[Senate Hearing 117-336]
[From the U.S. Government Publishing Office]
S. Hrg. 117-336
THE 2021 FILING SEASON
AND 21ST-CENTURY IRS
=======================================================================
HEARING
before the
COMMITTEE ON FINANCE
UNITED STATES SENATE
ONE HUNDRED SEVENTEENTH CONGRESS
FIRST SESSION
__________
APRIL 13, 2021
__________
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Printed for the use of the Committee on Finance
_________
U.S. GOVERNMENT PUBLISHING OFFICE
48-296-PDF WASHINGTON : 2022
COMMITTEE ON FINANCE
RON WYDEN, Oregon, Chairman
DEBBIE STABENOW, Michigan MIKE CRAPO, Idaho
MARIA CANTWELL, Washington CHUCK GRASSLEY, Iowa
ROBERT MENENDEZ, New Jersey JOHN CORNYN, Texas
THOMAS R. CARPER, Delaware JOHN THUNE, South Dakota
BENJAMIN L. CARDIN, Maryland RICHARD BURR, North Carolina
SHERROD BROWN, Ohio ROB PORTMAN, Ohio
MICHAEL F. BENNET, Colorado PATRICK J. TOOMEY, Pennsylvania
ROBERT P. CASEY, Jr., Pennsylvania TIM SCOTT, South Carolina
MARK R. WARNER, Virginia BILL CASSIDY, Louisiana
SHELDON WHITEHOUSE, Rhode Island JAMES LANKFORD, Oklahoma
MAGGIE HASSAN, New Hampshire STEVE DAINES, Montana
CATHERINE CORTEZ MASTO, Nevada TODD YOUNG, Indiana
ELIZABETH WARREN, Massachusetts BEN SASSE, Nebraska
JOHN BARRASSO, Wyoming
Joshua Sheinkman, Staff Director
Gregg Richard, Republican Staff Director
(ii)
C O N T E N T S
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OPENING STATEMENTS
Page
Wyden, Hon. Ron, a U.S. Senator from Oregon, chairman, Committee
on Finance..................................................... 1
Crapo, Hon. Mike, a U.S. Senator from Idaho...................... 3
ADMINISTRATION WITNESS
Rettig, Hon. Charles P., Commissioner, Internal Revenue Service,
Washington, DC................................................. 5
ALPHABETICAL LISTING AND APPENDIX MATERIAL
Crapo, Hon. Mike:
Opening statement............................................ 3
Prepared statement........................................... 49
Rettig, Hon. Charles P.:
Testimony.................................................... 5
Prepared statement........................................... 50
Responses to questions from committee members................ 61
Wyden, Hon. Ron:
Opening statement............................................ 1
Prepared statement........................................... 100
Communications
Center for Fiscal Equity......................................... 103
Desai, Anand..................................................... 107
Lee, Nicholas Matthew............................................ 108
Professional Managers Association................................ 112
U.S. Citizen..................................................... 115
(iii)
THE 2021 FILING SEASON
AND 21ST-CENTURY IRS
----------
TUESDAY, APRIL 13, 2021
U.S. Senate,
Committee on Finance,
Washington, DC.
The hearing was convened, pursuant to notice, at 10 a.m.,
via Webex, in Room G-50, Dirksen Senate Office Building, Hon.
Ron Wyden (chairman of the committee) presiding.
Present: Senators Cantwell, Menendez, Carper, Cardin,
Brown, Bennet, Casey, Warner, Whitehouse, Hassan, Warren,
Crapo, Grassley, Thune, Portman, Toomey, Cassidy, Lankford,
Daines, Young, Sasse, and Barrasso.
Also present: Democratic staff: Chris Arneson, Tax Policy
Advisor; Adam Carasso, Senior Tax and Economic Advisor; Michael
Evans, Deputy Staff Director and Chief Counsel; Joshua
Sheinkman, Staff Director; and Tiffany Smith, Chief Tax
Counsel. Republican staff: Andre Barnett, Senior Tax Counsel;
Courtney Connell, Senior Tax Counsel; and Gregg Richard, Staff
Director.
OPENING STATEMENT OF HON. RON WYDEN, A U.S. SENATOR FROM
OREGON, CHAIRMAN, COMMITTEE ON FINANCE
The Chairman. The Senate Finance Committee will come to
order.
This morning the Finance Committee is joined by IRS
Commissioner Rettig for our annual hearing that typically marks
the end of tax filing season. However, 2021 is no typical year.
There's lots to talk about, and I am going to start with the
tax gap, the difference between taxes owed and what is
collected.
Even the most conservative estimates of the annual tax gap
put it in the hundreds of billions of dollars a year. My own
view is, the annual tax gap is at least double the official
estimate and growing.
The most recent official estimate pegs the tax gap at $381
billion a year, but it looks all the way back to data from 2011
through 2013. That means the estimates are out-of-date as soon
as released.
The fact is, our economy has changed and expanded. In 2011,
one Bitcoin could not buy you a ham sandwich. Today's
cryptocurrencies and other technologies create huge new
opportunities for the tax cheats to rip off the American
people.
More and more wealth is building up in the hands of the
fortunate few and big corporations. They are the ones with the
high-priced lawyers and accountants who specialize in
concealing income with sketchy bookkeeping, money laundering,
and shell companies.
I am coming off 10 town hall meetings in Oregon. When I
hold those meetings--especially during tax season--lots of
Oregon taxpayers tell me they have a gut feeling they are being
cheated. They hear about the massive tax gap, and they are
rightfully ticked off. Close even a portion of the tax gap and
you are better able to fund care for the elderly at home,
assistance to needy kids, and affordable housing.
The IRS needs more resources to tackle this challenge, but
it is only just beginning to recover from a decade of
Republican budget cuts. Those cuts hobbled our ability to root
out cheating by high flyers and their high-priced accountants.
Criminal tax evasion cases have fallen nearly by half. The
number of IRS tax enforcement staff--the experts who know how
to break down tax evasion cases--has now fallen by nearly a
third. Wealthy tax cheats have proven that with enough attack
dog lawyering, they can litigate the IRS into submission and
rip off working taxpayers for big money.
Meanwhile, the burden of tax audits has shifted unfairly to
working people. That is because it is a lot cheaper and easier
to hassle a working mom over a tax credit overpayment than it
is to decipher the latest money laundering schemes.
My bottom line is, it is time to throw out business as
usual on this. Business as usual has proven to be a rainmaker
for cheaters and criminals and unfair to everybody else.
The IRS needs more highly skilled investigators and better
technology to keep up with these modern crooks. The Biden
administration's new budget proposal calls for a 10-percent
increase in IRS funding. That is a good start. I believe there
is room for a more comprehensive strategy that will lower the
tax gap.
The committee is going to kick off a new policy this
morning. On my watch, the annual filing season from this point
on will put a special focus on what the IRS has done over the
previous year to catch the cheats and close the gap. There is a
lot of catching up to do.
Let me wrap up with just a couple of other comments. First,
Commissioner, I am going to give you a formal introduction, but
I want to thank you and the staff for working many, many long
hours during the pandemic to get three rounds of relief
payments to the public. Millions of hurting families got
desperately needed relief payments, and our country got an
economic boost.
The committee, the Finance Committee, also led an important
effort to make sure that Americans who got unemployment
benefits did not get a painful tax surprise this year.
Finally, Commissioner, we are going to want to hear about
getting the new Child Tax Credit payments up and running. It is
a big job, and millions of Americans are counting on the IRS to
get it done.
Commissioner, we will give you a formal introduction after
we hear from Senator Crapo.
Thank you for joining us, Senator Crapo.
[The prepared statement of Chairman Wyden appears in the
appendix.]
OPENING STATEMENT OF HON. MIKE CRAPO,
A U.S. SENATOR FROM IDAHO
Senator Crapo. Thank you, Mr. Chairman, and welcome, Mr.
Commissioner. I appreciated our phone call the other day.
The past 23 months have brought unprecedented challenges
not only for the American people, but also for the Internal
Revenue Service.
In addition to its role as our Nation's tax collector,
Congress has recently given the IRS an expanded mission and a
central role in delivering our economic recovery. So far, this
has included distributing three rounds of over 150 million
Economic Impact Payments and implementing a variety of
temporary tax incentives to keep employees on payroll,
guarantee paid leave for employees who contract COVID-19, and
help taxpayers bridge the gap through the pandemic. Soon, it
will also include the distribution of millions of advance
payments of the Child Tax Credit in a temporary policy that
vastly changes the scope and mission of the IRS.
Commissioner Rettig, I commend you and your staff for your
diligent efforts to balance all of these competing priorities.
At the same time, given how much is at stake for our economy
and the American people, it is critical that we get it right.
Filing season and Economic Impact Payment issues are the most
frequent topics I hear about from Idahoans.
I am extremely concerned about the reports of a backlog of
millions of tax returns from last year's filing season that
have not yet been processed. This means that millions of
taxpayers are having to wait longer to receive their refunds in
the middle of a pandemic.
Further, IRS call center wait times remain unacceptably
long, and many taxpayers have been sent confusing automated
notices indicating that they have not yet filed their return,
when in fact it was filed but has not yet been processed by the
IRS.
Confusion has also been generated because of the massive
fraud in unemployment compensation programs. State workforce
agencies have been taxed because the Federal Government tells
victims of identity theft who have Federal tax issues to figure
it out with State agencies.
Meanwhile, in the midst of filing season, a brand-new
waiver of Federal taxes on unemployment compensation was passed
into law, causing yet more confusion for filers.
Today you have the opportunity to explain how the IRS plans
to remedy taxpayer confusion and tackle the backlog of prior-
year returns without falling further behind--a formidable task.
I also have a number of concerns about the implementation
of the Child Tax Credit advance payment program. Former Finance
Committee chairman Grassley and I sent you a letter a few
months ago requesting reasonable information about the timeline
of implementation, the cost of implementation, and how the IRS
plans to tackle fraud and other risks associated with the
administration of this new program. What we received from your
staff was untimely and unresponsive.
Today is an opportunity for a real conversation about the
timeline that the IRS envisions for getting the online portal
up and running and issuing the first advance CTC payments.
The IRS must assure us that this implementation will not
mean putting the filing season on the back burner, nor rushing
to get payments out before we have accurate information from
taxpayers regarding eligibility. To date, absent any contrary
indication from the IRS, I am left with the impression that the
aggressive July 1st payment deadline imposed by congressional
Democrats will be challenging to meet by an IRS staff that is
already stretched thin, without cutting corners or reassigning
staff who should be focused on processing tax returns.
If congressional intent was really to get these advance
payments out at all costs as soon as possible, then the logical
approach would have been to simply provide an extra bonus in
the Economic Impact Payment of each qualifying low-income
child. Congress could have put those increased payments in the
hands of those parents a month ago with that approach.
Instead, the legislation created a complicated new program
for these periodic advance payments, with a clearly stated goal
of making this temporary program permanent. With that in mind,
fully setting up the required online portal and equivalent
secure mechanisms for those without Internet access, in order
to ensure that any advance payments issued are both accurate
and desired by parents, must be considered at least as much of
a controlling priority as the requirement to begin issuing
advanced payments this summer.
Finally, we are now approaching 2 years since Congress
passed the Taxpayer First Act, an important bipartisan measure
that will enhance taxpayer protections, modernize the IRS's
organizational structure, and improve its customer service and
information technology. Commissioner Rettig, I look forward to
hearing an update today on the IRS's efforts to implement these
reforms and to usher forth a 21st-century IRS.
Thank you again for appearing before us today, and for your
tireless efforts on behalf of our taxpayers.
Thank you, Mr. Chairman.
[The prepared statement of Senator Crapo appears in the
appendix.]
The Chairman. Thank you, Senator Crapo.
Our witness today is Charles P. Rettig, the 49th
Commissioner of the IRS. Previously, he was a highly respected
law firm partner for 36 years. He has represented thousands of
individuals, businesses, and corporate taxpayers before the
IRS, the Department of Justice Tax Division, Federal and State
courts, and State taxing authorities.
Mr. Rettig has served as a past chair and member of the IRS
Advisory Council. He also served as chair of the Taxation
Section of the State Bar of California, and has served on the
advisory boards of both the Franchise Tax Board and the Board
of Equalization in his home State of California. He has a B.A.
in economics from the University of California in Los Angeles,
as well as a J.D. with honors from Pepperdine University, and
an LLM in taxation from New York University.
Welcome. Please proceed, Mr. Commissioner.
STATEMENT OF HON. CHARLES P. RETTIG, COMMISSIONER, INTERNAL
REVENUE SERVICE, WASHINGTON, DC
Commissioner Rettig. Chairman Wyden, Ranking Member Crapo,
and members of the committee, thank you for the opportunity to
discuss the current filing season and our efforts to help
taxpayers during the COVID-19 pandemic.
Before I begin, I want to thank Congress, each of the
members of this committee, and each of your staff for working
with us during drafting of the recently enacted stimulus
packages. The ability to administer legislation passed by
Congress is almost as important as the content of the
legislation that is passed. We also thank you for providing the
IRS with resources to enable us to implement the tax-related
portions of such important legislation.
It will take time for the IRS to overcome the challenges of
the past decade, and the agency will continue to struggle to
replace workers lost through attrition and to expand our
workforce and support implementation of our multi-year
integrated business modernization plan as designed. We will
continue enhancing meaningful service and compliance efforts on
behalf of every American.
With respect to the COVID response, our response
illustrates the importance of every American to the IRS, and
the importance of the IRS to every American. IRS employees have
worked hard since mid-March of last year to implement the major
provisions of the CARES Act, the COVID Tax Relief Act, and more
recently the American Recovery Plan; to deliver three rounds of
Economic Impact Payments; to deliver filing season 2020 and
filing season 2021; and to help millions and millions of
Americans during the pandemic.
In a bit more than 12 months, IRS and Treasury employees
delivered the first round of EIP1, totaling almost $275
billion. They issued refunds during filing season 2020 of over
$320 billion. We issued EIP2 of over $142 billion. We are in
process with respect to EIP3, and to date we have delivered
another $372 billion. And with respect to filing season 2021,
to date we have issued over 62 million refunds totaling more
than $180 billion.
In a bit more than 12 months, the IRS has been instrumental
in delivering almost $1.3 trillion to individuals in our
country, and we are proud to have had the opportunity and the
privilege to do so.
I want to emphasize and recognize the amount of advance
preparation of our employees to achieve such quick turnaround.
I believe the committee is aware of the fact that the first
EIP1 payments went out within 2 weeks. EIP2 payments went out
within 2 days, and the first round of EIP3 payments were issued
in less than 24 hours after the date of enactment.
This is a tribute to the quality, dedication, and caliber
of the employees that we have. We care, and we know the
importance of our role. It is also a call for consistent,
timely, adequate, multi-year funding to support our business
system's modernization. It should not impede our ability to
deliver quickly, promptly, and most of all accurately--and I do
understand and we accept that we did not get it perfect, but we
did try our best--but the ability to do so should not translate
into the fact that we do not need a modernized system.
Our systems are built on the legacy systems of the IRS, and
we need to replace our legacy system to have the IRS in a
position to move forward effectively when called upon to do
so--and as part of our normal daily operations.
Turning to tax season 2021, filing season 2021, it
continues to go smoothly. We have received, at peak, 335
submissions per second. We have received more than 93 million
individual returns and, as stated, have issued more than 62
million refunds totaling $180 billion.
As you are aware, we also process returns for various
States. We also process business returns and other related
matters. To date, that category, all in, we have received over
206 million Federal, State, and business returns--keep in mind,
during the pandemic.
The late start of the filing season did not impact our
ability to issue refunds. The first rounds of refunds--we
opened filing season on February 12th. The first round of
refunds for the most needy individuals, the EITC and ACTC, went
out on February 16th and February 18th.
As you are aware, we recently issued Notice 21-21 extending
the current filing season to May 17th. That extension was not
based upon any operational challenges of the Internal Revenue
Service. The Internal Revenue Service is operating smoothly
with respect to filing season.
With respect to the unemployment insurance and the
exclusion of $10,200 per individual, the IRS announced in IR-
2021-71 on March 31st, that for people who filed their returns,
we will automatically issue the refunds. We will first be doing
the refunds--we will adjust the returns when we are first doing
the refunds for single filers, followed by married filers.
Taxpayers do not need to file amended returns to claim the
exclusion with respect to their unemployment insurance, if they
previously reported it. And we expect to be issuing the refunds
in May.
Turning to level of service, this has been a challenging
year. As you are aware, we have a congressional mailbox. The
input and intake for each of you was challenging, but keep in
mind that our level of service is an appropriated budget item,
which was determined before there was a pandemic, before there
was an EIP1, before there was an EIP2, before there was an
EIP3.
Our call volumes have more than doubled. We have received
at peak more than 1,500 calls per second. We have received 1.1
billion visits to irs.gov. We have had to deploy some of our
customer service representatives to FEMA work with respect to
hurricanes, wildfires, earthquakes, and the more recent extreme
cold weather.
During the pandemic, we adjusted to a virtual operation as
quickly as we could, but we realized that that was not seamless
for the people who had to interact with us, and we greatly
appreciate the patience and understanding of others as we tried
to operate to the best of our abilities. And I think the
foregoing--personally, I am very appreciative of the efforts of
our employees, and people generally, and I am not going to call
out our people separately. I know everybody had a difficult
time. But I asked a tremendous amount of every employee of the
Internal Revenue Service.
We got the best of the best. They stepped in. They were
creative. They were innovative. They came up with plans in a
hurry to allow us to do as well as we did. The success and
strength of the Internal Revenue Service is the employees of
the Internal Revenue Service.
Chairman Wyden, Ranking Member Crapo, and members of the
committee, this concludes my statement, and I would be happy to
take your questions.
[The prepared statement of Commissioner Rettig appears in
the appendix.]
The Chairman. Thank you very much, Commissioner. And again,
we very much appreciate all the efforts to get those checks out
through the pandemic.
And now we are going to look to the future. And Oregonians
come up to me at home, and they say, ``Ron, what is the deal
with the taxes that the big guys owe that don't get
collected?'' Then they tell you they pay taxes with every
paycheck, lots of them, and they want to know what is being
done to collect from the cheaters.
I went through the estimates, which seem like they are from
the Dark Ages--you know, a decade ago--and I have been digging
into this, and I have come to the conclusion that the tax gap
is in fact far greater than has been officially reported.
So what I would like to start with, Commissioner, is what
is your personal opinion about how big the annual tax gap
actually is?
Commissioner Rettig. The published tax gap estimate of the
Internal Revenue Service, the current one that is out--and we
will be issuing one next year--but the published tax gap
estimate for tax years 2011 to 2013 has a gross tax gap of $441
billion.
As you indicated, Mr. Chair, in 2011 folks were generally
unaware of the term cryptocurrency, Bitcoin, and all--there are
more than 8,600 cryptocurrencies, virtual currencies, in the
marketplace. And the market cap worldwide for cryptocurrencies
is almost $2 trillion.
Our tax gap map for 2011 to 2013 is based on information
that is from 2011 to 2013. It does not include any focus with
respect to virtual currencies, which I indicated now are about
a $2-trillion market cap. It does not include much information
with respect to foreign source income. It does not include
information with respect to illegal source income, which is
still taxable, and which we do chase. More recently, within the
last 2 weeks, there was a report published that included two
IRS researchers from our RAAS organization that indicated that
the top 1 percent of all taxpayers by high income account for
as much as an additional $175 billion in the tax gap
computation. And that is associated with their look at only two
issues, which were pass-through entities and offshore income
associated with the top 1 percent.
If you aggregate the points that I am talking about, and
you look at the fact that there is a current estimate by folks
on the outside that the tax gap is $7.5 trillion over the next
10 years, and you add in the component pieces that I have
referenced--there are more; I've just referenced the ones that
are most highly visible at this point. If you add those in, I
think it would not be outlandish to agree that the actual tax
gap could approach and possibly exceed $1 trillion.
The Chairman. Thank you. And that is something that we very
much want to focus on on this committee. We think we can do it
in a bipartisan way. A trillion-dollar tax gap--and that is
very much in line with our analysis and reflects the amount
that is owed that we are not collecting from cheaters. So I
very much appreciate your clarifying that.
What would the IRS do with an increase in funds for
enforcement to better be able to collect that trillion-dollar
annual tax gap? And what would the rate of return be on those
kinds of efforts?
Commissioner Rettig. To approach the tax gap and have a
meaningful reduction in the tax gap, we need a multi-faceted
approach. So you have asked with respect to enforcement.
Our figures with respect to--if we received a billion
dollars for enforcement, we could bring onboard 4,875 front-
line enforcement personnel, which also includes the component
parts for taxpayer advocate service, appeals, counsel, and
whatnot. It is our package, if you will, to go down that road.
We would also need to use some of those funds to modernize
our systems. We are today able to identify evidence of tax
fraud, the signatures of tax fraud if you will, and tax
evasion, that even 2 years ago we could not identify. But it is
an example of how we are heading in the right direction. We
need to get there ahead of time. We are up against more
sophisticated elements in the community, practitioners and
others, and the tools that they are using.
So essentially, the key priorities would be to modernize
our system, and onboard enforcement personnel. Realistically,
we are down 17,000 enforcement personnel over the last decade.
So to replenish that, we could not do that in 1 year. We could
not absorb that. We have about 50 to 55,000----
The Chairman. I am almost out of time, Commissioner.
Commissioner Rettig. I'm sorry.
The Chairman. Do you need, in addition to the financial
resources, any changes in either regulation or statute to be
able to more aggressively go after the tax cheats?
Commissioner Rettig. We do. We need information reporting
almost across all lanes. The statistics are that when there is
substantial information reporting and withholding, about 99
percent of those income items get reported. Without information
reporting, it fluctuates down around 45 percent. Electronic
filing of most returns in most systems would obviously enhance
our ability to take a look and focus our resources in the
appropriate areas.
And there is, you know, correctable error authority, return
preparer regulation. As I said, it is a multi-faceted approach.
And nobody should discount the desire of any employee of the
IRS to get there. We want to get there, but we do need your
help.
The Chairman. Good. And I am going to do everything I can
to make this a bipartisan effort.
Senator Crapo?
Senator Crapo. Thank you much, Senator Wyden.
Commissioner Rettig, I want to follow up on Senator Wyden's
questions for just a minute. First of all, I completely agree
that if there are those who are cheating on their taxes and
causing us to have such a large tax gap, which I do not doubt,
we should address that.
We often see many allegations that there are corporations
who pay no income taxes for one reason or the other. In fact,
the reasons are not given. And I am not quite sure I understand
why. But one response that has been given back to me when I try
to check that out is that many corporations are being accused
of using legal provisions in the tax code, such as the R&D tax
credit or other tax credits and the deductions and options that
they can, in order to manage their tax liabilities.
As you calculate these numbers you just talked to us about
involving the tax gap, you are not counting the utilitization
of legal provisions in the tax code like the R&D tax credit and
so forth. Is that correct?
Commissioner Rettig. Definitely not. There is no part of
the tax gap that should include legal transactions that are
authorized by the code and the courts and whatnot.
Senator Crapo. The reason I asked that question is because
often in the political discussion of this, what we see in the
media at least, is this notion that there are so-called
``loopholes'' that taxpayers are taking advantage of. And to
me, I wonder what those loopholes are. If they are legal
provisions in the code, we ought to know that and determine
whether they are in fact some valid tax credit that we want to
continue to allow, or whether they are some unjustified tax
policy.
But that is a whole different discussion than the tax gap,
correct?
Commissioner Rettig. Correct.
Senator Crapo. Okay. And that is a discussion I think we
should engage in as well, Senator Wyden.
I am going to conclude with the questions that I referred
to you when we were on the telephone the other day with regard
to the CTC advance payment provision.
The first is, the experience with the 2017 tax reform law
showed that many American taxpayers have an ongoing expectation
of receiving a sizeable refund. And when given the option to
get that refund earlier, many households opt to take the refund
when they file their taxes because they choose to get it in
that fashion.
Based on that experience, has the IRS estimated what
percentage of eligible CTC recipients it might expect to opt
out of receiving advance payments?
Commissioner Rettig. We do not currently have that
information, but you are accurate that that is the information
that we are getting: that this for many people is their largest
annual refund.
We are working on that, as you can imagine, because we are
implementing--our teams are working on the implementation of
the requirements and priorities and whatnot. And I would hope
that we would have that for you soon. And I do acknowledge you
have asked for that on more than one occasion.
Senator Crapo. Well, thank you. And again on the same
issue, many lower-income and rural individuals and families do
not have access to the Internet. And that makes it very
difficult for them to use a portal to update their status, or
opt out of receiving advance payments.
Can you address how the IRS intends to reach such filers to
ensure that they have the same opportunities for access to the
portal?
Commissioner Rettig. If people do not have broadband--and
there are tens of millions of people in this country who do not
have access or are not comfortable with it--they will end up
needing to deal with us either through paper sources, the U.S.
mail, or visiting an IRS office, which certainly is not ideal
if they are adjusting. And the portal is statutorily required,
and it is there for people to identify changed circumstances,
and also to opt out.
And so we will make instructions for the forms available
for folks who want to opt out in avenues other than the portal.
Senator Crapo. And when do you project that both the secure
online portal and the equivalent non-electronic processes will
be fully operational?
Commissioner Rettig. We will launch the portal for CTC by
July 1st, which is the statutorily mandated date. And we have
already put our teams together and our working groups together,
and we are looking at communication strategies and all the
rest.
We will launch by July 1st, with the absolute best product
we are able to put together. We might need to address that. We
did that with respect to the EIP online portals we would
monitor. And we may need to adjust that. But we are trying to
get it as user-friendly as possible, but we will launch by July
1st.
Senator Crapo. Thank you. And clearly a number of important
steps have to be taken to achieve that. As such, can you assure
us that the IRS will not issue advance CTC payments until the
online portal and its secure nonelectronic counterpart process
are fully operational, and that all potentially eligible
taxpayers have been given the full opportunity to update their
status and information, and to opt out of receiving any advance
payments if they choose to?
Commissioner Rettig. We will do so. We will follow the
statute, and the statute requires us to do so by July 1st. If
we are not prepared--as I indicated to another congressional
committee a few months back--if we are not prepared, we will
not launch. We are not going to risk our systems. We are not
going to open our systems up to possible fraudsters and the
rest, and to a series of errors.
We will test, retest, and get it right before we launch.
And we are not--the statute requires July 1st, but if we are
not ready July 1st, we will tell you that. As of now, we will
launch July 1st, but we will not risk our system.
Senator Crapo. Thank you. Thank you, Mr. Chairman.
The Chairman. Thank you, Senator Crapo.
Senator Cantwell is next.
[No response.]
The Chairman. Senator Grassley is after Senator Cantwell.
Senator Grassley. Okay. The American Rescue Plan included
major temporary modifications of the Child Tax Credit,
including making the credit fully refundable and advanceable.
I have concerns that these changes will drastically expand
the IRS role into kind of social welfare-oriented, at the
expense of its primary mission of tax collector. As Erin
Collins, the National Taxpayer Advocate said, quote, ``The
challenge is, the IRS was not set up for that purpose, and
their IT is not structured for that,'' end of quote.
It is clear that setting up periodic advance payment and
associated infrastructure will be a significant undertaking for
your agency. In addition to the dollar cost of this program,
can you expand upon the amount of work hours and the number of
personnel it is estimated it will take to set up and administer
what is now a temporary program?
Commissioner Rettig. The budget to implement the CTC
program--and we have to create an entirely new structure for
the Internal Revenue Service. We are not, historically, a
benefits delivery Federal agency--but we are setting that up.
The cost for that program is $391 million. Right now, it will
be somewhere around--and this is my guess, but it is an
educated guess--a minimum of 300 to 500 people, which includes
folks who will have to handle the phone service, because we
will have increased phone service.
The Taxpayer Advocate Service will get additional touch
points. Criminal Investigation, to the extent fraudsters try to
come into the system, will need additional resources there. So
it is pretty widespread.
What we have done to date, and the IRS--and again I thank
Congress for this--we were part of getting the July 1st date as
opposed to an earlier date, and that is very meaningful to the
Internal Revenue Service because, as you know, we have filing
season, normally April 15th but we moved it to May 17th, but we
also have the third round of Economic Impact Payments. It would
have been extremely difficult for the IRS to launch a CTC
program at any time before July 1st. It is a challenge to do it
by July 1st, but it would have been really difficult----
So what we are in process on now--and you have asked as
well for additional information, and we will continue to update
you and update members of the committee--but what we have done
now is put together our working groups to figure out the points
such as what you are asking. Who do we need? Where do we need?
What are the requirements to launch this portal?
So we have working groups with respect to guidance and
policy changes. We have working groups with respect to chief
counsel on what we are able to do and what we are not able to
do within the scope of the law, and outside the scope of the
law. We have working groups in IT working with respect to the
authentication levels. As you can imagine, every time--this is
a risk-averse agency. Every time we open some system up, it
becomes a risk issue for the agency, and we are not going to
allow undue risk.
Senator Grassley. I think you have satisfied me for now.
Commissioner Rettig. Okay; I will follow up----
Senator Grassley. You said you would give updates. So I am
also concerned that the Advance Child Tax Credit program might
have the possibility of fraud. According to the Treasury
Inspector General for Tax Administration, in 2019 the improper
payment rate in the program exceeded 15 percent, or $7.2
billion.
The IRS's experience with the advanceable premium tax
credit, which TIGTA estimated has an improper payment rate of
27 percent, suggests a proposal to make the Child Tax Credit
advanceable could result in billions more of improper payments.
How would you expect the advanceability of the Child Tax
Credit to affect improper payment rates clearly associated with
the credit?
Commissioner Rettig. Opening up the system and having
people have the ability to modify their circumstances monthly
is another element of risk that the IRS is required to assume
under the statute. And so, I cannot quantify it because we are
not there, but there is definitely a risk there.
I will say that our Criminal Investigation division is
best-in-class, and they are engaged with us with respect to the
planning on this. And you know, we will work from a deterrence
perspective, but we will also chase those who come in
unlawfully.
Senator Grassley. And my last question will have to be
this: the current IRS private debt collection program was
established in 2015 on a bipartisan basis to collect tax debts
that are due but are not currently being worked by the IRS. The
program has proven its ability to collect hundreds of millions
of dollars in otherwise uncollectible tax debt on an annual
basis, including generating nearly half a billion dollars in
net revenue in 2020.
However, I was recently informed that the contractors of
the program were told IRS decided to delay the delivery of the
new cases until the end of September.
Do you agree this program has allowed tax debts to be
collected that otherwise would not have been? And can you
assure me that the program will continue to be operated on the
full extent required under law?
And the reason for the question--and I will quickly stop--
is that you know the program was put on hold by the previous
Obama administration but is now operating and bringing in
money, and I would hope that does not happen again.
Commissioner Rettig. I have about 18 months left in my term
as Commissioner. I am a believer in the private debt
collectors. We have a high degree of oversight with respect to
the companies that are doing this. There are three companies.
They have a 600,000 case backload at present. We are providing
1,000 to 1,500 updates to them, addresses and evidence of
activity for folks that they have to collect. And overall, I
think it has worked well.
We do work with them so that they do not overly breach.
There are a lot of rules in the country generally, and also
with respect to tax collection. And so we watch all of that,
and we have teams that do that.
The Chairman. Thank you, Senator Grassley.
Our next questioner will be Senator Menendez, on the web.
Senator Menendez. Thank you, Mr. Chairman.
Commissioner, I appreciate the work that you and all of
those public employees at the IRS have done, incredible work,
despite having their funding undermined for years by
congressional Republicans.
The IRS budget shrank by 20 percent, resulting in 20
percent of its workforce being laid off over the last 10 years.
Now middle-class families and small businesses bear the brunt
of the IRS customer service problems. Wealthy individuals and
large corporations are all too happy to take advantage of the
IRS's limitations.
Indeed, according to a recent study by the National Bureau
of Economic Research, the top 1 percent of households do not
report nearly 21 percent of their income. Overall, some experts
estimate that the agency has missed out on $630 billion in tax
revenue in just 2020 alone.
Now, I certainly do not blame you for the tax gap. That
problem is rooted in the chronic underfunding of a budget for a
decade. It is estimated that for every dollar invested in the
IRS, the agency brings back $7 to our Treasury.
So, Commissioner, would the agency be able to better pursue
corporations and high-income earners that are cheating the tax
system if the agency's budget was increased?
Commissioner Rettig. The IRS absolutely needs more
resources across all lanes of the Internal Revenue Service. And
you know, we do get out-gunned. There is no other way to say
it. We are using our resources--I am confident, and I can
assure you we are using our resources to the absolute best of
our ability. It is not a dedication or a people issue. It is a
numbers issue.
We have about 6,500 front-line revenue agents who handle
the most complex, sophisticated individual and corporate
matters. Substantially every one of them is dedicated to either
high-income individuals, the most egregious cases, or the
largest corporations.
Senator Menendez. So then it is a resource problem. Who
pays the price of tax evasion by the very wealthy and large
corporations?
Commissioner Rettig. Well ultimately, you know, if people
are not paying their fair share, it is borne by the other
people who are paying their fair share.
Senator Menendez. Yes, and that is overwhelmingly middle-
class and working families. I certainly believe that we can do
better by giving the resources to the agency so that everybody
pays their fair share and there is not a disproportionate
burden.
Let me ask you--I included into law a provision that gives
immediate relief to those whose student loans have been
forgiven during the pandemic through 2025. Do you think that
most borrowers who had their student loans forgiven would be
aware that their debt relief would be considered taxable
income, if it were not for the Student Loan Tax Relief Act?
Commissioner Rettig. Hit and miss, probably. If you are
asking me a percentage, maybe 30 or 40 percent. I know a lot of
folks from those programs who went to professional schools and
whatnot, from my time on the outside, and many people are not
aware that debt forgiveness is a taxable item for them.
But you know, I would speculate 30 or 40 percent. I really
cannot identify it. But certainly many are not aware.
Senator Menendez. And finally, I agree with you that many
are not. And we have seen cases who got debt relief and then
got a $7,000 tax bill. So I am glad we were able to get this
provision into law to create the relief from that being a
taxable event.
Our colleagues on the committee--Chairman Wyden and
Senators Brown and Bennet and others--have been very active
about the CTC provisions of the American Rescue Plan that have
a historic enhancement that can cut child poverty in half.
Commissioner, could you provide us with an update on the
progress you are making on implementing the expanded and
enhanced Child Tax Credit, and where your agency is on
providing recurring advance refund payments?
Commissioner Rettig. As I indicated to Senator Grassley, we
put together working groups. We have put together working
groups within our counsel, within our IT, within wage and
investment, to determine the requirements, to determine the
legal abilities, to determine our ability to do certain things;
what is the most user-friendly path to launching? And we fully
anticipate to launch by July 1st, which is the statutorily
mandated date.
Senator Menendez. All right; I will look forward to seeing
that happen. Thank you, Mr. Chairman.
The Chairman. Thank you, Senator Menendez.
Next in the queue--Senator Thune asked that we wait--would
be Senator Carper on the web--excuse me, in person. And then he
will be followed by Senator Portman. I did not see you, Senator
Carper. You are next.
Senator Carper. Good morning, Mr. Chairman, and to our
ranking member, and to my colleagues. It is good to see you.
Commissioner, the last time you were before us that I
remember, I think your wife was with us. She's a native of
South Vietnam, a place where I served in the Southeast Asian
Vietnam War, and we send her a warm welcome. Tell her we say
thanks for sharing you with us, especially to find time to be
with us today. I believe you have a son who is an Army doc, and
I think he is on his way to Fort Benning----
Commissioner Rettig. He was just promoted to Major. We are
very proud of him.
Senator Carper. Tell him we said navy salutes army.
We have been talking with our colleagues about the need at
the IRS for resources that include people, that include
technology, that include money. And we have heard several of my
colleagues who have said that for every dollar that we provide
in additional resources to the IRS, the payback to the Treasury
is something like 7 bucks.
When I was elected to the House of Representatives a
million years ago, I think Chuck Grassley had just been elected
to the U.S. Senate. And I think Senator Wyden and I served
together for a number of years in the House. And those are
years when we measured the Federal deficit in terms of tens of
billions of dollars a year--tens of billions of dollars a year.
Today we measure the Federal deficit in terms of like
trillions of dollars a year, trillions of dollars a year. And
when you tell us, and you have--and the President has said this
as well in his budget offering--that for every dollar in
additional resources we provide to the IRS, we get an extra 6
or 7 bucks in revenue to the Treasury, we need every buck that
we can bring into the Treasury.
The thing that we lose track of a little bit is, in
addition to reducing this enormous deficit, there is a problem
with providing good service. And we make the tax code more
complicated every year, and we say to you and the folks who
work for you, ``Deal with this. Provide good constituent
service.'' So how, by providing additional resources, will it
actually help us on that side?
Commissioner Rettig. The service is a component of the tax
gap as well, because the enforcement side supports the
taxpayers who comply. And you know the deterrent effect of
enforcement helps keep the honest people more honest.
On the service side, the easiest category to identify is
what we refer to as level of service, which is our telephone
service. We currently have 13,760 folks online answering the
phones. Only 3 percent of them were telework-eligible before we
went into the pandemic; 100 percent of them are telework-
eligible today. And that was not only important for the
pandemic, but when we ran into cold weather, we did not skip a
beat.
But the easily identifiable number there, when people are
looking at our budget, is every 10-percent increase in level of
service, so each 10 percent--out of 10 calls to answer one more
globally--for the IRS, is $100 million. So we want a 30-percent
increase; that would be $300 million.
What we are caught in now is, the budget is appropriated
for level of service, and this budget was, as I said earlier,
determined pre-pandemic, pre-EIP1, 2, and 3, and our call
volumes have gone up between 2 and 4 times, depending on the
time of service. And we have 13,760--Congress did appropriate
1,000 more in the last budget. It takes us 14 weeks to train
those folks. They will be coming onboard in the summer.
Senator Carper. I have a question for the record. You and I
talked on the phone about the IRS's Free File program, which
allows people, for free, to get help in filing their taxes. And
I am going to ask you to, for the record, provide that
response, to share your views with us on the future of the Free
File program, what can be done to make this program more widely
used and more effective.
The other thing I would ask you to respond to, for the
record, is, we have four committees that have jurisdiction over
surface transportation legislation, and one of those is the
Environment and Public Works Committee. The others include the
Banking Committee, which has transit; the Commerce Committee,
which has rail and safety; and this committee, whose
responsibility is to figure out how to pay for things.
The gas and diesel tax in this country has not been raised,
I think, since 1993. We have been stuck at 18 cents per gallon
on gasoline, 24 cents a gallon on diesel. Meanwhile, we have
seen the shortfall for monies we provide through the user fees
for roads, highways, bridges, and so forth, transit, that has
now ballooned to like hundreds of billions of dollars.
I am interested in exploring, for the record, a response
from the IRS. If the gas and diesel tax were raised maybe about
a penny a quarter, a penny per quarter, starting in the next
calendar year, 4 cents over a year, for a number of years, is
there some way to somehow rebate that money, approximately, to
families whose savings income is below median family income?
Could you use the tax code to do that?
I do not expect you to do this on the fly, but I want you
to talk with your folks about it. The administration has
expressed a reluctance to do anything that affects folks whose
income is under $400,000 a year, raising user fees like this.
And my response is, you mean somebody who is making $300,000 a
year should not have to help pay for our roads, highways, and
bridges?
I am looking for ways that we could possibly use the tax
code to rebate to families below a certain income level and
make them whole. If you can do that for the record, I would be
most grateful.
Commissioner Rettig. We will take a look.
The Chairman. I thank my colleague.
Senator Portman is next.
Senator Portman. Thank you, Chairman Wyden. And,
Commissioner, I really appreciate your being here and, more
importantly, what you and your team have done over the past
year. I know it has been a big challenge for you, including
workforce challenges you have had with COVID, and people
working remotely, and also being asked to do so much by us,
including the direct payments and CTC changes and others.
I appreciate your staying in touch with us. On the tax gap,
I was intrigued hearing earlier the comments from Chairman
Wyden and other members of the committee. I think this is a
great opportunity, and it has always been kind of a
frustration, you know--how do you get at it?
You mentioned more electronic filing. That is happening.
That should make it easier. As you know, we exceeded our
expectations on that. You also mentioned information reporting
to help close it. We are working on a cryptocurrency bill which
would define cryptocurrency for tax purposes and try to provide
appropriate reporting rules.
Can you give us any specific suggestions on what reporting
would be helpful on the cryptocurrency side, and would that
help in closing the tax gap?
Commissioner Rettig. Absolutely, reporting with respect to
cryptocurrencies would be important. I think it is noteworthy,
if you go back and you look at the 2019 Form 1040, I was
instrumental in adding a provision--together with Diane Grant,
who is here with me today--adding a provision in there asking
the question, did you have transactions in cryptocurrency? That
got on, because of timing, it got on a schedule further in. But
on the 2020 Form 1040, right under the address portion, is a
cryptocurrency question similar to the FBAR question. It is a
yes/no question.
So visibility--and we could give you a lot of guidance from
what we see with respect to areas in the crypto world. It is
replicating itself constantly. And so now we have these non-
fungible tokens, which are essentially collectables in the
crypto world. These are not visible items by design. The crypto
world is not visible.
I will say, in the criminal context, the IRS Criminal
Investigation Cyber Crimes Unit has been spectacular operating
in the dark web, engaging with cryptocurrency-related
transactions. So we have a lot of experience there.
Senator Portman. Great. We would like your input on it and
to get some technical advice. We are working on the bill; it is
meant to be bipartisan and something that can help to close the
tax gap in that area. Obviously there are a lot of other issues
related to cash businesses, and frankly going to the issue of
modernization. Back many years ago when I was working on IRS
reform, I remember getting this call from a constituent saying,
``I had to wait on the line for 45 minutes. I am not going to
keep waiting on the line that long.'' And here we are again,
waiting on the line for 45 minutes, and therefore this
individual chose not to file.
So part of the modernization efforts that we have been
trying to undertake is about closing that gap as well. Do you
agree with that? And let me ask you specifically about what
happened with the filing season in 2019.
We still have people who filed paper returns who have not
heard. And this is tough for them. One is actually a cousin of
a Tax Court judge who happens to live in Ohio, who calls every
couple of months and says, ``You know, I've got to have my
certification from the IRS that I have at least filed my tax
return, because you cannot get a mortgage.'' In some cases,
people are not getting their refunds, because some people who
file by paper do actually expect a refund, and they have not
been able to get it.
