[Senate Hearing 118-782]
[From the U.S. Government Publishing Office]
S. Hrg. 118-782
THE PRESIDENT'S FISCAL YEAR 2025 IRS
BUDGET AND THE IRS 2024 FILING SEASON
=======================================================================
HEARING
before the
COMMITTEE ON FINANCE
UNITED STATES SENATE
ONE HUNDRED EIGHTEENTH CONGRESS
SECOND SESSION
__________
APRIL 16, 2024
__________
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
Printed for the use of the Committee on Finance
______
U.S. GOVERNMENT PUBLISHING OFFICE
63-325--PDF WASHINGTON : 2026
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 TIM SCOTT, South Carolina
SHERROD BROWN, Ohio BILL CASSIDY, Louisiana
MICHAEL F. BENNET, Colorado JAMES LANKFORD, Oklahoma
ROBERT P. CASEY, Jr., Pennsylvania STEVE DAINES, Montana
MARK R. WARNER, Virginia TODD YOUNG, Indiana
SHELDON WHITEHOUSE, Rhode Island JOHN BARRASSO, Wyoming
MAGGIE HASSAN, New Hampshire RON JOHNSON, Wisconsin
CATHERINE CORTEZ MASTO, Nevada THOM TILLIS, North Carolina
ELIZABETH WARREN, Massachusetts MARSHA BLACKBURN, Tennessee
Joshua Sheinkman, Staff Director
Gregg Richard, Republican Staff Director
(II)
C O N T E N T S
----------
OPENING STATEMENTS
Page
Wyden, Hon. Ron, a U.S. Senator from Oregon, chairman, Committee
on Finance..................................................... 1
Crapo, Hon. Mike, a U.S. Senator from Idaho...................... 3
ADMINISTRATION WITNESS
Werfel, Hon. Daniel I., Commissioner, Internal Revenue Service,
Washington, DC................................................. 5
ALPHABETICAL LISTING AND APPENDIX MATERIAL
Blackburn, Hon. Marsha:
Submissions for the record................................... 45
Crapo, Hon. Mike:
Opening statement............................................ 3
Prepared statement........................................... 66
Werfel, Hon. Daniel I.:
Testimony.................................................... 5
Prepared statement........................................... 67
Responses to questions from committee members................ 75
Wyden, Hon. Ron:
Opening statement............................................ 1
Prepared statement........................................... 132
Communications
Center for Fiscal Equity......................................... 135
Starkman, Jay, CPA............................................... 141
(III)
THE PRESIDENT'S FISCAL YEAR 2025 IRS
BUDGET AND THE IRS 2024 FILING SEASON
----------
TUESDAY, APRIL 16, 2024
U.S. Senate,
Committee on Finance,
Washington, DC.
The hearing was convened, pursuant to notice, at 10:36
a.m., in Room SD-215, Dirksen Senate Office Building, Hon. Ron
Wyden (chairman of the committee) presiding.
Present: Senators Cantwell, Menendez, Carper, Cardin,
Bennet, Casey, Warner, Whitehouse, Hassan, Cortez Masto,
Warren, Crapo, Grassley, Cassidy, Lankford, Young, Barrasso,
Johnson, Tillis, and Blackburn.
Also present: Democratic staff: Grace Enda, Tax Policy
Analyst; Jonathan Goldman, Senior Tax Counsel, International;
Eric LoPresti, Detailee; Joshua Sheinkman, Staff Director; and
Tiffany Smith, Deputy Staff Director and Chief Counsel.
Republican staff: Courtney Connell, Chief Tax Counsel; Michael
Gould, Tax Counsel; Gregg Richard, Staff Director; and Don
Snyder, Senior 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.
Today the committee meets to discuss the IRS budget and tax
filing season, which closed yesterday. I want to thank
Commissioner Werfel for being here at a very busy time for
everybody at the agency.
There are lots of issues to discuss, and one that certainly
is important to the American people is Direct File. Anyone who
denies that the Direct File pilot was a huge success, my guess
is, is just living in another universe. It was open to a fairly
small percentage of taxpayers, but the reviews it got from its
initial users were overwhelmingly positive.
It seems like a whole lot of people were very stunned that
a Federal agency, particularly one as frequently vilified as
the IRS, was able to build a helpful website that works. The
tens of thousands of taxpayers who used Direct File this year
collectively saved millions on fees that they would have paid
to one of the tax software giants.
The website was user-friendly. It was quick and easy to
use. It did not hassle users with upcharges for add-on services
they did not need. Direct File showed that the IRS could build
a good tool that people like because it saves Americans time
and money. No surprise then that people who oppose it are
absolutely furious, and once again are doing everything they
can to stop it from growing.
The detractors said it did not attract enough users, but
tens of thousands of new users came in over the last week. The
IRS hit its goal of 100,000 taxpayers using the system. There
is no doubt in my mind that this will be more popular every
year.
Others have said that the cost estimates were too vague.
But the fact is, there are always challenges with pilot
programs. Now that the IRS has tested this system and set a
baseline, the costs are going to be clear going forward.
Finally, there are some who said the whole project was
unnecessary. They have said that taxpayers have the option of
using ``free file'' systems through the big tax prep companies.
They may have had a valid argument years ago, before the tax
prep giants got caught hiding free file options from eligible
taxpayers. They were conning people into forking over hundreds
of dollars they did not need to spend. Congress simply cannot
go around trusting the big tax prep companies to do the right
thing. For some of them, their version of free file is the
freedom for Americans to pay them even more.
Bottom line: Direct File is long overdue, and it is the
kind of public service the Federal Government ought to be
providing to Americans whenever it can. I understand the IRS
and Treasury Department are now evaluating how the pilot
program went over the last few months. Personally, I believe
that this program should be expanded.
I am looking forward to the day when Oregonians come up to
me in one of our 51 Fred Meyer grocery stores--I have been to
every single one of them, having had a chicken in each one--to
tell me how thrilled they were to save time and money with
Direct File.
On the topic of vastly improved Federal programs, I will
turn now to the IRS's continued success in improving customer
service during the filing season. The IRS answered a million
more calls with live assistance than it did during last year's
filing season. It got call waiting times down to 3 minutes. It
saved taxpayers 1.4 million hours of time that in previous
years they would have spent basically listening to all the
music and just being on hold. It smashed its goals for in-
person service.
Despite the success, apparently there have been some
complaints from the other side of the aisle that the
administration is asking for money to sustain this progress. I
am not sure what is behind that. Maybe they want to go back to
the bad old days when taxpayers sat on hold for hours and could
not get timely refunds. It does not make any sense to me.
For the second filing season in a row, the IRS is proving
that it can provide a top-notch level of taxpayer service when
Congress gives it the resources.
Just a few words, to close, on enforcement. The IRS has
announced some major enforcement efforts in the last few
months. This includes cracking down on 125,000 cases where
wealthy individuals--many of them people who bring in more than
a million dollars a year--never even filed a tax return. Let me
repeat this. This is not people who figure out how to game the
system. They are sufficiently contemptuous of the rules that
they never even filed a tax return.
There is also a new effort to root out the abuse of tax
breaks for corporate jets--high-flying executives who take tax
write-offs for personal travel, for example.
In my view, the IRS ought to look at similar abuses with
corporate-owned yachts. When it comes to yachts, the abuses
seem to me to be even more blatant. Yachts produce big write-
offs, but I find it hard to believe that anybody is yachting to
a board meeting.
If Congress continues to cut the IRS's funding, or if the
Inflation Reduction Act funding expires and Congress does not
add more, we know exactly what will happen. Wealthy tax cheats
will have an easier time getting away with breaking the law.
And that means misery for typical Americans who are just trying
to do their civic duty when tax filing season comes around
every spring. That is an outcome that the vast majority of the
American people oppose.
Lots to discuss this morning, colleagues. I want to thank
Commissioner Werfel for joining us. I look forward to the
questions and answers.
Senator Crapo?
[The prepared statement of Chairman Wyden appears in the
appendix.]
OPENING STATEMENT OF HON. MIKE CRAPO,
A U.S. SENATOR FROM IDAHO
Senator Crapo. Thank you, Mr. Chairman. And welcome again,
Commissioner Werfel.
I agree with and appreciate the work that you are doing and
the progress that you have made. There are going to be issues
that are raised today, however. The IRS needs to be accountable
for the choices it makes, become more efficient, rigorously
plan, provide full transparency, and solicit real feedback from
informed stakeholders like Congress before acting. Despite
claims that the $80 billion in new funding would transform the
IRS into a 21st-century agency, the President's budget request
indicates otherwise.
While modest progress has been made, there are other areas
where the agency continues to miss the mark. For example, last
year I raised concerns with the IRS's strategic operating plan,
including its vagueness and missing line-item cost projections.
A year later, we are still missing important details.
Yet this year's budget asks for even more unprecedented IRS
funding, more than $104 billion. This underscores that the
initial windfall was not a cure. The IRS has not transformed,
and the President believes the only way that that vision can be
achieved is to spend more. While I support a transformed IRS,
this approach is not the solution.
For $80 billion, one would expect transformational customer
service changes and fully modern front-end and back-end IT.
Instead, it seems that taxpayers have paid for mail to actually
be opened, and a decline in the phone wait times. Meanwhile,
several million items of taxpayer correspondence remain
unanswered, and half a million ID theft cases remain
unresolved, on average, years later.
IT modernization funding is also scheduled to run out years
before the IRS finishes updating its systems. I assume that
this is due in part to the bulk of the IRA funding being
directed to enforcement. I do not disagree with the enforcement
needs that my colleague the chairman has identified.
An emblematic example of the ``just spend more, no
questions asked'' approach though is the Direct File program.
Despite there already being multiple free filing programs--I
say that again, multiple free filing programs offered by the
IRS--the agency embarked on a redundant government-run tax
preparation project complete with all the attendant
inefficiencies and conflicts of interest.
Just last week, a Government Accountability Office report
highlighted many ways the supposed pilot program has not
followed best practices, including key planning, budgeting, and
accountability failures. The report noted that while GAO could
not determine how much the program has and will cost to develop
and operate--the IRS having not provided sufficient information
to do this--the current tab far exceeds $100 million, just
through Fiscal Year 2024, for an option that might only serve
100,000 taxpayers this year.
In contrast, the Federal Government spends less than $5
million a year to have 2 to 3 million taxpayers served in one
of its free income tax preparation programs. Were the IRS to
use this year's Direct File spending to pay third-party
providers to prepare and file returns instead, literally
hundreds of times the number of taxpayers could file for free.
The IRS spending hundreds of millions of its finite funding to
simply test the utility of doing something that can already be
done more efficiently, with better outcomes and without the
very real conflicts, while simultaneously pleading for more
funding, calls for more oversight.
Direct File is not my only concern with the IRS's current
path. Other serious concerns include the continued IRS use of
biased data and post-facto metrics to plan and justify its
actions; indiscriminate IRS enforcement campaigns that pressure
honest taxpayers and waste government resources; and the IRS's
continued--and highly disproportionate--focus on increasing
enforcement over improving taxpayer services.
Commissioner Werfel, while I appreciate the positive steps
the IRS has taken during your tenure, so much remains undone at
the IRS that any victory lap is unwarranted. I look forward to
your testimony, Commissioner Werfel, and I thank you, Mr.
Chairman.
[The prepared statement of Senator Crapo appears in the
appendix.]
The Chairman. All right. Our witness today is Commissioner
Daniel I. Werfel, 50th Commissioner of the IRS. Previously he
was a managing director and partner at the Boston Consulting
Group. Before joining them, he was nominated to be the
Controller of the Office of Management and Budget, a post he
served in for 4 years before becoming Acting Commissioner of
the IRS in 2013. He began his career at the Office of
Management and Budget in 1997 as a policy analyst in the Office
of Information and Regulatory Affairs.
Commissioner, welcome. Please go ahead.
STATEMENT OF HON. DANIEL I. WERFEL, COMMISSIONER, INTERNAL
REVENUE SERVICE, WASHINGTON, DC
Commissioner Werfel. Chairman Wyden, Ranking Member Crapo,
and members of the committee, thank you for the opportunity to
testify on the filing season and the IRS budget. I am pleased
to report that the 2024 tax season opened on schedule on
January 29th, and we have seen a historic filing season unfold
since then.
Through April 6th, the IRS received more than 101.8 million
individual income tax returns and issued nearly 66.8 million
refunds for more than $201.1 billion. The Inflation Reduction
Act funding has enabled the IRS to have one of its best filing
seasons ever, in terms of customer service. Taxpayers are
seeing a difference.
We have answered over 1 million more taxpayer calls than we
did a year ago, and 3 million more calls than we did in 2022.
Wait times and level of service on our main phone lines have
improved. We have dramatically expanded service in our walk-in
sites, increasing hours and serving more taxpayers; and new and
expanded tools on irs.gov are seeing heavy use.
We had several ambitious transformation goals at the start
of filing season, and IRS employees worked hard to deliver.
Here are some examples through early April. We committed to an
85-percent level of phone service on our main taxpayer helpline
during the filing season. As of early April, we exceeded that
goal at 88 percent. That is a huge improvement from 2022, when
only 15 percent of calls could connect and receive support from
a live assistant.
We committed to an average call wait time of 5 minutes or
less on the agency's main taxpayer helpline. We exceeded that
goal, with our main line phones being answered in about 3
minutes. These are some of the examples of how we are seeing
historic improvements in taxpayer service, and the agency is
rebounding from some very tough and lean years during the past
decade.
At the same time, the Inflation Reduction Act funding has
enabled us to begin making critical inroads in addressing tax
evasion amongst the most complex and largest filers. This is a
sharp turnaround from the past decade, when we were hindered by
a lack of resources.
Our compliance work includes focusing on tax delinquencies
and nonfiling among high-income individuals, areas we are
particularly concerned about. We are also responsibly
leveraging artificial intelligence and hiring subject matter
experts to find tax evasion amongst the largest and most
complex partnerships and corporations.
I want to be clear. Despite the improvements this tax
season, the IRS still has much more work to do on many fronts.
This includes closing remaining gaps on phone service,
expanding digital options for all taxpayers, further
strengthening data security, and supporting vulnerable
populations by protecting them from scams and increasing access
to the Earned Income Tax Credit and other refundable credits.
Our ongoing success hinges on sustained investments, to
make sure that we have the right size workforce with the right
training and tools, as well as modern technology infrastructure
with increasingly modern web-enabled tools for taxpayers. These
are needed to ensure the IRS continues our transformation work
to serve the Nation today and in the future.
Helping us in these efforts is the administration's Fiscal
Year 2025 budget proposal. It gives us flexibility and
increases IRS transfer authority, so all available resources
can be used efficiently and effectively. It will also help
sustain a new IRS baseline of resources and avoid immediate
funding cliffs that will dramatically degrade our ability in
many different areas, including the service improvements that
taxpayers saw this filing season.
The 2025 funding is necessary for us to build on our
successes this filing season and continue our work to, for
example, make further phone service improvements and provide
digital tools to help taxpayers. For the IRS to be able to do
all these things, adequate annual discretionary funding and
complementary long-term mandatory funding are both essential.
Finally, I want to publicly thank taxpayers for taking the
time to file and pay their taxes this filing season. This is a
critical component that citizens do to support our great
Nation. Please know that all of us at the IRS deeply appreciate
and respect the time and care taxpayers take to do this vital
civic duty, and IRS employees remain committed to helping
taxpayers that we can.
Chairman Wyden, Ranking Member Crapo, and members of the
committee, that concludes my statement. I would be happy to
take your questions.
[The prepared statement of Commissioner Werfel appears in
the appendix.]
The Chairman. Commissioner, thank you, and we very much
appreciate your being here.
So, you have experience in both the public and the private
sector, and it seems to me that launching something like Direct
File is a little bit like starting a startup company.
Tell us, from a business perspective, how has this project
launch gone?
Commissioner Werfel. It has gone very well. I think of it
as a product launch. We are putting a new product on the
street, if you will, and our customers, in this case taxpayers,
are going to let us know if the product is working effectively,
and if they think they would like to use the product in the
future.
So, we started like any private-sector company would. We
had the idea for the product, and then we put it on the street
with volunteers. We tested it.
So, from about January 29th to March 8th, the Direct File
product was in testing with volunteer taxpayers who agreed to
submit. We got very positive reviews, but we were also able to
make real-time fixes to the product, based on taxpayer
experience.
On March 8th we were ready to go, and that is when we made
it publicly available to the millions of taxpayers in 19 States
who were eligible this year. The feedback has been great.
People are telling us that it is easy to use, it is simple. Of
course, they like the price tag. It is free, and as you
mentioned, Mr. Chairman, in the final days of the filing
season, we saw an extraordinary increase in the pace of
taxpayers filing with Direct File, and it all went very
smoothly.
The Chairman. Okay.
Let's talk about the massive fraud that we are seeing now
in the Employee Retention Tax Credit program, and as we all
know, this was a real help to lots of people during the
pandemic. But a whistleblower told me not too long ago that
there is now an avalanche of fraud. Something like 95 percent
of the claims now being made are fraudulent, choking the IRS
systems and delaying valid refunds.
Now, the bipartisan tax bill that I introduced with
Chairman Jason Smith over in the House would cut off the claims
after January 31, 2024 and give the agency new enforcement
tools.
My question to you is, if this Senate fails to take action
on this bipartisan tax agreement, it seems to me fraudulent
ERTC claims are going to continue to clog the system. That is
going to cost taxpayers billions of dollars, and it is going to
divert resources away from law-abiding taxpayers. Your
thoughts?
Commissioner Werfel. Yes. I absolutely agree, Mr. Chairman.
We issued a moratorium on September 14, 2023 because, over the
summer of 2023, we were seeing an increasing number of
questionable claims coming in, and we were worried, not just
about the financial bottom line of the U.S. Government, we were
worried about honest small businesses that we saw were being
taken advantage of by aggressive marketers and promoters,
convincing these small businesses that they were eligible for a
credit they were not truly eligible for.
And they were saying, ``You can get this credit at no risk
to you,'' and that was not true. So, it was also false
advertising. So we had to take steps to stop the flow, and we
did slow it. But even today, Mr. Chairman, we are still getting
20,000 new claims every week, even when we announced in
September that we stopped processing. This is because the law
allows these claims to be submitted through 2025, and these
promoters are out there still pushing for these claims to be
filed.
I really do appreciate the legislation that you are
sponsoring with Chairman Smith in the House that would give us
the tools. There are two things being harmed if that bill does
not get passed: one, the financial bottom line of the U.S.
Government, because you are giving us tools to crack down on
fraud; and two, in our big inventory of claims, there are still
eligible claims in the mix. But they are very hard to find. It
is like finding a needle in a haystack. So, with your help, we
can get those eligible claims found and issued, and hold back
from issuing the ineligible claims.
The Chairman. Well, I talked to Chairman Smith late last
night, and he wanted me to say we are pulling out all the stops
to get this legislation passed. If I were to go through all of
the groups, conservative groups, progressive groups, and other
groups who are for this legislation, we would still have you
here tomorrow morning at breakfast, so I am not going to do
that. But we are pulling out all the stops to get this passed.
The last question I want to ask deals with IRA funding and
customer service. The funding provided by the IRA this filing
season seems to have been a major success. The IRS cut call
wait times to 3 minutes, expanded the customer callback
service, and opened or reopened 54 sites for in-person service.
There are new digital tools, and you scanned millions of paper-
filed returns. That ought to speed up some refunds.
Commissioner, how will taxpayers notice that IRA funding
has improved service this year, A; and B, so we get this in,
what would taxpayers notice if the funding were cut?
Commissioner Werfel. Well, taxpayers I believe--and I have
heard from them--have seen and felt a big difference in the
past 2 years, and in particular this year. We are putting
Inflation Reduction Act funds to good use to serve taxpayers.
How? We now have the right number of phone assisters in our
phone center. They are trained, they are answering the phone
calls at peak efficiency. The wait time is down to 3 minutes,
and we used IRA funding to modernize our call center with
things that taxpayers want, like a callback option, and like
more chatbots and automated solutions, so you do not have to
wait on the phone if what you can get done with the IRS can be
done by pressing a button or speaking out loud.
So, these are things that taxpayers are seeing and feeling
and are making a difference. We are also using Inflation
Reduction Act funding to update irs.gov with new tools. There
are things that people can do on their individual online
accounts now, updates to Where's My Refund?
We had over 500 million hits to irs.gov this year. It is a
record for us, and we believe that is because we have updated
it with tools that taxpayers are finding useful, like for
example, being able to submit documentation to the IRS
electronically rather than on paper at the post office.
So all of that needs to be sustained, and this is what is
critical about our budget proposal. Our budget proposal is not
saying we need a lot more money to get the job done. We have
gotten, for example, the service to an extraordinarily high
level.
The money we are asking for in the out-years of the
President's budget is to sustain. We do not want to lose those
5,000 new assisters. We do not want to have to fire them or lay
them off. That means that phone calls will not get answered. So
the funding that we are asking for is making sure that we can
sustain the right size customer service workforce and the right
tools, so this new service level that we have achieved can be
sustained into the future.
The Chairman. I am over my time.
Senator Crapo?
Senator Crapo. Thank you, Mr. Chairman.
Commissioner Werfel, the first issue I want to talk with
you about is identity theft case resolution.
Commissioner Werfel. Yes.
Senator Crapo. I assume you are aware we have some
significant issues with that in Idaho. I think they are
existing all across the country. According to data provided by
your staff, on average it is currently taking the IRS almost 2
years to resolve ID theft cases flagged by taxpayers to the
IRS.
Your staff also indicates that the IRS currently has a
backlog of almost 600,000 such cases. During the time a
taxpayer awaits the IRS resolving a case, many negative
outcomes can occur, including the IRS itself taking actions
that could harm the already victimized taxpayers, such as
imposing liens or levies.
As a sign of how pervasive and troubling these cases are, I
am aware of instances where State and local governments have
reached out to Congress to assist with their own ID theft
cases. Now, I am not asking you to comment today on any
particular case, though my staff has been in touch with you and
your staff with regard to some of these.
Speaking generally to all of the cases, I am concerned--and
certain that you would agree--that taking years to identify and
resolve ID theft victims' claims and problems is unacceptable,
and that both the delinquent resolution time and the sheer
volume of the backlog needs to be improved rapidly.
Would you agree to provide me, no later than your responses
to the committee's other questions for the record, with a
report detailing the concrete steps that the IRS will hereafter
take to quickly and thoroughly resolve these unresolved ID
theft cases, as well as analysis of the reasons why there are
so many of these cases in the first place?
Commissioner Werfel. Yes, absolutely. We will commit to
that.
Senator Crapo. Well, I appreciate that. This is something
that really needs to be highly prioritized.
The next issue that I would like to go to with you is
basically the Direct File and what I see as a lack of
transparency regarding the way that it has been managed.
When you last testified before this committee, I raised
concerns with the wasteful and duplicative Direct File program,
that at the time the IRS was allegedly only studying. You
assured me then that no decision had been made on moving
forward with the Direct File.
A week later you told House Ways and Means Committee
members that you would produce a study and then you would come
back and talk about it with Congress. What happened is that,
the very same day you issued your study--which both GAO and
TIGTA have since flagged as missing key information and
analysis--you announced that the IRS was going to launch Direct
File.
Putting aside policy concerns with respect to Direct File,
my question for you is, do you believe that the IRS has
statutory authority to implement the Direct File program?
Commissioner Werfel. I do.
Senator Crapo. And what is that authority?
Commissioner Werfel. We have authorities under the Internal
Revenue Code to provide taxpayer service to taxpayers and
update the tools and solutions that taxpayers use to file. So,
we lived in a world where we had only paper forms. Then we
moved to a world where, for example, we can put a PDF form on
the web, and people can fill out that PDF form on the web. We
did not need congressional authority to do that.
We worked to develop, as you mentioned in your opening
statement, a partnership with the Free File Alliance, with
commercial software providers, to work with them and support
their efforts to support free electronic solutions. We did not
need congressional authority to do that.
And now we stand here where we are hearing from taxpayers--
not every taxpayer but some taxpayers--that they want an
additional option. They want an additional--they have paper.
They can go on a PDF file on the web. They can work with a
commercial software provider. We did not--IRS did not ask for
legislative authority. Now there is just yet another option on
the menu.
It is our assessment that we have the authority to add such
options on the menu. Maybe there is another option that is
going to come after Direct File. Again, this is about the IRS
working with taxpayers, serving their best interest, and making
sure we are giving them options to make their life less
stressful and easier as they file their taxes.
Senator Crapo. Well, I will pursue this with you more
later. I only have time for one last question, and I need to
get this question in. This is the budget request for another
$104 billion.
Commissioner Werfel. Yes.
Senator Crapo. You stated before that the IRS would have a
decade to rebuild with the $80 billion in IRS funding, and
there would be a healthy pressure to immediately take the funds
and demonstrate what a well-funded IRS means. At the time, when
many of us raised concerns about that level of funding, which
was five times or more of the budget of the IRS, it was stated,
well, we need that money to maintain these employees. Now I am
understanding that we need the $104 billion more to maintain
the employees of the IRS.
I guess in part, my question could be, when will it stop?
But my question is, now that the IRS has requested an
additional, more than eight times its annual budget for more
new mandatory multiyear spending, when is it going to end? What
is the actual amount of doubling, tripling, multiplying the
size of the IRS budget in order to accomplish whatever the
objectives are you say can't be accomplished with what has been
provided?
When will we see the end of the amount of phenomenal
multiplications of the size of the IRS in budget requests?
Commissioner Werfel. Yes, I am glad you asked the question,
Senator. I would like to take a moment just to explain our
budget as quickly and easily as I can. We have a base budget,
and then we have a modernization budget, and our base budget is
too small to serve the tax system that we have today.
Our base budget is roughly the same as it was in 2010, and
the tax system has grown in a variety of different ways: more
filers, a gig economy, more complexity, thousands of changes to
the tax code. So, as the tax system grows and our base budget
stays constant, we have to rely on the modernization funds to
close that gap.
And so, what we are asking for in the funding is to
basically create a new baseline, so, as the tax system
continues to grow, we have the right setup to run the train
schedules that are created by that tax code. It is not about
asking for more and more and more money to build an ever-
increasing IRS. It is about achieving a baseline, because what
happens in the out-years is, all the money goes away.
So, if you look at 2026, we lose all of our ability to
maintain services. If you look at 2028 and 2029, we lose all of
our ability to maintain technology, because there is a cliff.
So what you are describing as a concern is really just intended
to address the cliffs in the out-years.
And so, when taxpayers came to us this year, and we were
able to answer close to 9 out of 10 of their calls in 3
minutes' time, what the President's budget is saying is, please
make sure that the same result exists in 2026, 2027, 2028, and
2029. That is all the President's budget is asking.
Senator Crapo. So, a new baseline that is 800 percent of
the existing baseline?
Commissioner Werfel. It is not 800 percent. I would say it
is, you know, it is close--it is different in services than it
is in operations. But currently we are about $2 to $3 billion a
year off of our services baseline, as an example. And by the
way, the tax system continues to grow. So, I can show you all
the math and work with your team on that.
But I want to be clear that the increased money is really a
combination of making sure that we can provide digital tools to
taxpayers, but also just run the train schedules that we have
today, and overcome these cliffs that are coming. Thank you.
The Chairman. Okay. Senator Carper then, followed by
Senator Grassley.
Senator Carper. Yes. Thanks so much.
I think it was 14 months ago that you sat at this table,
and behind you was not your leadership team from the IRS but
your wife, your kids, your parents. I thanked them at the time
for sharing you with all of us, and just convey to them I still
feel that way, and I am encouraged by the leadership that you
are providing.
I want to say to my colleagues on both sides of the aisle,
some of us previously served as Governor. In Delaware, we do
not have an IRS. We have a Delaware Division of Revenue, which
used to provide lousy service, and we did not do a very good
job collecting taxes that were owed.
We went to work on that. We did not fix it in a year. We
did not even fix it in one term of mine, but we fixed it in 8
years. After I stepped down, the year that I stepped down as
Governor of the State of Delaware, the Delaware Division of
Revenue earned and received a quality award for service among
all the businesses and nonprofits in the State of Delaware.
The quality award is like, are you kidding? No, we are not.
We learned to provide great service. We learned to do a better
job of collecting the revenues we were owed, and we balanced
our budgets 8 years in a row, in large part because we had done
that.
And so, it can be done. It cannot be done overnight, and it
cannot be done without support. It cannot be done without
leadership. Thank you for providing that leadership.
I want to talk a little bit about Direct File, if we can.
The Direct File program we talked about already, but it is a
major step toward improving the taxpayer experience. And this
year taxpayers in, I think, 12 States could directly file with
the IRS through Direct File.
I look forward to working--we look forward to working with
you and your team to build on the success of this year's pilot,
to bring Direct File to taxpayers in all 50 States, including
the first State of Delaware.
Question: Commissioner Werfel, does the IRS plan on
continuing Direct File for next tax filing season, and do you
plan on expanding the scope of the program for the next filing
season, and if so, how?
Commissioner Werfel. Senator, as we sit here today, the
Direct File pilot is still ongoing, because Massachusetts is
one of our pilot States, and because of Patriots Day they have
until April 17th to file. So the pilot is not done yet.
Here is the plan. Once the pilot is complete, we will
gather the data--and we have already started gathering the
data--and we will report out publicly the information,
including cost. And Senator Crapo mentioned in his remarks a
cost estimate that may exceed $100 million.
I am not seeing that in some of the early data that is
coming in; not even close to that. So I am looking forward to
having a public discussion around what we saw, what the demand
was, what the performance of the product was, and what the cost
was once the pilot wraps up. We are, you know, a couple of days
away from that.
Once we can get that information out into the public space,
I would expect we are going to hear from some stakeholders, and
we are going to hear from taxpayers, and we are going to hear
from States, and we are going to hear from members of this
committee and members from House Ways and Means.
And then we will make a decision. I will consult with
Secretary Yellen, and we will make a decision about the future
of Direct File. The results have been encouraging. There was
significant demand for the product. When we released it on
March 8th to the broader public, we anticipated at that time,
based on traffic, we would see about 100,000 users by April
15th. We blasted through 100,000 on April 13th or 14th, and we
are still getting more returns in.
So, demand exceeded what we thought the day we launched the
product widely, and then in terms of costs, we are still
gathering information. But I do not see anything in the data,
early data, that points to over-exorbitant costs. But again, we
want to have that public discussion, and then we want to make a
decision as transparently as we can.
Senator Carper. Good. Thank you for that.
I am going to stick with Direct File for just another
moment, if I could. How can Congress, how can we on this side
of the dais, support the Direct File program and ensure that
more States, including my State, can participate next year?
Commissioner Werfel. Yes. I think it is about making sure
there is balanced information out there about what the ambition
of Direct File is. It is intended to be an option, not intended
to be mandatory. It is still taxpayers preparing their own
taxes. It is not the IRS preparing the taxes for you.
People can opt out of it any time they want and switch
products, and we want to hear from taxpayers in Delaware and
other States more broadly, what do they want from the IRS to
make the tax filing process as seamless and easy as possible?
How can we reduce their stress?
A lot of taxpayers are telling us a free solution to work
directly with the IRS online is one option they would like to
have. They might not use it, but they want it on the menu. We
want to hear from your citizens in Delaware what they think, so
that we can be ever more informed in how we serve taxpayers
most effectively.
Senator Carper. Good; thanks.
Mr. Chairman, when we were House members a million years
ago, and Senator Grassley was a House member as well, we used
to hold a lot of town hall meetings in our respective States.
Every year right around tax filing season, I would host up and
down the State--we only have three counties. But in every
county, we would bring in the Division of Revenue. We would
bring in the IRS.
We would help people file their taxes, prepare their taxes,
and would actually have an exercise where people in the
audience could help us balance the budget. It was really
interesting, and we would have like 50 to 100 people there.
One year we were having a hard time; I think my group was
having a hard time with citizens. We were having a hard time
balancing the budget, and we had to work on defense spending,
non-defense spending. We worked on entitlements and still could
not balance the budget in the exercise.
A lady in the back of the room raised her hand. I said,
``Yes, ma'am?'', and she said, ``We're having a hard time.
Would you have any thoughts?'' ``Well, you have not thought at
all about revenues in trying to get us to this. Revenues are
part of the solution. It is not just raising tax rates and so
on, but it is making sure that people who have an income, that
they are paying their fair share.''
The lady in the back of the room, she said, ``I don't mind
paying even more taxes. I just want to make sure that everybody
else is paying their fair share.'' And that is what we are
trying to do here. Thank you for helping with that.
The Chairman. We are going to move on, but don't think you
are really retiring. We are going to call on you for counsel.
Senator Grassley?
Senator Grassley. Yes. You know that I spend a lot of time
listening to whistleblowers throughout the bureaucracy, so let
me speak about it. I know on July 21, 2023, IRS Supervisory
Special Agent Gary Shapley emailed you, asking that you direct
senior IRS leadership to stop retaliating against him.
On May the 18th last year, IRS Special Agent Joseph Ziegler
emailed you to disclose his concerns about the IRS handling of
a case that he was working on, and I had an opportunity to talk
to him. So I know that they have asked to meet with you. What
they want to discuss with you--I assume they want to tell you
what is wrong with the handling of certain cases, and I think
you at the top of the IRS would want to listen to them.
So, I am not going to ask you a question, but I am going to
do now what I told them I would do. I was going to ask you to
meet with the two of them and just listen to them. Whether you
take action or not is up to you, but I think you ought to at
least listen to them. I think whistleblowers throughout
government are some of the most patriotic people I know, and I
would ask you to do that.
Now I want to go to my first question. The IRS
whistleblower program, which you know I was involved in getting
enacted, has brought $6 billion into the Federal Government. It
has been a pretty effective and efficient program, but we have
this problem of the average wait time for people to get their
case closed getting longer, and it is now up to 10 years. The
long average wait time is in part due to the IRS policy against
paying partial awards.
Under this policy, the IRS will wait until all the years of
claims are completed to pay anything whatsoever. Effectively,
the IRS has created barriers to pay awards on its own that are
not in the whistleblower statute passed by Congress. So you
need to examine the unnecessary policy in the IRS revenue
manual and work to allow partial awards to be paid to
whistleblowers as quickly as possible. Could you do that?
Commissioner Werfel. Senator, I am glad you asked the
question. Between the question that Senator Crapo asked on
identity theft backlogs and your question on the backlog on our
whistleblower claims, you are pointing to two very high
priorities as we move forward.
As I said in my opening statement, we have had a good
filing season, but we have a lot more work to do, and these are
two areas. I will commit to you--that is an interesting
recommendation on partial payments and the way we can
potentially accelerate how whistleblowers who are providing
such valuable information to us get their fair share of the
money that they saved for the American taxpayer.
So, we will look into that, and I will get back to you.
Also, since I did not get an opportunity, Senator Crapo, I will
get back to you on identity theft, another big priority and a
big issue that we have to do better at.
Senator Grassley. I am glad for whoever makes arrests for
people who violate the law in IRS, because this one contractor
is now serving 5 years for disclosing information. But I kind
of wonder how an activist like him who wants to be contracted,
who presumably got a job for the sole purpose of making public
information about taxpayers--in this case, I guess he was after
Trump's tax returns. How was an activist with plans to steal
taxpayer information able to get hired and gain access to
taxpayer information, and what action has the IRS taken to
ensure an active employee or a contractor is never again able
to access and share sensitive taxpayer information?
Commissioner Werfel. Thank you for the question. Protecting
taxpayer information from unauthorized access is an absolutely
solemn responsibility to the IRS. The individual you referenced
betrayed the trust of the IRS and the American people. It is a
betrayal that cannot be tolerated, and based on what played out
in court, it is not being tolerated, as this bad actor was
brought to justice and will be serving a 5-year term in prison.
From my first day on the job back in March 2023, it was a
top priority to strengthen the data security at the IRS, and we
have taken numerous steps, working with TIGTA, to make sure
that we have their to-do list, along with our to-do list: fewer
users, more robust encryption, stronger oversight, better
access logs, less removable media, tighter email controls, new
printer controls.
All of this is ongoing and being put in place, to make sure
that this type of unauthorized access by a contractor--in this
case it was a contractor--or an IRS employee, can never happen
again. There is always going to be that risk. What you try to
do is narrow the risk to as small as it possibly can be.
Insider threats and unauthorized access from insider threats--
they are impossible to get rid of completely. But I am
committed to reducing the probability to as small as it can be
by putting in the sweat equity to close all those gaps.
The Chairman. Commissioner, I am Senator Grassley's partner
in the whistleblower effort; have been for years. I very much
support the fact that you are going to make those issues about
whistleblowers that Senator Grassley mentioned a priority going
forward. I will be working with our colleague from Iowa.
Senator Bennet?
Senator Bennet. Thank you, Mr. Chairman; I appreciate it.
And, Commissioner Werfel, thank you for being here. I am
considering taking a political risk this morning, which is to
use the words ``good news'' and ``the IRS'' in the same
sentence.
But I think certainly, I really want to call out, at a
moment when there is a lack of confidence among the American
people in our governing institutions, and particularly in the
deployment of technology by government agencies--I am going
through that misery myself, as the American people are, with
the Department of Education, which has failed to do the FAFSA
form, a form that Lamar Alexander and I worked for years and
years and years to try to improve.
Now the American people are having to struggle with the
absolute disaster that that has become, in terms of
implementation. I have to say it appears to me that the IRS's
Direct File effort may be a model of government technology
implementation. That certainly has been the experience of
people in Colorado.
I know that there are around 100,000 Americans who have
used this to file their returns. I hope many more States are
going to have the chance to participate going forward. You
know, there are a lot of Coloradans who have interest in using
this tool going forward.
So, I just wonder if you could talk a little bit about how
you were able to successfully deploy this, Commissioner, and
what do you think made the Direct File effort successful that
we could learn from in other technological implementations
across the Federal Government?
And I apologize for that sounding like such a ridiculously
softball question, but it is such a rare occurrence that I
thought it was important to give you the chance to talk about
it.
Commissioner Werfel. No, and I appreciate that. Look, I am
proud of what we were able to accomplish this filing season. I
am proud of the success of the Direct File pilot. I also
acknowledge that there is a lot more work to do. As I look
across the IRS, there are areas where we can learn from the
success of Direct File and our own technology operations and
our own management success, and I am going learn from it as
well.
I think the first big decision we made was not to go too
big, and to make sure that we focused on what I will call
executional certainty. We could have tried to release Direct
File to way more States and to have way more taxpayers eligible
to use it in this first year.
But what we decided to do is, find that right first step,
where we could test the interest, the demand, the user
experience, the cost, but not try to, you know, hit a home run
at our first at-bat. So, we went out to 12 States, and based on
the way we scoped it, 19 million people were eligible. We could
have scoped it a lot bigger.
We waited until March 8th. Filing season started January
29th. We could have gotten excited and said, ``Let's release
this to everyone first day of filing season,'' to try to really
kind of drive a bigger impact. But we wanted to take weeks
working with a small number of volunteer taxpayers, to see how
their experience was, to work out any bugs. Any time you do
something for the first time, there are going to be mistakes.
So, lots of testing, lots of prioritizing, executional
success versus the big splash. I think also, we worked across
government. This was done not by IRS alone; we had a lot of
help from people at GSA, in 18F, and we had a lot of help from
the U.S. Digital Service in particular, who brought agile
technology product expertise and worked side by side in a team
room at IRS headquarters.
It was inspiring to visit that team room, see the energy
and excitement, and see different parts of the government
working together so well. But ultimately--and this is a little
geeky--it was agile technology that was the eye-opener. There
is a whole discipline about how you move more quickly to
deliver incremental functionality, how you strip through
bureaucracy and get decisions made more quickly, that you take
calculated risks more regularly.
And the IRS is no different--Federal agencies tend to not
be agile when they do technology. That is why you hear about
projects taking 5, 6, 7 years. Here, by sizing this in an
increment, an increment that had impact, we were able to be
more agile, have executional certainty, and launch something
that we can all learn from.
Where Direct File goes from here, we are not ready to
announce that. But one thing is for sure: taxpayers had a
positive experience with it, and we all learned a lot from this
experience.
The Chairman. Thank you, and I thank my colleague. And I
would just say to him, I do not think in the history of the
Finance Committee we have ever heard anyone give an eloquent
explanation of incremental functionality. So, we very much
appreciate it.
Commissioner Werfel. Had to start somewhere.
The Chairman. You did. You got the points on the board.
Senator Whitehouse?
Senator Whitehouse. Thank you very much, Mr. Chairman, and
thanks, Commissioner, for being here.
First of all, let me just echo what Senator Bennet said. I
meet pretty regularly with my Taxpayer Advocate in Rhode
Island, and she has seen her workload expedited so quickly as
the caseload that she carries to help Rhode Island constituents
has been able to move much more rapidly and successfully
through the IRS in the wake of the funding.
So you have a fan who can show real results from the work
you have done to simplify and speed things up at the IRS.
The topic I want to raise with you is one I have raised
before, and that is the problem of 501(c)(3) and 501(c)(4)
enforcement. My view is that when the Supreme Court performed
its Citizens United decision, that unleashed enormous amounts
of money into the political system and made it, for the first
time, a very significant and consequential thing to be able to
hide who the donors were.
Once you have tens of millions of dollars to donate, it is
a whole different game than if it is thousands of dollars. So
they went straight to work, and the first area was the
501(c)(4)s. I will concede that the IRS did kind of a fumble of
the way it handled that, but at the same time, the problem was
real.
And when people started looking into the abuse of
501(c)(4)s, there was a massive right-wing pushback using what
I call the ``full outrage machine,'' and the next thing you
know your predecessor was being threatened with impeachment.
His assistant was being referred to the Department of Justice
for criminal prosecution, and since then, literally billions of
dollars have flowed through 501(c)(4)s.
There are at least two areas in which there seem to be a
lot of ongoing violations. One is the planned cycling of money
through 501(c)(4)s, where you get four related 501(c)(4)s
sitting around the table, and the first one takes 50 percent of
the money and sends it to the super PAC, and the second one
takes 50 percent of the 50 percent and sends it to the super
PAC, and the third takes 50 percent of the 25 percent and sends
it to the super PAC.
By the time you are done with the fourth one, you've got
more than 90 percent of the money going straight into politics,
contrary to the rule of 50 percent, which I think was a sloppy
rule to begin with.
But taking it as a given, this is a really cheesy end-
around, and I do not see any effort at enforcing it.
The second is that now the state of the art in political
influence is a 501(c)(3) and a 501(c)(4) that are virtually
indistinguishable. And as best I can tell, there is no effort
whatsoever to pierce the corporate veil or investigate whether
a 501(c)(3) and a 501(c)(4) are legitimately staying in their
lanes when they share the same staff, the same office, the same
address, the same donors, the same boards, all of that.
So I would really urge you to take a look at this. It is
the Wild West out there, and it is a Wild West of
nonenforcement. I know that you guys took a hell of a beating,
and I know that the Obama administration did not stand up for
the organization back then.
But at some point, the sheriff has to take his boots off
the table and put them on the ground and go out and clean up
the town, and we badly need it cleaned up.
Commissioner Werfel. Senator, I want to make sure we get to
the right answers on an effective following of the appropriate
rules for 501(c)(3)s and 501(c)(4)s. Look, between Fiscal Year
2020 and 2023, the IRS worked 100 unique cases under our
political campaign intervention program. Is that enough? No.
There is more work to be done.
When I describe what the Inflation Reduction Act funding
enables us to do, it enables us to make investments to spot
complexity and to address complexity. That complexity often
happens in multinational corporations, offshore tax havens, all
of that. But there is also complexity in the tax-exempt space
as well.
The situation with tax-exempts, as you very clearly
outlined, is fraud, with risk and delicate decisions that need
to be made. Because if you--let's say there are 10 different
paths for how you move forward and enforce. Eight of them you
can step in a pothole and really mess it up.
So we have to be really, really cautious in terms of how we
scale our enforcement efforts, so there is no sense ever that
there is any politics in IRS operations, that we are doing
things above board, nonpartisan, and we are tackling this issue
in a way that is above any reproach.
Senator Whitehouse. Well, if your goal here is not to
enforce the law but to avoid reproach, then people who do not
want you to enforce the law can use strategic reproach to try
to keep you from enforcing the law.
Commissioner Werfel. Well, we want to make sure that we are
building trust with citizens. And so I am ready to roll up
sleeves and work with you on how do we build off the 100 cases
we have launched, ramp up our enforcement, but do it in a way--
look, I am ready to take criticism. That is not my concern.
The issue is just making sure that, broadly, taxpayers
believe that we are taking the right process, that we are doing
things transparently, and that they can have confidence that
there is effective oversight as well, to make sure that there
is no risk or no perception of any politics in our operations.
I am absolutely committed to that, and willing of course to
work with you on it.
Senator Whitehouse. My time is now up. Thank you, Mr.
Chairman.
The Chairman. Okay; let's see. Next would be Senator
Cassidy and then Senator Warner.
Senator Cassidy. Mr. Commissioner, thanks for coming in; I
appreciate it.
When--maybe it was the first time we met, certainly the
first hearing, I think I pulled out clippings from the Reagan
administration talking about how the IRS was modernizing their
computer systems, and they were about how it never happens.
Now, I have been looking at a lot of this, because you are
not the only agency which, I mean, never accomplished it. I
grant that there has been some success with the IRS, but I keep
on getting the sense that we are having something custom-built
for the IRS.
Now, I have done a little research, and in 1994 there was
the Federal Acquisition Streamlining Act, a law that prohibits
government from starting bloat-filled projects if an off-the-
shelf solution is available. I am quoting from the article I
found.
Now, there are off-the-shelf solutions right now to capture
fraud, to answer people during tax season. AI can do that. I
read a statistic that only 29 percent of phone calls were
actually answered in the 2023 tax season. There is off-the-
shelf stuff that can do this, with minor modification.
But if you said it has to be done within 6 weeks or 6
months, boom, they would hit it. Is the IRS doing any of that?
Commissioner Werfel. Well, yes. It is mixed. Where we see
an opportunity to use an off-the-shelf solution, we need to
seize it, and there are instances where we will use off-the-
shelf----
Senator Cassidy. Now, let me stop you. In all due respect,
when you say ``when we see it,'' by what means are you viewing?
Commissioner Werfel. Well, we have looked--we try to
understand, for example, where industry is using something
similar. Let me give you an example. So, if we have an
opportunity to use voice recognition, so when someone asks,
calls in, they can talk to a computer and say, ``Can you tell
me about my refund, how many more days until I get it?'', that
the computer understands them. They do not have to wait for a
phone call and the computer says, ``Your refund will be issued
to you in 8 days from now,'' or whatever. That is something
where we have an opportunity; why reinvent the wheel?
But when you have something that is very specifically wired
to having to accommodate the complexity of the tax system, like
someone filing an amended return--right now, the way we process
amended returns is not automated, and it is a priority for us
to automate it.
Senator Cassidy. But let me ask: have you gone to industry
and asked them if there is an off-the-shelf solution? I say
this because Operation Warp Speed was warp speed because we did
a lot of off-the-shelf stuff that people formerly thought had
to be custom designed.
When I read about AI in Ukraine or in Israel, it is kind of
not entirely off-the-shelf, but it can be adapted on the fly.
So I say that we are really good at software. So, who is making
the call that this is so specific that it cannot have an off-
the-shelf solution? Are you actually soliciting to see if there
is----
Commissioner Werfel. I agree. Look, I am in agreement with
you. I agree that off-the-shelf is the way to go, and that in
general, government agencies tend to try to customize when they
should not.
And so, I have the same guiding principle that you do, that
why modify it? You should modify your business processes to
meet the commercial off-the-shelf solution. It is a better
approach, and we can certainly be more aggressive in that
space.
I do not have--what I would like to do is come back, if you
are willing, with some inventory discussions around where we
are off-the-shelf, where we are not, and maybe we can look at
the gray area and see if we can move more to off-the-shelf.
Senator Cassidy. And can I ask you this, because my staffer
is right behind me, he is taking notes. If you said, okay,
listen, this is what we are going to talk about. We are going
to meet ideally within 3 or 4 weeks, and this is what we are
going to talk about. Give us a week just to call three or four
different big software companies and ask, could you address
this with off-the-shelf?
Because I think there are capabilities out there that you
and I are not familiar with, and that frankly a government
agency may not be familiar with, even at its best.
Commissioner Werfel. I agree.
Senator Cassidy. So, if we could have you both schedule
that
follow-up and then get a little bit of advance notice, and give
us time to kind of scout out----
Commissioner Werfel. Senator, will do.
Senator Cassidy [continuing]. That would be fantastic. I
appreciate that. Oh, this is going to make my day.
Let me give you one more thing. The IRS has decided to
delay implementing the change to the Form 1099-K reporting
threshold for transactions on third-party payment platforms
such as Venmo and PayPal. That was enacted under the American
Rescue Plan in 2021, and it moved the threshold from $20,000 to
$200 to help taxpayers transition. The IRS will keep the
$20,000 and $200 transactions threshold for 2023, and phase it
in in 2024.
So, can you discuss what the IRS's--now by the way, Senator
Brown and I, bipartisan, we put in the Red Tape Reduction Act,
that would raise the threshold to $10,000 to protect small
businesses. So, can you discuss the IRS authority to delay the
implemented laws, and can you explain how the IRS arrived at
the $5,000 threshold for Tax Year 2024?
Commissioner Werfel. Yes, I can do both. I will do it
quickly. First, we have in law a responsibility to implement
all tax laws in a way that protects taxpayers' rights, and a
set of Taxpayer Bill of Rights is written out in the law.
As a result, there have been times in IRS history where in
order to protect taxpayer rights, we have had to ramp
implementation of a law if it was going to be either overly
burdensome to them or potentially overtax them beyond what they
actually owed.
This particular law created both risks. So we felt, on
balance, in order to meet our statutory responsibility to
implement the code consistent with the Taxpayer Bill of Rights,
this was one case, and we have done it before where we have
ramped implementation of a law.
Five thousand dollars came from work with stakeholders. We
worked with the major companies that are third-party pay
platforms. They were concerned about their customers receiving
a slew of 1099s that they would not know what to do with and a
lot of confusion about how you would, for example, calculate a
basis of some kind of good that you sold on one of these
platforms.
So many questions came in, and we asked them a lot of
questions like, what is the right way to ramp this, consistent
with protecting taxpayers from confusion, burden, and being
overtaxed? They said, ``Give us time,'' and they helped
identify $5,000 as a threshold that would allow them to deal
with a smaller number of transactions and customers, but yet
get a lot of receipts back to the U.S. Government.
The Chairman. As important as the Cassidy issue is, we have
to move on.
The next three will be Warner, Lankford, and Johnson.
Senator Warner. Well, thank you. Thank you, Mr. Chairman.
I wanted to quickly add, if you are going to get Senator
Cassidy this information about not recreating the whole ball of
wax on software programs and updates on computers, I would like
to see it as well. I 100-percent agree with Bill, you know.
It just seems we always have to customize everything in
government and usually end up with products that are frankly
not as good as off-the-shelf. I would also add, while there are
enormous challenges around AI, in this area there is a great
deal of upside. So I hope whatever information you get to
Senator Cassidy, you get to me as well.
I am a little surprised--and, Commissioner, it is great to
see you. Thank you for--I remember when you first got nominated
for this and, you know, was this really the way you wanted to
spend this part of your life? I am glad you are; I am glad you
are doing it. I think you are getting results.
I am a little surprised that we have gone through a number
of questions and you have not been asked what I would have
thought would have been one of the first questions, because
even some of my Republican colleagues who do not like all the
money going to IRS, I think most of them would agree that
better enforcement will help grapple with the tax gap. And the
most recent estimate on the tax gap for 2021, I think, put it
at about $688 billion.
So we would not have to raise taxes if we could have that
full payment. There have been some estimates that we could
actually get a savings with the investments we have been making
of $800 billion over a 10-year span, by 2034.
There has been some testimony that, while you and the
Treasury Secretary indicated you are looking at high-net-worth
individuals in terms of enforcement, I think there is some
reference said that there is upwards of $500,000 in additional
revenue from each investigation you garner.
Can you give us some sense--for those of us who pushed this
kind of record investment in the IRA in your organization--what
do we look like in terms of how we are making progress in
closing this tax gap, and what kind of metrics on a regular
basis could we see?
Commissioner Werfel. Yes. Thank you for the question.
First, I would start by saying that the first gap that we have
been able to close is the services gap, and we put the
Inflation Reduction Act money to use to make sure that we had
the right number of people on the phone----
Senator Warner. Yes, and we have gone from 30-minute waits
to 3-minute waits.
Commissioner Werfel. Yes, exactly; so that is first.
Second, we have made a commitment to use Inflation
Reduction Act funds and enforcement exclusively on large,
complex, high-wealth filers, and we are just getting started.
We have announced initiatives for wealthy individuals who
have not filed, about 125,000 of them. We have announced
initiatives to collect delinquencies from millionaires and
billionaires who owe back taxes. We have announced efforts to
crack down on something called transfer pricing, where
multinational corporations shield profit and income in the U.S.
and move it to a different tax jurisdiction.
We have announced efforts on cracking down on the largest
and most complex partnerships, who are particularly
sophisticated at times in shielding their income, and using AI
to spot that complexity. We believe that the efforts that we
are undertaking under the Inflation Reduction Act, when they
are all totaled--and we issued a report on this a few months
ago--could result in nearly $700 billion in return. And we
are----
Senator Warner. And that $700 billion is over 10 years?
Commissioner Werfel. Yes, yes. We were debating earlier the
President's 2025 budget, and concerns were raised about the
$104 billion that we have asked for in the out-years, starting
in 2026 and beyond. I described needing that money to make sure
that we are sustaining what we are able to achieve this year
and beyond, as the tax system and the economy continue to grow
in complexity.
That $104 billion that we are asking for would also return
about $341 billion over 10 years in additional revenue.
Senator Warner. Beyond the $700 billion that you have
already mentioned?
Commissioner Werfel. No, that would be included in it. That
is why it is so important. That is why it is such an
interesting debate on IRS funding, because there are two things
at play. One, it is making sure that we can help taxpayers who
need it. Taxpayers have questions. Filing your taxes can be
stressful. The tax system is complicated, and it is
heartbreaking to us as IRS employees if we cannot answer the
call.
So having enough funding to be able to have the right staff
size and the right customer service, but also, it is absolutely
essential to the government's bottom line that the IRS is
closing that tax tap and collecting those balances due.
Senator Warner. I agree.
Let me just quickly, because I know that my time is running
out. One area where I still get a lot of concerns with this
improved customer service is, families who have a loved one who
has died, how you deal with the deceased processing. Are there
some plans on how we can improve that part of the service?
Commissioner Werfel. Yes. There are a couple of different
areas where we hear from taxpayers that it is complicated and
they are not getting direct and clear service. Identity theft
victims--we have done a fairly good job preventing identity
theft, working with partners.
But on the back end, once you have unfortunately been
victimized, we are too slow, and we need to get quicker. And
you raise another question in terms of families that are
dealing with deceased relatives and resolving--it gets
confusing.
Senator Warner. I hope you can come back----
Commissioner Werfel. Yes, absolutely.
Senator Warner. Our time is up, but I hope you will come
back with a plan on how you are going to improve that service.
Commissioner Werfel. We will.
Senator Warner. That is one of the areas we still have a
lot of concerns about.
Commissioner Werfel. We will.
The Chairman. Thank you, Senator Warner.
Senator Lankford?
Senator Lankford. Mr. Chairman, thank you. Good to see you
again. Thanks for the work you continue to do. It is an
incredibly difficult job, and obviously this week, with all of
the filings and everything else that goes on, I appreciate you
being here on this.
Senator Cassidy was just asking about the Venmo
requirements that my Democratic colleagues added in the
Inflation Reduction Act, that there would be additional new
reporting on people that actually use Venmo, and that there
would be new filing requirements and such that would come from
that.
You expressed that there is a flexibility of that
interpretation, based on other statutes on this. This is part
of the challenge that we are dealing with right now, is the
flexibility side of things, and trying to determine what is
something that can be counted on and how that is actually
interpreted and where it goes.
Sitting at that exact same table just a few weeks ago was a
business leader from the Huntsman Corporation, who was talking
about how they were doing some chemical manufacturing for EV
batteries, but for the tax credit piece, the 30D clean vehicle
tax credit, the Foreign Entity of Concern restriction that was
out there dealing with that was waived for China by Treasury
and by IRS, so that that company that was an American company
no longer was competitive, because the Chinese company was now
competitive, even though the statute itself says that that is
not allowed.
There was a waiver that was given to a Chinese company that
directly undercut an American company on that. So the
predictability of this becomes a big issue. Where I am headed
on this is, this administration took out what is called the
OIRA review for the IRS for new regulations.
