[Senate Hearing 113-440]
[From the U.S. Government Publishing Office]
S. Hrg. 113-440
PROTECTING TAXPAYERS FROM INCOMPETENT
AND UNETHICAL RETURN PREPARERS
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HEARING
before the
COMMITTEE ON FINANCE
UNITED STATES SENATE
ONE HUNDRED THIRTEENTH CONGRESS
SECOND SESSION
__________
APRIL 8, 2014
__________
Printed for the use of the Committee on Finance
U.S. GOVERNMENT PRINTING OFFICE
90-922 WASHINGTON : 2014
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COMMITTEE ON FINANCE
RON WYDEN, Oregon, Chairman
JOHN D. ROCKEFELLER IV, West ORRIN G. HATCH, Utah
Virginia CHUCK GRASSLEY, Iowa
CHARLES E. SCHUMER, New York MIKE CRAPO, Idaho
DEBBIE STABENOW, Michigan PAT ROBERTS, Kansas
MARIA CANTWELL, Washington MICHAEL B. ENZI, Wyoming
BILL NELSON, Florida JOHN CORNYN, Texas
ROBERT MENENDEZ, New Jersey JOHN THUNE, South Dakota
THOMAS R. CARPER, Delaware RICHARD BURR, North Carolina
BENJAMIN L. CARDIN, Maryland JOHNNY ISAKSON, Georgia
SHERROD BROWN, Ohio ROB PORTMAN, Ohio
MICHAEL F. BENNET, Colorado PATRICK J. TOOMEY, Pennsylvania
ROBERT P. CASEY, Jr., Pennsylvania
MARK R. WARNER, Virginia
Joshua Sheinkman, Staff Director
Chris Campbell, Republican Staff Director
(ii)
C O N T E N T S
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OPENING STATEMENTS
Page
Wyden, Hon. Ron, a U.S. Senator from Oregon, chairman, Committee
on Finance..................................................... 1
Hatch, Hon. Orrin G., a U.S. Senator from Utah................... 3
WITNESSES
Koskinen, Hon. John A., Commissioner, Internal Revenue Service,
Washington, DC................................................. 5
Olson, Nina E., National Taxpayer Advocate, Internal Revenue
Service, Washington, DC........................................ 7
McTigue, James R., Jr., Director, Strategic Issues, Government
Accountability Office, Washington, DC.......................... 32
Cobb, William, president and CEO, H&R Block, Kansas City, MO..... 34
Salisbury, Janis, chair, Oregon Board of Tax Practitioners,
Oregon City, OR................................................ 36
Barrick, John, Ph.D., associate professor, Brigham Young
University, Provo, UT.......................................... 37
Wu, Chi Chi, staff attorney, National Consumer Law Center,
Boston, MA..................................................... 39
Alban, Dan, attorney, Institute for Justice, Arlington, VA....... 40
ALPHABETICAL LISTING AND APPENDIX MATERIAL
Alban, Dan:
Testimony.................................................... 40
Prepared statement with attachment........................... 49
Barrick, John, Ph.D.:
Testimony.................................................... 37
Prepared statement........................................... 62
Cobb, William:
Testimony.................................................... 34
Prepared statement with attachments.......................... 76
Hatch, Hon. Orrin G.:
Opening statement............................................ 3
Prepared statement with attachment........................... 126
Koskinen, Hon. John A.:
Testimony.................................................... 5
Prepared statement........................................... 131
McTigue, James R., Jr.:
Testimony.................................................... 32
Prepared statement........................................... 138
Olson, Nina E.:
Testimony.................................................... 7
Prepared statement........................................... 163
Salisbury, Janis:
Testimony.................................................... 36
Prepared statement with attachments.......................... 193
Wu, Chi Chi:
Testimony.................................................... 39
Prepared statement with attachments.......................... 257
Wyden, Hon. Ron:
Opening statement............................................ 1
Prepared statement........................................... 288
Communications
Gonzalez, Manuel................................................. 291
Jennings Advisory Group, LLC..................................... 292
Latino Association of Tax Preparers, Inc. (LATAX)................ 294
Maryland State Board of Tax Preparers............................ 301
National Association of Enrolled Agents (NAEA)................... 302
National Association of Tax Professionals (NATP)................. 306
National Society of Accountants.................................. 310
Williamson, Donald T. and James Gale............................. 316
PROTECTING TAXPAYERS FROM
INCOMPETENT AND UNETHICAL
RETURN PREPARERS
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TUESDAY, APRIL 8, 2014
U.S. Senate,
Committee on Finance,
Washington, DC.
The hearing was convened, pursuant to notice, at 10:08
a.m., in room SD-215, Dirksen Senate Office Building, Hon. Ron
Wyden (chairman of the committee) presiding.
Present: Senators Cantwell, Carper, Cardin, Brown, Casey,
Hatch, Grassley, Crapo, Roberts, Thune, Burr, and Isakson.
Also present: Democratic Staff: Michael Evans, General
Counsel; Anne Cammack, Senior Tax Counsel; Joshua Sheinkman,
Staff Director; Todd Metcalf, Chief Tax Counsel; Maureen
Downes, Detailee; and Juan Machado, Professional Staff Member.
Republican Staff: Chris Campbell, Staff Director; Shawn Novak,
Senior Accountant and Tax Advisor; Jim Lyons, Tax Counsel; and
Preston Rutledge, Tax Counsel.
OPENING STATEMENT OF HON. RON WYDEN, A U.S. SENATOR FROM
OREGON, CHAIRMAN, COMMITTEE ON FINANCE
The Chairman. The Finance Committee will come to order.
There is just a week to go before the April 15th deadline
for filing taxes, and millions of Americans are spending a good
portion of the spring struggling to fill out tax forms and
digging through piles of receipts in a painful annual ritual.
The complexity of the tax code creates an environment where
confusion and errors flourish. And the Congress is not
blameless on this issue, and that is one reason, in my view,
why it is time to rewrite the tax code and make filing your
taxes easier in America.
For many Americans, maybe even a majority, nothing will
have a bigger impact on their pocketbooks all year long. The
great majority of Americans want to get it right, but because
the tax code is so byzantine and so complicated, and so
overgrown, nearly 80 million Americans pay for help preparing
their tax return. And what is especially alarming is that most
of those paid tax return preparers do not have to meet any
standards--any standards--for competence in order to prepare
somebody else's tax return.
Earlier this year, because of the baffling outcome of that
Federal Appeals Court case called Loving v. IRS, protection for
American taxpayers against incompetence and fraud among tax
preparers has taken a significant blow. As too often seems to
be the case in situations like this, the most vulnerable people
in America are going to bear the brunt of the effects of this
decision. These are often people who are struggling from
paycheck to paycheck, counting down the days until their refund
comes through to help them make ends meet. They could be
seniors or working families who qualify for the Earned Income
Tax Credit, or they could be immigrants proud to pay taxes in
their new country who just want to make sure they are following
the rules of a tax code that is hard for anybody to understand.
Here is my bottom line. For the second time in 8 years, the
Government Accountability Office has done an independent
inquiry and proven that the absence of meaningful oversight of
much of the tax preparer industry is harming too many citizens
who can least afford it. The problems they run into could be as
simple as a typo or a miscalculation on a form, but they could
also be much worse.
In some egregious cases, preparers calculate a taxpayer's
refund in person and skip the line that shows who did the work.
Then, after the taxpayer leaves, the preparer falsifies the
math to boost the refund, files the return, and pockets the
difference. And worst of all, unless the taxpayer can prove
what happened, they are on the hook for the money when the IRS
finds out.
Witnesses today are going to share some more eye-opening
stories, and we are eager to get their thoughts on what the
government can do to come up with more sensible policies here.
The most important step is to restore standards to protect the
American taxpayer.
Now, I am proud to say my home State of Oregon gets this
issue right. Tax preparers at home study, pass an exam, and
keep up with the changing landscape of the tax code in order to
maintain their licenses. And Oregon's standards work. The
Government Accountability Office took a look at the system a
few years ago and found that tax returns from Oregon were 72
percent likelier to be accurate than returns from the rest of
the country. That puts fewer Oregonians at the mercy of
unscrupulous preparers and reduces the risk of a dreaded audit.
Now, there are ways for Congress to help in this arena. For
example, I strongly believe that comprehensive tax reform must
simplify the tax code and make filing easier. That must be a
priority.
When the Finance Committee passed the EXPIRE Act last week,
practically every Senator here on the dais agreed it is time to
end stop-and-go policies and give Americans more certainty
about their taxes. The bipartisan tax reform plan I worked on
with Senators Begich and Coats, as well as former Senator
Gregg, would make filing much quicker and more simple for
millions of taxpayers by tripling the standard deduction. That
would eliminate the need for more than 80 percent of taxpayers
to itemize deductions. Then they could easily prepare their own
returns and never fall risk to tax preparers' ineptitude or
misconduct.
Now, Senator Nelson of the committee has led our charge to
protect taxpayers from identity theft, and Senator Cardin has
also fought very hard for taxpayer rights. They and other
Senators have valuable ideas on how to solve the challenge, and
that is the point of today's hearing: to look at a variety of
approaches to protect the American taxpayer and the integrity
of our tax system.
As long as the code is so overgrown and so complicated that
most Americans have to seek out help to file, they should not
have to worry about crooked or incompetent preparers. It is
that simple.*
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* For more information, see also, ``Present Law and Background
Related to the Regulation of Conduct of Paid Tax Return Preparers,''
Joint Committee on Taxation staff report, April 4, 2014 (JCX-34-14),
https://www.jct.gov/publications.html?func=startdown&id=4580.
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As I wrap up, I would like to thank both our panels of
witnesses for being here today. As always, Senator Hatch and I
plan to work on this issue in a bipartisan way. You saw that,
again, last week.
[The prepared statement of Chairman Wyden appears in the
appendix.]
The Chairman. Senator Hatch, we welcome your comments.
OPENING STATEMENT OF HON. ORRIN G. HATCH,
A U.S. SENATOR FROM UTAH
Senator Hatch. Thank you, Mr. Chairman, for holding this
timely hearing. As we all know, the day for individuals to
complete and file their annual income tax returns is 1 week
away, and, at this point in the year, millions of Americans
face a number of difficulties in trying to comply with that
deadline.
The sheer complexity of our tax system requires the
majority of Americans to seek the services of a paid preparer
in order to navigate through and comply with the tax code. Of
the 142 million income tax returns filed by individuals last
year, nearly 80 million, as the distinguished chairman has
said, or roughly 56 percent, were prepared by a paid preparer.
Our income tax system relies heavily on good faith,
voluntary compliance, which, in turn, requires the services of
paid preparers who are both competent and ethical. The IRS
attempted to implement regulations in 2011 that, for the first
time, imposed both ethical and competency standards on any
person who sought to prepare tax returns for compensation. The
D.C. Circuit Court of Appeals, however, has since prevented IRS
from enforcing those regulations when it upheld the Loving
decision on appeal, as mentioned by our chairman.
Among the approaches to solving the problem of incompetent
and unethical paid preparers that we will hear about today is
government regulation. However, there are other approaches
worthy of thoughtful consideration. One approach is
comprehensive tax reform that results in a much simpler and
straightforward tax system, with fewer compliance and
administrative burdens.
A less complex tax system that allows for simpler
compliance rules will reduce taxpayer and preparer errors--
certainly errors associated with complexity--decrease the need
for complex tax filings, and eliminate opportunities to cheat
the system through unethical behavior. It is my belief that the
best way to protect tax filers from incompetent and unethical
tax preparers is to implement a fair and simple tax system that
dramatically reduces their dependence on paid return preparers.
Until we get there, we need to minimize the damage that
incompetent and unethical return preparers can cause, and I
look forward to hearing about different ideas on how to
accomplish this worthy goal during today's hearing.
Of course, with the IRS Commissioner testifying before us
today, there are other matters that deserve the committee's
attention. For example, there is the ongoing investigation into
the IRS's targeting of conservative groups during the 2010 and
2012 campaign seasons.
Four congressional committees, including the Finance
Committee, are currently looking into this matter. And up to
now, the IRS officials have, with some exceptions, been
cooperating. That is why it was disheartening to hear that 2
weeks ago, Commissioner Koskinen apparently tried to spin what
had gone on at the IRS, claiming that no one had used the word,
quote, ``targeting'' to describe what happened.
The fact is that the Treasury Inspector General for Tax
Administration, or TIGTA, Russell George, used the word
``targeting'' in his May 2013 report to describe the
allegations; and, in testimony before Congress, he stated that
the allegation had proven to be true.
Furthermore, Commissioner Koskinen himself described the
activities as ``targeting'' during his confirmation hearings
before this committee. I want to remind you of that, although I
really appreciate you being here today, more than you know.
Now, this may seem like we are engaging in semantics, but
the words we use here are important. If the administration,
rather than acknowledging what went on at the IRS and trying to
fix it, is going to engage in word play to minimize what
happened, we are going to continue to have difficulties as we
try to resolve these important issues.
Even the Washington Post fact checker said it is ``silly
and counterproductive'' to deny that the phrase ``targeting''
describes what happened, awarding the Commissioner 3 Pinocchios
for saying otherwise. On top of that, we have the regulatory
effort at the IRS that appears to be designed to further
marginalize these same conservative groups. I am talking, of
course, about the proposed regulations governing the political
activities of 501(c)(4) organizations.
People in organizations across the political spectrum have
rightly condemned these proposed regulations, because they
undermine free speech and the ability of American citizens to
participate in the political process. The IRS had a record
number of public comments filed in response to the proposal
from all points on the political spectrum, and, from what I
gather, they were almost uniformly negative.
This regulation, if given the force of law, would
effectively silence grassroots organizations by categorizing a
number of routine and long-accepted activities as political,
and it would ensure that a number of the administration's
critics remain on the sidelines of the political debate, and
that could work both ways in the future. And I do not want it
to work both ways.
This proposal is particularly disturbing given what has
already gone on at the IRS with the targeting scandal. Now,
last week, Commissioner Koskinen publicly stated that the
regulation is not likely to be finalized this year. To me, that
is not good enough. These regulations should go away entirely,
and Commissioner Koskinen has the power to make that happen.
Throughout the public debate over this proposal, little has
been said of the role of the IRS Commissioner in approving the
final regulation. However, as was confirmed by Secretary Lew in
his recent appearance before this committee, the IRS
Commissioner has the authority to unilaterally prevent these
regulations from taking effect. That being the case, any effort
to deflect responsibility in a different direction would appear
to me to be futile.
Now, as you can see, Mr. Chairman, we have a number of
issues to discuss today, and I look forward to a robust and
informative hearing. So I want to thank you for this.
The Chairman. Thank you, Senator Hatch.
[The prepared statement of Senator Hatch appears in the
appendix.]
The Chairman. Our hearing today is going to consist of two
panels. Our first panel includes two government witnesses from
the IRS. Our second panel will include the Government
Accountability Office and a cross-section of individuals who
are knowledgeable about tax preparation.