It has caused a lot of complications. And some have
received this CP-59 notice for failing to file a tax return,
even though they filed it over a year ago. So I know you have
made some progress in reducing the mail backlog, but
unfortunately a large delay still exists. What do you plan to
do to mitigate the impact on these taxpayers? And how does this
delay impact the processing of the 2020 returns with these same
individuals?
Commissioner Rettig. We have about 1.7 million returns
still in process that were filed prior to January 1st of 2021.
Those for the most part will be 2019 returns filed in 2020.
We are current with respect to our mail. At one point we
had over 20 million pieces of unopened mail. We are current,
and that standard is actually right around a million pieces of
mail. We always have substantial mail.
As far as processing returns, it is all hands on deck in
our submission processing. We have mandatory overtime, split
shifts, dual shifts, mandatory weekends, processing as quickly
as we can. And we expect to get through this--you know, the
term that we use, fortunately or unfortunately, is summer.
Being a lawyer on the outside, I used to categorize things
and say, ``Well, that is kind of a lawyer answer.'' It is,
because summer could be May or it could be September. I can
just assure you that we are giving it our best.
Folks who did not get an EIP who have not had their 2019
return filed, must file a 2020 return to get the EIP. And we
have a lot of avenues to help them with that.
Senator Portman. Well on that, in particular, we have heard
from constituents who cannot file electronically in 2020
because they do not have the Adjusted Gross Income from 2019,
because they have not received from the IRS the processed
return.
So it does look like your 2020 filing season as well. So I
appreciate you throwing a lot at it. I think you should let us
know what more we can do to be helpful, because this is causing
real heartburn for people.
On the modernization effort--and this is an issue that you
and I have talked about--one thing we got into legislation in
2019 was to have an Independent Office of Appeals. There is a
concern about the independence of that office. It is that the
IRS employees, particularly during COVID, did not have the
ability to have video conferences. Often they were held by
telephone, making it more difficult. And there are other
concerns that they are not following the rules of independence
that we laid out in that legislation.
How is the IRS protecting taxpayer data as employees work
from home? And what technology is the IRS using to allow IRS
employees to review but not retain protected taxpayer data such
as trade secrets?
Commissioner Rettig. As you can imagine, because we are one
of the largest data warehouses on the planet--other than maybe
a few organizations that probably do not have an identity--but
because of that, we collect data from everybody who does
business in the United States, as well as every American.
So we take to heart the protection and security of the data
that we do have. Tying that into the Independent Office of
Appeals, I also, from the outside, worked with Appeals for 36
years. I truly respect the independence of Appeals. Most
matters that are not resolved in exam are actually resolved
inside Appeals. And the training and effort--every employee
could not become telework-eligible because every employee did
not have a particular secluded area maybe at their home, or did
not have broadband, did not have this or that.
So the ability to telework, work from home, and
particularly to use accessed taxpayer data, was determined on
an individual basis, based on the employee's circumstances. We
do have employees who we could not get into----
The Chairman. We are going to have to move on, Senator
Portman.
Senator Portman. Thanks, Mr. Chairman.
The Chairman. I look forward to following up with you.
Senator Cardin, on the web.
Senator Cardin. Thank you, Mr. Chairman. And, Commissioner,
thank you for your service, and thank you for being before our
committee.
You have heard so many of our colleagues talk about the tax
gap, which is shocking--a trillion dollars. That is obviously
of concern to every member of our committee.
I want to question on the other end. That is, those who are
entitled to benefits under the tax code but have a hard time
accessing those benefits. Some use paid tax preparers. Others
are having a hard time getting through the requirements in
order to get the qualifications. The Earned Income Tax Credit
is more challenging than it was before.
I regret that we were not able--and I know the chairman
worked very hard on this--to give you back the regulatory power
in regards to paid tax preparers. But can you just share with
us your concern as to being able to protect some of our most
vulnerable taxpayers without the ability to regulate the paid
tax preparers?
Commissioner Rettig. We absolutely need the ability to
regulate paid tax preparers--and we talk in terms of the most
vulnerable taxpayers, the EITC recipients, individuals living
in different communities, and also in ethnic communities,
individuals who are challenged with the English language. Some
of the preparers--you know, they look to somebody, or if they
are in fear of the U.S. Government, they look to somebody who
might have a comfort factor there, and it is not at all unusual
for those individuals, the taxpayers, to be taken advantage of.
In the EITC context, 51 percent of the EITC returns are
prepared by preparers. A majority of the mistakes--the mistakes
made by preparers in the EITC context--are significantly
greater than mistakes made by individuals who prepare their own
EITC returns. Individuals generally know whether a child
resided with them or not for more than 6 months. They generally
know whether they provided more than half of the support.
Preparers, in certain contexts, certain preparers take
advantage of the situation.
If you look at the Criminal Investigation cases that we
refer to the Department of Justice, the vast majority are of
preparers. And in the last year, IRS Criminal Investigation ran
450 undercover operations. Many of those were posing as
taxpayers in the preparer community. And many of those led to
referrals to the Department of Justice for prosecution.
So without regulation of paid preparers, it is very
difficult for us to monitor them. And most preparers,
obviously, it goes without saying, are amazing and help the tax
administration in this country. They provide comments to you.
They provide comments to us. But there is definitely an element
out there, as there would be in any type of a community, that
takes advantage. And we need to go after that element. And
without regulation, we are left with either criminal cases or
civil fines, which are a much more complex thing.
Regulation gives us the ability to preclude them from
interacting with the Internal Revenue Service, essentially
precluding them from having the ability to prepare returns. We
absolutely need that ability.
Senator Cardin. You know, Mr. Chairman, you have expressed,
and we have all expressed concerns about the accuracy of the
applications for the Earned Income Tax Credit and others. And I
think what the Commissioner is telling us is, a lot of this
rests with the paid tax preparers.
So I would hope that we will once again try to find a
bipartisan way forward to provide reasonable authority to the
IRS to regulate tax preparers. It is in the consumer's
interest. It is also in the taxpayers' interest that we do
this.
Mr. Commissioner, I want to ask you one additional
question, if I might, and that is about your outreach to the
underserved communities. We have the VITA programs. What are
you doing in order to try to assist those who find it more
challenging to get services from government to deal with our
tax code?
Commissioner Rettig. Well we, with respect to this last
year, opened up the Low-Income Taxpayer Clinics to actually
prepare returns. Obviously, we have the VITA sites.
We partnered with more than 11,000 different organizations
during the past year with respect to EIPs in filing season. We
partnered with over 400 homeless shelters to be able to have
what we call trusted partners to receive information for
unsheltered homeless individuals.
We did a historic launch in the language area for the first
time in history. The Form 1040--the Form 1040 for 2020--is in
English and Spanish. Individuals who call in to our phone
service get translation services in up to 350 different
languages.
And if I might add one more point, the 2020 1040 has a
Schedule LEP, Limited English Proficiency. An individual can
check one of 20 boxes as to what language they would like us to
communicate with them in writing.
So far, we have received over 220,000 of those forms
completed. And I give this--the benefit of all this is IRS
employees. I opened those doors on languages. As you know, I am
sensitive to the communities. I opened those doors, and our
employees went through with passion and were really creative
and dedicated.
Senator Cardin. I would just ask you, as you request
additional funds, if additional funds are needed to reach
underserved communities, I hope that is part of your request.
So thank you, Mr. Chairman.
Commissioner Rettig. Absolutely. Thank you, sir.
The Chairman. Thank you, Senator Cardin. And thank you for
all your leadership on the tax preparer question, which is
hugely important to protecting consumers.
Senator Whitehouse is next.
Senator Whitehouse. Thank you, Mr. Chairman. Commissioner,
it is good to have you here.
When you were here for your confirmation, I asked you about
the 501(c)(3), 501(c)(4) reporting problem. As you know, a lot
of these organizations report that they have nothing to do with
politics when they file with the IRS, consistent with IRS
regulations. And then they turn up in election filings at the
Federal and State level with tens of millions of dollars
claimed in spending in political races.
That would seem to be a pretty flagrant predicate for a
false-statement investigation, and yet we have a failure in the
government between your organization and the Department of
Justice.
The Department of Justice will not look at these flagrant,
obvious predicated false statement concerns without a referral
from the IRS. I have a separate problem with the Department of
Justice over that policy, which I think is idiotic.
But setting their problems aside, on the IRS side, have you
made any referrals since you have been here for any of these
discrepancies in reporting out of 501(c)(3)s and particularly
501(c)(4)s?
Commissioner Rettig. I don't have that data, but I will get
you that data. But I will say that----
Senator Whitehouse. Would you mind telling me when, because
I have a very long record of executive agencies saying that
they will get me things, and then never doing it.
Commissioner Rettig. I will let you know this week when we
know.
Senator Whitehouse. Great, thanks.
Commissioner Rettig. And our office will get back to you.
But people should not assume that we are not doing something
just because it is not visible.
Senator Whitehouse. Okay; well, that is what I want to find
out. Because I think this referral policy is a mutually
agreeable situation between DOJ and IRS where powerful special
interests get to get away with things, and neither organization
has to deal with any backlash because you do not make
referrals, and they demand referrals. And to me that is just
not appropriate when you are seeing public reporting showing
what seems to be really strong predication for a false-
statement case. Because both of these statements are filed
under oath, and both are different. And it is hard to see how
both can be true.
On to the Treasury IG for Tax Administration report. The IG
said that wealthy taxpayers are paying 39 percent of what they
owe; that $2.4 billion in revenue was lost to the Federal
Government as a result; that this is not a collection priority
for your collection folks; that there is no strategy to address
nonpayment by high-income taxpayers; and the Treasury IG for
Tax Administration made a number of recommendations, and you
rejected five of them.
Can you tell me why?
Commissioner Rettig. I think, one, I disagree with their
report entirely, and I am more than willing to have a
discussion with you separately about that, or anybody else,
with respect to sometimes what might be in those reports.
But I would draw your attention to the management report
there. And I think that the statement that high-income non-
filers are not a priority is absolutely false.
Senator Whitehouse. All right. Well, I would love to see
that, because you are the first person who has----
Commissioner Rettig. I will meet with you personally and
walk you through it, and I will bring our team.
Senator Whitehouse. Great. No, I would love to see some
evidence of that, because all the evidence seems to be the
exact opposite way: that you are more likely to get audited if
you get an Earned Income Tax Credit as a very poor person----
Commissioner Rettig. That is false.
Senator Whitehouse [continuing]. Than you are to be audited
if you are a very wealthy person surrounded by lawyers.
Commissioner Rettig. 2019's Data Book, page 34, Table 17-A:
high-income taxpayers are audited more than any other taxpayer
there; over 8 percent of the people over $10 million. In EITC
folks, it is 1.12 percent. And those are actually hard
statistics. We are about ready to issue the 2020 data book----
Senator Whitehouse. I want to get to the bottom of this
with you.
Commissioner Rettig. I am more than willing to come and sit
with you on that as well, sir.
Senator Whitehouse. The last topic is that Congress, on a
bipartisan basis--much thanks to the leadership of Senator
Crapo, the ranking member on this committee--passed a new law
obliging shell corporations to report their true beneficial
owner to FinCEN at the Treasury so that we can look behind the
screen of these corporations and see what criminals, tax
evaders, foreign kleptocrats, and other evildoers are up to
using the American corporate shield as their device.
Could you give us--in my last minute here--an overview of
what you are doing to implement that new law?
Commissioner Rettig. We have teams that, when legislation
passes, they do it. But the real implementation happens in the
trenches. It is our front-line employees, so, training the
employees on new legislation, and having them go seek. Our
struggle, as you are aware, is our front-line agents, which are
the examiner revenue agents, who are our most highly capable
employees. We only have 6,500 of them, and they are fully
deployed in the high-wealth context.
In terms of organizations and nonprofits--that is tax-
exempt government entities--I think the committee is aware that
our Deputy Commissioner of Services Enforcement, Sunita Lough,
just moved over to TEGE, and she has a strong history with
TEGE. She was formerly a Commissioner in TEGE, and I would
encourage you to invite us up for briefings in that space.
Senator Whitehouse. All right. It sounds like, at this
point, the implementation is primarily in the training of
front-line----
Commissioner Rettig. No, I would not say that. It takes us
a while to train, but it is not just in the training. It is in
the----
Senator Whitehouse. What else? For instance, have you got a
link of some kind with FinCEN so that you can make appropriate
requests when it bumps into the----
Commissioner Rettig. I will have somebody brief you on
exactly what is happening there. That is not something that I
am directly involved in, as you are aware.
Senator Whitehouse. That ends my questioning and my time,
but, Mr. Chairman and Mr. Ranking Member, this may be something
that, given the bipartisan support and interest in this
committee in getting this shell corporation problem solved,
should perhaps be done as a committee-wide briefing so that
everybody has the chance to understand what is going on to
enforce the law that we passed.
I am happy to take the briefing myself, but I think it is
probably going to be of interest to all of the--or a great many
of our members.
The Chairman. I will follow up with the ranking member on
that. And the point really is--and the Commissioner is seeing
this--there is a connection between these issues. We are seeing
huge tax gaps. We are seeing the question of the shell
companies. We are seeing how modern crooks are constantly being
more inventive and have better resources than the people who
are trying to catch them when they abuse the laws. So we have a
lot of heavy lifting to do here.
Commissioner Rettig. We are fully supportive of that.
The Chairman. We appreciate that.
And Senator Cassidy, I believe, is going to be next on the
web.
Senator Cassidy. Can you hear me, Mr. Chairman?
The Chairman. Yes.
Senator Cassidy. Okay. Mr. Commissioner, thank you very
much for your service and for the service of all the Treasury
Department employees. Thank you for what you all are doing.
One thing that I proposed is that in Louisiana, with our
geography, we tend to get more hurricanes than almost anybody
else, maybe more than anybody else, and almost every time there
is a major disaster in whatever stage it occurs, there is going
to be some tax provision that allows disaster tax relief.
My question is, I propose making this permanent. Would it
help the IRS if, as opposed to waiting until it is passed to
then implement, if you knew that once there was a federally
declared disaster of some magnitude, that you would immediately
begin to click into the implementation of this? I am maybe
begging the answer, but I still think it is important for the
record.
Commissioner Rettig. Yes, I think you are begging the
answer a little bit. Everybody should know that we monitor
legislation. We plan for that legislation. And when there are
multiple bills pending and they start to merge, our planning
merges. And that is why--I think it is obviously clear--we are
able to launch our activities as quickly as we are.
So you know, we would be supportive. We have to follow the
law. We cannot launch until there is actually a law that
supports our ability to do so.
Senator Cassidy. So if the law was in place then--granted,
the efficiency of your staff somehow overcomes it--but if the
law was in place, obviously you could launch before, because
the law would already be in place. And I do not think I am
begging that answer; I think I am just pointing out the
obvious.
Commissioner Rettig. Correct.
Senator Cassidy. Going to a different issue, in May of
2020, Senator Brown and I introduced legislation to ensure that
lower-
income families impacted by the coronavirus outbreak could use
their wages reported in the 2019 tax return to determine their
eligibility for the EITC and the CTC on their 2020. This was
included in the December 2020 relief bill.
Can you just give me an update on what IRS has done to make
sure that folks will know they are eligible for this relief?
Commissioner Rettig. Yes; again our outreach, I think, has
been more significant than any outreach by the IRS, possibly
than any Federal agency in history. Unfortunately, as a Federal
agency, sometimes when we think we are doing great, if we put
something for example on irs.gov, or we issue notices, there
sometimes tends to be a belief that folks might actually look
there. But in this context during 2020, as I indicated earlier,
we partnered with over 11,000 different organizations. We
partnered with every other Federal agency. We partnered with
HUD, and aggressively so, in terms of getting the word out,
getting forms out, getting instructions out.
We had people on the ground throughout the country in 511
different offices, and our folks started coming back in June. I
did shut it down in March, but our folks started coming back in
June. And the vast majority of people who had a reason to be in
the office, who could not otherwise telework, were in our
facilities.
Senator Cassidy. Got it. Let me ask you one more thing--we
talked about it yesterday on the phone--the stimulus checks for
prisoners. Last year when Congress passed the CARES Act, IRS
determined prisoners were not eligible.
As we spoke about, the 9th Circuit ruled otherwise. I
proposed an amendment in this latest COVID relief package to
prevent those who have been convicted of a crime and sentenced,
and currently are incarcerated, from receiving stimulus checks.
Surprisingly, that turned out to be partisan, with every
Democrat opposing not giving a check to a rapist or a murderer
or a terrorist. It was just the most amazing thing. But I
recently saw press reports indicating that prisoners in some
States had received debit cards which were unusable and had to
be replaced. Knowing that the IRS is somewhat stretched thin,
there are some folks in my State still waiting on their
stimulus check.
So I guess, what are the priorities here? Replacing the
debit cards for the inmates or getting folks who are not
incarcerated their stimulus checks? It is just kind of amazing
that we are giving them to prisoners anyway. And are there
administrative challenges to providing stimulus checks for
prisoners that take up IRS resources that could be used for
other purposes?
Commissioner Rettig. First, Secretary Mnuchin is the one
who made the policy decision on not paying prisoners last year,
and then we reversed that when the 9th Circuit--excuse me, when
the District Court ruled against us.
With respect to the debit cards, I think as most people
know, we actually do the files. We deliver the files to the
Bureau of Physical Services to determine--for unbanked people,
they determine whether it is a check or a debit card. Those
debit cards should not have been issued by the BSF to
prisoners. There is a note on the individual's forms that
indicates that. And those debit cards came back and will be
replaced by checks.
And as far as the decision or the policy on prisoners
receiving or not receiving, we are only a tax administrator.
But the individuals could file a 2020 return. There is a
separate issue with, for prisoners having access to the 2020
return, having access to the online ability.
We are distributing over 200,000 simplified Form 1040
packages to over 200 different prison institutions in the
country to facilitate their ability to file 2020 returns.
The Chairman. I thank my colleague. Senators obviously have
a hectic schedule this morning. The order now is Senator
Cantwell, Senator Brown, and Senator Lankford for the next
three questioners.
Senator Cantwell?
Senator Cantwell. Good morning, Commissioner.
Commissioner Rettig. Good morning.
Senator Cantwell. Commissioner Rettig, I appreciate you
being here today and all your hard work, particularly in such a
busy season. I know you already know that you are receiving, or
have received, a letter from myself and Senator Toomey about
the tax season payment, wishing that the first quarter
estimated tax payment deadline would be extended to
individuals.
We do not get this difference between individual filers and
estimated filers, and the confusion that we think is being
caused. And so do you have a comment about the letter? I mean,
you do have the ability to do this, correct?
Commissioner Rettig. It would be a Treasury call, and I
have not received the letter. I am obviously familiar with the
issue, and we will not be extending the estimated payment
beyond April 15th----
Senator Cantwell. Well, if it is a Treasury call, then why
are you saying that?
Commissioner Rettig. Because we are working with Treasury.
Obviously the first call was made with Treasury, and this call
was made with Treasury. And I am a bureau of Treasury
supervised by the Secretary.
Senator Cantwell. I think I understand that. So we will
take it up with the Secretary of the Treasury then as well, and
the White House, because, look, this makes no sense.
You have mom and pop businesses that have a hard time
anyway complying with complex regulations. And now we make it
seem like they do not have to file until May. But then all of a
sudden, they start the process and they realize that, oh, they
were supposed to make a payment anyway.
And so this, I think, is confusing. I think it is
unnecessarily confusing. You also probably have some 1099
individuals who are not--you know, if you talk about the gig
worker--also really not sophisticated tax filers, and they are
also confused by this deadline.
So the deadline that is May 17th, but really requires
people to do something beforehand is, I think, at least for
this segment of the population, confusing. I just do not get
it. I just do not get why we are creating this level of
uncertainty in this environment, particularly when there are
probably other complexities related to the COVID packages and
what people might have done in the COVID packages.
So then you create more work for yourself later in the
process when people overpaid or underpaid, and then we have to
figure that out later. I don't know, it just seems to me that
it adds to a lot of confusion when we could be saying to
everybody, ``The deadline is May 17th; that is the deadline.''
Commissioner Rettig. There are numerous other deadlines
that were not extended. The only deadline that was extended was
the filing of the Form 1040 and affected taxpayers associated
with the 1040. We did not extend any other deadlines.
Last year was different. This year is different.
Senator Cantwell. I think, Mr. Chairman--personally, I
think Senator Toomey and I have a well-founded point,
particularly as it relates to small businesses and the
confusion.
I have certainly heard from lots of people in the State of
Washington over this. I am sure we will hear more about it
later. So I certainly will push my case to continuation with
the rest of Treasury and the administration.
Thank you, Mr. Chairman--oh, one other question, actually,
since I have a minute here. I want to understand--the IRS
recently put out proposed regulations on income averaging which
create a set-aside test that operates completely differently
than the other set-aside tests within the Low-Income Housing
Tax Credit.
So I am concerned about that. I understand there was a
hearing on this in March and would like to know if the IRS is
considering any changes to the income averaging regulations to
bring them more in line with other LIHTC set-aside tests?
Commissioner Rettig. I do not have the updated information
at the hearing, but we will brief you or your staff, and do
that in short order.
Senator Cantwell. Thank you. Thank you, Mr. Chairman.
The Chairman. Thank you, Senator Cantwell.
Senator Brown, you are next on the web.
[No response.]
The Chairman. And then Senator Lankford is next, while we
wait for Senator Brown. Senator Lankford?
Senator Lankford. Thank you. Thank you, Mr. Chairman.
Mr. Rettig, thanks for all the work. There is a lot going
on, to say the least. The IRS is being tapped right now to send
checks when you are really designed to be able to receive taxes
and be able to process those efficiently.
There is a tremendous backlog right now that you are
working through, I understand. Can you give us an update on the
backlog, on the mail coming in and what the status is for being
able to answer mail? We still get a tremendous amount of calls
from people saying they are calling the office, trying to get
through as well. So help us understand the status on that.
Commissioner Rettig. We are current on our mail, which
means that we have a more typical backlog, which is about a
million pieces of mail being processed.
In terms of returns, we have about 1.7 million returns that
came in during 2020. And that is a priority for us to get
through those returns.
In terms of level of service and the phone calls, the
volume of inbounds has probably gone up as much as four times,
depending upon the time of the day. I think I might have
indicated earlier that we have received as many as 1,500--one
thousand, five hundred--phone calls per second on some of the
days.
Our irs.gov has had over 1 billion hits in calendar year
2021. And one of the issues is that the level of service, and
the staffing, and whatnot inherent with that is determined
about 2 years in advance, and it is an appropriated item.
We did get budget to bring on board 1,000 people from the
last act, and those people are in training. It takes 14 weeks
to train them, to get them on the phones, because obviously,
somebody who is trained is better on the phones than somebody
who is not trained.
So all I can really say is, we appreciate the patience and
understanding of everyone. We are operating, I used the term
earlier, at ``all hands on deck.'' We are doing that
everywhere.
For a lot of these activities, we cannot take somebody from
one position and move them to another one. One, we need them in
that position; two, they might not be trained. But what we have
done, where people have moved off of a certain position and
they were previously trained, we have taken those folks back
into that position to try to do our best. And we get it, that
it is far from perfect.
Senator Lankford. All right; that is helpful to be able to
get the update and be able to get that out.
Economic Impact Payments, when they went out last year,
individuals who received those checks were fine, they received
those; others who did not receive them for whatever reason,
they had to then file for them on their taxes.
What I am finding from some of my constituents now is they
file it on their taxes, and if they have outstanding debt, that
debt is being withdrawn. They are calling our office and
saying, ``If I received the check, then I would have just
received the entire thing. If there was other debt that was
outstanding, it is being withdrawn from it.'' Can you help to
provide any clarity there?
Commissioner Rettig. Yes, that is the--there are certain
provisions in certain areas that allow for an offset as far as
the EIPs with respect to tax debt. EIP1 was different than
EIP2, and EIP3 was different than EIP1 and EIP2. You know,
individuals should reach out to us if they are in that
situation, but essentially we are following the law. We are
trying to do our best. Where we can exercise discretion, we are
exercising discretion.
Senator Lankford. Let me ask about cryptocurrency. I have
had folks who have asked about a very confusing aspect of our
law, and again what I want to try to get from you is, what
clarity is needed on this? Any time a cryptocurrency is cashed
in or changed into a fiat currency, it is a taxable event
because it is property that is actually moving into that.
What would you suggest is the best place to be able to get
information? And what do we need to do in Congress to be able
to deal with the cryptocurrency issues, and to be able to
clarify what is a taxable event, a nontaxable event, and how
they can actually manage that?
Commissioner Rettig. Yes, we have issued some guidance. We
will continue to issue guidance and work with Treasury with
respect to the issuance of guidance. And you know, it is not
too dissimilar than other property-type issues and the
interests that people have.
There is some uniqueness to it, you know, in terms of split
forks and such. But by and large, it is there. In terms of
assisting us in that arena, obviously information reporting
would be significant and huge in helping us, going forward.
That is kind of a universal answer for us on our behalf, but it
definitely works. More information reporting assists us in tax
administration.
Senator Lankford. What would that look like for you to get
more information reporting for that?
Commissioner Rettig. 1099s.
Senator Lankford. For each of those events?
Commissioner Rettig. If they are electronically filed, yes.
Paper filed, we might trim it down.
Senator Lankford. Obviously, lots of folks use
cryptocurrency for a lot of transactions, just in their daily
or regular life--it may not be daily, it may be monthly, it may
be weekly even, for different events. So you would consider
each of those a 1099 taxable event?
Commissioner Rettig. I am saying 1099s. I am not saying
that they are taxable events. You can have transfers. You can
split. You can do a lot of different things that are not
taxable events. That is the guidance that we need to issue, and
that is between us and Treasury to get that guidance out. But I
think we have issued a considerable amount of guidance,
considering the volume of crypto that is out there.
Senator Lankford. Okay. Thank you. Thank you, Mr. Chairman.
The Chairman. I thank my colleague. The next three
questioners will be Senator Brown, Senator Casey, and I see
Senator Daines--the next three.
Senator Brown, on the web.
Senator Brown. Thank you, Mr. Chairman. I hate to go before
Bob Casey on his birthday, but you called on me, so I will.
Commissioner, first of all I want to start by saying
``thank you'' to your outstanding employees at the IRS. You and
your workers, the professionals at the IRS, have withstood
years of budget cuts, then the pandemic, and a Congress that
keeps giving you more and more work to do, even right in the
middle of a filing season.
The IRS has been under-resourced for years. You have my
commitment to get you the resources you need--I know Chairman
Wyden cares about that--to hold corporations accountable for
taxes they owe; getting working families the tax returns they
need, including that they have earned, including the
significant expansion of the Earned Income Tax Credit and the
Child Tax Credit we passed in the American Rescue Plan,
including monthly distributions as we talked about,
Commissioner, of the CTC. The expectation from me and from
Senator Bennet, especially on this committee, and other members
of Congress, is the distribution will start going out monthly
starting in July.
My question is simple: is the IRS on track for monthly
payments starting in July?
Commissioner Rettig. We are. If we end up not being on
track for some unforeseen situation, we will advise you and the
committee.
Senator Brown. Thank you for that, Commissioner.
On a related note, I want to address the alarmism we hear
from some of my friends across the aisle about improper
payments with the EITC and the CTC. That alarm ignores the
billions in revenue we are losing out on from corporations and
wealthy people who use every trick in the book to try to get
out of paying their fair share.
I remind my colleagues, we have already passed the set of
program integrity measures with their support in 2015, as part
of the PATH Act. There are two additional bipartisan measures
we can take to reduce improper payments and make sure Americans
get the refunds they have earned. One of them Senator Cardin
mentioned--I thank him for leading that effort--is regulating
paid tax preparers. Just to follow up on that question, would
we see fewer improper payments if IRS could set minimum
competency standards for paid tax preparers?
Commissioner Rettig. I believe absolutely, yes.
Senator Brown. Thank you. And I appreciate our private
conversation last week about that. As I run out of time, I will
raise another bipartisan way to ensure more accurate returns,
by supporting VITA, the Volunteer Income Tax Assistance
program. VITA has a 94-percent accuracy rate, as you know,
Commissioner. If you want an accurate EITC or CTC return
prepared, have it done by a VITA volunteer.
Commissioner, I know that VITA is stretched thinner than
ever. Will you use part of the IRS funding from the American
Rescue Plan to support VITA through the calendar year to help
families get their stimulus checks and their Child Tax Credit?
Commissioner Rettig. VITA is an appropriated item, and we
are using every resource, including numerous IRS employees who
volunteer for VITA. I just got an email yesterday from an
employee expressing her pride at the volume of folks coming in
to do returns and getting EIPs out. She said that over 98
percent of the ones that she has done returns for have received
their EIPs, and she is very proud to participate in that. And
that goes throughout our agency.
Senator Brown. Thank you, Mr. Chairman.
The Chairman. Thank you, Senator Brown, and especially for
recognizing our wonderful volunteers. That is such an
incredible asset right now. Senator Daines--no, excuse me,
Senator Casey is next, and then Senator Daines.
Senator Casey?
Senator Casey. Mr. Chairman, thanks very much. And I want
to thank you, Mr. Chairman, for the work that you did working
with Senator Brown, Senator Bennet, and others on the expansion
of the Child Tax Credit, and so many other provisions in the
Rescue Plan that relate to children and seniors. I know we have
more work to do, but I want to commend and salute your work.
Some of the questions that I will raise to the Commissioner
are critically important to the people of Pennsylvania, as the
Commissioner knows, and I want to thank the Commissioner not
only for his public service, but for spending the time
recently, as he did, with so many members, to meet with us,
with me and my team, and to discuss some of the challenges that
Pennsylvanians are facing in tax filing.
We understand--or at least I have some sense of the tasks
that your team has undertaken this past year. I have in the
past, and will continue to advocate for the IRS to have the
resources available to fulfill its responsibilities to
taxpayers.
My office, as the Commissioner knows, has heard from
Pennsylvanians whose returns have been referred to the Error
Resolution System, but have not received communication from the
IRS as to why their return was flagged, or how to correct their
return.
So I would start with this question, Commissioner. Can you
explain the steps that the IRS is taking now to ensure
taxpayers understand why, why their returns are being flagged?
Commissioner Rettig. We have done a fairly--again, IRS-
speak, you know, maybe not in the private sector or other
people--but for us, we believe we have done a pretty fair
amount of outreach, and we continue to do so.
In terms of the Error Resolution Service, historically it
has been about a 3- to 5-day process. It is currently running
about 10 to 14 days. We currently have an inventory of about 1
million--exceeding 1 million, but about a million matters
there.
Where we could, in other arenas we have actually
transshipped physical items and returns to other campuses. I
think as everybody knows, the Error Resolution System operates
out of Kansas City.
The top five issues of why returns are in there, just
quickly, are return recovery rebate matching EIP1 and EIP2
against their RRC claim; the EITC with people who elected for
2019 as opposed to 2020; the additional Child Care Credit they
claim on the return does not match the information that we
have; EITC math errors; and the last one is that they received
a premium tax credit but they did not file the Form 8962. And
for individuals who do their own returns, the software actually
requests that.
But those have been the most prevalent, and they are fairly
consistent across the board as to what is pulling returns out,
and Error Resolution System is a manual process. And we have
put as many folks in there as we can. We get it, and those need
to be processed. We are doing the best we can. That does not
mean that we are doing well, but we are doing the best we can.
Senator Casey. Well, Commissioner, thanks for your
attention to that issue.
I wanted to make reference to a report in March in The
Washington Post. The Post reported that a caller was told by an
IRS call center agent that over 7 million returns were sent
into the Error Resolution System to, quote, ``buy time,''
unquote.
I would ask, just by way of follow-up, can you share how
the number of returns being routed to Error Resolution this
filing season compares to previous years? And also, a second
question is, what is the IRS plan to resolve this?
Commissioner Rettig. First, let me just say, we do not do
something to ``buy time.'' If somebody gave that comment, they
did not know what they were saying and should not be working
for the Internal Revenue Service.
We are a service organization on behalf of the people in
this country, and that is just outrageous. Nobody should say
that. We do our best. We have processes, and those processes
are in place.
In terms of Error Resolution, historically we did not have
issues with respect to individuals who could elect, say in this
year, 2019, as opposed to 2020, for their EITC. We did not have
the matching with respect to the EIP1, EIP2, and the return
recovery rebate.
Those are the top two of the five most prevalent issues as
to why things get into ERS. And you know, it has certainly
increased the volume. If you want a year-to-date item, I do not
have that present, but I certainly could give it to you. But
you know, we got hit with a couple of additional issues. We got
hit with the pandemic. We got hit with staffing issues, and we
have had difficulty hiring during this period of time.
And we are hiring, for anybody who might be watching and
listening. And on behalf of every member of the committee, now
or at other times, I would encourage and invite you to visit
some of our facilities. Our employees would very much like to
see you, the ones who are on-site. And you know, it is quite
meaningful when people do show up.
We have had people show up, you know. Members of Congress
show up at some of our facilities, and it does help the
motivation of our employees.
Senator Casey. Commissioner, thank you very much.
Thanks, Mr. Chairman.
The Chairman. I thank our colleague. And if it did not come
through, a big ``happy birthday'' to our friend.
Our next questioner will be Steve Daines.
Senator Daines. Thanks, Mr. Chairman.
Commissioner Rettig, thank you for being here today. As
Montana's U.S. Senator, and bringing 28 years of private-sector
experience to this job, I truly believe we are here to serve
and not to be served. I believe it very important that
government works to make life easier for Montanans, and all
Americans, on issues they are facing every day. For example,
paying taxes.
A Montanan from Billings brought an issue to my attention
that I would like to briefly discuss. This individual lost his
mother in January of 2020, and only then found out that she had
not filed taxes for fiscal years 2017, 2018, and 2019, due to
the fact she was ill. He completed and mailed the returns to
the IRS in April of 2020, so about a year ago. This Montanan is
trying to close out the estate. However, he cannot do so until
he receives the refunds as a result of filing these tax
returns.
The IRS is not showing they received the returns. My office
submitted copies of these returns to the IRS to ensure that
they had them. I have heard from other Montanans who have e-
filed returns that are not showing up in the IRS system as
having been received. And in some instances, this backlog has
prevented individuals from even receiving their Economic Impact
Payments.
A question, Commissioner Rettig--and I thank you for your
passion in the comments you made about service; I think that is
really important in the role that you have, and we all have.
Could you provide any sort of timetable for when the IRS might
fully clear out its mail backlog and help Montanans who are
navigating through tough situations like this constituent from
Billings?
Commissioner Rettig. Our mail is current. We have a million
pieces of mail. We get about a million to a million and a half
pieces of mail per week, and we work through a million to a
million and a half pieces of mail per week.
Obviously, we are a large operation in terms of that. So
our mail is current. On the matters that you referenced, I
would encourage your staff to reach out to me, or to my staff,
and I think pretty much everybody on the committee has my
cellphone. I have handed that out to members of the committee
with the intent that you do so, and feel free to use it to me,
and also the Deputy Commissioner Jeff Tribiano, because items
that seem unusually long--and certainly April seems unusually
long with respect to the estate--we will have somebody look
into that.
Senator Daines. I appreciate that, and the Montanans as
well, and we will do that. We will follow up. Thanks for that
open door.
Switching gears, I want to talk briefly about conservation
easements. This is something that we talked about on the phone
last week. I was glad to see it mentioned in your written
testimony. Thank you.
Senator Stabenow and I will soon reintroduce our Charitable
Conservation Easement Program Integrity Act, which seeks to
restore faith in this very valuable conservation incentive by
cracking down on these abusive syndicated conservation easement
transactions.
Montana in fact is the national leader in the number of
acres under conservation easement, with over 2.6 million acres
conserved by these voluntary agreements. That is a big reason
why I am very passionate about eliminating the abuse, these bad
actors that are taking this tax deduction.
Could you provide a brief update of where things stand with
syndicated conservation easements, for instance: approximately
how many cases has the IRS prosecuted?
Commissioner Rettig. By a head count, we have 28,000
taxpayers under examination in those easements. We have cases
in Tax Court. We have cases in various other courts. We have
cases on IRS appeals. You know, we have in excess--well, for
tax years 2016, 2017, and 2018, we had about $21 billion of
deductions that we do not believe people are entitled to.
We will soon have information with respect to 2019. I know
the committee has held hearings in the space of syndicated
conservation easements. We have criminal matters--we recently
received two guilty pleas down in Georgia from some advisors.
We have just announced this week somebody agreed to a
lifetime injunction to preclude themselves from the ability to
participate in these. We have quite a few cases, civil and
criminal, with respect to advisors and others. But really to
get through it, I think most people would say we absolutely
need legislation. The legislation has been pending. We would
certainly like to work with members of Congress on legislation
and administrability of such legislation.
Senator Daines. What is your sense of approximately what it
might cost the IRS to litigate these cases one by one? It has
to be a very costly endeavor.
Commissioner Rettig. It is absolutely hundreds of thousands
of dollars. We are up against people who are funding litigation
to the extent of millions and millions of dollars per case.
Senator Daines. And do you think these resources could be
put to use elsewhere, if legislation like the Charitable
Conservation Easement Program Integrity Act is signed into law?
Commissioner Rettig. There is no shortage of places for the
IRS to put its resources. We are resource-challenged. So in
this space, we have many hundreds of employees, from lawyers
down through agents and everybody in between, plus support
folks. And you know, it just needs to be stopped.
Senator Daines. Thank you. And I want to thank you,
Commissioner Rettig. Please pass along my gratitude to your
workforce, which I know has been working very, very hard in the
past 12 months under difficult circumstances.
Commissioner Rettig. I appreciate that.
Senator Daines. Thank you.
The Chairman. I thank my colleague.
And next will be Senator Warner, who I think is going to be
questioning on the web. Senator Warner, are you out there in
cyberspace?
Senator Warner. Yes, I am, Mr. Chairman; thank you.
The Chairman. Great.
Senator Warner. Let me follow up, pick up from where my
colleague, Senator Daines, just left off.
Commissioner, thank you and your workforce. I know, with
the pandemic, with the stimulus payments being sent out, it has
been an incredibly challenging year. And I am going to take you
up on your invitation to go out and visit the workforce.
I know--I think Senator Casey tried to ask you though,
because we are both still hearing from a number of constituents
who are concerned about the fact of 2019 tax returns still not
being processed. I believe Senator Casey asked if you had any
idea of the backlog. And I would be curious, how many tax
returns prior to January 1, 2021, are still being processed?
Can you get us that number at some point for the record?
Commissioner Rettig. One-point-seven million.
Senator Warner. One-point-seven? Thank you. And you had
said, I believe, in your testimony before the House that you
were going to try to get through this backlog by the summer.
Are you still on track to do that?
Commissioner Rettig. We are.
Senator Warner. I think also, as we get into the
President's new proposal on infrastructure and how we pay for
it, one of the areas where there might be broad-based
understanding is this tax gap, which I understand by some
estimates--the National Bureau of Economic Research said it is
about $600 billion. I understand, Commissioner, you have said
it may be as large as a trillion dollars. I think President
Biden has moved forward with an increased funding proposal of
about 10 percent.
I know former Commissioners Rossotti and Goldberg have
argued for a more dependable multi-year income stream. Have you
seen a proposal out there on a multi-year income stream that
might give you and your workforce a little more assurance about
funding that you would be willing to support?
Commissioner Rettig. I personally, and as Commissioner of
the Internal Revenue Service, fully support every proposal from
every person with respect to funding. What we need is
consistent, adequate, multi-year funding. And it needs to be
appropriated in the right positions. And there are accounting
financial issues as to where it needs to go so that we can get
the best use for it.
We proudly serve more Americans than any other
organization, public or private. I think it is in everybody's
best interests--and I think folks are aware that we account for
96 percent of the gross revenue of the United States of
America. Our last gross revenue, Fiscal 2019, was $3.56
trillion. And when we look at the tax gap, we know that we
could do better.
The desire of our employees to do better is there. We need
the tools. We need the resources. We need the staffing. We need
the training. We need modernization. We need information
reporting. It is a multi-faceted approach, but I believe in my
interactions with members of the committee, I think there is
strong bipartisan support to get us there. And I know that it
is our responsibility to handle any funds we get efficiently
and appropriately. And we intend to do so.
I have invited, from before I became Commissioner,
oversight from this committee and everybody else of any funds
that the Internal Revenue Service gets. I see us in this
together. Tax administration does not just belong to the
Internal Revenue Service. It belongs to members of Congress. It
belongs to taxpayers. It belongs to tax professionals. And I
think we can get to a better place.
Senator Warner. One of the things I hope to work with you
on--and one of the disappointments in the March package we just
completed was that we did not do the full level of IT
modernization that, again, is not a silver bullet, but we do
know your systems need to be upgraded.
In my last minute, I just want to raise the issue of gig
workers--16 million gig workers in America. I do not think we
are going to go back to a traditional 40-hour W-2 work week for
all workers going forward.
One of the most important things I think we did in the
initial CARES Act, under the chairman's leadership, was to
expand unemployment to cover gig workers. I know in the
American Rescue Plan we made some additional steps forward on
making sure that those workers who make more than $600 a year,
that employers or payers would send out 1099s.
Commissioner, could you talk about other programs that you
are looking at, at the IRS, and how we can deal with this 16
million and growing contingent of the American workforce that
does contingent or gig work, and how we can make their
interactions with the IRS easier?
Commissioner Rettig. Part of the issue with gig workers is
our need for outreach, guidance, education, and the rest. And a
lot of folks who get into a certain element of gig work, if you
will, do so temporarily. Or it is a second job, and then they
move on to another job, or they move on to education, and they
do a lot of different things.
So from that perspective, it is somewhat of a transient
workforce. And it is difficult for us to actually connect with
them directly when we do that. And again, you know, mainstream
media tends to be one of the best outlets, much more so than
irs.gov, because the average gig worker is not necessarily
going on irs.gov to see our latest notice. And my point there
is that it is a collective responsibility for the IRS, for
members of Congress, as well as folks on the outside, to get
our messages across clearly, in single syllables, and be direct
and timely.
And we take that to heart. And we do our best.
Senator Warner. Thank you. Thank you, Mr. Chairman.
The Chairman. I thank my colleague.
Senator Young, I believe, is next on the web.
Senator Young. Well, welcome to the committee, Commissioner
Rettig. And thanks for taking time out of your schedule. I know
it has been a really busy time for the IRS. You have seen your
role greatly increase over the past year in the midst of this
pandemic.
