    [Senate Hearing 117-459]
    [From the U.S. Government Publishing Office]

                                                           S. Hrg. 117-459

                       CLOSING THE TAX GAP: LOST REVENUE
                           FROM NONCOMPLIANCE AND THE
                          ROLE OF OFFSHORE TAX EVASION

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

                                    HEARING

                                   BEFORE THE

                   SUBCOMMITTEE ON TAXATION AND IRS OVERSIGHT

                                     OF THE

                              COMMITTEE ON FINANCE
                              UNITED STATES SENATE

                        ONE HUNDRED SEVENTEENTH CONGRESS

                                 FIRST SESSION

                                   __________

                                  MAY 11, 2021

                                   __________

    [GRAPHIC NOT AVAILABLE IN TIFF FORMAT]

                Printed for the use of the Committee on Finance

                                   __________

                        U.S. GOVERNMENT PUBLISHING OFFICE
    49-445                     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

                                     ______

                   Subcommittee on Taxation and IRS Oversight

                   SHELDON WHITEHOUSE, Rhode Island, Chairman

    DEBBIE STABENOW, Michigan            JOHN THUNE, South Dakota
    ROBERT MENENDEZ, New Jersey          CHUCK GRASSLEY, Iowa
    BENJAMIN L. CARDIN, Maryland         JOHN CORNYN, Texas
    SHERROD BROWN, Ohio                  RICHARD BURR, North Carolina
    CATHERINE CORTEZ MASTO, Nevada       ROB PORTMAN, Ohio
    ELIZABETH WARREN, Massachusetts      PATRICK J. TOOMEY, Pennsylvania
                                         BEN SASSE, Nebraska

                                      (ii)

                                C O N T E N T S

                                  ----------

                               OPENING STATEMENTS

                                                                       Page
    Whitehouse, Hon. Sheldon, a U.S. Senator from Rhode Island,
      chairman, Subcommittee on Taxation and IRS Oversight, Committee
      on Finance.....................................................     1
    Thune, Hon. John, a U.S. Senator from South Dakota...............    10

                                   WITNESSES

    George, Hon. J. Russell, Treasury Inspector General for Tax
      Administration, Department of the Treasury, Washington, DC.....     3
    O'Donnell, Douglas, Deputy Commissioner, Services and
      Enforcement, Internal Revenue Service, Department of the
      Treasury, Washington, DC.......................................     5
    Rossotti, Hon. Charles O., former Commissioner (1997-2002),
      Internal Revenue Service, Washington, DC.......................     7
    Olson, Nina E., executive director, Center for Taxpayer Rights,
      Washington, DC.................................................     9
    Johnson, Barry, Acting Chief, Research and Analytics, Internal
      Revenue Service, Department of the Treasury, Washington, DC....    12

                   ALPHABETICAL LISTING AND APPENDIX MATERIAL

    George, Hon. J. Russell:
        Testimony....................................................     3
        Prepared statement...........................................    35
        Responses to questions from subcommittee members.............    43
    Johnson, Barry:
        Testimony....................................................    12
        Prepared statement...........................................    45
        Responses to questions from subcommittee members.............    53
    O'Donnell, Douglas:
        Testimony....................................................     5
        Prepared statement...........................................    45
        Responses to questions from subcommittee members.............    54
    Olson, Nina E.:
        Testimony....................................................     9
        Prepared statement...........................................    56
        Responses to questions from subcommittee members.............    72
    Rossotti, Hon. Charles O.:
        Testimony....................................................     7
        Prepared statement...........................................    75
        Responses to questions from subcommittee members.............   111
    Thune, Hon. John:
        Opening statement............................................    10
        Prepared statement...........................................   111
    Whitehouse, Hon. Sheldon:
        Opening statement............................................     1
        Prepared statement...........................................   113

                                 Communications

    American Bankers Association et al...............................   115
    American Citizens Abroad, Inc....................................   117
    Association of Americans Resident Overseas.......................   120
    Barrow, Cody Gentry..............................................   122
    Buzatu, Anne-Marie Yarbrough.....................................   124
    Center for Fiscal Equity.........................................   129
    Coates, James Webster............................................   132
    Democrats Abroad.................................................   135
    Gillie, Darcey...................................................   141
    Hartford, Donna..................................................   144
    Independent Community Bankers of America.........................   145
    Lee, Nicholas Matthew............................................   147
    Regent, James....................................................   151
    Riddle, Cecile...................................................   154
    Rubenstein, Rachael..............................................   154
    Stop Extraterritorial American Taxation (SEAT)...................   156

                       CLOSING THE TAX GAP: LOST REVENUE
                           FROM NONCOMPLIANCE AND THE
                          ROLE OF OFFSHORE TAX EVASION

                                  ----------

                             TUESDAY, MAY 11, 2021

                                   U.S. Senate,
            Subcommittee on Taxation and IRS Oversight,
                                          Committee on Finance,
                                                        Washington, DC.
        The hearing was convened, pursuant to notice, at 2:34 p.m.,
    via Webex, in Room SD-215, Dirksen Senate Office Building, Hon.
    Sheldon Whitehouse (chairman of the subcommittee) presiding.
        Present: Senators Wyden, Carper, Brown, Cortez Masto,
    Warren, Grassley, Portman, and Daines.
        Also present: Democratic staff: Michael Evans, Deputy Staff
    Director and Chief Counsel; and Dan Smith RuBoss, Senior
    Economic Advisor to Senator Whitehouse. Republican staff: James
    Williams, Legal Assistant to Senator Thune.

     OPENING STATEMENT OF HON. SHELDON WHITEHOUSE, A U.S. SENATOR
     FROM RHODE ISLAND, CHAIRMAN, SUBCOMMITTEE ON TAXATION AND IRS
                    OVERSIGHT, COMMITTEE ON FINANCE

        Senator Whitehouse. Let me call this hearing to order. My
    ranking member, Senator Thune, is not here. A vote has just
    gone off in the Senate chamber. I was one of the first to vote,
    and so I am here now, so I can go through some of the
    rudimentaries of the hearing and welcome our witnesses.
        Barry Johnson is the Acting Chief of Research and Analytics
    at the Internal Revenue Service. Douglas O'Donnell is the
    Deputy Commissioner for Services and Enforcement at the
    Internal Revenue Service. J. Russell George is the Treasury
    Inspector General for Tax Administration. Nina Olson is the
    executive director of the Center for Taxpayer Rights. And
    Charles O. Rossotti is a former Commissioner of Internal
    Revenue, currently a senior advisor at the Carlisle Group.
        I am delighted that you are all here, and I guess I will
    begin with my opening statement, and then that will give the
    other members a chance to come here.
        This is, I think, an important and timely hearing on the
    tax gap and the related role of offshore tax evasion. My
    Republican colleagues and I may disagree on what makes a fair
    tax code, but we very much agree that everyone should pay what
    they owe. That principle is what today's hearing is about.
        The IRS conservatively estimates the tax gap, the
    difference between taxes that are owed and taxes that are
    collected, to be $441 billion per year. Commissioner Rettig
    recently testified that the tax gap may have grown as high as
    $1 trillion in recent years--trillion with a ``t.''
        One reason for the gulf between the official estimate and
    Commissioner Rettig's is the bad job the official estimate does
    in incorporating the so-called ``international tax gap'' when
    it is hidden by wealthy individuals and large corporations
    overseas.
        Tracking this offshored money is difficult, but we know
    there is lots of it. Research suggests the Treasury may lose
    anywhere from $40 billion to $123 billion every year from
    offshore tax evasion. Of course, typical American taxpayers do
    not have the option to hide money abroad, so the wealthy who
    cheat on their taxes through offshoring also worsen income and
    wealth inequality.
        One study estimates the highest earning 1 percent of
    taxpayers hide 20 percent of their income and account for 36
    percent of unpaid taxes: 1 percent of the taxpayers, 36 percent
    of the unpaid taxes.
        Most Americans pay what they owe, meaning that they cover
    for the tax cheats through higher taxes, fewer public services,
    and a larger Federal debt. For large multinational corporations
    that stretch loopholes beyond recognition to book income to
    offshore tax havens, the line between legal avoidance and
    evasion may be paper-thin and may turn on whether an outgunned
    IRS can defend against the armies of lawyers hell-bent on
    burying the IRS in litigation.
        An outsider looking at these numbers may ask how the most
    wealthy, powerful country in the world could let this happen.
    The answer is, we made it happen. Over a decade, Republicans
    cut the IRS budget by 20 percent, with enforcement hit
    especially hard.
        There are 30 percent fewer enforcement staffers than a
    decade ago, and the number of highly trained revenue agents who
    tackle complex audits of the wealthy and large corporations is
    down nearly 40 percent. The results? Millionaire and
    billionaire audits dropped over 72 percent. And audits of the
    largest corporations, those with $20 billion in assets,
    declined by half. As former Commissioner Koskinen once said,
    cutting the IRS budget gives a tax cut to tax cheats.
        As the IRS budget fell, audit rates for the rich and poor
    in America converged. The worker receiving the Earned Income
    Tax Credit is nearly as likely to be audited as a seven-figure
    earner. What do we do?
        Well, we should start with the multi-pronged approach of
    the Biden administration. First, ensure that the IRS has the
    resources to collect what taxpayers owe. It needs a larger
    staff with the knowledge and experience to untangle the
    networks of shell companies the ultra-rich and large
    corporations can use to hide their income, often in offshore
    tax havens.
        I would like to explore mandatory funding for the IRS so
    the agency has sustained and predictable support.
        Two, require more reporting of the type of income the
    super-rich tend to hide. Regular taxpayers cannot hide their
    wages from the IRS. They are reported by their employer. The
    super-rich should not be able to hide them either.
        Three, support a technological reboot at the IRS. The
    agency still relies on some systems from the 1960s. Modern
    tools and technology could help root out offshore and other
    types of tax evasion. The investment will pay off. Treasury
    estimates that $80 billion spent to revitalize the IRS will
    yield $700 billion in revenues, funding that we could invest in
    working families. I will note that budget scoring rules block
    Congress from using that high return investment as a pay-for.
    That needs to change.
        Ramped-up enforcement is essential, but it is no substitute
    for addressing the fundamental injustice in the tax code,
    particularly the tax breaks for the ultra-rich and large
    corporations. For example, my No Tax Breaks for Outsourcing Act
    would end the incentive for multinational corporations to shift
    profits offshore.
        [The prepared statement of Senator Whitehouse appears in
    the appendix.]
        Senator Whitehouse. I am pleased to be joined by such a
    distinguished panel of witnesses to discuss the size and scope
    of the tax gap, the role of offshore tax evasion in that gap,
    and what we should best do to combat it.
        And I don't know--Senator Grassley, are you here in place
    of Senator Thune, as acting ranker, and wish to make a
    statement, or should we go ahead and let Senator Thune make his
    statement when he arrives?
        Senator Grassley. Please go ahead.
        Senator Whitehouse. Okay; we will do that.
        The first witness we will call is Barry Johnson. Mr.
    Johnson, thank you very much for your participation in this
    hearing. Please proceed with your testimony.
        [Pause.]
        Senator Whitehouse. We have to hold on a second while the
    technical people connect things.
        [Pause.]
        Senator Whitehouse. We have been hearing about technical
    difficulties and impediments with the IRS doing its job. We are
    having technical difficulties with our first witness to sign
    in.
        So why don't we go to a live witness, and we will let the
    technical stuff catch up with us.
        Let me start with Mr. George, please. You are good.

    STATEMENT OF HON. J. RUSSELL GEORGE, TREASURY INSPECTOR GENERAL
    FOR TAX ADMINISTRATION, DEPARTMENT OF THE TREASURY, WASHINGTON,
                                   DC

        Mr. George. Okay; thank you. Chairman Whitehouse, Senator
    Grassley, and members of the subcommittee (once they arrive),
    thank you for the opportunity to provide information on the
    IRS's efforts to address the tax gap.
        The tax gap is a longstanding issue that has been a
    substantial challenge for the IRS. Finding effective solutions
    to this challenge would yield substantial additional tax
    revenue. As you noted, Mr. Chairman, the tax gap estimates
    currently in use are outdated, and the tax gap is likely much
    higher at this point in time.
        IRS studies have shown that audits have the largest impact
    on tax compliance. The IRS lost 15,000 enforcement employees
    between 2010 and 2018, which led to a significant reduction in
    the number of audits, also referred to as examinations.
        Over that period, the number of examinations dropped by
    about 40 percent, even as the number of returns filed grew by 5
    percent. Since 2010, the IRS has conducted fewer examinations.
    Between 2010 and 2018, the share of individual income tax
    returns examined fell by 46 percent, and the share of corporate
    income tax returns examined fell by 37 percent.
        The percentage decline in the examination rate was larger
    for higher-income returns. For returns with more than $1
    million in total income, the examination rate dropped from 8
    percent in 2010 to 3 percent in 2018, a 63-percent decline.
        In March 2021, TIGTA reported that the IRS could more
    effectively prioritize high-income tax payers who owed
    delinquent taxes but do not pay. In addition, we have also
    raised concerns that in 2015 the Small Business/Self-Employed
    Division of the IRS terminated its high-income, high-wealth
    strategy, which was designed to address high-income taxpayers
    who had not reported all of their earned income.
        Tax gap studies have found that self-employed individuals
    underreported their net income by 64 percent, which is up from
    the 2001 estimate of 57 percent. With the growth of online
    platform companies, it is likely that income and self-
    employment tax under-
    reporting will continue to be a growing problem.
        TIGTA issued an audit report studying the gig economy's
    impact on tax compliance and the lack of an IRS strategy to
    address this challenge. We reported that the IRS is not working
    cases with billions of dollars of potential tax discrepancies
    involving taxpayers who earned income in the gig economy. Many
    cases were not selected to be worked by the IRS due to resource
    constraints and the large volume of discrepancies that were
    identified.
        The use of virtual currency, also called cryptocurrency, is
    emerging as an alternative asset to U.S. and other currencies.
    However, we found that it is difficult for the IRS to identify
    taxpayers with virtual currency transactions because of the
    lack of third-party information reporting.
        Nonpayment of taxes owed is a smaller proportion of the tax
    gap, estimated to be $39 billion annually. Reductions in
    resources have also impacted payment compliance. From Fiscal
    Year 2015 to Fiscal Year 2019, field revenue officers have
    decreased by approximately 14 percent from 2,612 to 2,239.
        Improving international tax compliance remains a challenge
    for the IRS. The IRS has not developed a reliable estimate of
    the international tax gap. Non-IRS estimates of the
    international tax gap vary widely. Previous estimates range
    from $40 billion to $123 billion annually.
        Congress gave the IRS important tools to help stem
    international tax evasion with the passage of the Foreign
    Account Tax Compliance Act. It was reported that, after 8 years
    of spending at least $380 million on IRS systems and efforts to
    establish international agreements across the globe, the IRS
    has not taken the compliance actions needed to meaningfully
    enforce it.
        In conclusion, the IRS can more effectively reduce the tax
    gap by developing compliance strategies for the changing
    domestic and global economies, and using its resources on
    information reporting more effectively.
        Mr. Chairman, that concludes my statement. Thank you for
    the opportunity to share my views.
        [The prepared statement of Mr. George appears in the
    appendix.]
        Senator Whitehouse. Thank you very much, Mr. George. I
    appreciate it. And on behalf of myself and also Senator
    Grassley, who is a long-time friend of the Inspector General
    community, and a great one for whistleblowing and transparency,
    let me thank you for your service to our country as Inspector
    General.
        Mr. Johnson is still experiencing some technical
    difficulties, so we will turn now to Doug O'Donnell, the Deputy
    Commissioner for Services and Enforcement at the Internal
    Revenue Service, to make his statement.
        Mr. O'Donnell?

     STATEMENT OF DOUGLAS O'DONNELL, DEPUTY COMMISSIONER, SERVICES
     AND ENFORCEMENT, INTERNAL REVENUE SERVICE, DEPARTMENT OF THE
                        TREASURY, WASHINGTON, DC

        Mr. O'Donnell. Chairman Whitehouse, Ranking Member Thune,
    and members of the subcommittee, my name is Douglas O'Donnell.
    Earlier this month, I became the Deputy Commissioner for
    Services and Enforcement at the IRS. Before stepping into that
    role, I spent several years as a Commissioner of our Large
    Business and International Division.
        I appreciate the opportunity to testify on the tax gap. My
    colleague, Barry Johnson, will talk about the technical
    components of the tax gap and how we measure it. I will discuss
    what the IRS is doing to address the tax gap, to increase
    compliance, and to ensure the integrity of our tax system.
        Addressing the tax gap requires both service and
    enforcement. We need to help people who want to comply with the
    tax laws, and track down those who willfully refuse to fulfill
    their obligations or commit tax fraud.
        The entire IRS workforce is focused on doing the very best
    we can in both of these areas with the resources that we have.
    This includes employees who develop clear and understandable
    forms, instructions, and publications; answer taxpayer
    questions; process e-filed and paper returns; and audit returns
    and investigate tax fraud.
        Every one of us at the IRS has an important role to play in
    providing service to taxpayers and ensuring compliance with the
    tax laws in a fair and impartial manner. But we struggle to
    keep pace with change.
        The size of our economy, the number of taxpayers we serve,
    the complexity of the tax law, and the global nature of
    economic interaction account for much of the challenge we face
    to keep pace. And our ability to deliver on our mission is
    limited by the level of funding that we receive.
        The IRS uses the tax gap to help decide where to deploy our
    limited resources to minimize the burden on compliant
    taxpayers, and to concentrate on reaching taxpayers who avoid
    complying.
        Thanks to the help of artificial intelligence, advanced
    data analytic strategy, and emerging tools, we are able to
    identify areas of noncompliance in ways that were impossible
    just a few years ago. With that said, there is room to further
    modernize these efforts.
        The IRS has requested funding to do that. Likewise, the IRS
    has asked for modernization funding that will allow us to make
    better use of the data we already collect. Yet we cannot devote
    all of our resources to just the deepest pockets of
    noncompliance. It is important that the IRS have a presence in
    every neighborhood, so to speak.
        If the IRS were to stop auditing one segment of the
    population, then noncompliance in that segment would be more at
    risk to increase. That is because tax enforcement has not only
    a direct effect on taxpayers we audit, but also an indirect
    deterrence effect on taxpayers generally.
        To ensure compliance with the tax laws, we are exercising
    our best efforts, with limited numbers of experienced,
    specialized examination personnel, covering enforcement from
    several angles.
        In my previous role leading the Large Business and
    International Division, I was very involved in directing how we
    would address a wide range of noncompliance, both domestically
    and internationally. A good example is our Global High Wealth
    program. This is focused on ensuring tax compliance among the
    wealthiest taxpayers, those with income or assets in the tens
    of millions of dollars.
        Audits under this program look at the complete picture of
    an individual and the entities that they control. At LB&I, we
    worked hard to stretch limited resources to address the two
    issues that consumed significant examiner time: transfer
    pricing and the research and experimentation credit. We could
    improve our risk analysis in both these areas if we had
    enhanced tools, more data scientists, and additional examiners
    with subject matter expertise.
        In the international arena, we have put a great deal of
    time and effort into administering the Foreign Account Tax
    Compliance Act, or FATCA. Congress enacted FATCA to improve our
    offshore compliance efforts by requiring foreign financial
    institutions to report information to the IRS about accounts
    held abroad by U.S. taxpayers.
        While increased tax enforcement is critical to addressing
    the tax gap, making further progress on the tax gap also
    requires policy and legislative changes to reduce tax law
    complexity, to increase information reporting, to improve IRS
    access to development data, and to increase IRS authority in
    certain areas such as regulating paid tax return preparers, as
    the President recently proposed.
        This concludes my statement. I look forward to hearing from
    my co-panelists and responding to your questions. Thank you.
        [The prepared statement of Mr. O'Donnell appears in the
    appendix.]
        Senator Whitehouse. Thank you very much, Deputy
    Commissioner O'Donnell.
        We have been joined by my distinguished ranking member. We
    went ahead with the testimony of Inspector General George. We
    are having technical difficulties that may or may not be
    resolved with Mr. Johnson. Mr. O'Donnell has just concluded his
    testimony. So we are two down and three to go. And if you would
    like to give your opening statement----
        Senator Thune. That is okay, Mr. Chairman. Once you got
    underway with testimony, that is fine.
        Senator Whitehouse. Let me go to Mr. Rossotti, if you don't
    mind. We are still sorting through Mr. Johnson's technical
    difficulties.
        [Pause.]
        Senator Whitehouse. I think you may need to punch your mic
    button.
        Mr. Rossotti. Is that better?
        Senator Whitehouse. Much better.

      STATEMENT OF HON. CHARLES O. ROSSOTTI, FORMER COMMISSIONER
         (1997-2002), INTERNAL REVENUE SERVICE, WASHINGTON, DC

        Mr. Rossotti. Okay. Well, thank you for allowing me to
    testify about the tax gap. We estimate that the taxes that were
    legally owned and not paid were $574 billion in 2019 and will
    accumulate to $7.5 trillion over 10 years.
        This amount is equal to what the lower 90 percent of
    individuals, 135 million taxpayers, paid in income taxes. And
    as you know, Commissioner Rettig recently testified that it
    might be even higher than that.
        We estimate that it is practical to recover $1.4 trillion
    of the tax gap over 10 years, which would still be only 19
    percent of the total. In our estimate, all of the gain would be
    from the top 25 percent of taxpayers, and the majority from the
    top 3 percent.
        Tax compliance is heavily driven by whether a taxpayer's
    income is reported by third parties in a manner that the
    information can be efficiently used by the IRS. Where income is
    reported and it is easily checked in forms like W-2s and 1099s,
    compliance is 95 to 99 percent. And almost all of that tax is
    paid voluntarily without any IRS intervention. But when income
    is not recorded, compliance is as low of 50 percent.
        My plan for shrinking this tax gap is based on an
    integrated three-part program. First, move more of the income
    from low visibility to high visibility by filling the gaps on
    income that is not reported by third parties. Second, upgrade
    IRS technology to make full use of all the information
    available to the IRS, and to increase the efficiency of all IRS
    compliance activities. And third, rebuild IRS's skilled
    workforce, but also provide them technology to resolve cases
    more rapidly and efficiently.
        It is really critical, in our view, to use technology to
    make the entire IRS compliance process more efficient. Because
    simply scaling up what the IRS does today will not produce the
    desired results. As important as audits are, currently all of
    IRS auditing activity only recovers about 2\1/2\ percent of the
    tax gap.
        For example, the IRS today cannot efficiently evaluate
    information on 40 million K-1 returns, on the 1099-K reports
    from payers, or on submissions from foreign financial
    institutions required by FATCA. But modern technology can
    effectively use this information to identify potential
    deficiencies more precisely. Technology will also allow the IRS
    to transform the follow-up process when deficiencies are
    identified, to one that is far more accurate and efficient for
    taxpayers and the IRS than traditional auditing.
        The technology we are suggesting is not futuristic. It is
    widely used today, including on a limited scale in the IRS--for
    example, in screening refunds. But most of the gain in our plan
    would also come from increased voluntary compliance. So it is
    essential to make compliance as easy as possible. The
    technology investments we propose would increase the ease and
    speed of dealing with the IRS and, very importantly, reduce the
    number of unnecessary audits.
        We also recommend that this committee follow its bipartisan
    practice of establishing pertinent taxpayer rights whenever it
    considers legislative authority for the IRS. And our plan
    proposes several new or clarified taxpayer rights.
        Our program would require both authorization and consistent
    long-term funding from Congress. We recommend a funding
    increase of about 6 percent per year above what is required to
    sustain IRS operations. But spreading this increase over 10
    years is what will allow the IRS to make effective use of these
    funds. Over a decade, the investment will produce a revenue
    gain of about 20 times it cost, and will vastly increase the
    quality of service the IRS provides the taxpayers.
        Implementing a program such as this is challenging. But
    based on my 50 years of managing programs in business and
    government, I believe it is achievable and very clearly
    outbalances any risks.
        As Congress did when it passed the IRS Restructuring and
    Reform Act some years ago, both compliance and service goals
    can be clearly established. Progress could be measured year by
    year, and can and should be closely monitored by congressional
    oversight committees.
        I note that our proposals offer long-term investment, and
    in the short term the IRS certainly must focus on the immediate
    priorities of the filing season, economic recovery programs,
    and the new programs such as the Child Credit.
        Finally, I believe that fundamental fairness alone is a
    compelling reason to address this problem, particularly when
    Congress is contemplating raising taxes on people who already
    pay what they owe.
        That concludes my testimony. Thank you, Mr. Chairman.
        [The prepared statement of Mr. Rossotti appears in the
    appendix.]
        Senator Whitehouse. Thank you very much, Commissioner
    Rossotti. I've got to say, I am on the Budget Committee where
    we look at 10-year increments, and your testimony that there is
    a 10-year increment out there of taxes owed but not paid of
    $7.5 trillion is pretty stunning.
        Now let me turn to Ms. Nina Olson, who served for nearly 20
    years as the National Taxpayer Advocate, leading an independent
    organization within the IRS dedicated to assisting taxpayers.
    She is now the executive director of the Center for Taxpayer
    Rights.
        Ms. Olson, welcome. Thank you for being here. Please
    proceed with your statement.

      STATEMENT OF NINA E. OLSON, EXECUTIVE DIRECTOR, CENTER FOR
                    TAXPAYER RIGHTS, WASHINGTON, DC

        Ms. Olson. Thank you, Chairman Whitehouse, Ranking Member
    Thune, and members of the subcommittee. I am pleased to appear
    here today to discuss the Federal tax gap.
        To address the tax gap, the IRS needs transformational
    change. And that change must occur in the context of
    minimalizing undue taxpayer burden and protecting taxpayer
    rights. That change also will require significant investment in
    new technology, leadership, employees, training, and
    procurement skills. It requires a massive redesign of IRS
    systems so that they update quickly and can process information
    and talk to one another in real time.
        All of this is not going to happen overnight, but it must
    occur. If we do not make these investments in the IRS, we will
    not only not address the upper reaches of the tax gap, but we
    will actually risk increasing the tax gap by failing to meet
    the needs of taxpayers who are, in good faith, trying to comply
    with the law.
        There are a few things we should remember as we try to
    narrow the tax gap. First, we will never close it. We will only
    narrow it. Second, the drive to enforce the tax laws cannot
    come at the expense of taxpayer service. Approximately 2
    percent of the $3.6 trillion the IRS collects each year comes
    from direct enforcement actions. The remaining 98 percent comes
    from the indirect effect of a mix of people's fear of the IRS,
    and their desire to be compliant with the tax laws.
        When these taxpayers have problems, they call the IRS,
    because dealing with the IRS has consequences that do not
    accrue to a bad online Amazon or airline transaction. Yet the
    IRS routinely answers less than 50 percent of calls, and this
    year, at times, answered only 2 percent of calls to its main
    1040 number.
        The IRS does not have a 360-degree view of taxpayers'
    accounts because there is no database in which all taxpayer
    information is stored or linked, so assistors cannot provide
    issue resolution to callers. This lack of a full picture of the
    taxpayer's tax life has significant consequences not only for
    taxpayer assistance, but also for audit selection, collection
    prioritization, and protection of taxpayer rights. Taxpayer
    service, which is so important to achieving the level of
    compliance we have today, must be funded to maintain that
    level.
        Third, the tax gap does not equal tax evasion. Framing
    noncompliance as tax evasion not only undermines compliance
    among the currently compliant who begin to feel naive for
    complying, but it creates an environment in which IRS staff can
    feel justified in undermining, if not outright ignoring
    taxpayer rights and protections.
        Tax compliance is a continuum of behavior with many causes,
    including tax law and procedural complexity, and economic
    downturns. We should not treat a taxpayer who has simply made a
    mistake in the same way as the taxpayer who is actively evading
    tax.
        For example, between 2009 and 2018, the IRS offered a
    series of settlement programs for U.S. taxpayers with
    unreported foreign bank accounts and income. Although the IRS
    recovered $11.1 billion from these settlement programs through
    2018, just a little over $1 billion a year for 10 years, the
    data for the 2009 program paints a shocking picture of a
    regressive penalty structure whereby the taxpayers with the
    lowest dollar accounts and the least amount of unreported
    income paid the highest percentage rate of penalty for taxes.
        Fourth, intelligent use of data can improve tax
    administration enormously if it is fit for the purpose intended
    and used in algorithms and other techniques that mimic human
    reasoning--and if it does not displace human decision-making
    and discretion.
        Today, IRS data is mired in the 1980s, with some notable
    exceptions. There is heavy emphasis on data matching and rule-
    based systems that rarely include feedback loops. Many IRS
    systems have high false-positive and abatement rates. The IRS
    also does not use data proactively to alleviate burden and
    prevent harm to taxpayers. For example, the IRS could use its
    taxpayer income data and allowable expense guidelines to
    identify taxpayers who may be at risk of economic hardship and
    protect them from harmful collection actions.
        Finally, proposals to expand information reporting are very
    promising, but they must be accompanied by taxpayer
    protections. Bank account information alone is not prima facie
    evidence of underreporting. Therefore, if Congress authorizes
    financial account reporting, it should prohibit the IRS's use
    of this data in its automated underreporting. Congress should
    also extend the burden or proof protections of section 6201(d)
    to apply to IRS examination and matching activities.
        Thank you very much for the invitation to appear today, and
    I look forward to answering any questions you may have.
        [The prepared statement of Ms. Olson appears in the
    appendix.]
        Senator Whitehouse. Thank you very much, Ms. Olson, and
    thank you for your long service as our National Taxpayer
    Advocate. I appreciate that very much.
        Let me turn now to my distinguished ranking member, Senator
    Thune, for any opening comments he should care to make.

                 OPENING STATEMENT OF HON. JOHN THUNE,
                    A U.S. SENATOR FROM SOUTH DAKOTA

        Senator Thune. Thank you, Chairman Whitehouse. And let me
    begin by saying I am looking forward to working with you on the
    subcommittee.
        The Subcommittee on Taxation and IRS Oversight covers a
    number of important issues, perhaps none more so than the
    responsible stewardship of taxpayer dollars. And I am
    optimistic we will work to find common ground and common
    solutions.
        Today we are here to discuss the tax gap: what it is, what
    its components are, and how to reduce it. The chairman also has
    a particular interest in the role of offshore tax evasion, an
    important issue as well.
        The tax gap is real. Republicans on this committee support
    closing it. The tax gap, the difference between taxes owed and
    paid, has been a stubborn problem for decades. The IRS
    periodically estimates the tax gap, using audits and other data
    it collects. As of September 2019, the IRS estimates the
    average gross tax gap at $441 billion per year for 2011 to
    2013. And after late payments and enforcement, I should say,
    the net tax gap is $381 billion.
        While those numbers are improvements from preceding years,
    the tax gap remains a problem. The IRS Commissioner even
    speculated that the tax gap could be as much as $1 trillion per
    year, a number that far exceeds the official IRS estimate.
        While that guesstimate might conflate the tax gap with tax
    evasion, one thing is certain. No one at any income level
    should believe that they are safe in cheating on their taxes.
    And we should pursue bipartisan measures to reduce the tax gap
    and better enforce our tax laws. But any such effort must
    strike an appropriate balance between taxpayer responsibilities
    and taxpayer rights.
        To address the tax gap, some believe that increased IRS
    resources, tax audits, and intrusion of a taxpayer's personal
    information will automatically yield the golden goose of
    revenue. For example, President Biden recently proposed
    increasing IRS funding to $80 billion over the next 10 years,
    projecting those funds would net $700 billion over the decade.
    Former IRS Commissioner John Koskinen, who served as
    Commissioner under Presidents Obama and Trump, said he thought
    that $80 billion was too much. I agree. Based on official
    estimates about the tax gap and what can reasonably be
    collected, a return of $700 billion is a tall order as well.
        An analysis from the Wharton Business School projected a
    lower payoff by about $220 billion. CBO estimated that
    increasing IRS funds for examinations by $40 billion over 10
    years would increase revenues by $103 billion, resulting in a
    net $63-billion decrease in the deficit.
        That is not to say that better utilized or enhanced
    resources could not help find real money, but let's be straight
    about the return on investment, particularly when those figures
    are portrayed as offsets for new spending proposals.
        Republicans are open to discussions of IRS resources, but
    those discussions should include measures to improve customer
    service, ensure existing resources are allocated optimally, and
    promote smarter and more effective audits. Just as with
    President Trump's budgets, which also included additional IRS
    funding and enforcement resources, any increase to the agency
    should come with commensurate accountability and transparency.
        Memories remain fresh of past IRS use of taxpayer resources
    to disproportionately single out conservative organizations for
    extra scrutiny. Some on the other side of the aisle will say
    the Republicans hollowed out the agency's coffers, but IRS
    budgets have been generally stable for the past 15 years. Any
    budget reductions are compared to the agency's all-time high
    budget of 2010, which spiked under all-Democrat rule.
        In addition to boosting enforcement, the Biden
    administration proposes tackling the tax gap by requiring banks
    to give the IRS new documentation on income from businesses
    such as partnerships and sole proprietorships, as well as
    individuals with business income. Under the proposal, the IRS
    would soon be recovering troves of new data on taxpayers' bank
    accounts. As you might imagine, many Americans are
    understandably concerned with the risk of government overreach.
    More specifically, they are concerned their local banks could
    turn into extensions of tax enforcement on behalf of the IRS.
    While we should look at ways to improve reporting, the IRS
    should better use the information it already receives, like
    partnership income reports it has collected for years.
        Just for everyone to understand, enforcement is only one
    method to reduce the tax gap. It is actually two degrees of
    separation between the tax gap estimate and revenue that can be
    scored from enforcement proposals. CBO budget rules prohibit
    scoring hoped-for but entirely uncertain revenue from
    enforcement.
        Policy-makers need to be reasonable about what is doable on
    the persistent problem of the tax gap and the limits of score-
    keeping rules, particularly for near-term spending proposals.
        Finally, while we should find bipartisan ways to reduce the
    tax gap, it is worth noting that our Nation has a relatively
    high and stable voluntary tax compliance rate. According to the
    most recent IRS data, about 84 percent of taxes are paid
    voluntarily and on time. After enforcement efforts and late
    payments were taken into account, about 86 percent of taxes
    were paid. Tax compliance levels remain substantially unchanged
    since at least the 1980s.
        There is not one solution to solving the tax gap, or one
    type of taxpayer responsible for it. Reducing the tax gap
    requires a comprehensive strategy and effective execution from
    the IRS, and appropriate safeguards and accountability to
    taxpayers.
        We have an excellent panel before us. Thank you so much for
    your testimony. I thank you all for being here, and I look
    forward to having the opportunity to engage with you in some
    questions.
        Mr. Chairman, I yield back. Thank you.
        [The prepared statement of Senator Thune appears in the
    appendix.]
        Senator Whitehouse. Thank you very much, Senator Thune. I
    look forward to working with you on solving this problem. And I
    am told, speaking of solving problems, that we have solved the
    problem of Mr. Johnson's connection. Okay, we are good to go.
        Let me ask our last witness--our first witness, now our
    last witness, Barry Johnson, the Acting Chief of Research and
    Analytics for the IRS--to make his statement.

        STATEMENT OF BARRY JOHNSON, ACTING CHIEF, RESEARCH AND
        ANALYTICS, INTERNAL REVENUE SERVICE, DEPARTMENT OF THE
                        TREASURY, WASHINGTON, DC

        Mr. Johnson. Good afternoon, Chairman Whitehouse, Ranking
    Member Thune, and members of the subcommittee. Can you hear me?
        Senator Whitehouse. Yes.
        Mr. Johnson. Super. I apologize for the technical problem.
    My name is Barry Johnson, and I am the IRS's Acting Chief
    Research and Analytics Officer. I appreciate the opportunity to
    testify today to discuss my office's work on the tax gap.
        I direct the Office of Research, Applied Analytics, and
    Statistics, or RAAS, within the IRS. We support effective and
    efficient tax administration by providing strategic research,
    analytics, statistics, and insight to the IRS business units to
    inform their decision-
    making and increase innovation across the agency.
        One of the functions of the IRS is to oversee data
    collection and methodology used to measure the tax gap. As you
    have heard already, the most recent IRS study of the tax gap
    was released in 2019. It covered tax years 2011 through 2013
    and included methodological improvements that resulted in
    updates to earlier estimates.
        The study estimated that the average annual gross tax gap
    for that period was $441 billion, and that the voluntary
    compliance rate was 83.6 percent. We are in the process of
    preparing a new study on the tax gap covering tax years 2014 to
    2016, which will also include projections up to tax year 2019,
    the last year for which we have data.
        We expect to release this report early next year. The gross
    tax gap estimate of $441 billion does not account for the
    revenue brought in through enforcement activities such as
    audits and document matching, as well as late payments.
        After factoring in these efforts, the average net tax gap
    for 2013 is estimated at $381 billion. When looked at by mode
    of noncompliance, the tax gap can be divided into three
    components: nonfiling or not filing required returns on time;
    underreporting, or not reporting one's full tax liability when
    a return is filed on time; and under-payment, or not paying by
    the due date the full amount of tax reported on a timely filed
    return.
        By far the largest component of the tax gap is
    underreporting, representing $352 billion of the $441-billion
    total. Individual underreporting comprises $245 billion, while
    employment tax represents $60 billion; corporate taxes, $37
    billion; and excise taxes, $1 billion.
        The report confirms an important point about the tax gap.
    The compliance rate is very high for income that is subject to
    third-party information reporting, and higher still when you
    have withholding. The net misreporting percentage was just 1
    percent for amounts subject to substantial information
    reporting and withholding, and it was 5 percent for amounts
    subject to information reporting without withholding.
        The net misreporting percentage jumped to 65 percent for
    income not subject to any information reporting or withholding.
        While the IRS's tax gap methodology has been deemed the
    gold standard by tax administrators around the world, we
    recognize that the lag between the focus years and the release
    of the estimate reduces the utility for some purposes.
        We are developing improved methodology we believe will
    produce more timely estimates. Primary research using this
    methodology that goes from the 2011 to 2013 estimates suggests
    that the gross tax gap for 2019 will be approximately $600
    billion.
        We also know that our current methodology primarily
    captures known factors that contribute to the tax gap based on
    actual examinations, but may not include emerging issues,
    issues not disclosed during examinations, certain international
    issues, and issues that are concentrated in a relatively small
    portion of the highest-income population.
        Recently, researchers explored two such factors used by the
    very wealthy: offshore accounts and pass-through business
    entities. Using the findings from this paper, we estimate that
    underreporting from these sources would add about $33 billion
    to our 2011 to 2013 tax gap estimates, or about $50 million in
    tax year 2019.
        My written testimony notes several ways the IRS is using
    data and analytics to improve IRS processes. To ensure that we
    direct our scarce resources to the most important
    opportunities, Doug O'Donnell, Deputy Commissioner for Services
    and Enforcement, and I co-chair our data analytics governance
    board, which created a small innovation lab that brings
    together subject matter experts and data scientists to develop
    solutions to the highest priority cross-cutting challenges.
        To date, we have created new tools, techniques, and
    outreach strategies to help reduce the tax gap and increase
    voluntary compliance. For example, working with the Taxpayer
    Advocate Service, we recently developed new online educational
    materials on employment taxes, and we are testing a soft notice
    intended to nudge businesses to send in a payment when they
    appear at risk of becoming noncompliant.
        Despite limited resources, the IRS is demonstrating our
    ability to better use data and analytics to modernize processes
    and reduce the tax gap. Additional resources to scale up these
    efforts would enable our hardworking, dedicated staff to make
    even more progress.
        Chairman Whitehouse, Ranking Member Thune, members of the
    subcommittee, this concludes my statement, and I would be happy
    to answer your questions.
        [The prepared statement of Mr. Johnson appears in the
    appendix.]
        Senator Whitehouse. Thank you so much, Mr. Johnson, and my
    apologies for the technical difficulties.
        Let me ask you--even the conservative IRS estimate of the
    $441-billion annual tax gap is more than honest taxpayers ought
    to tolerate. And Commissioner Rettig has testified that it may
    be as high as $1 trillion.
        How do you think the international tax gap fits into that
    discrepancy between $441 billion and $1 trillion?
        Mr. Johnson. We do not have--the tax gap estimates include
    some international activity, but not all. So any estimates that
    we have been talking about this afternoon--we measure
    international activity by domestic tax return filers in the
    general estimates.
        We do not include activities from taxpayer investors
    abroad, and businesses--foreign businesses--in the tax gap
    estimate, mainly because of the difficulty of trying to collect
    data using our standard classical methodology for those
    estimates.
        We do hope that, with the new methodology I mentioned, that
    we will be able to address that in the future. I think that the
    research I have cited gives some insights into the magnitude of
    money that is overseas.
        We have done some preliminary analysis of the FATCA
    reporting for 2017, and we find that there are $3.7 trillion in
    assets that are abroad. And 56 percent of those, or $2 trillion
    of that, is located in what the OECD would consider to be tax
    haven countries. And we think that the tax gap attributable to
    international activities, particularly overseas accounts, could
    be quite large.
        Senator Whitehouse. Is Inspector General George correct
    that the IRS--I am quoting him here--``has not developed a
    reliable estimate of the international tax gap''?
        Mr. Johnson. We have not produced a separate estimate of
    the tax gap, that's true. And it is partly because it is
    difficult to define what is really meant by----
        Senator Whitehouse. I see that it is not easy, but I think
    it is important to nail down the starting place that we are at
    right now.
        Mr. Johnson, outside research has suggested that U.S.
    citizens hold as much as a trillion dollars in offshore tax
    havens. Do you think that that is a reasonable estimate, or
    could the number be larger than that?
        Mr. Johnson. Based on our estimate using the 2017 FATCA
    reporting, it looks like that number would really be about $2
    trillion. So twice that.
        Senator Whitehouse. Okay; well, thank you.
        A question for Commissioner Rossotti. You described gaps in
    income not reported that need to be filled. Your testimony
    describes the importance of filling gaps in income that is not
    reported. Are there some fairly simple ways that we could help
    the IRS fill those gaps?
        Mr. Rossotti. Well, we have proposed a method to do that,
    which would be an additional 1099 report on money in and money
    out of certain financial accounts, which we think would be
    covering basically the--and we also suggested that be limited
    to certain taxpayers, meaning the upper-income taxpayers and
    businesses. We believe, together with the other information the
    IRS has, and with the new technology, that would go a long way
    to closing the gap.
        I do point out that, even though we estimated our total
    revenue gain higher than others, at one point $4 trillion, that
    is only 19 percent of the total over the 10 years. And so my
    feeling is that with the information reporting, the technology,
    and the resources, that is not an unreasonable goal over a 10-
    year period.
        Senator Whitehouse. And will you help us define whatever we
    may need to do legislatively, or by way of oversight, to make
    sure we close that gap?
        Mr. Rossotti. Mr. Chairman, I would be delighted to. I have
    submitted for the record a rather lengthy document that
    describes some of our proposals. But those are just a starting
    point. I mean, we are just private citizens here, but we are
    trying to help as best we can.
        Senator Whitehouse. So one thing I will note as I close out
    my questioning: we have heard testimony today that 36 percent
    of missing tax revenues of the tax gap, 36 percent of that
    comes from 1 percent of the taxpayers. And it comes from the 1
    percent of the taxpayers at the top, the high-income 1 percent.
        And yet--and yet, the county with the highest audit rate in
    the United States is a poor, mostly black county in
    Mississippi, where over half of the taxpayers claimed the
    Earned Income Tax Credit, and median annual household income is
    $26,000.
        I will now turn to Senator Thune. But before I do, let me
    read off the list that we have right now of Senators. We have
    Senator Thune here. We have Senator Brown, who would be next,
    on the web. We have then Senator Grassley, then Senator Warren,
    then Senators Portman, Daines, Stabenow, Cortez Masto, and
    Carper.
        Senator Thune?
        Senator Thune. Thank you, Mr. Chairman. And I would be
    interested in the IRS's answer to your observation about the
    area, the lower-income area, that gets the greatest attention
    from the auditors. I think that would be good for them to
    answer.
        Ms. Olson, your written testimony clarifies important
    distinctions about how the tax gap does not equal tax evasion,
    and how conflating the phrases can lead to wrong impressions,
    and possibly incorrect estimates about the tax gap.
        Could you tell us more about the distinction between the
    tax gap and tax evasion, and why it is so important to be clear
    with the terminology?
        Ms. Olson. I think that there are many causes for the tax
    gap, which can go from tax law complexity to even procedural
    complexity, people not understanding what the IRS is requiring
    of them in terms of submitting documentation. It can go to pure
    evasion, that asocial form. And it can even be a protest
    against how money is being used.
        There are any number of reasons. And if you treat every
    single taxpayer the same way, you really risk converting
    compliant taxpayers into noncompliant taxpayers because they
    feel that they have been treated badly, poorly.
        Senator Thune. According to the latest official IRS
    estimates--and this was alluded to in our panel's testimony--
    the gross tax gap is $441 billion, and you said that. That is
    before the late payments and enforcement. And after payments
    and enforcement, the net tax gap is $381 billion.
        And again, pointing out earlier this year the IRS
    Commissioner did speculate at a Finance Committee hearing that
    the tax gap could approach or exceed $1 trillion, a figure that
    many have taken as a factual data point. For example, on the
    day of the hearing, The New York Times ran a headline stating
    ``Tax Cheats Cost the U.S. $1 Trillion Per Year, IRS Chief
    Says.''
        Even with the rise of virtual currencies and other changes
    in the economy, these numbers obviously do not square. Mr.
    Johnson, could you clarify the official IRS estimate of the tax
    gap?
        Mr. Johnson. Yes, sir. The official tax gap estimate is
    $441 billion, the proposed tax gap. That relates to tax years
    2011 to 2013. I think the IRS Commissioner was updating that to
    the present, and I testified earlier that if we do that with
    just the gross tax gap estimate we have discussed, we get to a
    tax gap that is $600 billion.
        If we add in the little bit extra that was identified as
    undisclosed, or uncovered in the current estimates of $50
    billion, then we are up to $650 billion. Factoring in other
    issues related to the changes, the structural changes in our
    economy that have taken place since 2013, the incredible rise
    of cryptocurrency, the growth of the platform economy, tax
    schemes like syndicated conservation easements, the micro-
    captive insurance, I think we would be looking at adding a
    significant additional amount to the potential tax gap.
        Also, we have to keep in mind that, over the last 10 years,
    IRS audits have fallen, and we know that one of the benefits of
    IRS audits is that there are direct consequences--we collect
    more money--but there are also indirect consequences. Others
    perceive that their risks of being audited are higher, and that
    might cause them to disclose more information when they are
    reporting their income and their taxes.
        The fact that IRS audits have fallen--and that has been
    very well publicized--due to the budget cuts, tends to also be
    having an impact on the deterrence effect.
        So I think, when we add all these things together and think
    about what the tax gap might be today, I do not think that it
    is unreasonable to speculate it could be as high as the
    Commissioner's estimate. And that is even before we think about
    illegal income.
        Senator Thune. And when you talked about the breakdown of
    the $381 billion, I think you said that $245 billion of that is
    on the individual side? Did I get that right?
        Mr. Johnson. That is correct.
        Senator Thune. Okay, so $245 billion. And most of this, you
    suggest, is underreporting. Give me some examples of that. I
    understood what the chairman was saying about some of this
    being offshore accounts that people are not reporting, wealthy
    folks. Do you have the components or how you compose the $245
    billion on the individual side?
        Mr. Johnson. Sure. I believe I provided a copy of the tax
    gap map in the written testimony. We estimate that business
    income makes up $110 billion of that; non-business income, $57
    billion of that; credits that are misreported, $42 billion;
    income offsets, $20 billion; filing status misreporting, $5
    billion; and other taxes, about $1 billion.
        Senator Thune. Very quickly, Ms. Olson, as a former IRS
    watchdog, what do you think about the significantly higher
    guesstimate and its methodology?
        Ms. Olson. I am very disturbed about guesstimates about the
    tax gap. I think that sends a message to IRS employees that
    there are lots of people out there cheating, and so whomever
    they see, they may view as that. I think that there is a need
    to do really responsible work. It sounds like the IRS is trying
    to do that with offshore, but I think we should wait to hear
    what the actual rigorous methods are.
        The article by the NBER has not been peer-reviewed yet, and
    so I think all of these things need to be taken very carefully.
        Senator Thune. Thank you, Mr. Chairman.
        Senator Whitehouse. Thank you very much, Senator Thune.
        We will now turn to Senator Brown. And after Senator Brown,
    if Senator Grassley is not here, we will turn to Senator
    Warren.
        Senator Brown. Thank you, Chairman Whitehouse and Senator
    Thune, ranking member; thank you for this hearing.
        The 2017 tax law, as we know, gave a huge windfall to
    owners of so-called pass-through businesses. Contrary to what
    our Republican colleagues say, these are mostly not small
    businesses. They are more likely to be hedge funds, real estate
    interests, and companies like the Trump organization.
        The 2017 tax law gave these wealthy taxpayers a huge tax
    cut. To make matters worse, the IRS has not funded its staff to
    effectively audit them either.
        So, Commissioner Rossotti, in your proposal--explain to us,
    if you would, how it will help the IRS more effectively target
    pass-through businesses, the entities that largely drive the
    tax gap?
        Mr. Rossotti. Yes, Senator Brown. So I think one of the
    observations that underlies our proposal is that over the last,
    even I would say 40 years, the fraction of business income that
    is earned in pass-throughs, which was relatively limited, very
    limited in fact in past years, has become as large as all the
    corporate income combined.
        So it is a large sector. And you know, honestly, the IRS
    programs for compliance in this sector have not kept up. So
    what we proposed is really three things, the same as other
    areas.
        We want some additional information reporting--really, one
    additional information report; secondly, the technology to make
    use of it. Because right now, even where the IRS has
    information--for example, K-1s report income from partnerships
    to individuals, but the IRS has no technological ability to use
    that. So that is almost $2 trillion of income that is reported
    but is not checked.
        And finally, of course, you need that information to follow
    up when there are deficiencies that are identified. Because
    right now, even though the Congress has given IRS some
    additional authority to use that, the ability of the IRS to use
    that, and the audit rate, are very, very limited. There is
    actually negligible auditing in that sector.
        So those are some of the proposals that we think could help
    to identify underreporting in that sector.
        Senator Brown. Thank you, Commissioner. And I can think of
    no better way to undermine faith in our democracy than to tell
    working Americans that there are really, when it comes to
    paying taxes, two sets of rules: one for people like them who
    pay their taxes, and another for the 1 percent that just about
    everybody on this panel has mentioned who do not pay close to
    their fair share. And if that is not bad enough, we obviously
    said we have a serious infrastructure need that people here
    want to pay for, and pay for with real tax dollars.
        So I have a question to you, Ms. Olson. I want to ask about
    the EITC. Does the EITC comprise--I heard the chairman's
    question about Mississippi--or comment. Does the EITC comprise
    a significant part of the tax gap?
        Ms. Olson. Sir, no. It is about 3.9 percent of the tax gap,
    if you estimate at $441 billion. And if you take the
    Commissioner's estimate of $1 trillion, it would be about 1.7
    percent----
        Senator Brown. Spread out over lots and lots and lots of
    taxpayers' portion of the EITC. Would we see fewer improper
    payments in the EITC returns if the IRS had the authority to
    establish minimum confidence standards for paid tax preparers?
        Ms. Olson. I think that is a significant provision that
    would reduce noncompliance in that area, since so much of the
    returns are procured by paid preparers, and even ghost
    preparers, people who do not sign returns who are actually
    getting paid. And there is where you have the highest error
    rates.
        Senator Brown. Thanks, Ms. Olson.
        Presidents of both parties have proposed it in their
    budget. Congress needs to enact it, with expansions of the EITC
    and the Child Tax Credit. It is critical that eligible filers
    take advantage of these--of all of these credits which support
    them, support workers, support families; and it is a very high
    priority of this Congress.
        Chairman Whitehouse, thank you for allowing me to be a part
    of this hearing today.
        Senator Whitehouse. Thank you very much, Senator Brown. We
    will turn now to Senator Grassley, followed by a shift in order
    of Senator Carper, and then Senator Portman.
        So, Grassley, Carper, Portman.
        Senator Grassley. Ms. Olson, thank you for your long
    service, before I ask my question--for your good work.
        One of the difficulties the IRS has is targeting its
    limited audit resources at bad actors while not unduly
    burdening honest taxpayers; in short, avoiding no-change
    audits.
        The IRS whistleblower program has proven to be an effective
    means of identifying and examining noncompliant taxpayers. As a
    result, the IRS whistleblower program provides significant bang
    for the buck. This also benefits honest taxpayers, since they
    are less subject to hassle from the IRS.
        What are your general thoughts on the whistleblower
    program? Do you agree that a robust whistleblower program must
    be a part of any effort to reduce the tax gap?
        Ms. Olson. I think the whistleblower program is uniquely
    designed in the area of offshore. That is where you will,
    through whistleblowers, get information that you might not be
    able to achieve elsewhere, and obtain elsewhere.
        Senator Grassley. So it is a useful tool?
        Ms. Olson. Yes, absolutely.
        Senator Grassley. Mr. George, I have been a proponent of
    the IRS private debt collection program as one means of closing
    the tax gap. The program has proven able to collect hundreds of
    millions of dollars annually that otherwise would go
    uncollected.
        However, as mentioned in your testimony, one issue that
    injures the program is the old age of accounts assigned to the
    program. To address this issue, the Taxpayer First Act
    shortened the time period for when accounts may be assigned to
    the program after assessment by over 1 year. This shorter
    timeline became effective beginning in 2021.
        Mr. George, can you confirm whether the IRS has implemented
    this updated time frame for assigning accounts to the program?
        Mr. George. We know that they are taking steps now,
    Senator, to implement the changes that are required. And, to
    the extent that they have completed those, I would have to get
    back to you.
        Senator Grassley. Okay; please get back to me.
        Also to you, Mr. George: I have long been concerned about
    the amount of time IRS employees spend on union activity at
    taxpayers' expense. Sensible standards for granting and using
    taxpayer-funded union time were imposed during the Trump
    administration. This resulted in about a 26-percent drop in the
    number of hours Treasury employees spent on union time.
        This equates to the annual workload of about 61 full-time
    employees. If we are serious about closing the tax gap, a top
    priority should be ensuring IRS personnel are used effectively.
    Now the current administration repealed the Trump limitation on
    this activity.
        Mr. George, can you speak to whether Treasury and the IRS
    have reverted to the pre-Trump policy with regard to union
    time?
        Mr. George. That I cannot address, Senator, no. I do not
    have information regarding that. We will look at it, and if
    we----
        Senator Grassley. Can you submit it to me in writing?
        Mr. George. I most definitely will.
        Senator Grassley. And my last question to you, Mr. George,
    and for everybody: I am concerned by a finding in a recent
    report issued by your office titled, quote, ``High-Income
    Taxpayers Who Owe Delinquent Taxes Could Be More Effectively
    Prioritized,'' end of quote.
        According to this report, IRS failed to assign 3,185 high-
    income taxpayer accounts to the private debt collection
    program, despite meeting the program's eligibility requirement.
    This suggests that the IRS is not making full use of the
    private debt collection program.
        So my question: do you have any suggestions on how the IRS
    could improve the process it uses to identify and assign
    eligible accounts to the program?
        Mr. George. Senator, we have reported that the IRS does
    receive very dated tax accounts, but provides those to the
    private debt collection organizations. And the longer, as you
    well know, you wait to provide those tax accounts to these
    private debt collectors, the less likely it is that they are
    going to receive anything from it.
        That said, even though, by general standards, the
    percentage of accounts that are given to private debt
    collectors is below industry standards in terms of the recovery
    rate, they are still, the private debt collectors, receiving
    more money in terms of collecting it from people who owe it
    than the cost that it is charging to the government.
        So giving more quickly accounts for these private debt
    collectors to address, would help address that problem, among
    many other factors that could happen.
        Senator Grassley. Thank you, Mr. George.
        Thank you, Mr. Chairman.
        Senator Whitehouse. Thank you very much, Senator Grassley.
    We will turn now to Senator Carper, followed by Senator Warren.
        Senator Carper?
        [Pause.]
        Senator Whitehouse. Senator Carper just logged off.
        Senator Warren?
        [Pause.]
        Senator Carper. Mr. Chairman?
        Senator Whitehouse. Yes. Proceed, Senator Carper.
        Senator Carper. Thank you so much.
        I want to thank you, and I want to thank Senator Thune for
    convening this important hearing.
        I will never forget, as a Congressman a million years ago,
    every year I hosted a workshop, a budget workshop, with
    Delawareans from all walks of life to come to a town hall
    meeting to spend a couple of hours together trying to figure
    out how to balance the budget.
        At one of those meetings I suggested maybe raising the
    revenues was part of the solution. This one lady sitting in the
    back of the room said, ``I don't mind paying, I just want to
    make sure that others are paying their fair share.'' I will
    never forget that conversation.
        But for years, former IRS Commissioner John Koskinen,
    somebody whom I have enormous respect for--and I know others do
    too--he testified before the Senate Finance Committee about the
    need for increased resources for additional personnel, updated
    technology, year after year after year. Unfortunately, much of
    his testimony fell on deaf ears.
        The IRS budget has shrunk, I think since 2010, by something
    like 20 percent, and the number of revenue agents who
    specialize in evaluating the complex returns of high-income
    individuals and corporations has decreased, I am told, by
    nearly 40 percent.
        Last month, my colleagues will recall, our current
    Commissioner, Chuck Rettig, reiterated the need for additional
    resources for enforcement. But providing additional
    appropriations funding to the IRS may not be enough. It is
    certainly part of what is needed, but an effective enforcement
    structure at the IRS is going to require sustained and longer-
    term funding, and certainly predictability.
        Last week, five former IRS Commissioners, including you,
    Mr. Rossotti, penned an op-ed in, I believe it was The
    Washington Post, in support of President Biden's IRS plan. Mr.
    Rossotti, thanks for joining us here today.
        What components of the President's plan for the IRS do you
    think would be most effective for Congress to adopt as we
    address the tax gap?
        Mr. Rossotti. Yes. I think all five of us Commissioners had
    discussed that editorial before we agreed to sign it, and we
    think that there are three parts to the administration's
    proposal which are, together, what makes for the effectiveness.
        There is a need for some additional information reporting
    to fill some gaps in the types of income that are reported.
        Secondly, the administration's proposal does provide for
    funding on a long-term basis for technology and for rebuilding
    staff. And I think those two latter things are really why it is
    so important to have a sustained effort.
        It is not possible in a case like the IRS to put a one-time
    appropriation. And frankly, you could overdo putting money in
    too quickly and not be able to get it used effectively.
        So I think what is most effective about the
    administration's proposal--which we certainly support--is the
    idea of funding over a 10-year period that would be reasonably
    assured but not overdone in any one year. Our own estimate that
    we have made independently is that about a 6-percent a year
    increase that would cover both technology and staffing would be
    most effective, and could be readily managed.
        Senator Carper. Thank you, Commissioner.
        The second question I have deals with fiscal responsibility
    and IRS enforcement. I would direct this question to Mr.
    Johnson and to General Russell George.
        Part of maintaining fiscal responsibility is making sure
    that we have adequate revenues, as we all know. And this
    includes collecting the taxes that are currently owned under
    the law.
        Commissioner Rettig, who was before us a month or so ago,
    has estimated that for every additional dollar of enforcement
    funds, we could bring in somewhere between $5 and $7 in
    additional revenues. That seems like a pretty good return on
    investment to me. And I would ask Mr. Johnson and Mr. George,
    how would robust investments in the IRS enforcement represent
    an efficient use of taxpayer dollars and raise revenues in a
    way that improves our long-term fiscal outlook?
        Mr. Johnson? Mr. George?
        Mr. Johnson. Thank you. I can comment on how we produce
    those revenue estimates. For the return on investment estimates
    that are produced in my office, in conjunction with the Chief
    Financial Officer's office, we look at the historic revenue
    collected by the enforcement staff over the most recent 10-year
    period, putting more weight on more recent years, because those
    activities obviously reflect current uses.
        And as you noted, the ROI does vary a bit between the
    different types of taxpayer work that we do, but on average it
    is about 4 or 5 to 1. And you know, for my money, I would be
    happy to have any investment that returned 5 to 1 as an average
    return.
        Senator Carper. I think we would all like a piece of that
    action.
        Mr. George?
        Mr. George. Senator, I would give the following example in
    response to your question. The IRS's high-income threshold for
    underreporting is around $200,000. And its threshold for non-
    filing is $100,000. Average revenue agent productivity on
    incomes above $10 million is over $4,500 per hour of the
    revenue agent's time, as compared to a few hundreds of dollars
    per hour in audits for taxpayers with incomes between $200,000
    and $400,000.
        The bottom line is, if you give the money so that the
    expertise can aim towards the group that is in a position
    better to manipulate their taxes so that their responsibility
    to the government, I am not saying intentionally is hidden, but
    that the avoidance versus evasion argument is addressed, the
    IRS could get a better return on investment for all the dollars
    that it expends.
        Senator Carper. Thanks.
        Mr. George, you remind me of my words at commencement
    addresses sometimes, when I am talking to graduating seniors. I
    say, ``Aim high. There's more room up there.'' That would
    probably be germane here as well.
        My thanks to all the witnesses. It is also very nice to see
    you again. Nice to see you all. Thank you all for joining us
    today.
        Senator Whitehouse. Thank you, Senator Carper.
        Next is Senator Warren, then Senator Stabenow.
        Senator Warren. All right. Thanks very much. Thank you.
        I am glad we are focusing on the gap between taxes owed and
    taxes collected. I am introducing a bill with mandatory
    funding, so that the funding lasts year by year by year, so
    that the IRS can boost tax enforcement for wealthy individuals
    and for giant corporations who are some of the biggest tax
    cheats. And I know that President Biden has a similar proposal.
        But funding is not all that the IRS needs to do better
    enforcement. When a teacher sits down to do her taxes, she
    relies on a W-2 that tells her exactly how much she earned in
    wages. Her school sent her this W-2 automatically, and it sent
    a copy to the IRS as well. And this is called third-party
    reporting, and it helps the teacher fill out her tax return
    accurately.
        It also helps the IRS do its job, both by making it easier
    to verify incomes, and by keeping people honest because they
    know the IRS can spot it if they fudge the numbers.
        So, Mr. Rossotti, I want to run through a few examples with
    you, if we can. If you own your own law firm, is there as much
    third-party reporting on how much you made as there is for the
    teacher?
        Mr. Rossotti. What most law firms are organized as is
    partnerships. There is some limited reporting, but it is quite
    limited on partnerships, where of course for wage earners it is
    100-percent reported.
        Senator Warren. Okay. And what about if you own a giant
    beach-front mansion, and you sell it for a lot more money than
    you bought it for? In other words, you made capital gains
    income.
        Is the IRS likely to know exactly how much income you
    received?
        Mr. Rossotti. Well, of course you are required to report it
    as a capital gain, but there is not any third-party reporting
    in that kind of a transaction.
        Senator Warren. So the IRS has no independent verification
    of that automatically?
        Mr. Rossotti. Not unless it does an audit.
        Senator Warren. Okay. And what about if, instead of selling
    your mansion, you decide to post it on Craigslist and rent it
    out? Is the rental income you get likely to be automatically
    reported to the IRS?
        Mr. Rossotti. Same answer. I mean, you are required to
    report it, of course, but there is no third-party reporting on
    that transaction, if you just rent the property yourself.
        Senator Warren. Okay. So here's the thing. The kinds of
    income that the IRS has the least visibility into are the kinds
    of income that are overwhelmingly concentrated among the very
    richest taxpayers.
        So if you're a teacher, or a construction worker, a bank
    teller, nearly all of your income comes from wages, and that
    information is automatically reported to the IRS by your
    employer. But if you are someone say in the top 1 percent, most
    of your income is coming from business and capital income, and
    the IRS is counting on you to follow the honor system when you
    file your taxes.
        So, Mr. Rossotti, as a former Commissioner of the IRS, you
    saw this first-hand. Let me just ask you, do you think the
    honor system is working?
        Mr. Rossotti. Well, it works to a certain extent, because
    there is a great deal of income that is not reported by a third
    party that is still reported by taxpayers. But it is also true,
    I think as Mr. Johnson noted in his report earlier, that the
    reporting level on income that is not third-party reported is
    as low as 50 percent on the kinds of income that you
    identified, for example.
        Senator Warren. Okay, so----
        Mr. Rossotti. So there is a big difference.
        Senator Warren. So I think the conclusion we can draw is
    that strengthening third-party information reporting would
    obviously help people file their taxes more easily and more
    accurately. And frankly, it would make it harder for wealthy
    tax cheats to get away with hiding their income.
        The top 1 percent failed to report, I have heard, more than
    a fifth of their income--you are saying maybe as much as half--
    and more than a third of all unpaid Federal income taxes. That
    cost us an estimated $175 billion in tax revenues last year
        So that is why my legislation takes Mr. Rossotti's advice
    and requires banks and other financial institutions to provide
    the IRS with information on account-holders' balances. It would
    fill in the holes that allow the richest taxpayers to
    underreport their income and skip out on the taxes they owe.
        Strengthening information reporting, as well as providing
    protected and sustained IRS funding, would ensure that we focus
    enforcement on the biggest fish. This is about making our tax
    system fair, and about raising the revenue that we need to
    create opportunity for every kid in America.
        Thank you, Mr. Chairman. I yield back my time.
        Senator Whitehouse. Thank you very much, Senator Warren.
        We will now turn to Senator Stabenow, and then to Senator
    Daines, who is going to be here.
        Senator Stabenow?
        Senator Stabenow. Well, thank you so much, Mr. Chairman.
    This is such an important discussion, and I know that folks in
    Michigan listening to this right now are certainly scratching
    their heads, or may be very mad about what they are hearing in
    terms of the level of scrutiny on their taxes as middle-income
    working people versus someone who is very, very wealthy.
        So let me just start there. As a typical Michigan family
    goes to work, they earn their pay with their taxes withheld;
    they are sent a W-2 every year. The IRS knows exactly how much
    money they make, and how much money they owe.
        But as we are talking about today, when you look at
    households who have more money, more assets, leading to more
    capital gains income and pass-through income, there is
    shockingly less oversight by the IRS.
        And so it is important enough that we are not talking about
    how much, how many taxes the wealthy should pay. We are talking
    about how much they already owe, which I think is really,
    really important.
        And so I know today we are looking at, whether it is
    Commissioner Rettig's estimate of $1 trillion a year in the tax
    gap, or $600 billion or $800 billion, or $2 trillion, any of
    that pretty much adds up to a lot of money. And I think about
    the things that we could do with that, like extending the Child
    Tax Credit to permanently lift children out of poverty, or fix
    our roads and bridges, or critical investments in education and
    small businesses and manufacturing, and on and on and on. I
    think we hopefully would all agree that the wealthy should be
    paying their fair share.
        So, Mr. Johnson, my question first would be, can you talk a
    little bit more about why the top 1 percent account for a
    disproportionate share of the tax gap and are more likely not
    to pay their taxes, for whatever reason, than the bottom 50
    percent of Americans?
        Mr. Johnson. I think the best way to think about this is to
    think about the statistics we talked about earlier. And that is
    that, when we have information reporting and withholding, the
    reporting of that income is 99-percent accurate. When we have
    information reporting without withholding, that information is
    reported with about 95-percent accuracy. But when we have
    income that does not have any information reporting at all,
    that is reported with an accuracy rate of about 45 percent.
        And so I think the answer to your question is that, for
    those taxpayers whose income is primarily made up of income
    that is subject to substantial reporting and withholding, those
    folks are more likely to be compliant.
        But where people who have more of their income coming from
    sources where there is not third-party reporting, that is where
    we see the higher levels of non-reporting. And I think that is
    consistent with what we have been hearing from other speakers.
        Senator Stabenow. Yes; absolutely. It is important for us
    to consider that; that is for sure.
        And, Mr. George, one other thing. As the chairman was
    talking about--and as was depicted in a ProPublica report--the
    highest audit rates are located in predominantly black and
    brown lower-
    income households in rural counties. Yet the number of audited
    tax returns of millionaires has fallen by 72 percent--fallen by
    72 percent; down from 40,965 millionaire audits in 2012 to just
    11,331 in 2020. Similarly, two out of every three of the 755
    largest corporations in the country, those with over $20
    billion in assets, were not audited last year.
        We know that tax evasions using offshore accounts and pass-
    through entities are techniques mostly employed by the top 1
    percent, and the IRS estimates, systemically, tax evasion at
    the very top to the tune of, as we have heard, about $175
    billion annually.
        So, Mr. George, we have the data. We understand what is
    happening. Why is the IRS unable to target these individuals
    who are deliberately evading the taxes that they owe, but
    lower-income individuals with less resources, less wealth, less
    recourse, are subject to audits and costly fees at higher rates
    from errors or unintentional noncompliance?
        Mr. George. Senator, there are a number of factors that
    come into play here. Everything from, of course, a lack of
    resources to where some of the tax examiners are located,
    physically located, who can do more complex tax returns versus
    less complex tax returns.
        As it relates to the very high-income taxpayer, you need
    someone to go in and literally physically look at information
    as it relates to the return; whereas, some very simple
    taxpayers, in terms of their returns and issues relating to
    that, could simply be a correspondence audit, a letter sent to
    them.
        And so, when you look at the actual numbers, a lot of the
    IRS examiners are in areas that have a preponderance of low-
    income taxpayers. It really is interesting--the IRS, you would
    think, would be able in this day and age to do things
    electronically, or in other ways that would not require a
    physical presence, but unfortunately, in many instances, that
    is not the case.
        Senator Stabenow. Well, we certainly could do better,
    right? And what you are describing does not make any sense,
    because--it does not make any sense to anybody listening to
    this. I think even those who would benefit would have trouble
    really being able to explain why this is a good idea. You are
    saying if you make more money and your tax returns are more
    complex, it is more likely you can get out of paying your
    taxes, right, than somebody who has a simple form, works hard,
    has withholding, and is just going to work every day and pay
    their taxes.
        So thank you, Mr. Chairman, for this.
        Senator Whitehouse. We will go to Senator Daines, who is
    here in the room, and then Chairman Wyden will be recognized
    next.
        Senator Daines?
        Senator Daines. Thanks, Chairman Whitehouse. I think it is
    very safe to say that all Republicans and Democrats oppose tax
    evasion and support steps to close the tax gap.
        Congress supported President Trump's budget proposals to
    increase IRS funding, as well as the enforcement resources. It
    incorporated the Congressional Budget Office's recommendations.
        I do believe there is room for further bipartisan
    cooperation to address the tax gap. I do have some concerns
    about President Biden's proposal to increase the IRS budget by
    an unprecedented $80 billion over 10 years. I am even more
    concerned that the administration is using the highly
    questionable estimate of some $700 billion in revenue raised as
    a key offset for its latest $2-trillion infrastructure package.
        I have not seen the modeling that explains exactly how this
    $700 billion net revenue would be raised, and to my knowledge,
    nobody outside the administration has either.
        Ms. Olson, former IRS Commissioner Koskinen recently stated
    that he is not sure if the IRS would be able to use that $80
    billion effectively. Would you agree with that statement?
        Ms. Olson. I think that it will be very hard for the IRS to
    ramp up that quickly. What Commissioner Rossotti has suggested
    is a sustained increase over what they need to just keep the
    lights on and do their basic job. And that set-aside over a
    sustained period of years can bring on the technology and the
    skilled employees with different skills sets to be able to use
    that technology wisely
        And then the last thing is, it needs continued
    congressional oversight to make sure that those dollars are
    applied well. But it needs to be a level increase over a
    sustained period of years, not a ramp-up that will not be able
    to do that well.
        Senator Daines. Thanks for your thoughts. A follow-up on
    that would be that the CBO estimated last year that an
    additional $40 billion in funding for the IRS would result in a
    net revenue collection of $63 billion--$40 billion invested and
    $63 billion collected.
        Could you explain how doubling that funding level to $80
    billion would magically produce an additional $637 billion in
    net revenue?
        Ms. Olson. I don't know that. I am not an economist, and I
    don't know what underlies any of those numbers. If you are
    focusing on the highest income, so you may get a greater return
    on investment there than just the basic level of return of
    investment of four to five; that may be something. But again, I
    cannot answer where those numbers come from.
        Senator Daines. Yes; we are exploring the gap between $40
    billion and $63 billion--$40 billion invested, $63 billion back
    from CBO, and the administration is suggesting $80 billion
    would give us $637 billion. That is a huge, huge disconnect.
        Mr. Johnson, some of my colleagues across the aisle like to
    state that low-income individuals are audited at higher rates
    than high-income individuals. We had Commissioner Rettig before
    the Finance Committee in mid-April. I think he did a pretty
    good job of responding to this charge, but I think it is worth
    highlighting that once again.
        My question, Mr. Johnson, is, are you more likely to get
    audited if you are a low-income taxpayer or a high-income
    taxpayer?
        Mr. Johnson. Thanks for the question. I think you are
    asking what the audit rates are for those different taxpayer
    groups. And the audit rate for low-income taxpayers is lower as
    a percentage of all taxpayers in that category than the audit
    rate for higher-income taxpayers, looking at levels of income.
        Senator Daines. I just wanted to dispel this myth we have
    heard some of my colleagues suggest that low-income individuals
    are audited at higher rates than high-income individuals. Of
    note, according to the IRS, for the record high-income
    taxpayers--this would be over a million dollars--they are
    audited at about an 8-percent rate; whereas Earned Income Tax
    Credit recipients are audited at about 1.12 percent. I just
    wanted to set the record straight on that. That is data coming
    from the IRS.
        Mr. Chairman, thank you. I yield back my time.
        Senator Whitehouse. Thank you very much.
        And I have the privilege now to turn to Chairman Wyden.
        Senator Wyden. Thank you very much, Mr. Chairman, and thank
    you for scheduling a very important hearing, and for your long
    history of going after these kinds of cases and trying to
    protect taxpayers.
        What I would like to do with our panel--we have a terrific
    panel here--is to better understand how the IRS uses the tools
    at its disposal to enforce collection from repeat offenders. I
    do not believe we have talked about that yet, and what we are
    talking about is high-income nonfilers with multiple years of
    unfiled tax returns. And 26 U.S. Code 7203 makes the willful
    failure to file a tax return, and failure to pay Federal income
    tax, a crime.
        So what we are talking about is high-income individuals
    with multiple years of unfiled tax returns. And the agency
    recently estimated there were almost 50,000 high-income
    nonfilers owing $7.1 billion in taxes, with multiple unfiled
    returns for tax years 2014 through 2016.
        So my question is for you, Mr. O'Donnell. For cases
    involving high-income nonfilers, people with multiple years of
    unfiled returns, has the IRS made any recent criminal referrals
    to the Tax Division of the Department of Justice for the
    willful failure to file a tax return or pay estimated tax?
        Mr. O'Donnell. Thank you, Senator Wyden. I am uncertain
    whether or not we have made any criminal referrals to the
    Department of Justice. I will certainly look into that and get
    back to you.
        But what I can say is that our revenue officers are hard at
    work out in the field ensuring that high-income nonfilers that
    we are aware of are being brought into compliance. And we are
    using all tools available to bring them into compliance. And
    currently in this environment, where it is very difficult to go
    into the field, our revenue officers continue to perform that
    work.
        Senator Wyden. Well, respectfully, Mr. O'Donnell, I do not
    understand how one can assert that all tools are being used
    when we are talking about high-income non-filers, multiple
    years of unfiled returns, an estimate of $7.1 billion in taxes
    in just 2 years, and you are not aware of whether there were
    any criminal referrals to the Tax Division of the Department of
    Justice.
        What I would like you to do is to furnish to Chairman
    Whitehouse and myself, as chairman of the full committee, why
    this is the case. And you said you were not aware of any.
    Because I just believe this sends a message that there is not
    much of a deterrent there. If there have not been any referrals
    at all--and that is why we are going to need the facts--I would
    like that to be available to myself as chairman of the full
    committee, and Chairman Whitehouse within 2 weeks. Will you
    make that possible?
        Mr. O'Donnell. Yes, Senator, I will. And just to clarify my
    response, this is my second day in this role, and I am not yet
    up to speed on that program, but I will certainly get there and
    be happy to provide the information that you have asked for.
        Senator Wyden. Thank you. And I certainly understand that
    if you are new there, it takes some time to gather all the
    facts. But I think you can get a sense of why I think this is a
    show-stopper kind of question. Repeat offenders, enormous sums
    of money involved; this is not somebody making a once-in-a-
    rare-instance kind of mistake. We have to get on top of that.
    So we will expect to get an explanation within 2 weeks about
    whether there have been any referrals, and if there have not
    been, why there have not been--and what is going to be done
    about it. Okay? Two weeks.
        Mr. O'Donnell. Yes, Senator; will do.
        Senator Wyden. Great. Thank you.
        Senator Whitehouse. Thank you very much, Chairman Wyden.
        I think we have Senator Cortez Masto standing by
    electronically, and I would call on her, if she is available.
        Senator Cortez Masto. Thank you, Chairman Whitehouse.
        Ms. Olson, let me start with you. You recommended in your
    testimony that the IRS could use data and technology not just
    to find the taxpayers who are noncompliant, but to help
    taxpayers ensure they get full access to the benefits that they
    deserve.
        In our last hearing with the IRS Commissioner, I raised
    that the Advance Child Tax Credit portal should provide ease--
    --
        [Garbled audio.]
        Senator Whitehouse. Senator Cortez Masto, we are having
    trouble hearing you in the hearing room. I do not know if there
    is a sound issue of some kind.
        Senator Cortez Masto. Let me try that. Is that better? Can
    you hear me okay?
        Senator Whitehouse. It seems to be better. We hear you, and
    we will restart the clock.
        [Pause.]
        Senator Whitehouse. No; still stuck. Your screen is not
    quite frozen, but moving very, very slowly. Senator Cortez
    Masto, we are being advised that you might turn off your video
    and then your voice would be able to come through. Taking
    advice from me on a technological matter is not the wisest
    thing.
        But there you are, so it worked.
        Senator Cortez Masto. Better. Can you hear me okay?
        Senator Whitehouse. Yes, we hear you well. Proceed.
        Senator Cortez Masto. Wonderful. Thank you. Sorry for the
    technical difficulty.
        Ms. Olson, if you can hear me okay, you recommended in your
    testimony that the IRS could use data and technology, not just
    to find those taxpayers who are noncompliant, but to help
    taxpayers to get the access they deserve.
        In our last hearing with the IRS Commissioner, I raised
    that the Advance Child Tax Credit portal should provide access
    for taxpayers who find themselves in unique situations, such as
    domestic violence survivors. So my question to you is, could
    the portal be designed to help domestic violence survivors get
    their Advance Child Tax Credit?
        Ms. Olson. Yes; absolutely. I think that because the
    marital status, the household status where the children reside,
    would change perhaps with the domestic violence survivors, by
    the time that the last-filed return has been filed. There
    should be a portal to allow them to do a simplified electronic
    filing so that they can update their filing easily. And then
    also, the change of circumstances portal should allow them to
    enter their change in marital status, and also where the
    children are.
        And because it is likely that there would be a disagreement
    between the abuser and the survivor as to where the children
    are, there needs to be an appeals process, an expedited appeals
    process, so the survivor and others can come in and submit
    documentation to show where the children are, and not have to
    wait until the filing of the next year's tax return in order to
    get the Advance Credit.
        And there are procedures in the IRS like the collection
    appeals process, where there is a 2- to 3-day turnaround from
    the appeals officers when they get the case. And the benefit of
    that is, it minimizes improper payments.
        Senator Cortez Masto. Thank you, Ms. Olson. Thank you so
    much. I really do appreciate that, because this is an area that
    we need to prioritize. And I knew there was a way to get this
    done, and I appreciate your comments. I am going to submit the
    rest for the record.
        Thank you, everyone.
        Senator Whitehouse. Thank you, Senator Cortez Masto.
        I believe that Senator Portman is holding, and I would call
    on Senator Portman, if he is available.
        Senator Portman. Thank you, Chairman Whitehouse, and thanks
    to the panelists who have come today. I feel that this is a
    reunion of sorts. Former Commissioner Rossotti, thank you for
    your continued interest in tax administration and the work you
    have done over the years as Commissioner. And, Ms. Olson, thank
    you for your work over the years. I have loved working with you
    as well, as the Taxpayer Advocate and now with the Center for
    Taxpayer Rights. And Russell George, hanging in there as our IG
    for Tax Administration. Thank you, all three of you, for your
    service.
        My first questions are not going to go to any of the three
    of you, but to Mr. Johnson and Deputy Commissioner O'Donnell
    regarding the big issue here, which is the tax gap. I
    understand that has been discussed quite a bit today, so I will
    not belabor that, except to say that it is confusing seeing so
    many different predictions as to what the tax gap would be
    based on different enforcement options and different amounts of
    funds that could be provided. And I understand you have
    answered that today.
        But what you have not, apparently, answered as much about
    is your estimated revenues from improved enforcement. So I
    wonder if you could speak to that a little bit. There are
    various enforcement numbers out there. One from Larry Summers
    and Natasha Sarin estimates that a $100-billion investment,
    along with some other changes they propose, would generate more
    than a trillion in revenue over 10 years. That is the most
    generous one, I suppose.
        Can you all talk a little about what the limits are? In
    other words, if these projections just get higher and higher,
    depending how much more money you put into the IRS, and all of
    them are significant ratios, where is that balance? Where is
    the right enforcement leading to the right assistance on the
    tax gap?
        Mr. Johnson. So I can start. Thank you for the question,
    Senator. The estimates of revenues it might help us produce are
    based on historic tax data. So we look over the last 10 years
    at the revenues that have been generated by actual workers
    working on groups of taxpayers that have similar
    characteristics. So we divide the tax filing community into
    what we call activity codes, or groups, and we look at the
    revenue that is brought in based on the hours of work that the
    revenue officers do. The return on those--or the revenue raised
    by those officers and agents--varies based on a couple of
    factors.
        First, on the complexity of the return or the tax situation
    that they are examining, the experience that they have working.
    And so when we produce revenue estimates of what the impact of
    an increased investment would be, we take into account the fact
    that, for the first year or so, a new agent working in the
    field would not raise very much money. And in fact, they would
    cost us a bit of money because we have to take someone offline
    to do training, and we recognize that, for the first year,
    there is probably a loss on that person.
        In the second year, there is some revenue. And then by the
    third year, we believe that they are working at full capacity.
    We also recognize that, as we audit larger numbers of cases, a
    larger percentage of the cases in a particular activity code or
    group of returns, the return on those cases is going to fall,
    if we are picking--and we hope we are--the returns that are the
    most egregiously noncompliant. And as we increase the number,
    we are going to be working cases that will have lower dollar
    returns. And so that is also a fact that leads into our
    estimates that we produce for what the return would be on
    different kinds of investments. So----
        Senator Portman. That must be where the term ``diminishing
    returns'' comes from.
        Mr. Johnson. That is correct. Right.
        Senator Portman. That was a joke, Mr. Johnson--diminishing
    returns.
        Well, look, I know the last time Commissioner Rettig was
    before us, he explained about how the tax gap numbers were
    still subject to some adjustment. And he specifically said that
    he was going to ask your Research Division to update its
    approach to determining the tax gap.
        Has that happened? Is the approach you are talking about
    today the new approach? Or are you still updating your
    methodology?
        Mr. Johnson. We are in the course of updating that
    methodology. So we have been working for about a year and a
    half on a methodology that relies more on machine learning, or
    some would call it AI, artificial intelligence, to make greater
    use of the operational audit data in looking at the tax gap.
    But traditionally our tax gap estimates have been based on a
    sample of tax return filings that enable a purposeful audit,
    and it is just those returns that have been used for this
    estimation. We believe that by bringing in more of the
    operational audit data, we will be able to produce estimates
    that are more timely, and are better able to detect emerging
    issues.
        So our current estimates, those estimates that are official
    estimates, are based on tax returns that were filed in 2011 to
    2013 and were audited in the years after that. The audit
    statistics that we are going to put out next year will be
    partially based on a similar sample. But we will also be using
    this new methodology to update those estimates to provide an
    estimate of tax year 2019, which is the tax year that we have
    almost all returns in for now, based on the way returns get
    filed with the IRS.
        Senator Portman. So at the conclusion of this new analysis
    and looking at your new methodology, will you be able to tell
    us what you recommend as the right amount of resources to
    maximize the optimal amount of tax revenue and to close the tax
    gap?
        Mr. Johnson. That is not a decision that my office would
    make. We do hope to be able to supply the information that
    would enable the business units and the Commissioner, Deputy
    Commissioner O'Donnell, to make those kinds of decisions. But
    we hope that the information we get will----
        Senator Portman. Can I ask, Deputy Commissioner O'Donnell,
    is that your hope then, to come up with some suggestions as to
    the notion of diminishing returns? At some point, the return on
    the investment is not as great, and there is also the issue of
    personnel, and the issue of taxpayer rights, and just ensuring
    that it is done in a way that is appropriate.
        So, Deputy Commissioner, are you in a position today to say
    that you have any sense of what that optimal number might be?
        Mr. O'Donnell. No, Senator, I do not know what the optimal
    number would be, but I do know that the work that Mr. Johnson's
    team does to estimate the tax gap helps us understand where to
    deploy our resources.
        We know that those--and we heard from former Commissioner
    Rossotti on this, but where there is opacity in income sources,
    and there is low third-party reporting, there is likely to be
    less compliance. And that is where we would want to put
    additional resources. The precise number is not clear. We do
    know we are down 17,000 enforcement personnel over the past
    decade. And that, we believe, is some barometer of where we
    would want to get to.
        Senator Portman. Yes; okay. Well, certainly I think you
    will find bipartisan support for some of these efforts to
    increase personnel and to target these resources appropriately.
        Is Commissioner Rossotti, former Commissioner Rossotti,
    still with us?
        Mr. Rossotti. Yes, I am right here.
        Senator Portman. Charles, I can't see you, so I am
    concerned.
        Mr. Rossotti. I am here in the hearing room, Senator.
        Senator Portman. Let me say, first of all, it is good to
    hear your voice at least, and I hope to see you visually here
    in a minute, but talk for a minute, if you could--I am at the
    end of my time, I am sure, and I appreciate Mr. Chairman
    indulging me--on the reporting. I agree with you, more
    reporting is a good idea, generally. On the other hand, there
    are limits to reporting. It's that same balance we have talked
    about.
        I remember in 2011, expanded Form 1099 for the Affordable
    Care Act was repealed, and it was very bipartisan because,
    although it was a component of the health-care law, President
    Obama knew that it imposed excessive burdens on small
    businesses.
        My question to you is, I guess, can you tell us, is there a
    way to improve reporting that would have a measurable impact on
    enforcement while still protecting taxpayer privacy, without
    being overly burdensome?
        Mr. Rossotti. I actually think there is, Senator. And that
    is something I and several colleagues have been working on for
    a number of years. It basically would be one additional 1099 on
    certain financial accounts that would basically backstop all
    the other 1099s. As it is now, there are actually 22 1099s, and
    3 billion 1099s are reported. So everybody is getting a lot of
    1099s. The trouble is that there are some significant holes in
    the less visible kinds of income.
        And the difficulty is that in the past--you know, when I
    was Commissioner, it actually would not have been possible to
    do what I am suggesting today because the technology did not
    exist. I can tell you, I actually tried some experiments and
    they did not work because the technology was just too rule-
    driven and too specific.
        But today you have technology, as actually Mr. Johnson
    said, that can essentially do part of what a revenue agent
    would do. I mean, not all of it, but some of it. And that would
    allow you to use new kinds of information that are not
    available today.
        So, while I think all of the discussion about productivity
    and scaling up audits is meaningful, I actually am not
    suggesting that you could make a huge difference in the tax gap
    no matter how well you scaled up audits.
        I really think it is the combination of new kinds of
    technology using all the information IRS has, supplemented by
    audits, that actually would make the big difference.
        Senator Portman. Great. Well, I appreciate that
    perspective, and I hope you will continue to work with us as we
    try to figure out the best way forward here. Again, it is good
    to have you before us, and thank you for your continued
    commitment to try to make the IRS work better. You did that
    when you were Commissioner, and we appreciate you doing it
    today.
        Thank you, Mr. Chairman.
        Senator Whitehouse. Thank you, Senator Portman. We
    appreciate very much the effort at tax humor, which is not a
    very well-known category of humor. But I think ``point of
    diminishing returns'' sets a pretty high bar within the
    category of tax humor. So you were entitled to some extra
    minutes there.
        Let me--ending on that note--thank all of the witnesses.
    Let me actually ask Mr. George, if I may, Inspector General
    George, for one clarification.
        Your testimony today said that as of 2018 the IRS--I am
    quoting you here--``the IRS has taken virtually no compliance
    action to meaningfully enforce the Foreign Account Tax
    Compliance Act.''
        That was as of 2018. It is now 2021. Do you have any update
    from that 2018-based observation?
        Mr. George. Well, I would never say that the IRS has done
    ``absolutely nothing'' to advance the implementation of that.
    They are lacking some very basic tools. And one of them is the
    ability to literally have taxpayers and the entities that they
    utilize overseas provide information, taxpayer identification
    numbers, for the IRS to be able to match the information the
    entity has versus the information that the taxpayer has
    provided, or perhaps has not provided. And we are literally
    talking about Social Security numbers in many instances.
        The IRS has done a tremendous amount of work in working
    with nations across the globe to initially get this program off
    the ground. But the most basic thing lacking, again, is the
    ability for the IRS to, necessarily, match up the information
    that it receives, and again, may not receive from one party or
    the other.
        So a light needs to be placed under the IRS to get them
    moving on that one, sir. And it is, in my book, low-hanging
    fruit.
        Senator Whitehouse. Okay; so some progress has been made,
    but not enough to be able to say that they have it covered. We
    need to continue to work on FATCA compliance.
        Mr. George. Correct.
        Senator Whitehouse. It's too bad we couldn't put an extra
    ``t'' on that. [Laughter.] Then it would say ``FATCAT,'' which
    would be such an appropriate acronym for it. There, that is my
    effort at tax humor.
        Let me thank all the witnesses. This has been really,
    really helpful. This is the first hearing of this Finance
    Subcommittee on Taxation and IRS Oversight under my watch, and
    I hope that all of them are as successful and have as
    distinguished and helpful a panel as we have had today, and
    have the same level of input and engagement from all of our
    distinguished members.
        So with all of that, we will keep the record open--okay, so
    QFRs as filed will be due a week from today. I hope you will
    comply. There were specific requests for a response by Chairman
    Wyden within 2 weeks. I would hope and expect that would be
    honored.
        And with that, the hearing is adjourned. Thank you all
    very, very much.
        [Whereupon, at 4:27 p.m., the hearing was concluded.]

