    [Senate Hearing 117-787]
    [From the U.S. Government Publishing Office]

                                                            S. Hrg. 117-787

                           SPOTLIGHTING IRS CUSTOMER
                               SERVICE CHALLENGES

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

                                    HEARING

                                   before the

                              COMMITTEE ON FINANCE
                              UNITED STATES SENATE

                        ONE HUNDRED SEVENTEENTH CONGRESS

                                 SECOND SESSION

                                   __________

                               FEBRUARY 17, 2022

                                   __________

     [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                Printed for the use of the Committee on Finance
                                 _________

                     U.S. GOVERNMENT PUBLISHING OFFICE

    54-247-PDF               WASHINGTON : 2024

                              COMMITTEE ON FINANCE

                          RON WYDEN, Oregon, Chairman

    DEBBIE STABENOW, Michigan            MIKE CRAPO, Idaho
    MARIA CANTWELL, Washington           CHUCK GRASSLEY, Iowa
    ROBERT MENENDEZ, New Jersey          JOHN CORNYN, Texas
    THOMAS R. CARPER, Delaware           JOHN THUNE, South Dakota
    BENJAMIN L. CARDIN, Maryland         RICHARD BURR, North Carolina
    SHERROD BROWN, Ohio                  ROB PORTMAN, Ohio
    MICHAEL F. BENNET, Colorado          PATRICK J. TOOMEY, Pennsylvania
    ROBERT P. CASEY, Jr., Pennsylvania   TIM SCOTT, South Carolina
    MARK R. WARNER, Virginia             BILL CASSIDY, Louisiana
    SHELDON WHITEHOUSE, Rhode Island     JAMES LANKFORD, Oklahoma
    MAGGIE HASSAN, New Hampshire         STEVE DAINES, Montana
    CATHERINE CORTEZ MASTO, Nevada       TODD YOUNG, Indiana
    ELIZABETH WARREN, Massachusetts      BEN SASSE, Nebraska
                                         JOHN BARRASSO, Wyoming

                        Joshua Sheinkman, Staff Director

                    Gregg Richard, Republican Staff Director

                                      (II)

                                C O N T E N T S

                                  ----------

                               OPENING STATEMENTS

                                                                       Page
    Wyden, Hon. Ron, a U.S. Senator from Oregon, chairman, Committee
      on Finance.....................................................     1
    Crapo, Hon. Mike, a U.S. Senator from Idaho......................     3

                                   WITNESSES

    Collins, Erin M., National Taxpayer Advocate, Internal Revenue
      Service, Washington, DC........................................     5
    Lucas-Judy, Jessica, Director, Strategic Issues, Government
      Accountability Office, Washington, DC..........................     7
    Lewis, Jan F., chair, Tax Executive Committee, American Institute
      of CPAs, Washington, DC........................................     9

                   ALPHABETICAL LISTING AND APPENDIX MATERIAL

    Collins, Erin M.:
        Testimony....................................................     5
        Prepared statement...........................................    49
        Responses to questions from committee members................    58
    Crapo, Hon. Mike:
        Opening statement............................................     3
        Prepared statement...........................................    64
    Lewis, Jan F.:
        Testimony....................................................     9
        Prepared statement...........................................    65
        Responses to questions from committee members................    72
    Lucas-Judy, Jessica:
        Testimony....................................................     7
        Prepared statement...........................................    75
        Responses to questions from committee members................    88
    Wyden, Hon. Ron:
        Opening statement............................................     1
        Prepared statement...........................................    97

                                 Communications

    Baker, Mary Burke................................................    99
    Center for Fiscal Equity.........................................   100
    Coates, James Webster............................................   104
    Coolidge, Joseph Eugene..........................................   106
    Democrats Abroad.................................................   110
    Dente, Marlene...................................................   113
    EZERC LLC........................................................   114
    Federation of Tax Administrators.................................   116
    McIntyre, Dean Jerome............................................   121
    Professional Managers Association................................   121
    Public Citizen et al.............................................   125
    Purcell, Amy.....................................................   128
    Steiner, Jeffrey.................................................   129
    Yelvington, Denise C.............................................   129

                                     (III)

                           SPOTLIGHTING IRS CUSTOMER
                               SERVICE CHALLENGES

                                  ----------

                          THURSDAY, FEBRUARY 17, 2022

                                           U.S. Senate,
                                          Committee on Finance,
                                                        Washington, DC.
        The hearing was convened, pursuant to notice, at 10 a.m.,
    via Webex, in Room SD-215, Dirksen Senate Office Building, Hon.
    Ron Wyden (chairman of the committee) presiding.
        Present: Senators Menendez, Carper, Cardin, Cantwell,
    Brown, Bennet, Casey, Hassan, Cortez Masto, Warren, Crapo,
    Grassley, Cornyn, Thune, Portman, Cassidy, Lankford, Daines,
    Young, and Barrasso.
        Also present: Democratic staff: Adam Carasso, Senior Tax
    and Economic Advisor; Michael Evans, Deputy Staff Director and
    Chief Counsel; Eric LoPresti, Detailee; Joshua Sheinkman, Staff
    Director; and Tiffany Smith, Chief Tax Counsel. Republican
    staff: Michael Gould, Detailee; Mike Quickel, Policy Director;
    Gregg Richard, Staff Director; and Don Snyder, Tax Counsel.

       OPENING STATEMENT OF HON. RON WYDEN, A U.S. SENATOR FROM
                 OREGON, CHAIRMAN, COMMITTEE ON FINANCE

        The Chairman. The Finance Committee will come to order.
        Once again, it is income tax filing season in America.
    Struggling after a decade of Republican budget cuts that have
    decimated staff, technology, and operations, the IRS is
    overwhelmed. Customer service has suffered. Enforcement against
    tax cheating by the wealthy has been hollowed out. There's a
    huge backlog of returns to work through.
        I want to emphasize, this did not happen by osmosis.
    Democrats and Republicans used to agree on the importance of
    funding the IRS. President Ronald Reagan, for example--nobody's
    idea of a tax-and-spend liberal--shared exactly that view.
    There were more employees at the IRS at the end of Ronald
    Reagan's term than there were at the beginning.
        The cuts that have hurt customer service and enforcement
    against cheats started more than a decade ago. Republicans had
    an opportunity with the big 2017 tax law to have changed
    course, corrected these issues, and unfortunately, that was not
    the case. They could have worked on processing to deal with the
    backlog, and the country would have been in better shape to
    deal with the stresses of the pandemic. That was not done. In
    fact, the budget cuts continued while the tax code got more
    complicated.
        So, the result is what you see today. Typical working
    Americans are dealing with tax filing nightmares, and wealthy
    tax cheats get away with rip-offs while they live the dream.
        I want to tick through several of the effects of these
    budget cuts--first, on customer service. According to the
    National Taxpayer Advocate, the IRS received a record 282
    million customer service phone calls during the last fiscal
    year. It was able to answer 11 percent of them--only 11
    percent.
        Now there is a cottage industry popping up--companies
    charge taxpayers hundreds or even thousands of dollars for the
    ability to cut the line and get through to the IRS by phone.
    This is an insult added to injury for the typical American, and
    it is a direct result of Republican budget cuts that have badly
    broken a basic government service.
        Second, on the IRS's aging technology. This committee has
    spent a long time discussing the decrepit IT used by the IRS.
    Incredibly, some of that information technology actually goes
    back decades to the Apollo program. A new report from the
    Inspector General out last week provided a clear example of how
    failing technology costs taxpayers money.
        The IRS gets a lot of mail, and some of it includes
    physical checks sent by taxpayers. The problem is, the machines
    that scan and sort the mail are just way out of date and unable
    to properly handle the envelopes that contain checks. This cost
    the taxpayer more than $56 million dollars in 2021 alone
    because the IRS was unable to open the right envelopes and then
    process the payments in time.
        So, in the long run, failing to invest in technology
    upgrades does not save taxpayer dollars, it costs them.
        Third, on enforcement. Commissioner Rettig, appointed by
    Donald Trump, has given the committee a few key facts. One is
    that the amount of taxes owed that go unpaid each year could be
    as high as $1 trillion. My colleagues, both sides of the aisle,
    we sat here when Commissioner Rettig said that, in his opinion,
    we were looking at a tax gap that could be as high as a
    trillion dollars.
        Another thing is that the IRS is especially overmatched
    when it comes to cracking down on partnership schemes. This is
    one of the go-to tax avoidance loopholes for the wealthiest.
    Partnership rules got a whole lot more complicated under Donald
    Trump. The IRS, meanwhile, is able to audit only a small sliver
    of the partnership returns that come in. This is in part
    because there are fewer auditors working today than at any
    point since World War II.
        Now, when the tax rules get more complicated and the IRS's
    enforcement division shrinks, it is no surprise that high-
    flyers see a green light for cheating. I would just say,
    colleagues, we have got to work, and work aggressively to stop
    this.
        Furthermore, at a time when a lot of members are concerned
    about prices going up for a lot of goods and services, closing
    the tax gap and making sure the rich pay what they owe is a
    promising way to cut the deficit and to fight inflation. I
    would rather go that route than cut financial support for
    working families who walk an economic tightrope every day.
        A couple of points, and then I want to let Senator Crapo
    give his remarks. Commissioner Rettig made the right call here
    in the last few days, dropping the plan to require taxpayers to
    use facial recognition to access their Internal Revenue Service
    data. Use of this technology raises serious concerns dealing
    with privacy and civil liberties, as well as built-in biases
    that can have a harmful impact on women, Black and Latino
    Americans, and seniors. My view is, when you're talking about
    digital identity, this is IT infrastructure. It is sensitive,
    and the government should not be outsourcing it.
        The Finance staff and I were in contact with the Internal
    Revenue Service as soon as it was clear this facial recognition
    contract was causing problems, and we pushed hard for them to
    reconsider. The IRS made the right decision. The reality is,
    protecting Americans' privacy and increasing security are not
    mutually exclusive. They are not. It is like what Senator
    Cornyn and I faced on the Intelligence Committee. The reality
    is, smart policies in both of these areas give you more liberty
    and more security. The same is true with respect to the
    economy. Not-so-smart policies give you less of both.
        Going forward, this is not just an IRS issue, because the
    same shady contractor and its facial recognition technology are
    used by nine other agencies. Senator Crapo and I have talked
    often about this issue and the committee doing more on privacy.
    I think it is ripe for bipartisanship, and I hope colleagues
    will want to work together on this going forward.
        I also want to welcome Erin Collins, the new Taxpayer
    Advocate. This is her first hearing with the committee. We
    always count on the Taxpayer Advocate--tough shoes to fill with
    Nina Olsen leaving, I am telling you that. She was incredible,
    and so we are glad the new Taxpayer Advocate is here, and the
    whole committee looks forward to working with her. We welcome
    all our guests.
        [The prepared statement of Chairman Wyden appears in the
    appendix.]
        The Chairman. Senator Crapo?

                 OPENING STATEMENT OF HON. MIKE CRAPO,
                       A U.S. SENATOR FROM IDAHO

        Senator Crapo. Thank you, Mr. Chairman, and I thank all of
    our witnesses for joining us today.
        For Ms. Collins, as my chairman has said, this represents
    her first official appearance before the Finance Committee in
    her role as the National Taxpayer Advocate, so we welcome you
    in that capacity as well.
        Let me divert from my prepared remarks for just a moment to
    respond to some of the comments of the chairman about the
    responsibility for this crisis we are seeing in the IRS right
    now.
        The entire attack from some on the other side of the aisle,
    saying that the cause of our crisis right now is the failure of
    Republicans to adequately fund the IRS over the years is, in my
    opinion, an attempt to try to justify why we see the crisis,
    and to try to justify their desire, which was built into the
    Build Back Better Act, of an $80-billion influx of revenue to
    the IRS, which, by the way, would have virtually doubled the
    budget of the IRS over a period of time, and would have been
    focused almost entirely--not entirely, but almost entirely--on
    basically funding an army of new auditors to go after the so-
    called ``tax gap,'' claiming that that tax gap was among very,
    very wealthy individuals who are tax cheats.
        When you look at the tax gap, which is from data I received
    from the IRS, this so-called tax gap--and there is a tax gap--
    that tax gap comes largely in the lower- and middle-income
    categories from people who are having difficulty figuring out
    how to deal with the complex IRS code. That is not the entirety
    of it, but that is where the focus really is. And that is why
    we were fighting so hard not to have such a heavy-handed
    response, to help those in our society who are having
    difficulty dealing with the IRS not to just face basically an
    increased enforcement pressure.
        What we need is assistance from the IRS, and I think that
    we can find some common ground there if we can work in that
    context. I should also note, just for a couple of data points,
    you can make data look like you want it to as you pick your
    starting points and your ending points for analysis, but over
    the years I think that the IRS budget has pretty much kept up
    with inflation.
        In the last 4 or 5 years, the IRS budget has been
    appropriated at 100 percent of their budget request. This was
    not a problem that came about because Congress was refusing to
    give the IRS its requested budgets. It is a problem which the
    IRS leadership has told us, as recently as a day or so ago,
    came about because of the pandemic, which shut down the IRS,
    just like it shut down much more of the economy. And the
    ensuing problems have come because of that, and because of the
    inability of the IRS to adequately update its IT and be able to
    actually communicate with taxpayers, which is what I hope we
    will be able to discuss significantly today.
        So let me go on quickly. This committee relies on the
    Taxpayer Advocate Service for analysis, guidance, and vital
    assistance for our constituents, and for taxpayers across the
    country. That assistance is especially useful in the current
    environment.
        By any measure, the 2022 tax filing season is shaping up to
    be the most challenging and frustrating in decades, on the
    heels of challenging 2020 and 2021 filing seasons. In 2021,
    just over 1 in 10 Americans was ever able to reach the IRS by
    telephone. More than 250 million calls to the IRS went
    unanswered in 2021. Those who did manage to get through spent
    more than 23 minutes on hold, to say nothing of the lengthy
    waits spent by those who could not get through at all.
        Also in 2021, the IRS began the tax filing season with a
    backlog of more than 13 million unprocessed tax returns from
    the prior season, and it began this year's tax filing season
    with an even greater backlog of at least 18 million unprocessed
    tax returns and correspondence. This backlog has grown to over
    23 million items today.
        Currently, millions of Americans need to file their tax
    returns, despite not having their last year's tax returns even
    processed. These are by no means the only areas of deep
    concern. Many Americans await last year's tax refunds. Many
    Americans await any response to correspondence they sent to the
    IRS, in many instances many months ago. Many Americans have
    received incorrect or outdated information from the IRS, or
    have been subject to improper collections or other adverse
    actions simply because the IRS does not know they have filed a
    return or responded to a notice.
        Many Americans cannot receive accurate answers to basic
    questions, like how long it will take to receive their tax
    refund or an answer to their correspondence. These problems
    show no sign of abating and appear to be magnifying. Even at
    this very early stage of the season, significant filing delays
    already abound--and new problems are arising.
        For example, many taxpayers are struggling to reconcile the
    stimulus and Advance Child Tax Credit (ACTC) payments they
    received in 2021 with the applicable tax credits they are
    allowed, and countless others do not even realize that they are
    required to do this. Official communications meant to assist
    taxpayers with these tasks have, in many instances, only added
    to the confusion or were simply inaccurate.
        I appreciate the willingness of the IRS to be open to
    providing relief to taxpayers affected by the straining
    circumstances of this tax filing season. But the IRS has the
    ability to do more, and the taxpayers deserve more.
        This is the third consecutive filing season impacted by
    COVID, and it is time for the IRS to demonstrate that it has
    learned, and will grow, from the prior two.
        Despite the many issues plaguing the IRS, I do support the
    agency's efforts to further its essential mission, and I salute
    the sacrifices its employees are currently making to ``do
    more.'' I look forward to the hearing today and hearing the
    perspectives of our witnesses on these issues.
        Thank you, Mr. Chairman.
        [The prepared statement of Senator Crapo appears in the
    appendix.]
        The Chairman. Thank you, Senator Crapo. And we could
    probably go back and forth all morning. I am just going to make
    a comment, and then we are going to put the rest of the figures
    in the record.
        I was particularly struck by this argument with respect to
    service before the pandemic. In 2019, the Internal Revenue
    Service employees answered less than a third of the calls to
    the Internal Revenue Service.
        So, Senator Crapo and I work together on a lot of issues.
    This is one where we have differences of opinion, but I sure
    hope we can go back to the old days that were led by Ronald
    Reagan with a lot of bipartisanship, because the country needs
    it.
        All right, we are ready for our guests. Ms. Collins, the
    National Taxpayer Advocate--we very much appreciate her. And
    then we have Ms. Jessica Lucas-Judy, the Director of Strategic
    Issues at the Government Accountability Office. She has been
    doing good work on those issues for a number of years. And then
    we have Ms. Jan Lewis, the chair of the American Institute of
    CPAs' Tax Executive Committee.
        We welcome all of you, and we will go forward with your
    comments, first, Ms. Collins.

       STATEMENT OF ERIN M. COLLINS, NATIONAL TAXPAYER ADVOCATE,
                INTERNAL REVENUE SERVICE, WASHINGTON, DC

        Ms. Collins. Chairman Wyden, Ranking Member Crapo, and
    distinguished members of the committee, thank you for inviting
    me today to testify at today's hearing, ``Spotlighting IRS
    Customer Service Challenges.''
        As I wrote in my recent report to Congress, this past year
    was the most challenging year taxpayers and tax professionals
    have ever experienced. Millions of taxpayers are confused. They
    are frustrated, and they are still waiting for the refund from
    the last filing season.
        Taxpayers who called the IRS toll-free line last year were
    only able to reach an IRS employee 11 percent of the time.
    Thousands of businesses are still waiting to receive the
    Employee Retention Credit and other benefits that Congress has
    provided. And although the IRS's Where's My Refund? tool
    received more than 632 million hits, it often was unable to
    answer the question.
        A toxic combination of office closures early in the
    pandemic, inadequate staffing, antiquated IT systems, and the
    need to divert resources from core work to administer the three
    rounds of stimulus payments, the monthly Child Tax Credit
    payments, and several financial relief programs, has created an
    unprecedented imbalance between the IRS's workload and their
    resources.
        During the past 18 months, the inventory backlog has
    continued to snowball. We need to put the processing backlogs
    behind us and get the IRS out of the hole it finds itself in,
    and get the IRS to a stable and healthy condition so it can
    perform its core mission.
        When I released my annual report last month, I said paper
    is the IRS's kryptonite--and the agency is buried in it. I want
    to elaborate on that point, because paper remains at the heart
    of the IRS challenges in the processing of returns.
        For context, IRS received almost 170 million individual
    income tax returns last year. About 90 percent were filed
    electronically. And if there were no problems, they were
    processed quickly and the refunds were paid in under 21 days.
    But paper is different.
        The IRS still transcribes paper line by line, number by
    number. Last year the IRS received about 17 million original
    paper returns, and processing delays have been running up to 10
    months. And still we have over 4 million amended returns that
    taxpayers are waiting to be processed. And when the IRS
    requires additional information or proposes a change to the
    taxpayer's liability, it sends the taxpayer written notice.
    Most likely the taxpayer is going to respond in writing, adding
    to the correspondence backlog.
        All of these delays contribute to taxpayers' frustration
    and confusion. The main question I am sure you and millions of
    taxpayers are asking is, ``What can the IRS do now to catch up
    on its paper backlog?''
        As I see it, we have two plausible options. One is to
    leverage the IRS employees and to use outside vendors to assist
    with the clerical work. The other option is to automate some of
    this work.
        For background, there are two IRS functions involved in
    processing the tax return: submission processing and accounts
    management. Submission processing is the first step in the
    process. Electronic returns are processed. The paper original
    returns are transcribed, and paper amended returns are either
    transcribed or scanned for submission processing.
        By contrast, the accounts management group consists of what
    most people think of as the customer service representatives
    who answer the phone. But they also process original amended
    returns, and they process the taxpayer correspondence.
        Recently, the IRS announced it has an inventory surge team.
    The Commissioner is going to assign about 1,200 employees to
    account management designed to help process amended returns and
    correspondence. That was an important first step.
        The IRS is now establishing a second surge team to put
    additional resources on the processing challenges. The IRS
    recently announced a welcomed suspension of many of the
    automated notices while it gets caught up on the backlog.
        These additional steps should reduce phone calls and
    eliminate the need for additional correspondence and, more
    importantly, reduce some of the taxpayers' frustration.
        And third, the IRS is in the process of outsourcing for
    staffing to assist in this submission processing function,
    which again will provide much-needed relief.
        The second viable option is to automate the paper
    processing through scanning technology, with a goal of
    automating the process so returns can be machine-read, avoiding
    the need for a manual key on every number.
        In closing, taxpayer service must improve. And for that to
    happen, the IRS first needs to eliminate the backlog, pay the
    delayed refunds, get current on its work, and then return their
    focus to improving taxpayer service and protecting taxpayer
    rights. Americans deserve better. Our citizens deserve a
    responsive and respectful tax administration that serves all
    taxpayers fairly and timely.
        So, thank you, and I look forward to your questions.
        [The prepared statement of Ms. Collins appears in the
    appendix.]
        The Chairman. Proceed, Ms. Lucas-Judy. Go ahead.

     STATEMENT OF JESSICA LUCAS-JUDY, DIRECTOR, STRATEGIC ISSUES,
            GOVERNMENT ACCOUNTABILITY OFFICE, WASHINGTON, DC

        Ms. Lucas-Judy. Chairman Wyden, Ranking Member Crapo,
    members of the committee, I am pleased to be here today to
    discuss preliminary observations from GAO's ongoing work at
    IRS: first, challenges in processing tax returns in 2021 that
    resulted in delays and increased costs; and second, struggles
    taxpayers faced getting help.
        Both of these have important implications for the current
    2022 filing season that I will discuss as well. IRS faced an
    unprecedented workload in 2021 that included delivering COVID-
    19 relief. IRS also had to manage typical filing season
    operations during the pandemic.
        By mid-February of last year, as the filing season began,
    IRS had a backlog of about 8 million unprocessed returns from
    2020. IRS adjusted staffing at processing centers and relied on
    overtime to handle the returns. By mid-December, IRS had
    entered all the returns received in 2020 through its processing
    systems. However, we are again seeing that IRS has a return
    backlog this season.
        As of the end of 2021, IRS had about 10.5 million returns
    from that year that had not been fully processed. IRS may need
    to again rely on overtime to process the backlog and manage
    incoming returns.
        The high volume of returns with errors was another
    challenge. From January to November, our preliminary work
    indicates IRS suspended about 35 million returns due to errors.
    Now that is a big increase; about 86 percent more than in prior
    years. These errors required manual review and correction,
    which led to refund delays for millions of taxpayers. Delays
    cause hardships for taxpayers, and can also cost the government
    money.
        In the last 7 years, IRS has paid almost $14 billion in
    interest on refunds. In our ongoing work, we are analyzing data
    on refund interest payments and exploring factors that
    contributed to that increase.
        Turning now to customer service, IRS answered more calls
    during the 2021 filing season than the last four filing
    seasons. But an unprecedented increase in calls resulted in a
    low level of customer service overall. From January until the
    end of the filing season in May, calls increased about 400
    percent from 2019. IRS said it did not have enough staff to
    meet the demand. It hired 3,800 customer service staff by the
    end of the filing season, but they needed training, and they
    were unable to answer calls during the busiest time.
        In part to help manage the call volumes, IRS directed
    taxpayers to use its online application Where's My Refund? to
    get the most up-to-date information. But our ongoing review
    indicates Where's My Refund? provides limited information, and
    user satisfaction declined.
        IRS recognizes Where's My Refund? has limitations, but does
    not have plans to modernize it. We know that IRS has
    significant long-term efforts underway to upgrade its IT
    infrastructure, and modernizing Where's My Refund? will take
    planning and resources. So we are continuing to explore these
    challenges in our ongoing work.
        IRS's correspondence inventory also increased. Our
    preliminary analysis indicates that, as of the end of the 2021
    filing season, it was nearly three times the average inventory
    from prior years. Further, almost half of that was over age.
        IRS's different customer service options are
    interdependent, often sharing the same staff. IRS struggles to
    balance competing demands of the telephone and written
    correspondence because many staff are responsible for both
    duties. Further, when taxpayers cannot find the information
    that they need using online resources, they call, or they send
    mail.
        To help address immediate needs, IRS converted seasonal
    workers to permanent hires, rehired former staff, and used a
    streamlined hiring approach. Our ongoing review, however,
    indicates IRS encountered challenges hiring enough new returns
    processing staff during fiscal year 2021. Attrition further
    affected staffing, with the attrition rate for returns
    processing staff more than twice the agency's overall rate.
        We recognize overtime is a necessary tool to help manage
    unexpected surges in workloads, but it is not sustainable to
    rely primarily on overtime to offset complex human capital
    challenges such as reduced staffing levels and attrition. IRS's
    use of overtime may also indicate a larger need for a strategic
    workforce plan that addresses mission-critical skills gaps. In
    2019, we recommended IRS establish such a plan. IRS agreed, but
    the effort to implement that has been delayed.
        In conclusion, ongoing challenges precipitated by the
    pandemic, and new responsibilities to provide relief to
    Americans, adversely affected IRS's return processing and
    customer service. Amid these challenges, IRS issued Economic
    Impact Payments and answered more calls than in prior years.
    Nevertheless, new and persistent challenges that IRS faces pose
    risks for the 2022 filing season.
        Chairman Wyden, Ranking Member Crapo, members of the
    committee, this concludes my prepared remarks, and I look
    forward to any questions you have.
        [The prepared statement of Ms. Lucas-Judy appears in the
    appendix.]
        The Chairman. Thank you very much, Ms. Lucas-Judy.
        Ms. Lewis, welcome.