Obviously, the previous administration had an additional
review. This administration took that out. My question is, why
is it a bad thing for the IRS to be able to have OIRA review
for regulations they are putting in, when you have expressed
the flexibility that you have to be able to do that, but every
other entity needs to have OIRA review, to be able to have some
kind of review under the Administrative Procedures Act?
Commissioner Werfel. That is a great question. Ironically,
I started my career at the Office of Information and Regulatory
Affairs at OMB, and I am a big proponent of notice and comment
rulemaking. I am always telling my team, if there is an
opportunity for us to go out for public comment, whether
through formal channels like the Administrative Procedures Act
or any way, so that we can telegraph where we are going, so
much the better.
Going back to the 1099-K, that is what we tried to do in
terms of having public meetings and open forums and webinars,
to try to hear the concerns and reconcile them, and to make
sure that we were accessible. I know that we continue to do
notice and comment rulemaking. I know that, for example, on the
recent regulations on cryptocurrency, we got 40,000 comments on
it, and so we continue to have that process.
I will have to get back to you on kind of the nuances of
how we continue to work with OMB and OIRA. It is a different
path than other agencies, but it is not a no path. We continue
to feel accountable, to make sure that we are leveraging notice
and comment as often as we can.
Senator Lankford. What I do not want to have is, when we do
not want to go through review, we do not have to; when we do
want to go through review, we do. I do not want to have a
situation like that, because then it is unpredictable again,
and we are back again to the flexibility issues.
This committee has talked about this often dealing with the
Pillar 1/Pillar 2 conversation that is out there. Pillar 2 is
expected to be able to take away about $120 billion from
American taxpayers. The Finance Committee in particular has
asked the Treasury to say, ``Are you really going to go around
this committee and cut out $120 billion,'' and we are still
getting this push and pull back and forth with Treasury on it.
So we are interested in what is predictable and what is
consistent.
If I could move on to a couple of other quick things on it.
One is, as you and I have talked about before, I have worked a
lot on charitable giving. This is an issue I think is important
that we incentivize as American in our tax code. It is
something that will come up in our conversation next year when
we are dealing with a lot of tax policy issues. But it is an
area where we do need to get some insight from the IRS on what
has happened in charitable giving.
It is our understanding that after we stopped incentivizing
charitable giving through our tax code, we had a dramatic drop
in charitable giving across the country, which hurts our
nonprofits, which hurts that big safety net. We want to be able
to get more information from you on that. We will follow up on
that in the days ahead.
We are also working a lot on the Tax Cuts and Jobs Act.
Obviously, that is coming up next year for bonus depreciation.
We are in a lot of debate right now on it. But it was
interesting to me on this that we have seen such conservative
bastions as Harvard, Princeton, University of Chicago recently
put out a study saying that based on some of the business tax
pieces, that there was a 20-percent increase in investment, and
also an increase in taxes that are actually coming in.
My question is, there is this conversation that is
happening out there about trying to raise business taxes again.
Based on this study that I am sure you have seen and others
that are out there, are we continuing to see more investment in
business now than what we saw years ago?
Commissioner Werfel. Senator, that is a question that I
need to get back to you on, in particular because it is more in
the domain of Treasury and tax policy, and I do not want to get
out in front of them. But I will coordinate with my Treasury
colleagues and get back to you on the answer to that question.
Senator Lankford. Okay; thank you.
The Chairman. The time of the gentleman has expired.
We are just going to keep going, because I know the
Commissioner has got a schedule. Senator Cardin is going to
help. I am going to run and go vote, but we will just keep
going. Next will be, in order of appearance, Senator Johnson,
Senator Hassan, and Senator Tillis. But we will just keep
going.
Senator Johnson, you are next. Senator Cardin will act as
chair, and I will be right back.
Senator Johnson. Thank you, Mr. Chairman.
Mr. Commissioner, Senator Grassley asked you to meet with
whistleblowers Shapley and Ziegler. I do not think he asked for
a commitment, so I will ask you to commit. Will you commit to
meeting with those two whistleblowers?
Commissioner Werfel. Senator, what I commit to is relying
on the Inspector General to run the process, to make sure that
the rights of those whistleblowers are protected. So, I will
consult. I am not going to jump in front of the Inspector
General.
Senator Johnson. Okay, so your answer is ``no.''
Last year at this hearing, there were some pretty bizarre
things going on that seem like a politically motivated
unannounced home visit. We wrote you about that. You claimed
section 6103, which I understand.
But since then, we have also seen IRS agents using a fake
alias, deceptive tactics to enter someone's home. We have seen
the IRS attorney backdating documents. My question is, have you
investigated these situations? Has anybody been held
accountable?
I know you ended unannounced home visits by and large, but
have you investigated these? Has anybody been held accountable,
anybody disciplined for these bizarre actions?
Commissioner Werfel. Yes. In any situation where the IRS
makes a mistake or acts inappropriately, or an IRS employee, we
have to acknowledge it, and we did in the cases that you are
describing. We have to then fix the issue, fix the process,
train, put in new controls, and then, as you mentioned, take
appropriate personnel actions.
I have instructed the team in all of these cases to do all
of those things.
Senator Johnson. Okay; good. I appreciate that.
In your testimony, you said ``as the tax system continues
to grow.'' You obviously mentioned the fact that our economy is
growing. We have more taxpayers, I understand that. But you
also mentioned complexity. Later on, you said ``the tax system
is complex.''
Commissioner Werfel. Yes.
Senator Johnson. You know, I have noticed, certainly in the
Inflation Reduction Act, the solution was not to address
complexity, but it was to throw more money at the problem. You
know, from my standpoint I think we could do so much to help
solve so many problems if we would address the complexity and
try to start simplifying the tax system.
So that is my first question: is that something the IRS,
this team, looks at in terms of a project of what would be the
best way; what would be the most effective simplifications we
could direct toward the tax system?
I will also ask you, is it more complexity on the
individual side versus the business side? I mean, can you give
me some sort of feel----
Commissioner Werfel. Yes. It is definitely more complex on
the business side.
Senator Johnson. So let me just stop you right there.
Commissioner Werfel. Yes, please.
Senator Johnson. What is interesting about that is, you
know, business taxes, C corps, were about 16 percent last year
of total revenue. If that is all of the complexity--now again,
I do not have the numbers of pass-throughs as it relates to the
individual.
But we do not raise anywhere near the amount of revenue if
that is the more complex side. So that is just begging for
simplification, right?
Commissioner Werfel. Yes. Well, we always advocate where we
can, for the ability to administer the tax code effectively,
and any time we look at a set of laws and in reality, what is
going on out there in the economy, we are always going to say,
here is where we can administer more easily versus not.
Ultimately, it is up to this committee, working with Ways
and Means and my leadership over at the Treasury Department, to
decide how to change those laws. But yes, the complexity--it is
not just the complexity in the tax laws, but that feeds
different types of corporate and large partnership behavior. We
are seeing really, really more complicated arrangements, the
movement of money across international jurisdictions, movement
of subsidiaries. Very complicated processes----
Senator Johnson. And when I am talking about all the
problems being solved by simplifying the tax code, again, not
economic behavior driven by a complex tax system. So again, I
am also interested in the off-the-shelf solutions. Let me kind
of let the entire committee know that.
But again, I would really encourage the IRS, with your
expertise in terms of what you are having to deal with in terms
of complexity, to report back to this committee, here is the
low-hanging fruit. This could really help us out a lot if we
could simplify this without really impacting revenue, okay?
Again, I think we could do so much in terms of closing the
tax gap. Well, part of the tax gap is just complexity and
people avoiding taxes, not necessarily evading them. But again,
if you make the tax code complex, it is easier; there is a lot,
a lot more avoidance. So again, I would--is that something you
have done? Is that something you could take a look at?
Commissioner Werfel. We generally do it on a case-by-case
basis, like earlier in discussion with Chairman Wyden on the
ERC, the law associated with the Employee Retention Credit. The
fact that you can still file for an ERC into 2025, when the
period of eligibility was between 2020 and 2021, that creates a
lot of extra work for the IRS and a lot of extra complexity
that drives our costs up, and this is why we need more funding.
So, yes, on a case-by-case, on an inventory basis, like you
are describing, I think it is a great question, and I will go
back and talk to the team about that.
Senator Johnson. I would appreciate it, because if you can
find the low-hanging fruit that is just completely nonpartisan,
say, ``This is so obvious, fix this,'' I would like to think
this committee and this Congress could fix it for you.
Thank you.
Senator Cardin [presiding]. Senator Hassan is recognized.
Senator Hassan. Well, thank you very much, Senator Cardin,
and I want to thank you and Chair Wyden and Ranking Member
Crapo for this hearing. Commissioner, thank you for being here,
and thank the people you work with for all their fine work as
well.
At the IRS, modern IT systems are critical for improving
services provided to taxpayers. In past years, I have heard
again and again from my constituents about delays with getting
their refunds and other taxpayer services. IT issues have
obviously contributed to these delays.
For example, IRS's difficulty in processing paper tax
returns has led to significant issues for taxpayers, an issue I
know that IRS is taking steps to address. What are you doing
going forward to modernize IRS's IT systems so that families do
not experience delays in getting their refunds and other
taxpayer services?
Commissioner Werfel. Well, on this, I have some good news,
which is the main system at the IRS that is the engine for all
individual returns is on the cusp of finally being turned into
a modern solution. That is coming after this filing season. We
will have more on that.
What we will be able to describe to you and the American
people and your constituents is how that will impact them, with
more real-time information, faster processing. So there is some
good news coming on our technology modernization effort, in
particular how it impacts individuals and families.
Senator Hassan. That is terrific. Thank you, and I look
forward to hearing more about that. It is something that we
hear about literally daily in our constituent service team.
Different topic: cyber-criminals often quickly convert
stolen funds into cryptocurrency, making it nearly impossible
for law enforcement to recover the funds. This happened to the
town of Peterborough, NH in 2021, when criminals stole $2.3
million and then converted it to cryptocurrency.
Following this cyberattack, I pressed your predecessor,
Commissioner Rettig, on how the IRS can help combat this kind
of cybercrime. He sent me a letter recommending stronger ``know
your customer'' requirements for cryptocurrency exchanges.
Commissioner, in your view, how could strengthening these
requirements help recover stolen funds after a cyberattack?
Commissioner Werfel. Yes. I agree that there is a chain of
events that occurs, and people along that chain of events need
to know what is going on. Outside of crypto, for example,
suspicious activity reports by financial institutions or
brokers are a critical unlock for law enforcement to understand
where these activities are.
That is not mature yet in the crypto space and with the
crypto brokerages. So I completely agree, that is a place to
focus.
Senator Hassan. Okay; thank you.
And last question: last year I led a bipartisan push with
Senators Wyden, Grassley, and Lankford for the IRS to address
possible tax scams fueled by artificial intelligence. One
concern that we raised is that scammers can target seniors and
small businesses with convincing AI-generated emails that claim
to be from the IRS.
What trends in possible AI-generated tax scams has the IRS
seen so far this filing season?
Commissioner Werfel. Well, first of all, we have seen an
increase across the board, and our private-sector partners, tax
preparers, are also reporting an increase. There is a lot of
IRS impersonation, a lot of very sophisticated behavioral
science to understand what, for example, will convince an
elderly person to pull out their credit card and pay a fake tax
debt.
We have to solve this through a combination of things.
Awareness campaigns can help. One thing, Senator--I
participated in an international tax summit, asked my fellow
commissioners around the world this same question. One of the
big fixes that is out there that has helped is putting into an
individual's online tax account the basic flag of whether the
IRS or the tax authority is trying to reach you.
Some of our peer nations have really disrupted AI
impersonation by encouraging their citizenry to come to their
tax account and see whether it is us that is really trying to
reach you. We have plans for next filing season to include such
a flag in people's online accounts.
Senator Hassan. Okay. That is very helpful, because in
response to our letter--I think this is along the same lines--
you said that the IRS was adding online tools that would allow
taxpayers to verify that.
Commissioner Werfel. Yes.
Senator Hassan. So this is what you are really talking
about.
Commissioner Werfel. Yes, but we also have to educate
people. They have to sign up for their online accounts and not
panic when someone calls claiming to be the IRS.
Senator Hassan. Okay. And so, where is the IRS in getting
these online tools up and running to protect taxpayers against
these scams?
Commissioner Werfel. This is a big priority for next filing
season. It is a combination of that flagging, but also kind of
a one-stop shop for taxpayers, all the notices that you may
have gotten. Many taxpayers will have none.
Senator Hassan. Yes.
Commissioner Werfel. I mean, this is what is really
interesting. It is like you get a text, you get an email, you
get a phone call, and your neighbors got the same one, your
work colleagues. The vast, vast majority of taxpayers are not
going to hear from us, so it is really about educating.
But we are working to make sure that by next filing season,
we have these tools in place. In the meantime, we are doubling
down on awareness campaigns.
Senator Hassan. Thank you very much.
Thank you, Mr. Chairman.
Senator Cardin. Senator Tillis is recognized.
Senator Tillis. Thank you, Mr. Chairman. Commissioner
Werfel, would you introduce the lady who is sitting behind you,
who has been working for the IRS for 53 years?
Commissioner Werfel. Diane Grant.
Senator Tillis. Thank you for your decades of service. And
she is also from Tennessee, Senator Blackburn. I think we
mentioned that earlier.
Commissioner Werfel, quickly--I do not expect you to have
an answer for it. If you do, it would not surprise me, but I
would not expect it. Can you give me to date the fully burdened
cost of the free filing system implementation?
Commissioner Werfel. I would not want to do that, Senator,
only because the pilot is still running as I am sitting here.
So, it would be premature, but within days, by the end of
April----
Senator Tillis. I also--I do not want just the IRS internal
cost. I want fully burdened----
Commissioner Werfel. Understood, yes.
Senator Tillis [continuing]. Other actors, so that we
really understand the nature of the investment.
A quick question on that as the pilot is moving forward. I
think that you all are implementing an API that automatically
loads AGI, adjusted gross income, something the industry and
something the Free Alliance asked for for years.
What is the posture of the agency in providing that API to
authenticated third parties?
Commissioner Werfel. I will look into that. I mean, we were
talking to taxpayers who are using the Direct File solution,
and there was some confusion around how to get to your AGI
amount, which is a key moment in your tax filing process, from
the previous year. Absolutely willing to talk.
Those partners, our partners who provide the commercial
software, we work very closely with them.
Senator Tillis. Yes, I agree; they are great.
Commissioner Werfel. Yes. They are terrific.
Senator Tillis. If it is a tool that is going to be
available for free filing, we can deal with whatever privacy
security concerns that there may be. But it does not seem fair
or appropriate to have that additional step.
Commissioner Werfel. We will look into it, sir.
Senator Tillis. I for one hope that this pilot, this thing
you are working on right now, at some point you just decide it
is not worth it, because the private-sector options are so much
better. It becomes a distraction. That is my personal bias. I
know you are--I cannot believe----
I was trying to figure out a way that I could ask this
question that would not get you in hot water. But I admire your
background, that is why I supported your confirmation, and so
far, I am happy with what I have seen. But I just cannot
imagine a project of this scale, if you were coming in and
trying to fix all the things that need to be addressed or
modernized in the IRS, that you would have been pounding the
table saying, ``This has to be one of my top five initiatives
in my tenure.''
I mean, can you at least stipulate that while this may be
nice, it is not one of the most important things that the IRS
should be dealing with right now?
Commissioner Werfel. It is such a difficult question to
answer, because there is so much that goes into it. I will say
that as we try to hear from taxpayers--and it is not an exact
science, right, in terms of what you are hearing from different
constituents--there are loud voices out there who want this----
Senator Tillis. Again, I am not going to get you in hot
water, but it just defies logic. I worked in the consulting
profession for years, implemented a lot of financial system
platforms. I never went into a client and said, ``You know
what? We should just build it from the ground up. We should do
this differently.''
So what is disturbing to me, or disappointing to me, is
that I have not seen a fully executed strategy on exhausting
all the possibilities for free filing, for for-pay filing, for
being able to file for free on some of the for-pay platforms.
It just seems to me that we could have found another way to
fix the problem. And so, instead of just using a fly swatter to
address some of the problems that some of the IRS filers were
having, we decided to create a thermonuclear detonation device
to do the same thing.
Commissioner Werfel. Can I share with you----
Senator Tillis. It's like a $100 saddle on a $10 horse.
Commissioner Werfel. I will share with you, one benefit
from all of this is that we saw a substantial increase in the
number of people who filed for free electronically across all
platforms this year.
Senator Tillis. Sure.
Commissioner Werfel. Two million more people filed
electronically for free.
Senator Tillis. I agree, and so----
Commissioner Werfel [continuing]. Because there was so much
attention on it.
Senator Tillis. And so, to follow up, if we had spent just
a fraction of the money on this platform that we are putting in
place, that we are going to have to care and feed and then
modernize 10 years from now, and so on and so forth. it just
seems like there would have been a better way to achieve the
goal. If the goal was to provide cost-effective or no-cost
filing options, there were other options out there. So I know
you are doing your job.
Tax gap: you know, I hear people--and I am just going to
make a comment and not even ask you to respond. I think your
goal right now, if you are a successful IRS Commissioner, you
are going to succeed in not having the tax gap grow. You are
not going to dramatically reduce the tax gap, because we can
get into a variety of reasons why it exists, at the high end of
the spectrum or the low end of the spectrum.
But is it fair to say that those of us up here who may see,
I don't know, let us say $500 billion, whatever the latest
number is, of uncollected taxes----
Commissioner Werfel. Six hundred sixteen billion.
Senator Tillis. Is it fair to say that people up here who
think that is a smoking good pay-for are probably not being
realistic about your ability to just zero out that tax gap?
Commissioner Werfel. It is a difficult enterprise to
undertake. If you will notice, when we----
Senator Tillis. Okay. I will go ahead and roll, because I
want to be respectful of other folks' time. But I want to get
back with you on progress with the tax gap. Thank you.
The Chairman. I thank my colleague, and it is an important
issue.
The next two in order will be Senators Warren and
Blackburn, and I have just got to tell colleagues that we have
to keep everybody to 5 minutes at this point. We are just never
going to get done.
Senator Warren?
Senator Warren. Thank you, Mr. Chairman.
So, it was not long ago that the one-two punch of the
pandemic and nearly 20 years of underfunding brought the IRS to
its knees. We all remember the phones that were not answered,
the stacks of unprocessed returns sitting in boxes.
But Democrats secured billions of dollars in long-term
funding for the IRS so that you could do your jobs, and the
turnaround has been truly remarkable. Yesterday was the tax
filing deadline, and I want to congratulate you, Commissioner
Werfel, and all of the hardworking folks at the IRS for a
smooth tax filing season.
So this year, the IRS launched a pilot program called
Direct File, a first-of-its-kind option for Americans in 12
States, to be able to file their taxes online directly with the
IRS. It is easy, and it is free. And that means, instead of the
$150 on average and 9 hours that taxpayers typically spend for
the privilege of filing their taxes, they can do it for free
with the IRS.
So, Commissioner Werfel, I am sure your team is still going
through all of the data from the filing season. But what is the
feedback that you have seen so far on Direct File?
Commissioner Werfel. It has been tremendously positive. The
results of the pilot have been super-encouraging for a couple
of different reasons. One, the product worked. Second, our
partnership with the States like Massachusetts, the State's
product that we handed it off to--because once you do your
Federal taxes on Direct File, if you have a State income tax,
then you have to do the handshake like we did with the State of
Massachusetts and the State of New York and others--that worked
as well.
Taxpayers told us in almost, almost unanimity that it was
easy to use, fast, secure, and of course free, which was the
bottom line that people wanted to emphasize. So very, very
encouraging results. But as we sit here--and you know this
better than anyone--Massachusetts is still filing, and the
pilot is not done.
I know there are a lot of people who want to know, okay,
what was the cost, what are the final numbers?
Senator Warren. So we are not there yet.
Commissioner Werfel. We are days away.
Senator Warren. I just want to--that's right, days away.
But I do want to start with the fact that Direct File is
getting five star reviews, I take it.
Commissioner Werfel. It is.
Senator Warren. So, taxpayers are raving. The phrase I have
heard is ``so darn easy'' that they filed on their lunch break.
And best of all, as you say, they did not have to worry about
fees, did not worry about ads, did not have to worry about
upsells, the way that giant tax prep companies like TurboTax
make their profits.
So of course, these tax prep companies are kicking and
screaming and trying to shut the program down, and their
lobbyist friends claim that it is somehow illegal for the IRS
to provide a 21st-
century online tax form. This argument is laughable. The IRS,
like every other government agency, is supposed to modernize
and upgrade services over time.
But let us dig in a little more. Commissioner Werfel,
decades ago the IRS mailed out tax filing forms, and the post
office stocked the paper forms, and that was it. But in 1986,
the IRS piloted electronic filing. Back then, that meant
plugging phones into modems, transferring data by tapes. It was
real cutting-edge stuff in 1986.
To your knowledge, did anyone suggest that the IRS did not
have legal authority to do that?
Commissioner Werfel. No.
Senator Warren. All right. Decades ago, a tax refund was a
paper check. But in 1987, the IRS expanded the pilot and added
electronic direct deposit, to put refunds directly into
people's bank accounts. Did anyone, to your knowledge, say that
the IRS could not do that because direct deposit was not
specifically referenced in the statute?
Commissioner Werfel. No.
Senator Warren. And in 2008, the IRS created PDF forms that
taxpayers online could fill out and file electronically. Did
anyone suggest that service was somehow beyond the reach of the
IRS?
Commissioner Werfel. No.
Senator Warren. You know, there was a time when the only
way to ask the IRS a question was to mail them a letter or to
show up in person. But at some point, the IRS started using the
phone, and then email and, whoa, be still my beating heart, the
IRS now uses texts.
In other words, the IRS is doing what all of government
should be doing: modernizing and making it work better for
ordinary people. There is a big return on the investment here.
The Economic Security Project studied the full costs and
benefits of a full-fledged Direct File program and determined
that nationwide, Direct File will save taxpayers $23 billion a
year, including tax prep fees that they will not have to pay
and tax refunds that people currently miss out on.
I did the math. That is about $100 to individual taxpayers
for every $1 invested in Direct File. It is a great investment.
Thank you for the program.
Thank you, Mr. Chairman.
The Chairman. As much as I agree with the Senator from
Massachusetts, we have to move on.
Senator Blackburn?
Senator Blackburn. Thank you, Mr. Chairman. And,
Commissioner, always good to see you.
I want to talk to you about telework policies. You and I
have discussed this before, and I understand that you all have
a policy now of requiring people to work in-office 50 percent
of the time?
Commissioner Werfel. That is correct.
Senator Blackburn. Now how many, what percentage of your
employees are teleworking?
Commissioner Werfel. We are at the governmentwide mandate
of 50 percent.
Senator Blackburn. So half of your employees are working 50
percent of the time?
Commissioner Werfel. I think the way to look at it is we
have, at any given moment--the way to think about it is, 50
percent of the IRS is working in a remote location, and 50
percent of the IRS is working onsite, if you will randomly pick
out a time.
Senator Blackburn. Have you all evaluated whether
teleworking enables employees to properly work without proper
supervision?
Commissioner Werfel. That is a constant evaluation of ours
in terms of, are we hitting our productivity goals? Like are we
answering the phones, are we processing, are we getting refunds
out, all of the key fundamental mission-critical things we have
to do.
Senator Blackburn. And you all are about 2 years behind on
refunds, right?
Commissioner Werfel. No.
Senator Blackburn. No?
Commissioner Werfel. We are up to date. We actually had one
of the best filing seasons we have ever had.
Senator Blackburn. All right. I was asking these questions
about telework because of the Tax Court cases regarding IRS
Revenue Agent Thomas E. Fields and manager David Combs. They
were backdating penalty approval forms during audits of
partnerships in 2022.
Mr. Chairman, I have got a Tax Notes article to submit for
the record.
The Chairman. Without objection, so ordered.
[The article appears in the appendix beginning on p. 45.]
Senator Blackburn. And I think that this type of fraudulent
activity taking place within the agency is important to be
addressed, and I think it is important that you are doing
something to ensure IRS employees are fired and removed when
they are found to be in such violation of policy, and that they
are properly reprimanded by the respective bar associations.
Commissioner Werfel. Yes, and look, with respect to the
case you raised, we need to do better if we are going to build
trust with the American people. We are acknowledging that we
should have promptly corrected our representations in court in
this case. I have instructed the IRS leadership team to take
all the appropriate actions to make sure this never happens
again: training, controls, and to the extent appropriate,
personnel actions with those involved.
Senator Blackburn. Okay. And I think it is important to
note this happened during a teleworking time, and without
proper supervision.
I want to talk to you--we have discussed before also this
issue of total positive income and the $400,000, what is going
to happen with those audits.
Now, in the American Families Plan Tax Compliance Agenda--
and I have that for the record, Mr. Chairman--Treasury pledged
that audits would not increase for taxpayers with incomes below
$400,000 in actual income relative to recent levels.
[The agenda appears in the appendix beginning on p. 46.]
Senator Blackburn. And one can assume that actual and
taxable income would be the same thing, but the IRS has opted
to use total positive income. That is the sum, according to
what you all have said, of all available income before
deductions. Congress has not established a statutory definition
for total positive income.
So let's have you clarify, what does TPI account for? Does
it allow charitable deductions? If you are gifted money, is it
included in that? If you get an insurance settlement or an
inheritance, is it included in that TPI? Since there is that
definition and then there is actual and taxable, where are we
on this?
Commissioner Werfel. I think as a general rule, you can
assume that if it is income, it is included in total positive
income. What we are trying to do is give a bright line, an easy
way to understand how to distinguish. We believe our commitment
of only increasing audit scrutiny on those above $400,000 is a
high enough amount, where middle- and low-income people around
the country can breathe easier, knowing that they are likely
never----
Senator Blackburn. Well, my time has run out, but when you
say ``general rule'' and ``assume,'' you know what happens when
people end up going to court. So, we are going to have to be
more explicit, and I will talk with you about it later.
The Chairman. Very good.
Next in order of appearance would be Senator Young.
Senator Young. Commissioner, welcome to the committee.
Thank you so much for being here today.
When you came before the committee for your nomination
hearing, you noted in questions for the record that if
confirmed, ``it will be a priority of mine to ensure IRS
employees are where they need to be to carry out IRS's mission
most effectively.''
Mr. Commissioner, over a year later, I continue to hear
that my constituents are having trouble obtaining assistance
from the Internal Revenue Service. My office--like I am
assuming all my colleagues' offices--still regularly receives
complaints from Hoosiers that the local IRS offices are empty,
representatives are not consistently answering the phones, and
when someone at the IRS does pick up, there is often no
resolution to the issue at hand.
So, Commissioner, I know you are here today touting some
customer service improvements, and advocating for additional
funds for the IRS. One of the reasons you were put in this
position, I think the general perception was, in looking at
your background, you are a results-oriented guy.
I know that it is your objective and your team's objective
to make sure that you achieve results. I am curious what
results you are seeing that indicate success regarding taxpayer
services, however. Frankly, the IRS has received billions of
dollars in supplemental funding, and yet 2 years later, we are
still seeing some poor customer results manifested in the
feedback I get from taxpayers.
So, it is my responsibility to press a bit on that issue. I
suspect you are going to quote me some data on phone answering
rates. Unfortunately, those phone answering rates are not
particularly instructive to us because those answered phone
calls are not actually leading to resolutions, by my
estimation, which is why I continue to hear from my
constituents all sorts of lamentations and upset pertaining to
the service from the IRS.
So I will just ask you, Mr. Commissioner, and give you an
opportunity to respond: why is the IRS just focused on hiring
employees to answer the phones instead of focusing on hiring
where taxpayer problems remain the most significant, such as
the processing of paper returns, responding to correspondence,
and resolving taxpayer disputes and issues?
Commissioner Werfel. So let me start by saying, Senator--I
will say up here, we have more work to do. We want every
taxpayer in America to feel like, if they need the IRS, we are
there for them, that we answer the call, that the person on the
other end of the line or the person in the walk-in center or
the tool on irs.gov meets their needs, and we have not achieved
that goal.
So there is no victory lap here. There is a lot more work
to do, and as you can imagine, as the IRS Commissioner, 99 out
of 100 voices I hear from taxpayers are concerns.
I know that a lot of taxpayers are being served well. I
know that things are trending better. I am not going to cite
all the statistics. But I know that we are answering more
calls, we are getting more people into those walk-in centers in
the Hoosier State. We are serving more people in the Hoosier
State than we ever have served before, but that does not mean
we are done.
We have more work to do, and we are prioritizing some of
the areas that you raised, where we do not answer the calls
effectively on some of these topics that we are going to focus
on, like victims of identity theft. We need to do more on that,
and some of your colleagues on both sides of the aisle have
raised really pressing questions, where there are still gaps in
the ability of the IRS to serve.
But I want to build on the momentum. Things are getting
better. Things are improving in all dimensions of customer
service, but the race is not finished.
Senator Young. We are going to stay on top of this issue.
As you know, we have a 5-minute question-and-answer format on
this committee, and I have roughly 15 seconds left, certainly
not enough to continue with this line of questioning. I have
put on the record my concerns. I have heard from you that we
should remain hopeful but continue to vigorously oversee the
IRS, and I will certainly do the latter on behalf of my
constituents.
Thank you.
Commissioner Werfel. Thank you.
The Chairman. Senator Young, your point about vigorous
oversight: that is what our job is all about, and thank you for
that.
Senator Cortez Masto is next.
Senator Cortez Masto. Thank you. Commissioner, thank you.
It has been a long morning.
I just have two questions for you. One involves the
Inflation Reduction Act solar bonus tax credits. I want to
thank you for making the Low-Income Communities Bonus Credit
program a success in its first year. It is set to deliver
nearly 1.8 gigawatts of clean energy in low-income communities
across the United States. More residential solar was installed
in 2023 than ever before.
Here is my concern though. After reviewing the 2024 program
year, the current guidance reduces the amount of capacity for
Category 1 residential solar projects. This reduction will
negatively impact States like Nevada that have an active
residential solar market but no regulatory framework to support
community solar, which is where the credit capacity was
increased. So residential solar deployed seven times more
capacity than community solar last year.
So my question to you is, can you explain that, or can you
address the concerns that I have with respect to that?
Commissioner Werfel. I need to learn more, Senator. Why
don't I commit to getting back to your team as early as
tomorrow and schedule a follow-up meeting where we can dig into
the issue and get the answers to your questions?
Senator Cortez Masto. Thank you. I appreciate that, and I
look forward to that dialog.
The only other question I have for you is on the Earned
Income Tax Credit. I, like my colleagues, am particularly
concerned about one in five taxpayers who are eligible but do
not claim the credit. So, what do we need to be doing, and what
can the IRS do to reach these families?
Commissioner Werfel. Yes, it is such an important issue.
The last time--for the most recent data we have, there were
roughly 7 million Americans who were eligible for EITC that
never claimed it. There are a series of steps that we need to
take to make sure that people are getting the credits that they
are entitled to, in particular vulnerable populations.
These are individuals typically who do not have the means
or are intimidated by the IRS in some way, shape, or form. We
need to break down those barriers and get these people the
credits they are entitled to. We need to do more outreach in
communities, working with local community leaders, setting up
safe spaces for people to come, learn more about the credit,
understand that it is a friendly environment and we are there
to help them get the credits they are entitled to.
There is also some work that we can do, for example,
potentially to improve the 1040 form, and other things that we
can do to make it easier to claim. We are analyzing a variety
of different steps, from outreach to the form itself, to
anything we can do behind the scenes at the IRS to detect
whether someone is eligible and they did not claim, and get out
in front of that.
So, we are going to be releasing our updated annual plan in
the coming weeks. We have dedicated a new priority section in
there to what we are calling ``credit uptake.'' It addresses a
lot of these questions, and I look forward to sharing that with
you and talking to you more about it.
Senator Cortez Masto. Thank you, Commissioner.
Thank you, Mr. Chair.
The Chairman. I thank my colleague, and Senator Cardin
would be next.
Senator Cardin. Well, thank you, Mr. Chairman. Mr. Werfel,
first of all, I want to thank you. I want to thank you for
taking on this challenge. As we have talked about previously,
it is an extremely difficult challenge, and we appreciate the
commitment that you have made to public service and getting
this done.
I want to talk about one area where we have seen a change
in the way that athletes are handled among colleges, and
whether our tax code is really keeping up with those changes.
Senator Thune and I introduced legislation to deal with NIL,
and many of the nonprofit organizations associated with
colleges are participating.
Our concern is whether that was consistent with their
nonprofit tax-exempt status. So you issued a general legal
advice memorandum in June 2023. Can you update us as to the
enforcement of the tax-exempt status for those organizations
that may be going over the line in what they are doing?
Commissioner Werfel. Yes, we did. We did issue that
memorandum. We made it clear in that memorandum that
organizations that promote and develop Name, Image, and
Likeness opportunities for student athletes are often engaging
in what would be a non-exempt purpose. If that is the
fundamental thing that you are doing, it is very likely that
you are operating for non-exempt purposes.
We have started finding organizations and revoking tax-
exempt status or not granting tax-exempt status based on this
update. So, this is a new area, right? There is more work to be
done. We are at the early stages of working across stakeholders
to make sure they understand what the IRS position is on this.
But I would say that we are at the early stages of
implementation, but we have taken some steps with respect to
certain organizations and enforced the general legal advice
memorandum that we issued in May 2023.
Senator Cardin. Senator Thune operated with me on this
because we saw some real abuses of this by certain
organizations that were not rewarding athletes, but trying to
enhance the ability to recruit, rather than giving benefit to a
person because of their name or likeness.
Commissioner Werfel. Yes. I should be clear that we do not
have any opinion, good or bad, on NIL as an area of the
economy.
Senator Cardin. Nor do we.
Commissioner Werfel. It is, just do it, but play by the
rules.
Senator Cardin. That is our exact point. We want people to
be rewarded for their--we do not want to see it abused.
Commissioner Werfel. Yes.
Senator Cardin. So, I would appreciate it if you would keep
us informed as to how your enforcements are going in that area,
and if you need additional help from us.
Commissioner Werfel. Absolutely.
Senator Cardin. I want to follow up on Senator Cortez
Masto's points in regards to low-income families. The VITA
program is one program that has been helping low-income
taxpayers get the help that they need. Your Direct File--I know
it is a pilot program. We expect that will help. You mentioned
trying to simplify the forms.
Can you just tell me your strategies to try to help lower-
income taxpayers who struggle when trying to comply and get the
benefits of our tax code?
Commissioner Werfel. Well, it is multifaceted. I was
actually recently, Senator Cardin, at a VITA clinic in
Baltimore. I have seen the good works that are going on there
to provide free tax services to distressed communities or
vulnerable populations. It is inspiring work, and we need to do
more of it.
We should be investing in growing these volunteer programs,
working in local communities, working with local universities
to provide these free services. These are the environments
where we can really connect people to their Earned Income Tax
Credit who might otherwise not be.
So, it is about awareness campaigns, it is about working
with local partners, it is about setting up environments like a
VITA clinic, where people feel that they can come in and they
understand the benefits that are provided.
There are also things that we can do behind the scenes at
the IRS. I mentioned to Senator Cortez Masto we are looking at
updates to the 1040 potentially, and other changes to the
forms. What can we do to make it absolutely clear and easy for
taxpayers to apply for the Earned Income Tax Credit, because if
7 million Americans are eligible and are not applying,
something is not connecting correctly, and we want to fix it.
Senator Cardin. And it is also protecting them against paid
preparers that are abusing lower-income families.
Commissioner Werfel. Exactly. Protecting them from scams,
exactly.
Senator Cardin. And you need that authority. Thank you.
Commissioner Werfel. Thank you.
The Chairman. I thank my colleague.
The Senator from Wyoming.
Senator Barrasso. Thanks so much, Mr. Chairman.
Commissioner, thanks for being here today.
Commissioner Werfel. Thank you.
Senator Barrasso. I want to talk with you about this Direct
File pilot program.
Commissioner Werfel. Please.
Senator Barrasso. I know you have talked to some others
about it today. A couple of things----
Commissioner Werfel. Yes.
Senator Barrasso [continuing]. Because you know, there has
been a lot of controversy surrounding the IRS's starting up
this direct filing portal that could replace successful
private-sector options that are currently available to
taxpayers around the country.
You know, unlike the current Free File process, which you
know partners with the private sector, this would be solely
handled by the Internal Revenue Service, make the IRS both the
tax collector as well as the tax preparer.
The so-called Inflation Reduction Act did provide $15
million for the IRS to study the feasibility of a government-
run Direct File system, but it did not provide statutory
authority to create and operate a new multimillion-dollar
Direct File program.
So to me, in a classic big file fashion, the IRS spent $130
million on a Direct File program, and only 55,000 people, as of
at least a couple of weeks ago, used the program. So the IRS
spent over $2,000 per taxpayer, and when you compare that to
the private-
sector Free File options serving roughly 30 million taxpayers,
they cost the taxpayers and the government nothing.
So, 18 State Treasurers, including my Wyoming State
Treasurer, Curt Meier, sent a letter asking you to terminate
the program. They called this a solution in search of a
problem. The Treasury Inspector General for Tax Administration
has also raised some concerns.
Last week, the Government Accountability Office released a
report listing out problems with this new IRS program. So, do
you think the IRS can do a better job than the private sector
at helping taxpayers?
Commissioner Werfel. I think what we are trying to do,
Senator, is provide an option for taxpayers that is not
supposed to be better or worse. It is supposed to give
taxpayers options. I also would offer that the pilot is not
done. There have been no cost estimates.
You referenced a cost estimate in your question that I am
unfamiliar with. I do not think it is going to end up being an
accurate cost estimate. There are way more taxpayers who have
filed with Direct File in the past few days, so the numbers are
very different than you have in front of you.
But I will say this, that we have not made a decision on
the future of the program, that after the pilot is done--and we
still have Massachusetts filing through April 17th, and they
are one of our pilot States--we will report publicly on the
results.
I will be able to provide a final cost number, a final
number of taxpayers, and we will give opportunities for your
State Treasurer to react to the data and provide us feedback,
and we look forward to that feedback.
Senator Barrasso. Yes, and I will see the State Treasurer
this weekend at home in Wyoming. Again, he is a big private-
sector guy, as am I. And the question is, does the private
sector have the same, what I consider maybe a conflict of
interest that the IRS has, if the IRS is the tax collector or
the tax auditor or the tax enforcer and now the tax preparer--
judge, jury, and lord high executioner.
Commissioner Werfel. My answer to that is twofold. One, I
do not consider us the preparer. We provide the platform. The
taxpayer inputs the information and makes the final sign-off.
Second, it is an option. If the taxpayer feels like this is
too much IRS for them, they can use any other option that is
available to them, including using the free solutions that are
offered by the software companies. I encourage them to. They
are very good products.
Senator Barrasso. Can I ask you what safeguards you have
put in place at the IRS to protect taxpayers from either
conflict of interest as well as any additional information the
IRS will now have relating to taxpayers?
Commissioner Werfel. It is the same as I just mentioned.
First of all, it is your option. We try to be as transparent as
we can about what the parameters of Direct File are and what
they are not, and we make it very clear that there are other
ways to file your taxes. You do not have to file with Direct
File.
We have allowed taxpayers to make the final call. They hit
submit. They review the form. They make the final decisions on
what they submit, and once they submit it, their data goes into
the same pool of data as any other tax filing coming in.
So it has equal protection in terms of data security. There
is no real change in your status as a taxpayer once you hit
submit on Direct File versus hitting submit on any other
solution.
Senator Barrasso. So, when you were here last year, I
voiced my concerns about funding priorities. The so-called
Inflation Reduction Act allowed roughly $80 billion to the
Internal Revenue Service. Forty-five billion dollars went for
enforcement, compared to only $3 billion in taxpayer services.
We talked about that in my office; we talked about it in the
hearing. In the recent budget request, the IRS asked for
another $104 billion in mandatory spending. Of that, $50
billion is for enforcement.
This will be on top of almost $5.5 billion provided for
enforcement annually through regular appropriations. Are small
business owners and hardworking taxpayers really going to be
protected from some of the burdensome onslaught of audits if
you spend more than $100 billion on auditors and enforcement
agents in the next 10 years?
Commissioner Werfel. Those are my marching orders, and as
long as I am Commissioner----
Senator Barrasso. Not from anybody on my side of the aisle.
Thank you, Mr. Chairman. My time has expired.
The Chairman. The time of the gentleman has expired.
Senator Casey?
Senator Casey. Thanks, Mr. Chairman. Commissioner, great to
be with you, and congratulations on a successful filing season,
and thanks for being here today.
I am pleased that the IRS continues to use the money
appropriated in the Inflation Reduction Act to improve taxpayer
services, with call wait times down to 3 minutes after being up
to 28 minutes just 2 years ago, and more filing options
available than ever before.
I am also pleased you announced an increase in audits of
large complex partnerships with more than $10 billion in
assets, and you will pursue the 25,000 millionaires who
neglected to file their taxes since 2017--a much bigger number
when you lower that below a million dollars.
So here is my first question. Can you explain what the IRS
is doing with this new funding to ensure that billion-dollar
companies, millionaires, or higher, pay what they owe, just
like middle-class Americans have to?
Commissioner Werfel. I appreciate the question, especially
because I just want to close out my response from Senator
Barrasso. My marching orders are to make sure that Inflation
Reduction Act funds are exclusively used on enforcement of
high-wealth complex organizations, large partnerships, large
corporations, and that is where our focus is.
If you are a mom and pop, middle or low income, there is no
new wave of audits coming under the Inflation Reduction Act.
The audit rate you had the day before the Inflation Reduction
Act, which was historically low, is the same audit rate you had
the day after, and the same audit rate you will have today, and
the same audit rate into the future. So again, no new wave of
audits.
We have a lot of work to do to deal with the complexity
that exists in the U.S. economy today, and how large
corporations, complex partnerships, and very wealthy
individuals are shielding income. Many are not. Many are
playing by the rules, and I would like to say that our focus on
high-wealth and large businesses benefits high-wealth and large
businesses, because if you are the CFO of a major corporation
and you are playing by the rules, you want the other company
that you might be competing against to also play by the rules.
You want the IRS to be able to know which case to select
for audit. By having the right funding, we can be more precise.
Those who are playing by the rules will never have to hear from
us if we are smarter, more technical, and more competent in
this complexity.
And that CFO who is playing by the rules will also have the
comfort of knowing we are not selecting them for audit, but we
are selecting those in their industry that may not be playing
by the rules. That is going to create fair competition.
So this is really about an IRS that can do its job and
enforce the code fairly and equitably. If we do not have the
resources to be able to spot and deal with the complexity we
are seeing, then the system starts to degrade.
Senator Casey. Thanks very much.
Commissioner, you might be aware that in February 2023, a
Norfolk Southern train carrying hazardous materials derailed in
East Palestine, OH, very close to the Pennsylvania border, just
feet away from Pennsylvania. The township is Darlington, the
township in Pennsylvania.
To avoid toxic exposure from the crash and the burning of
the leaked toxic materials, thousands of people in Ohio and
hundreds in Pennsylvania had to flee their homes. Norfolk
Southern later provided some reimbursements for the families'
hardship.
Senator Brown and I have been working to make sure the
victims of this disaster are not taxed on these reimbursements
that they received from Norfolk Southern. I hope we can deliver
on this tax assistance to the victims by passing the Wyden-
Smith bipartisan tax bill.
But if not, if that does not happen, I hope that you and
Secretary Yellen will use your authority to declare that this
was a catastrophic disaster, and that related payments are
exempt from tax. Can you assure us that you will do everything
in your power to deliver tax relief to Norfolk Southern
derailment victims?
Commissioner Werfel. Yes, absolutely. I mean, this is one
of those spots--and we have talked a lot today about IRS
authorities. I mentioned on many occasions that I think one of
my fundamental responsibilities as Commissioner is to implement
the tax code in a way that protects the Taxpayer Bill of
Rights. I was just reviewing its--it is actually section
7803(a)(3), which requires me to implement the tax laws
consistent with a delineated set of Taxpayer Bill of Rights.
I think that is one of the most important provisions that I
have as Commissioner, and this is a moment where you basically
look for opportunities to protect taxpayers, because you have
this Taxpayer Bill of Rights that is balancing against what
might be a part of the tax code that has this unintended
consequence of placing undue burden, or not really
understanding the situation.
I think the Wyden-Smith bill on disasters is going to be
enormously helpful, but in the meantime, we are rolling up our
sleeves to find a solution for the residents of East Palestine.
Senator Casey. Thanks very much.
The Chairman. The time of the gentleman has expired.
Senator Menendez?
Senator Menendez. Thank you, Mr. Chairman. Commissioner,
good to see you.
Contrary to the standard in most professions, paid
preparers are not obligated to hold a license. While many tax
return preparers offer exceptional and professional services,
yet regrettably there are some who take advantage of the lack
of oversight of the market to take advantage of hardworking
taxpayers.
These ``ghost preparers,'' as some call them, or other
unscrupulous preparers often promise hefty returns, claim
credits for taxpayers that they are ineligible for, and charge
fees based on the inflated refund amounts. Then the preparer
will balk at signing or providing their IRS preparer tax ID
number, as mandated by law, leaving the taxpayer exposed and
potentially liable for any inaccuracies on their returns.
Commissioner, what have you done or what can you do to
crack down on fraudulent tax preparers, and what additional
resources and authority, if any, does the IRS need to eliminate
this practice?
Commissioner Werfel. What we have tried to do, Senator,
within our legal authorities that we have, is lean in, do more
awareness campaigns, work with taxpayers on the risks of ghost
preparers. That only gets you so far, but it does not mean we
should not be leaning in to do more of these awareness
campaigns.
We have put in the President's budget a variety of
different provisions that would help us with cracking down on
ghost preparers and other unscrupulous preparers, new tax
penalties that would be created, allowing us to determine more
comprehensively whether a tax preparer is suitable or not.
There are certain restrictions that we have at the IRS in terms
of being able to essentially regulate this space, and this is a
spot where I think regulations would be helpful, because in
particular, vulnerable populations in distressed communities
need help if they do not have the means to hire an accountant
or a lawyer, and we should be helping them.
Senator Menendez. I would very much like to hear from you--
not right now--and your staff about what type of authorities or
regulations you would like to see to be able to be more
successful in this regard.
Commissioner Werfel. Yes.
Senator Menendez. You know, I would imagine that if a law
says that if you are a tax preparer and you fail to put your
tax ID purposely, that making that some type of a crime is a
real incentive not to do that. So anyhow, I would like to hear
from you on it.
Commissioner Werfel. I appreciate the question.
Senator Menendez. Last year, a collaborative study by
Stanford University and the Department of the Treasury
uncovered that Black taxpayers face over three times the
likelihood of being audited by the IRS. The absence of race or
ethnicity data collected by the IRS obscures the roots of this
inequality.
But the report points to potential discrimination embedded
with the audit selection algorithms. At your confirmation
hearing, you and I had a little bit of a discussion about this.
Additionally, the research highlights the disproportionate
audit rates targeting individuals claiming the EITC.
Commissioner Werfel, in a letter to you from Chairman
Wyden, you committed to identify and implement changes prior to
the next tax filing season. Within the framework of the
Inflation Reduction Act strategic operating plan, the IRS has
pledged to engage in research aimed at comprehending any
systemic bias.
A primary focus with this initiative is the continual
assessment of algorithms for selecting audits related to the
EITC, for example. So my question is, what are the findings of
your research thus far? The Stanford report did not conduct
research into potential audit biases for Latino taxpayers, but
as you work on this issue, will you commit to evaluating Latino
taxpayers as well?
Commissioner Werfel. Yes. Let me start by saying as I sat
here on February 15, 2023 at my confirmation hearing when this
report had just come out, it was alarming and concerning, and I
wanted to get to the IRS and roll up my sleeves and address it.
First thing I did when I got to the IRS was respond to Mr.
Chairman's request for an update. I provided an update. I told
him--and I acknowledged the validity of the findings,
acknowledged that there were racial disparities in how we
selected audits for certain refundable credits including EITC,
and committed to doing something about it.
We have dramatically reduced the number of EITC audits. We
made changes to our selection algorithm. We have done more
outreach to impacted stakeholders. We are working with the
Census Bureau and others to make sure we are setting up the
right data infrastructure in order to better evaluate the
racial disparity, potential racial disparity of any tax
administration, so that this does not happen again.
The results are that I committed to the chairman that I
would be prepared by the fall of 2024 to start unpacking some
of the results of what these steps are, and I still think we
will make that deadline.
Senator Menendez. Well, I look forward to hopefully you
sharing that with us, and I hope you will look at Latinos as
part of the overall effort.
Commissioner Werfel. Absolutely.
Senator Menendez. Fairness is an essential part of your
mission, so thank you.
The Chairman. Very important.
Mr. Commissioner, you have been in that seat for almost
2\1/2\ hours, and I am going to liberate you here very briefly,
in just a couple of minutes. In particular, we have dealt with
an array of very substantive and important issues. I think, for
example, we could have a debate further about Direct File.
I mean, there has been back and forth; it has been a
partisan exercise. I have to just say for history, that is just
not accurate. In that seat over there sat, at one time, Dan
Coats of Indiana, and he joined me in a bipartisan tax reform
bill that included a version of Direct File.
Now that was history, and I know sometimes history feels
like the last minute, but there really are bipartisan roots in
this Direct File effort, and I am appreciating the way you
described this as similar to building a startup, because I
think that is very appropriate.
And also, I want you to know, we are going to pull out all
the stops to pass this tax bill--bipartisan, 357 votes in the
House of Representatives. You cannot get 357 votes to order a
piece of apple pie, and this is just an extraordinary
accomplishment.
Chairman Smith deserves an enormous amount of credit. The
bipartisan work went on for months and months. And the
provision we talked about today, dealing with the fraudsters--I
mean, this is now a bill that is on offer, to give you the
tools to go after these fraudsters. And you have made it clear
that you are not going to be able to do the job that you want
to do without the enforcement capability, so I appreciate that.
But I am going to close with this. I have had at home about
1,060 town hall meetings, and the way you come to the Finance
Committee seems to me to be almost a town hall meeting. You
know, you get a lot of questions from Senators. That is what we
get an election certificate for, and you either answer them or
you say, ``I have to get back to you because we do not know X,
Y, and Z.''
This is not just an isolated event. You have been available
for roundtables. Senators have asked you to come to meetings
privately, sessions just in the office, in my Senate office, to
come and talk for 40 minutes or something like that.
So, you have been open and accountable. That is what public
service is supposed to be all about. I want you to know I
appreciate it.
I want colleagues to know that questions for the record are
due by 5 p.m. next Tuesday. With that, Mr. Commissioner, we
will excuse you.
[Whereupon, at 12:54 p.m., the hearing was concluded.]
A P P E N D I X
Additional Material Submitted for the Record
----------
Submitted by Hon. Marsha Blackburn,
a U.S. Senator From Tennessee
Easement Litigants Allege Penalty Backdating in Three More Cases
by Kristen A. Parillo
[TAX NOTES FEDERAL, VOLUME 180, AUGUST 28, 2023]
Emails between an IRS examiner and his manager show that they
backdated penalty approval forms during audits of three syndicated
easement partnerships, according to Tax Court documents filed by the
partnerships.
The backdating allegations and email exchanges are included in a
first request for admissions filed with the Tax Court on August 16th by
each of the petitioners in Arden Row Assets LLC v. Commissioner,
Basswood Aggregates LLC v. Commissioner, and Delwood Resources LLC v.
Commissioner.
The petitioners are represented by Todd Welty of Todd Welty PC, who
is handling another Tax Court syndicated easement case, LakePoint Land
II LLC v. Commissioner (Dkt. No. 13925-17), involving allegations that
an IRS supervisor backdated her signature on a penalty approval form.
The IRS's compliance with section 6751(b) has been a contentious
issue in Tax Court litigation for the last several years, particularly
in syndicated conservation easement cases. The provision states that
the IRS may not assess a penalty unless the initial determination is
approved in writing by the immediate supervisor of the employee who
made it.
Arden Row Assets LLC, Basswood Aggregates LLC, and Delwood
Resources LLC each filed a Tax Court petition March 21st to challenge
the IRS's disallowance of a conservation easement deduction they
claimed on their 2018 partnership tax return.
Each easement was donated over land ``with significant limestone
reserves'' in Jackson County, Alabama, according to the petitions.
Arden Row, Basswood, and Delwood each claimed charitable contribution
deductions of $57 million. For each partnership, the IRS asserted
penalties under sections 6662A, 6662(c), 6662(d), 6662(e), and 6662(h).
The audits were conducted under the centralized partnership audit
regime enacted by the Bipartisan Budget Act of 2015. In notices of
final partnership adjustment issued to each partnership, the IRS
determined an imputed underpayment of around $21 million in income tax
and $8.4 million in penalties.
Audits of all three partnerships were handled by revenue agent
Thomas E. Fields and team manager David M. Combs. LakePoint involved a
different set of IRS employees: revenue agent Pamela Stafford and her
immediate supervisor, revenue agent Catherine Brooks. The IRS has
acknowledged in LakePoint that Brooks ``misdated'' the penalty approval
form but argues there was no bad faith or fraud.
Emails Raise Questions
The request for admissions filed by each petitioner--worded nearly
identically--asks the IRS to confirm that it is contending that the
revenue agent made the ``initial determination'' to assert penalties on
July 12, 2021, and that the team manager approved that determination 2
days later.
The request notes that, according to email exchanges attached as
exhibits, the agent merely told his manager on July 12th that there
would likely be penalties asserted against each partnership. The agent
didn't specify the applicable penalties or basis for asserting them,
the request says. It further notes that in his July 14th response to
the agent, the manager simply wrote in the subject line that he
approved the penalties--again, without specifying the penalties he was
approving or the basis for asserting them.
In a March 11, 2022, email in which the agent asked the manager to
sign penalty approval lead sheets for the three partnerships, the agent
wrote: ``Ideally (?) the date you use to sign should be either the date
you `approved' penalties against Taxpayer (7/14/21) . . . or a little
thereafter?''
The request for admissions asks the IRS to admit that at the time
the March 11, 2022, email was sent, no penalty approval lead sheet or
similar form had been signed by the team manager and that the agent was
asking the manager to backdate his signature on the lead sheet to July
14, 2021, or shortly after that date.
The request further asks the IRS to admit that in his March 11,
2022, email, the agent attached workpapers and a signed penalty lead
sheet from a different (unrelated) audit so that the manager had
``backup'' examples. The request notes that in his March 14, 2022,
response to the agent, the team manager wrote: ``All 3 are signed with
the date of July 14, 2021. Thanks for giving me all the `backup' too!''
That email shows that the manager was admitting to backdating
penalty consideration lead sheets for three separate audits, the
request says, adding that the manager ``knew when he signed those three
penalty consideration lead sheets that it was March 2022, not July
2021.''
The request also asks the IRS to admit that the manager's signature
on the lead sheet ``was copied and pasted from another document,'' and
that the agent ``co-
mingled information, documents, and workpapers from three separate
taxpayers in his work on the Audit.''
The cases are Arden Row Assets LLC v. Commissioner (Dkt. No. 3817-
23); Basswood Aggregates LLC v. Commissioner (Dkt. No. 3820-23); and
Delwood Resources LLC v. Commissioner (Dkt. No. 3821-23).
______
u.s. department of the treasury
THE AMERICAN FAMILIES PLAN TAX COMPLIANCE AGENDA
MAY 2021
I. Executive Summary and Introduction
President Biden recently proposed the American Families Plan, advancing
comprehensive and necessary investments in American children and
families. To help support this important agenda and increase fairness
in the tax system, the President also proposed a set of tax compliance
measures to foster a tax system where Americans pay the taxes they owe.
This report describes the President's tax compliance initiatives that
seek to close the ``tax gap''--the difference between taxes owed to the
government and actually paid. According to Treasury analysis, the tax
gap totaled nearly $600 billion in 2019 and will rise to about $7
trillion over the course of the next decade if left unaddressed--
roughly equal to 15 percent of taxes owed. These unpaid taxes come at a
cost to American households and compliant taxpayers as policymakers
choose rising deficits, lower spending on necessary priorities, or
further tax increases to compensate for the lost revenue.
The magnitude of the tax gap means that compliance initiatives have the
potential to raise substantial revenue, but these reforms also improve
tax progressivity and economic efficiency. While roughly 99 percent of
taxes due on wages are paid to the Internal Revenue Service (IRS),
compliance on less visible sources of income is estimated to be just 45
percent.\1\ The tax gap disproportionately benefits high earners who
accrue more of their income from non-labor sources where misreporting
is common. Further, the tax gap imposes distortions because of the
resources some expend to avoid paying taxes and the incentives created
to shift economic activity into certain areas where tax liabilities can
be illegally evaded.
---------------------------------------------------------------------------
\1\ IRS, 2019. ``Federal Tax Compliance Research: Tax Gap Estimates
for Tax Years 2011-2013.'' Publication 1415 (Rev. 9-2019).