                                A P P E N D I X

                  Additional Material Submitted for the Record

                                  ----------

       Prepared Statement of Hon. J. Russell George, Treasury Inspector
           General for Tax Administration, Department of the Treasury
        Chairman Whitehouse, Ranking Member Thune, and members of the
    subcommittee, thank you for the opportunity to provide information on
    the Internal Revenue Service's (IRS) efforts to address the tax gap.
    The tax gap is a longstanding issue that has been a substantial
    challenge for the IRS. I first testified on this issue before the
    Committee on Finance in April 2005. Since then, the Treasury Inspector
    General for Tax Administration (TIGTA) has performed a significant body
    of work addressing components of the tax gap as well as related IRS
    compliance and enforcement programs. Finding effective solutions to
    address the tax gap and its components would yield substantial
    additional tax revenue.

        TIGTA was created by Congress in 1998 with a statutory mandate of
    ensuring integrity in America's tax system. It provides independent
    audit and investigative services to improve the economy, efficiency,
    and effectiveness of IRS programs and operations. TIGTA's oversight
    activities are designed to identify high-risk systemic inefficiencies
    in IRS programs and operations and to investigate exploited weaknesses
    in tax administration. TIGTA plays a key role working to ensure that
    the approximately 82,000 IRS employees,\1\ who collected more than $3.5
    trillion in tax revenue, processed more than 242 million tax returns,
    and issued more than $736 billion in tax refunds during Fiscal Year
    (FY) 2020,\2\ have done so in an effective and efficient manner while
    minimizing the risk of waste, fraud, and abuse.
    ---------------------------------------------------------------------------
        \1\ Total IRS staffing as of January 16, 2021. Included in the
    total are approximately 13,300 seasonal and part-time employees.
        \2\ IRS, Management's Discussion and Analysis, Fiscal Year 2020.
    The IRS reported that $275 billion in refunds issued in FY 2020 were
    the result of COVID-19 economic impact payments paid under the
    Coronavirus Aid, Relief, and Economic Security (CARES) Act.

        In this section of my testimony, I will discuss a number of
    challenges facing the IRS in addressing the tax gap and our work to
    address those challenges.
                            improving tax compliance
        One of the IRS's key responsibilities is to ensure that taxpayers
    comply with tax laws. If the IRS can increase the rates of voluntary
    compliance, it can reduce the tax gap. The tax gap is defined as the
    difference between the estimated amount taxpayers owe and the amount
    they voluntarily and timely pay for a tax year. The gross tax gap,
    which is the amount that is owed by taxpayers before collections
    resulting from IRS enforcement actions and other late taxpayer payments
    taken into account, is estimated to be $441 billion annually.\3\ The
    underreporting of income taxes comprises the largest component of the
    tax gap at $352 billion annually,\4\ with individual taxpayers being
    responsible for the largest share of the underreporting tax gap at $245
    billion. The amounts attributable to nonfiling and nonpayment of taxes
    at $32 billion and $39 billion, respectively. However, the tax gap
    estimates are generally outdated because they are for tax years of a
    decade earlier, so their usefulness may be limited. Recently, the IRS
    Commissioner testified that he believes the annual tax gap is at least
    $1 trillion.\5\
    ---------------------------------------------------------------------------
        \3\ Hereafter in this testimony, the tax gap refers to the gross
    tax gap.
        \4\ Improper payments for the Earned Income Tax Credit and other
    refundable credits are considered a component of this amount.
        \5\ Testimony of the Commissioner of Internal Revenue, Charles
    Rettig, On the Filing Season and COVID-19 Recovery, Senate Finance
    Committee (April 13, 2021).

        There are a number of different factors that drive voluntary tax
    compliance. The IRS estimates that information reporting and
    withholding requirements are significant drivers of tax compliance. For
    instance, when there is information reporting and withholding at the
    source, tax compliance is approximately 99 percent. When there is
    information reporting only, tax compliance is approximately 95 percent.
    When there is neither withholding nor information reporting, the IRS
    believes tax compliance is as low as 45 percent.\6\
    ---------------------------------------------------------------------------
        \6\ Federal Tax Compliance Research: Tax Gap Estimates Tax Years
    2011-2013.

        Sustaining and improving taxpayer compliance is important because
    small declines in compliance cost the Nation billions of dollars in
    lost revenue and shift the tax burden away from those who do not pay
    their taxes onto those who pay their fair share on time every year.
    High-Income Taxpayers Could Be More Effectively Prioritized
        High-income taxpayers generally have more opportunities to engage
    in planning to avoid taxes. According to the IRS, high-income non-
    filers, although fewer in number, contribute to the majority of the
    non-filer tax gap. In March 2021, TIGTA reported that the IRS could
    more effectively prioritize high-income taxpayers who owe delinquent
    taxes but do not pay.\7\ Specifically, TIGTA identified 685,555
    taxpayers who had a balance due as of May 14, 2019. These taxpayers
    reported adjusted gross income of $200,000 or more and owed a combined
    total of $38.5 billion. Because the IRS prioritizes high balance due
    cases for collection, many of these high-income taxpayers would be
    included in high-priority work. However, balances due are not generally
    prioritized by income earned and some improvements could be made to
    prioritize high-income taxpayers more effectively. TIGTA also found
    that revenue officer staffing does not always align with locations
    where the greatest number of high-income cases are located, because the
    IRS is understaffed in geographic locations where high-income taxpayers
    with delinquencies are located. While TIGTA recognizes that resources
    are limited, hiring or reallocating resources to work high-income
    taxpayer cases with delinquencies in these areas could lead to
    increased tax compliance as taxpayers realize that the IRS is focusing
    on taxpayers who can pay their taxes but do not.
    ---------------------------------------------------------------------------
        \7\ TIGTA, Report No. 2021-30-015, High-Income Taxpayers Who Owe
    Delinquent Taxes Could Be More Effectively Prioritized (March 2021).

        We have also been concerned that the Small Business/Self-Employed
    Division (SB/SE Division) terminated its High-Income/High-Wealth
    strategy (HIHW) in 2015.\8\ The HIHW strategy started in 2010 and was
    designed to address high-income taxpayers whose total positive income
    (TPI) was at least $200,000 on Form 1040, U.S. Individual Income Tax
    Return, and who had not reported all of their earned income. The HIHW
    strategy consisted of two subcategories: filed returns for High Income
    Underreported taxpayers, and High-Income Non-filers, i.e., taxpayers
    who had earned income necessitating the filing of a tax return but who
    have not done so. The SB/SE Division's HIHW strategy was disbanded in
    2015 and by the end of FY 2017 the cases pursued under the strategy
    were closed, though the reasons for the termination of the strategy
    remain unclear.
    ---------------------------------------------------------------------------
        \8\ TIGTA, Audit No. 201930026, The IRS Continues Compliance
    Efforts for High-Income Taxpayers After Disbanding the High-Income
    High-Wealth Strategy, but With Less Effective Outcomes. The Final
    Report for this audit will be issued at a later date.

        However, when the SB/SE Division's HIHW strategy was in place, it
    was not focused on high-income taxpayers given that individual tax
    return examination closures with TPI of less than $200,000 represented
    the majority (73 percent) of the individual returns closed from the
    strategy for FYs 2015 through 2017. The SB/SE Division did not cease
    examining high-income taxpayers after the HIHW strategy was disbanded.
    In fact, in an environment where declining resources have caused a
    significant decline in all IRS examinations, the percentage of the SB/
    SE Division's high-income high-wealth examination closures for which
    TPI was at least $200,000 compared to other audits actually increased
    from 20 percent in FY 2015 to 26 percent in FY 2019. However, total
    closures continued to drop during this time due to a reduction in
    available resources and resulted in actual high-income return closures
    dropping from 47,024 for FY 2015 to 29,610 for FY 2019 resulting in
    potential lost assessments totaling $1.9 billion. In addition to the
    decrease in examination compliance resources, TIGTA is also concerned
    that the IRS is less able to track its progress in auditing high-income
    ---------------------------------------------------------------------------
    taxpayers by eliminating the HIHW strategy.

        After disbanding the HIHW strategy, the SB/SE Division increased
    examinations of high-income taxpayers using the discriminant function
    (DIF), i.e., the algorithm the IRS uses to choose some examinations,
    rather than maintaining or increasing High Income Underreported
    examinations. This change, affecting 1,534 taxpayers, resulted in
    $121.5 million in potential lost assessments for FYs 2018 and 2019.

        TIGTA has also identified significant pockets of tax noncompliance
    among business owners filing Form Schedule C, Profit or Loss From
    Business (Sole Proprietorship), who showed no revenue but significant
    losses (losses larger than $100,000).\9\ We reviewed 1,142 returns that
    contained a loss on at least one Schedule C that was equal to or
    greater than $100,000, and those audits had an average examination
    assessment of $53,183, which was greater than the examination results
    of seven of the 10 top SB/SE Division Field Examination function
    strategies. Additionally, the results of these examinations have
    demonstrated that these types of returns are more productive than DIF-
    selected returns. Yet, the SB/SE Division utilizes DIF to select most
    of its returns for examination. We recommended that the SB/SE Division
    establish a compliance improvement project to focus on the tax
    compliance risk of businesses with at least one Schedule C attached, no
    gross receipts, and more than $100,000 in losses to evaluate it as a
    new strategy or workstream; however, the SB/SE Division declined.
    ---------------------------------------------------------------------------
        \9\ TIGTA, Report No. 2020-30-056, Individual Returns With Large
    Business Losses and No Income Pose Significant Compliance Risks
    (September 2020).

        For Tax Years (TY) 2011 through 2013, the IRS estimated that the
    portion of the $441 billion tax gap due to underreporters was $352
    billion (approximately 80 percent). Of this, $245 billion was from
    individual tax returns and $37 billion was from corporation income tax
    returns. Additionally, the portion of the tax gap due to non-filers was
    $39 billion (approximately 9 percent). TIGTA reported for TY 2017,
    numerous business and individual non-filer taxpayers with Form 1099-K,
    Payment Card and Third Party Transactions, income were not identified
    and cases were not created by the IRS's non-filer programs, and in
    other cases, they were identified but not worked by the IRS.\10\
    ---------------------------------------------------------------------------
        \10\ TIGTA, Report No. 2021-30-002, Billions in Potential Taxes
    Went Unaddressed From Unfiled Returns and Underreported Income by
    Taxpayers That Received Form 1099-K Income (December 2020).

        Specifically, TIGTA identified 314,586 business taxpayers with
    $335.5 billion in Form 1099-K income that appeared to have a filing
    obligation, but were not identified as non-filers by the IRS. The
    problem is that the IRS cannot use third-party information returns,
    such as Form 1099-K data, to identify business non-filers and create
    cases if the taxpayers' accounts are coded as not having an open filing
    requirement, or no tax account exists because the business has never
    filed a tax return. TIGTA recommended that the IRS fund and implement a
    programming revision to its process that identifies these types of
    business taxpayers. However, the IRS disagreed with this
    recommendation, citing ultimate approval and implementation of that
    programming is subject to IRS-wide needs and priorities.
     The Large Business and International Division Strives to Identify
            Corporate Non-Compliance
        The IRS has struggled to effectively identify the pockets of tax
    noncompliance in large corporations. For example, we reported that IRS
    audits of large corporations using the Discriminant Analysis System
    (DAS) selection tool \11\ had a no-change rate of almost 55
    percent.\12\ Audits that result in no changes can inefficiently consume
    IRS resources and burden taxpayers who are compliant with the tax laws.
    TIGTA analyzed the potential cost for excessive time charged to no-
    change returns, i.e., time in excess of 200 hours, and estimated that
    potentially $22.7 million was spent examining no-change returns for
    time periods in excess of 200 hours.
    ---------------------------------------------------------------------------
        \11\ The DAS is a computer model developed to systemically score
    the examination potential for Form 1120 returns with total assets of
    $10 million or more. Generally, the higher the score, the greater the
    audit potential.
        \12\ A no-change rate is a reflection of the effectiveness of the
    IRS's examination selection methods. A high no-change rate suggests
    that the IRS is not selecting the most productive tax returns for
    examination and may be burdening compliant taxpayers with audits.

        However, the LB&I Division is aggressively addressing these issues.
    It is in the process of implementing a strategy to update its DAS
    System selection tool to improve the no-change rates. Additionally,
    beginning in 2017, the LB&I Division initiated a strategy to audit more
    on an issue-based system. The LB&I Division refers to this effort as
    ``Campaigns,'' which currently cover 57 issues, including virtual
    currencies, micro-captive insurance, net operating loss carryovers, and
    many other issues.
     Impact of the Internet Platform Companies on Tax Compliance
        Tax gap studies have found that self-employed individuals
    underreported their net income by 64 percent (based on the average for
    TYs 2008 through 2010), which is up from 57 percent in the TY 2001
    estimate. With the growth of online platform companies in recent years,
    which allow people easy and convenient ways to obtain needed services
    and others to work as self-employed individuals providing those
    services, it is likely that income and self-employment tax
    underreporting will continue to be a growing problem.

        TIGTA issued three reports addressing a related problem with
    information reporting in three emerging industries: the gig economy,
    virtual currency exchanges and peer-to-peer payment businesses.
    Internal Revenue Code section 6050W and related Treasury regulations
    addressed Third-Party Settlement Organizations, who bring buyers and
    sellers together using the Internet platform and guaranteeing payment
    for goods and services. The law and Treasury regulations did not
    require Third-Party Settlement Organizations to issue Form 1099-K,
    Payment Card and Third Party Network Transactions, unless those
    transacting business earn at least $20,000 and engage in at least 200
    transactions annually.

        TIGTA issued an audit report on the gig economy's impact on tax
    compliance and the lack of an IRS strategy to address this
    challenge.\13\ The gig economy includes online platform companies, such
    as ride-share companies, which act as facilitators that bring together
    people offering goods or services with others that need such goods or
    services. TIGTA reported that the IRS is not working cases with
    billions of dollars in potential tax discrepancies involving taxpayers
    who earn income in the gig economy. Many cases were not selected to be
    worked by the IRS due to resource constraints and the large volume of
    discrepancies that were identified. Consequently, many taxpayers who
    earn income in the gig economy do not receive a Form 1099-K; therefore,
    their income is not reported to the IRS.
    ---------------------------------------------------------------------------
        \13\ TIGTA, Report No. 2019-30-0116, Expansion of the Gig Economy
    Warrants Focus on Improving Self-Employment Tax Compliance (February
    2019).

        Virtual currency is a digital representation of value, other than a
    representation of the U.S. dollar or a foreign currency (``fiat''
    currencies), which functions as a unit of account, a store of value,
    and a medium of exchange.\14\ The use of virtual currency as a payment
    method continues to grow in popularity and is emerging as an
    alternative asset to U.S. or other fiat currencies. Virtual currencies
    are often described as ``cryptocurrencies'' because they use
    cryptographic protocols to secure transactions recorded on publicly
    available decentralized ledgers, called ``blockchains.''\15\
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        \14\ Fiat currency is the name for what is traditionally recognized
    as currency. Fiat currency is the coin and paper money of a country and
    designated as its legal tender.
        \15\ Commodity Futures Trading Commission v. McDonnell, 287
    F.Supp.3d 213 (E.D. NY 2018).

        Making payments in virtual currency, instead of fiat currency, may
    allow users to pay lower transaction fees and achieve faster transfer
    of funds. However, the use of virtual currency may also allow anonymity
    in transactions and the possibility of avoiding tax reporting
    obligations. Taxation compliance risks can arise from willful conduct
    by a taxpayer (e.g., using virtual currency to evade taxes) or non-
    willful conduct (e.g., lack of understanding of the taxability of
    virtual currency transactions, calculation of gain/loss from virtual
    currency transactions, characterization of income, third-party
    ---------------------------------------------------------------------------
    reporting responsibilities).

        Virtual currency exchanges allow virtual currency to be readily
    exchanged for legal tender, and many of them are also Third-Party
    Settlement Organizations, meaning they did not have to report
    transactions to the IRS unless such annual transactions exceeded 200
    and exceeded $20,000.\16\ While these exchanges are in a position to
    provide important information for use by the IRS in tax administration,
    information reporting on virtual currency transactions from the
    exchanges is lacking. TIGTA found that it is difficult for the IRS to
    identify taxpayers with virtual currency transactions because of the
    lack of third-party information reporting that specifically identifies
    virtual currency transactions.\17\ As of October 2018, both the LB&I
    and SB/SE Divisions' examination functions have started a small number
    of examinations of taxpayers based on potential virtual currency
    issues, and the SB/SE Division's examination function has few known
    open examinations of virtual currency exchanges.
    ---------------------------------------------------------------------------
        \16\ The American Rescue Plan Act of 2021 reduced this reporting
    threshold to $600 annually so that these organizations are subject to
    the same reporting requirements as other businesses.
        \17\ TIGTA, Report No. 2020-30-066, The Internal Revenue Service
    Can Improve Taxpayer Compliance for Virtual Currency Transactions
    (September 2020).

        In addition, the growth of peer-to-peer payment applications (P2P)
    has greatly enhanced the flow and transfer of funds between users on
    virtual platforms, making it easier and cheaper to send payments from
    one person to another. However, the technology presents additional tax
    compliance challenges in that the payments are not always reported to
    the IRS and can be hard to detect during an IRS examination. The IRS's
    tax gap analyses indicate that information reporting is associated with
    higher voluntary compliance. However, some taxpayers may not report
    income received via P2P payment applications if they do not believe the
    IRS has received an information return, such as a Form 1099-K.\18\
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        \18\ TIGTA. Report No. 2021-30-022, The Internal Revenue Service
    Faces Challenges in Addressing the Growth of Peer-to-Peer Payment
    Application Use (April 2021).

        TIGTA judgmentally selected eight P2P payment applications and
    found that these companies appear not to meet the current definition of
    a third-party settlement organization, and therefore are not required
    to file Form 1099-K. However, three P2P companies filed 950,965 Forms
    1099-K involving $198.6 billion of payments in TY 2017, which included
    ---------------------------------------------------------------------------
    amounts below the reporting thresholds.

        The IRS did not always take compliance actions on non-filers of tax
    returns and underreporters related to P2P payments even when
    information reporting was available. In total, 169,711 taxpayers
    potentially did not report up to $29 billion of payments received per
    Form 1099-K documents issued to them by three P2P payment application
    companies.

        When income information is not reported to the IRS, taxpayers are
    more likely to be noncompliant. A provision was included in the
    American Rescue Plan Act of 2021 which addressed a TIGTA recommendation
    contained in this report by addressing the disparity of information
    reporting between third-party settlement organizations and other types
    of businesses. Section 9674 of the American Rescue Plan Act changed the
    exception for de minimis payments by third-party settlement
    organizations, reducing the exception threshold to $600 annually so
    that these organizations are subject to the same reporting requirements
    as other businesses.\19\
    ---------------------------------------------------------------------------
        \19\ The exception threshold for de minimis payments was previously
    $20,000 and an aggregate number of transactions exceeding 200.
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    Resources and Their Potential Impact on Enforcement Revenue
        According to the Congressional Budget Office (CBO), the
    appropriations for the IRS fell by about 20 percent (adjusted for
    inflation) between 2010 and 2018.\20\ Approximately 70 percent of the
    IRS's overall budget is for labor, and the drop in funding thus
    resulted in a decline in the number of IRS employees over that period,
    particularly in enforcement. The CBO estimated the amount of funding
    and staff allocated to enforcement activities has declined by about 30
    percent since 2010. The number of employees who work the most complex
    examination and collection cases experienced especially large declines.
    Between FYs 2010 and 2018, the number of revenue agents, who handle
    complex enforcement cases, fell by 35 percent, and the number of
    revenue officers, who manage difficult collections cases, dropped by 48
    percent.\21\
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        \20\ Congress of the United States, Congressional Budget Office,
    Trends in the Internal Revenue Service's Funding and Enforcement (July
    2020).
        \21\ TIGTA, Report. No. 2021-30-011, Trends in Compliance
    Activities Through Fiscal Year 2019 (March 2021).

        Over the past 5 years, the IRS's budget has increased approximately
    6 percent, from $10.7 billion in FY 2015 to $11.3 billion in FY 2019.
    However, funding for each of the IRS's main budget activities has
    varied. For example, business systems modernization and taxpayer
    services budgets have increased 39 percent and 18 percent,
    respectively, whereas, the funding for enforcement has dropped 2
    ---------------------------------------------------------------------------
    percent over the same period.

        While the IRS experienced a general decline in staffing over the
    last 5 years, the amount of total enforcement revenue related to the
    work performed by these compliance employees has not decreased in
    total. Although enforcement revenue collected increased 6 percent
    between FYs 2015 and 2019, from $54.2 billion to $57.5 billion, most of
    this revenue is collected during the automated collection notice stream
    in which a series of collection notices are sent to taxpayers owing
    balances due. Revenue collected by revenue officers in the field for
    more complicated cases decreased by 24 percent between FYs 2015 and
    2019, from $5 billion to $3.8 billion.

        Overall, the IRS ended FY 2019 with approximately 74,196 FTEs, a
    117 FTE decline from the approximately 74,313 FTE in FY 2018. In
    addition, the IRS's compliance programs continued to see a reduction in
    available resources. The Examination staff steadily declined during FYs
    2015 through 2019, whereas, the Collection staff fluctuated during the
    same 5-year period and increased from FY 2018 to 2019.
                Reductions in Most Types of Examinations
        It is important to note that the IRS's research showed the greatest
    compliance impact comes from audits. Audits have a strong positive
    impact on reporting compliance and have the greatest impact on tax
    compliance.\22\ The IRS's primary objective in selecting returns for
    examination is to promote the highest degree of voluntary compliance.
    Examination is a vitally important aspect of maintaining a voluntary
    tax compliance system because approximately 80 percent of the gross tax
    gap is comprised of underreported tax on timely filed returns.\23\
    Examinations are the means of detecting and collecting a portion of
    this tax that is not reported and paid voluntarily. These efforts have
    a direct impact on the tax gap.
    ---------------------------------------------------------------------------
        \22\ IRS, The Impact of the IRS on Voluntary Tax Compliance:
    Preliminary Empirical Results (November 2002).
        \23\ IRS, Publication 1415, Federal Tax Compliance Research: Tax
    Gap Estimates for Tax Years 2011-2013 (September 2019).

        The CBO estimated that the IRS lost 15,000 enforcement employees
    between 2010 and 2018, which led to a significant reduction in the
    number of examinations and the number of follow-ups on discrepancies
    between returns and third-party data. Over that period, the number of
    examinations dropped by about 40 percent even as the number of returns
    filed grew by 5 percent. Since 2010, the IRS has conducted fewer
    examinations. Between 2010 and 2018, the share of individual income tax
    returns examined fell by 46 percent, and the share of corporate income
    ---------------------------------------------------------------------------
    tax returns examined fell by 37 percent.

        Furthermore, the percentage decline in the examination rate was
    larger for higher income returns. For returns with more than $1 million
    in total income (before losses were deducted), the examination rate
    dropped from 8 percent in 2010 to 3 percent in 2018, a 63 percent
    decline. The examination rate for returns with total positive income of
    less than $200,000, accounted for over 95 percent of individual returns
    each year, dropped to 0.6 percent in 2018 from 1.0 percent in 2010.
                Nonpayment
        The component of the tax gap related to nonpayment of taxes owed is
    estimated to be $39 billion annually. However, reductions in resources
    have also impacted payment compliance. From FY 2015 to FY 2019, field
    revenue officers have decreased by approximately 14 percent (from 2,612
    to 2,239).

        As required by the Fixing America's Surface Transportation Act,\24\
    the IRS began using private collection agencies (PCA) and implemented
    the Private Debt Collection (PDC) program. In two prior attempts, PDC
    programs did not generate sufficient revenue to cover costs and the IRS
    terminated the programs early with net losses to the Government.
    ---------------------------------------------------------------------------
        \24\ Pub. L. No. 114-94, 129 Stat. 1312 (2015).

        The Joint Committee on Taxation estimated that the current PDC
    program would yield approximately $2.4 billion in additional revenue
    through FY 2025. From the launch of the PDC program in 2016 through
    September 2019, the program generated revenue totaling $358 million
    ($276 million in commissionable payments, $27 million in non-
    commissionable payments, and $55 million in Special Compliance
    Personnel Program revenue), resulting in net revenue to the General
    Fund/Treasury of $220 million.\25\ From 2016 through FY 2019, the
    program's total cost was $132 million. These collections reflected 2
    percent of the total outstanding tax liability assigned to the program,
    which is well below the national average for the collection of
    delinquent debts of 9 percent. While the private collection agencies
    working in this initiative have performed well in terms of the quality
    of their interactions with taxpayers, TIGTA reported that delinquent
    accounts assigned to private collection agencies had an average age of
    4.75 years. Cases this old are generally uncollectible, and this may
    explain why the PDC collections are below the national average.\26\
    ---------------------------------------------------------------------------
        \25\ Net revenue to the General Fund/Treasury is the total revenue
    (commissionable payments, non-commissionable payments, and Special
    Compliance Personnel Program revenue) minus retained earnings. Retained
    earnings are 50 percent of commissionable payments.
        \26\ TIGTA, Report No. 2019-30-018, Fiscal Year 2019 Biannual
    Independent Assessment of Private Collection Agency Performance
    (December 2018).
    ---------------------------------------------------------------------------
    Improving International Tax Compliance
        The IRS has not developed a reliable estimate of the international
    tax gap. The tax gap is estimated using statistics from the IRS's
    National Research Program data that does not measure international
    noncompliance. Non-IRS estimates of the international tax gap vary
    widely (from $40 billion to $123 billion annually).\27\ In 2008, the
    then-Commissioner of Internal Revenue indicated that the IRS had not
    measured the international tax gap using other methodologies and did
    not have an estimate for the number.\28\ Complexity and change in the
    international tax environment require that the IRS collaborate with tax
    administrations of foreign countries to enforce compliance.
    International agreements and tax law changes are important, but the
    Department of the Treasury and the IRS should follow through to ensure
    that these efforts achieve their intended results.
    ---------------------------------------------------------------------------
        \27\ TIGTA, Report No. 2009-IE-R001, A Combination of Legislative
    Actions and Increased IRS Capability and Capacity Are Required to
    Reduce the Multi-Billion Dollar U.S. International Tax Gap (January
    2009).
        \28\ Comments of Douglas Shulman, Commissioner of Internal Revenue,
    21st Annual George Washington University International Tax Conference,
    IR-2008-37 News Release, December 8, 2008.

        For example, TIGTA reported in 2018 that after 8 years and spending
    at least $380 million on IRS systems and efforts to establish
    international agreements across the globe, the IRS had taken virtually
    no compliance actions to meaningfully enforce the Foreign Account Tax
    Compliance Act (FATCA).\29\ FATCA was designed to establish reporting
    requirements for U.S. citizens with foreign accounts, with significant
    penalties if foreign accounts were not reported. It was estimated that
    revenue from FATCA would be $8.7 billion from FYs 2010 to 2020. While
    initial
    enforcement-related complications involved data reliability issues,
    more recent problems are related to the fact that the Department of the
    Treasury and the IRS have delayed the requirement for Foreign Financial
    Intermediaries (FFI) to require that United States citizens provide
    Social Security Numbers when establishing accounts and the FFIs to
    provide that information to the United States so that the IRS can match
    compliance information it has with information that the FFIs have.
    ---------------------------------------------------------------------------
        \29\ TIGTA, Report No. 2018-30-040, Despite Spending $380 Million,
    the IRS Is Still Not Prepared to Enforce Compliance With the Foreign
    Account Tax Compliance Act (July 2018).

        The IRS must follow through on global tax cooperation efforts and
    tax administration practices that can prevent and resolve disputes
    among countries to increase certainty for taxpayers. In most cases,
    foreign persons \30\ are subject to U.S. tax of 30 percent \31\ on
    their U.S. source income. The U.S. tax owed is generally withheld from
    payments made to foreign persons by a withholding agent.\32\
    Withholding agents are required to file Forms 1042-S, Foreign Person's
    U.S. Source Income Subject to Withholding, to report on an individual
    taxpayer basis the income and withholding for each foreign person. For
    Tax Year 2017, the IRS received 6.3 million Forms 1042-S from 49,618
    withholding agents.
    ---------------------------------------------------------------------------
        \30\ A foreign individual is any person that is not a U.S. person,
    including a nonresident alien, a foreign corporation, a foreign
    partnership, a foreign trust, or a foreign estate.
        \31\ A reduced rate, including exemption, may apply when there is a
    tax treaty between the United States and the country of residence for
    the foreign individual.
        \32\ A withholding agent is any U.S. or foreign entity (individual,
    corporation, partnership, etc.) that takes receipt of, has control or
    custody of, or disposes of or makes a payment of any income to a
    foreign individual that is subject to withholding.

        In response to our prior recommendations, the IRS has implemented
    processes to improve its identification of reporting discrepancies for
    Federal tax withheld on U.S. source income paid to foreign individuals.
    However, these processes did not identify some withholding tax
    discrepancies. TIGTA reported that IRS processes did not identify 1,919
    withholding agents with reporting discrepancies totaling more than
    $182.7 million.\33\ Our review also identified 366 withholding agents
    that claimed $506 million more in credits for tax withheld than was
    reported on the Forms 1042-S.
    ---------------------------------------------------------------------------
        \33\ TIGTA, Report No. 2020-40-021, Continued Efforts Are Needed to
    Address Billions of Dollars in Reporting and Payment Discrepancies
    Relating to Tax Withheld From Foreign Persons (June 2020).

        In addition, partnerships conducting business in the United States
    are required to withhold taxes on certain income paid to foreign
    partners.\34\ The withholding serves as an incentive for foreign
    partners to file the appropriate U.S. tax return. However, TIGTA
    reported that the IRS's compliance efforts in this area can be
    improved.\35\ TIGTA identified significant errors in the database that
    the IRS uses to track withholding reported by partnerships. As a
    result, the IRS's ability is limited to verifying withholding credits
    and accurately identifying potential non-filers.
    ---------------------------------------------------------------------------
        \34\ A foreign partner can be a foreign corporation, foreign
    partnership, and any other person who is not a U.S. citizen.
        \35\ TIGTA, Report No. 2020-30-026, Withholding Compliance Efforts
    for Partnerships With Foreign Partners Can Be Improved (June 2020).

        Foreign individuals are also required to pay tax related to the
    sale of U.S. real estate. Specifically, the Foreign Investment in Real
    Property Tax Act of 1980 \36\ (FIRPTA) imposes an income tax on foreign
    persons selling U.S. real property interests. Buyers are required to
    withhold a percentage of the anticipated taxes due on the amount
    realized from the sale. A foreign seller of U.S. property can claim a
    credit for the tax withheld by the buyer. If the seller's tax liability
    is less than the amount of tax withheld, the seller gets a refund of
    the difference. TIGTA reported that the IRS's reconciliation processes
    do not effectively identify and address FIRPTA reporting and payment
    noncompliance.\37\ TIGTA identified 2,988 buyers with discrepancies of
    more than $688 million between the withholding reported on Forms 8288-
    A, Statement of Withholding on Dispositions by Foreign Persons of U.S.
    Real Property Interests, filed during Processing Year 2017 and the
    withholding assessed to the buyer's tax account. Extensive data
    inaccuracies in the FIRPTA database, incorrect and unclear guidelines,
    and employee errors contributed to these discrepancies.
    ---------------------------------------------------------------------------
        \36\ Enacted as Subtitle C of Title XI (the Revenue Adjustments Act
    of 1980) of the Omnibus Reconciliation Act of 1980, Pub. L. No. 96-499,
    94 Stat. 2599, 2682 (December 5, 1980).
        \37\ TIGTA, Report No. 2020-40-014, Millions of Dollars in
    Discrepancies in Tax Withholding Required by the Foreign Investment in
    Real Property Tax Act Are Not Being Identified or Addressed (March
    2020).

        The IRS also has not established processes to use Form 1099-S,
    Proceeds from Real Estate Transactions, to identify buyers that do not
    report and pay FIRPTA withholdings. TIGTA's analysis of Forms 1099-S
    for TY 2017 identified approximately $22 million in FIRPTA withholding
    that was not reported and paid to the IRS. Finally, employee errors
    resulted in 1,835 foreign individuals potentially receiving more than
    ---------------------------------------------------------------------------
    $60 million in FIRPTA withholding credits than they were entitled.

        With the rising number of taxpayers giving up or abandoning their
    U.S. citizen or resident status, it is important that the IRS have
    controls in place to enforce the tax provisions applicable to
    expatriates. Since the Heroes Earnings Assistance and Relief Tax Act of
    2008, the number of taxpayers expatriating increased significantly from
    Calendar Year 2008 through Calendar Year 2018 (from 312 to 3,974).
    During the same period, TIGTA found that the IRS did not have a
    centralized compliance effort aimed at enforcing the expatriate
    rules.\38\
    ---------------------------------------------------------------------------
        \38\ TIGTA, Report No. 2020-30-071, More Enforcement and a
    Centralized Compliance Effort Are Required for Expatriation Provisions
    (September 2020).

        Expatriates are required to file Form 8854, Initial and Annual
    Expatriation Statement, to certify that they have been in compliance
    with all Federal tax laws during the 5 years preceding the year of
    expatriation. However, TIGTA found that the IRS database of expatriates
    was incomplete for 16,798 expatriates who did not file Form 8854. In
    addition, TIGTA found instances of potential nonfiling, underreporting
    of income, and/or payment compliance issues by expatriates. From a
    sample of 26 expatriates who did not file a Form 8854, five had
    potential unreported income over $6 million. From a sample of 61
    expatriates who filed a Form 8854, 15 had potential unreported income
    over $17 million. Lastly, TIGTA also found that expatriates with high
    ---------------------------------------------------------------------------
    net worth appear to not be paying their exit tax.

        We appreciate the opportunity to testify on the topic of the tax
    gap and the related IRS enforcement efforts. We plan to provide
    continuing audit, investigative, and inspections and evaluations
    coverage of these very important issues.

        Chairman Whitehouse, Ranking Member Thune, and members of the
    subcommittee, thank you for the opportunity to share my views.

                                     ______

          Questions Submitted for the Record to Hon. J. Russell George
                   Questions Submitted by Hon. Chuck Grassley
        Question. I've been a proponent of the IRS private debt collection
    program as one means of closing the tax gap. The program has proven
    able to collect hundreds of millions of dollars annually. Moreover, its
    success has contributed additional resources to the IRS, which IRS has
    used to hire a couple hundred compliance personnel. As a result, the
    program contributed nearly $460 million in net revenue to the Treasury
    in FY 2020 alone. However, as you mention in your testimony, one issue
    that may hinder the program is the old age of accounts assigned to the
    program. To address this issue, as part of the Taxpayer First Act, 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. Mr. George has the
    IRS has updated its pool of eligible accounts for the program based on
    this updated timeline?

        Answer. We have confirmed that the IRS completed the programming
    changes to IRS systems such that accounts that are 2 years past the
    assessment date are now included in private debt collection inventory,
    and these cases were in the process of being sent to the private
    collection agencies. However, we also learned that delinquent accounts
    are not currently being assigned to private collection agencies because
    new contracts with the four collection agencies are currently being
    developed. We will continue to monitor these developments.
                                union activities
        Question. I've long been concerned about the amount of time IRS
    employees spend on union activity at taxpayer's expense. Sensible
    standards for granting and using taxpayer-funded union time were
    imposed during the Trump administration. This resulted in about a 26-
    percent drop in the number of hours Treasury employees spent on union
    time. This equates to the annual workload of about 61 full-time
    employees. If we're serious about closing the tax gap, a top priority
    should be ensuring IRS personnel are used effectively. Now, the current
    administration repealed the Trump-era limitation on this activity. Can
    you speak to whether Treasury and the IRS have reverted to the pre-
    Trump policies with regard to union time?

        Answer. Mid-term negotiations between the IRS and the National
    Treasury Employees Union (NTEU) resulted in changes to their current
    national agreement. These changes went into effect on October 1, 2018.
    As you noted during the hearing, the number of hours IRS employees
    spent on union time decreased after these changes were implemented. IRS
    management stated that they are following the current national
    agreement regarding the use of official union time. However, the
    current agreement expires on October 1, 2021. Therefore, the IRS and
    the NTEU are currently negotiating a new collective bargaining
    agreement. These negotiations include limits on the use of official
    union time. IRS management stated their opening bargaining position is
    maintaining the level of union time that is included in the current
    agreement. As of this writing, the IRS and the NTEU have not reverted
    to pre-2018 policies with regard to union time.
                            private debt collection
        Question. I've been a proponent of the IRS private debt collection
    program as one means of closing the tax gap. The program has proven
    able to collect hundreds of millions of dollars annually that otherwise
    would go uncollected. However, as mentioned in your testimony, one
    issue that hinders the program is the old age of accounts assigned to
    the program. To address this issue, the Taxpayer First Act shortened
    the time period for when accounts may be assigned to the program after
    assessment by over one year. This shorter timeline became effective
    beginning in 2021. Can you confirm whether the IRS has implemented this
    updated time frame for assigning accounts to the program?

        Answer. The Taxpayer First Act provision shortening the time frame
    for assigning accounts to the program was effective January 1, 2021,
    and the IRS has stated that it has implemented the provisions. We will
    be conducting the Private Debt Collection Performance Review this year,
    and we will verify that the IRS has effectively implemented these
    provisions.

        Question. I'm concerned by a finding in a recent report issued by
    your office titled ``High-Income Taxpayers Who Owe Delinquent Taxes
    Could Be More Effectively Prioritized.'' According to this report, IRS
    failed to assign 3,185 high-income taxpayer accounts to the private
    debt collection program, despite meeting the program's eligibility
    requirements. This suggests that the IRS is not making full use of the
    private debt collection program. So my question, do you have any
    suggestions on how the IRS could improve the process it uses to
    identify and assign eligible accounts to the program?

        Answer. In our report, we identified 3,185 high-income taxpayer
    accounts that were shelved. We believe these accounts should be
    prioritized by the IRS and worked by IRS revenue officers, because
    these taxpayers have the ability to pay but are intentionally not
    paying. However, if the IRS cannot work the cases due to resource
    issues, at a minimum they should assign these cases to private debt
    collection agencies. The IRS will not be able to take this action
    unless the IRS is willing to identify and prioritize high-income
    taxpayers who are not paying the taxes that they owe. Currently, the
    IRS is only prioritizing cases by the size of balances that are due.
                                     ______

                     Questions Submitted by Hon. John Thune
        Question. According to official IRS data and research, overall tax
    compliance rates have been holding steady around 85 percent since the
    1980s (voluntary tax compliance around 82-84 percent and net tax
    compliance around 85-86 percent with late payments and enforcement).
    That is a relatively high and stable compliance rate for at least 40
    years.

