrawals, recovery, etc.).
          Taxes on phantom income are recoverable in full but 
        are only allowed to be carried back 3 years. The balance (NOL) 
        can be carried forward up to 20 years.
FICTION_MISINFORMATION COMMONLY GIVEN TO THE PUBLIC
          Before a taxpayer can claim a deduction, they must 
        first exclude 10 percent of their Adjusted Gross Income and 
        $100 per item--Wrong. Although originally an aspect of the 
        deduction, this exclusion was eliminated 25 years ago by the 
        Tax Reform Act of 1984.
          2 Year Net Operating Loss Carry Back--Common 
        misconception. Other than in 2002, when Congress allowed an 
        exception allowing for 5 years, the carry back has always been 
        3. The 2 year carry back does not apply to investment losses 
        caused by theft.
          Up to 50 percent recovery of loss--Misleading. In my 
        experience, taxpayers should expect to receive a total benefit 
        between 10-20 percent of their loss. Although there may be an 
        exception out there somewhere, I've never seen any victims 
        receive even close to a 50 percent benefit.
          The deduction is taken in the year victims discover 
        the money is gone--Maybe but not likely. Convincing the IRS of 
        the right year to take the deduction is complicated. The big 
        issue is the taxpayer having ``exhausted all reasonable means 
        of recovery''. The ``year of discovery'' determination will 
        vary from agent to agent.
          The deduction is simple to obtain--Really? It takes a 
        knowledgeable and experienced 165 tax preparer to guide both 
        taxpayers and the IRS agents through this process. I promise 
        you, you should be prepared to be fully prepared. Taxpayers 
        should expect to be reviewed carefully.
FUTURE_NEW PROPOSED LEGISLATION
    For some time, I have been trying to get Congress to see the need 
for changes in the law. The size of the Madoff ponzi scheme helped me 
with my mission to get congresses attention. In doing so, they are now 
discovering how prevalent investment theft and ponzi schemes are in 
America. Congressman Kendrick Meek of Florida's 17th district moved 
quickly and proposed new legislation on February 24, 2009. I'm thrilled 
to see it happen, but it did not go far enough.

Proposed changes to current tax law.

          Will allow a 10 year carry back (or length of time in 
        fraudulent investment, whichever is lesser) on cost basis and 
        taxes paid on phantom income verses the current carry back of 3 
        years. Given the fact that a great deal of injured investors 
        are in the retiree/elder categories and have had little to no 
        income over the last several years, this change will hopefully 
        increase the chance of them reaching a year where significant 
        taxes were paid.
          Proposes to provide assistance to individuals who 
        contributed to charitable organizations. This is a new aspect 
        to the law and it needs to be further examined in order to 
        determine just who gets what benefits? It's not clear on how 
        this will work and I'll have to wait for more details before I 
        can comment.
          New legislation uses the word ``estimate'' verses 
        ``ascertained''. This may be a big help in the filing of the 
        claims in a reasonable amount of time, but it is not definitive 
        and more work needs to be done.
FUTURE_CONTINUED_QUESTIONS NOT ADDRESSED
          Will the complicated terms ``Year of Discovery, 
        Privity, Scienter, Cost Basis and Complete and Final 
        Transaction'' be defined in a way that makes it reasonable for 
        the taxpayer to meet the requirements for filing? Regardless of 
        what legislation is proposed or passed, unless these issues are 
        defined in a way that tax payers, their tax professionals and 
        the IRS alike can understand, little if any of this assistance 
        will reach the intended recipients.
          Why is this limited to just ponzi schemes? Although 
        certainly less publicized, other forms of investment fraud are 
        still investment fraud and all qualifying victims should be 
        given the same consideration, Will the new legislation actually 
        limit the amount of time before a victim can claim the 
        deduction and the IRS can take to approve it? The current 
        process often takes so long that victims lose everything, 
        including benefits, their homes and even their lives, before 
        the help arrives.
          Will IRA and pension savings be added to the forms of 
        acceptable losses/victims? A huge constituency of victims falls 
        into this category and although technically they never paid 
        taxes, they still worked hard for their money and would have 
        paid them when the time arose. The money was withdrawn, the 
        perpetrator was enriched and he or she should owe the taxes. 
        Regardless of whether the IRS actually receives them, the 
        victim should be entitled.
          Would a uniform tax rate potentially be the better 
        and fairer way to go? Although the current proposed legislation 
        goes far in trying to help, there are still a group of 
        individuals that will be left helpless. As many of these 
        individuals paid on average 15-20 percent in taxes when the 
        money was made, it doesn't seem quite fair that they are 
        penalized for having grown older or now having no income.
SOLUTION
    I'd start with definable (and reasonable) guidelines for tax payers 
and professionals. Next would be setting up fair opportunities for 
recovery across the board, regardless of tax bracket or age. And 
finally would be the creation of an organization, or an IRS qualifying 
exam, that sets the standards for professional services. Setting these 
guidelines and standards, much the same as what CPAs, doctors, 
attorneys, etc. must adhere to or lose their standing, would help 
satisfy the IRS that the claims are legitimate, would provide the 
relief that so far is nearly impossible to receive and insure that the 
professionals assisting these victims are qualified and making claims 
in good faith. By enacting legislation that gives the IRS authority to 
qualify those who represent taxpayers, they'd not only protect the 
victims, they'd protect all taxpayers against fraudulent or unworthy 
claims.
    It was a breath of fresh air to finally see someone step up and try 
to help these people and I applaud Congressman Meek. He's taken the 
first step, and with a few additions, he could make this law something 
to be proud of.
    I'd like to officially request an opportunity to discuss this issue 
with the individuals working on this bill and formally request the 
opportunity to speak before any hearing considering it. I not only can 
provide valuable practical information on how current legislation is 
affecting individuals but potentially can provide insight into aspects 
not yet considered that directly impact this issue.