Your employees have been asked to undertake all manner of
COVID-related duties, like distributing each round of Economic
Impact Payments to Americans, and still taking all necessary
requirements to keep IRS employees safe amid the pandemic.
I understand the challenges presented to the IRS, but I
have to say, I do have deep concerns regarding the delays that
Hoosiers continue to see over a year into this crisis. An early
and recurring complaint that I receive from constituents
involves the backlogs from our regional offices, namely, the
IRS processing center in Kansas City.
Even with the involvement of local taxpayer advocates, we
still have constituents waiting on 2019 refunds, sometimes with
no reason provided for the delay. Can you please explain the
process that the IRS has adopted in order to process the
backlog of tax returns, sir?
Commissioner Rettig. It is our submission processing
element of what we refer to as the Wage and Investment
Operating Division, and as I indicated, we have all hands on
deck. We are doing multiple shifts, mandatory overtime. We are
doing weekends. Folks who were trained in that lane who went on
to other positions within the Internal Revenue Service have
been detailed back into that.
So we have the maximum amount of folks dedicated to that.
About 5 million returns that are in process are actually
returns where we have asked for additional information, whether
it is a form, or certain information in the EITC space
verifying that, you know, children are qualifying children for
EITC. And so we have actually sent out requests for that
information, and that ties into our mail side. Because of those
folks who have actually responded in paper mail--in our mail
side of the house, our mail backlog is about a million pieces
of mail, which is actually current. It is not a backlog. We
average a million to a million and a half pieces of mail a
week. And that is what we process. And ``process'' means we
open it, and we enter it into our system, and we redirect it to
where it needs to go.
We are moving that as quickly as possible. I get it, and I
am very sensitive to the fact of--you mentioned things like
refunds and whatnot, and certainly in addition to that, refunds
for the most vulnerable taxpayers, the EITC, CTC folks out
there.
I want to assure you, we are doing everything we can. There
is a high degree of concern and dedication. And I get it that
doing everything we can did not get somebody their payment
earlier. But we are doing everything we can in that space. We
have used every resource possible.
Senator Young. Right, including addressing major
bottlenecks. The errors department in Kansas City and the
processing of unopened mail from over a year ago have been a
challenge, but what I am hearing from you is, you are diverting
resources to attend to challenges like that. Is that accurate,
sir?
Commissioner Rettig. We are. And we transship physical mail
among our four different campuses for processing, specifically
out of Kansas City into Austin, Memphis, and Ogden, to handle
that. And the errors are now averaging about 10 to 14 days,
where historically it was about 3 to 5 days to process.
Senator Young. Thank you, Commissioner.
In my remaining time, I would like to discuss an issue that
is of great concern to me: the tax gap. As you know, the tax
gap is the difference between the taxes legally owed and taxes
that are actually paid.
The gap results from individual taxpayers and businesses
under-reporting their income, over-reporting tax-preferred
activities, failing to file, or under-paying taxes owed.
Mr. Commissioner, the law needs to be followed. And I think
we should all obviously agree on that. In response to the
chairman's questioning earlier, Mr. Commissioner, you shared
your estimate that the tax gap could approach $1 trillion per
year.
Now just to re-emphasize the point, you are stating that if
everyone paid exactly what the tax code says today, without
increasing current tax rates, no increases in tax rates, the
IRS would collect an additional $1 trillion every year. Is this
correct?
Commissioner Rettig. That is what the tax gap represents.
But it must be acknowledged that, I think historically most
people have indicated, with resources, the IRS could probably
bring in 10, 15, 20 percent. I think a modernized IRS could
actually beat that. I am just relying on historical estimates.
But when I see--you know, I came from the private sector.
When I see the employees and the dedication--you see it in
their eyes, you know where their heart and soul are to try to
get this done. Our people are equally offended by people who do
not comply.
And the other side of that is, they want to support those
who do comply. And so both components of that are there. And I
think a modernized IRS--give us the tools, give us the
resources, let us bring on people. We are down 17,000
enforcement people over the last decade. That has to have an
effect, and it does.
And you know, certain elements of society take advantage of
an agency like ours if they think we are on our back.
Senator Young. Well, Mr. Commissioner, I am going to follow
up with you about that----
Commissioner Rettig. I would appreciate that.
Senator Young [continuing]. So I can better understand what
constitutes a modern IRS, and how we might work together to
address this.
It is my understanding that high-income taxpayers account
for most of the tax gap. Is that accurate, sir?
Commissioner Rettig. And corporations, yes.
Senator Young. And corporations. Why might the IRS have
difficulties in verifying certain high-earning taxpayers'
income to ensure that they are paying what they legally owe?
Commissioner Rettig. If you look at the report that was
recently published on NEBS, two IRS researchers were involved,
and they looked at two different components. One is offshore
and the offshore FATCA, and other components helped with
respect to offshore. And obviously IRS ran various programs in
the offshore arena.
But the other area that they looked at, where we need help,
is in pass-throughs, partnerships, S corporations; tiered
partnerships are sometimes used to mask. You add some foreign
elements there, you add a private foundation in there--it is
very difficult for us to get there. We did just bring on--we
had a hiring in the pass-through arena. We brought on more
agents--sophisticated, experienced folks from the private
sector--than we ever have before.
The Chairman. Senator Young, we are just going to have to
move on. We appreciate the areas you are looking at.
Senator Cortez Masto is next.
Senator Cortez Masto. Thank you, Mr. Chairman.
Commissioner, it is good to see you again. Thanks for
coming before the committee. As you remember, we exchanged
letters about making sure that survivors of domestic violence
could access their Economic Impact Payments. My letter included
a list of steps the IRS could take to help survivors get their
checks. And I was on telephone calls with you as well regarding
this.
In your last hearing before this committee, you said that
many of the suggestions were good, and yet you have implemented
very few of them to date. I am frustrated that your verbal
commitment to me on this issue does not seem to match the
agency's actions.
So my question to you is, what are you currently doing to
help domestic violence survivors get their Economic Impact
Payments? And please tell me the systems you have put in place
to help these survivors really to, not only address their
concerns about getting this relief, but also in the future.
Commissioner Rettig. I think you are aware, the issue on
domestic violence victims is not in the statute for us to be
able to peel out and make a duplicate payment to somebody if
the abuser, if you will, received both payments and took both
payments, and whatnot. And I know initially folks took the
position that it is a civil matter between the abuser and the
abuse victim.
And I realize and am sensitive to the fact that that is not
an appropriate answer for the victim. But as an administrative
agency, we have limited discretion in a lot of different
arenas. There was nothing in the EIP3 that addressed this issue
either. And if the IRS actually had the authority to issue a
duplicate payment for victims of domestic violence and had the
ability to demonstrate that--and there are areas where we can
put information in our system to identify not to share
information belonging to one spouse with the other spouse. We
have that ability, but we do not have the discretion to
actually make a duplicate payment.
Senator Cortez Masto. Well, let's--I get the fact about the
duplicate payment. What else are you doing to address the
concerns that we highlighted for you, now and in the future,
for domestic violence survivors?
Commissioner Rettig. We have guidance. We have outreach.
Our people have been on the ground with presentations. We have
done remote presentations through Zoom and the rest. And you
know, I will follow up with you and get you more specifics. I
am sensitive to your initial comments. And if that is how you
feel, I would like to talk to you individually. I think you
also have my cellphone, and I consider myself pretty reachable.
Senator Cortez Masto. Commissioner, thank you. Yes, but my
frustration is that this is the same conversation we have
already had. And you were responsive in the sense that you got
on the phone with me and talked about how we can work together.
Commissioner Rettig. Maybe we can work together on
legislation.
Senator Cortez Masto. I hope so. Listen, I hope so.
Let me ask you this: I understand the IRS is preparing a
change-of-circumstances portal to allow taxpayers to update
changes in information that determines their ability to access
their stimulus payments, and other payments.
Talk to me a little bit about that. What gives you the
authority to make that change-of-circumstances portal? And what
is that all about?
Commissioner Rettig. That is in the statute with respect to
the CTC, to launch by July 1st. And people who have changed
family circumstances, or people who want to opt out of what
will be monthly payments for the CTC, will be able to use the
portal beginning July 1st. A challenge will be somebody who has
changed family circumstances: they put information in there in
July, and they are expecting their August payment to be
different. That will be a challenge for the agency, but we will
do our best. We will also have to messenger around that. If we
cannot make it for the next month, we need to let people know
that in advance. But it is in the statute.
Senator Cortez Masto. So this potential portal could help
survivors of domestic violence as well address some of the
concerns that they have?
Commissioner Rettig. As it is going to launch on July 1st.
But let me get back to you on that. I appreciate the question.
Senator Cortez Masto. Okay. Yes, please do. There is an
opportunity here, and if we have to pass legislation, we will
look at legislation. I think there are innovative ways that we
can talk about. Across the country, Secretaries of State are
doing innovative things about how we address survivors of
domestic violence to make sure that they are getting access to
the mail that they need, the information that they need. And I
think there is a way for the IRS to do it as well. And I am
hopeful that we can work together.
The last thing I want is for folks at the IRS to say, ``No,
we just do not do it that way.'' I am looking for somebody who
is innovative, who really is looking forward and thinking,
``Yes, maybe there is a way we could figure something out and
look at legislation.'' I was hopeful that we would be able to
do something when I initially contacted you years ago. So I am
hopeful we can try to address this.
And I really would look forward to you reaching out to some
of the advocate groups that are out there that have been
bringing forward these issues to really look out and fight for
our survivors around domestic violence.
So thank you for being here, and I will follow up with you.
The Chairman. I thank my colleague.
Senator Sasse is next on the web.
Senator Sasse. Thank you, Mr. Chairman.
Commissioner, thanks for being here. I would like to talk
about the Employee Retention Credit that is part of the CARES
Act--and obviously the congressional purpose in it was to
encourage employers to keep employees on their payrolls during
the pandemic and the lockdowns.
In December of last year, Congress made some changes to the
credit to try to enhance its usefulness. And one of the
purposes there was to retroactively allow employers who took
PPP loans to be eligible for the credit. Given the economic
strain caused by the pandemic, it is obviously incredibly
important that businesses are incentivized to both rehire and
to retain their employees.
Can you just discuss a little bit the IRS's implementation
of this credit, as well as any efforts you are making to
retroactively provide refunds to businesses that became
eligible because of the December change, please?
Commissioner Rettig. Yes. Where we can, we do recoveries.
But with respect to the retention credit, I think that we have
actually processed--we actually received around 56,000. I think
we have processed about 47,000. Many of them that were rejected
were rejected because they otherwise filed a 941. And so rather
than getting the advance, they should have it with respect to
the 941 itself.
But we have been processing those as quickly as possible.
Senator Sasse. So help me understand that on the 941 point,
because we are hearing about this from some Nebraska
businesses. Your number was 56,000 applied, and 47,000 got it?
Commissioner Rettig. It was 56,017 or something like that
received, and I think we have processed about 47,000 of those,
which would leave a current pool, if I am correct, of about
10,000. I will get you the specific numbers, but that is the
number that I recollect as within the last week or so.
Senator Sasse. Okay, but as for the 10,000, is that just a
backlog? Or do you mean those are people who applied for it on
both sides and they should have only applied on one?
Commissioner Rettig. Some of the 47,000 are folks who have
applied for both sides and were given information back
indicating that if they have already done a 941, it comes under
941 not the 7200. So we had that situation. And we can get you
specifics. We have quite a bit of data here, and I know some
other members of the committee have asked questions in this
space as well.
So let me get you up-to-date, accurate data as far as the
ones that are pending, why they are pending, and then the ones
that have been processed yet--my term would be ``rejected''--
but why they were rejected. And we should be able to provide
that for you in short order.
Senator Sasse. That would be great. I have three follow-up
questions in that lane, but I will just wait for your data,
because you are probably going to speak to what I was going to
ask there.
So then I will just conclude by asking, could you give us a
bit of a status check on the interaction between you all, the
IRS and the Small Business Administration, on whether or not we
think we have adequately explained to small businesses and to
their tax advisors any complications in this space? Just give
us a status report on the interaction between the two agencies.
Commissioner Rettig. Again, you know--let me put that in
two pieces: one, as somebody who was in private practice for 36
years; two, as somebody who is with the government. I think the
government view is that we do really great with respect to
outreach. And this is not to be disparaging of anybody in our
communications and other departments, or of SBA, or of others,
but we sometimes are narrowly focused on the lanes that we
know, and the lanes that historically our agency has been in.
And certainly, with respect to PPP and other issues that
have come up during the pandemic, those lanes are not
sufficient to actually get the information out to members of
the public.
I think we have done well in terms of outreach beyond our
normal lanes, but I think we all would agree we could all do
better. And we constantly try to do better. We have modified--
we have learned lessons from March of last year through June of
last year, through September of last year, through today. We
are doing things better. Our outreach is better. And you know,
that is kind of what I would give it.
And I get it on the outside why some people in certain
lanes say, ``Hey, I just did not know this.'' And I had that in
private practice as well. So I can only really say that we are
trying our best. We do think, from an agency perspective, that
we have done amazingly well. But every time somebody did not
get something, obviously that calls out that we could do
better.
Senator Sasse. Thank you, sir. I am out of time, but thank
you for being here.
Commissioner Rettig. We will follow up.
Senator Sasse. Thank you.
Senator Crapo [presiding]. Thank you very much.
And we will next move to Senator Bennet.
Senator Bennet. Thank you, Commissioner. I do not know if
you can see me, my video----
Senator Crapo. We cannot see you, but we can hear--oh,
there you are.
Senator Bennet. Commissioner, I want to thank you for being
here, and for your service. I also want to thank your staff for
their incredible hard work in the last few months.
Commissioner Rettig. We appreciate that.
Senator Bennet. I want to go back to the Child Tax Credit.
As you know, the American Rescue Plan today is a significant
expansion of the Child Tax Credit modeled after my American
Family Act I built with Senator Brown, which would cut
childhood poverty nearly in half.
Our bill advances payments of $250 a month per child, or
$300 per month for children under the age of six. I had a
meeting at the Boys and Girls Club of Pueblo, CO last week with
parents, and I was asking them whether it was important for
them to get these checks on a monthly basis, or whether a
periodic payment would work for them? And not surprisingly, as
any parent can tell you, expenses like diapers and formula and
child care cannot wait until tax time. And monthly payments are
particularly important during the pandemic when so many low-
and middle-income families are experiencing significant
challenges.
I think Congress's intent was clear with the American
Rescue Plan, and that was for the expanded CTC payments to be
available monthly starting in July of this year.
So I would ask you, Commissioner, whether you can commit to
sending CTC payments starting in July and delivering them on a
monthly basis?
Commissioner Rettig. We fully expect to launch in July. We
expect to launch with payments going out on a monthly basis. I
think I might have commented earlier to the effect that we will
launch the portal, that it is going to be as user-friendly as
possible. But as we did with respect to the Non-Filers portal,
as we did with respect to the Get My Payment portal, as we did
with respect to pretty much every IT product that we provide
certainly externally, we will enhance that over the course of
probably the first 6 months, 3 to 6 months or so, to make it
more so. We will monitor the traffic. We will monitor the
activity. If we see people having difficulty on certain
aspects, we will have to deal with that and monitor that.
There is an authentication level that will be moderately
significant. Any time we open a system to allow an individual
to provide information as to that individual, we need certain
levels of verification. And the more information that they are
able to provide, the higher that level of verification needs to
be. And so that will be one area that will certainly be
monitored closely. But we will pay attention, and we expect to
launch July 1st.
Senator Bennet. I deeply appreciate that.
Commissioner Rettig. If we are unable to do so, you will
hear from me as well.
Senator Bennet. That is all I was going to ask for. I
deeply appreciate that answer, and please let us know if there
is anything that we can do between now and then to make sure
that we do whatever we can do to make sure you and your folks
are successful at that.
One of the most important steps we took in the American
Rescue Plan was to make the Child Tax Credit fully refundable.
As you know, previously a third of all children, 27 million
kids, were left out of the full CTC, mostly because their
parents earn too little to qualify for the full credit. We
fixed that flaw for this coming year, and I sincerely hope we
are going to make that fix permanent going forward.
Many of these newly eligible children are in the Nation's
most vulnerable families, families who face barriers to
navigate, as you were just saying, our complex tax code,
especially during the pandemic. And many of them may not have a
filing requirement at all.
I was worried when I heard you say in March that families
will need to file a 2020 tax return in order to receive their
Advance Child Tax Credit. And I was wondering whether it would
be possible for the IRS to use information from a 2019 return,
if they filed one, or the Social Security Administration, or
the Veterans Administration, to locate many of these families
and determine their eligibility.
Are there more creative ways for us to skin this cat?
Commissioner Rettig. We do work closely with other Federal
agencies, and certainly I think everybody is aware, during the
pandemic, with SSA, VA, and others. We also work with a lot of
State agencies and others, and where we can, we try our best.
One issue with respect to the filing of tax returns is, tax
returns get us the information so that we know the amount of
the credits that we are to provide by law, under both the CTC
and the EITC, and otherwise. And without that return
information--and certainly current information is better than
old information.
And in addition, banking information is critical, and
current banking information is extremely critical.
Senator Bennet. I appreciate that answer as well, and I
think that the work that you are doing on the Non-Filer portal
is going to be enormously important to answering these
questions in a way that gets the American people the help that
they need.
So, Mr. Chairman, I will yield back. Thank you for having
me.
Senator Crapo. Thank you, Senator Bennet.
Senator Barrasso?
Senator Barrasso. Thank you very much, Mr. Chairman.
Shortly after passage of the American Rescue Plan Act, I
got an email from a constituent in Wyoming. She is a tax
preparer, and she let her feelings be known about the inclusion
in the bill of retroactive provisions that were implemented
during the middle of the tax filing season.
She had already filed taxes for some of her clients. And
then, when you get a sudden change in the law, what she had
done was now wrong. I know that is not your doing, that is the
law. That is the mistake made by the way that this was passed
through Congress. But essentially she was asking for a reading
between the lines. Are we all nuts for doing this sort of thing
while we have preparers all around the country who are working
and sending in things, and clients who have signed forms that
are now incorrect?
You know, trying to explain that does not make it any
better for what she is going through, or for her clients as
well.
So can you understand the anger that my constituents are
experiencing, having the rules change after the work was
completed correctly and submitted?
Commissioner Rettig. I personally know more than 1,000 tax
return preparers--let me just leave it at that--including my
wife.
Senator Barrasso. So you can appreciate the----
Commissioner Rettig. I hear everything in the system every
single day, in the morning, in the evening, and sometimes I get
phone calls.
Senator Barrasso. So in terms of the resources and manpower
that you use at the IRS, what is the impact on your own staff
when you have to deal with situations like this?
Commissioner Rettig. We--I will say that the IRS as an
agency, and the employees of the IRS, have been spectacular in
rising to challenges. The unemployment, the exclusion, was a
significant challenge for us. And I think that the innovation
of our employees allowed us to be able to do something where
people will not have to file amended returns who had already
filed returns. And it would be easier for me to say this if I
was on the outside, but I think that is absolutely spectacular
of our employees, but it is absolutely a challenge. And it is
more challenges, and more challenges, and more challenges.
Senator Barrasso. Along those lines--Senator Cantwell
touched on this during her questions, and I would like to add
my support to what Senator Cantwell had to say.
Because the Treasury Department and IRS agreed to extend
the tax filing deadline for individuals from April 15th to May
17th, after visiting with a number of CPAs back home, I do not
understand the logic of the limited extension, in particular
since the deadline to file the estimated payments was still
left at April 15th. So, individuals who have to make estimated
payments must virtually complete their 2020 return to determine
what their estimated tax payment is going to be for the first
quarter so they can get it in by this Thursday.
So the extension to a month from now really was of no
benefit to those taxpayers. In fact, I would argue that the
extension created more confusion and stress for the taxpayers
and the professionals working with them.
So were you given an explanation by your boss, the
Secretary of Treasury Janet Yellen, as to the logic behind not
extending it beyond this, especially as it relates to taxpayers
who need to file their estimated taxes?
Commissioner Rettig. There are two ways--I was a small
business owner on more than one occasion, different businesses
on the outside. I grew up in a small business. My dad had a
truck. I probably know hundreds of small business owners, and I
probably know hundreds of tax preparers preparing returns for
small business owners. And the issue that is being floated
around is actually the difficulty, if you will, for small
business owners.
Let me give you an example of a small business owner, a
small business owner who for calendar 2021 might have $100,000
net profit. Over that--and I would start to argue it is no
longer a small business owner--but if I had a $100,000 net
profit, and I had $32,000 of taxable income, you divide that by
4, theoretically I owe $8,000 as of April 15th.
I file my return, Schedule C. I file that return as of May
17th. I pay my $8,000 on May 17th. And I will do that. And the
question that people are raising--and I have had discussions
with members of this committee; I have had discussions with
people in the House. And we have received substantial amounts
of comments from people on the outside, including people inside
organizations that are sending letters to you all disagreeing
with the content of the letters you are receiving.
But in the example I just gave--$100,000 net income,
$32,000 of tax, $8,000 first quarter--I make my payment on May
17th. People who are referring to the penalty, it is an
interest penalty. What I owe on May 17th--if by way of calendar
year 2021 I have not paid 90 percent of my income, my tax for
the year is $20. So it is $8,020 if I make that payment on May
17th; $8,000 times 3 percent for 1 month, so 112 times 3
percent times $8,000, and I actually do not owe that $20 when I
make my payment on May 17th.
There is a true-up at the end of the year, and I can
qualify. It is not based on just did I do last year's income,
do I have that number? Section 654 of the code provides two
alternatives.
I will also say that a majority of small business owners
that I am aware of are not going to make that $8,000 payment to
the Internal Revenue Service. They are going to pay rent. They
are going to buy chicken. They are going to buy whatever it is
their business is, and they are going to pay what the
equivalent would be of a 3-percent interest charge on money
that they used in their business as working capital during the
year. And the code allows that.
It is an interest charge, because the taxpayer who gets
withholding has withholding out of every single check, so they
pay as they go. For people who are 1099 and Schedule C, the
pay-as-you-go is, you make quarterly payments during the course
of the year. If you fail to do so, and many people choose to
not make those payments and retain the funds, the $8,000 in my
example, at the end, when there is a true-up when you file your
2021 return, you owe 3 percent on that.
There is not a penalty on the penalty. It is an interest-
based penalty.
The Chairman. We are just going to have to move on. We have
additional colleagues.
Senator Hassan is next.
Senator Barrasso. We can follow up. Thank you.
Senator Hassan. Good afternoon, Commissioner Rettig, and
thank you, Mr. Chairman and Ranking Member Crapo, for holding
this hearing.
Commissioner Rettig, I just want to reiterate what many of
my colleagues have said, and thank the employees of the IRS who
are, as you point out, doing double time, overtime, and really
trying to work their way through an enormous amount of work. So
we are grateful to them.
Commissioner Rettig. We appreciate those comments.
Senator Hassan. And I really want to emphasize that.
I want to start with following up on something Senator
Sasse was asking you about, which was the Employee Retention
Tax Credit, and the general awareness around it.
The December relief package was a bipartisan bill that I
worked on with Senator Burr and others to provide the Employee
Retention Tax Credit to businesses that received Paycheck
Protection Program assistance. The relief package also directed
the IRS and Treasury to raise awareness of the tax credit among
small businesses.
And so you talked a little bit about some of the things you
are doing, but we are still hearing from small businesses and
preparers that they do not know much about it. So how can
Congress, or members of this committee, work with you to
increase the outreach and the awareness generally?
Commissioner Rettig. I think the responsibility is ours to
do the outreach, but it is not ours alone. I mean, I appreciate
your comments for assistance from Congress, but also with
respect to particularly local community groups. The pandemic
has put us in touch with more local community groups--churches,
social organizations, and whatnot--than we ever had access to.
So they are now, if you will, on our outreach campaigns and
participating. We have folks on the ground who participate.
When local organizations have events, we participate on the
ground.
Could we do better? I believe that we could. Do I have an
idea where we have a deficit? I do not.
Senator Hassan. Just because my time is limited, my issue
is not that you guys are not doing a lot----
Commissioner Rettig. No, I get it----
Senator Hassan. But what I am hearing is, they are not
aware of it, right? So we want our small businesses to be able
to use this Employee Retention Tax Credit, and we want them to
know about it.
So let's move on to another question. But this is an
invitation from me and other members of the committee: we would
be eager if there are ways that we can partner with all of you.
It would be, I think, in everybody's interest, our
constituents' interests, to get it done.
I want to turn to the issue of the backlog in unprocessed
2019 tax returns. You have heard a lot about it from members of
this committee. I sent you a letter in January urging the IRS
to clear the backlog of unprocessed 2019 tax returns. And
obviously, I have been hearing from constituents, as all my
colleagues have.
You have discussed in your answer to Senator Portman and
others the steps that the IRS is taking to address this
backlog, but could you explain how or if IRS is working to
mitigate the impact of unprocessed returns on affected
taxpayers?
Commissioner Rettig. We are working--we are doing
everything we can to process--which is not the impacts on them,
but actually processing to try to get to the ``there'' point
sooner. And in terms of mitigation, there was an example given
where we issued a CP59 notice. That notice was a mistake. It
absolutely should not have been sent out. I think we issued
about 278,000.
We found out about that. We notified Congress. We corrected
that. We issued corrected notices. So you know, we do have
issues. Those are not mitigation. They are making it worse,
right?
Senator Hassan. Right. I mean, what I am thinking about is
examples of somebody who cannot close an estate. They cannot
get a mortgage. And if there are ways that the IRS can say,
yes, this person has actually filed the return, we are
processing--something like that that would help the taxpayer be
able to get on with the rest of their business, right?
Commissioner Rettig. Actually, we have 1.7 million returns
in process that came in before January 1st. Those, our system
is aware of. Our system has those returns, which I think is
critical. That has not always been the case.
Senator Hassan. Okay.
Commissioner Rettig. You know, we have a lot of avenues for
folks. For example, the estate, or the mortgage, or whatnot--
through the pandemic, we were doing a lot of things for folks
in those situations. And if you become aware of that, I would
appreciate it if you let our staff work with your staff. We
should be able to find those and resolve them.
Senator Hassan. Okay. Thank you.
I also want to thank you for acknowledging the impacts that
the IRS's dependence on legacy IT has had. I have been working
to reduce reliance on outdated IT systems at a number of
Federal agencies, including the IRS. They cost more to maintain
than newer systems, while they also deliver worse service.
So how would reducing your reliance on outdated IT systems
at the IRS help reduce the issues with processing tax returns,
prevent future backlogs--and I assume it would save you money
over time.
Commissioner Rettig. I would assume that many of you
probably woke up sometime in the night during 2020 wondering
whether we were going to be delivering the next day. So one
thing is, it will get people a lot more sleep to have the
reliability of our system.
Our systems work. They operate. But unfortunately, they
are--you know, we have had to build through the years systems
on systems on systems, and ultimately the foundation cannot
hold what we are building on those systems.
So the ability for the IRS to be agile, to be nimble, to
deliver services, to deliver in the enforcement arena, both
internally and externally, is where we are headed. And I think
collectively, including members of the committee, I think we
all agree, it is what the people of this country deserve.
Senator Hassan. Okay; thank you. I look forward to working
with you on that. And I thank you, Mr. Chair. I will ask you
another question about the Employee Retention Tax Credit for
startups for the record. Thank you.
The Chairman. I thank my colleague.
Senator Warren is next.
Senator Warren. Thank you, Mr. Chairman.
Our tax system is rigged in favor of wealthy individuals
and giant corporations that can use lawyers and accountants and
lobbyists to avoid paying their fair share in taxes.
One problem is the tax code that shields the wealthy and
the wealth of ultra-millionaires. And I have proposed solutions
like a wealth tax to be able to fix that. But the tax code is
only part of the problem.
Right now, we are not actually enforcing the laws on the
books and catching people who fail to pay what they already
owe, particularly the ultra-rich. The top 1 percent of
Americans account for more than a third of all unpaid Federal
income tax. And this adds up.
Over the next decade, IRS will fail to collect an estimated
$7.5 trillion in taxes owed. That is money we are leaving on
the table under current law, money that could be invested in
child care, education--a whole bunch of other priorities.
So let me ask you, Commissioner Rettig. One of the best
tools the IRS has to ensure that people are paying their taxes
is to audit them, check their numbers, force them to pay up if
they are cheating. But since 2010, audit rates have fallen
nearly 60 percent overall, and they have fallen nearly 80
percent for taxpayers with more than $10 million in income. Why
has the audit rate fallen most sharply for the richest
taxpayers?
Commissioner Rettig. In the last decade, our enforcement
personnel--we have lost 17,000 enforcement personnel. So we
have 17,000 fewer people to do exactly what you are asking. And
the point is, we actually have 6,500--that is our population--
who go after the high-income taxpayers, the most egregious
cases in the corporate world.
So if you were to add 17,000 to 6,500, I think you would
see a reversal in those numbers. We are very hopeful. We feel
some momentum, bipartisan momentum, for our support if we
manage our operations effectively. But also there are amounts
that we can absorb, and probably absorb 5,000 to 7,000 per
year.
We are ramping up our Human Capital office----
Senator Warren. I appreciate that. Republicans deliberately
targeted the IRS with budget cuts, which depleted its ability
to enforce our tax laws. So even as the wealthy and
corporations engineer increasingly creative tricks to game the
system, the IRS is forced to play catch-up with an enforcement
staff that is now 30 percent smaller than it was 10 years ago--
and a technology system that is built on computer programming
that is nearly 60 years old.
It is clear we need a bold investment in the IRS, which
President Biden has called for in his infrastructure plan. And
Chair Wyden has been a champion for more enforcement funding
for years.
But the solution is not just more funding. It is about more
stable funding that is targeted toward catching the biggest
fish and that is protected from lobbyists that try to chip away
at that funding.
Most of the IRS's funding is discretionary, meaning that
Congress decides every year how much the agency should get. But
this leaves the IRS budget unpredictable and vulnerable to
cuts.
By contrast, mandatory funding would provide funding on an
ongoing basis, ensuring that the IRS has a stream of funds that
is steady, that is predictable, that is sustained. Congress has
provided this kind of funding for important purposes like
preventing fraud in Medicare and Medicaid.
So let me ask you, Commissioner Rettig, would additional
mandatory funding, on top of what the IRS gets through the
annual appropriations process--would that kind of mandatory
funding strengthen the IRS's ability to go after wealthy tax
cheats?
Commissioner Rettig. Absolutely. Mandatory, consistent,
adequate, multi-year funding allows us to plan appropriately.
Every time we go into hiring, we have a concern whether we can
actually feed those folks the next year.
Senator Warren. Well, I am glad to hear that this would be
helpful, because I am working on legislation to do exactly
that. It is one of the biggest ways that the wealthy and
corporations hide their income and avoid paying taxes by
claiming they have much less income than they really do.
This legislation would also require more third-party
verification of the reported numbers, the same way that wages
and interest are already reported to the IRS for the rest of
us.
Rebuilding the IRS is about making sure that we have a
playing field that is level and making sure that we have a
government that works for everyone.
Thank you, Mr. Rettig. And thank you, Mr. Chairman.
The Chairman. Thank you, Senator Warren. I know we are
going to be working closely together on these issues.
So, Commissioner, just a quick comment on where we are
going to go from here. I asked you, close to 3 hours ago, about
the tax gap. I thought that the official estimates were just a
fraction of what the real tax gap was. And you have delivered
this morning, now this afternoon, a jaw-dropping figure of a
trillion dollars annually.
So in the budget window in the U.S. Congress, we are
talking about $10 trillion that does not come into government
coffers because of cheaters. That is what this means when you
set aside all of the government lingo and the like. And the
fact is that nurses and firefighters have to pay with every
paycheck, and so many high flyers can get off using fancy
accountants and lawyers to figure out how to avoid paying
taxes. And then some just do not pay at all.
So that is what we are dealing with here. And what I think
was helpful, especially this morning--and by my count, about
half of the members of the Finance Committee on both sides of
the aisle have asked you about this, reflecting the seriousness
of the matter--we have now broken down some of the big areas
where taxpayers get fleeced: crypto global market cap, $2
trillion; foreign source income; illegal source income; the top
1 percent pass-through and offshore kind of activity. This is a
real blueprint for where you have to go, and a number of my
colleagues brought up constructive ideas for getting that money
from the cheaters into the government coffers.
The Biden administration has proposed increasing the IRS
budget by 10 percent. I have made it clear I think that more--
and particularly targeted enforcement efforts--is necessary.
And you know, the reality is that we are going to have to, in a
50/50 Senate, have a bipartisan effort. And I have been talking
with Senator Crapo about this, and my hope is, on the basis of
the number of members who brought this up this morning, we can
have an aggressive, proactive effort that reflects the
seriousness of this.
We have big debates about all kinds of future tax policy.
How about telling people that we are really serious about going
after the cheaters who are figuring out ways to not pay their
taxes, when millions of law-abiding Americans are?
So I have paid attention to your comments, especially about
how funding for the IRS will yield substantial, like 7-, 8-fold
amounts of revenue collected. I indicated that Senator Crapo
and I have talked over the course of the morning about wanting
to tackle this in a bipartisan way.
I thank you for delivering this important wake-up call to
this committee about the enormity of the cheating that is
taking place in America with respect to taxes. That is what
this morning has really been all about for me. We have a lot of
heavy lifting to do on a variety of issues, but this has been a
wake-up call, particularly at a time when Americans are asking
what is going to be done to promote more fairness in the tax
system.
Well, I think we had a pretty good assessment of what the
job is all about.
So with that, the Finance Committee is going to be
adjourned, but, Commissioner, know that we are going to be
following up. And every year we are going to be asking, when we
have this hearing, what has actually been accomplished to
reduce the tax gap from the last time this was discussed. A
trillion dollars is a big number, and we are going to want to
see big results in the next year.
With that, the committee is adjourned.
[Whereupon, at 12:37 p.m., the hearing was concluded.]
A P P E N D I X
Additional Material Submitted for the Record
----------
Prepared Statement of Hon. Mike Crapo,
a U.S. Senator From Idaho
Thank you, Mr. Chairman, and thank you, Commissioner Rettig, for
joining us today.
The past 12 months have brought unprecedented challenges not only
for the American people, but also for the Internal Revenue Service. In
addition to its role as our Nation's tax collector, Congress has
recently given the IRS an expanded mission and central role in
delivering our economic recovery.
So far, this has included distributing three rounds of over 150
million Economic Impact Payments and implementing a variety of
temporary tax incentives to keep employees on payroll; guaranteeing
paid leave for employees who contract COVID-19; and helping taxpayers
bridge the gap through the pandemic.
Soon, it will also include the distribution of millions of advance
payments of the Child Tax Credit, in a temporary policy that vastly
changes the scope and mission of the IRS.
Commissioner Rettig, I commend you and your staff for your diligent
efforts to balance all of these competing priorities. At the same time,
given how much is at stake for our economy and the American people, it
is critical that we get it right. Filing season and Economic Impact
Payment issues are the most frequent topics I hear about from Idahoans.
I am extremely concerned about the reports of a backlog of millions
of tax returns from last year's filing season that have not yet been
processed. This means that millions of taxpayers are having to wait
longer to receive their refund in the middle of a pandemic.
Further, IRS call center wait times remain unacceptably long, and
many taxpayers have been sent confusing automated notices indicating
that they have not yet filed their return, when in fact it was filed
but has not yet been processed by the IRS. Confusion has also been
generated because of massive fraud in unemployment compensation
programs. State workforce agencies have been taxed because the Federal
Government tells victims of identity theft who have Federal tax issues
to figure it out with the State agencies.
Meanwhile, in the midst of a filing season, a brand new waiver of
Federal taxes on unemployment compensation was passed into law, causing
yet more confusion for filers. Today, you have the opportunity to
explain how the IRS plans to remedy taxpayer confusion and tackle the
backlog of prior year returns without falling further behind.
I also have a number of concerns about the implementation of the
Child Tax Credit advance payment program. Former Finance Committee
Chairman Grassley and I sent you a letter a few months ago requesting
reasonable information about the timeline of implementation, the cost
of implementation, and how the IRS plans to tackle fraud and other
risks associated with administration of this new program. What we
received from your staff was untimely and unresponsive.
Today is an opportunity for a real conversation about the timeline
that the IRS envisions for getting the online portal up and running,
and issuing the first advance CTC payments. The IRS must assure us that
this implementation will not mean putting filing season on the back
burner, nor rushing to get the payments out before we have accurate
information from taxpayers regarding eligibility.
To date, absent any contrary indication from the IRS, I am left
with the impression that the aggressive July 1st payment deadline
imposed by congressional Democrats will be challenging to meet by an
IRS staff that is already stretched thin, without cutting corners or
reassigning staff who should be focused on processing tax returns.
If congressional intent was really to get these advance payments
out at all costs, as soon as possible, then the logical approach would
have been to simply provide an extra bonus in the Economic Impact
Payment of each qualifying low-income child. Congress could have put
those increased payments in the hands of those parents a month ago,
with that approach.
Instead, the legislation created a complicated new program for
these periodic advance payments, with a clearly stated goal of making
this temporary program permanent.
With that in mind, fully setting up the required online portal, and
equivalent secure mechanisms for those without Internet access, in
order to ensure that any advance payments issued are both accurate and
desired by parents, must be considered at least as much of a
controlling priority as the requirement to begin issuing advance
payments this summer.
Finally, we are now approaching 2 years since Congress passed the
Taxpayer First Act--an important bipartisan measure that will enhance
taxpayer protections, modernize the IRS's organizational structure, and
improve its customer service and information technology.
Commissioner Rettig, I look forward to hearing an update today on
the IRS's efforts to implement these reforms and usher forth a 21st-
century IRS.
Thank you again for appearing before us today and for your tireless
efforts on behalf of taxpayers.
______
Prepared Statement of Hon. Charles P. Rettig,
Commissioner, Internal Revenue Service
introduction
Chairman Wyden, Ranking Member Crapo, and members of the committee,
thank you for the opportunity to discuss the filing season and IRS
operations, especially the work we have been doing to help taxpayers
during the COVID-19 pandemic.
I am pleased to report the 2021 filing season is going smoothly in
terms of tax return processing and the operation of our information
technology (IT) systems. Through April 2nd, the IRS received more than
93.2 million individual Federal tax returns and issued more than 62.3
million refunds totaling more than $180.2 billion. A more detailed
discussion of the filing season is provided later in this testimony.
At the same time, the IRS is working closely with the Treasury
Department to implement the American Rescue Plan Act of 2021 (ARP Act)
as quickly as possible to help the Nation's taxpayers. As part of these
efforts, we took immediate steps to begin delivery of the third round
of Economic Impact Payments (EIP) to millions of Americans within days
of the legislation being signed on March 11th. Thus far, we have
delivered about 156 million payments totaling approximately $372
billion. The IRS is also coordinating with Treasury on another
important provision, which provides periodic advance payments of the
Child Tax Credit (CTC) to eligible taxpayers. The IRS will be working
hard to deliver this program quickly and efficiently.
Now in my third year as Commissioner, I remain extremely proud to
be working for the IRS and excited about the future of our agency. We
are grateful for the increased and multi-year funding that will allow
the IRS to (i) modernize our systems, (ii) increase our workforce and
their capabilities through a robust recruitment and training program,
(iii) implement the provisions of the Taxpayer First Act, including
improving the taxpayer experience, and (iv) conduct compliance
activities that support our voluntary tax compliance system.
My experiences as Commissioner have strengthened my belief that a
fully functioning IRS is critical to the success of our Nation. In
Fiscal Year (FY) 2019, the IRS collected $3.56 trillion in taxes and
generated almost 96 percent of the funding that supports the Federal
Government's operations. We serve and interact with more Americans than
nearly any other public or private organization.
This unprecedented pandemic illustrates the significant role that
the IRS plays in the overall health of our country. We have been called
to provide economic relief during this national crisis while also
fulfilling our routine responsibilities of tax administration.
I am proud that IRS employees have responded admirably to the
COVID-19 situation by quickly facilitating financial assistance and
administrative relief to hundreds of millions of deserving and needy
Americans--including distributing nearly $800 billion in Economic
Impact Payments since the spring of last year. People at the IRS
continually demonstrate just how much they care, and how important the
agency is to our country, by their heroic response to events over the
past year. At the same time, the IRS remains focused on its core
mission, striving to serve taxpayers in a manner that facilitates
voluntary compliance by providing meaningful guidance and proper levels
of staffing and support at points of significant taxpayer interaction.
Given the events of the past year, we appreciate the $3.1 billion
in additional funding we received from Congress to respond to the
COVID-19 pandemic and implement the EIPs and other tax changes. In
addition, our base FY 2021 funding level (excluding these additional
resources) represents a 3.6-percent increase over FY 2020. However, it
will take time to overcome the challenges of the past decade, and the
agency will continue to struggle to replace employees lost through
attrition and expand our workforce, support implementation of our
multi-year Integrated Modernization Business Plan as designed, and
continue enhancing meaningful service and compliance efforts that will
earn the trust and respect of every American and improve our working
relationships with taxpayers and others in the tax community.
We respect and proudly serve all taxpayers, none more or less so
than any other. We must operate from their perspective, through their
eyes, enhancing their experiences while striving to provide clear,
meaningful guidance and services, in the language of their choice,
wherever possible. In support of compliant taxpayers, we must
aggressively pursue non-compliant taxpayers by maintaining robust,
visible civil and criminal enforcement efforts. We are making a
difference, and we want to continue to successfully pursue our mission
on behalf of our great country.
update on the 2021 filing season
The IRS workforce navigated preparation for the 2021 filing season
while continuing to implement COVID-related relief measures and
delivering an extended 2020 filing season. These circumstances
challenged our ability to make the necessary annual changes for filing
season 2021. Nonetheless, as a result of the ongoing efforts of our
employees, the IRS is on track to deliver a smooth filing season again
this year.
I'm pleased to report the filing season opened successfully on
February 12th. To give you an idea of how well our systems performed,
the IRS over that initial weekend received a total of 55 million
submissions, which includes individual Federal returns along with other
items such as State tax returns, amended returns and returns filed by
businesses. At the peak that weekend, our IT systems enabled us to
successfully receive 335 submissions per second.
The February 12th opening of the filing season was slightly later
than in previous years. The delayed start gave the IRS time to do
additional programming and testing of our systems following the
December 27th tax law changes that provided the second round of EIPs
and other benefits. The additional programming and testing ensured that
people would receive their needed tax refunds quickly, and also receive
any remaining stimulus tax credits they might be eligible for as
quickly as possible.