        GAO has recommended a long-term, quantitative goal for improving
    taxpayer compliance (ex. 85 percent, 86 percent, 87 percent, etc.).
    What are your thoughts about GAO's numerical target proposal?

        Answer. We agree with the GAO that specific goals can be helpful in
    focusing an organization on improvement opportunities. However, with
    respect to the goal of improving taxpayer compliance, there are two
    determinants that rise above all others in importance: information
    reporting and income tax withholding. When there is third-party
    information reporting and withholding, tax compliance is approximately
    99 percent. By expanding information reporting and withholding
    obligations to fit the emerging economies (e.g., the gig economy,
    virtual currencies and peer-to-peer payment applications), Congress
    could enable the IRS to achieve significant improvements in tax
    compliance.

        With respect to performance goals, the IRS can set high-level
    performance goals at the program level, but Congress prohibited the IRS
    from using records of tax enforcement results (ROTERS) to evaluate
    employees or to impose or suggest production quotas or goals with
    respect to such employees (IRS Restructuring and Reform Act of 1998,
    section 1204(a)). While numerical goals at a program level can be
    useful to foster improvement, it is important that such goals are
    accompanied with sufficient resources and a road map to reach those
    goals. Otherwise, such goals can drive objectionable behavior.

        Question. As part of the bipartisan Taxpayer First Act, which
    passed in 2019, the IRS is required to develop a thorough strategy for
    customer service. How is the IRS following-through and executing on
    that strategy? What improvements can be made?

        Answer. The IRS submitted its report to Congress on January 11,
    2021, and it contained improvement strategies for customer service
    (known as the taxpayer experience), employee training, and
    organizational design. The taxpayer experience strategy is the largest
    strategy with estimated implementation costs of over $1.2 billion over
    the next 5 years. The taxpayer experience strategy includes: expanding
    digital services to provide self-service; increasing outreach and
    education; reaching more underserved communities; and increasing the
    use of advanced analytics to develop an agency-wide understanding of
    the taxpayer experience, emerging needs, and operational data.

        The IRS has begun building the Taxpayer Experience Office and has
    named the Chief Taxpayer Experience Officer. TIGTA plans to audit this
    area during implementation to help ensure that any potential issues are
    identified early in the process and potentially make recommendations
    that can be timely implemented.

        Question. Can you discuss the role and importance of high-quality
    IRS customer service and how it helps voluntary tax compliance? What
    are up to three recommendations you have for the IRS to improve its
    customer service to taxpayers?

        Answer. Taxpayers have multiple options to choose from when they
    need assistance from the IRS, including assistance through the toll-
    free telephone lines, face-to-face assistance at the Taxpayer
    Assistance Centers (TAC) or Volunteer Program sites, and self-
    assistance through IRS.gov and various other social media channels
    (e.g., Twitter, Facebook, and YouTube).

        Providing taxpayers with quality customer service is a key
    component in the IRS's mission. Ensuring that taxpayers understand and
    meet their tax responsibilities is crucial for the IRS in its effort to
    encourage voluntary compliance with the tax laws. Resolving questions
    before tax returns are filed helps taxpayers avoid unintentional errors
    and noncompliance, and reduces the burden on both taxpayers and the IRS
    that results from the issuance of notices and correspondence.

        The IRS's goal of providing world-class service to taxpayers hinges
    on the theory that, if the IRS provides the right mix of education,
    support, and up-front problem solving to taxpayers, the overall rate of
    voluntary compliance with the tax laws will increase. The compliance
    program (examining tax returns and collecting tax liabilities) would
    then address those taxpayers who purposefully did not comply. However,
    providing high- quality customer service continues to be a challenge to
    the IRS.

        We have made many recommendations that will assist the IRS in
    improving its customer service to taxpayers. The following are three
    recent recommendations we have made in this area:

            Develop processes and procedures that provide taxpayers with
    the opportunity to self-correct errors on accepted electronically filed
    (e-filed) returns that are suspended from processing for manual error
    resolution. These processes can reduce unnecessary burden on the
    taxpayers and improve the efficiency and effectiveness of tax return
    processing. For example, some e-filed returns with a missing form are
    rejected to provide the taxpayer the opportunity to self-correct the
    error (i.e., attach the missing form and resubmit the e-file return)
    while others are accepted and sent to the Error Resolution System for
    manual correction by an IRS tax examiner, which suspends the return and
    holds the refund until the error condition is resolved. Allowing the
    taxpayer to self-correct can reduce delays in obtaining their refunds.

            Create a closing code to be entered into a tax account when a
    refund inquiry is closed that denotes the cause of the refund being
    misdirected (i.e., IRS error, taxpayer error, or bank error). The
    addition of this code would enable the IRS to monitor compliance with
    section 1407 of the Taxpayer First Act. Section 1407 of the Taxpayer
    First Act requires the IRS to establish procedures to assist taxpayers
    when a direct deposit refund was not transferred to the taxpayer's bank
    account.

            Develop a long-term recruitment strategy in an effort to
    ensure that the remaining Tax Processing Centers after consolidation
    are sufficiently staffed. This strategy should also include contingency
    plans to address hiring shortages. IRS management has not adequately
    addressed the increasing risk related to the inability to recruit and
    retain sufficient Submission Processing function personnel needed to
    handle the increased workload being transferred to the remaining Tax
    Processing Centers as it continues its consolidation efforts. Given the
    IRS's continued inability to meet its hiring goals, it needs a long-
    term strategy that details actions to be taken to address this concern.

                                     ______

        Prepared Statement of Barry Johnson, Acting Chief, Research and
     Analytics, Internal Revenue Service, Department of the Treasury; and
       Douglas O'Donnell, Deputy Commissioner, Services and Enforcement,
              Internal Revenue Service, Department of the Treasury
        Chairman Whitehouse, Ranking Member Thune, and members of the
    subcommittee, thank you for the opportunity to discuss the tax gap.

        Understanding the tax gap and its components helps government make
    better decisions about tax policy and the allocation of resources to
    tax administration. The IRS continues to pursue many different angles
    to address the tax gap. We are committed to enhancing taxpayer services
    and guidance, reducing noncompliance while ensuring fairness in the tax
    system and minimizing taxpayer burden.
                             measuring the tax gap
        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 noncompliance with our tax laws.
    Tax Gap Methodology and Data
        The tax gap is determined by the IRS Research, Applied Analytics
    and Statistics (RAAS) organization. The most recent tax gap study
    released in 2019 covered Tax Years (TY) 2011-2013 (generally returns
    filed during calendar years 2012-2014). For that time period, the
    estimated gross tax gap (the amount of ``true'' tax that is not paid
    voluntarily and timely) was $441 billion.

        The net tax gap is the amount of tax that will not be paid after
    subtracting from the gross tax gap the portion that eventually will be
    collected as a result of IRS enforcement activities or paid late but
    voluntarily by taxpayers. RAAS estimated that $60 billion of the gross
    tax gap eventually would be paid--either voluntarily or collected
    through IRS administrative and enforcement activities--resulting in an
    annual net tax gap of $381 billion of taxes owed as compared to what is
    actually paid. Without action to address this gap, the potential growth
    in the amount of taxes left unpaid and uncollected could result in a
    tax gap totaling several trillion dollars over the next decade.

        When looked at by mode of compliance, the tax gap can generally be
    divided into three components:

            Nonfiling, or not filing required returns on time;
            Underreporting, or not reporting one's full tax liability when
    the return is filed on time; and
            Underpayment, or not paying by the due date the full amount of
    tax reported on a timely filed return.

        Looking at the components of the tax gap, the non-filing gross tax
    gap was estimated at $39 billion, the underreporting gross tax gap was
    $352 billion and the underpayment gross tax gap was $50 billion. And by
    the various types of taxes, the estimated gross tax gap for individual
    income tax was estimated at $314 billion, the gross tax gap for
    corporate income tax was $42 billion, the gross tax gap for employment
    tax was $81 billion, and the gross tax gap for estate and excise tax
    combined was $3 billion.

        The underpayment gap is the easiest component to measure because it
    is calculated directly from IRS administrative records for the
    individual income tax, the corporate income tax, employment taxes,
    estate tax, and excise taxes. Taxpayers who have filed returns
    indicating taxes owed but who have not paid the full amounts on time
    are identified upon filing. The difference between taxes owed as
    reported on returns and the amounts paid on time is the underpayment
    gap.

        The other two components of the tax gap--nonfiling and
    underreporting--present vastly greater estimation challenges because
    they measure activity that is either not revealed to the IRS at all
    (such as failure to file a return) or may be reported in an understated
    fashion.

        The predominant method used to calculate the underreporting gap
    involves actual audit data. For the individual income tax, this
    involves audits of a stratified random statistical sample of tax
    returns. These audits are time consuming, but they constitute a viable
    method for estimating the underreporting gap for the individual income
    tax. These audits are done under a program called the National Research
    Program (NRP) that has been in place since 2000. The audits are
    potentially broader in scope than the typical compliance/risk-based
    audits, in that they examine a set of issues that are determined by the
    NRP procedures instead of focusing on the top few compliance issues
    with a given tax return. The information gleaned from these audits
    helps us refine our audit selection tools, helping to ensure that our
    examiners are working the best possible cases under our risk-based
    models. This work also offers other more detailed insights about
    compliant and noncompliant behavior. Those insights are used throughout
    the IRS to focus our taxpayer service and enforcement work.

        One of the key findings from our ongoing research on the tax gap
    has been that tax compliance is far higher when reported amounts are
    subject to information reporting and, more so, when subject to
    withholding as well. In our report on tax years 2011-2013, the net
    misreporting percentage (NMP) was calculated by looking at the net
    amount that was misreported (which includes both under- and
    overreporting items) and expressing it as a ratio of the absolute value
    of the correct amount that should have been reported. This ratio was 1
    percent for amounts subject to substantial information reporting and
    withholding, and 5 percent for amounts subject to substantial
    information reporting without withholding. But the NMP jumped to 55
    percent for amounts subject to small amounts of or no information
    reporting or withholding.

        In terms of what makes up the tax gap, the detected underreporting
    of business income by individual taxpayers--income of sole proprietors
    and those earning rental, royalty, partnership, and S corporation
    income--is the largest contributor, accounting for $110 billion of the
    total $441 billion in the 2011-2013 period. The IRS believes that the
    lack of reliable and comprehensive reporting and withholding for
    business income received by individuals is the main reason for these
    findings.

        These statistics provide further confirmation that ``visibility''
    of income sources and financial transactions is a significant
    contributor to increasing the compliance rates, and enhanced
    information reporting is one of the few means of sizably increasing the
    compliance rate. Business income reported on Form 1040s is a much
    lower-visibility income source because it is not often subject to the
    same information reporting and withholding requirements that exist for
    salary and wage income.

        Over the years, our studies have consistently suggested that
    overall tax compliance is holding steady in the 82 percent to 84
    percent range (the actual dollars represented by the tax gap can be
    impacted by whether the country is experiencing a recessionary economy
    but the percentage has remained mostly steady since about 2001). For TY
    2011-2013, the estimated tax gap translated into about 83.6 percent of
    taxes paid voluntarily and on time, which is in line with recent
    levels. This estimate is essentially unchanged from a revised TY 2008-
    2010 estimate of 83.8 percent. After enforcement efforts are taken into
    account, the estimated share of taxes eventually paid is 85.8 percent
    for both periods and is in line with the estimates for TY 2001 and TY
    2006 of 86.3 percent and 85.5 percent, respectively.

        The IRS is in the process of preparing a new study on the tax gap,
    covering tax years 2014-2016 and we expect to release the updated
    report next year. It is important to note that the data needed to
    produce tax gap estimates using our traditional methodology takes a few
    years to collect, due to a number of factors. For example, taxpayers
    have until late in a given year to file a previous year's tax returns,
    and it then takes a few years to measure compliance. The IRS uses
    examination data to estimate some components of the tax gap, and that
    takes the longest amount of time to collect. Furthermore, reliable
    estimates require resource-intensive, time-
    consuming research gathered from a wide range of sources, including
    statistically selected in-person audits of taxpayers. The audit
    findings are supplemented by other information sources, such as income
    and expenditure information from third-party sources, information from
    late-filed returns, and tabulations from IRS Master Files of enforced
    and other collections. These steps mean that tax gap estimates
    traditionally trail the tax year as we gather data about compliance
    upon which to base the estimates. Current efforts to produce more
    timely estimates are detailed below.
    Modernizing IRS Tax Gap Estimates
        While the IRS's tax gap estimation methodology has been deemed a
    gold standard by other tax administrators because it is grounded in
    classical statistical methods, there is room for improvement.
    Technology and data collection and analysis are continuing to improve.
    In 2020, the Office of the Chief Statistician's Federal Committee on
    Statistical Methodology released a Framework for Data Quality, which
    builds on the Information Quality Act and advances the Federal Data
    Strategy. Timeliness, defined as the length of time between the event
    or phenomenon the data describe and their availability, was added as a
    key component of data quality. Likewise, as part of the IRS's ongoing
    efforts to improve tax gap estimation, the IRS is researching methods
    to reduce the lag between the focus tax years and release of the tax
    gap estimates by incorporating newer estimation methods that have
    emerged from the big data revolution.

        This new methodology will make greater use of information collected
    during operational audits to augment a smaller, focused random
    statistical sample. By applying modern machine learning techniques to
    our data in close to real time, we hope to produce more timely
    estimates and projections of the tax gap that will better support
    strategic planning. These analyses will be grounded in data reported on
    tax returns and informed by contemporaneous audit results. In our
    preliminary research, applying this methodology to the 2011-2013
    official estimate of the gross tax gap, $441 billion, suggests the
    gross tax gap for 2019 would be approximately $600 billion.

        Making greater use of the full range of filing and audit data
    collected by the IRS and evolving technology, we also hope to ensure
    that future tax gap measures better capture emerging issues. For
    example, data that underlie the tax year 2011-2013 estimates largely
    omit the platform economy and cryptocurrency because both were just
    beginning to gain popularity at that time. Today, these contribute
    significantly to the U.S. economy. Some estimates suggest that today
    the global cryptocurrency market may be as high as $2 trillion,
    suggesting the potential non-compliance from transactions involving
    this asset may be significant. Later this year, IRS will release
    statistics on the number of individual income taxpayers who reported
    holding cryptocurrency in their portfolio, and through collaborations
    between IRS researchers, field agents, and Criminal Investigation
    teams, we eventually hope to be able to estimate the contribution of
    this asset to the tax gap.

        Making greater use of operational audit data, combined with
    advanced analytics will also provide insights into issues that are not
    well measured through statistical samples because they are highly
    concentrated in relatively small segments of the tax filing population.
    A recently released National Bureau for Economic Research (NBER)
    working paper, ``Tax Evasion at the Top of the Income Distribution:
    Theory and Evidence,'' demonstrates the utility of the operational
    audit data for this purpose. By combining data from randomly selected
    audit cases and operational audits, the research team was able to
    measure sophisticated tax evasion by taxpayers at the very top of the
    income distribution that is not fully captured by our legacy tax gap
    estimation methodology. Based on the findings from that paper, IRS
    researchers estimated that though the use of offshore bank accounts
    and/or complex pass-through business structures, this evasion
    contributed an additional $33 billion to the 2011-2013 tax gap, which
    would amount to about $46 billion for Tax Year 2019. While this work is
    still undergoing peer review, the results seem very plausible.

        Combining historically representative audit data, operational audit
    data, and data selected through a focused set of artificial
    intelligence workstreams with economic and budget projection data will
    allow us to estimate changes in the tax gap under different economic
    and budget scenarios. Incorporating enforcement resource data into this
    modeling and analysis will further aid us in developing strategies to
    change compliance behavior in response to emerging issues. This
    approach will also facilitate better tracking of IRS performance
    against strategic objectives, highlighting the role of IRS service and
    enforcement in promoting voluntary compliance.

        In summary, by more fully leveraging IRS data collected during
    audits and applying cutting-edge analytic methods, we believe that we
    will be able to improve both the timeliness and coverage of the tax gap
    estimates so that these statistics will be more useful in helping shape
    IRS service and enforcement strategies. Our analysis so far shows that
    this approach can help us better detect and measure both emerging
    issues and issues that are concentrated in small segments of the
    population. It remains to be seen whether or not this approach will
    also help us do a better job of measuring other, difficult to detect
    issues, such as the cash economy and even illegal source income, both
    of which likely contribute significantly to the tax gap but by their
    nature, are largely missing from our current measures.
    Making Better Use of Analytics at the IRS
        Our progress in improving measures of the tax gap is just one of
    the many ways the IRS is using data, analytics, and cutting-edge
    technology to modernize tax administration. The machine learning-based
    approach described above is part of a broader strategy to develop new
    models for risk identification and workload selection to reduce the
    underreporting gap. The goal is to improve our ability to better
    identify returns with the highest probabilities of non-compliance and
    to prioritize those returns to ensure teams of highly specialized,
    highly trained examiners work those with the largest potential
    unreported tax liability first. As noted, one of the benefits of this
    approach is that by regularly updating the models using the most recent
    audit findings, we will incorporate emerging areas of risk into
    selection models.

        The IRS is also incorporating behavioral insights in many aspects
    of our work, including pilots to inform improvements to IRS notices and
    outreach activities. We have employed plain language and other
    enhancements to certain notices alerting taxpayers to underpayment of
    taxes or delinquencies. We have also added QR codes to allow taxpayers
    who prefer using online tools to easily access a web page that allows
    them to make online payments or set up a payment plan. The early
    results of these activities suggest that taxpayers resolve issues
    earlier, reducing the need to send follow-up notices without increasing
    phone calls, which help to reduce the underpayment gap.

        We are utilizing data and analytics to assist IRS employees by
    automating formerly time-consuming processes. This includes
    incorporating supervised robotic process automations that can quickly
    execute queries across multiple systems and compile them for human
    review and analysis, greatly reducing the time employees formerly spent
    on the same activities. Similarly, we are increasing our use of
    graphical databases that can be used to review clusters of activities
    or to provide a holistic view of all tax returns and information
    documents related to a specific entity, such as a business, tax-exempt
    entity or individual. For example, it can help an auditor see and drill
    down into all returns filed by partnerships in a complex business
    structure. This approach is also helping uncover sophisticated identity
    theft schemes, protecting millions of dollars in revenue from being
    paid in fraudulent refund claims.
                             addressing the tax gap
    Tax Gap Enforcement Efforts
        The IRS uses the tax gap data to help decide where to deploy our
    resources, both to minimize burden on compliant taxpayers (e.g., we
    would rather not audit someone who paid fully and timely) and to
    concentrate on reaching noncompliant taxpayers. Thanks to the help of
    artificial intelligence, advanced data, and analytic strategies, we
    have enhanced our capabilities to identify areas of noncompliance in
    ways that were not remotely possible just a few years ago. With that
    said, there is room to further modernize these efforts.

        Yet, we cannot devote all of our resources to just the deepest
    pockets of non-
    compliance but also must ensure that tax enforcement has an indirect
    ``deterrence'' effect on taxpayers generally.

        Enforcement supports the efforts of compliant taxpayers. To do
    this, we are exercising our best efforts with limited numbers of
    experienced, specialized examination personnel covering taxpayer
    compliance from several angles. Since 2018, we have shifted significant
    examination resources and technology to increase our focus on high-
    income/high-wealth taxpayers. We have also initiated a Compliance
    Initiative Project to ensure that we continue to maintain a high rate
    of audit coverage of taxpayers at the highest income categories using
    examiners across each of our operating divisions. Our specialized, most
    highly trained examination personnel are conducting audits of high-
    income/high-wealth taxpayers at an examination rate far higher than any
    other category of individual filers.

        Investing in the agency that interacts with more Americans than
    almost any other public or private organization and collects almost 96
    percent of the gross revenue of the United States of America is
    important. We must invest in meaningful taxpayer services, technology,
    data and analytics to improve the effectiveness of our existing
    enforcement workforce and programs, restore base enforcement functions
    that have declined substantially over the last decade, tackle key
    compliance priorities and emerging issues, and invest in programs that
    are essential to maintaining the broad compliance framework even though
    they may not directly generate revenue.
    Funding and Enforcement Trends
        The Congressional Budget Office (CBO) reported in ``Trends in the
    Internal Revenue Service's Funding and Enforcement'' in July 2020 that
    IRS appropriations have fallen by 20 percent in inflation-adjusted
    dollars between 2010 and 2018, resulting in a decline of 22 percent in
    the number of IRS staff. Because labor costs account for about 70
    percent of the IRS's budget, measures to reduce the IRS workforce were
    instituted, including a hiring freeze from 2011-2018. The amount of
    funding and staff allocated to enforcement activities has declined by
    about 30 percent since 2010. In this regard, the CBO determined that
    experienced Revenue Agents, who handle complex enforcement
    examinations, fell by 35 percent and Revenue Officers, who manage
    difficult collection matters, dropped by 48 percent. According to the
    CBO, the number of examinations since FY 2010 dropped by about 40
    percent even as the number of returns filed grew by 5 percent. The
    disruptions stemming from the 2020 coronavirus pandemic have further
    reduced the ability of the IRS to enforce tax laws.

        The loss of more than 17,000 enforcement employees since FY 2010
    led to a significant reduction in the number of examinations and the
    number of follow-ups on discrepancies between returns and third-party
    data, as well as an increase in assessments that were not collected and
    unfiled returns that were not secured. Enhancements in IRS technology
    are clearly helpful in offsetting some portion of the declining
    enforcement workforce, but we must acknowledge that such enhancements
    are hard pressed to significantly offset the increased sophistication
    of taxpayers and their transactions operating in a digital world
    economy coupled with the overall complexity of tax law.

        As noted later in this testimony, the President has made a series
    of proposals as part of the American Families Plan to invest in the IRS
    and improve tax administration--including funding for increased
    enforcement activities--that will generate an additional $700 billion
    in tax revenue over the course of a decade, net of the investments
    made. This is important, because the IRS's enforcement activities also
    have an indirect, deterrent effect on the tax gap by discouraging
    taxpayers from making misstatements on their returns.
    Foreign Account Tax Compliance Act (FATCA) Compliance Efforts
        Congress enacted the Foreign Account Tax Compliance Act (FATCA) in
    2010 to improve tax reporting compliance of U.S. Account Holders with
    assets held in Foreign Financial Institutions (FFI). Account Holders
    are required to annually report specified assets to the IRS on Form
    8938, Statement of Specified Foreign Financial Assets, while FFIs are
    required to annually report to the IRS the specified assets of United
    States Account Holders on Form 8966, FATCA Report.

        The IRS continues to perform outreach to ensure U.S. Account
    Holders and FFIs are aware of and able to timely and accurately report
    specified assets held abroad. Indeed, we coordinate with treaty
    partners and financial institutions to provide updated information
    which they may translate for improved use by those who are not
    proficient in English.

        In addition to our ongoing outreach efforts, we have undertaken
    multiple efforts to improve compliance of United States Account Holders
    and FFIs to include the following:

            The IRS uses a variety of treatment streams such as soft
    letters, examinations and termination of an FFI's FATCA status.
            Examination, Collection, the Office of Fraud Enforcement (OFE)
    and Criminal Investigation (CI) use the information to either identify
    noncompliant taxpayers and FFIs or to assist with developing specific
    cases. For example:
                CI has referred cases for examination based on
    FATCA data.
                Examination, Collection, the OFE and CI are
    working to identify more instances of non-reporting of offshore
    accounts.
                Collection utilizes FATCA data on balance due
    accounts to identify assets for collection as well as to identify
    certain non-filer/delinquent return cases of high-income non-filers.
            The IRS has a campaign to compare the filings by FFIs and
    individuals (i.e., Form 8966, FATCA Report, and Form 8938, Statement of
    Specified Foreign Financial Assets). We began with soft letters to
    remind them of the need to timely and accurately report their assets
    and have examined others who have not.
            The IRS also has a campaign that compares the filings of FFIs
    and individuals for withholding compliance purposes.
            We conduct compliance checks of FFI certifications and send
    follow-up letters enabling FFIs to bring themselves into compliance.
    For those FFIs who will not comply, we will terminate them resulting in
    30 percent withholding on certain United States Source Income. The IRS
    has terminated the FATCA status for nearly 1,000 non-compliant FFIs.
            FATCA data is associated with individual examination cases
    involving identified offshore-related issues, and third-party FATCA
    information received is also reconciled in numerous compliance
    activities on an ad hoc basis.
            The substantial increase in Foreign Bank Account Reporting
    (FBAR) filings, as well as the voluminous Form 8938 filings, both of
    which reflect the increased disclosure of individuals' foreign
    financial account holdings, demonstrate the significant voluntary
    compliance impacts of the FATCA regime. Indeed, the number of accounts
    reported on Forms 8938, Statement of Specified Foreign Financial Assets
    filed has grown from 1.3 Million in 2014 to 2.0 Million in 2019; FBAR
    reporting has grown from 538,000 in 2010 to 1.4 Million in 2019, and;
    the number of Form 8966, FATCA Report has grown from 1.6 Million in
    2014 to 6.3 Million in 2019.

        While the IRS has significantly increased its compliance efforts in
    recent years, we continue to be limited by technological and staffing
    limitations. Improved systems and data analytics capabilities, as well
    as more data scientists, analysts and enforcement personnel would
    improve our ability to better assist those United States Account
    Holders and FFIs who want to comply and improve fairness to all by
    taking appropriate enforcement actions on those who do not want to or
    will not comply.
    The American Families Plan
        A robust and sustained investment in the IRS is necessary to ensure
    it can do its job of administering a fair and effective tax system. In
    the American Families Plan, the President has included a series of
    proposals that overhaul tax administration and provide the IRS the
    resources and information it needs to address tax evasion. All told,
    these reforms will generate an additional $700 billion in tax revenue
    over the course of a decade. Specifically, the tax administration
    reforms will:

            Provide the IRS the resources it needs to stop sophisticated
    tax evasion. The IRS needs resources to pursue costly tax evasion.
    These cases are not easy to resolve; the average investigation of a
    high-wealth individual takes 2 years to complete and often requires the
    IRS to commit substantial resources. Moreover, the lack of investment
    in compliance has significant revenue consequences. Altogether, the
    proposal would provide roughly $80 billion to the IRS over a decade to
    fund an array of priorities--including overhauling technology to
    improve enforcement efforts. This investment will also facilitate the
    IRS hiring and training auditors to focus on complex investigations of
    large corporations, partnerships, and global high-wealth individuals.
    The President's proposal would ensure that additional resources go
    toward enforcement against those with the highest incomes, rather than
    Americans with actual income of less than $400,000.
            Provide the IRS with more complete information. When the IRS
    has information from third parties, income is accurately reported, and
    taxes are fully paid. However, high-income taxpayers disproportionately
    accrue income in opaque sources--like partnership and proprietorship
    income-- where the IRS struggles to verify tax filings. This proposal
    would provide the IRS information on account flows so that it has a
    lens into investment and business activity--similar to the information
    provided on income streams such as wage, pension, and unemployment
    income. Importantly, this proposal provides additional information to
    the IRS without any increased burden for taxpayers. Instead, it
    leverages the information that financial institutions already know
    about account holders, simply requiring that they add to their regular,
    annual reports information about aggregate account outflows and
    inflows. Providing the IRS this information will help improve audit
    selection so it can better target its enforcement activity on the most
    suspect evaders, avoiding unnecessary (and costly) audits of ordinary
    taxpayers.
            Overhaul outdated technology to help the IRS identify tax
    evasion. Elements of IRS IT systems are antiquated and make it
    difficult for the IRS to identify those who are not paying what they
    owe and to help those who want to comply. The President's proposal
    provides the IRS much-needed resources to modernize its technological
    infrastructure. Leveraging 21st-century data analytic tools will enable
    the IRS to make use of new information about income that accrues to
    high-earners and will help revenue agents unpack complex structures,
    like partnerships, where income is not easily traced.
            Improve taxpayer service and deliver tax credits. A well-
    functioning tax system requires that taxpayers be able to interact with
    the IRS in an efficient and meaningful manner. Inadequate resources
    often mean that IRS employees are unable to provide taxpayers timely
    answers to their tax questions. Service enhancement will improve the
    ability of the IRS to communicate with taxpayers securely and promptly.
    Importantly, the proposal also includes the necessary resources to
    ensure that the IRS effectively and efficiently delivers tax credits to
    families and workers, including the administration's proposal to make
    the Child Tax Credit and the advance payments permanent.
            Regulate paid tax preparers. Taxpayers often make use of
    unregulated tax preparers who lack the ability to provide accurate tax
    assistance. These preparers submit more tax returns than all other
    preparers combined, and they make costly mistakes that subject their
    customers to painful audits, sometimes even intentionally defrauding
    taxpayers for their own benefit. The President's plan calls for giving
    the IRS the legal authority to implement safeguards in the tax
    preparation industry. It also includes stiffer penalties for
    unscrupulous preparers who fail to identify themselves on tax returns
    and defraud taxpayers (so-called ``ghost preparers'').

        Chairman Whitehouse, Ranking Member Thune, and members of the
    subcommittee, thank you again for the opportunity to discuss the tax
    gap. This concludes the IRS's statement.
                         appendix 1: tax gap visibility
        Source: Page 14, Federal Tax Compliance Research: Tax Gap Estimates
    for Tax Years 2011-2013, Publication 1415 (Rev. 9-2019) Catalog Number
    10263H Department of the Treasury, Internal Revenue Service

    [GRAPHIC] [TIFF OMITTED] T1121.001

                          .epsappendix 2: tax gap map
        Source: Page 8, Federal Tax Compliance Research: Tax Gap Estimates
    for Tax Years 2011-2013, Publication 1415 (Rev. 9-2019) Catalog Number
    10263H Department of the Treasury, Internal Revenue Service

    [GRAPHIC] [TIFF OMITTED] T1121.002

                                     .eps__

              Questions Submitted for the Record to Barry Johnson
                     Questions Submitted by Hon. John Thune
        Question. What is the IRS's latest official estimate of the tax
    gap?

        Answer. The current gross tax gap estimate, based on TY11-TY13, is
    $441 billion. The next set of tax gap estimates, based on TY14-TY16,
    will be released in spring 2022 and will include projections of tax gap
    for TY17-TY19.

        Question. How does the voluntary tax compliance rate of the United
    States compare to other countries, namely countries from the OECD?

        Answer. Because the tax regimes of OECD countries vary widely, they
    are not easily comparable. For example, many of the OECD countries
    include a value-added tax (VAT) as part of their tax regime, while the
    United States does not. In the UK payments for both National Insurance
    and VAT are included in their tax gap estimates. In their 2020 release,
    HM Revenue and Customs reports an estimated gap of 4.7 percent, that is
    analogous to the net tax gap reported in the IRS tax gap report
    (computed as the gross tax gap less enforced and other late payments).
    This equates to a net compliance rate of 95.3 percent as compared to
    the net compliance rate of 85.8 percent reported by IRS in the
    ``Federal Tax Compliance Research: Tax Gap Estimates for Tax Years
    2011-2013.'' The UK does not include a measure of the voluntary
    compliance rate in their report.

        Question. What data does the IRS have as to whether, or how much,
    self-prepared tax returns contribute to the tax gap?

        Answer. The IRS does not have a separate breakout of how much self-
    prepared tax returns contribute to the tax gap. The tax gap is a high-
    level measure that breaks out type of tax (individual, corporate,
    excise, and estate) by whether the gap relates to nonfiling,
    underreporting, or underpayment.

                                     ______

            Questions Submitted for the Record to Douglas O'Donnell
                 Questions Submitted by Hon. Sheldon Whitehouse
        Question. In 2010, Congress passed the Foreign Account Tax
    Compliance Act (FATCA), with bipartisan support, to provide the IRS the
    information it needs to find hidden income in offshore accounts.
    Inspector General George noted in his testimony that as of 2018--nearly
    a decade after the law's passage--``the IRS had taken virtually no
    compliance actions to meaningfully enforce the Foreign Account Tax
    Compliance Act (FATCA).''

        How have resource constraints and outdated technology impacted your
    ability to make effective use of the information the IRS collects?

        Answer. The IRS's ability to conduct data analysis of, as well as
    comparisons between, Forms 8938 filed by U.S. account holders and Forms
    8966 (or FATCA reports) filed by or on behalf of foreign financial
    institutions (FFIs) has been impacted by the following factors:

            Both information technology and human resource limitations
    have caused delays in the time it takes to make FATCA data available
    for analysis and use. Moreover, taken together, the constraints set
    forth below have precluded the development of fully automated data
    matching capabilities.
            IRS information technology limitations have made it difficult
    to conduct queries and analysis of data relevant to FATCA enforcement.
    By way of example, development of new capabilities for the primary
    database intended to house data from Forms 8938 and 8966 was halted in
    2018 due to budget and resource constraints prior to deployment of
    functionality that would have made it easier to query, extract, and
    analyze FATCA data. An interim reporting solution has produced more
    limited and less usable output. More effectual utilization of FATCA
    data currently requires highly specialized and trained IRS employees
    who must develop complex code.
            Forms 8938 and 8966 apply divergent reporting conventions,
    foreign currency conversion standards, and exceptions and alternatives
    to reporting that significantly complicate analysis and use of FATCA
    data and preclude straightforward form-to-form matching as a means to
    identify non-compliance. These data do not lend themselves to the
    automated matching models of the Automated Under Reporter system, but
    rather require resource-intensive review and comparison of the data.
    Moreover, current law (including intergovernmental agreements with
    other countries that provide FATCA information to the United States)
    does not require that FFIs report their Global Intermediary
    Identification Numbers (GIINs) to their U.S. account holders, and
    similarly current regulations do not require U.S. account holders to
    report the GIINs of the FFIs with whom they maintain reportable
    accounts on their Form 8938 filings because of concerns that it might
    be difficult for individuals to obtain GIINs without such reporting
    from FFIs. Similarly, guidance has allowed for the deferral of taxpayer
    identification number (TIN) reporting by FFIs on Forms 8966 in many
    instances through the 2019 tax year. The absence of these reporting
    requirements significantly increases the resource load on the IRS, both
    in terms of information technology and employees, in making optimal and
    timely use of data relevant to FATCA enforcement.

        Further, after the data are available for use, resource constraints
    in our compliance functions have impacted the magnitude of compliance
    activities we are able to conduct regarding both the individual and
    financial institution populations.

        Question. What can the IRS do to improve the accuracy of data
    provided by foreign banks? What tools does IRS have to encourage or
    compel compliance?

        Answer. The IRS has and will continue to provide educational and
    outreach efforts, conduct compliance checks of FFIs, and terminate
    GIINs of non-compliant FFIs both to improve the accuracy of data
    provided and to encourage and compel compliance. The termination of the
    GIIN would result in thirty percent tax for any FATCA withholdable
    payment of U.S. source income being paid to the FFI, pursuant to the
    FATCA rules.

        Question. When does the IRS plan to crack down on those with
    offshore bank accounts who fail to file FATCA disclosure forms?

        Answer. The IRS has been and continues to utilize FATCA data in its
    compliance activities. LB&I has a campaign filter approved for
    compliance efforts (including soft letters and examinations) that
    identifies individuals with offshore bank accounts who may have
    erroneously failed to file FATCA disclosure forms. This filter is
    currently being run on the 2019 tax year data, due to our expectation
    of greater TIN reporting rates in later years. Without TIN reporting,
    it is much more difficult to verify the taxpayer, and when addressing
    potential non-filers, the IRS must be certain it has identified the
    correct (non-reporting) taxpayer.

                                     ______

                     Questions Submitted by Hon. John Thune
        Question. What is the IRS doing to improve how the agency estimates
    the tax gap so that members and the public can get a number that is
    more timely and accurate?

        Answer. The next tax gap estimate will be released in the spring of
    2022. In addition to the formal estimates for the TY14-TY16 time frame,
    the report will include projections for TY17-TY19. At the time the next
    tax gap report is issued, TY19 will be the most current year with all
    or nearly all returns filed.

        The existing tax gap methodology is sound and conforms with OMB
    requirements for producing reliable official statistics in that the
    methodology is rigorous, peer-
    reviewed, and based on well-established statistical principles. Since
    our objective with tax gap estimation is to measure compliance behavior
    as that behavior is manifested in tax not paid voluntarily and timely,
    we strive to base our estimates on observed compliance for the years
    being estimated. There is, therefore, a tradeoff between achieving that
    and the contemporaneousness of the estimates, especially in the context
    of the underreporting tax gap estimates, which are based on examination
    data. The addition of projections in the next release will address some
    of the timing concerns. Those projections eventually will be revised
    once additional compliance data for those years becomes available.

        We continually review our estimation methodologies to identify
    refinements and additional data that would improve the estimates. We
    also conduct separate studies to understand emerging issues such as
    trends in international noncompliance or changes to the economy (e.g.,
    the emergence of the gig economy) to understand their impact on tax
    administration.

        Question. As the IRS is currently in the process of preparing a new
    study on the tax gap, how will the study focus on ways to better
    understand the contributing factors that allow for errors and omissions
    on tax returns that are completed by type of tax (for example,
    individual income tax, corporation income tax, employment tax, and
    estate tax)?

        Answer. Outside of the framework of the tax gap, the IRS has a
    robust program of research into specific compliance areas including
    extensive behavioral research intended to produce more effective
    notices and nudges designed to improve voluntary compliance. The
    research includes studies to specifically understand contributing
    factors that allow for errors and omissions on tax returns. These
    reports are much more granular in detail and allow for better
    identification of root causes.

        For example, the IRS has conducted separate studies of the sources
    of errors for the Earned Income Tax Credit, the Child Tax Credit, and
    the education credits. The IRS also completed an analysis of employer
    compliance with Form 1099 Miscellaneous Income (Form 1099-MISC), one
    specific issue in the employment tax compliance area. The challenge
    with all analyses of compliance is the need for data that can be used
    to develop reliable estimates of the population. The type of data that
    is essential for understanding the nature and extent of noncompliance
    often differs from the type of data that is needed for basic tax
    administration and therefore requires additional resources to collect.
    Data availability limits the type of detail that is available,
    especially for corporation income tax and estate tax.

        Question. What recommendations, if any, does the IRS's research
    division have to develop more timely and accurate estimates of the tax
    gap?

        Answer. As mentioned in the response above, the next tax gap
    estimates will include projections through TY19, which will be the most
    current year with full or nearly full timely return filings. Currently,
    the compliance-related data available for tax gap estimation support
    methodologies that yield reliable estimates by broad categories of tax
    and sources of noncompliance (nonfiling, underreporting, and
    underpayment)--and for individual income tax, for selected tax return
    and schedule line items. Additional data collection geared to specific
    objectives and/or areas of interest would be of benefit because it
    would allow reliable estimation at a more disaggregated level and could
    help quantify potential compliance problems associated with new and
    emerging issues (e.g., the comprehensiveness of third-party reporting
    related to cryptocurrency transactions.) We have been working on
    updating and enhancing the underlying methodology, making more current
    estimates, and considering how to identify and incorporate additional
    information and emerging compliance issues. By including more
    operational audit data, RAAS anticipates we'll be able to produce
    estimates that are more timely and inclusive and include forecasts of
    emerging issues.

        Question. According to official IRS data and research, overall tax
    compliance rates have been holding steady around 85 percent since the
    1980s (voluntary tax compliance around 82-84 percent and net tax
    compliance around 85-86 percent with late payments and enforcement).
    That is a relatively high and stable compliance rate for at least 40
    years. GAO has recommended a long-term, quantitative goal for improving
    taxpayer compliance (ex. 85 percent, 86 percent, 87 percent, etc.).

        How does the IRS view GAO's proposal of a clear numerical target in
    terms of addressing progress related to the tax gap?

        Answer. The gross tax gap and voluntary compliance rate (VCR)
    appear to be appealing measures because they synthesize noncompliance
    behavior (as manifested in tax voluntarily and timely paid) into single
    numbers. However, the tax gap measures do not have properties that are
    well suited for purposes of setting goals and targets for the IRS. IRS
    actions alone do not determine the level of voluntary compliance and
    the measure is much more likely to change resulting from macroeconomic
    factors or legislative changes than discrete actions taken by the IRS.

        The IRS has established and reports on a series of measures as part
    of its strategic plan. Additionally, the IRS routinely conducts studies
    outside the framework of the tax gap estimates that report on
    compliance efforts related to specific programs and issues. These
    studies provide more detailed analyses and assessments of specific
    programs or issues and provide evidence on how procedural and other
    changes can enhance compliance and/or improve the efficiency of IRS
    activities.

                                     ______

           Prepared Statement of Nina E. Olson, Executive Director,
                           Center for Taxpayer Rights
        Chairman Whitehouse, Ranking Member Thune, and members of the
    subcommittee, thank you for inviting me to appear before you today at
    this hearing to discuss the important issue of the Federal tax gap and
    lost revenue attributable to noncompliance and offshore tax evasion. It
    feels like I have spent my entire professional career wrestling with
    taxpayer compliance, taxpayer rights, and the tax gap, first as an
    unenrolled return preparer helping individuals and small businesses
    comply with the tax laws, next as a tax controversy attorney
    representing low-
    income taxpayers and others before the IRS and in the courts, then for
    18 years as the National Taxpayer Advocate, and today, as the executive
    director of the Center for Taxpayer Rights,\1\ where our focus is
    awareness and protection of taxpayer rights in the United States and
    internationally.
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        \1\ The Center for Taxpayer Rights is a 501(c)(3) corporation that
    promotes taxpayer rights in the United States and internationally. For
    more information about the Center, see https://www.taxpayer-
    rights.org/.

        As National Taxpayer Advocate, I regularly made the case for
    increased IRS funding in order to maintain and improve tax compliance,
    not just for additional hiring of audit and collection employees but
    also those in the taxpayer service functions, the Office of Appeals,
    and the Taxpayer Advocate Service (TAS). I first identified the Cash
    Economy Tax Gap as a Most Serious Problem of taxpayers in my 2003
    Annual Report to Congress, and recommended withholding on non-wage
    workers in that report.\2\ I identified the tax gap as a Most Serious
    Problem or made legislative recommendations to address it in at least
    three other Annual Reports.\3\ As early as 2006, I submitted a
    legislative recommendation for revising Congressional Budget Procedures
    both to increase IRS funding and accountability.\4\ In my 2011 Annual
    Report to Congress, I identified IRS (under)funding as a Most Serious
    Problem, and raised that issue again in my 2012 and 2013 Annual
    Reports.\5\ In 2018, I made a legislative recommendation to address
    sustained Information Technology (IT) multi-year funding.\6\ All of
    these proposals are framed in the context of taxpayer rights and the
    fundamental principle that the government must treat the taxpayers on
    which it relies for its ``lifeblood'' with decency, respect, accuracy,
    and integrity.
    ---------------------------------------------------------------------------
        \2\ National Taxpayer Advocate 2003 Annual Report to Congress, Most
    Serious Problem: Nonfiling and Underreporting by Self-Employed
    Taxpayers, 20-25; and Legislative Recommendation: Tax Withholding on
    Nonwage Workers, 256-269.
        \3\ National Taxpayer Advocate 2004 Annual Report to Congress,
    Legislative Recommendation: Tax Gap Recommendations, 478-489; National
    Taxpayer Advocate 2005 Annual Report to Congress, Most Serious Problem:
    The Cash Economy, 55-75; Legislative Recommendation, Measures to Reduce
    Noncompliance in the Cash Economy, 381-396; and National Taxpayer
    Advocate 2006 Annual Report to Congress, Most Serious Problem: The Tax
    Gap, 6-9.
        \4\ National Taxpayer Advocate 2006 Annual Report to Congress,
    Legislative Recommendation: Revising Congressional Budget Procedure to
    Improve the IRS Funding Decisions, 442-457.
        \5\ National Taxpayer Advocate 2011 Annual Report to Congress, Most
    Serious Problem: The IRS Is Not Adequately Funded to Serve Taxpayers
    and Collect Taxes, 3-14; National Taxpayer Advocate 2012 Annual Report
    to Congress, Most Serious Problem: The IRS is Significantly Underfunded
    to Serve Taxpayers and Collect Tax, 34-41; and National Taxpayer
    Advocate 2013 Annual Report to Congress, Most Serious Problem: IRS
    Budget: The IRS Desperately Needs More Funding to Serve Taxpayers and
    Increase Voluntary Compliance, 20-39.
        \6\ National Taxpayer Advocate 2018 Annual Report to Congress,
    Legislative Recommendation: IT Modernization: Provide the IRS With
    Additional Dedicated, Multiyear Funding to Replace Its Antiquated Core
    IT Systems Pursuant to a Plan that Sets Forth Specific Goals and
    Metrics and Is Evaluated Annually by an Independent Third Party, 351-
    358.

        Despite its funding challenges, the IRS has plugged on, and in many
    instances has performed admirably. Its issuance of three rounds of
    Economic Impact Payments is nothing short of miraculous.
    Notwithstanding this performance, in my testimony today I will describe
    the problems created by the current state of IRS resources, technology,
    and skillsets. I do this not to denigrate the IRS but to make the case
    that to address the tax gap we need transformational change, and that
    change must occur in the context of minimizing undue taxpayer burden
    and protecting taxpayer rights. That change also will require
    significant investment in new technology, leadership, employees,
    training, procurement skills, and funding. It requires a massive
    redesign of IRS systems, phased in over all IRS systems, so that they
    can process information and talk to one another in real time in order
    to keep up with current and trending issues. It requires upgrading the
    input systems--those that receive data and complete error processing,
    and it requires all systems to update quickly and be flexible.
    ---------------------------------------------------------------------------
    ``Flexible'' is not a word often applied to IRS systems today.

        All of this is not going to happen overnight. And although this is
    a monumental undertaking, I want to emphasize that such change is
    possible. It will take a lot of work, in increments. It will take
    sustained funding, and sustained oversight. It will require additional
    hiring authorities, and it will require IRS leadership and personnel
    who are experienced and capable of overseeing and delivering a project
    of this magnitude. In my opinion, there really is no choice about all
    this--it must occur. If we do not make these investments in the IRS, we
    will not only not address the upper reaches of the tax gap, but we will
    actually risk increasing the tax gap by failing to meet the needs of
    taxpayers who are compliant or who are in good faith trying to comply
    with the law. That is a result we cannot allow to happen.
    in the drive to ``enforce'' the tax laws, we cannot allow the emphasis
           on enforcement to come at the expense of taxpayer service
        I first appeared before the Senate Finance Committee in February
    1998, as the executive director of The Community Tax Law Project, the
    first independent low-income taxpayer clinic in the country.\7\ I
    testified about how the Service's drive to collect taxes and its
    failure to consider the facts and circumstances of individual
    taxpayer's situations led to harmful overreach, especially for low
    income and middle class taxpayers who could not afford representation.
    The passage of the landmark Internal Revenue Service Restructuring and
    Reform Act of 1998 (RRA 98) \8\ was a watershed in the advancement of
    taxpayer rights, equaled only by the passage of the Taxpayer Bill of
    Rights in 2015,\9\ and the Taxpayer First Act in 2019.\10\
    ---------------------------------------------------------------------------
        \7\ IRS Restructuring: Hearings on H.R. 2676 Before the Senate
    Committee on Finance, 105th Congress 105-529, at 329-40 (1998)
    (statement of Nina E. Olson, executive director, The Community Tax Law
    Project).
        \8\ Internal Revenue Service Restructuring and Reform Act of 1998,
    Pub. L. 105-206, 112 Stat. 685.
        \9\ Protecting Americans from Tax Hikes Act of 2015, Pub. L. No.
    114-113, Sec. 401, 129 Stat. 3040, 3117.
        \10\ Taxpayer First Act, Pub. L. No. 116-25, 133 Stat. 981.

        Approximately 2 percent of the $3.6 trillion the IRS collects each
    year comes from direct enforcement actions.\11\ The remaining 98
    percent comes from the indirect effect of a mixture of people's fears
    about IRS enforcement and their desire to be compliant with the tax
    laws (tax morale). Even the compliance of purely wage-earning
    taxpayers, who are subject to reporting and withholding, is
    attributable to their employers voluntarily withholding and depositing
    payroll taxes. Because it is easier to measure the direct revenue
    effect of enforcement, however, budgets for administrations of both
    parties have consistently proposed increased enforcement spending,
    usually through the device of a program integrity cap, giving taxpayer
    service short shrift.\12\
    ---------------------------------------------------------------------------
        \11\ IRS, 2019 Data Book, Table 1 and Table 25 (June 2020). The IRS
    collected a total of $3.56 trillion in FY 2019. It reported
    approximately $60.1 billion in revenue attributable to its collection
    activities, including $44 billion (net after credit transfers) on
    balance due returns, $1.89 billion on delinquent returns, $289 million
    on offers in compromise, and almost $14 billion on installment
    agreements.
        \12\ The National Taxpayer Advocate reports the IRS Taxpayer
    Service enacted appropriations provided for 28,531 full-time employees
    in FY 2019, 26,760 in FY 2020, and down to 25,678 for FY 2021. National
    Taxpayer Advocate 2020 Annual Report to Congress 32.

        The chronic underfunding of taxpayer service has led to an
    environment where we routinely see delays in mail handling and
    telephone ``level of service'' (LOS) performance at 50 to 60 percent,
    measured as the percentage of calls the IRS directs to a live assistor
    that actually reach a live assistor.\13\ According to the National
    Taxpayer Advocate, the IRS LOS on the main 1040 number plummeted to 5
    percent during the current filing season, and the TAS measure of LOS
    actually placed it at 2 percent.\14\ This means 98 percent of calls to
    the main IRS number did not get through to a live assistor. For FY
    2021, the IRS requested funding that would provide LOS at 60 percent,
    which Congress approved. This means we've accepted it is okay to not
    answer 4 out of 10 calls from taxpayers who the IRS directs to reach a
    live assistor at the IRS.\15\
    ---------------------------------------------------------------------------
        \13\ Id. at 31.
        \14\ NTA Blog: 2021 Filing Season Bumps in the Road: Part I (April
    22, 2021) at https://www.taxpayeradvocate.irs.gov/news/nta-blog-2021-
    filing-season-bumps-in-the-road-part-1/.
        \15\ Id. at 30. Of course, this LOS does not account for the calls
    the IRS phone tree directs away from a live assistor, even though the
    caller may want to talk to someone and not reach an automated line. In
    this way, the IRS performance measure misrepresents the taxpayer
    experience on the phones.

        Today, much of the IRS's compliance contacts fall in the category
    of what I call ``unreal audits.''\16\ According to IRS chief counsel,
    they do not meet the definition of an audit, which involves an
    examination of the taxpayer's books and records (IRC Sec. 7602). Yet
    for millions of taxpayers each year, these unreal audits sure feel like
    an audit, and they can result in an assessment of additional tax (and
    penalties) just like an audit, even if the IRS does not include these
    contacts in its calculation of audit rates. Take summary assessments
    under IRC Sec. 6213(b), for example, also known as ``math errors.''
    Summary assessment authority (SAA) allows the IRS to make an immediate
    adjustment to a taxpayer's return and only follow deficiency procedures
    (including the right to petition Tax Court before paying the tax) if
    the taxpayer objects within 60 days. Yet the math error notices are
    incomprehensible. The typical math error notice (Notice CP-11) reads as
    follows:
    ---------------------------------------------------------------------------
        \16\ See National Taxpayer Advocate 2017 Annual Report to Congress,
    Most Serious Problem: Audit Rates: The IRS is Conducting Significant
    Types and Amounts of Compliance Activities That it Does Not Deem to Be
    Traditional Audits, Thereby Underreporting the Extent of its Compliance
    Activity and Return on Investment, and Circumventing Taxpayer
    Protections, 49-63. See also NTA Blog: ``Real'' vs. ``Unreal'' Audits
    and Why This Distinction Matters (July 6, 2018) at https://
    www.taxpayeradvocate.irs.gov/news/ntablog-real-vs-unreal-audits-and-
    why-this-distinction-matters/.
    ---------------------------------------------------------------------------
    Changes to your 2019 Form 1040
        We found miscalculations on your 2019 Form 1040, which affect the
    following areas of your return:

            Income
            Tax Computation

        We changed your return to correct these errors. As a result, you
    owe $xxxx.

        Buried on page 3 of this 4-page notice is some language that is
    only marginally more helpful:

                         Changes to your 2019 tax return

                                 Your Calculation         IRS Calculation

    Adjusted Gross Income,
     Line 8b
    Taxable Income, Line
     11b
    Total Tax, Line 16

        That's all the information a taxpayer gets about this ``error'' and
    change. This vague language, which fails to put the taxpayer on notice
    of precisely what was changed on a taxpayer's return so they can decide
    if the IRS is correct or not, contravenes Congress's explicit direction
    to the IRS when it expanded math error authority in 1976. At that time,
    Congress told the IRS it would get this expansion but to address
    fairness concerns about removing more situations from deficiency
    procedures, Congress added IRC Sec. 6213(b)(1), which requires that
    ``[e]ach notice under this paragraph shall set forth the error alleged
    and an explanation thereof.'' The House and Senate Committee Reports
    both directed the IRS to phrase the notice regarding inconsistent
    entries on returns in such a way as to include questions designed to
    show why the IRS had chosen to challenge a particular entry on the
    taxpayer's return.\17\ It is now almost 50 years later, and IRS math
    error notices are as vague and imprecise as they were in 1976. This is
    a violation of the taxpayer's right to be informed, to quality service,
    and to challenge the IRS and be heard.\18\
    ---------------------------------------------------------------------------
        \17\ See H.R. Rep. 94-658, at 289 and S. Rep. No. 94-938(l), 94th
    Cong., 2d Sess. 375 (1976). The reports cited an example where the
    taxpayer enters six dependency exemptions, but then calculates for
    seven exemptions; in this case, the IRS should phrase its notices to
    show the taxpayer the specific discrepancy and inform the taxpayer they
    might be eligible for the greater number of exemptions. For a detailed
    discussion of math error notices, see National Taxpayer Advocate 2014
    Annual Report to Congress, Most Serious Problem: Math Error Notices:
    The IRS Does Not Clearly Explain Math Error Adjustments, Making it
    Difficult for Taxpayers to Understand and Exercise Their Rights, 163-
    171.
        \18\ I.R.C. Sec. 7803(a)(3); IRS, Publication 1, Your Rights as a
    Taxpayer (Rev. September 2017).

        Upon receipt of a summary assessment/math error notice, the
    taxpayer has 60 days to dispute the IRS's assessment in order to have
    the tax abated. In the taxpayer disputes it timely, the IRS will review
    the change and if the IRS believes the original assessment is correct,
    the IRS must issue a Notice of Deficiency, giving the taxpayer the
    opportunity to petition the U.S. Tax Court before having the pay the
    ---------------------------------------------------------------------------
    tax.

        If the taxpayer calls the IRS to get clarification about the
    specific item that was changed pursuant to a SAA/math error notice so
    he can decide whether to dispute the notice, technology defeats him.
    IRS assistors on the phone number listed on the notice cannot see the
    taxpayer's return to know what caused the problem. That assistor must
    fill out the dreaded Form 4442 ``referral'' to another IRS
    function.\19\ That function may or may not provide the taxpayer with a
    substantive answer, but it will generally send a letter saying it needs
    30 days to review. And then the taxpayer will get another letter,
    saying it needs another 30 days to review. (This letter is referred to
    as a ``stall letter'' in IRS jargon.) By this time the taxpayer is in
    an anxiety-producing situation--60 days will soon elapse and the
    taxpayer doesn't know if the IRS has abated the assessment or if the
    taxpayer's account will proceed to collection.
    ---------------------------------------------------------------------------
        \19\ See IRM 21.3.5.

        Customer service representatives and other IRS employees have no
    access to a 360-degree view of the taxpayers account because the IRS
    has no database in which all taxpayer information is stored or linked.
    Although the IRS has been working on an Enterprise Case Management
    system since at least 2015, it still has 60 separate major databases
    containing taxpayer information. The lack of a full picture of the
    taxpayer's tax life has significant consequences not only for taxpayer
    assistance but also for audit selection, collection prioritization, and
    ---------------------------------------------------------------------------
    protection of taxpayer rights.

        Dreams of the future IRS having purely digital communications with
    taxpayers will likely not materialize any time soon. Dealing with the
    IRS has consequences that don't accrue to a bad Amazon or airline
    transaction. For example, over the next 2 years, there will be millions
    of taxpayers with Paycheck Protection Program loans and Employee
    Retention Credits, hundreds of millions reconciling Rebate Recovery
    Credits for 2 years straight, millions claiming and reconciling a new
    Advance Child Tax Credit, and an influx of reporting on gig economy
    workers. If these taxpayers receive an IRS notice questioning their
    return, it is unlikely they will be comfortable with just going online
    to resolve the matter (if they make it through the IRS online account
    authentication required to open an account), especially when their bank
    accounts could be levied, their refunds offset, and their wages levied,
    all without any judicial review. Taxpayers want to know that they have
    been listened to and they want answers. They have the right to be
    informed, the right to quality service, the right to pay no more than
    the correct amount of tax, and the right to challenge the IRS and be
    heard.\20\ Taxpayer service, which is so important to achieving the
    level of compliance we have today, must be funded to maintain that
    level.
    ---------------------------------------------------------------------------
        \20\ I.R.C. Sec. 7803(a)(3); IRS, Publication 1, Your Rights as a
    Taxpayer (Rev. September 2017).

            Recommendation: Amend IRC Sec. 6213(b)(1) to require any notice
            of assessment issued pursuant to the IRS's summary assessment
            authority under that section to include a reference to the
            specific form and line that has been adjusted as well as a
            detailed explanation of the adjustment, including the amount of
            adjustment and the reason therefor. Further, require that the
            notice prominently displays on its first page the last date for
            requesting abatement and explain on the first page the
            consequences of not requesting abatement before the last day
            listed. Finally, require the IRS to provide the taxpayer with a
            dedicated fax number or email address for making the request,
            and require the IRS to issue an acknowledgement letter or
            email, informing the taxpayer the request has been received and
            the tax is abated pending further review.\21\
    ---------------------------------------------------------------------------
        \21\ Regarding similar shortcomings of IRS notices providing
    taxpayers their right to a Collection Due Process hearing, see National
    Taxpayer Advocate 2018 Annual Report to Congress, Most Serious Problem:
    Collection Due Process Notices: Despite Recent Changes to Collection
    Due Process Notices, Taxpayers Are Still at Risk for Not Understanding
    Important Procedures and Deadlines, Thereby Missing Their Right to an
    Independent Hearing and Tax Court Review, 212-222.
    ---------------------------------------------------------------------------
                     the tax gap does not equal tax evasion
        Recent studies estimating the amount of unreported income by the
    highest-income taxpayers, and proposals to reduce the underreporting
    component of the tax gap by increased information reporting, along with
    the Commissioner's guestimate that the annual tax gap could be as much
    as $1 trillion, have led policy-makers, commentators, and the media to
    equate the tax gap with tax evasion.\22\ The ubiquitous usage of this
    phrase actually dilutes its meaning and impact. It also allows very
    different types of noncompliance attributable to very different causes
    to be lumped together. And framing noncompliance as tax evasion not
    only undermines compliance among the currently compliant, who will
    begin to feel naive for complying, but it creates an environment in
    which tax agency personnel can feel justified in undermining if not
    outright ignoring taxpayer rights and protections.
    ---------------------------------------------------------------------------
        \22\ See, e.g., Washington Post, ``IRS chief says cheats are
    costing the U.S. $1 trillion a year,'' April 13, 2021 at https://
    www.washingtonpost.com/business/economy/irs-chief-says-cheats-are-
    costing-the-us-1-trillion-a-year/2021/04/13/128f1b0c-9c5d-11eb-b7a8-
    014b14aeb9e4_story.html; and New York Times, ``Tax cheats cost the U.S.
    $1 trillion per year, IRS chief says,'' April 13, 2021, at https://
    www.nytimes.com/2021/04/13/business/irs-tax-gap.html.

        I have always viewed tax noncompliance as a continuum of behavior
    and causes--i.e., factors that influence that behavior.\23\ Even as the
    financial, technology, and economic landscape evolves, not all
    noncompliance can be categorized as ``tax evasion.'' Take
    cryptocurrency, for example. A wide variety of human beings use
    cryptocurrency for a wide variety of reasons. Not all of that usage is
    on the dark web--some people purchase it for novelty or for investment,
    some people use it for everyday transactions. An article about the
    recent Coinbase initial public offering on Nasdaq notes that one-third
    of small and medium-sized U.S. businesses accept cryptocurrency as
    payment.\24\ Not everyone understands which cryptocurrency transactions
    constitute a realizable event for tax purposes, much less when that
    event generates taxable income. Indeed, the IRS only issued guidance on
    cybercurrency in 2014.\25\ Yet the IRS has clearly adopted the
    viewpoint that mere ownership or acquisition of cybercurrency is an act
    worthy of closer scrutiny--in a prominent place on the 2020 Form 1040,
    Individual Income Tax Return, it asks every taxpayer the following
    question (under penalties of perjury): ``At any time during 2020, did
    you receive, send, sell, exchange or otherwise acquire any financial
    interest in any virtual currency?'' This question, on its face
    requiring the reporting of the acquisition of virtual currency, has
    brought almost universal condemnation as overreach.\26\
    ---------------------------------------------------------------------------
        \23\ Professor Leslie Book described a typology of tax
    noncompliance, based on the work of sociologists Robert Kidder and
    Craig McEwen. See L. Book, ``The Poor and Tax Compliance: One Size Does
    Not Fit All,'' in Kansas Law Review, vol. 51, 1145-1195 (2003). Kidder
    and McEwan identified eight types of tax noncompliance: procedural,
    ``lazy'' or characteristic, unknowing, asocial, brokered, symbolic,
    social and habitual.
        \24\ ```It's more than just Coinbase': Crypto Giant snares $85.8
    billion valuation in Nasdaq debut,'' Washington Post, April 14, 2021 at
    https://www.washingtonpost.com/business/2021/04/14/coinbase-ipo-crypto-
    bitcoin/?utm_source=rss&utm_medium=referral&utm_campaign=wp_
    business.
        \25\ Internal Revenue Service, Notice 2014-21, at https://
    www.irs.gov/pub/irs-drop/n-14-21.pdf. In 2013 I identified the IRS
    Chief Counsel's failure to address the treatment of cryptocurrency as a
    Most Serious Problem of taxpayers. National Taxpayer Advocate 2013
    Annual Report to Congress, Most Serious Problem: Digital Currency: The
    IRS Should Issue Guidance to Assist Users of Digital Currency, 249-255.
        \26\ See National Taxpayer Advocate, NTA Blog: Wait, When Did This
    Virtual Currency Question Appear on My 1040 Tax Form, March 3, 2021 at
    https://www.taxpayeradvocate.irs.gov/news/nta-blog-wait-when-did-this-
    virtual-currency-question-appear-on-my-1040-tax-form2/; see also
    Guinevere Moore, ``IRS Rules on Reporting Bitcoin and Other Crypto Just
    Got Even More Confusing,'' Forbes, March 3, 2021 at https://
    www.forbes.com/sites/irswatch/2021/03/03/irs-rules-on-crypto-reporting-
    just-got-even-more-confusing/?sh=2a393e487850.

        Leaving cryptocurrency aside, of the current $441 billion gross tax
    gap estimate by IRS,\27\ some portion of the underreporting gap is
    attributable to errors made as a result of tax law complexity
    (unknowing noncompliance) and others are attributable to procedural
    complexity and barriers--for example, where taxpayers are eligible for
    a deduction or credit but cannot navigate the bureaucracy on their own
    and cannot afford representation, so they just give up (functional or
    characteristic noncompliance).
    ---------------------------------------------------------------------------
        \27\ IRS, Tax Gap Estimates for Tax Years 2011-2013, at https://
    www.irs.gov/newsroom/the-tax-gap.

        Then there is that component of the tax gap attributable to
    underpayment, which will most assuredly increase as a result of the
    pandemic economy. Are the taxpayers who failed to make tax payments
    during this period tax evaders and tax cheats because their businesses
    shut down or went under during this period, or because they lost their
    jobs? Maybe some actively engaged in evasion, but most faced
    extraordinary challenges making ends meet and simply weren't able to
    pay their taxes as well. Failure to differentiate between the causes of
    noncompliance results in the tax agency taking disproportionate actions
    and risks turning struggling noncompliant taxpayers into determined and
    intentional tax evaders. At a minimum, such a failure erodes trust,
    which is never good for a tax system and which research has shown is
    vital to achieving and maintaining voluntary tax compliance.
                  lessons from the ovdp settlement initiatives
        As the IRS continues to focus on the tax gap attributable to
    offshore activities and tax havens, one can learn a lot about the risks
    of classifying noncompliance as tax evasion by looking at past IRS
    offshore initiatives. Painting everyone with one brush can lead to
    programs that treat a taxpayer who has simply made a mistake in the
    same way as a taxpayer who has engaged in complex tax planning. For
    example, between 2009 and 2012, the Internal Revenue Service offered a
    series of settlement programs for U.S. taxpayers with unreported
    foreign bank accounts and income.\28\ The initiative came in the
    aftermath of congressional hearings and a 2004 amendment to Sec. 31
    U.S.C. 5321(a)(5), which strengthened the penalties for underreporting
    the existence of foreign financial accounts, including a penalty of up
    to the greater of $100,000 or 50 percent of the maximum account balance
    for the period. Recognizing that not every failure to report was
    willful, however, the statutory scheme provided a flat $10,000 penalty
    for nonwillful failures to report and the discretion to impose no
    penalty at all where the failure to report had reasonable cause.
    ---------------------------------------------------------------------------
        \28\ For an extensive discussion of the IRS offshore settlement
    programs between 2009 and 2018, see National Taxpayer Advocate, NTA
    Blogs: An Analysis of Tax Settlement Programs as Amnesties: Part 1,
    Part 2, and Part 3 (March 14, 21, and 30, 2018).