      STATEMENT OF JAN F. LEWIS, CHAIR, TAX EXECUTIVE COMMITTEE,
               AMERICAN INSTITUTE OF CPAs, WASHINGTON, DC

        Ms. Lewis. Thank you. Good morning, Chairman Wyden, Ranking
    Member Crapo, and members of the committee. My name is Jan
    Lewis, and I am chair of the AICPA's Tax Executive Committee,
    and a CPA and a partner at Haddox Reid in Jackson, MS.
        On behalf of the AICPA, I am pleased to have the
    opportunity to testify. However, I really should not be here
    today. It is tax season, and I should be at home in Mississippi
    helping my clients. But I am here today because there is still
    time to salvage this filing season, or at least make a
    difference.
        Over the past several years, we have experienced a variety
    of service issues with the IRS, most of which relate to
    erroneous notices, slow processing of returns and written
    correspondence, and difficulty in reaching the IRS by
    telephone. These problems have been magnified in the past 2
    years. And at times we, as CPAs, feel powerless to help our
    clients navigate these IRS service issues.
        For example, my clients are getting notices to file forms
    and returns that they have already filed. Several clients
    received notices stating that the IRS needs more time to
    resolve an issue, but there is no record of an original notice
    ever being received.
        We have had clients receive notices regarding payroll Form
    941s stating that the IRS needs more time, but the client has
    no employees and does not even file payroll tax returns.
    Clients are still waiting for refunds from Forms 941 and 941-X
    filed to claim the Employee Retention Credit for 2020 and 2021.
        I could go on for hours with examples, but let me just give
    you one more that is particularly frustrating. Several pass-
    through entities were not able to file their 2019 returns
    before the extended due date in 2020 because of various issues
    related to the pandemic. All were only 1 or 2 months late, but
    despite the IRS's indications that there would be penalty
    relief for late filings due to COVID, the telephone answerers
    had no knowledge of any special pandemic relief when we have
    called.
        Taxpayers and practitioners understood that the IRS would
    offer leniency, but that simply did not happen, and penalties
    were assessed. This is not just about my own personal
    experiences. We are hearing every day from CPAs who are having
    the same types of problems.
        When the pandemic hit in 2020, we know the IRS did have to
    shutter campuses and offices. They did have to learn a new and
    safer way to do business. Relief legislation did bring
    additional work for the IRS, and questions and confusions
    brought the unprecedented call volumes from taxpayers and their
    advisors.
        But the past 2 years have been like none of us could have
    imagined. Frankly though, we expected a little more flexibility
    and a little more empathy from IRS leadership. As the work
    piled up beyond historic proportions, the AICPA continued to
    give suggestions to reduce some of that work.
        Let me be clear. Our suggestions will not fundamentally fix
    the problems, although in my written testimony I do outline
    some strategic long-term recommendations that may help. But for
    almost 2 years, we have offered suggestions on how to slow down
    the work coming in, particularly the paper, so that the IRS can
    have a better chance to catch up.
        We started on our own, and this year we found 12 other
    willing partners to form the Tax Practitioners United for
    Taxpayer Relief Coalition, which easily came together to help
    mitigate the burden on taxpayers and practitioners. So here are
    our suggestions. All of these are steps the IRS can implement
    now on its own.
        Temporarily postpone all automated compliance actions.
    Adjust account hold time. Liberalize the reasonable cause
    penalty waiver process. And provide taxpayers with targeted
    relief from both the underpayment of estimated tax and late
    payment penalties.
        We would like to acknowledge the recent steps taken by the
    IRS in reaction to this growing expression of concern,
    including the suspension of some notices and letters. However,
    we must urge the Service to move as quickly as possible to
    offer all available reasonable measures of relief. We are
    already in the throes of filing season. Time is of the essence.
        Before I conclude, I would like to bring up one other item:
    IRS's insistence on the implementation of the reporting on
    Schedules K-2 and K-3 for this filing season, without the
    ability for those forms to even be e-filed before the due date
    of the returns.
        Additional IRS changes to the instructions for these forms
    mid-filing season added even more confusion to the issue. So,
    although we do appreciate the recent IRS statement regarding
    transition relief, given the already unprecedented processing
    backlogs, the AICPA has deep concerns that implementing these
    new requirements will ultimately exacerbate the challenges
    everyone in the tax administration community already is facing.
    And they conflict with the intended goal of Schedules K-2 and
    K-3.
        We therefore recommend the IRS delay the implementation of
    the Schedule K-2 and K-3.
        Thank you again so much for the opportunity to be here
    today, and I look forward to answering any questions you may
    have.
        [The prepared statement of Ms. Lewis appears in the
    appendix.]
        The Chairman. Thanks to all three of you. And you can only
    imagine the typical taxpayer sitting out there gnashing their
    teeth listening to all of these tortured exercises through a
    kind of bureaucratic never-never land. And I want to see if I
    can ask a question that might provide a path for really going
    forward that we could both work on, Democrats and Republicans
    together.
        So you all have made a very convincing case that the
    information technology at the IRS is from the Dark Ages. So we
    have Ms. Collins saying, for example, the IRS has at least 60
    different computer systems that cannot talk to each other. That
    is kind of a show-
    stopper.
        Clearly that ripples through to customer service, which is
    why I mentioned all these people listening to all this who
    cannot get through. And I am going to give you an example.
        Right now, if you call the IRS about your refund, the
    person who answers the phone may not have access to the
    information that the caller needs. So I checked the IRS's
    Where's My Refund? tool, and it cannot talk to other systems to
    find out what I need to do to get my refund. And I cannot send
    the IRS an email.
        So I've got to write the IRS and make another call, adding
    to the backlog of things that the IRS has to process manually.
    So that is why I described this kind of intersection out there,
    in the bureaucratic never-never land, that the typical taxpayer
    faces of outdated technology and the service problems.
        So, my question to all of you--and I noted the last
    comments by Ms. Lewis about actually getting the upgrades done
    and doing it quickly. It just seems to me that you have a
    fundamental challenge of how you get the IRS to make major
    upgrades to 60 different computer systems while they are
    running the filing season, and probably not even knowing how
    much money has to be spent on upgrades to really get at the
    problem.
        I would just get each one of you involved. What is the
    challenge here to getting a permanent fix--a permanent fix? We
    will start with you, Ms. Collins. We will just go down the row.
    What is the path to getting a permanent fix so we can upgrade
    the technology for the long term, rather than just putting
    band-aids on, and in that way improve customer service?
        Ms. Collins?
        Ms. Collins. Yes, I think you hit the nail on the head by
    describing the stand-alone systems that the IRS has. They do
    not talk to each other, so it is very difficult for an IRS
    employee to assist either an IRS employee or the taxpayer
    without getting all of these systems integrated.
        So in essence, the IRS needs to get out of the age of the
    dinosaur or the Dark Ages, as you indicated, and we need to
    modernize our systems. We need to--in essence, the entire
    infrastructure that it was built upon, which is at least 40,
    50, 60 years old, we need to correct that. And then the systems
    can work in concert with each other.
        But it is our underlying systems that have been around for
    a long period of time that need to be upgraded so we can
    modernize the entire system.
        The Chairman. Does anybody have a plan to do this? Because
    I constantly hear about the status quo, which is why I
    described taxpayers listening to all this and gnashing their
    teeth, but you do not hear as much about a game plan or a
    strategy for getting beyond that band-aid placement program.
        Ms. Collins. Yes, the challenge, in my discussions with the
    IRS, is it is really--they look at it as a funding issue. This
    is a heavy lift for the IRS. They need to have sustained, long-
    term funding in order to take on a project that size.
        Congress, with respect to the monthly payments, provided
    resources, so they were able to come in and do that. And they
    did it in a very short period of time. But again, it is another
    stand-alone system. We need to start with the foundation and
    work our way up.
        So if you were to ask the IRS, they do have a plan. But
    unfortunately, it involves long-term funds.
        The Chairman. We are going to ask them about that at the
    next hearing, actually.
        Okay, Ms. Lucas-Judy, your thoughts?
        Ms. Lucas-Judy. I would just add that GAO is currently
    reviewing IRS's plans for modernizing its systems, including
    the Individual Master File and others. But overall, IT
    management and acquisition is a high-risk issue across the
    government. And it is important for IRS to have an inventory to
    know what it currently has, to prioritize how it is going to
    address the different systems, know what that is going to cost,
    have a schedule, and then have a plan in place to be able to
    monitor and report to Congress and others on its progress.
        The Chairman. Ms. Lewis, your comments really were a big
    factor in my asking the question the way I did, because I do
    see this intersection between outdated technology and customer
    service problems. What are your thoughts about getting beyond
    just slapping band-aids on things?
        Ms. Lewis. Well, Senator Wyden, I appreciate your comments.
    And while, as a practitioner, it is not my role to budget for
    the IT at the IRS, we know that technology and staffing and
    budget are critical for the IRS. And we have steadfastly
    supported that, as long as there is a balance between
    enforcement efforts, IT efforts, and customer service.
        The specific comment that I made about the Schedules K-2
    and K-3 not being able to be--it is a particular issue with
    practitioners. This is a schedule that has come out for pass-
    through entities. In 2020, we knew it was going to come out. We
    knew it would be required. But it is still not able to be
    included in an e-filed return, and it will not be until at
    least late March for partnerships.
        The Chairman. I am going to keep the record open for those
    of you who would like to put some thoughts on paper with
    respect to what I think is almost the existential question for
    reform: how do you do the big upgrade while still giving people
    better service? Put it down on paper for the Democrats and
    Republicans--like I mentioned as was done with Ronald Reagan--
    to get serious about fixing this.
        Senator Crapo?
        Senator Crapo. Well, thank you, Mr. Chairman. And I want to
    follow up on Senator Wyden's questions. This shows that we can
    find an intersection where we can find some serious agreement
    on a bipartisan basis. And so I am going to follow up just to
    try to noodle out a little bit more information about this
    exact question.
        And, Ms. Collins, I really found interesting your comment
    about paper being the kryptonite for the IRS. As Americans who
    listen to your testimony heard you say that and describe it,
    and then heard the rest of the testimony of our panelists, it
    must have been mind-blowing to them to believe that that is the
    way it is with the IRS in terms of their IT infrastructure and
    technology.
        And it seems to me that this is something that we really do
    need to solve. I have asked the IRS, and will continue asking
    them, as Senator Wyden said. In our next hearing on this, I
    expect that we will have a chance to ask them here, what is
    their plan? And what is it going to cost? How do we need to
    fund it to get this issue solved?
        Just a couple more data points. As you know, in fiscal year
    2021, the IRS was given a special $1-billion allocation for IT
    modernization. This represents about three to four times its
    annual IT modernization appropriation request. But we do not
    know whether that was enough, or whether it was just a drop in
    the bucket, or how we need to deal with it.
        Yet currently, the IRS has actually only spent, or
    committed about $160 million of that appropriation, around 16
    percent. If you go on, from fiscal year 2018 through 2021, on
    average only 1.44 percent of the IRS's appropriated funding has
    been allocated to modernization, as compare to nearly 42
    percent for enforcement, and 35 percent for operations support,
    which includes trying to stand up and maintain the existing
    outdated infrastructure.
        As you know, the IRS gets around 10 percent of its
    operating budget from non-appropriated funds such as user fees,
    and it entirely controls how these fees are spent. Are these
    being allocated to modernization? Or are they being allocated
    to some other function?
        So my question, which I would really like each of you to
    respond to briefly--we have about 2\1/2\ minutes for you to
    finish your responses here--is just, can you put a little more
    detail on this? Do we have any notion?
        Ms. Lucas-Judy, you indicated that you are reviewing their
    plan, which means they must have a plan. Is there any notion as
    to whether the plan is sufficiently detailed that we could know
    how much it is going to cost? What do we need to do in terms of
    making that funding support available for the IRS to get this
    issue fixed? Could we, again, just go down the line?
        Ms. Collins?
        Ms. Collins. Yes, my understanding as well is that they do
    have a plan. I believe they have a price tag associated with
    the plan. I think their concern is that it is a very large
    number, that they cannot start it without multiyear funding.
    And so it is sort of, you start and stop a project this size,
    and so what they have been doing, unfortunately, is a large
    percentage of their operation, or their budget, goes to what I
    call putting the band-aids on the 60 legacy systems.
        We need to decommission those systems and, again, start
    from the foundation and work our way up. Again, my
    understanding is they do not feel they have the funding
    sufficient for multiyear efforts to do the foundation. So
    again, we are working on the band-aids to keep the system
    running.
        Senator Crapo. Do you have any idea what that funding
    amount is? Can you give us a ballpark idea?
        Ms. Collins. I do not. We can always supplement it and get
    that information for you.
        Senator Crapo. All right. I would appreciate that.
        Ms. Lucas-Judy?
        Ms. Lucas-Judy. Likewise, as I said, we are looking at the
    plan. It was delayed somewhat, in part from the pandemic, and
    from the same supply chain issues that others have been dealing
    with, but really the multiyear funding, I think, was one piece
    of it.
        Also, it is important that the plan is sufficiently
    coordinated with all the different parts of IRS and the
    different stakeholders to make sure that priorities are set
    among the different systems.
        Senator Crapo. Thank you.
        And Ms. Lewis?
        Ms. Lewis. I will defer to the GAO and the Taxpayer
    Advocate and look forward to working with them.
        Senator Crapo. All right.
        One quick question that any of you could answer, if you
    know the answer. It would seem to me that if we can get going
    on this plan and we can get down the road on coordinating,
    getting rid of the kryptonite, that we would save tremendous
    amounts of money in the IRS budget that is now being used to
    deal with kryptonite. Am I seeing that wrong?
        Ms. Collins. No. I think--not only do I agree, but if you
    ask the IRS, I think they would wholeheartedly agree with that
    as well.
        Senator Crapo. All right; thank you.
        The Chairman. Thank you, Senator Crapo.
        Senator Cantwell?
        Senator Cantwell. Mr. Chairman, thank you, and thank you to
    the ranking member. I join my Northwest colleagues in
    ``technology update, technology update, technology update.'' We
    say this because we saw what happened last year with our
    constituents trying to get answers.
        And so, what was it?--one in nine actually were able to get
    through to the IRS as far as calls. So we believe that that
    focus--and if you talk to your accountant this tax season, you
    can see the complexity in the letters they are sending out, if
    you have an accountant. And if you do not have an accountant,
    the complexity is amazing.
        So there is lots to discuss, and people need answers. So
    one issue is, the IRS is piloting its use of online chat
    features, but right now it is limiting it to resolving
    collection notices. It has not been expanded to allow taxpayers
    to chat with customer service representatives about tax
    questions.
        In 2019, a GAO study compared the IRS online communication
    capabilities with other nations and found that taxpayers in the
    UK, Australia, and New Zealand were able to securely chat
    online with tax agencies to get answers to their questions. So,
    we need--I think California and Alabama also have revenue
    agencies that offer similar chat functionality.
        So, as we look at increasing the funding for the IRS to
    invest in the agency's technology workforce, what, Ms. Lucas-
    Judy, is part of that GAO study? Are you guys resisting this?
    What is the review of this process? What can we do to get this
    online communication support system in place for our
    constituents?
        Ms. Lucas-Judy. One of the challenges there was in
    security, trying to make sure that the function is sufficiently
    secure to be able to protect sensitive taxpayer information. We
    know that, as you mentioned, there are other places that have
    been able to put such a function in place. That is something
    that the IRS has been looking at and testing. And we are
    continuing to follow up with them.
        One of our recommendations to them from that report was
    that they better integrate taxpayer needs, making sure they are
    putting functions out there and systems out there, and
    prioritizing things that taxpayers actually want and will use
    and not just things that are sort of, you know, easy to do.
        Senator Cantwell. But you are saying that you use it for
    online chat for collections. The IRS uses it. Is that--do I
    have that right?
        Ms. Lucas-Judy. Right.
        Senator Cantwell. Okay, so you are using it to talk to
    taxpayers about sensitive tax information like, please, pay
    your bill, okay? But you do not want to use it to allow them to
    communicate to you about, listen, how do I do this and this and
    this?
        Ms. Lucas-Judy. That is something that GAO has heard that
    IRS is working on expanding. And as part of its taxpayer
    experience strategy, that is one of the functions that they are
    trying to expand.
        Senator Cantwell. Are you supportive of that?
        Ms. Lucas-Judy. We are supportive of anything that can
    protect taxpayer information but provide better customer
    service.
        Senator Cantwell. Okay, I am just confused. Do you think
    that there is not taxpayer information being discussed when you
    call them in an online chat for collection?
        Ms. Lucas-Judy. I have not reviewed that, so I am not sure.
    I mean, I would assume that there is.
        Senator Cantwell. I just think that we have to think about
    where our constituents are. And so, if you are using one
    technology to basically call them and use that as a
    communication tool, but then they have questions and they want
    to talk to you, you are saying we do not know whether it is
    secure.
        So, I think the issue is that countries around the globe
    are using it, because it is secure. Maybe, Mr. Chairman and
    Ranking Member, we need to look at how to upgrade the security
    technology----
        The Chairman. It sounds too logical.
        Senator Cantwell [continuing]. Of the IRS. And I am not
    saying that there are not real security issues, for sure, but
    at the same time I think this one in nine calls being answered
    during tax season is just not acceptable, and we have to figure
    out--we talked, obviously, with our IRS Commissioner about the
    surge capacity the IRS uses, but that is not enough. We have to
    get into the 21st century here with this level of
    communication.
        Thank you, Mr. Chairman.
        The Chairman. When Senator Cantwell talks technology,
    everybody listens.
        Senator Cornyn?
        Senator Cornyn. Thank you, Mr. Chairman.
        The witnesses today have painted a pretty dire picture of
    the IRS, and we appreciate you reporting to us some of your
    suggested solutions. I for one am skeptical that technology and
    money, which seem to be the answer to a lot of our problems
    these days, is going to be the panacea that is going to solve
    the problem. Maybe that is part of the answer.
        But actually, as bad as the IRS's record is, I would like
    to tell you that this is only part of the story. It is actually
    worse. For example, in fiscal year 2020 the Office of
    Management and Budget determined that the Earned Income Tax
    Credit, the additional Child Tax Credit, are susceptible to
    improper payments. As a matter of fact, according to the most
    recent reports, the IRS paid out in just one fiscal year $22.8
    billion in improper payments. That is money, taxpayer dollars,
    that went to a person who was not legally entitled to that
    money. And I believe the Taxpayer Advocate has listed this as
    one of their top concerns.
        So not only is the IRS not responding to customer inquiries
    and processing IRS returns for people--for their customers--
    they are actually writing checks to people who are not entitled
    to them.
        I noticed that the administration's budget request for 2022
    was $13.2 billion. And so the amount of improper payments that
    went out in 2020 was more than double the entire budget for the
    IRS. And I would note that, if the administration thought that
    more money was the solution--they made a budgetary request for
    a 10.4-percent increase over the previous year. But
    unfortunately, as you know, we have been operating on
    continuing resolutions and have not even passed an
    appropriation bill, a single appropriation bill, this year,
    which is a serious problem.
        I would like to ask Ms. Lucas-Judy: on top of the ordinary
    problems that the IRS has dealing with the tax code, in 2021
    Congress passed a number of additional tax legislative changes,
    including enacting a new temporary Advance Child Tax Credit,
    further stimulus payments, and a retroactive change in certain
    tax benefits of unemployment benefits. I am worried that we are
    not making the IRS's job any easier; we are just making it more
    and more difficult by passing that sort of legislation without
    actually considering what impact it would have on the IRS's
    ability to administer these changes.
        Can you help us better understand how each of these changes
    has repercussions for the filing season? And give us a sense of
    what this says about the tax legislative changes that Congress
    makes.
        Ms. Lucas-Judy. Certainly. Any changes that are made to the
    tax code or to IRS's responsibilities during an existing filing
    season, or right before the filing season begins, do cause
    challenges for IRS because then it has to redirect resources
    into putting systems and processes in place to be able to make
    payments, such as the Advance Child Tax Credit payments.
        It also causes confusion for taxpayers, because then, if
    rules are changing, they have to wait for IRS to get guidance
    out. Some people had already filed their taxes in 2021 when
    changes were made retroactively to taxation of unemployment
    benefits. And IRS scrambled to figure out a way to be able to
    process those returns and get people refunds if they needed
    them, without folks having to file an amended return and add to
    the backlog that IRS already was facing.
        So anything that can be done as far as making changes
    perhaps farther in advance of the filing season, would be
    helpful to taxpayers.
        Senator Cornyn. So it sounds to me like Congress, instead
    of making the IRS's job easier, is actually making it more
    complicated and making it worse. I think there are three
    questions that need to be answered to determine if the IRS is
    meeting its stated mission. One, do taxpayers find that filing
    their tax return was easier than the previous year? Secondly,
    were taxpayers' questions and problems handled as smoothly as
    account inquiries from their bank, their credit card company,
    or a utility? And, did the IRS treat taxpayers respectfully and
    professionally?
        I know my time is running out, but let me just ask all of
    you, if I can, if you had one priority, one recommendation that
    you could make, and only one, what would it be to fix this
    mess?
        Ms. Collins. Having a robust online account for not only
    individuals but for practitioners to access taxpayer records
    would make a huge difference. And I think, during the whole
    pandemic, we realized that telephones are a real challenge. And
    as you alluded to, this is not the same service you can get
    from your bank. We need to expand. We need to include chatting
    with an IRS agent, uploading documents, downloading documents.
        So, my vision from the day I joined is, we really need to
    get this and get it moving. And I would put that as a number
    one priority for improving taxpayer experience.
        Ms. Lucas -Judy. I am going to cheat a little bit and add
    to that and just say that the more things that we can do to
    encourage electronic filing, provide electronic processing of
    forms--this makes the system faster and cuts down on mistakes,
    both on the taxpayers' side and on IRS's side--would help
    significantly.
        Ms. Lewis. I will echo Ms. Collins's comments about having
    a tax practitioner's special third-party office with the IRS. I
    do think practitioners would welcome that. We have actually
    asked for that in the past.
        I do want to just circle back around--I apologize for being
    a broken record--but we are talking about customer service
    challenges right now, and we have heard about the backlog. So,
    if I had an immediate solution--we have some concrete
    solutions, but we have to stop the notice process, the
    automated notices, from continuing to come out. This is what is
    impacting taxpayers right now. And it is right now that we are
    worried about.
        The Chairman. I thank my colleague. I just want to take a
    quick minute, because my colleague raised a number of important
    issues. And we are going to do everything we can--and Senator
    Crapo and I have been talking about this--to see if we can
    engineer a bipartisan effort here.
        This is so important, talking about these systems that are
    still apparently using Apollo technology and the like. I just
    want to make one point.
        My colleague from Texas said a big problem is Earned Income
    Tax Credit and Child Tax Credit fraud. Now I am against fraud
    everywhere, but the evidence is, that is not where the big
    money is. That is not where the heart of the problem is, with
    those people who are walking an economic tightrope. They spend
    the money they get on basic services: food, shoes, and the
    like.
        But the fact is, today wealthy tax cheats in a big
    partnership are more likely to get hit by a meteor than they
    are to be audited. And so, we really have to find a way to
    bring basic fairness into this. And it certainly starts at the
    top. So we will continue this discussion, and I am going to do
    everything I can to find common ground with colleagues.
        Senator Cardin?
        Senator Cardin. Mr. Chairman, thank you very much. I have
    been listening to the exchange, and I really do think this
    committee has an extremely important role to play here.
        I am proud of our chair and ranking member working
    together, and I understand the exchanges that took place a
    little bit earlier, but I think it is critically important that
    this committee protect the integrity of the IRS and give it the
    resources it needs in order to carry out its important mission.
        We know there will be members on both sides of the aisle
    who will beat up on the IRS. That is just what happens. We have
    to make sure that it gets the support it needs to carry out its
    mission. And I appreciate all three of our witnesses being
    here.
        Ms. Lewis, I know it is tax season. I heard your comments.
    Thank you for being here, because we appreciate that very much.
    The IT issues are incredibly challenging. And yes, we need to
    have a plan from the IRS. We need to review that plan. We have
    to recognize the investments that are going to be necessary to
    do that.
        But then Congress needs to act to give them the long-term
    commitment of resources in order to implement the IT
    modernization. And we have been talking about this now for
    about 30 years, so this is not a new subject for our committee.
    But we have to make that commitment to upgrade the IRS's
    technology, because the paper explosion just--we have a
    responsibility to deal with that.
        In regards to the personnel, look, the numbers speak for
    themselves, as the chairman pointed out. The number of IRS
    employees today is what it was 20 or 30 years ago, and the
    volume has increased by such a dramatic amount. They need the
    numbers. They need the training support.
        I want to go on--and first of all, I want to compliment the
    very talented people, the line workers at the IRS who are doing
    an incredible service under extremely challenging
    circumstances, and I thank them for their willingness to stick
    by their posts and help us deal with this issue.
        I want to deal in my time, if I might, with two issues. So
    let me start first with my responsibilities as chair of the
    Small Business Committee. I think we have not paid enough
    attention to small business owners. Small business owners are
    burdened by the individual tax issues. They are not using the C
    rate. So I would welcome, Ms. Collins, if you have some
    thoughts as to how we can be more user-friendly to small
    businesses, particularly to really small ones, the ma and pa's,
    how we can help them in perhaps policy changes, or changes
    within the IRS to be more friendly towards those small business
    owners who do not have the capacity to have the accounting
    services either in-house or by contract in order to deal with
    the tax challenges.
        Ms. Collins. Yes, I think small businesses, as you pointed
    out--and COVID has hit them really hard these last 2 years. So
    I think, as we all acknowledge, the tax code is anything but
    simple. And trying to comply and do the right thing is a very
    difficult process.
        A lot of small businesses, as you pointed out, do not have
    the funds to hire a CPA or accountant. They do try and do it
    the best they can. So I think the IRS is trying to reach out,
    doing a lot of outreach for small business. We really need to
    help educate them, bring them into the fold, and explain to
    them what needs to be done.
        So I think we really need to look at some of the under-
    resourced communities and help those businesses out.
        Senator Cardin. Thank you.
        I do not know, Ms. Lucas-Judy, if you have a comment on
    that. I would welcome your thoughts.
        Ms. Lucas-Judy. Likewise, we are looking at outreach, and
    how IRS has been reaching out to small businesses with regard
    to COVID relief, the provisions that are there for them, and to
    see the extent to which small businesses are able to take
    advantage of those provisions--so, anything the IRS can do to
    improve customer service there.
        Senator Cardin. And, Ms. Lewis, what I would appreciate
    from you is--the 2017 tax bill did very little to help small
    companies. Pass-through issues have certainly not been helpful
    to a lot of my constituents.
        Can you just share with us your thoughts as to how we could
    do a more effective job in the tax code as far as policy to
    help small companies that use the individual tax rates?
        Ms. Lewis. Thank you. And, Senator, this is really an issue
    that I am passionate about in what my clients do. They are
    small businesses. I grew up as the daughter of an independent
    pharmacist who had his own store, and I watched him every day
    come home after working till 6 o'clock to do the sales tax
    returns, and the payroll tax returns, and all of the compliance
    activities. And that is what I do for my clients right now.
        It is burdensome. It is complex. But we are here to help in
    any way that we can. And I would appreciate any technology
    updates as well. But again, I am going to go back to my point.
    What is burdening my small businesses right now is the unending
    notices, and not being able to reach the IRS.
        Senator Cardin. I appreciate that.
        Mr. Chairman, just one additional comment, and that is on
    the paid preparers. As we know, the IRS lost that authority. We
    have not been able to come together to correct that. I know the
    chairman has been very interested in it.
        Ms. Collins, could you just give us your thoughts as to the
    need for the IRS to have the authority to deal with the paid
    preparers?
        Ms. Collins. Yes; my office has been a very big advocate.
    And I think, unfortunately, what we see is, we have a lot of
    taxpayers come in who have been the victim of individuals who
    are not qualified to prepare returns. And that is something
    that I think, across the country, we need to stop.
        Some folks may be well-intentioned when they get it wrong,
    but I think there are other folks who actually are taking
    advantage of taxpayers. And we think by regulating it and
    providing some standards, hopefully that would weed out some of
    those bad actors.
        Senator Cardin. Thank you.
        Thank you, Mr. Chairman.
        The Chairman. I thank my colleague, and his expertise on
    the small business issue is going to be absolutely crucial when
    we wend our way to some really permanent reforms.
        I think Senator Cassidy, my colleague from Louisiana, is
    online and ready to ask some questions. Senator Cassidy?
        Senator Cassidy. Thank you, Mr. Chairman. Thank you all for
    being here.
        Ms. Lewis, I am going to start with you, and I am going to
    give a little bit of context on this. And I am channeling my
    CPAs back home, and you would understand why this is so
    important to them.
        Ida, Hurricane Ida, hit Louisiana, and many found
    themselves without power. In fact, I went down to one place--
    total devastation--and the wife of the fellow doing the
    emergency management was most concerned about getting her tax
    forms in timely.
        And so, even people who are punctilious nonetheless are
    having a problem. And so I am told that in response to the
    disaster, the IRS extended filing deadlines for businesses and
    individuals in Louisiana, Mississippi, Pennsylvania, New
    Jersey, New York, and Connecticut, until February 15th. And I
    appreciate that. But I am also told, according to my
    accountants, that after November the 15th returns had to be
    filed as paper returns because software vendors in the
    government shut off the system to prepare for the upcoming
    filing season.
        So my concern is that all these folks filing by paper are
    going to have their returns stuck with millions of others that
    were delayed and, with only 11 percent of the phone calls being
    answered, that they will not be able to get through.
        So, Ms. Lewis, just from your experience, how does the
    delay at the IRS impact those business individuals taking
    advantage of a disaster tax relief, and what can the IRS do to
    provide relief in the situations such as I described?
        Ms. Lewis. Thank you, Senator Cassidy. I know this
    firsthand, not only because I am from Mississippi next to your
    State, and we do deal with disaster relief, but we specifically
    dealt with Hurricane Ida concerns. In my case, I actually had
    to stop my preparation for this hearing so that I could finish
    those last returns that were due February 15th.
        I think the issue was, the original extension date was
    January the 3rd, which made sense according to some 90-day
    timeline after the hurricane, but in that January time frame I
    had clients that were ready to file. And we had these
    conversations about should I go ahead and file a paper file?
    How long will it take to get my refund? Or should I wait until
    IRS filing season opens up on January 24th and then e-file my
    return? It will be late, but at least it will be e-filed.
        It was a real struggle for us in talking to taxpayers about
    that. Fortunately, they did come back and give us until
    February 15th, and I think in large part because that way we
    could e-file these returns. That was a tremendous help. But we
    continue to have issues with disasters, and we have supported
    the disaster retirement savings act and other disaster relief,
    and AICPA stands ready to help in any way on disaster relief,
    because we do need that permanent relief.
        Senator Cassidy. Well, kind of related to that--and I will
    follow up with you, and perhaps also a question for Ms.
    Collins--I am told that there is a system, an internal system
    known as an O freeze. The IRS is supposed to flag the ZIP codes
    affected by disasters so those eligible to receive relief do,
    but there is some measure of errors associated with this.
        Now again, these are my accountants, and accountants are
    paid to be anxious for their clients' welfare. Because I asked,
    how often is ``sometimes,'' but I did not really get an answer
    on that. But I can imagine that failure to flag these ZIP codes
    correctly is going to cause potentially lots of complications
    for the taxpayers, penalty notices, et cetera. Has this been
    your experience?
        And then I would like to ask Ms. Collins, what can the IRS
    do to reduce errors like failure to put in the O freeze
    information correctly?
        Ms. Lewis. I will let Ms. Collins speak. I was just going
    to say that, as a practitioner, we have in the past had
    difficulties with hurricanes, or any kind of disaster relief
    that should be allowed to our taxpayers in our ZIP codes, but
    it somehow was not indicated by the IRS.
        Senator Cassidy. Can I ask how big a problem that was, Ms.
    Lewis? Was that a major problem, or just an occasional
    inconvenience?
        Ms. Lewis. I will tell you, we have not experienced that
    for Hurricane Ida yet, because we have just filed those
    returns. I am very nervous, because the current system, with
    the backlog and the correspondence, is much worse now than we
    had it with Katrina, or with some of the other hurricanes at
    that time. It was not a huge issue, but we were able to reach
    the IRS then.
        Senator Cassidy. So the fact that the phone calls are only
    11 percent being returned now compounds it.
        Ms. Collins, any thoughts on that?
        Ms. Collins. Yes, our office monitors those. And what we
    did find was, if you had overlapping disasters, that is where
    the challenge was with the IRS having the incorrect coding.
    They have gone back and changed that programming, so hopefully
    on a go-
    forward basis that is not an issue.
        We also were very strong in pushing the IRS to move that
    January date because, again, we do not want paper returns if it
    is at all possible. So one of the recommendations we made in
    our annual report is, going forward for the IRS, instead of
    just having a 90-day window, look to see the filing dates. Do
    we have the ability to electronically file? And that should be
    the extended due date.
        Do not move the extended due date to a situation where they
    have to file a paper return.
        Senator Cassidy. Got it.
        Thank you, Mr. Chair. I yield.
        The Chairman. I thank my colleague.
        Senator Menendez?
        Senator Menendez. Thank you, Mr. Chairman.
        Let me first, before I make other remarks I am about to,
    acknowledge the hardworking employees of the IRS, many of whom
    have been working tirelessly since the pandemic began almost 2
    years ago next month. And we certainly want to thank them for
    their dedication to America's taxpayers.
        But throughout 2021 and during the 2022 tax filing season,
    tens of millions of taxpayers have been forced to wait
    extraordinarily long periods of time for the IRS to perform the
    most basic of functions: processing their returns, issuing
    their refunds, and addressing their correspondence. That is why
    my office has continued to receive calls about these issues,
    each and every day. We have had thousands of calls since the
    pandemic began.
        The IRS touches more Americans than any other entity,
    public or private. We have to have an IRS that works. That is
    why I have led or co-led six letters in the last 5 months,
    including the most recent one--210 bipartisan, bi-cameral
    members of Congress--encouraging the IRS to work down its
    unprecedented backlog and improve it customer service.
        Now, Ms. Lewis, I worked with the AICPA to send two letters
    to the IRS last month asking for the IRS to halt automatic
    collections, delay the collection process for filers,
    streamline the penalty relief process for taxpayers who had
    been impacted by COVID-19, provide penalty relief for taxpayers
    who have paid at least 70 percent of their taxes that were due
    for the 2020-2021 tax years, expedite the processing of amended
    returns, provide the National Taxpayer Advocate staff and
    congressional caseworkers with timely responses, pursue maximum
    overtime options for IRS staff while working on processing the
    backlog of returns, allow additional employees to volunteer to
    join surge teams to work on the backlog, and to extend overtime
    options for additional surge team employees.
        So my question to you: is the IRS listening to any of these
    requests? What changes has the IRS made in response to these
    requests?
        Ms. Lewis. Thank you, Senator Menendez. I also want to echo
    your comments about IRS employees. We do appreciate that they
    have worked tirelessly throughout this process. We need a
    modern functioning IRS. The AICPA works best, taxpayers work
    best when we have an IRS that works.
        I also want to especially thank you for keeping these
    issues in the forefront. This hearing today is important, and
    the letters that are going out are important.
        The IRS has responded, probably in large part because of
    the heat that has been raised the last few weeks. So, thank you
    for that. What they have responded is a partial response. One
    notice turned into several notices. There are still several
    other notices that we would like to see halted that are not on
    the list.
        They have done the notice part. They have not extended the
    hold times. They have not helped us with the penalty relief
    that we desperately need, and the taxpayers desperately need.
        So yes, there are more things to do. They are responding.
    We just wish they had responded sooner.
        Senator Menendez. Yes. What you just mentioned, are those
    some of the notices yet to be issued that you believe should
    not be issued?
        Ms. Lewis. Yes. Well, notices that have already been
    issued--if the automated compliance action stopped, then
    hopefully the taxpayers will not get continued follow-up issues
    while those are being worked.
        The concern is, there are a few notices like levying Social
    Security benefits. That is an IRS notice that goes out if there
    is a collection issue, and that is not on the list. So if they
    are still working on the backlog and there is a balance out
    there, someone's Social Security benefits could be levied. So
    there are a few like that, and some matching notices that we
    would like to see added to that list.
        Again, anything that could help them work through the
    backlog.
        Senator Menendez. Well, let me turn to Ms. Collins. There
    was a Washington Post article published yesterday, ``Eight
    scary IRS notices that are being suspended for now''--for now--
    where you alerted the public to a very important issue.
    Specifically, you stated that, quote, ``If taxpayers believe
    they owe some or all of the tax, they should determine what
    they can pay and make that payment, stop the running of the
    interest, and continue to work with the IRS to resolve this
    issue.''
        How would you suggest that taxpayers best work with the IRS
    to make those payments or resolve those issues? What is the
    most painless way for taxpayers to do this?
        Ms. Collins. Yes, as you pointed out, I think that is one
    thing I want to make sure the taxpayers do not misunderstand.
    The suspension of the notice does not mean that interest is
    suspended. So until the payment is made, the interest continues
    to accrue.
        So taxpayers can work with the IRS--and we all are noticing
    and talking about the IRS's poor level of service on the
    phones, but on collection issues, you actually can do multiple
    things. You can go online and do an installment agreement. If
    it is under $50,000, it is a very quick process to do. You can
    also do it through--they have chatbots. You can do it through a
    bot as well on the phone.
        You can reach out to the IRS and do what we call an offer
    in compromise. If you can show that you have financial
    challenges, you may be able to reduce the liability and settle
    it with finality to put the tax behind you so you can move
    forward.
        And they also have something that is called ``currently not
    collectible,'' which if you can establish your financial
    concerns, they will in essence back off collections for a
    period of time, giving the taxpayer an opportunity to get into
    a better financially healthy state.
        So the IRS is willing to work with you. But again my
    concern is--I was a big proponent to shutting down the notices
    and suspending them, but if you do owe the tax, I want to make
    sure those folks understand that the interest continues to
    accrue.
        Senator Menendez. Well, thank you for that. And thank you
    to you and the Taxpayer Advocate Service for the incredible
    work you have been doing during this challenging time.
        The Chairman. And, Senator Menendez, before you go, I just
    want to make sure people understand, you have been leading some
    of these very important letters with respect to reforms that we
    need in the Internal Revenue Service. We thank you for it.
        Okay; I think Senator Grassley is next.
        Senator Grassley. Senator Menendez asked one of the
    questions I was going to ask, so maybe I will not have to take
    my full 5 minutes.
        Ms. Collins, I will first lead into the question that is
    fairly long, but I want you to kind of hear what I told the
    Taxpayer Advocate in my State about some of the problems we are
    dealing with. The taxpayers' correspondence backlog and other
    customer service challenges facing the IRS have reached a
    crisis level.
        As you mentioned in your testimony, the current filing
    season challenges require an all-hands-on-deck strategy. In my
    view, this not only applies to the IRS's internal operations,
    but Treasury broadly, the Taxpayer Advocate Service, and
    Congress as well. For IRS to dig itself out of its current
    hole, we must all work together.
        Caseworkers in my State offices in Iowa have been inundated
    with requests for assistance with the IRS. As someone who takes
    constituent service very seriously, I instruct my caseworkers
    to go the extra mile to provide assistance. Unfortunately, my
    dedicated caseworkers have been frustrated in their work by
    roadblocks put up by the IRS, and in some cases by the Taxpayer
    Advocate Service.
        For instance, there was a period where the Taxpayer
    Advocate Service stopped accepting status inquiries regarding
    original and amended tax returns. I understand this was done
    because there is little TAS can do to speed up processing of
    returns. However, State caseworkers often cannot determine if
    there are any issues with taxpayer accounts beyond processing
    delays without being able to verify the reason for the delays
    with the IRS or TAS.
        I appreciate that TAS has recently updated its policies to
    provide a status update and case monitoring when it has been
    over 5 months since the taxpayer filed their returns. This is
    very helpful and reasonable given the length of the backlog.
        Going forward--and now I am getting to my question--going
    forward, do you have any suggestions on how congressional
    caseworkers and TAS can work together to more efficiently and
    effectively get taxpayers the assistance that they deserve?
        Ms. Collins. Thank you for the question. We have been
    working with the IRS, because this is a real challenge. As we
    alluded to earlier with the lack of technology, when we go into
    the IRS systems we cannot see the return on the system. We
    cannot see the reason for the delays.
        So we are working with the IRS, trying to get a work-around
    so we can work with your constituents. We are going to ask a
    little bit more from your staff to help us sort of be the
    intermediary with the taxpayer, help us get some of the
    information more quickly so we can get it in the system and
    continue to work with the IRS.
        So we will be reaching out to all the members to say,
    again, it is all-hands-on-deck. We all need to help taxpayers
    get through this.
        Senator Grassley. Ms. Collins, Ms. Lucas-Judy, each of you
    has discussed the difficulty IRS is having hiring employees to
    fill customer service, the mail processing openings. Ms.
    Collins, you have noted in your annual report that, on average,
    it takes IRS about 3 months to hire external candidates for a
    position in the current labor market. I suspect many applicants
    would have already found a different job during that time.
        Could either of you help me understand what barriers, legal
    or otherwise, lead to such a long drawn-out hiring process, or
    period?
        Ms. Collins. Government bureaucracy. I think part of the
    challenge is the rules that we have in place. What we are
    asking for is direct authority for the IRS to be able to just
    hire people, especially right now in return processing and some
    of the areas in service, including actually TAS, so we can get
    the people onboarded quickly.
        It is a long process. By the time you advertise the
    position, they apply, you go through the challenges--they also
    have security checks. So by the time a person could get
    onboard, it could be 60 days, 90 days, 120 days before they
    even get training.
        So we need these people onboard now to get through this
    filing season.
        Senator Grassley. Are there any legislative changes
    Congress should be considering so IRS can have the flexibility
    to hire employees they need now to get out of this hole that
    they are in?
        Ms. Collins. Yes, again I think the direct-hiring authority
    would be the key to moving quickly, so that if I sat down with
    you, interviewed you, and I thought you were the right person
    for the job, I could hire you on the spot, versus having to go
    through the entire process.
        So that would be a big help for the IRS with some of the
    challenges that they are facing.
        The Chairman. I thank my colleague.
        Senator Portman is next.
        Senator Portman. Thanks, Mr. Chairman, and thanks for
    having this hearing and the testimony we have had already today
    regarding the crisis we face, which is overwhelming: 23.5
    million pieces of mail, including 8.5 million paper returns, a
    total of nearly 17.6 million returns. The backlog is having a
    huge impact on people in my home State, and around the country.
        IRS is overwhelmed, clearly. And we have heard a lot about
    those challenges today. We should be doing stuff to make it
    easier, not harder, for the IRS to do its work.
        I want to ask you about a proposal that is being advocated
    by some of my colleagues that I think would make it more
    complicated for the IRS, and more difficult to administer the
    tax code. It is a proposal called the book tax, also called the
    corporate alternative minimum tax by some, but it is different
    because it does not actually tax income. It was put into the
    Build Back Better framework. Whether that goes forward or not,
    I do not know, but the idea has been advocated on its own.
        It adjusts the financial statement of corporations, and
    again does not look at the income for tax purposes, but rather
    the adjusted financial statement, basically creating a parallel
    tax.
        And among the concerns, it would override bonus
    depreciation, alter the foreign tax credit system, provide
    adverse treatment to invest in some State and local bonds, and
    so on. The Joint Tax Committee has said that manufacturers
    would be hit the hardest because of their capital investment
    and their use of the code to deal with their physical capital
    investments.
        Ms. Lewis, you might be the best one to answer this
    question. How do you feel about this book tax proposal? And
    what would it do to the IRS's ability to administer the tax
    code that it is already struggling with?
        Ms. Lewis. Thank you, Senator Portman. This is an important
    issue to the AICPA. We have commented on it several times. We
    had issued a comment letter back in October, late October, and
    again in early December. I believe the main issue here is that
    having a corporate minimum tax, or a book tax--obviously on C
    corporations, being based on their financial statement income
    as opposed to their taxable income--takes the definition of
    taxable income away from Congress and puts it in an industry,
    maybe even a foreign country, or what industry looks at in
    financial statements.
        Financial statements are not prepared the same way a tax
    return is. There are totally different rules with Generally
    Accepted Accounting Principles. And you know, financial
    statements are made for bankers, for creditors, for
    shareholders, to determine what the book income is.
        Taxable income is determined based on the tax code. And
    there are specific things, such as depreciation, which you
    mentioned, that are different for tax purposes than for
    financial statement purposes.
        So the AICPA has grave concerns about the corporate minimum
    tax. We are happy to look at specific provisions. Our
    recommendation would be, look at specific provisions that are
    allowed deductions, or credits that are allowed under the tax
    code that are not for other reasons, and build a proposal based
    on that.
        But as it stands right now, we are not in favor of this
    corporate minimum tax. Even though it does only--it would not
    affect my clients. It does affect only large corporate clients
    that would have more than----
        Senator Portman. How about the IRS? What it would do to the
    IRS now with all the burdens they are facing?
        Ms. Lewis. Yes, I think it adds one more level of
    complexity to the IRS. And again, we are mostly focused on what
    could happen right now.
        Senator Portman. Let me ask another question of Ms.
    Collins. We have, obviously, this huge backlog, and it is
    affecting everybody, including in my home State where a lot of
    our constituents are calling in. One was a low-income taxpayer
    who had identity theft. And that is unfortunately happening
    more and more. And he went to a Low-Income Taxpayer Clinic in
    Columbus, OH, filed his identity theft form, actually in April
    of 2021, and he had to use a paper form, Form 14309. There is
    no electronic option.
        And of course he did not hear back. Why? Because there is
    this huge backlog, so people are not looking at paper forms. So
    he missed his refund. He was totally frustrated. We tried to
    help. The low-income clinic tried to help. But they had to
    submit a paper form also to be able to help.
        Shouldn't we have more of this done electronically, at a
    minimum, to be able to help some of these taxpayers who are
    just struggling to get through the system and get the refund
    and move ahead?
        Ms. Collins. Yes. In our annual report, we focused on some
    of the barriers for e-filing, and I wholeheartedly agree. The
    IRS needs to get its IT systems to a point that we can process,
    in essence, any piece of paper that the taxpayer submits,
    especially if it is an IRS form.
        If it is an IRS form, we should be able to file that
    electronically. But there are a number of forms that,
    unfortunately, are not compatible with our system today.
        Senator Portman. Well, thank you. I appreciate that. And
    you know, this is an idea that came out of the mid-1990s
    reforms, to do more electronic filings. It has gone well in
    terms of the tax reform efforts in the returns themselves, but
    it should be expanded, clearly.
        Thanks, Mr. Chairman.
        The Chairman. Thank you, Senator Portman.
        Senator Carper, I believe, is ready online.
        [No response.]
        The Chairman. Senator Carper? Is that an urban legend?
        Apparently, Senator Carper is not ready to go, which would
    mean that Senator Lankford is next.
        Senator Lankford. Mr. Chairman, thank you for that. Thanks
    to the witnessess for all your testimony on this.
        Ms. Lucas-Judy, I want to be able to respond to something
    you had written in your testimony. You wrote in your testimony
    that the IRS has answered more calls than ever this past time,
    but only 11 percent of the calls that actually were inbound
    were actually answered by an IRS customer service rep. And you
    had some pretty astounding numbers to go with that. Fifty-three
    percent of the calls were disconnected due to a lack of
    customer service representatives. So 53 percent of the calls
    just disconnected. Twenty-seven percent of the calls the
    taxpayer abandoned after hours of waiting there. Another 2
    percent of the calls just got a busy signal and did not get
    through at all.
        So, while we answered more calls than ever, really only 11
    percent of the calls were actually answered coming in. That is
    not a great number to be able to have, that 89 percent of your
    calls did not get through to actually get an answer on that.
        Am I correct on those numbers?
        Ms. Lucas-Judy. You are correct. And a lot of it has to do
    with the volume of the incoming calls. There was a lot of
    confusion on the part of taxpayers that prompted calls to IRS.
    The backlog also was a big contributor to that. People were
    wondering about the status of their returns, and they were not
    getting enough information from IRS's Where's My Refund?
    application. They were not getting enough information to know--
    they had waited beyond the time frame that IRS typically takes
    to process the return, to pay a refund, had heard nothing, and
    so they were starting to call with questions.
        Senator Lankford. Were the individuals answering calls also
    the same individuals who were processing returns?
        Ms. Lucas-Judy. Not processing returns, but processing
    correspondence. And so it does----
        Senator Lankford. Does that also increase the backlog,
    then, as well?
        Ms. Lucas-Judy. Right.
        Senator Lankford. Do we need to have individuals who are
    answering calls, and different individuals actually doing
    correspondence, rather than them having to go back and forth?
    Or is that okay to have the same individuals doing both?
        Ms. Lucas-Judy. Typically, it has been a challenge for the
    IRS. You know, that is one of the reasons that they get a
    backlog--usually during the filing season--a backlog of
    correspondence. It has not been as much of a problem in prior
    years as it was in 2020 and 2021, but as we can see right now,
    it is a significant challenge.
        Senator Lankford. Yes. So, in your testimony as well, you
    note that 17-percent attrition rate for those individuals who
    are processing returns, that those folks are not staying. The
    overall attrition rate for the entire agency is 7.6 percent. It
    is obviously significantly higher for those who are processing
    returns.
        What do you recommend to be able to get a lower attrition
    rate for those individuals who are processing returns? Or is
    that just a burn-out job?
        Ms. Lucas-Judy. We have recommended that IRS do a skills-
    gap assessment; that they look across their workforce and
    figure out places where they have specific needs and put a plan
    in place, put a strategy out there to try to address those
    needs; to be thinking beyond just the current filing season to
    what is the workforce of the future going to look like?
        That plan, unfortunately--they did create a plan and start
    to implement it, but the implementation has been delayed. From
    what we understand from IRS, they expect full implementation of
    their Strategic Workforce Plan hopefully by August 2022.
        Senator Lankford. Okay.
        Ms. Collins, I want to go into the conversation you were
    having with Senator Grassley earlier on hiring authorities.
        This is something we have talked specifically to the
    Commissioner about. We have had multiple requests to be able to
    come in. As I am picking up from your testimony, there are
    5,000 open positions in the IRS; 179 of those jobs have
    actually been filled. That is a real problem, when you stated
    there are 120 days to be able to go through the process.
        So let me ask you this: on the direct-hire--and we have no
    issue, by the way, giving the IRS direct-hiring authority for
    those key positions that need to be done. We have done that in
    DoD. We have done that in other areas as well. When we have
    seen a critical need, we have given them direct-hiring
    authority to be able to pick that up.
        There is no reason it should take 120 days to be able to go
    through the process, and then start training individuals, which
    will take months to be able to catch up as well.
        So my question to you is, with that direct-hiring
    authority, you are not talking about taking away background
    checks and security verifications for their hiring. What would
    be the issue with why people would not get direct-hiring
    authority? Or what seems to be the fear with not getting that
    direct-hiring authority to the IRS?
        Ms. Collins. I personally do not see a downside to it. I do
    see an upside to the IRS, especially if we are trying to get
    this backlog behind us. We need to move quickly.
        I think in the long term, again it gives the IRS an
    opportunity for those key positions--I am not saying across the
    board--to be able to be more competitive. If you have a senior
    person looking at a job with the IRS versus let's say an
    outside firm, being able to commit quickly will make the
    difference of whether or not we can retain someone versus
    losing them.
        Senator Lankford. Okay. I hope we can get that done,
    because, obviously, everyone with the IRS is asking for that as
    well.
        Ms. Lewis, quickly, you noted in your testimony that on
    February the 9th, the IRS announced suspension of more than a
    dozen letters, including automated collection notices normally
    issued when the taxpayer owes additional tax or has no record
    of filing a return. That is helpful.
        Are there other correspondence backlogs and other things
    that need to be addressed that you think need to be suspended
    to be able to help protect taxpayers?
        Ms. Lewis. Thank you, Senator. One thing I want to
    highlight on the backlog and the correspondence is, oftentimes
    our calls and our written correspondence are not about balances
    due or an assessment that is made correctly, they are about
    erroneous notices, notices that come out that we need to
    change.
        And because of that--for example there is a CP-2000 notice,
    a matching notice, where the IRS sends a notice out to the
    taxpayer suggesting changes based on what they see. And
    oftentimes it is not correct and requires correspondence. So we
    would like that notice to be held. And also I had mentioned
    there are notices about levying Social Security benefits on
    elderly taxpayers while, again, they are working through the
    backlog.
        So there are a few other notices that we would like to have
    stopped.
        Senator Lankford. Great. Thank you.
        Thank you, Mr. Chairman.
        The Chairman. I thank my colleague.
        I believe Senator Carper and Senator Casey are available
    online. We are getting close, colleagues, to the end. So if
    there are other members who want to come besides the very
    patient Senator Young and Senator Hassan, the word should go
    forward.
        Okay, Senator Carper?
        Senator Carper. Yes, thanks.
        Let me say to our witnesses, thanks very, very much for
    joining us today. I think this is--I have been on this
    committee for over 1,000 years. I have cared about this issue
    for a long time before this, including when I was Governor. So
    I am glad to have you here and to tell us that we have to do a
    better job. There was a comic strip a long time ago, Pogo, and
    in Pogo there was a famous caption: ``We have met the enemy,
    and the enemy is us.''
        And we in the Congress are just dilatory in terms of
    meeting our responsibility to provide the tools that the IRS
    needs, to provide the funding the IRS needs for technology, for
    people, and we need to do something about it.
        We keep having these conversations. This is not the first
    time we have been at this well, and I am tired of talking about
    it and am just anxious to get stuff done.
        A question for Ms. Collins. How do the workforce challenges
    at the IRS currently impact our customer service? And what
    steps can Congress and the IRS take to support hiring and
    retention at the agency? I am sure you have been asked this
    already. I am asking it again. Go right ahead.
        Ms. Collins. Right now I think the focus is on getting
    current and getting at the backlog. So that is probably the
    number one challenge, getting people in who could help process
    those returns as well as address the correspondence, the
    notices that we keep talking about, and getting that behind us.
        So that is key right now to getting that resolved.
        Senator Carper. Another question for you, if I could, Ms.
    Collins. Not only have I been a strong advocate of providing
    tools, technology, and so forth for the IRS, I have also been a
    long-time supporter of existing resources to help vulnerable
    taxpayers, including the Free File program, including the
    Volunteer Income Tax Assistance program, including the Tax
    Counseling for the Elderly program.
        I believe to my core that these tools can help taxpayers
    avoid making mistakes on the tax returns, and in turn avoid
    some of the hurdles with processing and receiving their
    refunds.
        And my question, again for you, Ms. Collins, is how can the
    IRS make it easier for taxpayers to access these programs? And
    what should we in the Congress consider to strengthen these
    critical tools?
        Ms. Collins. Yes, I would agree with you that these tools
    are very valuable, especially for the low-income folks. The
    VITA program, the TCE program--and again I would like to do a
    shout-out for all those, the volunteers, because it truly is a
    lot of dedicated accountants and enrolled agents who offer
    their time up. But we can always do a better job, especially in
    the under-served communities, getting the word out as to what
    resources are available, either reaching out to again, as you
    said, VITA or TCE, and letting them understand what they can do
    through the IRS's Free File program so that they could file the
    returns both electronically and at no cost.
        Senator Carper. A third question I would ask. You know that
    the IRS backlogs have created very significant delays, and
    frankly a lot of confusion for taxpayers, who call our office
    every day and our offices in Delaware. We have three of them.
        Many of my constituents have reached out to casework staff
    up and down the State because those constituents have received
    confusing and outdated automated tax collection notices.
        I am pleased that the IRS recently responded to these
    concerns by announcing the suspension of these notices as the
    agency works its way through this backlog of returns.
        What--and this would be for all three witnesses. What other
    steps should the IRS consider taking during the current filing
    season to help minimize taxpayer confusion and provide more
    efficient taxpayer service? This will be for all three of you.
        Ms. Collins. I will go ahead and start. I think one of the
    issues that we have been looking at and recommending within the
    IRS is really penalties. How do we relieve taxpayers of
    penalties? And more importantly, it is the touch point with the
    IRS. We want to stop the phone calls. We want to stop the
    letters. You know, what can we do fairly, applied across the
    board? One of our recommendations has been--the IRS has what
    they call an administrative waiver, first-time abate. And what
    we would like to recommend is that the IRS apply it across the
    board systemically so that we do not have to have phone calls,
    we do not have to send letters, taxpayers do not have to
    respond.
        Things like that, I think--at the IRS, we should start
    thinking outside the box as to how the IRS can help taxpayers
    during this backlog and during this challenging time.
        Senator Carper. Thank you.
        Same question, Ms. Lewis, Ms. Lucas-Judy. Split these, if
    you will.
        Ms. Lucas-Judy. I would agree, we need to get more
    information out there to taxpayers. We have made a number of
    recommendations and worked with the IRS on getting more
    information on its website, getting information into Where's My
    Refund? And also we have a recommendation open to IRS to just
    put a plan out there, a strategy for managing the backlog that
    it still has from 2020.
        Ms. Lewis. And, Senator, we have asked for four specific
    recommendations. One is to temporarily postpone those automated
    compliance actions.
        Two is to adjust the hold times when you call the IRS. They
    will put a hold on for perhaps 8 or 9 weeks, but as we know, it
    is going to take 4 months or more for that inquiry to get
    answered. So that could cut down on phone calls, having to call
    again.
        Liberalize the reasonable calls penalty waiver, and also
    estimated tax payment relief for those who have already paid in
    at least 70 percent of their tax.
        I agree that first-time abatement is a great tool and an
    opportunity to be used. We do have to be concerned about that,
    because you can only use that one time in every few years, and
    that could be an issue for those who have probably already used
    it during the 2019 or 2020 filing season, or those who did not
    want an automatic first-time abate but actually had a
    reasonable call.
        So we would want to make sure that we look at that, but
    absolutely, penalty abatement needs to be part of the solution.
        Senator Carper. Thank you all so much.
        Thanks, Mr. Chairman.
        The Chairman. Senator Casey is also online.
        Senator Casey. Mr. Chairman, thanks very much. I want to
    start with a commendation. I will commend you for having this
    hearing and spotlighting these issues, and also for the
    advocacy that you have been bringing to bear on getting the
    resources necessary to give the IRS what it needs. And I can
    extend that commendation, of course, to the IRS employees for
    the great work that they have done under adverse circumstances.
        Ms. Collins, I have really focused my question, starting
    with an observation, but let me start with you on your
    testimony discussing the importance in this tax season for
    filers who are eligible for refundable tax credits. In
    particular you said, and I am quoting, ``Millions of taxpayers
    rely on the benefits from these programs to pay their basic
    living expenses,'' unquote. I could not agree more, and I think
    most Americans would agree with that.
        A report came out just this Monday that said that child-
    care costs have been growing faster than inflation since 2019.
    And care costs now are about $11,800 per infant, for example,
    just in Pennsylvania.
        So not many people know this information. We have to do a
    better job of telling people what families are up against every
    day. But one thing we do know--and again this is not widely
    known, but we are going to make sure that people do know about
    it--is that when Democrats passed the Rescue Plan, as part of
    that we passed a $4,000 credit for child-care expenses. This is
    separate and apart from the Child Tax Credit. That is not what
    we are talking about here; we are talking about the Child and
    Dependent Care Tax Credit. I am saying it slowly because we
    have to keep this in front of people.
        And if you want to shorthand it, it is really about the
    Child Care Credit, not the Child Tax Credit. We also made this
    Child and Dependent Care Tax Credit fully refundable in the
    Rescue Plan, so that, for the first time, lower-income families
    could benefit.
        So the first question I have, Ms. Collins: do public
    outreach and information campaigns affect how many people can
    claim tax credits like the one I just outlined?
        Ms. Collins. Yes, I think outreach is key to getting the
    message out to communities, and to taxpayers. So I would agree
    that any way we can get the message out--whether it is through
    a newspaper, or TV, your offices, your website, IRS website,
    our website--I think we all have to get the message out there
    that these benefits are available to taxpayers, and explain
    what they need to do to apply for and receive them.
        Senator Casey. Thank you. And here is the problem, and it
    pains me to report this, but here is a fact: number one, there
    are no fact sheets available from the IRS that can explain how
    families can benefit from this newly eligible credit.
        Number two, a Google search result for this Child and
    Dependent Care Tax Credit on the IRS website is out of date. It
    is from information from 2017.
        And thirdly, the IRS even has a page entitled ``coronavirus
    tax relief for families,'' but the page does not even mention
    the Child and Dependent Care Tax Credit, which can provide
    thousands to families. When I say ``thousands,'' here is what I
    mean. Single parent, one child, who has a $50,000 income, with
    child-care expenses of $8,000--and this is real life for
    people. So income of $50,000, child-care expenses of $8,000,
    that single parent can save, under the new version of this
    credit, $3,400--$3,400.
        Here is another example. Married couple, two children,
    making $75,000, with $12,000 in child-care expenses--again,
    this is real life for people. That family making $75,000 with
    $12,000 in child-care expenses can save $4,800 because of this
    tax credit in the American Rescue Plan.
        So we have to do something about it. We are going to do our
    part, and we need the administration to do it--the IRS, the
    Treasury Department--and members of Congress, both parties,
    both Houses, to get the message out.
        I know I am out of time.
        Thank you, Mr. Chairman.
        The Chairman. And, Senator Casey, thank you for all the
    leadership you have provided on this crucial child-care credit.
    It is absolutely essential for so many families in this
    country. We have families spending a lot more, for example, on
    child care than rent, and so many people in bureaucratic lines
    and the like, again just trying to get what is essential to be
    able to be a part of the workforce.
        I think Senator Young is next, and then the exceptionally
    patient Senator Hassan.
        Senator Young. Thank you, Mr. Chairman.
        The COVID-19 pandemic has shaken every aspect of our
    economy, and the IRS was not immune to the disruptions caused
    by widespread telework, worker shortages, and increased
    responsibilities as our country fought to maintain Americans'
    health and economic stability.
        As has been mentioned repeatedly this morning, the IRS is
    experiencing considerable backlogs and delays. During the
    pandemic, my office has worked tirelessly to assist Hoosiers
    who struggle with issues in getting their tax refunds, EIP
    payments, and amending their tax returns. Over the course of
    the pandemic, my office has helped over 1,000 Hoosier
    taxpayers, and yet we still have over 150 constituent cases
    outstanding with the IRS. And that number, unfortunately, grows
    daily.
        One of these cases is over 2 years old and still waiting on
    a resolution from the IRS. Roughly half of our current cases
    involve original 2020 unprocessed tax returns. We are already
    in the midst of the 2021 tax filing season, and the IRS has
    still not processed 2020 tax returns. My constituents are
    understandably quite frustrated. My staff are frustrated. I am
    frustrated.
        I want to thank the witnesses for testifying here today. We
    need improved customer service for Hoosiers who are simply
    doing what the law requires of them: filing their taxes. I look
    forward to hearing your perspective on how the IRS can deliver
    that essential service to my constituents.
        Ms. Collins, first I want to thank you and the hardworking
    men and women of the Taxpayer Advocate Service for your
    assistance in many of the constituent casework matters I just
    described. As I am sure you know, TIGTA's 2020 IRS audit
    included a report that, at the height of the pandemic, the IRS
    was unable to function properly because of printer issues that
    persisted for months. In many cases, printers were down simply
    because the ink cartridges were out, and no one bothered to
    replace them.
        Now, I understand that a number of these printer issues
    occurred at the IRS's Kansas City processing center, where most
    of my constituents' IRS submissions end up. You recently
    visited the Kansas City processing center. Can you please share
    a few brief observations from that visit?
        Ms. Collins. Yes, I would be happy to. I think--you know,
    we talk about paper all the time, and I commented paper is not
    the IRS's friend; paper is the IRS's kryptonite. But when you
    are physically in the room and you see the mounds and the piles
    of those returns sitting there--when I was looking at it, I was
    looking at individuals, small businesses, companies. These are
    returns crying out, saying, ``Please, process me.'' And it was
    very much--looking at the IRS, we should be a very high-tech
    tax administration. But we are pretty much--I was appalled as
    to how much we manually do.
        We have a manual process from arrival at the docks all the
    way to processing. They separate checks from the envelopes,
    they remove staples, they hand-stamp. They move the return all
    the way through by humans. We should have that automated. It
    should not be in the condition that it is in.
        Senator Young. I am not personalizing this, but it sounds
    like a scene from a Soviet bureau, really--I mean, you know, a
    centrally planned economy, and so forth.
        So I know there are a number of individuals who are working
    hard to try and remedy this, and this is why it is important we
    hold these oversight hearings as well. The IRS frequently says
    it is nearly current on opening mail. And yet many of my
    constituents wait for months, sometimes close to a year, for
    any indication from the IRS that it has received a mailed
    return or other tax document.
        Now, I understand there is a difference between opening the
    mail and actually processing the mail, but it seems hard to
    believe that that activity should take upwards of a year. So,
    Ms. Collins, where are the bottlenecks in the processing
    system? And during your Kansas City visit, where did you see
    opportunities for improvement?
        Ms. Collins. Part of the challenge is resources. We just do
    not have enough employees to move it through quickly. So that
    is a challenge that the IRS is dealing with.
        They are looking at--and I believe they are going to be
    going out, if they have not done it already--requesting bids
    for companies to come in and do some of the manual labor,
    because it does not have to have a highly specialized skill
    set. But there are positions where they do the review, and
    other things within the IRS, that have to have more of that
    skill set and training. So that is where they need to move
    their employees around and get rid of that bottleneck.
        But paper really is the challenge, because we do not have
    an automated process to move that through the system quickly.
    So we need to solve the paper problem.
        Senator Young. Okay. Well, I will look forward to following
    up with you and doing whatever I can to help to improve the
    system. I know everyone here agrees our constituents deserve
    better.
        Thank you.
        The Chairman. I thank my colleague. We are going to work
    very closely with the members.
        At this point, we are going to lock in the order. Let's
    see. Senator Thune is next, then Senator Hassan, and then
    Senator Daines. And I know other Senators are contemplating
    getting here. We will work them in. But folks have been very
    patient.
        So, Senator Thune is next, followed by Senator Hassan, and
    then Senator Daines.
        Senator Thune. Thank you, Mr. Chairman. And thanks to our
    panelists for your testimony.
        My offices in South Dakota get a lot of phone calls and
    emails about the IRS, and South Dakotans generally call about
    getting help with their refund. They simply cannot get in touch
    with the IRS, and the National Taxpayer Advocate report seems
    to back that up.
        According to the report, at the end of last year at least
    10 million returns remained unprocessed. And IRS only answered
    about 11 percent of taxpayers' calls. The report also found the
    processing time for some taxpayer correspondence now runs 6
    months or longer.
        Ms. Collins, how have the new responsibilities placed upon
    the IRS, including new transfer payment programs and the 6-
    month Advance CTC programs, impacted basic customer service
    such as picking up phones and taxpayer correspondence?
        Ms. Collins. It basically impacted in a number of ways.
    Telephone calls have been a real challenge because, although a
    lot of the legislation has been very helpful to taxpayers, it
    creates a lot of confusion. And that confusion causes folks to
    reach for the phone, logically. And so we have had a very high
    volume, in fact an abnormally high volume of calls this past
    year, which has caused a lot of challenges in the customer
    service area.
        So that was one area that has been a real problem.
        Senator Thune. And why? Tell me, is it accurate that the
    IRS is only answering 11 percent of taxpayer calls?
        Ms. Collins. Unfortunately, that is the case, yes.
        Senator Thune. Let me ask you about this recent IRS
    notification that millions of Americans may owe additional
    taxes this year. And the reason, of course, was that many
    families received Advance Child Tax Credit payments that may
    have been too high. The monthly program, which was passed last
    March and implemented in July, led to increased overpayments,
    and as a result, many taxpayers are going to face surprise tax
    bills this year, which will be a tough cash flow problem for
    lots of Americans who are already experiencing 40-year-high
    inflation.
        Ms. Collins, what type of problems do we see these Advance
    CDC payments having on taxpayers this year? And how is the IRS
    going to handle that?
        Ms. Collins. Yes, I think for taxpayers, as you said, some
    of them may have a safe harbor and will not have to pay the
    money back. Others may have to pay the money back. And for
    them, I think it will be a surprise that they are in that
    situation.
        I believe the IRS wants to work with those folks and make
    arrangements in the system and the collections, but I think the
    real challenge is going to be, as you pointed out, the surprise
    that they did not know they would have to pay the money back.
        But again, the legislation does provide a safe harbor. So
    facts and circumstances, depending on the individual, will
    determine whether or not it will impact them.
        Senator Thune. But I assume it is going to be another
    deluge of work for the IRS, which is already having a hard time
    keeping up, clearly, with the current demand.
        Ms. Collins. Yes; if the taxpayer has any inconsistencies
    or discrepancies on their return with the IRS records, yes,
    that will require manual processing. So that return would be
    pulled out of the system and processed. So that is a potential
    challenge and a concern we have as to how the amount of
    discrepancies on these returns is going to cause additional
    caseload and add more to the inventory of the backlog.
        So we need to get rid of the old backlog, but we do not
    need to create new backlogs.
        Senator Thune. The IRS provided an $86-million contract to
    ID.me that will require taxpayers to verify their identity
    through facial recognition technology, which was extremely
    concerning to my constituents, both for privacy and safety
    reasons. It is also my understanding that ID.me would hold onto
    that data for up to 7 years.
        Ms. Collins, can you confirm that the IRS has stopped its
    use of facial recognition technology with ID.me?
        Ms. Collins. That is my understanding, yes.
        Senator Thune. Do you know how many taxpayers were led to
    use the facial recognition technology in order to opt out of
    the Advance CTC?
        Ms. Collins. I do not have the exact number. I can get that
    for you, but I know it was north of maybe single-digit millions
    of taxpayers who went through the ID.me program.
        Senator Thune. Based on the work that you have done, is the
    IRS capable, or does it have the appropriate structure in
    place, to properly protect this type of data?
        Ms. Collins. Yes. I mean, I am not an IT person, so I will
    start with that. But I do think giving taxpayers access to
    their records is vital. And so the advantage of ID.me for what
    it allowed is the authentication process. Rather than having 30
    to 40 percent being able to access their records, it increased
    to north of 70. To me, that is a huge benefit for taxpayers,
    but at the same time I do recognize the concern of the security
    and privacy.
        So what I would like all of us to work together on with the
    IRS is, how do we get a secure environment that provides
    protections for the taxpayers, but also at the same time, how
    do we get as many people access to their own records as
    possible? And so, that is my only concern of quickly switching
    away from ID.me. I want to make sure that we do not harm
    taxpayers who are seeking to get access to their own records.
        Senator Thune. Thank you, Mr. Chairman.
        The Chairman. Thank you, Senator Thune.
        And, colleagues, here is the state of play with respect to
    ID.me. This committee led the effort. Senator Crapo and I have
    been talking about this, because we felt that people should not
    be required to submit to selfies in order to get essential
    government services. So I was very pleased that the
    Commissioner responded and responded quickly. They are now
    transitioning away from this. In fact, yesterday Senator Brown,
    and also Senator Warren and I, started the effort to extend
    this to other agencies.
        The bottom line here is, smart technology policies, for
    example, address your privacy and your security. Not-so-smart
    technology policies give you less of both. So that is what we
    are going to work on. We are going to do it in a bipartisan
    way. I look forward to working with Senator Crapo.
        Senator Hassan has been so patient. Senator Hassan?
        Senator Hassan. Well, thank you very much, Mr. Chairman. I
    want to thank you and Senator Crapo for holding this hearing,
    and thank you to the witnesses for testifying today.
        I am going to start with a question to you, Ms. Collins. As
    you have heard from so many of my colleagues, Granite Staters
    have been reaching out to my office in record numbers for help
    because they have been unable to reach a real person at the
    IRS.
        And according to your annual report to Congress--and as
    Senator Lankford has mentioned, Senator Thune just mentioned--
    taxpayers who tried to call the IRS last year were only able to
    speak to a customer service representative 11 percent of the
    time, often after sitting on hold.
        To address this, you have recommended that the IRS
    implement an automated callback system, among other
    technologies. How can the IRS upgrade its technology to improve
    phone service for taxpayers?
        Ms. Collins. Yes, I think the callback feature would be key
    to offer across all of their lines. They have multiple phone
    lines. And right now it is only on a portion of the phone
    lines.
        [Phone ringing.]
        Ms. Collins. I'm sorry about this----
        Senator Hassan. Speaking of phones----
        Ms. Collins. Speaking of phones, right on que. So we do
    think that it would be helpful for the challenges. Callback
    only works for the amount of individuals who are answering the
    phones. If they have 15,000, let's say, customer service
    representatives, you can only have callbacks for the equivalent
    of 15,000 individuals. So if you have 200, and, I believe, it
    was 82 million phone calls, they do not have the resources to
    have callbacks on every one of those calls.
        Senator Hassan. Okay, so technology is a piece of this, but
    having the numbers and the capacity match is another piece of
    this too. Okay.
        To Ms. Lewis, I wrote a letter to the IRS in January
    highlighting the problems that the unprecedented tax return
    backlog has created for Granite Staters. And we have heard
    concerns from a number of Senators about this, but just an
    example: my office has heard from constituents who paid their
    taxes and saw that the IRS cashed their checks, but then my
    constituents received nonpayment and penalty notices from the
    IRS because the agency had not officially processed the tax
    returns.
        Although the IRS recently suspended some of those automatic
    notices, this has created confusion and real concern,
    obviously, among taxpayers.
        So, Ms. Lewis, how are tax preparers helping families
    navigate these issues during the backlog? And how could IRS
    further address concerns of taxpayers who receive these
    notices?
        Ms. Lewis. Thank you, Senator. And I feel for your
    constituents, because that is who we deal with every single
    day. And I wish I had a lot of hope for you, because the answer
    is trying to get the backlog relieved so that we can reach out
    to the IRS on those issues.
        Right now, it is probably dialing into the phone line 20
    and 22 and 24 times before you can actually get someone
    possibly to answer, then be on hold for an hour, and then hope
    to not get cut off.
        Senator Hassan. Right.
        Ms. Lewis. So I think the answer, the only answer, is to
    get rid of the backlog. And the only answer to getting rid of
    the backlog is to stop the notices so that taxpayers do not get
    another two or three or four or five notices before it is
    resolved.
        Senator Hassan. Right.
        Ms. Lewis. That is the solution right now.
        Senator Hassan. Thank you.
        I want to turn to the overall issue of IT modernization and
    start with you, Ms. Lucas-Judy. And this follows up on another
    group of questions you have already had from other Senators,
    but I have been working to modernize outdated IT systems at
    Federal agencies all across the board.
        They cost more to maintain than newer systems, and they
    deliver worse service to taxpayers; the worst of both worlds.
    Many of the IRS's IT systems are severely outdated, such as the
    tax processing mainframe, which is 62 years old. These outdated
    IT systems have worsened the current tax return backlog and led
    to extensive taxpayer service problems for people in New
    Hampshire who have contacted my office.
        So how can IRS expedite plans to modernize its obsolete tax
    processing mainframe to cut operations costs and improve
    services?
        Ms. Lucas-Judy. IRS does have an IT modernization plan, and
    GAO is currently reviewing that. We hope to have a report out
    on that later this year. But what I can say overall is that it
    is very important for the service to be able to have an
    inventory of what technology it currently has, to understand
    what it needs for the future, what it is going to cost to get
    there, have a schedule in place with clear time frames and
    deliverables along the way, and then to be able to monitor its
    implementation of that plan and communicate to Congress and to
    the public its progress along the way.
        Senator Hassan. Well, thank you for that. And I look
    forward to continuing to work with you and the GAO on this
    issue.
        I have another question I will submit for the record to Ms.
    Collins.
        Thank you, Mr. Chair.
        [The question appears in the appendix.]
        The Chairman. All right. And colleagues are all appearing
    now, and we are trying to be fair to both sides.
        Next will be Senator Daines, followed by Senator Warren.
        Senator Daines. Mr. Chairman, thank you.
        We all know that taxpayers are in for a very tough tax
    filing season, which comes on the heels of a difficult filing
    season of last year, a year in which taxpayers had more trouble
    reaching the IRS by telephone than any year in history. That is
    unacceptable, and it also imposes huge burdens on taxpayers.
        One solution we should consider that might help solve this
    problem for our first responders is a bipartisan bill that I
    have, called the Putting First Responders First Act.
        Since 1985, service-connected disability compensation has
    been tax-exempt, following Revenue Ruling 85-105. But
    oftentimes IRS auditors are not aware of Revenue Ruling 85-105
    and demand that injured first responders in Montana and across
    the country pay taxes on their injury-related compensation.
        It is also not uncommon for first responders, who are often
    facing significant life changes, to be unaware of the revenue
    ruling and unnecessarily pay sizeable tax bills. So passing
    this bill, Senate bill 1618, would codify the principle of this
    revenue ruling, and it would clarify that this injury-related
    compensation is in fact tax-exempt, just as Revenue Ruling 85-
    105 states.
        Further complicating this situation is that injury-related
    compensation does become taxable once a first responder reaches
    the retirement age of 65, although his or her injuries remain
    and the individual's retirement compensation level is limited
    due to prematurely leaving the workforce.
        So the Putting First Responders First Act would provide
    clarity to both IRS employees and first responders, and it
    keeps injury-
    related compensation tax-exempt after the retirement age. I
    think that is the least we can do for them after their heroic
    efforts throughout the pandemic and through today.
        Turning to my question, Ms. Collins, do you think that the
    Putting First Responders First Act would serve a dual purpose
    of relieving our disabled first responders of the burden
    imposed by erroneous audits, while also removing any doubt from
    the minds of IRS auditors that service-connected disability
    compensation is tax-
    exempt?
        Ms. Collins. Yes, IRS agents should be following the
    revenue ruling, but as you stated, codifying it takes it to a
    higher level of authority, and I think that would be something
    that the IRS would be very--agents should follow the law.
        Senator Daines. Just to drill down a bit further on that--
    this could be for Ms. Collins or Ms. Lewis--let's say a
    disabled first responder receives a notice from the IRS that
    they are being audited. What type of luck might they have if
    they pick up the phone to call the IRS to explain the
    situation?
        Ms. Collins. I guess the good news is that, if you are
    under IRS audit, you do not have to call the toll-free line.
    You get to talk to the revenue agent. So you do not have the
    same challenges of calling that 800 toll-free line.
        Senator Daines. If we basically have about a 1 in 10 shot
    right now on the regular line, what are the odds if you are
    audited to call this other line?
        Ms. Collins. I do not know if we have any statistics, but
    it would be better. Anything would be better than----
        Senator Daines. We can't fall out of the basement, I think.
        Ms. Collins. Right. But I think the real challenge is, you
    know, educating--unfortunately, not every IRS agent is familiar
    with every code section. If we were to put the codes in front
    of us--the Internal Revenue Code is, I don't know how many
    inches thick, but it is a very complex document.
        So I think we have to make sure we educate IRS agents. But
    if it is codified, it should be easier for them to find and
    follow the law.
        Senator Daines. Ms. Lewis?
        Ms. Lewis. Senator, I agree with Ms. Collins's comment that
    if it was a full-blown audit, you actually have an auditor
    assigned to you, and maybe that would help. But in reality,
    what happens is, it is not an audit. It is a notice. It is a
    notice that comes that says that the income does not match, and
    call this 800 number, and that is where the problem lies, just
    along with all of these other notices we are talking about,
    these matching notices or whatever.
        It is not a full-blown audit. And I wish I could offer----
        Senator Daines. In fairness, though, any time you get a
    letter from the IRS, you may know it is not a full-blown audit,
    but I can tell you, it gets the pulse rate going and the blood
    pressure up, a note from the IRS saying something is wrong.
        Ms. Lewis. Yes, and that is my point. Our clients are
    getting these, and worrying about these. They do not--it is a
    big long official notice, and it looks very scary. And I hate
    that. We deal with it every day. And so that notice needs to be
    responded to--again adding to the backlog of the phones and the
    notices--when you know that that tax return is correct.
        Senator Daines. All right; I am out of time. I just went to
    the irs.gov site. Before I came to Congress, I wanted to help
    the customer experience. I have a recommendation here. When you
    go to irs.gov, there is a search tab up there. If you hit
    ``search'' and then put in ``disability compensation,'' you
    actually find some pretty good information. But then it says,
    ``how can we help you?'' If you go down here and go down to
    your ``get answers to your tax questions,'' and then you put in
    ``disability compensation,'' nothing pops up. It is a really
    simple, easy fix, and I just would encourage you all to think
    about customer service from the out working in, not from the in
    working out.
        Thank you.
        The Chairman. I thank my colleague.
        Senator Warren?
        Senator Warren. Thank you, Mr. Chairman.
        So even before the pandemic hit, the IRS was in trouble.
    Corporate lobbyists and anti-tax extremists have slashed the
    IRS budget by 20 percent over the last decade, leaving the
    agency with 22 percent fewer staff and decades-old IT systems,
    forcing it to out-source key capabilities to profiteering
    private companies.
        Now this means that the IRS cannot chase down wealthy tax
    cheats or adequately assist the majority of Americans trying to
    honestly fill out their taxes and claim refunds. As of this
    filing season with ongoing pandemic-related challenges, let's
    face it, it is worse than ever.
        This has to end. We need to invest in the IRS. And today, I
    would like to highlight a key investment that we can make--
    simplified filing--and how it would help address precisely the
    kinds of rampant delays that taxpayers are facing this year.
        Right now, the IRS is advising taxpayers to file
    electronically and accurately in order to avoid delay. So, Ms.
    Collins, as National Taxpayer Advocate, you know that taxpayers
    have a lot to keep track of when they are filing their taxes,
    from W-2 income to Advance Child Tax Credit payments to the
    pandemic stimulus checks.
        What happens if a family makes an error on their return and
    doesn't get the number exactly right?
        Ms. Collins. Yes, that is a challenge that the IRS dealt
    with last year that caused part of the backlog. Numbers that a
    lot of individuals, over 11 million, put on their stimulus did
    not match the IRS's records----
        Senator Warren. Right. So what happens when there is a
    mismatch?
        Ms. Collins. So they pull it out of the processing, and the
    IRS sends the taxpayer notice. The taxpayer gets to respond,
    and it does slow the process down. So it is a real challenge,
    and some of those are still sitting out there 10 months later.
        Senator Warren. Yes, 10 months later people could still be
    sitting out there. So here is the thing that gets me about
    this, though. The IRS actually has all this data from the
    employers who tell the IRS how much the employees made each
    year, or from the IRS's own data on how much it sent to
    families in those CTC payments or stimulus checks.
        But even though it already has the information, the IRS
    quizzes the tax filer to make sure that the tax filer can
    accurately enter that information. And if the numbers do not
    match exactly, then it is lose-lose. The taxpayer faces huge
    delays, as you point out. The IRS wastes resources taking a
    second look at the return and falls further behind in helping
    everyone else.
        So, Ms. Collins, if the IRS already has this information on
    taxpayer income, why doesn't it just give it to the taxpayers?
    Wouldn't it make the returns more accurate and processing much
    faster?
        Ms. Collins. Yes, this past year what the IRS is doing is
    sending out two letters, one on the Advance Child Tax Credit--
    --
        Senator Warren. Yes, I get the letters, but why don't they
    just push out the information?
        Ms. Collins. I am a big proponent of an online account, and
    I very much would like the IRS to have that data available so
    the taxpayers could access it and possibly set it up to
    download it directly into a taxpayer's return, or to provide it
    for their CPA or their accountant.
        Senator Warren. Okay, so now we are speaking each other's
    language on this. This is precisely why I have proposed in my
    Tax Filing Simplification Act that the IRS invest in its IT
    systems so that taxpayers could download their IRS data
    directly into tax prep software.
        Right now, Americans waste an average of 11 hours and $200
    preparing their tax returns. And they still risk getting it
    wrong and waiting months and months for their return. With
    simplified filing, they could plug in IRS data, take a look,
    maybe make a tweak if they think there is something that is not
    right there, and then send it in in minutes instead of hours.
        So, Ms. Collins, do you think that the IRS should commit to
    creating this kind of simplified filing tool, allowing
    taxpayers to download their data from the IRS right into tax
    filing software?
        Ms. Collins. It is definitely something I would recommend
    they look into, because they do have the W-2 information, the
    1099 information, and the credits that the IRS has paid out,
    and it would simplify it for taxpayers. And I am a big
    proponent of simplifying everything.
        Senator Warren. Good. Me too. And I agree with you on this.
    But we have to remember that there is somebody who does not
    agree. There are giant corporations like Intuit that hate this
    idea, because they rake in billions of dollars each year by
    tricking taxpayers into buying unnecessary tax preparation
    products. There are also right-wing extremists who want an IRS
    that cannot serve folks at the bottom, and cannot reach tax
    cheats at the top.
        So my view on this is, it is time to put hardworking
    Americans at the center of our tax policy, simplify it, make it
    easier, let them be able to pay their taxes and move on with
    their lives. We cannot put Americans through another bad tax
    filing season.
        So, thank you very much.
        Thank you, Mr. Chairman.
        The Chairman. I thank my colleague.
        And, Ms. Collins, you certainly struck a chord when you
    said, ``I'm for simplifying everything.'' And I think that
    certainly resonates.
        I very much favor this idea of giving people the option of
    being able to do what Senator Warren is talking about. And
    obviously, it goes best if it is in tandem with the technology
    upgrade. In other words, that is really the promised land: to
    simplify things and get the technology upgrades, and I am going
    to work closely with Senator Warren.
        Okay, next will be--I believe it is Senator Brown, and then
    Senator Barrasso.
        Senator Brown, are you there?
        Senator Brown. I am. Thank you.
        The Chairman. And then Senator Barrasso, who has been very
    patient.
        Senator Brown. Thank you, Mr. Chairman.
        Ms. Collins, thank you for your work. I am not surprised my
    colleagues want to ask about the American Rescue Plan and Child
    Tax Credit. You have heard these numbers: 92 percent of the
    kids in my State come from families with children under 18. I
    think it is the same number in Senator Cortez Masto's and
    Senator Warner's States who benefit from this expansion of
    $3,000--in almost every case, $3,000 at least in tax cuts.
        Parents, I hear over and over, are less stressed about
    affording their groceries or new school clothes because of
    that. My question is, Ms. Collins--and then I will just defer
    to my colleagues because I kind of was up the queue a little
    bit here--what steps should the IRS take to make it easier for
    families to get the full Child Tax Credit to which they are
    entitled?
        Ms. Collins. Yes, I think the challenge for the IRS is
    really reaching those underserved communities and educating the
    taxpayers as to what benefits are out there. For more
    financially comfortable individuals and larger corporations,
    they have access to accountants, CPAs, other professionals. But
    it is usually the lower-income folks who do not.
        So programs such as VITA and TCE are very important. And
    the outreach the IRS does with all of its partners that it
    works with is hugely important to getting that message out
    there.
        Senator Brown. Thank you.
        And thank you, Mr. Chairman, for the work--I will just
    close there. Thank you for the work you are doing on the Child
    Tax Credit. It has been such a good committee effort to change
    people's lives in about the most dramatic way we have ever done
    on this committee. So, thank you for that.
        I yield back my time.
        The Chairman. Thank you, Senator Brown. And you may not
    have heard, earlier there was discussion about, well, there
    might have been cheating in the Earned Income Tax Credit or the
    child tax program. And I said those people are constantly,
    every day, just trying to pay the bills and trying to pay for
    rent, and groceries, and shoes. And of course fraud is fraud,
    and anywhere in government where we see it, it ought to be
    rooted out.
        I just think you have to start at the top. And wealthy tax
    cheaters are basically living the dream as a result of all
    these broken systems. So when we are talking about going after
    fraud, start at the top.
        Senator Barrasso?
        Senator Barrasso. Thanks very much, Mr. Chairman, and thank
    you, Senator Crapo, for holding this really important hearing.
    I also want to thank all the members here on the panel for all
    the time and discussion on these really critical issues.
        Ms. Collins, I know my constituents in Wyoming certainly
    appreciate all the work that you and the Taxpayer Advocates do
    in Wyoming--very grateful. Given this massive backlog of
    unprocessed returns from last year, you issued the Taxpayer
    Advocate Directive to the IRS. It required the IRS to either
    complete processing of all the backlog and amended tax returns
    by the end of last year, or provide a plan for processing.
        The IRS clearly did not meet the deadline, but it did
    provide a plan. Among other steps, the IRS employees have been
    reassigned to help process this backlog mail, and the IRS has
    halted some automated notices that we have been talking about.
        In your view, how successful has their plan been?
        Ms. Collins. Well, they are just beginning it, so we will
    have to determine how successful it is months down the road.
        My concern is, based on the numbers that I have been seeing
    and we have been monitoring, this is not going to be a quick
    fix. My goal for IRS is to be out of this by December. It is
    not going to happen tomorrow. They could move all these
    employees over and it is still going to be a very time-
    consuming challenge for the IRS.
        Senator Barrasso. And, Ms. Lucas-Judy, thank you also for
    being--it has always been helpful to have the data and the
    analysis from the GAO during these conversations. You know, one
    of our goals, of course, is to ensure that government is
    accountable to the taxpayers.
        In your testimony, you mentioned the IRS suspended a much
    larger number of returns in 2021 because of error resolution
    than in previous years. The IRS staff then had to review these
    suspended returns, which resulted in additional processing
    delays and substantial delays of refunds to these taxpayers.
    You mentioned refund delays of several months.
        So that is a long time for a lot of people who are living
    paycheck to paycheck, who might be depending on their refund,
    as most people are. So, given the IRS will most likely see
    another large number of filings suspended for error resolution
    this year, are there some steps that the IRS can take to speed
    up or better automate this process and ensure that the
    constituents are not waiting again months for a refund?
        Ms. Lucas-Judy. As part of our ongoing review, IRS just
    told us the other day that it has put some tools in place to
    try to do some of that, to automate some of these suspended
    returns where the errors are due to problems with the
    refundable credits. And so, we are going to be continuing to
    follow up with them to see how successful that is.
        But you know, primarily they still have a backlog from 2020
    in terms of returns that are caught up in error resolution, and
    they are trying to work through processing that. And so, we
    thought it was important for them to put a timeline in place to
    get information out there to the public on when they are going
    to be able to resolve those errors and pay those refunds, as
    well as be able to put something in place for dealing with
    2021, and now 2022.
        Senator Barrasso. Can I follow up, because in your
    testimony you also discuss the taxpayers' dissatisfaction with
    the IRS's, quote, Where's My Refund? tool? You would think that
    having a convenient online tool could actually decrease the
    number of calls to the IRS, but it does not seem to be the case
    here.
        So, based on your analysis, what features or functions
    would be most successful additions to this Where's My Refund?
    tool?
        Ms. Lucas-Judy. This is another place where I am pleased to
    say that, partly as a result of our ongoing work, IRS has put
    some additional information into Where's My Refund? The problem
    was that taxpayers did not really get an interim status update
    there. They would see their return was being processed, and
    processed, and processed, and it would go on, but there was not
    anything else until the refund was actually approved and they
    had a date. And so they were calling. They were writing. They
    were filing another return. And that was creating the backlog,
    or contributing to the backlog.
        And so, we think it is important for IRS to take these
    interim steps to get more information into the application, but
    also to ultimately modernize it and upgrade it and make it part
    of this online account so that there is more information
    available to taxpayers.
        Senator Barrasso. Ms. Lewis, you are nodding you head. Is
    there anything you would like to add to that? I mean, you
    obviously were agreeing with that.
        Ms. Lewis. We are up for anything that will reduce the
    backlog so we can stop the calls, and the notices, and the
    touch points. If we can just minimize the touch points that we
    are having to have as taxpayers and practitioners with the
    IRS----
        Senator Barrasso. Ms. Collins, is there anything you would
    like add?
        Ms. Collins. No; I am in agreement. The Where's My Refund?,
    the challenge was, again, the front and then the back end, but
    it does not tell you anything in the middle of what you would
    have to do, or what the time frame is.
        Senator Barrasso. Great. Thank you.
        Thank you, Mr. Chairman.
        The Chairman. Thank you, Senator Barrasso.
        Senator Cortez Masto is next.
        Senator Cortez Masto. Thank you. I thank you all for the
    hearing today. I know it has been a long morning.
        I am curious for the panel members to really answer this
    question, if you can: is the IRS adequately funded to address
    the concerns you have heard today, the backlogs and touch
    points? This is something we need to be aware of on the Federal
    level.
        So, Ms. Collins, let me ask you that. We will start with
    you.
        Ms. Collins. Yes; I think that the challenges--if you look
    at the backlog, the short-term resolution is, we need to just
    move our employees around. The IRS needs to take their
    employees and put them on the backlog, because the process will
    take too long if we have to go out and hire additional
    resources.
        In the long term, absolutely the IRS needs additional
    resources. And they need them across all lanes. That has been a
    challenge for the IRS, and unfortunately, taxpayers are paying
    the price of that.
        Senator Cortez Masto. And have they been traditionally
    under-funded in meeting the pandemic?
        Ms. Collins. Yes. If you look at the funding, the funding
    has gone down over the last 10 years. Unfortunately, the
    workload has increased, and we have also lost more employees in
    the last 10 years.
        So it is kind of a lose-lose situation that the IRS is
    dealing with.
        Senator Cortez Masto. Thank you.
        In the interest of time, I will only ask one final
    question.
        Ms. Lewis, 80 million tax filers in 2018 had trusted return
    preparers to ensure they accurately prepared and filed their
    taxes. There is no shortage of businesses claiming to offer tax
    preparation services in my home State of Nevada.
        Beyond the minimum competency requirements already in
    place, what else can the IRS do to improve the quality and the
    reliability of return preparation--and to also ensure the
    transparency and fairness to taxpayers who rely on these
    services to meet their obligations during tax season?
        Ms. Lewis. Thank you, Senator, and we do want to thank this
    committee and Senators Brown, Cardin, and Wyden, and several
    other Senators, who have worked towards preparer regulation.
        And let me just be clear, the AICPA has steadfastly
    supported preparer regulation. We do believe that having those
    minimum standards will help the tax system, the voluntary
    compliance system.
        We do agree that preparer regulation is important. We have
    supported legislation in that realm, and I think that would
    help with some of the unscrupulous tax preparers. We do support
    the concept broadly and look forward to working with you guys
    on supporting the preparer regulation legislation.
        Senator Cortez Masto. Thank you.
        And finally, let me just commend the men and women who work
    for the IRS. They have done an incredible job with increased
    burden upon them to really focus on the needs of our taxpayers.
    So thank you, everyone.
        I yield the remainder of my time.
        The Chairman. Thank you, Senator Cortez Masto. And as we
    wind towards an end, I am glad that you and several of our
    colleagues are sending out the word for the terrific work that
    is being done by many people at the IRS under incredibly hard
    circumstances.
        Okay, Senator Warner will close.
        Senator Warner. Well, thank you, Mr. Chairman. And you and
    Senator Cortez Masto just grabbed my opening comments. I want
    to join both of you in commending the IRS workers. A lot of
    them live in the Commonwealth of Virginia, both at headquarters
    and at regional offices, and we asked them to do a lot more
    last year with the stimulus payments and Child Tax Credit
    payments. And I absolutely believe--and I know you share this
    belief, Mr. Chairman--that we have to make real investments in
    the IRS.
        I know it is not going to deal with the current backlog,
    but we have to make real, substantive investments in people,
    personnel, IT. It is crazy that the systems are so old.
        I guess one of the things--and I know there has been some
    discussion on this already--but we have the backlog, about 6
    million, and I hear about it every day. I know there is some
    debate on this issue, but I would ask the panel--pretty
    briefly, if you could--should we go ahead, recognizing the
    backlog that is out there and what is going to be already still
    a difficult filing system, and still remnants of COVID both in
    terms of the workforce and otherwise, and look at some level of
    a delay in the deadlines this year?
        Ms. Collins. Well, I will start and jump in here.
        I do not think the IRS needs additional time. In fact, I
    think it will cause more challenges for the IRS, because they
    have to go in and reprogram everything. It also impacts States.
    It also impacts preparers.
        So I personally do not see it as a benefit right now for
    taxpayers. They have the ability to file an extension. And they
    have the additional time until October 15th if it is an
    individual. So again, my personal view is, I think it would
    actually be harder for tax administration and not necessarily
    beneficial for taxpayers.
        Senator Warner. Others on the panel?
        Ms. Lewis. The AICPA at this point does not advocate moving
    the tax due date. We obviously will be monitoring this as
    things happen. Our point is, most of our members would like to
    keep the April 18, 2022 date, and the ones that do not have
    various dates.
        So we are not taking a position on that at this point, but
    we do have one very clear position. If the due date is moved,
    we want it to be announced as soon as possible--sooner rather
    than later, not just right before the deadline. And then also,
    it should include not just the filing, but the payments, and
    also the first quarter estimated tax payment that would be due.
        Senator Warner. I am--you know, I relate to some of those
    comments. As a former Governor, I know how it does throw a bit
    of a monkey wrench into State filings, although I would also
    say not only IRS, but we have to take into consideration
    taxpayers themselves. But I clearly feel--and I know that those
    folks who have still got payment delays from the 2020 tax
    season will have to be filing extensions.
        In my last moment, I just wanted to ask both of you as
    well, are we setting expectations right? Can the IRS--and this
    maybe goes back to what Ms. Lewis just mentioned--are we
    setting appropriate expectations? Can the IRS do a better job
    of forewarning? And is there a systemic way to do that? Ms.
    Lewis, and then Ms. Collins.
        Ms. Lewis. Thank you, Senator. I believe we highlighted
    this when we discussed the IRS funding issue. We do believe
    that expectations have to be set for the funding, for any
    requests that the IRS makes. What do they need? What resources
    do they need? What help do they need? But we really want it to
    be balanced between enforcement and also customer service.
    There needs to be an expectation of customer service, and that
    is not being met right now.
        Ms. Collins. Yes, and I would agree that we need to get the
    word out to the taxpayers. You know, again, part of my job as
    National Taxpayer Advocate is, I focus on the problems. But
    when you look at what the IRS has actually accomplished over
    the last 2 years in the filing season, the overwhelming amount
    of those returns, especially if they are late filings, they
    went through without a hitch.
        It is those that had a discrepancy with IRS records, or
    those that were filed on paper; those are the ones that are
    being challenged right now. So we need to educate people to
    make every effort to file electronically. Triple check for
    errors. And if you can, put on direct deposit information. That
    will speed up the information or the refunds for the particular
    taxpayer, but it is also going to benefit all taxpayers by
    having fewer issues for tax administration.
        Senator Warner. Ms. Collins, I think you are right. And I
    know my time is up. Just every time I can get in front of a
    camera, I say we have to file electronically. It is those paper
    filers who make up the vast majority of this.
        So thank you, Mr. Chairman.
        The Chairman. Thank you, Senator Warner.
        Senator Crapo and I are both going to have some closing
    remarks that will probably last like a couple of minutes, but I
    want to let Senator Crapo go first.
        Senator Crapo. Well, thank you, Mr. Chairman. Again, thank
    you for holding this hearing.
        I just wanted to take a minute to thank each of our
    witnesses for bringing your expertise here to us to help us
    find out how we can be most effective at helping the IRS to do
    its job for the American people. So, thank you for what you
    have done here today to help us understand our task better.
        The Chairman. And let me be clear. I agree exactly with
    what Senator Crapo has said. And I am just going to add two
    sentences.
        It seems to me--and you all have been very helpful with
    your expertise and years of experience--we have a choice. What
    this committee can do is to create a system that works for
    everybody, or a system that works mostly for wealthy tax cheats
    and criminal syndicates.
        And I think we have an opportunity to choose the former.
    And it is my view--and Senator Crapo and I both touched on this
    in our questions to you--it is at the intersection of outdated
    technology and unacceptable service. And stopping these
    collisions is going to take a modern plan, a modern plan that
    looks to the long term rather than these band-aids. And I just
    want you to know we are going to be calling on you, as Senator
    Crapo and I have been saying throughout this hearing, and we
    have an opportunity to build on some of the outstanding ideas
    you have given us. We are committed to doing it.
        And with that, the Finance Committee is adjourned.
        [Whereupon, at 12:38 p.m., the hearing was concluded.]

