[Senate Hearing 115-825]
[From the U.S. Government Publishing Office]
S. Hrg. 115-825
IMPROVING TAX ADMINISTRATION TODAY
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HEARING
BEFORE THE
SUBCOMMITTEE ON TAXATION AND IRS OVERSIGHT
OF THE
COMMITTEE ON FINANCE
UNITED STATES SENATE
ONE HUNDRED FIFTEENTH CONGRESS
SECOND SESSION
__________
JULY 26, 2018
__________
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
Printed for the use of the Committee on Finance
__________
U.S. GOVERNMENT PUBLISHING OFFICE
40-584-PDF WASHINGTON : 2020
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COMMITTEE ON FINANCE
ORRIN G. HATCH, Utah, Chairman
CHUCK GRASSLEY, Iowa RON WYDEN, Oregon
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
DEAN HELLER, Nevada MARK R. WARNER, Virginia
TIM SCOTT, South Carolina CLAIRE McCASKILL, Missouri
BILL CASSIDY, Louisiana SHELDON WHITEHOUSE, Rhode Island
Jeffrey Wrase, Staff Director and Chief Economist
Joshua Sheinkman, Democratic Staff Director
______
Subcommittee on Taxation and IRS Oversight
ROB PORTMAN, Ohio, Chairman
MIKE CRAPO, Idaho MARK R. WARNER, Virginia
PAT ROBERTS, Kansas THOMAS R. CARPER, Delaware
MICHAEL B. ENZI, Wyoming BENJAMIN L. CARDIN, Maryland
JOHN CORNYN, Texas CLAIRE McCASKILL, Missouri
JOHN THUNE, South Dakota ROBERT MENENDEZ, New Jersey
RICHARD BURR, North Carolina MICHAEL F. BENNET, Colorado
JOHNNY ISAKSON, Georgia ROBERT P. CASEY, Jr., Pennsylvania
PATRICK J. TOOMEY, Pennsylvania MARIA CANTWELL, Washington
TIM SCOTT, South Carolina SHELDON WHITEHOUSE, Rhode Island
(ii)
C O N T E N T S
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OPENING STATEMENTS
Page
Portman, Hon. Rob, a U.S. Senator from Ohio, chairman,
Subcommittee on Taxation and IRS Oversight, Committee on
Finance........................................................ 1
Warner, Hon. Mark R., a U.S. Senator from Virginia............... 3
WITNESSES
Bruckner, Caroline, executive-in-residence, accounting and
taxation; and managing director, Kogod Tax Policy Center, Kogod
School of Business, American University, Washington, DC........ 5
Kubey, Phyllis Jo, member, National Association of Enrolled
Agents and IRS Advisory Council, Washington, DC................ 7
Olson, Nina E., National Taxpayer Advocate, Internal Revenue
Service, Washington, DC........................................ 8
Sapp, John, Chair, IRS Electronic Tax Administration Advisory
Committee, Washington, DC...................................... 10
Thompson, Rebecca, project director, Taxpayer Opportunity
Network, Prosperity Now, Washington, DC........................ 11
ALPHABETICAL LISTING AND APPENDIX MATERIAL
Bruckner, Caroline:
Testimony.................................................... 5
Prepared statement........................................... 27
Kubey, Phyllis Jo:
Testimony.................................................... 7
Prepared statement........................................... 32
Olson, Nina E.:
Testimony.................................................... 8
Prepared statement........................................... 37
Portman, Hon. Rob:
Opening statement............................................ 1
Prepared statement........................................... 49
Sapp, John:
Testimony.................................................... 10
Prepared statement........................................... 50
Thompson, Rebecca:
Testimony.................................................... 11
Prepared statement........................................... 54
Warner, Hon. Mark R.:
Opening statement............................................ 3
Prepared statement........................................... 56
Communications
Blum, Jeffrey M.................................................. 59
Center for Fiscal Equity......................................... 65
Lacy, David H.................................................... 66
(iii)
IMPROVING TAX ADMINISTRATION TODAY
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THURSDAY, JULY 26, 2018
U.S. Senate,
Subcommittee on Taxation and IRS Oversight,
Committee on Finance,
Washington, DC.
The hearing was convened, pursuant to notice, at 10:32
a.m., in room SD-562, Dirksen Senate Office Building, Hon. Rob
Portman (chairman of the subcommittee) presiding.
Present: Senators Grassley, Thune, Isakson, Cantwell,
Carper, Cardin, Warner, and Whitehouse.
Also present: Republican staff: Robert Cusmano, Tax Counsel
for subcommittee chairman Portman. Democratic staff: Jonathan
Goldman, Senior Tax Counsel for Ranking Member Warner.
OPENING STATEMENT OF HON. ROB PORTMAN, A U.S. SENATOR FROM
OHIO, CHAIRMAN, SUBCOMMITTEE ON TAXATION AND IRS OVERSIGHT,
COMMITTEE ON FINANCE
Senator Portman. Thank you all for being here. We are
delighted to have the opportunity to talk about IRS reform
today. And I know that my ranking member, Senator Warner, has
another engagement before long. So we are going to try to go
through this quickly. And when it comes time for questions, I
am going to defer to him so he gets to ask questions first.
Just to start, this is a really important topic to me, to
Senator Warner, to Senator Cardin, and other members--Senator
Whitehouse. We know tax policy is important, and we have a
historic new tax legislation the IRS is trying to implement.
But perennially, we have these taxpayer service issues and
tax administration issues that are going to arise. So this
hearing is an opportunity to examine current issues related to
tax administration.
Of particular focus--the gavel is being hit right now. Is
that loud enough? [Laughter.] Particular focus on customer
service and information technology, interaction with
practitioners--we have some practitioners here--low-income
taxpayers, and tax administration issues related to workers in
the high-tech economy we are now in, the gig economy.
Senator Hatch and Ranking Member Wyden gave us an
opportunity to hold this hearing. I appreciate that. And again,
Ranking Member Warner, I appreciate your being here today.
This is not just important, it is also timely. This week
marks 20 years since the last time we went through any major
reform at the IRS. And it is time to do it again.
During that time, there was a clear need for IRS reform.
IRS calls were being unanswered by the thousands--sound
familiar? Calls that were being answered were often incorrect.
The agency had spent $3 billion on IT systems that were not
working.
The bottom line: the American public had lost faith in the
institution, and we created this commission. I was honored to
co-chair that with then-Senator Bob Kerrey. We published a
confidential report that became the basis for that legislation
20 years ago.
Senator Cardin, by the way, was an original author of that
legislation with me, along with Senator Hatch and Ranking
Member Wyden. So there are a lot of members on the committee
now who were very involved in that.
Unfortunately in the years since, after some sustained
improvement, we have now gotten to the point where we are back
to some of these very same issues again. And once again, the
agency tasked with helping Americans carry out one of their
most basic duties is failing to serve the taxpayers in an
effective manner.
So it is an opportunity now to reboot again. Congress, I
think, has an interest in doing this. I know Senator Wyden and
Chairman Hatch have been involved already in putting forward
solutions to some of the things that the IRS is struggling
with. And I support those. And I support what the House has
done.
But we think there is more to do as well. This is why today
I introduce with Senator Cardin the Protecting Taxpayers Act.
It is bipartisan legislation to make the IRS more responsive
and accountable to taxpayers. We will talk about that a little
today. Its goals are to revitalize the organizational structure
on the management side to increase taxpayer protections, to
improve small business and retirement plan tax administration,
better serve low-
income tax payers, overhaul the IRS appeals process, and
strengthen the IRS IT infrastructure.
All of this is critical to the agency, but I would like to
get feedback from you all on a couple of things. First, we
completely rethink one of the key provisions of the 1998 reform
bill, which was the IRS Oversight Board. And when we originally
thought of the idea of this board back in 1998, our intent was
to create sort of a board of directors for the IRS that would
help guide the direction and the long-term strategy of the
agency, provide private-sector expertise, along with
experience.
Every administration since then really has not supported
the Oversight Board, including the current one. As a result, it
has fallen by the wayside. In fact, the Board suspended
operations a couple of years ago, and there is, technically,
only one member left out of nine. So we want to get this board
functioning again, but functioning the way it was originally
intended. I think it has a lot to offer in turning the agency
around, particularly in areas like customer service, IT
modernization, budgeting, and so on.
So that is one thing I want to get your input on. Also, the
IRS appeals process--you recall in the 1998 reform bill, we
created more than 50 new taxpayer rights, including the right
to an independent appeal, and then 3 years later took steps
toward codifying some of those in the Taxpayer Bill of Rights,
including independent appeal.
But in recent years, these independent appeals have
declined as more cases are being sent to Tax Court, amounting
to a 70-percent increase since 2000. So that is not what was
intended, I do not believe. And further, the IRS continues to
issue guidance and procedures that make it harder for all
taxpayers to access this appeals process. So we need to talk
about that today.
Overall, I think it is clear--and I am sure we will hear as
much from the witnesses today--that Congress needs to build on
the progress we made way back in 1998 and engage in this new
set of reforms to the IRS. I am interested in hearing from my
colleagues today on it, and of course the witnesses here before
us. I thank you for being here.
I now would like to hear from the ranking member.
[The prepared statement of Senator Portman appears in the
appendix.]
OPENING STATEMENT OF HON. MARK R. WARNER,
A U.S. SENATOR FROM VIRGINIA
Senator Warner. Thank you, Mr. Chairman. And I want to
thank you for your long-term interest in this subject. I know
you and Senator Cardin have been leaders. I think if we--the
witnesses and we on the panel--would look around, I think we
all qualify as tax nerds if we are in this room at this moment
in time. Senator Thune has always been viewed as that kind of
nerd, we know.
But then the notion of tax administration--it does not
sound necessarily exciting, but in many ways, this is the front
line of how Americans intersect with the Federal Government.
And the effectiveness of that intersection, the customer
service components, I think, are really important.
Let's face it. Let's acknowledge no one loves paying taxes,
but if we can make that payment of taxes more effective, more
user-friendly, more fair, I think a process that we all have to
take on as obligations as citizens will at least become less
painful. And again, I want to commend the chairman and Senator
Cardin for having a long, long history in this field.
The two topics that I hope that we can also address are--
over the last few years, I have spent a lot of time looking at
the changing nature of work. I think we are moving into an
environment where your classic W-2 full-time employment, where
folks go work for the same firm for 35 years, is a thing of the
past. Part of that is driven by economic circumstance, part of
that is driven by, frankly, choice amongst many millennials.
We have seen the emergence of a number of new platforms,
the so called ``gig economy.'' How do we monitor that? How do
we understand and make a tax system that does not impede
individuals who are trying to become more entrepreneurial and
actually utilize these services, utilize these platforms? How
do we make their tax administration a smoother and easier
process?
I believe as well that people on a going forward basis may
not have a single income stream, but multiple income streams.
They may be an IT consultant starting their own business,
driving Uber, and renting out their apartment on Airbnb.
Frankly, the tax administration burden in this kind of new
economy is enormously challenging.
I have called for two studies, one from the GAO, one from
the Treasury Department, to try to look at the size of this
workforce. I frankly believe that the recent BLS study that
indicated that there was, frankly, not much growth in this
field--I will accept that data. I do not think it was fully
complete enough, because I just think--I have seen estimates
from government and non-
government sources that literally show close to a third of the
American workforce at this point is at least receiving some of
their income from contingent work.
So how we think about tax administration, how we think
about even the whole concept of a social contract, I would
argue that means we need to move to a portable benefit system.
If we are going to move to a portable benefit system, we have
to have flexibility on the tax administration side as well.
The other item that I think is an on-going challenge is
technology updates. We have all seen the IRS, I think, make
good faith efforts. Sometimes those good faith efforts have
ended up with perhaps more negative publicity than upgrades.
Something is wrong in our overall Federal Government when we
spend $88 billion a year on IT services, and $75 billion of
that $88 billion is spent on patches and upgrades of legacy
systems.
My hope is, as well, we can get into the question of how we
could create a technology-enabled modern tax system. And if the
Congress has to bite the bullet and say we really need to junk
some of our legacy systems and fully upgrade, I think we ought
to have that kind of discussion.
Again I want to thank the chairman for hosting this, and
again, I am proud to call myself now part of the tax
administrative nerd caucus as well. Thank you.
Senator Portman. You have always been a charter member of
that caucus, whether you knew it or not. [Laughter.]
[The prepared statement of Senator Warner appears in the
appendix.]
Senator Portman. And your points are well-taken. And it
just creates more of a challenge for the IRS. How do we deal
with--we talked about the gig economy, but also the economy
where people are moving around so frequently and have much less
likelihood of a single corporate entity that can provide that
tax conduit for the IRS.
With this, let us hear from our witnesses. We are going to
get right into it.
Ms. Caroline Bruckner is here. She is managing director of
the Kogod Tax Policy Center at American University.
Ms. Phyllis Jo Kubey is here. She is a member of the
National Association of Enrolled Agents and the IRS Advisory
Council.
Ms. Nina Olson, as many of you know, is the National
Taxpayer Advocate at the Internal Revenue Service.
Mr. John Sapp is the current Chair of the Electronic Tax
Administration Advisory Committee advising the IRS.
And Ms. Rebecca Thompson is the project director of the
Taxpayer Opportunity Network within the organization Prosperity
Now.
Thank you all for agreeing to testify. We are looking
forward to it. In the interest of time, we would ask that you
keep your comments to 5 minutes. And you can submit your
written comments in their entirety for the record.
Ms. Bruckner, let us start with you.
STATEMENT OF CAROLINE BRUCKNER, EXECUTIVE-IN-
RESIDENCE, ACCOUNTING AND TAXATION; AND MANAGING DIRECTOR,
KOGOD TAX POLICY CENTER, KOGOD SCHOOL OF BUSINESS, AMERICAN
UNIVERSITY, WASHINGTON, DC
Ms. Bruckner. Good morning, and thank you for the
opportunity to testify today.
My name is Caroline Bruckner. I am a tax professor on the
faculty at American University's Kogod School of Business. I am
also the managing director of the Kogod Tax Policy Center,
where we focus our research exclusively on tax and compliance
issues specific to small businesses and entrepreneurs.
Since 2015, we have focused on those small business owners
who are renting rooms, providing ride-sharing services, running
errands, and selling goods and services via business
transactions coordinated online and through apps by companies
such as Airbnb, Etsy, Uber, Lyft, Rover, and others.
In May 2016, we published our initial research findings in
a report titled, ``Shortchanged: The Tax Compliance Challenges
of Small Business Operators Driving the On-Demand Platform
Economy.''
A number of our research findings are particularly relevant
to today's discussion and are based on a survey we did of the
membership of the National Association of the Self-Employed, a
population of experienced self-employed taxpayers. We wanted to
gauge whether or not they understood what their tax compliance
obligations would be, particularly those who were working in
the on-
demand economy.
Our results were dismal, to say the least. One-third of
respondents working for a platform did not know whether or not
they were required to file quarterly estimated payments with
the IRS with respect to their platform income. Thirty-six
percent did not understand what kind of records were needed for
tax purposes for business income and expenses generated from
working with a share economy partner. Forty-three percent were
unaware as to what they would owe in taxes and did not set
aside any kind of money. And almost 70 percent of our survey
respondents received no tax guidance from the platforms they
worked with.
Most notably for today's hearing, and for tax
administration purposes, more than 60 percent of the sharing
economy operators we surveyed did not receive any Form 1099 on
their platform income. And that means that the IRS did not
either.
This is because under current law, the form that is used
for reporting electronic payments requires that a taxpayer have
more than 200 transactions and payments exceeding $20,000 in
order to receive a Form 1099 filing form. However, the reality
is that most folks in the sharing economy earn substantially
less and they use platforms as a way to earn secondary income.
They cycle in and out of the sharing economy, and on
average per month earn between $533 or $314 a month. This is
typically a source of secondary income and is not their primary
source of income. As a result, the reporting loophole that
exists between a 1099 miscellaneous $600 threshold and a 1099-K
$20,000 threshold guarantees that taxpayers working for these
platforms are more likely to misreport their income because
they are not getting any 1099.
In fact, IRS taxpayer data released last year confirmed the
ultimate impact of our research findings that in 2015 the
number of filers penalized for underpayment of estimated taxes
rose nearly 40 percent from 2010 to 2015, up to 10 million
taxpayers. This rise in underpayments corresponds to the rise
in the sharing economy over the same period.
However, since we released our groundbreaking findings in
``Shortchanged,'' there have been a number of changes that have
been made in response. In August 2016, the IRS launched the
Sharing Economy Tax Center on IRS.gov, and the National
Taxpayer Advocate has elevated the lack of tax guidance for
these taxpayers as one of the Nation's most serious problems
facing taxpayers. And some industry platforms, unprompted and
even though not required to, have begun issuing 1099-Ks at $600
thresholds. In addition, the House Appropriations Committee
followed recommendations from my team and included language in
the most recent financial services bill mandating the IRS
consider this problem and report back to Congress.
However, there is more work that needs to be done. Congress
needs to consider immediately aligning the 1099 miscellaneous
and the 1099-K reporting thresholds for service providers and
sellers earning income from these platforms. By aligning these
thresholds--the 1099 miscellaneous threshold has not been
updated since it was first instituted in 1954--you are
guaranteeing a higher rate of tax compliance. It is just that
simple.
The States have already started to experiment with this
last year, and in Massachusetts, our informal conversations
with 1099 preparers have said that reporting has catapulted
over 100 percent in just this most recent tax filing period.
Congress should also update the quarterly estimated payment
due dates for the second and third quarter filing deadlines to
make those required after the quarter's end, not in the middle
of the second and third quarter so taxpayers do not have to
guesstimate when their taxes are due.
Finally, the National Taxpayer Advocate has an excellent
suggestion that the IRS develop a publication that online
platforms can provide to platform service providers and sellers
as part of the onboarding process. These are all common-sense
changes that will impact the 2.5 million Americans working for
these platforms every month.
And in addition, it is a very real problem that JCT has
quantified to be at least a $3.6-billion problem.
Thank you, and I am happy to answer any questions that you
have.
Senator Portman. Thank you, Ms. Bruckner.
[The prepared statement of Ms. Bruckner appears in the
appendix.]
Senator Portman. Ms. Kubey?
STATEMENT OF PHYLLIS JO KUBEY, MEMBER, NATIONAL ASSOCIATION OF
ENROLLED AGENTS AND IRS ADVISORY COUNCIL, WASHINGTON, DC
Ms. Kubey. Good morning. Thank you, Chairman Portman,
Ranking Member Warner, and Senator Cardin, for this opportunity
to present the tax professional's perspective on improving tax
administration and enabling the Internal Revenue Service to
fulfill its mission effectively.
I speak on behalf of the National Association of Enrolled
Agents. EAs are tax experts licensed by the Department of
Treasury. I might say we are also tax nerds. We are partners
who work closely with IRS personnel at all levels of the tax
administration system.
In the past decade, we have observed a decline in the level
of IRS service. Superior customer service--and tax
practitioners are customers too--will improve all IRS
functions.
Our written testimony proposes major reforms for oversight,
governance, budget, workforce, taxpayer service, technology,
and IRS's relationship with tax professionals. An integrated
approach will bring real measurable results.
IRS needs direction and resources to recruit high-level
executives and staff. IRS must attract, train, and retain staff
to administer the tax law while providing an outstanding
customer experience. We suggest: (1) grant IRS a reformed,
streamlined, critical pay hiring authority stipulating the
areas of expertise covered by the program; and (2) create and
fund a dedicated training division within the IRS that
streamlines the education process and ensures the tax law and
administrative policies are taught and supported consistently.
As part of this centralized division, research state-of-the-art
tax administration techniques at the State, local, and
international levels and incorporate what works into IRS
training and practice.
IRS training focusing on early, fast, and fair resolution
of tax disputes will ease the burden for taxpayers and for the
tax professionals who serve them. Enforcement will not suffer,
but will be enhanced by an IRS equipped to serve the public. No
one is well-served by delayed or protracted tax compliance.
When taxpayers have a compliance issue, they deserve to
discover and resolve it quickly without the hardship of
additional penalties and interest.
We offer several proposed changes in our written testimony,
including many offered by the National Taxpayer Advocate.
The elephant in the room, of course, is IRS technology. We
live in a world where everything is possible on the smartphone.
When we submit authorizations for our clients, we revert to a
world of inked signatures and fax machines. Taxpayers expect
electronic solutions and the ability to work with us and the
IRS remotely and securely. Our ETAAC colleagues, in their
recent 2018 report, present extensively on secure technology
solutions.
We propose to facilitate earlier and more efficient dispute
resolution by: (1) requiring IRS to provide guidance on which
private-
sector electronic signature options are acceptable for forms
2848 and 8821; and (2) fast-tracking creating tax practitioner
online accounts with secure and robust communication capability
in both directions.
Correspondence audit should not entail mailing or faxing
large quantities of materials, delayed resolutions, and
potential increased penalty and interests. Electronic
communication will serve the public, the practitioners, and the
Service.
Tax preparers have, over the last years, taken on an
adjunct compliance officer role. Various and increasing due
diligence requirements are intrusive and frequently
unreasonable. In our profession, time and risk are money
typically passed to the taxpayer.
These changes will help us help the Service: (1) provide
statutory authority to establish minimum standards for
unenrolled return preparers. Standards should include a one-
time competency exam, require tax compliance background checks,
setting and monitoring continuing education requirements, and
compliance with strict ethical standards. And (2) create a
dedicated executive level practitioner services unit that
centralizes and modernizes practitioner service and leverages
our reach.
Once again, I thank you for this opportunity, and I look
forward to your questions.
[The prepared statement of Ms. Kubey appears in the
appendix.]
Senator Portman. Ms. Olson?
STATEMENT OF NINA E. OLSON, NATIONAL TAXPAYER ADVOCATE,
INTERNAL REVENUE SERVICE, WASHINGTON, DC
Ms. Olson. Chairman Portman, Ranking Member Warner, and
members of the subcommittee, thank you for your interests in
examining the operations of the Internal Revenue Service and
for inviting me today to discuss improving the agency.
As you know, the IRS Restructuring and Reform Act of 1998
was signed into law 20 years ago this week. At the time, I was
director of a low-income taxpayer clinic in Richmond, VA, and I
was invited to testify about the experiences of low-income
taxpayers at Senate and House hearings.
RRA98 brought about many significant taxpayer protections.
Nonetheless, the world of tax administration looks very
different today than at the time RRA98 was passed. The IRS
desperately needs congressional support and direction to help
it do a better job of fulfilling its vital mission. In my
written statement, I discuss the core challenges that I believe
Congress and the IRS should focus on to improve tax
administration. I will quickly highlight the following points.
(1) IRS oversight--RRA98 contained two provisions that I
believe were helpful to tax administration and have effectively
lapsed: one, the IRS Oversight Board; and second, joint
congressional IRS oversight hearings. I encourage you to
strengthen the board's appointment process and permanently
reinstate the joint hearings.
(2) IT challenges--the IRS's struggles with information
technology systems were significant in 1998, and they have only
grown worse.
The IRS reportedly has the two oldest databases in the
Federal Government, dating to the 1960s, on which it stores
taxpayer data. It has more than 60 case management systems that
all house different kinds of data, and those systems generally
cannot talk to each other. There is no one system or repository
of data that contains a 360-degree view of the taxpayer's
activity and engagement with the tax system, so often, the left
hand does not know what the right hand is doing.
One recurring problem is that the IRS continually receives
work that requires it to make significant IT updates in the
short-term and limits its ability to pursue its long-term
modernization efforts. I believe the IRS needs a separate
stream of funding dedicated to long-term improvements,
particularly involving its IT systems.
(3) Funding--as the IRS's workload increased from fiscal
year 2010 to 2018, its appropriated budget has been reduced by
9 percent in straight dollar terms and by 20 percent after
adjusting for inflation. Because of these reductions, the IRS
does not have enough employees to answer the phones, to conduct
outreach and education, or to provide basic taxpayer service.
The compliance enforcement side of the house has been cut
by even more. The IRS needs adequate funding to do its job
effectively.
(4) Performance measures--there is an old adage that you
get what you measure. During the 2018 filing season, the IRS's
benchmark level of service was reported to be 80 percent, but
that measure only reflected the minority of calls directed to
employees. It ignores the majority of calls to its automated
response system which the IRS routes taxpayers to without
giving taxpayers a choice to speak to a live assister. Overall,
IRS employees answered only 29 percent of the telephone calls
it received.
(5) Taxpayer service--private industry and experts say the
number one driver of customer satisfaction is the first contact
resolution rate. Yet the IRS does not measure this rate
consistently or across every service channel, and it ignores
significant data showing taxpayers prefer multiple channels for
different types of interactions.
(6) Use of big data and automation--the IRS regularly uses
technology and big data to identify fraud and noncompliance,
but it fails to use technology to help taxpayers get to the
right answer or prevent or minimize harm to taxpayers. The IRS
could use the data it has in-house, for example, to identify
taxpayers who are at risk of economic hardship and therefore
are highly unlikely to be able to pay their basic living
expenses if the IRS collects their back tax debts. This
approach could also be applied when selecting cases for
referrals to private debt collectors.
(7) Local presence--research has shown personal contacts
produce better response resolution and agreement rates than
less personal contacts, and also result in better-educated
taxpayers. Yet 12 States do not have appeals or settlement
officers within their borders, and 14 States do not have
employees to conduct outreach and education to small business
and self-employed taxpayers. Of the 362 taxpayer assistance
centers, 25 are not staffed and 84 have only 1 employee.
Moreover, a trained and professional workforce is
paramount. And the IRS spent only $489 per employee on training
in fiscal year 2017, a level that is about one-third of
spending 8 years ago.
Thank you for inviting me to participate today. And I would
be happy to answer any questions you may have.
[The prepared statement of Ms. Olson appears in the
appendix.]
Senator Portman. Mr. Sapp?
STATEMENT OF JOHN SAPP, CHAIR, IRS ELECTRONIC TAX
ADMINISTRATION ADVISORY COMMITTEE, WASHINGTON, DC
Mr. Sapp. Chairman Portman, Ranking Member Warner, other
members of the subcommittee, good afternoon. Thank you for
inviting me to testify at this hearing on ``Improving Tax
Administration Today.''
My name is John Sapp. I am pleased to represent ETAAC, of
which I am just finishing my tenure as chair. As you know,
ETAAC was created by Congress in 1998. We have a diverse
membership of individuals from the State departments of
revenue, private industry, tax preparers, payroll companies,
and consumer groups such as VITA. We hope to provide to the IRS
a diverse perspective on electronic tax administration and its
impact on taxpayers.
