[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                     
          
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                          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.
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    \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\
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    \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\
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    \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.
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    \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.
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    \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 
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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.
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    \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\
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    \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.
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    \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.
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    \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 
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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.
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    \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 
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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\
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    \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 
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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.
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    \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\
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    \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).
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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.
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    \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.
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    \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.
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    \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. 
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``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\
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    \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\
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    \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\
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    \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:
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    \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/.
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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\
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    \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 
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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.
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    \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 
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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.
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    \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\
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    \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.
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                 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.
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    \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\
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    \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).
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    \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.
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    \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 
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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\
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    \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\
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    \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\
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    \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 
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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.
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    \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.
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    \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 
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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\
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    \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.
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    \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\
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    \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\
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    \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.
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  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\
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    \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 
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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.
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    \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\
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    \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 
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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.
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    \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 
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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\
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    \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 
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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\
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    \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.
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    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 
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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 
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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 
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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.
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    \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.
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    \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.
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    \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 
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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

[GRAPHIC] [TIFF OMITTED] T1121.017


.eps[GRAPHIC] [TIFF OMITTED] T1121.018


.eps[GRAPHIC] [TIFF OMITTED] T1121.019


          .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: [email protected]

               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: [email protected]

                                                       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

                      [email protected]

                    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 
[email protected]) 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

                            [email protected]

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/.
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 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]