                                A P P E N D I X

                  Additional Material Submitted for the Record

                                  ----------

      Prepared Statement of Erin M. Collins, National Taxpayer Advocate,
                            Internal Revenue Service
        Chairman Wyden, Ranking Member Crapo, and distinguished members of
    this committee, thank you for inviting me to testify at today's hearing
    on IRS customer service challenges.\1\ As I wrote in the National
    Taxpayer Advocate's Annual Report to Congress, last year was the most
    challenging year taxpayers and tax professionals have ever experienced.
    ---------------------------------------------------------------------------
        \1\ The views expressed herein are solely those of the National
    Taxpayer Advocate. The National Taxpayer Advocate is appointed by the
    Secretary of the Treasury and reports to the Commissioner of Internal
    Revenue. However, the National Taxpayer Advocate presents an
    independent taxpayer perspective that does not necessarily reflect the
    position of the IRS, the Treasury Department, or the Office of
    Management and Budget. Congressional testimony requested from the
    National Taxpayer Advocate is not submitted to the IRS, the Treasury
    Department, or the Office of Management and Budget for prior approval.
    However, we have provided courtesy copies of this statement to both the
    IRS and the Treasury Department in advance of this hearing.

        In this statement, I will highlight the main challenges taxpayers
    faced last year, suggest steps the IRS can take now to reduce its
    processing backlog and otherwise meet taxpayers' needs, make
    recommendations for medium-term and longer-term solutions, and address
    challenges my own organization, the Taxpayer Advocate Service (TAS),
    ---------------------------------------------------------------------------
    has been facing in assisting taxpayers.

        Before I discuss taxpayer problems, I want to take a moment to
    credit the IRS for doing a lot right under difficult circumstances.
    Although taxpayer service challenges existed prior to 2020, the
    unprecedented return processing and correspondence backlogs we have
    seen over the past 2 years did not exist before the pandemic. The
    pandemic forced the IRS to temporarily shut down its processing
    facilities for the health and safety of employees. That, in turn,
    caused the IRS to fall behind on its inventories, and it is still
    struggling to catch up. Also due to the pandemic, Congress directed the
    IRS to administer several financial relief programs that required the
    IRS to divert resources from its core tax administration work.

        Among other things, the IRS has issued 478 million stimulus
    payments (referred to as Economic Impact Payments or ``EIPs'') totaling
    $812 billion and has sent Advance Child Tax Credit (AdvCTC) payments to
    over 36 million families totaling over $93 billion. It also implemented
    a retroactive change in law enacted during last year's filing season
    that excluded up to $10,200 in 2020 unemployment compensation benefits
    from gross income--in most cases without requiring affected taxpayers
    who had already filed returns to file amended returns. The IRS's
    leadership and workforce deserve credit for their accomplishments--and
    I am particularly grateful to TAS employees for all they have done to
    assist taxpayers under these difficult circumstances.
                          i. main taxpayer challenges
        The biggest problems taxpayers encountered last year--and likely
    will encounter this year--were return processing delays, correspondence
    processing delays, difficulty reaching the IRS by telephone, and
    inability to obtain information from the IRS's Where's My Refund? and
    Where's My Amended Return? tools.
    A. Taxpayers Have Been Experiencing Significant Delays in Receiving
            Their Tax Refunds Because of Unprecedented IRS Backlogs in the
            Processing of Original and Amended Tax Returns
        During 2021, the IRS received approximately 169 million individual
    income tax returns.\2\ About 90 percent were e-filed, and most of them
    were processed without delay. Nevertheless, tens of millions of
    taxpayers were subject to delays in the processing of their returns,
    and many of the delays have been substantial and ongoing.
    ---------------------------------------------------------------------------
        \2\ IRS, Filing Season Statistics for Week Ending December 3, 2021,
    https://www.irs.gov/newsroom/filing-season-statistics-for-week-ending-
    december-3-2021.

        At the close of the filing season (which was May 17, 2021, due to
    the postponed deadline), the IRS was holding 35.3 million tax returns
    for manual review. This backlog consisted of roughly half unprocessed
    paper returns and half tax returns suspended during processing, leading
    to refund delays for many of these taxpayers. For original returns that
    were e-filed, the IRS has mostly worked through the backlog. But the
    ---------------------------------------------------------------------------
    story is very different for paper returns.

        In releasing my Annual Report to Congress, I said that paper is the
    IRS's Kryptonite and that the IRS is still buried in it. There is no
    doubt that paper processing remains the agency's biggest challenge, and
    that will continue throughout 2022. As of late December 2021, the IRS
    still had backlogs of 6 million unprocessed original individual returns
    (Form 1040 series) and 2.3 million unprocessed amended individual
    returns (Forms 1040-X)--with some return submissions dating back at
    least to April and many taxpayers still waiting for their refunds 10
    months later. In addition, more than 2 million employer's quarterly tax
    returns (Forms 941 and 941-X) remained unprocessed.

        As of early February 2022, the IRS had in its inventory about 17.6
    million tax returns and about 5.9 million pieces of taxpayer
    correspondence/Accounts Management cases (excluding amended tax
    returns) that require manual processing, as shown in the following
    chart.

                                     Status of Inventory Requiring Manual Processing
                                                (as of February 5, 2022)
    ----------------------------------------------------------------------------------------------------------------
                                                                                               Not
                                                               Individual     Business      Specified       Total
    ----------------------------------------------------------------------------------------------------------------
    Paper Returns Awaiting Processing
    ----------------------------------------------------------------------------------------------------------------
        Received in Calendar Year 2021                          3,500,000     1,900,000             -     5,400,000
    ----------------------------------------------------------------------------------------------------------------
        Received in Calendar Year 2022                            700,000     1,700,000       700,000     3,100,000
    ----------------------------------------------------------------------------------------------------------------

    Total Paper Returns Awaiting Processing                     4,200,000     3,600,000       700,000     8,500,000
    ----------------------------------------------------------------------------------------------------------------
    Paper and Electronic Returns--Processing Suspended          3,900,000     1,200,000             -     5,100,000
    ----------------------------------------------------------------------------------------------------------------
    Amended Returns Inventory                                   2,700,000     1,300,000             -     4,000,000
    ----------------------------------------------------------------------------------------------------------------
    Total Unprocessed Returns                                  10,800,000     6,100,000       700,000    17,600,000
    ----------------------------------------------------------------------------------------------------------------
    Correspondence/Accounts Management Cases (excluding         2,700,000     1,100,000     2,100,000     5,900,000
     amended returns)
    ----------------------------------------------------------------------------------------------------------------
    Total Inventory Requiring Manual Processing                13,500,000     7,200,000     2,800,000    23,500,000
    ----------------------------------------------------------------------------------------------------------------

        As of February 14, 2022, the IRS website reports that ``all paper
    and electronic individual refund returns received prior to April 2021
    have been processed if the return had no errors and did not require
    further review.''\3\ By implication, that means returns filed as far
    back as April of last year are still awaiting processing. That is now
    10 months ago and counting, and if IRS systems detect any discrepancies
    and issue a math error notice with respect to a return, the taxpayer
    likely will end up waiting more than a year to receive any refund due.
    ---------------------------------------------------------------------------
        \3\ IRS Operations During COVID-19: Mission-critical functions
    continue, https://www.irs.gov/newsroom/irs-operations-during-covid-19-
    mission-critical-functions-continue (showing data updated on February
    7, 2022).

        Of all individual returns processed last year, 77 percent resulted
    in refunds. Therefore, processing delays translated directly into
    refund delays. Refund delays can create financial hardships for many
    taxpayers, particularly those who are low-income. Earned Income Tax
    Credit benefits are worth up to $6,660; Child Tax Credit benefits were
    worth up to $2,000 per qualifying child under tax year 2020 rules; and
    Recovery Rebate Credits (RRCs) are potentially worth several thousand
    dollars for families who did not receive some or all of their EIPs.
    Millions of taxpayers rely on the benefits from these programs to pay
    their basic living expenses, and when refunds are substantially
    delayed, the financial impact can range from mild inconvenience to
    ---------------------------------------------------------------------------
    severe financial hardship.

        While taxpayers who e-filed their returns generally fared better
    than taxpayers who filed on paper, millions of e-filed returns were
    suspended during processing due to discrepancies between amounts
    claimed on the returns and amounts reflected in the IRS's records. The
    most common discrepancy involved RRC claims filed by taxpayers who did
    not receive some or all of their EIPs the prior year. These returns had
    to be manually reviewed, and the IRS issued more than 11 million math
    error notices to taxpayers due to RRC discrepancies with the IRS's
    records. When a taxpayer disagreed with a math error notice and
    submitted a response, the correspondence added to the IRS's mounting
    paper submission pile that awaited processing and generated more
    delayed responses.

        I am concerned that the number of returns suspended and requiring
    manual processing will be high again in 2022 and that the numbers in
    the chart shown above will continue to grow. As part of the American
    Rescue Plan Act enacted last March, Congress authorized two advance tax
    credit payments that may result in additional discrepancies between
    amounts claimed on tax returns and in IRS records. The first was a
    third round of EIPs that may be claimed as RRCs by taxpayers who did
    not receive them or did not receive the full amounts for which they are
    eligible. The second was monthly payments of the AdvCTC for the second
    half of 2021. Both credits will have to be claimed and/or reconciled on
    2021 individual tax returns. The IRS has attempted to minimize
    discrepancies by including the information in online taxpayer accounts
    and sending notices to taxpayers who received EIPs and AdvCTC payments
    showing how much they received, but a small number of the notices were
    inaccurate and millions of discrepancies--and consequent math error
    notices--remain likely.
    B. Taxpayers Have Been Experiencing Additional Delays in Receiving
            Their Tax Refunds Because of IRS Delays in Processing Taxpayer
            Correspondence
        The IRS sent tens of millions of notices to taxpayers during 2021.
    These included nearly 14 million math error notices overall, Automated
    Underreporter notices (where an amount reported on a tax return did not
    match the corresponding amount reported to the IRS on a Form 1099 or
    other third-party information return), notices requesting a taxpayer
    authenticate his or her identity (where IRS security filters flagged a
    return as potentially filed by an identity thief), correspondence
    examination notices, and collection notices. In many cases, taxpayer
    responses were required, and if the IRS did not process a response, its
    automated processes could take adverse action or not release the refund
    claimed on the tax return. The IRS received 6.2 million taxpayer
    responses to proposed adjustments and took an average of 199 days to
    process them--up from 74 days in fiscal year (FY) 2019, the most recent
    pre-pandemic year.
    C. Taxpayers Had More Difficulty Reaching the IRS by Telephone in 2021
            Than in Any Prior Year
        The combination of processing delays and questions about new
    legislation and programs like the AdvCTC caused call volumes to almost
    triple from the prior year to a record 282 million telephone calls.
    Customer service representatives (CSRs) only answered about 32 million,
    or 11 percent, of those calls. As a result, most callers could not
    obtain answers to their tax law questions, get help with account
    problems, or speak with a CSR about a compliance notice. Among the one
    in nine callers who was able to reach a CSR, the IRS reported that hold
    times averaged 23 minutes. However, the IRS data on hold times excludes
    taxpayers who waited on hold for extended periods and hung up before a
    CSR answered their calls. Tax professionals and taxpayers have reported
    that hold times were often much longer than 23 minutes, and frustration
    and dissatisfaction were high throughout 2021 with the low level of
    telephone service.
    D. Taxpayers Found That the IRS's Where's My Refund? and Where's My
            Amended Return? Tools Often Could Not Answer Those Questions
        Taxpayers attempted to check the status of their refunds on IRS.gov
    more than 632 million times last year, but Where's My Refund? does not
    provide information on unprocessed returns, and it does not explain any
    status delays, the reasons for delays, where returns stand in the
    processing pipeline, or what actions taxpayers need to take, if any.
    Where's My Amended Return? received more than 13 million hits but
    suffered from similar limitations. For taxpayers who experienced
    significant refund delays, these tools often did not answer the
    questions they were designed to address and added to overall
    frustration.
                         ii. short-term recommendations
        The IRS's leadership recognizes that processing delays are the most
    serious problem facing taxpayers, and it is developing plans to work
    through its backlog as quickly as possible. There are immediate steps
    the IRS can take to process returns more quickly, protect taxpayer
    rights, treat taxpayers more fairly, and provide transparency. Among
    them are the following:

            Prioritize the processing of original and amended paper tax
    returns through an ``all-hands-on-deck'' surge strategy. The IRS has
    begun temporarily reassigning employees from other areas to its
    Accounts Management function and is providing them with training to
    process tax returns. This reallocation of employees is intended to
    continue until the agency fully works through its backlog, as it
    continues to struggle with its antiquated information technology (IT)
    systems for return processing and the overwhelming volume of paper
    returns and correspondence. The IRS must also increase staffing in its
    Submission Processing function, as a significant volume of the
    unprocessed returns work resides there, including all paper Forms 1040.
    Additionally, paper Forms 1040-X are sent through Submission Processing
    for initial screening and many are worked, through manual adjustments,
    by Submission Processing employees.

            Explore options to increase compensation for processing
    employees, minimize hiring lags, and utilize outside consultants to
    assist if necessary. Submission processing employees are generally
    hired at or around the GS-3 level. The current base pay for GS-3
    employees is $24,749. In this economy, it is not surprising that the
    IRS is having difficulty finding enough suitable job applicants.
    Recently, the IRS announced 5,000 positions in its campuses but only
    179 positions have been filled so far. The IRS should utilize all
    available pay flexibilities, including incentive and retention bonuses,
    hazard pay, and other options, to retain key processing employees and
    attract qualified job applicants who can quickly be onboarded and
    trained.

            Provide penalty relief for 2020 and 2021 tax returns. The
    penalties for failure to file (FTF), failure to pay (FTP), and failure
    to deposit (FTD) must be abated if a taxpayer can show that the failure
    to comply was ``due to reasonable cause and not due to willful
    neglect.''\4\ Where the taxpayer does not make this showing, the IRS
    can abate these penalties under its ``first-time abatement'' (FTA)
    procedures, which require that the taxpayer is otherwise compliant and
    has not utilized an FTA penalty waiver within the preceding 3 years.\5\
    To reduce administrative burdens on taxpayers and the IRS, free up
    resources, and provide equitable treatment of similarly situated
    taxpayers, we recommend the IRS provide FTA penalty relief systemically
    for all eligible taxpayers. In addition, we recommend the IRS send
    correspondence informing taxpayers that they have automatically
    received the FTA penalty waiver but can request the IRS consider a
    request for ``reasonable cause'' relief so they can preserve the
    availability of an FTA waiver for future tax years.
    ---------------------------------------------------------------------------
        \4\ See IRC Sec. Sec. 6651(a)(1) (FTF), 6651(a)(2) and (a)(3)
    (FTP), and 6656 (FTD).
        \5\ See Internal Revenue Manual 20.1.1.3.3.2.1, First Time Abate
    (FTA) (October 19, 2020).

            Suspend all automated collection notices until the IRS gets
    current in processing original and amended tax returns and taxpayer
    correspondence. Premature lien and levy notices have been issued to
    taxpayers in circumstances where tax returns or correspondence that
    show the taxpayers do not have liabilities have not yet been processed.
    That should not happen. On February 9, the IRS announced it would
    suspend the issuance of several collection notices to reduce confusion
    and frustration for taxpayers still waiting for their returns or
    correspondence to be processed. I commend the IRS for taking this step,
    and I encourage the IRS to reassign employees who ordinarily process
    responses to these notices to assist with return processing and the
    ---------------------------------------------------------------------------
    related correspondence.

            Add a dedicated team to accelerate the processing of claims
    for tentative refunds and employer's quarterly Federal tax returns.
    Taxpayers have experienced long processing delays resulting in delayed
    payment of refunds. Individuals, estates, and trusts may file Form
    1045, Application for Tentative Refund, and corporations may file Form
    1139, Corporation Application for Tentative Refund, to carry back net
    operating losses and certain other tax benefits to prior years, as
    authorized by the Coronavirus Aid, Relief, and Economic Security Act.
    Some taxpayers need these refunds to meet payroll or otherwise maintain
    operations. In addition, the IRS should accelerate the processing of
    Forms 941, Employer's Quarterly Federal Tax Return, and Forms 941-X,
    Adjusted Employer's Quarterly Federal Tax Return or Claim for Refund.
    Many Forms 941-X have been filed to claim the Employee Retention
    Credit, and a Form 941-X cannot be processed until the original Form
    941 has been processed.

            Create and update a weekly ``dashboard'' on IRS.gov to provide
    the public with current and specific information about delays. The IRS
    has created a webpage, IRS Operations During COVID-19: Mission-critical
    functions continue, that provides certain high-level information.
    However, it does not provide detailed information on processing
    backlogs. For amended returns, for example, it says only that ``[t]he
    current time frame can be more than 20 weeks.'' For correspondence
    backlogs, it says only that processing mail ``is taking longer than
    usual,'' and ``[t]he exact time frame varies depending on the type of
    issue.'' It does not provide information on recent telephone delays,
    even though doing so would give taxpayers a better sense of whether
    they should devote the time to calling.

             I have recommended that the IRS post a filing season
    dashboard, updated at least weekly, that lists each category of work
    and the date through which the IRS has completed processing (e.g., the
    IRS has processed all original tax returns through Date X and all
    amended tax returns through Date Y). The dashboard should include this
    information for original paper tax returns, amended paper tax returns,
    and math error and other categories of taxpayer correspondence. To
    apprise taxpayers of their chances of reaching an IRS employee by
    telephone, the IRS should also post data for each key telephone line
    showing the percentage of calls that reached an IRS employee the
    previous week.

        None of these steps, standing alone, will immediately solve the
    processing backlog. But taken together, they should accelerate
    processing, reduce current filing season challenges, ensure taxpayers
    are treated fairly, and inform taxpayers and tax professionals of the
    status of work at the IRS.
        iii. medium-term and longer-term administrative recommendations
    A. Improve Online Taxpayer Accounts and Allow Taxpayers to Communicate
            With the IRS Routinely by Secure Email
        Online taxpayer accounts are plagued by limited functionality. For
    example, taxpayers generally cannot use their online accounts to view
    images of their past tax returns, most IRS notices, or proposed
    assessments; file documents; or update their addresses. Taxpayers
    should have the ability to make corrections or adjustments to their
    returns through their online accounts. Similarly, the IRS generally
    does not communicate with taxpayers by email. Limitations on
    communicating with the IRS electronically frustrate taxpayers who have
    been conducting comparable transactions with financial institutions for
    more than 2 decades. This increases the number of telephone calls and
    pieces of correspondence the IRS sends and receives, and leads to more
    paper processing delays. I recommend that the IRS prioritize the
    development of online accounts along the lines of what financial
    institutions offer.
    B. Utilize Scanning Technology
        The IRS could reduce its backlog of paper tax returns by using
    scanning technology to machine read paper returns. There are two
    leading types of scanning technology: (i) 2-D barcoding and (ii)
    optical character recognition (OCR). When a customer buys a product at
    a grocery store or a pharmacy, the product is typically marked with a
    2-D barcode that can be scanned at the checkout line. Similarly, when a
    taxpayer prepares a tax return using tax software, the software
    companies generally can place a 2-D barcode on the return that encodes
    the return data in a machine-readable form. The IRS could then scan the
    barcode--like the supermarket or pharmacy does--and thereby eliminate
    the need for an employee to manually transcribe each digit on the
    return. Software companies have been placing 2-D barcodes on returns
    for some State tax agencies for more than a decade. The advantage of 2-
    D barcoding is that it should be 100-percent accurate. The disadvantage
    is that it does not help with paper tax returns prepared by hand or
    otherwise prepared without tax software.

        OCR, an alternative type of scanning technology, has the opposite
    advantage and disadvantage. The advantage is that it can be used to
    machine read all returns, including returns prepared by hand. The
    disadvantage is that it is not 100-percent accurate; for example, a
    ``1'' and a ``7'' may look similar, so OCR may read the digit
    incorrectly. However, OCR technology should still be more accurate than
    manual data transcription because an employee not only may have the
    same difficulty distinguishing between the ``1'' and the ``7'' but also
    may hit the wrong key by mistake from time to time. Last year, IRS
    employees made transcription errors on 22 percent of paper returns.\6\
    ---------------------------------------------------------------------------
        \6\ IRS response to TAS information request (September 16, 2021)
    (data through August 2021).

        Some states use both 2-D barcoding for software-prepared returns
    and OCR for other returns. The IRS recently conducted a pilot and is
    exploring broader use of scanning technology. In my view, this should
    be a top technology priority.
    C. Reduce Barriers to E-Filing
        The IRS deserves considerable credit for raising the e-file rate
    for individual returns to about 90 percent. But that still leaves about
    17 million individual income tax returns coming in on paper. Scanning
    technology, as discussed above, would provide a solution. However, it
    is worth noting that some taxpayers who want to e-file their returns
    are not able to do so for any of several reasons: some lower-volume tax
    forms are not ``supported'' by the IRS's e-file system; the IRS
    rejected millions of e-filed returns last year because they broke one
    or more ``business rules''; and some taxpayers cannot e-file when they
    need to include an attachment or when they override a field pre-
    populated by software. The IRS should take a hard look at the barriers
    that prevent taxpayers who wish to e-file from doing so. If it can find
    ways to eliminate those barriers, it will reduce its paper return
    inventory.
    D. Automate the Creation and Review of Amended Tax Returns
        All Forms 1040-X, Amended U.S. Individual Income Tax Return, are
    reviewed by IRS employees and treated as if submitted on paper even if
    they are e-filed. That is highly inefficient. The IRS should prioritize
    an IT upgrade to allow taxpayers to log into their online accounts,
    select to file an amended return, and have all return data from the
    taxpayer's originally filed return pre-populate. The taxpayer could
    then enter the changes--often just one or two--and the amended return
    could be e-filed and processed electronically. The IRS should be able
    to pass the return through its business rules via automation. Those
    returns that pass would be approved quickly without employee review.
    Others would be routed for further review. If the IRS could implement
    an upgrade along these lines, it would substantially accelerate the
    processing of amended tax returns. Over the longer term, the IRS should
    expand the online account features to allow taxpayers to make
    adjustments to their tax returns in lieu of filing amended returns.
    E. Deploy ``Customer Callback'' Technology on All Telephone Lines, so
            Taxpayers and Tax Professionals Don't Have to Wait on Hold and
            Can Receive a Return Call When the Next CSR Is Available
        The IRS has begun to deploy customer callback technology on some of
    its telephone lines. It should continue to expand this technology to
    all lines. I need to caution, however, that customer callback may not
    be a cure-all for IRS telephone operations. If the IRS workforce only
    has the capacity to answer 32 million telephone calls, as it did last
    year, customer callback still will not enable the IRS to handle all of
    the 250 million calls that went unanswered. However, many taxpayers and
    tax professionals call the IRS multiple times before they get through,
    and if effectively used, customer callback technology could
    substantially reduce the need for repeat calls, thereby reducing call
    volumes and assisting taxpayers more effectively. I recommend that
    Congress provide funding specifically allocated to expand the use of
    customer callback technology.
                        iv. legislative recommendations
        The recommendations I have proposed above are ones the IRS can
    implement on its own. To improve the taxpayer experience, I will
    highlight three legislative changes that I encourage the Congress to
    consider.
    A. Provide the IRS With Additional Sustained, Multi-Year Funding at
            Sufficient Levels to Meet Taxpayers' Needs
        The pandemic and the resulting processing and refund delays have
    shined a spotlight on the IRS's taxpayer service challenges, but they
    existed before the pandemic. Since FY 2010, the IRS's workforce has
    shrunk by 17 percent, while its workload--as measured by the number of
    individual return filings--has increased by 19 percent. The increasing
    imbalance between more work and reduced resources has had predictable
    effects. In FY 2019--the most recent year before the pandemic--IRS
    employees answered only 29 percent of taxpayer telephone calls, and
    they were not able to process 58 percent of taxpayer responses to
    proposed tax adjustments within the agency's own standard processing
    times. IT systems are antiquated and are largely held together by belts
    and suspenders, currently unable to offer taxpayers seemingly basic
    features like effective online accounts.

        The IRS receives its annual appropriation in four accounts: (i)
    Taxpayer Services; (ii) Enforcement; (iii) Operations Support; and (iv)
    Business Systems Modernization. With limited exceptions, the IRS cannot
    move funds among its accounts.

        To meet basic taxpayer service needs, the IRS requires additional
    funding in its Taxpayer Services account to improve return processing,
    correspondence processing, and telephone service. My own organization,
    TAS, is provided with a minimum funding level in the Taxpayer Services
    account and requires additional funding to address the increase in our
    cases, including the spike in congressionally referred cases that we
    have been receiving, as discussed below. Relatedly, funds from the
    Operations Support account, which includes IT funding, are allocated
    partly to support Taxpayer Services operations and partly to support
    Enforcement operations. To ensure that Taxpayer Services programs
    receive the funding they need, I encourage Congress to require that a
    specified amount of Operations Support funding be dedicated to Taxpayer
    Services initiatives. This would include, for example, additional
    funding to improve telephone service.
    B. Refrain From Making Changes to the Internal Revenue Code Just
            Before, and Particularly During, the Filing Season
        Last-minute tax law changes create administrability challenges for
    the IRS and tax software companies, and confusion for taxpayers and tax
    return preparers. When a law is changed, the IRS must re-program its
    processing systems to accommodate the change, sometimes leading to
    delays in the start of the filing season, and tax software companies
    must update their software so taxpayers and tax return preparers get
    the right results. In 2007, the National Taxpayer Advocate's Annual
    Report to Congress designated the impact of late-year tax law changes
    as the #1 most serious problem facing taxpayers.