To raise revenue, improve efficiency, and build a more equitable tax
system, investments in tax compliance are of first order importance.
The compliance proposals in the American Families Plan provide the IRS
with the resources and information it needs to overhaul and enhance tax
administration. These policy changes are integral to addressing
evasion, but they also prioritize improving taxpayer service and the
experience of Americans as they navigate the tax system. Taxpayers
would benefit from effective communication with the IRS, access to the
tax credits to which they are entitled, and competent assistance as
---------------------------------------------------------------------------
they file their taxes.
The President's compliance agenda has several transformational
elements:
1. Provide the IRS the resources it needs to address sophisticated
tax evasion. The first step in the President's tax administration
efforts is a sustained, multi-year commitment to rebuilding the IRS,
including nearly $80 billion in additional resources over the next
decade. The IRS would grow manageably (no more than around 10 percent
annually) but also have certain funding in place to make investments
with large fixed costs--like modernizing information technology,
improving data analytic approaches, and hiring and training agents
dedicated to complex enforcement activities. This would make up the
ground that the IRS has lost over the last decade. During this time,
the IRS budget fell by about 20 percent, leading to a sustained decline
in its workforce particularly among specialized auditors who conduct
examinations of high-income and global high net worth individuals and
complex structures, like partnerships, multi-tier pass-through
entities, and multinational corporations.
2. Provide the IRS with more complete information. When the IRS
can verify taxpayer filings with third-party information reports, such
as the W-2 forms submitted by employers to report wages, compliance
rates exceed 95 percent. Without third-party reporting, compliance
rates fall below 50 percent and thus lead to an inequitable asymmetry
in tax collections depending on the form in which income is accrued.
The Government Accountability Office (GAO) and IRS agree that
strengthening third-party reporting is one of the most effective ways
to improve tax compliance. The President's proposal leverages the
information that financial institutions already know about the accounts
that they house. Financial institutions would add information about
total account outflows and inflows to existing reporting on bank
accounts. Importantly, there are no added requirements for taxpayers.
The IRS will be able to deploy this new information to better target
enforcement activities, increasing scrutiny of wealthy evaders and
decreasing the likelihood that fully compliant taxpayers will be
subject to costly audits. As a result, voluntary compliance will rise
through deterrence as would-be tax evaders realize that the IRS has an
additional lens into previously unreported income streams.
3. Overhaul outdated technology to help the IRS identify tax
evasion and serve customers. The IRS still relies on Individual and
Business File Systems that date back to the 1960s--the oldest in the
Federal Government. The result is decades upon decades of tax
administration built upon a system that is written in a programming
language that is no longer taught, and where new functions are added in
a patchwork rather than integrated manner. Modernization funding would
allow the IRS to address technology challenges and develop innovative
machine learning that can be deployed to better identify suspect tax
filings, for example, by comparing returns to similarly situated
taxpayers and historical filings in a way that the current IRS
ecosystem does not allow. These resources would also support efforts to
meet threats to the security of the tax system, like the 1.4 billion
cyberattacks the IRS experiences annually. With a revitalized IRS,
taxpayers would also be able to communicate with and receive guidance
from the IRS in a clear, timely manner when questions arise. Further,
modernized IT would help improve taxpayer service and ensure that the
IRS is able to effectively and efficiently deliver tax credits to
eligible families and workers, including recent expansions to the Child
Tax Credit, the Earned Income Tax Credit, and the Child and Dependent
Care Tax Credit proposed in the American Families Plan.
4. Regulating paid tax preparers and increasing penalties for
those who commit or abet evasion. Taxpayers often make use of
unregulated preparers who lack the training to provide accurate tax
assistance. These preparers submit more returns than all other
preparers combined, and taxpayers rely on their guidance, in part
because of challenges in reaching the IRS in a timely manner when
questions arise. In addition to the regulation of paid preparers and
service improvements that would simplify tax filing, the President's
proposal includes additional sanctions for so-called ``ghost
preparers'' who fail to identify themselves on the tax returns which
they prepare.
Experts at the Treasury Office of Tax Analysis estimate that these
initiatives would raise $700 billion in additional tax revenue over the
next decade. This revenue is backloaded in the 10-year budget window as
several of these new investments--such as hiring revenue agents capable
of complex global high net-worth examinations and building the
technological infrastructure to support a new information reporting
regime--take years to reach their full potential. As Figure 1 shows,
the revenue raised in the second decade amounts to $1.6 trillion.
These estimates are conservative because the revenue potential of
additional resources for tax administration is based on return on
investment (ROI) estimates from the IRS that only exist for adjustments
detected through current enforcement-related activities. Benefits of
other foundational shifts in tax administration that would result from
this proposal--for example, overhauling and integrating IT systems and
restoring trust in the IRS through timely support for taxpayers--are
also unaccounted for. Moreover, although revenue estimates for
increased information reporting include the effects of this regime on
voluntary compliance, estimates for increased enforcement actions do
not account for deterrent effects, which are generally considered
qualitatively significant.
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
II. Defining and Measuring the Tax Gap
A well-functioning tax system requires that taxpayers make good on
their tax obligations. An important measure of our tax system's
administrative effectiveness is the ``tax gap''--the aggregate
difference between Federal taxes owed and taxes paid voluntarily and
on-time. The size of the tax gap has meaningful implications for fiscal
policy, while the distribution of the tax gap across income levels has
important consequences for tax progressivity.
The IRS periodically releases estimates of the Federal tax gap. The
most recent estimates, covering years 2011-2013, showed an average
gross tax gap of $441 billion annually. After late payments and
enforcement efforts are factored in, the net tax gap over this period
is estimated at $381 billion. Extrapolating for growth in the
intervening years, for tax year 2019, the gross tax gap was estimated
at $584 billion, and is on pace to total $7 trillion over the course of
the next decade. This is almost 3 percent of GDP on an annualized
basis. These estimates imply a voluntary compliance rate of around 84
percent, and a net compliance rate of around 86
percent.\2\,\3\
---------------------------------------------------------------------------
\2\ The voluntary compliance rate is defined as the amount of taxes
paid ``voluntarily and timely'' divided by ``total true tax,'' and
corresponds to the gross tax gap. The net compliance rate is higher
because it is the ratio corresponding to the net tax gap, after
``enforced and other late payments'' are added to the numerator of this
ratio. Greater enforcement efforts increase both the voluntary
compliance rate and taxes collected through enforced and other late
payments. Ibid.
\3\ The IRS tax gap report shows that average annual Federal taxes
owed and voluntarily paid on time for 2011-2013 were about $2,242
billion and total estimated annual tax liability was about $2,683
billion, for a voluntary compliance rate of about 84 percent. This rate
has been relatively constant since the 1970s. Ibid.
The tax gap has three distinct elements: taxpayers who fail to file
returns in a timely manner (the ``nonfiling'' tax gap, around 9 percent
of the gross tax gap); those who underreport income or overclaim
deductions and credits on tax returns (the ``underreporting'' tax gap);
and those who underpay taxes despite reporting obligations in a timely
manner (the ``underpayment'' tax gap, around 11 percent). By far the
largest contributor to the tax gap is the underreporting gap--around 80
percent.\4\
---------------------------------------------------------------------------
\4\ Ibid.
Table 1: Tax Gap Estimates Over Time
Tax Gap Estimates and Projection
------------------------------------------------------------------------
TY 2019
Tax Gap Component TY 2011-2013 TY 2019 Projection,
Published Projection \1\ Adjusted \2\
------------------------------------------------------------------------
Estimated Total True $2,683 $3,589 $3,635
Tax
------------------------------------------------------------------------
Gross Tax Gap $441 $584 $630
------------------------------------------------------------------------
Nonfiling Tax Gap $39 $52 $52
------------------------------------------------------------------------
Underreporting Tax $352 $466 $512
Gap
------------------------------------------------------------------------
Underpayment Tax Gap $50 $66 $66
------------------------------------------------------------------------
Voluntary Compliance 83.6% 83.7% 82.7%
Rate
------------------------------------------------------------------------
Enforced and Other $60 $76 $76
Late Payments
------------------------------------------------------------------------
Net Tax Gap $381 $508 $554
------------------------------------------------------------------------
Net Compliance Rate 85.8% 85.8% 84.8%
------------------------------------------------------------------------
\1\ Estimates based on applying the tax gap projection technique (which
assumes constant compliance rates by major component of income) to the
TY 2011-2019 IRTF and BRTF data.
\2\ Estimates based on adjusting compliance rates for Guyton et al.
(2021) estimate that the published tax gap was understated by an
annual average of $33 billion (in 2012 dollars) in underreported
income from offshore wealth and pass-through entities in TY 2006-2013,
then applying constant compliance rates by major component of income.
Many attempts to assess the tax gap rely on a sample of random audits
that the IRS undertakes to estimate the share of unpaid taxes. The most
prominent of these studies examines individual income tax returns. Such
random studies are generally thought of as the ``gold standard'' for
understanding tax evasion. However, these audits can struggle to
capture the full extent of tax evasion for high-income taxpayers
because sophisticated taxpayers and those who advise them are well-
positioned to shield unpaid taxes from audit detection.\5\ This has led
some scholars to suggest that the results from studies based on IRS
``National Research Program'' (NRP) random audit data may not
satisfactorily capture tax evasion by the very wealthy taxpayers, and
that tax gap estimates are significantly understated because they do
not fully reflect this sophisticated evasion.\6\
---------------------------------------------------------------------------
\5\ For example, capital income accruing to offshore accounts have
until recently not been subject to reporting requirements that make
them easily traceable in audits. In addition, pass-through income
accrues disproportionately to high earners and can be challenging to
attribute to its ultimate owner.
\6\ See, e.g., Alstad#ter, Annette, Niels Johannesen, and Gabriel
Zucman, 2019. ``Tax Evasion and Inequality.'' American Economic Review,
109(6): 2073-2103.
The IRS attempts to mitigate this by adjusting for income undetected by
audits through ``Detection Controlled Estimation'' (DCE), a methodology
under which detected evasion is used to estimate the magnitude of
undetected evasion. DCE adjustments are intended to bring the amounts
of estimated non-compliance in line with the amounts detected by the
most specialized auditors. In the aggregate, these adjustments roughly
triple the estimated amount of unreported income. But even DCE
estimates may not fully account for the most sophisticated evasion
techniques, undetected income, and unidentified emerging issues. One
estimate of the magnitude of this issue is shown in Table 1, which
illustrates that adjusting the tax gap for pass-through and offshore
---------------------------------------------------------------------------
evasion increase the tax gap significantly.
Research also finds that underreporting tends to rise with income when
taxpayers are ranked by their total income, including the unreported
amount.\7\ In part, tax evasion rises with higher incomes because
higher-income taxpayers have sophisticated accountants and tax
preparers who can stake out aggressive tax positions that can help
shield true tax liability. And because the IRS lacks the number of
specialized auditors needed to adequately detect and pursue these
instances of noncompliance, the consequences of tax underpayment are
perceived to be minor, and voluntary compliance rates are lower.
---------------------------------------------------------------------------
\7\ See, e.g., Guyton, John, Patrick Langetieg, Daniel Reck, Max
Risch, and Gabriel Zucman, 2021. ``Tax Evasion at the Top of the Income
Distribution: Theory and Evidence,'' NBER Working Paper No. 28542. The
estimates in Guyton et al. (2021) are based on imputations of
undetected evasion using multipliers developed from earlier audit data.
The advisability of so-called ``detection-controlled estimation'' (DCE)
adjustments are debated in the literature, especially with respect to
understanding the distribution of noncompliance (see also DeBacker,
Jason et al., 2020. ``Tax Noncompliance and Measures of Income
Inequality,'' Tax Notes Federal, 17 February; and Johns, Andrew and
Joel Slemrod, 2010. ``The Distribution of Income Tax Noncompliance,''
National Tax Journal, 63(3)).
But the distribution of the underreporting tax gap is also a byproduct
of the current information reporting regime. For some, but not all,
categories of income, the IRS can crosscheck taxpayer filings because
it receives information reports from third parties, like employers, and
this information can be used to verify that taxpayers are accurately
reporting income and deductions. When taxpayers know that their tax
information is being reported to authorities, their voluntary
---------------------------------------------------------------------------
compliance rate increases.
For ordinary wage and salary income, where employers share a Form W-2
with both employees and the IRS (as well as automatically withhold
income taxes), compliance is very high, with only an estimated 1
percent misreporting rate.\8\ As Figure 2 shows, compliance drops off
with a decline in third party information reporting. For income subject
to substantial information reporting, but not withholding, estimated
misreporting rates are 5 percent. For income subject to some limited
information reporting, misreporting rises to 17 percent. In stark
contrast, for opaque income sources that accrue disproportionately to
higher earners--like proprietorship income and rental income--
misreporting is estimated to be 55 percent. The IRS and GAO have
identified increased information reporting as one of the best ways to
improve taxpayer compliance because providing the IRS with a lens into
opaque income sources both improves enforcement activities and
encourages voluntary compliance by taxpayers who perceive that the IRS
has information necessary to pursue them should they not meet their tax
obligations.\9\
---------------------------------------------------------------------------
\8\ IRS, 2019. ``Federal Tax Compliance Research: Tax Gap Estimates
for Tax Years 2011-2013.''
\9\ GAO, 2019. ``Multiple Strategies are Needed to Reduce
Noncompliance: Statement of James R. McTigue, Jr., Director, Strategic
Issues,'' GAO-19-558T.
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
Although less is known about the distribution of the nonfiling and
underpayment tax gaps, a recent Treasury Inspector General report
highlights the importance of high-income nonfilers \10\ as contributors
to the tax gap. The report notes that since 2010, the estimated number
of high-income non-filers has risen by nearly 50 percent as a resource-
constrained IRS lacked the ability to pursue all of these cases.
Between 2014-2016, the Inspector General's report identified nearly
900,000 high-
income nonfilers, of which 400,000 cases (44 percent of cases) were
never investigated due to resource constraints. Of these 400,000 cases,
300 of the most egregious evaders cost the Federal Government $10
billion in unpaid tax liabilities over this period.\11\ The IRS is
already working to address this issue: In 2018, it established a
program to pursue all high-income nonfilers for tax years from 2016
through 2019, and it intends to select all high-income nonfiling cases
for enforcement action for tax years 2020 and beyond.
---------------------------------------------------------------------------
\10\ A high-income nonfiler is any nonfiler with total income
greater than or equal to $100,000.
\11\ TIGTA, 2020. ``High-Income Nonfilers Owing Billions of Dollars
Are Note Being Worked by the Internal Revenue Service,'' 2020-30-015.
Since 2020, the IRS has committed to a new strategy for handling non-
filing cases and aims to prioritize those involving high-income
taxpayers (see Eric Hylton, ``How the IRS Prioritizes Compliance Work
on High-Income Non-Filers Through National and International Efforts,''
CL-20-08, IRS.)
---------------------------------------------------------------------------
III. IRS Challenges With Compliance
Given the current magnitude of the tax gap in the United States, large
compliance initiatives will have benefits that far exceed costs. One
illustration of the large potential return on these resource
investments is provided by the IRS, which estimates that $1 spent on
tax enforcement typically yields at least $4 in direct revenue (for
example, increased tax payments collected from high-income nonfiler
audits).\12\ This direct increase in additional tax revenue that the
IRS is able to collect from compliance efforts does not include the
indirect effects of greater enforcement activities, as evidence
suggests that taxpayers are more likely to be compliant in the presence
of visible, robust enforcement efforts.
---------------------------------------------------------------------------
\12\ IRS estimates. For direct enforcement agents and associated
staffing, the ROI is much higher. The IRS provides a range of ROI
estimates for different types of activities, informed by how
collections have risen historically across categories. These range from
2 to 11, and increase over time as new initiatives become more
productive. IRS, 2020. ``Congressional Budget Justification & Annual
Performance Report and Plan.'' Publication 4450 (Rev. 2-2020).
Technology (and, in theory, the ability to detect tax evasion) has
developed significantly in recent years. In the late 1990s, only about
10 percent of individual income tax returns were filed electronically
and the vast majority of the IRS's enforcement activities focused on
returns filed on paper. The Internal Revenue Service Restructuring and
Reform Act of 1998 helped change this by setting an ambitious goal of
reaching an 80 percent electronic filing rate over the course of the
decade following 1998. The IRS furthered the transition away from paper
returns by providing electronic filing options for all of the major tax
filing categories, and by 2011, the electronic filing rate for
individual income tax returns was 78 percent and continued to rise to
93 percent in 2019. For business returns, the electronic filing rate
---------------------------------------------------------------------------
has more than doubled (from 33 percent to 70 percent) since 2011.
Enhanced electronic filing should help the IRS improve compliance in an
efficient manner.\13\ In addition to reducing processing burden, data
from electronically filed returns are easier to match against data
contained on third-party information returns, prior year's returns, and
similarly situated returns to help identify the most productive tax
returns to audit. This work can also help avoid unnecessary, costly and
burdensome audits of compliant taxpayers. Yet, tax compliance has not
improved. This is because the IRS operates outdated systems and lacks
the ability to fully take advantage of the benefits of more modern
technology due to its resource constraints. Further, noncompliance has
been exacerbated by enhanced opportunities to shield income from tax
liability, and even from audits. These opportunities are particularly
available for those in the top end of the income distribution who can
avoid taxes through sophisticated strategies such as offshoring,
creating complex partnership structures, or moving taxable assets into
the crypto economy.\14\
---------------------------------------------------------------------------
\13\ GAO, 2019. ``Multiple Strategies are Needed to Reduce
Noncompliance: Statement of James R. McTigue, Jr., Director, Strategic
Issues.''
\14\ The difficulty of tracking down offshore income is why some
countries have adopted amnesty agreements that incentivize individual
taxpayers to voluntarily disclose foreign wealth. These tend to
increase tax revenue, reflecting a large gap between true taxable
income and what is taxed. Langenmayr, Dominika, 2017. ``Voluntary
Disclosure of Evaded Taxes--Increasing Revenue, or Increasing
Incentives to Evade?'' Journal of Public Economics, 151: 110-125.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
A. Consequences of Technology Shortfalls
Due in part to the IRS's reliance on outdated technological platforms,
the compliance benefits of the transition to electronic tax return
filing have yet to be fully realized. Without adequate technology, the
IRS is unable to make use of 21st century data analytic approaches to
verify the accuracy of taxpayer filings.
The IRS's core tax processing system for over 150 million individual
tax returns and $1.2 trillion in annual revenue--known as Individual
Master File (IMF)--is written in programming languages that date back
to more than half a century ago, making IMF among the oldest IT systems
in the Federal Government.\15\ Designed in 1962, IMF is one of the
highest risk systems in the Federal Government, exposing a major
weakness to the IRS's ability to administer and collect taxes. (The
system for processing business tax returns is similarly antiquated.)
Annual changes have been made to the system since its development to
address tax code changes and to improve processes and, where possible,
to update the underlying hardware. The result today is decades of tax
law written in a programming language that is no longer taught, a data
platform that is highly complex to maintain, and an outdated system
with a limited number of employees supporting it--about half of whom
are eligible to retire.
---------------------------------------------------------------------------
\15\ GAO, 2019. ``IRS Needs to Take Additional Actions to Address
Significant Risks to Tax Processing,'' GAO-18-298.
The IRS's legacy computing infrastructure cannot keep pace with the
preferences of today's taxpayers for instantaneous data access, real-
time interactions, and other customer-centric services. The cost to
operate the IRS's current technology ecosystem continues to increase as
well. The GAO has pointed out that the use of such an antiquated
systems is more costly for the IRS than replacing with modern
technology since ``procurement and operating costs associated with this
[programming] language will steadily rise, because fewer people with
the proper skill sets are available to support [it].''\16\ Outdated
technology is a problem that extends beyond the 1960s Master File
architecture. As of the end of 2020, 30 percent of software in use was
``aged,'' meaning behind the most up-to-date version.\17\
---------------------------------------------------------------------------
\16\ Ibid.
\17\ IRS, 2021. ``Information Technology Annual Key Insights
Report.'' Publication 5453 (3-2021).
Without the resources to modernize its underlying technological
infrastructure the IRS is required to layer new IT systems on top of an
obsolete base infrastructure.\18\ The result is a patchwork approach
that poses a threat to the stability of the tax system. As the National
Taxpayer Advocate warned, ``By analogy, the IRS has erected a 50-story
office building on top of a creaky, 60-year-old foundation, and it is
adding a few more floors each year. There are inherent limitations on
the functionality of a 60-year-old infrastructure, and at some point,
the entire edifice is likely to collapse.''\19\ To illustrate the
danger, in the peak of the 2017 tax filing season, the IRS system
crashed on the day of the filing deadline and forced a last-minute
national Federal tax filing extension.\20\ An added risk exposure
caused by outdated technology is that it is ill-suited to meet new and
expanding challenges. The IRS defends against approximately 1.4 billion
sophisticated cyberattacks annually as criminals seek access to a
significant volume of sensitive taxpayer data which would be better
protected by more modern infrastructure.\21\
---------------------------------------------------------------------------
\18\ IRS, 2021. ``IRS, Treasury Disburse 25 Million More Economic
Impact Payments Under the American Rescue Plan,'' IR-2021-77.
\19\ National Taxpayer Advocate, 2018. ``Annual Report to Congress
2018.''
\20\ Rappeport, Alan. ``IRS Website Crashes on Tax Day as Millions
Tried to File Returns,'' New York Times, April 17, 2018.
\21\ Treasury, 2019. ``Treasury Announces IRS Integrated
Modernization Business Plan Promoting Cost Efficiency, Improved
Taxpayer Service, and Protection.''
The limitations of outdated technology are well understood by Treasury
and the IRS. The Taxpayer First Act of 2019 included a push to
modernize information technology and move toward rebuilding IRS
computer systems and implementing machine learning approaches to help
give tax enforcement agents a clearer picture of the most suspect
filers.\22\ The ability to make progress on these efforts will be
dependent on a sustained, timely multi-year budget commitment to cover
the large fixed costs associated with transitioning away from legacy
systems toward a modern, integrated platform.
---------------------------------------------------------------------------
\22\ IRS, 2018. ``Criminal Investigation Annual Report 2018,'' IRS-
2018-219.
In addition to hindering compliance efforts, IRS technological
deficiencies have broad consequences for taxpayer service as well. The
National Taxpayer Advocate reports that the IRS has struggled to
provide adequate and reliable customer service. For example, the IRS
had the resources to answer only 29 percent of the 100 million
telephone calls received in FY 2019, and during many months of the
COVID-19 pandemic, the combination of resource constraints and a shift
to remote operations further complicated service efforts and reduced
service levels.\23\
---------------------------------------------------------------------------
\23\ See National Taxpayer Advocate, 2019. ``Annual Report to
Congress 2019''; National Taxpayer Advocate, 2020. ``Annual Report to
Congress 2020.''
---------------------------------------------------------------------------
B. Budget Shortfalls Worsening over Time, Leading to a Decline in
Enforcement Activity
The magnitude of the U.S. tax gap is the byproduct of many factors,
including long-term IRS resource constraints. Since the early 2000s,
the IRS budget as a share of GDP has been trending downward.\24\ This
decline masks the severity of the funding shortfall because the
pressure for enforcement resources due to a growth in sophisticated
evasion opportunities is rising even more rapidly than GDP. Examples of
advanced evasion techniques include the use of foreign bank accounts to
shield income from IRS scrutiny and the adoption of international,
intra-company dealings that shift income solely for tax purposes but
can be made to appear legitimate in ways challenging for the IRS to
detect.
---------------------------------------------------------------------------
\24\ IRS Statistics of Income, 2019. ``Table 31: Collection Costs,
Personnel, and U.S. Population,'' Databook.
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
Over this same time period, there has been a rise in complex
business structures, such as partnerships, which also require
significant efforts by IRS agents to obtain a complete understanding of
interrelated business activities. Partnership income as a share of
total income grew from less than 5 percent to more than 35 percent
since 1990. More than 4.2 million partnership returns were filed in
calendar year 2018, which is more than double the number of corporate
returns filed the same year; however, the IRS audited only 140 of these
returns.\25\ Examining these returns is resource-intensive for the IRS
because many partnerships use tiered organizational structures where
multiple levels of domestic and sometimes foreign business entities
combine to obscure the ultimate beneficiaries of the business
operations. Some recent research suggests that 30 percent of
partnership income cannot unambiguously be traced to the ultimate
owner.\26\
---------------------------------------------------------------------------
\25\ This translates to an audit rate of less than 0.00004 percent.
Similarly, just 397 of the 4.8 million S-corporation returns were
audited. IRS Statistics of Income, 2019. ``Table 17a: Examination
Coverage and Recommended Additional Tax After Examination, by Type and
Size of Return,'' IRS Databook.
\26\ Cooper, Michael et al., 2016. ``Business in the United States:
Who Owns It, and How Much Tax Do They Pay?'' Tax Policy and the
Economy, 30(1): 91-128.
The IRS, like all Federal agencies, is best suited to provide the
services Americans deserve when it has the resources it needs to do so.
At present, IRS funding deficiencies have directly resulted in an
inability for the IRS to meet its mission of administering a fair and
---------------------------------------------------------------------------
effective tax system.
Despite preexisting needs to modernize outdated systems and to detect
increasingly complex evasion, the last decade shows a decrease--rather
than an increase--in IRS resources. In real terms, the IRS's overall
budget declined by 18.5 percent between FY 2010 and FY 2021.\27\ The
IRS's enforcement budget decreased by 15 percent over this time period,
leading to a 20 percent decline in the IRS workforce.\28\ These losses
have been most significant for revenue officers who collect taxes (50
percent decrease) and revenue agents who audit complex returns (35
percent decrease). Today, the IRS has fewer auditors than at any time
since World War II.\29\ As experienced employees have retired, the IRS
has been unable to replace departing workers with new revenue officers
and with agents of comparable training and skills necessary to pursue
the most complicated noncompliance cases.
---------------------------------------------------------------------------
\27\ IRS Statistics of Income, 2019. ``Table 31: Collection Costs,
Personnel, and US Population,'' IRS Databook; Congressional Research
Service, 2021. ``Internal Revenue Service Appropriations, FY2021.''
\28\ IRS Statistics of Income, 2010. ``Table 28: Costs Incurred by
Budget Activity,'' IRS Databook. IRS Statistics of Income, 2019.
``Table 31: Collection Costs, Personnel, and US Population,'' IRS
Databook.
\29\ Sarin, Natasha and Lawrence Summers, 2019. ``Shrinking the Tax
Gap: Approaches and Revenue Potential,'' Tax Notes Federal, 18
November.
Consequently, the share of audited returns has declined by nearly 45
percent between 2010-2018.\30\ There has also been a contemporaneous
steep decline in audit rates across all filing categories. The share of
corporate income tax, individual income tax, estate tax, and employment
tax returns examined by auditors have all dropped in the last decade.
---------------------------------------------------------------------------
\30\ IRS Statistics of Income, 2019. ``Table 17b: Examination
Coverage: Recommended and Average Recommended Additional Tax After
Examination,'' IRS Databook. IRS Statistics of Income, 2010. ``Table
9a: Examination Coverage: Recommended and Average Recommended
Additional Tax After Examination,'' IRS Databook.
Table 2: Audit Rates, 2010 vs. 2018
Decline in Audit Rates by Filer Category
------------------------------------------------------------------------
Percent Audited
Filer Category ---------------------- Percent
2010 2018 Decline
------------------------------------------------------------------------
All Filers 0.93% 0.51% -45.39%
------------------------------------------------------------------------
Individuals 1.11% 0.59% -46.30%
------------------------------------------------------------------------
EITC recipients 2.39% 1.41% -41.10%
------------------------------------------------------------------------
With annual income over $1 million 8.36% 3.23% -61.35%
------------------------------------------------------------------------
$1 million-$ 5 million 6.67% 2.21% -66.87%
------------------------------------------------------------------------
$5 million-$ 10 million 11.55% 4.21% -63.55%
------------------------------------------------------------------------
$ 10 million + 18.38% 6.66% -63.76%
------------------------------------------------------------------------
Corporations 1.39% 0.88% -36.54%
------------------------------------------------------------------------
With assets over $20 billion 97.99% 49.29% -49.70%
------------------------------------------------------------------------
Employment 0.21% 0.14% -33.63%
------------------------------------------------------------------------
Estates 10.12% 8.60% -15.01%
------------------------------------------------------------------------
With assets over $5 million 24.31% 18.71% -23.07%
------------------------------------------------------------------------
Source: IRS Statistics of Income Databook. Audit rates by annual income
are imputed from Table 9b; all other data are from Table 9a.
The decreases in audit rates are most pronounced for highly complex
audits performed by experienced agents. Among individual taxpayers,
audits of taxpayers with income over $1 million have fallen by over 60
percent between 2010-2018, with the audit rate decreasing from 8.4
percent to 3.2 percent.\31\
---------------------------------------------------------------------------
\31\ Ibid.
Audit coverage for large corporations has been cut in half over the
last decade. as coverage for companies with $20 billion or more in
assets decreased from 98 percent in FY 2010 to around 50 percent.\32\
This is the result of staff attrition and budget stringency, which both
diminish the resources that the IRS can dedicate to auditing high-
income taxpayers and large corporations. During the past 10-year
period, global high wealth examinations have taken roughly 2 years on
average to complete and have averaged around 284 hours per return. The
same is true for partnerships, where audits average around 333 hours
per return. In contrast, routine field audits of less complex taxpayers
average approximately 40 hours per return.\33\
---------------------------------------------------------------------------
\32\ Ibid.
\33\ IRS data.
In order for the IRS to appropriately focus enforcement scrutiny on
high-income taxpayers and the businesses they own--which research has
shown is a primary source of the tax gap--its budget must be
replenished. IRS agents cannot simply be assigned to global high
wealth, partnership, or large and complex business examinations without
the requisite skills, training, and experience to analyze returns that
are highly complex: For large corporations, the average number of pages
per tax filing has risen from slightly under 4,000 to nearly 6,000
since FY 2012.\34\
---------------------------------------------------------------------------
\34\ Ibid.
The vast majority of taxpayers timely file their returns and pay the
tax liabilities they owe. However, declining examination coverage has
real consequences. There is a direct correlation between the number of
audits that the IRS is able to perform and the revenue that the IRS
collects from examinations.\35\ In addition, if certain compliant
taxpayers come to believe that there is little to lose or much to gain
from underpaying tax liabilities, overall compliance levels will
decline.\36\ Visible enforcement efforts can help keep taxpayers
compliant.
---------------------------------------------------------------------------
\35\ Sarin, Natasha and Lawrence Summers, 2019. ``Shrinking the Tax
Gap: Approaches and Revenue Potential,'' Tax Notes Federal, 18
November.
\36\ Ibid.
Falling revenue due to fewer audits imposes added real costs passed on
to non-evaders. In the long run, either taxes must be raised on
compliers or government expenditures must be limited. The lack of
enforcement thus leads to a de facto punitive tax on compliant
taxpayers as those who pay their fair share will have their taxes
increased or government services reduced because evaders are not
paying. The costs can be particularly high for compliant direct
competitors of tax evaders.\37\ Evasion opportunities essentially
impose an even greater tax on compliant taxpayers because direct
competitor businesses who abide by the tax laws are put at a
competitive disadvantage. As taxes rise to meet revenue needs, this
disadvantage is made more pronounced since only law-abiding taxpayers
bear the burden of tax changes.
---------------------------------------------------------------------------
\37\ Slemrod, Joel, 2007. ``Cheating Ourselves: The Economics of
Tax Evasion,'' Journal of Economic Perspectives 21, 1 (2007): 25-48.
The consequences of these shortfalls have been exacerbated by expanding
responsibility, as these consequential budget cuts have been matched
with calls for the IRS to take on new functions. While these new
functions are related to the IRS' core mission of tax administration,
the increased workload spreads limited resources even more thinly.
Indeed, many parts of the Affordable Care Act are administered through
the IRS. And recently, the IRS has been pivotal in facilitating support
for American families in the COVID-19 pandemic: For example, it has
administered three rounds of Economic Impact Payments, most recently
sending out over 160 million payments totaling nearly $400 billion
within weeks of the American Rescue Plan's passage.\38\ The IRS also
has been charged by Congress with providing periodic advance payments
of the Child Tax Credit for the first time in history, and proposals in
the American Families Plan call on the IRS to administer credits that
provide expanded support for families, childcare, and low-income
individuals in the coming years.
---------------------------------------------------------------------------
\38\ Treasury, 2021. ``More than 1.1 Million Additional Economic
Impact Payments Disbursed Under the American Rescue Plan; Payments
Total Approximately 164 Million,'' IR-2021-103, 5 May.
---------------------------------------------------------------------------
C. Inequities in Tax Enforcement
Although the tax code redistributes income in a way that mitigates
racial and income inequality, it also can function in ways that
exacerbate it.\39\ Indeed, research has highlighted ways in which
aspects of tax policy can advantage upper-income taxpayers, while also
identifying aspects that burden low-income individuals. In addition,
scholars have increasingly focused on aspects of the tax code that
disadvantage Black and Hispanic families in particular.\40\
---------------------------------------------------------------------------
\39\ For example, until recently, the vast majority of children
living in poverty were ineligible for the Child Tax Credit (CTC).
Because of the concentration of poverty in minority communities, this
meant that although three-quarters of white and Asian children were
eligible for the full CTC, only about half of Black and Hispanic
children were. Goldin, Jacob and Katherine Michelmore. ``Who Benefits
from the Child Tax Credit?'' National Tax Journal, forthcoming. The
Biden Administration's reforms are focused on redressing this inequity.
\40\ Brown, Dorothy A. ``The Whiteness of Wealth: How the Tax
System Impoverishes Black Americans--And How We Can Fix It.'' Crown
Publishing Group, New York City, 2021.
IRS enforcement efforts can have similar effects. Recently, a stream of
research has begun to identify disparities in tax enforcement
activities.\41\ Historically, this inquiry has been complicated by the
absence of data on taxpayers' race or ethnicity.\42\
---------------------------------------------------------------------------
\41\ Work by former IRS economist Kim Bloomquist points out that
the five counties with the highest audit rates are predominantly
African-American, rural counties in the South. Bloomquist, Kim M.
``Regional Bias in IRS Audit Selection.'' Tax Notes Federal, March 4th.
A number of other promising research projects are underway.
\42\ Bearer-Friend, Jeremy, 2019. ``Should the IRS Know Your Race?
The Challenge of Colorblind Tax Data.'' Tax L. Rev. 73 (2019): 1.
The Biden administration recently launched an Equitable Data Working
Group that seeks to address these data limitations across Federal
datasets. At the same time, the Treasury Department is currently
undertaking research to study the relationship between the tax code and
racial inequities. This multi-year project will require close
engagement between Federal agencies and those in the research and
---------------------------------------------------------------------------
advocacy communities.
Over the last decade, a reduction in resources available to the IRS
exacerbated inequities in predictable ways. In particular, diminished
resources made it difficult to maintain a cadre of the most specialized
auditors, which in turn depressed audits rates for high-income
taxpayers relative to those in the lower part of the income
distribution. Indeed, although audits of those claiming the Earned
Income Tax Credit (EITC), have fallen by around 40 percent since 2010,
income tax audits of those earning $10 million or more annually have
fallen by closer to 65 percent (See Table 3). While it is true that
audit rates generally rise with income levels so that high earners are
audited with a greater probability than those of low or moderate
income, the level differences mask a significant shift in the trend.
Inequities in enforcement are not solely the result of a reduction in
the number of audits of high-income taxpayers. Rules and regulations
governing tax procedures can advantage well-resourced and corporate
taxpayers who have access to tax experts in ways lower-income taxpayers
do not. For instance, wealthy taxpayers often rely on tax opinions
provided by advisors to avoid penalties and have their representatives
negotiate terms to obtain more favorable outcomes.\43\
---------------------------------------------------------------------------
\43\ Blank, Joshua D., and Ari D. Glogower, 2021. ``Progressive Tax
Procedure.'' 96 New York University Law Review, forthcoming.
It is important to note that the President's compliance proposals are
designed to ameliorate existing inequities by focusing on high-end
evasion. Audit rates will not rise relative to recent years for those
with less than $400,000 in actual income. This focus is justified by
the composition of the tax gap, which accrues disproportionately to
those at the top of the distribution, who earn income in opaque
categories like partnership and proprietorship income, where
misreporting rates are high. While the impact on racial disparities
from future enforcement efforts remains to be seen and will be the
byproduct of a broader set of policy initiatives, the Biden
administration's commitment to racial equity was a key factor in the
---------------------------------------------------------------------------
design of the current proposal.
For these reasons, investments in tax compliance do more than raise
revenue to fund necessary investments or improve our fiscal position.
They also work to address inequities by increasing the share of IRS
enforcement attention that is focused on high-income noncompliers.
Further, improvements in taxpayer services and other enhancements to
tax administration such as the tighter regulation of tax preparers can
decrease disparities in the treatment of different groups of taxpayers.
IV. The President's Compliance Proposals
The President's proposals would overhaul tax administration in the
United States to create a more equitable tax regime. These proposals,
taken as a whole, would generate revenue from taxes that are owed but
not paid and through improved voluntary compliance. Increased funding
for the IRS would also improve how taxpayers are served by the IRS--
making sure that all taxpayers are able to take advantage of the tax
benefits to which they are entitled and are able to communicate
effectively and efficiently with the IRS when questions arise.
The compliance initiative has several elements, including:
Increasing the resources of the IRS to pursue noncompliant
taxpayers and better serve the vast majority who are fully compliant;
Leveraging information that financial institutions already
collect to shed light on those taxpayers who misreport income derived
from opaque categories;
Overhauling antiquated technology to help IRS leverage 21st
century data analytic tools; and
Regulating paid tax preparers and increasing penalties for those
who those who intentionally commit malfeasance.
While it will take time and substantial effort to achieve these goals,
even modest progress would translate into a substantial increase in
revenue. Treasury's Office of Tax Analysis estimate that over the next
decade, these changes would shrink the tax gap by about 10 percent,
raising $700 billion in additional tax collections over the next 10
years net of investments. The revenue raised is even larger in the
second decade after enactment at about $1.6 trillion. Revenue raised is
backloaded in part because investments in the IRS often take several
years to reach their ultimate payoff.
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
In addition to raising substantial revenue, investments in tax
compliance would improve the efficiency and fairness of the tax code.
Evasion imposes economic distortions because the resources taxpayers
expend to implement and hide income from tax authorities create no
social benefits. Tax evasion also can shift economic activity into
certain areas like proprietorship or cash-based businesses due to their
evasion advantage. In addition, the same tax rates raise more revenue
once evasion is made more difficult, and economic distortions caused by
disparate tax treatments of honest versus evasive businesses, among
other examples, would be decreased. Further, the tax code will be
fairer when it no longer benefits opaque sources of income relative to
wage labor. In sum, effectively tackling tax evasion can decrease the
amount of resources expended on underpaying tax liabilities, limit
distortions, and encourage more socially responsible behavior.
The uneven distribution of the tax gap implies that evasion contributes
to after-tax income inequality. Prior empirical evidence demonstrates
that the tax gap can be tied disproportionately to people in the top
end of the income distribution,\44\ and recent research emphasizes the
importance that income misreporting has for understanding income
inequality trends.\45\ Further, asymmetric compliance rates between
labor wage income and more opaque sources of income, especially for
high-income earners, has important horizontal and vertical equity
implications. As such, the fairness and progressivity of the tax code
can be enhanced through more equal compliance rates that ensure those
with high incomes pay what they owe.
---------------------------------------------------------------------------
\44\ See, e.g., Alm, James and Keith Finlay, 2013. ``Who Benefits
from Tax Evasion?'' Economic Analysis & Policy, 43(2). This is true
outside of the United States as well: recent evidence in Scandinavia
based on the Panama Papers revelations finds that although 3 percent of
personal taxes are evaded on average, this figure rises close to 30
percent in the top 0.01 percent of the distribution. Annette
Alstads#ter, Niels Johannesen, and Gabriel Zucman, ``Tax Evasion and
Tax Avoidance,'' Journal of Public Economics (under review).
\45\ DeBacker, Jason et al., 2020. ``Tax Noncompliance and Measures
of Income Inequality,'' Tax Notes Federal, 17 February; and Johns,
Andrew and Joel Slemrod, 2010. ``The Distribution of Income Tax
Noncompliance,'' National Tax Journal, 63(3).
---------------------------------------------------------------------------
A. Restoring IRS Resources
The first step in the President's efforts to restore IRS enforcement
capability is a sustained, multi-year commitment to rebuilding the IRS.
This involves spending nearly $80 billion on IRS priorities over the
course of the decade including hiring new specialized enforcement
staff, modernizing antiquated information technology, and investing in
meaningful taxpayer service--including the implementation of the newly
expanded credits aimed at providing support to American families.
Importantly, the additional resources will go toward enforcement
against those with the highest incomes, and audit rates will not rise
relative to recent years for those earning less than $400,000 in actual
income.
The President's proposal includes two components: a dedicated stream of
mandatory funds ($72.5 billion over a decade) and a program integrity
allocation ($6.7 billion over a decade).\46\ These mechanisms provide
for a sustained, multi-year commitment to revitalizing the IRS that
will give the agency the certainty it needs to rebuild.
---------------------------------------------------------------------------
\46\ The congressional budget resolution allows for additional
appropriations to the IRS in the form of be multi-year commitments to
fund ``program integrity'' activities that are estimated to save more
than they cost, as is the case with IRS enforcement efforts.
The IRS proposal includes year-by-year estimates of the additional
resources that will be directed toward the agency as well as the
specific activities that these resources would support. The design
ensures that the IRS is able to absorb and usefully deploy additional
resources over the entire 10-year horizon and keeps budget growth
---------------------------------------------------------------------------
manageable at around 10 percent per year.
Table 3: IRS Proposal and Revenue Raised, 2022-2031
Return on Investing in the IRS (inflation adjusted)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Return Per
$M 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 Total Dollar
Invested
--------------------------------------------------------------------------------------------------------------------------------------------------------
Mandatory
Cost 1,142 2,095 3,035 4,174 5,563 7,189 9,203 11,405 14,115 14,546 72,467
FTE 2,642 6,729 13,326 20,874 29,783 39,803 51,770 64,770 80,349 81,743
Direct Revenue - 631 3,098 6,959 12,435 19,758 29,903 40,730 53,721 63,780 231,015 3.2
Revenue - - 214 603 1,402 2,584 4,178 6,211 8,532 11,157 34,881
Protected
Direct & Protected - 631 3,312 7,562 13,837 22,342 34,081 46,941 62,253 74,937 265,896 3.7
Revenue
Program Integrity
Cap Adjustment
Cost 417 647 643 660 677 694 712 731 750 769 6,700
FTE 2,555 5,109 5,109 5,109 5,109 5,109 5,109 5,109 5,109 5,109
Direct Revenue 334 1,690 2,826 3,538 4,099 4,565 4,954 5,279 5,554 5,794 38,633 5.8
Revenue - 168 339 517 795 1,324 1,641 1,964 2,242 2,657 11,647
Protected
Direct & Protected 334 1,858 3,165 4,055 4,894 5,889 6,595 7,243 7,796 8,451 50,280 7.5
Revenue
Mandatory and Cap
Adjustment
Combined
Cost 1,559 2,742 3,678 4,834 6,240 7,883 9,915 12,136 14,865 15,315 79,167
FTE 5,197 11,838 18,435 25,983 34,892 44,912 56,879 69,879 85,458 86,852
Direct Revenue 334 2,321 5,924 10,497 16,534 24,323 34,857 46,009 59,275 69,574 269,648 3.4
Revenue - 168 553 1,120 2,197 3,908 5,819 8,175 10,774 13,814 46,528
Protected
Direct & Protected 334 2,489 6,477 11,617 18,731 28,231 40,676 54,184 70,049 83,388 316,176 4.0
Revenue
--------------------------------------------------------------------------------------------------------------------------------------------------------
The $6.7 billion program integrity allocation allows for increases in
base discretionary funding for boosting effective enforcement of
taxpayer compliance. This effort will support the hiring and retention
of at least 5,000 new enforcement personnel.
The mandatory funds are allocated over a 10-year horizon. They provide
enforcement resources, including a significant investment in
revitalizing the IRS's examination of large corporations, partnerships,
and global high-wealth and high-income individuals. Mandatory funds are
also directed toward other important IRS priorities. For example,
nearly $6 billion is dedicated to IT modernization. Modernization
funding will allow the IRS to address core technology challenges and
transform IRS provision of meaningful taxpayer services and tax
enforcement efforts. Tax processing technology today is supported by an
inefficient and inflexible batch processing architecture that delays
the provision of tax administration data to IRS systems, employees, and
taxpayers. Modernized technology will allow the IRS to make data more
easily available for service and enforcement purposes and to move
toward near real-time tax processing. The existing case management
system supported by more than 60 different components could be
integrated to provide a more comprehensive view of enforcement case
information and taxpayer data and real-time tax processing. The result
would be a more interactive tax processing experience that will allow
for an improved taxpayer experience and for the IRS to focus resources
on redressing noncompliance.
Additional IT tools will help support a staff capable of deploying new
analytical techniques; investing in developing machine learning
capabilities will enable the IRS to leverage the information it
collects to better identify tax returns for compliance review. The
proposed IT investment includes $4.5 billion to implement a new
information reporting regime. New resources would also support efforts
to meet imminent threats to the security of the tax system, like
cyberattacks.
Revitalizing the IRS requires more than building up the IRS's
enforcement efforts and technological systems. Revitalization also
demands a renewed commitment to meaningful taxpayer service. The
President's proposal will enable taxpayers to communicate with the IRS
securely and efficiently, and the IRS's new workforce would include
additional dedicated customer service representatives ready to assist
taxpayers as they navigate newly expanded programs like the Child Tax
Credit, the Child and Dependent Care Tax Credit, and the Earned Income
Tax Credit.
Because the expansion in the IRS's budget is phased in over a 10-year
horizon, each year the IRS's workforce should grow by no more than a
manageable 15 percent. By the end of the decade, however, the IRS's
budget would be roughly 40 percent above 2011 levels in real terms as a
result of this proposal.\47\ This is a sizable increase, but a
necessary one given that the IRS's responsibilities have grown
dramatically over the intervening period. Yet even with this increase,
the IRS budget would still not return to early 1990s levels as a share
of gross collections.
---------------------------------------------------------------------------
\47\ This calculation assumes that the IRS discretionary budget
over time will approximately resemble the real resource levels
indicated by the FY 2022 discretionary budget request.
The IRS estimates the marginal return on investment (ROI) for most of
its enforcement activity based on historical tax enforcement data.
Average ROIs for the mandatory and program integrity allocations are
shown in Table 3 above. The Office of Tax Analysis' revenue estimate
for the IRS funding proposal is projected based on these ROI estimates.
Total additional revenue generated from the $80 billion increase in the
IRS budget over 10 years is estimated to be around $320 billion during
---------------------------------------------------------------------------
this horizon, which suggests roughly a 4-to-1 ROI.
These numbers are conservative because IRS ROI estimates are only
available for the subset of enforcement investments, and not technology
or service improvements that are likely to improve compliance. As a
result, revenue estimates do not take into account increases in
enforcement efficiency or taxpayer compliance that will arise from non-
enforcement investments such as the benefits of widespread use of
machine learning technologies. Further, these estimates do not account
for increases in voluntary compliance attributable to improvements in
taxpayer service. For example, when taxpayer questions are answered in
a timely manner, taxes tend to be paid more accurately plus the fact
that an effective system of tax administration increases taxpayer trust
and compliance.\48\
---------------------------------------------------------------------------
\48\ See, e.g., Williamson, Vanessa S. ``Read My Lips: Why
Americans are Proud to Pay Taxes.'' Princeton University Press, 2017.
Further, because standard IRS methodologies focus on enforcement cases
and the associated revenue and costs, they are not capable of arriving
at an ROI for large-scale IT investments. Although researchers
understand that the potential of better IRS technology to improve
collections efforts is sizable, these gains are difficult to attribute
---------------------------------------------------------------------------
in revenue estimation.
Moreover, these estimates do not take into account the deterrent
effects associated with different types of enforcement activities which
are generally considered to be quite significant.\49\ More recent
empirical work provides a way to start to try and understand the
importance of the indirect effects in understanding the revenue
potential of compliance initiatives. A recent peer-reviewed study
found, for example, that increased income reported in the 5 to 8 years
following a random audit is about 1.5 times the audit revenue.\50\
Another peer-reviewed study noted that in-person collection visits
raise as much revenue from firms that share a tax preparer with the
visited firm as they do from the visited firm itself.\51\ Although more
research is needed to arrive at a better understanding of the magnitude
of deterrent effects, revenue estimates that fail to include
noncompliance deterrence are conservatively low.
---------------------------------------------------------------------------
\49\ A longstanding Treasury estimate suggests that the deterrent
effects of compliance activities are likely at least three times as
large as the direct effects. IRS, 2018. ``Budget in Brief FY 2019.''
\50\ Jason DeBacker et al., 2018. ``Once Bitten, Twice Shy? The
Lasting Impact of Enforcement on Tax Compliance,'' The Journal of Law
and Economics, 61, 1 (2018).
\51\ Boning, William, et al., 2020. ``Heard it through the
grapevine: The direct and network effects of a tax enforcement field
experiment on firms.'' Journal of Public Economics 190 (2020): 104261.
For the purposes of the Office of Tax Analysis' estimation, revenue is
counted when it accrues to the IRS, and a collection stream for
enforcement revenue is built into these estimates: For example, even
for an audit closed in FY 2022 with adjustments, collections will be
realized over time. This is part of the reason why revenue from this
proposal is backloaded in the traditional 10-year budget window.
Further, estimates incorporate the fact that new hires take several
years to reach their full potential. Revenue estimates also assume a
declining marginal return for enforcement activity as the level of
enforcement rises. Revenue generated reaches its steady state shortly
after the end of the 10-year horizon, and the backloaded nature of
additional tax collections results in a second-decade revenue estimate
that is more than twice as large as the first (See Figure 5).
B. Increased Information Reporting
The second step in the compliance agenda involves shining light on
opaque income streams, including proprietorship and partnership
business income. Bolstering information reporting is regarded by the
IRS and GAO as one of the best ways to increase the overall compliance
rate,\52\ and existing empirical evidence confirms that introducing
third party reporting requirements is effective.\53\
---------------------------------------------------------------------------
\52\ GAO, 2019. ``Multiple Strategies are Needed to Reduce
Noncompliance: Statement of James R. McTigue, Jr., Director, Strategic
Issues,'' GAO-19-558T, Washington, DC: GAO, 2019; and IRS, 2019.
``Understanding the Tax Gap and Taxpayer Noncompliance, Written
Testimony of Dr. Benjamin D. Herndon, Chief Research and Analytics
Officer, Internal Revenue Service, Before the House Ways and Means
Committee on the Tax Gap.''
\53\ Pomeranz, Dina, 2015. ``No Taxation Without Information:
Deterrence and Self-Enforcement in the Value Added Tax.'' American
Economic Review, 105(8); Phillips, Mark D., 2014. ``Individual Income
Tax Compliance and Information Reporting: What Do the US Data Show?''
National Tax Journal, 67(3); Marchase, Carla, 2009. ``Rewarding the
Consumer for Curbing the Evasion of Commodity Taxes,'' Public Finance
Analysis, 65(4); Johannesen, Niels, 2014. ``Tax Evasion and Swiss Bank
Deposits,'' Journal of Public Economics, 111; Adhikari, Bibek et al.,
2016. ``Taxpayer Responses to Third-Party Income Reporting: Evidence
From a Natural Experiment in the Taxicab Industry,'' IRS Research
Bulletin, 6th Annual Joint Research Conference on Tax Administration,
IRS and the Urban-Brookings Tax Policy Center; Naritomi, Joana, 2019.
``Consumers as Tax Auditors,'' American Economic Review, 109(9). (See
also Kleven, Henrik et al., 2011. ``Unwilling or Unable to Cheat?
Evidence from a Tax Audit Experiment in Denmark,'' Econometrica, 79(3),
finding that the tax evasion rate is close to zero for income subject
to third-party reporting, but substantial for self-reported income.)
Previous changes to information reporting shed light on the significant
potential of such efforts but also on pitfalls that can arise when
reporting requirements are imprecisely designed. It is important to
implement comprehensive information reporting regimes, as partial
reforms can simply shift tax evasion into other areas.\54\ Further,
financial institutions house a lot of valuable information, and indeed
already provide third-party reports to the IRS. Leveraging this
information--rather than introducing new requirements for taxpayers
\55\--is a proven way to improve compliance.\56\
---------------------------------------------------------------------------
\54\ For example, the introduction of Form 1099-K provided the IRS
and taxpayers with information about businesses' sales by payment card
and other electronic means. As a result, taxpayers increased reported
receipts by up to 24 percent once they began to believe that the IRS
could conceivably verify gross receipts. However, many business
taxpayers appeared to offset this change with simultaneously increased
reported expenses. Slemrod, Joel et al., 2017, ``Does Credit Card
Information Reporting Improve Small-Business Tax Compliance?'' Journal
of Public Economics, 149. See also Adhikari, Bibek et al., 2020.
``Information Reporting and Tax Compliance,'' AEA Papers and
Proceedings, 110.
\55\ As part of the Affordable Care Act, a new provision was
introduced which would have required businesses to send Form 1099
information returns for all purchases of goods and services over $600.
It was set to go into effect in 2012 but repealed 6 months prior to
enactment because of a concern about the burden imposed on small
businesses. National Taxpayer Advocate, 2010. ``Fiscal Year 2011
Objectives Report to Congress.''
\56\ For example, in the international sphere, the Foreign Account
Tax Compliance Act (FATCA) was enacted in 2010 to help combat tax
evasion by those with offshore accounts. Although it is difficult to
draw full conclusions given the nascency of these efforts, research
suggests that financial institutions play an important role in
providing information to the IRS that encourages increased compliance.
De Simone, Lisa, Rebecca Lester, and Kevin Markle, 2020. ``Transparency
and Tax Evasion: Evidence from the Foreign Account Tax Compliance Act
(FATCA).'' Journal of Accounting Research 58(1). This is in part
attributable to amnesty programs that were implemented around the same
time as new reporting requirements and precipitated a significant
increase in self-reported foreign dealings. Johannesen, Niels, et al.,
2020. ``Taxing Hidden Wealth: the Consequences of US Enforcement
Initiatives on Evasive Foreign Accounts,'' American Economic Journal:
Economic Policy 12(3).
The President's proposal requires information reporting on financial
accounts to increase the visibility of gross receipts and expenses to
the IRS. Today, business income is subject to limited information
reporting. Current reporting of gross receipts exists for only certain
types of revenue, and there is no information reporting on deductible
expenses. This is why the tax gap for partnership, S-corporation, and
proprietorship income is estimated at around $200 billion annually with
the net misreporting percentage for certain income categories exceeding
---------------------------------------------------------------------------
50 percent.
Third party information reporting is already provided on primary income
streams for the vast majority of Americans, such as wage, pension, and
unemployment income. The President's proposal would help make tax
administration more equitable by subjecting financial flows, especially
those that accrue disproportionately to those at the top of the income
distribution, to third-party reporting as well.
The new reporting regime would build from the framework of the Form
1099-INT reports that taxpayers already receive from financial
institutions when they earn more than $10 in interest from a bank,
brokerage, or other financial institution. Financial institutions would
simply report additional data on the financial accounts of these
existing information returns. Specifically, the annual return would
report gross inflows and outflows on all business and personal accounts
from financial institutions, including bank, loan, and investment
accounts but carve out exceptions for accounts below a low de minimis
gross flow threshold.\57\
---------------------------------------------------------------------------
\57\ The proposal preserves significant flexibility for the
Secretary and the IRS to design the new reporting requirements in the
way that will be most effective for tax compliance efforts.
Other accounts that are similarly situated to financial institution
accounts would also be covered under this new reporting regime--for
example, payment settlement entities would also be required to report
gross receipts and gross purchases. The reporting regime would also
cover foreign financial institutions and crypto asset exchanges and
---------------------------------------------------------------------------
custodians.
These new reporting requirements would come with no additional
reconciliation requirement for taxpayers. For already compliant
taxpayers, the only effect of this regime is to provide easy access to
summary information on financial accounts and to decrease the
likelihood of costly ``no fault'' examinations once the IRS is able to
better target its enforcement efforts. For noncompliant taxpayers, this
regime would encourage voluntary compliance as evaders realize that the
risk of evasion being detected has risen noticeably.