I would note that we have eight witnesses, and, to that
end, we hope that all of you are going to limit your testimony
to 5 minutes.
Our first witness is the Honorable John Koskinen,
Commissioner of the Internal Revenue Service. Our second
witness is Ms. Nina Olson, the National Taxpayer Advocate of
the IRS.
Thank you both for coming. Your prepared statements are
going to automatically be made a part of the record.
Why don't you start, Commissioner?
STATEMENT OF HON. JOHN A. KOSKINEN, COMMISSIONER, INTERNAL
REVENUE SERVICE, WASHINGTON, DC
Commissioner Koskinen. Thank you. Chairman Wyden, Ranking
Member Hatch, and members of the committee, thank you for the
opportunity to discuss IRS regulation of paid return preparers.
The tax return preparer community is a key ally in our
efforts to fulfill our dual mission of taxpayer service and tax
compliance. Each year, paid preparers are called upon to
complete about 80 million returns, as noted earlier, about 56
percent of total individual income tax returns filed.
Preparers make the IRS's job easier by helping their
clients properly report their taxes and pay what they owe. At
the same time, the level of oversight of paid return preparers
has traditionally been uneven, at best. While attorneys,
enrolled agents, and CPAs must meet mandated professional
competency requirements, they make up only about 40 percent of
the universe of paid tax return preparers. That has left
another 60 percent preparing returns with little or no Federal
oversight.
Although a few States, including the State of Oregon, as
noted, have begun regulating unlicensed preparers, most of the
tax professional community favors Federal oversight to avoid
the possibility of a patchwork of conflicting State
requirements.
While a majority of return preparers are competent and
operate with the highest ethical standards, there are those who
do engage in fraud. Others do not have enough training and are
not equipped to do an adequate job of preparing tax returns. To
ensure that return preparers are competent and adhere to
professional standards, the IRS launched the Tax Return
Preparer Initiative in 2010. Under this initiative, individuals
must register with the IRS if they prepare all or a substantial
portion of any Federal tax return or refund claim for
compensation.
The initiative also required paid preparers who are not
CPAs, attorneys, or enrolled agents to pass a competency exam
and complete annual continuing education requirements related
to tax law and professional conduct.
The IRS also extended the ethical rules found in
regulations, commonly known as Treasury Department Circular
230, to all paid preparers. This allows us to suspend, or
otherwise discipline, tax return preparers who engage in
unethical or disreputable conduct. Since 2010, more than a
million individuals have registered with the IRS and obtained a
Preparer Tax Identification Number, or PTIN. As of last month,
approximately 677,000 return preparers were active in our tax
professional database.
Preparers must use their PTIN as the identifying number on
returns they prepare for compensation, and they must renew
their PTINs annually. Along with regulation of return
preparers, the IRS also has a comprehensive compliance and
enforcement strategy. With regard to these efforts, it is
important to note that the registration requirement gives the
IRS a better line of sight into the return preparer community
than ever before. The information we obtain through the
registration process helps us do more to analyze trends, spot
anomalies, and potentially to detect fraud.
The IRS announced the testing phase of its return preparer
program in November of 2011. The test was designed to cover
preparation of Form 1040 and its related schedules. Through
2012, about 84,000 tests were given, and about 62,000 preparers
received a passing grade, for a pass rate of about 74 percent.
This, obviously, means that 26 percent were unable to pass the
exam.
The 15-hour annual education requirement consisted of 10
hours of Federal tax law topics, 3 hours of tax law updates,
and 2 hours of ethics or professional conduct. A lawsuit
against the return preparer program, as noted, resulted in a
court decision that invalidated the testing and education
requirements in January of 2013. An appellate court recently
upheld that decision. The IRS is continuing to assess the
appeals court decision while consideration is given to options
for appeal.
It is true that preparer registration alone does help in
identifying the paid preparer community, analyzing trends, and
determining a general level of taxpayer service. But competency
testing and continuing education may put us on a path to
ensuring that all tax return preparers provide the appropriate
level of service to taxpayers. We believe that this level of
service will translate into improved overall tax compliance and
certainly, with that, more effective tax administration.
Therefore, we urge Congress to pass the proposal in the
administration's fiscal year 2015 budget that would explicitly
authorize the IRS to regulate all tax return preparers. This
would let us resume mandatory testing and continuing education.
In the meantime, we are taking a close look at the possibility
of an interim step involving a program of voluntary continuing
education.
Before moving forward on this idea, we will solicit
feedback from a wide range of external stakeholders as to
whether such an interim step would be useful and appropriate.
But the better solution would be for Congress to grant us
explicit authority to provide better oversight of tax
preparers.
This concludes my testimony, and I would be happy to take
your questions.
The Chairman. Thank you, Mr. Koskinen.
[The prepared statement of Commissioner Koskinen appears in
the appendix.]
The Chairman. Ms. Olson?
STATEMENT OF NINA E. OLSON, NATIONAL TAXPAYER ADVOCATE,
INTERNAL REVENUE SERVICE, WASHINGTON, DC
Ms. Olson. Chairman Wyden, Ranking Member Hatch, and
members of the committee, thank you for holding today's hearing
on a subject I consider among the most important for U.S.
taxpayers.
Nearly 150 million individual taxpayers file tax returns
every year, many jointly with their spouses. Because the tax
code is so complex, the significant majority of taxpayers pay
preparers to complete their returns for them. Unfortunately,
many taxpayers have no easy way to determine whether the
preparer they are hiring can do the job.
In recent years, around 80 percent of tax filers have
received tax refunds. The average refund amount is a little
under $3,000 per return, and it is often higher for low-income
taxpayers who receive refundable tax credits. Therefore, the
work a preparer does can have a significant financial impact on
the taxpayer.
Other financial professionals whose work affects the
financial lives of their clients are widely regulated. Yet,
anyone can hang out a shingle as a tax return preparer, with no
knowledge, no skill, and no experience required. I know this
well, because I began my career in tax administration in 1975,
when I myself hung out a shingle as an unenrolled return
preparer. At that time, however, there were no widely available
return preparation software packages. To do my job, I had no
choice but to study and learn tax law, rules, regulations, and
publications. Because one actually had to know something about
the tax law to be a return preparer, taxpayers had some
assurance of the preparer's competency.
Today, there is no such assurance. Three transformational
changes have taken place in the return preparation field.
First, the advent of return preparation software has eliminated
barriers to entry into the profession. Second, the enactment of
refundable credits has expanded the taxpayer base to include
low-income individuals. Third, preparers have financial
incentive to inflate refunds and cross-market non-tax goods and
services, like pay-stub loans. In fact, in many tax season
advertisements today, it is difficult to discern the connection
between the service offered--get money quick--and the act of
tax preparation.
As a result of seeing firsthand the radical change in the
industry and its impact on vulnerable taxpayers, as National
Taxpayer Advocate, in 2002, I recommended that Congress enact a
program to register, test, and certify these preparers. I also
recommended that Congress authorize greater preparer penalties
and strengthen due diligence requirements. But there is an
important distinction between these approaches.
While penalties and due diligence requirements are a vital
component of any oversight regime, these actions occur only
after the taxpayer has been harmed. Prevention is less costly
and more effective. Accordingly, Congress should clarify that
the IRS has the authority to establish minimum standards for
the unenrolled preparer population and to test and require
continuing education of these preparers.
The only credible argument I have heard against
establishing preparer standards is that the cost will
ultimately be passed on to the consumer. But the per-taxpayer
cost of the program the IRS was implementing before the Loving
decision seemed very reasonable as compared with the far more
significant cost the GAO's and other ``shopping visits'' have
found, where preparer errors caused some taxpayers to overpay
their tax by thousands of dollars, and other taxpayers to
underpay their tax by thousands of dollars and then likely face
IRS enforcement action down the road.
In the absence of clear legislative authority, I believe
the IRS should do the following: first, offer unenrolled return
preparers the opportunity to earn a voluntary examination and
continuing education certificate; second, restrict the ability
of unenrolled preparers to represent taxpayers in audits of
returns they prepared unless they earn that certificate; third,
mount a consumer protection campaign that educates taxpayers
about the need to select preparers who can demonstrate
competency and reminds taxpayers to obtain a copy of their tax
return with the preparer's signature on it.
Finally, the IRS should develop a publicly accessible and
searchable preparer database to include all preparers who
register with the IRS. After all, the best enforcement and
consumer protection strategy is to have an informed and
educated consumer base--in this instance, the taxpayers, who
need to have some clear-cut way of knowing which preparers meet
minimum levels of competency and which are not willing to make
the effort. That is why having a mandatory ``certified
preparer'' designation, along with enrolled agents, CPAs, and
attorneys, is so important. It is a bright line that the
taxpayers can understand.
Thank you.
The Chairman. Ms. Olson, thank you.
[The prepared statement of Ms. Olson appears in the
appendix.]
The Chairman. Colleagues, we will all take 5-minute rounds
at this point.
Let me start with you, Ms. Olson, if I could. You are the
National Taxpayer Advocate. In other words, it is your job to
go to bat for the kind of people whom we are seeing getting
fleeced around the country.
I was particularly struck--and I would like you to amplify
a bit on it--when you said that there are actually new
incentives and new opportunities for the unscrupulous tax
preparer to, in effect, rip people off. Could you describe that
in a little more detail?
Ms. Olson. Well, there are several ways we see this. One is
that entities that would not normally be involved in the
profession of return preparation use the ability to give
advance loans on the refund itself to cross-market goods,
whether it is cars that the client could purchase with a down
payment, but at the very highest interest rates, or just simply
the loan product itself, like the pay-stub loans.
The other thing we are seeing is really out-and-out fraud,
where, as was described in your statement, preparers will take
the taxpayer's return after the taxpayer has approved it or, in
some instances, the taxpayer has not approved it, but the
preparer will inflate items on the return and pocket the
refund. And then the taxpayer later finds out about this when
the IRS is contacting them and saying ``You owe us taxes,'' and
that causes the taxpayer to be engaged in a long, extended
conversation with the IRS.
By that point, the preparer is long gone. You cannot find
that preparer.
The Chairman. I appreciate your clarifying that, because I
did not think the standards were adequate even before we saw
taxpayers bumping up against the kinds of problems that you are
talking about. And I appreciate your demonstrating that it is
usually the case that the unscrupulous are always one or two
steps ahead of efforts, particularly voluntary efforts, to deal
with the problem.
Now I gather, so we are clear on this point, that the
Loving decision, in your view, has created new problems in
effect, in terms of protecting taxpayers; is that right?
Ms. Olson. Absolutely. The Loving decision, first of all,
my reading of it is, it did not go to the fact of whether
regulation is desirable or not. It addressed whether the IRS
has the authority to regulate the return preparer under the
current law. And right now there is an injunction in place
against the IRS being able to implement the exam and the
continuing education requirements, and that is a significant
obstacle. We can register tax preparers, but we cannot test
them, require them to be tested, or require them to take
continuing education in order to do returns.
The Chairman. How limited are the tools that are left given
the Loving decision? Because my sense is that there are some
tools that are left, but they are pretty narrow and they really
do not go to the heart of what you have been talking about,
which is protection against the unscrupulous preparer.
I share the view that there are many, if not the majority,
of preparers who are very honest and reputable, but it sure
looks like some new opportunities, some new trap doors, have
been created for those who are unscrupulous.
Tell us, given the decision in the Loving case, how
restricted the tools are for the IRS to deal with the
unscrupulous preparer.
Ms. Olson. Well, right now, the IRS has penalties that it
can apply against preparers that it identifies as unscrupulous.
It requires, in the Earned Income Tax Credit arena, for
preparers to complete due diligence certifications, sort of
questions that they have to ask the taxpayer, and certify that
they have done so.
We have the ability to seek injunctive relief against some
unscrupulous preparers, working with the Department of Justice.
But this is a situation where the IRS cannot audit itself out
of this situation. It cannot audit or apply penalties or even
do injunctions with 1.2 million preparers.
It cannot get the kind of competence that we need to
engender by doing one-on-one audits. You need a much broader
approach. And more importantly, taxpayers need the designation
so that they have a bright line, so that they can say, ``Yes,
this is someone who has demonstrated competency, and this is
someone I should go to.'' If you go to someone other than that,
all bets are off whether that person is competent. That is a
very important distinction that audits will not get you.
The Chairman. I appreciate that, and I especially
appreciate that last point, because, in effect, what you are
saying is, we need a system that up front makes it clear to
those who need these services where the, as you call it, bright
lines are and where you ought to go to get the kind of consumer
protection you need.
The alternative to that, what we are stuck with, in effect,
post the Loving decision, is essentially reactive kind of tools
where you are playing catch-up ball. Is that a fair appraisal?
Ms. Olson. Yes. And the taxpayer has already experienced
the harm rather than being able to prevent the harm.
The Chairman. It is very helpful to have your views today.
Senator Hatch?
Senator Hatch. Well, thank you, Mr. Chairman.
Let me just ask both of you. What is the IRS doing to
educate the public about how to select a competent and ethical
return preparer, and what else should it do to educate the
public on this issue and make it easier to confirm the
competence and ethical standards of a particular preparer?
You have alluded to answers to this, but I would like to
have a little bit more.
Commissioner Koskinen. As part of our outreach to
taxpayers, we provide, on a regular basis throughout the year,
a wide range of information and advice to taxpayers, trying to
assist them in their attempts to figure out how much they owe
and how to pay it. So we advise people they should be careful
who their tax preparer is. They should check them out. But as
noted, there is no way we can provide any minimum standard
guarantee for tax preparers.
So all we can do for taxpayers, which is what we do, is
say, you should be careful; you should make sure you know who
the tax preparer is and what their background and experience
are. But for the average taxpayer, that is a very difficult
thing to do. There are no listings, there is no way for them to
figure out who are those who have studied and have a minimum
level of competence and who do not.
So our view has been, if you had a way of giving that
information to the taxpayer, then the free market would be more
intelligently applied. People would be able to say, ``All
right. If I am going to a tax preparer who has not received the
minimum standards, I am taking a bigger chance than if I go to
a tax preparer who actually has passed the IRS examination.''
But at this point, we cannot give them that additional
information. So we simply have to tell them, be careful with
your preparer, but that is not particularly helpful to the
average taxpayer.
Ms. Olson. There is one thing that my office did, which is,
we created a poster last year in this environment to warn
taxpayers to obtain two things to protect themselves, and they
are: preparers are required to give you a copy of your return
that is signed by the preparer and has their PTIN number on it.
So I think if there is one piece of information in this
environment, without setting standards, it would be for
taxpayers to at least get that, because then if the preparer
alters the return afterwards, you, one, have the name and
identifying number of the preparer, and, two, you can show that
there really was fraud committed, and that is a very important
piece of information for us to have when that happens.
Senator Hatch. That is good.
Mr. Commissioner, when you were confirmed by this
committee, one of my charges to you was that you needed to
restore public confidence in the IRS, and you affirmed it was
your intent to make that a top priority. However, there have
been several recent incidents which underscore the degree to
which the public still may have reason to not trust the IRS.