Thank you for your time and consideration.

Moira Souza Shiver
MSS Advocacy Group
mss165.com
[email protected]

                                 

                     STATEMENT OF COLLEEN M. KELLEY
    Chairman Lewis, Ranking Member Boustany, and distinguished Members 
of the Subcommittee, I would like to thank you for allowing me to 
provide comments on IRS assistance for taxpayers experiencing economic 
difficulties. 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.
    Mr. Chairman, NTEU believes that in the current economic climate, 
it is more important than ever that taxpayers be able to deal with the 
IRS directly to work through any financial difficulties they may 
encounter. IRS employees have a wide range of tools and information at 
their disposal, which allow them work with taxpayers to address their 
financial hardships and to become compliant.
    Above all else, the IRS employee's interest is in assisting 
struggling taxpayers to meet their tax obligations in a way that will 
not exacerbate their financial distress. When an IRS employee works 
with a taxpayer, the employee has access to all of the taxpayer's 
information and can answer questions and offer advice. For example, 
they can see whether a taxpayer has not filed a return and explain that 
the sooner the taxpayer makes arrangements to address filing and 
balance due issues the less penalty and interest they will owe. They 
can look at the taxpayer's records and answer questions about why they 
owe a balance and what they can do about it. They can also tell the 
taxpayer that they are not having enough taxes withheld by their 
employer and need to address that or that if an ex-spouse is claiming a 
child as a dependent they will not also be able to receive an 
exemption. If a simple mistake, like a math error, has occurred, they 
can fix it. They can provide an extension of the time period for 
payment. They can make a determination that the taxpayer meets the 
currently not collectible requirements or whether the taxpayer may be 
eligible for an Offer in Compromise, in which part of the balance due 
is foregone.
    In addition to this wide-range of services, the IRS just last month 
announced a number of additional steps which will allow IRS workers to 
better assist financially distressed taxpayers. These include, 
providing IRS employees with greater authority to suspend collection 
actions in certain hardship cases where taxpayers are unable to pay; 
allowing skipped payments or partial monthly payments for taxpayers in 
existing installment agreements that have previously paid on time but 
are no longer able to do so due to loss of employment or some other 
financial hardship; easing ability of some taxpayers to get an Offer in 
Compromise, and speeding delivery of levy releases for homeowners who 
are behind on their taxes who want to refinance or sell their homes.
    Mr. Chairman, while these additional flexibilities will better 
enable IRS workers to provide some struggling taxpayers with the 
assistance they require to work through their financial difficulties, 
some of our most vulnerable taxpayers, including low-income taxpayers, 
those with language barriers, the elderly and the less educated will 
continue to be disadvantaged as a result of the IRS' continuing use of 
private collection agencies (PCAs) to pursue tax debts. Aside from the 
folly of turning this inherently governmental function over to the 
private sector, use of the PCAs to collect taxes creates a double 
standard and disadvantages Americans who may be in the most dire 
straits.
    Unlike the PCAs, the IRS is able to provide special assistance to 
the most vulnerable in our society. IRS workers can postpone, extend or 
suspend collection activities for a period of time, make available 
flexible payment schedules that provide for skipped or reduced monthly 
payments or waive late penalties or postponing asset seizures.
    The PCAs cannot offer taxpayers any of these authorities. They can 
only request full payment of taxes owed either immediately or in an 
installment agreement of 5 years or less. What is worse is that 
taxpayers who deal with PCAs are extremely unlikely to know that other 
options are available to them if they deal directly with the IRS, 
because the PCAs do not inform them.
    The PCAs sole interest is to collect from a taxpayer the balance 
due amount they have been provided. They have no interest in whether 
the taxpayer owes other taxes or may not have filed required returns, 
nor do they have access to any other taxpayer records, so they are 
unable to answer any questions, provide any advice or use any tools, 
such as extensions or offers in compromise.
    In addition, while taxpayers unfortunate enough to be assigned to 
the PCAs are limited to interacting with the PCAs over the phone, 
vulnerable taxpayers that prefer personal, face-to-face tax assistance 
with IRS employees can do so at the 401Taxpayer Assistance Centers 
(TACs) located nationwide. Taxpayers are able to visit the TACs when 
they have complex tax issues, need to resolve tax problems relating to 
their tax accounts, have questions about how the tax law applies to 
their individual income tax returns, or feel more comfortable talking 
with someone in person.
    The IRS is also specially equipped to assist persons with limited 
English proficiency work through their financial troubles through its 
Multilingual Initiative (MLI). This service wide initiative provides 
written and oral assistance to Limited English Proficient (LEP) 
taxpayers in Spanish, Chinese, Vietnamese, Korean and Russian. This 
program ensures that non-English-speaking taxpayers who lack full 
command of the English language and are experiencing financial 
difficulties are able to take advantage of the wide array of services 
that the IRS can offer them.
    In calling for an end to the IRS use of PCAs, Nina Olson, the 
National Taxpayer Advocate, an independent official within the IRS that 
looks out for taxpayer rights, has said that taxpayers who are 
unrepresented and vulnerable are disproportionately likely to be 
contacted by PCAs, and that the median income of taxpayers assigned to 
the PCAs is significantly less than that of taxpayers assigned to the 
IRS.
    In addition, Olson has noted that no case can be turned over to a 
PCA in which a taxpayer is represented by a tax professional. Thus, 
``taxpayers who can afford representation are exempt from this 
initiative.'' Clearly, that treats lower income taxpayers more harshly 
than others.
    Clearly, a tax system relying on public confidence that everyone is 
paying her or his fair share is dangerously eroded by the double 
standard generated when bounty hunters collect taxes from vulnerable 
people for profit and people who work directly with the IRS are 
receiving assistance that those working with debt collectors are not.
    NTEU strongly supports provisions in the Omnibus Appropriations 
bill to cut off appropriations for PCAs and supports H.R. 796 
introduced by Chairman Lewis and Chris Van Hollen that would repeal the 
IRS' authority to use them.
    Mr. Chairman, NTEU believes that in a bleak economic landscape, 
with skyrocketing job losses, home foreclosures and rising credit 
delinquencies, the last step we should be taking is disadvantaging 
people who are among our most vulnerable taxpayers.
    IRS employees remain committed to assisting delinquent taxpayers 
facing financial difficulties in the current economic climate. With 
access to a wide range of tools and information, the IRS can provide 
struggling taxpayers the flexibility and assistance they need to meet 
their tax obligations during the current economic downturn.