The delay in the start of the filing season did not add any
additional delays to refunds on returns claiming the Earned Income Tax
Credit (EITC) or the Additional Child Tax Credit (ACTC). By law the IRS
cannot issue these refunds before February 15th. This filing season,
the IRS was able to issue refunds for EITC and ACTC returns on February
16th and 18, 2021. We expect those refunds were promptly available in
taxpayer bank accounts if they chose direct deposit and there were no
other issues with their tax return. We encourage taxpayers to e-file
their returns and to check the Where's My Refund online tool on IRS.gov
or the IRS2Go app to find out their estimated refund date.
On March 17th, Treasury and the IRS announced that the deadline for
individuals to file Form 1040 and pay their Federal income tax has been
extended from April 15, 2021 to May 17, 2021. IRS Notice 2021-21
provides details on the additional tax deadlines which have been
postponed until May 17th. After carefully considering all the options,
the Department of the Treasury and the IRS determined a limited 2021
filing season deadline extension for individuals filing Form 1040 to
May 17, 2021, was in the best interest of tax administration.
All individuals can get an automatic extension of time to file a
Federal income tax return until October 15, 2021. Taxpayers can request
the filing extension on paper or online, including through various free
online tax services. They must request the filing extension on or
before May 17, 2021. For most, the request only requires their name,
address and Social Security number. Many States will also grant an
extension to file a State return without requiring a form. Those
anticipating a Federal income tax liability must also pay that
estimated tax liability no later than May 17, 2021.
While we recognize the desire and importance of requests to further
extend the 2021 filing season deadline or expand the scope of the
extension, doing so poses a significant potential risk to implementing
the ARP Act. Additionally, it could further delay delivery of Recovery
Rebate Credits (RRCs) and the third round of EIPs, as well as refunds--
including EITC and CTC payments--to the most vulnerable Americans.
As part of our work on the filing season, the IRS continues to
spread the word about EIPs by reminding people who didn't initially
qualify for a payment--or didn't receive the full amount--that they
should check to see if they qualify to claim the payment as an RRC. The
EIPs represented advance payments of the RRC, and this credit can be
claimed on the 2020 tax return, by taxpayers and by individuals who
don't normally file. The 2020 Instructions for Forms 1040 and 1040-SR
include a worksheet that can be used to calculate the amount of any RRC
for which a taxpayer is eligible. Individuals are encouraged to file
electronically to claim this credit, and most can do so at no cost with
IRS Free File, including those who do not have a filing requirement.
This process should not be a burdensome action for individuals,
including those who normally do not file. We realize that delayed
processing of some 2019 returns could affect the ability of some
taxpayers to claim the RRC, so we are working as quickly as possible to
process outstanding returns.
Another important filing season reminder involves people who
received unemployment compensation during 2020. We are working to make
sure they understand the tax law governing unemployment benefits they
received pursuant to U.S. law or that of a State. In general, these
payments are taxable and must be reported as income on taxpayers'
Federal returns. These individuals should receive Form 1099-G showing
the amount they were paid, along with any Federal income tax they
elected to have withheld. Since some States do not mail Form 1099-G,
some recipients will need to get the electronic version of the form
from their State's website.
However, the ARP Act exempts the first $10,200 in unemployment
compensation from Federal taxation for individuals with income below
$150,000. For those who received unemployment benefits last year and
have already filed their 2020 tax return, they should not file an
amended return.
As set forth in an IRS news release (IR-2021-71) issued on March
31, 2021, because the change occurred after some people filed their
taxes, the IRS will take steps in the spring and summer to make the
appropriate change to their return which may result in a refund. The
first refunds are expected to be made in May and will continue into the
summer. For those taxpayers who already have filed and figured their
tax based on the full amount of unemployment compensation, the IRS will
determine the correct taxable amount of unemployment compensation and
tax. Any resulting overpayment of tax will be either refunded or
applied to other outstanding taxes owed. For those who have already
filed, the IRS will do these recalculations, in two phases starting
with those taxpayers eligible for the $10,200 exclusion. The IRS will
then adjust returns for those married filing jointly taxpayers who are
eligible for the $20,400 exclusion and others with more complex
returns.
There is no need for taxpayers to file an amended return unless the
calculations make the taxpayer newly eligible for additional Federal
credits and deductions not already included on the original tax return.
For example, the IRS can adjust returns for those taxpayers who claimed
the EITC (or other credits) and, because the exclusion changed the
income level, they may now be eligible for an increase in the EITC
amount which may result in a larger refund. However, taxpayers would
have to file an amended return if they did not originally claim the
EITC but now are eligible because the exclusion changed their income.
These taxpayers may want to review their State tax returns as well.
The IRS is also working to alert taxpayers to an identity theft
scam involving these payments. There have been instances of criminals
using stolen identities to fraudulently apply for and receive
unemployment compensation. For many individuals who did not claim
unemployment compensation last year, this issue came to light when they
began receiving 1099-G forms with amounts they never applied for or
received. We encourage anyone in this situation to file an accurate
return only reporting the taxable funds they actually received, report
this fraud to the State agency that issued the 1099-G, and ask the
agency to issue them a corrected 1099-G showing the correct amount.
They can also go to dol.gov/fraud for more information about how to
reach their State workforce agency and report this type of fraud.
During this filing season, the IRS will continue to emphasize the
safety and health of taxpayers and our employees. For that reason, our
face-to-face operations will continue to be limited to appointment
services, with provision for assisting taxpayers with hardships on a
walk-in basis. We believe that this year, it is more critical than ever
for taxpayers and tax professionals to take advantage of e-filing and
online and virtual services to help them with their taxes. We continue
to encourage taxpayers to use electronic tools to the extent possible,
including IRS.gov, where they will find a wealth of helpful
information.
For taxpayers who need help preparing and filing their returns, I'm
pleased to report that the Volunteer Income Tax Assistance (VITA) and
Tax Counseling for the Elderly (TCE) programs supported by the IRS are
again providing free assistance to eligible individuals. I'm very proud
of the work our VITA and TCE partners are doing during the filing
season to help taxpayers at approximately 8,000 sites around the
country, including military bases. This year, to ensure the health and
safety of taxpayers and volunteers, many volunteer tax preparation
sites are offering virtual help to taxpayers, either over the phone or
online. Some sites still offer in-person tax help, but safety and
social distancing will be emphasized.
Understanding the need to plan for the future and the desire to
maintain a safe operating environment, the IRS will continue operating
under its current posture until further notice, and we will continue to
follow--and where possible, exceed--applicable CDC guidelines for
public health and safety and measures. We will continue to balance
responding to urgent tax administration needs with doing everything
possible to protect taxpayers and our employees.
We appreciate the patience and understanding of taxpayers and tax
professionals as we work to deliver the filing season during this
challenging time. I am confident the IRS will deliver for the Nation,
just as it has during other times of national urgency.
Phone Level of Service During the 2021 Filing Season
An important service delivery channel, during the filing season and
throughout the year, continues to be our toll-free telephone line,
which constitutes one of the world's largest customer service phone
operations. This filing season through April 2nd the IRS has received
approximately 21.4 million taxpayer calls, with about one-third, or
6.94 million, handled by our Customer Service Representatives (CSRs).
The rest were calls made to lines providing automated messages
containing helpful tax information.
When we were submitting our Congressional Budget Justification
level of service (LOS) estimates for the 2021 filing season last spring
(before the pandemic, EIP1, EIP2, EIP3, partial exclusion of
unemployment compensation, and other tax law changes emanating from
several rounds of legislation), there was no way to predict the
pandemic and the impact it would have on our call volume, filing
season, and hiring. We are still working through the impacts of COVID-
19, which created staffing shortages and closures, and we have been
experiencing a much higher-than-expected call volume coupled with an
increase in call handling time caused by greater call complexity due to
three rounds of EIPs and other tax law changes.
We attempted to mitigate these issues by starting the CSR hiring
process for the 2021 filing season earlier than normal, with the
anticipation that the high unemployment rate throughout the country
might result in larger applicant pools in all locations. However, this
was not the case. We set a CSR hiring goal for FY 2021 of 5,000 CSRs
but have encountered significant hiring challenges during the pandemic,
including low applicant pools in some locations, delays in
fingerprinting due to closed facilities, and delays in processing
applicants virtually. As such, the IRS has onboarded approximately
3,800 CSRs (our largest-ever hiring of phone assistors for a filing
season), for a total of approximately 13,760 CSRs. We also expect to
hire an additional 1,000 CSRs to be ready this summer with the funding
provided in the ARP Act for implementation of the child tax credit
changes, to address potential call volume increases. Accordingly, we
are currently estimating a LOS for the 2021 filing season that is
significantly less than where we want to be, and that may fluctuate
further based on increasing call volumes.
Improving Service to Diverse Communities
We view our efforts through the eyes and experience of those we
proudly serve. An important way the IRS serves taxpayers during the
filing season and throughout the year is by communicating with them in
their most comfortable language. In preparing for the 2021 filing
season, the IRS took important steps to further improve the amount of
service we provide in multiple languages.
Prior to this filing season, the IRS for years had been working to
provide tax information in additional languages. For example, many
pages of IRS.gov are available in Spanish, Vietnamese, Russian, Korean,
Haitian Creole and Chinese (Simplified and Traditional), and basic tax
information is available on the website in 20 languages. And the IRS
continues to expand its efforts to post and link to information
available in multiple languages on social media platforms, including
Twitter and Instagram.
I'm proud to say that this filing season, we are providing the Form
1040 in Spanish for the first time. Also for the first time, the 2020
Form 1040 will give taxpayers the opportunity to indicate whether they
wish to be contacted in a language other than English.
Other recent changes include making Publication 1, Your Rights as a
Taxpayer, available in 20 languages. In addition, we have issued a new,
streamlined version of Publication 17, Your Federal Income Tax, that is
easier to navigate and faster to download than previous versions, and
is now accessible on most personal electronic devices. The new
Publication 17 is available in English, Spanish, Chinese (traditional
and simplified), Vietnamese, Russian, and Korean.
Additionally, taxpayers who interact with an IRS representative now
have access to over-the-phone interpreter services in more than 350
languages. The IRS has also recently begun inserting information about
translation services and other multilingual options into the high-
volume notices we send out to taxpayers. Our diverse workforce is proud
to be reflective of the diverse communities we serve.
providing relief to taxpayers during the covid-19 pandemic
Delivering Economic Impact Payments
While delivering last year's filing season--which was the longest
in history--and preparing for the one now underway, IRS employees also
worked many long hours to implement major provisions of the Coronavirus
Aid, Relief and Economic Security (CARES) Act, including developing new
tools and meaningful guidance to deliver the first round of EIPs in
record time. In fact, millions of Americans started seeing EIPs show up
in their banking accounts within 14 days after the March 27, 2020
enactment of the CARES Act. IRS employees successfully delivered more
than 160 million payments of nearly $275 billion in this first round of
EIPs.
The IRS also quickly delivered the second round of EIPs included in
the Tax Relief Act enacted on December 27, 2020. The IRS delivered
approximately 147 million payments totaling about $142 billion and in
many cases, these payments started posting to bank accounts just two
days after the law's enactment. IRS employees worked nonstop through
the holidays to get these payments out, while remaining hard at work
preparing for the 2021 tax filing season. I want to emphasize the
amount of advance preparation our employees did, once it started to
become apparent that a second round of payments would be enacted, in
order for us to achieve such a quick turnaround.
Another factor helping us speed the effort on the second round of
EIPs was our ability to build off and use the data we had accumulated
in delivering the first round. That accumulation of data again helped
us move quickly on delivery of the third round of EIPs that began last
month.
The vast majority of people did not need to take any action to
receive an EIP, either in the first or second round, and we have been
working to ensure the same is true for the third round of EIPs. The IRS
calculated and automatically sent the payments to taxpayers as well as
others eligible, including many people who may not normally need to
file returns, such as senior citizens with modest incomes, others
receiving Social Security retirement, survivors or disability insurance
benefits, and railroad retirees. The IRS also issued EIPs last year to
those whose only income is from Supplemental Security Income (SSI)
benefits and people receiving disability compensation, pension or
survivor benefits from the Department of Veterans Affairs (VA).
In our initial work on EIPs during the spring of 2020, the IRS
worked cooperatively with the Social Security Administration (SSA), the
VA, and other government agencies to pull these agencies' information
into our systems to ensure that we could send payments to these groups
of people without requiring them to file a return or take any other
action. These agencies provided critical help that allowed the IRS to
reduce the burden for these individuals, including reducing the need
for them to seek in-person tax return preparation to file a return.
This effort was a significant step beyond anything the IRS was able to
do during previous stimulus efforts to help taxpayers.
Again this year, the IRS began working with the SSA and the VA
early on to help ensure we could deliver the latest round of EIPs as
soon as possible to non-filers who receive Federal benefits such as
those described above. Because information about who receives Federal
benefits changes over time, the IRS needed these agencies to provide
updated 2021 information, and we requested this information as quickly
as possible so we could process the beneficiary data and make these
automatic payments. For the first round of EIPs in the spring of 2020,
these groups received their payments in four to six weeks after the
CARES Act was signed into law.
For the EIP3, we are on track to meet or surpass last year's time
frame, and we will continue working to get these payments out to
Federal beneficiaries as soon as possible. As of April 7th, we
delivered more than 19 million EIP3 payments with a total value of more
than $26 billion to Retirement, Survivors, and Disability Insurance
(commonly referred to as ``Social Security'') program beneficiaries who
didn't file a 2020 or 2019 return and who did not use the Non-Filers
tool last year. We have also delivered more than 3 million payments to
SSI beneficiaries with a total value of nearly $5 billion, and nearly
85,000 payments with a total value of more than $119 million to
Railroad Retirement Board beneficiaries.
In its efforts last year to quickly deliver EIPs and provide
information to eligible recipients, the IRS provided two new online
tools:
The Non-Filers tool, which was launched on IRS.gov on April
10, 2020 and available through November 21, 2020 in both English and
Spanish, allowed people who normally don't have a filing obligation to
enter basic information so that they could receive their payment.
The Get My Payment tool, which launched on IRS.gov on April
15, 2020 and is available in English and Spanish, allows many taxpayers
to check the status of their payment or enter their bank account
information to receive their payment electronically, if it was not
already provided on a 2019 or 2018 tax return or through the Non-Filers
tool.
Since the launch of Get My Payment, nearly 350 million successful
status checks have been made using this tool. And nearly 15 million
people have successfully provided their banking information, meaning
they received their payments much more quickly via direct deposit.
The IRS has taken significant steps to reach all potential EIP
recipients throughout each round of EIPs. We extended our reach far
beyond our normal contacts to many lower-income, military, veterans,
retired, older, limited English proficient, and homeless communities
around the country. In fact, we worked with our partners to distribute
EIP outreach materials in 35 languages within these communities.
We have continued to ask for assistance from hundreds of local
community groups and religious organizations, as well as the national
associations to which they belong, and numerous others to reach into
their respective communities. We worked with thousands of homeless
organizations, including more than 300 organizations that became
``Trusted Partners'' where an unsheltered homeless individual could
designate to receive their payment. We also expanded the authority of
Low-Income Taxpayer Clinics (LITCs) to provide return preparation
assistance for individuals seeking their EIPs. To support these ongoing
efforts, we developed a special online toolkit containing helpful
information for groups to use in identifying and getting the word out
to people who qualify for EIPs. The toolkit, IRS Publication 5420, can
be found on IRS.gov. We also provided information regarding a similar
online toolkit to every member of Congress.
Also as part of this effort, we mailed a letter in September 2020
to millions of Americans who might be eligible, but hadn't received an
EIP and didn't file a return for either 2018 or 2019. We obtained these
names by performing an extensive internal analysis of records
corresponding to individuals who did not file returns or receive
Federal benefits and were not responsive to other EIP outreach efforts.
These individuals did not typically have a tax return filing
requirement but had received Forms W-2, 1099s and other third-party
statements. We sent letters to these individuals to notify them of
their potential eligibility as we lacked information on: whether they
would qualify; whether they had eligible dependents; or whether an
individual may be ineligible due to being claimed as a dependent by
someone else.
To help these groups, we extended the initial access to the Non-
Filers Tool five weeks to November 21, 2020. This new deadline provided
additional time for individuals to use the tool without adversely
affecting our work on the 2021 filing season. On November 10th we held
National EIP Registration Day (and supported other similar events), to
encourage people who had not received a payment to use the Non-Filers
tool before the November 21st deadline.
Our outreach effort during delivery of this third round of EIPs
includes reminding people who did not receive payments in the first or
second rounds last year that, if they qualify for them, they can
receive those payments by filing a tax return and claiming the RRC. We
are also encouraging these people, when filing their return, to check
to see if they qualify to claim other tax credits, including the EITC
and the CTC.
The IRS has also been providing support to members of Congress who
have been receiving inquiries from constituents about the payments. To
help provide these answers, the IRS set up a special online ``EIP
Mailbox'' last May to which congressional staffs could send inquiries.
The EIP Mailbox proved even more popular than anticipated, with the
number of emails received averaging 700 a day at first and reaching
1,000 a day by the summer. To make sure we helped as many people as
possible, we modified our processes and temporarily reassigned IRS
employees to respond to these inquiries. By the time we closed the
mailbox in December, we had received a total of more than 130,000
inquiries and resolved an estimated 90 percent of the questions. To
accommodate inquiries related to the second round of EIPs, we reopened
the EIP mailbox on January 11, 2021, and it has remained open since
then. Currently, we are receiving approximately 150 emails a day.
Implementing Business Tax Relief
Along with EIPs for individuals, the IRS has also been working to
make sure businesses know about important tax relief available to them,
and we continue to provide guidance about business tax relief. This
assistance was originally provided in COVID-relief legislation last
year. Two important measures, the Employee Retention Credit and the
Credit for Sick and Family Leave, have already resulted in, as of
January 2021, credit amounts claimed on returns of nearly $10 billion.
These measures were extended and/or modified by the ARP Act as follows:
Credit for Sick and Family Leave. Eligible employers are
entitled to receive a refundable (and advanceable) tax credit for the
qualified sick leave and family leave they provide to employees dealing
with specified health and family issues related to the coronavirus
between April 1, 2020, and September 30, 2021.
Employee Retention Credit. This refundable credit is designed
to encourage businesses to keep employees on their payroll. As amended
by the American Rescue Plan, the refundable credit is 70 percent of up
to $10,000 in qualified wages paid by employers financially affected by
COVID-19. Qualifying wages--including health plan expenses--are those
paid after June 30, 2021 and before January 1, 2022. The credit was
modified to include: eligibility for certain startup businesses;
special rules for ``severely financially distressed employers'' that
experienced a gross receipts reduction of more than 90 percent; and a
5-year statute of limitations for the IRS to make an assessment of any
amount attributable to the employee retention credit.
In addition, for the Credit for Sick and Family Leave and the
Employee Retention Credit, the IRS set up a system that allowed
businesses to claim these refundable credits in advance during 2020 and
thus have more funds available to keep their workers employed without
having to wait to claim the credits on tax returns filed in 2021.
Another important area where Congress provided relief involves net
operating losses of businesses. The CARES Act includes a provision
allowing businesses to carry back net operating losses over 5 years and
obtain tax refunds for those years. The IRS issued Revenue Procedures
2020-23 and 2020-24 and Notice 2020-26 to clarify this provision and
help businesses and partnerships take advantage of the relief it
provides.
Providing Administrative Relief and Protecting Taxpayers
Along with implementing the CARES Act, the IRS provided significant
administrative relief in 2020 to ease the burden on taxpayers:
A postponement of the deadline for individuals to file Federal
returns and pay Federal income tax from April 15, 2020, to July 15,
2020. This relief covered all taxpayers with a tax return filing
deadline or payment due date between April 1, 2020, and July 15, 2020.
As noted above, this year we provided a more limited extension,
applying to individuals filing Form 1040, to May 17, 2021.
The IRS People First Initiative, under which we temporarily
adjusted our processes to help people and businesses during these
uncertain times. This included limiting certain collection and
examination activities.
While it has been important to the tax system, and the Nation, for
the IRS to resume its critical tax compliance responsibilities, we
continue to assess the wide-ranging impacts of COVID-19 and other
difficulties people are experiencing.
To that end, the IRS continues to offer a wide range of taxpayer
relief options. We are:
Doing everything we can under existing rules for immediate,
broad-based relief from unpaid liabilities resulting from COVID-19
issues, including those affected by IRS mail processing and
correspondence delays;
Removing bureaucratic barriers and expanding flexibilities to
all taxpayers whose financial condition has been affected by COVID-19;
and
Balancing the relief provided against the need to serve all
taxpayers and uphold the Nation's tax laws.
When appropriate, the IRS can help taxpayers by abating penalties,
extending payment plans, expanding access to installment agreements,
and providing relief for taxpayers having difficulty meeting the terms
of previously accepted offers to settle tax debts.
Our new initiatives offer help in a variety of ways. Taxpayers
without income or the ability to pay can request a temporary suspension
of collection activity through the Currently-Not-Collectible program.
Taxpayers with balance due amounts may qualify for installment
agreement options with generous terms and timeframes, and taxpayers
with existing Online Payment Agreements, or Direct Debit Installment
Agreements can propose lower monthly payment amounts and update their
payment due dates. Other penalty relief options include first-time
abatement for reasonable cause.
The IRS has also been diligently working to alert taxpayers and tax
professionals to scams related to COVID-19, especially calls and email
phishing attempts tied to the EIPs. The IRS and its partners throughout
the country have been publicizing these scams.
maintaining irs operations during covid-19
The IRS's initial efforts to provide relief to taxpayers came
during Filing Season 2020 and at a time when the agency had to
temporarily scale back operations to protect the health and safety of
both IRS employees and taxpayers. Even with our reduced operations, the
IRS continued to successfully deliver the 2020 filing season, by
processing electronic tax returns, issuing tax refunds, and accepting
electronic payments.
During COVID-19, the IRS has been using innovative approaches to
make sure our employees can deliver on the agency's mission:
We have set records for the number of IRS employees
teleworking, thanks to the continued support of our Information
Technology (IT) division;
Our IT systems continue to perform at a high level. Our
internal networks are supporting nearly 61,000 employees online at the
same time, all in a secure environment;
IT provided the equipment necessary to allow thousands of our
customer service representatives (CSRs) to telework, which gave
critical help to the IRS in its efforts to resume phone assistance to
taxpayers while maintaining the safety of employees during the COVID
pandemic;
Our external-facing IT systems also continue to work extremely
well in a time of increased demand, including filing season systems as
well as IRS.gov tools; and
We have been able to continue bringing on new employees
through the use of a successful virtual onboarding process.
As part of these efforts, the IRS continues to find ways to provide
new virtual services and online tools for practitioners to ensure the
critical work of the agency continues.
Last summer, for example, we moved quickly to shift our Nationwide
Tax Forums for tax professionals into an all-virtual setup rather than
handling these in person at locations across the country. And in our
30th year of offering the forums, I'm proud to report our virtual
version last year still attracted more than 10,000 practitioners from
across the country.
Another great example is our announcement earlier this year that we
are giving tax professionals a new online option to obtain signatures
from individual and business clients and submit authorization forms
electronically. This option applies to Form 2848, Power of Attorney and
Declaration of Representative, and Form 8821, Tax Information
Authorization. This development is an important first step in our
ongoing efforts to expand digital options for tax professionals using
electronic signatures and online uploads.
New options for taxpayers include the launch last year of an
electronic filing option for those who need to amend their income tax
returns. Providing an online filing option for the amended individual
income tax return--also known as Form 1040-X--has been an IRS goal for
many years and is a major milestone for us. Electronically accepting
Form 1040-X posed a number of unique challenges, but we succeeded
thanks to a great deal of hard work by employees across the agency.
Resuming Operations and Answering Taxpayer Needs
Last summer, the IRS began resuming operations for non-portable
services, as more States and local areas also began reopening. As we
have continued our work during this unusual period, we have been aware
of the continuing taxpayer needs and the backlog of work at our campus
and office locations.
One area we have worked hard to improve upon is opening the mail.
Because we had to scale back mail-processing functions last spring due
to the pandemic, we developed a backlog of unprocessed paper returns
and other mail. At one point, the backlog reached more than 20 million
pieces. But since last summer, we have been working through this
backlog, and we are now current.
While working to reduce the paper backlog, we also have provided
relief for taxpayers who sent us mail that was unopened for a period of
time. For example:
For people who had tax refunds affected by our closure, the
IRS has paid interest on refunds. These payments, which can sometimes
show up as a second deposit, averaged $18 for nearly 14 million
taxpayers.
For people who made a payment but where there was a delay in
when the mail was opened, we credited people on the date the mail was
received, not the day we processed the payment.
As difficult as these last months have been, we have seen many
examples of how this crisis has brought out the best in people,
including the IRS workforce. I am proud of what our employees have
accomplished during the pandemic. Our employees shared the same health
and safety concerns for themselves and their families as every other
American. However, they not only went the extra mile in doing their
jobs; they also made a difference in their communities.
For example, we saw IRS employees across the country doing some
amazing things: getting out their sewing machines and creating homemade
face masks for family members and friends; donating essentials to
protect first responders on the front lines in their communities; and
delivering ``care packages'' to seniors in nursing homes. During last
summer's Feds Feed Families Campaign, employees at our Memphis Campus
donated a record-breaking 51,800 pounds of food to the Mid-South Food
Bank!
Another good example of providing help during the pandemic involved
our Criminal Investigation division. A group of 12 special agents
deployed to Travis Air Force Base in Fairfield, CA in March 2020. They
helped provide security and quarantine enforcement at hospitals and
other locations, such as COVID-19 quarantine sites operated by the
Department of Health and Human Services (the Assistant Secretary for
Preparedness and Response and the Centers for Disease Control and
Prevention).
It is important to note that, in addition to their efforts during
the pandemic, IRS employees routinely deliver in times of need for the
Nation when disasters strike. Since 2012, more than 10,000 IRS phone
assistors have stepped up to help take the burden off the Federal
Emergency Management Agency's (FEMA) call centers in the aftermath of
hurricanes and other natural disasters, answering an estimated 1.6
million calls from storm survivors seeking help. We have also had many
agents from our Criminal Investigation division provide their help and
expertise during disasters. For example, in September 2020, a team of
about two dozen special agents deployed to Oregon in support of those
fighting wildfires in that State. More recently IRS phone assistors
were called upon to be ready to help FEMA with respect to the weather-
related difficulties in Texas.
ensuring tax compliance
Enforcement activities of the IRS affect revenues directly, through
the collection of unpaid taxes, and indirectly, by influencing
taxpayers' behavior. Nearly all of the IRS's funds are appropriated
annually by Congress. Appropriations for the IRS fell by about 20
percent (adjusted for inflation) since FY 2010. About 70 percent of the
IRS's overall budget is for labor, and thus the decline in the overall
IRS budget resulted in a 15-percent decline in the number of full-time
employees at the agency (since FY 2010) and a 31-percent decline in the
number of full-time employees working in enforcement roles (since FY
2010). The number of examining revenue agents, who handle complex
enforcement cases, fell by 35 percent, and field collection revenue
officers, who manage difficult collections cases, dropped by 48
percent. The loss of approximately 17,436 enforcement employees since
2010 has resulted in the examination rate for individual returns
falling by about 45 percent; for businesses with assets equal to or
exceeding $10 million, the examination rate fell by about 72 percent.
Despite these resource challenges, the IRS remains committed to
having a strong, visible, robust tax enforcement presence to support
voluntary compliance. When taxpayers file their returns, they should
feel confident others are doing the right thing too. Enforcement of the
tax laws is critical to ensuring fairness in our tax system. IRS
employees who collect taxes, audit returns and investigate fraud, as
well as tax-related identity theft, work hard throughout the year to
enforce the tax laws while treating taxpayers fairly and respecting
their rights. This commitment is true across our agency--our divisions
that deal with individuals, large businesses, small businesses and
exempt organizations are highly coordinated. In fact, the IRS's Office
of Fraud Enforcement (OFE), which was created in March 2020, is
actively encouraging and ensuring this coordination across IRS,
promoting compliance, strengthening the IRS's response to fraud and
mitigating emerging threats.
Over the past 2 years, we have shifted significant examination
resources and technology to increase our focus on high-income and high-
wealth taxpayers. For example, an IRS initiative announced last year
involves improving tax compliance among high-income taxpayers by
increasing visits to those generally with incomes above $100,000 who
failed to file tax returns in 2018 or previous years. Substantially all
experienced examiners--those who are the most highly trained with
substantial accounting skills--are almost entirely focused on tax
returns that include complex issues, such as high-income taxpayers,
pass-through entities, multi-national taxpayers involving international
tax issues, large pension plans, private foundations and the most
egregious situations.
As reported in the IRS's most recently published Data Book (2019),
the exam coverage rate (closed and in-process) for Tax Year 2015 of
taxpayers with income of $10 million or more was about 8.16 percent
(down from almost 23.06 percent in 2010). The rate for taxpayers with
income between $5-10 million was 4.39 percent; for those with income
between $1-5 million was about 2.39 percent; for those with income
between $500,000-$1 million was about 1.13 percent; and for those with
income between $200,000-$500,000 was about 0.55 percent. The IRS
receives more third-party information (Forms W-2s, Forms 1099, etc.)
for taxpayers with income between $200,000-$1 million than for those
above $1 million. These audit rates are higher than for any other
category of individual filers. Tax Year 2015 is the last year for which
we know the actual final audit rates, because the IRS can still open
audits for more recent years, so the data for more recent years is not
yet complete but we expect to see that trend generally continue with
Tax Years 2016, 2017, and 2018.
We also have new compliance programs addressing virtual currency
(non-filers and filers), return preparer non-filers, those who fail to
file Form 8300, Report of Cash Payments Over $10,000, and others. These
programs require experienced, specialized examiners.
Along with launching our OFE, where technical advisors provide
fraud policy and operations support to all IRS operations, we also
created an Office of Promoter Investigations (OPI) within the past
year. OPI is focused on taxpayers and the promoters of abusive tax
avoidance transactions, including abusive syndicated conservation
easements and abusive micro-captive insurance arrangements, as well as
the use of virtual currencies, offshore transactions and other
transactions to inappropriately avoid or under-report tax.
Substantially all of these transactions are engaged in by high-income
individuals. OPI coordinates Service-wide enforcement activities, most
often interacting with our Large Business and International division,
our Small Business/Self-Employed division, OFE, the Office of Chief
Counsel, and our Criminal Investigation division.
We are also investing in our Human Capital Office to ensure that we
can hire the necessary enforcement personnel in our priority areas,
such as the oversight of large corporations, partnerships and other
pass-through entities, and high-income/high-wealth taxpayers.
The IRS is committed to pursuing those who would intentionally
evade their tax obligations and commit fraud. We are also pursuing
those who promote and make use of abusive tax shelters, and are
especially concerned about certain variations, including abusive
syndicated conservation easements and micro-captive insurance shelters.
The IRS Office of Chief Counsel, which appointed a National Fraud
Counsel last year, is working closely with IRS compliance officers to
properly and fully develop cases with indicators of fraud across all
operating divisions, in pursuit of a civil fraud penalty where
appropriate, or for the most egregious violations, a criminal fraud
referral. Our Criminal Investigation division also does important work
to uncover tax fraud,
Additionally, the IRS--in particular, the OFE and the National
Fraud Counsel--has been focused on preventing COVID-19-related fraud
and scams, working closely with the Small Business Administration, the
Bureau of Fiscal Service and the Department of Justice to prevent and
stop improper claims for tax credits and see that the unscrupulous
individuals face appropriate civil and criminal sanctions.
Importantly, the IRS is using technology to develop new enforcement
tools. Our advanced data and analytic strategies allow us to catch
instances of tax evasion that would not have been possible just a few
years ago. We also recognize that we must evolve our enforcement
efforts to address new types of tax fraud and criminal behavior. For
example, the IRS has been working to ensure taxpayers with virtual
currency transactions understand the tax laws governing virtual
currency and meet their tax obligations. Our Criminal Investigation
Cyber Crimes Unit has been involved in new complex types of tax
enforcement, including: taking down the largest child exploitation site
operating in the Dark Net utilizing virtual currencies; uncovering
international money laundering operations involving the theft of
virtual currencies; and the seizure of terrorism financing sites
maintained on behalf of al Qaeda, Hamas, and ISIS.
taxpayer first act: update on implementation
Even during this challenging period, the IRS is meeting not only
the immediate needs of taxpayers but is also developing an innovative
approach to the future of tax administration that will better serve
everyone, including those in underserved communities.
The IRS is using its implementation of the Taxpayer First Act
(TFA), to make significant improvements in the way we serve taxpayers,
enforce the tax laws in a fair and impartial manner, and ensure our
workforce collaborates and is well- trained. In January, pursuant to
the statutory requirement, we submitted our TFA Report to Congress.
This report includes strategic recommendations to improve the taxpayer
experience, employee training, and the current agency organizational
structure. The report is the culmination of input and feedback from our
employees, our partners in the tax community, and other stakeholders.
I'm pleased to report that we will have strong, experienced leaders
guiding us in our efforts to improve the taxpayer experience:
We recently announced that Heather Maloy, a former IRS
executive, has returned to the agency to be the new director of the
Taxpayer First Act Office. Heather held many prominent positions while
at the IRS, including Commissioner of our Large Business and
International Division.
Just 2 weeks after issuing the Report to Congress, we
announced the creation of the Chief Taxpayer Experience Officer
position to unify and expand efforts across the agency to serve
taxpayers. We selected Ken Corbin, the Commissioner of our Wage and
Investment Division for this role. With more than three decades at the
IRS, Ken Corbin is ideally suited to lead our efforts to improve
interactions with the IRS for taxpayers and the tax professional
community.
As we move forward on TFA implementation, our Enterprise Case
Management initiative (ECM) is a major part of our Integrated
Modernization Business plan and is a critical component in the
implementation of long-term TFA changes. ECM will allow us to modernize
key IRS business processes and migrate them to a common case management
platform. This in turn will allow us to decommission as many legacy
components and systems as possible. For our employees, implementing ECM
will mean giving them appropriate access to a 360-degree view of a
taxpayer's account and also support our ability to give taxpayers more
digital options in their interactions with us. The employees who
interact with taxpayers are helping to develop features and services
that will best help their customers, and they have been the key to the
success of ECM thus far.
The Tax Exempt/Government Entities Division's (TE/GE) Exempt
Organizations Correspondence Unit process was the first business
process to migrate to our new ECM platform in 2020. This milestone
transitioned paper-based processes to an electronic format that enabled
the Correspondence Unit to work more efficiently, speeding up the
response time to organizations that interact with TE/GE. The lessons
learned while migrating this business process to ECM will allow us to
build on this initial success and migrate other business processes
quickly and efficiently in the coming years. We are currently working
on migrating the IRS Grants Management program in time to award grants
under the new system in 2021 to organizations participating in the VITA
and TCE programs.
Our progress thus far on implementation of the TFA shows how
committed IRS employees are to serving the Nation. With our TFA Report
guiding us, and with ongoing support and feedback from our employees
and partners in the tax community, we will continue to make
improvements to ensure the IRS can serve the needs of the Nation's
taxpayers well into the future.
conclusion
Chairman Wyden, Ranking Member Crapo, and members of the committee,
thank you again for the opportunity to update you on IRS operations,
especially our responses to the COVID-19 situation. The IRS is
dedicated to improving service to taxpayers, modernizing its systems
and maintaining the integrity of the tax system, while also protecting
the health of its workers and American taxpayers.
We believe we have made great strides over the past year and will
continue this progress with the help of Congress, as we move the agency
into the future. This concludes my statement, and I would be happy to
take your questions.
______
Questions Submitted for the Record to Hon. Charles P. Rettig
Questions Submitted by Hon. Ron Wyden
Question. 26 U.S. Code Sec. 7203 makes the willful failure to file
a tax return and failure to pay Federal income tax a crime. As you are
aware, the Treasury Inspector General for Tax Administration (TIGTA)
published a report last year which found that hundreds of thousands of
high-income taxpayers did not file tax returns for tax years 2014-2016,
collectively owing an estimated $45.7 billion in taxes to the U.S.
Treasury. While the IRS has moved to resolve and collect revenue from
this group, you recently told the committee that over $34 billion in
taxes from this group of taxpayers remains uncollected.
I am particularly concerned that IRS has not fully addressed the
problem posed by repeat offenders, high-income non-filers with multiple
years of unfiled tax returns. The IRS recently estimated that there are
almost 50,000 high-income non-filers owing $7.1 billion in tax with
multiple unfiled returns for TYs 2014 through 2016. This amount is
likely even higher as this figure is dated and the annual amount of
owed taxes uncollected by the IRS has only continued to increase.
For cases involving high-income non-filers with multiple years of
unfiled returns, has the IRS made any criminal referrals to the tax
division of Department of Justice for the willful failure to file a tax
return or pay estimated tax? If so, please provide the number of cases
the IRS has referred for prosecution.
Answer. The IRS is the sole law enforcement agency with title 26
authority. Beyond the investigation of tax crimes associated with a
particular taxpayer, a significant component of any IRS Criminal
Investigation (IRS-CI) investigation is deterrence of similar conduct
by others. The willful failure to file a return, supply information or
pay a tax is generally a misdemeanor offense under Internal Revenue
Code (IRC) section 7203. As a misdemeanor, violations of IRC 7203 are
limited to a maximum 1 year term of incarceration. Historically,
sentencing courts have imposed probation or limited terms of
incarceration for violations of IRC 7203.
During Fiscal Year (FY) 2014 through FY 2020, IRS-CI recommended
approximately 134 IRC 7203 violations only to the Department of Justice
for prosecution consideration. For that same period, we recommended
approximately 229 IRC 7203 violations along with other felony charges
to the Department of Justice for criminal prosecution. During FY 2014-
FY 2020, the Department of Justice indicted approximately 196 IRC 7203
matters associated with IRS-CI prosecution recommendations and
approximately 244 indictments for IRC 7203 violations along with other
felony charges.
IRS-CI's primary goal is deterrence. After considering all relevant
options, including the allocation of limited investigative and
prosecutorial resources, every opportunity is taken to maximize the
impact of potential deterrence effect upon the public in deciding which
cases to investigate and, when appropriate, which to recommend for
prosecution to the Department of Justice. Investigations by IRS-CI are
not public, but, generally, the filing of a Criminal Information or
Indictment by the Department of Justice is a public document.
Deterrence is most significant in the criminal tax context when
unlawful conduct results in a successful prosecution followed by period
of incarceration for those involved. To ensure that our limited
criminal investigation resources are primarily used to further the goal
of deterrence, IRC 7203 prosecutions are less favored than felony
violations when pursuing criminal tax fraud.
Question. Please describe the process and criteria used by the IRS
to initiate a criminal investigation regarding cases involving
taxpayers with multiple years of unfiled tax returns and significant
amounts in unpaid taxes. Please also describe how the IRS assesses
whether a taxpayers failure to file tax returns in multiple years is
considered ``willful'' and criminal as described in 26 U.S. Code
Sec. 7203.
Answer. IRS-CI identifies taxpayers with multiple years of unfiled
returns in a variety of ways. Many come from Internal Revenue Service
(IRS) civil operating divisions, who make a fraud referral when in the
course of their operations they encounter a taxpayer who has a history
of not filing in an effort to evade their tax obligations. Other ways
non-filing taxpayers are identified include: whistleblower filings,
walk-in informants, complaints from law enforcement partners, spin-offs
of existing criminal investigations, and data analytics at the field
office level. After a potential subject is identified, IRS-CI evaluates
the information to determine if a criminal investigation (referred to
as a Subject Criminal Investigation) is warranted. In this process,
referred to as a Primary Investigation, special agents use IRS records,
interviews of the IRS employee who made the fraud referral, interviews
of other IRS employees who had contact with the taxpayer, real estate
public records, Department of Motor Vehicle data, other law enforcement
records, State corporate filings, and public court records to determine
filing requirements and the scope of the potential tax loss. During the
Primary Investigation, no contacts are made with non-governmental,
third-party witnesses in order to maintain taxpayer confidentiality.
The special agent decides, based upon the information evaluated, if the
case warrants a Subject Criminal Investigation, or should be forwarded
to IRS civil operating divisions for civil enforcement consideration or
closed. The initiation of a Subject Criminal Investigation requires
approval by the Special Agent in Charge of the field office.
The criteria used to initiate a Subject Criminal Investigation
include, but are not limited to: if the failure to file is part of a
broader scheme to evade taxes, the amount of tax due, the number of
years or pattern of non-filing, any prior history of tax non-
compliance, if the subject is involved in other criminal activity, if
the subject is in a position of trust, the complexity of the subject's
non-compliance scheme, the number of participants in the subject's
scheme, if the subject is promoting tax non-compliance to others, how
prosecution will promote voluntary compliance by others, the health of
the subject, and the likelihood of the case being prosecuted by the
Department of Justice.
Willfulness is an element of title 26, United States Code,
Sec. 7203. The U.S. Supreme Court has defined willfulness in criminal
tax violations as a ``voluntary, intentional violation of a known legal
duty'' [United States v. Bishop, 412 U.S. 346, 360 (1973)]. Proving a
subject's willfulness is done with direct evidence and/or
circumstantial evidence. Direct evidence of willfulness is obtained
through subject admissions or accomplice testimony. Circumstantial
evidence of willfulness is determined through multiple sources,
including but not limited to: prior tax filing history, providing
fraudulent tax documents to financial institutions, statements to
witnesses, soliciting cash payments, false statements on Forms W-4
claiming exemption from taxation, specialized education or work
experience, statements to State tax agencies, titling and movement of
assets to place them beyond government reach, use of nominee accounts,
and deliberate use of business entities to obfuscate beneficial
ownership and income.
Question. According to a recent analysis by TIGTA, a group of
64,005 high-income taxpayers each owe over $100,000 to the IRS, with a
total balance of over $28 billion in unpaid taxes. How many of these
taxpayers have multiple years of unfiled returns?
Answer. In TIGTA's final report for Audit # 2021-30-015 (``High-
Income Taxpayers Who Owe Delinquent Taxes Could Be More Effectively
Prioritized''), it is reported in Figure 1 that as of May 2019, there
were 64,005 taxpayers who had a balance due of at least $100,000 and
who reported an Adjusted Gross Income (AGI) of $200,000 or more on at
least one Form 1040, U.S. Individual Income Tax Return, filed for Tax
Years 2013 through 2017.