Between the furor over the IRS's proposed rulemaking for
501(c)(4)s, which received over 150,000 comments, most of which
were negative, and recent concerns raised by my colleagues on
the House side about whether or not your agency is fully
cooperating with producing documents related to the ongoing IRS
political targeting investigation, I am concerned that it is no
longer such a priority.
The American people deserve to have an IRS which is free
from political bias, and, of course, we have to hold you
accountable as members of Congress, and I personally am holding
you accountable for ensuring that, under your watch, no such
bias is or will be present, and I believe you believe that and
intend to do that.
To that end, can you tell me what steps you have taken to
begin restoring that trust and how my colleagues and I can be
assured that you are continuing to make this a top priority?
Commissioner Koskinen. Thank you, Senator. It is and always
has been and will continue to be a priority of mine and the
agency's.
With regard to the production of documents for the tax
writing committees, the House Ways and Means Committee and this
committee, we have had no complaints about the volume of
material we have now provided, well over 700,000 pages of
information. We do not have to redact it. So, as we work
through it, we are simply giving you everything we can find.
We have worked closely with your staff and with the Ways
and Means Committee staff to identify additional information
that you may need, and we are providing that material in
volume. We hopefully are nearing closure on that. We have
provided you all the information about the determinations
process that we have.
The discussion has been, and the concern has been, with
those committees that do not have the authority to see taxpayer
information, where we have to review every single page and
redact any information related to individual taxpayers before
we can provide that information. But we are continually
providing information. Since the hearing I had before the House
Oversight Committee, we have provided them, by the end of this
week, another 50,000 pages of redacted information.
No one has a greater interest than me personally, within
the IRS, to have these investigations come to a close. As I
have said from the start, whenever we get a final report from
someone, we will look at the facts as they are found, and we
will consider what additional actions need to be taken, if any.
We have already accepted all of the Inspector General's
recommendations. And then we will move forward, because I do
think it is important for every taxpayer to be confident that
no matter who they are, what their organization, what their
political beliefs, who they voted for in the last election,
when they deal with the IRS, they will be treated fairly, in an
evenhanded way, and they will be treated the same way everyone
else is treated as we go forward.
Senator Hatch. That is good.
Thank you, Mr. Chairman.
The Chairman. I thank my colleague.
I would only say--it is Senator Casey's turn--I would just
say that I do not see any evidence that protecting taxpayers
from unscrupulous preparers is a partisan issue, and that is
what we are focused on here today, and we have a lot of heavy
lifting to do.
We will go to Senator Casey next.
Senator Casey. Mr. Chairman, thank you very much. Before I
pose some questions for our witnesses, I wanted to address an
issue that has been raised a number of times, including this
morning. This is the 501(c)(4) issue, the processing of those.
We did our subcommittee assignments recently, and I was
just appointed the new chair of the Subcommittee on Taxation
and IRS Oversight. So I, like folks in both parties on this
committee, am committed to making sure that any kind of abusive
practice that is engaged in is not repeated and is rooted out
and exposed.
The committee, Mr. Chairman, I guess, undertook an
investigation, which has been a bipartisan investigation, into
the issue. The investigation included interviews with
individuals who are impacted, as well as IRS employees.
Mr. Chairman, it is my understanding that the committee
staff has essentially completed the investigation and is
prepared to release its findings and conclusions. So, Mr.
Chairman, I would welcome the prompt release of the conclusions
of that bipartisan investigation and look forward to working
with you on the issue, as well as other members.
The Chairman. Thank you, Senator Casey. Certainly, that
investigation was well underway when Chairman Baucus chaired
the committee. Senator Hatch has been very constructive in
terms of working with me.
This is the only bipartisan investigation that is taking
place into these issues, and I am very hopeful that we will
have that report ready for members quickly.
Senator Casey. Thanks very much.
Commissioner, I wanted to start with you. I know that your
team has identified some tax scams on a so-called ``dirty
dozen'' list, and there are two issues that I have worked on
that are related to this, the kind of abuse of data or
information. One is the Death Master File, preventing that from
being used for fraudulent purposes, as well as working with the
Social Security Administration to prevent criminals from
stealing Social Security checks.
I guess more broadly, on this issue of scams and preventing
them, what would you hope that we could do here in the
Congress, starting here in the Senate and the Senate Finance
Committee, to better help the IRS protect taxpayers? I am
assuming that it would be some form of the items that you
outlined on pages 6 and 7 of your testimony.
Commissioner Koskinen. Right. I appreciate the question.
Obviously, the Taxpayer Advocate and I are here supporting
congressional efforts to give us the authority to set minimum
standards for tax preparers--a reasonable amount.
As I say, most tax preparers are competent, they are
educated, and they do a good job. What we are worried about is
those on the periphery who either do not have enough
information to adequately prepare a return or, worse, are
figuring out various ways to defraud taxpayers either by high
fees, by taking all or a portion of their refunds, or by
channeling them, as the Taxpayer Advocate said, into other
activities which may or may not be in the taxpayer's interest.
We also are proposing, with regard to identity theft and
refund fraud generally, that the Congress give us authority to
get W-2 information by the end of January. Right now, what has
happened is--we are sort of the victims of our own progress.
In the old days, you used to get your IRS refund months
later, and, in the meantime, we would have gotten all of the
third-party information. Now, with electronic filing and the
tremendous progress the IRS and its employees have made, when
you file your return, we say we will get you a refund within 21
days. So we have leapfrogged the receipt by the IRS of the
third-party information. So a critical part of that information
for us would be to have third-party information and W-2
identifiers earlier so we could check refund applications to
ensure that at least there is some comparison before issuing
refunds.
The action the Congress already took to close the Death
Master File has been very helpful, although there are still
people who have access to it. We are concerned across the board
with the ease of theft of Social Security numbers in the public
sector. No one has ever stolen Social Security numbers from the
IRS database, but they use the Social Security number to file a
false return.
Senator Casey. I appreciate that.
Ms. Olson?
Ms. Olson. I think one thing that is an emerging trend that
I have just been briefed on is the theft of Social Security
numbers from preparers themselves, hacking into preparer
databases. And that is very disturbing, because you do get the
wage information. So, even if we have the wage information, we
cannot necessarily tell that that is a bad return.
The IRS right now is doing a pilot to see if you can match
the name on the return, where the deposit is supposed to be
made into an account, with the name on the account itself, the
bank account itself, and that is having some mixed results. But
there may be things on that end where you can work with the
financial institutions to do greater security--are these
dollars supposed to go into there? And I know that the IRS is
considering limiting how many refunds can be made into a
particular account. So that would be a very easy fix.
Again, these criminals are--you are truly talking about
scams. These are opportunistic criminals. They are going to do
whatever is easiest, and the more you can create barriers for
them committing fraud, the more they will look somewhere else.
They will not necessarily go away permanently, but they will go
somewhere else.
Senator Casey. Thank you very much.
The Chairman. Thank you, Senator Casey.
Senator Roberts?
Senator Roberts. Mr. Koskinen, when you visited with me
last year prior to your confirmation, sir, you told me that you
thought it was your role to clean up the IRS and get the agency
back on track in regard to the processing of exemption
applications and the implementation of the Affordable Health
Care Act, both monumental tasks indeed. You said that your
longer-term goal, however, was to restore the IRS's reputation
and integrity on these and other functions.
I have some confidence that you are going to be able to do
that. However, prior to your confirmation, you said that the
IRS was targeting certain groups during the exemption
application process, thereby trampling on their First Amendment
rights.
It seems to me that there is a common-sense step that you
need to take, and you should take it today--stop all action on
the proposed 501(c)(4) regulations until the House Ways and
Means Committee, this committee, and everyone knows what went
on, who was involved, what the implication of all of this is,
and how we can address the issues raised and hold people
accountable. That is why I have joined with Senator Flake from
Arizona and 40 of my colleagues to offer legislation to stop
the IRS from proceeding with the new rules until we have
answers.
Here is the deal. We have Code of Federal Regulations title
26. I am sure you are familiar with it. Internal Revenue rules
take various forms. The most important rules are issued as
regulations, and the Treasury decisions are prescribed by the
Commissioner and approved by the Secretary or his delegate.
Other rules may be issued with the signature of the
Commissioner or the signature of any other official to whom
authority has been delegated. Regulations and Treasury
decisions are prepared in the Office of the Chief Counsel after
approval by the Commissioner.
Here is the deal. Our constituents informed us, with some
degree of outrage, that there is an IRS fox in the First
Amendment chicken house. The response by the IRS: ``Yes, we
know that. We are writing regulations that will tell the fox to
behave himself.'' But that makes no sense. We are investigating
why the fox was even in the First Amendment chicken house in
the first place.
So I have some suggestions. First, why do we not get the
damn fox out of the First Amendment chicken house? Second, why
not waive the regulations until we get our investigations done,
at least until we can find out who put the fox in the chicken
house in the first place and how and hold them accountable?
Why can we not stop on these regulations until we are done
with our investigation?
Commissioner Koskinen. Having worked on my uncle's farm in
Minnesota, I have a little bit of familiarity with foxes and
henhouses, but let me just respond to the point.
As I have said for some time, actually in my earlier
testimony in February, especially since the volume of comments
since then has gone up, the chances of our finishing any
regulation before the end of the year are very slim, if not
nonexistent.
Our hope has been that, in fact, one or more of the six
investigations that have been going on now since last year will
be completed well in advance of that. So I think, in terms of
the goal of not having a regulation until we have some
investigations done, I think that unless the investigations are
going to go on into next year, somebody will issue at least
one, and hopefully this committee, perhaps others, will issue
their report sometime in the next 3 or 4 months, which will be
well in advance of any time that we would have a chance of
completing this regulation.
With regard to the regulation, as I have said in the past,
not having been around when it was originally formulated, my
commitment and dedication is that any regulation that is
ultimately issued should be fair to everybody, should be clear,
and it should be easy to administer.
And we are going to carefully review the 150,000-plus
comments that have been made. We have just started the review,
so I am not quite sure how everybody knows whether they are
positive or negative, but clearly the regulation has attracted
a lot of interest.
And as I have said, by the time we hold a public hearing,
in all likelihood, re-propose any regulation that we would be
considering and get more public comments, it is going to be
well toward the end of this year. And as I say, my hope would
be at least one of the six investigations will have been done
by then, if not more, and we are committed to reviewing the
findings of those investigative reports and taking any
additional action that is necessary to put this behind us.
Senator Roberts. My time is about up. I want to thank you
for that word ``committed.'' So you are unequivocally committed
to this committee and you are committing to this committee that
501(c)(4) proposed regulations will not be finalized this year?
Commissioner Koskinen. I think what I have said is that the
chances of it being finalized before the end of the year, not
before the election, before the end of the year, are slim.
We are not rushing to get them done. We are actually
being----
Senator Roberts. There is an expression that the chances of
something happening in Dodge City, KS are slim and none, and
slim left town. So why do we not just say ``none'' this year
and, more especially, until the investigations are done? Why
can't we do that?
Commissioner Koskinen. We could do that, and I think
probably that it is a slim chance and it is fairly likely. What
I can easily commit to is, we will not be anywhere near
completing these regulations before somebody has completed an
investigation, because I am confident----
Senator Roberts. I hope you share these regs with us as we
go through this, because there are an awful lot of people----
The Chairman. The Senator's time has expired.
Senator Roberts [continuing]. Who are outraged by this.
Thank you, Mr. Chairman.
The Chairman. Senator Grassley?
Senator Grassley. Mr. Koskinen, I wrote to you and
Secretary Lew on February the 20th. I asked about the
administration's decision to delay the employer mandate until
2017 for businesses with 50 to 99 employees. That category of
businesses is not specified in the health care law at all.
In order to qualify for the delay, you require employers to
certify that they did not lay off employees to get below the
100-employee threshold. This certification seems like
unnecessary information, unless you think the employer mandate
will cause businesses to lay people off.
(A) Do you think that businesses will lay off their
employees in order to avoid paying penalties under the health
care law, and, if not, why are you requiring the certification?
And (B), what is the legal justification for a new category of
businesses with 50 to 99 employees in the certification
process?
Commissioner Koskinen. Senator, as you know, tax policy
issues like this are all the domain of the Treasury Department.
Those decisions were made by the Treasury Department. I did not
participate in those.
As a general matter, I do not think that companies, with
regard to health care issues, are going to willy-nilly lay off
their employees. I think most companies are dedicated to their
workforce and to developing them.
But the question in terms of on what basis those decisions
were made, is really a question that has to be addressed to the
Treasury Department.
Senator Grassley. But you have to sign off on them.
Commissioner Koskinen. All Treasury regulations are issued
by Treasury and the IRS, but the policy issues behind questions
like this are decided by the Treasury Department. The Chief
Counsel's Office actually reports directly to the Treasury
Department.
Senator Grassley. Well, I requested a response from you and
Secretary Lew by March the 7th. So then, when can I expect such
a response? And I assume you can be an Aaron for making sure
that this gets done.
Commissioner Koskinen. I will clearly commit that I do not
know why the delay, other than the fact that any response gets
cleared by a complicated process. But my commitment to this
committee and you and all of you has been that we will reply
promptly to any letter we get from you, and I will assure you
that I will get you a prompt response from our side. I cannot
tell you when the Treasury Department will respond, but we
should respond to you promptly.
Senator Grassley. Well, you surely talk to Secretary Lew,
and he made the same promise that you made: when he comes
before the committee, he is going to answer our questions. And
I do not know why people say they will answer our questions if
they will not.
Well, anyway, let us go on to the second question. Mr.
Koskinen, just last week, I wrote to you concerning the
nonprofit hospital reforms that I authored and were enacted in
2010. These reforms imposed new requirements on nonprofit
hospitals to hold them accountable for their tax-exempt status.
To date, key legal guidance needed to ensure compliance
with the law does not appear to be finalized. What has been the
delay in finalizing regulations in this area, and when we can
expect final regulations?
Commissioner Koskinen. A series of regulations and
proposals have been drafted pursuant to that statute. And in
January of this year, Treasury provided, with the IRS jointly,
guidance to hospitals that they could rely on the existing
proposed regulations that are out there.
We expect that the final regulations will be issued before
the summer is out. But the hospitals have already been advised
that they can rely upon the earlier regulations or proposals
that are out there.
Senator Grassley. The 2010 nonprofit hospital reforms also
required the IRS and the Department of Health and Human
Services to collect information on nonprofit hospitals and
report to Congress every year. An annual report should have
been issued to Congress for fiscal year 2012, but Congress
never received any report. Congress has yet to receive a final
report for fiscal year 2013.
A 2012 report by the Inspector General of Treasury
recommended that the IRS enter into a memorandum of
understanding with HHS in order to better coordinate the
collection and sharing of the information for the report. The
IRS agreed with the Inspector General's recommendations, and,
as I understand it, the memorandum of understanding has not
been finalized.
What is the status of the memorandum between IRS and HHS?