To arrive at a revenue estimate for the impact of a comprehensive
information reporting regime, the Office of Tax Analysis began with an
estimate of the tax gap for business income which included Schedule C
proprietorship income, Schedule E rent and pass-through income, and
small corporation income as well as the portion of the employment tax
gap associated with business incomes. This tax gap estimate was then
reduced to reflect the expected increase in voluntary compliance once
taxpayers realize that the IRS has a lens into business income. The
revenue estimate added two assumptions: first, a reduction in the
steady state share of the tax gap due to increased voluntary compliance
as taxpayers react to increased information reporting; and second, a
gradual increase of voluntary compliance that phases in over time.
The revenue estimates assume that the bank reporting proposal will
become effective for tax year 2023, building in implementation time for
the IRS and for financial institutions. The administration would
concurrently seek out ways to reduce any new burden on financial
institutions associated with this information reporting requirement.
This additional information reporting would also enhance the
effectiveness of enforcement measures, as it will provide a proxy
measure for a taxpayer's potential income position, and suspect account
flows could help the IRS better target its enforcement activities. This
would benefit compliant taxpayers, whose risk of costly no-fault audits
would decrease as the IRS better targets enforcement actions.
According to the Office of Tax Analysis, the increase in compliance
that would result from this new reporting regime is estimated to raise
$460 billion over the next decade.
Challenges of Cash and Virtual Currencies
For a new information reporting regime to shed light on previously
opaque income sources effectively, it is imperative to prevent business
income from being shielded from reporting requirements. This is why the
new Form 1099 reports would also be required from payment services
providers so that businesses cannot shift out of traditional financial
institutions to other kinds of platforms and avoid making their income
visible to the IRS.
Another concern is that an information reporting regime will shift
taxpayers toward a greater use of cash. Although information reporting
may push some taxpayers to transact more in cash to avoid the
reporting, it is unlikely that a substantial share of the business tax
gap will move to cash-based transactions. Businesses already have
incentives to use cash as much as possible to avoid detection via bank
statements obtained in an audit, but there are practical barriers--such
as security risks and the difficulty of spending large amounts of cash
for certain transactions--to expanding the use of cash without
depositing it in a bank account.
Still another significant concern is virtual currencies, which have
grown to $2 trillion in market capitalization.\58\ Cryptocurrency
already poses a significant detection problem by facilitating illegal
activity broadly including tax evasion.\59\
---------------------------------------------------------------------------
\58\ Chavez-Dreyfuss, Gertrude. ``Crypto Market Cap Surges to
Record $2 Trillion, Bitcoin at $1.1 Trillion,'' Reuters, April 5, 2021.
\59\ Early work suggested the significance of the challenges posed
by the rise of virtual currencies: ``To the extent that
cryptocurrencies continue to gain momentum; we could reasonably expect
tax evaders--who traditionally executed their tax-evasion techniques
through the use of offshore bank accounts in tax-heaven jurisdictions--
to opt out of traditional tax havens in favor of cryptocurrencies.''
See, e.g., Marian, Omri, 2013. ``Are Cryptocurrencies Super Tax
Havens,'' Michigan Law Review First Impressions, 112(38).
This is why the President's proposal includes additional resources for
the IRS to address the growth of cryptoassets. Despite constituting a
relatively small portion of business income today, cryptocurrency
transactions are likely to rise in importance in the next decade,
especially in the presence of a broad-based financial account reporting
regime. Within the context of the new financial account reporting
regime, cryptocurrencies and cryptoasset exchange accounts and payment
service accounts that accept cryptocurrencies would be covered.
Further, as with cash transactions, businesses that receive
cryptoassets with a fair market value of more than $10,000 would also
be reported on. Although cryptocurrency is a small share of current
business transactions, such comprehensive reporting is necessary to
minimize the incentives and opportunity to shift income out of the new
information reporting regime.\60\
---------------------------------------------------------------------------
\60\ It is worth noting that the IRS has identified cryptocurrency
transactions as an enforcement priority and recently included
cryptocurrency reporting on the individual tax return, Form 1040.
---------------------------------------------------------------------------
C. Other Compliance Proposals
The administration's compliance proposals include a number of other
additional tools for the IRS that complement the transformational
nature of the investments and information reporting regime discussed
above.
For example, the proposal provides the IRS with the authority to
regulate and establish minimum competency standards for all paid tax
preparers.\61\ Unregulated preparers submit more tax returns than all
other preparers combined, and they often make costly mistakes that
subject their customers to audits.\62\ A recent GAO study shed light on
the scope of this problem. During undercover visits to 19 randomly
selected unregulated preparers, only two calculated taxpayers' refunds
accurately.\63\ The issues of unregulated tax preparers go beyond the
quality of services provided. Some unregulated preparers enrich
themselves by ascribing to themselves a portion of taxpayers' refunds;
or they commit fraud while failing to sign returns (so called, ``ghost
preparers''), leaving the taxpayers who are audited without the ability
to prove that fraudulent returns are the fault of unscrupulous
preparers.\64\ In addition to establishing standards for unregulated
tax preparers, the President's proposal would include additional
penalties for ghost preparers.
---------------------------------------------------------------------------
\61\ A previous initiative in 2010 launched by the IRS proposed
requiring a basic competency exam and taking annual classes to stay
abreast of tax changes; however, courts ruled that the IRS required
statutory authority to regulate in this space. The IRS's experience
administering the test before this ruling indicates its importance:
roughly 25 percent of unenrolled preparers who took it did not pass the
exam. See, e.g., GAO, 2014. ``Protecting Taxpayers from Incompetent and
Unethical Return Preparers: Hearing Before the Committee on Finance.''
\62\ National Taxpayer Advocate, 2018. ``Most Serious Problem #7:
Return Preparer Oversight: The IRS Lacks a Coordinated Approach to Its
Oversight of Return Preparers and Does Not Analyze the Impact of
Penalties Imposed on Preparers,'' Annual Report to Congress 2018.
\63\ GAO, 2014. ``In a Limited Study, Preparers Made Significant
Errors: Statement of James R. McTigue, Jr., Director, Strategic
Issues,'' GAO-14-467T.
\64\ National Taxpayer Advocate, 2013. ``Most Serious Problem #8:
Return Preparer Fraud: The IRS Still Refuses to Issue refunds to
Victims of Return Preparer Misconduct Despite Ample Guidance Allowing
the Payment of Such Refunds,'' Annual Report to Congress 2013. IRS,
2021. ``Beware of `Ghost' Preparers Who Don't Sign Tax Returns,'' IR-
2021-30.
Other proposals identify opportunities in several areas to strengthen
tax collection. An additional change would improve taxpayer information
accuracy by permitting the IRS to require payment recipients to certify
their taxpayer identification numbers (TINs) to payers who issue third-
party information reports; another proposal imposes unpaid corporate
tax liability on shareholders in specified tax shelter cases.
D. Interaction Between Compliance Initiatives
The increase in information reporting and the IRS's resources and
enforcement tools are complementary, and both are essential ingredients
to effective and equitable tax administration. For reporting to be most
useful, the IRS needs the funding to understand and process the
information it receives. For the IRS's funding to be best spent, the
IRS needs more lenses into opaque sources of income.
To be effective in promoting accurate reporting of business income, the
new financial account reporting regime would require a substantial
expansion of the IRS's information technology and data analytic
capacity. This funding is provided for with mandatory funds that are
predesignated for implementing the new reporting regime.
Financial account reporting will also make underreported business
income that has historically only been revealed at audit visible in
some form to the IRS. Information on inflows and outflows can help the
IRS select cases for enforcement activity and may make the audit
process more efficient. Finally, the proposed enforcement funding,
coupled with the improved visibility of business income, could increase
the IRS's efficiency, facilitating the pursuit of a greater share of
suspected evaders.
V. Conclusion
Over the last decade, and even prior, the IRS has lacked the resources
it needs to enforce the tax laws and best serve taxpayers. This costs
the government around 3 percent of GDP each year in owed but
uncollected taxes. But it also decreases the progressivity of the tax
code since the benefits of noncompliance accrue disproportionately to
top earners. Further, tax noncompliance creates inefficiencies and
distortions by pushing economic activity toward those areas where there
are the most opportunities for evasion.
The President's proposals would address these deficiencies, benefitting
those who fulfill their tax obligations, and raising revenue to fund
urgent fiscal priorities. At the crux of these proposals is a
commitment to revitalizing tax enforcement, decreasing noncompliance by
about 10 percent over the course of a decade.
Achieving this goal will require providing the IRS the resources it
needs for hiring specialized auditors, training them to detect
noncompliance by sophisticated taxpayers, and investing in a 21st
century technology infrastructure. Equally important, these investments
are coupled with new third-party information reports that the IRS can
use to help detect evasion. More effective enforcement will improve the
experience of most taxpayers by reducing the number of audits imposed
on compliant taxpayers. A robust investment in the IRS will rebuild
taxpayer service to help ensure that the agency is capable of
responding to taxpayer needs in a timely manner and efficiently
delivering tax credits, refunds, and other benefits to families and
workers.
Overhauling tax administration in this manner will require a sustained,
multi-year commitment to foundational change. Effective management of a
well-resourced IRS will be essential to the agency's long-term success
and will strengthen voluntary compliance in the United States. Frequent
reporting on milestones and performance metrics--including a more
current tax gap report--will be essential, providing insight into the
efficacy of new programs.
Working to close the tax gap reflects a commitment to ending our two-
tiered tax system, one where most American workers pay their full
obligations, but high earners who accrue income from opaque sources
often do not. The President's proposals address this inequity in a way
that will pay large dividends in this decade--and in the decades to
come.
______
Prepared Statement of Hon. Mike Crapo,
a U.S. Senator From Idaho
Thank you, Mr. Chairman, and welcome again, Commissioner Werfel.
The IRS needs to be accountable for the choices it makes, become
more efficient, rigorously plan, provide full transparency, and timely
solicit real feedback from informed stakeholders--like Congress--before
acting.
Despite claims that the $80 billion in new funding would
``transform the IRS into a 21st-century agency,'' the President's
budget request indicates otherwise. While modest progress has been
made, there are other areas where the agency continues to miss the
mark.
For example, last year, I raised concerns with the IRS's strategic
operating plan, including its vagueness and missing line-item cost
projections.
A year later, we are still missing important details, yet this
year's budget asks for even more unprecedented IRS funding--more than
$104 billion. This underscores that the initial windfall was not a
cure, the IRS has not transformed, and the President believes the only
way to realize that vision is to just spend more.
While I support a transformed IRS, this approach is not a solution.
For $80 billion, one would expect transformational customer service
changes and fully modern front- and back-end IT. Instead, it seems
taxpayers have paid for mail to actually be opened and a decline in
phone wait times. Meanwhile, several million items of taxpayer
correspondence remain unanswered and half a million ID theft cases
remain unresolved, on average, years later.
IT modernization funding is also scheduled to run out years before
the IRS finishes updating its systems. I assume this is due, in part,
to the bulk of the IRA funding being directed to enforcement.
An emblematic example of the ``just spend more, no questions
asked'' approach is the Direct File program. Despite there already
being multiple free filing programs offered by the IRS, the agency
embarked on a redundant government-run tax preparation project,
complete with all the attendant inefficiencies and conflicts of
interest.
Just last week, a Government Accountability Office (GAO) report
highlighted many ways the supposed pilot program has not followed best
practices, including key planning, budgeting, and accountability
failures. The report noted that while GAO could not determine how much
the program has and will cost to develop and operate--the IRS having
not provided sufficient information to do this--the current tab far
exceeds $100 million just through FY 2024, all for an ``option'' that
might only serve 100,000 taxpayers this year.
In contrast, the Federal Government spends less than $5 million a
year to have 2 to 3 million taxpayers served in one of its free income
tax preparation programs. Were the IRS to use this year's Direct File
spending to pay third-party providers to prepare and file returns
instead, literally hundreds of times the number of taxpayers could file
for free.
The IRS spending hundreds of millions of its finite funding to
simply ``test'' the utility of doing something that can already be done
more efficiently, with better outcomes, and without very real
conflicts, while simultaneously pleading for more funding, calls for
more oversight.
Direct File is not my only concern with the IRS's current path.
Other serious concerns include: continued IRS use of biased data and
post-facto metrics to plan and justify its actions; indiscriminate IRS
enforcement campaigns that pressure honest taxpayers and waste
government resources; and the IRS's continued--and highly
disproportionate--focus on increasing enforcement over improving
taxpayer services.
Commissioner Werfel, while I appreciate a handful of positive steps
the IRS has taken during your tenure, so much remains undone at the IRS
that any victory lap is unwarranted.
I look forward to your testimony, Commissioner Werfel. Thank you,
Mr. Chairman.
______
Prepared Statement of Hon. Daniel I. Werfel,
Commissioner, Internal Revenue Service
introduction
Chairman Wyden, Ranking Member Crapo, and members of the committee,
thank you for the opportunity to discuss the 2024 filing season and the
IRS budget.
After a year as IRS Commissioner, it remains an honor for me to
lead this great institution. My respect for the agency's role and
admiration for its workforce continue to grow. I'm pleased to report
the 2024 tax season opened on schedule on January 29th, and we've seen
a historic filing season unfolding since then. Through March 30th, the
IRS received more than 90.3 million individual income tax returns and
issued more than 60.8 million refunds for more than $185.6 billion.
Going into the final days of tax season, the Inflation Reduction
Act (IRA) funding has enabled the IRS to have one of its best filing
seasons ever in terms of customer service. Wait times and level of
service on our main phone lines have improved. We've dramatically
expanded service in our walk-in sites, increasing hours and serving
more taxpayers. And new and expanded tools on irs.gov are seeing heavy
use. I will have more detail on these later in this testimony.
IRA funding has also enabled us to begin making critical inroads in
addressing the tax gap and tax evasion among the most complex and
largest filers, which represents a sharp turnaround from the past
decade when our work was hindered by lack of resources. Our compliance
work includes focusing on delinquency and non-filing among high-income
individuals, as well as leveraging artificial intelligence (AI) and
hiring subject matter experts to find tax evasion among our largest and
most complex partnerships and corporations.
But while we have seen a historically strong tax season so far, I
want to be clear the IRS has much more work to do on many fronts:
closing remaining gaps on phone service; expanding digital options for
all taxpayers; further strengthening data security; and increasing
support for vulnerable populations by such actions as increasing access
to the Earned Income Tax Credit (EITC) and other refundable credits as
well as protecting and supporting scam victims.
Our ongoing success hinges on sustained investments to make sure
that we have the right size workforce, with the right training and
tools as well as a modern technology infrastructure, with increasingly
modern web-enabled tools for taxpayers. These are needed to ensure the
IRS is ready to implement the tax system of today and the future.
Along with delivering the filing season and other day-to-day
activities, we have a tremendous amount of transformation work taking
place at the IRS. These changes, which are made possible by IRA
funding, touch every part of our operations, from taxpayer service to
tax enforcement to information technology and data security.
We have a unique opportunity--a once-in-a-generation chance--to
envision and realize a future of tax administration that meets the
evolving needs of taxpayers and the nation. Using IRA funding, there
are three central themes I've been reminding taxpayers about this
filing season:
Ensuring taxpayers can easily contact the IRS--whether in
person, on the phone or online--and get help navigating complex tax
laws and accessing the credits for which they are eligible;
Identifying the growing number of taxpayers with complex
returns--including certain wealthy individuals, large corporations and
complex partnerships--who are shielding income to evade their tax
responsibility and collecting from them what is owed; and
Addressing the growing risk of tax scams and schemes by
protecting honest taxpayers from them and rooting out the nefarious
actors that perpetrate them.
The IRS has many other goals and objectives supporting this effort
as part of our strategic operating plan. This includes making dramatic
improvements to our information technology (IT) infrastructure and
design as well as delivering modern technology platforms that center
around data and applications. These efforts will support all our
transformation work.
Achieving this ambitious transformation agenda requires us to
rebuild areas in the IRS that have suffered from more than a decade of
underfunding that preceded the IRA. A critical change we are making
involves providing our IRS workforce with the right tools--including
training, technology and smarter processes--so we are ready now, and in
the future, to meet our core mission of supporting taxpayers and the
Nation.
Aiding us in our efforts, the President's Fiscal Year (FY) 2025
budget proposal would restore and maintain the full IRA investment in
the IRS through 2034, avoiding funding cliffs that would dramatically
degrade our ability in many different areas, including taxpayer
services beginning in 2026. Sustained funding is necessary for us to
build on the successes of the 2024 filing season and continue our work
to:
Make further phone service improvements, answering calls and
other inquiries from taxpayers,
Provide additional digital tools for taxpayers so the IRS can
keep pace with the rest of the digital economy,
Continue efforts to hold complex filers accountable for tax
evasion,
Make critical upgrades to our data security environment so that
we remain one step ahead of evolving cyberattacks and other threats,
Disrupt tax scams by bad actors and provide assistance to
taxpayers victimized by such scams, and
Deploy and sustain new technologies made necessary by an
expanding tax system.
For these improvements to continue and accelerate, a consistent,
reliable funding stream remains critical for the agency--both in regard
to our annual appropriations and maintaining the IRA funding.
The decision about whether to adequately fund the agency comes down
to a fundamental choice: Whether or not we will have an IRS that . . .
Taxpayers can easily interact with to meet their tax
responsibilities or resolve issues if they arise,
Ensures fairness in the tax system through its enforcement
activities,
Quickly and effectively addresses tax scams that exploit
vulnerable populations, and
Has updated IT infrastructure and modern technology platforms
capable of supporting our transformation work.
For the IRS to be able to do all these things, adequate stable
funding is essential.
update on the filing season and transformation efforts
The IRS remains focused on improving service to taxpayers, offering
them more in-person and online resources as part of our effort to
deliver another successful tax season this year. Taxpayers and tax
professionals saw additional improvements in our operations and service
this year that made it easier for them to prepare and file taxes.
The IRS has worked hard to ensure this filing season would build on
the accomplishments of last year. Early results show that we've
exceeded several transformation goals set for the 2024 filing season:
Again committing to an 85-percent level of service (LOS) on our
main toll-free phone line during the filing season. As of early April,
we have exceeded that level of service, which means the vast majority
of callers routed to live assistors have been able to connect and
receive support.
Committing to an average call wait time of 5 minutes or less on
the agency's main taxpayer helpline. As of early April, we exceeded our
goal, with our main line phones being answered in about 3 minutes.
Giving taxpayers the ability to opt for a call back from the IRS
if their wait time on the phone is more than 15 minutes. This has saved
taxpayers many thousands of hours of wait times.
Increasing self-service support in a number of areas, such as
the Where's My Refund? and Where's My Amended Return? tools, which used
conversational voice bot technology for the first time to help
taxpayers get answers on the status of their refund or amended return
more quickly.
Providing more in-person help at our Taxpayer Assistance Centers
(TAC), with a goal of delivering 8,500 more hours of in-person
assistance than we did during the 2023 filing season. We have exceeded
that goal, having delivered 9,000 more hours of in-person assistance.
We expanded hours at nearly 250 TACs around the country during the
filing season. And we again offered special Saturday hours at TAC
locations around the country; this past Saturday, April 13th, we had
more than 70 TACs open to help taxpayers.
Although these were ambitious goals, our workforce proved it is up
to the challenge. The progress we have made thus far using IRA funding
shows what is possible in the years ahead.
I'll have more to say about our efforts to provide world-class
service, but first I'll turn to enforcement, where we've seen early
success in ensuring the wealthiest Americans with ongoing issues pay
what they owe.
On the compliance side we continue to take swift and aggressive
action to ensure that high-income taxpayers who evade taxes play by the
same rules as everyone else. We are increasing scrutiny of these
taxpayers as we work to reverse the historically low audit rates for
large corporations, complex partnerships, and high-wealth individuals
that existed since before the IRA was passed.
As an example, we have concentrated our revenue officers' work on
those taxpayers with more than $1 million in income and more than
$250,000 in recognized tax debt. Over the past year, the total we have
recovered through these new initiatives is about $500 million. That's
half a billion dollars recovered from fewer than 1,000 millionaires and
billionaires. That is just the beginning: Our revenue officers continue
to work on hundreds of these cases to recover more back taxes from
delinquent high-wealth individuals.
In a related effort, we recently launched an initiative focused on
high-income taxpayers who have failed to file Federal income tax
returns, some as far back as 2017. In February we began sending out
compliance letters on more than 125,000 cases where tax returns haven't
been filed. This includes more than 25,000 mailings to those with more
than $1 million in income, and over 100,000 mailings to people with
incomes between $400,000 and $1 million, between tax years 2017 and
2021. People who fail to respond to these letters will be subject to
additional notices and other enforcement actions.
We are also closely examining potential noncompliance among the
largest U.S. corporations and partnerships that were identified as
higher risk for tax noncompliance with the help of new AI tools. As of
December, the IRS had open audits of more than 75 of the largest U.S.
partnerships. On average, they each have more than $10 billion in
assets and represent a cross-section of industries that include hedge
funds, real estate investment partnerships, publicly traded
partnerships, large law firms, and other industries. IRA funding is
also helping us expand our Large Corporate Compliance Program, which
covers entities with average assets of more than $24 billion and
average taxable income of about $526 million per year, and our hiring
of new staff has allowed us to open 60 new audits of taxpayers in this
group.
Another illustration of how our long-term funding is helping us
more fully address high-risk compliance areas: We recently announced we
are beginning dozens of new audits on corporate aircraft involving
personal use. We are focusing on aircraft usage by large corporations,
large partnerships and high-income taxpayers. The IRS has concerns that
the use of these jets is not being properly allocated between business
and personal activities. We are concerned people are using business
aircraft for personal use, which means the businesses are taking
deductions they may not be fully entitled to.
Personal use of corporate jets and other aircraft by executives and
others has personal and business tax implications. This is a complex
area where, in the past, IRS work has been stretched thin. With
expanded resources, these aircraft audits will help ensure high-income
groups aren't flying under the radar with their tax responsibilities.
In all its compliance work, the IRS's focus is on those posing the
greatest risk to our Nation's tax system in terms of ensuring fairness.
As I have previously stated, we remain committed to following the
Secretary of the Treasury's directive not to increase audit rates
relative to historical levels for small businesses and households
earning less than $400,000 per year. All of this work will be with an
eye toward fairness and always respecting taxpayer rights. Although
focusing on these types of complex issues will be resource intensive,
achieving our goals will result not only in a fairer tax system, but
also in benefits for taxpayers and the Nation, because detecting and
stopping noncompliance in these areas will result in significant
additional revenues and reduce the deficit.
Launching the Direct File Pilot
As part of our effort to deliver significantly improved taxpayer
services, the IRS has been conducting a limited-scope pilot this filing
season of a system that allows taxpayers to prepare and file a tax
return for free, online, directly with the IRS, called Direct File. Our
work on Direct File is an important innovation in our ongoing efforts
to transform the IRS and lead the agency into a digital, taxpayer-
focused future.
This year, eligible taxpayers in 12 participating States had the
option to prepare and file their return this way. The pilot will allow
us to assess customer and technology needs, so we can evaluate and
develop solutions and make a recommendation about the future of a
Direct File system. After a successful testing phase, we announced on
March 12th that all eligible taxpayers in the 12 States--representing
19 million taxpayers--could use the system at any time.
Thousands of taxpayers already have successfully used the system,
and users are giving the new option positive reviews. These early
results from Direct File have shown taxpayers like the ease and
convenience of the tool.
It is important to note that a core part of the IRS's mission is to
meet taxpayers where they are and ensure they have options to fulfill
their tax obligations that meet their needs. I want to emphasize that
taxpayers will always have choices for how they prepare their taxes.
They can file using a trusted tax professional, our Free File program,
tax software, or free tax preparation services such as the Volunteer
Income Tax Assistance and Tax Counseling for the Elderly programs, or
they can file a paper return. We saw an extremely successful filing
season involving all of those options. We continue to emphasize that
taxpayers should use the filing option that works best for them and
their personal financial situation. Direct File is designed to be an
additional option for some taxpayers this year that is simple, secure,
accurate and free.
Progress on Transformation
IRA resources have been fundamental in our efforts to modernize our
operations. The IRS is using this funding to upgrade our IT
infrastructure and improve the experience for those who choose to
interact with us online. By utilizing technology, we are making the IRS
more efficient while meeting taxpayers where they are.
Along those lines, we continue to enhance our online offerings. We
have expanded the capabilities of the IRS Online Account and Tax Pro
Account, so this filing season taxpayers and tax professionals have
been able to perform more types of transactions in their accounts. We
also launched a Business Tax Account to make interacting with us easier
for small business owners.
We have also made critical progress on our Paperless Processing
Initiative. While online options for taxpayers have increased, the IRS
has continued to be flooded with paper, including tax returns and
correspondence. We had been working toward digital scanning of paper
forms and returns for some time, but the IRA funding has allowed us to
greatly accelerate these efforts. For example, during Calendar Year
2023, we scanned more than 1.5 million forms and returns we received on
paper.
Additionally, we are making progress toward our 5-year goal of
giving taxpayers the ability to securely file all documents and respond
to all notices online, as well as securely access and download their
data and account history. We met our first goal of this initiative 3
months ahead of schedule. Taxpayers are now able to digitally submit
all correspondence and responses to notices.
Complementing these efforts, the IRS recently announced a sweeping
initiative to simplify and clarify about 170 million letters sent
annually to taxpayers. The Simple Notice Initiative builds on notice-
redesign efforts already in place for the 2024 tax season and expands
on a recent successful pilot involving identity theft letters. The
redesign work will accelerate during the 2025 and 2026 filing seasons,
improving common IRS letters going out to individual taxpayers and then
expanding into notices going to businesses.
The IRS also made significant progress in bringing our paper
inventory back to manageable levels after COVID-related interruptions
in our operations resulted in historic backlogs. Inventory challenges
involving original returns have been completely resolved.
Taken together, these initiatives will make it easier for taxpayers
to respond to notices from the IRS. They have the option to go
paperless and conveniently submit necessary responses online, and they
will receive clearer and more concise IRS notices, so they can better
understand the actions they need to take.
enhancing data security
The IRS works continuously to preserve taxpayer privacy and protect
our computer systems from cybersecurity incidents through a combination
of preventative and detective controls. IRS systems withstand well over
1 billion cyberattacks annually (including denial-of-service attacks;
unsuccessful intrusion attempts, probes, or scans; and other
unauthorized connectivity attempts). Since I became Commissioner, I
have seen teams across the IRS make amazing progress to improve our
security posture, permanently closing gaps utilizing IRA funding to
make needed updates, and we continuously work to ensure that taxpayers
and our own systems are protected.
We continue to strengthen our systems, training and overall
infrastructure under the strategic operating plan, funded by the IRA.
Measures we have taken include (but are not limited to):
Further restricting user access. We restructured our operations
to reduce the number of people with access to the most sensitive
taxpayer datasets.
More robust protective security controls. We updated data
protection mechanisms--including encryption and anonymization--to
better protect taxpayer information.
Improved firewalls. We have added additional firewalls between
key taxpayer information and the rest of the IRS, providing additional
monitoring capabilities.
Stronger 24/7 monitoring. We have expanded advanced analytics to
detect and prevent risky data usage, providing improved insight into
suspicious activities around the clock.
New tools. We are adding new analytical tools and dashboards to
monitor user activity involving sensitive data. These tools will help
to improve the detection of potential data misuse.
The bottom line is that as Commissioner I have made it a priority
to improve the data security protections at the IRS against potential
internal and external threats. Taxpayer data must always be protected
and safeguarded, and any unauthorized disclosure will not be tolerated.
We've made remarkable progress and have dramatically reduced risk in
all aspects of data security, and we will remain focused on this in the
future.
combating fraud: employee retention credit
The IRS is committed to protecting hardworking people and small
businesses from scammers and fraudsters who try to use the tax system
for their schemes. Along those lines, we continue to face a major
challenge related to scams involving the Employee Retention Credit
(ERC).
The ERC provided a financial lifeline to millions of businesses and
exempt organizations during the pandemic. The IRS has worked hard to
implement this credit, and we have processed about 3.6 million ERC
claims worth approximately $230 billion to businesses. However,
promoters have been aggressively misleading people and businesses that
are not eligible into claiming the ERC, even though they do not
qualify.
The IRS has been flooded with ERC claims, and we are concerned that
many of these claims were not being filed by businesses that qualify.
We appreciate the patience of businesses and tax professionals as we
continue our effort to protect against fraud. Since last fall we have
been intensifying our compliance work in this area.
Last September, as we were being inundated by questionable ERC
claims, we announced a moratorium on processing new claims to allow us
time to make adjustments and add taxpayer protection provisions into
the program, including options for businesses that may have been unduly
pressed by a promoter.
Since then, the IRS has taken a number of actions, which together
have protected more than $1 billion between September 2023 and mid-
March 2024:
We continue to offer a withdrawal option for businesses with a
pending ERC claim, which allows certain employers that filed a claim--
but have not yet received a refund--the ability to withdraw their
submission and avoid future repayment, interest, and civil penalties on
a refund for which they are ineligible. Claims that are withdrawn are
treated as if they were never filed. A total of 1,800 entities have
withdrawn a total of $251 million in claims so far.
In December, we sent letters to more than 20,000 businesses
notifying them of disallowed ERC claims. Since then, we have determined
that more than 12,000 entities filed more than 22,000 claims that were
improper and resulted in $572 million in assessments that the IRS will
be working to recoup. The IRS is continuing this work with all of our
available compliance tools, and more activity is planned in this area
in the months ahead.
Also in December, we launched a special ERC Voluntary Disclosure
Program that ended on March 22nd. The program allowed voluntary
repayments by businesses that received an improper ERC payment. Those
accepted into the program needed to repay only 80 percent of the credit
they received. This has yielded more than $225 million from over 500
taxpayers, with another 800 submissions still being processed,
including many that came in at the last minute before the March 22nd
deadline.
During this period, we have processed some ERC claims, but at a
much slower rate than before our approach changed in the summer and
fall. While we continue to process ERC applications received prior to
the moratorium, our progress is hampered by the fact that amended
returns from ERC applicants come in on paper and require time-intensive
manual processing. We are developing a scanning process for both pre-
and post-moratorium paper returns so that we can digitize the
information from other pending claims and expect that process to be
completed this spring. We continue our work to determine next steps
involving ERC.
This current situation is an excellent example of where IRA funding
will make a difference in the future. These claims are being filed on
paper. The IRA funding will give us improved capability to receive
digital information, whether on amended returns or other information
such as taxpayer correspondence. In turn, this will help us more
rapidly identify risks and develop response strategies--the exact issue
that we have confronted with the ERC claims.
Additionally, the IRS remains very serious about tracking down
unscrupulous promoters of the ERC. We have specially trained auditors
examining ERC claims that pose the greatest risk. Also, our Criminal
Investigation Division is conducting hundreds of investigations
involving potentially false claims worth billions of dollars.
the president's fiscal year (fy) 2025 budget
The President's FY 2025 budget proposal for the IRS provides $12.3
billion in discretionary appropriations, equal to the FY 2024 and FY
2023 enacted levels. As the IRS implements its plans for transformative
change with the significant resources provided by the IRA, annual
discretionary appropriations need to provide sufficient recurring
``base'' resources.
However, with no anticipated discretionary increases for
inflationary requirements in FY 2024 and FY 2025, the IRS will be
required to further extend its reliance on IRA resources to fund base
needs. IRA resources are limited, and the IRS will likely use them
entirely before the funding expires in FY 2031. In addition, the
authorizing language does not provide the flexibility to realign the
IRA funds across appropriations.
This will have the most immediate impact on the taxpayer services
appropriation, with IRA resources for this category expected to run out
completely by FY 2026. The IRS is spending much more on taxpayer
services than is provided for in annual appropriations, with IRA
funding heavily supplementing telephone and in-person service. Without
additional funding or additional flexibility to realign between
appropriations, IRS telephone LOS is expected to see a drastic decline
in FY 2026 and fall even further in FY 2027. In this scenario, the vast
majority of taxpayers would be unable to reach an IRS representative
for assistance and millions of pieces of taxpayer correspondence would
not be answered in a timely manner.
To address this issue, the President's budget includes a mandatory
proposal that will avert the IRA funding ``cliffs'' (after which IRA
funds are exhausted for a given appropriation) and will extend IRA
funding through FY 2034. This proposal would provide $104 billion over
the 10-year budget window and is estimated to generate at least an
additional $341 billion in revenue. It will ensure the IRS can continue
its transformation efforts--as described in our strategic operating
plan--to improve service, modernize technology and ensure that
taxpayers with complex returns, including certain high-income
individuals, large corporations and complex partnerships, pay the taxes
they owe.
We have worked to identify the highest priority areas of focus
through filing season 2025, with a second sprint to cover efforts
through filing season 2026. The following represent the areas of focus
from this work:
Digitalization. Digitizing all paper documents we receive from
taxpayers and enabling our employees to perform their work digitally.
Fairness in enforcement. Expanding enforcement efforts for
complex taxpayer segments while simultaneously ensuring fairness for
taxpayers at all income levels. This includes providing the outreach
and support necessary to ensure taxpayers receive the benefits for
which they are eligible.
Live assistance. Ensuring that when taxpayers need answers from
the IRS, we are available.
Notifications and scams. Providing taxpayers with clear and
concise notices, and stepping in to disrupt and dismantle scams while
providing support to victims.
Self-service and online accounts. Giving taxpayers the option to
address all of their tax-related needs with the IRS online if they
choose.
Employee tools and experience. Enabling a fully equipped,
empowered and engaged IRS workforce ready to serve taxpayers.
Foundational technology. Modernizing the IRS's foundational
technology to meet the needs of taxpayers and IRS employees.
Human capital. Attracting, retaining and empowering a highly
skilled, diverse workforce that is better equipped to deliver results
for taxpayers.
legislative proposals in the president's fy 2025 budget
Along with the funding requested in the President's FY 2025 budget
request, we are also requesting legislative proposals that would
improve tax administration, including, but not limited to, the
following:
Direct Hire Authority and Streamlined Critical Pay. The
President's budget includes two administrative provisions within the
appropriations language designed to expand Direct Hire Authority (DHA)
and provide the ability to offer Streamlined Critical Pay (SCP) to
certain new hires to accelerate IRS hiring efforts. DHA provides the
ability to expedite the normal hiring process to hire more efficiently
during a severe shortage of highly qualified candidates or during a
critical hiring need. DHA has helped the IRS address the backlog of
paper tax returns and taxpayer correspondence. As the IRS works to
rapidly implement plans to utilize IRA resources, expanded DHA will
help ensure that hiring delays are not an obstacle for achieving broad
mission related functions. The current DHA provision will expire in
2024; the proposal included in the budget will extend DHA through 2027.
SCP authority gives the IRS a management tool to quickly recruit and
retain a limited number of employees with high levels of expertise in
technical or professional fields that are crucial to the success of the
IRS's transformative efforts by allowing for higher base salaries for
these hires than would otherwise be possible. The current SCP authority
will expire in 2025; this proposal would extend it through September
30, 2031.
Provide for information reporting by certain financial
institutions and digital asset brokers for purposes of exchange of
information. Over time, the United States has established a broad
network of information exchange relationships with other jurisdictions
based on established international standards. The information obtained
through those relationships has been central to recent successful IRS
enforcement efforts against offshore tax evasion. The ability to
exchange information reciprocally is particularly important in
connection with the implementation of the Foreign Account Tax
Compliance Act (FATCA). Currently, however, the United States provides
less information to foreign governments than we receive from them. The
proposal would expand reporting by U.S. financial institutions and
digital asset brokers with respect to foreign account holders in a
number of ways--for example, by requiring financial institutions to
report the account balance for all financial accounts maintained at a
U.S. office and held by foreign persons. These new reporting
requirements would enable the IRS to provide equivalent levels of
information to cooperative foreign governments in appropriate
circumstances to support their efforts to address tax evasion by their
residents. The proposal would be effective for returns required to be
filed after December 31, 2026.
Require reporting by certain taxpayers on foreign digital asset
accounts. Section 6038D(b) of the Internal Revenue Code contains an
annual reporting requirement for individuals in regard to two
categories of foreign financial assets, but there is no reporting
requirement under this section for digital assets. Against this
backdrop, tax compliance and enforcement with respect to digital assets
is a rapidly growing problem. The global nature of the digital assets
market offers opportunities for U.S. taxpayers to conceal assets and
taxable income by using offshore digital asset exchanges and wallet
providers. The proposal would amend section 6038D(b) to require
reporting with respect to a new third category of asset: that is, any
account that holds digital assets maintained by a foreign digital asset
exchange or other foreign digital asset service provider. Reporting
would be required only for taxpayers who hold an aggregate value of all
three categories of assets in excess of $50,000. The proposal would be
effective for returns required to be filed after December 31, 2024.
Extend the statute of limitations for certain tax assessments.
Section 6501 of the Internal Revenue Code generally requires the IRS to
assess a tax within 3 years after the filing of a return. But for
complex audits in the largest cases, critical issues may not be
identified until late in the process of an examination, and in many
cases these issues cannot be pursued further due to time and resource
constraints. The proposal would amend section 6501 to extend the 3-year
statute of limitations to 6 years if a taxpayer omits from gross income
more than $100 million on a return. This change would give the IRS
enhanced agility and flexibility in evaluating and staffing its case
inventory and appropriately allocating its limited enforcement
resources. The proposal would be effective for returns required to be
filed after the date of enactment.
Increase oversight of paid tax return preparers. Paid tax return
preparers have an important role in tax administration because they
assist taxpayers in complying with their obligations under the tax
laws. The proposal would amend title 31, U.S. Code (Money and Finance)
to provide the Secretary with explicit authority to regulate all paid
preparers of Federal tax returns, including by establishing mandatory
minimum competency standards. The proposal would be effective on the
date of enactment.
Expand and increase penalties for noncompliant return
preparation and e-filing. Inappropriate behavior by paid tax return
preparers harms taxpayers through the filing of inaccurate returns,
erroneous refunds and credits, and personal tax return noncompliance.
Tax return preparer misconduct continues, in part, because the amounts
of the penalties under current law do not adequately promote voluntary
compliance. The proposal would increase the amount of the tax penalties
that apply to paid tax return preparers for willful, reckless, or
unreasonable understatements, as well as for forms of noncompliance
that do not involve an understatement of tax. The proposal would be
effective for returns filed after December 31, 2024.
Expand authority to require electronic filing for forms and
returns. Under this proposal, electronic filing would be required for
returns filed by taxpayers reporting larger amounts or that are complex
business entities, including: (1) income tax returns of individuals
with gross income of $400,000 or more; (2) income, estate, or gift tax
returns of all related individuals, estates, and trusts with assets or
gross income of $400,000 or more in any of the 3 preceding years; (3)
partnership returns for partnerships with assets or any item of income
of more than $10 million in any of the 3 preceding years; (4)
partnership returns for partnerships with more than 10 partners; (5)
returns of real estate investment trusts, real estate mortgage
investment conduits, regulated investment companies, and all insurance
companies; and (6) corporate returns for corporations with $10 million
or more in assets or more than 10 shareholders. Further, electronic
filing would be required for the following forms: (1) Form 8918,
Material Advisor Disclosure Statement; (2) Form 8886, Reportable
Transaction Disclosure Statement; (3) Form 1042, Annual Withholding Tax
Return for U.S. Source Income of Foreign Persons; (4) Form 8038-CP,
Return for Credit Payments to Issuers of Qualified Bonds; and (5) Form
8300, Report of Cash Payments Over $10,000 Received in a Trade or
Business. Return preparers that expect to prepare more than 10
corporation income tax returns or partnership returns would be required
to file such returns electronically. The Secretary would also be
authorized to determine which additional returns, statements, and other
documents must be filed in electronic form in order to ensure the
efficient administration of the internal revenue laws without regard to
the number of returns that a person files during a year. The proposal
would be effective for forms and returns required to be filed after
December 31, 2024.
Improve reporting for payments subject to backup withholding.
Backup withholding applies to a reportable payment if a payee fails to
furnish the payee's taxpayer identification number (TIN) to the payor
in the manner required. It is an enforcement tool that ensures payors
and payees are compliant with reporting obligations. Currently, the IRS
may only require that the payee furnish the TIN under penalties of
perjury with respect to interest, dividends, patronage dividends, and
amounts subject to broker reporting. Payees of these reportable
payments are generally required to furnish their TINs using a Form W-9,
Request for Taxpayer Identification Number and Certification. However,
payees of other reportable payments subject to backup withholding may
furnish their TINs in other ways. The proposal would treat all
information returns subject to backup withholding similarly.
Specifically, the IRS would be permitted to require payees of any
reportable payments to furnish their TINs to payors under penalty of
perjury. The proposal would be effective for payments made after
December 31, 2024.
Improve IRS data disclosure to Tribal child support services and
to child support services contractors. Section 6103 of the Internal
Revenue Code prohibits the disclosure of return information except
under specific circumstances. For example, section 6103 authorizes the
IRS to disclose certain return information to Federal, State, and local
child support enforcement agencies (CSEs). The section further
authorizes CSEs to disclose some, but not all, of that information to
their contractors. There is no explicit authority for the IRS to
disclose to Tribal CSEs or their contractors return information for
purposes of child support enforcement. The proposal would expand the
IRS's authority to allow CSEs to share information with their
contractors. It would also provide Tribal CSEs with the same access to
the same return information as Federal, State, and local CSEs. These
changes would facilitate the establishment and collection of child
support obligations, locating individuals owing child support, and the
administration of the Federal tax refund offset program. These
proposals would be effective upon enactment.
conclusion
Chairman Wyden, Ranking Member Crapo, and members of the committee,
thank you again for the opportunity to update you on the filing season
and the IRS budget. The 2024 filing season has been a good one overall,
and, assuming the agency receives adequate funding going forward, the
future holds great promise for the agency and the taxpayers we serve.
As Commissioner, I remain committed to leading the IRS's transformation
efforts in close collaboration with your committee, and I look forward
to working with you to achieve a more modern and high-performing IRS,
which will better serve taxpayers and our Nation.
______
Questions Submitted for the Record to Hon. Daniel I. Werfel
Question Submitted by Hon. Ron Wyden
Question. Whistleblowers play an essential role in helping to
identify and root out tax cheating schemes that rip off the American
people. The numbers show that the IRS whistleblower program works, and
my view is the IRS ought to look for every opportunity to improve it.
That's why I was glad to hear you say at the hearing that you would
investigate ways of expediting payments to whistleblowers.
My understanding is that the IRS can make partial payments of
whistleblower awards, but the Internal Revenue Manual limits such
payments to situations where the partial payment is determined to be in
the ``best interest'' of the IRS and even then, only to the extent
``necessary to efficiently administer the program.''
How will you ensure that whistleblowers start to get paid more
quickly?
Answer. The Whistleblower Office seeks to make award payments as
soon as they are permitted under the law. Awards cannot be paid until
the relevant taxpayer audit or investigation is completed and proceeds
are collected with finality. The Whistleblower Office's ability to make
an award payment is heavily dependent on the IRS's separate enforcement
actions against the taxpayer, including the audit or investigation of
the taxpayer, the taxpayer's exercise of rights to request assistance
from the Independent Office of Appeals or to litigate disagreements,
and the time it takes to collect any proceeds from the taxpayer with
finality. Similarly, a whistleblower's appeal of their award
determination will delay payment until the litigation is final. These
variables, which are outside of the Whistleblower Office's control
account for most of the time between submission of an award claim and
an award payment.
The whistleblower statute provides for awards on proceeds collected
as a result of an action. The proceeds collected must have finality,
which generally precludes partial or ongoing payments. Consistent with
the statute, the regulations, provide discretion to the Whistleblower
Office to aggregate or disaggregate actions for purposes of determining
awards. This permits the Whistleblower Office to make separate award
determinations on different actions identified within the same
whistleblower claim.
The Whistleblower Office has sought to disaggregate eligible claim
submissions to allow for earlier payments when an award claim involves
multiple actions. For example, if the IRS pursues multiple taxpayers in
response to a whistleblower's claim, the Whistleblower Office may issue
a separate final determination with respect to each taxpayer, if there
is a difference in timing on the collected proceeds. Disaggregating
award claims has been a recent point of emphasis for the Whistleblower
Office. In Fiscal Year (FY) 2024, nearly 90 percent of awards paid were
for disaggregated award determinations.
While the average cycle time for paying an award under section 7623
\1\ is currently over 10 years, this isn't due to an IRS policy
prohibiting partial payments. As noted above, nearly 90 percent of the
awards paid in FY 2024 were disaggregated award payments where the
Whistleblower Office disaggregated claims meeting the regulatory
requirements for issuing an award payment from those that still had
ongoing administrative and judicial actions, and/or active collection/
refund statutes, and made a final determination with respect to those
disaggregated claims. In FY 2024, on average, the IRS issued section
7623(b) award payments within 48 days of all regulatory requirements
being met.
---------------------------------------------------------------------------
\1\ All section references are to the Internal Revenue Code of
1986, as amended, unless otherwise noted.
The IRS is currently developing and implementing a plan to improve
the whistleblower program. One of the initiatives identified in that
plan is to clarify guidelines when additional levels of disaggregation
would be appropriate. The Whistleblower Office updated the IRM to
clarify the types of disaggregation and factors to be considered for
potential on September 13, 2024. Another initiative in the plan is to
increase the capacity for processing whistleblower claims. As part of
this initiative the Whistleblower Office is hiring additional analysts
for processing whistleblower claims and award determinations as well as
additional staff members focused on data and analytics to ensure
---------------------------------------------------------------------------
determinations are made timely.
______
Questions Submitted by Hon. Mike Crapo
Question. To reiterate a live question, please provide a report
detailing the concrete steps the IRS will hereafter take to quickly and
thoroughly resolve unresolved ID theft cases, as well as an analysis of
reasons why there are so many cases in the first place.
Answer. The IRS takes identity theft (IDT) seriously and is
committed to returning to our pre-pandemic standard of resolving these
cases within 120 days or less. Fraudsters have targeted pandemic-era
legislative measures and relief to commit IDT. This led to a surge in
Identity Theft Victim Assistance (IDTVA) cases, drastically increasing
IDTVA's inventories at time when IRS resources were stretched and
causing an increase in the average amount of time to resolve IDT cases.
Through June 1, 2024, the total number of cases in our IDTVA
inventory is approximately 594,000. This includes both tax-related IDT
inventory of approximately 513,000 cases and non-tax-related IDTVA
inventory which includes 81,000 cases. The average time to resolve
IDTVA cases for fiscal year 2024 through April is 638 days.
action plan to reduce cycle time in 2024
We have taken several steps to reduce the inventory and the number
of days to resolve these cases, including:
Adding Customer Service Representatives (CSRs). More IDTVA
program employees have been trained on full scope IDT.
Additional employees have also been trained on non-tax related
IDTVA. The assignment of IDTVA CSRs to IDT paper inventory has
been prioritized by limiting toll-free phone assignments when
possible.
Overtime. Funding has been allocated to the IDTVA program to
increase the pace of case resolution.
Enhanced Review of IDTVA Cases. We are reviewing IDT cases
to determine which cases we can close systemically or move to
another area within the IRS if they were referred to IDTVA in
error.
Education. We are providing additional guidance, in
particular explaining when filing a Form 14039, Identity Theft
Affidavit, is needed.
Processing Improvements. We implemented the Form 14039
Digital Upload Tool to allow taxpayers to submit their Form
14039 directly to the IRS electronically. We are also working
to identify process improvements.
Case Identification. We are working to identify IDTVA cases
that fit within identified criteria to pre-identify the
fraudulent return for the IDTVA caseworker. This will reduce
the amount of research needed and improve efficiencies.
In addition to the aforementioned items, we will continue to
explore other options to reduce IDTVA inventory. At the same time,
we're committed to protecting taxpayers by detecting, preventing, and
deterring tax-related IDT.
Question. Please provide the following information with respect to
the Direct File pilot program.
As of the end of each filing week in the 2024 tax filing season,
please provide: the total number of Direct File returns submitted as of
such date; the total number of Direct File returns accepted as of such
date; and the rate that submitted returns were not accepted by the IRS.
For purposes of answering this question, the end of a filing season
week can be any day of the week so long as that day is used
consistently for all weeks and so long as the day of the week utilized
is specified.
Answer. Over the course of the pilot, more than 3.3 million
taxpayers started the Direct File Eligibility Checker, 423,450
taxpayers logged in to Direct File, and 140,803 taxpayers submitted
accepted returns. More detailed information about the number of Direct
File return and acceptance rates can be found in IRS Publication 5969,
IRS Direct File Pilot Program: Filing Season 2024 After Action Report,
May 3, 2024, available at https://www.irs.gov/pub/irs-pdf/p5969.pdf.
Question. As of April 15, 2024, please provide: the total number of
Federal Government FTEs (employees and contractors) that are currently
tasked with supporting Direct File; the total number of IRS FTEs
(employees and contractors) that are currently tasked with supporting
Direct File; the total number of IRS customer-service-related FTEs
(employees and contractors) that are currently tasked with supporting
Direct File; and a list of each occasion on or after May 16, 2023,
where any of the following listed individuals publicly referenced the
Direct File program, such as in a public statement, press release,
media quote, interview, social media posting, et cetera.
The individuals are: the President, Vice President, other senior
administration officials (e.g., any Assistant or Deputy Assistant to
the President, any senior advisor to the President, Chief of Staff or
Deputy Chief of Staff, Press Secretary, Communication Advisor, head or
deputy head of an executive office or Office of the President), any
member of the Cabinet, the Deputy Secretary of the Treasury, any
Assistant Secretary of the Treasury, the head or deputy head of any
office of the Treasury, the IRS Commissioner, the IRS Deputy
Commissioner, any Chief Officer of the IRS, any Division Commissioner
of the IRS, any Director of an IRS office, and any member of the IRS
Direct File team.
As of one week before the date of your response to these questions,
please provide: the total number of taxpayers that began the process of
filing a return using Direct File but who did not ever submit a return
that the IRS accepted; the total number of returns that were submitted
to the IRS via Direct File but which were not accepted by the IRS; the
total number of returns that were begun on Direct File but which were
never completed; the total number of Federal Government FTEs (employees
and contractors) that were involved in the Direct File program at any
point (e.g., study-phase, pilot-phase, et cetera) but are not involved
as of such date; a list of each contractor (by entity, or in the case
of an individual providing services in a capacity unaffiliated with an
entity, by individual) who provided services to the Federal Government
with respect to the Direct File program; the total amount of resources
the IRS has expended in furtherance of the Direct File program; the
total amount of resources the IRS has budgeted to expend (measured as
of the later of April 15, 2024 or one week before the date of your
response) in furtherance of the Direct File program through FY 2030,
broken out by fiscal year; and a description of the resources expended
or budgeted to be expended.
Answer. In the report to Congress, the IRS estimated that the
annual cost for Direct File could range from between $64.3 to $248.9
million for a service that reached between 5 to 25 million taxpayers
depending on the tax scope and the taxpayers reached. We noted that
these estimates were subject to uncertainty due to the nature of
launching a new product like Direct File. The pilot provided an
opportunity to collect concrete data on the cost of Direct File.
Through April 20, 2024, the IRS spent $24.6 million on Direct File,
which includes $11.6 million in costs for the development of last
year's report to Congress. Of the $13.0 million spent on pilot
development and implementation, $10.6 million is technology and product
development costs and $2.4 million is operational costs (customer
service, cloud computing, user authentication, etc.). To build and run
the pilot, the IRS also engaged the U.S. Digital Service (USDS). The
IRS's agreement with the U.S. Digital Service did not involve costs to
IRS, see response below. The limited design of the pilot means that the
IRS was not able to benefit from economies of scale. If the number of
Direct File users were to increase, the cost per return would decrease.
------------------------------------------------------------------------
Total through
$ in Millions FY 2023 FY 2024 YTD FY 2024 YTD
------------------------------------------------------------------------
FY 2023 Direct File 11.6 - 11.6
Feasibility Study and
Report to Congress
Technology and Product 11.6 - 11.6
Labor 0.8 - 0.8
Non-Labor 10.8 - 10.8
Advisory and 8.6 - 8.6
assistance
service
Equipment 0.3 - 0.3
Other goods and 1.9 - 1.9
services from
Federal sources
Direct File Pilot Development 1.5 11.5 13.0
and Implementation
Customer Service 0.1 1.8 1.9
Labor 0.1 1.8 1.9
Technology and Product 1.4 9.7 11.0
Labor 0.2 2.9 3.1
Non-Labor 1.2 6.8 8.0
Advisory and 1.2 3.2 4.4
assistance
services
Ongoing cloud - 0.5 0.5
services
Equipment - 0.2 0.2
Other goods and - 2.8 2.8
services from
Federal sources
Travel and - 0.1 0.1
transportation
of persons
Grand Total 13.1 11.5 24.6
------------------------------------------------------------------------
Note: FY 2024 labor includes actuals through April 6, 2024 and an
accrual through April 20, 2024. Costs do not include other shared
corporate costs.
These totals include costs associated with vendor support and an
interagency agreement with General Services Administration's (GSA) 18F.
To build and run the pilot, the IRS also engaged 29 employees from the
U.S. Digital Service (USDS) to supplement the IRS employees and other
team members. The USDS costs are not included in the $24.6 million
spent on Direct File. The IRS estimates that the annualized cost for
the USDS team is $7.2 million. While the costs outlined above all
center on the actual costs involved in delivering the pilot, the team
is using this data to develop a more robust cost estimate for potential
future costs for delivering Direct File.
The Direct File pilot was the largest use of live chat support
within the IRS to date. It allowed the agency to continue learning how
live chat meets taxpayer preferences and expectations and how taxpayers
would react when live chat was the only option for receiving
assistance. This has the potential to impact IRS taxpayer service
overall as the agency looks to provide taxpayers with more choices in
how they can interact with the IRS.
From March 4, 2024, through April 20, 2024, Direct File staffing
averaged 41 CSRs per day. This average was determined by using the
total CSR hours available to chat in the system, divided by 7.5 hours
of production time over a total of 47 workdays. The actual quantity of
CSRs varied throughout the 15-hour workday (7:00 a.m. to 10:00 p.m.
Eastern), from a low of 7 CSRs to a high of 62 CSRs. The CSRs handled
38,600 chats with an Average Handle Time of 9 minutes. Based on the
staffing available to support the pilot, the IRS had the capacity to
handle approximately 450,000 Direct File chats per month. Given that
approximately 10 percent of pilot participants engaged customer
support, this means the IRS could have assisted 4.5 million filers with
the 400 CSRs who were trained for the pilot.
Question. With respect to GSA, 18F, SSA, and USDS, please provide:
a description of their involvement with the Direct File program at any
point in time; a timeline of their participation in the Direct File
program; the total amount of resources each of these has expended in
furtherance of the Direct File program; as of the later of April 15,
2024 or 2 weeks before the date of your response, the total amount of
resources each of these has budgeted to expend in furtherance of the
Direct File program through FY 2030, broken out by fiscal year; and a
description of the resources expended or budgeted to be expended.
Answer. Both GSA (through 18F) and USDS supported the IRS in our
work to deliver the Direct File and were essential to the successful
delivery of the pilot. While the cost of USDS was born by the Office of
Management and Budget (OMB), the IRS entered into an Interagency
Agreement (IAA) with GSA to cover the cost of the 18F support. As noted
in the IRS Direct File Pilot Program Filing Season 2024 After Action
Report dated May 3, 2024, Publication 5969 (Direct File After Action
Report),\2\ the IRS estimates that the annualized cost for the USDS
team is approximately $7.2 million. The IAA for the 18F team is
approximately $5.5 million for April 2023 through May 2025. The costs
of the 18F IAA were included in the estimates the IRS has provided on
the cost to delivery Direct File. We have not entered into any longer-
term agreements with either 18F or USDS.
---------------------------------------------------------------------------
\2\ See IRS Direct File Pilot Program Filing Season 2024 After
Action Report dated May 3, 2024, Publication 5969, https://www.irs.gov/
pub/irs-pdf/p5969.pdf.
Question. Please identify each reference to the U.S. Code and/or
Code of Federal Regulations that the IRS believes establishes or
otherwise supports a basis for claiming it is authorized to conduct the
Direct File program, as well as a description of why such cited
---------------------------------------------------------------------------
provision establishes or supports such claim.
Answer. The IRS has the authority to offer Direct File as a filing
option.
Direct File is an important part of our ongoing effort to meet
taxpayers where they are and give them choices to interact with the IRS
in the manner they prefer. The IRS has a long history of innovations to
help taxpayers file their taxes as easily as possible, as mandated in
the Taxpayer Bill of Rights. For example, in 1986, the IRS launched a
pilot program to prove the technical feasibility of the Electronic
Filing System (EFS). In its pilot year, EFS accepted 25,000 returns
submitted electronically by five tax preparers in three cities. In
1987, 66 tax preparers in seven cities filed 78,000 returns
electronically, while the IRS slowly expanded the program's tax scope
and capabilities. When IRS e-File became operational nationwide in
1990, 4.2 million returns were filed electronically. Within the first
25 years after its limited pilot, IRS e-File surpassed 1 billion
returns; every year since, e-File has processed more than 100 million
returns electronically, and today 93 percent of tax returns are filed
electronically.