While we were initially focused on achieving acceptance of
electronic filing of tax returns and the impact that that would
have, ETAAC's charter recently was expanded to include a focus
on the issue of identity theft, tax refund fraud, and
information security, entailing making recommendations on
improving the efforts of the Security Summit. The Security
Summit has been a tremendous success story of the IRS, where
they have led a collaborative effort between the States and the
private sector to fight ID theft and tax refund fraud, and to
deal with security issues.
As we evaluated electronic tax administration, some high-
level issues have become evident. First, the need to supplement
traditional IRS service delivery channels, phone or in-person,
is obvious. Electronic services online, but increasingly
mobile, are expected by both individuals and businesses. But
everyone also expects to be able to talk or interact with a
real person when that is necessary.
Second, electronic services operate in a high-threat
environment. The fight against those bad actors will never end.
So, as we close one door on security, criminals look to find
another.
Third, in order to be adopted, electronic services must be
secure, easy to use, and integrated--we believe--into their
existing work flows. A good example of this is electronic
filing, which has been integrated into tax software solutions
and also leveraged by taxpayers and tax professionals.
Another example of this would be if a taxpayer chooses to
file their tax return using an enrolled agent, for example,
integrating information and features into that channel,
especially about the electronic filing of their tax return.
That has worked very well for taxpayers.
And number four, electronic services--we thought about four
principles for the taxpayer-facing systems. The first principle
would be that electronic services must be secure. And as such,
the IRS should have the authority to set and enforce minimum
security requirements for the tax system.
In our 2018 report, we identified potential gaps in the
application of the FTC safeguards rule. It is the most
prevalent security standard for the tax system. It was unclear,
actually, if the IRS has the authority to set or enforce those
minimum standards for taxpayers, particularly because of the
Loving case and others which specify limitations on the IRS's
ability to regulate tax preparers.
Second, electronic services must be accessible or useable
for taxpayers and tax professionals. So certain segments of the
population today--as I am sure you know--may not be able to
validate themselves digitally using the IRS's secure access
channel because they do not have a credit card, or the right
home mortgage, or an inability to complete their cell phone
validation. Those inefficiencies create a very cumbersome
process for taxpayers.
ETAAC's report also encouraged the IRS to consider options
to expand in-person identity-proofing opportunities. The IRS
may be able to leverage existing physical locations for this
purpose. And I am speaking to authenticating that taxpayers are
who they say they are before they interact with the IRS.
They could leverage government agencies with a larger
physical presence such as the Social Security Administration,
or a more dramatic idea that we thought of was to utilize
authorized tax professionals through a trusted third-party
methodology similar to the current Certified Acceptance Agent
program which is used to validate taxpayers in need of an ITIN,
and those who do not have a Social Security number but still
have a tax filing obligation.
An obstacle to this interaction may be, as others have
mentioned, the filing of powers of attorney on behalf of
taxpayers, which now is a manual process and should be
electronic. Solving the signature on the 2848 and other forms
is a key component of that.
Third, we also support issuance of an identity protection
PIN for all taxpayers who would ask for it, and the account
lock and unlock features. Our third silo that we think is very
important in electronic services is, taxpayers should be able
to control their taxpayer account and access to that account.
And finally, we recommend the IRS take a collaborative
approach to develop the online and mobile services. The
Security Summit and electronic filing successes are great
examples of the benefits of that collaborative approach, where
ID theft cases have been reduced and adoption of electronic
filing has now become the norm.
Thank you again for the opportunity to provide my thoughts.
And I would say I would like to answer any questions, but I
will be available to answer any questions. [Laughter.]
[The prepared statement of Mr. Sapp appears in the
appendix.]
Senator Portman. Ms. Thompson?
STATEMENT OF REBECCA THOMPSON, PROJECT DIRECTOR, TAXPAYER
OPPORTUNITY NETWORK, PROSPERITY NOW, WASHINGTON, DC
Ms. Thompson. Chairman Portman, Ranking Member Warner, and
members of the subcommittee, thank you for the opportunity to
testify before you today on improving tax administration. It is
a great privilege and honor to speak with you about the
Volunteer Income Tax Assistance or VITA program. I am the
project director of Prosperity Now's Taxpayer Opportunity
Network. And in my role, I lead a national network of more than
2,500 stakeholders, including VITA program managers; site
coordinators; volunteers; community, corporate, and
philanthropic partners; and others. Our network serves as a
convening body for them, providing a way for them to connect to
one another. We provide tools, resources, information, and
capacity building support to strengthen VITA programs, ensure
quality return preparation, and help to extend the reach of the
VITA program to more low-income Americans.
However, the views I express today are reflective of my own
personal experiences as both a VITA volunteer and a program
manager. I am proud to stand among the ranks of the 55,000 tax
nerds who volunteer and give our time to help low-income
Americans.
For the last 2 years, I have served as a VITA volunteer co-
site coordinator with the Northern Virginia CASH Campaign in
Prince William County. Every Saturday morning throughout the
tax season, I rise from my bed--a little bit earlier than I
would like to--and make my way down to the Prince William
County Ferlazzo Building, joining alongside 10 to 12 other
volunteers at my site, 1,200 volunteers across Virginia, and
55,000 VITA volunteers nationwide, to help low-income, hard-
working Americans meet their civic obligation by filing a tax
return.
I remember the first return I filed, and the first person I
helped at the Ferlazzo Building. He was a single father raising
three children. He had been unemployed for part of the year and
had about three W-2s showing that he was trying to piece
together an income to support his family.
He had gone to a paid preparer and gotten an estimate of
$382 to prepare his return. It was a simple return. It only
took me about 30 minutes to complete. He was so grateful for
the help that I provided for him and the almost $400 that I had
saved him.
The 24 VITA coalitions across the State of Virginia operate
at 121 sites, serving over 33,000 customers last year. We
gave--as volunteers--more than 60,000 hours in training and tax
preparation. And we brought back almost $35 million in Federal
refunds to our State free of charge.
Virginia is special, but it is not unique. The same thing
happens in Ohio, and in Delaware, and in Rhode Island, and in
Maryland every year by thousands of volunteers who are giving
their time.
In addition to preparing and filing returns, many VITA
sites connect the families that we serve to public benefits,
financial education, and other financial capability services
like financial coaching and credit building, providing strength
and support to a family's financial future. As volunteers, we
endure rigorous training that can sometimes go as long as 24
classroom hours. We pass a certification test every year so
that we are well-equipped to translate what can be a daunting
and complex tax code for our clients into a meaningful
representation of their lives. We follow the IRS-prescribed
intake interview and quality review process for every return,
which has consistently yielded unparalleled results with
accuracy rates above 90 percent for the last several years, and
93 percent for this filing season.
But for all of the great work that we do and all the people
whom we serve, two things remain lacking. First, after nearly
50 years in operation, the VITA program has never formally been
authorized by Congress. Formal congressional authorization will
put the VITA program on sure footing, demonstrating that you
recognize the value we bring to the American people we serve,
and acknowledging that we should keep up the good work. Second,
the VITA program lacks adequate funding. Since its beginning in
2008, VITA grant funding has grown from $8 million to $12
million to $15 million, and I understand it may be slated for
$20 million this year.
As I go about my daily routine, everywhere I look, I see
potential VITA clients. They help me get to work on the
commuter train. They drive the Metro. They are in the grocery
store helping me make purchases for my family every week. When
I went on vacation, they were in the hotels. They were in the
airports, all around me, helping me to achieve my goals.
Some of them draw Social Security and still work, like the
cafeteria worker I helped who works at the cafeteria at my
son's school who used her refund to sustain her household over
the summer, because she does not work then. There are millions
like her and others whom we help every year.
The low-income, elderly, disabled, rural, underserved,
limited English-speaking populations could benefit from our
services, but we are at capacity and lack current sustainable
funding. By making the VITA program permanent with $30 million
in funding, it is the least thing--I think--that we can do for
all of them.
Thank you, Chairman Portman and Ranking Member Warner, for
providing me with this opportunity, and I am happy to answer
any questions you have at this time.
Senator Portman. Thank you, Ms. Thompson.
[The prepared statement of Ms. Thompson appears in the
appendix.]
Senator Portman. As you may know, in the legislation we
introduced today, we actually authorized VITA for the first
time.
Senator Warner has another commitment, so I am going to ask
him to start on the questioning. I will postpone mine. And
again, I am happy at so many colleagues who came. We come and
go in this place because we all have different hearings, so do
not take offense.
Senator Warner, I would like you to start with the
questioning.
Senator Warner. Mr. Chairman, thank you for that courtesy.
I really do appreciate it. I want to try to get in three
questions. So I would ask for relatively rapid responses.
Ms. Bruckner, I want to start with you. As we have looked
at the gig economy, as we have looked at these new on-demand
type services, in the past there has been a sense that
companies' platforms have been unwilling to provide any
benefits, perhaps even tax planning benefits, because of the
concern about 1099 versus W-2 and labor classification issues.
Have you found in your research that that concern about,
perhaps, sliding from independent contractor into traditional
employee has restrained the companies and platforms from
helping their workers get their tax planning assistance?
Ms. Bruckner. Anecdotally, I found that to be true. But
after we released ``Shortchanged,'' I had an opportunity to
talk to several different platforms, Lyft, in particular, and
really convinced them and chatted with them about how the 1099-
K filing rules really did a disservice to their service
providers. And they took my comments, my research, and
internally reviewed it and then made an executive decision that
they were going to provide 1099-Ks at the $600 threshold,
rather than the $20,000 threshold because it was the right
thing to do, to give taxpayers the forms that they need.
Senator Warner. Have you seen the same take-up rate from
Uber, Airbnb, TaskRabbit, any of the other platforms?
Ms. Bruckner. I have actually had informal conversations at
several industry conference events that I speak at and what
have you. And it would be--I think the general consensus is, it
is not required by law. They say they are consistent with the
law, and they are absolutely right. They are acting completely
consistently with the law. It is the law that needs to change
in order to get these taxpayers the tax forms they need.
Senator Warner. Well, I would look forward to working with
you on changing that. But I also--as somebody who has spent the
last couple of years digging in pretty deep into this area--
would welcome the opportunity to work with you to see if we
could force more of the platforms, or urge more of the
platforms to participate, even before we get to the whole
question of how we create a new social contract around the
portable benefit system.
So I commend your work and look forward to working with you
a little more.
Ms. Thompson, Ms. Olson--I know, Ms. Olson, you have also
done some of this VITA work in Virginia. And, Ms. Thompson, I
appreciate the 121 different sites in Virginia that you are
doing. And I saw there was a number, 60,000 hours.
Is there an ability--and I applaud Senator Portman's
legislation that actually authorizes VITA, long overdue. As a
budget note as well as tax note, is there an ability to--I am
going to give you a formula that for every hour of work, or for
every individual helped, we increase tax compliance by ``Y.''
Is there a formula that you can almost break down to an
individual or an hourly basis, either of you?
Ms. Olson. I do not think I have seen any IRS research on
that, but I just made a note about that, to take a look at that
myself in my own organization.
If I might make a point about the VITAs, I think going to
the sharing economy, few VITAs are able to do Schedule C
preparation, simple Schedule C preparation. And so,
particularly, if you have people who are workers, you know with
W-2s, but then they have small Schedule Cs, that becomes
important.
And so the legislation authorizing VITA should clearly say
that one of the tasks that they can do is simple Schedule Cs
within that income level, or Schedule Fs for that matter. There
are many small farmers who are just doing family homestead
things.
Senator Warner. And, Ms. Thompson, do we get that Schedule
C and Schedule F training at this point within the VITA
program?
Ms. Thompson. There is currently limited training for
Schedule Cs for VITA programs to be able to provide some
limited services for Schedule Cs. But there is additional work
that is needed.
With regard to your first question, I do not have an
estimate. Like Ms. Olson stated, that is something that we have
not looked into. But the number that I do have is, for every
Federal dollar that is invested in the VITA program, it costs
about $14.74 per tax return for the Federal Government.
Senator Warner. I guess what I would hope is, under Senator
Portman's and Senator Cardin's leadership, if there was a way
that we could get that down to, say, for every Federal dollar
spent, Federal tax compliance goes up--if we spend ``X,'' it
goes up ``Y''--that would be, I think, a helpful argument to
convince our other colleagues.
Mr. Sapp, in the last couple of seconds I have--I would
love to see the day where we thought the IRS was ahead of the
game on its technology updates. I feel like we are always
chasing.
One of the concerns I have--again, just from the banking
provision--is, when we have enterprises like Equifax and others
where we do not have a customer relationship, yet they have the
ability to look at all of our personal information, that
increases the ability for tax fraud if there are violations
there. Have you thought about what kind of liability regime or
other incentives we ought to put in place for those enterprises
that have access to our personal financial information?
That will be my last question. I appreciate the courtesy
from the chairman.
Mr. Sapp. Senator, I have not actually considered the
liability aspects of that. Although I will say that it is a
liability for the government, in general, whenever a tax refund
is misappropriated and sent to a criminal or to an
inappropriate party.
One of the advantages that the IRS has is, they do
diversify the entry points to include the in-person and online
authentication. But one of the challenges with authentication,
obviously, is, we have a very diverse population.
As long as the United States has as diverse a population as
we have, the ways that they want to interact with the IRS are
going to be diverse. So if you take a third party, such as an
Equifax, how an individual may choose to interact with an
Equifax, they can choose to go to a different credit reporting
agency. The way I report to my bank, I can choose to go to a
different bank.
I cannot choose to go to a different IRS. So the challenge
with that in the electronic authentication is that it has to be
secure, but it also has to be diverse.
Senator Warner. The comment I would make is, I am not sure
you get to choose your credit report.
Mr. Sapp. No, you do not.
Senator Warner. That is not a relationship we can choose.
Again, I thank the chairman for the courtesy.
Senator Portman. Thank you.
Let me make a couple comments and ask a question. Then we
will move on to our others.
Again, I appreciate all my colleagues who came today, and
they all have other places to be.
Great testimony. And, Ms. Olson and Ms. Kubey, in your oral
testimony and in your written testimony, you both talk about
the Oversight Board. As I said earlier, I want to get some
input on that today.
So if we could start with, maybe, Ms. Kubey. In your
written testimony, you recommend a lot of changes designed to
revitalize the IRS Oversight Board, as it is called now. We
call it the Management Board in the legislation Senator Cardin
and I put forward today to make that distinction, because there
is a lot of oversight that might be viewed as overlapping.
You mentioned the Board should have the power to both
review and approve all operational plans. The Board currently
only has approval power over long-term strategic plans, as you
know.
In our legislation, we sought to address this limited
approval power by being more explicit in the type of plans that
they would be permitted to approve, including the annual
performance report, which I think is really important in the
plan that is submitted as part of the President's budget
request.
Ms. Kubey, what do you think the value is of giving the
Board more direct approval power over a wider range of
operational and strategic plans?
And then, Ms. Olson, really the same question to you. You
were there at the outset as we tried to establish what the
priorities were for the Oversight Board.
But, Ms. Kubey, you could respond to that. What is the
value of giving the Board more direct approval power over this
wider array of operational and strategic plans?
Ms. Kubey. Well, I echo what you say, that the IRS has
plenty of oversight. And I applaud the change of language to a
management function.
I see the alignment of the higher-level management
function, the operations, and, if you will, rewards for
successful outcomes to be highly correlated. And I do not think
you would want to have oversight or management functions
without having the power to also monitor operational functions,
because you could conceivably have one point of view from the
top. And then if, operationally, the Service is going off and
doing something else, you would never have that level of
implementation that you want.
And then the other end of that would be, assuming that we
do have sound management, good operational function, and we
have high-level executives who are in charge of making those
successful outcomes, that they would then be rewarded and the
Board would have that opportunity.
Senator Portman. I saw in your written testimony you
suggested that the Board be able to approve bonuses, as an
example, to high-level executives----
Ms. Kubey. Correct.
Senator Portman [continuing]. To align those performance
measures with the Board's responsibilities.
Ms. Olson?
Ms. Olson. As you referenced, I have been subject to the
oversight of the Board as the Office of the National Taxpayer
Advocate. And I found the Board in 2001 to be composed of very
engaged individuals with a variety of experiences.
So there was a professor from a law school who was very
interested in training and didactic methods and produced the
best report that I have seen on IRS training in the 17 years I
have been the National Taxpayer Advocate.
There was a representative of small businesses from rural
Iowa with agriculture. And he was a very strong advocate of
what was the IRS doing about small businesses. And you had
people skilled in technology. You had this really good mix of
talent.
The battle came with, I believe, the IRS leadership. And
Treasury did not support the Board and viewed it as intrusive.
And that battle really came to a head when the Board--a few
years in--tried to weigh in on IRS performance measures. And I
think that is vital for the Board, if it is a management board
with experience and expertise from outside the IRS, to have a
voice in those measures and even in approval of those measures.
And the IRS really fought that. And that became really the
part of the demise, in my opinion, of the Board. So as I look
forward to what it should do--I think looking at performance
measures, holding the senior leadership accountable to
delivering on those measures, but also, are we measuring the
right thing and comparing it to private-sector measures, et
cetera?
That is vital for the Board.
Senator Portman. Well, I think those are very helpful
points. And you are right.
Initially we talked about expertise, and that is why we had
those individuals included, everything from service providers
to technology to small business people. You mentioned some of
the really dedicated people who were on it.
And then we also wanted experience, just because the IRS
sometimes lives in its own bubble, as many Federal agencies and
departments might. And so to have that experience to be able to
come in and help the IRS be able to do its job better,
particularly in the light of the fast-changing economy we have
now, as Ms. Bruckner has talked about.
And the final one which was very important was continuity.
Accountability, but also continuity, because every Deputy
Secretary, every new IRS Commissioner, sometimes a Secretary
comes in with a big new reform plan, and sometimes--you
mentioned--the right hand does not know what the left hand is
doing. Sometimes we do not have that experience and continuity,
and that is where we get staggered terms.
So I am not telling you something that you do not know, Ms.
Olson, but maybe trying to reiterate that this is an important
opportunity for us, I think, with reform to look at the
Oversight Board--why it is not working, how it could work
better--and to provide what I think is still needed, which is
all of those things: critiques, accountability, the experience,
and the continuity.
So we will get into this deeper. Our legislation does not
go quite as far as some of the suggestions you are making, but
it does revitalize the Board.
By the way, I had a conversation with the Deputy Secretary
nominee as recently as this morning on this, in a public
hearing, and also obviously, we have talked about this a lot
with the IRS Commissioner nominee.
With that, I will turn to Senator Cardin.
Senator Cardin. Well thank you, Mr. Chairman.
I want to thank all of our witnesses, not just for your
testimony here today, but for your help in trying to help us
improve the administration of the Internal Revenue Code.
I think I want to thank Senator Portman, for 20 years-plus,
inviting me to join him on his crusade to reform IRS, inviting
me to join the tax nerd caucus. I thank you for that.
It has been a challenge, and it is interesting because--Ms.
Olson, we have talked about this--one of the chief problems is
resources. It is hard to get consistent attention by Congress
to give the Internal Revenue Service the resources they need.
Historically, it has been the Ways and Means Committee and
the Senate Finance Committee that have taken up that cause with
the appropriators and OMB to make sure that these funds are
available. Now I know this budget year is a little bit better.
That is because of a new tax law, not so much of a found
religion for giving the IRS the type of resources that they
need. So I think part of it is to make sure we have the
resources.
I think the chairman and ranking member bringing up the
challenges that we have today with the changing of our
economy--I think Senator Warner's point there is absolutely on
target. We have also the challenges of technology and how we
use technology. That is a constant change, and the IRS has
never caught up. As many of you pointed out, they are trying to
deal with current problems rather than dealing with the
underlining capacity to use technology.
Then I would add a third thing. And that is, Congress
changed the law. I am saying whether it is good, bad, or
indifferent, when you change the law, it is going to add a
challenge to the IRS. They are going to have to deal with that
as they are dealing with all of these other issues.
So I invite you to--your testimonies cover a lot of the
points that are included in Senator Hatch's and Wyden's
legislation, in legislation that I have joined Senator Portman
on, and in the bills that have come over to us from the House.
But I invite you to be more granular. Please take a look at
these provisions and give us the input beyond just today's
hearing.
I want to talk, first, about training. Thank you for
mentioning that. We do try to help with more permanent
commitment by IRS to training the personnel to deal with these
challenges. But let me ask all of you a question on two points
that are in the Portman-Cardin bill that there are different
views on. So I would like to get your thoughts.
One is to reinstate the authority of the IRS to regulate
paid providers, and the other is to deal with private debt
collection. Our legislation takes a similar approach to what
the House did in limiting the private debt collectors--not
using private debt collectors for those who are of modest
income.
If you would care to comment about either one of those two
provisions, because, as I said, there have been some different
views in Congress on these points.
Ms. Olson, do you want to start?
Ms. Olson. Well, as you know, we recommended back in 2002
to create some kind of regulatory minimum competency regime
around the unenrolled return preparer. I had been one for 16
years, so I knew what I was talking about.
I really think that that is vital to the future of the IRS.
We are running so much through the Internal Revenue Code in
terms of refundable credits, and they are very complicated
provisions. So we have unsophisticated taxpayers going to
preparers who do not have any kind of training, have no
accountability, will never lose a license, et cetera.
So establishing some minimum competency standards for them
and requiring them to come into the IRS and declare themselves
is vitally important for identity theft, for refund fraud, for
accuracy of returns, et cetera.
On private debt collection, my focus has been that Congress
has already spoken about how it wants the IRS to treat
taxpayers in the collection context, by saying that if you are
levying on someone with an economic hardship, you have to stop
levying on that person. An economic hardship is defined as not
being able to pay your basic living expenses.
Congress has mandated that the IRS create guidelines for
Offers in Compromise. That came into our area in 1998, and
those guidelines are based on basic living expenses. So what I
have said to the IRS is, try to proactively screen out these
taxpayers, not just in private debt collection, but in all your
activities, based on all of this data we have in-house, but
certainly in private debt collectors. They should not even go
over there.
Senator Cardin. Ms. Thompson, I was just impressed by the
training that you have to go through in the VITA program and
thinking about those who are subjected to that $400 fee. And
there is really no ability of the IRS today to regulate,
although you are very much subject to that training.
Ms. Thompson. Absolutely.
Our VITA volunteers go through extensive training. There is
an annual certification. We have two opportunities to take the
certification test and pass it. After that, we suggest other
volunteer opportunities for them. And like I mentioned, they
are volunteers.
What I will say is, when I go to get my nails done, my
technician has a license. When I take my children to get their
hair cut, their barber has a license. That is an interaction
between myself and an individual.
But yet paid preparers--and I can tell you that we, as VITA
volunteers, overwhelmingly spend a lot of time and energy
amending returns and correcting the mistakes and errors of paid
preparers. And particularly low-income families are the ones
that are subjected to those errors.
So we spend a lot of time correcting the mistakes and
helping people to come into compliance for preparers that are
not even regulated, even though, for something as simple as a
barber or a nail tech, you are.
Senator Cardin. Thank you. I appreciate it.
Thank you, Mr. Chairman.
Senator Portman. Senator Whitehouse?
Senator Whitehouse. Let me first thank Ms. Thompson for--
you make a terrific advocate, just to begin with. And the
program is so important. I cannot tell you how many families in
Rhode Island depend on VITA and depend on the Earned Income Tax
Credit. The whole State's economy is lifted when those returns
come in. So I just want to appreciate you.
My question goes, however, more to the end of the income
spectrum that you do not represent. Primarily, I think I am
probably asking Ms. Bruckner, and Ms. Kubey, and Ms. Olson.
What I am interested in is, if you look at, for instance,
the corporate income tax, generally you see corporate income
tax revenues declining steadily as a proportion of our national
Federal tax revenues. When I was young, it was about--steadily
about 30 percent of Federal tax revenues. Now it is down around
10 percent.
So, as a share of everybody's contribution to funding our
government, corporations seem to have managed to evade a lot of
their responsibility, and now only provide 10 percent of our
revenues.
Relatedly, perhaps, the IRS publishes information on its
highest income earners. The highest tranche of income that they
report on is the top .001 percent, which amounts to a total of
1,400 individuals who earn, on average--across the 1,400 tax
returns--$152 million in a year.
Most people do not dream of getting $152 million if they
win the lottery. These are people who earn it in a year. And
yet, when you look at what the IRS reports about their
contribution to revenues, they are paying a 24-percent tax
rate.
When you go back to the normal people and look at who pays
a 24-percent tax rate, you get to people who are earning
$78,000 a year, so a nurse, an occupational therapist, people
like that.
My concern is how much the, essentially, free-riding of big
corporations--many of them will pay no taxes at all. And the
relative free-riding of these super-high-income taxpayers is a
function of the IRS's capability to deal with them.
Obviously, they have the ability as very-high high-income,
very wealthy interests, to come to Congress and get favorable
tax treatment passed legislatively. And you cannot blame the
IRS for that. We are to blame for that.
But to the extent that these people have, or these
organizations have, enormous clout to manipulate the IRS, to
apply political pressure to the IRS, to simply outgun the IRS,
I am interested in the extent to which you think that that
latter problem is a factor in the relatively low contributions
of these very-high-income entities. I would be happy to take
that as a question for the record and let you just write
something into us, so you have a chance to reflect on it, and
get your thoughts.
One particular sub-aspect of that is the question of false
statements. There is a weird wrinkle in IRS false statements in
which the Department of Justice will not prosecute a plain
vanilla false statement case that relates to tax returns unless
the IRS has made a referral, which gives the IRS a chokehold
over those false statements.
I am looking separately into how often the IRS actually
makes those referrals. I believe with respect to 501(c)(4)s,
which are a particularly powerful form of corporation on the
political side, the referral number is exactly zero, despite
evident discrepancies between what the 501(c)(4)s report to the
IRS and what they report to, for instance, the Federal Election
Commission.
So that would be a specific place in which I would be
interested in your thoughts and whether the IRS as an
institution has been cowed, or disabled, or outgunned in its
enforcement efforts and what effect that would have on our
overall revenues were that not the case.
So again, those are kind of big questions. And I know that
my time is expired, but if you would get back to me with a
response for the record, that would be very helpful.
And I will let Mr. Sapp and Ms. Thompson be excused from
that, because I do not think your taxpayers have that problem,
Ms. Thompson. And I do not see this as an electronic or a
technical thing, Mr. Sapp.
So, thank you very much, Mr. Chairman.
Senator Portman. Thank you, Senator Whitehouse.
Senator Cantwell?
Senator Cantwell. Thank you, Mr. Chairman. Thanks for
holding this hearing.
I wanted to ask Ms. Thompson about how we continue to do
simplification. And the Volunteer Income Tax Assistance, VITA,
and Tax Counseling for Elderly, the TCE, are grants to local
communities. So that works really well.