When would you expect it to be finalized? Why has there not
been an annual report, as required by law, and when can
Congress expect the 2013 report?
Commissioner Koskinen. We have been working cooperatively
with HHS. We expect not a memorandum of understanding, but
written, final confirmation from them about the process we are
going to use going forward.
The problem with timing is, it takes 2 to 3 years for all
of the data to be filed. So the 2011 data has now been made
public by HHS. We expect to provide it jointly, because our
data is going to measure with theirs. The hospitals all asked
for us to use apples-to-apples data.
So this summer we will be issuing to the Congress a report
for 2011, because that is the timing in which we actually get
the final data. And then every year thereafter, we will provide
that report on an annual basis jointly with HHS.
So the data for 2011 is already public from HHS's side. We
are collecting then for the same time period, calendar 2011,
putting the data together, and every year it will be late
because of the time the hospitals have to file all of that
data. But as a regular matter, starting this summer, you will
get annually the data required.
The Chairman. Thank you, Senator Grassley.
Senator Thune is next.
Senator Thune. Thank you, Mr. Chairman. I want to thank you
and Senator Hatch for holding this hearing.
I think all Americans expect the IRS to administer our tax
laws in an impartial manner, and they expect the tax preparers
to act in a competent and ethical manner too. And so the
concerns that have been brought to light by the GAO in its
recent study are very troubling, and I am pleased the committee
is examining this issue in order to determine if legislative
action is necessary to ensure that Americans are protected from
unscrupulous and incompetent tax return preparers.
I do want to, Mr. Koskinen, give you an opportunity--I want
to turn to something that has been mentioned here by my
colleagues and has been discussed of late, and give you an
opportunity to correct the record.
Last week, the Washington Post fact checker, Glenn Kessler,
awarded you three Pinocchios for your statement that the
Treasury Inspector General for Tax Administration, Russell
George, had not used the term ``targeting'' when referring to
how the IRS has treated conservative social welfare groups. The
Post article noted that Mr. George specifically stated in his
testimony to Congress that the IRS targeted specific groups--I
am quoting now--``applying for tax-exempt status. It delayed
processing of these groups' applications and requested
unnecessary information, as well as subjected these groups to
special scrutiny.''
Given that Post article and the confusion around recent
statements that you have made on this topic, I want to give you
an opportunity to correct the record. And the question, I
guess, specifically, is, do you agree that the Treasury
Inspector General for Tax Administration has found that certain
conservative groups were targeted for extra scrutiny by the
IRS?
Commissioner Koskinen. I appreciate the opportunity to
correct the record. It has been intriguing to me that it has
become this big issue, a tempest in the teapot. What I said in
my testimony, which seems to have triggered this, was that the
Inspector General's report last May, in his findings, said that
he found that inappropriate criteria were used to select
applications for further review. It was in response to a
question about the findings of the IG, and my point was the
IG's finding in the report said it was improper criteria.
Thereafter, I have--and a couple of times since then--made
it clear the IG clearly in his testimony to Congress used the
word ``targeting.'' He talked about targeting beforehand. My
only point was in response to a question in which I was asked
if the Inspector General's finding was ``targeted.'' I said his
actual finding said ``improper criteria.''
But one man's improper criteria is another man's targeting.
How it got to be this big an issue I do not know, because
clearly the issue is, however you describe it, it should not
have happened. It should not happen going forward in the
future.
We are committed. We have already taken all of the IG's
recommendations and accepted them. We are committed that, as I
say, when people, not only for (c)(4) applications, but in any
relationship with the IRS--we are going to continue to audit
people. Some will be Democrats, some will be Republicans; some
will go to church, some will not.
When you hear from us, it is only because of something in
your tax return. People need to be confident that that is our
commitment, that is our general approach to these issues, and
that is how we are going to behave going forward.
Senator Thune. Just as a follow-up to that, the Post
article also referenced your use of the term ``targeting'' and
posed this question. The basic question was, was the phrase so
toxic that it was wiped from the lexicon once you arrived at
the IRS?
And I guess I would just ask, since your confirmation as
Commissioner, has anyone in the administration, within the IRS,
the Treasury, the White House, anyplace like that, pressured
you or counseled you against using the terms ``target'' or
``targeting'' in reference to the matter that we are talking
about?
Commissioner Koskinen. No one in the administration. The
only concern I have heard--I have been to 20 offices at the IRS
now, and I have listened to and met with over 8,000 employees.
Several of the employees have objected to the use of the term
``targeting,'' but nobody in the White House, nobody in the
Treasury, nobody in the administration, has asked me not to use
the word.
Senator Thune. Thank you.
Mr. Chairman, I want to just--I have about a minute left
here--focus on what I believe is a major driver of more and
more Americans seeking tax preparation assistance, and that is
the incredible complexity of the tax code.
As you know, much of the Affordable Care Act is
administered through the tax code, which means that when
uninsured Americans file their taxes, they are going to need to
figure out whether they qualify for the subsidies, how much
they can receive, whether it makes more financial and medical
sense to get coverage or to pay the penalty for violating the
law.
The question is, doesn't the Affordable Care Act create a
lot of new complexity issues on top of those that we already
have, making it even more difficult and driving even more
Americans to tax preparers when it comes to getting their
returns in on time? And do you believe that most tax preparers
are adequately prepared to handle the complexities arising from
the Affordable Care Act?
Commissioner Koskinen. I think we are going to have a lot
of questions by preparers and taxpayers about the Affordable
Care Act.
The vast majority of Americans are going to be unaffected
by it. They are going to check off a box that says they have
insurance, they have Medicare, and they will not be affected.
But for the people who are in that area, who are applying for
insurance, getting advanced premium credits, there are going to
be questions asked.
One of our concerns is to make sure we are prepared to
answer those questions.
Senator Thune. Ms. Olson, quickly, on that, do you have a
comment?
Ms. Olson. I think that there is certainly a great deal of
complexity in the Affordable Care Act. I would note that I am
watching very carefully and closely how the IRS is approaching
that also, on the compliance side, what they do if somebody
owes money as a result of the ACA.
But there is one thing about the Affordable Care Act that
is very important. We are going to get a lot of information
from third parties, which will allow us to identify inaccurate
claims during the filing season. As the Commissioner earlier
alluded, it is very important for us to get W-2 and 1099
information early in order to avoid all this fraud and errors
in the regular tax system.
So there is an actual added benefit in the Affordable Care
Act that we do not have with the rest of the filing system that
would be really good to have in the rest of the filing system.
Senator Thune. Thank you, Mr. Chairman.
The Chairman. Thank you, Senator Thune.
I very much appreciate your also highlighting the
complexity of the code, because the Congress is not blameless
here. Virtually every session, some other group comes up,
usually with a good cause, and what happens here on the Finance
Committee is, we just add it to the code. There have been
something like 15,000 changes. It comes to maybe one or two for
every working day in recent years.
So that is right at the heart of tax reform, and I look
forward to working with my colleague.
Senator Isakson is next.
Senator Isakson. Thank you, Mr. Chairman. I concur with
your opening statement, talking about how tax simplification is
the key to this, and I think it is the key.
There is another key that I use to determine what Georgians
are interested in, and that is how long I have to stay in the
narthex after church to answer questions and what that subject
is about. Yesterday, given the proximity to April 15th,
everything was about the IRS. Listening to Senator Casey's
statement, I think I heard that we are close to having
conclusions from our bipartisan investigation. Is that correct?
The Chairman. I will let Senator Hatch chime in here, but I
believe so. Certainly, the staffs have been talking.
Senator Hatch has been very constructive, given the fact
that this is the only bipartisan investigation into this, and,
obviously, there were errors made. There is no question about
that. It is important that we wrap this up, but I am very
hopeful that we can do that quickly.
Senator Hatch, would you like to add to that?
Senator Hatch. Well, we are trying to wrap this up as
quickly as we can. It has been slow. We still have not gotten a
number of documents that we still have to get, but I agree with
the distinguished chairman that we are working in a bipartisan
manner and hopefully we can conclude this within the relatively
near future--at least I hope so.
The Chairman. Commissioner, can we have some clarity on
that point?
I understand you have sent us a letter indicating that you
have made available all the documents for purposes of this
investigation. Is that right? I do not have the letter with me.
Commissioner Koskinen. Yes. We, 3 weeks ago, said we had
provided you all the documents we had about the determinations
process, which was the subject of the Inspector General's
report.
Since then, we have had requests for additional
information, not about the determinations process, but about
any involvement by Lois Lerner in the exam process, the appeals
process, and the regulatory process, and we are completing the
provision to you of all of that additional information as well.
But for the base issue of the determinations issue that the
IG raised, you have all of the documents we could find.
The Chairman. We are intruding on Senator Isakson's time,
and I will let Senator Hatch have the last word here.
Senator Hatch. They said they had given us most of the
documents, and then we found out that they had not. So we just
got a new set of documents last week.
We are appreciative of the cooperation. We still have not
gotten into the Treasury documents as much as we would like to,
although we are starting. All I can say is, we are trying to do
the very best we can to conclude this investigation, and
hopefully we will in the near future.
The Chairman. We are committed to getting this done,
Commissioner. We are going to get it done in a bipartisan way,
and I want to assure you that we will be following up with you
quickly on any remaining questions. But I knew that, as of a
couple of weeks ago, you had given us everything we asked for,
and that strikes me as indicative of your cooperation.
This is not going to be imputed to Senator Isakson's time.
So let us make sure that----
Commissioner Koskinen. In that case, let me just say I
appreciate that. We have had good working relationships with
the staffs of the majority and the minority, and we are
committed to continuing to work with you. Whatever you need, we
are anxious to get it to you.
The Chairman. Very good.
Senator Isakson, we are going to roll the clock back so you
can have your full 5 minutes.
Senator Isakson. Well, I asked the question, and I am glad
you all went into the detail to answer the question, because,
in a voluntary compliance-dependent system, which ours is, the
confidence the American people have in the Internal Revenue
Service is the key to voluntary compliance.
I think the quicker we can get to all the answers, whatever
those answers are, the better off all of us are. I want to
thank Commissioner Koskinen for the visit he paid to Atlanta 3
or 4 months ago and his including me in that visit.
I would just comment, having run a business before and
watched a department manager or a business head motivate
employees, if your performance in Atlanta was typical of what
you do when you visit other offices around the country, I think
the confidence of the IRS employees and the IRS will go up,
because I was very impressed.
Commissioner Koskinen. Thank you.
Senator Isakson. Ms. Olson made a statement about financial
incentives to inflate numbers in tax returns for the preparer
to take advantage and pocket the difference. How do they pocket
the difference?
Ms. Olson. Well, one of the ways that you see is, if you
can get a larger tax refund for your customer, and you are
actually preparing returns in a car dealership or in a
furniture rental place or in any number of other kinds of
entities that are selling products unrelated to tax, then you
can give a loan advancing funds so that the taxpayer can apply
those inflated refunds to purchasing a product.
And what we are seeing in some instances--and I used to see
this in the low-income taxpayer clinic I ran when I represented
taxpayers--is we see this in a vehicle purchase, where a
taxpayer would use the loan on an inflated refund to purchase
an automobile. The IRS would then disallow that refund.
The taxpayer would be unable to make the ongoing payments
on this higher-dollar vehicle that they really could not
afford. They owed the refund back to the IRS, and the car would
ultimately be repossessed, and then the taxpayer would end up
with cancellation of debt income for the next year, which was
taxable.
Commissioner Koskinen. Another, more direct way of fraud
is, the preparer puts his bank account down as the bank account
to which the refund should go, and it is all done
electronically. Then the preparer can either take out a big fee
before he provides the refund to the taxpayer, can keep some of
the refund, or may keep it all. And there is no way for us--
because it is all done electronically, when he puts down his
bank account--to keep the refund from going to his bank account
rather than the taxpayer's. A lot of those taxpayers do not
have bank accounts.
Senator Isakson. In either case, that is a fraud against
the taxpayer.
Commissioner Koskinen. Fraud against the taxpayer.
Senator Isakson. Which brings me to the question I wanted
to ask about IRS's Free File program. You talked about low-
income taxpayers being the ones who are most often abused in
something like that.
Has Free File helped? Because it seems like electronic
technology would help prevent people from padding deductions or
padding income.
Ms. Olson. Well, I think that the issue is, many of these
taxpayers who are most vulnerable do not have computer
literacy, the level of computer literacy, that would enable
them to do that.
In some of the walk-in sites that the IRS has and at some
of the Volunteer Income Tax Assistance sites, they are actually
trying to get taxpayers to sit down, and they walk them
through. You can prepare--they have computer terminals. You can
go and prepare your own return, and, if you can learn it once,
maybe next year you can do it yourself. But there is a very
high learning curve.
I think one thing that can help is if we can get this W-2/
1099 information in advance, then maybe the IRS can pour that
into, whether it is commercial software or into Free File or
into the free fillable forms that we have as part of the
consortium, if you could pour some of the data in, that might
make it easier for taxpayers to then say, ``Okay, and I have
these dependents,'' et cetera, and prepare their own returns.
But it is a big lift for this population.
Senator Isakson. This is my last question, and I appreciate
the time, Mr. Chairman.
When you catch an unenrolled preparer in a fraud, under the
Loving decision, you do not have any standing to do anything to
that person, but can you refer them to the Justice Department
for prosecution or investigation?
Commissioner Koskinen. Yes, and we do that. Whenever we
find either systemic fraud or fraud that is a violation of law,
we can refer it for prosecution. As the Taxpayer Advocate
noted, that is after the fact, after the taxpayer has been
abused, and we cannot prosecute every case. We do not have the
resources to either catch everybody who has defrauded their
clients or to prosecute them all, but they are at risk.
If they commit fraud in the filing of their returns for
their clients, if they violate the law, they are at risk of
prosecution. The question is whether we can catch enough of
them to make a difference.
Senator Isakson. Well, if CMS does a good job of trying to
enforce against fraud in Medicare and Medicaid by making highly
visible profiles of anybody they catch defrauding the
government, the same thing might be beneficial for the IRS as
well.
Commissioner Koskinen. We give as much visibility as we can
to the prosecutions we get and to the sentences we get, but
there are still a lot of people figuring out that they are
playing roulette. And assuming that, at the levels they are
operating, it will be hard to find them, and the question is
whether there will be enough resources to prosecute them.
Senator Isakson. Thank you, Mr. Chairman.
The Chairman. Thank you, Senator Isakson.
Among the good points that you just made, I think there
really ought to be more inquiry into Free File to actually see
what its strengths and limits are. I have heard, for example,
questions about whether they can do State returns and these
kinds of matters. So I want to work closely with you on it.
Senator Burr?
Senator Burr. Commissioner, welcome. Senator Coburn and I
have shared some correspondence with you in the last 2 weeks.
You have responded. I thank you for that very timely response.
Let me refresh your memory. This was in relation to the
Chicago District of the NLRB's decision as it relates to the
Northwestern Football Players and their potential unionization.