        The IRS's 2009 Offshore Voluntary Disclosure Program (OVDP), on the
    other hand, provided for taxpayers to pay a flat 20-percent penalty of
    the highest account balance over a 6-year period as well as all other
    tax and interest on the unreported income, and a 20-percent accuracy-
    related penalty. The IRS simultaneously made clear that failure to
    enter the OVDP could result in an extensive audit and could also lead
    to criminal investigation. The 2009 OVDP thus failed to differentiate
    between those taxpayers who had small offshore accounts for family
    reasons (e.g., providing support for a parent who lives overseas), or
    those taxpayers who, although being ``accidental'' U.S. citizens, had
    lived their adult lives without any professional nexus with the IRS and
    were surprised to learn they had an obligation to file returns with the
    IRS, and those taxpayers who were actively seeking to shelter their
    assets and income offshore so as to escape U.S. taxation. Although the
    IRS recovered $9.9 billion USD from these settlement programs through
    October 2016, the data for the 2009 OVDP paints a shocking picture of a
    regressive penalty structure, whereby the taxpayers with the lowest
    dollar accounts and least amount of unreported income paid the highest
    percentage rate of penalty (as a percentage of tax due on the
    unreported income). The 2009 initiative clearly violated the principle
    ---------------------------------------------------------------------------
    of proportionality, a fundamental taxpayer rights protection.

     Figure 1. Comparison of Median Offshore Penalties to Unreported Tax by
         Median Account Size and Representation for the 2009 OVD Program
    ------------------------------------------------------------------------
                                Bottom 10%      Middle 80%        Top 10%
    ------------------------------------------------------------------------
    Offshore account(s)              $44,855        $607,875      $7,259,580
     balance
    ------------------------------------------------------------------------
    2009 OVD penalty                  $8,540        $117,803      $1,410,517
    ------------------------------------------------------------------------
    Additional tax, tax               $1,472         $30,894        $452,966
     years 2002-2011
    ------------------------------------------------------------------------
    Offshore penalty as a               580%            381%            311%
     percent of tax assessed
    ------------------------------------------------------------------------
    Unrepresented percent                31%             11%              4%
    ------------------------------------------------------------------------
    Offshore penalty as a               772%            474%            398%
     percent of tax assessed
     (unrepresented
     taxpayers only)
    ------------------------------------------------------------------------
    Source: NTA Blog, March 21, 2018

        An additional point about the offshore initiatives--they occurred
    during a time when the Department of Justice was successfully breaching
    the wall of Swiss bank secrecy. Whistleblowers were coming forward.
    IRS, Treasury, and Justice were all focused like a laser on offshore
    noncompliance. Taxpayers had a strong incentive to enter the programs.
    Yet when the programs ended in 2018, the IRS announced in a press
    release that it had collected $11.1 billion through the programs over
    the period of 2009 to 2018. That is a little over $1 billion a year,
    for 10 years.
    enhanced information reporting and data use can improve case selection
    and taxpayer service but it requires a change in irs culture, staffing,
                                  and systems
        Intelligent use of data can improve tax administration enormously
    if it is fit for the purpose intended and used in algorithms and other
    techniques that mimic human reasoning and if it does not displace human
    decision-making and discretion. Data about a taxpayer's business or
    family status can identify services and information taxpayers need to
    meet their tax obligations and lead to more tailored and relevant
    communications; this information can minimize errors by enabling
    taxpayers to access their own information and download that information
    into return preparation programs;\29\ it can identify taxpayers who are
    eligible for certain tax provisions such as the childless worker EITC
    and compute and refund credits when taxpayers fail to claim them; and
    it can identify questionable refund claims while at the same time
    minimize false positives and false negatives. Data also can ensure the
    IRS selects the most appropriate cases to audit.\30\ IRS also can, and
    should, identify taxpayers at risk of economic hardship so the IRS does
    not take harmful collection action against them. However--and this is a
    big however--because there is so much pressure on the IRS to collect
    revenue, there is a risk the IRS will not deploy the data intelligently
    or effectively, and instead use enhanced information reporting to go
    after the lowest hanging fruit.\31\
    ---------------------------------------------------------------------------
        \29\ In 2011, for example, I recommended that Congress accelerate
    third-party information reporting and use that data to pre-populate
    returns. See National Taxpayer Advocate 2011 Annual Report to Congress,
    Legislative Recommendation: Accelerated Third-Party Information
    Reporting and Pre-populated Returns Would Reduce Taxpayer Burden and
    Benefit Tax Administration But Taxpayer Protections Must Be Addressed,
    284-295.
        \30\ See National Taxpayer Advocate 2009 Annual Report to Congress,
    Most Serious Problem: The IRS Does Not Have a Significant Audit Program
    Focused on Detecting the Omission of Gross Receipts, 185-190.
        \31\ In 2011, in the introduction to a series of Most Serious
    Problems about the IRS questionable refund program, identity theft
    filters, math error assessments, automated substitute for returns, and
    automated lien filing procedures, I wrote about my concerns regarding
    the potential of automation to lead to taxpayer abuses. See National
    Taxpayer Advocate 2011 Annual Report to Congress, Most Serious Problem
    Introduction: As the IRS Relies More Heavily on Automation to
    Strengthen Enforcement, There is an Increased Risk it will Assume
    Taxpayers are Cheating, Confuse Taxpayers About Their Rights, and
    Sidestep Longstanding Taxpayer Protections, 15-17.

        Today, IRS data use is mired in the 1980s, with some notable
    exceptions. There is heavy emphasis on data-matching and rule-based
    systems, instead of pattern/
    network recognition algorithms that include feedback loops. The IRS
    underutilizes financial account data it receives pursuant to FATCA
    because it cannot match much of it to existing returns. The manner in
    which IRS receives data can limit its effectiveness. For example, in
    2015 to 2016, the IRS created a program whereby it matched Forms 1042-S
    associated with the 1040-NRs filed by foreign students. Because IRS
    systems could not accept these returns electronically, IRS employees
    had to keystroke in the entries on the returns, including the 18 fields
    on Form 1042-S. The IRS sent out thousands of letters to foreign
    students (most of whom were no longer in this country) notifying them
    they had to obtain a corrected Forms 1042-S from their educational
    institutions since the payor data did not match their returns. Further
    investigation found over 90 percent of those ``errors'' were actually
    keystroke errors attributable to IRS data entry. The IRS's assumption
    that taxpayers themselves were to blame imposed undue burden on the
    taxpayers and educational institutions and created significant rework
    for the agency itself.\32\
    ---------------------------------------------------------------------------
        \32\ For a detailed discussion of this issue, see National Taxpayer
    Advocate Fiscal Year 2017 Objectives Report to Congress, Area of Focus:
    IRS Implementation and Enforcement of Withholding on Certain Payments
    to Foreign Persons Is Burdensome, Error-ridden, and Fails to Protect
    the Rights of Affected Taxpayers, vol. 1, 80, 82-83. See also https://
    www.irs.gov/newsroom/irs-takes-steps-to-help-students-and-others-
    outlines-interim-process-for-obtaining-refunds-of-withholding-tax-
    reported-on-form-1042-s-foreign-persons-us-source-income-subject-to-
    withholding.

        Many IRS systems have high false positive and abatement rates. The
    National Taxpayer Advocate has reported that during the 2020 filing
    season, the IRS ``refund fraud filters'' selected 3.2 million returns,
    up 107 percent from the 2019 filing season.\33\ Of those returns, the
    IRS approximately 66 percent of them were false positives.\34\ That is,
    two-thirds of the refund returns IRS systems labelled as potentially
    fraudulent turned out to be legitimate. About 25 percent of the returns
    the IRS froze as potentially fraudulent took longer than 56 days to be
    unfrozen and released for processing and appropriate refund
    issuance.\35\ While some of the delay may be attributable to closures
    during the pandemic, this high false positive rate associated with non-
    identity theft refund fraud filters has persisted for years--including
    72 percent for the 2019 filing season.\36\ These are very high rates,
    and they are exacerbated by the inadequate staffing and assistance to
    taxpayers who try to demonstrate the legitimacy of their returns. As a
    consequence, this issue has been #1 among case receipts for the
    Taxpayer Advocate Service for the last 4 years.\37\
    ---------------------------------------------------------------------------
        \33\ The Pre-Refund Wage Verification Program, a component of RRP
    and administered by the Return Integrity Verification Operation (RIVO),
    freezes returns claiming refunds while the IRS attempts to verify wages
    and withholding claimed on the return. National Taxpayer Advocate, 2020
    Annual Report to Congress, 230. RIVO utilizes ``an obsolete case
    management and screening system called Return Review Program Legacy
    Component (RRPLC) (or Electronic Fraud Detection System), which the IRS
    has been planning to replace for more than a decade.'' Id. at 156.
        \34\ Id. at 151, note 19.
        \35\ Id. at 231; 18 percent took longer than 120 days for refund
    issuance.
        \36\ Id. at 151.
        \37\ Id. at 148.

        Clearly, archaic data practices create burdens for taxpayers of all
    types and are especially harmful for the lowest-income taxpayers who
    depend on their refunds to meet basic living expenses. Moreover, these
    systems label legitimate returns as ``potentially fraudulent,'' which
    has consequences with respect to how IRS employees view these taxpayers
    and the quality of assistance provided them. This points to the culture
    change necessary before the IRS can utilize data and advanced systems
    ---------------------------------------------------------------------------
    effectively.

        The IRS also does not use data proactively to alleviate burden and
    prevent harm to taxpayers. I have advocated and written extensively
    about the need for IRS to use its taxpayer income data and the
    allowable expense guidelines developed under IRC Sec. 7122(d)(2) to
    identify taxpayers who may be at risk of economic hardship.\38\ The IRS
    can use this data both as part of its case selection and assignment
    criteria and as a tool to prompt its collection employees to gather
    sufficient financial information when a taxpayer calls or is contacted,
    in order to make an actual determination as to the taxpayer's ability
    to pay a tax debt while paying for basic living expenses. The IRS has
    stubbornly refused to adopt this approach, asserting it does not have
    sufficient information to identify those risks.\39\ This, of course, is
    simply not a credible assertion. Financial institutions and debt
    collection agencies make assessments like this every day with far less
    financial information than the IRS has at its figurative fingertips.
    ---------------------------------------------------------------------------
        \38\ See, e.g., Nina E. Olson, Procedurally Taxing: My IRS Wishlist
    for 2021, Part 2: The Economic Hardship Indicator, at https://
    procedurallytaxing.com/my-irs-wishlist-for-2021-part-2-the-economic-
    hardship-indicator/; National Taxpayer Advocate 2018 Annual Report to
    Congress, Most Serious Problem: The IRS Does Not Proactively Use
    Internal Data to Identify Taxpayers at Risk of Economic Hardship
    Throughout the Collection Process, 228-239.
        \39\ See, e.g., IRS response to the Most Serious Problem, cited at
    note 35, in National Taxpayer Advocate FY 2020 Objectives Report to
    Congress, vol. 2, 93-94.

        The shortcomings of a pure ``matching'' program without attendant
    intelligent programming are evidenced by the IRS's approach to math
    errors relating to dependent Taxpayer Identification Numbers (TINs).
    IRC Sec. 6213(g)(2) authorizes the IRS to summarily assess additional
    tax by disallowing dependent exemptions, EITC, Child Tax Credit, and
    the child and dependent care credit where the qualifying child's TIN
    does not match Social Security or other records. In 2011, a research
    study conducted by my former office showed the IRS abated, at least in
    part, 55 percent of the summary assessments related to incorrect TINs,
    and in 56 percent of those returns with abatements, the IRS possessed
    internal information that would clearly show the source of the error
    (e.g,, systemically reviewing past year returns to identify the
    taxpayer merely keystroked and inverted digits on the child's TIN in
    the current year).\40\ The failure to do something so simple as an
    historical systemic review of taxpayer data on-hand demonstrates a
    disturbing lack of concern on the IRS's part with imposing undue and
    significant burden on taxpayers, who have to call or write the IRS to
    obtain their legally owed refunds. That the IRS has been aware of this
    problem (and its solution) since 2011 and has not prioritized fixing
    it, even when it is in the IRS's own best interests (because the
    programming will reduce phone calls and correspondence) is troubling
    indeed.
    ---------------------------------------------------------------------------
        \40\ National Taxpayer Advocate 2011 Annual Report to Congress,
    Research Study: Math Errors Committed on Individual Tax Returns: A
    Review of Math Errors Issued for Claimed Dependents, vol. 2 at 113-144.

        I raise these examples not as an objection to proposals for more
    information reporting, but rather to make clear that in addition to
    modernized technology and data integration and design, including a 360-
    degree taxpayer account, the IRS must have a culture shift about how it
    approaches data--including using it proactively to assist taxpayers,
    and guarding against labelling taxpayer returns as ``potentially
    fraudulent'' before it has conclusive evidence of fraud. Most taxpayer
    ---------------------------------------------------------------------------
    error is not fraud. Repeat as needed.

            Recommendation: Require the IRS to use to tax return and other
            information reports to proactively identify taxpayers who may
            be at risk of economic hardship.

            Recommendation: Clarify the IRS may use its summary assessment
            authority under IRC Sec. 6213 to make assessments with respect
            to refundable credits, such as the childless worker EITC, and
            similar items for which it has information that enable it to
            determine eligibility with sufficient accuracy and issue
            refunds accordingly.

            Recommendation: Require the IRS, as a prerequisite to using
            summary assessment authority for an addition to tax, to utilize
            historical and other taxpayer account data to minimize the use
            of the summary assessment procedures.
      artificial intelligence systems that lack transparency and displace
     human decision-making and discretion may violate privacy, human, and
               taxpayer rights: case studies from other countries
        There are lessons to be learned from other countries' experiments
    with data use and artificial intelligence systems to identify fraud in
    welfare and tax credits. Data and AI can improve detection of
    noncompliance, but human intervention must be retained and these
    systems must adhere to basic principles of human dignity and privacy.
    Moreover, intelligent systems must not be designed as black boxes--they
    must transparent and explainable.

        In 2016 the Australian government announced the Online Compliance
    Intervention (OCI), an automated debt recovery system that matched data
    from Centrelink with averaged income data from the Australia Tax
    Office.\41\ As a result of several Parliamentary inquiries and several
    legal challenges, the program was scrapped in May, 2020, after it was
    alleged that 470,000 welfare recipients were wrongfully issued debt
    notices and paid these nonexistent debts in full. In June 2020, the
    Prime Minister apologized, and the government agreed to pay $720
    million to the individuals who received the incorrect collection
    notices and paid the tax on the incorrect bill. In November 2020, the
    amount the Australian government committed to resolving the wrongful
    collection under this program expanded to $1.2 billion AUD to include
    settlement of a class action lawsuit.\42\
    ---------------------------------------------------------------------------
        \41\ Centrelink is a system that is administered by Services
    Australia, a government agency. Centrelink delivers payments and
    services for retirees, the unemployed, families, carers, parents,
    people with disabilities, Indigenous Australians, and people from
    culturally and linguistically diverse backgrounds.
        \42\ The Guardian, ``Robodebt Class Action: Coalition Agrees to Pay
    $1.2bn to Settle Lawsuit,'' November 16, 2020 at https://
    www.theguardian.com/australia-news/2020/nov/16/robodebt-class-action-
    coalition-agrees-to-pay-12bn-to-settle-lawsuit.

        In 2020, the Hague District Court, reviewing a civil complaint
    filed by several nongovernmental organizations, found that the System
    Risk Indicator (SyRI), a system established by the Dutch government to
    use 17 types of data, including tax, assets, and social benefits, to
    identify various types of fraud in government programs, violated the
    European Convention on Human Rights Article 8 which provides a right to
    the protection of private life, including the protection of personal
    data.\43\ Although this right may be interfered with in the interests
    of society, the court found that there was no balance between those
    interests because the system was not transparent--there was no
    information available about how it worked or what data was actually
    used, (i.e., it was a black box) and there was no notification of the
    person when a person was flagged as a ``fraudster'' and information was
    passed on to prosecutors and police. This created a risk of
    discriminating and profiling against certain vulnerable groups of
    persons.
    ---------------------------------------------------------------------------
        \43\ See Nederland Juristen Comite Voor De Mensenrechten v. The
    State of The Netherlands, Hague District Court (February 5, 2020)
    (English translation at https://uitspraken.rechtspraak
    .nl/inziendocument?id=ECLI:NL:RBDHA:2020:1878).

        Finally, in January, 2021, the entire government of The Netherlands
    resigned after it was disclosed that a separate government initiative
    to investigate welfare fraud, including sharing and matching income
    information with other authorities, had resulted in parents being
    labeled as fraudsters and incurring thousands of euros in fines for
    simple mistakes, including missing signatures on forms. Moreover, the
    Dutch Data Protection Authority found the program was discriminatory
    against dual nationality citizens. The government announced that nearly
    10,000 families will receive 30,000 euros (about $36,500) in
    damages.\44\
    ---------------------------------------------------------------------------
        \44\ New York Times, ``Government in Netherlands Resigns After
    Benefit Scandal,'' January 15, 2021 at https://www.nytimes.com/2021/01/
    15/world/europe/dutch-government-resignation-rutte-netherlands.html.

            Recommendation: To ensure AI systems comport with privacy and
            taxpayer rights protections and have the requisite level of
            transparency, the IRS should follow the practices recently
            recommended by the U.S. Administrative Conference of the United
            States.\45\
    ---------------------------------------------------------------------------
        \45\ See Administrative Conference of the U.S., Administrative
    Conference Statement #20: Agency Use of Artificial Intelligence
    (December 16, 2020) at https://www.acus.gov/recommendation/agency-use-
    artificial-intelligence.
    ---------------------------------------------------------------------------
      proposals to expand information report are promising but should be
                 accompanied by additional taxpayer protections
        With respect to specific proposals for expanded information
    reporting, I note that the information reporting proposal, Shrink the
    Tax Gap, from former Commissioner Rossotti targets the largest
    component of the tax gap--underreported unincorporated business income,
    and the related self-employment tax--and leverages information already
    compiled by financial and other institutions for issuance of a new
    information report, Form 1099-NEW.\46\ Further, the proposal explicitly
    states it is not a ``matching'' proposal. Instead, it requires the
    highest income taxpayers in this category to reconcile their aggregate
    financial account deposits and withdrawals (reported on Form 1099-NEW)
    to the income and expenditures reported on their returns, and for the
    IRS to use this reconciliation to score returns based on a mapping of
    the reconciliation categories to audit results for those categories.
    Further, those taxpayers with incomes above a certain threshold and
    below the ``reconciliation'' threshold will still receive a Form 1099-
    NEW reporting their deposits and withdrawals. This form will put
    taxpayers on alert that the IRS has this information, and the IRS can
    use this information for real-time scoring of returns not subject to
    the reconciliation and use the results to identify potential
    noncompliance and to provide more detailed communication (non-audit)
    with taxpayers.\47\
    ---------------------------------------------------------------------------
        \46\ See Shrink the Tax Gap proposals at https://
    shrinkthetaxgap.com/.
        \47\ Shrink the Tax Gap, Appendix E: Taxpayer Impact (April 7,
    2021) at https://shrinkthetaxgap.com/appendix-e-burden-model/.

        One of the challenges with this proposal is the IRS's ability to
    execute it--the IRS today lacks the expertise and systems to achieve
    this level of sophisticated tax administration. It requires a sustained
    investment in leadership, technology, employees, training, and
    procurement. It is not really a matter of if the IRS can make these
    changes in its culture, because to fulfill its mission of collecting
    revenue and administering social benefit programs in the 21st century,
    it simply must change. All of this is achievable. The question is when
    and how it will make that change. Congress, through appropriations and
    oversight, including setting goals for the agency, is key to effecting
    ---------------------------------------------------------------------------
    this change.

        There is a second challenge with this proposal. As noted above, it
    seeks to identify taxpayers who are underreporting their gross receipts
    of business income. Perhaps to target information reporting to the
    group most able to accommodate the administrative burden, it proposes
    that Form 1099-NEW reporting will be limited to business accounts, and
    related pass-throughs, of taxpayers reporting unincorporated business
    income whose adjusted gross income (AGI) is in the top quartile,
    currently about $92,000. The difficulty with this approach is that
    targeting information reporting in this way may imply, in many people's
    minds, the presumption that these taxpayers are evading tax. The other
    drawback to this approach is it relies on taxpayers' own self-reporting
    of gross receipts to identify taxpayers who are not properly reporting
    their gross receipts.

        In 2007, as the National Taxpayer Advocate, I recommended that
    Congress require information reporting on all bank accounts as a
    measure to address cash economy noncompliance.\48\ The IRS already
    received 1099 forms indirectly reporting the existence of interest- or
    dividend-bearing accounts. What was missing were the accounts that were
    non-interest-bearing. We believed the mere requirement of reporting the
    existence of these accounts would have a direct compliance effect,
    because taxpayers would know the IRS could, if it wanted to, look at
    the deposits in the minimal or non-interest-bearing accounts.
    ---------------------------------------------------------------------------
        \48\ National Taxpayer Advocate 2007 Annual Report to Congress,
    Legislative Recommendation: Measures to Address Noncompliance in the
    Cash Economy, 490-502.

        Thus, to avoid the appearance and implication that a targeted group
    of taxpayers whose account deposits and withdrawals are subject to
    information reporting are in some way prima facie noncompliant or tax
    cheats, I recommend Congress require financial institutions to report
    deposits and withdrawals on all accounts designated by the taxpayer as
    used for business, regardless of AGI levels. In this way the IRS can
    identify those taxpayers whose tax returns report income below the
    threshold in the Shrink the Tax Gap proposal but whose financial
    accounts show deposits significantly above that threshold.\49\
    ---------------------------------------------------------------------------
        \49\ Some taxpayers, of course, will avoid designating accounts as
    business accounts and thus escape detection. There will always be these
    types of actors (asocial noncompliance). As noted above, no one
    proposal will address all forms of noncompliant behaviors. The Shrink
    The Tax Gap proposal will help close some of the unincorporated
    business underreporting tax gap, if not all.

        But I would not stop there, because if the IRS received this mother
    lode of data, it would be too tempting for it to resist falling back on
    its income matching techniques rather than utilizing the data in a more
    sophisticated and targeted way. If it did that, the IRS would be
    focusing its efforts on the lowest hanging fruit and not using the data
    to identify the most serious noncompliance, thereby defeating the
    entire purpose of the information reporting. Bank account information
    alone will not identify who the IRS should look more closely at, nor is
    it prima facie evidence of underreporting. Therefore, if Congress
    authorizes bank account information reporting, I recommend that it also
    restrict the IRS's use of this data by prohibiting it from utilizing it
    in the Automated Underreporter Program. While this restriction may seem
    counter-intuitive, I believe it is necessary to change the IRS's
    ---------------------------------------------------------------------------
    approach to the use of data and to bring it into the 21st century.

        Finally, as noted earlier, many of the IRS's adjustments to returns
    occur outside of the traditional ``audit'' context. In FY 2019, the IRS
    closed 1.96 million automated underreporter assessments, and 365,000
    automated substitute for return assessments.\50\ These assessments
    historically have experienced high abatement rates. One reason for AUR
    and ASFR abatements is that these adjustments are made based on third-
    party information reports, which may contain errors or be the result of
    identity theft (as in the recent case with pandemic-related
    unemployment insurance scams). Normally, the IRS's Notice of Deficiency
    (NOD) receives the presumption of correctness and taxpayers bear the
    burden of disproving it in Tax Court. Since 1991, however, Federal
    courts have consistently held that in court proceedings where a
    taxpayer disputes a proposed assessment based solely on a third-party
    document, the presumption that the subsequent NOD is correct does not
    automatically apply. This position is incorporated in IRC Sec. 6201(d),
    which provides in any court proceeding the taxpayer ``asserts a
    reasonable dispute'' of the accuracy of an information reporting
    document and the taxpayer ``fully cooperates'' with the IRS, the
    government shall have the burden of producing ``reasonable and
    probative information'' concerning the proposed deficiency, beyond the
    information reporting document. There is, however, no complimentary
    provision to IRC Sec. 6201(d) that requires an IRS audit employee to
    take on the burden of running down the underlying information where the
    taxpayer raises a reasonable dispute about an information document and
    cooperates in a ``real'' or ``unreal'' audit. Thus, I recommend that
    Congress extend IRC Sec. 6201(d) to apply to IRS examination and
    matching activities, to ensure the proper use and application of
    expanded information reporting and to avoid unnecessary litigation.
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        \50\ IRS, FY 2019 Data Book, Table 22.

            Recommendation: If information reporting is expanded to require
            financial institutions to report on the aggregate deposits and
            withdrawals for business accounts of sole proprietors and other
            pass-through entities, the use of this data in the IRS
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            Automated Underreporter Program should be prohibited.

            Recommendation: Amend IRC Sec. 6201(d) to require the IRS in
            examinations and in information document matching compliance
            programs to support a proposed assessment with ``reasonable and
            probative information'' beyond the information document, where
            the taxpayer has raised a reasonable dispute about that
            information document(s) and cooperated with the
            examination.\51\
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        \51\ For a discussion of a compelling case that makes clear just
    how important such protections are at the administrative level, see
    John A. Clynch and Scott A. Schumacher, Procedurally Taxing, Oral
    Persuasion: Taxpayer Testimony and the Burden of Proof at https://
    procedurallytaxing.com/oral-persuasion-taxpayer-testimony-and-the-
    burden-of-proof/. Congress should amend IRC Sec. 7430 to provide for an
    award of attorney fees where the IRS fails to comply with its
    obligation under the amended IRC Sec. 6201(d), even if the position of
    the IRS in Tax Court is ``substantially justified.'' If the taxpayer
    has tried his or her best to provide information at the administrative
    level and is forced to keep providing it or to go to court because the
    exam and appeals level are not listening, then the taxpayer should be
    compensated.
    ---------------------------------------------------------------------------
      to ensure the effective use of data and the protection of taxpayer
       rights, congress should require the irs to conduct a rights-based
     administrative burden assessment of each new initiative, overseen by
                      the office of the taxpayer advocate
        In the course of its operations, the IRS must comply with various
    Federal statutes designed to minimize administrative burden, including
    the Regulatory Flexibility Act,\52\ the Paperwork Reduction Act,\53\
    the Privacy Act,\54\ and the Privacy Impact Assessment (PIA).\55\ There
    are limitations for each of these regimes. The IRS has generally failed
    to make the flexibility analysis required by the RFA or perfunctorily
    stated that it need not conduct the analysis since it had determined
    the regulations would not have a significant impact on a substantial
    number of small businesses.\56\ The PRA requires agencies to estimate
    the amount of time it takes to comply with a request for information,
    such as a Form 1040, but the definition of ``time'' is very narrow--it
    ignores other types of costs and other types of burdens, for example,
    downstream burdens including audits, summary assessments, and
    collection actions. With respect to the Privacy Act, IRS disclosure
    laws trump the Privacy Act in many instances, so compliance with the
    Act is difficult to measure. The Privacy Impact Assessment, on the
    other hand, is a system of guiding program owners through a process of
    assessing privacy risks during the early stages of development as well
    as through the life cycle of the system. The PIA can go beyond just
    assessing the ``system'' itself and consider the ``downstream'' effects
    on people who are affected in some way by the proposal. The PIA,
    however, does not explicitly address the taxpayer rights implications
    of a proposed program or system.
    ---------------------------------------------------------------------------
        \52\ 5 U.S.C. Sec. Sec. 601 et seq. The Regulatory Flexibility Act
    requires government agencies to make an initial flexibility analysis
    prior to publishing regulations for public comment, and a final
    regulatory flexibility analysis when publishing the final rule. In
    conducting these analyses, the agency must describe the effect of the
    rule on small business, analyze alternatives that might minimize
    adverse economic consequences, and make their analyses available for
    public comment. Agencies are relieved of performing this analysis if
    the agency ``certifies that the rule will not, if promulgated, have a
    significant economic impact on a substantial number of small
    entities.'' 5 U.S.C. Sec. 605(b).
        \53\ 5 U.S.C. Sec. Sec. 3501 et seq. The PRA seeks to ``ensure the
    greatest possible public benefit from and maximize the utility of
    information created, collected, maintained, used, shared and
    disseminated by or for the Federal Government'' and to ``improve the
    quality and use of Federal information to strengthen decision-making,
    accountability, and openness in Government and society.'' 44 U.S.C.
    Sec. 3501. To satisfy PRA requirements, prior to information collection
    agencies must (1) provide the public with an opportunity to comment on
    the information gathering activity; and (2) submit the proposal for
    collection of information to the Office of Information and Regulatory
    Affairs (OIRA) within the Office of Management and Budget (OMB). 44
    U.S.C. Sec. 3502(1).
        \54\ 5 U.S.C. Sec. 552a. The Privacy Act establishes ``fair
    information practices'' requiring the IRS to (1) maintain in its
    records only such information ``about an individual that is relevant
    and necessary to accomplish a purpose of the agency required to be
    accomplished by statute'' (5 U.S.C. Sec. 552a(e)(1)); (2) ``collect
    information to the greatest extent practicable directly from the
    [taxpayer]'' (5 U.S.C. Sec. 552a(e)(2); and (3) maintain the records it
    uses in making a determination concerning a taxpayer ``with such
    accuracy, relevance, timeliness and completeness as is reasonably
    necessary to assure fairness to the individual in the determination.''
    (5 U.S.C. Sec. 552a(e)(5).
        \55\ Pub. L. No 107-347, Sec. 208(b), 116 Stat. 2922 (2002).
        \56\ In a Government Accountability Office (``GAO'') review of 200
    tax regulations issued from 2013 to 2015, only two preambles included
    an RFA analysis. GAO-16-720, Regulatory Guidance Processes: Treasury
    and OMB Need to Reevaluate Long-standing Exemptions of Tax Regulations
    and Guidance 22 (2016). In approximately half of the regulations
    reviewed by GAO Treasury and the IRS claimed that the ``RFA's
    requirements for a regulatory impact analysis did not apply because the
    regulation does not impose a collection of information requirement on
    small entities.'' Id. at 22

        To address this gap, in an upcoming article Professors Leslie Book
    and Keith Fogg and I are proposing a rights-based framework for
    assessing the excessive administrative burden and taxpayer rights
    impact of a given IRS initiative or system.\57\ Our framework
    acknowledges that where there is evidence of broad-based, systemic
    noncompliance, developing programs which increase up-front
    administrative burdens on taxpayers in order to facilitate downstream
    compliance may be justified in order to protect program integrity (and
    even enable continuation of the program). However, where a program
    impacts a significant number of individuals, even one with a
    superficially large monetary impact, but one where the incidence of
    noncompliance occurs within a small percentage of taxpayers, the
    problem may not justify a solution which imposes a disproportionate
    administrative burden on all taxpayers.
    ---------------------------------------------------------------------------
        \57\ A working draft of this article, Administrative Burdens,
    Sludge, and Taxpayer Rights, is available at https://papers.ssrn.com/
    sol3/papers.cfm?abstract_id=3545357.

        The rights-based administrative burden framework requires the
    Service to expand its horizon and think more holistically about how it
    interacts with taxpayers. It focuses on the relationship between the
    Service and the taxpayer, and requires the IRS to consider the
    distributional impact of the burdens it imposes, minimizing the risk
    that its actions are arbitrary. Under this analysis, the critical
    questions are, did the Service consider taxpayer rights in taking this
    action or designing this system? And, is the Service ignoring taxpayer
    ---------------------------------------------------------------------------
    rights by not taking an action?

        An initial challenge with this approach is how to require the
    Service to be more cognizant of how its actions impose excessive
    administrative burden and harm on particular taxpayer populations and
    sub-populations before and during program design and implementation.
    Building on elements present in the PRA, the Privacy Act, and the PIA,
    we recommend the IRS conduct a Taxpayer Rights Impact Statement (TRIS)
    with respect to all prospective programs. Additionally, we propose a
    method for systematic review of existing programs. By adopting the
    Privacy Act's approach to transparency, the Taxpayer Rights Impact
    Statements (TRIS) resulting from these reviews should be required to be
    posted on a dedicated, public webpage on the agency's website. Finally,
    the application of the framework requires the Service to measure
    different impacts from its current practices, which in turn will
    require the Government Accountability Office (GAO) and the Treasury
    Inspector General for Taxation (TIGTA) to shift their audit focus.

        While this approach seeks to protect all taxpayers from excessive
    administrative burdens, it must look at those disproportionately
    impacted which may result in an analysis for a particular subset of
    taxpayers. If the IRS is proposing an initiative that affects 75 to 100
    percent of overseas taxpayers and few domestic taxpayers, the overall
    program may appear appropriate yet it has a disproportionate impact. An
    example here might occur if the Service does not have any toll-free
    overseas lines, does not allow email communications, and does not allow
    overseas taxpayers to establish online accounts. This creates an
    excessive administrative burden given the characteristics of the
    population of overseas, and violates the right to quality service, the
    right to challenge the IRS and be heard, and the right to a fair and
    just tax system, among others. The TRIS would require the IRS to
    identify these gaps and propose mitigation strategies prior to
    implementing the initiative.

        Under our proposal, the Service would conduct this rights-based
    administrative burden assessment for both customer service and
    compliance programs and systems. We define compliance programs and
    systems as broad in scope--including notices, refund claim freezes,
    automated matching compliance programs, audits, collection actions,
    collection alternatives, public filings of notices of Federal tax
    liens, and passport denials. Customer service programs include online
    self-service, automated and live telephone assistance, in-person
    assistance as well as outreach and education initiatives, including
    notices. At the outset, we anticipate this analysis to be conducted on
    programs that operate across the entire program areas of the Service;
    where regional or local programs propose deviations from the broader
    program approach, they will be required to conduct a similar
    review.\58\
    ---------------------------------------------------------------------------
        \58\ In our article, we set forth a procedure for applying the
    framework to programs already in existence.

        We recommend placement of the design and oversight of the TRIS
    process within the Office of the Taxpayer Advocate. This arrangement
    would ensure the process is driven by the external, taxpayer-oriented
    perspective of the NTA. We envision the TRIS process working as
    ---------------------------------------------------------------------------
    follows:

        1.  When an IRS function proposes a new initiative, the IRS program
    owner will complete a questionnaire that assists the agency in
    identifying whether there is a significant likelihood the program's
    administrative burden will deprive the protected taxpayer segment of a
    fundamental taxpayer right, including undermining the public policy
    goal for the program.
        2.  The completed questionnaire will be circulated to appropriate
    agency personnel, including the Office of the Taxpayer Advocate and the
    Office of Chief Counsel, as well as operating divisions that are
    affected both upstream and downstream by the program proposal.
        3.  All comments will be addressed by the program owner, with
    attendant internal discussions as necessary.
        4.  Where the NTA determines the IRS has not addressed the concerns
    she or others have identified, the initiative will not go forward until
    these concerns are addressed. Functions will be able to appeal the
    NTA's determination to the Commissioner or appropriate Deputy
    Commissioner.\59\
    ---------------------------------------------------------------------------
        \59\ This approach is consistent with that enacted by Congress in
    I.R.C. Sec. 7803(c)(5)(A) and (B), which provides a process for appeal
    to the Commissioner of any Taxpayer Advocate Directive issued by the
    National Taxpayer Advocate and rescinded or modified by the Deputy
    Commissioner. The approach is also modeled on the IRS processes for
    Privacy Impact Assessments, which are overseen by the Office of
    Privacy, Government Liaison, and Disclosure. See IRM 10.5.2.2 for the
    requirements for IRS Privacy and Civil Liberties Impact Assessments.
    ---------------------------------------------------------------------------
        5.  The taxpayer rights and administrative burden analysis,
    including the risks to fundamental taxpayer rights and discussions of
    mitigations, will be documented in a Taxpayer Rights Impact Statement
    that is posted to the agency's dedicated webpage for public viewing,
    similar to the public posting of Privacy Impact Assessments.\60\
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        \60\ The IRS's Privacy Impact Assessments are available at https://
    www.irs.gov/privacy-disclosure/privacy-impact-assessments-pia.

        The framework and approach discussed above accomplishes several
    things. First, it requires the Service, before programs are
    implemented, to identify under-resourced populations that are affected
    by its actions; to articulate how the design of agency programs may
    undermine taxpayer protections or access to benefits, based on the
    specific characteristics of the taxpayer segment; and to make
    recommendations to mitigate those burdens. Second, it requires that the
    Service's assessment--the Taxpayer Rights Impact Statement and the
    related questionnaire--is posted on the agency's website so the public,
    Congress, and IRS oversight agencies can see how the Service is
    conducting the rights-based administrative burden framework. This
    transparency will enable stakeholders to raise concerns where the
    analysis provided by the Service has fallen short, and it provides an
    important tool to conduct ongoing oversight of the agency. Third, and
    most important, it is the first step in driving a culture change in the
    agency, where it recognizes its dual mission as both a revenue
    collector and a social benefits administrator. The framework analysis
    will require the Service to establish different measures of program
    success, which in turn will require the agencies auditing its
    performance to shift their audit focus of these programs solely from
    measures of revenue collected to measures of taxpayer burden and rights
    ---------------------------------------------------------------------------
    impaired.

            Recommendation: Amend the Internal Revenue Code to require the
            National Taxpayer Advocate to develop a rights-based
            administrative burden analysis process; require the IRS to
            follow that procedure with respect to the development and
            implementation of major initiatives; and require posting of
            such analysis and the accompanying Taxpayer Rights Impact
            Statement on a dedicated public webpage.
             additional recommendations to protect taxpayer rights
              in an environment of increased information reporting
        In addition to the recommendations mentioned above, I recommend
    that Congress enact or amend the following the provisions so taxpayers
    can ensure the IRS administers these new technologies and sources of
    data appropriately, in accordance with taxpayer rights and not
    arbitrarily and capriciously.

        1.  Clarify certain time frames are claims processing deadlines and
    not jurisdictional. The United States Tax Court has consistently held
    that certain statutory time periods for seeking judicial review are
    jurisdictional; thus, if the taxpayer misses the deadline for filing by
    one day, even where the lateness is due to good cause or even no fault
    of the taxpayer's, the Tax Court will dismiss the case for lack of
    jurisdiction.\61\ The United States Supreme Court has held, in other
    contexts, that jurisdictional time frames must be explicitly described
    as such in the statute; otherwise the time frames should be treated as
    claims processing rules, subject to equitable tolling.\62\ I recommend
    that Congress amend the code to make clear that except where explicitly
    stated, the time periods for seeking judicial review or seeking relief
    from the IRS are not jurisdictional but are claims processing rules
    subject to equitable tolling if the taxpayer has good reason for
    missing the deadline. This clarification is particularly important in
    the context of IRC Sec. 6213(a) (deficiency jurisdiction); IRC
    Sec. 6015 (relief from joint and severability); and IRC Sec. Sec. 6320
    and 6330 (collection due process hearings).\63\
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        \61\ See, e.g., Castillo v. Commissioner, Docket No. 18336-19L
    (order dated March 25, 2020) (notice of determination mailed by IRS to
    taxpayer's last known address but never delivered by post office--case
    dismissed for lack of jurisdiction due to untimely petition) (appeal
    pending at Second Circuit, Docket No. 20-1635). The Center for Taxpayer
    Rights has filed an amicus brief in this appeal.
        \62\ See Henderson v. Shinseki, 131 S. Ct. 1197, 1203 (2011)
    (indicating a preference that claim-processing rules, which require
    parties to take certain steps by certain times in order to promote the
    orderly progress of the matter, should not be treated as
    jurisdictional.)
        \63\ For a detailed discussion of this issue, see Bryan Camp, ``New
    Thinking About Jurisdictional Time Periods in the Tax Code,'' 77 Tax
    Lawyer 1 (2019).

        2.  Extend certain time frames by 60 days when the taxpayer is
    outside of the United States at the time of notice issuance. IRC
    Sec. 6212 extends the deadline for filing a petition in the Tax Court
    by 60 days where the taxpayer is outside of the United States. There
    are many other provisions providing taxpayers the right to
    administrative and judicial review where such an extension for
    international taxpayers would protect those rights, including petitions
    to appeal IRS denials of relief from joint and several liability under
    IRC Sec. 6015(e) and petitions to appeal from IRS Collection Due
    ---------------------------------------------------------------------------
    Process Determinations under IRC Sec. 6330(d)(1).

        3.  Repeal the ``full-pay'' requirement for refund litigation in
    Federal district courts and the U.S. Court of Federal Claims. In Flora
    v. United States, 362 U.S. 145 (1960), the United States Supreme Court
    held that, with a few exceptions, taxpayers must fully pay a tax
    liability before filing a refund suit in a U.S. district court or the
    U.S. Court of Federal Claims under IRC Sec. 7422. This rule deprives
    taxpayers who cannot full pay, including taxpayers who the IRS has
    determined to be ``currently not collectible'' because of economic
    hardship, of the opportunity to press their refund claims in court.
    Moreover, taxpayers who do fully pay under lengthy installment
    agreements will not be able to recover all their payments if they
    ultimately prevail in court, because under IRC Sec. 6511(b)(2)(B), such
    refunds are generally limited to those payments made within 2 years
    before the date of filing the refund claim. Further some assessable
    penalties, which are not subject to deficiency procedures, may be so
    large that the prepayment requirement deprives a taxpayer of any
    ability to challenge the penalty in court.

             In the event full repeal is not possible, I recommend Congress
            adopt the National Taxpayer Advocate's recommendations to
            address this issue:\64\
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        \64\ See National Taxpayer Advocate 2018 Annual Report to Congress,
    Legislative Recommendation: Fix the Flora Rule: Give Taxpayers Who
    Cannot Pay the Same Access to Judicial Review as Those Who Can, 364-
    386. See also, National Taxpayer Advocate 2020 Purple Book, Repeal
    Flora: Give Taxpayers Who Cannot Pay the Same Access to Judicial Review
    as Those Who Can, 82-84.

              Amend IRC Sec. 6212 to expand the deficiency process to
    cover all penalties in title 26, including the penalties located in
    chapter 68, subchapter B, and those located in chapter 61, so that
    taxpayers can obtain judicial review by the Tax Court before they are
    ---------------------------------------------------------------------------
    assessed.

              Clarify that a person is not required to fully pay before
    filing suit in a U.S. district court or the U.S. Court of Federal
    Claims under 28 U.S.C. Sec. 1346(a)(1) (i.e., repeal the Flora court's
    full payment rule).

              Amend IRC Sec. Sec. 7442 and 7422 to give the Tax Court
    jurisdiction to determine liabilities in refund suits to the same
    extent as the U.S. district courts and the U.S. Court of Federal
    Claims, without regard to how much of the liability has been paid.

        4.  Amend IRC Sec. 3401(p)(3) to explicitly authorize voluntary
    withholding agreements between independent contractors and service
    recipients. According to the IRS, the portion of the tax gap
    attributable to underpayment is $50 billion.\65\ The requirement that
    platforms must now issue a Form 1099-K where payments to a service
    provider is $600 or more per year will bring surface previously
    unreported income. Allowing independent contractors and service
    providers to voluntarily agree to withholding on payments will avoid
    increasing the underpayment tax gap even as the underreporting tax gap
    is reduced.
    ---------------------------------------------------------------------------
        \65\ IRS, Tax Gap Estimates for Tax Years 2011-2013 at https://
    www.irs.gov/pub/irs-pdf/p5365.pdf.

        5.  Allow certain contests of regulations outside of case specific
    contexts. In other areas of law, interested parties generally have the
    opportunity to litigate the application of the Administrative Procedure
    Act (APA) \66\ to rules and regulations before the agency enforces
    those rules against the public. The ability to generate prompt court
    review helps ensure that agencies comply with the APA by appropriately
    seeking and applying input from the public when promulgating rules that
    have the force and effect of law.
    ---------------------------------------------------------------------------
        \66\ 5 U.S.C. Sec. Sec. 500 et seq.

           Tax law, however, differs from this norm. Because of the Anti-
    Inunction Act (AIA),\67\ parties only generally have an opportunity to
    judicial review of IRS APA compliance during enforcement proceedings or
    in refund litigation. Those proceedings can arise years after the
    guidance is promulgated. Any challenge requires disobeying the rules or
    complying with the rule, paying any associated taxes and penalties, and
    seeking a refund.
    ---------------------------------------------------------------------------
        \67\ IRC Sec. 7421.

           The tax system's limited opportunity for court review means that
    taxpayers and third parties may not have a meaningful opportunity to
    challenge IRS actions. While there is litigation pending before the
    Supreme Court in the case of CIC Services v. Commissioner that may
    create some additional pre-enforcement opportunities to challenge
    certain rules or regulations, Congress should provide a uniform
    legislative path to prompt court review. That would allow for earlier
    efficient resolution of possible disputes and help ensure that IRS
    actions are consistent with the APA before taxpayers and third parties
    are placed in the difficult of either (1) complying with a rule that
    may be in conflict with the APA or (2) failing to comply with a rule
    ---------------------------------------------------------------------------
    and subjecting themselves to penalties for that noncompliance.

           In the last few years, academics have highlighted this problem
    and offered legislative solutions. For example, in the article
    ``Restoring the Lost Anti-
    Injunction Act,'' Professor Kristin Hickman and Gerald Kerska propose
    legislation that would allow an opportunity for parties or persons
    affected by agency rules or regulations to seek court review to ensure
    compliance with the APA in a defined, prompt, and orderly manner. They
    propose a legislative amendment to the AIA that would allow judicial
    review of IRS rules or regulations in both the pre-enforcement and
    enforcement context.\68\ This legislative change would help ensure that
    the IRS acts lawfully and in a manner that appropriately seeks and
    reflects public input. I recommend Congress adopt the Hickman-Kerska
    proposal.
    ---------------------------------------------------------------------------
        \68\ Kristin E. Hickman and Gerald Kerska, ``Restoring the Lost
    Anti-Injunction Act,'' 103 Va. L. Rev. 1683 (2017); Stephanie Hunter
    McMahon, ``The Perfect Process Is the Enemy of the Good Tax: Tax's
    Exceptional Regulatory Process,'' 35 Va. Tax Rev. 553 (2016).

        The legislative amendment Hickman and Kerska propose is as follows:

        Notwithstanding section 7421(a), not later than 60 days after the
    promulgation of a rule or regulation under authority granted by this
    title, any person adversely affected or aggrieved by such rule or
    regulation may file a petition for judicial review of such regulation
    with the United States Court of Appeals for the District of Columbia or
    for the circuit in which such person resides or has their principal
    place of business.

                                     ______

              Questions Submitted for the Record to Nina E. Olson
                 Questions Submitted by Hon. Sheldon Whitehouse
        Question. The county with the highest audit rate in the country is
    a poor, mostly black county in Mississippi where over half of the
    taxpayers claim the EITC and the median annual household income is
    $26,000.

        How could the IRS effectively use information reporting and new
    technology as former IRS Commissioner Rossotti and the Biden
    administration have proposed to better focus its audit resources on the
    very wealthy, who are more likely to underreport their income than
    other income groups?

        Answer. Some level of compliance touches is appropriate for every
    component of the tax gap. However, the IRS ``audit rate'' of low-income
    taxpayers who receive the EITC understates the amount of compliance
    contacts these taxpayers experience, because the IRS does not include
    in its audit rate calculation the data on programs such as summary
    assessment authority (math errors), automated underreporter, or
    automated substitute for return. I call these programs ``unreal
    audits'' because although the IRS doesn't classify them as a ``real''
    audit, they sure feel like an audit to the taxpayer and they have the
    same potential consequences as an audit, i.e., an additional assessment
    of tax. IRS data show that it issued 1.872 million Math Error notices
    in Fiscal Year 2019 (per FY 2019 IRS Data Book Table 23) compared with
    680,543 individual returns audited that same year (per FY 2019 IRS Data
    Book Table 17b). Thus, the IRS conducted almost 3 times as many math
    error touches as it did individual audits.

        The noncompliance addressed by these unreal audit programs is low-
    hanging fruit and is the result of rudimentary data or document
    matching. To address the more sophisticated noncompliance described in
    former Commissioner Rossotti's proposal, the IRS will need a
    combination of additional information reporting, highly skilled
    employees, and advanced technology. Information reporting of financial
    account deposits and withdrawals, especially focused on pass-through
    entities and their
    owners/partners/shareholders, can provide a clearer picture of
    relationships between those entities and underreporting by them. But
    this information cannot be used as prima facie evidence of
    noncompliance--that is, the existence of a discrepancy between bank
    deposits and reported income alone is not and should not be considered
    conclusive of underreporting, absent other evidence; that is why I
    recommend that Congress prohibit the use of these information reports
    in the IRS Automated Underreporting Program and amend IRC 6201(d) to
    extend its taxpayer protections to IRS audit and document matching
    programs. This information reporting is best used as an indicator to
    identify accounts requiring further investigation; alternatively, it
    can be used to identify taxpayers we don't need to worry about. The
    information should be used in conjunction with sophisticated modelling
    techniques and other taxpayer data to better focus IRS audit resources
    on those taxpayers who will not respond to other, less intrusive
    compliance touches.

        Question. Would the IRS be able to make effective use of this
    information and new technology without major, sustained investment?

        Answer. The IRS is profoundly behind the rest of the developed
    world's tax administrations in terms of technology, employee training
    and skillsets, and effective use of data. For the IRS to provide 21st-
    century customer service and address 21st-century noncompliance, it
    will need sustained investment over a decade and longer. But investment
    is not enough--Congress must undertake the necessary oversight to
    ensure that the IRS uses this investment appropriately. There are
    technology and systems available today in the private sector that the
    IRS could utilize relatively quickly, but it needs employees with the
    vision and training to effectively use that technology. IRS needs to
    recruit leaders and employees from outside the IRS with those skills
    and invest in its current employees in terms of training--especially
    encouraging them to pursue advance degrees in computer science, data
    engineering, data ethics and philosophy, as well as law and accounting.
    Without highly skilled, visionary, and creative employees, technology
    is just that--technology. And without improved technology and employees
    with advanced skillsets, additional information reporting will be
    underutilized, or worse, lead to inaccurate results (both false
    positives and false negatives).

                                     ______

                     Questions Submitted by Hon. John Thune
        Question. Your written testimony states that IRS's initiative to
    crack down on offshore tax noncompliance over the last decade occurred
    when the IRS, Treasury, and the Department of Justice (DOJ) were
    focused ``like a laser'' on offshore noncompliance. It was also during
    a time when the DOJ was breaching the wall of Swiss bank secrecy, as
    your testimony states. Yet when the programs ended in 2018, the IRS
    announced it had collected $11.1 billion through the programs over the
    period of 2009-2018--a little over $1 billion a year, for 10 years.

        What lessons can be learned from the IRS's Offshore Voluntary
    Disclosure Program?

        Answer. One of the main lessons we can draw from the IRS Offshore
    Voluntary Disclosure Programs is that one size does not fit all. In the
    early years of the program, the IRS offered the same ``deal'' to
    taxpayers who had very low dollar offshore accounts and were only
    inadvertently noncompliant (e.g., ``accidental Americans'') as it
    offered to taxpayers who were actively and intentionally sheltering
    significant income and account balances offshore. The IRS treated all
    taxpayers with offshore accounts as if they were actively evading tax;
    it treated the benign actors the same as the bad actors. This led to
    profoundly regressive penalties on taxpayers with small account
    balances or who were unrepresented. The approach increased fear and
    anger toward the IRS and eroded trust; on the other hand, it brought in
    relatively modest amounts of tax and penalties over the 10-year period
    the programs ran. I believe a better-designed program would have
    brought in at least as much, without the erosion of taxpayer trust,
    which may lead to taxpayers finding other ways to not comply.

        The 2009-2018 OVDP shows that to tackle difficult issues like
    offshore noncompliance, the Service needs a nuanced compliance strategy
    based on the understanding that the tax gap is not solely made up of
    tax evasion. For example, the IRS could have analyzed the legitimate
    reasons individuals had offshore accounts (e.g., to care for overseas
    relatives) as well as the historical or cultural reasons (e.g.,
    inherited Holocaust accounts), and developed settlement programs and
    pathways for those taxpayers to come into compliance without a shaming
    component. These initiatives would be different from the compliance
    strategy for taxpayers who took steps to actively avoid or evade tax.
    This approach comports with the taxpayer's right to a fair and just tax
    system--one that takes into consideration the taxpayer's facts and
    circumstances in determining their tax liabilities and ability to pay.

        Question. Can you discuss the role and importance of high-quality
    IRS customer service and how it helps with voluntary tax compliance?
    What are up to three recommendations you have, if any, for the IRS to
    improve its customer service to taxpayers?

        Answer. IRS tax gap data show that the majority of U.S. taxpayers
    voluntarily comply with, or are trying to comply with, our country's
    complex tax laws. Only 2 percent of the over $3.5 trillion the IRS
    collects each year is directly attributable to IRS enforcement actions;
    taxpayers pay the remaining 98 percent for a variety of reasons,
    including wanting to be compliant and not wanting to get mixed up with
    the IRS. Customer service plays a key role in promoting and enabling
    voluntary compliance and helping taxpayers get it right from the start;
    if it is difficult for taxpayers to get answers to their questions,
    they will make mistakes; if they make mistakes and they cannot resolve
    the problem quickly, they will resent the amount of time they must
    spend; if they have to pay for assistance and representation to resolve
    the matter, they will resent having to make that expenditure. That
    resentment can lead taxpayers to take noncompliant actions in the
    future, as a way of making up for the burden, cost, and anxiety
    attributable to poor customer service and misguided enforcement
    actions. Thus, taxpayer service maximizes voluntary compliance by
    providing information to taxpayers and making it easy for most
    taxpayers to comply with the tax laws; by providing prompt, accessible,
    and comprehensive assistance when problems arise; and by explaining to
    taxpayers what they did wrong and by listening to taxpayers in order to
    learn where the tax agency is wrong.

        The three priority areas in which IRS can improve taxpayer service,
    and thus have a positive impact on voluntary compliance, are:

          1.  Improve phone assistance. The IRS needs to both increase the
    staffing it assigns to all its phone lines and establish higher goals
    for the level of service on the phones. Customer call-back technology
    will reduce taxpayer frustration, but taxpayers have demonstrated they
    want and need information directly from the IRS and they want to speak
    with a live human being when problems arise and receive specific, not
    canned, answers. This can only be resolved by increasing the number and
    training of IRS phone assistors. Further, the IRS needs to extend its
    tax law assistance phone line throughout the year, instead of shutting
    it down after April 15th of each year. Finally, the IRS should
    establish a dedicated toll free phone line, open throughout the year,
    to answer questions from taxpayers about Earned Income Tax Credit and
    Child Tax Credit eligibility; enabling taxpayers to speak with someone
    about their family situation and eligibility before they file their
    return (or claim the Advance CTC) will help reduce errors and
    overclaims.

          2.  Improve notice clarity. Despite many efforts over the years,
    the IRS still sends out notices that are models of un-clarity. For
    example, it is impossible to tell from the face of a math error notice
    what, exactly, the IRS has changed on the return. The taxpayer must
    call or write the IRS to figure out the what the error is and whether
    the taxpayer agrees with it. Other notices do not alert taxpayers to
    significant taxpayer protections that are available, including the
    right to challenge a proposed deficiency or collection alternative in
    Tax Court before paying the tax. While the IRS notice system is
    cumbersome and needs updating or replacement, all IRS notices can be
    improved today, without updated technology, by applying a rights-based
    approach to notice writing. Taxpayers have the right to be informed;
    notices should be educational and clearly explain what the problem is,
    what taxpayers can do to get help and resolve the problem, what
    taxpayer protections are available, and what deadlines apply.

          3.  Use Automation and Data to Reduce Taxpayer Burden. The IRS
    should identify ways in which it can use data to minimize taxpayer
    burden and provide better assistance to taxpayers. Better use of data
    and artificial intelligence can reduce the false positive rate
    attributable to questionable refund rules and models, so fewer
    legitimate returns are frozen each year and fewer taxpayers experience
    unnecessary delays in receiving their refunds (which generate more
    phone calls). Similarly, IRS could use internal historical return data
    to identify simple math errors such as a switched digit in a
    dependent's social security number; the IRS could fix this error
    internally and issue a math error notice, which in turn would prompt
    the taxpayer to call. A 2011 Taxpayer Advocate Service study showed
    that 55 percent of math errors attributable to dependent taxpayer
    identification numbers were later abated in whole or in part, and of
    those abatements, 56 percent of them could have been detected and
    corrected by the IRS from its own internal data sources. Such an
    approach would reduce taxpayer burden and free up IRS resources to
    address other issues.

        Question. Do you have any additional comments that you would like
    to share about the IRS Commissioner's $1-trillion guestimate about the
    tax gap?

        Answer. Estimating the tax gap is very difficult, and many tax
    administrations around the world do not try to do so because such an
    estimate is necessarily based on assumptions and imperfect data sets.
    The IRS has spent years developing the National Research Program (NRP),
    which it uses to estimate the tax gap. The NRP was heavily negotiated
    with Congress and others in order for the IRS to resume conducting
    random audits, following the cessation of its predecessor, the Tax
    Compliance Measurement Program (TCMP), because of overly burdensome
    audits. I believe making guestimates of a $1-trillion tax gap, without
    any rigorous analysis to back up that number and without making that
    analysis available for scholarly and objective review, undermines the
    integrity of tax gap estimates and leads to an environment in which the
    tax gap is equated with tax evasion, rather than conducting the more
    nuanced analysis it requires.

        Question. Based on your experience, does the IRS have the
    institutional capacity and expertise to successfully implement Mr.
    Rossotti's proposal to narrow the tax gap? Are there sufficient
    safeguards in the proposal to protect taxpayers from enforcement abuse?
    If not, what are the most important safeguards you would recommend?

        Answer. The IRS today lacks the enhanced technology and enhanced
    employee skills to successfully implement former Commissioner
    Rossotti's proposal. Attaining such skills and technology will require
    an investment in the IRS, and sustained oversight by Congress to ensure
    the investment is properly applied. This investment is necessary to
    improve the IRS's ability to meet the sophisticated tax compliance
    challenges in a global economy. I am concerned, however, that without
    more safeguards the IRS will use financial account data in the way it
    currently uses much of its data from information reporting, namely by
    document matching. This approach will pick up ``low-hanging fruit'' but
    will not achieve the proposal's intended compliance effect. Thus, if
    the IRS is authorized to receive reporting of financial account
    deposits and withdrawals, I recommend that it be prohibited from using
    this data in its Automated Underreporter program, since the mere
    existence of a discrepancy between financial account deposits is not
    prima facie evidence of underreporting. This prohibition will force the
    IRS to use the data within a more sophisticated, artificial
    intelligence-based system that should result in more accurate audit
    selection and minimal false positives. I also recommend that Congress
    extend the protections of IRC Sec. 6201(d) to IRS examination and
    information document matching compliance programs. section 6201(d)
    currently requires the IRS, in Tax Court, to support a proposed
    assessment with ``reasonable and probative information'' beyond the
    information document, where the taxpayer has cooperated with the IRS.

                                     ______

      Prepared Statement of Hon. Charles O. Rossotti, Former Commissioner
                     (1997-2002), Internal Revenue Service
        Mr. Chairman and Ranking Member, thanks for allowing me to testify
    on how to shrink the ever-growing tax gap.

        We estimate that the amount of taxes that were legally owed but not
    paid was $574 billion in 2019 and will accumulate to $7.5 trillion over
    10 years. This amount in 2019 was equal to what the lower 90 percent of
    individuals, 135 million taxpayers, paid in Federal income taxes.
    Commissioner Rettig recently testified the tax gap may be even larger
    than that.

        We estimate that it is practical to recover $1.4 trillion of this
    tax gap over 10 years, which is still only 19 percent of the total. All
    this gain would be from the top 25 percent of taxpayers and the
    majority from the top 3 percent.

        Tax compliance is heavily driven by whether a taxpayer's income is
    reported by third parties in a manner that the information can be
    efficiently used by the IRS. Where income is reported and easily
    checked from forms such as W-2s and 1099s, compliance is 95 to 99
    percent. Almost all the tax on that income is paid voluntarily without
    IRS intervention. Where income is not reported, compliance is as low as
    50 percent.

        Our plan for shrinking this tax gap is based on an integrated
    three-part program. First, move more income from low visibility to
    higher visibility by filling the gaps on income that is not reported by
    third parties to the IRS. Second, upgrade IRS technology to make full
    use of all the information available to the IRS to increase the
    effectiveness and efficiency of all IRS compliance activities. Third,
    rebuild IRS's skilled workforce and provide them technology to resolve
    taxpayer cases more rapidly and efficiently.

        It is critical to use technology to make the entire compliance
    process far more efficient because simply scaling up what the IRS does
    today will not produce the desired results. Currently, all of IRS
    auditing activity recovers only about 2.5 percent of the tax gap.

        For example, the IRS today cannot efficiently evaluate information
    on 40 million K-1 forms, on the 1099-K reports from payers, or on
    submissions required by FATCA. Modern technology can effectively use
    this information to identify potential deficiencies.

        Technology will also allow the IRS to transform the follow-up
    process when deficiencies are identified to one that is far more
    accurate and efficient for taxpayers and the IRS than traditional
    auditing. The technology we propose is not futuristic. It is widely
    used today including on a limited scale in the IRS, for example in
    screening refunds.

        Most of the gain in our plan comes from increased voluntary
    compliance so it is essential to make compliance as easy as possible.
    The investments we propose would increase the ease and speed of dealing
    with the IRS and reduce the number of unnecessary audits.

        We also recommend that this committee follow its bipartisan
    practice of establishing pertinent taxpayer rights when it considers
    legislating authority for the IRS and our plan proposes several new or
    clarified taxpayer rights.

        Our program requires both authorization and consistent long-term
    funding from Congress. We recommend a funding increase of about 6
    percent per year above what is required to sustain IRS operations.
    Spreading this increase over 10 years is what will allow the IRS to
    make effective use of the funds Congress is providing. Over a decade
    this investment will produce a revenue gain of about 20 times its cost
    and will vastly increase the quality of service the IRS provides to
    taxpayers.

        Implementing this program will be challenging, but based on my 50
    years of managing programs in business and government I believe it is
    achievable and clearly outbalances any risks. As Congress did when it
    passed the IRS Restructuring and Reform Act, compliance and service
    goals can be established, progress could be measured year-by-year and
    closely monitored by congressional oversight committees.

        I note that our proposals are for long-term investment. In the
    short term, the IRS must focus on the immediate priorities of the
    filing season, the economic recovery program and the new child tax
    credit.

        Finally, I believe that fundamental fairness alone is a compelling
    reason to address this problem, particularly when Congress is
    contemplating raising taxes on people who already pay what they owe.
                       summary of shrink the tax gap plan
     One Minute Explanation of How to Recover $1.4 Trillion Over 10 Years
            From Taxes Already in the Tax Code
        The tax gap is all the taxes that are owed but not paid: $574
    billion in 2019, and it has been growing every year.

        Our shrink the tax gap plan has three elements:

          1.  Fill the gap in information reporting. Most taxpayers have no
    choice about paying their tax, because their income is reported by
    third parties on familiar documents like W-2s and 1099s, so their
    compliance is 95 percent. But where there is no reporting, as in much
    business income, compliance is as low as 50 percent. Our plan moves
    more income into higher visibility categories through the addition of
    one 1099 information report on business income of the top income
    quartile of taxpayers and their businesses.

          2.  Upgrade technology to identify underreported income, to make
    the follow-up process more efficient, and to improve service to all
    taxpayers.

          3.  Effectively focus and streamline auditing. We would transform
    auditing to be an essential but a supporting element to complete the
    follow up process and to deal with complex cases.

    [GRAPHIC] [TIFF OMITTED] T1121.003

        .epsWe estimate that this plan would shrink the tax gap by 19
    percent over 10 years, gaining about $1.4 trillion, almost as much as
    President Biden's proposal to increase individual income taxes. All
    this revenue gain would be from taxpayers in the top quartile of income
    and most of it would come from increased voluntary compliance. The
    revenue gain would be about 20 times the cost.