I think there are lots of people in our State who have used
that, focusing on underserved communities, rural communities
where they may not be able to get larger assistance. So during
the--I think it was the 2004 tax season, they helped prepare
3.2 million returns. So that is a lot of returns and very
helpful.
I wanted to say, though, that I feel like the forms for,
particularly these areas where people are looking for education
credits and the Earned Income Tax Credit, Child Tax Credit,
American Opportunity Tax Credit, all of those things are good
for simplicity purposes. Well, let us just say, they should be
more simplified.
My colleagues, Senators Brown and Heller, have a bipartisan
amendment to increase funding for programs which would help
support more simplification on the tax forms. Do you think that
is a good idea?
Ms. Thompson. The simplification of the tax forms?
Senator Cantwell. Information to make it easier on these
deductions.
Ms. Thompson. Absolutely. And thank you for your question,
Senator Cantwell.
We have tremendous partners across the country. In
particular, I am thinking of partners in Seattle, WA--United
Way of King County is one of our largest partners.
One of the things that taxpayers get when they come to VITA
sites is education.
Referring back to your question earlier, Senator Cardin,
our volunteers go through extensive training and certification
to be able to deliver education. Sometimes it comes in the
forms of financial education. But at the end of every return,
there is a quality review process where the taxpayer actually
gets an education about how their life translated into that tax
return this year.
Of course, if the forms are simplified and the process is a
little bit simpler, yes, it makes it easier for everyone--
notwithstanding the 2017 complexity and the prior year
complexities, and whatever the complexity looks like in the
coming years with the restructuring of the IRS and the tax
forms for 2018 and beyond.
Our volunteers stand ready. We are the tax nerds. And we
gladly give our time and stand ready to learn and undergo the
training that is necessary. I think it is important that they
have the training and that information is available timely so
that we can get that information, so whatever it is, we are
able to communicate that to the low-income, the elderly,
disabled, rural, and underserved communities as we have done
for almost the last 50 years and that we are able to continue
to do so.
Senator Cantwell. Well, we like nerds where I come from.
But I do think we need to continue to communicate and
amplify, think of ways to just generally make the public aware
of those deductions. So that is, I think, the key point.
But thank you for those grants to those communities,
because we think they are very, very helpful to them.
Thank you, Mr. Chairman.
Mr. Sapp. Senator, if I could--could I just comment on
that?
Senator Cantwell. Yes, go ahead.
Mr. Sapp. Because one of the challenges--and I think my
colleague from NAEA brought it up before--is that paid
preparers' experience is, they have a due diligence checklist
they have to go through with that taxpayer. And a lot of times
that can seem antagonistic to the taxpayer and discourage them
from claiming some of these refundable credits.
So one of the recommendations, in general, is that the IRS
clarify what those due diligence requirements are for the paid
preparers. And that would include the VITA folks, as they have
to go through some of those due diligence--for example, what is
the documentation requirement for a paid preparer to meet those
requirements?
It needs to be simplified and educated, both on the paid
preparer side and on the consumer side.
Ms. Olson. And if I might add, my office has made
legislative recommendations about how to reform the Earned
Income Tax Credit and other family status provisions, because
frankly, the IRS struggles with making an incredibly complex
law simple and understandable. And any time you deal with
family--families are not simple or understandable.
And so we have tried to look at provisions from around the
world, as well as IRS data, to come up with ways that you could
come up with a few more safe harbors so you would not
necessarily have to go through intrusive inquiries. That would
require legislation, but I think there are ways to make it a
little bit better without increasing errors and things like
that.
Senator Cantwell. I would like to see those
recommendations.
Ms. Kubey. If I may just add one thing, Senator Cantwell.
Preparers--we have all sorts of varying practices. Many of
us have walk-in practices. Some of us are taking clients by
appointment. So it is sort of all over the map.
Often, we are put in the position with these new due
diligence requirements where we are asking questions of clients
that we have known from before their children were born, about
their children, simply so that we can check all the boxes and
say that we have asked the questions that we are required to
ask.
I do agree with what Mr. Sapp said. It is tremendously
burdensome, and it creates a little bit of anxiety with the
taxpayers who are coming to us for help. So I know it is a
tricky thing, but if there were some way of balancing the
requirement for knowing our taxpayers with some kind of nod to
people who have known their clients for 20 years or more, it
would be helpful, and I think it would aid efficient tax
administration.
Senator Cantwell. Well, definitely believe that, on this
end of the tax code, helping people understand and qualify for
these things so that they can make the right decisions is very
important.
Thank you, Mr. Chairman.
Senator Portman. Thank you.
Good question. And with regard to the forms and
simplification, so much of that does not require legislation.
It requires the IRS focusing more on simplification. And I
think the Taxpayer Advocate, obviously, has made some
recommendations along those lines.
But again, looking to the Board and customer service, which
is one of the top priorities, that would seem to me a natural
thing that a real Management Board would look at and say, how
do we simplify and ensure taxpayers understand this across the
board, which I think is always helpful. And Congress has not
made it simpler, as Senator Cardin said, because there is now a
transition going on for things like closely held corporations
trying to figure out how those new tax revisions work, and
those regulations are coming up. So there is an opportunity as
well.
On electronic filing, let me just make a point. We have
talked about a lot of negative aspects of taxpayer service,
including your extraordinary comments this morning, Ms. Olson,
about the number of phone calls that actually get through. You
said really it is only 29 percent of calls received that are
answered by an individual--29 percent.
One place where we have made great progress since Senator
Cardin came up with this brilliant idea 20 years ago--I will
give him credit because he was complaining about having been
dragged into this process, which he was.
But seriously, electronic filing has really been
successful. I remember at the time, our goal was 80 percent. We
got to 80 percent by 2007, probably. And I think we are close
to 90 percent now, electronic filing.
That is a huge success because, not only is it helpful to
the taxpayer, it is obviously helpful to the system because we
found that, when it was done manually, there were so many
errors that it ended up with downstream cost to the taxpayer
and to the system. And that is far less likely to happen with
electronic filing. So that is a good thing.
Mr. Sapp, you talked earlier about some of the difficulties
of managing that balance between e-services providing taxpayer
ease of access, but also security and authentication in
particular.
Recent reports show that only 30 percent of taxpayers who
have tried to set up an online account at the IRS website were
successful in doing so because of the tough authentication
procedure. So I am not sure how that balance is going when only
30 percent of folks are able to set up that online account.
So how can the IRS strike that right balance between
customer service and taxpayer protection through security and
authentication? And in what ways would the IRS incorporate
comments and individual ideas more effectively from
stakeholders? How can we get them to work more with the outside
stakeholders who are very engaged in electronic means of
communicating, either with the IRS or otherwise? How do you
feel about adopting uniform standards on the use of private-
sector electronic signature options, as an example? Would that
help this problem?
Mr. Sapp. We at ETAAC have evaluated several different
options for how the IRS could authenticate people, because that
is the big challenge. How do you authenticate someone
electronically, as I mentioned before, with a diverse
population in the United States, with differing access to
Internet, or differing access to phones? It is a very difficult
solution to provide.
So 30 percent may not be a bad number for that particular
type of authentication. However, we need to get to 100 percent
of taxpayers controlling that account and having access to it.
So I agree with you that the IRS, 100 percent, has to solve
that issue.
One of the things that I would consider is the electronic
filing program, the way the IRS has taken that collaborative
approach, where they brought in stakeholders from the private
sector to help be that front end for the taxpayer. So one of
the things that we discussed, and I mentioned it in my
testimony, was trying to leverage--for those folks who may not
be able to authenticate through standard channels (and not
everyone today can authenticate at a particular bank or a
particular vendor relationship they might have), they may need
to do it in person.
So we did recommend that they consider leveraging tax
preparers and consider having those tax preparers go through a
vetting process so that they could become trained in how to
authenticate a taxpayer, and then allow that taxpayer to
leverage that authentication to access their secure services
similar to what happens today with that certified Acceptance
Agent.
And that in-person--when over half the taxpayers in the
United States today are choosing to pay a preparer--that in-
person appointment could allow them to authenticate with their
tax preparer and then have access to their services that way.
But again, one of the side lights of that is, the IRS
should have the ability to regulate preparers to ensure that
that interaction is secure with their paid preparer.
Ms. Olson. Senator Portman, I have traveled around the
world meeting with other tax administrations, looking at their
online accounts. In the United Kingdom, one way to sign into
your taxpayer account is that you are directed to Amazon or
your bank, somewhere else where you already have an online
account, and you sign on through them, and that message is sent
back to HMRC, that you are who you say you are, through their
verification process. That seems to work very well, and they
have a much higher ability to get their taxpayers into
accounts.
Australia has put into effect voice recognition. And it is
in its infancy, but I think that is very important. That is
very interesting.
GAO just published a report in June that looked at
different authentication methods. And some of those methods are
discussed there.
The other thing that I have seen--and I just raised this
with senior leadership of the IRS--is they have the same level
of security if you are trying to get into an account to pull
information out as they do sending information in. So taxpayers
who just want to send an email with a picture of a document
that is necessary in exam, have to be able to, in a pilot, sign
into an online account and go through this high authentication,
even though they are not pulling any information or accessing
their particular account.
And I have tried to say to the IRS, why don't we think
about another level for people just sending us information,
rather than that they get into our systems?
Senator Portman. Good points.
I am going to ask Senator Cardin if he has some closing
comments or questions, because I know he has another
commitment.
Senator Cardin. Thank you, Mr. Chairman.
Again, I thank all of the witnesses. I think I will ask
this for the record.
If you could let us know--I am also ranking member on Small
Business. I find that IRS questions are now becoming one of the
top questions being asked by small businesses.
In your prepared statements and in your testimony, you have
mentioned issues that would help small businesses. I would hope
you would identify for me, perhaps the top one, two, or three
changes you think in administration that would be the most
valuable for the small business community. If you could put a
priority on the small business community on those
recommendations, I would appreciate it.
Thank you again for your testimony.
Senator Portman. Thank you.
And again, as Senator Cardin is leaving, I thank him for
joining me in this effort, but really for 20 years of being
part of this enterprise of figuring out how to make taxpayers
and the IRS work better together. It is something that most
members of Congress do not spend a lot of time on, and yet it
is incredibly important to people we represent.
I have so many more questions for you all. But I guess I
would like to end with this. We do have a new legislative
initiative out there now.
Among other things, Mr. Sapp, it has these uniform
standards on the use of private-sector electronic signature
options. We want to hear from you on these things to the extent
we did not get to those questions today.
So if I could ask you, as a favor, to take a close look at
the legislation. Many of you at this table, maybe all of you,
gave us input already into the legislation. That is one reason
I think it is a pretty good bill, but there are things we heard
today that would, I think, improve it further.
And in the case of Ms. Kubey, particularly, some ideas on
the Oversight Board, the Management Board as we are calling
it--it would be a little different and take it to even more of
a management function with accountability, with performance
measures, and so on.
And with regard to what people might see as a number of
different efforts, let me just say again, what the House did
and what the committee did back in 2016, which has been
reintroduced, essentially, in the last couple of weeks, I think
is entirely complementary with what we are talking about. So
these are not competing proposals. Instead, I think these are
additive.
And at the end of the day, it may not be as ambitious a
project as it was 20 years ago, but frankly it is time, once
again, to look at this broad range of issues in the context of
a new economy, as Ms. Bruckner has said and Mr. Sapp has said,
in terms of the reality of how people interact, and the reality
of how people use platforms. And sometimes, increasingly, the
platform is them as independent contractors or sole
proprietors.
So we have a number of challenges in front of us. We want
to get something done. We are hopeful that we can work with the
House and the Senate and have a product by the end of this
year. That is urgent by congressional standards. Getting
something done that quickly is not easy.
So we really appreciate your coming today, and your
continued interaction with us. Robert is here. I know Beth is
here, and others of us who have been working on this. So please
interact with our staff and with us, and let us be sure that we
can get this across the finish line before the end of the year
and improve the experience all of our taxpayers have and ensure
that the IRS is viewed, again--I said earlier, people had lost
faith in the IRS 20 years ago. Many people have lost faith
again. And we need to get back to a point where people have
more faith and trust in government, in particularly in the
agency that collects our taxes.
Thank you all for being here.
[Whereupon, at 11:53 p.m., the hearing was concluded.]
A P P E N D I X
Additional Material Submitted for the Record
----------
Prepared Statement of Caroline Bruckner, Executive-in-Residence,
Accounting and Taxation; and Managing Director, Kogod Tax Policy
Center, Kogod School of Business, American University
Subcommittee Chair Portman, Ranking Member Warner, members of the
U.S. Senate Committee on Finance Subcommittee on Taxation and IRS
Oversight (the ``Committee''), and staff, thank you for the opportunity
to testify today. My name is Caroline Bruckner, and I am a tax
professor on the faculty at American University's Kogod School of
Business. I also serve as the managing director of the Kogod Tax Policy
Center (KTPC), which conducts non-partisan policy research on tax and
compliance issues specific to small businesses and entrepreneurs. We
develop and analyze solutions to tax-related problems faced by small
businesses.
Prior to joining AU's faculty, I served on the staff of the U.S.
Senate Committee on Small Business and Entrepreneurship, from 2009-
2014, ultimately as Chief Counsel. Before public service, I worked in
private practice in Washington, DC as a tax attorney with both Paul
Hastings and PwC's Washington National Tax Services.
Since March 2015, I've directed the KTPC's efforts towards
developing research on the tax and compliance issues impacting
America's latest iteration of self-
employed small business owners who are renting rooms, providing ride-
sharing services, running errands, and selling goods to consumers in
business transactions coordinated online and through app-based
platforms developed by companies such as Airbnb, Etsy, Uber, Lyft,
TaskRabbit, Instacart, and others (i.e., the ``sharing economy'' or the
``on-demand platform economy'').\1\
---------------------------------------------------------------------------
\1\ Kogod Tax Center, letter to U.S. Senate Committee on Finance
Bipartisan Business Tax Working Group (April 15, 2015), available at
https://www.finance.senate.gov/legislation/details/business-tax-
working-group-submissions.
In May 2016, we released groundbreaking research in a report titled
``Shortchanged: The Tax Compliance Challenges of Small Business
Operators Driving the On-Demand Platform Economy.'' Our research
included--for the first time--survey data from a range of on-demand
platform service providers and sellers that quantified the reality that
under current tax rules, most of these taxpayers are not likely to
receive any Form 1099 regarding the income they earn through these
platforms.\2\ One major consequence of this is that millions of these
small businesses are working and earning income in ways that are not
readily identifiable by existing government research or publicly
available taxpayer filing data.\3\
---------------------------------------------------------------------------
\2\ Caroline Bruckner, ``Shortchanged: The Tax Compliance
Challenges of Small Business Operators Driving the On-Demand Platform
Economy,'' American University Kogod Tax Policy Center (May 2016),
available at https://www.american.edu/kogod/research/upload/
shortchanged.pdf.
\3\ See, e.g., letter from the U.S. Department of the Treasury to
Senator Mark Warner, Tax Analysts (October 27, 2015), Doc. 2015-25376.
However, there are some official measures of independent contractors
and alternative contingent work. See, e.g., the June 2018 U.S. Bureau
of Labor Statistics (BLS) release of its 2017 measure of the
alternative contingent workforce, available at https://www.bls.gov/
news.release/conemp.nr0.htm. BLS is scheduled to release 2017 survey
data specific to the gig economy on September 30, 2018.
Our research concluded that this growing problem demands Congress's
attention to more fully consider how to fairly and efficiently
administer the U.S. tax code with respect to these small business
taxpayers, who typically are required to report this income on a
Schedule C or Schedule E and are not subject to withholding on these
earnings.\4\ A number of findings we review in ``Shortchanged'' are
particularly relevant to today's discussion, including:\5\
---------------------------------------------------------------------------
\4\ See Annette Nellen, Caroline Bruckner, and Jennifer Brown,
``Taxes and the Growing Gig Workforce: What to Know'', Journal of
Taxation, Vol. 128 No. 6 (June 2018) (summarizing the tax rules
specific to on-demand platform economy service providers and sellers).
A primary reason for why policymakers, tax and labor experts, and the
online platform companies have been slow to tackle the simmering tax
and compliance issues underlying this evolving marketplace is the
looming question of whether workers who provide services for customers
via online platforms are really misclassified employees. Those issues
are currently being litigated in courts in a number of jurisdictions
across the country. Our view is that because the research to date
consistently shows that millions of taxpayers actively participate in
the on-demand platform economy as small business owners, addressing the
existing tax compliance challenges these taxpayers face is warranted,
notwithstanding the outcome of a specific misclassification case
applicable to a single online platform company.
\5\ In ``Shortchanged,'' we adopted the on-demand platform economy
criteria used in the first major study to track actual income earned
using financial transaction data from platforms that: (1) directly
connect service providers and sellers with consumers; (2) process
payment electronically; (3) allow service providers and sellers to
provide goods or services at their discretion; and (4) customers pay
for a singular task or good. Bruckner, supra at n. 2 at 4.
1. Size of the on-demand platform economy: At least 2.5
million Americans are earning income via on-demand platforms
every month (this translates to approximately 4.2 percent of
adults or more than 10 million from 2012-2015);\6\ and
---------------------------------------------------------------------------
\6\ Diana Farrell and Fiona Greig, Paychecks, Paydays, and the On-
demand Platform Economy: Big Data on Income Volatility, JP Morgan Chase
Institute (February 2016), https://www.
jpmorganchase.com/corporate/institute/document/jpmc-institute-
volatility-2-report.pdf. Other tax preparer industry experts we've
consulted in our research have gone so far as to note that ``their own
studies found that 34 percent of the U.S. workforce participates in the
gig economy, with this number projected to grow to 43 percent by
2020.'' Patrick Gillespie, ``Intuit: Gig Economy Is 34 percent of U.S.
Workforce,'' CNN Money (May 24, 2017), available at https://
money.cnn.com/2017/05/24/news/economy/gig-economy-intuit/index.html.
2. Average income of on-demand economy small businesses:
Although people do cycle in and out of the on-demand platform
economy, during the months in which people are actively using
platforms to earn income, their earnings ``represented a
sizeable but still secondary source of income.'' Average
monthly income from active participation ranges from $533 to
$314.\7\ Other studies have found that an overwhelming
majority--85 percent--of gig workers make less than $500 per
month.\8\
---------------------------------------------------------------------------
\7\ Farrell, supra n. 6.
\8\ Abha Bhattarai, ``Side hustles are the new norm,'' The
Washington Post (July 3, 2017), available at https://
www.washingtonpost.com/news/business/wp/2017/07/03/side-hustles-are-
the-new-norm-heres-how-much-they-really-pay/.
In addition, as part of our research on the tax compliance
challenges of these taxpayers, we initiated a survey of members of the
National Association of the Self-Employed (NASE). Our survey was
designed to gauge existing self-identified self-employed workers'
participation in the on-demand economy (e.g., how many hours worked;
how much income earned) as well as respondents' understanding of their
tax filing obligations (e.g., whether respondents kept records for
their expenses or received a Form 1099 from their on-demand platform
company).\9\
---------------------------------------------------------------------------
\9\ 2016 Kogod Survey of National Association of the Self-Employed
Membership (April 2016) (unpublished raw survey data, National
Association of the Self-Employed). Our intention in conducting the
survey was not to prepare a statistically reliable estimate of the
entire American population of the self-employed or freelancers or all
workers in the on-demand platform economy. Instead, our objective was
to assess whether tax compliance challenges exist--even among a group
of taxpayers, who, by their own self-selection as members of NASE, are
self-employed small business owners. During March 2016, NASE invited
approximately 40,000 members to participate in the survey and received
518 responses.
Our survey results revealed that among respondents who had earned
income working with an on-demand platform company in 2015, which was
---------------------------------------------------------------------------
approximately 22 percent of all of our respondents:
Approximately one-third did not know whether they were
required to file quarterly estimated payments with the IRS on
their on-demand platform income;
36 percent did not understand what kind of records were
needed for tax purposes for business income and expenses
generated from working with a sharing economy partner;
43 percent were unaware as to how much they would owe in
taxes and did not set aside money for taxes on that income; and
Almost half did not know about any tax deductions, expenses,
or credits that could be claimed related to their on-demand
platform income.
The population we surveyed can be generally considered experienced,
self-
employed taxpayers when viewed in terms of their NASE membership, and
yet their responses indicate a significant lack of understanding and
information available regarding self-employed tax filing obligations in
addition to undue tax compliance burdens for reporting income earned in
the on-demand platform economy.
Moreover, almost 70 percent of survey respondents received no tax
guidance from the platform they worked with, and most notably for tax
administration purposes, more than 60 percent of the sharing economy
operators we surveyed did not receive any Form 1099 on their platform
income, and that means the IRS didn't either.
Our survey findings are consistent with current law reporting
requirements. In general, a Form 1099-MISC is required on amounts paid
by nonemployers to service providers and sellers on amounts of $600,
but, if a payment is made via a credit card or debit card, nonemployers
are instructed to use a Form 1099-K.\10\ However, in cases where a Form
1099-K is required, a taxpayer must have more than 200 transactions and
payments exceeding $20,000 before the Form 1099-K reporting rules are
triggered. As a result of the 200 transaction/$20,000 income thresholds
for Form 1099-K filings, the majority of small business on-demand
platform operators are not guaranteed to receive a Form 1099-K because,
on average, they earn substantially less than $20,000 per year.\11\
---------------------------------------------------------------------------
\10\ Bruckner, supra n. 2.
\11\ Id. at 7.
The failure of Congress to require Form 1099 be provided to these
small business taxpayers by the platforms they contract with to sell
goods and services has significant consequences for taxpayers and the
IRS. Taxpayers are more likely to misreport their income and face audit
and penalty exposure. According to the IRS's own research, in
circumstances where there is no withholding or information reporting,
the IRS has documented a 63-percent net misreporting rate.\12\
---------------------------------------------------------------------------
\12\ Internal Revenue Service, ``Tax Gap Estimates for Tax Years
2008-2010'' (May 2016), available at https://www.irs.gov/pub/newsroom/
tax%20gap%20estimates%20for%202008%20through
%202010.pdf.
In fact, IRS taxpayer data released last year confirmed the
ultimate impact of our research findings: for 2015, the number of
filers penalized for underpaying estimated taxes rose nearly 40 percent
between 2010 and 2015--to 10 million from 7.2 million.\13\ At the same
time, the government, too, is being shortchanged of the tax revenue its
owed. In terms of budget consequences, the most recent analysis from
GAO of the $458 billion net tax gap finds that underreporting of
business income by sole proprietors ``accounted for the largest share
of individual income tax underreporting.''\14\
---------------------------------------------------------------------------
\13\ Laura Saunders, ``Number of Americans Caught Underpaying Their
Taxes Surges 40 percent,'' The Wall Street Journal (August 11, 2017),
available at https://www.wsj.com/articles/the-numberof-americans-
caught-underpayingsometaxes-surges-40-1502443801. In addition, we
consulted tax form preparer industry stakeholders in connection with
preparing this testimony who informed us, on a confidential basis, that
fewer forms are being reported (reduced by 35 percent from 2016 to
2017) despite growth in the space and that the drop in 1099-Ks
correlates to fewer taxpayers reporting sharing economy income.
\14\ U.S. Government Accountability Office, ``Tax Gap--IRS Needs
Specific Goals and Strategies for Improving Compliance,'' report to
Committee on Finance, U.S. Senate, GAO-18-39 (October 2018), available
at https://www.gao.gov/products/GAO-18-39.
However, in response to the release of ``Shortchanged,''
significant work has been done by both the IRS and industry
stakeholders to help sharing economy operators navigate the complexity
---------------------------------------------------------------------------
of the tax code. For example:
1. In August 2016, the IRS launched the Sharing Economy Tax
Center on IRS.gov ``to help taxpayers involved in the sharing
economy quickly locate the resources they need to help them
meet their tax obligations;''\15\
---------------------------------------------------------------------------
\15\ Press release, IRS, ``IRS Launches New Resource Center on
IRS.gov, Provides Tips for Emerging Business Area'' (August 22, 2016),
available at https://www.irs.gov/businesses/small-businesses-self-
employed/sharing-economy-tax-center.
2. The National Taxpayer Advocate elevated the lack of tax
guidance for sharing economy workers as one of the Nation's
most serious problems facing taxpayers on the basis of our
survey of NASE members in her most recent annual report to
Congress;\16\ and
---------------------------------------------------------------------------
\16\ Taxpayer Advocate Service, 2017 Annual Report to Congress--
Volume 1 (December 2017), available at https://
taxpayeradvocate.irs.gov/Media/Default/Documents/2017-ARC/ARC17_
Volume1_MSP_14_SharingEconomy.pdf.
3. Some industry platforms began issuing Form 1099-Ks to
sharing economy operators even though not required to under
current law.\17\
---------------------------------------------------------------------------
\17\ See, e.g., Lyft, ``Tax Information for U.S. Drivers,''
available at https://help.lyft.com/hc/en-us/articles/115012926967-Tax-
information-for-US-drivers.
But there is more work to be done. Congress can't rely on the
goodwill of industry stakeholders who are not required by law to
provide 1099s or tax guidance to these taxpayers. To facilitate tax
administration, compliance and aid these smallest of small business
owners, Congress needs to take additional action.
1. align the form 1099-misc and 1099-k reporting thresholds
Congress should move forward with modernizing the information
reporting regime by lowering the filing threshold for Form 1099-K to
$1,500 to ensure at the very least taxpayers have the forms they need
to file their taxes and claim any deductions or credits they may be
entitled to in order to lower their tax liability. At the same time,
Congress should update the Form 1099-MISC threshold by raising it from
$600 to $1,500 to provide some relief for small businesses who are
subject to the Form 1099-MISC filing rules. Keep in mind, the Form
1099-MISC filing thresholds have not been fundamentally reviewed or
updated since at least 1954.\18\ Adjusted for inflation, $600 in 1954
would be more than $5,000 in today's dollars.\19\
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\18\ See Pub. L. 83-591, which was enacted on August 16, 1954 and
which created IRC Section 6041 with the original $600 threshold.
\19\ H.R. 3717 takes the approach of aligning the Form 1099
threshold filing requirements at $1,500, among other tax changes
targeted to small business. Other bills, notably, S. 1549, would align
the thresholds at $1,000. S. 1549 goes further and includes other
provisions on misclassification and provides for voluntary withholding
agreements to be instituted between platforms and their service
providers and sellers. The Joint Committee on Taxation (JCT) provided a
score for S. 1549 and estimated that aligning the information reporting
thresholds raises approximately $3.6 billion over a 10-year budget
window. JCT, ``Estimated Revenue Effects of the Chairman's Mark of the
Tax Cuts and Jobs Act,'' scheduled for markup by the Committee on
Finance on November 13, 2017 (JCX-52-17) (November 9, 2017), available
at https://www.jct.gov/publications.html?func=startdown&id=5033. S.