We said to you that our interpretation of section 117 of
the Internal Revenue Code was, in fact, exactly what your tax
experts said, that there was an exclusion specifically stated
in there for scholarships, educational scholarships, that made
those exempt from ordinary income.
But the statute goes on to note one exception, and I will
quote it. It says section 117, and I quote, ``shall not apply
to that portion of any amounts received which represents
payment for services by the student required as a condition for
receiving the qualified scholarship,'' meaning if the
individual received a scholarship, a portion or the portion
that represented a payment for service was no longer tax-
exempt.
I got a very detailed letter back from you basically
stating the first part, which is about section 117 and the
exclusion for scholarships, and you made a very specific
statement in here that the NLRB definition of an employee for
labor law does not control whether the individual is an
employee for the purposes of Federal tax. In other words,
scholarships are governed by IRS code, and this is going to
raise a big question, because nowhere did your letter note the
disqualifying thing found in the tax code, which is providing a
service.
Now, let me just state for my colleagues, the NLRB decision
said these students are employees. The suit was brought by
Northwestern football players because they said, ``We are under
the control of the university. They tell us when to go to
practice, when to go to a game. They control. Therefore, we
should have the opportunity to bargain with them because we are
employees.''
The NLRB made a determination that they were employees, and
they referred to section 2.3 of the National Labor Relations
Act. Let me just quote from the NLRB decision.
``The Act provides, in relevant part, that the term
`employee' shall include any employee. The Supreme Court has
held that by applying this broad definition of an employee, it
is necessary to consider the common law definition of an
employee. Under the common law definition, an employee is a
person who performs services for another under a contract of
hire, subject to the others' control or right of control, and
in return for payment.''
Now, let me just suggest to you that, if that does not meet
the exclusionary part of section 117, I really do not
understand it. And I understand your point here that labor law
does not dictate tax law.
So let me point then to tax law. In Revenue Ruling 77-263,
which discusses section 117 and the tax law treatment of
athletic scholarships, the IRS states this clearly: ``Any
amount paid or allowed to or on behalf of an individual to
enable an individual to pursue studies or research is not
considered to be an amount received as a scholarship or a
fellowship grant for the purposes of section 117, if such
amount represents compensation for past, present, or future
employment services or for services that are subject to,'' and
I underline, ``direction or supervision of a grantor or if such
studies or research are primarily for the benefit of the
grantor. Any of these conditions will negate the existence of a
scholarship or fellowship grant as defined in the regulation.''
So the body of tax law is pretty clear on this question,
Mr. Commissioner. Bargained-for payments cannot be excluded
from income as athletic scholarships. Again, the players were
seeking to unionize in the Northwestern case, and they make the
argument that they are employees and that the scholarships they
receive from the university are compensation for services
rendered. The NLRB has agreed with the players that they are
employees and that their scholarships are compensation for
services rendered.
Let me just ask you, how can the IRS ignore tax law and the
facts in the answer that they prepared for you to send me?
Commissioner Koskinen. Well, first of all, it would be
interesting to see what the NLRB final decision is as that
issue from the regional office goes forward.
Senator Burr. If it goes as currently written, are those
scholarships taxable?
Commissioner Koskinen. Well, the revenue ruling you are
talking about talks about and tries to distinguish, obviously,
graduate students who teach, who do research, who get paid, and
that issue.
Obviously, interesting discussions are going on in the NCAA
about whether, in fact, student athletes should get stipends,
so whether they should, in fact, be paid in addition to their
scholarships. The principle thus far has been that all of these
students are student athletes, that the scholarship allows them
to attend college and to participate in athletics, and that
historically has been the rule applied.
To the extent that the circumstances change significantly--
and that is why I say it will be interesting to see where this
goes--then, obviously, we will take another look at what the
definition of compensation is, what the definition of
scholarships are, and what the situation is. But thus far, the
people who have looked at it, the experts in the IRS, have
ruled that nothing has changed thus far that would cause us to
make a----
Senator Burr. Commissioner, let me ask. Just from the
explanation and what I read of tax law, where have I missed it
that it is clearly stated there, that if they are supervised,
if they perform a service required by that entity that controls
them, this is no longer considered a scholarship?
I think that you are reinterpreting what the tax law says
and----
Commissioner Koskinen. What I am saying is, historically,
what football players do today is no different than what they
did 5, 10, or 20 years ago, and they have always been treated
as if those were scholarships.
To the extent that the nature of the compensation changes,
then we would take a look at it. But nothing in terms of what a
student athlete does has changed, even as a result of that NLRB
decision.
The Chairman. Senator Burr, I just think we have to move
on. We have a lot of additional witnesses. Is that acceptable
to you? Do you have anything else you need to do? You are way
over.
Senator Burr. Let me just say, Mr. Chairman, it concerns me
that we might look at it in the future, because we either
follow the statute that is in the law, which I think is very
clear, or we do not, and I am not sure the IRS statute is open
for interpretation when it is as clear as it is. You would have
to change a lot of words there to suggest that this does not
fit the determination that the labor law makes.
Thank you, Mr. Chairman.
The Chairman. Senator Brown?
Senator Brown. Thank you, Mr. Chairman.
I appreciate Senator Burr bringing up such an interesting
issue of what happens at Northwestern with these players, and I
might add, I have met with a couple of them, and they are
definitely not asking for compensation.
I know Senator Burr did not say that, but it is about
concussions, and it is about a kid who gets hurt and loses his
scholarship because he is of no use to the university then and
may not have his health care provided for.
I remember a suspension some years ago of a major player at
a university in my State. The suspension did not take effect
until after the bowl games because of the revenue he
represented to the university, the NCAA, and ESPN. So, even
though he deserved suspension, he did not deserve it until
after he would play that ballgame that would bring in that
revenue. So I think we have a lot of discussions ahead of us on
this.
Senator Burr. If I could say to my good----
The Chairman. Colleagues, we have quite a number of
witnesses on the second panel. We are just going to have to
continue on the question of fraud by tax preparers.
Senator Brown?
Senator Brown. Thank you, Mr. Chairman. And it will be
that.
There has not been much said--well, nobody on this panel
has talked about the Earned Income Tax Credit. I cannot stay
for the second panel. I do know one of the witnesses on the
second panel will have much to say about the Earned Income Tax
Credit.
My view is, if we are going to look at the EITC--which
President Reagan, as you know, called the best poverty program
going in America--couple it with the Child Tax Credit and what
that means. I know Ms. Olson has been outspoken about that. If
we are going to look at EITC as being subject to too much
fraud, and we always should be vigilant, to be sure, we might
be just as focused on carried interest and blocker corporations
and accounts in the Cayman Islands.
But let me ask Ms. Olson. There was a TIGTA report that
found higher rates of improper payments for EITC. They also
estimate that between 20 percent to 22 percent of eligible
workers are not claiming EITC.
For many of us, in our States, we put real time and real
staff, real personal staff and real staff time, into getting
people to sign up, to know about it, to be aware of it.
First, two questions, Ms. Olson. What do we do to maintain
and enhance the EITC and the Child Tax Credit while reducing
the error rate and increasing enrollment? And second, in
Professor Barrick's written testimony, he states that despite
the fact that EITC and the Child Tax Credit lift millions of
families out of poverty, he says the risk of fraud is so great
that it should be addressed by eliminating both credits.
So comment on both of those, if you would, Ms. Olson.
Ms. Olson. I think that the IRS has some research, some
very good research, from its random audits of EITC taxpayers
that really demonstrates that the sources of error are very
great. And it is a complicated statute, so you have those kinds
of errors, and then you do have fraud, for all the reasons we
have talked about here, including the vulnerability of the
population.
The population also changes one-third every year. So it is
very hard to have a learning curve where you are teaching
people. They are leaving the EITC and coming into the EITC in
great numbers.
I have proposed in other testimony multiple ways of
addressing the errors, including both education and redesigning
the statute a little bit to combine the family-related credits
and dependency exemptions and child credit into a larger family
credit that would be refundable, and then a worker credit,
because that makes the overall dollar amount a little less for
each provision and a little less attractive for fraud.
But the main point I really want to make about this is that
the EITC has very low administration costs for such a large
social benefit program. Where its costs are are in the
compliance and error and fraud rate, and we do not know what is
fraud and we do not know what is error.
Other benefit programs have very high administration costs
and not as high error costs. That is because they have a lot of
front-end application process. We do not. You file on an income
tax return. That is very inexpensive. We have the costs at the
back end.
But what the EITC has that no other benefit program has is
a high participation rate. We have 75 to 80 percent of the
eligible taxpayers getting that money. It is higher than any
other benefit program that the United States administers to
that population, to my knowledge.
So, if you really want to look at the effectiveness and the
efficacy of the EITC, yes, we have a higher error rate, but we
have low cost and we have a high participation rate, as opposed
to the programs that have low error rates but very high
administration costs and low participation rates.
I think if you look at it holistically, yes, we have to get
down our error rates--and I have made really substantive
proposals on how to do that--but as an effective program, it is
very good, in my personal opinion, and my professional opinion
too.
Commissioner Koskinen. Yes. I agree with the Taxpayer
Advocate. We have had two big meetings with everybody who has
ever thought about this program. We have tried a lot of
different things.
I think the error rate, 20 percent to 22 percent, and the
amount of payment made in error--it is not all fraud, as the
Taxpayer Advocate said--are untenable. It is a great program,
and, as I have told everybody, we have to make it clear to the
public that we understand it is a problem, it is a serious
problem that we care about, and, in fact, we are going to do
something about it.
One of the things we need, and we have asked the Congress
this time around for, is authority for what is called
``correctable error authority.'' We, if we find and know there
is a problem in a return, cannot change that return, unless it
is just simple math errors, without an audit and contacting the
taxpayer. Correctable error authority would allow us, when we
know there is an error in the return, to make the change, then
advise the taxpayer. The taxpayer could appeal and come back to
us. But it would allow us to eliminate some of the improper
payments at the front end rather than requiring us to have an
audit each time.
The Chairman. My colleague's time has expired.
Senator Carper?
Senator Carper. Thanks, Mr. Chairman.
Commissioner Koskinen, Ms. Olson, it is very nice to see
you both. Thank you so much for your service and for being with
us today.
I just want to say, Mr. Chairman, I am delighted we are
having this hearing, and I commend you and Senator Hatch for
holding it.
My colleagues hear me say from time to time that there are
three things we need to do for deficit reduction if we are
serious about it. We have seen the deficit come down from about
$1.4 trillion in 2009; last year it was only $680 billion. This
year it is expected to come in at about $550 billion, then drop
a little bit more, and then start going back up again.
But if we are serious about deficit reduction, we need to
do three things. One is entitlement reform, save these programs
for our kids, save some money, so it does not savage old people
or poor people. Number two, we need tax reform that actually
brings down our top corporate rates to something that is more
competitive with the rest of the world and also generates some
revenues for deficit reduction. The third thing we need to do
is look at everything we do in government and ask this
question: how do we get a better result for less money? And
this falls right into that bailiwick.
GAO has spent a lot of time in recent years looking at this
and how we make sure, in terms of other revenue that is coming
into the Treasury, that taxpayers are paying a fair and
reasonable amount, but others are not being unduly burdened
because some of our neighbors are not doing their fair share.
And this hearing puts a real spotlight on one of the ways that
we could better ensure that everybody is paying their fair
share. So I am delighted we are having this hearing.
The investigations by the GAO and by the Treasury Inspector
General have revealed serious problems with tax return
preparation by preparers who are not CPAs or who are not
attorneys or otherwise credentialed, and, as we know, this
poses serious problems for tax administration, particularly for
highly complex tax provisions like the EITC. You indicate it is
pretty easy to fill out the form, the tax form to apply for it,
but the actual compliance of it is quite a different matter.
In light of the recent circuit court decision, it looks
like legislation is necessary to allow the IRS to adequately
regulate the tax preparers. In the meantime, I support IRS's
efforts to create a voluntary certification program for
preparers. And let me ask this question.
Do you believe that offering voluntary certification will
offer enough opportunity for return preparers to distinguish
themselves so that many preparers will participate?
Commissioner Koskinen. Go ahead.
Ms. Olson. I think that if we couple that voluntary
certification with some conditions--for example, right now,
unenrolled return preparers can represent taxpayers in audits
before the IRS for returns that they prepare, and that is a
rule that we have promulgated. We should change that rule to
only grant that ability to people who have taken the test and
demonstrated competency and continuing education.
They can also write their name on the return and say, ``You
can call us if there are questions about the return,'' and we
should restrict that to certified preparers. So that gives a
leg-up to those people who are taking the time out to do that
voluntary testing and continuing education. They can say, ``We
can do these things,'' whereas other people cannot.
It will not work if we do not have a comprehensive
education campaign. We have to make it the Good Housekeeping
Seal of Approval, that you have a clear choice. You go to
someone, an attorney, a CPA, an enrolled agent, or a certified
preparer, or all bets are off.
Senator Carper. How could we help in this regard, other
than passing legislation, which I would like to see us do, but
how can we help short of that? There may be nothing, but there
may be something.
Commissioner Koskinen. This hearing is very valuable to
give visibility to the issue to try, as we do, to get taxpayers
to be careful when they select a preparer, to try to determine
what their background is and their competency.
Again, the government and the IRS have a great interest in
competent preparers, because the errors that are provided, or
the fraud that is created when it is not done well, create a
tremendous burden on the system, as well as a question of
whether we are getting adequate compliance.
So I think a voluntary program, which we are considering,
would be a step forward, but it is still going to leave people
on the periphery, if for whatever reason they decide they are
not going to register and take the exams and demonstrate
competence, to produce erroneous returns that we then have to
deal with and have to contact taxpayers about.
Ultimately, it is not as if it is sort of six of one and
half a dozen of the other. From our standpoint, it is critical
that taxpayers get proper advice and that we get as many
accurate tax returns as we can so that we do not fritter away
resources chasing people who had no business filling out that
return in the first place.
Senator Carper. Mr. Chairman, my time has expired. I am
going to be submitting a question for the record, because I
thought Senator Thune asked a question that is worth
highlighting and returning to about a substantial portion of
the Affordable Care Act being implemented through the tax
system. So you will get a question from me on that.
But thank you so much. It is great to see you both.
The Chairman. I appreciate my colleague bringing up this
voluntary compliance issue. My concern about voluntary
compliance is it really does not deal with the scofflaws. We
know that the majority of preparers are scrupulous and honest.
The problem is what to do about the outliers, and those are the
people who are not going to be exactly tripping over themselves
to comply with the voluntary compliance point. But we are going
to discuss that, and we are going to discuss all of the options
here for dealing with this problem.
Senator Cantwell?
Senator Cantwell. Thank you, Mr. Chairman. And following on
that note, one of the options, I believe, is continuing to make
things simpler from a technology perspective.
So some of my colleagues have brought up the Free File
program, which is a public-private partnership between the IRS
and commercial tax software companies that offer free Federal
tax preparation. And since its inception, it has saved over 30
million taxpayers in helping them with their filings, and it
has also saved the Federal Government something like $91
million by making it easier, obviously, on the processing
costs.