        Since most revenue comes from voluntary compliance, making it
    easier for taxpayers to comply is essential. Our plan would increase
    IRS increase service to levels to commercial levels. Treating taxpayers
    fairly, even when there is a dispute, is also essential and our plan
    proposes expanding taxpayer right.

        Our plan is a major long-term program that would require
    congressional action to provide direction, authority and a source of
    assured funding of about 6 percent per year increase over what is
    needed to sustain IRS operations.

        All the details are available at shrinkthetaxgap.com.
                        shrink the tax gap presentation
        This document presents the current version of our STTG plan as of
    May 3, 2021. We regularly update our plan to reflect comments and
    further research.
    Shrink the Tax Gap Authors

    [GRAPHIC] [TIFF OMITTED] T1121.004

        .epsFred Forman, Fred Goldberg, and Charles Rossotti are the
    authors of the STTG plan. We are private citizens who previously served
    in leadership positions in the IRS. Most of our work before and after
    our government service has been in private business.

        We began drafting proposals on how to shrink the tax gap because,
    regardless of what else we as a country do about taxes and the deficit,
    we believe we should at least do what we reasonably can to collect
    taxes that are due under the tax code but are not being paid. That
    unpaid tax is called the tax gap, and it is a longstanding subject of
    conversation in the tax world, but at this time we believe there is
    much more that we can do.
    Size of the Tax Gap
        Here is a chart just to remind us how big this tax gap is on a
    comparative basis.

    [GRAPHIC] [TIFF OMITTED] T1121.005

        .epsIt is more than all the income taxes paid by about 90 percent,
    meaning about 135 million, individual taxpayers.

        It is 87 percent of what the government spent on all domestic
    programs (before COVID).

        The tax gap is not only very large, but also growing every year so
    it will accumulate to about $7.5 trillion over 10 years if nothing more
    is done to address it.
    Driver of the Tax Gap--Visibility of Income
        The tax gap is largely driven by opportunity to underpay. Where
    there is little opportunity, because income is fully reported by third
    parties, such as on W-2s or 1099s, and can be efficiently checked by
    the IRS, there is little underpayment. Where income is less visible and
    harder to check, there is more opportunity and more underpayment.

    [GRAPHIC] [TIFF OMITTED] T1121.006

        .epsThis chart from the last IRS compliance study makes that point
    clearly.

        The sources of income that are highly visible and easily checked
    are on the left of the chart. At least 95 percent of these sources of
    income are reported on tax returns. Where income is less visible
    because there is little or no third-party reporting, as on the right of
    the chart, only about half is reported.

        At least 85 percent of that low visibility income is earned by the
    top 25 percent of taxpayers, so that quartile of taxpayers also
    accounts for most of the underpayment.

        This top quartile of taxpayers also accounts for most of the
    income, over 95 percent, reported by businesses organized as pass-
    through entities, S corporations, and partnerships. These businesses do
    not pay tax directly but pass the income onto their owners. This
    category of businesses comprises another large category of low-
    visibility income.
    Growth of Pass-through Business Income
        Pass-through business income has been growing steadily for 35 years
    to the point that it now produces almost as much income as corporations
    that pay tax directly (known as C corporations).

    [GRAPHIC] [TIFF OMITTED] T1121.007

        .epsToday there are about 7 million pass-through businesses with
    about $2 trillion in reported income. They exist in a tax limbo,
    because there is very limited third-party reporting of their income at
    the business entity level and negligible IRS examination activity to
    verify it. Fewer than one-tenth of 1 percent of these businesses are
    audited.

        An IRS study of one part of this universe of pass-through
    businesses indicated that their underreporting level was like that of
    sole proprietors for businesses up to a certain size. Another study by
    a group of economists using IRS data found that as much as 30 percent
    of partnership income could not be traced to any identifiable ultimate
    owners. Another important study by the National Bureau of Economic
    Research which came out recently concluded that unreported income in
    the top 1 percent of the income distribution is much greater than
    previously estimated and much of that income is buried in pass-through
    entities.
    Continued Growth of the Tax Gap
        The biggest part of the tax gap is driven by low visibility
    business income earned by the top income quartile of individuals,
    including in the pass-through businesses they own. The losses from this
    source have been growing every year and have largely not been addressed
    in any significant way. The opposite has happened, because over the
    last 25 years IRS enforcement resources have been cut 30 percent while
    the number of business returns have grown 80 percent.

        The only reason the tax gap is not even bigger is because most
    taxpayers have no meaningful opportunity to underreport since their
    income is in a highly visible form that is reported by third parties
    and easily matched to their return. That still leaves a significant
    minority who have both the opportunity and the willingness to pay less
    than they owe, producing the ever-growing tax gap. The tax gap is not
    an even percentage with every taxpayer underpaying by some percent. It
    is a highly uneven percentage of underpayment based mainly on who is
    most easily able to underpay, so it is highly concentrated. Therefore,
    allowing it to continue to grow is very unfair to the vast majority of
    compliant taxpayers, who will bear all the burden of any tax increases
    while the non-compliant taxpayers bear little or none.
    Shrinking the Tax Gap
        Right now, the only IRS tool for collecting most underreported
    income is auditing. While more auditing is an essential part of any
    solution, auditing alone is not an adequate solution. Today, all IRS
    audit activity recovers less than 3.0 percent of the tax.

        If we want to recover a substantial amount of the tax gap, we need
    to move more of the income from lower visibility categories to higher
    visibility categories.

        With appropriate authority and funding from Congress, we believe
    there is a practical way to do this. It consists of three actions that
    build on what works best in the tax system today.

    [GRAPHIC] [TIFF OMITTED] T1121.008

        .epsFirst, we need to fill in the gap in the sources of income
    reported to the IRS by third parties. Over the last year, in response
    to many comments, we have refined our STTG plan to make sure it
    proposes efficiently collecting the bare minimum of information we need
    and only from taxpayers with income sources and amounts that
    significantly contribute to the tax gap. (See ``Updated Information
    Reporting Plan'' on our website www.ShrinktheTaxGap.com.)

        Our plan would produce one new 1099 report on low-visibility
    business income of individual taxpayers in the top quartile of income
    and the pass-through businesses they own. This 1099 would provide the
    taxpayer and the IRS a simple annual summary of deposits and
    withdrawals from their bank accounts. We estimate that slightly more
    than 13 million individuals and pass-through businesses would receive
    the 1099New, out of a universe of about 160 million individual and
    pass-through returns.

        Second, we need to make more effective use of technology to use all
    the information the IRS has but cannot use efficiently, in addition to
    the 1099New that we propose, to identify likely deficiencies in
    returns.

        Third, we need to transform the auditing process to be the last
    step in resolving the deficiencies in returns that are identified and
    analyzed by technology.

        It is the combined effect of all three of these elements that will
    produce a large and efficient reduction in the tax gap. The additional
    reporting helps the taxpayer file more accurately and provides the IRS
    the information to check the return efficiently. The technology allows
    the IRS to use its information to accurately identify likely
    deficiencies on returns and to increase the efficiency of the follow-up
    process. The transformed, data-driven audit process will allow the IRS
    and taxpayers to resolve cases promptly and efficiently.
    Gain From Voluntary Compliance
        IRS compliance studies universally show that third-party reporting
    actively used by the IRS for enforcement enormously improves voluntary
    compliance. Taxpayers who underreport income do so for many reasons,
    ranging from simple errors to sloppy bookkeeping, a belief that a
    little corner-cutting is not so bad, overly favorable interpretations
    of code provisions and outright evasion. More complete third-party
    reporting that is known to be effectively used by the IRS can
    positively affect all these factors. The desired and important result
    is simply to increase compliance without needing IRS intervention.

        We estimate that about 68 percent of the revenue gain from our STTG
    plan would come from improved voluntary compliance. We believe this is
    a conservative estimate because it is a much lower ratio of voluntary
    versus enforced compliance than the tax system produces today for
    income with effective information reporting. Almost all taxes paid on
    income with high visibility from third-party reporting (over 98
    percent) is paid without intervention by the IRS.
    Streamlined Follow-up on Identified Deficiencies
        Most of our estimated gain that requires intervention by the IRS
    comes from an enhanced matching and streamlined auditing process
    supplemented by some traditional auditing. Better use of data and
    technology greatly improves the follow-up process by more effective
    targeting and increased case productivity. You can see that difference
    clearly in this chart.

    [GRAPHIC] [TIFF OMITTED] T1121.009

        .epsBy the IRS calculation, traditional audit cases produce revenue
    equal to four times the cost, while data-driven matching programs like
    the AUR matching process produce 25 times. They are not perfect
    comparisons to our STTG plan, but the key point is valid: an entirely
    manual audit is far less efficient than a process that starts with data
    that can be analyzed with technology before handing it off to an
    employee.

        The GAO reported in 2018 that the IRS Return Review Program, which
    uses modern technology to analyze all relevant information to screen
    returns for incorrect or fraudulent refund claims, had a revenue return
    of 15 times its cost.\1\ The report recommended that approach be used
    on a broader basis to detect underreported income. That recommendation
    is exactly what the STTG plan is designed to do.
    ---------------------------------------------------------------------------
        \1\ Government Accountability Office, GAO-18-544, July 2018. ``IRS
    reported that between January 2015 and November 2017, RRP prevented the
    issuance of more than $6.51 billion in invalid refunds. As of March 30,
    2018, IRS reports spending about $419 million developing and operating
    RRP.''

        Unfortunately, even the current IRS data-driven programs, while
    efficient, are limited not only by lack of data in some areas but lack
    of sufficient current technology to make use of the data. That is why
    ---------------------------------------------------------------------------
    the technology component of our plan is critical.

        GAO reported that the IRS could only process about 15 percent of
    the cases in which mismatches were identified. Some third-party data,
    such as 40 million K-1s reporting income from pass-through businesses,
    are only matched manually as part of an audit. Reports provided under
    FATCA by foreign financial institutions cannot currently be matched to
    taxpayer returns. And new technology would be needed to use the 1099New
    data we recommend and to make the follow-up auditing process more
    efficient for the IRS and the taxpayer.
                Quality of Service and Taxpayer Rights
        Assisting taxpayers to comply with the law and treating taxpayer
    fairly evenly when there is a dispute is a critical component of any
    program to achieve maximum overall tax compliance. Maximum voluntary
    compliance is the goal, and the easier it is for taxpayers to comply
    the more likely it is to achieve this goal.

    Quality of Service

        The technology we propose for our STTG plan would improve the
    quality of service to taxpayers in two ways that are most important to
    taxpayers: prompt and efficient resolution of issues and avoidance of
    unnecessary audits.

        The technology and process improvements in our plan will allow
    taxpayers and the IRS to resolve any issues that are identified in a
    return more efficiently for the taxpayer and the IRS. Today, even a
    simple examination (called a correspondence exam) is often initiated by
    a letter from the IRS that is not clear or specific as to the issue or
    how to resolve the issue. Even these simple cases typically take more
    than 6 months to resolve. In addition, lack of adequate staffing and
    inadequate tools for employees often make it very slow or difficult to
    reach an employee who can resolve a case, even when the taxpayer wants
    to comply. The technology-supported STTG plan we propose will make IRS
    letters clearer, provide for a wider range of ways for IRS employees to
    communicate with taxpayers, and provide the IRS employees better tools
    to resolve cases. The increased staffing resources called for in our
    plan will provide for an adequate number of trained employees to
    resolve taxpayer issues promptly.

        A second improvement for taxpayers in our plan will be to reduce
    the number of so-called false positive audits, namely audits in which
    no deficiency is actually found. Such audits are unnecessary and costly
    to the taxpayers and the IRS, and today can be as high as 20 percent
    for individuals and even higher for businesses. These ratios might be
    even higher if cases where only immaterial amounts of deficiencies were
    counted. Proposed technology under our STTG plan would provide a much
    more effective and accurate way of identifying returns and issues on
    returns that need follow-up auditing. In addition, a part of our plan
    calls for the IRS to provide taxpayers a reconciliation schedule that
    can be attached to their return. This schedule allows taxpayers to
    explain in advance any differences between the amounts on information
    reports and those on their return, just as it does today for taxpayers
    with capital gains reported on a 1099B. This schedule would aid the
    taxpayer in filing an accurate return and in most cases should make an
    audit unnecessary. Audits of any kind are expensive for the IRS and the
    taxpayer, and reducing unnecessary ones is a key way to improve the
    burden of tax compliance on compliant taxpayers.

        These service improvements are solutions to problems the taxpayer
    advocate has highlighted many times in her reports.

    Taxpayer Rights

        Taxpayer rights are protections that all taxpayers are entitled to
    and are mandatory for the IRS to observe whenever the IRS exercises its
    authority to audit a return or to propose a deficiency. As part of the
    STTG plan, taxpayer rights should be fully observed and where necessary
    clarified by law or regulation. Some of the most important rights that
    are relevant to our plan are:

            Issue Resolution Process. No taxpayer should ever be presented
            with a notice asserting a deficiency in tax without a prompt
            opportunity to communicate with a qualified IRS employee who
            can explain the basis for the asserted deficiency and how it
            can be resolved. This is the intent of all the Shrink the Tax
            Gap proposals and is implicit in the service goals we propose.
            This commitment could be further clarified by law or
            regulation.

            Appeal Rights. Right of appeal of an asserted deficiency to the
            IRS independent Appeals Office (recently strengthened by the
            Taxpayer First Act).

            Burden of Proof on Assessments. Although courts have held that
            the IRS has the burden of proof in making a deficiency
            assessment based solely on third-party reporting, this rule
            should be mandated for internal IRS practice. To ensure
            implementation of this right, the IRS should provide taxpayers
            a process for identifying errors on information return.

            Recovery of Attorney's Fees. Clarify Eligibility for Small
            Business Taxpayers to Recover Attorney's Fee and increase
            limits on fees.

            Access to Tax Court. Assure that taxpayer have access to tax
            court before paying assessments by allowing tax court power to
            accept jurisdiction on equitable grounds and include cases of
            penalties assessed by the IRS in the tax court jurisdiction.

            Self-employed Access to VITA sites. Expand the jurisdiction of
            Federal funded VITA sites to assist self-employed individuals.
    Revenue Gain
        This chart shows our estimate of what our proposed approach could
    produce if it had been implemented starting in 2020 and how much it
    would cost in the IRS budget.

    [GRAPHIC] [TIFF OMITTED] T1121.010

        .epsWe did not start with top-down numbers. Rather, with help from
    an expert revenue estimator, we estimated how much we could gain by
    moving the two lowest visibility categories of income to the next
    higher category source of income. All our calculations are shown in
    detail on our website (www.ShrinktheTaxGap.com).

        Our estimate of the gain, although a large number ($1.4 trillion),
    still only recovers 19 percent of the tax gap over 10 years. The gain
    builds gradually in our estimate, because we have been realistic about
    how fast the IRS could implement what we propose. Our recommended plan
    is a long-term investment, not a quick fix, but the gain would continue
    to build year after year as shown see in the chart.

       Government Actions Required for Success of Shrink the Tax Gap Plan

          1.  Clear authority and direction from Congress set in the law.

          2.  Dedicated, high-level, and ongoing management program within
    the IRS.

          3.  Consistent funding increases of about 6 percent per year (in
    addition to amounts to sustain IRS operations).

    [GRAPHIC] [TIFF OMITTED] T1121.011

        .epsTo make our STTG plan successful, we believe it would take
    three major actions by our Federal Government.

          1.  Clear authority and a mandate from Congress set in the law is
    essential to provide a long-term commitment. Specific compliance and
    service goals, monitored by regular reports of milestones and metrics,
    can provide the basis for effective oversight and assure taxpayer
    rights. Our paper, ``Goals, Metrics, Taxpayer Rights, and Oversight,''
    provides details of how this could be done.

          2.  A dedicated, high-level, ongoing management program within
    the IRS will be required. In our Tax Notes article published on
    September 11, 2020, we have described how the IRS could successfully
    implement this plan.

          3.  Steady, assured funding is essential because the program
    requires investments in technology and staff that must be planned and
    executed over time. We estimate that additional funding on the order of
    6 percent per year for 10 years is required for implementation of the
    STTG plan. (This is in addition to that required to sustain IRS ongoing
    operations, restore adequate filing season services, and modernize
    legacy systems.)

    Summary

          We have a plan to shrink the tax gap by $1.4 trillion ove 10
    years.

          This gain is only 19 percent of the total 10-year tax gap.

          The plan includes three actions that work together:
          -  Fill the gap in income reported by third parties.
          -  Use modern technology to use all the information the IRS has
    and improve service.
          -  Scale up and transform auditing to be the last step in
    resolving cases identified by technology.

    [GRAPHIC] [TIFF OMITTED] T1121.012

        .epsSee our website (www.shrinkthetaxgap.com) for more details on
    our plan, including the basis for revenue and cost estimates.
                 shrink the tax gap information reporting plan
     Revised Criteria and Process for Financial Service Provider
            Information Reporting of Low-Visibility Income (1099New),
            Revised April 15, 2021
                Summary
        A key part of our proposal to Shrink the Tax Gap is a new
    information report (1099New) to be provided by financial service
    providers (FSPs) on accounts held by taxpayers with low visibility
    income. This update simplifies the proposed process for individual
    taxpayers by limiting the report to taxpayers who have both adjusted
    gross income (AGI) over a set amount and low-visibility income. It also
    eliminates the need for taxpayers to notify their financial service
    providers that their accounts should be reported as the IRS will notify
    the financial institutions directly of which accounts to report. An
    earlier version of the proposal indicated that taxpayers would need to
    notify their financial institutions.
                Previous Proposal
        The following excerpt from our September 14, 2020 article in Tax
    Notes Federal, entitled ``Recover $1.6 Trillion, Modernize Tax
    Compliance and Assistance, the How To,'' summarized the previous
    proposal:

            Taxpayers who have only income that's already reported to the
            IRS by employers, financial institutions or customers (on
            documents such as the familiar W-2 or 1099) wouldn't have to do
            anything except check a box on their return.

            A. TCAM \2\ Reporting Proposal
    ---------------------------------------------------------------------------
        \2\ At the time the September 14th Tax Notes Federal article was
    published, we referred to the current Shrink the Tax Gap proposal as
    Tax Compliance and Assistance Modernization, TCAM.

            Taxpayers with more than $25,000 of business income would be
            required to list the account numbers of all their financial
            institution accounts on their returns. They would notify their
            financial institutions of the accounts they listed on their
    ---------------------------------------------------------------------------
            returns.

            The financial institutions that were notified by taxpayers
            would provide the taxpayer and the IRS a new 1099 summary
            report of total deposits received and total withdrawals made in
            each of these accounts.

            The taxpayer would attach a new schedule to their tax return,
            reconciling the total amounts reported on the financial
            institution reports to the income and expenses reported on the
            tax return. For example, if the cash received in the financial
            institution accounts was greater than the income reported on
            the return, the schedule would itemize and explain the
            differences.

            More details on the TCAM proposed financial institution and
            taxpayer reporting is provided in Appendix E, Taxpayer Burden
            Estimate, on our website TCAmodernization.com (Rossotti/Forman
            1366).
                Updated Proposal
        As a result of comments and suggestions from reviewers of our
    previous article, we decided to change the criteria and process for
    producing the 1099New information report. We have continued to refine
    this process as we receive comments and suggestions. The content and
    use of the report itself would be the same.

    Individual Filers

        The report would be required for individual taxpayers whose income
    was in the top 25 percent of all filers and who had income from low
    visibility sources.\3\ Using these criteria, the 1099New report would
    be provided for about 5 percent of all individual filers and about 20
    percent of those with sole proprietor income.
    ---------------------------------------------------------------------------
        \3\ In our analysis we used Adjusted Gross Income (AGI) as an
    indicator of individual income because IRS statistics are most readily
    available using this definition. However, we recommend allowing the IRS
    flexibility as to the precise definition of income it would use to
    identify taxpayers who would receive the 1099NEW. For example, the IRS
    sometimes uses a definition of business income that adds back loses to
    reported income because returns that report high positive income offset
    by losses often have significant non-compliance issues.
    ---------------------------------------------------------------------------

    Pass-through Entities

        The report would also be required for all pass-through entities who
    had an ownership interest held by the individual taxpayers above the
    designated income level.
                Process
        The IRS would be responsible for determining which taxpayers
    (individual filers and pass-through entities) would be covered by the
    1099New reporting requirement. The IRS would analyze all individual and
    pass-through returns filed in the previous tax year, determining which
    returns qualified for the information reporting based on AGI limit,
    presence of low visibility income and ownership interest in pass-
    through entities.

        Treasury regulations would specify the types of accounts and
    financial service providers that are covered by the reporting
    requirement.

          A.  The IRS would provide the financial service providers limited
    access to an encrypted file of the taxpayer ID numbers (SSN or EIN)
    designated to receive the 1099New report.

          B.  The financial service providers would provide the designated
    taxpayers and the IRS a 1099New report for all the identified accounts
    the following year in the same manner as for all other 1099s.

        The 1099New rules would apply to financial service providers, which
    we suggest include:

            Banks and traditional financial institutions that enable
    individuals to make and receive payments and hold balances.

            Online payment systems and mobile payment apps that permit
    individuals and companies to make and receive payments and hold a
    balance that is not always reflected in the traditional banking system.

            Cryptocurrency exchanges.

        These rules would cover both FDIC-insured institutions as well as
    financial service providers not covered by the FDIC. We believe that
    this definition provides a level playing field and helps accomplish our
    goal of identifying low-visibility income by covering not only the
    traditional ways that individuals and businesses execute financial
    transactions but also the new, technology-driven payment mechanisms
    that will only become more common in the future.

        This process would apply to U.S.-based financial service providers,
    including U.S. subsidiaries of foreign financial institutions. The IRS
    already obtains information on accounts in non-U.S. foreign financial
    institutions under the Foreign Accounts Tax Compliance Act (FATCA) and
    would make use of this FATCA information in its compliance program.

        Taxpayers who receive the 1099New would use the information return
    in the same way as all taxpayers use 1099s (such as for securities
    transactions or interest income), to assist in filing an accurate
    return. The IRS would provide taxpayers a reconciliation schedule that
    would allow taxpayers to reconcile the 1099News with their return, just
    as the IRS provides a supplementary schedule (Form 8949) that allows
    taxpayers with capital gains to reconcile their tax return with amounts
    reported on the 1099B information return.\4\
    ---------------------------------------------------------------------------
        \4\ IRS instructions to Form 8949 explain its purpose as follows:
    ``Form 8949 allows you and the IRS to reconcile amounts that were
    reported to you and the IRS on Forms 1099-B or 1099-S (or substitute
    statements) with the amounts you report on your return.''

        This schedule is explained in detail in Appendix E on our website
    https://www.shrinkthetaxgap.com/. As discussed in the section titled
    ``How Much of a Burden Would This Be'' in our September 14, 2020 Tax
    Notes Federal article, this schedule would benefit both the taxpayer
    and the IRS by explaining in advance any potential discrepancies,
    thereby reducing the likelihood of unnecessary follow-up audits.
    Unnecessary audits, those in which no change or a trivial change in the
    tax liability is the result, is a serious source of frustration for
    ---------------------------------------------------------------------------
    taxpayers and inefficiency for the IRS.

        The reconciliation schedule would be optional for all taxpayers and
    would be required after a 1-year delay for individual taxpayers with
    AGI over $400,000 and all related pass-through entities.

        The following figure (also in Exhibit 14 on our website) shows how
    this new information flow would be implemented over a 3-year period:

    [GRAPHIC] [TIFF OMITTED] T1121.013

        .epsWe have constructed several scenarios to illustrate how the
    1099New information reporting and reconciliation schedule would apply
    to taxpayers in typical situations. These are shown in Exhibit 15 on
    our website.
    Considerations Affecting This Proposed Method
        Any additional information reporting will impose some requirements
    on some taxpayers and on the reporting entities and will involve the
    exchange of personal financial information between the reporting
    entities and the IRS. Our goal has been to obtain the required
    information in a method that, taken as a whole, balances three key
    considerations:

            Provides the new information reports to the universe of
    taxpayers who have the predominant amounts of underreported income
    while avoiding unnecessary reporting on other taxpayers.

            Minimizes the taxpayer information exchanged to and from the
    reporting entities and ensures the protection of any information
    exchanged.

            Provides reliable information to the IRS that can be used
    effectively to shrink the tax gap.

        An important fact in weighing these considerations is that the IRS
    needs the new information report on fewer than 10 percent of the
    universe of individual and business taxpayers, (approximately 13
    million individual and pass-through business taxpayers out of a
    universe of about 160 million) but it does need as complete a view as
    possible of the accounts of those taxpayers who do receive the reports.
    Reporting which omits a significant fraction of a taxpayer's financial
    accounts is not useful for the IRS and could mislead taxpayers
    receiving the partial information.

        A more traditional method of producing 1099s would delegate to
    financial services providers the role of selecting which taxpayers
    would receive the 1099s based on such criteria as the dollar value or
    dollar inflow to an account. Because the need for information in the
    STTG plan is limited to a relatively small subset of taxpayers, any
    such general method would provide information reporting on many more
    taxpayers than required, while failing to produce complete information
    on those taxpayers whose income is not otherwise reported. Our proposed
    method will reliably provide the additional information reporting to
    only those taxpayers whose income is not otherwise reported, thereby
    minimizing any overreporting or confusion on other taxpayers.
    Privacy and Security Safeguards
        The information provided by the IRS to the financial service
    providers specified in Treasury regulations in order to designate which
    taxpayer accounts should receive the 1099New would be subject to legal
    and technology-based safeguards to protect against any misuse of this
    information. Some of the safeguards would be the following:

            Financial service providers receiving access to the
    information are all entities that receive and maintain large quantities
    of sensitive information as a part of their basic operations. They are
    subject to oversight and compliance checks on their processes to
    safeguard this information.

            The information provided by the IRS would be provided under
    regulations specifying that the information could only be used for the
    purpose of designating accounts to receive the specified 1099New and
    for no other purpose.

            The information provided by the IRS would contain no financial
    information, only the bare minimum needed to identify the designated
    accounts.

            The computer file containing the IRS information would be
    retained under the control of the IRS at all times. Each financial
    institution would receive limited, controlled and secure access to this
    file for a limited time needed solely to identify which of its accounts
    are designated to receive the 1099New.

            Each financial institution would only be able access the IRS
    information to identify which of its own accounts were designated to
    receive the 1099New. It would not have access to any information at all
    on accounts held at other financial institutions.

            All access to the IRS information would be tracked and logged.

        Technical details on the method of by which financial institutions
    would access the necessary information is provided in Appendix F.
     Financial Results With Revised Information Reporting Criteria
        Our methodology for making our revenue estimates is explained in
    Appendix A, Calculating the Revenue Impact, and in Exhibits 1, 3, and
    4, on our website.

        The revised criteria for defining which taxpayers receive the
    1099New information report would change our estimate of the revenue
    gain from our initial proposal because only taxpayers with more than
    the designated AGI would receive the report, even if they had
    significant low visibility income below the AGI threshold. Taxpayers
    with income below this threshold would of course still be legally
    required to report all their income and would be subject to traditional
    enforcement procedures, but the IRS efficiency in enforcing compliance
    would be reduced.

        By setting the threshold at an AGI level equal to the top 25
    percent of individual taxpayers, we believe we would cover
    approximately 62 percent of underreported low visibility income on
    individual returns, while minimizing the number of information reports.
    We also estimate that requiring the 1099New report for pass-throughs
    for entities with an ownership interest held by the top 25 percent of
    individual taxpayers would cover approximately 97 percent of income
    from pass-through entities. (See Exhibit 12, Backup for Information
    Reporting, on our website.)

        Using these criteria, the estimated revenue gain over 10 years from
    individual taxpayers would be reduced by about $180 billion, from $929
    billion to $749 billion. The calculations for this estimate are shown
    in our revised Exhibit 3-1, Tax Gap Gain from Individual Taxpayers,
    Adjusted for AGI Class, on our website.

        We also analyzed the effect of this change in reporting on the
    estimated gain from pass-through entities, as detailed in Exhibit 4-1,
    Tax Gap Gain from Pass-throughs, Update One, on our website. We
    concluded that there is no need to change the original estimate of the
    gain, since about 97 percent of the income of pass-throughs is earned
    by the top 25 percent of individual taxpayers.

        In addition, our initial analysis did not include any gain from
    pass-throughs with gross receipts over $25 million because we assumed
    that these large pass-throughs were all technically compliant. On
    further analysis, by extrapolation from the prior IRS study of S
    corporations, we concluded that some gain, amounting to approximately
    six-tenths of 1 percent of income, would be found by the additional
    reporting on these large pass-throughs.

        Finally, we did not include any estimated gain from the application
    of our technology-enhanced matching process for partnerships owned by
    other partnerships (so-called tiered partnerships), although prior
    studies have indicated that as much as 30 percent of partnership income
    is not traceable to any taxable return.\5\ The technology we propose
    would be capable of identifying where this missing income is going.
    ---------------------------------------------------------------------------
        \5\ Cooper, Michael et al., ``Business in the United States: Who
    Owns it and How Much Tax They Pay.'' Tax Policy and the Economy, Number
    30, The University of Chicago Press.  2016 by the National Bureau of
    Economic Research.

        We did not assume any change in the estimated cost for the IRS to
    ---------------------------------------------------------------------------
    execute our proposed program.

        The technology program would be unchanged except for a minor change
    in how the 1099New report would be obtained from financial
    institutions. The new method would actually be simpler for the taxpayer
    and the IRS.

        With respect to IRS staffing, there would be somewhat fewer
    matching cases under the new criteria for information reporting because
    a smaller fraction of individual taxpayers would receive the 1099New
    report. However, we did not assume any reduced staffing requirement
    because we assume some staffing would be required to perform selective
    audits on taxpayers below the threshold for receiving the 1099New.

        The net effect of these assumptions is to slightly reduce the
    estimated revenue gain and the estimated efficiency of the overall
    plan. The overall result of the proposal using the revised reporting
    criteria is as follows:

                                                      $ in billions
    ----------------------------------------------------------------------------------------------------------------
                                                                                                             10-year
                      2019    2020    2021    2022    2023    2024    2025    2026    2027    2028    2029    total
    ----------------------------------------------------------------------------------------------------------------
    IRS Base Budget   $12.3   $12.6   $12.9   $13.1   $13.4   $13.7   $13.9   $14.2   $14.5   $14.8   $15.1   $138.3
    ----------------------------------------------------------------------------------------------------------------
    Technology Cost             0.1     0.4     0.5     0.7     0.9     1.3     1.7     2.0     2.2     2.3     12.0
     Increment
    ----------------------------------------------------------------------------------------------------------------
    Staffing Cost               0.6     1.4     2.3     3.3     4.4     5.6     7.2     8.2     9.4     9.4     51.8
     Increment
    ----------------------------------------------------------------------------------------------------------------
    Total Cost                  0.7     1.8     2.8     4.0     5.4     6.9     8.9    10.1    11.5    11.7     63.8
     Increment
    ----------------------------------------------------------------------------------------------------------------
    Revenue Gain                 32      65      89     111     131     149     171     199     219     243   $1,408
    ----------------------------------------------------------------------------------------------------------------
    Ratio: Revenue                                                                                                22
     Gain to Cost
     Increment
    ----------------------------------------------------------------------------------------------------------------
    Unmitigated Tax             602     631     661     693     731     763     815     866     897     935    7,593
     Gap
    ----------------------------------------------------------------------------------------------------------------
    Revenue Gain as              5%     10%     14%     16%     18%     20%     21%     23%     24%     26%      19%
     % of
     Unmitigated
     Tax Gap
    ----------------------------------------------------------------------------------------------------------------

                                taxpayer impact
    Appendix E Version 2: Taxpayer Impact, April 18, 2021
    Note: This update replaces an earlier version of Appendix E in its
    entirety.
                Reason for Update
        Update 1 to our Shrink the Tax Gap plan updated and narrowed the
    criteria for which taxpayers would receive the 1099New information
    report and eliminated the need for taxpayers to notify banks about
    their accounts. These changes also reduced our estimate of the 10-year
    revenue gain by approximately $200 billion, because the estimated
    revenue gain would be limited to the top quartile taxpayers. Because of
    these changes and other comments received on our original proposal, the
    method used to estimate taxpayer impact in our original Appendix E is
    no longer valid and is being replaced by Version 2.
                Who Would Receive the 1099New Information Report?
        The 1099New information report would be provided only to individual
    taxpayers who have income in the top quartile (i.e., top 25 percent) of
    adjusted gross income (AGI) and who have business income not reported
    on other 1099s. It would also be provided to pass-through businesses
    that these top quartile taxpayers own.

        AGI is a frequently used measure of taxpayer income as it allows
    for certain deductions in stating income. The cutoff for the top
    quartile of taxpayers was estimated to be about $92,000 AGI in 2020 and
    will increase each year. We estimate that approximately 13 million
    individual and pass-through taxpayers would receive the 1099New, out of
    a total universe of about 160 million individual and pass-through
    returns.

        The 1099New would show total annual deposits and withdrawals from
    each of the taxpayer's bank accounts over the course of a calendar
    year.

        Individual and pass-through taxpayers would receive the 1099 from
    financial institutions that hold their depository accounts as they do
    all other information reports. They would not have to do anything to
    receive these reports.

        The universe of financial institutions and types of accounts to be
    reported on would be defined by Treasury regulations and would include
    not only commercial banks but other financial providers who regularly
    accept and process financial inflows and transactions.
                Reconciliation Schedule
        Summary Description. The IRS would provide instructions and a
    supplementary information schedule that would allow taxpayers to
    reconcile their total withdrawals and total deposits from the 1099New
    reports to their business gross income, business deductions, and net
    income or loss. This schedule would aid the taxpayers and their
    preparers to prepare an accurate return and would eliminate the need in
    many cases for the IRS to audit a tax return, thereby saving the
    taxpayer and the IRS significant time spent in unnecessary audits.

        This schedule is similar to the schedule the IRS provides to
    taxpayers (Form 8949) to allow them to reconcile their capital gains
    income as reported on the tax return to amounts reported on information
    returns 1099-B.\6\ Form 8949 provides a set of codes allowing the
    taxpayer to designate amounts that are reported on the 1099B that are
    not required to be reported as gains on the tax return. That is the
    same process that would be used on the STTG proposed reconciliation
    schedule.
    ---------------------------------------------------------------------------
        \6\ The instructions to Form 8949 state that ``Form 8949 allows you
    and the IRS to reconcile amounts that were reported to you and the IRS
    on Forms 1099-B or 1099-S (or substitute statements) with the amounts
    you report on your return.''

        Schedule Optional for Most Taxpayers. The filing of the
    reconciliation schedule would be optional for any individual taxpayers
    with AGI under $400,000. Taxpayers with AGI over this limit and who
    receive the 1099New and report the income on their individual returns
    would be required to file the reconciliation schedule. We estimate that
    requirement would cover approximately 1 percent of all individual tax
    returns and about 20 percent of those who receive the 1099New. It would
    also be required for most pass-through businesses since most of them
    ---------------------------------------------------------------------------
    are owned by top quartile taxpayers.

        Personal Accounts Excluded. The reconciliation schedule would
    provide for taxpayers to designate any bank accounts that did not
    include business receipts or deductions as personal accounts and to
    exclude them from the reconciliation schedule for simplification
    purposes.

        Schedule Details. The reconciliation schedule would allow the
    taxpayer to identify and explain adjustments to deposits that do not
    constitute income, such as deposits from non-business income, or loans
    and adjustments to withdrawals that are not allowable business
    deductions, such as personal use withdrawals or return of owner
    capital.

        The adjusted amounts of deposits and withdrawals would reconcile to
    the appropriate line items on the tax return schedule.

        A reconciliation schedule would be done for business income (e.g.,
    Schedule C, E, or F) on an individual tax return and at the entity
    level for pass-through entities.

        The data from the 1099New and the process of reconciling it would
    aid the taxpayer or his preparer in filing an accurate return by
    checking that all appropriate receipts are included in income and that
    only appropriate deductions are used.

        The reconciliation schedule would only need to cover significant
    items causing a difference between the 1099New and the return and would
    not need to balance to the penny. It would not require transaction-
    level detail, only general categories, such as ``non-deductible
    personal expenses'' in reconciling withdrawals, or ``gifts'' in
    reconciling deposits. These categories would be similar to the codes
    provided for in the instructions to the Form 8949 reconciliation
    schedule. Most taxpayers covered by this requirement are cash-basis
    taxpayers, but the schedule would also provide for taxpayers who report
    on an accrual basis.
                How the Reconciliation Schedule Would Be Prepared
        The providers of tax preparation software would incorporate the
    1099New and the related IRS reconciliation schedule into their
    software. The software would allow the preparer to enter or directly
    upload the 1099New just as they do for all other 1099s. After the
    associated tax return schedule (e.g., Form 1040, Schedule C, or Form
    1065) was prepared, the software would then prompt for or require
    adjustments necessary to prepare the reconciliation schedule, which
    would be filed as part of the tax return.

        In order to allow software providers, preparers and taxpayers
    adequate time to prepare the reconciliation schedule efficiently, for
    those taxpayers required to file the reconciliation schedule, the
    requirement would be delayed for one full tax year after the first year
    in which the taxpayers would receive the first 1099New. This would
    allow sufficient time for taxpayers who file the schedule to identify
    any transactions in their records so they could be retrieved and used
    at the end of the year to prepare the schedule for the following years.
                Cost to the Taxpayer
        There would be no cost to the taxpayer to receive the 1099New, as
    it would be provided by the taxpayer's financial institution just as
    any other 1099. The only additional requirement for the taxpayer would
    be preparation of the reconciliation schedule to be filed with the
    return by high income individual taxpayers (those with AGI over
    $400,000) and for pass-through business entities.

        According to the annual survey by National Federal of Independent
    Business (NFIB), 88 percent of their members use preparers for their
    returns, and we believe almost all high-income business taxpayers use
    preparers with automated systems to maintain business records and to do
    tax return preparation. All bank accounts of pass-through businesses
    have separate tax ID numbers and we believe that almost all the high-
    income individual taxpayers who would file the reconciliation schedule
    would maintain separate accounts for their business activities. Since
    filing the reconciliation schedule would be delayed for a full tax year
    after first receiving the 1099New, preparers would be able to identify
    any transactions in their systems of record that would be required to
    prepare the schedule. Taxpayers could also take advantage of this delay
    to reconfigure their bank accounts to simplify the process.

        Based on published surveys and informal discussions with software
    providers and preparers, we are working on estimating how much the
    reconciliation schedule would increase the cost of preparing a business
    return. We do not yet have this data but will publish it if we can get
    reliable data.

        Whatever the cost to the taxpayer, preparation of business tax
    returns is a deductible business expense.
          goals, metrics, taxpayer rights, and oversight, may 4, 2021
    Direction and High-Level Goals Set by Congress
        Shrink the Tax Gap is a long-term program involving major change in
    how the IRS does business and how it interacts with taxpayers. It
    encompasses increased information reporting, investment in modern
    technology, and modernized enforcement processes. From Congress, these
    changes will require clear direction and goals, sustained long-term
    funding, and continuing oversight. The IRS in turn will have to provide
    data to measure progress and to provide a basis for oversight.

        This paper shows how goals and measurements of progress for the
    program could be articulated and used for oversight by the
    administration and congressional committees.
                A Successful Example: Electronic Filing
        An example of how the goals for the Shrink the Tax Gap program
    could be stated is the IRS Restructuring and Reform Act of 1998. This
    law was passed after a year of study of the IRS by a bipartisan
    congressional panel. It prescribed and authorized many significant
    changes, including a key one requiring the IRS to convert to electronic
    filing of tax returns, set in the law as follows:

            (a) IN GENERAL--It is the policy of Congress that--(1)
            paperless filing should be the preferred and most convenient
            means of filing Federal tax and information returns; (2) it
            should be the goal of the Internal Revenue Service to have at
            least 80 percent of all such returns filed electronically by
            the year 2007; and (3) the Internal Revenue Service should
            cooperate with and encourage the private sector by encouraging
            competition to increase electronic filing of returns.

        At the time this law was passed, electronic filing at an early
    stage, but today the tax system could not function without it. The
    program required major behavioral change by taxpayers and technological
    change in the IRS and had to overcome many obstacles over the
    subsequent 20 years. A key element in allowing it to succeed was the
    clear mandate and direction set in law.

        The goal stated in the legislation of 80 percent electronic filing
    seemed clearer than it actually was and required more definition by the
    IRS to make it operational. These more specific metrics were developed
    by the IRS following guidance from hearings and studies that both
    preceded and followed the legislation.

        Through all the challenges and changes, the clear mandate in the
    law provided the direction the IRS needed to continue making progress.
    Congressional Direction and High-Level Goals for the STTG Program
        Following the pattern set in the Restructuring and Reform Act of
    1998, we suggest formulating the IRS mandate for the STTG program in a
    form such as:

        ``It is the policy of Congress that--

            1. Compliance
                a.  Goal. It should be the goal of the IRS that, by the
    10th tax year after the effective date of this statute, the net tax
    gap, as measured by the fraction of taxes due that are not reported and
    paid, should be reduced by at least 20 percent, as compared with the
    fraction estimated in the most recent IRS study prior to enactment of
    this statute.
                b.  Priorities. Priorities for actions and resources to
    improve compliance should be guided by the relative dollar amounts of
    non-compliance.

            2. Service
               Goal. It should be the goal of the IRS that the quality,
    timeliness and accuracy of assistance provided to taxpayers interacting
    with the IRS be comparable to that provided by leading private
    financial services institutions.

            3. Reporting
                a.  Within 1 year of enactment, the IRS will prepare a plan
    to achieve the compliance and assistance goals and will define
    milestones and metrics indicating progress on achieving the goals.
    Milestones and metrics must be reported at least annually indicating
    progress in executing the plan.
                b.  In addition to reporting annual milestones and metrics,
    within 3 years after the effective date of this statute and every 2
    years thereafter, the IRS shall present a comprehensive quantitative
    and qualitative report evaluating progress towards these goals and
    reporting changes to the overall plan.''

        Compliance Goal. A formulation in this manner would ensure that the
    IRS would seek to steadily reduce the tax gap and improve assistance to
    taxpayers, but also would focus its highest priority on taxpayers that
    are responsible for the largest dollar amounts in the tax gap. The
    compliance goal is largely independent of fluctuations in the level of
    revenue collections because it is defined as improvement in the
    fraction of taxes due that are paid rather than any absolute amount. As
    shown in past IRS compliance studies, this fraction has remained
    relatively stable over time in the absence of effective IRS actions to
    reduce it.\7\
    ---------------------------------------------------------------------------
        \7\ In four IRS compliance studies in time periods from 2001 to
    2013, the voluntary compliance rate varied in a very small range, a
    maximum of 1.3 percent. See Figure 2 in Internal Revenue Service (IRS)
    Research, Applied Analytics and Statistics, Federal Tax Compliance
    Research: Tax Gap Estimates for Tax Years 2011-2013, Publication 1415
    (Rev. 9-2019), Washington, DC. This ratio is driven primarily by the
    level of information reporting and IRS follow-up on identified
    deficiencies, both of which were relatively constant in that period.
    This is what STTG aims to change.

        Service Goal and Taxpayer Rights. Although we call the program
    Shrink the Tax Gap (STTG), our proposed improvements in IRS's business
    processes and technology would also improve the taxpayer experience in
    all aspects of their dealings with the IRS. The taxpayer experience
    encompasses two aspects taxpayer service and taxpayer rights. Both are
    essential to achieving voluntary compliance and fairness to all
    ---------------------------------------------------------------------------
    taxpayers.

        A high quality of service whenever a taxpayer interacts with the
    IRS is essential so that taxpayers who are trying to comply can do so
    efficiently and without undue time or stress. For this reason, we
    include a service goal on par with the compliance goal. Taxpayer rights
    are a mandatory aspect of the IRS dealings with the public whenever it
    asserts its authority to enforce compliance.

        To support the improvement in taxpayer experience and ensure
    adherence to taxpayer rights in the compliance process, approximately
    24 percent of the STTG estimated staffing costs are allocated to
    taxpayer education, prefiling service support and taxpayer rights
    function such as appeals and taxpayer advocate.

        Reporting and Oversight. Clear and consistent reporting is
    essential to effective oversight by both the executive branch and
    congressional oversight committees. This requirement will be aided by
    defining and incorporating an appropriate reporting process into the
    IRS mandate.

        Once a clear mandate and direction such as suggested above is set
    into law, the IRS will propose specific programs and resources to
    accomplish the goals, including defining appropriate milestones and
    metrics to indicate progress. This framework would enable both Congress
    and Treasury to perform their critical oversight function. The
    following discussion shows how these milestones and performance metrics
    could be defined. This discussion focuses on measurements that would be
    newly developed or updated to be relevant to the goals of the STTG
    program.

        In considering the specific milestones and performance metrics we
    recommend, we want to emphasize four points:

          1.  This kind of change cannot happen overnight. Successful
    implementation will require long-term funding commitments and
    consistency in much-needed congressional and executive branch
    oversight.

          2.  While modernized enforcement strategies including increased
    audit coverage will be necessary, the primary driver of shrinking the
    tax gap will be the improved voluntary compliance that flows from
    enhanced information reporting supported by modernized technology.
    Approximately 68 percent of our estimated revenue gain is from
    voluntary compliance.

          3.  Meeting industry standard service levels an essential element
    of improving compliance and one that can and should be implemented on a
    far more rapid time.

          4.  Since the STTG program focuses on reducing underreporting of
    income, it important for taxpayer rights related to this aspect of the
    IRS process be clarified and fully monitored. (This is discussed more
    fully below.)
    Milestones and Performance Metrics
        The reported data should fall broadly into two categories:
    Milestones and Performance Metrics.
                Milestones
        Milestones reflect a point in the STTG program when a specific
    improvement in IRS operations or services has been achieved and that
    indicates progress in implementing the overall plan. An example of an
    early milestone would be for the IRS to implement the procedures to
    exchange information with banks needed for the 1099New and to receive
    the 1099New. A high-level list of possible milestones for the proposed
    compliance plan is as follows:

    [GRAPHIC] [TIFF OMITTED] T1121.014

        .epsThe STTG planning process would be an essential foundation for
    the program. An initial plan would be produced by the IRS and updated
    regularly. At each update, the list of milestones for the near-term
    years would be expanded, usually including two to three meaningful
    milestones each year. The milestones would be updated each year to
    reflect updates to the plan and to add to the near-term list of
    milestones.
                Performance Metrics
        Performance metrics are numerical indicators of progress toward the
    IRS broad compliance and service goals as mandated by Congress.
                Compliance Metrics
        The major long-term measure of success for the compliance program
    is the fraction of taxes due that are paid and collected after
    considering IRS intervention. This is referred to as the Net Compliance
    Rate (NCR), which is defined by the IRS as follows:

            The net compliance rate (NCR) is defined as the sum of all
            timely and enforced and late payments divided by total true
            tax, expressed as a percentage.\8\
    ---------------------------------------------------------------------------
        \8\ Internal Revenue Service (IRS) Research, Applied Analytics and
    Statistics, Federal Tax Compliance Research: Tax Gap Estimates for Tax
    Years 2011-2013, Publication 1415 (Rev. 9-2019), Washington, DC.

        In the last full IRS study, the NCR was 85.8 percent and the net
    tax gap percentage was therefore (1-85.8 percent) or 14.2 percent of
    the total amount of tax legally due. To get to the overall goal of a
    20-percent reduction after 10 years, the net tax gap percentage would
    ---------------------------------------------------------------------------
    have to go down from 14.2 percent to 11.4 percent.

        While this broad measure is the most meaningful measure of
    compliance in the tax system in the past it has been available only
    sporadically after periodic IRS studies. The most recent study
    concluded in 2013. Furthermore, it is a composite that summarizes a
    number of sub-elements such as underpayment, underreporting and non-
    filing for each type of tax (individual income tax, corporate tax,
    etc.).

        The IRS compliance studies also compute a ratio, called the Net
    Misreporting Percentage, (NMP) which specifically measures the
    underreporting of different sources of income in the individual income
    tax, which is the largest component of the tax gap and is the major
    focus of the STTG program.\9\ The NMP is the metric that shows large
    variations in compliance are driven by the level of information
    reporting.
    ---------------------------------------------------------------------------
        \9\ Our STTG program would also include underreported self-
    employment tax related to underreported income.

        Our recommended long-term STTG compliance program would build on
    these sound measurement concepts but would use them to provide more
    current and useful compliance metrics on an on-going basis. This would
    be possible as a by-product of the proposed transformed compliance
    approach which would use greatly enhanced technology to evaluate every
    return as it was processed using all available information, including
    enhanced information reporting and machine learning models.\10\ This
    automated process would usually analyze returns and follow up on issues
    in the same year they were processed, greatly increasing the timeliness
    of available data. Some traditional auditing would be needed to train
    the machine learning models as well as to follow up on certain types of
    cases. From this large amount of data, rolling samples could be used to
    track compliance trends at least annually.\11\
    ---------------------------------------------------------------------------
        \10\ This process is described in detail in Tax Notes article,
    ``Recover $1.6 Trillion, Modernize Tax Compliance and Assistance: The
    How-To,'' published September 14, 2020, and at www.
    shrinkthetaxgap.com, Appendices B and C.
        \11\ The IRS is already working on approaches similar to this. In a
    recent memo, Commissioner Rettig noted, ``In an effort to provide more
    frequent and timely updates, RAAS is actively developing methods to
    `forecast' the tax gap in advance of actually reporting compliance data
    and then revising the estimates as actual data are later collected and
    analyzed. These new approaches and methodologies designed by RAAS would
    enhance the currency of future tax gap estimates as well as identify
    possible additional sources contributing to the tax gap.''

        Our proposed plan breaks the work of building models and analyzing
    returns into an estimated 16 return analysis models which would be
    implemented incrementally over a 10-year period. The actual number of
    models would be increased or decreased as the IRS gained experience
    ---------------------------------------------------------------------------
    with this approach.

        Each of these models would represent a subcategory of
    underreporting. For example, one model might focus on underreporting of
    rental income, which is now in the lowest visibility category with a
    Net Misreporting Percentage (NMP) of 51 percent. Another model would
    focus on matching K-1s reporting pass-through income to taxable
    returns, which has an NMP of 11 percent. Each model would include
    tracking statistics to estimate trends in compliance as measured by the
    Net Misreporting Percentage, both as filed and after IRS intervention.

        The trend in this ratio would provide the basis for measuring
    progress towards improving compliance (including the effect of both
    voluntary compliance and enforcement activities).\12\ Over time these
    could be aggregated to estimate overall reductions in the Voluntary
    Compliance Rate and the Net Compliance Rate for all underreported
    income for the individual income tax.
    ---------------------------------------------------------------------------
        \12\ Although these ratios would be subject to some estimation
    error, this error would decrease over time as the IRS processed and
    sampled more returns in each subcategory from the return analysis
    process. The IRS would also be able to provide statistical analysis
    showing the level of significance of changes in the estimates.

        While not proposed explicitly as part our STTG plan, a similar
    approach could be taken by the IRS to measure trends in non-filing
    ---------------------------------------------------------------------------
    compliance.

        In addition, TIGTA and GAO produce reports analyzing compliance
    levels for certain sensitive categories of taxpayers. These reports
    provide additional baselines against which the IRS could periodically
    re-estimate compliance trends in these categories. For example, a
    recent TIGTA report provided could be used as a baseline of non-filing
    by high income taxpayers.

        In summary, the IRS would produce measurements of the change in the
    compliance ratios of various subcategories of taxpayer income
    regularly, beginning approximately 2 years after the start of the
    program. Broader aggregated measures should be possible approximately 3
    years after the start of the program and a full annual tax gap report
    should be possible after 5 to 6 years.

        The critical consideration in the compliance program is to develop
    performance metrics that align with the major goal, which is to improve
    overall compliance results with improved voluntary compliance as well
    as revenue from enforcement actions. We believe the program we
    recommend can produce performance metrics that are properly aligned
    with that goal and are reasonably indicative of progress or lack of
    progress, even if they are partial or imperfect in the early periods.

        Another category of performance metrics indicates performance in
    direct interactions with taxpayers. These are commonly referred to as
    ``customer service'' metrics, and they are in many respects comparable
    to metrics used in commercial businesses, including financial services
    businesses. They can apply to taxpayer interactions that occur through
    different channels, such as phone calls, traditional mail, or
    increasingly through electronic communications. The IRS already
    produces many of these metrics and reports on them to the public and to
    Congress.
                Compliance-related interactions
        Compliance interactions related to underreporting of income are the
    primary focus of the STTG plan. A fundamental aspect of this plan is to
    transform the majority of interactions with underreporting taxpayers to
    a faster and more efficient process of identifying and resolving
    potential underreporting issues than now occurs in traditional audits.
    The IRS would have the responsibility to use all the information it
    already has to analyze returns and identify possible deficiencies
    before contacting the taxpayer. The interaction with the taxpayer
    should be faster, more efficient in use of the IRS and the taxpayer's
    time and focused on resolving any specific issues identified by the
    process.

        Service performance metrics for this process should be broadened to
    include, for example: (1) the fraction of false positive cases (i.e.,
    cases with no or minimal change in tax); (2) the taxpayer's view of the
    clarity and quality of notices; (3) quality, timeliness and accuracy of
    calls and other interactions (as measured by surveys); and (4) the time
    to resolve cases.

        The previous discussion is not a comprehensive specification of all
    service and assistance metrics but is intended to illustrate the kinds
    of new or updated metrics the IRS should produce as part of its
    modernization of business practices and accompanying funding.
    Taxpayer Rights
        Unlike compliance and service goals for the IRS, taxpayer rights do
    not represent a goal for the IRS. They are a mandate that the IRS must
    adhere to, just as taxpayers are expected to adhere to the law. Many
    taxpayer rights are already included in law or regulations but many of
    those relate to the IRS process for collecting amounts known to be owed
    by the taxpayer. The STTG compliance process is aimed at identifying
    income not properly reported on tax returns and resolving those likely
    deficiencies with taxpayers through follow up enforcement processes of
    various kinds.

        We believe that several key taxpayer rights do already apply in
    these situations but some of these rights may need to be clarified by
    regulation, and all should be regularly monitored by the independent
    Treasury Inspector General of Tax Administration (TIGTA).

        Some of the most important rights that are relevant to our plan
    are:

        Issue Resolution Process. No taxpayer should ever be presented with
    a notice asserting a deficiency in tax without a prompt opportunity to
    communicate with a qualified IRS employee who can explain the basis for
    the asserted deficiency and how it can be resolved. This is the intent
    of all the Shrink the Tax Gap proposals and is implicit in the service
    goals we propose. This commitment could be further clarified by law or
    regulation.

        Appeal Rights. Right of appeal of an asserted deficiency to the IRS
    independent Appeals Office (recently strengthened by the Taxpayer First
    Act).

        Burden of Proof on Assessments. Although courts have held that the
    IRS has the burden of proof in making a deficiency assessment based
    solely on third-party reporting, this rule should be mandated for
    internal IRS practice. To ensure implementation of this right, the IRS
    should provide taxpayers a process for identifying errors on
    information return.

        Recovery of Attorney's Fees. Clarify eligibility for small business
    taxpayers to recover attorney's fees and increase limits on fees.

        Access to Tax Court. Assure that taxpayer have access to tax court
    before paying assessments by allowing tax court power to accept
    jurisdiction on equitable grounds, and include cases of penalties
    assessed by the IRS in the tax court jurisdiction.

        Self-employed Access to VITA Sites. Expand the jurisdiction of
    federally funded VITA sites to assist self-employed individuals.
    Operations and Financial Metrics
        In addition to the items discussed above, the IRS produces many
    operational statistics and much budget and financial data. This
    includes data reported internally to manage the agency, to support
    budget requests and to report periodically to Treasury, OMB and
    Congress. This data includes project level data on specific
    modernization projects and other initiatives and would be readily
    expanded to cover all the STTG programs.
    External Indications of Progress
        In a recent CBO report on IRS enforcement, CBO suggested an
    excellent possibility for considering the impact of major IRS programs,
    stating the following:

            The scorekeeping guidelines do not apply to CBO's baseline
            budget projections or to its other projections such as the
            analysis of the President's budget. So, although CBO does not
            include the revenue effects of changes in the IRS's funding in
            cost estimates, the agency incorporates both the spending and
            revenue effects of enacted legislation in its next update of
            baseline budget projections.\13\
    ---------------------------------------------------------------------------
        \13\ Congressional Budget Office (CBO), Trends in Internal Revenue
    Service's Funding and Enforcement, July 2020.

        For a program like STTG, which would over time have a material
    impact on revenue estimates, CBO's ability to incorporate this impact
    in its regular revenue and budget projections would be extremely
    valuable. Although it would not necessarily tie precisely to the impact
    of STTG, it would show revenue trends over time as the program
    progressed.
    Oversight
        In a major program such as we recommend, it would be essential for
    the incumbent administration and congressional committees to conduct
    regular oversight. Establishing clear goals and a set of regularly
    reported milestones and metrics as recommended in this paper would
    provide a baseline for these oversight committees to evaluate progress
    and make recommendations for changes. The GAO and TIGTA, well
    established independent reviewers of IRS activities, could use this
    baseline and these regularly provided metrics, as well as their own
    audits, to inform the oversight committees.

        This approach would ensure that resources were used as intended,
    that plans were adjusted based on experience, and that the public could
    be informed of progress.
             legislative financial analysis summary, march 14, 2021
    Basis for cost estimates
        The Shrink the Tax Gap proposal is for a major long-term program
    aimed at reducing major sources of underreported income.

        We have done considerable analysis to document a plan that includes
    additional information reporting, a major technology program to make
    full use of all the information available to the IRS, and a scaled up
    and modernized matching and auditing program.

        We have estimated in some detail the technology costs and the
    staffing and support costs to fund this program over a 10-year period.
    This estimate is fully explained in documents and spreadsheets on our
    website shrinkthetaxgap.com. The details of the methodology for
    estimating technology costs, staffing costs and overall summary costs
    are explained in Appendices B, C, and D and the calculations are shown
    in Exhibits 9, 10, and 11.

        These estimates necessarily used certain conventions. One of these
    conventions is the assumption that the program began on January 1,
    2020. We also assumed that all other programs, including modernization
    of legacy systems, not in scope for the STTG program, would be rolled
    forward with only an inflationary annual adjustment, assumed to be 2
    percent per year.
    Adjusting to Fit a Legislative Timetable for Funding
        We adjusted our STTG cost estimates to fit an assumed legislative
    timetable as follows:

            Authorizing legislation passed in calendar 2021

            IRS Planning phase started in fiscal 2022

            IRS STTG program starts in fiscal 2023

        The results for the adjusted program are shown in the Exhibit 16,
    STTG Legislation Financial Analysis along with the assumption used to
    make the adjustments. The 10-year total costs are as follows:

                  STTG Technology With Inflation Shifted        $13,373,000

                  STTG Staffing With Inflation Shifted
    $59,253,000

                  Organizing and Planning                      $29,000

                  Total STTG Funding Request                  $73,005,000

        Also shown is a summary functional allocation of total projected
    10-year costs, which is as follows:

                 Summary Allocation of Total STTG 10-Year Costs

                                                           Percent of total

    Technology Investment                                                19%

    Staffing and support
            Enforcement                                                  62%
            Pre-filing education and service                              6%
            Appeals, Counsel, Taxpayer Advocate                          14%

    Total for Shrink the Tax Gap Program                                100%

    What Is Included and Not Included in STTG Program Costs Estimates
        The STTG program cost estimates include all costs necessary to
    develop and implement the STTG program over a 10-year period. This
    includes technology development and operating costs for all new
    technology needed to support the STTG program, as well as an allocation
    for necessary modifications to IRS legacy systems. It also includes
    staffing costs, for the modernized enforcement program, which consists
    of:

            Field exams; e-exams, and enhanced matching;

            Staffing costs for pre-filing and customer service related to
    the STTG information reporting and enforcement programs;

            Staffing for the post enforcement processes of appeals,
    Counsel and the Taxpayer Advocate and responding to taxpayer and
    adviser inquiries; and

            An allowance for support costs related to the direct staffing
    costs.

        The STTG cost estimates do not include any incremental costs needed
    for the IRS to provide industry standard customer service in its day-
    to-day dealings with the vast majority of compliant taxpayers and their
    advisors. It also does not include costs required for ongoing
    modernization of IRS legacy systems beyond what is in the IRS base
    budget, or for supporting newly enacted programs such as the periodic
    child credit. Funding for some of these items may be included in
    recently enacted IRS appropriations. In our estimates, we only assumed
    a constant IRS base budget increased 2 percent per year for inflation.

        Four points worth emphasizing:

          1.  This kind of change cannot happen over-night; the 10-year
    funding period is needed to permit effective implementation.

          2.  In turn, this will require long-term funding commitments and
    consistency in much-needed congressional and executive branch
    oversight.

          3.  The primary driver of shrinking the tax gap will be the
    improved voluntary compliance from enhanced information reporting,
    supported by modernized technology and enforcement. Approximately 68
    percent of our estimate of the revenue gain is from enhanced voluntary
    compliance.

          4.  While not covered by the STTG cost estimates, meeting
    industry standard service levels for basic tax law and account
    inquiries is an essential element of improving compliance.

    [GRAPHIC] [TIFF OMITTED] T1121.015

                       .epsrevenue estimating methodology
    Calculating the Revenue Impact, Revision 2, April 7, 2021
    Note: All STTG articles, appendices, and exhibits referenced in this
    Exhibit A, Revision 2, are posted on our website
    www.shrinkthetaxgap.com.
                Introduction
        This Appendix represents our second revision of the document first
    published in connection with our Tax Notes article on March 2, 2020.
    The basic methodology is the same, but we made two significant changes.
    We revised the projected revenue phase-in to be consistent with the
    more detailed timeline described in Appendix B, in connection with our
    second Tax Notes article published on September 11, 2020. We then
    further revised the revenue estimate to be consistent with our updated
    plan for information reporting (see Update 1 on our website). Our
    revised information reporting plan limits the 1099New to taxpayers with
    low-visibility income in the top income quartile and related pass-
    through businesses. This change reduced our overall estimate of the
    revenue gain over 10 years from about $1.6 trillion to about $1.4
    trillion.

        We estimated the revenue gain from implementing the plan using
    published IRS data and compliance studies. In addition, we used IRS
    data and other government data to project revenue estimates over a 10-
    year budget window for the years 2020 through 2029.

        This Appendix documents the methodology and the resulting
    calculations. Each exhibit notes the specific source of the data used
    in the calculations.

        As the author, I am responsible for the estimates. I was ably
    assisted in these calculations by Michael Udell of the District
    Economics Group and by other highly qualified experts in tax and
    advanced technology.
                Methodology Summary
        It is well established by many IRS studies that the fraction of
    underreported income is driven by the visibility of the income source
    as determined by the level of third-party reporting that the IRS can
    use to follow up. This chart, from the IRS Research, Applied Analytics,
    and Statistics study titled Federal Tax Compliance Research: Tax Gap
    Estimates for Tax Years 2011-2013, shows this difference clearly.

    [GRAPHIC] [TIFF OMITTED] T1121.016

        .epsWe made our revenue estimates by calculating how much revenue
    would be gained if income in the two lowest visibility categories were
    each improved by one level. The misreporting percentage of income in
    the lowest category would improve from 55 percent to 17 percent, and
    the second lowest category would improve from 17 percent to 5 percent.

        We made separate calculations for income reported on individual
    returns and pass-through returns.

        We did a detailed estimate of the revenue impact of our plan for
    one tax year if the improvement had all occurred in that year. We then
    assumed that this improvement would take a full 10 years to achieve,
    and we estimated a phase-in over the 10-year period. We applied
    standard revenue projecting factors to estimate the impact for each
    year of the 10-year budget period from 2020 through 2029.

        Our end result is summarized in Exhibit 1, Projection of Gains from
    STTG.

        Two items are very critical to note about this methodology. One,
    the revenue gain is the result of a combined 3-part program of
    increased information reporting; improved technology to make use of all
    the pertinent information (including not only our proposed 1099New but
    more use of existing information) and finally efficient
    follow-up on identified deficiencies in returns. This is the process
    that works today that allows the IRS to efficiently collect 95 to 99
    percent of the taxes due in the two highest visibility categories. We
    are proposing to extend that approach to more sources of income.\14\
    And, two, even after our projected 10-year period, our estimated gain
    is still only a cumulative 19 percent of the tax gap over that period.
    This is true because we are only assuming a relative, not a full,
    improvement in underreported income, and even that improvement occurs
    gradually over the period.
    ---------------------------------------------------------------------------
        \14\ The sources of income to which we are increasing the
    visibility, which are various forms of business income, are more
    complex than most other sources, which is why we also recommend a
    supplementary reconciliation schedule that taxpayers can use to explain
    differences between the information report and their return without the
    need for IRS follow-up.