1549 is laudable because it is an important marker for a larger overdue
policy review of our current withholding regime, which Congress needs
to comprehensively review and reform.
By creating a uniform reporting standard for filing for Form 1099-
MISC and Form 1099-K, Congress is likely to enhance compliance by both
taxpayers and reporting entities because more taxpayers will receive
Form 1099s, which is abundantly supported by the existing research on
tax compliance and information reporting, and will benefit other self-
employed small business owners operating outside the sharing economy,
but who primarily are paid via credit card transactions. Some States
have already moved forward with this approach and aligned the 1099-K
and 1099-MISC reporting thresholds at the current 1099-MISC level of
$600 with positive results.\20\
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\20\ In 2017 both Vermont and Massachusetts began to require
information reporting for income earned by small business on-demand
platform operators and paid electronically at the current 1099-MISC
threshold of $600. According to the industry experts we consulted in
preparing this testimony, the lower reporting threshold in
Massachusetts ``catapulted reporting by over 100 percent.''
2. update quarterly estimated payment due dates
Under current tax rules, when self-employed taxpayers are expected
to owe at least $1,000 in taxes and aren't subject to withholding,
advance payments of estimated tax are due to the IRS throughout the
year in the form of quarterly estimated payments.\21\ It just doesn't
take that much income to trip over these filing requirements. Our
survey found that more than one-third of respondents did not know
whether they were required to file quarterly estimated payments on the
income they earned working with a platform.\22\
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\21\ Form 1040, Estimated Tax for Individuals, Internal Revenue
Service (July 23, 2018), https://www.irs.gov/forms-pubs/about-form-
1040-es.
\22\ ``The Sharing Economy: A Tax Experience for New Entrepreneurs
Part I,'' hearing before the House Committee on Small Business, 113th
Congress (2016) (statement of Caroline Bruckner, managing director,
Kogod Tax Policy Center), available at https://smallbusiness.house.gov/
uploadedfiles/5-24-16_bruckner_testimony_.pdf.
As the National Taxpayer Advocate has repeatedly recommended,
anything that can be done ``to help taxpayers make their estimated tax
payments more easily and lessen the burden of saving to make such
payments is likely to increase compliance.''\23\ In order to facilitate
tax compliance and ease taxpayer burden, Congress should update the
filing deadlines for second and third quarter installment payments set
forth in IRC section 6654(c) to be due two weeks after a quarter's end,
rather than in the middle of a quarter as is required under current
law.
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\23\ ``The Sharing Economy: A Tax Experience for New Entrepreneurs
Part II,'' hearing before the House Committee on Small Business, 113th
Congress (2016) (statement of Nina Olson, IRS National Taxpayer
Advocate), available at https://smallbusiness.house.gov/uploadedfiles/
national_taxpayer_advocate_testimony-5-26-2016_hearing.pdf.
The bipartisan small business tax bill proposed by the House Small
Business Committee (H.R. 3717) in this Congress does just that and
modernizes the existing filing deadlines to reflect business reality of
the second and third quarters' end. As a result, this change is likely
to increase compliance because under current law ``taxpayers must
remember oddly spaced payment dates . . . [that] do not consistently
coincide with calendar quarters, making difficult to calculate net
income and confusing to taxpayers.''\24\ By simply changing existing
due dates to fall after a quarter's end, Congress can ease the
burdensome process of estimating income for purposes of remitting
quarterly estimated payments because taxpayers will know how much they
earned the preceding quarter rather than requiring taxpayers to make
their best guess.
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\24\ Id.
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3. require the irs to develop and publish guidance for on-demand
platforms to provide service providers and sellers as part of the on-
boarding process
Our survey data of experienced self-employed taxpayers operating in
the sharing economy found that there is a significant knowledge gap
between what taxpayers understand their tax obligations to be, if any,
and what they actually are. From talking to industry stakeholders, we
know that many platforms are hesitant to provide tax information to
their service providers and sellers due to ongoing concerns and
litigation over misclassification issues. To address the knowledge gap,
the National Taxpayer Advocate has recommended the IRS develop a
checklist for first-time, self-employed on-demand economy workers and
sellers. We couldn't agree more. Time and again we have heard from IRS
lawyers and tax preparers that most folks want to do the right thing,
but are unfamiliar with the requirements of quarterly estimated
payments. By the time taxpayers learn that they have failed to file
quarterly estimated payments on this income, many just walk away and
fail to file altogether. By developing accessible content that
platforms can distribute to service providers and sellers as part of
the onboarding process, the IRS can make immediate progress in
addressing the knowledge gap even experienced, self-employed small
business owners have. This is particularly important for 2018 as many
on-demand small business owners will benefit from changes included in
2017's tax reform bill.
conclusion
Current tax administration rules are shortchanging the small
business taxpayers powering the on-demand platform economy--who in most
instances don't earn enough income to warrant receiving tax reporting
forms from the online platforms they work with to file the taxes they
owe and claim any offsets or deductions they are entitled to to lower
their tax bills as well as credit their Social Security accounts for
amounts earned.\25\
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\25\ See Bruckner, supra n. 2. See also, Caroline Bruckner, Jen
Brown, and Thomas Hungerford, Failure to Contribute: The Consequences
of Non- and Underpayment of Self-Employment Taxes of On-Demand Workers
on Social Security, American University Kogod Tax Policy Center
(forthcoming October 2018) (draft on file with witness).
Taken together with our additional research, our findings suggest
that, at best, many small business owners are shortchanged when filing
their taxes on their platform income; at worst, they fail to report it
altogether. Moreover, a significant percentage of these taxpayers could
face potential audit and penalty exposure for failure to comply with
filing rules that are triggered by relatively low amounts of earned
income. Congress has the tools at its disposal to make significant
progress in remedying this growing problem. Thank you for the
opportunity to share our research with you today and I welcome your
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questions regarding the foregoing testimony.
______
Prepared Statement of Phyllis Jo Kubey, Member, National
Association of Enrolled Agents and IRS Advisory Council
Internal Revenue Service Reform
Recommendations of the National Association of Enrolled Agents
July 2018
The IRS mission is to ``provide America's taxpayers top quality
service by helping them understand and meet their tax
responsibilities and applying the law with integrity and
fairness to all.''\1\
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\1\ https://www.irs.gov/about-irs/the-agency-its-mission-and-
statutory-authority.
The National Association of Enrolled Agents (NAEA) represents the
interests of over 55,000 enrolled agents (EAs) nationwide. EAs are tax
experts, licensed by the Department of Treasury. They must pass a
series of federally administered exams covering broad swaths of the
Internal Revenue Code. Additionally, EAs are subject to background
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checks and ongoing continuing education/ethics requirements.
The Internal Revenue Service, for better or worse, touches more
U.S. citizens than any other Federal department or agency. It is the
face of the Federal Government for most citizens. Increasingly, EAs,
who are the front-line representatives of taxpayers at every level of
the tax administrative system, are expressing the view that the quality
of taxpayer and practitioner service within IRS has deteriorated to an
unacceptable level over the last decade.
The data available to the public backs up our members' assessment.
For instance, while the IRS answered 87 percent of taxpayer calls in
2004, in 2016 the agency answered only 53 percent. The erosion in
service between 2004 and 2016 is more alarming when we consider the
following: the number of taxpayer calls the IRS received increased from
71 million to 104 million, yet the number of calls telephone assistors
actually answered declined from 36 million to 26 million.
NAEA takes an expansive view of taxpayer service, which we submit
encompasses nearly all of the agency's external-facing functions. As a
result, pre-filing issues (e.g., tax ID numbers, withholding and
estimated tax payments, forms and instructions, walk-in service, access
to prior year tax information); filing issues (e.g., electronic filing,
math error adjustments, ID theft); and post-filing issues (e.g.,
compliance notices, audits--both office and correspondence--and
collections) are included. Too often, policymakers and IRS create a
false choice between providing service and assuring compliance. From a
taxpayer's perspective, any interaction with the IRS is essentially
compelled.
Policymakers often refer to our tax system as one of voluntary
compliance, yet we suggest the term is a misnomer; even ``voluntary
self-assessment'' is a stretch. While many taxpayers file tax returns
and respond to IRS inquiries because it's the right thing to do, our
experience tells us taxpayers are more compelled by fear of the
consequences. Because taxpayers are fearful, and the agency so
powerful, IRS and Congress must ensure the agency remains relentlessly
focused on service grounded in fairness, accuracy and timeliness at all
points of the tax administration process.
Reform needs to encourage IRS to develop a strategic mission shared
by its many stakeholders--employees, congressional overseers, and tax
professionals alike. To help sustain this shared mission, Congress must
consider governance, management, personnel, and budget. Only in this
comprehensive approach do we believe the agency can be successful in
its mission, which is to provide top quality service.
To that end, we recommend the following reforms.
irs oversight, governance, and management reform
The Report of the National Commission on Restructuring the IRS (the
Commission) in 1997 highlighted an issue that once again plagues the
agency: its inability to set and maintain consistent long-term
strategy, develop and execute focused plans for improvement, and ensure
its budget, staffing, and technology are aligned with organizational
success.\2\ The Commission recommended comprehensive changes to IRS
oversight and governance. Most have been set aside or ignored over the
last 5 to 10 years. NAEA urges Congress to reassess these
recommendations and make changes where necessary.
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\2\ The Report of the National Commission on Restructuring the
Internal Revenue Service: Vision for a New IRS, page 1.
Reduce the IRS Oversight Board size to five private-sector
members--representing tax, legal, and business expertise. The
members would continue to be appointed by the President to 5-
year terms as under current law and not be subject to Senate
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approval.
Increase the power of the board to review and approve all
operational plans of the agencies and any modifications to
those plans.
Require the IRS Commissioner to certify annually to the
Board that the IRS DOES NOT use any enforcement or approval
criteria based on political, religious, or racial standards.
Empower the Board to direct TIGTA to investigate systemic
issues involving customer service, enforcement resources, and
modernization.
Allow the Board to award top executives bonuses based on
specific success criteria established by the Board in
consultation with Congress.
workforce reform
An organization's culture produces its results. The wrong culture
produces the wrong results, the right culture produces the right
results. The power of an organization's culture is pervasive.
The agency needs to have a dialog centered on its values and its
approach to providing service to the public. We believe the IRS's
adopted Taxpayer Bill of Rights is an excellent starting point. We also
believe clear and consistent training is an essential element in moving
the IRS towards a service orientation.
Focus on culture and leadership: Create and fund a dedicated
training division within the IRS to increase competency and
create the appropriate culture.
Streamline the IRS education process,
ensuring that tax law and administrative policies be taught
consistently throughout the country while guaranteeing that
experienced personnel will not have to be taken offline to
train new employees.
Research state-of-the-art tax administration
techniques at the State, local, and international levels and
incorporate these approaches into education materials and the
Internal Revenue Manual.
Focus IRS training on early and fair
resolution of tax disputes.
Provide the agency executive level flexibility: grant the
IRS a reformed Streamlined Critical Pay Hiring Authority,
stipulating the areas of expertise covered by the program.
irs budget reform
The agency is handicapped by budgeting that is not only
insufficient to meet its large and growing portfolio, but also
inefficiently structured. The IRS for years has met the constraints of
a shrinking real budget through attrition, yet shrinking through
attrition is, to put it kindly, a suboptimal management technique. The
Service has not controlled of much of its staffing for years and
presently faces demographics that should concern all.\3\
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\3\ In 2016, then-Commissioner John Koskinen stated at his annual
National Press Club speech (https://www.irs.gov/newsroom/commissioner-
koskinens-speech-to-the-national-press-club-march
-24-2016), ``We expect more than 40 percent of the IRS workforce will
be able to retire by 2019.'' At the other end of the age spectrum, IRS
had about 200 employees who were 25 or younger.
Re-establish an annual joint congressional hearing, charged
with providing a detailed congressional statement on levels of
service and compliance, as well as oversight of strategic and
business plans, taxpayer service and compliance, technology and
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modernization, and filing season.
Authorize the Joint Committee on Taxation, in cooperation
with the Congressional Budget Office, to provide an annual
report on the Joint Hearing issues and estimates on the funding
necessary to carry out these priorities.
Make IRS user fees appealable to GAO. The agency must be
able to provide clear, detailed costing estimates to those who
are charged user fees and must not charge user fees for
services that largely improve the organization's own
operations.
Provide funding necessary to meet mutually agreed upon
levels of service and compliance, or in the alternative,
explain to the American people why these funding levels were
not provided. Special funding attention should be provided to
timeliness and efficiency, for instance:
Require an IRS decision within 30 days of a
taxpayer response to an IRS notice or letter.
Provide compliance staff greater authority to
settle cases early (IRS should also evaluate settlements based
on a singular focus on early and fair resolution of disputes).
Provide appropriate staffing at the points of significant
taxpayer contact (such as all call centers and TAC counters)
and training at all levels.
Charge the IRS with exploring technology
options (e.g., video-conferencing) to improve communications.
Provide adequate funding when increasing the
agency's workload (e.g., to implement the recent Tax Cuts and
Jobs Act).
u Taxpayers will need IRS guidance quickly.
u Front-line employees will need to be retrained in
all aspects of the legislation.
taxpayer service/dispute resolution reform
Both tax administrators and taxpayers are ill-served by delayed or
protracted compliance activity. Taxpayers who are unable to address
promptly positions taken on returns run the risk of compiling penalties
on similar positions taken on subsequent returns. Further, taxpayers
who enter the collection stream late are harder pressed to pay full
balances due and the payments often cause greater hardship. IRS
Taxpayer Advocate Service is at the forefront of problem resolution
within the IRS.
Provide collection staff wider discretion to reach early
agreements on payment plans and training to resolve quickly
cases deviating slightly from the financial standards to
facilitate payments by taxpayers.
Require IRS to reevaluate the National Standards for
Collection Information Statements, either by adjusting the
allowable living expenses for regional or local cost of living
variations, or by returning to use of a dollar range, based on
gross monthly income.\4\
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\4\ As was the case prior to a 2007 IRS decision to apply a single
dollar amount for food, clothing, and other items, based on family size
alone.
Increase the authority of and set higher standards for
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appeals personnel.
While we welcome and applaud IRS for a recent
addition of video conferencing as a substitute for some in-
person appeals hearings, we suggest additional provisions be
implemented.
The knowledge, experience, and authority of
the appeals personnel should meet a higher standard than the
campus appeals technical employees, who may have very little
authority and may not grasp the intricacies of cases assigned
to them.
Incorporate a number of taxpayer rights changes from the
National Taxpayer Advocate's 2017 Purple Book \5\
recommendations, including:
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\5\ The Purple Book, https://taxpayeradvocate.irs.gov/reports/2017-
annual-report-to-congress/NTA-Purple-Book, is a summary of 50
legislative recommendations she believes will strengthen taxpayer
rights and improve tax administration. Each of these proposals is
outlined at length within this document.
Authorize IRS to work with financial
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institutions to reverse misdirected deposits.
Revise the ``Mailbox Rule'' to apply to
electronically submitted documents and payments in the same
manner as it applies to mailed submissions.
Amend IRC Sec. 6654(c)(2) to adjust estimated
tax payment deadlines to occur quarterly.
Harmonize reporting requirements for
taxpayers subject to both FBAR and FATCA by eliminating
duplication and excluding accounts a U.S. person maintains in
the country where (s)he is a bona fide resident.
Codify the rule that taxpayers can request
equitable relief under IRC Sec. 6015(f) any time before
expiration of the period of limitations on collection.
Authorize IRS to release levies that cause
economic hardship for business taxpayers.
Extend the time limit for taxpayers to sue
for damages for improper collection actions.
Require IRS to waive user fees for taxpayers
who enter into low-cost installment agreements and evaluate
potential revenue/compliance costs of future user fee
increases.
Hold taxpayers harmless when IRS returns
funds levied from a retirement plan or account.
Continue to limit IRS's use of ``math error
authority'' to clear-cut categories specified by statute.
Clarify that taxpayers may raise innocent
spouse relief as a defense in collection proceedings.
Require taxpayer consent for IRS counsel/
compliance staff to attend appeals conferences.
Ensure compliance staff clearly understand that bypassing an
active POA is a taxpayer rights violation.
Congress should reemphasize and reaffirm the
consequences of violations of 26 U.S.C. Sec. 7525, to ensure
that IRS personnel shall not ignore valid powers of attorney by
directly contacting taxpayers by telephone or at their
residences or places of business.
Require IRS exam and collection personnel to offer
alternative dispute resolution options.
IRS's expansion of Fast Track Settlement
earlier this year is a step in the right direction, bringing
the opportunity for small business and individual taxpayers to
resolve unique examination issues through appeals, allowing for
consistency with large and mid-sized businesses.
We recommend IRS expand alternative dispute
resolutions options to all taxpayers and that exam and
collection staff be required to offer these options at the
appropriate time.
future state
We commend IRS for looking at formulating strategies to meet
taxpayers' needs in the future. Technology and preferences are changing
rapidly--and the significant perils of identity theft and fraud are,
unfortunately, keeping pace. On the one hand, the agency needs support
and encouragement as well as resources, while on the other hand agency
leaders must remain mindful of taxpayer rights and resist the
temptation of one-size-fits-all solutions.
Ultimately, the success of any future vision will be judged by
whether it protects the right to a fair and just tax system. Part of
any future State must include access to secure online communication for
both taxpayers and taxpayers' representatives. To facilitate earlier
and more efficient dispute resolutions:
Congress should require the IRS to provide guidance on which
widely used private-sector electronic signature options will be
acceptable for Forms 2848 and 8821 used by Circular 230
practitioners.
The IRS should debut tax practitioner online accounts that
include a robust and secure means of communicating with IRS
employees. Correspondence audits cannot rely upon taxpayers or
their representatives putting stacks of supporting
documentation into the mail. Individual online accounts should
display a Publication 1 \6\ equivalent when taxpayers use
account payment options.
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\6\ Publication 1, ``Your Rights as a Taxpayer,'' https://
www.irs.gov/pub/irs-pdf/p1.pdf, explains to a taxpayer his/her rights
and the processes for examination, appeal, collection, and refunds.
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practitioner reforms
A focus on taxpayer rights is essential to any effort to reform the
IRS's culture. The right to representation is one of those rights and
we have several recommendations--that would help both tax
administrators and taxpayers--to strengthen that right.
In 2017, taxpayers filed 132 million returns electronically and IRS
categorized 79 million of those as paid preparer returns.\7\ As of
March 1, 2018, 728,000 individuals held current PTINs.\8\ IRS's website
is inarguably one of the most trafficked Federal websites. Yet tax
professionals--including some 300,000 enrolled practitioners--lack even
an entry point on IRS's landing page, far from an organization
dedicated to the proposition that the professional preparer community
is part of the solution if the goal is a well-run, efficient IRS. The
Service is making efforts, to be sure, yet is missing significant
opportunities to assure taxpayers that their preparers are at least
minimally competent, and to leverage the tax professional community,
well under a million souls who file 60 percent of all electronically
filed returns.
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\7\ See IRS website: 2017 Filing Season Statistics, https://
www.irs.gov/newsroom/filing-season-statistics-for-week-ending-december-
29-2017, cumulative statistics comparing December 30, 2016 and December
29, 2017.
\8\ See IRS website: Number of Individuals With Current Preparer
Tax Identification Numbers (PTINs) for 2018, https://www.irs.gov/tax-
professionals/return-preparer-office-federal-tax-return-preparer-
statistics.
The IRS should create a dedicated, executive-level
practitioner services unit that would centralize and modernize
its approach to all practitioners. All administration and
oversight of third-party stakeholders (e.g., Circular 230
practitioners; unenrolled preparers; tax software providers; e-
filing; payroll providers) would be consolidated under the new
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executive.
The Office of Professional Responsibility should be
empowered to issue cease-and-desist letters to any person or
corporation improperly using the EA credential, or using it in
a fashion that could reasonably be construed confusing, and
granted authority to enforce the letter through the Federal
courts.
Congress should provide IRS with the authority to establish
minimum standards for unenrolled tax preparers.\9\ Congress
should override Loving \10\ and all subsequent cases relying on
its holdings and provide specific authority for the IRS to
require all non-credentialed paid tax preparers to meet minimum
standards. Such standards should include passing a one-time
competency exam administered under the auspices of the
Department of Treasury, requiring tax compliance background
checks, setting continuing education requirements, and
requiring compliance with strict ethical standards.
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\9\ The Purple Book, op. cit. at recommendation 6.
\10\ Loving v. IRS, 742 F.3rd 1013 (D.C. Cir. 2014), https://
www.cadc.uscourts.gov/internet/opinions.nsf/
B63C3129A4FE761985257C7C00539949/$file/13-5061-1479431.pdf.
Congress should clarify that CPAs, EAs and lawyers regulated
under 31 U.S.C. Sec. 330 who prepare a return may provide a
statement verifying any element of the return, such as adjusted
gross income, for purposes of qualifying for any Federal
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program or benefit.
IRS should provide practitioners with a robust practitioner
priority hotline (or hotlines) with higher-skilled employees
who have the experience and training to understand and address
more complex technical and procedural issues.
Under the practitioner services unit, the IRS should assign
customer service representatives (also known as a single point
of contact) to each geographic area to address unusual or
complex issues that practitioners were unable to resolve
through the priority hotlines.
conclusion
In the 20 years since Congress last tackled IRS reform, the
environment has changed significantly. Identity theft has become a
cottage industry, electronic commerce has become ubiquitous, and the
Internet has changed all the rules--and altered all expectations. Yet
what hasn't changed is the basics. Taxpayers still have the right to
quality service, the right to challenge the IRS's position and be
heard, the right to finality, the right to appeal, and the right to
representation, to name a few.
The time to address our Nation's tax administration system is now.
The reform should encompass Oversight, Governance, Management,
Workforce, Budget, Taxpayer Service, Dispute Resolution, Future State,
Practitioners, and be grounded in taxpayer rights.
We look forward to working with Congress to reform the Internal
Revenue Service. Our staff and members stand ready to assist in
considering these important proposals.
______
Prepared Statement of Nina E. Olson,
National Taxpayer Advocate, Internal Revenue Service
Chairman Portman, Ranking Member Warner, and members of the
subcommittee:
Thank you for your interest in examining the operations of the
Internal Revenue Service and for inviting me to provide my perspective
on the areas of tax administration that I believe require particular
focus and improvement.\1\
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\1\ The views expressed herein are solely those of the National
Taxpayer Advocate. The National Taxpayer Advocate is appointed by the
Secretary of the Treasury and reports to the Commissioner of Internal
Revenue. However, the National Taxpayer Advocate presents an
independent taxpayer perspective that does not necessarily reflect the
position of the IRS, the Treasury Department, or the Office of
Management and Budget. Congressional testimony requested from the
National Taxpayer Advocate is not submitted to the IRS, the Treasury
Department, or the Office of Management and Budget for prior approval.
However, we have provided courtesy copies of this statement to both the
IRS and the Treasury Department.
As you know, the IRS Restructuring and Reform Act of 1998 was
signed into law 20 years ago this month.\2\ I want to note at the
outset that I am particularly grateful for the interest Senators
Portman and Cardin have shown in tax administration for at least the
past 20 years. Senator Portman became a leading congressional expert in
IRS operations when he co-chaired the National Commission on
Restructuring the Internal Revenue Service in 1996 and 1997,\3\ and
Senators Portman and Cardin were the House co-sponsors of the Internal
Revenue Service Restructuring and Reform Act of 1998 (RRA 98),\4\ which
largely implemented the recommendations of the National Commission.
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\2\ Pub. L. No. 105-206, 112 Stat. 685 (1998).
\3\ National Commission on Restructuring the Internal Revenue
Service, A Vision for a New IRS (June 25, 1997).
\4\ Then-Congressmen Portman and Cardin co-sponsored the Internal
Revenue Service Restructuring and Reform Act of 1997, H.R. 2292, 105th
Cong. (1997), which was subsequently rolled into H.R. 2676, 105th Cong.
(1997), and became RRA 98.
At the time, I was the director of a low-income taxpayer clinic in
Richmond, VA, and I was invited to testify about the experiences of
low-income taxpayers at Senate and House hearings.\5\ I met Senator
Portman at that time, and both then and as the National Taxpayer
Advocate, I have had the privilege of working with both Senator Portman
and Senator Cardin on tax administration issues over the years. With
the many changes that have taken place in tax administration, I am
delighted that you are again working together to try to improve the tax
administration system and protect taxpayer rights. I am also grateful
for the interest of Senator Warner in tax administration issues,
particularly regarding workers in the gig economy, an area about which
I have a great deal of concern.\6\
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\5\ IRS Restructuring: Hearings on H.R. 2676 Before the Senate
Committee on Finance, 105th Cong. 124-126 (1998) (statement of Nina E.
Olson, executive director, Community Tax Law Project); Taxpayer Rights:
Hearing on H.R. 2676 Before the House Subcommittee on Oversight of the
House Committee on Ways and Means, 105th Cong. 145-154 (1997)
(statement of Nina E. Olson, executive director, Community Tax Law
Project).
\6\ National Taxpayer Advocate 2017 Annual Report to Congress 165-
171 (most serious problem: Sharing Economy: Participants in the Sharing
Economy Lack Adequate Guidance From the IRS); The Sharing Economy: A
Taxing Experience for New Entrepreneurs: Hearing Before the House
Committee on Small Business, 114th Cong. (2016) (written statement of
Nina E. Olson, National Taxpayer Advocate).
RRA 98 brought about many significant taxpayer protections,
including strengthening the Office of the Taxpayer Advocate,\7\
establishing a matching grant program to fund low-income taxpayer
clinics,\8\ expanding relief from joint and several liability (commonly
known as ``innocent spouse'' relief),\9\ expanding the availability of
offers in compromise,\10\ and creating collection due process
hearings.\11\ Notwithstanding these important advances, due to the
changes in technology and the changes in the Internal Revenue Code that
have taken place over the past 2 decades, the world of tax
administration looks very different today than at the time RRA 98 was
passed. The IRS desperately needs congressional support and direction
to help it do a better job of fulfilling its vital mission.
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\7\ RRA 98 Sec. 1102; Internal Revenue Code (IRC) Sec. 7803(c); IRC
Sec. 7811.
\8\ RRA 98 Sec. 3601; IRC Sec. 7526. At the time RRA 98 was
enacted, there were 14 LITCs in existence, all but one affiliated with
law or business schools. IR-1999-63, IRS Encourages Growth of Low-
Income Taxpayer Clinics With $1.5 Million in Grants (July 14, 1999).