The IRS continues to select (and since tax year 2016 has selected)
all high-income non-filers for compliance action since, including the
taxpayers identified in this group. We estimate that almost 8 percent
of the 64,005 taxpayers (5,120 taxpayers) have multiple unfiled returns
where the taxpayer likely has a filing requirement.
This estimate was derived based on an independent analysis
conducted by IRS's Collection organization as the list of taxpayers
corresponding to TIGTA's analysis in Audit # 2021-30-015 was not
provided to the IRS.
______
Questions Submitted by Hon. Michael F. Bennet
Question. One of the most important steps we took in the American
Rescue Plan was to make the Child Tax Credit fully refundable.
Previously, one-third of all children--27 million kids--were left out
of the full CTC, mostly because their parents earned too little to
qualify for the full credit.
We fixed that flaw for this coming year and I sincerely hope we
will make that fix permanent going forward. Many of these newly
eligible children are in our Nation's most vulnerable families--
families who may face barriers to navigating our complex tax code,
especially during a pandemic. Many of them may not have a filing
requirement at all.
I was disappointed to hear you say in March that families will need
to file a 2020 tax return in order to receive their advance Child Tax
Credit payments.
Could the IRS use its forthcoming CTC portal to collect sufficient
information to send out payments instead of requiring them to file a
2020 return?
Answer. The Advance Child Tax Credit (Advance CTC) payments will be
based on a processed tax year 2020 tax return or 2019 tax return
(including information entered into the Non-Filer tool for Economic
Impact Payments on irs.gov in 2020).
Last year the IRS established a new online tool in collaboration
with outside partners for the Economic Impact Payments. This year, IRS
worked with its partners to develop and deliver the Non-filer Sign-up
Tool. This tool is a new online tool designed to help eligible families
who don't normally file tax returns register for the monthly Advance
CTC payments scheduled to begin July 15th. This new tool provides a
free and easy way for families who don't have a return-filing
obligation to provide the IRS the information needed to figure and
issue their Advance CTC payments if eligible. Often, these are families
who receive little or no income, including those experiencing
homelessness, the rural poor and other underserved groups. This new
tool will be available only on irs.gov.
This effort includes a robust outreach strategy that will inform
eligible taxpayers about the Advance CTC payments and how they can make
modifications as needed. The IRS has started sending letters (Letter
6416 and 6416-A) to more than 30 million American families who, based
on tax returns filed with the agency, may be eligible to receive
monthly Advance CTC payments We have developed a portal for taxpayers
to opt out of the advanced payment or provide new information that is
relevant to determining their eligibility and advance payment amount.
As is the case with any IRS initiative including Economic Impact
Payments (EIPs) and the Rebate Recovery Credit (RRC), we will work with
a broad and growing partner base to reach those individuals who may be
eligible for the Advance CTC so that they can prepare for the
opportunity to receive advance payments later in 2021. We have
established relationships or built upon many existing partnerships that
will help the IRS reach the underserved with this important information
and communicate the necessary steps to take to access the Advance CTC.
The IRS is exploring other outreach opportunities that may help address
the special needs of the homeless and other hard to reach communities.
Question. Will the IRS provide supplemental funding to enable
volunteer income tax assistance (VITA) sites to remain open all year to
help non-filers claim the CTC?
Answer. The IRS is unable to provide supplemental funding to VITA
sites. The VITA grant program is a matching program, and the partner
sites must have the funding to match the amount of the grant. Matching
funds are a legislative requirement. Most grant recipients have
received their grant funds; therefore, the matching requirement has
been met for Filing Season 2021. However, the IRS and its partners in
non-profit organizations, churches, community groups and others will
host events to help people who don't normally file a Federal tax return
to register for the monthly payments.
Question. I hope the IRS will seek support from a broad range of
State, local, and community organizations to reach families who do not
typically file or have trouble interacting with the IRS. What efforts
is the IRS making engage to agencies and nonprofits that wish to
conduct their own outreach, and what information will be shared with
such organizations?
Answer. For Advance CTC outreach we plan to build off and expand
the extensive campaign we undertook for the Economic Impact Payments.
The IRS has taken significant steps to reach all potential EIP
recipients throughout each round of EIPs. We extended our reach far
beyond our normal contacts to many lower-income, military, veterans,
retired, older, limited English proficient, and homeless communities
around the country. In fact, we worked with our partners to distribute
EIP outreach materials in 35 languages within these communities. On May
19th, the IRS issued a release, IR 2021-116, explaining how community
groups can assist those taxpayers without a permanent address receive
their payments. We also have a section on irs.gov dedicated to
providing outreach materials on a variety of subjects to partners and
volunteers: https://www.irs.gov/individuals/partner-and-volunteer-
resource-center.
We have continued to ask for assistance from hundreds of local
community groups and religious organizations, as well as the national
associations to which they belong, and numerous others to reach into
their respective communities. We worked with thousands of homeless
organizations, including more than 300 organizations that became
``Trusted Partners'' which an unsheltered homeless individual could
designate to receive their payment. We also expanded the authority of
Low-Income Taxpayer Clinics (LITCs) to provide return preparation
assistance for individuals seeking their EIPs. To support these ongoing
efforts, we developed a special online toolkit containing helpful
information for groups to use in identifying and getting the word out
to people who qualify for EIPs. The toolkit, IRS Publication 5420, can
be found on irs.gov. We also provided information regarding a similar
online toolkit to every member of Congress.
Question. As you know, last year the IRS created a Non-Filer portal
to help families claim their checks under the CARES Act. During last
year's filing season hearing, you told this committee that tools like
the Non-Filer portal are ``the future of the IRS.'' While the tool was
not without its flaws, I was disappointed to learn that the IRS plans
to discontinue the Non-Filer portal.
How many households ultimately used the Non-Filer portal to access
their stimulus payments?
Answer. The total number of households who accessed Economic Impact
Payments during the first round of distribution on the Non-Filers:
Enter Payment Here Tool portal was 8,518,600.
Question. Why did the IRS decide to discontinue the Non-Filer
portal, despite your statement about such tools constituting ``the
future of the IRS''?
Answer. Last year, the IRS established a new online tool in
collaboration with outside partners, called the Non-Filers: Enter
Payment Info Here tool, which was launched on irs.gov on April 10, 2020
and was available through November 21, 2020 in both English and
Spanish, allowing people who normally don't have a filing obligation to
enter basic information so that they could receive their EIP.
The Non-Filers tool was designed to capture limited information
from taxpayers who did not have a filing requirement, but who may have
been eligible for an EIP. The information captured was used to
determine EIP eligibility and to produce a very simple tax return with
no income or tax liability calculated.
The Non-Filers tool did not capture essential information about an
individual's eligibility to claim the earned income tax credit (EITC)
and any other refundable credits to which the taxpayer may be entitled.
The utility only captured limited information used to determine EIP
eligibility.
Because of income changes in 2020, people may qualify for the EITC
when they didn't previously. We encourage taxpayers to file a tax
return to determine eligibility for other credits they may be entitled
to. Taxpayers may use their 2019 earned income to figure their Earned
Income Tax Credit if they earned more income in 2019 than in 2020. The
same is true for the Additional Child Tax Credit. This could increase
the credit for someone who lost their job or worked reduced hours
because of the pandemic.
Most taxpayers can e-file for free using IRS Free File. If they
earned $72,000 or less during 2020 they can click ``browse'' on the
page to review the options, or IRS Free File has a look-up tool to help
you find an offer that best meets your needs. You can find it on
irs.gov or the IRS2Go app. For taxpayers who need help preparing and
filing their returns, the IRS sponsored Volunteer Income Tax Assistance
and Tax Counseling for the Elderly volunteer sites will again provide
free assistance, including free electronic filing, to low-income
taxpayers, those who are older, people with disabilities and those
whose primary language is not English. Some volunteer sites will offer
virtual help to taxpayers in place of face-to-face assistance. This
allows volunteers to help taxpayers over the phone or online to
complete their returns. While virtual volunteering will be an option
this tax season, some VITA/TCE sites will still offer in-person free
tax help. However, safety and social distancing will be emphasized.
Filing electronically is the fastest and most accurate way to file. The
safest and fastest way to get a tax refund is to combine electronic
filing with Direct Deposit.
However, the IRS is using a similar approach for the monthly
Advance CTC payments. The IRS worked with the Free File Alliance to
create the Non-Filer Sign-up Tool. This tool is a new online tool
designed to help eligible families who don't normally file tax returns
register for the monthly Advance CTC payments scheduled to begin July
15th. This new tool provides a free and easy way for families who don't
have a return-filing obligation to provide the IRS the information
needed to figure and issue their Advance CTC payments if eligible.
Often, these are families who receive little or no income, including
those experiencing homelessness, the rural poor and other underserved
groups. This new tool will be available only on irs.gov.
Question. Many low-income individuals and families don't claim
benefits for which they're eligible, such as the EITC or CTC, because
they face difficulty filing or accessing overburdened resources like
VITA. Others hand over large portions of these benefits to paid
preparers in exchange for help filing. Should the IRS build and
maintain an easy-to-use point of access for individuals who might not
otherwise file, as the non-filer portal was intended to be?
Answer. The IRS cannot determine at the time of filing if the
taxpayer has met certain key eligibility requirements for claiming the
EITC without a qualifying child without obtaining additional
information from the taxpayer. For example, based on the information on
the Form 1040, the IRS cannot determine if a taxpayer can be claimed as
a dependent on another return or if the taxpayer lived in the United
States for more than six months. Therefore, issuing the EITC
automatically, based solely on return information, could lead to
erroneous refunds which would hinder the IRS's ongoing efforts to
reduce improper payments.
Without legislative and policy changes, current processes do not
allow for accurate determination of automatic taxpayer eligibility for
the credit at the time of filing.
The IRS will continue to send notices to taxpayers who appear to be
eligible for the EITC and ask them to provide additional information.
Question. In 2020, despite the pandemic, 3,700 volunteer income tax
assistance (VITA) sites across the Nation prepared more than one
million returns for free, helping taxpayers claim more than $1.7
billion in refunds. VITA sites will be instrumental in ensuring low-
income taxpayers--especially those who do not usually file a return--
can access the CTC, EITC, and stimulus payments for which they are
eligible.
However, VITA programs only receive funding from Treasury during
the traditional filing season, and face a 50-percent matching
requirement, entailing extensive fundraising efforts. Without
additional funding--and a request to remain open--most VITA programs
will close in mid-May.
Will the IRS communicate with VITA site grantees about the
importance of remaining open for the rest of the year, giving programs
as much lead time as possible?
Answer. The IRS works collaboratively with external partners to
operate VITA sites nationwide. While the IRS provides guidance and
oversight to partners that run these sites, we do not determine
operating hours including open and close dates. Partners have the
flexibility to operate sites that fit their IRS certified volunteers'
schedules. For instance, in contrast to those sites that are open on a
regular schedule throughout the filing season, some sites are open just
a day or a few days during the filing season. Additionally, there are
volunteer sites located in donated space, such as libraries and may not
have the flexibility to remain open past April 15th. Traditionally,
some VITA sites may be open year-round depending on the partners' time
and resources. Not all VITA partners receive grant funding. In some
cases, whether grant-supported or not, the volunteers may not be
available after the traditional filing season due to other commitments.
Question. Will the IRS commit to funding VITA sites to remain
operational for the remainder of 2021, without requiring matching
funds, using some of the funds it received in the American Rescue Plan?
Answer. The IRS is unable to commit to VITA sites remaining open,
regardless of matching grant funds or American Rescue Plan funding.
While the IRS provides guidance and oversight to partners that run
these sites, we do not determine operating hours including open and
close dates. Partners have the flexibility to operate sites that fit
their IRS certified volunteers' schedules. However, the IRS and its
partners in non-profit organizations, churches, community groups and
others will host events to help people who don't normally file a
Federal tax return to register for the monthly payments.
______
Questions Submitted by Hon. Thomas R. Carper
Question. The Highway Trust Fund will become insolvent in 2022, and
over the next 10 years, the total shortfall just to maintain baseline
spending will be nearly $200 billion. It is clear that we need to find
new revenues to provide for the long-term solvency of the Highway Trust
Fund. However, it's also clear that we need to consider the equity of
the impact of any new taxes, and President Biden has stated that
households making less than $400,000 per year should not face any
increase in their tax burden.
My question to you is this: if we were to raise gas taxes and
collect those taxes from all drivers, is there a way to use the tax
code to rebate the cost of that tax increase for households earning
less than median family income, whether it be the exact amount of gas
tax they paid, or an average amount for all households??
Answer. Under the current tax code, taxpayers who use or sell
certain fuels for a nontaxable use or produce alternative fuels, can
claim a refundable tax credit on their income tax return using Form
4136, Credit for Federal Tax Paid on Fuels. The credit is treated as a
payment towards a taxpayer's tax liability and is fully refundable even
if a taxpayer has no tax liability. Any expansion to allow additional
taxpayers to claim a rebate on a potential gas tax increase would have
to be analyzed to determine feasibility, taking into account factors
such taxpayer burden, IRS resources, cost, and information technology
programming changes.
Question. Last Congress, I served as the ranking member of the
Permanent Subcommittee on Investigations (PSI), which conducted a
bipartisan review of the IRS Free File program. As you know, Free File
is a partnership between the IRS and online tax preparation companies
that allows the majority of taxpayers--this year, those making less
than $72,000--to file their taxes for free. Unfortunately, the Free
File program is greatly underutilized. The Treasury Inspector General
for Tax Administration (TIGTA) found that 14 million taxpayers could
have filed their taxes for free using Free File, but instead paid for
tax preparation services.The program has also experienced challenges,
including findings that Free File partners manipulated search results
to direct consumers to paid products, and one of the largest Free File
partners recently leaving the program.
With the Memorandum of Understanding (MOU) between the IRS and Free
File members expiring in October this year, can you share whether the
IRS has any plans to change its MOU based on the findings from the
Permanent Subcommittee on Investigations, Treasury Inspector General
for Tax Administration, and Government Accountability Office? If so,
what changes does the IRS plan to make to the Free File program?
Answer. In 2019, the IRS commissioned an independent assessment of
the IRS Free File program, leveraging MITRE to obtain objective
feedback on the program. In September 2020 we made improvements to the
IRS web pages. We improved web searches and implemented random surveys
of taxpayers by Free File, Inc. (FFI). We also responded timely to all
follow up status requests from TIGTA regarding their recommendations,
and we have made progress on five of their nine recommendations. IRS's
MOU with the Free File members is scheduled to expire in October 2022.
The IRS is developing the agency's renegotiation position inclusive of
the appropriate reports recommendations. This work is evolving as we
continue to balance demands and resources.
The MITRE report is available at https://www.irs.gov/newsroom/irs-
statement-on-free-file-program on irs.gov. It includes a section on
consumer choices and decisions. In late 2021, MITRE will provide a
report to the IRS on overall taxpayer behaviors and what shapes choices
that taxpayers make for the tax preparation methods.
An addendum signed December 26, 2019, was added to the MOU that
states: ``FFI Members are prohibited from engaging in any practice that
would cause the member's Free File Landing Page to be excluded or
lowered on the order of search results from an organic Internet search.
Each FFI member shall standardize the naming of its Free File offer
listed on the IRS Free File Website and the member Free File Landing
Page so taxpayers can link to the member's Free File Landing Page from
organic searches.'' Membership in Free File is by company choice: each
company makes its own business decision whether to participate in Free
File Inc. The IRS cannot speak to business decisions made by any
company for provisioning free services via FFI.
Question. Reports by the Permanent Subcommittee on Investigations,
Treasury Inspector General for Tax Administration, and Government
Accountability Office have found that the Free File program has
suffered from a lack of marketing funds and IRS oversight for many
years. Last year, you told us about some of the outreach efforts the
IRS has conducted to increase awareness of the Free File program.
What resources does the IRS currently dedicate to marketing and
overseeing the Free File program? What additional resources does the
IRS need to improve taxpayer uptake of Free File, and what resources
does the President's upcoming full FY 2022 budget include for the IRS
to better market and oversee the Free File program?
Answer. As of April 26, 2021, 3.3 million IRS Free File tax returns
have been submitted in the 2021 Filing Season.
Oversight:
The Free File Program Office is a part of the
Industry Engagement and Strategy Office under e-File Services.
Currently, the IRS uses one temporary detailee and three full-time
employees to administer the program. This group includes a team lead,
two senior program analysts, and a temporary business analyst detailed
into the program. The senior manager of the Industry Engagement and
Strategy Branch divides management time among the duties of that office
and the other demands under her purview.
In order to implement many of the recommendation
changes, and to manage and monitor the impact of the changes, the IRS
is considering allocating additional staffing to this program. This
needed staff will need to be focused on: interpreting survey results in
order to create actionable next steps; working with Online Services to
design on-line Real-Time website surveys; working with Communications
and Liaison (C&L) to help develop proposals and outreach/education
plans; and assisting with performing in-depth reviews of Free File
websites and software.
Marketing:
It is important to note that a mature multi-
billion-dollar tax preparation software industry exists against which
the IRS would be competing for consumer attention. This industry spends
a considerable amount, exceeding $1 billion annually, to advertise
their commercial products which include ``free'' tax preparation
commercial products. For example, in 2019 based on public filings, H&R
Block spent $269.8 million and Intuit spent $800 million advertising
their commercial products. Any government funded advertising would
necessarily have to compete with these commercial efforts in the tax
preparation marketspace. As can be interpreted from these marketing
budgets for private industry, IRS would need to spend significant
amounts on marketing to garner any attention.
The IRS Free File team works with the shared
service of W&I Communications and Liaison to utilize existing
communication and promotion vehicles that are available to all IRS
programs. This group manages production and posting of press releases
before and during the filing season, tax tips, and fact sheets as part
of the IRS's larger, annual campaigns. The IRS also employs social
media to promote Free File, actively posting on Facebook, LinkedIn,
Instagram and @IRSNews and @IRSenEspanol. Their efforts have helped
drive an increase in volume this year compared to last year; we ended
the 2020 year with a 50 percent growth.
In addition to the more typical messaging channels the agency
employs, in the 2021 filing season the Free File team led an effort to
send 2.5 million postcards to prior year paper filers eligible for the
IRS Free File program. These postcards were to promote the IRS Free
File and VITA programs. The IRS Free File team, working with W&I
research, will assess the efficacy of this effort to determine if it
should be used in subsequent years.
Question. As you know, the IRS is currently working through a
backlog of 2.4 million 2019 paper tax returns filed by individuals.
These processing delays have slowed the delivery of much-needed tax
refunds and Economic Impact Payments to many of my constituents who are
struggling to get by during this pandemic.
Can you please share the specific actions that the IRS is taking to
address this backlog of 2019 paper returns and what Congress can do to
help? What is the IRS's timeline for clearing this backlog?
Answer. The backlog of all individual paper returns received in
2020 has been cleared and they are now in the processing pipeline. We
took all necessary steps to address this, including transshipping
backlogged work between our centers and shifting resources between
functions to address backlogs. This is also attributable to our four
Submission Processing Centers working day, night, and weekend shifts
(16 hours per day) along with mandatory overtime to open mail and
process tax returns and taxpayer correspondence.
______
Question Submitted by Hon. Bill Cassidy
Question. Incentives for historic preservation in the tax code are
extremely important to Louisiana, and easements and other preservation
programs have made it viable to protect and rehabilitate buildings in
New Orleans and other cities that would otherwise likely have been
bulldozed.
Some preservationists in my State report that actions by IRS have
led to uncertainty and delay. I recognize there are instances of abuse
in conservation easement transactions, and recommend that historic
preservationists be included in the conversation as the IRS addresses
these abuses.
I am told your team recently met with historic preservationists to
discuss ways to differentiate valid historic preservation easements
from inappropriate abuses of the tax code, and appreciate your taking
the time to hear from the group.
Moving forward, can you work towards bringing together a working
group, which includes stakeholders such as historic preservationists,
to work on detailed IRS guidance?
Answer. The Internal Revenue Service recognizes that Congress
authorized the charitable contribution deduction for conservation
contributions--historic preservation--to provide taxpayers with a
valuable incentive to preserve historic structures. We recognize the
importance of providing such taxpayers with guidance that will create
certainty and with advice that helps taxpayers ensure that their
contributions comply with the law and conserve historic structures in
perpetuity, as Congress intended. As such, we are committed to the
continued development of, and encourage members of the public to
suggest topics for, such guidance and advice.
We are currently formulating this year's Priority Guidance Plan
that focuses our resources for guidance items that are the most
important to taxpayers and tax administration. We encourage the public
and other stakeholders to engage us in developing the Priority Guidance
Plan by submitting items for consideration, pursuant to Notice 2021-28.
______
Questions Submitted by Hon. Mike Crapo
irs enforcement
Question. Your testimony expressed a need for further information
reporting, and indicated that with information reporting 99 percent of
items get reported.
What areas of information reporting currently present the greatest
gaps for the IRS?
Answer. Our research on the compliance of filers of individual
income tax returns indicates that income subject to substantial
information reporting and withholding has the least amount of
misreporting with a net misreporting percentage of 1 percent. Income
subject to substantial information reporting but not withholding also
has high voluntary reporting with a net misreporting percentage of
about 5 percent.
``Gaps'' in the information reporting and withholding system fall
into the following general categories:
(1) Exclusions of certain type of ``payee'' entities from
being subject to information reporting.
(2) Exclusions of certain type of entities from a requirement
to report on certain types of payments.
(3) Exclusions of certain types of payments.
(4) Lack of requirement/option for withholding.
(5) Information and other detail.
(6) Timing.
Many of the choices previously made related to the above gaps were
made in a different era of technology. Substantial advances in
technological capabilities and expectations over time make what once
would have been considered overly burdensome or complex requirements
more feasible in our current and future environments.
The ``visibility'' chart below shows the relationship between
information reporting/withholding and reporting compliance. The income
items associated with each level of information reporting are specified
in the footnotes.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
.epsWe also note that the usefulness of information reporting for
tax enforcement depends to a large extent on the IRS's ability to
electronically capture and analyze the information received. Electronic
filing of tax returns and information returns is the most efficient way
to ensure availability of data. The existing framework for mandating
electronic filing covers a patchwork of tax forms and entities,
however, it also leaves several comparable filings out of reach for an
e-filing requirement. It would be most effective to authorize the
Secretary to determine which returns, statements, and other documents
must be filed electronically, to apply without regard to the number of
returns that a person files, and with an exception for any individual
filing forms in the Form 1040 series. Paper returns, and even pdf
attachments filed electronically, are only of use for data aggregation
and analysis if they are digitized after the fact. While we do this,
those processes are resource-intensive, time-consuming, and often
error-laden. IT funding is critical for the development,
implementation, and maintenance of business requirements for existing
and new information reporting.
Another category of income that is subject to little information
reporting is income derived from virtual currency transactions. The
virtual currency market has grown substantially over the past several
years reaching a market cap in excess of $2 trillion for more than
8,600 different virtual currencies. We believe that there is a high
degree of noncompliance involving reporting of taxable virtual currency
transactions. We are receiving information reports in some cases from
virtual currency exchanges; however, more complete data are needed to
administer the tax law on this segment. Comprehensive reporting from
brokers, exchangers and payment facilitators for virtual current
transactions and payments are needed. Additionally, Currency
Transaction Reports (CTRs) are required to be filed by U.S. financial
institutions with the Financial Crimes Enforcement Network (FinCEN) for
each deposit, withdrawal, exchange of currency, or other payment or
transfer, by, through, or to the financial institution which involves a
transaction of currency of more than $10,000. As with cash
transactions, businesses that receive cryptoassets with a fair market
value of more than $10,000 could also be reported on.
Question. Do you have authority to address any of these key areas
via regulation?
Answer. The Secretary has general authority to propose regulations
that would close many of the gaps discussed above. For example, the
Secretary has the authority, and is currently working on, proposed
regulations that would expand broker reporting for virtual currency
transactions and payments. The Secretary also likely has the authority
to require employers reporting wages to indicate the amount of total
wages paid using virtual currency.
Question. Are there areas where legislation is necessary, and if
so, what are they?
Answer. Many of the gaps discussed above would require or benefit
from legislation to resolve because the underlying statutory language
might not provide sufficient authority to make the necessary changes.
The President's FY 2022 Budget includes a number of legislative
proposals to expand information reporting:
Create a comprehensive financial account information reporting
regime, including reporting on crypto exchanges, to increase the
visibility of business income to the IRS.
Apply the current law reporting requirements to cases in which
taxpayers buy crypto assets from one broker and then transfer the
crypto assets to another broker, and to cases in which businesses
receive crypto assets in transactions with a fair market value of more
than $10,000.
Expand broker information reporting with respect to crypto
assets to include reporting on beneficial owners of entities holding
accounts with the broker, and allow the United States to share such
information with appropriate partner jurisdictions.
Expand the Secretary's authority to require electronic filing
for tax forms and returns.
Allow the IRS to require payees of any reportable payments to
furnish their taxpayer identification numbers (TINs) to payors under
penalty of perjury.
Details of these legislative proposals can be found in this budget
document: https://home.treasury.gov/system/files/131/General-
Explanations-FY2022.pdf.
Question. Assuming regulations or legislation were put in place to
address information reporting gaps, how long would it take before such
reporting had a material impact on the tax gap?
Answer. The tax gap estimates are aggregated at a very high-level
which makes it difficult to decouple the impact of any legislative or
regulatory changes from general economic factors which are much more
likely to have a material impact on the tax gap. For example, the most
recent reported tax gap, pertaining to tax years 2011-2013, computed an
annual gap of $441 billion, and it's important to note that the revenue
collected from all enforcement programs in a given year is
approximately 12 to 14 percent of that total. That said, there are
alternatives available to estimate or track the impact of any
regulatory or legislative changes outside of the framework of the tax
gap.
Following legislation, we draft and promulgate regulations to
provide guidance to the third parties who will collect and report the
information. Once the guidance is in place, the reporter may need time
to update their system to collect the data. The data would then be
collected starting on January 1st of the new tax year and reported to
the IRS in the spring of the following calendar year. Then, the IRS
will conduct document matching processes during that calendar year and
select returns for compliance activities. This process may take two to
four years for results to be reflected in tax gap estimates. We will
also need the funds to support electronic receipt of the information
returns and to build the document matching processes.
Question. What tradeoffs would exist with respect to enacting such
greater information reporting, including estimates of the specific
costs to taxpayers (financial and time spent)?
Answer. Information reporting typically imposes burden on one set
of taxpayers (the issuers) and reduces burden on another set of
taxpayers (the recipients). In addition, information reporting creates
a paper trail between the issuer and the recipient which facilitates
better tax administration. Thus, when considering imposing a new
information collection, one must consider the impact on the issuer, the
recipient, and tax administration to understand whether that new
information collection requirement is reasonable.
The IRS conducts surveys to gather information from taxpayers about
the time and money they spend to meet their information reporting
responsibilities. This information could be used to estimate the costs
associated with a new reporting obligation. However, the accuracy of
such an estimate is dependent on how similar the new reporting
requirement is to an existing reporting requirement for which the IRS
has previously collected survey data. When a specific burden estimate
is not possible, a decision to impose a new information collection can
be informed by a general understanding of how the burden of information
reporting varies by taxpayer. A taxpayer who already keeps the records
to be reported, has the infrastructure in place to electronically
process and submit the returns, and can benefit from economies of scale
faces a much lower per-return burden than a small business that
manually prepares a few of the same information returns each year. For
example, a tax year 2014 information return issuer compliance cost
survey indicates that issuers responsible for completing a single Form
1099-MISC incur approximately 3.5 hours and $40 of burden while issuers
responsible for completing over 500 Forms 1099-MISC incur approximately
15 minutes and $3 of burden per information return.
Information reporting works the most efficiently when the issuer
has an incentive to report the information and the recipient benefits
from the information. For example, Form W-2 serves as an employer's
documentation of wages paid and removes all wage record-keeping
requirements for the employees. If the recipient has documentation of
income or expenses (such as invoices), receipt of an information
document provides little benefit to the recipient. In such a case, it
may be reasonable to require the issuer to report the information only
to the IRS.
While we must always consider the taxpayer burden, there are times
when the need to collect information to facilitate tax administration
outweighs any burden imposed. In this case, IRS strives to impose the
minimum amount of burden necessary.
child tax credit
Question. In order for the IRS to move forward with beginning to
make advance child tax credit payments on July 1st:
What are the specific metrics that must be met as far as
availability of and level of security with respect to the portal?
Answer. The Advance CTC monthly payments will begin on July 15th.
In compliance with National Institute of Standards and Technology
(NIST) Special Publication 800-63-3, the portal Identity Proofing
requirement is Identity Assurance Level 2 and Authentication
requirement is Authentication Assurance Level 2. These security metrics
will provide enough rigor of ID proofing such that the IRS will have
confidence that only legitimate individuals are accessing their
accounts on the portal.
Question. How far along must the IRS be in its outreach process to
those without the ability to access the portal via the Internet and
what are the appropriate metrics?
Answer. We developed an implementation strategy for the Advance CTC
credit as provided in the American Rescue Plan Act of 2021. The
strategy includes the portal and non-portal (non-electronic) processes
for taxpayers to opt out of the advanced payment or provide new
information that is relevant to determining their eligibility and
advance payment amount. This effort includes a robust outreach strategy
that will inform eligible taxpayers about the periodic Advance CTC
payments and how they can make modifications as needed. The IRS has
started sending letters (Letter 6416 and 6416-A) to more than 30
million American families who, based on tax returns filed with the
agency, may be eligible to receive monthly Child Tax Credit payments.
Question. Once the portal and non-electronic process are fully
available, how long will you give individuals to opt out of receiving
any advance payments before you start issuing the first batch of
payments?
Answer. The specific timeline is still being developed; however, we
plan to issue a notice to eligible taxpayers prior to issuing advance
payments to provide them instructions on how to opt out if they are not
interested in receiving advance of payments. This effort includes a
robust outreach strategy that will inform eligible taxpayers about the
periodic Advance CTC payments and how they can opt-out or make
modifications as needed.
Question. What is your estimate of the percentage of advance
payments issued starting on July 1st that will be completely accurate
and desired by the recipients to be received as advance payments?
Answer. The Advance CTC payments will begin on July 15th and will
be based on a processed tax year 2020 tax return (or tax year 2019 if
the tax year 2020 tax return has not been filed). We developed an
implementation strategy for the advance payments of the child tax
credit as provided in the American Rescue Plan Act of 2021. The
strategy includes the portal and non-portal (non-electronic) processes
for taxpayers to opt out of the advanced payment or provide new
information that is relevant to determining their eligibility and
advance payment amount.
Question. Your senior staff previously told us it will take 12
weeks to hire and fully train each new customer service representative
needed to handle the responsibilities related to this new program. How
many new customer service representatives will you require to be hired
and fully trained before going forward with issuing any advance
payments?
Answer. Our implementation team is still developing the portal and
procedures, so we have not finalized the length of training at this
time. We are also still working with our research division to get a
better projection of how many calls we may receive. Until we have a
firm projection, we are unable to determine how many assistors will be
needed to answer these calls. We plan to hire additional Customer
Service Representatives between June 21st and August 30th, but we can
redirect existing staff to answering these calls if they begin coming
in before the new hires are fully trained.
Question. With respect to non-filers: will a current non-filer, who
is the parent of a qualifying child, be in a position to receive an
advance payment on July 1st solely based on whatever non-filer
information that individual provided to the IRS to prove eligibility
for their EIP?
Answer. The Advance CTC payments will be based on a processed tax
year 2020 tax return (or tax year 2019 if the tax year 2020 tax return
has not been filed). The IRS worked with its Free File Alliance to
develop a new Non-Filers Sign-up tool for taxpayers to report their
qualifying child tax credit dependents to be used to determine
eligibility for the advance payments. This tool is a new online tool
designed to help eligible families who don't normally file tax returns
register for the monthly Advance CTC payments scheduled to begin July
15th. This new tool provides a free and easy way for families who don't
have a return-filing obligation to provide the IRS the information
needed to figure and issue their Advance CTC payments if eligible.
Often, these are families who receive little or no income, including
those experiencing homelessness, the rural poor and other underserved
groups. This new tool is available only on irs.gov.
Question. Or, to receive an advance payment on July 1st, or any
other date, will the individual have to first file and have processed a
complete 2020 tax return, even if that individual otherwise has no
obligation to file a return?
Answer. Please see our response immediately above.
As is the case with any IRS initiative including Economic Impact
Payments (EIPs) and the Rebate Recovery Credit (RRC), we will work with
a broad and growing partner base to reach those individuals who may be
eligible for the Advance CTC so that they can prepare for the
opportunity to receive advance payments later in 2021. We have
established relationships or built upon many existing partnerships that
will help the IRS reach the underserved with this important information
and steps to take to access the Advance CTC. The IRS is exploring other
outreach opportunities that may help address the special needs of the
homeless and other hard to reach communities.
Question. How many individuals, who otherwise have no need to file
or interact with the IRS, will need to go through the process of
actually filing a tax return in order to receive the full amount of the
credit?
Answer. We developed an implementation strategy for the Advance CTC
as provided in the American Rescue Plan Act of 2021. This effort
includes a robust outreach strategy that will inform eligible taxpayers
about the Advance CTC payments and the new Non-Filer Sign-Up tool that
individuals with no filing requirement may use to register for the
advance payments.
Question. With respect to all filers: what is your estimate for the
overall increased burden (both in terms of cost and time) on taxpayers
in terms of return filing and provision of information updates with
respect to the credit?
Answer. We developed a portal for taxpayers to opt out of the
advanced payment or provide new information that is relevant to
determining their eligibility and advance payment amount. The
applicable tax forms, instructions and publications will be updated and
we will provide each taxpayer a notice no later than January 31, 2022,
that provides the aggregate amount of Advance CTC payments made in 2021
to aid in completing their tax year 2021 tax return. We keep the
customer experience at the forefront of all our efforts, and we strive
to minimize taxpayer burden.
Question. How would these costs change (if at all) if the provision
is made permanent?
Answer. Taxpayers only need to take action to receive the Advance
CTC if they do not have a filing requirement, wish to opt out of
receiving advance monthly payments, or need to make some other change
not already included in their most recent tax filing, such as recording
additional children, or changing bank account information. Otherwise,
the payments will be automatic based on information from their most
recent tax return filed. If this law were to be made permanent,
depending how the law is written, we believe the additional burden
would mostly be on those who would not have a filing requirement, as
they would still be required to report certain information through the
portal annually.
Question. With respect to potential delivery issues on the advanced
refundable CTC: notwithstanding the diligent efforts of IRS employees,
the economic impact payments have been plagued by both accuracy and
timeliness issues. Elsewhere, various States have had significant
challenges providing enhanced jobless benefits to recipients. How will
delivery issues compare (i.e., better, worse, etc.) between advance
refundable credits and economic stimulus payments?
Answer. The IRS stands ready to deliver and serve the American
taxpayers, much like we did when implementing major provisions of the
Coronavirus Aid, Relief, and Economic Security Act and COVID-Related
Tax Relief Act of 2020. The IRS is an administrative agency and will
take steps to deliver whatever is asked of us as we did with the
delivery of Economic Impact Payments (EIPs) and will leverage our
experience in successfully delivering three rounds of EIP payments
totaling more than $800 billion as we deliver the Advance CTC payments.
Question. To what extent will the use of debit cards impact the
rate (and dollar amount) of improper payments and other delivery
issues?
Answer. The IRS defers to the Treasury Department's Bureau of
Fiscal Service to address these concerns.
roi/$1-trillion ``tax gap''
Question. In July 2020, the nonpartisan Congressional Budget Office
estimated that ``increasing the IRS's funding for examinations and
collections by $20 billion over 10 years would increase revenues by $61
billion'' and that ``increasing such funding by $40 billion over 10
years would increase revenues by $103 billion.''\1\
---------------------------------------------------------------------------
\1\ See https://www.cbo.gov/publication/56467.
Please explain whether, and why or why not, the IRS methodology
would confirm CBO's projections that a $20 billion ($40 billion)
increase in IRS funding for examinations and collections over 10 years
---------------------------------------------------------------------------
would increase revenues by $61 billion ($103 billion).
Answer. The CBO estimate is based on the IRS methodology with some
minor adjustments as detailed on page 19 of the July 2020 ``CBO Trends
in the Internal Revenue Service's Funding and Enforcement'' document
(excerpt below).
Although CBO's estimates start with the IRS's calculations of
the revenue it would collect per dollar of enforcement
spending, CBO made two adjustments to better approximate the
marginal return on that spending. The first is an adjustment
for taxpayers' learning. After the third year of an initiative,
CBO judges that taxpayers will have adapted to a new
enforcement activity and developed ways to evade that
enforcement. CBO therefore reduced the marginal return on each
activity after the third year. The second adjustment
incorporates the expectation that the IRS prioritizes
enforcement activities that it projects to have the highest
average return; therefore, the spending associated with the
2021 initiative would have the greatest return, and initiatives
that start in the 2022-2025 period would have progressively
lower returns.
It is worth noting that while our current model does not directly
address a learning curve on the part of taxpayers, we do include a
learning curve on the part of newly hired employees. Specifically, the
revenue potential is low within the first 2 years for each wave of new
hires because new hires will generally not reach full productivity
until year 3, and we also assume no new revenue generating work 5 years
after hire to account for new hire attrition and turnover. Once
assessments are made, revenues can be generated across the 10-year
statute of limitations to collect an assessment. We estimate the 10-
year revenue stream based on (i) the estimated assessments from work
completed by successive waves of new hires during their respective 5
years of work and (ii) the past observations of how long it takes to
collect revenue following an assessment. Like the CBO, we include
marginality adjustments to account for the assumptions that any new
hires will be working cases lower in priority than current staff.
Question. Please provide the specific IRS empirical basis for
computing returns on investment to additional funding for examinations
and collections, including assumptions and estimation methodology.
Answer. This ROI methodology uses 10 years of direct enforcement
revenue attributed to enforcement activity in constant weighted dollars
to calculate a revenue per FTE estimate. Using a 10-year constant
dollar-weighted average discounts the importance of any particular year
that may be influenced by unusual events or economic cycle, while
recognizing that recent years are more predictive than older years and
that a dollar collected 10 years ago is not the same as a dollar
collected last year.
Adjustments are made to account for the date of hire, the learning
curve of new employees (productivity), training costs, and an
assumption that new work will generate less revenue than current work
(marginality). This is divided by the FTE cost, which includes the cost
of the FTE along with other costs associated with bringing in a new
hire, such as training, information technology, and other support
costs.
Revenue Estimation Model Data
Enforcement Revenue Information System (ERIS) Data
Recommended/Assessed/Collected Dollars
Direct Hours
Business Operating Division (BOD)
Input from the BODs
Number of FTE--By Position Type (Example: Revenue Agent/
Revenue Officer)
Type of Work Assumed (Example: Activity Codes 278-281)
Gross Domestic Product (GDP) Deflators
Adjustments to Revenue
Enter on Duty Date (Reduced for January/April hire date)
Productivity Adjustments
Year 1-60 percent; Year 2-80 percent; Year 3-100 percent
Marginality Assumption
The next cases worked will be 90 percent as productive as
the previous cases
Training (FTE in years 1 and 2 are reduced by hours employees
and trainers spend in training)
Question. Please explain why specifically the IRS concurs or does
not concur with the diminishing returns to additional funding for
examinations and collections that are reflected in CBO's projections.
Answer. The IRS concurs that there are diminishing returns to
hiring additional enforcement staff, and we incorporate them into our
revenue estimates. However, we also believe that with the current level
of staffing, we are far from reaching the level of diminishing returns
that would dramatically affect ROI assumptions in most enforcement
areas. And we account for that when determining the type of enforcement
activities to emphasize in budget requests.
Question. Your testimony cited past ``tax gap'' estimates, and you
indicated that those estimates did not, or perhaps did not fully,
account for things like virtual currencies, foreign-source income, and
illegal-source income. You identified that past estimates also do not
reflect more recent findings of researchers, including IRS researchers,
who have focused on pass-through entities and offshore income of the
``top 1 percent.'' Regarding the latter, you suggested that the recent
research findings suggest perhaps $175 billion per year which could be
added to a tax gap estimate. It appears that the research you referred
to is the March 2021 National Bureau of Economic Research (NBER)
Working Paper 28542 (``Tax Evasion at the Top of the Income
Distribution: Theory and Evidence,'' by J. Guyton, P. Langetieg, D.
Reck, M. Risch, and G. Zucman). I have several questions about basing a
tax-gap estimate on results of the recent paper, and on the research
findings themselves.
The NBER working paper, as identified on its title page, has not
been peer-
reviewed or been subject to the review by the NBER Board of Directors
that accompanies official NBER publications. Is it reasonable to assign
to what we believe might be the tax gap results from very recent
research that has not yet been peer-reviewed?
Answer. Section 61 of the Internal Revenue Code generally defines
``gross income'' as ``all income from whatever source derived. . . .''
Taxable income is that portion of gross income that is properly subject
to taxation under applicable provisions of tax law. The tax gap is
defined as the difference between the amount of tax owed by taxpayers
for a given year and the amount that is actually paid voluntarily and
timely. The tax gap represents, in dollar terms, the annual amount of
tax noncompliance with our tax laws. It does not distinguish between
under-reporting, non-filing or underpayment of tax based on a good
faith misunderstanding of the tax law, intentional evasion of filing or
reporting obligations, domestic or foreign source income, legal or
illegal source income, etc. However, our published estimates are based
on limited types of information and are not intended to represent an
all-inclusive measure of global tax non-compliance by U.S. taxpayers.
The most recent ``official'' tax gap estimates relate to tax years
2011-2013 and were released in 2019. The 2021 digital world economy is
significantly different from the world economy of 2011-2013.
``Official'' tax gap estimates have traditionally relied on historical
audit and collection data for certain identified non-filers,
underreporters, and underpayers. Estimates currently in use represent a
substantial challenge for the IRS, are outdated, and under-inclusive.
For at least the past 18 months, we have been working on updating and
enhancing the underlying methodology, improving the currency of the
estimates and considering how to identify and incorporate additional
information and emerging compliance issues. By including more
operational audit data, the IRS anticipates that we'll be able to
produce estimates that are more reflective of the actual tax gap, more
timely, more inclusive and that include forecasting of emerging issues.