In 2002, Treasury Secretary Paul O'Neill asked IRS Commissioner
Charles Rossotti to establish a partnership with tax software companies
to develop a free online filing system, managed by the IRS, for low-
income taxpayers. The impetus behind Secretary O'Neill's request was to
boost individual e-filing as part of the Treasury Department's
implementation of President George W. Bush's 2001 E-Government
Initiative. The IRS established the public-private partnership, the
Free File Alliance, which has evolved into our current partner, Free
File, Inc. (FFI). The IRS and FFI have extended and revised their
original memorandum of understanding five times, most recently in May
2024, which extends the program through 2029.
Providing taxpayers with additional choices strengthens the tax
filing system, and importantly, Direct File is one option among many
from which taxpayers can choose.
Question. Please identify each reference to the U.S. Code and/or
Code of Federal Regulations that the IRS believes establishes or
otherwise supports a basis for claiming that with respect to the Direct
File program none of its conduct results in the IRS being engaged in
the preparation of tax returns or acting as a return preparer, as well
as a description of why such cited provision establishes or supports
such claim.
Answer. Direct File is an online tool provided by the IRS that
allows taxpayers to file their returns for free, directly with the IRS.
It uses an interview-based platform to help taxpayers self-prepare
their own returns. Direct File guides taxpayers through the process of
preparing a tax return by asking questions which the taxpayer can
answer without needing to consult other instructions or IRS
publications. Direct File uses these answers to fill out the forms and
schedules of a tax return, which the taxpayer can review and choose to
electronically file. But providing Direct File does not make the IRS a
return preparer under the Internal Revenue Code (IRC).
Under the IRC, the definition of ``tax return preparer'' depends on
the specific provision that is referenced. Generally, a tax return
preparer is defined in section 7701(a)(36)(A) as ``any person who
prepares for compensation, or who employs one or more persons to
prepare for compensation, any return of tax imposed by this title or
any claim for refund of tax imposed by this title.''\3\ Here, Direct
File does not prepare returns for compensation or employ others to
prepare returns for compensation. It is a free tool for taxpayers to
prepare their own returns. Moreover, a person is not a tax return
preparer if the person merely provides ``typing, reproducing, or other
mechanical assistance.''\4\ A computerized tax return preparation
service is considered to be a tax return preparer under section
7701(a)(36) only if it provides substantive determinations, beyond mere
typing, reproducing, and other mechanical assistance.\5\ Finally, under
Treas. Reg. Sec. 301.7701-15(f)(1)(i), any official or employee of the
IRS performing official duties is not a tax return preparer.
---------------------------------------------------------------------------
\3\ See Treas. Reg. Sec. 301.7701-15; see also Circular 230,
Sec. 10.2(a)(8).
\4\ I.R.C. Sec. 7701(a)(36)(B).
\5\ See Rev. Proc. 85-187, 1985-2 C.B. 338.
As noted previously, the IRS provides various tools, including
Direct File, on its website and through other channels to help
taxpayers prepare and file their own returns. Direct File is not a paid
service and does not make substantive determinations as to the
---------------------------------------------------------------------------
correctness of the reported amounts shown on the return.
Question. Will you return to speak with the Senate Finance
Committee before making a determination over whether to continue and/or
expand the Direct File program?
Answer. Once I decided to make Direct File permanent, I notified
the chairman and ranking member of the Senate Finance Committee of my
decision.
Question. The IRS budget projects that the proposed $104 billion in
additional multiyear funding would generate approximately $341 billion
through FY 2034.
Can you describe how the IRS came to the projection of $341 billion
in revenue? Please be specific. For example, what group of taxpayers
would generate the bulk of the $20.1 billion in estimated revenue in
2034, and what information is that estimate based on?
Answer. The proposal restores the full IRA investment in the IRS
and extends it through 2034, and would provide funding for taxpayer
services, business systems modernization, operations support, and
enforcement. The estimated revenue considers the effect of the proposed
increase in enforcement resources. The IRS intends to extend the IRA
funded compliance work on taxpayer segments with complex issues where
our coverage had been minimal due to resource and budget constraints
prior to the enactment of the Inflation Reduction Act (IRA). The
additional funding would provide us the necessary resources to increase
focus on noncompliant priority segments such as large corporations,
large partnerships, and high-income/high wealth taxpayers, and the IRS
is committed to not increasing audit coverage for small businesses and
households below the $400,000/year threshold compared to historic
levels. This funding request is expected to produce additional revenue
of $3 billion in FY 2029, which will gradually increase to $83.3
billion in FY 2034 with total projected revenue of $341 billion from FY
2029 through FY 2034. The $83.3 billion in revenue projected for FY
2034 comes from a combination of direct revenue ($52 billion), revenue
protected via audit ($12.8 billion), increases in efficiency ($11.5
billion), and an estimate of deterrence effect ($6.8 billion).
Question. Of the proposed $104 billion of multiyear supplemental
funding for the IRS, you have stated that the funding would, ``pay for
itself several times over, yielding an estimated $341 billion in
revenue.''
Assuming such funding was enacted, would taxpayers see measurable
Federal revenues result from such funding within 5 years of it being
enacted?
If so, how much (broken down by year)?
Answer. The IRS projects total revenue generated by the proposal to
be just over $341 billion from FY 2029 to FY 2034. The FY 2029 revenue
increase of $3 billion is only for a partial year, as it picks up when
the IRA enforcement funds are expected to drop off. The revenue impact
in FY 2030 reflects a full year of funding and is correspondingly much
higher: $42.7 billion. Revenues then increase more modestly each year
through 2034. This proposal is intended to supplement the enforcement
work that began with IRA funding and carry it through FY 2034, while
simultaneously allowing IRS to continue its modernization and taxpayer
services work, which have fiscal cliffs in IRA that arrive much sooner.
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
Question. Outside of the Department of Defense, is the IRS
aware of any instances in the last 10 Federal fiscal years of
appropriated Federal agencies receiving multi-fiscal-year supplemental
funding from Congress that equals or exceeds 75 percent of such
agency's total annual budget request (net of the supplemental funding,
if such was made in the particular budget request) for the fiscal year
such funding was requested? If so, please identify each example.
Answer. Based on our research of non-Defense appropriated funding
in the past 10 years, the IRS was not able to identify any agency that
received multiyear supplemental funding that exceeded 75 percent of its
total annual budget request.
The IRS has experienced significant budget reductions since FY
2010. To remain within the budget levels, the IRS was forced to reduce
its staff from 93,337 employees in FY 2010 to just 72,803 in FY 2017, a
reduction of about 22 percent. The IRS was able to address, to some
extent, the staffing crisis in recent years as it received supplemental
funding, including IRA funding. However, prior to having IRA
investments to help address issues, the significant budget reductions
over the years have meant the percentage of millionaires who were
audited plummeted to historic lows, service levels were abysmal, many
TACs were closed, inefficient paper-based processes persisted across
the agency, and old IT did not serve taxpayers well. Additionally, the
complexity of tax work has significantly increased with the tax filing
population increasing significantly over the years. The charts below
provide insight into how the IRS budget changed since FY 2010, a net
reduction of more than 26 percent in real dollars, and an overview of
how the Gross Domestic Product (GDP) and tax filers have increased and
IRS taxpayer services and enforcement employees have decreased since
2010.
[GRAPHIC{S} NOT AVAILABLE IN TIFF FORMAT]
Question. How many future years does the IRS currently
anticipate asking Congress for multiyear supplemental funding?
Answer. Multiyear funding has been critical in helping the IRS
accomplish long-term technology projects and other IRS transformational
efforts in the service and enforcement areas. When current multiyear
funding is depleted, the IRS will need either higher discretionary
funding levels or additional multiyear funding to continue providing
the level of service taxpayers expect and deserve and to continue an
appropriate level of enforcement with respect to large corporations,
complex partnerships, and wealthy taxpayers.
The IRS saw more than a decade of underfunding, with a decrease of
more than 26 percent of discretionary funding in inflation-adjusted
dollars from FY 2010 to FY 2024. Prior to having IRA investments to
help address issues, this reduction has meant the percentage of large
corporations, large partnerships, and other complex taxpayers who were
audited plummeted to historic lows, service levels were abysmal, many
TACs were closed, inefficient paper-based processes persisted across
the agency, and old IT did not serve taxpayers well. The IRA funding is
helping restore enforcement staffing, and the current additional
multiyear supplemental request will align the funding cliffs of
Taxpayer Services, Business Systems Modernization, and Operations
Support. Regardless of its source, adequate funding is imperative for
the IRS to provide taxpayers with the service they deserve and fairly
enforce the law.
Question. Measured in current dollars, and assuming the IRS only
has its current funds (annual and multiyear) on hand, what is the IRS's
estimate for the total amount of additional funding that it would take
to finally adequately modernize all IRS systems? For these purposes,
additional funding only includes funding in excess of a projected IRS
annual budget for the fiscal year in question, determined by adjusting
the actual IRS' fiscal year budget for FY 2022 for inflation.
Answer. In April 2023, the IRS included five major objectives in
its strategic operating plan (SOP) to transform the administration of
the tax system and the services provided to taxpayers, which was based
on receiving $79 billion in IRA mandatory funding plus additional
discretionary funding. The plan described how the IRS would transform
service to taxpayers by updating technology capabilities and investing
in employees with new tools, skills, and capabilities as well as
ensured the fairness of the tax system by addressing the tax gap.
Rescissions of IRA funding, which have left a balance of $57.8
billion has put IRS in jeopardy of not achieving this future state. As
that reduced balance must be used not only to transform the IRS but
also to supplement operational requirements, which will continue to
grow as technology is modernized and IRS will have no option but to
scale down its work if additional funding is not received. Technology
is the foundation of the vision outlined in the SOP and IRS would
require additional funding to facilitate the full-scale transformation
journey describe as the IRS future state and summarized below.
In short, a transformed IRS is a digital organization that provides
taxpayers the ability to engage in tax administration in a completely
digital environment if they choose to do so, i.e., every type of
engagement, while the premise of a fair and equitable tax system is
also present in the compliance aspects of the system for completeness.
Therefore, the technology that supports this from end to end must also
be modernized or transformed to enable that future transformed state.
Existing systems servicing taxpayers and IRS employees cannot be simply
modified to deliver this. Replatforming and replacing the custom built
for purpose systems on modern platforms with new tools capable of
providing a modern digital experience and new capabilities are needed.
Additionally, it is expected that work will need to continue in the
form of incremental changes over time and beyond this initial
transformation/modernization effort, to keep pace as technology
changes, so as not to have the need for a major transformation again
that stemmed from years of not keeping pace as we have seen
historically.
Taxpayer service vision: All taxpayers can meet all their
responsibilities, including all interactions with the IRS, in a
completely digital manner, if they prefer.
Today, many taxpayers expect to handle all their financial
transactions online. While taxpayers will continue to have the option
to file their tax returns on paper or reach the IRS by phone or mail,
our vision is to offer a seamless and convenient digital experience to
the large number of taxpayers that prefer online. In addition, Call
Center modernization is focused on leveraging technology, such as
voicebots, that will route calls based on human language to make the
call centers even more efficient. Automated answering of calls frees up
employees from answering basic questions addressed by bots and allows
taxpayers to obtain faster service. The IRS launched The Simple Notice
Initiative and will review and redesign hundreds of notices with an
immediate focus on the most common notices that individual taxpayers
receive. This initiative coupled with the IRS Paperless initiative
provide taxpayers the option to go paperless and conveniently submit
necessary responses online. Having digital versions of notices online
will also help taxpayers verify that the notices they receive in the
mail are legitimate. Our vision is to have online self-service options
for all taxpayer needs. Future investments into our technology will
further enable taxpayers to access their information in real time.
Once these efforts are completed, they will increase employee
capacity for areas where taxpayers need the most help and assist with
more complex issues, especially in addressing tax scams and schemes,
and claiming credits and deductions.
Fairness in enforcement vision: Noncompliant taxpayers, including
some of the largest and most complex filers, pay what they owe because
the IRS has the workforce and advanced technology needed to enforce
fairness in the tax system and narrow the tax gap.
IRS is using modernization to rebalance our enforcement focus to
boost enforcement capability for the most complex, high-income
taxpayers. Advanced compliance analytics will ensure the IRS is
detecting high-risk noncompliance effectively and will empower
employees to work more efficiently. This will ensure the IRS has the
capability needed to tackle new issues as the tax administration
landscape continues to become more complex include investing in
training so that our workforce has the necessary capabilities to tackle
increased complexity. Better analytics will also allow IRS to minimize
auditing taxpayers where they are found to be compliant upon completion
of the audit, avoiding time-consuming audits and focusing resources on
noncompliance among complex, high-income taxpayers.
Cybersecurity and data protection focus: Taxpayer privacy and
security will remain paramount in all we do. Modernization encompasses
implementing new technology capabilities faster, at a larger scale with
better reliability and cybersecurity built in, so taxpayers can
seamlessly access their data and rest assured that their data is
protected and secure. With the latest cybersecurity implemented and
always staying ahead, the IRS can detect and address issues before they
interrupt services.
Cybersecurity and data protection must keep pace with new threats,
technologies, and architectures, this can be achieved by maintaining
currency with our infrastructure and cybersecurity posture. We already
identify, assess and respond to security risks, but our efforts must
increase to protect many more cloud vendors and solutions, taxpayer
interaction types and employee data access capabilities. Modernization
will continue to scale data encryption across dozens of systems to
limit exposure of taxpayer data. We will continue to espouse a
continuous, proactive, and adaptive security posture through a zero-
trust model, which will allow IRS to reduce fraud and better protect
the system from cyberattacks ensuring taxpayers can continue to trust
that their information and identities are protected.
Information technology vision: Technology is modern, scalable, and
easy to maintain to meet IRS mission. Data is easily accessible and
used in an innovative way.
To achieve the visions above and cybersecurity and data protection
focus, there is a need for a modernized robust technical foundation at
the IRS that will improve the efficiency, performance, and
accessibility of its information technology systems. The foundational
technology infrastructure, data, systems, and network are critical to
enabling services and enforcement efforts, while ensuring core IRS
operations remain resilient and secure. The IRS needs to continue
modernizing the legacy footprint (which includes aged programming) from
the point of intake of tax returns and information systems through
processing and ultimately retention. Data access and security will be
integrated in each instance to ensure we retain the integrity of the
tax system and secure taxpayers' information. A modernized IRS
information technology echo system would provide real-time updates to
taxpayers, improve transparency, and offer advanced tools for
employees, ultimately creating a more efficient, secure, agile, and
taxpayer-focused organization.
Question. With respect to the funding provided to the IRS as part
of the Inflation Reduction Act, would the IRS support receiving
transfer authority for any such funding? If so, how much transfer
authority would the IRS suggest, and with respect to which accounts?
Answer. Multiyear funding has been critical in helping the IRS
accomplish long-term technology projects and other IRS transformational
efforts in the service and enforcement areas. When current multiyear
funding is depleted, the IRS will need either higher discretionary
funding levels or additional multiyear funding to continue providing
the level of service taxpayers expect and deserve and to continue an
appropriate level of enforcement with respect to large corporations,
complex partnerships, and wealthy taxpayers. The FY 2025 budget
proposed $12.3 billion in discretionary funding for FY 2025 and $104
billion in additional mandatory funding for the IRS between FY 2026 and
FY 2034, including $17.7 billion for taxpayer services, $58.9 billion
for enforcement, $23.8 billion for technology and operations support,
and $3.9 billion for business systems modernization. In conjunction
with this proposal, the administration also proposed expanded transfer
authority to allow the IRS to deploy the resources Congress has
provided effectively. But without the additional funding proposed in
the budget, transferring resources from other accounts to taxpayer
services would shortchange other critical activities and accelerate
other funding cliffs. In particular, it would likely accelerate the
enforcement funding cliff into the 2020s and/or force the IRS to cut
back on planned investments with high rates of return for the Federal
budget.
Question. The IRS budget projects that the proposed $104 billion
would generate approximately $341 billion in revenue, while providing,
among other things, ``equitable enforcement activities that minimally
burden taxpayers.''
Can you provide examples of these ``equitable enforcement
activities'' and how they would impact taxpayers?
Answer. The IRS will increase fairness for all taxpayers and
address the tax gap by focusing more resources on priority taxpayer
segments, including large partnerships, large corporations and
noncompliant high-income and high-wealth individuals, that
disproportionately contribute to the tax gap. We are also working to
improve enforcement in areas of non-income taxation (excise, employment
tax, and estate and gift) and emerging issues such as digital assets.
Specific examples include:
Ramped up efforts to pursue noncompliant high-income, high-
wealth individuals who have either not filed their taxes or
failed to pay recognized tax debt, concentrated among taxpayers
with more than $1 million in income and more than $250,000 in
recognized tax debt.
Opened examinations of 76 of the largest partnerships in the
U.S., representing a cross section of industries including
hedge funds, real estate investment partnerships, publicly
traded partnerships, large law firms and other industries.
Expanded the large corporate compliance (LCC) program,
focusing on noncompliance by using data analytics to identify
large corporate taxpayers for audit. LCC includes the largest
and most complex corporate taxpayers with average assets of
more than $24 billion and average taxable income of
approximately $526 million per year.
Increased audits involving personal use of business
aircrafts. The audits focus on aircraft usage by large
corporations, large partnerships, and noncompliant high-income
taxpayers. We will examine whether the use of jets is being
properly allocated between business and personal use.
Question. Would any of the estimated $341 billion in purported
revenue come from taxpayers earning less than $400,000?
Answer. The IRS is committed to not increasing audit coverage for
small businesses and households below the $400,000/year threshold
compared to historic levels.
Question. Congressional Budget Office (CBO) rules prohibit scoring
hoped-for but entirely uncertain revenue from proposed enforcement.
Has the IRS projection of the $341 billion in revenue been
evaluated by the nonpartisan CBO?
If not, does the IRS believe that based upon past practices CBO
would confirm that amount?
If not, does the IRS believe that based upon past practices the
amount CBO would project would be higher or lower than the $341 billion
projection?
Answer. The IRS collected $4.034 billion dollars on behalf of the
United States in FY 2023. The vast majority of what the IRS collects is
paid ``voluntarily and timely'' and many of IRS's operational
activities exist to collect that revenue. These include significant
service and technology activities to assist taxpayers and accept and
track tax revenue. IRS enforcement exists primarily to encourage and
promote voluntary and timely compliance and, secondarily, to collect
revenue from those who do not accurately and timely file and pay their
taxes. In FY 2023, total enforcement revenue collected was $86 billion
or 2 percent of total collections.
The IRS recently published a white paper that discusses how the
focus on IRS enforcement almost certainly underestimates the actual
revenue benefit to the United States of America that investing in the
IRS will have. As described in the IRS strategic operating plan, the
IRS is investing in the full spectrum of its activities, including
service, technology and enforcement. While $341 billion seems like a
lot, when taken in context, as a multiyear estimate of the proceeds of
maintaining a transformative investment for the IRS--an organization
which was already collecting $4 billion annually pre-transformation--it
is a modest and likely conservative estimate for the increased revenue
from that investment.
CBO analyses consistently show that investing in the IRS produces
more revenue for the United States than it costs. However, we would
refer you to CBO for their analysis of any specific proposal.
Question. Of the $80 billion of funding for the IRS provided in the
IRA, more than half--$46 billion--was allocated to enforcement, while
only 4 percent was provided to taxpayer services. In your testimony
before the committee, you noted supplemental funding is needed for both
modernization and customer service.
In addition, Treasury Inspector General for Tax Administration
(TIGTA), keeps track of the IRS's spending of IRA funding, but this
tracking is only updated every 3 months (with the latest TIGTA figures
reflecting spending as of December 31, 2023).
Beyond the data reported by TIGTA as of December 31, 2023, how much
of the IRA funding allocated to enforcement has been spent?
Beyond the data reported by TIGTA as of December 31, 2023, how much
of the IRA funding allocated to taxpayer services has been spent?
Beyond the data reported by TIGTA as of December 31, 2023, how much
of the IRA funding allocated to modernization has been spent?
Do you believe the IRA struck the optimum balance in its allocation
of funding between enforcement versus modernization and taxpayer
services?
If IRA funding allocated to enforcement currently remains unspent,
and is not projected to be spent within the next 2 years, would any of
those funds be more effectively used by being allocated to
modernization or customer service?
Answer. IRS provides quarterly reporting on IRA spending. Below is
the most recent report from the fourth quarter of Fiscal Year 2024,
which is also posted on the IRS website at IRS financial reports. The
IRS has obligated a total of $1,634.3 million of IRA enforcement
allocation through September 30, 2024.
Management Quarterly Update
Fiscal Year 2024 Quarter 4 Update
The Management Quarterly Update is a supplemental document to the
IRS Agency Financial Report, Management's Discussion and Analysis
section to provide transparency on the IRS's management and operational
challenges. The Fiscal Year 2024 Quarter 4 update includes a table
describing the IRS's Inflation Reduction Act of 2022 (IRA) spending.
IRS's IRA Spending as of September 30, 2024
(in millions)
----------------------------------------------------------------------------------------------------------------
Appropriated FY22 FY23 FY24 FY24 FY22-FY24
Appropriation Funds Spent Spent Apportioned Spent Spent
----------------------------------------------------------------------------------------------------------------
Taxpayer Services $3,181.5 $1.1 $888.5 $969.3 $402.5 $1,292.1
Enforcement $24,047.9 $0.0 $299.0 $1,347.6 $1,335.3 $1,634.3
Operations Support $25,326.4 $61.0 $1,473.8 $3,258.5 $2,456.2 $3,991.0
Business Systems Modernization $4,750.7 $43.9 $723.2 $1,789.4 $1,282.0 $2,049.0
Direct e-File Study $15.0 $0.0 $11.6 $0.0 $0.0 $11.6
Energy Security $500.0 $0.0 $0.0 $180.0 $59.1 $59.1
----------------------------------------------------------------------------------------------------------------
Total $57,821.5 $106.0 $3,396.1 $7,544.8 $5,535.1 $9,037.2
----------------------------------------------------------------------------------------------------------------
Notes: Enforcement appropriation is adjusted for $1.48 rescission from the Fiscal Responsibility Act of 2023
(Public Law 118-5) and $20.28 from the Further Consolidated Appropriations Act, 2024 (Pub. L. 118-47).
Direct e-File Study funds were only appropriated through FY23.
FY24 apportionment amount does not include prior year accounting adjustments.
Source: FY24 End of Year Actuals Obligations Expenditures and Disbursements report.
This allocation allows the IRS to increase enforcement in priority
segments such as large corporations, large partnerships, and
noncompliant high-income/high-wealth taxpayers to generate revenue and
enforce the tax laws. IRS intends to utilize all the remaining funding
allocated to enforcement to right-size enforcement staffing, which has
suffered from more than a decade of underfunding.
The FY 2025 budget proposed $12.3 billion in discretionary funding
for FY 2025 and $104 billion in additional mandatory funding for the
IRS between FY 2026 and FY 2034, including $17.7 billion for taxpayer
services, $58.9 billion for enforcement, $23.8 billion for technology
and operations support, and $3.9 billion for business systems
modernization. This funding would allow the IRS to provide taxpayers
with the service they deserve and fairly enforce the law.
Question. Please list all of the ways that the IRS currently
utilizes, or anticipates to start utilizing in the next 2 fiscal years,
artificial intelligence (AI) and/or machine learning.
Answer. As of June 20, 2024, the IRS has 84 active AI use cases in
our internal AI use case inventory, 37 of which are currently used in
an operational workflow. All AI use cases must meet governance
requirements that align with OMB, Treasury, and IRS standards before
they are approved for use. Broadly speaking, the IRS is using AI for
three purposes:
1. to improve taxpayer services
Examples: Using chatbots to address taxpayer questions online and
provide general FAQ-type information, and voicebots to answer taxpayer
questions over the phone and provide general information along with
some account-specific information. These bots are designed to be more
user-friendly than legacy, menu-driven phone assistance and reduce wait
times to speak with a live agent. Note: all chatbot and voicebot
responses are predetermined by IRS business owners; responses to
taxpayers are not produced by generative AI. We also use AI and other
advanced analytic methods to identify taxpayer pain points and help
develop targeted service improvement strategies.
2. to improve efficiency of internal business operations
Examples: Using machine translation systems that decrease the time
required to translate some public-facing documents from English to
Spanish and other languages. All output is reviewed by a bilingual
human translator prior to publication. The IRS has deployed internal
chatbots to help answer employee IT questions or learn about job-
related benefits. IRS employees can also use internal machine
translation software to translate case related documents to English. We
have also used sophisticated AI techniques to generate insights from
documents and memoranda and use those insights for training new staff
in the compliance domain.
3. to detect tax noncompliance and fraud, including identity theft
AI is used to help identify fraud (e.g., returns filed using other
taxpayers' personally identifiable information), and to identify
potentially high-risk cases that may warrant examination. All model
outputs are reviewed by humans and used to inform human decision-
making; decisions to conduct an audit are made by humans, and audits
are performed by humans. IRS does not use AI to audit taxpayers.
Examples: AI models are used to improve IRS ability to detect
potential tax fraud or noncompliance on complex tax returns filed by
large corporations and large partnerships.
Anticipated future use: The IRS recognizes that generative AI has
great potential but must be used carefully to ensure outputs are
accurate and trustworthy. The IRS is exploring use cases such as:
Summarizing document content, such as logs of customer
contacts or documentation provided with tax returns to better
understand taxpayer concerns.
Assisting IRS notice writers and content developers by
producing first drafts of new materials, which IRS subject
matter experts will review before taxpayers receive them.
Expanding chatbot capabilities to help taxpayers get answers
to questions.
Improving search and summarization of employee training
materials, knowledge artifacts and the Internal Revenue Manual.
Assisting audit examiners by helping to translate case notes
into final reports and usable data on the audit outcome as well
as models to improve our ability to identify noncompliance on
complex tax returns from high-income filers are in development.
Note: None of these anticipated future use cases are currently
being used in production.
Question. Please list all of the policies the IRS currently has in
place, or anticipates having in place in the next 2 fiscal years, that
will (or would) govern its utilization of AI or machine learning.
Answer. AI capabilities can be delivered into the enterprise
through multiple avenues, including internal development of machine
learning/AI models, inclusion of commercial or open-source AI
components in technology solution architectures, or updates/releases of
commercial technology systems that include new AI functionality. To
help ensure that third-party AI components are being properly governed,
the IRS has updated its existing information technology governance
processes for the software development lifecycle (``OneSDLC'') and
technology insertion (``Tech Insertion''). Both the OneSDLC and Tech
Insertion processes now include steps to capture new AI use cases for
IRS AI inventory. Project teams engaged with OneSDLC and Tech Insertion
are directed to follow IRS AI Governance process to support the
development of artifacts for ongoing review including use case risk
assessments, model cards, and data sheets.
In May 2024, the IRS issued interim guidance codifying our AI
governance policy (RAAS-10-0524-0001, Artificial Intelligence
Governance and Principles) (May 20, 2024) (RAAS-10-0524-0001).\6\ It
codifies Federal requirements such as the AI use case inventory and OMB
M-24-10 \7\ minimum practices for rights-impacting or
safety-impacting AI, along with establishing an IRS-wide AI governance
process that includes multiple levels of human review and artifacts
that must be completed for each use case. All rights- or safety-
impacting AI use cases require executive board approval prior to being
authorized for use in an operational workflow.
---------------------------------------------------------------------------
\6\ This policy is available to the public on the irs.gov FOIA
library at https://www.irs.gov/pub/foia/ig/spder/interim-guidance-raas-
10-0524-0001-artificial-intelligence-governance-and-principles-
redacted.pdf.
\7\ See OMB Memorandum titled ``Advancing Governance, Innovation,
and Risk Management for Agency Use of Artificial Intelligence, March
28, 2024, OMB Memorandum M-24-10 (OMB M-24-10) at OMB M-24-10.
In addition, the IRS is bound by the decisions rendered by the
Treasury Artificial Intelligence Governance Board (AIGB), in which the
IRS is a standing member. The AIGB helps ensure AI is implemented
within the Department in a manner consistent with the Department's risk
---------------------------------------------------------------------------
appetite, with appropriate considerations given to safety and equity.
Question. The House Judiciary, Ways and Means, and Oversight and
Accountability Committees have been informed that the IRS may be
investigating IRS agents Gary Shapley and Joseph Ziegler, who reported
concerns to Congress about the handling of the Hunter Biden case.
Reports suggest this investigation might be in retaliation for their
lawful disclosures.
These allegations are particularly alarming in light of claims
reported by The New York Times that Hunter Biden's lawyers have accused
the whistleblowers of illegal disclosures and urged their prosecution.
I am concerned by the possible misuse of investigative power as a means
of punishing these individuals for their protected actions.
Could you provide an update on the status of the investigations
into agents Shapley and Ziegler, especially in relation to claims of
whistleblower retaliation?
How is the IRS ensuring its adherence to Federal whistleblower
protection laws?
Answer. The IRS has not conducted any investigation of Shapley or
Ziegler, nor would there typically be an investigation of IRS personnel
in the circumstances described above. We have long believed it is
essential to good government that public-sector employees have ample
mechanisms available to report potential concerns--and that employees
feel comfortable and secure making such reports.
As a general matter, when there are concerns or allegations of
potential unlawful activity by IRS personnel relating to their tax
administration duties--which could include allegations of unlawful tax
disclosure, allegations of retaliation or other prohibited personnel
practices, or any other violation of law, regulation, or duty--it is
IRS's standard practice to refer these matters to TIGTA. This places
the decision on whether to pursue an investigation, not with the IRS,
but with an independent and separate authority. The IRS then awaits any
appropriate guidance or recommendations from TIGTA and acts, as
warranted, with the benefit of TIGTA's fact-finding and analysis. This
approach is consistent with Department of Treasury Order 115-01 (May
24, 2018), and it ensures that the relevant questions are independently
reviewed, in a manner that is protective of our mission, complies with
all legal obligations, and safeguards the rights of the relevant
employees and of any impacted taxpayers. As a result, and as stated
above, there has not been, nor is there, any IRS investigation of the
two employees referenced above.
Question. This past December, the Treasury Inspector General for
Tax Administration (TIGTA) released a report concluding the IRS is not
in compliance with the No TikTok on Government Devices Act. TIGTA's
reported TikTok was found on devices used by employees in the IRS's
Criminal Investigation division, for example.
Could you describe the IRS policy of letting IRS employees use
their personal devices to handle highly sensitive and legally protected
taxpayer information?
Answer. The IRS Bring Your Own Device (BYOD) program is a voluntary
program that allows personnel to use their personally owned mobile
devices to stay connected to, access data from, or complete many IRS
tasks. Internal Revenue Manual 10.5.1.6.13 (September 15, 2023), Bring
Your Own Device, provides an overview of the BYOD program and the
related requirements to protect highly sensitive and legally protected
taxpayer data.
To protect the privacy of the tax information, BYOD participants
must only use IRS-approved applications provided by IRS through a
secure container on the device. They must also adhere to all applicable
laws, regulations, rules, policies, and procedures, including the
Federal Records Act, Office of Government Ethics Standards of Ethical
Conduct, and the Department of Treasury's Employee Rules of Conduct. In
addition, BYOD users must consent to monitoring, interception,
recording, reading, copying or capturing by authorized personnel of all
activities on the IRS-approved mobile device business software on their
mobile devices.
To access IRS resources, the user must have their device enrolled
in the BYOD program, have the container software installed, and use
both a passcode to unlock the device and a password when using an
application within the container to access IRS data. The applications
used within the container and information accessed on the personal
device is encrypted and fully separate from the user's personal
applications and data. If the device is lost or stolen, the user is
required to report the theft immediately.
With respect to IRS Criminal Investigation, consistent with Office
of Management and Budget (OMB) Memorandum M-23-13, ``No TikTok on
Government Devices Implementation Guidance,'' which ``permits limited
exceptions to the restrictions outlined in this memorandum for law
enforcement activities, national security interests and activities, and
security research,'' a limited subset of employees in the IRS Criminal
Investigation Division (CI) are able to access TikTok through an
isolated, secure, and compartmentalized third-party solution for
legitimate investigative purposes. IRS CI employees cannot access the
TikTok website or download or install the TikTok app on their agency
mobile devices or computers.
Question. Why did TIGTA find TikTok, which is infamous for
collecting data from mobile phones, on the same mobile phones that
handle highly sensitive and legally protected taxpayer information?
Answer. The IRS is committed to ensuring devices used to access IRS
systems do not have TikTok installed and can neither install the
application nor access the TikTok website. IRS has control over IRS-
issued devices, and we prevent both installing the TikTok application
and accessing the TikTok website on IRS devices. The IRS also has
control over the secured, encrypted container on employee devices
enrolled in the IRS's BYOD program, and TikTok cannot be installed in
or accessed from the secure container. Although the IRS manages the
secure portion of the device that contains IRS applications and data
and the IRS prevents the copying or sharing of data between that
container and other applications on the device, we do not have the
ability to control what applications BYOD users install or what
websites they access on their personal devices outside the secure IRS
BYOD solution.
Question. The IRS received approximately tens of billions of
dollars in multiyear supplemental funding. Why do IRS employees need to
use their own mobile phones to handle highly sensitive and legally
protected taxpayer information? If an IRS employee needs a mobile
phone, why can't the IRS provide the employee with a secure mobile
phone?
Answer. The IRS conducted an assessment of BYOD opportunities and
determined the program could save budget resources without sacrificing
data security. By deploying BYOD, the IRS saves money by not purchasing
a fleet of mobile devices and supporting cell-phone data packages. The
IRS avoids not only up-front device and data costs but also the
expenses for smartphone refreshes, software updates, and repairs. In a
BYOD program, users simply add secure functionality to devices they
already own and maintain.
The BYOD program also improves productivity, connectivity, and
employee satisfaction. In the event of tasks that need immediate
approval or a work-related emergency, it's crucial to reach key
employees immediately. Employees typically have their personal devices
available, and employees who utilize the BYOD program are more likely
to be able to access work materials at all times than users with a
dedicated work device.
The BYOD program provides savings for the IRS and better access for
employees. It provides convenience for employees who don't have to
manage multiple mobile phones.
Question. ``Troves'' of taxpayer information have been leaked by
IRS-hired contractors. There is The New York Times and ProPublica leak
of IRS contractor Charles Littlejohn. Then there is the astonishing
double leak by the IRS of legally protected taxpayer information on
Form 990-T. This particular leak was first reported in September 2022
and then, after telling us this would never happen again, it happened
again as reported in December 2022. And again, the IRS blamed this
double leak on an IRS contractor.
What is the IRS doing to stop contractors it hires from leaking
private taxpayer information?
Answer. When I arrived as IRS Commissioner in March 2023,
safeguarding taxpayer information was a priority for me, and I quickly
focused on using new Inflation Reduction Act resources to bolster the
agency's data security. In addition to reviewing the report, the IRS
has taken multiple steps to improve the safeguarding of taxpayer data.
These measures include:
Further restricting user access. We restructured our
operations to reduce the number of people with access to the
most sensitive taxpayer datasets. Stronger protocols are now in
place to ensure only people with documented, mission-essential
needs are entitled to receive access.
More robust protective security controls. We updated data
protection mechanisms (e.g., encryption, anonymization) to
better protect taxpayer information.
More frequent data entitlement reviews. We are strengthening
review protocols to ensure more IRS oversight of data users,
have implemented procedures to ensure that all network access
is timely removed for users who separate from the IRS. So far,
we have reduced timeframes for deactivating inactive accounts
assigned to current employees and contractors by 25 percent.
Managers are required to review and approve initial requests
for access and to periodically validate continuing user need
for the access. IRS Cybersecurity will conduct additional
reviews to ensure we limit access to key sensitive systems to
properly authorized individuals.
Collection and retention of detailed access logs. Key data
sources inside the IRS have improved monitoring and event logs.
We now maintain evidentiary copies of database queries and data
outputs, which improves surveillance of internal data use and
preserves records of who accessed which data and when.
Additionally, we enforce an approved destination for data
exports and prevent users from copying those files to
unapproved drives and/or folders.
Improved firewalls. We have added additional firewalls
between key taxpayer information and the rest of the IRS,
providing additional monitoring capabilities. We record all
traffic between these areas to improve monitoring.
Stronger 24/7 monitoring. We have expanded advanced
analytics to detect and prevent risky data usage, providing
improved insight into suspicious activities around the clock.
New tools. We are adding new analytical tools and dashboards
to monitor user activity involving sensitive data. These tools
will help to improve the detection of potential data misuse.
Less removable media. We have dramatically reduced users'
ability to connect removable media, such as thumb drives, to
IRS computers. The new protocol requires executive approval of
those users who have legitimate business needs and close
monitoring of user activity to watch for risky behavior. This
step has significantly curtailed opportunities to remove
sensitive taxpayer information from the IRS computing
environment.
Tighter email controls. We have dramatically strengthened
email controls involving taxpayer information, including new
restrictions on contractors' ability to email information
outside the IRS, while preserving but closely monitoring this
ability when necessary for collaborating with non-IRS
employees. This step has further reduced the risk of
contractors removing sensitive taxpayer information from the
IRS computing environment.
New printer controls. We are now logging and scanning
printing by all IRS users to detect potential policy violations
and to preserve evidence to support inquiries of suspected
wrongdoing. This effort includes printing at telework/remote
work locations.
Question. What consequences have there been for the consulting
firms involved in leaking taxpayer data?
Answer. Mr. Littlejohn was found guilty of disclosing tax return
information without authorization and was sentenced to prison. His
actions were criminal, intentional, and accomplished using
sophisticated methods to try and avoid detection. They were the actions
of one criminal individual.
The IRS is not aware of any consulting firms involved in
intentionally leaking taxpayer data.
Question. Is the IRS using any of its supplemental IRA funding to
continue to pay any consulting firms whose employees leaked private
taxpayer information?
Answer. The IRS must follow Federal Acquisition Regulations (FAR).
Under the FAR, the indictment or conviction of a consulting firms'
employee would not automatically negate contractual agreements. As
detailed above, the IRS has made significant improvements to our
taxpayer data protections, including closing access and exfiltration
opportunities this sophisticated insider used to collect and remove
data and try and hide his criminal unauthorized access and disclosure.
Question. You and your staff have conveyed that the IRS will
endeavor to implement any law changes from H.R. 7024 as expeditiously
as possible.
You have provided in writing that it will take approximately 6-12
weeks to make software and programming changes and process second
refunds. However, you and your staff have also conveyed that these
second refunds will come in the form of paper checks. I understand that
the Bureau of Fiscal Services is responsible for issuing those checks,
and that it will take them another 5-6 weeks to process them.
Is that timeline accurate or are there any updates to this
information that you can share?
Answer. The timeline needed of approximately 6-12 weeks from the
date of enactment to adjust systems and issue paper payments is still
accurate, while noting the potential for unforeseen events that could
affect timing. After further analysis and study, the IRS will be able
to issue refunds as direct deposit when banking information is
available from the 2023 tax return. This will reduce the volume of
paper checks issued from the Bureau of the Fiscal Service.
The IRS is positioned to implement laws enacted by Congress as
quickly as possible. The IRS will move with urgency to ensure taxpayers
and tax professionals are informed, and that those lawfully entitled to
a benefit due to enacted tax code changes are able to receive that
benefit.
Question. Amid concerns about fraudulent ERC claims, on September
14, 2023 the IRS enacted a moratorium on processing new claims. When
the moratorium took effect, it was estimated the IRS paid $230 billion
in Employee Retention Credits. The moratorium appears to be driven by
three factors. First, the IRS and some tax professionals believe a vast
majority of ERC claims are ineligible. Second, initial estimates placed
the ERC's cost at about $78 billion, yet current estimates suggest it
could exceed $550 billion. Third, fraudulent promoters have misled
honest small business owners into applying for the credit.
As a result of the moratorium, it is estimated more than 1 million
ERC claims await processing. Separately, the IRS has promoted an ERC
Voluntary Disclosure Program (VDP), which ended March 22, 2024.
What percentage of ERC claims overall does the IRS believe to be
ineligible for the credit, and how many have been paid?
Answer. The Employee Retention Credit (ERC) is a complex claim with
precise requirements to help businesses during the pandemic. Amended
returns from ERC applicants come in on paper. During the moratorium,
the IRS transcribed data from approximately 1 million claims and
analyzed the data to evaluate the risk of ineligibility. The moratorium
provided valuable time to determine the risk profile of these claims.
This analysis shows that 10-20 percent of the 1 million transcribed
claims were in the highest-risk group, while potentially 60-70 percent
have an unacceptable level of risk and cannot be processed without
further analysis.
Throughout the moratorium, the IRS continues to work ERC claims
received prior to the moratorium and to pay out claims, select
potentially ineligible claims for audit and issue notices of claim
disallowance for ineligible claims. In addition, we have undertaken an
array of compliance initiatives around erroneous ERC claims, to include
Voluntary Disclosure Program, withdrawal process, and disallowances,
topping more than $2 billion since last fall. These ERC initiatives are
working to protect businesses from ERC promoters that shared misleading
information or misrepresented eligibility rules and lured businesses to
apply for the ERC when they did not qualify. IRS efforts have confirmed
inappropriate claims across several compliance programs:
More than 2,600 applications for the special ERC VDP disclosed
more than $1 billion.
The ongoing claim withdrawal process for those with unprocessed
ERC claims has led to 7,300 entities withdrawing $677 million as of
August 15, 2024. The IRS has determined that more than 12,000 entities
filed over 22,000 claims that were improper and resulted in $572
million in assessments. The IRS is continuing this work, and more
activity is planned in this--and other areas in the months ahead.
Question. What percentage of pre-moratorium ERC claims does the IRS
believe were ineligible for the credit, and how many were paid?
Answer. During the moratorium review period, the IRS digitized and
analyzed more than 1 million ERC claims (all of which were paper
returns) representing more than $86 billion. In June 2024, we announced
our findings, which confirmed concerns raised by reputable tax
professionals and others that there was a high rate of improper claims
in the inventory:
Between 10 percent and 20 percent of claims fall into what
we have determined to be the highest risk of being ineligible.
Between 60 percent and 70 percent of the claims showed an
unacceptable level of risk and further analysis was needed.
Between 10 percent and 20 percent of the ERC claims showed a
low risk of being ineligible.
Question. Why did the IRS wait until September 14, 2023 to
institute a moratorium to address the problem of ineligible claims?
Answer. The IRS wants to prevent businesses from being misled while
ensuring that businesses that make legitimate claims receive the
credits they are entitled to receive. Despite what these ERC promoters
promised, this tax credit is not a risk-free way to get money from the
government. Businesses putting in claims could be putting themselves at
financial risk. Nearly 2 years removed from the heart of COVID-19
economic disruptions, we observed an increase in the number of ERC
claims being filed that seemed to have been influenced by aggressive
marketing. During this time, ERC claims filing increased, averaging
50,000 to 60,000 claims weekly. We feared that too many honest small
businesses were being put at risk to the benefit of unscrupulous
promoters that received a contingency fee of up to 20 percent of the
refund being claimed.
The IRS initiated the moratorium following these growing concerns
inside the agency, as well as from tax professionals and media reports,
that a substantial share of new ERC claims, filed well after the
legislation had passed were ineligible.
As stated above, the moratorium provided valuable time to risk
assess the inventory. It also slowed the filing of ERC claims
dramatically--they dropped by about half, to about 30,000 a week.
Question. When was the earliest point where an IRS employee raised
concerns to the IRS Commissioner, Deputy Commissioner, or any IRS
Chief, Division Commissioner, Director, or other senior IRS official
with respect to IRS actions or policies in paying ERC claims?
Answer. In the winter of 2022 and spring of 2023 the IRS leaders
attempted to alert taxpayers to potential abuse of the ERC. See news
release: IRS issues renewed warning on Employee Retention Credit
claims; false claims generate compliance risk for people and businesses
claiming credit improperly, Internal Revenue Service. By the summer of
2023, IRS officials were hearing concerns first-hand from the tax
professional community that high volumes of the claims being filed were
ineligible.
Question. Did any senior IRS official listed in the prior question
ever advocate for imposing a moratorium on the payment of ERC claims
prior to August 15, 2023? If so, what was the earliest instance that
such occurred?
Answer. In the summer of 2023, IRS officials were hearing concerns
firsthand from tax professionals that an estimated 95 percent of these
claims being filed at that time were ineligible. This concern was based
on the tax professionals' clients who were ineligible for the ERC but
were going to promoters/preparers and having ERC claims prepared and
filed. Discussions began about what actions should be taken to protect
businesses and protect the public fisc from improper claims for tax
refunds.
Question. What steps has the IRS taken to recover ERC payments made
to ineligible claimants? How do these steps protect eligible ERC
claimants from unnecessary inquiries?
Answer. As noted earlier, we have undertaken an array of compliance
efforts around erroneous ERC claims that have topped more than $2
billion since last fall. Specifically, within those efforts, before the
expiration of the assessment statute for tax year 2020 claims, we
assessed $572 million in involving 12,000 entities due to the claims
being improper. We also announced that taxpayers that want to
participate in the ERC VDP were required to voluntarily pay back 80
percent of the ERC received, cooperate with any requests from the IRS
for more information and sign a closing agreement. This program, which
was available through March 22, 2024, resulted in the disclosure of
more than $1 billion from over 2,600 taxpayers who opted to
participate.
Question. How many IRS employees are dedicated to recovering money
paid to ineligible ERC claims?
Answer. The IRS has trained over 50 employees to perform efforts to
recapture ERC claims that were paid in what has subsequently been
identified to be excessive or erroneous amounts.
Question. What specialized training is provided to IRS employees
tasked with retrieving ERC funds that were paid to ineligible
taxpayers? How does such training educate IRS employees to identify
eligible ERC claims thereby acknowledging a valid claim?
Answer. The IRS is deploying data analytics across paid claims to
identify those deemed excessive or erroneous. Employees who work the
output of these analytics are being trained in general criteria for
eligibility. Additionally, revenue agents who work audits of ERC
receive training on ERC eligibility and apply it to any active audits.
Question. What is the return on investment on tax enforcement
resources assigned to pursuing invalid ERC claims?
Answer. As noted above, our special compliance efforts have yielded
more than $2 billion since fall. This far exceeds the cost of our
resources.
Question. Is the IRS planning to allocate more enforcement
resources to pursue ineligible ERC claims?
Answer. We are planning to continue our existing efforts, and more
activity is planned in the months ahead.
Question. How many taxpayers applied for the VDP?
Answer. As noted above, 2,600 taxpayers opted to participate in the
special ERC VDP, yielding more than $1 billion.
Question. How many taxpayers did the IRS accept into the VDP?
Answer. Applications are still actively being reviewed.
Question. How much money was recovered by the VDP?
Answer. Due to the ongoing processing of VDP applications, this
information is not available. As noted above, more than 2,600
applications for the special ERC VDP disclosed more than $1 billion.
The Service is currently receiving applications for the second ERC VDP.
Question. Of the recovered amount, how much will be recovered
through installment payments?
Answer. Due to the ongoing processing of VDP applications, this
information is not currently available.
Question. When do you anticipate resuming pre-moratorium ERC claim
processing levels?
Answer. During the moratorium review period, the IRS digitized and
analyzed more than 1 million ERC claims (all of which were paper
returns) representing more than $86 billion. In June 2024, we announced
our findings, which confirmed concerns raised by reputable tax
professionals and others that there was a high rate of improper claims
in the inventory.
In August, we announced that we are now processing claims based on
our risk analysis of the approximately 1.2 million pre-moratorium
claims, and we moved the date of the moratorium to claims filed as of
January 31, 2024. We began processing on about 400,000 claims filed up
to this new date, representing about $10 billion of eligible claims. We
have continued and will continue until the end of the calendar year to
process both allowance and disallowance claims of pre-moratorium
claims.
Question. When do you estimate the backlog of ERC claims will be
processed?
Answer. We are moving as rapidly as possible while still ensuring
that ineligible claims are not being paid. There will be significant
movement of the inventory by the end of FY 2025.
Question. How much do you estimate will be paid to ERC claimants
once the moratorium is lifted?
Answer. We cannot provide an estimate at this time.
Question. Does this amount include interest accrued to the delay
caused by the moratorium?
Answer. We cannot provide an estimate at this time.
Question. If the moratorium were to be lifted on June 30, 2024,
what would the interest rate be for a valid ERC claim received on the
first day of the moratorium?
Answer. The IRS pays interest at a rate dictated by section 6621
which is subject to change every calendar quarter. The answer to the
question depends on which calendar quarter the ERC was claimed, and if
it was claimed on a timely filed return.\8\
---------------------------------------------------------------------------
\8\ For interest computation information, you can find more
information at https://www.
irs.gov/payments/quarterly-interest-rates.
Question. Considering the Commissioner described finding an
eligible ERC claim is like finding ``a needle in a haystack,'' how is
the IRS ensuring the integrity of the tax system by only paying valid
ERC claims? Due to the importance of this question, please provide a
---------------------------------------------------------------------------
detailed answer.
Answer. The goal of closing one-third of the inventory includes
claims that will be disallowed and those that will be allowed. The
remaining claims in inventory require additional steps to unlock the
complexity and determine eligibility. We are adjusting our risk scoring
as taxpayers respond to disallowance letters and to audits. The work
will proceed in a way that balances the need for claimants to have
closure and to avoid improper payments.
Question. Before issuing moratorium-delayed ERC payments, has the
IRS considered a large-scale campaign to ask ERC claimants for more
information to better filter the eligible from ineligible claims?
Answer. The IRS wants to prevent businesses from being misled while
ensuring that businesses that are making legitimate claims receive the
credits they are entitled to receive. Asking taxpayers to provide books
and records would require both the IRS and the taxpayer to engage in
additional administrative activities that could unnecessarily burden
the taxpayer. The risking methodology has allowed the IRS to identify
claims with low risk of being ineligible. Since July 2024,
approximately 400,000 claims, totaling about $10 billion, have been
processed including both eligible claims allowed and ineligible claims
not allowed, with the vast majority in this tranche being processed for
approval. Checks are being mailed for eligible claims with refunds,
with more planned in the weeks and months ahead. As we continue to
refine our analytical tools, we will also be exploring a potential
alternative treatment stream.
Question. What percentage of moratorium-delayed ERC claims are
being asked to further support their claim?
Answer. We have thousands of ERC claims currently under audit.
Question. Before ending the moratorium, will the IRS execute
another ``soft letter'' campaign highlighting repayment options,
withdrawal procedures, and the possibility of ERC audits and give
recipients a reasonable amount of time to respond?
Answer. No potential actions have been ruled out.
______
Questions Submitted by Hon. Michael F. Bennet
pilot programs
Question. The IRS has deployed machine learning tools to identify
fraud trends in the Employee Retention Credit program and has used
artificial intelligence (AI) to audit 76 of the largest partnerships in
this country as part of the Large Partnership Compliance (LPC) program.
Is the IRS considering implementing new pilot programs that could
leverage advances in machine learning and data analytics to more
accurately identify tax evasion and fraud, and improve the efficiency
of customer service professionals? If yes, what is your timeline for
doing so, and what resources above current appropriations are required?
Answer. The question indicates that AI was used ``to audit 76 of
the largest partnerships. . . .'' To clarify, IRS does not use AI to
conduct any audit of a taxpayer or tax entity. The IRS only uses AI in
upstream audit planning and selection processes.
The IRS is continuously looking at new opportunities to build and
deploy the best and most advanced tools (including new and more
sophisticated machine learning models) to enhance its capabilities to
identify fraud and improve tax administration. The duration to develop
and employ new models is usually an annual process. New or enhanced
models that do not require a field test (pilot) may be deployed within
a year from initiation.
Where feasible, the IRS seeks to conduct operational pilots of new
AI and advanced analytics methodologies to ensure that new techniques
provide an improvement over the legacy approaches they may replace
without posing additional risk to the taxpayers or the IRS. The IRS is
continually seeking to more accurately identify tax evasion, fraud, and
noncompliance, and evaluate how we can improve our use of machine
learning and data analytics to do so. We are also using AI to extract
insights from data sources in the customer service domain to better
understand service interactions and create new opportunities to
streamline and improve the customer experience while improving the
efficiency of customer service professionals. We expect process
improvements to be implemented gradually over the coming years,
following sufficient testing via pilot programs or other means to
ensure new tools are used responsibly to produce value while protecting
taxpayer rights.
Some examples of current and upcoming pilots in the near term
include:
Use of generative AI to improve plain language in taxpayer
notices. The IRS is currently piloting the use of generative AI
with a limited number of users from the Office of Taxpayer
Correspondence. AI is used to generate a draft. The draft is
then reviewed and edited by IRS subject matter experts before
it is sent to taxpayers.
Use of natural language processing and machine learning to
detect potential fraud leads in financial reporting documents.
The IRS is conducting a pilot to determine whether potential
fraud leads identified by an AI workflow provide an improvement
over more manual legacy process.
Currently, the IRS uses a combination of employee and contractor
resources to develop and support advanced analytics programs. However,
with the help of IRA funding, the IRS is working to hire more data
scientists who will support the development and rollout of advanced
analytics pilot programs and operational uses.
deficit reduction and the tax code
Question. The Bush tax cuts added $8 trillion to the debt. The 2017
Tax Cuts and Jobs Act added nearly $2 trillion more. Around a quarter
of these cuts went to the top 1 percent--Americans in the bottom
quintile received only 1 percent. These cuts are responsible for 57
percent of the increase in our debt-to-GDP ratio since 2001, while
eroding our revenue base. Revenue as a share of GDP has fallen from
about 19.5 percent in the years immediately preceding the Bush tax cuts
to just 16.3 percent in the years immediately following the Trump tax
cuts. Recent estimates show that making the TCJA's individual income
and estate tax cuts permanent would further imperil America's public
finances, costing around $350 billion a year beginning in 2027.
How can the tax code be improved to more accurately capture
generational wealth transfers and contribute to sustainable debt
reduction?
Answer. Treasury is the appropriate agency to answer this question.
______
Question Submitted by Hon. Sherrod Brown
Question. Historic tax credits and historic preservation easements
are effective tools to increase housing affordability in the urban core
of cities in Ohio and across America--an imperative for local
economies. It is essential that these credits be administered
accurately and efficiently. However, I am concerned by what appears to
be a very high correlation between returns involving these historic tax
breaks, and audits and often litigation in Tax Court initiated by the
IRS. A growing expectation by taxpayers that their legitimate use of
historic tax breaks will generate costly and time-consuming litigation
only serves to deter use of measures enacted by Congress to promote
affordable housing.
Will you work with historic preservation stakeholders to ensure
that this trend does not deter the legitimate use of historic
preservation easements to convert at-risk buildings into affordable
housing in places like Cleveland and Columbus?
Answer. The IRS will continue to work with taxpayers, historic
building owners, nonprofits, and other stakeholders in the historic
preservation community to provide clear guidance on the use of historic
preservation easements and historic tax credits to benefit communities
like Cleveland and Columbus. It also should be noted that there are
other Federal agencies and offices that have responsibilities in this
area, most notably the U.S. Department of the Interior and the Advisory
Council on Historic Preservation.
______
Questions Submitted by Hon. Thomas R. Carper
sole proprietor tax gap
Question. According to GAO's November 2023 report entitled ``Sole
Proprietor Compliance: Treasury and IRS Have Opportunities to Reduce
the Tax Gap,'' between tax years 2014 and 2016, the IRS attributed an
average of approximately $80 billion per year of the tax gap to sole
proprietorships (accounting for 16 percent of the overall tax gap).
Does the IRS have an updated estimate on the sole proprietor tax
gap for more recent tax years?
Answer. The most recent tax gap estimates are for 2014-2016.
However, in October 2023, the IRS released Tax Gap Projections for TY
2020 and TY 2021 (Publication 5869).\9\ Table 4 on page 14 of the
report includes the most recent projection of the portion of the
individual underreporting tax gap attributable to nonfarm sole
proprietors. The TY 2021 projection is $110 billion. In contrast to our
reported tax gap estimates, our tax gap projections are updated
annually.
---------------------------------------------------------------------------
\9\ See Tax Gap Projections for TY 2020 and TY 2021, Publication
5869 at https://www.irs.gov/pub/irs-pdf/p5869.pdf.
Question. How is the IRS currently monitoring the noncompliance
---------------------------------------------------------------------------
risk of sole proprietorships?
Answer. With the National Research Program (NRP), the Discriminant
Function (DIF) model, and other risk modeling, the IRS has the most
well-developed and rigorous compliance risk assessment for sole
proprietors relative to any other business entity type. The NRP data
that are the foundation of the tax gap estimates provide extensive
information on the nature and extent of sole proprietor noncompliance.