        The sections below discuss the methodology for each aspect of the
    calculations, followed by a discussion of the 10-year projections. Each
    section refers to exhibits which contain spreadsheets and backup data.
    The list of relevant exhibits, which can be found at
    ---------------------------------------------------------------------------
    www.shrinkthetaxgap.com, is as follows:

          1.  Projection of Gains from STTG;

          2.  Tax Gap Projection to 2019;

          3.  Tax Gap: Calculation of Gain From Individuals; and

          4.  Tax Gap: Calculation of Gain From Mid-sized Pass-throughs.

     Reduction in Tax Gap From Additional Third-Party Reporting, Taxpayer
            Reconciliation Schedule and Modernized Compliance Process and
            Technology
                Individuals With Unreported Income
        The STTG plan describes reforms for individuals with income that is
    not currently reported by third parties. The reforms include increased
    reporting by banks of deposits and disbursements in the bank accounts
    used by taxpayers for their business activities, a schedule attached to
    the taxpayer's return to reconcile the bank reporting with the tax
    return and a modernized technology-supported compliance program to make
    use of all available data.

        See Exhibit 3 for details of calculations used for the STTG plan.

        We based our estimates of the revenue gains under this plan on the
    most recent IRS Research, Applied Analytics, and Statistics study
    titled Federal Tax Compliance Research: Tax Gap Estimates for Tax Years
    2011-2013.

        Taking into account the amounts that IRS existing enforcement
    activities already collect, and eliminating any gain from income
    taxpayers below the top quartile of the income distribution, the net
    gain from these proposed STTG reforms in the 2011 through 2013 period
    of the IRS study would have been $57.3 billion if the plan were fully
    effective in that year.

        This is equivalent to $78.7 billion for fiscal year 2019.

        The IRS study showed $109 billion of tax lost from individual
    returns with underreported income of the type that has ``little or no
    information reporting.'' An additional $15 billion is lost from related
    self-employment income, for a total of $124 billion. (The IRS study
    identified a total of $45 billion of tax loss from self-employment
    income, but we only included a proportion that we could relate directly
    to the underreported business income.) For this category of income, 55
    percent of the income that should have been reported was not reported.

        The same IRS study showed that the categories of income that had
    ``some information reporting'' had only 17 percent underreporting.

        We estimate that the STTG plan will move the $124 billion category
    of underreported income to the ``some information reporting'' category.
    With additional reporting and IRS follow up, this move to the ``some
    information reporting'' category would reduce the underreporting
    percentage from 55 percent to 17 percent.

        In addition, using a similar approach, $36 billion of underreported
    income identified in the IRS study would be moved from the ``some
    information reporting'' category to the ``substantial reporting''
    category, thereby reducing the underreporting percentage from 17
    percent to 5 percent.

        As shown in Exhibit 3, these numbers from the IRS study were
    adjusted downward to account for the STTG plan is to provide the new
    information reporting only for the top quartile of individual
    taxpayers.

        A modernization of the IRS compliance program, making use of modern
    advanced analytical models to use additional data recommended by the
    STTG plan, would be an essential aspect of realizing the potential
    revenue that could be generated. This is explained in more detail in
    the section of the STTG main plan titled ``How the modernized
    compliance and assistance program would work in our Tax Notes article
    published on September 11, 2020.''

        In extrapolating from a 1-year gain to an actual gain over 10
    years, we have assumed a conservative curve that converges over 10
    years. We assume we do not reach the target level until the final year.
    This estimate is discussed below in the section on projections.
                Mid-sized Pass-throughs: S Corporations and Partnerships
        We did not include any estimate of revenue gains from pass-throughs
    with over $25 million receipts because we assume large pass-throughs
    are mostly technically compliant We believe all IRS compliance tools
    would be used to find non-compliance in these large pass-throughs, but
    we did not have a basis for estimating revenue from this source. We
    view this as a very conservative assumption in our estimates. A recent
    study by National Bureau of Economic Research, released after our
    calculations were completed, estimates that tax evasion in the top one
    percent of the income distribution was much greater than previously
    estimated, much of it through use of partnerships.\15\
    ---------------------------------------------------------------------------
        \15\ National Bureau of Economic Research: Guyton, Langetieg, Reck,
    Reish, and Zucman (March 2021). ``Tax Evasion at the Top of the Income
    Distribution: Theory and Evidence.'' Working Paper 28542. Cambridge,
    MA.

        STTG proposes reforms for the compliance program for mid-sized
    pass-through businesses that are similar to that for individuals with
    ---------------------------------------------------------------------------
    business income.

        This includes increased reporting by banks of deposits and
    expenditures in the bank accounts used by taxpayers for their business
    activities, a schedule provided to the IRS to reconcile the bank
    reporting with the tax return and a modernized compliance program
    supported by advanced technology together with some focused field
    audits. Only pass-throughs with ownership interest by top quartile
    taxpayers would receive the 1099New, but we estimate that as much as 97
    percent of all pass-through income is received by the top quartile
    taxpayers.

        See Exhibit 4 for details of the calculations for this calculation.

        We estimated the revenue gain from this plan based on the only
    available IRS compliance study of S corporations and the most recent
    IRS Research, Applied Analytics, and Statistics tax gap study, titled
    Federal Tax Compliance Research: Tax Gap Estimates for Tax Years 2011-
    2013.

        The IRS tax gap study provided data on the amount of underreported
    tax (NMA) and the percentage of underreported tax (NMP) by visibility
    category. Business income of sole proprietors fell into the lowest
    visibility category with an NMP of 55 percent.

        The IRS study of S corporations found that those with under
    $200,000 receipts (2004 dollars) were comparable to small proprietors,
    while those over that level had an NMP that was half that amount. The
    conclusions of this study are completely consistent with the factors
    that generally drive compliance--lack of meaningful third-party
    reporting and negligible audit activity (on the order of one-tenth of 1
    percent for pass-throughs)

        Using these statistics, and SOI tax year 2016 data on the income of
    the mid-sized pass-throughs, we calculated the net gain in tax in the
    same manner as described above for individuals with underreported
    income.

        We then adjusted the gain for the amount that would be collected
    through existing enforcement.

        For all unreported income, enforced and late payments are 14
    percent of the gap. In the case of these entities, there's negligible
    direct enforcement, but assuming that some unreported income is
    detected in audits of individuals, we assumed that half of this general
    ratio is collected.

        These calculations result in a net gain in tax year 2016 of $52
    billion, if the plan were fully effective in that year. This is
    equivalent to $64 billion in 2019 dollars. This estimate was not
    materially affected by the change in our plan to limit the 1099New to
    the top quartile of taxpayers because such a large fraction of pass-
    through income in earned by top quartile taxpayers.

        We assume that the phase-up curve of compliance would be the same
    as discussed above for individuals with business income. This phase-in
    methodology is discussed further in the section on projections.
    Projection Methodology
        As discussed above, the revenue gain from proposed reforms under
    STTG was estimated for a baseline year using IRS compliance studies. We
    applied the same methodology for the tax gap plan for individuals and
    medium-sized pass-throughs. This baseline year analysis shows what the
    revenue gain would have been for that year if the plan had been fully
    effective. These baseline calculations are detailed in Exhibits 3 and
    4.

        We first projected forward the estimated annual tax gain from the
    base years using CBO's projection of total Federal tax receipts. We
    used this index because the tax gap itself is a calculation of the
    shortfall in receipts from taxes that are due but not paid. The tax gap
    ratio to total receipts has been reasonably steady over the last
    several compliance studies. This estimate was projected forward for
    each year in the 10-year period 2020 through 2029, since we were using
    a convention that the reforms were passed into law in 2019 and made
    effective as of January 1, 2020. These projections are shown in Exhibit
    1, including the backup indices used to make the projections. This
    calculation shows what the revenue gain would be for each year in the
    period if it were fully effective in that year.

        Since we assumed the proposed plan would not be fully effective
    until the 10th year (2029), we then backed down the revenue estimates
    each year to allow for the phase in the plan and the likely taxpayer
    response during the period.

        At the end of the 10-year period, nearly the full projected tax
    gain is achieved.

        This assumption does NOT imply 100-percent compliance in reported
    income. It only implies that misreporting will be reduced to the
    misreporting percentage associated with the next higher level of
    visibility of income. For example, misreporting by individuals with
    income in the lowest visibility category, which is 55 percent, would
    drop to 17 percent misreporting associated with the next visibility
    category. In other words, in this example, even after 10 years of
    increased reporting and enhanced 100-percent technology processing of
    returns, it assumes that the tax on 17 percent of the business income
    still would not be reported. This level of underreporting is more than
    three times the level of misreporting for income such as dividends and
    interest that receive 1099 reports (which is 5 percent).\16\
    ---------------------------------------------------------------------------
        \16\ Internal Revenue Service (IRS) Research, Applied Analytics and
    Statistics, Federal Tax Compliance Research: Tax Gap Estimates for Tax
    Years 2011-2013, Publication 1415 (Rev. 9-2019), Washington, DC.
    ``These most recent estimates continue to confirm the relationship
    between reporting compliance and third-party information reporting that
    was demonstrated by prior tax gap estimates. For the individual income
    tax, reporting compliance is far higher when income items are subject
    to information reporting and even higher when also subject to
    withholding. As shown in Figure 3 on page 14, from the individual
    income tax underreporting tax gap estimates, the net misreporting
    percentage (NMP) for income amounts subject to substantial information
    reporting and withholding is 1 percent; for income amounts subject to
    substantial information reporting but not withholding, the NMP is 5
    percent; and for income amounts subject to little or no information
    reporting, such as nonfarm proprietor income, the NMP is 55 percent.
    The grouping of items into categories is the same as for the TY 2008-
    2010 estimates.''

        In addition, the IRS data that shows reporting compliance at each
    visibility level is voluntary compliance, before adding whatever IRS
    gets from enforcement through examination and matching. In other words,
    for the ``some reporting'' visibility category, the voluntary
    compliance is 83 percent (100 minus 17). The additional income that the
    IRS recovers from enforcement is on the average about 3 percent of the
    unreported income, thus over 99 percent of the income that is reported
    in this visibility category is from voluntary compliance as compared
    with enforcement.\17\ In our estimates we counted maximum total
    compliance in the final year of the plan, including both voluntary and
    auditing, at the 83 percent level. However, we assumed a much more
    conservative estimate of what fraction of that revenue would come from
    voluntary compliance versus enforcement. Our final year estimates are
    that only 58 percent of the revenue would come from voluntary
    compliance and the rest from some form of enforcement. Much of this
    enforcement we propose would be much more data driven, more focused and
    more efficient than traditional audits, but we considered any follow-up
    with taxpayers to fall under the heading of ``enforcement.'' Our
    proposed follow-up enforcement process is discussed in detail in our
    September 11, 2020 Tax Notes article and in Appendix B.
    ---------------------------------------------------------------------------
        \17\ Visibility category 3 with ``some information reporting''
              Net misreporting percentage                            17
    percent
              Voluntary reporting percentage                          83
    percent
              Average percent of gap recovered by exam and AUR      3
    percent
              Amount recovered by auditing and AUR                  0.5
    percent
              Total reported after enforcement                         83.5
    percent
              Percent reported by voluntary compliance                99
    percent

        We made this more conservative assumption about the ratio between
    voluntary compliance and enforcement because the sources of income in
    the lowest visibility category have been historically much more non-
    compliant and more difficult to recover. To the extent that voluntary
    compliance in this category increased to more historical levels, the
    ---------------------------------------------------------------------------
    amount of required enforcement would decrease.

        In our enforcement estimates we did not specifically allow for
    collection enforcement on underreported taxes assessed but not paid.
    Since 100 percent of our estimated revenue is from upper income
    taxpayers the amount of collection enforcement should be small relative
    to the underreporting component. Some additional collection resources
    would likely be required but we believe our estimate of enforcement is
    sufficiently large to provide for them.

        Our final calculation was to estimate the time phasing of the
    increase in estimated revenue over the 10-year time period. This phase-
    up is also shown in Exhibit 1, broken down between voluntary compliance
    and enforcement by year. This estimate is judgmental but is based on
    both the factors affecting taxpayer behavior and the specific
    milestones in the STTG plan.
    Factors Affecting Taxpayer Behavior
        Initiation of third-party reporting for business income and the
    requirement for preparing a reconciliation schedule would produce an
    initial voluntary increase in compliance. This would occur for three
    reasons:

            Taxpayers would have a new document which would provide
    specific information on what to report and would serve as a reminder to
    do so,

            Tax preparers would be on notice that the IRS has verifiable
    information, and

            The risk of non-compliance would obviously increase,
    especially if this risk is effectively communicated by the IRS.

        In addition, it would be important for the IRS to increase some
    field auditing based on this new information, even while upgraded
    technology was being implemented. This auditing would produce immediate
    revenue, show taxpayers that the additional reporting was being used
    and, very importantly, produce valuable data to inform the machine
    learning models.

        These considerations would lead to a partial but immediate increase
    in compliance in the first years after the increased reporting
    occurred.

        On the other hand, some taxpayers would ignore the requirement but
    would eventually comply once the IRS notified them of deficiencies in
    their returns and followed up appropriately. This increase in
    compliance would build up gradually over time, driven in part by the
    build-up in the IRS of enhanced compliance programs, which we refer to
    as enhanced matching, E-exams and field exams. As described in more
    detail in our September 11th Tax Notes article and in Appendix B on our
    recommended technology program, each of these compliance programs would
    be data driven using machine learning technology to initiate the
    process.

        Some taxpayers would actively resist compliance and require
    aggressive enforcement to produce eventual compliance, including in a
    few cases potential criminal prosecution where outright fraudulent
    behavior has occurred.

        Assuming the IRS over a 10-year period implements the improved
    technology and enhanced compliance programs recommended by the STTG
    plan, compliance would converge to a level close to that which already
    exists in the categories of income where substantial third-party
    reporting exists, which is what our estimate assumes. This conclusion
    is clear from the long-term data on the level of compliance where
    third-party reporting has been in effect for a long time.
    STTG Plan Milestones
        The timeline for the start-up of the plan is based on the following
    key milestones (discussed more fully in our Plan Update 1 and Appendix
    B):

            Authorizing legislation passed, allowing plan to begin after
    startup and planning period.

            First full year of STTG. IRS issues guidance and education
    materials to taxpayers and preparers, describing the plans for the
    1099New information report and reconciliation schedule. IRS provides
    restricted access to financial institutions to determine which
    taxpayers will receive the 1099New.

            Second full year of STTG. Taxpayers receive first 1099New. IRS
    provides additional detail and educational materials to taxpayers and
    preparers concerning the 1099New and the optional reconciliation
    schedule. Taxpayers file returns using 1099New with optional
    reconciliation schedule. IRS initiates traditional examinations of
    returns using 1099New and other existing data, and begins to build
    models.

            Third full year of STTG. Taxpayers receive 2nd year of
    1099New, and those over $400,000 income and pass-through entities are
    required to file reconciliation schedule. IRS expands traditional
    examinations and expands models.

        Beginning in the 2nd year, a modest amount of enforced compliance
    will occur, and then will increase as the IRS builds its enhanced
    technology-enabled compliance program. Compliance gains will then level
    off and only increase gradually as more enforcement cases will occur.

        As shown in Exhibit 1, we estimated a voluntary compliance ratio
    and enforced compliance ratio for each year. The voluntary compliance
    ratio is the fraction of the full gain that would be achieved in that
    year from voluntary compliance and the enforced compliance ratio is the
    fraction of the full gain that would be achieved through all forms of
    enforcement activity.

        Our assumption is that the voluntary compliance ratio will start at
    20 percent, which means that 20 percent of the difference between the
    lower visibility category and the next lowest would be reported.

        History shows that when additional specific supporting
    documentation is required from taxpayers, compliance increases. See
    Exhibit 5 for the immediate effect of additional reporting in the Tax
    Reform Act of 1986.

        Some revenue will be received in the first full year of the plan
    because taxpayers with business income must file quarterly estimates
    and are subject to penalties for underpayment.

        Overall, during the 10-year period the STTG plan would steadily
    shrink the tax gap as compared to its current unmitigated trajectory.
    By 2029, it would reduce the gap by approximately $242 billion, a 26
    percent reduction. Over the 10-year period, it would reduce the tax by
    a cumulative 19 percent.

        While we have not estimated what would happen after the first 10-
    year period, we believe the gradual progress in shrinking the gap would
    continue. Even after the projected gains in the first 10-year period,
    74 percent of the tax gap would remain to be addressed. Some staff
    resources could be reassigned from cases with business returns to non-
    business returns and non-filing cases. The nature of the process
    proposed by STTG is one of continuous improvement, using data gathered
    to improve the models and the process. This would enable increasingly
    precise assessments of noncompliance in specific returns and increasing
    efficient communications with taxpayers.
    Adjusting to Different Start Years
        Using these conventions, the estimates in this report could readily
    be revised for an assumption about any later start year.

        Any multi-year projection is subject to error because of variations
    in the forecast of underlying macroeconomic variables, such as GDP and
    total tax receipts. We used the latest Congressional Budget Office
    (CBO) projections for these variables and therefore our projections
    contain the same level of likely variations as the CBO projections,
    which are also used to project tax revenue in the existing tax system.
    On a relative basis, we do not know of any reason that the revenue
    results under our plan would vary more or less than those the CBO makes
    for the current tax system.
                           revenue estimating detail

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              .epsshrink the tax gap, inc. history and biographies
    Our History and Objectives
        Shrink the Tax Gap is a non-profit entity organized under section
    501(c)4 of the Internal Revenue Code.

        Purpose--Our purpose is to make the Federal tax system fair for
    everyone who pays their taxes by proposing plans to increase overall
    compliance, raising more revenue from taxes already in the tax code,
    and making it faster and easier to interact with the IRS.

        Sponsorship--Our organization has two directors: Charles O.
    Rossotti and Fred L. Forman, both private citizens. We have no
    affiliation with or sponsorship from any other individuals or entities.

        Relationship to the IRS--Our work has been done entirely with
    public data and without any consultation with or support from the IRS
    or any current IRS employees. One retired IRS employee was paid to
    provide part-time administration support such as document preparation
    and scheduling. Other former IRS employees have voluntarily and without
    compensation chosen to comment on our articles and some have posted
    comments on our website.

        Employees and Vendors--We have no employees. As noted above, we pay
    one part-time person to provide administrative support. We pay other
    vendors and service providers on a commercial basis.

        Funding--To date all funding has been provided personally by
    Charles O. Rossotti. We do not plan to solicit any funds from other
    parties. In the future, if we accept funding from any third parties, we
    will disclose those donors on our website.
    Background Statements for Charles Rossotti and Fred Forman
        Charles Rossotti served as IRS Commissioner from 1997 to 2002 and
    on President Bush's panel on tax reform in 2005. Since then, I have not
    been involved in any tax professional activities, and I am not a tax
    advisor to anyone. I have been and continue to be engaged in business
    and non-profit activities, including serving as a part-time advisor to
    The Carlyle Group. My principal business activity is investing and
    serving on the boards of companies. My work on the Shrink the Tax Gap
    program is not connected in any way with The Carlyle Group or any
    business entity.

        In 2019 as the presidential campaigns got underway, it became
    apparent to me that the Federal Government would face a very difficult
    financial challenge over the next decade as demands for spending and
    tax relief would be high while the budget deficit was already high and
    growing. I believed that whatever else was done to resolve this dilemma
    part of the solution should be a more sound and fair tax administration
    system that collected more of the taxes already in the tax code. I
    drafted a proposal for this purpose, based on ideas I had been thinking
    about since my years as IRS Commissioner and on President Bush's tax
    panel. This culminated in an article I published in the journal Tax
    Notes in March 2020. At that time, I did not plan to do anything more
    on the subject.

        After the first Tax Notes article was published, I received a
    number of generally positive inquiries and indications of interest in
    my proposal. Many of the inquiries were about how the proposal could be
    implemented. Based on this response. I decided to develop the proposal
    in more detail. At this time, Fred Forman joined me in the work.

        Fred Forman was our senior technology executive at American
    Management Systems, where I was CEO. From 2000 until 2004 he joined the
    IRS as Associate Commissioner for Business Systems Modernization. Since
    then, he has done occasional consulting for businesses and is engaged
    in various non-profit activities. He is not involved in tax advisory or
    other tax-related activities.

        In September we co-authored a second article in Tax Notes providing
    more details on how our proposal could be implemented. We also updated
    our website www.
    shrinkthetaxgap.com to provide more information on our Shrink the Tax
    Gap plan and to post comments.

        Based on comments received on our articles we continue to update
    the plan. All updates are posted on the website.

        In September we started to discuss our plan with interested parties
    and to obtain feedback and support. We continued to post news coverage
    and comments on the website. Some individuals who posted comments are
    also reaching out to discuss the proposal with their personal networks.
    In addition, we set up Shrink the Tax Gap pages on various social media
    networks.

        In November 2020 Fred Goldberg joined our team.

        On January 14, we incorporated Shrink the Tax Gap, Inc. as a
    501(c)4 organization to manage our activities more formally. Before
    this incorporation, we managed our activities as individuals.

        In April 2021 David Borden, a lawyer and economist, joined our
    team.

        We will continue to update our plan as we receive comments and
    suggestions. We will reach out to and work with all those interested in
    our ideas on how to improve the fairness and effectiveness of the tax
    system. All of us working on the program view this as a public service
    activity that we can now do as private citizens, much as we did public
    service as government officials earlier in our careers. It is a way we
    believe we can make constructive use of our years of experience in
    business, government, and technology.

                                     ______

         Questions Submitted for the Record to Hon. Charles O. Rossotti
                     Questions Submitted by Hon. John Thune
        Question. Under your proposal, what information will be required to
    be provided on the proposed Form 1099New?

        Answer. Only two items for each account, once a year: total
    deposits, total withdrawals.

        Question. Will taxpayers' information be limited only to deposits
    and withdrawals from ``depository'' accounts, or will it require
    information with respect to other accounts?

        Answer. We recommend that the Treasury be given authority to
    specify what types of accounts would be covered, as the world of
    financial accounts changes regularly. The intent would be to include
    all accounts able to be used to accept receipts in payment for goods or
    services.

        Question. Does the IRS already have access in some other manner to
    the information that would be contained your proposed Form 1099New?

        Answer. The IRS has access to other information reports that cover
    parts of business receipts, including the recently expanded 1099K, but
    none that cover substantially all. The IRS could determine that
    information in the course of an audit, but otherwise does not have full
    access to that information for use in determining likely underreporting
    of income.

        Question. Could the IRS better use the partnership income reports
    it has collected for years? If so, how?

        Answer. The IRS receives K-1s prepared by partnerships that show
    the income allocated from the partnership to its partners. With
    increased investment in technology, the IRS could make better use of
    this information. The IRS receives only very limited information on the
    receipts or the income received by the partnership itself.

                                     ______

                    Prepared Statement of Hon. John Thune,
                        a U.S. Senator From South Dakota
        Thank you, Chairman Whitehouse. Let me begin by saying I'm looking
    forward to working on this subcommittee with you.

        The Subcommittee on Taxation and IRS Oversight covers a number of
    important issues, perhaps none more so than the responsible stewardship
    of taxpayer dollars. And I am optimistic we will work to find common
    ground and common solutions.

        Today, we are here to discuss the tax gap--what it is, what its
    components are, and how to reduce it. The chairman also has a
    particular interest in the role of offshore tax evasion, an important
    issue as well.

        The tax gap is real. Republicans on this committee support closing
    it.

        The tax gap--the difference between taxes owed and paid--has been a
    stubborn problem for decades. The IRS periodically estimates the tax
    gap using audits and other data it collects. As of September 2019, the
    IRS estimates the average gross tax gap at $441 billion per year for
    2011-2013. After late payments and enforcement, the net tax gap is $381
    billion.

        While those numbers are improvements from preceding years, the tax
    gap remains a problem. The IRS Commissioner even speculated that the
    tax gap could be as much as $1 trillion per year--a number that far
    exceeds the official IRS estimate. While that guestimate may conflate
    the tax gap with tax evasion, one thing is certain: no one at any
    income level should believe they are safe in cheating on their taxes.
    And we should pursue bipartisan measures to reduce the tax gap and
    better enforce our tax laws.

        But any such effort must strike the appropriate balance between
    taxpayer responsibilities and taxpayer rights. To address the tax gap,
    some believe that increased IRS resources, tax audits, and intrusion of
    taxpayers' personal information will automatically yield a golden goose
    of revenue.

        For example, President Biden recently proposed increasing IRS
    funding by $80 billion over the next 10 years, projecting those funds
    would net $700 billion over the decade. Former IRS Commissioner John
    Koskinen, who served as Commissioner under Presidents Obama and Trump,
    said he thought that $80 billion was too much. I agree.

        Based on official estimates about the tax gap, and what can
    reasonably be collected, a return of $700 billion is a tall order as
    well. An analysis from the Wharton Business School projected a lower
    payoff by $220 billion.

        CBO estimated that increasing IRS funds for examinations by $40
    billion over 10 years would increase revenues by $103 billion,
    resulting in a net $63 billion decrease in the deficit. It is not to
    say that better utilized or enhanced resources couldn't help find real
    money, but let's be straight about the return on investment--
    particularly when those figures are portrayed as offsets for new
    spending proposals.

        Republicans are open to discussions about IRS resources, but those
    discussions should include measures to improve customer service, ensure
    existing resources are allocated optimally, and promote smarter and
    more effective audits. Just as with President Trump's budgets, which
    also included additional IRS funding and enforcement resources, any
    increase to the agency should come with commensurate accountability and
    transparency.

        Memories remain fresh of past IRS use of taxpayer resources to
    disproportionately single out conservative organizations for extra
    scrutiny. Some on the other side of the aisle will say that Republicans
    hollowed out the agency's coffers, but IRS budgets have been generally
    stable for the past 15 years. Any budget reductions are compared to the
    agency's all-time high budget of 2010, which spiked under all-
    Democratic rule.

        In addition to boosting enforcement, the Biden administration has
    proposed tackling the tax gap by requiring banks to give the IRS new
    documentation on income from businesses such as partnership and sole
    proprietorships, as well as individuals with business income. Under the
    proposal, the IRS would soon be receiving troves of new data on
    taxpayers' bank accounts. As you might imagine, many Americans are
    understandably concerned with the risk of government overreach. More
    specifically, they're concerned their local banks could turn into
    extensions of tax enforcement on behalf of the IRS.

        While we should look at ways to improve reporting, the IRS should
    better use the information it already receives, like partnership income
    reports it has collected for years. Just for everyone to understand,
    enforcement is only one method to reduce the tax gap. And it is
    actually two degrees of separation between the tax gap estimate and
    revenue that can be scored from enforcement proposals.

        CBO budget rules prohibit scoring hoped-for but entirely uncertain
    revenue from enforcement. Policy-makers need to be reasonable about
    what is doable on the persistent problem of the tax gap and the limits
    of score-keeping rules, particularly for near-term spending proposals.

        Finally, while we should find bipartisan ways to reduce the tax
    gap, it's worth noting that our Nation has a relatively high and stable
    voluntary tax compliance rate. According to the most recent IRS data,
    about 84 percent of taxes were paid voluntarily and on time. After
    enforcement efforts and late payments were taken into account, about 86
    percent of taxes were paid.

        Tax compliance levels remain substantially unchanged since at least
    the 1980s. There is not one solution to solving the tax gap or one type
    of taxpayer responsible for it. Reducing the tax gap requires a
    comprehensive strategy and effective execution from the IRS--and
    appropriate safeguards and accountability to taxpayers.

        We have an excellent panel before us today. Thank you all for being
    here, and I look forward to hearing your testimony.

                                     ______

                Prepared Statement of Hon. Sheldon Whitehouse,
                        a U.S. Senator From Rhode Island
        I'm pleased to convene this hearing on the tax gap and the related
    role of offshore tax evasion. My Republican colleagues and I may
    disagree on what makes a fair tax code, but we very much agree that
    everyone should pay what they owe. That principle is what today's
    hearing is about.

        The IRS conservatively estimates the tax gap--the difference
    between taxes owed and taxes collected--to be $441 billion per year.
    Commissioner Rettig recently testified that the tax gap may have grown
    as high as $1 trillion in recent years (trillion with a ``t'').

        One reason for the gulf between the official estimate and
    Commissioner Rettig's is the bad job the official estimate does
    incorporating the so-called international tax gap--what is hidden by
    wealthy individuals and large corporations overseas. Tracking this
    offshored money is difficult, but we know there's lots of it. Research
    suggests the Treasury may lose anywhere from $40 billion to $123
    billion annually from offshore tax evasion.

        Typical American taxpayers don't have the option to hide money
    abroad, so the wealthy who cheat on their taxes through offshoring also
    worsen income and wealth inequality. One study estimates the highest-
    earning 1 percent of taxpayers hide 20 percent of their income,
    accounting for 36 percent of unpaid taxes. Most Americans pay what they
    owe, meaning they cover for the tax cheats through higher taxes, fewer
    public services, or a larger Federal debt.

        For large multinational corporations that stretch loopholes beyond
    recognition to book income to tax havens, the line between legal
    avoidance and evasion may be paper-thin. It turns on whether an
    outgunned IRS can beat back the armies of lawyers hell-bent on burying
    them in litigation.

        An outsider looking at these numbers may ask how the most wealthy,
    powerful country in the world could let this happen. The answer is, we
    made it happen. Over a decade, Republicans cut the IRS budget by 20
    percent, with enforcement hit especially hard. There are 30 percent
    fewer enforcement staffers than a decade ago, and the number of highly
    trained revenue agents--who tackle complex audits of the wealthy and
    large corporations--is down nearly 40 percent. The result: millionaire
    and billionaire audits dropped over 72 percent, and audits of the
    largest corporations--those with $20 billion in assets--declined by
    half. As former Commissioner Koskinen once said, cutting the IRS budget
    gives a ``tax cut to tax cheats.'' As the IRS budget fell, audit rates
    for the rich and poor in America converged. A worker receiving the
    Earned Income Tax Credit is nearly as likely to be audited as a seven-
    figure earner.

        What do we do? We ought to start with the multi-pronged approach
    put forward by the Biden administration:

            One: Ensure the IRS has the resources it needs to collect what
    taxpayers owe. It needs a larger staff with the knowledge and
    experience to untangle the networks of shell companies the ultra-rich
    and large corporations use to hide their income, often in offshore tax
    havens. I'd like to explore mandatory funding for the IRS, so the
    agency has the sustained, predictable support it needs to make long-
    term investments.

            Two: Require more reporting of the type of income the super-
    rich tend to hide. Middle-class taxpayers can't hide their wages from
    the IRS. The super-rich shouldn't be able to either.

            Three: Support a technological reboot at the IRS. The agency
    still relies on some systems from the 1960s. Modern tools and
    technology could help root out offshore and other types of tax evasion.

        The investment will pay off. Treasury estimates $80 billion to
    revitalize the IRS will yield $700 billion in revenues--funding we
    could invest in working families. I'll note that budget scoring rules
    block Congress from using such high-return investments as pay-fors--
    that needs to change.

        Ramped-up enforcement is essential, but it's no substitute for
    addressing the injustice in the tax code, particularly tax breaks for
    the ultra-rich and large corporations. For example, my No Tax Breaks
    for Outsourcing Act would end the incentive for multinational
    corporations to shift profits offshore.

        I'm pleased to be joined by such a distinguished panel of witnesses
    to discuss the size and scope of the tax gap, the role of offshore tax
    evasion, and how to combat it.

                                     ______

                                 Communications

                                  ----------

                      American Bankers Association et al.
    May 10, 2021

    U.S. Senate
    Committee on Finance
    Subcommittee on Taxation and IRS Oversight
    Dirksen Senate Office Bldg.
    Washington, DC 20510-6200

    RE:  Subcommittee Hearing ``Closing the Tax Gap: Lost Revenue From
    Noncompliance and the Role of Offshore Tax Evasion''

    Dear Committee Members:

    The undersigned trade associations represent banks, credit unions and
    related financial institutions of all sizes. We thank you for your
    interest in better understanding and addressing the causes of the ``Tax
    Gap,'' and we share your interest in ensuring taxpayers honor their
    obligations. Our associations agree the government must have adequate
    funding and resources to promote compliance with our Nation's tax laws,
    and to that end, our members already provide significant data to the
    Internal Revenue Service (IRS) and other governmental units. However,
    recent proposals to create new reporting requirements for financial
    institutions would impose cost and complexity that are not justified by
    the potential, and highly uncertain, benefits. Furthermore, we believe
    additional reporting requirements guided by subjective criteria have
    privacy and fairness implications and the potential to put financial
    institutions in an untenable position with their account holders.

    President Biden's American Families Plan includes the following:

            The President's proposal would change the game--by making sure
            the wealthiest Americans play by the same set of rules as all
            other Americans. It would require financial institutions to
            report information on account flows so that earnings from
            investments and business activity are subject to reporting more
            like wages already are.\1\
    ---------------------------------------------------------------------------
        \1\ See ``Fact Sheet: The American Families Plan,'' The White House
    Briefing Room, April 28, 2021, https://www.whitehouse.gov/briefing-
    room/statements-releases/2021/04/28/fact-sheet-the-american-families-
    plan/.

    At this time, we understand and appreciate there are not detailed
    official proposals on how the additional reporting requirements and
    related administration would work. That said, as the Subcommittee
    begins to consider the feasibility and advisability of this proposal,
    we encourage you to carefully assess the costs and benefits of imposing
    a new level of bureaucracy and personal data collection on our already
    over-complicated tax reporting structure. This proposal will have real
    costs, not only for government, but also for financial institutions,
    small businesses, and individual taxpayers. Strengthening IRS funding
    to facilitate targeted auditing of questionable tax returns is a much
    more efficient and effective approach to closing the tax gap.
    Financial Institution Reporting Is Already Robust
    Considering all the existing tax and other compliance reporting
    responsibilities already borne by the financial services industry
    (Forms 1099, 1098, Suspicious Activity Reports, Currency Transaction
    Reports, etc.), we have serious reservations regarding the efficacy of
    yet another reporting requirement. We respectfully suggest that further
    cost benefit analysis is necessary before moving forward with this
    proposal. For example, it is not clear that the proposed information
    reporting requirement would materially improve the IRS's ability to
    identify non- reporters or generate deterrence for non-reporting over
    and above the tools already at their disposal. We urge policymakers
    first to ensure that the existing framework of information collection
    and oversight is being fully utilized before adopting new requirements.
    A recent GAO report suggests some existing data is not used due to
    resource constraints.\2\
    ---------------------------------------------------------------------------
        \2\ GAO Report 21-102; Tax Administration: ``Better Coordination
    Could Improve IRS's Use of Third-Party Information Reporting to Help
    Reduce the Tax Gap'' (December 2020).

    In addition, previously enacted policy initiatives aimed at helping to
    close the tax gap are already at work and likely starting to have an
    impact. For example, tens of millions of dollars have been expended to
    comply with the Foreign Account Tax Compliance Act (FATCA), which
    requires reporting on foreign bank accounts designed to address one of
    the main sources of unreported and underreported income.
     Creating a New Reporting Structure Is Not as Simple as it Sounds
    The costs and other burdens imposed to collect and report account flow
    information would surpass the potential benefits from such a reporting
    scheme. New reporting would appear to require material development
    costs and process additions for financial institutions, as well as
    significant reconciliation and compliance burden on impacted taxpayers.
    For example, reporting total gross receipts and disbursements would
    require a new reporting paradigm for depository institutions, which
    necessitates system changes to collect the information. Those system
    changes will need to address the myriad challenges that arise when
    trying to apply a new statutory construct to the complex reality of
    different account ownership and use structures. A few preliminary
    hurdles include:

          Identifying accounts based on taxpayer identification
    numbers.
          Defining the entities and account holders within
    scope of the statute.
          Navigating privacy concerns related to joint
    accounts.
          Specifying definitions for beneficial owners, DBA's
    (Doing Business As), and ``control'' of an account.
          Reconciling business and personal transactions that
    are commingled in single accounts.

    Furthermore, assuming taxpayers have a responsibility to ``reconcile''
    whatever information is provided to them and the IRS by financial
    institutions, this new reporting structure could create a significant
    burden on individuals and businesses subject to the requirement--the
    majority of whom will have nothing inherently suspicious about their
    returns. The additional compliance responsibilities and complexity of
    implementation should be carefully considered before these proposals
    move forward.
     Benefits of Enhanced Account Flow Reporting Are Uncertain and
            Estimates May Be Exaggerated
    Given the substantial burden that this proposed reporting requirement
    would create on businesses, individual taxpayers and financial
    institutions, it is imperative that the benefits of implementation
    materially outweigh the costs and risk associated with this large scale
    collection of sensitive personal financial information. Some of the
    estimates that have been used to derive the expected benefits from this
    proposal, however, may be outdated and misleading. For example, one
    study cites foreign bank accounts as a key source of the underreporting
    of income, though its underlying data were from a time period that
    preceded enactment of FATCA requirements to report such accounts.\3\
    Another study acknowledges the savings it projects are ``optimistic''
    compared to those of the Congressional Budget Office (``CBO'') and
    encourages the CBO and the Joint Committee on Taxation (``JCT'') to
    weigh in on its policy recommendations.\4\ We agree that it will be
    critical, therefore, for the CBO and JCT to independently assess the
    assumptions and data underlying the forecasted benefits of this
    proposal.
    ---------------------------------------------------------------------------
        \3\ See Guyton, Langetieg, Reck, Risch, Zucman. ``Tax Evasion at
    the Top of the Income Distribution: Theory and Evidence,'' https://
    www.nber.org/papers/w28542.
        \4\ See Sarin, Summers. ``Shrinking the Tax Gap: Approaches and
    Revenue Potential,'' https://www.nber.org/system/files/working_papers/
    w26475/w26475.pdf.
    ---------------------------------------------------------------------------
     Providing Enhanced Resources for IRS Audits Is a More Effective,
            Efficient, and Fair Approach
    Assuming there were enhanced resources for audits, we expect it would
    be standard protocol for IRS auditors to ask taxpayers to do exactly
    the type of reconciliation under consideration. This analysis would be
    based on information the taxpayers already have in their possession
    (e.g., bank statements). Asking financial institutions to perform this
    role, piecing together a picture of individual taxpayers' accounts, is
    inefficient and indirect, and account holders may rightly question
    whether this process is being applied fairly.

    Additionally, policymakers should consider the issues of protection of
    account holder data and privacy related concerns. The IRS is already
    facing challenges and expending resources to handle the problems
    associated with identity theft and false tax returns filed to claim
    refunds. The collection of this additional data is only likely to
    aggravate the problem of identity theft.

    As we stated earlier, we support efforts to increase compliance so that
    all taxpayers meet their responsibilities, but putting financial
    institutions in the position of reporting more information on their
    account holders--especially when the benefits are far from certain--is
    not the answer.

    We welcome any opportunity to further discuss our policy concerns on
    this matter.

    Sincerely,

    American Bankers Association
    Bank Policy Institute
    Consumer Bankers Association
    Credit Union National Association
    Independent Community Bankers of America
    National Association of Federally-Insured Credit Unions
    National Bankers Association
    Subchapter S Bank Association

                                     ______

                         American Citizens Abroad, Inc.

                          2001 L Street, NW, Suite 500

                              Washington, DC 20036

                             Phone: +1 540 628-2426

                        Email: info@americansabroad.org

                   Website: https://www.americansabroad.org/

    May 24, 2021

    U.S. Senate
    Committee on Finance
    Dirksen Senate Office Bldg.
    Washington, DC 20510-6200

    The Honorable Sheldon Whitehouse
    Chairman
    U.S. Senate
    Committee on Finance
    Subcommittee on Taxation and IRS Oversight

    The Honorable John Thune
    Ranking Member
    U.S. Senate
    Committee on Finance
    Subcommittee on Taxation and IRS Oversight

    American Citizens Abroad, Inc. appreciates the opportunity to submit
    this statement for the ``Closing the Tax Gap: Lost Revenue From
    Noncompliance and the Role of Offshore Tax Evasion'' hearing held on
    May 11, 2021.

    American Citizens Abroad, Inc. (ACA) appreciates the opportunity to
    submit this statement to the Committee. This statement benefits from
    our having listened to the hearing before the Subcommittee on Taxation
    and IRS Oversight on April 11th and reading the written statements of
    witnesses, as well as the opening statements of Chairman of the
    Subcommittee Senator Whitehouse and Ranking Member Senator Thune. We
    have also reviewed the statements submitted by others to the Committee.

    By way of introduction, ACA is a qualified section 501(c)(4) non-profit
    membership organization, which advocates on behalf of Americans abroad.
    Its sister organization, American Citizens Abroad Global Foundation
    (ACAGF), is a qualified section 501(c)(3) tax-exempt public charity,
    which identifies subjects that affect Americans abroad, develops
    information about these subjects and provides this information to
    Congress, Treasury Department and other relevant persons.

    ACA and ACAGF (collectively, ACA) favor a balanced approach to
    subjects, supporting efforts that can provide tangible results and
    practical solutions. ACA is the premier thought-leader on issues
    affecting Americans abroad. It is the largest Washington, DC-based
    organization of its type. Its membership base is overwhelmingly long-
    term American residents overseas. Members live in approximately 70
    countries around the world. The profiles of these individuals are very
    similar to those of individuals of the same economic stratum and age
    living full-time in the U.S.

    Among other things, ACA maintains the ACA Expat Tax Services Directory,
    which lists expat tax preparers (including firms focusing on FATCA
    compliance, streamlined procedures, and exempt organizations, charities
    and foundations), expat financial services providers (including those
    working in the fields of estate planning and pension and deferred
    compensation plan), and expat legal services providers (including firms
    specializing in voluntary disclosures and whistleblower cases).

    ACA, together with the State Department Federal Credit Union,
    facilitates the quick and easy opening of US bank accounts for its
    members around the world. These accounts are the same as the accounts
    owned and operated by individuals working at US embassies and
    consulates. They are federal credit union accounts very much like the
    federal credit union accounts enjoyed by individuals working on Capitol
    Hill and at the Treasury Department and IRS. These accounts make it
    easier for expat Americans to pay taxes, receive tax refunds, receive
    special payments, like the Economic Impact Payments (variously called
    CARES Act or COVID-19 payments), and receive Social Security payments.

    On the subject of closing the tax gap as it relates to individuals and
    activities outside the United States and revenue lost due to
    noncompliance and ``offshore tax evasion'', ACA has two big points to
    make.

    First, good data and other information are critical. When attacking the
    problem of tax noncompliance involving individual US citizens, their
    entities and their activities and assets associated with these persons
    and activities, which assets are secreted outside the United States,
    great care must be taken in first uncovering all the facts. No one
    doubts that there is a significant amount of noncompliance and hiding
    of assets. It is remarkable, however, that Treasury Department and the
    Internal Revenue Service do not have complete or near complete
    information on the subject. If we do not know the facts and we start
    making changes, it is likely that we will miss things and, of great
    concern to ACA, that we will do harm to regular, compliant, well-
    meaning Americans abroad. We know these people because they are our
    members. We communicate with them every day. We help them with their
    everyday problems, including such things as dealing with the IRS
    electronically, getting a tax ID number (Social Security number),
    opening and maintaining a bank account where they live--outside the US,
    keeping a US bank or other financial account with a US institution, and
    finding a competent tax return preparer.

    It is remarkable that the US government does not have reliable figures
    for the size and shape of the ``offshore'' element of the tax gap.
    Also, and this is of particular interest to ACA, it does not know the
    number of non-filers, and those otherwise out of compliance, who are
    resident abroad. All of us would like to know how much of the problem,
    which we are focusing on here, is traceable to individuals truly
    residing abroad, as opposed to individuals living in the U.S. and doing
    all manner of things to evade tax.

    The problem at hand cannot be dealt with until we have complete
    information. Americans abroad should not be made to suffer because some
    bad actors are, frankly, cheating ``like all get out''.

    ACA and ACAGF, it should be noted, undoubtedly have the best, most
    complete sets of private baseline data relevant to the taxation of
    Americans abroad, outside those in the files of the Joint Committee on
    Taxation and the Office of Tax Analysis. With District Economics Group,
    over an 8-month period in 2017, developed an analysis of a basic
    Residence-Based Taxation (RBT) proposal. ACA/DEG do not have access to
    tax return data other than what is published. We do, however, have
    information and insights not available to others, due to the fact that
    we and our members are immersed in the real-world experiences that
    yield the data. For example, what is the situation with Americans in
    the border communities between the US and Mexico and US and Canada?
    Also, we are very aware of the issues and practices arising with US
    taxpayers using the services of tax preparers and other advisors listed
    in our Directory. For example, how many people discover they are out of
    compliance and, for whatever reason, do not make a disclosure? How many
    people renounce US citizenship and, apparently, from all appearances,
    do not ``catch up'' and pay taxes owed either willfully or because they
    were unaware?

    Incidentally, the aforementioned ACA-funded DEG analysis \1\ of revenue
    effects of enactment of a ``vanilla'' version of RBT did not account
    for additional federal income taxes that might be paid by the nearly 2
    million persons who are resident overseas who currently do not file
    income tax returns.
    ---------------------------------------------------------------------------
        \1\ https://www.americansabroad.org/media/files/files/dc1e1c4e/
    DEG_short_memo_on_RBT_
    proposal_11.06.2017.pdf?utm_source=congress&utm_medium=email&utm_campaig
    n=RBT%20
    fundraising%20campaign.

    If the Committee or others have questions, just call us. We are happy
    to try to help. We have already had a large number of meetings on this
    ---------------------------------------------------------------------------
    subject and look forward to having more.

    Secondly, while at first glance this might seem to be counterintuitive,
    the key to cleaning up the ``offshore'' element of the tax gap is
    enactment of Residence-Based Taxation as a replacement for the current
    Citizenship-Based Taxation.

    With RBT, Americans truly resident outside the US would no longer be
    taxed on foreign, i.e., non-US, income. This approach is the same used
    by every other country in the world with the exception, generally
    speaking, of Eritrea. It is the corollary of the approach, referred to
    as territorial taxation, applied to US companies. Big changes were made
    in the taxation of US companies on their foreign income in 2017, in the
    Tax Cuts and Jobs Tax Act. The Administration and Congress may, to some
    extent, make additional adjustments very soon. The treatment of
    individuals was completely--100%--ignored at the time of passage of
    TCJA. ACA begs Congress not to repeat this very unfair treatment.

    Moving to RBT can help narrow the tax gap attached to individuals'
    activities and presence abroad. It can throw light on the size and
    nature of assets belonging to Americans and located outside the US,
    including in zero tax and low tax jurisdictions. Having RBT in place
    could help separate out compliant, regular Americans residing abroad
    from non-filers and nervy--some would say foolish--people who simply
    walk away from the US self-assessment system, without looking back.
    Regular American expats who bring themselves within the RBT system
    would no longer pay US tax on foreign income. They would remain in the
    system and still file a greatly simplified form. Of course, they would
    remain US citizens. RBT is a significant benefit which essentially is
    aimed at ``Long-Termers'' living abroad. To get the benefit, you would
    have to be, or get, compliant. New-to-foreign-residence (``Newbies'')
    might be subject to special rules to avoid large revenue losses. People
    wanting to pay no tax anywhere would be cut off; no ``zero tax''
    outcomes would be allowed under RBT. People resident in zero or low tax
    countries would not qualify; and these countries would be incentivized,
    in a bunch of ways, to exchange information. RBT can be made revenue
    neutral--no harm to the U.S. fisc--and tight, tight, tight against
    abuse.

    RBT fits within the global system of taxing individuals. It would help
    the adoption by other countries and international organizations of
    measures facilitating the taxation of offshore accounts.

    It would be the single most helpful step to relieve Americans abroad
    from double taxation and ridiculously complex and expensive reporting.
    All of the FATCA-related paperwork could be eliminated. Americans
    living normal lives outside the United States would no longer be viewed
    as financial lepers.

    We want to emphasize that RBT can be made revenue neutral, tight
    against abuse and such that no one is worse off than they are under the
    current rules.

    The drafting of amendments to the Internal Revenue Code to effect RBT
    is not especially difficult or tricky. Because the population of
    qualifying American citizens abroad would be treated similar to
    nonresident alien individuals under existing law, most of the statutory
    language is already in the Internal Revenue Code. For a ``leg up'' on
    statutory amendments, see ``Side-By-Side Analysis: Current Law;
    Residency-Based Taxation''.

    Thank you for your attention to this important subject.

    Marylouise Serrato                  Charles Bruce
    Executive Director--ACA             Legal Counsel--ACA
                                        and Chairman--ACAGF

                                     ______

                   Association of Americans Resident Overseas

                               4 rue de Chevreuse

                              75006 Paris, France

                            Tel: +33 (0)1 4720 2415

                         Website: https://www.aaro.org/

                            Email: contact@aaro.org

                                                           May 25, 2021

    U.S. Senate
    Committee on Finance
    Dirksen Senate Office Bldg.
    Washington, DC 20510-6200

    The Association of Americans Resident Overseas (AARO) is a Paris-based
    Association representing more than 1,000 American members living
    outside the United States. We welcome the opportunity to comment on
    administration plans to raise large sums by reducing the $381-billion
    net ``tax gap'' (14.2% of ``true taxes owed''). We understand that the
    IRS will likely revise upward its estimate of the tax gap, in part due
    to the large role attributed to offshore tax evasion.

    We fully appreciate the need to modernize computing and information
    systems at IRS, something which AARO agrees should have been done long
    ago.\1\ We also strongly urge that some of the large budgetary
    increases planned for the IRS be used to fund major improvements in
    taxpayer services accessible to overseas Americans. These include the
    creation of a dedicated division whose mandate includes providing
    customer service to taxpayers outside the U.S., online accounts, video-
    conferencing, facilitating payments both to and from IRS and use of
    foreign languages.
    ---------------------------------------------------------------------------
        \1\ See the various Annual Assessments of IRS' Information
    Technology Program by the Treasury Inspector General for Tax Assessment
    (TIGTA) and reports from the Government Accountability Office (GAO)
    such as ``Identity theft: IRS Needs to Strengthen Taxpayer
    Authentication Efforts'' [GAO-18-418]; and ``Information Technology:
    IRS Needs to Take Additional Actions to Address Significant Risks to
    Tax Processing'' [GAO-18-298].

    At the same time, the substantial increase in funding for the IRS
    proposed by the administration of around $8 billion per year for the
    next decade (an increase on the order of 60-70%) \2\ raises a concern
    that, if its use is not properly structured, it may prove to be
    wasteful or even damaging. The emphasis on presumed but unidentified
    offshore evasion is particularly worrying to AARO given the problems
    existing enforcement efforts, relying heavily on foreign banks, have
    created for Americans overseas trying to access their local financial
    system. Rapidly diminishing returns to increases in expenditures seem
    inevitable, even given careful design of new enforcement measures.
    ---------------------------------------------------------------------------
        \2\ For comparison, IRS resources in the Continuing Resolution for
    FY 2019 were $11.2 billion from appropriations ($4.7 billion for
    enforcement) plus $1.1 billion from other sources, mainly user fees.

    The administration is targeting very high-income people assumed to be
    skilled at large-scale evasion, especially offshore. No one is
    deliberately targeting ordinary expats whose demographics and financial
    means are much like those of domestic American taxpayers across the
    entire socioeconomic scale. But our experience is that legislation and
    regulations are too often rushed and/or designed without consideration
    of their harsh, usually unintended, real-world impact on non-resident
    citizens. Recent examples include the deprivation of local bank
    accounts due to application of the Foreign Accounts Tax Compliance Act
    (FATCA); abusive and arbitrary resort to passport suspension and
    revocation; punitive tax penalties for small American businesses
    located outside the U.S. under the 2017 tax law's Transition Tax; and
    the levy on Global Intangible Low-Taxed Income (GILTI) are recent
    ---------------------------------------------------------------------------
    examples.

    We have seen the IRS submission for this hearing and have obtained the
    research it released though the National Bureau of Economic Research
    (NBER).\3\ This describes the methodology it has used in the past for
    calculating tax gaps as well as its basis for new estimates that will
    reflect an offshore component. A virtue of the NBER paper is that it
    includes clear, transparent and robust evidence-based analysis, derived
    mainly from the large National Research Program (NRP) of random audits:
    ---------------------------------------------------------------------------
        \3\ Guyton, J; P. Langetieg; D. Reck; M. Risch; and G. Zucman
    (2021), ``Tax Evasion at the Top of the Income Distribution: Theory and
    Evidence''. NBER Working Paper 28542, http://www.nber.org/papers/
    w28542.

          Income underreporting is 4% of the total, and the related tax
    deficiency is 7.7%.
          Just under 40% of this tax deficiency is owed by the top 10%.
          The total ``net'' tax gap (i.e., taking all types of federal tax
    into account, net of enforcement and late payments) was around $193
    billion p.a.\4\
    ---------------------------------------------------------------------------
        \4\ The $381-billion total ``net gap'' estimate is for 2011-13. The
    NBER study covers 2006-13 but describes the numbers relating to
    underreporting in the two studies as ``essentially identical'' (p. 9).
    On this basis, we proceed on the basis that we can adjust the former on
    the basis of adjustments to the latter alluded to in our following
    paragraph.
    ---------------------------------------------------------------------------
          Adjusting for growth and inflation since 2012 yields a current
    estimate around $282 billion.

    We are still digesting this work, but the gap between these numbers and
    more widely reported headline figures running to $1 trillion \5\ seems
    to consist almost entirely of ``adjustments'' that are at best highly
    speculative guesswork. We can find little basis in evidence for these
    ``adjustments,'' labelled variously ``less sophisticated'' and
    ``sophisticated'' evasion (``sophisticated'' includes the offshore
    component, as well as evasion by many small businesses). Hopefully the
    referees who peer-review this work will be well-versed in international
    banking analysis and provide guidance to assist IRS toward well-
    targeted and realistic deployment of its coming resource increases.
    ---------------------------------------------------------------------------
        \5\ Including the 2011-13 $441-billion gross and $381-billion net
    tax gaps, the estimate that the gap had risen to c. $600 billion in
    2019, all cited in the IRS submission, and Commissioner Rettig's widely
    reported testimony to the Senate Finance Committee in April.

    While IRS methodology may be deemed the gold standard internationally,
    as the IRS submission states, other countries also prepare useful
    estimates of their own tax gaps. Notably, the latest tax gap reported
    by HM Revenue and Customs (HMRC) for the United Kingdom was 4.7% of
    ``tax liabilities''.\6\ This is just \1/3\ of the 14.2% U.S. net tax
    gap. Offshore evasion plays no explicit role in the analysis, and
    evasion attributed to the ``wealthy'' is below levels suggested by NRP
    audits, i.e., even before ``adjustments'', in the United States.
    ---------------------------------------------------------------------------
        \6\ ``Measuring Tax Gaps, 2020 Edition'', HRMC. https://
    assets.publishing.service.gov.uk/government/uploads/system/uploads/
    attachment_data/file/907122/Measuring_tax_gaps_2020_
    edition.pdf. See p.5 for a summary.

    This raises the question as to why the tax gap is so much lower in the
    United Kingdom? One possibility is that the tax system is simpler and
    more coherent and allows better coverage of tax bases by easily
    administered collection points and third-party reporting. In this case
    the solution to the tax gap is not more enforcement but major tax
    reform. Another possibility is that HMRC carries its duties out more
    efficiently than does the IRS, in which case the IRS might usefully
    learn from its British counterpart. The third possibility is that the
    difference lies in the respective capacities and methodologies of the
    two agencies for measuring tax gaps, in which case one should be able
    to learn from the other. Investing $20,000 for an independent expert to
    review IRS methodology, report on the reasons for the much smaller
    British tax gap and suggest lessons that can be drawn might be a good
    use of government money before $80 billion are deployed to mine an
    ---------------------------------------------------------------------------
    uncertain tax gap.

    Finally, as noted above, there has been a long track record of hasty
    legislation and poorly targeted rules that have inadvertently done
    great damage to American citizens who happen to live overseas. AARO
    strongly urges the IRS (and its congressional overseers) to take care
    to ensure that the rules and procedures to be used by the IRS,
    especially where it targets offshore evasion, be subject to far more
    careful and meaningful regulatory impact assessments than have been
    carried out in the past. Unintended assaults on large numbers of
    compliant, law-abiding, working class, middle class and retired
    Americans who are not part of the top 1%, as well as small businesses,
    must be avoided.

    AARO is available to Finance Committee members and their staff, and
    would welcome the opportunity, to elaborate on any of the citations or
    commentary provided above.

    Thank you for your attention.

    Paul Atkinson
    Chair, Banking Committee

    Fred Einbinder
    Vice-President, Advocacy
    William Jordan
    President

                                     ______

                     Letter Submitted by Cody Gentry Barrow
    U.S. Senate
    Committee on Finance

    Sir/ma'am,

    I am an American citizen living in The Netherlands, effective August
    2019. I vote in the State of Massachusetts because it is my most recent
    U.S. residence. I spent most of my career prior to moving abroad in
    Virginia. I believe my profile is unusual among individual submissions
    from Americans abroad you may receive, as I will explain below. It is
    certainly extraordinary for an individual with my security clearance
    \1\ and government service experience to permanently reside abroad as a
    private citizen and express this level of concern with our nation's
    extraterritorial policies. I ask you and your staff members take my
    statement seriously as someone who served more than half his adult life
    to this nation.
    ---------------------------------------------------------------------------
        \1\  Between 2004 through approx. 2020 I held a Top Secret--
    Sensitive Compartmented Information (SCI) security clearance with
    Single Scope Background Investigation adjudicated by the Defense
    Intelligence Agency (DIA), National Security Agency (NSA), and United
    States Air Force (USAF), including full-scope and counterintelligence
    polygraphs adjudicated by NSA. I was additionally responsible for
    Special Access Program and Special Access Required compartmented
    programs and indoctrinated into numerous such compartments, some of
    which were otherwise exclusive to Agency directors and Senior Executive
    Service personnel.

    As you know, the United States is the only developed nation in the
    world that taxes its citizens based on citizenship rather than where
    they reside and work. As a lifelong American patriot who has simply
    elected to work for a Dutch company and permanently reside abroad in
    the ``second act'' of his life, your committee's inattention to
    extraterritorial taxation and citizenship-based taxation issues has
    caused this military and intelligence veteran extreme and unnecessary
    financial distress. These issues also reflect poorly diplomatically
    with our Allied partners, including the Kingdom of the Netherlands,
    struggling with ``accidental Americans'' and the undue hardships placed
    upon U.S. citizens abroad due to FATCA and PFIC laws' unfortunate
    inadequate accounting for individual citizens pursuing middle-class
    ---------------------------------------------------------------------------
    lives.

    For background, I am a former senior grade intelligence officer (GG/GS-
    14) and military veteran with experience in Afghanistan countering
    Taliban information operations on behalf of United States Cyber
    Command, of which I am a plank-holding (founding) member; the National
    Security Agency; and the Pentagon, where I worked with the Office of
    the Undersecretary of Defense for Intelligence, the Office of the
    Secretary of Defense for Policy, and was responsible on behalf of the
    Defense Intelligence Agency for strategic information operations
    program policy and special operations programs in direct engagement
    with the Secretary of Defense and in some cases the President, at the
    time President Barack Obama. You may also find several of my
    publications with the government/intelligence/academia think tank, the
    Intelligence and National Security Alliance (INSA), in the
    footnotes.\2\, \3\
    ---------------------------------------------------------------------------
        \2\ Please see my 2018 publication, Getting Ahead of Influence
    Operations, coauthored with the former Director of the National
    Security Agency and former Deputy Director of the Central Intelligence
    Agency, here: https://www.insaonline.org/getting-ahead-of-foreign-
    influence-operations-may-2018/.
        \3\ Please see my other publication, A Framework for Cyber
    Indications and Warning, co-
    authored with other industry leaders and former intelligence officials
    here: https://www.
    insaonline.org/a-framework-for-cyber-indications-and-warning/.

    As you can imagine, this makes it all the more painful and excruciating
    that U.S. extraterritorial taxation policy has placed me in the highly
    unusual position of tax advisors suggesting I consider ``unthinkable''
    options, such as citizenship renunciation, simply to pursue an ordinary
    life with a retirement plan, investment options in standard vehicles
    like ETFs, and other norms afforded to other American citizens without
    the extreme duress placed upon citizens abroad because of PFIC, FATCA,
    and other rules that classify middle-class individuals abroad as
    second-class citizens. This of course is not the course I will take. My
    intention is to remain an American citizen and to work through my
    elected officials to make our policies fair to Americans. It is always
    possible I will return to the U.S., my home country, and I should not
    be in a position of tax advisors suggesting I consider permanent
    ---------------------------------------------------------------------------
    separation simply to experience a normal life while residing abroad.

    I assure this honorable committee that no American ever fled to Europe
    to evade taxes. European tax rates are among the highest in the world,
    including in wealth and capital gains unprotected from any double
    taxation exemption treaty, which is yet one more reason why U.S.
    citizens ought not be taxed both by their adopted nation and their home
    nation.

    Here are some of the issues faced with citizenship-based taxation
    instead of residency-based taxation:

          Each treatment of U.S. citizens' abroad bank accounts, pensions,
    and other ordinary tenets of a healthy financial life are treated as
    ``foreign'' by the Internal Revenue Service (IRS), but for us these are
    local institutions. The United States's highly irregular and unique
    citizenship-based taxation system inadequately accommodates American
    citizens permanently living abroad.
          PFIC regulations similarly classify U.S. citizens' investments
    as ``foreign,'' levying an extreme tax on middle-class Americans simply
    trying to invest in local equities, either for retirement or in the
    hope of improving their situation with capital gains investments. We
    cannot even invest in exchange-traded funds (ETFs), because European-
    based ETFs are classified as ``foreign''--they are local to us--and
    local institutions will not allow investment in U.S.-based ETFs.
          The 2014 FATCA law, well-intentioned to prevent tax evasion and
    schemes, is a crushing regulatory burden on ordinary Americans. Foreign
    institutions are not willing to conduct business with middle-class U.S.
    citizens solely because of the burden levied here.
          U.S. tax treaties and policies to help prevent double taxation
    like FEIE and FTC are ineffective and incomplete. They have capped wage
    limits too low for professionals working and paid in Euro currencies
    and in professional fields. While my earned wage income may be higher
    than median, I am also taxed at a 49% rate by my country in Europe and
    I am paid at the market rate for a cybersecurity professional--my
    industry after leaving the government. I am not, nor likely ever will
    be, ``wealthy'' or a ``fat cat.'' I am a working cyber intelligence
    professional. I am simply taxed twice, unlike any of my colleagues who
    are citizens of other developed nations--they are taxed based on where
    they reside and work, not based on their passport.
          Not in my case, but in other cases many American citizens have
    not been to the U.S., or in some cases have never been to the U.S., in
    many years. Many do not have any ties to the U.S. They do not have
    employment in the U.S. Yet the U.S. taxes them based on their passport,
    leading to a painful stigma against U.S. citizenship and resulting in
    more ``burden'' than gift. This is especially painful for me to witness
    as a former servicemember.
          This has led to an increasingly negative diplomatic image
    \4\, \5\, \6\ for the United States through what
    has become ``Accidental Americans,'' who contend with citizenship-based
    taxation's unintended negative effects regularly.\7\
    ---------------------------------------------------------------------------
        \4\ Dutch MPs call for action on accidental American bank accounts:
    https://www.
    dutchnews.nl/news/2020/11/dutch-mps-call-for-action-on-accidential-
    american-bank-accounts/.
        \5\ France's ``accidental Americans'' file new suit over bank
    refusals: https://www.thelocal.fr/20200706/frances-accidental-
    americans-file-new-suit-over-bank-refusals/.
        \6\ Accidental Americans Appeal FATCA in Luxembourg Court: https://
    www.law360.com/tax-authority/articles/1372690/accidental-americans-
    appeal-fatca-in-luxembourg-court.
        \7\ Why `Accidental Americans' Are Desperate to Give Up Their U.S.
    Citizenship: https://time.com/5922972/accidental-americans-fatca/.

    While U.S. citizenship brings global protection and diplomatic and it
    is a privilege to be a citizen of what is frankly still the greatest
    country on Earth, these diplomatic services are U.S. citizens receive
    no benefits, use no services, and pay double taxes based on their
    passport. Citizens of every other developed country--in fact, every
    country save the African dictatorship of Eritrea--pay taxes based only
    ---------------------------------------------------------------------------
    on where they reside and are employed.

    There is simply no excuse for citizenship-based taxation and immense
    distress wrangling with the IRS each year for citizens that use no
    services and have no connection to the United States besides their
    passport.