So one of the things that I kind of disagree with you a
little bit on, Ms. Olson, is, I am sure there are a lot of
people who make less than $58,000 who know how to use Word or
Excel or various software programs. This is about continuing to
make the complexity of the tax code simple so that the
administration of it is simpler too.
So I wanted to talk to you about what else we can do to
continue to advance the use of technology and help taxpayers
file efficiently, because I have certainly heard stories within
my own office of young people using an online version, and
paying a little bit for that, and then going the next year,
thinking they were going to get some great advice from
somebody, and all they are doing is sitting across from
somebody who knows barely more than they do, but is charging
them 2 times or 3 times the rate.
So to me, I think we need to make the tax code simpler,
make it easier for people to file, make the code easier to
understand so that people know exactly what they are doing. Is
that not the direction that we should be going?
Ms. Olson. Absolutely. I have made the complexity of the
tax code the number-one most serious problem for taxpayers many
times in my annual report to the Congress.
I was an unenrolled return preparer and then an attorney
who prepared returns for many clients, and I was baffled why
people would not do some of the returns that they were bringing
to me. There is this nervousness factor that they are going to
make a mistake, that they missed something, and I think that is
driving people of all income levels to return preparers.
The Free File usage has not been robust in terms of the
numbers of taxpayers, even though it covers a large population,
and I think some of that is that some taxpayers like to buy the
tax software products to get all the other bells and whistles
that are on those products, incorporating them with their
accounting programs, et cetera. Others want to go to return
preparers, like I said before, because they do not want to make
a mistake and they just do not trust themselves, even with the
software.
I think the IRS publicizes the Free File or the free
fillable forms. I will come back to something I said earlier. I
think it is very important for the IRS to be able to get W-2
and 1099 data early in the filing season, as early as possible,
so we can make it available to taxpayers, so they can download
it into their software programs that they may purchase, so
preparers can download it into their programs, and so that
people can download it into Free File or free fillable forms
and get a little further along and that is accurate information
then.
You avoid keystroking errors and things like that and that
missed W-2 that got sent to a wrong address. That would be the
big technology push, and Congress could do something about this
by setting some goals for the IRS to move forward in this.
Congress set goals for the IRS to get into electronic
filing, and, even though it did not hit the goal on time, it
became a rationale, it became a goal, and the IRS organized
itself around achieving that. And I think to get to this next
electronic umph with getting the third-party information
reporting timely, being able to help taxpayers, but, also,
protect against fraud----
Senator Cantwell. I think software developers have to focus
all their attention on making it intuitive, and I think there
is some intuitiveness we could probably put into the tax code
explanations. And so we will certainly take you up on that
offer.
I also wanted to ask, quickly, because we have, obviously,
suffered this devastating loss in the Oso, Darrington mud slide
area of our State, and so we have been looking at all of this
as it relates to disaster relief, and you certainly have seen a
lot of these incidents with Sandy.
Do you think that we need to look at this issue of what is
available to communities? It seems like we are so almost rifle-
shot, and then here is a community where you have lost your
house. In a lot of instances, you still have to pay on your
mortgage even though your house has been totally wiped out.
How do we help these communities?
Ms. Olson. We have made some recommendations in the past
about disasters that did not quite qualify for presidentially
declared disasters, and I will commit to working with your
office about some of that. And I also think your idea about
some of the mortgage relief and debt relief and things, so you
do not trigger taxable events because you cannot pay these
things, that is very important. I would be more than happy to
look into that.
Senator Cantwell. Thank you.
The Chairman. Thank you, Ms. Olson, both of you. This was
very helpful in terms of the technology issue. There is no one
in the Senate who is more tech-savvy than Senator Cantwell. So
we are going to follow up on these two issues and on the
mortgage point in terms of trying to protect people from tax
increases when they get debt relief. That is part of the
extenders, as a result largely of Senator Stabenow.
At this point, I think we have completed our first round.
I would like to introduce our second panel, and we will
have Senator Hatch introduce Dr. John Barrick, associate
professor at Brigham Young University.
Thank you both very much. You have spent a lot of time at
the witness table, and we thank you for your expertise and your
patience.
Now for our second panel. I would like to introduce the
first witness, Mr. James McTigue, Director of Strategic Issues
from the Government Accountability Office. Mr. Wayne McElrath
is Director of Investigative Services and will answer any
questions that members have after Mr. McTigue provides his
testimony.
Our next witness is Mr. William Cobb, the president and CEO
of H&R Block.
Our third witness is Ms. Janis Salisbury, the chair of the
Oregon Board of Tax Practitioners. Ms. Salisbury, we know that
you have tax clients waiting for you at home in Oregon, so we
thank you for coming.
Senator Hatch will introduce Dr. John Barrick momentarily.
Our fifth witness will be Ms. Chi Chi Wu, staff attorney at
the National Consumer Law Center.
Our final witness will be Mr. Dan Alban, attorney for the
Institute of Justice.
Let us now have Senator Hatch introduce Dr. John Barrick,
associate professor, Brigham Young.
Senator Hatch. I would like to welcome Professor John
Barrick from the School of Accountancy in the Marriott College
of Business at Brigham Young University, which is a very highly
rated business school.
Professor Barrick is a leading academic expert in taxation.
In addition, he has a wealth of practical experience. His
highlights include 2 years of tax experience with the
bipartisan Joint Committee on Taxation and 4 years as a tax
consultant with PriceWaterhouse.
John's family is with him here today. And we welcome you
all here, and we are very happy to have you here helping us to
understand these issues.
The Chairman. Thank you very much, Senator Hatch.
We thank all of our witnesses for coming.
In order to give members of the committee time to ask
questions, we would ask that you limit your testimony to 5
minutes. Your prepared statements are going to automatically be
part of the record.
Why don't you start, Mr. McTigue?
STATEMENT OF JAMES R. McTIGUE, JR., DIRECTOR, STRATEGIC ISSUES,
GOVERNMENT ACCOUNTABILITY OFFICE, WASHINGTON, DC
Mr. McTigue. Thank you, Mr. Chairman and members of the
committee. I am pleased to be here today to discuss the quality
of services provided by paid tax preparers.
Millions of taxpayers rely on paid preparers to provide
them with accurate and fully compliant tax returns. The IRS has
long recognized that paid preparers' actions have an enormous
impact on its ability to administer tax laws effectively and
collect the revenue that funds the government. Despite the
importance of paid preparers in our tax system, IRS's authority
to regulate paid preparers is limited to certain preparers, as
you have heard, such as attorneys and certified public
accountants. The majority of preparers, 55 percent, are known
as unenrolled preparers and are not regulated by IRS. In 2010,
IRS initiated steps to regulate unenrolled preparers, but the
courts ruled that IRS lacked the authority.
In order to gain some insight into how unenrolled preparers
actually perform, we developed two scenarios based on common
tax issues. We call these scenarios our waitress scenario and
our mechanic scenario. In our waitress scenario, our undercover
investigator posed as a single mother who received wage income
and unreported cash income from tips. She had one child who
lived with her during the year and qualified for the Earned
Income Tax Credit and one who did not. In our second scenario,
a mechanic and his wife derived the majority of their income
from his wages, but also had some side income from repair work
and child care. They had three children who lived at home; one
attended college.
As you can see from the board on my right and figure 3 in
my written statement, in 19 visits to randomly selected
commercial paid preparers, refund errors ranged from $52 lower
to $3,700 higher than they should have been. In only two
instances did the paid preparer calculate the correct refund
amount.
In the waitress scenario, preparers made two key errors;
first, not reporting all the cash tip income and, second,
claiming both children as being eligible to receive the Earned
Income Tax Credit. The clustering of the bars illustrates that
different preparers made the same errors. For example, four
preparers did not claim the cash tip income, which overstated
the waitress' refund by $654. One preparer told our
investigator that if she reported the tip income, it would be a
red flag, and her employer would be audited. Three preparers
made both errors, which resulted in refunds that were
overstated by more than $3,700. In one case, the preparer told
our investigator that she could claim her second child if no
one else did, even though the child did not live with her for
more than half of the year.
In the mechanic scenario, not reporting cash income also
resulted in refunds that were overstated by $3,000. One
preparer told our investigator that if the side income was
reported, his tax preparation fee would go up and his refund
would go down. Two preparers went as far as to show our
investigator how his refund would change if the side income was
reported.
Clearly, taxpayers were not well-served by the preparers
that we visited. But as the next board on my right illustrates,
figure 6 in the written statement, they paid a lot of money for
the services, and fees varied widely. For example, with the
mechanic scenario, fees ranged from about $300 to $600.
Alarmingly, the average fee for the waitress scenario was
nearly $300, more than 80 percent of her weekly pay.
Often, the paid preparers either did not provide an
estimate of the fees up front or the actual fees charged were
higher. Higher fees, however, do not translate into more
accurate returns. In fact, the fee charged for the correct
mechanic return was one of the lowest at $311. When our
investigators inquired about the high fees, we heard a range of
responses like, we charge more in the morning than the
afternoon, we charge more early in the tax season than later,
and the Earned Income Tax Credit form is one of the most
expensive.
Although our findings are anecdotal, GAO's analysis of
IRS's national research program data reveals that preparer-
filed returns showed an estimated 60-percent error rate
compared to an estimated 50-percent for self-prepared returns.
Errors on paid preparer returns were similar to those
encountered during our visits. For example, preparer-filed
returns claiming the Earned Income Tax Credit had an estimated
error rate of 51 percent.
Undoubtedly, many paid preparers do their best to provide
clients with returns that are accurate and fully compliant.
However, poor performance can result in taxpayers being
audited, having to pay back taxes and interest, and possibly
even penalties.
In 2008, when GAO looked at States that regulate paid
preparers, we found that returns filed by paid preparers in
Oregon, which has the most stringent requirements of any State,
were more likely to be accurate than comparable returns filed
by preparers in the rest of the country.
Given the importance of paid preparers in our voluntary tax
system, we are recommending that, if Congress agrees
significant preparer errors exist, it should consider granting
IRS the authority to regulate unenrolled tax preparers.
This concludes my statement, and I would be happy to answer
any questions.
Thank you.
The Chairman. Thank you very much.
[The prepared statement of Mr. McTigue appears in the
appendix.]
The Chairman. Mr. Cobb, I think you will be next.
Mr. McElrath, would you like to add to that?
Mr. McElrath. No. I have nothing to add.
The Chairman. Very good.
Mr. Cobb?
STATEMENT OF WILLIAM COBB, PRESIDENT AND CEO,
H&R BLOCK, KANSAS CITY, MO
Mr. Cobb. Chairman Wyden, Ranking Member Hatch, and the
distinguished members of the committee, thank you for inviting
H&R Block. We are pleased to participate in this important
discussion about protecting consumers from incompetent and
unethical preparers.
As the world's largest consumer tax services provider,
competent, ethnical tax return preparation is something we take
very seriously. Last year, we filed more than 22 million U.S.
individual income tax returns, about 15 million returns in our
more than 10,000 offices, and another 7 million through our do-
it-yourself software offerings.
We know a lot about consumer views on taxes and know what
it takes to maintain expertise in this always-changing tax
landscape. In order to protect taxpayers from incompetent and
unethical tax return preparers, there are two key items that
must be addressed: first, minimum standards for tax return
preparers, and, second, consistent fraud prevention measures
across all tax preparation methods.
First, we support legislation that sets standards for
professional tax return preparers. The most obvious way to
address incompetent and unethical tax return preparers is to
establish a set of minimum standards. Standards provide an
objective measure for both consumers and tax preparers to
measure and monitor the overall competency, expertise, and
performance of tax return preparers.
This is critical, because the ultimate goal is to help
taxpayers file more complete and accurate returns. Equally
important is the reduction of both fraudulent tax returns and
the improper payment rate of the Earned Income Tax Credit. More
than 80 million people file an individual income tax return
with the help of a tax return preparer every year. Consumers
need an objective way to know that the person they turn to for
one of the biggest financial transactions of their year is
competent and meets standards necessary to accurately prepare
tax returns.
Taxpayers themselves agree. A recent national survey that
we commissioned found that 9 out of 10 consumers support
requiring professional tax preparers to meet minimum training
standards. As this initiative moves forward, the U.S. Treasury
Department and IRS must leverage the lessons learned from the
prior registered tax preparer program and partner with private
industry to create an effective and cost-efficient program.
The components of the program must include tax preparer
registration, demonstrated competency, continuing education,
and background screening. At the end of the day, requiring
return preparers to meet minimum standards and stay current
with the tax code is not about granting the IRS additional
authority that it should not have or to advance anti-
competitive pursuits. It is about protecting the 60 percent of
consumers who get help with their taxes every year. This is why
we require our H&R Block tax preparers to meet stringent
education and competency standards: 75 hours of tax law and
return preparation education, plus 35 hours of skills training
in their first year, then annually, another 15 hours of
continuing education and 20 hours of skills training.
The second key item that must be addressed is implementing
consistent fraud prevention measures across all tax preparation
methods. The steps designed to prevent EITC fraud in the paid
preparer channel are notably absent in the do-it-yourself
channel. Specifically, for the 40 percent of taxpayers who do
their own taxes using do-it-yourself software, such as H&R
Block's, they are not required to provide the same information
and documentation to substantiate their eligibility for this
refundable credit.
Congress must close such obvious gaps not only for EITC,
but for all refundable credits. With an EITC improper payment
rate persisting at 20 percent or higher, this is an obvious
opportunity that can and should be seized immediately.
Consumers are not concerned about answering more questions.
In the same survey I mentioned before, a significant majority
of taxpayers expressed a willingness to do more to help combat
tax fraud, such as answering more questions on their returns or
even waiting a little longer for their refund.
Government, the tax preparers, software developers, and
taxpayers each play a significant role in the tax filing
process. Taxpayers are willing to do their part as long as it
is administered consistently for all. Additionally, this
difference in standards creates a loophole for ghost preparers
who do not want to comply with the paid preparer requirements.
They simply use a do-it-yourself product. IRS should set
standards for tax software to ferret out ghost preparers.
Before I close, let me take a moment, Mr. Chairman, to
acknowledge your interest in streamlining the tax code and the
tax filing process. We would be pleased to share our consumer
tax expertise on these issues with you and your staff.
The Tax Institute at H&R Block, comprised of enrolled
agents, tax attorneys, CPAs, and former IRS officials, analyzes
proposed legislation and regulations with an eye on how they
will affect consumers. And in doing this analysis, the Tax
Institute has access to the real world expertise of our 70,000
tax professionals who are on the front line with consumers.
In conclusion, we urge Congress to listen to consumers and
move to enact minimum standards for return preparers and
implement consistent anti-fraud measures for taxpayers. These
standards are essential for protecting consumers, combating
fraud, and reducing improper payments.