Twenty years later, for the 2018 grant cycle, there are 134 LITCs
throughout the Nation. Forty-three are affiliated with academic
institutions, 53 are legal aid programs affiliated with the Legal
Services Corporation, and 38 are other nonprofit organizations. IRS
Publication 4134, Low-Income Taxpayer Clinic List and IRS Publication
5066, LITC Program Report. For 2018, Congress has appropriated $12
million for matching grants. Consolidated Appropriations Act, 2018,
Pub. L. No. 115-141 (2018). This provision of RRA 98 alone has brought
meaning to the rights to retain representation and to a fair and just
tax system by providing representation before the IRS to taxpayers who
otherwise could not afford such help.
\9\ RRA 98 Sec. 3201; IRC Sec. 6015.
\10\ RRA 98 Sec. 3462; IRC Sec. 7122.
\11\ RRA 98 Sec. 3401; IRC Sec. Sec. 6320 and 6330.
In that vein, the enactment of the provisions of the Taxpayer Bill
of Rights in 2015 was a significant step in the right direction.\12\
While there is ongoing debate about whether this provision establishes
enforceable taxpayer rights, there is no doubt that it sets out clearly
the rights Congress expects the IRS to adhere to and respect in its
dealings with taxpayers.
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\12\ Consolidated Appropriations Act, 2016, Pub. L. No. 114-113,
containing Division Q, Sec. 401 (2015) (codified at IRC
Sec. 7803(a)(3)).
Similarly, the Taxpayer First Act, passed by the House on an
extraordinary 414-0 vote in April, contains certain provisions that
would significantly benefit taxpayers.\13\ The most important may well
turn out to be the requirement that the IRS develop and submit to
Congress a comprehensive Taxpayer Service strategy within 1 year and
certain requirements to improve information technology.\14\
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\13\ Taxpayer First Act, H.R. 5444, 115th Cong. (2018).
\14\ Id. at Sec. 11201 and Sec. Sec. 18001-18403.
Similarly, a Senate version of the Taxpayer Protection Act,
introduced last week by Chairman Hatch and Ranking Member Wyden, would
require the IRS to report to the tax-writing committees on proposed
closures of IRS Taxpayer Assistance Centers at least 90 days in advance
and would make other helpful changes.\15\
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\15\ Taxpayer First Act, S. 3246, 115th Cong. Sec. 1004 (2018).
In the balance of this statement, I will first describe some of the
challenges the IRS and taxpayers are facing, and I will then identify
core areas that I believe warrant attention to improve IRS operations.
a. the irs is struggling in key areas
The IRS's struggles with information technology systems were
significant in 1998, and they have only grown worse. The IRS reportedly
has the two oldest databases in the Federal Government--dating to the
1960s--on which it stores taxpayer data.\16\ It has more than 60 case
management systems that all house different kinds of data, and those
systems generally cannot ``talk'' to each other. The number of
taxpayers filing returns continues to grow, and unfunded legislative
mandates have forced the IRS to divert funds from its core functions.
In particular, the IRS spent more than $1 billion to implement the
Patient Protection and Affordable Care Act,\17\ and nearly $400 million
to implement the Foreign Account Tax Compliance Act.\18\
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\16\ Government Accountability Office (GAO), Information
Technology: Federal Agencies Need to Address Aging Legacy Systems, GAO-
16-468 (2016).
\17\ Government Accountability Office, IRS 2017 BUDGET: IRS Could
Improve Presentation of Budget Data in Its Congressional Justification,
GAO-16-695, at 14 (2016).
\18\ Treasury Inspector General for Tax Administration, Despite
Spending Nearly $380 Million, the Internal Revenue Service Is Still Not
Prepared to Enforce Compliance With the Foreign Account Tax Compliance
Act, Ref. No. 2018-30-040 (2018).
Thus, while some of the IRS's struggles can be addressed by better
management, much of the IRS's challenges are attributable to funding
cuts. At the same time that the IRS's workload was increased between FY
2010 and FY 2018, its appropriated budget has been reduced by 9 percent
in straight dollar terms and by 20 percent after accounting for the
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effects of inflation, as the following chart shows.
FIGURE 1.1--IRS Budget in Nominal and Inflation-Adjusted Dollars, FYs 2010-2018 \19\
(in millions)
----------------------------------------------------------------------------------------------------------------
%
Type of Reduction
Dollars FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FYs 2010-
2018
----------------------------------------------------------------------------------------------------------------
Nominal $12,146 $12,122 $11,817 $11,199 $11,291 $10,945 $11,235 $11,235 $11,111 9%
----------------------------------------------------------------------------------------------------------------
Inflation- $12,146 $11,865 $11,325 $10,580 $10,506 $10,119 $10,291 $10,092 $9,762 20%
Adjusted
----------------------------------------------------------------------------------------------------------------
\19\ IRS Chief Financial Officer. Fiscal year (FY) 2018 numbers do not include supplemental funding of $320
million to implement the recent tax reform legislation.
As a result, the IRS has lost funding and lost people across the
board, as Figure 1.2 shows.
FIGURE 1.2--Locations With Specified Employees in the Last Pay Period of the Fiscal Year \20\
----------------------------------------------------------------------------------------------------------------
%
Number of Locations, Employees, or Change
Visitors 2011 2012 2013 2014 2015 2016 2017 Since
FY 2011
----------------------------------------------------------------------------------------------------------------
Appeals Officers (AOs) 1,129 1,058 958 881 795 739 744 -34%
----------------------------------------------------------------------------------------------------------------
Revenue Officers (ROs) 4,402 4,035 3,703 3,441 3,191 3,072 2,898 -34%
----------------------------------------------------------------------------------------------------------------
Revenue Agents (RAs) 11,849 11,160 10,413 9,688 9,009 8,789 8,138 -31%
----------------------------------------------------------------------------------------------------------------
Stakeholders Liaison Outreach Employees 137 123 119 110 105 98 105 -23%
----------------------------------------------------------------------------------------------------------------
Stakeholder Partnerships, Education, and 522 475 444 405 386 365 311 -40%
Communication Outreach Employees (SPEC)
----------------------------------------------------------------------------------------------------------------
Taxpayer Assistance Centers (TACs) 401 401 398 382 378 376 371 -7%
----------------------------------------------------------------------------------------------------------------
TAC Service Reps 1,639 1,515 1,484 1,520 1,423 1,267 1,140 -30%
----------------------------------------------------------------------------------------------------------------
Taxpayer Advocate Service, Case 996 945 919 862 784 726 683 -31%
Advocates
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\20\ For FYs 2011 through 2016, employee counts for Appeals Officers, Revenue Officers, Stakeholder Liaison
Outreach, and Stakeholder Partnerships, Education, and Communication Outreach are from the IRS response to TAS
fact check (December 16, 2016). Taxpayer Assistance Center (TAC) Office figures for FYs 2011-2014 from IRS
response to TAS fact check (December 23, 2014). TAC Office figures for FY 2015 from Wage and Investment (W&I)
analyst (December 13, 2016). TAC Office figures for FY 2016 from the IRS response to TAS fact check (December
20, 2016). TAC Office figures for FY 2017 from the IRS response to TAS fact check (November 3, 2017). The
remaining data is obtained from a TAS query of the IRS Human Resources Reporting Center, Position Report by
Employee Listing for the ending pay period. TAC customer service representative and Revenue Agent figures are
from the IRS Human Resources Reporting Center, Position Report by Employee Listing for the ending pay period
for FY 2011 to 2017. TAC Service representatives are non-supervisory employees in the 501 job series. Revenue
Agent counts exclude agents in Appeals and the Taxpayer Advocate Service. The Stakeholder Liaison Outreach
employees were transferred to the Communication and Liaison (C&L) Office on April 2, 2017 so employee counts
were not included. Figures for IRS Offices for FY 2011 to FY 2017 are from IRS Human Resources Reporting
Center, Position Report by Employee Listing for the ending pay period for FY 2011 to 2017. The counts of TAS
caseworkers are from the Integrated Financial System. IRS response to TAS information request (October 13,
2017). In response to TAS's information request for the number of outreach employees assigned to each State,
territory, and the District of Columbia in FY 2017, the IRS responded that Communication and Liaison (C&L) had
105 employees assigned to outreach activities spread over 33 States and the District of Columbia. However, the
IRS response to fact check stated that these numbers only account for Small Business/Self-PEmployed (SB/SE)
Stakeholder Liaison (SL) employees. Therefore, we do not have details regarding any additional outreach
employees.
Because of these reductions, the IRS does not have enough employees
to answer the phones, to conduct outreach and education, or to provide
basic taxpayer service. The compliance and enforcement side of the
house has been cut by even more. Thus, IRS telephone assistors answered
only 29 percent of the telephone calls received on the Accounts
Management lines during the recent filing season,\21\ the audit rate
has dropped to the lowest level in memory (0.6 percent), and collection
actions have declined as well.\22\ The IRS has even suppressed
collection notices because it doesn't have the resources to handle the
incoming telephone calls and correspondence prompted by those
notices.\23\
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\21\ IRS, JOC, Snapshot Reports: Enterprise Snapshot (week ending
April 21, 2018).
\22\ IRS, Fiscal Year 2017 Enforcement and Service Results 3, 8,
https://www.irs.gov/pub/irs-news/
fy_2017_enforcement_and_services_results_final.pdf. See also National
Taxpayer Advocate 2017 Annual Report to Congress 49-63 (most serious
problem: Audit Rates: The IRS Is Conducting Significant Types and
Amounts of Compliance Activities That It Does Not Deem to Be
Traditional Audits, Thereby Underreporting the Extent of Its Compliance
Activity and Return on Investment and Circumventing Taxpayer
Protections).
\23\ IRS, ACS Optimization/RAAS: ACS LT 16 Notice Redesign Test
Pilot Report 3-4 (September 27, 2017).
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b. irs performance measures are misleading and often fail to
identify areas of weakness
Like many businesses and agencies, the IRS has an extremely lengthy
list of performance measures. It seems to measure almost everything.
But its measures often are not accurate gauges of program performance.
IRS measures tend to affirm that the agency is doing a great job,
whereas other measures tell a very different story. Bad measures are
not just problematic because they provide the public with a misleading
picture. IRS operations are highly technical, and senior managers often
rely on the multitude of measures they receive to make program
decisions. If they don't understand the nuances of the measures, bad
measures can lead to bad decisions.
One example involves the IRS's measures of telephone service. In
most years over the past decade, the IRS has received more than 100
million telephone calls.\24\ That's a staggering number, and not
surprisingly, discussions of the quality of taxpayer service often
focus largely on how the IRS handles its phone calls.
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\24\ IRS JOC, Snapshot Reports: Enterprise Snapshot, IRS Enterprise
Total (final week of each fiscal year (FY) for FY 2008 through FY 2017)
(showing telephone call volumes exceeding 100 million in every year
through FY 2016 and 95 million calls in FY 2017).
During the 2018 the filing season, the IRS's benchmark ``level of
service'' was reported to be 80 percent, which most observers
understand to mean that the IRS answered 80 percent of its calls.\25\
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\25\ IRS, JOC, Snapshot Reports: Enterprise Snapshot (week ending
April 21, 2018).
Not so. That benchmark measure is a very narrow one and does not
reflect the taxpayer experience in two respects. First, the benchmark
measure only reflects calls that are directed to the IRS's ``Account
Management'' telephone lines. The IRS received 42.5 million calls
during the filing season.\26\ Of those, 35.7 million came in on the
``Accounts Management'' lines and 6.8 million came in on other
telephone lines, such as the compliance lines.\27\ The benchmark
measure does not tell us anything about how the other 6.8 million calls
were handled.
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\26\ Id.
\27\ Id.
Second, callers to the Accounts Management telephone lines are
greeted by a phone tree, and based on their responses, callers are
directed either to an employee for live assistance or to an automated
system. Depending on which buttons a caller pushes, the IRS decides
whether to direct the caller to automated offerings. In other words,
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automation is not a deliberate caller-selected option.
During the 2018 filing season, only 37 percent of taxpayer calls
(about 13.0 million) were routed to employees, while 63 percent (about
22.6 million calls) were directed to automation or reflected taxpayer
hang-ups.\28\ Thus, the benchmark level of service reflects only the
minority of calls directed to IRS employees--not the majority of calls
directed to automation.
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\28\ Id.
As a result, while the IRS is reporting a benchmark level of
service of 80 percent, IRS employees answered only 10.4 million calls
on the Accounts Management lines out of 35.7 million calls
received.\29\ That's 29 percent. If we assume callers generally want to
speak to an employee for live assistance, 29 percent is a more accurate
reflection of the taxpayer experience than 80 percent. For IRS leaders
trying to assess which programs need priority attention, this
difference in results is huge.
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\29\ Id.
Another example of a narrow and misleading measure involves
customer satisfaction. The IRS conducts surveys to measure customer
satisfaction with its toll-free telephone service. The survey results
show the toll-free customer satisfaction rating is an impressive 90
percent.\30\ But the IRS only surveys taxpayers who spoke with an IRS
employee and whose call was completed. It does not survey the 71
percent of taxpayers who called the IRS and didn't speak with a
telephone assistor. Thus, this result also is misleading and also can
lead to poor management decisions.
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\30\ IRS, Fiscal Year 2017 Enforcement and Service Results, https:/
/www.irs.gov/pub/irs-news/
fy_2017_enforcement_and_services_results_final.pdf.
For a reality check, compare the IRS's own relatively stellar
customer service results with the evaluation of external organizations.
The President's Management Agenda for 2018 states: ``Federal customers
. . . deserve a customer experience that compares to--or exceeds--that
of leading private sector organizations, yet most Federal services lag
behind the private sector.''\31\ The Agenda identifies several Cross-
Agency Priority (CAP) Goals, including CAP Goal 1: Modernize IT to
Increase Productivity and Security, and CAP Goal 4: Improving Customer
Experience with Federal Services.\32\ The Agenda notes that ``the 2016
American Consumer [sic] Satisfaction Index and the 2017 Forrester
Federal Customer Experience Index show that, on average, Government
services lag nine percentage points behind the private sector.''\33\
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\31\ President's Management Agenda 7, https://www.performance.gov/
PMA/Presidents_Manage
ment_Agenda.pdf.
\32\ Id. at 14 and 28.
\33\ Id. at 28. The correct name of the index is the American
``Customer'' Satisfaction Index.
How do the American Customer Satisfaction Index (ACSI) and the
Forrester Federal Customer Experience Index assess the IRS's customer
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service relative to other Federal agencies and the private sector?
The American Customer Satisfaction Index ranks the Treasury
Department 12 out of 13 Federal Departments and says the Treasury
Department's score is effectively an IRS score because ``most citizens
make use of Treasury services via the [IRS] tax-filing process.''\34\
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\34\ ACSI, Federal Government Report 2017, http://www.theacsi.org/
news-and-resources/customer-satisfaction-reports/reports-2017/acsi-
federal-government-report-2017 (last visited July 18, 2018).
The Forrester Federal Customer Experience Index ranks private
sector companies and Federal agencies based on a variety of factors
that influence the customer experience on a scale from 0 to 100. The
private-sector average score for Customer Experience (CX) is 69, the
Federal average score is 59, and the IRS's score is 54 out of 100,
which is considered ``very poor.''\35\ This places the IRS twelfth out
of 15 rated agencies, behind the U.S. Postal Service, the Department of
Veterans Affairs, the U.S. Citizenship and Immigration Services, and
the Social Security Administration, among others.\36\ In fact, the
IRS's Customer Experience score places it on par with airlines and
Internet service providers.
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\35\ Rick Parrish and Margaret Rodriguez, Forrester, The U.S.
Federal Customer Experience Index, 2018: How U.S. Federal Government
Agencies Drive Mission Performance With the Quality of Their Experience
8 (May 31, 2018).
\36\ Id. at 5.
There is an old adage that ``you get what you measure.'' The ACSI
and Forrester measures are broad measures relied on by OMB, and they
show significant weaknesses and opportunities for the IRS to improve.
The IRS's narrower measures show the agency is performing well and
seemingly does not have significant weaknesses in this area that need
to be addressed. As this example illustrates, the IRS would benefit
from studying and refining its performance measures to get a better
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handle on where it needs to focus its efforts.
Recommendation: Direct the IRS to consult with Forrester
Research, ACSI, and the National Taxpayer Advocate about
effective customer service performance measures and to report
to the committee on its findings and the performance measures
it intends to use going forward.
c. the irs needs to be strengthened in 11 core areas
The following core areas require particular attention to improve
IRS operations.
1. Taxpayer Services
Private industry and experts say the #1 driver of customer
satisfaction is the First Contact Resolution (FCR) rate.\37\ As we
discuss in several of my reports to Congress, measures like telephone
level of service (LOS) are secondary and can be manipulated to look
favorable while not reflecting the customer's actual experience.\38\
Yet the IRS does not measure its FCR rate consistently or across every
service channel. The IRS continues to ignore significant data showing
taxpayers prefer multiple channels for different types of interactions.
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\37\ Jeff Rumburg and Eric Zbikowski, MetricNet, The Five Most
Important KPIs for the Call Center 5 (February 20, 2013).
\38\ National Taxpayer Advocate Fiscal Year 2019 Objectives Report
to Congress 41-46 (area of focus: The IRS's Failure to Create an
Omnichannel Service Environment Restricts Taxpayers' Ability to Get
Assistance Using the Communication Channels That Best Meet Their Needs
and Preferences; National Taxpayer Advocate 2017 Annual Report to
Congress, vol. 1, 22-35 (most serious problem: Telephones: The IRS
Needs to Modernize the Way It Serves Taxpayers Over the Telephone,
Which Should Become an Essential Part of an Omnichannel Customer
Service Environment); National Taxpayer Advocate 2017 Annual Report to
Congress vol. 2, 229-244 (literature review: Improving Telephone
Service Through Better Quality Measures).
Notably, 41 million U.S. taxpayers do not have broadband access in
their homes, with 14 million having no Internet access in their homes
at all.\39\ Moreover, even sophisticated taxpayers and representatives
want to speak with the IRS about tax matters. Thus, the way forward
must include an omnichannel approach to customer service that focuses
on FCR.\40\
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\39\ National Taxpayer Advocate 2017 Annual Report to Congress vol.
2, 61-146 (research study: A Further Exploration of Taxpayers' Varying
Abilities and Attitudes Toward IRS Options for Fulfilling Common
Taxpayer Service Needs.)
\40\ An omnichannel service environment allows taxpayers to contact
the IRS through the channel of their choice and receive a consistently
high quality of service. National Taxpayer Advocate 2017 Annual Report
to Congress vol. 2, 230 (literature review: Improving Telephone Service
Through Better Quality Measures.)
Despite this widely accepted approach, the IRS's new FY 2018-2022
Strategic Plan touts the savings of digital interactions and introduces
a new measure that will determine its ``success'' at meeting Strategic
Goal 1: Empower and Enable All Taxpayers to Meet Their Tax Obligations.
Specifically, the Enterprise Self-Assistance Participation Rate
``measures the percent of instances where a taxpayer uses one of the
IRS's self-assistance service channels (i.e., automated calls, web
services) versus needing support from an IRS employee (i.e., face-to-
face, over the phone, via paper correspondence).''\41\
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\41\ IRS, Strategic Plan Fiscal Year 2018-2022, at 12, https://
www.irs.gov/pub/irs-pdf/p3744.pdf.
Thus, we have the IRS explicitly stating it will have achieved
success if there is less personal interaction with its taxpayers! This
measure, in fact, sets up self-assist in opposition to (i.e.,
``versus'') personal support--sending a clear message to employees and
taxpayers alike that omnichannel service is neither a priority nor a
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strategic goal for the IRS--unlike in the private sector.
Recommendation: Direct the IRS to appoint a Chief Customer
Experience Officer with cross-agency oversight of customer
service strategy, and direct the IRS to develop and submit to
Congress a comprehensive customer service strategy that
reflects an omnichannel approach, addresses taxpayer needs for
personal contact, and adopts First Contact Resolution as a
primary performance measure.
2. Online Services
The IRS is far behind most Organization of Economic Cooperation and
Development (OECD) countries \42\ (and many non-OECD countries) in
developing an online account. Only about 30 percent of taxpayers who
seek to create an online taxpayer account can do so because of
stringent authentication requirements.\43\ The IRS is right to
prioritize data security, but the agency must not neglect the
importance of providing improved telephone and in-person services for
all taxpayers, including the significant majority who do not have
online accounts.
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\42\ See http://www.oecd.org for a list of member countries.
\43\ See National Taxpayer Advocate Fiscal Year 2019 Objectives
Report to Congress 10-35 (Review of the 2018 Filing Season) and IRS
Response and National Taxpayer Advocate's Comments Regarding Most
Serious Problems Identified in the 2017 Annual Report to Congress
(Online Accounts: The IRS's Focus on Online Service Delivery Does Not
Adequately Take Into Account the Widely Divergent Needs and Preferences
of the U.S. Taxpayer Population), https://www.
taxpayeradvocate.irs.gov/Media/Default/Documents/2019-JRC/
JRC19_Volume2.pdf.
The features of the online account, for those taxpayers able to
create one, are, and will continue to be, limited because of profoundly
archaic IRS IT architecture and the need to pull information from more
than 60 different case management systems.\44\ Moreover, the tools that
are being tested to email with taxpayers are clunky and burdensome. Of
note, the IRS imposes the same stringent security requirements on
taxpayers seeking to send the IRS information electronically as it
imposes on taxpayers seeking to retrieve account information
electronically.\45\ Thus, most taxpayers and representatives end up
faxing or using U.S. mail or overnight delivery services to transmit
documents--placing the IRS squarely in the 20th century. Finally, rules
governing communication with the IRS, such as the ``mailbox rule'' of
Internal Revenue Code (IRC) Sec. 7502, have not been updated for 21st-
century tax administration.\46\
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\44\ See IRS Legacy Information Technology Systems: Hearing Before
the Subcommittee on Government Operations of the House Committee on
Oversight and Government Reform, 114th Cong. (2016) (written statement
of Terence Milholland, Chief Technology Officer, IRS) (noting there are
more than 60 aging IRS case management systems), https://
oversight.house.gov/wp-content/ uploads/2016/05/2016-05-25-Milholland-
Testimony-IRS.pdf; TIGTA, Ref. No. 2016-20-094, Annual Assessment of
the Internal Revenue Service Information Technology Program 22
(September 2016) (noting the IRS maintains approximately 90 case
management systems); email from Director, Enterprise Case Management
(ECM) to all designated ECM Business Unit Point of Contacts, which
included the TAS Executive Director, Business Modernization (March 11,
2016) (listing 198 case management systems). IRS response to TAS fact
check request (December 16, 2016). See also TIGTA, Ref. No. 2014-20-
071, ``Information Technology: Improvements Are Needed to Successfully
Plan and Deliver the New Taxpayer Advocate Service Integrated System''
(September 2014); TIGTA, Ref. No. 2014-20-088, ``The Information
Reporting and Document Matching Case Management System Could Not Be
Deployed'' (September 2014) (both TIGTA reports note ``there are more
than 200 case management applications in operation across the IRS
enterprise'').
\45\ At this writing, the pilot for testing Taxpayer Digital
Communication is suspended because IT resources need to be redirected
to tax reform implementation.
\46\ See National Taxpayer Advocate Purple Book, Compilation of
Legislative Recommendations to Strengthen Taxpayer Rights and Improve
Tax Administration, 26-27 (December 2017) (Recommendation #12: Revise
the ``Mailbox Rule'' to Apply to Electronically Submitted Documents and
Payments in the Same Manner as It Applies to Mailed Submissions).
Recommendation: Amend IRC Sec. 7502, the ``mailbox rule,'' to
reflect the use of digital communication; require the IRS to
develop an online strategy that enables taxpayers to submit
information to the IRS with a lower level of authentication;
and provide continued funding for the development of a user-
friendly and secure bilateral email communication.
3. Enterprise Case Management
As noted above, the IRS has more than 60 case management systems,
all storing data and records pertaining to different aspects of a
taxpayer's interactions with the IRS. There is no one system or
repository of data that contains a 360-degree view of the taxpayer's
activity and engagement with the tax system. As a result, the left hand
often doesn't know what the right hand is doing. For example, telephone
and other assistors cannot see what is happening in certain systems and
so cannot assist taxpayers with related issues; they must send off a
form to the appropriate area to take action, thereby ensuring that the
First Contact Resolution rate for these issues is zero!
The IRS is working on development of an ``Enterprise Case
Management'' (ECM) system that promises to bring much of the most
important taxpayer data and records into a critical few systems that
then can be made available to employees, analysts, and researchers in a
permission-based environment.\47\ Congress can help ensure the IRS
keeps on the right track with the 360-degree taxpayer view design.
Without this system, and the improvements to the underlying systems
(see below), the IRS cannot provide a robust Online Account and must
create manual processes or workarounds for new categories of work
(e.g., ACA and FATCA).
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\47\ National Taxpayer Advocate Fiscal Year 2019 Objectives Report
to Congress 47-51 (area of focus: The IRS's Enterprise Case Management
Project Shows Promise, But to Achieve 21st-Century Tax Administration,
the IRS Needs an Overarching Information Technology Strategy With
Proper Multi-Year Funding).
Moreover, the current structure creates rework for IRS employees
and tremendous burden for taxpayers who must send and resend
documentation that is stored on different systems and is not
retrievable by the appropriate employees. Without ECM, a complete
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virtual case file is not achievable.
Recommendation: Direct the IRS to submit to Congress a
comprehensive plan describing the development of and funding
requirements for ECM, and subsequently provide funding based on
the IRS achieving milestones that demonstrate progress toward
specific goals and stages of implementation.
4. Underlying Information Technology (IT) Systems
According to the Government Accountability Office, the IRS has the
two oldest databases in the Federal Government--the Individual and
Business Master Files.\48\ The age of IRS legacy systems causes patches
and workarounds that create risks when trying to integrate with more
current IT hardware and software (e.g., the April 17th stoppage of the
filing and payment system).\49\
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\48\ See Government Accountability Office (GAO), GAO-16-468,
Information Technology: Federal Agencies Need to Address Aging Legacy
Systems (May 2016) (discussing aging IT systems throughout the
government and listing the IRS's Individual Master File (IMF) and
Business Master File (BMF) as the two oldest investments or systems at
56 years old each in 2016).
\49\ See IR-2018-100 (April 17, 2018).
It is not clear to what extent Customer Account Data Engine 2
(CADE2) has improved the filing experience, much less reduced employee
workarounds. Although CADE2 can post items daily, the underlying
systems largely operate on a weekly cycle, leaving the IRS stuck in the
1960s or 1970s with the speed of its returns processing. Again, the
utility of modernized ECM and Online Accounts will be limited if the
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IRS does not bring its underlying systems into the 21st century.