        This problem is compounded when the law is changed during the
    filing season. The American Rescue Plan Act, enacted in March 2021,
    provided that taxpayers could exclude up to $10,200 in 2020
    unemployment compensation (UC) benefits from gross income. By that
    time, almost half of all taxpayers had filed their 2020 tax returns,
    including millions who included the full amount of their UC benefits in
    gross income. To its credit, the IRS figured out a way to retroactively
    give most taxpayers the benefit of the exclusion without requiring them
    to file amended returns. But there were several adverse consequences:
    (i) the IRS was forced to divert its limited IT resources to develop
    and implement this fix; (ii) confused taxpayers made millions of calls
    to the IRS and some filed amended returns before the fix was announced;
    and (iii) the fix could not be applied in all cases, generating further
    confusion for taxpayers and tax return preparers regarding which
    taxpayers had to file amended returns.

        I recognize that Congress must balance competing priorities, and
    there are occasions where providing retroactive taxpayer relief may
    trump considerations of administrability. But changes in law enacted
    after the IRS has programmed its systems for the filing season create
    significant challenges for the IRS, software companies, taxpayers, and
    tax return preparers. I urge Congress to keep these administrability
    concerns in mind and refrain from making retroactive tax law changes
    except in extraordinary circumstances.
    C. Vastly Simplify the Internal Revenue Code
        I list this recommendation last only because it is the least likely
    to be implemented quickly. Over the long run, simplifying the tax law
    is the most important step Congress can take to reduce taxpayer
    compliance burdens. In prior reports, we have discussed the benefits of
    tax law simplification at length, and we have designated the complexity
    of the tax code as the most serious problem facing taxpayers.\7\ In our
    2016 Annual Report to Congress, we said the current tax code:
    ---------------------------------------------------------------------------
        \7\ See National Taxpayer Advocate 2016 Annual Report to Congress
    305-324 (Legislative Recommendation: Tax Reform: Simplify the Internal
    Revenue Code Now); National Taxpayer Advocate 2012 Annual Report to
    Congress 3-23 (Most Serious Problem: The Complexity of the Tax Code);
    National Taxpayer Advocate 2010 Annual Report to Congress 3-14 (Most
    Serious Problem: The Time for Tax Reform Is Now); National Taxpayer
    Advocate 2010 Annual Report to Congress 365-372 (Legislative
    Recommendation: Enact Tax Reform Now); National Taxpayer Advocate 2005
    Annual Report to Congress 375-380 (Key Legislative Recommendation: A
    Taxpayer-Centric Approach to Tax Reform).

            Makes compliance difficult, requiring taxpayers to devote
    excessive time to preparing and filing their returns;
            Requires the significant majority of taxpayers to bear
    monetary costs to comply, as most taxpayers utilize tax return
    preparers and many other taxpayers purchase tax return preparation
    software;
            Rewards taxpayers who can afford expensive tax advice and
    discriminates against taxpayers who cannot;
            Undermines trust and confidence in the tax system, as many
    taxpayers do not understand how their taxes are computed or even what
    rate of tax they pay;
            Leads to lower levels of tax compliance, as taxpayers make
    high rates of both inadvertent and deliberate errors, and the
    complexity of tax returns limits the IRS's ability to detect
    noncompliance through audits or other means; and
            Requires a large Federal agency to administer the tax system,
    as the IRS each year must, among other things, publish forms and
    publications, create computer code for thousands of tax provisions,
    enforce the law, and respond to more than 100 million telephone calls,
    10 million letters, and several million visits from taxpayers (although
    in-person visits were lower over the last 2 years due to the pandemic).

        We continue to believe that simplifying the law would enhance
    public confidence in the fairness of the tax system and reduce taxpayer
    compliance burdens and that tax-law simplification should therefore be
    prioritized.
                             v. tas case processing
        Congress created TAS to serve as a ``safety net'' for taxpayers,
    but over the past few years, the combination of more cases, fewer
    experienced case advocates, and an inability to close cases due to
    limited IRS resources has caused the TAS safety net to fray. That has
    increased case cycle times, made it harder for taxpayers to reach TAS,
    and reduced service levels for taxpayers and congressional offices that
    refer cases to us. From FY 2017 to FY 2021, TAS's case receipts rose
    from 167,000 to 264,000--a 58-percent increase--while our appropriated
    funding on an inflation-
    adjusted basis declined by about 6 percent. When taxpayers cannot get
    their problems resolved directly with the IRS, they often contact their
    congressional offices for assistance. The number of cases TAS received
    from congressional offices demonstrates the magnitude of the challenges
    taxpayers experienced in 2021. In the 3 years preceding the pandemic,
    TAS received between 10,000 and 11,000 congressional referrals
    annually. Last year, we received more than 66,000 congressional
    referrals--more than six times as many cases as in pre-pandemic years.

        Although our employees are resilient and want to help every
    taxpayer in need of assistance, we had to make some difficult decisions
    during the past year to address our workload challenges. In November,
    we reinstated our prior policy against accepting cases where the sole
    issue was a delay in the processing of an original or amended tax
    return. Since then, numerous members of Congress have contacted us to
    express concern about this policy. We recognize the hardship and
    frustration taxpayers are facing, and we recently communicated to your
    local offices that we will again accept processing cases in certain
    circumstances. TAS has been working with the IRS to obtain dedicated
    resources to enable us to do this. Going forward, TAS will be utilizing
    the IRS's surge team, once it stands up, to assist in processing TAS
    cases.

        Nevertheless, I think it would be helpful to explain TAS's role in
    assisting taxpayers and the tradeoffs that accepting these processing
    cases involves. Congress created TAS as part of the IRS Restructuring
    and Reform Act of 1998 to serve as an ``advocate'' for taxpayers in
    resolving problems with the IRS. By law, ``taxpayer advocate offices
    operate independently of any other Internal Revenue Service office''\8\
    and the National Taxpayer Advocate and her delegates are authorized to
    issue ``Taxpayer Assistance Orders'' to assist taxpayers by requiring
    the IRS to take certain actions or refrain from taking certain actions,
    unless an order is modified or rescinded by the Commissioner or the
    Deputy Commissioner.\9\
    ---------------------------------------------------------------------------
        \8\ IRC Sec. 7803(c)(4)(A)(iii).
        \9\ IRC Sec. 7811.

        As advocates operating independently of the IRS, TAS is not
    authorized to resolve taxpayer problems on its own. We ``advocate.'' We
    do not implement. We do not have the authority to accept or process tax
    returns, to resolve audits, or to make final determinations regarding
    whether collection actions are warranted. Rather, our function is to
    serve as an ombuds when a taxpayer is experiencing a hardship or when a
    taxpayer's case has fallen through the bureaucratic cracks. Our case
    advocates generally resolve cases by sending an ``Operations Assistance
    Request'' (OAR) to the IRS operating division with control over the
    issue to request that it take specified actions, and we include
    documentation to support the request. In pre-pandemic years, TAS had
    sufficient staff to accept substantially all cases that met our case-
    acceptance criteria, and the IRS had sufficient staff to process our
    ---------------------------------------------------------------------------
    OARs in a relatively timely manner.

        The pandemic has presented unique challenges for TAS that are
    derivative of the challenges facing the IRS. For example, processing
    delays of ten months mean that millions of taxpayers are experiencing
    economic or systemic hardships and ordinarily may qualify for TAS's
    services. But TAS does not have the staffing to accept more cases, and
    the IRS is so buried in backlogged returns that it cannot give priority
    to the returns of taxpayers who come to TAS without slowing down the
    processing of all other returns.

        That is the tradeoff we face when asked to expedite the processing
    of original or amended tax returns. In general, the IRS is processing
    returns on a first-in, first-out basis. When tax returns come in, they
    are ``batched'' by the date of receipt. If TAS accepts a case involving
    an amended tax return and asks the processing center to locate it or
    expedite its processing, the processing center manager generally must
    instruct employees to stop transcribing returns to look through all the
    returns in the ``batch'' where the target return is thought to be
    located. There may be thousands of returns in the batch. This is akin
    to asking an IRS employee to find a needle in a haystack. As a result,
    a request to expedite the processing of one return will delay the
    processing of many other returns, as IRS employees must stop
    transcribing returns by date of receipt to locate the return at issue.

        This is obviously not an ideal situation, but it typifies the
    current challenges. While TAS may be able to help in limited
    circumstances, our ability to assist taxpayers is limited by our
    staffing and the IRS's speed in responding to us. Although TAS has
    expanded our case acceptance criteria, there is no getting around the
    reality that millions of taxpayers will continue to experience refund
    delays, and some will experience economic hardships, until the IRS
    works through its processing backlog.
                                 vi. conclusion
        The 2021 filing season presented unprecedented challenges for
    taxpayers and the IRS alike. Most of those challenges remain. Some
    arguably have grown worse. There are millions of tax returns and pieces
    of correspondence that the IRS received last year but could not
    process. It therefore started the 2022 filing season in a deep hole.
    While there is no magic bullet, there are short-term steps the IRS can
    take to accelerate the processing of returns and treat taxpayers
    fairly, and with Congress's support, there are steps the agency can and
    should take over the medium and longer term to improve its operations
    overall.

        The longer-term solution should involve strengthening both human
    and IT resources. And once the IRS digs out of its current backlog
    hole, it will require an investment in its infrastructure, touching
    everything from basic taxpayer service and filing season processing to
    tax law enforcement that is effective but fair to taxpayers who are
    experiencing economic hardships. The IRS needs to rebuild and modernize
    its foundation to enable it to make good on its stated mission to
    ``[p]rovide America's taxpayers top-quality service by helping them
    understand and meet their tax responsibilities and enforce the law with
    integrity and fairness to all.''\10\ In this statement, I have outlined
    my priority recommendations to help the IRS do a better job of
    accomplishing its mission by improving the taxpayer experience and
    ensuring the protection of taxpayer rights.
    ---------------------------------------------------------------------------
        \10\ See Internal Revenue Manual 1.1.1.2, IRS Mission (July 29,
    2019).

                                     ______

             Questions Submitted for the Record to Erin M. Collins
                 Questions Submitted by Hon. Michael F. Bennet
        Question. The IRS faces deep challenges this filing season--the
    result of years of underfunding, outdated technology, a global
    pandemic, and more. At the same time, the agency and its staff have
    done a remarkable job meeting the urgent tasks Congress has set for
    them, from sending stimulus checks to hundreds of millions of Americans
    to delivering advance Child Tax Credit payments to 61 million
    children--payments that cut the child poverty rate nearly in half.

        Can you highlight one or two newly developed capabilities or
    positive steps forward that IRS will be able to build upon in years to
    come?

        Answer. In my view, the most significant capability the IRS has
    developed as a result of the pandemic and can build upon in the future
    is the expanded use of digital technologies to communicate with
    taxpayers and practitioners. The IRS has substantially lagged behind
    private financial institutions in offering customers a way to sign
    documents and communicate without utilizing paper and snail mail.
    Because most IRS employees began to telework after the pandemic began
    and could not easily receive or transmit snail mail, the IRS issued
    temporary guidance allowing for the use of e-signatures and the secure
    emailing of documents.\1\ Beginning in March 2020, the guidance
    permitted:
    ---------------------------------------------------------------------------
        \1\ Sunita Lough, Deputy Commissioner for Services and Enforcement,
    Memorandum for All Services and Enforcement Employees (March 27, 2020).

            The use of electronic or digital signatures to sign certain
    paper forms submitted for processing;
            The acceptance of images of signatures and digital signatures
    on documents relating to the determination of tax liability or the
    collection of tax; and
            The use of email to receive or transmit encrypted documents to
    prove tax compliance.

        This guidance has been extended through October 31, 2023.\2\ It is
    my hope and expectation that the IRS will enhance and expand digital
    communication options in the future.
    ---------------------------------------------------------------------------
        \2\ Douglas W. O'Donnell, Deputy Commissioner for Services and
    Enforcement, Memorandum for All Services and Enforcement Employees
    (November 18, 2021).

        A second technological innovation the IRS can build upon is the
    creation of portals that have allowed taxpayers to provide and update
    information for stimulus payments and Advance Child Tax Credits. The
    IRS can apply this technology to expand the functionality of online
    taxpayer accounts. The past 2 years have highlighted the need and
    desire of taxpayers and practitioners for access to their tax records
    electronically. Additional functionality should include two-way secure
    chats with an IRS representative, the ability to upload and download
    documents, and the ability to receive email communications to access
    ---------------------------------------------------------------------------
    and view notices and other communications.

        Question. The American Rescue Plan roughly tripled the Earned
    Income Tax Credit (EITC) for workers without dependent children. That
    will mean an important income boost for 17 million struggling workers,
    including nearly 300,000 in Colorado. Some of these workers have
    incomes low enough that they are not required to file taxes.
    Unfortunately, the EITC's rules are complex, and many workers have
    trouble claiming the credit, which delays their much-needed refunds.
    When I spoke to Commissioner Rettig recently, I told him I was
    encouraged by the IRS's progress on simplified filing for low-income
    workers and families--and that I hoped simplified filing could be
    significantly expanded in the coming years.

        What are the hurdles and opportunities for simplified filing? And
    what would it take to develop a simplified filing process that includes
    the EITC--perhaps even one that pre-populates the amount of credit for
    which IRS believes the taxpayer is eligible?

        Answer. When taxpayers use tax software to prepare their returns--
    either directly or through preparers--the software generally will
    prompt them to claim the EITC if the information they enter indicates
    they are qualified. The software also will generate the amount of the
    credit for which the taxpayer is eligible based upon the income and
    family information the taxpayer has entered. It would be difficult for
    the IRS to prepopulate information to compute accurate EITC benefits.
    While the IRS has access to a taxpayer's wage information, it does not
    have access to information relating to changes in family circumstances,
    such as marital status, the number of qualifying children, and whether
    the taxpayer meets EITC relationship and residency requirements. The
    IRS also would not generally know about self-
    employment income.

        However, the IRS could provide taxpayers with certain third-party
    downloadable data at the time of filing, which would assist in
    simplifying the entry of this data into tax software. It would also
    provide taxpayers with relevant information that may reduce errors or
    show inconsistencies prior to the filing of a return.

        We have recommended that Congress restructure the EITC by
    separating its benefits into two credits: (i) a refundable worker
    credit based on each individual worker's earned income without regard
    to qualifying children and (ii) a refundable child benefit. For wage
    earners, claims for the worker credit could be verified with nearly
    100-percent accuracy by matching claims on tax returns against Forms W-
    2, thereby driving down the improper payments rate on those claims to
    nearly zero. The portion of the EITC that would vary based on family
    size could be combined with the Child Tax Credit into a larger family
    credit. The National Taxpayer Advocate published a special report in
    2019 detailing this proposal.\3\
    ---------------------------------------------------------------------------
        \3\ National Taxpayer Advocate Fiscal Year 2020 Objectives Report
    to Congress vol. 3 (Special Report: Earned Income Tax Credit: Making
    the EITC Work for Taxpayers and the Government).

                                     ______

                   Questions Submitted by Hon. Chuck Grassley
        Question. You recommended IRS suspend a number of taxpayer notices
    to provide an opportunity for IRS to clear its backlog and catch up on
    processing paper returns. Since then, IRS has suspended certain
    automatic notices and letters to taxpayers. However, according to
    Commissioner Rettig, ``other notices are statutorily required to be
    issued within a certain time frame to be legally valid.'' Are there
    additional notices you support suspending that you believe IRS could
    suspend under its existing authority? Are there additional notices that
    you recommend Congress temporally suspend or grant flexibility to IRS
    to suspend?

        Answer. We continue to work with the IRS on a variety of issues
    relating to notices, including suspension of certain notices, time
    frame, and the process for resuming the issuance of notices. At this
    time, the IRS has halted the issuance of many automated notices.\4\ It
    has also halted the issuance of follow-on notices that are typically
    mailed after the announced suspended notices. We anticipate that the
    suspension will continue until the IRS gets the backlog under control
    and that the IRS will then begin staggering the issuance of future
    notices. We believe the IRS has begun to take appropriate steps to
    minimize the impact to taxpayers due to the backlog of unprocessed
    correspondence.
    ---------------------------------------------------------------------------
        \4\ IRS News Release IR-2022-31, IRS continues work to help
    taxpayers; suspends mailing of additional letters (February 9, 2022),
    https://www.irs.gov/newsroom/irs-continues-work-to-help-taxpayers-
    suspends-mailing-of-additional-letters.

        Question. Recently, IRS selected ID.me to provide identity
    verification services for accessing taxpayer accounts. While the
    original plan called for the use of facial recognition, IRS has backed
    away from that requirement due to concerns from Congress and others.
    However, ID.me will still provide other verification services. I
    understand section 6103 does not apply to the data that ID.me collects
    from taxpayers to verify identities to the IRS. Are you confident that
    the information that is collected by ID.me, or could be collected and
    used by any contractor is subject to adequate privacy protections?
    Should the committee consider whether additional privacy protections
    ---------------------------------------------------------------------------
    should be applied?

        Answer. The confidentiality of tax return information should always
    be a priority consideration. By its terms, Internal Revenue Code
    section 6103 generally prohibits IRS employees and contractors with
    authorized access to return information from disclosing tax return
    information. In addition, the IRS generally inserts a term in its
    contracts that prohibits contractors from redisclosing tax return
    information and may include background checks, training requirements,
    and penalties.

        The IRS engages contractors to provide many services, ranging from
    processing checks to collecting delinquent tax liabilities. While
    concerns expressed about facial scans were understandable, it's
    important to keep in mind that the IRS established a facial recognition
    requirement to comply with identity verification standards prescribed
    by the National Institute of Standards and Technology (NIST), including
    use of biometric data and retention of the data for a period of years.
    For the highest level of security, NIST recommends utilizing biometrics
    to protect taxpayer data and prevent fraud. As a result of recently
    expressed concerns, my understanding is that ID.me has deleted taxpayer
    biometrics data from its systems and will not retain it after the
    taxpayers authenticate their identities going forward.

        Using the highest level of security is beneficial to taxpayers
    because it will allow the IRS to provide taxpayer-specific information
    within an online account as well as other tools and applications. With
    ID.me's technology, the IRS has been able to authenticate a higher
    percentage of taxpayers--almost twice the authentication rate compared
    with the prior technology--allowing more taxpayers to access their
    data. Decreasing the level of security would negatively impact the
    IRS's ability to provide taxpayer data online or increase the risk of
    data breaches. I am a big proponent of having taxpayers access their
    tax information and increasing the functionality of online accounts,
    and I support having the level of security required to securely provide
    that functionality.

        I do not believe the circumstances involving the use of facial
    recognition technology require immediate legislative action. I do
    believe Congress should continually treat privacy protection as
    paramount in exercising its oversight responsibilities and should work
    with the IRS and other Federal agencies using ID.me, another vendor, or
    an internal program to provide the highest level of security for
    taxpayers' financial and other personal records while respecting their
    privacy and other concerns.

        Question. Critics of the use of facial recognition technology have
    raised concerns of racial bias and other civil liberties concerns.
    Critics have also raised concerns about the ability of low-income
    taxpayers to be able to access the technology necessary to meet the
    requirements of facial recognition or biometric security. Proponents of
    facial recognition insist the technology is effective across all racial
    groups and is easily accessible. Do you think there is merit to
    concerns raised that facial recognition technology incorporates a
    racial bias or that it presents signification hurdles to low-income
    taxpayers?

        Answer. I understand these concerns, but I am unable to quantify
    the impact to taxpayers. The controversy over the use of facial scans
    arose recently, and TAS has not yet had an opportunity to study all the
    concerns that were raised in detail. However, my recommendation is that
    the IRS provide taxpayers with options when authenticating their
    identities. IRS records contain vast financial data, and the IRS should
    do everything possible to protect that data and prevent fraud. The IRS
    should utilize secure methods of authentication that allow taxpayers
    and representatives to access their tax records while being respectful
    of taxpayer privacy issues.

                                     ______

                   Questions Submitted by Hon. Maggie Hassan
        Question. Many of my constituents who are facing problems because
    of the IRS backlog amended their tax returns after COVID-response
    legislation. They are now having difficulty getting resolution on their
    amended tax returns from the IRS.

        How can the IRS improve processing of amended tax returns and clear
    this part of the backlog?

        Answer. According to the most recent IRS data, more than 2 million
    Forms 1040-X, Amended U.S. Individual Income Tax Return, remain
    unprocessed. The IRS reports it is taking about ten months to process
    Forms 1040-X. Many taxpayers and tax professionals say they have been
    waiting considerably longer. There are two plausible solutions to
    address the backlog. The first is to assign more employees to the IRS's
    Submission Processing and Accounts Management functions to process
    original and amended tax returns and correspondence. The second is to
    automate more of the work. Relating to automation, TAS has recommended
    that the IRS implement 2-D barcoding and/or optical character
    recognition (OCR) technology so paper returns can be machine read and
    do not need to be manually transcribed. The IRS is currently detailing
    employees to Submission Processing and Accounts Management to work the
    amended returns.

        TAS generally is not able to assist with cases involving
    unprocessed tax returns. Once a tax return is entered on IRS systems,
    we can help. In light of the unprecedented backlogs and refund delays
    taxpayers are experiencing, however, TAS has worked with the IRS's Wage
    and Investment Division to create special processes to accept delayed
    amended return cases referred by congressional offices for tax year
    2020 and earlier years, provided the return was filed at least five
    months prior to the request for TAS assistance. Our specific procedures
    have been communicated to the local offices of all members of the
    Senate and House.

                                     ______

                    Questions Submitted by Hon. Rob Portman
        Question. As we discussed, the IRS is in a crisis with an
    astounding 23.5 million pieces of mail including 8.5 million paper
    returns and a total of nearly 17.6 million returns. This has a real
    impact on many Ohioans.

        Most of this backlog is the result of tax returns and other forms
    filed in paper. While the IRS advises taxpayers to file electronically,
    not all forms, past year tax returns, or amended returns can be filed
    electronically. When a taxpayer is trying to get into compliance and
    fix back tax years they must file these amended returns in paper. So,
    if a taxpayer has an offer-in-compromise (OIC) pending and mailed in
    their amended back-year tax returns their offer can get rejected since
    the IRS hasn't opened the mail. This causes additional delays and
    generates more paperwork when a new OIC is submitted because the first
    one was rejected.

        Is there any additional relief we can provide to these taxpayers?
    Would providing broad appeal rights for OICs during this delay make
    sense?

        Answer. The delays in processing tax returns are causing adverse
    impacts in multiple areas. For example, the delays may adversely affect
    loan applications, whether for mortgages, personal or business loans,
    and even student aid. For those reasons, among others, the IRS's top
    priority must be to work through its returns backlog.

        The delays also have the potential to cause OIC applications from
    qualifying taxpayers to be rejected. However, the IRS recently issued
    guidance designed to prevent that from happening.\5\ Under the
    guidance, IRS employees are instructed not to return OIC applications
    as ``not processible'' when tax year 2020 returns are not showing on
    IRS systems as having been filed. Employees are instructed to address
    the missing return(s) during the offer evaluation. This guidance is
    scheduled to expire on April 30th, but I have recommended the IRS
    continue to follow current procedures until it works through the
    processing backlog.
    ---------------------------------------------------------------------------
        \5\ IRS Small Business/Self-Employed Division, Control No. SBSE-05-
    1221-0071, Extension of Temporary Deviation on Offers in Compromise
    (OICs) Involving Delayed Processing of Individual Master File (IMF) and
    Business Master File (BMF) Tax Returns (December 22, 2021), https://
    www.irs.gov/pub/foia/ig/sbse/sbse-05-1221-0071.pdf.

        Question. Low-Income Taxpayer Clinics in Ohio have indicated that
    the taxpayer transcripts are very helpful, but that notices sent to the
    taxpayer are not listed. It would be useful to ensure that notices,
    especially statutory notices which must be responded to in a set amount
    of time and can be confusing to taxpayers, are indicated on the
    ---------------------------------------------------------------------------
    transcript.

        Would you recommend that the IRS add these notices to taxpayer
    transcripts?

        Answer. This is an easy answer: yes. In addition, my vision of
    online taxpayer accounts also encompasses notices and would provide
    taxpayers with electronic notification of notices, the ability to view
    the notices, the ability to download the notices, and the ability to
    respond through their online accounts.

        Question. You have stated that clearing the backlog should be the
    top priority at the IRS. In your testimony before the Ways and Means
    Committee, you mentioned that one of the things we could do right now
    was to utilize IRS employees by directing more employee resources
    towards processing the backlog, as well as outsourcing some of the
    clerical work to third parties. Commissioner Rettig has indicated to us
    that the IRS has already been deploying ``surge teams,'' which are
    employees from across the agency who are organized to focus on urgent
    issues like the backlog.

        Would you suggest that the IRS add more ``surge teams'' or make
    additional efforts directing employee resources on the backlog? Would
    it be helpful for employees from elsewhere in the Department of the
    Treasury to aid in processing the backlog, or potentially even
    employees from other parts of the Federal Government?

        Please detail any additional measures that can be taken to reduce
    the backlog, and whether action from Congress could be helpful to the
    agency in this regard.

        Answer. The IRS should focus on two measures to expedite its
    processing of backlogged returns:

            1.  More Employees Assigned to Returns Processing. It is my
            understanding that the IRS is reassigning more employees from
            other parts of the agency to its Submission Processing (SP)
            function, including campus compliance employees (inventory
            surge team #2). Despite increases in electronic filing, the IRS
            still receives roughly 17 million paper Forms 1040 each year,
            and employees still manually keystroke all numbers from paper
            returns into IRS systems. The first employee ``surge'' the IRS
            announced involved Accounts Management (AM) employees. These
            employees are being trained and should begin processing returns
            and correspondence in March. AM employees answer toll-free
            telephone calls, process correspondence, and process some
            amended tax returns. To make progress in working through the
            backlog of paper tax returns, however, the IRS must increase
            the number of employees working in SP. The IRS has begun
            identifying additional employees and will be reassigning a
            second surge team to cover SP and AM.

            2.  Scanning Technology to Machine Read Paper Tax Returns. The
            IRS should take immediate steps to implement technology that
            would allow paper tax returns to be machine read and thereby
            avoid the need for an employee to transcribe them digit by
            digit. In my written statement for this hearing, I described
            the two leading types of scanning technology: (i) 2-D barcoding
            and (ii) optical character recognition (OCR). The IRS conducted
            a pilot involving OCR last year but has decided not to continue
            with it. While the IRS explores other OCR options, I recommend
            it adopt 2-D barcoding technology for the next filing season.
            It is a ``tried and true'' method that has been used by State
            tax agencies for some 2 decades.

               The IRS Office of Chief Counsel recently advised that the
            IRS lacks the authority to require software companies to place
            barcodes on paper-filed tax returns.\6\ As noted, however,
            software companies have routinely done it for the States. In
            the National Taxpayer Advocate's 2004 Annual Report to
            Congress--18 years ago--we reported that 17 States were using
            it.\7\ 2-D barcoding will require some lead time to implement
            because the software companies will need to modify their
            software to generate barcodes, and the IRS will need to program
            its systems to read the barcodes and import the data they
            contain. For that reason, I recommend the IRS immediately enter
            into discussions with the software industry to request that it
            place barcodes on 2022 returns filed during the 2023 filing
            season and, if software companies decline, to notify Congress
            within 30 days so it can decide whether to impose the
            requirement through legislation.
    ---------------------------------------------------------------------------
        \6\ IRS Office of Chief Counsel, PMTA 2022-02, Program Manager
    Technical Advice: Authority to Mandate Tax-Software Developers to Embed
    Two-Dimensional Barcodes on Returns and Forms or to Incorporate Two-
    Dimensional Barcodes on Returns and Forms that the IRS Designs and
    Issues (December 17, 2022), https://www.irs.gov/pub/lanoa/pmta-2022-
    02.pdf.
        \7\ National Taxpayer Advocate 2004 Annual Report to Congress 89,
    101 (Most Serious Problem: Electronic Return Preparation and Filing).

        Question. On February 9th, the IRS announced the suspension of
    certain notices, and Commissioner Rettig previously outlined additional
    measures underway to provide relief to taxpayers. As you know, the
    backlog of returns at the IRS is creating challenges for taxpayers
    whose filings have not yet been processed, such as some taxpayers
    having their loan applications put on hold and experiencing
    extraordinarily long waiting times for audit reconsideration and
    ---------------------------------------------------------------------------
    penalty abatement.

        What further relief measures should the IRS provide for taxpayers
    whose filings are backlogged, or who are experiencing other delays as a
    result of the backlog, and what might those look like?

        Answer. I have recommended that the IRS provide automatic first-
    time abatement (FTA) penalty relief for taxpayers from the failure-to-
    file, failure-to-pay, and failure-to-deposit penalties. Because FTA
    relief is only available once every 3 years and arguably may be viewed
    as an acknowledgement that the taxpayer was liable for the penalty, I
    have further recommended that taxpayers be given the opportunity to
    demonstrate they had ``reasonable cause'' for their noncompliance. If a
    taxpayer successfully demonstrates reasonable cause, the IRS should
    abate the penalty on that basis and allow the taxpayer to preserve FTA
    relief for late filings or payments not attributable to IRS processing
    delays.

        Question. I have heard from numerous constituents--individuals and
    businesses both large and small--that are awaiting refunds stemming
    from amended returns following the 2020 CARES Act. Some of these
    constituents have been waiting for nearly 2 years for the IRS to
    process their refund claim.

        My staff has been in touch with the IRS on these issues, and the
    taxpayers and their representatives have reached out in many instances
    as well. However, the IRS has not provided any updates.

        What do we tell taxpayers who have tried every avenue, and what can
    we do to help them?

        Answer. TAS may be able to help. Although TAS historically has not
    handled processing cases, we have worked with the IRS's Wage and
    Investment Division to create special processes to accept delayed
    amended returns cases referred by congressional offices for Tax Year
    2020 and earlier years provided a return was filed at least 5 months
    prior to the request for TAS assistance. The specific procedures have
    been communicated to the local offices of all members of the Senate and
    House.

        Question. I understand the challenges the IRS faces to quickly
    process returns that haven't even been entered into the system yet. As
    you know, every day these items are not processed costs the government
    money in the form of back-interest. What is the IRS plan to address
    these types of returns?

        Answer. This question is better directed to the Commissioner and
    the IRS operating divisions. However, my impression is that minimizing
    interest payments is not the overriding driver of IRS decision-making
    at this point. The IRS recognizes that eliminating the processing
    backlog must be its top priority for many reasons. Although reducing
    interest payments is one of them, the main driver is to deliver to
    taxpayers the refunds they deserve.

        Question. There have also been reports of math error notices being
    sent to taxpayers, but many of these notices are a result of the
    backlog, with automated messages going out before the backlogged return
    is processed.

        Would you recommend that the IRS suspend or modify these automatic
    notices, or provide subsequent clarification for math error notices
    sent to tax filers with a backlogged amended return?

        Answer. This may be a matter of terminology, but I don't believe
    the premise that the IRS is issuing math error notices to taxpayers as
    a result of the backlog is correct. Math error notices are issued as
    part of the processing of a tax return--not prior to the processing of
    a return. For example, the IRS issued more than 11 million math error
    notices last year when it processed tax returns that claimed Recovery
    Rebate Credit amounts that were inconsistent with IRS records. More
    generally, however, there are many notices that have been issued
    prematurely as a result of the processing backlog. The IRS recently
    suspended most of those notices.

        Question. In 2018, I was the sponsor of the 21st Century Integrated
    Digital Experience Act, ``21st Century IDEA'' (Public Law No. 115-336),
    which among other things, requires that any Federal agency form that is
    related to serving the public be made available in a digital, mobile
    responsive format that is fully functional and usable on common mobile
    devices.

        Can you tell me how many IRS forms are fully compliant with the
    21st Century Integrated Digital Experience Act (Public Law 115-336)
    today? What is your plan and timeline to fully modernize all publicly
    facing, as well as all internal IRS paper-based forms (including
    accepting them for e-filing)?

        Which office within the IRS has overall responsibility for ensuring
    full compliance and implementation of the 21st Century Integrated
    Digital Experience Act?

        Specifically, who is responsible for the IRS website, e-signature,
    and forms modernization efforts?

        Answer. We discussed e-filing challenges in the National Taxpayer
    Advocate's 2021 Annual Report to Congress (Most Serious Problem #8: E-
    Filing Barriers: Electronic Filing Barriers Increase Taxpayer Burden,
    Cause Processing Delays, and Waste IRS Resources). Our discussion
    provides detailed information on numerous IRS forms that cannot be e-
    filed. We anticipate the IRS will respond to our recommendations by the
    end of April, and we will be posting its responses on our website. I
    speak only for TAS so I cannot directly answer your question about the
    IRS's plans and timeline to fully modernize its forms. I suggest you
    direct that question to the Commissioner or his staff for more
    information.

        Primary responsibility for digitalization issues rests with the
    IRS's Enterprise Digitalization and Case Management Office. Hampden
    (Harrison) Smith is the Co-Director for Digitalization in that office.

        Several functions within the IRS work on the website, e-signature
    policy, and forms modernization, including the Office of Online
    Services, the Office of Privacy, Governmental Liaison and Disclosure,
    and the operating divisions, respectively. The Office of Information
    Technology and several other functions are also involved. Online
    Services and the operating divisions report to Doug O'Donnell, Deputy
    Commissioner for Service and Enforcement. Privacy, Governmental Liaison
    and Disclosure and Information Technology report to Jeff Tribiano,
    Deputy Commissioner for Operations Support.

                                     ______

                    Prepared Statement of Hon. Mike Crapo,
                           a U.S. Senator From Idaho
        Thank you, Mr. Chairman, and I thank all of our witnesses for
    joining us today.

        For Ms. Collins, this represents her first official appearance
    before the Finance Committee in her role as the National Taxpayer
    Advocate.

        Let me divert from my prepared remarks for just a moment to respond
    to some of the comments of the chairman about the responsibility for
    this crisis we are seeing in the IRS right now. The entire attack from
    some on the other side of the aisle, saying that the cause of our
    crisis right now is the failure of Republicans to adequately fund the
    IRS over the years, is, in my opinion, an attempt to justify why we see
    the crisis, and to try to justify their desire, which was built into
    the Build Back Better Act: an $80-billion influx of revenue to the IRS.
    This would have virtually doubled the budget of the IRS over a period
    of time, and would have been focused almost entirely funding an army of
    new auditors to go after the so-called ``tax gap,'' claiming that the
    tax gap was among very, very wealthy individuals who were tax cheats.

        When you look at the so-called tax gap--and there is a tax gap--
    that tax gap comes largely from the lower- and middle-income categories
    from people who are having difficulty figuring out how to deal with the
    complex IRS code. That is not the entirety of it, but that is where the
    focus really is. And that is why we were fighting so hard not to have
    such a heavy-handed response, to help those in our society who are
    having difficulty dealing with the IRS not to just face basically an
    increased enforcement pressure.

        What we need is assistance from the IRS, and I think we can find
    some common ground there if we can work in that context. I should also
    note, just for a couple data points, you can make data look like you
    want to as you pick your starting points and ending points for
    analysis, but over the years I think that the IRS budget has pretty
    much kept up with inflation.

        In the last 4 or 5 years, the IRS budget has been appropriated at
    100 percent of their budget request. This was not a problem that came
    about because Congress was refusing to give the IRS its requested
    budget--it is a problem which the IRS leadership has told us, as
    recently as a day ago or so, came about because of the pandemic, which
    shut down the IRS, just like it shut down much more of the economy. The
    ensuing problems have come because of that, and because of the
    inability of the IRS to adequately update its IT and actually be able
    to communicate with taxpayers, which is what I hope we will be able to
    discuss significantly today.

        This committee relies on the Taxpayer Advocate Service for
    analysis, guidance, and vital assistance for our constituents, and for
    taxpayers across the country. That assistance is especially useful in
    the current environment.

        By any measure, the 2022 tax filing season is shaping up to be the
    most challenging and frustrating in decades, on the heels of
    challenging 2020 and 2021 filing seasons. In 2021, just over 1 in 10
    Americans was ever able to reach the IRS by telephone. More than 250
    million calls to the IRS went unanswered in 2021. Those who did manage
    to get through spent more than 23 minutes on hold, to say nothing of
    the lengthy waits spent by those who could not get through at all.

        Also in 2021, the IRS began the tax filing season with a backlog of
    more than 13 million unprocessed tax returns from the prior season, and
    it began this year's tax filing season with an even greater backlog of
    at least 18 million unprocessed tax returns and correspondence. This
    backlog has grown to over 23 million items today.

        Currently, millions of Americans need to file their tax returns,
    despite not having their last year's tax returns even processed. These
    are by no means the only areas of deep concern.

        Many Americans await last year's tax refunds. Many Americans await
    any response to correspondence they sent the IRS, in many instances
    many months ago. Many Americans have received incorrect or outdated
    information from the IRS, or have been subject to improper collections
    or other adverse actions simply because the IRS does not know they have
    filed a return or responded to a notice. Many Americans cannot receive
    accurate answers to basic questions, like how long it will take to
    receive their tax refund or an answer to their correspondence.

        These problems show no sign of abating, and appear to be
    magnifying. Even at this very early stage of the season, significant
    filing delays already abound--and new problems are arising.

        For example, many taxpayers are struggling to reconcile the
    stimulus and Advance Child Tax Credit (ACTC) payments they received in
    2021 with the applicable tax credits they are allowed, and countless
    others do not even realize they are required to do this. Official
    communications meant to assist taxpayers with these tasks have, in many
    instances, only added to the confusion or were simply inaccurate.

        I appreciate the willingness of the IRS to be open to providing
    relief to taxpayers affected by the straining circumstances of this
    filing season. But the IRS has the ability to do more, and taxpayers
    deserve more.

        This is the third consecutive filing season impacted by COVID, and
    it is time for the IRS to demonstrate it has learned--and grown--from
    the prior two.

        Despite the many issues plaguing the IRS, I do support the agency's
    efforts to further its essential mission, and salute the sacrifices its
    employees are currently making to ``do more.''

        I look forward to hearing the perspectives of our witnesses in
    today's hearing.

                                     ______

           Prepared Statement of Jan F. Lewis, Chair, Tax Executive
                     Committee, American Institute of CPAs
                                  introduction
        The American Institute of CPAs (AICPA) recognizes and appreciates
    the efforts the Department of the Treasury (``Treasury'') and the
    Internal Revenue Service (IRS) have made to provide various forms of
    relief to taxpayers affected by the Coronavirus Disease 2019 pandemic
    (commonly known as ``Coronavirus''). However, as we enter a third
    filing season under the pandemic many taxpayers and their tax advisors
    continue to face challenges and are still unable to voluntarily comply
    with their tax obligations, despite making good faith efforts to do so.
    Furthermore, the IRS continues to be stretched thin by the Coronavirus
    pandemic and has a staggering 23 million returns,\1\ correspondence,
    and adjustments needing manual processing, on top of their ability to
    only answer 2 percent of all phone calls at certain points of the
    year.\2\ For the entire FY 2021, IRS received 282 million calls, of
    which only 32 million were answered, or about 11 percent.\3\
    ---------------------------------------------------------------------------
        \1\ Erin Collins, National Taxpayer Advocate, Testimony before
    House Ways and Means Oversight Subcommittee Hearing on ``Challenges
    Facing Taxpayers,'' February 8, 2022.
        \2\ National Taxpayer Advocate Blog, ``2021 Filing Season Bumps in
    the Road: Part I,'' April 22, 2021.
        \3\ 2021 National Taxpayer Advocate Annual Report to Congress, Most
    Serious Problem #3, page 66.

        All taxpayers, regardless of their economic standing, deserve a tax
    administration system that provides support to help them meet their tax
    obligations. With this in mind, the AICPA proposes both short-term
    recommendations to immediately mitigate IRS service deficiencies
    experienced by taxpayers, and long-term recommendations to help
    establish a modernized and respected Federal agency. Additionally, we
    flag some potential areas of concern that could create further hardship
    to the already strained tax administration system, particularly during
    ---------------------------------------------------------------------------
    the current tax filing season.

        We would like to acknowledge recent steps taken by IRS in reaction
    to the growing expression of concerns including (1) suspension of the
    CP80 notice on January 27, 2022; (2) the February 2, 2022 creation of a
    Service-wide inventory surge team to address inventory backlogs; and
    (3) the February 9, 2022 suspension of additional letters including
    certain automated collection notices.

        The AICPA appreciates that the IRS seems to be listening and
    responding to the collective frustrations of all taxpayers. Taxpayers,
    practitioners and IRS will benefit from reducing unnecessary contact
    that will result from the notice suspensions. However, we must urge the
    Service to move as quickly as possible to offer all possible,
    reasonable measures of relief as we are already in the beginnings of
    tax busy season. All of the recommendations that follow are actions
    that the IRS can legally take right now to provide immediate relief to
    taxpayers. Time is of the essence.
                           short-term recommendations
                1. DELAY IRS COLLECTIONS
    Background
        If taxpayers do not timely pay their tax obligations, they
    generally will receive a series of automated notices reminding them of
    the amount owed, including escalating amounts of any penalties and
    interest accrued, and demanding payment. These notices precede the
    automated collection process, which continues until the account is
    satisfied, the case is transferred to a revenue officer, or until the
    IRS is no longer able to legally collect the tax.

        If taxpayers do not contact the IRS to pay their tax obligation in
    full or make payment arrangements, for example through an installment
    agreement or offer in compromise, the IRS may file a Federal tax lien
    against the taxpayer, serve a notice of intent to levy to the taxpayer,
    or offset some other refund to which the taxpayer is entitled, to
    satisfy the liability. In 2020, due to the Coronavirus pandemic, under
    its ``People First Initiative,'' the IRS suspended required payments on
    installment agreements and halted certain collection activities,
    including new automatic liens, systemic liens and systemic levies
    through July 15, 2020.

        After July 15, 2020, once the People First Initiative expired,
    taxpayers started to receive numerous automatic collection notices for
    amounts owed, new automatic liens, systemic liens and systemic levies.
    The IRS's compliance cycle was not realigned to the postponed due date,
    mail and processing backlogs, and resource limitations which resulted
    in millions of incorrect notices and actions. Over a year later,
    taxpayers are still inappropriately receiving collection notices or
    threatening liens or levies, often with severe penalties.
    Recommendation
        The AICPA recommends that the IRS temporarily discontinue automated
    compliance actions until it is prepared to devote the necessary
    resources for a proper and timely resolution of the matter. At a
    minimum, the IRS should halt its automatic collections activities of
    liens and levies for at least 90 days after the April 18, 2022 filing
    deadline. At that time, the IRS should reassess further extending the
    halt of the automatic collection activities based on its capacity and
    capability.

        Furthermore, many taxpayers must respond to notices through paper
    correspondence and must wait months for a resolution. Even though the
    IRS, in some instances, has indicated that taxpayers need not respond
    to these erroneous notices as IRS will systemically abate them,
    taxpayers are understandably concerned about the escalation of
    inappropriate IRS compliance activities before the penalty abatement.

        The IRS must provide taxpayers relief from the endless cycle of
    unnecessary and inappropriate notice and collection activities.
                2. ACCOUNT HOLDS
    Background
        Taxpayers and their advisors can request a temporary delay,
    typically 8 or 9 weeks, of the collection process for various reasons
    (e.g., disputing a notice, penalty abatement requests or to discuss
    other payment options).
    Recommendation
        The AICPA recommends that the IRS align the length of a requested
    account hold with the amount of time it takes to process and resolve
    any notice disputes, penalty abatement requests or coordination of
    alternative payment arrangements.

        It is our understanding that the current account holds are for 9
    weeks. However, the current time for the IRS to process the mail is
    about 16 weeks. This time discrepancy forces taxpayers and their
    advisors to unnecessarily call the IRS and request additional account
    holds to prevent further collections activities.

        Given the fact that an incredibly low percent of taxpayers are able
    to speak with the IRS, not automatically aligning account holds with
    their current processing times creates an undue burden on taxpayers and
    further contributes to the number of phone calls the IRS receives. In
    addition, anecdotally, CPAs tell us that when they are able to reach a
    call assistor, the hold is of limited duration, and they are told to
    call back if they need additional time.
                3. REASONABLE CAUSE REQUESTS
    Background
        A taxpayer can request reasonable cause penalty relief for ``[a]ny
    reason that establishes a taxpayer exercised ordinary business care and
    prudence but nevertheless failed to comply with the tax law. . . .''\4\
    However, taxpayers must provide documentation to support their claim,
    such as hospital records, and must submit a written request.
    ---------------------------------------------------------------------------
        \4\ Internal Revenue Manual Sec. 20.1.1.3.2.1.

        At the end of 2020, to help alleviate the burdensome written
    requirement, the IRS stated that taxpayers could request penalty relief
    due to reasonable cause over the phone up to a certain threshold.\5\
    Additionally, if the request is for an amount above the phone
    threshold, the IRS should offer an e-fax alternative.
    ---------------------------------------------------------------------------
        \5\ IRS, ``IRS Operations During COVID-19: Mission-critical
    functions continue,'' January 13, 2021.
    ---------------------------------------------------------------------------
    Recommendation
        For taxpayers that have received failure to file or late payment
    penalty notices due to the monumental difficulties of the Coronavirus,
    the AICPA recommends the IRS offer a reasonable cause penalty waiver,
    similar to the procedures of FTA administrative waiver, based on the
    Coronavirus effects on both the taxpayer and the practitioner.\6\ As
    the Coronavirus is an extraordinary event unlike anything faced in
    recent history, penalty relief based on a Coronavirus effect should not
    be considered first time abate. A taxpayer's eligibility for first time
    abate should not be affected in future tax years even if the taxpayer
    was granted penalty relief due to Coronavirus effects.
    ---------------------------------------------------------------------------
        \6\ We indicate ``similar to'' so that taxpayers who don't qualify
    for FTA will qualify for relief, and those who would otherwise qualify
    for FTA can reserve it.

        Furthermore, the IRS should honor reasonable cause penalty
    abatement requests when a taxpayer qualifies for reasonable cause
    relief. Though the IRS has stated that penalty relief requests due to
    reasonable cause can be requested through the phone, only a very small
    number of taxpayers are granted reasonable cause penalty abatement.
    Instead, as IRS policy dictates, taxpayers are offered FTA regardless
    if the taxpayer qualifies for reasonable cause penalty relief.\7\
    Certainly, there are taxpayers who qualified for and requested
    reasonable cause relief in 2020 but were provided with an FTA waiver.
    The leniency was appropriate and appreciated but those taxpayers,
    however deserving, will not qualify for FTA for problems experienced in
    2021.
    ---------------------------------------------------------------------------
        \7\ The FTA is an administrative waiver which is considered and
    applied prior to reasonable cause analysis as policy of the IRS.
    Information on the waiver and the policy to apply it prior to
    reasonable cause analysis can be found in the Internal Revenue Manual
    20.1.1.

        Finally, the IRS should make it well known that an e-fax
    alternative to written reasonable cause requests over a certain
    threshold (determined by the IRS) is available. Instead, the IRS
    telephone assistors are instructing taxpayers and their advisors to
    submit a written request and must wait months for a resolution.
                4. UNDERPAYMENT AND LATE PAYMENT PENALTY RELIEF
    Background
        Taxpayers are generally required to make payments of estimated
    Federal income taxes. In order to avoid failure to pay estimated tax
    (``underpayment'') penalties, individuals, with limited exceptions, are
    required to pay at least 90 percent of the tax due for the current year
    or 100 percent (110 percent if adjusted gross income exceeds $150,000)
    of the amount of tax shown on their United States (U.S.) income tax
    return for the prior year, whichever is smaller. Alternatively,
    taxpayers with a tax due of less than $1,000 receive an exception to
    the underpayment penalties.\8\
    ---------------------------------------------------------------------------
        \8\ Section 6654. All references to ``section'' or ``Sec. '' are to
    the Internal Revenue Code of 1986, as amended, and all references to
    ``Treas. Reg. Sec. '' and ``regulations'' are to U.S. Treasury
    regulations promulgated thereunder.

        Taxpayers are also required to pay the amount of tax shown on their
    U.S. income tax return by the tax deadline or the taxpayer is subject
    to failure to pay (``late payment'') penalties. Taxpayers who can show
    reasonable cause for not paying on time may not have to pay the late
    payment penalty.\9\ Historically, the IRS has granted relief to
    taxpayers that request an extension of time to file their income tax
    return and pay at least 90 percent of the taxes owed with the request.
    Taxpayers must pay the remaining balance by the extended due date.\10\
    ---------------------------------------------------------------------------
        \9\ Section 6651.
        \10\ IRS, IRS Tax Tip 2013-58, ``Eight Facts on Late Filing and
    Late Payment Penalties,'' Tip #5, April 18, 2013.
    ---------------------------------------------------------------------------
    Recommendation
        The AICPA recommends providing taxpayers relief from underpayment
    and late payment penalties for the 2021 tax year. Specifically, we
    recommend taxpayers receive relief from the underpayment penalty if:

            Taxpayers paid at least 70 percent of the tax due for the
    current year; or
            Taxpayers paid 70 percent (90 percent if adjusted gross income
    (AGI) exceeds $150,000) of the amount of tax shown on their U.S. income
    tax return for the prior year.

        Taxpayers should also receive relief from late payment penalties if
    they timely request an extension of time to file their income tax
    return and pay at least 70 percent of the taxes owed with the
    request.\11\
    ---------------------------------------------------------------------------
        \11\ AICPA letter, ``Underpayment and Late Payment Penalty Relief
    for 2020 Tax Year,'' February 16, 2021.

        Some taxpayers, such as the elderly or those with pre-existing
    health conditions, have been hesitant to meet with their tax advisors
    to provide all their tax data. Also, social distancing requirements for
    others continue to create difficulties in providing all tax data to
    preparers to accurately calculate necessary payments required for
    ---------------------------------------------------------------------------
    extensions.