DIF is a risk-based predictive model used to separate returns that have
a high likelihood of a high tax change (at or above a given threshold
level) from those that do not. Sole proprietor cases are a major
component of the Small Business/Self Employed (SB/SE) Division's audit
plans. Significant efforts and resources are also aimed at increasing
sole proprietors' compliance with employment tax filing, payment, and
reporting compliance.
improving sole proprietor tax compliance
Question. In addition, GAO writes: ``IRS has a communications plan
for platform workers, who are one type of sole proprietor. However, it
does not have a coordinated communications plan focused on informing
the wide variety of sole proprietors about their tax and reporting
responsibilities. Such a plan would help sole proprietors meet their
tax obligations and navigate tax law changes. According to stakeholders
GAO spoke with, some sole proprietors are unaware of their tax
obligations on income earned through online platforms. Additionally,
stakeholders told GAO that they found the existing guidance overly
technical and difficult to understand.''
What steps is the IRS currently taking to improve the ease of tax
filing for sole proprietors, particularly from a communications
perspective? What is the agency's current strategy to enforce
noncompliance and identify underreporting of sole proprietorships?
Answer. Our ongoing communications and engagement with small
businesses, including sole proprietors, is integral to the IRS's larger
focus in the strategic operating plan on improving our taxpayer
service, helping taxpayers meet their tax obligations and receiving the
tax incentives they deserve. The IRS offers significant resources for
sole proprietors and gig workers on irs.gov, including detailed
instructions for filing Schedule C, the Gig Economy Tax Center, Tax Tip
2023-05, tax tips for gig economy entrepreneurs and workers, and Tax
Tip 2023-85, info to help gig economy workers stay on top of their tax
responsibilities--to name just a few.
The IRS incorporates messaging for the many types of sole
proprietors in its communications and outreach plans, engaging with
regional and local small business organizations across the country on a
nearly daily basis. The IRS hosted or attended more than 1,300
stakeholder partner events since July 2020. The agency also hosts a
quarterly Small Business Forum with national small business
organizations providing them important updates and information for
their millions of members. In addition, IRS Communication and Liaison
outreach team engages with small business audiences in nontax-related
sole proprietor events at IRS seminars at Small Business Expos across
the country, presenting plain-language tax information to these sole
proprietor audiences. This outreach is expected to continue and grow
through FY 2024.
The strategic operating plan, released in April 2023, discusses
several initiatives for expanding enforcement in key areas and
addressing the tax gap. We believe our new IRA resources will be used
most effectively when focused on noncompliant high-income individuals,
(including those who may be sole proprietors), large corporations; and
complex partnerships that are not paying the taxes they legally owe. In
addition, the strategic operating plan contains multiple initiatives
that will assist all taxpayers, including sole proprietors, to meet
their payment obligations by providing improved access to account
information, payment reminders, easy payment options, and assistance
with past-due obligations.
______
Questions Submitted by Hon. Catherine Cortez Masto
Question. Under the McCarran-Ferguson Act, States were tasked with
regulating the business of insurance. Exercising such authority, Nevada
has passed laws governing the formation, licensing, and operations of
small captive insurance companies domiciled within its jurisdiction.
The proposed IRS rule 109309-22 regarding small captives has caused
concern among Nevada's insurance regulators and small captive industry.
Has IRS considered the impact of this regulation on State laws like
Nevada's that have governed the captive insurance industry?
Answer. The McCarran-Ferguson Act provides that ``[n]o Act of
Congress shall be construed to invalidate, impair, or supersede any law
enacted by any State for the purpose of regulating the business of
insurance, or which imposes a fee or tax upon such business, unless
such act specifically relates to the business of insurance.'' See 15
U.S.C. Sec. 1012(b). In other words, McCarran-Ferguson Act precludes
application of Federal law in face of State law ``enacted . . . for the
purpose of regulating the business of insurance,'' if the Federal law
does not ``specifically relat[e] to the business of insurance,'' and
would ``invalidate, impair, or supersede'' the State law. Humana Inc.
vs. Forsyth, 525 U.S. 299, 307, 119 S.Ct. 710 (1999).
The proposed regulations do not render ineffective any State law,
nor do they displace or diminish any State regulator's ability to
regulate the insurers within their jurisdiction. Rather, the proposed
regulations apply concurrently with State laws. Identification of a
transaction under section 6011 as an abusive or potentially abusive use
of section 831(b) solely for Federal tax purposes does not in any way
invalidate, impair, supersede, or otherwise affect State insurance
laws.
Question. Artificial intelligence (AI) has the ability to transform
customer service for the IRS. At the same time, this technology must be
evaluated to protect consumers from harm. For example, a March 4, 2024
Washington Post article found that a private-sector AI tool gave
unhelpful answers to more than 30 percent of questions asked regarding
tax preparation. It did well on 529 plans and mortgage deductions, but
confidently recommended an incorrect filing status and erroneously
described IRS guidance on cryptocurrency.
Can you speak to how the IRS plans to use AI to more efficiently
answer taxpayer questions?
Answer. As of June 20, 2024, the IRS is using two taxpayer-facing
chatbots and six taxpayer-facing voicebots to provide general
information to taxpayers. In addition, three taxpayer-facing
authenticated voicebots provide limited account-specific information to
taxpayers. These chatbots and voicebots allow taxpayers to find answers
to their questions more quickly and efficiently without waiting for
live assistors.
All taxpayer-facing AI tools provide content that has been
predefined by IRS business owners; generative AI is not used to produce
responses to taxpayers in order to ensure taxpayers do not receive
inaccurate information. The only AI functionality in the chatbots and
voicebots is to interpret taxpayer input (utterances) and classify
those utterances as one of multiple pre-mapped request topics so the
chatbot or voicebot can provide a correct, predetermined response
applicable to the taxpayer's inquiry.
More specific information about the chatbots and voicebots the IRS
is currently using to efficiently answer taxpayer questions is below:
Chatbots: One chatbot provides general information on
payment topics (e.g., how to make a payment, how to set up a
payment plan, how to seek financial relief or offer in
compromise) while the other provides general information on
topics such as refund status, advance child tax credit,
identity theft, amended returns, and more.
FAQ-type voicebots: The IRS is using six voicebots to
provide general information to taxpayers on topics such as the
economic impact payment, one-time payments, general information
about notices, and the Advance Child Tax Credit. These
voicebots seek to provide a more user-friendly experience for
taxpayers calling the IRS than the menu-driven legacy phone
systems.
Authenticated voicebots: The IRS is using voicebots that
leverage shared secrets such as taxpayer identification number,
personal identification number, date of birth, filing status,
and ZIP code to authenticate taxpayers and provide limited
account-specific information such as refund status, fact of
filing information, amended return status, account history,
balance due, and payment plan information. These voicebots
provide a more user-friendly upgrade to legacy systems.
The IRS is evaluating options to improve Customer Service
Representative (CSR) capabilities through use of AI. The focus is to
build an integrated information system that uses AI to understand and
summarize a taxpayer question and present the CSR with contextual
specific information, thereby enabling the CSRs to answer taxpayer
questions effectively and with higher efficiency.
Question. How will the IRS work to ensure such technologies do not
cause misinformation?
Answer. All information provided by chatbots and voicebots is
predetermined by humans who are subject-matter experts; AI is not being
used to generate responses to taxpayers. There is some risk that if the
AI fails to correctly interpret taxpayer inquiries it will provide
responses that are not applicable to the taxpayer's question, and the
IRS is working to mitigate this risk by regularly reviewing the AI
system to identify and reduce such occurrences. However, even responses
that may not address the taxpayer's question are always predetermined
by humans and will not contain information that is factually incorrect.
The IRS is conducting internal pilot projects evaluating Generative
AI/Large Language Models suitability for specific uses. For some use
cases the response from the model can be validated. For example,
generating first draft of content that is part of a rigorous review and
approval process. For all use cases under investigation, extensive
tests are conducted, and a measure of accuracy is provided and used to
determine fitness for the intended use case.
Question. How will IRS work to protect consumers from businesses
that beta-test AI tax preparation technologies on everyday people who
trust their services?
Answer. Although the IRS can't control commercial market or beta-
testing services, we provide filing options to taxpayers who do not
wish to use commercial products that may beta-test AI tax preparation
technologies, through public-private partnerships (IRS Free File), free
fillable forms, and the new Direct File program. The IRS also conducts
accuracy checks when returns are filed and is implementing additional
at-filing checks as outlined in the IRA strategic operating plan.
Additionally, the IRS is aware that AI can be used by bad actors to
perpetuate fraud or other nefarious acts. The IRS is committed to
improving our own AI-
enhanced fraud detection and promoter investigation models to protect
taxpayers from bad actors.
______
Questions Submitted by Hon. Marsha Blackburn
Question. I am deeply disappointed and troubled by your decision to
press ahead with the agency's misguided Direct File pilot program
despite significant doubts regarding the program's viability, potential
costs, and the IRS's capacity to launch such a program. I am concerned
that the Biden administration is repeating the same mistakes as the
disastrous 2013 healthcare.gov rollout, which has cost taxpayers more
than $21 billion.
Could you provide an update on the performance of the pilot as it
relates to Tennessee, as well as a breakdown of participation by State
and count of the number of participants who are Federal or State
government employees?
Answer. In IRS Direct File After Action Report, we provided a
breakdown of taxpayer usage by State (see footnote 2). That breakdown
by State can be found in Figure 4 on page 17 of the report.
We did not collect information from taxpayers who used the Direct
File pilot about whether they were Federal or State Government
employees.
Over the course of the pilot, more than 3.3 million taxpayers
started the Direct File Eligibility Checker, 423,450 taxpayers logged
in to Direct File, and 140,803 taxpayers submitted accepted returns.
More detailed information about the number of Direct File returns and
acceptance rates can be found in IRS Publication 5969, IRS Direct File
Pilot Program: Filing Season 2024 After Action Report, May 3, 2024,
available at https://www.irs.gov/pub/irs-pdf/p5969.pdf.
Question. What is the approximate reject rate for returns submitted
via Direct File? What was the most frequent reason for rejection? How
did IRS overcome it?
How many returns received in Direct File during the pilot were
flagged for potential fraud and/or sent to special processing? Of those
sent to special processing, how many were rejected?
Answer. The IRS is not in the practice of releasing the requested
information for any of the individual tax filing options or services
taxpayers may choose to use, including Direct File, Free File, or
options provided by commercial providers. However, the IRS is committed
to ensuring Direct File is a secure, accurate, and easy-to-use direct
e-filing system. Direct File joined the Security Summit public-private
partnership and implemented all the Summit's Trusted Customer
protections, leveraging insights gained over more than 2 decades of e-
filing. The IRS has not identified new threats associated with Direct
File or with the system's IAL2 identity verification, and the 2024
pilot's limited scope further reduced risk.
The pilot design ensured the IRS addressed the vast majority of
bugs before they affected users. In the small number of cases where
taxpayers did encounter rare glitches, they were quickly fixed, and
additional tests were put in place to ensure that they did not recur.
Once data is available, the IRS will review the rates at which
Direct File returns were amended, and the reasons taxpayers had for
amending returns. In addition to the taxpayer frustration caused by
needing to amend a return, amended returns are costly for the IRS to
process. An analysis of amendment rates, and the reasons taxpayers
filed amendments, could identify further opportunities to improve the
accuracy of Direct File, including in how it guides taxpayers to
recognize when they are missing information necessary to file their
return.
Question. On March 12, 2024, Treasury released a statement
estimating that 19 million taxpayers may be eligible to use Direct File
in the 2024 filing season. What percentage of the population eligible
for Direct File completed and submitted their tax return through Direct
File?
Answer. Throughout this filing season, the IRS saw strong interest
in Direct File from taxpayers throughout the country. Millions of
people--including many from outside of the 12 pilot States--visited the
Direct File website to learn about the new system. Over the course of
the pilot, more than 3.3 million taxpayers started the Eligibility
Checker to see if they could use Direct File; 423,450 taxpayers logged
into Direct File; and 140,803 taxpayers submitted accepted returns.
More detailed information about the number of Direct File return and
acceptance rates can be found in IRS Publication 5969, IRS Direct File
Pilot Program: Filing Season 2024 After Action Report, May 3, 2024,
available at https://www.irs.gov/pub/irs-pdf/p5969.pdf.
Question. Over the last several months, IRS officials have given
widely varying Direct File user estimates to the press. Estimates
ranged from ``several hundred thousand'' in November 2023 to ``hopes
that it will reach 100,000'' in March 2024. How did officials arrive at
these estimates? The official launch date of the pilot never changed
from mid-March, so what factors contributed to the variance in
estimates?
Answer. From the beginning the IRS said that we hoped that several
hundred thousand taxpayers would use Direct File during the pilot
phase. When Direct File opened to the public in March, we stated that
we hoped that 100,000 taxpayers would file using Direct File. More than
400,000 taxpayers logged into Direct File, and more than 140,000 filed
an accepted return. Maximizing usage was never a goal of the Direct
File pilot. These numbers are more than sufficient for us to evaluate
Direct File.
More than 15,000 taxpayers responded to our Touchpoints survey
after submitting or resubmitting their return. This is a fantastic
response that provides the team with invaluable data to study to better
understand the experience of Direct File. We are particularly grateful
to the many taxpayers who volunteered to be contacted for follow-up
user research about their experience.
Question. What was Direct File's cost per return for filing season
2024?
Two watchdog agencies, GAO and TIGTA, have found that cost
estimates for the Direct File Pilot provided by IRS were not the
product of best practices and could not be substantiated. Can you
provide a comprehensive cost estimate that ensures all costs are
included and documented?
Answer. In the Report to Congress, the IRS estimated that the
annual cost for Direct File could range from between $64.3 to $248.9
million for a service that reached between 5 to 25 million taxpayers
depending on the tax scope and the taxpayers reached. We noted that
these estimates were subject to uncertainty due to the nature of
launching a new product like Direct File. The pilot provided an
opportunity to collect concrete data on the cost of Direct File.
Through April 20, 2024, the IRS spent $24.6 million on Direct File,
which includes $11.6 million in costs for the development of last
year's report to Congress. Of the $13.0 million spent on pilot
development and implementation, $10.6 million is technology and product
development costs and $2.4 million is operational costs (customer
service, cloud computing, user authentication, et cetera). To build and
run the pilot, the IRS also engaged the U.S. Digital Service (USDS).
The IRS's agreement with the U.S. Digital Service did not involve costs
to IRS. The limited design of the pilot means that the IRS was not able
to benefit from economies of scale. If the number of Direct File users
were to increase, the cost per return would decrease.
Total through FY
$ in Millions FY 2023 FY 2024 YTD 2024 YTD
FY 2023 Direct File 11.6 - 11.6
Feasibility Study and
Report to Congress
Technology and Product 11.6 - 11.6
Labor 0.8 - 0.8
Non-Labor 10.8 - 10.8
Advisory and 8.6 - 8.6
assistance
services
Equipment 0.3 - 0.3
Other goods and 1.9 - 1.9
services from
Federal
sources
Direct File Pilot 1.5 11.5 13.0
Development and
Implementation
Customer Service 0.1 1.8 1.9
Labor 0.1 1.8 1.9
Technology and Product 1.4 9.7 11.1
Labor 0.2 2.9 3.1
Non-Labor 1.2 6.8 8.0
Advisory and 1.2 3.2 4.4
assistance
services
Ongoing cloud - 0.5 0.5
services
Equipment - 0.2 0.2
Other goods and - 2.8 2.8
services from
Federal
sources
Travel and - 0.1 0.1
transportation
of persons
Grand Total 13.1 11.5 24.6
Note: FY 2024 labor includes actuals through April 6, 2024, and an
accrual through April 20, 2024. Costs do not include other shared
corporate costs.
These totals include costs associated with vendor support and an
interagency agreement with GSA's 18F. To build and run the pilot, the
IRS also engaged 29 employees from the USDS to supplement the IRS
employees and other team members. The USDS costs are not included in
the $24.6 million spent on Direct File. The IRS estimates that the
annualized cost for the USDS team is $7.2 million.
While the costs outlined above all center on the actual costs
involved in delivering the pilot, the team is using this data to
develop a more robust cost estimate for potential future costs for
delivering Direct File. We look forward to working with GAO and TIGTA
on those future estimates.
Question. Who decided to expand the scope of the feasibility study
into Direct File? Were you, as IRS Commissioner, acting on your own
authority? Did the White House, Congress, or Treasury influence the
decision to go beyond the mandate in IRA?
Answer. On May 22, 2024, I issued a memo to the Secretary telling
her that the IRS recommends making Direct File a permanent option for
taxpayers to file their Federal tax returns beginning in 2025, and the
Secretary concurred.
Question. A recent Treasury Inspector General for Tax
Administration report found that more than 2,800 IRS employees are not
following the mandate from Congress regarding the use of TikTok, a
Chinese Government spying app, on government devices. Senator Thune and
I sent a letter to you this January seeking answers on Treasury's
actions to comply with the No TikTok on Government Devices Act. We have
yet to receive a response.
What are you doing to rectify this compliance failure? Will you
commit to ensuring we receive a thorough response?
Answer. Please see my response to your letter dated May 23, 2024,
which answers the questions you raised.
Question. The Treasury Department originally pledged in its May
2021 American Families Plan Tax Compliance Agenda that audits wouldn't
increase for taxpayers with income below $400,000 in ``actual'' income
relative to ``recent'' levels. One could assume that ``actual'' would
be ``taxable'' income but instead the IRS opted for ``total positive
income,'' the sum of all available income before any deductions or
exemptions, versus another measure like adjusted gross income. The
goalposts have moved dramatically since then but regardless, the
$400,000 figure has remained unchanged.
In May of 2021, $400,000 has the purchasing power of $344,754 as of
the end of March 2024. The fact that this figure hasn't changed means
there are millions more Americans, middle-class families, and small
business owners that could find themselves in the crosshairs of the IRS
than at the time of the original pledge. In fact, according to The Wall
Street Journal, between 2019 and 2022 number of households with income
above $400,000 increased by 3.4 million.
Has the administration changed its position on its pledge given the
soaring inflation Americans have experienced since Treasury originally
made this pledge?
Answer. The Secretary's 2022 directive is that audit rates will not
increase over historic levels for individuals and households earning
$400,000 or less. That directive has not changed.
Question. Can you clarify how this pledge applies to joint filers
and commit that married couples filing jointly will be protected from
the IRS's auditing dragnet?
Answer. The directive applies to households, which includes joint
filers.
Question. I'd like you to address the IRS's cybersecurity
deficiencies and instances that the IRS abused its access to
confidential tax information, as seen in the ProPublica case and the
recent sentencing of Charles Littlejohn, an IRS contractor who pled
guilty to stealing and leaking President Trump's tax returns. Recent
reports have highlighted the IRS's vulnerability to both external and
internal threats, putting private taxpayers data at risk.
GAO found numerous instances of ``willful unauthorized access of
tax data by employees.''\10\ And this past fall, your agency's watchdog
found that the IRS failed to maintain cybersecurity standards to the
level required by Federal law.\11\ These instances of negligence--and
sometimes even criminal conduct--undermine the public's trust in the
IRS. Law-abiding stakeholders are rightfully concerned that our tax
authorities are acting in a political manner, threatening taxpayers
with serious privacy breaches and punishing them for complying with the
law.
---------------------------------------------------------------------------
\10\ https://www.gao.gov/products/gao-22-105872.
\11\ https://www.tigta.gov/sites/default/files/reports/2023-09/
202320064fr.pdf.
Could you please provide a detailed update on how you plan to
protect taxpayers' privacy and ensure that we protect taxpayers'
---------------------------------------------------------------------------
sensitive information?
Answer. When I arrived as IRS Commissioner in March 2023,
safeguarding taxpayer information was a priority for me, and I quickly
focused on using new Inflation Reduction Act resources to bolster the
agency's data security. In addition to reviewing the report, the IRS
has taken multiple steps to improve the safeguarding of taxpayer data.
These measures include:
Further restricting user access. We restructured our
operations to reduce the number of people with access to the
most sensitive taxpayer datasets. Stronger protocols are now in
place to ensure only people with documented, mission-essential
needs are entitled to receive access.
More robust protective security controls. We updated data
protection mechanisms (e.g., encryption, anonymization) to
better protect taxpayer information.
More frequent data entitlement reviews. We are strengthening
review protocols to ensure more IRS oversight of data users,
have implemented procedures to ensure that all network access
is timely removed for users who separate from the IRS, and will
ensure that sensitive system access is timely removed for users
who separate from the IRS. So far, we have reduced timeframes
for deactivating inactive accounts assigned to current
employees and contractors by 25 percent. Managers are required
to review and approve initial requests for access and to
periodically validate continuing user need for the access. IRS
Cybersecurity will conduct additional reviews to ensure we
limit access to key sensitive systems to properly authorized
individuals.
Collection and retention of detailed access logs. Key data
sources inside the IRS have improved monitoring and event logs.
We now maintain evidentiary copies of database queries and data
outputs, which improves surveillance of internal data use and
preserves records of who accessed which data and when.
Additionally, we enforce an approved destination for data
exports and prevent users from copying those files to
unapproved drives and/or folders.
Improved firewalls. We have added additional firewalls
between key taxpayer information and the rest of the IRS,
providing additional monitoring capabilities. We record all
traffic between these areas to improve monitoring.
Stronger 24/7 monitoring. We have expanded advanced
analytics to detect and prevent risky data usage, providing
improved insight into suspicious activities around the clock.
New tools. We are adding new analytical tools and dashboards
to monitor user activity involving sensitive data. These tools
will help to improve the detection of potential data misuse.
Less removable media. We have dramatically reduced users'
ability to connect removable media, such as thumb drives, to
IRS computers. The new protocol requires executive approval of
those users who have legitimate business needs and close
monitoring of user activity to watch for risky behavior. This
step has significantly curtailed opportunities to remove
sensitive taxpayer information from the IRS computing
environment.
Tighter email controls. We have dramatically strengthened
email controls involving taxpayer information, including new
restrictions on contractors' ability to email information
outside the IRS, while preserving but closely monitoring this
ability when necessary for collaborating with non-IRS
employees. This step has further reduced the risk of
contractors removing sensitive taxpayer information from the
IRS computing environment.
New printer controls. We are now logging and scanning
printing by all IRS users to detect potential policy violations
and to preserve evidence to support inquiries of suspected
wrongdoing. This effort includes printing at telework/remote
work locations.
Question. I request that you review the GAO's May 2022 report ``IRS
Security of Taxpayer Information: Characteristics of Employee
Unauthorized Access and Disclosure Cases'' (GAO-22-105872, https://
www.gao.gov/products/gao-22-105872).
Will you commit to reviewing this report and provide a written
response regarding Treasury's efforts to address the IRS's past
failures to safeguard taxpayer information?
Answer. Please see my answer above on steps taken to safeguard
taxpayer information.
Question. Similarly, I request that you review GAO's September 2023
report ``Security of Taxpayer Information: IRS Needs to Address
Critical Safeguard Weaknesses'' (GAO-23-105395, https://www.gao.gov/
products/gao-23-105395).
Will you commit to reviewing this report and provide a written
response addressing the GAO's recommendations to the IRS, and what
steps you have taken to implement GAO's outstanding recommendations?
Answer. Please see my answer above on steps taken to safeguard
taxpayer information. In addition, I can note that we have taken
multiple steps so far to address weaknesses that were identified in the
report. We have centralized the responsibility for monitoring
contractor training completion and established a 90-percent training
completion goal for contractors, and we are monitoring the training
completion rates for contractors and sharing completion rates with
appropriate personnel.
In addition, we have developed a reference guide to assist
contracting officer representatives (COR) with documenting and
reporting Unauthorized Access to Tax Return Information (UNAX) and
unauthorized disclosure incidents involving contractors; and improved
the consistency and reliability of contractor UNAX reporting, and with
improved reporting, we are able to monitor UNAX and unauthorized
disclosure cases for trends and take appropriate action when trends are
identified.
Question. I would appreciate an expedient response regarding the
substantiation and disclosure requirements for charitable
contributions.\12\ I have heard from Tennesseans that have had their
charitable contribution deductions retroactively denied due to the
arcane documentation rules. I am concerned that the strict
``contemporaneous'' requirements have prevented philanthropic
contributions from being acknowledged by the agency and will have a
chilling effect on charitable contributions. These organizations are
integral to local communities and families in Tennessee.
---------------------------------------------------------------------------
\12\ https://www.irs.gov/pub/irs-pdf/p1771.pdf.
In cases where taxpayers have made charitable contributions in good
faith but are subsequently denied deductions due to minor technical
errors in the contemporaneous acknowledgment provided by the recipient
charitable organization, would the IRS consider implementing a policy
that allows these taxpayers a grace period to correct such
---------------------------------------------------------------------------
acknowledgments?
Answer. The contemporaneous written acknowledgement (CWA) rules
were established by Congress under the IRC. Under section 170(f)(8)(A),
enacted in 1993, a taxpayer may not take a deduction for a charitable
contribution of $250 or more unless the taxpayer substantiates the
contribution with a CWA of the contribution by the donee organization.
Section 170(f)(8)(C) specifies that an acknowledgement will be
considered ``contemporaneous'' if the taxpayer obtains it on or before
the earlier of (i) the date on which the taxpayer files a return for
the taxable year in which the contribution was made, or (ii) the due
date for filing such return.
In section 170(f)(17), Congress has imposed additional
recordkeeping requirement for contributions in the form of cash, check,
or other monetary gift. Regardless of the amount, no deduction is
allowed for any such contribution unless the donor maintains a bank
record or a written communication from the donee showing the name of
the donee organization, the date of the contribution, and the amount of
the contribution.
Congress enacted the CWA requirements to increase compliance with
rules governing charitable contributions. By requiring taxpayers to
obtain a CWA, Congress aimed to ensure that taxpayers were aware of
potential limitations to the deductibility of certain contributions,
such as in situations involving a quid pro quo. S. Prt. No. 103-37 at
91 (1993).
In section 170(f)(8)(D), Congress has authorized Treasury and IRS
to implement rules to ease burden on small donors. Under that
authority, Treasury and IRS issued regulations that except small
contributions of less than $250 from the CWA requirements. This
exception applies even when the taxpayer's total contributions to the
same charity in the same year equal or exceed $250. See Treas. Reg.
Sec. 1.170A-13(f)(1).
Question. This exemption could provide a fair opportunity to
address and rectify these minor discrepancies without penalizing well-
intentioned donors. In the 2024 Taxpayer Advocate Service (TAS) Purple
Book, TAS proposed a legislative change to loosen strict
contemporaneous timing requirements (Recommendation #59, https://
www.taxpayeradvocate.irs.gov/wp-content/uploads/2024/01/ARC23_Purple
Book_08_MiscRecs_59.pdf). TAS argues that current requirements harm
taxpayers and tax-exempt organizations that make a technical mistake in
their written acknowledgment or that provide some necessary information
only after the statutory deadline has passed.
Could you elaborate on the IRS's position on this specific TAS
recommendation, and will you commit to working with my office on
potential legislation on the issue?
Answer. As you stated, the National Taxpayer Advocate 2024 Purple
Book includes a TAS proposal for a legislative change to remove the
requirement that written receipts acknowledging charitable
contributions must be contemporaneous (Recommendation #59), which
states:
To claim a charitable contribution, a taxpayer must receive a
written acknowledgement from the donee organization before
filing a tax return. For example, if a taxpayer contributes
$5,000 to a church, synagogue, or mosque, files a tax return
claiming the deduction on February 1st, and receives a written
acknowledgement on February 2nd, the deduction is not
allowable--even if the taxpayer has credit card receipts and
other documentation that fully and unambiguously substantiate
the deduction. This requirement can harm civic-minded taxpayers
who do not realize how strict the timing requirements are and
undermines congressional policy to encourage charitable giving.
We recommend Congress modify the substantiation rules to
require reliable--but not necessarily advance--acknowledgement
from the donee organization.
The ``contemporaneous'' timing component of section 170(f)(8) is a
longstanding statutory requirement that has been in effect since 1993.
The statutory language provides clear guidance on what
``contemporaneous'' means for the CWA requirements. Charities are well-
versed in these requirements, and the timing component is well
understood and not complex. Many tax preparation software providers
integrate pop-up reminders about the CWA requirement when a
contribution amount is input. Additionally, the related IRS
publications and the instructions for forms where a taxpayer would
claim a deduction under section 170 provide numerous alerts to these
CWA requirements. See e.g., Publication 526, Charitable Contributions;
and the Instructions for Schedule A (Form 1040).
We believe that this longstanding and clear definition of
``contemporaneous'' enables ease in compliance and administration. If
the CWA is not required to be contemporaneous, the effect of the CWA is
diluted and could make it less meaningful.
We are concerned that the removal of the timing component may
create a greater burden for both the donee and the donor in the event
of an examination in subsequent years.
If Congress determines to replace the CWA requirement with new
standards for the section 170 substantiation requirements, it must
consider the historic concerns that led to the adoption of today's
current standards. These concerns include widespread abuse of section
170 deductions, clear standards for substantiation, and concerns of
administrability. Legislating clear standards for substantiation is
also essential to ensure compliance and reduce the likelihood of
confusion or abuse.
Treasury may be better suited to working on legislation and
addressing any policy considerations. However, the IRS will serve to
assist Congress and Treasury work on legislation and to implement and
uphold whatever legislation Congress passes.
______
Questions Submitted by Hon. Bill Cassidy
Question. According to an article in Forbes, the IRS Direct File
program contains Google Analytics JavaScript code and a more covert
tracking mechanism called canvas fingerprinting. As I understand it,
these tools potentially offer valuable insights into user behavior,
which can be leveraged to enhance functionality, improve user support,
and even discern what outreach campaigns are most effective.
Is the IRS partnering with any other companies to collect,
aggregate, or otherwise use taxpayer information?
Answer. The IRS is committed to protecting the privacy and security
of taxpayers and their personal information. IRS did not track
individual taxpayers' usage of Direct File. Direct File uses Google
Analytics for collecting anonymous data in the aggregate that can be
used to identify improvements to the Direct File product; use of Google
Analytics does not involve the collection of any personally
identifiable information. As part of Direct File, taxpayers who used
customer support or successfully filed a tax return were given the
ability to take an optional customer survey to provide feedback on
their experience. The IRS is not partnering with any other companies to
collect, aggregate or otherwise use taxpayer information. The optional
customer survey conducted was done by the IRS using the General
Services Administration's survey tool.
Question. If so, what is the scope of taxpayer information being
collected, and for what uses?
Answer. As noted above, the IRS is not partnering with companies to
collect, aggregate, or otherwise use taxpayer information. The IRS
administered the optional customer survey.
Question. As part of the agency's increased focus on the tax issues
applicable to partnerships and partners, the IRS says that it has been
increasing compliance to ensure that Self-Employment Contributions Act
(SECA) taxes are being properly reported and paid by wealthy individual
partners who provide services and have inappropriately claimed to
qualify as ``limited partners'' in State law limited partnerships (such
as investment partnerships) not subject to SECA tax. In contrast to
wage earners whose employment taxes (Federal Insurance Contributions
Act/FICA) are deducted from their paychecks, self-employed individuals
are required to report and pay their SECA taxes on their Federal income
returns.
In November 2023, the U.S. Tax Court issued an opinion in Soroban
Capital Partners LP vs. Commissioner that agreed with the IRS's
position that the limited partner exception to SECA tax does not apply
to a partner who is ``limited'' in name only. As a result, partners who
actively participated in the State law limited partnership must report
their partnership share as net earnings from self-employment subject to
SECA tax.
Given the dire circumstances of Social Security and Medicare, I am
more sympathetic with enforcement mechanisms that help shore up
solvency for these programs.
In addition to your focus on large partnerships, are you
integrating AI systems to detect payroll and self-employment tax
avoidance?
Answer. The IRS is actively working to develop and improve its
models for selecting cases for examination, including partnerships. The
examination of a partnership may include assessing if a limited partner
was subject to SECA and did not correctly pay the tax.
Question. What are some indications in addition to the potential
mischaracterization of a ``limited partner'' that payroll or self-
employment tax is being avoided imprudently?
Answer. In addition to the ``limited partner'' exception, taxpayers
try other approaches to inappropriately argue that they do not owe
self-employment taxes. Some taxpayers create complicated organizational
structures using various pass-through entities (partnerships and S
corporations) to try to optimize inconsistencies in the application of
the SECA tax and the net investment income tax. This is the subject of
a proposal in Treasury's 2025 Green Book. Other taxpayers enter a
partnership with one or more nonworking family members (for example, a
spouse). These taxpayers argue that income allocated from the business
to the family members is passive, and therefore not subject to SECA,
even though in reality the income is generated by the taxpayer and
includable on that individual's return as business income subject to
SECA. Still others may wrongly claim that income is not income derived
from a trade or business carried on by the individual, but instead
earned through other means that are not subject to SECA. Some employers
attempt to avoid payroll tax obligations by misclassifying common law
employees as independent contractors or pay wages to an entity, instead
of directly to an employee.
Question. It feels like we started to make some initial progress
toward clearer guidance for the historic preservation community,
building owners, and taxpayers, on how to use historic preservation
easements to help save buildings in New Orleans and across the country.
However, we still have work to do. We would appreciate it if you will
urge your team at the IRS to work in earnest with my staff and others
from this committee, as well as with stakeholders in the historic
preservation community, to continue to work on solutions.
Will you please work with Chief Counsel Marjorie Rollinson on a
strategy to finalize clearer regulatory guidance for historic
preservation easements going forward?
Answer. The IRS looks forward to working with Chief Counsel
Rollinson to develop regulatory guidance for historic preservation
easements. Similarly, we look forward to working with committee staff,
historic building owners, nonprofits, and other stakeholders in the
historic preservation community. It also should be noted that there are
other Federal agencies and offices that have responsibilities in this
area, most notably the U.S. Department of the Interior and the Advisory
Council on Historic Preservation.
______
Questions Submitted by Hon. John Cornyn
Question. Despite the best efforts of regulators and law
enforcement, unscrupulous individuals continue to defraud investors and
consumers through Ponzi schemes and other fraudulent enterprises. When
these illicit operations collapse, a Federal receiver is typically
appointed to recover and distribute any remaining assets to the
victimized parties.
I have been told that the distribution process often encounters
unnecessary delays due to the Internal Revenue Service's (IRS)
procedures. Before the Federal receiver can disburse funds, they must
obtain a final determination from the IRS regarding the tax liabilities
of the fraudulent enterprise. This determination process can, and
frequently does, take up to 3 years or more to complete. Moreover, by
statute, the Federal receiver faces personal liability for unpaid taxes
if reserves for such taxes are insufficient after distributions are
made to victims. In certain cases, a receiver has been required to claw
back distributions to satisfy the tax obligation.
Considering the financial hardship endured by the victims of these
fraudulent schemes, what measures is the IRS taking to expedite these
determinations and ensure the timely distribution of recovered assets?
As you may know, the bankruptcy process incorporates statutory
mechanisms (11 U.S.C. 505) to facilitate prompt tax liability
assessments, in some cases as quickly as within 60 days after the
request for a determination is made.
Answer. The IRS is committed to ensuring that it doesn't
unnecessarily delay the distribution of assets in receivership
proceedings. For example, on December 1, 2022, the IRS updated IRM
5.9.20 (April 3, 2017), Non-Bankruptcy Insolvencies (including
receiverships) to ensure that IRS employees apply the procedures
applicable to all non-bankruptcy insolvencies, including receiverships,
uniformly (and we endeavor to process these quickly). In addition, we
work closely with the receivers and our Chief Counsel and Department of
Justice attorneys to facilitate distributions to the victims of
fraudulent schemes. For example, in Ponzi schemes, when the funds to be
distributed to victims are traceable to the fraudulent scheme, the
United States typically won't assert an interest in the funds and may
stipulate to the distribution(s). Also, when a receiver is requesting a
decision on whether the IRS will audit a return, in light of their
concern for personal liability under 31 U.S.C. Sec. 3713 (Federal
insolvency statute), those decisions are prioritized.
Question. What explains the IRS's apparent failure to timely
provide Federal receivers with the necessary determination?
Answer. Each receivership is different, and the IRS must balance
the need for timely distribution with protection of governmental
interests in accordance with Federal law, including 31 U.S.C.
Sec. 3713, governing priority of government claims. It would be helpful
to have specific examples of when the IRS purportedly failed to provide
timely determinations in receivership cases to better understand where
delays may be happening and how to address them.
Question. Will you and the IRS commit to provide Federal receivers
with the necessary and timely service that will help them to
appropriately distribute recovered assets to those victimized by
fraudsters?
Answer. Yes. Also, to the extent there is a private-sector
receivership group, we sometimes face delays from the receiver's delay,
but we are committed to improving the process and working to expedite
these requests.
Question. In December 2023, you provided information to this
committee in response to a question I submitted during last year's tax
season hearing, confirming that more than 1,100 small captive audit
cases are pending in the U.S. Tax Court--a case load that could take
decades to resolve. As you may know, since 2017 the IRS has allowed
just seven cases to go to judgment, leaving the remaining taxpayers in
limbo for years. You also reported that the IRS has settled
approximately 27 percent of the section 831(b) cases that previously
were before the U.S. Tax Court for 10 percent or less than the claimed
deficiency, including penalties. Many small business taxpayers have
incurred significant costs and spent years fighting what appears to be
overstated tax assessments.
To better understand the challenges facing taxpayers, please
provide the following information regarding section 831(b) cases that
have been pending for 1 year or more:
The number of cases where the IRS asked for two or more
continuances, but the taxpayer has not asked for one.
Answer. As we explained in our previous responses to the Senate
Finance Committee in April 2023, each small captive audit may result in
multiple related cases docketed in the Tax Court that we refer to as a
``family.'' Upon motion by the parties or upon its own motion, the Tax
Court typically orders consolidation of a family of all related
dockets. The family is consolidated for trial, briefing, and opinion
pursuant to Tax Court Rule 141. The IRS has asked for two or more
continuances where the taxpayer has not asked for one in only three
families, which involve eight dockets. While the taxpayers did not
request the continuances sought by the IRS in those three case
families, the taxpayers also did not oppose the continuances sought by
the IRS. Generally, we only seek continuances when we need more time to
hire experts, complete discovery, file dispositive motions, or prepare
our cases for trial. Moreover, the Court will not likely grant a
continuance if the taxpayers object in good faith, or if the party
seeking the continuance has not stated a sufficient basis for it. A
continuance may be granted over an objection if the Court does not have
the time to try the case on that calendar, but in such a situation, the
Court retains jurisdiction over the case and schedules it on a special
trial calendar.
Question. The number of cases where the IRS asked for three or more
continuances than the taxpayer has (including the cases identified
above).
Answer. The IRS asked for three or more continuances than the
taxpayer in three families, which involve eight dockets. Two of the
families responsive to this request are also included in the families
mentioned above. Again, the taxpayers did not oppose the continuances
sought by the IRS in the three case families responsive to this
request.
Question. A list of all cases where the deficiencies attributable
to the captive have been settled for 10 percent or less and where the
IRS asked for two or more continuances.
Answer. The IRS interprets this request to include only those cases
in which it unilaterally requested two or more continuances, and it is
not including joint motions for continuance in its response to this
request. Only four cases fall into this category. See our previous
responses to Senate Finance Committee, Senator Cornyn (July 2023) and
Ways and Means Committee, Representative Feenstra (March 2024).
Question. A report analyzing the IRS's continuance practices with
respect to cases involving microcaptives that elaborates on this data
and answers the question of whether or not there have been (or will be)
instances where the IRS continued cases that it should have otherwise
been settled.
Answer. Counsel is dedicated to the timely and fair resolution of
all taxpayers' cases in the Tax Court. Counsel strives to ensure that
all taxpayers are treated equally, and that the correct amount owed is
determined. Counsel evaluates every case separately, regardless of the
type or size of the case. Counsel does not have a ``practice''
regarding continuances in microcaptive cases, but counsel attorneys are
instructed to request them sparingly. See CCDM 35.3.4.2 (August 11,
2004), Continuances From Trial Date. Counsel's goal is to resolve every
case as quickly, efficiently, and fairly as possible. Moreover, Tax
Court Rule 133 provides in relevant part: ``Continuances will be
granted only in exceptional circumstances.'' The parties' joint
requests and counsel's unilateral requests for continuance met the Tax
Court's criteria.
In general, when a case is petitioned, the Commissioner then has 60
days to file his answer. Once a case is answered the parties generally
must wait at least 30 days before they can commence discovery or take
other actions. If a taxpayer has not previously had an opportunity to
be heard by the IRS Independent Office of Appeals, counsel sends the
case to the Independent Office of Appeals for consideration, unless the
taxpayer specifically requests that the case not be considered by that
office.
The Tax Court will usually ``calendar'' a case for trial in the
location requested by the petitioner no sooner than 4 months after the
case is answered. Some cities have fewer trial calendars than others,
so the timing for a case to be calendared can vary significantly, based
on the date of the Tax Court's next trial session in a city. The Tax
Court frequently calendars cases while they are still being considered
by the Independent Office of Appeals and before the parties have
engaged in discovery. Accordingly, the parties may jointly request that
the Tax Court continue the case to allow for the appeals process to
continue and potentially yield a result acceptable to the parties, such
that a trial is no longer necessary. Many times, the Tax Court judge
who rules on that initial joint motion for continuance will retain
jurisdiction over that case and require the parties to file a joint
status report in 90-120 days to inform the Tax Court of the status of
the case at that point in time (subsequent status reports are
frequently ordered--these are not continuances of a trial). If
resolution is not reached through the appeals process, the assigned
judge determines the trial schedule for that case based on a number of
factors, such as the discovery still required to be completed, the
availability of the courtroom in the requested place of trial, the
parties' availability, and the judge's schedule. Other times, a case
will be returned to the ``general docket,'' in which case, unless the
parties reach settlement, the case will again be placed on the next
available trial calendar for the city requested by the taxpayer, but
again generally no sooner than 4 months from the date of the notice
setting the case for trial.
Trials for microcaptive insurance cases frequently take multiple
weeks to complete and are generally not suitable to be tried during the
Tax Court's regular trial sessions. Accordingly, they are often set for
``special trial sessions'' of the Court--this requires the parties to
request a continuance off of the regular trial calendar, to a date
certain.
While Counsel or taxpayers may seek to continue certain
microcaptive cases when warranted, the cases are continued only by
order of the Tax Court. Of all currently pending microcaptive cases
petitioned in the Tax Court prior to May 29, 2023, and ordered to be
continued by the Court, the taxpayer requested the continuances jointly
with counsel 89.5 percent of the time. Even in the 10.5 percent of
those cases where the taxpayer did not jointly request the continuances
with counsel, the taxpayer objected to counsel's motions for
continuance only 13 times.
Question. I also continue to hear concerns from my constituents
about the IRS's default position that taxpayers who use section 831(b)
are guilty of tax avoidance or tax evasion unless and until they prove
otherwise. Some even suggest that IRS agents lack the knowledge to
regulate captive insurance, and others say that the IRS lacks the
expertise to administer insurance. How would you respond to these
concerns?
Answer. The IRS takes seriously the proper enforcement of the tax
laws, including those governing captive insurance. Taxpayers should pay
taxes legally due, no more and no less. To ensure that taxpayers pay
the amount of tax legally due, the IRS must stop abusive transactions
that give rise to improper tax treatment. Microcaptive cases selected
for audit meet the criteria for transactions that have characteristics
of a tax plan. After the examination is commenced, the IRS requests
information from the taxpayer to support the taxpayer's position on the
tax return it filed with the IRS. The IRS analyzes and evaluates the
information provided by the taxpayer. In the case of microcaptives, the
IRS generally evaluates whether the premiums deducted are properly
deductible as ordinary and necessary business expenses and whether the
transaction is insurance for Federal income tax purposes.\13\ The IRS
does not regulate captive insurance or administer insurance. However,
the IRS does evaluate whether taxpayers have documentation to support
positions taken on their returns.
---------------------------------------------------------------------------
\13\ In all of the microcaptive cases decided on their merits, the
Tax Court has concluded that the microcaptive transaction at issue
lacked the necessary characteristics, based on the specific facts in
each case, to qualify as insurance for Federal tax purposes. See
Avrahami vs. Commissioner, 149 T.C. 144 (2017); Syzygy vs.
Commissioner, T.C. Memo. 2019-34; Caylor vs. Commissioner, T.C. Memo.
2021-30; Keating vs. Commissioner, T.C. Memo. 2024-2; Swift vs.
Commissioner, T.C. Memo. 2024-13; Patel vs. Commissioner, T.C. Memo
2024-34; and Royalty Mgmt. Ins. Co., Ltd. vs. Commissioner, T.C. Memo.
2024-87; see also Reserve Mechanical Corp. vs. Commissioner, 34 F.4th
881 (10th Cir. 2022) (concluding transactions entered into by company
filing as a tax-exempt entity under section 501(c)(15) did not meet the
requirements for treatment as insurance for Federal income tax
purposes).
The IRS on multiple occasions encouraged taxpayers that may be
involved in abusive microcaptive insurance transactions to consult
independent tax advisors regarding their filing positions and consider
exiting these transactions by not claiming deductions or by filing
---------------------------------------------------------------------------
amended returns to reverse claims to improper deductions.
Question. As you know, on December 22, 2022 the IRS announced in
Notice 2023-10 a delay in the reporting threshold for third-party
settlement organizations that was set to take effect for the 2022 tax
filing season. Because of this delay, third-party settlement
organizations were not be required to report the tax year 2022
transactions on a Form 1099-K to the IRS as enacted and required by
section 9674 of Pub. L. 117-2:
SEC. 9674. M ODIFICATION OF EXCEPTIONS FOR REPORTING OF THIRD PARTY
NETWORK TRANSACTIONS.
(a) In general.--Section 6050W(e) of the Internal Revenue Code of
1986 is amended to read as follows:
``(e) De Minimis Exception for Third Party Settlement
Organizations.--A third party settlement organization shall not be
required to report any information under subsection (a) with respect to
third party network transactions of any participating payee if the
amount which would otherwise be reported under subsection (a)(2) with
respect to such transactions does not exceed $600.''.
(b) Clarification That Reporting Is Not Required on Transactions
Which Are Not for Goods or Services.--Section 6050W(c)(3) of such Code
is amended by inserting ``described in subsection (d)(3)(A)(iii)''
after ``any transaction''.
(c) Effective Date.--
(1) In general.--The amendment made by subsection (a) shall
apply to returns for calendar years beginning after December
31, 2021.
(2) Clarification.--The amendment made by subsection (b) shall
apply to transactions after the date of the enactment of this
Act.
The Joint Committee on Taxation, which serves as a nonpartisan tax
policy and revenue estimating resource to Congress, scored section 9674
as raising $145 million in 2022, $1.081 billion in 2023, and $8.403
billion from 2022-2031 [JCX-14-21]. Hence, it appears JCT believed that
the IRS would enforce section 9674 per the effective date. I oppose
this intrusive and burdensome proposal and am a cosponsor of the SNOOP
Act, which eliminates this reporting requirement.
During your confirmation process in February 2023, I asked you to
explain what the legal basis was for the delay and if you thought the
IRS had the legal authority to make this decision without congressional
action. Your response was:
The American Rescue Plan included a provision to require third-
party settlement organizations to report certain transactions
to the IRS. It was set to take effect this year. It's my
understanding the IRS recently announced a 1-year delay. I am
not familiar with the specifics surrounding this decision and
therefore, cannot speak to the legal or regulatory authorities
that served as the basis for this delay. If confirmed, I look
forward to learning about this issued delay and updating you
and your staff.
In November 2023, the IRS announced another 1-year delay in the
enforcement of section 9674.
Please explain the specifics surrounding the decision to delay the
enforcement of section 9674 for the second time.
Answer. Section 7803(a)(2)(A) gives the IRS Commissioner discretion
to administer the tax law, which includes the discretion to enforce or
not enforce penalty provisions. Section 7803(a)(2)(A) gives the
Commissioner broad discretion to ``administer, manage, conduct, direct,
and supervise the execution and application of the Internal Revenue
laws.'' We have delayed implementation of laws in the past in the
interests of tax administration. For example, we delayed implementation
of the employer shared responsibility provision under section 4980H for
1 year. This was done to give the public and the IRS time to develop
their systems and processes for the new provision. Likewise, we delayed
the companion information reporting provision under section 6056. We
also provided penalty relief for several years under sections 6055 and
6056 for the time to file if filers could demonstrate good faith
efforts to file accurately. Additionally, the IRS delayed withholding
under the Foreign Account Tax Compliance Act (FATCA) and certain other
FATCA timelines.
For reporting on Form 1099-K, we have worked closely with
stakeholders and believe we now have the right path given this law's
novel complexities.
As the IRS continued to work to implement the new law, the agency
determined that it would treat 2023 as an additional transition year to
reduce the potential confusion caused by the distribution of an
estimated 44 million Forms 1099-K that would be sent to taxpayers who
may not expect one and may not have a tax obligation. Given the
confusion taxpayers may experience when getting a Form 1099-K where
they may not have income, the large number of individual taxpayers
affected and the need for stakeholders to have certainty with enough
lead time, the IRS determined it would be in the best interest of tax
administration to delay enforcement of the new law for one additional
year. The IRS will use this additional time to continue carefully
charting an implementation path that simplifies the process and
minimizes undue burden on taxpayers. Our intention has always been--and
will always be--to implement the law as Congress enacted.
Question. Please explain the legal or regulatory authorities that
serve as the basis for the delay of enforcing section 9674 for the
second time.
Answer. Section 7803(a)(2)(A) gives the IRS Commissioner broad
discretion to administer the tax law. We have delayed implementation of
complex laws in the past in the interests of tax administration.
Section 7803(a)(2)(A) gives the Commissioner broad discretion to
``administer, manage, conduct, direct, and supervise the execution and
application of the Internal Revenue laws.'' This includes the
discretion to enforce or not enforce penalty provisions (i.e., sections
6721 and 6722).
Question. Does Section 7803(a)(3), which was enacted as part of the
FY 2016 Consolidated Appropriations Act (Pub. L. 114-113, title IV,
subtitle A, section 401), provide the IRS with this authority? If so,
how many times has the IRS evoked section 7803(a)(3) when administering
the Internal Revenue Code? Please list each time.
Answer. No, section 7803(a)(3) requires the Commissioner, in
discharging his duties, to ``ensure that employees of the Internal
Revenue Service are familiar with and act in accord with taxpayer
rights as afforded by other provisions of this title. . . .'' Rather,
section 7803(a)(2)(A) provides the Commissioner with the authority to
delay implementation.
Question. ``Yes'' or ``no,'' do you believe the IRS has the legal
or regulatory authority to delay the enforcement of section 9474 for
another year? Why or why not?
Answer. See response to question below.
Question. ``Yes'' or ``no,'' do you believe the IRS has the legal
or regulatory authority to delay the enforcement of section 9474 for
another 5 years? Why or why not?
Answer. See response to question below.
Question. ``Yes'' or ``no,'' do you believe the IRS has the legal
or regulatory authority to delay the enforcement of section 9474
indefinitely? Why or why not?
Answer. Section 7803(a)(2)(A) gives the Commissioner broad
discretion to ``administer, manage, conduct, direct, and supervise the
execution and application of the internal revenue laws.'' This includes
the discretion to enforce or not enforce penalty provisions (i.e.,
sections 6721 and 6722) and the ability to efficiently and effectively
implement new laws and changes to laws.'' The IRS has used this
authority to delay implementation of expanded Form 1099-K reporting as
part of a phased implementation of the law.
______
Questions Submitted by Hon. Steve Daines
Question. Last Congress, a version of my Conservation Easement
Program Integrity Act to shut down abusive conservation easement
transactions was signed into law.
How has my bill helped the IRS crack down on abusive transactions,
and to date how much does the IRS project my bill has saved the
taxpayers?
Answer. I very much appreciate Congress taking action to pass
legislation that addresses abusive syndicated conservation easements.
For several years, the IRS has been taking various actions to address
these transactions. The legislation was needed in the wake of the
Finance Committee report of August 25, 2020, which found, among other
things, that the conservation easement transactions examined were
exceptionally abusive. The report found that the transactions examined
were nothing more than retail tax shelters which allowed taxpayers to
buy tax deductions with no economic risk. These abusive transactions
undermine the public's trust in private land conservation and defraud
the government of revenue. The IRS recognizes the important role of
legitimate conservation easement deductions in incentivizing land
preservation for future generations. The IRS is committed to continuing
to administer the IRC in a way that encourages conservation easements
while curbing the abuse that has overshadowed the true purpose of the
law.\14\
---------------------------------------------------------------------------
\14\ In recent Tax Court cases, the IRS has prevailed in
establishing that these cases involve grossly inflated valuations. See,
e.g., Oconee Landing Property vs. Commissioner, T.C. Memo 2024-25
($20.7 million valuation claimed, reduced to zero due to a lack of a
qualified appraisal, and the 40-percent gross valuation misstatement
penalty); Savannah Shoals, LLC vs. Commissioner, T.C. Memo. 2024-35
($23 million charitable deduction reduced to $480,000 with a 40-percent
gross valuation misstatement penalty).
Section 170(h), which became law as section 605 of the SECURE 2.0
Act, provides the IRS with new and powerful tools for ensuring the
legitimate use of conservation easements and historic preservation
easements. The legislation enabled us to issue guidance to taxpayers,
such as Notice 2023-30 (Safe Harbor Deed Language for Extinguishment
and Boundary Line Adjustment Clauses), updated forms and publications
to better address conservation easements, and proposed and final
regulations (88 Fed. Reg. 80910 and 89 Fed. Reg. 54284) to implement
---------------------------------------------------------------------------
section 605.
We are hopeful the legislation has and will curb these abusive
transactions. We expect taxpayers are less likely to enter these
abusive transactions and we are hopeful they will not find ways to
circumvent the law. Taxpayers just completed filing of 2023 tax
returns, which is the first full year that the legislation was in
effect, and complete filing data is not currently available. Therefore,
we cannot yet project how much the bill has saved taxpayers. For tax
years 2016-2022, syndicated easements of open space, facades and
similar transactions accounted for almost $6.2 billion in deductions
per year, of which approximately $5 billion was open space easements.
Anecdotally, we have seen some shifts to transactions structured
similarly to SCE but with different property, continued fee simple
donations, and promotional material developed to circumvent the 2.5
times basis limitations but are unable to quantify the impact at this
time. We continue to address transactions that were entered into prior
to the passage of the bill.
Question. At the time of the hearing, reports were as few as
100,000 taxpayers used Direct File this season, and that the IRS spent
$127 million this year on the program. With these numbers, each return
for this small subset of taxpayers cost the average Montanan $1,270 to
file other peoples' taxes.
Now that filing season has ended, what was the total number of
Direct File users?
Answer. Over the course of the pilot, more than 3.3 million
taxpayers started the Direct File Eligibility Checker, 423,450
taxpayers logged in to Direct File, and 140,803 taxpayers submitted
accepted returns. More detailed information about the number of Direct
File return and acceptance rates can be found in IRS Publication 5969,
IRS Direct File Pilot Program: Filing Season 2024 After Action Report,
May 3, 2024, available at https://www.irs.gov/pub/irs-pdf/p5969.pdf.
This data alone does not suggest the total extent of taxpayer
interest in Direct File. Direct File was unavailable to the general
public early in filing season when many taxpayers file to receive much
needed tax refunds and was later only available in 12 pilot States. The
2024 Taxpayer Experience Survey will again include questions about
Direct File, potentially revealing more about taxpayers' updated level
of interest with the benefit of the pilot and associated media
coverage.
What the data does show is that whatever the theoretical maximum
level of interest is, it has not yet been reached. Each week following
the announcement of Direct File's availability, growth in Direct File
usage far outpaced overall filing season trends, reflecting significant
upside potential, as shown in Figure 3. The data demonstrates taxpayer
demand for a Direct File option. Further study can quantify the extent
of that demand.
In the report to Congress, the IRS estimated that the annual cost
for Direct File could range from between $64.3 to $248.9 million for a
service that reached between 5 to 25 million taxpayers depending on the
tax scope and the taxpayers reached. We noted that these estimates were
subject to uncertainty due to the nature of launching a new product
like Direct File. The pilot provided an opportunity to collect concrete
data on the cost of Direct File.
Through April 20, 2024, the IRS spent $24.6 million on Direct File,
which includes $11.6 million in costs for the development of last
year's report to Congress. Of the $13.0 million spent on pilot
development and implementation, $10.6 million is technology and product
development costs and $2.4 million is operational costs (customer
service, cloud computing, user authentication, et cetera). The limited
design of the pilot means that the IRS was not able to benefit from
economies of scale. If the number of Direct File users were to
increase, the cost per return would decrease. Both GSA (through 18F)
and USDS supported the IRS in our work to deliver the Direct File and
were essential to the successful delivery of the pilot. While the cost
of USDS was born by the Office of Management and Budget (OMB), the IRS
entered into an Interagency Agreement (IAA) with GSA to cover the cost
of the 18F support. As noted in the IRS Direct File Pilot Program
Filing Season 2024 After Action Report dated May 3, 2024, Publication
5969 (Direct File After Action Report),\15\ the IRS estimates that the
annualized cost for the USDS team is approximately $7.2 million.