                                 

                STATEMENT OF SANTA BARBARA BANK & TRUST

Dear Mr. Chairman:

    On behalf of Santa Barbara Bank and Trust (SBBT), a brand of 
Pacific Capital Bank, N.A. and one of the nation's largest providers of 
tax-refund related products, I am writing to respond to testimony 
offered by Nina E. Olson, the National Taxpayer Advocate, at the 
Subcommittee's February 26th hearing to examine assistance available 
from the Internal Revenue Service (IRS) to taxpayers experiencing 
economic difficulties.
    The Taxpayer Advocate's testimony focused on the tax compliance 
challenges facing struggling taxpayers during this tax filing season. 
One such challenge cited by Ms. Olson was that ``[m]any taxpayers who 
are entitled to tax refunds and need them quickly do not receive them 
for weeks and this delay drives many of them to pay significant 
transaction fees to obtain refund anticipation loans (RALs).'' \1\ In 
fact, we believe that RALs offer a significant value to almost nine 
million families who use them every year to more quickly obtain access 
to needed funds in anticipation of their tax refunds.
---------------------------------------------------------------------------
    \1\ Written statement of Nina E. Olson, National Taxpayer Advocate, 
before the Subcommittee on Oversight, House Committee on Ways and 
Means, Hearing on Tax Compliance Challenges Facing Struggling 
Taxpayers, February 26, 2009, p. 14.
---------------------------------------------------------------------------
    For many low-income taxpayers, Federal tax refunds represent the 
largest sum of money they will receive at any one time in the entire 
year. As Ms. Olson's testimony noted, ``[a]mong taxpayers who received 
the earned income tax credit (EITC) and tax refunds in tax year 2006, 
the average refund amount was $3,184, and the average adjusted gross 
income was $15,763. Thus, the average refund amounted to 20 percent of 
each taxpayer's adjusted gross income.'' \2\ The National Taxpayer 
Advocate also stressed in her 2007 Annual Report to Congress that 
delays in obtaining tax refunds can be particularly challenging for 
low-income taxpayers:
---------------------------------------------------------------------------
    \2\ Id., p. 15.