        Though we realize that the majority of Americans receive refunds
    and do not make quarterly estimated payments, hardworking Americans
    that pay estimated taxes, such as business owners or gig economy
    workers, should not be penalized by the difficulties created by the
    Coronavirus pandemic. Nor should taxpayers be penalized for the ongoing
    effects on the IRS, such as delayed or continuing lack of important
    guidance.

        Income status should not be used as a shield against reasonable tax
    administration relief. Approximately 76 percent of Schedule C, Profit
    or Loss From Business, filers have relatively modest incomes below
    $100,000 of AGI.\12\ Similarly, 68 percent \13\ of Schedule F, Profit
    or Loss From Farming, filers have AGIs below $100,000. Indeed, IRS's
    own ``Taxpayer Bill of Rights'' indicates that ``each and every
    taxpayer'' has fundamental rights that include:
    ---------------------------------------------------------------------------
        \12\ IRS SOI Tax Stats--Individual Income Tax Returns with Small
    Business Income and Losses (2018).
        \13\ Id.

            The right to be informed.
            The right to quality service.
            The right to pay no more than the correct amount of tax.
            The right to challenge the IRS's position and be heard.

        Along the lines of fundamental rights, an important purpose of
    offering underpayment and late payment penalty relief is to reduce the
    administrative burden on the IRS to issue these notices and to reduce
    the number of touch points taxpayers have with the IRS (i.e., the
    number of phone calls and written responses necessary for a taxpayer to
    resolve the notice).

        Furthermore, by extending underpayment and late payment penalty
    relief retroactively for the 2021 tax year, there is little room for
    abuse since the last estimated payments were due on January 18, 2022.

        Given the hardship and challenges so many taxpayers and their
    advisors continued to face during the 2021 tax filing season, it is
    both necessary and appropriate to provide penalty relief to all
    taxpayers.
                           long-term recommendations
        The AICPA is committed to supporting the IRS in achieving improved
    customer service and organizational modernization from a long-term,
    strategic perspective. Our suggestions are focused in two areas: (1)
    Pub. L. No: 116-25 (referred to as the Taxpayer First Act (TFA)); and
    (2) resources for the Internal Revenue Service.
                (1) The Taxpayer First Act
        The IRS should adopt a visionary approach looking beyond immediate
    constraints to develop long term goals (which look towards a 10- or
    even 15-year horizon). In addition, the IRS should provide flexibility
    in its design to ensure the agency will continue to evolve. In January
    2021, IRS sent its Taxpayer First Act Report to Congress as required by
    statute. We provided input as the IRS established a comprehensive
    customer service strategy, a comprehensive training strategy and a
    comprehensive written plan to redesign the organization of the IRS, as
    required by TFA and are pleased that IRS adopted several AICPA ideas
    into its report.

        Importantly, we appreciate that a new Third-Party Relationships
    Office \14\ is being contemplated as an integral part of the
    organizational modernization. Leveraging the value that practitioners
    and other third-parties provide to taxpayers will ultimately serve to
    elevate the level of service IRS is able to provide to all taxpayers.
    AICPA's full recommendations follow:
    ---------------------------------------------------------------------------
        \14\ Taxpayer First Act Report to Congress, January 2021, page 107.
    ---------------------------------------------------------------------------
                    comprehensive customer service strategy
        The IRS's comprehensive customer service strategy should provide
    its customers with access to empowered employees, timely information,
    and tailored resources.

        -  Access to empowered employees--In order to improve customer
    service, the IRS should: (1) grant authority to general assistors to
    resolve issues over the phone; (2) provide an opportunity for a
    discussion with a higher skilled/trained assistor (on the same call);
    and (3) expect a sense of ownership from a single team (or ``pod'').
    Resolving issues on the ``front end'' of the process (e.g., through the
    initial assistor) would free up resources on the back end.

        -  Access to timely information--To streamline interactions, the
    IRS should provide: (1) a secure communications platform (for two-way
    communication with tax professionals); (2) a robust tracking system
    (similar to Where's my Refund?) for notices, ITIN applications, time-
    stamped responses, confirmations of receipt, and other correspondence;
    (3) an efficient process for taxpayers to authorize third parties; and
    (4) an online professional account (with single sign-on for access to
    all of their clients' information, not just one client.) Authentication
    for accessing information must be strict, but manageable.

        -  Access to tailored resources--The vast majority of resources
    have traditionally focused on taxpayers. Other customers, such as tax
    professionals and hard to serve taxpayers with differing needs, should
    not be forced to use platforms/
    resources designed for general taxpayers. The IRS would create
    efficiencies by developing resources to serve tax professionals (who
    represent the majority of taxpayers, including taxpayers served by low-
    income clinics). The IRS also should form focus groups to better
    understand how particular taxpayers (that are not currently served by
    traditional resources) best receive information.
                        comprehensive training strategy
        The IRS's strategy on training should include customer-focused
    subject matters, a consistent and high-quality format, and the
    leveraging of trained employees.

        -  Customer-focused subject matters--In addition to substantially
    enhancing the way it teaches core and advanced tax law, the IRS should
    fundamentally prioritize the training it provides employees on: (1)
    general customer service; (2) procedural issues; and (3) real-life
    business practices and taxpayer limitations.

        -  Consistent and high-quality format--To deliver training
    comparable to the private sector, the IRS should: (1) standardize its
    approach (perhaps through an IRS University); (2) modernize its
    approach to training, including implementing current training best
    practices and offering interactive options; (3) leverage the experience
    of tax professionals; and (4) use subject matter experts with strong
    instructional skills (internal and external) to train employees. If an
    internal ``IRS University'' is deemed unfeasible, we recommend a
    centralized and more coordinated oversight of cross-organization
    specialized training to ensure consistency and quality.

        -  Leveraging of trained employees--Given the limitations, we
    recognize it is not realistic to fully train all the IRS employees on
    the large scope of the tax laws and procedures. Therefore, we recommend
    that IRS assistors operate in teams (or ``pods'') that allow general
    assistors to immediately transfer more complex issues to higher skilled
    assistors with specialized training.
                               irs redesign plan
        The IRS's comprehensive plan to redesign the organization should
    incorporate a customer-focused culture, provide an integrated
    technological infrastructure, and create a dedicated Practitioner
    Services Division.\15\
    ---------------------------------------------------------------------------
        \15\ This recommendation is consistent with previously submitted
    recommendations: Tax professionals' coalition letter, ``Ensuring a
    Modern-Functioning IRS for the 21st Century,'' April 3, 2017; AICPA
    comment letter, ``Taxpayer First Act Discussion Draft,'' April 6, 2018;
    and NAEA white paper, ``Creating a Taxpayer-Focused Internal Revenue
    Service,'' January 15, 2020.

        -  Customer-focused culture--To improve customer service, the IRS
    should (1) adopt a business-like approach to maximize its efficiencies;
    (2) embrace a mind set as if there were a competitive incentive to
    provide stellar service; (3) partner with external stakeholders to
    efficiently leverage private sector best practices; and (4) develop
    metrics based on quality of service instead of the number of touches
    with taxpayers and metrics that will help determine the success of
    ---------------------------------------------------------------------------
    implementing the TFA.

        -  Integrated technological infrastructure--The IRS currently has a
    significant number of legacy systems that prevents it from using
    current and evolving technology. Therefore, we recommend the IRS move
    to a platform company model in which the technological infrastructure
    allows for integration and coordination of information throughout the
    organization. An integrated infrastructure will ultimately allow the
    IRS to meet the needs of both the taxpayers and their representatives
    in an efficient and timely manner. Furthermore, the IRS should explore
    the efficiencies of cost and timeline of implementation with in-house
    development as well as outsourcing. Many partner organizations, such as
    banks, software companies and municipalities, are currently utilizing
    the technological platforms and understand the benefits and challenges
    of implementing the platforms. Outsourcing could potentially allow the
    IRS to remain current from a technological perspective.

        -  Dedicated Practitioner Services Division--Practitioners play a
    vital role in tax administration. In order to enhance its relationship
    with the practitioner community, the IRS should commit to a
    Practitioner Services Division. Without a dedicated ``executive-level''
    Practitioner Services Division that can participate in the design of
    key practitioner-impacting policies and programs, the IRS will not
    achieve the success it desires with the tax preparer community.\16\ At
    a minimum, the Practitioner Services Division should: (1) engage with
    the tax professional community; (2) ensure practitioner feedback is
    acted upon through a liaison with all major operating divisions; (3)
    maintain robust practitioner hotlines; and (4) provide an online tax
    professional account.
    ---------------------------------------------------------------------------
        \16\ Tax professionals represent millions of taxpayers, including
    58.34 percent of all e-filed returns in 2019, according to the Filing
    Season Statistic for Week Ending November 22, 2019.
    ---------------------------------------------------------------------------
                (2) Resources for the Internal Revenue Service
        We understand that enforcement is an important aspect of the
    responsibilities of the IRS, however, enforcement actions must be in
    balance with the services the IRS provides to taxpayers. In order to
    meet the needs of taxpayers, we encourage the IRS to strive to be a
    modern-functioning IRS for the 21st century. A modern-
    functioning IRS prioritizes customer satisfaction, including from
    enforcement actions, a modernized technological infrastructure, and
    provides IRS employees with the experience and training to understand
    and address taxpayer needs.

        The legislative and executive branches should determine the
    appropriate level of service and compliance necessary for the IRS to
    provide and dedicate adequate resources for the agency to meet those
    goals. Given the historic low levels of IRS taxpayer services, we are
    concerned about a possible imbalance between the funding for taxpayer
    services and enforcement.
                             other areas of concern
                1. FILING DEADLINE
        Discussions regarding the viability of the April 18th tax return
    due date have been flourishing. AICPA members are split in opinion on
    the due date although a majority prefer that April 18th not be changed.
    And of those who prefer that the date change, there is no unanimity as
    to the month of postponement with their choices mainly split between
    May, June, and July, with other months cited as well.

        AICPA is not currently advocating for a change but will closely
    monitor the situation as we move through tax filing season. However,
    practitioners are unified on at least one point: if the IRS does opt to
    extend the filing season, that decision should be made early, and the
    extension should apply to both return filing and tax payments including
    estimated tax due dates.
                2. TELEPHONE CALL SERVICES
        Because of the unprecedentedly low IRS telephone response
    rates,\17\ practitioner use of commercial telephone call services, such
    as enQ, have prospered. At least one congressional inquiry \18\ has
    asked IRS Commissioner Rettig to evaluate whether these commercial
    services are impacting the capacity of IRS systems and that he consider
    ``all potentially applicable remedies.'' In addition, media reports
    \19\ indicate that IRS is looking into the issue.
    ---------------------------------------------------------------------------
        \17\ See footnotes 2 and 3.
        \18\ Letter to IRS Commissioner Charles P. Rettig, November 18,
    2021, from Senators Bill Cassidy, Robert Menendez, Todd Young, and Mark
    Warner.
        \19\ ``IRS Looking Into Phone-Line-Jumping Service,'' Tax Notes,
    November 8, 2021.

        The AICPA has no position regarding the use of commercial telephone
    services; however, we note that their growing use is symptomatic of
    degraded IRS service levels.
                3. TIMING OF THE USE OF THE NEW SCHEDULES K-2 AND K-3
        The AICPA, the tax return preparer community, and taxpayers welcome
    any and all relief that the IRS can provide for the expanded
    international reporting on Schedules K-2 and K-3. A streamlined and
    expanded reporting tool of complex matters through fiscally transparent
    entities was undeniably necessary. However, with further clarification
    needed on the actual mechanics of filing, along with the late IRS
    announcement expanding expectations for reporting with regards to
    foreign tax credits, the tax system has been left confused and in
    disarray.

        Given IRS's already unprecedented processing backlogs, the AICPA
    has deep concerns that implementing these new requirements will
    ultimately exacerbate the significant challenges everyone in the tax
    administration community currently faces. We therefore recommend that
    the IRS delay the implementation of the Schedules K-2 and K-3 to at
    least the 2023 tax filing season (the 2022 tax year). Delaying the
    filing of Schedules K-2 and K-3 will provide the IRS with additional
    time to properly complete the Modernized e-File (MeF) acceptance of
    these forms in electronic format and allow the tax professional
    community to appropriately apply the expanded guidance and scope only
    recently announced in updates to the final instructions.
                               concluding remarks
        From a broad policy perspective, this year, the IRS should
    liberally waive penalties for late filing returns or late payments that
    are delayed both due to the effects of the Coronavirus on taxpayers and
    their advisers as well as unprecedentedly low IRS service levels.
    Furthermore, the procedures for granting penalty relief should be
    expedited and adjusted so that the procedures reduce the burdens placed
    on the taxpayer, the practitioner, or the IRS. Indeed, the IRS has
    indicated that it still has a 23-million-piece return, adjustment, and
    mail backlog, questioning the efficacy of requiring abatement requests
    in writing. An expedited and streamlined reasonable cause penalty
    abatement process is both necessary and appropriate to provide the
    needed penalty relief during these extraordinary circumstances.

        The AICPA appreciates the opportunity to submit this written
    statement for the record in support of taxpayers and the tax system.

                                     ______

               Questions Submitted for the Record to Jan F. Lewis
                     Questions Submitted by Hon. Todd Young
        Question. You and the AICPA have submitted many recommendations to
    the IRS regarding the improvement of their return processing time. One
    of those recommendations is to halt temporarily the sending of all
    automated compliance actions to taxpayers.

        How do you believe halting the transmission of all automated
    compliance actions can improve return processing times?

        Answer. After July 15, 2020, once the People First Initiative
    expired, taxpayers started to receive millions of incorrect notices and
    actions. In response to those incorrect notices, taxpayers flooded the
    IRS call lines or submitted paper correspondence in hopes of resolving
    the notices. These attempts to resolve the notices are often
    unsuccessful, in part because taxpayers or their practitioners simply
    cannot connect with IRS staff, and needlessly consume IRS resources. By
    halting more automated compliance actions the IRS should have the
    ability to devote more resources into improving return and
    correspondence processing times and thereby stopping the continual
    cycle of inappropriate IRS compliance activities. The key issue here is
    that if we are able to stop much of the correspondence and phone calls
    coming into the IRS as a response to these incorrect notices or as a
    response to
    follow-up notices that keep coming out, IRS personnel will have more of
    a chance to clear the backlog of returns and correspondence and answer
    the phone calls from taxpayers and practitioners.

        Question. While the IRS has already suspended sending eight types
    of notices to taxpayers, what other additional notices should the IRS
    immediately stop sending?

        Answer. As of March 10, 2022, it is still unclear what additional
    notices the IRS believes it can and should unilaterally suspend, which
    is why it is important that the IRS immediately provide to Congress the
    additional notices they have the power to suspend; the additional
    notices they do not think should be suspended; and any notices that
    require congressional action to suspend. We believe the IRS has broad
    authority to suspend more notices and that they ought to announce a
    comprehensive plan for notice suspension as soon as possible.

        Question. What do you believe are the risks to taxpayers associated
    with temporarily halting all automated compliance actions?

        Answer. We believe the risks of temporarily halting all or a vast
    majority of automated compliance actions are small since it is
    temporary and therefore a timing issue. However, some taxpayers may be
    under the impression that they do not have to pay their tax liabilities
    when notices are suspended. We appreciate that but believe that the IRS
    and the National Taxpayer Advocate have made it clear that taxpayers
    still have tax obligations. We understand that taxpayers may need some
    notice information to pay their taxes in a timely manner, but in the
    vast majority of the automated compliance actions issues we are
    concerned about the notices are not advising of a tax liability that is
    correct and agreed upon. They are requiring more information to
    determine whether additional tax is owed at all--thus, they are adding
    to the backlog.

        Question. During your hearing testimony, you mentioned that a large
    percentage of the clients you assist are small businesses.

        What are the biggest challenges you and your small business clients
    encounter when interacting with the IRS?

        Answer. Small businesses receive many erroneous notices, and they,
    much like individual taxpayers, also are unable to communicate with the
    IRS right now. One of the biggest IRS problems currently facing small
    businesses is that processing backlogs have delayed certain pandemic-
    relief refunds like the Employee Retention Credit (ERC). IRS Notice
    2021-49 mandates that an employer claiming the ERC must reduce the
    deduction for the corresponding wages on their Federal income tax
    return in the taxable year the wages were paid or incurred. Due to
    delays in processing ERC claims and the timing of the inclusion of
    additional income in 2021 Federal income tax returns due March and
    April of 2022, many taxpayers will be responsible for an additional
    cash outlay before receiving the ERC refund. This creates a cash-flow
    issue for small businesses and minimizes the positive impact of the
    pandemic related relief.

        Also, given the inability to get paper returns timely processed and
    the difficulty in getting the IRS to answer the phone, taxpayers are
    enduring hardships waiting for refunds due from originally filed income
    tax returns and refunds from amended income tax returns for loss
    carrybacks.

        Small businesses have endured ongoing hardships due to the IRS
    delays. Since many small businesses operate as pass-through entities
    the repercussions of the problems end up affecting both the business
    and the individual owners.

        Question. As you know, millions of taxpayers and thousands of small
    businesses have experienced extraordinary challenges throughout the
    pandemic. In many cases, those challenges have resulted in taxpayers
    and small businesses being unable to meet certain filing deadlines. In
    your testimony, you expressed the need for the IRS to ``liberalize the
    reasonable cause penalty waiver process.''

        What specific actions do you recommend the IRS take as it relates
    to its process for providing penalty relief due to reasonable cause?
    Which of those recommendations do you believe the IRS could implement
    immediately to streamline penalty relief for individual taxpayers and
    businesses?

        Answer. The IRS could immediately offer a reasonable cause penalty
    waiver, similar to the procedures of first time abate administrative
    waiver, based on the myriad effects of the COVID-19 pandemic on both
    the taxpayer and the practitioner. Additionally, a taxpayer's
    eligibility for first time abate should not be affected in future tax
    years even if the taxpayer was granted penalty relief due to
    Coronavirus effects.

        Question. What are the biggest challenges your members and their
    clients encountered when attempting to request penalty relief due to
    reasonable cause from the IRS?

        Answer. In our profession's experience, it seems that the IRS
    consistently and automatically denies reasonable cause penalty
    abatement requests. While the taxpayer can appeal the denial, that
    exacerbates the backlog in appeals and creates a dilemma for taxpayers
    who may not have the time or the ability to pay a professional to
    represent them to follow through on the issue. Oftentimes, a taxpayer
    will pay a penalty that should be abated only to avoid this and to stop
    the continuing cycle of notices that cause stress to the taxpayer. The
    IRS should honor reasonable cause penalty abatement requests when a
    taxpayer qualifies for reasonable cause relief.

        Additionally, the current reasonable cause abatement procedures
    require taxpayers to submit written correspondence. This further adds
    to the backlog and forces the taxpayer to wait many months for a
    response. Though the IRS said in 2020 that they would offer an option
    to call in or e-fax the abatement request, the telephone assistors are
    unaware of this option and often request taxpayers submit written
    correspondence.

        Question. On February 2, 2022, I joined all of my Senate Finance
    Committee Republican colleagues on a letter expressing the need for
    Congress to reconsider the proposed tax on financial statement income
    of U.S. companies, or otherwise known as the ``book minimum tax,''
    which was included in the House-passed version of the Build Back Better
    Act (H.R. 5376).\1\ I understand the AICPA also submitted a similar
    letter to Congress expressing concern with the book minimum tax.
    ---------------------------------------------------------------------------
        \1\ https://www.young.senate.gov/newsroom/press-releases/young-
    finance-committee-members-congress-should-close-the-book-on-the-failed-
    book-minimum-tax.

        What do you believe are the fundamental flaws of the book minimum
    ---------------------------------------------------------------------------
    tax?

        Answer. The introduction of a corporate minimum tax based upon
    financial statement income takes the definition of taxable income out
    of Congress's hands and puts it into the hands of industry regulators
    and others. There are many key conceptual differences between financial
    income and taxable income, including the idea of materiality. Public
    policy taxation goals should not have a role in influencing accounting
    standards or the resulting financial reporting. Independence and
    objectivity of accounting standards are the backbone of our capital
    markets system. A corporate book minimum tax would substantially
    increase the complexity of the Internal Revenue Code and would present
    a fundamental shift in the taxation of U.S. entities, with uncertain
    results to taxpayers and a costly compliance requirement.

        Question. If implemented, how would a book minimum tax affect U.S.
    investment, competitiveness, and jobs?

        Answer. The new minimum tax would eliminate tax breaks, such as
    benefits for new capital investments, that Congress has put in place to
    achieve other policy goals. The tax will likely lead companies to alter
    what they report to their shareholders and would tarnish the value of
    reporting book income, which is very important to various stakeholders
    such as investors and creditors and will lead to less transparent
    information for financial markets. Disincentivizing certain tax breaks
    through the minimum tax will create many unintended consequences that
    will be harmful to the economy, such as limiting clean energy
    investment. The introduction of a corporate minimum tax that is not
    based on tax law will not simplify the tax system, will not be neutral
    with respect to decision making by management, or promote economic
    growth and efficiency. It will not be transparent or minimize the tax
    gap. This will directly lead to an adverse impact on U.S. investment,
    competitiveness, and jobs.

        Question. As you noted in your testimony, some of my Senate Finance
    colleagues and I wrote a letter to IRS Commissioner Rettig last year
    regarding a company called ``enQ'' that floods the IRS with robocalls
    and sells front-of-the-line access to individuals paying as much as
    $1,000 a year.\2\
    ---------------------------------------------------------------------------
        \2\ https://www.young.senate.gov/newsroom/press-releases/young-
    joins-colleagues-to-urge-irs-to-investigate-enqs-pay-for-service-
    scheme.

        I understand from your testimony that the AICPA has no position
    regarding the use of commercial telephone services. However, at a
    general level, do you believe taxpayers or tax professionals should
    have to pay money to a private company in order to reach someone at the
    ---------------------------------------------------------------------------
    IRS in a timely manner?

        Answer. No, I do not believe it is fair that some practitioners
    feel that they need to pay money to a private company in order to reach
    someone at the IRS. This service exists because it is a symptom of the
    degraded IRS service levels which need to be addressed.

        Question. During the hearing, we heard the National Taxpayer
    Advocate comment that ``paper is the [IRS's] kryptonite.'' I would
    imagine tax practitioners have similar sentiments.

        From a practitioner's standpoint, can you please briefly comment on
    the IRS's management of paper submissions?

        Answer. From a practitioner's standpoint, for many years prior to
    COVID, the IRS's ability to timely respond to written communications
    has been the top area that, if improved, would have the biggest impact
    on their practice. Knowing there is a 23-million-piece return and
    correspondence backlog at the IRS creates a sense of helplessness
    amongst practitioners. Without immediate actions to meaningfully reduce
    the backlog, we fear that next year's filing season could be
    problematic as well.

        Question. What recommendations would you make to address the IRS's
    ``paper kryptonite'' issue?

        Answer. From a broad policy perspective, this year, the IRS should
    liberally waive penalties for late filing returns or late payments that
    are delayed both due to the effects of the Coronavirus on taxpayers and
    their advisers as well as unprecedentedly low IRS service levels.
    Furthermore, the procedures for granting penalty relief should be
    expedited and adjusted so that the procedures reduce the burdens placed
    on the taxpayer, the practitioner, or the IRS. The IRS has indicated
    that it still has a 23-million-piece return, adjustment, and mail
    backlog, which questions the requirement for penalty abatement to be in
    writing. An expedited and streamlined reasonable cause penalty
    abatement process is both necessary to provide the needed penalty
    relief during these extraordinary circumstances. Finally, we call on
    IRS to delay for 1-year the implementation of the Schedules K-2 and K-
    3. The recent transitional relief IRS provided is confusing and
    insufficient. In addition, IRS's e-file system does not currently
    accept those schedules. Collectively, all these efforts will help
    address the IRS ``paper kryptonite'' issue.

                                     ______

     Prepared Statement of Jessica Lucas-Judy, Director, Strategic Issues,
                        Government Accountability Office

                                   TAX FILING

        Preliminary Observations on IRS's Efforts to Address Persistent
                                   Challenges

                             why gao did this study
        During the annual tax filing season, generally from January to mid-
    April, IRS processes more than 150 million individual and business tax
    returns and provides telephone, correspondence, online, and in-person
    services to tens of millions of taxpayers. To accommodate new tax
    legislation and provide additional relief to taxpayers, IRS extended
    the 2021 individual filing and payment deadline by 1 month to May 17,
    2021.

        GAO was asked to testify on IRS's performance during the 2021
    filing season. This statement summarizes GAO's findings from prior
    reports and preliminary observations from ongoing work describing IRS's
    performance during the 2021 filing season on (1) processing individual
    and business income tax returns, and implications for the 2022 filing
    season; and (2) providing customer service to taxpayers.

        GAO analyzed IRS documents and data on filing season performance,
    refund interest payments, hiring, and employee overtime; and
    interviewed cognizant officials. GAO also updated selected information
    from March 2021 (GAO-21-251), January 2020 (GAO-20-55), and March 2019
    (GAO-19-176) reports.
                                 what gao found
        IRS experienced multiple challenges during the 2021 filing season
    as it struggled to respond to an unprecedented workload that included
    delivering COVID-19 relief. IRS began the filing season with a backlog
    of 8 million individual and business returns from the prior year that
    it processed alongside incoming returns. IRS reduced the backlog of
    prior year returns, but as of late December 2021, had about 10.5
    million returns to process from 2021. For the current filing season,
    IRS will need to process the remaining returns from 2021 along with
    incoming returns from 2022 and may need to rely on overtime to do so.
    IRS also expects about 21 million returns to be stopped for errors
    associated with recent tax law changes.

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        In 2021 IRS answered more phone calls than in recent years, but
    taxpayers had a difficult time reaching IRS due to high call volumes.
    IRS expects customer service representatives to answer about 35 percent
    of incoming calls during the 2022 filing season.

        To help manage high call volumes, IRS urged taxpayers to access its
    Where's My Refund? online tool to get refund status information. This
    tool provides limited information on refund status and delays. GAO's
    preliminary observations indicate IRS has no plans to modernize Where's
    My Refund?, although this could help IRS better serve taxpayers, lower
    call volume, and reduce costs. In ongoing work, GAO plans to further
    review this issue.

        IRS also struggled to respond to taxpayer correspondence. IRS's
    correspondence inventory grew to more than 8 million by the start of
    2022. IRS expects this inventory to exceed 10 million by the end of
    fiscal year 2022--more than triple what it was as of the end of fiscal
    year 2020. This backlog will be difficult to manage as IRS balances
    prioritizing telephone calls from taxpayers with responding to incoming
    correspondence in 2022.

        Finally, in-person service visits have significantly declined since
    2015. IRS officials attributed the decline to the ongoing impacts of
    the pandemic and the option for taxpayers to use services via the phone
    and online.

                                   __________
        Chairman Wyden, Ranking Member Crapo, and members of the committee,
    I am pleased to be here today to discuss preliminary observations from
    our ongoing work on the tax filing season, including challenges IRS
    faces in processing returns and correspondence.

        Every tax filing season is a large-scale, critical operation during
    which the IRS processes more than 150 million individual and business
    tax returns electronically or on paper, issues hundreds of billions of
    dollars in refunds, and provides customer service to tens of millions
    of taxpayers. IRS has experienced several challenges in recent years,
    including difficulty hiring workers to process returns, implementing
    notable tax law changes, and, most recently, managing the 2020 and 2021
    filing seasons during the COVID-19 pandemic.

        As a result of the CARES Act and other pandemic relief legislation,
    IRS and the Department of the Treasury have been given additional
    responsibilities.\1\ For example, during the 2021 filing season, IRS
    was responsible for issuing a third round of Economic Impact Payments
    to millions of taxpayers and establishing capabilities to issue monthly
    Advance Child Tax Credit payments to eligible taxpayers starting in
    July 2021.\2\ IRS also had to manage its typical filing season
    operations--such as updating its systems and procedures to incorporate
    tax law provisions enacted in early 2021--and processing millions of
    backlogged returns from the 2020 filing season along with incoming
    returns from 2021.\3\ To accommodate this and provide additional relief
    to taxpayers, IRS delayed the 2021 filing season by about 2 weeks to
    February 12, 2021, and extended the 2021 Federal individual income tax
    filing deadline from April 15, 2021, to May 17, 2021.
    ---------------------------------------------------------------------------
        \1\ CARES Act, Pub. L. No. 116-136, 134 Stat. 281 (2020). The
    American Rescue Plan Act of 2021 (ARPA) authorized the IRS and the
    Department of the Treasury to issue advance payments of the Child Tax
    Credit, as amended by ARPA, and to issue direct payments known as
    Economic Impact Payments, to eligible individuals to help address
    financial stress due to the pandemic. Pub. L. No. 117-2,
    Sec. Sec. 9601, 9611, 135 Stat. 4, 138, 144 (2021).
        \2\ As of December 10, 2021, IRS had issued about $410 billion to
    about 176 million taxpayers for the third round of Economic Impact
    Payments.
        \3\ GAO, Tax Filing: Actions Needed to Address Processing Delays
    and Risks to the 2021 Filing Season, GAO-21-251, (Washington, DC: March
    1, 2021). We reported that as of December 2020, IRS had more than 13
    million unprocessed 2020 returns and about 4 million pieces of taxpayer
    correspondence that required IRS's review and response.

        In my statement today, I will draw on data and preliminary results
    from our ongoing work to discuss IRS's performance on (1) processing
    tax returns during the 2021 filing season, and implications for the
    2022 filing season; and (2) providing customer service to taxpayers.
    Our ongoing work also updates selected information from three prior
    reports, published in March 2021, January 2020, and March 2019.\4\
    ---------------------------------------------------------------------------
        \4\ GAO-21-251; GAO, 2019 Tax Filing: IRS Successfully Implemented
    Tax Law Changes but Needs to Improve Service for Taxpayers With
    Limited-English Proficiency, GAO-20-55 (Washington, DC: January 15,
    2020); and Internal Revenue Service: Strategic Human Capital Management
    Is Needed to Address Serious Risks to IRS's Mission, GAO-19-176
    (Washington, DC: March 26, 2019). We plan to issue our upcoming report
    on the filing season in early spring 2022.

        For the ongoing work on which this statement is based, we analyzed
    IRS's 2021 weekly filing season performance data on processing
    electronic and paper tax returns for individuals and businesses and
    issuing refunds. We also analyzed individual and business tax return
    data from IRS's Compliance Data Warehouse from October 1, 2014 through
    September 30, 2021 to identify refund interest payments by fiscal year
    and other characteristics of the returns, such as whether the returns
    were amended. In addition, we analyzed IRS's 2021 weekly filing season
    performance data on providing customer service (via telephone, online,
    correspondence, and in person), and the results of IRS's online survey
    about user satisfaction with its Where's My Refund? application
    (January 2018 to October 2021). We also analyzed IRS data on
    correspondence inventory to report on IRS's performance responding to
    paper or digital taxpayer communications and amended returns within
    prescribed time frames. We reviewed data reports on the volume of in-
    person services IRS provided during 2021. Additionally, we analyzed
    IRS's data on hiring during 2021 and its use of overtime. We compared
    IRS's 2021 filing season performance data on returns processing and
    customer service to performance data from prior filing seasons, as
    appropriate, and average performance data from prior filing seasons. We
    ---------------------------------------------------------------------------
    also reviewed relevant documentation and interviewed IRS officials.

        The data we reviewed were the most recent available at the time of
    our work. We assessed the reliability of the data by reviewing existing
    information and interviewing agency officials. Where appropriate, we
    performed electronic testing and compared our results with other
    sources.

        We determined that these data were sufficiently reliable to address
    our reporting objectives. We provided a draft of this statement to IRS
    officials for technical review and incorporated their technical
    comments as appropriate.

        We conducted the work on which this statement is based in
    accordance with generally accepted government auditing standards. Those
    standards require that we plan and perform the audit to obtain
    sufficient, appropriate evidence to provide a reasonable basis for our
    findings and conclusions based on audit objectives. We believe the
    evidence obtained provides a reasonable basis for our findings and
    conclusions based on our audit objectives.\5\
    ---------------------------------------------------------------------------
        \5\ We have been conducting our ongoing audit work since February
    2021.
    ---------------------------------------------------------------------------
       irs had challenges processing tax returns during the 2021 filing
                season, resulting in delays and increased costs
    IRS Began the 2021 Filing Season With a Large Backlog of Returns
        IRS's ability to process returns was hindered, in part, by a
    backlog of millions of unprocessed returns from the prior year. The
    majority of these returns were paper, which take longer to process. As
    we reported in March 2021, the COVID-19 pandemic created challenges for
    IRS during the 2020 filing season because IRS had to close return
    processing centers and manage the filing season with reduced staff,
    particularly for in-person work.\6\ As of the end of December 2020, IRS
    had about 13.1 million unprocessed 2020 filing season returns.\7\ By
    mid-February 2021, as the 2021 filing season began, IRS had reduced the
    backlog to about 8 million.
    ---------------------------------------------------------------------------
        \6\ GAO-21-251.
        \7\ Unprocessed returns include those filed on paper or
    electronically that IRS received but had not fully processed, and
    returns suspended due to errors, such as math errors, or potential
    fraud.

        IRS had to process the remaining backlogged returns and incoming
    2021 returns simultaneously. In March 2021, IRS officials said this was
    a challenging task. For example, the returns from 2020 had to be
    handled as prior year returns, and required manual, time-consuming
    coding and editing of return information in IRS's systems. In our
    ongoing work, IRS officials also said they had to train additional
    returns processing staff on processing prior year returns. Meanwhile,
    IRS had to continually adjust staffing and prioritize workloads at
    processing centers to manage returns from both years.\8\ As a result,
    from February to August 2021, IRS required returns processing staff to
    work 10 hours of overtime per week to help address the dual inventory
    of returns and correct returns suspended due to errors, as discussed
    later in this testimony.
    ---------------------------------------------------------------------------
        \8\ IRS used a first-in, first-out method to prioritize 2020
    returns, meaning prior year returns received first were processed
    first. Since 2020 and 2021 returns were processed simultaneously, 2020
    returns were not necessarily prioritized over 2021 returns due to the
    fact they were received first. Rather, IRS developed strategies to
    ensure both year returns could be processed in the order in which they
    were received. IRS officials also stated that in April and May 2021,
    they shipped backlogged 2020 returns between processing centers to
    better match workloads at each center with available resources.

        IRS gradually reduced the backlog to about 1.2 million by the end
    of the 2021 filing season in mid-May, as we reported in July 2021.\9\
    IRS reported that as of early June 2021, it had entered all of the
    individual returns it received in 2020 into its processing systems. In
    our ongoing work we found that in mid-December 2021, IRS completed
    entering all remaining business returns from 2020 into its systems for
    processing.\10\
    ---------------------------------------------------------------------------
        \9\ GAO, COVID-19: Continued Attention Needed to Enhance Federal
    Preparedness, Response, Service Delivery, and Program Integrity, GAO-
    21-551 (Washington, DC: July 19, 2021).
        \10\ Once returns are entered into IRS's processing systems, the
    returns may still not be fully processed and refunds provided to the
    taxpayer if the return was stopped for various reasons. These reasons
    include a miscalculated tax credit, incorrect Social Security number or
    Employer Identification Number, or suspected fraud.

        Our preliminary observations indicate IRS will have a return
    backlog again this filing season. As of the end of 2021, IRS had about
    10.5 million 2021 returns that had not been fully processed due to the
    additional workload of processing the 2020 backlog, along with other
    issues discussed in this testimony such as the high volume of returns
    with errors and staffing challenges. IRS may need to again rely on
    overtime to process the backlog along with new incoming returns from
    2022.
    IRS Suspended Millions of Returns With Errors Related to Pandemic
            Relief, Leading to Processing and Refund Delays
        From January to November 2021, our preliminary observations
    indicate IRS suspended about 35 million individual and business returns
    in its Error Resolution System (ERS). As shown in figure 1, IRS
    suspended about 86 percent (16 million) more returns in ERS in 2021
    compared to the average volume of returns with errors from 2017 to
    2019, which were more typical filing seasons.\11\ These returns were
    suspended because they contained errors that prevented IRS's systems
    from processing the returns automatically, such as math errors or
    discrepancies in income amounts reported on the taxpayer's return that
    did not match IRS records. To reconcile the errors, IRS staff review
    the suspended returns, which can take substantially longer than
    automated processing and can delay refunds.
    ---------------------------------------------------------------------------
        \11\ For comparison, we calculated the average volume of returns in
    ERS from 2017 to 2019. We excluded 2020 from this calculation because
    it was an atypical filing season, due to the impacts of the COVID-19
    pandemic.

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        In March 2021, IRS officials said that they anticipated an
    increase in errors during the 2021 filing season due to the Recovery
    Rebate Credit and other tax law changes, but the volume of errors was
    much higher than expected.\12\ The need to manually review and correct
    errors led to refund delays of up to several months for millions of
    taxpayers.\13\
    ---------------------------------------------------------------------------
        \12\ Consolidated Appropriations Act, 2021, Pub. L. No. 116-260,
    Sec. 272, 134 Stat. 1182, 1965-76 (2020) and American Rescue Plan Act
    of 2021, Pub. L. No. 117-2, Sec. 9601, 135 Stat. 4, 138 (2021). The
    Recovery Rebate Credit was new for the 2021 filing season and required
    taxpayers to report the total amount they received for two economic
    impact payments during 2020. To the extent the amount taxpayers
    received was less than the credit amount for which they were eligible,
    taxpayers could claim a credit for that amount. If the credit the
    taxpayer claimed exceeded the amount in IRS's records, IRS suspended
    the return for manual review.
        \13\ Beginning in late July 2021, IRS's website stated that
    individual returns suspended due to RRC and refundable credit errors
    were taking longer than the normal 21 days to process, and that
    taxpayers should expect their return to be delayed for up to 120 days.

        In December 2021, as part of our ongoing work, IRS provided
    documentation indicating that during the 2022 filing season it expects
    about 21 million returns to be stopped for errors associated with
    recent tax law changes.\14\ Officials said that they plan to adjust
    their systems for the 2022 filing season to automate selected ERS
    processing functions and identify returns that could be processed more
    quickly. According to IRS documentation, this adjustment will help to
    streamline the workflow and allow IRS to process returns with errors
    more efficiently.
    ---------------------------------------------------------------------------
        \14\ IRS projected that about 17 million returns filed during the
    2022 filing season will be stopped for processing due to changes in the
    Child Tax Credit, and about 3.6 million returns will be stopped due to
    the new Refundable Child and Dependent Care Credit. IRS's projections
    also indicate that if a return is stopped for errors, the taxpayer may
    need to wait 3 to 6 months before receiving their refund. IRS's planned
    improvements to ERS processing is intended to shorten this time frame
    for some taxpayers.
    ---------------------------------------------------------------------------
    Nearly $14 Billion Dollars Has Been Paid in Refund Interest Since 2015
        In March 2021, we reported that IRS paid a total of $3.03 billion
    in interest on refunds to individual and business taxpayers in fiscal
    year 2020.\15\ This was about a 50-percent increase compared to the
    $2.06 billion in refund interest that IRS paid in fiscal year 2019. IRS
    officials told us that the increase in refund interest during fiscal
    year 2020 was due to circumstances out of IRS's control as a result of
    the COVID-19 pandemic. These circumstances included the extended 2020
    filing and payment deadline of July 15, 2020, and the requirement for
    IRS to pay more refund interest to individuals than initially expected
    due to the Federal disaster declaration.
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        \15\ GAO-21-251.

        Our preliminary findings indicate that total interest payments on
    refunds increased further in fiscal year 2021. According to our ongoing
    analysis, IRS paid a total of $3.27 billion in interest on refunds in
    fiscal year 2021, about an 8-percent increase over refund interest paid
    in fiscal year 2020. From fiscal years 2015 to 2021, IRS has paid a
    total of about $13.85 billion in interest on refunds. We are analyzing
    data on refund interest payments and further exploring factors that may
    have contributed to increases.
     taxpayers struggled to get help from irs during the 2021 filing season
        Our ongoing review shows that taxpayers experienced challenges
    obtaining assistance from IRS during the 2021 filing season compared to
    the 2019 filing season (see figure 2).\16\
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        \16\ We compared IRS's performance in providing customer service
    during the 2021 filing season to the 2019 filing season because during
    the 2020 filing season, IRS offices were closed and customer service
    operations were suspended for several weeks due to the COVID-19
    pandemic.

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    Taxpayers Had Difficulty Reaching IRS Customer Service
            Representatives on the Telephone
        IRS answered more calls during the 2021 filing season than in the
    last four filing seasons, but our preliminary findings indicate an
    unprecedented increase in taxpayer inquiries by telephone resulted in a
    low level of taxpayer customer service overall. As shown in figure 3,
    customer service representatives (CSR) answered about 36 percent (2.9
    million) more calls during the 2021 filing season than the 2019 filing
    season. However, from January 1 to the end of the filing season on May
    17, 2021, IRS received about 195 million calls from taxpayers seeking
    assistance, compared to about 39 million calls during the same period
    in 2019, which is about a 400 percent increase.\17\ Further, each
    filing season includes calls that ultimately do not get through to a
    CSR. During the 2021 filing season, about 159.8 million incoming calls
    did not reach IRS:
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        \17\ We calculated the total number of taxpayer calls as those (1)
    answered by a CSR; (2) that used IRS's automated tools such as
    automated account information; and (3) that the taxpayer abandoned,
    received a busy signal, or IRS disconnected.

            IRS disconnected 102.9 million calls (53 percent) due to lack
    ---------------------------------------------------------------------------
    of CSR availability;

            Taxpayers abandoned 52.5 million calls (27 percent); and

            Taxpayers received a busy signal on 4.4 million calls (2
    percent).

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    Additionally, figure 3 shows that taxpayers' use of automated
    call assistance increased by about 43 percent (7.3 million calls)
    compared to 2019. Using IRS's automated call services, taxpayers can
    listen to recorded information to help answer a tax law question or
    access automated account information such as a balance due.

        IRS officials attributed the volume of calls in 2021 to the impacts
    of the COVID-19 pandemic, including taxpayer questions about Economic
    Impact Payments and delayed refunds. In July 2021, we recommended that
    IRS update relevant pages of its website to help explain the nature and
    extent of refund delays to taxpayers and to help reduce the volume of
    incoming taxpayer calls.\18\ Taxpayers also had questions about new
    provisions in ARPA, which, among other things, changed how much
    taxpayers were required to pay in taxes on unemployment income earned
    in 2020 and established monthly Advance Child Tax Credit payments for
    eligible taxpayers starting in July 2021.\19\
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        \18\ GAO, COVID-19: Continued Attention Needed to Enhance Federal
    Preparedness, Response, Service Delivery, and Program Integrity, GAO-
    21-551 (Washington, DC: July 19, 2021). IRS took action to address our
    recommendation before we issued our final report by updating relevant
    pages of its website in June 2021.
        \19\ ARPA, which was enacted about a month after the start of the
    2021 filing season, excluded up to $10,200 per person in 2020
    unemployment compensation from taxable income calculations. The
    exclusion applied to individuals and married couples whose modified
    adjusted gross income was less than $150,000. IRS performed manual
    adjustments on relevant returns that were filed prior to ARPA's
    enactment. Pub. L. No. 117-2, Sec. 9042, 135 Stat. 4, 122 (2021).

        Although CSRs answered more calls overall during the 2021 filing
    season than in the last four filing seasons, officials stated that they
    still did not have enough staff to meet the demand for live taxpayer
    assistance. IRS customer service officials said that they hired about
    3,800 customer service staff by the end of the filing season. However,
    officials explained that new CSRs have about 14 weeks of training
    before they can work with taxpayers on the phone, meaning that these
    newly hired staff were unable to answer calls during IRS's busiest
    season. In addition, IRS officials said that the ongoing effects of the
    COVID-19 pandemic contributed to periods of reduced staffing and
    unexpected attrition, which also affected IRS's ability to meet
    ---------------------------------------------------------------------------
    taxpayers' needs for live telephone assistance.

        As of November 2021, IRS officials stated that they expect CSRs to
    answer about 35 percent of incoming calls during the 2022 filing
    season. This figure is based on current projections for the volume of
    incoming calls and staffing levels. IRS officials described additional
    services to help manage high call volumes during the 2022 filing
    season, including implementing an online chat function on IRS's website
    and expanding its telephone call-back feature. However, limited
    information online about refund delays as well as delayed processing
    and responses to correspondence typically increase telephone calls to
    IRS as taxpayers seek information. Throughout the 2022 filing season,
    we will continue to monitor IRS's efforts to provide the level of
    telephone customer service that taxpayers and Congress expect.
    Most Taxpayers Do Not Find IRS's Where's My Refund? Application Helpful
            and IRS Does Not Have Plans to Modernize It
        Throughout the filing season, IRS consistently directed taxpayers
    to use IRS's online application Where's My Refund? to get the most up-
    to-date information about the status of their return and refund.\20\
    However, our ongoing review indicates Where's My Refund? provides
    limited information to taxpayers and taxpayers' satisfaction with the
    application has declined. IRS recognizes that Where's My Refund? has
    limitations, but it does not have plans to modernize or replace the
    existing application. According to IRS officials, this is due to
    limited information technology resources funding to address the
    technical limitations of the application's supporting infrastructure.
    ---------------------------------------------------------------------------
        \20\ IRS communicated this information on IRS.gov, during on-hold
    messages on its toll-free phone line for taxpayers, and in print
    materials. Taxpayers can access Where's My Refund? at https://
    www.irs.gov/refunds, or through IRS2Go, IRS's mobile phone application.
    Taxpayers are required to provide information to verify their identity
    before accessing their return and refund status information in Where's
    My Refund?

        According to IRS, Where's My Refund? is IRS's most frequently used
    online service. In our ongoing review, we identified the following
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    issues with the Where's My Refund? application:

        Limited refund status information is available online. After
    taxpayers verify their identity, Where's My Refund? displays one of
    three statuses: (1) return received, (2) refund approved, or (3) refund
    sent. In the ``return received'' phase, taxpayers may also see a
    general message that IRS is processing their return. For returns where
    the refund has been sent, Where's My Refund? may also display
    information on the refund amount and any corrections IRS made to the
    return during processing.\21\ However, our ongoing review found that
    Where's My Refund? does not provide taxpayers with additional status
    information between the ``return received'' and ``refund approved''
    phases, which can take several weeks during a typical filing season.
    For example, the application does not alert taxpayers if processing has
    been suspended due to an error or other reason, which could delay
    refunds.\22\
    ---------------------------------------------------------------------------
        \21\ This may include corrections to the refund amount, which IRS
    can make using its math error authority.
        \22\ In its annual report to Congress, the National Taxpayer
    Advocate cited similar limitations with IRS's Where's My Refund?
    application and the impact of the lack of useful refund status
    information on taxpayers and IRS. The National Taxpayer Advocate
    preliminarily recommended that IRS improve Where's My Refund?, IRS2Go
    (IRS's mobile application), or online accounts by providing taxpayers
    specific information about the cause of their refund delay and an
    estimated date when the IRS might issue their refund. In response, IRS
    stated that they plan to perform research to help inform potential
    updates to Where's My Refund? National Taxpayer Advocate, Annual Report
    to Congress 2021 (Washington, DC: December 31, 2021).

        As previously discussed, millions of taxpayer returns were stopped
    for manual review during the 2021 filing season that prevented IRS's
    systems from processing the returns automatically. In July 2021, IRS
    began posting regular updates on its ``IRS Operations Status'' webpage,
    informing taxpayers that some returns may take up to 120 days or longer
    to process due to the need for IRS staff to manually review returns
    containing errors. This was a positive step in communicating general
    information to taxpayers on IRS's processing delays. However, because
    taxpayers could not get detailed status information from Where's My
    Refund?, they continued to call IRS for live assistance or in some
    cases filed a second return, which created additional work for IRS
    ---------------------------------------------------------------------------
    staff.

        User satisfaction has declined. All taxpayers who access Where's My
    Refund? have the option of answering three user experience survey
    questions, including a question on how helpful the application's
    information is regarding the status of their refund.\23\ As shown in
    figure 4, results from IRS's survey from January 2018 to October 2021
    show that user satisfaction with Where's My Refund? has declined in all
    three areas--helpfulness of information, ease of use, and ease of
    locating the application. In 2018, about 55 percent of taxpayers who
    responded to the survey were satisfied with the helpfulness of the
    information provided in the application; that measure declined to about
    24 percent satisfaction in 2021.
    ---------------------------------------------------------------------------
        \23\ Taxpayers using the Where's My Refund? application must elect
    to take the survey; therefore, the survey results are not generalizable
    to all taxpayers who used the application from January 2018 to October
    2021. The survey asks taxpayers to rate their satisfaction with: (1)
    the ease of locating the application on IRS.gov; (2) the ease of using
    the application; and (3) the helpfulness of the information received
    through the application. Responses were on a 6-point scale, ranging
    from ``totally dissatisfied'' to ``satisfied.'' According to IRS
    officials, the survey questions have not been modified since 2006.

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       In November 2021, IRS officials stated that due to the limited
    information in the survey results, they do not use it in a meaningful
    way. For example, the survey does not allow taxpayers to provide
    specific feedback on the reasons for their dissatisfaction with Where's
    My Refund?, so that IRS could identify improvements. IRS officials
    attributed the more recent overall decline in user satisfaction with
    Where's My Refund? to pandemic-related processing delays and taxpayers'
    frustration with being unable to reach IRS for additional information
    ---------------------------------------------------------------------------
    on the status of their return or refund during the 2021 filing season.

        However, the Where's My Refund? survey results show that in the 2
    years prior to the start of the pandemic, only about half of taxpayers
    reported being satisfied with the helpfulness of the information
    provided in the application. These data may indicate the application
    had not been meeting user needs and expectations since before the
    pandemic-- despite being one of IRS's most commonly used applications.

        IRS does not have plans to modernize Where's My Refund? In October
    2021, as part of our ongoing review, IRS officials said that Where's My
    Refund? has limitations due to its age and described some of the
    technical challenges associated with updating it. First, they said that
    the application is nearly 20 years old and the last time IRS made
    improvements that related to taxpayer experience--that is, changes that
    the taxpayer could see--was in 2013. Second, IRS officials said the
    current Where's My Refund? application is not capable of accessing the
    data sources that provide more detailed return processing status
    information, and modifying the existing application to include this
    information would be cost-prohibitive. Finally, IRS officials raised
    concerns about balancing taxpayers' need for additional refund status
    information in Where's My Refund?, and the risk of providing details
    that could be useful to fraudsters.