    There is no excuse for classifying home sales, investments, and other
    aspects of normal financial planning as ``foreign'' investments and
    incurring a 40% tax penalty that other American citizens do not endure.
    For U.S. citizens abroad, these are local investments.

    These are local homes where U.S. citizens abroad have purchased homes
    to raise their families, just as Americans domestically, but we are
    subject to highly irregular ``foreign'' tax penalties simply because we
    hold U.S. citizenship.

    These policies like PFIC and FATCA are well-intentioned and typically
    designed to prevent tax evasion, yet they have a severe effect of
    harming ordinary citizens while corporations and wealthy individuals
    find other ways to avoid taxes, such as leveraged borrowing. Neither
    the IRS nor the U.S. tax code acknowledges how much unnecessary burden
    these policies place on ordinary Americans who happen to live abroad.
    Many, perhaps most of these citizens have no affiliation with American
    employers or corporations in any capacity and are simply trying to live
    normal lives.

    There must be a more fair and equitable solution that would identify
    how many days a citizen has worked in the United States, or has visited
    the United States, and incur tax liability only in such circumstances.
    I am certain all U.S. citizens would be happy to pay taxes when working
    for American employers, residing in the United States, or using
    American services, et cetera. As it stands, American citizens abroad
    are in a unique and the most situation possible among developed
    nations--hamstrung with retirement, investment, home ownership, and
    other options--merely based on our passport.

    Americans should be proud of our passport, not afraid of how it will
    harm our futures or our families because of highly irregular tax
    policies. As well-intentioned as they may be, it is important to
    distinguish much more effectively between corporate entities evading
    taxes and individuals simply trying to live normal lives abroad.

    Please feel welcome to reach out to me with further engagement.

    Sincerely,
    Cody Gentry Barrow
    10 May 2021

                                     ______

                Letter Submitted by Anne-Marie Yarbrough Buzatu
    Dear Committee Members,

    Imagine you were born in Canada, but moved to Texas as a young person,
    obtained U.S. citizenship and built your family life and career in
    Texas. You love your life in Texas, and you don't have plans to return
    to Canada, but there is one BIG catch: you have to pay higher Canadian
    tax rates on your income, often on top of the taxes you are already
    paying in the U.S., for services such as Canadian nationalized health
    care that you never personally benefit from, just because you were born
    there. You can't take advantage of U.S. tax programs such as 401K plans
    and education deductions because they are not ``Canadian approved''
    programs, so you have to pay even higher taxes to Canada on the income
    the U.S. allows you to deduct.

    Furthermore, Texas banks have to report all of your financial records
    to the Canadian tax authorities, and as a result very few banks will
    accept you as a client, so you can't shop around for a better mortgage
    or a higher savings interest rate. On top of this, jobs in which you
    would have bank authority or signatory power don't want to hire you
    even if you are the best candidate because the organization's financial
    information would have to be sent to the Canadian financial
    authorities.

    Finally, you are effectively barred from investing in any kind of
    mutual funds or investment instruments in Texas because they are
    treated by Canada as ``offshore'' accounts overseen by the Canadian
    Financial Crimes Unit, with onerous reporting requirements and punitive
    tax rates. All of this because you were born in Canada, and because of
    your place of origin you are discriminated against/treated more
    punitively than other Americans--even those born in other countries who
    are living in the U.S. Then imagine that your repeated calls to change
    the system to something more equitable were systematically ignored by
    both Canadian and U.S. authorities.

    Sound unfair? This is the reality I have to contend with every day as a
    ``U.S. person'' who has made my home in Switzerland.

    I am an American citizen, born and raised in Texas, who has resided in
    Switzerland for more than 15 years, and who has recently obtained Swiss
    citizenship. Because of my status as a ``U.S. person'', I am
    discriminated against in Switzerland, my place of residence and now
    nationality, because of the U.S. practice of taxing ``U.S. persons'' on
    their worldwide income, the Foreign Account Tax Compliance Act (FATCA)
    and the bilateral agreement that the U.S. negotiated with Switzerland
    in order to enforce FATCA. Furthermore, because I reside outside of the
    U.S., I am discriminated against as compared to my U.S.-based
    compatriots and am unable to benefit from a whole host of social
    benefits, tax deductions, tax credits and banking services. Here are a
    few examples:

          I am effectively banned from opening an investment account in
    Switzerland, my place of residence and nationality, because financial
    institutions do not want to assume the onerous reporting requirements
    that come with a potential withholding fee of 30%.
          Nearly all banks in Switzerland will not accept me as a client
    for regular banking services for the same reasons, so there is no way
    for me to compare banking services or take advantage of offers that are
    not provided by the one bank that will accept me (UBS).
          Nearly all U.S.-based investment firms and banks will not accept
    me as a client because I am not a resident of the U.S.
          I pay into a retirement fund that is very similar to a 401K
    program, and which provides similar tax advantages in Switzerland
    because I am only taxed on that income when I take it out at
    retirement; but both my and the employer's contributions are taxed by
    the U.S. in the year I earn them meaning I am taxed at a punitive rate.
          I cannot take deductions for my sons' university tuition because
    they schools they go to are not on the U.S. Department of Education's
    Database of Accredited Post \1\ Secondary Institutions and Programs
    (DAPIP) or the Federal Student Loan Program list.\2\
    ---------------------------------------------------------------------------
        \1\ https://ope.ed.gov/dapip/#/home.
        \2\ https://studentaid.gov/understand-aid/types/international.
    ---------------------------------------------------------------------------
          I am not able to benefit from a whole host of tax deductions and
    credits that my U.S.-residing compatriots do because I am not a
    resident of the U.S.
          Many IRS services are only available to U.S. residents, meaning
    that they are not available to me as a U.S. person residing abroad.
          Being a ``U.S. person'' has impacted me professionally because
    any Swiss institution I work and have bank signatory rights for would
    have to have their finances reported to the IRS. I have only worked for
    non-profit NGOs in Switzerland.
          In many cases Swiss taxes are assessed in a manner that is
    fundamentally incompatible with the U.S. income tax approach, meaning
    that in some cases I am double-taxed by both systems; the current U.S.-
    Swiss tax treaty does not effectively address these inconsistencies
    (see more below).

    U.S. taxation on my and my husband's incomes is disastrous for us, for
    numerous reasons which are laid out in detail in the below submission.
    However, before wading into the weeds, I wanted to put up front my
    recommendations for how to overhaul international taxation so that it
    is fairer and reduces discrimination against folks like myself:

        (1)  Change the system of citizen-based taxation of individuals to
    that of individual taxation on only income earned from U.S. sources,
    and not worldwide taxation, also known as resident-based taxation for
    individuals, the kind of income taxation that most of the rest of the
    world practices (for a relatively simple and fast interim fix to this
    issue by the U.S. Treasury while waiting on lengthier legislative
    processes, please read this article);\3\
    ---------------------------------------------------------------------------
        \3\ https://papers.ssrn.com/sol3/
    papers.cfm?abstract_id=3795480&fbclid=IwAR10eXmPraGW
    3Wuaa_VgnL7HYObjUBZz3302cglQOsT2rPyxtmy5SS7ibgU.
    ---------------------------------------------------------------------------
        (2)  Create a special committee that looks at the impacts of U.S.
    taxation on its nationals residing abroad so that any changes made to
    the tax code are reviewed by this body to ensure that our situations
    are taken into consideration, including analyses of how they are
    (in)compatible with the tax systems of the other 190+ countries in
    which U.S. persons live in order to protect against unintended negative
    consequences; and finally
        (3)  Include formal representation of Americans living abroad in
    our representative bodies, as the approximately 9 million of us living
    abroad need a voice. Switzerland and France include seats for their
    citizens residing abroad in their Parliaments, and the U.S. can and
    should do the same.

    To understand why I am making these recommendations, please read the
    more personal account below.

    I was born and raised in Texas, where I lived most of my life until I
    and my family moved to Switzerland more than 15 years ago. We didn't
    feel we had much choice. In August 2005, my husband was laid off from
    his job in the high-tech sector. We had two young boys aged 4 and 7,
    and I was working as a part-time consultant and a more than full-time
    mom. Once my husband lost his job, we suddenly were faced with
    extremely high health insurance costs (COBRA), significant student loan
    debts and a high monthly rent with no income. My husband applied for
    several jobs and had a few interviews, but the offer that he got was
    working in IT for the International Computing Center, a UN-affiliated
    computer services organization, located in Geneva, Switzerland.

    In Switzerland, I went back to school studying the impact of war and on
    international security and human rights. I subsequently managed to
    carve out a really fulfilling career working for Swiss-based NGOs where
    I strive to limit the negative impacts of businesses on human rights,
    as well as work with the private sector to foster positive change, both
    on the ground as well as in the halls of international policy.

    I love the U.S. and have close ties with family members and several
    good friends who live there. Both of my elderly parents are alive but
    have been experiencing some serious health issues of late. Before the
    pandemic, I typically would visit them at least once a year, and it has
    been tough waiting on the sidelines, hoping that I will be able to see
    them again before too long. It is important to me that I am able to
    visit them, and to be able to spend more time with them should they
    need extra care and support, and more generally I love getting back to
    the U.S. There are definitely things that I miss, like really good Tex-
    Mex (!) in an affordable restaurant, infinite sunsets over a West Texas
    sky, and easy, laid-back conversations with good friends and family.

    What I do not love is the U.S. taxation of people like me who live,
    work and pay taxes in a completely different tax system, which in many
    areas is completely incompatible with the U.S. tax system. As a matter
    of fact, you could say that the U.S. has three different distinct
    income tax regimes which creates different, unequal classes of
    taxation: 1. Residence--For U.S. residents, 2. U.S. Source--For non-
    resident aliens, 3. Extraterritorial--For Americans Abroad. This last
    regime to which I and my family are subject means that we don't get the
    same kinds of deductions and tax credits as our homeland-based
    compatriots. For example: I participate in an employer-contribution
    retirement program which is very similar to U.S. 401K programs: the
    employer matches my contributions, and I do not have to declare the
    employer nor my contributions on my Swiss taxes as they are paid, only
    when I take them out after retirement when I am likely earning much
    less. However, the U.S. taxes me on the employer contributions as well
    as my own contributions to the tax plan in the year that they are paid,
    so I am taxed by the U.S. on money I haven't even received, and likely
    at a higher tax rate than I would be at during retirement. Another
    example: my son is going to a university located in Berlin, Germany,
    however the school is not on the list of U.S. recognized educational
    institutions, so we are unable to deduct his tuition from our taxes.

    Furthermore, Swiss income taxes are structured completely differently
    from those of the U.S., and they are in most cases lower than the U.S.
    income tax rates. However, the cost of living in Switzerland is one of
    the highest in the world and is considerably higher than we were paying
    in Texas. People who visit from the U.S. are shocked at the prices in
    the stores and restaurants here, and renting/buying homes is extremely
    expensive. However, because of the relatively high salaries (in Geneva
    we have an appx. $25/hour min wage) and low taxes, these prices are
    generally affordable to people who work here. Less so for us: as ``U.S.
    persons'', because we are unable to take many of the same deductions as
    our homeland compatriots, we essentially have to pay higher U.S. taxes
    than Americans living in the U.S., higher taxes than others who live
    and work in Switzerland and pay the higher Swiss prices. And to be very
    clear, we are not earning very high salaries, but rather are at that
    sour spot of earning just a little more than the Foreign Earned Income
    Exemption (FEIE) once things like our employer contributions to
    pensions and other benefits--much of which we don't get in pocket--are
    taken into account. As such, we pay U.S. taxes at a pretty high rate on
    income that doesn't make it into our bank account and given the high
    cost of living we have here, this means we are penalized financially
    relative to our colleagues who are working similar jobs.

    Moreover, as U.S. persons residing abroad, we are not able to take
    advantage of many of the tax credits that are available to those living
    in the U.S. For example, in March 2018 we bought a Tesla Model 3 (the
    more affordable Tesla) and were under the impression that we would be
    able to get the $7,500 tax credit to help us offset the still
    significant cost. However, when we did our U.S. taxes, we learned that
    this tax credit was only available to those actually living in the
    U.S., not those living abroad. In a way I understand the rationale: our
    Tesla would not be directly benefitting those living in the U.S.
    (although it is contributing to an overall globally cleaner
    environment), and therefore we should get no incentive from the U.S. to
    buy it. However, by the same logic, we should not be paying taxes in
    the U.S. on income that we do not earn from there, to pay for an
    infrastructure and a Congress that does not directly benefit or
    represent us.

    Coming back to the incompatibility between Swiss and U.S. income tax
    systems, this is not just limited to the fact that similar Swiss
    retirement and education tax programs are not recognized by the U.S.,
    but also to completely different approaches in the manner of
    calculating income tax. For example, in Geneva the way that taxes are
    assessed in relationship to our townhouse is that the income tax
    authorities tax us on the fictional ``income'' we would have earned if
    we had been renting the house out (which we are not). The way they
    calculate this is very complicated and not fully known to me, but it
    has something to do with the type of property, when the property was
    built, where it is located, and the amount of income that we earn from
    our work (this last element helps to ensure that we will not be priced
    out of our home by property taxes even as property values rise).
    Furthermore, it is something we find out long after the fact of filing
    taxes. For example, for tax year 2020, we will file our Swiss tax
    returns in June of 2021 and we will get the calculation of this
    ``income tax on our property'' somewhere in October-November 2021, long
    after our U.S. tax returns are due and interest is being assessed on
    any unpaid amounts. Furthermore, its incompatibility with how U.S.
    assesses income and property taxes makes it really difficult to know
    how to include that in our tax returns. We tried to do it for a couple
    of years, but this did not seem to be accepted by the IRS, and then we
    had to pay additional taxes with penalties and interest. Now we do not
    even try to include these taxes we pay on our U.S. tax return, and so
    we are being double-taxed by both Swiss and U.S. jurisdictions on that
    income.

    When it comes to trying to get information, help and guidance from the
    IRS so that we can navigate these difficulties more easily, this is
    also not set up for those of us living abroad. Most of the time when I
    call the IRS, I get a message that the line is too busy and they are
    not accepting calls at that time. Sometimes I have gotten a message
    saying that the estimated wait is between a certain time, such as 7 to
    10 minutes, and then finally hung up after being on hold for more than
    30 minutes. Needless to say, there are no toll-free numbers for U.S.
    persons abroad, so of course we have to pay international long-distance
    rates. However, even many of the IRS online services are not available
    to those of us living outside of the U.S. (see below for an example).

    Another problem is that as ``U.S. persons'', nearly ALL banks will
    simply not open an account for us, which has huge implications on, for
    example, shopping for affordable mortgages from local/cantonal banks.

    Further, we are effectively banned from investing in any kind of
    stocks, bonds or mutual funds in our country of residence and
    nationality. We are getting older, and we wanted to try to invest in a
    mutual fund here to put aside a little extra money for our golden
    years. However, the only bank we found in Switzerland that would accept
    us as customers had a 250,000 Swiss Francs (about $270,000) minimum
    investment requirement--something that is definitely out of our league!
    Furthermore, we learned that even if we could and did invest in a
    mutual fund here in the country where we live (and now are also
    citizens of), that it would be treated by the U.S. as a ``Passive
    Foreign Investment Company'' and would be taxed at an exorbitant rate.

    Discrimination against me as a ``U.S. person'' has also impacted me
    professionally. After I was hired as the COO for a very small, non-
    profit Swiss NGO we learned that if I were given signatory rights on
    our organizational bank account, that the financial records of this
    Swiss organization would have to be sent to the IRS. Therefore, I do
    not have these rights, and I can't perform all of the functions of my
    role. This puts me at a disadvantage employment-wise relative to all of
    the qualified candidates who do not have U.S. citizenship.

    Furthermore, filing and paying taxes in the U.S. is extremely
    complicated, and
    calculations/corrections made by the IRS are not transparent. We have
    consistently filed and tried to pay our taxes in accordance with the
    rules as we understand them, although the tax code is not exactly
    straight-forward especially for people like us living outside the U.S.
    Sometimes we get bills years later without any explanation as to why or
    how new calculations were made. For example, we recently got a bill
    from the IRS from 2014 for nearly $8,000(!) This is a lot of money for
    us. I wrote the IRS and asked for an explanation of how they calculated
    this amount more than six years after the fact and got no response
    except for a threatening letter that they are going to levy taxes on
    our assets. I tried to go online to get a transcript of how they
    calculated this tax, however the online service is not available to
    persons who live abroad! There is a phone-in/write-in service to obtain
    tax transcripts, but it only goes back to the previous three years'
    returns. I tried to call anyway and was not able to get through.

    I am not against paying taxes, and fully recognize the necessity of
    them. If I were to earn any money from U.S. sources, it would make
    sense that I pay U.S. tax rates under the U.S. tax system, but not that
    I pay Swiss taxes on top of them. If every country taxed because of
    nationality (or even former permanent residence status) with no regard
    to the other nationalities and their accompanying tax systems, the
    impacts would be devastating: many persons here in Geneva have 3, 4 or
    even more nationalities, and having to satisfy the requirements of
    multiple different, incompatible national income tax systems on income
    earned in one country would not be sustainable, nor would it be fair.
    In this respect the U.S. is the only country (outside of Eritrea) that
    taxes on the basis of nationality/permanent residence, but this also
    highlights how incongruent and out of step this practice is with the
    rest of the world, and for its citizens/permanent residents who happen
    to reside in other countries. Every time Congress makes a change to the
    tax code, this directly impacts me and those of us living outside of
    the U.S. who are also subject to other tax code regulations. However,
    these impacts are rarely if ever discussed by members of Congress, and
    certainly not studied in depth as to how they will impact/interact with
    the other 190+ countries' income tax regimes where U.S. persons may be
    living. This results in devastating unintended consequences on ordinary
    folks: if I were rich, or a multinational, I would have the resources
    to figure out how to get around the different tax systems, but I am
    not.

    Finally, I cannot express the anger and frustration I feel when I read
    that Amazon and 54 other major U.S. corporations, as recently reported
    in the NY Times,\4\ paid ZERO income taxes on incredible, record-
    setting profits in the many billions. How is it that we, a middle-class
    family who hasn't even lived or earned any income in the U.S. for more
    than 15 years, are effectively paying more income taxes than Amazon?
    ---------------------------------------------------------------------------
        \4\ https://www.nytimes.com/2021/04/02/business/economy/zero-
    corporate-tax.html.

    Therefore, we ask you to:
        (1)  Change the system of citizen-based taxation of individuals to
    that of individual taxation on only income earned from U.S. sources,
    and not worldwide taxation, also known as resident-based taxation for
    individuals, the kind of income taxation that most of the rest of the
    world practices (for a relatively simple and fast interim fix to this
    issue by the U.S. Treasury while waiting on lengthier legislative
    processes, please read this article);\5\
    ---------------------------------------------------------------------------
        \5\ https://papers.ssrn.com/sol3/
    papers.cfm?abstract_id=3795480&fbclid=IwAR10eXmPraGW
    3Wuaa_VgnL7HYObjUBZz3302cglQOsT2rPyxtmy5SS7ibgU.

        (2)  Create a special committee that looks at the impacts of U.S.
    taxation on its nationals residing abroad so that any changes made to
    the tax code are reviewed by this body to ensure that our situations
    are taken into consideration in such regulation and to protect against
    ---------------------------------------------------------------------------
    unintended consequences; and finally

        (3)  Include formal representation of Americans living abroad in
    our representative bodies, as the approximately 9 million of us living
    abroad need a voice. Switzerland and France include seats for their
    citizens residing abroad in their Parliaments, and the U.S. can and
    should do the same.

    We should not be penalized and discriminated against just because we
    were born in, had American parents or lived a significant time in the
    U.S., and reside in another country. Furthermore, we can be an
    important resource to the U.S.--we can play the role of ``local
    ambassador'' in our countries of residence, helping to bridge
    differences and forge understandings between the U.S. and the countries
    we call home, which is increasingly important in our highly
    interconnected, shrinking world.

    As a last note, it is more than somewhat ironic that the U.S.
    ostensibly got its start over a tax dispute with its overseas colonial
    parent, with American revolutionaries crying out the slogan ``no
    taxation without representation,'' launching a war that brought about
    the birth of our nation, and yet it taxes folks like me who earn their
    income completely outside the U.S. system and have no effective
    representation on the U.S.-created impacts we face living abroad. That
    notion of justice, of democratic representation and fair taxation is
    fundamental to the very identity of the United States, and yet somehow
    it is the only developed country that burdens individuals such as
    myself with a tax imposition that does not take into account the
    situations in which we are living, and which prevents us from fully
    participating in the societies of which we are part.

    Many have said that you, our representatives, don't care for U.S.
    persons residing abroad, that we don't matter enough in terms of votes
    or funding, that our situations don't play well on media platforms in
    terms of messaging, that we don't have enough pull or importance to get
    any attention. However, I am still hoping that you can care about
    something that is wrong and unfair, even if it isn't politically
    expeditious. In fact, it is my American-bred idealism and pragmatic,
    can-do spirit that make me believe that we can work together to develop
    an income tax system that is fair and not unduly burdensome, and that
    honors those fundamental American values which we all hold dear.

    I thank you for your time and attention, and hope that this submission
    will be fully considered by the Committee. I would be happy to provide
    any additional information or support to help you better understand the
    implications of the U.S. income tax system on folks like me who live in
    other countries.

    Sincerely,

    Anne-Marie Yarbrough Buzatu

                                     ______

                            Center for Fiscal Equity

                          14448 Parkvale Road, Suite 6

                              Rockville, MD 20853

                          fiscalequitycenter@yahoo.com

                        Statement of Michael G. Bindner

    Chairman Whitehouse and Ranking Member Thune, thank you for the
    opportunity to submit these comments for the record to the
    Subcommittee.

    For additional context, see our comments submitted to the full
    committee on ``How U.S. International Tax Policy Impacts American
    Workers, Jobs, and Investment'' on March 25, 2021.

    The Administration has requested $80 Billion to enable the IRS to go
    after an estimated net gain of $700 Billion, or $780 Billion in gross
    collections. This sounds like a good deal. The only reason to oppose
    this is the belief that tax cheating is a civil right. Sadly, this may
    not be far from the truth. By all means, this money should be spent, as
    the scheduled witnesses will like affirm.

    There is an easier way to recoup these funds while ending the
    requirement to file taxes for 97% of households who are not filing
    business taxes. Please see the attachment for more information on how
    this may be done.

    Businesses would pay a subtraction VAT, with a first tier meant to fund
    the child tax credit, paid leave, childcare, health care, social
    services and education (including a state administered tax). Ideally,
    at the federal level, no revenue would be collected because employers
    would provide these services in lieu of tax payment.

    Higher tiers of the subtraction VAT would collect taxes on salaries
    with a 6.5% rate on income over $85,000, with increments of that amount
    to a top rate of 26% starting at $340,000 in salaried income. Salary
    surtaxes, with an option to purchase tax prepayment bonds, would start
    at $425,000 at 6.5% to a top rate of 26% starting at $680,000.

    A credit invoice value-added tax to fund what is now collected through
    the employer contribution to Old-Age, Survivors and Disability
    Insurance (credited equally for all workers) and discretionary military
    and civil spending in the continental United States.

    Taxes on salaries can be collected by employers without having to file
    because taxes on capital income and gains would be funded separately.
    Rental and capital gains on real property would be collected by states
    and capital gains and income from financial assets would be collected
    by the federal government, with funds remitted by brokers or trading
    platforms directly to the Securities and Exchange Commission. Our
    proposed rate is 26%.

    Sales of stock (publicly traded and privately held) to qualified
    Employee Stock Ownership Plans would be zero rated. Sales of real
    estate sold to ESOPs or cooperatives would be zero rated at the state
    level. Shares would be marked to market when information on sale prices
    is lost, when stock options are exercised and at the first sale after
    inheritance, gift or charitable donation. Self reporting will not
    occur, ending non-compliance due to strategic record keeping.

    Parking money offshore to avoid taxes can be easily dealt with if we
    the desire to do so (see again my comments on tax cheating).
    Subtraction Value-Added and Credit Invoice taxes will pull in most
    revenue--both from labor and profit within the enterprise where the
    costs are incurred or the goods and services are provided. Even medical
    services provided remotely (as my last x-ray was) would be subject to
    tax.

    This applies to headquarters location as well. Correspondence and
    revenue will be credited where the correspondence is opened and
    presented at the physical location of the home office. I am sure there
    are legislative drafters among committee staff who can iron out
    ironclad language. It is time to let them.

    The biggest tax shelter is the use of money market funds to accumulate
    capital gains and income without taxation. This practice must end if
    salary surtaxes no longer include non-salaried income. 75% of such
    funds are held by the top 10% of households as measured by the 2019
    Survey of Consumer Finance by the Federal Reserve. I suspect the other
    20% are held by high income retirees. The working class will not be
    harmed.

    This ratio affirms what Pareto found, except his ration was 80% of
    wealth held by 20% of asset holders. Clearly, things have gotten worse
    for the 80th to 89.9th percentile. If you apply the Pareto rule to
    higher levels of income, and with Berkshire Hathaway there is no reason
    not to, the top 1450 households hold roughly 30% of all wealth in
    mutual funds. This ratio also applies to bond holdings, but this is a
    topic for another day.

    This finding also takes away the excuse used to shift retirement income
    from defined benefits to defined contributions. The only people who
    benefit more from such arrangements are brokers. The relationship
    between investment bankers, brokers and ratings agencies makes
    scenarios about how defined contribution reserve requirements are
    calculated suspect at best and likely unethical, if not criminal. This
    ranks up there with using inside information to make electronic trades.
    At least there, an Asset VAT of 26% should end this practice.

    We have left a loophole on Asset Value-Added Taxes that some will be
    able to fly a 757 through, which is trading stock overseas to avoid
    taxation. The only way out of this is an internationally negotiated
    asset VAT rate, or at least the same range. This ends the need for a
    minimum tax on corporate income (note that corporate income taxes will
    be discontinued under this proposal).

    Ending the mutual fund shelter and levying an Asset VAT gets at all of
    the income and gains that wealth taxes are proposed to capture, or
    rather, it limits the accumulation of gains and income that is
    currently sheltered. Indeed, doing so dwarves what Senators Warren and
    Sanders and Professors, Piketty and Zucman propose to collect with
    their Wealth Tax proposal. For more on my analysis of wealth taxes, see
    my comments to the Subcommittee on Fiscal Responsibility and Economic
    Growth hearing on ``Creating Opportunity Through a Fairer Tax System''
    held on April 27, 2021.

    Thank you for the opportunity to address the committee. We are, of
    course, available for direct testimony or to answer questions by
    members and staff.

      Attachment--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.

                                     ______

                    Letter Submitted by James Webster Coates

               Non-Resident U.S. Citizens Are Not ``Fat Cats''--
                     Yet, We Are the Ones Impacted by FATCA

    Chairman Whitehouse and members of the Subcommittee on Taxation and IRS
    Oversight:

    I was disturbed by the insinuation behind Chairman Whitehouse's tax
    joke at the May 11th hearing, which implied that FATCA will reign in
    tax evading ``Fat Cats.'' The pain caused by the extraterritorial
    application of U.S. income tax information reporting requirements falls
    primarily on the 8 million U.S. citizens who reside outside the United
    States. The great majority of us are not rich ``Fat Cats.'' To the
    contrary, in a survey \1\ of 1,564 overseas resident citizens conducted
    by Stop Extraterritorial American Taxation (``SEAT''), an independent,
    non-partisan not-for-profit association, 66% of recipients had annual
    income of less than $75,000 and 25% less than $25,000. Furthermore, 46%
    of participants agreed with the statement ``I pay significant fees for
    preparation of U.S. tax return but owe nothing in U.S. taxes,'' with
    41% of those who engaged a professional preparer paying more than
    $1,000 in fees.
    ---------------------------------------------------------------------------
        \1\ http://seatnow.org/survey_report_intro_page/.

    This is a reflection of the burden non-residents face due to complex
    information reporting requirements related to ordinary banking,
    investment and pension products which are ``foreign'' to the United
    States but just a part of living an ordinary financial life in one's
    ---------------------------------------------------------------------------
    country of residence.

    Beyond the reporting complexities which fall on non-resident U.S.
    citizens, we also face denial of service from financial institutions
    which do not want to deal with the compliance burden of IRS reporting
    now expected of Foreign Financial Institutions under FATCA. 41% of the
    respondents to the SEAT survey stated that ``I have not been able to
    open one or more bank, retirement or other financial account.''

    As for myself, I am a U.S. citizen who has resided in Japan since 2001,
    and since the implementation of FATCA, have been denied service by one
    bank and two life insurance companies because I am a U.S. citizen. It
    is indeed quite ironic that the financial institutions which denied me
    service are subsidiaries of major U.S. firms.

    This is a real hardship for non-resident U.S. citizens. U.S.-based
    financial institutions generally won't open accounts for us because we
    have no address in the United States, and the onerous and complex FATCA
    reporting requirements often cause financial institutions in our home
    countries to decline to do business with individuals who happened to
    have been born in the United States.

    The topic of the May 11 hearing was supposed to be about ``Fat Cats''
    and regaining Lost Revenue from Noncompliance and Offshore Tax Evasion,
    but I urge you to balance this perspective with the impact that FATCA
    and other federal tax programs have on ordinary law-abiding citizens
    who happen to reside outside the United States.

    According to the SEAT survey, 80% ``experience personal stress in
    relation to U.S. taxation,'' a large part of which is due to the
    constant sense of fear because of the excessive penalties that could be
    applied for making an honest mistake in our tax compliance. For
    example, for FinCEN Form 114, the Report of Foreign Bank and Financial
    Accounts (FBAR), the penalty for misfiling is the GREATER OF 50% of the
    maximum balance of the account in question or $100,000. For Form 8938,
    which is similar to, but different from the FBAR, the penalty is
    $50,000 per mistake. For Form 8621 which must be filed for non-U.S.
    mutual funds, the penalty is $10,000 per form per year. Imagine if you
    reported your mutual fund dividends on Schedule B of Form 1040 the same
    way U.S. residents do but didn't realize that you were actually
    supposed to report them as a ``Passive Foreign Investment Company'' on
    Form 8621. What if this happened to you for multiple mutual funds over
    a multi-year period? The penalties would be astronomical! Even if you
    are trying to be fully-compliant, you can easily get caught up in an
    issue like this.

    I urge the Senate Finance Committee to hold a hearing focused on the
    difficulties U.S. citizens who reside outside the United States are
    facing in navigating the increasingly complex extraterritorial tax
    compliance regime that the U.S. imposes on its non-resident citizens.
    These issues are not well known or understood, but they are a
    tremendous burden on millions of ordinary people who happen to live
    overseas.

    Despite the billions in dollars in compliance costs that the global
    financial services industry has suffered as a result of FATCA, I can't
    imagine that this regime will actually result in significant
    enforcement opportunities for the IRS. I faithfully report all of my
    Japanese financial accounts on my own tax returns (Form 8938, FBAR,
    Form 8621, etc.) but the majority of the financial institutions that do
    business with me have no means of grasping that I am a U.S. taxpayer
    and are therefore unable to make the corresponding disclosures to the
    IRS. In his testimony to the Committee, Treasury Inspector General for
    Tax Administration George seemed to indicate that the solution is as
    simple as having the IRS ask foreign financial institutions to provide
    social security numbers for their accountholders, but I think that
    comment ignores fundamental flaws and failures in the design of FATCA.

    The United States should stop trying to ``go it alone'' with FATCA, and
    instead join the OECD standard CRS data exchange framework. This would
    result in the fair, open and reliable reporting of account information
    related to all United States residents. FATCA should be repealed, or at
    least modified to eliminate reporting requirements (both for Foreign
    Financial Institutions, and also on IRS Form 8938 and FinCEN Form 114
    for individual taxpayers) for accounts held by individuals in their
    country of residence.

    It is time for the United States to stop extraterritorial taxation of
    non-resident citizens. The best solution to this problem is for the US
    to come into alignment with every other developed nation on the planet
    and move to a residence-based taxation system for individuals. The
    definition of ``individual'' in Treasury Regulation, 26 Section 1.1-1
    should be modified to include only ``residents.'' U.S. citizens who are
    tax residents of other countries would continue to be liable to pay
    U.S. Federal Income Tax on any income which is effectively connected
    with the United States, as all non-resident aliens do, by using Form
    1040-NR instead of Form 1040.

    The tax compliance industry of lawyers and accountants will hate my
    suggestions because they would remove red tape which drives inordinate
    amounts of revenue to their industry. But the reality is that by
    solving these issues for ordinary U.S. citizens who live in other
    countries, the United States would sacrifice a relatively small amount
    of tax revenue, while freeing up IRS resources to focus on other larger
    priorities.

    If the United States continues to subject overseas residents to
    extraterritorial taxation, then it must enhance the capabilities of the
    IRS to support these taxpayers, and these costs must be incorporated
    into a cost-
    benefit analysis of the impact of continuing to force non-resident
    citizens to report their non-U.S. source income. In a paper entitled,
    ``Mission Impossible: Extraterritorial Taxation and the IRS'' published
    in the Tax Notes Federal journal, authors Laura Snyder, Karen Alpert
    and John Richardson \2\ explain that ``international taxpayers'' have
    been identified by the IRS as an underserved community, and that the
    failure to provide access to the following services, individually and
    collectively, constitute violations of the Taxpayer Bill of Rights:
    ---------------------------------------------------------------------------
        \2\ Snyder, Laura, et al.. ``Mission Impossible: Extraterritorial
    Taxation and the IRS,'' Tax Notes Federal, Volume 170, March 22, 2021.

          In-person assistance
          Toll-free telephoning
          Knowledgeable IRS agents
          Online accounts
          E-filing
          Timely delivery of postal mail
          Use of other languages
          Explanations of tax obligations
          Making payments to the IRS
          Receiving payments from the IRS
          Third-party assistance
          Low income taxpayer clinic
          IRS internal organization

    According to Alpert, et al., these failures when considered as a whole,
    ``manifest a systemic pattern of discriminatory treatment of
    international taxpayers as compared with domestic taxpayers. The
    collective failures are evidence that the IRS is either unable or
    unwilling to administer an extraterritorial tax system.''

    Finally, let me close by providing some biographical information on
    myself. I am a United States citizen, registered to vote in the 3rd
    Congressional District of Pennsylvania. I moved to Japan in 2001
    immediately after graduating from college, and have been living and
    working here ever since. My financial life is entirely in Japan since
    I've never worked a day in my life in the U.S. and have never earned
    any money there. I am a tax resident of Japan, and my worldwide income
    is subject to full taxation under the laws of Japan.

    I am employed as a compliance officer for a financial institution, so I
    have a high attention to detail around my own personal tax compliance
    matters and try very hard to fulfil the requirements of the U.S. tax
    system in addition to the tax requirements in my country of residence.
    The reality, though, is that the U.S. requirements (especially the
    myriad of required informational filings) get increasingly burdensome
    every year, and the compliance costs for knowledgeable tax preparers
    are egregious. I rarely actually owe much tax to the United States, but
    my annual accounting fees have frequently been higher than the ultimate
    amount of my U.S. Federal tax liability.

    Since my employment income is generated in Japan and denominated in
    Yen, as are all of my living expenses, I need to organize my financial
    and retirement planning in Japan. The problem I have is that the U.S.
    tax laws make it very difficult for me to live the same kind of life
    that my friends and neighbors live. You see, they are subject only to
    the Japanese tax system and can organize their finances appropriately.
    As a U.S. citizen, I am subject to the tax system here in Japan and the
    U.S. tax system. Those systems are not compatible. Most attempts at
    responsible financial/retirement planning here in Japan are frustrated
    by the need to comply with U.S. tax laws. How can this be fair? How can
    the United States impose taxation on the non-US income and assets of a
    person who is a tax resident of another country--often with no economic
    connection to the United States?

    I do not live ``offshore.'' I do live in Japan, where I am responsible
    for paying tax on my worldwide income at rates of up to 55%. Yet,
    because I am a U.S. citizen, I am subject to the U.S. extraterritorial
    tax regime, which means the United States imposes taxation on my non-US
    income even though I am already fully taxed on that income in the
    country where I reside, and do not live in the United States. There is
    no other advanced country in the world that imposes such
    extraterritorial taxation.

    The U.S. extraterritorial tax regime makes it difficult for me to save,
    invest, participate in pension plans and generally behave in a
    financially responsible way. This is because all of these essential
    activities are taking place in my country of residence and not in the
    United States. My retirement investments are foreign to the United
    States, but local to me. As a tax resident of both the United States
    and my country of residence, I get the worst of both tax systems.

    This is extremely unjust. For many years, Americans abroad have been
    attempting to get both Treasury and Congress to address these issues.
    The time has come for the United States to abandon its extraterritorial
    tax regime and join the rest of the world in adopting a system of
    residence-based taxation. I implore you to hold a hearing focusing on
    the issues faced by ordinary American citizens who reside outside the
    United States, and to take action on the issues detailed in this
    submission.

    Thank you for your attention to this matter,

    James Webster Coates
    Tokyo, Japan

                                     ______

                                Democrats Abroad

                                  PO Box 15130

                              Washington, DC 20003

                              DemocratsAbroad.org

    U.S. Senate
    Committee on Finance
    Dirksen Senate Office Building
    Washington, DC 20510-6200

    Democrats Abroad thanks the Subcommittee on Taxation and IRS Oversight
    for the invitation to comment on matters covered in their May 11th
    hearing on ``Closing the Tax Gap.'' This submission reflects our
    observations on the testimony of the Subcommittee and witnesses, the
    experience of Americans abroad contending with provisions in the U.S.
    tax system established to mitigate offshore tax evasion, and our
    recommendations for strengthening and reducing the unintended adverse
    consequences of U.S. anti-avoidance policy.

    The State Department estimates there are 9 million Americans living
    outside the United States. Unfortunately, we suffer from the stubborn
    misperception that Americans abroad are uniformly ``high-rollers''
    living a life of luxury in low- or no-tax countries. This apocryphal
    stereotype has driven the development of tax policy and regulations,
    causing inordinate harm to Americans living abroad.

    Research published at the behest of Congressional staff demonstrates
    that we live abroad primarily because a relationship, employment,
    education, or adventure took us abroad, and we decided to stay.\1\ The
    vast majority of us are middle-class Americans, working, raising
    families, and retiring in countries with a higher overall tax-burden
    than the United States. U.S. tax policies and regulations established
    to stop tax evasion using offshore bank accounts and tax secrecy
    jurisdictions do not reflect this reality.
    ---------------------------------------------------------------------------
        \1\ ``Tax Filing From Abroad: 2019 Research on Non-Resident
    Americans and U.S. taxation,'' Bit.ly/FilingFromAbroad.

    Measures to foil the efforts of tax evaders and other financial
    criminals penalize millions of ordinary American citizens in
    ---------------------------------------------------------------------------
    extraordinary ways:

          We are being denied even ordinary banking products and services
    in the places where we live.
          Relationships with non-U.S. spouses are put under strain because
    many spouses resent the IRS reaching into their financial lives.
          U.S. citizens are frequently removed from the joint accounts we
    share and assets we own with non-U.S. spouse, putting our financial
    security at grave risk.
          Americans abroad are denied employment, promotions, and business
    partnerships when roles involve signatory authority over the business
    accounts in foreign financial institutions.

    Given this accounting of the serious personal and financial problems
    foreign financial account reporting has caused for Americans abroad,
    Congress can understand why we react with great concern when hearings
    like this one focusing on the ``tax gap'' lean towards strengthening
    international tax-enforcement provisions.

    IRS Acting Chief of Research and Analytics Barry Johnson produced data
    on funds held by U.S. citizens in non-U.S. bank accounts: an
    astonishing $2.7 trillion, according to 2017 FATCA reports. He also
    noted that $2 trillion of that is held in tax secrecy jurisdictions \2\
    where a scant 6% of Americans abroad live (4% of them in Switzerland
    where eliminating bank secrecy has been an IRS project for a decade.)
    \3\
    ---------------------------------------------------------------------------
        \2\ https://fsi.taxjustice.net/en/faq/what-is-a-secrecy-
    jurisdiction.
        \3\ ``Tax Filing From Abroad: 2019 Research on Non-Resident
    Americans and U.S. taxation,'' Bit.ly/FilingFromAbroad.

    The comments made in the hearing by Chairman Whitehouse, Senator
    Warren, and others made clear that the focus of concern is on high
    earners, but that provides little comfort to Americans abroad who for a
    decade have been the minnows caught in the FATCA net meant for big
    ---------------------------------------------------------------------------
    fish.

    We have reform recommendations that would, in association with other
    legislation, help the IRS re-fashion the net to better catch bad actors
    using offshore accounts to commit financial crimes and hide assessable
    income. The changes will provide consequential relief for Americans
    abroad and simplify compliance generally. And, consistent with
    President Biden's vision in the American Families Plan, these reforms
    would help ensure that all Americans have access to essential banking
    services and the financial infrastructure necessary to live a normal
    life abroad.

    As the government is building a fairer tax system for all Americans, we
    propose these updates to the Report of Foreign Bank and Financial
    Accounts (FBAR):

        b  Indexation to inflation of the FBAR reporting threshold;
        b  Creation of an FBAR filing threshold for Americans abroad that
    is five (5) times higher than the indexed threshold for domestic
    filers;
        b  Elimination of duplicate FBAR and FATCA filing;
        b  Modification of the enormously out-of-proportion penalties for
    non-willful neglect to file FBAR reports;
        b  Provision of an FBAR reporting platform for Spanish and other
    foreign-
    language speakers; and
        b  Reinstatement of the option to paper-file the FBAR.

    Further, we re-affirm our support for the Same Country Exception, an
    exemption for Americans abroad from FATCA reporting of the financial
    accounts in the country where they live and pay tax. We believe these
    financial account reporting reforms fit into the proposed provisions of
    the American Jobs Plan/Made In America Tax Plan and we want to work
    with Congress on language to implement them.

    AMERICANS ABROAD ARE NOT ``FAT CATS''

    Democrats Abroad wants desperately to vanquish the persistent
    stereotype that American civilians living abroad are wealthy ``fat
    cats'' avoiding U.S. taxes. The vast majority of us are ordinary
    working-class Americans, about whom our research has found:\4\
    ---------------------------------------------------------------------------
        \4\ ``Tax Filing From Abroad: 2019 Research on Non-Resident
    Americans and U.S. taxation,'' Bit.ly/FilingFromAbroad.

          61% had household income less than $100,000;
          72% were married, 71% of whom to non-U.S. spouses;
          63% owned their own home;
          32% had moved abroad for marriage or a relationship;
          25% had left the U.S. for work/employment;
          64% had made their home abroad and had no plan to return to the
    U.S.; and
          Most live in countries with a higher overall tax-burden than the
    U.S.

    Americans abroad winced at the joke made toward the end of the
    ``Closing the Tax Gap'' hearing that lamented the inability to put a
    ``t'' on the end of FATCA to draw better attention to the ``FATCATS''
    the law has in its crosshairs. We hope that the Subcommittee members
    take into account this data and the statistics and comments that follow
    when they think about FATCA and those Americans abroad who bear its
    impact.

     AMERICANS ABROAD DENIED ACCESS TO EVEN ORDINARY FINANCIAL PRODUCTS AND
                        SERVICES

    In implementing FATCA compliance frameworks, some foreign banks and
    financial institutions have elected to curtail their product offerings
    to U.S. citizens.

          36% of Americans abroad have been refused products or services
    from a foreign bank or financial institution;
          11% have had accounts in a foreign bank or financial institution
    closed;
          10% have been denied a mortgage from a foreign bank or financial
    institution because of U.S. citizenship; and
          30% have been denied access to investment or retirement savings
    vehicles from a foreign bank or financial institution.\5\
    ---------------------------------------------------------------------------
        \5\ ``Tax Filing From Abroad: 2019 Research on Non-Resident
    Americans and U.S. taxation,'' Bit.ly/FilingFromAbroad.

    Research published in 2014 indicated that one in six Americans abroad
    has been denied access to financial services because of FATCA. By 2019
    that figure had grown to more than one in three. Americans abroad
    endure on-going difficulty in obtaining even ordinary financial
    products and services, which gravely impacts their ability to save for
    ---------------------------------------------------------------------------
    the future.

    ``FATCA has resulted in 6 banks closing my accounts completely or
    refusing to maintain investment accounts. I had accounts in these banks
    for 25-40 years.''
    --New Jersey voter living in Germany.

    ``FATCA has made my life a lot harder. I've been denied the opportunity
    to open accounts with financial institutions in my country of
    jurisdiction. I've been evicted as a client from other banks, because
    they don't want to deal with U.S. compliance.''--Washington, DC voter
    living abroad.

    ``My banking options were reduced to one, as all other banks contacted
    would not accept U.S. citizens. Many investment options are also not
    available due to U.S. citizenship. Not allowed to invest here or in the
    U.S.A.''--Montana voter living in Austria.\6\
    ---------------------------------------------------------------------------
        \6\ ``Tax Filing From Abroad: 2019 Research on Non-Resident
    Americans and U.S. taxation,'' Bit.ly/FilingFromAbroad.

    ``I was shocked by the closure of two of my local bank accounts,
    especially as the large bank in question (Deutsche Bank) did not even
    explain correctly why it had to close those accounts--they basically
    made up nonsensical reasons (unfounded under the law) and clearly got
    ---------------------------------------------------------------------------
    FATCA wrong.''--Washington, DC voter living in Belgium.

    ``I don't blame German banks for denying me certain services because of
    FATCA--at the same time, most American banks deny me services because I
    do not reside in the U.S. Stuck between a rock and a hard place, it
    feels like my own country is punishing me for living abroad.''--
    California voter living in Germany.\7\
    ---------------------------------------------------------------------------
        \7\ ``Stories of FATCA: Affecting Everyday Americans Every Day,''
    October 2014, Bit.ly/FATCAStories2014.

    ``My bank of 17 years, Barclays, will only allow me to have checking
    accounts and savings accounts that pay simple interest (.01%). I am
    subject to onerous paperwork. I am being treated like a criminal and I
    have never done anything wrong.''
    --New York voter living in the United Kingdom.\8\
    ---------------------------------------------------------------------------
        \8\ ``Stories of FATCA: Affecting Everyday Americans Every Day,''
    October 2014, Bit.ly/FATCAStories2014.

    ``I am unable to access the majority of ``normal'' investment products
    for basic college or retirement savings in either the UK or the U.S.
    due to my U.S. citizenship. This will have an even greater impact on my
    children, who will be unable to live normal lives from a tax/savings
    point of view as dual US/UK citizens living abroad.''--Maryland voter
    living in the United Kingdom.\9\
    ---------------------------------------------------------------------------
        \9\ ``Can We Please Stop Paying Twice? Reforming the Tax Code for
    Americans Abroad,'' October 2017, Bit.ly/CanWePleaseStopPayingTwice.
    ---------------------------------------------------------------------------

     AMERICANS ABROAD SUFFER RELATIONSHIP STRESS WITH NON-U.S. SPOUSES

    Research published in 2019 found that nearly one in five Americans
    abroad had been removed from a joint financial account held with a
    domestic spouse/partner, up from one in eight in 2014.\10\
    ---------------------------------------------------------------------------
        \10\ ''Tax Filing From Abroad: 2019 Research on Non-Resident
    Americans and U.S. taxation,'' Bit.ly/FilingFromAbroad and ``Stories of
    FATCA: Affecting Everyday Americans Every Day,'' October 2014, Bit.ly/
    FATCAResearch2014.

          19% have been removed from an account with their non-U.S.
    spouse/partner;
          4% report that their non-U.S. spouse/partner would like to
    divorce/separate due to U.S. foreign financial account disclosure
    requirements;
          9% have been denied an account in a foreign financial
    institution for a U.S. citizen child;
          5% have been denied trustee or power of attorney abroad; and
          7% have been denied or lost position in a non-commercial
    organization requiring foreign bank-signature authority.\11\
    ---------------------------------------------------------------------------
        \11\ ''Tax Filing From Abroad: 2019 Research on Non-Resident
    Americans and U.S. taxation,'' Bit.ly/FilingFromAbroad.

    The strain FATCA has placed on the relationships of Americans abroad
    with their non-U.S. partners is certainly underreported as well.
    Individuals denied joint ownership of financial accounts and other
    assets sacrifice consequential financial support and control. They
    become dependent on their non-U.S. spouses, which brings financial and
    ---------------------------------------------------------------------------
    even physical risk.

    ``My husband refuses to share a main savings account with me now, which
    puts me at a disadvantage in the event that something should happen to
    me, as I would have no legal access to that account. It has put great
    stress on my marriage.''--Iowa voter living in Germany.

    ``I fear that because of FATCA I will lose all means of independent
    access to funds and, if something happens to my husband, I won't be
    able to access our household accounts because my name is not included
    on the accounts. FATCA is driving us to keep large amounts of money at
    home, which is not a safe option in most countries.''--American voter
    living in Vietnam.

    ``My non-U.S. husband does not understand how it can be possible that I
    am obliged to send his personal financial information to a foreign
    government. Therefore, we have taken my name off our accounts. After 30
    years of marriage, I no longer have free access to our money. I am not
    surewhat situation I would be in if he were to pass away suddenly.''--
    American voter living in Italy.\12\
    ---------------------------------------------------------------------------
        \12\ ``Stories of FATCA: Affecting Everyday Americans Every Day,''
    October 2014, Bit.ly/FATCAStories2014.

    ``The FATCA, FBAR, and PFIC requirements are having a material negative
    impact on me and my family and are just so unfair. I can understand why
    the U.S. wants to suppress tax avoidance, but the legislative framework
    has delivered a blunt instrument that treats the wealthiest and poorest
    alike as far as reporting requirements are concerned. The results are
    absurd, costly, and unimaginably stressful.''
    --California voter living in New Zealand.\13\
    ---------------------------------------------------------------------------
        \13\ ''Tax Filing From Abroad: 2019 Research on Non-Resident
    Americans and U.S. taxation,'' Bit.ly/FilingFromAbroad.
    ---------------------------------------------------------------------------

    AMERICANS ABROAD ARE DENIED OPPORTUNITIES

    Americans whose role or position depends upon them having signature
    authority over foreign bank accounts will have FATCA reporting issues
    even if they are not the beneficiary of the account nor a shareholder
    in the business.

          3% of Americans abroad have been denied employment positions
    requiring signature authority on business accounts in a foreign bank;
          7% have been refused participation in business and partnership
    opportunities; and
          4% have been asked by their employer to surrender signature
    authority over business accounts in a foreign bank.\14\
    ---------------------------------------------------------------------------
        \14\ ``Tax Filing From Abroad: 2019 Research on Non-Resident
    Americans and U.S. taxation,'' Bit.ly/FilingFromAbroad.

    Americans abroad report being deemed ineligible for these roles, are
    ---------------------------------------------------------------------------
    unable to advance in their profession or to start their own business.

    ``I (was) told due to reporting/signing requirements a U.S. citizen
    could not be offered the Job.''--Delaware voter living in Austria.

    ``I was told they did not want an `American person.' Too costly,
    complicated, and dangerous, they said.''--American living abroad.\15\
    ---------------------------------------------------------------------------
        \15\ ``Stories of FATCA: Affecting Everyday Americans Every Day''
    October 2014, Bit.ly/FATCAStories2014.

    ``The legislation was cited by the prospective employer who indicated
    that they would only engage me if I accepted cash payments. I figured
    this was a sure fire way to get arrested and dragged into an expensive
    legal proceeding that would only result in my paying out even more
    money, so I declined the position at the local university.''--American
    ---------------------------------------------------------------------------
    living in Thailand.

    ``Americans abroad should be huge advocates for America and American
    businesses. Instead, the U.S. government makes it difficult to save for
    retirement, puts on onerous reporting requirements that mean that most
    foreign (and in some cases U.S.) entities won't hire you if signature
    authority is required. I know of at least one large U.S. tech firm that
    has simply stopped hiring Americans abroad--too difficult and expensive
    for the company and the employee. I'm watching two friends try to
    figure out how to comply with the GILTI tax without completely
    destroying their small business. How is any of that good for American
    business or employment of Americans?''--Texas voter living in
    Australia.\16\
    ---------------------------------------------------------------------------
        \16\ ``Tax Filing From Abroad: 2019 Research on Non-Resident
    Americans and U.S. taxation,'' Bit.ly/FilingFromAbroad.
    ---------------------------------------------------------------------------

    MAKING THE CASE FOR REFORMS TO FBAR AND FATCA

    Court cases involving FBAR violations are not rare. The foreign
    financial account reporting requirement is clearly instrumental in the
    apprehension of tax evaders using offshore financial accounts to hide
    assessable income. The perpetrators, however, are invariably citizens
    living inside the U.S. rather than abroad.\17\
    ---------------------------------------------------------------------------
        \17\ https://www.cbo.gov/sites/default/files/114th-congress-2015-
    2016/workingpaper/52199-wp-taxcompliance.pdf.

    Rules guiding the implementation of FBAR have not been adjusted since
    the law was passed in 1970. Reasonable updates can both improve the
    report's focus on bad actors and simplify compliance for Americans
    abroad.

    PROPOSAL: We propose the following reforms to the FBAR

        1.  Index the $10,000 reporting threshold for inflation;
        2.  Create a separate reporting threshold for Americans living
    abroad, perhaps 5 times higher;
        3.  Address the duplication of reporting on FBAR and FATCA, as
    recommended by the IRS National Taxpayer Advocate;
        4.  Modify the out-of-proportion penalties for non-willful failure
    to disclose accounts;
        5.  Restore the option to submit FBAR paper filings; and
        6.  Provide for FBAR reporting in Spanish and other languages.

    Further, we re-affirm our long-standing support for the Overseas
    Americans Financial Access Act which would exempt from FATCA reporting
    the foreign financial accounts of Americans abroad in the countries
    where they live and face taxation because tax cheats do not hide
    assessable income in the countries where they live. Further, the
    Corporate Transparency Act adds a powerful new tool for discouraging
    and apprehending tax cheats. As the law mandating disclosure of
    beneficial interests in anonymous shell companies is implemented,
    reports will illuminate the activities of the tax cheats and other bad
    actors that foreign financial account disclosure did not.

    Consistent with President Biden's vision in the American Families Plan,
    these reforms would help ensure that all Americans have access to
    essential banking services and the financial infrastructure necessary
    live a normal life abroad. They can be modified to exempt certain
    individuals from eligibility and ensure they enhance existing tax-
    enforcement mechanisms. They will focus policy on bad actors, and
    provide relief to those who have long suffered unintended adverse
    consequences, such as bank lock-outs. Finally, these FBAR and FATCA
    reform recommendations are entirely consistent with the goal of getting
    everyone to pay their fair share.

    CONCLUSION

    Democrats Abroad understands that non-resident Americans are bystanders
    in an on-going war against tax cheats and other malign actors who abuse
    foreign financial accounts, anonymous shell companies, and tax-secrecy
    jurisdictions. We know that those seeking to hide assessable income
    from the IRS, or crimes from law enforcement, engage legions of clever
    lawyers, bankers, accountants, and formation agents to collaborate on
    the development of ever-more-complex illicit schemes.

    But Americans abroad also need government officials to understand our
    experience of anti-abuse laws, so that they can strike a better balance
    in policy-making between, on the one hand, discouraging and
    apprehending financial criminals--which we strongly support--and, on
    the other hand, caring for the welfare of ordinary Americans living
    abroad.

    In this submission we have demonstrated how the household accounts,
    retirement savings, family harmony and personal security of Americans
    abroad have been gravely impacted by FATCA. As we noted in the title of
    a research report we published in 2014, FATCA affects everyday
    Americans every day.\18\ Can you imagine the reaction of Americans
    abroad when they heard Treasury Inspector General for Tax
    Administration J. Russell George testify that the IRS has STILL ``taken
    virtually no compliance action to meaningfully enforce FATCA''?\19\
    ---------------------------------------------------------------------------
        \18\ ``FATCA: Affecting Everyday Americans Every Day,'' October
    2014, bit.ly/FATCAResearch2014.
        \19\ The IRS, after doing an enormous amount of work with countries
    around the world to get FATCA off the ground, still lacks the ability
    to match up the information it receives from banks with the information
    it receives from taxpayers; https://www.finance.senate.gov/hearings/
    closing-the-tax-gap-lost-revenue-from-noncompliance-and-the-role-of-
    offshore-tax-evasion.

    Ordinary law-abiding Americans abroad, the unintended objects of FATCA,
    have suffered an extraordinary amount of personal and financial
    disruption, anxiety and duress, and yet, after ten years, the IRS has
    still not begun to use FATCA reports to identify and apprehend genuine
    lawbreakers. This is a disturbing injustice, and we strongly urge the
    Subcommittee to review our research, the testimonials of your
    constituents abroad, and the abundant scholarly material indicating the
    ---------------------------------------------------------------------------
    ways that Congress can provide relief to law-abiding Americans abroad.

    Former National Taxpayer Advocate Nina Olsen made this comment during
    the hearing: ``The IRS needs transformational change, change that must
    occur in the context of minimizing undue taxpayer burden and protecting
    taxpayer rights.''\20\
    ---------------------------------------------------------------------------
        \20\ https://www.finance.senate.gov/hearings/closing-the-tax-gap-
    lost-revenue-from-noncompliance-and-the-role-of-offshore-tax-evasion.

    We agree. We support enhanced funding for the IRS, which we ask to
    include funding to address the serious deficiencies in IRS service and
    support to Americans abroad trying to comply with their filing and
    ---------------------------------------------------------------------------
    reporting responsibilities.

    For many years the IRS has provided little to no advice about tax-
    filing obligations to non-resident citizens. Ignorance, misinformation,
    and confusion abound, even among consulate and embassy staff. In recent
    years, the IRS has withdrawn staff from international postings and
    replaced them with telephone and online support that vastly
    underestimates how inordinately difficult it is to file taxes from
    abroad. FreeFile programs are not suited to non-resident filers, and
    free support from volunteer tax-return preparers available to aged and
    indigent taxpayers in the U.S. is not accessible to those living
    abroad. These are all matters that should be addressed with the new IRS
    funding proposed by President Biden.

    Thank you for the opportunity to comment and provide recommendations.
    Not since the Carter Administration has there been a hearing in the
    U.S. Congress on Americans living abroad and the range of serious
    personal and financial problems U.S. taxation causes for them, their
    families, their businesses, and the U.S. and non-U.S. entities with
    which they do business. We re-state our belief that it is past time
    that the issues of Americans abroad be heard, documented in the public
    record, and addressed by the government.

    Thank you for your interest in these matters. Please contact Carmelan
    Polce of our Taxation Task Force (+61 404 767 088 or
    carmelan@democratsabroad.org) or the undersigned with any questions
    about the information and recommendations provided herein.

    Sincerely,

    Candice Kerestan
    International Chair

                                     ______

                       Letter Submitted by Darcey Gillie
    I am the child of a manual worker and a store cashier, leaving America
    over 20 years ago to study in the UK. I fell in love, married and have
    made my home here ever since with my spouse. My career here in the UK
    been devoted to helping people as a university teacher, secondary
    school teacher, and as a guidance counsellor; I volunteer in
    conservation and social care. I am living the American dream made
    available to me through Pell Grants and Sallie Mae loans. Before I even
    knew about my IRS compliance obligations, I paid off (in fact, I
    believe I over paid by 17 dollars) the student loans I incurred to pay
    for my UK studies. As soon as I discovered my tax compliance
    obligations (no one tells you), I immediately (at eyewatering expense
    for a guidance counseller) engaged a tax professional to help me
    through the streamlined filing process to ``get compliant.''

    The Americans I know of abroad are university workers, hospice
    administrators, stay at home moms, English teachers, law enforcement
    officers, and health care professionals. We are not the super wealthy.
    We may be comfortable, we may be struggling--we all need to think about
    the next paycheck and what the future holds. We are also the people
    most likely to follow the rules. The super rich have the money,
    connections, time and resources to continue to avoid tax compliance. I
    don't even have the time or energy to iron my clothes or make dinner
    beyond a sandwich some days.

    I am a dual national living in my country of second citizenship, with
    my spouse. It doesn't make me less American or somehow a ``bad''
    American, which is how laws like FATCA and the ways in which American
    emigrants are talked about make me feel. I have never met an American
    or anyone else who, upon my explanation of the tax situation of
    Americans abroad who say it's a good thing. All of the m are appalled
    and immediately see the unfairness of it. Many non-Americans ask my why
    I don't renounce. Frankly, I'd rather cut my right arm off. I was born
    and American, and I shall leave this earthly world an American. Being
    American is the source of the characteristics and attributes people
    value in me the most. In my over 20 years living in the UK, I have been
    ambassador for American ideals and values.

    In the United States we are nurtured to believe ourselves part of a
    tradition of justice, equality, opportunity, fairness--and as such a
    beacon to the world in all these things and more. Our foundations as a
    nation rest on the humane and compassionate ideals of the American
    Enlightenment:

            We hold these truths to be self-evident, that all men are
            created equal, that they are endowed, by their Creator, with
            certain unalienable Rights, that among these are Life, Liberty,
            and the pursuit of Happiness.

    Laws are conceived and established by governments to promote the
    security, prosperity, and well-being of a nation and its people. In the
    United States of America, since 1776 we--the people and our
    Government--have agreed that citizenry are endowed with the unalienable
    rights of Life, Liberty, and the Pursuit of Happiness.

    It is with great regret, then, that I find myself writing this letter
    because the United States of America, through FATCA and its
    citizenship-based taxation regime, has abandoned me, betrayed my trust
    and loyalty, and denied my me unalienable rights to Life, Liberty, and
    the Pursuit of Happiness.

    The United States of America was founded by men and women who could no
    longer tolerate the oppression and overreach of a British government
    hungry for revenue. Punitive taxes prohibited healthy business,
    innovation, growth--and for many people, simple survival. Despite the
    lessons taught to us by the founding of our own nation, it is strange
    to find ourselves here in 2021, where American citizens abroad--making
    new lives for themselves, on distant shores, are being subject to the
    same intolerable intrusions, demands, and punishments as our ancestors.

    Many submissions to this hearing will make highly technical legal
    arguments. And I am grateful to the knowledge and expertise of the men
    and women who can do this. I am a university guidance counsellor. I
    make no pretense to understanding the most complex tax code in the
    world. My representation for myself and the estimated 9 millions
    Americans abroad is historical, moral, and ethical--and deeply
    personal. Laws should never be conceived that--intentionally or
    otherwise--harm individuals' fundamental rights. FATCA and the tax code
    that applies to Americans residing abroads harms us in diverse ways,
    depending on circumstances and where we live. There is even no equity
    within an already unequitable situation.

    Sadly, because we are diaspora, because there are no votes to be
    garnered from supporting us; because of a persistent erroneous belief
    we are all ``GILTI'' ``FATCATs'' with Swiss bank accounts--no one in
    the United States Government cares about us and no one is moved to help
    alleviate the deliberate harm being caused to us. We are the collateral
    damage of well intended but poorly conceived legislation. Laws must
    work for all citizens or they work for none. FATCA sets a terrible
    precedent for the rights of every United States citizen--paving the way
    for intolerable intrusions into privacy and oppressive monitoring not
    subject to normal legal safeguards such as probably cause and warrants.
    Our founding fathers would be appalled at the road the United States
    Government taken with FATCA, and citizenship-based taxation.

    Representative Neal once said that he did ``not accept'' that FATCA is
    a ``burden''. I am sure if Representative Neal found himself considered
    a criminal by virtue of having a ``foreign'' bank account he would only
    find it a burden, he would find it an intolerable injustice:

        1.  Reporting to FinCEN is an enormous psychological burden. In no
    other situation are American citizens presumed to be guilty by virtue
    of certain characteristics (i.e., a ``foreign'' bank account). This is
    an utter betrayal of U.S. citizens by the U.S. Government. It causes me
    weeks of psychological stress and anxiety every year.

         Query: How would you feel if you were considered a criminal by
    virtue of where you lived, and on no other basis?

        2.  I have been refused accounts by banks, prohibited from
    investing in local green energy schemes, and discouraged from board
    membership of charities.

        3.  It is a time burden to check my accounts--up to 8 hours to
    check and recheck the data, plus enter it into the FinCEN site.

        4.  I choose to do my own FBARS because my affairs are fairly
    simple--for others it can add hundreds or thousands in compliances
    costs to engage a tax professional to do this. I accept the near
    constant stress and worry about excessive fines for mistakes because I
    can't afford to add to what I already pay my accountant to ensure my
    IRS compliance.

        5.  My bank account is NOT foreign or abroad. I do not live ``off-
    shore.'' I reside permanently in the UK. It is my local bank. I
    generally spend a maximum of 21 days a year in the U.S.

        6.  Being happily married, I share a bank account with my UK
    spouse. FATCA means that his data--that of a citizen completely foreign
    to the US, who has never lived or worked there--is being shared with a
    foreign government and he is subject to the laws of a foreign country.