This NBER working paper has received several rounds of comments
from internal IRS reviewers and external reviewers as well prior to
posting as an NBER working paper. Earlier drafts of this working paper
were accepted to the program of the National Bureau of Economic
Research (NBER) Conference on Research in Income and Inequality (March
2020) and the Annual Meetings of the National Tax Association (November
2019 and November 2020). The current draft was accepted to the program
on the NBER Public Economics Program Meeting. As noted in the text, the
work is grounded in work by other, well respected economists and
consistently uses assumptions from relevant sources in that literature
while providing sensitivity analyses around those assumptions.
Therefore, we believe findings to be of high quality and credible.
Question. The title page of the working paper identifies that ``The
views expressed here are those of the authors and do not necessarily
reflect the official view of the Internal Revenue Service or the
National Bureau of Economic Research.'' Does the IRS endorse the
findings and views of the paper?
Answer. Yes, the IRS endorses the findings of the paper.
Question. The title page identifies that ``All data work for this
project involving confidential information was done at IRS facilities,
on IRS computers, by IRS employees, and at no time was confidential
taxpayer data ever outside of the IRS computing environment.'' Can you
substantiate those claims?
Answer. Yes, all data work for this project involving confidential
information was done at IRS facilities, including telework locations
approved as part of COVID-19 mitigation, on IRS computers, and by IRS
employees. At no time was confidential taxpayer data outside of the IRS
computing environment.
Question. The title page identifies that authors ``Reck and Risch
are IRS employees under an agreement made possible by the
Intragovernmental Personnel Act of 1970 (5 U.S.C. 3371-3376).'' Please
provide copies of the agreements for each author to my Senate Finance
Committee staff.
Answer. Copies of these agreements are attached.
MOU IC Risch
IPA Risch
Dreck 2018 JSRP IPA Addendum
DRsigned DReck IPA MOU Date Change
DRSigned Dreck modified IPA OF 69
IPA Reck LSE completed
Question. Please list all outside researchers deemed to be IRS
employees under any agreement, including the Intragovernmental
Personnel Act of 1970, and the terms of their employment.
Answer. Below we have provided a list of current/active IPA's/
Student Volunteers working with the Research, Applied Analytics and
Statistics division. Documentation addressing the terms of employment
are attached--the OF-69 and the supplemental IPA/SV agreements/
addendums.
------------------------------------------------------------------------
IPA-SV
Last First Affiliation Status IPA-SV Expiration
Name Name Start Date Date
------------------------------------------------------------------------
Anderson Brandon Stanford Univ. IPA 4/1/2020 4/1/2022
------------------------------------------------------------------------
Black Emily Stanford /CMU Student 3/1/2021 3/1/2023
Voluntee
r
------------------------------------------------------------------------
Elzayn Hadi Stanford Univ. IPA 10/26/2020 10/26/2022
------------------------------------------------------------------------
Goldin Jacob Stanford Univ. IPA 12/5/2019 12/5/2021
------------------------------------------------------------------------
Henderso Peter Stanford Univ. Student 6/1/2020 n/a
n Voluntee
r
------------------------------------------------------------------------
Hess Ryan Stanford Univ. IPA 5/3/2021 5/3/2023
------------------------------------------------------------------------
Ho Daniel Stanford Univ. IPA 9/30/2019 9/30/2021
------------------------------------------------------------------------
Paul Mansheej Stanford Univ. Student 11/5/2020 n/a
Voluntee
r
------------------------------------------------------------------------
Reck Daniel London School IPA 8/1/2016 8/31/2021
of Economics
------------------------------------------------------------------------
Risch Max Carnegie IPA 10/15/2019 10/15/2021
Mellon
University
------------------------------------------------------------------------
Smith Evelyn Stanford/Univ Student 4/30/2018 n/a
of MI Voluntee
r
------------------------------------------------------------------------
Intergovernmental Personnel Act (IPA) agreements are governed by
OPM. A link to the relevant policy document is included below: https://
www.opm.gov/policy-data-oversight/hiring-information/intergovernment-
personnel-act/#url=Provisions.
Question. Results from the paper rely on data that involve
confidential taxpayer information, and therefore are replicable only by
a researcher having access to such information. To have access, what is
required of a non-IRS-employee researcher? Please document any
processes through which a non-IRS-employee can access confidential and
sensitive taxpayer information, including the process that was used to
assign Reck and Risch to be IRS employees.
Answer. Please see the attached document--JSRP Program Description.
joint statistical research program (jsrp)
I. Goals
The Joint Research Program is intended to increase the use of tax
microdata by researchers outside the Federal Government in order to
provide new insights that provide new understandings of taxpayer
behavior that could impact the administration of the tax system.
Research may also that will advance the understanding of the ways that
existing tax policies affect people, businesses, and the economy
Finally this research will benefit RAAS employees by providing
developmental opportunities through joint research with the Nation's
leading economic researchers, improving RAAS's ability to hire and
retain a talented and highly motivated work force.
II. Soliciting Projects
Projects for the program are solicited bi-annually, resources
permitting. RAAS consults a variety of sources, including a panel of
internal and external stakeholders, to develop a list of specific
research topics for each annual solicitation. Applicants, however, can
propose additional ideas for consideration. (The 2018 Call for
Proposals can be found at: https://www.irs.gov/pub/irs-soi/
18jsrpapplication.pdf)
III. Evaluating Projects
Review team: The composition of the team will include RAAS and
Treasury staff. Review Criteria: Selection criteria will include
factors such as:
Relevance to Tax Policy and/or Tax Administration (as defined
in Internal Revenue Code (IRC) 6103(b)), with preference given to
projects with a direct impact on current tax policy questions;
Available RAAS resources--includes data, human capital,
financial;
Degree of RAAS Employee involvement included in the proposal;
Issue's contribution to IRS/OTA research goals;
Research team's demonstrated ability to do the work, based on
past performance, qualifications, etc.
IV. Data Access
Researchers can be granted microdata access through one of three
mechanisms: Intergovernmental Personnel Act (IPA), Student Volunteer
program, or a contract executed under IRC 6103(n).
Intergovernmental Personnel Act: This program is available for
Non-IRS researchers who are employees of non-profits or State
governments, and who meet the other requirements of the program (see 5
CFR part 334). Under an IPA, a researcher is treated as an employee
administratively, subject to background investigation and all
applicable disclosure restrictions and penalties, sworn in as an
employee and assigned to a manager who provides oversight of the
project. The researcher's primary employer remains solely responsible
for his/her salary and benefits as long as both the researcher's
organization and RAAS benefit from the arrangement. The term of the
agreement is usually 2 years but can be extended. These agreements are
reviewed and processed by the IRS human resources function, with
additional approval from the CFO office.
Student Volunteers: This program is available for Non-IRS
researchers who are students at accredited institutions, and who meet
the other requirements of the program (see 5 U.S.C. 3111). Under this
program, a researcher is treated as an employee administratively,
subject to background investigation and all applicable disclosure
restrictions and penalties, sworn in as an employee and assigned to a
manager who provides oversight of the project. The researcher's
institution must approve the student's participation in the project and
the project must be clearly related to the student's area of study.
Participation ends when the project is completed or when the
participant graduates or leaves the institution. These agreements are
reviewed and processed by the IRS human resources function, with
additional approval from the CFO office.
IRC 6103(n) Contracts: IRC 6103(n) contracts are approved and
administered through the IRS procurement system, with oversight by a
RAAS contracting officer's representative and an RAAS/SOI manager. The
researchers are generally awarded a sole source contract and the cost
is limited to cover travel fees that allow contractors to meet with SOI
and OTA staff over the course of the 2-year contract in order to
discuss the work and present findings. For the 2016 JSRP, these
contracts are used only for research partners from other Federal
agencies or organizations.
Regardless of the mechanism used to grant data access, an RAAS
manager will be assigned to oversee each project. Researchers who are
given access to tax microdata are subject to the following conditions:
Must undergo a background clearance prior to accessing data.
All tax data remain in a secure IRS system and are accessed
using IRS-issued equipment.
All software access is requested and approved through the IRS
Online 5081 system by the manager of record and annually recertified.
Researchers accessing tax data must take UNAX/FMSS/ISS data
security training courses on an annual basis. Failure to complete
training timely would result in cancellation of all system access
privileges.
Project team members who are neither IPAs, Student Volunteers or
contractors will be required to sign an MOU acknowledging that they
will not be permitted to access taxpayer data. They will only be
permitted to access RAAS disclosure-protected output.
V. Periods of Performance and Extensions
Given that the scope of all approved research projects will be
narrowly focused, research arrangements will last 2 years, with an
additional extension of up to 2 years available on a case-by-case
basis. Additional extensions may be granted, for example, if a project
is significantly delayed due to unexpected administrative issues, for
example delays in completing background investigations, issuing ID
cards, or configuring computer hardware/software.
VI. Disseminating Results
1. Research projects should result in a paper that will be
suitable for presentation at a professional conference and may also be
submitted for publication in economic or statistical journals.
Completed papers will also be included in the SOI Paper Series and will
be made available to the public via the Tax Stats pages on irs.gov
(https://www.irs.gov/uac/SOI-Tax-Stats-SOI-Working-Papers).
2. Prior to publication or presentation, all papers are reviewed
to ensure:
The work complies with disclosure prevention protocols as
outlined in IRS Publication 1075 and SOI's disclosure rules as
articulated by its Disclosure Review Board.
The text is consistent with the approved research project
purpose and clearly articulates the tax administration purpose for
which it was undertaken.
The text accurately describes the data and tax law.
The tone and content comply with OMB statistical policy
directives (see https://www.whitehouse.gov/omb/inforeg--statpolicy).
Question. The paper contains numerous assumptions, methodological
choices, and interpolation. Does the IRS endorse all assumptions,
choices, and interpolations used?
Answer. Yes, the IRS endorses the assumptions, choices and
interpolations used in this paper. As is common in the literature, this
working paper relies on a series of other published papers and reports
as a starting point. The paper conducts a variety of sensitivity
analyses around many of the required assumptions, acknowledging that
the current estimates fall within a broader range of plausible
estimates. As a research paper developing new estimation methods, it
has been released as a working paper to provide an opportunity to
receive feedback on methods for further refinement prior to submission
for independent peer review.
Question. The paper uses wealth estimates and estimation
methodology constructed by the often-cited authors Zucman and Saez.
Those estimates and the methodology used by those authors have been the
subject of substantial controversy within the economics, finance, and
tax research communities. Some have speculated that political agendas
may influence some of the methodological choices made, rather than
adherence to the scientific method. Are you aware of any controversy
surrounding research by any of the authors of NBER Working Paper
28542--a paper from which you suggested we may find useful information
for estimating the tax gap?
Answer. It is common practice to reference relevant prior work as
part of the context of developing new analytical methods. Work by
Zucman with Saez on the distribution of income and separately on
offshore evasion are important parts of the current literature in this
area. That said, the work by Zucman does not play a major role in the
magnitude of additional misreporting identified in this paper. Earlier
drafts of this working paper were accepted to the program of the
National Bureau of Economic Research (NBER) Conference on Research in
Income and Inequality (March 2020) and the Annual Meetings of the
National Tax Association (November 2019 and November 2020). The current
draft was accepted to the program on the NBER Public Economics Program
Meeting. Drafts of the paper have been presented twice to the staff of
the Treasury Office of Tax Analysis and have seen extensive internal
IRS review. We believe the paper makes important contributions to our
understanding of the challenges in the detection of certain forms of
offshore and pass-through income even as the exact measures and their
distribution across the population are reviewed and refined through the
professional feedback process of working paper releases prior to
submission for independent peer review for an academic journal.
unemployment assistance
Question. The Department of Labor's Office of Inspector General has
estimated that more than $63 billion of unemployment assistance under
COVID-19 relief packages has been paid out improperly, either through
fraud or errors, which is roughly 10 percent of the total amount paid
under COVID pandemic-related unemployment programs. As of March, the
State of California alone estimates that there has been about $11
billion in fraudulent payments and an additional $19 billion in suspect
accounts. Other States have also similarly been affected.
You noted in your testimony that individuals who received a 1099-G
form that should not have received the form should notify their State
agency. Does the IRS intend to work with these State agencies to
compile data on who fraudulently received 1099-G forms as a way to
track the fraud as well as prevent fraud in the future?
Answer. We have taken proactive measures to address unemployment
identity fraud to minimize the burden on fraud victims and in December
2020 conducted training sessions with State workforce agencies to
instruct them not to file Forms 1099-G with the IRS in cases where they
have determined benefits were fraudulently paid. We've also presented
and issued an alert to the Federation of Tax Administrators and the
State Departments of Revenue who in turn issued a bulletin to their
membership.
Question. How can the IRS, working with the DOL, ensure that as UI
funds continue to be sent to Americans, fraudulent activity is capped?
Answer. If taxpayers are concerned that someone has stolen their
personal information and they want to protect their identity when
filing their Federal tax return, they can request an Identity
Protection PIN (IP PIN) from the IRS. An IP PIN is a six-digit number
that prevents someone else from filing a tax return using the
taxpayer's Social Security number. The IP PIN is known only to the
taxpayer and the IRS. Using an IP PIN helps the IRS verify the
taxpayer's identity when they file their electronic or paper tax
return.
We have raised awareness and educated taxpayers on steps they may
take if they become victims of fraudulent unemployment claims. Actions
we've taken include:
Issued identity theft guidance for unemployment compensation
reporting on irs.gov, as requested by States (December 2020).
Issued a press release and an additional guidance alert to
taxpayers on identity theft involving unemployment benefits (January
28, 2021).
Held ongoing IRS Security Summit meetings to talk with the
Federation of Tax Administrators (FTA) and other partners to share best
practices on identifying irregularities and how to share and
disseminate information.
tigta report
Question. In your testimony, you indicated that you disagreed
``entirely'' with the TIGTA report and its conclusions. Can you
elaborate as to the specific bases for why you so disagree?
Answer. Please see the Management Response to the TIGTA Report
Number: 2021-30-015, High-Income Taxpayers Who Owe Delinquent Taxes
Could Be More Effectively Prioritized. Decisions regarding IRS
workplans are made by career employees based on consideration and an
evaluation of all available options, including significant enforcement
resource limitations, leading to determinations that are deemed to be
in the best overall interests of tax administration. Tax enforcement
has both a direct effect on taxpayers actually contacted, but also an
indirect ``deterrence'' effect on taxpayers generally. Unfortunately,
decisions significantly impacting the people of this country are often
driven by the lack of available resources. Criticism for not deploying
sufficient resources to a specific issue or type of taxpayer often
ignores the importance to tax administration of maintaining meaningful
compliance coverage across all segments of society, compliance issues,
etc. With that coverage requirement in mind, and after considering all
the options, including the tax dollars involved, the IRS determines the
best overall solution for tax administration by devoting our limited
enforcement resources across numerous areas with significant perceived
non-compliance. Reporting that the IRS fails to ``prioritize'' any
single enforcement option, without appropriately referencing the need
to spread extremely limited resources across many different areas of
noncompliance is not appropriate.
______
Questions Submitted by Hon. Chuck Grassley
Question. I've heard concerns from a number of accountants and tax
preparers in Iowa on the current filing deadline. While the IRS has
postponed the deadline 1 month, many say additional time is still
needed given the delayed start to filing season, changes in tax law
late last year, and COVID related issues. Can you explain why the IRS
has been reluctant to extend the filing deadline further? Also, why
wasn't the postponed deadline extended to estimated tax payments?
Answer. We appreciate and respect the comments we received both for
and against a filing extension. Those requesting a FS21 deadline
extension included members of Congress and several associations
representing tax professionals and others. Those requesting that we not
extend the FS21 deadline included the following:
Federation of Tax Administrators, representing State tax
administrators around the country;
Council for Electronic Revenue Communication Advancement,
representing a wide diversity of industry participants, including tax
software firms, large tax preparation companies, technology
integrators, and financial services companies; and
American Coalition of Taxpayer Rights, helping more than 110
million taxpayers each year through tax preparation solutions.
We also had direct talks with members of Congress, tax
professionals, and others about whether to extend the FS21 deadline and
the nature of any potential extension.
After carefully considering all the options, the Department of the
Treasury (Treasury) and the IRS determined a limited FS21 deadline
extension for individuals filing Form 1040 to May 17, 2021, was in the
best interest of tax administration.
IRS Notice 2021-21 sets forth the details of the extension. Notice
2021-21 only applies to income tax returns for individual taxpayers. It
does not extend the filing deadline for any other type of tax return
and does not change the April 15, 2021 deadline for estimated tax
payments.
While we recognize the desire and importance of requests to further
extend the FS21 deadline or expand the scope of the extension, doing so
poses a significant potential risk to implementing the American Rescue
Plan Act (ARP). Additionally, it could have delayed delivery of the
Recovery Rebate Credits (RRCs), ARP Economic Impact Payments (EIP3),
and refunds--including Earned Income Tax Credit (EITC) and Child Tax
Credit (CTC) payments--to the most vulnerable Americans.
The IRS is continuing to help taxpayers navigate the unusual
circumstances related to COVID-19, while also meeting its important tax
administration responsibilities for our country. The IRS frequently
faces competing priorities for the same set of limited resources,
especially customer support and information technology.
We currently have more than 13,700 IRS customer service
representatives (CSRs) assisting taxpayers on the phone and they will
remain available through the May 17, 2021 extended FS21 deadline. ARP
included funding to bring an additional 1,000 CSRs onboard this summer.
Following the end of the filing season, CSRs begin sorting and working
through our correspondence inventory. This correspondence often
includes taxpayer responses to our requests for additional information
required to complete processing some filed returns. Extending the
filing season deadline delays the CSR correspondence assistance. This
delay, in turn, potentially slows the resolution of taxpayers' accounts
and results in delayed refunds, including EITC and CTC payments.
For many taxpayers, refunds are often their largest source of funds
each year, and they use this money to purchase necessities and pay down
debt. When we extend the filing season deadline, many taxpayers
postpone filing their return. This postponement, in turn, delays
refunds and impairs the timely benefit of EITC and CTC payments. For
FS21, it also delays distribution of RRCs, which is the only way
eligible taxpayers can claim any unreceived payments from the first and
second rounds of EIPs. Further, under ARP, the IRS bases EIP3
eligibility and amount on information in the 2020 return or, if not
filed, the 2019 return. If a taxpayer who received an EIP3 based on
2019 return information then files a 2020 return showing they are
entitled to a larger EIP3, the IRS promptly issues a supplemental EIP
to that taxpayer for the difference. A delayed 2020 return means a
delayed supplemental EIP.
Extending any filing season also compresses the development cycle
for the entire tax ecosystem, including the IRS, the State departments
of revenue, and the tax software development companies. The IRS
typically begins preparing for the next filing season shortly after the
traditional April 15th deadline. This preparation includes developing
the programming and form changes needed to implement recent tax
provision changes. Extending the filing season deadline limits the time
to identify, test, and build changes for the next filing season and
introduces risks of problems or even an unsuccessful filing season. It
also affects programming and preparation challenges for industry
stakeholders. Continued changes and uncertainty in the filing season
deadlines create confusion and affect taxpayer confidence and
understanding of compliance deadlines.
The IRS and Treasury also remain highly sensitive to the numerous
challenges facing small business owners in general and especially
during the pandemic. The estimated tax ``penalty'' is an interest-based
addition to tax, based on the IRS's current interest rate. We are aware
that, during the pandemic, many small businesses are choosing to absorb
the estimated tax penalty and retain the funds as working capital or to
pay down other obligations with a higher interest rate.
Small businesses choosing to make the first quarter estimated
payment on May 17th instead of April 15th will have to pay an estimated
tax penalty equal to \1/12\ of the annualized interest rate (currently
3 percent) times the estimated payment amount. For example, a first
quarter estimated tax liability of $8,000 paid on May 17th would incur
an estimated tax penalty of $20 (\1/12\ 3 percent $8,000).
Meanwhile, the business would retain any economic benefit of having
such funds in its possession during the period from April 15th to May
17th.
Individual taxpayers must pay taxes as they earn or receive income
during the year, either through withholding or estimated tax payments.
Most individual taxpayers have their taxes automatically withheld from
their paychecks and submitted to the IRS by their employer. Individuals
whose income is not subject to income tax withholding must make
quarterly estimated tax payments to the IRS. However, there are certain
exceptions and special rules that apply to some groups, including
farmers, fisherman, those who recently became disabled, recent
retirees, and those who receive income unevenly during the year.
Estimated taxes can be paid online using IRS Direct Pay, credit card,
Electronic Fund Withdrawal (EFW), or the Electronic Federal Tax Payment
System; through the mobile application IRS2Go using EFW or credit card;
by phone using EFW or credit card; or in person or mail using a check
or money order and the Estimated Tax Payment Voucher.
Individuals do not need to rely solely on their prior year's taxes
to properly estimate their first quarter estimated income tax payment.
Section 6654 of the Internal Revenue Code imposes an addition to tax on
individuals for failing to timely pay estimated income taxes. The
addition to tax is calculated by using the lesser of the following:
100 percent of the prior year's tax (110 percent for higher-
income individuals), or
90 percent of the current year's tax.
Individuals also retain the ability to automatically extend the
filing date of their 2020 income tax return. There are many online
services that allow most individuals to automatically extend their
filing deadline without cost for such services. As noted above,
businesses that do not report income on an individual tax return are
not affected by the extended filing season deadline.
Question. I appreciate your response to my question on the
importance of the IRS Private Debt Collection (PDC) program during the
Finance Committee hearing. This program allows the IRS to engage
private debt collectors to collect delinquent tax debts that in most
cases the IRS has stopped pursuing. This means that the PDC program
brings in revenue that would otherwise not be collected, and allows the
IRS to use the proceeds to hire more revenue agents.
According to IRS data, the PDC program has collected more than $623
million from FY 2017 through September 17, 2020, with more than $320
million collected in FY 2020 alone. Combined with revenue collected by
additional IRS personnel funded by the program, the PDC program has
provided more than $678 million to the U.S. Treasury.
Despite the clear success of this program, I am concerned by
reports that the IRS has made a decision not to provide new cases for
the program until the end of September, 2021.
What is the basis for the decision to delay the delivery of new
cases to PDC companies?
Answer. The IRS considered several factors when making the decision
to delay the delivery of new cases to the private collection agencies
(PCA):
Current status of the filing season and processing delays the
IRS and taxpayers are experiencing. The IRS continues to work through
backlogs in some of our operations that affects the eligible inventory.
Contract transition activities including IT development work
for new capabilities and compensation structures
Each PCA has approximately 670K open cases that in total
averages $6.8B in balances due.
In addition to the open cases, the IRS is still delivering new
tax debts on the accounts that are already assigned to a PCA. Since the
end of January 2021, we have placed about 50,000 new tax debts
(modules) totaling $379M in balances due.
Question. Is the date which the PDC companies have been given for
new cases, which I understand is September 27th, final, or will the IRS
attempt to provide new bases before that date?
Answer. The date is firm, for the same reasons as stated above.
Question. I also want confirm the full inventory of ``outstanding
inactive tax receivables'' is being made available to the PDC program
as intended by law. Aside from the recent pause in cases delivered to
PDC companies, I am concerned by a finding in a report issued by the
Treasury Inspector for Tax Administration (TIGTA) on March 10, 2021. In
this report, titled ``High-Income Taxpayers Who Owe Delinquent Taxes
Could Be More Effectively Prioritized,'' ``TIGTA identified 3,185 high-
income taxpayers whose accounts were not sent to a private collection
agency at any point since the program started in Fiscal Year 2017 and
who owed $110 million on modules that were shelved in an inactive
inventory as of May 14, 2019.''
In light of these concerns, I have the following questions
regarding the available inventory of cases eligible to be assigned for
the Private Debt Collection program.
The Taxpayer First Act generally exempted taxpayers under 200
percent of the Federal poverty level from the program. However, at the
same time, the time period for when accounts may be assigned to the
program was shortened from over 3 years after assessment to 2 years.
This shorter timeline became effective at the beginning of 2021. Can
you confirm that the IRS has updated its pool of eligible accounts for
the program based on this updated timeline? How many additional
accounts has this resulted in being eligible for the program?
Answer. The IRS updated the pool of eligible accounts for the
program based on this change. The change from 3 years to 2 years
currently adds about 80,000 additional cases to the pool of eligible
accounts. Note that many cases older than 2 years are already swept
into inventory by other parts of the statute, because they are already
shelved due to lack of resources or there has been no taxpayer contact
for over a year.
Question. Please provide the most recent estimate of the gross
dollar amount of tax debt receivables and number of tax modules in the
Individual Master File.
Answer.
------------------------------------------------------------------------
Individual Master File \2\ Number of Entities Gross Dollar Amount
------------------------------------------------------------------------
15,665,114 $303,618,588,929
\2\ All figures for the
tables in this response
are as of April 22, 2021.
------------------------------------------------------------------------
Question. Please provide the most recent estimate of the gross
dollar amount of tax debt receivables and number of tax modules in the
Business Master File.
Answer.
------------------------------------------------------------------------
Business Master File Number of Entities Gross Dollar Amount
------------------------------------------------------------------------
3,379,230 $165,784,958,068
------------------------------------------------------------------------
Question. Please provide the most recent estimate of the number of
tax modules in each file that meet the requirements of ``inactive tax
receivable'' as defined under section 6306 of the tax code without
regard to section 6306(d).
Answer.
------------------------------------------------------------------------
------------------------------------------------------------------------
Inactive Tax Receivables (accounts/entities) 2,886,404
------------------------------------------------------------------------
Individual Master File 2,340,150
------------------------------------------------------------------------
Business Master File 546,254
------------------------------------------------------------------------
Question. Please provide the most recent estimate of the number of
tax modules in each file that have been designated by IRS as eligible
for transfer to PDC companies.
Answer.
------------------------------------------------------------------------
------------------------------------------------------------------------
Eligible for Transfer (accounts/entities) 704,398
------------------------------------------------------------------------
Individual Master File 359,187
------------------------------------------------------------------------
Business Master File 345,211
------------------------------------------------------------------------
Question. Please provide the most recent estimate of the number of
tax modules that are excluded from the PDC program according to each
exception under IRC section 6306(d).
Answer.
------------------------------------------------------------------------
Legislative Exclusions Count
------------------------------------------------------------------------
Pending or Active Offer in Compromise 1,117
------------------------------------------------------------------------
Pending or Active Installment Agreement 106,121
------------------------------------------------------------------------
Open Examination 17,191
------------------------------------------------------------------------
Litigation and Bankruptcy 1,103
------------------------------------------------------------------------
Currently Under Levy 125,894
------------------------------------------------------------------------
Right to Appeal--Collection Due Process 23,765
------------------------------------------------------------------------
Innocent/Injured Spouse 3,883
------------------------------------------------------------------------
Combat Zone/Military Deferment 13,525
------------------------------------------------------------------------
Deceased 183,186
------------------------------------------------------------------------
Less than 18 Years Old 2,362
------------------------------------------------------------------------
Identification Theft 365,046
------------------------------------------------------------------------
SSDI 125,329
------------------------------------------------------------------------
Low Income 396,205
------------------------------------------------------------------------
Criminal Investigation 1,385
------------------------------------------------------------------------
Total 1,366,112
------------------------------------------------------------------------
Question. Please provide the number, if any, of tax modules that
are excluded from the program for any reason other than as an exception
under section 6306(d) of the tax code and the reason for exclusion.
Answer. In addition to the exceptions identified in section
6306(d), there are other operational conditions that excluded an
account from the program. The operational conditions include IT
constraints, data limitations, and the complexity of an account.
------------------------------------------------------------------------
Operational Condition Count
------------------------------------------------------------------------
Individual Master File (IMF) Balance Due and Sole 37,688
Proprietorship BMF assigned at IRS (not inactive)
------------------------------------------------------------------------
Earliest Collection Statute Expiration Date is zero, 246,819
incorrect, or about to expire
------------------------------------------------------------------------
Financial Classification is write-off 104,214
------------------------------------------------------------------------
IRS/Federal Employee 36
------------------------------------------------------------------------
Restricted Interest 170,961
------------------------------------------------------------------------
Complex IMF-Spousal Split Assessments; Additional 23,865
Tax on Qualified Retirement Plans
------------------------------------------------------------------------
IMF Joint liability and Spouse has also Separate 51,877
Balance Due at IRS (not inactive)
------------------------------------------------------------------------
Non-Master File Account 5,647
------------------------------------------------------------------------
Individual Taxpayer Identification Number (ITIN) 145,487
(Primary or Spouse)
------------------------------------------------------------------------
Foreign Address/International 14,220
------------------------------------------------------------------------
Invalid TIN 699
------------------------------------------------------------------------
Private Collection Agency (PCA) Block (Cases 1,732
returned from PCA)
------------------------------------------------------------------------
Private Debt Collection/Caution Upon Contact 362
Indicator
------------------------------------------------------------------------
Active Passport Program 1,243
------------------------------------------------------------------------
Taxpayer Advocate Service 29
------------------------------------------------------------------------
Sole Proprietor Business Master File with IMF 11,015
account at IRS (not inactive)
------------------------------------------------------------------------
Total 815,894
------------------------------------------------------------------------
______
Question Submitted by Hon. Maggie Hassan
Question. The American Rescue Plan contained the Recovery Startup
Assistance Act, my bipartisan bill with Senator Braun to provide
assistance, through the Employee Retention Credit, to new businesses
that started during the pandemic. Startups will be eligible to start
receiving this assistance in July. When do you expect that the IRS will
issue guidance around this assistance for new businesses?
Answer. We are working with the Department of Treasury on
additional guidance on the Employee Retention Credit, specifically with
regard to the changes made to the credit by the American Rescue Plan
Act of 2021. We understand that employers will need guidance in advance
of taking the employee retention credit under the American Rescue Plan
Act beginning with the third quarter of 2021. In addition, employers
who are eligible due to a full or partial suspension of business
operations or a decline in gross receipts may still claim the credit
based on existing applicable employee retention credit guidance found
in Notice 2021-20 and Notice 2021-23, relating to calendar quarters in
2020 and the first and second calendar quarters of 2021, respectively.
______
Question Submitted by Hon. Robert Menendez
Question. Section 2201 of The Taxpayer First Act requires the IRS
to modernize the disclosure of taxpayer information for third party
income verification. Third party income verification is crucial for
consumers to access many financial products and services, including
home mortgages. The modification of this process is intended to
increase speed, accuracy, and taxpayer data privacy. This process is
funded by transaction fees charged to users of the system, which often
times are residential lenders. Congress requires the solution to be
fully automated and accomplished in as close to real time as
practicable.
Will you please provide us an update on the status of attaining a
real time automated process for the Income Verification Express Service
(IVES) Program?
Answer. TFA section 2201 requires an Internet platform and
automation of the current Income Verification Express Service (IVES) by
January 1, 2023. This automation will reduce IVES request processing
time from 3 days to ``as close to real time as possible'' and will be
compliant with applicable security standards and guidelines. The IRS is
on track to deliver the solution by January 1, 2023.
______
Questions Submitted by Hon. Rob Portman
Question. My bipartisan legislation with Senator Cardin, the
Protecting Taxpayers Act, included many provisions that were
incorporated in the 2019 law, the Taxpayer First Act. One of these
provisions provided that the IRS establish an Independent Office of
Appeals and strengthen taxpayers' right to an appeals. As you are
working to implement the law, it seems that there are still challenges
to ensuring taxpayers feel the Independent Office of Appeals is truly
independent--in that not only are the reviews fair, but that they
appear fair and free from conflict of interest.
First, many Appeals officers were former IRS examiners and this
often provides an implicit bias (if not explicit) for making a
determination. Second, Appeals officers could benefit from training
with the Taxpayer Advocate Office to better understand the issues
taxpayers are facing. Next, transparency is key. While the pandemic has
provided challenges for all of us, I understand Appeals conferences are
often over the phone or if they are by videoconference, most IRS
participants do not utilize the camera. This leads to a sense of
distrust as taxpayers do not know who is in the room, the reaction of
the Appeals officer to the argument, and whether others are being
consulted to make the decision. Finally, as many IRS employees are
still working from home, there's a challenge for ensuring taxpayers
data is being protected.
What additional steps will the IRS take to ensure taxpayers feel
Appeals is truly independent? How is the IRS protecting taxpayer data
as employees work at home? What technology is the IRS using to allow
IRS employees to review, but not retain, protected taxpayer data such
as trade secrets?
Answer. Since passage of the Taxpayer First Act, the Independent
Office of Appeals (``Appeals'') has taken various steps to reinforce
our (actual and perceived) independence. For example:
Appeals held a series of all-employee continuing education
sessions to focus on the independence-related provisions of the
Taxpayer First Act and to reemphasize our role as impartial arbiters
who listen to taxpayers and seek to resolve cases without litigation.
We will continue to emphasize these themes with existing employees, and
we are incorporating these themes into mandatory training for new hires
as well.
Appeals is working with IRS Chief Counsel and the Department
of Treasury to issue regulations clarifying the broad scope of access
to an independent Appeals review contemplated by the Act and also is
working with the IRS Chief Taxpayer Experience Officer to increase
awareness of Appeals among unrepresented taxpayers.
Appeals developed recruiting materials this year that are
directed toward encouraging professionals outside of the IRS to
consider a career in Appeals. We currently are recruiting applicants
from private industry and public accounting on the theory that an
independent Appeals should have a workforce with a diversity of
professional backgrounds.
Following passage of the Taxpayer First Act, Appeals
leadership began a series of discussions with tax practitioners to
identify their concerns with Appeals and to seek their views on
ensuring the best taxpayer experience in Appeals. We also met with the
IRS Advisory Council (IRSAC) and solicited their input specifically on
the Taxpayer First Act and any Appeals policies or procedures that
should be reconsidered to better meet the letter and spirit of Appeals
independence in the Act. These conversations are helping to promote
policies and procedures that ensure fair and impartial hearings for
taxpayers.
An independent Appeals as contemplated by the Taxpayer First Act
requires a continual focus by Appeals leadership on ensuring that
Appeals employees treat taxpayers fairly and with respect, and that
they endeavor to settle cases in a manner that reflects the litigating
hazards that would be faced by each side (taxpayer and government) were
the case to proceed to court. We are proud of the professionalism and
the expertise of our employees; we will continue to emphasize the
importance of impartiality, fairness, and taxpayer rights; and we will
continue to review our internal policies and procedures to ensure they
adequately protect Appeals' independence.
The IRS has strict data protection standards to ensure taxpayer
data is protected from loss and to protect against unauthorized
disclosure of taxpayer information. IRS employees approved for telework
must complete required telework security training. IRS security
measures cover all aspects of the information systems, including paper
files, storage devices, and telecommunications equipment (laptops,
PDAs, and cell phones). These security measures include:
Equipment, data, files, and other information must be secured
under lock and key when not in an employee's possession.
Sensitive information must be disposed of in accordance with
established procedures.
Trade secrets and other protected taxpayer data must be
safeguarded in accordance with established procedures.
IRS laptop computers have a special folder to encrypt
sensitive but unclassified data.
Employees must connect to the IRS network from home over a
secure virtual private network using their HSPD12-Smart ID government
identification badges.
COVID-19 emergency procedures allow Appeals' employees to
email taxpayers using Secure Zip to encrypt data, while IRS data loss
prevention technology stops attempts to email sensitive unencrypted
data.
The Taxpayer Digital Communications system, secured by the IRS
eAuthorization process, is used for secure messaging with taxpayers.
Virtual conferencing software used to interact with taxpayers
and review documents is configured to prevent any downloading of
protected taxpayer data displayed during the conference.
It also is important to note that Appeals employees are not
investigators. Appeals' access to taxpayer records is limited to
material included in the casefile compiled by the IRS Compliance person
who conducted the audit or collection action.
Finally, Appeals has made significant strides in our ability to
offer videoconferences to taxpayers who want to meet with us ``face to
face'' but cannot do so during the pandemic. Appeals proactively
negotiated a Memorandum of Understanding with the National Treasury
Employees Union that requires Appeals employees use the full
capabilities of the videoconference equipment and software when holding
``virtual'' conferences with taxpayers. We provided comprehensive
training to employees about how to conduct a virtual conference and
Appeals leadership promotes virtual conferencing efforts in each of our
outreach events to tax practitioners. We will continue to offer virtual
taxpayer conferences, as well as in-person and telephonic conferences,
when the IRS returns to more normal business operations.
Question. Additionally, what steps has the IRS taken to ensure
greater uniformity in the taxpayer experience with Appeals? Is there
guidance from the Appeals Team Case Leaders on the number of attendees
from Compliance at an Appeals Conference? What procedures does Appeals
follow to ensure that a taxpayer's settlement discussions only begin
after the Compliance team is excused from the meeting?
Answer. All Appeals employees receive training and continuing
professional education about the importance of providing high-quality
taxpayer service and adhering to internal procedures. Appeals
leadership also holds interactive employee town hall meetings to
discuss important issues, including consistent treatment of taxpayers,
and we reinforce these points throughout Appeals' training. In
addition, Appeals maintains its own internal staff of technical tax
guidance specialists who serve as issue specialists to advise Appeals
Officers on the consistent application of the law to taxpayers.
Regarding IRS Compliance attendance at Appeals conferences, Appeals
has concluded the Appeals Team Case Leader (ATCL) conferencing pilot
that was intended to test the mandatory inclusion of Compliance
employees in Appeals conferences. Following the pilot, ATCLs reverted
to the longstanding Appeals policy under which they retain the
discretion, but are not required, to invite Compliance personnel to the
non-settlement portion of the conference. While there is no formal
guidance limiting the number of attendees at Appeals conferences, the
expectation for any conference attended by Compliance is that
Compliance attendees should have been involved with the case before it
came to Appeals or will provide some value to the process by attending.
If Compliance personnel accept an invitation to attend a virtual
conference, they, along with Appeals personnel, are expected to fully
identify themselves and use their cameras.
Appeals policy has consistently been that, when invited, Compliance
may attend only the non-settlement discussion portion of a conference
unless the taxpayer consents to mediation. In response to external
feedback received during the ATCL conferencing pilot, Appeals published
a series of policy statements and FAQs to clarify and reinforce that
settlement discussions for pilot cases were to be held solely between
the ATCL, the taxpayer and their authorized representatives. Appeals
continues to assess whether changes to IRM policy are needed to ensure
impartial and fair hearings for taxpayers.
Although the ATCL conferencing pilot has ended, Appeals leadership
believes that it is critical to our ATCLs' understanding of the case
that they retain the discretion to include Compliance personnel in the
non-settlement portion of the conference in appropriate cases. For
example, in complex transfer pricing or valuation cases where both
sides rely on expert reports, each side may seek to challenge the other
side's report. Our ATCLs find it helps significantly to be able to hear
each side respond to challenges raised by the other side. This
discussion can lead the ATCL to understand the essence of the dispute
more fully and thus better assess the litigating hazards faced by each
side. In all cases, however, settlement discussions must be between
only Appeals personnel and the taxpayer and must not include Compliance
personnel. Our guidance is clear on this point.
Question. What guidance does the IRS provide to its Appeals
Officers to ensure they remain independent, consider the facts and the
law, exercise their own judgment, and do not merely concede their
decision-making authority to other segments of the IRS?
Answer. Appeals is dedicated to resolving tax controversies,
without litigation, in a manner that is fair and impartial to both the
taxpayer and the Government. The core values of independence,
impartiality and quality decision-making are reflected in employee
training and continuing professional education, as well as a variety of
IRS policy statements, administrative guidance and IRM policies. In
particular, Appeals training focuses on key competencies, including
fair and effective case resolution, relevant tax law changes,
independent decision-making, taxpayer service, etc. Appeals Officers do
not concede decision-making authority to other segments of the IRS.
Sole authority to settle a case remains in Appeals' jurisdiction. If
technical guidance is needed on specialized issues in a case, Appeals
retains its own cadre of issue specialists who provide this advice.
Appeals does not rely on IRS Compliance specialists to advise on our
settlements. These policies help to promote Appeals independence and
encourage independent judgment of our Appeals Officers and their
managers.
Question. Thank you for your response to my letter and for the
March 8th guidance which clarified (as Congress intended) that ADA-
accessible wheelchair ramps are permitted as an exterior modification
on buildings where historic preservation easements are claimed. On a
related issue, both in the letter and in questions to Secretary Yellen
and Deputy Secretary Adeyemo, I requested that the IRS issue guidance
on conservation easements and provide sample deed language for
taxpayers looking to utilize this program appropriately.
Can you please provide an update on the status of that guidance?
Will you commit to engaging stakeholders including land and historic
preservationist to develop this guidance?
Answer. The Treasury Department and the Internal Revenue Service
recognize the importance of providing guidance that will create
certainty for taxpayers who make conservation contributions, guidance
and advice that helps those taxpayers ensure that their contributions
comply with the law and conserve historic structures and other
significant conservation interests in perpetuity, as Congress intended.
As such, we are committed to developing, and encourage members of the
public to suggest topics for, such guidance and advice.
We are currently formulating this year's Priority Guidance Plan
that focuses our resources for guidance items that are the most
important to taxpayers and tax administration. We encourage the public,
and other stakeholders to engage us in developing the Priority Guidance
Plan by submitting items for consideration, pursuant to Notice 2021-28
(irs.gov).
Question. Under Sec. 41(h), qualified small businesses (QSBs) are
authorized to elect to apply up to $250,000 of an R&D tax credit
claimed under IRC 41 against its payroll tax obligations. To receive
this credit, QSBs must first calculate and claim the credit on their
corporate income tax return. Many QSBs use Professional Employer
Organizations (PEOs) for payroll tax services and other services that
are important to small businesses and their employees, such as human
resources assistance and access to quality health insurance, retirement
plans and other employee benefits. PEOs report and remit QSB payroll on
an aggregate basis on the PEO's quarterly Forms 941 and other payroll
tax returns, including applying any R&D tax credits that a QSB elects
to apply against its payroll tax obligations. In accordance with IRS
guidance, PEOs report quarterly each QSB that is applying R&D tax
credits against its payroll tax obligations. We understand that the IRS
may seek reimbursement from the PEO for disallowed R&D payroll tax
credits applied by these PEOs on behalf of their small business
clients. PEOs are a service provided and have no way to determine if a
client's tax credit is accurate.
Given that a QSB's R&D tax credit is claimed on the QSB's corporate
income tax return, does the IRS plan to examine these credits on the
QSB's return? Or on the PEO's aggregate payroll return?
Answer. A QSB may claim the credit on their income tax or their
employment tax return and either of these returns may be selected for
examination. If a taxpayer utilizes a Professional Employer
Organization, the research credit could be claimed on the PEO's
aggregate payroll return; thus the PEO's aggregate payroll return may
be examined as well.