One recurring problem is that the IRS continually receives work
that requires it to make significant IT updates in the short term and
detracts from its ability to pursue its longer-term modernization
efforts. In recent years, as noted above, the IRS implemented two major
new programs--the Patient Protection and Affordable Care Act and the
Foreign Account Tax Compliance Act. To accomplish this, the IRS
effectively placed a moratorium on all Information Technology (IT)
projects that were not related to the filing season, the ACA, or
FATCA.\50\ Only in the last year or so has the IRS begun to look
forward with its systems planning and development. But because of the
demands of tax reform and the need for the IRS to reprogram its systems
to reflect the new Form 1040, it is expected there will be another
moratorium on systems and programming revisions unrelated to tax
reform/filing season system improvements.
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\50\ FY 2016 Treasury Department Budget: Hearing Before the Senate
Subcommittee on Financial Services and General Government of the Senate
Committee on Appropriations, 114th Cong. (2015) (written statement of
John Koskinen, Commissioner, Internal Revenue Service).
That is no way to run a railroad. I recognize the appropriations
process generally provides for 1-year funding, and the subject of
multi-year funding is controversial. But a way must be found to provide
the IRS with a separate stream of funding dedicated to long-term
improvements, particularly involving its IT systems. Absent a dedicated
stream of long-term funding, the IRS's IT saga is doomed to continue as
the IRS falls further behind the rest of the world with respect to its
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underlying systems and its customer-facing technology.
Recommendation: Direct the IRS to submit a comprehensive
information technology strategic plan that lays out how it will
replace aged legacy systems, its funding requirements and
timetable for such replacement, and realistic milestones, so
that Congress can monitor progress toward stated goals; upon
receipt and review of said plan, provide IRS with multi-year
appropriated funds for this purpose, with each year's
appropriation contingent on the IRS achieving stated
milestones.
5. Automation, Artificial Intelligence, and Big Data
The IRS regularly uses technology and big data to identify fraud
and noncompliance, but it fails to use technology to help taxpayers get
to the right answer or prevent or minimize harm to taxpayers. This is
particularly true when the IRS devises tools and utilizes data or
automation to identify compliance issues or automate workstreams.
As I have discussed in a recent blog \51\ and in several reports to
Congress,\52\ the IRS could use the data it has in-house to identify
taxpayers who are at risk of economic hardship and therefore are highly
unlikely to be able to pay their basic living expenses if the IRS
collects their back-tax debts.\53\
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\51\ Nina Olson, ``The National Taxpayer Advocate Responds to
Private Debt Collectors' Contentions,'' NTA BLOG (July 18, 2018),
https://taxpayeradvocate.irs.gov/news/nta-blog-the-national-taxpayer-
advocate-responds-to-private-debt-collectors-contentions?category=Tax
News.
\52\ For further discussion of the National Taxpayer Advocate's
concerns about taxpayers entering into payment agreements they cannot
afford, see National Taxpayer Fiscal Year 2019 Objectives Report 58-79
(area of focus: The IRS's Private Debt Collection Program, Which Has
Yet to Generate Net Revenues, Continues to Unnecessarily Burden
Taxpayers Experiencing Economic Hardship and Produces Installment
Agreements With High Default Rates); National Taxpayer Advocate 2017
Annual Report to Congress 10-21 (most serious problem: Private Debt
Collection: The IRS's Private Debt Collection Program Is Not Generating
New Revenues, Appears to Have Been Implemented Inconsistently With the
Law, and Burdens Taxpayers Experiencing Economic Hardship); National
Taxpayer Advocate 2016 Annual Report to Congress 230-238 (most serious
problem: Installment Agreements (IAs): The IRS Is Failing to Properly
Evaluate Taxpayers' Living Expenses and Is Placing Taxpayers in IAs
They Cannot Afford).
\53\ IRC Sec. 6343(a); IRM 5.15.1, Financial Analysis Handbook
(November 17, 2014).
The right to a fair and just tax system requires the IRS to
``consider facts and circumstances that might affect [a taxpayer's]
underlying tax liabilities, ability to pay, or ability to provide
information timely.''\54\ In the context of tax collection, Congress
has enacted several statutes to ensure the IRS refrains from collecting
tax when doing so will leave taxpayers unable to pay their basic living
expenses. The law requires the IRS to release a levy when it determines
the levy ``is creating an economic hardship due to the financial
condition of the taxpayer.''\55\ Similarly, for purposes of determining
the adequacy of an offer-in-compromise, the law requires the IRS to
``develop and publish schedules of national and local allowances
designed to provide that taxpayers entering into a compromise have an
adequate means to provide for basic living expenses.''\56\ The IRS has
developed and published these schedules of allowances, and they are
known commonly as the Allowable Living Expense (ALE) standards.
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\54\ See Taxpayer Bill of Rights (TBOR),
www.TaxpayerAdvocate.irs.gov/taxpayer-rights. The rights contained in
the TBOR are now listed in the IRC. See Consolidated Appropriations
Act, 2016, Pub. L. No. 114-113, Division Q, Sec. 401 (2015) (codified
at IRC Sec. 7803(a)(3)).
\55\ IRC Sec. 6343(a)(1)(D).
\56\ IRC Sec. 7122(d).
The IRS could develop an algorithm that utilizes the ALE standards
and taxpayers' income based on their most current returns or
information reporting (IRP) data and other in-house data. Thus, it
could automatically screen out from collection activities those
taxpayers at risk of economic hardship, in accordance with
congressional directive and IRS policy. Further, the IRS could use this
algorithm to screen these taxpayers out of the group assigned to
Private Collection Agencies (PCAs). IRS data show that after 1 year's
operation, 43 percent of taxpayers who entered into installment
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agreements with the PCAs had incomes below their ALEs.
The IRS's continuing refusal to use data in this taxpayer-friendly
approach constitutes a serious violation of the taxpayers' rights to
privacy and to a fair and just tax system.\57\
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\57\ The IRS also places a significant burden on taxpayers because
it is not utilizing state-of-the-art techniques to design and adjust
its fraud detection filters (consisting of rules and models) to
minimize false detections. As a result, for calendar year 2017 (through
September), the false detection rate was 62 percent for identity theft
(IDT) fraud filters and 66 percent for non-IDT fraud filters. The IRS's
failure to use state-of-the-art modelling and other techniques harms
legitimate taxpayers and wastes IRS resources. National Taxpayer
Advocate Fiscal Year 2019 Objectives Report to Congress 52-57 (area of
focus: High False Detection Rates Associated With Fraud Detection and
Identity Theft Filters Unnecessarily Burden Legitimate Taxpayers).
Recommendation: Require the IRS to develop an algorithm that
applies Allowable Living Expense standards to screen out from
IRS and PCA collection programs taxpayers who are at risk of
economic hardship. Alternatively, apply 250 percent of the
Federal poverty level as a proxy for economic hardship.\58\
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\58\ The Taxpayer First Act, passed by a vote of 414-0 by the House
of Representatives in April 2018, would carve out taxpayers with
incomes at or below 250 percent of the Federal poverty level from PCA
assignment. Taxpayer First Act, H.R. 5444, 115th Cong. Sec. 305 (2018).
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6. Geographic Presence
Activities like outreach and education, congressional and media
relations, examinations, and collections in a country as large and
diverse as ours require local knowledge and interaction.\59\ Yet 12
States do not have Appeals or Settlement Officers within their borders,
and 14 States do not have Stakeholder Liaison employees whose job is to
conduct education and outreach to Small Business and Self-
Employed taxpayers.\60\
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\59\ For a detailed discussion of this topic, see National Taxpayer
Advocate 2017 Annual Report to Congress vol. 2, 245 (literature review:
Fostering Taxpayer Engagement Through Geographic Presence).
\60\ IRS response to TAS information request (October 13, 2017).
The geographic outreach data provided in the IRS response to a TAS
information request does not include in-person speeches given by IRS
employees who are not dedicated outreach employees. IRS response to TAS
fact check (November 20, 2017).
Of the 362 Taxpayer Assistance Centers, 25 are not staffed and 84
have only one employee.\61\ The number of field employees in exam,
collection, appeals, and taxpayer service has shrunk significantly over
the years, replaced by large centralized sites of employees who never
look a taxpayer in the face. As TAS research studies have shown,
personal contacts--while more costly initially--produce better
response, resolution, and agreement rates than less personal contacts,
and they also result in better educated taxpayers.\62\ The private
sector, particularly the banking industry, acknowledges the importance
of a local presence even as it continues to improve its digital
experience. TAS Local Taxpayer Advocates are often the only ``face'' of
the IRS in the community, and because we are an independent voice, we
cannot adequately substitute for an IRS presence.
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\61\ Email from Wage and Investment, June 25, 2018 (on file with
TAS).
\62\ See, e.g., National Taxpayer Advocate 2013 Annual Report to
Congress vol. 2, 15 (research study: A Comparison of Revenue Officers
and Automated Collection System in Addressing Similar Employment Tax
Delinquencies).
Recommendation: Direct the IRS to provide Congress with a plan,
including cost and return-on-investment estimates, to staff at
least one Appeals Officer and one Settlement Officer, one Small
Business outreach and education employee, and one congressional
liaison in each State, as well as provide adequate staffing for
existing and new TACs and a robust field examination and
collection presence.
7. Personnel
Closely related to IT and geographic presence challenges is the
State of the IRS workforce. The IRS can do more to attract the best and
brightest job candidates, even for limited periods, in IT, Exam,
Collection, and Appeals. It has not really changed its recruiting to
address the fact that people move from one job to another and that a
career in government is no longer viewed as a lifetime commitment. The
IRS could make the case to young workers that spending some years in
government service will provide them with skills and perspective that
simply can't be found elsewhere and will be very useful for their
futures.
The IRS could also recruit people who are mid-career and are
looking for a more stable work environment for a period of time. I
believe people will work for the IRS if the jobs and work are presented
in the right light. TAS has had no problem recruiting people from
outside the IRS at all levels, and this ``fresh blood'' has
reinvigorated many of our offices. These new recruits can bring energy
and help current employees see their jobs in a new light.
Recommendation: As part of the personnel plan recommended
above, direct the IRS to describe its efforts and plan to
recruit and maintain new hires from the private sector,
including mid-career professionals.
8. IRS Oversight
RRA 98 contained two provisions that I believe were helpful to tax
administration and have effectively lapsed: (i) the IRS Oversight Board
and (ii) joint congressional IRS oversight hearings.
RRA 98 created an Oversight Board to improve the management of the
IRS.\63\ The intent was to establish a board of experienced managers,
largely consisting of corporate executives from the private sector, to
provide guidance at a high level on IRS strategic plans, operations,
personnel, and budget. I began my service as the National Taxpayer
Advocate in 2001, and at that time, the Oversight Board was fully
staffed and active. I personally believed the Board added significant
value. Over time, as you know, Board nominations and confirmations
slowed and eventually came to a halt, requiring the Board to suspend
its operations. I believe the Board should be reinvigorated. But I
think the threshold challenge is creating a mechanism that ensures, or
at least substantially increases the likelihood, that Board members
will be replaced when their terms end.
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\63\ See IRC Sec. 7802.
RRA 98 also provided that congressional committees with IRS
oversight responsibility would hold a joint annual hearing on IRS
operations generally or on a particular aspect of IRS operations, such
as customer service or IT. Participating committees were the Senate and
House tax-writing, appropriations, and government oversight committees.
I thought these hearings were very helpful for several reasons. From a
congressional perspective, it ensured that committees with different
IRS oversight responsibilities would work together, at least once a
year, to explore IRS challenges and solutions. In that way, it provided
an opportunity for the committees to discuss the challenges and
potentially come to a common understanding about how to address them.
From an IRS perspective, it gave the agency a chance, in a single
hearing, to provide its perspective on its challenges and tell the
committees of jurisdiction what they could do to help. And from a
taxpayer perspective, I think customer service and taxpayer rights are
best protected when the IRS and its congressional overseers are working
together and reach common understandings. By its terms, this provision
sunset after 5 years. I recommend these hearings be reinstated on a
permanent basis.\64\
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\64\ For a previous discussion of this recommendation, see National
Taxpayer Advocate 2016 Annual Report to Congress 10.
Recommendation: Reinvigorate the IRS Oversight Board by
developing a mechanism that ensures continuing appointments and
members with the necessary skillsets (e.g., backgrounds in
education, information technology, small business experience,
large business experience, individual taxpayer representation);
and reinstate the joint annual hearing on IRS operations on a
permanent basis.
9. Gig Economy Tax Compliance
The growth of gig economy platforms has increased compliance
challenges for taxpayers and the IRS alike. Gig economy workers are
generally treated as independent contractors. As such, neither income
taxes nor employment taxes are generally withheld from the payments
they receive. Instead, they are expected to pay their taxes in four
installments over the course of the year.\65\ However, many gig economy
workers don't understand they are responsible for making tax payments.
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\65\ We have recommended that Congress revise the due dates for
estimated tax payments so they fall quarterly rather than at 3-month,
2-month, 3-month, and 4-month intervals, as under current law. See
National Taxpayer Advocate Purple Book, Compilation of Legislative
Recommendations to Strengthen Taxpayer Rights and Improve Tax
Administration 28 (Recommendation #13: Amend IRC Sec. 6654(c)(2) to
Adjust Estimated Tax Payment Deadlines to Occur Quarterly).
When they prepare their tax returns for the preceding calendar
year, they sometimes realize for the first time that they must pay the
full amount of tax due for the year--and they may face a penalty for
failing to make estimated tax payments as well. Other gig economy
workers know about the tax requirements, but they don't manage to save
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and find themselves in the same position.
The IRS, too, faces compliance challenges. When an employer pays
wages to an employee, the employer is required to file a Form W-2 with
the IRS. That puts the IRS and the taxpayer on notice that the IRS is
aware of the income. Reporting compliance rates in the presence of
withholding and information reporting are about 99 percent.\66\ In
stark contrast, the income earned by independent contractors often is
not reported to the IRS. IRS studies consistently show that taxpayers
report less than 50 percent of the income they receive when there is no
reporting mechanism and that this unreported income accounts for the
single largest portion of the tax gap.\67\ To the extent that economic
activity in the gig economy is expanding, more tax revenue is likely to
go uncollected and an uneven playing field is arising, where gig
economy workers are sometimes able to evade tax while persons
classified as employees are paying their full fare and effectively
subsidizing noncompliance.
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\66\ See IRS, Tax Gap Estimates for Tax Years 2008-2010 (April
2016), https://www.irs.gov/pub/newsroom/
tax%20gap%20estimates%20for%202008%20through%202010.pdf.
\67\ Id.
In my recent Annual Report to Congress, we identified many steps
the IRS can take to assist participants in the gig economy comply with
their tax obligations. While the IRS has taken steps to address some of
these recommendations, it has declined to take others.\68\ Policymakers
should assess this area with an eye toward simplifying the compliance
challenges for both gig economy workers and the IRS. I note that a
recent bill proposes to raise the Form 1099-MISC reporting threshold
from $600 to $1,000, while lowering the Form 1099-K reporting threshold
from $20,000 to $1,000.\69\ Legislation along these lines would help
close the reporting gap and address horizontal equity concerns.
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\68\ See National Taxpayer Advocate 2017 Annual Report to Congress
165-171 (most serious problem: Sharing Economy: Participants in the
Sharing Economy Lack Adequate Guidance From the IRS); National Taxpayer
Advocate Fiscal Year 2019 Objectives Report to Congress, vol. 2, IRS
Response and National Taxpayer Advocate's Comments Regarding Most
Serious Problems Identified in the 2017 Annual Report to Congress
(Sharing Economy: Participants in the Sharing Economy Lack Adequate
Guidance From the IRS).
\69\ NEW GIG Act of 2017, S. 1549, 115th Cong. Sec. 2(d)(3) (2017).
Recommendation: Direct the IRS to develop a publication
specifically designed for members of the gig economy and an
online, user-friendly wizard that walks participants through
the various steps and tax requirements; and consider
legislation similar to S. 1549 to improve tax compliance.
10. Return Preparer Oversight
At present, anyone may hold himself or herself out as a tax return
preparer. No Federal competency standards exist. The GAO and TIGTA,
among other organizations, have conducted several studies where their
auditors have posed as taxpayers and had returns prepared by non-
credentialed preparers (i.e., preparers who are not attorneys, CPAs, or
Enrolled Agents). The results have consistently been appalling. I have
described the tax return preparation industry as something akin to the
``Wild, Wild West.''\70\
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\70\ For additional background on the GAO and TIGTA studies and the
history of this issue, see National Taxpayer Advocate 2017 Purple Book,
Compilation of Legislative Recommendations to Strengthen Taxpayer
Rights and Improve Tax Administration 14-16 (Recommendation #6:
Authorize the IRS to Establish Minimum Competency Standards for Federal
Tax Return Preparers).
The Finance Committee has twice approved bipartisan legislation
authorizing preparer oversight under the leadership of Chairman
Grassley and Ranking Member Baucus, and on one occasion, the full
Senate approved the legislation by unanimous consent.\71\
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\71\ See H.R. 1528 (incorporating S. 882), 108th Cong. Sec. 141
(2004) (as approved by the Finance Committee and the full Senate); S.
1321 (incorporating S. 832), 109th Cong. Sec. 203 (2006) (as approved
by the Finance Committee).
In 2009, the IRS Commissioner concluded that the IRS had the
authority to establish minimum competency standards for tax return
preparers without statutory authorization. As a result, the IRS
initiated an extensive series of hearings and discussions with
stakeholder groups to receive comments and develop a system within
which all parties believed they could operate. The IRS began to
implement the program in 2011, but it was terminated after a Federal
court rejected the IRS's legal position, concluding the agency did not
have the authority to impose preparer standards without statutory
authorization.\72\
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\72\ Loving v. IRS, 917 F. Supp. 2d 67 (D.D.C. 2013), aff'd, 742
F.3d 1013 (D.C. Cir. 2014).
In my view, the need for preparer standards is just as acute today
as it was in 2004 and in 2011. Both as a consumer protection measure
and to improve the accuracy of prepared tax returns, I have continued
to recommend that Congress authorize the IRS to reinstate the same
program that key parties agreed on, and the IRS was implementing,
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before the court overturned it for lack of authority.
Recommendation: Authorize the IRS to reinstate the program to
require Federal tax return preparers to register with the IRS
and meet minimum competency standards, including initial
testing and annual continuing professional education
requirements.
11. Employee Training
A trained and professional workforce is paramount if the IRS is to
administer the tax laws ``with integrity and fairness to all.''\73\ In
light of congressional concern about the IRS's inappropriate use of
training dollars, Congress and the Treasury Department imposed
restraints and oversight procedures for training expenditures. The
annual appropriations bills require the IRS to have a video editorial
board that approves all videos produced,\74\ and the Treasury
Department has set dollar limits for training expenditures that can be
approved by the IRS Commissioner and heads of agency divisions ($49,999
and $19,999, respectively).\75\
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\73\ IRS, Mission Statement, https://www.irs.gov/about-irs/the-
agency-its-mission-and-statutory-authority (last visited July 18,
2018).
\74\ See, e.g., Consolidated Appropriations Act--2018, Pub. L. No.
115-141 (2018).
\75\ Treas. Dir. 12-70 (February 24, 2014).
These procedures, in combination with reductions to the IRS budget,
have resulted in a significant drop in training dollars expended per
employee. For example, the IRS spent $1,450 per employee on training in
FY 2009, compared to $489 per employee in FY 2017, a level that is
about one-third of spending 8 years ago.\76\ Training dollars per
employee in the Wage and Investment Operating Division were $87 per
employee in FY 2017.\77\ Because of budget restrictions, business unit
commissioners and heads of office have learned not to request or
prioritize significant face-to-face training, which I believe is the
most effective way to train employees with customer-facing duties.
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\76\ See National Taxpayer Advocate 2017 Annual Report to Congress
84-92 (most serious problem: Employee Training: Changes to and
Reductions in Employee Training Hinder the IRS's Ability to Provide Top
Quality Service to Taxpayers).
\77\ Id. at 85.
Instead, the IRS is making due with inadequate virtual training and
is not utilizing the current technology and approaches available to
universities and businesses that have mastered the art of distance
learning. The IRS also underutilizes external tax professionals as
trainers. Taxpayer representatives and academics would welcome the
opportunity to interact with IRS technical, service, and compliance
employees, and their participation would provide a balanced perspective
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on tax compliance and taxpayer interaction.
With a tax law as complex as the Internal Revenue Code and with
human experiences as varied as they are, it is difficult in the best of
times to apply the law accurately and fairly. But reductions in
training at the levels experienced at the IRS are having significant
impact on taxpayer trust and confidence in the tax system. In fact, the
Forrester Customer Experience survey cited above found that only 13
percent of IRS customers seek its expertise, which is less than half of
the Federal agency average of 32 percent.\78\
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\78\ Rick Parrish and Margaret Rodriguez, Forrester, The U.S.
Federal Customer Experience Index, 2018: How U.S. Federal Government
Agencies Drive Mission Performance With the Quality of Their Experience
10-11 (May 31, 2018).
Recommendation: Direct the IRS to appoint a Chief Training
Officer who has significant educational and training experience
in academia or the private sector and who will chair the
training review board and work with the heads of office to
develop a robust training plan, including face-to-face and
sophisticated distance learning approaches.
d. conclusion
The IRS today faces significant challenges. Due in part to the
combination of more work and reduced resources, it has fallen behind
significantly on customer service and IT. The Forrester US Federal
Customer Experience Index report found that only 24 percent of IRS
customers say they speak well of the IRS and only 20 percent of
customers say they trust the IRS.\79\ That is not a recipe for
maintaining or increasing voluntary tax compliance. Because of the
critical importance of the tax system, these are serious challenges
that must be addressed.
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\79\ Id. at 11.
The good news is that I believe that, with congressional support,
these challenges can be addressed. In this statement, I have tried to
provide my perspective on the biggest challenges the IRS faces and
offer recommendations to address them. I look forward to working with
you to make the IRS the best agency it can be--an effective tax
collector that operates efficiently while providing world-class
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taxpayer service and respecting taxpayer rights.
______
Prepared Statement of Hon. Rob Portman,
a U.S. Senator From Ohio
Good morning; this hearing will come to order. This morning we
convene the Senate Finance Subcommittee on Taxation and IRS Oversight
to discuss an important topic: ``Improving Tax Administration Today.''
This hearing presents a great opportunity to examine current issues
related to tax administration at the IRS, with a particular focus on
customer service, information technology, interaction with
practitioners, low-income taxpayers, and tax administration issues
related to workers in the gig economy and 1099 filings. Before we
begin, I want to thank Chairman Hatch and Ranking Member Wyden for
giving us the opportunity to hold this hearing and our subcommittee
ranking member Senator Warner for being here with me today.
Improving tax administration at the IRS is not only an important
topic, but a timely one. This past weekend was the 20th anniversary of
the passage of the IRS Restructuring and Reform Act of 1998, which is
the last time Congress enacted a major overhaul of the agency. During
the late 90s, there was a clear need for reform at the IRS. Calls with
questions for the IRS went unanswered by the thousands, and the calls
that were answered were often incorrect. The agency had also spent $3
billion on IT systems that weren't working. Bottom line: the American
public had lost faith in the agency.
In response, Congress put together a commission that I had the
honor of co-chairing with then-Senator Bob Kerrey. We published a
comprehensive report that became the basis for the legislation 20 years
ago. That legislation, which Senator Cardin, Chairman Hatch, and
Ranking Member Wyden all took leadership roles on, led to a long period
of substantial improvements at the IRS. Unfortunately, in recent years
that period of sustained improvement has unraveled as the agency
suffers from some of the same issues that plagued it in the mid-1990s.
Once again, the agency tasked with helping Americans carry out one of
their most basic duties is failing to serve taxpayers in an effective
manner.
Because of these issues, I believe there is an opportunity for this
Congress to get the IRS back moving in the right direction. Congress
should act to meaningfully reform the agency, and I applaud the efforts
of Chairman Hatch and Ranking Member Wyden, as well as the House, for
the solutions they've offered to advance IRS reform.
I think there is much more to be done, however, which is why today
I introduced with Senator Cardin the Protecting Taxpayers Act--
bipartisan legislation to make the IRS more responsive and accountable
to taxpayers. This legislation aims to reform the agency through six
key goals: (1) revitalize the IRS organizational structure and
management; (2) increase taxpayer protections and modernize enforcement
procedures; (3) improve small business and retirement plan tax
administration; (4) better serve low-income taxpayers; (5) overhaul the
IRS appeals process; and (6) strengthen the IRS IT infrastructure.
I wanted to highlight a couple of provisions from this bill I feel
will be critical to reforming the agency and that I'd love to get
feedback on from our witnesses. First, our bill completely rethinks one
of the key provisions of the 1998 reform bill--the IRS Oversight Board.
When we originally thought of the idea of this board in 1998, our
intent was to create a board of directors for the IRS that would help
guide the direction of long-term strategy at the agency, provide
private-sector experience and expertise, and hold senior management
accountable. The Board started off pretty well, but then because of
lack of support by really every administration, it has since fallen by
the wayside. The Board suspended operations a couple of years ago, and
there is technically only one member left out of nine. If we were able
to get this board not just functioning again, but functioning in the
way we originally intended, I think it has a lot to offer in turning
the agency around in areas such as customer service, IT modernization,
and budgeting effectively.
I also wanted to mention the reforms we're making to the IRS
appeals process. In the 1998 reform bill, we created more than 50 new
taxpayer rights, including the right to an independent appeal of an IRS
decision. Three years ago, we took those rights a step further by
codifying 10 of them in a Taxpayer Bill of Rights, which included that
right to an independent appeal. Yet in recent years, access to an
independent appeals process has declined as more cases than ever are
being sent to Tax Court, amounting to a 70-percent increase since 2000.
Further, the IRS continues to issue new guidance and procedures to make
it harder for all taxpayers to access the appeals process. The
Protecting Taxpayers Act aims to reinforce this taxpayer right through
an ambitious set of reforms, ensuring that we resolve as many tax
controversies in an equitable manner.
Overall, I think it's clear--and I'm sure we will hear as much from
our witnesses today--that Congress needs to build on the progress we
made in 1998 and engage in a new set of reforms at the IRS. I am
interested to hear from my colleagues and the witnesses here about ways
we can improve tax administration at the IRS, and I look forward to
working with all of you as we work to make the IRS more responsive and
accountable to the American taxpayer.
______
Prepared Statement of John Sapp, Chair,
IRS Electronic Tax Administration Advisory Committee
Chairman Portman, Ranking Member Warner, other members of the
subcommittee, good afternoon.
Thank you for inviting me to testify at this hearing on ``Improving
Tax Administration Today.''
My name is John Sapp, and I am just finishing my tenure as Chair of
the IRS Electronic Tax Administration Advisory Committee (ETAAC).
