[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
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OPENING STATEMENTS
Page
Wyden, Hon. Ron, a U.S. Senator from Oregon, chairman, Committee
on Finance..................................................... 1
Crapo, Hon. Mike, a U.S. Senator from Idaho...................... 3
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.
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\1\ The views expressed herein are solely those of the National
Taxpayer Advocate. The National Taxpayer Advocate is appointed by the
Secretary of the Treasury and reports to the Commissioner of Internal
Revenue. However, the National Taxpayer Advocate presents an
independent taxpayer perspective that does not necessarily reflect the
position of the IRS, the Treasury Department, or the Office of
Management and Budget. Congressional testimony requested from the
National Taxpayer Advocate is not submitted to the IRS, the Treasury
Department, or the Office of Management and Budget for prior approval.
However, we have provided courtesy copies of this statement to both the
IRS and the Treasury Department 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.
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\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
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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\
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\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:
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\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\
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\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
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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.
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\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:
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\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.
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\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
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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\
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\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.
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\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
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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.
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\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
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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.
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\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
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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\
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\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
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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.
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\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.
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\5\ IRS, ``IRS Operations During COVID-19: Mission-critical
functions continue,'' January 13, 2021.
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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.
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\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.
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\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\
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\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\
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\9\ Section 6651.
\10\ IRS, IRS Tax Tip 2013-58, ``Eight Facts on Late Filing and
Late Payment Penalties,'' Tip #5, April 18, 2013.
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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\
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\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
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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:
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\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:
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\14\ Taxpayer First Act Report to Congress, January 2021, page 107.
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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\
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\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
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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.
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\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.
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(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.
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\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.
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\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
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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\
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\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
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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.
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\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\
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\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
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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\
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\5\ We have been conducting our ongoing audit work since February
2021.
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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.
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\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.
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\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\
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\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.
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\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.
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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\
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\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.
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\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.
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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
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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
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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.
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\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\
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\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
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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.
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\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
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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\
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\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
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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.
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\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
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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.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
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.
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\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.
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\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\
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\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\
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\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.
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\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,
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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.
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\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
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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.
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\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
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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.
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\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
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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.
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\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
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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.
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\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
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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\
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\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-
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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\
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\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
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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
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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.
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\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
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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
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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
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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\
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\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 [email protected] or (202) 778-9223 with any
questions or for further discussion.
______
Center for Fiscal Equity
14448 Parkvale Road, Suite 6
Rockville, MD 20853
[email protected]
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.
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\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
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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.
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\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
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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:
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\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 [email protected] with any questions about the
information and recommendations provided.
Sincerely,
Candice Kerestan Rebecca Lammers
International Chair Chair, Taxation Task Force
[email protected] [email protected]
______
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\
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\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.
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\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
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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 [email protected].
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\
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\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.
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\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
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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.
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\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.
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\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
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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\
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\5\ NASBO, Fiscal Survey of the States--Fall 2021.
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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: [email protected]
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.
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\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
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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
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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\
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\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.
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\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
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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.
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\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
([email protected]) 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
[email protected]
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.
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\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
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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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