        Further, IRS does not have plans to modernize Where's My Refund?
    According to IRS officials, this is due to a lack of information
    technology resources and funding, and the technical limitations
    described above. IRS officials said that they planned to make some
    simple changes to the application in January 2022, prior to the start
    of the filing season. These include adding general, static messages on
    the Where's My Refund? status page so that taxpayers are aware of
    possible circumstances where their refund may be delayed, similar to
    the information IRS currently provides on processing delays on its
    website.

        In addition, for taxpayers whose returns have taken more than 21
    days to process, IRS plans to include a link to its ``Frequently Asked
    Questions'' webpage in Where's My Refund? so that taxpayers can read
    about general IRS processing delays. According to IRS officials, only
    such simple improvements are possible given the current technical
    limitations of the application. IRS also identified high-level efforts
    related to Where's My Refund? in its January 2021 Taxpayer First Act
    Report to Congress. For example, the report states that IRS intends to
    make the same information from Where's My Refund? available in the
    taxpayer's online account and the IRS2Go mobile application, as well as
    send notifications about return status changes to the taxpayer's mobile
    device. However, these efforts do not change the extent or detail of
    return information currently provided through the Where's My Refund?
    application. As noted above, the lack of detailed information in the
    application has led taxpayers to call IRS for live assistance, or in
    some cases file a second return, which creates additional work for IRS
    staff.

        We recognize that IRS has significant long-term efforts underway to
    modernize and upgrade its IT infrastructure and components. Further, we
    understand that modernizing Where's My Refund? will take planning and
    resources given the application's current technical limitations. In
    February 2022, IRS said its long-term goal is to give taxpayers access
    to more information through IRS modernization efforts.

        As part of our ongoing work we are continuing to explore challenges
    with modernizing Where's My Refund?
    IRS's Inventory of Taxpayer Correspondence Has Increased Due to
            Competing Demands for Customer Service
        Throughout the 2021 filing season, IRS's inventory of individual
    and business-
    related taxpayer correspondence continued to increase.\24\ This was due
    to increased demand for live telephone assistance and because the rate
    of incoming correspondence outpaced how many existing correspondence
    cases CSRs could address. As discussed below, many CSRs are responsible
    for both telephone and correspondence duties. Due to the high demand
    for live phone assistance during the 2021 filing season, IRS
    prioritized answering calls over responding to taxpayer correspondence.
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        \24\ Inventory reflects all paper and digital correspondence from
    taxpayers that IRS received but had not yet responded to.

        Our preliminary analysis indicates that IRS's inventory of taxpayer
    correspondence as of the end of the 2021 filing season was nearly three
    times the average inventory compared to the same time period from 2016
    through 2019 (see figure 5). Further, about 46 percent (2.7 million
    pieces) of 2021 taxpayer correspondence was overage as of the end of
    the 2021 filing season.\25\
    ---------------------------------------------------------------------------
        \25\ IRS's policy is to generally respond to correspondence within
    30 days of receipt, but it may take longer than 30 days to respond to
    taxpayer correspondence depending on the type and complexity of the
    issue. IRS generally considers correspondence that is older than 45
    days to be ``overage.''

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     During our ongoing review, IRS officials described several
    reasons for the increase in the volume and types of backlogged
    ---------------------------------------------------------------------------
    correspondence:

            Duplicate Returns. As a result of delayed processing of
    returns filed in 2020 and 2021, some taxpayers filed a second return
    because they could not get information on the status of their initial
    return and refund, and were concerned that IRS had not received the
    initial return.

            Amended Returns. The increase in amended returns was likely
    due, in part, to new provisions included in pandemic relief
    legislation. Under provisions in the CARES Act, some taxpayers filed
    amended returns to claim net operating loss carrybacks in 2018, 2019,
    or 2020. In addition, ARPA, which was enacted a month after the filing
    season began, included changes to the amount of taxable unemployment
    income for 2020 which prompted some taxpayers to file an amended
    return.

            Refund Inquiries. According to IRS officials, IRS received
    more refund and account inquires by correspondence because taxpayers
    could not get through to a CSR on the phone for information on the
    status of their return or refund, and could not get detailed
    information online; therefore, taxpayers tried to reach IRS by mail.

        IRS's different customer service options are interdependent, often
    sharing the same staff. As we have reported in prior years, IRS has
    struggled to balance competing demands for maintaining quality customer
    service levels via telephone and timely written correspondence because
    many CSRs are responsible for both telephone and correspondence
    duties.\26\ As a result, IRS's ability to respond to correspondence in
    a timely manner is dependent on the volume and length of telephone
    calls answered by CSRs and the volume of calls that are addressed
    through self-service options including automated telephone lines and
    online tools. Further, as discussed earlier, when taxpayers cannot find
    the information they need using IRS's online resources such as Where's
    My Refund?, they will call IRS or send inquiries through the mail.
    ---------------------------------------------------------------------------
        \26\ See GAO-21-251; GAO-20-55; and, 2015 Tax Filing Season:
    Deteriorating Taxpayer Service Underscores Need for a Comprehensive
    Strategy and Process Efficiencies, GAO-16-151 (Washington, DC: December
    16, 2015).

        In November 2021, as part of our ongoing review, IRS officials told
    us they were continuing to work through the correspondence inventory,
    which by that time had grown to about 7.8 million with about 57 percent
    (4.5 million) of it overaged. IRS officials stated that they were
    continuing to rely on overtime, training additional staff to help work
    through some types of correspondence inventory such as identity theft,
    and were hiring additional staff, as discussed later in this testimony.
    Nevertheless, millions of taxpayers continue to wait for IRS to process
    a wide range of correspondence, including amended returns and reviewing
    documentation related to resolving identity theft issues, both of which
    ---------------------------------------------------------------------------
    may result in a refund to the taxpayer.

        The extent of IRS's correspondence inventory as of January 1, 2022,
    was 8.2 million, a backlog that IRS will need to address during the
    2022 filing season. Further, IRS's data from early January 2022 showed
    that IRS expects its correspondence inventory to exceed 10 million by
    the end of fiscal year 2022. This is more than five times IRS's
    inventory of correspondence as of the end of fiscal year 2019 and more
    than three times the inventory as of the end of fiscal year 2020. This
    backlog will be difficult to manage as IRS balances prioritizing
    telephone calls from taxpayers with reducing the volume of
    correspondence such as amended returns from 2021 and incoming
    correspondence for 2022.
    In-Person Taxpayer Service Volume Has Declined in Recent Years
        Our ongoing analysis of IRS data on the volume of taxpayers
    visiting a TAC shows a gradual decline in visits since 2015, even prior
    to the COVID-19 pandemic.\27\ As seen in figure 6 below, during
    calendar year 2015, IRS served about 5.5 million taxpayers in person;
    this volume dropped by an average of about 800,000 taxpayer
    interactions annually from 2016 to 2019. From 2019 to 2020, in-person
    visits declined by about 70 percent (1.6 million). The total volume of
    taxpayers served in-person further declined to about 700,000 during
    2020, and was about 1 million during 2021. In June 2021, IRS officials
    stated that the ongoing impacts of the COVID-19 pandemic, along with
    increased service options available to taxpayers via the phone and
    online, primarily accounted for the overall decline in in-person
    service volume in 2020 and 2021, compared to prior years.\28\
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        \27\ IRS's 358 TACs are located across the United States and in
    Puerto Rico, and taxpayers are generally required to make an
    appointment to receive in-person assistance. IRS Field Assistance staff
    provide various in-person services, including authenticating taxpayers
    whose returns have been held for potential identity theft, assisting
    taxpayers applying for an Individual Taxpayer Identification Number,
    issuing overseas travel permits, handling cash payments from taxpayers,
    and providing taxpayer assistance with account adjustments and Economic
    Impact Payments.
        \28\ GAO-21-251. As we previously reported, from late March 2020 to
    late June 2020, IRS closed all TACs and halted in-person customer
    service functions due to the pandemic. IRS gradually resumed in-person
    services during 2020.

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    IRS Increased Hiring and Relied on Overtime to Manage Unprecedented
            Workloads
        To address challenges providing customer service and processing
    returns in the 2021 filing season, IRS increased its hiring efforts,
    but with mixed success. As a result, it primarily relied on overtime
    and shifted existing staff to higher priority areas of work, including
    manual review of returns stopped due to errors and answering record-
    high volumes of calls from taxpayers.

        IRS used several approaches to increase staffing levels during the
    2021 filing season. To help address immediate needs, it converted
    seasonal workers to permanent hires, and rehired former IRS staff with
    expertise in handling returns with errors. In addition, IRS human
    capital officials stated that they used a streamlined hiring approach
    to match a potential applicant with multiple positions for which they
    were qualified, to help reduce the number of incoming applications.
    Officials also sought to hire filing season staff throughout the year,
    including the summer and fall which are not typical hiring periods.

        IRS officials reported that they exceeded their hiring goal of
    5,000 customer service staff as of the end of fiscal year 2021. As of
    early May 2021, IRS hired 3,817 customer service staff (76 percent of
    their goal), and then hired an additional 1,377 staff as of early
    September 2021.\29\ Officials noted that newly hired CSRs are trained
    for 14 weeks before they can help taxpayers on the phone, so staff
    hired toward the beginning of the filing season were not trained before
    the filing season ended. Nevertheless, officials noted that once
    trained, new CSRs were assigned to phones to assist taxpayers.
    ---------------------------------------------------------------------------
        \29\ IRS officials reported that of the 3,817 new hires, 2,935 (77
    percent) were CSRs, who primarily provide live telephone assistance to
    taxpayers. The remaining positions were for tax examiners (713) and
    clerks (169).

        However, our ongoing review indicates IRS encountered challenges in
    hiring enough new returns processing staff during fiscal year 2021. As
    of October 2021, officials reported that they had hired 3,662 returns
    processing staff out of about 5,500 planned (67 percent of their goal),
    and had not hired new staff since the end of August. Additionally,
    attrition has further contributed to reduced levels of returns
    processing staff, who perform essential filing season functions.\30\ As
    of the end of fiscal year 2021, IRS reported that the attrition rate
    for returns processing staff was 17 percent (about 1,630 staff), which
    is more than twice the agency's overall attrition rate of 7.6
    percent.\31\ Therefore, for every 10 newly hired returns processing
    staff discussed above, IRS needed about four staff to offset attrition.
    ---------------------------------------------------------------------------
        \30\ Returns processing staff open and batch mail, process tax
    returns, and perform other on-site work at IRS campuses.
        \31\ The attrition rate for returns processing and customer service
    staff includes separations and retirements, and instances where staff
    moved to another organization within IRS.

        As we have previously reported, IRS has consistently used overtime
    to meet returns processing milestones, respond to taxpayer calls and
    correspondence, and address increases in workload.\32\ For example, in
    January 2020--prior to the start of the COVID-19 pandemic--we reported
    that IRS increasingly relied on overtime to meet returns processing and
    customer service demands, with its use of overtime more than
    quadrupling from fiscal year 2014 through mid-July of fiscal year
    2019.\33\
    ---------------------------------------------------------------------------
        \32\ GAO-20-55.
        \33\ GAO-20-55. We measured increases in overtime in terms of full-
    time employee equivalents. IRS's workload increases during the 2019
    filing season were due, in part, to IRS needing to implement provisions
    of the Tax Cuts and Jobs Act before the filing season began, and a 5-
    week lapse in appropriations which furloughed many IRS employees during
    the critical filing season preparation period.

        We recommended that IRS develop and implement a strategy for the
    efficient use of overtime. At the time, IRS agreed with this
    recommendation, but stated that its existing process within the Wage
    and Investment division for the use and approval of overtime is
    sufficient, so it did not plan to take further action.\34\
    ---------------------------------------------------------------------------
        \34\ IRS allocates a certain amount of overtime for both returns
    processing and customer service staff each fiscal year, based in part
    on prior year usage and its budget. IRS operating divisions can also
    request increases to their overtime allocation, as needed. In addition,
    a 2019 agreement with the National Treasury Employee Union governs
    other aspects of overtime, such as ensuring fairness of offering
    overtime opportunities to employees.

        During fiscal year 2021, IRS again relied heavily on overtime to
    address both customer service demand and returns processing work. We
    recognize that overtime is a practical and necessary tool to help
    organizations manage short-term and unexpected surges in workload.
    However, it is not sustainable to rely primarily on overtime to offset
    complex human capital challenges such as reduced staffing levels and
    attrition. IRS's use of overtime may also be indicative of a larger
    need for IRS to establish and use a strategic workforce plan that
    addresses mission-critical skills gaps. In 2019, we recommended IRS
    establish such a plan.\35\ IRS agreed and has made progress towards
    implementing a strategic workforce plan, but that effort remains
    delayed.
    ---------------------------------------------------------------------------
        \35\ GAO, Internal Revenue Service: Strategic Human Capital
    Management Is Needed to Address Serious Risks to IRS's Mission, GAO-19-
    176 (Washington, DC: March 26, 2019).

        Given the recent challenges IRS has experienced during the last two
    filing seasons and the ongoing impacts of the COVID-19 pandemic, we
    believe our recommendation to develop an overtime strategy remains
    valid. As we noted in our prior work, consistent reliance on the use of
    overtime, among other things, can contribute to low morale and employee
    dissatisfaction, and increased errors. Further, if not well managed,
    ---------------------------------------------------------------------------
    overtime can be expensive, inefficient, and contribute to skills gaps.

        In conclusion, ongoing challenges precipitated by the COVID-19
    pandemic, coupled with new responsibilities to provide relief to
    Americans, adversely affected IRS's return processing and customer
    service during the 2021 filing season. Amid these challenges, IRS
    issued economic impact payments and answered more telephone calls than
    in prior years, as taxpayers sought unprecedented levels of assistance.
    Nevertheless, the new and persistent challenges that IRS faced pose
    risks for the 2022 filing season.

        Chairman Wyden, Ranking Member Crapo, and members of the committee,
    this concludes my prepared statement. I look forward to answering any
    questions you may have.

                                     ______

            Questions Submitted for the Record to Jessica Lucas-Judy
                 Questions Submitted by Hon. Michael F. Bennet
        Question. This year, IRS is delivering transformational benefits
    that are helping families cope with rising costs and get ahead. In
    Colorado, families with kids received an average of $445 per month in
    advance monthly payments from the expanded Child Tax Credit. And they
    will receive the second half of the credit--up to $1,800 per child--
    with their tax refund. In Colorado, the average child-care cost for a
    4-year-old is nearly $12,400 per year. But this year, thanks to the
    expanded Child and Dependent Care Tax Credit (CDCTC), families can
    receive up to $4,000 per child back on their tax refund.

        As you noted in your testimony, the IRS expects a large number of
    tax returns to require extra processing because of errors associated
    with these and other recent tax law changes. This could delay refunds
    for families by 3 to 6 months.

        Can you describe the IRS's planned improvements to its Error
    Resolution System, which is designed to shorten this timeframe for
    taxpayers?

        Answer. As stated in my testimony, as part of our ongoing work, IRS
    provided us documentation indicating that during the 2022 filing season
    it expects about 21 million returns to be stopped for errors associated
    with recent tax law changes. In December 2021, IRS officials said that
    they planned to adjust their systems for the 2022 filing season to
    automate selected Error Resolution System (ERS) processing functions
    and identify returns that could be processed more quickly. Such
    automation would reduce the need for time-consuming, manual review of
    returns stopped for errors, which contributed to processing delays
    during 2021. In February 2022, officials confirmed that IRS implemented
    the FixERS tool in late January, prior to the start of the 2022 filing
    season. As part of our review of the 2022 filing season, we plan to
    assess IRS's performance in processing returns. This will include
    following up on IRS's efforts to process returns stopped due to errors.
    We expect the results of this work to be released by the end of 2022.

        Question. What other steps could IRS take this filing season and
    next to reduce the wait time for error resolution for low- and middle-
    income taxpayers who most depend on their refunds?

        Answer. Our prior work has shown that communicating clear, timely
    information to taxpayers can help IRS better manage taxpayers'
    expectations and potentially reduce the volume of calls to IRS. IRS has
    taken steps to provide key information to taxpayers before they file
    their tax returns, with the goal of stopping errors before they occur.
    For example, in December 2021 and January 2022, IRS began issuing
    letters to recipients of the advance child tax credit, and the third
    economic impact payment. These letters include the amounts that IRS
    paid out to taxpayers during 2021, which is information that the
    taxpayer needs when filing their 2021 tax return. IRS also made this
    information available in taxpayers' online accounts at www.irs.gov. IRS
    anticipates that making this information more widely available to
    taxpayers will result in taxpayers making fewer errors on their returns
    compared to last year, such as for errors related to the Recovery
    Rebate Credit. In addition, IRS continues to post processing updates on
    its website, including a new webpage with special filing season alerts.
    Making this information available will help taxpayers to adjust their
    expectations if processing delays occur. Our forthcoming April 2022
    CARES Act report (GAO-22-105397) will include an enclosure on IRS's
    administration of the Advance Child Tax Credit and Economic Impact
    Payments, which may be of interest.

                                     ______

                   Questions Submitted by Hon. Chuck Grassley
        Question. Everybody agrees that IRS must update its information
    technology (IT) systems to more efficiently perform its duties and
    provide top-level taxpayer service. However, IRS has a long history of
    over-promising and under-delivering in its modernization efforts.
    Individual GAO reports over the past several decades detail various
    struggles dating back to the early 2000s and reference past failed
    attempts as far back as the 1980s.

        Based on previous GAO reports, are you able to provide a timeline
    or summary of past IT modernization efforts that will give Congress an
    overview of all successes, failures, and setbacks IRS has experienced
    in its modernization attempts?

        Answer. IRS began modernizing its paper-intensive approach to
    processing tax returns in the mid-1980s. However, we identified serious
    management and technical weaknesses in the modernization program that
    jeopardized its successful completion. We made several recommendations
    aimed at addressing the weaknesses and added IRS's modernization to our
    High Risk List in 1995.\1\ Over the years, IRS worked to address our
    recommendations, build management capacity, and deliver key programs,
    including a segment of the Customer Account Data Engine (CADE) 2
    program that is critical to the modernization of the individual Master
    File (IMF), IRS's authoritative data source for individual tax account
    data. Due to IRS's progress in addressing the weaknesses we identified
    and the agency's commitment to sustaining progress, we removed Business
    Systems Modernization from our High Risk List in 2013. We have
    continued to monitor IRS's modernization efforts and make
    recommendations to increase the successful delivery of the
    modernization program.\2\ In October 2021, we reported that, while the
    agency had reported implementing most modernization activities planned
    for fiscal years 2019 and 2020 within cost and schedule goals, the
    long-term performance and outlook for CADE 2 was troubling.\3\
    Specifically, we noted that IRS had revised the program's cost,
    schedule, and scope goals on numerous occasions since its inception in
    2009. As a result, a key major program milestone for replacing key
    functions of the IMF had slipped 9 years--from 2014 to 2023--and the
    completion of CADE 2 was projected for 2030, further delaying the
    benefits to be gained by modernizing the IMF. We also have two ongoing
    reviews which are likely to lead to recommendations. In one review, we
    are examining IRS's detailed modernization plans and cloud computing
    efforts, and in the other, we are examining the agency's safeguards for
    protecting taxpayer information.
    ---------------------------------------------------------------------------
        \1\ GAO, High-Risk Series: An Update, GAO-13-283 (Washington, DC:
    February 2013). In 1995, we also added the agency's financial
    management to our High Risk List due to longstanding and pervasive
    problems which hampered the effective collection of revenues and
    precluded the preparation of auditable financial statements.
        \2\ We have reviewed IRS's IT modernization efforts as part of our
    mandated reviews of IRS's system modernization expenditure plans from
    1999 to 2011 and nearly annual reviews of IRS's IT investments since
    then.
        \3\ GAO, Information Technology, Cost, and Schedule Performance of
    Selected IRS Investments, GAO-22-104387 (Washington, DC: October 19,
    2021).

        Question. Over the decades, GAO has made a number of
    recommendations to IRS on carrying out its modernization efforts. Are
    there outstanding recommendations that IRS has not implemented, or not
    agreed to, that you believe IRS must implement to ensure current
    ---------------------------------------------------------------------------
    modernization efforts don't repeat the failures of the past?

        Answer. Since IRS began modernizing its paper-intensive processes
    for processing tax returns, we have made a number of recommendations
    aimed at addressing technical and management weaknesses with the
    program and increasing the likelihood IRS will successfully deliver it.
    IRS has addressed many of the recommendations over the years. In June
    2018, we reviewed the performance of selected IRS investments and the
    extent to which IRS had identified and taken steps to address the risks
    associated with three mission critical legacy systems. We made 21
    recommendations as a result of our findings. IRS neither agreed nor
    disagreed with the recommendations, and, as of October 2021, had
    implemented 18 of the 21 recommendations. Specifically, we reported
    that IRS had yet to fully implement two recommendations for improving
    its analyses of the performance of two investments and one
    recommendation to implement effective workforce planning practices for
    mission-critical investments.\4\ In addition, as part of a March 2019
    review of the agency's enterprise-wide strategic workforce planning
    efforts, we made six recommendations to IRS that included implementing
    its delayed workforce planning initiative, evaluating actions to
    improve the agency's hiring capacity, and addressing changes in its
    processes that have contributed to hiring delays.\5\ The agency agreed
    with our recommendations. As of February 2022, IRS had implemented five
    of the recommendations and had taken steps to implement the
    recommendation to fully implement its workforce planning initiative.
    Finally, as mentioned above, we also have two ongoing reviews, which
    are likely to lead to recommendations.
    ---------------------------------------------------------------------------
        \4\ GAO-22-104387. We made the recommendations in GAO, Information
    Technology, IRS Needs to Take Additional Actions to Address Significant
    Risks to Tax Processing, GAO-18-298 (Washington, DC: June 28, 2018).
        \5\ GAO, Internal Revenue Service, Strategic Human Capital
    Management Is Needed to Address Serious Risks to IRS's Mission, GAO-19-
    176 (Washington, DC: March 26, 2019).

        Question. In 2019, IRS unveiled an updated 6-year IT modernization
    plan. In your view, how successful has the IRS been in implementing
    this plan and is this 6-year plan still an effective strategy for IT
    ---------------------------------------------------------------------------
    modernization as viewed in 2022?

        Answer. IRS's April 2019 IT modernization plan defined efforts IRS
    considered necessary to transform the agency's technology and deliver a
    modernized taxpayer experience in support of its mission for fiscal
    years 2019 through 2024. In October 2021, we reported that IRS had made
    changes to its plan, and that, according to the agency, these changes
    were made primarily to account for advances in technology and evolving
    customer expectations and needs.\6\ As noted above, we also found that
    IRS had reported completing most of its activities intended for fiscal
    years 2019 and 2020 within cost and on or ahead of schedule, but the
    longer-term performance and outlook for CADE 2 which is critical to
    replacing the IMF were troubling. Specifically, we noted that IRS had
    revised the program's cost, schedule, and scope goals on numerous
    occasions, including seven times between 2016 and 2019.\7\ As a result,
    a key major program milestone for replacing selected IMF functions,
    known as transition state 2, had slipped 9 years--from 2014 to 2023,
    and CADE 2 completion was projected for 2030. IRS IT modernization
    officials, including the Chief Information Officer, recently told us
    that they were updating the modernization plan to reflect current
    needs. They stated they expected to complete the update in the spring.
    As mentioned above, we also have ongoing work to examine IRS's plans
    for implementing its modernization program and efforts to safeguard its
    taxpayer information which are likely to result in additional
    recommendations.
    ---------------------------------------------------------------------------
        \6\ GAO-22-104387.
        \7\ We specifically noted that the CADE 2 delays and IRS's
    continued use of IMF were troubling given, that IMF (1) is one of the
    oldest systems in the Federal Government; (2) has software written in
    an archaic language that IRS stated is no longer taught in school; and
    (3) is supported by a workforce with specialized skills that are
    increasingly harder to find.

        Question. As Congress considers additional IT funding, what
    priorities or requirements should Congress consider specifying in
    ---------------------------------------------------------------------------
    legislation?

        Answer. IRS is already required to report to Congress on the status
    of its efforts to modernize information technology on a quarterly
    basis. We believe these reports, as well as periodic hearings such as
    the one held by the committee on February 17, 2022, will continue to
    keep attention on IRS's efforts.

        Question. What role does the Federal procurement process play in
    inhibiting IT modernization at the IRS? Should Congress look at
    reforming procurement government wide in order to facilitate more rapid
    IT modernization at the IRS?

        Answer. We have not done the work to determine the role, if any,
    that the Federal procurement process plays in inhibiting IT
    modernization at the IRS, nor have we done the work to determine what
    government-wide procurement reforms would help facilitate more rapid IT
    modernization at the agency. However, IRS has commented that successful
    implementation of its modernization efforts depending, among other
    things, on multiyear funding at predictable levels. Relatedly, in
    October 2021, we found that IRS had completed five activities it had
    planned for fiscal years 2019 and 2020 later than planned, and that the
    agency attributed the late completion primarily to funding delays.\8\
    In March 2021, Congress and the President enacted the American Rescue
    Plan Act, which provided approximately$1.5 billion to the agency to
    continue to develop ``integrated, modernized, and secure Internal
    Revenue Service systems,'' among other things.\9\ IRS is currently
    using these funds to accelerate several programs.
    ---------------------------------------------------------------------------
        \8\ GAO-22-104387.
        \9\ American Rescue Plan Act of 2021, Pub. L. No. 117-2, title IX,
    subtitle G, Sec. 9601(d), 135 Stat. 4, 144 (March 11, 2021).

        Question. Based on GAO reports, in 1999 IRS instituted a Business
    System's Modernization (BSM) plan, which was intended to modernize
    several systems. A core project under its plan was the Customer Account
    Data Engine (CADE), which was intended to operate a number of customer
    service applications and eventually replace its antiquated Individual
    Master File (IMF). Unfortunately, due to system limitations, cost
    overruns, and repeated delays, CADE was abandoned in 2009. In its
    place, IRS began work on CADE 2 with plans for it to replace the legacy
    IMF system by 2014. Yet, according to an October 2021 GAO report, CADE
    2 is now expected to replace ``core functions'' of the IMF only and not
    ---------------------------------------------------------------------------
    until 2030.

        Since 1999 to date, how much has IRS spent on its BSM plan?

        Answer. IRS reported spending $5.4 billion for Business Systems
    Modernization activities from fiscal year 1999 to fiscal year 2020. In
    addition, the agency's operating plan for BSM was $252 million for
    fiscal year 2021.

        Question. How much did IRS spend on the original CADE project prior
    to its suspension? How much has IRS spent to date on CADE 2?

        Answer. IRS reported spending about $400 million for CADE before
    suspending the program in fiscal year 2011. IRS reported spending $1.5
    billion on CADE 2 from fiscal year 2009 to fiscal year 2020. In
    addition, the agency's operating plan for CADE 2 was $100 million for
    fiscal year 2021.

        Question. The IRS has told the Finance Committee that it selected
    ID.me, a private company, to provide identity verification services for
    accessing taxpayer accounts because only ID.me met National Institute
    of Standards and Technology (NIST) requirements while being able to
    handle the volume of Internet traffic the IRS expected. While the
    original plan called for the use of facial recognition, IRS has backed
    away from that requirement due to concerns from Congress and others.
    Are there alternative methods for providing identity verification
    services that do not use facial recognition technology or biometric
    data at all that fully comply with NIST? Is there a list of companies
    providing verification services that meet NIST standards?

        Answer. According to the NIST Digital Identity Guidelines (NIST
    800-63), in certain situations, identity verification may be performed
    by comparing photographs from identity documents provided by
    applicants, such as driver's licenses or passports, to real-life
    applicants instead of using biometrics comparison, such as facial
    recognition.\10\ In 2019, OMB issued a memo directing General Services
    Administration (GSA), in coordination with OMB, to determine the
    feasibility for accrediting products and services on GSA acquisition
    vehicles that meet NIST 800-63 criteria, including identity
    verification, and to develop a roadmap for achieving this goal.\11\ In
    response, GSA has issued a roadmap that provides a fiscal year 2023-
    2025 time frame to design and implement a validation process for
    companies that provide identity, credential, and access management
    services.\12\ Further, validation of companies that would meet NIST
    standards would not begin until fiscal year 2025 or later.
    ---------------------------------------------------------------------------
        \10\ U.S. Department of Commerce, National Institute of Standards
    and Technology, Digital Identity Guidelines: Enrollment and Identity
    Proofing (June 2017, includes updates as of March 2, 2020).
        \11\ Office of Management and Budget, Memo 19-17, Enabling Mission
    Delivery Through Improved Identity, Credential, and Access Management
    (Washington, DC: May 21, 2019).
        \12\ General Services Administration, GSA Identity, Credentialing,
    and Access Management (ICAM) Solutions and Shared Services Roadmap
    (November 12, 2020).

        Question. In August of last year the GAO published a report titled
    ``Facial Recognition Technology: Current and Planned Use by Federal
    Agencies,'' which I understand did not include reference to the use of
    ID.me by the IRS. Outside of the standards on the use of facial
    recognition published by NIST, is there a point in the Federal
    Government that tracks and monitors the use of biometric data or facial
    recognition throughout the Federal Government and ensures that existing
    ---------------------------------------------------------------------------
    standards are in fact complied with?

        Answer. We are not aware of a central point in the Federal
    Government that tracks and monitors the use of facial recognition
    technology throughout the Federal Government. In order to compile the
    information for our August 2021 report, we needed to administer a
    survey to the 24 Chief Financial Officers Act agencies to collect
    information on how agencies used facial recognition technology and
    their plans to expand its use in the future. Further, to compile the
    information in our June 2021 report (GAO-21-518, Facial Recognition
    Technology: Federal Law Enforcement Agencies Should Better Assess
    Privacy and Other Risks), we similarly needed to administer a survey to
    42 agencies that employ law enforcement officers to collect information
    on the facial recognition systems owned or used by these agencies. We
    made recommendations to 13 of those agencies because they did not track
    their use of non-Federal systems, including systems owned by State,
    local, and non-
    government entities. We will be following up with these agencies to
    determine their progress in implementing our recommendations.

        Question. Critics of the use of facial recognition technology have
    raised concerns of racial bias and other civil liberties concerns.
    Critics have also raised concerns about the ability of low-income
    taxpayers to be able to access the technology necessary to meet the
    requirements of facial recognition or biometric security. Proponents of
    facial recognition insist the technology is effective across all racial
    groups and is easily accessible. Do you think there is merit to
    concerns raised that facial recognition technology incorporates a
    racial bias or that it presents signification hurdles to low-income
    taxpayers?

        Answer. In our 2020 report on the commercial uses of facial
    recognition technology (GAO-20-522, Facial Recognition Technology:
    Privacy and Accuracy Issues Related to Commercial Uses), we found that
    evaluations by the National Institute of Standards and Technology
    (NIST) and others have found that many facial recognition systems
    perform differently among demographic groups. For example, NIST's
    recent evaluations of facial recognition algorithms found significant
    improvements in the accuracy of facial recognition technology, but also
    that accuracy differs by race, ethnicity, or country of origin, as well
    as by gender and age. Differences in errors across demographic groups
    were undetectable for a small number of algorithms. But, in general,
    NIST found that facial recognition algorithms performed more accurately
    on white males. NIST also found elevated error rates for the elderly
    and children, and these rates climbed with increasingly older or
    younger subjects. Performance differences varied by the algorithms
    tested, with some performing better than others.

                                     ______

                     Questions Submitted by Hon. Todd Young
        Question. In the GAO's fiscal year 2020 audit of the IRS, GAO
    identified new information system control deficiencies related to
    access controls and security management. These findings were in
    addition to the 114 recommendations GAO previously made to the IRS to
    address its deficiencies in its information systems, for which
    corrective action by the IRS was never taken. GAO notes that these
    ``new deficiencies, along with unresolved information system control
    deficiencies from GAO's prior audits, increase the risk of unauthorized
    access to, modification of, or disclosure of financial reporting and
    taxpayer data and disruption to critical operations.''\13\
    ---------------------------------------------------------------------------
        \13\ https://www.gao.gov/products/gao-21-
    401r#::text=What%20GAO%20Found%20During%20
    its%20audit%20of%20the,in%20its%20internal%20control%20over%20financial%
    20reporting%20
    systems.

        As you know, the IRS has struggled to secure taxpayers' sensitive
    personal information, as evidenced by the June 2021 ProPublica leak
    that included confidential taxpayer information of multiple high-
    ---------------------------------------------------------------------------
    profile individuals.

        Do you believe that any of the IRS's control deficiencies
    identified by GAO may have contributed to the IRS's failure to prevent
    private and sensitive taxpayer information from being disclosed
    publicly?

        Answer. In our review, we focus on key financial systems, including
    taxpayer systems, that process transactions needed to prepare IRS's
    financial statements. Our work did not identify any control
    deficiencies that would have a reasonable possibility of a material
    misstatement in IRS's financial statements. Furthermore, IRS has many
    systems that process taxpayer information that are outside the scope of
    our review. Without knowing the root cause of the issue, we cannot
    speculate on how private and sensitive taxpayer information was
    disclosed publicly.

        Question. Why do you believe the IRS has failed to remediate the
    control deficiencies noted by GAO?

        Answer. IRS has made considerable efforts to address information
    system control deficiencies identified. In our fiscal year 2021 and
    2020 reviews, IRS addressed 63 and 41 recommendations, respectively. In
    addition, IRS has developed plans of action and milestones to address
    the remaining recommendations. However, entity-wide recommendations can
    take multiple years to correct because of their coordinated efforts.
    These challenges in implementing certain recommendations are due to the
    complexities in the environment and the impact to and maintaining the
    continuity of business operations.

        Question. In a June 8, 2021 appearance before this committee, IRS
    Commissioner Rettig confirmed that an investigation into the apparent
    IRS leak to ProPublica was already underway.\14\ In her June 16, 2021
    testimony before this committee, Treasury Secretary Yellen indicated
    that the matter was referred to TIGTA and the Department of Justice,
    and that the IRS Commissioner was looking into the matter.\15\ However,
    in her November 30, 2021 testimony before the Senate Banking Committee,
    Secretary Yellen said, ``We don't know what the source of the leak of
    that information was, and I would say it's premature to indicate that
    it came from the IRS.''\16\
    ---------------------------------------------------------------------------
        \14\ https://www.finance.senate.gov/hearings/the-irss-fiscal-year-
    2022-budget.
        \15\ https://www.finance.senate.gov/hearings/hearing-on-the-
    presidents-fiscal-year-2022-budget.
        \16\ https://www.banking.senate.gov/hearings/cares-act-oversight-
    of-treasury-and-the-federal-reserve-building-a-resilient-economy.

        In your opinion, do you believe it is reasonable that Treasury and
    the IRS appear to have zero leads on this matter despite investigating
    ---------------------------------------------------------------------------
    for over 8 months?

        Answer. We have ongoing work on the security of taxpayer
    information and expect to issue a report later in 2022.

        Question. During last year's filing season, many of my constituents
    were frustrated by the widespread closures of the IRS's Taxpayer
    Assistance Centers.

        How did the lack of in-person services during the 2021 tax filing
    season affect the IRS's ability to deliver high-quality service to
    taxpayers?

        Answer. Overall, taxpayers experienced challenges in getting help
    from IRS during the 2021 filing season, whether it was over the phone,
    online, via mail, or in person. However, as I noted in my testimony,
    our ongoing analysis of IRS data on the volume of taxpayers visiting
    Taxpayer Assistance Centers (TAC) shows a gradual decline in visits
    from 2015 to 2019, prior to the COVID-19 pandemic. Specifically, about
    5.5 million taxpayers visited TACs in 2015, compared to about 2.3
    million in 2019. During this time, TACs were generally open to serve
    taxpayers. Over the years, IRS officials have told us that about half
    of the taxpayers who called IRS to schedule an appointment at a TAC end
    up not needing the appointment because assistors were able to resolve
    the taxpayer's issue over the phone. During the pandemic, in-person
    volumes further declined due to temporary TAC closures, but also due to
    increased service options available to taxpayers online or over the
    phone, according to IRS officials. We have ongoing work in this area,
    which will be issued in April 2022.

        Question. About 73 percent of the U.S. population over the age of
    12 is fully vaccinated against COVID-19 and about 95 percent of
    vulnerable seniors have received at least one dose.\17\ I am hopeful
    that these positive developments will encourage the IRS to get
    employees back in the office and reopen its Taxpayer Assistance Centers
    to help more Americans resolve their tax issues in person.
    ---------------------------------------------------------------------------
        \17\ https://covid.cdc.gov/covid-data-tracker/#vaccinations--vacc-
    total-admin-rate-total.

        Based on your observations of past filing seasons, do you believe
    it is important for taxpayers to have an in-person option to address
    ---------------------------------------------------------------------------
    their tax issues with the IRS?

        Answer. As we have noted in prior work, OMB Circular A-11 provides
    guidance to agencies on evaluating and improving the customer
    experience. Among other things, OMB's guidance cites the importance of
    providing services to citizens through multiple channels to ensure they
    are equitable and effective, particularly for taxpayers who do not have
    or are unable to use information technology tools. We have ongoing work
    on IRS's in-person customer service, which will be issued in April
    2022.

        Question. As discussed during the hearing, other countries' tax-
    collecting agencies have already rolled out live-chat functions to
    assist their citizens with resolving tax-related matters. Meanwhile,
    the IRS has only managed to roll out such a function on a very limited
    basis.

        Are you aware of any plans the IRS may have to introduce a live-
    chat function across the agency?

        Answer. IRS shared its strategy for improving customer service in a
    variety of ways, including adding both online live chat and artificial
    intelligence chat options to assist taxpayers. In March 2022, IRS
    announced that it has established the Taxpayer Experience Office to
    improve taxpayer services and implement its strategy.

        Question. How can a live-chat function assist taxpayers and result
    in shorter wait times on the IRS phone lines?

        Answer. We plan to review IRS's performance providing customer
    service during the 2022 filing season, including the extent to which
    IRS implements an online chat feature and further expands its telephone
    call-back option to help manage high call volume. However, as I
    testified, limited information online about refund delays as well as
    delayed processing and responses to correspondence typically increase
    telephone calls to IRS as taxpayers seek information.

        Question. In the past, Commissioner Rettig has expressed the need
    for the IRS to have direct-hiring authority over certain positions,
    attributing the lack of sufficient staffing levels to the IRS's lack of
    such authority.

        Based on GAO's research, do you believe the IRS should have direct-
    hiring authority, and if so, for what categories of position?

        Answer. Direct-hiring authority can be an important tool for
    agencies when there is a demonstrated severe shortage of candidates or
    a critical hiring need, and the agency can demonstrate that its
    efforts, such as the use of other appointing authorities and
    flexibilities and training and development programs tailored to the
    positions, have not been sufficient.\18\ IRS has taken steps to
    identify and address persistent mission-critical skills gaps at the
    agency, and direct-hiring authority for those positions--such as
    customer service representatives, human resource specialists,
    information technology specialists, and revenue agents--could
    potentially help IRS be more competitive with the private sector or
    other agencies for these in-
    demand skills.
    ---------------------------------------------------------------------------
        \18\ Office of Personnel Management, Direct Hire Authority: Policy,
    Data, Oversight, accessed March 8, 2022, https://www.opm.gov/policy-
    data-oversight/hiring-information/direct-hire-authority/.

        In March 2022, IRS confirmed that it had received direct-hiring
    authority for submission processing staff. IRS has scheduled several
    direct hiring events in an effort to support its goal to hire about
    ---------------------------------------------------------------------------
    5,500 submission processing staff during 2022.

        Question. Can providing the IRS with direct-hiring authority lead
    to the IRS ultimately reaching sufficient staffing levels?

        Answer. Direct-hiring authority is one of many tools IRS could use
    to address skills gaps in mission-critical occupations, but the
    authority alone will not lead to sufficient staffing levels. In 2019,
    we recommended IRS implement a strategic workforce plan.\19\ Such a
    plan would help inform IRS's use of not only its hiring authorities,
    but also its decisions related to recruiting, training, retention,
    overtime, and contracting for assistance. IRS has made progress in
    implementing its plan and expects to fully address this recommendation
    by August 2022. This plan, when combined with consistent monitoring and
    evaluation of results, will provide information IRS needs to determine
    when and how best to use direct-hiring authority and other available
    tools to achieve sufficient staffing levels.
    ---------------------------------------------------------------------------
        \19\ GAO, Internal Revenue Service: Strategic Human Capital
    Management Is Needed to Address Serious Risks to IRS's Mission, GAO-19-
    176 (Washington, DC: March 26, 2019).

        Question. The IRS recently announced that it was hiring 5,000
    positions in preparation for the 2022 filing season, but has only been
    ---------------------------------------------------------------------------
    able to fill 179 positions so far.

        Based on GAO's observations of the IRS, what do you believe are the
    IRS's biggest hurdles in finding workers and what steps would you
    recommend the agency take to overcome those hurdles?

        Answer. We have not specifically reviewed the root causes of IRS's
    recruiting challenges. We have previously reported, however, on hiring
    and retention issues that contributed to skills gaps at the agency.\20\
    For example, we reported that IRS's human capital office had limited
    capacity to hire new employees and had skills gaps among its human
    resources staff. IRS took steps to measure the effectiveness of its
    hiring activities, and it will be important for IRS to identify and
    address problems with its hiring capacity that may emerge as the agency
    works to close skills gaps in mission critical occupations going
    forward.
    ---------------------------------------------------------------------------
        \20\ GAO-19-176.

        We also found that there were issues related to employee retention.
    For example, causes for skills gaps among revenue agents included
    ineffective onboarding, IRS's negative stigma, and more lucrative
    opportunities in the private sector. These issues could also contribute
    ---------------------------------------------------------------------------
    to issues bringing in new staff today.

        Question. As you know, IRS refund delays are not only causing
    taxpayer frustration, but also costing the Federal Government an
    exorbitant amount in refund interest payments. As you communicated to
    this committee, preliminary findings from a continuing analysis show
    that the IRS paid $3.27 billion in interest on refunds in the 2021
    fiscal year. This total marks a roughly eight percent increase over the
    $3.03 billion paid in refund interest in fiscal year 2020, and even
    more concerning, a fifty percent increase from the $2.06 billion in
    fiscal year 2019.

        What immediate steps can the IRS take to ensure that refund
    interest paid out in future years does not continue to grow?

        Answer. We highlighted the issue of increasing refund interest
    payments in September 2020, March 2021, and again in my testimony. Our
    analysis of IRS's data on refund interest payments shows that this has
    been an ongoing issue for several years. In March 2021, we reported
    that comprehensively identifying and addressing barriers to e-filing
    faced by business taxpayers may help IRS reduce costs of processing
    paper returns and potentially reduce overall refund interest payments.
    We recommended that IRS identify barriers taxpayers face to e-filing
    business-related returns, and determine what actions it could take to
    address the barriers and implement those actions, as feasible. IRS
    agreed with these recommendations and is taking steps to implement
    them. We also recommended that IRS track business refund processing,
    such as through its weekly performance tracking. IRS disagreed with
    this recommendation, stating that it tracks information on the
    timeliness of business refund processing, and that a report to track
    business refunds would not be useful in reducing interest payments. We
    maintain that this recommendation is valid and that IRS does not know
    how well it is processing business returns with refunds, or the extent
    to which it will have to pay refund interest. We will continue to
    monitor this issue. We also have ongoing work on this complex topic
    more broadly--including on refund interest paid to business and
    individuals--which will be issued in April 2022.

        Question. Last year, some of my Senate Finance colleagues and I
    wrote a letter to Commissioner Rettig regarding a company called
    ``enQ'' that floods the IRS with robocalls and sells front-of-the-line
    access to individuals paying as much as a thousand dollars a year.\21\
    ---------------------------------------------------------------------------
        \21\ https://www.young.senate.gov/newsroom/press-releases/young-
    joins-colleagues-to-urge-irs-to-investigate-enqs-pay-for-service-
    scheme.

        Do you believe taxpayers should have to pay money to a private
    ---------------------------------------------------------------------------
    company in order to reach someone at the IRS in a timely manner?

        Answer. GAO has not studied robocall services and the extent to
    which taxpayers and tax professionals utilize the service to reach IRS.
    As I testified, IRS answered more calls during the 2021 filing season
    than in the last four filing seasons, but our preliminary findings
    indicate an unprecedented increase in taxpayer inquiries by telephone
    resulted in a low level of taxpayer customer service overall. IRS
    officials attributed the volume of calls in 2021 to the impacts of the
    COVID-19 pandemic, including taxpayer questions about economic impact
    payments and delayed refunds. We continue to believe that providing
    alternative options for taxpayers to get information from IRS can
    improve IRS's telephone service. For example, providing more
    information online about refund delays as well as delayed processing
    and responses to correspondence can help reduce telephone calls to IRS
    if taxpayers can obtain the information by other means.

        Question. In your testimony, you stated that during the 2021 filing
    season, about 159.8 million incoming calls did not reach the IRS, out
    of a total volume of 195 million calls. A staggering 53 percent of all
    calls during the 2021 filing season were disconnected by the IRS due to
    a lack of staff availability. Many of my constituents have shared with
    me their frustrations after receiving these so-called ``courtesy
    disconnects.'' As you noted in your testimony, the IRS projects it will
    only be able to answer about 35 percent of incoming calls during the
    2022 filing season.

        Would you expect robocall services such as enQ to ultimately
    increase wait times on the IRS call lines?

        Answer. GAO has not studied the effect of robocall services on
    IRS's telephone service and the extent to which such calls increase
    wait times. However, the number of calls IRS answers and wait times can
    be affected by multiple factors including the number of customer
    service representatives available to answer telephone calls and total
    calls received, both of which vary each year.

        Question. Based on GAO's study of the IRS, what advice would you
    have for my constituents who are seeking to reach the IRS by phone?

        Answer. Overall, taxpayers experienced challenges in getting help
    from IRS during the 2021 filing season, whether it was over the phone,
    online, via mail, or in person. These challenges may continue during
    the 2022 filing season. If taxpayers are unable to find the information
    they seek on IRS's website, then it may be necessary to call IRS for
    assistance. If call volumes are high, taxpayers may have to wait or
    call IRS back later to reach a live assistor. IRS includes general
    information on call wait times during the filing season and after,
    including when to expect longer wait times, on its help page at https:/
    /www.irs.gov/help/telephone-assistance. Alternately, taxpayers may opt
    to use IRS's call-back feature rather than wait on hold.

        Question. In your testimony, you mentioned several aspects of the
    Democrats' American Rescue Plan Act (ARPA) that exacerbated IRS
    processing delays in the 2021 tax filing season.

        Can you please briefly summarize why ARPA had such a negative
    impact on processing timelines?

        Answer. As stated in my testimony, processing delays during the
    2021 filing season were primarily attributed to the backlog of work
    from the 2020 filing season and a large volume of errors related to the
    Recovery Rebate Credit in which taxpayers had to reconcile payment
    amounts from the first two Economic Impact Payments authorized by the
    CARES Act. ARPA introduced changes that affected taxpayers during the
    2021 filing season, which prompted many taxpayers to call for
    assistance. For example, ARPA, which was enacted a month after the
    filing season began, reduced the amount of unemployment income earned
    in 2020 that was taxable. As a result, taxpayers who already filed
    their return may have called IRS about getting a refund on unemployment
    income taxes paid, or may have filed an amended return. ARPA also
    established temporary monthly Advance Child Tax Credit payments for
    eligible taxpayers starting in July 2021, which also prompted
    additional taxpayer calls to IRS.

        Question. How will ARPA continue to impact IRS processing delays
    during the current tax filing season?

        Answer. Similar to the 2021 filing season, IRS will need to
    reconcile the payments taxpayers received from the third Economic
    Impact Payment during the 2022 filing season. Additionally, IRS will
    need to reconcile the Advance Child Tax Credit payments and confirm
    eligibility for the refundable Child and Dependent Care Tax Credit,
    which were authorized under ARPA. IRS anticipates about 21 million
    returns to be stopped for errors associated with these recent tax law
    changes.

        In December 2021, IRS officials said that they planned to adjust
    their systems for the 2022 filing season to automate selected Error
    Resolution System (ERS) processing functions and identify returns that
    could be processed more quickly. Such automation would reduce the need
    for time-consuming, manual review of returns stopped for errors, which
    contributed to processing delays during 2021. In February 2022,
    officials confirmed that IRS implemented the FixERS tool in late
    January, prior to the start of the 2022 filing season. As part of our
    review of the 2022 filing season, we plan to assess IRS's performance
    in processing returns. This will include following up on IRS's efforts
    to process returns stopped due to errors. We expect the results of this
    work to be released by the end of 2022.

        Question. I understand that the IRS estimates that about 17 million
    returns filed in 2022 will be stopped for manual processing because of
    the Child Tax Credit changes enacted by ARPA.

        If a taxpayer's return is stopped for manual processing, what kind
    of delay might they expect in the IRS's processing of any refund for
    which they may be eligible?

        Answer. IRS's projections indicate that if a return is stopped for
    errors, the taxpayer may need to wait 3 to 6 months before receiving
    their refund. As noted above, IRS's planned improvements to error
    resolution processing is intended to shorten this timeframe for some
    taxpayers.

                                     ______

                     Prepared Statement of Hon. Ron Wyden,
                           a U.S. Senator From Oregon
        Once again, it's income tax filing season in America. Struggling
    after a decade of Republican budget cuts that have decimated its staff,
    technology, and operations, the IRS is overwhelmed. Customer service is
    suffering. Enforcement against tax cheating by the rich has been
    hollowed out. There's a huge backlog of returns to work through.

        This did not happen by osmosis. Democrats and Republicans used to
    agree on the importance of funding the IRS. Even Ronald Reagan--
    nobody's idea of a tax and spend liberal--shared that perspective.
    There were more employees at the IRS at the end of his term than there
    were at the beginning.

        The cuts that have hurt customer service and enforcement against
    cheats started more than a decade ago. Republicans could have changed
    course and corrected these issues in their big 2017 tax law. They could
    have worked on processing to deal with the backlog, and the country
    would have been in better shape to deal with the stresses of the
    pandemic. They did not. In fact, the budget cuts continued while the
    tax code got more complicated.