Until Congress can enact minimum standards for return
preparers, we recommend that Treaury and IRS implement a
voluntary certification program as supported by IRS
Commissioner Koskinen and the National Taxpayer Advoate.
Thank you for the time, and I look forward to working
together to implement these common-sense measures.
The Chairman. Mr. Cobb, thank you.
[The prepared statement of Mr. Cobb appears in the
appendix.]
The Chairman. Ms. Salisbury, welcome. You made a long trek
at a busy time of the year, and I know you have some late
nights ahead of you, so we really appreciate your coming.
STATEMENT OF JANIS SALISBURY, CHAIR, OREGON BOARD
OF TAX PRACTITIONERS, OREGON CITY, OR
Ms. Salisbury. Thank you. Chairman Wyden, Ranking Member
Hatch, and distinguished members of the committee, my name is
Janis Salisbury. I am an IRS enrolled agent and a licensed tax
consultant in Oregon. For the past 6 years, I have served the
State of Oregon as a member of the Board of Tax Practitioners
and have served on that board for the last 2 years as chair.
I am pleased to be here to discuss with the committee the
actions that Oregon has taken to protect taxpayers from
incompetent and unethical tax return preparers, and to
recommend that Congress provide the IRS with the authority to
require individuals to demonstrate minimum competency in tax
return preparation, either by passing a State board examination
or for the individual to pass an IRS examination, and then to
impose continuing education requirements after passage of such
examination.
The primary reason Oregon felt it necessary to develop its
own paid preparer regulatory program 40 years ago is the same
today as it was then. Initial training and registration is
essential before anyone can even begin preparing your tax
returns. Oregon's track record proves this.
In 1972, Oregon determined that people engaging in tax
return preparation should be licensed and be required to obtain
continuing education relating to the tax return preparer
occupation. The Board of Tax Practitioners currently regulates
tax return preparers in Oregon. Oregon requires paid preparers
who are not already licensed by the State as CPAs or attorneys
to obtain a State license to prepare tax returns.
To become a licensed tax preparer, a person must have a
high school diploma or the equivalent, complete 80 hours of
approved qualified education, pass a State-administered
examination, and then pay a registration fee at application.
Annual renewal by licensees requires proof of at least 30 hours
of continuing education.
According to a report to this committee prepared by the GAO
in August of 2008, Federal tax returns for the year 2001 filed
in Oregon were more likely to be accurate than returns filed
anywhere in the rest of the country. Specifically, the GAO
found that the odds that a return prepared by an Oregon paid
preparer was accurate were about 72 percent higher than the
odds for a comparable return filed by paid preparers in the
rest of the country.
Oregon has been a leader in requiring the licensing of tax
return preparers for over 40 years, and the results noted by
the GAO show the excellent results of Oregon's regulations.
Accordingly, the Oregon State Board of Tax Practitioners urges
the Congress to enact legislation similar to Oregon's
legislation, which would require individuals to demonstrate
competency in the preparation of tax returns and satisfy
continuing education requirements.
We suggest that such competency be demonstrated by passing
a written examination approved by a State board of accountancy
or a board of law examiners or a State entity, such as the
Oregon Board of Tax Practitioners, or by the IRS. The passage
of an examination recognized by a State, such as Oregon, to
show competency in tax return preparation must be considered to
demonstrate tax competency for Federal tax return preparers, in
order to recognize efforts that have been undertaken at the
State level and to avoid duplicate and unnecessary testing.
We commend the Senate Finance Committee for holding this
hearing and considering this important legislation. Thank you
for the opportunity to be with you, and please let me know if
you have any questions. I am very willing to answer.
The Chairman. Thank you. That is very helpful, and we will
have some questions in a moment.
[The prepared statement of Ms. Salisbury appears in the
appendix.]
The Chairman. Professor Barrick?
STATEMENT OF JOHN BARRICK, Ph.D., ASSOCIATE PROFESSOR, BRIGHAM
YOUNG UNIVERSITY, PROVO, UT
Dr. Barrick. Chairman Wyden, Ranking Member Hatch, and
members of the committee, thank you for inviting me to
participate in this hearing. Protecting taxpayers from
incompetent and unethical tax return preparers is an important
topic.
To illustrate the problem, I would like to share a former
colleague and classmate's recent experience with a taxpayer who
previously received return preparation services from a ghost
preparer.
A new client comes to visit a CPA and indicates that he has
a tax problem. The client never attended college, is a single
father, has two young children, ages 4 and 6, and is facing
uncertain economic times. During the previous year, he engaged
a tax return preparer who claimed that he could get him an
$8,000 refund at the cost of $800 or 10 percent of the refund
due.
The return preparer did not sign the return nor did he
provide reliable preparer contact information. As promised, the
client did receive an $8,000 refund and began spending it.
However, a short time later, the client received an IRS notice
denying the three American opportunity credits that were
claimed, one for himself and each of his two young children.
The money had to be returned.
Who was to blame? Both the client and the tax preparer
knowingly submitted or had opportunity to know that the return
claimed false information.
The client is now worse off than before. He owes the full
amount of the refund, plus he is out the $800 return
preparation fee. The preparer is a ghost, not to be found, $800
richer than before.
All of us at this hearing would like to prevent this type
of behavior from happening again. But how can we best do that?
First, our tax system is both necessary to raise revenue
and complex, as has been noted today. With 6.1 billion hours
spent complying with the law and the code having over 4 million
words and containing 4,600 changes since 2001, this complexity
has led to the need for tax return preparers.
There are three main problems associated with regulations:
the inability to regulate the most unscrupulous and unethical,
the inability to impose ethics on return preparers, and the
creation of winners and losers within the industry. I firmly
believe that the current regulatory framework is insufficient
to address these limitations, and I will make several
recommendations that the Congress and the IRS could follow to
better protect these taxpayers.
First, voluntary disclosure. We live in a free society. Let
the markets decide. Create incentives for the return preparers
to voluntarily register. Attorneys, CPAs, and enrolled agents
already do this. If the IRS chooses to endorse or certify a new
class of return preparers with only 15 hours of education, the
IRS will provide a seal of approval and a false sense of
security to taxpayers. I do not recommend this latter approach.
Second, eliminate or limit refundable credits. The growth
of refundable credits in the income tax system encourages
unethical behavior by taxpayers, ghost preparers, and others
wishing to defraud the Federal Government. The Earned Income
Tax Credit, Child Tax Credit, and education credits are
refundable. The new credits provided by the Affordable Care Act
will double the amount of refundable credits available by the
income tax system. Prior research has shown that financial
incentives do matter, that current law encourages and creates
incentives for fraud. To the unscrupulous and unethical, this
is easy money.
Third, enforce existing return preparer laws. In 2005, the
IRS Criminal Investigation Division stated that the IRS
currently has numerous tools available to address return
preparer fraud. If the IRS already has ample statutorily
authorized tools, why do they need regulations to address this
issue? Encourage the IRS to use the existing tools.
Fourth, educate taxpayers. Taxpayers are ultimately
responsible for their returns. They have an obligation to put
forth a good effort. If something promised to you by anyone
sounds too good to be true, it probably is. Buyers beware.
Taxpayer education can be an effective tool that the IRS has
historically used successfully.
In conclusion, the tax law is large and complex. For these
reasons, the majority of taxpayers seek out return preparers to
help them. But there are ghosts that attempt to defraud the
income tax system.
Rather than regulate, please take the previous steps that I
have mentioned. The most important protection for taxpayers
would be a simpler income tax system, as suggested by Chairman
Wyden today. I would encourage the committee to continue to
pursue meaningful reform.
Thank you for giving me the time and opportunity to speak.
The Chairman. Thank you, Dr. Barrick.
[The prepared statement of Dr. Barrick appears in the
appendix.]
The Chairman. Ms. Wu?
STATEMENT OF CHI CHI WU, STAFF ATTORNEY, NATIONAL CONSUMER LAW
CENTER, BOSTON, MA
Ms. Wu. Chairman Wyden, Ranking Member Hatch, and members
of the committee, thank you for inviting me here today. My name
is Chi Chi Wu. I am a staff attorney at the National Consumer
Law Center.
Mr. Chairman, thank you for holding this hearing on the
need to protect taxpayers from incompetent and unethical tax
preparers. This is a consumer protection issue, as well as a
revenue protection issue. Simply put, there needs to be
licensing and competency standards for paid tax preparers.
Either Congress needs to give IRS the authority, or the States
need to enact such laws. Indeed, mindful of the difficulty in
getting Federal legislation passed, we at NCLC have issued a
model act to encourage States to adopt such laws.
I have worked at the intersection of taxpayer and consumer
rights for over a decade. When I began this work, I assumed, as
do many Americans, that tax preparers were licensed
professionals with certain educational credentials. After all,
the tax return is the most important financial transaction
during the year for many Americans, and it would only make
sense that the preparers in whom consumers place their trust
and their sensitive financial information would be required to
take some courses and pass a test.
To my surprise, the exact opposite was true. Preparers are
essentially unregulated in 46 States. Contrast this with other
professions that do require licensing in all or most States,
such as hairdressers or landscape architects.
The lack of regulation for tax preparers has resulted in an
environment that breeds incompetence and fraud. One indication
is the existence of fringe preparers, tax preparation offered
by businesses such as payday lenders, pawn shops, check
cashers, used car dealers, jewelry shops, even liquor stores
and a ``rent-a-wheel'' business.
This, of course, raises questions. How accurate are tax
returns prepared by used car dealers? One can imagine that the
incentive for accuracy might take a back seat to the desire to
sell a car by using a tax refund as a down payment.
Unfortunately, the problems go beyond that. In 2008, we
conducted mystery shopper testing, the original purpose of
which was to investigate disclosures concerning refund
anticipation loans. To our surprise, what we found were serious
tax errors and fraud in four out of the 17 tests we conducted,
or nearly 25 percent. One example involved a preparer who did
not know how to handle a Form 1099-D. To quote, ``The preparer
said that there was a problem she did not know how to handle.
The problem was that there was a $5,000''--that is a fictional
number--``dividend that we must pay taxes on. With the
dividend, our return would only return $100. If she were to
ignore it, then we would receive $3,000 in returns. She then
called her `tax people,' who told her we do not need to report
the dividend and just ignore it.''
In 2010, we conducted another round of testing and found
incompetence and fraud in six out of 19 tests, or about 30
percent. One example involved a preparer who, when realizing
the tester would only receive a $1,000 refund and would owe
State taxes, began making up deductions.
To quote, ``The tester does not attend church, but the
preparer included a $2,000 church donation. The preparer also
deducted the cost of work clothes and laundry, even showed the
tester that her Federal refund would increase to $3,000 from
about $1,000. The preparer also tried to convince the tester to
make up a dependent, as she does not have any, showing her that
her refund would go to $5,000 if she did. The preparer also
tried to qualify her for the EITC, even though she is not
eligible. Finally, the tax preparer deducted $400 in 2008 tax
preparation costs, even after the tester told the preparer she
did not pay for tax preparation last year.''
Unfortunately, these test results are not isolated and
unique. Similar testing, including the testing announced by the
GAO today, has found equal or greater levels of fraud or
incompetence. Looking at the totality, we can see these
problems are not limited to a handful of bad apples. Thus,
bringing enforcement actions on a one-by-one basis is simply
inadequate.
For example, a recent lawsuit by the Department of Justice
against Instant Tax Service might be considered a success
because it shut down that chain, but it probably cost the
government tens or even hundreds of thousands of dollars in
staff time by IRS personnel and DOJ lawyers.
There are simply not enough resources to go after all the
bad actors. Furthermore, we disagree with the notion that
preparer regulation could harm taxpayers because preparers will
raise their fee to cover the cost of education and testing.
First, the interest of consumers in obtaining competent,
accurate, and ethical tax preparation far outweighs any
increased marginal cost. After all, an erroneous return could
put the taxpayer at risk of an IRS audit or even criminal
sanctions.
Second, we believe that preparer regulation will not
actually even create significantly greater costs. Preparer
compliance costs are minimal. For example, prior to the Loving
decision, the IRS had planned to charge less than $120 for the
exam. These costs are dwarfed by the hundreds of dollars in
fees that some paid preparers charge for a single return, as we
heard from the GAO today, and as our testing revealed--$400 to
$500 in somes cases.
And the DOJ's lawsuit against Instant Tax Service revealed
that that chain typically charged about $550 for as little as
15 minutes worth of work. Preparer regulation has more
potential to lower costs than increase them by improving
transparency and reducing abuses.
Thank you for the opportunity to testify, and I look
forward to your questions.
The Chairman. Thank you very much, Ms. Wu.
[The prepared statement of Ms. Wu appears in the appendix.]
The Chairman. Mr. Alban, welcome.
STATEMENT OF DAN ALBAN, ATTORNEY,
INSTITUTE FOR JUSTICE, ARLINGTON, VA
Mr. Alban. Thank you, Chairman Wyden and Ranking Member
Hatch, and other members of the committee.
Congress should not give the IRS additional power over tax
preparers by forcing them to get an IRS license before they can
assist taxpayers with their tax returns. Tax preparers are
already regulated by numerous Federal statutory requirements
imposing both civil and criminal penalties for everything from
failing to keep a list of the returns they prepared for the
past 3 years to actual tax fraud. Tax preparers are also
required to register with the IRS to obtain an individualized
number, known as a PTIN, that they must include on every return
they prepare, so that the IRS can track and analyze their
returns. These tools already provide the IRS with what it needs
to identify, track, and penalize the few bad apples without
unnecessarily burdening the vast majority of law-abiding
preparers.
I have three main critiques of preparer licensing as bad
public policy, followed by a few recommended solutions that are
superior to licensing.
First, preparer licensing is protectionist and
anticompetitive. Rather than protecting consumers, licensing
regulations can protect large incumbents and industry insiders
from competition, by erecting costly barriers to entry. Indeed,
several financial analysts have concluded that the largest
firms, such as H&R Block, stand to benefit the most from
licensing preparers.
Unsurprisingly, the IRS licensing regulations were a
product of lobbying by powerful special interests. H&R Block,
Jackson Hewitt, and Intuit, the makers of TurboTax, all
actively supported licensing, while other industry insiders,
such as the American Institute of CPAs, obtained special
exemptions for their members. Former H&R Block CEO Mark Ernst
even oversaw the drafting of the regulations at IRS.
Of course, mom-and-pop preparers generally do not have the
resources to send lobbyists to Washington, DC to represent
their interests. At the same time, licensing burdens usually
fall hardest on the little guys who do not have the same
financial resources and cannot benefit from economies of scale.
Licensing was expected to push out tens of thousands of
independent preparers, possibly as much as 10 percent to 20
percent of all preparers. Most of those who would have been put
out of business were seasonal mom-and-pop preparers, like my
client, 81-year-old Elmer Kilian, of Eagle, WI, who hangs a
shingle outside his house every tax season and has been
preparing tax returns for over 30 years on his dining room
table.
Second, consumers would be harmed by preparer licensing,
which raises prices and reduces choices. Licensing reduces
competition, which is bad for consumers. Between reduced
competition and increased regulatory compliance costs,
licensing is expected to artificially drive up the prices
consumers pay for tax preparation.