          Tax refunds are particularly important to low-income 
        taxpayers--A taxpayer for whom the refund is so significant 
        often makes financial plans based on when he or she anticipates 
        receiving the refund and may view the refund as a lifeline. For 
        some taxpayers, a delay of two to four weeks in receiving the 
        refund could mean eviction, inability to pay the high heating 
        bills that arise during winter, or defaulting on credit card 
        bills from the holiday season.\3\
---------------------------------------------------------------------------
    \3\ National Taxpayer Advocate's 2007 Annual Report to Congress, 
December 31, 2007, Volume I, p. 5.

    The length of time it takes for taxpayers to receive their tax 
refund depends on (1) whether or they file electronically, (2) have a 
bank account and can receive the tax refund through the IRS Direct 
Deposit program, or (3) are unbanked and would have to wait for the IRS 
to send their refund via paper check. For taxpayers who have bank 
accounts and can receive their refunds through direct deposit, the IRS 
has done a good job of shortening the delivery time to between 8-15 
days. However, for taxpayers without bank accounts, obtaining a refund 
via paper check still takes up to eight weeks from the date they file 
their tax return.
    Ms. Olson is concerned that for unbanked taxpayers, such 
potentially long delays ``drive many of them to pay significant 
transaction fees to obtain refund anticipation loans (RALs).'' \4\ 
While SBBT cannot speak to the transaction fees charged by tax return 
preparers, we believe that our RAL fees are very reasonable and that 
RALs provide a valuable service by bridging the potential eight week 
gap that those without bank accounts would otherwise have to wait for 
their tax refunds.
---------------------------------------------------------------------------
    \4\ Id., p. 15.
---------------------------------------------------------------------------
    SBBT's average RAL amount in 2008 was $3,286. For that loan, SBBT 
charged a total of $113 in fees, including a $31 bank account set-up 
fee and a finance charge of 2.5 percent of the loan amount. Other than 
the actual principle due the bank (typically repaid after the IRS 
deposits the expected refund into a customer's temporary RAL bank 
account), there are no other loan fees, payments or interest due from 
the taxpayer, even if the IRS holds the refund up (e.g., because the 
taxpayer's return is undergoing a compliance check) or ultimately 
refunds less than the expected amount. There is simply the one-time 
fee. We believe this is certainly a fair amount to pay to receive 
access to much needed funds up to eight weeks faster than the IRS can 
currently deliver them.
    In order for SBBT to be able to offer RALs to taxpayers at a fair 
and reasonable price, we must develop a business plan each year for the 
program. This ``plan'' is based upon loan repayment rates, projected 
volume and certain fraud assumptions. The loan repayment rates are 
projected out over the tax season to determine the funding curve that 
the bank will need to cover the loans until repayment occurs. Finally, 
income projections for the filing season complete the ``plan,'' which 
is subsequently used to secure appropriate funding for the program. 
Funding agreements, sometimes obtained outside the bank, and their 
performance are critical to achieve profitability
    This filing season, our RAL program has been thrown into disarray 
as a result of significant IRS delays in providing timely refunds for 
thousands of taxpayers who are also RAL borrowers. Our information 
tells us that the Service is experiencing significant processing and 
operational delays, in part due to added compliance checks instituted 
this year. As a result of these IRS processing delays, the rate of 
return that SBBT will earn on its RAL program will be less than what 
was estimated in our plan. Because our earnings will be lower than 
estimated, next year the cost of funds to securitize our RAL lending 
program will likely increase. That increase will inevitably be passed 
on to consumers.
    Collectively, the RAL banks consider ourselves to be major 
stakeholders in the IRS electronic filing program. Returns associated 
with RALs represent 20-25 percent of all e-filed returns. RALs provide 
an important service every year to millions of taxpayers at a fair 
price. While the Taxpayer Advocate's suggestion to expand refund 
delivery channels is commendable, delivery of refunds for debit cards 
would not be a panacea for the processing and operational delays that 
occur in almost every tax filing season. For example, the compliance 
checks instituted this year would still have caused delays in refunds 
being loaded to debit cards for thousands of taxpayers. Conversely, 
thousands of taxpayers who otherwise would have had to wait (and would 
still be waiting) for their refunds obtained much-needed funds within 
24-48 hours after filing their taxes by using RALs. Until the IRS is 
able to quickly and efficiently deliver all tax refunds, we believe 
that RALs will continue to play an important role in tax 
administration.
    We look forward to discussing with you and the Subcommittee staff 
ways in which both the private and public sectors can achieve greater 
transparency for fees throughout the entire tax preparation process, 
rather than simply continue to focus on RAL fees.

Sincerely,

Joseph Sica
Senior Vice President
National Government Relations Director
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