         Query: Would any of you be happy putting your most sensitive
    information in the hands of a foreign government, as my spouse is
    forced to?

        7.  Others I am sure will provide more detailed on nuanced
    discussion of data protection. Suffice to say, given the recent
    Treasury data breach, I do not feel satisfied that my most sensitive
    financial data is currently in good hands via FATCA.

         Queries: Can you absolutely 100% guarantee the safety of my
    personal data? What compensation or support will I receive if I become
    a victim of a data breach caused by FATCA?

        8.  FATCA has prevented me from setting up a small charitable
    foundation with my spouse to support first generation university
    students (like I was) with small grants (100-200) towards
    their university education. I don't have the time, money, energy or
    know-how to tackle compliance with U.S. laws. It distresses me that I
    am prevented from paying forward the same support to young people in
    small scholarships that helped me at that age.

    In every way, FATCA undermines and denies hard working Americans (who
    happen to live abroad) their rights to life, liberty, and the pursuit
    of happiness. I have been deeply affected by the stories of Tina, the
    Canadian woman (but also ``U.S. Person'') who late in life discovered
    her obligations as an accidental American. Can we all stop to imagine
    and empathise for a moment how the realisation of compliance and its
    costs must have felt? Can you feel thee tight knot of fear she felt
    when realising that FATCA would cost Tina her modest savings and
    support for retirement? How can members of Congress be happy and
    content with this sort of suffering? Let's remember in this Easter
    season: ``What you do to the least of my people, you do to me.''

    The story of Ronald Aries has also touched me. Can you imagine working
    hard, as a highly trained professional on whom the safety and lives of
    others depends, get to a well-deserved retirement and find yourself on
    the precipice of losing everything? Read this--and imagine yourself as
    Ronald Aries. You get a letter from your bank closing your account,
    refusing your mortgage on the house you were buying for your old age,
    plus 10s, if not 100s of thousands of dollars in compliance costs and
    fines. What is happening to Ronald Aries is not moral, it is not just.
    In every way it abandons the humane ideals of the American nation.

    I am delighted to pay taxes. In the UK, we have a fairly simple,
    straightforward system and I barely have to think about it. On the rare
    occasion in the past 20 years when there has been an error--mine or
    HMRC's--I ring them up, we settle the matter--there are no punishments
    or penalties for making a mistake. I either increase my monthly
    contributions or decrease depending where the error lies. My taxes
    ensure that children are educated, we have law enforcement, fire
    services, clean streets, disability support, a safety net for those who
    have lost their jobs, good roads, universal health care free at the
    point of delivery, and so much more. Every year, all UK citizens
    receive a statement informing them of how their tax money is spent.

    No one disagrees with the intention of American lawmakers to hold large
    companies or resident Americans ``off-shoring'' vast wealth accountable
    for tax contributions. The U.S. Government might find it more effective
    to start at the other end of the process--changing hearts and minds
    about taxes--making them something people want to contribute to rather
    than avoid. As a constructive suggestion in all of this, what about
    periodic (3-4 times a year) televised updates of how federal tax
    dollars are being spent nationally and locally to support and improve
    people's lives? Inspire people instead of alienating and frightening
    them. Make tax avoidance as socially unacceptable as smoking in a
    restaurant or drink driving.

    If the United States Government wants to create a fairer society, it
    needs to start by setting the example. FATCA is a law of anger,
    vengeance, fear, and punishment. It is a microcosm of the whole
    legislative philosophy of the United States Government at the moment.
    Bring back inspiration, aspiration, hope, compassion, and our
    unalienable rights to the process--and America will flourish.

    As second constructive suggestion, I urge the United States Government
    to explore (and implement) progressive forms of taxation that enable
    some of the ambitious changes we need and have proposed for society:
    e.g., sugar taxes, fossil fuel taxes, higher sales taxes, land taxes,
    etc. Here in the UK, besides paying some of the highest income tax in
    the world, I pay 20% valued added (sales) tax on almost all goods and
    services, car tax (higher for more polluting vehicles), and also pay
    council tax to cover local infrastructure, social, welfare investment
    and other services.

    All countries in the world (excepting Eritirea, of course) demonstrate
    that it is possible to fund their governments (some such as Denmark,
    the Netherlands and Sweden, quite generously) without harassing their
    overseas private citizens. Other nations who have tried citizenship-
    based taxation (e.g., Mexico, Romania) gave it up, or limit it to a few
    years after someone emigrates.

    Queries: Why is the United States of America different? Why do you have
    to be so unjust to us? Why do you hate us? We are a tremendous source
    of free soft power all over the world. Instead of cultivating and
    supporting us, you punish us--over and over.

    There isn't even equity in your punishment of us--it depends entirely
    on the nature of the tax treaty the United States has with the country
    we live in--if indeed there is one. I am aware that I enjoy the
    advantages of the tax treaty between the U.S. and the UK, whilst my
    fellow citizens living in Mozambique, Jordan, Singapore or Afghanistan
    do not. People are prevented from saving adequately for their
    retirement due to laws around PFIC (which I don't understand, and so
    avoid anything other than a standard savings account in a bank), and
    are subject to double and even triple taxation--no doubt putting higher
    social care burdens on the country where they live. Women are already
    at a disadvantage globally in terms of retirement income. FATCA and
    citizenship based taxation reinforces and deepens this disadvantage.

    Query: As a middle aged, middle income woman--how would you, under
    current laws, recommend that I save adequately, responsibly, and
    without penalty for my retirement in the UK?

    Whilst I can understand that updating the tax code to reflect the 21st
    century needs and interests of American citizens abroad will be time
    consuming, ``Simple Regulatory Fix for Citizenship Taxation''
    (Richardson, Snyder, and Alpert (2020), 169 Tax Notes Federal 275,
    available at SSRN: https://ssrn.com/abstract=3725506), easily and
    fairly solves problems for everyone. It will enable the IRS to refocus
    efforts on tax avoiders, rather than spending time and money on America
    citizens who are tax resident (and compliant) in their country of
    residence.

    I am over halfway through my life, if I can trust the actuarial tables.
    Things I should be worrying about:

          My mother's (who lives 3,000 miles away) advancing dementia.
          Her recent stroke.
          Her recovery from bowel cancer.
          The fact that she cares for my 101 year-old grandmother--who
    lives 6 hours from my parents.
          My sister who is caring for my mother, my 80 year-old father,
    and (in reality) my 101 year-old grandmother.
          My preventive chemotherapy for breast cancer and maintaining
    good health.
          As a childless woman, making adequate preparations for my own
    old age.

    Things I should not be worrying about:

          Complying with burdensome, amoral, intrusive laws that have no
    positive benefits for society or individuals.
          The excessive penalties should I make a mistake.

    Thank you for taking the time to organise this hearing, to read and
    listen to all of the evidence, including mine. I hope that on hearing
    our stories, engaging with our suggestions, and on the balance of
    evidence you will be able to work with us to find a solution the
    restores our rights and freedoms as American citizens. At the very
    least, please find it in your heart to have a little mercy on us--and
    recognise we are not the source of the Tax Gap.

    Yours sincerely,

    Darcey Gillie

                                     ______

                       Letter Submitted by Donna Hartford
        Greetings to members of the U.S. Senate Subcommittee on Finance,

        I am writing in support of the recommendations by the Democrats
    Abroad Taxation Task Force, regarding the April 26 hearing on funding
    the American Jobs Plan and the American Family Plan, and the
    Subcommittee on Taxation and IRS Oversight, May 11, 2021. Specifically,
    the committee proposes reforms to ``ease the tax and tax filing burden
    placed on Americans living abroad.'' This submission from May 7, 2021
    is accurate in identifying Americans like myself living abroad:

            The vast majority of us are middle-class Americans, working,
            raising families, and retiring in countries with a higher
            overall tax-burden than the U.S.--Creating Opportunity Through
            a Fairer Tax System--Comments and Recommendations in Support of
            Americans Abroad

        I was working as a social worker in Chicago over 25 years ago, when
    a chance meeting with a Canadian on a business trip changed my life. I
    have lived in the Vancouver, BC area since we married, 2 years after
    meeting. I first became a Permanent Resident and a step-mom, later a
    grandmother and Dual Citizen of Canada and the U.S.

        I have worked for my husband's office supply company for over 20
    years. He had started working for others, then slowly built his own
    small business from scratch. We enjoy a comfortable life, but not one
    of luxury. We were able to buy a modest home in a quiet village 15
    years ago, my first time as a homeowner. Our grown daughter and her
    fiance' live with us. My step-children work in the family business and
    we employ several other people as well: people who depend on their jobs
    to support their families. However, without reform of current U.S. tax
    policies, our home, our business, our retirement and financial security
    (especially mine, individually), will be in jeopardy.

        We file Canadian and U.S. taxes as well as FBAR requirements
    through our accountant. We file on time and pay any taxes owing on
    time. It costs me approximately $400-$500 a year for the accountant to
    prepare my tax return and FBAR. My income is below $40,000 U.S., and
    our joint income is less than $100,000 U.S. I do not own shares in the
    family business. As we approach retirement most of our income will come
    from modest retirement savings in registered retirement accounts that
    we have worked hard to save over the years, and the equity in our home.

        When we bought our home 15 years ago we could have put it in my
    husband's name only. The down payment came from the house he owed that
    we sold to buy this one. We felt that as a couple who live together,
    raise a family together, and run a small business together owing a home
    together would be the right thing to do for our relationship. When we
    purchased the home, prices were expensive in Vancouver, compared to
    other cities, but it was under $500,000. We were not aware at the time
    that I would be responsible for capital gains on the sale of the home
    in the future. We have renovated the home to make it comfortable for us
    and my step daughter and fiance but it is still a modest home. As
    prices have risen in our area I am now in a position where I may have
    to pay capital gains on my portion of the home when we sell to support
    our retirement. As mortgage interest is not deductible in Canada, I am
    not able to deduct this amount, yet may have to pay a capital gains tax
    that is not charged on principal residences in Canada. This has caused
    my husband and I a huge amount of anxiety and put some strain on our
    relationship. I understand if the current policies are not amended or
    abolished, the I.R.S. would expect us to pay taxes in excess of $40,000
    on the sale of our home as it is currently valued. Not only is this
    unfair, but impossible, which means ineffective.

        We are people who file our taxes, pay our taxes, employ others, do
    not hide any assets that we have and contribute to our community. The
    U.S. is the only country in the world that does not follow a resident
    based tax system. I feel as though I am being punished for being a U.S.
    citizen living in a foreign country. Canada is The United States
    closest Neighbor, ally, and friend; the two counties have tax and trade
    treaties that cover many issues. It seems to me that treating average
    middle class citizens fairly should be at the top of the priority list
    not the bottom simply because we don't have a powerful lobby group or
    much political clout.

        I voted for President Biden, knowing the unfair tax-filing and
    invasion of privacy for Americans living abroad would remain until
    Congress heard from enough average citizens who will be deeply hurt if
    these policies are not abolished or revised. The so-called wealthy,
    tax-avoiding ``fat cats'' are a separate entity from working people
    like myself, and we should be treated accordingly.

        I urge President Biden, and congress to remove the fear and
    uncertainty that many of us living abroad are feeling. I have been and
    am a loyal U.S. citizen. The United States was founded on the values of
    equality for all and no taxation without representation. Our
    international reputation has also been built on these values.

        As a U.S. citizen living abroad, I feel as though the tax system is
    punishing me rather than treating me as an equal.

        Please do the right thing and amend this unjust law.

        Respectfully submitted,

        Donna Hartford

                                     ______

                    Independent Community Bankers of America

                           1615 L St., NW, Suite 900

                             Washington, D.C. 20036

                             www.icba.org/advocacy

    The Independent Community Bankers of America, representing community
    banks across the nation with nearly 50,000 locations, appreciates the
    opportunity to provide this statement for the record for today's
    hearing titled: ``Closing the Tax Gap: Lost Revenue from Noncompliance
    and the Role of Offshore Tax Evasion.''

    ICBA is supportive of effective and balanced measures to increase
    revenue through improved compliance, including increased funding for
    targeted IRS audits. However, we strongly oppose the Administration's
    proposal to require increased bank reporting because of the costly,
    error-prone burden it would place on community banks in exchange for a
    highly uncertain benefit. We urge Congress to pursue other means of
    improving tax compliance.

     Community Banks Already Responsible for Significant Reporting on
                        Accounts and Transactions to the IRS and to
                        Treasury

    While full details are not yet available, the Administration's American
    Families Plan includes a proposal that would require financial
    institutions to report information on financial account flows. The
    White House believes that this and other compliance proposals would
    increase tax revenues by $800 billion over a period of 10 years.

    ICBA strongly objects to this proposal for the following reasons:

          It would create a costly and complex new reporting burden for
    community banks that already carry significant data collection and
    reporting obligations for the federal government, effectively acting as
    uncompensated agents of the government. These obligations include
    reporting to the IRS through the furnishing of Forms 1099 and 1098 to
    support tax compliance. More significantly, banks are subject to
    extremely burdensome reporting under the Bank Secrecy Act to detect tax
    evasion, money laundering, and expose shell companies used for
    terrorist financing and other crimes. Specifically, banks must file a
    currency transaction report (CTR) for every deposit or withdrawal of
    more than $10,000, a threshold that has not increased since the 1970s,
    as well as suspicious activity reports (SARs). Banks dedicate
    significant resources to BSA reporting and report millions of
    transactions to the Financial Crimes Enforcement Network (FinCEN). More
    recently, banks are required to collect and report beneficial ownership
    information on commercial accounts under the new customer due diligence
    rule. The government increasingly turns to the banking system to act as
    police for a variety of criminal, or fully legal but controversial,
    conduct. Burdening community banks comes at a cost: It diverts
    resources and management from their core function of providing credit
    and other banking services to individuals, families, small businesses,
    and other entities that make up communities.
          The Administration proposal would expose banks penalties for
    inadvertent errors. The IRS will try to reconcile millions of pieces of
    information reported by banks with information provided by individuals.
    Mismatches will trigger audits. But there are numerous sources of
    mismatched information. Accounts are opened and closed throughout the
    year, and account ownership changes as couples marry and divorce and
    individuals are added and removed from accounts. These factors will
    reduce the value of the reported information, create mismatches, and
    trigger audits. Banks should not be placed in the middle of inevitable
    disputes between taxpayers and the IRS. Banks may be forced to freeze
    accounts or garnish income as disputes are addressed.
          The proposal would channel more personal taxpayer information
    into the IRS than the agency can realistically track and process. It is
    unreasonable to require banks to provide information at significant
    cost that cannot be effectively used.
          Estimates of the tax gap vary widely. There are serious grounds
    for skepticism of the Administration's claim that increased tax
    enforcement would raise tax collections by $700 billion. An analysis by
    the Congressional Budget Office found a much lower figure of $103
    billion. There is simply too much uncertainty to justify the creation
    of a significant new burden for community banks.
          Reporting to the level of granularity proposed by the
    Administration would infringe on account holders' privacy. Much of the
    data collected on cash flows would be irrelevant to an account holder's
    tax liability. The Administration's proposal would be the equivalent of
    sending all account holder's bank statements to the IRS.

    ICBA supports the Administration's proposal to increase the IRS's audit
    resources. Better trained auditors with more sophisticated technology
    at their disposal may well significantly increase tax collections
    without costly, burdensome, and intrusive new bank reporting
    requirements.

    Closing

    Thank you for convening today's hearing. Closing the tax gap can and
    should be an alternative to raising taxes on American individuals,
    families, and businesses. However, we ask you to reject enhanced bank
    reporting of customers' personal financial statements and information
    that are unrelated to their income tax returns. This is a risky and
    counterproductive proposal that would yield uncertain benefits at
    significant cost to institutions that are best focused on serving their
    communities' credit needs.

                                     ______

                    Letter Submitted by Nicholas Matthew Lee
    U.S. Senate
    Committee on Finance

    Dear Senators,

    Thank you for the opportunity to submit comments regarding the May 11th
    hearing on ``Closing the Tax Gap''--funding necessary spending on
    infrastructure through making the wealthy pay their fair share is a
    laudable goal.

    Unfortunately, I must express my deep concern that once again, the
    discourse in the Senate Finance Committee is one based on prejudices,
    assumptions, stereotypes, and a willful refusal to consider the
    realities of the policies that they are discussing.

    The Senate Finance Committee has been repeatedly informed in filings
    from a number of groups that have commissioned their own research into
    the demography of non-resident U.S. citizens, and they are unanimous in
    their findings--we are not rich. We are not fat cats. When examining
    gross incomes, we are overwhelmingly average. When looking at net
    incomes, we are average to below average.

    The statement by Senator Whitehouse about renaming FATCA to FATCA(T) is
    not just inappropriate--it's wrong. It ignores the realities of the
    harm that FATCA has inflicted on 9 million Americans that live
    overseas, and it ignores the reality that the harm is
    disproportionately inflicted on the working and middle class.

    In this statement, I will outline my response to the hearing and its
    relation to the Treasury's recently announced ``American Families Plan
    Tax Compliance Agenda.'' Much of this will rely on observations
    relating to the implementation of the Foreign Accounts Tax Compliance
    Act (FATCA), which has been a remarkable failure with respect to its
    inability to raise revenue, its lack of effectiveness in preventing the
    wealthy from avoiding taxes, and the collateral damage that it has
    inflicted on the middle class.

     U.S. Taxation of Individuals and the Extraterritorial Nature of FATCA

    To understand the harms of FATCA, it is first necessary to understand
    what makes it such a uniquely problematic piece of legislation.

    In short, the United States is the only developed country in the world
    that asserts a global right of taxation over non-residents in addition
    to its residents. Fundamentally, this underlies a view that the United
    States may freely impose its laws, regulations, and taxes in any
    foreign country, in violation of their own sovereignty.

    This mentality is reflected in the FATCA legislation. The U.S.
    establishes a definition of persons subject to special reporting
    definitions, they assert a right to impose on foreign institutions a
    penalty so draconian that it is viewed as a ``corporate death
    sentence'', and under threat of this penalty, they coerce foreign
    governments into signing Inter-Governmental Agreements (IGAs).

    Problems With Banking Access

    Because of the risk of sanctions from the U.S. and the unique reporting
    requirements that greatly differ from the global Common Reporting
    Standard (CRS), many Financial Institutions simply refuse to do
    business with U.S. Citizens seeking accounts in the same country they
    live in--we are neither worth the cost, nor the risk.

    The data regarding access issues is well-documented by research and
    Statements for the Record submitted over the past 10 years by:

          American Citizens Abroad
          Association of Americans Resident Overseas
          Democrats Abroad
          Republicans Overseas
          SEAT: Stop Extraterritorial American Taxation

    The impacts of FATCA on U.S. citizens vary significantly between
    countries and jurisdictions, but ultimately, between \1/3\ and \1/2\ of
    overseas Americans have been denied access to simple bank accounts.
    When considering retirement accounts, investment accounts, or
    mortgages, the proportion increases.

    Worth noting as well, Americans often have difficulty obtaining access
    to accounts that are actually exempted from institutional requirements
    under the FATCA IGAs.

    I personally have been denied a Dutch retirement account (Dutch Art.
    3.126a Wet Inkomstenbelasting 2001) that is exempted from institutional
    reporting. The account administrator noted that while the account is
    exempt from reporting, the are concerned that the account could become
    reportable if the IGA is amended, and that their risk and compliance
    department cannot justify the cost and risk of permitting U.S. Citizens
    resident in the Netherlands and complying with FATCA. They simply
    refuse us as customers instead.

     FATCA Harms the Working and Middle Class, not the Wealthy

    It is important to understand that these reporting requirements
    disproportionately harm the working and middle class--the wealthy have
    lawyers, tax consultants, and can meet the ``High Net Worth Client''
    tests that exempt them from the ever-present ``No Americans'' rule that
    many foreign financial institutions now have.

    Indeed, especially when we move beyond simple bank accounts towards
    investment accounts and retirement accounts, those are essential to the
    middle class. In the country I live in, bank accounts have negative
    interest rates, and it is assumed that any appreciable sum of money
    will be invested. Similarly, you are expected to make the maximum
    legally permissible retirement contributions--our 50% income tax rate
    all but requires it.

    By failing to respond to financial access issues raised going back as
    early as 2014, and especially in a 2017 House Oversight hearing,
    Congress perpetuates a harm that disproportionately affects the middle
    class.

    A billionaire does not need a retirement account whose contributions
    are capped around $5,500 per year. That is pocket change to them, and
    they would never evade taxes in such a regulated and monitored account.
    A working or middle class resident most definitely needs this if they
    are to have any hope of something more than a subsistence retirement.

    FATCA Harms Law-Abiding Americans, not Tax Cheats

    FATCA's draconian penalties for institutions relate to tolerating
    customers that are non-compliant on their U.S. tax obligations.
    Unfortunately, it's never been clearly defined for institutions what
    constitutes a violation, and what qualifies as due diligence.

    A common argument from banks here for rejecting U.S. citizens for
    accounts is that while we can prove our tax compliance now, they are
    concerned that we will open accounts as a tax-compliant Americans and
    later go delinquent--and they'll be the ones stuck with the biggest
    fines.

    Without adequate safe-harbor provisions and a delegation of enforcement
    to local courts, it is unlikely that this behavior will change.

    Discrimination is simply the most effective form of risk management.

    Congress Has Failed to Protect U.S. Citizens While Implementing FATCA

    In numerous venues dating all the way back to FATCA's original
    introduction, the concerns by Non-Resident U.S. Citizens, banks,
    foreign governments, and advocacy groups have been disregarded.

    While there could have been safe-harbor language included, or even
    language requiring non-discrimination under threat of penalties equal
    to enabling tax evasion, none of this has been added.

    In congressional discussions, the issues are often brushed away with
    ``we need more research'' or ``we need more official research.''

    It is 2021, and there is a wealth of data and research available. None
    of this is Congressional research, but this is because Congress has
    stubbornly and obstinately refused to discuss the issue or to
    commission research.

    The Commission on Americans Living Abroad Act of 2019 (H.R. 4363) would
    have conducted such research, but there has been no desire to advance
    it or similar legislation beyond committee--perhaps out of fear that it
    might force the House and Senate to confront uncomfortable truths about
    the corrosive effect of FATCA on U.S. citizenship.

    The corrosive effect is evident in the number of U.S. citizenship
    renunciations published in the federal register. Since the enactment of
    FATCA, there has been a steady and accelerating increase in the number
    of Americans forced to renounce citizenship--not for tax reasons, but
    because of pervasive discrimination against Americans.

     While Relentlessly Pursuing Delinquency on U.S. Taxes, the U.S.
                        Enables Foreign Tax Cheats

    Interestingly, while the United States demands total cooperation in
    enforcement from other countries, it has thus far failed to provide any
    meaningful assistance in preventing offshore tax evasion by non-U.S.-
    Persons seeking to hide their wealth in U.S. banks.

    Indeed, the FATCA IGAs are either non-reciprocal, or the reciprocal
    provisions have never been respected by the United States.

    Some of this is justified by members of the Senate as preventing
    illegal and unconstitutional breaches of privacy by allowing a U.S.
    account holder's data to be shared with a foreign government. Somehow
    though, these invasions of privacy are permissible if it is the U.S.
    Government, even if it is in breach of the laws of the countries we
    live in.

    The only possible explanations I can come up with for this double
    standard are:

        1.  Congress is pursuing a policy to encourage/force U.S. citizens
    to renounce citizenship, which would be legally problematic in the
    context of Afroyim vs. Rusk.
        2.  Congress considers a non-resident citizen to have lesser rights
    than a resident citizen, which would be a suspect classification likely
    in violation of the 14th Amendment's equal protection clause.
        3.  The U.S. Government considers tax evasion within U.S. borders
    to be permissible because it benefits U.S. financial institutions, but
    it is opposed to tax evasion outside U.S. borders because it does not
    benefit U.S. entities.

    The U.S. is ranked as #2 in the world for Financial Secrecy and #25 as
    a tax haven.\1\ There is a wealth of information about tax shelters in
    Delaware and South Dakota that are used by both foreign and U.S.
    residents.
    ---------------------------------------------------------------------------
        \1\ https://www.taxjustice.net/country-profiles/united-states/.
    ---------------------------------------------------------------------------

    The Sometimes Discussed ``Same Country Exception'' Is Useless

    The Honorable Rep. Carolyn Maloney and Democrats Abroad have often
    advocated for a ``Same-Country Exception'' to FATCA reporting. The
    proposed exception is unlikely to meaningfully improve the situation,
    given concerns by financial institutions about someone joining as a
    compliant customer and later going delinquent.

    Under such an exception, would a Foreign Financial Institution be
    subject to penalties if a U.S. Person resident in the Netherlands
    opened their account and moved back to the United States without
    informing them? Would the Financial Institution be responsible for
    verifying residence on an ongoing basis? Would the Financial
    Institution bear the costs of this verification themselves?

    In any case, the compliance risk would not be improve by a Same-Country
    Exception, and the compliance costs would remain the same or actually
    increase.

    It is also worth noting as well that this would cause problems in the
    European Union's integrated financial markets--it is not uncommon for a
    Dutch financial institution to provide services to customers in Belgium
    or Germany and vice-versa. Any residency-based reporting exemptions
    would need to consider the European Union as a single jurisdiction to
    avoid creating further problems.

     FATCA Discrimination Is not Prevented by the U.S. or our Places of
                        Residence

    It is important to note that U.S. courts view discrimination motivated
    by FATCA as being an unrelated result that is outside of their
    jurisdiction to prevent--Congress can pass the laws, but the United
    States is under no obligation to mitigate negative consequences.

    In our countries of residence, we similarly lack legal protections--it
    varies by country, but we typically see a number of arguments for why
    the discrimination is permissible. The common arguments are:

        1.  The discrimination is effectively mandated by IGA with the
    U.S., so the U.S. should amend FATCA if the discrimination is
    problematic.
        2.  Enforcing non-discrimination statutes would pose an
    unreasonable burden for the business, and businesses have freedom of
    association to select or deny customers as needed.
        3.  While discrimination based on nationality or place of birth is
    illegal, discrimination on the basis of ``U.S. Person Tax Status,''
    inextricably linked to nationality or place of birth, is permissible.

    Because of FATCA's extraterritorial nature, there are now 9 million
    U.S. Citizens that are denied the legal protections necessary to live
    ordinary financial lives.

     The Existing FATCA Regime Is Under Legal Scrutiny

    While the negative effects of FATCA on individuals have not faced any
    meaningful challenge, an increasing number of legal challenges have
    occurred in our home countries.

    In Canada, litigation seeking to challenge the constitutional
    compatibility of FATCA has been side-stepped with arguments of
    political expediency and fear of consequences related to opposing
    FATCA. That case is now headed to the Canadian Supreme court.

    In the European Union, litigation challenging the compatibility of the
    FATCA IGAs with the EU General Data Protection Regulation (GDPR) is
    expected after parliamentary inquiry finishes--to date, European
    Parliament has expressed concern over political interference with
    independent regulators by the European Commission. Other challenges
    relate to the lack of measures to prevent discrimination against U.S.
    Persons in Europe--an insular minority.

    In all of these cases, the plaintiffs are arguing that the FATCA IGAs
    are in clear breach of local laws, and the defenses are arguing that
    the severe penalties threatened by the United States justify ignorance
    of the principle of rule of rule of law.

    If the United States wishes to be regarded as a world leader, rather
    than a hostile foreign power, it should respect the rights of its
    citizens and respect the rule of law and sovereignty of close allies
    like Canada and the European Union. It is unthinkable that pressure
    from the U.S. is causing fundamental legal rights to be trampled in the
    name of expediency.

    Alternatives to FATCA

    There are less destructive alternatives to FATCA that can be pursued--
    the OECD Common Reporting Standard (CRS), a new mechanism rolled out
    via the OECD, or a heavily modified FATCA that somehow protects the
    rights and interests of non-resident U.S. citizens.

    In conjunction with the move to the Common Reporting Standard, the
    United States would also benefit from a move towards the global
    standard of Residence Based Taxation, rather than double-taxation on
    the basis of citizenship.

    Conclusion

    If Congress wishes to narrow the tax gap, and it is concerned about
    offshore evasion, further crackdowns and reporting requirements are
    unlikely to achieve the intended result. The harms of FATCA and the
    legal challenges to it underscore that any new measures are likely to
    face fierce legal and diplomatic opposition, possibly even in the
    United States.

    Tax evasion by U.S. residents is indeed problematic, but to prevent
    this, a level of introspection is needed. Congress must respond to
    reports that the popular jurisdictions for tax evasion are now South
    Dakota and Delaware, rather than the Cayman Islands or Switzerland.

    It must also take into account the reasons why tax compliance among
    non-residents is spotty at best: extraterritorial taxation of non-U.S.
    residents on non-U.S. source income is an aberration, compliance is
    expensive and difficult, taxpayer services are lacking or totally
    absent, and the continual worsening of conditions for Non-
    Resident Citizens, an insular minority, encourages hiding rather than
    compliance.

    Alignment of the U.S. to the global standard of Residence Based
    Taxation coupled with a deemed-sale exit tax triggered on transition
    from Tax Resident to Tax Non-Resident would go a long way in
    encouraging compliance.

    Residence based taxation can be made tight against abuse, generates tax
    revenue today, and it will protect the working and middle class.

    I firmly believe that the concerns expressed in the past that a Wealth
    Tax is only workable in a system of Citizenship Based Taxation are
    unfounded--the strong outcry about the possible removal of the estate
    tax cost basis step-up indicates that the thing the wealthy fears most
    is the realization of capital gains.

    If the United States were to take a page out of Canada's book and
    realize all unrealized gains when someone moves abroad, it would be
    fair, effective in raising revenue for the infrastructure plan, and it
    would make changes in residence for tax purposes extremely
    unattractive.

    Above all else, I urge this Congress to resist the temptation to blame
    the tax gap on the offshore bogeyman and to introduce new
    extraterritorial reporting obligations. The last ten years has shown
    that FATCA has had limited efficacy in closing the tax gap while
    causing serious collateral damage to the working and middle class.

    Engagement with the American diaspora is absolutely necessary. Our
    experiences must be heard, documented in the public record, and finally
    addressed by the government. We have valuable experiences from the
    countries we live in, and we are happy to point to examples of other
    tax systems that run smoothly.

    Please, before recklessly implementing new reporting requirements, hold
    a hearing about the failings of the U.S. tax system with regards to
    Non-Resident citizens.

    Thank you,
    Nicholas Matthew Lee

                                     ______

                        Letter Submitted by James Regent

    U.S. Senate
    Committee on Finance

    Dear Senators,

    I appreciate the opportunity to comment on the May 11 subcommittee
    hearing on ``Closing the Tax Gap.'' I understand the importance of
    international taxation issues and the need for tax reform that ensures
    everybody contributes their fair share, especially the wealthy and
    those who evade taxes. That being said, I am deeply distressed after
    listening to this hearing; not once were the rights and needs of the
    individual tax-obliged non-resident American addressed, a huge voting-
    bloc estimated at around 9 million that has continuously been maligned
    and/or ignored in the Congressional dialogue.

    Americans overseas have too long suffered the misperception that they
    are wealthy tax cheats living the high life while the average American
    suffers, a uniquely American politician conflation. Since the
    implementation of FATCA in 2010, non-resident Americans have been
    caught in the crosshairs of the U.S.'s bulldoze-effort to catch the
    elusive ``tax cheat.'' Despite numerous efforts over the last decade by
    organizations (Democrats Abroad, Republicans Overseas, National
    Taxpayer Advocate, American Citizens Abroad, etc.) to provide guidance
    and research based evidence that provide a clearer picture of the non-
    resident diaspora, which has shown to be overwhelmingly average by
    wealth standards, I fear Congress is continuing the tradition of
    ignoring this already underrepresented group with the intent to push a
    legislative agenda that will further disenfranchise them.

     The Pernicious Effects of FATCA on the Non-Resident American

    While the original purpose of FATCA was to target high net worth
    individuals hiding money overseas, the lack of foresight that coincided
    with its implementation has created a nightmare for countless non-
    resident Americans, particularly Accidental Americans, those born in
    the U.S. to foreign parents that returned overseas at a young age. News
    from Europe since FATCA's implementation has reported that thousands of
    local bank accounts were and continue to be forcibly closed because
    they are tagged as a ``U.S. taxpayer'' but unable to provide a social
    security number, despite no real connection to the U.S.\1\
    ---------------------------------------------------------------------------
        \1\ https://time.com/5922972/accidental-americans-fatca/.

    Countless lawsuits and complaints have been filed as a direct result of
    this rushed policy. French dual citizens lodged an official complaint
    to the European Commission for having been blacklisted by French banks
    due to the complexity of dealing with anyone U.S. related.\2\ HM
    Revenue and Customs (HMRC) of the UK was sued over privacy breach
    associated with the compliance obligations imposed by the U.S. law that
    conflict with European privacy law.\3\ Law suits are ongoing in Canada
    as well. Millions of other non-resident Americans face a similar fate
    if/when they are tagged as a U.S. person unless they disclose their
    social security number and agree to have their private personal
    information shared internationally, something any rational person would
    be hesitant to do due to pervasiveness of cyber crimes in the recent
    decade (something the U.S. should be all-too-familiar with the
    aftermath of the recent Colonial Pipeline ransomware attack). In terms
    of FATCA filing obligations I am thankful I do not have the savings to
    trigger any additional complicated paperwork, however I was personally
    denied a normal investment account years ago here in Japan when I
    considered trying to utilize some of my savings better (incidentally
    also how I found out about FATCA), while my British friend who
    accompanied me was able to open an account with no impediment. Instead
    of honest reflection in how to remediate these situations with
    meaningful reform, the stance of the U.S. has been to embarrassingly
    deny any cause and effect relationship and shift the blame to that of
    the country where the problems are occurring. My question is: are these
    the people Senator Whitehouse cavalierly joked about at the end of the
    hearing when he lamented over the missed opportunity to add a T to the
    end of FATCA?
    ---------------------------------------------------------------------------
        \2\ https://www.internationalinvestment.net/news/4005675/
    accidental-americans-sue-france-fatca-disclosure-rules.
        \3\ https://international-adviser.com/uk-taxman-faces-lawsuit-over-
    fatca.

    It is imperative that Congress understand the situation of the overseas
    American and acknowledge the distinction between 1) offshore accounts
    of the ``super rich'' that live in the U.S. and hide their income
    earnings overseas and 2) the ``offshore'' accounts of non-resident
    Americans that reside and earn a living overseas and use these local
    bank accounts for their basic financial needs. Furthermore, the non-
    resident American should not be burdened with extraneous compliance
    obligations and should be excluded from any such reporting
    requirements, on an individual basis and for the financial institutions
    we need to use in order to lead our lives in our country of residence.
    Current discussions obsess over catching the ``super rich'' that they
    fail to address the extreme negative consequences such policies like
    FATCA, in its current form, have on the millions of ``little fish''
    regular Americans living abroad.

     The Uniquely Antiquated System of Citizenship Based Taxation and its
                        Detriment on the Expat

    Any discussion regarding international tax reform cannot be done
    without referencing that the issues outlined above regarding FATCA stem
    from the aberrant system of Citizenship Based Taxation (CBT), a system
    utilized solely by the U.S. and the small African country of Eritrea.
    Part of the injustice in the tax code that was mentioned during the
    hearing is, without a doubt, the tax breaks given all too often to the
    ultra rich and corporations. However, the other major injustices much
    less spoken about are the onerous filing requirements, potential tax
    liability incurred on non-resident Americans for income that is sourced
    in their country of residence, and the inability to achieve true
    control over our financial future due to suffocating direct and
    indirect restrictions on overseas accounts.

    If the filer does not proactively take the steps to file with the
    proper exclusion (which is puzzlingly capped) or foreign tax credit
    that often needs to be prepared with a professional in order to be done
    properly (typically at increased cost than regular preparation since
    the forms are less commonly used), the citizen faces double taxation;
    this is a requirement no other industrialized country in the world puts
    on its non-resident citizens. A recent submission by Democrats Abroad
    \4\ notes that a mere 6% of citizens live in what would be considered a
    ``tax secrecy jurisdiction;'' other research by American Citizens
    Abroad et al. has similarly shown that the overwhelming majority live
    in tax jurisdictions with taxes higher than the U.S. Barring any
    discrepancies in deductible expenses associated with social programs
    that the IRS refuses to acknowledge, this means that one way or another
    zero tax is typically owed to the U.S. since more is paid in the
    country of residence. Yet, personal testimonies presented via these
    advocacy groups claim some pay up to a month of their annual salary
    each year hiring an accountant to ensure tax compliance, despite owing
    nothing.
    ---------------------------------------------------------------------------
        \4\ https://www.democratsabroad.org/carmelan/
    democrats_abroad_urges_the_senate_to_protect
    _and_support_americans_abroad_in_closing_the_tax_gap.

    Personally, in my 11 years living abroad my income has never generated
    in excess the amount allowed by the Foreign Earned Income Exclusion, so
    because I pay taxes in my country of residence regularly and file U.S.
    taxes on time, I have zero tax liability to the U.S. Despite that, the
    effects of CBT are still detrimental, particularly with respect to
    suffocating tax compliance obligations, both FATCA and non-FATCA
    related. I am hesitant to own a home here out of fear of the tax event
    it would trigger in the U.S. if I ever sold it. I am afraid to even
    consider opening a small business because of the harm American small
    business owners overseas suffered thanks to GILTI in the 2017 TCAJ Act.
    More insidious, though, is how current tax law effectively prohibits
    using any type of local investment/retirement account because the
    investment vehicles (run-of-the-mill mutual funds of which many are
    identical to those in the U.S., just registered locally) are deemed
    ``foreign,'' thus triggering onerous IRS paperwork and tax liabilities
    (referring specifically to locally established mutual funds deemed
    ``PFICS,'' extremely unfair tax treatment and notoriously expensive
    forms to fill). This effectively paralyzes me and other Americans
    abroad when it comes to having any type of control over planning our
    financial future. We cannot open an account where we live without
    facing punitive U.S. tax (some may be refused in general), nor can we
    open one in the U.S. because we do not work nor have a legitimate U.S.
    address. I hear certain agreements with Canada and UK make it easier to
    ---------------------------------------------------------------------------
    do this, but that does not do me much good here in Japan.

    Society has evolved globally over the past two decades, and movement
    around the world is more fluid than ever. However, U.S. tax policy is
    unique in the world in hindering its own people, who could act as
    unofficial ambassadors generating goodwill for the U.S., from realizing
    any type of long-term dream abroad. For 10 years Congress has not only
    refused to act on bipartisan and non-partisan calls for reform, it has
    refused to even discuss the issue. If something does rarely get
    proposed, it gets sent to committee to die (see Rep. Holdings 2018 Tax
    Fairness for Americans Abroad Act) or kicked down the road for ``more
    research and information'' (see any attempt to implement Residency
    Based Taxation (RBT), despite an abundance of solid research in the
    past few years). Ironically, both major parties like to claim the
    moniker ``party for the working class,'' but it is becoming evidently
    clear that the definition does not extend to the working class non-
    resident American. This is evidenced by the lack of plan to provide
    tax-compliant Americans overseas any kind of vaccine access, and more
    recently demonstrated by recent news that Americans overseas will not
    be able to use the full amount of the new child tax credit. I would
    also note that while I received a stimulus check, I could not even cash
    it since Japan does not use checks and had no idea what to do with it.
    I assume this blame falls squarely on Japan or the individual since the
    U.S. Government did its bare minimum.

    Meaningful Reform Recommendations

    I believe strengthening the IRS to be able to update its infrastructure
    and effectively collect taxes that are owed is an important endeavor,
    however that energy needs to be directed in the right places.

    Ms. Olson mentioned during the hearing that the use of new technology
    is important; Senator Thune also said that policy makers need to be
    reasonable about what is possible regarding closing the tax gap.
    Efficient allocation of resources, like new technology, should focus on
    what is realistically feasible. Implementation of a RBT system is
    necessary to not only bring the U.S. to the global standard and finally
    make American workers competitive globally, but would also facilitate
    that efficient (re)allocation of resources necessary to narrow the tax
    gap while simultaneously relieving the undue burden on the current non-
    resident American. The U.S. has over a thousand countries to learn
    from, and the Common Reporting Standard (CRS) serves a similar function
    of preventing the abuse of offshore accounts by reporting account
    holders with a tax residency elsewhere to that country of residence;
    even if Congress is reluctant to remove FATCA, it could be easily
    modeled off the CRS and heavily modified so that it protects the rights
    of non-resident Americans.

    RBT should be implemented so non-resident Americans can live their
    lives with the financial freedom like any other person in their country
    of residence--without having to answer to multiple tax regimes that
    make them anxious about whether the IRS is going to come after them and
    threaten their passports or bank account. Renunciation of citizenship
    should not be the answer, but as I am sure you are aware, that is the
    route an extraordinarily growing number of average, responsible working
    class people have taken since 2010, not in order to ``avoid tax'' but
    in order to relieve them of the crippling effect of the unfair
    obligations imposed by their homeland and (re)gain control of their
    financial independence.

    I implore Congress to read the research, data and reports from
    organizations like Democrats Aboard, Republicans Overseas, Association
    of Americans Resident Overseas, Stop Extraterritorial American
    Taxation, and in particular that of the ACA since 2017 (and currently
    being updated) to understand 1) the major issues that affect non-
    resident Americans as a result of the current U.S. tax system and 2)
    that the implementation of a robust residency based tax system that
    protects against tax evasion while being revenue neutral and not
    creating undue burden on the everyday American is entirely possible.
    Every other major country in the world has done it, it is now the
    U.S.'s turn.

    Thank you for your time.
    James Regent

                                     ______

                       Letter Submitted by Cecile Riddle

    U.S. Senate
    Committee on Finance

    I am an Australian citizen who has been notified by my bank that I am
    subject to U.S. tax laws. I have never lived in the USA (since I was 4
    years old). Neither my parents (Maltese immigrants to the USA in the
    late 1940s) have owned properties or businesses in the USA.

    Since becoming an Australian citizen at the age of twelve, I had
    thought I was Australian. I only retained my U.S. citizenship so that I
    could easily visit my elderly aunt in the U.S. She has now passed away
    and I have renounced my citizenship.

    Now elderly, retired and in poor health, I'm severely distressed
    because I have to comply with U.S. tax laws. What's more, I find that
    my savings in superannuation are subject to U.S. taxation.

    So far, attempting to comply has cost me $12,000 to engage a U.S. tax
    attorney to ensure I do it properly and don't get fined by the IRS.
    This tax law is unfair, unjust, and is causing me to spend an
    inordinate amount of time (10 months) collating documents to submit tax
    returns.

    I plead with you to change this law immediately, so that I can spend
    what limited life I have left (I have cancer) in peace.

    Thank you for your consideration.

    Cecile Riddle

                                     ______

                     Letter Submitted by Rachael Rubenstein

                                  May 26, 2021

    U.S. Senate
    Committee on Finance

    Dear United States Senate Committee on Finance:

        I am a tax attorney. Most of my practice involves dealing with IRS
    compliance-related issues and disputes. I've been in practice for 11
    yrs. Early in my career, I ran a lower income taxpayer clinic, funded
    by an IRS grant. For the past 6 years, I have been in private practice
    representing small to mid-size businesses, higher income individuals,
    and U.S. persons who have foreign accounts/income/assets. As a side
    bar, in my experience taxpayers with assets outside of the U.S. are
    often not willful tax evaders. Many I represent are somewhat
    unsophisticated dual citizens, nonresidents, or relatively small
    business owners with operations in U.S. and MX. Most offshore
    compliance issues I deal with involve taxpayers who did not know about
    or understand all the complex reporting requirements under BSA, FACTA,
    etc. but who want to voluntarily disclosure prior noncompliance, or who
    were given bad advice from a former tax professional.

        I write to share my opinion on a topic that was not discussed much
    during the hearing on May 11th--deteriorating customer service at the
    IRS and the agency's worsening inability to effectively handle
    compliance matters, routine taxpayer requests, refund claims, and
    taxpayer communications. From my perspective, except for processing of
    electronic returns for the current season and paying out individual
    stimulus payments, IRS has become pretty much dysfunctional in this
    COVID era. The agency has always been slow and inefficient with respect
    to how it handles compliance cases and routine customer service
    inquiries. But this past year has been awful, and I do not see how the
    agency can possibly recover without assistance.

        For instance, I have many clients who have mailed tax payments to
    the IRS whose checks were not deposited months after being sent. For
    example, in late 2020, a cashier's check for over a million was sent by
    certified mail for an estimated tax payment. It took the IRS about six
    months to process/deposit that payment. I encourage all business and
    individual clients to pay online but not all consult me before making
    payments and paying online is not necessarily that simple for large tax
    payments. Lately, I have been advising individual clients making large
    payments to do so via wire transfer to IRS. But that too presents
    problems. For instance, about six month ago, I assisted an individual
    with making wire payments involving millions of dollars for assessed
    taxes. After we properly wired the funds, months went by and then the
    IRS sent the money back via mailed checks. It turned out that the
    payments were returned not because of anything we did wrong regarding
    the wires or payment designations but because of a glitch on IRS' end
    regarding how it processes certain types of tax payments. After
    investigating the matter and obtaining guidance, we promptly mailed the
    checks back with designation instructions. Nevertheless, those returned
    checks have yet to be processed, and the IRS proceeded to mail out
    automated collection notices threatening levy enforcement for the same
    ``unpaid'' taxes.

        Further, IRS can no longer timely process mailed tax returns,
    including employment tax returns. Some taxpayers still must file paper
    returns--especially amended prior year returns to take advantage of
    COVID-related relief legislation-- and some business taxpayers do not
    have the technology resources or knowledge to file 941s electronically.
    I have several business clients trying to resolve their IRS collection
    cases involving prior year liabilities. For them to negotiate a
    collection resolution, IRS requires them to be currently complaint with
    filing/deposit obligations. But the collection resolutions we proposed
    cannot be considered because IRS has yet to process 941 returns that
    were timely mailed for Q2 2020, Q3 2020, Q4 2020, and Q1 2021. The lack
    of timely return processing can create all sorts of downstream problems
    in the context of 941 returns. For instance, when a certain amount of
    time passes without a 941 tax return posting to a period where the
    taxpayer made timely payroll deposits in full, IRS automation regularly
    moves that quarter's deposits to other balance due quarters, so when
    the return finally does post, penalties are automatically assessed
    because the quarter was underpaid (due to the moved payments).

        With respect to routine taxpayer correspondence, including claims
    for refund under COVID-related tax legislation (FFCRA and CARES), IRS
    simply cannot handle processing the mail or faxes it receives. Yet the
    agency continues to send automated notices to taxpayers, which do not
    take into account correspondence previously sent to the agency long
    ago. Communications I send by certified mail or FedEx are not responded
    to for many months. For some of my clients, years pass waiting on a
    response, especially cases involving penalty abatement requests (which
    taxpayers have a right to request under various Code provisions and
    Treasury regulations).

        Regarding IRS field examinations and collections cases, Revenue
    Agents and Revenue Officers always ask for tons of documents in
    Information Document Requests or in Form 9297 Summary Contact Requests
    (usually requiring production of hundreds or thousands of pages of
    documents). But those employees have no efficient way to receive or
    appropriately consider such information electronically. Working from
    faxes or paper copies when dealing with accounting and bookkeeping
    records is bad practice--it leads to errors, unnecessary duplication of
    efforts, increased costs, and extended delays. It is very different in
    the private sector. For instance, when private parties in a controversy
    engage in the discovery process, they mostly exchange large volumes of
    data without printing, faxing, or using flash drives. Moreover, the
    parties are also usually able to utilize e-discovery tools to
    effectively analyze data exchanged or other more basic software to
    facilitate analysis. But IRS very rarely does anything like that in
    field exam and collection cases. Outside of the Office of Chief
    Counsel, IRS employees cannot accept file share invites or links to
    receive document productions electronically. Also, even now with
    changed Internal Revenue Manual (IRM) guidance regarding emailing, IRS
    collection and exam employees often refuse to communicate by email due
    to concerns about security and disclosure. Of course, we all must be
    mindful of security issues and IRC Sec. 6103 does present a unique
    challenge for IRS. Nevertheless, IRS cannot continue indefinitely to
    rely on only fax and mail to effectively work these cases, especially
    when handling more complicated compliance matters.

        Most frustrating for tax professionals is the current slow as
    molasses IRS Form 2848, Power of Attorney, processing at the IRS CAF
    Unit. I have had a practitioner e-services account set-up since 2011.
    Traditionally, it worked fairly well. I would submit a Form 2848 to the
    IRS CAF Unit by fax and after about 7-10 days it would be processed,
    allowing me to then pull from my e-services account various types of
    IRS transcripts electronically without having to call or mail IRS to
    obtain. Transcripts are necessarily for most cases, as they facilitate
    assessment of whatever situation I am hired to handle and allow me to
    issue spot key items that most clients cannot ascertain on their own.
    In January 2021, to comply with the 2019 Taxpayer First Act, IRS
    developed a tool whereby tax professionals could submit Forms 2848
    electronically. I was very excited about this improvement and began
    using this method to submit Forms 2848. But it has not worked out well.
    Forms 2848 submitted to IRS whether by fax or electronically take
    longer to process now than ever before. Months not weeks or days. Not
    unfrequently, despite properly submitting, Forms 2848 are simply not
    processed at all or are rejected for perceived errors.

        This past week, I had 3 rejected improperly requiring me to send
    detailed responses explaining why they were correct with supporting IRM
    references or further documentation. In order for me to now obtain
    transcripts in a timely manner, I must call IRS and fax my Form 2848
    while on the phone with an assistor who then goes through disclosure
    verification. During those calls, I can order transcripts to be
    delivered electronically to my secure IRS e-mailbox. Doing it this way
    eats up hours which means increased fees charged to clients who do not
    want to pay for time spent on this type of task. And because many tax
    professionals must go through this inefficient process (and due to
    other reasons related to IRS workforce challenges and high call
    volumes), the wait times on IRS phone lines are terribly long--
    averaging, in my experience, more than an hour to connect with a phone
    assistor and usually 1.5 to 2.5 hrs. to complete the call. Thankfully,
    the IRS now has a call back feature which has helped some with
    minimizing the actual time spent on hold. But so much time could be
    saved by IRS and practitioners with more prompt processing of Forms
    2848.

        Lastly, most IRS Accounts Management, Exam, Collection, and even
    Appeals employees are not well trained on tax procedure beyond the
    sections of the IRM (employee handbook) which they primarily operate
    under and are less trained when it comes to application of substantive
    law to specific case facts. As a result, way too much time is spent
    working on compliance cases that never seem to reach a resolution point
    until years have passed or the taxpayer litigates. I sympathize with
    the IRS workforce who seem overburdened and lacking in resources to
    effectively do their jobs. That said, the knowledge gap between the
    private sector and most of the IRS workforce is too vast. That
    knowledge gap combined with increased bureaucratic inefficiencies,
    longer case processing time frames, and an ``enforcement mindset''
    leaves my clients with a very negative impression of the agency. That
    impression and their experiences overall do not accord with the goal of
    encouraging voluntary compliance.

        Overall, the above problems at IRS have gotten worse each year I
    have been in practice and now appear unmanageable. As a result, I am
    filing more litigation cases. For some of these cases, the goal is
    simply to get someone competent--a DOJ Tax Division or IRS attorney--to
    consider the substance of the unresolved issue(s), or to deal with IRS
    confusion/mismanagement.

        I am all for giving the IRS what it needs to appropriately carry
    out its core mission and functions. Presently, I worry about a lack of
    executive and congressional focus on the fundamentals. Before giving
    IRS greater access to third party reporting information and increased
    responsibilities around that or other expansion of duties and
    expectations, the agency needs more funding; increased oversight;
    better trained employees; and improved technology to handle what is
    already has in front of it.

        The observations and opinions expressed herein are my own and not
    Clark Hill's. Thank you for your attention to this matter.

                Respectfully,

                Rachael Rubenstein

                                     ______

                 Stop Extraterritorial American Taxation (SEAT)

                              3 impasse Beausejour

                             78600 Le Mesnil le Roi

                                     France

                             http://www.seatnow.org

                                info@seatnow.org

    U.S. Senate
    Committee on Finance

                                                            24 May 2021

    Please accept this as our submission with respect to the subject of the
    May 11, 2021 Senate Finance Committee Hearing: ``Closing the Tax Gap:
    Lost Revenue From Noncompliance and the Role of Offshore Tax Evasion.''

    Part A--SEAT's Fifth Submission to the Senate Finance Committee

    This is the fifth in a series of submissions from SEAT which have
    addressed issues raised in the Senate Finance Committee hearings since
    March 25, 2021, http://seatnow.org/seat-home/seat-submissions/.

    Each of SEAT's previous submissions has invited the Senate Finance to
    consider the fact that U.S. citizens living outside the United States
    are profoundly (and in many cases negatively) impacted by the
    Committee's assumptions and proposals. To date, there has not been one
    single instance or witness which has acknowledged or considered that
    changes in U.S. tax law do impact Americans abroad. This omission
    continues to be in flagrant disregard of the fact that the United
    States imposes a separate and more punitive tax system on U.S. citizens
    living outside the United States than on U.S. citizens living in the
    United States.

    Indeed, the Senate Finance Committee recognized the problem of the
    extraterritorial tax regime, at least as early as 2015. That is when
    the Senate Finance Committee Bipartisan Tax Working Group \1\ on
    International Tax concluded their report \2\ with the following
    paragraphs:
    ---------------------------------------------------------------------------
        \1\ https://www.finance.senate.gov/chairmans-news/finance-
    committee-bipartisan-tax-working-group-reports.
        \2\ http://www.finance.senate.gov/download/?id=E1FA3F08-B00C-4AA8-
    BFC9-7901BD68A30D.

            According to working group submissions, there are currently 7.6
            million American citizens living outside of the United States.
            Of the 347 submissions made to the international working group,
            nearly three-quarters dealt with the international taxation of
            individuals, mainly focusing on citizenship-based taxation, the
            Foreign Account Tax Compliance Act (FATCA), and the Report of
    ---------------------------------------------------------------------------
            Foreign Bank and Financial Accounts (FBAR).

            While the co-chairs were not able to produce a comprehensive
            plan to overhaul the taxation of individual Americans living
            overseas within the time-constraints placed on the working
            group, the co-chairs urge the Chairman and Ranking Member to
            carefully consider the concerns articulated in the submissions
            moving forward.

    In other words, in 2015 the Senate Finance Committee recommended that
    that the negative effects of the extraterritorial tax regime be
    specifically considered.

    Six years have passed and there is still no movement on overhauling the
    taxation of individual U.S. citizens living overseas, in spite of the
    clear directive from the International Tax Working Group. In fact, the
    situation for U.S. citizens abroad has gotten far worse. This is due in
    large part to the enhancements to the Subpart F regime in TCJA.\3\ We
    informed the Senate Finance Committee in that regard in our submission
    dated April 22, 2021, available here.\4\
    ---------------------------------------------------------------------------
        \3\ An Act to provide for reconciliation pursuant to titles II and
    V of the concurrent resolution on the budget for fiscal year 2018, Pub.
    L. 115-97. Known colloquially as The Tax Cuts and Jobs Act (TCJA).
        \4\ http://seatnow.org/wp-content/uploads/2021/04/SEAT-Submission-
    Overhauling-International-Taxation.pdf.
    ---------------------------------------------------------------------------

     Part B--Recent Comments at the Senate Finance Hearings About FATCA and
                        Citizenship-based Taxation

    Furthermore, both FATCA and Citizenship Taxation continue to exacerbate
    the problems for Americans abroad. Both the April 27 and May 11
    hearings contained comments and assumptions that reveal a level of
    ignorance of how the tax code impacts Americans abroad. There is a fine
    line between ignorance and malice.

    With Respect to FATCA:

    Senator Whitehouse concluded the May 11, 2021 hearing with following
    words: ``. . . we need to continue to work on FATCA compliance. It's
    too bad that we couldn't put an extra `T' on it. Then it would say
    FATCAT, which would be such an appropriate acronym for it.''

    Such an indescribably ignorant and appalling comment about the impact
    of FATCA on Americans abroad!

    With Respect to Citizenship Taxation:

    At the April 27, 2021 hearing Professor Gamage made the following
    comments about citizenship-based in the context of using citizenship-
    based taxation as the tool to enforce a wealth tax.

    What follows is a transcript of part of Professor Gamage's testimony at
    the April 27, 2021 hearing:

            1:15:10--Second exchange between Senator Cassidy and David
            Gamage

            Cassidy: Do you favor a worldwide wealth tax because that
            doesn't seem practical to me but that seems like people can
            move and they do. And capital can move, and it does. One
            example for example: I understand that China has an incredible
            capital flight and if there's any country that's done its best
            to surveille everything about every one of its citizens it's
            China and yet they have significant capital flight. So, would
            you recommend a global wealth tax?

            Gamage: The United States tax system--the current income tax is
            citizenship-based and taxes all worldwide income for citizens
            and always has. This is a key difference between the U.S. tax
            system and the French tax system. You can't escape the U.S.
            taxation without revoking your citizenship and paying a
            substantial exit tax. That's current law and it works quite
            well.

            Cassidy: And so the idea that somebody would give up their
            citizenship--I think one of the partners that made a lot of
            money from selling--some big Silicon Valley going public,
            renounced his citizenship and moved to Singapore, if I remember
            correctly. I'm gathering from you you feel as if that problem
            would be minimal.

            Gamage: It historically has been minimal and you pay a big exit
            tax . . .

            Cassidy: Historically we haven't had a wealth tax so I'm not
            sure we can use past history to predict future actions to kind
            of paraphrase the financial commercial.

            Gamage: Again, you pay a substantial exit tax under current law
            by revoking citizenship. Not many people do it. Some do. If
            they don't value the protections and services provided to
            citizens of the United States then fine. But the protections
            and services provided to extreme wealth are huge and most
            ultra-wealthy benefit tremendously from being United States
            citizens and having those protections and services, and it's
            fair to have them pay a reasonable amount of tax on that which
            they currently are not.

    It's not clear what part(s) of the current extraterritorial tax system
    Professor Gamage thinks work ``quite well'', but from the perspective
    of Americans actually living outside of the U.S., the system is
    inherently dysfunctional. Numerous surveys \5\ have been conducted
    which provide ample evidence that the U.S. tax laws (including the
    FATCA enforcement system) have resulted in handicapping Americans
    abroad whose financial lives are necessarily foreign to the U.S. These
    Americans have difficulty keeping bank accounts, saving for retirement,
    and running small businesses. Furthermore, while high net worth
    individuals might pay a substantial exit tax to renounce their U.S.
    citizenship, the threshold for this tax has been set at such a low
    level that middle-class Americans with retirement savings are often
    subject to this tax that was initially aimed at billionaires.
    ---------------------------------------------------------------------------
        \5\ See, for example, ``Survey Report: Effects of the
    Extraterritorial Application of U.S. Taxation and Banking Policies''
    (2021) at http://seatnow.org/survey_report_intro_page/; ``I Feel
    Threatened by My Very Identity: U.S. Taxation and FATCA Survey'' (2019)
    at http://citizenshipsolutions.ca/2019/10/27/recently-released-survey-
    report-dispels-myth-of-the-wealthy-american-abroad-and-demonstrates-
    why-middle-class-americans-abroad-are-forced-to-renounce-us-
    citizenship/.
    ---------------------------------------------------------------------------

     Part C--The Senate Finance Committee Continues a Long History of
                        Misunderstanding and Prejudice Toward U.S. Citizens
                        Abroad

    Former Senator Max Baucus--one of Senator Wyden's predecessors as Chair
    of the Senate Finance Committee--was not immune to this prejudice. In
    1995, he stated:

            [Americans] are going to great lengths, thousands of miles to
            other countries, to avoid paying their fair share. In a
            metaphorical sense, burning the flag, giving up what should be
            their most sacred possession, their American citizenship, to
            find a tax loophole. . . . These are precisely the sort of
            greedy, unpatriotic people that FDR called malefactors of great
            wealth. . . . Let us not allow more of these rich freeloaders
            to get away.\6\
    ---------------------------------------------------------------------------
        \6\ 3 Senate Committee on Finance, ``Tax Treatment of Expatriated
    Citizens:'' hearing on S. 453, S. 700, H.R. 831, H.R. 981, H.R. 1535
    and H.R. 1812, 104th Congress 2 (July 11, 1995), https://
    www.finance.senate.gov/imo/media/doc/Hrg104-795.pdf [https://perma.cc/
    7LDH-XW26] (statement of Senator Max Baucus). See also https://www.c-
    span.org/video/?66084-1/tax-treatment-expatriates.

    This profoundly ignorant comment from Senator Baucus, alongside many
    others expressed by other members of the United States Congress dating
    back to the Civil War right up to today,\7\ expose longstanding and
    deep-seated prejudices against Americans who live outside the United
    States. Is it any wonder that these prejudices have been translated
    into extraterritorial taxation and banking policies that are highly
    damaging to Americans and green card holders living outside the United
    States? It appears that Senator Warren's wealth tax is premised on many
    of the same profoundly ignorant assumptions about U.S. citizens living
    outside the United States.
    ---------------------------------------------------------------------------
        \7\ Laura Snyder, ``Taxing the American Emigrant,'' 74(2) Tax
    Lawyer 299 (2021). Available at SSRN: https://ssrn.com/
    abstract=3795480, at 317-20.
    ---------------------------------------------------------------------------

     Part D--The Senate Finance Committee Must Include Witnesses With
                        Knowledge of How FATCA and Citizenship Taxation
                        Impact Americans Abroad

    The Internal Revenue Code establishes three distinct U.S. tax regimes:

        1.  Non-resident Alien Tax Regime: Taxation on U.S. source income
    only.
        2.  Tax Regime for U.S. Residents: Taxation of U.S. residents on
    worldwide income (regardless of citizenship).
        3.  Extraterritorial Tax Regime: Taxation of the worldwide income,
    mostly non-U.S. source income of individuals who are U.S. citizens, who
    do not live in the United States and are tax residents of other
    countries. This is a separate and more punitive tax regime \8\ than
    that imposed on U.S. citizens living outside the United States. To put
    it simply: The extraterritorial tax regime is based on citizenship
    regardless of economic or physical connection to the United States.
    Some--including the Committee witness Professor Gamage--refer to the
    extraterritorial tax regime as ``citizenship-based taxation.''
    ---------------------------------------------------------------------------
        \8\ https://www.taxconnections.com/taxblog/the-united-states-
    imposes-a-separate-and-much-more-punitive-tax-on-u-s-citizens-who-are-
    residents-of-other-countries/.

    Every Senate Finance Committee Hearing has focused ONLY on the U.S. Tax
    Regime for U.S. Residents! The simple fact is that the United States is
    also operating an Extraterritorial tax regime which is applied to
    Americans abroad. The impact of tax reform on individuals subject to
    that Extraterritorial tax regime must be considered. SEAT respectfully
    ---------------------------------------------------------------------------
    requests that:

        1.  There be a special Senate Finance Hearing for the sole purpose
    of providing evidence of how tax reform would impact Americans abroad;
    and
        2.  SEAT should be included as participants in that hearing.

     Part E--The Solution: Ending the U.S. Extraterritorial AKA
                        Citizenship-Based Tax Regime

    The best solution to this problem is for the United States to come into
    alignment with every other developed nation on the planet and move to a
    residence-based taxation system for individuals. Taxing non-resident
    citizens is ``Mission Impossible,'' as it is impossible to fairly
    administer an extraterritorial tax system and afford non-resident U.S.
    citizens the rights guaranteed by the Taxpayer Bill of Rights (IRC
    Sec. 7803(a)(3)), by multiple human rights instruments and by the U.S.
    Constitution.\9\
    ---------------------------------------------------------------------------
        \9\ Laura Snyder, Karen Alpert, and John Richardson, ``Mission
    Impossible: Extraterritorial Taxation and the IRS,'' 170 Tax Notes
    Federal 1827 (March 22, 2021). Available at SSRN: https://ssrn.com/
    abstract=3828673.

    It is well past the time that the Senate Finance Committee act upon the
    call of the 2015 Senate Finance Committee Bipartisan Tax Working Group
    on International Tax, and finally accord to Americans living outside
    the United States the full attention, concern, and respect to which
    they are entitled as U.S. citizens. It is also well past time to put an
    end to the taxation and banking policies that penalize them so
    ---------------------------------------------------------------------------
    severely.

    Thank you for your attention to these matters.

    Respectfully submitted by:

    Stop Extraterritorial American Taxation (SEAT) Board Members (info@seat
    now.org):

    Dr. Laura Snyder (President)
    Dr. Karen Alpert
    Suzanne Herman
    David Johnstone
    Keith Redmond
    John Richardson

                                      [all]