---------------------------------------------------------------------------
\15\ See IRS Direct File Pilot Program Filing Season 2024 After
Action Report dated May 3, 2024, Publication 5969, https://www.irs.gov/
pub/irs-pdf/p5969.pdf.
______
Questions Submitted by Hon. Chuck Grassley
Question. President Biden and Secretary Yellen have repeatedly
promised not to use mandatory IRS funding to increase audits on those
earning under $400,000. However, a recent Wall Street Journal editorial
notes that as of last summer, more than 60 percent of new audits
targeted taxpayers with income under $200,000. And a recent TIGTA
report notes that IRS is still ``continuing to develop their proposal
to comply with the Secretary's mandate.''
What is taking the IRS so long to develop a proposal to comply with
the Secretary's pledge not to increase audits on taxpayers earning
under $400,000? Clearly, the promise to not target middle-income
taxpayers has been broken by the Biden administration.
Answer. The Commissioner has publicly committed that the IRS will
comply with the Secretary's directive to not increase audit rates above
historic levels for small businesses or household earning less than
$400,000. We have already announced that Tax Year 2018 will be the
historical level. Total Positive Income (TPI) will be the measure of
income for individuals, and Tax Year 2023 will be the first year that
the directive applies to not increase audit rates for small businesses
or households earning less than $400,000 above Tax Year 2018 historic
levels. Examinations of Tax Year 2023 tax returns filed in 2024 will
begin as FY 2024 concludes and FY 2025 starts, with a larger share of
the examinations beginning later in FY 2025. IRS will continue working
with the Treasury Department to reach an agreement on the methodology
for the examinations of Tax Year 2023 returns.
We respectfully submit that the Service's commitment to
administering the tax code in accordance with this directive is
reflected in the enforcement efforts we have undertaken since
implementation of the IRA in 2022. Specifically, we note the steps the
IRS has taken to shift more tax compliance attention to noncompliant
high-
income earners, partnerships, large corporations, and abusive
promoters.
Question. Shouldn't the IRS pause or scale back enforcement
activity using its mandatory funding until it is able to follow-through
with the Secretary's supposed mandate to only target the upper-income?
Answer. The IRS is using the enforcement funding provided by the
IRA to hire accountants, engineers, economists, data scientists,
attorneys, and tax experts with the specialized skills to examine the
complex returns of large corporations, complex partnerships, and
noncompliant high-income individuals.
Question. When Democrats authorized billions in mandatory funding,
they chose to allocate the bulk of such funds to enforcement. This
decision has created a funding cliff for taxpayer services and business
systems modernization beginning in Fiscal Year 2025.
Despite this coming cliff, the IRS is siphoning millions of dollars
from its business systems modernization account to fund its Direct File
initiative. Of course, every dollar spent on Direct File is one less
dollar available to make critical improvements to its business systems
to better protect taxpayer information and guard against security
threats.
Given the high importance of modernizing its business systems, does
it make sense for the IRS to divert scarce resources from critical
needs to what some view as an unnecessary political pet project?
Answer. The IRS was able to fund the Direct File program pilot with
minimal impact to IRS program areas. This was largely due to the
targeted filling options and narrow system scoping of the system
infrastructure. IRS spent $24.6 million on Direct File, from the
beginning of the pilot through April 20, 2024. The $24.6 million
includes all vendor and interagency costs, including $2.8 million
obligated through April 20th for GSA support. Both GSA (through 18F)
and USDS supported the IRS in our work to deliver the Direct File and
were essential to the successful delivery of the pilot. While the cost
of USDS was born by the Office of Management and Budget (OMB), the IRS
entered into an Interagency Agreement (IAA) with GSA to cover the cost
of the 18F support. As noted in the IRS Direct File Pilot Program
Filing Season 2024 After Action Report dated May 3, 2024, Publication
5969 (Direct File After Action Report),\16\ the IRS estimates that the
annualized cost for the USDS team is approximately $7.2 million.
---------------------------------------------------------------------------
\16\ See IRS Direct File Pilot Program Filing Season 2024 After
Action Report dated May 3, 2024, Publication 5969, https://www.irs.gov/
pub/irs-pdf/p5969.pdf.
Direct File plays a role in a stronger, comprehensive tax filing
system. Filing a tax return is a legal obligation and a civic duty for
nearly all adult Americans. The core mission of the IRS is to meet
taxpayers where they are, give them options to interact with the IRS in
ways that work for them, and help them meet their tax obligations as
---------------------------------------------------------------------------
easily and quickly as possible.
Question. You have stated that the IRS could make use of artificial
intelligence (AI) to identify potential tax cheats. AI has been used by
other revenue agencies around the world with bad results for taxpayer
rights and the protection of personal data.
In testimony before the Finance Committee in 2021,\17\ former
National Taxpayer Advocate Nina Olson describes how the use of AI in
Australia and the Netherlands violated taxpayer rights and put personal
information at risk. Ms. Olson notes that the Australian Government's
``Online Compliance Intervention'' program wrongfully sent debt notices
to 470,000 welfare recipients and resulted in a 1.2-billion Australian
dollar cost to the government which included settlement of a lawsuit.
In the Netherlands, the System Risk Indicator, which was established by
the Dutch Government to collect information including tax data, was
found by a Hague District Court to violate data protection provisions
in the European Convention on Human Rights.
---------------------------------------------------------------------------
\17\ https://www.finance.senate.gov/download/051121-olson-
testimony.
Given that AI has already been used for tax purposes in many
countries and has resulted in multiple instances of taxpayer rights
being violated and personal date being misused, how will you ensure
that any use of AI by the IRS will be transparent, remain subject to
---------------------------------------------------------------------------
human oversight, and respect taxpayer rights?
Answer. In compliance with Federal requirements to support
transparency, the IRS has submitted our AI use cases each year to
Treasury to be published in the Treasury AI use case inventory).\18\
The IRS is additionally standing up policies and processes to ensure
compliance with new OMB M-24-10 \19\ requirements for the use of AI
considered rights-impacting or safety-impacting, which includes
requirements relating to human oversight and respecting taxpayer
rights, including privacy. These policies mandate transparency through
the AI use case inventory, the completion of privacy assessments where
required (such as when an AI system uses personally identifiable
information), human oversight of and accountability for AI
decision-making, and regular human review of any AI used in IRS
operations. Full details on these policies are available in interim
guidance RAAS-10-0524-0001, Artificial Intelligence Governance and
Principles.\20\
---------------------------------------------------------------------------
\18\ See Artificial Intelligence (AI) Use Cases, U.S. Department of
the Treasury, https://home.treasury.gov/data/ai_inventory.
\19\ https://www.whitehouse.gov/wp-content/uploads/2024/03/M-24-10-
Advancing-Governance-Innovation-and-Risk-Management-for-Agency-Use-of-
Artificial-Intelligence.pdf.
\20\ Full details on these policies are available in interim
guidance RAAS-10-0524-0001, Artificial Intelligence Governance and
Principles, https://www.irs.gov/pub/foia/ig/spder/interim-guidance-
raas-10-0524-0001-artificial-intelligence-governance-and-principles-
redacted.pdf.
Question. Internal Revenue Code (IRC) section 6751(b)(1) requires
that IRS personnel obtain approval in writing from their immediate
supervisor of their determination before a penalty may be assessed.
Failure to follow this code section has led to assessed penalties being
thrown out in court. In some of these instances, the IRS was found to
---------------------------------------------------------------------------
have backdated documentation of supervisor sign-off of penalties.
Given the IRS has struggled to abide by IRC 6751(b)(1) without the
use of artificial intelligence (AI), what specific policies and
procedures will the IRS have in place to ensure AI doesn't result in
taxpayers being inundated with penalties that have not met the
requirements enacted by Congress? Who will be considered to be the
supervisor of any AI system?
Answer. AI is used to revise our models for identifying returns
that are potentially noncompliant. None of IRS's models consider
penalties at all. In addition, a person will risk-assess the returns
identified by the AI models before a decision is made to open an
examination. During the course of the examination, an examiner
considers whether penalties are appropriate and obtains their immediate
supervisor's personal, written approval when appropriate.
Question. The IRS strategic operating plan, issued in April of
2023, includes as a goal to ``[d]evelop and implement a plan to improve
the IRS Whistleblower Program.'' While that plan is being developed,
conditions for IRS whistleblowers have not improved.
The most recent annual report for the IRS Whistleblower Office for
FY 2022 details the increasing lengths of time whistleblower need to
wait for a reward, if they ever get one. The average wait time for
awards under Internal Revenue Code (IRC) section 7623(a), under which
the IRS has more discretion to pay what are generally smaller awards,
is 9.79 years. The average wait time for IRC section 7623(b), which
more specifically defines the size of the awards and generally applies
to higher-
dollar cases, is 11.24 years. Many whistleblowers face immediate
negative consequences for whistleblowing and risk being ostracized from
their careers, so these incredibly long wait times are not fair and
discourage others from coming forward.
What are appropriate targets for the length of time it takes the
IRS to pay awards under 7623(a) and 7623(b)? While it is a good
sentiment, unless specific goals are set in terms of days, months, or
years, ``as soon as possible'' is not an adequate goal for driving real
change in how the Whistleblower Office operates.
Answer. The Whistleblower Office is unable to set a processing goal
for the overall time that it takes from claim submission to payment of
an award because of statutory and regulatory requirements. Under the
whistleblower statute, awards are paid from the proceeds of amounts
collected by reason of a whistleblower's information. The IRS must
collect such proceeds with finality before making an award payment.
Finality occurs when the proceeds have been collected and the taxpayer
no longer has a right to seek a refund of the proceeds. Before an award
can be paid, the Treasury Regulations require a final determination of
tax with respect to any action, that Whistleblower Office has
determined the award, and either all appeals of the Whistleblower
Office's determination are final, or the whistleblower signed a waiver
agreeing to the determination.
The length of time for the administrative and judicial actions are
varied. Often, the best whistleblower claims involve novel and complex
issues. The examination may take several years. If the taxpayer
appeals, goes to court, and/or appeals the court's decision it can take
several more years. Collection can also take many years as the IRS
generally has 10 years from the date of assessment to collect. The
Whistleblower Process Timeline illustrates the process flow with
general time frames for the various steps. When the underlying actions
move swiftly through the processes, the Whistleblower Office is able to
pay the award in a relatively short period of time. In each of the past
three fiscal years, the Whistleblower Office has paid out several
awards within 4 years of the date the whistleblower's claim was
received. There were also several awards paid out more than 14 years
from the date the whistleblower's claim was received.
The only aspect the Whistleblower Office can control regarding the
timeliness of paying awards is how quickly the award is paid once all
the statutory and regulatory requirements are met. The Whistleblower
Office has a goal to pay awards within 90 days of this date. On
average, section 7623(b) claims were paid within 67 days of the date
when all requirements were met in FY 2023. This was in improvement of 1
day from the prior year.
In FY 2023, the Whistleblower Office also measured how quickly the
Preliminary Award Recommendation letters were being issued for section
7623(b) using the applicable date for interest on whistleblower awards
that was introduced in section 6 of the draft IRS Whistleblower Program
Improvement Act of 2021 (subsequently included in the draft IRS
Whistleblower Program Improvement Act of 2023 and later, the draft
Taxpayer Assistance and Service Act) as the measurement point. The
Whistleblower Office found that Preliminary Award. Recommendation
letters were issued on average, 217 days before the applicable date in
the draft legislation.
Question. At the close of the Tax Year 2023 filing season it has
been reported that the IRS met a goal of 100,000 users for the Direct
File pilot out of an estimated 19 million eligible tax filers.\21\
---------------------------------------------------------------------------
\21\ https://www.washingtonpost.com/business/2024/04/15/irs-direct-
file-reviews/.
Another article from earlier in April notes that ``[i]n January,
IRS officials said they expected several hundred thousand taxpayers
could use direct file during the current tax filing season.''\22\
---------------------------------------------------------------------------
\22\ https://thehill.com/business/4570215-irs-direct-file-program-
struggles-to-find-users-after-late-launch/.
There is a significant difference between several hundred thousand
and 100,000. How and when did the IRS determine that 100,000 was the
---------------------------------------------------------------------------
goal of the pilot?
How many Direct File users completed and filed Federal returns
using the pilot program? How many taxpayers started a return using the
pilot program, but did not file a return?
Answer. Over the course of the pilot, more than 3.3 million
taxpayers started the Direct File Eligibility Checker, 423,450
taxpayers logged in to Direct File, and 140,803 taxpayers submitted
accepted returns. More detailed information about the number of Direct
File return and acceptance rates can be found in IRS Publication 5969,
IRS Direct File Pilot Program: Filing Season 2024 After Action Report,
May 3, 2024, available at https://www.irs.gov/pub/irs-pdf/p5969.pdf.
Question. Since the IRS Direct File pilot was not able to file
State returns, the tax-exempt entity Code for America partnered with
State tax agencies to provide a State filing capability for users of
Direct File.\23\ The announcement from Code for America notes that
``Direct File users will be able to disclose their Direct File
information to our tool.''
---------------------------------------------------------------------------
\23\ https://codeforamerica.org/news/providing-easy-and-free-state-
filing-for-irs-direct-filers/.
---------------------------------------------------------------------------
How was Code for America selected to partner with Direct File?
Did the IRS select them, or did individual States make the choice?
Answer. Code for America was not involved in Direct File at the
IRS. The States that participated in the Direct File pilot could choose
any approach to making an integrated tool available in their State. It
was the State's decision to choose vendors or award State contracts,
and none of those vendors had contracts with the IRS.
Question. Recently, an activist working as a contractor for the IRS
was able to access taxpayer information, steal that information, and
make it publicly available.
What protections are in place for taxpayer information shared with
Code for America to file State returns?
How is taxpayer information transmitted to Code for America stored
and who has access to it?
Answer. Code for America is under the same obligations to protect
taxpayer data as any other Modernized e-File transmitter and is
required to safeguard taxpayer data in compliance with the requirements
of IRS Publication 3112: IRS e-file Application and Participation, IRS
Publication 4164: Modernized e-File (MeF) Guide for Software Developers
and Transmitters, and Revenue Procedure 2007-40.
Question. A former IRS contractor, Charles Littlejohn, was recently
sentenced to 5 years in prison for disclosing thousands of tax returns
without authorization.\24\ This individual apparently stole the tax
information of former President Trump and thousands of other taxpayers
and disclosed this information to news organizations.
---------------------------------------------------------------------------
\24\ https://www.justice.gov/opa/pr/former-irs-contractor-
sentenced-disclosing-tax-return-information-news-organizations.
Does the IRS know the full scope of information that was improperly
---------------------------------------------------------------------------
accessed and stolen by this individual?
Answer. It was only after Mr. Littlejohn was sentenced in February
2024, that the IRS was able to access information regarding all
affected taxpayers. The data set the IRS received from the TIGTA is
voluminous and complex. The IRS is working with TIGTA to process and
analyze this data to fully understand and identify which taxpayers and
what data Mr. Littlejohn unlawfully disclosed.
Question. How many taxpayers and what specific forms, in what
numbers, where stolen by this individual?
Answer. As noted above, the IRS is working to identify the
taxpayers, forms, and data elements that were stolen and disclosed.
Question. Have all taxpayers whose information was accessed without
authorization or stolen been notified and informed of the taxpayer
information at issue?
Answer. As of May 31, 2024, a total of 70,666 notification letters
have been mailed out. The IRS is continuing to process and analyze the
data that Mr. Littlejohn unlawfully disclosed to understand and
identify additional taxpayers who may need to be notified.
Question. Have steps been taken to prevent further dissemination of
the stolen taxpayer information and has the IRS offered any
remediation, such as free credit monitoring, to affected taxpayers?
Answer. We have seen no indication thus far that Mr. Littlejohn
disclosed tax information to any persons outside of the two news
organizations referenced in his sentencing. The IRS has screening and
review procedures in place to identify and address potential identity
theft and/or tax refund fraud. We have not seen any indication this
taxpayer information was used in any way for identity theft or tax
fraud. The IRS did not offer credit monitoring because the unauthorized
disclosure occurred over 36 months ago, was not perpetrated for the
purpose of identity theft or tax refund fraud, and we have not
identified any indication of identity theft for tax refund fraud.
Question. On April 16, 2024, I wrote you about the IRS holding
Federal employees accountable who fail to file and pay their taxes. As
millions of Americans pay their taxes, they must be assured that the
Internal Revenue Service (IRS) holds Federal employees accountable who
fail to pay their taxes. In 1993, the IRS established the Federal
Employee/Retiree Delinquency Initiative (FERDI) to promote tax
compliance among current and retired Federal employees by collecting
and publishing a report about tax delinquent Federal employees.\25\ On
March 6, 2023, the Treasury Inspector General for Tax Administration
(TIGTA) issued a report titled, ``The IRS Has Not Adequately
Prioritized Federal Civilian Employee Nonfilers.'' \26\ That report
showed, in part, ``the Federal civilian workforce increased by 6
percent between FY 2015 and 2021'' yet ``there was a 32-percent
increase in the number of delinquent Federal civilian taxpayers during
the same period.''\27\ In FY 2021, the last fiscal year the report
studied, 149,000 Federal employees owed approximately $1.5 billion in
unpaid taxes.\28\ TIGTA also found that 42,000 Federal employees
repeatedly failed to file their tax returns for multiple years between
FY 2016 and FY 2020, and the IRS knows the identity of these
individuals.\29\ The report found that of the top 10 agencies with
repeat nonfilers, the U.S. Postal Service and Department of Veterans
Affairs were first and second, respectively.\30\
---------------------------------------------------------------------------
\25\ Treasury Inspector General for Tax Administration, The IRS Has
Not Adequately Prioritized Federal Civilian Employee Nonfilers, 2023-
30-011 (March 6, 2023), https://www.
tigta.gov/sites/default/files/reports/2023-03/202330011fr.pdf.
\26\ Id. at 2-3.
\27\ Id.
\28\ Id at 4.
\29\ Id.
\30\ Id at 5.
TIGTA reported that more enforcement is needed to deter Federal
employees from willfully failing to file their taxes.\31\ However, IRS
disagreed with TIGTA's recommendation that the IRS should work with the
Justice Department to develop referral criteria for non-filing federal
employees with multiple years of unfiled tax returns for investigation
and prosecution stating that the IRS has a ``well-established
process.''\32\ TIGTA's response to this disagreement indicates that the
IRS's referral process is flawed, noting the following:
---------------------------------------------------------------------------
\31\ Id. at 4.
\32\ Id. at 13.
We identified over 17,000 repeat Federal civilian employee
nonfilers who had not filed an income tax return for three or
more years. Yet, these employees continued in their Federal
jobs, with pay and benefits, without adequate IRS enforcement
scrutiny.\33\
---------------------------------------------------------------------------
\33\ Id. at 14.
Federal employees have a heightened responsibility to be compliant
in paying their tax obligations.\34\ As TIGTA recommended, the IRS
should prioritize cases where Federal employees are in brazen
noncompliance with tax laws by failing to file their tax returns and,
in some cases, for several years.\35\ The IRS's apparent enforcement
failures against Federal employees is unacceptable. Taxpayers deserve
to be assured that Federal employees, whose salaries and benefits are
funded through taxpayer dollars, are held to account by the IRS for
failing to pay their taxes just like the rest of the American people
are held to account.
---------------------------------------------------------------------------
\34\ 5 CFR part 2635.809.
\35\ TIGTA, supra note 1 at 22.
Provide copies of the FERDI Annual Report from Fiscal Year 2020 to
---------------------------------------------------------------------------
present.
Answer. We are happy to work with you to get you the information
you need.
Question. Provide, in detail, the steps IRS has taken, and will
take, to implement the report's recommendations and hold Federal
employees accountable for failing to file tax returns and pay taxes.
Answer. We have already updated the FERDI section of the IRM to
include fraud indicator check sheets and links to fraud procedures to
help our Campus Collection employees identify fraud in FERDI case. Our
IRS Office of Fraud Enforcement (OFE) delivered Fraud Awareness
presentations in January 2024 as part of annual FERDI training for
employees in all our Campus Call Sites.
Per TIGTA's recommendation, we shared their report with Treasury's
Office of Tax Policy for them to consider legislative proposals to
amend section 7203, making willful nonfiling a felony, and also section
6103 to allow the IRS to share essential compliance return information
with other Federal agencies upon the IRS's identification of a current
Federal employee who is tax-delinquent. Treasury included the proposal
to amend Sec. 7203 in the General Explanations of the Administration's
Fiscal Year 2025 Revenue Proposals.\36\
---------------------------------------------------------------------------
\36\ See General Explanations of the Administration's Fiscal Year
2025 Revenue Proposals, https://home.treasury.gov/system/files/131/
General-Explanations-FY2025.pdf.
Following the report's recommendation, our Research, Applied
Analytics, and Statistics (RAAS) Division analyzed the 42,047 taxpayers
TIGTA cited in their report as Federal employee nonfilers and RAAS
determined 3,712 of these taxpayers had 2 or more open, unfiled
---------------------------------------------------------------------------
returns, as of March 2023.
Since willfulness is a requirement to develop and submit fraud
referrals to our CI division, RAAS used data available under the Bank
Secrecy Act to identify 163 of these cases with possible indicators of
fraud. They worked with our OFE function to determine which cases had
potentially had enough indicators to establish that these taxpayers
willfully failed to file their tax returns. In February 2024, we
assigned the accounts with sufficient willfulness indicators to Field
Collection revenue officers who will work with OFE personnel and refer
the accounts to CI if appropriate.
Other efforts coming out of the report are still in progress and on
track to be completed by the implementation date outlined in our
management response to TIGTA. These include:
Ensuring FERDI balance due and delinquent return cases are
worked as a top priority in collection programs and designated
FERDI sites;
Sending taxpayers Automated Collection System (ACS) Letter
26--which requests the taxpayer to file their tax return
immediately--within 30 days of the case moving into a stand-
alone Taxpayer Delinquency Investigation (TDI) inventory;
Completing programming to update ACS Letter 39 (reminder
letter) with language to help taxpayers address their
outstanding delinquent return(s); and
Executing a programming fix to ensure FERDI taxpayer
delinquency investigations are not removed from active
inventory.
In our continuing effort to improve tax compliance and ensure
fairness, we announced a new initiative on February 29, 2024, in IR-
2024-56,\37\ to restart nonfiler compliance programs. The initial
effort is focused on high-income taxpayers who failed to file Federal
income tax returns in more than 125,000 instances since 2017. In April
2024, we completed issuing nonfiler notices to every taxpayer who has
an unfiled tax return, some as far back as to 2017, with reported
income of $400,000 or more. These include FERDI cases that meet this
criterion. We are in the process of issuing return delinquency notices
on the remaining noncompliant high income nonfilers, including the
FERDI sub-set of this population.
---------------------------------------------------------------------------
\37\ See I.R.S., IR-2024-56, IRS launches new effort aimed at high-
income nonfilers; 125,000 cases focused on high earners, including
millionaires, who failed to file tax returns with financial activity
topping $100 billion (February 29, 2024), https://www.irs.gov/newsroom/
irs-launches-new-effort-aimed-at-high-income-non-filers-125000-cases-
focused-on-high-earners-including-millionaires-who-failed-to-file-tax-
returns-with-financial-activity-topping-100-billion.
Question. Are you able to dispute the following TIGTA statement:
``We identified over 17,000 repeat Federal civilian employee nonfilers
who had not filed an income tax return for 3 or more years. Yet, these
employees continued in their Federal jobs, with pay and benefits,
without adequate IRS enforcement scrutiny.'' If so, describe in detail
with facts and evidence what steps the IRS has taken to hold the
``17,000 repeat Federal civilian employee nonfilers'' accountable to
the taxpayer. If not, why did you disagree with the recommendation to
develop referral criteria for Federal employee nonfilers with multiple
---------------------------------------------------------------------------
years of unfiled tax returns?
Answer. To clarify, the number of 17,000 was not intended to
represent the total number of Federal employees currently delinquent in
filing returns. In Figure 2 of the report, TIGTA provided a chart
showing 42,047 Federal civilian employees who failed to file a return
for 2 or more years during FY 2016 through FY 2020. In footnote 15,
TIGTA stated the number cited was not intended to represent the current
status of the delinquent modules, such as how many were currently in
open delinquent return status. As explained above, out of TIGTA's list
of 42,047 taxpayers, which includes the 17,000, we determined only
3,712 had two or more delinquent returns. Our civil functions will
refer those cases with sufficient willfulness indicators to CI for
their consideration.
We will prioritize processing those cases we do not refer to CI
once we fully resume nonfiler processes. For example, FERDI nonfilers
who qualify for the Automated Substitute for Return Program (ASFR) will
be a priority in the program. If the result of an ASFR is a tax
assessment that goes unpaid, the taxpayer may then be included in the
IRS's Federal Payment Levy Program, which allows the IRS to levy 15
percent of Federal employee salaries. Our civil collection functions
may take additional appropriate actions on FERDI balance due accounts
that go unpaid including filing Notices of Federal Tax Liens, issuing
levies, and referring cases with fraud indicators to CI for further
consideration.
CI has a well-established process for referring cases to the
Department of Justice. The IRS disagreed with TIGTA's recommendation to
create a separate referral process for Federal employee nonfiler cases.
The Department of Justice does not accept or deny cases for prosecution
based on generalized sets of referral criteria. Under current law, the
willful failure to file a tax return is a misdemeanor. The likelihood
of a criminal investigation and prosecution of a failure to file
misdemeanor is relatively low given CI's and the Department of
Justice's limited resources to prosecute offenders and competing
priorities. Both agencies invest resources in prosecuting felonies that
are likely to result in a substantial period of incarceration and
provide the most effective deterrence.
As noted above, the Treasury included a legislative proposal in the
FY 2025 Treasury Greenbook related to this issue. Specifically, the
proposal would make repeated failure to file a tax return a felony for
an individual who was a nonfiler for 3 years within a 5-year period and
had an aggregate tax loss of at least $250,000. If failure to file was
a felony, CI would be more likely to strategically dedicate additional
resources to those investigations.
______
Question Submitted by Hon. James Lankford
Question. The point of the Administrative Procedure Act and
Executive Order 12866 is to ensure rules are thoroughly scrutinized and
reviewed by the OMB's Office of Information and Regulatory Affairs
(OIRA) before they bind the American people. In June 2023, under
Executive Order 12866, OMB and Treasury signed an updated memorandum of
agreement (MOA) effectively removing tax regulations from OIRA
centralized review.
In your response to my question on the MOA, you characterized the
process as ``a different path than other agencies,'' but noted that the
IRS continues to work with OIRA.
Please detail the IRS's interagency review process and coordination
with OIRA for tax regulations. Please specify if every tax regulation
is subject to the process.
Will you commit making to making the process with OIRA and
subsequently captured tax regulations publicly available?
Answer. All tax regulations are coordinated with the OIRA. When
other executive branch agencies may have an interest in the tax
regulation that is not significant enough to effectively incorporate
employees of the other agencies into the drafting team, Treasury
coordinates with those agencies. A Notice of Planned Regulatory Act,
referred to as a 7-point memorandum, is submitted to OIRA for every tax
regulation. The Chief Counsel Directives Manual, which is publicly
available on irs.gov, contains this process. CCDM Part 32.1.2.3 (4)
(August 16, 2018) identifies a 7-point memorandum as being submitted to
OMB related to Executive Orders 12866 and 13563. The 7-point memorandum
process and the content of a 7-point memorandum can be found at CCDM
Part 32.1.2.4 (November 12, 2019), OMB Notice of Planned Regulatory
Action (7-Point Memo). Sample 7-point memoranda can be found as
exhibits in CCDM Part 32.1.2-3 and 32.1.2-3.
______
Questions Submitted By Hon. Tim Scott
Question. As you are aware, several cases in which IRS employees
misled taxpayers and the U.S. Tax Court regarding the backdating of
penalty documents have recently come to light. In one of those
backdating cases, Lakepoint Land II, LLC, the Tax Court found that IRS
employees acted in ``bad faith'' and failed to correct their previous
``misrepresentations of fact.'' Our tax system depends on the public
having confidence they are being treated fairly, and such behavior by
IRS employees severely erodes that confidence. This committee and the
public need to know that such illegal behavior will not be tolerated.
Can you assure me that the employees who backdated penalty
documents and/or misled the Tax Court will be disciplined for their
acts?
Answer. It is critical to our tax compliance system that taxpayers
and the courts have the utmost confidence in the IRS's work. The IRS
and IRS Office of Chief Counsel (Chief Counsel) must vigorously pursue
our mission and enforce the tax laws fairly. In doing so, we hold
ourselves to the highest standards of candor to the court, integrity,
and fairness toward taxpayers. We must meticulously ensure compliance
with the letter and spirit of the rules and laws that govern our
operations. And if we fall short in this, we must promptly make things
right.
In that respect, the IRS and Chief Counsel are committed to
ensuring that only properly approved penalties are being pursued. The
IRS conducted mandatory penalty approval training for all Large
Business and International examiners and managers involved in the
development and approval of penalties and for all SB/SE Field
Examination examiners and managers. In addition to the mandatory
training, similar penalty approval training has been offered to other
employees. Chief Counsel conducted mandatory training for all Chief
Counsel attorneys and managers in fall 2023, which addressed section
6751(b) compliance as well as our ethical obligations. In May 2024,
Chief Counsel held its annual mandatory ethics training, which included
a discussion of candor to the court and the requirement to correct
previously submitted erroneous factual or legal statements.
The IRS is pursuing appropriate accountability measures for
employees who did not comply with required standards. Without getting
into any particular personnel matter, the IRS will take all appropriate
measures, including discipline, in addressing conduct issues.
Question. Direct File Is Tax Preparation. Commissioner, you have
now told the Senate Finance and Ways and Means Committees that Direct
File is not tax preparation; that taxpayers are preparing their own
returns and Direct File is simply a platform to help them do that.
Please explain your reasoning for this assertion. In other words,
is it your view that commercial tax software companies likewise are not
engaged in ``tax preparation''? If the differentiation here is that
there is no compensation paid by the Direct File users for the Direct
File service, does this then mean that commercial tax software
companies participating in the IRS Free File Program are not engaged in
tax preparation (since no compensation is paid by the taxpayer who in
that context either)?
Answer. Direct File is an online tool provided by the IRS that
allows taxpayers to file their returns for free, directly with the IRS.
It uses an interview-based platform to help taxpayers self-prepare
their own returns. Direct File guides taxpayers through the process of
preparing a tax return by asking questions which the taxpayer can
answer without needing to consult other instructions or IRS
publications. Direct File uses these answers to fill out the forms and
schedules of a tax return, which the taxpayer can review and choose to
electronically file.
You asked whether commercial tax software companies and companies
that participate in IRS Free File are engaged in ``tax preparation.''
The IRC does not define ``tax preparation,'' but it does define ``tax
return preparer.'' Under the IRC, the definition of ``tax return
preparer'' depends on the specific provision that is referenced.
Generally, a tax return preparer is defined in section 7701(a)(36)(A)
as ``any person who prepares for compensation, or who employs one or
more persons to prepare for compensation, any return of tax imposed by
this title or any claim for refund of tax imposed by this title.'' See
Treas. Reg. Sec. 301.7701-15; see also Circular 230, Sec. 10.2(a)(8).
Here, the IRS does not prepare returns for compensation or employ
others to prepare returns for compensation. Rather, Direct File is a
free tool for taxpayers to prepare their own returns. Companies
participating in the Free File program are not tax return preparers, as
defined in section 7701(a)(36), if they do not prepare for compensation
any tax returns or claims for tax refunds for taxes imposed under the
IRC.
Moreover, section 7701(a)(36)(B) provides that a person is not a
tax return preparer if the person merely provides ``typing,
reproducing, or other mechanical assistance.'' A computerized tax
return preparation service is considered to be a tax return preparer
under section 7701(a)(36) only if it provides substantive
determinations, beyond mere typing, reproducing, and other mechanical
assistance. See Rev. Proc. 85-187, 1985-2 C.B. 338. Direct File does
not make substantive determinations as to the correctness of the
reported amounts shown on the return. Finally, note that under Treas.
Reg. Sec. 301.7701-15(f)(1)(i), any official or employee of the IRS
performing official duties is not a tax return preparer.
Question. Number of Users. Why did the Treasury Department and IRS
lower the estimated number of Direct File users from ``several hundred
thousand'' to about 100,000?
Answer. When the IRS set a goal of having hundreds of thousands of
taxpayers use Direct File and 100,000 accepted returns, it wanted to
ensure that enough taxpayers used Direct File to provide the IRS with
enough data to adequately evaluate the pilot. Each additional user had
the potential to help the IRS learn something new about Direct File and
its users.
Question. The U.S. Government Accountability Office (GAO), in its
recent report on Direct File, stated that the purported ``benefits'' of
Direct File (e.g., easier to use, lower compliance burdens for
taxpayers, increased take-up of credits and deductions) were not
substantiated by the IRS. At the Senate Finance hearing on April 16th,
you stated that Direct File is not intended to be better or worse than
commercial tax preparation software. Do you agree that the purported
benefits of Direct File that are claimed by advocates of the ``pilot''
are in fact unsubstantiated and illusory?
Answer. No. The after-action report that the IRS published this
spring showed the benefits of Direct File as well as ways the IRS can
improve the tool going forward. The pilot was a year-long effort to
study the interest in--and feasibility of--creating a direct e-filing
system as a new option for taxpayers to file Federal income tax
returns. Direct File is an important part of the effort to meet
taxpayers where they are, give them choices as to what best meets their
needs when interacting with the IRS, or otherwise meet their tax
obligations as easily and quickly as possible. And it is a key
component of the modernization efforts, which were detailed in the IRS
strategic operating plan.
During the pilot, the IRS worked to answer whether a direct e-
filing option was feasible. The IRS assembled a team of some of the
smartest and most experienced tax experts, digital product specialists,
engineers, pilot strategists, and data scientists from across the
Federal Government. They studied the challenges, met with tax officials
from dozens of States, and designed a pilot for a system that is
secure, accurate, easy to use--and free. The Direct File platform used
this filing season contained more than 350 screens. Under the hood were
more than 1,000 ``facts'' representing information about the filer's
tax situation.
By design, the Direct File Pilot started out gradually to allow the
team to test the new system. In February, we began testing Direct File
with a handful of volunteer Federal and State government employees. The
team continuously refined and strengthened the system based on its
technical performance and feedback from its first users. Over several
weeks, the IRS incrementally opened the system to new users in short
availability windows before fully launching Direct File on March 8th.
Throughout this filing season, the IRS saw strong interest in
Direct File from taxpayers throughout the country. Millions of people--
including many from outside of the 12 pilot States--visited the Direct
File website to learn about the new system. Over the course of the
pilot, more than 3.3 million taxpayers started the Eligibility Checker
to see if they could use Direct File; 423,450 taxpayers logged into
Direct File; and 140,803 taxpayers submitted accepted returns. In cases
where a user's tax situation was out of scope for the pilot, they were
directed to other options to complete their tax returns. Direct File
issued more than $90 million in tax refunds and collected $35 million
in tax balances due.
Overall, usage was in line with the IRS's expectations for the
limited pilot, and it far exceeded what was necessary to provide
sufficient data for evaluation. In the filing season's final weeks, the
percent growth in accepted returns submitted through the Direct File
system outpaced the growth in total returns accepted by the IRS across
all platforms. During the final week, more than 5,000 taxpayers
submitted returns each day using Direct File, and the system stood up
well under the high-volume push of the tax season's final days.
A key aspect of the pilot was learning more about what taxpayers
expect from this kind of system. More than 15,000 Direct File users
participated in the GSA's Touchpoints survey, which collects
comprehensive user feedback about government systems. In the GSA
Touchpoints survey about Direct File:
Ninety percent of respondents ranked their experience as
Excellent or Above Average.
When asked what they particularly liked, respondents most
commonly cited Direct File's ease of use, trustworthiness, and
that it was free.
Additionally, 86 percent of respondents said that their
experience with Direct File increased their trust in the IRS.
Ninety percent of survey respondents who used customer
support rated that experience as excellent or above average.
Direct File's users told the IRS that the system saved them time--
filing their taxes with Direct File generally took less than an hour,
and many reported filing in as little as 30 minutes. One taxpayer even
said it was fun. Nearly half of Direct File users reported paying for
tax preparation last year, and Treasury estimates that Direct File
users saved $5.6 million in tax preparation fees. More than 4 percent
of Direct File users report filing on paper last year. One lesson the
IRS will focus on is how to ease the transition from paper to
electronic filing.
The cost to develop the Direct File pilot came in much lower than
initial estimates. Through the end of the pilot, the total amount spent
by IRS was $24.6 million, including the Report to Congress. Direct
File's operational costs--including customer service, cloud computing,
and user authentication--were just $2.4 million. To build and run the
pilot, the IRS also engaged the USDS. The IRS's agreement with the USDS
does not involve costs to IRS.
Based on the pilot's success in meeting the operational challenges,
widespread interest from millions of taxpayers across the country, and
positive feedback from Direct File users, I recommended to Secretary
Yellen that the IRS make Direct File a permanent option to file Federal
tax returns next year.
Question. Please provide an explanation for why the IRS chose to
commandeer the IRS Free File Program homepage by putting information
related to IRS Direct File at the top of that page? Didn't this
decision just lead to taxpayer confusion?
Answer. When the Direct File pilot became available to the general
public, the IRS expanded the webpage that outlines free filing options
to include all free filing options so taxpayers could choose the filing
option that best met their needs. The webpage outlined the various free
filing options and provided links to each of them in order to clarify
the differences between the various options and avoid taxpayer
confusion. In addition, the IRS also maintained a separate page
dedicated to just the IRS Free File program.
Question. Please provide the committee with an explanation for why
the IRS Free File Program--incorrectly derided as ``failed''--finished
the tax-filing season with 10.5 percent more returns than the previous
year?
Answer. Direct File plays a role in a stronger, comprehensive tax
filing system. Filing a tax return is a legal obligation and a civic
duty for nearly all adult Americans. The core mission of the IRS is to
meet taxpayers where they are, give them options to interact with the
IRS in ways that work for them, and help them meet their tax
obligations as easily and quickly as possible.
The IRS took giant leaps in accomplishing that mission when the
Free File Alliance launched in 2003 and the agency worked with Free
File to offer fillable PDF forms in 2008. Direct File is a critical
part of the IRS's ongoing modernization effort, and an important
component of a stronger, comprehensive tax filing system that gives
taxpayers choices of electronic filing options that best suit their
needs.
We learned from the pilot there is strong interest in no-cost
filing options across the country. Millions of taxpayers who did not
live in one of the 12 pilot States visited the Direct File website to
learn more about this option or asked live chat assistors to make
Direct File available in their State.
As a permanent filing option, Direct File will continue to be one
option among many from which taxpayers can choose. We have heard from
many taxpayers that they prefer to file their taxes directly with the
IRS, and 86 percent of Direct File users reported that their experience
with Direct File increased their trust in the IRS. We also know from
public polling that many taxpayers prefer to work with a third party,
whether that is a trusted tax professional or use tax preparation
software (both free and commercial). The IRS will continue to support
all filing options.
We remain committed to the IRS's ongoing relationship with the Free
File Alliance. Free File and the tax preparation software industry have
been critical partners in serving taxpayers for 2 decades. This year,
Free File saw an increase of about 200,000 tax returns filed through
the program, reaching 2.9 million returns, an increase of 7.3 percent
from the 2.7 million filed through the same period last year. In May,
the IRS announced the extension of the Free File program through 2029,
assuring that it will continue to be a key component of the tax filing
system through the end of the decade. As we work to expand the Direct
File system, we will also strengthen free filing options for taxpayers,
because giving taxpayers additional options strengthens the entire tax
filing system.
Question. While the proponents of Direct File have lauded the
``pilot'' as a ``success,'' isn't it true that the take-up rate by
taxpayers was a fraction of 1 percent (i.e., 140,000 users out of 19
million eligible taxpayers, or .007)?
Answer. Over the course of the pilot, more than 3.3 million
taxpayers started the Direct File Eligibility Checker, 423,450
taxpayers logged in to Direct File, and 140,803 taxpayers submitted
accepted returns. More detailed information about the number of Direct
File return and acceptance rates can be found in IRS Publication 5969,
IRS Direct File Pilot Program: Filing Season 2024 After Action Report,
May 3, 2024, available at https://www.irs.gov/pub/irs-pdf/p5969.pdf.
Question. Is it true that the IRS has the technological know-how to
monitor every keystroke of users of the Direct File tool? Did IRS
monitor taxpayer key strokes at any time during the Direct File
``pilot?''
Answer. No, the IRS is not monitoring the keystrokes of Direct File
users while they are using the Direct File application or any other IRS
application.
Question. Of the 12 States where the Direct File ``pilot'' was
offered, please provide a breakdown of the usage of Direct File by the
State in which the taxpayer lives. In other words, how many
Massachusetts residents used Direct File? How many from Tennessee used
Direct File, and so on?
Answer. In the IRS's Direct File After Action Report, we provided a
breakdown of taxpayer usage by State (see footnote 2). That breakdown
by State can be found in Figure 4 on page 17 of the report.
______
Questions Submitted by Hon. John Thune
Question. Though many Americans receive a tax refund, recent
reporting indicates that IRS backlogs have led to significant delays in
hundreds of millions of dollars being refunded to taxpayers despite the
tens of billions of dollars appropriated to your agency through the
IRA. For example, TIGTA found that hundreds of millions of dollars in
taxpayer funds from the 2020 tax year still have yet to go out the
door.
Can you please speak to why this problem continues to go unresolved
and outline the specific steps the IRS is taking to get these refunds
back to taxpayers and how you all plan to avoid these years-long delays
going forward?
irs return processing operations
Answer. The COVID-19 pandemic era was an immensely trying period
for taxpayers and for the agency. Filing season bottlenecks caused
severe delays, with many Americans waiting months for their returns to
be processed and refunds issued. The IRS took numerous actions to
return to normal levels in our original return processing programs by
the end of CY 2022, entering the 2023 filing season with normal
inventories. In 2024, taxpayers have continued to see major
improvements original return processing, with the IRS delivering one of
the best filing seasons the Nation has seen in years, processing all
timely received original individual returns that requested a refund and
did not require error correction or special handling.
For individual tax returns received in the current year, we process
returns for which refunds are due first. The IRS issues more than 9 out
of 10 refunds in less than 21 days. Some returns require additional
review and take longer, regardless of whether the return was filed
electronically or on paper.
We encourage individual taxpayers to check ``Where's My Refund?''
on irs.gov \38\ for a personalized refund status within 24 hours after
the IRS accepts their e-filed tax return. The ``Where's My Refund?''
tool updates once every 24 hours, usually overnight. This tool has a
tracker that displays a return's progress in three stages: Return
Received, Refund Approved, and Refund Sent. Taxpayers receive
personalized refund information based on the processing of their tax
return. The tool also provides an actual refund date as soon as the IRS
processes the tax return and approves the refund.
---------------------------------------------------------------------------
\38\ See https://www.irs.gov/wheres-my-refund.
We also regularly update information on irs.gov to realistically
reflect our processing time frames. We encourage taxpayers to visit our
``Status of Operations'' page\39\ for the latest information and
updates on individual and business returns.
---------------------------------------------------------------------------
\39\ See https://www.irs.gov/help/processing-status-for-tax-forms.
---------------------------------------------------------------------------
modernization efforts
IRA funding has enabled the IRS to have historically strong 2023
and 2024 filing seasons. We have a tremendous amount of transformation
work taking place at the IRS and we remain focused on improving and
modernizing services to taxpayers. We have hired additional employees
to address accumulated inventories and launched initiatives to
modernize workstreams that permits electronic submission of documents
by taxpayers and allows work to be processed electronically. Return
submissions go into inventory immediately, allowing us to maintain one
inventory workable in a first-in, first-out order that is accessible by
all employees working the respective programs, regardless of their
physical locations.
We have made critical progress on our paperless processing
initiative. While online options for taxpayers have increased, the IRS
has continued to be flooded with paper, including tax returns and
correspondence. We had been working toward digital scanning of paper
forms and returns for some time, but IRA funding has allowed us to
greatly accelerate these efforts. For example, during Calendar Year
(CY) 2023, we scanned more than 1.5 million forms and returns we
received on paper. In CY 2024 through September 20th, we have scanned
over 2 million forms and returns we received on paper.
We have developed innovative tools which automate the processing of
error conditions on returns that prevent them from processing through
to completion and would otherwise require review and action by an
employee. This both expedites case closures and reduces overall
inventory, permitting employees to focus on more complex issues.
We have also expanded the capabilities of the IRS Online Account
for Filing Season 2024, allowing taxpayers to perform more types of
transactions in their accounts, including viewing digital copies of
select IRS notices. Taxpayers who want to check their account
information including balance, payments, tax records and more, can log
into their IRS online account. It's a simple and secure way to get
information fast.
Moreover, we now have technology, known as the Document Upload
Tool, that gives taxpayers the option of submitting documentation
online through irs.gov. This allows taxpayers who receive certain
notices requiring them to send information to the IRS to electronically
upload documents rather than mailing them in, helping reduce time and
effort resolving tax issues. This provides immediate benefits to
taxpayers, who have nearly instant confirmation that documents were
received by the IRS.
Question. In December, TIGTA found that certain IRS computers and
mobile devices used by Criminal Investigation employees continued to
have access to TikTok. This is unacceptable. That is why a few months
ago, Senator Blackburn and I sent a letter requesting additional
information from you regarding the failure of the IRS to comply with
the Federal law banning TikTok--an app that is directly tied to the
Chinese Communist Party--on government devices.
Why did the IRS refuse to block access to TikTok on the 2,800
mobile devices and 900 computers identified in this TIGTA report and
what specific steps have you taken to remove access to TikTok on these
devices?
Answer. Please see my response to your letter dated May 23, 2024,
which answers the questions you raised.
Question. This Inspector General report also revealed that the IRS
has not updated its ``Bring Your Own Device'' policies, which allow IRS
personnel to use their own personal devices for business purposes.
Therefore, IRS personnel can potentially access TikTok on the personal
devices that are also used to access personally identifiable taxpayer
information.
When will the IRS, if it hasn't already, update its guidance on the
BYOD program to ensure the ban of TikTok on government devices extends
to personal devices participating in the BYOD program?
Furthermore, given the highly sensitive nature of the information
that IRS employees have access to and the IRS's troublesome data
security record, do you believe it is appropriate for the IRS to
administer a BYOD program at all?
Answer. The IRS Bring Your Own Device (BYOD) program is a voluntary
program that allows personnel to use their personally owned mobile
devices to stay connected to, access data from, or complete many IRS
tasks. Internal Revenue Manual 10.5.1.6.13, provides an overview of the
BYOD program and the related requirements to protect highly sensitive
and legally protected taxpayer data.
To protect the privacy of the tax information, BYOD participants
must only use IRS-approved applications provided by IRS through a
secure container on the device. They must also adhere to all applicable
laws, regulations, rules, policies, and procedures, including Federal
Records Act, Office of Government Ethics Standards of Ethical Conduct,
and the Department of the Treasury Employee Rules of Conduct. In
addition, BYOD users must consent to monitoring, interception,
recording, reading, copying or capturing by authorized personnel of all
activities on the IRS-approved mobile device business software on their
mobile devices.
To access IRS resources, the user must have their device enrolled
in the BYOD program, have the container software installed, and use
both a passcode to unlock the device and a password when using an
application within the container to access IRS data. The applications
used within the container and information accessed on the personal
device is encrypted and fully separate from the user's personal
applications and data. If the device is lost or stolen, the user is
required to report the theft immediately.
______
Questions Submitted by Hon. Todd Young
Question. As we discussed during the hearing, my constituents
continue to run into difficulty resolving outstanding issues with the
IRS. I appreciated your comments committing to focusing on better
success in addressing these concerns.
What specific steps do you plan to take to better address
substantive taxpayer issues, such as assisting victims of identity
theft, addressing individuals whose paper returns have not been
processed in a timely manner, and resolving taxpayer disputes?
Answer. A tremendous amount of transformation work is taking place
at the IRS. We remain focused on improving and modernizing services to
taxpayers in the areas you mention.
identity theft victim assistance (idtva)
The IRS takes identity theft seriously and is committed to
resolving these cases as quickly as possible. We are taking steps to
reduce our case resolution time frames with the following efforts:
Adding additional Customer Service Representatives (CSRs).
More IDTVA employees have been trained on full scope identity
theft. Additional employees have also been trained on non-tax
related IDTVA. The assignment of IDTVA CSRs to IDT paper
inventory has been prioritized by limiting toll-free phone
assignments when able.
Overtime. Funding has been allocated to the IDTVA program to
increase the pace of case resolution.
Enhanced Review of IDTVA Cases. We are reviewing identity
theft cases to determine which cases we can close systemically
or move to another area within the IRS if they were referred to
IDTVA in error.
Education. We are providing additional guidance, explaining
when filing a Form 14039, Identity Theft Affidavit, is needed.
Processing Improvements. We implemented the Form 14039
Digital Upload Tool to allow taxpayers to submit their Form
14039 directly to the IRS electronically. We are also working
to identify process improvements.
Case Identification. We are working to identify IDTVA cases
that fit within identified criteria to pre-identify the
fraudulent return for the IDTVA caseworker. This will reduce
the amount of research needed and improve efficiencies.
return processing
We have made critical progress on our paperless processing
initiative. While online options for taxpayers have increased, the IRS
has continued to be flooded with paper, including tax returns and
correspondence. We had been working toward digital scanning of paper
forms and returns for some time, but IRA funding has allowed us to
greatly accelerate these efforts. For example, during CY 2023, we
scanned more than 1.5 million forms and returns we received on paper.
In CY 2024 through April 19th, we have scanned nearly 900,000 forms and
returns we received on paper.
For individual tax returns received in the current year, we process
returns for which refunds are due first. The IRS issues more than 9 out
of 10 refunds in less than 21 days. Some returns require additional
review and take longer, regardless of whether the return was filed
electronically or on paper.
We encourage taxpayers to check ``Where's My Refund?'' on irs.gov
(see footnote 33) for a personalized refund status within 24 hours
after the IRS accepts their e-filed tax return. The ``Where's My
Refund?'' tool updates once every 24 hours, usually overnight. This
tool has a tracker that displays a return's progress in 3 stages:
Return Received, Refund Approved, and Refund Sent. Taxpayers receive
personalized refund information based on the processing of their tax
return. The tool also provides an actual refund date as soon as the IRS
processes the tax return and approves the refund.
We also regularly update information on irs.gov to realistically
reflect our processing time frames. We encourage taxpayers to visit our
``Status of Operations'' page for the latest information and updates on
individual and business returns. (Also, see I.R.S., IR-2024-56
published February 29, 2024) at the following link: https://
www.irs.gov/newsroom/irs-launches-new-effort-aimed-at-high-income-non-
filers-125000-cases-focused-on-high-earners-including-millionaires-who-
failed-to-file-tax-returns-with-financial-activity-topping-100-billion.
taxpayer inquiries and service
Along with the IRS's annual discretionary budget, the 10-year IRA
investment is transforming the IRS so we can provide best-in-class
service to taxpayers. Taxpayers are beginning to see the benefits of an
IRS with predicable multiyear funding. That funding is already
providing a better experience for taxpayers, who have had access to
expanded tools and resources during the 2024 tax season (as of April
20, 2024), including:
Expanded in-person hours. The IRS added extended hours at
242 Taxpayer Assistance Center (TAC) locations across the
Nation, generating nearly 13,000 extra service hours for
taxpayers during the 2024 filing season. In addition to
extended service hours, the IRS also offered taxpayer
assistance on Saturdays in more than 70 locations. These
evening and Saturday hours made it more convenient for
thousands of hardworking taxpayers to get help.
Improved phone service. Continuing a trend seen last year
following the addition of 5,000 new telephone assistors, the
IRS level of service on its main phone lines reached nearly 88
percent, this filing season. That level is above the 87-percent
level seen last year and more than a five-fold increase from
the phone service levels seen during the pandemic era period,
when the level of service was at just 15 percent in 2022.
Faster response times. Taxpayers waited, on average, just
over 3 minutes for help on the IRS main phone lines. This wait
time is consistent with what was delivered during filing season
2023 and less than the average of 28 minutes delivered during
filing season 2022.
More calls answered. The IRS answered more taxpayer calls on
its live assistor lines this filing season, a 17.3-percent
increase from 2023. IRS assistors answered over 9.0 million
calls, up from 7.7 million during the 2023 filing season. IRS
automated lines answered approximately 8.9 million calls,
458,000 more than the previous year.
More callback options. The IRS offered callback options on
97 percent of the phone lines this filing season. The agency
offered callback for over 4.6 million taxpayers this tax
season, more than double the 2.2 million calls in 2023. This
option, offered when phone lines were busy, saved taxpayers
nearly 1.5 million hours of wait time on the phones.
Additional free help at volunteer sites. The IRS saw tax
return preparation work at volunteer sites increase to
approximately 2.7 million returns this tax season, up nearly
300,000 from last year following work at Volunteer Income Tax
Assistance and Tax Counseling for the Elderly sites.
More in-person help. The IRS helped 212,000 more taxpayers
in-person this filing season than in 2023. IRS employees at
TACs served 784,000 taxpayers this year, up from 572,000 in
2023, a 37-percent increase.
Enhanced paperless processing. This offering will enable
taxpayers to submit digitally all correspondence, non-tax forms
and responses to notices that don't have a filing or payment
requirement. And taxpayers can now e-file additional tax forms
that previously had to be filed on paper.
Enhanced IRS Individual Online Account. This improvement
includes chat, the option to schedule and cancel future
payments, revise payment plans and validate and save bank
account information.
If your office has constituent-specific concerns, we will research
and address those inquiries if your staff provides us with the
appropriate privacy release forms.
Question. Earlier this year, Charles Littlejohn was sentenced to
prison for disclosing thousands of tax returns to ProPublica. As you
know, my Republican colleagues and I were frustrated that it took the
IRS and the Department of Justice so long to identify the leaker and
bring him to justice. Looking to the future, I am concerned that
another IRS employee, whether they be full-time or government
contractors, may inappropriately exploit their access to the most
sensitive taxpayer information for political gain.
Do you believe it is important to maintain taxpayer privacy and
uphold current law with respect to the confidentiality of taxpayer
information, ``yes'' or ``no''?
Answer. Yes. Let me start with this critical point: Any improper
disclosure of taxpayer information is absolutely unacceptable. The
actions taken by the wrongdoer mentioned above, were a heinous betrayal
of public trust, not just to taxpayers but also to the IRS employees
who work hard and take great pride protecting the Nation's tax
information. I strongly believe that maintaining taxpayer privacy and
upholding the laws governing confidentiality of taxpayer information is
arguably the most important role the IRS performs to administer the tax
system. There should be no question that IRS staff across the Nation
take great pride serving taxpayers and take very seriously their
obligation to safeguard confidential taxpayer information.
Question. What protections have you put in place at the IRS to
prevent this violation of taxpayer privacy from happening ever again?
Answer. When I arrived as IRS Commissioner in March 2023,
safeguarding taxpayer information was a priority for me, and I quickly
focused on using new Inflation Reduction Act resources to bolster the
agency's data security. In addition to reviewing the report, the IRS
has taken multiple steps to improve the safeguarding of taxpayer data.
These measures include:
Further restricting user access. We restructured our
operations to reduce the number of people with access to the
most sensitive taxpayer datasets. Stronger protocols are now in
place to ensure only people with documented, mission-essential
needs are entitled to receive access.
More robust protective security controls. We updated data
protection mechanisms (e.g., encryption, anonymization) to
better protect taxpayer information.
More frequent data entitlement reviews. We are strengthening
review protocols to ensure more IRS oversight of data users,
have implemented procedures to ensure that all network access
is timely removed for users who separate from the IRS. So far,
we have reduced timeframes for deactivating inactive accounts
assigned to current employees and contractors by 25 percent.
Managers are required to review and approve initial requests
for access and to periodically validate continuing user need
for the access. IRS Cybersecurity will conduct additional
reviews to ensure we limit access to key sensitive systems to
properly authorized individuals.
Collection and retention of detailed access logs. Key data
sources inside the IRS have improved monitoring and event logs.
We now maintain evidentiary copies of database queries and data
outputs, which improves surveillance of internal data use and
preserves records of who accessed which data and when.
Additionally, we enforce an approved destination for data
exports and prevent users from copying those files to
unapproved drives and/or folders.
Improved firewalls. We have added additional firewalls
between key taxpayer information and the rest of the IRS,
providing additional monitoring capabilities. We record all
traffic between these areas to improve monitoring.