As you know, ETAAC was created by Congress in the IRS Restructuring
and Reform Act of 1998. It has a diverse membership of individuals from
the State departments of revenue, private industry, including the
payroll community, and consumer groups. This diversity allows the IRS
to receive a wide variety of perspectives on electronic tax
administration and its impact on taxpayers.
ETAAC's primary focus was initially on researching, analyzing, and
advising the IRS on its electronic tax administration strategy and most
specifically on achieving the goal of receiving at least 80 percent of
major tax return types electronically. ETAAC is pleased to report that
it estimates that IRS will achieve its 80-percent goal this filing
season for all major return types.\1\ More recently, ETAAC's charter
was expanded to include a focus on the urgent issue of Identity Theft
Tax Refund Fraud (IDTTRF) and information security. This expanded focus
reflects the ever-changing threat environment for electronic tax
administration.
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\1\ ETAAC takes a broad view of ``major'' returns, including
employment, corporate, partnership, fiduciary, and exempt organization
returns. The IRS achieved 80 percent for the 1040 series of returns
several years ago.
This year, ETAAC's Annual Report to Congress continued to focus on
the work of the IRS Security Summit--an unprecedented collaborative
effort lead by IRS to engage State governments and private industry to
work together to fight IDTTRF and protect American taxpayers. Although
we can never declare final victory over the criminal elements attacking
our tax system, the Security Summit has made significant progress in
the fight. That progress has been enabled by strong IRS leadership, the
support of both the States and private industry and a collaborative
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mindset of all participants.
I am pleased to represent ETAAC today to provide a perspective on
tax administration. After providing some brief context, I will offer my
thoughts on the following four principles concerning IRS electronic tax
administration illustrated with specific recommendations made by ETAAC
in its 2017 and 2018 Reports to Congress:
Security.
Accessibility.
Taxpayer control.
Collaborative development.
electronic tax administration operates in a challenging environment
Initially, I would like to set context regarding some challenges
facing electronic tax administration.
First, the need to supplement traditional IRS service delivery
channels (phone, in person, etc.) is obvious. Electronic services--
online but increasingly mobile--are an essential element in enhancing
IRS's overall service channels. Both consumers and businesses expect to
be able to conduct much of their business electronically, but they also
expect to be able to talk with someone when necessary.
Second, electronic services operate in a high threat environment.
The subcommittee is well aware of the cybersecurity threats facing our
Nation. Cyber-
criminals are well-funded and very capable. They continue to target our
tax system to obtain tax refunds fueled by the theft of personal
information from a variety of government and private sources, most of
which are external to our tax system. This fight will never end--as we
close one door, the criminals look to find another. We need to raise
our cybersecurity game across the board.
Third, like all consumers, taxpayers have high expectations for
electronic services. They expect them to be secure, easy to use and
integrated into their existing workflows. In ETAAC members' experience,
the adoption rate for isolated or stove-piped solutions is not high--
integrated solutions have higher adoption rates over time. A good
example of this is electronic filing, which has been integrated into
the tax software solutions used by taxpayers and tax professionals.
However, some taxpayer expectations are in tension with one
another. For example, secure solutions necessarily require effective
identity proofing and authentication--potential users must be able to
prove they are who they say they are to gain access to ``their''
sensitive personal information. Traditional digital identity proofing
solutions are typically somewhat tedious multi-step processes. As a
result, security can be in tension with ease of use and accessibility--
a particularly challenging balance to achieve.
Of course, ease of use and accessibility are elements of the
overall customer service experience. Taxpayers who find electronic
services difficult to use, or who are unable to access such services,
understandably will revert to call IRS assistors or visit IRS offices
to meet their needs.
principles for taxpayer-facing systems
With this context, I will summarize some specific ETAAC
recommendations supporting the key principles for electronic tax
administration mentioned above--security, accessibility, taxpayer
control and collaborative development.
electronic services must be secure
Security is a prerequisite for any electronic solution to be
adopted, and standards are a foundational element for any secure
system. In its 2018 Report, ETAAC identified potential gaps in the
security standards covering our individual and business income tax
systems. Specifically, the most prevalent security standard currently
covering ``tax preparers'' is limited to those serving consumers--I'm
referring to the FTC Safeguards Rule, which was implemented pursuant to
the Gramm-Leach-Bliley Act (GLB).
Additionally, it is unclear whether the IRS has the authority to
set or enforce minimum security standards for tax preparers,
particularly because of the Loving and other cases which specify
limitations on IRS' ability to ``regulate'' tax preparers.
ETAAC believes our tax system requires a high-level security
standard, such as the one articulated in the FTC Safeguards Rule.
Further, we believe IRS should have the authority to set and enforce
security requirements for our tax system.
electronic services must be accessible
As I mentioned above, IRS's ability to remotely identity proof and
authenticate taxpayers in a secure and reliable manner is a key enabler
for electronic services. These are the processes by which the IRS
collects, validates, and verifies information about a taxpayer to
ensure the applicant is who they claim to be to a stated level of
assurance. Digital identity management presents a technical challenge
because it involves proofing and authenticating individuals over an
open network, which presents opportunities for impersonation and
attacks leading to fraudulent claims of a subject's digital identity.
The IRS has several online services with different levels of
assurance. Some services provide access to less sensitive information
such as refund status whereas others require the highest level of
assurance because of the sensitivity of the information, e.g., Get
Transcript Online, Get an IP PIN, IRS e-Services and the taxpayer
online tax account.
The IRS's current remote identity proofing solution is the Secure
Access identity management platform. Generally, Secure Access requires
the taxpayer to successfully complete a process of validating their
identity using personal information, an email address, third party
public information and a cell phone. The IRS has constantly evolved its
current Secure Access identity proofing platform, but it still has its
limitations. For example, certain segments of the population may not be
able to validate themselves digitally using Secure Access because of an
insufficient public record or an inability to complete cell phone
validation. While there may be alternative authentication methods
provided by the IRS, the inefficiencies they create are cumbersome.
In our experience, the IRS is taking a deliberate, studied approach
to identifying and pursuing solutions to this challenge. It is looking
for ways to both protect taxpayer data and, simultaneously, enable more
taxpayers to identity proof remotely. It is also considering solutions
under development in both the governmental and private sectors. Of
course, digital identity management is a broader challenge for all of
government, not just the IRS.
ETAAC has made two recommendations in this area.
First, the IRS should continue to collaborate with key stakeholders
to help IRS identify, test and implement new identity proofing and
authentication solutions. This innovation effort should be done in a
way that manages risks, but stakeholders should not expect zero
defects. Innovation necessarily involves a mix of successes and
failures. Small pilots can help to manage these risks.
Second, remote identity proofing solutions have inherent
limitations and challenges. We have already mentioned the difficulty of
navigating Secure Access to gain access to and use online solutions.
For that reason, ETAAC's 2018 Report encouraged IRS to consider options
to expand in-person identity proofing opportunities. The IRS may be
able to leverage its existing physical locations for this purpose, or
those of other government agencies with a larger and more diverse
physical presence such as the Social Security Administration.
Additionally, our Report offered another option for the IRS to
consider--the creation of a ``Trusted Third Party'' program to expand
the availability of in-person taxpayer identity proofing. To illustrate
this approach, we referenced IRS's previously created Certified
Acceptance Agent (CAA) Program to improve access to Individual Taxpayer
Identification Numbers (ITINs). A CAA is a person or an entity
(business or organization) who, pursuant to a written agreement with
the IRS, is authorized to assist individuals who do not qualify for a
Social Security Number but still need a Taxpayer Identification Number
(TIN) to file their taxes. The CAA facilitates the application process
by reviewing the necessary documents, authenticating the identity when
possible and forwarding the completed forms to the IRS. Applicants to
become a CAA must complete a rigorous application process, including
submitting an application and finger print cards, as well as completing
mandatory training.
Adapting the Certified Acceptance Agent (CAA) Program model to this
need may also correspond with taxpayer expectations. Most taxpayers
expect their tax professionals or tax service providers (whether paid
practitioners, software providers or volunteers in the VITA, TCE or
LITC programs) to assist them in engaging with or accessing information
from the IRS. Since these third parties are already reviewing physical
identification documents in connection with tax preparation or may have
other avenues for confirming identity not readily available to the IRS,
they represent a possible opportunity to help identity proof taxpayers.
ETAAC believes this option is worthy of consideration, likely starting
with a small pilot program to test the concept.
An obstacle to this interaction may be the filing of Powers of
Attorney on behalf of taxpayers by their tax preparer or
representative. ETAAC has recommended (as have others) that the IRS
enable the secure online submission of Powers of Attorney (Form 2848),
which currently must be mailed or faxed.
Accessibility and ease of use are likewise considerations for IRS
electronic services used by tax professionals. Difficulty in using or
accessing tax professional services will again, potentially drive them
to traditional IRS customer service channels, most particularly
telephone assistors or tax professional hotlines.
electronic services must be under taxpayer control
Taxpayers must be ``in control'' of their services. For example,
our 2018 Report mentions the benefits of taxpayers having the ability
to provide access to their account information to their chosen tax
service providers, whether tax professionals or software. However,
taxpayers must always have the ability to control any such permissions
whether at the time of any initial grant or on an ongoing basis.
Additionally, any third parties that might be granted such access must
meet some important thresholds such as completing background checks and
meeting information security requirements.
On a related note, ETAAC made two recommendations in 2018
associated with taxpayer control. First, we recommended (as have other
advisory committees) that the IRS continue to evaluate the concept of
``account lock and unlock'' feature as described in our Report. Second,
we support the idea of expanding eligibility for the Identity
Protection Personal Information Number (IP PIN) to all taxpayers, which
others have supported including the National Taxpayer Advocate.
electronic services should be collaboratively developed
The development of electronic services that consumers will actually
use is not as easy as it might seem. As pointed out in our 2018 Report,
consumers will often ``tell'' you that they will use some proposed
service that seems beneficial. In fact, that is often not the case.
Instead, as it attempts to develop electronic solutions, it is
essential that IRS take advantage of the insights available from a
variety of sources and stakeholders including taxpayers, States, tax
technology providers, tax professionals, VITA providers and others.
Additionally, product research is essential, but not sufficient. We
believe the IRS should continue to test ``minimum viable services'' to
see how taxpayers and tax professionals will actually use any online
services, not just how they say they will use them.
For that reason, ETAAC recommended that IRS take a collaborative
approach to developing online and mobile services. The Security Summit
is a great example of the benefits of a collaborative approach.
conclusion
In conclusion, IRS has been an engaged, collaborative and
constructive partner in support of ETAAC's work with the Security
Summit. ETAAC believes the improvement of tax administration can
benefit from a collaborative effort.
Moreover, as we pursue initiatives to improve electronic tax
administration, ETAAC encourages all of us to remember the guiding
principles of:
Security.
Accessibility.
Taxpayer control.
Collaborative development.
Thank you again for the opportunity to provide my thoughts today. I
am ready to answer any questions to the best of my ability.
______
Prepared Statement of Rebecca Thompson, Project Director,
Taxpayer Opportunity Network, Prosperity Now
Chairman Portman, Ranking Member Warner, and members of the
subcommittee, thank you for the opportunity to testify before you on
``Improving Tax Administration Today.'' It is a privilege and an honor
to speak with you about the Volunteer Income Tax Assistance (VITA)
program. For nearly half a century, the IRS has enlisted the support of
community partners leveraging the strength, skill, and good will of
tens of thousands of volunteers to provide free tax preparation and
filing for low-income Americans during the annual tax filing season.
VITA volunteers come from all walks of life and endure a rigorous
training and certification process to help low-income, elderly,
disabled, and limited English-speaking tax filers fulfill their civic
obligation by filing an accurate tax return, claim Federal and State
credits for which they are eligible, and access other financial
capability building services to strengthen their family's household
financial well-being at tax time.
In my role as the project director of the Taxpayer Opportunity
Network, I lead a national network of more than 2,500 stakeholders,
including VITA volunteer program managers, site coordinators,
volunteers, community, corporate and philanthropic partners, and
others. Our Network serves as a convening body for VITA practitioners
and stakeholders, providing a way for them to connect with one another,
developing and distributing tools, resources, information and providing
capacity-building support to strengthen VITA programs, ensure quality
return preparation, and help to extend the reach of the VITA program to
more low-income Americans.
For the last 8 years, I have spent nearly every Saturday, and many
a weekday from January through April, in a VITA site. I have always
enjoyed working in VITA sites, either through my prior roles as a VITA
program manager, there to ensure that things run smoothly, or as a
volunteer, using a unique skill set that I've acquired to help average,
everyday Virginians.
For the last 2 years, since transitioning to my current role at
Prosperity Now, and moving to Northern Virginia, I have had the
pleasure of serving as a VITA volunteer co-site coordinator and quality
reviewer with the Northern Virginia CASH Campaign, at the Employment
Resource Center at the Prince William County A.J. Ferlazzo Building in
Woodbridge, VA. Every Saturday morning throughout the filing season, I
rise from my bed, much earlier that I would like to, and make my way
down to the Ferlazzo building, joining about 10-12 other volunteers at
my site, over 1,200 volunteers in Virginia, and 55,000 volunteers
nationwide, to help low-income, hard-working Americans meet their civic
obligation by filing a tax return.
Our site is a small one, only open on Saturdays, serving just over
300 households. On average, our clients earned close to $25,000 last
year. That's not a lot, especially for a family living in Northern
Virginia, and I often wonder how they make it. I'm fortunate, that as I
take the time to review their tax return with them, we can chat, and I
learn how they make it through, and share any information and resources
I can to help them until I see them next year. I can vividly remember
the first return I prepared at the Ferlazzo Building tax site. He was a
single father, raising three young children. He had been unemployed for
part of the year, and in addition to his unemployment statement, he had
about three W-2s, where he was trying to piece together enough income
to support his family. He had gone to a paid preparer to have his
return prepared, but when he was quoted an estimate of $382 for his
preparation and filing, he decided to look for an alternative, and he
found us. The return wasn't complex, it only took me about 30 minutes
to do, but it saved him almost $400 and he was very grateful for the
assistance.
This year, 315 volunteers at 15 sites in the Northern Virginia CASH
Campaign served 4,300 households, with an average Adjusted Gross Income
of just over $25,000. I always knew that northern Virginia was one of
the most affluent regions in the country. Volunteering in a VITA site
has helped me see the other side of the coin.
During the 2018 filing season, 24 VITA coalitions operating 121
VITA sites across the Commonwealth of Virginia (central Virginia,
Tidewater, northern Virginia, Piedmont, and western Virginia) helped
over 33,500 individuals and families file their tax return for free.
Together we gave more than 60,000 volunteer hours in training and tax
preparation in Virginia, bringing back almost $35 million in Federal
refunds, including just under $12 million in EITC refunds, and saving
Virginians over $6 million in tax preparation fees.
Nationally, more than 4,000 VITA sites helped 1.4 million
households by preparing and filing their tax return for free. In
addition to preparing and filing tax returns, many VITA sites connect
the families we serve to public benefits, financial education and other
financial capability services, such as financial coaching and credit
building, providing strength and support to a family's financial
future.
At their core, VITA volunteers are gifted translators with big
hearts. We endure a rigorous training regimen that can in some cases
take as much as 24 hours, and pass a certification test annually, so
that we are well-equipped to translate what can be a daunting and
complex tax code for our clients, into a meaningful representation of
the life of the people we serve. We do it through conversational
interviewing, using IRS Form 13614-C as a guide, to ensure we deliver
high quality, accurate returns for the low-income, underserved,
elderly, rural, disabled, and limited English-speaking populations in
communities across America. And at the end of each return, there is an
extensive quality review process, that involves reviewing the completed
tax return with the client to ensure they understand how their life
over the previous year has translated into their tax return, along with
the acknowledgement that while we have done our part in assisting them,
ultimately the responsibility for the information contained in that
return lies with them. This process has consistently yielded
unparalleled quality results, above 90 percent for the last several
years, and 93 percent for the most recent filing season.
Last year, IRS Stakeholder Partnerships Education and Communication
(SPEC) organization, which has oversight for the VITA and TCE programs,
estimated that over 5.2 million lives were touched by our collective
work. That includes all the people (spouses and dependents) who are
covered and represented by the 1.4 million tax returns we prepared. For
all the great work that we do, and all the people we serve, two things
remain lacking. First, after nearly 50 years in operation, the VITA
program has never formally been authorized by Congress. Formal
congressional authorization will put the VITA program on sure footing,
ensuring that you recognize the value we bring to the American people
we serve, and acknowledging that we should keep up the good work.
Second, the VITA program lacks adequate funding. In December 2007,
Congress first appropriated funds to the IRS to establish and
administer a 1-year matching grant program in consultation with the
Taxpayer Advocate Service. VITA grant funding has grown from $8 million
in 2007, to $12 million in 2012, to $15 million in 2015. Still, there
are millions of low-income, elderly, disabled, rural, underserved, and
limited English-speaking populations who could benefit from our
service, but we are constrained by our current funding level in our
ability to reach and serve them.
During the last grant cycle, 243 community partners were awarded
the VITA grant. Seventy percent (70 percent) of VITA sites are
sponsored by organizations that receive grant funding from the IRS
while thirty percent (30 percent) are wholly funded and operated by
their sponsoring community partners who so greatly believe in the work
we do and the impact it has in their communities, that their
organizations bear the cost of operating a VITA program with no
financial support from the IRS.
For its $15-million investment in the VITA grant program, Federal
funds which must be matched dollar-for-dollar by either cash or in-kind
contributions, the cost per return to the Federal Government is $14.74.
Doubling VITA grant funding to $30 million will help the IRS extend
more financial resources to support more community partners, which will
in turn increase their ability to devote time to recruiting, training
and managing volunteers, to purchase equipment, such as laptops and
printers, to pay for Internet service, to develop and to execute
creative and innovative strategies to deliver services more
effectively, and to market the program to extend their reach and serve
more people.
Volunteering in a VITA site helps to keep me grounded. I witness
first-hand and come to understand the unique and sometimes complex
challenges that low-income Americans face. Volunteering also helps me
to see the impact of the work I do during the week, and to get to know
the people who are impacted by the time I spend working on projects at
my desk, or in meetings. It brings my work to life and helps me see
things from the perspectives of the volunteers and clients. I get a
``boots-on-the-ground'' view that helps me to identify needs, and
opportunities for program and process improvements that I take back to
my job during the week and apply it in meaningful ways that will
ultimately make life a little better, a little easier, and improve the
financial well-being of those we serve collectively.
As I go about my daily routine, everywhere I look, I see potential
VITA clients. They're helping me get to work--conductors on the
commuter train, driving the Metro. They are in the grocery store,
helping me make my weekly purchases of food and household items for my
family. When I went on vacation earlier this summer, they were all
around me, from the front desk to the cleaning staff at hotels. They
were in the airports, working in all different capacities to help me
and my family get to and from our destinations. When I go out to eat on
occasion, they're all around me, serving, cooking, and cleaning in the
restaurants I visit. They are teaching my children, serving as school
support staff, administrators, and janitors. They are seniors drawing
Social Security but still working to make ends meet, like the cafeteria
worker who feeds my son lunch during the school year. She told me that
she was using her refund to cover her household expenses during the
summer months because she doesn't work when school isn't in session.
She had paid almost $300 over the last several years to have her return
prepared. This year she decided that she just couldn't afford to pay
someone to do her taxes. She found out about our service at the county
office, where our site is located on Saturdays, when she went there to
apply for SNAP benefits. Many folks are unaware of this diamond in the
rough that we call VITA. Others swear by it and tell friends and
relatives about the great service they found that can save them
hundreds of dollars, all while providing information about and access
to other resources that can help improve their family's financial
future.
VITA clients, both current and potential, are hard-working,
everyday Americans. They give so much, are the very fabric of America,
and they serve me and my family every day. Helping them as many of them
as we can to fulfill their civic obligation by filing an accurate
return, accessing and claiming all the credits and benefits they're
entitled to, and doing it for free, all while connecting them to
resources and information that can improve their family's financial
well-being, by making the VITA program permanent, with adequate
funding, is the least we can do for them.
Thank you again, Chairman Portman and Ranking Member Warner, for
providing me with this opportunity to share information with the
subcommittee about the VITA program. I look forward to answering any
questions you or the other members may have about it at this time.
______
Prepared Statement of Hon. Mark R. Warner,
a U.S. Senator From Virginia
Thank you, Mr. Chairman. And I'd like to thank you for your long-
term interest in this subject. I know you and Senator Cardin have been
leaders in this field, as have Chairman Hatch and Ranking Member Wyden.
We know the notion of tax administration doesn't necessarily sound
that exciting, but this is the front line of how Americans intersect
with the Federal Government. The effectiveness of that intersection and
the customer service at that intersection are very important. Let's
face it, no one loves paying taxes, but if we can make that payment of
taxes more efficient, more user-friendly, more fair, I think an
obligation that we all have to take on as citizens will at least become
less painful.
The title of this hearing is ``Improving Tax Administration
Today,'' but let me raise two issues about the tax administration of
tomorrow.
Over the last few years, I have spent a lot of time looking at the
changing nature of work. I think we are moving into an environment
where classic W-2 full-time employment--where folks go work at the same
firm for 35 years--is a thing of the past. Part of that is driven by
economic circumstances, part of that is driven by, frankly, the choices
of millennials. We have seen the emergence of a number of new
platforms, the so called ``gig economy.'' I believe that people moving
forward may not have a single income stream, but multiple income
streams. They may be an IT consultant starting their own business,
driving for Uber, and renting out their apartment on Airbnb. Frankly,
the tax administration burden in this new economy is enormously
challenging. We need to have a tax administration system that doesn't
impede on individuals who are trying to become more entrepreneurial and
actually utilize these services and platforms, while making tax
compliance for them easier.
I have called for two studies, one from the GAO and one from the
Treasury Department, to try to look at the size of this workforce and
how they interact with the tax system. The recent BLS study indicated
that there is not that much growth in this field. I will accept that
data, but I don't think it was complete enough. I have seen estimates
from government and non-government sources that literally show close to
one third of the American workforce is at least receiving some of its
income from contingent work.
So how we think about tax administration, how we think about even
the concept of a social contract, I would argue means we need to move
to a portable benefits systems. If we move to a portable benefits
system, we've got to have flexibility on the tax administration side as
well.
The other item that I think is an ongoing challenge is IRS
technology. We've all seen the IRS make good faith efforts to get its
technology up to date. Sometimes those good faith efforts have not
panned out. But something is wrong with our overall Federal Government
when we spend $90 billion a year on IT, but a huge share is spent on
maintaining and trying to upgrade legacy systems. My hope is, as well,
we can get into the question of how we could create a technology-
enabled modern tax system. If the Congress has to bite the bullet and
go all-in to fully upgrade the Federal IT system, then maybe we need to
have that kind of discussion.
Again, I want to thank the chairman for having this hearing, and I
look forward to hearing from our witnesses today.
______
Communications
----------
Statement Submitted by Jeffrey M. Blum
Law Offices of Jeffrey M. Blum
7106 Meadow Ridge Drive,
Louisville, Kentucky 40218,
Telephone (502) 494-2889, Fax (502) 749-2949
[email protected]
Introduction
I have been representing the owners of Country Folk Art Shows, Inc.
(``CFAS''), a fully lawful family business, since the summer of 1994.
CFAS has been victimized by one of the first and largest improper civil
asset forfeitures conducted by IRS agents. Approximately four million
dollars has been unlawfully taken and despite repeated court rulings
and a review conducted by the Deputy Attorney General (initiated by
Attorney General Ashcroft, and conducted by Deputy Attorney General
Comey and Associate Deputy Attorney General Catherine O'Neil), all
directing the IRS to return the money as tax refunds, the IRS has done
nothing but stonewall since first being directed to address refund
claims in 2002. The extensive, well-
documented tax refund claims have repeatedly been ``lost,'' and
inaction has been justified by saying that mere theft of assets by
agents does not justify a tax refund until the Commissioner writes a
letter crediting the money as tax payments.
The details of the circumstances surrounding this illegal
forfeiture, which include the Sixth Circuit Court of Appeals reasons
why the money should be returned as tax refunds, are explained in the
statement that I submitted for the record of the whole Finance
Committee's confirmation hearing for Commissioner Designate Charles
Rettig that was held on June 28, 2018. I will not repeat them here.
This statement will focus on the failure of IRS oversight that we have
experienced to date. Specifically, I am sorry to say, direct personal
involvement by the National Taxpayer Advocate Nina Olson appears to
have been used on two occasions to assist in perpetrating acts of fraud
and larceny designed to facilitate the unlawful taking of four million
dollars. On both occasions Ms. Olson nullified a large amount of good,
careful work by her subordinates, Regional Taxpayer Advocate based in
Cincinnati, Joseph W. Budd, in 2006, and District of Columbia Taxpayer
Advocate, Glen Thomas this past year.
The illegality of what Ms. Olson appears to have been trying to
achieve can be explained quite simply, even though the initial taking
occurred in 1992-1993, well before Ms. Olson assumed her current
position in 2001. Her wrongful acts have been rooted in a combination
of ignorance, arrogance and abuse of bureaucratic authority. In
September, 1992 our clients, the owners of Country Folk Art Shows, Inc.
(``CFAS owners'' or ``the taxpayers'') owed an agreed upon amount of
$5.3 million to the IRS and wanted to pay off their debt quickly. At
the request of the United States Attorney for the Eastern District of
Michigan they agreed to tender slightly over four million dollars in
assets in a Consent Judgment of Forfeiture. This unusual method of
first installment payment was possible because the owners and the
United States agreed that all the income in question had been lawfully
derived from the gate receipts of country folk art exhibitions
conducted nationally, and the then IRS Assistant Commissioner in Charge
of Criminal Investigations had promulgated a policy that forfeiture of
lawfully derived assets for ``structuring'' could only be used to pay
down tax liability, not for other purposes such as providing additional
bounty for IRS agents and agencies. Because the amount of tax liability
had been agreed upon, the only additional allegation involved the
amorphous charge of ``structuring,'' and the CFAS owners had been
assured that the Assistant Commissioner's policy would be followed, the
agreement embodied in the Consent Judgment was clear. Their remaining
tax liability should have been $1.3 million, and that appeared to be
the case until about three months after the assets had been tendered.
Then suddenly it was raised back up to $5.3 million based on a claim
that every time the owners deposited their regular cash income in the
bank, it was a ``structured deposit'' that could be forfeited over and
above any tax liability.