Question. If the IRS plans to examine these credits on the PEO's
aggregate return, how will the IRS ensure that R&D tax credits for
unrelated QSBs that were applied on the PEO's aggregate payroll tax
return are not delayed?
Answer. When the Service conducts an examination of a Form 941
filed by these types of third-party providers, the Service is examining
the aggregated amount of the line item claimed by the third-party,
using the client by client allocation information provided on Schedule
R as part of the examination. The Service does not issue refunds or
make credit adjustments to the client entities themselves, but rather
any allowable credits/refunds are paid to the third-party provider.
______
Question Submitted by Hon. Patrick J. Toomey
Question. Improper payments continue to be a pressing and expensive
issue. One specific area of concern is the Advance Premium Tax Credit
(APTC). When an individual enrolls in marketplace coverage, he or she
must provide his or her household income estimate. The self-reported
income estimate is then used to calculate the APTC. If income is
underestimated, a taxpayer will receive a higher APTC than eligible
for. However, required repayment of any excess credit received is
limited based on income level. Further, the American Rescue Plan of
2021 (Pub. L. 117-2) eliminated all required repayments for the 2020
plan year regardless of income level.
In Fiscal Year 2015, the Office of Management and Budget
established an interagency working group to assess the risk of improper
payments across all payments made from the Premium Tax Credit (PTC)
budget fund, including APTCs, and to define the improper payment rate,
which is necessary to determine if any additional controls are needed.
The working group included representatives from the Internal Revenue
Service, the Treasury Department, the Centers for Medicare and Medicaid
Services, and the Department of Health and Human Services. However, to
date, an improper payment rate has not been reported.
Can you provide an update on the improper payment rate
determination and a timeline for completion?
Answer. The IRS and the Centers for Medicare and Medicaid Services,
with the support of the Department of the Treasury and the Department
of Health and Human Services, have been collaborating to develop error
rates and to ensure there are no gaps or overlaps in reporting. The
Department of the Treasury provided notification to the Office of
Management and Budget (OMB) that it will delay the annual reporting,
within Treasury's Agency Financial Report (AFR) for Fiscal Year (FY)
2020 and 2021, of improper payment estimates for the net PTC program
pursuant to the Affordable Care Act. This delay stems from significant
new and persistent demands placed upon Treasury and IRS in connection
with the Coronavirus Disease 2019 (COVID-19) crisis. Consistent with
the OMB's guidance on prioritizing work based on risk, issued via a
June 17, 2020 memorandum, Risk Based Financial Audits and Reporting
Activities in Response to COVID-19, we have given top priority to
implementing the COVID-19 programs under both the American Rescue Plan
Act of 2021 and the Consolidated Appropriations Act of 2021.
______
Question Submitted by Hon. Mark R. Warner
Question. The pandemic highlighted the need for safe digital
services, like remote online notarization, which is one of the reasons
I introduced the SECURE Notarization Act last Congress with Senator
Cramer. The bipartisan legislation would permit nationwide use of
Remote Online Notarizations, a type of electronic notarization where
the notary and signer are in different physical locations (provided
they have a multi-layered process to prevent fraud). Moving forward,
bringing the notarization process into the 21st century seems like the
right direction to move in. During the pandemic, the IRS allowed people
to use remote online notarization for things like spousal waivers under
qualified retirement plans.
Does the IRS have plans to extend or make permanent access to make
digital services, like remote online notarization?
Answer. Yes, although the IRS does not make extensive use of notary
services (in-person or remote), extending, improving and launching new
digital services is a core part of our IRS Integrated Modernization
Business Plan as well as the Taxpayer First Act (TFA) Report to
Congress. Subject to available resources, the IRS plans to make great
strides towards providing taxpayers with permanent access to new
digital services with robust fraud prevention, including additional
Online Account functionality that will continue to enhance the customer
experience with the Service seamlessly and securely.
TFA section 2302 mandates that the IRS publish guidance to
establish uniform standards and procedures for the acceptance of
taxpayers' electronic signatures on Forms 2448 and 8821, which
authorize disclosure granted by a taxpayer to a practitioner or power
of attorney. The IRS successfully launched a new online capability on
January 25, 2021, allowing tax professionals to remotely obtain
signatures from individual and business clients in different physical
locations and submit authorization forms electronically.
The ``Submit Forms 2848 and 8821 Online'' option is part of a
broader IRS effort to expand options for electronic signatures on
authorization forms as required by TFA. In the summer of 2021, the IRS
plans to launch the initial release of additional Online Account
functionality, which consists of two parts: a new application tax
professionals can use to initiate authorization requests for taxpayers
to sign, and new functionality within the individual Online Account,
called Authorizations, to be used by taxpayers to sign and manage their
authorizations. The IRS expects this new digital service will
dramatically speed authorization processing and allow for almost
immediate access to transcripts and other services.
Additionally, in response to industry concerns about face-to-face
interactions during the COVID-19 pandemic, the IRS issued interim
guidance allowing taxpayers and representatives to use electronic or
digital signatures when signing certain forms. The Service has also
issued similar interim guidance to permit electronic transmittal of
documents and acceptance of digital signatures on documents related to
the determination or collection of tax liability. This guidance has
been extended through December 31, 2021.
The Secure Access Digital Identity (SADI) effort addresses the
IRS's need to conform with National Institute of Standards and
Technology (NIST) Special Publication 800-63-3 Digital Identity
Guidelines and consider additional technology, customer experience, and
security drivers to provide taxpayers with a seamless and secure user
experience when interacting with the IRS online. Launched in late June
of this year, SADI implements updated digital identity proofing and
authentication solutions that better protect taxpayer data while
enhancing access to safe digital services.
______
Questions Submitted by Hon. Sheldon Whitehouse
Question. During the hearing, you asserted ``high income taxpayers
are audited more than any other taxpayer,'' noting that the audit rate
is ``over 8 percent of the people over $10 million.'' You cited table
17a of the IRS Data Book. This table also shows that in tax year 2014,
and each subsequent year, taxpayers earning between $500,000 and
$1,000,000, a range that includes taxpayers in the top 1 percent of
income earners, were audited at a lower rate than recipients of the
Earned Income Tax Credit.
How do you justify auditing low-income EITC taxpayers at higher
rates than those earning in the upper six-figures?
Answer. Examinations are a critical piece of our compliance efforts
and help ensure fairness in the tax system. The Service takes pride in
ensuring our examination selection process is fair and impartial. As
reported in the IRS's most recently published Data Book (2019), the
exam coverage rate (closed and in-process) for Tax Year 2015 of
taxpayers with incomes of $10 million or more is about 8.16 percent.
The coverage rate for taxpayers with incomes between $5-10 million was
4.39 percent; for those with income between $1-5 million was about 2.39
percent; and for those with income between $500,000-$1 million was
about 1.13 percent. The IRS receives more third-party information
(Forms W-2, 1099, etc.) for taxpayers with income between $200,000 and
$1 million than for those above $1 million. These audit rates are
higher than for any other category of individual filers, and we expect
to see that trend continue with Tax Years 2016, 2017, and 2018. Tax
Year 2015 is the last year for which we had the actual audit rates when
I testified, because the IRS could still open audits for more recent
years, and the data for more recent years was not yet complete.
The IRS averages a little less than 300,000 EITC audits per year
out of the universe of 27 million, which is a rate somewhat smaller
than 1.11 percent. The challenge with auditing fewer lower-income
taxpayers claiming EITC is that around 50 percent of the returns
claiming EITC have overclaimed the credit, and individuals claiming
more EITC than allowed make up 11 percent of the individual income tax
underreporting gap, contributing $27B or more of the overall tax gap
each year. There are several factors behind why the EITC is such a
large component of the individual income tax underreporting tax gap.
Despite significant guidance provided by the IRS and others, some
people (including tax preparers) simply misunderstand the complex EITC
rules; other people misreport income. Each year, at the start of the
tax filing season, the IRS participates in EITC Awareness Day events
throughout the country in an effort to increase participation by
eligible people and enhance the rate of compliance.
The IRS fully appreciates the importance of the refundable EITC and
the significant difference it makes for people. More than 25 million
people claim EITC per year, generating more than $63 billion each year
to people in need. This program lifts millions of Americans out of
poverty, and the IRS is proud to work hard each year to raise awareness
about the program since many, many EITC-eligible people simply overlook
claiming this important refundable credit.
Question. The Treasury Inspector General for Tax Administration has
found the IRS defines ``high income,'' for the purposes of identifying
taxpayers for potential examination, as earning above $200,000. It has
suggested increasing that threshold, since focusing audit resources on
higher-income taxpayers yields more revenue per audit hour spent.
Has the IRS considered increasing the annual income level used to
identify ``high-income'' taxpayers for potential examination? Why or
why not?
Answer. Although the current definition of ``high-income''
references ``above $200,000,'' that has not precluded the Service from
increasing our focus on those taxpayers in higher income ranges, well
above $200,000. Audit rates for taxpayers with income greater than $1
million are higher than for any other category of individual filers. We
have also initiated a Compliance Initiative Project to ensure that we
maintain a high audit coverage of taxpayers at the highest income
category.
Question. You explained during the hearings that the annual tax
gap--the difference between what is owed and what the IRS collects--may
be as high as $1 trillion per year, which is more than double the most
recent IRS estimate. You cited foreign-source income as one potential
reason why the gap may be significantly higher than prior estimates.
In 2010, Congress enacted the bipartisan Foreign Account Tax
Compliance Act (FATCA) to crack down on offshore tax cheats who hide
their wealth in foreign bank accounts. A 2018 TIGTA audit found that
eight years after the law's enactment, the IRS ``ha[d] yet to begin
holding taxpayers and [foreign financial institutions] accountable for
noncompliance.'' The IRS accepted a number of TIGTA's recommendations.
What progress has the IRS made in accomplishing the objectives set
out in its FATCA Compliance Roadmap? What challenges does the IRS face
in meeting these objectives?
Answer. Since the 2018 TIGTA report (2018-30-040), the IRS has made
significant progress with its compliance enforcement efforts
surrounding the Foreign Account Tax Compliance Act (Act). While the
TIGTA audit report focused on the FATCA Compliance Roadmap as a means
to measure compliance enforcement efforts, the roadmap was not intended
to be a static comprehensive plan and was superseded by myriad
compliance efforts and task-specific documents that address changing
circumstances to identify and combat individual and foreign financial
institution non-compliance. The roadmap served as an initial framework
to create an infrastructure that could support compliance efforts and
could not envision future policy changes and/or potential information
technology or human resource constraints.
Over the past several years, the IRS has continued and initiated
new compliance activities and has developed campaigns that use
automated risk assessment processes to identify potential tax
noncompliance related to a taxpayer's failure to report the proper
income and tax and or failure to properly submit required information
returns associated with these offshore accounts. One component of the
campaigns is cross referencing information reported on Form 8966, FATCA
Report, with what is reported on Form 8938, Statement of Specified
Foreign Financial Assets. Significant discrepancies of both individuals
and Foreign Financial Institutions (FFIs) are identified for compliance
follow-up. Additionally, FATCA data are associated with individual exam
cases involving identified offshore-related issues. Third-party FATCA
information received is also reconciled in numerous compliance
activities on an ad hoc basis. Automated risk assessment processes are
also in place to identify those entities that have FATCA Reporting
obligations but do not meet all their compliance responsibilities. The
Service's business operating divisions address noncompliance and errors
through a variety of treatment streams, such as soft letters,
examinations and termination of an entity's FATCA status.
While the Service has significantly increased its compliance
efforts in recent years, compliance efforts continue to be limited by
technological and human resource limitations in light of budgetary
constraints.
______
Questions Submitted by Hon. Todd Young
Question. I am interested in the ongoing improvements to the IRS
process for distributing the Economic Impact Payments. It is not
uncommon for constituents to have had no issues receiving one or two
rounds of payment, then have issues with a later round. While the EIP
portal is a step in the right direction, there is still a wide
variation in timeliness and accuracy of responses.
How has the IRS changed its systems or protocols for the
distribution of these payments during each round?
Answer. The IRS continues to build on programming improvements and
changes that we have made since the first round of Economic Impact
Payments (EIPs). Indeed, by leveraging these upgrades, the IRS
successfully issued the majority of the EIP2s through a single payment
file in late December before the opening of the 2021 tax filing season.
Building on our success, the IRS sent out the first round of EIP3
payments the Friday after the enactment of the American Rescue Plan
Act. This first round included those individuals with 2020 or 2019 tax
return and where the IRS has direct deposit information. It also
included EIP3 payments to non-filers who used the Non-Filers Tool in
2020. The IRS issued a second round of EIPs the next week for those
recipients with a 2020 or 2019 tax return but where the IRS did not
have direct deposit information (such as those returns where a taxpayer
received a paper check for their refunds, where the taxpayer did not
owe tax, or where the taxpayer owed tax). It also included payments to
recipients with newly processed 2020 or 2019 returns with direct
deposit information. As of May 26, 2021, we have distributed
approximately 167 million EIP3s worth more than $391 billion.
The IRS initiated and led a cross-agency coordination effort to
accelerate EIP3 disbursement to certain Federal benefit recipients who
are not tax filers. We coordinated with the Social Security
Administration, Railroad Retirement Board, and Department of Veterans
Affairs to issue automatic payments to their recipients who have not
already received an EIP3 based on a tax return (or use of the Non-
Filers Tool in 2020).
On Friday, April 2nd, we started making the first round of ongoing
supplemental payments for people who earlier in March received payments
based on their 2019 tax returns but are eligible for a new or larger
payment based on their recently processed 2020 tax returns. These
``plus-up'' payments could include a situation where a person's income
dropped in 2020 compared to 2019, or a person had a new child or
dependent on their 2020 tax return, and other situations. As of June 4,
we have distributed approximately 338,416 of these payments totaling
more than $609 million.
To ensure that the public remains informed throughout the
disbursement of EIP3, the IRS continues to issue frequent news releases
to share current volumes of EIP3 disbursements and the populations
included in each week's distribution. To better manage tax refund and
EIP3 issuance, the IRS has worked diligently with the Bureau of the
Fiscal Service to eliminate any potential disruption to the tax refund
process.
Question. What challenges persist, and what is the IRS doing to
address those challenges?
Answer. To increase the success of this third round of Economic
Impact Payments (EIP3), the IRS and Bureau of the Fiscal Service (BFS)
continue to work collaboratively to reduce the volume of paper checks
and the number of direct deposits rejected by designated financial
institutions. A direct deposit may be rejected for a variety of
reasons, including because the eligible recipient's account is closed
or otherwise is invalid. Despite this, EIPs sent electronically are far
more likely to be successfully delivered than both paper checks and
debit cards sent by mail. As of March 30, 2021, the rate of return for
direct deposits issued during EIP3 is 2.0 percent, which is lower than
for the first two rounds of EIPs.
By leveraging our experience gained during the first two rounds of
Economic Impact Payments (EIP1 and EIP2), the IRS and BFS evaluated all
eligible individuals who previously received a paper check or a debit
card. Specifically, BFS performed an analysis of these paper check and
debit card populations to locate available direct deposit information
from recent payments made to or from the Social Security
Administration, Railroad Retirement Board, and Department of Veterans
Affairs that could be used to increase disbursements of EIP3 through a
direct deposit. As part of this process, BFS leveraged an account
verification service as appropriate to confirm account validation and
ownership. As a result, the IRS was able to issue direct deposits of
EIP3s to more than 12 million recipients who would have otherwise
received a mailed payment. This significantly expedited payment
delivery for these recipients including many who receive benefits from
the Social Security Administration and Department of Veterans Affairs.
It also helped ensure that those who receive Federal benefits payments
on a Direct Express card would be more likely to receive their EIPs on
their cards, instead of by check or a newly issued EIP Card. Less than
one-half of 1 percent of these payments have been returned as
undeliverable by financial institutions as of March 30, 2021. In
addition, the IRS issued millions of additional electronic payments to
Social Security, RRB, and VA recipients who do not normally file a tax
return and for whom direct deposit information would otherwise be
unavailable. The majority of these beneficiaries have received their
EIPs.
In preparation for EIP3, the IRS worked with the financial and tax
industries to validate banking information provided on tax returns. The
IRS undertook these efforts to prevent unsuccessful disbursements of
EIP3 to temporary accounts used for tax refund purposes. By validating
this banking information, the IRS has dramatically reduced EIP3
disbursement to temporary accounts. Prior to the enactment of the
American Rescue Plan Act of 2021, we had intended to leverage the
account verification service available through BFS to test this data in
advance of EIP3 disbursements. However, to comply with that
legislation's directive to disburse these payments ``as rapidly as
possible,'' we used our validation efforts instead and begin disbursing
EIP3 within days of the legislation's enactment. We continue to work
with BFS on options to validate account information, while following
all disclosure provisions and legislative authority for EIPs, tax
refunds, and other non-tax payments from the IRS.
Question. You had referenced a few metrics in our discussion during
the hearing of the backlog of 2019 returns which I would like to
revisit. You stated that your mail processing is ``current, not a
backlog'' of 1 million parcels, which is the amount you can process in
a week. I find this troubling, as we continue to hear from the Taxpayer
Advocate Service that the Kansas City facility is continuing to open
mail from June 2020.
Can you please identify exactly how many parcels of mail remain
unopened that were delivered to the IRS within the last 6 months?
Within the last 9 months?
Answer. All mail that remains unopened in our four Submission
Processing (SP) centers was received in 2021. As of June 5, 2021, there
were approximately 120,000 pieces of mail waiting to be processed, with
the oldest work received on June 1, 2021. Although TAS identified work
from our Kansas City SP center being received from June 2020, this was
an anomaly. SP has requested any additional feedback of instances TAS
may see of this issue. As of June 11, 2021, we have not received any.
Question. Exactly how many parcels is the IRS able to process per
week, and how are these being prioritized if not by date of delivery to
the IRS?
Answer. Over the past 4 weeks, we have averaged opening 1.8 million
pieces of mail per week. All mail is being opened on a First In/First
Out (FIFO) basis. We are opening mail within normal timeframes.
Question. Can you please identify the exact number of 2019 tax
returns that have yet to be processed? If a taxpayer has not received
any communication from the IRS regarding their 2019 tax return filed
over six months ago, should they now file a duplicate return?
Answer. The backlog of all individual returns received in 2020 has
been cleared and they are now in the processing pipeline. We do not
recommend filing a duplicate return.
Question. There have been a wide variety of problems in the
distribution of stimulus checks that I understand arise from the IRS's
usage of outdated information. While annual updates to personal
information via tax returns makes sense, this process alone is simply
inadequate to ensure urgently needed stimulus payments are accurately
directed to the correct recipient.
During a year in which so much has changed for so many people, what
processes has the IRS been able to set up in order to quickly update
individual records?
Answer. The Coronavirus Aid, Relief, and Economic Security (CARES)
Act, the COVID-Related Tax Relief (CRTR) Act, and the American Rescue
Plan (ARP) Act were the largest economic rescue packages in U.S.
history. Legislation directed the IRS to issue payments as rapidly as
possible to provide relief to U.S. citizens. Implementing these Acts
was an extraordinary test of IRS's core mission and function which
presented numerous challenges requiring rapid delivery timeframe,
unprecedented coordination, taxpayer outreach, and increased risk
tolerance.
Though implementing these laws was a challenge, the IRS built on
prior lessons learned and recognized the need to establish customer
facing tools that did not require a phone call or face-to-face contact.
Working with our external partners to help facilitate payments and
share information with the public, we quickly launched two innovate
wed-based tools. This included the Non-Filers: Enter Payment Info Here
tool for individuals who did not have a filing obligation so they could
quickly and easily provide relevant information to receive their EIPs.
Additionally, to help individuals who had not previously provided their
bank information, we collaborated with our external partners to develop
the Get My Payment tool which allowed many individuals to receive their
EIPs quicker through direct deposit into their bank account. We also
quickly established a dedicated webpage with evolving Frequently Asked
Questions where customers could, find information about EIP payments
and get answers to their questions.
Question. What factors have you seen in the past year that have
prevented the IRS from more quickly updated such records?
Answer. The IRS performed an internal review that included the
following lessons learned:
1. Coordination across agencies was imperative and will be further
enhanced for future tax legislation packages, including that associated
with EIP3.
2. Payment files were prepared using IRS's IT infrastructure with
input(s) from other Federal agencies' databases. Opportunities exist
for more similar formatting of data to allow for smoother ingestion of
data.
3. The IRS leveraged industry partnerships and has identified
opportunities while beginning to broaden and expand these
relationships.
4. Continue to expand virtual infrastructure to facilitate virtual
workforce in multiple locations.
We recognize that when appropriate, we will begin IT planning while
legislation is being finalized. We will also introduce standardized
processes for data intake from external delivery partner agencies
(i.e., SSA, SSI, VA, RRB) to reduce the need for heavy manual
``perfection'' of data.
Question. The Taxpayer Advocate Service plays an important role in
assisting Hoosiers and resolving issues with the IRS. Given the added
challenges faced by the IRS in the past year, I am wondering how
individuals working in this crucial role are best empowered to address
the needs of Hoosiers. a. In the past year, have taxpayer advocates
been granted any additional roles or responsibilities in order to speed
up the processing of cases?
Answer. In 2020, we agreed with Taxpayer Advocate Service (TAS) to
expand authorities to resolve one Error Code (EC) in our Error
Resolution System (ERS). TAS secures needed documentation and resolves
the error, allowing the return to continue processing. We plan to work
with TAS further to review authorities to allow TAS to resolve more
taxpayer cases. In addition, TAS and the IRS collaborated extensively
over the past year to develop and implement strategies to resolve the
backlog of cases that resulted from the shutdown of our service centers
and subsequent reduced onsite staffing in response to the COVID-19
pandemic.
Question. What concerns do you have with granting advocates limited
administrative rights, including updating addresses or unlocking files
for surviving spouses?
Answer. The actions TAS takes are routine and follow very specific
instructions not exercising any judgement on these cases while
resolving certain EC and ERS taxpayer account cases. It is not a
substitute for authorities performed by IRS operating divisions and
functions. This collaboration is mutually beneficial to TAS and the
IRS, as it allows TAS to actively assist some taxpayers whose returns
and associated refunds have been delayed due to the COVID-19 pandemic.
This also allows IRS functions to reallocate resources to resolving
other outstanding matters. We plan to work with TAS further to review
authorities to allow TAS to resolve more taxpayer cases.
Question. Commissioner, I appreciate you addressing the issue of
the tax gap during the hearing, and I am interested in continuing to
understand the nature, causes, and potential solutions for the tax gap
in this country. During your testimony, you shared your estimate that
the tax gap could approach $1 trillion per year.
How does the tax gap in the U.S. compare to the tax gaps in other
advanced countries?
Answer. Tax law, tax administration, the size of an economy, and
many other factors that affect the nature and extent of tax
noncompliance differ across countries. The data and estimation methods
used for estimating tax gaps also differ. For these reasons, the U.S.
tax gap estimates are not comparable to the estimates of other
countries.
The Organisation for Economic Co-operation and Development (OECD)
biennially issues a tax administration comparison covering OECD and
other economies. These documents include comparative information about
tax administration characteristics including summary information about
countries producing and/or issuing tax gap estimates. Below are links
to recent documents.
Tax Administration 2019: Comparative Information on OECD and Other
Advanced and Emerging Economies (oecd-ilibrary.org)
Data tables (oecd-ilibrary.org)
Tax Administration 2017: Comparative Information on OECD and Other
Advanced and Emerging Economies (oecd-ilibrary.org)
Question. I understand that workers get W-2s or 1099s from their
employers and from their banks and other financial institutions, and
that those employers and financial institutions report that information
to the IRS, which enables the IRS to easily confirm those tax filers'
income and other information. As you mentioned during the hearing,
there are certain sources of income that do not have that kind of
third-party reporting.
How does compliance with tax laws differ between income that is
also reported by a third party and income that is not?
Answer. Our research on the compliance of filers of individual
income tax returns indicates that income subject to substantial
information reporting and withholding has the least amount of
misreporting with a net misreporting percentage of 1 percent. Income
subject to substantial information reporting but not withholding also
has high voluntary reporting with a net misreporting percentage of
about 5 percent.
The ``visibility'' chart below shows the relationship between
information reporting/withholding and reporting compliance.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Question. When we left off in our hearing conversation, you
acknowledged that most of the tax gap is due to high-income taxpayers.
Is it accurate that high-income taxpayers are more likely to have
income sources that are not subject to third party reporting?
Answer. Although high-income taxpayers account for a significant
portion of the tax gap, taxpayers at all income levels underreport
their taxes. High-income taxpayers are more likely to have income
sources that the IRS classifies as subject to little or no information
reporting. High income taxpayers are also more likely to have flow-
through and capital gains income. Although these sources of income are
covered by some information reporting, the extent and completeness of
the reporting is likely less than other types of income, such as wages,
interest, or dividend income.
Question. Given that audits are useful tools but inadequate to
capture all lost revenue, how does the IRS make sure taxpayers with
income that is not reported by others are paying the taxes that the tax
laws require?
Answer. Examinations are a critical element of tax administration,
and during audits our examiners utilize various analytical tools to
identify other sources of income not reported by third parties, such as
interviewing the taxpayer/representative, conducting a tour of the
business, probing for additional sources of income, and reviewing
related returns (i.e., corporate, partnership, employment tax, and
excise tax returns). Since 2018, we have shifted significant
examination resources and technology to increase our focus on high-
income taxpayers. With technological advances, we are now able to
identify instances of evasion that would not have been possible just a
few years ago. Our Examination personnel are conducting audits of high-
income taxpayers identified with a risk of non-compliance at an
examination rate higher than any other category of individual filers.
We have also initiated a Compliance Initiative Project to ensure that
we maintain a high audit coverage of taxpayers at the highest income
category. Examiners across our operating divisions are assigned work to
cover this important category of taxpayers.
In addition to examinations, the Service utilizes other approaches
to address taxpayer noncompliance. In our Collection division, high-
income taxpayers are also a focus of our work. High-income taxpayers
with balances due receive high prioritization for enforcement action.
For high-income taxpayers who fail to file a return, we have programs
that address their compliance through notices as well as field
presence.
Within the past 2 years, we launched our Office of Fraud
Enforcement (OFE) where technical advisors provide fraud policy and
operations support to all IRS operations. A robust fraud program is an
essential deterrent to all type of taxpayers who may consider engaging
in non-compliance. OFE is currently engaged in a project focused on the
development of various signatures associated with the hidden ownership
of virtual currencies to better enable the IRS to pursue undisclosed
taxable transactions. Within the past year, we have created an Office
of Promoter Investigations (OPI) focused on taxpayers and the promoters
of abusive tax avoidance transactions, including abusive Syndicated
Conservation Easements, abusive Micro-Captive insurance arrangements,
and other transactions. Many of these transactions involve income or
deductions not subject to third party reporting.
Most investigations conducted by our Criminal Investigation
division (IRS-CI) involve high-income individuals and their advisors.
Our Nationally Coordinated Investigations Unit (NCIU) supplements case
development by identifying, promoting, and supporting innovative
investigations, delivering high-impact investigations, and addressing
emerging issues to advance the mission of the IRS and IRS-CI. During
the past year, IRS-CI has conducted approximately 450 undercover
investigations, many focused on high-income individuals and their
advisors. If completion of a criminal investigation leads to an
indictment by the Department of Justice, the publicity surrounding the
indictment often has a deterrent effect helpful to tax administration.
The IRS's Global High Wealth (GHW) enterprise approach is another
way that the IRS seeks to ensure compliance of high-income taxpayers
where there is not a lot of third-party reporting. GHW uses a holistic
look at a taxpayer's entire sphere of financial activities with which
they are involved. This would include related/
controlled pass-through entities, charitable entities and gifting. The
information is found through in-depth requests for information and
detailed interviews.
Question. What impact do you think the Biden administration's
proposed increase of the corporate tax rate to 28 percent will have on
total taxes collected?
Answer. The Biden administration's proposed increase of the
corporate tax rate to 28 percent is expected to raise corporate tax
revenues dramatically. Together with the other provisions of the
American Jobs Plan, according to the Treasury, the package is expected
to raise about $1.7 trillion over the coming 10 years.
Question. Could this rate, which as I understand it, would be among
the highest of all OECD member countries, actually contribute to
increasing the tax gap over the next decade?
Answer. Any change in tax rates must be viewed holistically,
alongside changes to the tax base. The administration's full tax plan
includes many provisions that tighten loopholes, including provisions
that address the discrepancy between the tax treatment of foreign and
domestic income. In addition, the administration's tax plan proposes to
direct resources to the IRS in order to improve tax compliance. Thus,
we'd expect the package to reduce the tax gap.
Question. During our conversation, you had indicated that the most
optimistic analyses of the tax gap showed that at most 20 percent of
the loss could be recaptured through increased enforcement mechanisms.
Further, you expressed your own view that more could be recaptured
under a so-called ``modern IRS.''
What are some of the major structural or process changes that the
IRS should make in order to meet the needs of 21st-century taxpayers
while addressing the threats posed by 21st-century tax evaders?
Answer. There's no single solution to achieving a meaningful
reduction in the tax gap or one type of taxpayer responsible for it.
Reducing the tax gap requires a comprehensive, multi-faceted strategy
and effective execution from the IRS coupled with appropriate
safeguards and accountability to taxpayers. Investment in our service,
enforcement and compliance efforts is extremely important. Multi-year,
consistent, timely and adequate funding helps us deliver meaningful
services to taxpayers, conduct critical enforcement initiatives, and
support long term IT modernization efforts that help improve
compliance. Greater investments in technology can help us properly
assist compliant taxpayers. Modernization of our systems coupled with
technological advances in artificial intelligence, data and analytics
will continue to enhance services to compliant taxpayers and make tax
avoidance by others more visible and more difficult.
In January, we delivered our Taxpayer First Act Report to Congress
detailing how the IRS intends to modernize our structure and processes
to provide a better taxpayer experience, increase efficiencies and
improve operations. Our modernized organizational structure will better
align operations with our mission, increase
agency-wide collaboration, and deconstruct operational silos. Key
elements include:
Realigning the IRS's organizational structure to increase
consistency across compliance functions and improve our ability to
address the more complex areas of non-compliance through multi-
discipline teams.
Improved services through broader line of sight across the
entire taxpayer experience.
Improving the leadership structure, reducing organizational
redundancies, and removing silos.
Providing solutions to best position the IRS to combat
cybersecurity and other threats.
Our Organizational Redesign Strategy focuses on the following key
areas:
Improve the Taxpayer Experience and Provide a Continued
Emphasis on Taxpayer Rights
In January, we appointed IRS's first Chief
Taxpayer Experience Officer (CTXO). Leading our new Taxpayer Experience
Office (TXO), this Senior Executive will drive strategic direction for
improving the taxpayer experience across the IRS-including both service
and compliance interactions.
The TXO provides an enterprise level holistic
view of the taxpayer experience. This Office will identify
opportunities to modernize service delivery, increase access and drive
continuous improvements in real time.
The new structure combines and centralizes
taxpayer-facing program offices to streamline responses to taxpayer
inquiries and increase coordination across the agency.
The CTXO reports directly to the IRS
Commissioner and plays a key role in our senior leadership team to
ensure continued focus on improving the taxpayer experience and
protecting rights.
Improve Operational Efficiencies
The modernized structure consolidates
previously segmented examination operations into one function to reduce
internal duplication and fragmentation of activities and provide
consistent outcomes for resolving taxpayer compliance issues;
Our new Relationships and Services Division
operationalizes the taxpayer experience; and
u Consolidates all toll-free telephone and taxpayer
assistance center operations under one, ``Assisted Services''
organization.
u Combines all outreach activities under one
organization.
u Combines all third-party partnership activities within
one division.
By establishing Data Office and an Enterprise
Digitalization and Case Management Office we will improve our use of
data to reduce manual processes, reliance on paper, and improve
compliance operations and taxpayer service initiatives.
Enhance Innovation
Establish a direct line from the Commissioner
to the Information Technology Division to enhance critical focus on
cutting-edge business processes and technology.
Continue our emphasis on innovation in existing
offices that are already driving or enabling creative taxpayer
approaches across the IRS, such as Procurement and Information
Technology, to build an even more innovative culture throughout the
organization.
While tax enforcement is necessary and, from a financial
perspective, worthwhile, significant mitigation of the tax gap will
also require policy and other changes. Proposals for legislative
expansions of IRS authority, reduced complexity, increased information
reporting, as well as policy changes that improve the IRS's access to
relevant data, have historically included:
Giving the IRS clear statutory authority to regulating return
preparers and require they have a minimum knowledge of the tax code, to
improve the accuracy of the returns they prepare.
Expanded electronic filing for individuals, corporations,
partnerships, and tax exempt organizations to provide tax return
information in a more uniform electronic form, which will enhance the
ability of the IRS to more productively focus its audit activities,
lessening audits of compliant taxpayers and overall taxpayer burden.
Expanding the scope of information returns.
Requiring early filing and electronic submission of all
information returns.
Requiring withholding on certain Form 1099 income, especially
1099-MISC and 1099-NEC (non-employee compensation).
Providing the IRS with greater flexibility to correct specific
errors on taxpayer returns, such as math errors or taxpayer
identification numbers, with appropriate safeguards, where information
doesn't match information in government databases would also avoid
burdensome audits.
Requiring all payers to obtain and maintain TINs (Form W-9)
for all information documents subject to back-up withholding and expand
TIN matching.
Clarifying and strengthening worker classification rules.
Making repeated willful failure to file a tax return a felony.
Question. When the IRS verifies information and processes tax
returns, how much is still done manually, and how much is automated?
Answer. On average, a little less than 10 percent of individual
returns and over 25 percent of business returns received are paper
returns and have to be manually processed. In addition, electronic or
paper filed returns that fall out to Error Resolution System (ERS),
Rejects, or Unpostables might require a manual touch. Some Unpostables
are not related to return processing and some are systemically closed
and do not require manual intervention.
2020 and 2021 production was affected by Submission Processing
Center closures and the subsequent backlog experienced as a result of
those closures. ERS fallout has been especially high for electronic
returns this year due to legislative changes.
Question. Compared to other countries and to the States, how do we
compare on the use of modern technology?
The IRS's tax ecosystem is among the most complex in the world
requiring a vast technology environment to support it. When the IRS's
information technology is compared to other countries or those of our
Nation's States, the IRS's technology environment is much larger,
generally older and more complex, and incumbered by legacy software,
hardware, and a complex, ever-changing tax code.
In addition, the IRS must also be strategically aligned and
compliant with Federal mandates and guidelines that ensure the IRS not
only protects the security of taxpayer data, but also ensures
information and communication technology is accessible to the public.
To maintain the public trust, the IRS must remain ahead of its
adversaries and expanding cyber-threats that risk the confidentiality,
integrity, and availability of taxpayer data.
The IRS has already begun to embrace modern technologies.
Nevertheless, IT modernization requires consistent and available
funding to be maintained. We remain committed to modernizing our
technology as it plays a critical role in protecting the integrity of
the tax system and enabling taxpayers and their representatives to
voluntarily meet their tax obligations.
Question. How could modernizing the IRS's information technology
infrastructure to better identify errors in tax returns help close the
tax gap?
Answer. Many of the tools and technologies described in the IRS
Modernization Plan and Taxpayer First Act Taxpayer Experience Strategy
are intended to improve voluntary compliance--when taxpayers timely
file, report, and pay the correct amount of tax with no or minimal
assistance from the IRS. This frees up assistors to address more
complex cases versus simple inquiries that could be resolved online or
with better information and awareness of the tax law. For example
digital tools, like the IRS's online account, transparently provide an
up-to-date account balance, payment options and payment history, copies
of notices, and options to respond to the IRS. While some of these
services exist today, as resources allow, the IRS will expand and
better integrate options for taxpayers to seamlessly upload documents
in response to a notice, securely email or chat with an agent or
assistor, and authorize tax professionals to assist with tax matters.
This expansion will allow the IRS to work more cases, more productive
cases, and work more efficiently to help narrow the tax gap.
Question. Is our tax system unusually complex by global standards,
and if so, does it make technological adoption and use more difficult?
Answer. The IRS believes this question is better addressed by
Treasury's Office of Tax Policy.
______
Prepared Statement of Hon. Ron Wyden,
a U.S. Senator From Oregon
This morning the Finance Committee is joined by IRS Commissioner
Rettig for our annual hearing that typically marks the end of tax
filing season. However, 2021 is no typical year. There's a lot for us
to talk about, so I'll start with the tax gap, the difference between
taxes owed and what's collected.
Even the most conservative estimates of the annual tax gap put it
in the hundreds of billions of dollars a year. My view is, the annual
tax gap is at least double the official estimate and growing. The most
recent official estimate pegs the tax gap at $381 billion per year, but
it looks all the way back to data from 2011 through 2013. That means
these estimates are out of date as soon as they're released.
The fact is, our economy has changed and expanded. In 2011, one
Bitcoin couldn't buy you a ham sandwich. Today cryptocurrencies and
other technologies create huge new opportunities for tax cheats to rip
off the American people.
More and more wealth is building up in the hands of the fortunate
few and big corporations. They've got the high-priced lawyers and
accountants who specialize in concealing income with sketchy
bookkeeping, money laundering, and shell companies.
I'm coming off 10 town halls in Oregon. When I hold those
meetings--especially the ones during tax season--lots of Oregon
taxpayers tell me they have a gut feeling they're being cheated. They
hear about the massive tax gap, and they're rightfully ticked off.
Close even a portion of the tax gap, and you're better able to fund
care for seniors at home, assistance to needy children, and affordable
housing.
The IRS needs more resources to tackle this challenge, but it's
only just beginning to recover from a decade of Republican budget cuts.
Those cuts hobbled our ability to root out cheating by high flyers and
their high-priced accountants. Criminal tax evasion cases have fallen
nearly by half. The number of IRS tax enforcement staff--the experts
who know how to break down tax evasion cases--has fallen by nearly a
third.
Wealthy tax cheats have proven that with enough attack dog
lawyering, they can litigate the IRS into submission and rip off
working taxpayers for big money. Meanwhile, the burden of tax audits
shifted unfairly onto working people. That's because it's a lot cheaper
and easier to hassle a working mom over a tax credit overpayment than
it is to decipher the latest money laundering schemes.
Bottom line, it's time to throw out business as usual on this
issue. Business as usual is a rainmaker for cheaters and criminals and
unfair to everybody else. The IRS needs more highly skilled
investigators and better technology to keep up with these modern
crooks. The Biden administration's new budget proposal calls for a 10-
percent increase in IRS funding. That's a good start. I believe there's
room for a more comprehensive strategy that'll lower the tax gap.
This committee will kick off a new policy today. On my watch, this
annual filing season hearing will put a special focus on what the IRS
has done over the previous year to catch the cheats and close the gap.
There's a lot of catching up to do.
Wrapping up, we appreciate Commissioner Rettig and the staff at IRS
for working long hours during this pandemic to get three rounds of
relief payments to the American people. Millions and millions of
hurting families got desperately needed relief payments, and our
country got an economic boost. This committee also led the effort to
make sure that Americans who got unemployment benefits didn't get a
painful tax surprise this year.
Finally, we'll want to hear about getting the new Child Tax Credit
payments up and running. It's a big job, and millions of families are
counting on the IRS to get it done.
______
Communications
----------
Center for Fiscal Equity
14448 Parkvale Road, Suite 6
Rockville, MD 20853
fiscalequitycenter@yahoo.com
Statement of Michael Bindner
Chairman Wyden and Ranking Member Crapo, thank you for the opportunity
to address this issue. This tax season raises four issues. The first is
dealing with the pandemic.
The 2021 tax filing season has been overcome by the signing of the
American Recovery Act. Families that would have relied on their refunds
because of the overpayment of taxes and using the Earned Income Tax
Credit to catch up on their bills and spend money on a few luxuries are
receiving stimulus payments, many this week. Those who, for whatever
reason, do not usually file will do so this year. There is simply too
much money on the table to do otherwise.
Many who simply do not know how to go about getting help in filing
taxes need direction on where to find it. The President, members of
Congress, the IRS, state and local government, (especially social
services agencies) and community institutions can all help with this
effort. Even members who did not support the legislation will be eager
to be part of this solution. Politics is both the art of the possible
and the stage of the ironic.
As the pandemic recedes (there are only so many possible vectors for
the virus remaining), the IRS can begin to bring people back to work.
Contractors, including former revenue agents, can be helpful in
clearing the backlog. Such relationships should continue so that the
portion of the tax gap due to non-compliance can be closed. As more
well off individuals face enforcement, others will do a better job of
paying what they owe under the law.
IRS funding is not adequate at present to meet the immediate challenge.
The recent change in government should bring about more of a
willingness to spend the necessary funds.
The second issue is distributing the increased child tax credit to
eligible families. For middle income taxpayers whose increased credits
are less than their annual tax obligation, a simple change in
withholding tables is adequate. Procedures are already in place to
deliver refundable credits to larger families. For the coming year,
they merely need to be expanded to all families with children. This
fact was likely already included in Mr. Rettig's testimony. If not, I
am sure he can easily confirm that this is the case.
Employers can work with their bankers to increase funds for payroll
throughout the year while requiring less money for their quarterly tax
payments (or estimated taxes) to the IRS. The main issue is working out
those situations where employers owe less than they payout. This is
especially true for labor intensive industries and even more so for low
wage employers. A higher minimum wage would make negative quarterly tax
bills less likely. Indeed, no one should have to subsist mainly on
their child tax payments.
A further challenge is fraud. I am not speaking of fictional
dependents, but of hiring more employees than workload demands in order
to reduce tax payments. Once the American Relief Act expires, any
permanent increase to and refundability of the child tax credit (and
ideally an even more generous credit) will require permanent tax
reform. At that point, the issue of possible fraud must be addressed.
Even without comprehensive reform, corrective legislative language will
be necessary.
Senior committee members and staff are likely familiar with the
Center's proposals for tax reform which, as usual, are included as an
attachment. A summary of individual policy changes has been added. As
the reader has likely surmised, tax reform is the third issue.
Allow me to highlight five points.
First, the difference between changing quarterly withholding and
enacting a subtraction VAT is six of one and a half dozen of the other.
The reason for this is that the proposed subtraction VAT is based on
the notion that employers would be responsible for paying and
reconciling the taxes now filed by employees. This would add little
additional burden to employers (especially the self-employed) but end
the burden of filing for all but the highest salaried employees.
The second is that this debate has gone on so long that the numbers
have changed. What used to be proposed at $75,000 per year should now
be delivered at $84,000. Proposals should always be indexed.