Stronger 24/7 monitoring. We have expanded advanced
analytics to detect and prevent risky data usage, providing
improved insight into suspicious activities around the clock.
New tools. We are adding new analytical tools and dashboards
to monitor user activity involving sensitive data. These tools
will help to improve the detection of potential data misuse.
Less removable media. We have dramatically reduced users'
ability to connect removable media, such as thumb drives, to
IRS computers. The new protocol requires executive approval of
those users who have legitimate business needs and close
monitoring of user activity to watch for risky behavior. This
step has significantly curtailed opportunities to remove
sensitive taxpayer information from the IRS computing
environment.
Tighter email controls. We have dramatically strengthened
email controls involving taxpayer information, including new
restrictions on contractors' ability to email information
outside the IRS, while preserving but closely monitoring this
ability when necessary for collaborating with non-IRS
employees. This step has further reduced the risk of
contractors removing sensitive taxpayer information from the
IRS computing environment.
New printer controls. We are now logging and scanning
printing by all IRS users to detect potential policy violations
and to preserve evidence to support inquiries of suspected
wrongdoing. This effort includes printing at telework/remote
work locations.
Question. What kind of continuous monitoring does the IRS conduct
to identify whether taxpayer data is being accessed or shared in
violation of Federal law?
Answer. We have implemented 24/7 monitoring using advanced
analytics to detect and prevent risky data usage. This includes
establishment of a process for monitoring user behavior to detect
potential insider threats originating from either intentional or
inadvertent misuses of taxpayer information. Once the potential misuse
is identified by IRS Cybersecurity, the user's manager must evaluate
and report whether the user behavior was sanctioned. Lack of IRS
manager confirmation results in a referral to the TIGTA Office of
Investigations for further investigation. Last year, the IRS further
improved the detection of potential policy violations, leveraging our
investment in modern software solutions, deployment of hundreds of
detection algorithms, and increased sophistication in our advanced
analytics. These enhancements resulted in a significant increase in
user behavior flagged for review and investigation. We have implemented
streamlined procedures for IRS cybersecurity personnel to, in
appropriate cases, immediately revoke user access to IRS systems to
ensure protection of our sensitive data.
The IRS also implemented a new Insider Threat Hub to enhance
internal information sharing on potential insider threats. In 2023, the
hub enhanced employee incident monitoring and established new standard
operating procedures. We continue to strengthen oversight, enhance
metrics, and prioritize hundreds of risk indicators, with significant
emphasis on improved monitoring of IRS contractors. We have sharply
expanded insider threat monitoring capabilities to conduct continuous
internal surveillance for any inappropriate user activity involving
sensitive taxpayer information and to facilitate swift action in
response to actual threats and policy violations.
Question. In the press release announcing the roll out of IRS's
Direct File pilot program, Deputy Secretary of Treasury Wally Adeyemo
stated the goal of launching this service was to ``save taxpayers time
and money they can spend on themselves and their families.'' While I
think we can all agree that saving taxpayers time and money is a
laudable goal, the cost of the initial rollout has raised some
questions regarding whether it actually saves taxpayers time and money.
How much has the IRS spent on the creation of Direct File so far?
In your estimate, please include: any funds that the Treasury
Department has spent on Direct File; funds you have spent on
advertising and promoting Direct File; resources from the OMB Digital
Service team, which I understand has also been involved in the
development of Direct File; and any other vendors or Federal agencies
you have used or are currently using and the costs associated with
them.
Answer. See below.
Question. How does the cost of the Direct File pilot program
compare to the cost to the government of the existing Free File system
offered by certain tax preparation organizations?
Answer. See below.
Question. Do you commit to providing this committee with a report
analyzing the per-return costs to the government of Direct File, Free
File, and the Volunteer Income Tax Assistance and Tax Counseling for
the Elderly programs within 60 days?
Answer. In the report to Congress, the IRS estimated that the
annual cost for Direct File could range from between $64.3 to $248.9
million for a service that reached between 5 to 25 million taxpayers
depending on the tax scope and the taxpayers reached. We noted that
these estimates were subject to uncertainty due to the nature of
launching a new product like Direct File. The pilot provided an
opportunity to collect concrete data on the cost of Direct File.
Through April 20, 2024, the IRS spent $24.6 million on Direct File,
which includes $11.6 million in costs for the development of last
year's report to Congress. Of the $13.0 million spent on pilot
development and implementation, $10.6 million is technology and product
development costs and $2.4 million is operational costs (customer
service, cloud computing, user authentication, et cetera). The limited
design of the pilot means that the IRS was not able to benefit from
economies of scale. If the number of Direct File users were to
increase, the cost per return would decrease. Note: FY 2024 labor
includes actuals through April 6, 2024 and an accrual through April 20,
2024. Costs do not include other shared corporate costs.
These totals include costs associated with vendor support and an
interagency agreement with GSA's 18F. To build and run the pilot, the
IRS also engaged 29 employees from the USDS to supplement the IRS
employees and other team members. The USDS costs are not included in
the $24.6 million spent on Direct File. The IRS estimates that the
annualized cost for the USDS team is $7.2 million.
While the costs outlined above all center on the actual costs
involved in delivering the pilot, the team is using this data to
develop a more robust cost estimate for potential future costs for
delivering Direct File.
The Direct File pilot was the largest use of live chat support
within the IRS to date, and it allowed the agency to continue learning
how live chat meets taxpayer preferences and expectations and how
taxpayers would react when live chat was the only option for receiving
assistance. This has the potential to impact IRS taxpayer service
overall as the agency looks to provide taxpayers with more choices in
how they can interact with the IRS.
From March 4th through April 20, 2024, Direct File staffing
averaged 41 CSRs per day. This average was determined by using the
total CSR hours available to chat in the system, divided by 7.5 hours
of production time over a total of 47 workdays. The actual quantity of
CSRs varied throughout the 15-hour workday (7:00 a.m. to 10:00 p.m.
Eastern), from a low of 7 CSRs to a high of 62 CSRs. The CSRs handled
38,600 chats with an Average Handle Time of 9 minutes. Based on the
staffing available to support the pilot, the IRS had the capacity to
handle approximately 450,000 Direct File chats per month. Given that
approximately 10 percent of pilot participants engaged customer
support, this means the IRS could have assisted 4.5 million filers with
the 400 CSRs who were trained for the pilot.
Direct File plays a role in a stronger, comprehensive tax filing
system. Filing a tax return is a legal obligation and a civic duty for
nearly all adult Americans. The core mission of the IRS is to meet
taxpayers where they are, give them options to interact with the IRS in
ways that work for them, and help them meet their tax obligations as
easily and quickly as possible.
The IRS took giant leaps in accomplishing that mission when the
Free File Alliance launched in 2003 and the agency worked with Free
File to offer fillable PDF forms in 2008. Direct File is a critical
part of the IRS's ongoing modernization effort, and an important
component of a stronger, comprehensive tax filing system that gives
taxpayers choices of electronic filing options that best suit their
needs.
We learned from the pilot there is strong interest in no-cost
filing options across the country. Millions of taxpayers who did not
live in one of the 12 pilot States visited the Direct File website to
learn more about this option or asked live chat assistors to make
Direct File available in their State.
As a permanent filing option, Direct File will continue to be one
option among many from which taxpayers can choose. We have heard from
many taxpayers that they prefer to file their taxes directly with the
IRS, and 86 percent of Direct File users reported that their experience
with Direct File increased their trust in the IRS. We also know from
public polling that many taxpayers prefer to work with a third party,
whether that is a trusted tax professional or use tax preparation
software (both free and commercial). The IRS will continue to support
all filing options.
We remain committed to the IRS's ongoing relationship with the Free
File Alliance. Free File and the tax preparation software industry have
been critical partners in serving taxpayers for 2 decades. This year,
Free File saw an increase of about 200,000 tax returns filed through
the program, reaching 2.9 million returns, an increase of 7.3 percent
from the 2.7 million filed through the same period last year. In May,
the IRS announced the extension of the Free File program through 2029,
assuring that it will continue to be a key component of the tax filing
system through the end of the decade. As we work to expand the Direct
File system, we will also strengthen free filing options for taxpayers,
because giving taxpayers additional options strengthens the entire tax
filing system.
Question. Over the past year, I have partnered with several of my
colleagues on both sides of the aisle to gain a better understanding of
the potential opportunities, and areas of concern, for AI deployment.
As you evaluate budgetary needs for the IRS for Fiscal Year 2025,
what role do you see artificial intelligence playing in improving
customer service at the agency?
Answer. The IRS is currently using chatbots and voicebots to
provide convenient multichannel avenues for taxpayers to access general
information and FAQs, along with some account-specific information,
without needing to wait for a live assistor.
In addition, the IRS is exploring use of AI to extract insights
from customer service data to better understand common pain points and
create new opportunities to streamline and improve the customer
experience.
The IRS is also exploring use of AI to suggest plain language for
revising taxpayer notices, with the goal of communicating more clearly
to taxpayers. In this use case, AI will be used to generate a draft.
IRS subject matter experts will then review the drafts before they are
sent to taxpayers.
The IRS is also evaluating options to improve CSR capabilities
through use of artificial intelligence. The focus is to build an
integrated information system that utilizes AI to understand and
summarize a taxpayer question and present the CSR with contextual
specific information, thereby enabling the CSRs to answer taxpayer
questions effectively and with higher efficiency.
Question. What safeguards is the agency putting in place to ensure
effective and proper use of these new and emerging technologies?
Answer. The IRS AI governance process requires review by an AI
Assurance Team and approval by a senior executive board prior to any
in-production use of rights-impacting or safety-impacting AI. It also
requires the completion of artifacts to enhance transparency and
support risk evaluation and mitigation. Furthermore, it requires
regular review of all AI use cases at least annually and whenever
significant modifications are made, to ensure the IRS continues to use
AI safely, responsibly, and effectively.
IRS policy on AI governance and principles is codified in interim
guidance RAAS-10-0524-0001, Artificial Intelligence Governance and
Principles (May 20, 2024). This includes all minimum practices for
rights-impacting and safety-impacting AI outlined in OMB M-24-10 (March
28, 2024), along with Treasury-specific and IRS-specific governance
processes and artifacts for AI use cases (see RAAS-10-0524-0001,
section 10.24.1.5).
In addition, the IRS is bound by the decisions rendered by the
Treasury Artificial Intelligence Governance Board (AIGB), in which the
IRS is a standing member. The AIGB helps ensure AI is implemented
within the Department in a manner consistent with the Department's risk
appetite, with appropriate considerations given to safety and equity.
Question. Partnerships and pass-through entities are important
corporate structures that allow startups, small businesses, and other
important organizations needed flexibility that allows businesses to
innovate and thrive. However, there has been some criticism of
partnerships abusing the tax code.
Do you believe partnerships and pass-through entity structures can
benefit the economy?
What evidence have you seen that business partnerships, a
longstanding structure that has helped facilitate critical innovation,
have been a source of tax reporting malfeasance?
Do you believe stepped-up enforcement will be more of a deterrence
of tax fraud or a more of a disincentive for viable individuals and
businesses to avoid beneficial partnerships altogether?
Answer. An increasingly large amount of business activity is taking
place in partnerships and pass-through entity structures. The number of
partnerships and S corporation returns have increased to 9.5 million
for Tax Year 2021--a 24-percent increase since 2013.\40\ The number of
large partnerships--entities with over $100 million in assets and 100
or more partners--have increased nearly 600 percent since 2002.\41\
---------------------------------------------------------------------------
\40\ See Internal Revenue Service Data Book (2023), Publication 55-
B, https://www.irs.gov/pub/irs-pdf/p55b.pdf.
\41\ See GAO-23-106020, available at: https://www.gao.gov/products/
gao-23-106020.
The audit rate of these pass-through structures has historically
been low--less than .5 percent in 2021. To restore fairness in tax
compliance, in September 2023, the IRS announced it would increase
attention to large partnerships and would soon open examinations of the
---------------------------------------------------------------------------
largest partnerships, each averaging more than $10 billion in assets.
Recently identified abusive transactions such as basket option
contracts and syndicated conversation easements have necessarily relied
on partnership structures. Partnerships are structured in these
transactions to defer tax, convert the character of income, and
artificially inflate deductions.
Tax frauds and tax noncompliance are unfair to individuals and
businesses that comply with tax laws. Increased enforcement coverage
for partnerships--particularly large, multitiered, and publicly traded
partnerships--and pass-through entity structures will help ensure
fairness across the entire taxpayer population.
______
Prepared Statement of Hon. Ron Wyden,
a U.S. Senator From Oregon
The committee meets this morning to discuss the IRS budget and tax
filing season, which closed just yesterday. I want to thank
Commissioner Werfel for being here at a very busy time for everybody at
the IRS. There are a lot of issues to discuss, and I'll begin with
Direct File.
Anybody who denies that the Direct File pilot was a huge success
must be living in another universe. It was open to a fairly small
percentage of taxpayers, but the reviews it got from its initial users
were overwhelmingly positive. Frankly, it seems like a whole lot of
people were pleasantly stunned that a Federal agency--particularly one
as frequently vilified as the IRS--was able to build a helpful website
that works.
The tens of thousands of taxpayers who used Direct File this year
collectively saved millions on fees they would have paid to one of the
tax software giants. The website was user-friendly. It was quick and
easy to use. It didn't hassle users with upcharges for add-on services
they didn't need.
In short, with Direct File, the IRS built a good tool that people
like because it saves Americans time and money. No surprise then that
the people who oppose it are absolutely furious and doing everything
they can to stop it from expanding.
The detractors said it didn't attract enough users, but tens of
thousands of new users came in over the last week, and the IRS hit its
goal of 100,000 taxpayers using the system. There's no doubt this will
become more popular every year.
Others have said the cost estimates were too vague. But the fact
is, there's always some uncertainty with pilot programs. Now that the
IRS has tested the system and set a baseline, the costs will be a lot
clearer going forward.
And finally, some say this whole project was unnecessary because
taxpayers have the option of using ``free file'' systems through the
big tax prep companies. That might have been a valid argument years
ago, before the tax prep giants got caught hiding free file options
from eligible taxpayers and conning people into forking over hundreds
of dollars they didn't need to spend. Congress simply cannot trust the
big tax prep companies to do the right thing. For some, their version
of free file is the freedom for Americans to pay them even more.
Bottom line: Direct File is long overdue, and it's the kind of
public service the Federal Government ought to be providing to
Americans wherever it can. I understand the IRS and Treasury Department
are now evaluating how the pilot program went over the last few months.
I want to see this program expand. I'm looking forward to the day
when Oregonians come up to me in one of our 51 Fred Meyer grocery
stores--I've been to every last one--to tell me how thrilled they were
to save time and money with Direct File.
On the topic of vastly improved Federal programs, I'll turn now to
the IRS's continued success at improving customer service during this
filing season. The IRS answered a million more calls with live
assistance than it did during last year's filing season. It got call
waiting times down to 3 minutes. It saved taxpayers 1.4 million hours
of time that in previous years they would have spent sitting on hold.
It smashed its goals for in-person service.
Despite this success, Republicans are complaining that the
administration is asking for money to sustain all this progress. They
seem to want to go back to the ``bad old days'' when taxpayers sat on
hold for hours and could not get timely refunds. It makes no sense
For the second filing season in a row, the IRS is proving that it
can provide a top-notch level of taxpayer service when Congress gives
it the resources.
I'll close with a few words on enforcement. The IRS has announced
some big enforcement efforts in the last few months. That includes
cracking down on 125,000 cases where wealthy individuals--many of them
people who bring in more than $1 million per year--never even filed a
tax return.
There's also a new effort to root out the abuse of tax breaks for
corporate jets--high-flying executives who take tax write-offs for
personal travel. And in my view, the IRS ought to look at similar
abuses with corporate-owned yachts. When it comes to yachts, the abuses
are even more blatant. Yachts produce big write-offs, but I find it
hard to believe that anybody is yachting to a board meeting.
If Congress continues to cut the IRS's funding--or if the Inflation
Reduction Act funding expires and Congress doesn't add more--we know
what is going to happen. Wealthy tax cheats will have an easier time
getting away with breaking the law. And it'll be misery and higher
costs for typical American taxpayers who are just trying to do their
civic duty when tax filing season comes around every spring. That's an
outcome that the vast majority of the American people oppose.
______
Communications
----------
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. Thank you for allowing me to participate in the
traditional annual hearing about this time of year concerning the IRS
filing season.
As I mentioned the last 2 years, support contractors could be more
widely used for customer and information technology services. This
would identify the balance of spending to justify the budget request
for FY 2025.
Additional analytical resources are required for tax reform initiatives
such as a Fair Tax initiative and exploration of options due to
expiration of the Trump/Ryan/Brady tax cuts. The Ways and Means
Committee and the Committee for a Responsible Federal Budget are
agitating for a Fiscal Commission to justify or pay for some kind of
extension of the 2017 Tax Bill.
While such an extension should be allowed to die on the vine,
analytical resources should be budgeted for the debate and a
consideration of alternatives, such as those presented last year to the
Ways and Means Committee. My comments on those alternatives, plus a
presentation of my own, are attached.
This year, the House has passed a reboot of the pandemic era child tax
credit distribution. This will require more funds, although with tax
reform, this could be done more cheaply. Such a change is essential in
a post-Roe environment. If women must keep their pregnancies, then they
must be funded adequately to raise the child to maturity.
To prevent 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.
As usual, 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 Policies to Expand Economic Growth and
Increase Prosperity for American Families, December 6, 2023
Consumption-Based Taxation in an International Setting, Alan J.
Auerbach
Professor Auerbach provides a good summary of consumption-based taxes,
but then describes the Destination Based Cash Flow Tax, which he
favors. This proposal leaves the current tax system which forces most
households to file income tax--where a shift to an employer paid tax
with deductions for family support and a goods and services tax would
take the trash out of the tax system. His proposal assumes the
continuation of the corporate income tax, both in the United States and
abroad. The employer-paid subtraction VAT, adopted by our trading
partners, would tax locally to provide services to families while
exempting these services from border adjustment--thus ending the
incentive to avoid these taxes and the associated benefits.
In summary, the DBCFT is a small ball solution that keeps the
complexity of corporate profits taxes intact--and adds to it.
Addressing the Long-Term Fiscal Imbalance With a Value-Added Tax, Alan
Viard
Mr. Viard provides a textbook explanation of Value-Added Taxation, but
leaves adjustments to the income tax system that everyone must file
intact. His assumption that income tax increases are impossible is
short sighted, especially as these taxes are about to increase
automatically if nothing is done. Indeed, the baseline for calculating
income tax revenue must be the permanent rate, not the current rate
which is soon to expire. Tax Reform MUST NOT be an excuse to leave
income tax rates at their current level.
Adding a value-added tax must be part of a more comprehensive
solution--including levying income taxes solely on the highest 1
percent (although the top 20 percent would have subtraction VAT
surtaxes paid for them by their employers on wages and dividends--with
capital gains taxes being repealed in favor of a different tax). The
remaining income tax would range between 6.5 percent and 26 percent--
which is also the range for the VAT Surtax. As discussed below, the
remaining personal income tax would go toward paying interest on the
national debt and paying down a portion of the principal.
Americans for Tax Reform, Grover Norquist
Mr. Norquist is opposed to any revenue measure, despite the fact that
when taxes are more progressive, the economy improves. This is shown by
historic data included in our May comments to the House Budget
Committee which demonstrated that when progressive income taxes are
reduced, deficit spending must occur to avoid or recover from a
recession (or worse). The reduction in growth that occurred before the
Pandemic was one point lower than before the Tax and Job Cuts Act (not
a typo) was enacted--this includes a 1-year lag for investors to pocket
their tax cuts and invest in the latest investment scam, such as crypto
currency and single family home rental mortgage backed securities--
while household consumption (and income) similarly declines.
Revenue is at historic lows as a percentage of Gross Domestic Product.
Letting the TCJA expire as scheduled will be healthy for the economy,
for households and does not violate the precedent that letting tax cuts
expire does not trigger Mr. Norquist's pledge, which was set in 2013.
Member conformity to Mr. Norquist's will is no longer the standard for
most far-right Republicans. It is now supporting former President Trump
and excusing or minimizing the events of January 6, 2021 (which will
have no impact on future criminal proceedings for Mr. Trump or any who
assisted in the planning of that day's events).
I propose actual tax reform--reform that simplifies the tax system
while distributing burden equitably.
Americans for Fair Taxation, Stephen L. Hayes
Mr. Hayes begins his testimony claiming he is not a tax economist.
Given the impact of his proposal on low-income households and the boon
his proposal is to high-income households, I agree with his assessment.
The idea of a national consumption tax is meritorious, as long as it is
not a single tax.
Unless he includes gambling at the Wall Street Casino as a consumable
good covered under the Fair Tax, while retaining some kind of surtax
for very high-income individuals (one as part of the Fair Tax that
employers remit--as Lawrence B. Lindsey suggested--and the second as
residual high-income tax that can be remitted early as a tax prepayment
bond, thus reducing interest on the debt), his suggestion is profoundly
unfair.
The Fair Tax proposal includes incentives for tax avoidance that a
value-added tax removes. There are already tax breaks for individuals
and firms who collect income taxes--as such taxes are a deduction. With
a VAT, such taxes are a CREDIT that is fully refundable. If I were
selling a product, I would much rather have the full credit and not
have to look over my shoulder for auditors looking to see if I am
misusing the exclusion of wholesale goods.
The Fair Tax replaces income distributed to families through the child
tax credit with a prebate that only covers the Fair Tax--a substantial
income loss that would either force more people into very low wage
jobs--those akin to slavery--or force the government to restore Aid for
Families with Dependent Children (welfare) and Food Stamps to levels
higher than when President Clinton reformed welfare as we knew it.
The subtraction VAT we propose takes the government out of
redistribution almost entirely--save for payments of child tax credits
to families receiving disability or unemployment benefits--with
employers receiving tax benefits to provide adequate, family size
sensitive, wages instead. Such a proposal would both benefit families,
make work pay (along with increases to the minimum wage) and increase
economic growth and household savings.
The final flaw in Mr. Hayes' proposal is that it always comes around
when income tax rates cuts are scheduled to expire. A single tax
proposal which assumes the permanent baseline could not pass. The rate
would be too high. America can do better--and it would be fairer.
The Tax Policy Center, Len Burman
Professor Burman addresses wage stagnation and the prospect that
technological advancement may make it worse. He would use a universal
earned income tax credit to remedy this. My answer to this is
increasing the minimum wage. The UEITC would solidify the two-tiered
economy.
The other factor which has led to economic inequality is bad math. By
bad math, I mean the rewarding of cost-of-living adjustments (which are
an unearned benefit) on a percentage basis, rather than an equal dollar
basis. Because prices follow the 90th percentile (with one half of
total adjusted growth income under that point, with the other half
above--counting dollars, not people), most families do worse each year.
Only product improvement and social programs, such as the Child Tax
Credit, allow most families to avoid starvation. Whether this effect is
accidental or intentional is a matter for more systematic study.
From here on in, adjust for cost of living on a per dollar an hour
rather than on a percentage basis (or dollars per month or week for
federal beneficiaries). Calculate the dollar amount based on inflation
at the median income level. No one gets more dollars an hour raises, no
one gets less dollars per hour in increases. Increase the minimum wage
as above and consider decreasing high end salaries paid to government
employees and contractors. Even without decreases, simply equalizing
raises will soon reduce inequality.
Burman echoes the proposal to restore the child tax cut to pandemic era
level. I would double that, but take the IRS out of the income
distribution business--as previously discussed. He and I agree on the
Fair Tax--although I would use the term Fair Tax for a VAT as part of a
multi-tax reform. Doing so extracts money spent by heirs and plutocrats
who borrow from their fortunes to buy companies and luxuries. If they
buy companies or take them public, they would pay an asset value-added
tax (see below). Our proposals would end tax shelters. Tax expenditures
for health care, family incomes, daycare and the eventual shift to
employee ownership to replace much of the employer contribution to FICA
are not shelters, they are basic reforms.
The Center for Fiscal Equity Solution
A single tax will never provide enough revenue while being politically
acceptable. We propose a series of taxes, which are detailed in the
appendix, which will still prove easier to collect and administer than
the current income tax system.
The tax gap leaves revenue on the table. Neither a wealth tax, nor the
President's proposal to tax capital gains at death should pass. Indeed,
a wealth tax simply multiplies the problems of capital gains taxation.
It is time for the nation to shift away from taxing short term capital
gains taxes at nominal rates and preferred rates for long-term gains.
Instead, set one rate for all transactions and shift from end of the
year reconciliation to an asset value-added tax for each transaction.
At initial public offering, option exercise and the first sale after
inheritance, gift or donation, the sale would logically be marked to
market. If a family keeps the stock or company, there will be no tax
until someone else buys it. The second tax cut would be to expand the
ESOP tax exemption to all sales of public stock, rather than just
private stock. Maximizing employee ownership will bring a new level of
motivation and excellence to the economy.
The 2017 personal income tax changes should not be made permanent or
extended, as has been proposed. This will reward savings and
speculation, rather than providing an incentive to invest in plants and
equipment. The latter responds to greater levels of consumption by
households funded by both the public and private sectors, including
Social Security recipients.
Our latest comprehensive tax reform proposal is in the attachment. We
propose replacing the complexity of the Earned Income Tax Credit with a
floor on FICA contributions by employees and a lower ceiling to reduce
the amount of funding for high-income households. The employer
contribution would be shifted from employers to consumers (but not
exporters) to the Fair Tax--which would also fund domestic
discretionary spending and domestic military basing and operations.
This should be operated like a Value-Added Tax--in other words, the
deduction of sales taxes paid would be replaced with a tax credit for
such payments. This change should be made, even without enactment of
the Fair Tax. To not do so is to force companies to pay tax on tax--
something that the uninitiated thing the VAT does, but in reality, this
is what happens in the current tax system due to its extreme
complexity.
Rather than providing for a rebate and shifting the more generous
portions of the child tax credit (which is the most anti-abortion
provision in law) to direct subsidy, expand the child tax credit and
distribute it with Unemployment Insurance, Social Security old-age,
survivors and disability insurance and wages (including stipends paid
for those in educational and work experience programs to raise them out
of poverty).
The child tax credit would be an offset to a subtraction value-added
tax, as well as a credit for providing employee health insurance. This
will replace all Obamacare subsidies and the health insurance exclusion
to corporate income taxes. Corporate income taxes would be abolished.
The base level of the subtraction VAT should be a wash--with taxes
fully offset by credits for the average business above 50 employees.
Some firms would even get a rebate if their credits are greater than
their tax obligations.
Personal income tax filing on wage and dividend income for middle
income households will be replaced with a subtraction value-added tax
surtax for income above the ceiling for FICA employee contributions,
which will be graduated from a 6.5-
percent rate to a 26-percent rate for income over $425,000.
At $500,000, an individual surtax ranging between 6.5 percent and 26
percent would fund net interest payments, debt reduction and paying
down the Social Security Trust Fund. For this reason, these payments
will be made to the Bureau of the Public Debt. The Asset VAT will be
collected by the SEC. The subtraction VAT, any carbon added tax and the
Fair Tax will be collected by the states (who will also do any auditing
on tax collection issues). What would happen to the IRS? Abolition.
Attachment Two--Tax Reform, Center for Fiscal Equity, March 24, 2023
Synergy: The President's Budget for 2024 proposes a 25-percent minimum
tax on high incomes. Because most high-income households make their
money on capital gains, rather than salaries, an asset value-added tax
replacing capital gains taxes (both long- and short-term) would be set
to that rate. The top rate for a subtraction VAT surtax on high incomes
(wages, dividends and interest paid) would be set to 25 percent, as
would the top rate for income surtaxes paid by very high-income
earners. Surtaxes collected by businesses would begin for any
individual payee receiving $75,000 from any source at a 6.25 percent
rate and top out at 25 percent at all such income over $375,000. At
$450,000, individuals would pay an additional 6.25 percent on the next
$75,000 with brackets increasing until a top rate of 25 percent on
income over $750,000. This structure assures that no one games the
system by changing how income is earned to lower their tax burden.
Individual payroll taxes. A floor of $20,000 would be instituted for
paying these taxes, with a ceiling of $75,000. This lower ceiling
reduces the amount of benefits received in retirement for higher income
individuals. The logic of the $20,000 floor reflects full time work at
a $10 per hour minimum wage offered by the Republican caucus in
response to proposals for a $15 wage. The majority needs to take the
deal. Doing so in relation to a floor on contributions makes adopting
the minimum wage germane in the Senate for purposes of Reconciliation.
The rate would be set at 6.25 percent.
Employer payroll taxes. Unless taxes are diverted to a personal
retirement account holding voting and preferred stock in the employer,
the employer levy would be replaced by a goods and receipts tax of 6.25
percent. Every worker who meets a minimum hour threshold would be
credited for having paid into the system, regardless of wage level. All
employees would be credited on an equal dollar basis, rather than as a
match to their individual payroll tax. The tax rate would be adjusted
to assure adequacy of benefits for all program beneficiaries.
High-income Surtaxes. As above, taxes would be collected on all
individual income taxes from salaries, income and dividends, which
exclude business taxes filed separately, starting at $400,00 per year.
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.
Asset Value-Added Tax (A-VAT). A replacement for capital gains taxes
and the estate tax. It will apply to asset sales, exercised options,
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 high income and subtraction VAT surtaxes.
There will be no requirement to hold assets for a year to use this
rate. This also implies that this tax will be levied on all eligible
transactions.
The 3.8-percent ACA-SM tax will be repealed as a separate tax, with
health-care funding coming through a subtraction value-added tax levied
on all employment and other gross profit. The 25-percent rate is meant
to be a permanent compromise, as above. Any changes to this rate would
be used to adjust subtraction VAT surtax and high income surtax rates
accordingly. This rate would be negotiated on a world-wide basis to
prevent venue seeking for stock trading.
Subtraction Value-Added Tax (S-VAT). Corporate income taxes and
collection of business and farm income taxes will be replaced by this
tax, which is an employer paid Net Business Receipts Tax. 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.
As above, S-VAT surtaxes are collected on all income distributed over
$75,000, with a beginning rate of 6.25 percent. replace income tax
levies collected on the first 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 forces everyone, from the working poor to the beneficiaries of
inherited wealth, to pay taxes and share in the cost of government. 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. Inherited assets will be taxed under A-
VAT when sold. Any inherited cash, or funds borrowed against the value
of shares, will face the I-VAT when sold or the A-VAT if invested.
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
19.25 percent to 13 percent).
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. 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.
Attachment Three--Tax Administration, Treasury Budget,
February 12, 2020
Shifting to a single system for all business taxation, particularly
enacting invoice value-added taxes to collect revenue and employer-
based subtraction value-added taxes to distribute benefits to workers
will end the need for filing for most, if not all, households. Any
remaining high salary surtax would be free of any deductions and
credits and could as easily be collected by enacting higher tiers to a
subtraction VAT.
Subtraction VAT collection will closely duplicate the collection of
payroll and income taxes--as well as employment taxes--but without
households having to file an annual reconciliation except to verify the
number of dependents receiving benefits.
Tax reform will simplify tax administration on all levels. Firms will
submit electronic receipts for I-VAT and 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.
______
Statement Submitted by Jay Starkman, CPA
1431 Stephens Drive
Atlanta, GA 30329
404-636-1400
https://www.starkman.com/
INTRODUCTION
Chairman Wyden, Ranking Member Crapo, and members of the Committee, I
would like very respectfully to submit the following statement to you
on the appearance of IRS Commissioner Werfel before your distinguished
committee.
I have been a tax practitioner for almost 50 years, active in promoting
good tax policy--especially tax simplification--through serving in
leadership positions of national nonpartisan professional
organizations, and am the author of many tax policy articles (including
a dozen in The Wall Street Journal in recent years) and a book on tax
history. I am also an avid follower of Congressional tax hearings.
Commissioner Danny Werfel is the most enthusiastic commissioner in my
many years of observing the office. I respect Mr. Werfel and hope that
his tenure will be very successful.
However, I respectfully object to his proposal to expand mandatory
efiling, as it will burden taxpayers with more complexity in order to
save IRS from needed improvements to management.
MANDATED EFILING
Businesses understand that communication should be as simple and smooth
as their customers require, leading to a great customer experience. At
IRS, the customer must adapt to the government's often complex and
incomprehensible methods. This often leads to frustration, confusion,
and noncompliance.
Regarding Commissioner Werfel's written testimony, I strongly object to
his proposal that would require efiling by all individuals with income
tax returns showing gross income of $400,000 or more, and 10 other
efiling mandates.\1\ This is for the benefit of IRS, and a heavy burden
on taxpayers. It would allow IRS to further burden taxpayers with
onerous tax compliance requirements while freeing IRS from dealing with
the paperwork it unnecessarily adds to the process.
---------------------------------------------------------------------------
\1\ Written Testimony of Daniel Werfel, Commissioner Internal
Revenue Service, Before the Senate Finance Committee on the Filing
Season and the IRS Budget, April 16, 2024, p. 13, https://
www.finance.senate.gov/hearings/the-presidents-fiscal-year-2025-irs-
budget-and-the-irs-2024-filing-season.
---------------------------------------------------------------------------
TAX FORM PROLIFERATION
Efiling has fueled the mind-boggling proliferation of tax forms,
whether filed on paper or efiled. IRS wants taxpayers to deal with its
two thousand form portfolio of ever-increasing complexity, but doesn't
itself want to deal with the paperwork it inflicts on taxpayers.
The 2-page Form 1040 now requires up to 8 pages, including two lines
for reporting Olympic medal winnings.\2\ The 2-page Schedule D can
require up to 8 pages. A 20-page Schedule K-3 must be computed and
attached to each partnership or S corp K-1, and one 19-page K-2 to the
main return.
---------------------------------------------------------------------------
\2\ Form 1040, Schedules 1, 2, and 3, each two pages. Olympics at
Schedule 1 lines 8m and 24c.
Up to four 2-page Due Diligence Forms 8867 must be attached to returns
claiming common tax credits or head of household status, subject to a
$600 preparer penalty for each omitted form. A new Form 7206, Self-
Employed Health Insurance Deduction, adds 14 lines for each business
---------------------------------------------------------------------------
that provides SE health insurance for the taxpayer.
These extra forms make tax returns bigger, more complex, costly, and
treacherous to prepare, surely reducing compliance and accuracy because
the larger the return, the more difficult to review. It costs IRS
nothing extra to process--unless the return is filed on paper. IRS
tests to determine if a software vendor's product meets efiling
standards, but may not test whether tax software guides taxpayers to
prepare correct and accurate returns.\3\ Too many pages are daunting
and discourage taxpayers from reviewing the returns presented for their
approval.
---------------------------------------------------------------------------
\3\ ``Tax Administration: Many Taxpayers Rely on Tax Software and
IRS Needs to Assess Associated Risks,'' GAO-09-297 (Feb. 2009), at 10-
12.
---------------------------------------------------------------------------
EFILING HAS PROBLEMS
Though IRS rejects even the most trivial impropriety or error in
efiling, IRS cuts no slack for taxpayers or their preparers who don't
notice that they failed to receive an IRS acceptance confirmation (not
just software provider's confirmation that a return was submitted).
IRS National Taxpayer Advocate, Erin Collins, calls paper,
``kryptonite,''\4\ demonstrating contempt for traditional filing
practices. Paper forms originate with IRS and IRS is burying taxpayers
in it, not the other way around. Back in 2011, then NTA Nina Olson,
recommended that ``IRS should allow taxpayers to voluntarily turn off
the ability to efile'' as protection against identity theft,\5\ a crime
that is still proliferating.
---------------------------------------------------------------------------
\4\ ``National Taxpayer Advocate delivers Annual Report to
Congress; focuses on taxpayer impact of paper processing delays,'' IR-
2024-07, 10 Jan. 2024, https://www.irs.gov/newsroom/national-taxpayer-
advocate-delivers-annual-report-to-congress-focuses-on-taxpayer-impact-
of-paper-processing-delays.
\5\ ``2011 Annual Report to Congress, vol. 1'' National Taxpayer
Advocate, p. 62-63, https://www.taxpayeradvocate.irs.gov/wp-content/
uploads/2020/08/IRS-TAS-ARC-2011-VOL-1.pdf.
Efiling is still costing billions in identity theft and other types of
fraud. IRS claims it ``identified $5.5 billion in tax fraud'' in fiscal
year 2023, though it does not state whether this was discovered before
or after the fraudulent amounts were paid by IRS.\6\ Efiling has
allowed IRS to close six service centers, leaving only three. Rather
than reducing costs, it has largely converted variable labor into fixed
computer hardware and software as the filing and account services
budget continues to grow.
---------------------------------------------------------------------------
\6\ ``IRS Criminal Investigation targets tax fraudsters, urges
taxpayers to protect themselves this tax season,'' Internal Revenue
Service, 29 Jan. 2024, https://www.irs.gov/compliance/criminal-
investigation/irs-criminal-investigation-targets-tax-fraudsters-urges-
taxpayers-to-protect-themselves-this-tax-season.
In recent years, largely unpublicized court rulings have confirmed
---------------------------------------------------------------------------
harsh results for taxpayers who thought they had properly efiled.
By law, a signed paper return received by IRS is deemed timely filed by
the postmark date.\7\ A return containing information sufficient for
IRS to calculate the proper tax is valid.\8\ Neither protection fully
applies to efiling. Signing Form 8879 authorizing your preparer to
efile is no protection because a return actually efiled is not
officially ``filed'' until the IRS acknowledges its filing.\9\
---------------------------------------------------------------------------
\7\ Internal Revenue Code Sec. 7502.
\8\ Beard, 82 T.C. 766 (1984), aff'd 793 F.2d 139 (CA-6, 1986). A
taxpayer filing constitutes a return if (1) it purports to be a return
and provides sufficient data to calculate tax liability, (2) the
taxpayer made an honest and reasonable attempt to satisfy the
requirements of the tax law, and (3) the taxpayer executed the document
under penalties of perjury (signature requirement).
\9\ IRS Pub. 1345. p. 7.
Should the tax preparer, through negligence or fraud, fail to efile the
return (or fail to notice that he received no IRS acceptance
acknowledgment), the courts have held that reliance on a preparer is no
excuse. The taxpayer is responsible for failure to file penalties. The
court suggested that taxpayers seeking to avoid the risk of a negligent
or fraudulent agent can file on paper, which would no longer be an
option under Commissioner Werfel's $400,000 mandatory efiling
proposal.\10\
---------------------------------------------------------------------------
\10\ Lee v. U.S., No 22-10793 (CA-11, 2023), aff'g No. 8:21-cv-
01579 (DC M.D. FL, 2022), https://cases.justia.com/federal/appellate-
courts/ca11/22-10793/22-10793-2023-10-24.pdf. ``[T]axpayers can confirm
independently with the IRS on the phone . . . [or] choose to file the
return independently on paper.'' CA-11 at p. 23.
Failure to include an IP-PIN issued by IRS will cause rejection of an
efiled return but not a paper return.\11\ A trivial technicality like
entering a social security number on a line designated for an employer
ID number can result in rejection of an efiled return, but not a paper
return.\12\ Failure to file penalties may apply.
---------------------------------------------------------------------------
\11\ Fowler, 155 T.C. No. 7 (2020), citing Beard, see FN5 above.
``[R]espondent does not explain why the IRS automatically rejects an
efiled return, but not a paper return, without a correct IP PIN.''
\12\ Hayes v. U.S., No. 17-50816 (CA-5, 2019) aff'g No. 3:16-cv-
00112 (DC W. TX, 2017). [John William Dunbar, El Paso, Texas, https://
www.sbngcpa.com, (915) 544-6770, John (Jay) Dunbar [email protected]
[CA-5 remanded to DC]], https://cases.justia.com/federal/appellate-
courts/ca5/17-50816/17-50816-2019-01-29.pdf.
Considering how efiling is not as forgiving as paper filing, the best
and safest strategy for the average taxpayer seems to be to file by
paper. Unlike efiling, paper returns won't be rejected for failure to
check a box.
EFILING FAILURES
While efiling is widely used and appears popular, it is in fact often
not voluntary. Efiling is mandated for every tax-exempt organization,
preparers who file 10 or more returns, and any business filing 10 or
more returns (each W-2, 1099, and payroll return counts toward the
10).\13\
---------------------------------------------------------------------------
\13\ Reg. 301.6011-3 (partnerships); Reg. 301.6011-5
(corporations).
Over 95 percent of taxpayers now efile, so IRS no longer handles as
much paper.\14\ In the past, IRS smoothly processed 100 million paper
1040s annually. Today, it has difficulty handling under 9 million paper
returns.
---------------------------------------------------------------------------
\14\ Commissioner Rettig, ``The Fiscal Year 2023 Budget Request
from the U.S. Internal Revenue Service,'' Senate Financial Services and
General Government Subcommittee Hearing, 3 May 2022, https://
www.appropriations.senate.gov/hearings/the-fiscal-year-2023-budget-
request-from-the-u-s-internal-revenue-service at 51:20.
The IRS website lists over 2,700 different forms (including foreign
language versions). IRS imposes this mountain of complex forms on
taxpayers who risk hacking of their most sensitive data, as occurred at
TaxSlayer,\15\ or online services like H&R Block, TaxAct, and TaxSlayer
sharing data with Facebook.\16\ Paper filing is safe from hacking and
data-sharing brokers.
---------------------------------------------------------------------------
\15\ ``FTC Gives Final Approval to Settlement with Online Tax
Preparation Service,'' 8 Nov. 2017, https://www.ftc.gov/news-events/
news/press-releases/2017/11/ftc-gives-final-approval-settlement-online-
tax-preparation-service.
\16\ ``Tax Filing Websites Have Been Sending Users' Financial
Information to Facebook,'' The Markup, 22 Nov. 2022, https://
themarkup.org/pixel-hunt/2022/11/22/tax-filing-websites-have-been-
sending-users-financial-information-to-facebook; ``Schiff Urges
Investigation Into Disclosure of Taxpayers' Personal, Financial
Information to Facebook,'' Press Release, 2 Feb. 2023, https://
schiff.house.gov/news/press-releases/schiff-urges-investigation-into-
disclosure-of-taxpayers-personal-financial-information-to-facebook.
Further, efiling services can go down at critical times. H&R Block was
down for about 18 hours on April 15, 2024, affecting thousands of last
minute filers.\17\ Malware brought down Wolters Kluwer's CCH cloud
services in May 2019 necessitating IRS granting a week's extension for
affected customers' business tax filings.\18\ It is unlikely that IRS
would consider the same relief for a small tax firm affected by
malware, computer failure, or electrical outage.
---------------------------------------------------------------------------
\17\ Ashlea Ebeling, ``H&R Block's Tax Day Outage Frustrates Last-
Minute Filers,'' 15 April 2024, https://www.wsj.com/personal-finance/
taxes/hr-block-outage-tax-day-2024-16789a21.
\18\ Daniel Hood, ``IRS gives extensions for returns hit by CCH
outage,'' AccountingToday, 12 May 2019, https://
www.accountingtoday.com/news/irs-approves-extensions-for-returns-hit-
by-cch-outage.
The IRS itself experiences failures and occasional service outages,
including Tax Day, April 18, 2022 \19\ and Tax Day, April 17, 2018
filing day outages, among others in 2016 and 2014.\20\ These caused
serious alarm and frustration among many taxpayers and professionals
dealing with last minute filings. Such failures provide compelling
evidence that paper filing should always be an option.
---------------------------------------------------------------------------
\19\ ``Tax Day 2022: IRS website experiences major slowdown,''
FoxBusiness, 18 April 2022, https://www.foxbusiness.com/personal-
finance/tax-day-2022-irs-website-experiences-major-slowdown.
\20\ ``Review of the System Failure That Led to the Tax Day
Outage,'' Treasury Inspector General for Tax Administration September
19, 2018, Ref. No. 2018-20-065, https://www.tigta.gov/sites/default/
files/reports/2022-02/201820065fr.pdf; ``IRS computer problems shut
down e-file system,'' USA Today, February 3, 2016; There was also an
infamous shutdown of the Modernized e-File (MeF) System from October
11, 2014 afternoon through Tuesday, October 14th morning for system
maintenance, just before the final October 15th filing deadline. It was
compared to Macy's closing for inventory count from December 21st to
December 24th.
---------------------------------------------------------------------------
DIRECT FILE
I applaud Senator Elizabeth Warren's efforts toward instituting the IRS
Direct File program, though not the execution of the program by IRS. I
have long supported direct filing and preferably a pre-populated return
filing system \21\ together with increased funding for IRS.
---------------------------------------------------------------------------
\21\ ``Automatic Tax Filing: Simulating a Pre-Populated Form
1040,'' National Bureau of Economic Research, Working Paper 30008,
April 2022, Revised May 2023, https://www.nber.org/papers/w30008.
IRS already has all the relevant W-2 and 1099 information and could
mail pre-
populated returns to certain taxpayers for signature. Taxpayers often
want to file a return as soon as they receive their W-2, so they can
receive a refund. Saving tax preparation fees could be a big incentive
to waiting for their IRS pre-populated return before filing. Or, IRS
could incorporate pre-populated data into Direct File. IRS often issues
refunds on good faith, before it has full income and withholding
information from the Social Security Administration and 1099 filers,
which in the past was not before May. In many countries, tax refunds
are not issued until after the official filing date, which minimizes
---------------------------------------------------------------------------
fraud.
The Inflation Reduction Act included a $15-million authorization for a
Direct File study. Enacted in August 2022, it resulted in two
reports.\22\ One by a nonprofit that claimed to have received no
compensation and another by IRS. I inquired of Senate staff in
September 2023 on how much of the $15 million remained and was advised
that it was all spent. It is unfortunate that no one asked Commissioner
Werfel where the $15 million went as it surely wasn't required to
secure one free and one internal report.
---------------------------------------------------------------------------
\22\ ``IRS-run Direct e-File Tax Return System,'' May 16, 2023, IRS
Pub. 5788. ``MITRE Taxpayer Filing Preference Surveys,'' May 3, 2023,
https://www.mitre.org/news-insights/publication/mitre-taxpayer-filing-
preference-surveys.
IRS Direct File is a free program for simple tax returns filed on the
IRS website.\23\ There is a code provision allowing the simplest
returns to file a paper tax return and elect for IRS to calculate the
tax due.\24\
---------------------------------------------------------------------------
\23\ IRS Pub. 5917.
\24\ IRC Sec. 6014. Should probably be repealed as the 1969 limit
of $10,000 gross income has never been adjusted for inflation and IRS
has not exercised its authorization to raise the income limit.
The Direct File pilot cost far more than justified, and served far
fewer taxpayers than studies contemplated. It was too expensive to be
considered a success. I hope it will be a resounding success in the
future at greatly lower and efficient cost. The benchmark should be
that the per return cost to IRS should not exceed the lowest charged by
---------------------------------------------------------------------------
private companies for efiling.
The two studies projected that program costs would range from $5-$15
per federal only return (depending on whether there are 25 million or 5
million filers).\25\ With a tentatively reported cost of about $100
million, the pilot program achieved only 100,000 returns at a cost
approaching $1,000 per return. Even if the cost was nowhere near $100
million, as Commissioner Werfel protested at the hearing, a $15 million
cost would still be $150 per simple tax return.
---------------------------------------------------------------------------
\25\ ``IRS-run Direct e-File Tax Return System,'' 16 May 2023, IRS
Pub. 5788, p. 69.
---------------------------------------------------------------------------
ID.me
Registering with third-party ID.me \26\ is a prerequisite to obtaining
an IRS online account or using the new IRS Direct File tax program.
ID.me is a private contractor that Congress has expressed serious
reservations about.\27\ Senate Finance Committee Chair Ron Wyden has
complained, ``The infrastructure that powers digital identity,
particularly when used to access government websites, should be run by
the government.''\28\ IRS is a ``supernet''\29\ registered through
Homeland Security and hosted by CloudFare which is perhaps the most
secure web host.\30\
---------------------------------------------------------------------------
\26\ Laura Saunders, ``They're Your IRS Records. Getting Them Means
Giving Up Privacy,'' Wall Street Journal, 29 April 2022, https://
www.wsj.com/articles/getting-irs-records-from-id-me-means-giving-up-
privacy-11651189687.
\27\ Letter to Mr. Blake Hall, Chief Executive Officer, ID.me, 14
April 2022, House Committee on Oversight and Reform and Select
Subcommittee on the Coronavirus Crisis, https://
oversightdemocrats.house.gov/letters.
\28\ ``Wyden Calls on IRS to End Use of Facial Recognition for
Online Accounts,'' 7 Feb. 2022, https://www.finance.senate.gov/
chairmans-news/wyden-calls-on-irs-to-end-use-of-facial-recognition-for-
online-accounts.
\29\ IRS has been assigned internet IP range 152.216.0.0-
152.225.255.255 (CIDRs 152.216.0.0/13, 152.224.0.0/15). IRS is much
bigger than Google's 209.85.128.0-209.85.255.255 (CIDR 209.85.128.0/
17).
\30\ CloudFare advertises, ``Introducing CloudFlare Registrar:
Designed for Security, Not the Masses.'' https://blog.cloudflare.com/
introducing-cloudflare-registrar/.
ID.me is registered with GoDaddy, a retail web host.\31\ I get lots of
email from spammers registered with GoDaddy, but have never received
any hosted by CloudFare. I do not suggest that ID.me is insecure; only
that IRS.gov appears far more secure than ID.me.
---------------------------------------------------------------------------
\31\ GoDaddy commercial webhosting ranges from $60 to as much as
$250 per month. CloudFare starts at $200 and up.
ID.me's privacy policy is 5,400 words plus a 6,000 word term of service
that few read nor understand, but everyone must check the box that they
accept.\32\ Over 20% of users are unsuccessful registering with
ID.me.\33\ I advise clients not to use ID.me because it's another
private database of personal information over which the user lacks
control and must trust not to get hacked or sold ``anonymized'' (i.e.,
sanitized of personally identifiable information). Direct File has just
forced another 100,000 users into ID.me's private database.
---------------------------------------------------------------------------
\32\ https://www.id.me/privacy; www.id.me/terms.
\33\ ``IRS leader explains why the IRS went to ID.me,'' NextGov/
FCW, 4 May 2022, https://www.nextgov.com/digital-government/2022/05/
irs-leader-explains-why-irs-went-idme/366516; ``2003 Annual Report to
Congress,'' National Taxpayer Advocate, 98, https://www.
taxpayeradvocate.irs.gov/wp-content/uploads/2024/01/ARC-
2023_FullBook_FINAL.pdf; ``Despite privacy concerns, ID.me nearly
doubled the number of people able to create an IRS account,''
Washington Post, 25 Feb. 2022, https://www.washingtonpost.com/business/
2022/02/25/irs-idme-account-success-rate/.
Login.Gov, operated by the U.S. General Services Administration,
appears would be a superior IRS partner, also registered through
Homeland Security and hosted by CloudFare. It is far more transparent,
disclosing that it stores login credentials on Amazon Web Services
servers, a cloud service. It is currently available for very limited
use between taxpayers and IRS. Commissioner Charles Rettig referred to
ID.me as a ``short-term solution is in place for this year's [2022]
filing season.'' The apparent limitation was Login.Gov's inability to
handle the massive volume generated from IRS access, which Commissioner
Rettig said would be ready to replace ID.me in late 2022.\34\
---------------------------------------------------------------------------
\34\ ``Written Testimony of Charles P. Rettig, Commissioner
Internal Revenue Service before the House Ways and Means Committee,
Subcommittee on Oversight on the Filing Season and IRS Operations,'' 17
March 2022, https://www.irs.gov/newsroom/written-testimony-of-charles-
p-rettig-commissioner-internal-revenue-service-before-the-house-ways-
and-means-committee-subcommittee-on-oversight-on-the-filing-season-and-
irs-operations.
Congress should press IRS into replacing ID.me with Login.Gov. IRS has
more personal information on taxpayers than any other government agency
or commercial database, so it should be easier for a taxpayer to verify
his identity than submitting a passport or driver's license to a
private contractor. Why must it be so much harder and intrusive to
access one's IRS account online than with a bank or brokerage account?
CHALLENGE TO EFILING
It can be treacherous to challenge IRS with it's push toward universal
efiling. Three months after I wrote a 2012 Tax Notes article, ``The
Case Against Efiling,''\35\ I received an IRS notice that I had been
selected for a random research audit.
---------------------------------------------------------------------------
\35\ Jay Starkman, ``The Case Against E-Filing,'' Tax Notes
Federal, 16 July 2012, https://www.taxnotes.com/tax-notes-federal/
return-preparation/case-against-e-filing/2012/07/16/qr0g.
Research audits are extremely rare but intensely time consuming and
intrusive. There were only 1,500 research audits in 2012. The IRS agent
who audited me was at my premises for 3 days poring over every receipt
and disbursement, finding no change in my returns. I have handled two
other research audits for clients with seven figure incomes, and I'm
nowhere near that threshold. I can only consider that this was a
---------------------------------------------------------------------------
``random'' revenge audit.
Administration critics James Comey and Andrew McCabe, former high
ranking FBI officials, were also subject to research audits. The furor
that theirs were revenge audits precipitated an investigation that
examined an inadequate judgment sample size of only 20 out of a
population of 10,900 returns using seed numbers \36\ that the Treasury
Inspector General for Tax Administration complained created a risk that
``the seed numbers used could have ensured that specific taxpayers from
the original sample remained in the subsamples.''\37\ In other words,
the TIGTA investigation proved nothing.
---------------------------------------------------------------------------
\36\ The seed is a starting point of random number generator and
the same seed always produces the same random number.
\37\ ``National Research Program Tax Return Selection Process for
Tax Years 2017 and 2019,'' Treasury Inspector General for Tax
Administration, Report Number: 2023-IE-R002, 29 Nov. 2022, https://
www.tigta.gov/sites/default/files/reports/2022-12/2023ieR002fr.pdf.
I have published three other articles on efiling, including best
practices for safely efiling.\38\ I have also published articles
promoting tax simplification''\39\ and many others promoting good tax
policy.
---------------------------------------------------------------------------
\38\ ``Beware of E-Filing Your Tax Return,'' Wall Street Journal, 5
Feb. 2024, https://www.wsj.com/articles/beware-of-e-filing-your-tax-
return-legal-trouble-for-error-privacy-risk-cyberattack-96d31111;
``Practice safe efiling,'' Journal of Accountancy, January 2013,
https://www.journalofaccountancy.com/Issues/2013/Jan/20126243.html; ``
E-Filing and the Explosion in Tax-Return Fraud,'' Wall Street Journal,
13 Jan. 2013, https://online.wsj.com/article/
SB10001424127887323374504578222130665022160.html.
\39\ ``Why Are Taxes So Complex?'' Tax Notes Federal, 18 Sep. 2017,
https://www.taxnotes.com/tax-notes-today-federal/net-investment-income-
tax/why-are-taxes-so-complex/2017/09/18/1w85l; ``Taxation for
Prosperity,'' Tax Notes Federal, 13 Feb. 2012, https://
www.taxnotes.com/tax-notes-federal/alternative-minimum-tax/taxation-
prosperity/2012/02/13/qpy7; ``Prelude to Tax Simplification,'' Journal
of Accountancy, May 1990.
Despite my acquaintances with top IRS officials, my name appearing in
several places for the same honors, being known by IRS Media Relations,
and having been audited by IRS, I am unable to obtain an EFIN that
would allow me to efile. Even with an EFIN, my office computers run
Linux exclusively and commercial tax software will not install or run
in Linux.
MANDATING EFILING IS BAD TAX POLICY
I would have to tell half my clients, most elderly, whose returns I
have been preparing for over 40 years, that they would need to find a
new accountant if Congress mandates efiling income tax returns showing
$400,000 or more gross income.
Mandated efiling places the start of tax filing at the mercy of IRS.
Commissioner Werfel's assertion at the beginning of his hearing
testimony that ``the 2024 Tax Season opened on schedule on January
29th'' is questionable. IRS did not announce until January 8th that it
would begin accepting efiled returns before that date.\40\ Last year,
opening day was January 23rd.\41\
---------------------------------------------------------------------------
\40\ IR-2024-04, January 8, 2024.
\41\ IR-2023-05, January 12, 2023.
Neither date was suitable for many filers, like me, as I mail all my
individual and business returns with paper on January 2nd every year.
As a practicing CPA, efiling would put me weeks behind schedule because
commercial tax software is not ready until close to the ``official''
start date, and sometimes, not until later because late-released forms
---------------------------------------------------------------------------
have not yet been incorporated into their products.
Finally, and perhaps most important: the private sector knows, it
should be as easy as possible to communicate with a business in the
customer's preferred method. Especially when it comes to taxes, as we
have no alternative to IRS to deal with.
I respectfully urge Congress to reject more efiling mandates because it
is bad tax policy. It may help IRS, but it's bad for taxpayers.
Thank you very much for taking the time to consider my comments on this
very important issue.
[all}