Soon after I was retained we learned that the government had not
been using the actual law against structuring a single transaction in
currency, 31 U.S.C. Sec. 5324(a)(3), but an imaginary law designed to
mimic it. Because the imaginary law had no ``single transaction''
requirement, it was much broader and made many of the nation's
legitimate cash businesses vulnerable to having years of income
forfeited after the fact. The CFAS owners' currency structuring
convictions were swiftly vacated by the original trial judge in 1997,
but it took all the way until August 6, 2008 for the United States to
concede on the record of the Sixth Circuit Court of Appeals that the
forfeiture had not been based on any structured transactions. The only
other possible explanation for the tender of four million dollars,
apart from it being part of some sort of IRS fraud scheme, was that it
was payment of a tax liability. Because the same taxes can only be
collected once, not twice, the Court of Appeals pointed to tax refunds
under the Internal Revenue Code as the proper means of repayment.
After D.C. Taxpayer Advocate Glen Thomas had worked on this matter
for several months earlier this year Nina Olson intervened and
announced a new IRS policy, to be applied retroactively to September
1992, that any use of the word ``forfeiture'' in an agreement to tender
assets meant that the IRS was entitled to keep the money over and above
payment of any tax liability. In doing so she ignored over a hundred
pages of documentation that had been provided to the D.C. Taxpayer
Advocate showing that this could not possibly be true. Conversely, if
Ms. Olson's pronouncement is an accurate statement of IRS policy, then
it, read in conjunction with the Service's prior handling of this
matter, means that this is a fundamentally lawless agency that cannot
be trusted to handle money.
Shortly before Ms. Olson intervened I had prepared a formal Request
for a Taxpayer Assistance Order pursuant to 26 U.S.C. Sec. 7811 and 26
CFR 301.7811-1 that was delivered to Mr. Thomas on March 14, 2018. I am
now incorporating that formal request into this statement as an
appendix to this statement. I request specifically that Ms. Olson be
held accountable and required to meet with a representative of the
Finance Committee or this Subcommittee to discuss our Request for a
Taxpayer Assistance Order, ideally with me being allowed to
participate. Our request is important even beyond the particular case.
It contains within it an exposition of statutory and regulatory
authority showing that under the statute and pertinent regulations this
is an instance where issuance of a Taxpayer Assistance Order is
mandatory, not discretionary with Ms. Olson. As such the Country Folk
Art Shows matter and the Taxpayer Advocate Service's handling of the
owners' Request for a Taxpayer Assistance Order provides a useful
bellwether to assist the Subcommittee on Oversight in determining
whether the Taxpayer Advocate Service under Ms. Olson's leadership is
an agency capable of functioning as intended, or is itself a body
offering only the illusion of substantive oversight that needs to be
reconstituted in order for statutory purposes to be given effect.
Sadly, if this matter is ignored, the United States will continue to
suffer two significant losses of legitimacy, one of which Ms. Olson
ironically decried in her testimony before the Subcommittee. The IRS
will continue its public relations nightmare stemming from its misuse
of an imaginary law against ``structuring generally,'' and Congress,
whose approval ratings are currently not the best, will likely be
suspected of offering only the illusion of substantive oversight. Those
suspicions will likely be highlighted by the Subcommittee having
brought in Ms. Olson to provide expert testimony on necessary oversight
while refusing to question her about her own most egregious acts.
Respectfully submitted,
Jeffrey M. Blum
Counsel for the Owners of Country Folk Art Shows
______
APPENDIX
The attached formal Request for a Taxpayer Assistance Order dated
March 14, 2018 (and commencing on the next page) is incorporated into
this statement because it is the document, the transmission of which to
National Taxpayer Advocate Nina E. Olson provides the crux of the
requested oversight.
______
Jeffrey M. Blum
Attorney-at-Law
_______________________________________________________________________
March 14, 2018
Mr. Glenn Thomas
D.C. Local Taxpayer Advocate
Taxpayer Advocate Service DCTA 3 Request for Taxpayer
Assistance Order
TA:DCLTA, K Suite 1500 By email attachment to
1111 Constitution Ave, NW [email protected] and fax to
Washington, DC 20224 (855) 810-2124
Dear Mr. Thomas:
PART ONE: REQUEST FOR A TAXPAYER ASSISTANCE ORDER
This letter outlines the Taxpayer Assistance Order now being
requested by our clients, explains why its issuance is explicitly
permitted by 26 U.S.C. Sec. 811 and the accompanying regulation, 26 CFR
301.7811-1, and documents the fact that it is mandated by
jurisdictional determinations already made by the IRS. The letter also
argues that the requested Order is either essential, or would at least
be very helpful, for bringing the IRS into conformity with the law, and
would not be inconsistent with the brief letter previously written by
Deputy Commissioner for Services and Enforcement, Kevin M. Brown on
January 16, 2007.
The Requested Order
``The Taxpayers, John E. and Virginia Long, and John Keith and
Rhonda Blakely, who have been self-employed owners of the small
business, Country Folk Art Shows, Inc., have had bona fide, properly
formalized amended refund claims pending since either March 11, 2002 or
April 2, 2002. The refund claims arose when the IRS overlooked its
obligation to credit these taxpayers' voluntarily tendered forfeiture
of approximately four million dollars in assets as tax payments and
assessed the same taxes, interest and penalties a second time. Despite
a July 25, 2005 request from the Deputy Attorney General of the United
States that the IRS act on the refund claims, the claims have never
been addressed and no Notice of Disallowance has ever been sent.
``This failure to act is due largely to the claims remaining with
the Criminal Investigations Division (CID) of the IRS nearly the entire
time, even though its Chief, Nancy Jardini, and counsel, Edward F.
Cronin, have been clear and emphatic in maintaining that IRS Criminal
Investigations does not have jurisdiction to address them. In 2003 IRS
Attorney Joanne Minsky correctly identified the Small Business/Self
Employed Division as the proper entity within the IRS that would have
jurisdiction over them. In light of the complexity of background
circumstances relating to the claims she suggested that counsel for
these taxpayers communicate directly with the then National IRS Counsel
for Small Business/Self Employed, Thomas R. Thomas. The current
Commissioner for the Small Business/Self Employed Division is Mary Beth
Murphy. The taxpayers' long pending refund claims should be referred to
Commissioner Murphy within thirty days for decision with a suggestion
that her counsel communicate directly with counsel for the taxpayers in
order to make an informed decision about how the claims should be
resolved. Such communication with counsel should include assurances
that the refund claims are now being addressed in a reasonably
expeditious manner.''
The Requested Order's Appropriateness Under 26 U.S.C. Sec. 7811 and
26 CFR 301.7811-1
Under 26 CFR 301.7811-l(a) ``the National Taxpayer Advocate (NTA)
may issue a Taxpayer Assistance Order (TAO) if, in the determination of
the NTA, the taxpayer is suffering or is about to suffer a significant
hardship as a result of the manner in which the internal revenue laws
are being administered by the Internal Revenue Service (IRS), including
action or inaction on the part of the IRS.'' (Emphasis supplied.) The
term ``National Taxpayer Advocate'' includes any designee of the
National Taxpayer Advocate. 26 U.S.C. Sec. 7811(f). The terms of a
Taxpayer Assistance Order ``may require the Secretary within a
specified time period-to cease any action, take any action as permitted
by law, or refrain from taking any action,'' Sec. 781 1(b), and any
Taxpayer Assistance Order issued by the National Taxpayer Advocate
under this section may be modified or rescinded--(1) only by the
National Taxpayer Advocate, the Commissioner of Internal Revenue or the
Deputy Commissioner of Internal Revenue, and (2) only if a written
explanation of the reasons for the modification or rescission is
provided to the National Taxpayer Advocate.'' Sec. 7811(c). ``In cases
where any Internal Revenue Service employee is not following applicable
published administrative guidance (including the Internal Revenue
Manual) [e.g., defying the IRS Litigation Guideline Memorandum
directing that `structuring' forfeitures of lawfully derived assets be
credited as tax payments; requiring IRS Criminal Investigations to
exercise authority only over matters within its jurisdiction], the
National Taxpayer Advocate shall construe the factors taken into
account in determining whether to issue a Taxpayer Assistance Order in
the manner most favorable to the taxpayer.'' Sec. 7811(a)(3).
The taxpayers in this case have experienced significant hardship in
three respects, including (B) a delay of more than 30 days in resolving
taxpayer account problems, (C) the incurring by the taxpayer(s) of
significant costs (including fees for professional representation) if
relief is not granted, and (D) a foreseeable possibility of irreparable
injury to, or a long-term adverse impact on, the taxpayer if relief is
not granted. Sec. 301.7811-1(a)(4)(ii). It has now been over 16 years
since the refund claims were fully submitted, over 12 years since the
Deputy Attorney General requested that they be processed, and over 9
years since all pertinent legal questions have been resolved in a
federal court of appeals. See part two of this letter, at infra.
Plainly, these time periods exceed 30 days. During this very prolonged
process the United States has forced the taxpayers to incur significant
costs, which have included the filing of an additional federal lawsuit,
as to which the government's only response was to contest venue and
seek exemption from the court's requirement that it state a position on
the merits. In addition, massive amounts of wasteful legal
correspondence have been elicited by a bizarre communications loop
whereby all the taxpayers' counsel's efforts to communicate with
appropriate decision makers have been re-routed to IRS Criminal
Investigations, which has responded uniformly that it does not have
jurisdiction over the matter. At the insistence of House of
Representatives government oversight personnel the acting director of
warrants and forfeitures for CID has communicated with the undersigned
and expressed sympathy, but refused to play any active, constructive
role in getting the refund claims referred to the correct division of
the IRS.
The possibility of irreparable harm has arisen from the history of
legal rulings in this case coupled with IRS refusal to acknowledge the
existence of the rulings pointing to tax refunds as the appropriate
vehicle for the Longs and Blakelys to have their overpayment returned
to them. Prior to the Sixth Circuit's published decision in Blakely v.
United States there had been repeated acknowledgments that they should
be getting money back and there were four possible avenues of redress.
The Sixth Circuit eliminated three of the four and specified procedures
to be followed with the fourth. The three eliminated avenues were (1)
having the consent judgment of forfeiture set aside, which was rejected
because the existence of tax liability in excess of the judgment at the
time of the judgment meant it was a valid consent judgment, (2) suing
the government under the Federal Tort Claims Act or some other
authorized tort remedy, which was rejected as being precluded by the
existence of a valid consent judgment, (3) a petition for remission
addressed to the Department of Justice, which was held to be voluntary
with DOJ, which declined to grant it but offered to help get the IRS to
act on tax refunds, and (4) tax refunds amended and filed in accordance
with the Sixth Circuit's opinion in Blakely.
In essence the Court of Appeals ruled, you may not get A, B, or C,
but you are entitled to get D. Deputy Commissioner Brown's letter of
January 16, 2007, see Part Two, infra, in essence said we have read the
court's opinion which says you may not get A, B, or C, and furthermore
the National Taxpayer Advocate has now overruled the Sixth Circuit
Court of Appeals to say you are not going to get D either. This is not
lawful because the National Taxpayer Advocate does not have the
authority to overrule a federal court of appeals. Worse yet, given the
other three rulings of the Sixth Circuit, there is the possibility of
the clients being deprived of all their assets through such unlawful
machinations. This would certainly constitute irreparable harm. The
National Taxpayer Advocate could, of course, invite the Longs and
Blakelys to file the same lawsuit again, but what would be the value of
winning point D again, if the National Taxpayer Advocate could simply
ignore and overrule the Court of Appeals, inviting the filing of a
third attempt to get the same result?
PART TWO: WHY THE JANUARY 16, 2007 LETTER OF DEPUTY COMMISSIONER
KEVIN M. BROWN HAS BEEN SUPERSEDED BY THE SIXTH CIRCUIT COURT OF
APPEALS ORDER OF AUGUST 6, 2008 AND MAY HAVE BEEN INAPPOSITE EVEN WHEN
WRITTEN
You have explained that the January 16, 2007 letter I received from
Deputy Commissioner for Services and Enforcement, Kevin M. Brown, needs
to be taken seriously regardless of its intellectual merit because of
the position he then held within the IRS. The letter made two points
that together led to the erroneous conclusion that ``there is no
further action to be taken by the Internal Revenue Service.'' These
were (1) ``The forfeiture action . . . has been litigated through
federal district court and the Court of Appeals and has been decided by
them,'' and (2) ``In addition the Taxpayer Advocate Service advised you
in a letter dated September 19, 2006 that Form 843 is not the
appropriate course of action for disputing the collection of forfeited
assets.''
``The Forfeiture Action,'' Which Was Then an Amalgam of Two
Different Cases in the Sixth Circuit Court of Appeals--and Now Includes
Three--Had Two Main Holdings, Each of Which Is Important.
The two original cases, Blakely v. United States (``Blakely'') and
United States v. Real Property at 6185 Brandywine Drive (``Brandywine
Drive'') addressed and resolved two questions. One was whether the
Consent Judgment of Forfeiture dated September 22, 1992 would be set
aside under Rule 60(b), Fed. R. Civ. Proc., and the other was if the
consent judgment is not set aside, what redress is available to
taxpayers if the consent judgment has resulted in double taxation.
Brandywine Drive made clear that the consent judgment would not be set
aside shortly, while Blakely determined that the imprimatur of
lawfulness established by the consent judgment would preclude tort
claims against the government, such as those of the Federal Tort Claims
Act.
However, both before and after Blakely and Brandywine Drive there
have been court decisions involving the Longs and Blakelys that have
pointed toward the need to return money to them. After the government
pointed toward the Longs' and Blakelys' guilty pleas on currency
structuring charges to support the assertion that the forfeiture was
for ``structuring,'' not tax collection, the District Court that had
sentenced the Longs and Blakelys vacated their currency structuring
convictions. Previously the Assistant Commissioner in Charge of IRS
Criminal Investigations and the IRS Litigation Guideline Memorandum had
made clear that currency structuring forfeitures of lawfully derived
assets (which everyone agreed these were) could only be used to pay off
tax liability.
Finally, in response to the IRS failure and/or refusal to follow
through on the Deputy Attorney General's request--and especially
Division Counsel Cronin's admonition of February 17, 2006, ``if your
clients remain unsatisfied with the outcome, they are free to take any
additional legal action they deem prudent; until such legal action is
pursued by the Longs and Blakelys, the IRS has no further action to
take in this matter''--I filed another Rule 60(b) motion largely for
the purpose of forcing the government to acknowledge that it had no
factual basis for the forfeiture apart from its use as a tax collection
measure. This conclusion had already been reached by the Deputy
Attorney General and was reflected in Associate Deputy Attorney General
Catherine O'Neil letter to IRS Criminal Investigations Chief, Nancy
Jardini, on July 25, 2005, which stated:
This office has been mindful of the fact that the factual basis
for the forfeiture appears to be closely linked with the facts
underlying the $5.3 million tax liability of the taxpayers.
Counsel for the taxpayers has advised us that he filed a refund
claim with the Internal Revenue Service pertaining to that tax
assessment on or about April 2, 2002. As you and I have
discussed, I am writing to suggest that your office undertake
its own review of the facts of the pending refund claim and
render a decision.
Once the action generated by the renewed Rule 60(b) motion
(``Brandywine Drive II'') reached the Sixth Circuit it quickly yielded
an Order making clear that the government had had no factual basis for
the forfeiture other than the Longs' and Blakelys' $5.3 million tax
liability. In response to a motion to supplement the record on appeal a
panel of three Sixth Circuit judges ruled that Plaintiffs:
. . . now move to supplement the record on appeal by requiring
the government to file with the court a list of structured
transactions. No such list was filed in the district court, and
that court did not consider a list of structured transactions
in ruling on the appellants' motion to vacate. The government
opposes the motion to supplement the record. . . . As noted by
the court in denying appellants' motion for a limited remand, a
list of structured transactions will not assist the court in
its consideration of the issue on appeal.
Order of motions panel filed August 6, 2008. (Emphasis supplied.)
The Order, which was rendered nineteen months after Deputy
Commissioner Brown's letter of January 16, 2007 and memorializes what
is in effect a second consent judgment, makes clear that the factual
basis for the forfeiture had never been a list of structured
transactions that would make those assets forfeitable independently of
their being used to pay off a tax liability. The government again
refused to provide any list, thus confirming what Associate Deputy
Attorney General O'Neil had told Chief of Criminal Investigations,
Nancy Jardini, that the forfeiture had been transacted to pay off most
of the $5.3 million tax liability.
After the August 6, 2008 Order it becomes easy to address Deputy
Commissioner Brown's other point about tax refunds not being ``the
appropriate course of action for disputing the collection of forfeited
assets.'' The answer is that the Longs and Blakelys are not now
``disputing the collection of forfeited assets.'' Rather, the point is
that now that everyone has agreed the forfeited assets could lawfully
be collected but only for the purpose of paying off tax liability, the
IRS decision to collect the same taxes, interest and penalties a second
time several months later--seemingly forgetting that they had already
collected them through the Consent Judgment of Forfeiture--had resulted
in double taxation, for which refunds are now owed.\1\
---------------------------------------------------------------------------
\1\ If Deputy Commissioner Brown on January 19, 2007 was trying to
argue that tax refund claims are not the appropriate vehicle for
remedying double taxation caused by IRS confusion over the factual
basis of a forfeiture, then he is wrong in this case for three reasons:
(1) Stare decisis from the Sixth Circuit Court of Appeals decisions in
Blakely and Brandywine II, (2) the fact that at the time of the
transaction, the Longs' and Blakelys' consent to forfeit the assets was
elicited by promising them that the assets would be credited as tax
payments, and (3) for three different reasons--one in place at the time
of the consent judgment of forfeiture, a second made clear by Associate
Deputy Attorney General Catherine O'Neil's review, and a third stated
outright in an Order from the Sixth Circuit Court of Appeals dated
August 6, 2008--the only way that the IRS could lawfully forfeit the
assets was as a tax collection measure.
All three of these have been communicated to you previously. Since
you have urged me not to repeat myself, I will simply cite you to the
pertinent passages, which in turn cite to the primary documents that
were sent to you in the same transmission. Nearly all evidence is
discussed in Sections I. A, I. B, and II (pages 1-9) of my letter to
you dated December 20, 2017 and captioned, ``Outline and History of
Legal Arguments and Rulings Establishing Taxpayers' Right to Refunds.''
This should be found in your email of that date with the caption,
``DCTA 2.'' The ``APX'' citations in that letter refer to the
compendium in documents sent to you in five parts, labeled ``Part One,
Part Two,'' etc. Most are found in the first three parts. All five
parts use the same consecutive numbering.
The Taxpayer Assistance Order that is Now Being Sought Asks for Nothing
More than IRS Compliance with Jurisdictional Determinations that It Has
---------------------------------------------------------------------------
Already Made.
In response to the July 25, 2005 request of Associate Deputy
Attorney General Catherine O' Neil, IRS Criminal Investigations Chief
Nancy Jardini ordered a review of the matter. At the conclusion of the
review she wrote to me, ``we have concluded that the Internal Revenue
Service-Criminal Investigations (CI) does not have jurisdiction with
regard to these [tax refund] claims.'' (APX 86). Although technically
correct in this, Jardini did not take the next step and pass the refund
claims along to the Small Business and Self-Employed Division, which
did have jurisdiction over them. Deputy Commissioner Kevin M. Brown
oversaw the Criminal Investigations Division and would have been the
appropriate Deputy Commissioner to exercise jurisdiction over the
refund claims if the claims had lawfully been within the purview of IRS
Criminal Investigations. However, according to both the chief of CID
and several attorneys representing CID, including Division Counsel
Edward F. Cronin, Criminal Investigations did not have such
jurisdiction--which probably means that any authoritative determination
on behalf of the IRS should have been made by the Commissioner of the
IRS or the Commissioner/Deputy Commissioner in charge of the Small
Business/Self-Employed Division. The requested Taxpayer Assistance
Order seeks to remedy this jurisdictional failing.
Yours truly,
Jeffrey M. Blum
______
Center for Fiscal Equity
14448 Parkvale Road, Suite 6
Rockville, MD 20853
[email protected]
Statement of Michael G. Bindner
Chairman Portman and Ranking Member Warner, thank you for the
opportunity to submit these comments for the record to the Taxation and
IRS Oversight Subcommittee. Recent tax legislation has not met the
Center's policy goals, nor America's, nor the goals of other advocates
with similar proposals, for example the advocates of the FairTax, who
were disappointedly silent in the last round of debate. While recent
legislation will likely help, radical change is needed to really help
the average family.
As you may know, we did raise our voices and will continue to, as the
recent law will still have all of the flaws of the prior system as well
as the asset inflation that would have made another Great Recession
inevitable were not for the new biennial spending targets and
appropriations, including much needed help for the IRS. Still, we
withdraw none of our proposals. Therefore, as usual, we will preface
our comments with our comprehensive four-part approach, which will
provide context for our comments.
A Value-Added Tax (VAT) to fund domestic military spending and
domestic discretionary spending with a rate between 10% and 13%, which
makes sure very American pays something.
Personal income surtaxes on joint and widowed filers with net
annual incomes of $100,000 and single filers earning $50,000 per year
to fund net interest payments, debt retirement and overseas and
strategic military spending and other international spending, with
graduated rates between 5% and 25%.
Employee contributions to Old-Age and Survivors Insurance (OASI)
with a lower income cap, which allows for lower payment levels to
wealthier retirees without making bend points more progressive.
A VAT-like Net Business Receipts Tax (NBRT), which is
essentially a subtraction VAT with additional tax expenditures for
family support, health care and the private delivery of governmental
services, to fund entitlement spending and replace income tax filing
for most people (including people who file without paying), the
corporate income tax, business tax filing through individual income
taxes and the employer contribution to OASI, all payroll taxes for
hospital insurance, disability insurance, unemployment insurance and
survivors under age 60.
The collection of the Employee Contribution to Social Security will be
exactly as it is now. Like proposals for a FairTax, the Value-Added Tax
and NBRT/Subtraction VAT will be collected by the states. If the basic
structure of reform is adopted in the states, the biggest change will
be the need for a common base between federal and state consumption
taxes.
Shifting from retail sales taxes and gross receipts taxes to value
added taxes and VAT-like net business receipts taxes will change the
nature of most state taxation, while enabling ease of collection of
taxes on online sales, since taxes would be levied at every stage of
the production process. The IRS will assist states in this process,
which will likely take the form of some federal-state compact
commission to draft and approve the transitional rules.
If a common base agreement can be negotiated for these taxes, state
treasurers can collect both their own taxes and the federal taxes, as
well as analytical information on tax credit usage, which can then be
shared with the U.S. Internal Revenue Service in order to track income
accruing to payers of the federal high income surtax, as well as to
recipients of the federal child tax credit, which would be paid to
employees with wages under the NBRT and then verified by a mailing from
both the employer and the Internal Revenue Service, with employees
verifying that their employees paid every dollar to them reported as a
credit. There will likely be problems to resolve in our proposed
system, where the states collect the Value-Added Tax and the Net
Business Receipts Tax and forward the money and records to the Internal
Revenue Service. This will not impact most taxpayers, since once they
have bought a product, no further action is necessary.
The IRS will likely supplement state-based auditing with reviews of
their own, but this is a small price to pay for a reform that will
reduce the income tax payment and audit workload by at least 80%.
Indeed, income tax simplification (through the elimination of all but a
few deductions), will further eliminate the workload generated by
remaining income tax payers.
Employees with children will need to annually verify the information
provided by employers and, if they received less than was reported to
the government, notify the IRS who will send a refund and collect the
difference from the employer. This may trigger a dispute, but likely
most employers will simply pay if there was an error. Fraud is another
matter, which is criminal not a dispute to be settled. Other disputes
may involve parents double dipping on two jobs or two earners, but
these will likely work out a payment plan or contact their divorce
lawyers to negotiate who pays.
Whenever an employee or an heir is paid interest, a dividend, a capital
gain or an heir sells an inherited asset, information will be
transmitted to the IRS, as well as sales to a qualified Employee Stock
Ownership Program (untaxed) and aggregated by Social Security Number.
Verification will be accomplished to make sure that tax avoidance does
not occur through use of multiple SSNs.
Another option is to charge value-added taxes on any capital gain at
sale, with losses taxed at the average VAT payment of the last two
sales. In this case, the NBRT of Lawrence B. Lindsey could be used to
tax dividends paid and excess salaries paid at a higher rate, this
making all income tax collection unnecessary.
If income taxes are retained, individuals making over $50,000 per year
and joint filers making over $100,000 will have their information
stored to compare to tax filings, unless the Congress authorizes an
automatic filing system where all income surtax payers will receive
notification when all data should have arrived and what their refund or
payment will be once they correct the information or certify it is
correct already. Banking information should be on file, so
authorization for payment, either at once or installments should be
easy.
Very little IRS administration will be required to do this. Indeed,
data management and mailing could be contracted out. All IRS employees
could fit in a bathtub with room for Grover Norquist.
Thank you for the opportunity to address the committee. We are, of
course, available for direct testimony or to answer questions by
members and staff.
______
Statement Submitted by David H. Lacy
The so-called Internal Revenue Service does not provide a reasonable
SERVICE for the individual tax payer to directly submit electronic tax
returns to the IRS as are paper returns. The IRS has enabled private
industry to create a monopoly for electronic tax returns rather than
provide an invaluable service to the ones that pay the taxes in the
first place.
For years, individual tax payers prepared paper tax returns on IRS
provided forms without the use of third parties. We, the tax payers,
should be provided with the same option to electronically prepare and
transmit tax returns to the IRS without the services of a third party.
The IRS operates the EFTPS website for taxpayers to make electronic
payments to the IRS. Internet passwords and PINs are issued by the IRS
to allow secure electronic payments. Surely, if secure electronic
payments can be made to the IRS, then the IRS should be able to receive
individual electronic tax returns.
The IRS should provide electronic forms that include the math
calculations and electronic integration of Schedules (A, B, C, D, etc.)
with Form 1040, specifically for individual taxpayers. I used a Lous 1-
2-3 spreadsheet of the IRS Form 1040 in the 1980s to prepare my paper
tax return. I was able to update the spreadsheet each year based on
changes to the IRS tax code.
In recent years, I have been using an Excel spreadsheet available from
an Internet website to prepare my tax return. This site provides free
Excel formatted forms (Schedules A, B, C, D, etc.) which are
electronically integrated with the IRS Form 1040, providing highly
accurate calculations and returns. An Excel file can be configured in a
PDF form that could be submitted electronically to the IRS.
However, I must now print the return and mail it to the IRS. What a
waste of paper and time! I'm sure there are many more individuals like
myself. If one individual can provide this service free, surely the IRS
with its vast resources could provide such a service. After all, the
IRS is an organization to serve the people. However, it appears that
the IRS is more interested in supporting business that sells tax
preparation software and preparation services rather than directly
supporting the individual tax payer.
Without such, I will continue to file paper returns of the electronic
generated returns. As a taxpayer, I am deeply concerned that the IRS is
pandering to private industry rather than serving individual taxpayers.
[all]