        The result is what you see today. Typical working Americans are
    dealing with tax filing nightmares, and wealthy tax cheats getting away
    with rip-offs are living the dream.

        I want to tick through a few of the effects of these budget cuts--
    first, on customer service. According to the National Taxpayer
    Advocate, the IRS received a record 282 million customer service phone
    calls during the last fiscal year. It was able to answer only 11
    percent of them.

        Now there's a cottage industry popping up--companies are charging
    taxpayers hundreds or even up to $1,000 for the ability to cut the line
    and get through to the IRS by phone. This is an insult added to injury
    for typical Americans, and it's a direct result of Republican budget
    cuts that have broken a basic government service.

        Second, on the IRS's aging technology. This committee has spent a
    long time discussing the decrepit IT used by the IRS. Some of it goes
    back to the days of the Apollo program. A new report from the IRS
    Inspector General out last week provided a clear example of how failing
    technology costs taxpayers money.

        The IRS gets a lot of mail, and some of it includes physical checks
    sent by taxpayers. The problem is, the machines that scan and sort that
    mail are out of date and unable to properly handle the envelopes that
    contain checks. This cost the taxpayer more than $56 million in 2021
    alone because the IRS was unable to open the right envelopes and
    process the payments in time. So, in the long run, failing to invest in
    IT upgrades doesn't save taxpayer dollars, it costs them.

        Third, on enforcement. Commissioner Rettig, a Trump appointee, has
    told the committee a few key facts. One is that the amount of taxes
    owed that go unpaid every year could be as high as $1 trillion. Another
    is that the IRS is especially overmatched when it comes to cracking
    down on partnership schemes.

        This is one of the go-to tax avoidance loopholes for the rich.
    Partnership rules got a whole lot more complicated under Donald Trump.
    The IRS, meanwhile, is able to audit only a tiny sliver of the
    partnership returns that come in. That's in part because there are
    fewer auditors working today than at any point since World War II.

        When the tax rules get more complicated and the IRS's enforcement
    division shrinks even more, it's no surprise that high-flyers see a
    green light for cheating. This simply cannot go on.

        Furthermore, at a time when a lot of members are concerned about
    prices going up for a lot of goods and services, closing the tax gap
    and making sure the rich pay what they owe is a promising way to cut
    the deficit and fight inflation. I'd rather go that route than cut
    financial support for working families who are walking an economic
    tightrope.

        A few final points before I wrap up. First, Commissioner Rettig
    made the right call dropping the plan to require taxpayers to use
    facial recognition to access their IRS data. The use of this technology
    raises serious concerns dealing with privacy and civil liberties, as
    well as built-in biases that can have a harmful impact on women, Black
    and Latino Americans, and seniors. My view is, when you're talking
    about digital identity, this is sensitive IT infrastructure that the
    government should not be outsourcing.

        My staff and I were in contact with the IRS as soon as it became
    clear this facial recognition contract was causing problems, and I
    urged them to reconsider. The IRS made the right decision, because the
    reality is, protecting Americans' privacy and increasing security are
    not mutually exclusive. Going forward, this isn't just an IRS issue
    because this same shady contractor and its facial recognition
    technology are used by nine other Federal agencies. I hope my
    Republican colleagues will work with me to address it there too.

        I also want to welcome Erin Collins, the new Taxpayer Advocate, to
    her first hearing with the Senate Finance Committee. This committee
    really counts on the Taxpayer Advocate, and I'm pleased she's here with
    us today, along with all our witnesses. I know the entire committee is
    looking forward to working with her in the months and years ahead.

                                     ______

                                 Communications

                                  ----------

                               Mary Burke Baker
                                 K&L Gates LLP

                               1601 K Street, NW

                              Washington, DC 20006

    Dear Chairman Wyden and Ranking Member Crapo, thank you for holding the
    hearing, ``Spotlighting IRS Customer Service Challenges,'' to consider
    important tax administration issues. Effective tax administration is
    vital to our nation's system of voluntary tax compliance. Fairness,
    equity and certainty for taxpayers are among the important factors to
    achieve that goal.

    We are writing to bring to your attention a proposal in the Build Back
    Better Act (``BBBA'') that would violate those principles. House-passed
    Section 138303 and Senate Section 128403 propose to repeal Internal
    Revenue Code (``IRC'') section 6751(b). Section 6751(b) prevents the
    assessment of many types of commonly imposed IRS penalties unless ``the
    initial determination of such assessment is personally approved (in
    writing) by the immediate supervisor of the individual making such
    determination. . . .'' Enacted in the IRS Restructuring and Reform Act
    of 1998, the provision is intended to protect taxpayers from the
    arbitrary imposition of IRS penalties. The BBBA not only proposes to
    repeal this taxpayer protection policy, the repeal would be retroactive
    to the date of enactment in the 1998 legislation, almost 24 years ago.

    We respectfully suggest that the proposal to repeal IRC 6751(b) be
    stricken from future consideration of the BBBA.

    Since enactment, the IRS has failed in many instances to comply with
    this statutory requirement. In recent years the courts have ruled that
    the IRS may not impose penalties in such circumstances.\1\ To prevent
    these foot faults in the future, within the last two years the IRS has
    made changes to the Internal Revenue Manual to clearly establish and
    clarify the IRC 6751(b) requirements of IRS personnel.\2\ Further, the
    2021-2022 Treasury Priority Guidance Plan lists as a priority project,
    ``Regulations regarding supervisory approval of proposed penalties
    under Sec. 6751(b).''
    ---------------------------------------------------------------------------
        \1\ Graev v. Commissioner, 147 T.C. at 460, superseded by, in part,
    modified by, in part, 149 T.C. 485 (2017); Chai v. Commissioner, 851
    F.3d 190 (2d Cir.2017); Clay v. Commissioner, 152 T.C. 223 (2019).
        \2\ IRM Sections 20.1.1.2.3.1 (10.19.2020); 20.1.5 2.3 (8.31.2021);
    20.1.5.4 (8.31.2021).

    Perhaps contrary to popular assumption, the case files of IRS examiners
    and other IRS officials are not subject to automatic review. Requiring
    immediate supervisory approval regarding the imposition of penalties is
    a safety net that helps ensure that penalties are consistently applied
    among all types of taxpayers. It helps prevent the imposition of
    penalties in cases of inadvertent errors on the part of taxpayers or
    IRS officials, situations where taxpayers have not had an opportunity
    to submit information relevant to their case, circumstances where IRS
    backlogs have delayed processing of taxpayer correspondence,
    personality differences between agents and taxpayers, or the use of
    penalties as bargaining chips to convince the taxpayer to agree to the
    proposed adjustments. As former IRS Taxpayer Advocate Nina Olson
    ---------------------------------------------------------------------------
    states,

            Supervisor approval helps ensure consistent and equitable
            treatment for taxpayers. . . . Laying a second set of eyes and
            judgement on the case can smooth out the edges of differing
            value systems and mindsets of examiners.\3\
    ---------------------------------------------------------------------------
        \3\ Nina Olson, ``Throwing the Baby Out With the Bathwater--The
    Proposed Repeal of IRC Section 6751(b) Supervisor Approval of
    Penalties,'' Procedurally Taxing, December 1, 2021,
    procedurallytaxing.com.

    Repeal of IRC 6751(b) not only would result in taxpayers losing the
    protection of immediate supervisor approval and the consistency it
    provides, the retroactive nature of the proposal could result in the
    imposition of penalties in currently pending cases where the IRS failed
    to follow the required approval procedures. This would include cases
    where the IRS already has informed taxpayers that penalties will not be
    imposed. Further, retroactively repealing a statute that has been in
    place for almost a quarter of a century could further undermine trust
    and confidence in our tax system that relies on voluntary compliance
    and arguably runs counter to any reasonable sense of fairness and
    ---------------------------------------------------------------------------
    certainty.

    Repeal would affect a wide array of taxpayers, including lower-income
    filers. An IRS National Taxpayer Advocate study of 2019 found that in
    54% of cases IRS employees did not obtain the statutorily required
    approval before imposing a two-year ban on the ability to take the
    Earned Income Tax Credit.\4\
    ---------------------------------------------------------------------------
        \4\ ``Study of Two-Year Bans on the Earned Income Tax Credit, Child
    Tax Credit, and the American Opportunity Tax Credit,'' Taxpayer
    Advocate Service--2019 Annual Report to Congress, pp. 239-256.

    The repeal also would apply to assessable penalties where the taxpayer
    is required to pay a penalty in advance and in full before being able
    to contest it. Supervisory approval before the imposition of the
    penalty could avoid some of these unfortunate circumstances where
    penalties may be inappropriately imposed but taxpayers cannot afford to
    ---------------------------------------------------------------------------
    challenge them, a Catch-22 situation.

    Of course, there may be situations where penalties might be appropriate
    but cannot be imposed after it is determined that the IRS has not
    followed the statutorily required approval process. However, these
    limited situations should not be used as justification to undermine the
    integrity and efficacy of the penalty process by retroactively
    repealing a taxpayer protection that was deemed important enough to
    merit inclusion in a major piece of tax legislation and that has been
    in place for close to 24 years.

    Conclusion

    Repealing IRC 6751(b) to cover over the IRS's noncompliance with a
    significant taxpayer protection mechanism runs the risk of reprising
    inappropriate or inconsistent actions that triggered the enactment of
    IRC 6751(b) in the first place. Further, repeal is not necessary since
    the IRS has taken proactive steps to ensure that IRC 6751(b) is
    properly executed and Treasury plans to execute guidance toward that
    same end.

    Taxpayer confidence in our nation's tax system is essential to promote
    voluntary compliance. Fairness and consistency are critical to
    establishing that confidence. Much attention has been focused during
    recent tax reform efforts on restoring fairness to the tax code.
    Repealing a longstanding taxpayer protection measure intended to help
    achieve that goal controverts these efforts. Please strike the
    provision in the BBBA that would repeal IRC 6751(b).

    Thank you for the opportunity to provide these comments. Please contact
    Mary Baker at mary.baker@klgates.com or (202) 778-9223 with any
    questions or for further discussion.

                                     ______

                            Center for Fiscal Equity

                          14448 Parkvale Road, Suite 6

                              Rockville, MD 20853

                          fiscalequitycenter@yahoo.com

                          Statement of Michael Bindner

    Chairman Wyden and Ranking Member Crapo, thank you for the opportunity
    to address this issue. You have much to discuss with Erin Collins, the
    new Taxpayer Advocate. I wish her luck. We submitted these comments to
    the Ways and Means Committee, Subcommittee on Oversight on February 8,
    2022.

    We urge you to submit a written question (or one during the hearing)
    about the advisability of using support contractors--both for the
    hotline and for audit services. There are many qualified revenue agents
    working in the private sector who are up to this task, as well as top
    flight federal customer service providers to handle simple questions
    and arrange follow-up calls with revenue agents.

    We are sure you already have questions on how Build Back Better can
    help the IRS meet these challenges as well. This is especially true
    regarding the suspension of payments refundable child tax credits to
    parents. Hopefully she will not have to handle inquiries for long from
    distressed families.

    The Child Tax Credit should be the focus of BBB, as well as childcare
    and sick leave. While other matters are certainly important, they
    realistically will have to wait for a larger Senate majority. In the
    interim, it should be shouted from the housetops that the CTC is anti-
    abortion legislation. The Catholic Bishops must be urged in the
    strongest possible language to assure that increasing the CTC be scored
    as a must-pass pro-life vote.

    As we have said before, to end the ``stink of welfare'' that Senator
    Manchin so objects to, CTC payments should be included with wages for
    all employees--not just those with three or more children. They should
    also be distributed through other federal and state assistance
    programs--some of which can be reduced to do so.

    For middle-income taxpayers whose increased credits are less than their
    annual tax obligation, a simple change in withholding tables is
    adequate. Procedures are already in place to deliver refundable credits
    to larger families. For the coming year, they merely need to be
    expanded to all families with children.

    Employers can work with their bankers to increase funds for payroll
    throughout the year while requiring less money for their quarterly tax
    payments (or estimated taxes) to the IRS. The main issue is working out
    those situations where employers owe less than they pay out. This is
    especially true for labor intensive industries and even more so for low
    wage employers.

    A higher minimum wage would make negative quarterly tax bills less
    likely. Indeed, no one should have to subsist mainly on their child tax
    payments.

    Please ask, either orally or in written form, how such a CTC proposal
    might work and how it would make things easier for taxpayers whose
    returns would be simpler--with fewer having to file at all.

    We have attached the latest version of our tax reform plan, with a
    separate attachment on how implementation of this plan would affect IRS
    manpower. The answer is that the change would be drastic. It would also
    allow the Committee to focus more on how social welfare is being
    delivered in general, as well as eliminating current roadblocks to
    promptly filing for Social Security Disability Income.

    Thank you, again, for the opportunity to add our comments to the
    debate. Please contact us if we can be of any assistance or contribute
    direct testimony.

    Attachment One--Tax Reform, Center for Fiscal Equity, December 7, 2021

    Individual payroll taxes. Employee payroll tax of 7.2% for Old-Age and
    Survivors Insurance. Funds now collected as a matching premium to a
    consumption tax based contribution credited at an equal dollar rate for
    all workers qualified within a quarter. An employer-paid subtraction
    value added tax would be used if offsets to private accounts are
    included. Without such accounts, the invoice value added tax would
    collect these funds. No payroll tax would be collected from employees
    if all contributions are credited on an equal dollar basis. If employee
    taxes are retained, the ceiling would be lowered to $100,000 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. If a $10 minimum wage is passed, the employee
    contribution floor would increase to $20,000.

    Wage Surtaxes. Individual income taxes on salaries, which exclude
    business taxes, above an individual standard deduction of $100,000 per
    year, will range from 7.2% to 57.6%. 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.

    Our proposed brackets have been increased from $85,000 to $100,000
    because this is the income level at the top of the 80% of tax paying
    households who earn the bottom third of adjusted gross income. Earners
    above this level are considered middle class. Likewise, the top 1% of
    income earners are at the $500,000 level, which will be used as the
    start of the highest rate.

    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, IPOs, inherited, gifted and donated assets will be marked to
    market, 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 23.8% rate (including ACA-SM surtax) and the
    Democratic 28.8% rate as proposed in the Build Back Better Act. It's
    time to quit playing football with tax rates to attract side bets. A
    single rate also stops gaming forms of ownership. Lower rates are not
    as regressive as they seem. Only the wealthy have capital gains in any
    significant amount. The de facto rate for everyone else is zero. For
    now, however, a 28.8% rate is assumed if reform is enacted by a
    Democratic majority in both Houses.

    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 Added Tax (C-AT). 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-AT 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 unless it is in other nations,
    however in this case the imposition of this tax at the border will be
    noted, with the U.S. tax applied to the overseas base.

    Tax Reform Summary

    This plan can be summarized as a list of specific actions:

    1.  Increase the standard deduction to workers making salaried income
    of $35,000 and over, shifting business filing to a separate tax on
    employers and eliminating all credits and deductions--starting at 7.2%,
    going up to 28.8%, in $50,000 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.  Employers distribute the child tax credit with wages as an offset
    to their quarterly tax filing (ending annual filings).

    4.  Employers collect and pay lower tier income taxes, starting at
    $100,000 at 7.2%, with an increase to 14.4% for all salary payments
    over $150,000 going up 7.2% for every $50,000--up to $250,000.

    5.  Shift payment of HI, DI, SM (ACA) payroll taxes to employers,
    remove caps on employer payroll taxes and credit them to workers on an
    equal dollar basis.

    6.  Employer paid taxes could as easily be called a subtraction VAT,
    abolishing corporate income taxes. These should not be zero rated at
    the border.

    7.  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.

    8.  Change employee OASI of 7.2% from $18,000 ($20,000 for $10 minimum
    wage) to $100,000 income are optional taxes for Old Age and Survivors
    Insurance.

    Attachment Two--Tax Administration, Treasury Budget, February 12, 2020

    Shifting to a single system for all business taxation, particularly
    enacting invoice value-added taxes to collect revenue and employer-
    based subtraction value-added taxes to distribute benefits to workers
    will end the need for filing for most, if not all, households. Any
    remaining high salary surtax would be free of any deductions and
    credits and could as easily be collected by enacting higher tiers to a
    subtraction VAT.

    Subtraction VAT collection will closely duplicate the collection of
    payroll and income taxes--as well as employment taxes--but without
    households having to file an annual reconciliation except to verify the
    number of dependents receiving benefits.

    Tax reform will simplify tax administration on all levels. Firms will
    submit electronic receipts for I-VAT and Carbon Added Tax (C-AT)
    credit, leaving a compliance trail. S-VAT payments to providers, wages
    and child credits to verify that what is paid and what is claimed match
    and that children are not double credited from separate employers.

    A-VAT transactions are recorded by brokers, employers for option
    exercise and closing agents for real property. With ADP, reporting
    burdens are equal to those in any VAT system for I-VAT and A-VAT and
    current payroll and income tax reporting by employers.

    Employees with children will annually verify information provided by
    employers and IRS, responding by a postcard if reports do not match,
    triggering collection actions. The cliche will thus be made real.

    High-salary employees who use corporations to reduce salary surtax and
    pay I-VAT and S-VAT for personal staff. Distributions from such
    corporations to owners are considered salary, not dividends.

    Transaction based A-VAT payments end the complexity and tax avoidance
    experienced with income tax collection. Tax units with income under
    $84,000 or only one employer need not file high salary surtax returns.
    Separate gift and inheritance tax returns will no longer be required.

    State governments will collect federal and state I-VAT, C-AT, S-VAT
    payments, audit collection systems, real property A-VAT and conduct
    enforcement actions. IRS collects individual payroll and salary surtax
    payments, performs electronic data matching and receive payments and
    ADP data from states. SEC collects A-VAT receipts.

    I-VAT gives all citizens the responsibility to fund the government. C-
    AT invoices encourage lower carbon consumption, mass transit, research
    and infrastructure development. A-VAT taxation will slow market
    volatility and encourage employee ownership, while preserving family
    businesses and farms. Very little IRS administration will be required
    once reform is fully implemented. All IRS employees could fit in a
    bathtub with room for Grover Norquist.

                                     ______

                    Letter Submitted by James Webster Coates
    Dear Chairman Wyden, Ranking Member Crapo, and Members of the
    Committee:

    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 fulfill 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.

    The extraterritorial application of the U.S. federal income tax system
    is a painful issue for the 9 million U.S. citizens who reside outside
    the United States. 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, 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.

    The uniquely American definition of ``tax residency'' includes the
    imposition of taxation on the worldwide (including non-U.S. source)
    income of persons who are tax residents of other countries. This system
    requires the IRS to do the impossible: to administer not only a
    domestic tax system for U.S. residents and a system of source taxation
    for non-resident aliens, but also an extraterritorial one whose details
    are defined by unique interactions with the tax codes of other
    countries in the world.

    Administering an extraterritorial tax system has become an overwhelming
    task, both procedurally and substantively. The IRS cannot remotely
    serve U.S. tax residents in the more than 100 countries in the world
    where they live, let alone in the languages that they speak. Nor can
    the IRS know how U.S. laws apply to the local financial services, small
    business structures, and retirement savings plans that are common in
    all those other countries.

    Indeed the IRS itself has identified ``international taxpayers'' as a
    community which is underserved by the IRS. Although the IRS's
    Publication 54, ``Tax Guide for U.S. Citizens and Resident Aliens
    Abroad,'' is helpful, it does not adequately enable non-resident
    taxpayers to understand their U.S. tax obligations in the context of
    the financial systems of the countries in which they live. Since IRS
    guidance is not sufficient for non-resident taxpayers to accurately
    understand how the U.S. tax system applies to them, they require the
    support of professional tax service providers, which is unaffordable
    for many.

    The IRS's inability to provide non-resident taxpayers with essential
    services violates several aspects of the Taxpayer Bill of Rights,
    including the following:

          The right to be informed, including the right to know what to do
    to comply with tax laws and the right to receive clear explanations.
          The right to quality service, including the right to receive
    prompt service and clear and easily understandable communications from
    the IRS.
          The right to pay no more than the correct amount of tax,
    including the right to have the IRS apply all tax payments properly.
          The right to a fair and just tax system, including the right to
    expect the tax system to consider facts and circumstances that might
    affect taxpayers' underlying liabilities and ability to timely provide
    information.

    In order for the IRS to fairly administer the system of
    extraterritorial taxation which the United States currently imposes,
    the IRS must provide equal levels of service to both taxpayers resident
    in the United States and non-resident U.S. citizens. The level of
    service currently provided by the IRS is highly unequal.

    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.''

    With limited ability to interface with non-resident taxpayers, the IRS
    has shut itself off from taxpayers, and as a result is unable to
    determine whether the taxpayer is providing accurate information,
    unless the IRS selects his or her return for audit. For their part,
    Americans living abroad are subject to potentially devastating
    penalties for failure to file a variety of documents accurately, even
    for inadvertent non-compliance. 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. The inability of the IRS to address their
    questions makes it more likely that filers will get it wrong. As a
    result, the inaccessibility of these basic services leads to further
    non-compliance, as evidenced by the low rate of filing compared to
    domestic citizens.

    The IRS should take immediate steps to address the many valid concerns
    that have been raised by Americans abroad. 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.

    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.

    If the IRS is unwilling or unable to administer a system of
    extraterritorial taxation, then it is time for Congress to take action
    to cease the imposition of tax on the non-U.S. source income of non-
    residents. The cost-benefit analysis of the impact of a transition from
    citizenship-based taxation to a residence-based system of taxation
    should include an assessment of the investments which would be required
    to enhance the capabilities of the IRS to provide fair and equitable
    support to non-resident taxpayers under the current system.

    The best solution to this problem is for the U.S. 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.

    Thank you for your attention to this matter.

    James Webster Coates
    Tokyo, Japan

                                     ______

                 Statement Submitted by Joseph Eugene Coolidge
    I would like to thank the committee for the opportunity to have my
    statement added to the record. I have watched the recorded hearing and
    listened to the questions asked by members of the senate. I have
    listened to the comments and answers provided by the witnesses, as well
    as the committee members. I felt it necessary to provide some further
    information.

    I currently work for the IRS in Accounts Management as a Customer
    Service Representative, although our official designation is Contact
    Representative. I am the voice on the phone when you call with
    questions about the status of your refund, or have questions about a
    notice you received, etc. I have been doing this since 2012. It is a
    challenging job, even without the addition of the pandemic, new
    refundable credits, and tax law changes midway through the filing
    season. I feel I have unique insight and information that may help the
    committee in addressing the current situation with the IRS.

    Why is there a backlog? This is a straightforward answer. Not enough
    people to do the work. Now you may say that this statement isn't
    correct because the IRS was having no issues processing things timely
    with the staff it had before the pandemic started, and the staffing
    levels haven't decreased substantially. This is true, but let's look at
    what has happened over the years. Beginning in 2003 the IRS determined
    that it could save money in the budget by consolidating its service
    centers where paper returns are processed. They merged 10 processing
    centers into 5. This was in response to the increased use of electronic
    filing, and the decline in paper returns. In 2016, after a continuing
    decline in appropriations made to the IRS by Congress, the IRS put in
    place a plan to shutdown 3 of the remaining service centers over a
    period of years, starting with the Covington, KY office in 2019, then
    Fresno, CA in 2021, and Austin, TX in 2024.

    The closure of the office in Covington meant that there were 1,800 less
    people to process paper returns, and although the IRS created new
    positions and moved as many people as they could into other jobs, jobs
    were lost. The pandemic occurred just months after this closure. All
    processing centers were closed completely. Tractor trailers of unopened
    correspondence and tax returns sat in parking lots at the remaining
    processing centers. When employees returned to work, they made great
    efforts to get through the backlog and get things processed as quickly
    as possible, while preparing for the next filing season for 2020 year
    tax returns. During this time, Congress enacted legislation that helped
    to get money into the hands of Americans who were struggling with being
    out of work, and to help business owners who were impacted by the
    safety mandates enacted. The legislation was beneficial and helped
    millions of Americans, and the IRS was able to implement the
    legislation and get millions of dollars in funds paid to the American
    public. There was an unforeseen issue with this, however. For taxpayers
    to receive the economic impact payments, the IRS had to determine
    eligibility. It used records from previously filed returns in the past
    couple of years to determine this. This meant that taxpayers who had
    not filed a return for 2018 and 2019, or were not receiving payments
    through social security, railroad retirement, supplemental security
    income benefits or VA benefits, or had never filed a return would not
    be getting the economic impact payments. The IRS set up an online
    system where taxpayers who were not required to file a return based
    upon these reasons, could input their information to update IRS
    records. It was called the Non-Filers Tool. This tool allowed these
    taxpayers to provide information regarding dependents, as well as
    update address and banking information. It created a simple 2019 tax
    return for IRS records. It helped get more taxpayers the money that
    Congress had made available that would have otherwise not received
    them. For Taxpayers that still did not receive economic impact
    payments, they could file a tax return for 2020 and claim the recovery
    rebate credit. Here is where some of the backlog started. The
    electronic system for filing needs to verify the AGI or Self-Selected
    PIN number from the previous year's return to be accepted
    electronically. When a taxpayer has never filed a return before, or has
    not filed for several years, although they are generally able to
    electronically file, most of them have difficulty because they do not
    know to enter ``0'' as the AGI. and end up mailing the return. In the
    case of Identity theft, where an electronically filed return has been
    filed by the Identity thief, then the real taxpayer must mail their
    return. In cases where an Identity Protection PIN number is issued,
    that PIN number must be included, or the electronically filed return is
    rejected by the IRS. Many taxpayers are unable to retrieve this
    Identity Protection PIN using the online verification system or are
    unable to have it reissued by mail as their identity cannot be
    verified. Another reason a return is required to be mailed is a
    dependent being claimed on more than one return. Once a return is
    accepted electronically, the social security numbers used on it are
    locked from being used on another electronically filed return, except
    for returns filed as married filing separate, or the checkbox is
    selected that another person can claim you as a dependent on their
    return. Anyone else claiming the same dependent must mail in their
    return. All these situations led to more paper returns being filed. For
    taxpayers that used the Non-Filers Tool, the creation of a simple 2019
    return in the IRS system stopped them from filing their original 2019
    tax return electronically. This meant they had to mail in their tax
    return. That tax return was then treated by the IRS system as an
    amended return because the system thought a return was already
    submitted. Legislation was then enacted during the filing season that
    impacted millions of taxpayers with unemployment payments. Before
    programming was put in place to systemically adjust accounts for this
    change, taxpayers who had already filed were submitting amended
    returns. There was much confusion among taxpayers with the new credits,
    economic impact payments, using the Non-Filers Tool and changes to
    unemployment. This resulted in many more paper returns, amended
    returns, and calls to the IRS. The IRS, although facing more paper
    returns and amended returns, continued with its plans to shut down
    processing centers, and closed its Fresno facility in 2021. The
    unprocessed 2020 tax returns from this service center were then
    distributed to the remaining three processing centers in Ogden, UT,
    Kansas City, MO, and Austin, TX increasing the workload for them. If
    the closing of this service center would have been postponed, there
    would have been over 3,000 more employees able to process 2020 paper
    returns and amended returns. With the changes made to the Child Tax
    Credit for the 2021 tax year, and the Advanced Child Tax Credit
    payments that were issued from July thru December of 2021, many
    taxpayers who would otherwise not be required to file a return, now
    must do so to reconcile the advanced payments. Since the advanced
    payments were based upon previously filed returns to determine
    eligibility, there will undoubtedly be those who are in the same
    situation as they were in 2020 with the economic impact payments and
    will be mailing in their returns. On a positive note, the IRS has
    decided to delay it's planned closure of the service center in Austin,
    TX.

    Because the primary reason for the backlog is staffing, I would like to
    address the issue. The IRS is currently at around the same staffing
    levels it had in the 70s. While normal attrition occurs with every
    employer, the IRS has seen a greater level of attrition than most
    agencies. Around the time that I was hired, there was an IRS training
    video that garnered attention from the public and Congress. It was seen
    as a waste of taxpayer funds. Shortly after, there was also an
    investigation and scandal regarding the IRS denying applications for
    tax exempt status due to certain political viewpoints. These
    contributed in part to a reduction in the budget allocated to the IRS
    by Congress. This also affected the image of the IRS as an employer.
    The cuts to the budget caused a hiring freeze for the IRS for a period
    of years. When the IRS did have hiring authority again, a series of
    continuing resolutions, as well as government shutdowns further
    contributed to the inability for IRS to hire adequate staff. The images
    on the news of IRS, and other federal employees, being told they must
    work without a paycheck undoubtedly created a negative image of the
    government as a great employer to work for. This has only been further
    supported by the disparity in pay for government employees vs. the
    private sector. Under the current GS schedule, the position of Contact
    Representative starts at GS-5. This position requires a bachelor's
    degree or equivalent experience. In many locations, someone working
    fast food or other service industry can be hired quicker and make more
    money, without a degree. This puts the IRS, as an employer, at a
    disadvantage. With the increase in the federal minimum wage to $15hr,
    there is no incentive for someone with a degree to apply, as there is
    no real pay benefit. This is further compounded by locality. In Seattle
    where my office is located, the cost of living is far beyond the pay
    received by the Customer Service Representatives working there.
    Everyone commutes from outlying areas. There is no parking at our
    office, so most everyone commutes using public transportation. Although
    using public transportation is great for the environment and reduces
    traffic congestion, not everyone wants to spend hours on a bus or a
    train to work for less than they can make right around the corner
    working at a drive thru window. While we have seen increases in pay in
    the past few years, they have been negated by the increased premium
    costs for insurance, resulting in an overall pay cut. The discussion
    between the committee and the witnesses regarding the number of
    employees hired by the IRS only addressed the total number hired. The
    number of employees that were hired, then left during the training
    process or shortly after was never addressed. I'm sure that those
    numbers are available and would shed additional light on the difficulty
    the IRS is having in hiring and retaining employees.

    In order address the issue with staffing, there will have to be several
    changes made. First, an audit of the base GS pay table needs to be
    performed, and corrections made, to ensure that pay is comparative to
    the private sector as stipulated in the Federal Pay Comparability Act
    of 1970. Second, the locality pay adjustments need to be reviewed and
    corrected to ensure that wages remain competitive for the locality.
    Adjusting the salary table to be competitive would entice qualified
    applicants to apply. Third, the image of the IRS as an employer needs
    to be addressed. Years of budget cuts, negative news stories, and
    declining service levels have led to a negative view of the IRS in
    general. Positivity in the media and from Congress can help change this
    image and help make the IRS's ability to hire new employees easier.
    Fourth, the current process for hiring employees is a long process,
    taking months. This needs to be changed to align with the private
    sector, allowing for direct hiring authority. Taking all these actions
    would help to create a position that compares with the private sector,
    bringing in qualified applicants.

    I would like to address the issue of Customer Service, and the
    experience the taxpayer has when they call the IRS. The IRS tracks many
    statistics when it comes to customer service calls. The big talking
    points that were brought up by the Committee and the witnesses address
    the percentage of answered calls. The statistics that were brought up
    were that only 11% of calls were answered in Fiscal Year 2021. The
    National Taxpayer Advocate had stated that there was a low point during
    which only 4% of calls were answered, but also stated that there was
    also an unprecedented call volume due to the tax law changes, and that
    the IRS answered more calls in 2021 than in the prior year. The IRS
    tracks statistics such as the average hold time, the average time of
    the call, how many calls are disconnected, how many calls are
    transferred, and how many calls are received, but it doesn't track how
    many calls resolve the taxpayer's issue, or how many times a caller has
    had to call back to have the issue resolved. Based upon my interactions
    with callers, the taxpayer doesn't always have their issue resolved on
    the first call. I have spoken with many taxpayers, and their primary
    complaints have been that they were on hold for long periods of time,
    they have called numerous times and they haven't been able to speak to
    a live person, they get transferred to a line that states that the call
    volume is too high and they get disconnected, they have spoken with
    several people and get different information from each of them, and
    that they wait on hold for hours only to be disconnected before
    speaking to somebody. As a customer service representative, I can
    empathize with them. IRS employees that have tax questions and issues
    call the same toll-free number that the taxpayer does and go through
    the same experience. These issues could be resolved with adequate staff
    to handle phone calls.

    The IRS has many procedures in its Internal Revenue Manual, which
    Customer Service Representatives are required to follow. Once we
    determine the issue the taxpayer is calling about, we refer to the
    appropriate guidance in the manual and follow its steps. Calls are
    required to be randomly reviewed to ensure that we are correctly
    following procedure, and our performance evaluations and annual
    appraisals are based in part upon how well we followed the procedures
    and if any mistakes were made. This affects not only our pay, but our
    ability to remain an employee, and the ability to advance in our IRS
    career. We are held to a high standard of perfection. We are also
    required to ensure that the Taxpayers rights are upheld in all
    interactions. This is sometimes a difficult thing to do. I will provide
    a general example. When a taxpayer moves, the IRS does not
    automatically know. Generally, address updates are based upon the
    filing of a tax return, unless the taxpayer has provided correspondence
    to the IRS informing them of an address change. If we are speaking to a
    taxpayer, and they inform us that they have moved, the procedure in the
    Internal Revenue Manual is to update the address if it is a permanent
    address change. This seems like a simple procedure. The problem occurs
    with how the IRS system processes information. Each IRS computer system
    is part of a hierarchy. The change I input in my computer system is not
    effective immediately. It is stored on our local server and is
    transmitted either that evening, or the end of the week to our main
    computing center. From there it is processed, and the account updated,
    then that information is transmitted out to the rest of the network. An
    address update can take up to two weeks to be a permanent change to a
    tax record. Now let's say a taxpayer submitted a 2020 tax return and it
    is 2022. The taxpayer has not filed his current year return yet. The
    IRS has not processed his 2020 return but we see that it was received.
    The taxpayer explains that they have moved since the return was filed.
    If I input the address change as required by the Internal Revenue
    Manual, and it processes before the 2020 return does, then once the
    2020 return finishes processing, the old address on the return then
    updates our system, and the address change I did is reversed. This
    means that the taxpayer no longer gets correspondence from the IRS at
    is current address and either must call back, complete a change of
    address form, or submit the current year return with the current
    address to update the tax record. Now let's say that the 2020 return
    address processes through at the same time as the updated address I
    input. Since there are two separate computer systems submitting an
    address update to the main computer, one from the center that is
    processing the tax return, and my own, it doesn't know how to process
    the input, and generates an error. The taxpayer, through no fault of
    their own can be negatively impacted in both scenarios. The address of
    record is where tax refund checks are issued. A taxpayer wanting to
    ensure they get their refund check timely takes steps to notify the IRS
    of their address change based upon the scenarios I provided. Our
    procedure is to update the address, which we are required to follow. In
    both situations previously described, the taxpayer will most likely
    face a delay. The refund check will either be issued to the old address
    as shown on the tax return or be held until the error is resolved. This
    generally results in another call to the IRS to resolve. It also
    results in the taxpayers right to have their tax issue resolved
    properly and timely being denied. This is just one example of how our
    procedure sometimes gets in the way of the taxpayer's rights, resulting
    in poor customer service, and increased calls to resolve the issue.
    Modernization of the IRS infrastructure may resolve this and would
    certainly make the Taxpayer experience better.

    Modernization and updates to the Technology that the IRS uses has been
    a topic on the radar for years, and the IRS has been making changes,
    but it has been a slow process. The changes necessary to make a big
    impact on customer service have still not occurred. The problem is that
    the change necessary will take years to complete. There is no overnight
    solution. This requires consistent, reliable, long-term funding. There
    can't be budget increases and decreases, and continuing resolutions.
    This is something Congress can do. It won't change the situation with
    the backlog but will certainly help prevent it from reoccurring. Think
    of the IRS as a Steam locomotive, traveling back and forth, picking up
    and dropping of things. When it was created, it was one of the most
    powerful machines of it's day. It was able to handle substantial loads
    without issue and was reliable to get the job done. Over time, however,
    the demands placed upon the Steam locomotive became greater, much like
    the changing tax code. This required changes to the engineering of the
    locomotive to keep up and things were added and removed as the budget
    and time allowed, but the core steam engine remained. This is similar
    to what has happened with the tax code over the years. The engine was
    still strong and reliable but was slowing down with the changes. Over
    time, newer technology created even stronger locomotives, with steam
    power becoming obsolete. The cost of these newer engines was very
    expensive and required changing the tracks and equipment for the new
    engines to do their job. Since the steam engine was still working and
    could still do its job, the cost to upgrade was not worth it. This is
    much like the scenario now with the IRS. We still use the steam engine,
    but the parts are harder to find, the maintenance personnel are
    becoming fewer, and although it is still working and reliable, it is
    costing more and more to maintain. This is our IRS. Old, unattractive,
    and struggling to keep up with the modern day. It is useful and
    reliable, but behind the times. This engine is the money maker for the
    nation and its budget. Some people may not like it, but it is necessary
    for the nation to function, and should be the priority to ensure that
    it is upgraded. Without it, how long until the voluntary compliance
    fades away?

    Congress needs to enact legislation that funds the IRS for the long
    haul, including long-term funds for Technology modernization. It needs
    to correct the pay gap between federal employees and the private sector
    and ensure that employee benefits remain attractive to potential
    applicants, so that the IRS can hire enough employees to get its work
    done for the taxpayer. Congress needs to recognize the continued delay
    in taking these actions could be more costly, and more detrimental to
    the nation then making the necessary changes. Thank you.

                                     ______

                                Democrats Abroad

                                 P.O. Box 15130

                              Washington, DC 20003

                                 (202) 733-6790

                               February 16, 2022

    The Honorable Ron Wyden
    Chairman
    U.S. Senate
    Committee on Finance
    221 Dirksen Senate Office Building
    Washington, DC 20510

    The Honorable Mike Crapo
    Ranking Member
    U.S. Senate
    Committee on Finance
    239 Dirksen Senate Office Building
    Washington, DC 20510

    Re: Hearing on Spotlighting IRS Customer Service Challenges on February
    17, 2022

    Dear Chairman Wyden, Ranking Member Crapo, and Members of the
    Committee:

    Democrats Abroad greatly appreciates your holding this important
    hearing. We recognize the enormous challenges facing the Internal
    Revenue Service (IRS) in this COVID-19 era. However, just as the IRS is
    required to assist Americans living in the U.S., it must help Americans
    living abroad, of whom there are an estimated nine million,\1\ the
    overwhelming majority of whom are working or middle class.\2\ Our
    recommendations would increase tax compliance while also alleviating
    problems faced by them. We strongly support the National Taxpayer
    Advocate's recommendations to reform the tax code.
    ---------------------------------------------------------------------------
        \1\ The U.S. Department of State's Bureau of Consular Affairs.
    (2020, January). Consular Affairs by the Numbers. Retrieved February 6,
    2022, from https://travel.state.gov/content/dam/travel/CA-By-the-
    Number-2020.pdf.
        \2\ Democrats Abroad. (2019, March 1). Tax filing from abroad--2019
    Research on Non-
    Residents and U.S. Taxation. Page 4. Retrieved February 7, 2022, from
    https://democratsabroad.atlassian.net/wiki/download/attachments/
    4257416635/Tax%20filing%20from
    %20abroad%20-%202019%20Research%20on%20Non-
    Residents%20and%20US%20Taxation.pdf?
    api=v2.

    Americans living abroad are subject to potentially devastating
    penalties for failure to file a variety of documents accurately, even
    for inadvertent non-compliance. The inability of the IRS to address
    their questions makes it more likely that filers will get it wrong. As
    a result, the inaccessibility of these basic services leads to further
    non-compliance, as evidenced by the low rate of filing compared to
    ---------------------------------------------------------------------------
    domestic citizens.

    We have long advocated common-sense solutions to many of the problems
    raised in the National Taxpayer Advocate's Purple Books. Despite years
    of their recommendations--and despite many of the proposed solutions
    being revenue-neutral or even revenue-positive--at least 23 provisions
    in the current tax code \3\ violate the widely-accepted Taxpayer Bill
    of Rights and harm Americans filing from abroad, who face greater
    complexity, harsher penalties, and more ambiguity. Preparing an average
    tax return filed from abroad costs from $500 to $1000,\4\ often
    exceeding any taxes owed.
    ---------------------------------------------------------------------------
        \3\ Democrats Abroad. (2020, May 27). How to fix 23 tax problems
    for Americans abroad with three solutions. Retrieved February 16, 2022,
    from https://democratsabroad.atlassian.net/wiki/download/attachments/
    4271082033/23%20Problems%203%20Solutions%202020.pdf?version=1&
    modificationDate=1590588973000&cacheVersion=1&api=v2&download=true.
        \4\ Ibid.

    We strongly support the National Taxpayer Advocate's 2022 Purple Book
    recommendations, which also have the support of the Government
    Accountability Office and the IRS Taxpayer Advocacy Panel:

    Legislative Recommendation #8

            Harmonize Reporting Requirements for Taxpayers Subject to Both
            the Report of Foreign Bank and Financial Accounts [FBAR] and
            the Foreign Account Tax Compliance Act [FATCA/Form 8938] by
            Eliminating Duplication and Excluding Accounts Maintained by
            U.S. Persons in the Countries Where They Are Bona Fide
            Residents.

    Legislative Recommendation #14

            Allow Additional Time for Taxpayers to Request Abatement of a
            Math Error Assessment Equal to the Additional Time Allowed to
            Respond to a Notice of Deficiency When the Math Error Notice Is
            Addressed to a Person Outside the United States.

    Legislative Recommendation #15

            Amend IRC Sec. 6212 to Provide That the Assessment of Foreign
            Information Reporting Penalties Under IRC Sec. Sec. 6038,
            6038A, 6038B, 6038C, and 6038D Is Subject to Deficiency
            Procedures.

    Legislative Recommendation #38

            Modify the Definition of ``Willful'' for Purposes of Finding
            Report of Foreign Bank and Financial Accounts Violations and
            Reduce the Maximum Penalty Amounts.

    These initial recommendations would improve taxpayer rights while
    respecting the intentions of the tax code. More fundamental reforms
    will also be necessary to address underlying issues facing Americans
    abroad, such as:

        1.  Double taxation--due to misalignment of tax systems--that
    cannot be mitigated using the Foreign Earned Income Exclusion (FEIE),
    Foreign Tax Credit (FTC), or existing Tax Treaties.
        2.  Phantom gains, caused by the requirement to use the U.S. dollar
    as the functional currency, even for taxpayers who have no financial
    connection to the United States.
        3.  Disproportionately high tax-preparation costs and excessive
    compliance risks associated with information reporting required for
    financial assets held in a taxpayer's country of residence harm
    ordinary taxpayers who are unable to afford sophisticated tax advice or
    bespoke financial planning.
        4.  Non-resident taxpayers with a non-U.S. citizen spouse face
    discriminatory treatment in the tax code and greater difficult in
    meeting filing obligations due to the lack of a Social Security Number.
        5.  Corporate tax rules intended to apply to overseas subsidiaries
    of multinational corporations are applied to small businesses owned by
    U.S. citizens residing outside the United States, resulting in punitive
    taxation of undistributed income and unreasonably high compliance
    costs.
        6.  Refusal of service by banking and financial services providers,
    resulting from conflicts between U.S. laws and the laws of the
    countries that Americans reside in. U.S.-based financial institutions
    routinely refuse service to Americans abroad while local providers also
    overwhelmingly have ``No U.S. Persons'' policies that are used to
    justify account refusals and shutdowns.

    Americans residing abroad have been effectively barred from saving for
    retirement, starting a small business, taking title to real estate, or
    sharing finances with their spouse, with devastating consequences. This
    is on top of the inordinate stress, cost, and time involved just in
    understanding and meeting the complex reporting requirements of the
    U.S. tax code.

    Americans abroad have pleaded for relief for over a decade, with no
    meaningful response from Congress. Democrats Abroad and virtually every
    other organization representing Americans abroad agree that
    implementing the above reforms would:

          Substantially improve the well-being of Americans abroad;
          Improve the administrability of the Internal Revenue Code and
    facilitate greater tax compliance;
          Reduce strain on an Internal Revenue Service that has expressed
    that the burden associated with servicing Americans abroad is
    disproportionate to the minuscule tax revenue raised.

    The uniquely American definition of ``tax residency'' includes the
    obligation to report worldwide (including non-U.S. source) income even
    of Americans who are tax residents of other countries. This requires
    the IRS to do the impossible: to administer both a domestic tax system
    for U.S. residents (including source taxation for non-resident aliens)
    and also an extraterritorial system interacting uniquely with the tax
    codes of other countries.

    Problems facing Americans abroad include (1) understanding what is
    required, (2) complying while also maintaining tax compliance in their
    country of residence, (3) communicating with the IRS, and (4) paying
    the IRS when U.S. tax is owed, or receiving refunds from overpayments/
    credits.

    Administering this extraterritorial tax system has become an
    overwhelming task, both procedurally and substantively. The IRS cannot
    remotely serve Americans in the more than 100 foreign countries where
    they live, let alone in the languages they speak. Nor can the IRS know
    how U.S. laws apply to the local financial services, small business
    structures, and retirement savings plans that are common in those
    countries.

    The IRS has itself identified ``international taxpayers'' as an
    underserved community.\5\ Although IRS Publication 54, ``Tax Guide for
    U.S. Citizens and Resident Aliens Abroad,'' is helpful, it does not
    adequately enable non-resident filers to understand their U.S.
    obligations in the context of the financial system of the country where
    they live. They often then require professional tax preparers which can
    be prohibitively expensive even if no tax is actually owed.
    ---------------------------------------------------------------------------
        \5\ IRS. (2021, January). Taxpayer First Act Report to Congress.
    Retrieved February 16, 2022, from https://www.irs.gov/pub/irs-pdf/
    p5426.pdf?mc_cid=95523e3176&mc_eid=[942e2d2064].

    The level of service currently provided by the IRS to Americans inside
    and outside the country is highly unequal. For those abroad, IRS agents
    are insufficiently trained to respond to the common issues faced. In
    addition, there is no in-person assistance; toll-free telephone
    services are not available; access to online portals is severely
    limited; postal mail delivery is often delayed; and there is limited
    documentation in languages other than English. Moreover, it is often
    time-consuming, complicated, and costly for non-residents to make
    payments to the IRS, and it can be difficult to deposit any refund or
    ---------------------------------------------------------------------------
    stimulus check received from the IRS.

    The IRS's inability to provide non-resident filers with essential
    services violates several aspects of the Taxpayer Bill of Rights,\6\
    including:
    ---------------------------------------------------------------------------
        \6\ IRS. (2021, December 21). Taxpayer Bill of Rights. Retrieved
    February 16, 2022, from https://www.irs.gov/taxpayer-bill-of-rights.

          The right to be clearly informed about tax laws, including
    knowing how to comply;
          The right to prompt quality service, including clear and easily
    understandable communications from the IRS;
          The right to pay no more than the correct amount of tax,
    including having the IRS properly apply all tax payments; and
          The right to a fair and just tax system, including consideration
    of facts and circumstances that affect filers' liabilities and ability
    to provide timely information

    Despite an increase in the number of Americans abroad, the IRS has
    significantly reduced its targeted taxpayer services while continuing
    to impose filing obligations. Services have been strained by the
    termination of tax help at consulates and online. There were over a
    dozen IRS offices abroad in 1993, but now none, and the Electronic Tax
    Law Assistance Program has also been terminated, as has R-mail, which
    allowed customer service representatives to refer questions to
    employees with specific expertise.

    Telephone and correspondence service for filers abroad is also
    inadequate. Self-
    service options cannot fully replace personal service, whether by
    phone, face-to-face, or online chat. Callers from abroad may face
    significant expense, then not be able to reach an IRS representative.

    We also ask the committee to ensure that as the IRS transitions away
    from using third-party identity verification services, that Americans
    abroad receive continued access and sign-up availability for online IRS
    accounts.

    It is time for Congress to cease the imposition of filing requirements
    for non-U.S.-source income of non-residents. Cost/benefit analysis of
    such a transition from citizenship-based to residence-based taxation
    should include consideration of what would be required for the IRS to
    provide fair and equitable support to non-resident filers under the
    current system.

    We urge the Senate Finance Committee to hold an additional hearing to
    specifically consider the tax-filing and financial-access problems
    faced by Americans abroad as a result of the current system of
    extraterritorial taxation of non-resident U.S. citizens. We would also
    welcome engagement with individual Members of the Senate Finance
    Committee to discuss opportunities to introduce such reforms.

    Democrats Abroad plans to release updated research on Americans abroad
    and their tax situations this summer. We will share our results and
    analysis with the Committee and encourage you to review it then.

    Thank you for the opportunity to provide this testimony.

    Please do not hesitate to contact Rebecca Lammers of our Taxation Task
    Force on taxadvocacy@democratsabroad.org with any questions about the
    information and recommendations provided.

    Sincerely,

    Candice Kerestan                    Rebecca Lammers
    International Chair                 Chair, Taxation Task Force
    chair@democratsabroad.org           taxadvocacy@democratsabroad.org

                                     ______

                       Letter Submitted by Marlene Dente
    U.S. Senate
    Committee on Finance
    Dirksen Senate Office Bldg.
    Washington, DC 20510-6200

    Distinguished Ladies and Gentlemen,

    As one of the nearly 9 million Americans living abroad, I have been
    subject to filing and paying U.S. taxes the entire time I have lived
    abroad. This extraterritorial reach of taxation to be an unfair burden
    on U.S. citizens.

    As is the case for all residents living in Switzerland, we file and pay
    taxes to the Swiss government on all of our income--regardless of its
    source. This includes income and capital gains or inheritance if
    applicable. We pay federal, cantonal, and local (city) taxes. This is
    not insignificant in Switzerland. Further, the cost of living in this
    country is high compared to the U.S., which further reduces our
    disposable income for savings, housing, food, schooling, and generally,
    living costs.

    We are a normal, middle class working family.

    It is an incredible overreach of the U.S. Government, to impose its own
    taxes on our income, which has nothing to do with the U.S. in any way
    and which is taxed where it is earned. What does the U.S. do with our
    tax money and why does the U.S. Government feel entitled to levy a tax
    on our income earned on a foreign territory?

    Where do U.S. federal tax monies go?
    We do not draw on the resources of American schools.
    We do not use public infrastructure in America.
    We will not be drawing on social security, Medicaid or Medicare.
    We do not require the U.S. military to defend us while we live on
    foreign territory.

    Supporting these services is necessary and important for resident
    citizens of a country. These are goods and services that a government
    should provide its resident citizens.