Third, for the sake of parity, the minimum wage should be set to $10
per hour immediately, with a phase in to $12 per hour to restore wages
to the level of productivity found in 1965. $15 should be treated as
either a bargaining chip or as the inflationary position to reach the
same buying power $12 wage would provide now.
Fourth, enacting an asset VAT allows for higher tiered subtraction VAT
(as proposed by Lawrence B. Lindsey) to replace some or all taxation of
higher incomes at progressive, rather than proportional rates. The only
advantages of keeping filing in place for high income individuals
(rather than households) are that keeping the highest salary rate and
the Asset VAT rate the same will reduce the incentive to game income
streams to avoid taxes and to allow higher income individuals to
purchase tax prepayment bonds, thus reducing the national debt sooner
than later.
Fifth is that in reality, explicit and implicit value added taxes are
already in force.
Individuals and firms that collect retail sales taxes receive a rebate
for taxes paid in their federal income taxes.
Tax withheld by employers for the income and payroll taxes of their
labor force is an implicit VAT. A goods and services tax simply makes
these taxes visible.
A second attachment on tax fairness and the third on tax administration
details the impact of tax reform on federal and state governments.
Thank you, again, for the opportunity to add our comments to the
debate. Please contact us if we can be of any assistance or contribute
direct testimony.
Attachment One--Tax Reform, Center for Fiscal Equity, March 5, 2021
Individual payroll taxes. These are optional taxes for Old-Age and
Survivors Insurance after age 60 for widows or 62 for retirees. We say
optional because the collection of these taxes occurs if an income
sensitive retirement income is deemed necessary for program acceptance.
Higher incomes for most seniors would result if an employer
contribution funded by the Subtraction VAT described below were
credited on an equal dollar basis to all workers. If employee taxes are
retained, the ceiling should be lowered to $85,000 to reduce benefits
paid to wealthier individuals and a $16,000 floor should be established
so that Earned Income Tax Credits are no longer needed. Subsidies for
single workers should be abandoned in favor of radically higher minimum
wages.
Wage Surtaxes. Individual income taxes on salaries, which exclude
business taxes, above an individual standard deduction of $85,000 per
year, will range from 6.5% to 26%. This tax will fund net interest on
the debt (which will no longer be rolled over into new borrowing),
redemption of the Social Security Trust Fund, strategic, sea and non-
continental U.S. military deployments, veterans' health benefits as the
result of battlefield injuries, including mental health and addiction
and eventual debt reduction. Transferring OASDI employer funding from
existing payroll taxes would increase the rate but would allow it to
decline over time. So would peace.
Asset Value-Added Tax (A-VAT). A replacement for capital gains taxes,
dividend taxes, and the estate tax. It will apply to asset sales,
dividend distributions, exercised options, rental income, inherited and
gifted assets and the profits from short sales. Tax payments for option
exercises and inherited assets will be reset, with prior tax payments
for that asset eliminated so that the seller gets no benefit from them.
In this perspective, it is the owner's increase in value that is taxed.
As with any sale of liquid or real assets, sales to a qualified broad-
based Employee Stock Ownership Plan will be tax free. These taxes will
fund the same spending items as income or S-VAT surtaxes. This tax will
end Tax Gap issues owed by high income individuals. A 26% rate is
between the GOP 24% rate (including ACA-SM and Pease surtaxes) and the
Democratic 28% rate. It's time to quit playing football with tax rates
to attract side bets.
Subtraction Value-Added Tax (S-VAT). These are employer paid Net
Business Receipts Taxes. S-VAT is a vehicle for tax benefits, including
Health insurance or direct care, including veterans' health care
for non-
battlefield injuries and long term care.
Employer paid educational costs in lieu of taxes are provided as
either
employee-directed contributions to the public or private unionized
school of their choice or direct tuition payments for employee children
or for workers (including ESL and remedial skills). Wages will be paid
to students to meet opportunity costs.
Most importantly, a refundable child tax credit at median income
levels (with inflation adjustments) distributed with pay.
Subsistence level benefits force the poor into servile labor. Wages and
benefits must be high enough to provide justice and human dignity. This
allows the ending of state administered subsidy programs and
discourages abortions, and as such enactment must be scored as a must
pass in voting rankings by pro-life organizations (and feminist
organizations as well). To assure child subsidies are distributed, S-
VAT will not be border adjustable.
The S-VAT is also used for personal accounts in Social Security,
provided that these accounts are insured through an insurance fund for
all such accounts, that accounts go toward employee-ownership rather
than for a subsidy for the investment industry. Both employers and
employees must consent to a shift to these accounts, which will occur
if corporate democracy in existing ESOPs is given a thorough test. So
far it has not. S-VAT funded retirement accounts will be equal-dollar
credited for every worker. They also have the advantage of drawing on
both payroll and profit, making it less regressive.
A multi-tier S-VAT could replace income surtaxes in the same range.
Some will use corporations to avoid these taxes, but that corporation
would then pay all invoice and subtraction VAT payments (which would
distribute tax benefits. Distributions from such corporations will be
considered salary, not dividends.
Invoice Value-Added Tax (I-VAT). Border adjustable taxes will appear on
purchase invoices. The rate varies according to what is being financed.
If Medicare for All does not contain offsets for employers who fund
their own medical personnel or for personal retirement accounts, both
of which would otherwise be funded by an S-VAT, then they would be
funded by the I-VAT to take advantage of border adjustability. I-VAT
also forces everyone, from the working poor to the beneficiaries of
inherited wealth, to pay taxes and share in the cost of government.
Enactment of both the A-VAT and I-VAT ends the need for capital gains
and inheritance taxes (apart from any initial payout). This tax would
take care of the low-income Tax Gap.
I-VAT will fund domestic discretionary spending, equal dollar employer
OASI contributions, and non-nuclear, non-deployed military spending,
possibly on a regional basis. Regional I-VAT would both require a
constitutional amendment to change the requirement that all excises be
national and to discourage unnecessary spending, especially when
allocated for electoral reasons rather than program needs. The latter
could also be funded by the asset VAT (decreasing the rate by from
19.5% to 13%).
As part of enactment, gross wages will be reduced to take into account
the shift to S-VAT and I-VAT, however net income will be increased by
the same percentage as the I-VAT. Adoption of S-VAT and I-VAT will
replace pass-through and proprietary business and corporate income
taxes.
Carbon Value-Added Tax (C-VAT). A Carbon tax with receipt visibility,
which allows comparison shopping based on carbon content, even if it
means a more expensive item with lower carbon is purchased. C-VAT would
also replace fuel taxes. It will fund transportation costs, including
mass transit, and research into alternative fuels (including fusion).
This tax would not be border adjustable.
Summary
This plan can be summarized as a list of specific actions:
1. Increase the standard deduction to workers making salaried
income of $425,001 and over, shifting business filing to a separate tax
on employers and eliminating all credits and deductions - starting at
6.5%, going up to 26%, in $85,000 brackets.
2. Shift special rate taxes on capital income and gains from the
income tax to an asset VAT. Expand the exclusion for sales to an ESOP
to cooperatives and include sales of common and preferred stock. Mark
option exercise and the first sale after inheritance, gift or donation
to market.
3. End personal filing for incomes under $425,000.
4. Employers distribute the child tax credit with wages as an
offset to their quarterly tax filing (ending annual filings).
5. Employers collect and pay lower tier income taxes, starting at
$85,000 at 6.5%, with an increase to 13% for all salary payments over
$170,000 going up 6.5% for every $85,000- up to $340,000.
6. Shift payment of HI, DI, SM (ACA) payroll taxes employee taxes
to employers, remove caps on employer payroll taxes and credit them to
workers on an equal dollar basis.
7. Employer paid taxes could as easily be called a subtraction
VAT, abolishing corporate income taxes. These should not be zero rated
at the border.
8. Expand current state/federal intergovernmental subtraction VAT
to a full GST with limited exclusions (food would be taxed) and add a
federal portion, which would also be collected by the states. Make
these taxes zero rated at the border. Rate should be 19.5% and replace
employer OASI contributions. Credit workers on an equal dollar basis.
9. Change employee OASI of 6.5% from $18,000 to $85,000 income.
Attachment Two--Taxpayer Fairness, October 13, 2020
To start, we must distinguish between fairness and justice. Fairness is
having your say. Justice is getting or paying what is due to or for
you.
Lower income taxpayers depend on the fairness of the system, rather
than individual fairness. It is costly to make one's case to the IRS
when disputes arise. To an extent, they must pay and obey. As long as
they can provide information when it is lacking or work out payment
arrangements when they do not have funds available the system is fair.
Generally, they do, although currently the unopened mail resulting from
the pandemic stretches that fairness, as Chairman Neal noted in August
(2020).
Higher income taxpayers have more room to argue, as well as more to
argue about. Sometimes their attempts to hide income are too clever by
half. If they succeed in beating the system, the result for all of us
is both less fair and unjust. A wealth tax, because the elements are
both debatable and gameable, compound the problems inherent in current
capital gains taxation.
The tax rate on capital gains is seen as unfair because it is lower
than the rate for labor. This is technically true, however it is only
the richest taxpayers who face a marginal rate problem. For most
households, the marginal rate for wages is less than that for capital
gains. Higher income workers are, as the saying goes, crying all the
way to the bank.
The injustice in the system is baked in by the maldistribution of
income in the economy at large. Prior to the Kennedy-Johnson tax cuts,
high marginal rates prevented the extraction of economic rent from
workers. Any labor cost savings went to the government, so gains in the
economy were shared by all. In 1981, the problem got worse and in 1986,
higher marginal rates were traded for reduced tax benefits, with
corporations taking the hit. The class warfare which began in 1965 was
over twenty years later. Labor lost, both organized and otherwise.
Recently, tax rates for corporations and pass-through income were
reduced, generally, to capital gains and capital income levels. This is
only fair and may or may not be just. The field of battle has narrowed
between the parties. The current marginal and capital rates are seeking
a center point, as most as if the recent tax law was based on
negotiations, even as arguments flared publicly. Of course, that would
never happen in Washington. Never, ever.
Compromise on rates makes compromise on form possible. If the Pease and
Affordable Care Act provisions are repealed, a rate of 26% is a good
stopping point for pass-through, corporate, capital gains and capital
income. A single rate also makes conversion from self-reporting to
automatic collection through an asset value added tax levied at point
of sale or distribution possible. This would be both just and fair,
although absolute fairness is absolute unfairness, because there would
be little room to argue about what is due and when.
Ending the machinery of self-reporting also puts an end to the Quixotic
campaign to enact a wealth tax. Out of fairness, if the revenue
committees do give its proponents and opportunity to testify, it must
hear from me as well. It would only be fair.
Attachment Three--Tax Administration, Treasury Budget, February 12,
2020
Shifting to a single system for all business taxation, particularly
enacting invoice value added taxes to collect revenue and employer-
based subtraction value-added taxes to distribute benefits to workers
will end the need for filing for most, if not all, households. Any
remaining high salary surtax would be free of any deductions and
credits and could as easily be collected by enacting higher tiers to a
subtraction VAT.
Subtraction VAT collection will closely duplicate the collection of
payroll and income taxes--as well as employment taxes--but without
households having to file an annual reconciliation except to verify the
number of dependents receiving benefits.
Tax reform will simplify tax administration on all levels. Firms will
submit electronic receipts for I-VAT and C-VAT credit, leaving a
compliance trail. S-VAT payments to providers, wages and child credits
to verify that what is paid and what is claimed match and that children
are not double credited from separate employers.
A-VAT transactions are recorded by brokers, employers for option
exercise and closing agents for real property. With ADP, reporting
burdens are equal to those in any VAT system for I-VAT and A-VAT and
current payroll and income tax reporting by employers.
Employees with children will annually verify information provided by
employers and IRS, responding by a postcard if reports do not match,
triggering collection actions. The cliche will thus be made real.
High salary employees who use corporations to reduce salary surtax and
pay I-VAT and S-VAT for personal staff. Distributions from such
corporations to owners are considered salary, not dividends.
Transaction based A-VAT payments end the complexity and tax avoidance
experienced with income tax collection. Tax units with income under
$84,000 or only one employer need not file high salary surtax returns.
Separate gift and inheritance tax returns will no longer be required.
State governments will collect federal and state I-VAT, C-VAT, S-VAT
payments, audit collection systems, real property A-VAT and conduct
enforcement actions. IRS collects individual payroll and salary surtax
payments, performs electronic data matching and receive payments and
ADP data from states. SEC collects A-VAT receipts.
I-VAT gives all citizens the responsibility to fund the government. C-
VAT invoices encourage lower carbon consumption, mass transit, research
and infrastructure development. A-VAT taxation will slow market
volatility and encourage employee ownership, while preserving family
businesses and farms. Very little IRS Administration will be required
once reform is fully implemented. All IRS employees could fit in a
bathtub with room for Grover Norquist.
______
Letter Submitted by Anand Desai
Re: Transparency on challenges and results no less essential than
funding to a ``21st-Century IRS''
Dear U.S. Senate Committee on Finance:
Thank you for addressing ``The 2021 Filing Season and 21st-Century
IRS'' on April 13, 2021. As a citizen (and writing only for myself),
I'd like to share these recommendations for the hearing record.
Chairman Wyden's prepared opening statement posits that the ``tax
gap, the difference between taxes owed and what's collected'' is
several hundred billion dollars a year; that ``the fortunate few and
big corporations [have] high-priced lawyers and accountants who
specialize in concealing income with sketchy bookkeeping, money
laundering and shell companies;'' and that ``wealthy tax cheats have
proven that with enough attack dog lawyering, they can litigate the IRS
into submission and rip off working taxpayers for big money.''
I urge the Committee to consider more litigation--which simply
means the government preparing and explaining its side of a tax dispute
for a court to resolve openly--and overall publicity as part of the
tax-gap solution. As remote access to Tax Court and others' hearings
should now help demonstrate, the process is reasonably orderly, even-
handed, and standardized in a way that professionals soon pick up.
Along with finding one's voice amid a fast-paced environment, respected
authorities, and occasional bluster--much like in politics.
If a case turns out as the IRS expects, it'll apply more clearly to
similarly situated taxpayers, who can at least be content that paying
won't put them at a competitive disadvantage. And if it isn't, the
bureau is on notice to reconsider its practices or update its
regulations, and Congress, to debate the relevant tax laws and IRS
funding levels. This is fairer to the average taxpayer and can make
government more responsive than under patterns of small settlements on
large matters (but generally not the underlying demands or rationales
for compromise) occasionally spotlighted by internal-watchdog
investigations years after insiders must be able to figure out the
general situation.
To this end, I specifically suggest the Committee (1) balance the
requirement of section 7803(e)(5) of the Internal Revenue Code (26
U.S.C.) to tell Congress about any ``designation'' of cases for
litigation rather than internal settlement, with an expectation to
report persistent challenges that might need a more robust approach;
(2) amend IRC 6110(b)(2) for release of major settlement ``closing''
agreements in anonymized form to mitigate ``secret law'' problems, as
the section already does for other kinds of ``written determinations;''
and (3) request more comprehensive and granular statistics under IRC
6108 on efficiency and results throughout the tax reporting and
controversy process.
As many Americans' most noticeable point of contact with the
federal government, an effective, responsive IRS can build confidence
that other parts' budgets are worthwhile too. Skeptics of spending
levels and particular tax laws stand to benefit as well: who better to
point out a policy's costs and incentive issues than a large,
sophisticated business with no choice but to confront them head on?
Respectfully submitted,
Anand Desai
______
Letter Submitted by Nicholas Matthew Lee
U.S. Senate
Committee on Finance
Dear Senators,
While I appreciate the sentiments expressed by Ranking Member Senator
Wyden about closing the tax gap and holding tax cheats accountable, I
find it necessary to draw attention to the Committee's failure to
respond to and prioritize recommendations that are necessary to provide
a reasonable, fair, and just tax filing experience to the 9 million
overseas U.S. citizens that are obliged to file in, pay into, and
conform to a tax system that is from their perspective foreign.
This comment will contain three sections:
1. Comments on specific discussion items in the hearing.
2. Reminders of previous National Taxpayer Advocate
recommendations to Congress that have not been substantively responded
to.
3. Raising additional concerns not covered by those other two.
I emphasize that if the United States wishes to uniquely assert this
extraterritorial tax on nonresident citizens, it has a strong moral and
practical obligation to provide adequate taxpayer services to overseas
taxpayers.
Commenting on Specific Aspects of the Hearing:
Unacceptable Hold Times
The Senate Finance Committee lambasted the IRS for what it considered
to be unacceptably long hold times to talk to a human at the IRS.
In the context of non-resident taxpayers, this is particularly
damaging.
I am fortunate in that I have the technical know-how to maintain an
affordable international calling setup using Voice over IP (VoIP).
Without it, I would be paying =0.65 ($0.75) per minute via my Dutch
phone provider.
I have needed to contact two IRS help lines in recent months--the
general help line, and the Taxpayer Advocate Service intake line. In
the former case, I spent approximately 30 minutes on hold. In the
latter case, I spent 6 hours on hold before eventually reaching an
intake advocate that accepted my case and assigned a case number. These
two international calls to the IRS would have respectively cost $22.50
and $270 respectively.
It is unacceptable that the IRS provides no easy or affordable means of
contact to international taxpayers. If the United States asserts that
it has a right to tax overseas citizens, contrary to global norms, it
has a moral and practical obligation to provide international toll-free
numbers in each and every country that overseas taxpayers reside in.
Lack of Online Access
During the pandemic, the IRS switched to reliance on its online account
system to reduce the burden on its phone lines and mailed processing
facilities.
Per the norm, this left overseas taxpayers in the cold. The online
account system explicitly does not work for any taxpayer with a foreign
address on file. For a number of months, it was impossible to request
tax transcripts because the only means of requesting them were via
overloaded phone lines or via mailed forms that were not being
processed.
According to some reports, the IRS hopes to add online account support
for overseas taxpayers sometime between 2025 and 2030, though funding
has not been procured or allocated for this.
This lack of urgency is astounding, given that the United States
asserts a global right to tax, when it very clearly lacks a basic
capability to offer tax payment related services outside of U.S.
borders.
COVID Stimulus Checks
In 2020, it was well documented that overseas American taxpayers had
immense difficulty in obtaining their COVID stimulus payments, for
three key reasons:
1. The web page for checking status and providing direct deposit
information did not support foreign addresses until after many checks
were mailed, sometimes to incorrect addresses.
2. International postal systems were severely affected by travel
restrictions. To illustrate this, I was receiving letters sent from the
U.S. in March 2020 in October 2020.
3. Many overseas citizens lack U.S. bank accounts, leaving them
unable to receive a direct deposit or to cash a check. The last bank
cashing checks in the Netherlands stopped processing them in February
this year, preventing the third stimulus payment from being received by
many.
Furthermore, in the context of the cost and complexity of overseas
American tax preparation, the stimulus checks were a slap in the face.
I can say that not a penny of the received check has gone towards
necessary living expenses--it has instead gone towards covering a
fraction of my tax preparation costs, which are inordinately expensive
compared to those by resident U.S. citizens.
While I appreciate the taxpayer funded discount towards my 2021 filing
costs, it goes back to one of my fundamental complaints regarding the
U.S. extraterritorial tax regime--it lines the pockets of accountants
more than it provides funding for the government.
Ordinary Americans, in ordinary living situations, with ordinary
incomes, paying higher than ordinary (in the U.S.) taxes to the
governments of the countries they live in, often have to spend hundreds
to thousands of dollars to stay compliant on their U.S. tax
obligations--while also not owing any money to the government. I would
rather pay taxes to the IRS than to pay fees to my accountant.
The Tax Gap
Foreign Sourced Income
Chairman Wyden and Commissioner Rettig asserted that part of the tax
gap consists of overseas tax cheats hiding foreign source income.
While I do not deny that there are most likely overseas Americans that
have failed to pay their taxes, please be aware that by failing to
acknowledge the existence of ordinary, tax-paying overseas Americans
unfairly stigmatizes us and conflates us with bad actors in an
emotionally charged discussion.
For more information about how we are unfairly lumped in with tax
cheats, I encourage you to read The Criminalization of the American
Emigrant, written by Laura Snyder, a member of the IRS Taxpayer
Advocacy Panel. It can be located and read for free here: https://
papers.ssrn.com/sol3/papers.cfm?abstract_id=3655145.
Previous National Taxpayer Advocate Recommendations not Acted Upon
All recommendations here can be located in the ``NTA Purple Book''
reports that are submitted on an annual basis to Congress.
None of the following recommendations pertaining to overseas taxpayers
have been acted on by Congress, even when raised repeatedly on an
annual basis:
2020:
Adjust the Filing Threshold for Taxpayers Filing as Married
Filing Separately and Nonresident Alien Individuals
Harmonize Reporting Requirements for Taxpayers Subject to Both
the Report of Foreign Bank and Financial Accounts and the Foreign
Account Tax Compliance Act by Eliminating Duplication and Excluding
Accounts a U.S. Person Maintains in the Country Where He or She Is a
Bona Fide Resident
2019:
Harmonize Reporting Requirements for Taxpayers Subject to Both
the Report of Foreign Bank and Financial Accounts and the Foreign
Account Tax Compliance Act by Eliminating Duplication and Excluding
Accounts a U.S. Person Maintains in the Country Where He or She Is a
Bona Fide Resident
Allow a Period of Notice and Comment on New Intergovernmental
Agreements and Require That the IRS Notify Taxpayers Before Their Data
Is Transferred to a Foreign Jurisdiction
2018:
Harmonize Reporting Requirements for Taxpayers Subject to Both
the Report of Foreign Bank and Financial Accounts and the Foreign
Account Tax Compliance Act by Eliminating Duplication and Excluding
Accounts a U.S. Person Maintains in the Country Where He or She Is a
Bona Fide Resident
2017 (First Purple Book Report):
Harmonize Reporting Requirements for Taxpayers Subject to Both
the Report of Foreign Bank and Financial Accounts and the Foreign
Account Tax Compliance Act by Eliminating Duplication and Excluding
Accounts a U.S. Person Maintains in the Country Where He or She Is a
Bona Fide Resident
Please note that these recommendations by the National Taxpayer
Advocate, not acted upon, are purely those that directly fall under the
scope of Congress. The more general ``Annual Report to Congress'' has
numerous recommendations that have similarly been neglected over the
years.
There, we see many items under ``Most Serious Problems'' that are
similarly ignored.
(2011) Numerous International Issues raised in the 2011 report,
available here: https://www.taxpayeradvocate.irs.gov/wp-content/
uploads/2020/08/2011_ARC
_MSP-7-12.pdf.
(2012) The IRS's Offshore Voluntary Disclosure Programs
Discourage Voluntary Compliance by Those Who Inadvertently Failed to
Report Foreign Accounts.
(2012) Challenges Persist for International Taxpayers as the IRS
Moves Slowly to Address Their Needs.
(2013) REPORTING REQUIREMENTS: The Foreign Account Tax
Compliance Act Has the Potential to Be Burdensome, Overly Broad, and
Detrimental to Taxpayer Rights.
(2014) FOREIGN ACCOUNT REPORTING: Legislative Recommendations to
Reduce the Burden of Filing a Report of Foreign Bank and Financial
Accounts (FBAR) and Improve the Civil Penalty Structure.
(2015) FOREIGN ACCOUNT REPORTING: Eliminate Duplicative
Reporting of Certain Foreign Financial Assets and Adopt a Same-Country
Exception for Reporting Financial Assets Held in the Country in Which a
U.S. Taxpayer Is a Bona Fide Resident.
(2015) INTERNATIONAL TAXPAYER SERVICE: The IRS's Strategy for
Service on Demand Fails to Compensate for the Closure of International
Tax Attache Offices and Does Not Sufficiently Address the Unique Needs
of International Taxpayers.
(2016) PASSPORT DENIAL AND REVOCATION: The IRS's Plans for
Certifying Seriously Delinquent Tax Debts Will Lead to Taxpayers Being
Deprived of a Passport Without Regard to Taxpayer Rights.
(2016) TAXPAYER RIGHTS: The IRS Does Not Effectively Evaluate
and Measure its Adherence to the Taxpayer's Right to a Fair and Just
Tax System.
(2016) FOREIGN ACCOUNT TAX COMPLIANCE ACT (FATCA): The IRS's
Approach to International Tax Administration Unnecessarily Burdens
Impacted Parties, Wastes Resources, and Fails to Protect Taxpayer
Rights.
(2017) INTERNATIONAL PENALTIES: Provide Uniformity for the
Reasonable Cause Exception to Initial and Continuation Penalties for
the Failure to File Information Returns Under IRC Sec. Sec. 6038,
6038A, 6038D, 6677, and 6679.
(2018) FOREIGN ACCOUNT REPORTING: Authorize the IRS to
Compromise Assessed FBAR Penalties It Administers.
(2019) MULTILINGUAL NOTICES: The IRS Undermines Taxpayer Rights
When It Does Not Provide Notices in Foreign Languages.
(2020) INTERNATIONAL: The IRS's Assessment of International
Penalties Under IRC Sec. Sec. 6038 and 6038A Is Not Supported by
Statute, and Systemic Assessments Burden Both Taxpayers and the IRS
The lack of improvement in this area shows an appalling neglect to
address the needs and respect the rights of international taxpayers.
Without improvement in this area, discussion of the issue, or
acknowledgement that there is even a problem, the United States
continually erodes its relationship with overseas U.S. citizens. Where
most countries recognize the ``soft power'' value of a diaspora that
loves its country, the United States broadly vilifies its emigrant
population, merely regarding it as a source of revenue.
Other Issues:
Administrative Complexity:
The complexity, and therefore cost, of preparing a non-resident citizen
tax return is disproportionately expensive compared to that of a
resident.
IRS Forms 5471 and 8621 are particularly egregious examples of this,
not being supported by any mainstream tax preparation tools and
requiring substantive and expensive accountant support.
For foreign retirement accounts held by or small businesses run by
overseas U.S. Persons, the sheer complexity of compliant filing is
problematic. Often, it forces individuals to choose between excessive
filing costs and non-compliance.
Poor Quality of IRS Literature:
Much of the aforementioned complexity stems from tax filing
requirements that are unclear in relation to how the U.S. Tax Code maps
onto 180 different foreign jurisdiction.
Understanding how to report a foreign retirement account in a compliant
manner according to instructions on various IRS forms requires an
understanding and reading of:
The U.S. tax code.
International tax treaties.
Updates to tax treaties.
Auxiliary documents related to the tax treaties.
IRS Revenue Procedures.
Foreign laws and tax codes.
Furthermore, the IRS does not publish a ``current'' reading of the tax
treaties that includes all amendments made--it is instead necessary to
``layer'' documents over each other to understand the current state of
affairs.
As this is all related to classification and how to interpret
something, tax filing software and instructions associated with forms
are woefully inadequate. The complexity obligates overseas Americans to
seek professional help, at great expense.
Inadequate Access to Assistance Interpreting Tax Treaties
Continuing in the same vein, the IRS provides no affordable means of
consulting it to determine how it would interpret an international tax
situation. All such procedures for doing this are applicable only to
international business entities, but not individuals.
The position of the IRS appears to be ``we will interpret foreign
situations as we see fit and fine individuals for non-compliance if we
disagree with their interpretation, but we will not provide individuals
any way of proactively understanding their tax situation in the eyes of
the IRS.''
Should the United States wish to subject individuals to this inordinate
complexity, it must provide ways of managing and resolving that tax
complexity for individuals.
There are many countries in which the average net annual income is not
sufficient to cover the cost of qualified tax advice and preparation.
Residents of these countries are put in impossible situations with
regards to their U.S. tax obligations.
Conclusion:
It is vitally necessary for the Senate Finance Committee to schedule a
hearing to discuss the problems and challenges faced by overseas
taxpayers. The situation with regards to Non-Resident Citizen U.S.
taxpayers has continually worsened in the past decade, and we are in
urgent need of reform.
The United States tax experience imposes separate, more punitive, and
more complicated tax obligations on overseas U.S. citizens. On the
basis of nationality, U.S. Citizens are not afforded the favourable tax
treatment granted to Non-Resident Alien taxpayers. In an international
context, this is discussed as a violation of fundamental rights.
It is unthinkable that in discussing ways in which the IRS must change,
there is zero thought given towards heeding advice that was already
given, issues that were raised by the citizens this tax code is meant
to serve, and concerns raised by foreign governments about a lack of
respect by the U.S., for U.S. citizens. To date, there has been more
sympathy and understanding expressed by foreign governments than the
United States Congress--a truly distressing situation.
The U.S. treatment of its non-resident taxpayers is an aberration that
must be recognized and corrected. Previous discussion on this topic, by
some members of the Senate Finance Committee, shows a myopic view that
fails to consider how exceptional this poor treatment is.
It is American Exceptionalism in all the worst ways, ranking up there
with our approach to gun violence and unaffordable health care.
Hold a hearing on tax issues faced by overseas Americans, and correct
the injustices.
______
Professional Managers Association
700 12th St., NW, Ste. 700, PMB 95968
Washington, DC 20005
202-793-6262
https://www.promanager.org/
April 13, 2021
Hon. Ron Wyden Hon. Mike Crapo
Chairman Ranking Member
U.S. Senate U.S. Senate
Committee on Finance Committee on Finance
Washington, DC 20510 Washington, DC 20510
RE: Professional Managers Association Statement for Committee Hearing
on ``The 2021 Filing Season and 21st-Century IRS'' held on April 13,
2021
Dear Chairman Wyden, Ranking Member Crapo, and Members of the
Committee:
On behalf of the Professional Managers Association--the non-profit
professional association that has, since 1981, represented professional
managers, management officials, and non-bargaining unit employees at
the Internal Revenue Service (IRS)--I write to provide a statement
regarding the April 13, 2021 hearing, ``The 2021 Filing Season and
21st-Century IRS.''
PMA appreciates this Committee's focus on the IRS. As our nation's
revenue collector, the success of the IRS is critical to the success of
our entire federal government. IRS employees have been administering an
extended 2021 filing season while grappling with retroactive tax law
changes, expanding credits, delivering nearly a half billion economic
impact payments, and continuing to manage dozens of complications
impacting both the 2021 and the still-ongoing 2020 tax filing seasons.
These conflicting missions call upon the IRS to be far more than just a
tax administration agency. The IRS now also serves as a benefits
administrator and an emergency relief agency.
This phenomenon did not originate during the pandemic. Since 1993, the
Congressional mandates falling on the IRS, outside the traditional
filing season and tax administration roles, have dramatically
increased. The IRS has been called upon to manage healthcare expansions
and alternative energy credits. During the 2008 economic crisis, the
Congress called on the IRS to stabilize the housing market but did not
provide tools for the IRS to independently research land deeds and
titles resulting in the widespread burden falling on taxpayers to
provide documentation. Unlike the Department of Housing and Urban
Development (HUD), the IRS is not equipped to interpret deed and title
recording practices varying from county to county, or town to town.
In order to administer the Individual Taxpayer Identification Number
program, which provides SSN-type numbers to non-citizen taxpayers, the
IRS needed to learn how to examine foreign passports, foreign medical
records, and foreign birth certificates, among others. Unlike
Immigration and Customs Enforcement (ICE), IRS employees are not
forensic examiners for foreign documents.
To administer generous, refundable tax credits for families, the IRS
must determine legal parentage and navigate complex custody issues.
There is no centralized database the IRS can rely upon to independently
verify custody. As a result, taxpayers are burdened and must provide
extensive documentation demonstrating legal custody. Because 50/50
custody arrangements are popular in family court, this can become an
absurd exercise where the IRS must ask parents for calendars marking
each night their child slept in their home.
PMA needs the Congress to understand how difficult it is to administer
these types of credits and programs.
Despite expanding mandates, the IRS has not seen a commensurate
increase in funding. In 2019, the National Taxpayer Advocate \1\
highlighted this conflict in noting the IRS is neither funded nor
staffed to serve as a benefits agency. This hinders the IRS's ability
to perform critical functions such as collecting $3.5 trillion in
revenue, processing 253 million tax returns, and issuing $452 billion
in tax refunds.
---------------------------------------------------------------------------
\1\ https://www.irs.gov/newsroom/national-taxpayer-advocate-nina-
olson-releases-comprehensive-report-intended-to-improve-eitc-
administration-publishes-subway-map-of-taxpayers-journey-through-the-
tax-system.
If Congress wishes to continue expanding the IRS mission, it must
provide the resources and funding to support this new, reimaged Federal
agency. Instead, Congress has consistently cut funding while
criticizing the IRS for its perceived poor performance in administering
these programs. From a peak in FY 2010 to FY 2019, the IRS budget was
reduced by 20 percent adjusting for inflation and the IRS workforce
lost 29,000 full-time positions. Budget increases in the last two
years, while appreciated, still fail to return the IRS to FY 2010
---------------------------------------------------------------------------
levels let alone enable the IRS to meet all current requirements.
Funding issues underlie almost every tax administration challenge the
IRS faces. When the IRS lacks mission resources, it is unable fully
execute its mission. The Congressional Budget Office \2\ (CBO)
estimates increasing the IRS's funding for examinations and collections
by $20 billion over 10 years would increase revenues by $61 billion,
and increasing funding $40 billion over 10 years would increase
revenues by $103 billion. No other agency can boast such a return on
investment. The research is clear--consistent, robust funding will
enable the IRS to collect all the revenues due by law to be collected.
---------------------------------------------------------------------------
\2\ https://www.cbo.gov/system/files/2020-07/56422-CBO-IRS-
enforcement.pdf.
The President's FY 2022 Budget Request \3\ of $13.2 billion for the IRS
includes a modest $0.9 billion increase in resources for tax
enforcement, including welcomed multiyear funding. While better than
years of budget cuts, this single increase, if enacted, will not
provide the IRS the stability it needs to ensure a fair and equitable
tax system. PMA commends President Biden for requesting a 10.4-percent
increase above the 2021 enacted funding level. However, PMA believes
this amount will also prove insufficient for modernizing the capacity
of the IRS. As previously mentioned, the IRS remains a long way from FY
2010 levels, and will require the ongoing investment of billions to
effectively close the tax gap to collect a potential of $1.4 trillion
in unpaid taxes.\4\
---------------------------------------------------------------------------
\3\ https://www.whitehouse.gov/wp-content/uploads/2021/04/FY2022-
Discretionary-Request.pdf.
\4\ https://www.nytimes.com/2021/03/20/opinion/sunday/unpaid-tax-
evasion-IRS.html.
The IRS must upgrade and integrate its 60+ overlapping taxpayer
databases, used by more than five generations of IRS employees. The
Individual and Business Master Files are the oldest computing systems
still in use within the Federal government. These systems were
developed with appropriations under President Eisenhower and
implemented in the Kennedy administration. The IRS cannot be expected
to meet modern needs with archaic technology. IRS systems face unique
risks due to a continued reliance on legacy programming languages,
outdated hardware, and a shortage of staff with critical skills needed
---------------------------------------------------------------------------
to maintain these systems.
The Department of Treasury Inspector General \5\ recently found that in
FY 2019, the IRS spent over $2.86 billion to operate its current
information technology infrastructure, nearly $2.04 billion (71
percent) of which was on operations and maintenance. In other words,
the IRS spends nearly 20% of its annual budget merely trying to
stabilize its outdated systems, and this does not include the
additional costs incurred due to losses in productivity as employees
experience IT-related work stoppages. Until the IRS is able to dedicate
consistent time and funding to update its technology, the IRS will
continue spending more to maintain legacy systems than to modernize
them.
---------------------------------------------------------------------------
\5\ https://www.treasury.gov/tigta/auditreports/2020reports/
202020044fr.pdf.
Without robust, multiyear funding the IRS will continue to struggle to
undertake the necessary long-term transformation envisioned by the
Taxpayer First Act to enter the 21st Century and meet modern taxpayer
needs. PMA strongly supports the IRS request for $4.1 billion in
dedicated funding over a five-year period to allow full implementation
of TFA. Without this sustained funding, the IRS continues to struggle
with improving taxpayer experience, coordinating Service-wide
---------------------------------------------------------------------------
initiatives, and reaching traditionally underserved communities.
As the Committee dedicated to tax policy, we urge Members to appreciate
the additional strain placed on the IRS and assist the IRS by
clarifying and then appropriately funding its core mission. IRS
employees consistently display their dedication to serve the American
people in every way requested of them. However, it is unfair to
taxpayers and employees alike to continue placing additional burdens on
the Service without providing the requisite support. Only by adequately
investing in its workforce and technology can the IRS be transformed
into a 21st-Century tax administration agency.
In summary, PMA calls on the Congress to provide multiyear budgets for
both IT Modernization and for Taxpayer First Act implementation so this
crucial work can be completed without being undermined in the annual
appropriations process. We request the Congress provide the IRS with
Correctable Error Authority so that we can serve taxpayers efficiently,
correct errors as we identify them, and proactively stop improper
payments. We also ask that the Congress pass legislation giving the IRS
authority to regulate tax return preparers so that we can protect
taxpayers from economic harm caused by bad actors in our tax system.
Thank you for your consideration of PMA's perspective. Please contact
PMA Washington Representative Natalia Castro
(ncastro@shawbransford.com) if we can be of further assistance.
Sincerely,
Chad Hooper
Executive Director
Professional Managers Association
______
Letter Submitted by U.S. Citizen
The Honorable Ron Wyden
Chairman
U.S. Senate
Committee on Finance
219 Dirksen Senate Office Building
Washington, DC 20510
The Honorable Mike Crapo
Ranking Member
U.S. Senate
Committee on Finance
219 Dirksen Senate Office Building
Washington, DC 20510
April 19, 2021
RE: Hearing 2021 Filing Season and 21st-Century IRS, April 13, 2021
Honorable Committee Members,
I write today for your consideration on the serious matter of taxation
recently discussed during the hearing with IRS Commissioner, Mr.
Charles Rettig on April 13, 2021.
In the hearing, Mr. Rettig stated a priority for ensuring tax
compliance, delinquencies and collections.
Please be reminded of the most devastating financial crisis the United
States has ever experienced beginning in 4Q 2008 thru 2009. The
trillion dollar Financial Crisis left many small business owners
(myself included), investors, low and high-
earning individuals without the ability to pay ordinary tax liabilities
incurred prior to the free-fall crash. For some, the devastation of
this financial crash is easily forgotten now in the shadows of COVID
payouts and, a decade passed with now, all-time high equity markets. If
any staff members need a reminder of the devastation to taxpayers, they
can always conduct the most cursory search of the Internet for;
``Financial Crisis'' or, read the US Department of Treasury's own
writing, ``The Financial Crisis Response in Charts'' April 2012. It is
easy to play Monday morning quarterback now and assume that everyone
has recovered from those debilitating losses and simply, turned the
page with a, ``buy the dip'' mentality.
Unfortunately, there are tens of thousands of individuals and entities
that have never recovered from this event; psychologically or
financially. Some without any financial ability to return or rebuild. A
risk event of this magnitude scars for life. As a small, closely held
corporation actively involved in real estate, livestock, and automotive
finance during the relevant years and prior thereto; I recall the
losses as if they occurred yesterday. They haunt us daily. Literally,
we witnessed all of the ordinary earnings and capital holdings from the
same year 1Q-3Q 2008 and prior years, completely disappear in a few
weeks in the 4Q of 2008! It felt like just a few minutes as everything
was in free-fall and capital evaporated from the accounts daily. Every
telephone call we received at the office during that turbulent time was
to inform us that projects were being shelved, lines of credit frozen,
demand for curtailments and capital calls, etc. We attempted to hold on
with financial investments however, they were too volatile and remained
in free-fall. We were diluted from all projects requiring capital
contributions.
Most of us, unsophisticated taxpayers would assume that those losses
could be deducted and off set against the same year earned income.
Sadly, this was not the case. According to our experienced tax
preparer, taxpayers could not deduct these ``capital'' losses against
ordinary income in that year or anytime thereafter ($3K/year is
unpalatable). In our case, this involved a small seven figure amount of
ordinary income and seven figure amount of capital loss. This created
an immediate insolvent position for the entity. There was no way for
the entity to continue. It would never recover without any working
capital, frozen debt markets, depreciating assets that had to be
liquidated in fire-sales and, a significant six-figure tax liability.
Never mind the capital loss carry-forward. That is a worthless
proposition when you can't pay the rent or keep the lights on the next
month. Our tax advisor and preparer repeatedly reminded us that the IRS
would never accept a 165 extraordinary loss deduction that generated
from the most severe, trillion dollar financial crisis recession of all
time. If the financial crisis of 2009 doesn't align with the
legislative intent of 165 casualty loss stated by the 88th Congress in
1963, ``the most fundamental purpose of the deduction was to minimize
the financial hardships of extraordinary losses'' (HR Rep. 749, 88th
Congress, 1963); what could possibly be a more appropriate application
of this extraordinary loss event?
Please be further reminded, during the trillion dollar financial
crisis, no relief was afforded to small businesses or taxpayers. As you
know, there was also an administration change in the middle of this
crisis that added to the inefficiency of any purported relief. No
consideration whatsoever was extended for these described tax liability
situations. Only the large, too big to fail corporations and banks were
saved. The worst financial crisis in history and not even a foreclosure
moratorium. This created a gross inequity among taxpayers and further
eliminated thousands of entrepreneurs. Further, TARP never provided the
promised, ``shovel-ready'' jobs for small businesses to recover.
Pursuant to IRS collection and assessment limits, it is precisely now
that all, or most of those 2008 and 2009 filed tax delinquencies would
presumably appear on the commissioner's delinquency reports. Likely
making up a significant amount of the growing delinquency that Mr.
Rettig referenced in the hearing.
Sadly, I did not hear mention or read any subsequent comments from any
committee members inquiring about the cause and effect of the largest
financial crisis recession in U.S. history contributing to the overall
delinquency.
As a committee, you now have an opportunity to repair some of the short
falls from the prior handling of this devastating financial crisis. A
crisis far greater damaging than COVID with far less relief. Please
consider reminding Commissioner Rettig of the scenarios outlined herein
and request that he forego collection of these years before releasing
aggressive collection agents to further attack financial crisis victims
or target small business owner.
The committee has an opportunity to extend some small relief to those
taxpayers that were devastated by this crisis a decade prior.
Out of fear of retaliation and future, on-going targeting from the
agency, I would request that the committee please accept this anonymous
writing as a synopsis and allow serious consideration for all taxpayers
that find themselves in a similar situation.
U.S. Citizen
Taxpayer
Small Business owner
Financial Crisis Victim
[all]