Licensing also reduces consumer choices and interferes with
consumer autonomy over personal finances. Many taxpayers will
not only be left with fewer options, but will be forced to pick
a new preparer if licensing drives their current preparer out
of business. Instead, taxpayers, not the IRS, should be the
ones who get to decide who prepares their taxes.
Licensing may also result in other unintended consequences
that harm consumers. Higher prices and fewer choices may push
unqualified taxpayers to prepare their own returns. It will
also likely boost the number of unregistered ghost preparers
who do not sign the returns they prepare and are, thus, very
difficult for the IRS to monitor.
Third, preparer licensing offers a false promise and fails
to deliver. As an initial matter, licensing regulations cannot
do much about fraud prevention that is not already achieved by
the PTIN registration combined with existing criminal
penalties. Dishonest preparers can take exams and sit through
continuing education courses just as well as honest preparers.
Moreover, licensing and IRS-mandated training are largely
ineffective. For example, IRS-trained and certified preparers
in the VITA volunteer program were found by TIGTA to have a 61-
percent error rate in 2011. Similarly high error rates have
been found over the years in TIGTA studies of IRS employees
answering just a single tax question.
Likewise, an IRS study found that licensed California
preparers had the third-highest error rates in the country for
2 years in a row, despite the State's long-standing licensing
program. That is because the real problem is not competency,
but tax code complexity.
As the National Taxpayer Advocate explained last May, tax
code complexity almost guarantees that every return has an
error in it, some inadvertent, some intentional. Thus,
licensing will not prevent tax preparers from making errors. It
will simply limit who is licensed to make those errors.
Licensing should be rejected because better solutions for
these problems already exist. First, voluntary certification is
far superior to mandatory licensing. It allows both consumers
and preparers to decide if they value certification and permits
them to opt in or opt out.
Second, the best way to reduce errors is to reduce
complexity. Simplify the tax code to reduce error rates.
And, third, the IRS already has the legal and technical
tools it needs to identify, track, and penalizes the few bad
apples. Enforcement of these existing laws is far preferable
because, unlike licensing, it does not impose substantial costs
on the vast majority of law-abiding tax preparers.
Thank you.
The Chairman. Thank you, Mr. Alban. And all of you have
been very helpful.
[The prepared statement of Mr. Alban appears in the
appendix.]
The Chairman. I want to see what I can do to draw out some
key questions.
Mr. Alban, as I understand it, is particularly concerned
about the small practitioner, and I certainly understand why
small businesses can be frustrated with needless government red
tape and bureaucracy. My understanding, however, here, Ms.
Salisbury, is that you are a small practitioner. Are there not
two practitioners at your firm?
Ms. Salisbury. Yes. There are a total of four. Two are CPAs
and two are licensed tax consultants.
The Chairman. So I think that would certainly qualify you
as a small practitioner.
Do you all feel, apropos of Mr. Alban's point, that somehow
this disadvantages you against Mr. Cobb? Because it looks to me
like both of you passed a competency test. That does not look
to me like a disadvantage to a small practitioner.
Ms. Salisbury. Well, the numbers prove it is not in Oregon
and in California. In Oregon, with our licensing, and as
recently as 2011--these are the most recent facts I have--
nearly 84 percent of the practitioners in Oregon are not
employed by H&R Block, Jackson Hewitt, or Liberty Tax Service,
the three big companies in Oregon. And in California, it is
nearly 89 percent.
So it disproves that small practitioners will be affected,
and both of those States have some form of registration for
practitioners.
Mr. Cobb. Mr. Chairman, if I may add, quickly, forty
percent of our system is small business people. We have 1,670
franchisees, many of whom are like Ms. Salisbury, have one or
two offices, and really they are small businesses.
The Chairman. So now that we have at least addressed, to
some extent, this question of whether small practitioners are
disadvantaged by having some minimum standards, I want to ask
you, Ms. Salisbury--we have had our system for decades, and we
Oregonians are pretty outspoken souls.
I can tell you, I have been on the Finance Committee now
since 2005, and I have not had anybody who is a practitioner
come and say, ``Oh, my goodness, Ron, it is going to be
bureaucratic water torture if we have the kind of thing that
you have in Oregon.'' We pass a competency test. We undertake
30 hours per year of continuing education, audit preparation,
and sanctions for those who are not competent.
We have done this for decades. Nobody is marching in the
streets, nobody is picketing. There is no sign of unhappiness.
Is that a fair appraisal of what we have had? And then, of
course, the results have been documented by the Government
Accountability Office, which you have referred to as well. We
have superior results with this kind of system, and I think
Oregonians would agree that appropriate oversight is missing
today, which is the minimum competency standard.
Is that a fair assessment?
Ms. Salisbury. Very much so, very fair.
The Chairman. What lessons can the IRS learn from Oregon's
experience over these decades? I heard discussion from Mr.
Alban about the cost. I have not heard complaints about
Oregon's cost or things of this nature. Are there other lessons
here from the standpoint of Oregon's experience for the IRS?
Ms. Salisbury. Well, the costs in Oregon are very
affordable. Probably the most expensive cost is education, but
because we require education, we have a lot of resources in the
State that provide cost-effective education.
Rather than spending $200 or $300 or $400 for a day of
education, you can get education through other resources, not
as expensive. So education is not an issue. The registration
fees are very affordable for even a small business. I had a
larger business in years past and paid those fees for my
employees and still managed to keep my head above water with
the business. So it is not a concern.
We have wondered why it has taken the Nation so long to
be----
The Chairman. We are always too logical for the rest of the
country.
One other question, if I might, for you, Mr. McTigue. One
of the things that concerns me about some of these questions
with respect to having minimum competence and the like is,
those who are opposed say we already have these tough
standards, and it seems to me what you all have found is that
that is not the case.
What we basically have is reactive, after the fact, when
the harm is done to people who just want to get every single
dollar back that they are owed. Is that a fair
characterization?
Mr. McTigue. Yes, Mr. Chairman, that is a fair
characterization. As you stated, the majority of tools and
actions that the IRS can take are after the fact, after the
refunds have gone out, after the paid preparer has disappeared
in some cases, and it is the taxpayer who is left explaining,
dealing with the back taxes, having to pay back interest and
penalties, whereas up-front regulation has the potential to
prevent some of these return errors.
The Chairman. My time has expired. I just appreciate the
fact that you have done this second independent inquiry. People
can question the value of one independent inquiry. I would not,
because I have watched the professionalism of your office over
the years, but you have now found it twice.
I also know, because you are quite scrupulous in
documenting the facts, you said, ``Look, we have looked at 19
sites,'' but as you know, there have been other analyses which
are pretty much in line with yours.
So we have a lot of heavy lifting to do to fix this, and we
are going to be working with all of you.
Senator Hatch?
Senator Hatch. Thank you, Mr. Chairman.
I want to thank all of you for being here. Each of you has
presented us with the various perspectives that I think will
benefit the committee and hopefully the IRS as well.
Dr. Barrick, let me just ask you a question. Credentialed
preparers, such as attorneys, CPAs, and enrolled agents, have
long been regulated and subject to professional standards of
competence and ethical conduct. Is there clear evidence that
returns prepared by these credentialed preparers are less prone
to error than those returns that are prepared by now-
unregulated preparers or even ghost preparers?
Dr. Barrick. I am unaware of specific evidence that shows
that credentialed preparers in those specifically mentioned
groups are fundamentally different. However, I do not have full
access to the data that the GAO or TIGTA or others have used.
As an academic, though, I am always willing to help them
design more statistically reliable and more educated studies
examining these important questions.
Senator Hatch. Thank you.
Mr. McTigue, let me ask you this. Software developments and
increasing computer literacy have made it easier for many
people to prepare and, of course, file their own tax returns.
In fact, the percentage of self-prepared returns has been
increasing in recent years.
Is this trend one that is improving or degrading the
overall quality of tax compliance?
Mr. McTigue. Senator Hatch, that is an issue that we did
not look at in this study. But when we did look at data from
IRS's national research program database on error rates for
preparer-filed returns versus self-prepared returns, and we did
see a significant difference. Returns prepared by paid
preparers had an error rate of 60 percent versus 50 percent for
self-prepared returns.
Senator Hatch. Let me throw this one out. When a tax filer
stops using the services of a paid preparer and instead uses
software to self-prepare their own return, do we know or have
any statistics or any evidence--do we know what happens to the
quality of their tax filings?
Mr. McTigue. The data that IRS collects through random
audits--the most recent national research program audit covered
tax years 2006 through 2009--estimates error rates for both
paid preparers and self-prepared returns, both in the aggregate
and, also, for specific tax issues or line items. For example,
for the Earned Income Tax Credit, the estimates showed that
returns prepared by paid preparers had an error rate of 51
percent versus 44 percent for self-prepared returns.
Senator Hatch. Now, some have expressed concern that
regulation will drive unethical preparers underground, turning
them into what have been referred to here as ghost preparers
who are very difficult to discover and shut down. How big is
this problem of ghost preparers, and is the problem getting
worse? What is being done to address that particular problem?
Mr. McTigue. I am not aware of any data that exists, either
IRS data or otherwise, that goes to the scope of that problem.
Again, GAO feels that some basic level of regulation can help
provide consumers with assurance that the people whom they are
using to prepare their tax returns meet certain qualifications,
and they have a certain level of assurance that their tax
returns will be as compliant as they expect.
Senator Hatch. Well, I want to thank all of you. H&R Block
certainly does a great job, as do others.
I would like, Mr. Chairman, to put this Intuit letter into
the record.
The Chairman. Without objection, so ordered.
[The letter appears in the appendix on p. 129.]
Senator Hatch. Thank you. Thank you all for being here.
The Chairman. Senator Casey?
Senator Casey. Thank you, Mr. Chairman. I only have time
for one question, and I know the panel will not necessarily be
upset about that.
But, Mr. Cobb, I wanted to ask you a question that relates
to your testimony. On page 12, you summarize what the so-called
VITA folks have to go through, the Voluntary Income Tax
Assistance folks, in their minimum standards.
We all would agree, I think, that that is especially
important. Those kinds of standards are especially important to
vulnerable populations, folks who are easily misled or often
isolated and who have to depend upon someone whom they come
into contact with who might mislead them.
I would assume that when we talk about kind of basic
minimum standards here, that you would hope that everyone would
have an opportunity to be served by an individual who goes
through the minimum standards that would be comparable to your
Appendix D, which were the requirements that these so-called
volunteer tax preparers go through. Is that generally accurate?
Mr. Cobb. Yes. That is generally accurate, Senator. For our
people, we have continuing education every year. For people who
start out wanting to be a tax preparer for us, it is over 100
hours of training, and 75 hours of it is income tax training,
including ethical training. We also do skills training.
For continuing education, we average around 35 hours--15
hours of income tax training plus 20 hours of skills training.
For anyone, even if you have been a tax preparer for 30 years,
you have to come in and get that. And we can adjust the hours,
depending upon what the statute is. But, generally, we agree
with your point.
Senator Casey. And what is set forth in this appendix,
these requirements that you just outlined, you would think that
those would be the best direction that the Federal Government
should move in? In other words, how do you effectuate this as a
matter of national policy for all taxpayers to benefit from?
Mr. Cobb. And again, I think Ms. Salisbury--I think we have
a great model. The chairman has certainly pointed out with
pride what Oregon does. I think that is a model to be built off
of.
I think the research we have done shows that this is--you
have heard all day about fraud and various cases that people
have cited. I think that we have a standard which has been
implemented for a number of years in Oregon. We have the test
in the market, if you will. We do a lot of training.
So I think the outline is there to put the national policy
in place. Plus, you have clients, consumers, who in our
research are saying, ``Of course, I want to know that the
person sitting across from me has certain standards.''
Usually, people in my position are not in front of a
committee like this asking for more regulation. I do not
imagine you would find that very often. What we want is a level
playing field. What we want to do is protect consumers; this is
not about anticompetitive behavior. This is about going up
against people who are just looking out for themselves. You
have heard the horror stories about tax preparers in a
furniture store or somewhere else saying, ``How big is your
refund,'' to make loans to people based on that amount.
We do not do refund anticipation loans. We just want to
clean up this industry.
Senator Casey. Thank you very much.
The Chairman. Thank you, Senator Casey.
I want to thank all of our witnesses for their
participation.
Members of the committee are going to have until the close
of business on Friday, April 11 to submit questions for the
record.
I just want to make a short statement and then give the
last word to Senator Hatch on this topic.
Last week, in this room, on a bipartisan basis, our
committee committed to dealing with what are called the tax
extenders. There are a number of provisions that expired, that
will expire this year and next year, and we indicated this was
going to be the last time this committee did this. We called
the proposal the EXPIRE Act because it was meant to expire.
That is it, turn the lights out on it.
So really, with this hearing, we begin the effort at
overhauling the tax system and particularly making it simpler,
doing it in a bipartisan way, so that Americans this time of
year do not feel like they are going through bureaucratic water
torture to comply with the tax rules.
You have given us some very helpful suggestions here.
Senator Hatch and I will be working together on this in a
bipartisan way. The challenge is to figure out, with our
colleagues on both sides of the aisle, the appropriate
oversight of preparers.
The two of us are going to talk about it, and then we will
inform members of our proposal. But, clearly, what we have
learned today, starting with the GAO, is this problem persists.
You have documented it a second time. It is consistent not just
with your analyses, but with others.
Nina Olson, the independent Taxpayer Advocate, said not
only does the problem exist now, but there are incentives for
additional opportunities for the unscrupulous--who are,
fortunately, a minority--to fleece our people, and very often
those are the most vulnerable, those are the low-income. So
that ought to concern us.
Then, Ms. Salisbury, we are really glad that you came,
because you have shown once again that Oregonians know that
there is a better way. We do not just sit around and say, ``Oh,
this is wrong, and that is wrong.'' We roll up our sleeves, and
we come up with solutions.
So you all have been very helpful to us, and I just want
you to know I am going to work very closely with Senator Hatch
on comprehensive tax reform, and on appropriate oversight with
respect to tax preparers.
I want to give my friend and colleague the last word here.
Senator Hatch. Thank you, Mr. Chairman.
I am grateful to all of you for being here, and all I can
say is that, the more I look into this, the more I worry about
the problems that are involved.
On the other hand, there are a lot of good people in this
industry who are trying to do what is right and who do do what
is right. So we have to look at this very carefully. I do not
want another great big bureaucratic institution to make it even
more expensive to file tax returns. I have certain feelings for
your libertarian approach toward tax preparers as well.
So I am grateful that you all took time to come and see us
here, helping us to understand this better, and hopefully you
will continue to weigh in and give us your ideas on how we
might do a better job here.
Thanks so much.
The Chairman. The committee is adjourned.
[Whereupon, at 12:34 p.m., the hearing was concluded.]
A P P E N D I X
Additional Material Submitted for the Record
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Communications
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