    We, as non-resident citizens, should not be double-taxed to support
    these services that do not benefit us.

    Taxing U.S. citizens abroad places an undue and unnecessary burden upon
    them.

    For example, we cannot save enough to purchase a house in the country
    where we live in. The amount we would be able to put away for a down
    payment on a house is sent directly to the U.S. Government. We spend
    20-30% of our income for U.S. taxes, on top of the Swiss taxes we
    already pay. In addition to the actual tax payments, we also pay a tax
    preparer to help us wade through the documents and requirements to file
    correctly from abroad, including the FBAR. This is absurd.

    According to a CNBC article in May 2021, 4 of 10 people who renounce
    their U.S. citizenship do so due to the burden of filing U.S. taxes.
    25% of expats polled abroad say they are seriously considering dumping
    their U.S. citizenship due to the U.S. tax filing requirement.\1\
    ---------------------------------------------------------------------------
        \1\ 2021, Dore, K., and CFP. (n.d.). The top reason why Americans
    abroad want to dump their U.S. citizenship. CNBC. https://www.cnbc.com/
    2021/05/18/the-top-reason-why-americans-abroad-want-to-dump-their-
    citizenship.html.

    I find that telling: U.S. citizens are so upset about unfair taxation
    ---------------------------------------------------------------------------
    that they consider or actually do renounce citizenship.

    The United States Congress should follow through on previous
    discussions to switch to a residency-based taxation system. It would be
    more fair and more democratic.

    Sincerely,

    Marlene Dente

                                     ______

                                   EZERC LLC

                         2550 N. Federal Hwy, Suite 201

                           Fort Lauderdale, FL 33305

    February 16, 2022

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

    Dear Members of the Committee on Finance,

    Considering the operational challenges already faced by the IRS, we
    respectfully ask that Congress and the IRS strongly consider offering
    certain ``small employers'' a safe harbor election that will permit
    cash-basis treatment of the receipt of Employee Retention Credit
    (``ERC'') refunds. At the time the CARES Act was drafted, it could not
    have been anticipated that the preponderance of ERC claims would be
    made through amended filing procedures, which in turn would require
    corollary amendments to ERC beneficiaries' Federal income tax returns
    under the strict application of Section 280C. It is our view that this
    additional requirement imposes a significant unanticipated
    administrative and financial burden to both ERC recipients and the
    Internal Revenue Service and may possibly discourage small and medium-
    sized business owners under financial hardships from pursuing the
    stimulus program.

    Considering the retroactive nature of the Consolidated Appropriations
    Act (released December 27, 2020) and the prolonged guidance from the
    IRS on the application of the ERC's ``Interaction with Paycheck
    Protection Program (PPP) Loans'' in Notice 2021-20 (released March 1,
    2020), the vast majority of employers wishing to take advantage of the
    ERC were not afforded adequate time and resources to have made an ERC
    claim in advance of filing their 2020 income tax return. Further, many
    closely held business owners were unsure of how to interpret the
    application of the ``related party rules'' to majority owner wages
    until the release of Notice 2021-49 on August 4, 2021, well after the
    original due date for 2020 income tax returns.

    Based on the above and due to the overall disjointed and confusing IRS
    guidance over the life of the program,\1\ it has been nearly impossible
    for most employers to have filed a timely filed Form 941 or Form 7200
    to claim the ERC. Furthermore, it could not have been contemplated by
    Congress that this government stimulus program, intended to aid and
    reward businesses in a timely manner, would take over 6 months (and in
    many cases more than 12 months) to process and monetize.
    ---------------------------------------------------------------------------
        \1\ In fact, the IRS continues to maintain an outdated FAQ page
    that has many small business owners under the belief that they are
    ineligible for the ERC as a result of taking a PPP loan (See: https://
    www.irs.gov/newsroom/covid-19-related-employee-retention-credits-
    interaction-with
    -other-credit-and-relief-provisions-faqs).

    As we approach the 2021 tax filing season, it will be imminent that any
    ERC claim will require any new applicants to also file an amended
    income tax return. This imposes an unwarranted administrative and
    financial burden on these new applicants, and without doubt, an
    unwelcomed, additional administrative and financial burden on the
    Internal Revenue Service in terms of an increased volume of amended
    ---------------------------------------------------------------------------
    income tax returns to review and process.

    Further compounding the administrative burden to both employers and the
    IRS, it is our recent experience with the IRS that an automatic late-
    payment penalty would be administered due any amended income tax return
    presenting a greater income tax liability (i.e., due to the unfavorable
    280C adjustment), regardless of any explanatory statements that have
    been attached to the return to explain the reasonable-cause-basis for
    the increased liability. As a result of the IRS's current inability to
    comprehensively evaluate reasonable cause at the time of filing the
    amended returns, the automatic penalty procedures further result in an
    additional administrative, financial, and often emotional burden, of
    having to address and seek abatement for such penalties.

    The IRS admittedly has been operating in a ``critical mission'' state
    since the beginning of the COVID-19 pandemic through the current day.
    With reports of many letters, notices, and other correspondence taking
    upwards of 24 months to receive the IRS's attention, the outlook for
    employers looking to take advantage of the ERC at this juncture is
    overwhelmed with additional time, cost, and stress. Many, if not most,
    of these business owners are small and medium-sized business owners
    that may not be able to bear the current financial burden to be
    supported by an external CPA or other advisor, leaving them ill-
    equipped to address the significant unanticipated and unintended
    consequences of pursuing an ERC claim through the amended return
    process.

    To remedy these aforementioned burdens that have been unintentionally
    imposed on employers and the IRS, we believe that it is appropriate for
    Congress and the IRS to devise a solution to allow for small employers
    to elect cash-basis treatment (i.e., a 280C adjustment in the year of
    receipt). Such election should be made by reflecting the 280C
    adjustment in the year the ERC was received. Of course, we acknowledge
    that in order for this treatment to be equitable from the perspective
    of the U.S. Treasury, any interest paid on an ERC should be immediately
    repayable by the recipient back to the IRS.

    We appreciate the opportunity to provide our views on this matter and
    look forward to your comments. Please do not hesitate to contact me at
    (954) 461-7852 or kenneth@ez-erc.com.

    Respectfully,

    Kenneth Dettman
    CEO and Managing Director

                                     ______

                        Federation of Tax Administrators

    Introduction

    The Federation of Tax Administrators (FTA) appreciates the opportunity
    to submit a statement on the current state of this year's filing
    season. We also want to thank the U.S. Senate Committee on Finance for
    examining these key issues facing tax administration both at the
    federal and state levels. FTA is eager to work with the Committee
    during the 117th Congress and beyond to identify ways to improve
    taxpayer experience, strengthen revenue collection, and increase
    voluntary tax compliance within our nation's departments of tax and
    revenue.

    Founded in 1937, FTA is an association of principal tax administration
    agencies in all fifty states, the District of Columbia, Philadelphia,
    and New York City. Collectively, FTA members include more than 57,000
    employees across our state and city departments of revenue. Our purpose
    is to improve the techniques and standards of tax administration
    through a program of research, information exchange, training,
    intergovernmental and interstate coordination, and representing the
    interests of state tax administration before Congress and the
    Administration. Through these efforts, FTA works as a bipartisan
    organization to ensure that states' interests are effectively
    represented, and that consideration is given to the impact federal tax
    law changes have on state tax administration.

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    State tax agencies play a vital role in each filing season with
    taxpayers across the country filing annually an estimated 120 million
    state individual income tax returns. These taxpayers rely on the state
    tax agencies to administer the tax system effectively and efficiently,
    and we take that responsibility seriously. The tax system is based on
    the premise of voluntary compliance, and with each filing season, we
    must work to ensure taxpayers have the information and tools they need
    to meet their tax filing obligations while balancing the preservation
    and integrity of the revenue system.

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Although state tax agencies meet the challenges facing them each
    new filing season, external factors frequently impact the efficiency in
    which we are do our work. This statement documents some of the
    challenges the departments face, like our sister agency, the Internal
    Revenue Service (IRS) and outlines opportunities for addressing these
    issues. We also respectfully request the Committee to carefully
    consider the impact potential federal tax measures may have on state
    and local income tax systems.

    Revenue Collection Across the States

    In total, 41 states and the District of Columbia have broad-based
    individual income taxes similar to the federal income tax. Overall,
    state individual income taxes were the largest revenue source
    accounting for 36 percent of total state tax revenue collected in 2020,
    and it was the largest source of tax collection in 30 states. States
    collected $388 billion from individual income taxes in fiscal year (FY)
    2020.\1\
    ---------------------------------------------------------------------------
        \1\ Source for 2020 data was the Census Bureau. The National
    Association of State Budget Officers' (NASBO) Fiscal Survey of the
    States--Fall 2021 reports preliminary revenue of $463 billion. Note,
    some states reported above normal payments due to a shift in final
    payments from the previous fiscal year.

    Of the 41 state income taxes, all but five conform to the federal
    Internal Revenue Code (IRC) by starting their state income calculations
    with the federal definition of income.\2\ In addition, the five
    nonconforming states tie their state income to specific provisions of
    the federal code. This conformity to the IRC helps to simplify
    compliance for individual taxpayers by creating common definitions and
    rules within state and federal tax administration. Conformity also
    facilitates joint administrations with the IRS, i.e., federal-state
    electronic filing and collaborative compliance programs.
    ---------------------------------------------------------------------------
        \2\ State Individual Tax Conformity to Federal IRC Graph.

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    While conformity can be beneficial, it can also cause complications
    for states and taxpayers when there are federal legislative and
    administrative changes that impact the definition of taxable income.
    Any federal change that affects taxpayers' Adjusted Gross Income (AGI)
    or Taxable Income will automatically flow through to the states that
    conform to the current IRC. States with a fixed date conformity would
    need state legislative action to conform. These federal legislative
    changes frequently impact state revenues, and recently, these changes
    have been enacted during tax filing seasons, legislative sessions, and
    ---------------------------------------------------------------------------
    state fiscal years.

    This was seen recently when the federal government extended the tax
    filing date for the 2020 tax processing year. While most states have
    their own laws for individual income tax filing deadlines, they
    typically follow the federal filing date.\3\ However, with state taxes
    coupled to the federal definition of income, taxpayers must compute
    their federal income to be used when calculating their state income.
    The date change influenced states to conform with the federal date
    change which in turn required many states to shift income from FY20 to
    FY21. While most states had sufficient reserves to handle the cash flow
    and managed this budget situation, the revenue shift provides an
    example of federal changes impacting state revenues and their long-term
    fiscal planning.
    ---------------------------------------------------------------------------
        \3\ Five states have filing deadlines other than April 15th. Hawaii
    returns are due April 20th; Delaware, Iowa, and Virginia are due May
    1st; and Louisiana returns are due May 15th.

    As depicted in ``2020 State Tax Collections by Source,''\4\ income tax
    receipts are a major source of state tax revenue. Accounting for more
    than a third of states' tax collection, it is important for state
    budgets that income taxes remain a stable revenue source.
    ---------------------------------------------------------------------------
        \4\ U.S. Bureau of the Census, State Tax Collections 2020.

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    The chart titled ``Monthly State Individual Income Tax
    Collections,'' plots monthly state income tax receipts for calendar
    year (CY) 2017 through 2021. Beginning in March 2020, there was a sharp
    decline on state individual income tax collections due to the COVID-19
    pandemic [black line]. After March, collected revenue remained below
    CY19 collections until July, when income tax estimated and final
    payments were received. The July 2020 revenue peak did not recover the
    losses from the four previous months. For the remainder of CY20, income
    ---------------------------------------------------------------------------
    tax revenue was flat and at the same level as CY19.

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Thanks to the unprecedented fiscal stimulus, CY21 revenues quickly
    rebounded as the economy recovered and inflationary effects began to
    take effect.

    FY22 revenue estimates are currently expected to decline by nearly 3
    percent from the previous year. It is largely due to an inflated FY21
    revenue base as the tax filing deadlines changes, and federal stimulus
    payments boosted revenues last year.\5\
    ---------------------------------------------------------------------------
        \5\ NASBO, Fiscal Survey of the States--Fall 2021.
    ---------------------------------------------------------------------------

    Priorities for State Tax Administration

    Each filing season presents new challenges and opportunities. FTA
    continues to work with our federal and corporate partners to advance
    tax administration. Some of these priorities include:

    Combating Fraud

    In 2020, the Federal Bureau of Investigation's (FBI) Internet Crime
    Report reflected a 69-percent increase in Internet enabled fraud with a
    reported loss of $4.1 billion and numbers increasing exponentially as
    criminals use automated methods in attempts to steal and use more data.
    States play a key role in fraud detection and prevention, and while
    they do not publicly disclose fraud detection and prevention
    strategies, states deploy diverse fraud strategies that utilize
    intelligence, technology, and people to detect and prevent fraud.
    States are also a member of the Identity Theft Tax Refund Fraud
    Information and Analysis Center (ISAC), and states are proud to share
    that they are major contributors of fraud alerts and data used by the
    IRS and other tax partners to identify and prevent identity theft tax
    refund fraud. The ISAC plays a significant role in the global tax fraud
    detection and prevention efforts, and the states want to thank you for
    your continued support of the ISAC as it is making a difference in this
    important fight.

    Increasing Voluntary Tax Compliance

    One of the best ways to increase voluntary tax compliance is through
    customer service. Ensuring taxpayers have the information and tools
    they need to comply with their tax responsibilities is a priority for
    states. States continue to innovate as they find new and creative ways
    to engage taxpayers, deliver information and resources, and provide
    customer service. Their engagement and service strategies facilitate
    the filing of timely and accurate tax returns. Their innovation covers
    a broad spectrum ranging from plain language initiatives designed to
    make it easier for taxpayers to understand how to comply to increasing
    access to tax credits through robust communication initiatives. State
    tax agencies work to increase current and future voluntary tax
    compliance by providing staff professional development and training,
    participating in tax practitioner educational programs, implementing
    self-service options and customer relationship management solutions on
    agency websites, with the use of chatbots, data analytics and other
    technology solutions. These strategies also allow the states to better
    understand the communities they serve by engaging in diversity and
    inclusion efforts within the agency and the community and increase
    voluntary compliance while improving constituent relations.

    Addressing Staffing Challenges

    State tax agencies are not immune to the significant staffing
    challenges facing the private and public sectors. Like the IRS, many
    states have experienced high attrition during the pandemic and continue
    to identify innovative ways to recruit and retain talented tax
    administrators. Staffing challenges create knowledge gaps and can
    disrupt the tax administration cycle. Impacts may include, but are not
    limited to processing delays, customer service issues, and challenges
    achieving voluntary compliance. States are optimistic that the human
    capital, continuous improvement, and technology investments made over
    the past several years will temper some of the negative consequences of
    staffing shortages during the filing season.

    Modernizing Technology

    The states are a lead investor in technology that facilitate tax
    administration. They recognize the critical importance of investing in
    technology that supports the filing season and beyond. Many states have
    implemented Commercial Off the Shelf Technology (COTS) which makes it
    easier to maintain, modernize, and advance tax administration. They
    continue to invest in cyber and data security strategies designed to
    protect the integrity of their systems and the taxpayers they serve.
    Lastly, they have implemented Voice Over Internet Protocol (VOIP)
    technology to support remote work and deployed self-service technology
    allowing taxpayers to meet their filing requirements in a timely
    manner, increasing efficiency and improving the taxpayer experience.

    Administering Retroactive and Late Tax Law Changes

    FTA would be remiss in neglecting to share the challenges state
    agencies face as it relates to retroactive tax laws and tax law changes
    that occur late in the tax filing season. As mentioned previously, most
    states conform with federal tax laws and their state tax return begins
    with information from the federal tax return. Federal tax law changes
    can result in issues that require most states to seek state tax laws
    changes to conform to federal law. In addition, there are typically
    system changes, current year return processing, payment processing,
    amended return and other account adjustments, while trying to manage an
    active filing season. Late tax law changes especially create a
    significant risk of error and vulnerability because technology changes
    cannot be fully tested due to time constraints and system limitations.
    Retroactive and late law changes impacting state tax administration,
    such as the Unemployment Income exclusion and Payroll Protection
    Program loan forgiveness exclusion create taxpayer and tax practitioner
    confusion, contribute to processing backlogs, and can promote fraud--
    all causing potential delays in processing returns and issuing refunds.
    By understanding organizational effectiveness and managing human and
    technological resources, states have led through the pandemic and met
    the challenges presented by the retroactive and late tax law changes.

    Conclusion

    State tax agencies are very empathetic to the challenges facing the
    IRS, and these challenges have a direct impact on state tax
    administration. As laboratories for innovation, many state tax agencies
    have successfully modernized their tax processing systems and have
    implemented other emerging technology to enhance the taxpayer
    experience. As a result, state tax agencies have well-established best
    practices the IRS can leverage, and FTA stands ready to liaise with the
    IRS and state tax authorities for the purpose of identifying proven
    solutions to address the challenges raised.

    FTA thanks the Committee for holding this important hearing on this
    year's filing season. We appreciate you giving state tax administrators
    the opportunity to express our contribution to the filing season
    experience. As the Committee continues its work in a bi-partisan manner
    on this important issue, FTA and our membership look forward to being a
    resource for you and your staff. Through FTA's continued work to
    improve the techniques and standards of tax administration through
    research, information exchange, intergovernmental and interstate
    coordination, and communicating interests, we look forward to ensuring
    that the federal and state governments work closely together to provide
    a superior taxpayer experience for the advancement of tax
    administration and in support of the communities we serve.

                                     ______

                  Statement Submitted by Dean Jerome McIntyre
    Chairman Wyden, Ranking Member Crapo, and Members of the Committee:

    Reaching an Internal Revenue Service customer service representative by
    calling the special telephone number for callers out of the country,
    001-267-941-1000, is seriously dysfunctional. Frequently the response
    is ``IRS not available'' or ``try your call later'' and the one time I
    got through there was a long wait.

    Please properly fund the Internal Revenue Service for effective
    customer service.

                                     ______

                       Professional Managers Association

                     700 12th St., NW, Suite 700, PMB 95968

                              Washington, DC 20005

                           e: general@promanager.org

                             w: www.ProManager.org

                                o: 202-793-6262

                                f: 888-396-6975

    March 2, 2022

    Hon. Ron Wyden                      Hon. Mike Crapo
    Chairman                            Ranking Member
    U.S. Senate                         U.S. Senate
    Committee on Finance                Committee on Finance
    219 Dirksen Senate Office Bldg.     219 Dirksen Senate Office Bldg.
    Washington, DC 20510                Washington, DC 20510

    Re: Written Comments for Feb. 17, 2022, Hearing on ``Spotlighting IRS
    Customer Service Challenges''

    Dear Chair Wyden and Ranking Member Crapo:

    On behalf of the Professional Managers Association (PMA)--the non-
    profit professional association that has, since 1981, represented
    professional managers, management officials, and non-bargaining unit
    employees at the Internal Revenue Service (IRS)--I write to provide
    additional information for your February 17, 2022, Hearing on
    ``Spotlighting IRS Customer Service Challenges.''

    Thank you for hosting this hearing. We understand many Members of
    Congress are frustrated by the high volume of constituent complaints
    regarding the IRS. Our members are also deeply frustrated by the
    problems at the IRS and genuinely wish they could be doing more for the
    taxpayers they serve. With this written testimony, PMA provides
    additional insight on issues raised by the Committee.

    1.  Funding IT Modernization in a Consistent and Stable Manner

    Technology modernization was a central concern of both the hearing
    panelists and lawmakers. We understand lawmakers' dissatisfaction with
    the current state of IRS technology and frustration that funding,
    particularly the $1 billion allocated in the American Rescue Plan Act
    (ARPA), has not yet been spent in full. As the National Taxpayer
    Advocate Erin Collins explained, this discrepancy boils down to the
    consistency of funding. Each time Congress fails to pass appropriations
    and teeters between continuing resolutions and shutdowns, the IRS must
    cautiously allocate what little funding it has to ensure it can
    continue functioning should additional funding not materialize.
    Congress's inability to pass consistent and timely appropriations makes
    long-term planning, and execution of those plans, impossible.

    For example, when Congress passed ARPA, it passed IRC Section 6428B.
    The provision says: ``$1,464,500,000 to remain available until
    September 30, 2023 for necessary expenses for the Internal Revenue
    Service for the administration of the advance payments, the provision
    of taxpayer assistance, and the furtherance of integrated, modernized,
    and secure Internal Revenue Service systems, of which up to $20,000,000
    is available for premium pay for services related to the development of
    information technology as determined by the Commissioner of the
    Internal Revenue occurring between January 1, 2020 and December 31,
    2022, and all of which shall supplement and not supplant any other
    appropriations that may be available for this purpose.''

    In prior years, the IRS had to raid its personnel budget to fund IT
    overages, and it seems likely the IRS is spending these funds
    cautiously because other modernization dollars might not materialize
    and, if they do not, the IRS will need the $1 billion for ``the
    furtherance of integrated, modernized, and secure Internal Revenue
    Service systems'' which, again, they have all the way until 2023 to
    spend. In our view, the IRS is being responsible--it spent a third or
    so in FY21, perhaps it will spend a third or so this year rather than
    raid personnel budgets and leave the balance for FY23. The IRS is not
    hiding this money in a rainy-day fund--Congress specifically authorized
    the agency to hold the money.

    PMA has urged Congress to provide dedicated, multi-year funding for IRS
    IT modernization. In the absence of such consistency and stability, the
    IRS is hamstrung from enacting its longstanding modernization plan.

    2.  Addressing the Backlog Through Surge Team Efforts

    Many members raised concerns regarding the IRS processing backlog. The
    IRS has responded by launching Inventory Surge Teams. Through this
    plan, the IRS has moved personnel who previously worked in Accounts
    Management (AM) back to AM to work on reducing the backlog.

    PMA understands the pressing need to allocate additional personnel and
    resources to AM. The surge team represents an innovative ``all-hands-
    on-deck'' approach to mitigating the backlog impacting taxpayers.
    However, the IRS's lack of engagement with relevant stakeholders raises
    serious concerns about the implementation of this plan.

    PMA was informed of the Inventory Surge Team creation a little more
    than an hour before the rest of the IRS workforce and was not provided
    an opportunity to relay questions or feedback regarding implementation.
    As the nation looks to the IRS during the 2022 Filing Season with many
    concerns and frustrations, it is imperative the IRS use every resource
    at its disposal to ensure its decisions are effective and do not create
    embarrassing situations for the Service or unforeseen consequences for
    our members or the taxpayers they serve. PMA is one of those resources.
    Unfortunately, only after issuing a letter \1\ to Commissioner Rettig
    raising concerns about the lack of forenotice and questions regarding
    the implementation of this plan, was PMA afforded a meeting with IRS
    leadership to discuss the Surge Teams.
    ---------------------------------------------------------------------------
        \1\ https://www.promanager.org/hot-topics/pma-letter-to-irs-
    commissioner-on-surge-team.

    Additionally, reports now indicate the IRS did not consult NTEU about
    this plan either. The IRS cannot conduct such a novel and unprecedented
    effort to reallocate employees in a vacuum without discussion with
    either employee or management representatives. This will not improve
    service delivery and will increase confusion and delay while sowing
    ---------------------------------------------------------------------------
    discord among the workforce.

    PMA is appreciative that, since expressing our concerns, the IRS has
    begun working with PMA to ensure the proper implementation of the Surge
    Team efforts. We raise this issue to Congress to emphasize the need for
    oversight to confirm the IRS is working with stakeholders, particularly
    stakeholders with legal agreements \2\ in place mandating a cooperative
    relationship to improve mission delivery.
    ---------------------------------------------------------------------------
        \2\ https://uploads-ssl.webflow.com/609c42731ab0dcaa4e6cfed2/
    615b6afdbdc94954affec208_PM
    A%20Agreement%20-%20signed.pdf.

    Further, we must level-set expectations. There is a sentiment that once
    the Surge Team timeline ends in September this year, the backlog issue
    will be resolved. It will not be. The situation at the IRS is dire and
    the backlog is historic. Surge Team employees can answer, on average,
    20,400 calls per day or reply to 14,400 correspondence cases per day.
    Over 6 months--if zero employees called out sick or took any leave--the
    Surge Team could answer 2.6 million total calls or answer 1.9 million
    correspondence cases. The current backlog of cases is over 9 million,
    inclusive of amended returns. Congress must prepare for the reality
    that the Surge Team, doing their absolute best, will make a dent in the
    backlog but the size of the impact may be marginal. This issue will
    ---------------------------------------------------------------------------
    exist after September 30, 2022.

    Long-term solutions aimed at restoring the capacity of the IRS are
    essential. The IRS is under-resourced and understaffed across the
    Service and shuffling personnel from one area to another will only
    exacerbate problems elsewhere in the absence of long-term investment
    and improvement.

    3.  Reforming IRS Hiring to Ensure a Competitive Workforce

    Senator Grassley and Senator Lankford rightly dedicated time in their
    questioning to addressing hiring issues at the IRS. While the
    conversation focused on direct hiring authorities, the Committee must
    realize that the issue far surpasses ``a long-drawn out hiring
    process.'' The IRS is not a competitive employer, and even with a
    direct hiring authority, if people do not want to work at the IRS, the
    IRS will have no one for whom to use this hiring authority.

    Hiring is a real and substantial challenge for the IRS, as it is in
    many areas of the federal government due to archaic and convoluted
    hiring procedures. However, the problem at the IRS is exacerbated by
    insufficient engagement with partners and stakeholders. In prior years,
    PMA's Kansas City Chapter helped attract student interns at the GS-2
    level. This year, the agency did not respond to our Chapter President's
    offers of similar support. Overall, it is not clear the IRS is using
    the full extent of tools in their toolbox to attract new talent.

    PMA also feels the IRS could offer external workshops on how to
    navigate USAJobs for candidates who may be interested. Or they could
    develop content and/or presentations that groups like the National
    Treasury Employees Union (NTEU) and PMA could use in our own outreach
    to partner organizations. Stakeholders like PMA could also attend job
    fairs on the agency's behalf.

    Unfortunately, these are palliative measures. Congress needs to
    modernize the General Schedule pay system so federal agencies can
    actually compete for talent in a modern market. ``We believe there is a
    need to consider major legislative reforms of the white-collar federal
    pay system,'' wrote the Secretary of Labor, Director of the Office of
    Personnel Management, and the Acting Director of the Office of
    Management and Budget in the December 2021 report from the President's
    Pay Agent.\3\
    ---------------------------------------------------------------------------
        \3\ https://www.opm.gov/policy-data-oversight/pay-leave/pay-
    systems/general-schedule/pay-agent-reports/2020report.pdf.

    The unemployment rates in Austin, Ogden, and Kansas City (where the
    largest IRS processing facilities are housed) are all below 3 percent.
    The IRS does not control wages and benefits so it cannot tweak them to
    be competitive in those markets. We need Congress to think about this
    seriously. Should anyone involved in the handling of tax information
    earn less than someone at an Amazon warehouse or fast-food restaurant?
    The recent change to a $15/hr. minimum wage was through an Executive
    Order--not an action taken by Congress to update the Civil Service and
    make it more competitive. Still, $15/hr. is too low for a civil
    servant. Civil servants have a mandatory retirement contribution of 4.4
    percent if hired after 2014 so already that minimum pay is reduced to
    $14.34/hr. Amazon is paying a $3,000 sign-on bonus in Austin, Ogden,
    and Kansas City and their entry-level warehouse workers can earn
    $17.80/hr. Additionally Amazon offers flexible schedules and shifts
    ---------------------------------------------------------------------------
    each week which the IRS does not.

    Further, the antiquated technology at the IRS pushes young people away
    from public service. PMA members cannot even access our association's
    website on their work devices' default web browsers because their
    devices operate on outdated technology. Finding people who can operate
    IRS technology is a challenge.

    We cannot compete with private-sector organizations using a pay system
    and technology from another era. We can barely compete with fast-food
    chains with what the IRS has to offer.

    4.  Halting Mid-Year Tax Changes to Prevent Further Delay

    Senators must realize that mid-year tax changes devastate the IRS. We
    understand the pressing need to alleviate problems for taxpayers, but
    when Congress enacts mid-year tax changes, the burden on the IRS and
    taxpayers grows.

    When Congress passed ARPA on March 11, 2021, it included a provision
    that reduced taxable unemployment compensation by $10,200 per
    individual. This was undoubtedly critical relief for many taxpayers.
    Unfortunately, many of those taxpayers already filed their returns. The
    IRS had to pivot mid-filing season, the busiest time of year, to
    reprogram its obsolete databases and retrain its personnel. As a
    result, the IRS had to amend nearly 12 million returns. The IRS still
    has about 1 million to go.

    IRS employees are not the only ones confused and overwhelmed by mid-
    year tax changes. When Congress enacts a well-intentioned retroactive,
    mid-year tax change, taxpayers and tax practitioners are confused as
    well. When Congress enacted ARPA, calls flooded IRS facilities. As most
    lawmakers know, in 2021, a human answered only 11 percent of calls to
    the IRS. But in the weeks following ARPA--in the middle of the tax
    season--a human answered barely 4 percent of calls. Everyone was
    confused. Everyone had questions. No one could provide answers. This is
    the real impact of mid-year tax changes.

    Congress must stop retroactive, mid-year tax changes. Current IRS
    infrastructure simply cannot handle them.

    5.  Reconsidering the Mission of the IRS, and Funding that Mission
                        Appropriately

    As Chairman Wyden noted, ``The monthly child tax credit payments and
    several financial relief programs has created an unprecedented
    imbalance between the IRS's workload and their resources.'' These
    financial relief programs, among other programs, have spread the IRS
    mission far past traditional tax administration. As PMA has previously
    highlighted to appropriators,\4\ the IRS has transformed from a tax
    administration agency into a benefits agency and an emergency relief
    agency.
    ---------------------------------------------------------------------------
        \4\ https://uploads-ssl.webflow.com/609c42731ab0dcaa4e6cfed2/
    61e2049e77c6d8a10a895293_P
    MA%20FY22%20Approps%20Testimony.pdf.

    This phenomenon did not originate during the pandemic. Since 1993, the
    Congressional mandates falling on the IRS, outside the traditional
    filing season and tax administration roles, have dramatically
    increased. The IRS has been called upon to manage healthcare expansions
    and alternative energy credits. During the 2008 economic crisis, the
    Congress called on the IRS to stabilize the housing market but did not
    provide tools for the IRS to independently research land deeds and
    titles resulting in widespread burden falling on taxpayers to provide
    documentation. Unlike the Department of Housing and Urban Development
    (HUD), the IRS is not equipped to interpret deed and title recording
    ---------------------------------------------------------------------------
    practices varying from county to county, or town to town.

    To administer the Individual Taxpayer Identification Number program,
    which provides Social Security-type numbers to non-citizen taxpayers,
    the IRS needed to learn how to examine foreign passports, foreign
    medical records, and foreign birth certificates, among others. Unlike
    Immigration and Customs Enforcement (ICE), IRS employees are not
    forensic examiners for foreign documents.

    To administer generous, refundable tax credits for families, the IRS
    must determine legal parentage and navigate complex custody issues.
    There is no centralized database the IRS can rely upon to independently
    verify custody. As a result, taxpayers must provide extensive
    documentation demonstrating legal custody. Because 50/50 custody
    arrangements are common in state family courts, this can become an
    absurd exercise where the IRS must ask parents for calendars marking
    each night their child slept in their home.

    Congress needs to understand how difficult it is to administer these
    types of credits and programs. Despite expanding mandates, the IRS has
    not seen a commensurate increase in funding. In 2019 the National
    Taxpayer Advocate \5\ highlighted this conflict, noting the IRS is
    neither funded nor staffed to serve as a benefits agency. This hinders
    the IRS's ability to perform critical functions such as collecting $3.5
    trillion in revenue, processing 253 million tax returns, and issuing
    $452 billion in tax refunds.
    ---------------------------------------------------------------------------
        \5\ https://www.irs.gov/newsroom/national-taxpayer-advocate-nina-
    olson-releases-comprehensive-report-intended-to-improve-eitc-
    administration-publishes-subway-map-of-taxpayers-journey-through-the-
    tax-system.

    The IRS cannot continue serving expanded, novel missions with limited
    funding and archaic infrastructure. Congress must decide the type of
    ---------------------------------------------------------------------------
    agency it wants to the IRS to be and fund that appropriately.

    The IRS is the largest revenue source for the federal government--we
    fund freedom. It must function effectively for the entire rest of the
    federal government to function effectively. At minimum, it must be able
    to serve the American people who call looking for answers. PMA
    appreciates the bipartisan interest in improving the IRS, and we hope
    we can work together to address the issues outlined above.

    Thank you for your consideration of PMA's perspective. Please contact
    PMA Washington Representative Natalia Castro
    (ncastro@shawbransford.com) if we can be of further assistance on these
    matters or provide addition insights on the issues facing the IRS.

    Sincerely,

    Chad Hooper
    Executive Director

                                     ______

                             Public Citizen et al.

                           215 Pennsylvania Ave., SE

                              Washington, DC 20003

                                 (202) 588-1000

                            https://www.citizen.org/

    U.S. Senate
    Committee on Finance
    Dirksen Senate Office Bldg., Rm. SD-219
    Washington, DC 20510-6200

    Re: ``Spotlighting IRS Customer Service Challenges'' Hearing on 02/17/
    22

    Dear Chair Wyden, Ranking Member Crapo, and honorable Committee
    Members:

    On behalf of Public Citizen's more than 500,000 members and supporters
    nationwide, we thank you for holding this hearing to shine a light on
    the difficulties facing the Internal Revenue Service (IRS) at a time
    when it has been starved for resources and is struggling to provide the
    timely customer service American taxpayers deserve.

    Attached, as a statement for the record, you will find a letter from 35
    groups dedicated to social, racial, gender, worker, and economic
    justice urging the U.S. Department of Treasury to use existing
    authority to implement changes to simplify tax filing for everyday
    Americans. The letter argues that those with uncomplicated taxes should
    have the option of return-free filing--where a taxpayer's wage and data
    is pre-filled by the IRS--since U.S. taxpayers spend an average of 11
    hours doing their taxes and often pay $200 or more for paid filing
    services. Return-free filing would not only save Americans money, it
    would free up the IRS from having to process returns that contain
    simple, avoidable mistakes made by well-meaning taxpayers. The groups
    also called on the IRS to terminate the corporate-run Free File
    partnerships, which are ripe for self-dealing and confusing for
    taxpayers to navigate. Instead, they urged a publicly run free filing
    system that could be the leading edge of the agency's efforts to
    modernize its outdated technology.

    The letter also notes our groups' call to Congress to increase IRS's
    annual appropriations and to pass the Build Back Better Act that would
    provide $80 billion for the IRS to modernize its technology, improve
    taxpayers' customer service, and strengthen enforcement against wealthy
    tax cheats and large corporations.

    The IRS has the data it needs to take away the headache of tax filing
    for Americans with simple returns and it should be building the
    technology to make tax filing free and easy for everyone. We urge this
    Committee to investigate these tax simplification reforms as you
    investigate the problem of taxpayer frustration with the agency. Thank
    you again for your focus on maximizing the customer experience at the
    IRS.

    Sincerely,

    Susan E. Harley, J.D.
    Managing Director
    Public Citizen's Congress Watch division
    sharley@citizen.org

            Thirty-Five Organizations Urge Biden Administration to
                 Simplify Tax Filing to Help Taxpaying Families

    Dear President Biden, Vice President Harris, Secretary Yellen, and
    Commissioner Rettig:

    As groups dedicated to social, racial, gender, worker, and economic
    justice, we are writing to urge you to use your existing statutory
    authority to implement reforms that would improve customer service and
    simplify the process by which Americans file their tax returns.

    As you know, the Internal Revenue Service's (IRS) budget has been
    reduced by about 20% (in real dollars) since 2010, and staff is down by
    almost a quarter over that same period.\1\ The combined effect has been
    to permit too many wealthy people to evade or aggressively avoid paying
    the taxes they owe while making it increasingly difficult for millions
    of ordinary taxpayers to reach the IRS when they need help filing their
    taxes.\2\, \3\ As a result, the current system disadvantages
    low-income individuals--disproportionately Black and Brown households
    and other households of color--who lack the resources to navigate
    unnecessarily complicated systems or spend weeks trying to get a
    resolution to their questions.\4\ We can and must better equip the IRS
    to reduce the estimated annual $600 billion tax gap in unpaid taxes,
    disproportionately owed by the wealthy,\5\ by bolstering enforcement
    while also funding top-notch customer service to facilitate the process
    of paying taxes.
    ---------------------------------------------------------------------------
        \1\ Chuck Marr, Samantha Jacoby, et al., Center on Budget and
    Policy Priorities, ``Congress Needs to Take Two Steps to Fund the IRS
    for the Short and Long Term'' (February 1, 2022), https://www.cbpp.org/
    research/federal-tax/congress-needs-to-take-two-steps-to-fund-the-irs-
    for-the-short-and-long-term.
        \2\ Russ Buettner, Susanne Craig and Mike McIntire, ``Long-
    concealed Records Show Trump's Chronic Losses and Years of Tax
    Avoidance,'' New York Times (September 27, 2020), https://
    www.nytimes.com/interactive/2020/09/27/us/donald-trump-taxes.html;
    Clare Duffy, ``Software CEO Robert Brockman charged in $2 billion tax
    evasion case,'' CNN (October 17, 2020), https://www.cnn.com/2020/10/17/
    business/robert-brockman-tax-evasion-charges/index.html; Sharon
    LaFraniere, ``Paul Manafort, Trump's Former Campaign Chairman, Guilty
    of 8 Counts,'' New York Times (August 21, 2018), https://
    www.nytimes.com/2018/08/21/us/politics/paul-manafort-trial-
    verdict.html.
        \3\ ``Backlog and severe understaffing at IRS portends delays this
    tax season: `It's a huge headache,' '' CBS News (January 31, 2022),
    https://www.cbsnews.com/news/tax-season-irs-backlog-understaffing-
    delays-refunds/.
        \4\ Kori Hale, ``Why Taxes Continue to be a Sunken Place for
    African Americans,'' Forbes (July 15, 2020), https://www.forbes.com/
    sites/korihale/2020/07/15/why-taxes-continue-to-be-a-sunken-place-for-
    african-americans/?sh=6eb21efd3752.
        \5\ The IRS's most recent estimate of the ``tax gap'' is $381
    billion annually over 2011-2013, which extrapolates to $574 billion in
    2019 assuming the same compliance rate. See Charles O. Rossotti and
    Fred L. Forman, ``Recover $1.6 Trillion, Modernize Tax Compliance and
    Assistance: The How-To,'' Tax Notes (September 29, 2020).

    That is why our organizations advocate increasing IRS's annual
    appropriations and providing the $80 billion in additional funding in
    the House-passed Build Back Better Act that would enable the IRS to
    modernize its IT systems, enhance customer service, and strengthen tax
    enforcement with an emphasis on high-income taxpayers and large
    ---------------------------------------------------------------------------
    corporations.

    But while we push for increased funding through Congress, we urge you
    to take steps now to implement simple, common-sense reforms that would
    immediately improve taxpayers' experiences interacting with the IRS. As
    taxpayers are warned to brace for significant delays this tax filing
    season, there is no excuse for failing to use your existing authority
    until Congress acts.\6\ These steps would also lay the groundwork for a
    state-of-the-art process that allows ordinary taxpayers to easily file
    and fully pay their federal taxes in the future without having to spend
    money on paid preparers or software.
    ---------------------------------------------------------------------------
        \6\ ``It's Likely to be a Frustrating Tax Season, Deputy Treasury
    Secretary Says,'' NPR (January 26, 2022), https://www.npr.org/
    transcripts/1075717058.

    First, using the powers granted to the IRS by a Republican Congress in
    the Internal Revenue Service Restructuring and Reform Act of 1998, the
    IRS can and should immediately implement the same return-free filing
    option already enjoyed by taxpayers in other countries. It is
    indefensible that ordinary American taxpayers spend an average of 11
    hours doing their taxes and often pay $200 or more for paid filing
    services \7\ when the government already has the data needed for most
    taxpayers with simple returns.
    ---------------------------------------------------------------------------
        \7\ Press Release, Sen. Warren Leads Colleagues in Reintroducing
    Legislation to Simplify and Decrease the Costs of Tax Preparation and
    Filing (April 12, 2019), https://www.warren.senate.
    gov/newsroom/press-releases/senator-warren-leads-colleagues-in-
    reintroducing-legislation-to-simplify-and-decrease-the-costs-of-tax-
    preparation-and-filing.

    Providing taxpayers with preliminary tax returns pre-populated with
    wage and other data already collected by the IRS through information
    reporting would not only reduce the burden on families who are
    struggling to make ends meet, it would reduce the errors and other
    problems that collectively add to the IRS's backlog and to the demand
    for live customer support. What better way to easily fix minor problems
    before they become major problems than providing ordinary taxpayers
    ---------------------------------------------------------------------------
    with their own data and doing the math for them?

    Second, the IRS should terminate the confusing and poorly implemented
    corporate Free File partnerships. This effort has been plagued with
    problems from the start and subject to sabotage from corporate partners
    that sought to divert taxpayers to their paid alternatives.\8\ A
    publicly run free filing system should be a cornerstone of the effort
    to modernize the IRS's antiquated technology.
    ---------------------------------------------------------------------------
        \8\ See, e.g., Rachel Sandler, ``FTC Probes Intuit Over Suspicions
    It Diverted TurboTax Users From Free Filing,'' Forbes (September 8,
    2020), https://bit.ly/3eyT1Kd.

    We recognize that Treasury and the IRS have gone to extraordinary
    lengths to meet new challenges during the COVID-19 pandemic, including
    implementing systems to dispense Economic Impact Payments and monthly
    Child Tax Credit payments and implementing non-filer portals for COVID
    relief. We also commend the Biden Administration for recent efforts
    such as creating ChildTaxCredit.gov and better publicizing free tax
    filing partnerships and tools. It is with these achievements and your
    commitment to the public in mind that we urge you to act boldly under
    your existing authority to help American taxpayers while eliminating
    ---------------------------------------------------------------------------
    unnecessary burdens on the IRS's resources.

    Sincerely,

    Americans for Tax Fairness
    Center for American Progress
    Public Citizen
    American-Arab Anti-Discrimination Committee (ADC)
    American Federation of Government Employees
    Americans for Democratic Action (ADA)
    Americans for Financial Reform
    Blue Future
    Campaign for America's Future
    Chicago Political Economy Group
    Church WORLD SERVICE
    Coalition on Human Needs
    Consumer Action
    Economic Policy Institute
    Economic Security Project Action
    Faith in Public Life
    Friends Committee on National Legislation
    ICNA Council for Social Justice
    Institute on Taxation and Economic Policy
    Jobs With Justice
    Missionary Oblates of Mary Immaculate--U.S. Province
    National Advocacy Center of the Sisters of the Good Shepherd
    National Consumer Law Center (on behalf of its low-income clients)
    Network Lobby for Catholic Social Justice
    Our Revolution
    Oxfam America
    Public Good Law Center
    Responsible Wealth
    RESULTS
    Revolving Door Project
    RootsAction.org
    Take on Wall Street
    Transparency Task Force
    Unitarian Universalists for Social Justice
    United for a Fair Economy

                                     ______

                        Letter Submitted by Amy Purcell
    U.S. Senate
    Committee on Finance
    219 Dirksen Senate Office Building

    Thursday, February 17, 2022

    To whom it may concern,

    I am writing to you as a USA citizen abroad as I am concerned about
    some issues.

    While I appreciate that USA government and IRS are focused on catching
    international tax cheats, citizen taxation causes many issues for
    citizens abroad. Citizens abroad have had to pay tax on non USA-income
    and non-USA assets. This includes capital gains tax on their home in
    their resident country as well as retirement savings. I feel this is
    unfair because these items belong to the country of residence and not
    to USA. Additionally, USA government does not provide the same services
    to citizens abroad as it does to homeland USA citizens. Accordingly,
    citizens abroad should not be required to pay tax to USA government,
    unless the tax is applied to USA sourced income.

    USA tax filing procedures from abroad are complex and not easily
    understood by an average person. It is often necessary to hire the
    services of a tax agent who specializes in the tax practice of both USA
    and the country of residence. This service is often quite a burden on
    an average person.

    FATCA has caused great difficulty to citizens abroad. Many citizens
    abroad are unable to access banking services in their country of
    residence because the banks in these countries are unwilling to fulfill
    the FATCA reporting requirements. Such banks refuse service to USA
    citizens. Since the majority of citizens abroad are not sophisticated
    tax cheats, it is worthwhile removing FATCA as the disruption and
    distress caused to these innocent people outweighs the legitimate tax
    recovered via FATCA.

    The FBAR is another problem for USA citizens abroad. I see no benefit
    to the IRS to knowing how much money we have in our bank accounts. The
    FBAR does not show how we acquired the money or how we spend it. It
    only shows the amount of money in the accounts. The penalties for a
    missed FBAR or an incorrect FBAR are outrageous. Fines start at
    USD$10,000 and may be as high as half the value of the account. This is
    unconscionable as the majority of citizens abroad are honest people who
    already report their income to their country of residence for tax
    purposes.

    Solutions such as citizen taxation, FATCA and FBAR are punitive and
    hurt innocent people. The majority of USA citizens abroad are on
    average incomes earned only in our countries of residence. Of course,
    should we relocate to USA, we would immediately start filing tax in USA
    anyway. There is no point in punishing the small people in a bid to
    trap sophisticated tax cheats.

    A large number of citizens abroad actually are dual citizens, such as
    myself. There are also people who were born in USA and moved overseas
    as children. We have no incentive to cheat USA and do not wish to have
    any trouble with IRS. We just want to live normal lives in our resident
    countries.

    I request you to please replace citizen taxation with resident-based
    taxation. Please also remove FATCA reporting and FBAR.

    Regards,

    Amy Purcell

                                     ______

                      Letter Submitted by Jeffrey Steiner
    February 18, 2022

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

    Re: ``Spotlighting IRS Customer Service Challenges''

    Dear Senate Committee on Finance:

    As a longtime American living outside the United States, I urge the
    committee and the National Taxpayer Advocate to do more to alleviate
    the filing requirements I face yearly. These include FBAR submissions
    and filing of a more and more complicated tax return.

    In my over 20 years of living outside the United States I have never
    had to pay taxes to the IRS, but I have had, and will I'm sure continue
    to pay a tax professional to help with my yearly tax returns.

    Also thanks to FATCA, I face the real possibility of having banks
    accounts closed, like many other overseas Americans. I don't see the
    point of making my life difficult when in fact as an American overseas
    I, as are all overseas American citizens, am an ambassador.

    I urge the repeal of FATCA and the implantation of a tax code based on
    residency and not citizenship.

    Sincerely,

    Jeffrey Steiner

                                     ______

                   Letter Submitted by Denise C. Yelvington
                            CPA, Sheffield Advisors
    U.S. Senate
    Committee on Finance

    National Tax Day (April 15th) has not been modified since 1955. In
    1955, the federal tax code was 929 pages. Today, the federal tax code
    is more than 6,600 pages, yet Tax Day has not changed.

    Accuracy matters. The proper calculation of tax liabilities is
    important for both Treasury and taxpayers.

    Often, individual taxpayers are receiving and gathering tax documents
    until mid-March. Tax practitioners end up with the bulk of their work
    falling into those last four weeks of tax season. The complexities of
    various COVID-19 relief programs add to the time needed to accurately
    prepare a tax return. Partnerships and S-Corporations have a tax
    deadline of March 15th so that the individual partners/shareholders
    have the information necessary to complete their individual tax returns
    by April 15th. Adding to the complexity of these business returns is
    the new requirement to include Schedules K-2 and K-3 for the 2021 tax
    year. However, at this time, the IRS website states the availability to
    electronically submit these forms will be March 20, 2022, for
    partnerships, and mid-June for S-Corporations, both of which are after
    the March 15th deadline. This necessitates filing extension requests
    for these business entities, which then impacts the ability of the
    individual partners/shareholders to timely file by April 15th.

    When an individual taxpayer files an extension request with the IRS, it
    only grants additional time to file the tax return. It does not extend
    the time to pay. Therefore, taxpayers must pay their tax liability by
    April 15th or face interest and penalties on any unpaid liability.
    Taxpayers may or may not have all of the information available to
    properly calculate their tax by the April 15th date. Taxpayers and tax
    practitioners seeking assistance from the IRS may not have their calls
    answered. Penalizing the taxpayer for making an effort to comply, but
    not perfectly covering their tax liability for the year, is an unfair
    burden to place on the American people.

    What are possible solutions? An easy solution is to allow extensions to
    not only extend the time to file but also the time to pay. Start the
    penalty assessment after the extended deadline rather than the original
    deadline. If that's not feasible, permanently move Tax Day to a later
    date, like May 15th, June 15th or July 15th. The IRS opened this tax
    season on January 24, 2022. Why not consider a tax season of February
    15th to May 15th? There are many ways to improve the tax filing season.

    Accuracy matters. We need additional time to ensure the taxpayers are
    paying the proper amount of tax without risk of penalty. As tax
    complexity increases, more taxpayers seek the assistance of a
    professional tax preparer. April 15th is no longer practical. We only
    strain the profession, the taxpayers, and an already-burdened IRS by
    retaining this deadline. Please consider some kind of permanent change.
    It is long overdue.

    I would also like the Senate Finance Committee to place priority
    consideration on Senate Bill 2936, introduced by Mr. Cassidy. This Bill
    would fix a burdensome reference in the CARES Act to Internal Revenue
    Code Section 267(c). Small business owners did not have clear guidance
    from the IRS about whether owner's wages could be included in the
    calculation of the Employee Retention Credit until August 2021, long
    after many of them had claimed the credit and received the payroll tax
    refund. Businesses are still suffering through a pandemic, and we
    cannot ask them to return money that they received while IRS guidance
    was unclear. Eliminate the reference to IRS 267(c) and allow small
    business owners the relief of having to pay back money that they have
    already used to keep their businesses afloat during the pandemic.
    Businesses that have closed or dissolved also have no way of paying
    this back to the IRS. This Bill should be passed expeditiously as it
    affects the current filing season and 2021 business tax returns. Please
    consider passing this Bill and providing relief to these business
    owners that provided a great service by keeping their employees paid
    during the COVID-19 pandemic.

    Thank you for your consideration.

    Denise C. Yelvington

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